As Kevin said, there’s still things that we can’t really be perfect about in terms of not just the year-on-year, but production volumes and other things on how good can this get. And we’re just going to be prudent as we move forward in some of our numbers and projections just given the history. And that now we really don’t have, as I said at the beginning, we don’t have visibility to the orders anymore. And our models, our statistical models don’t capture recovery, right? So I think we’re going to be looking recovery more based on the more recent demand. If we look at 12 month moving average demand versus two month moving average demand, our two month moving average demand is increasing significantly and strengthening. And now we have three data points.
So I think now we feel a little bit more comfortable on that side.
Operator: Our next question comes from Laurence Alexander with Jefferies.
Laurence Alexander: Good morning. What’s the price versus cost differential so far and how do you think, when you think about the range that you’re giving for the year, what are you assuming?
Kevin Willis : So far, it’s pretty balanced, I would say. And we’re continuing with, to try and maintain that throughout the year. And that’s our view basically. We think that probably specialty additives are going to likely have more price raws dynamic to it just because there’s a lot more volume there than on, say, life sciences and personal care. But that’s what we would expect for the balance of the year.
Guillermo Novo: I think in intermediate, obviously, it’s been more price, the raw materials we have seen some benefits in natural gas and all that in our costs. But as said before, the market price of BDO obviously impacting our competitors and all that. I think pricing has been a bigger impact for us in intermediates. I think on the other sides, traditionally, if you look at the high inflation time, we increased prices, we didn’t increase margins based on pricing. We were able to recover the raw materials. So I think as long as we can maintain that balance, I think we’ll be okay. And that’s what the businesses are trying to make sure that we do.
Laurence Alexander: And can you flesh out a little bit just how much, when you think about the growth CapEx that has been delayed, if demand does recover, what, how quickly we should expect CapEx to follow?
Guillermo Novo: I think we’re looking at the portfolio actions, the HEC, I mean, as we take action on CMC and MC, the bigger volume now is going to be the HEC side. Some of these network adjustments we’re doing, we should be in a very good position to be able to grow and support the growth of the business. So we would start implementing different actions as demand picks up. For other areas that we, where we put more of the slowdown in CapEx , Aquaflow was one. That, we have a lot of that goes into the DIY market that continues to be slower. So we’re pacing still ourselves there. Benecel is done, the HEC expansion is done. So a lot of the big asset projects are basically done, except for the Aquaflow. Most of the other activities are to support our higher margin, the more asset like type investments.
Those are moving ahead per plan. We just, as I said, finish our biofunctional plant in China. We’re converting our plant in Brazil from nutraceuticals to the oral solid dose coatings and biofunctional in Brazil. And we’re in the process of buying land in India. We should be closing soon and expanding production capabilities there again for more of these more specialized, lower asset-intensive type businesses. So all of those are going to be growing. And the other plant that we just finished was our injectables plant in Ireland that’s also in final stages. So everything else other than Aquaflow, we’re pretty much moving on.
Laurence Alexander: And then just lastly on the free cash flow question.
Guillermo Novo: Lawrence, just one, all right, ask your free cash flow question because that’s where I was headed.
Laurence Alexander: Well, I was going to take it in a slightly different tangent in terms of the restructuring outlays in 2024 versus 2025. But so however you want to tackle it.
Kevin Willis : For fiscal ‘24, the current outlook would anticipate free cash flow conversion, call it in the 50% or 60% range of adjusted EBITDA so just in support of what Guillermo just said around our CapEx shouldn’t be outsized necessarily compared to what we would have otherwise expected. We still expect strong free cash flow conversion this year.
Operator: Our next question comes from John McNulty with BMO.
John McNulty: Yes, good morning. Thanks for taking my question. So, if I understand it right, you’re not building up inventory kind of ahead of the busier season. But it also sounds like you’re not really planning on destocking any further. So are you moving pretty much to adjust in time type operation going forward, or is there inventory that you have? And it’s not really a fixed cost absorption anymore, but you have enough safety stock to kind of handle that seasonal up draft. I guess how should we be thinking about that?
Guillermo Novo: So the inventory, we carry inventory, we don’t just carry — we don’t carry excess inventory. So we’re looking now at more of the near term demand. Our safety stocks, we look at safety stocks that we want to hold in different parts of the world. The transportation time, all those things factor into what would be our target inventories to support our ongoing business. And then that’s where we’re going. What we didn’t do is really look like in the past, we would just have looked at much longer outlook and say we’ll start producing for six months out for because we just want to build up the inventory to meet long-term demand. Given that outlook is still muted versus historic, we are not building that inventory at this point in time.
So we’re really looking at more near term inventories and as orders increase, then we will take appropriate action. That’s why to the comments we said before, if in the back end of the year, what moves us towards the upper side of our guidance range, it’s not just higher sales, is do we have confidence that the higher sales, higher demand is moving, that we would run our plants a little bit more aggressively. Right now, we’re being much more cautious. I think what you can hear today is, we’re more optimistic on the sales, the inflection point, but we are not as, we’re not taking the equal actions in our operating side of the equation from a manufacturing perspective. That’s where we’re probably more conservative at this point in time.
