Eastman Chemical Company

This call is being broadcast live on the Eastman website, www.eastman.com. We'll now turn the call over to Mr. Greg Riddle, Eastman Investor Relations. Please go ahead, sir.

Thank you very much, Becky, and good morning, everyone, and thanks very much for joining us today. On the call with me are Mark Costa, Board Chair and CEO, Willie McLean, Executive Vice President and CFO, and Jake Leroux and Emily Alexander from the Investor Relations Team. Yesterday, after market closed, we posted our first quarter 2025 financial results news release and SEC 8K filing, our slides, and the related prepared remarks in the investor section of our website, Eastman.com. Before we begin, I'll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our first 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 first 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 first quarter 2025 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.

Thank you. If you wish to ask a question, please press star followed by one on your telephone keypad now. If you are unsure if you have registered, please press star followed by one again to confirm your place in the queue. If for any reason you want to remove your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Patrick Cunningham from Citigroup. Your line is now open. Please go ahead.

Hi, good morning. First, just on the lower sales guide for Renew, I guess first, what has been the sales and EBITDA contribution in the first quarter? And I'm just curious on the level of confidence in the low end of the sales guide, how much visibility do you have into order books? And is there a floor for that EBITDA contribution just based on cost performance and volume that's already contracted?

Certainly, and good morning, Patrick. When it comes to the overall methanolysis program with Kingsport, things are actually going quite well on the operational side. We've had a very successful quarter of running the facility at high rates. We've maintained an 85% yield on the DMT feedstock from the hard recycle stream. We're finding ways to use even cheaper versions of feedstock. So operations are really good if you analyze sort of the production rate that we had in the first quarter, we're very much on track for that two and a half greater production volumes. So when you put that together, you know, with the absence of the startup costs in the first quarter, you know, it's generated a considerable amount of earnings, you know, in the corporate other area around $25 million. When that absence, when you look at the overall cost program we're on for a full year basis we're very much on track to get our 50 million dollars of EBITDA from the manufacturing cost side of the equation out of the original 75 to 100 million dollar guide so I'd say on the operational side that 50 million certainly showed up in the first quarter as expected and we expect will continue to show up through the year but it comes through a new side of things on the revenue side you know we originally had given you a guide back to the deep dive of 75 to 100 million dollars of renewed revenue And that was based on the assumption around the economy being relatively stable and consumer durables, you know, stable, modest growth in packaging for food applications, et cetera. So, you know, basically continuation of the dynamics we had for 24 would continue into 25. And that was for sure true through the first quarter. But what happened is with the trade dispute tensions developing, and the discussions of tariffs, especially the tensions between China and the U.S. and where the tariffs have now gone, the rate and growth of the consumer durable market that is largely made in China and shipped to the U.S. is now in question about how that market is going to hold up. With the level of tariffs that we currently have, it's not economic to import those kind of products. So the revision that we've given you from $50 to $75 million of revenue now versus the higher rate is purely an in-market estimation of the impact of tariffs. It has nothing to do with the engagement we're seeing in the marketplace. But we certainly don't expect the same kind of growth in those kind of products for the year. When it comes to engagement, customers are still very much engaged, as we said, on the durable side. We have over 100 customers. The economic tensions are certainly slowing the rate of product launches. If you can't import a product from China, you can't launch a new product. So that reduces the rate at which the new product launches with new content can be brought to market. So that factor is being managed. We've only had a few customers revert back to normal Triton because of the premium that they're trying to avoid in this economic time. So I would say market engagement there is still good. It's just a question of where these tariffs Disputes go, if they're resolved soon, this quarter, then things would start to recover and get back to normal. They'll actually have to restock because they're pulling inventory down below normal levels right now to avoid paying the tariffs. So we certainly aren't sitting on a big amount of finished good inventory in the point of given we've been in a recession for a while. And then what I say on the food packaging side, on our pet, the engagement is also good. The brands are really facing some significant limitations on mechanical recycling in a variety of applications and are very much engaged in trying to find ways to buy some RPET for us in applications where there's high quality aesthetics required or certain technical performance requirements that mechanical can't meet. So we're still making good progress to be able to sell RPET in the back half of the year as we convert that Triton line over to making PET that we discussed before. So overall I'd say we're in good shape and it's just a market question around tariffs.

Very helpful, Mark. And then maybe just on Fiverr, it seems to be getting a double hit on some tariff-related impact and persistent destocking. How long do you anticipate this destocking to persist, and how should we think about contract performance in the next couple of years and a potential further normalization from here?

