Eastman Chemical Q3 2026 Earnings Call Transcript

Eastman Chemical (NYSE:EMN) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Eastman Chemical reported their Q3 2026 earnings, highlighting a reinstated DOE grant to support their Kingsport expansion, enhancing U.S. supply chain resilience and manufacturing job creation.

The company managed to secure a mid-single-digit volume growth in Advanced Materials despite market challenges, with significant progress in price recovery, although facing a $15 million headwind in Q4 due to raw material costs.

Eastman Chemical aims for $100 million in circular sales for 2026, with similar expectations for 2027, while operating cash flow guidance for 2026 was adjusted down from $900 million to $850 million due to inflationary pressures.

Significant strategic initiatives include minimizing CapEx through DOE support, expanding methanolysis plant capabilities, and leveraging existing shutdown recycling facilities for cost-effective growth.

Despite challenges in Chemical Intermediates due to unusual propylene-propane spreads, the company remains optimistic about 2027 prospects, anticipating moderate volume growth in Advanced Materials and AFP segments.

Full Transcript

OPERATOR

Recorded. This call is being broadcast live on the Eastman Chemical website at www.eastman.com. I will now turn the call over to Mr. Greg Riddle, Eastman Investor Relations. Please go ahead, sir.

Greg Riddle (Investor Relations)

Thank you, Joel, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, board chair and CEO; Willie McLean, executive vice president and CFO; Jake Larow, Director of Corporate Finance and Investor Relations; and Mason Tincher, Investor Relations Manager. Yesterday after market close, we posted our third quarter 2026 financial results news release and SEC 8-K 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 third 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-K filed for full year 2025 and the Form 10-Q to be filed for third quarter 2026.

Second, earnings referenced in this presentation exclude certain non-core 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 third quarter 2026 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. Joel, please, let’s start with our first question.

OPERATOR

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

Vincent Andrews (Analyst at Morgan Stanley)

Thank you and good morning, everyone. Congratulations on getting the DOE grant back together. We’d be curious to hear a little more details on how that can be allocated in terms of how much can you put towards the Kingsport expansion. And then there was some discussion of restoring underutilized American recycling assets. And so what does that actually entail? Are those going to be also chemical recycled or methanol that you’re going to somehow be able to do, or is that the more traditional recycling?

Thank you.

Mark Costa (Chief Executive Officer)

Good morning, Vincent. And we are very excited to get the grant back. I would say that the Department of Energy has been a phenomenal partner in coming back to us and talking about how we could collaborate on a reinstatement. And I think we’re fully aligned in their vision, which is, you know, priority on reindustrializing the U.S., supply chains to America, building resiliency. And when you look at this project, it’s creating U.S. manufacturing jobs directly as well as in all the collection, recycling industry that feeds into it.

It’s providing security on a critical material. Without security on things like PET, when China is getting to be 75% of the industry, you have a serious issue about how you can put food and water on the shelves. And so security is incredibly important. And it also allows us to be another leader and demonstration of technology leadership in creating a unique position in this that allows us to also create a regional economy. So when you think about the grant coming back at the full value, it’s really exciting.

Now, the grant does require Eastman Chemical to provide at least sort of 50% of the CapEx. But it is structured where up to 50% of the capital, if we can get the number at the right target, can be paid for by the DOE. So that’s a great place for us to be. And as you mentioned, the scope has materially changed. The original scope was centered around building the second plant, and all the capital would have been sort of devoted to that in their support.

This actually pulled in the scope of the current plant. So all the debottlenecking of the current methanolysis plant to get to that 30% extra production, the expansion of the feed processing capability in front of it, the additional add of polymer and infrastructure that goes around producing more product and getting it to the market across both specialty and in the PET section — those kind of incremental expansions are covered under DOE, where we would get a 50% share from them on those investments.

So that’s great. It helps us minimize CapEx in the short term in this environment, and it allows us to build momentum to, you know, to the second plant. And then it also of course covers the second plant. And that will be, you know, a project that I think will have substantially less CapEx than what we talked to you about in Longview, Texas. For one of the reasons that you just mentioned, we are looking at — you know, you have to remember that the Longview project was not just a methanolysis plant.

It was also a polymer line. It was feedstock processing on the front end. It was infrastructure to support all that together. And about 40 to 50% of the capital is actually not the methanolysis plants. It’s all the other things — the processing, the polymer lines, the infrastructure, etc. So those kind of assets exist today. You know, there are recycling plants that have shut down in this country that we can purchase for a very low price. There are polymer lines that have been shut down, and there’s infrastructure around both of them that are sitting there in those sites. So we have made great progress in finding a way to acquire those sites at very low capital and have that replace a significant amount of new-build capital associated with the second plant.

So we’re very excited about that, and we’ll tell you more about that once we get it fully completed. Also, I would mention on the methanolysis plant itself, we believe we can build it at a much lower capital cost than the first plant because of all the learnings we’ve had in how to design it better, how to execute the construction better. I would also note that the solar facility is out of the scope of the project. And the other thing to keep in mind is given the insights we have about building a 130,000-ton plant — you know, we build a 130,000-ton plant, not a 100,000-ton plant — you know, with incremental extra capital from all the learnings we’ve had for the first plant.

So the output you’re going to get out of this plant is far greater for a similar amount of capital. So you can get the capital number down a lot when you put it all together. It basically says to complete the expansion and debottlenecking of the first plant and building this second plant, the DOE would probably cover 30 to 50% of the capital cost associated with that combined investment.

Vincent Andrews (Analyst at Morgan Stanley)

Well, that’s great news. I’ll pass it along. Thanks so much.

