Kevin McCarthy: Perfect. I appreciate that. And secondly, if I may, Mark, I want to come back to the Fibers discussion. I think it’s interesting that you’ve got so much under contract through 2026. When we talk about a lot of the output being under contract, can you speak to — does that just mean the volume is committed? Or can you speak to the degree to which you’ve got visibility into both pricing and cost? Just trying to get a sense for kind of the confidence intervals around the economics through ’26.
Mark Costa: Yes. So the sort of the commitments we have in ’25 and ’26 with the market is both on price and cost. It covers both. Now there’s ranges in the volume side, right, so they have a min and a max on volume. But the pricing formula which in most cases include — these prices will then adjust based on changes in energy and raw material. So it’s sort of cost pass-through, if you will, to some degree. So these margins, if we get a tailwind, we’ll share that with the customers. If costs go up, we’ll raise our prices formulaically. But that is the nature of most of these contracts, not all but most have some version of pricing it, a lot of it includes the CPT. So no, that’s — but there’s always a little bit of potential volume decline in the market that we have to accommodate with them. So that part has room for sort of changes in market demand.
Operator: Our next question comes from Laurence Alexander of Jefferies.
Laurence Alexander: Can you — on the renewable side, can you discuss how the policy landscape is shifting in terms of the potential incentives you may receive for this second and third plant compared to what you had initially expected or broader policy shifts that might be incentivizing customers?
Mark Costa: Sure. So two different sets of topics there. On the incentives, the European Union and the governments within it have certain prescribed methodologies around how they do incentives and we are working to get the higher end of what’s allowed in the European Union. We’re in the middle of finalizing that, so I can’t talk about it right now. But there are some improvements we expect to get as the inflationary environment has impacted the CapEx cost. So we feel good about where we’re at on that. When it comes to the U.S., the Inflation Reduction Act is out there. As I think we discussed in the third quarter call, we do have an application in to them. We have not yet been notified about whether or not we’ll get that reward and what the level of the reward will be.
We’ve asked for a substantial amount of capital because it would support some very impressive environmental investments around the plant that allow that plant to be carbon neutral which would be extremely attractive. There are two things customers want right now, 100% recycled content. They don’t want anything less, because they want to have a bold claim. And they want to be carbon neutral or as close to that as possible. And so the second and third plants are both capable of being carbon neutral and they are obviously capable of delivering 100% recycled content. So there’s a lot of interest and attraction to making sure these kind of plants get built. But it’s a political process and I never want to guess politics until I know what the incentives are.
We’ll just wait and see what they do. When it comes to the policy for the circular economy, the European policy in place that they’re finalizing the rules on as we speak, is very attractive for driving demand of the product. So it’s a — it requires circularity in certain percentage targets for like beverages, 25% by next year. And the industry only probably has half of the capacity mechanically to serve that. So there’s a lot of demand and market need in that space. And then all packaging needs to be 30% by recycled content. As I mentioned earlier, no one wants 25% or 30%, every customer we’re talking to wants 100%. So the demand is probably in excess of the regulatory requirements but there’s definitely requirements that will force people to start getting recycle content.
It also requires the content to be made from packaging place in the European market. So it allows that to be a regional circular business. So we’re still waiting for all of that to be finalized but that’s sort of where it’s headed at this point as we understand it. The U.S. is a patchwork. So every state is developing a different point of view around circular economy and how they want it to play out. Half the country that is the more conservative states are all passing. They’re very sort of favorable circle economy language. The other half, it’s a patchwork. But so far, everything we’ve seen, our technology fits within the definitions of being a solution to the plastic waste crisis.
Laurence Alexander: And then just as we start looking towards 2025 and 2026, to what extent have you pulled forward productivity that would make it more difficult to get sort of incremental productivity gains over the next few years?
Mark Costa: Are you talking about sort of total company or product — I’m sorry, I just — I’m not sure I understand the question. Are you talking about just general productivity in the company or…
Laurence Alexander: Yes, the kind of structural productivity gains you’ve been delivering kind of fairly consistently. I guess my impression is that effort ramps up in the more recent period. And so I’m just curious as to have you pulled things forward? Or should we be thinking about there’s another leg of structural productivity getting over the next couple of years? Just what’s the next piece of that story?
Mark Costa: Yes. So I think what I’d say happened to us and every company is we had extraordinary inflation in ’21 and ’22 and we lost productivity through COVID and work at home and everything else that I think every company, including us, is working our way through. So we aggressively went after it last year, where we got $200 million of productivity above inflation to start addressing some of that sort of extraordinary inflation and get our cost structure where it should be. This year, as you saw, we’re just getting enough productivity to offset inflation. So $100 million of productivity offsetting total inflation of labor and external spend. And so that’s more normal is what I’d say. We have to have productivity every year, where we’re offsetting inflation so that we have the ability to invest in growth, deliver earnings growth and cash to the shareholders all at the same time.
And so that’s sort of where we’re at. And so you should expect continued productivity but it’s more in the offsetting inflation category going forward than some big additional step-up, right? The leverage for our company right now is volume recovery, especially in the specialties where the value per product is much higher than the company average. So you get volume, you get mix lift, you get fixed cost leverage which is how we’ve demonstrated a lot of success in our past and certainly, the strategy we’re going to be on this year and leveraging into next year with innovation.
