Eastman Chemical Q2 2024 Earnings Call Transcript

Participants

Corporate Executives

• Gregory A. Riddle, Vice President of Investor Relations & Communications
• Mark J. Costa, Chairman and Chief Executive Officer
• William T. McLain, Jr., Executive Vice President and Chief Financial Officer

Analysts

• Patrick Cunningham, Smith Barney Citigroup
• Josh Spector, UBS Group AG
• Frank Mitsch, Fermium Research
• Jeff Zekauskas, JP Morgan Cazenove
• Aleksey Yefremov, KeyCorp
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Michael Leithead, Barclays PLC
• Duffy Fischer, The Goldman Sachs Group, Inc.
• Vincent Andrews, Morgan Stanley
• John Roberts, Mizuho
• Kevin McCarthy, Vertical Research Partners
• Laurence Alexander, Jefferies Financial Group Inc.

Presentation

[Operator]

Good day, everyone, and welcome to the Second Quarter 2024 Eastman Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com.

We will now turn the call over to Mr. Greg Riddle of Eastman Investor relations. Please go ahead, sir.

[Gregory A. Riddle, Vice President of Investor Relations & Communications at Eastman Chemical]

Okay, thank you, Chach [Phonetic] Good morning, everyone, and thanks for joining us on the call. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Executive Vice President and CFO; Jake LaRoe, Manager, Investor Relations; and the new member of our IR team, Emily Edwards.

Yesterday after market closed, we posted our second quarter 2024 financial results news release and SECA K filing, our slides and the related prepared remarks in the Investors section of our website, eastman.com.

Before we begin, I'll cover three items. First, during this presentation you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are, or will be detailed in our second quarter 2024 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 2023, and the form 10-Q to be filed for second quarter 2024.

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 second quarter 2024 financial results news release.

And one more item. After we posted our materials last night, I became aware that there is a conflict on the date we chose, Tuesday, November 19th for our circular economy deep dive here in Kingsport, Tennessee. We are currently working through alternatives and we'll let you know when we've decided on a path forward.

With that, we are now ready for questions. Chach, please start with our first question.

Questions and Answers

[Operator]

Thank you. We'll now take our first question from Patrick Cunningham of Citigroup. Please go ahead.

[Patrick Cunningham, Analyst at Smith Barney Citigroup]

Hi, good morning. Thanks for taking my question. Maybe just with -- just some questions on methanolysis. Maybe first just clarification on the feedstock preparation issues. Can you give a little more detail there? What sort of equipment modifications did you have to take? And how much downtime was there in 2Q, and any expected downtime in 3Q?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Sure, and good morning, everyone. Love to talk about where we are with methanolysis plant. I'm going to give a little context of the journey we've been on and then answer that specific feedstock question. We're very excited to be operational with the world's largest chemical recycling facility and we've made tremendous progress on this project and really showing what's possible in the world when it comes to recycled content and dealing with this challenge that we face.

We are very excited that we're making on spec plastic from the output of this facility. We've actually produced on spec food grade Tritan with 75% RDMT, and that's the most difficult product we have to make the highest standards on clarity, a wide range of performance specs, and we're making these products with no materials of concern getting through the purification process. So a very safe product from garbage. And that's an incredible accomplishment and a great job by our team in operating this plant and overcoming a series of challenges.

We have had a lot of successes. As I said, we're making on spec product now. We are doing all of this with hard to recycle waste. Mechanical recyclers can't take back the food grade and send a landfill. We validated all of the unit ops and they can run at very high rates. We've had, as I mentioned, sustained rates in our prepared remarks of around 70% when you're running all the units together, and there's been one sort of small mechanical thing limiting us getting to 100%. And we just recently made the change this week actually, in fixing that one mechanical issue, and we're ramping up to full rates.

We have made a lot of progress on improving the mechanical reliability issues that we were facing in the startup of the process that we shared with you in the first quarter call. So when we took a variety of corrective actions on the early failures around instrumentation, valves, rotating equipment, especially pumps, that has been effective, and we've seen much higher reliability across the plant. So, as you said, the next step, as we're now moving to higher rates and a broader set of hard to recycle feedstock, we encountered some plugging issues.

So, to be clear, from the beginning of this process we've been using hard to recycle material that can't be made back into food grade bottles mechanically, true to our strategy of dealing with this waste that doesn't have an alternative life. But we've been broadening that spectrum of different types of HTR recently, and we encountered some plugging issues in the front of the plant. I want to be clear that this is not about chemical impurities, it's not about process chemistry. It took us a few weeks to really understand what was going on, but we realized that it was in the feedstock preparation and some of the fitness for use aspects of a few sources of material.

Fortunately, the issues were relatively straightforward to address once we understood them, which just involves sort of optimizing sort of the feedstock form that we're using and dealing with some of the non-polymer waste that was in a few select sources of feedstock. So we have now implemented all those changes. We're ramping up, as I said, with the change also run at full rates and are confident all these changes will be effective and we'll be running very hard with the facility as we go through Q3 and Q4.

The thing I would note is, this has been a journey. This is an incredibly complex plant to take garbage and turn it into clear on spec polymer that doesn't have any materials of concern that can exist in that waste feedstock. So we've made a lot of investments in purification and how to manage all these different feedstocks, and we've learned a lot over the last five months -- six months of startup that I think is a huge competitive advantage for us. And frankly, there's a lot of strategic intellectual property we're gathering through this process.

