Q3 2020 Avient Corp Earnings Call
Ladies and gentlemen, please standby your conference call I'll begin momentarily. Thank you for your patience simply standby.
[music].
It's crystal and I'll be your operator for today at this.
Time, all participants are in a listen only mode.
Well have a question and answer session at the end of the conference as.
As a reminder, this conference is being recorded for replay purposes.
Finally, I would like to turn the call over to Jody, Although like President Treasury and Investor Relations. Please proceed.
Thank you Crystal 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 making money funds.
Forward looking statements will give current expectations or forecasts of future events and are not guarantees of future performance, they're based on management's expectation and involve a number of business risks and uncertainties any 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 the companys filings with the Securities and Exchange Commission as well from today's press release.
During the discussion today, the company will use with GAAP and non-GAAP financial measures.
Please refer to the earnings release posted on <unk> website, where the company describes the non-GAAP measures and provides a reconciliation for the most comparable GAAP financial measures.
Joining me today is our chairman President Chief Executive Officer, Bob Patterson.
And senior Vice President and Chief Financial Officer, Jimmy Bucks.
Also joining us for his last earnings conference call is Brad Richardson or previous executive Vice President and Chief Financial Officer, who announced his retirement a couple of months ago.
Now I will turn the call over to Bob personal opening comments.
Thanks, Joe and good morning, everyone.
To start with words of support for those who have been impacted by the krona virus. The pandemic is far from over we remain mindful of the many ways. It is impacting people around the world.
Our heartfelt appreciation goes out to the countless frontline workers first responders as they continue to play such an important role in the response and recovery effort.
This is our first quarter. We are reporting results that included the Clarient Masterbatch business, which we acquired on July 1st.
At that time, we walk them, we welcomed over 3500 associates to our newly named company Abiomed.
And we took a big step forward in our specialty transformation journey.
It's created tremendous energy internally with our associates are customers are viewing us as a specialty partner and.
And our performance in this challenging environment is demonstrating the strength of our diverse and resilient portfolio.
I'm pleased to report that we delivered third quarter.
Adjusted EPS of 54 cents, excluding the impact of purchase accounting step up depreciation and amortization.
Inclusive of the step up DNA, we reported adjusted EPS of 46 cents and this was three cents better than we expected in our Preannouncement in September.
And exceeds the 44 cents, we reported last year.
The three cents improvement from one we met or talked a month ago was driven by strong finish to the quarter was September sales growing 6% over the prior year.
Particularly encouraging was that the increased demand in September wasn't isolated to one segment or regions. All grew sales for the month.
The last couple of quarters have been challenging for sure, but we our customers and our shareholders have clearly benefited from the execution of our strategy to reposition our portfolio in recent years.
Through our divestiture of P.P.S. and organic growth up offices, we have greater exposure to more stable higher value end markets, such as packaging consumer and health care. These.
These three areas now represent nearly 60% of our sales.
The clarity Masterbatch integration is going extremely well as we announced in September we have increased our synergy target from $60 million to 75 million.
The increase is a result of the time that we have been able to spend with a talented management team that came with the business.
We were not only able to validate our initial synergy estimate but gain confidence as a team and our ability to do more.
No I think this is important to remember we didnt just acquire incredible technology deep customer relationships, a well run facilities, we acquired tremendous talent was.
With a passion for innovation, serving customers with excellence and they are immediately embracing our strategy and our culture.
And that's what is making this isn't the greatest impact on our first quarter together and has me more confident than ever about our future as avian.
Another bright spot of course is our specialty engineered materials segment.
E.M. had record third quarter operating income of nearly $25 million, that's a 27% increase over last year.
The growth was driven by continued momentum in our composites platform, which has benefited from consumer demand for outdoor high performance products.
Recall that our composite business was breakeven only a couple of years ago.
And this quarter, our composites business achieved 17% return on sales.
We executed our investor growth strategy by making investments in sales marketing and technology.
And it's paying off the we expect that our composites platform will continue to be a key revenue growth driver for aviation in the future.
To give us more detail in the third quarter I'm very pleased to introduce Jamie bags, our new CFO.
I'm thrilled to have her join us and thankful for the seamless transition that's been occurring with her Brad over the last several weeks Jamie.