Certainly, the overall Fiverr's business has some challenges to it. As you said, there are two separate challenges. I'll start with the destocking one first. First, there's no change we've seen in market growth rates. So that is not part of what's going on as far as we can tell. So market growth rates are still modest in the 1% to 2% rate as the traditional cigarette market is declining in the 2% to 3% range. But the heat not burn cigarettes offsetting it, we've talked about that in the past. So that part is actually quite stable. Our contract rate for the year of this year is around 90%, which has put the prices in place for the year, so we're in very solid shape on a pricing point. So as you said, it's really a question of what's driving the volume decline. Well, if the markets are stable, then by definition, it's a dynamic around customer destocking as the principal driver of what's going on. As I said before, tow is an incredibly small percent of the final price of a cigarette, about 2%. So the cost of it is not a high priority when you're selling cigarettes that are greater than 60% gross margins. The focus always starts with security of supply. And when the market got incredibly tight in that 21-22 timeframe, customers were building inventory. And as we've now discovered, building a lot more inventory than we fully understood. One of the challenges with customers when you're in situations like a very tight market is No one wants to tell you how much inventory they have because they're afraid you will not supply material to them as much as they might need going forward. So you get this dislocation of inventory. And we certainly lived through that in the 22, 23 timeframe where we discovered just how much inventory people had built over time. And so the destocking is going a bit longer than we expected. And the reason the destocking started, I should have mentioned, is the market has loosened up a little bit. So there's some capacity that's been added in China. If you look at it from a 23 to 25 point of view, that capacity is around 5% of the ex-China market. So the capacity realizations have now moved down into that lower 90% range, 90, 95% range. And with that room, the customers feel safe in destocking. And that's what we see going on. what we're going to see in the second quarter is something similar to the first quarter. Um, I've learned my lesson around predicting how long the stocking is going to last. Um, certainly we expect some of it to continue in the back half of the year. Um, and we're still working with our customers to truly understand exactly where, you know, where this all sits. Uh, but the good news is the fundamentals are there. The capacity utilization is still, you know, in the nineties, you know, the markets are not declining in some significant way. And I think that gives us stability. The contracts, as you asked, are about 80% for next year. You know, most of those are multi-year contracts, some are annual. They generally include pricing. A lot of it's CPT pricing that actually gives customer protection on, you know, making sure the margins are tracking with, you know, raw materials. So overall, I'd say we feel like the market, you know, is certainly facing that challenge. And it's going to continue a bit more than we expected. It's good to remember there are a couple other dynamics driving earnings down. We had a discontinued product from customers of about $10 million, and energy is a bit of a headwind this year relative to last year and how it flows in. The second part of this discussion, of course, is around the impact on the tariffs with China. We do have two products that go into China. One is the textiles, the Naya product, which has been a great growth story for us, and Half of the NIAID that we sell is in China. The other half is outside of China. It's a huge market. So it's a time-based issue for us to, if these tariffs last for a period of time, of just winning market share in mills outside of China to replace what we do in China. So that one is manageable, and we have some inventory in place to mitigate some of those issues now. When it comes to the flake, this is, you know, cellulose flake that you spin into fiber, and we do this with the Chinese National Tobacco Company. Obviously, the rates are, you know, pretty high there, and so we'll have to just see how those tariffs evolve over time. So that's a more specific thing around, you know, what's going on with the tariffs, and we'll have to just see how long the tariffs last with China. When you put them together, obviously it creates a bit more of a challenge for this year. It's still extraordinary earnings compared to our past and great cash flow that comes out of this business.

Very helpful. Thank you.

Thank you. Our next question comes from David Begleiter from Deutsche Bank. The line is now open. Please go ahead.

Thank you. Good morning. And first, congrats on being recognized for your support of veterans and active duty service members. Very well done. Thank you. Mark, on your China sales of the portion roughly 60% supplied from the US, if these tariffs stay in place, how much of a risk do you think of perhaps just going away? I know you address fibers, but how about AM and AFMP? Thank you.