As I look back on it, I just can't reinforce enough, the power and success of our team in enabling us to have this kind of success. I can't even imagine trying to build these kind of technologies and plants without the depth of technical expertise and the scale we have to throw at these kind of challenges. So great shout out to the team in overcoming these things. We're feeling very good about how we're moving forward and excited to sort of serve customers as we ramp up volumes in the back half of the year.

[Patrick Cunningham, Analyst at Smith Barney Citigroup]

Great. Thank you so much for the detail there. And then maybe just one quick one, just squaring current macro environment and maybe some of the comments you made on inflationary pressures leading to slower ramp-up of Renew. Why is now the right time to move forward with the Tritan expansion?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah, good question. So when you look at sort of where we are with -- with the Tritan market, a lot of that goes in consumer durables. As everyone, I think in the industry has called out, that market's been weak. It continues to be weak, but we did see a significant amount of return in volume with the end of destocking. So a huge amount of the hit that we took, you know, in '23 was associated with destocking. That volume has come back, and the very high margins that go with it are certainly very helpful this year and will be going forward. We're also continue to have a lot of wins just on the traditional value proposition of Tritan.

So when you look at the compelling attributes of its heat resistance, its chemical resistance, its clarity, it being a safe product that's BPA free, we've always had a lot of volume wins in applications that's driven tremendous growth in this product area for over a decade. And that engine is back in gear this year. We're winning on those value propositions a variety of places, on top of an end of destocking that's giving us good momentum. And then on top of that, we're now layering on recycled content. And for a lot of brands, you know, that's really important.

You know, we have a lot of customers that have been with us for a long time that are using this recycled content claim as a way to enhance their product offering or drive new volume growth, like PNG, Nalgene Kennelbach, LVMH and L'Oreal, Estee Lauder, etc. You've seen the icon chart of all the customers we've had who are using in one form or another.

And then we've, you know, what's really exciting is also opening up new markets for us to serve that wouldn't have originally been available for our value proposition. This is not a cheap polymer, so you really have to have a compelling value proposition. And now you have people like Black & Decker doing a trial run, as we told you about in tools, and seeing that go very well with recycled content and expanding to a broader product line, or Sistar, which is the leading supplier of housewares for food service type products for airlines and food service, and them going to this product with the recycled content claim. So lots of volume engagement, customers are paying the premiums that we expect to make a return on this investment that we've made here in Kingsport.

And so as we looked at the volume build this year and as we go into next year, you know, we see the need for this additional capacity. So we don't short the market, right? So we're moving to get that product, that line online in the sort of third quarters of next year as a way to keep on growing that business. So we feel good about it. You know, certainly it's a tough economic time. But when the market recovers, that will just be additional volume we have to serve. So we feel like this is the right time.

[Patrick Cunningham, Analyst at Smith Barney Citigroup]

Great. Thank you so much, Mark.

[Operator]

Thank you. The next question is from Josh Spector of UBS. Please go ahead.

[Josh Spector, Analyst at UBS Group]

Yeah, hey, good morning. Quick follow-up on the prior set of questions. Did you say that you're now running back at higher rates at methanolysis? So the issue is resolved, or is that yet to be determined?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

We're actually in the process of ramping back up to higher rates. We, that sort of small mechanical change we made in the middle of the plant that was limiting rates we just implemented, and we're ramping up towards those higher rates right now. So we're not there yet.

[Josh Spector, Analyst at UBS Group]

Okay. Thanks for that. And just another point around methanolysis and specifically your comment around Tritan Renew and some slower adoption. You referred to inflation being a factor. I was curious, is that at the customer level and you're talking about consumer buying of higher priced goods, or is that on their spending and perhaps any comments or read through on willingness to buy a higher priced feedstock for their applications?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

I'm not going to repeat all the answer I just gave you, but we have a lot of customers obviously, out there in the durable space as well as packaging cosmetics that are very interested and committed to using Tritan. They were buying it last year at certain premiums. They're continuing to buy it this year and we're accessing new markets. So the demand out there is real. The issue we face, that I think everyone in the industry faces right now is that it's a really tough economic environment. We have some version of stagflation, right? You have inflation still impacting consumers and demand being quite weak in many sort of discretionary markets and durables is very connected to B&C. So when you see all that challenge, that's very real and it's duration. It's not just demands weak. It's been weak for over two years now. And so that weighs on companies and their economics.

So while they're very committed, we haven't seen anyone sort of cancel a program. They're also focused on managing their cost structure like everyone is right now. And so the rate at which they're ramping up volume on some of the programs that we've won with these customers is going a bit slower than we thought.

To be clear, that's a modest part of the overall adjustment we made in the $75 million of EBITDA incremental to last year down to 50 [Phonetic] More than two thirds of that adjustment is the cost conversation we just had about sort of run rates in the second quarter as we work through some different issues. But there is a sort of modest adjustment we've made in our expectations around sort of volume ramp.

I don't think it has any impact on next year when we look at the number of wins we're having in different applications. The fact that at least the end market is now stable and destocking is behind us. Companies are now looking for ways to grow and create their own growth, just like we are trying to create our own growth with better value propositions in the marketplace. The brands are now switching to thinking about how do they do that as well. And so I think those collaborations will be there. So we still feel like we're on track to go from our incremental $50 million of EBITDA this year to a run rate of $150 million of EBITDA by the end of next year. Otherwise, we wouldn't be starting the -- completing the Tritan line if we didn't see that volume coming.

