Operator
Good day, everyone, and welcome to the first quarter 2025 Eastman conference call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We'll now turn the call over to Mr. Greg Riddle, Eastman Investor Relations. Please go ahead, sir.
Thank you very much, Becky, and good morning, everyone, and thanks very much for joining us today. On the call with me are Mark Costa, Board Chair and CEO, Willie McClain, Executive Vice President and CFO, and Jake LaRoe and Emily Alexander from the Investor Relations team. Yesterday, after market closed, we posted our first quarter 2025 financial results news release and SEC 8K filing, our slides, and the related prepared remarks in the Investor section of our website, eastman.com before we begin i'll cover two items first during this presentation you will hear certain forward-looking statements concerning our plans and expectations actual events or results could differ materially certain factors related to future expectations are or will be detailed in our first quarter 2025 financial results news release during this call in the preceding slides and prepared remarks in and in our filings with the SEC, including the Form 10-K filed for full year 2024 and the Form 10-Q to be filed for first quarter 2025. Second, earnings referenced in this presentation excludes certain non-core 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 first quarter 2025 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.
Operator
Thank you. If you wish to ask a question, please press star followed by one on your telephone keypad now. If you are unsure if you have registered, please press star followed by one again to confirm your place in the queue. If for any reason you want to remove your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Patrick Cunningham from Citigroup. Your line is now open. Please go ahead.
Hi, good morning. First, just on the lower sales guide for Renew, I guess first, what has been the sales and EBITDA contribution in the first quarter?
And I'm just curious on the level of confidence in the low end of the sales guide how much visibility do you have into order books and is there a floor for that EBITDA contribution just based on cost performance and volume that's already contracted certainly good morning Patrick when it comes to the overall methanolysis program with Kingsport things are actually going quite well on the operational side we've had a very successful quarter of running the facility at high rates. We've maintained an 85 percent yield on the DMT feedstock from the hard recycle stream. We're finding ways to use even cheaper versions of feedstock, so operations are really good. If you analyze sort of the production rate that we had in the first quarter, we're very much on track for that two and a half greater production volume. So when you put that together, you know, with the absence of the startup costs in the first quarter, you know, it's generated a considerable amount of earnings, you know, in the corporate other area around $25 million in that absence. When you look at the overall cost program we're on for a full year basis, we're very much on track to get our $50 million EBITDA from the manufacturing cost side of the equation out of the original $75 to $100 million guide. So I'd say on the operational side, that $50 million certainly showed up in the first quarter as expected, and we expect will continue to show up through the year. When it comes to the renew side of things, on the revenue side, we originally had given you a guide back to the deep dive of $75 to $100 million of renewed revenue, and that was based on an assumption around the economy being relatively stable in consumer durables of stable, modest growth in packaging for food applications, et cetera. So basically, a continuation of the dynamics we had for 24 would continue into 25. And that was for sure true through the first quarter. But what happened is with the trade dispute tensions developing and the discussions of tariffs, especially the tensions between China and the U.S. and where the tariffs have now gone the you know rate and growth of the consumer durable market that is largely made in China and shipped to the US is now in question about how that market's going to hold up right with the level of tariffs that we currently have it's not economic to import those kind of products so the revision that we've given you from 50 to 75 million dollars of revenue now versus the higher rate is purely an in-market estimation of the impact of tariffs it has nothing to do with the engagement we're seeing in the marketplace but we certainly don't expect the same kind of growth in those kind of products for the year when it comes to engagement you know customers are still very much engaged as we said on the durable side we have over 100 customers the economic tensions are certainly slowing the rate of product launches if you can't import a product from China you can't launch a new product so that reduces the rate at which the new product launches with new content can be brought to market. So that factor is being managed. We've only had a few customers revert back to normal Triton because of the premium that they're trying to avoid in this economic time. So I would say market engagement there is still good. It's just a question of where these tariff disputes go. If they're resolved soon, this quarter, then things would start to recover and get back to normal. they'll actually have to restock because they're pulling inventory down below normal levels right now to avoid paying the tariffs. So we certainly aren't sitting on a big amount of finished good inventory in the planet given we've been in a recession for a while. And then what I say on the food packaging side on RPET engagement is also good. The brands are really facing some significant limitations on mechanical recycling in a variety of applications and are very much engaged in trying to find ways to buy some RPET for us in applications where there's high quality aesthetics required or certain technical performance requirements that mechanical can't meet. So we're still making good progress to be able to sell RPET in the back half of the year as we convert that Triton line over to making PET that we discussed before. So overall, I'd say we're in good shape, and it's just a market question around tariffs.
