Q2 2022 Avient Corp Earnings Call

July 26, 2022

Good morning, ladies and gentlemen, and welcome to the avian Corporation's webcast to discuss company's second quarter 2022 results. My name is Catherine and I'll be your operator for today at this time all participants are in a listen only mode. We will have a question.

<unk> 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 The Salvo, Vice President Treasurer and Investor Relations. Please proceed.

Thank you, Kevin and good morning to everyone joining us on the call today.

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 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 in or implied by the forward looking statement.

Please refer to the Investor presentation for this webcast for a number of factors that could cause actual results to differ.

During the discussion today the company to use both GAAP and non-GAAP financial measures.

Please refer to the presentation posted on our website, where the company describes the non-GAAP financial measures and provides a reconciliation for historical non-GAAP measures to their most directly comparable GAAP financial measures.

Joining me today is our chairman President and Chief Executive Officer, Bob Patterson.

Senior Vice President and Chief Financial Officer, Jamie Baker.

We have another quarter of positive results to share today.

We'll also provide some updates on our recent announcement to acquire the DSM protective materials.

Which at times, we refer to as Denny.

As well as the status of a potential sale of the distribution business, both of which are progressing well.

Bob will share more with you after Jamie covered our second quarter results.

Thanks, Joe and good morning, everyone.

Second quarter performance, delivering what was our highest level of sale adjusted operating income and adjusted EPS for our second quarter reporting period.

Sales grew 5% to $1 3 billion against the backdrop of challenging circumstances.

And conditions in Europe were impacted by the uncertainty created by the war in the Ukraine and sales in Asia were negatively impacted by the extended Lockdowns in China due to their zero Covid policy.

We have our plant in Shanghai were shut down for all of April and May as were many of our customers.

Despite these challenges adjusted EPS grew 13% to 98 cents per share exceeding our prior guidance of 92 per share.

This was driven by better than expected demand in the Americas and our ability to stay ahead of inflation.

From a segment perspective.

Group operating income, 16%, excluding foreign exchange.

This was driven by 25% growth in health care applications, a continued recovery in our screen printing inks business and synergies from the integration of the Clarient color business.

Engineered materials results were in line with expectations for the quarter.

Recall that as we began the year, we acknowledged blowing demand for certain outdoor applications and this remains true in quarter two.

The primary difference between Q1 and Q2 as weaker sales in Europe , what is encouraging for the balance of the year as the uptick in demand, we're seeing for composites for five G and electrical infrastructure as well as growth in health care herself.

The distribution business delivered another excellent quarter, driven by demand for health care applications and expanding margins.

As you know the majority of the businesses in North America, where demand trends have been very favorable.

The next slide highlights our key growth drivers of sustainable solutions health care composites, and our presence in Asia and Latin America. The previously mentioned shutdowns in China, obviously impacted the growth in Asia. In fact Asia was down, but Latin America was up 15% as we're seeing solid demand in the Americas.

The Lockdowns also impacted our growth in sustainable solutions, excluding the impact of the shutdown sustainable solutions increased 12% in the quarter.

And lastly, we split out the impact of outdoor high performance solutions within the <unk> segment, you can see very good growth in the other composite applications I just referenced.

The EBITDA bridge on the next slide really does three things.

First you can see that we continued to realize price more than offsetting inflation.

You can see the specific pockets of demand decline that most significantly impacted us in the quarter.

But in Italy, and Lockdowns in Shanghai lots of sales into Russia, and a broader transportation decline.

Lastly, weaker foreign exchange, primarily the euro was a negative $7 million for the quarter.

To wrap up our comments on Q2 performance on slide eight we bridge EPS year over year here as you can see the EPS impact by segment as well as the effect of weaker foreign currencies.

We also highlight that while interest expense was lower this was offset by a higher tax rate due to a higher percentage of income earned in the Americas.

It's really great work by the team to achieve a record second quarter, but navigating through challenging macroeconomic conditions.

Before I turn the call over to Bob We also announced in our press release issued yesterday, our most recent sustainability report.