David, a lot of these questions are really sort of situational specific to this segment. So I just addressed the fiber's part. Half of it is very much addressable to move out of the country, rather than mitigating actions we're pursuing around the flake supply. So I think there's lots of different ways over time to manage the fiber side of the equation. When it comes to CI, just to be clear, no exposure, so nothing to worry about there. Frankly, probably upside in CI. which is primarily selling in North America and the tariffs that we have coming in this country from products around the world that sort of set the price on the marketplace, you know, over time will give us some lift there. But in the short term, pretty modest just because of the, you know, competitive situation. When it comes to AFP, the exposure in AFP is more limited. You know, similar to fibers, it's around $200 million of revenue in 2024. But a lot of the segment does not have exposure to China from a U.S. production point of view. So our especially fluids business, we have production outside Europe. When it comes to all of our means business and care and ag, we've got assets in the U.S., you know, our largest assets in Europe and assets in China. So we have lots of different ways to serve those markets locally around the world. And a lot of the coating-related products, we don't really sell into China. But there are a couple of very high value specialty products like our cellulose additives that go into a wide range of coatings from, you know, cars to pharma to some other packaging applications. And that is exposed. It is a proprietary product that only we make. The margins on this business are pretty high. So short term, it's hitting us in Q2 because our customers are well stocked on inventory because it's so important they carry a lot of inventory. in their formulations. And so we certainly see them not buying this quarter. We're hoping for a resolution between the US and China discussions. But it's a very important functional product where there really isn't a substitute. And so we have an ability to pass on some of that duty costs if we need to and find ways to work with our customers when they get back to ordering after they've used up their stock. So I think that one is also the category of manageable over time. In advanced materials, which is obviously the largest segment from a revenue point of view in China, there are really three businesses that have different stories. Interlayers makes the products in China, so no issue there. Performance Films historically has used a lot of product made in the U.S., but that's why we did the acquisition of Dynaland to have our own Performance Films manufacturing capability in China. We also did an expansion of our capability in Germany. And so those two assets are in the middle of ramping up for this specific reason of being more local and diversified how to serve the market. And so, you know, we're not going to have that much impact this quarter because of the inventory in place for performance films. We'll have some impact, you know, as we balance out the ramp up of these assets relative to what we make in the U.S., but we can supply that market long term from other locations in the U.S. And then especially plastics, you know, clearly has exposure when they're made here in the U.S. and those products are sent to China. On that front, we're also not getting that much of an impact this quarter because customers are sitting on inventory. And the real question in especially plastics is a lot of what we sell into China, especially Triton, is then re-exported back to the U.S. and Europe and other markets. and a lot of it to the U.S. So the main issue is how long do the tariffs stay in place that make it very expensive to buy an appliance or water bottle or whatever else in the U.S. that's made in China. So there's some uncertainty and risk around how those supply chains adjust to that. All these companies that make all these appliances have to get their products from somewhere. The retail lines need products from somewhere. There's a huge amount of effort going on around the world right now to find ways to source and make these products ramp up production. And we'll follow the customers wherever they move around the planet, because Triton is a unique product. There is no easy substitute for Triton. There are different plastics you can use, but they all come with significant compromise. Either if you go to polypropylene, it's very cloudy and not clear. If you go to a variety of different styrenics, the toughness or the chemical resistance from other products all create failure modes in how well the product performs in the market. So you can go if you want to compromise your product on the shelf, but otherwise you really want to keep using Triton. And so we'll certainly feel some of that risk and impact if these tariffs stay in place through the back half of the year as these supply chains move around and the market here in the U.S. has been impacted. So overall, that's sort of where we stand. When you put it all together, You know, we've told you there's about a $30 million impact in Q2. It's honestly, with all these uncertainties around tariffs and where they may negotiate, it's hard to predict what this impact is in the back half of the year.

Very good. And just lastly, on Longview and the DOE funding, I know you've been getting some funding every quarter, the last couple quarters. What's your level of confidence in this funding continuing under the current administration?

Uh, we feel good about the executive order. Um, you know, sorry, I just lost my track of thought. We feel very good about where we are with, um, the deal. We, um, they, uh, have, uh, been highly engaged with us. Um, we think that we've got a good relationship there and we think that our project actually holds up well, um, in the way president Trump thinks about, you know, us manufacturing. When you look at it, we're focused on growing U.S. manufacturing. It is a serious issue. Manufacturing hasn't grown here in this country. It's been growing around the world. And the vertical integration and all the products that go into manufacturing of finished products is equally important if you want to have national economic security. So there's actions that I think we should be taking. Strategic trade actions that are focused on specific issues around this topic make a lot of sense. We need a lot of regulation. that reduces the difficulty and cost of building your tax and other incentive policy workforces. A variety of things I think we're very aligned with. The current administration is important and this project fits all of these criteria. When you look at these circular investments, we're building infrastructure to deal with plastic waste, right? And it's also a natural security way to make raw materials for food packaging, medical, et cetera. It's on-shoring jobs from Asia because most of all the P&T business has now gone to China. And you're creating revenue way beyond just our facility and supporting the growth of the recycling infrastructure behind us and being a better supplier to local manufacturing of plastic-related products in the market. So it checks all the boxes on that front. It also is a version of, you know, energy independence. Plastic waste is basically oil sitting above ground, you know, and you're reusing it instead of throwing it away. And this process is advantage relative to parasailing at any oil price above $60. So economically advantaged as well. And from a voter point of view, there's a lot of debate on climate, but there's no debate that people don't like plastic waste in their environment, no matter which side of the aisle they sit on. So we think we're in really good shape on this. So far, everything I just said seems to be aligned with what the DOE is looking for in the conversations we've had with them. We've been receiving our funds in Q4 and Q1. There's a lot of staff change going on in the DOE right now, so we're moving a little slow in how we sort of finalize the next phases of the contract, but we're not getting an indication that the project's at risk.

Thank you very much.

