Q1 2023 Avient Corporation Earnings Call
Speaker 1: And as I set up the onset, we are very pleased with how well the business is performing in the early days.
Speaker 2: and that our pricing continues to cover this inflation. Certain cost reduction activities, including targeted European restructuring, provided an $8 million benefit to the bottom line, this quarter. We've had a significant amount of change for our portfolio over the past few years, with the acquisition of Clarendt and Dynama, along with the divestiture of our distribution business. This is the first quarter where those changes are fully represented in our actual results, and it's a good opportunity to highlight the diversity of our portfolio.
Speaker 2: Here you see our sales and EBITAB breakdown by our two segments in the bar charts to the left. You also see the diversity of our in-markets and regions represented by the two circle graphs to the right. The portfolio transformation has given us broad and market exposure that reduces the difficulty and a geographic presence necessary to serve multinational.
Speaker 2: OEM.
Speaker 2: Our foundation is stronger than ever, which is helping us weather the current macroeconomic environment. The following slide reflects the first quarter year-to-year changes in sales by region, excluding the impacts of foreign exchange. The overall demand of our amendment is fairly consistent with what we projected earlier this year.
Speaker 2: In Asia, although China ended their COVID-related restrictions in December , biking and section rates at the end of the year and into the first quarter, likely played a role in delaying a rebound in economic activity.
Speaker 2: We expect moderate and continuous sequential quarterly improvement in Asia as the year progresses.
Speaker 2: Command and Europe is relatively stable at the current levels, not getting worse, but not really getting much better, with the exception of automotive, which was of double digits compared to prior year.
Speaker 2: We're seeing increased sobness in the US across most end markets, particularly in building a construction and consumer markets.
Speaker 2: The inventory de-stocking in the US started a little later than other regions and will likely affect the first half of 2020.
Speaker 2: 2023.
Speaker 2: In Latin America, specifically Mexico, the man was down only slightly, we believe the region is benefiting from reshoring from Asia.
Speaker 2: And as we dig deeper into the end markets within those regions.
Speaker 2: There are a few that are holding up more consistently and better than others. They include energy, telecommunication, deep ends, and transportation.
Speaker 2: In terms of energy, there's an increased focus around the world to improve the quality of the electrical grid, including strength, capacity, and reliability. Capital investments are being made to update aging infrastructure with a large portion that is over 25 years old.
Speaker 2: These updates include replacing materials such as wood and steel with alternative composite technologies that are stronger, more durable, and corrosion resistant.
Speaker 2: We serve customers that support the electrical infrastructure with components made from composites, such as primary and secondary insulators, distribution and transmission poles, and cross-arms.
Speaker 2: In addition, we provide ballistic resistant protective barriers to improve the physical security of electrical substations.
Speaker 2: Recent and unfortunate attacks against substations have the full attention of government agencies and public utilities, which have accelerated their efforts to protect vital power generation and transmission equipment. Telecom is another industry where there is significant worldwide investment, especially as connectivity trends require faster speeds.
Speaker 2: and greater coverage. For example, the USB program alone designates $42 billion to close the digital divide by increasing fiber optic cable deployments with a maiden America provisions that will bring high-speed internet to all.
Speaker 2: Recall our fiber line acquisition in 2019 with a strategic initiative to better align us to the growing needs of the major telecom providers.
Speaker 2: The unparalleled performance of Dineema is trusted to protect the world's finest from the realities of war. As Bob mentioned at the beginning of the call, half of our protective materials business goes into personal protection, with the highest strength through weight ratio of any material and leading protective qualities, it makes Dineema the material choice for environments where optimal safety is the priority. Finally, sales for transportation applications have grown double digits over the prior year, first quarter.
Speaker 2: Automakers continued to work through the backlog that was created by significant supply chain issues over the past year. In addition, regulations continued to accelerate fuel efficiency where applications decrease energy usage and lower emissions.
Speaker 2: provide lightweight solutions that increase fuel and battery efficiency and and help transport material safely and efficiently. Our color formulations are used in vehicle interiors where manufacturers look for durability, consistency, and style. Our portfolio transformation has been purposeful to allow for the breadth of end markets you've heard about today. As we navigate through the current macroeconomic environment, the diversity of end markets and geographic presence will help us perform through the cycle. It also puts us in a position to accelerate growth as things improve. Now I'll turn it back over to Bob to discuss our outlook for the second quarter in the school year of 2023 guidance.
