Avient Corporation

Good morning, ladies and gentlemen, and welcome to AVN Corporation's webcast to discuss companies' fourth quarter and full year 2023 results. My name is Norma, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will have a question and answer session following the company's prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Joe DiSalvo, Vice President, Treasurer and Investor Relations. Please proceed.

Thank you, and good morning to everyone joining us on the call today. Before beginning, I'd like to remind you that statements made during this webcast may be considered for-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectations and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the for-looking statement. Please refer to the Investor presentation for this webcast for a number of factors that could cause actual results to differ. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on the Avian website, where the company describes the non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures. Joining me today is our President and Chief Executive Officer, Dr. Ashish Kanpur, and Senior Vice President and Chief Financial Officer, Jamie Beggs. We also have Bob Patterson, who is serving in a transition advisory role with the company. Bob will briefly make some opening remarks before we start the discussion on performance. I will now hand the call over to Bob to begin.

Thanks, Joe, and good morning, everyone. Last November, I announced my plans to retire and pursue my lifelong passion for teaching and spending more time doing that at the University of Michigan, my alma mater. Today, I have the privilege of introducing Dr. Ashish Kanpur, who succeeds me as Avian's new President and Chief Executive Officer. Ashish took over on December 1st and brings a fresh perspective to our specialty portfolio that has undergone a tremendous transformation over the past decade. Ashish joined us from 3M, where he spent 28 years. A chemical engineer by education and trade, he began his career there and rose to become Chief Technology Officer of the company. Over those nearly three decades, he distinguished himself as a brilliant scientist, innovator, and ultimately a proven business leader and operator. His last role at 3M was Group President of Transportation and Electronics, a $9 billion business. It's a business he took into high growth and markets with new technologies and applications, which is exactly where Avian is focused. I have been with the company almost 16 years in total and nearly 10 as CEO. During that time, we have upgraded our portfolio by divesting commodity businesses and reinvesting the proceeds into transformational and 17-bolton acquisitions. We are the number one leading color formulator in the world. We have built a composites portfolio from scratch, which includes Dyneema, the world's strongest fiber. We've completely transformed where EVA does generated from and now have 100% of our businesses dedicated to formulating specialty solutions. I look back on my time with the company with a lot of pride and appreciation for what we accomplished. The transform portfolio is a perfect springboard for Ashish to elevate Avian to the next level of performance. I'm confident he will drive profitable growth and create long-term value for our shareholders. His background and experiences are perfect for the next era in Avian's journey. To our associates, shareholders, and board of directors, I thank you for your support and trust during my tenure. I now leave you in very capable hands with Ashish, Jamie, and the 9,500 associates at Avian I've had the pleasure of working

