Q1 2024 Avient Corporation Earnings Call
Operator: Good morning, ladies and gentlemen, and welcome to Avient Corporation's webcast to discuss the company's first quarter 2024 results. My name is Livia, and I'll be your operator for today.
Good morning, ladies and gentlemen.
Welcome to ABN Corporation's webcast to discuss the company's first quarter 'twenty 'twenty four and shops.
Levy: My name is levy and I'll be your operator for today.
Operator: At this time, all participants are on 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 like to turn the call over to Giuseppe Salvo, Vice President, Treasurer, and Investor Relations. Please proceed.
Levy: At this time, all participants are in listen only mode.
Levy: We will have a question and answer session. Following the company's prepared remarks.
Levy: As a reminder, this conference is being recorded for replay purposes.
Speaker Change: I would now like to turn the call over to Joe to Salvo, Vice President Treasurer and Investor Relations. Please proceed.
Giuseppe Di Salvo: Thank you and good morning everyone for joining us on the call today. Before beginning, we'd like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For looking famous, we have current expectations or forecast future events and are not guaranteed future performance. They're based on management's expectations and involve a number of business risks and uncertainties, any of which can cause actual results to differ materially from those expressed in or implied by the forelooking statement.
Giuseppe Di Salvo: Thank you and good morning, everyone to joining us on the call today.
Giuseppe Di Salvo: We encourage you to review our most recent reports, including our 10-Q or any applicable amendments, for a complete discussion of these factors and other risk factors that may affect our future results. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation in the investor relations section of the Avient website where the company describes non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures.
Giuseppe Di Salvo: Before beginning we'd like to remind you that statements made during this webcast may be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Giuseppe Di Salvo: Forward looking statements will give current expectations or forecasts of future events.
Giuseppe Di Salvo: Not guarantees of future performance.
Giuseppe Di Salvo: 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.
Giuseppe Di Salvo: We encourage you to review our most recent reports, including our 10-Q4 any applicable amendments for a complete discussion of these factors and other risk factors that may affect our future results.
Giuseppe Di Salvo: During the discussion today, the company will use both GAAP and non-GAAP financial measures.
Giuseppe Di Salvo: Please refer to the presentation in the Investor Relations section of the avian website, where the company describes non-GAAP measures and provides a reconciliation of historical non-GAAP financial measures to their most directly comparable GAAP financial measures.
Giuseppe Di Salvo: A replay of this call will be available on our website. Information to access the replay is listed in today's press release, which is available at avient.com in the investor relations section. Joining me today is our President and Chief Executive Officer, Dr. Ashish Khandpur, and Senior Vice President and Chief Financial Officer, Jamie Beggs. I will now hand the call over to Ashish to begin.
Giuseppe Di Salvo: A replay of this call will be available on our website.
Giuseppe Di Salvo: Information to access the replay is listed in today's press release, which is available at <unk> Dot com in the Investor Relations section.
Speaker Change: Joining me today is our president and Chief Executive Officer, Dr. Ashish, Camper, and senior Vice President and Chief Financial Officer, Jamie bags.
Speaker Change: I will now hand, the call over to Ashish to begin.
Ashish K. Khandpur: Thanks, Joe. And good morning, everyone. I'm pleased to report that we started the year strong with first quarter adjusted EPS of 76 cents, reflecting an increase of 21% over the prior year quarter. This exceeds our first quarter guidance by 8 cents. Our improved performance was driven largely by additional sales and defense applications, as well as further raw material depletion. However, this was partially offset by lower sales in Europe. Later in the call today, Jamie will provide more details on our first quarter results and the positive revisions we are making to our 2024 full year guidance.
Ashish K. Khandpur: Thanks, Joe and good morning, everyone.
Ashish K. Khandpur: I am pleased to report that we started the year strong with fourth quarter, adjusted EPS of 76%, reflecting an increase of 21% over the prior year quarter.
Ashish K. Khandpur: This exceeds our first quarter guidance by <unk> <unk>.
Ashish K. Khandpur: Our improved performance was driven largely by additional sales in defense applications as well as further raw material deflation.
Ashish K. Khandpur: This was partially offset by lower sales in Europe.
Ashish K. Khandpur: Later in the call today, Jamie will provide more details on our first quarter results and the positive revisions, we are making to our 2020 for full year guidance.
Ashish K. Khandpur: But first, I'll share some of my recent observations about our company and performance in the regions and markets we serve. Over the past two months, I have been traveling around the world, meeting with our employees, connecting with key customers, and touring our facilities. I have also had the opportunity to dig deep into regional market dynamics. In doing so, I learned firsthand from customers about their material science needs and opportunities. And I have held in-depth business reviews with our leaders in the United States, Europe, China, and Southeast Asia. I have done a lot of listening and probing and have been impressed with the quality of our leaders.
Speaker Change: But first I'll share some of our recent observations about our company and performance in the regions and markets we serve.
Speaker Change: Over the past two months I have been traveling around the world meeting with our employees connecting with key customers and touring our facilities.
Speaker Change: I've also had the opportunity for big deep into regional market dynamics.
Speaker Change: In doing so.
Speaker Change: First hand from customers about their material science needs and opportunities.
Speaker Change: And I have held in depth business reviews, with our leaders in the United States, Europe, China and Southeast Asia.
Speaker Change: I have done a lot of listening and probing and have been impressed with the quality of our leaders there.
Ashish K. Khandpur: The strategy is to serve local markets and the feedback received from customers. However, it is also clear that consumer sentiment in each region is vastly different. And for this reason, we will spend some time this morning walking through demand trends to provide context for our results and outlook. We'll start with our largest region, the US and Canada, which make up 41% of overall sales. The US and Canada grew 2% in the first quarter, driven by year-over-year growth in the consumer, packaging, defense, industrial, and building and construction market segments.
Speaker Change: Our strategy, serving local markets and the feedback received from customers.
Speaker Change: It is also clear that consumer sentiment in each region is vastly different.
Speaker Change: For this reason we will spend some time this morning walking through demand trends to provide context on our results and outlook.
Speaker Change: We will start with our largest region U S and Canada, which makes up 41% of overall sales.
Speaker Change: U S and Canada grew 2% in the first quarter driven by year over year growth in consumer packaging defense industrial and building and construction market segment.
Ashish K. Khandpur: More than half of our sales and defense occur in the United States. These sales not only support military applications that protect soldiers from high-power rifle ammunition but also local law enforcement, including Border Patrol and the Capitol Police.
Speaker Change: More than half of our sales in defense occur in the United States.
Speaker Change: These sales not only support military applications that protect soldiers from high power rifle ammunition.
Speaker Change: But also local law enforcement, including border patrol and the capital policy.
Ashish K. Khandpur: Award of Additional Defense Customer Programs exceeded our original estimates for the quarter, offsetting the growth over continued and significant destocking in the telecommunications space. Based on discussions with some of our key fiber customers in the telecom markets, it appears unlikely that we will see any meaningful rebound here until 2025. For EMEA, which represents 36% of our revenue, sales continue to be sluggish and were down 6% on a year-over-year basis for the first quarter. Consumer confidence remains weak there, and the Eurozone manufacturing PMI continues to signal contraction.
Speaker Change: Award of additional defense customer programs exceeded our original estimates for the quarter.
Speaker Change: Offsetting the growth was the continued and significant destocking in the telecommunications space.
Speaker Change: Based on discussions with some of our key fiber customers in the telecom market is up.
Speaker Change: Bierce unlikely that we will see any meaningful rebound here until 2025.
Speaker Change: For EMEA.
Speaker Change: At present, 36% of our revenue sales continued to be sluggish and were down 6% on a year over year basis for the first quarter.
Speaker Change: Consumer confidence remains weak there and eurozone manufacturing PMI continues to signal contraction.
Ashish K. Khandpur: On the positive side, we are seeing encouraging signs in packaging and healthcare as we enter the second quarter. Within the quarter, sales for defense and healthcare applications grew. For defense, ongoing geopolitical situations, as well as the recent addition of Nordic countries to NATO, have increased demand for vests and helmets for ballistic protection.
Speaker Change: On the positive side, we are seeing encouraging signs in packaging and healthcare as we entered the second quarter.
Speaker Change: Within the quarter sales for defence and healthcare applications grew.
Speaker Change: For defense ongoing geopolitical situations as well as the recent addition of Nordic countries to NATO has increased demand for risks and help mix for ballistic prediction.
Ashish K. Khandpur: In healthcare, there is positive momentum in drug delivery devices, which allowed us to grow year over year in that region. Auto injectors continue to gain momentum, and we have partnered with key pharmaceutical companies in this space to meet the growing demand. Looking ahead, the second quarter has started off slightly better in Europe. Easing inflation and lower interest rates will be important contributors to freeing up household income for food, beverage, and other consumable goods as we progress through the year.