Speaker 1: Thanks, Jamie. Our second quarter guidance is for revenue and adjusted EPS of 845 million and 60 cents respectively.
Speaker 1: We are maintaining our full year guidance of $530 million of adjusted EBITDA and adjusted EPS of $2.40. This factors in a more conservative growth rate in the second half, given the uncertainty around demand levels and timing of economic recovery. Jamie provided a number of comments about regional and end market observations in her remarks, and I will just emphasize that many customers continue to tell us that they are sitting on more inventory than they'd like.
Speaker 1: So that we assume some level of destocking remains, particularly in end markets like building a construction in the U.S.
Speaker 1: With respect to expected cash generation and a balance sheet, we reaffirm our prior estimate of a full year free cash flow of 200 million and in the year with net debt to adjusted eva-duff of 2.9 times. While we are focused on the near term macroeconomic environment, nothing has changed our view on the four key long-time growth drivers that we discussed at our investor day in December of 2021. They were sustainable solutions, healthcare, composites, and high growth regions such as Asia and Latin America.
Speaker 1: You'll hear about consumer trends and customer sustainability goals that are shaping and driving our material science innovation. Despite a myriad of economic, geopolitical and public health impacts to business around the world, our sustainable solutions portfolio has grown substantially since 2016. We're excited for what's ahead as sustainability needs apply to every industry, each with its own set of demands or challenges.
Speaker 1: Common themes are reducing CO2 emissions, eliminating plastic waste, and increasing the use of recycled content. Yet each industry requires different specifications and certain attributes.
Speaker 1: to achieve the desired effect for the end consumer.
Speaker 1: Our diverse portfolio, backed by our deep material science know-how, positions us well.
Speaker 1: to capitalize in these shared goals.
Speaker 1: This helps our customers and leaves our planet a better place
Speaker 1: Over 80% of our new product pipeline is dedicated to sustainable solutions, which will enable us to meet not only the needs of today, but also the challenges our customers face in the future. So to wrap up our team is aligned and executing as we manage through this downturn, we are doing so by optimizing our cost structure, staying close to our customers and prioritizing free cash flow. As Jamie said, our portfolio is stronger than it has ever been to perform through this cycle. And we are positioning ourselves for long-term success by continuing to invest in the future.
Speaker 1: and aligning our innovation platforms to our four key growth drivers.
Speaker 1: With that, I want to say thanks for your time today. We'll open up the line for questions.
Speaker 1: With that, I want to say thanks for your time today. We'll open up the line for questions. Thank you.
Speaker 3: To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker 2: It's a great question Frank. So as we take a look at age is sequentially progressing slightly better. We also see the US in an environment where things may be flowing down as Bob mentioned in his comments with inventory desocking and consumer demand as well as building a construction. So when we take those factors together in Europe being roughly flat sequentially, that's how we get with flat sales.
Speaker 1: Are you seeing that right now here in the month of April and your order books for me? I'm just curious.
Speaker 1: right now here in the month of April and your order books for me, I'm just curious on that.
Speaker 1: Oh, okay, fantastic. And you mentioned, you know, the RAWs are still a bit of a headwind, but you're seeing some deflation on the hydrocarbon based. How would you handicap that progressing, you know, into 2Q3Q and your ability to hold on to pricing so that your margins expand, continue to expand?
Speaker 1: year over year. It's the same bridge we've been presenting now for year or so. So you can obviously look back in time and see that that is decelerating. I think as we look forward, you know, it's possible that that becomes a little bit of a benefit for us. I think we're sort of being conservative with respect to how much of that manifests itself over time, but I do think that starts to turn to be a little bit of a benefit. And I think we're doing a really good job of handling price and environment. The one thing that's really important to...
Speaker 1: Just remember is that you know most of our raw material costs are still anywhere from 35 to 50% higher than they were you know 18 months.
Speaker 1: so it's still a pretty high cost environment. Thanks so much.
Speaker 3: So thank you one moment.
