Celanese Corp - Series A (CE) — Q2 2023 Earnings Call Transcript

Thank you, Darren. Welcome to the Celanese Corporation second quarter 2023 Earnings Conference Call. My name is Brandon Ayache, Vice President of Investor Relations. With me today on the call are Lori Ryerkerk, Chairman of the Board and Chief Executive Officer; and Scott Richardson, Chief Financial Officer. Celanese distributed its second quarter earnings release via Business Wire and posted the prepared comments on our Investor Relations website yesterday afternoon. As a reminder, we'll discuss non-GAAP financial measures today. You can find definitions of these measures, as well as reconciliations to the comparable GAAP measures on our website. Today's presentation will also include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of both the press release and prepared comments. Form 8-K reports containing all of these materials have also been submitted to the SEC. As we published our prepared comments yesterday, we'll go ahead and go directly to questions. Darren, please go ahead and open up the line for questions.

Hey, guys. Good morning. I guess first off, Lori in your prepared comments you had some comments about China and some of the trends that you saw in 3Q. I was just hoping you could give us a little bit more color in terms of how things are evolving at that point in context of all the chatter about stimulus, et cetera. Are you starting to see any signs of that permeating through to your business?

Thank you, Ghansham. When we look at China, it's been a difficult year in China, clearly, as we've seen depressed demand consistent with the rest of the world but probably more pronounced in China. I think what we see differently now as we start moving through the year, we saw some signs of it early in 2Q, already is despite lower demand conditions, conditions especially for the Acetyl Chain seem a bit tighter. And the reason I say that is when we saw some unexpected outages in the second quarter and here really in July, we did see pretty rapid price response to those outages, which suggests that there's not a lot of spare inventory or spare capacity in that area. And if you look at utilization for acetyls for global assets, it's around 90%, about the same in China. So again, that suggests to us that although demand hasn't recovered significantly, there is enough demand matched with the supply that we are in a place where we can see some price movement up as we see supply growing. I would say we're not seeing a lot of response yet to the stimulus. We hear a lot about it, but we haven't seen a lot of response yet. But we think it's coming. There are some pockets of strength in China, in particular, autos remain pretty strong in China and the broader Asia area. But we see the pockets of weakness as well, electronics, especially consumer electronics, consumer goods, and I would say challenged by the situation in Europe and the core economy in Europe, which is limiting exports out of China, which is also, I think, putting a damper on the production of goods in China.

Okay. Terrific. Thanks for that, Lori. And then in terms of the current operating environment obviously, it's very complex. And you're pulling the levers that you need to in terms of managing supply, et cetera. In the scenario that this sort of complexity spills over into 2024, what are some of the other internal offsets we should keep in mind as it relates to the variances 2024 versus 2023 from an earnings standpoint?

Ghansham, I think it's a good point. We really have no visibility into 2024 at this time. So we don't really know what demand is going to look like in 2024. If I had to guess, I'd say it's going to be better than 2023, but we don't know. But there are a few things we do know that we know will give us an uplift and we are confident will give us an uplift in 2024. So if you start with the engineering materials side, with the amount of inventory drawdown we're doing this year, we will be able to completely flush through our higher-cost inventory as we move into 2024, which will give us lower variable costs in 2024. We'll see less hits to our P&L from the inventory reductions. We'll see those in 2023. We don't anticipate a lot of those continuing into 2024. So that will be an uplift. We have an additional $150 million of M&M synergies, which we will hit next year. That's helped by our first quarter SAP integration, which will get everything on the system and give us additional opportunities for synergy as we get everything fully integrated and cost takeout. And of course with the lack of destocking, I would expect to see next year, since we'll have taken so much destocking this year, in addition to that lift then we'll get from share recovery, we should continue to see M&M volume recovery in particular. On the Acetyl side, we know at a minimum, we have at least this additional $100 million contribution from the Clear Lake asset that we have next year. And then with the more than $1 billion of net debt reduction that we will take this year, we'll have lower interest expenses next year. So again, if you take all those factors, those are things that we feel very confident will lift our earnings from '23 to '24, regardless of what happens to demand.

