Q4 2024 Avient Corp Earnings Call
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Michelle: Good morning, ladies and gentlemen, and welcome to IBM Corporation's webcast to discuss the company's fourth quarter and full year 2024 results. My name is Michelle and I will be your operator for today. At this time, all participants are in a listen-only mode.
Michelle: We will have a question and answer session following the company's prepared remarks.
Speaker Change: As a reminder, this conference is being recorded for replay purposes. I would like now to turn the call over to Joe DiSalvo, Vice President, Treasurer and Investor Relations. Please go ahead.
Joe DiSalvo: Thank you, and good morning to everyone joining us on the call today.
Joe DiSalvo: Before we begin, 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.
Joe DiSalvo: Four looking statements will give current expectations or forecasts of future events and are not guarantees of future performance.
Joe DiSalvo: They are based on management's expectations 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 forelooking statements.
Joe DiSalvo: We encourage you to review our most recent SEC filings and any applicable amendments for complete discussion of these factors and other risk factors that may affect our future results.
Joe DiSalvo: During the discussion today, the company will use both GAAP and non-GAAP financial measures.
Joe DiSalvo: Please refer to the presentation posted in the investor relations section of the Avian website where the company describes the non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures.
Joe DiSalvo: 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 avian.com in the investor relations section.
Speaker Change: Joining me today is our President and Chief Executive Officer, Dr. Ashish Khandpur.
and Senior Vice President and Chief Financial Officer Jamie Beggs.
Ashish Khandpur: I will now hand the call over to Ashish to begin. Thank you Joe and good morning everyone.
Ashish Khandpur: 2024 was my first full year as CEO of Aviant and an important year of change for our company.
Ashish Khandpur: Over the course of the year, we developed and launched a new strategy to deliver and accelerate organic growth.
Ashish Khandpur: As part of our evolution as a company, we articulated a new purpose, which is to be an innovator of material solutions to help our customers succeed while enabling a sustainable world.
Ashish Khandpur: Our strategic approach is to intersect secular trends and high growth markets with our technologies to create product platforms of scale.
Ashish Khandpur: We have conducted extensive portfolio prioritization and identified growth vectors to both catalyze growth in our core and to build businesses in high-growth markets supported by secular trends.
Ashish Khandpur: As we began deploying our new strategy, it was important that we also remain focused on delivering performance in the present.
Our overarching objective is organic top-line growth.
with Margin Expansion on the bottom line.
Ashish Khandpur: I am very pleased to report that in 2024 we delivered both.
Ashish Khandpur: On this slide, we present Organic Revenue Growth by Region, which removes the impact of FX for the full year 2024.
Ashish Khandpur: As you can see, we grew organically in every region of the world, including EMEA, where the macro environment was quite challenging.
Ashish Khandpur: We also realized significantly higher growth versus respective regional GDP for the U.S. and Canada, Asia, and Latin America regions.
Ashish Khandpur: This was driven by our enhanced focus on customers, share gains, winning new product specifications, and restocking in certain end markets.
Ashish Khandpur: Some of our key highlights for Pool Year 2024 are shown in this next slide.
Organic sales for the total company increased by 4%.
Ashish Khandpur: Both our business segments grew and both expanded adjusted EBITDA margins.
Ashish Khandpur: Organic sales growth was 3% for color, additives, and inks, or CAI segment, and 6% for Specialty Engineered Materials, or SEM segment.
Ashish Khandpur: Adjusted EBITDA margin expansions were 90 basis points and 110 basis points for CAI and SEM segments respectively.
Ashish Khandpur: For the company, our adjusted EBITDA margins expanded 20 basis points to 16.2%.
Ashish Khandpur: Operationally we remain disciplined and leverage our top-line growth to deliver 13% adjusted EPS growth for the year, which includes the impact of FX.
Ashish Khandpur: In December, at our Investor Day in New York, we shared our new company purpose and strategy, which has already been under execution for some time.
