Q3 2022 Avient Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good morning, ladies and gentlemen, and welcome to events Corporation's webcast to discuss the company's third 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.
A question and answer session. Following the Companys 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 VI.
Vice President Treasurer, and Investor Relations. Please proceed.
Thank you Catherine 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 forecasts of future events and are not guarantees of future performance.
Based on management's expectation and involve a number of business risks and uncertainties any of them.
She cause actual results to differ materially from those expressed in or implied by the forward looking statements.
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 will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on <unk> website, where the company describes the non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures.
Joining me today is our chairman President and Chief Executive Officer, Bob Patterson and.
And senior Vice President and Chief Financial Officer, Jamie.
Now I will turn the call over to Bob.
Thanks, Joe and good morning, everyone.
September 27th we issued a press release to provide revised EPS projections for the quarter and the year.
Here.
Our projections were updated to include the acquisition of DSM protective materials.
The distribution business as discontinued operations and.
And adjust our outlook to reflect current demand conditions and weaker foreign exchange.
At the time, we said the war in Ukraine and related energy supply concerns had significantly eroded consumer sentiment and demand in Europe .
We're not seeing a recovery in Asia from the COVID-19, Lockdowns and the first half of the year.
It also that the economic environment has further challenged by rapidly rising interest rates in the U S.
Which have negatively impacted dementia demand trends in the Americas and.
In addition, we believe current global demand is likely further weakened by customer inventory destocking.
And all of this remains true today with further weakness now expected as a result of <unk>.
Recently announced Covid Lockdowns in China.
And you may have read about that in connection with major manufacturers like Fox Con and the applications for brand owners like Apple.
They're even further reaching than that.
Well, we'll certainly provide more color on each of these areas as our call progressive today.
From a headline perspective, we are reducing our full year adjusted EPS guidance to $2 60 sets there's.
There was an additional $5 that change to the pro forma estimate related to modeling not demand, which Jamie will cover in her remarks.
Economists may debate, the technical definition of a recession, but that is academic.
We are experiencing lower demand for the reasons that I, just mentioned and that is happening now.
So to help ground us in the state of preparedness I really wanted to just spend a few minutes reminding everyone of the portfolio changes that we've made in the last few years and.
And acknowledge the tremendous amount of change that has taken place since we last spoke I'm extremely.
We are proud of what we have accomplished these last few months I guess this backdrop with challenging dynamic and macroeconomic circumstances.
We achieved two key milestones, which are part of a much bigger transformational story.
I'm very pleased that we have been able to acquire DSM protective materials.
Aimed AVN protective materials our APM.
It adds a world renowned <unk> brand to our portfolio.
In doing so we have substantially increased our presence in the composite fiber space.
Adding important technologies to our sustainable solutions portfolio.
When we announced the deal in April Youll recall that we also announced we were going to explore a sale of our distributions segment.
And we did this for three reasons.
First I believe there was a perception potentially.
Potentially held by investors and potential buyers that we wouldnt sell distribution.
Announcing the potential sale was really an effective way to gauge the broader interest in the business.
They have publicly put all potential buyers on notice that we were going to run a sale process, which quickly became competitive.
The second reason was I wanted to convey the sale as a potential next step on our multiyear journey to becoming a pure play specialty pardon me later.
Our distribution business had been part of our company since it was created back in 2000.
No. It was not a formulation business. It did play an important role in our growth story has certainly helped US fund our specialty investments.
As you saw from our announcement yesterday the divestiture of distribution is now complete.
I'm really pleased that distribution as part of good home with H I G capital as they will continue to represent AVN in the marketplace as a distributor for certain materials in our portfolio.
And the third and final reason for announcing the sale and ultimately proceeding with it was so that we could remain modestly levered.
Which would protect us in a downturn, while also providing capacity for future acquisitions. When the time is right.
And we did what we said we would do.
We are using the proceeds from the distribution sale to pay down debt.