Speaker Change: In healthcare there is positive momentum in drug delivery devices, which allowed us to grow year over year in that region.
Speaker Change: Auto injectors continue to gain momentum and we have partnered with key pharmaceutical companies in this space to meet the growing demand.
Speaker Change: Looking forward the second quarter has started off slightly better in Europe.
Speaker Change: Easing of inflation and lower interest rates will be important contributors to freeing up household income per food beverage and other consumable goods as we progress through the year.
Ashish K. Khandpur: Let's move to Asia, which represents 18% of our sales. The region is undergoing tremendous change as China transitions to focusing on its domestic economy. The fiscal stimulus by the Chinese government continues, but the visibility into its impact is still unclear.
Speaker Change: Let's move to Asia, which represents 18% of our sales.
Speaker Change: The region is undergoing tremendous change as China transitions to focusing on its domestic economy.
The fiscal stimulus by the Chinese government continues but the visibility into its impact is still unclear.
Ashish K. Khandpur: Approximately 60% of our Asia sales are in China, and 70% of what we do today within China serves local markets. This positions us well to grow, especially when the consumer is incentivized to spend more. With that being said, our sales in China grew 6% in the quarter, driven by strength in industrial and healthcare end markets. However, this was offset by lower packaging sales in remaining Asia. Overall, total sales in Asia were flat in the first quarter, excluding the impact of foreign exchange.
Speaker Change: Approximately 60% of our Asia sales are in China, and 70% of what we do today within China sales local markets.
Speaker Change: This positions us well to grow, especially when the consumer is incentivized to spend more.
Speaker Change: With that being said our sales in China grew 6% within the quarter driven by strength in industrial and health care end markets.
Speaker Change: This was offset by lower packaging sales and remaining Asia.
Speaker Change: Overall total sales in Asia were flat in the first quarter, excluding the impact of foreign exchange.
Ashish K. Khandpur: Putting it all together for the entire company, organic sales were down 1.5% for the quarter. We do see demand conditions generally improving across all regions, but there is some variation in how overall end markets are trending. Telecommunications and energy remain the weaker end markets, with first quarter year-over-year sales down double digits and weakness continuing into the second quarter. However, we are seeing reasonably good demand year over year with improved momentum in consumer, packaging, defense, healthcare, and industrial end markets. With that, I will now hand it off to Jamie, who will provide more detail on our first quarter results and an update on our 2024 outcome.
Speaker Change: Putting it altogether for the entire company organic sales were down one 5% for the quarter.
Speaker Change: We do see demand conditions generally improving across all regions, but there is some variation in how overall end markets are trending.
Speaker Change: Telecommunications and energy remained the weaker end markets with first quarter year over year sales down double digits and weakness continuing into the second quarter.
Speaker Change: However, we are seeing reasonably good demand year over year with improved momentum in consumer packaging defense healthcare and industrial end markets.
Speaker Change: With that I will now hand, it off to Jamie who will provide more detail on our first quarter results and an update on our 2020 for outlook.
Jamie A. Beggs: Thank you, Ashish. I also attended the recent trips and meetings around the globe and was able to see firsthand how our teams are managing the current environment in each of their local markets while remaining focused on our long-term priorities. Our attention to execution and serving our customers led to a better-than-expected quarter. We are extremely pleased to have started the year exceeding guidance with a 21% year-over-year increase in adjusted EPS of 76 cents. Adjusted EBITDA was up 7% to $143 million, and first quarter adjusted EBITDA margins increased 150 basis points to 17.3%. However, as Ashish highlighted, organic sales were down 1.5%, primarily due to sluggish demand and challenges in EMEA.
Jamie A. Beggs: Thank you Ashish I also joined the recent trips and meetings around the globe and was able to see firsthand how our teams are managing the current environment in each of their local markets, while remaining focused on our long term priority.
Jamie A. Beggs: Our attention to execution and serving our customers led to a better than expected quarter.
Jamie A. Beggs: We are extremely pleased to have started the year exceeding guidance with a 21% year over year increase in adjusted EPS of <unk> 76.
Jamie A. Beggs: Adjusted EBITDA was up 7% to $143 million and first quarter adjusted EBITDA margin increased 150 basis points to 17, 3%.
Jamie A. Beggs: As Ashish highlighted organic sales were down one 5%, primarily due to sluggish demand and challenges in EMEA <unk>.
Jamie A. Beggs: These factors were partially offset by volume growth in the Americas, particularly in the packaging, consumer, defense, and industrial end markets. Ultimately, our ability to maintain price, capture deflation, and manage costs enabled us to grow EBITDA by 7%. That performance, coupled with the net interest expense benefit from the 2023 debt paydown and loan repricing, resulted in a 21% increase in adjusted EPS. Turning to a review of segment performance, I'll start with color additives and inks, which grew adjusted EBITDA 7% in the quarter on a 4% decline in sales.
Jamie A. Beggs: Factors were partially offset by volume growth in the Americas, particularly the packaging consumer defense and industrial end market.
Jamie A. Beggs: Ultimately our ability to maintain price capture deflation and manage costs enabled us to grow EBITDA by 7%.
Jamie A. Beggs: That performance, coupled with a net interest expense benefit from the 2023 debt Paydown and loan repricing resulted in a 21% increase in adjusted EPS.
Jamie A. Beggs: Turning to a review our segment performance I'll start with color additives, and inks, which grew adjusted EBITDA, 7% in the quarter on a 4% decline in sales.
Jamie A. Beggs: While demand was down primarily in Europe, the segment was able to maintain net price benefits from continued raw material deflation. We've also been focused on cost reductions, particularly in Europe, which also helped expand adjusted EBITDA margins to 18.8% and an improvement of 180 basis points versus the prior year. We are seeing positive momentum around the globe in consumer and packaging applications, the segment's two largest in the market.
Jamie A. Beggs: While demand was down primarily in Europe. The segment was able to maintain net price benefit from continued raw material deflation.
Jamie A. Beggs: We've also been focused on cost reduction, particularly in Europe, which also help expand adjusted EBITDA margin to 18, 8% an improvement of 180 basis points versus the prior year.
Jamie A. Beggs: We are seeing positive momentum around the globe in consumer and packaging applications.
Jamie A. Beggs: <unk> two largest end market in.
Jamie A. Beggs: In addition, the color segment is benefiting from new business wins in health care, which helps offset most of the impact from customer deep stocking within this end market. Our specialty engineered materials segment was up 14% in adjusted EBITDA from the prior year quarter on a 1% increase in sales. Defense, which makes up approximately 20% of the segment sales, was up over 35% due to continued geopolitical tensions and overseas costs. However, this is partially offset by weaker demand for fiber optic cable, which we discussed during the last earnings call. As with color, SEM also benefited from raw material deflation, as well as a favorable mix from defense growth. Adjusted EBITDA margins expanded 240 basis points. 23.2% for the quarter.
Jamie A. Beggs: In addition, the color segment is benefiting from new business wins in healthcare, which helped offset most of the impact from customer destocking within this end market.
Jamie A. Beggs: Our specialty engineered materials segment was up 14% and adjusted EBITDA from the prior year quarter on a 1% increase in sales.
Jamie A. Beggs: Defense, which makes up approximately 20% of the segment sales was up over 35% due to continued geopolitical tension and overseas conflicts.
Jamie A. Beggs: This was partially offset by weaker demand for fiber optic cable, which we discussed during the last earnings call.
Jamie A. Beggs: Color SCM also benefited from raw material deflation as well as favorable mix from defense growth.
Jamie A. Beggs: Adjusted EBITDA margins expanded 240 basis points to 23, 2% for the quarter.
Jamie A. Beggs: Next, let's look at our adjusted EPIDA bridge, where we highlight the impact of demand, price, and mix, as well as raw material costs on a year-over-year basis. We've covered demand quite a bit already, but the other key takeaway on this slide is the place. This is the fourth consecutive quarter we have seen raw material deflation on a year-over-year basis. In last quarter's call, I said that we expected between $20 and $30 million in raw material deflation benefits in the first half of the year, and we still believe that will be the case.
Jamie A. Beggs: Next let's look at our adjusted EBITDA Bridge, where we highlight the impact of demand.
Jamie A. Beggs: And mix as well as raw material costs on a year over year basis.
Jamie A. Beggs: We've covered demand quite a bit already but the other key takeaway on this slide is deflation.
Jamie A. Beggs: This is the fourth consecutive quarter, we have seen raw material deflation on a year over year basis.
