Ryan Weis : This is Ryan on for Aleksey. The first question, I wanted to dig into a little bit on nylon pricing. I believe at least one peer of yours is out in the market, announcing some pricing. Are you seeing any momentum of it here? And can you just talk about what your expectations might be for the balance of the year?
Lori Ryerkerk: Yes. Look, nylon pricing varies a lot depending by region or by end use. But I would say, in general, we feel like we hit kind of the bottom in terms of variable margins. So it’s not just pricing that’s important, but it’s raws as well, so raws have come down. But I’d say, in general, we feel like we’re coming off the bottom. But let me hand it over to Scott, because I think he can give a bit more color here.
Scott Richardson: No. I think Lori hit it, Ryan. We are seeing a lot of stability, which is a really good thing. And as Lori mentioned, we’re starting to see the flow-through of variable costs. So margins are expanding in the nylon business, and we continue to work, as we said in previous quarters, to get back some of that share that had been lost prior to us closing the transaction. So we feel good about the trajectory as we work our way through this year of the nylon business.
Ryan Weis : Great. That’s very helpful. And then if I could just dig a little bit into the $150 million synergy target in your bridge for ’24. If there’s no demand improvement, demand kind of trend sideways from here. Do you still feel you’re confident in being able to deliver on that target?
Lori Ryerkerk: Yes. So I feel really confident in our ability to deliver on that $150 million. I think if you look at it, it really is in three buckets. The first really be the footprint optimization steps that we’ve taken at the end of this year, would start to show up in the bottom line next year. So that’s probably about $50 million in the year. We have the transition to the single SAP platform, which is happening now which gets us out of the TSA and we get other synergies from. And then we have cross-sell opportunities which have been identified this year, closed one this year, which will start to come online next year, and we’ll start to see the revenue return from. So I feel very confident about that $150 million of synergies for 2024.
Operator: Next question is coming from Frank Mitsch from Fermium Research.
Frank Mitsch : If I could just follow up, did you guys disclose what your M&M synergies were realized for 2023? Apologies if I missed that.
Lori Ryerkerk: I’m not sure if we disclose it or not, but we achieved $100 million in synergies in 2023. A little bit lower than we had anticipated earlier in the year, but still above what we had thought at the beginning of the year. And really, the reason for that was the volume related, just not seen volume recovery and some of the volume-related synergies not pulling through. But again, those synergies are there, they will just pull through at a later time as volumes recover.
Frank Mitsch : Got you. Understood. Understood. And if I could, a question on the acetyls chain. I know back in the ’21 Investor Day, back when you had acetate split out, the expectation was that it was going to be relatively flat to ’21 during 2023, at $245 million of EBIT. I suspect it might have been higher than that. Can you give us an idea as to how well that part of the business is performing and what outlook is?
Lori Ryerkerk: Yes. Look, acetate tow had a really good year this year as a result of the work we did last year to really reset how we contracted and how we manage that business. As you’ll recall, we pulled it in to be part of the acetyl chain to give us more flexibility and more optionality much like we do for the rest of our projects. So I would say we called out our target was to get to the $245 million at Investor Day. I would say we have meaningfully exceeded that target for the year. But again, I think the important thing here is we are just running as part of the chain. And that way, we stabilize the earnings of the entire acetyl chain, much like we do with say redispersible powders and other downstream derivatives. It simply gives us another outlet to pull acetic acid through the chain to make sure we can maximize value from the chain and again, stabilize earnings.
Operator: Your next question is coming from Vincent Andrews from Morgan Stanley.
Unidentified Analyst : This is [Turner Hendriks] on for Vincent. I was wondering if you could provide your updated view on auto builds for 2024 and the impact of slowing EV sales on product mix in EM and M&M? Also, how is opposed to China autos is the combined EM and M&M business?
Scott Richardson: Yes. Thanks, Turner. First, let me start with auto builds. I think the industry, most publications are projecting somewhere more or less flattish build. Our business tends to grow about 150 basis points to 200 basis points above build. So that’s what we’re baking into our current plan. When it comes to the mix of EVs, we’re largely across our EM portfolio, pretty agnostic to whether it’s an EV, an ICE vehicle or honestly, hybrids are the best. And we have about 20% more accessible content on a hybrid vehicle. So starting, particularly here in the U.S. to see more shifts to hybrid that tends to be a good thing for us overall. So really no impact if we see the mix impact here in the U.S. change away from EVs and move back to ICE or to hybrid.
And from a China perspective, overall, if you kind of start at the corporate level, it’s about 1/4 of our overall sales. You bring that down into EM pretty similar. And our overall exposure is kind of around that range as well in terms of automotive in China.
