Q2 2021 Avient Corp Earnings Call

[music].

Good morning, ladies and gentlemen, and welcome to Amy Corporation webcast to discuss the company's second quarter 2021 results. My name is G. G and I will be your operator for today at this time all participants are in.

The only mode. We will have a question and answer session. Following the company's prepared remarks as a reminder, this conference is being recorded for replay purposes I would now like to turn the call over to Joe do Salvo, Vice President Treasurer and Investor Relations. Please proceed.

Thank you Gigi and good morning of welcomed.

Welcome to our second quarter 2021 earnings call before beginning we'd like to remind you that statements made during this webcast may be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Forward looking statements will give current expectations or forecast of future events and are not guarantees of future performance.

They are based.

Listen if the expectation and involve a number of business risks and uncertainties any of which could cause actual results to differ materially from those expressed in or implied by the forward looking statement.

Also during the discussion today of the company will use both GAAP and non-GAAP financial measures.

Please refer to the presentation posted on the avian website, where the company describes the non-GAAP measure.

<unk> and provides a reconciliation from historical non-GAAP financial measures to their most directly comparable GAAP financial measures.

In addition, unless otherwise stated comparisons of the prior year will be pro forma for the Clariant Master batch acquisition as if the business had been together during all periods referenced.

Joining me today is our chairman president.

<unk> Chief Executive Officer Patterson.

<unk> Senior Vice President and Chief Financial Officer, Jamie Bank.

Now I will turn the call over to Bob for some opening comments.

Thanks, Joe and good morning, everyone. Today, we are reporting record second quarter results that reflect the transformation of our portfolio and demonstrates the success.

And just some of our key growth platforms the.

Most recent piece of that transformation of occurred when we acquired clairvoyance color business a year ago. This month, and we became avions. The first year of integration has been a tremendous success, which not only shows up in our numbers, but in the engagement we see in our associates.

Success around the World. This momentum has served us well as we have seen unprecedented demand for our solutions grow against the backdrop of challenging conditions. Our team has come together to deliver world class service to our customers through creativity and flexibility in our operations as we.

We have managed through a myriad of supply chain disruptions, we truly are better together and well on our path to a record year as we turn these challenges and the opportunity opportunities.

Obviously, the second quarter of 2020 was the low point during the pandemic the.

The year over year.

Comparisons reflect that with sales up 42% and adjusted EPS up 107%. What you can't see here is a very compelling story of how we delivered record revenue of $1.2 billion and 87 of adjusted EPS, while handling inflation.

<unk> as well as the incremental costs associated with the previously mentioned the supply chain challenges and these have been substantial but soho of our efforts to overcome and offset the.

Both of which you will see in future slides. This morning, our performance continues to be underpinned by our 4 pillar strategy.

G. The guided the investments we made to transform our portfolio to 1 that is more specialized focused on sustainable solutions and concentrated on high growth end markets and it's working.

All 3 of our segments contributed to delivering these record second quarter results.

Color additives and inks grew operating income, 59% from robust demand across all markets and for our sustainable solutions and.

And we have also achieved significant synergies with the ongoing integration with Clariant.

Specialty engineered materials more than doubled operating income.

<unk> driven by continued growth of our composite technologies.

We see ongoing strength in consumer applications as well as increased demand for our fiber optic cable solutions used in telecom for <unk> and other infrastructure build outs.

Our distribution segment.

Delivered record second quarter operating income of $24 million, an increase of 60% over the prior year.

And we reached a notable milestone with nearly 50% of the segment sales coming from health care and consumer end markets.

Over the years, our portfolio has undergone.

This and deliberate transformation with an increased focus on specialty applications. As you know these require more sustainable solutions and advanced performance characteristics and.

And not only has this been an important contributor to our recent sales growth, but the benefits of improved mix and our.

Tremendous actions are improving margins, despite the inflationary pressures we've seen.

When we contemplated the acquisition of the clearing of color business.

We knew there was an opportunity to improve margins to the same level of performance as the legacy poly 1 color business.

And.

Price of share of ownership, we have made significant progress in this regard.

1 driver of this improved performance is the acceleration of synergy capture between the 2 teams, where we realized $11 million in the quarter and we are on track to deliver over $45 million in 2021.

And the first on synergy capture we see an intense focus on innovation.

Sustainable solutions and pricing excellence across both businesses.

There is so much energy and excitement that is being generated from the combined organizations and I got to experience that firsthand earlier this month when.

I visited our legacy Clarient site in West Chicago.

Seeing in interacting with our people and our team further validated everything we have known and we did that during our diligence and after a year of integration, we know and now do confirm we are better together.

It was invigorating.

B not only our production facility.

The explore our color works innovation center, where designers have the opportunity to see touch feel and watch the color designs come to life.

What impressed me most about the visit was how our teams are supporting our customers' sustainability.

The C initiatives the.

The single most requested service is to help our customers use more recycled content and packaging.

Let me elaborate.

<unk> cycled material has a natural grayish look to it.

