Q2 2020 Avient Corp Earnings Call
[music].
My name is there and I'll be the operators.
At this time all participants on in listen only mode.
We will have a question and answer session at the end of the conference.
As a reminder, this call is being recorded for replay purposes.
At this time I would like to turn the call over adult Joe The Sabal, Vice President Treasurer and Investor Relations. Please proceed.
Thank you Sir good morning, and welcome everyone joining us on the call today.
Before beginning we'd like to remind you that statements made during this conference call maybe considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements will do current expectations are forecast to future events are not guarantees of future performance.
They are based on management's expectation in the bulk of number this business risks and uncertainties many of which could cause actual results to differ materially from those expressed or implied by the forward looking statement.
Some of these risks and uncertainties can be found in the company's filings with the Securities Exchange Commission as well in today's press release.
During the discussion today, the company, who use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the avian website, where the company describes the non-GAAP measures and provides a reconciliation from the most comparable GAAP financial measures.
Joining me today is our chairman President Chief Executive Officer, Bob Patterson, an executive Vice President and Chief Financial Officer, Fred Richardson now it will turn the call over to Bob.
Well, thanks, Joe Good morning, everyone and welcome to our second quarter 2020 earnings call the first ever as 80 incorporation.
I'd like to begin our call today with an acknowledgment of support for those who have been impacted by corner virus.
Heartfelt appreciation also goes out to the countless frontline workers first responders as they continue to play an important role in a response the recovery effort.
At avian our first priority remains the health and safety of our associates customers and all stakeholders.
We continue to adhere to government guidelines and protocols as well as other preventative measures to help stop the spread of the virus.
As we do we continue to serve our customers as an essential supplier and partner.
On June 16th we hold the mid quarter Investor call during which we commented on our second quarter expectations in light of the pandemic.
As we now share our actual results. We report we delivered adjusted EPS of 39 cents.
Which is three cents better than we expected at the time.
Recall that to provide an apples to apples comparison to the prior year. These results exclude the impact of the financing for the Clariant Masterbatch acquisition.
Including the additional shares from the equity offering in February and the debt raised in May our adjusted EPS for the second quarter was 28 cents.
The improvement was driven by an uptick in the sales in Asia in the last two weeks as the quarter and better than expected margins in color.
We believe Asia is recovering from the pandemic, but also is a leading manufacturer products that are specifically aiding in the world's response efforts.
Sales in the region increased 13% over the prior year.
This was not enough to offset weaker demand in Europe, and the Americas. However, in overall second quarter sales declined 18.6% or 17% on a constant currency basis.
That's a challenging decline for sure, but we have benefited from our historic efforts to reposition our portfolio with a greater emphasis on healthcare packaging.
Sales into these markets were up 7% and 3% respectively in the quarter.
With the acquisition of Clarient Masterbatch.
We take an even bigger step forward toward a more specialized in more sustainable portfolio.
And the numbers speak for themselves.
While we didn't know the masterbatch business in the second quarter. They achieved adjusted EBITDA of 37 million in Q2.
Up slightly from what they reported in the prior year.
Like us they were deemed essential and the colder response and recovery.
And they're associates continue to serve critical industries, such as packaging consumer care products in health care.
Recall that approximately 75% of their sales are into these end markets.
And then also benefited from a strong presence in Asia, where they achieved EBITDA growth just as we did.
For months now investors have been concerned that we might be buying a business in distress from the pandemic.
Thats simply isn't true.
Here is what is true.
We have acquired a business that is effectively achieving a run rate EBITDA of $130 million, which is what we estimated when we reported in December when we announced the acquisition.
We are inheriting a very talented management team.
And our organization with a passion for innovation and customer service.
We have quickly validated our initial synergy estimate of 60 million.
And identified potential upside that we believe we can deliver even in a colvin environment.
We expect the acquisition will be immediately accretive to adjusted earnings per share in the third quarter, our first together.
Excluding amortization step up which we have not finalized we expect clarient will add approximately 10 cents of EPS accretion in Q3.
This approximates what we expect clarity it will deliver from a cash perspective.
And recall from our December presentation that our three year goal for EPS accretion on the same basis is 85 cents.
So 10 cents in the initial quarter of ownership is a great start.
This is an exciting time for us than it is an important inflection point in our specialty journey.
Brad is going to provide some further details on the second quarter, and then I'll make some closing remarks Brett.
Bob will thank you very much.
And good morning, everyone. It's always do I'm going to start with our GAAP results in the second quarter, We reported GAAP earnings per share from continuing operations of 25 cents.
Special items in the quarter resulted in a net after tax charge of $2.6 million.
Special items in the second quarter were primarily associated with acquisition related and restructuring costs, which were largely offset by insurance reimbursements from previously incurred environmental cost any mark to market pension adjustment.
Adjusted EPS for the quarter was 39 cents as Bob noted, which excludes the impact of the financing for the Clariant acquisition.
Total company revenue declined 18.6% in the second quarter compared to the prior year with weaker foreign currencies impacting total company sales by 1.3%.
Automotive and consumer discretionary markets accounted for 70% of the sales decline.
This is not a surprise given the shutdowns that took place for much of April and May in the automotive and retail spaces.
From a regional standpoint.
Sales in Europe were down 22%, excluding the impact of changes in foreign currencies.
This was primarily due to weak demand in automotive and industrial applications.
Unfavorable foreign currencies negatively impacted the regions over overall sales by 4%.
In North America sales declined 21%, primarily due to the automotive production shutdowns and demand for consumer discretionary applications. These include things like outdoor high performance sports.
Electronic accessories, such as cell phone cases.
And sporting and leisure apparel.
The regional performance in North America, and Europe are in Stark contrast to what we experienced in Asia.
Where sales increased 17% for the quarter on a constant currency basis.
Growth in the region was driven by new business wins in health care applications for the Cobot 19 response.
Along with continued strong demand for our barrier additives used in food and beverage packaging.
We certainly hope Asia can serve as a roadmap for what is possible and ahead in the pandemic pandemic recovery for the other regions of the world.
In reviewing our segments for the second quarter, SCM sales and operating income were down 19% and 32% respectively.
Lower sales were partially offset by cost containment accident actions, which reduced SGN expense, 12% versus the prior year second quarter.
The sand segment was primarily impacted by the automotive and wire and cable end markets in Europe and North America.
Our composite businesses, we're also negatively impacted as demand for transportation and oil and gas declined.
Sales and operating income for the color additives in Inc. segment declined, 15% and 24% respectively.
Lower sales were partially offset by improved mix and cost containment actions, which reduced SGN expense, 11% versus the prior year second quarter.
As we previously commented the color business benefited from health health care applications used in the covert 19 response as well as continued strong demand for its packaging applications.
For the color segment packaging sales were up 5%.
And healthcare sales nearly doubled over the prior year second quarter.
The increase sales in these end markets provide a better than expected margins driven by improved mix.
Please note that the color segment performance I just discussed does not include the impact of Clariant Masterbatch business since the acquisition closed on July Onest.
The acquired business performance will be included in our color segment results beginning in the third quarter.
Lastly, sales and operating income declined 22% and 27% within our distribution segment again, primarily due to the automotive shutdowns.
Lower sales were partially offset by improved mix and cost containment actions, which reduced at genie extent, 11% versus the prior year second quarter.
From a cash flow perspective, we generated $80 million of free cash flow in the second quarter.
In line with the prior year has reduced working capital offset lower earnings.
During our last call I emphasized our cash flow as a significant strength for us and it certainly is.