Jamie A. Beggs: Last quarter's call I said that we expected between 20 and $30 million and raw material deflation benefit in the first half of the year and we still believe that will be the case.
Jamie A. Beggs: As reflected on the bridge, the majority of this benefit was realized in the first quarter. This was driven by better-than-expected pricing on non-hydrocarbon-based raw materials, such as pigments and certain performance additives. This trend is reversing, and I'll provide additional context on the raw material environment in my Outlook commentary in just a moment. Our net price benefits more than offset inflation and other input costs, including wages.
Jamie A. Beggs: As reflected on the bridge the majority of this benefit was realized in the first quarter.
Jamie A. Beggs: This was driven by better than expected pricing on non hydrocarbon based raw material such as segment and certain performance additives.
Jamie A. Beggs: This trend has reversed course, and I'll provide additional context on the raw material environment and my outlook commentary and just a moment.
Jamie A. Beggs: Our net price benefit more than offset inflation and other input costs, including wages.
Jamie A. Beggs: These items resulted in an increase to adjusted EBITDA by 7% versus the prior quarter despite sales being down 2%. Turning next to guidance, we are providing estimates today for the second quarter and an update to our full year 2024 guidance. We expect second-quarter earnings per share of 71 cents, which reflects a 13% increase over the prior year. This expected double-digit growth is driven by improving demand conditions across most end markets and all regions.
Jamie A. Beggs: These items resulted in an increase to adjusted EBITDA by 7% versus the prior quarter, despite sales being down 2%.
Jamie A. Beggs: Turning next to guidance, we are providing estimates today for the second quarter and an update to our full year 2024 guidance range.
Jamie A. Beggs: We expect second quarter earnings per share of <unk> 71.
Jamie A. Beggs: Which reflects a 13% increase over the prior year.
Jamie A. Beggs: This expected double digit growth is driven by improving demand conditions across most end markets and all regions.
Jamie A. Beggs: We have also taken into account seasonality in Europe, a moderating benefit from raw material deflation, and the timing of defense. Regarding defense, we did have incremental wins in personal protection applications during the first quarter, but order patterns can be lumpy for this business due to the nature of the large military programs in which we supply.
Jamie A. Beggs: We have also taken into account seasonality in Europe.
Jamie A. Beggs: Moderating benefit from raw material deflation.
Jamie A. Beggs: The timing of defense orders.
Jamie A. Beggs: Regarding deepen we did have incremental wins in personal protection applications during the first quarter.
But order patterns can be lumpy for this business. This is the nature of the large military programs in which we supply.
Jamie A. Beggs: We do expect double-digit growth to continue through the year, but not likely to the same extent in the first quarter. On a full year basis, we are increasing the low end of our guidance for adjusted EBITDA to a range of $510 million to $535 million. And adjusted earnings per share to a range of $2.50. A few dollars and 65 cents to account for the better-than-expected results in the first quarter. Our full year adjusted EPS guidance range now represents 6 to 12 percent growth over the prior year.
Jamie A. Beggs: We do expect double digit growth to continue through the year, but not likely to the same extent in the first quarter.
Jamie A. Beggs: On a full year basis, we are increasing the low end of our guidance for adjusted EBITDA to a range of $510 million.
Jamie A. Beggs: $535 million and adjusted earnings per share to a range of $2 50.
$2 65.
Jamie A. Beggs: To account for the better than expected results in the first quarter.
Jamie A. Beggs: Our full year adjusted EPS guidance range, now represents 6% to 12% growth over the prior year.
Jamie A. Beggs: Demand conditions have evolved where Europe started the year more slowly due to stagnant consumer sentiment. And while demand is improving in this region, especially in packaging and health care, overall regional year-over-year growth will likely remain muted.
Jamie A. Beggs: Demand conditions have evolved where Europe started the year more slowly due to stagnant consumer sentiment and while demand is improving in this region, especially in packaging in health care overall regional year over year growth will likely remain muted.
Jamie A. Beggs: In the U.S., due to persistent inflation, the timing of interest rate cuts will likely come later than originally estimated, which may weigh on sales in building and construction, industrial, and transportation. We expect pricing, net of raw materials, to drive earnings growth year over year, but not to the degree of the prior few quarters as we begin to lap the deflation that started in the second quarter of 2023. The strengthening of the U.S. dollar has also created a headwind and, based on today's rates, would have an unfavorable impact of $8 million on full year adjusted EBITDA versus the prior year and or prior guidance.
Jamie A. Beggs: In the U S. Due to persistent inflation the timing of interest rate cuts will likely come later than originally estimated which may weigh on sales and building and construction industrial and transportation end markets.
Jamie A. Beggs: We expect pricing net of raw material to drive earnings growth year over year, but not to the degree of the prior few quarters as we begin to lap the deflation that started in the second quarter of 2023.
Jamie A. Beggs: The strengthening of the U S. Dollar has also created a headwind and based on today's rates would be an unfavorable impact of $8 million to full year adjusted EBITDA versus the prior year and our prior guidance.
Jamie A. Beggs: Our revised adjusted EPS guidance reflects lower interest expense associated with repricing of our term loans and lower expected depreciation expense based on the timing of capital expenditures. Interest expense is now expected to be $105 million in 2024 as we lowered our interest rate on our term loan by 50 basis points, or $3.5 million annually, in April. This benefit is partially offset by the expectation of higher SOFR rates in the second half of the year, impacting our variable rate debt, which represents about a third of our outstanding debt.
Jamie A. Beggs: Our revised adjusted EPS guidance reflects lower interest expense associated with the repricing of our term loan and lower expected depreciation expense based on the timing of capital expenditures.
Jamie A. Beggs: Interest expense is now expected to be $105 million in 2024, as we lowered our interest rate on our term loan by 50 basis points or $3 5 million annually in April.
Jamie A. Beggs: This benefit is partially offset by the expectation for higher silver rate in the second half of the year impacting our variable rate debt, which represents about a third of our outstanding debt.
Jamie A. Beggs: We continue to expect our adjusted effective tax rate to be between 23 and 25% and our capital expenditures to be roughly $140 million. Both of these are unchanged versus our prior guidance. Before we open the lines for questions, I'll turn the call back over now to Ashish for closing remarks.
Jamie A. Beggs: We continue to expect our adjusted effective tax rate to be between 23% and 25% and our capital expenditures to be roughly $140 million.
Jamie A. Beggs: These are unchanged versus our prior guidance.
Jamie A. Beggs: Before we open the lines for questions I will turn the call back over now to Ashish for closing remarks.
Ashish K. Khandpur: The Avient team executed well in the first quarter as we navigated the changing demand environments in each geographic region. I am confident that we will carry this momentum through the rest of the year as the underlying macro environment improves.
Ashish K. Khandpur: Thank you Jamie.
Ashish K. Khandpur: The avian team executed well in the first quarter as we navigated the changing demand environment in each geographic region.
Ashish K. Khandpur: I am confident that we will carry this momentum through the rest of the year as the underlying macro environment improves.
Ashish K. Khandpur: During the last earnings call, I shared a few top of mind areas that are forming the basis of our long-term strategy, which we will build out and share later this year. The first of these is driving profitable organic top line growth with margin expansion on the bottom line. We have the portfolio and material science expertise to do this. Part of our portfolio is aligned to high-growth end markets with attractive secular trends.
Ashish K. Khandpur: During the last earnings call I shared a few top of mind areas that are forming the basis of our long term strategy that we will build out and share later this year.
Ashish K. Khandpur: The first of these is driving profitable organic top line growth with margin expansion on the bottom line.
Ashish K. Khandpur: We have the portfolio and material science expertise to do this.
Ashish K. Khandpur: Part of our portfolio is aligned to high growth end markets with attractive secular trends.
Ashish K. Khandpur: Another part of our portfolio is focused on delivering exceptional service and quality solutions in more established markets. Both are important to the overall avian business but require different tactics to win and help us grow profitably in a sustained manner.
Ashish K. Khandpur: Another part of our portfolio is focused on delivering exceptional service and quality solutions and more established markets.
Ashish K. Khandpur: Both are important to the overall avian business, but require different tactics to win and help us grow profitability in a sustained manner.
Ashish K. Khandpur: In particular, the high growth portions of our portfolio may need higher investments to realize their full potential fast. Conversely, more mature portions of our portfolio may need to drive efficiencies to generate the high cash flows expected of these businesses. Beyond prioritizing our portfolio, there is room to maximize what we already have by translating and replicating our success faster in the markets where we already play. In addition, our commercial teams have a unique advantage in the market.
Ashish K. Khandpur: In particular, the high growth portions of our portfolio may need higher investments to realize their full potential faster.
