Ashish Khandpur: On the CAI side, the color side, we should see expect incremental margins just because we have done a lot of good work there with respect to driving synergies, but also the cost reductions and things like that. So, that should translate into – and you’re seeing that in fourth quarter, the results that Jaime showed, how strong the margin was. And there, the team has done a great job on cost reduction, maintaining price discipline, and also margin expansion. On the SEM side, margin expansion story will depend on what happens to the destocking story on the telecom side, what happens to the destocking story on the healthcare side, but also how strong the demand for Dyneema remains, which, as you know, is pretty accretive to our margins. So all those three things would play a big important mix to define the margins on the SEM side, and then that, of course, determines the total margin for the company as well.
Operator: The next question comes from the line of Kristen Owen with Oppenheimer & Company.
Kristen Owen: Wanted to ask about the free cash flow outlook for next year. As you are talking about a potential return to growth and seeing some of the mix benefits and then some of the working capital that you’ve been carrying over the last couple of years, just how we should think about free cash flow in the context of return to growth?
Jamie Beggs: There’s a couple different dynamics in the cash flow just to take into consideration. The return to growth, we would expect a cash use on working capital. A good way to think about that in your models is we do have about a 12% working capital runway. We expect that to continue. The team has done a really great job managing inventory in light of sales being more uncertain. So that’s going to be one of the factors that will be of use for this coming year. Another dynamic, what you saw on the guidance slide, is that our capital expenditures will move up to $140 million. We did about $120 million last year. The increase is really primarily focused on certain IT investments to drive greater productivity efficiency, as well as the use data.
And that’s really centered around the S/4HANA implementation that will begin this year and will go into the next couple of years. And we gave information on the tax rate as well as interest. So that should give you the primary components as we think about free cash flow for the year.
Kristen Owen: I did want to ask about that CapEx number. So thank you for the context there. Somewhat of a related question to sort of investment for growth and organic growth opportunities. Ashish, you had mentioned in your prepared remarks, particularly around Latin America, and as we are thinking about some of the near shoring trends, can you just help us understand that the market positioning in Latin America, how you’re positioning to capture some of those trends?
Ashish Khandpur: Actually, with respect to R&D on the organic side, if you think about Latin America, specifically, the biggest markets are packaging and consumer. And so, we have to work – as nearshoring happens, whether that goes into whatever industries are playing, wherever our customers are playing, we have to play with them in that part of the world. And that’s what gives us the market to speed advantage, that’s what gives us the closeness to customer advantage, and the relationships that we build. I think in the end, we follow where our customers are going. And if Latin America becomes a bigger hub, we will accordingly scale our operations and our capabilities in that part of the world as well.
Operator: And our next question comes from the line of David Huang with Deutsche Bank.
David Huang: Ashish, getting your focus on organic growth, I guess two questions. One, given the service intensity your business has, should we expect a period of elevated SG&A costs, given your focus to drive growth and reinvest? Second, I think R&D historically is below 3% for Avient. Is that the right level going forward?
Ashish Khandpur: Service intensity, as you said, a lot is happening with respect to the world changing, as the intensity is increasing, but there’s also technology getting available to serve customers better. And I think a little bit of that is what Jamie was mentioning, with the S/4HANA and utilizing data to serve customers in a more efficient way. So I don’t expect our SG&A to grow bigger with respect to serve the intensity for the customers, to serve our customers better. I think our teams are doing a very good job in terms of really doing the best use of customer stratification and utilizing data and information to serve our customers in a more proficient way. And even technology, especially in our color, for example, we are now using digital tools to turn around color matches faster with our customers from four days to two days, for example.
And I think that’s a real improvement and will give us a competitive advantage. So that’s just an example of how we’re using technology to serve our customers better. On the R&D at 3%, I don’t think there’s a magic number for R&D as a percentage. As I said right now, we are looking at how we prioritize whatever we are spending in the places where we should be spending it, which are the areas of growth for us, and are we feeding them in the appropriate way? And as we evolve our strategy and build new vectors, if we need to add more, we’ll do that not just in R&D, but other parts of the organization as well because, I said, everything has to be linked to the strategy in the end. And whatever is needed to do that, we’ll put resources accordingly.
David Huang: On leverage, I don’t think you’re assuming a debt paydown this year. But I think previously, you had a target of 2.2 times by 2024. Is that still a valid target?
Jamie Beggs: Our goal is to get down closer to 2 times. We ended the year about 3.1 times. Based on where we’re anticipating the year to end up, we’ll be below that as well. And as you know, we use a net debt number. So, regardless, if we actually pay down debt or keep it on the balance sheet, that leverage number doesn’t move, but we’re committed to being closer to 2 times over time.
Operator: [Operator Instructions]. Our next question comes from the line of Vincent Andrews with Morgan Stanley.
Turner Hinrichs: This is Turner Hinrichs on for Vincent. I’m wondering if you could size or just provide additional color on the opportunity for fiber optic mentioned for 2025. And what are you expecting as that ramps up in the second half of this year?
Jamie Beggs: That’s our telecom business, specifically our fiber line business, which represents about 4% of sales, just to put that in context. We do expect the first half to still be in a destocking mode with some recovery in the back half. But I would say it’s pretty muted. On a year-over-year basis, I don’t expect there to be much growth there, considering how much first half destocking we still expect there to be. And as we look into 2025, it really is dependent on how that BEAD program is rolled out. There’s a tremendous opportunity with regards to fiber optics and laying down and bringing internet access across rural areas. We did provide some information at one of our last investor days, that was back in September, about how that opportunity can grow. And we still believe in that. But we’re not providing any guidance at this point for 2025.
Turner Hinrichs: How was your order visibility this quarter? And can you provide any notes on mix? Last quarter, specifically, you had noted visibility was shorter than normal due to plant shutdowns. Is that affecting the first quarter at all?
Jamie Beggs: So, from a visibility standpoint, and we mentioned this in the last quarter as well, is that all of our customers are managing inventory very tightly as they monitor the demand from their customers. So, it’s about 20 days out now versus, maybe a few months ago or a year ago, it was closer to like 45 days. So it is something that we’re monitoring, we have to be nimble on our supply chain to be able to meet that. Some visibility issues as we think about the first quarter is that we’re in the middle of Chinese New Year. So, right how Asia is going to come back is a factor that we’re looking at until they actually start placing orders again. That’s a factor. And then how it ends up playing out even with Easter coming in a little bit differently in the first quarter versus the second quarter last year is something that we’re also watching.
But that should give you some context. It’s a little bit shorter. We are confident in our guidance that we’re giving out for the first quarter. But it is a much shorter visibility than we’ve had historically.
Operator: Thank you. I’m currently showing no further questions at this time. This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