Ashish Khandpur: We strengthen our leadership team with new appointments for the CTO, CIO, General Counsel, and SVP of New Business Development and Marketing Excellence roles.
Ashish Khandpur: Since then, in early January this year, we have rolled out a new incentive compensation plan for the company to ensure there is direct alignment between executing our strategy and how and where our employees are focused.
And culturally, like every year, we strive for continuous improvement.
That starts with safety.
Ashish Khandpur: I'm proud to share that 2024 was a record year for safety for us.
Ashish Khandpur: And our injury incident rate was the best in the company's history.
Ashish Khandpur: That being said, our ultimate and ongoing goal remains zero injuries, so we will continue to be disciplined and focused on further improving our safety performance.
For more information, visit www.FEMA.gov
Thank you. Thank you. Thank you.
Ashish Khandpur: One last point I would like to highlight for the year is our 5% dividend increase.
Ashish Khandpur: That increase marked the 14th consecutive year of annual dividend growth for Aviant.
Ashish Khandpur: At the Investor Day in December, we also shared our prioritized growth vectors.
Ashish Khandpur: One of our identified growth vectors is composites for defense and law enforcement to catalyze growth in our core business of advanced protective materials.
Ashish Khandpur: The market need for lighter and better protection materials is driving strong innovation in our labs and manufacturing processes.
Ashish Khandpur: Today, I will highlight a new innovation in our Dyneema portfolio that is used in military and law enforcement applications.
Ashish Khandpur: Thank you for watching. Please subscribe to my channel. I will see you in the next video.
Speaker Change: As you may know, Dyneema is the world's strongest fiber and we just announced a breakthrough launch of our third generation technology of this product line under Dyneema HB330 and HB332.
Speaker Change: This innovation offers industry-leading performance through unmatched ballistic protection that is able to stop high-velocity threats with precision.
Speaker Change: It has outstanding thermal performance and retains its stiffness and properties in high-temperature environments.
Speaker Change: and its ultralight strength delivers the lightest possible solution for hard ballistics applications without compromising protection.
Speaker Change: For law enforcement, this innovation will enable a high-performance system that is up to 45% lighter than current solutions in use.
Speaker Change: For military personnel, it will enable upwards of 20% weight savings when compared to current materials that have been incorporated into military hard armor contracts.
Speaker Change: The lightweight strength of Dyneema enhances agility, comfort, and overall mission effectiveness for those who protect and serve.
Speaker Change: This proprietary and revolutionary innovation will be used by our customers for both personal armor and vehicle armor.
Speaker Change: Before I turn the call over to Jamie, I would like to comment on a significant decision we have recently made in the first quarter this year.
Jamie: We decided to seize all work related to the implementation of S4HANA, a cloud-based ERP system, which we had begun some time ago.
Jamie: The decision was based on the risk, complexity, time, and associated costs, all of which have substantially increased to complete the project.
Jamie: Accordingly, the initial value proposition of the project no longer holds true.
Jamie: Further, we have determined that there are alternative solutions less than a global ERP system that are less costly, easier to implement, and can deliver substantially the same benefits which will ultimately deliver better returns for our shareholders.
Jamie: As a result of this decision, the company will recognize a non-cash impairment charge of approximately $71 million.
Jamie: Associated with capitalized implementation costs and a charge of approximately $15 million Associated with contractual obligations for license fees in the first quarter of 2025
Jamie: These charges will be considered special items and are not included in our adjusted 2025 projections.
For more information, visit www.FEMA.gov
Speaker Change: I want to reassure our investors that we don't take such decisions lightly, but I fully believe it is the right one going forward for the company and our shareholders.
Jamie: With that, Jamie can provide more context on 2024 and outlook for the year ahead.
Jamie: Thank you, Ashish, and good morning, everyone. The headline for the fourth quarter is that overall earnings results were in line with expectations.
Jamie: We delivered within our guidance range for both Adjusted EBITDA and Adjusted EPS.
