Eastman Chemical Company (EMN) — Q4 2025 Earnings Call Transcript

Thank you, Becky, and good morning, everyone, and thanks for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; and Jake LaRoe, Senior Manager, Investor Relations. Yesterday after market closed, we posted our fourth quarter and full year 2025 financial results news release and SEC 8-K filing. Our slides and the related prepared remarks in the Investors section of our website, eastman.com. Before we begin, I'll cover 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 fourth quarter and full year 2025 financial results news release. During this call, in the preceding slides and prepared remarks and in our filings with the Securities and Exchange Commission, including the Form 10-K filed for full year 2024 and the Form 10-K to be filed for full year 2025. Second, earnings referenced in this presentation 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 fourth quarter and full year 2024 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night. We will now go straight into Q&A. Becky, please let's start with our first question.

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

Fibers are a top priority for us as we focus on managing and stabilizing that business after last year's events. It's important to remember that tow was the main reason for the decline in volume, although we managed to hold prices relatively steady. About 40% of the drop in EBIT isn't related to tow, as there was around a $30 million decline due to tariffs affecting the textile business, which typically grows to balance out market declines in tow but instead faced negative pressure. Additionally, reduced demand in cellulosics contributed to a $20 million headwind, and energy costs rose by about $15 million. There are multiple factors at play beyond tow in this portfolio. On the tow side, we feel we've stabilized the volume situation this year compared to last, even though it involved a slight price reduction to achieve that. The price adjustment was partly due to some customers previously benefiting from higher market prices, so they aligned closer to the broader market. We expect stability to mean our customers are operating at their contract minimums, especially since we anticipate continued destocking this year, similar to last year. Despite having contracts last year, customers adjusted their behavior, which means they will also need to destock this year. The first quarter is beginning a bit slow, and while the annual contracts allow for some flexibility, we expect a soft start to the year. Typically, the second half of the year shows stronger performance as customers prepare for normal January tax increases. We are also pursuing significant cost reduction goals, targeting $125 million to $150 million, building on a $100 million target from last year, with a portion allocated to fibers. We're seeing a gradual return of growth in textiles and are expanding our efforts. Currently, our focus has been on Naia filament, a high-value product, but we're also ramping up sales of staple fiber, which is more affordable and widely used in products like denim and fleece. While margins are lower, they remain appealing, and this will help drive asset utilization. Regarding cellulosics, we are advancing our Aventa product, which has been in the Corporate and Other category, and we expect to see volume increases this year, particularly in food trays and cutlery, which will enhance stream utilization. We have numerous actions in place that will progressively contribute to this year's performance. On pricing, some of the tow business prices include CPTs, which allow for adjustments based on raw material and energy cost fluctuations; however, many contracts will not adjust, and textile prices are market-based. In the current weak environment, I wouldn't expect us to raise prices significantly beyond what's necessary to manage some of the headwinds we face. We are fully committed to optimizing this crucial source of earnings and cash flow.

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

Absolutely, David. The most significant action we're pursuing is the ETP project, which involves converting our bulk ethylene into propylene. This approach addresses the earnings challenges we face in this segment due to a tough ethylene market. This isn't a new issue for us, and our project aims to enhance earnings significantly by reducing our reliance on bulk ethylene sales. It allows us to substitute higher-cost purchased propylene, thus improving our losses and margins simultaneously. Depending on various industry spread scenarios, we anticipate an earnings enhancement of approximately $50 million to $100 million, with a payback period of less than two years from a capital perspective. We're committed to advancing this project as a structural improvement for our business. Additionally, the cyclical nature of our industry, driven by demand, plays a critical role. The North American market is proving to be more profitable than the export market, particularly in light of the challenges posed by Chinese market dynamics. Import tariffs provide some protection for North American markets. A rebound in demand within North America, particularly in construction and durable goods, represents a significant improvement opportunity. Notably, over half of our output in this segment supports our specialties, and as demand recovers, we shift from low-value exports to higher-value specialty sales, further stabilizing earnings as we return to normal demand levels in our core CI business. There are broader market considerations as well; current pricing and products being released from China are putting pressure on high-cost global assets, particularly in Europe, South Korea, and Japan. This could lead to asset rationalization, though it's difficult to predict the timing given China's capacity expansion. Nonetheless, I believe the global market structure will progressively improve over the next few years. We are not relying on these changes for this year, given current market uncertainties, but we're executing several long-term strategies to enhance our business.