with. Thank you, Bob, and congratulations on your retirement. A transformation of any kind is difficult, difficult for an organization to go through, but even more challenging for the person leading it. These achievements of transforming Avian to 100% specialty portfolio took commitment, talent, and certainly leadership. Bob has provided all three. It is a retirement well earned, and I wish him the very best in health and happiness. In the first two months I have been with Avian, I have had a chance to meet with several stakeholders, including investors, customers, and of course, our talented associates. A common question I get is, why did I join Avian? While there are many factors to consider when changing roles, it ultimately boiled down to the tremendous potential I see to profitably grow the company. Doing so requires a culture of strong customer focus and a relevant portfolio of technologies, both of which Avian possesses. Leveraging these, along with amplifying innovation in high growth market segments, all around secular trends, will help us grow profitably in a sustained manner. This will also require some bold thinking, prioritization, and acting with courage, which are all leadership traits I have personally developed and honed over the years, and that I will be purposeful to instill in my teams as well. Over the last several years, the company has highlighted its four key growth drivers of sustainable solutions, composites, health care, and emerging regions. I see these as secular growth areas, and they currently make up 60% of our business. The team did a great job laying out the market dynamics underlying sustainable solutions, as well as showcasing many of our differentiated formulations at last September's Investor Day. I'm also impressed with the trajectory of our composites portfolio as it continues to displace wood, glass, or metal in an increasing number of applications. And while a smaller portion of our portfolio currently, the health care business is sticky, profitable, and an area that will continue to grow steadily as our population ages and people trend towards more self-care. Now, turning to our earnings announcement this morning. I'm extremely pleased to finish the year with fourth quarter adjusted EPS of 52 cents, reflecting an increase of 24% over the prior year quarter. Jamie will provide more details and some guidance for 2024 in a moment. But first, I'm going to share a few observations on the demand trends we are seeing across the end markets and the major regions of the world that we serve. As we noted in our earnings release, our two largest end markets of packaging and consumer benefited from the slow pace of the stocking during the fourth quarter. They make up a little more than 40% of our sales, and while still down year over year, they are much less so than in previous quarters. It is worth noting that both packaging and consumer sales were down sequentially only 4% and 3% respectively from the third quarter to the fourth, despite the typical fourth quarter seasonality we experience in our business. This, along with the order trends to start the year and insights from our customers, gives us confidence that the stocking has largely come to an end in these areas and that orders are more of a reflection of underlying demand. We discussed the health care end market in detail in our last quarterly earnings call. While fourth quarter sales in health care were down 9% year over year, the pace of the stocking has also started to slow. Q4 sales were up sequentially 3% from Q3. Fundamentally, the underlying demand from consumers for health care applications remains steady. Examples include the increased use of self-injection pens for drug delivery, continuous glucose monitors to manage diabetes, as well as catheters and tubing used in surgeries. And while some of our health care customers continue to manage their inventory levels to start the year, we expect to see improvement in demand as we progress through 2024. In industries which are sensitive to interest rates and are more capital intensive, such as building and construction and industrial, we do see continued softness, both from the stocking and overall demand. There are new business gains in composite applications, replacing conventional building materials, which should provide some offsets to the industrial and building and construction end markets. Telecommunications was the weakest end market for us in the fourth quarter, and we expect softness to continue in the first half of 2024. Rising interest rates and de-stocking have definitely impacted demand here, as has the delayed timing of projects flowing from the BEED program. Jamie will cover more details on this topic when we discuss SEM's performance. Rounding out the end markets, sales in defense applications continue to be strong, as demand remains high in light of continued geopolitical tensions and recent conflicts overseas. The primary growth is in personal protection, where Dyneema plays a significant role, protecting soldiers with ballistics vests and helmets. Moving on to the regional observations, each of the regions have different fundamentals that have resulted in varying performance in 2023 and will continue to influence how we look ahead to 2024. Starting with our largest region, we expect the US and Canada to continue to improve as the year progresses, given consumer sentiment appears to be resilient, despite higher interest rates. This region does have slightly more exposure to healthcare, which implies potentially sluggish growth in the near term, but should ultimately drive greater growth as de-stocking ends. Telecommunications will also be a significant tailwind once de-stocking ends and when the federal funding is fully allocated to states to expand the installation of fiber optic cable under the BEED program. In EMEA, demand remains tapered with consumers staying cautious due to prolonged geopolitical issues, higher interest rates and the lack of government stimulus or infrastructure spending compared to other regions. However, defense is a bright spot and de-stocking appears to have ended for packaging, which is the largest end market in the region. In Asia, our outlook remains cautious due to uncertainties in the China economy and it remains to be seen how the new government stimulus package will translate to spurring the economy in 2024. While Latin America only represents 5% of our business, we do view it as an important region not only to tap into local market opportunities, but also as a region where our global customers look towards shifting production. Our sales were up year over year in Latin America in the fourth quarter in our largest end market packaging and we expect that momentum to continue into 2024. With that, I will now hand it off to Jamie, who will discuss our fourth quarter results as well as our initial outlook for 2024.