Quite simply this has to be overcome with additional color concentrates.

<unk> and additives to achieve a similar level of brilliance and differentiation for shelf appeal the brand owners demand and this isn't easy but think of this as a sales and margin multiplier recall of plus factor. The more recycled content is used the more color and additives required.

Ability of these capabilities were a key driver behind our decision to double down on color of last year. When we acquired the Clarion of Master batch business, who was and is a clear market leader in this space.

And the trend towards using more recycled content bodes well for us and our long term expectation.

Our Asian of driving 8% to 12% growth from sustainable solutions.

Our second quarter results are no exception as we achieved substantial growth in the sustainable solutions as well as the other 3 key areas of focus healthcare composites and growth in Asia and Latam.

Back to you.

You can also see the contribution margin associated with each area.

And that we are lapping the effects of Covid response applications sold in the prior year.

From an end market perspective over half our revenue is tied to the strategic end markets such as consumer.

<unk> share in packaging in.

In particular consumer demand over the prior year grew 67%.

Primarily for outdoor high performance applications.

The healthcare packaging space also performed exceptionally well during the quarter.

All of these 2 percentages may look relatively small.

Health page, but recall these were 2 end markets that outperformed in the second quarter of last year. During the early days of the pandemic.

Overall, I'm very pleased with our results for the quarter.

The view of the next couple of slides is perhaps the most insightful as we quantify and illustrate how we have overcome.

<unk> and cost increases related to supply chain disruptions.

The combination and magnitude of these 2 factors is unprecedented during my 13 years with the company.

And I can't say enough about how well our teams have handled both.

Given our recent performance and continued strong demand.

<unk>.

We have increased our outlook for the rest of the year and raised our full year projections to $3 of adjusted EPS.

I'll turn the call over to Jamie now to provide more details.

Thank you as Bob mentioned, the second quarter of 2020 with the low point during the Covid pandemic.

<unk> in the year over year comparisons reflect the substantial increase in demand.

I wanted to highlight the significance of inflation and costs associated with supply chain disruption.

All 3 segments attack the situations swiftly by raising prices multiple times throughout the quarter and have continued to do so in July as.

As you can see in the bridge schedule.

We more than covered inflation with our proactive approach and demonstrated our ability to move price as quickly.

Beyond raw material inflation, we incurred an additional $14 million of costs related to supply chain disruptions exasperated by a shortage of manufacturing associates.

These cost manifest itself in a form of higher freight.

Increased overtime less than optimal production batches and increased scrap as we qualified new sources of supply for our customers.

These are costs that can be difficult to predict or quantify on a contemporaneous basis as they happen real time, as we seek to meet customer demand without sacrificing quality.

Looking.

Looking back on our projections heading into the second quarter, we submit that these additional supply chain costs, where the lease well known and had its hardest in may and June.

The following slide illustrates that.

Here, we walk our Q1 to Q2 sequential performance to highlight how we navigated the current market dynamics.

Year over year, the increase in supply chain.

Chain disruptions were $14 million.

5 of which came from Q1 to Q2 similarly.

Similarly during the second quarter, we experienced the highest rate of inflation again, all of which had been covered with pricing.

Related to demand, it's hard to bifurcate the impact of seasonality from supply chain disruption.

But.

We did see a slight decline in orders in Europe, and the middle East, which is consistent with what.

What we have seen historically this may have also been driven by COVID-19 as certain parts of the world continued to experience a high number of cases.

Heading into the third quarter demand continues to be to be strong reflected in the orders we have received thus far.

We expect supply chain issues to persist for the foreseeable feature and we may continue to see higher inflation the <unk>.

Given our performance in the second quarter and our demonstrated ability to navigate both of these dynamics, we are increasing our outlook for the remainder of the year.

So for Q3, we expect total company sales of 1.15 billion and adjusted.

EPS of approximately 68 per share this reflects 24% growth in sales and of 48% growth in adjusted EPS over the prior year.

The sequential decline from Q2 to Q3 is primarily driven by typical seasonality of the business yet 68 still would represent another record for third quarter adjusted.

Just the EPS.

The biggest driver of the seasonality as the holiday scheduled in Europe and from what we're hearing from our customers. Many of them are seeking to take of holiday much deserved given the backdrop at the last half year and a half.

For the full year, we now expect total company sales to increase by about 23% be.

Between 4.6 to $4.7 billion.

Current demand patterns suggest the continued recovery into the fourth quarter as many customers are still trying to keep up with the orders and replenish low levels of inventory.

This is predicated on the economy, continuing to recover and the pandemic conditions subsiding.

The 23%.

<unk> sales growth combined with $45 million of synergy capture that Bob mentioned previously is expected to result in adjusted EPS of $3, which is up 55% increase over the prior year.

We realize there are many companies reporting significant growth rates compared to 2020 <unk>.

Perhaps it is an easy comp for many.

That's why we want the reminder of shareholders. How avian is differentiated in this regard recall that last year in 2020, our EBITDA did not decline versus 2019, it grew and.

