Eastman Chemical Company (EMN) Earnings Call Transcript & Summary

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.