Operator: Our next question comes from the line of Ben Briggs from Sonic Financial, Inc. Please go ahead.
Ben Briggs: Good morning guys and thanks for taking the questions. So I’ve got a few here. So as I go through your 2024 guidance, if you kind of add those all up at the midpoint, you get to roughly free cash flow breakeven just using an EBITDA minus — minus the cash costs. Kind of simple analysis. I know that working capital was obviously a tailwind for free cash flow generation this year, especially in the fourth quarter. Can you talk a little bit about what you expect working capital impact to be in fiscal 2024?
Jon Banas: Yes, Ben, this is Jon. I’ll take that one. As you can appreciate, we don’t provide direct guidance on free cash flow. But your math is directional. We do see the path towards positive free cash flow overall in 2024. We’ve made good progress in 2023 to improve those working capital areas. Certainly, inventory management and the focus on collection of customer tooling receivables were a couple of big areas. So there is still some room for improvement in many of those areas. They probably won’t be as significant as we saw in 2023, to be frank. But the incremental cash flows will certainly come from the higher cash earnings overall, continued improvements in operating efficiencies in the volume that we’re showing you here on the bridge walk across.
Ben Briggs: Okay. Got it. But should we expect — I know you don’t provide direct working capital guidance. Should we expect to see — do you think you’re at a more normalized inventory number, I guess, right now? Or do you think it should be significantly different at the end of the year?
Jon Banas: Not significantly different, but there’s certainly continuous improvement in optimization of those. The biggest challenge in the last couple of years was obviously the volatility in production schedules from our customers. So it’s really hard to continue to work to whittle those balances down when the releases are changing [indiscernible] volatility. So as the production environment stabilizes and things get more normalized and consistent, then we can go to work to continue to take that overall inventory balance down.
Ben Briggs: Okay. Got it. Thank you. And then was — I don’t think you already answered this, but have all the — I know there’s some onetime true-ups especially in the third quarter from customers with onetime payments that positively impacted gross margins. It didn’t look to me like there were many in the fourth quarter. Is that accurate? And can you just confirm whether or not you guys have received all the onetime true-ups that you’re expecting to?
Jon Banas: Your supposition is right. There weren’t a lot of those onetime retroactive type deals reached in Q4. We said on the last call that around $25 million to $30 million was booked in Q3 that didn’t repeat here in Q4. And so once those deals were reached in September, call it, the normal payment terms would have been such that we’ve received all that money that was booked in Q3 in Q4 already. So as part of the working capital elements that we’re able to collect on those receivables that were recorded in Q3.
Ben Briggs: Okay. Got it. So not much to expect from that going forward. And then finally, when should we expect the NIKE partnership to be moving the EBITDA needle? I know that you’d spoken a few quarters ago that it was probably not going to make a major impact in the immediate term, but I wanted to see if there is maybe any positive news there that we should expect some tailwinds from that in the next couple of years.
Jon Banas: Yes, Ben, right now, we’ll just leave it as a TBD. Jeff described the arrangement that NIKE has, and they want to move fast. So we’ll monitor and see how progress, and we’ll be able to report those once they start cranking it up.
Ben Briggs: Okay. All right. I appreciate the time to take questions. Thanks very much.
Jon Banas: Thanks Ben.
Operator: Our next question comes from the line of Brian DiRubbio from Baird. Please go ahead.
Brian DiRubbio: Good morning, gentlemen. A few questions for me. Just maybe starting off with CapEx spending. You used to spend more on CapEx as a percent of sales in prior years. How should we think about that CapEx to sales number today? Is it — do you consider sort of underspending a little bit? Or do you think that’s the new run rate for you going forward?
Jeffrey Edwards: This is Jeff. As I think we mentioned in the last call, that 3% to 3.5%, some years, if there’s a lot of launches, you could get up closer to 4%. But I would say this is closer to the new normal, to answer your question.
Brian DiRubbio: Okay. That’s helpful. And then just on working capital. I know you’re not guiding there, but I’m sort of monitoring a bunch of commodities. I see still costs up pretty significantly over the last couple of months, rubber costs up pretty significantly. I guess, two parts to that: A, should we expect that a little bit of a build in working capital; B, does it make sense for the company to make an investment in some of these products, the concern as prices could go higher; and C — I apologize for the multipart, but how are your contracts now structured so you can get compensated for those higher costs? What’s the lag in that? Thank you.
Jon Banas: Yes. Brian, I’ll take the second one first. We’ve said in the past that we’re reaching a point where most of our commodity buys are — we’ve got the index agreements with our customers to recover. And that was also in around the 70% ballpark. So as costs go up, then we were able to pass along that requisite amount. The rest of it, we can negotiate as the — that’s just a general go forward. And typically, those resets are either a quarterly or a 6-month basis that we go back in. Many of them are automatic. The PO just adjusts with those indices updates. So that’s kind of how we’re viewing the world. As far as the commodities that we’re exposed to or that we’re buying, we don’t see a significant increase in costs in 2024, at least from the data points that we’re using.