This year's report is our most comprehensive yet it's also the most inclusive and turns of ESG metrics and data that we know a growing interest to our investors and all of our stakeholders for that matter at.

It includes enhanced disclosures that align with current ESG frameworks and emphasizes our commitment to the UN Global compact. In addition, it lays out the details of our sustainability strategy, which centers on people products planet and of course performance.

We have made specific investments in ESG initiatives that drive value for the business.

Our efforts have been recognized by ESG rating firms as well as other research firms, placing US ahead of many companies in our space.

With ISS were ranked in the top 10% on social and then the top 20% on environmental impacts as compared to our peer groups Likewise.

Likewise sustained analytics now houses in the top 16%.

Also been rated in the top 5% of America's most responsible companies by Newsweek, essentially placing us among the best of the best.

We're really proud of these ratings and accolades. It means we have a clean house in a really strong foundation to build upon.

We're most excited about in terms of ESG and sustainability is that it truly drives growth for our company and positions us extremely well for the evolving road ahead.

Really encourage you to open our latest sustainability report, we believe that the true indicator of where we are as a company and our sustainability will continue to create value into the future.

I'll now turn the call over to Bob to provide details on our outlook for the year as well as update onto NEMA and distributions.

Thank you Jamie we are pleased with our second quarter performance, but recognize there is reason for caution in the near term.

The warranty Ukraine and uncertainty around energy supply is dampened demand in Europe .

It could create further disruptions in the future.

Difficult for anyone to fully predict how demand and supply chain might be affected if energy availability is disrupted.

But what we can say is that we are controlling what we can and developing contingency plans. So that we are best positioned to service our customers.

This includes leveraging the over 30 manufacturing plants, we have in Europe , specifically on many others around the world to flex and ship production, if needed and where we are able to.

We do see improving conditions in Asia, given the fact that all of our plants remained are reopened in June as well as solid demand in the Americas, which has helped shape our view for the balance of the year.

For the full year, we are maintaining our adjusted EPS guidance of $3 50, and Thats before any adjustment for dynamic or distribution and introducing guidance of 80.

For the third quarter.

We are forecasting demand to be lower in Europe . However, we see growth in health care and advanced composite applications like <unk> infrastructure in the Americas, which should help offset some of this weakness in.

Further we continue to capture price to more than offset inflation and supply chain challenges and.

And we anticipate margins to improve in the second half of the year versus the prior year.

For the full year projections slide 13 shows that we are increasing our cash flow guidance to 285 million <unk>.

We expect to finish the year with a net debt to adjusted EBITDA ratio of one six times and again this is before including the impact of the <unk> acquisition or a potential sale of distributions.

And this is important because this is the foundation upon which we plan to add dine email while remaining conservatively leveraged.

As you know in April we announced our intention to acquire.

<unk> and <unk>.

Junction with this we also announced our intention to explore a sale of our distributions segment and let me update you on both.

With respect to distribution, we did launch a process in may and as we expected there was significant interest in the business.

We received multiple first round bids and.

And based on preliminary valuations, we invited a smaller set of buyers to proceed to a second round, which is underway now.

We expect second round bids in August and we should be in a position to decide whether or not to move forward at that time.

With respect to die NEMA, all regulatory approvals have been received.

Our engagement with the management team has been incredibly positive and we're both looking forward to joining forces as soon as September one.

The business is performing well this year in line with our pro forma modeling with upward momentum as demand for personal protective gear for the military is expected to increase.

We will seek to complete our financing between now and then let me speak.

Specifically to that.

Yes interest rates have increased from when we announced the deal and I have heard some investor concern that the cost of financing done Eamonn will now be astronomical <unk> leverage simply too high and that isn't true.

As a starting point, we have committed financing in place.

Second.

We're going to access more international cash on the balance sheet, and ultimately borrow about $200 million less than we modeled in April .

On slide 15, we model the impact of the acquisition of <unk> and potential sale of the distribution business and most of this is unchanged from the model that we shared with you in April .