[Josh Spector, Analyst at UBS Group]

Understood. Thank you, Mark.

[Operator]

Thank you. The next question is from Frank Mitsch from Fermium Research. Please go ahead.

[Frank Mitsch, Analyst at Fermium Research]

Good morning, and congrats on the 2Q B, which Mark does peg the question. You narrowed the range for 2024, but maintained the midpoint of the guide. I was just curious, given the upside in 2Q, was there a thought to possibly raising the midpoint and what may have been arguing against that? Thank you.

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

Yeah, Frank, good morning and thank you. As we think about the guidance, obviously we focused on keeping the midpoint at the guide of where we had it to start the year. Also, at the segment level you saw some modest improvements in the AFP midpoint as well as the midpoint decline in AM, as Mark's already highlighted around our view of the benefits of methanolysis and the ramp there.

So as we think about it, we're driving strong growth year-over-year, 20%. Narrowing the range we think was appropriate at this point in time. As we started the year, there's no significant primary demand increasing in the second year. We're doing well with driving our own growth and we think, again as we enter the second half, we're doing it from a strong position and it's the factors of the $0.015 cent beat in Q2 being offset by the reduction in our methanolysis expectations.

[Frank Mitsch, Analyst at Fermium Research]

Thanks so much for that, Willie. Can you talk about the factors that will drive you towards the low end versus the high end of the full year guide?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

So when you think about the variables on that Frank, the biggest factor is demand. That's true for the impacts we had last year, true. And we had good results in '21 and '22, and so it's a macroeconomic question around just where does demand trend. I think we went out at the beginning of the year with a very sort of neutral approach about -- in markets being sort of similar to last year from an end market point of view, but benefiting from destocking. That seems to be playing out as we expected at this stage. So if the economy gets better, that will be upside. If the economy gets worse, obviously there'll be some risk within the range that we've given you. But I think that's the main factor.

I mean, we feel good about our price management and feel confident in our commercial excellence to maintain our price cost relationships across our specialties. Obviously, there's a certain amount of spread and predictability in olefins and acetyls where you could get some volatility. That's in the CI sector -- cost structure. We're very much on track to manage our costs. So the element that's material is really about the economy. We feel good about how we're creating a lot of our own growth this year with all the application wins that we've had in the sort of traditional specialty model, plus the -- the growth we expect in the circular platform.

[Frank Mitsch, Analyst at Fermium Research]

Great. So just to be clear. The midpoint of the guide assumes absolutely no change from the economic activity as we stand here today?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

That's correct. We're assuming -- to be clear, in consumer discretionary markets, whether it's autos, B&C, durables, we're assuming that there's no improvement in the end market demand relative to last year. And that's been true how we build our forecast every quarter. The stable markets, we do have a little bit of modest growth, call it 2%, 3% in there that we've already seen in the first half of the year and we expect that to continue in the second half of the year. Those markets are like AG, you know, and in its normal sort of cycle and pattern, you know, personal care, water treatment, those kind of more special, you know, sort of stable markets, which is about half of our revenue. So half of revenue has modest growth in it, half our revenue has no in market growth. But we have completely confirmed that the theory of a lack of destocking adds a lot of volume back is very true, right?

We told you that we had a $450 million hit in variable margin last year from '22 to '23 when volume and mix declined. And part of our guidance, as we said, about $150 million [Phonetic] of that, call it a third, would come back when, you know, as a lack of destocking. And we very much have seen that in the first half and see that in the order books in 3Q. So that sort of logic is playing out, and that's sort of where we've built our midpoint of our guide.

[Frank Mitsch, Analyst at Fermium Research]

Terrific. Thank you so much.

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yep.

[Operator]

The next question is from Jeff Zekauskas from J.P. Morgan. Please go ahead.

[Jeff Zekauskas, Analyst at JP Morgan Cazenove]

Thanks very much. I was hoping you could clarify what's going on in the acetyl chain? In that, you talked about higher plant maintenance of $50 million related to a shutdown in the acetyl chain, and half of that is the acetyl, which is $25 million. Is that in the third quarter or the fourth quarter? You talked about unfavorable price cost in acetyls. What's that about? Does that have to do with the divestiture or not? And forgive me, is the divestiture already done, or when does the divestiture close?

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

Yeah, Jeff, happy to clarify. So as we think about the second half versus first half, higher plant shutdowns, Q3is primarily our acetyl, cellulosic stream, which is about half. And then in Q3 and then in Q4 would be our polymer turnaround. And again, that represents about half. Yes, the transaction has closed last year also, so that impact is not in our guidance. That's a headwind. As we think about in our chemical intermediates business, the combination of, I'll call it the Texas City divestiture, as well as the key customer shutdown that we've highlighted was roughly $30 million headwind on a year-over-year basis.

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

So that's on the cost side and investors side, Jeff. On the market side, there's two dynamics going on. One is the acetyl margins are just lower this year and continue to be challenged from a market point of view. And then the second part is, as we divested the acetyl business, we had to shift our business model a bit and how we were taking our acetyl product to market. And so there's just some readjustments and logistics costs and how we manage our acetyl output out of Kingsport when we no longer have that plant down in Texas, and how we were working in the market. So those two things are sort of some hits to the economics.

The spread will obviously come back one day and a lot of these sort of one-time logistics costs and reconfiguring supply chains to serve customers will also sort of be a bit of a modest tailwind for next year too as we line them out. So those are sort of the combined factors that's going on in that acetyl business.