Thank you Bob I'm extremely excited and proud to have joined Eaton in my first few weeks have been fantastic, it's great to be back in the specialty space, one that I know well and part of a company that has tremendous growth opportunities. Most importantly, I moved across the country with my two kids and my dog for the culture that Bob has built a culture that has.
Both an intense focus on winning an excellence as well as well as one that is fostering a great place to work fourth employees.
Several of you already on the call and look forward to working with each of you in the future, let's jump into the specifics of the third quarter.
We reported GAAP earnings per share from continuing operations of two cents.
Additional items in the quarter resulted in a net after tax charge of $40 million.
Special items were primarily associated with acquisition related costs and an adjustment to in that environmental reserves Act.
Acquisition related costs, primarily consist of inventory step up and the financing commitment associated with the Clarient Master back acquisition.
Adjusted EPS for the quarter with 46 cents compared to 44 cents in the prior year third quarter.
Excluding the impact of the step up depreciation and amortization associated with the Clarient Masterbatch acquisition adjusted EPS was 54 cents.
Total company revenue increased $219 million to $925 million, primarily due to the Clarington Masterbatch acquisition, which closed on July 1st.
On a pro forma basis for the acquisition third quarter sales declined 5% compared to the prior year, primarily due to covert related demand weakness the impact of foreign currencies on total company sells with very minimal at less than half of a percent.
Well the pandemic continues to have an impact on revenues overall demand improved significantly from the second to the third quarter across all end markets. The two in markets that experienced the most significant improvement, we're transportation and consumer discretionary.
Consumer discretionary cells, which account for about 17% of the total company sales was down 28% in the second quarter and grew 1% in the third quarter as strength in our composites platform more than offset weak demand for screen printing inks business.
In transportation cells, which primarily consists of automotive applications and accounts for 10% of total company sales was down 15% in the third quarter compared to over 50% in the second quarter.
From a regional standpoint pro forma sales in Europe were down 14%, excluding the impact of foreign currencies. This is a modest improvement from the second quarter were pro forma sales in Europe were down 18% the.
The pandemic has had the greatest impact on the automotive and industrial end markets in Europe.
In the Americas sales declined 7% in the third quarter compared to 21% in the second quarter. The improvement is reflective of automotive production resuming and increasing demand for consumer discretionary applications, particularly in the west.
And lastly, our Asian businesses grew yet again this quarter expanding sales, 11% over the prior year third quarter nearly all end markets in the region grew with the most significant growth coming from health care.
Our growth in health care continues as there is a strong demand for applications using the COVID-19 response.
In reviewing our segments for the quarter SCM grew operating income, 27% on slightly lower sales as a segment expanded operating margins 350 basis points, driven by improved mix and lower raw material costs.
As Bob mentioned earlier this is a record performance for third quarter.
The improved mix.
Reflect strong demand for our composite application used in consumer discretionary products.
With this third quarter performance and demand trends, we're seeing to start the fourth quarter, we feel confident the FCM can deliver operating growth for the full year. That's remarkable given all the volatility what's taken place this year globally.
The color business continues to benefit from health care applications as health care sales grew 10% over the prior year.
These gains in health care were more than offset by continuing pandemic revenue weakness, primarily in the automotive and industrial end markets and the screen printing inks business.
I realize it may be challenging to follow the color segment's results with Clarion out at it so here's a high level review at this year versus last year.
Last year in Q3, we reported $49 million in EBITDA for the color segment.
This year, we were reporting $77 million of EBITDA.
The Clarion Masterbatch acquisition added 33 million, which would bring you to 82 million.
Offsetting this this pandemic related weakness primarily related to automotive and our inks business.
Lastly, other distribution segment, where sales were down 6% in the third quarter. We are encouraged that volumes were flat year over year.
Finding prices, it's up our suppliers account for the year over year change in sales and earnings.
There's a certainly a big improvement from the second quarter, driven by stronger demand in the U.S., and Canada, automotive and consumer discretionary in market.
Despite the impact of the pandemic to our overall company sales and earnings we have done what we always do that is to control what we can and this year. It was managing working capital efficiency to maximize cash generation.
In the third quarter, we generated $107 million of adjusted free cash flow exceeding our estimates and we are now increasing our full year projection to $270 million.