Pro forma for the clearing acquisition and tax payments made in July associated with the PNM divestment, we have $450 million in cash on the balance sheet and over $700 million in available liquidity.
In summary, we are an excellent position to navigate the near term dynamics of the pandemic and begin the very important work of integrating our two companies.
It is important to note that is still too early to predict when and how the markets will recover.
Importantly, we don't plan to provide specific EPS guidance for the third quarter.
What we can't tell you is that orders for the month of July are down about 15%.
This is an improvement sequentially from Q2, but still off from the prior year for sure.
We are seeing some early signs of automotive business picking up as well as spending on discretionary consumer discretionary items.
But these appear to be returning gradually.
We expect Clariant will add $250 million of revenues in the third quarter and as Bob mentioned, it will be immediately accretive, adding 10 cents of EPS.
This excludes the impact of depreciation and amortization from the step up in the asset values associated with purchase accounting.
We are in the middle of the process to complete the allocation of the purchase price.
We believe this immediate EPS accretion is incredibly relevant for our investors to assess our cash return on our investment.
I think what it's also relevant is the quality of the business, we acquired it specialty composition.
And resiliency during this challenging economic environment.
Bob will now provide some comments, including an update on clearing.
Thanks, Brad.
I'm very proud of our teams accomplishments this quarter navigated the coven 19 pandemic, while at the same time completing the acquisition of color as Masterbatch business, the largest than our company's history.
We have been very purposeful in clear that our initial communications just as we are being now in our early integration.
And that is this is a joining of two great companies to make it even better one.
And even stronger organization that is more global and more innovative.
As good as a legacy Polyone and clarity it organizations were separately, we're better together as a new company with a new brand.
Avian it is rooted in lot of in Europe, which means the future NV, which means life.
You can hear environment. It had mentioned two important areas of focus for us as we emphasize sustainable solutions.
Quite simply it's a new name for a new company.
I have met with the company now for 12 years that have always respected Clarion masterbatch.
Even the best of competitors in both legacy Polyone and clearly its shared a passion for innovation customer service and for taking care of our associates I never viewed the goal to acquire clarion, but rather to build a new team together.
This is the opportunity that we now have in front of us and I believe with our new collective brand that's exactly what we will do.
The new brand is about the cultural integration of over 9000 talented passionate and proud associates as it is about anything else.
Over the past several decades legacy Polyone and Clarient masterbatch of each built a strong legacy of success.
And it is important as we come together, we learn from each other and harness the best of our two organizations.
This is a time when the world Craves, a path forward out of the pandemic as green shoots began to emerge the world will once again prioritize sustainability innovation and economic growth.
We will rely on strong relationships and partnerships and demand a more inclusive society.
By joining our two incredible and complimentary businesses into one.
I feel like we're better positioned than ever before to help in the response and recovery and to create future value for all our stakeholders.
Having closed the acquisition on the first in July we have hit the ground running with integration efforts well underway.
Despite the challenges brought on by the pandemic, we're confident that we will be able to execute our plans and achieve our synergy targets.
We plan to provide a more thorough update on integration progress in synergies on our next call.
As we look ahead, we believe there are encouraging economic signs you heard our performance in Asia versus the other reasons. Our plants are fully operational commercial activity is picking up and again, China. In particular has demonstrated that coal that can be managed an economic growth can return.
Automotive plants around the world our reopening in there appears to be demand for passenger vehicles.
In the consumer space production of products like off road vehicles really came to a hole in the second quarter.
But towards the end of the quarter, our customers were finding that dealers were running short on inventory as consumers rush to buy them.
Many people it turn to the outdoors as a respite from the confines of cold Lockdowns.
No one is waving the recovery flag, yet, but following the considerable declines for the last three months. These are positive signs.
That being said, we expect any recovery in the us in Europe to be gradual.
Unlike the rapid spread of the virus and then the swiftly ensuing shutdowns throughout Europe, and the Americas recovery will take time.
If there is one thing that we have learned or relearned about people. During this pandemic has that individual attitudes behaviors very drastically.
I make this comment because when there is a more consistent and higher level of individual Tom for that the pandemic can be managed I believe thats, one consumerism and commerce will likely returned to pre coal that levels.
The addition of client will certainly help our performance that we have highlighted and I expect the business will fare well in the second half of the year.
And this is a main factor what attracted us to the business in the first place.
They have market, leading technology and specialty less cyclical end markets and.
No I say they have it's really we have because they are us than we are them and together we are avian.
The new kind of specialty materials company, the great place to work for our associates and an investment opportunity poised for growth and value creation for our shareholders.
With that.
I'm happy to take any questions from anyone on the call. Thank you.
Thank you.
The call lines there now open.
As a reminder, you will need to press Star then one to ask a question.
Please limit yourself to one question and one follow up question.
Your first question comes from the line of Mike Harrison.
Seem quite global your line is now open.
Hi, good morning, and.
Mike.
Bob I was wondering if you can comment a little bit.
Customer inventory levels I know you just mentioned that in some places you're seeing that theres been demand and maybe the dealers are the stores don't have enough inventory to keep things on the shelves at this point you feel like you're seeing essentially real time demand.
Theres still some destocking going on as Ernie restocking going on maybe just walk through some of your key end markets and let us know what you're seeing.
Yes, maybe I'll sort of highlight on to that being automotive and then also what we're seeing in off road.
Vehicles, because those are two areas where.
Specifically with off road vehicles, it's aligned with what you just said where dealers were running short on inventory.
As those operations began to reopen towards the end of the quarter, we didnt see an immediate pickup in demand as a result of that in our estimation is that.
There was a lag and whether or not that was a result of other suppliers in the network.
Still having on hand inventory for those customers, having on and new inventory to begin production.
It's difficult to say, which is which but I do think there is and was some inventory in the system that's being worked through during the startup.
And that we'll see a pickup in demand in the in the third quarter.
Alright, and then.
I know you're reluctant to give.
EPS guidance.
I think maybe a starting point is kind of where Q2.
Was and then adding the 10 cents of accretion from Clarion, but maybe can you talk about some of the key variables in the outlook is is it really just demand related or pandemic related or are there some other.
Levers or areas, where you feel like you have some more control over how you can perform in Q3.
I mean look the primary.
You know unknown, if you will really is the.
Pace of recovery extent of recovery.
You know as.
As you well aware of course, there has been a surge in cases in certain areas of the world and that could continue to keep.
Demand muted.
So I mean, that's really the unknown and as I think about the primary sort of driver of things in the third quarter. That's the biggest day I do think that there are.
With some green shoots emerging for lack of a better description really around automotive off road vehicles.
In some areas of consumer discretionary, which we just did not see and the second quarter. So I view that.
Really as a positive when I look at July orders being down 15%.
That's a little bit better than the year over year comparison in Q2, and we think reflects some of that uptick in demand Mike.
Alright sounds good thanks very much.
Yep.
Thank you. Our next question comes from the line Vincent Andrews with Morgan Stanley. Your line is now open.
Thank you and good morning, everyone.
I could just commented that the 10 cents from Clariant could you just clarify whether that includes synergies or not and also on that 10 cents.
Is that 10 cents indicative of.
Sort of a run rate. So it's it you'd be 40 cents towards 85 cent goal or is there something in particular, what's a third quarter that would make that 10 cents higher or lower than what the run rate would be in terms of just seasonality or anything else.
Yes. So the first thing is theres, probably about 1 million and a half of synergies in there with respect to.