I would note that we are predominantly acetic acid. I'm sorry, acetic anhydride in our production. So that's the market you should be paying more attention to for us relative to the acetic acid market that some other companies produce into. And we feel good about how that market will sort of be a tailwind next year relative to this year.

[Jeff Zekauskas, Analyst at JP Morgan Cazenove]

Okay. And you have an other segment that's now losing a couple of hundred million a year roughly, and that line used to lose $50 million a year. Can you talk about the difference between $50 million in the old days and $200 million [Phonetic] in the new days? And does that just extend out in time? Is the normal run rate $200 million?

And then going back to acetyls, what's the total acetyl year-over-year penalty?

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

Okay, Jeff, on your question at other, obviously, as we talked about from '22 to '23, one of the major resets, and that was with regards to pension and that being roughly $100 million headwind. So I would highlight that as one of the accounting outcomes of higher interest rates. Also, as we've increased in the back half of '23, the pre production and the startup costs regarding our methanolysis and circular platforms, you saw that increase, and that's more connected to, I'll call it the project timing and our progression through those. As you saw here in Q2, you saw roughly almost $30 million reduction in the expenditures in other, and that is with our Kingsport methanolysis plant coming online and going from pre production into producing inventory.

So as I think about it over time, obviously the factors matter. And as we see interest rates decline, that could be a tailwind into the future. So I wouldn't say $200 million is the run rate. It's just with the current, I'll call it macro situation, as well as us progressing successfully projects through the pipeline, and now you'll see those results in Advanced Materials. And that's also how you will see some of our cellulosic products as well as we continue to invest there. Those will then turn into the businesses in the future. But I would say $200 million or less in the current macro environment.

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

So in addition to just the pre production expense and efforts around the first plant, the engineering expense and project development expense around France project and Texas project, those costs are in that segment. So that's sort of been driving it. We'd also note the pension costs are non cash. So it's a headwind, but it's not a cash.

Jeff, I didn't understand your acetyl question. Could you expand on your question just a bit?

[Jeff Zekauskas, Analyst at JP Morgan Cazenove]

In other words, you've got some pressure in unfavorable price cost, you've got some shutdown costs. So if you look at the year-over-year penalty that you're experiencing from the acetyl business and you summed it all up, what would that penalty be? If you can do that this year.

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

Jeff, you know, I would highlight, as we think about acetyls in whole, I think it's the $30 million plus the increased logistics cost that Mark has highlighted. We're not going to be more specific in that at this point.

[Jeff Zekauskas, Analyst at JP Morgan Cazenove]

Okay, thank you.

[Operator]

Thank you. The next question is from Aleksey Yefremov from KeyCorp. Please go ahead.

[Aleksey Yefremov, Analyst at KeyCorp]

Good morning, everyone. In prepared remarks, you're saying that you demonstrated ability to run methanolysis at around 70% using a diverse feedstock slate. So I wanted to ask you, what is your expectations for operating rates on average for the second half of this year? And also that 70% utilization, was it achieved on a feedstock slate that's representative of what you're going to be using for this plant in the long run?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah. Great questions. So we're not going to get into our specific operating strategy, but we certainly intend to run above 70%. This is a new plant, new technology as we just discussed, a new set of feedstocks that vary significantly from one source to another, right? That's the significant difference in the circular economy versus the linear economy that's making products out of very consistent feedstock when you think about fossil feedstocks every day. So we have been using a wide range of different sources of hard to recycle material. Some are better quality than others.

When I talked about the 70%, that was running representative feedstock in what we think of -- what we call HTR, hard to recycle material. The limitations in run rate through really the first half of the year have been more mechanically related, or these sort of feedstock processing related issues about what we're putting in the plant that were sort of easily addressed. But when the plant, is it having some mechanical issues that we had to resolve, it runs really stably, right? We had this one issue about, once again, how to move some of the product from the middle of the plant to the back of the plant mechanically that took several improvements to address, the last final improvement we implemented this week. And that should get us into the sort of 90 plus percent range and how we can run the plant.

But it's, you know, there are going to be times it's down for another issue that pops up, and we have a plan shut down for some sort of normal maintenance. But we feel like the forecast that we've built has us running much better in the back half than the first half, well in excess of customer demand. So we're confident we can serve customers with the ramp up in the volumes with the actions that we've taken.

[Aleksey Yefremov, Analyst at KeyCorp]

Thanks, Mark. And on the marketing site, have you been selling Tritan Renew mostly to customers who are already buying Tritan, or has this broadened your customer base for Tritan using the recycled version?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah, it's a mix of both. So we certainly have loyal customers who've been buying Tritan for a long time that see a lot of value in the recycled content value proposition. But there's also, you know, we've been actually surprised by the number of application wins we're having with new customers and new end markets. So if you ask me, from where our plan was in January to where we are today, we're actually growing volume in new wins and new customers more than I thought. And the upgrade of recycled content on some existing volumes is a bit slower for the economic reasons I mentioned. And so we feel good about how we're broadening our customer base and our actual market base and where we can sell as we go into next year.

[Aleksey Yefremov, Analyst at KeyCorp]

Thanks a lot, Mark. Thank you.

[Operator]

The next question is from David Begleiter from Deutsche Bank. Please go ahead. Thank you.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you. Good morning. And Mark, just on the maintenance, can you remind us if this is a normal year for planned maintenance and how does it look for 25? Could '25 be lower maintenance expenses versus '24?