Very helpful, Mark. And then maybe just on fibers, you know, it seems to be getting a double hit on some tariff-related impact and persistent de-stocking how how long do you anticipate this de-stocking to persist and how should we think about contract performance in the next couple of years and potential further normalization from here yeah so you know certainly the you know overall fibers business has some challenges to it as you said there's sort of two separate challenges i'll start with the de-stocking one first first there's no change we've seen in the in-market growth rates So that is not part of what's going on as far as we can tell.
So market growth rates are still modest in the 1% to 2% rate as the traditional cigarette markets are declining in the 2% to 3% range, but the heat-not-burned cigarettes offsetting it, we've talked about that in the past.
So that part is actually quite stable.
Our contract rate for the year of this year is around 90%, which has put the prices in place for the year. So we're in very solid shape on a pricing point. So, as you said, you know, it's really a question of, you know, what's driving the volume decline, or if the markets are stable, then by definition, you know, it's a dynamic around customer de-stocking as the principal driver of what's going on. You know, as I said before, tows are incredibly small, percent of the final price of a cigarette, about 2%. So, the cost of it is not a high priority when you're selling cigarettes that are greater than 60% gross margins you know the focus always starts with security of supply and when the market got incredibly tight in that 21 22 time frame customers were building inventory and as we've now discovered building a lot more inventory than we fully understood one of the challenges with customers when you're in situations like a very tight market is no one wants to tell you how much inventory they have because they're afraid you will not supply material to them you know as much as they might need going forward so you get this dislocation of uh you know inventory and we certainly lived through that in the 22 23 time frame where we discovered just how much inventory people had built over time and so the destocking is going a bit longer than than we expected and the reason the destocking started i should have mentioned is the market has loosened up a little bit so there's some capacity that's been added in china uh if you look at it from a 23 to 25 point of view that the capacity is around five percent of the you know ex-china market um so the capacualizations have now moved down into that lower you know 90 percent range uh 90 95 range and with that room the customers feel safe in destocking and that's what we see going on and what we're going to see in the second quarter is something similar to the first quarter I've learned my lesson around predicting how long destocking is going to last. Certainly, we expect some of it to continue in the back half of the year, and we're still working with our customers to truly understand exactly where this all sits. But the good news is the fundamentals are there. The capacity-lization is still in the 90s. The markets are not declining in some significant way, and I think that gives us stability. The contracts, as you asked, are about 80% for next year. You know, most of those are multi-year contracts, some are annual. They generally include pricing, a lot of it's CPT pricing that actually gives customer protection on, you know, making sure the margins are tracking with, you know, raw materials. So overall, I'd say we feel like the market, you know, is certainly facing that challenge and it's going to continue a bit more than we expected. It's good to remember there are a couple other dynamics driving earnings down. We had a discontinued product from customers of about $10 million, and energy is a bit of a headwind this year relative to last year and how it flows in. The second part of this discussion, of course, is around the impact on the tariffs with China. We do have two products that go into China. One is the textiles, the Naya product, which has been a great growth story for us, and half of the Naya that we sell is in China. the other half's outside of china it's a huge market um so it's a time-based issue for us to if these tariffs last for a period of time uh of just winning market share in in mills outside of china to replace what we do in china um so that one is manageable and we have some inventory in place to mitigate some of those issues now um when it comes to the flake uh this is you know cellulose flake that you spend into fiber and we do this with the chinese national tobacco company Obviously, the rates are pretty high there, and so we'll have to just see how those tariffs evolve over time. So that's a more specific thing around what's going on with the tariffs, and we'll have to just see how long the tariffs last with. When you put them together, obviously, creates a bit more of a challenge for this year.
It's still extraordinary earnings compared to our passed and great cash flow that comes out of this business helpful thank you thank you our next question comes from david begleiter from deutsche bank your line is now open please go ahead thank you good morning and first um congrats on being recognized for your support of veterans and active duty service members very well done um thank you mark on your china thank you on your china sales of the portion roughly 60% supply from the U.S., if these tariffs stay in place, how much is at risk do you think of perhaps just going away? I know you address fibers, but how about AM and AF&P? Thank you.
