Q2 2023 Avient Corporation Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the avian Corporation's webcast to discuss the company's second quarter 2023 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 and answer session. Following the Companys prepared remarks as a reminder.
This conference is being recorded for replay purposes.
Now I'll turn the call over to Joe to Salvo, 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.
Forward looking statements will go current expectations or forecasts 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 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 the website, where the company describes the non-GAAP measures and provides a reconciliation to their most comparable GAAP financial measures.
Joining me today is our chairman President and Chief Executive Officer, Bob Patterson.
And senior Vice President and Chief Financial Officer, Jimmy bags.
Now I will hand, the call off to Bob to begin.
Thanks, Joe and good morning today, we reported our second quarter results with adjusted EPS of <unk> 63 exceeded our guidance driven.
Driven by better than projected margins in both segments.
All material deflation was a net positive and our composites portfolio continues to be resilient.
Otherwise challenging environment.
Composites is an area that we have grown through a series of acquisitions and incremental commercial investment.
<unk> now makes up about 20% of our business.
<unk> offer a lighter weight option was strengthened design flexibility and other materials simply cannot.
Since 2012, we invested in six technologies to build out this portfolio that now includes long fiber tapes laminates.
<unk> and engineered fibers.
Our goal has been to acquire businesses, where we can add commercial resources to drive growth.
Specifically in end markets and applications that are underserved or not served at all by composite players today.
From a performance standpoint.
Our composite businesses are holding up well in the current economic downturn.
<unk> is the latest addition to our portfolio and Couldnt have come at a more important time.
As the world's strongest flavor and utilized in defense and other end markets, where failure is simply not an option.
Year to date demand for personal protection was up 13% and is expected to increase as the year progresses.
85% of our composite materials serve the following five end markets.
Personal protection or defense applications include body armor, and helmets that rely on dynamic fiber.
And its unrivaled performance lightweight.
Light weight and high strength combination provides the highest level of protection for women and men in the military law enforcement, while also allowing for EES physical movement.
The industrial end market.
Certainly vast and there are many opportunities to leverage the benefit of composites.
Posit tapes or reinforcing high pressure pipes.
Being used for a conveyor springs to be replaced that replace more durable materials.
The composites provide significant performance benefits lifting slings.
Can also be tailor made to deliver strength as the surface and specific directions or certain areas depending on us.
Bind with being resistant to corrosion chemical and environmental exposures. There really is limitless possibilities in this end market.
And our acquisition of fiber line in 2019 expanded our solutions into the fiber optic cable and telecom industry.
But of serving the <unk> and more recently <unk> infrastructure build outs.
And most recognized the value of <unk> simply is speed.
But it's really about connectivity <unk>.
<unk> power or the development of smart cities remote surgeries in autonomous driving vehicles.
Sustainability benefits like process automation reduction of waste and greater control over water management are also being enabled by this technology.
Private wireless networks and manufacturing facilities and warehouses.
Lie on <unk> as well to meet the emerging technical requirements of AI automation and high Tech production.
As you all know China was an early mover in <unk> infrastructure.
With nearly $3 billion base stations and growing.
In the U S with the upcoming deployment of funding from the bead program. It will greatly accelerate <unk> and avian is well positioned to take advantage.
In the energy end market. There has been an increased focus around the world to improve the capacity and reliability of the energy grid will.
While also expanding more sustainable energy sources.
We serve customers that support the traditional electrical infrastructure with components, such as primary or secondary insulators.
Distribution and transmission poles across arms.
These updates often replace materials, such as wood and steel.
And for offshore wind farms, <unk> and <unk> lines are considered the best option for positioning and anchoring windmills.
We're all modes of transportation customers are looking to use composites to increase fuel efficiency.
And battery applications.
Examples you may not be as familiar with include air cargo panels railcar doors and laminates to protect the underside of truck bed floors, what I love about these applications is that they.
I serve as perfect. Examples of how we have to take in composites to these new underserved markets I previously referenced.
And winning new business in these areas has helped us to navigate the challenging market conditions that we find ourselves in this year.
In that regard.
Our message today about Q2, and the remainder of the year is really about improving margins.
Offsetting weaker demand conditions. This is both from better mix and cost reductions.
Jamie is going to tell you more now and then I will have some concluding remarks.
Thanks, Bob second quarter, adjusted EBITDA of $131 million came in slightly ahead of our forecast as lower sales, particularly in Europe .
All set by stronger margin adjust.
Adjusted EPS was <unk> <unk> better than expected driven by the EBITDA would be as well as lower interest expense and depreciation expense.
Adjusted EBITDA margins exceeded guidance by 50 basis points at sustainable solutions and composites continued to prove resilient in the current environment and provided favorable mix in the quarter.
Deflating raw material prices, along with our ongoing cost reduction initiatives also factored into the margin improvement.
The second quarter EBITDA bridge shown here, what's the impact of demand price and cost on a year over year basis.
Starting with demand customers remain cautious and continue to closely manage inventory levels.
Overall demand was slightly below our expectations and regional trends have evolved since we last spoke.
U S and Canada went about as expected with softness across most end markets, particularly in building and construction and consumer.
Latin America demand was slightly worse, but most notably we saw Europe weaken further which we thought going into the quarter has stabilized.
Partially offset by a slight uptick in Asia, which is modestly better than expected.
Also highlighted on the spreads at the impact of pricing and deflation. This is the first quarter, we've seen raw material deflation on a year over year basis deflation.
Deflation was most covalent and our and our hydrocarbon inputs such as polyethylene and polypropylene.
Have started to see moderation in other raw materials, such as certain performance additives.
It along with price continues to help us offset weaker demand and cover wage and energy inflation, which remain elevated versus the prior year.
Lastly, certain cost reduction activities, including targeted European restructuring and reduced discretionary spend provided a $13 million benefit to the bottom line this quarter.
Turning to page 10 on the webcast slides, we provide another view on sales. This time on a sequential basis from Q1 to Q2 by region.
Sales on a global basis or two 6% lower.
In Europe , where we typically see an increase in packaging as our customers prepare for the summer vacation months.
But that didn't come to fruition as persistent inflation had a negative impact on consumer sentiment and or some level of destocking remain.
Customers in Europe continue to be the most cautious of any region.
As we look around the rest of the world mainly in the Americas. It's largely is largely unchanged from the first quarter U S. Consumer has been quite resilient and we expect weaker demand to continue in the second half.
In Asia, we experienced modest improvements in the second quarter with China reopening and recovering from the Covid Lockdowns last year. We hope this remains a positive trend going forward.
As we mentioned during our first quarter call ordering patterns have shifted to smaller quantities and shorter lead times. This is true even in traditionally recession resistant markets like packaging and health care.