Really administrative costs in terms of Im pleased that did not begin with the acquisition on day, one just by design of the acquisition. So that's not a big number it will obviously get bigger as we get towards the end of the year.
With respect to the Tencent number again that excludes the step up in amortization were working on that right now.
And then the way to think about that as I'd say look there is seasonality in the Clariant Masterbatch business is very similar to our own.
We're the first half of the year is quite a bit stronger than the second half. So when I think about that run rate.
If we were just bringing over that our business in looking at it on that basis that accretion would be higher than it is in the first half.
Got it is in the second half of the year if that helps that's very helpful and just as a follow up.
Are there any cost that you have avoided in the second quarter, just with having things closed or whatever else that we'll have to come back.
Later in the year as sales return or anything like that in any and anything like that we should keep in mind for our model.
Yes, I mean look there's no doubt as a result of the the locked down to mean travel as just almost completely stopped in all.
Look inside of China customers are seeing suppliers again and people are.
Meeting again face to face, but for the most part that's.
Inter nation, if you will but if I look year over year, meaning travel and entertainment related costs and what I would say are the typical trade shows that we would have attended or participated in a minute that balance of that's probably about five and a half million dollars.
Down in the second quarter versus what we spent in the prior year now.
I don't expect that to actually come back in the third quarter.
At some point in time, it will but as the world tries to figure out what the new normal as I'm sure, but we don't ever get back to the same level of travel at least not in the foreseeable future. So.
Hopefully that puts set in perspective, we don't expect any of that come back in Q3.
Okay. Thanks, very much guys.
Yep.
Thank you. Our next question comes from the line of Mike Sison look Wells Fargo. Your line is now open.
Hey, guys.
Nice quarter, there that can you give us a little bit more color on the 37 million for to queue for clearing up year over year just.
That's it that's pretty impressive given your color business is down quite a bit either in anything that they're doing really well and maybe just give us.
Some background of why they prefer it sounds like for the full year had done done much better.
Yes, I mean look it really comes down to end market.
Exposure, Mike and 75% other sales are into.
Packaging consumer Staples, and then health care.
Those were actually very good markets for us in our color segment as well in this second quarter and up also.
The primary difference between the performance of our two businesses in the second quarter really was consumer discretionary items. As you know we have a large screen printing inks business that was a down considerably and then also our exposure to auto I mean, those are the two things that I'd say really do differentiate.
Them from US and you know again kind of hearkens back to our.
Our investment thesis about why we were interested in buying clarion bring into the company.
Is that improvement in the portfolio so.
That's the biggest thing plus candidly there no exposure to Asia Asia had a very good quarter in the second quarter for down as it did for us.
Got it and then it's quick follow up you talked about the 85 cents feeling feeling good about that.
Also had a $500 million number fee, but.
Longer term can you can you maybe.
Help us understand the walk to that again, just as a quick reminder, and have given how well Clarence done thus far is that as it is it still in the same timeline as you maybe initially thought or or is it may be even accelerate.
Yes, I mean look with respect to synergy capture we're very confident in the timeline and our ability to continue to capture.
The $60 million, even in a coal that environment.
You know and our next call we plan to give an update on our synergy expectations. The preliminary reviews have all been very positive between our two organizations and candidly, there's going to be upside to that.
Number so I think theres no.
I'm still feel very comfortable about the timing feel very comfortable about the order of magnitude.
And can only what that leaves really with respect to ultimately getting to $500 million is of course, you know related to the pandemic and recovery and where our legacy underlying EBIT Doug.
Performs but with respect to the ultimate accretion number Mike on that 85 cents. We believe that's achievable in that same timeframe.
Great. Thank you.
Thank you.
Our next question comes on the line of Frank Mitsch.
Where are we in research.
Your line is now open.
Good morning, gentlemen.
Hey.
If I could speak.
If I could follow up candidly upside on the synergy side. I mean, you guys had indicated that sourcing was going to before.
An early key and clearly that's one of the things that you guys can just look at your purchase.
Prices that you're paying for your for your raws between Clarion and and the heritage Polyone.
Is that one of the areas, that's giving you confidence.
Confidence on that quote candid candidly there will be upside on the synergies.
Yes, I mean that is we see we see upside potential in all three of the cost categories that.
We shared with everybody initially in December.
Initially, though and where we think we will get there the quickest is around those sourcing synergies Frank so.
You know that's I think correcting the best way to think about that here, particularly in the second half of this year.
Alright, terrific and if I could if I could talk about the pace of business you guys. It indicated that April for heritage Polyone.
It was down 15% may was down 20% that implies the June.
I was down in the upper teens, so you're seeing that July is down 15%, so you're seeing.
You are seeing things getting less bad is on the heritage Polyone and.
And to that point, yet clearly impressive that clariant was up in the second quarter, what's what's cleric what's heritage Clariant July looking like.
Well first of all I, just want to make sure a clear that look there were from that from a sales perspective, the Clarion Masterbatch business was.
Down in the second quarter, some but EBITDA was up slightly so there was some mix effect in there and our expectation is that their sales are probably be down about 7% or so.
In Q3, but still positive contribution on the EBITDA side.
So that hopefully gives you some perspective on their relative sales performance to what we're seeing right now in the July orders for the legacy Polyone business, which is about 15% and to be clear.
Brad said that that was just in reference to legacy.
The legacy or heritage Polyone businesses.
Yes, understood, but that at that pace is better than what June was correct.
Correct, Yes, yes, sorry, all right.
No worries thanks, so much.
Yep.
Thank you. Our next question comes on the line of Laurence Alexander.
Yes now thanks.
Good morning.
Can you give us a fuel for.
The degree to which you're seeing any change and the types of innovation requests.
That you're seeing but particularly in the packaging in the automotive channels.
Yes, you are you seeing us a pivot hinders the types of projects people are working on.
Yeah.
It was it's interesting because when.
When everyone initially went into lockdown mode.
You know I would say that there was a pretty significant level of silence right and basically all industries and all organizations as everyone just tried to.
Really figure out.
How to continue to provide supply, particularly in these essential industries.
But warrants it didnt take very long for I'd say that.
To return to focus on innovation and what we found.
And our labs, where that we were seeing actually had almost an increase in requests and to some extent, we think maybe the reduced activity on the current business afforded customers more of an opportunity to think about long term revisit projects that they had in.
Maybe it was just a change in dynamic of working from home versus in the office, we're not sure.
But there was a lot of activity in the second quarter around.
Innovation, so I, just say that broadly the themes, however were pretty consistent with what we've seen in the past which is around sustainability in Lightweighting and packaging. For example in the same thing can be said for other industries.
Maybe less so on the automotive side simply because of those shutdowns, but in those other industries. We saw again common themes really around light weighting.
Sustainability.
And have you seen.
Sort of any opportunities or significant opportunities are shifting landscape or evidence of disarray.
Pat competitors in the sense of talent acquisition.
How youre the only the pool of available salespeople in researchers and how you think about.
Youre your talent pool versus where you would like to be when the dust settles in a couple of years.
I mean, well first of all me just say I'm really.
Proud that.
Through through the pandemic, we've taken care of our associates reiterated.
You know our commitment to them and the type of organization that we're trying to to creating a culture we have here.
So I'd first comment positively with respect to our own retention.
I'm not sure that I'm seeing anything so to speak in.
Massive disarray or dislocation if you will.
Potentially that could be a result in certain industries.
That are off significantly from a demand perspective and that are contemplating.