And our EBITDA projection for 2021 of 31% higher than 2019.

This is a direct reflection of the investments made to position.

<unk> the company to benefit from long term secular growth trends the quality of the clearing color business and our team's ability to execute.

Our strong balance sheet helps support what we are working to achieve the increased sales and earnings will further benefit our free cash flow generation now expected to be $280 million.

This includes the investments in working capital to support our sales growth as well as the impacts from inflation and restructuring activities associated with the color business.

With Clariant.

From a leverage perspective, we expect the finished the year at 1.9 times net debt to adjusted EBITDA. This is an organic projection assuming cash remains on the balance.

Balance sheet.

Our preference will be to put that cash to work pursuing strategic M&A just as we did on July 1 when we acquired Magna colors Magna as a market leader in water based ink technology for textile screen printing, serving the largest consumer brand owners as they seek eco conscious materials for their products. This acquisition expands.

Portfolio of sustainable solution and fits nicely into our sustainable growth strategy.

That concludes my prepared remarks, I will now hand, the call back over to Bob.

Thanks, Jamie sustainability is not a buzzword per avian it's a growth driver we are a leader in helping customers reach their sustainability goals.

And we've been doing this for many years.

Of the knowledge and expertise to formulate customized solutions and we will continue to grow in this space double digits well into the future.

The recent acquisition of Magna highlights our commitment to invest in new technologies supporting these initiatives.

Our growing of with these technologies, we are helping our customers improve the recyclability of their products reduced material content or product weight news more recycled or eco conscious materials and we expect revenue from sustainable solutions to grow an additional 14%. This.

You will be able to read about all of those benefits and more in our upcoming sustainability report that we expect to release in August.

This year's report is our most comprehensive yet and it's the most inclusive in terms of ESG metrics and data that we know are of a growing interest to our investors.

And all of our stakeholders for that matter.

Not only does it include enhanced disclosures that align with current ESG frameworks.

But our report also provides progress updates on our own 2030 sustainability goals.

And we've made those goals more aggressive and challenged ourselves to think further.

Further into the future.

I Hope you take the time to really read this report since it's 1 of the best documents. We have the describes who we are what we do and the value as we stand for.

As investors you ask yourselves why should I invest in avian customers do the same and ask why should I.

I buy from avian as prospective employees ask why should I join in work for avian and no better place or these answers captured none in the pages of our sustainability report. So I ask that you read it in that regard, we're committed to becoming a world class sustainable organization and.

And in doing so provide a tremendous opportunity for all our stakeholders.

I am incredibly proud of what our team has accomplished in the last year. We brought 2 world leaders together with the acquisition of <unk> color business at.

At the time I doubt, we all of our outsiders may of believes this.

But our timing probably couldnt have been better as the business was well positioned as an essential supplier to so many industries.

We changed our named the avian internally, we did this to galvanize, our employees and of United effort to bring our 2 companies together.

Externally we saw it a new.

New named the truly represent who we are today and it will be tomorrow as a sustainable solutions provider.

We are navigating the COVID-19 pandemic and I believe of emerging a stronger company the.

The evidence of that can be seen in our first half results, where we have delivered significant sales growth.

And overcome massive inflation and the supply chain challenges you hear about so frequently.

The lastly, and perhaps more importantly, we have built a very important foundation for the future driven by sustainable solutions.

Our message and momentum after a year as avian are very exciting.

And we plan to share more with you at our Investor Day that we will host in New York in December we.

We will be taking a deeper dive into our sustainable solutions portfolio provide more insight into our innovative technologies and long term strategy and hopefully we can see all of you there in person.

Has something.

We're really looking forward to it.

And hope that Youll blocked your calendars now.

Of course, while we are planning to host an in person should the state of the pandemic make that not conducive.

All of it virtually.

That concludes our prepared remarks today, we'd love to take any questions. You may have at this time.

As a reminder, task of question you will need to press star 1 on your telephone to withdraw your question gross <unk>. Please standby, while we compile the Q&A lost share.

Our first question comes from the line of Frank Mitsch from from.

Permian Research your line is now open.

Yes.

Good morning, and congrats on the quarter and the outlook.

You mentioned that I think may and June were particularly.

The difficult months in terms of the supply chain issues.

And raw materials now obviously, you've been you've been.

Outpacing them with with.

With pricing and I was wondering if you could kind of provide a cadence.

As what we should anticipate.

And 3 Q4, what are you what are your expectations on how on how this plays out through the balance of the year.

So I think that these conditions, we're going to continue for the.

The foreseeable future of from a dollar of perspective my ex.

<unk> is that.

Those costs will probably be light kind in Q3 to what we experienced in Q2.

I wouldn't say at this point Frank the things are getting worse, but I don't see them getting better. So we've modeled that into our guidance here for the second half of the year.

Year, and Thats, probably the best way to think about.

Things going from Q2 to Q3.

Alright.

Thats helpful and and Bobby mentioned net.

You highlighted your the.

The business in the outdoor high performance space.