Health care has been surprisingly and negatively impacted more than anticipated in terms of demand this year.
Historically this is among the more recession resistant market.
It seems even health care device manufacturers, just like manufacturers and other industries still have too much inventory on hand.
In the first half of the year major companies like Becton, Dickinson, ICU and Teleflex, all point to reducing inventories this year.
Further rising interest rates continue to have a negative impact on consumer applications and building and construction.
Partially offsetting the impact of the macro environment as the resilient nature of our composites business, serving the end markets. The Bob highlighted earlier, we have factor all of this into our guidance projections for the balance of the year.
Our third quarter guidance is for revenue of $800 million and adjusted EPS at 56 cents.
Our current view of demand and higher margins based on the strength in composites raw material deflation and cost reductions.
We are maintaining our full year guidance of adjusted EPS of $2 40.
Lower revenues of $3 3 billion.
While we have slightly lowered our full year adjusted EBITDA projection. This was offset by lower interest and depreciation expense.
We have been consistent all year, and saying that we believe that demand conditions weakened beyond our initial model that we would be able to offset that with strength in composites, improving margins and cost reductions and that's exactly what we've done so far.
With respect to expected cash generation and leverage we are updating our full year free cash flow to $180 million to include additional costs related to environmental remediation expenditures and timing of tax payments.
<unk> net leverage at year end is three times.
I'll hand, the call back over to Bob for some closing remarks.
Thanks, Jamie at our Investor Day in 2021, we highlighted four key long term growth drivers, where we focus our investments.
Theyre sustainable solutions health care composites and high growth regions, such as Asia, and Latin America.
These four areas make up over 60% of our sales today.
Where we expect to provide long term revenue growth above GDP.
Larger of these as sustainable solutions, which has grown at an 11% compound annual growth rate since 2016.
Some great examples of those solutions are highlighted in our latest sustainability report just released and are available on our website.
It's a comprehensive publication that provides our many stakeholders important updates on ESG matters that are important to them to us and to our planet.
In our report we have provided updated metrics and highlights for each of our four pillars of sustainability people products planet and performance.
When it comes to products and performance.
Third of our revenue now comes from this portfolio.
You'll read about how our customers are using these technologies to meet their sustainability goals.
Included in our report we showcased several customer case studies.
<unk>, enabling sustainable infrastructure.
Like our work with L'oreal, where we have helped them incorporate recycled content into their packaging.
All while maintaining the performance and color integrity of this leading global brands.
His support and supporting our planet objectives, you see our progress towards our internal goals of reducing waste to landfill and energy intensity.
Increasing our use of renewable energy sources are more.
You will also see how our products help our customers achieve similar objectives.
And at Avion. This is all made possible by our people in this section of our report you will see why.
We are increasing our investments in training and leadership development at all levels of the company.
Employee resource groups are expanding their outreach, helping to further strengthen our culture of diversity inclusion and performance.
This is a culture that last year was certified again is a great place to work in fact last year, we achieved our highest employee engagement scores ever and we did.
So in the midst of tremendous change at our company and really the beginning of a global economic downturn.
I encourage you all to read our report and better understand the many ways, we are leading and investing in sustainability.
I'm curious this is the most comprehensive report.
At one place highlights who we are what we do.
And we frequently get questions about how customers are viewing sustainability in light of the current economy and environment.
This much is clear they are still committed.
Brand owners have established ambitious sustainability goals on a range of topics across the ESG spectrum.
They've committed to these goals internally and publicly and are working hard to achieve them.
Two common objectives, where they are seeking help from us are increasing the use of recycled content and lowering carbon emissions.
In our materials science directly facilitates both.
By light weighting reducing material consumption.
Proving performance in coloration of post consumer recycled content to name a few.
It's truly inspiring work, it's also a core area of investment and growth for us.
The how and where we are having success warrants. Some focus time to fully appreciate which is why we will be holding our virtual sustainability day for investors on September 20th.
At our sustainability day, we will provide a deeper look into our growing portfolio.
And you'll also hear about the consumer trends and customer sustainability goals that are shaping in driving our innovation.
Sustainability is here to stay the stakeholders are driving demand for sustainable products and from sustainable companies like us.
In closing with respect to our prior guidance I'll reiterate what Jamie said in that we have been consistent all year as saying demand conditions are uncertain.
If they were weaker than we initially projected we could offset that with cost reductions and better margins. So far that has certainly been the case.
We acknowledge that near term challenges persist.
But I think there should be a growing sense of optimism.
From a from a macro perspective. It is beginning to look like the U S rate of inflation that is declining.
And just and Destocking should become begun to moderate in many industries.
Position us for long term growth.
And we don't plan to cover the slides today, but on our website, we have refreshed or a peer church and.
And believe we are on the right path to being viewed and valued as a specialty formulators.
Thank you for listening today, we'd be happy to over the line for any questions.
Thank you.
Yeah ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question Press Star One one again please.
Please stand by while we compiled the Q&A roster.
Our first question comes from Frank Mitch with Fermium.
Fermium Research your line is open.
Thank you. Thank you so much and and good morning, everyone.
Yeah I have to ask you your obligatory question, you're keeping your guy for the full year, obviously you've exceeded your.
Sure your Bogeys in Q1 and Q2, so that's a D facto cut.
The second half of the year so.
Are you suggesting that.
You know what your thoughts when you were first put out the four year guide you had a certain expectation on how the second half would play out and and as you sit here today. It's it's it's moderately worse than that or are we.
We still have a couple of quarters ago, and there was some measure of conservatism that's factored in.
Yeah, I mean like I guess, the best way to describe the beginning of the year is we didn't have real good visibility too you know what the second half would look like and I don't know, it's just the best way to convey that was that if you know demand conditions weaker weaken further from what we initially projected.
You know, we would be able to offset that.
Particularly if we experienced raw material deflation, which we know are so I think as we stand here sort of in the middle of the year. We've just got.
Better perspective on what the numbers are going to look like or the balance of the year and that's really what shapes or guidance I I hope that helps.
Gotcha.
So you're a belt and suspenders.
So I think about Europe .
The tenor the tone is it seems a bit.
More negative than perhaps we might have thought three months six months ago and so forth.
Your.
Your your sales declines what downturn percent <unk> down 8% in Tokyo at least that's cam moderating somewhat but it's still materially negative year over year.
How close are we to bottom when might we hit bottom in that region or it's still fairly murky.
Maybe a clarifying point on add up I could burst just with the numbers that you decided that slide that Jamie presented today was actually but changed from Q1 Q2.
Oh slightly different.
Wow, you're right in Europe , Europe's got worse right Wow there.
And that you know.
I think if you went back to our last call we.
We're probably more optimistic about Europe sort of reaching bottom and that didn't prove to be the case.
