Eastman Chemical's Q3 2025 Earnings Call: Contradictions on Demand Stability, Renew/PET Recycling, Fiber Volume Trends, and Recovery Outlook

Guidance:

• Targeting $100M incremental run-rate cost savings in 2026 (on top of 2025 actions).
• Expect a utilization tailwind of $50M–$75M in 2026 depending on volumes.
• Full-year 2025 volume base guidance: AM down ~4% and AFP down ~2%; fibers intended to be stable in 2026.
• Methanolysis/ARPET (Renew) revenue to meaningfully ramp (material impact expected starting Q1).
• Q1 should improve vs Q4 seasonally; buyback plans to be updated in January; dividend expected to be supported.

Business Commentary:

• Volume and Market Conditions:
• Eastman's full-year volume projections for 2025 show a 4% decline in Advanced Materials (AM) and a 2% decline in Adhesives, Films, and Polymers (AFP).

• The decline is attributed to demand volatility due to trade disputes and economic conditions, particularly in discretionary markets, and lower-than-expected consumer demand.

• Cost Reduction and Efficiency:

• Eastman plans for $100 million in cost reduction for 2026, building on a $75 million reduction already achieved in 2025.

• Cost reduction efforts include aggressive productivity improvements, competitive manufacturing, and AI integration across operations and commercial activities.

• Innovation and Revenue Growth:

• Eastman expects revenue growth from innovation, including the circular polyester methanolysis plant, which is projected to provide a meaningful increase in earnings.

• This is supported by ongoing innovation in areas like automotive interlayers, HUD, and EV components, as well as the conversion of ARPET capacity.

• Regional Strategy and Market Dynamics:

• Eastman's strategy involves vertical integration and regional optimization, as shown by the conversion of a Kingsport plant to make ARPET, expected to significantly boost revenue.
• The strategy is driven by market demand shifts, particularly in consumer durables and specialty polyesters, and is supported by trade regulations such as tariffs.

Sentiment Analysis:

Overall Tone: Neutral

• Management repeatedly emphasized cautious optimism: “meaningful earnings increase” from cost actions, utilization and Renew/methanolysis ramps, but also noted weak end-market demand, inventory destocking and tariff-driven distortions; stated confidence in dividend and buyback discipline while warning timing of recovery is uncertain.

Q&A:

• Question from Vincent Andrews (Morgan Stanley): Can you walk through the bridge to 2026 — is it full-year EBIT plus $100M cost savings and $50–$75M utilization, and are there other puts/takes?
  Response: Build off full-year volumes (AM ≈ -4%, AFP ≈ -2%), then add $100M cost saves, a $50–$75M utilization tailwind, and innovation/methanolysis (Renew/ARPET) revenue to drive meaningful earnings growth.

• Question from David Begleiter (Deutsche Bank): What’s status at Kingsport (conversion/expansion to ARPET), expected costs/timing, and plans for the second plant/locations?
  Response: Kingsport performing well with ~90% yields; a modest, staged ~30% capacity expansion is feasible with relatively small capital; ARPET demand commitments should significantly increase revenue and the second-plant options are being evaluated for more capital-efficient builds (more detail in January).

• Question from Alexei Yefremov (KeyBanc): Customers show interest in Renew specialty applications but aren’t buying volumes — how do you gauge real interest and willingness to pay?
  Response: Customers remain committed (>100 customers, only one cancellation); launches limited by weak consumer-durable demand, so interest is real but conversion to volume awaits end-market recovery.

• Question from Alexei Yefremov (KeyBanc): Why are fiber volumes expected to be stable next year given weaker textiles and destocking?
  Response: Textiles headwind is cyclical (tariff-driven); tow destocking and share shifts are stabilizing, so net effect expected to be roughly flat volumes next year.

• Question from Patrick Cunningham (Citigroup): Reminder on the Pepsi contract and what’s prompting its restructuring?
  Response: Pepsi was a baseload contract sized for a second plant; restructuring is shifting some volume timing to start next year and Eastman can supply near-term needs from Kingsport configurations.

• Question from Patrick Cunningham (Citigroup): How should we think about CI earnings in 2026 — any signs of inflection from trade or rationalization?
  Response: CI recovery depends on broader demand/housing recovery and capacity rationalization; tariffs help protect North American margins, but management remains cautious until market tightening is evident.

• Question from Salvator Tiano (Bank of America): Are any chemical chains seeing structural supply from China that could cause prolonged share/earnings loss?
  Response: Some low-value/coalescence and architectural interlayer segments saw competition and share loss, but most AM/AFP specialties remain protected; management sees current headwinds as primarily cyclical/demand-driven, not structural specialty overbuild.

• Question from Salvator Tiano (Bank of America): Any change to buyback plans next year vs this year?
  Response: This year’s buybacks completed as planned; dividend confidence for 2026; buyback range for 2026 will be updated in January while targeting net debt progress toward ~2.5x.

• Question from Josh Spector (UBS): Should the utilization/add-back be applied to the full year or to the second half when modeling 2026 EPS?
  Response: Use full-year volumes as the base; utilization benefits are annual and expected to provide $50M minimum and up to $75M depending on demand, so model off full-year to build the bridge.

• Question from Kevin McCarthy (Vertical Research): Any downside risk from Pepsi restructuring to Eastman, or can you perform from Kingsport? Also thoughts on continued annual dividend increases?
  Response: No material downside — contract can be supported from Kingsport and reconfigurations; dividend policy is a board decision but cash flow coverage is strong and management is confident in maintaining the dividend.

