Q3 2021 GCP Applied Technologies Inc Earnings Call

[music].

If you've not done so already please go to our website <unk> dot com and click on the investors' tab to obtain copies of our earnings release, which contains tables with our financial results.

Along with the slide presentation.

[music] all of our comments today will include forward looking statements under the U S. Federal Securities Law actual results may differ materially from those projected or implied due to a variety of factors, including but not limited to the impact of COVID-19.

We refer everyone to our more robust forward looking statement disclaimer and discussion of these risk factors facing our business in our earnings release and SEC filings.

We will discuss certain non-GAAP financial measures.

Good morning.

And on our website.

Comment on forward looking statements and non-GAAP financial measures.

Both to the prepared remarks and the Q&A.

References to EBITDA refer to adjusted EBITDA references to EBIT referred to adjusted EBIT and references to margin referred to adjusted gross margin adjusted EBITDA margin and adjusted EBIT margin as defined in our press release.

All revenue and associated growth rates in this discussion are stated on a comparable constant currency basis, which adjust for the impact of foreign currency.

I'll now turn the call over to Simon.

Thanks will good morning, and thank you for joining today's call.

Our financial performance in the third quarter was within the expectations, which we laid out in early August.

What is notable is that we delivered these results despite cost inflation being significantly higher than we had forecast in the quarter, both for raw materials and transportation.

Notably SG&A was down by more than 8.5% year over year in the quarter, a direct result of our efforts to rightsize the business.

I am confident we are building, a leaner and more agile business and setting <unk> up for future success. This will become more evident once macro conditions have normalized.

Now I'd like to give a little bit more insights about our segment results.

Given the market dynamics I am very pleased with the performance of the SPM business for 2021 we forecast both revenue and operating income growth year over year.

Our employees have done an outstanding job in improving service and driving better results in this segment.

But the FCC business, the supply chain disruptions and year over year cost inflation started earlier and had been more severe when compared to the SPM segment.

Unfortunately, the cost inflation impacting the FCC segment has accelerated and price recovery is lagging.

We are clear on the actions, we need to take to improve profitability in the SCC business.

The addition of David campus as our new President of the FCC Americas business is already bringing tangible change we are working closely with David on developing our revenue and profit improvement plan for this business and I look forward to sharing more on this in future calls.

Since I joined <unk>, a little over 13 months ago, we are focused on improving the competitiveness of the business. So that we can drive revenue and margin improvement. When we last spoke in August I shared that this was one of the tougher working environment that I have experienced this.

This remains a very dynamic and challenging period.

Our revenue and margins have been negatively negatively impacted by raw material shortages cost inflation transportation bottlenecks and tight labor markets.

The G. C. P team is working diligently to address the challenges we evaluate every opportunity to streamline production processes find substitute raw materials, where possible and we continue to prioritize the customer.

I want to make sure we recognize our employees for their continued focus on meeting our customers' needs. Despite the unprecedented challenges they have done and continue to do a truly remarkable job.

Looking into 2022, we will continue to focus on the things that we can control and on repositioning the business for growth.

We will accomplish this through the combination of building out our organizational capability and improved focus on the customer giving.

Given our strong balance sheet, we can accelerate our strategy strategic plan through the right M&A.

I'd now like to turn the call over to Craig Great.

Thank you Simon good morning, everyone and thank you for joining us today.

As a reminder, all sales and associated growth rates in my comments are on a constant currency basis, I will discuss <unk> third quarter results, including comments on each of our business segments.

Lastly, I will provide commentary on the remainder of 2021.

<unk> constant currency sales of $246 1 million were 9% lower than prior year, but generally in line with our expectations. We had forecasted stable demand year over year with respect to revenues, but with a slight impact from material and logistic constraints globally, which we started to see them.

In the late quarter two.

Price for the quarter improved one 3% compared with third quarter 2020, as price continued to come through from pricing actions implemented earlier in the year G.

<unk> gross margin decreased 710 basis points to 33, 9%.

As higher raw material and logistic costs impacted margins at a higher rate versus our Q3 forecast with a significant impact on the FCC segment.