Thanks so much.

Great. Thank you. Good morning. First question, when you look at the weakness in Engineered Materials during 2Q and into 3Q, can you help us roughly understand how much is just due to weaker end demand versus how much is due to weaker price? And other than POM, can you talk about where you're seeing the most competitive pricing pressure today?

Sure. Thanks, Mike for your question. As we review the second quarter, our performance was clearly below our expectations. Approximately half of the shortfall originated from the M&M sector, primarily due to an unexpected inventory drawdown, affecting our earnings. The other half was driven by weak demand, particularly in the industrial and electronics sectors. When it comes to demand, we've observed a decline in volumes of differentiated products as customers are reducing their orders, lacking a strong end market for their goods. We have managed to maintain prices for differentiated products but are experiencing a drop in volume. Consequently, we've opted to take in molecules rather than moving them, while also increasing sales in the standard grade market, which allows us to capture volume at lower margins. This situation reflects a combination of volume and pricing factors, with a significant mix shift from differentiated to standard grade, crucial for maintaining volume as we anticipate recovery. However, this also necessitated some price concessions. Regarding molecules, POM is the primary one, particularly for our heritage in selling these products. We've seen similar volume impacts from other differentiated molecules used in electronics and connectors. I believe these challenges are short-term, and we can expect to see recovery. On the M&M side, nylon remains a key focus, and the transition from differentiated to standard grade is more impactful on earnings than the volume changes themselves.

Okay. That's super helpful. And then just second, if I look at your updated EPS guidance, it seems to imply going from about $2.25 at the midpoint in the third quarter to slightly north of $3 in 4Q. So can you just help us understand what you think gets sequentially better there in the fourth quarter?

Sure. As we move from the third quarter to the fourth quarter, there are a couple of things happening. One is, we have initiated about an additional $60 million to $80 million of cost control. Most of that impact will show up in the fourth quarter since this is work that we've been doing just in the last few months. So, most of that will show up in the fourth quarter. You have additional M&M synergies, which show up in the fourth quarter versus the third quarter. And then we are expecting a pretty robust fourth quarter. In fact right now, we would say we expect fourth quarter to be our best quarter of the year. So partly we think that's on destocking. We think destocking in the Western Hemisphere should be over for the most part in the third quarter, probably a little bit of destocking carrying into the fourth quarter from Asia. We also think we'll have less seasonality because we've had so much destocking across the year; we wouldn't expect the usual amount of seasonal destocking that we see in the fourth quarter. The last factor I would say is, given the acquisition of M&M, we are now more heavily weighted towards Asia and China than we were before. Typically, the fourth quarter is a very strong quarter in Asia and China, as we go before Chinese New Year, which will more than offset any seasonality we would expect to see in the Western Hemisphere.

Great. Thank you.

Thanks, very much. Can you talk about VAM volume growth or contraction by geography please?

Thanks, Jeff. On VAM, Jeff in general, the markets have been a little weak for VAM as we've seen. I would say Europe is still our most challenged geography. Really, there's not been a rebound in paints and coatings, construction and building, as we continue to see the economy really drag on VAM. I think globally, the indication of this is we do see VAM utilization has moderated into the mid-80s on a global basis, which is the lowest we've seen for many years, I would say, I mean really since early COVID. We are seeing some recovery in VAM in the US, especially in packaging; packaging continues to be pretty strong. That's one of our bigger end markets in the Americas. And then in China, although we see some of the more industrial uses of VAM coming back again, we have not seen a lot of rebound yet in construction and building, although with some of the stimulus that's been announced, perhaps that has to come here in the second half.

Okay. And then for Scott, are there any hard objectives that you need to reach in order to retain your investment-grade rating, or are there no hard objectives?