Unidentified Analyst : Of the lower raw materials cost in nylon, how significant is this expected to be in 2024? And what’s the confidence that these will not get passed through to price?
Scott Richardson: I think, as Lori mentioned, we have a bucket of the lower variable and fixed cost we think is going to flow through the earnings. That could be the largest year-over-year benefit for us. A good chunk of that is in the nylon part of the M&M portfolio. So it has the ability to be a pretty significant driver of uplift year-over-year. A lot will depend upon what happens with raw materials as well as pricing in the second half of the year. We feel good about where things are in the first half of the year, given the amount of inventory that we have in the order book as we see it. Pricing, as we said earlier, has kind of bottomed out in nylon. So we don’t expect to see a lot of pricing impact downward from where it is today. So we feel very confident that the margins we’re seeing right now here, at least in the first half are here to stay.
Operator: Our next question is coming from David Begleiter from Deutsche Bank.
David Begleiter: Lori, can you talk to the foundational level of earnings in acetyls post the Clear Lake expansion coming on stream and given the step-up in acetate tow earnings we’ve seen this year?
Lori Ryerkerk: Yes, it’s pretty simple. I mean we’re — we said foundational level of earnings is $1.3 billion today. I think we’ve proved that in 2023 and what we’re pretty sub-foundational markets for most of the year. And next year, we expect — or this year, I should say, we expect that to increase by $100 million, which is really what we expect to get in productivity from the combination of Panther and our CCU project, Panther being, sorry, the Clear Lake acetic acid expansion.
David Begleiter: And have you assumed some normalized level of steal demand, what could our earnings power be?
Lori Ryerkerk: Well, I mean, look, we’ve had years where we were over $2 billion in acetyls. So I mean, when we have fly-ups and those sorts of things because the supply outages or sudden demand increases, it can be very high. But again, right now, we’re focused on what we can control. And so I would focus on that 1.4 level of foundational earnings.
David Begleiter: And one more thing. Just on the tax rate, is 9% a good rate going beyond 2024?
Chuck Kyrish: Hey, David, this is Chuck. For 2024, we do expect a really similar rate to ’23. I’d use 9% for now for that, and we will update you if that changes. Going forward, we feel like we’re in a good position. It will depend on the jurisdictional mix of our earnings. And we’ll update that each year, but we feel like we’re in a pretty good position where we are right now.
Operator: Our next question is coming from Arun Viswanathan from RBC.
Arun Viswanathan: Great. And apologies for that earlier. I guess, first off, just on the deleveraging trajectory. I know that the target obviously is to get to 3 turns as rapidly as possible. Maybe you can just walk us through the opportunity on free cash flow and how you expect to get to that returns? Is there any more opportunity to harvest a little bit more free cash flow to working capital? Or yes, maybe we can start with that.
Lori Ryerkerk: Yes. Let me ask Chuck to cover the details. But what I would say is, this year, like we were last year, we were very focused on generation of free cash flow and deleveraging. We’re very committed to maintaining that investment grade. And so we are anxious to delever to that 3x level so that we will have flexibility in our use of capital going forward and be able to move on with other opportunities in the company. But Chuck, let me you walk through the bucket.
Chuck Kyrish: Yes. Thanks. Thanks, Lori. Thanks, Arun. First, I want to just thank the global teams that we have that drove the record free cash results in ’23. That’s a lot of work by a lot of smart people. So I just want to salute that for your efforts. You know who you are out there. For ’24, let me give you a few key drivers that we’re seeing for free cash flow right now. If we start with earnings, if you take our EPS guide, that would translate into about $300 million of incremental net income, give or take. On working capital, our target for ’24 is $100 million to $150 million benefit for the year. This compares with a little over $500 million cash benefit for the year in ’23. So not as much working capital benefit year-over-year, but we’re still striving for working capital benefit within the year.
And this driver could change depending on how demand shapes up across ’24, of course, and kind of how earnings and synergies ramp. And we do know CapEx should be lower year-over-year by $100 million to $150 million as we cycle out of a lot of large projects. Those are the key drivers. There are some other puts and takes in that, that we need to refine as the year goes on like cash tax and cost to achieve synergies. But I would focus on key drivers right now in ’24. And as you know, we are really focused on converting our earnings into cash flow, deleveraging the balance sheet. We think we’re going to finish this year much closer to our 3x target and we expect to finish to our 3x target in 2025.
Arun Viswanathan: Great. And then I just have one quick follow-up. Just thinking about the portfolio as it stands now. Obviously, you’ve gone through some changes within the food ingredients and integrating M&M. Is there anything else on the horizon that we should be thinking about as far as portfolio management or potential divestitures or anything along those lines?