Selling general and administrative costs of $59 2 million decreased eight 5% during the quarter, partially offsetting the gross margin compression.

And stronger than our forecast due to lower employee cost.

<unk> income from continuing operations attributable to G. C. P shareholders totaled $7 8 million compared with 100 million for the third quarter 2020 of.

Of course, the prior year period included $82 5 million in gains from the sale of the Cambridge corporate office.

<unk> adjusted EBIT totaled $24 5 million compared with $36 million in prior year quarter down approximately 32%.

Adjusted EBIT margin decreased 470 basis points to nine 8% due to higher raw material and logistics costs.

Adjusted EBITDA margin was 14, 3% for the quarter were 500 basis points lower versus the same period in 2020.

Our capital spending year to date.

Is $23 9 million versus 28 million prior year to date, reflecting improved discipline of capital deployment.

To better service our customers, we continue to hold higher inventories as we worked through significant supply chain disruptions.

Therefore for the first nine months of 2021 net cash provided by operating activities from continuing operations equals $25 8 million versus $59 3 million.

Compared to prior year.

Now looking at the specific performance of our two segments for the third quarter.

FCC's constant currency sales were up one 3% to $141 million due to favorable impact of price increases.

We saw year over year growth, specifically around global cement additives and geographically in both in Latin America and Europe.

The FCC volume offset was generally in Asia, where we saw intermittent government restrictions due to COVID-19 impacting demand.

Gross margins in the FCC segment declined year over year by 900 basis points to 31% in the third quarter due to high raw material costs, and logistics costs, which accelerated in the quarter.

FCC gross margins will be unfavourably impacted for the remainder of the year in comparison to 2020.

Mainly due to the inflation headwinds, including shipping and freight costs.

F. C. C segment operating income was $7 7 million with segment operating margin of five 4%.

A decrease of 820 basis points compared with the prior year quarter, primarily due to higher raw material costs.

Historically third quarter has been our strongest margin quarter for FCC and unfortunately, the severity of the inflation will have a significant impact on our SEC full year results in 2021.

Turning to the SPM segment for the quarter.

S. P M sales constant currency totaled $106 million during the third quarter of 33, 7% decrease versus the third quarter 2020, due to lower sales volumes. The volumes were slightly lower than we expected as we reduced shipments to certain property developers in China.

To reduce credit risk we.

We did see solid volume growth in certain product lines, such as our Sterling void business and our specialty construction products group, which includes the fireproofing injections and flooring products.

Although spm's gross margin decreased 460 basis points to 37, 9% compared with the third quarter of 2020 due to higher raw material costs. It was in line with our expectations.

<unk> segment operating income totaled $29 million with operating margins at 19, 4%, a 390 basis point decrease versus prior year.

However year to date Spm's operating margins continue to outpace 2020 margins due to volume growth productivity, good mix and cost leverage to date.

Now looking to quarter four it is clear that inflation in logistics cost increases we will continue to impact our financial results on a year to year comparable basis, particularly in the FCC segment.

We continue to take actions, we believe are needed to offset these costs. However, we do not believe the actions will be sufficient to substantially lift margins sequentially moving into the fourth quarter for FCC.

We are using our balance sheet in order to better service, our customers and we continue to do so in order to ensure we have product to supply into 2022 without disruption.

As a result, we expect to have on hand, more physical inventory volume versus our historical trend at year end.

Certainly the second half of 2021 has been an extremely challenging time to operate.

With material shortages global supply chain disruptions and the changing labor dynamics.

The global teams have done a great job working together to manage through the day to day disruptions to meet order commitments and keep construction projects on track.

We do expect our gross margins to remain compressed for the short term.

Price increases continued to be implemented however, we believe it will take a couple more quarters for price to overcome inflation and stabilize margins.

The impacts on gross margin are expected to be more in favorable on the FCC segment versus the SPM segment as approximately two thirds of our inflation is impacting our FCC segment.

We forecast SG&A expenses for the full year to be down approximately $8 million year over year, and we expect a further favorable impact in 2022.