Thank you. Our next question comes from Alexey Yefremov from Key Corp. The line is now open. Please go ahead.

Thank you. Good morning. I wanted to ask you, there's a lot of concern about consumer health in the businesses where your products end up in consumer, I guess, such as autofilms. Are you seeing any meaningful slowdown in demand?

On auto demand? Just consumer discretionary demand.

Consumer-related demand.

Right. Yes. Look, in our Q2 guide, we basically called out two dynamics that took us from where we were originally to now, both of which are trade-related. So I already covered the impacts, the direct impacts of trade, which is that $30 million. But the other impact, as we tried to explain in our prepared remarks, is Seasonal growth is typically really strong for our portfolio when you go from Q1 to Q2. And that is what drives going from $1.91 to some higher EPS in a normal situation. We still see seasonal growth now, but we don't expect it to be as strong as what would have been normal. And that is very much related to consumers being concerned about the world and what's going on, you can see the confidence decline. Um, you can certainly see consumer purchases on discretionary items right now increasing, right? You know, people are buying cars, people are buying, you know, blenders, whatever else, because they're worried about tariffs coming. So the consumer data would lead you to believe that there's a certain amount of growth going on. Um, but in some sense, what you're doing is you're pulling forward consumer demand from the second half into now, and there's people worried and being cautious about what they want to spend in general, that's creating a lot of fog in what's really going on. But as a company, whether it's us or our customers, you have to be considering multiple scenarios right now, one of which is it gets resolved quickly and everything's okay, but you also have to prepare the more difficult scenario where these tariffs stay in place for a longer period of time and impact demand. we can see customers being a little bit more cautious on just how much inventory they want to build. And that's sort of the dynamic we're looking at here in the second quarter is not seeing as much growth. I mean, there is a risk where we don't make much progress on some of these trade issues, and you start getting people more nervous about when this is going to get resolved, and you can see some more destocking towards the back end. But we'll just have to see how that all plays out.

Thanks, Mark. And just listening to your remarks about how tariffs are impacting your businesses, it seemed like initially you maybe had some inventory in China that allowed you to mitigate it. Is it fair to say that if this tariff does not change, In the second half, you may see a larger negative impact, direct negative impact from the tariff, or that is not the case because you have some other mitigating measures. I just couldn't quite understand the net result of these two.

Sure. So, again, sorry, guys, but I've got to go segment by segment because it's a different story. So, I don't think there's any additional risk in the FIBRS business. With the mitigating actions that are in place, I would expect that number to be relatively steady as you go through the rest of the year if things are not resolved. Same is really true of AFP. I think there may be some modifications or mitigations there, but where things are a bit better in the back half of the year versus where we are now where the customers aren't buying at all. And then, so it's got probably some moderate upside. And then when it comes to the advanced materials segment, You know, that's a little bit more complicated, right? Again, interlayer is fine. Performance films, you know, does have inventory in the marketplace right now. So that will run out at some point as you go in the back half of the year. But they're ramping up plants to replace a bunch of inventory from being made in China or in Europe. So hard to say exactly how that balances out. But I'd say that the headwind in the back half is a little bit more than the first half on PF. And then on especially plastics, you know, the headwind there would be more than where we are now. You know, with the second quarter, you know, people stop buying, you know, all these appliances and consumer durables. We'll have, you know, downside on the durable side, and then we'll have upside on selling more PET in the back half versus the first half as we start taking that to market. Obviously, that's lower margin, so it's not going to be a total offset. So some more exposure on SP in the back half versus the first.

Thanks a lot, Larry.

I would note there are

I would know there are mitigating actions that we're taking that are a lot broader across just inventory. So we certainly have done that. We're ramping up plans. We're definitely working with a lot of customers around how they're moving to other parts of the world to make products. So there's a lot of that going on right now. If we're under pressure, imagine what it's like being someone forcing a blunder from China right now. They're highly motivated to find solutions, and we'll follow them where they go. There's going to be pricing opportunities. uh that we're going to find across the portfolio and there's going to be volume growth opportunities that we've you know that we can realize here in the us we've got opportunities when it comes to uh you know direct competition being a bit more expensive as it's being imported and so we're going to see some benefits you know in those kind of areas uh you know for example especially plastics we'll see some of those benefits uh when it comes to um you know thinking about Parts of the portfolio in AFP will see some benefits around ag, and even things in CI will see benefits like floor tile. So there's a bunch of different examples moving around where there'll be some growth we should realize in the U.S. I mean, we are the ultimate company with a low-cost structure to serve the North American market across all these different products that we make.

Let's go to the next question, please.

Thank you. Yes, our next question is from Vincent Andrews from Morgan Stanley. Your line is now open. Please go ahead.

Thank you, and good morning. Mark, could you talk a little bit about the CapEx reduction and sort of what triggered the decision you made on, I guess, sort of deferring that CapEx at Longview, and are there any sort of costs associated with doing that in terms of the overall cost of the plant? It seems like timing's not changing, but just Just curious there.