Speaker 3: Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.
Speaker 4: Hi, good morning.
Speaker 5: One of the ask a couple questions about the dyneema business. It sounds like that The integration and the contributions from that business are kind of exceeding expectations
Speaker 5: I'm just curious, what have been maybe some of the positive surprises as you look at, I guess, the team and the operations or maybe the markets and solutions that came with that Daimino business? Yeah, I don't know if I would necessarily put it in the...
Speaker 1: surprise category. Obviously we had the chance to get to know the management team ahead of completing the acquisition and felt very good about them and what they were bringing to our organization. I just have nothing but positive things to say about them, their passion for the business and culture is everything and we really are.
Speaker 1: fitting together very well. That's a huge plus. So I don't put it in the surprise category per se, but I think it's a great reason why the integrations go so well. The defense industry is actually the industry that has grown the most in the first quarter, which I think.
Speaker 1: just for Plex demand in those specific areas. So maybe not also in the surprise category, but something that I think is a testament to, you know, their technology and their position in that space with a very unique set of offerings.
Speaker 1: personal protection. So I'm not sure I've got anything necessarily to put into the surprise category, Mike, things are going really well and that's what we expected. Maybe let me ask you a different way.
Speaker 5: I don't believe you've given a revenue synergy number, but maybe just talk about how you're thinking about Dynamo revenue synergies today versus when you acquired it. I know sometimes that those revenue synergies can take time to materialize, but are there some opportunities that are maybe moving faster than you had anticipated?
Speaker 1: Well, I think the opportunities, there are some that exist with, I just think, a cross-sharing of information across our existing customer base.
Speaker 1: Particularly in the consumer space where, you know, Legacy AV1, or Avian is very solid in that regard. About 20% of Dyneema is in consumer. Obviously consumer market is down right now for everybody. So that might present a near-term challenge, but one where I see opportunities.
Speaker 1: You know, a very short order. I think it's really a longer term about bringing technologies together and creating some new solutions that could be used across the avian advanced composites businesses where we can leverage some of the technology that we have with...
Speaker 1: ultra high molecular weight polyethylene from Dine E-MIMM.
Speaker 5: All right, just a quick last one for me. And in the engineering materials business, it looks like you got only $6 million of price mix. It's about 2% year on year. Is that the segment where we could expect you?
Speaker 1: to give back some pricing if ros are moving lower. I guess maybe just a little more detail on what's going on with pricing in EM. I think we always have to be flexible with respect to price and consider the competitive dynamics that exist.
Speaker 1: As I mentioned, maybe a moment ago to, you know, Frank look, we're still sitting on substantially higher cost than we were, you know, a year and a half ago, so we have to be mindful of that, too. But I wouldn't draw any distinction between EM or color in terms of which.
Speaker 1: You know, in terms of their price elasticity, if you will, I'm not sure there's a real demarcation between the two. Thank you.
Speaker 1: In terms of their price elasticity, if you will, I'm not sure there's a real demarcation between the two. All right, thanks very much.
Speaker 3: Thank you. One moment for our next question. We have a question from Vincent Anderson with Steve. Your line is open.
Speaker 6: Yeah, thanks. So I was hoping to dig in maybe a little bit more on B, just because all these government initiatives kind of have their own nuances. So curious what this looks like from kind of a timing of fund disbursements, any minimums in that spending plan specifically designated to things like hardware, and can you detail the domestic sourcing benefit component?
Speaker 1: I think the business of ours that benefits the most from that will be the fiber line business which supplies composites into fiber optic cable and infrastructure build out. Obviously we are excited about the incremental investment that's coming.
Speaker 1: I'm not sure how much of that's going to find its way into 23. My sense is that we'll see more of that in...
Speaker 1: 24 just with respect to how long it takes for those kind of things to actually make their way into the spending universe. Hopefully that helps.
Speaker 6: Yeah, no, that's good. Thank you. And then, you know, I wanted to maybe break down the restructuring efforts in a little more detail if possible. I think this is around the time after a large acquisition that you would start to see things like footprint rationalizations.