Yeah. I think Jeff, we've been talking very consistently going back to when we announced the deal in 2022 about two focus areas. The first is reducing net debt by $1 billion in 2023, and then achieving three times leverage towards the end of 2024 into early 2025. I think those continue to be where we're focused on. I think that first objective, as we called out in the prepared comments, we're very confident given the cash flow that we're going to generate this year of hitting that $1 billion of debt reduction. With the additional proceeds coming in from the Food Ingredients transaction, that will allow us to actually go up another $450 million above that from a debt reduction perspective. So definitely on track and tracking ahead for that first objective and then continuing to build plans and a focus around cash generation and harvesting, as well as the EBITDA lift into 2024 that Lori talked about a few minutes ago to be able to get to that second objective.

Great. Thank you so much.

Yeah. Thanks for taking my question. Just in your prepared remarks, you talked about the mix impact within M&M. and just recall one of your opportunities to grow earnings you're going to go after some of the more commodity markets that maybe DuPont walked away from. Has anything there changed in terms of that mix impact or really where you can go after different shares? Any of that taking place this year, or is that more of a longer-term target now?

No, I wouldn't say it’s a longer-term target. It will probably take us until the end of 2024 or maybe even into 2025 to recover all of that volume. Some of the strength you see in M&M volume is related to gaining back some of that standard grade. However, we have experienced some offsets due to lower demand for differentiated grades. The good news is that DuPont's Zytel has been specified into all of these standard grades at some point, so we don’t need to recertify. Yet, some of the standard grade markets operate under contracts, so we must wait for those contracts to expire to seize the opportunity. I would say we are on track with our plan to recover standard grade or more commodity grades. Nevertheless, fully recovering will take several years due to the business's contractual nature.

Thanks. And just on the cash side, I guess, I mean with the JV you liberated some additional cash, I mean, how do you think about the opportunities there over the next year or so? Are there any other opportunities that you could maybe accelerate because of the uncertain demand environment, or should we think about improvement being more organic-based? Thanks.

So I'll let Scott comment on the math. What I would say is, look, we remain confident in our ability to generate sufficient cash flow through earnings and through inventory drawdown and other steps to meet all of our debt requirements and commitments. And so we'll continue to be opportunistic as we always have been in terms of future divestments and opportunities. That really hasn't changed again, because we have a lot of confidence in our ability to meet our cash commitments.

Yeah. And I think while we'll be opportunistic on possible other deals, our focus really is on what we can control. And we've been now talking most of this year about reducing our inventories and harvesting cash from the balance sheet and then focusing on cash our CapEx bringing that down to $500 million this year and then as we put in the prepared comments lowering even further down to $400 million next year. With that, and then the expectation of higher earnings, we do believe that as we continue to work our way through the second half of this year and then into next year, the free cash flow generation will be robust and then we will use that cash to continue to aggressively lower that debt.

Thank you.

Thank you, and good morning, everyone. Scott, I'm wondering, if you can give us any more color on your comments in the prepared remarks about being able to term the debt out and remove the refi risk from the next several years?

Yeah. I mean, we put the maturities in place that we did a year ago because that's what was available to us. What that yielded was higher levels of maturities coming up in 2024 and 2025. As we said at the time we would be opportunistic around what we could do to bring those towers down. As we look at the landscape, we think there could be an opportunity for us to bring those down and really match up the maturities over the next few years with the lower levels of cash flow that we're at with where the economy is right now, but still very robust; and so bringing those down to the levels of free cash flow generation in the next couple of years.

And that would be straight debt, or are you considering a convertible type thing or anything like that?

Our focus in the past has really been around bonds and term loans. We think that's been the right structure for us from a capital perspective. We've looked at everything, but that's our current focus.

Okay. Thank you very much.

Hi, good morning. In the last quarter, you provided insight on how to achieve that extra dollar per share through several factors including M&M integration, reducing high-cost inventory, and lower natural gas prices, among others. Considering that dollar, can you explain how that has evolved? Do you still see that dollar intact, or are there additional negatives that impact your outlook for the third and fourth quarters?