Layoffs or reductions in force and that could be an opportunity for us in certain technical areas such as composites. For example, so but not much else I can really comment or say in that regard.
Okay. Thank you.
Yeah.
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Thank you. Our next question comes from the line of calling Lash with Oppenheimer. Your line is now open.
Thanks, so much gosh I want to follow up on that same spread around.
Potential premium for.
Our advanced materials are high performance materials that are coming from the cycle inputs and I'm curious what you're seeing in terms of the supply chain on recyclable polypropylene and polyethylene.
Innovation, there you're hopeful about.
As you look at any incremental source and potential for you guys to get a premium for those those products with recycled material.
Yeah, I mean look first.
You know, we're a founding member of a lion's den plastic waste and.
Our participation in that organization has given us a lot of really good insight.
Into and helping to actually invested in drive some pretty significant infrastructure projects that will improve.
In the capture of plastic waste in the ultimate recycling of yet.
I mentioned that first because.
There really is a supply issue with respect to access to recycled content in companies are stating goals in terms of how much they want to achieve by certain years into future, but the first thing we have to really resolve and provide is.
As supply. So there are a number of projects underway that I think will drive that those have continued, albeit perhaps a little slower as a result of coal of it but I think that's the most important observation is that very important necessary infrastructure is going into places.
You know like Indonesia Southeast Asia for example that I think we'll provide necessary supply when that's the case I think you will see a higher degree of recycled content.
Great just shifting gears a little bit.
With Fibernet.
You know.
There's a lot of different use on on the cadence to fiveg growth, but what are you seeing right now.
There's potential for some acceleration here starting in the back half, but where are you seeing from your customers on that.
Right.
The cadence of.
Five gross.
No I didn't hear that minimal thanks, Mike My colleagues here appear better than I do so.
You know.
So there definitely was.
A a slowdown in the first half of the year.
You know and if I look at our fiber line business for example, and what we experienced with respect it there definitely was year over year sales declined but it wasn't significant.
And we actually view.
Potential upside here with respect to.
Fiveg because as the world has.
Worked from home in such a broader fashion than it ever has in the past and utilize technology to connect with each other there's a need for more bandwidth right. There's a need for faster better connections I think thats going to drive an acceleration of.
Fiveg and infrastructure build out.
In the U.S., which is a real good guy for us. So we're hearing that from our customers I think thats, a reasonable trend or conclusion to draw as candidly I don't think people are going to go back to traveling in the traditional anytime soon.
Okay. Thanks, so much.
Thank you. Our next question comes on the line of Jim Sheehan with Suntrust. Your line is now open.
Good morning, Thanks for taking my question.
So on the Alright, Masterbatch business could you talk about also the performance of the first quarter 2020, and how maybe that compared to legacy Polyone color business and also with respect to the synergies on on there.
What adjustments are you making for the pandemic.
That maybe you didn't expect to make.
Yeah. So if you.
You know if you're looking at our color segment results for the first quarter.
Sales were down slightly but EBITDA was up slightly that actually it was pretty consistent with.
Their results as well and I'd say that really was.
You know as you know.
For us for the most part we didnt experienced much in the lab, a pandemic impact until really in April so.
I think there were very much a line between our two businesses in the first quarter.
With respect to you know one assessment of the pandemic impact on.
The clarient side of the equation.
We have looked at this by end market in the same way that we look at it for our own businesses.
And you know Fortunately because of the preponderance of sales going into packaging.
These consumer staple type products or you know there can be some impact, but not anything to the extent that we've seen in automotive and consumer discretionary so.
There will be a sales decline.
I mentioned that to I think Frank one of his questions about sort of our estimation of their business in the third quarter, but again not to the extent that we're seeing in other industries that are impacting us.
Terrific and then.
Maybe you could also address any raw material tailwinds that you're experiencing.
I think some key raw materials have declined year to date or how much inventory do you still have to go through to.
But before maybe raw materials stop being a tailwind for you and.
Maybe you could comment on that Masterbatch business in that in that regard as well.
Yeah.
So in the second quarter lower raw material costs were a slight good guide to us in order of magnitude of.
Pride for four or $5 million pretty consistent with what we saw.
In the first quarter.
You know our inventory turns over pretty fast.
So to the extent that prices move up or down we experienced that.
But one thing I'd I'd point out, though there's always a lot of focus on maybe some of the majors in the base resins.
Again, the preponderance of our spend really is in.
All the other special ingredients that go into a specialty formulations. So while we're experiencing you know downward trend in those majors.
Our things are flat to maybe up slightly so.
I expect to still see a small benefit here in a in the third quarter.
Does that go for the Masterbatch business as well.
Correct Yeah.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Rosemarie Morbelli Teen Research. Your line is not open. Thank you good morning, everyone.
Good morning.
Bob I was wondering if joking depend they make Wednesday days in Asia Europe fee U.S., how have you changed the way you when your business how have you adjusted and which ones of those changes are going to stay forward. Jeff as you go forward, making you you know a stronger company post.
Depend they make.
Yeah, I mean on that just to state the obvious of course, I mean that connection between our associates as you know entirely been bye.
Phone or video I think everybody has gotten infinitely smarter on how to use technology to that effect and candidly I think thats going to make us and probably everyone else.
More efficient organization in the future you know what I Miss of course is the in person contact the time that I get to spend with our associates and customers in person.
And so I do hope that we can get back to some level of travel some point because those in person connections are so.
Important.
I think you know from a strategy standpoint look the pandemic has reinforced for us.
You know, where we want to focus our time and attention from an end market and specialty products standpoint specialty products I think about of.
Perform better than commodities in many cases and I also think of course or end market exposure and packaging.
Health care.
Speaks for itself, so, perhaps it's more of a reinforcing message.
Out of the out of the pandemic as much as anything else.
Alright, Thanks, and when we look at your Uh Huh.
Oh.
No as I understand it.
I'll say loved down has resulted in people taking.
I'm off they didn't have a choice, but that counting as teekay sometime so does that mean that Dan August 15, Yeah, we are not going to see how fuel up shutting down when they say yield Cleveland.
That's really hasn't changed.
We're not planning really on a much of a change, but I have to say that does remain to be seen.
You know given where demand levels are right now.
You know, we're still expecting that there is a seasonal affective third quarter versus Q2, which as you know.
Is typically down for us that being one of the reasons.
In terms of European demand. So at this point I'm not expecting any change.
But we'll see how this plays out or in next couple of weeks.
Alright. Thank you when you say made Chesapeake one more.
As Jimmy was down 8% to 11%, 12% and a year over year and yes. It does not match up that is coming back into third quarter.
But going forward how much of that do you think it's a in a common it yes are we going to be looking at as Ginny going back to previous level, Oh, leeny stay more or less 5% to 10% lower it going for it.
Well you saw me a year over year decline and a asked DNA.
I mentioned the.
Sort of the travel and trade show related cost element of that.
We do have lower personnel and benefits costs, including incentives which are lower.
This year than last year so.
What I'm basically saying is that for the most part you know we're not going to see any change in that in Q3 with respect to that travel trade show side.
And then longer term.
Obviously, our performance will drive you know benefits in incentives, but I don't think will ever at the same level of.
Travel and trade show related expense.
At least not in 2021 so.
Maybe when the world gets all the way back to normal whatever that is that will be the case, but we don't see in the foreseeable future. Thank.
Thank you.
Okay. Thanks.
In summary, and thanks, everyone for your questions and also for your time to dial into the call today.
We look forward to provide an everybody a further update.