David, a lot of these questions are really sort of situational specific to this segment. So I just address the fibers part where half of it is very much addressable to move out in the country or other mitigating actions we're pursuing around the flake supply um so i think there's lots of different ways over time to manage the fiber side of the equation um you know when it comes to uh ci just to be clear no exposure so nothing to worry about there frankly probably upside in ci which is primarily selling in north america and the tariffs um that we have coming in this country from products around the world um that sort of set the price on the marketplace you know over time will give us some some lift uh there but in the short term pretty modest just because of the you know competitive situation um when it comes to afp uh the exposure in afp is more limited uh you know similar to fibers it's around 200 million dollars of revenue in 2024 but a lot of the segment does not have exposure to china from a u.s production point views or especially fluids business we have production outside europe when it comes to all of our means business and care and ag we've got assets in the u.s you know our largest assets in europe and assets in china so we have lots of different ways to serve those markets locally around the world and a lot of the coating uh related products we don't really sell into china but there are a couple of very high value specialty products like our cellulose additives that go into a wide range of coatings from, you know, cars to pharma to some other packaging applications. And that is exposed. It is a proprietary product that only we make. The margins on this business are pretty high. So short-term, it's hitting us in Q2 because our customers are well-stocked on inventory because it's so important they carry a lot of inventory uh in in their formulations um and uh and so we certainly you know see them not buying this quarter hoping for a resolution between the u.s and china uh discussions um but it's a very um important functional product where there really isn't a substitute um and then so we have a an ability to pass on some of that duty costs if we need to and find ways to work with our customers when they get back to ordering after they've used up their their stock so I think that one is also the category of manageable over time in advance materials which is obviously the largest segment from a revenue point of view in China they're really three businesses that have different stories interlayers makes the products in China so no issue their performance films historically has used a lot of product made in the US but that's why we did the acquisition of Thailand to have our own performance films manufacturing capability in China we also did an expansion of our capability in Germany and so those two assets are in the middle of ramping up for this specific reason of being more local and diversified how to serve the market and so you know while some that we're not gonna have that much impact this quarter because of the inventory in place for performance films well some impact you know as we balance out the ramp up of these assets relative to what we make in the U.S., but we can supply that market long term from other locations in the U.S. And then especially plastics, you know, clearly has exposure when they're made here in the U.S. and those products are sent to China. On that front, we're also not getting that much of an impact this quarter because the customers are sitting on inventory. And the real question, and especially plastics, is a lot of what we sell into China, especially Triton is then re-exported back to the US and Europe and other markets and a lot of it to the US so the main issue is how long do the tariffs stay in place that you know make it very expensive to buy an appliance or water bottle or whatever else in the US that's made in China so there's some uncertainty and risk around how those supply chains adjust to that all these companies that make all these appliances have to get the products from somewhere the retail lines need products from somewhere there's a huge amount of effort going on around the world right now to you know find ways to source and make these products you know ramp up production and we'll follow the customers wherever they move around the planet you know because frighten is a unique product there is no easy substitute for Triton there are different plastics you can use but they all come with significant compromise either if you go to polypropylene it's very cloudy and not clear if you go to a variety of different styrenics the toughness or the chemical resistance you know from other products all create failure modes and how well the product performs in the market so you can go if you want to compromise your product on the shelf but otherwise you really want to keep using Triton and and so we'll certainly feel some of that risk and impact if these tariffs stay in place through the back half of the year as you supply chains move around and and and you know the of market here in the U.S. has been impacted. So overall, that's sort of where we stand. You know, when you put it all together, you know, we've told you there's about a $30 million impact in Q2. It's honestly, with all these uncertainties around tariffs and where they may negotiate, it's hard to predict what this impact is in the back half of the year.
And just lastly, on Longview and the DOE funding, I know you've been getting some funding every quarter, the last couple quarters. What's your level of confidence in this funding continuing under the current administration?
We feel good about the executive order. You know, sorry, I just lost my track of thought. We feel very good about where we are with the DOE. They have been highly engaged with us. We think that we've got a good relationship there, And we think that our project actually holds up well in the way President Trump thinks about U.S. manufacturing. When you look at it, we're focused on growing into U.S. manufacturing. It is a serious issue. Manufacturing hasn't grown here in this country. It's been growing around the world. And the vertical integration and all the products that go into manufacturing of finished products is equally important if you want to have national economic security. So there's actions that I think we should be taking. Strategic trades actions that are focused on specific issues around this topic make a lot of sense. We need a lot of regulation that reduces the difficulty and cost of building your tax and other incentive policy workforces. A variety of things I think we're very aligned with. The current administration is important, and this project fits all of these criteria. When you look at these circular investments, we're building infrastructure to deal with plastic waste, right? And it's also a national security way to make raw materials for food packaging, medical, et cetera. It's onshoring jobs from Asia because most of all the PT business has now gone to China. And you're creating revenue way beyond just our facility and supporting the growth, the recycling infrastructure behind us and being a better supplier to local manufacturing of plastic related products in the market. So it checks all the boxes on that front. It also is a version of, you know, energy independence. Plastic waste is basically oil sitting above ground, you know, and you're reusing it instead of throwing it away. And, you know, this process is advantaged, you know, relative to paraxylene, you know, at any oil price above $60. So economically advantaged as well. and you know from a voter point of view there's no one there's a lot of debate on climate but there's no debate that people don't like plastic waste in their environment no matter which side of the aisle they sit on so we think we're in really good shape on this the so far everything I just said seems to be aligned with what the DOE is looking for in the conversations you know we've had with them we've been receiving our funds in Q4 and Q1 there's a lot of staff change you wanted on the DOE right now. So, you know, we're moving a little slow in how we sort of finalize the next phases of the contract, but we're not getting any indication that the project's at risk.