Thank you, Ashish. Your overview provides good context to now dive deeper into our results. As Ashish mentioned earlier, we delivered adjusted EPS of $0.52, exceeding our guidance of $0.47. This was driven by a slight beat in sales and favorable net interest expense. Fourth quarter adjusted EBITDA margins of .9% was also slightly ahead of our guidance and reflects a 240 basis point improvement versus the prior year. This margin expansion was driven by favorable mix, deflating input costs, and prudent cost management. Favorable mix came from improving demand and packaging in consumer end markets as well as certain applications in our composites platform such as defense. Regionally, Europe was a key contributor to the margin expansion and drove the year over year earnings growth in the quarter. Looking at performance versus the prior year fourth quarter, sales were down 9% mostly due to weaker demand with some offset in price and mix and a marginal benefit from FX. Ultimately, our ability to price effectively, capture deflation, and manage costs allowed us to grow EBITDA by 7% and adjusted EPS by 24%. From a segment perspective, color added as an ink grew EBITDA 20% in the quarter driven by the earnings improvement in Europe. As we discussed before, many of the remaining cost energies related to the clearing acquisition were to come from Europe as we rationalized operations and adjusted staffing levels. These cost reductions helped the bottom line as well as the impact of raw material deflation. Color also benefited from improving demand and consumer and packaging markets which has a favorable impact on mix for the segment. The specialty engineer materials segment was down $6 million in EBITDA from the prior year quarter and $5 million of this reduction is due to exposure and the telecommunications in market where demand was significantly down. Specifically, this impacted our fiber line business that provides composite applications used in fiber optic cable. This end market has been impacted by inventory destocking and timing of the funding related to the BEDE program. For those who aren't familiar, BEDE, also known as Broadband Equity Access and Deployment, is the $42 billion program to expand high speed internet access by funding infrastructure and adoption programs in the US. States submitted plans to the government and approval is intimate. We anticipate fiber optic cable demand to improve in the second half of 2024 as the states begin receiving funds for their broadband deployment projects and then become more significant in 2025. Similar to color, SEM also benefited from raw material deflation and favorable mix driven by certain composite applications in the building and construction space as well as in defense. These items along with cost action partially offset the reduction in demand. Moving to the fourth quarter EBITDA bridge, we highlight the impact of demand, price and mix, as well as raw material costs on a year over year basis. Starting with demand, it is down less compared to previous quarters as the pace of destocking slowed in most end markets. Also highlighted on this bridge is the impact of pricing and deflation, which more than offset lower demand. This is the third consecutive quarter we've seen raw material deflation on a year over year basis and we expect that to continue as we start 2024. Further down, you'll also see the impact of certain cost reduction activities that were initiated at the beginning of 2023, including targeted European restructuring and reduced discretionary spend, which provided a $13 million benefit in the quarter. These cost control efforts more than offset wage inflation. All in all, we were able to grow EBITDA 7% despite sales being down 9% for the quarter. Turning to 2024, we're providing guidance today for the first quarter and full year. We expect Q1 earnings per share of 68 cents, which would reflect an 8% increase over the prior year. This takes into account the end market and regional trends Ashi's commented on earlier. To reiterate, we are seeing improving trends in our largest end markets, packaging and consumer, and strong demand for defense applications. Balancing this is the continued distalking and telecommunications and healthcare, as well as in markets that are more sensitive to higher interest rates, such as building and construction and transportation. On a full year basis, we anticipate adjusted earnings per share between $2.40 to $2.65 and adjusted EBITDA of $505 million to $535 million. We're providing a range to account for different scenarios of how demand could ultimately play out in 2024. We are optimistic that demand in the US will strengthen as the stocking comes to an end across all end markets. We also see growth in emerging regions such as Southeast Asia and Latin America, but we are more conservative on our view of China, since their growth will be dependent on increased consumer spending and sentiment. Lastly, Europe's underlying demand is likely to be muted, but we can confidently say destalking is done, and we believe sustainable solutions, especially in packaging, will help us grow year over year. We do expect raw material deflation to provide a benefit in the first half of the year. Conversely, in the back half, we have some headwinds associated with an incentive reset. Interest expenses expected to be between $105 and $110 million in 2024. This is slightly lower than 2023 based on the most recent SOFR curves and the full year benefit of the $100 million pay down that we did in August of last year. In addition, we expect our effective tax rate to be between 23 and 25%. We are taking a balanced view of 2024, where we are optimistic that demand will improve, but also mindful that there are certain economic factors that could influence particular end markets and regions. Before we open the lines for questions, I'll now turn the call back over to Ashish for a few closing remarks.