Ashish K. Khandpur: Conversely, more mature portions of our portfolio and the need to drive efficiencies to generate the high cash flow is expected of these businesses.
Ashish K. Khandpur: Beyond prioritizing our portfolio there is room to maximize what we already have.
Ashish K. Khandpur: By translating in replicating our success faster in the markets, where we already play.
Ashish K. Khandpur: Further our commercial teams have a unique advantage in the market.
Ashish K. Khandpur: They can leverage the full Avient portfolio, from colors to additives to composites to engineered materials, every time they knock on a customer's door. The breadth and depth of our solutions are unmatched by others. We have the portfolio and the foundation to win in the marketplace and gain share. With that being said, the only way to stay relevant is to continue to innovate. There is a path to play bigger and bolder on certain secular trends, such as lightweighting and recyclability.
Ashish K. Khandpur: Can leverage the full avion portfolio from colors to additives to composites to engineered materials every time, they knock on a customer store.
Ashish K. Khandpur: The breadth and depth of our solutions is unmatched by others.
Ashish K. Khandpur: The portfolio and the foundation to win in the marketplace and gain share.
Ashish K. Khandpur: With that being said the only way to stay relevant is to continue to innovate.
Ashish K. Khandpur: There is a path to play a bigger and bolder on certain secular trends such as light weighting and recyclability.
Ashish K. Khandpur: Additionally, the fast-changing world is creating new opportunities for a material science company like Avient every day. We will be agile to capture the most relevant and important opportunities that will create value for our stakeholders. I am energized by my recent travels visiting our employees and customers around the world. I'm also excited about the growth potential of our portfolio and how we will win in the market. More details to come, but we have a bright future ahead. That concludes our prepared remarks. Jamie and I are happy to answer any questions you may have.
Ashish K. Khandpur: Additionally, the fast changing world is creating new opportunities for a material science company like avian everyday.
Ashish K. Khandpur: We will be agile to capture the most relevant and important opportunities that will create value for our stakeholders.
Ashish K. Khandpur: I am energized by my recent travels visiting on employees and customers around the world.
Ashish K. Khandpur: I'm also excited about the growth potential of our portfolio and how we will win in the marketplace.
Ashish K. Khandpur: More details to come but we have a bright future ahead.
Speaker Change: That concludes our prepared remarks, Jamie and I are happy to answer any questions Humana.
Operator: Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A roster. Now, the first question comes from the line of Frank Mitsch with Permian Research.
Jamie A. Beggs: Thank you.
Speaker Change: Ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question simply press Star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Operator: Your line is open.
Speaker Change: No first question coming from the line of Frank Mitsch with Permian Research. Your line is now open.
Frank Joseph Mitsch: Thank you, and good morning, nice start to the year, and obviously, on 35% growth in defense. Ashish, you just mentioned that some of these higher growth regions might require higher investments. Can you talk about where we are on a utilization basis? I mean, is this something that you're going to need to, you know, invest some more capital very quickly? And you know, Jamie mentioned that you're expecting double digit growth for the rest of the year. Any more color on that, because that really kind of jumped off the page?
Frank Joseph Mitsch: Thank you and.
Frank Joseph Mitsch: Good morning, nice start to the year.
Frank Joseph Mitsch: And obviously like Wow on 35% growth in defense Ashish you just mentioned that some of these higher growth regions might require higher investments.
Frank Joseph Mitsch: Can you talk about where we are on a utilization basis. I mean is this something that youre going to need to.
Frank Joseph Mitsch: Invest some more capital very quickly.
Speaker Change: Jamie mentioned that Youre expecting double digit growth for the rest of the year any more color on that because that really kind of jumped off the page.
Ashish K. Khandpur: Thanks, Frank. It's good to hear your voice, and I just want to say some things about utilization here. I think defense is obviously very well utilized. I mean, I actually got a chance to see the line actually running in Europe when I was visiting there. So it's running full swing, and utilization rates are great, and we are able to produce whatever is in the demand forecast right now. So we don't see any capacity limitations to meet our orders this year at all. You know, in the future, of course, over time, we will continue to evaluate the situation. These kinds of lines take some time to build, and typically one to two years is the typical time frame.
Speaker Change: Thanks Frank.
Speaker Change: It's good.
Speaker Change: Good to hear.
Speaker Change: I just wanted to say some things about utilization here I think defenses obviously.
Frank Joseph Mitsch: Very well utilized I mean, I actually got a chance to see the in line actually running in Europe, when I was visiting there so.
Frank Joseph Mitsch: It's running full swing and utilization rates are great and we are able to produce whatever is in.
Frank Joseph Mitsch: And the demand forecast right now so we don't see any capacity limitations to meet our orders this year at all.
Frank Joseph Mitsch: Of course over time.
Frank Joseph Mitsch: We will continue to evaluate the situation. These kinds of lines takes some time to build and you are not typically one to two years is the typical timeframe and so we have to prepare in advance.
Ashish K. Khandpur: And so we have to prepare in advance for those kinds of situations. And we are on top of that with respect to our CapEx budget as well as planning the capacity expansion, where we are seeing the demand growing. But APM or Dyneema line is just one of the examples we, with respect to other high growth areas as well, as we amplify innovation in certain growth areas which have secular trends and are expected to grow faster, then those are the other areas where we're going to be putting a little bit more CapEx money over time to make sure that we are able to meet the demand.
Frank Joseph Mitsch: Or those kinds of situations and we are on top of that with respect to our capex budget as well as buying the capacity expansions, where we are seeing.
Frank Joseph Mitsch: The demand growing.
Frank Joseph Mitsch: But.
Frank Joseph Mitsch: More dining my line is just one of the examples we.
Frank Joseph Mitsch: Respect to other high growth areas as well as we amplify inova.
Frank Joseph Mitsch: Innovation in certain growth areas, which have got secular trends and I would expect it to grow faster.
Frank Joseph Mitsch: Those are the other areas, where we're going to be putting a little bit more capex money over at the time to make sure that we are able to meet the demand of our customers.
Frank Joseph Mitsch: Understandable and very helpful. On the flip side of the ledger, you know, Europe has been a bit of a restraint. However, you know, looking at the year over year declines, 14% in the fourth quarter, only down to 6% in the first quarter. What are your thoughts on Europe flipping to neutral and maybe even showing some growth before 2024 is out?
Speaker Change: Understood very helpful. On the flip side of the Ledger Europe has been a bit of a restrained however, looking at the year over year declines.
Speaker Change: The 14% in the fourth quarter only down to 6% in the first quarter, what's your thoughts on.
Speaker Change: Europe flipping to neutral.
Speaker Change: And maybe even showing some growth before 2024 is out.
Ashish K. Khandpur: So, Frank, I mean, actually, I'm pretty excited as we move from Q. By the way, Q1 just unfolded almost largely like what we had projected, except we saw stronger than expected demand for defense orders but also a little bit sluggish recovery in Europe. So that was the highlight of Q1 for us. As we look into Q2, we are seeing increased momentum in our demand in many more market segments than we had seen in Q1.
Speaker Change: So Frank I mean actually I am pretty excited as we move from Q by Q1.
Speaker Change: Was.
Speaker Change: Unfolded almost largely like what we had projected except we saw stronger than expected demand in defense orders, but also.
Speaker Change: Little bit sluggish recovery in Europe color. So that was the highlight of Q1 for us as we look into Q2, we are seeing increased momentum in our demand in many more markets sentiment than what we had seen in Q1 and that is also in projections with how we are thinking so we.
Ashish K. Khandpur: And that is also in line with how we are thinking. So we are hoping and expecting that Q2 is a positive year-over-year quarter for us after seven straight quarters of negative growth year-over-year. And Europe is also going to look positive on the demand side in Q2.
Speaker Change: We're hoping unexpected that Q2 is a positive year over year quarter for us after seven straight quarters of negative growth year over year and Europe is going to also look positive.
Speaker Change: In.
Speaker Change: On the demand side in Q2.
Frank Joseph Mitsch: Excellent. Thanks so much, Ashish.
Speaker Change: Excellent. Thanks, so much ashish.
Operator: Thank you. One moment for our next question, and our next question coming from the line of Lawrence Alexander with Jeffrey Thiel on his cell phone. Yifei Huang.
Speaker Change: Thank you one moment our next question.
Speaker Change: And our next question coming from the line of Laurence Alexander with Jefferies. Your line is open.
Laurence Alexander: Good morning, first I wanted to get your perspective on the M&A environment, what kind of opportunities you might have available, and if multiples are coming down to more reasonable levels. And secondly, can you give a bit of sense about the overall caution in North America in terms of kind of restocking? How much visibility do you think you'll have if and when the inventory channel dynamics change?