And this will continue to partially offset the temporary margin compression.

Our expense management and restructuring programs are ahead of schedule.

We currently have approximately $482 million of cash and cash equivalents on hand at the end of the third quarter slightly lower than forecast as we are holding higher inventory.

In closing we.

We are pleased with our progress and although the environment is challenging on both the supply side and logistics, we expect quarter four revenues to be in line with our regular seasonality following our quarter three results with higher price capture in Q4 versus Q3.

Our strong balance sheet continues to provide significant flexibility and opportunity to deliver shareholder value whether it be return of capital to shareholders M&A or a combination.

During the year, we have accelerated our efforts to identify and broaden the scope of potential M&A opportunities, which will provide increased capability scale and leverage for our organization.

I will now turn it back over to Simon Simon.

Yeah.

Thanks, Craig 2021 has been a truly dynamic gear.

Our operating plan assumed both cost inflation and productivity improvements I'm very pleased to say that between productivity and SG&A reductions, we will realize more than $20 million improvement in operating expense and efficiency by the end of the year.

Consequently had cost inflation has been in line with that budget or historical gnomes. Our results would have been well in excess of our operating plan.

Unfortunately in the short term these unprecedented increases in costs have negatively impacted our consolidated results.

Although we feel very good about the progress we are seeing in the underlying business. We have naturally switched our focus to address margin through price and to drive further productivity improvements.

I also want to note that we are ahead of schedule on the exit from our Cambridge facility and we have stood up our new head office in Alpharetta, Georgia.

Our new state of the R&D facility in Wilmington mass is under construction and will be ready for occupancy in Q1 2022.

The execution of our strategic priorities to date has improved the business and coupled with the use of our strong balance sheet, we are committed to deliver shareholder value.

Thank you for joining our call and we look forward to taking any questions.

Yeah.

We will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your Touchtone phone you are using a speakerphone. Please pick up your handset before pressing the keys. If you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble.

Our roster.

Today's first question comes from Mike Harrison with Seaport Research partners. Please proceed.

Hi, good morning.

Good morning, Mike.

I was wondering if you could talk first about the volume impacts that you saw related to supply chain disruption.

Raw material availability, and maybe maybe even labor shortages or labor availability.

And maybe kind of parse that out between the FCC segment and SPM.

I guess the question is how much how much higher could volumes had been if not for these disruption impacts.

Mike I think it's a good question, it's not something we are formally capture or calculate but I can tell you.

Be it from a production standpoint, with the inability to get raw materials or having to switch to alternate raw materials.

With the challenges of getting labor in some of our facilities.

And in our ability at times to source materials in a timely manner that is coming across an ocean.

We've also seen as we've tried to ship products a lack of trucks that are available and so I would tell you Mike those supply chain disruptions have impacted volumes in every geography that we operate.

These aren't limited or different honestly by geography and has equally impacted both the S. P M and the FCC segment.

Alright, and then on the.

The.

Price versus cost front.

Maybe just talk about how you see that trending over the next few quarters.

Any thoughts on who we expect to see peak margin headwinds and when we might expect to see some margin recovery.

Yeah, Michael it's Craig.

I'm going to give you a little bit more detail here just.

On the numbers so.

We generally had about $25 million worth of freight raw material inflation in the quarter.

We mitigated about half of that through price productivity and our SG&A efforts.

And you'll see that in the margin basically.

Use those numbers.

That's the margin drop.

Unfortunately, we expect that to continue into Q4.

So really sequentially I think the margins are going to be about the same the inflation is going to be about the same we are going to get a little bit more price.

So we're working to do a little more favorable winter Q4 honestly most of its around FCC, that's where we got the challenges on FCC normally.

In history, we've been able to formulate around and use different materials, one material goes up another one's neutralized, we change it out and we formulate.

Unfortunately, with a tsunami of price increases and supply chain disruptions.

Can't get the product that you want to switch into <unk>.

Properly or the freight has gone up or the cost has gone up so that's where we've been challenged on FCC, that's a temporary issue.

Our business models really strong and formulation.