Thank you, Jamie. I'm very pleased that we finished the year better than expected, and we view that as positive news as we head into 2024. It has been a couple of months since I joined Aviant. I have spent much of my time in great discussions with investors, customers, and employees, digging into our businesses, portfolio, and the innovation pipeline. Timing was perfect in that just two weeks ago we hosted our annual leadership conference, where we brought together our top 150 leaders to engage and align on expectations, as well as increase collaboration across businesses. Among my many encouraging takeaways from the conference is that we have a customer-focused team that loves to win and is fully committed to doing so going forward. What's next for me is to continue having robust dialogue with our many stakeholders. Given the diversity of our customer base and technology portfolio, these conversations are proving to be extremely valuable as we further evolve how and where we serve our current and future customers. To profitably grow our business, which leads me to a few top of mind things that will become core themes of our thinking as we evolve our strategy. First is driving profitable organic top line growth while expanding our margins on the bottom line. We have ample opportunities to drive profitable growth by focusing on our customers, leveraging secular trends, combining our technology platforms, and winning share in the marketplace. The second is amplifying innovation. This is an area of great interest and opportunity as well. Robust customer-driven innovation is near and dear to my heart, not just because of my background, but because I've seen firsthand how it powers business and delivers growth and margin expansion. We are an innovative company and in our future we will be even more so. And the third is around continuing to build and invest in our leadership and people. Avient has a highly competitive and collaborative culture. We live our brand of challenge accepted and embrace the work required to deliver on those challenges. Our next chapter at Avient will challenge us in new and exciting ways. So we will continue to ensure our teams are prepared for future success. Again, I will have more to share as our strategy and plans are built out, but let me close with this. In my short time here thus far, it has clearly qualified my very first impressions. That Avient is a fundamentally strong company and we have significant growth ahead of us. That concludes our prepared remarks. Jamie and I are happy to answer any of your questions now.

Thank you. To ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. We ask that you please limit your questions to one question and one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question, please. And our first question will come from the line of Michael Sisson with Wells Fargo. Your line is now open.

Hey, good morning. Congrats again to you, Bob, on your retirement. I guess my first question for 24, can you give us a thought of the range of sales growth for 24 relative to the guidance, kind of the low end, bottom end, and the high end? And maybe when you think volumes will sort of inflect and turn positive.

Sure, Mike. Let me just answer that one to start with and then Jamie will add to it. Actually, if you look at, we are probably, as you heard in the prepared remarks, we are not providing guidance on the sales, per se. But to get to the estimates that we have provided on the range, you will see that you will need sales to grow from low single digits to mid single digits as a total range. With respect to your second part of the question on inflection point, I think it's a story of first half, second half as we see it. I think it's going to be a pretty platish first half, if you ask me. And then most of the demand growth is built into the second part. So, Amy, would you like to add something?

Yes. So, Mike, I think we tried to describe in the call today, you know, the first half in particular, as we take a look at telecom and health care, where we still see continued de-stocking. I think that's the reason why we believe that the first half will be slower than the second half in terms of volume recovery. But we do see some dynamics within the market. In particular, if you look at defense and telecom potentially coming back, the back half will be stronger overall. Hopefully that gives you some further clarity on how we think sales could evolve for the year.

Got it. And then just a quick follow up, Ashish, when you think about, I know it's still a little bit early, but when you think about sort of the longer term earnings power for Avian, any initial thoughts of where EBITDAH could get back to in terms of a firm recovery over the next couple of years?

Yeah, Mike, I think a couple of things here. One is that in near term, as we pointed out, our growth drivers, the four growth drivers of sustainable solutions, composites, health care, and the emerging regions are going to be a catalyst for not just growth because they are in high growth markets growing at 5% plus in markets, but also for margin expansion because they're accretive to the margins. So I think that will help the Avian percentages to get better as that pie grows. So right now those four growth drivers are 60% of the revenue and so as they continue to grow, they'll become bigger piece of the pie and create more value. Then on top of that, in the near term, we can augment that growth further by really notching up cross selling and collaboration across businesses, as well as replication at scale, which means really how fast can we replicate our success with one customer at other places with scale, especially with some OEM accounts. That's a great opportunity for us. And then on top of that, over time, we can build the new growth vectors, which could be coming from markets which are growing fast. So there's a lot happening in the world of technology, in the world of regulatory, and so on and so forth. And so those create opportunities for us because materials will play a big piece as those technologies are getting realized. And so for us, it is finding a couple of more growth vectors that will scale where our technology portfolio is relevant and where we have access to the customer. So I think those combination of those three things that I mentioned would give us not just growth, but also good margin expansion because we would be differentiated. Got it. Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Frank Mish with Fermium Research. Your line is now open.

Hi, guys. It's Aziza on for Frank. For my first question, I was wondering, you know, following these recent years of notable portfolio transformation that the company has undergone, how should we be thinking about capital allocation priorities for this year and maybe even next year?