We are adding a line to show an estimate of incremental financing costs of approximately 22 per share.

And after refining our projections net debt to EBITDA would be approximately two eight times on a pro forma basis.

There are more details on leverage on slide 16, as we have presented our two year leverage projections.

And our confidence to achieve this comes from our successful Clarient color acquisition and integration.

Through our disciplined capital allocation approach.

We de Levered, one year ahead of schedule to create the capacity that we have today to invest in dining room.

Future.

By 2024, following the acquisition of the dining room and potential divestment of distribution, we expect net leverage to drop to 2.0 times.

In short <unk>.

<unk> remains a compelling acquisition for us.

And we expect to be able to finance it with a very modest level of leverage.

My name is truly one of the world's most remarkable technology.

One that we plan to invest in and grow.

In combination with the potential distribution divestiture.

It would become a pure play specialty formulated.

Note that the specialty transformation of our company I.

It was run on a natural parallel path with our goal to improve our end market mix.

And if you went back to 2006 presented on chart on the lots of Slide 18, you can see that the preponderance of our revenue was in housing.

Industrial and almost entirely in the U S.

Fast forward to 2022, and the end markets have changed dramatically and so as our company.

And the pro forma view on the right was dynamic and excluding distributions you can vividly see it's night and day.

Over half our revenues now come from consumer packaging and health care.

Including the defense business that dynamic supplies for lifesaving personal vehicle protective materials.

60% of our revenue going forward would be industries that are in far less cyclical than our more resilient during downturns.

But I'd like to hand, the call, where we started it and that is that I am really pleased with our second quarter performance, especially in this environment.

Record revenue adjusted EBITDA and EPS.

When I look at some of the charges that we've reviewed with you today.

And the historical performance trends I am incredibly proud of what we have accomplished over the years.

But I'm more proud of the culture of the organization and the people we have at Avion, who make our performance possible.

In 2020, when Covid created much uncertainty we stayed calm we stayed the course.

We completed the Clarient acquisition and.

And dramatically improve the financial profile of the company and strengthened our balance sheet.

We invested in our portfolio and our people and we executed.

We find ourselves in a similar position now these are certainly uncertain times, but what we are certain about is there a four pillar strategy and continuing to stay the course.

That's exactly what we've done in the past and we'll continue to do so going forward.

And I know that at times like this it's natural for companies as well as investors to think and plan for downside scenarios that makes all the sense in the world.

But we also have to play the long game.

For us that means completing the acquisition of <unk>.

And our review of the distribution business and both will be done shortly.

It also means continuing to invest in innovation.

As we highlighted at our Investor day.

Areas of focus for us than sustainable solutions in composites.

We're incredibly well positioned to participate and megatrend growth drivers related to each.

We are also looking further into the future.

And leveraging these technologies, we intend to pursue interconnected applications.

Longer term projects related to electronics and health care robotics.

Citing new markets and opportunities for us.

<unk> joined us a little over a year ago, as our new Chief Technology Officer and has been leading our efforts in these areas.

To support these initiatives, we are building a new innovation center in India, which we expect to be completed by the first quarter of next year.

Innovation is the engine of a specialty company.

We are very excited about our performance in this regard and what lies ahead. We certainly look forward to updating you on our efforts in this regard on future calls and with that we'll be happy to take any questions that you may have.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from Frank Frank Mitsch with Fermium Research Your line is open.

Good morning folks.

Nice result.

You came in <unk> <unk> ahead of Youre ahead of your guidance I'm curious as to what did you see.

<unk>.

Versus your initial expectations.

And how should we think about that possibly impacting your Q3 guidance.

Yes, I mean look I think if you look by segment really we had color was up a little bit distribution was also up from kind of where we were thinking back in April .

Which was really primarily driven by.

The demand conditions that we saw in the Americas, and then SCM was down a little.

Almost entirely because of the Lockdowns in Shanghai.

And these sort of conditions, you don't think will persist in Q3.

Really so as I look towards Q3.