• Question from Frank Mitsch (Fermium Research): How confident are you this is the bottom given recent guide changes and what are order trends for November? Also, details on the 7% headcount reduction and how it factors into cost savings.
  Response: Management: demand is the changing variable; October met expectations, Q1 likely better than Q4 but timing is uncertain; cost program is aggressive — net savings to exceed $75M in 2025 with an additional $100M in 2026 (gross >$300M) and the ~7% headcount reduction is part of these productivity and footprint actions.

• Question from Mike Season (Wells Fargo): Any portfolio changes needed to improve multiples/returns over next five years and does normalized EBITDA path change with cost saves?
  Response: Strategy remains innovation-led with disciplined M&A if attractive; normalized EBITDA recovery still requires volume stabilization — cost cuts materially improve margins but volume recovery is key to reaching prior EBITDA targets.

• Question from Aaron Viswanathan (RBC Capital Markets): Are you ceding lower-value share intentionally and how will that affect margins going forward?
  Response: Eastman continuously optimizes assets to favor higher-value products; sometimes runs lower-value to sustain utilization, but as demand recovers they will revalue-up mix to improve margins.

• Question from John Roberts (Mizuho): Will Renew in PET bottles be blended at consistent levels or vary by brand and is there an average level in your plan?
  Response: Brands will choose different recycled-content levels (range from lower blends to 100%); management expects specialties + RPEC to average roughly 50–75% recycled content across applications initially.

• Question from Duffy Fisher (Goldman Sachs): How exposed are you to AgChem market disruption and will tow/textile weakness force lower acetyls chain runs?
  Response: Eastman’s AgChem intermediates are largely North America-focused and aligned with market winners, limiting exposure; for acetyls/tow, innovation (e.g., Aventa and other cellulosic specialties) enables redeploying capacity into higher-value, growing applications.

• Question from Lawrence Alexander (Jefferies): Will reshoring of appliance capacity be a 2027–2028 catalyst and is China’s five‑year plan a net positive or negative for chemicals?
  Response: Reshoring and nearshoring trends should benefit demand over time but will take years to materialize; China’s current environment (weak consumer demand plus excess export capacity) is a headwind globally, and outcomes depend on whether Chinese policy effectively rationalizes capacity.

Contradiction Point 1

Demand and Market Stability

It highlights differing views on the stability of market demand, which are critical for forecasting growth and strategic planning.

How do you bridge from 2023 EBIT to 2026? Is the 2026 EBIT bridge based solely on this year’s EBIT plus $100 million cost savings and $50-$75 million asset utilization reversal? What are the key factors driving your 2026 outlook? - Vincent Andrews(Morgan Stanley)

2025Q3: 2026 outlook needs to consider full-year numbers, not just Q3/Q4. AM is down 4%, AFP down 2%. Growth expected in stable markets. Trade disputes exaggerated normal seasonal trends. - Mark Costa(CEO)

How representative is the second half of trough earnings levels? Has your mid-cycle earnings power assessment changed with current macro conditions? - Patrick David Cunningham(Citigroup)

2025Q2: The back half of this year is heavily impacted by trade issues, particularly tariffs, which affect consumer discretionary markets. Demand is the main concern, with indications of mid-single-digit drops in the back half. - Mark J. Costa(CEO)

Contradiction Point 2

Renew and Pet Recycling

It involves differing perspectives on the market demand and customer interest in Renew, which is a key strategic initiative for Eastman Chemical.

Customers are interested in Renew but not purchasing in volume. How does Eastman gauge their actual interest and ability to pay? - Alexei Yefremov(KeyBanc Capital Markets)

2025Q3: Strong interest in Renew for differentiation. Economic determinant depends on market consumer demand. Pent-up demand is accumulating, and we expect a resurgence with economic stability. - Mark Costa(CEO)

Why the shift in optimism for methanolysis sales between this year and next year? - Aleksey V. Yefremov(KeyCorp)

2025Q2: Demand is currently slowed by market conditions, but long-term demand for recycled content remains strong. There’s interest in rPET, with some customers finding mechanical recycled content not working well. Eastman’s offering is still sought, creating a competitive advantage. - Mark J. Costa(CEO)

Contradiction Point 3

Fiber Volume and Demand Trends

It involves differing perspectives on the stability of fiber volume demand, which is crucial for understanding market trends and company performance.

Why are fiber volumes expected to be stable next year? - Alexei Yefremov (KeyBanc Capital Markets)

2025Q3: Textiles, a key demand driver, is cyclical and affected by tariffs. Recovery expected with share gains and moving outside of China. Tow market is stabilizing with less inventory and share loss stabilizing. Expect stable volume next year. - Mark Costa(CEO)

How long will destocking persist in the Fibers segment, and how should we assess contract performance over the next few years? - Patrick Cunningham (Citigroup)

2025Q1: Destocking is due to market loosening and added capacity in China. Contracts are about 80% for next year, with most being multiyear. Market growth is stable, but volume decline is attributed to customer destocking rather than market growth changes. The current destocking may last longer than expected, but fundamentals are stable with contracts in place. - Mark Costa(CEO)

Contradiction Point 4

Demand Stability and Recovery

It highlights differing perspectives on the stability and recovery of demand, which are crucial for understanding the company's financial outlook and strategic positioning.

Given Q4's weakness, is the demand bottom expected to be reached soon? - Patrick Cunningham(Citigroup)

2025Q3: We expect relief soon, with demand trends showing some positive signs, especially in specialty plastics. - Mark Costa(CEO)

What is the expected sales volume of the methanolysis plant, given consumer brands' recycled plastic targets? - Vincent Andrews(Morgan Stanley)

2024Q4: We expect our global demand environment to stabilize, perhaps even improve modestly in the back half of the year and into 2025. - Mark Costa(CEO)