Jamie: The rapid strengthening of the U.S. dollar against other major currencies in the fourth quarter unfavorably affected our EBITDA results by $2 million and EPS by one cent.
Jamie: As a reminder, approximately 60% of our revenue is generated outside the United States.
Jamie: From a total company perspective, the fourth quarter marks our third consecutive quarter of organic sales growth, which grew 5% year-over-year.
Jamie: Adjusted EBITDA and adjusted EPS were down slightly as the benefit from higher sales was more than offset by the year-over-year impact of variable compensation accruals, as we said would be the case during our last quarterly earnings call.
Jamie: This negatively impacted 4th quarter adjusted EBITDA and adjusted EPS by $10 million and $0.08 respectively.
Jamie: Turning to segment performance, color additives and inks grew organic sales by three percent, driven by strong demand in drug delivery, consumer discretionary products, particularly in Europe and Latin America, and building and construction materials in the United States.
Jamie: Offsetting the growth in these end markets were sales into transportation where both the US and Europe were down year-over-year.
Jamie: While the segment did benefit from raw material deflation in the prior quarter, this was not the case in the fourth quarter where the segment's raw material basket was essentially flat to last year.
Jamie: Higher sales and favorable mix partially offset the impact of variable compensation reset, which resulted in an EBITDA decline versus the prior year.
Jamie: This segment was supported by robust demand for engineered materials and remote monitoring devices for healthcare applications.
Jamie: Composites for Building and Construction and Wind Energy Applications as well as Moderate Growth in Defense and Consumer Applications.
Jamie: The segment had overall raw material inflation, primarily related to certain flame retardant materials, but pricing and mix were favorable, resulting in a net price benefit of three million dollars for the quarter.
Jamie: Higher sales and favorable mix more than offset the impact of variable compensation within the quarter, leading to adjusted EBITDA growth as well as margin expansion for the segment.
Jamie: Moving to the full year results for 2024, we accomplished what we set out to do by growing the top line in excess of market, as well as the bottom line through customer intimacy, innovative offerings, and operational disciplines.
Jamie: Starting with the segments, color added is an ink screw organic cells by 3% in 2024.
Jamie: Performance was driven by new applications for drug delivery and building and construction, as well as demand recovery and packaging and consumer end markets.
Jamie: Adjusted EBITDA margins expanded 90 basis points driven by operating leverage from higher sales and favorable net price benefit.
Thank you for tuning in. We'll see you next time.
Jamie: SEM sales grew 6% over the prior year, excluding the impact of foreign exchange.
Jamie: The composites business, which represents approximately 55% of the segment, benefited from strong demand and defense applications, as well as growth in building and construction.
Jamie: Composite growth was tempered by de-stocking in the telecommunications and market.
Jamie: The segment also grew with engineering materials, especially in healthcare applications.
Jamie: Adjusted EBITDA margins expanded 110 basis points primarily driven by operating leverage from higher sales and favorable mix from margin accretive platforms.
Jamie: For total avian, adjusted EBITDA grew 6% excluding foreign exchange to $526 million for the full year.
Jamie: Earnings growth came from higher sales, favorable net price associated with raw material deflation, and lower cost from productivity measures.
Jamie: Taking this earnings growth and adding lower interest expense, we ended the year with adjusted EPS of $2.66, representing 15% growth over the prior year, excluding FX.
Jamie: Turning now to our 2025 guidance, for the first quarter we are projecting adjusted EPS to be $0.76, in line with the prior year first quarter, and includes a $0.04 headwind associated with the strengthening U.S. dollar.
This translates to 6% adjusted EPS growth, excluding FX.
Jamie: You may recall that last year's first quarter results benefited from the timing of outside defense orders.
Jamie: As a reminder, the order patterns and sales for this market can be lumpy, resulting in quarterly swings.
Jamie: So when considering this difficult comparison to the first quarter last year, this is an encouraging start to 2025.
Jamie: From a full-year perspective, we are providing a range to accommodate the current macroenvironment, which includes several uncertainties.