Way to think about that is that.

We do see Europe being down more.

We've really modeled that and from a sales and EBITDA perspective, Asia will be up slightly in Q3 from what we did in Q2.

Partially just due to the shutdowns are abating and we basically got Americas flat.

Q2 to Q3.

Alright, awesome and I was struck by.

I will start by avian buying back stock in.

In the second quarter given.

Given the M&A and the need for cash to pay for the transaction I was wondering if you could talk about the philosophy there.

Terms of buying back stock during the second quarter and does that imply anything for <unk> and beyond.

Well it doesn't really imply anything for Q3 and beyond and I think it's important that we remain modestly levered.

We are obviously going to need to finance the dynamic acquisition here shortly as.

As we did go through the leverage projections today back in April we modeled I think around two nine times and our modeling at about 2.8, which was inclusive of those share repurchases. So we felt comfortable doing that really just kind of in line with what our.

Plan was kind of starting at the beginning of the year and that our leverage is actually now projected to be a little lower than where we thought it was three months ago.

Awesome. Thanks, Thanks, so much.

Thank you.

We have a question from Michael Sison with Wells Fargo. Your line is open.

Hey, good morning nice quarter.

I guess with the NEMA.

Acquisition, if I take a look at that slide I think it was 15. The initially thought the deal would be 35 cents accretive I guess minus <unk> 22 is like 13 cents accretive and.

I sort of sense that.

Depending on how the bids come in for August that.

Thank you all.

Sort of decide what to do with the business. So could you maybe go through some of the thoughts there multiples and is there still potential that you keep the business if the pricing isn't where you want it to be.

I'm, sorry, you kind of like tailed off a little base I think your question is really around sort of the decision making process around distribution.

Yes.

Yes look we were very encouraged by what we saw in the initial first round bids and just the overall level of competition for the business, which is something that we really did expect.

We wouldn't move forward with a second round if that wasn't the case. So I mean, just based on what we see today I mean, I think there's a high probability that we can get something done.

Great and then.

I guess I had a follow up on slide seven Q2 EBITDA beds.

CIA or price mix is 87 inflation was minus <unk> 58, and similarly, SCM price makes US 36 minus 24 so.

Just curious how you're able to.

Get that price above inflation.

Such a degree and then is there a difference between the price and the mix and that sort of.

In those numbers.

Yes.

One thing I would actually encourage everyone to do is to put this in historical perspective. So.

Net price benefit for the quarter was 45. It was 40 in Q1. If you went back to Q4 I think it was 27 or so.

So we're actually getting momentum here.

We started reporting it basically in the similar format I think a year ago. So we should have a few quarters out there upon which you can do that.

So one is I think we're still getting really good pricing.

But I do think in some respects youre also seeing some moderation.

Inflation in terms of wage inflation over time and supply chain costs as well.

So look there's still strong demand for these materials supply chain challenges do persist.

Just I think as a result of that plus the end markets that we serve we've been able to continue to.

I'll get the pricing that we have.

Great. Thank you.

Thank you.

We have a question from P J <unk>.

<unk> with Citi. Your line is open.

Hey, good morning.

Good morning, Bob as it, especially on the <unk> can.

Can you give us some idea of how your new.

Also in our specialty portfolio is likely to perform for.

For example, maybe maybe packaging may hold up better, but maybe industrial markets could could go down.

And then have you.

Are you seeing any meaningful impact in the portfolio.

So far with the slowdown.

One of the things that.

We've done and there was a slide in our deck today that really just illustrated how the end markets today compared to where they were in 2006 that 2006 points relevant because obviously that was our portfolio heading into.

Great recession of O eight nine.

If we take those two different those two end market profiles.

And we model, let's say a mild recession like all one we'd see a downturn of 6% in sales, but there were more severe.

Like <unk> is something closer to 12.

And what we actually experienced nine with something closer to 30% 35 because of the end markets we were in.

So when I, just think about what the impact of that looks like that's a good way to think about it from a top line standpoint.