OPERATOR

Your next question is from Patrick Cunningham with Citi. Your line is now open. Please go ahead.

Patrick Cunningham (Analyst at Citi)

Hi, good morning. I guess just on Advanced Materials, where do you stand in terms of price/cost for the business? How much of the planned price recovery have you gotten year to date? And is this more of a headwind in 4Q as costs start to ramp up and prices start to stick in other areas? And just in terms of the January 1st price increases, how should we think about the levels that you’re targeting there?

Mark Costa (Chief Executive Officer)

Yeah, so I’ll start with just on a full-year basis, and then I’ll talk about Q4. So the commercial teams have done a phenomenal job on managing price in this environment. And as we talked about back in April when the Iran conflict was driving raw material prices up in a significant way, we leapt into action across the whole company, including AM, and started increasing prices in a pretty significant way to keep up with that higher raw material cost as well as distribution costs that come with this crisis.

So I think we’ve done a great job in the implemented prices that we did, especially the specialty plastics side of things I think was keeping up with those raw material increases with the actions we took through July. And I think we’ve made very good progress on that. So when it comes to the SP side of it, we’re pretty much catching up in September. And then of course with the Iran conflict escalating, you know, had a new spike up in PX prices back in the July/August time frame. Prices of oil were down in the 80s. You know, we were expecting a raw material tailwind in the back half of the year. In our guidance back in the second quarter call, as you know, prices sort of got implemented at a higher level and raw materials were expected to come off. Obviously that didn’t happen. You know, the prices have held, but we have, you know, a much higher level of PX that’s really impacting Q4.

And so we are, you know, taking actions, but it’s a little difficult in the middle of the quarter to sort of address the problems that higher cost creates. So we’ll probably have about a $15 million headwind that’s really associated with, you know, a bit in Q3 at the end of the quarter and mostly in Q4. And so we have a $15 million headwind relative to what we expected would have been a greater than $15 million tailwind. So it’s quite a swing from where we were in July.

On the film side, there were some prices, you know, that were locked in in annual contracts on the side and some adjustments we had made in prices to regain some share in a few places. So we talked about that to you in the beginning of the year. That’s been an all-year thing. Of course, raw materials higher there — that’s led to some compression — and some of that has been offset by some price/cost expansion in Performance Films. When you put all that together, it’s about a net 15.

So you’ve got, on a full-year basis, about a $30 million headwind in price/cost for the segment. Half of that is really a Q4 thing with specialty plastics, and the other half is spread across the entire year. But the January 1st price increases that we’ll put in place will address that raw material cost challenge that we’re facing, and we feel confident we can sort of cover the raw materials as we go into next year. And I would mention if the war comes off and prices go back to the 80s, you know, we’ll be in a position to have a pretty significant tailwind in price/cost next year relative to this year.

Patrick Cunningham (Analyst at Citi)

Great, that’s helpful. And then maybe just on some of the operational constraints with the delays on the Tritan startup and the polymer line conversion, I guess, you know, how substantial are these delays? Does this persist into next year? And, you know, maybe just in terms of the size of the planned shutdown, in terms of the earnings impact, pushing that from 3Q to 4Q, if you could help size that, that’d be helpful as well.

Mark Costa (Chief Executive Officer)

Sure. So the line delays are solely an impact in the third quarter. So we had two lines. One was the large Tritan line that we’ve been constructing as part of the circular program. And we had finished the construction of it and desperately needed it to ramp up and serve the Tritan demand that we had in the quarter. So we were pushing hard to start it up and we ran into some issues with some bad pumps that had to be replaced, and it delayed us by about a month in getting the line started up.

And that impacted both the cost of fixing that as well as missing some orders at the end of the quarter. The conversion of a polymer line to make PET, which we talked about to you guys a long time ago for making PET to serve all the Pepsi demand and other customers that really wanted the product in Q3, we ran into some startup issues in that line, which also delayed us about a month. Both lines are up and running and running incredibly well. So it’s no issue for Q4, but it did impact creating some additional expense in the quarter and then it also impacted, you know, some of the volume we could have sold in the quarter.

That was part of why we were, you know, not, you know, a little bit below Q2 as opposed to being, you know, above Q2 in our original guidance.

OPERATOR

Can we have our next question, please? Your next question is from Josh Spector with UBS. Your line is now open. Please go ahead.

Josh Spector (Analyst at UBS)

Yeah, hi, good morning. And maybe this is related with the prior question, but just, you know, your commentary around reiterating 3% volume mix growth this year, I mean, implies fourth quarter you need about high single-digit volume growth. Understanding it’s an easy comp in fourth quarter. But 3Q was an easy comp as well. I imagine it’s more than just the polymer lines that you need to pick up to get there. So, you know, what drives that confidence to say that?

Mark Costa (Chief Executive Officer)

That’s a great question. So I mean, I’m going to answer it first on the sort of full-year basis and then come back to sort of Q4 specifically because I think context matters, you know. Overall, for the full year we expect to be about 3% up in volume mix in Advanced Materials, which is a really impressive performance in the context of the year that we’re in. So two-thirds of our revenues in discretionary markets in Advanced Materials. And you’ve got challenges in auto, of course, where automotive demand is challenged both on the sales and the production side, especially in China, which is extraordinarily challenged.

And the innovation has just done a great job on the interlayer side of holding revenue flat when the market is probably down 2, 3, 4% depending on who you ask, but it’s certainly down. And that innovation in HUD and getting more territory on an EV versus an ICE car that we’ve told you about before, et cetera, is certainly playing out. And then on the Performance Films side, that’s been the more challenged part. The majority of our profit in Performance Films is sort of split between North America and China. Obviously things have been fine and holding up well in North America, but in China with the market being down about 20% in sales, you know, that’s a pretty material headwind. And so we faced that headwind and it really impacted us in Q1 where we serve the high-end market.