Operator
Thank you. Our next question comes from Alexey Yefremov from Keycorp. The line is now open. Please go ahead.
I wanted to ask you, there's a lot of concern about consumer health in the businesses where your products end up in in consumer i guess such as auto films are you seeing any uh meaningful slowdown in demand uh on auto demand just consumer discretionary consumer related demand right yes uh you know look at our q2 guide we basically called out two dynamics that took us from where we were originally to now both of which are trade related so i already covered the impacts the direct impacts of trade which is at 30 million dollars but the other impact and as we tried to explain uh in our prepared remarks is seasonal growth is typically really strong for our portfolio when you go from q1 to q2 um and that is what drives you know going from a dollar 91 to some higher eps in a normal situation we still see seasonal growth um now but we don't expect it to be as strong as what would have been normal and that is very much related to you know you know consumers you know being concerned about the world and what's going on you can see the confidence decline you can certainly see consumer purchases on discretionary you know items right now increasing right you know people are buying cars people are buying you know blenders whatever else because they're worried about tariffs coming so the consumer data would lead you to believe that there's a certain amount of growth going on but in some sense what you're doing is you're pulling forward consumer demand from the second half into now and there's people worried and being cautious about what they want to spend in general that's creating a lot of fog in what's really going on but as a company whether it's us or our customers you have to be considering multiple scenarios right now, one of which is rate gets resolved quickly and everything's okay, but you also have to prepare the more difficult scenario where these tariffs stay in place for a longer period of time and, in fact, demand. And so we can see customers being a little bit more cautious on just how much inventory they want to build. And that's sort of the dynamic we're looking at here in the second quarter is not seeing as much growth. I mean, there is a risk where we don't make much progress on on some of these uh trade issues um and you start getting people more nervous about when this is going to get resolved and you can see some more de-stocking you know towards the back end of the quarter but we'll just have to see how that all plays out mark and just listening to your remarks about how tariffs are impacting your businesses It seems like initially you maybe had some inventory in China that allowed you to mitigate it.
Is it fair to say that if this tariff does not change in the second half, you may see a larger negative impact, direct negative impact from the tariff? Or that is not the case because you have some other mitigating measures? I just couldn't quite understand the net result of these two.
Sure. so again sorry guys but i gotta go segment by segment because it's different story so i don't think there's any additional risk in the fibers business um with the mitigating actions that are in place i would expect that number to be relatively steady um as you go through the rest of the year if things are not resolved same is really true of afp um i think there may be some modifications or mitigations there but uh where things are a bit better in the back half of the year versus where we are now where the customers are buying at all and then so it's got probably some moderate upside and then when it comes to the advanced material segment you know that's a little bit more complicated right again interlayer spine performance films you know does have inventory the marketplace right now so that will run out at some point as you go in the back half of the year but they're ramping up plants to replace a bunch of inventory from being made in china or in europe so hard to say exactly how that balances out but i'd say that the headwind the back half's a little bit more than the first half um on pf and then on especially plastics you know the headwind there would be more than where we are now um you know with the second quarter you know people stop buying um you know all these appliances and consumer durables we'll have you know downside on the durable side and then we'll have upside on selling more pt in the back half versus the first half as we start taking that to market. Obviously, that's lower margin, so it's not going to be a total offset. So, some more exposure on SB in the back half versus the first. Thanks a lot, Larry. I would know there are mitigating actions that we're taking that are a lot broader across just inventory. So, we certainly have done that. We're ramping up plans. We're definitely working with a lot of customers around how they're moving to other parts of the world to make products. So, there's a lot of that going on right now. You know, if we're under pressure, imagine what it's like being someone forcing a blunder, you know, from China right now. You know, they're highly motivated to find solutions and we'll follow them where they go. There's going to be pricing opportunities that we're going to find across the portfolio. And there's going to be volume growth opportunities that we've, you know, that we can realize here in the U.S. We've got opportunities when it comes to, you know, direct competition being a bit more expensive as it's being imported. and so we're going to see some benefits you know in those kind of areas you know for example especially plastics we'll see some of those benefits when it comes to you know thinking about parts of the portfolio in an AFP we'll see some benefits around AG and and even things in CI we'll see benefits like floor tile so there's a bunch of different examples moving around where there'll be some you know, growth we should realize in the U.S. I mean, we are the ultimate company with a low-cost structure to serve the North American market across all these different products that we make.
Let's go to the next question, please.
Operator
Thank you. Yes, our next question is from Vincent Andrews from Morgan Stanley. Your line is now open. Please go ahead.