Speaker 6: And then maybe just related to that, it wasn't long ago we were talking about labor shortages, so curious if Headcount is a significant component of those restructuring efforts. Yeah, so first of all just to be clear, I mean the restructuring efforts have nothing to do with Dyneema, restructuring efforts really relate to.
Speaker 1: you know, bringing together the legacy, Poly-1 and Clareant businesses, and things that we had always planned to do with respect to some facility consolidation. That was really delayed because of COVID and what was going on with supply chain challenges and issues in 21 and so on. And so now we're finally doing those things, and that's really the preponderance of.
Speaker 1: what makes up the restructuring costs in Q1. You know, from a labor standpoint, I do think that things are improving. And obviously that was incredibly stressful in the end of 20, but certainly throughout 21. And I feel like we're finally getting some relief there.
Speaker 6: All right, perfect. Thanks so much.
Speaker 3: Our next question comes from Michael Cesson with Wells Fargo. Your line is open.
Speaker 7: Hey, good morning. I start to the year Bob. It sounds like two Q-vons can be down a lot again somewhere in the first quarter. What do you think fundamental demand is running at now? And how do you think about the stocking efforts? I mean, when do you think it'll sort of subside?
Speaker 7: Are you assuming it's a size heading into the third quarter?
Speaker 1: So our main art demand assumption is, you know, we were down about 14% in Q1, resuming roughly the same level in Q2, so it's really kind of flat if I just think high level in terms of how that's playing out. What from a destocking standpoint?
Speaker 1: Seems like many customers really still feel like they've got a lot of inventory on hand I know some of that's anecdotal. I can't tell you what percentage of customers that is, but we certainly
Speaker 1: through that routinely. And so I think that that's gonna weigh on things for Q2. There are maybe, you know, as an M-marker or two like building a construction where there's still more to come, particularly in the US and one of the...
Speaker 1: I think themes of our observations over the last few months has been that we still think there's more to come in the U.S. versus Europe and Asia, which have probably flattened out. So I guess that's the best way I could answer that by region and end market.
Speaker 7: Okay, and then longer term, if you do get, or at some point I assume volumes will come back with hope, and you still feel good about the longer term EBITDA levels that you wanted to hit.
Speaker 1: when you were doing the dining medial and it made me just walk us through what needs to happen to get to that level. I look at I do. I think that when we put the businesses together, we had a pro form of view of about $650 million of EBITDA. That was at the beginning of 2022.
Speaker 1: And, you know, I also would say that that was at a margin level of about 17 and a half to 18%. I think both of those are achievable within a reasonable amount of time as the economy recovers. That's not our stopping point on margins, as you know, our long-term goals to get the 20%.
Speaker 3: Our next question comes from David Wong with Deutsche Bank. Your line is open.
Speaker 1: So I think it's about maybe $3 million a show that are incremental specifically related to clearing it and the other is just a more broad based set of cost reductions. Okay. And then I get the current guidance implies a 9% EBITDA approved maintenance second half. Assuming demand stays at the current level, do you expect price costs will be enough to drive that type of growth? And if not, I guess what other levers do you have, you know, TT offset, a week demand situation? Look, I do think that there's, you know, I think we're...
Continuing to be conservative with respect to our margin expectations.
You know, things play out the way they have here in the first quarter. There's, you know, possibility that we would do better in that regard. We have continued to balance that, though, with just uncertainty around the demand environment. So there is more to come. I think with respect to margin improvement that can help us offset that.
which I think are the primary things that we're focused on executing in the near term. To the first question about where some of these cost reductions are coming from, more of that will come into the second half of the year with some of the plant rationalization that we had planned.
think of the primary things that we're focused on executing in the near term. To the first question about where some of these cost reductions are coming from, more of that will come into the second half of the year with some of the plant rationalization that we have planned. Thank you.
Hi, this is Jason Vernaugh on for Kristen Owen. I was wondering if you can walk us through your free cash flow assumptions for the remainder of the year? Sure, from a free cash flow perspective, there is the slide in the webcast which talks about cash flow from operations of $350 million. There's a slight benefit in working capital, but most of that came through in the fourth quarter of 2022. And then as we take a look at CAPEX, we do have some additional expenditures that we've assumed in 2023, primarily related to the synergy capture and plant rationalization that Bob mentioned on the last question, in addition and investment in our IT system.
industrial was not positive.
actually down. We focused on defense, transportation, energy, and telecom. And in terms of them being up in the first quarter, that is the
sequential order of that so defense was up the most followed by transport energy and telecom.