We remain modestly levered have no near term maturities of debt and substantial liquidity and.
In short we are very well positioned to navigate these challenging near term market conditions.
Demand is down and all signs point to a recession.
This is reflected in current equity market sentiment as share prices are down including avian.
And perhaps some element of our particular situation as a factual weighted by all these changes in the last few months.
Recall that just a few years ago. There was another important portfolio shift we were executing.
And this kind of reminds me of the similar dynamic.
In 2019, we divested a legacy business segment of the original avian call performance products and solutions, primarily constituting our geon brand and PVC based materials.
A few months later, we announced our agreement to acquire Clarient color business.
At the time, both transactions were very well received.
That is until the pandemic hit in early 2020.
Although it was a different impetus a very similar environment ensued with market disruption volatility and uncertainty.
Despite prevailing market peers during the early days of the pandemic, we confirm that we would stay the course with respect to Clariant and our strategy.
We knew that the Clarient color acquisition was the right one and that it would create value for the near term and long term.
And it certainly has.
We bought a business that generated around $130 million of EBITDA.
Today, the acquisition plus synergies or adding just over 200 million two years later.
EBITDA margins have expanded from around 12% over 16%.
And in terms of our purchase price it has dropped as a multiple from 10 eight to just over six times.
What I think is most compelling about the deal. However, really is the combined strength of the legacy Clarient legacy Poly one businesses that we've been able to create an enterprise that was better prepared to take care of customers.
The COVID-19 pandemic and take share.
We are the number one provider of specialty color and additive solutions today.
And it's an important reminder to stay the course in good times and bad just as we are right now.
Larry color and APM are the two largest acquisitions, we have done but we've also established a track record of bolt on acquisition success.
From thermal plastic elastomers specialty colorants and performance additives to building and now thriving composites business from scratch.
Acquisitions have played an important role in transforming our portfolio.
And so a divestitures, though as we exited businesses along the way that were more commodity and volume driven.
The following slide provides a snapshot of bolt on acquisition performance for established deals that we've had for over seven years.
And the value creation story is.
Similar to that of Clariant, but.
But it is also rooted in our invest to grow approach to integration.
We invest heavily in commercial excellence. This is often an underinvested area of smaller companies that we identify.
You entered offers tremendous opportunity for avs at our customers.
We increased sales marketing and R&D resources than.
And then train employees and provide them the tools they need to serve customers with the highest levels of innovation service and delivery.
The growth in value creation of those businesses are significant.
And when combined with the historic change in culture philosophy, and the way we go to market.
We really are now a pure play specialty formula later of sustainable solutions.
It's what we've been aiming for all these years, but not because its a finish line.
In fact, I really view this as a launching off point for us as a preeminent global leader in sustainable solutions.
Not many people could have imagined back in 2005, we'd be where we are today.
And that specialty transformation of our company ran in natural parallel with our goal to improve our end market mix.
If you went back to 2006 presented on the chart on the left you can see that the preponderance of our revenue wasn't housing auto and industrial.
Fast forward to 2022, and the end markets have changed dramatically.
On a pro forma view on the right over half our revenues now come from consumer packaging and health care.
And with <unk>, we add protecting men and women in the military and law enforcement with defense applications.
Here's another illustration of what moving from volume to value looks like.
Segment EBITDA margins have expanded substantially.
This is aggregated on slide 13, where you can see the total lift in EBITDA and margins over this time period.
And then the next slide you can see that as earnings have expanded.
So as the cash we have returned to shareholders.
A few weeks ago, we announced our 12 consecutive year of annualized dividend increases.
A record we're extremely proud of.
With the recent and significant acquisitions of Clariant and APM.
And our focus on de levering, we haven't bought back a lot of shares in the last couple of years.
But over a longer time horizon, we certainly have.
All told we have returned over $1 5 billion in cash and dividends and buybacks.
It's quite a story of growth and transformation through periods of immense Mac.
Macroeconomic geopolitical and personal stress beginning with the great recession in 2008 and nine.