Thank you, and good morning. Mark, could you talk a little bit about the CapEx reduction and sort of What triggered the decision you made on, I guess, sort of deferring that cap exit long And are there any sort of costs associated with doing that in terms of the overall cost of the plant? Seems like timing's not changing, but just curious there.
Good morning, Vincent. Thanks for the question. So as we're looking across the scenarios that Mark has outlined, obviously being prepared you know for the potential downside of an extended trade dispute we looked at you know now is the right time to optimize both efficiency and effectiveness of a capex reduction obviously we're in the engineering phase of the Longview Texas project and you know we can go through that detailed engineering and basically get more complete before we start, you know, to solidify the commitments without affecting the timelines of the completion of the project. So, as you think about the midpoint, we reduced our capital from roughly $750 to $550. I would again note that our CapEx, from a maintenance standpoint, is about $350 million, and we're still investing in this environment you know slightly above our DNA so we're confident in our strategy but we want to make sure that we're also prepared for those downside scenarios and making sure we deployed efficiently I would also highlight that you know the Texas project is the largest project but it's still a little bit less than half of the reduction and most of that is the remainder is across a combination of other business growth uh and i mean the key maintenance okay and then if i could ask you
um i know in the sort of march conference season you had you had some concern over march orders and then it sort of turned out that they were i guess better than feared or better than expected i'm not sure which it is but i'm just curious what happened there because usually it usually when when there starts to be hiccups in the order book they don't reverse so what what any any color there yes we are certainly with all the trade talk even in the first quarter you have to remember we still had 20 percent tariffs being put on place in china etc there was a lot of caution that developed around customers and what they wanted to order um and so we were reading into that you know as we were getting into march um and then frankly just surprised and how people sort of bought more i think um it wasn't really a lot of pre-tariff buying i'm sure there was a little bit of that at the end of March but what's comforting around that question is April orders are similar to March so if they were really pre buying you know you would have seen a drop-off in May in April as you as you as you've gone from March we've seen that before in our past and right now we're not seeing that so that's encouraging and the order books are holding up in in April May looks okay you know June to June is just too far away for us to really assess um when it comes to sort of our order of visibility um but i do think you know we're in solid shape but there is you know uncertainty risk obviously in june with how all these uh discussions around the world go let's add the next question please thank you our next question comes from jeff sakowskis from jp morgan your line is now open please go ahead uh thanks very much.
You abandoned your annual earnings guidance, but you didn't—but you're still guiding for annual cash flow. Why is that? Why would the cash flow for the year be more forecastable than the earnings? Or why do you have more certainty around the cash flow?
Yeah, good morning, Jeff. Thanks for the question. Obviously, as we've highlighted in our prepared remarks, and even in the Q&A this morning, it is highly uncertain, and we've pivoted to an emphasis on cash generation ahead of a potential recession. You know, as I think through the levers that we have, you know, whether it be in the cash earnings, obviously, but we have a broader set of working capital and operating set of solutions, and also how we manage variable resources across our global asset base. And in that, we've got flexibility that I think gives us a narrower range on the cash outcomes versus all the accounting ramifications that comes in with an earnings estimate when you're trying to deal with these choices. As we've highlighted, you know, if the trade dispute is resolved in the short term, ultimately we'll have higher cash earnings and less working capital actions. If it's drawn out, then ultimately it could cause a recession. But the dynamic between EBITDA and the OCF that we're going to deliver ultimately will be based on that trade scenario. But we do have higher confidence, and I think we've done that across multiple economic environments in the past.
Yeah, I think that we're really proud of the fact that we try and look forward and see what's coming and be prepared to take whatever actions are necessary to sort of weather storms. I mean, this industry has been, you know, facing a lot of storms over the last, you know, seven years, and it's well-oved machine on how to react to it at Eastman. You know, the reality is if the focus on cash is not needed because the economy is snapping back and recovering, then that's upside. It's easy to run the plants, you know, harder in the back half of the year and catch up. We have the excess capacity at this point. So, you know, I think this is a prudent way to approach things and will, you know, obviously adjust as the macroeconomy and sort of trade-related matters sort of evolve.
And then secondly, what you did is you estimated the tariff impact at $30 million in the second quarter. How do you calculate that? Is that lost sales? Is that tariffs that you're paying? you know what and could you describe where it seems that you're paying the tariffs or whether you're being reimbursed for your customers where are the tariffs actually touching you and is it China mainly or is it other you know regions as well can you you know sort of get to the bottom of this 30 million number and you know what it might be in the third quarter if things continued.