So, Aziza, thanks for the question. And as you heard in my prepared remarks, you know, one of our top priorities is to grow top line growth organically, profitably. And so I think that sets the starting point for our capital allocation strategy as well. We will invest more in organic part than, you know, we have been. And as we identify new growth vectors that will need more resources, not just R&D, but also commercial as well as operational side. So but but I think organic growth would be our top priority. On the M&A side, we have done a great job with the portfolio piece that Bob mentioned in his remarks. And, you know, we are still integrating the two big acquisitions we did in the last three years. So in the near term, I don't see any big acquisitions on the horizon, but I will not rule out acquisitions per se. We have a cadence on M&A and if any acquisitions are done, they will be smaller in size and probably bolt on. And then, of course, our commitment to giving back to shareholders on dividends is there. We can we expand the dividends as our earnings will grow. That that commitment is there. And then finally, you know, we have been paying debt over the last 15 months. We have paid three hundred million dollars of debt. And, you know, we as earnings grow and demand comes back, we will have flexibility in either paying the debt back or buying back shares. So those decisions can be made as relevant.

And I think you know this, but we have a lot of flexibility when it comes to potentially either paying down debt or share purchases, because we don't have any near term maturities until 2025, as well as we don't have any restrictive debt covenants. So we have a lot of flexibility in our capital structure to be able to pivot as we see opportunities in the marketplace.

Perfect. Thank you for that. And then, you know, the commentary on the end markets and geographies is helpful thinking of the full year guidance. I was wondering if it would be possible to kind of break down that EBITDA 505 to 535 for someone some of the other underlying assumptions, you know, as far as, you know, net price benefit, cost inflation, just for the full year. How you guys are thinking about effects and just some of the other underlying bridge items for 2024 EBITDA.

Sure. So I'll start. So these are one of the things that has been factored into our guidance. One is to what Ashish mentioned earlier to Mike is probably low to mid single digit top line growth. First half versus second half dynamics, he explained. We do expect raw material deflation in the first half and a little bit of an unknown in the second half, depending on how market conditions roll out. But that's probably 20 to 30 million dollars in the first half. And we mentioned this on the call in the back half. We do have some headwinds with regards to incentives being reset. So that's something else to consider in the range. But those are the primary factors. You mentioned effects. There's not going to be a whole lot of effects dynamics. I know the euro has strengthened from 23 to 24, but we also see some other currencies that have weakened against the US dollars like the Chinese Yuan that's basically going to offset most of that.

Thank you so much, guys. Thank you. One moment for our next question, please. Our next question comes from the line of Mike Harrison with Seaport Research Partners. Your line is now open.

Hi, good morning. Congrats on the new role of she's and congrats on the national title. Bob. Finally, thank you. I was wondering, I was wondering if we could maybe dig in a little bit more on the improvement that you've seen in the stocking trends in packaging and consumer. Would you say that the trends have been kind of exactly the same in both of those markets? Maybe just a little more color on what you were seeing in Q4 and maybe what order patterns are looking like and what customers are saying so far in Q1.

Maybe I'll start and then Jamie would like to add that she can do that. I think Q4 to Q1, as I mentioned in the prepared remarks, the packaging and consumer declined slower than what we would see in typical seasonality from Q3 to Q4. So that was a positive, of course. And then as we are looking into Q1 and how things are shaping up, we are seeing that those trends are continuing in the right direction. So we feel like we are, we feel pretty good that most of the de-stocking is over in packaging and consumer markets. With respect to geographies, I think we still see some slowness in the European market with packaging and consumer, although the de-stocking is over, but demand side is a little bit slower. But rest of the world, we are seeing underlying demand to keep moving in the right direction going forward.

So Mike, to add on to Ashish's comments, the packaging was down 5% on a -by-year basis, which is a significant improvement from where we have been trending for 2023. And if you look forward to Q1, we expect that to become even a lower variance on a -by-year basis. Consumer was down 12% in the fourth quarter. There is, although we believe de-stocking has come to an end, I do think that the demand associated with consumers really, not so much of a restocking, but just lower inventory levels to manage lower demand. And then if we take a look specifically in China, that's where we see some weakness in consumer, which is not to be unexpected just because of the sentiment that's in that region.

All right. That's very helpful. Thank you. And then Ashish, you're coming from a company with a much larger R&D organization with a lot of great capabilities. I know it's early days, but can you talk a little bit about what you see within the Avient R&D organization that you think they're doing well and maybe what areas you might look to improve?