On the Clarient integration our synergies in our performance on our next call take care Bye for now.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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Good morning, ladies and gentlemen, and welcome to the ABS Corporation's second quarter 2020 conference call My.
My name is there and I'll be the operators.
At this time, all participants are in listen only mode.
Have a question and answer session at the end of the conference.
As a reminder, let's call it being recorded for replay purposes.
At this time I like to turn the call over the adult Joe The Sabal, Vice President Treasurer and Investor Relations. Please proceed.
Thank you Sir good morning, you're welcome everyone joining us on the call today before beginning we'd like to remind you that statements made during this conference call maybe considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements will give current expectations are forecast to future events are not guarantees of future performance.
They are based on management's expectation in the ballpark number this does those risks and uncertainties any at which could cause actual results to differ materially from those expressed or implied by the forward looking statement.
Some of these restaurants are news can be found in the company's filings with Securities Exchange Commission as well in today's press release.
During our discussion today, the company or use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the avian website, where the company describes the non-GAAP measures and provides a reconciliation from the most comparable GAAP financial measures.
Joining me today is our chairman President Chief Executive Officer, Bob Patterson, and Executive Vice President and Chief Financial Officer, Brad Richardson now I will try to colored about.
Well, thanks, Joe Good morning, everyone and welcome to our second quarter 2020 earnings call.
First ever as 80 incorporation.
I'd like to begin our call today with an acknowledgment of support for those who have been impacted by CRADA virus.
Heartfelt appreciation also goes out to the catalyst frontline workers first responders as they continue to play an important role in a response the recovery effort.
At avian our first priority remains the health and safety of our associates customers and all stakeholders.
We continue to adhere to government guidelines and protocols as well as other provided a measures to help stop the spread of the virus.
As we do we continue to serve our customers as an essential supplier and partner.
On June 16th we held a mid quarter investor call during which we commented on our second quarter expectations in light of the pandemic.
As we now share our actual results. We report we delivered adjusted EPS of 39 cents.
Which is three cents better than we expected at the time.
Recall that to provide an apples to apples comparison to the prior year. These results exclude the impact of the financing for the Clarient Masterbatch acquisition.
Including the additional shares from the equity offering in February and the debt raised in May our adjusted EPS for the second quarter was 28 cents.
The improvement was driven by an uptick in the sales in Asia in the last two weeks as the quarter and better than expected margins in color.
We believe Asia is recovering from the pandemic.
But also is a leading manufacturer products that are specifically aiding in the world's response effort.
Sales in the region increased 13% over the prior year.
This was not enough to offset weaker demand in Europe, and the Americas. However, it overall second quarter sales declined 18.6% or 17% on a constant currency basis.
That's a challenging decline for sure, but we have benefited from our historic efforts to reposition our portfolio with a greater emphasis on healthcare packaging.
Sales into these markets were up 7% and 3% respectively in the quarter.
With the acquisition of Clarion Masterbatch.
We take an even bigger step forward toward a more specialized and more sustainable portfolio.
And then over speak for themselves.
While we Didnt know in the Masterbatch business in the second quarter. They achieved adjusted EBITDA of 37 million in Q2.
Up slightly from what they reported in the prior year.
Like us they were deemed essential and the cobot response a recovery.
And they're associates continue to serve critical industries, such as packaging consumer care products and health care.
Recall that approximately 75% of their sales are into these end markets.
And they also benefited from a strong presence in Asia, where they achieved EBITDA growth just as we did.
For months now investors have been concerned that we might be by a business in distress from the pandemic.
That's simply isn't true.
Here is what is true.
We have acquired a business that is effectively achieving a run rate EBITDA of water and $30 million, which is what we estimated when we reported in December when we announced the acquisition.
We are inheriting a very talented management team.
And our organization with a passion for innovation and customer service.
We have quickly validated our initial synergy estimate of 60 million.
And identified potential upside that we believe we can deliver even in a coal environment.
We expect the acquisition will be immediately accretive to adjusted earnings per share in the third quarter, our first together.
Excluding amortization step up which we have not finalized we expect clarient will add approximately 10 cents of EPS accretion in Q3.
This approximates what we expect clarity it will deliver from a cash perspective.
And recall from our December presentation that our three year goal for EPS accretion on the same basis is 85 cents.
So 10 cents in the initial quarter of ownership is a great start.
This is an exciting time for us than it is an important inflection point in our specialty journey.
Brad is going to provide some further details on the second quarter, and then I'll make some closing remarks Brett.
Well, thank you very much.
And good morning, everyone.
Always do I'm going to start with our GAAP results in the second quarter, We reported GAAP earnings per share from continuing operations up 25 cents.
Special items in the quarter resulted in a net after tax charge of $2.6 million.
Special items in the second quarter were primarily associated with acquisition related and restructuring cost.
Which were largely offset by insurance reimbursements from previously incurred environmental cost any mark to market pension adjustment.
Adjusted EPS for the quarter was 39 cents as Bob noted, which excludes the impact of the financing for the Clariant acquisition.
Total company revenue declined 18.6% in the second quarter compared to the prior year with weaker foreign currencies impacting total company sales by 1.3%.
Automotive and consumer discretionary markets accounted for 70% of the sales decline.
This is not a surprise given the shutdowns that took place for much of April and May in the automotive and retail spaces.
From a regional standpoint.
Sales in Europe were down 22%, excluding the impact of changes in foreign currencies.
This was primarily due to weak demand in automotive and industrial applications.
Unfavorable foreign currencies negatively impacted the regions over overall sales by 4%.
In North America sales declined 21%, primarily due to the automotive production shutdowns and demand for consumer discretionary applications. These include things like outdoor high performance sports.
Electronic accessories, such as cell phone cases.
And sporting and leisure apparel.
The regional performance in North America, and Europe are in Stark contrast to what we experienced in Asia.
Where sales increased 17% for the quarter on a constant currency basis.
Growth in the region with driven by new business wins in health care applications for the Cobot 19 response.
Along with continued strong demand for our barrier additives use in food and beverage packaging.
We certainly hope Asia can serve as a roadmap for what is possible and ahead in the pandemic pandemic recovery for the other regions of the world.
In reviewing our segments for the second quarter.
CRM sales in operating income were down, 19% and 32% respectively.
Lower sales were partially offset by cost containment accident actions, which reduced FG and H expense, 12% versus the prior year second quarter.
The sand segment was primarily impacted by the automotive and wire and cable end markets in Europe and North America.
Our composite businesses, we're also negatively impacted as demand for transportation and oil and gas declined.
Sales and operating income for the color additives in Inc. segment declined, 15% and 24% respectively.
Lower sales were partially offset by improved mix and cost containment actions, which reduced SGN expense, 11% versus the prior year second quarter.
As we previously commented the color business benefited from health health care applications used in the covert 19 response as well as continued strong demand for its packaging applications.
For the color segment packaging sales were up 5% and healthcare sales nearly doubled over the prior year second quarter.
The increase sales in these end markets provide a better than expected margins driven by improved mix.
Please note that the color segment performance I just discussed does not include the impact of Clariant Masterbatch business since the acquisition closed on July Onest.
The acquired business performance will be included in our color segment results beginning in the third quarter.
Lastly, sales and operating income declined 22% and 27% within our distribution segment again, primarily due to the automotive shutdowns.
Lower sales were partially offset by improved mix and cost containment actions, which reduced at GE in excess 11% versus the prior year second quarter.
From a cash flow perspective, we generated $80 million of free cash flow and the second quarter.