Working capital management has been the key driver for this performance our teams have done an excellent job at managing the demand volatility and uncertainty as a percentage of sales we have lowered our working capital investment by 1%, which on a full year basis translates to approximately $30 million of cash in the bank.
It's a tremendous achievement for this year, but it's also an operational benefit that we expect to maintain at the pandemic recovery continues.
This free cash flow performance has strengthened our balance sheet. We finished the quarter with nearly $580 million in cash and are positioned to finish the year with a net debt to EBITDA ratio below three times. This is below what we committed to do when we announced the Clarion Masterbatch acquisition in December 2019.
In summary, we are in an excellent position to navigate the near term dynamics of the pandemic and execute the very important work of integrating our two companies.
That concludes my prepared remarks, but again, let me say, how thrilled I am to be with avian I'm eager to contribute to our bright future and look forward to meeting with our investors virtually and eventually in person in the time become alternate.
I'll turn the call back over to Bob now for some concluding comments.
Thanks, Jamie I'm very proud of our team's accomplishments this quarter and for the entire year for that matter. Most importantly, we kept our people safe healthy engaged and inspired.
This has allowed us to effectively run the business and serve customers during these challenging times and.
And despite the pandemic, we're off to a fantastic start with Clarion.
Well synergy capture is a priority for us being key to value creation from the acquisition.
Even more excited about what the business brings to us in terms of long term innovation and the resulting revenue growth.
In early October we published a new Investor relations presentation to help articulate the story there.
Presentation remains available on our website and if you have not had a chance to review it. Please do so.
In it you will find important messages about avian who we are what we do and why we win it.
And just last week, we published our latest sustainability report.
It is a comprehensive account of our performance on E.S.G. matters. It is our second reporting we have significantly increased the amount of information data and transparency on topics that are important to all of our stakeholders.
Our position in the value chain as a special one.
And as a material science leader Formulator and designer we're in the early stages of our customers' new product development and we help them achieve their sustainability goals.
At the same time, we are running our facilities as an AC see responsible care certified company.
Operating safely for our employees, while protecting the environment and our communities.
Further as a founding member of the alliance done plastic waste.
Joining the global effort to eliminate plastic waste and build awareness and infrastructure to leverage the inherent benefits the plastics.
You will see in our sustainability report that we've established our first set of sustainability goals for 2013 and.
And we will pursue these goals with the same rigor and intensity that as a trademark of our culture.
Let's shift gears to the near term and focus on the quarter ahead.
Look there's still a lot of uncertainty related to coal bid and potential further lockdowns, we can't predict that.
Well, we can say is that based on orders for October and November.
So we are optimistic that an account that the economy is continuing to improve it will do so through the balance of this year.
So to give you some guidance for the fourth quarter, we want US first just ground you on a pro forma number for last year. So.
Had we owned Clariant last year in the fourth quarter, we would've reported $93 million in EBITDA.
For this year's fourth quarter, we expect to increase that by 11% to about a $103 million and this translates to adjusted EPS of 40 cents inclusive of step up depreciation and amortization, which is 17% higher than last year.
This is a big deal when you consider that many companies are reporting a P.S. are to be flat or down in the fourth quarter and I think that says a lot about the quality of our portfolio, but also the strength of our combination with Clarion.
This is an important time for us and if you've had the chance to go through our investor materials or hear me.
Make some remarks that are and you know that that's the case a year ago, we completed the divestiture of our PPS segment and shortly thereafter announced our intent to acquire Clarion Masterbatch.
Within days of the latter announcement, our stock reached a 52 week high as investors welcome the news.
Well these gains and positive sentiment we're quickly erased by the covert pandemic.
They can at least some specific fears about oss and that potentially we would have to complete the clarient masterbatch transaction under a state of dress or maybe there was some fear that the business was impaired as a result of the pandemic.
This simply wasn't and isn't true in our results for the third quarter offer proof.
So I'm glad that we didn't listen to the haters, joining us to back out at that time.
We're about to deliver the highest level of adjusted EBITDA of the company has ever achieved with the highest percentage of specialty applications and yet our stock trades at a multiyear low.
The last time, we came close to this amount of EBITDA was in 2018, when our stock reached an all time high of $46.