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

Good morning, David. Yeah, I would say that this year is a normal level of maintenance. Obviously, we go through each of our streams. We talked about the polymers turnaround, the acetyls, and then -- and next year we will also have an olefins turnaround, in addition to that with our crackers. But at an overall expense level, I would say this year is normal. There could be a little bit of favorability on a year-over-year basis.

Additionally, in the fourth quarter [Speech Overlap] Listen, David, I would say, as we have the polymer shutdown here in Q4, we've got the additional....

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

So, David, as you think about methanolysis, the cost this year from a maintenance point of view is extraordinarily high, right, as we're starting up the plant. So I'd say in the normal assets, maintenance will be similar to next year to this year. But when it comes to sort of methanolysis, we'll have a tailwind next year because we don't have all the extraordinary pre production expenses, all the sort of maintenance and fixing all the things, you know, in the plant as we're starting it up. So that'll be a tailwind. I mean, that's all embedded in our sort of incremental EBITDA conversation when we talk about circular, but for sure that part's going to be a tailwind next year. The rest I'd call it neutral.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. And just two things, Mark, in methanolysis. The $50 million this year of EBITDA keep breaking out between Advanced Materials and other. And just in the France project, reading the prepared comments doesn't seem like there was much progress the last three months. Can you provide any more color on what's happening with that project?

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

David, on the $50 million of incremental EBITDA, what I would say is in Q1 we saw -- we missed our guidance by about $10 million. So the $10 million of the decline was in other, and then $15 million, the remainder was in Advanced Materials.

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah, when it comes to the next two projects, first we feel great about the Texas project. We're really proud to have Pepsi as such a large contracted and committed partner with that project. And that combined with the DOE grant helping offset capital inflation makes us feel great about that project. And we really think that project is going to be a great example of scalability of this platform where we can solve a plastic waste problem, use green technologies on the energy side to get the carbon footprint down up to 90%. And so we're really helping customers with Scope 3 as well as on their mission, as well as solving this plastic waste problem.

The French project, as we said before in this the first quarter call is moving along a bit slower than we originally expected. It's predominantly due to these customer contract conversations that we've had being slower than what we had expected originally. And then, of course, we're still working on the capital inflation on that project too and trying to lower the capital costs. We do have incentives in Europe too, but not quite the same size as the IRA. So it's really about those customer contract discussions, and it's similar to the conversation we just had.

All the brands are very committed to recycling content goal, right, and dealing with the plastic waste crisis, as well as we are a significant contributor helping them lower their Scope 3 carbon emissions in Europe. That's equally if not more important win in most conversations with brands when you come down to, lets say, they continue to have very high recyclability goals, which by the way means the product is recyclable but you can't actually keep that status for your product unless it's actually recycled. So they also have to deliver high recycled content goals in order to deliver that value. So that's, I don't think changed.

They're not on track to hit their targets for 2025, partly because the economic situation had them moving a little bit slower, just like I explained with specialty customers where they're trying to manage costs in a difficult environment, partly because mechanical recycling isn't available to solve the problems. There isn't enough capacity to get to the targets that they have, especially in Europe, which starts for beverage bottles at 25% next year. And there's a lot of products and packages that they make that's not a clear water bottle, and those opaque colored trays, etc., different forms of PET. You can't -- in many of those you cannot actually use mechanical recycling to actually make those products. So they've got a challenge on how they're going to actually get recycled content into some of those products.

So all that context is still very much intact and the conversations are still going on with all the customers. But you've got a market, you know, the PET market's at the bottom of the cycle right now, prices are incredibly low, economic times are tough, and so the regulations are a little unclear in Europe right now on what counts as recycled content and how that's going to work, that's causing the conversation to go slowly. But we fortunately don't see anyone dropping their engagement with us. It's just become slower in getting the contracts done.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Operator]

The next question is from Michael Leithead from Barclays. Please go ahead.

[Michael Leithead, Analyst at Barclays]

Great, thanks. Good morning, guys. Can you just speak to the reduction of Capex a bit? I would have thought directionally that that's still ramping up, not coming down as you move forward with Tritan, the Texas project. So, is it a timing dynamic or can you just help refine that a bit?

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

Yes, Mike. As Mark just highlighted, we're still working towards milestones on our circular projects, both in Longview and France and France, and France specifically. That's pushing the timelines out. So as we think about the capex required to achieve the growth, we've got the Kingsport project behind us here in the first quarter of the year as we transitioned. Also as we highlighted, we're starting some of our other growth projects back up as we see the end of destocking and look forward with our innovation wins. So as we balance both of those out, $650 million to $700 million, we think is appropriate to achieve what we need to this year. And obviously, with that, we're not going to let cash sit on our balance sheet, and we increased our expectations for share repurchases for the full year to $300 million.

[Michael Leithead, Analyst at Barclays]

Great, that's helpful. And then can you speak more to what you're seeing in advanced inner layers today? I think you highlighted in the prepared remarks and in the slides a bit. Just remind us how big that is relative to Advanced Materials, how you think about the growth rate there? And is it fair to assume that, that business is on average a bit higher margin than the overall segment there?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

So the inner layers business is having a good year and delivering meaningful earnings growth relative to last year in a flat, slightly down auto market. So it's a great testament to our innovation strategy and it delivering results as well as operational excellence in running our plants well. So the earlier business is about a third of the revenue of the segment and it's predominantly focused on auto, but it also has B&C in it, which is sort of flat to last year. But on the auto side, we're seeing a lot of earnings growth as we're creating our own growth. We're very much leveraged to the luxury end market and the EV market is still growing better than the overall average auto build. So we're getting leverage out of that by being in the right market segments.