Jamie realized specifically highlighted some things that has historically happened in the summer months with respect to demand or additives for packaging, primarily around the food and beverage or not really doesn't materialize in the in the second quarter like we thought so I guess I would put Europe and the sort of negative surprised category.
Understood and that and so no scope for at least as you are looking at it right now you're not banking on any sort of recovery in the back half of 23.
I think things could be bottoming out, but not necessarily recovering so maybe that's the right way to think about that.
Alright very helpful. Thanks, so much.
Sure thing.
Thank you one moment for my next question.
Our next question comes from Michael <unk> with Wells Fargo, you're lying or something.
Hey, good morning, guys nice nice corner.
<unk> has it been down six quarters around I think that'd be a bonding affected what what did you think volumes will be down in the third quarter and how do you think I think shape up in the air and the fourth.
I mean look at the current guidance as sales down about nine and a half or send you three the preponderance of that really is a demand or volume related there is a little bit of a positive.
I think on F X a year over year, but.
Or maybe a little bit of positive on ethics, but.
I think when you look at Q3, Mike and that projection that we have on sales that is really primarily underlying demand.
Got it and then.
In terms of deflation when you look at the second half what what type of level deflation do you think you're gonna see.
Yeah. So I mean, one way to actually think about that is you know if you look at the changes to our guidance, we took $60 million of sales out of the third quarter.
But really only changed EBITDA by about 10, so that kind of gives you a sense for order of magnitude of what we see is incremental benefit from price and.
Raw material deflation, so hopefully that kind of helps you in with a bridge schedule that we had for second quarter, you can probably move to Q3 and Q4ced her to put that together.
Got it thank you.
Mmm.
Thank you one moment.
Our next question comes from Mike Harrison with Sea Port Research Partners. Your line is open.
Hi, good morning.
I wanted to ask about Asia.
<unk> noted that things there were stronger than you expected that doesn't really seem to be what the headlines are saying and a lot of companies are are kind of talking about this muted.
Piece of recovery, what markets were leading the strength that you saw in Asia.
And do you expect to add momentum to accelerate in the second half given that there's maybe some new government stimulus going on in China.
I mean, I think we would agree with some of the headline observations that you know.
The recovery has not been as.
Significant you know or to the extent that people may have hope for as a result of reopening from Covid lockdowns.
But it was still better if I look I'm going Q1, Q2, and that's that's a good thing you know I think that there was in general demand for.
Personal products consumer and packaging packaging is one of the largest markets we have there.
And as well as you know products that are getting distributed back into the U S and Europe .
And I think I forgot to answer your part about the second half of the year.
One of the things that I don't know if I've mentioned this on the last call or not but you know we are starting to see an uptick in.
Customer request for a new color designs and that usually is a pretty good leading indicator that there is.
[noise] positive momentum.
So hopefully that does continue in the second half of the year [noise].
[noise] alright, great and then was hoping that you could give us an update on what you're seeing in the packaging market I think your reference and softness that's going on in in Europe , there, but that's an area where you have some interesting sustainable solutions.
The the weakness that you're seeing there is is that really related more to destocking or slowing consumer demand I guess, maybe just hoping.
That there are signs that demand is starting to stabilize isn't that important market for you guys.
Yeah, I mean look I think that it is still is still some of both.
You know, maybe just specifically talk about Europe , where packaging is our largest.
Ah segment I do think you know consumer sentiment as impacting what they're spending money on right now inflation, obviously has dramatically increased the cost of food and beverage prices and so I think there that there certainly is a consumer impact too.
Man beyond that I think it's probably still some destocking at least with what we were you know saw in the second quarter.
But possibly some type of you know belt tightening in other places in the world as well.
Alright, thanks very much.
Thank you.
Mmm moment.
Our next question comes from David <unk> with Deutsche Bank. Your line is open.
Hi, Good morning, just some pricing I know practice next was.
Ah betting a quarter and mix was positive does that mean pricing by itself with negative in the corner.
And that gets you mentioned last corner there was some competitive dynamics. There do you expect any further practic clients in that back up.
Ah price was a positive for the quarter, that's pretty much what's in there and then I think what we've been saying is that.
You went back to last year pricing really probably peaked at the end of the second quarter.
A little bit in the beginning of the third so our expectation is is that pricing delta.
Delta just starts to decline over the course of the of the year. So I think you'll see that in the second half.
Could be flat I think that's probably a good estimate to use right now for two three and four.
Okay, and then cost reduction how much was it benefiting the corner if you strip out <unk> synergy.
Actually I think about additional cost savings in the back half.
Ah client synergies was Oh really a small number in that 13 it was about two.
And you know like.
By the end of last year I think we were worried about 70 576 million of the run rate we expected at 85 in total so we're pretty much there.
So hopefully I'll put that in the the balance of that really was other cost actions related to a European restructuring and some of it is <unk>.
Personnel.
Okay. Thanks.
Thank you.
And our next question.
Comes from Lawrence Alexander with Jeffries Your line is open.
Good morning, just a couple of different odds and ends up first with dining room can you give a sense for where the margins in volumes are compared to where you thought you'd be when you first.
When you're close to the acquisition.
Sure.
So maybe I'll just do this by you know and market. So member of 50% of the business is personal protection.
About 30 per cent of that's Marines sustainable infrastructure and 20 per cent of the consumer.
And personal protection.
I think your question was about versus expectations. So obviously.
Obviously, when we did this deal last year, we had an expectation that personal protection would start to picked up his demand for demand defense applications increased and that is happening I would say, that's probably even higher.
Higher maybe at the beginning of this year than what we thought.
Consumer is down significantly in the same way that the other alien markets or I'm not sure that's too much different than what we thought or what we know now just based on what.
What we're seeing in consumer and marinas sustainable infrastructure is also down some so that's possibly a slightly different change than we thought but again I think that is just what's going on in general with the industry today.
But anyway, the whole business is really holding up well and.
Margins are as good as they have done in the past and there's really no commentary there on margins to provide these will be our expectations.
Okay great.
Destocking.
What are you hearing from customers in terms of.
Kind of where they think equilibrium whoopee I mean in terms of.
The inspectors are pushing inventories lower then may be desired and then have a snap back sort of later on or.
Is everybody just trying to find a new equilibrium, which they can live with them and you just can you give us a sense for the flavor of the discussions like what they're warning you they have in mind.
Yeah, I mean, I really do think it does vary by by industry and I would say that.
You know in the consumer space.
Feel like that is one space that is actually starting to improve.
Improve.
Meaning I think less destocking.
I would compare and contrast that to healthcare, which actually was down.
I think the second highest of any I'm market that we had.
Quarter and healthcare companies are still telegraphing.
Yet.
More destocking to come.