And candidly when you look at the second quarter performance demand is down granted there is some uniqueness to that demand because of sales to Russia, and China Lockdowns and so on.

But it gives you some perspective I think of what our performance can look like with a 6% drop in demand.

Great. Thank you.

And then I have to say that your cash flow from operations was up nicely in this kind of inflationary environment.

The chemical companies have seen cash flows decline.

What kind of steps did you take to protect your cash can you just give us some idea about your.

Good performance on cash flow.

Yes.

Not sure if you're looking at the cash flow relative to our prior projection or not for the second quarter.

Team did a really good job managing working capital I think one thing that we've been very thoughtful about this whole year.

Are the inventory levels candidly I thought we started the year a little high.

I think that the team was very proactive and starting to work that.

Relative to sales levels, and so I think just from a working capital standpoint that ended up being a little bit of good guy in the second quarter.

Plus capex is a little bit lower than what we were planning started at the end of the year.

Great. Thank you.

Thank you.

Our next question comes from Angel Castillo with Morgan Stanley . Your line is open.

Alright, Thanks for taking my question.

We're hoping to come back the composites shrank a little bit more it seems like the momentum. There is continued and that's been part of the strong performance. So curious what you saw in Q2 that was driving that.

Generation, David despite pretty difficult comparison last year, and how should we think about that kind of flowing through into <unk>, maybe a little bit more color. There on STM kind of levels of operating income for the quarter would be helpful.

Yes.

So on slide six of the deck. There you can kind of see the two elements of <unk>.

Composites one is.

Just the specific impact of the outdoor.

Space being down year over year, and then good growth in the balance of the portfolio that really was from <unk>.

Electrical infrastructure.

As well as <unk> and composites related too.

Infrastructure associated with that those are the two really primary drivers of composite growth year over year.

I think as we look to the second half of the year, we see both of those actually continuing to pick up based on our orders. So we're encouraged about that.

That's very helpful. Thank you and then on energy.

Fully cognizant of the difficulty in assessing maybe whats the risk there might be EBIT I was wondering if you could talk a little bit more about maybe your exposure to that particular area.

Might be a concern whether it's Germany with it based on asset and also as we think about pro forma business with Dai NEMA.

Where do you see the kind of risks.

Areas of mitigation there.

Yes, so far from an energy perspective.

We've done quite a bit of.

Work at looking at contingency plans, but.

Maybe to ground, we have 30 plants in Europe that Bob mentioned on the call.

21 of those are located in countries that actually import gas from Russia.

It's about $800 million of sales, but it should be noted that our primary source of energy is in the form of electricity and not in natural gas.

And most of the countries in which we operate generate less than 30% of their electricity from natural gas and some have capacity to reduce reliance need. It you just mentioned, Germany, well that generates approximately about 15% of their electricity from natural gas and they have stated that they have the ability to switch completely to another energy source if needed.

And when we take these in account to these factors and our ability to switch production to other sites within the region, we estimate less than $150 million of our sales would be impacted if those countries.

<unk> access to natural gas from Russia.

With regards to <unk>.

They are located in the Netherlands. They also have.

Contingent contingency plans in place as well in order to mitigate the risks in case there.

Site goes down as well the other thing I would add to that is that I think.

Some of what Youre hearing with respect to natural gas.

Restrictions of course would be the implications for chemical and base resin manufacturers.

To that to us that's a more significant risk because it would impact our ability to get raw materials. So.

We looked at the major chemical base resin manufacturers in Europe , who could be.

At risk of natural gas.

Cut off.

Roughly $700 million of sales kind of attached to that.

Of which we could probably mitigate three to 400 with raw material sources from alternative locations or manufacturing and other places so to us it's really not about the natural gas because were using electricity, but it is I think a bigger risk on the raw materials side.

Very helpful. Thank you.

Thank you we have a question from Mike Harrison with Seaport Research Partners. Your line is open.

Hi, Good morning, and let me add my congratulations on a nice quarter in a challenging environment.