And then within that, we're selling more and more premium products. As we highlighted in the prepared remarks, we've had a great story around HUD, and multiple generations of that product that we've been offering to the marketplace in the future we're building for it. So that's being adopted for better security and safety driving reasons in the car. And so that has a lot of market upside.

Also, when you get to the EV's, as we said, there's about three times as much square meters of inner layer of laminated glass in an EV relative to an ICE car. And they're buying very high performance products. They want to have a very technology forward car in most EV's, especially in the luxury in the market where we're focused. And so they want HUD. They've got solar control that they need to have. And so all of that is driving high value at times a lot more square meters. And even though EV's are not growing as much as I think many people expected, it's still growing better than the ICE market and giving us leverage. So you've had, for example, HUD 20% up year-over-year in volume at very high margins. And we've had solar control up about 12% year-over-year. So these markets are growing fast in a market that's, you know, challenged. So it's a great story.

[Operator]

Thank you. The next question is from Duffy Fischer from Goldman Sachs. Please go ahead.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Yeah, good morning, guys. First question is just, again around methanolysis. So my understanding was the long pole in the tent has always been the cleanup on the back end and getting the impurities out. So were you able to -- when you were running at 70%, were you able to prove out that technology so that that no longer is an issue, or you still have to push it harder or get the max complexity of the HTR feedstock higher before you can kind of check that box and say that that's a done deal?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah, Duffy. That's been the big, huge, pleasant surprise to this whole project is, you're correct. Unzipping the polymer is pretty straightforward on the front of the process, purification of all this variable set of impurities from garbage to make sure you had a high purity DMT output on the back end is where there's a lot of complexity, and that's worked incredibly well from the very beginning.

Process technology and separating and isolating out the monomers that we want to use again and stripping out all the other impurities has worked really well across all the different HTR. The frustrating part is a lot of construction errors and sort of vendor equipment quality problems that we talked about that sort of really caused a lot of mechanical sort of a startup delays for us that had nothing to do with process chemistry. They were easy to fix. Once you had the pump break, you put a new pump.

This feedstock issue that we've had recently, again, it was about form factor, it was about a couple of suppliers having impurities that were really not supposed to be there that we've now identified. But, you know, the broad spectrum of HTR we intend to use and the changes we've already made on how to prepare that material before we put it in the plant, you know, has sort of, you know, addressed, you know, the recent plugging issues. So, you know, we actually feel great about the process chemistry. We just need to, you know, line out the sort of mechanical operation of the plant, which is -- this is a very big plant, it's got a lot of complexity to it, and we probably should have expected more of this and now built our guide as we work through these challenges in this sort of construction environment.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Great, thanks. And then just on the base business, two end markets you called out is kind of doing better, one coatings and the other one Ag. So on Ag, where are you now Kind of on a run rate relative to when it started to fall off, are you still well below kind of that normalized level? And then on coatings, what are you seeing there in volumes? Because your customers still seem to be putting up pretty weak numbers, but your volume seems to be stronger than that.

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah, I don't know if our volumes are a lot stronger than that. I mean, you got to remember there's two components. There's this in market demand discussion that we're all having, and I think we see the end market demand situation similar to our customers on coatings. But you got to remember there was a lot of destocking that those coatings customers did with us, right, and they completed that destocking, and so we've benefited from that volume recovery and coatings, just like durables and everything else. So when you look at that, we're probably up high single digits in volume in B&C, but I would attribute most of that to just a lack of destocking relative to last year.

The Ag side of things, what I'd say is, there was a huge amount of destocking as was well documented by all the Ag companies that certainly had an impact on us through last year. They resolved most of that destocking as we went through the first quarter. And by the time we were in the second quarter, I'd say we were sort of that normal sort of demand conditions. Reconnected to demand, I think, is sort of the phrase with destocking behind us, and we're having a normal Ag season this year so far. There's sort of puts and takes to that. But for the products that we make, it's -- I would call it a normal Ag season. So, you know, Q2 is good, Q3 will be softer. We do not expect much inventory building in Q4 from our customers. I think they're still being a bit cautious on how to manage inventory. So we expect we'll see a big build of Ag demand for us in the first quarter of next year, which will be a nice tailwind for next year versus this year.

[Duffy Fischer, Analyst at The Goldman Sachs Group]

Great. Thank you, guys.

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yep.

[Operator]

The next question is from Vincent Andrews from Morgan Stanley. Please go ahead.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you. Mark, is there sort of a go no go date in terms of France, or is there a plan B in case, you know, we're sitting here a couple quarters from now, or, you know, you still haven't made any progress on either of the gating issues to move forward?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

When it comes to the French project, I mean, Vince, I really hope we have clear insight by the end of the year where that project is headed. I wouldn't say it's necessarily a formal go no go decision, but we'll have good insight as we go through the fall with customer contract discussions and finish the engineering work.

The reality is, we have a lot of portfolio options and how we manage these three plants and what products we put into each of them and what pace we build them. So we're very excited about the first plant, very excited about getting Texas built. Texas will have the capability to make specialty products as well as PET. So you've got flex in how you serve and support specialty growth and PET growth from the Texas project as we then go into the French project, but hopefully have this sorted out.