Mike, looking back, we observed some improvement in acetyl last quarter when we provided our outlook, and we anticipated that it would likely continue through the quarter. Acetyl had a strong performance, reaching the lower end of our projected range, but not higher, as we experienced a decrease back to levels around the cost curve. In Engineered Materials, we noted a significant inventory impact in M&M. There was continued destocking, particularly in industrial and electrical and electronic sectors. When we conducted our earnings call last quarter, we saw strong order books in April, suggesting potential recovery throughout the quarter. However, in May and June, that momentum did not materialize. While we acknowledge our performance, we remain confident in the guidance we've provided for the remainder of the year.

Got it. And then, again if you take a look at your outlook the prior quarter, fourth quarter would have been somewhere around $3.50. I think there was some confidence that that would be a good run rate heading into 2024, meeting $14-some like EPS. So when you think about the new run rate of $3 in the fourth quarter, I know predicting next year is a little bit early but how do you think about that $3 in the fourth quarter as it relates to a run rate potential for 2024?

I believe that the actions I've mentioned earlier are reasonable steps that we can take and I think we can expect positive results from them.

Good morning, Lori and Scott. In your opening comments, you mentioned that the destocking phase is lasting longer than in previous cycles. Having experienced 2008, 2009, and the COVID lockdowns, I assume there are several lessons learned. My question is about the restock phase following this extended and deeper destock. How do you envision the restock process over the next couple of years? Additionally, has your customers' inventory appetite changed significantly after enduring the challenges of the past decade?

That's a really interesting question, Hassan. It's always challenging to predict customer behavior. We're observing a significant destocking trend, which reflects the uncertainty in the market, particularly in Europe and its implications for the China export market. In the US, the markets seem to be recovering reasonably well, with not much destocking left. However, while China is doing okay, the export situation there remains quite uncertain. We're also seeing value being extracted from the supply chain, especially in relation to Europe. This creates a unique global scenario. With low prices, many assume that prices will remain low, leading to a lack of incentive to hold inventory. There's an abundance of materials available, reducing the need to stock up. Still, we witnessed how swiftly conditions can change post-COVID. Once prices begin to rise and consistent demand returns, I believe customers will want to avoid a repeat of the situation from late 2020 and will likely start restocking. To directly answer your question, I think we are experiencing deeper destocking due to overarching global macroeconomic and geopolitical factors, but I remain optimistic about a future recovery. I don't think customers have settled into a lower inventory level, and there remains considerable uncertainty regarding the timing of demand recovery.

Very helpful. And as a follow-up on the EM side of it, again, in your prepared remarks, you guys talked about moving from exclusive distribution arrangements in the West to dual or multi-distribution approaches. How do you see the impact of that sort of playing out near-term as well as on a go-forward basis?

Yes, I think it's really a matter here of we are such a much bigger company now that continuing to have single distributors in these major geographies is probably not giving us the breadth and the reach to the amount of customers we need to be reaching to generate the new opportunities and volume sales that we desire to have. So, this is just about we need to have multiple partners to really get to the full range of customers and the full range of end markets.

Very helpful. Thank you so much, Lori.

Yes, good morning. Just a follow-up on the balance sheet discussion. Scott, you ended the quarter with $1.3 billion in cash and I believe you have another $450 million coming in from the Nutrinova deal. Is it your intention to just continue to accumulate cash to address your senior unsecured notes due in July of 2024, or would you prefer to refinance them over the next few quarters instead of paying them off with cash?

Yes, Kevin, I think we're not in the business of holding cash right now. We want to find ways at which to reduce that debt as quickly as we can. We still have term loans that we have coming up and so we can utilize that cash for the term loans. I would also remind you we do have a $300 million interest payment in the third quarter. So, we will use the cash we have on hand for that. We have maturities coming up still later this year that we will handle as well. We've talked very openly about having cash in other geographies that we need to move back to the US and we're building those pipelines now and we expect to be able to get that cash back here to the US by the end of the year. Once we get our systems integrated in the first part of next year, that will give us an ability to operate the company at a much lower amount of cash probably right around $500 million. With that, that's going to free-up a lot of opportunity for us to use that cash for deleveraging, given the maturities we have coming up plus the term loans we have outstanding.