That health care really did.
That's a caution for you know taking care of people during the Covid era and supply chain issues.
Over the course of 21 and 22, they simply did have too much inventory on hand, and I think they're all really working to bring that down.
I think Jamie mentioned that that I mean that was kind of a negative surprise for us this year because health care is typically resilient.
I think if it weren't for their destocking it would be because I don't really think consumers are really changed their health care patterns. This year. So I look at health care and so I think that's the preponderance of as Destocking and that's good continued through the rest of this year.
And then just lastly, just with the kind of performance you've seen on price mixed versus cost and also kind of having your productivity has been offsetting your wage inflation and energy.
How do you think this plays out over.
Five seven years and was there an upper limit to margins.
Should the price cost price next cost narrow over time.
It gives you a sense of just because it's a new dynamic for evening compared to kind of the predecessor.
And you've talked about quite a bit over the last couple of years, but can you get a sense for where you see.
The limits where the trajectory.
I mean look I think we're right I think we're at the beginning of a positive trajectory with respect to margins and if I look at how much they compressed and 2020 and 21 and then into 22 because of inflation.
You know that's an opportunity for you know that to reverse itself with deflation and you know hanging onto price.
We have long said that our goal is ultimately get EBITDA margins to 20 per cent.
If we simply got back to where we were on a pro forma basis.
In the middle of the 2022 that's about.
Under 18% and then I think with improving mix and the four key growth areas. We can get the 20th so I I don't feel at all like we're getting into some limit I feel like we're at the beginning of getting to where we want to get too.
Which is closer to 20%.
Thank you.
Thank you.
One moment for our next question.
We have a question from Christian Owens from Oppenheimer. Your line is open.
Hi, Good morning, Thank you for the question.
And all of the incremental color that you've provided I wanted to ask a little bit about that the comment you made about the short or order timelines, maybe since momma orders and just ask you to expand on that a little bit how that is impacting your planning horizon, what that means hermione from a planning perspective for AVN.
And then I'll have to find that.
I'd say, the one thing that it impacts more than anything else is just our visibility too.
Performance and I have always said that based on orders order patterns, we had pretty good visibility.
For the upcoming month, maybe 45 days and I feel like that's been cut in half.
With respect to shorter.
Shorter or surely time and also a smaller quantities.
So that's just made it more difficult for us to project, what's going to happen in the short term.
Lot of ancillary issues with that with production scheduling and planning and so on.
But that really is the biggest in fact, it's just affectively all weekend planned for running the business.
[noise] at helpful, and then sort of tying that into some of the longer term discussions about sustainable solutions and sort of customer timeline for the solution does it seem like very different types of conversation. So if you could just help us understand what that.
The tenor of the the sustainable solutions conversations or how does have tried to interest given the environment.
Yeah, I mean, that's the important part of well we want to share in September 20th is that like the brand owners are still very keenly focused on achieving their sustainability goals and.
And I really feel like the level of engagement with them.
Is still very high so despite destocking and generally what's going on with the manufacturing sector right now I don't feel like that's plain. So that's a good thing.
Those things are longer lead time product projects they really are.
Element projects and innovation and I think it says a lot look if you look at the color segment, I mean 100 per cent of our innovation portfolio is dedicated to sustainable solutions.
100 per cent right. So I mean that just tells you how important that is.
If I could sneak in one final follow up to that to that last sentence tying into the previous question. What does that mean in terms of your pricing abilities and vote for this longer term horizon. I mean is there is there a and is therefore I'm what you anticipate the cat.
Sure from the ammo solutions on a pricing fine. Thank you.
Yeah Man one I think there is a value to be had there from a pricing standpoint, but I would also tell you that.
There's a cost aspect of that in right now sustainable solutions often times you know have.
A higher level of cost is based on the you know.
Cost of recycled content and or the additional additives and so on.
You know to help get those colors that are brand owners are looking for so.
I I in general I would just say that that pricing.
Will continue to move forward and up I think is.
Annabelle solutions grow.
[noise] any others.
Okay, one moment.
We have a question from.
Vincent Andrew So it's Morgan Stanley Your line is open.
Thank you and good morning, everyone. I'm wondering if you could talk about cash flow.
It looks like with EBITDA down 5 million.
Cash flow from operations is now.
Give me 320, instead of 350 and pre Castro is gonna be one eight instead of 200.
I see on the balance sheet of a casual statement as working capital or inventory in particular is up but can you just help us understand.
What's going on from a cash flow perspective, and what actions you are putting into place to try to improve the situation.
Yeah, I mean, I guess really the primary changes from our previous guidance really related to some environmental expenditures and timing of tax payments.
I'm not sure what working capital information, you're looking at but in general are working capital as a percentage of sales is actually.
Line this year versus last year, we've done a really good job of managing inventories one of the things that you just have to look at with respect to cash for working capital is.
Just the timing of when those things happen, we had a pretty significant influx of cash and you know in November and December of last year.
And that obviously factors into our percentage of sales.
We don't have the same thing built into this year. So that might help you when you compare and contrast twenty-three versus 22.
Yeah, I was I was looking at the increasing inventory.
But anyway.
This is a follow up.
Where do you think your customers are I mean, I know you talked about the health care situation. They were overstock, just sort of as a function of COVID-19 and so forth, but do you think customers in general are now it it very lean level.
Leaving no obviously, there's a lot going on with the interest rates and just broader macro concerns, but do you think that there at sort of you know.
Levels, where you just can't go on that much more so that when we get to four Q. We've maybe won't see the same level of seasonality that we typically see where do you think that's still a risk in the fourth quarter.
Yeah, I mean, I think that is part of our assumption is that we don't see the level of seasonality I mean, if you look at our revenue projection for the fourth quarter, it's not that much higher than what it was last year, but last year was significantly below.
Where it's been in the last two to three years so.
You're right on with that assumption I think it does vary by industry.
You know I think in the outdoor space, which is one that we've talked about a lot I actually think that there are some green shoots in that area that will start during the second half of this year, we're seeing a little bit of that now dealer.
Dealer in retail inventories very low still so I mean that tells you maybe that is leanne.
But and then in other industries like health care, we said.
That apparently with what our customers are saying, both publicly and to us their inventory levels are not lean and so we see further destocking there.
Thanks very much.
All right well. Thank you very much for all the questions and for everyone listening in today, hopefully you can make it to our our sustainability day on September 20th we look forward to updating you.
In that regard on that day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Good morning, ladies and gentlemen, and welcome to the avian Corporation's webcast to discuss the company's second quarter 2023 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 and answer session. Following the company's prepared remarks as a reminder, this conference.
Is being recorded for replay purposes, I would now turn the call over to Joe The Salvo, 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.