And where we've been hampered there that's why the FCC margins have come down more than we would like them to obviously and more than historical even when we've had inflation like this so we're working through that and once the supply chain disruptions ease a little bit and stabilize over the next probably by the end of the year were hoping into next year, we will start to grab back.

Margins in FCC.

And just to talk a little bit about RSP EM segment, clearly for waterproofing building envelope business and our fireproofing business. These are job driven contract driven and consequently, youll pricing is specific to a job and generally and our.

P as would be in the same situation you're looking at a three to four months drank.

On the ability to move price specific to the next job having said all of that we did announce global price increases at the beginning of October for our SPM business and we will be doing the same again in January.

Alright, and then.

As it relates to the SG&A line those costs appear to be down quite a bit sequentially. You mentioned the restructuring actions that you've taken but I think also.

Mentioned in the press release, some changes in incentive accrual. So I wanted to get a sense of how much of that SG&A reduction is sustainable and what portion of it might be related to some true up.

Accruals.

Yes.

Yes, some is definitely a true up of some incentive accruals listen it's sustainable we accelerated some of our moves on our operating expense reduction. So it is sustainable I think it you won't get any further lift I think in Q4 honestly.

Because we are starting to we've got the Atlanta office that we're now and that's what we're speaking from right now honestly. So I think we're we're probably flat in Q4.

With any with no further uplift, but we will roll over we haven't even got fully Michael the benefit of all of the Cambridge rents for next year, we'll get that benefit because that's certainly more expensive than the Atlanta red.

Including the R&D facility in Wilmington, we will get the benefit of a number of actions we've taken in the second half year with reduction of head count during the year by the time, we end up at the end of the year will be down in G&A 100 head counts.

<unk>, which will rollover and help us next year, even if we have to put back some incentive next year as we roll through the year. So we'll be we'll be net positive and we're looking good on those programs.

Alright, and then my last question for now it has to do with a comment that you made about reducing sales into China to limit your credit risk can you give us a little bit more detail on I guess, how you're how you're viewing risk within that environment, given some of the issues that have.

Then in the headlines recently.

Yes, so payment terms in China for most of those on the phone probably know what it's almost you know between half a year to a year, depending on what customer you're you're working with.

Just kind of in the middle of that so I won't get into the detail. So we're kind of split right down the middle of that.

Terms, so we thought it more prudent with all the issues going on we have some developers we sell two there's one that's fairly into the situation that you read about and so we've restricted any more volumes to that developer until we get some payment.

And so we lost about 3 million to $3 $5 million worth of revenue in Q3, and we'll probably lose a little bit more in Q4, it could be $5 million in Q4 on a year over year wrap, but we think that's the prudent thing to do we're not nervous we're not going to get paid.

We've got some other.

Our customers that are paying us very well and we're selling to them and in fact, Stirling Lloyd product has been being sold there and we've really increase those sales in China, but that particular.

Developer, we're just holding back and giving up some volume until we get payment so.

So we can give you a further update on the next call once we work through it.

Does that does that answer your question Michael.

Yes, It does got maybe I'll give a bit more color from my perspective, Mike.

There's three revenues grew three revenue streams in China Stirling.

Selling Lloyd business, our fireproofing business in our water proofing business we're.

We're seeing year over year growth in our fire proofing and I Stirling Lloyd business.

This particular issue impacts our building envelope and waterproofing business in.

And I think we've taken a strong stance in terms of protecting our credit risk and there is a short term impact to our revenues, but I emphasize the short term.

No just just one more layer of challenges that you have to deal with.

Very much I'll turn it back for now.

Thanks, Mike Thanks, Michael.

Our next question comes from Rosemarie <unk> with Gabelli <unk> Company. Please proceed.

Good morning, everyone.

Good morning Rosemarie.

And then Craig I was wondering if you could get.

If you could talk about the specific end markets. The trends you are seeing and which ones are.

Being affected by.

But obviously all of them not being affected by just wanted to be affected by the logistics and so on but in terms of demand for the industry overall have.

Have you seen a slowdown do you have pent up demand can you give us a feel for what is going on out there in the marketplace.