Growing pretty well I mean, I guess, there was a thought out there that.

Ironically with the reopening that that might suffer a little bit what's your what's your outlook for the for that high margin business for you.

While inventory levels at the retail locations remain incredibly low and just about every area of outdoor applications. So.

So I think that there is.

Still a really good run ahead of us here in that respect.

Just given how long it's taking for people to get the things that they want so.

I haven't heard anything from our customers, who are feeling that way that when the pandemic sort.

Sort of subsides.

Size of debt that may and so I also really think their observations our inventory level driven too right. There is this level of demand. The candidly people just can't get what they want from bicycles to paddle boards or whatever it may be like an off road vehicle there just isn't enough out there.

So.

At this point I think thats going to be strong through the balance of the year.

Alright very helpful look forward to seeing you on December 9th if not sooner.

Thanks.

Thank you all of our next question comes from the line of Mike Sison from Wells Fargo. Your line is now open.

Hey, good morning, nice quarter guys some high.

Hey, Marty.

In terms of the recycled material potential what inning do you think you're in in terms of you know.

How much of your customers.

Lines have been converted as there is there a pretty good.

Runway.

And that.

And I mean, I would describe it as embryonic I think customers are really just getting started in this regard and I'd also really remind everyone that of major.

<unk> factor around growth is quite simply access to these recycled materials.

No.

The getting recycled PT or any other.

The polyolefin families there just.

It isn't enough as you know there is a lot of investment underway right now to increase the supply and I think as that happens youll see us.

Grow alongside that the really good news is.

As though is that all of just about every major brand owner out there is trying to do this they are trying to move everything in.

Candidly it's.

A lot of it is just around.

The traditional packaging that you see and I think that ultimately is.

As a good guy for us as I said from a sales and margin.

Margin perspective.

Great and as a follow up a lot of companies are struggling to get material.

2.

To generate sales and.

And impressed that you guys are able to range of sales guidance when you think about the.

The third quarter.

Growth the.

The 24% can you maybe run through each of the segments and then how are you able to get.

Sort of the supply to meet.

I mean, the demand thus far.

Yes, I mean, 1 of the ways that we're handling that candidly is.

You have seen we have.

The experienced some higher costs in the second quarter as Jamey pointed out and you can see in the British schedule. So.

There is of course to securing the supply.

And candidly manufacturing it in the way that we are sometimes in smaller batch sizes or bringing materials.

Together from 3 different locations to meet our customer needs. So.

I think it's because of that that we're able to deliver the sales and meet the orders, but it is certainly coming at it of cost.

I would say that at the end of every month there are orders that were probably not.

We're able to get out for 1 reason or another and sometimes it's just the complete absence of a particular source of supply. So these these dynamics of real and I know youre hearing of bottom from probably just about everybody but.

I guess, that's the best way I could answer of how we're doing that is just leveraging the network of facilities.

Aerials doesn't locations and suppliers we have.

To do that.

Great. Thank you.

Sure.

Thank you. Our next question comes from the line of Bob <unk> from Goldman Sachs. Your line is now open.

Thank you and good morning.

Morning.

Hey, Bob <unk>.

And thanks to the whole team your information.

And data that Youre, providing is super helpful and far more expansive than we've seen in the past we really appreciate that on slide 9 as 1 example, you talked about your incremental.

It looks like something.

Something like 30% Incrementals.

So I was wondering if you could talk about what the absolute margins are across those businesses and your expectation of the sustained that kind of incremental margin.

Sure thing and.

The.

The absolute margin.

Youre asking about some of these core areas 1 of the margins look like for.

For sustainable solutions healthcare composites, and so on right.

Yes, I mean, I think what you would see as you look at and it does really vary by by segment. So as you know for us that is kind of challenging sometimes to provide.

An elevator speech on.

For example, we do have a lot of health care business in distribution, which has lower margins vis vis color and engineered materials, but where.

Where we are seeing things as I would say that the run rate margins in those areas are really somewhere between probably.

The only 5 and 10% higher than the segment norm.

Is the best way to think about that.

That's a good question for us to perhaps do some more elaboration on.

When we get towards our Investor day, but we have been trying to just demonstrate the contribution margins in each of those.

With this chart. So that's at the takeaway for us to kind of look at the absolute levels.

The more granular way.

And let me ask a question maybe dovetails a little of Mikes.

Net consumer was up dramatically I think he also.

Hopefully recognize.

Some of the Covid hangover that goes away from last year.

Do you think there's a consumer hangover that you have to battle against next year as well as maybe some of the sales were exceptional I know you mentioned the inventory channel looks awfully lean, but could there be some demand destruction in some of those markets.

Makes it a little rough around the next year.

Well that could come and there could be a point in time, where inventory levels are replenished too.

Maybe what they look like back in 2018 in 2019.

Difficult to predict when that might happen I know, we try to kind of keep.

Keep current on.

Some of our customers, where we kind of where the AC.

That happening that probably has some time.