Laurence Alexander: Good morning, first wanted to get your perspective on the M&A environment, what kind of opportunities you might have available and if multiples are coming down to more reasonable levels and secondly.
Laurence Alexander: Can you give.
Laurence Alexander: A bit of sense about kind of the overall caution on North America in terms of kind of restocking.
Laurence Alexander: How much visibility do you think you'll have it.
Laurence Alexander: If and when kind of inventory channel dynamics change.
Ashish K. Khandpur: On the M&A side, Lawrence, you know, we mentioned last call and again, part of our strategy is to focus on driving organic profitable growth and margin expansion. So in the near term, M&A is really not a... I'm not ruling out M&A altogether, but if we do anything at all, it's going to be small and probably bolt-on in nature.
Laurence Alexander: Okay.
Laurence Alexander: On the M&A side Laurence.
Laurence Alexander: Mentioned last call and again.
Laurence Alexander: Part of our strategy is to focus on driving organic.
Laurence Alexander: Profitable growth and margin expansion. So in the near term M&A is really not.
Laurence Alexander: Priority for us I'm not ruling out M&A altogether, but if we do anything at all it's going to be small and probably bolt on in nature. So.
Ashish K. Khandpur: But right now, we continue to maintain a pipeline on the M&A side, and I think some of the areas that we continue to probe deeper are the ones where we are putting a strategy for our growth and. If you look at our four growth vectors of sustainable solutions, composites, healthcare, and the two areas of Asia and Latin America, those are the four areas. And so our M&A focus is largely around those areas, and we still feel the premiums are pretty high. But again, it's not something that we are looking very aggressively at right now.
Laurence Alexander: But.
Laurence Alexander: We right now we continue to maintain a pipeline and on the M&A side and I think.
Laurence Alexander: Some of the areas that we continue to.
Laurence Alexander: <unk>.
Laurence Alexander: Deepa are the ones, where we are putting a strategy for our growth and if you look at our four growth vectors of sustainable solutions.
Laurence Alexander: <unk> healthcare.
Laurence Alexander: And the two areas of Asia, and Latin America. Those are the four areas and so are our M&A focus is largely around those areas and still we feel the premiums are pretty high but again, it's not something that.
Laurence Alexander: We are looking very aggressively at right now.
Jamie A. Beggs: With respect to North America's situation on restocking... You know, we see pretty good momentum in North America right now. Actually, we see consumer packaging, defense, industrial, and building and construction all growing anywhere between 5 to 10% in those kinds of segments for us. The big issue in North America for us is transportation. It's a little bit of a question mark. And then energy and telecommunication obviously are the two big down market segments, as I mentioned in my prepared statement. So, I think overall, the demand is, the destocking in those markets is over.
Laurence Alexander: With respect to North America situation on restocking.
Laurence Alexander: We see pretty good momentum in North America, right now actually we see consumer packaging defense industrial and building and construction all.
Laurence Alexander: Growing anywhere between 5% to 10% in those kinds of segments for us the big issue on North America for US is transportation is a little bit of a question Mark and then an Argentine telecommunication, obviously are the two big down market segments as I mentioned in my prepared remarks.
Laurence Alexander: So I think overall the demand is.
Laurence Alexander: The destocking in those markets is lower I should also mention in southeast areas, although the demand may not be coming back like building and construction, but our team is doing a fantastic job winning share and taking.
Jamie A. Beggs: I should also mention in some of these areas, although the demand may not be coming back, like building and construction, but our team is doing a fantastic job winning share and taking, you know, basically growing the business by taking share from the competition. And I think that's something that we are continuing to do in Europe as well, whether it's our drug devices, drug delivery devices in healthcare, or, you know, defense applications back in for Wire and Cable Applications.
Basically growing the business by taking share from competition and I think thats something that we are.
Laurence Alexander: <unk> in Europe, as well, where there are drug devices.
Laurence Alexander: <unk> devices in health care.
Laurence Alexander: Defense applications spec in wins.
Laurence Alexander: Our wire and cable applications and building and construction. So overall I think demand is coming back in North America.
Jamie A. Beggs: So overall, I think demand is coming back in North America quite well. And in most of the market segments, although a couple of chronic areas like energy and telecommunications. You know, double digit negative. Adon Lawrence From a healthcare perspective, that industry is
Laurence Alexander: Quite well.
Laurence Alexander: And most of the market segments, all the couple of chronic.
Laurence Alexander: Areas like energy and telecommunications continue to be.
Laurence Alexander: In our double digit negative going into Q2.
Jamie A. Beggs: And just to add on, Lawrence, from a health care perspective, that industry is still downsizing. About 55% of our health care business is in the U.S. We see that continuing probably to the middle of the year. As Ashish mentioned earlier, we are doing some positive... Some positive momentum on auto injection or drug delivery devices. But overall, we expect that to also turn positive.
Speaker Change: And just to add on Lawrence from a healthcare perspective that industry is still destocking about 35% of our health care businesses in the U S.
Speaker Change: We see that continuing probably to the middle of the year.
Speaker Change: As Ashish mentioned earlier, we are into some positive.
Speaker Change: Some positive momentum in auto injection.
Speaker Change: Delivery devices, but overall, we expect that to also turn positive once we get into Q3.
Speaker Change: Thank you.
Operator: And our next question comes from the line of Mike Harrison with Seaport Research Partners. Your line is open.
Speaker Change: And our next question coming from the line of Mike Harrison with Seaport Research Partners. Your line is open.
Michael Joseph Harrison: Hi, good morning. Congratulations on a nice start to the year. I wanted to start out by asking about the engineered materials business.
Michael Joseph Harrison: Hi, good morning, Congrats on a nice start to the year.
Michael Joseph Harrison: That gross margin of 34% is, I don't know if it's an absolute high watermark, but certainly since you acquired Dyneema, it's a high watermark. And I assume a lot of that strength is driven by the strength that you're seeing in defense. So I'm just trying to get a little bit better sense of whether something in that low to mid-30s range for engineering materials gross margin is a sustainable level, or maybe talk a little bit about the dynamics that were going on in the quarter that led to that strength that may or may not be sustainable.
Michael Joseph Harrison: Wanted to start out by asking about the engineered materials business that gross margin of 34%.
Michael Joseph Harrison: It is.
Michael Joseph Harrison: I don't know if its an absolute high watermark, but certainly since you've acquired.
Speaker Change: It's a high watermark.
Speaker Change: And I assume a lot of that strength is driven by the strength that youre seeing in defense.
Speaker Change: Trying to get a little bit better sense of as we go through the year.
Speaker Change: Is something in that low to mid thirties.
Speaker Change: Range for.
Speaker Change: Engineered materials gross margin a sustainable level.
Speaker Change: Or maybe talk a little bit about the dynamics that were going on in the quarter.
Speaker Change: That led to that strength that may or may not be sustainable.
Ashish K. Khandpur: Thank you, Mike. I think, you know, obviously seven, our EBITDA adjusted EBITDA margins of 17.3% overall for the company and specifically for speciality engineering materials, about 23%, are really quite exciting for us as well, because as part of our strategy of top line profitable top line growth and margin expansion, it's good to see the margin. As you know, and we mentioned in our prepared remarks as well, Q1 benefited a lot from a better mix coming Now, the different orders are typically lumpy, they are large, and they are timing-based. We have to ship them out within a certain amount of time.
Speaker Change: Yes, Thank you Mike I think.
Speaker Change: Obviously.
Speaker Change: Our EBITDA adjusted EBITDA margins of 17, 3% overall for the company and specifically for especially at engineered materials about 23% is fairly.
Speaker Change: Exciting for us as well because as part of our strategy of topline profitable topline growth and margin expansion. That's good to see the margin expansion coming.
Speaker Change: As you know and we mentioned in our prepared remarks as well.
Speaker Change: Q1 benefited a lot from.
Speaker Change: A better mix coming from increased defense sales.
Speaker Change: And also.
Speaker Change: Although the RMB reflection.
Speaker Change: Now the defense.
Speaker Change: Those are typically lumpy they are large and they are timing based we have to ship them out in a certain amount of time, so that dynamic is not expected to repeat.
Ashish K. Khandpur: So that dynamics is not expected to repeat going into Q2 and further. And if it all repeats, it's going to be at a much different level or a much smaller level, D.C., or anything of that. So I would say Q1 was really a good quarter for us where we saw a good boost in our margins coming from defense, but also from RM deflation as well. So, as we go through the year, our expectations are that we will continue to grow margin and expand margins in the SEM business but also in the CAI, or color and additives, and inks business.
Speaker Change: Going into Q2 and further.
Speaker Change: If it all repeat is going to be at a much different level are much smaller level.