Good morning, Vincent. Thanks for the question. So as we're looking across the scenarios that Mark has outlined, obviously being prepared for the potential downside of an extended trade dispute, we looked at now is the right time to optimize both efficiency and effectiveness of a CapEx reduction. Obviously, we're in the engineering phase of the Longview, Texas project, and we can go through that detailed engineering and basically get more complete before we start to solidify the commitments without affecting the timelines of the completion of the project. So as you think about the midpoint, we reduced our capital from roughly $750 to $550. I would again note that our FX from a maintenance standpoint is about 350 million, and we're still investing in this environment slightly above our DNA. So we're confident in our strategy, but we want to make sure that we're also prepared for those downside scenarios and making sure we deploy it efficiently. I would also highlight that the Texas project is the largest project, but it's still a little bit less than half of the reduction. And most of that is the remainder is across a combination of other business growth and timing the key maintenance.

Okay. And then if I could ask you, I know in the sort of March conference season, you had some concern over March orders, and then it sort of turned out that they were, I guess, better than feared or better than expected. I'm not sure which it is, but I'm just curious what happened there because usually when there starts to be hiccups in the order book, they don't reverse. So any color there?

Yeah. So we are certainly with all the trade talk, even in the first quarter, you have to remember when we're still had 20% tariffs being put on place in China, et cetera. There was a lot of caution, uh, that developed around customers and what they wanted to order. Um, and so we were reading into that, you know, as we were getting into March, um, and then frankly, just surprised and how people sort of bought more. I think, um, it wasn't really a lot of pre-tariff buying. I'm sure there was a little bit of that at the end of March. But what's comforting around that question is April orders are similar to March. So if they were really pre-buying, you know, you would have seen a drop-off in April as you've gone from March. We've seen that before in our past, and right now we're not seeing that. So that's encouraging. And new order books are holding up in April. May looks okay. You know, June is just too far away for us to really assess when it comes to sort of our order of visibility. But I do think, you know, we're in solid shape, but there is, you know, uncertainty risk, obviously, in June with how all these discussions around the world go.

Let's have the next question, please.

Thank you. Our next question comes from Jeff Sikowskis from JP Morgan. Your line is now open. Please go ahead.

Thanks very much. You abandoned your annual earnings guidance, but you're still guiding for annual cash flow. Why is that? Why would the cash flow for the year be more forecastable than the earnings, or why do you have more certainty around the cash flow?

Good morning, Jeff. Thanks for the question. Obviously, as we've highlighted in our prepared remarks and even in the Q&A this morning, it is highly uncertain, and we've pivoted to an emphasis on cash generation ahead of a potential recession. As I think through the levers that we have, whether it be the cash earnings, obviously, but we have a broader set of working capital and operating set of solutions and also how we manage variable resources across our global asset base. And in that, we've got flexibility that I think gives us a narrower range on the cash outcomes. versus all the accounting ramifications that comes in with an earnings estimate when you're trying to deal with these choices. As we've highlighted, if the trade dispute is resolved in the short term, ultimately we'll have higher cash earnings and less working capital actions. If it's drawn out, then ultimately it could cause a recession. But the dynamic between EBITDA and the OCF that we're going to deliver ultimately will be based on that trade scenario. we do have higher confidence, and I think we've done that across multiple economic environments in the past.

Yeah, I think that we're really proud of the fact that, you know, we try and look forward and see what's coming and be prepared to take whatever actions are necessary to sort of weather storms. I mean, this industry has been, you know, facing a lot of storms over the last, you know, seven years, and it's well machined on how to react to it at Eastman. You know, the reality is if the focus on cash is, is not needed because the economy is snapping back and recovering then that's upside it's easy to run the plants you know harder in the back half of the year and catch up we have the excess capacity at this point so you know i think this is the prudent way to approach things and and uh and we'll you know obviously adjust as the macro economy and sort of trade related matters sort of evolve

And then secondly, what you did is you estimated the tariff impact at $30 million in the second quarter. How do you calculate that? Is that lost sales? Is that tariffs that you're paying? And could you describe where it seems that you're paying the tariffs or whether you're being reimbursed for your customers? Where are the tariffs actually touching you? And is it China mainly or is it other regions as well? Can you sort of get to the bottom of this 30 million number and what it might be in the third quarter if things continue?

