Operator: Our next question comes from the line of Lauren Lieberman with Barclays.
Lauren Lieberman : I was curious if you guys could talk a little bit about pricing. Pricing in the quarter came through a bit stronger, I think, than we had anticipated. And so just curious about that because I didn’t think that there was any incremental pricing going through. So maybe it was just sort of stickiness, but would love some detail on that.
Glenn Richter: Yes. It’s more related to deflation than price per se. Pricing – actually, all of our pricing was implemented earlier this year. We really have not been implementing any more pricing actions this year. So it’s really been the favorability associated with deflation that enhance our earnings versus expectations.
Operator: Our next question comes from the line of Josh Spector with UBS.
Josh Spector: So I was just wondering if you could give an update on free cash flow. What your expectations are for this year now? And just given you scaled back your inventory, I guess your manufacturing headwind from inventory adjustments, does that mean you’re done? Or is there more opportunistic inventory reduction to do to shore up free cash flow further?
Glenn Richter: So the second part – Josh, this is Glenn. So the second part of your question, we are largely done with the inventory reductions. We’re basically going to be largely flatlined for the balance of the year. Relative to our free cash flow estimates for the year, they are unchanged versus our previous quarter. We will be, call it, circa $450 million on reported free cash flow for the year. I will note, once again, that includes about $440 million-ish of Reg G items. So we’re right around $900 million of adjusted free cash flow for the year. Just as a reminder of those Reg G items, they’re broken down into about a little over half of them, call it, about $240 million are literally associated with our divestitures.
A big portion of those are taxes, not surprisingly. We also have another roughly $80 million of the final integration costs. Those are associated with systems conversion and legal entity changes from DuPont. Those will be completed this year. And then there’s about $75 million-ish related to restructure. That’s from the implementation of this year, and then, call it, $50 million-ish sort of all other related expenses. So that’s sort of a breakdown of the Reg G items.
Operator: The next question will come from the line of Laurence Alexander with Jefferies.
Laurence Alexander : Can you update how much of your business ex Pharma is in the fix or shift category? And how much it needs to improve in aggregate or on average for you to be happy with it? I mean like not just like a minimum threshold, but what your like 3- to 5-year target might be?
Glenn Richter: When you reference fix or shift, I’m assuming you’re talking about the Ingredients business, so is that correct?
Laurence Alexander : Most of it, but I guess I’m fishing for if you have anything else that you’re now putting in that category?
Glenn Richter: That’s largely — it’s 90% of it. And as we mentioned, that business is of our total businesses about 20% to 25% of the total portfolio. And Frank outlined on the call previously, the major initiatives. It will take some time to fully implement those initiatives. So we are seeing some progression improvement in the business. But we’re ways away from sort of getting back to sort of the full historical level of both earnings profile and growth. Our target is to go from largely a high single-digit EBITDA margin level to mid-teens and to basically get the business basically growing in line with the industry which historically has been sort of on a volume basis, 1% to 2% a year.
Frank Clyburn: And this is Frank. What I would add is on that 20% Glenn mentions and a number of those have – assets have been disposed and we continue down the path of optimizing our portfolio as we’ve highlighted. And then within Functional Ingredients, as we’ve mentioned, we are making good progress, as I highlighted earlier, and that’s really where the majority of the improvement area needs to be. But I don’t want to lose also sight of the 80% or so of the businesses we’ve been highlighting today that has seen good sequential improvement in a number of businesses that actually grew versus prior year.
Operator: Our next question comes from the line of Silke Kueck with JPMorgan.
Silke Kueck: Is there a $70 million SG&A benefit this year from the compensation changes? And did most of that occur in the third quarter? And secondly, if there’s a $160 million headwind from unfavorable manufacturing absorption, which is 150 basis points headwind to gross margin. Do you expect as a base case, your gross margin to be up by 150 basis points next year? And do you need volume growth in order to achieve that?
Glenn Richter: I think to the second question, you should definitely normalize the absorption as a starting point. The ultimate margin dynamics for next year, which we’ll discuss in more detail in February, will be a combination of mix, volume growth and ultimately, any additional sort of price inflationary pressures. So it’s a complex. I don’t think you can just straight line the improvement. I think you can reset the baseline, but then you have to sort of think through all the variables of what’s driving the gross margin rate for next year. So we’ll park that, come back to that in February. The $70 million that we’ve referenced really are the savings from headcount reductions we’ve implemented this year. So as a reminder, there was a program that where we’ve targeted $100 million of annualized cost reduction, so roughly $70 million, $75 million of that this year and then about $25 million will be the annualized impact.
It’s all been implemented. So it’s all done. So it’s really just a timing element of that. And then lastly, there’s always some choppiness quarter-to-quarter because of accruals around variable incentives. So depending on up or down, things can get trued up and can be a little bit choppy. So that does affect the quarter-to-quarter RSA as well.
Operator: Our next question comes from the line of Salvator Tiano with Bank of America.
Salvator Tiano : Yes. I wanted to ask if you can remind us a little bit your exposure to some of the key soybean — sorry, well, to the soybean price as well as to key oil seeds, vegetable oils? And whether the recent — previously decline in some of these edible oils can be a meaningful contributor to ’24 EBITDA?
Glenn Richter: I would say 2 things. We have a very, very large basket of raws. So there’s lots of things moving in either direction. In general, the cost trends or deflation trends are working in our favor. So that’s a general statement. Relative to soy, we do actually lock in over time. We typically hedge out for a period. So we don’t necessarily always capture either the immediate upside or downside, but over the longer arc, obviously, as those prices decline, we capture it.