So, Jeff, when it comes to the impacts on the tariffs in the second quarter, it is an impact on volume as opposed to an impact on duty, right? So, when you have a 125% duty into China, and there's a hope that the trade will get settled in between the two countries, customers, you know, don't want to buy a lot with that adder. So, that's the impact you're seeing in fibers where we're projecting less sale of you know a flake for the tow jv less naya textile fibers being purchased why people wait to see what plays out in this quarter so that's what happened there same thing i said in afp the high value cellulistic atoms are going to all these coatings and pharma applications some other applications those customers carry a huge amount of inventory because it is such an important product for them for the product they make and it's such a small percentage of the total cost of these products and in these cellulose adjectives and afp that um you know they're not going to take any risk uh and uh so they have inventory uh months of it um and so they can you know through this quarter just not order um so So they are pulling inventory down, right? And then it's the same dynamic in advanced materials, but just less, because we have a lot of inventory available in that marketplace. We make it in interlayers there. We already explained everything around PF and SP. The real risk there is ability to sell what they make as a finished product back to China. And I think people are – everyone in that whole supply chain is sort of trying to figure out what they're going to do on that dynamic. So it's a volume hit as opposed to a tariff hit. I mean, what I'd also note is, you know, while we have this exposure because we make a lot of product here in the U.S. and we export it around the world, we're also vertically integrated, and this is a very unique competitive advantage for us on that integration, which is most of the raw materials that we use across the company are sourced in North America. So we're not facing much tariff risk of what we have to pay for on the raw materials side of things even px which we buy around the world we have sourcing from all countries around the world so that we can flex on where we get our px and obviously px prices are very low right now um so you know we don't like a lot of companies who buy a lot of raw materials but may not have as much exports to china where they're having that problem they have to manage or if we're buying auto parts in the auto industry or whatever else you know we don't have that issue our issue is, you know, this primarily China-related matter right now, as far as the second quarter is concerned. And I think I already addressed, you know, how it trends, you know, into the back half of the year in my answer ahead of you.
Operator
Thank you. Our next question comes from Kevin McCarthy from VRP. Your line is now open. Please go ahead.
Yes, thank you, and good morning. Mark, I wanted to come back to the discussion around the fibers segment and the issue of de-stocking. I think what you've said in the past, and you alluded to again this morning, is that a high percentage of the volume is under contract. And obviously, the implication of that is that the business should be relatively stable volumetrically. So I'm trying to weigh those two things, you know, more severe de-stocking and contractual protection. And so maybe you can kind of talk through the first quarter volume was down 12 percent. Do you think that could be indicative of the year or or do you have sort of take or pay provisions in some of these contracts whereby maybe there'll be de-stocking in the first half, but then customers become obligated to meet minimum volume requirements as as the year progresses any any thoughts along those lines to you know frame out or bracket that the volume risk would be much appreciated here so on the volume side of the equation price by the way is just pretty predictable and locked in so this is really a volume question for this year than a price question with these contracts but on the volume there's there's always a band of
volume that customers can buy within from a low to high range you know typically the middle range is what they're aiming to do and and we have customers you know buying you know in the first and second quarter at the low end of the of the volume rate so they're not violating the contract they're just at the low end of the band across he you know the customer base what's changed I'd say from December and early January to now is it's a broader set of customers who are now destalking than what we originally had expected in January to where we are today so no one sort of violating a contract but they're just more customers moving to do some destalking and move to lower into their band then we were originally notified if you will in January as we built the forecast in versus where we are now so if you think about it and you're going back in the second half this just comes a question with each customer just how much inventory do they really have to do stock and where they would then start moving back up into the band to normal or staying you know at the lower level and you know I think that it's going to be a challenging year I would expect maybe it gets modestly better in the back half versus the first half as some customers address their inventory issues but we're just gonna have to see how it evolves.
Okay. And then secondly, if I may, on the subject of tariffs, I appreciate the various headwinds that you articulated. I am curious, though, are there examples of product lines within Eastman's portfolio where the tariffs may be helping you in chemical intermediates, for example, or otherwise? Or is that just simply not the case and the overall economic environment impact is sort of overwhelming any such benefits?
Certainly. So I would say the opportunities are still emerging. So it's early days to sort of have a definitive view on this as these tariffs are still being debated and implemented. Performance films, for example, does have upside in North America. We are by far the largest player in the performance films business, but we still have a lot of different competitors out there. All of our product is made in the U.S., so we are advantaged in having the largest-scale U.S. manufacturing base. Our competitors are sourcing some film domestically, but a lot of it is being sourced abroad, including places like China, et cetera, where they're facing tariffs. So we think there's going to be opportunities there to win some share but it sort of depends on where the auto market sales are going and how those net together in the short term but certainly a place where you know relative to the market we will do better in especially plastics there are definitely opportunities where we have you know imported products so we have to compete against so the shrink labels around the packaging for beverage bottles as an example even some of the consumer durables there are manufacturing capabilities in the US that some of our customers have and they're ramping that up and we're going to sort of see you know growth there in volume that they have you know that that could be advantageous for us the AG space is another place where we're going to have opportunity the our AG customers were facing a lot of downs you know competition with formulated AG you know crop protection products being imported and really frankly dumped in America at very low prices so the the tariffs are going to create some relief for them and ability to sort of regain some market share so that's another place where I think we'll see some benefits about our customers growing relative to out of China some other countries even in building construction there are opportunities like floor tiles you know which use our plasticizers a lot of that got offshore to China and and supplied by Chinese manufacturers a you know that make dotp we have a number of customers who are now looking to bring in that production back here this is a place where capacity does exist uh to ramp up uh in u.s manufacturing um so there's a there's a bunch of places you know it's not uniform across the portfolio and i think ultimately there'll be price benefits across the ci portfolio when you get some additional uh you know settlement of just the competitive dynamics are going on right now so And CI is a little complicated because you have a lot of companies that were exporting chemicals, and now they can't export them as easily. And so there's a dynamic there that's settling itself out. But over time, there should be upside.