Including the Covid pandemic, which continues to challenge the world and now the events of today.
And I think this is an incredibly important context to remember as we consider the current market conditions.
I believe we've never been in a better position to handle challenges like the ones before us.
And the reality is that business is down and we're not immune to it I.
I think this is exacerbated in the near term by these COVID-19 Lockdowns in China a.
A customer inventory Destocking, which is taking place to a degree I have not seen before.
I think much of this may be a correction in post COVID-19 buying behavior as well as the real effects of inflation and the impact that is having on consumer spending and sentiment.
Jamie is going to provide more details on our financial performance as well as how we are navigating these current trends Jamie.
Thank you Bob the transformation has indeed been a false bean pack of the two years I've been with the company and I truly cannot be more proud of the latest milestones. We've completed since our last earnings call and even more so when you consider the present economic condition.
We updated our projections in our September 27th press release for the reasons, Bob mentioned and to exclude intangible amortization.
For the third quarter, our EPS from continuing operations of 59.
In line with our guidance of 58.
A decline of 3% as reported but an increase of 5% excluding negative foreign exchange on a year over year basis.
The third quarter results shown on the slide include one month of dynamics in the current year.
Financing costs are higher than the ultimate run rate, we will achieve following the pay down of debt with proceeds from the distribution sale.
It is why the increase in EBITDA does not translate to a similar increase in EPS in the third quarter.
What is not immediate Lee evident from this slide are the underlying changes in demand price mix and cost we will cover on the next slide.
As you walk through the remaining financial slides, we've presented the information on a pro forma basis, which means APM is included for the entire period for both quarters presented.
As Bob mentioned before we have updated our pro forma modeling with more detailed information related to APM results in periods prior to our ownership and some impacts associated with preliminary purchase price accounting. This resulted in a <unk> <unk> change to our full year estimate.
As it relates to demand during the first half of the year, we reported declining demand related to a loss of sales in Russia, Covid Lockdowns in China, and lower sales into the outdoor high performance market.
This was more than offset by price and mix as well as the performance of our other end markets.
In the third quarter demand further declined resulting in an EBITDA impact of $39 million.
With the exception of our business in Latin America, all regions are experiencing a downturn.
Latin American sales are up 18% driven by growth in packaging applications and extending our reach within the region.
Europe as you would expect has been most heavily impacted as consumer sentiment has eroded with the ongoing war in Ukraine, and the associated energy supply concerns, causing virtually all end markets to be down.
We have not seen a recovery in Asia from the Lockdowns and the first and second quarters and with recently announced Lockdowns in Q4, we want this year.
Although the region is experiencing its own economic challenges. This is also likely tied to lower demand in the U S and Canada, which is really the new news we highlighted in our September 27th release.
U S and Canada represent about 40% of sale and their demand is down 9% year over year with a large portion of that coming from consumer applications, including outdoor high performance.
We believe inflation and higher interest rates are a significant factor in the shifting sentiment in the U S and Canada. This is further impacted by customer inventory Destocking, which Bob mentioned previously.
It's difficult to bifurcate the two and we're certainly hearing that from many customers across nearly every industry.
The impact of these demand trends on earnings was lessened by the net benefit of our pricing actions.
But I also point on this slide is that in prior quarters wage inflation has been a significant factor in cost increases.
Now we are seeing much higher energy costs, most notably in Europe , and particularly in our engineered materials segment.
From a segment perspective sales are down in both businesses due to lower demand with colors topline being more negatively impacted as virtually all of our exposure to Russia and parts within the segment.
And color has a larger international footprint than the engineered materials business was 65% of the business originating outside of the U S, which more negatively impacted Arizona due to the strengthening U S dollar.
Despite lower demand color was able to increase EBITDA, 7% year over year, excluding foreign exchange due to commercial excellence on pricing as well as lower cost associated with clariant synergies and reduced incentives.