Very helpful. And just on Q1, can you help us with the bridge versus the prior year to get to that decline you're forecasting on an EPS basis?

Sorry, could you repeat that question again? You were just broken up a little bit.

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

Year-over-year decline. Sorry. I just want to make sure I understood the question correctly. So as we look at where we are today, obviously, we went on a journey through last year, right? Q1 was relatively strong and then it evolved over time to where we finished Q4. In Q1, it's important to remember, as we told you on the third quarter call, that was actually a year-over-year growth scenario, right? So the end markets in the consumer discretionary, for example, were up 2% to 4%. So if we had that year, we would have had growth -- normal seasonality for the rest of the year would have had growth for the year. So the evolution of the market after the April Liberation Day causing markets to sort of go from being modestly up to down in meaningful ways, changed and altered the rest of the year. So Q1 is a tough comp because it was actually a growth quarter. Now where we are today, I think it's much more important to think about the progression of how we've gone through the year and how we come out of the back half of this year into Q1 and build from Q1 through this year. And so when I look at where we are now, we feel good about how Q1 is progressing. I think that we wanted to and are seeing a return in volume from fourth quarter to first quarter. So you're seeing strong improvement in volumes in AM with seasonality sort of coming back to some degree, although I'd say customers are still being cautious. We're definitely seeing the lack of destocking of pre-tariff inventory that we told you about in the third quarter call, which obviously was a big driver of the volume decline in Q4 relative to Q3. We think most of that's abated. So we're seeing good recovery in the volumes there, seeing good recovery in the volumes seasonally in AFP as you would normally expect. We've already talked about volume cover being a bit modest in fibers and we'll build through the rest of the year. And even CI is going to have volume recovery as a function of just less shutdowns, so more volume to sell as well as some of the seasonality and destocking that was pretty aggressive in CI abating. So overall, we feel like we've got a meaningful amount of volume recovery coming our way. I wouldn't -- it's by no means taking us back to last year, Dave, but it's making good progress from where we were in Q4. On top of that, you've got utilization benefits that come with the volume and some of the cost benefits and actions we're taking that continue to build as we go from the fourth quarter to the first. There will be some offsets. Obviously, energy costs are higher even in a normal period before we get to the winter storms. We expect the energy headwinds in our guidance. And we expect prices to be a bit off in CI with some contracts resetting. And then fibers, as we already told you, we will have a modest decline in price. So when you put it all together, we feel good about that guidance and starting the road to recovery. But all the things we're doing that we've talked to you about build over time, right? The innovation builds over time. Circular builds over time. Cost reductions build over time. We're assuming we get back to normal seasonality, which will certainly help Q2 and Q3. So while it's -- Q1 is not where we want to be relative to what we think is possible for the full year, we're really encouraged to see the strength of the recovery out of Q4. And we see a lot of levers on how we can build and improve and deliver a strong meaningful earnings growth for the year.

This is Rachael Lee on for Patrick. So the earnings contribution from methanolysis seems to imply maybe less than 25% incremental margins on additional volume this year. So is this the right way to think about incrementals for some of these non-core applications? Or is there any additional fixed cost or mix drag impacting 2026?