In line with the prior year has reduced working capital offset lower earnings.
During our last call.
The size, our cash flow as a significant strength for us and it certainly is.
Pro forma for the Clarion acquisition and tax payments made in July associated with the P. PNM divestment, we have $450 million in cash on the balance sheet and over $700 million and available liquidity.
In summary, we are an excellent position to navigate the near term dynamics of the pandemic.
Began the very important work up integrating our two companies.
It is important to note that is still too early to predict when and how the markets will recover.
Accordingly, we don't plan to provide specific EPS guidance for the third quarter.
What we can't tell you is that orders for the month of July are down about 15%.
This is an improvement sequentially from Q2, but still off from the prior year for sure.
We are seeing some early signs of automotive business picking up as well as spending on discretionary consumer discretionary items.
But these appear to be returning gradually.
We expect clariant, while at $250 million of revenues in the third quarter and as Bob mentioned, it will be immediately accretive, adding 10 cents of EPS.
This excludes the impact of depreciation and amortization from the step up in the asset values associated with purchase a crack county.
We are in the middle of the process to complete the allocation of the purchase price.
We believe this immediate EPS accretion is incredibly relevant for our investors to assess our cash return on our investment.
I think what is also relevant is the quality of the business we acquired.
It's specialty composition.
And resiliency during this challenging economic environment.
Bob will now provide some comments, including an update on clariant.
Thanks, Brad.
I'm very proud of our teams accomplishments this quarter navigated the covert 19 pandemic while at the same time completing the acquisition of color as Masterbatch business the largest our company's history.
We have been very purposeful declare that our initial communications just as we are being now in our early integration.
That is this is a joining of two great companies to make it even better one.
And even stronger organization that is more global and more innovative.
As good as a legacy Polyone and Clarient organizations, where separately, we're better together as a new company with a new brand.
Abiomed is rooted in lot of in Europe, which means the future NV, which means life.
You can hear environment and invention two important areas of focus for us as we emphasize sustainable solutions.
Quite simply it's a new name for a new company.
I have met with the company now for 12 years that have always respected Clarion masterbatch.
Even the best of competitors in both legacy Polyone and Clarion shared a passion for innovation customer service if are taking care of our associates.
I never viewed the goal to acquire Clarion, but rather to build a new team together.
This is the opportunity that we now have in front of us.
And I believe with our new collective brand that's exactly what we will do.
The new brand is about the cultural integration of over 9000 talented passionate and proud associates as it is about anything else.
Over the past several decades legacy polyone ancillary masterbatch of each built a strong legacy of success. It is important as we come together, we learn from each other and harness the best of our two organizations.
This is a time when the world Craves, a path forward out of the pandemic as green shoots began to emerge the world will once again prioritize sustainability innovation and economic growth.
We'll rely on strong relationships and partnerships and demand a more occlusive society.
By joining our two incredible and complimentary businesses into one.
Like we're better positioned than ever before to help in the response and recovery and to create future value for all our stakeholders.
Having closed the acquisition on the first in July we have hit the ground running with integration efforts well underway.
Despite the challenges brought on by the pandemic, we're confident that we will be able to execute our plans and achieve our synergy targets.
We plan to provide a more thorough update on integration progress in synergies on our next call.
As we look ahead, we believe there are encouraging economic signs you hurt our performance in Asia versus the other reasons. Our plants are fully operational commercial activity is picking up.
And again, China in particular has demonstrated that coal that can be managed an economic growth can return.
Automotive plants around the world our reopening in there appears to be demand for passenger vehicles.
In the consumer space production of products like off road vehicles really came to a halt in the second quarter.
Toward the end of the quarter, our customers were finding that dealers were running short on inventory as consumers rush to buy them.
Many people it turn to the outdoors as a respite from the confines of cold Lockdowns.
No no one is waving the recovery flag, yet, but following the considerable declines for the last three months. These are positive signs.
That being said, we expect any recovery in the us in Europe to be gradual.
Unlike the rapid spread of the virus, none the swiftly assuming shutdowns throughout Europe, and the Americas recovery will take time.
Yes, there is one thing that we have learned or relearned about people. During this pandemic has that individual attitudes behaviors very drastically.
I will make this comment because when there is a more consistent and higher level of individual called for the pandemic can be managed I believe that's one consumerism and commerce will likely returned to pre call that levels.
The addition of client will certainly help our performance that we have highlighted and I expect the business will farewell in the second half of the year.
And this is a main factor what attracted us to the business in the first place.
They have market, leading technology and specialty less cyclical end markets and.
No I'd say they have it's really we have because they are us than we are them and together we are avian.
The new kind of specialty materials company, the great place to work for our associates and an investment opportunity poised for growth and value creation for our shareholders.
With that.
I'm happy to take any questions from anyone on the call. Thank you.
Thank you.
The call lines there now open.
As a reminder, you will need to press Star then one.
Question.
Please limit yourself to one question and one follow up question.
Your first question comes from the line of like Harrison.
Seaport Global your line is now open.
Hi, good morning.
And Mike.
Bob I was wondering if you can comment a little bit.
Customer inventory levels I know you just mentioned that in some places you're seeing that theres been demand and maybe the dealers are the stores don't have enough inventory to keep things on the shelves at this point you feel like you're seeing it essentially real time demand.
Theres still some destocking going on is there any restocking going on maybe just walk through some of your key end markets and let us know what you're seeing.
Yes, maybe I'll sort of a highlight on to that being automotive and then also what we're seeing in off road.
Vehicles, because those are two areas where.
Specifically with off road vehicles, it's aligned with what you just said where dealers were running short on inventory.
As those operations began to reopen towards the end of the quarter, we didnt see an immediate pickup in demand as a result of that in our estimation is that.
There was a lag and whether or not that was a result of other suppliers in the network.
Still having on hand inventory for those customers, having on and inventory to begin production.
It's difficult to say, which is wedge, but I do think there is and was some inventory in the system that's being work do during the start up.
And that we'll see a pickup in demand in the in the third quarter.
Alright, and then.
I know you're reluctant to give.
EPS guidance.
I think maybe a starting point is kind of where Q2.
Was it and then adding the 10 cents of accretion from from Clarion, but maybe can you talk about some of the key variables in the outlook is it really just demand related or pandemic related or are there some other.
Levers or areas, where you feel like you have more control over how you can perform in Q3.
I mean look the primary.
You know on known if you will really is the.
Pace of recovery extent of recovery.
You know as.
As you well aware of course, there has been a surge in cases in certain areas of the world in that could continue to keep.
Demand muted.
So I mean, that's really the unknown and as I think about the primary sort of driver of things in the third quarter. That's the biggest day I do think that there are.
Some green shoots emerging for lack of a better description really around automotive off road vehicles.
Some areas of consumer discretionary, which we just did not see in the second quarter. So I view that.
Really as a positive when I look at July orders being down 15%.
Thats, a little bit better than the year over year comparison in Q2, and we think reflects some of that uptick in demand like.
Alright sounds good thanks very much.
Yep.
Thank you.
Next question comes from the line Vincent Andrews with Morgan Stanley. Your line is now open.
Thank you and good morning, everyone.
I think it just commented that the 10 cents from Clarion could you just clarify whether that includes synergies or not and also on that 10 cents.
Is that 10 cents indicative of sort of a run rate. So it's it you'd be 40 cents towards 85 cents call or is there something in particular about the third quarter that would make that 10 cents.
Hi are lower than what the run rate would be in terms of just seasonality or anything else.