And we responded and told you about this back in the Q1 call of broadening our position into the mid tier because there are low-cost assets that we brought online in China that allowed us to penetrate that market. And we had dramatic—We had a significant headwind with low demand, dealers destocking in Q1, and then a significant improvement in business as we went from Q1 into Q2. The actions that we took along with optimizing the cost structure of that business in Q2 and all that carries forward, carries forward into Q2 which was very strong.

Q3 was a little less strong because Q2 was very strong in sort of how the dealers had loaded some inventory and they were expecting the market to grow and it didn’t sequentially. And so, you know, they’re managing inventory. That’s a big part of the story on Q3. But overall when you look at it, that momentum still continues with that broader market position into Q4. So we have a broader market position in a tough market. We have innovation delivering growth. And autos will, you know, be a contributor year over year in Q4, but also on a full-year basis. But it’s lumpy across the quarters. You know, on consumer durables, same story, mid single-digit growth in a down market. And that’s all about, you know, winning applications in Tritan. That’s part of the renewed value proposition that’s allowing us to win with customers.

And just the great performance Tritan has. And our team’s just out there fighting every day, picking up market share versus other materials. So great story. Volume growth, the steady markets are obviously giving sort of modest growth and on a full-year basis I would note there’s also about a $50 million revenue loss relative to last year from some business that we walked away from last year. So this is not Iran conflict oriented but just walked away from in medical that just didn’t have much value.

So that sort of masks some of the growth that you’re seeing across all these other areas. So in Q4 you just have the momentum and pickup of all the Renew volume going into the quarter which is pretty significant as we’re driving to our up to $100 million of revenue. A lot of that’s in Q4. So that’s part of how Q4 is better. You’ve got the continuing innovation across the durables that’s delivering value and you’ve got some more stability and market presence in PF. All those come together to give you the ability to have some better volume growth year over year and not as much of a sequential decline as you would normally expect.

Josh Spector (Analyst at UBS)

Got it. Thanks, Mark.

OPERATOR

Your next question is from Frank Mitch with Fermium Research LLC. Your line is now open. Please go ahead.

Frank Mitch (Analyst at Fermium Research LLC)

Thank you. And if I could piggyback on a couple things. One, congratulations on getting the DOE grant. Mark, obviously you’re saying that you’re going to grow the circular sales in 2026 up to or approaching $100 million. And I believe in the prepared remarks it was expecting another 100 million in 2027. And I guess I would have thought that that 27 would have been higher than 26. Can you, can you speak to, you know, the expectations there and what we can expect, you know, in 27 and beyond?

Mark Costa (Chief Executive Officer)

Yeah, it’s a great question, Frank. And we are seeing a lot of great, you know, revenue momentum in the circular economy as you’re highlighting. And I think that it’s important to keep in mind that it’s sort of half specialty, half PET. So I think on the specialty side it’s going to be continuing to deliver the performance we delivered this year. Right. So mid single-digit growth, you know, in a challenged market, you know, is great. And that momentum should just continue as we go through next year and continue to build in, you know, the specialty side of things.

When it comes to packaging, I think that’s where the big step up in volume is. So this line that we just converted in Q3 is now available for full year next year. So we certainly have more capacity to support growth in the RPET space, you know, with PepsiCo, with some other major brands that are very, you know, engaged with us. And when we get to January, we’ll be able to talk more about, you know, some of those customers and what we’re doing with them as we get their commitments finalized.

But we have a very clear line of sight that the revenue there will be stronger. So I would say $100 million is a minimum for what we need to deliver next year relative to this year when you look at that momentum. But it’s early and we don’t know what the state of the economy is going to be with the Iran war. So at this stage it’s good to be a bit conservative until we have clarity on the economy and can give you better insight in January.

Frank Mitch (Analyst at Fermium Research LLC)

That’s very helpful. Makes sense. And then Willie, the expectations on operating cash flow for the full year went from 900 to 8. I was wondering what accounted for that decline? And if you care to offer a sneak peek on your expectations for 2027. Thank you.

Willie McLain (Chief Financial Officer)

Thanks, Frank, for the question. As Mark’s already highlighted, we’ve had continued inflationary pressures with the Iran conflict and what’s going on in the Middle East. So that’s putting a little bit more pressure on working capital as we wrapped up Q3 and early Q4. You know, we expect a release as you think about how much working capital has been built through the year. You know, that’s, you know, almost $500 million year to date, 560 to be exact.

And we expect that to release in Q4 and have our traditional strong Q4 cash flows again. We think that’s around 850 million. But that also sets us up for stronger cash in 2027. You know, even if you don’t even have to release cash next year. As long as we avoid headwind or re-escalation and things normalize, we will have significant cash flow above the 850 in 2027. And we’ll be talking more about that on the year-end call when we have—I’ll call it our complete outlook pulled together.

Frank Mitch (Analyst at Fermium Research LLC)

Thank you so much.

OPERATOR

Your next question is from John Roberts with Mizuho. Your line is now open. Please go ahead. Hey there, John. Your line is now open. You can go ahead.

John Roberts (Analyst at Mizuho)

Sorry, I was on mute there. Yep. My apologies. I think you initially announced the ethylene-propylene flex unit at the December 2021 Investor Day. What took so long for that project to reemerge? And if you had had it up for 2026 would the EBITDA benefit have been at the lower or higher end of that 75 to 125 plus range you gave on slide 10?