From an LTM perspective pricing and mix have not been able to offset lower demand in consumer applications and higher energy costs in Europe .
We added the next slide to highlight the impact of demand on EBITDA by end market.
Industries, such as defense energy and telecommunications are holding up well on are effectively flat.
As we move down the table you will see a relatively small impact from demand on packaging, which is our largest market as well as healthcare and transportation at this time. We believe these three markets are being impacted more by Destocking and consumer demand.
We believe end markets such as building and construction have been negatively impacted from rising interest rates and overall inflation, which is influencing and customer demand.
The end market that has been most impacted which has lifted towards the bottom of this table has been consumer.
One third of this is directly tied to outdoor high performance, which is already down this year.
The remaining decline is likely a combination of end user demand and destocking tighter retail inventory reductions.
On the next slide you can see how the current demand is impacting our key growth drivers as well as the impact of pricing power by each.
White cells and sustainable solutions, it's up year over year due to pricing initiatives demand is down as customers draw down inventory.
A significant portion of our sustainable solutions portfolio is when it is within the consumer and packaging space, where we see the highest levels of destocking by brand owners and retail suppliers.
We are still confident in the long term growth profile of this platform. Despite the short term destocking, we are experiencing in the value chain.
Health care continues to be resilient in these challenging economic conditions as sales increased and higher margin applications, such as drug delivery devices medical equipment and catheters.
We are starting to see a slowdown in COVID-19 related applications, such as those used in administrating the vaccine.
Medical device applications are being impacted by chip shortages.
With respect to the composites, we are seeing demand growth in energy and telecom driven at least partially by <unk> infrastructure build out this coupled with pricing initiatives has more than offset the decline in consumer applications.
As we mentioned this morning, we expect for year 2022, adjusted EPS from continuing operations to be $2 60.
And pro forma adjusted EPS to be $2 95.
As a reminder, that continuing operations figures include APM for the period of ownership. So since September one and pro forma figures include Apm's full year results as well as the full year impact of using distribution sale net proceeds to pay down debt.
And I'd like to end on that point.
We've acquired an amazing business with <unk>, the world's strongest fiber at a value that will be accretive to our shareholders. We completed the transformation of our company to be 100% specialty formulated with the divestiture of distribution. We've accomplished a significant portfolio moves in a short time window and under incredibly difficult market conditions.
We did both of these transactions with a keen focus on maintaining a strong balance sheet and having the ability to keep investing even with the economic uncertainty ahead of us.
Or using all of the after tax proceeds from the sale of distribution of $750 million to retire our 2023 note and a portion of our outstanding term loans.
It will allow us to be modestly levered at three one times net debt to EBITDA by year end.
We have ample liquidity today, which will only continue to grow due to the asset light and high free cash flow nature of our businesses.
As Bob has mentioned before we are in a great position to not only weather the current economic environment, but to also stay focused on our long term strategy of growing and investing in our business with a focus on our key growth drivers.
That I will turn the call back over to Bob.
Well thanks, Jamie.
Today, we.
I've made some comparisons today to the Covid pandemic illustrate how we have run the company during challenging times, but clearly today's environment is not exactly the same as it was in 2020.
There is war.
Political tension.
Energy availability concerns in Europe customer Destocking, and we're all living with what May become one of the longest fallout from the pandemic stifling inflation.
Demand is down, but we will get through it we have a strong balance sheet as Jamie said, we will continue to control discretionary spending and accelerate remaining synergy capture from the <unk> acquisition.
But I also see this as an opportunity for us to further differentiate with our customers we're going to accentuate the unique hallmarks of why they choose avion as their partner, that's exceptional customer service and delivery continue.
Continuous investments in innovation and utilizing our global team and manufacturing footprint to flex wherever and whenever they need us to in this volatile environment.
Doing these things and doing them well not only keeps us more resilient in the short term, but it's building customer loyalty and setting us up for long term success when demand recovers and it will.