Forward looking statements will give current expectations or forecasts 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 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.
These refer to the presentation posted on the evening and website, where the company describes the non-GAAP measures and provides a reconciliation to their most comparable GAAP financial measures.
Joining me today is our chairman President and Chief Executive Officer, Bob Patterson.
And senior Vice President and Chief Financial Officer, Jamie bags.
Now I will hand, the call off to Bob to begin.
Thanks, Joe and good morning.
We reported our second quarter results adjusted EPS of <unk> 63 exceeded our guidance driven by better than projected margins in both segments.
Raw material deflation was a net positive in our composites portfolio continues to be resilient.
Otherwise challenging environment.
Composites is an area that we have grown through a series of acquisitions and incremental commercial investment.
And now makes up about 20% of our business.
Posits offer a lighter weight option was strengthened design flexibility and other materials simply cannot.
Since 2012, we invested in six technologies to build out this portfolio that now includes long fiber tapes laminates.
Intrusion and engineered fibers.
Our goal has been to acquire businesses, where we can add commercial resources to drive growth.
Specifically in end markets and applications that are underserved or not served at all by composite players today.
From a performance standpoint.
Our composite businesses are holding up well in the current economic downturn.
<unk> is the latest addition to our portfolio and Couldnt have come at a more important time.
As the world's strongest flavor and utilized in defense and other end markets, where failure is simply not an option.
Year to date demand for personal protection and is up 13% and is expected to increase as the year progresses.
85% of our composite materials serve the following five end markets.
Personal protection or defense applications include body armor, and helmets that rely on dynamic fiber.
And its unrivaled performance.
Lightweight and high strength combination provide the highest level of protection for women and men in the military and law enforcement, while also allowing for ease of physical movement.
The industrial end market.
It's certainly a vast and there are many opportunities to leverage the benefit of composites.
Posit tapes or reinforcing high pressure pipes they're.
They're being used for a conveyor springs to be replaced that replace more durable materials.
In composites provide significant performance benefits and lifting slings.
They can also be tailor made to deliver strength as the surface of specific directions.
Certain areas depending on us.
Combined with being resistant to corrosion chemical and environmental exposures. There really is limitless possibilities in this end market.
And our acquisition of fiber line in 2019 expanded our solutions into the fiber optic cable and telecom industry.
We have a sense for the serving the <unk> and more recently <unk> infrastructure build outs.
Most recognized the value of <unk> simply as speed.
But it's really about connectivity.
<unk> empower the development of the smart cities remote surgeries in autonomous driving vehicles.
Sustainability benefits like process automation reduction of waste and greater control over water management are also being enabled by this technology.
Private wireless networks, and manufacturing facilities and warehouses rely on <unk> as well to meet the emerging technical requirements of AI automation and high Tech production.
As you all know China was an early mover in <unk> infrastructure.
With nearly 3 billion base stations and growing.
In the U S with the upcoming deployment of funding from the <unk> program. It will greatly accelerate <unk> and avian is well positioned to take advantage.
In the energy end market that has been an increased focus around the world to improve the capacity and reliability of the energy grid.
While also expanding more sustainable energy sources.
We serve customers that support the traditional electrical infrastructure with components, such as primary and secondary insulators.
Distribution and transmission poles across arms.
These updates often replace materials, such as wood and steel.
And for offshore wind farms, <unk> and <unk> lines are considered the best option for positioning and anchoring windmills.
We're all modes of transportation customers are looking to use composites to increase fuel efficiency.
And battery applications.
Absent examples you may not be as familiar with include air cargo panels railcar doors and laminates to protect the underside of truck bed floors, what I love about these applications is that they serve as perfect. Examples of how we have to taken composites to these new underserved markets I previously referenced.
And winning new business in these areas has helped us to navigate the challenging market conditions that we find ourselves in this year.
In that regard.
Our message today about Q2, and the remainder of the year is really about improving margins.
Offsetting weaker demand conditions. This is both from better mix and cost reductions.
Jamie is going to tell you more now and then I'll have some concluding remarks.
Thanks, Bob second quarter, adjusted EBITDA of $131 million came in slightly ahead of our forecast as lower sales, particularly in Europe .
All set by stronger margin adjust.
Adjusted EPS was <unk> <unk> better than expected driven by the EBITDA would be as well as lower interest expense and depreciation expense.
Adjusted EBITDA margins exceeded guidance by 50 basis points at sustainable solutions and composites continued to prove resilient in the current environment and provided favorable mix in the quarter.
A deflating raw material prices, along with our ongoing cost reduction initiatives also factored into the margin improvement.
The second quarter EBITDA bridge shown here walks the impact of demand price and cost on a year over year basis.
Starting with demand customers remain cautious and continue to closely manage inventory levels.
Overall demand was slightly below our expectations and regional trends have evolved since we last spoke.
U S and Canada went about as expected with softness across most end markets, particularly in building and construction and consumer.
Latin America demand was slightly worse, but most notably we saw Europe weakened further, which we thought going into the quarter has stabilized.
Partially offset by a slight uptick in Asia, which is modestly better than expected.
Also highlighted on this brands at the impact of pricing and deflation. This is the first quarter, we've seen raw material deflation on a year over year basis deflation.
Deflation was most covalent and our and our hydrocarbon inputs such as polyethylene and polypropylene and we have started to see moderation in other raw materials, such as certain performance additives.
Along with price continues to help us offset weaker demand and cover wage and energy inflation, which remain elevated versus the prior year.
Lastly, certain cost reduction activities, including targeted European restructuring and reduced discretionary spend provided a $13 million benefit to the bottom line this quarter.
Turning to page 10 on the webcast slides, we provide another view on sale this time on.
On a sequential basis from Q1 to Q2 by region, where sales on a global basis or two 6% lower.
In Europe , where we typically see an increase in packaging as our customers prepare for the summer vacation months.
But that didn't come to fruition as persistent inflation had a negative impact on consumer sentiment and or some level of destocking remain.
Customers in Europe continue to be the most cautious of any region.
As we look around the rest of the world mainly in the Americas largely is largely unchanged from the first quarter U S. Consumer has been quite resilient and we expect weaker demand to continue in the second half.
In Asia, we experienced modest improvements in the second quarter with China reopening and recovering from the Covid Lockdowns last year. We hope this remains a positive trend going forward.
As we mentioned during our first quarter call ordering patterns have shifted to smaller quantities and shorter lead times. This is true even in traditionally recession resistant markets like packaging and health care and food.
Health care has been surprisingly and negatively impacted more than anticipated in terms of demand this year.
Historically this is among the more recession resistant market.
But it seems even health care device manufacturers, just like manufacturers and other industries, you'll have too much inventory on hand.
Further rising interest rates continue to have a negative impact on consumer applications and building and construction.