So, Jeff, when it comes to the impacts on the tariffs in the second quarter, it is an impact on volume as opposed to an impact on duty. So when you have a 125% duty into China, and there's a hope that the trade will get settled between the two countries. Customers don't want to buy a lot with that adder. So that's the impact you're seeing in fibers where we're projecting less sale of flake for the tow JV, less NIA textile fibers being purchased while people wait to see what plays out in this. So that's what happened there. Same thing I said in AFP. The high-value cellulosic additives that go into all these coatings and pharma applications, some other applications, those customers carry a huge amount of inventory because it is such an important product for the product they make, and it's such a small percentage of the total cost of these products in these cellulosic additives in AFP that they're not going to take any risk. And so they have inventory. months of it. And so they can, you know, through this quarter, just not order. So they, you know, are pulling inventory down, right? And then it's the same dynamic in advanced materials, but just less because we have a lot of inventory available in that marketplace. You know, for, we make it in interlayers there. We, you know, I already explained everything around PF and SP. The real risk there is, ability to sell what they make as a finished product back to China. And I think everyone in that whole supply chain is trying to figure out what they're going to do on that dynamic. So it's a volume hit as opposed to a tariff hit. What I'd also note is while we have this exposure because we make a lot of product here in the US and we export around the world, we're also vertically integrated. And this is a very unique competitive advantage for us on that integration, which is most of the raw materials that we use across the company are sourced in North America. So we're not facing much tariff risk of what we have to pay for on the raw material side of things. Even PX, which we buy around the world, we have sourcing from all countries around the world that we can flex on where we get our PX, and obviously PX prices are very low right now. So we don't, like a lot of companies who buy a lot of raw materials but may not have much exports to China where they're having that problem they have to manage or if you're buying auto parts in the auto industry or whatever else, we don't have that issue. Our issue is this primarily China-related matter right now as far as the second quarter is concerned. And I think I already addressed how it trends into the back half of the year in my answer ahead of you.

Okay, great. Thank you so much.

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

Yes, thank you and good morning. Mark, I wanted to come back to the discussion around the fiber segment and the issue of destocking. I think what you've said in the past and you alluded to again this morning is that a high percentage of the volume is under contract. And obviously the implication of that is that, you know, the business should be relatively stable volumetrically. So I'm trying to weigh those two things, you know, more severe destocking and contractual protection. And so maybe you can kind of talk through the first quarter volume was down 12%. Do you think that could be indicative of the year or do you have sort of take or pay provisions in some of these contracts whereby Maybe they'll be destocking in the first half, but then customers become obligated to meet minimum volume requirements as the year progresses. Any thoughts along those lines to frame out or bracket that the volume risk would be much appreciated?

Sure. So on the volume side of the equation, price, by the way, is just pretty predictable and locked in. So this is really a volume question for this year than a price question. with these contracts. But on the volume, there's always a band of volume that customers can buy within from a low to high range. Typically, the middle range is what they're aiming to do. And we have customers buying in the first and second quarter at the low end of the volume range. So they're not violating the contract. They're just at the low end of the band across the customer base. What's changed, I'd say, from December and early January to now is it's a broader set of customers who are now destocking than what we originally had expected in January to where we are today. So no one's sort of violating a contract, but there are just more customers moving to do some destocking and move to the lower end of their band than we were originally notified, if you will, in January as we built the forecast in versus where we are now. So as you think about it and you're going back in the second half, this just comes to question with each customer and just how much inventory do they really have to do stock and where they would then start moving back up into the band to normal or staying at the lower level. And I think that it's going to be a challenging year. I would expect maybe it gets modestly better in the back half versus the first half as some customers address their inventory issues. But we're just going to have to see how it evolves.

Okay. And then secondly, if I may, on the subject of tariffs, I appreciate the various headwinds that you articulated. I am curious, though, are there examples of product lines within Eastman's portfolio where the tariffs may be helping you in chemical intermediates, for example, or otherwise? Or is that just simply not the case? And Um, you know, the overall economic environment impact is sort of overwhelming, uh, any such benefits.

Certainly. So I would say the, the opportunities are still emerging. Um, so it's, it's early days to sort of have a definitive view on this, uh, as these tariffs are still being debated and implemented, um, performance films, for example, does have upside in North America. We are by far the largest player in the performance films business, but we still have a lot of different competitors out there. All of our product is made in the U.S., so we are advantaged in having the largest scale U.S. manufacturing base. Our competitors are sourcing some film domestically, but a lot of it is being sourced abroad, including places like China, et cetera, where they're facing tariffs. So we think there's going to be opportunities there to win some share, but it sort of depends on where the auto market sales are going and how those net together in the short term, but certainly a place where, you know, relative to the market, we will do better. And especially plastics, there are definitely opportunities where we have, you know, imported products that we have to compete against. So the shrink labels around the packaging for beverage bottles, as an example, even some of the consumer durables, there are manufacturing capabilities in the U.S., that some of our customers have and they're ramping that up and we're going to sort of see growth there in volume that they have that could be advantageous for us. The ag space is another place where we're going to have opportunity. Our ag customers were facing a lot of competition with formulated ag crop protection products being imported and really frankly dumped in America at very low prices. So the tariffs are going to create some relief for them and ability to sort of regain some market share. So that's another place where I think we'll see some benefits about our customers growing relative to exports out of China and some other countries. Even in building construction, there are opportunities like floor tiles, which use our plasticizers. A lot of that got offshored to China and supplied by Chinese manufacturers that make DOTP. We have a number of customers who are now looking to bring that production back here. This is a place where capacity does exist to ramp up in U.S. manufacturing. So there's a bunch of places. It's not uniform across the portfolio. And I think ultimately there will be price benefits across the CI portfolio when you get some additional settlement of just the competitive dynamics that are going on right now. The CI is a little complicated because you have a lot of companies that were exporting chemicals and now they can't export them as easily. And so there's a dynamic there that's settling itself out. But over time, there should be upside.