And as you know today, we're trading below that.
Two weeks ago, we raised our dividend for the 10th year in a row as we expect to deliver record free cash flow this year and feel extremely positive about our growth projections for the future.
So I may say, the current discount is due to large and yet our net debt to EBITDA.
As Jamie just said, we'll be below three times by year end and that's only about a half a turn more than what we traded at $46.
Quite candidly I, just think our story isn't understood and I intend to fix that.
Hi, where many hats as chairman and CEO, but our president I'm very focused on telling our story to.
To get our shore shareholders. The return they deserve and I will go door to door, if I have to to sell it.
As you can tell I'm very excited about the future of the company very excited about our growth prospects.
And the future valuation.
But don't just do it for me do.
For Brad.
Brad's retiring it really love to set up some 520 nines first Grand Kids [laughter] as our CFO Ameritus I'd like to given the last word today.
Well. Thank you. Thank you Bob and I do appreciate that a final comment about do it for Brad I did want to just say.
A big thanks for the support and friendship over the last seven years, you know I've had a little bit of time to reflect.
And I have great memory is of our travels together with the sell side community. There are lot of smiles around the fit the table right now is that.
I can about this.
Franken as these are the annual Christmas dinner in New York I will Miss that some of those went into the Wee hours of the night, but just great memories.
Mike TSYS on.
I remember traveling with you after the cast won the National Championship there.
There was no suit to be found just cap skier and some of the stairs that we've gotten the elevators are just priceless.
Dinner with Ben Kallo in Portland, I can't really say more about that.
And Mike Harrison.
I still want to understand how it an important dinner in Chicago that we got off on an hour long discussion.
On who's cheesy potatoes were better Eurs are bops, so anyway I just want to thank you so much for the great memories and support.
Some of you know I I'd like to boats and Theres a favorite quote of mine about a sailor.
And it goes like this you know the pessimists complain about the wind.
The optimist expects it to change.
And the realist adjust the sales.
No our although our four pillar strategy remains the bedrock it remains our beacon our true north we have adjusted the sales.
With extensive portfolio changes over the last seven years.
Specialty solutions focused on consumer packaging and healthcare.
Which as Bob mentioned makes up over 60% of our portfolio portfolio think about where we were seven years ago, where we were building and construction focused company.
We've adjusted the sales to focus on R&D and M&A to give us the full breadth of sustainable solutions and those markets are growing at high single digits.
We've adjusted the sales certainly accelerated by Clariant to give us meaningful presence in high growth emerging markets Asia Pacific and India.
And we have focused on the development of our culture, which Jamie spoke to the development of our team being certified as a great place to work and I have to say and I've said. This so many times the Bob I, just some so appreciative of being a part of the best team that I have ever worked with and certainly.
Jamie joining the company you can see it's only going to get stronger.
So as I disembarked for my next port of call not sure where that is going to go I do so though with great confidence in the future of our company.
And our leadership team and.
And certainly Joe in our Investor relations function, you've done a superb job and I'm very very proud of you.
So I wish everyone all the best and thank you very much thanks, Brad you're absolutely going to be missed we really appreciate all your contributions to the company over the years. Thank you very much.
So we now have time to take.
Calls and who knows maybe Brad I'll take one or two of those [laughter].
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from Bob Koort from Goldman Sachs. Your line is open.
Thank you good morning, and best wishes Brad.
Thank you Bob.
Bob that was.
Quite an impassioned.
You know, it's a bit of enthusiasm for the company and what you see I.
I guess I'm curious you know your free cash flow looks pretty darn robust do you think you could flip to buying back some of that undervalued equity sometime in the next couple of quarters.
I think the primary goal is to get a net debt.
Leverage down below three times and were just above that but as of September thirtyth expected to be below up by year end. So I think once we pass that threshold, we could be in a place to consider doing that again.
I'm curious here in the fourth quarter is traditionally a pretty unkind to the chemical industry, you tend to see de stocking and inventory management by customers.
2020 is obviously a very different here you guys have thousands of customers do you have any sense.
Should these lockdowns accelerate through the end of the year is is there a big drawdown risk at your customer level at your own level, how do you assess sort of the channel inventories at the moment.
Yeah, I mean December is always been a wildcard and I've always said it's difficult to.