Mark Costa (Chief Executive Officer)

So John, first of all, the EWP project, the metathesis unit that we’re talking about, is a phenomenally great project and a huge value-adding investment. And it’s a fair question around why not do it sooner. Back when we originally had this idea and the concept we were trying to create was sort of limited. And we were very focused on capex when we were driving the organic investments in circular and some other growth projects across the company. And so being responsible about capital allocation, as we always are in our discipline and not spending more than we have, we had to make some tough trade-offs and we focused on the circular economy versus this investment. And I still believe that was the correct choice to do. And with the information we had at the time when we were making the decision, we didn’t exactly see four years of stagflation ahead of us when we were making this choice.

But where we are today, this is a great investment. And actually because of the way time has gone by, we’ve developed more insight around the technology and realized that we could double the scale of the investment from what we were intending to do in the beginning to create a lot more value for shareholders from that investment. So, you know, to get $100 million of earnings, you know, sort of on average, you know, 75 to 125 in range, you know, for something that is repurposing an existing cracker, that’s a very capital-efficient approach.

And a payback in one to two years is great, especially in this business that certainly has its volatility. And it not only delivers $100 million, you know, roughly in value, it also takes a lot of volatility out of the earnings because a lot of the volatility in our earnings comes from the ups and down of the bulk ethylene sales. And we sort of, you know, now minimize that and take that volatility out. So it’s great both in volatility and value. We did actually run the numbers because we thought someone might ask of what the value would have been in 2026, and if the capacity had been in line all year, it would have added coincidentally about $100 million of earnings to this year in this current volatile context. So it’s a great investment over time. It’s very capital efficient, reduces volatility. We’re looking forward to having it online in the middle of 2028.

Willie McLain (Chief Financial Officer)

And John, I would just add, as we think about capital efficiency that Mark just referenced, I think you highlighted also that on the high end the simple payback’s a year and on the low end it’s about two years, which is great as we think about capital going forward.

John Roberts (Analyst at Mizuho)

I’ll pass on.

OPERATOR

Your next question is from Salvatore Tiano from KeyBanc Capital Markets. Your line is now open. Please go ahead.

Salvatore Tiano (Analyst at KeyBanc Capital Markets)

Yes, thank you very much and good morning. I wanted to understand a little bit better the AFP price/cost situation. There are a lot of comments about how you have contractual pass-throughs, but the implied, I guess, price-cost spread seems to be widening every single quarter. So firstly, when it comes to your price mechanisms, how do we reconcile the view that most are just contractual for the cost versus the widening spread? And secondly, specifically on Q3 when we look sequentially versus Q2, you have 4% more price, 7% lower volume. It seems that this is pretty much resulting in the sequential EBIT increase and there was no incremental sequential cost. That’s kind of at least what the model would spit out. So how were you able to get sequentially 4% more price when your inflation didn’t rise materially, Q3 versus Q2?

Mark Costa (Chief Executive Officer)

So yeah, so first of all, it’s not all cost pass-through in this business. So, you know, roughly half is, you know, CPT, if you will, and the other half, you know, is where we make price choices like everywhere else in the portfolio. So the team has just done a phenomenally good job in commercial execution across the entire portfolio, managing price in this context. Their ability to sort of be commercially excellent is also supported by being in a lot of very stable markets.

Right. So two-thirds of AFP are in stable markets that don’t have as much economic stress in them as B&C or Auto or Durables does. So you have a calmer, more sort of straightforward relationship with customers in that market as they’re delivering steady growth year over year. So that helps. You know, the CPTs certainly do help, and the nature of those CPTs, you know, with the level of volatility in raw materials that we’re dealing with right now certainly, you know, continues to, you know, create some tailwind. And I think that as we go into next year it won’t turn into a headwind, just to be clear, but I think it’ll stabilize out as we’re catching up to these raw materials or, in this case in this quarter, getting ahead of them.

And so I think that we’re in good shape, that this is a durable improvement this year and that we can hold on to it next year from what we can see. And then of course the volumes being stable gives you a certain amount of growth on a full-year basis. On a sequential basis there’s obviously seasonality that you see in the numbers on the volume coming off, and that’s just seasonality as far as we can tell from Q2 to Q3. But it’s just excellent performance. And, yeah, operations have run really well. There was a big shutdown in Q2 and so we have a lack of shutdown headwind that was in Q1 to Q2, and then we have that as a tailwind across two large shutdowns that are giving us some help there.

OPERATOR

Your next question is from Alexei Yefremov with Barclays. Your line is now open. Please go ahead.

Ryan Weiss (Analyst at Barclays)

Thanks and good morning. This is Ryan Weiss on for Alexei. Mark, a couple questions for you all related to acetate tow. So I believe in the prepared remarks you guys were talking about some form of price degradation in ’27, so, you know, I guess just how much you’re kind of expecting there? And then I believe you also mentioned that you have some confidence that you can grow volumes in acetate tow next year. You know, I guess I recall this is a pretty competitive market, and you know, some of your customers have been comfortable running it at lower inventory levels.

So just trying to level set kind of what’s going on there. And then lastly, just in this market, I think a competitor in the East recently acquired some assets that are in Europe. So any commentary there? Thank you.

Mark Costa (Chief Executive Officer)

Sure. Well, you embedded about three questions in there, so we’ll try and answer all of them. So on the tow side, I just want to talk a little bit about context for this year before we get into next year. This year as we went into it, about 20% of the industry contracts were open for, you know, competition, if you will, as we went into the year. And a lot of those contracts were at relatively high prices compared to sort of the market average, if you will.