If it happens next year I think it would be towards the second half of next year, but again, that's really predicated on where demand and inventory levels are.

1 last 1 of our good real quick in your appendix you sort of contextualize your performance against peers, and obviously it looks incredibly flattering to you or maybe insulting to you depending on how you look at it but.

1 thing your peer group of formulated really got smacked in the head on this price raws cadence and you.

Got in front of that.

Can you just talk about what you did differently or what it might be about your product offering that's different than some of those peers that you look at from financial standpoint, because it really was I think remarkable and surprising.

Well I mean, it's difficult for us to say it was.

A lot of specifics.

You guys the city of what's happened with other companies, but when I look at our numbers for the second quarter. I think are really important there are 2 things that really were very important 1 is that we started moving on price.

Really around December and January.

I can tell you from my team's perspective it.

It was.

Front and center.

The topic of discussion for us.

Literally every 2 weeks so I just felt like we brought a lot of attention to it. We got ahead of it and knew it was coming.

And then when we had the.

Of the inclement weather, what you knew very well in Texas.

Specify I think that just made us move even faster and higher I mean, I guess, that's the best way to think about it. We just went up and we've had I mean I can tell you that in my conversations with the legacy Clarient team for example.

We've done more price increases in the first half of this year than.

They've ever done in a year right, but we've had to I mean, that's just the reality of the business and then secondly.

I just think that these the supply chain costs are probably more significant than people realize.

In terms of getting things from 1 place to another it's difficult.

The price for that because it's kind of happening.

While you are trying to deliver for our customer.

And I think that's a big thing to so from our standpoint, we were pricing with that in mind, but without perfect clarity of what exactly the order of magnitude would be and I am glad.

Glad we got to where we did in the quarter because we covered it all so maybe those are just 2 things to think about from a comparability standpoint.

Thank you Bob.

The opex.

Thank you. Our next question comes from the line of Angel Castillo from Morgan Stanley.

To plan is now open.

Alright. Thank you for taking my question and congrats on the strong quarter, Bob I was hoping you could give us an update on capital allocation and M&A and how you are where you are in terms of potential timeline of the pipeline of potential bolt ons that you might be looking at.

Also how youre thinking about.

Your line of buybacks.

And this kind of timeframe.

Yes, I mean look first of all we're really pleased to.

Magna.

Magna end of the equation.

For those of you who.

Of the chatted with me in the past about our acquisition history, you know that.

Net <unk> for example was something we had been working on for many years.

Magna is something we've been in conversations with for a long time, there have been a very respected.

Participant in the industry and candidly of competitor of ours.

And I think it's really important.

These acquisitions, we find have really strong cultural fit and bring technologies that help our sustainable solutions portfolio. So I guess that might be kind of a long winded preamble to we really want to put our money to work around acquisitions like this.

And we are optimistic about.

I'm going to keep doing so with some other bolt ons.

That we have relationships with as well so again, that's always going to be our first priority.

We've also had the priority of getting our net debt to EBITDA down below 2.

Which is just something we stated at the time, we announced the.

The acquisition of the Clarient color business and.

We're well on our way to getting there by the end of this year. So my sense is that we can be.

More opportunistic with respect of buying back shares and I'd also remind everyone that it's typically in October when we revisit our.

Our dividend and our intention would be to.

Increased that again as we have every year for the last decade.

Understood and then as you look at the second half in your outlook I was wondering if you could give us a sense for what youre seeing from a regional perspective.

As we see everything happening with our evolving.

The variance 1 what are you seeing are you seeing any differences across the regions.

If you could just kind of walk through that and give us more color that would be very helpful.

I mean look.

1 thing I would say about that.

Your question around the Delta variant and Covid is that.

It does continue.

The non create challenges for us.

In specific locations and we have had situations, where we've had to limit production or of close a location for a short period of time just to be in compliance with the local regulations and do the right thing from a safety standpoint so.

It's still continuing to cause disruptions and.

While maybe major other markets seem to be freeing up in.

Getting more open as an economy. There is a lot of places that really still R.

Are struggling so my sense is.

The <unk>.

That's going to continue here for the foreseeable.

Future of at least the maybe the second half of this year, we kind of factor that in.

2 our assessments here for the projections, but I do think we are going to see some seasonality with respect to.

What we see in Europe here in the third quarter versus the second quarter.

And I think that's just that's more normal than probably what it has been in the last year, but it looks like what it did let's say 3 or 4 years ago. So and all of that is really factored into the second half.

The projections that we have in.

Really our best estimate at this time.

And maybe just a quick follow up on that I guess Asia has been the big driver of growth. So curious how you're seeing that in the second half.

Yes, I actually I mean, I think Asia is going to continue to grow.

On the second half of the year.

1 thing that really kind of call out as you'll see in 1 of the bridge schedules, where we observed the Covid response application sales that we had in the second quarter of last year, a lot of that really was coming and source from Asia.

So.

And thats still going to be the case that we're lapping that in the third and fourth quarter as well so on the surface of it maybe the Asia sales growth doesn't look.