Was hoping that maybe we could continue talking about Europe here.

Curious what youre seeing in terms of demand trends and have you seen any differences between consumer oriented market. So as you think about comment that May June July period, and what youre seeing in industrial and transfer.

Oriented markets as you think about comment that May June July period, and what Youre seeing in industrial and transportation markets in Europe .

Yes look so all in.

I'd say demand in Europe was down about 1% for us.

The second quarter I think it was around four five in the first quarter.

We're effectively modeling that being down about <unk>.

11, so thats, all just sort of an underlying volume unit basis. If you will obviously, we've got pricing that's not the.

Total sales impact so.

Transportation really was already down so I don't say there is much of a change there but.

But I do think that there is a shift in consumer sentiment and of course fears about energy and inflation.

In general are reducing spending spending across the broad spectrum of industries. So there isn't any one thing Mike that I would point out to you as being proportionately greater than one or the other with respect to what we're seeing there.

Alright, and then just just curious on the raw material picture. It sounds like there are some buckets, where costs are stabilizing or even coming below were and it also sounds like availability and maybe logistics or supply chain impacts are improving.

I'm wondering if you can talk about are you actually seeing that and if there is some improvement how is that affecting your productivity as we get into the second half to the extent you are able to better plan.

Some of your manufacturing runs et cetera.

Yeah look I think that.

The overall basket of stuff that we're buying is still inflating right. So I think that was true in Q2 still anticipate that to be the case in Q3, but maybe the pace of that is coming down.

I mentioned sort of wage inflation and supply chain costs and so on that seems to have moderated. So when you look at that bridge on seven.

Some of those bridge items are actually lower than they've been for the last three quarters.

And hopefully if things do get a little bit better on the supply chain side in that.

Kelly can only help from an efficiency standpoint for.

For the balance of the year, So I hope that's the case.

For us going forward.

Alright, thanks very much.

Yep.

Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is open.

Good morning, so two.

Two related questions. Both visibility can you give a sense for your backlog and the more short cycle businesses and then in.

The health care.

Aviation and military do you have any sense or line of sight to what growth rates next year might be looking like as the base rates.

Then just the other question on the electricity in Europe .

Mark to market current electricity prices.

Sort of a headwind would you have next year.

I don't know that I could give a mark to market on electricity or where we're at relative to our current contracts and pricing for next year.

In total we spent around $50 million a year.

Electricity, but.

Okay, Great Thats helpful.

No.

Look with respect to health care, we actually saw.

Good growth there through the course of this year and we expect that to continue into <unk>.

The second half of this year, it's really across just about all of the categories medical equipment and devices drug delivery LIBOR our medical supplies.

Look at all of them. They are really all up sell my expectation is that continues into 'twenty, three but I really couldnt give you.

A good estimate on that obviously, our long term projection is that sales drawing in that space is about 10%.

Clearly, we're getting a lot of that in price this year.

Typically the case for that industry as well and then what was the first part of the question again, I'm, sorry, I missed the front end.

Just in terms of the level of backlog that you're that you're seeing now compared to where backlog for last quarter.

Yes look I think we've only really we really don't have backlog in the traditional sense. We've just got.

An order book that usually gives us pretty good insight for about.

45 days, so when I look at what we have from a 45 days perspective, right now pretty much aligns with what we've got in our.

EPS projections for Q3.

Okay. Thank you.

Our next question comes from.

Ben <unk> with Baird. Your line is open.

Hey, good morning, guys.

Bob you called out sustainability be negative negatively impacted because of.

China shutdowns could you just talk through that and then talk about I think you said it was if we take that out it was like plus.

Plus 12%.

Could you just talk about where the strength comes from thank.

Thank you.

Yep.

Yes, so I mean, if that bridge that we add on slide six I think it just shows you the total growth and sustainable solutions.

And look obviously a lot of what we do in certain applications is coming out of China and may find its way to other parts of the world, but a large connectivity to sustainable solutions and I think that was right ex that it was about 12% so with China coming back online that should be a good guy for us.