I see. Thank you for that. And then on a related note, your balance sheet reflects approximately $1.5 billion as the sum of short-term debt and current portion of long-term debt. That actually ticked up a little bit sequentially. I would have thought that it would go the other way with the term loan paydown of $370 million. Can you speak to what's in there in terms of how much you might have drawn on the revolver and what you might owe affiliates at this point?

Yes. Mainly it's ticked up, Kevin just because of foreign exchange; mainly the euro moved up a little bit, but that's the big delta there.

Okay. Thank you.

Thank you. It seems like a sharp acceleration in the China macro, I don't know maybe needed to improve the POM and PA66 trade flows. Like is that right? And does the recent PA66 capacity expansions within Asia-China make that business recovery more challenging?

Look our outlook is really not based on any increase in demand. We have a little bit of improvement of destocking occurring in the rest of the year, again based on our view of the market. But we really aren't forecasting any uptick in demand in any particular region. So, I wouldn't say that's needed to meet our $9 to $10 range for the year. Certainly, would be welcome, but I wouldn't say it's needed. I would say the expansions in nylon, nylon has always been pretty well supplied. There's been plenty of compounders, plenty of polymerization out there, the expansion that you've seen or maybe more on the upstream side the raw material side of that. So, I don't see that that really changes our dynamics much around nylon. We continue to focus our nylon on more differentiation, getting into highly differentiated products, looking for new applications, new end markets that share regain based on our good customer relationships, especially in standard grade, that's what I talked about earlier the regain of share over the next couple of years with those and really taking advantage of our integrated value chain and our option to be in or out of the polymerization market depending on where things are. Our value really comes from differentiation. Maybe if I can give you some examples because we've often gotten this question around nylon relative to EVs. We've recently actually just completed two new contracts for EV parts made from nylon. One is for a major OEM, we have a part now going into EV motor mounts which will use Zytel. We have a second application we just finished for the AC compressor bracket, which is made from Zytel, which is going into EVs. Why this is important is we talked about at the time of the deal but may have gone unnoticed is, there are a lot of applications for nylon into EVs, especially as you think about EVs being quiet. People want less noise; they need less vibration. Polymer parts and in particular in nylon for those that require strengths are great parts to replace metal and other things not just for light-weighting but also to give consumers the experience they want from an EV. We're already starting to see some successes using the Celanese knowledge of the EV market in our contact with those customers and applying Zytel to those and winning some new businesses there.

I appreciate that. I wasn't particularly worried about the 9% to 10% recovery number this year, but more so about repairing some of these markets, especially POM. It's one area we don’t have a lot of clarity on regarding supply and demand. Is it mainly trade flows from China, with China facing cost challenges in Europe, or is there another factor at play? If that’s the case, what would reverse that situation?

Matthew, I think it's important to note that we have a significant history with POM. Typically, these situations are temporary, as co-producers in the market sometimes produce excess material and redirect it to other regions just to clear it out. Our operational costs in Europe and the US are exceptional, particularly with our facilities in Bishop, Texas, and Frankfurt, Germany. Our ability to achieve sustainable success has been demonstrated over time. These fluctuations usually do not last long, and we do not anticipate that this will be a long-term issue.

Thanks for that.

Great. Thanks for taking my question. Just going back to the guidance. So, now the new midpoint is around $9.50, and if you just go through the Q3 that $2.10 to $2.50 with $2.30 at the midpoint, it kind of implies around $3 for Q4. So you noted that Q4 is going to be your strongest quarter. Could you just maybe bucket out that bridge between $2.30 and $3 from Q3 to Q4? We can do the math, but I just wanted to hear it from you as well as to how the two segments kind of play out. Thanks.

I would anticipate that for the year, the Acetyl Chain will be a key component of earnings, contributing approximately $1.3 billion, indicating that the second half of the year will mirror the first half closely. The real growth will come from Engineered Materials, with about half of that increase driven by M&M as we continue to regain market share and adjust pricing on specialized grades. The other half will stem from Engineered Materials, reflecting the conclusion of destocking in the Americas and a slight stabilization in other markets. A significant portion of the improvement will come from $60 million to $80 million in additional cost and productivity initiatives we've implemented, most of which will impact the fourth quarter. Additionally, M&M will benefit from increased synergies in the fourth quarter compared to the third, along with some reduction in interest expenses due to debt paydown. Altogether, these factors will combine to make the fourth quarter our strongest of the year.