Yes. So the first thing is theres, probably about 1 million and a half of synergies in there with respect to.
Really administrative costs in terms of.
Please that did not begin with the acquisition on day, one just by design of the acquisition. So that's not a big number it will obviously get bigger as we get towards the end of the year.
With respect to the Tencent number again that excludes the step up and amortization were working on that right now.
And then the way to think about that as I'd say look there is seasonality in the Clariant Masterbatch business, it's very similar to our own.
We're the first half of the year is quite a bit stronger than the second half. So when I think about that run rate.
If we were just bringing over that our business in looking at it on that basis that accretion would be higher than it is in the first half.
That is in the second half of the year if that helps that's very helpful and just as a follow up.
Are there any cost that you have avoided in the second quarter, just with having things closed or whatever else that we'll have to come back.
Later in the year as sales return or anything like that and anything like that we should begin in line for our model.
Yes, I mean look there's no doubt as a result of the Lockdowns I mean travel as just almost completely stopped in all.
Look inside of China customers are seeing suppliers again and people are.
Meeting again face to face the for the most part that's.
Inter nation, if you will but if I look year over year, I mean travel and entertainment related costs, and what I would say our.
Typical trade shows that we would have attended have participated in a minute that balance of that's probably about five and a half million dollars.
Down in the second quarter versus what we spent in the prior year now I don't expect that to actually come back in the third quarter.
At some point in time that will but as the world tries to figure out what the new normal as Im sure what we don't ever get back to the same level of travel at least not in the foreseeable future. So.
Hopefully that puts set in perspective, we don't expect any of that come back in Q3.
Okay. Thanks, very much guys.
Yep.
Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Your line is now open.
Hey, guys.
Nice quarter, there that can you give us a little bit more color on 37 million or to queue for clearing up year over year just.
That's pretty impressive given your color business was down quite a bit anything that they're doing really well and maybe just give us.
Some background of why they prefer it sounds like for the full year had done done much better.
Yes, I mean look.
It really comes down to end market.
Exposure like and 75% other sales are into.
Packaging consumer Staples, and then healthcare.
Those were actually very good markets for us in our color segment as well in the second quarter and up also.
The primary difference between the performance of our two businesses in the second quarter really was consumer discretionary items. As you know we have a large screen printing inks business that was down considerably and then also our exposure to auto I mean, those are the two things that I'd say really do differentiate.
Them from us and again kind of hearkens back to.
Our investment thesis about why we were interested in buying clarion bring into the company.
Is that improvement in the portfolio so.
That's the biggest thing plus candidly there no exposure to Asia Asia had a very good quarter in the second quarter for down as it did for us.
Got it and then it's quick follow up you talked about the 85 cents feeling feeling good about that.
So I had a $500 million number fee, but.
Longer term can you can you maybe.
Help us understand.
I understand the walk to that again, just this quick reminder, and given how Clarence done thus far is that as it is it still in the same timeline as you've maybe initially thought or or is it maybe even accelerate.
Yes, I mean look with respect to synergy capture we're very confident in the timeline and our ability to continue to capture.
You know the $60 million, even in a coal that environment.
And our next fall we plan to give an update on our synergy expectations the preliminary reviews.
Have all been very positive between our two organizations and candidly, there's going to be upside to that.
Number so I think theres no.
Im still feel very comfortable about the timing feel very comfortable about the order of magnitude.
And can only what that leaves really with respect to ultimately getting to $500 million is of course related to the pandemic and recovery and where our legacy underlying EBITDA.
Performs but with respect to the ultimate accretion number Mike on that 85 says we believe that's achievable in that same timeframe.
Great. Thank you.
Thank you.
Our next question comes from the line of Frank Mitsch, What Permian Research.
Your line is now open.
Good morning, gentlemen.
Right.
Like us.
If I could follow up candidly upside on the synergy side. I mean, you guys had indicated that sourcing was going to be sports.
And the early key and clearly that's one of the things that you guys can just look at your purchase.
Prices that you're paying for your for your raws between Clarient and heritage Polyone.
Is that one of the area, that's giving you confidence.
Confidence on that quote candid candidly there will be upside on the synergies.
Yes, I mean that is we see we see upside potential in all three of the cost categories that.
We shared with everybody initially in December.
Initially, though and where we think we will get there the quickest is around those sourcing synergies Frank so.
You know that's I think correct in the best way to think about that here, particularly in the second half of this year.
All right terrific and if I could if I could talk about the pace of business you guys. It indicated that April for heritage Polyone.
Our was down 15% may was down 20% that implies that June.
I was down in the upper teens, so you're seeing a July is down 15% so you're seeing.
You are seeing things getting less bad is on the heritage Polyone and.
And to that point, yet clearly impressive that clariant was up in the second quarter, what's what's clarify what's heritage Clariant. So July looking like.
Well first of all I, just want to make sure a clear that look there were from a from a sales perspective, the Clarion Masterbatch business was.
Down in the second quarter, some but EBITDA was up slightly so there was some mix effect in there and our expectation is that their sales are probably be down about 7% or so.
In Q3, but still positive contribution on the EBITDA side.
So that hopefully gives you some perspective on their relative sales performance to what we're seeing right now in the July orders for the legacy Polyone business, which is about 15% and to be clear when Brad said that that was just in reference to legacy.
The legacy or heritage Polyone businesses.
Understood, but that at that pace is better than what you in was correct.
Correct, Yes, yes, sorry, all right.
All right. Thanks, so much.
Yep.
Thank you. Our next question comes on the line of Laurence Alexander.
Your line is now open.
Good morning.
So can you give us a fuel for.
The degree to which you're seeing any change and the types of innovation requests.
That you're seeing most particularly in the packaging in the automotive channels.
Yes, you are you seeing us.
Thats enters the types of projects be per working on.
It was it's interesting because when.
When everyone initially went into lockdown mode.
You know I would say that there was a pretty significant level of silence right and basically all industries in all organizations as everyone just tried to.
Really figure out you know how to continue to provide supply, particularly in these essential industries.
But large didn't take very long for.
I'd say that.
To return to focus on innovation and what we found.
In our labs, where that we were seeing actually almost an increase in requests and to some extent, we think maybe the reduced activity on the current business afforded customers more of an opportunity to think about long term revisit projects that they had.
Maybe it was just a change in dynamic of working from home versus in the office, we're not sure.
But there was a lot of activity in the second quarter around.
Innovation, so I, just say that broadly the themes, however were pretty consistent with what we've seen in the past which is around sustainability in light weighting in packaging. For example in the same thing can be said for other industries.
Maybe less so on the automotive side simply because of those shutdowns, but in those other industries. We saw again common themes really around lightweighting.
Sustainability.
And have you seen.
Sort of any opportunities or significant opportunities are shifting landscape or evidence of disarray.
Pat competitors in the sense of talent acquisition.
How youre going to give you the pool of available salespeople that researchers and how you think about.
Your your talent pool versus where you would like to be when the dust settles in a couple of years.
I mean, well first of all major Sam really.
That.
Through through the pandemic, we've taken care of our associates reiterated.
You know our commitment to them and.
The type of organization that we're trying to to creating a culture we have here.
Side first comment positively with respect to our own retention.
Im not sure that I'm seeing anything so to speak in.
A massive disarray or dislocation if you will.
Potentially that could be a result in certain industries.
That are off significantly from a demand perspective and that are contemplating.
Layoffs are reductions in force and to be an opportunity for us is certain technical areas such as composites. For example, so but not much all second really comment or say in that regard.