The sequential order of that, so defense was up the most followed by transport energy in telecom.
about the revenue synergies. I was just wondering what the kind of how the sales process works where how long it would take really to kind of see the benefit of potential revenue synergies from between your business and the new Dynamo acquisition. I think it's a spectrum of things. I think there's an opportunity and consumer to do things in relative forward order. That's really just taking, you know,
and defense for energy. So it really does depend, Dan, I think, on which end market that is. So certainly more to come, but they can't be time consuming. So I guess your traditional products can be used in personal protection. There is a revenue synergy there, or I mean, I understand how their products could continuously cross over. I was wondering just now it goes both ways. I want to be careful there because obviously, avian doesn't have anything that was like dyneema and isn't going to be doing a revenue synergy in that direction to do something that they...
Okay, all right. Thanks a lot. Thank you. One moment. We have a question from Davis Sunderland with Baird. Your line is open. Hey, good morning, team. Thanks for taking my question. I wanted to ask another question about end markets and specifically the call out for transportation. Could you just maybe expand a little bit more on the opportunity there and maybe any long-term changes that we should expect in the end market mix? Thank you. Certainly. I mean, for us, transportation is...
you know, let's say 8 to 10 percent of sales roughly and It's one where we really focus on I think to applicates two things in particular a lot of that is the color and aspects of the interior packagings just so
as there are incremental vehicles produced. I also think there's a lot that goes into that from a sustainable solutions perspective. And then we're probably around light weighting and materials from an engineer materials perspective. So in general, I think what the automotive industry, transportation industry is performing well. We benefit simply from...
that demand improving, but also with respect to material replacement. Thank you.
And it looks like we have a follow up from Mike Harrison with Seaport Research Partners. Your line is open.
Hey, just a couple of other follow-ups. I'm a Q2 guidance with the revenue being flat compared to Q1, but it seems like you expect earnings to be a little bit lower than what we might have expected, even though you might be getting some benefits from the revenue.
assumptions and margins in that regard. There are some things that actually will go up a little bit as we project them today, like possibly higher interest expense in the second quarter versus the first quarter. I think we mentioned perhaps at the last quarter that
Just sort of part of our cost reduction plan that we had that. You know, senior executives and directors were not getting merit increases this year. However, the preponderance of our population is. Below the director level, and that all kicks in in April . So. There's just some things like that that really.
All right, thanks. And then on the Sustainable Solutions opportunity, obviously that's something you've talked about for some time, but you've talked in the past about being constrained by the availability of recycled plastic material. I was hoping maybe you can give us an update and maybe a little bit of a preview of a September event just talking about how you're seeing that recycled content opportunity play out. I still think that is true. I mean, it is a major constraint. I think that with investment in additional infrastructure around mechanical recycling that gets better.
I think that takes time and probably has some level of exponential effect as those things come online. So, as I just sit here and I look at 23 versus 22, there's no real significant change to that. But I do think that happens in the outer years.
But we will spend more time talking about that at the September 20th.
talk about what the compound annual growth rate of sustainable solutions through 22 is you know 10 or 11 percent and honestly, I think if we actually had that recycled content it would be even better. So this is one reason why I continue to feel good about that long-term growth rate. All right, sounds good. Thanks very much. Okay, thank you. I think that was our last question so we appreciate everyone's time on the call today. Obviously there'll be an opportunity to connect after our second quarter results and look forward to also hosting those who can join us for our Investors Sustainability Day on Peptinem.
The Compon Annual Gulf Rate of Sustainable Solutions through 22 is, you know, 10 or 11 percent. And honestly, I think if we actually had that recycled content, it would be even better. So this is one reason why I continue to feel good about that, launch on growth rate. All right, sounds good. Thanks very much. Okay, thank you. I think that was our last question. So we appreciate everyone's time on the call today. Obviously, there'll be an opportunity to connect after our second quarter results and look forward to also hosting those who can join us for our investor sustainability day on September 20th. Thank you. Thank you.