Thanks for that. As a follow-up, are you expecting to finish the year with a $3 run rate that would position you back in the $11 to $12 range for next year? Is this the correct perspective? Are you observing the conclusion of the destocking cycle? Are there any potential risks to this outlook, such as a slowdown in the automotive sector due to the strike? What other risks might prevent you from reaching that level of earnings in 2024?

If I look ahead to 2024, I believe the number you're suggesting is reasonable as a starting point. However, it is based on the assumption of steady demand through the end of 2024, which, as we approach the end of 2023, we are not anticipating. We expect to see continued destocking rather than a significant increase in demand by the end of this year. I don't expect a lot more destocking to happen next year. Focusing on the aspects we can influence, we should be in a stronger position regarding variable costs as we move high-cost inventory out of the system this year. The level of inventory reduction won't be as pronounced next year, which is advantageous. We also expect an additional $150 million from M&M synergies and $100 million from Clear Lake assets. If we annualize the fourth quarter results, I would view that as a baseline rather than our anticipated performance level for next year.

Great. Thanks.

Thank you. Good morning. Lori, do you have an updated forecast for M&M EBITDA for the full year?

Scott, do you have that number?

Yeah. David, I think as we put out the Q3 number, it's another lift off of where we were in the second quarter, which was a lift off of the first quarter. As we go into Q4 as Lori mentioned, we would expect another lift up. So that puts you in that range when you add up kind of all of those numbers, somewhere in that $500 million to $600 million range. We're going to try to get to the top end of that range or even exceed it depending on where Q4 lands, but that's where we'd be. But you're getting a lot closer on a quarterly basis as you end the year to that quarterly accretion level that we talked about last quarter.

Understood. And Lori just on the additional $60 million to $80 million of cost reductions, is that permanent? Is it somewhat temporary? And a little more color on that would be helpful. Thank you.

If I look at the $60 million to $80 million in cost reductions, some of it is definitely one-time. About half of it relates to production actions, which are focused on lower demand and optimizing our turnaround processes. For example, if we don't need the capacity immediately, we can avoid overtime and take a bit longer on turnarounds. We're idling some lines within compounding units, which helps us reduce staffing and save on power. We are also decreasing overtime and contractor usage, largely in response to demand. These actions are one-time or temporary, and we hope that demand will return, allowing us to reverse them. The other half consists of many smaller, one-time measures, such as continuing to cut travel costs throughout Celanese, which saves a few million, and reducing promotional and marketing expenses. Most of these actions are also temporary. Additionally, we are accelerating synergies from the M&M acquisition by eliminating redundant positions sooner rather than later. Roughly two-thirds of these measures are temporary and related to the reduced demand we're experiencing, while one-third involves accelerating planned steps for later this year and into next year.

Thank you.

Yeah. Good morning. Could you just comment, have you seen any change in behavior in polyplastics since you sold your half to Daicel? And are they part of the competitive dynamics issues that you called out in those increased imports into Europe?

Yeah. I don't think we've really seen any difference in their behavior. I mean nothing different than we're seeing in the rest of the industry in response to the macro conditions that we're all experiencing right now.

Fair enough. And then sequentially or year-over-year, what did Ibn Sina contribute to 2Q, and then what does that do in the back half of the year?

Year-over-year, Ibn Sina is probably the easier way for me to think about it. In 2022, we had higher crude prices and higher methanol prices, resulting in a strong contribution from Ibn Sina. This year, I believe Ibn Sina's contribution will be $60 million to $70 million less than last year for the full year. This decrease is due to our total for all joint ventures being about $100 million lower in 2023 compared to 2022. This reduction is a combination of Ibn Sina and the transition of KEPCO to a manufacturing joint venture.