In a succinct manner, Rosemarie, it's probably going to be a challenge when we speak about the segment in <unk> and geography, but I would say broadly.

Broadly, we sell into infrastructure and we sell into commercial new construction and we sell into residential repair and remodel.

And I would say we are positively have been positively surprised by.

By the commercial new construction market. This year in particular in North America, and that's resulted in some good results for us to proofing and fireproofing businesses.

On the residential repair and remodel we've seen nice growth year over year, I think as we've pointed out before our exposure, particularly in North America to residential new construction is quite limited and that would have been the strongest segment in North America. This year.

And then that's really talking specifically about our S. P. M S. B M business for our CEC business.

Because our customers are essentially cement producers and ready mix concrete producers, we get full exposure across all the different segments in terms of residential commercial and infrastructure I think where we've seen nice growth this year.

And it's been global growth.

That could have been better had we had access to more raw materials has been our infrastructure business.

And that's a segment that we enjoy and like and is likely to be more robust over the next three years than residential or commercial.

So looking at a.

And the infrastructure.

How much do you think you have.

Last Oh, you know revenues delayed because of the shortage.

Well, Rosemary let me I'm I use math, a little bit more and probably I should but we said at the beginning if you remember at the beginning of Q3, we said, we thought we'd be up about 6% to 8% and revenue for the full year.

I think now we're looking at around 5% approximately between 4% and 5% as reported right I'm going to say as reported.

So if you think about that you could argue that.

I would think the global construction market is probably lost a point or two for the full year versus what expected. They expect it too so quite a bit but we are seeing what happens rosemarie.

Especially infrastructure projects in any one of those projects.

They're missing one product or theyre missing one item to finish the sequence of the job. They cannot continue the job and they're having a problem switching out to other items alternative items, because they can't get it either so that's slowing down the bigger jobs.

One of the reasons why and we're not in new construction residential unfortunately.

The rest is the folks who are in new construction residential or light commercial they can switch out.

And they can move to another job and come back to a certain job they have much more flexibility on the high income commercial and the infrastructure and where we play the jobs just can't switch out products. So that's delayed it now the good news about that we'll get that in 2022.

The jobs, what we're seeing in our pipeline as the jobs are not going away money is cheap people are still continuing to invest and still completing those jobs.

They will move into 2022 and this is when we talk about supply chain disruption, it's not on the just on the inbound. It's also on the outbound on the demand and people delaying some need for our products because they are projects are delayed. So hopefully that's helpful. Yes. It is very helpful. Thank you.

And so they actually bring Snyder brings up my next question, which is regarding M&A is it safe to assume that it is going to open.

You know the residential construction market to you in a much larger fashion and is that do you have some things that could eventually close by yearend.

We are very.

We have put a lot of time and effort Rosemarie into M&A and we're very thoughtful.

And specific about where we would invest share.

Shareholders' funds.

We are clear on the geographies, where we want to play and we are clear on the segments, where we think an investment is prudent and we've talked about infrastructure. As an example, I think the global construction.

Trends all information for example from IHS would suggest that global construction should grow at about 2% to 3%. The next three years, but the infrastructure spend is likely to grow at more like 6% and so we think infrastructure would be a prudent investment.

And we also of course, when we think about North America.

Residential new construction given the pent up demand that is a decade in the making we think although growth might be limited that will remain a strong and robust segment over the next two or three years and.

And we think that would be a prudent investment too.

Thank you and one last question if I may.

So you are lagging price increases so I understand that there is and it's difficult to raise price in some particular areas are you considering two tranches in order to offset at least the higher cost of logistics.

It's a daily conversation Rosemary honestly and every option is on the table and every option has been discussed and as part of our execution plan.

Yeah, and maybe Rosemarie I'll weigh in on that they they we expect more price in Q4.

We actually have committed price from customers that we haven't received price in there in their current jobs or projects because we don't have the ability to get it on those projects, but they've committed to give it to us on the next projects, which are now being shipped in Q4 and that will roll through Q4 and Q1.