Okay. Thank you.
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Thank you. Our next question comes on the line Colin Rusch with Oppenheimer. Your line is now open.
Thanks, so much gosh I want to follow up on that that same spread around.
Potential premium for.
You know advanced materials are high performance materials that are coming from the cycle inputs and I'm curious what you're seeing in terms of the supply chain on recycle goal polypropylene and polyethylene.
Innovation, there that you're hopeful about.
As you look at any incremental source and potential for you guys to get a premium for those as products with recycled material.
Yeah, I mean look first.
You know, we're a founding member of alliance and plastic waste and.
Our participation in that organization has given us a lot of really good insight.
Two and helping to actually invest in and drive some pretty significant infrastructure projects that will improve.
In the capture of plastic waste in the ultimate recycling of it I mentioned that first because.
There really is a supply issue with respect to access to recycled content in companies are stating goals in terms of how much they want to achieve by certain years in the future, but the first thing we have to really resolve and providers as supply. So there are a number of projects underway that I think will drive.
That those have continued, albeit perhaps a little slower as a result of coal of it but I think that's the most important observation is that very important necessary infrastructure is going into places.
You know like Indonesia Southeast Asia for example that I think we'll provide necessary supply when that's the case I think you will see a higher degree of recycled content.
Great just shifting gears a little bit.
With fiber Matt.
Yes.
There's a lot of different views on on the cadence to fiveg growth, but what are you seeing right now.
There's potential for some toleration here starting in the back half right, where you've seen from your customers on that actually opportunity.
The cadence of.
By our gross yeah.
Well, thanks, Mike My colleagues year here are better than I do so.
Yes.
So there definitely was.
A a slowdown in the first half of the year.
And if I look at our fiber line business for example, and what we experienced with respect to hit there definitely was year over year sales declined but it wasn't significant.
And we actually view.
You know all potential upside here with respect to.
Fiveg because as the world has.
Work from home in such a broader fashion than it ever has in the past and utilize technology to connect with each other theres a need for more.
Bandwidth right, there's a need for faster better connections I think thats going to drive an acceleration of.
Fiveg and infrastructure build out.
In the U.S., which is a real good guy for us. So we're hearing that from our customers I think thats, a reasonable trend or conclusion to draw as candidly I don't think people are going to go back to traveling in the traditional way anytime soon.
Okay. Thanks, so much.
Thank you. Our next question comes on the line I'm, Jim Sheehan Suntrust. Your line is now open.
Good morning, Thanks for taking my question.
So on the pyrite Masterbatch business could you talk about also the performance of the first quarter 2020, and how maybe that compared to legacy Polyone color business.
And also with respect to the synergies on there.
What adjustments are you making for the pandemic.
That may be you didnt expect to make.
Yes, so if you.
If you're looking at our color segment results for the first quarter.
Sales were down slightly but EBITDA was up slightly that actually it was pretty consistent with.
Their results as well and I'd say that really was.
As you know.
For us for the most part we didnt experienced much in the way of a pandemic impact and so really in April so.
I think there were very much a line between our two businesses in the first quarter.
With respect to an assessment of the pandemic impact on.
The clarient side of the equation.
We have looked at this by end market in the same way that we look at it for our own businesses.
And Fortunately because of the preponderance of this sales going into packaging.
These consumer staple type products.
You know there can be some impact, but not anything to the extent that we've seen in automotive and consumer discretionary so.
There will be a sales decline.
Had mentioned that to I think Frank one of his questions about sort of our estimation of their business in the third quarter.
But again not to the extent that we're seeing in other industries that are impacting us.
Terrific and then.
Maybe you could also address any raw material tailwinds that you're experiencing.
I think some key raw materials had declines year to date.
How much inventory do you still have to go through kit.
But before maybe raw materials stopped being a tailwind for you and.
Maybe you could comment on that Masterbatch business in that in that regard as well.
Yeah.
So in the second quarter lower raw material costs were a slight good guide to us in order of magnitude of.
Pride for four or $5 million pretty consistent with what we saw.
In the first quarter.
In our inventory turns over pretty fast.
So to the extent that prices move up or down we experienced that.
But one thing I'd I'd point out the it's always a lot of focus on maybe some of the majors in the base resins.
Again, the preponderance of our spend really is in.
All the other special ingredients that go into a specialty formulation. So while we're experiencing you know downward trend in those majors order things are flat to maybe up slightly so I expect to still see a small benefit here and in the third quarter.
Does that go for the Masterbatch business as well.
Correct.
Thank you.
Yeah.
Thank you. Our next question comes on the line of Rosemarie Morbelli Gene Research. Your line is not open. Thank you good morning, everyone.
Morning.
Bob I was wondering if joking depend they make whether they didn't in Asia Europe. The U.S. So how have you changed the way you when your business how have you adjust to it.
And which ones of those changes are going to stay forward, Jeff as you go forward, making you you know it's stronger company.
And they make.
Yeah, I mean on that just to state the obvious of course, I mean that connection between our associates as you know entirely bend bye bye.
Boehner video I think everybody's got importantly, smarter on how to use technology to that effect and candidly I think thats going to make us and probably everyone else.
More efficient organization in the future what I Miss of course is the in person contact the time that I get to spend with our associates and customers in person.
And so I do hope that we can get back to some level of travel some point because those in person connections or so.
Important.
I think all foremost strategy standpoint look the pandemic has reinforced for us.
Where we want to focus our time and attention from an end market and specialty products standpoint specialty products I think about of.
Perform better than commodities in many cases and I also think of course or end market exposure and packaging.
Healthcare.
Speaks for itself, so, perhaps it's more of a reinforcing message.
Out of the out of the pandemic as much as anything else.
Alright, Thanks, and when we look at Chew up.
Oh.
Now as I understand it.
I'll say love down has resulted in people taking.
Well time off they didn't have a choice, but that counting as taking some time. So does that means that in August of fish. Yeah. We are not going to see how fuel up shutting down when they do for you.
Clearly into all of that really hasn't changed.
We're not planning really on a much of a change, but I have to say that does remain to be seen.
You know given where demand levels are right now.
You know.
We're still expecting that there is a seasonal affective third quarter versus Q2, which as you know.
Is typically down for us that being one of the reasons.
In terms of European demand. So at this point I'm not expecting any change.
But we'll see how this plays out here in next couple of weeks.
Alright, Thank you and your stymied Chesapeake one more.
As Jimmy was down 8% to 11% up 12% and a year over year on year said, that's not met shut that is coming back into third quarter.
But going forward.
That shows that do you think.
No problem in that Jeff how are we going to be looking at as Ginny going back to previous level, Oh, leeny stay more or less than 5% to 10% lower it going for it.
Well you saw me a year over year decline and a as DNA.
I mentioned the.
Sort of the travel and trade show related cost element of that we do have lower personnel and benefits costs, including incentives which are lower.
This year than last year so.
What I'm basically saying is that for the most part you know we're not going to see any change in that in Q3 with respect to the travel trade show side.
And then longer term.
Obviously, our performance will drive health benefits and incentives, but I don't think will ever at the same level of.
Travel and trade show related expense.
At least not in 2021 so.
Maybe when the world gets all the way back to normal whatever that is that will be the case, but we don't see in the foreseeable future.
Thank you.
Okay. Thanks.
Rosemarie and thanks, everyone for your questions and also for your time to dial into the call today.
We look forward to provide an everybody a further update.
On the Clarient.
Integration our synergies in our performance on our next call take care Bye for now.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.