Like what you might be expecting but it is because we're lapping some of these COVID-19 response applications.

That's very helpful. Thank you.

<unk> grown.

Thank you. Our next question comes from the line of Ben <unk> from Baird. Your line is now open.

Hey, good morning. Thanks.

Thanks for taking my the industrial that can grow out the.

Margin through.

You had the deal with per year.

Paul.

A couple quick.

Questions on.

On the margin front, it looks like margins held up.

Going back years to when you target the.

The operating margin.

Was the big target that you highlighted is that something that we should start expecting from you going forward.

As my first question.

Question.

Yes, I mean, I'd really like to expand on that at our Investor day, and if you.

Recall band, we had done that in the past, where we've looked at margin, specifically and outlined some goals and objectives in that regard.

Think that a big driver of that.

To be.

Bringing the 2 organizations together, where we still see synergy capture between Clarient legacy Poly 1 but.

There is a really important trend in the story here around sustainable solutions and margin improvement that I expect to come from that.

Really I think it is.

Going well understood yet what we're going to be doing as an enabler of customers using more recycled materials and I think it is going to be of big deals. So.

Maybe a little long winded, there and foreshadowing of what we wanted to cover at the Investor Day here in December, but there will definitely be of margin.

<unk>.

Okay, and then just on transportation and lightweight.

It's pretty specific the question, but I know you guys do work there.

We're hearing from the auto Oems, whether it's passenger vehicle or truck Oems.

Good.

<unk> for the move.

To Evs and I just wanted to.

2 here.

As the business goes kind of state of the steady where it is.

Or are there more opportunities for you to grow your exposure towards the lightweight.

The movement towards light weighted thank you for the questions.

Yes, I mean first of all when we actually report light weighting of sustainable solutions. That's also inclusive of using less material in other end markets.

Including packaging and so for US light weighting is bigger in those areas.

Then it really is in transportation and partly.

Lights is driven by the fact that transportation is really only around 7 or 8% of our sales. So it is a smaller market now for us.

While we continue to look at it as a growth area and.

As you sort of pointed out there specifically around vehicle electrification, which I think is.

Good.

<unk> as well so we do see that as a growth area.

If you look at the Q2 numbers transportation grew quite a bit but of course, it was down quite a bit last year or so.

Another thing that will just provide some more I think detail on us.

Where do the where does the growth come from in each of the sustained.

Guy from all areas by end market. So we will do some more of that in December 2.

Okay. Thank you guys.

Thanks, Matt.

Thank you. Our next question comes from the line of Colin Rusch from Oppenheimer. Your line is now from.

Thanks, so much.

Can you just give us a sense of the overall activity around the new formulations, whether it's on new products or evolution of existing products.

It seems like Youre in a position to actually expand your opportunity set as well as take some market share accounts and with some products.

There was an interesting.

Kind of an interesting time.

Time, I'd say in the second half of last year of where we're really in probably 1 of the more challenging times related to the pandemic and you would think that innovation might take a back seat, but actually we really saw a lot of customers kind of amp up their focus on sustainability and sustained.

Sustainable solutions at that time.

It may have been working from home or what other flexibility of AD sort of brought that about so I was encouraged to see that.

What I would say that's actually probably moderated in the last few months, just simply because of the supply chain challenges and it seems.

Seems a little bit like it's all hands on deck.

Just to deliver what customers need right now so I guess I view that as of just the short term dynamic.

With respect to share gain I really believe that we.

Or getting some share as a result of putting in our legacy.

Poly 1 together because of the.

The number of locations, we have and how we can serve and candidly move products back and forth. So.

There is innovation required to make that happen, but all of that sounds really kind of tactical and that's just how it feels right now so but I'll tell ya.

Manner, so many questions and inquiries around.

Sustainable solutions in this 1.

Particular area in packaging of using more recycled content is at the top of the list and I think we're going to be the best service provider in that area and I think if we move fast and we get.

Clariant business, there is a real opportunity for share gains.

That's super helpful. Thanks.

And then can you speak to the leverage of games and the sales process either in terms of just market share or pricing from the transparency you guys saw from your ESG program, which really is kind of at the top of yes.

On top of the best practice.

This is around around the industrial complex.

Yes, I mean I think.

You look at the sort of the price over inflation dynamics that we have in our bridge schedule is probably the best way to.

Mathematically illustrate what we've done.

But that being said I mean, the order of magnitude.

The significant.

In the second quarter of that.

Maybe youre not seeing leverage in a traditional way that you would around price with.

Immediate margin expansion, but I expect that I think expect that to come and look for us we've always looked at the long term margin.

Margin expansion opportunity in the business is really coming from mix and innovation driving that more than just the outright price increases so.

Maybe back to.

I don't know banner Bob's earlier question.

Good area for us to I think focus on induced the more work for the December night the investor.

Buster day.

Okay. Thanks, so much guys.

Sure thing.

Thank you. Our next question comes from the line of Mike Harrison from Seaport Research. Your line is now open.