Speaker Change: If you see anything of that so I would say Q1 was.
Speaker Change: A good quarter for us where we saw.
Speaker Change: Good boost in our margins coming from from defense, but also from iron deflation as well.
Speaker Change: No.
Speaker Change: As we go through the year, our expectation is that we will continue to grow margin and expand margins and SCM business, but also in <unk>, our color and additives and inks business.
Ashish K. Khandpur: But not to the extent that we are seeing it in Q1. And I think overall for our company, we expect margin expansion anywhere between zero to 50 basis points for the year at this point in time.
Speaker Change: And.
Speaker Change: But not to the extent that we are seeing it in Q1 and I think overall for our company. We expect margin expansion anywhere between zero to 50 basis points for the year at this point in time.
Jamie A. Beggs: And Mike, maybe to add specifically for SEM, yeah, 34% was the gross margin for engineering materials. We do expect that to be in the low 30s through the rest of the year. And I would characterize it just as you did, Q1 would be a high mark for SEM, really driven by the strong 38% growth in defense that Ashish talked about earlier.
Speaker Change: And Mike maybe to add on specifically for STM, Yes, 34% was the gross margin for engineered materials, we do expect that to be in that.
Michael Joseph Harrison: That low thirties through the rest of the year and I would characterize it just as you did Q1 to be a high mark for SCM are really driven by a strong 38% growth in defense as she has talked about earlier in his comments.
Jamie A. Beggs: All right, great. And then, Jamie, I didn't see a slide on free cash flow or working capital expectations, but can you talk about how those may have changed since your last earnings call? Yeah, there haven't been a whole lot of changes other than we did raise the overall guidance.
Speaker Change: Alright, Great and then Jamie I didn't see a slide on free cash flow or working capital expectations, but can you talk about how those may have changed since your last earnings call.
Jamie A. Beggs: Yeah, there haven't been a whole lot of changes other than we did raise the overall guidance and narrowed the range. So the EBITDA midpoint is higher. Working capital really is dependent on how the back half sales growth continues to evolve. Since that's been slightly higher, I would expect that working capital to be a slightly bigger draw than what had We haven't made any changes to CapEx and so on, so not a whole lot of changes in free cash flow other than to account for the increase in earnings and maybe a slightly higher working capital drawback.
Jamie A. Beggs: Yes, there hasnt been a whole lot of changes other than we did raise the overall guidance, we narrowed the range of the EBITDA midpoint is higher.
Jamie A. Beggs: Working capital really is dependent on how the back half sales growth continues to evolve.
Jamie A. Beggs: That's been slightly higher I would expect that working capital to be a slightly bigger drop than what had originally been communicated we haven't made any changes to <unk>.
Jamie A. Beggs: Capex and so on and so not a whole lot of changes in free cash flow other than to account for the increase in the earnings maybe a slightly higher working capital draw.
Speaker Change: Thanks very much.
Speaker Change: Thank you.
Operator: And our next question comes from the line of Michael Sison with Wells Fargo. Your line is open.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of Michael Sison with Wells Fargo. Your line is open.
Michael Joseph Sison: Hey, good morning, nice start to the year. I, as she said, it sounded like 2Q sales are going to be up sequentially from the first quarter. I think you noted some momentum in some of the markets. Why wouldn't EBITDA be up sequentially or EPS? Just, were there a couple things that were maybe better than or one-time items in the first quarter? I mean, margins were pretty good. So just curious: if sales are up, why wouldn't EBITDA earnings be up?
Michael Joseph Sison: Hey, good morning, nice start to the year.
Michael Joseph Sison: I assure you it sounded like QQ sales is going to be up sequentially from the first quarter. I think you noted some momentum.
Michael Joseph Sison: And some of the markets.
Michael Joseph Sison: EBITDA be up sequentially, our EPS, just whether a couple of things that were maybe better than our one time items in the first quarter.
Michael Joseph Sison: I mean margins were pretty good. So just curious if sales are up why wouldnt EBITDA and earnings be up.
Jamie A. Beggs: Yeah, Mike, you're right. I mean, sales are about $6 million. I think the EBITDA is down a little bit. It's largely because I think the raw material deflation impact, sequentially, is about $5 million. And then we have another $1 million or so in some investments in the IT area, which
Speaker Change: Yes, Mike you're right I mean sales are about $6 million EBITDA.
Speaker Change: Expectations.
Michael Joseph Sison: Yeah.
Michael Joseph Sison: EBITDA is down.
Michael Joseph Sison: A little bit.
Michael Joseph Sison: Largely because.
Michael Joseph Sison: The raw material deflation impact sequentially is about $5 million and then we have another million or so in some investments in the <unk> area, which kind of.
Michael Joseph Sison: The main reason why EBITDA is down.
Jamie A. Beggs: Got it. And then, and then for the full year.
Speaker Change: Got it and then and then for the full year.
Jamie A. Beggs: You know, it does seem like the first half is coming in better. The margins in SEM look really good. Any reason why? The margin is there. Don't get better as volumes get better. Just curious how that sort of unfolds. Yeah, Mike. So, absolutely.
Speaker Change: Yes, it does seem like the first half is coming in better margins.
Speaker Change: SCM look look really good any reason why.
Speaker Change: The margins there.
Speaker Change: That will get better as volumes get better just curious on how that sort of unfolds.
Jamie A. Beggs: Yeah, Mike. So, absolutely. The first half is coming strong, specifically, as you saw, key one results and the mix played a large dynamic as well as deflation. When we get to the back half, there are 2 primary things that are changing. 1, that deflationary aspect is starting to get lapped. As you recall, from our bridges that we've communicated out 2nd, quarter of 2023 was the 1st time we saw deflation. We'll be lapping it once we get into the back half of the year.
Speaker Change: Yes, Mike So yes, absolutely the first half is coming strong and specifically as you saw Q1 results in the next played a large dynamic as well as deflation when we get to the back half. There's two primary things that are changing one that deflationary aspect, it's starting to get lap as you recall from our bridges that we've communicated our second quarter of 2023.
Speaker Change: With the first time, we saw deflation will be lapping that once we get into the back half of the year and as <unk> seen raw material.
Jamie A. Beggs: And as you've seen raw materials evolve, even for the beginning of this year, we expect those deflationary benefits. But the other side of that, which we also communicated the last time we were together, really revolves around an incentive reset, so there are some back half headwinds in terms of costs that we expect to come back. So we do see margins continue to improve as we go through the year, but they're seasonally adjusted, and we have to account for some of these dynamics with raw materials and costs as we get to the back half of the year. But on a few-year basis, as Ashish mentioned earlier, we do expect margin expansion
Speaker Change: <unk> even for the beginning of this year, we expect that deflationary benefits to basically go away in the back half the other side of that which we also communicated the last time, we were together really revolves around an incentive reset. So there is some back half headwinds in terms of.
Speaker Change: Cost that we expect to come back, though we do see margins continuing to improve.
Speaker Change: As we go through the year, but they are seasonally adjusted and we have to account for some of these <unk>.
Speaker Change: Dynamics with raw materials and cost as we get to the back half of the year, but on a failure basis as Ashish mentioned earlier, we do expect margin expansion in total for the business.
Speaker Change: Got it thank you.
Jamie A. Beggs: And our next question comes from the line of David Wong with Deutsche Bank. Your line is open.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of David <unk> with Deutsche Bank. Your line is open.
David Wong: Hi, good morning. Just going back to the guidance, I guess Q1 exceeded your guidance by $10 million in EBITDA. It sounds like defense is doing better, and deflation is getting better. Why did you only increase the four-year guidance by $5 million on the low end? I guess what's the volume assumption embedded in the guidance right now versus three months ago?
David: Hi, Good morning, just going back to the guidance I guess Q1 exceeded your guidance by $10 million EBITDA and it sounds like defense, it's doing better Deflations getting better why did you to only increase the full year guidance by $5 million at the low end I guess, what's the volume.
David: Assumption embedded in the guidance right now versus three months ago.
Jamie A. Beggs: Maybe just to clarify, David, so the beat that we had based on our internal estimates was closer to eight. We did have some goodness in depreciation and interest expense as well. So about half of that relates to mix and demand, which we talked about specifically with defense offsetting some of the sluggishness that we had expected to not come from Europe. And the other half really relates to raw material deflation. Our assumptions for the full year have not changed for raw material deflation.
David: So maybe just to clarify David said the beat that we had based on our internal estimates with closer to $8 million and we did have some goodness and depreciation and interest expense as well.
David: So about half of that and be relate to mix and demand that we talked about specifically with defense offsetting some of the sluggishness that we had expected.
David: Im not come from Europe, and the other half really relates to the raw material deflation.