And that led to a certain amount of price degradation as we held onto our volume. So the good news is, you know, our total volumes are stable to 2025, but, you know, came with, you know, mid-single-digit declines. And so that is a context. We also were expecting tech sales to grow this year, which obviously they didn’t as we had hoped, and we didn’t realize that stream utilization benefit for that reason, as well as some slower demand in a few other places across the company on the stream. So those were sort of what drove the challenges, you know, as we think about market context. Something we also mentioned last call is that, you know, Eastman is by far the low-cost leader in the industry with the scale and integration that we have with our site in Kingsport, you know, given the nature and scale of the entire site benefiting our cost position.

But it does come with a need for the stream to run at a certain level of utilization for it to be economic and for other operational reasons. So we have to keep a close eye on that, and we’re pretty clear about that, you know, in past comments. So when you put those two together, we have to think about what’s our strategy for going into ’27, and we do believe volumes will improve next year. It’s a mixture of the destocking seems to have played out with the independents, which are, you know, often more on an annual contract basis and therefore they were more aggressive in their destocking. We still see the multinationals that have more multi-year agreements and contract minimums that are going to have to continue doing more destocking next year.

We’re certainly going to pick up a tailwind from that, that destocking finishing. And for the stream reasons, you know, we’ve been looking at our market position where, you know, we lost a lot of market share from ’24 to ’25 when we were being disciplined in our pricing, and we’re intending to regain some of that in this context. There’s a lot more industry contracts open this year. Unfortunately for us, quite a bit less of our contracts are actually open relative to the overall market. And as these contracts are playing out, you know, we are, you know, regaining a bit of our share in some places. So when you put all that together we have, you know, better volume next year, and then you’ve got, you know, the natural adjustment of these new open contracts where the prices are coming off.

You know, so we expect another mid-single-digit decline in prices but, you know, but differently, you know, improvement in volume. And this combined with a couple other growth programs that are now getting into gear, we expect a pretty meaningful asset utilization tailwind, you know, to go with all of this. And when you put all that together, you know, it allows us to keep earnings in 2027 stable to this year.

OPERATOR

Your next question,

Mark Costa (Chief Executive Officer)

I’m sorry. You asked me about the Jenan Sergey combination. I forgot to answer that. So, you know, we obviously can’t comment on what their plans are, and we’re certainly still evaluating what they intend to do and how it might impact the industry. But a couple high-level industry perspectives I would suggest is a combination of those two would increase their capacity to serve the market, but it will include some high-cost assets, and we expect them to be focused on cost synergies, as anyone is in an acquisition, and as they look at integration when they put that together to make sure they’re supporting the debt they’ve taken on and delivering a good return on investment.

So when you look at their situation, I think it could lead to higher capacity utilization, and they certainly don’t have any reason to add capacity, and I think that that could be a stabilizing force in the industry. But it’s way too soon to really know, and we’re going to have to see how customers respond to this announcement. But that’s sort of our view on it at this point.

OPERATOR

Your next question is from Jeff Zukowskis from J.P. Morgan. Your line is now open. Please go ahead.

Jeff Zukowskis (Analyst at J.P. Morgan)

Now that you have the—

OPERATOR

Hello. I just was making sure you were unmuted. You can go ahead with your question. Go ahead.

Jeff Zukowskis (Analyst at J.P. Morgan)

Thank you very much, Nazi. Thank you. Now that you’ve received this DOE grant, is it likely that the trajectory of your capital expenditures will go up or down or stay at the same rate? In other words, will you spend more capital over the next three years, less capital, or the same amount of capital now that you have the grant?

Willie McLain (Chief Financial Officer)

Jeff, thanks for the question. You know, the first phase of the project, as Mark’s highlighted, the investment scope is really focused on expanding our Kingsport metathesis operations and supporting the collection of feedstock and processing infrastructure. So we expect this first phase of investments to be incremental, as we’ve already previously stated, and, now with DOE support, to remain within our planned CapEx for 2027. So no major changes on ’27.

And if I think about CapEx overall, while we’re doing the metathesis project, we also have completed the Tritan project. So we’ll be disciplined out of the gate depending on the economic scenario for ’27. And effectively the grant cuts the additional investments, as we think about going forward in ’28 and the future, you know, at roughly 50%. We’ve also highlighted that we’ll be disciplined and, you know, ultimately it’ll be a good scenario as we think about moving forward with the second facility as we deliver on the first facility and fill out the expanded capacity.

So I’m not going to state more about the future, but that’ll be a good opportunity for us as we meet those milestones.

Mark Costa (Chief Executive Officer)

Yeah. What I’d say is it’s a great way to reduce the capital and improve efficiency and our ability to be competitive in the circular economy to drive volume growth and earnings growth. So we’re really happy about it. You know, overall capital allocation depends on your cash flow each year, so we’ll have to, you know, see how things play out in the economy.

Jeff Zukowskis (Analyst at J.P. Morgan)

Okay. And, you know, in terms of your inventories, I think year over year maybe they’re up 250 million. Do you have to cut back on your operating rates to bring them down, or do you think you can operate your businesses normally and still work your inventories down through the course of 2027?

Willie McLain (Chief Financial Officer)

Yeah, Jeff, a couple of things. So, one, I would just highlight that earlier in the year we’ve talked about how we’ve added raw materials for security of supply. I would highlight paraxylene as well. Also, as you think about Q2, we did actually reduce some of our finished goods inventory so that we could take on more of that. As Mark has also highlighted here, the inflation that we’ve seen here at the end of Q3 going into Q4, we would expect not only the raw materials to go up, but as we convert those raws into finished goods, that’ll put pressure across the work stream. We expect to have and also had a planned turnaround in Q3 that got pushed out into Q4.