Great. Thank you, guys.

Thanks, and good morning, everyone. This is Ryan standing in for Aleksey. My first question is about the $30 million to $35 million headwind in emerging markets due to destocking during the second quarter. Based on your comments, I believe this trend may continue into the third quarter. However, will there be a possibility of recovering some of this in the fourth quarter as the destocking process concludes?

Ryan, I'm sorry you were breaking up a little bit. I believe your question is the $35 million headwind that we had in the second quarter due to destocking, would we expect to recover that in the third quarter or sometimes later. Was that your question?

Yes, that was it.

I wouldn't necessarily say we expect to recover it. It's a one-time thing. In the future, if demand comes back strongly and people want to return to inventory levels, there may be some benefit from restocking. However, I don't have any idea when that might happen, and it's difficult to track. I would anticipate that third quarter destocking will be similar to the second quarter in terms of financial implications. I wouldn't expect significant changes, maybe a slight decrease in the third quarter due to more finished goods destocking and less raw material and intermediate destocking, but nothing hugely impactful. Therefore, I wouldn't forecast a major change between the second and third quarters regarding destocking.

Understood. Got it. Thank you. And then just my second question is, you flagged the delayed startup at Clear Lake, due to some component defects. I understand the financial impact of it is $25 million. But are there any material costs that go along with this? Thanks.

No. It's really the impact of not being able to get our synergies. I mean obviously, with the lower demand profile there is capacity in the world. So, we don't anticipate a big impact there. The cost of the site itself is covered by the manufacturer since the manufacturer is responsible for the defect.

Yes. Good morning. Thanks for taking my questions. So the cash generation Scott, it looks like you've pulled down CapEx for next year. Are levers as we look to 2024 that you still feel like you can pull? Is there more kind of to ring out of the working capital side of things? Are there other integration costs that can maybe be pushed off? I guess, how should we be thinking about some of the puts and takes for free cash flow coming in next year?

Yes. I think we've been very open about our priority to free cash flow here in 2023, John, and that doesn't change going into 2024. We put the $400 million CapEx number out for next year, that's the first step. On the inventory side of things, $400 million to $450 million reduction this year. There will likely be more opportunity going into next year, just given how much raw materials have come up over the course of the last several years, which we expect kind of volumes to be at good levels as we finish this year, from an inventory standpoint. But there will likely be more value opportunity as we work our way into next year to convert more working capital there. Then continuing to focus aggressively on terms and looking for other working capital opportunities, the teams are really focused heavily on that cash side. When you kind of layer in the elements of controllable EBITDA growth that Lori has mentioned several times on the call, we feel very good about the opportunity to continue to drive free cash flow going into next year.

Got it. Okay. Fair enough. And then just a question on EM's differentiated products. It sounds like so far, you haven't seen much pricing pressure there. Do you expect to see any as you look ahead over the next 12 months, given the level of deflation that we've seen across many industries so far?

No, John, not really. As I mentioned, we've noticed some softness in demand, primarily due to our customers experiencing similar demand issues for their products. We believe this is a temporary situation and expect a rebound. Typically, we do not encounter significant pricing pressure on our differentiated products.

We will take one more question, please.

Thank you. How is the Food Ingredients business performing into the deal closing? We've got some pretty broad weakness, in the Food Ingredients overall market.

Yes. I think our Food Ingredients is performing as expected, and as we laid out at the beginning of the year. We really haven't had any issues there.

Yes, John, that business tends to be pretty resilient through most economic conditions.

And then with the recent rise in oil prices, is there any risk to the Singapore unit being curtailed later in the year if oil continues up?

Look, I would say no more than it ever is. I mean, we constantly flex our Singapore and our Nanjing units depending on economics and depending on regional demand and the cost to supply those regional demand. With this level of crude pricing and coal pricing in China, I don't see that dynamic changing significantly.

Thank you.

Thank you. We'd like to thank everyone, for listening in today. As always, we're around for any follow-up questions you have. Darryl, please go ahead and close up the call.