Could even be a slight tailwind. And — but the good news is there it’s much more stable than it’s been in the past couple of years. So not seeing a significant change in the overall commodity exposure front that would cause us to do anything differently in our business.
Brian DiRubbio: Got it. And would you — so given that you — no plans to make any investments in inventory at this point?
Jon Banas: No.
Brian DiRubbio: Got it. And just a final question for me. Obviously, cash flow was good, but you’re picking a good portion of your interest. As those picks roll off, I know the ones in the first lien does at this year, how are you thinking about sort of the balance sheet and liquidity? And I guess, to put it another way, is an equity raise on the table at any point?
Jon Banas: Yes. Brian, I said in my prepared remarks that we think the cash flow generation and our continuous improvement activities to further right size the business optimize our financial strength here going forward is going to be adequate from a debt service standpoint. You’ll see actually today when we file our 10-K later on, we’ve elected a straight pay on the third lien notes for the June coupon period. So we’re confident that cash flows will continue to be strong, and we’re able to make that decision six months in advance. So as far as going forward into 2025 or 2026, I’m not going to talk about any strategic road map that we’re thinking about because a lot can change and a lot of execution needs to happen between now and then.
But to your point, the first and third lien non-call provisions come off Q1 of next year. So there could be opportunities there if the interest rate environment is positive. We continue to execute and have successive cash flow generation patterns in front of us. So we’ll see. There’s a lot to happen between now and then. But we’re already thinking ahead to what it means for us going forward as the business continues to execute and grow profitably.
Brian DiRubbio: Great. Appreciate all the color. Thank you so much.
Jon Banas: Thanks, Brian.
Operator: Our next question comes from the line of Zohair Azmi from Beach Point Capital. Please go ahead.
Zohair Azmi: Hi, thanks for taking the time. Just a few questions for me. First, has there been any impact to the business from the supply chain disruptions with what’s going on in the Red Sea?
Jeffrey Edwards: This is Jeff. I think the supply chain issues that we were talking about the last couple of years have essentially been resolved. Does that mean in this industry that’s extremely complex related to the supply chain that there aren’t still some things that crop up? I suppose the answer to that is there are. But I would say they’ve reached a point now where we could say that we’ve normalized our operations, right? We don’t have the type of headwinds that we’re dealing with. And for that reason, our costs have never been lower or more competitive. Our operation from an execution point of view is world-class. The price recovery negotiations that we just went through with our customers have really restored the margin foundation that the company needs in order to create and generate the type of cash going forward that’s required.
We have index agreements now that are in place that ensure that the inflation roller coaster that created some pretty big challenges for us is behind us. Innovation is strong. We’ve talked about that. We’re just waiting for a volume uplift. And when that happens, the company has never been positioned better to generate the type of free cash flow that we require going forward. So probably the reason why our customers have been so supportive.
Jon Banas: And Jon here, specific to the Red Sea issue, we don’t move a lot of inventory through the Suez Canal. While you’ve probably read about some of the European customers or European OEMs being impacted by their supply chains, we have not seen a material impact at all from the Red Sea issue.
Zohair Azmi: Right. And then would you mind sort of helping us understand the step-up in manufacturing and purchasing efficiencies this year from $56 million in 2023 to the guided $80 million? What’s happening there?
Jon Banas: Yes. The pipelines, if you will, Zohair, that the team is looking towards is really the sequential year-over-year improvements in their overall manufacturing operations in our purchasing area. So there’s continued opportunities our team sees on the purchasing side as we work towards a strategic supply base. We communized [ph] the supply base for economies of scale, work with a handful of strategic suppliers instead of spreading the purchases out. You get more bang for your buck that way. So there’s still a pipeline of opportunities that we’re continuing to see and some exciting things going on as far as how we analyze how we buy product. Similar on the manufacturing side, it’s more of a year-over-year number about how we continue to get more efficient, lean out the operations from — whether it’s a product flow or a manufacturing flow standpoint, reductions in scrap opportunities, reductions in freight costs and the like, all kind of weigh into that.
So many, many areas to attack and drive the continuous improvement that you see on the page. So to break it down a little bit for you discretely, it’s probably about 60-40 of that $80 million that you think about manufacturing versus the purchasing lean opportunities.
Zohair Azmi: Right. And then last one for me. How should we think about timing and path to get to the double-digit margin target you guys have previously highlighted?
Jeffrey Edwards: Yes, this is Jeff. I think if you project out two years with our current plans, that’s kind of what we have — what we’ve been saying and what we’ve circled certainly could be helped getting there faster if we get volume. But given the current projection from our customers as well as the people that forecast volume in the industry, it would take a couple more years of what we’ve seen as growth within the industry to have that line of sight. So that’s the answer I’d give you, and we’re hopeful that it’s much faster if we get the volume that we believe is pent up and available.