Thanks for the question. What I would highlight is, obviously, as we think about the benefits of our circular solution for the packaging model as well as the combination of the specialties with Tritan Renew and the end markets that we're going to into those applications. To your point, Rachael, there's, I'll call it, a spectrum of drop-through margins. As we think about 2025 to 2026, volume growth is a key aspect of that, and we've highlighted that with the contracts that we have across a spectrum of key brands that we're growing with in the packaging space and that being the substantial driver. So as you think about that growth rate, what I would say is for the fixed or I'll call it, the model that we've talked about for packaging, where we have volume commitments as well as cost pass-through, we believe that, that is reasonable outcomes and delivers the returns that we've been talking about. What we will also have is upside to that as we have additional mix upgrade and sell into our specialty markets and as we get momentum in the consumer discretionary markets over the long term to drive those returns that we've committed to previously in the circular economy.

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

Sure. There's a lot to unpack here, so I'll do my best to address it. As we look ahead to 2026, we recognize that the macroeconomic environment remains quite uncertain, a sentiment that most of us share. We're not attempting to predict the overall economy. The main factors influencing our company, earnings, and cash flow are volume, a trend we've seen consistently over the past four years and expect to continue this year. Currently, we are planning with the assumption that market conditions will be relatively stable compared to last year. We are exploring various avenues to drive value, starting with cost reduction, which is within our control. In fact, we achieved $100 million in cost reductions last year, exceeding our target by $25 million, and we believe we can add another $125 million to $150 million in savings. That amounts to $225 million to $250 million over two years, which is significant for a company of our size and reflects our commitment to shareholder value during challenging times. Growth is also a key focus. We have reduced costs, and a significant portion of those savings will flow into Advanced Materials. To drive volume growth, we are implementing several strategies that are more controllable than just waiting for the economic outlook to improve. Innovation is critical to achieving growth above market trends. For example, advancements in the circular economy for polyesters are projected to yield an additional $30 million improvement over 2025, with an expected revenue growth of 4% to 5%, largely driven by our rPET customers who are already placing orders and scaling up. We are optimistic about this growth as we start integrating it in the first quarter, as it will enhance our value over time. Additionally, we are seeing opportunities in traditional markets with films for HUDs, luxury vehicles, and electric vehicles, as well as in ultra-high purity solvents for semiconductors. Our ongoing initiatives in cellulosic growth and our broader approach to targeting volume growth, particularly in Advanced Materials and fibers, are essential. We want to pursue applications beyond our usual specialty products. While we aim to avoid aggressively competing for market share in high-value products to prevent erosion of value in a weaker market, we strive to win based on our value proposition and maintain our margins. We are focusing on expanding volume and utilization without compromising our cost structure. For instance, we have regained some share in architectural interlayers and are bolstering our staple product in fibers. Although our core polyester business already shows considerable volume growth, we are still exploring additional opportunities in markets like heavy gauge sheet and shrink packaging, where margins may not be as high as Tritan but still provide substantial benefits for asset utilization. Our goal is to enhance volume and utilization while leveraging the cost reductions we've achieved. The segment that stands to benefit the most from these strategies is Advanced Materials. Regarding pricing, we are experiencing some declines, particularly in Fibers and CI, and we also anticipate modest declines in Advanced Materials as we pass some raw material cost advantages on to customers. We can't fully counteract energy challenges in the current market environment, and our competitors outside the U.S. are also a factor. Nonetheless, we have effectively managed our pricing relative to costs over the past four years. As we've successfully implemented our strategies, it is appropriate to start sharing some of our raw material benefits with our customers, which we're currently doing. However, considering the growth in volume we are experiencing, our overall variable margin is on the rise. These actions collectively aim to drive value and achieve meaningful earnings growth for the year.

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

I believe I've covered much of this in my previous response, but the exciting aspect of Advanced Materials this year is that there are many factors to leverage. To achieve earnings growth compared to last year, the primary driver is volume growth, especially through our Circular initiative. We're also seeking volume growth in challenging markets by leveraging our innovations. There is some core recovery, along with Circular's contributions. Additionally, we are seeing a significant portion of cost reductions in Advanced Materials, which are part of the overarching corporate strategy. Last year, we faced substantial headwinds in utilization due to aggressive inventory management within Advanced Materials. As volumes rebound, we anticipate a positive impact on utilization in this segment. Furthermore, we have some favorable foreign exchange impacts. When these four factors are combined, they create considerable opportunities for growth. However, there are some challenges, including slightly increased energy costs this year and a modest decline in prices related to energy expenses. Another headwind we face is variable compensation.