So while we're all so laser focused on the economic conditions in performance. It's a good time to step back and remember at other important learning from the pandemic and that is a practicing empathy.
There is a war is still going on in the Ukraine. Many families in Europe are worried if theyre going to have <unk>.
And there's a ton to navigate in the personal lives of our associates and our customers.
So as we work hard to win in this downturn, we will do so with empathy and compassion.
Always recognizing the bigger factor is the state.
With that well open it up for questions. Thank you.
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 Mitsch with <unk> Research Your line is open.
Hey, good morning, Bob Good luck on Saturday Ruckers can be very tough so hopefully that answers your first loss of the year.
Yeah.
Thanks, Brian .
I won't I won't play this.
It's a shallow but.
Hey.
You talk about this destock being greater than you've seen in the past and I'm wondering if you could offer us some color on the pace.
Of the destock that you see relative to <unk> and then into <unk>, so far and if there are any material differences by the by the segments.
Yeah, I mean, the pace really did pick up and.
I think the first time, we really started to see that was an August orders picked up in September .
October kind of came in line with forecast as we adjusted it in September , but then really dropped off again in November so maybe to give you some perspective right.
Right out of the fourth quarter forecast is discuss sales being down about 14% October was about nine.
November is really up around 16% ourselves so.
It does seem to be taking place faster as we get closer to the end of the year.
Got you.
Understood and then Jamie I think you indicated that at the end of the year.
Net debt to EBITDA will be about three one times and I'm wondering what what your target is.
For that metric.
What's the game plan to get there and timeframe to get there.
Yeah, our overall philosophy is to be under three times and Thats, obviously, what we've communicated.
Communicated I think in other conversations with Clariant, where we started at three five times now that we're starting at $3, one and because of the high cash.
Cash flow nature of our businesses, we expect to keep.
Keep on that path to get down closer to under three and <unk>, two and three times.
And then just a follow up anymore and when you get there would there be a reconsideration of buybacks at that point.
Yes, I think along the way there certainly will be I think we can be balanced in that regard.
Obviously, we need to see what next year looks like from an EBITDA performance standpoint, I mean clearly were.
At the front edge of declining demand. So we just need to put that into perspective of what.
Next year looks like but as I've made a Mike maybe my.
Remarks today, we have bought back a lot of shares in the past, we just haven't done it in the last couple of years because of these acquisitions. So.
Obviously with the share price, where it is it's attractive.
We will give that some consideration as we go forward just give you leverage your mud.
Thank you so much.
Thank you.
One moment.
Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.
Hi, good morning.
Chuckling about.
Still chuckling into Ruckers comment.
Wanted to ask you Bob if you can walk through the consumer business and kind of help us understand.
Maybe a little bit more detail, what's going on there I guess, our view in general is that consumer equals defensive but.
But it seems like within your business. There are some pieces that are more.
Discretionary and seen some pressure and then there are also some areas that are more stable like it should be more steady. If so can you help break that business down.
For us and maybe talk about what Youre seeing right now.
Yes.
We can spend more time on this after you have a chance to kind of look at the slides further but on slide 19, you can see what the EBITDA impact is a consumer at about $15 million. Obviously, that's the most.
Significant and I think around 9%, so that's really probably in the discretionary sector versus the balance probably consumer staples.
It's just sort of broadly categorized between the two that we've included them all.
Together their outdoor high performance as one <unk> when we started the beginning of this year, we knew that was going to be down.
But it's down even more probably than initially thought.
And in general like I really think that there is a pretty significant curtailment of consumer spending and consumer sentiment.
For things in.
The outdoor industry and or even in the consumer staples area in terms of home appliances and small items.
That fact on the stable side so.
Hopefully that helps as a starting point.
Give that some more thought.
Yes, we can follow up on that slide.
Yes that sounds good Amgen was also hoping that you could.
Talk a little bit about you mentioned, some additional synergies yet to come from Clarient.
I know that with the <unk> business you guys have mentioned that they have some operational best practices that might be leveraged across some of your other composites facilities, maybe just talk a little bit about how much additional cost.