Partially offsetting the impact of the macro environment as the resilient nature of our composites business, serving the end markets that Bob highlighted earlier, we have factored all of this into our guidance projections for the balance of the year.
Our third quarter guidance is for revenue of $800 million and adjusted EPS of <unk> 56 cents.
This reflects our current view of demand and higher margins based on the strength in composites raw material deflation and cost reduction.
Revenues of $3 3 billion.
While we have slightly lowered our full year adjusted EBITDA projection. This is offset by lower interest and depreciation expense.
We have been consistent all year, and saying that we believe that demand conditions weakened beyond our initial model that we would be able to offset that with strength in composite improving margins and cost reductions and that's exactly what we've done so far.
With respect to expected cash generation and leverage we are updating our full year free cash flow to $180 million to include additional costs related to environmental remediation expenditures and timing of tax payments.
Projected net leverage at year end is three times and I'll hand, the call back over to Bob for some closing remarks.
Thanks, Jamie at our Investor Day in 2021, we highlighted four key long term growth drivers, where we focus our investments.
There are sustainable solutions healthcare composites.
High growth regions, such as Asia, and Latin America.
These four areas make up over 60% of our sales today.
Where we expect to provide long term revenue growth above GDP.
Largest of these is sustainable solutions, which has grown at an 11% compound annual growth rate since 2016.
Some great examples of those solutions are highlighted in our latest sustainability report just released and are available on our website.
It's a comprehensive publication that provides our many stakeholders important updates on ESG matters that are important to them to us and to our planet.
In our report we have provided updated metrics and highlights for each of our four pillars of sustainability people products planet and performance.
When it comes to products and performance.
Third of our revenue now comes from this portfolio.
You'll read about how our customers are using these technologies to meet their sustainability goals included in our report we showcased several customer case studies like.
<unk>, enabling sustainable infrastructure and.
Like our work with L'oreal, where we have helped them incorporate recycled content into their packaging.
All while maintaining the performance and color integrity of this leading global brands.
His support and supporting our planet objectives, you see our progress towards our internal goals of reducing waste to landfill and energy intensity.
Increasing our use of renewable energy sources are more well.
You will also see how our products help our customers achieve similar objectives.
And at <unk>. This is all made possible by our people in this section of our report you will see why.
We are increasing our investments in training and leadership development at all levels of the company.
Employee resource groups are expanding their outreach, helping to further strengthen our culture of diversity inclusion and performance.
This is a culture that last year was certified again is a great place to work in fact last year, we achieved our highest employee engagement scores ever and.
And we did so in the midst of tremendous change at our company and really the beginning of a global economic downturn.
I encourage you all to read our report and better understand and in many ways, we are leading and investing in sustainability.
I'm serious this is the most comprehensive report that one place highlights who we are and what we do.
And we frequently get questions about how customers are viewing sustainability in light of the current economy and environment.
This much is clear they are still committed.
Brand owners have established ambitious sustainability goals on a range of topics across the ESG spectrum.
Committed to these goals internally and publicly and are working hard to achieve them.
Two common objectives, where they are seeking help from us are increasing the use of recycled content and lowering carbon emissions.
In our materials science directly facilitates both.
By light weighting reducing material consumption.
Proving performance in coloration of post consumer recycled content to name a few.
It's truly inspiring work is also a core area of investment and growth for us.
The how and where we are having success words, some focus time to fully appreciate which is why we will be holding our virtual sustainability day for investors on September 20th.
At our sustainability day, we will provide a deeper look into our growing portfolio.
And you'll also hear about the consumer trends and customer sustainability goals that are shaping in driving our innovation.
Sustainability is here to stay and stakeholders are driving demand for sustainable products and from sustainable companies like us.
In closing with respect to our prior guidance I'll reiterate what Jamie said.
We have been consistent all year, and saying demand conditions are uncertain.
If they were weaker than we initially projected we could offset that with cost reductions and better margins. So far that has certainly been the case.
We acknowledge that near term challenges persist.
I think there should be a growing sense of optimism from a from a macro perspective that is beginning to look like the U S rate of inflation that is declining.
And destocking should become begun to moderate in many industries.
And it also seems less likely that recessionary conditions will spread beyond the manufacturing sector.
Specific to us and to repeat what I previously said the dynamic acquisition Couldnt have come at a more important time as demand for defense and sustainable infrastructure applications gain.
And momentum.
When combined with our other composite technologies, we are well positioned to take advantage of recently announced government sponsored initiatives such as the broadband equity access and deployment program.
B could really take hold in 2024 and increased demand for our applications and fiber optic cable.
The same is true for the inflation reduction act, which could translate into increased demand for our applications that helped to secure existing energy infrastructure as well as build new renewable energy sources.
In short I'm very confident with the portfolio moves that we've made the last few years to position us for long term growth.
And we don't plan to cover the slides today, but on our website, we have refreshed our peer church.
And believe we are on the right path to being viewed and valued as a specialty formulated.
Thank you for listening today, we'd be happy to open the line for any questions.
Thank you.
You ask a question. Please press star one on your telephone and wait for your name to be announced.
Of all your question Press Star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Frank Mitsch with Fermium Sharon.
Fermium Research your line is open.
Thank you. Thank you so much and good morning, everyone.
I have to ask the obligatory question Youre keeping your guide for the full year, obviously you have exceeded your.
Your Bogeys in Q1 and in Q2, so Thats, a fact, though cut to the second half of the year. So so are you suggesting that.
What your thoughts when you were first put out the full year guide you had a certain expectation on how the second half would play out and as you sit here today.
It's it's moderately worse.
In that or are we.
We still have a couple of quarters to go and there is some measure of conservatism that's factored in.
Yeah, I mean look I guess, the best way to describe the beginning of the year as we didn't have real good visibility to what the second half would look like.
And I don't know what is the best way to convey that was that if demand conditions weaker weakened further from what we initially projected.
We would be able to offset that.
Particularly if we experienced raw material deflation, which we know are so I think as we stand here sort of in the middle of the year. We've just got.
Better perspective on what the numbers are going to look like for the balance of the year and Thats really what shapes our guidance I hope that helps.
Got you.
So, yes belt and suspenders.
As I think about Europe .
The tenor the toe.
One is it seems a bit.
More negative than perhaps we might have thought three months six months ago and so forth.
Sure.
Your your sales declines what down 10% <unk> down 8% in <unk> at least that's kind of moderating somewhat but it's still materially negative year over year.
How close are we to bottom when might we hit bottom in that region or it's still fairly murky maybe.
Maybe a clarifying point on that if I could first just with the numbers that you cited.
That slide that Jamie presented today was actually changed from Q1 to Q2.
So slightly different.