You know draw a conclusion from December and or January by itself, but if you put the two together to get a sense for all things are going.
Look with an increased level of lockdowns or conservatism related to the pandemic anything I think could happen in the summer and it's very difficult to predict.
With respect to our own projection the growth EBITDA year over year.
You know, we've got a conservative estimate in there for the last month or so.
Yes that doesn't happen and things go better we could do better.
I'll tell you. It's also been a challenge to think through a forecast for this fourth quarter because.
To some extent the recovery is offsetting historic seasonality. So some of the things that we would have perhaps modeled in the past and said here's how I think Q4 will look.
Just simply don't seem to be playing out at least with respect to what we've seen in October which was a really good month. So that's.
That's as clear as we see things right now Bob obviously.
The goal that pandemic is still.
To be determined how that impacts the year.
Got you thanks, very much and good luck for it.
Thank you. Our next question comes from Frank Mitsch from Pharmedium Research. Your line is open.
Thanks, so much and congrats Brad don't don't be surprised if pharmion pays a visit to you out west down the line.
So yes, ma'am, we'll miss you.
And of course nice the nice to meet you again Jamie.
Bob if I want to come back to the clarity on business.
The the EBITDA in the second quarter I believe you said was $37 million for the third quarter 33 million and based on your guidance.
Looks like the fourth quarter's 29 million.
Or something that is how do we think about the seasonality of that business on a more normalized basis number one number two.
The pandemic, obviously as played some havoc with the top line how do we think about the top line of that trending for that business as well.
Yeah. So.
The fourth quarter, there's some seasonality in the Clarient business in the fourth quarter I'd say it looks.
Very similar to our own color business saw as you. If you look back historically at how we perform in Q4, that's how I think you can think about clarion performing in a normal year I mean, obviously there is some cold weather related impacts this year.
That could offset some of that seasonality in Q4, but that's probably the best way to think about it.
And then from a revenue.
Revenue standpoint, I'd say the same thing from a seasonality perspective, so if it was down a little bit year over year in Q3, we expect that to be about the same in Q4.
Okay, Alright, great and Jamie I believe you said that the free cash flow for 2020.
You are targeting 270 million.
I assume that that's just.
Have a half a year of Clarion and eight.
If the if clarion had been.
Part of the portfolio from January one where do you think that free cash flow number would it would've gone too.
Frank Frank This is Joe filling in for Ed around 30 to 35 million or free cash flow, we got a big benefit this year coming from working capital, obviously with declining sales so thats been helping us this year so.
So that's where you'll see it quick for Clarient half year next year should offset some of the benefit we got in the working capital improvement this year.
All right that's very helpful and Joe just remember the do it for Brad. Thank you [laughter]. Thanks Frank.
Thank you. Our next question comes from Mike Sison from Wells Fargo. Your line is open.
Hey, guys nice quarter, and Brad Congratulations I do have a nice Browns outfit if the two week ever do get to the Super Bowl, but.
In you know Bob.
Bob in terms of no 2021 can you maybe help us frame what the growth potential could be next year, how much synergy comes into play.
You do have other cost saving programs and then yes. This continued momentum in the EM. How do you think we see EBITDA growth next.
Next year.
I'm going to put a specific guidance related to do 2021 kind of in the parking lot for now.
Mike I feel comfortable with what we just said about Q4, but want to give.
A little bit more time to pass so I expect us to say more about.
The full year.
When we come out with our end of year results.
But I can answer I think maybe the last part of your question, which is synergy expectations. So.
You know, we have sort of talked a little bit about run rate achievement over.
Over periods of time and have said look let's call that $30 million of run rate by the end of next year.
And I think that that means that about let's say $15 million to $20 million could actually benefit the bottom line next year calendar wise. So maybe that's a good estimate our way to think about a starting point with that level of Clarion synergies.
Great and then.
When you when you announced the deal I think you are talking about a $500 million EBITDA potential synergies.
Synergies that come in better than.
Im enthusiastic on on the combination.
Is that still the marker or has that potentially gone up as you have spent more time at the company with the new company.
I missed the very first part of that was what's still the marker I'm sorry.
The 500 million EBITDA that you all talked about when you when you when you announced the deal.