Hi, good morning, Congrats on the line this quarter and the guidance range.

I wanted to come back to this.

This discussion around increasing recycled content in your comments that availability is is the key issue is there.

Do you have visibility on.

On recycled resins of recycled plastics capacity coming on stream.

You think thats going to be gradual or is.

We're gonna be a point, where theres a big slug of that comes on all at once.

Or are you working with customers now on solutions and new formulations, such that when the the materials become available.

Can really hit the ground running with with some of those new additives and colors. Thanks.

Yeah look I would say that.

I couldn't give you an absolute capacity number right now, but anybody who is making recycled.

The materials for these types of applications I am sure is running full out right. There's just way more demand than there is supply.

I'm really encouraged by what I see as stated investments in this area. There are a number of companies.

Dedicating assets to recycled materials for their particular streams.

Organizations like alliance to end plastic waste are doing the same thing.

So I think youre going to see a massive amount of.

The supply increases over the course of the next few years I don't think Youll see anything meaningfully change inside of 12 months or so but in a few years I think that you will.

Sometimes we get the question about our own investments.

In this area and I, just remind everybody look were not of base resin manufacturer right, we don't make polyethylene or polypropylene and don't have any intention to do that and don't have any intention to do.

1 recycling assets were of formulate or we're going to formulate around these materials.

And our efforts right now are 100% bogey on being the best of formulating around recycled content, we do that we win and so that does require some partnerships I think with some of these suppliers, who have that and some sources of supply unique plastics like ocean plastics and recover things.

Things of that nature are all partnerships that we have in motion.

Alright, and then on the distribution business the gross margin dropped below 10% I think that's the the lowest we've seen in some time.

Is this a product of supply chain disruption and.

<unk> increases in the logistics costs are.

Is this just really how the math works.

As prices go up and maybe you are maintaining your margin per pound.

How should we think about that gross margin number I guess for Q2 and as we look at the rest of the year industrial.

Yes, it's really just math.

And look I know the bridge schedules, we put out this morning, our fresh but I think when you get an opportunity to run some of that yourself youll see that.

Look if you just take the inflation number and the cost number right where we.

Maybe like a plus $3 million on that and distributions.

So bottom line is that we.

Our doing more from a bottom line standpoint, but with the higher revenue number and therefore the margin percentage of lower.

Do we lose Mike.

I'm all set thanks very much.

Okay. Thank you.

Thank you. Our next question comes from the line of Laurence Alexander from Jefferies. Your line is now open.

Yes.

Good morning, Jim the sense for how much volume might have been constrained by the supply constraints.

Customers are seeing.

And are there any areas, where you're seeing real demand destruction now because of the pricing or changes in how your customers manage inventory to handle the inflationary environment.

Yeah, I think this may have been 1 of the J.

Jamie's observations is that it's a little hard to bifurcate.

Sort of demand from Q1 the Q2.

It was down roughly like 2.5% and warrants I can't really say definitively if that was simply because of.

<unk>.

Seasonality.

We did see.

Those levels, perhaps most impacted in Europe, and middle East and that would've been normal I think in the second quarter, but.

There could be some that's candidly just due to supply chain challenges right and it's not only it's not always just our own but sometimes customers have.

Different supply chain issues and as a result can't place the orders that they would otherwise so really difficult to say what that is.

Definitively.

And then I'm sorry, the second part of your question.

Just in terms of customers changing behavior or purchasing patterns of the size.

Quarters because of the inflationary environment says yeah have you I mean, it seems the.

Yes, it's been surprising just how how easy how well you've handled that.

Yes, I mean look of I think customers of Ben.

I guess I'd say, they've just been very flexible I think that they are willing to take what they.

<unk> of what when they can get it oftentimes and we.

We do as you know lots and lots of small things so for us small batch sizes is not something we're.

Not used to but in some customers, it's even smaller than what they're used to and I think youre seeing a lot of flexibility.

Ability in the regard to do that but we're also looking at the alter.

Alternative sources of supply in ways that I'd say they may not have in the past just given these challenges. So look I think we are seeing changes in customer behavior, but I view it generally is.

As a positive.

Positive in terms of their willingness to work under these conditions.

With us and to explore alternative solutions.

Okay, great. Thanks.

Thank you.

Thank you. Our next question comes from the line of Vincent Anderson from Stifel. Your line is now from.

Good morning, everyone. Thank you.

Yes.

Yes.

First off thank you again for all of the added detail of especially around the recycled side recycling side of the business, but when I go to slide 18, I was trying to think more generally maybe how the research and commercialization.

For.

Specifically contrasts with maybe some of your traditional business as if it does at all and I'm thinking maybe as an example of that little sliver of Biopolymers, where you have very novel materials that your customers may not be prepared to work with or even may be aware of just how you develop a product around some of the sustainability attributes that they've heard from tradition.

Traditional performance based attributes.

Yes, I mean look 1 of the reasons why biobased as the sliver is the.