Jamie: We noted a few of these considerations on this slide, such as the extent and timing of interest rate cuts,
Jamie: the underlying performance of world economies, consumer sentiment, and of course, policy uncertainty and changes.
Jamie: As it relates to potential tariff impacts, our exposure is largely mitigated as the majority of our sales within a country is meant for local consumption.
Jamie: In addition, from a supply standpoint, roughly 5% of our global raw material purchases are at risk of being subjected to direct tariffs.
Jamie: Of this 5% of our global spend, we have mitigating plans to source the majority from other countries.
Jamie: However, as we said in the past, the real question is the broader impact on global demand, which is uncertain and unquantifiable today.
Jamie: Despite the uncertain macrodynamics like this, we will remain focused on what we can control.
Jamie: Accordingly, we are providing a range for four-year projections for adjusted EBITDA of $540 million to $570 million and adjusted EPS of $2.70 to $2.94.
Jamie: The midpoint of the adjusted EPS range represents 11% growth, excluding FX versus 2024. I'll now hand the call back over to Ashish.
Speaker Change: Thank you, Jamie, and thank you to all listening to our call today, especially to the Avian team out there who made possible the performance and highlights we reported today.
Speaker Change: That concludes our prepared remarks. Operator, please open the line for questions.
Speaker Change: Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 11 again. We ask you to please limit to one question and one follow-up.
Speaker Change: And our first question is going to come from Frank Mitch.
with Firmium Research. Your line is now open.
Good morning and a nice end to the year.
Speaker Change: You know, Ashish, you highlighted this Generation 3 Dyneema product. I'm curious as to, you know, what sort of impact it would have. I was surprised to see...
Speaker Change: that this defense as a percent of overall sales was steady at 7%, 24 vs. 23.
Obviously, that could be 6.6% in 2020.
Speaker Change: 3 and 7.4% in 24. But can you, can you talk about you know, this, the product that you highlighted and your expectations for defense and in context also of the difficult 1Q comp and what your expectations are for 25. Thank you.
Speaker Change: Yeah, thanks Frank for the question. First of all, you know the I want to emphasize that the product is driven by the innovation is driven there by by the needs of the market and that's important because you know, we want to have the innovation to be relevant and as you saw that
Speaker Change: That, you know, it's a significant upgrade to the performance of what both the military and the law enforcement units.
all are using today.
with respect to
Speaker Change: This is an important part for our game as we go forward because it helps us maintain our margins, if not increase them, make a more profitable mix.
out of the out of the pie
Speaker Change: And then also, you know, stay ahead of the competition. And as I mentioned in my prepared remarks, you know, this is...
Speaker Change: You know, it creates a mode for us with respect to.
Speaker Change: how to win share against competition and then retain it. So I think all those things are very important. Of course, as I mentioned, the innovation is gonna be used.
not just for personal protection but also vehicle armor.
Speaker Change: And then we are continuing to innovate this with rifle-resistant helmet as well in the same spirit. So, we are extending this innovation into other applications, and those are under commercialization as well. So, I won't give you a revenue number, but I can tell you that this innovation is very well-received.
Speaker Change: accepted and is being commercialized with full strength in the marketplace.
Speaker Change: both in the military segment as well as law enforcement and border security.
with respect to defense.
Speaker Change: You know, Q1 last year, as you may remember, was a pretty heavy defense quarter for us. You know, we had 38% year-over-year. All these numbers I'm going to give you are constant currency or XFX. So, 38% growth year-over-year in Q1.
Speaker Change: And just to give you a flavor, you know, we, 63% of our sales, of the revenue that, of the growth, 63% of the growth of defense last year came just out of Q1. So that's how lumpy Q1 was last year.
Speaker Change: What that means is typically we were 15 to 17 million over
sales than a typical expected quarter would be for defense.