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

I never expected to receive that question. The macro economy is quite complex at this moment, filled with uncertainty. In light of this, we are implementing numerous actions within our control, from managing costs to generating our own volume, improving asset utilization, and benefiting from favorable foreign exchange rates. However, we are also facing some headwinds, particularly regarding the pace at which our customer interactions recover from last year and managing the fibers business, alongside adjustments in variable compensation returning to normal levels. Overall, we believe there can be a significant improvement in earnings. When considering the upper end of the $6 per share discussion, that aligns with our expectations, but I must stress that there is a broad spectrum of possibilities due to macroeconomic factors and the associated uncertainty. While GDP figures appear positive, especially with discussions around data centers, AI, and healthcare, a deeper look shows that without these sectors, GDP growth is stagnant. Many consumers, particularly those most affected by economic challenges, are struggling with issues such as affordability and job security, leading to caution in spending. This cautious sentiment has persisted over the past year, and we don’t see it changing significantly. Though the economy may stabilize, it's still facing challenges, including geopolitical issues that could exacerbate the situation. However, there is potential for positive outcomes, particularly with weak demand since 2019. Housing market activity is down significantly, along with a decline in consumer durables and automotive sales, as affordability has become a major concern. Yet, with pent-up demand and the possibility of market recovery as consumer confidence improves, particularly in the U.S., there is hope for growth initiatives that could positively impact consumer spending. The current administration seems focused on stimulating the economy for consumers rather than just specific sectors like data centers and healthcare. Favorable interest rates and tax policies may also help increase disposable income for the majority of consumers. We're committed to controlling the aspects we can influence and remain aware that the economy could shift in various ways, ensuring we stay vigilant on our key priorities. Amidst the uncertainty, our current focus is on starting Q1 on the right foot and building upon that foundation.

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

We had a couple of crop protection products in Europe that had a regulatory ban going force and so we had to stop selling them. So that's what happened. It's just a European specific thing, but they were profitable products, and we felt the impact. We will feel the impact this year.

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

The decline in mechanical recycling quality is due to the inherent flaw in the process. When plastic is melted, the bonds in the polymer chain deteriorate with each cycle, leading to a decline in polymer integrity and material quality. As a result, impurities can enter the polymer, as mechanical recycling lacks a purification step. Even when the cleanest bottles are selected, washed, and chopped, contaminants may still remain. This degradation causes the polymer to become discolored, evident in the bottles on store shelves, and raises concerns about the strength of the polymer. Initially, it was believed that these integrity issues would take years to materialize, but they are becoming apparent much more quickly. This highlights our value proposition, as chemical recycling does not face these issues. Our method effectively breaks down the polymer into its building blocks, followed by a significant purification step, resulting in intermediates that are comparable to virgin materials, often with even better clarity. Our process can be repeated indefinitely, similar to aluminum recycling. While mechanical recycling is energy efficient, its yield is low, managing to clean only 25% to 35% of clear bottles, with the remainder downgraded or sent to landfill. Therefore, we are confident about the value of our platform, as customers are beginning to recognize the superior quality of our product, leading to increased demand and early purchases from brands like Pepsi for rPET from us next year.

Mark, I wanted to gather your thoughts on the current inventory levels among your customers. You mentioned the volume decline we experienced in the fourth quarter, which is somewhat similar to the significant destocking event back in 2022 and 2023. One could argue that inventory levels must be extremely low for your customers, but I’m interested in hearing your perspective on this.