Take out there could be between those two things.
And maybe some pullback on discretionary spending that you referenced in your remarks.
Yeah.
I mean, there is and there was a connection there I think you were making between.
APM and color there really isn't one in terms of learning between the two or if I misheard you I apologize.
But then with respect to the Clarient synergies I think there are more things that we can do from an operational perspective that were giving consideration to.
Recall that I think Kelly, putting these two businesses together.
During the pandemic really was a source of strength and we were able to take share obviously as we look at the current demand trends there is an opportunity to.
They do some more work from an operations perspective that we just Kelly, we're able to do over the last couple of years. So it's not new plans is partly I think getting to those plans as the best way I would describe that and then on the discretionary spending side. We're in the process right now of trying to rollout.
Our view of next year, you can imagine the challenges with doing that.
But everyone is going to be very mindful.
Trolling hedge out additions and just in general spending in travel and so on to be very prudent next year or so have more to say on that I'm sure when we get to the.
The fourth quarter results.
So I know this as you probably heard this before but we're on track to deliver $75 million of clearance synergies within 2022, and we've previously announced getting to $85 million in synergies and we're definitely on top of that and to Bob's point on whether or not we can accelerate those into a shorter time frame I think that's where we're headed and we'll obviously give an update when we get full year guidance.
For 2023.
Alright, and then sorry, just to clarify my question on <unk>.
<unk>.
My understanding is that there were some best practices that they had on their operations and that you might be able to leverage those into your composites business. Maybe just just take so again, taking some best manufacturing practices at finding ways to improve yields.
Productivity within composites.
Oh, yes, sorry.
Lump that in with Colorado's my mistake, but yeah, I mean, absolutely I think.
The <unk> business does some things incredibly well, obviously is world class technology, and innovation and I'm guessing, we're going to be able to learn a lot from that as well as manufacturing. So I think as the teams get more opportunities than together that will absolutely come to fruition.
Alright, thanks very much.
Yeah.
One moment.
We have a question from Michael Sison from Wells Fargo. Your line is open.
Hey, good morning.
I guess, Bob I appreciate the slide rigs.
Regarding the business.
The Dana portfolio being less cyclical, but when you look at the first half I think you advanced 6% second half looks like the volumes are going to be down.
Double digits, if you have a specific number.
Let us now.
It doesn't really feel less cyclical and maybe and I know your goal is to grow six 5%. So.
Maybe give us a little bit of color of why I mean volumes seem less cyclically.
It seemed more cyclical than they should be and maybe then just maybe any thoughts on if that's really the case.
Well I think first of all it's a relative comment.
When you look at the portfolio back in 2008, and 2009 and that recession.
Volume was down 36% so to beat down 12, it actually is less cyclical so.
Think thats Directionally correct, I think we're actually feeling that right now and seeing that in the fourth quarter.
I really think though that customer inventory destocking is playing a pretty significant factor in the fourth quarter I wish I could bifurcate. The two it had better visibility to that and that's one of the reasons why I think youre seeing.
That impact Q4, so significantly is seeing the corresponding EPS decline as a result, but anyway. When I look at 12, certainly much better than what it look like going through <unk>.
Got it and then when you think about 2023 and I understand a little bit early.
Obviously the consensus here is we're going to go into recession could you give us.
Sort of what you think.
The portfolio would generate in sort of a soft recession or a hard recession, I mean, what type of volume.
Declines do you think you would you would see in that scenario.
Yeah.
Well when we did the I mean, just to reference that OE <unk> scenario looking back on that had been 35% or 36%. When we ran a similar model with our existing portfolio today.
That type of a demand downturn, we did actually project it would be around 12%.
I still think Thats, a good long term view.
Think about what thats going to be like in this present recession. It may be down a little bit more in the fourth quarter again because of Destocking, but I still think that is a good way to think about what that looks like so look we haven't given any guidance yet for 2003, but clearly we're at the beginning of this down.