Speaker Change: And so that's the kind of headwind we are hitting right now. And as you know, this is a pretty profitable product for us. So both on the EPS side as well as on the sales side, this is a big hurdle to overcome. And the teams are doing everything they can to do that. And that's reflected in our EPS guidance.
that we talked about in the prepared remarks.
So maybe I'll just stop there and, you know...
Ashish Khandpur: Any follow-up questions? No, Ashish, I appreciate the color, for sure. One of the things the market is now speculating is that we will have peace.
Ashish Khandpur: at some point in Europe, you know, the Russia-Ukraine war. Do you have any insights as to, you know, how much that may have been driving some of this business?
Ashish Khandpur: and what may happen in the case that we hopefully do get peace in Russia-Ukraine.
businesses in those areas.
Ashish Khandpur: as there is more focus on border protection, etc. So it's a more balanced portfolio versus just being a defense or military application. That's point number one. Point number two, based on the political climate, we expect NATO countries will actually...
Ashish Khandpur: And then point number three is that we continue to find new applications beyond defense and military for these kinds of technology which is
specifically in the area of marine
and, you know, ropes for tugging and building sustainable infrastructure.
Ashish Khandpur: you know over in the ocean. So all those things are the teams are working on and and are winning business there. So diversification of portfolio is also as important in this case where we can find application where this differentiation is appreciated.
Sounds promising. Thank you, Ashish.
For more information, visit www.FEMA.gov
Speaker Change: And our next question will come from Mike Harrison with Seaport Research. Your line is open.
Speaker Change: Thank you for watching. Please subscribe to my channel. I hope to see you again soon.
Hi, good morning. Let me share my...
Congratulations on a solid finish to the year.
Speaker Change: I was hoping, Ashish, that we could dig in a little bit more on your decision to cease implementation of the SAP S4 HANA system.
I guess just help us understand.
Speaker Change: kind of where you were in the implementation process. Were you in kind of the second or third inning or were you a little bit later stage? And remind us also of the timing, I guess, of when you were expecting that to be complete.
Speaker Change: And how do you think the timing of alternatives is going to compare in terms of when this is going to be completed and we could start to see some benefits from the new ERP system?
Speaker Change: Yeah, thanks Mike for the question. First of all, you know, we, our original thinking on this was, or the plan was, to implement it across our U.S. and Canada sites and in
and especially on the color side of business.
Speaker Change: So there was a multitude of sites that were for Phase I or Cycle I, if you want to say that, and then moved to other parts of the world over subsequent phases.
Speaker Change: and what we realized after about two years of work and as I said a whole bunch of you know extended timeline and associated costs related with that and resource requirements they were continuing to creep up as we were going in the process and the project was much more complicated than the team had originally planned.
Thank you.
So and then what we what we realized was that
Speaker Change: In the end, it was a very high risk for us to go with...
Speaker Change: In the test cycle, we realized, based on the outcomes, it was very high risk for us to go with the implementation across that multitude of sites that we had originally planned. And so we reduced, we thought about reducing the scope and doing it over a fewer number of sites.
After those things came up and the cost and the...
Speaker Change: and data came out on what would it cost to implement there.
and the resource requirements.
Speaker Change: It didn't even make sense for us to go forward. So, the long and short of your answer is that the cost and resource requirements were way ahead of what, way higher than what we had originally envisioned.
and the complexity was very high as well.
Speaker Change: simultaneously I would like to point out that there are a lot of new applications that have evolved since we started the project because of all the different software and innovation happening in machine learning and artificial intelligence.
Speaker Change: That's those benefits that we had we were thinking of realizing with this ERP we could realize
Speaker Change: by implementing some of those systems which are lower in cost and easier to implement and can triangulate the same amount, similar kind of data, not exactly the same, but similar kind of information and benefits, substantially similar, so that we don't see any
Speaker Change: So that we don't lose out on the benefits that we had really done, especially on the price realization side
Speaker Change: inventory management side and supply chain visibility side. So all those things can be done
Speaker Change: Much faster by implementing certain tools. So we felt it was given where we were in the project based on what it would cost to implement
Speaker Change: It's across the globe. It would be a long time and a lot of dollars required versus what we can do with these small subset programs and realize the benefits in a faster way.