Yeah that was okay that was a pro forma norm or looking at portfolio team together, yeah, that's right. So.
Yeah, I mean, I think with the center the increased synergy estimate I think we've got an ability to get to that fast.
Faster than what we previously projected we haven't said anything else yet with respect to timing, but.
You can see where the numbers are coming out this year I think we're going to be ahead of that and timing perspective.
Great. Thanks.
Thank you.
Thank you and our next question comes from Vincent Andrews from Morgan Stanley. Your line is open.
Hi, Thank you for taking my question. This is Angela.
On for Vincent just a quick question regarding the fourth quarter I was wondering if you guys could give us a little bit more color on.
As you look at the guidance that you provided in terms of how much of that might be synergies and as we think about October you talked about I think is continuing to improve I think you said sales grew 6% in September. So does that then high single digits or could it be better in October and how you look at it in terms of November as well.
Yeah, I'm not we're not forecasting 6% sales growth for the fourth quarter to be clear while September was strong.
You know October results probably about.
One.
And I think for the fourth quarter, you can consider sales to.
Be down probably.
Around flat to down 1% something close to that Okay, I think Budd sales overall.
And then I think with respect to synergies.
I do have some administrative.
Costs that have already been based.
Basically there were some associates that didn't come with the deal that were synergies from day, one we'll still see the benefit of that here in the fourth quarter.
But the real benefit is going to start coming in in the first quarter of next year. So I mean, you can model and probably like $2 million or so in Q4.
Great and then in terms of as we look at 2021. So as you noted earlier in a previous question I guess start considering buybacks.
As you get below three turns of leverage how should we think about bolt on acquisitions and potential to do some of that.
Yeah, I mean look our priorities from a cash flow standpoint, there's always been obviously to invest in what we need to and the business. First then we'd like to be able to do.
Acquisitions increased our dividend and of course.
You know then we've opportunistically bought back shares.
What I'd say about the M&A market right now is that.
You know, there's some real challenges with looking at acquisitions outside the U.S. because candidly our leadership team here can't travel.
Now, we'd like to see everything in person. So there are some things in there.
You asked and we're continuing to look at but I do feel like there are some challenges just with respect to moving some things along we got to that candidly or just kind of on a back burner until we can find a time to travel.
So we do hope that next year, we can get back to doing some bolt ons and.
As you've seen historically, we've been able to do all that and buy back shares and I think next year could be a really good illustration of that.
Very helpful. Thank you.
Thank you.
And our next question comes from Mike Harrison from Seaport Global Securities. Your line is open.
Hi, good morning, and.
I don't know the I still like my recipe, but the Patterson potatoes.
Okay.
Yeah.
[laughter].
Wanted to ask about the Clarient synergies if you.
Maybe just talk a little bit more about the integration process so far.
Where have you seen things exceeded expectations and if you could break down and that that $15 million increase to the synergy number.
Where does that come from is there any further upside.
So for the most part the $15 million next year is going to come from.
You know sourcing savings there will be some administrative cost reductions but.
I think the cadence in terms of when we get after the three buckets that we've previously published is really unchanged with sourcing really coming first.
And as you and I think we put out in the Investor deck, you know well we went from 65 to 75, Mike We increased really our estimates of all three areas. So we.
We see opportunities within each yeah.
And.
That was one I think just a factor of having a conservative estimate of what we could do when we first announced the deal. But then also the Clarient leadership team coming forward and saying that there were other ideas, we should consider and we now are so I think it's a really good combination of our ability to validate what we thought and then.
Finally, but then also get some new ideas from from their team, which is which is how we came up with that number.
All right and then one to ask you about the.
The engineered materials business and the margin springs, there that 30%.
Plus gross margin number I think is the best you guys have done since 2016, you mentioned the improvement that you've seen in the margin performance of composites.
That's the main driver there or kind of how do we think about that gross margin sustainability versus.
Versus what you guys delivered in Q3.
I mean, it really is the main driver in Q3.
You know, we I'm sure we are benefiting for sure.
You know on an uptick in demand for outdoor applications. Some of that may have been as you know there were challenges customers being able to get product in Q2 and companies being able to supply that and so then that.
As a pick up in Q3, so there may be.
To sum up.
Uptick there that's taking place.