David: Our assumptions for the full year has not changed for raw material deflation, we still expect that 20% to $30 million primarily in the first half and just got pulled forward into the first quarter. So that is not something that we see is demand coming through that's just the timing of raw materials. So in essence, we really beat by $4 million on EBITDA for the first quarter and Thats basically.
Jamie A. Beggs: We still expect that $20 to $30 million, primarily in the first half. It just got pulled forward into the first quarter. So that is not something that we see as demand coming through. That's just the timing of raw materials. So in essence, we really beat by $4 million on EBITDA for the first quarter, and that's basically what we raised on the low end of our guidance.
David: What we raised in our low end of our guidance.
David Wong: Okay. And just on defense, what types of margins are you realizing these days on defense? And I guess given the current events, do you think you're over-earning on defense, which could become a headwind to you next year? So we typically don't give out.
David: Okay, and just on defense what type of EBITDA margins are you. Realizing these states from defense and I guess given the current events do you think youre over Ernie in defense, which could become a headwind next.
Jamie A. Beggs: So we typically don't give out margins by applications, but I will tell you from the 150 basis point margin improvement that we had in Q1 year over year, about 50 of that came from mix and defense, and about 100 of that came from deflation that comes through. We are mindful that defense can be lumpy. We did have some additional program wins in addition to some of the large military programs on more local law enforcement from Border Patrol and Capitol Police that came through in the first quarter.
David: Next year.
David: So we typically don't get out margin by applications, but I will tell you from the 150 basis point margin improvement that we had Q1 year over year about 50 of that came from mix and defence and about 100 of that came from deflation that comes through.
David: We are.
David: And mindful that defense can be lumpy. We did have some additional program wins. In addition to some of the large military programs on more local law enforcement from border patrol and capital police that came through the first quarter as we do you expect there to be some lumpiness as we go through the year and Thats inherent in the nature of defense.
Jamie A. Beggs: So we do expect there to be some lumpiness as we go through the year. That's inherent in the nature of defense, but we do expect strong double-digit growth for the full year of 2024. And as things evolve in the geopolitical environment, that would then play out in how we think about 2025 as well.
David: But we do expect strong double digit growth for the full year of 2024 and as things evolve in the geopolitical environment that would then play forward and how we think about 2025 and beyond.
Speaker Change: Okay. Thank you.
Operator: And our next question comes from the line of Kristen Owen with Oppenheimer. Your line is open.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of Kristen Owen with Oppenheimer. Your line is open.
Kristen E. Owen: Hi, good morning. Thank you so much for taking the time to answer the question. Ashish, I wanted to follow up on some of the comments that you made about sort of outperforming the market in certain end markets and gaining share. If you can help us understand, what are the drivers behind that share gain? You know, is there some additional investment that you need to put in place from a Salesforce perspective to help us understand the market share commentary, if you don't mind?
Kristen E. Owen: Hi, good morning. Thank you so much for taking the question.
Kristen E. Owen: I wanted to follow up on the commentary you made about sort of outperforming the market in certain end markets gaining share.
Kristen E. Owen: Can help us understand what are the drivers behind that share gain or is there. Some additional investment that you need to put in place from a salesforce perspective can you help us understand that the market share commentary if you don't mind.
Ashish K. Khandpur: Yeah. Thanks, Kristen.
Ashish K. Khandpur: Yeah. The share gains that I'm talking about really don't need any extra investment. They really are just basic blocking and tackling and staying close to customers. You know, quality of service. So like building and construction, I talked about the wire and cable business, and they're really maintaining high quality, high services, our differentiator, and that's what's driving us to win share there. Similarly, in defense, you know, much more, many more second wins, especially for short-term projects with Border Patrol and Capitol Police, and that's all just staying close to key accounts and customers and being in touch with what's happening on And then on the consumer side as well, you know, we've been taking shares, especially on the large appliance side, in different parts of the world.
Speaker Change: Yeah. Thanks Kristen.
Kristen E. Owen: The share gains that I'm talking about really don't need any extra in restaurants that are rarely are basic blocking and tackling and being staying close to customers.
Kristen E. Owen: No.
Kristen E. Owen: Quality of service, so like building and construction I talked about wire and cable business and Theyre really maintaining high quality high services, our differentiator and Thats, what driving us win share there.
Kristen E. Owen: Early in defense and a much more many more spec in rins for especially for short term project.
Kristen E. Owen: In border patrol and.
Kristen E. Owen: And the.
Kristen E. Owen: Capital for listen that's all just being staying close to key accounts and customers and be in touch with what's happening on a day to day basis.
Kristen E. Owen: And then.
Kristen E. Owen: On the consumer side as well <unk> been taking share, especially on the larger appliances site in.
Ashish K. Khandpur: And that's just, you know, providing a good price value but also a good service, which is really a differentiator there. So, I wouldn't say there is any extra investment needed in any of these things that we are winning share in. Obviously, as we grow these businesses, as we talked about earlier, and the volumes grow, we'll have to make investments as we go. Grow bigger, and in terms of making sure we have capacity to feed everyone.
Kristen E. Owen: In different parts of the world and that's just.
Kristen E. Owen: Providing.
Kristen E. Owen: Good price value, but also a good service switches.
Kristen E. Owen: Clearly a differentiator there so I wouldn't say that there's any extra investment needed any of these things that we are winning Sharon obviously as we grow these businesses and we've talked about earlier and the volumes grow you will have to make investments as these businesses grow bigger in terms of making sure we have capacity to feed all of these things.
Kristen E. Owen: Thank you for that. My follow-up question is related to actual margins in the color segment. You know, you guys have taken some restructuring actions post the MasterBatch acquisition really to bring up the profitability of the European business there. Just thinking, as that business flips from negative volume to positive volume, how should we think about the contribution of MasterBatch in terms of EBITDA accretion? Is that yet at the portfolio level? Just how should we think about margins in color going forward as you see Europe modestly improving?
Speaker Change: Thank you for that.
Speaker Change: My follow up question is related to actually margins in the color segment.
Speaker Change: You guys have taken some restructuring actions post the master batch acquisition really to bring up the profitability of the European business, there just thinking.
Speaker Change: That business flips from negative volume to positive volume, how we should think about the contribution of <unk>.
Kristen E. Owen: Master branch in terms of EBITDA accretion is that yet at the portfolio level, just how to think about margins in color going forward as you see Europe modestly improving.
Ashish K. Khandpur: Yes, so I think that the big thing for color in Europe is to drive margin expansion while we continue to gain share there as well. So the teams that are working hard, and, you know, we have done a lot of restructuring work there and looked at our plant footprints, so that our plant footprint optimization is underway, and we continue to drive that as well.
Speaker Change: Yes, So I think the big thing on color in Europe is to drive margin expansion and while we continue to gain share there as well. So the teams that are working hard and we are.
Speaker Change: Done a lot of restructuring work, there and looked at our plant footprint.
Speaker Change: So that our plant footprint a footprint optimization is underway and we continue to drive that as well and additionally, focusing color in settlements, which are more accretive on margin, we talked about health care, we talked about certain packaging applications.
Ashish K. Khandpur: And additionally, focusing color in segments which are more accretive to margin, we talked about healthcare, we talked about certain packaging applications, those kinds of applications are going to help us grow our margins better in color as well, and not just in Europe but everywhere else. So we are seeing year-over-year margin expansion in color; you saw that in Q1, we had 180 basis points adjusted for margin expansion, and we expect, you know, pretty good margin expansion for the year for color as well.
Speaker Change: Those kinds of applications is going to help us grow our margins better in.
Speaker Change: Color as well not just in Europe, but everywhere else. So we are seeing.
Speaker Change: Year over year margin expansion and color you saw that in Q1, we had 180 basis points EBIT adjusted EBITDA margin expansion and we expect.
Speaker Change:
Speaker Change: Pretty good margin expansion for the year for color.
Ashish K. Khandpur: So I think color is on its journey to dry margin expansion as the demand comes back. And then I think the higher volume will also help with better favorability on the factory side, which will help us dry margin. I think, Kristen, we have an overall goal for...
Speaker Change: So I think color is on its journey to drive margin expansion as the demand comes back and then I think the higher volume will also drive health with better favorability on the on the factory side, which will help us drive margins even more.
Jamie A. Beggs: I think, Kristen, we have an overall goal for both segments to be north of 20% so that we can have total company margins above 20%. And they're well on their way to being able to do that.
Speaker Change: Think Kristen we have an overall goal for both the segments to be north of 20%. So that we can have total company margins above 20%.