And in SPM honestly, we're doing well between price and productivity and this will be our low margin Mark for S. P M.

Pick up through a little bit of Q4, and then it'll it'll come more normalized into next year FCC is where we're focused to your point.

Of inbound freight and outbound freight on FCC and it is challenging and we're attempting to do surcharge and then working with our vendors on some of the extra freight costs overseas and inbound overseas because it's a global supply chain for FCC.

Versus SPM, which is little more local and it's easier to handle.

Alright, Thank you very much.

Thank you.

The next question comes from Laurence Alexander with Jefferies. Please proceed.

Guys, it's Dan Rizzo on for Laurence.

Just one quick question is there a way to shorten or change your supply chain I mean, obviously not right now but could you just excuse me.

Just to kind of change things. So this doesn't happen again, I mean, I guess, it's kind of.

Closing the barn door for horses out, but I was wondering if you are looking at that.

Dennis.

I truly believe every company that's a that is impacted by the supply chain challenges is asking that very same question and again, it's a daily conversation and.

Decisions that you would like to make.

As Craig said in terms of switching to an alternate material. It's just not feasible right now, but I think it does beg. The question how do you more fundamentally secure yourself against the prospect of this happening and it is a current and continuous conversation and we will be.

Part of our strategic planning going forward.

But to your point that the horse is already bolted.

And it's now thinking about what we can do over the next 12 24 months rather than what we can do right now Unfortunately.

And Dan I'll, just try sorry, Dan I'll, just reemphasize that that that's predominantly our challenge on the FCC part because and we've actually got the benefit from that global supply chain for years.

And unfortunately with the increase in freight the blackouts in China now on production on areas and even across Asia, that's challenging getting product let alone the cost increases going up so to your point is very valid and we need to have some sort of balance in that.

It sounds like that there are a lot of the issues or the at least the volume issues in S. C C because of the shortages or just pent up demand so.

Just make sure I'm thinking about this right that would suggest that once this is over or be it three months six months nine months from now you should see a pretty large restock cycle as people basically can't catch up, particularly given the infrastructure demand.

Our growing worldwide.

Yeah on SPM, certainly because we have Stirling Lloyd we actually have back orders on Stirling Lloyd right now breakthrough the quarter went on some of the <unk> FCC tends to restock fairly quickly, but I think our customers are not moving the product out to those projects. So you are right.

I think.

It will extend the cycle I think.

I don't know if there'll be a big Bang in Q1 or two but it will extend the cycle on the replenishment of inventory and Doug to your question.

I'll give a little bit more color.

Specific actions that we had taken that actually we're going to drive some very nice productivity improvements for us year over year have been negated by.

By the inability to get the product that we planned to replace the rule or the cost of that role has increased so much that it negates the productivity improvement.

The second thing because.

What you asked what can you do clearly we have taken the decision.

To increase our physical inventory and quite substantially and I think surprisingly that's meant for some customers in some segments, we've actually been able to drive improvement in our on time and in full on certain projects for certain customers.

And I think that's a testament to our supply chain group that we've been able to do that in these challenging times.

Thank you very much.

Thanks, Dan.

Our next question comes from Chris Shaw with <unk> Crespi. Please proceed.

Yeah, Hi, good morning, everyone. How are you doing.

Hey, Chris.

I can follow up on Rosemary his question about M&A.

You've you've lined out the strategy and the target sort of areas and geographies.

It seems like you've had that sort of set for a while now I guess, what's just sort of the.

What's the sticking point right now is it just are there no targets are they they're not selling or is the multiples to high have you lost out on some targets or are you guys.

All of it or are you guys is that distracted with the supply chain issue with me, what's really sort of a sticking point and all getting this done now we we've actually dedicated a lot of time and effort to M&A.

In some cases, we have lost out.

In some cases, we've decided the prices too high.

In some cases, we've decided there isn't enough good fit and synergies and so we want to be thoughtful we want to be discerning.

We actually have a very good pipeline.

And feel good about some of the targets that we are pursuing.

Okay. That's all a lot of reasons I guess.

Yes, and then if I could ask a historically I can't remember in both of your businesses.