But either way if you just smooth it out over Q2 versus Q3 are already looked at that the margins in the composite space have improved dramatically from where we were a couple of years ago. So no.
No doubt composites, playing a big role in the margin improvement if I looked at the rest of the business.
You know sales are down slightly in the story kind of resonates with everything else. You said, which is that you know automotive is still down industrial applications are still down there are still some pandemic effect and that plays a fad.
Factor in the rest of the business freedom.
All right thanks very much.
Yep.
Thank you and our next question comes from Ben Kallo from Baird. Your line is open.
Hey, Thank you congratulations Brad.
Yes, thank you more important than Facebook.
For me.
Uh huh.
Hub.
Can we talk about the the margins.
Color I imagine this step down just related to the acquisition, but can you talk us through that and try to work target margins fall on the operating side.
I'll leave it there thanks again brought revenue.
Yes.
I think everyone was aware that the starting point would the legacy Masterbatch Clarion Masterbatch business, certainly lower than our own.
And so when you look year over year.
EBIT or EBITDA margins, obviously, they're both down.
About two points and that's mostly just putting the businesses together so.
When.
I'd also point out, though the year over year, our inks business is still down quite a bit so thats, playing a factor in margins organically for us.
Look as we've said, we think that we can get the clarient masterbatch margins up to our legacy.
Color margins and ultimately above 20% EBITDA return on sales. So that's where we think we can get to here in the near term as we capture these synergies that should come to fruition.
Great. Thanks.
Thank you. Our next question comes from Colin Rusch from Oppenheimer. Your line is open.
Thanks, so much guys. Thanks.
Thinking about recycled and renewable materials and the availability of those.
Relative to some of your customers maps, you talked a little bit about.
Its pricing dynamics for sales and sourcing and then also your process for evaluating the viability of some of the newer processing center are starting to turn around.
I think your question was really about.
Recycled content and evaluating the.
Sort of the viability of that going forward.
Yes. It was just an update on the pricing dynamics and around the bus business.
Okay. So I mean as a starting point I think that.
You look all of our customers are looking at using an increasing level of recycled content, that's going to happen. It's moving forward. As you know there was a challenge with respect to getting it and for everyone who is set goals out there for the future.
They can't be achieved with the present level of recycled content that exists so lots got to be done there.
From a pricing standpoint.
And a lot of cases recycled content is actually more expensive and therefore create some challenging dynamics around that.
Look this year that just doesn't play a big factor.
In on our margins, but certainly it is and the conversations that we have with our customers at the end of the day, we are providing a formula.
And you know that base resin, if its recycled or Virgin is really.
We want to do what's best for the customer and best for the environment will price Accordingly, so look.
Look I overall I view the sustainable solutions platform has a really good margin good guy for us and one of the reasons why we should see margin expansion.
On top of the revenue growth that we have projected for that area.
Okay and then the second question is really about capacity and how you guys think about.
The incremental capacity, what do you need to see you know how do you think about repurchasing some of your existing capacity for higher margin opportunities and then how about capex on a go forward basis.
Yes, so I mean from a capacity standpoint, I think one of the.
You know the great things about bringing.
Scientists together with us is that we.
We can take some capacity out you know, it's a unique business and that.
Each of our plants is a relatively small footprint often with it's a small lines quick turn batch processing, but there are opportunities for synergies there, which will go after and really want to harmonize things on a product line basis and go to those locations that are the best.
So.
From a capex standpoint.
I think close to $60 million. This year is a good figure for us plus.
Clariant.
And you know if you want to look forward and we think about some capex that will take place related to achieving some of these synergies that may add about 20 next year, but it's still a little early on the time figuring out the timing of that Capex. So that's just a rough estimate of where to start.
Alright, that's super helpful. Thanks, guys.
[music].
Thank you. Our next question comes from Laurence Alexander from Jefferies. Your line is open.
Good morning, I guess first a new near term question in terms of the improvement in trends that you're seeing in Q4.
Are you seeing any significant areas of softening outside normal seasonality.
I don't think anything is softening I do think that you know in the third quarter we saw.
A little bit a change because in the second quarter. There was some higher dynamics for let's say healthcare and packaging and that moderated in Q3, probably will see a similar effect in Q4.