In the second half of the year.

Really the number one thing that we saw as growth was light weighting and I think that was partially connected to demand in Americas for <unk>.

Posit applications as well as.

Some other in terms of food and beverage.

Downsizing or Dom gauging, if you will materials for those for those items, probably the two biggest things that we haven't really gone to that light weighting category.

Second would be then on just recycled content I mean, we still continue to see really good.

Inquiries from customers on that where everyone is trying to use more recycled content in packaging. It's still at the top of the list is the customer inquiries and that is also in the <unk>.

Positive category for us.

Great and then maybe just sneaking in one more.

We saw price increases offsetting inflation, Bob could you just talk about your capacity to continue to do that.

How you view that going forward.

We were to see further repricing.

I mean, I think we've got a really good track record for the last really year and a half and I think one of the reasons why that's the case is because we just got ahead of it early on and haven't had to play.

Catch up.

At this point I think for the markets that we serve there continues to be.

Good demand for what we're offering obviously with Europe slowing down that changes that dynamic to some extent, but up I think about it.

The ability to continue to get.

Price in the Americas, and Asia I don't think that's changed at all so.

Anyway, we've been able to continue to push that forward, we actually announced even more price increases in July so.

For now we are able to continue to do that and we really do see continued inflation again.

The basket of stuff that we buy although maybe that.

<unk> level is moderating, but still something that we felt was necessary to cover with further pricing.

Yeah.

Thank you guys.

Yes.

We have a question from Kristen Owen with Oppenheimer. Your line is open.

Great. Thank you for taking my question and.

Follow up on sort of the pricing strategy. There is obviously some benefit in the overall shift in the portfolio, where youre seeing growth, but im wondering if you can talk about.

Your pricing strategy, how you've addressed that internally, how you are setting guidelines to price for value and maybe it's more of a cultural question around how you're training your sales force to price for the value that you're adding and I'll have a follow up thank you.

I mean, the first thing I would say look culturally and we change this a long time ago pricing responsibility to really falls to our marketing organization and has for a number of years so that debt.

Isn't in the hands of the sales force clearly the sales force has played a significant role in conveying the price increase to customers.

But set by again the marketing organization. So I think that's good that we have that.

Split so that we can genuinely think about the market value of what we do and what the prices that we should get.

For that.

Both organizations can only do a great job in their tools.

I think the sales force has done a great job of just articulating.

The need for these increases given the levels of inflation that we've been seeing and candidly as you know in these bridge schedule is kind of below the line items of wage inflation and supply chain costs and so on so.

So I think just culturally this goes back a number of years. So I think the most important thing for US was that we just decided to move early.

Towards the end of 2020 and that momentum has really helped us for the last couple of years.

Thank you for that.

And then I noticed in your bridge for Capex, you have outlined some IP system Capex higher call from Investor Day, you talked about building some some predictive capabilities to digitize some APR formulations help spin our flywheel, a little bit faster on that innovation.

Can you just talk about the progress that youre seeing in that area and how that is helping you on your innovation cycles. As you start to approach. These other tangential markets like semi in robotics that you've outlined.

Yes, Chris Great question I mean, there is something that we're really interested in furthering our capabilities. There theres a lot of great tools that are available and ready to be used in and they're not very passionate about using those tools. We have made some specific investments.

Intuit group in order to enable some of that.

Longer data technologies that Bob mentioned on the actual webcast, though we're definitely putting some investments there.

The larger Capex that we talked about at Investor Day is really the integration between legacy polygon and legacy Clarient and there is an opportunity for us to really take a fresh look at what data that we're capturing as a company in order to make better decisions and thats a longer term project.

Thank you so much.

Our next question comes from Vincent Anderson with Stifel. Your line is open.

Yes, good morning. Thanks.

I wanted to kind of beat that price mix horse, just a little bit longer.

Particularly on <unk> and I, just the strengths there relative to the other segments.