Perfect. Thanks, Mark.

Thank you. Our next question comes from Frank Mitch from Fermion Research. Your line is now open. Please go ahead. Sorry, Frank's line has just been closed. Let me just reopen it for him.

Hello.

Frank.

Hello, can you hear me?

Hey, Frank.

Yes. Yeah, good morning. Hey, good morning. Sorry about that. I don't know what happened. But given the number of ways things can go, certainly can't fault the pulling of annual guidance. I want to focus on the second quarter. As I think about Eastman, you know, more of a – less sick of gold than most companies that I follow, that range of $1.70 to $1.90 is rather large. So can you talk about kind of the puts and takes to hit the low end and the high end? What are you embedding in terms of that wide range?

To put it simply, it's a question around demand in June. And you know, to some degree may, but with the uncertainty of everything we've discussed on this call, uh, you know, how orders trend with customers is just heavily connected to that. And we're very encouraged that April's holding up, which is great. Um, so, you know, we're off to, you know, a solid start to the quarter. Um, but the, you know, how. customers behave and how many orders get placed creates the range on that uncertainty. I mean, there are other smaller things around trends on, you know, natural gas prices and currency and this, that, and the other, but the principal question is just a demand question in the back after the quarter.

Interesting. I want to drill into that, the positive take on April trending in line with March. As I might have thought that historically April, I don't want to be too granular, but I would have thought that April would have been a little bit better than March given building and construction, et cetera. But it seems like it's kind of one for one. And is that typically the norm at Eastman?

It is typical for April to be similar to March in a good year or a solid year, not a great year or a bad year. What happens, you got to remember, you know, the result of a quarter is three months, right? So Every quarter typically starts out where the beginning is weak and it gets stronger through the quarter. So the last quarter, March, June, September, all tend to be the stronger month of the year, of the quarter. And so the fact that April is similar to March, which is a strong month, is good. So you're building off of that performance because March was better than January and April. I'm sorry, January and February. But, you know, so I would put this in sort of a normal start to a Q2 as opposed to good or bad.

Okay, gotcha, gotcha. And then just following up on a lot of discussion on volumes in tow, obviously, but back to your earlier point about how small tow is as a percent of the cigarette, And so, you know, raising, you know, tariffs, raising the price by 145% or something like that. Who is, you know, when you sell to CNTC, are they paying, will they be paying that tariff and you're maintaining price? Or conversely, if you're having to eat some of the tariff or what have you, what would prevent you from raising price given how small it is as a percent of the total?

That's a great question. So technically, you know, when you're going into a country, you know, you're the one paying the duty and you have to decide to raise the price to cover the duty or not in the way that that works. The conversation, so the joint venture between Chinese National Tobacco Company and us, you know, has an obligation to buy flake from us, but they can jointly decide with us that if the price is too high for the flake, that they will reduce production, you know, if it's not economic at that price to sell the tow. And so that is where the volume risk comes, you know, with this flake sales is that price is much higher than the other plants that the CNTC has, right? Remember, they have a spectrum of joint ventures making tow. All joint ventures with us or a lot with Celanese and some other players. Those are making both the flake and the tow in China. So we're the only ones importing flake into China. So they can flex up the run rate of those other assets and reduce the run rate of this asset if our flake is too expensive.

Okay, gotcha. Fingers crossed that 90 days from now on your next call, this whole conversation will have been moot. and we'll be back to normal. But thanks so much.

Thank you, Frank. And it's a good point, Frank. I mean, if we get these things, all this tariff to moderate back to sort of more rational levels, and let's just say 10% to 20% range versus where we're at now, I don't think we should fantasize about everything going to zero. I do think things can normalize and get a lot better, and we would be able to snap back towards normal. our original forecast for the back half of the year from January. But you do need to get some of this extreme tension taken out of the system.

Let's go to the next question, please.

Thank you. Our next question comes from Mike Sison from Wells Fargo. Your line is not open. Please go ahead.