Yeah, thank you for the question. And although I come from a big company, I can tell you Avient is pretty strong with processes and R&D capabilities as well. You know, the biggest thing that R&D can do really good is focusing on the customer and starting from there to innovate. And I think that's one thing that Avient gets very well. So, you know, I'm really impressed with the customer focus this team has. The connection of technology portfolios over time with different acquisitions has given us many building blocks now that we can start putting together, mixing and matching, collaborating across businesses to create more value than what we have been doing in the past. That's an opportunity for us going forward.

All right. Thanks very much. Thank

you. One moment for our next question, please. Our next question comes from the line of Lawrence Alexander with Jeffreys. Your line is now open.

Good morning, everyone. It's Dan Rizwan for Lawrence. Thank you for taking my question. So, you mentioned that raw material costs are deflating in the first half. Is that going to be followed by some price givebacks to your customers?

So, you know, we don't see, you know, from our perspective, we see that the team has done a good job maintaining the pricing discipline, even as things have begun to normalize. So, we don't see much impact of pricing decrease on revenue if there is anything that's going to be very isolated and minimal in nature. We feel like we create differentiation by bringing value to the customers, and that gives us a little bit more sticking power and competitive advantage versus our competition.

Okay, great. And then as volumes turn positive and potentially accelerate, how should we think about incremental margins in the two different segments?

So, on the CAI side, you know, the color side, we should see that we should see expect incremental margins just because, you know, we have done a lot of good work there with respect to driving synergies, but also, you know, the cost reductions and things like that. So, that should translate into – and you were saying that in fourth quarter, the results that Jamie showed how strong the margin was, and the team has done a great job on cost reduction, you know, maintaining price discipline, and also margin expansion. So, on the SEM side, margin expansion story will depend on what happens to the de-stocking story on the telecom side, what happens to the de-stocking story on the healthcare side, but also how strong the demand for Dyneema remains, which, as you know, is pretty creative to our margins. So, you know, 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. All right. Thank you very much.

Thank you. One moment for our next question, please. Our next question comes from the line of Kristen Owen with Oppenheimer & Company. Your line is now open.

Great. Thank you. Good morning, and I'll express my thanks also to you, Bob, and congratulations, Ashish. I wanted to ask about the free cash flow outlook for next year. I mean, as you are talking about a potential return to growth, seeing some of the mixed 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?

Yeah, great question, Kristen. So there's a couple of different dynamics on the cash flow just to take into consideration. So as you return to growth, we would expect a cash use and working capital. A good way to think about that in your models is we do have about a 12% working capital run rate. 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 used for this coming year. Another dynamic, what you saw in 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 S4HANA 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.

Okay, that's great. 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. 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 the market positioning in Latin America, how you're positioning to capture some of those trends? Thank you.

Yeah, Kristen, thanks for the question. 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 near-shoring 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 -to-speed advantage. That's what gives us the closeness to customer advantage and the relationships that we build. So 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.

Great. Thank you so much. Thank you. One moment for our next question, please. And our next question comes from the line of David Wang with Deutsche Bank. Your line is now open.

Hi, good morning. Ashish, given 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? And then second, I think R&D historically is below 3% for AVM. Is that the right level going forward?

Yeah, David, thanks for the questions. You know, 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 S4 HANA 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 then I think that's a real improvement and will give us a competitive advantage. So that's just an example of how we are using technology to serve our customers better. On the R&D at 3%, you know, 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, you know, not just in R&D, but other parts of the organization as well. Because I said, you know, everything has to be linked to the strategy in the end. And whatever is needed to do that, we'll put resources accordingly.

Got it. And then a leverage. I don't think you're assuming any debt pay down this year, but I think previously you had a target of 2.2 times by 24. Is that still a valid target?

Yeah, I mean, our goal is to get down closer to two times. We ended the year about 3.1 times. Based on where we're anticipating the year to end up will 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 two times over time.

Okay,

thank you. Thank you. As a reminder, that's star 11 to ask your question. One moment for our next question. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is now open.

Hi, this is Turner Henrichs 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?

But 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 de-stocking 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 to stocking we still expect there to be. And as we look into 2025, it really is dependent on how that B 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.

Thanks. Makes sense. So how is 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 still, is that affecting the first quarter at all?

So on the 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 in 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.

Great. Thanks for the color.

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.