You know, we still think that -- that $450 million of EBITDA across these three projects is very much intact as a long term value creation target across these projects. And depending on how you go forward, you can still get a lot of that value by shifting where you make the specialties in the first two projects. So there's a lot of robustness in this plan, but we're very committed to wanting to build all three of these projects. But to be very clear, you know, we're sticking to our model, which is on the PET side. If we don't get these long term take or pay contracts, as we did get with Pepsi, you know, we will not build the French project. So we're being very clear to the customers that we need to get these contract commitments in place to produce product that they very much need if they want to get to high recycling content targets in Europe. There is no way you can do it with mechanical alone. Can't be done. So if they want to stay committed to their goals, they're going to have to support these kind of investments.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. Good to hear. And if I could just get your thoughts on, you know, obviously don't know what's going to happen with the election, but on one side of it, we could be entering, you know, back into a world with tariffs and things like that. And so maybe you could just help us understand what your -- what your view on that would be and what sort of the learnings for Eastman was from that original tariff period of 2017, 2018, and what the impact could be this time around?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

I'm glad you didn't ask me who's going to win the election in November because I wouldn't answer. But I actually think tariffs are an issue no matter which person we have as a President of this country. The China government has a very explicit and public policy of exporting their excess capacity to the world, and that's going to have an impact on markets. They're basically exporting unemployment to the world.

And for us, fortunately we're not that exposed to those exports from China. We do have some exposure when it comes to the CI business. It has some exposure, but really most of the exports from China are going to impact Europe and Latin America. We don't have that many sales. Over 70% of our sales are in North America with CI. So our exposure there is somewhat limited. And AFP has a little bit of exposure.

So from a direct import point of view in step one, which is where we are now, our exposure on the Chinese side is not that great, which is a good thing. The bad thing is, there's going to be reactions that you're already seeing in Europe and the U.S. putting tariffs in place for products are being exported at exceptionally low cost out of China, and then that will be counter response in China. So we do expect that there's some degree of tariff tension coming our way. This is not a new issue for us. China is about 10% of our revenue. About half of that goes into China and then re-exported back out of China. Typically think of appliances, electronics and things like that, durables, and that's mostly especially plastics, doing a round trip through China being made into something. The other half are products locally consumed, like some performance films and laminates for cars, windows, or a few coating specialties out of AFP. We do have a playbook on how to manage through that, that we developed in the 2018 to '19 timeframe. That playbook was relatively effective, and so we're just, you know, updating it and being prepared if that scenario plays out.

[Vincent Andrews, Analyst at Morgan Stanley]

Thanks so much.

[Gregory A. Riddle, Vice President of Investor Relations & Communications at Eastman Chemical]

We're ready for the next question.

[Operator]

Thank you. The next question is from John Roberts from Mizuho. Please go ahead.

[John Roberts, Analyst at Mizuho]

Thank you. Mark, in fibers, could you provide some color on sigtow [Phonetic] versus textile fiber? And now that textile is as profitable as sigtow, what's the constraint on how quickly you can shift volume from sigtow to fibers - to textile fibers?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

So, 80% of our revenue is tow. And obviously that market has changed pretty substantially over the last two years as the utilization rates have become very high and customers have been focused on security supply. So we expect that market to continue to be stable. As we've mentioned, we have a 100% of business sort of contracted this year, 90% next year, and 70% in '26. So I feel pretty good about the contracts in place. There obviously are provisions for natural market decline in the volume in those contracts because it is still a modestly declining industry when it comes to tow, and it does have pricing structures in there to adjust for changes -- substantial changes in raw material costs. So we're providing stability to both our customers as well as to us. So that part of the market, I think we feel pretty good about.

When it comes to the textile business, it's been great. We've seen tremendous growth in the textile market. This is also another very challenged end market. If you go look at the fashion industry, it's not exactly growing, but yet our volumes have grown materially relative to that underlying market. The Naia fabric is just a great story. It's got, you know, half bio content. And now with replacing coal with waste plastic, we can make the other half of the [Indecipherable] hydride to make the tow from wood pulp with waste plastic. So you got a very strong beginning of life story.

And then this is going to become increasingly important is the microfibers that break off of clothing in the washing machine that end up in the ocean as microplastics if it's a synthetic garment, ours will fully biodegrade. So we have plenty of certifications and studies that prove that our fibers will just naturally degrade at the same pace as cotton and have no sort of life in the environment. So that's exceptionally important. And that's going to become a bigger and bigger value proposition because textiles is by far the number one source of microplastics in the ocean or waterways. And having a product that biodegrades, I think is going to increasingly have a significant value proposition on that end of life proposition, not just the beginning of life. So we feel great about that business and expect it to continue to grow.

[Gregory A. Riddle, Vice President of Investor Relations & Communications at Eastman Chemical]

Let's move to the next question, please.

[Operator]

Thank you. The next question is from Kevin McCarthy from VRP. Please go ahead.

[Kevin McCarthy, Analyst at Vertical Research Partners]

Yes, thank you, and good morning. Mark. Maybe sticking with microplastics in a sense, can you provide an update on the Aventa business? How are the early days going there with sealed air and any other customers that you may be working with? And more broadly, can you just talk about things like market opportunity, growth rate, margin profile there? Do you think it could be bigger than Naia over time or smaller than Naia? How would you frame that out?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah, that is going really well. We've had a great, successful launch with sealed air in the marketplace, and we're now in a large grocery store that's doing a lot of trials, where the product performance in the -- in the counter, if you will, is going really well. For those who are not familiar with Aventa, we can replace polystyrene, expanded polystyrene, whether it's trays or clam shells, in this case, trays for protein like your chicken and pork and everything else that goes in the grocery store. We replace all that as a drop in replacement to the existing polystyrene equipment with our cellulosic polymer, and it will get to the same, you know, low density as polystyrene. And it is fully certified to biodegrade in home or industrial composting. And even if it ends up in landfill, it can biodegrade pretty much similar to paper. So it's a great story of end of life.