I believe that many hard lessons were learned in 2021 and 2022 when customers and retailers significantly overbuilt their inventory, only to see demand correct due to inflation and interest rates. As a result, many were left with excess inventory that took a long time to clear. This year, and particularly in 2025, stands in stark contrast to 2023. People have adjusted their strategies and aren't building inventory based on a projected growth surge. At the start of 2025, there was a cautious outlook regarding the economy, leading customers and retailers to be more disciplined. However, everything changed in April when the tariff situation escalated, prompting many to react by purchasing more than necessary to mitigate potential exposure. Then, demand slowed from the first to the second quarter, resulting in excess inventory, including for us, as we had anticipated modestly improving sales in the latter half of the year, which did not materialize. Consequently, we needed to destock in the third quarter. Our customers faced a similar situation, sitting on more inventory than necessary while consumer demand didn’t significantly improve. However, the starting inventory levels were much lower than in 2023. Demand in the end market has moderated somewhat but hasn't collapsed like it did in late 2022 and 2023. Additionally, back then, we experienced a challenging fourth quarter with a notable volume drop, followed by an even steeper decline in the first quarter of 2023. In contrast, we are now seeing an increase in orders in January and February compared to last fourth quarter, which reassures me that they wouldn't be placing new orders if they hadn't effectively managed their inventory.

Okay, I understand. This leads into my next question. I'm trying to reconcile a few different aspects related to this. The asset utilization headwind in 2025 was $100 million, as you are operating your plants at lower levels to meet demand. Therefore, that's a $100 million negative impact anticipated for 2025. For 2026, you're forecasting a benefit of $25 million to $50 million from improved utilization, fewer shutdowns, and volume growth. Is that range directly comparable to the $100 million negative figure for 2025? Additionally, there's also a $20 million benefit from reduced maintenance in 2026 compared to 2025. If you could clarify those numbers, that would be very helpful.

All right, Frank. Just at a high level, what I would highlight for you is, as Mark just highlighted, we had to do some of our own destocking. So first half to second half, we basically had $100 million headwind as we look at the way we ran our plants, the demand that we had in the first half and with the tariff, I'll call it, initiated prebuying, ultimately in the back half, as things got more cautious, we turned our plants down to deliver the $1 billion commitment that we made on cash flow. As you think about on a year-over-year basis, we highlighted in '24, we actually built inventory as we were planning for the strategic transitions to serve our circular economy footprint, including the rPET, and we built inventory in advance of the transition. I would say our Advanced Materials business did a great job of bringing that inventory back down, but it was really the build of inventory in '24 and the implications. So that's why there's a more modest utilization tailwind as we go into '26 from '25 is it's really those lower planned turnarounds as well as the benefit of not planning to build or deplete inventory. We expect to hold it pretty stable in our baseline assumptions starting the year.

We plan to drive significant volume growth in areas we can control, but like others in the industry, we remain cautious about the future market demand. Demand is steady, and we can meet our volume goals. We anticipate a utilization benefit of over $25 million to $50 million for this year, but we need to validate those projections. Therefore, we will take a conservative approach in estimating that figure until we see the volume materialize.

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

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

The high-purity solvents business is strong, with margins exceeding the segment average, and it benefits from the current growth in semiconductors. While it's not a significant product line and we don't provide specific figures for it, it plays an important role in driving earnings growth and helping to offset some of the impact from discontinued products as we aim to maintain stability in AFP this year. The growth rates are notable, around 20% to 30%, though the overall volume remains modest when applying those growth percentages. It is beneficial as we navigate the challenges posed by lower HTF sales and a few discontinued products in AFP this year.

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

It's still early to assess the situation. We are currently experiencing freezing temperatures in Tennessee and at our site in Longview, Texas, with more snow expected. So far, the impact on our facility has been limited. As you may know, the natural gas markets have been volatile. The primary influence is on energy and natural gas prices. We anticipated higher natural gas prices in the first quarter, but this situation might provide an additional benefit. We are taking steps to ensure the safety of our team members and to mitigate the impact of rising natural gas prices. Additionally, we have a hedging program in place, and approximately half of our exposure is hedged as we progress through the quarter. We will share more information as the quarter unfolds.