So naturally the key takeaways are inflation, security of supply, as well as the timing of our turnarounds. I see all of that ultimately normalizing. We’re going to release inventory in Q4 as we deplete that during our turnarounds as well as, as we go into 2027, we have a level of inventory on raw materials that we can work through and create a tailwind in 2027. I would highlight also that our days inventory from year-end 25 was, call it, 115 days. At the end of Q3, it was about 105. So there’s been a lot of inflationary pressure. We’re working through it, and that’s what’ll give us some additional tailwind in 2027.

Mark Costa (Chief Executive Officer)

And where the real opportunities for inventory reduction are is advanced materials and fibers, those two places. As we look at next year, we have confidence that volumes are going to be greater next year than this year. So you’ve got that volume growth to contribute and manage that. So I just addressed the fibers growth, and then advanced materials, if we deliver similar growth as we did this year or better, that gives us some momentum to sort of pull down that inventory as well.

Jeff Zukowskis (Analyst at J.P. Morgan)

Great, thank you.

OPERATOR

Your next question is from David Begleiter with Deutsche Bank. Your line is now open. Please go ahead.

David Begleiter (Analyst at Deutsche Bank)

Thank you. Good morning, Mark. Just in CI on the propane-propylene spread, you mentioned in the prepared comments how it should be a temporary condition. Can you talk through why you think it will be temporary and talk about the impact of the spread not just in CI but in the rest of the portfolio in Q4? Thank you.

Mark Costa (Chief Executive Officer)

Sure. Thanks for the question. Good to hear from you, David. So in general, high oil is a very good thing for the olefin complex in North America. And that has been true in Q2 and Q3 as we went through those dynamics driven by the Iran conflict. Q4 has turned into a very sudden and unusual situation. So what’s happened in the propylene side of the chain, which is where we’re concentrated: you had a situation in September where propane was $0.80 a gallon, oil was $80, PGP was $0.40 a pound, and the economics and the advantage that we have as a North American producer was good. Today we’re at $1.20 propane per gallon and $0.43 in PGP. And this is where it gets interesting. Asia, principally China, is at $0.61 in the value of propylene. So you’ve got a $0.20 per pound arbitrage that’s open between China and the U.S., and that is extremely unusual.

In fact, the last time it was this big was in 2004 and it lasted about two months. If you look over the last 20 years, which we did in preparation for this question, every time you see the ARB open between Asia and North America in this context, it closes very quickly. You can do your own math, but you can see it — it’s pretty clear. These ARBs, when they’re that wide open, get closed. Today you’ve got the cash margins in European crackers — and that’s a part of the refinery — are negative. So European production is being materially reduced.

I think you’re going to start seeing these prices, you’re going to start seeing even PDH reductions here in the U.S., supply is going to start getting constrained. That will reinforce the close of this ARB. I will admit that time to sort of close it is difficult because the ships to move propylene around are constrained by all the Iran war drama. So that’s a complexity and it’s also hard to solve in a Q4 dynamic when you’re seasonally low in volume. There’s a lot of customer caution out there about the future economy. You put all that together, it’s hard to close that ARB instantaneously.

But what we are doing is shifting our focus to offset some of this by shipping exports of olefin derivatives into Europe where the prices are going up because China is disadvantaged at the $0.61 plus logistics to get there relative to the U.S. and getting to that market. And so we’re taking actions as much as we can within the quarter to get that export out there and offset some of this ARB at the propylene level. Because remember, we don’t sell propylene; we sell propylene derivatives, and that’s our focus on how we manage that.

But when you look at this context, it looks very much like this ARB will get closed, and that will make a difference. When you think about that, as you think about next year, you can’t use Q4 as a proxy because of this. Even if you closed half of the ARB that’s open right now in this quarter, for the logic I’ve laid out, you’d add $30–$40 million of earnings to next year relative to Q4. And Q4 is seasonally very low in volume anyway, so you can’t annualize the volume side of it either.

So Q4 is not a very good proxy when you’re trying to look at how you want to do this. When you’re thinking about next year, I think Q3 is probably a better place to start at some level. And if you look at the propylene-propane spreads there, they’re about $0.27. The 10-year average is about $0.28. So pretty similar to historical average, whereas Q4 right now is at about $0.14, which is way disconnected from anything that is remotely normal. So some degree of return on that I think is logical to expect. Asset yields will get better next year because of some of the capacity shutdowns that have been announced. And we put all that together, I would say that we could be earnings next year somewhat moderately below this year, but it’s not likely to be a significant headwind. As we’re growing the specialties in the portfolio, I don’t expect CI is going to be, from what we know today, a big headwind to offset that.

David Begleiter (Analyst at Deutsche Bank)

Very helpful. And just on circular, you mentioned the incremental earning sales for next year. Can you discuss the incremental earnings you expect with those sales and maybe total earnings from this platform in 2027? Thank you.

Willie McLain (Chief Financial Officer)

So, David, what I would first highlight is with the up to $100 million this year, we think the earnings on an incremental basis is going to be around $20 million. Also, as you think about the current economic environment and the value that we’re getting from, I’ll call it, processing feedstocks versus paraxylene, we would expect to continue to run the plant hard here in Q4 and look to grow that into next year. So we’ll be building upon those and expect it to be at or above those.

As Mark’s already highlighted at this point, we’re looking at being at the conservative end, but we’ll be building upon that incremental growth in 2027 and we’ll be more specific as we get the economic scenarios and plans in place at the beginning of the year.