Winters. So some of that is going to go into 'twenty three for sure.
Got it and just a quick follow up so 12% down for the full year 'twenty two.
And then what would second half be.
No I wasn't saying, 12% I think I was just referencing kind of our present demand dynamic that we're seeing.
Right now between Q3 and Q4 so.
I don't have the math on top of my head there are and how that plays out for the full year.
Okay. Thank you.
Thank you.
Our next question comes from Angel Castillo with Morgan Stanley . Your line is open.
Alright, Thanks for taking my question. So I just wanted to get a little bit more color on the destocking that you're seeing I think.
You indicated obviously.
Hey that that's continuing here in the fourth quarter in November seemed to get a little bit worse.
Could you give us a little bit more of a sense of maybe what pockets or sectors, maybe saw more of a demand compression in November versus where we were kind of in October and then as you think about the fourth quarter. How do you kind of think about how much of that maybe is destocking versus just seasonality and other kind of broader trends.
Patents.
Yes, I mean again looking at that slide 19 that was at our deck.
I think when you look at I mean, obviously defense energy telecom relatively flat year over year I think we're seeing destocking in the <unk>.
Middle III categories transportation is already down so I think what we're seeing there is some.
Destocking and then in the final three probably a combination of <unk>.
Stocking a consumer and demand.
It really hard to bifurcate the two I wish I had better visibility into that but it's very challenging.
What I can say is that look buying behavior has changed dramatically in the last month or two where if you went back a year ago people were placing orders significantly farther ahead than what they needed they were placing orders for more than they needed and I'm sure that has resulted in a buildup.
Inventory and all that demand is pulling back everyone's correcting it so.
Again, I wish I had a better number on carving out the two but certainly I think that's played a big role in Q3 will be even bigger factor in Q4.
And maybe just a quick follow up to that do you kind of expect that to continue into early 'twenty three.
First quarter.
I mean, right now I feel like the.
The downturn is not really sustainable in terms of alignment with consumer demand because I don't think the demand is down as much as what we're actually seeing so I don't think that takes place for very long.
Billy.
Leave that at some point in time in the first quarter that starts to correct itself.
Got it that's helpful. And then just more broadly on <unk> now that you've had that asset for a couple of months.
Any kind of positive surprises or negative surprises as you start kind of going through the integration process.
Look I'll go so far and it's been just a little bit over a month so.
Really happy with the team Thats, joining us I think they are pretty.
Energized about becoming part of avian as well so the feeling is mutual that's a great start.
Obviously, we love the business that they're in I think you can see one of the reasons why would you kind of look at defense on that slide 19, obviously, it's a defensive market for us in it.
<unk> set of circumstances so.
No nothing else to really report on that think we're off to a good start.
Great. Thank you.
Thank you and our next question comes from Laurence Alexander with Jefferies. Your line is open.
Hi, everyone. This is Dan Rizzo on for Laurence how is everybody.
Hey, Dan.
Just for clarification, the 295 million pro forma.
You can see the sales and EPS pro forma guidance for 2022 that also excludes the contributions from distribution in the first half of the year correct.
That's correct.
Okay, I just want to make sure and then.
One of the things that others have talked about his concerns with energy curtailment amongst customers are amongst yourself is that something that could affect you guys and is it something that you expect to affect your customers' production.
I mean, I think the bigger concerns for us are probably I mean, I would just start with suppliers in Europe , particularly those that are in Germany.
Look at this point I haven't seen that impact us or them for that matter Bryan or it's on the table for discussion.
I would just imagine that that would ultimately impact customers as well I couldnt quantify that for you at this point, but that's the biggest areas of concern.
Would there be a difference I guess with the different end markets, obviously health care.
We think not be something that would be affected but something I guess more traditional industrial wood is that how we should think about it as well.
Yeah, I'm not sure it's that perfect at all I mean look with respect to sources of supply, particularly in Europe , and where base materials come from so I think thats something that governments will really have to.