Operator
Thank you. Our next question comes from Frank Mitch from Fermion Research. Your line is now open. Please go ahead. Frank's line has just been closed. Let me just reopen it for him.
Yes. Good morning. Sorry about that. I don't know what happened. But given the number of ways things can go, certainly can't fault the pulling of annual guidance. I want to focus on the second quarter. As I think about Eastman, less cyclical than most companies that I follow, that range of $1.70 to $1.90 is rather large. So can you talk about the, you know, kind of the puts and takes to hit the low end and the high end? What are you embedding in terms of that wide range?
To put it simply, it's a question around demand in June and, you know, to some degree May. But with the uncertainty of everything we've discussed on this call, you know, how orders trend with customers is just heavily connected to that. And we're very encouraged that April's holding up, which is great. So, you know, we're off to, you know, a solid start to the quarter. But, you know, customers behave and how many orders get placed creates the range on that uncertainty. I mean, there are other smaller things around trends on, you know, natural gas prices and currency and this, that, and the other. But the principal question is just a demand question in the back half of the quarter.
Interesting. I want to drill into the positive take on April trending in line with March, as I might have thought that historically April – I don't want to be too granular, but I would have thought that April would have been a little bit better than March, given building and construction, et cetera. But it seems like it's kind of one for one, and is that typically the norm at Eastman?
It is typical for April to be similar to March in a good year. or a solid year, not a great year or a bad year, what happens, you've got to remember, you know, the result of a quarter is three months, right? So every quarter typically starts out where the beginning is weak and it gets stronger through the quarter. So the last quarter, you know, March, June, September, all tend to be the stronger month of the year, of the quarter. And so the fact that April, similar to March, which is a strong month, is good, right? So you're building off of that performance because March was better than January and April. I'm sorry, January and February. But, you know, so I would put this in sort of a normal start to a Q2, as opposed to good or bad.
Okay, gotcha, gotcha. And then just following up on a lot of discussion on volumes and in tow obviously uh but back to your earlier point about how small uh tow is as a as a percent of the cigarette uh and so you know raising uh you know tariffs raising the price by 145 percent or something like that who is uh who you know when you sell to cntc are they paying or will they be paying that tariff and you're you're maintaining price Or conversely, if you're having to eat some of the tariff or what have you, what would prevent you from raising price given how small it is as a percent of the total?
That's a great question. So technically, when you're going into a country, you're the one paying the duty and you have to decide to raise the price to cover the duty or not in the way that that works. The conversation, so the joint venture between the Chinese Astro Tobacco Company and us has an obligation to buy flake from us, but they can jointly decide with us that if the price is too high for the flake, that they will reduce production if it's not economic at that price to sell the toe. And so that is where the volume risk comes with this flake sales is that price is much higher than the other plants that the CNTC has, right? Remember they have a spectrum of joint ventures making toe. All joint ventures with us or a lot with Celanese and some other players. um those are making both the flake and the toe in china so we're the only ones importing flake into china so they can flex up you know the run rate of those other assets and reduce the run rate of this asset if our flake is too expensive okay gotcha uh uh fingers crossed that 90 days from now on your next call this whole conversation will have been moot and we'll be back to uh to normal.
Thank you, Frank. And it's a good point, Frank. I mean, if we get these things, all this tariff to moderate back to sort of more rational levels, and let's just say 10 to 20% range versus, you know, where we're at now, I don't think we should fantasize about everything going to zero. You know, I do think things can normalize and get a lot better. And, you know, we would be able to snap back towards our original forecast for the back half of the year from January. But you do need to get some of this extreme tension taken out of the system.
Let's go to the next question, please.
Operator
Thank you. Our next question comes from Mike Sison from Wells Fargo. Your line is not open. Please go ahead.