While the Euro Europe , Europe got worse, Alright wildfire.
And that.
I think if you went back to our last call we.
We're probably more optimistic about Europe sort of reaching bottom and that didnt prove to be the case.
Jamie really specifically highlighted some things that have historically happened in the summer months with respect to demand for.
Additives for packaging, primarily around food and beverage and that really didn't materialize in the second quarter like we thought so I guess I would put Europe in the sort of negative surprise category.
Understood and then.
And so no scope for at least as Youre looking at it right now you're not banking on any sort of recovery in the back half of 'twenty three.
I think things could be bottoming out, but not necessarily recovering so maybe that's the right way to think about that.
Alright very helpful. Thanks, so much.
Thanks.
Thank you one moment for our next question.
Our next question comes from Michael Sison with Wells Fargo. Your line is open.
Hey, good morning, guys nice quarter.
I know your volumes have been down six quarters, now and I think you've felt there'd be a bonding affected what do you think volumes will be down in the third quarter and how do you think.
Yes things shape up as you end the year in the fourth.
I mean look the current guidance is sales down about nine 5% in Q3.
Preponderance of that really is a demand or volume related there is a little bit of a positive.
I think on FX year over year, but.
Or maybe a little bit of positive on FX, but.
I think when you look at Q3, Mike in that projection that we have on sales that is really primarily underlying demand.
Got it and then.
In terms of deflation when you look at the second half.
What type of level of deflation do you think youre going to see.
Yes, so I mean, one way to actually think about that is.
If you look at the changes to our guidance, we took $60 million of sales out of the third quarter.
But really only changed EBITDA by about 10, so that kind of gives you a sense for order of magnitude of what we see as an incremental benefit from price.
Raw material deflation, so hopefully that kind of helps you with the bridge schedule that we have for second quarter, you can probably move to Q3, and Q4 and start to put that together.
Got it thank you.
Okay.
Thank you one moment.
Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.
Hi, good morning.
Mike wanted to ask about Asia.
You noted that there were stronger than you would expected that doesn't really seem to be what the headlines are saying and a lot of companies are kind of talking about this muted.
Pace of recovery.
What markets, we're leading the strength that you saw in Asia.
And do you expect that momentum to accelerate in the second half given that Theres, maybe some government stimulus going on in China.
I mean, I think we would agree with some of the headline observations that.
The recovery has not been as.
Significant.
Or to the extent that people may have hope for as a result of reopening from Covid Lockdowns.
But it was still better if I look I'm going Q1 to Q2 and Thats.
That's a good thing.
I think that there was in general demand for personal products consumer and packaging packaging is one of the largest markets we have there as well as <unk>.
Products that are getting distributed back into the U S and Europe .
And I think I forgot to answer your part about the second half of the year.
I think one of the things that I don't know if we mentioned this on the last call or not but you know we are starting to see an uptick in.
Customer requests for new.
A new color design and that usually is a pretty good leading indicator that there's positive.
With momentum.
So hopefully that does continue in the second half of the year.
Alright, Great and then was hoping that you could give us an update on what youre seeing in the packaging market I think you referenced some softness that's going on in Europe , there, but that's an area where you have some interesting sustainable solutions.
The weakness that Youre seeing there is that really related more to destocking or slowing consumer demand I guess, maybe just hoping.
There are signs that demand is starting to stabilize in that important market for you guys.
Yeah, I mean look I think that it is still there's still some of both.
Maybe just to specifically talk about Europe , where packaging is our largest.
Segment, I do think consumer sentiment is impacting.
What they are spending money on right now.
Inflation, obviously has dramatically increased the cost of food and beverage prices and so I think there that there are certainly as a consumer impact to demand.
Demand.
Beyond that I think it's probably still some destocking at least with what we saw.
So on the second quarter.
But possibly some belt tightening in other places of the world as well.
Alright, thanks very much.
Thank you.
But at the moment.
Our next question comes from David Wang with Deutsche Bank. Your line is open.
Hi, Good morning, just on pricing I know price mix was up.
Bet in a quarter and mix was positive does that mean pricing by itself was negative in the quarter.
And I guess, you mentioned last quarter. There was some competitive dynamics. There do you expect any further price decline in the <unk>.
Okay.
Price was a positive for the quarter, that's pretty much what's in there.
I think what we've been saying is that.
You went back to last year pricing really probably peaked at the end of the second quarter.
Maybe a little bit in the beginning of the third so our expectation is that pricing.
Delta is just starts to decline over the course of the of the year. So I think youll see that in the second half.
Could be flat I think thats, probably a good estimate to use right now for Q3 and four.
Okay, and then cost reduction how much was the benefit in the quarter. If you strip out colleran synergy and I guess, how should we think about additional cost savings in the back half.
Clearance synergies was.
Really a small number in that 13 it was about two.
And we.
By the end of last year, I think we were at about $75 $76 million of the run rate we expected at 80.
<unk> 85 in total so we're pretty much there.
So hopefully I'll put that in the balance of that really was other cost actions.
Related to European restructuring and.
Some reduced.
Personnel.
Okay. Thanks.
Thank you.
And our next question.
Comes from Laurence Alexander with Jefferies. Your line is open.
Good morning.
Just a couple of different odds and ends the first NEMA can you give a sense for where the margins and volumes are compared to where you thought you'd be when you first.
When you closed the acquisition.
Sure.
So maybe I'll just do this by <unk> and.
And market, so remember 50% of the business is personal protection.
About 30% of the us Marines sustainable infrastructure and 20% is consumer.
And personal protection.
I think your question was about versus expectations. So obviously.
Obviously, when we did this deal last year, we had an expectation that personal protection would start to.
<unk> up as demand for domestic defense applications increased and that is happening I would say thats probably even.
Higher maybe at the beginning of this year than what we thought.
Consumer is down significantly in the same way that the other avion markets are I'm not sure that's too much different than what we thought or what we know now just based on.
What we're seeing in consumer.
Marine and sustainable infrastructure is also down some so that's possibly a slightly different change than we thought but again I think that is just what's going on in general with.
The industry today.
But anyway, the whole business is really holding up well and <unk>.
Margins are as good as they have been in the past and there's really no commentary there on margins to provide vis vis our expectations.
Okay great.
On the Destocking.
What are you hearing from customers in terms of kind.
Kind of where they think equilibrium will be I mean in terms of if I can.
Due to the expected sort of pushed inventories lower.
And then may be desired and then have a snapback.
Sort of later on or.
Or is everybody just trying to find a new equilibrium, which they can live with and then you just.
Can you give us a sense for the flavor of the discussions like what Theyre warning you they have in mind.
Yes, I mean, I really do think it does vary by by industry and I would say that.
In the consumer space.
I feel like that is one space that is actually starting to.