David Begleiter (Analyst at Deutsche Bank)

Thank you.

OPERATOR

Your next question is from Matthew DeYoe with Bank of America. Your line is now open. Please go ahead.

Matthew DeYoe (Analyst at Bank of America)

Yeah, good morning, everyone. It seems like, or at least directionally, I’ve seen some commentary around different degrees of interlayer capacity expansions coming, maybe from some of your Japanese competitors. Can you talk a little bit around some of the dynamics around that? I’m not 100% sure if it’s the same polymer strains or not, but demand isn’t necessarily super robust for some of these markets. So I’m just kind of wondering how you think that plays out.

Mark Costa (Chief Executive Officer)

Yeah, for the markets we play in with the Japanese that we compete against, we don’t see any sort of material capacity expansions coming from them. I think in this market, where demand has been pretty challenged, there’s not a lot of incentive to add capacity to that market until we have more clarity around market growth.

Matthew DeYoe (Analyst at Bank of America)

All right, I appreciate it. Otherwise, all my questions were asked. That’s fine. Oh, wait, did I have another one? So if I could drill in on Jeff’s question a little bit on capex — you know, Willie, I think you’d made a comment that ’27 capex will kind of be in line with plans. Can you just give me a notion — I think in our model we had you marked up a bit for ’27 versus ’26, just given some of the ramps. Can you give maybe a little bit more clarity on the absolute dollar spend plan for ’27?

Willie McLain (Chief Financial Officer)

So, yes. A couple of things. As I think about within plan, that was really more around the capacity expansion of our methanolysis facility and the spend on that front, and on that we would ultimately receive some funds from the DOE. On the absolute amount, I would expect, with this year coming in at $400 million as what we expect to be, also as we think about how do we move forward within the circular — as we think about the broader feedstock assets and we look at the metathesis — I would say the baseline starting point will be around $500 million.

Mark Costa (Chief Executive Officer)

I would note — thank you for that — we’re always disciplined about our cash flow and our capex. And our view of ’27 is we can deliver pretty reasonable growth in earnings and cash flow and release cash, obviously our working capital, on top of just the earnings growth. And so we feel good about where we’re headed, but we always are going to be disciplined to look at the situation. And if I’m right, we’ve got that kind of growth, and we’ll be able to support that kind of capex.

OPERATOR

Thank you for that. Your next question is from Abigail Eberts with Wells Fargo. Your line is now open. Please go ahead.

Abigail Eberts (Analyst at Wells Fargo)

Morning. Thanks for taking my question. Just clarification on Chemical Intermediates. It looks like your full-year assumption for Brent crude implies slightly lower pricing quarter over quarter for the fourth quarter, but you’re expecting CI spreads to be a tailwind to fourth quarter. If you could just clarify some of your underlying assumptions there. Thanks.

Mark Costa (Chief Executive Officer)

I would just point out, Abigail, on the assumption, I think you’re looking at the full-year average. The Q4 average is actually quite a bit higher than the full year. Yeah, the full year it’s been wild toads — right? I mean, you’ve had a pretty challenged market situation in Q1. Then you have the Iran conflict and it drives everything up. Then the oil prices collapse through the summer and everyone thinks it’s going to be okay because the conflict’s going to be moderated in some form or fashion, and then that turns out not to be true, and we are where we are today. So it’s a roller coaster, to be polite, on what’s going on in the market and how that all flows through, but it actually averages out to that number through all of it.

OPERATOR

Your next question is from Lawrence Alexander with Jefferies. Your line is now open. Please go ahead.

Kevin

Hey, good morning. This is Kevin S. on for Lawrence. Thank you for taking my question. I guess just on underlying demand, how much of the weakness recently, at least in auto and consumer durables, actually reflects end-market deterioration versus customers reducing inventories or delaying orders? And what are you assuming for your end markets as we enter the first half of 2027?

Mark Costa (Chief Executive Officer)

Yeah, so it’s a great question. From the end-market point of view, obviously the end markets have been challenged, and we’ve been in a version of stagflation since 2022. That has not had any improvement. And I think that as you look at the auto market, it’s impacted by interest rates, the price of gas, and everything else going on this year. But the challenge in demand has been in place for quite some time. We expected at the beginning of the year autos would have been similar to last year.

Turns out they’re going to be, from a sales point of view, probably down 3% to 4%. And that’s a function of interest rates and gas prices, which I think all connect to, to some degree, the Iran war. And I think when you look at building construction, it’s been down 20% on total home sales in the U.S., starting in ’23. And it stayed there and it continues to be weak also. True, about the same percentage, 20% down in Europe, and obviously China being worse. And consumer durables are to some degree connected to home sales as a transaction moment and overall affordability. So those also remain somewhat challenged, and I’d say at least in the back half are going to be a bit down relative to last year.

But overall, if you look at it, it’s been down, but it hasn’t gotten a lot worse this year—it’s just not gotten better. In the beginning of ’25, before the trade war, the economy was recovering, and then the trade war hammered it down. Things, I think, were stabilizing with consumers and were getting a bit better in the first quarter of this; the Iran war hammered it down. So unfortunately those two events have prevented some market recovery. But underneath it, what it tells you is consumers are resilient because everyone still has a job. And that’s the key difference between other recessionary moments where a lot of people lose their job and really cut back on spending.

People have their job; they’re just monitoring how they spend money to manage that affordability. So that’s the good news. And then if you actually add up the area under the curve of things they’ve not bought since 2020 to now, there’s a lot of pent-up demand, if we could just get to some stability and where they feel safe. And in this context, we’re demonstrating our innovation still delivers a lot of growth as we said it would and have proven year over year. So when you’ve got mid-single-digit growth in consumer durables in a down market, when you’ve got autos flat in a down market, you’ve got all this renewed growth creating new markets for us to grow in and expand our corporate addressable markets—accessing the packaging market in a profitable way, et cetera.