So firstly, I wanted to go back to the Fibers volume. I know it's been a pretty long discussion, but I still do not really understand getting that, obviously, the textile part was down a lot, how given the volume bounce in tow, the volume was down 19%, setting aside the EBIT that you addressed in the first question of the call. So what are typically the volume bounds in your contracts? Like is the minimum actually 20% below, for example, the normal level? And secondly, as we think about this year's volume, you do mention in the call that you secured flat volumes year-on-year, but there will be continued destocking. So I don't really understand what that leaves us on a net basis for the Fibers volume year-on-year. Should we just assume flat? Or does this mean there is a risk to the downside?

On a full-year basis, you can expect that tow volumes will be stable compared to last year. We are also aiming for some volume growth in textiles in addition to that stable volume situation. Last year, we began with stronger volumes in Q1, which then decreased each quarter. In Q1, customers were mostly purchasing within their contract ranges, but not necessarily at the lowest points of those ranges, so the volume seemed normal aside from a few initial destocking issues. As the year progressed, many customers began taking steps to minimize their stock levels and went down to their contract minimums to achieve this. We also had some growth commitments from a few customers, as they had plans for assets already established, and they were purchasing based on growth expectations that did not materialize, leading them to reduce their demand significantly. By the end of the year, most customers were focused on destocking. Within this context, we pursued and secured several contracts with specific volume ranges. Looking at the contracts we have now and the actions we've undertaken, we believe that on an annual basis, the minimum volumes will be stable compared to what we achieved last year. However, while these contracts come with annual volume commitments, there is flexibility on a quarterly basis regarding how much they purchase within that commitment. As a result, commitments are somewhat lower in Q1, meaning they will need to buy more to remain within their contract ranges as the year progresses, which aligns with a likely decrease in the need for destocking this year compared to last year.

That's very helpful. Regarding variable compensation, I understand you are working hard to ensure earnings growth this year as you indicated in your outlook. You're implementing over $300 million in gross cost reductions, correct? In this context, why could variable incentive compensation pose such a significant challenge? If earnings growth is not achieved due to the macro environment, how should we view the potential headwind from variable compensation? Could it end up being neutral compared to last year?

What I want to emphasize is that when we began our business plans for 2025, our expectations at the start of the year were significantly higher than what we actually achieved. We have adjusted our commitments, but the plan remains in effect, and we are accountable to our shareholders for it. Consequently, you will observe a reduction in variable compensation expenses in our profit and loss statement for 2025, and there will be decreased cash outflows in 2026 for these plans. As we reassess the business scenarios outlined by Mark today, we anticipate fulfilling those expectations. If we manage to provide stable cash flow and execute all necessary actions, while considering some challenges, we project that variable compensation will realign and could present a year-over-year headwind of approximately $50 million to $75 million, depending on how those scenarios unfold.

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

Regarding the second project, we have already incurred some engineering expenses related to the Texas facility. However, we lost the DOE grant, which has put all work on hold. Currently, we are not allocating any funds towards engineering until we have established a solid, cost-effective project plan to restart. At this moment, there are no engineering expenses or capital expenses impacting us. A team is actively working on the circular economy across various global platforms, and we are also working to reduce those costs as we adjust our progress rate. For the second project, we’re particularly excited that Kingsport can increase its capacity by 130%, which means we can derive more growth from the first plant and achieve better returns on investment before moving on to the second plant. This confidence is fueled by the increased demand from our customers in the rPET market, who are eager to purchase as we address the degradation of mechanical materials. We are still focused on developing a capital-efficient second plant and exploring three different options for potential locations and assets that could be leveraged. We are optimistic that at least one of these options will prove viable. The debottlenecking will allow us to avoid significant capital expenditures in this area for this year and next. This approach helps us manage our capital effectively during a challenging economic climate while ensuring we maintain strong free cash flow and stay aligned with the circular platform, which we believe will ultimately be very successful. Presently, there is a slight slowdown in specialty purchases, not due to recycling but due to a general lack of demand for products from consumer durable companies. This situation aligns well with our goal of responsibly managing cash short-term while providing good returns to our shareholders.