Just maybe reminding us if there is anything structurally different about that or is it just maybe your cogs basket there hasnt been moving quite as rapidly as the rest of your basket and you are just riding the broader inflation wave on the price side capturing that difference.

Maybe on the cost side first I mean again it.

One thing it would be interesting if you go back and look at these bridge schedules from prior quarters, I mean, you'll actually see that.

That inflation number of 58 is actually the highest we've had of any quarter so to put that in perspective.

It's not like the spread widens simply because of that number going down.

I just think the color business has done.

Really good job with respect to price and execution.

And I don't know if theres anything else to say about it is unique to that but both <unk> and.

And color again, if you go back and look over the last six quarters or so.

But <unk> done a really good job in that regard, but nothing I would point to specifically about one end market or another a reason.

Okay. That's helpful.

And then can you just refresh my memory, given how strong outdoor has been for a number of quarters up until recently.

Your estimation is still running kind of above those pre COVID-19 levels or are we back to more relatively.

Normal like a normal sales trajectory and you're welcome to adjust that for any underlying growth do you think is sticky.

Yes, I mean, the answer is it like it depends so there are certain aspects of outdoor like.

Off road vehicles for example that are continuing to run at a really strong pace.

Whereas other things like archery.

<unk>.

Hunting applications and things like that are actually quite.

Quite low so that really started in the fourth quarter of.

Last year, we haven't quite lapped it yet, but we will by the end of Q3.

Some of those narrower applications, so hopefully that helps.

Articulate that I think in the off road space you know you still have very low.

Dealer inventory, but a lot of demand.

Whereas that's not the case in some of the other applications that I mentioned, which are down this year.

Alright, thank you.

That's helpful I'll turn it over.

We have a question from J D <unk> with on field Research. Your line is open.

Thank you. The first question I was just on the regional demand dynamics.

If you look at China to start with.

Yes, there is an expectation post COVID-19 that there is a recovery but.

One of the end markets are struggling and none of the chemical prices have taken a further step down.

What gives you confident that China will actually be better in Q3, and Q4 and then on the flip side in America or in the U S, especially.

<unk>.

Is there a worry that what is happening in Europe today could happen actually in U S as well and therefore, you sort of have a synchronized.

Demand if you can give a little bit color around end markets that would be.

Highly appreciate it and then the really the second question is around.

Distribution business.

In the rounds of discussion that you're having is there a valuation number that is going to make you say, yes, or no with regards to going forward with the deal or is it really.

The supplies or rather not supply the ddos security with financing that youre looking for because a few players in the chemical industry and the recent box have actually chosen.

Our tangible partner on the other side rather than get the best book valuation. So what is it that.

You are looking for and how confident are you that this will this will be done thanks a lot.

First with respect to my.

Previous comments on Asia, most of that was really relative commentary against second quarter performance, meaning that.

Q3 would be a little bit better than Q2, primarily driven by.

The absence of Lockdowns that we experienced in April and May.

In total.

Demand for Asia is actually down and Thats been true all year. So I think we are already seeing that.

With some of that spillover effect and Thats not new that was true for us in the first quarter and the second quarter, obviously in the second quarter, its kind of hydro bifurcated demand from the shutdowns, but nonetheless thats true.

I think Asia is also.

From a demand standpoint down in Q3 as well. So we're just modeling relative performance in Q3 being a little bit better in Q2 in Asia.

Clearly that's kind of overshadowed by the weakness that we see.

Right now in terms of arriving at our Q3 guidance and then lastly on the question on distribution you know all look I can't see.

Anything with respect to valuation we're in the middle of a process right now.

So hopefully you can appreciate that.

As I'll say.

Say in my prepared remarks, there's a lot of interest in the business we're encouraged by.

That level of interest and.

I expected a really good chance that we could get.

You know something done as this moves forward, we'll know more in August .

Thank you.

Yes.

Okay, Great that was our last question, we appreciate everyone's time and attention today.

Look forward to updating you further progress at our next quarterly call take care everybody Bye for now.

Okay.

This concludes our call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Q2 2022 Avient Corp Earnings Call

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