Improve.
Meaning I think less destocking.
I would compare and contrast that to health care, which actually.
Was down.
I think the second highest of any end market that we had.
The quarter and healthcare companies are still telegraphing that.
You see more destocking to come.
Think that health care really did.
Out of an abundance of caution for.
Taking care of people during the Covid era and supply chain issues over the course of 'twenty one into 'twenty two.
We did have too much inventory on hand, and I think they are all really working to bring that down.
I think Jamie mentioned that I mean that was kind of a negative surprise for us this year because health care is typically resilient.
If it werent for their destocking it would be because I don't really think consumers have really changed their health care patterns. This year. So I look at health care and so I think thats the preponderance of that Destocking and that's going to continue through the rest of this year.
And then just lastly, just with the kind of performance you've seen on price mix versus cost.
And also kind of how your productivity has been offsetting your wage inflation in energy.
How do you think this plays out over <unk>.
Five seven years.
Or an upper limit to margins.
Should the price cost price mix cost delta narrow over time.
Can you just give a sense of just because it's a new dynamic for avian compared to kind of the predecessor.
Assets and you've talked about quite a bit over the last couple of years, but can you give us sense for where you see kind of the limits for the trajectory.
I mean look I think we're right I think we're at the beginning of a positive trajectory with respect to margins and if I look at how much they compressed in 'twenty 2020, one and then into 'twenty two because of inflation.
That's an opportunity for.
Thats, a reverse itself with deflation and.
Hanging on to price.
We have long said that our goal is ultimately get EBITDA margins to 20%.
If we simply got back to where we were on a pro forma basis.
In the middle of 2022 that's about just under 18% and then I think with improving mix in the four key growth areas, we can't get to 'twenty. So I don't feel at all like we're getting to some limit I feel like we're at the beginning of getting to where we want to get too.
It's closer to 20%.
Thank you.
Thank you.
One moment for our next question.
We have a question from Kristen Owen from Oppenheimer. Your line is open.
Hi, Good morning, Thank you for the question.
And all of the incremental color that you've provided.
Wanted to ask a little bit about the the comment you made about the shorter order timelines, maybe some smaller orders and just ask you to expand on that a little bit how that is impacting your planning horizon and what that means from a from a planning perspective for AVN.
Follow up.
I'd tell you the one thing that it impacts more than anything else is just our visibility to performance.
Performance and I have always said that based on orders order patterns, we had pretty good visibility.
For the upcoming months, maybe 45 days and I feel like that's been cut in half.
With respect to <unk>.
Sure our shorter lead time and also a smaller quantities.
So that's just made it more difficult for us to project, what's going to happen in the short term.
Lot of ancillary issues with Atlas production scheduling and planning and so on.
But that really is the biggest impact is just effectively how we can plan for running the business.
That's helpful and then.
Sort of tying that into some of the longer term discussions about sustainable solutions and sort of customer timelines for those solutions.
<unk> does seem like very different types of conversation. So if you could just help us understand what the tenor of the sustainable solutions conversations or how those have trended just given the environment.
Yeah, I mean, thats a important part of.
We want to share in September 20th is that like the brand owners are still very keenly focused on achieving their sustainability goals.
And I really feel like the level of engagement with them.
It's still very high so despite destocking and generally what's going on with the manufacturing sector right now I don't feel like that's Wayne. So that's a good thing some of those things are longer lead time products projects. They really are.
<unk> projects and innovation and I think it says a lot look if you look at the color segment, I mean, 100% of our innovation portfolio is dedicated to sustainable solutions.
100% right. So I mean that just tells you how important that is.
If I could sneak in one final follow up to that to that last bit and sort of tying into the previous question. What does that mean in terms of your pricing ability sort of over the longer term horizon. I mean is there is there a <unk>.
Is there a floor on what you anticipate to capture from the sustainable solutions on a pricing side. Thank you.
Yeah, I mean, one I think there is value to be had there from a pricing standpoint, but I would also tell you that.
There is a cost aspect of that and right now sustainable solutions oftentimes.
Have.
A higher level of cost is based on the.
Cost of recycled content and or the additional additives and so on.
To help get those colors that the brand owners are looking for so.
I in general I would just say that that pricing.
We'll continue to move forward and up I think is sustainable solutions grow.
Any others.
And one moment.
We have a question from.
Vincent Andrews with Morgan Stanley Your line is open.
Thank you and good morning, everyone. I'm wondering if you could talk about cash flow.
It looks like with EBITDA down $5 million cash flow from operations is now.
<unk> hundred 20, instead of $3 50, and free cash flow is going to be 180, instead of 200.
I see on the balance sheet and the cash flow statement that working capital or inventory in particular is up but can you just help us understand.
What's going on from a cash flow perspective, and what actions you are putting into place to try to improve this situation.
Yes, I mean, I guess really the primary changes from our previous guidance really related to some environmental expenditures.
And timing of tax payments.
I'm not sure what working capital information you're looking at.
But in general our working capital as a percentage of sales is actually.
The decline this year versus last year, we've done a really good job of managing inventories.
One of the things that you just have to look at with respect to cash flow and working capital is.
The timing of when those things happen, we had a pretty significant influx of cash in.
In November and December of last year.
And that obviously factors into our percentage of sales.
We don't have the same thing built into this year. So that might help you when you compare and contrast, two three versus 22.
Yes, I was looking at the.
Increase in inventory.
But anyway.
As a follow up.
<unk>.
Yes.
Or do you think your.
Customers are I mean, I know you talked about the health care situation they were.
Overstock, just sort of as a function of COVID-19 and so forth, but do you think customers in general are now very lean levels.
Because I know, obviously theres a lot going on with interest rates and just broader macro concerns, but do you think that there at sort of <unk>.
Level, where you just can't go on that much more so that when we get to <unk>, maybe won't see the same level of seasonality that we typically would see or do you think thats still a risk in the fourth quarter.
Yes, I mean, I think that is part of our assumption is that we don't see the level of seasonality I mean, if you look at our revenue projection for the fourth quarter. It is not that much higher than what it was last year, but last year was significantly below.
Where it's been in the last two to three years so.
You're right on with that assumption I think it does vary by industry.
I think in the outdoor space, which is one that we've talked about a lot I actually think that there are some green shoots in that area that will start here in the second half of this year, we're seeing a little bit of that now.
Dealer and retail inventory is very low still so I mean that tells you maybe that is lean.
But and then in other industries like healthcare, we said.
That apparently with what our customers are saying, both publicly and to us their inventory levels are not lean and so we see further destocking there.
Thanks very much.
Alright, well, thank you very much for the questions and for everyone listening in today, hopefully you can make it to our sustainability day on September 20th we look forward to updating you in that regard on that day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.