But again that is completely dependent on what happens with respect to parana virus right. So.
I'm basically just sharing with you what I've seen so far in Q3 and in October its best way I can describe that.
And in the end markets, where you have longer qualification cycles or qualification campaigns or technical campaigns to be accepted into new customers.
What's your confidence level on market share gains next year.
Well look I think first of all this year customers have focused very much on.
You know meeting demand for their essential businesses.
And I'd say, probably in the last month or so you're starting to see some pick up with respect to next generation projects, which is encouraging we're finding a way to do that virtually.
Virtually between our.
Our sales folks our technology teams and our customers, but I don't really see anything changing with respect to.
Maybe the timing of approval, except that for sustainable solutions, I think that moves faster because everyone's trying to get.
You know better solutions in that regard so.
If I just kind of think about that's probably one of the biggest trends is out there is I think desktop moves faster.
And then just lastly can you flush out a little bit your ambitions for your presence in Asia. So what percentage of sales in five years or how much additional resources you feel you need to put into the region.
Get to where you want to be.
Yes, and as you.
You know I think I don't know that we've mentioned in the last quarter or two probably because of everything going on with the.
The pandemic, but we have continued to invest in and build a new manufacturing facility and to show China will be our largest facility and it's really going to serve as a you know one important area of growth.
In 2019 or at the beginning of the year, we were really starting to bump into some cat capacity constrained so with that new facility Weve corners part of the team I think we'll have the footprint that we want.
Like from an organic perspective, I think sales can continue to grow it.
Eight plus.
Plus percent or more and for us to do more than that we probably have to look at.
You know acquisitions.
Thank you.
Yep.
Thank you and we'll take our final question from PJ Juvekar from Citi. Your line is open.
Yes, hi, good morning, and congratulations both to Brad and Jamie.
Thank you.
Quick question on you know EM products, what was impact of Fiveg.
As the networks are getting rolled out.
Does that have a significant impact in the quarter or is it just getting started and you should see that.
No for us.
Yeah, Yeah for us so first of all I mean, the fiber optic.
Business that we support with our composites platform.
Supports all the technologies, including.
Legacy generation, so that has been by far and away. The majority of our sales. So far fiveg is really getting started.
For us in that particular space, because we have a lot of the largest presence in the U.S. and in Europe.
What we serve and.
Asia for example is outside of.
Of that particular composite space. So I'd say fiveg was pretty small for us in Q3.
But obviously as more and more locations begin to adopt and put that into place.
That's going to grow that particular business, we have an expectation will grow at 10% of say 10%.
Sales annually.
Great. Thank you for that and then you sounded a little cautious on Europe and your comments was that an automotive specific comment I know the goal really cases are going up EBITDA.
Sure.
And then secondly on North American auto production.
Thank you sounded positive for Q typically these auto companies take downtime went on hold it is but you know there are there is some thinking that inventories are so low that maybe in a production it will be.
They want to take downtime in production will continue to ramp up and.
He just give your comments on auto production in the U.S. and Europe.
Yes, I mean, what we've seen so far in October the U.S. is positive it seems to be or North America was a positive.
You're right in terms of thinking about how the industry is historically navigated the fourth quarter, I guess anything could still happen, but what we've seen so far it's been a positive and I guess my observation on Europe is just.
Relatively weaker than that we just have not seen.
You know a recovery in Europe to the same extent that we have and.
You know the U.S. So maybe in this won't just be all automotive, but to put things in perspective.
You know I mean sales in the second quarter and you US North America were down about.
14%.
In the second quarter, they were down about five in Q3.
Which in Europe was still down about 10 in Q3 so.
Thanks, just haven't recovered at the same pace I guess, that's the best way I can describe the relative performance in the two regions.
Thank you.
Great. Thanks.
Yes, and I understand that was our last question I appreciate everyone joining.
The call today, we're obviously very excited.
But the business, we're excited about our growth prospects.
But we also want to keep in mind that the unmistakable reality here that we are still in.
And a pandemic and JV and we're going to continue to keep health and safety first and hope everyone else does the same so thanks and everyone have a great day.
Ladies and gentlemen, thank you for your participation in today's call. This does conclude the conference and you may now disconnect everyone have a wonderful day.
[music].