And think about as they if they need to ultimately curtail energy use.
They still need to find a way to maintain supply to essential industries like health care.
And I don't know exactly how that's going to take place at this point, but I'm certain that.
There would be and I would hopefully there'll be some exception in that regard and when they look to <unk>.
Wording in some fashion.
Okay. Thank you very much.
Certainly.
Thank you and our next question comes from David Wang with Deutsche Bank. Your line is open.
Hi, Good morning, just going back to the <unk> business can you talk about the volume trends, you're seeing for Diana and it looks like EBITDA margin was 28% in Q3 is that primarily due to higher energy costs and can you also talk about your expectation for Dynamo margins going into Q4 and 23.
Yes, so first of all Hi, David Secondly, I'd say that.
<unk> and the APM business is a more energy intensive business than the legacy AVN businesses.
Our feeling that right now for sure that is.
<unk>.
The numbers in Q3, we'll do probably even maybe it's about flat between Q3 and Q4 about the same.
Year over year that margin number you're referencing is about spot on and that's where I kind of expect things to.
And the year.
And then I guess, just taking the macro forecasts and what Youre seeing.
As it is.
Can you talk about your playbook for 'twenty, three and I know you don't give guidance, but can you talk about your confidence level in growing EBITDA in 'twenty three.
Well at this point I mean, looking at what the fourth quarter looks like and how much EBITDA is down I don't think EBITDA is going to go up in the first part of 2023, we haven't given any guidance.
If I see some demand trends continuing into the beginning of next year.
Think thats going to be a tough hurdle to get over at least in the first half.
We really are just in the beginning stages of kind of formulating our view on the 23 vessels that we normally do after we provider for quarter update in late January early February and hopefully we're prepared to do it at that time, but.
Look right now I mean demand is down significantly we're in a recession this isn't going to be over in 90 days. So I really think we're got a tough road ahead of us here for <unk>.
At least a couple of quarters.
Okay. Thank you.
Thank you and we have a question from Eric Petrie with Citi. Your line is open.
Hi, good morning, Bob.
Talk about can you talk about in a little more detail the larger buckets and sustainable solutions like White waiting and then any update on recycling solution efforts by your customers.
Yes, I mean, the first thing I would point out and Jamie made this comment just in comparing.
Some of the different bridge schedules that we have in here that you can look at sustainable solutions.
That's kind of roughly flat I think got a oi basis, but packaging is down. So what you do see is that you got favorable pricing and mix more than offsetting what you see in demand.
Down I think a lot of that is actually due to destocking more than anything else.
Packaging is not due to loss of share or due to people shifting from a sustainable solution to one that's not I don't really think does to replace this mostly just destocking.
And I, certainly say that there is still a high degree of.
Energy and interest.
And being able to use more recycled content and to make products more easily recyclable.
I do think there is a dynamic coming though with higher level of inflation and it won't really be about customers' changing the mix of their product as much as there might be a change in sort of how consumers think about major.
Major brands versus store brands and so on I think that has yet to play out I don't think thats happening right now, but certainly could in the future. So.
Anyway, it's still positive trends on light weighting and recycled solutions probably has the two biggest year to date when I look at overall, what's driving.
That may answer your question versus safely.
Okay, and then secondly can you just remind us how much in terms of earnings outdoor high performance is down year to date and then when do you think destocking complete kind of Anniversaried that.
Yes, it's down about <unk> <unk>.
$14 million for the full year and we're really in the process I mean last year's fourth quarter was.
So I think we're right on the edge of lapping that apps.
Absent any further destocking or something like that to take place this year, but I don't think the year over year change is going to be that big in Q4.
Great. Thank you.
Got it.
Oh that was it.
Last question.
Just want to say thanks, everybody for joining us on the call today, we look forward to.
Giving you an update after we concluded our fourth quarter results.
And as always if you have other questions. Please give us call.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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Okay.
Okay.