It's got the same beginning of life story I just told you from Naia and how we can make it. But this composability where all these different food service products can just be thrown away with food and biodegrade is exceptionally important. There's a number of states that are now banning it, polystyrene from being used, other states or companies wanting just to have a natural -- sort of national position. It also makes, by the way, a phenomenally good straw, which is also compostable and rolling out in some major food chains right now as we speak. So the program is going well. The volume is ramping up. We have meaningful commercial sales this year and expect a step up next year as we prove out this value proposition in these early trials.

To answer your question about size, it can definitely be bigger than the Naia business. There's a significant amount of volume potential in this space, as you can imagine, and the margins of this product are better than the company average. So as it grows, it's an upgrade for corporate earnings. It's an alternative market because it's made from the same exact [Indecipherable] assay flake that we make tow out of or Naia out of. And this uses the same polymer. So you've got flexibility to optimize value across tow, Naia and Aventa off the same sort of fixed asset base. And when we look at it all together, we think that the growth curve of this will allow us and support us in expanding our [Indecipherable] flake business over time.

We look forward to telling you a lot more about this in the sort of circular day that Greg is scheduling, because it's, you know, we'll cover the whole cellulose extreme as well as the polyester circular stream as we hope you better understand that when we bring you down here to Kingsport. We're very much looking forward to getting all of you down here in Kingsport to see all these different products and assets in action.

[Kevin McCarthy, Analyst at Vertical Research Partners]

Great. Then as a follow-up, if I may, Mark. Can you speak to the forward volume trajectory in Advanced Materials? You posted 12% there. But if I look at the two-year stack, it's still down. So do you see additional runway to grow at double-digit pace in the third quarter, for example? Maybe you could kind of talk through what you're baking into the guide there.

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

Yeah, so our guide is basically a similar -- from an earnings point of view a similar quarter in Q3 to Q2. And, you know, we've got the methanolysis coming online as we said, where the volume is now ramping up into 3Q and in 4Q. So you'll see that pick up on the Advanced Material side. You know, we'll continue to have innovation driving growth above underlying markets in the automotive sector, continue to win sort of, you know, applications across the portfolio on our innovation, like we do every year in our past, in the more traditional sense, if you will. So we see all that sort of volume helping us as we go into the back half of the year.

You will obviously see some normal seasonality drop in demand in the fourth quarter. We expect that to be not as much as you would normally see net because of the ramp up in methanolysis and everything else. So the fourth quarter will be better than typical because of methanolysis and some of these other in-market ramp up of innovation sales. So I think that all that will sort of come together to sort of help. There's also spread tailwind that helps in the back half of the year when you look at some of the trends in energy costs that are still -- the lower energy costs in the beginning of the year still flowing through inventory, and PX is a bit lower now than where it was in the first half of the year. So those are all tailwinds. Then the headwind is about $25 million higher shutdown costs in the back half of the year, but that's mostly in Q4 than the first half, where that nets off some of that volume growth.

[Gregory A. Riddle, Vice President of Investor Relations & Communications at Eastman Chemical]

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

[Operator]

Thank you. So the final question we have today is from Laurence Alexander from Jefferies. Please go ahead.

[Laurence Alexander, Analyst at Jefferies Financial Group]

Good morning. Two quick ones, just on heat transfer fluids. Is that $30 million expected to recur in the first half of '25? And secondly, the $50 million increase in your new project and growth project investments, is that new platforms you're working on, or is that just inflation in your cost base and how should we think about that going forward?

[Mark J. Costa, Chairman and Chief Executive Officer at Eastman Chemical]

So the first question I'm going to answer, and the second question I'm just not sure I understood the question. So the first question on heat transfer fluids. Timing is everything in that business and it's very hard to predict by quarter. So, we had a great year last year, $30 million lowered this year. A lot of that $30 million will come back next year, specifically in the LNG space that are very high value fills for us. But I would just think about it on an annual basis. It's very difficult to predict exactly when fills occur quarter by quarter.

On the second question, I apologize, but...

[William T. McLain, Jr., Executive Vice President and Chief Financial Officer at Eastman Chemical]

So, Lawrence, I think you're talking about our growth -- or increase in spend and our capabilities, as well as continued investments in growth. And as you think about what Mark just outlined on Aventa and the increased expenditures there that I referenced in our Other segment, that's where, again this year we're increasing those. We expect to see the ramp up of revenue that Mark just referenced in the cellulosics and including the Avanta product line. So we're making investments also to be efficient with working capital, etc., and expect returns on those as we go into 2025.

[Laurence Alexander, Analyst at Jefferies Financial Group]

Thank you.

[Gregory A. Riddle, Vice President of Investor Relations & Communications at Eastman Chemical]

Thanks, everyone, for joining us. We appreciate you being on this call with us. As Mark mentioned, we look forward to also having you in Kingsport later this year as we do a deep dive on our circular economy platform. Everybody have a great day.

[Operator]

[Operator Closing Remarks]