Hey, good morning. Mark, you sort of gave a soft recession sort of outlook, I guess, in your prepared remarks. How do you think the Eastman portfolio should hold up or perform If the U.S. does go into a recession, you know, in 23, your volumes took a pretty big hit for advanced materials and AFP, but, you know, a lot of de-stocking there. So just, you know, where do you think volumes would sort of mirror if we do go that route, unfortunately, this year?
That's a good question, Mike, and I think there's a lot of mitigating actions we're taking, but to answer your question first, I think that the demand situation this year will be considerably different and less potentially than what happened in the 22 time frame so we've been in a manufacturing recession since the summer of 2022 and we have not come out of it right I mean demand has been challenged as we all know with the inflation and the interest rate hikes etc that especially on the consumer discretionary demand side of the equation, cars, homes, autos. We're still below 2019 levels. And at the same time, there's been no driver for restocking in these markets. So the inventory levels that are sitting around the planet right now are not that high. They're at appropriate levels for this low demand scenario. And people have only had a couple of months to react to this tariff risk. So there's not a lot of time to sort of build inventory ahead of this tariff risk through the first quarter, and you're worried about recession. So everyone's trying to balance just how much inventory you don't want to have. What's happened is the geographic location in inventory has changed a lot, right? So anyone had blunders and TVs in China got them in the West, but that doesn't mean they made twice as much. And same thing, we got materials into China. So, you know, materials have moved around, but I don't think we're sitting on a huge amount of inventory right now for a de-stocking event. And I don't think, you know, demand has a big step down because we're already at a relatively low level of demand compared to a normal recession. So, you know, there are extreme differences, you know, obviously between the U.S. and China economies being dislocated at these tariff rates that you've got to then factor in. so hard to put it all together but you just don't have that sort of mountain of risk um you know in in absolute volumes i think this time relative to where we were in 22 so i think that's important to keep in mind the second thing i'd say is um you know there will be a tailwind you know on the price cost relationship if you go into recession i similar to the demand situation i don't think the tailwind will be as significant because you know we've already been at you know sort of stress levels in pricing with raw materials but but I do think you know you'll have a tailwind there to offset you know that demand dynamic and there's just a lot you can do to manage you know through this in the actions you take right so as we've said we've already focused on making sure we're going to be sort of generative in how we're performing there's a whole list of mitigating actions around paris i've already mentioned you know there is still innovation that's allowing us to grow above markets you know the commercial excellence of our teams is phenomenal in defending pricing and value for products which we've demonstrated over the last three years and will continue to do and methanolysis is a unique upside to easement um where we've got you know that 75 million dollars of ebitda as a way to offset some of all these challenges we've been talking about and of course we'll be you know prudent on the on the capex front so that, you know, from a free cash flow point of view, we're in good shape. So a lot of things that we're doing to manage through it, I think, you know, I would not recommend just running a proxy analysis on demand for 22, you know, and 23 relative to this scenario for the reasons I just mentioned.
Got it. And as a quick follow-up, if the tariffs were resolved and we get back to that 8, 875 run rate for the second half, what was the volume assumptions that AFP and AM could do, like low, mid-single digits? Is that sort of what we were hoping for initially?
Yeah, that's about right, Mike. I think that, you know, people are really draining stock right now to avoid the tariffs, which means, you know, inventory is going to be a lot lower than what is normal if we're going back to a normal economy. So, you know, you would hope in markets continue to you know come back to some stability there's going to be friction from all these tariffs so you know if we're at a 10 to 20 tariff you know there is going to be some consumer friction around that and what people can afford to pay or people managing headcount costs if there are you know companies are absorbing the you know the hit that will have an impact on the economy you know but you'll have a restocking uh you know uh bringing them forward back to more normal levels that you it will certainly help volumes in the second half be better.
Let's make the next question the last one, please.
Operator
Of course. Our next question is from Josh Spector from UBS. Your line is now open. Please go ahead.
This is James Cannon. I'm for Josh. Thanks for taking my question. Just given all the uncertainty in the market, I just wanted to focus on some of the more controllable items and looking at the guidance that baked in the 20 million headwind from turnarounds. Could you just help level set how the turnaround schedule is expected to look in the back half?
Yeah, so what I would highlight, it is unique for us to have the scheduled turnarounds here in the first half in Q2 specifically. So we've got the sequential 20 million headwind. I would say, you know, sequentially in the Q3, it'll be at similar levels. and then Q4 would actually be an improvement. So we basically have some higher cost in Q2 versus Q4. Obviously, in this uncertain environment, that also helps us get ahead as we look at inventory and generating cash flow, because taking actions here in Q2 and Q3 ultimately defines the year in cash.
Did you have a follow-up question? Okay. Thanks, everyone, for joining us. Okay. Yeah, appreciate it. Yep. Thanks everyone for joining us. I appreciate you joining this call. Hope you have a great rest of your day.
Operator
This concludes today's call. Thank you for your participation. You may now disconnect.