We feel good about how we’re delivering growth this year in this context. And as this context, which is very challenging, continues into next year, we’re confident we can keep delivering that revenue growth in this context. So that’s one context—it could stabilize if the Iran conflict gets resolved. I think that would be a big stimulus in consumer behavior feeling safer about the future. So that could happen, but that would be upside to how we plan for next year. But on the revenue part, it feels like we’re in good shape to drive growth in revenue. And as we mentioned, we have ways to stabilize Fibers. I don’t think CI is going to be a big headwind, despite the drama we’re in here in Q4.

And then we’ve got tailwinds in spread and tailwinds in asset utilization. So it all lines up to being a pretty good year with that volume, and importantly, when you think about that and that working capital can be released, a much better cash flow year next year.

Kevin

Okay, great, thank you.

OPERATOR

Your next question is from Kevin McCarthy with Vertical Research Partners. Your line is now open. Please go ahead.

Kevin McCarthy (Analyst at Vertical Research Partners)

Yes, thank you very much, and good morning. Most of my questions have been asked and answered, but I was curious, Mark, within AFP do you have in your mind that functional amines is likely to be appreciably better or worse moving into 2027 based on what you’re hearing from your agricultural customers in particular?

Mark Costa (Chief Executive Officer)

Yeah. So our functional amines business—first of all, it’s been a phenomenal acquisition and delivered consistent earnings growth year over year since we’ve had it, and it’s on track to have record earnings this year. I also mentioned AFP is on track to have record earnings for this year to anything in our past. So we feel really good about how the overall segment’s performing in this context, and amines is a real contributor to that steady, continuous improvement.

A lot of that goes into personal care products and home care products—it’s very stable and has growth. Obviously there’s some up and down in ag, but from what we’ve seen so far from our ag customers is they feel like next year will be a stable year and are planning on modest growth there. We’re not seeing any big spike up or drop, but there’s a lot of dynamics around ag as there is every year. So I’d rather not predict next year in the ag market until we get into January and have a little more clarity about how the season is expected to play out.

Kevin McCarthy (Analyst at Vertical Research Partners)

Okay, fair enough. And then just as a clarification, Mark, if I may, is the projected cost of your metathesis plant likely to be roughly $100 million, or would you steer us to a different level over the next couple of years?

Willie McLain (Chief Financial Officer)

Kevin, this is Willie. You may have missed earlier when I commented that it’s a one-year payback at the high end of the EBITDA and it’s a two-year at the low. That should give you a pretty good range on the capital.

Kevin McCarthy (Analyst at Vertical Research Partners)

All right, thank you.

Greg Riddle (Investor Relations)

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

OPERATOR

Thank you so much. Your final question is from Aaron Viswanathan with RBC Capital Markets. Your line is now open. Please go ahead.

Aaron Viswanathan (Analyst at RBC Capital Markets)

Great. Thanks for taking my question. Hope you guys are well. I just wanted to clarify on the volume outlook. It sounded like you said that you do expect volumes maybe slightly up next year. I was just wanting to clarify if that was AM and AFP specifically. And then, in the past, I think there’s been some confusion between primary demand and restocking, destocking. So could you just clarify that—and sorry if I missed that—but if it’s positive volume growth for next year in those two segments, and if it’s actual primary demand or maybe some restocking?

Mark Costa (Chief Executive Officer)

Sure. So, yes, we are expecting volume growth in AM, AFP, and Fibers next year relative to this year. And we’d expect volumes to be similar to this year in CI. So on the end-market question around the behavior of customers versus end markets, what I’d say right now is that we see the customers—our direct customers, the OEMs, the brands—being more cautious than the end-market demand. The market demand is pretty stable right now across a lot of markets.

I mean, it’s off a little bit, but we’re certainly seeing normal seasonality in the back half, which always happens as customers are managing inventory. But I think we’re also seeing much smaller orders more frequently. There’s a certain amount of caution they all feel in this environment with the uncertainty about the Iran war, about what that could do to consumer demand next year. And I think that softness that we have in our demand in the back half of this year is a bit driven more by that fear of the future than end-market consumption in the current fall that we’re in right now.

So there is that dynamic right now. In theory, that could mean there’s some destocking of inventory—certainly it is relative to current demand. I think they’re destocking and would need to replenish if demand holds up next year. And it’s understandable, with all the uncertainty, that that dynamic is playing out across any of the discretionary markets in particular. In that context, though, I think as we look, that happened this year relative to last year, by the way, with the Iran conflict creating additional stress on top of the trade war.

And so we’ve seen that impact, and yet we still found a way to have volume growth in Advanced Materials as we’ve described. AFP had about $20 million of discontinued products and were able to replace that with growth. So they are also doing reasonably well in the underlying growth market development efforts. So I think that we’re in a position, in a stable market to this year—which is certainly currently challenged—we’ll grow volume in AM, we’ll grow volume in AFP. You’ve got the whole circular program delivering a lot of revenue growth. Told you what we’re going to do in Fibers. So we feel pretty good about how that can play out. And it sets us up for at least having a good running start of next year and delivering earnings and cash flow growth.

Greg Riddle (Investor Relations)

Okay. Thanks again, everyone, for joining us. We very much appreciate your interest in Eastman Chemical, and I hope everybody has a great day.

OPERATOR

This concludes today’s call. Thank you so much for your participation. You may now disconnect.

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