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

The revenue growth from the Kingsport project in 2025 and 2026 will include a substantial amount of revenue from rPET. We have a contract with Pepsi, as well as several other leading brands that are increasing their volumes with us on rPET. This contributes significantly to the anticipated 4% to 5% revenue increase. The impact of our specialty products on the year's final outcomes depends on the overall economic situation we discussed. If the economy remains stable, we foresee some growth in specialty products, particularly in consumer durables, where we are introducing new content. We still have 100 customers committed to purchasing specialty Tritan Renew and various cosmetic Renew products, although their volume increases haven't met our expectations due to economic challenges. Once the economy stabilizes, these customers will likely launch new products to boost their growth and our volumes will increase accordingly. As the year progresses, we hope that our specialty business will start to contribute more significantly, although rPET remains a major component, supported by several customers beyond just Pepsi.

Mark, when you consider how to restore Eastman's earnings power to its previous level, do you think there are any structural issues in the end markets, competition, or China that could hinder that? Also, could you provide your outlook for AM and AFP regarding the significant earnings growth? What range of volumes do you need? I understand you have substantial volume from new products and that it's within your control, but what factors affect the volume growth necessary to achieve that significant EBIT growth?

Thanks, Mike. We have spent considerable time discussing this, and we touched on it during the deep dive regarding our approach to normalized earnings. The insights we shared back then are still relevant today. Currently, the primary reason for our earnings situation is the decline in volume due to economic demand, which is affecting AM and AFP, along with some impact on CI. The demand in high-value specialty growth in AM, attractive growth in AFP, and the North American market compared to exports and CI has all been influenced by the economy. Unfortunately, this economic weakness has persisted for over four years, a duration that is quite unusual compared to past short-term downturns. Given this context, I mentioned earlier that there is significant potential pent-up demand waiting to be realized. Many cars are over 15 years old, appliances purchased back in 2020 are nearing the end of their lifecycle, and the housing market has seen a 20% decline. It’s important to note that we focus on total housing, not just new builds, which are starting to recover. This could lead to increased demand for paint and appliances as people move into new or existing homes. Thus, there’s considerable potential for demand recovery that could positively impact our earnings. The focus should be on our innovation and the circular platform, which is driving growth alongside the recovery of our core market. Over the past three years, we have excelled in maintaining our pricing and variable margins while also protecting our market share through innovation, creating differentiation. If we see a volume rebound, the additional margins from that recovery and the benefits of increased utilization could significantly enhance earnings in AM and, to some extent, AFP, and also contribute to the recovery of CI earnings. I believe we do not face a structural issue in AM and AFP, but rather a cyclical demand issue. This also slightly applies to CI. However, there are structural challenges in the olefins and acetyl markets due to excess capacity in China, which is affecting margins in chemical intermediates. The discussion around how much these structural pressures will change continues in our industry. Currently, we are at the market's bottom, with prices matching the variable cash costs in China, which I find unsustainable. However, it is uncertain how fully CI will recover. Regarding CI, our initiatives with ETP will provide a boost, and the recovery of margins and demand in North America will also contribute positively. We see a path for earnings to return from their current state to a normalized range of approximately $150 million to $200 million. While this may be below our historical levels, it reflects the structural challenges we anticipate, yet it signifies a substantial improvement from today’s figures. In terms of fibers, as we discussed, our aim is to stabilize this year. Notably, the combined EBITDA for CI and Fibers in 2019 was around $520 million, while last year it was about $100 million less. From a structural perspective, addressing CI and Fibers through ETP can return us to the 2019 figures, while our specialties can build on that. We are also eliminating costs in the range of $225 million to $250 million to tackle structural challenges and enable us to reach normalized earnings. We still believe it's feasible to target that $2 billion figure.

Let's make the next question please.

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