When you've had to raise prices a decent amount is there any impact the bad or is there some sort of elasticity or is there any switching out until more commodity like product or anything like that I forget the sort of historical for that.

That happened in the past.

Yeah generally there.

I mean, we're managing the balance between price and volume.

And generally theres not not switching out as long as we are sensible, we communicate effectively and were clear to the customer on exactly why they're getting the price.

And the challenge is the timing I mean, certainly if we're going to jam the customer and put them in a very difficult position.

With his pricing to his customer his their project or her project.

That's up that's an issue so hence the reason why the delay a little bit on our part because we don't want to lose volume. We haven't lost volume that we know of as we're tracking where we had I think about two or three years ago. We did move price and we lost volume and you could see in 2019. It came back to haunt us on the SPM side.

So we're very thoughtful on this price approach.

Of course, we've got the.

The the wind at our back with the inflation. So we're going to get the price we are driving productivity to offset it too and I think at the end of this will be more competitive and we will be able to grow the business on the backs of that.

Versus just working on price and margin honestly.

Got it alright, thanks, guys.

Thanks, Chris.

As a reminder, if could you have a question. Please press Star then one on your Touchtone phone.

Yeah.

Our next question is a follow up from Mike Harrison with Seaport Research partners. Please proceed.

Hi, Yes, just one last one for you around free cash flow looking even at the adjusted number you are quite a bit behind where you were last year I know you mentioned the higher inventory levels.

But maybe just since we're starting to think about free cash flow for next year.

Maybe walk us through some of the puts and takes there presumably working capital becomes less of a headwind.

Expect to see some earnings growth in there, but also how do we think about the cash for restructuring and repositioning.

Into next year as well as Capex next year versus this year.

I mean, I'll give you a general comment Mike and then Craig will probably follow up with us with more specific data, but very deliberate decision on Craig and my PA early this year as we saw challenges on raw material pricing and the indications of shortages that we bought early.

And we bought a lot.

We're very deliberate so I'd say the majority of the change in the free cash free cash flow comes from increasing physical inventory what I am pleased to say is that throughout the course of this year. We've made some changes within our supply chain group and I think we have a very talented group and I think that.

It's part of the reason why we've been able to improve service levels to some customers even in these challenging times, but we will definitely be targeting that group with a reduction in physical inventory once the supply chain disruptions have abated and driving that improvement in free cash flow next year.

Yeah, So Michael all up playing on Chris's question, a little bit on this too so.

We decided to carry this extra inventory one of the reasons was the support number I'm from the commercial I have a commercial background to support the commercial teams on pricing. The last thing you want to do with customers is give them a price increase and then tell them you can't service them with the product. So we're supporting our commercial teams and our customers on that.

We have about 15% to 20% more cost in our inventory this year than we did last year about half of that as inflation and the other half is the decision Simon and I made to carry extra volume to make sure. We can service the customers. So we'll reap the benefit of that next year not at the end of this year because of supply chain disruptions are keeping on.

But next year, we will reap the benefit of that because we expect to bring that down slightly next year, but just to give you. Some numbers, we do expect to spend.

Probably about $5 million to $8 million more capex next year than this year that would be.

On the projects, we've identified some nice productivity projects.

And mostly North America on the SPM side, So that's where the number will be that will be at $45 million give or take on capex.

Interest expense will stay the same next year right at this moment.

Unless we do M&A, when we can get a target closed which would change it restructuring.

To accelerate the restructuring not just for the savings, but we want to get over it. So we can operate the business effectively just from an operating point of view, so youre going to see less cost than on on dollars and restructuring next year. So that's probably going to give us a bump of $10 million or $15 billion. So youre going to see probably our anticipation our best cash conversion year will be too.

22, once we get past this current restructuring.

Very helpful. Thanks.

At this time, we're showing no further questions in the queue and this concludes our question and answer session as well as today's conference.

You for attending today's presentation and you may now disconnect.

Okay.

[music].

Yes.

[music].

Yes.

[music] indeed.

Hum.

Thanks.

[music].