The sliver of that is simply because there isn't very much of this stuff available to work with.

People have been talking about it for years right in terms.

Of maybe plant based plastics or other.

Sources of supply so there just isn't much out there.

Look for us on the innovation side again, we view ourselves as a formula later and there's a lot of work going on behind the scenes to make sure that.

We can formulate around.

All of these materials, because really its going to be consumer excuse me customer preference that drives what we formulate and if they want to use bio based we can do that right. If they want to use just more recycled content, we can do that or.

As 1 of their product to be more easily recycle of bowl.

That's also of formulation for us so.

It's not 1 of these things and I'd also say, we're not trying to dig day for our customers what they use and why we just want to be able to support them.

Understood.

Or if they just helpful and so when I think about that.

It sounds like maybe it's not likely that you would be going out there and maybe looking to form stronger partnerships between the large supplier of the novel material and the significant buyer to bring something in the market, it's really more about being prepared for basically just customer.

Demand poll.

I know I might clarify on that I mean, I think they are.

What's good about what we do as a formulated or is that for suppliers of and I'll just use bio based materials.

They do seek out relationships with us as we do with them because they know.

That if we formulate well around their material that we're going to be an advocate for that is the specification in the future. So I see those relationships is very important and partnerships.

But I wouldn't go so far as to say, okay. That's so important that I wanted to acquire a bio based manufacturer of.

You know our polyolefin that that's not true so but the partnerships are there that are growing.

And Theres a lot of appetite from the suppliers to work with us in that regard.

Great well I appreciate the color on that good luck on the rest of the year alright.

Alright, thank you.

Thank you. Our next question comes from the line of Jed Deep Pandya from on field Research. Your line is now open.

Thanks.

The question really is on Clarion so back in the day when you guys of of competitors.

How difficult was it to sort of increase prices in an environment like.

With clarity that the competitor I'm just trying to understand now that you guys are AVN has that.

<unk>.

<unk> made it easier for you to go after these the dynamic price increases.

Versus when you guys were sort of competitors. That's the first question. The second question is really around.

Of the.

The whole of sustainable solutions recycling.

Aspect.

We're also working around solutions, where you're actually reducing the con the.

The plastic content.

In the solution I E.

Allowing the.

The same performance, but with a low of plastic.

<unk>.

Or is it really more just around up here and said and kind of that you're sort of working on and the third question really is just around sort of.

The the synergies in.

And of the environment, where demand is so dynamic how are you sort of managing.

Non fuel utilization and also sort of.

Plant rationalization, because obviously key part of your synergies is to sort of shut some of these sites. So how are you tackling that in such a dynamic world right now thanks a lot.

So the first question around pricing as well the first thing I'd say is that at all.

I think the legacy Clarient.

And the legacy Poly 1 competitive relationship was.

1 of the best that you could ask for in the sense that our 2 teams really did compete on the basis of innovation and customer service both of us viewed our businesses and <unk>.

Services.

And specialty so.

Anyway, I felt like we all competed in the right way.

And that.

Relates to pricing as well.

It's kind of difficult to actually answer that question because the pricing dynamic in our first year together has been 1 thats unlike any I've ever.

As seen in my time with the company.

I am sure that by having our 2 organizations together.

That we're better able to communicate and move collectively.

For our and communicate better with our customers.

But it's really hard.

Hard to compare and contrast, what it is to say, okay. What would the last 6 months of unlike if we werent together.

It's hard to say that but I'm sure that because we are 1 team and because of the integration has gone so well.

It just has to be better now than what it would've been.

With respect to your question.

On.

The the sustainable solutions.

It's huge for us right.

A lot of customers. They say, hey, look I want to make the same package, but I'd love to use half of the material right in on it might be of beverage.

Model it might be of container for.

And all of home care product or something like that and that's kind of the Holy Grail right is how do you make the same package with half the stuff.

And all of that is a good thing for us from a color and additives perspective, and a big part of what we call light weighting. So that's.

That's 1 of the most important areas.

You think from of sustainability.

Perspective that that exist and that we are well geared towards.

Towards serving and then your last question around integration is that.

Look we are ahead of schedule with respect to cost <unk>.

Areas of that and our ability to capture those largely to date, that's been administrative costs and sourcing.

There are operational synergies that we see in the future.

1 thing, though that has kind of come out of the pandemic and what we see with supply chain challenges right now is that we just need.

<unk> flexible so what we might have had as of plan 6 months ago could be different from what we see today just to make sure that we can continue to serve our customers as well as we can so we're still moving ahead with some of these ideas that we have.

But they may have gotten pushed back.

The state of it because of the <unk>.

<unk>.

And really probably even more so the supply chain challenges right now.

Great. Thanks, a lot.

Awesome. Thank you very much and we appreciate everyone's.

The time attention and participating on the call today.

Look forward to.

The connecting with you at our Investor day, and hopefully some time in between but again just want to say thanks for your time on the call today until we chat next time take care and stay safe.

This concludes today's conference call. Thank you for participating you may now disconnect.

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