Jamie A. Beggs: Part of that, obviously, is in the synergies related to the Clarion acquisition, which we still have a couple more plant closures that we are working through to be able to drive some additional margin expansion. But the majority of that going forward, as Ashish talked about, is really growing underlying volumes and also expanding in innovation areas, such as sustainable solutions and additives, that I think will also expand margins for the space. But 18.8% is closing that gap to be above 20%, and we expect further margin expansion as we look through this. Anna, we hope to, I guess, talk more about later in the year.
Speaker Change: On their way to be able to do that part of that obviously is on the synergies related to the Clarient acquisition, which we still have a couple more plant closures that we are working for to be able to drive some additional margin expansion, but the majority of that going forward. As he has talked about is really growing underlying volumes and also expanding and innovation areas such as in sustainable solutions and additives that I think.
Speaker Change: We'll also expand margins for the space, but.
Speaker Change: 18, 8% is closing that gap to be above 20% and we expect further margin expansion as we look through the strategic plan that we hope to.
Speaker Change: To talk more about later in the year.
Speaker Change: Great. Thank you so much.
Operator: And our last questioner comes from the line of Vincent Andrews of Morgan Stanley. Your line is open.
Speaker Change: Thank you.
Speaker Change: And our last questioner coming from the line of Vincent Andrews of Morgan Stanley. Your line is now open.
Vincent Stephen Andrews: Thank you and good morning, everyone. I'm wondering if you could drill in a little bit more to telecom a couple of scores. First, Ashish, I think I heard you say your customers are saying it's not going to get better until 2025. So what is it that they're telling you in that regard? And from our perspective on the outside, what do we need to see to kind of help us understand that that inflection is finally going to come?
Vincent Stephen Andrews: Thank you and good morning, everyone. I'm wondering if you could drill in a little bit more to telecom a couple of stores first Ashish I think I heard you say your customers are saying, it's not going to get better until 2025. So what is it that they're telling you.
Speaker Change: That regard and from our perspective on the outside what what do we need to see to kind of help us understand that that inflection is finally going to come there.
Ashish K. Khandpur: Yeah, so that specific comment was for telecommunications. And, you know, in the telecommunications area, we see it as really a two-piece situation.
Ashish K. Khandpur: Yeah, so that that specific comment broadsoft telecommunications.
Ashish K. Khandpur: And.
Ashish K. Khandpur: The telecommunications area, we see it as really.
Ashish K. Khandpur: If you look at the market, the biggest markets are in the U.S. and Canada, and then also in Europe. And we are seeing that market stabilize, the telecom market stabilize, not yet grow, but stabilize in the U.S., but Europe continues to not stabilize right now. So when we talk to some of our big customers who are in this 5G and telecommunications area, there is a lot of de-stalking still happening, there's a lot of inventory in the channel, and on the demand side, it's still low. And these are capital-intensive businesses, so the interest rates are not helping the deployment of fiber optic cable and so on and so forth.
Ashish K. Khandpur: <unk> situation. If you look at the market. It's the biggest markets are in U S and Canada and then also in.
Ashish K. Khandpur: In Europe, and we are seeing that market stabilize.
Ashish K. Khandpur: Telecom market to stabilize not yet grow about stabilized in the U S. But Europe continues to not stabilized right now so when we talk with all of our big customers, who are in despite and telecommunication area.
Speaker Change: There is a lot of destocking still happening.
Ashish K. Khandpur: Inventory in the channel.
Ashish K. Khandpur: And on the demand side its still low so and these are capital intensive businesses. So the interest rates are not helping deployment of <unk>.
Ashish K. Khandpur: So I think in the end, based on our assessment, we believe that this market overall is going, [inaudible] Sorry. No, go ahead, Ashish. I was going to say that earlier on we were expecting you to...
Ashish K. Khandpur: Fiber optic cable and so on so forth. So I think in the end.
Ashish K. Khandpur: Based on our assessment, we believe that this market overall is going to turn around.
Speaker Change: 2025.
Speaker Change: Okay, and if I could.
Ashish K. Khandpur: We would expect.
Ashish K. Khandpur: Alright.
ashish: Go ahead Ashish please.
ashish: I was going to say that earlier on we were expecting a turnaround.
ashish: And towards the second half of this year.
Speaker Change: Unchanged from our previous <unk>.
ashish: Earnings call, we feel like is going to go longer than we thought.
Vincent Stephen Andrews: Okay, that's really helpful. If I could follow up on the raw material costs, you know, no surprise, they're flattening out in the back half of the year. So maybe two questions. One, could you help us understand that 38% of your raw materials that are non-carbon based that are a little harder for us to track on the outside? Could you help us understand how those are trending?
ashish: Okay. That's really helpful. If I could follow up on the raw material costs.
Speaker Change: No surprises flattening out in the back half of the year. So maybe two questions one could.
Vincent Stephen Andrews: Could you help us understand that 38% of your your raws that are non carbon based that are a little harder for us to track on the outside could you help us understand how those are trending.
Speaker Change: And then just secondly, as I run some sort of generic raw material models. These days I'm starting to see modest inflation.
Vincent Stephen Andrews: Low single digit what have you for 2025.
Vincent Stephen Andrews: And then just secondly, you know, as I run some sort of generic raw material models these days, I'm starting to see modest inflation, you know, low single-digit, what have you, for 2025. And obviously, a lot can change between now and then. But, you know, if we do get back to an inflationary environment, what is your plan? Do you think you'll, you'll, sort of proactively go after some further productivity? Or do you think there's still the ability to price to more than offset it? And as well as getting price for mix and innovation? Yeah, I'm the one who said it.
Vincent Stephen Andrews: And obviously a lot can change between now and then but if we do get back to an inflationary environment. What is your plan do you think Youll know youll sort of proactively go after some further productivity or do you think there's still the ability to price to more than ought to offset it.
Vincent Stephen Andrews: As well as getting price for mix and innovation.
Jamie A. Beggs: Yeah, on the other raw materials, those are more stable raw materials to really call out the ones in the charts on the back of our deck that have a little bit more volatility. We don't expect a whole lot there other than just the general comment that you said before that there is some inflation that would be in the single digits. Really, what we've been watching are the ones that are highlighted in the back.
Speaker Change: Yeah on the other raw materials that are more stable raw materials are really call off the ones in the charts in the back of our deck that have a little bit more volatility in terms of.
Jamie A. Beggs: Market dynamics.
Jamie A. Beggs: So we don't expect a whole lot there other than just the general comment that you said before that there is some inflation there that would be in the single digits I'm really what we've been watching as the ones that are highlighted in the back and we do expect inflation to come in the back half of the year, but total for the company $20 million to $30 million is what we anticipate most of that being.
Jamie A. Beggs: We do expect inflation to come in the back half of the year, but total for the company 20 to 30 million is what we anticipate, most of that being recognized in the first half with some inflation in the back half, which is causing some of the headwinds that I think Mike talked about. We've always been really good at pricing. The team is very attuned to watch how that works. We do price based on value; that's the first avenue that we always look at, and then second, if raw materials are moving against us in a material way, we also make sure that we're aware of that to maintain the margins.
Jamie A. Beggs: <unk> in the first half of some inflation in the back half, which is causing some of the headwinds, but I think Mike talked about from the standpoint of margins and we've always been really good about pricing on the team is very attuned to watch how that works, we do price based on value. That's the first.
Jamie A. Beggs: <unk> that we always look at and then second half.
Jamie A. Beggs: If raw materials are moving on us in a material way. We also make sure that we're aware of that.
Jamie A. Beggs: And as you've seen through the bridges that we provided over the last, I don't know, eight to nine quarters, we've been able to always have a net positive impact from deflation or inflation based on our pricing initiatives, and we expect to continue to be able to cover that through 24 and 25 as these conditions continue to evolve.
Jamie A. Beggs: Maintain the margin and as you've seen through the bridges that we provided over the last I don't know, 8% to nine quarters, and we've been able to always have a net positive impact from the <unk>.
Jamie A. Beggs: Deflation or inflation based on our pricing initiatives and we expect to continue to be able to cover that through 'twenty four and 'twenty five as these conditions continue to evolve.
Speaker Change: Thanks very much.
Operator: Thank you. I'm showing no further questions. I will now turn the call back over to Dr. Ashish Khandpur for any closing remarks.
Speaker Change: Thank you and I'm showing no further questions I will now turn the call back over to Dr. <unk> conclude for any closing remarks.
Ashish K. Khandpur: Yeah, thank you very much, everybody, for joining us this morning. That concludes this call, and goodbye, and see you next quarter.
Speaker Change: Yes. Thank you very much everybody for joining this morning that can close the call and Goodbye and see you next quarter.
Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
Speaker Change: Ladies and gentlemen that does go conference for today. Thank you for your participation you may now disconnect.
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