Hey, good morning. Mark, you sort of gave a soft recession sort of outlook, I guess. in your prepared remarks, how do you think the Eastman portfolio should hold up or perform if the U.S. does go into a recession? You know, in 23, your volumes took a pretty big hit for Vance Materials and AFP, but, you know, a lot of destocking there. So just, you know, where do you think volumes would sort of mirror if we do go that route, unfortunately, this year?

Yeah, that's a good question, Mike, and I think there's – a lot of mitigating actions we're taking. But to answer your question first, I think that the demand situation this year will be considerably different and less potentially than what happened in the 22 timeframe. So we've been in a manufacturing recession since the summer of 2022, and we have not come out of it, right? I mean, demand has been challenged, as we all know, with the inflation and the interest rate hikes, et cetera. that especially on the consumer discretionary demand side of the equation, you know, cars, homes, autos, you know, we're still below 2019 levels. And at the same time, there's been no driver for restocking in these markets. So the inventory levels that are sitting around the planet right now are not that high, right? They're at appropriate levels for this low demand scenario. And people have only had a couple of months to react to this tariff risk. So there's not a lot of time to sort of build inventory ahead of this tariff risk through the first quarter. And you're worried about recession. So everyone's trying to balance just how much inventory do I want to have? What's happened is the geographic location in inventory has changed a lot, right? So anyone who had blunders in TVs in China got them in the West. But that doesn't mean they made twice as much. And same thing, we got materials into China. you know, materials have moved around, but I don't think we're sitting on a huge amount of inventory right now for a destocking event. And I don't think, you know, demand has a big step down because we're already at a relatively low level of demand compared to a normal recession. So, you know, there are extreme differences, you know, obviously between the U.S. and China economies being dislocated at these tariff rates that you've got to then factor in. So hard to put it all together, but You just don't have that sort of mountain of risk, you know, in absolute volumes, I think, this time relative to where we were in 22. So I think that's important to keep in mind. The second thing I'd say is, you know, there will be a tailwind, you know, on the price-cost relationship if you go into recession. Similar to the demand situation, I don't think the tailwind will be as significant because, you know, we've already been at, you know, sort of stress levels in pricing and with raw materials, but I do think you'll have a tailwind there to offset that demand dynamic. And there's just a lot you can do to manage through this in the actions you take. So as we've said, we've already focused on making sure we're going to be sort of cash generative in how we're performing. There's a whole list of mitigating actions around tariffs I've already mentioned. There is still innovation that's allowing us to grow above markets. The commercial excellence of our teams is phenomenal in defending pricing and value for products, which we've demonstrated over the last three years and will continue to do. And methanolysis is a unique upside to Eastman, where we've got that $75 million EBITDA as a way to offset some of all these challenges we've been talking about. And of course, we'll be prudent on the CapEx front so that from a free cash flow point of view, we're in good shape. A lot of things that we're doing to manage through it, I think, you know, I would not recommend just running a proxy analysis on demand for 22, you know, and 23 relative to this scenario for the reasons I just mentioned.

Got it. And as a quick follow-up, if the tariffs are resolved and we get back to that 8.875 run rate for the second half, what was the volume assumptions that AFP and AM could do? like low mid single digits. Is that sort of what we were hoping for initially?

Yeah, that's about right, Mike. Um, I, I think that the, you know, people are really draining stock right now to avoid the tariffs, which means, you know, inventory is going to be a lot lower than, than, uh, what is normal if we're going back to a normal economy. So, you know, you would hope in markets continue to come back to some stability. there's going to be friction from all these tariffs. So, you know, if we're at 10 to 20% tariff, you know, there is going to be some consumer friction around that and what people can afford to pay or people managing headcount costs. If there are, you know, companies are absorbing the, you know, the hit that will have an impact on the economy, you know, but you'll have a restocking, you know, bringing them back to more normal levels that, you know, will certainly help volumes in the second half, you know, be better.

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

Of course. Our next question is from Josh Spector from UBS. Your line is now open. Please go ahead.

Hey, guys. This is James Cannon for Josh. Thanks for taking my question. Just given all the uncertainty in the market, I just wanted to focus on some of the more controllable items. and looking at the guidance that baked in the 20 million headwind from turnarounds. Could you just help level set how the turnaround schedule is expected to look in the back half?

Yeah, so what I would highlight, it is unique for us to have the scheduled turnarounds here in the first half. in Q2 specifically. So, we've got the sequential 20 million headwind, I would say, you know, sequentially into Q3, it'll be at similar levels, and then Q4 would actually be an improvement. So, we'll basically have some higher cost in Q2 versus Q4. Obviously, in this uncertain environment, that also helps us get ahead as we look at inventory and generating cash flow, because taking actions here in Q2 and Q3 ultimately defines the year in cash.

Thank you. Did you have a follow-up question? Okay. Thanks, everyone, for joining us. Okay. Yeah, I appreciate it. Yep. Thanks, everyone, for joining us. I appreciate you joining this call. Hope you have a great rest of your day.

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