Speaker Change: So when we looked at the two options, it was clear to us that this was the right direction to move.
Speaker Change: All right, thank you for that. And then the other question I had was on health care. It sounds like health care was kind of a driver in both segments in the fourth quarter. Can you give a little bit more detail on the strength that you were seeing in the fourth quarter and how you would expect trends to play out in 2025? Thanks.
Speaker Change: And then also in Q4, it was double digit growth as well. We saw, you know, north of 15% growth numbers, both in EMEA and Asia. Also, you know, USAC was pretty.
Speaker Change: positive to kind of close to mid-single-digit growth in healthcare. And it was driven by both the businesses, as you said. In the US, we saw restocking of certain healthcare products.
Speaker Change: healthcare supplies, medical supplies area. Also, we saw, we want some new business around new business, you know, with respect to continuous glucose monitoring devices that is creating new business for us.
We also saw...
Bob Patterson, Giuseppe Salvo
Some
Speaker Change: Business in Asia come from the new drug delivery devices like this injector pens for diabetes.
drugs, etc.
Speaker Change: which was also a new business for us. And then finally, in EMEA, again, this remote monitoring devices was a new business win for us that we were seeing, with that all leading to this double-digit kind of growth that we saw in EMEA as well.
Speaker Change: So overall, I would say it's a mix of new business wins that the team has had in
In areas that are growing fast, which are...
Speaker Change: you know, remote monitoring devices as well as injector pens, but also winning in the core, which is where you know, we are we have applications for medical devices as well as restocking happening in the area of medical equipment like
you know, nebulizers and you know, vapors kind of application.
Sounds good. Thank you.
Thank you.
unknown: And our next question will come from David Wong with Dorche Bank. Your line is open.
David Wong: Hi, good morning. I just want to follow up on defense. Is the base case in 25 still a mid-single-digit growth? And also, I guess given the tough comp in 24 and potentially 25, do you expect defense volume, the earnings?
David Wong: that could be down year-over-year in 2026, or do you think that'll be offset by some of the new innovations and new generation of technologies you have here?
David Wong: Thanks David. First, let me just talk about 2025 here. You know, I think mid-single digit is the right way to think about it, you know, with respect to, you know, we grew double digit in defense in 2020,
For
So, you know, we grew...
Thank you.
David Wong: I believe we grew 14% or so in 2024, so it is a big bump to overcome and I think 5% or so or mid-single digits is the right way to think about it. You know, we obviously, our teams continue to grow.
David Wong: pick up more wind as they come. And I would say that 2026, similarly, I mean, we...
David Wong: It's hard for us to comment this is a lumpy business so I don't want to speculate on 2026 but all I can tell you is that we are trying to build our pipelines for the future and
David Wong: and a lot of what we will sell in 2026 will be spec'd in this year. So as the year progresses, we'll have better visibility. But at this point, I think a mid-single-digit kind of a number is the right way to think about it.
Speaker Change: Got it. And then just back to the guidance, what's the baseline volume assumptions you have embedded in your guidance and I guess how much of that will come from new product introductions and I guess which end markets will those come from?
For more information, visit www.FEMA.gov
Speaker Change: Yeah, so, I mean, just like, I mean, I want to calibrate with respect to guidance. We gave a range and, you know, if you take 2024 as a reference point, our weighted average real GDP in the regions that we operate, you know, if you weight them with the revenue exposure we have to different regions.
Speaker Change: The real GDP was close to 2.5% or so, and we grew organic local currency growth by 4%. So that gives you a feel for that we were doing better. It was all volume or demand-driven growth, you know. So it was... And I think if...
Speaker Change: In 2025, at least from the paper, the GDP projections are similar, so the data points...
are midpoint
in our guidance.
Speaker Change: is kind of mirroring that part, that we should do kind of a similar year as we did in 2024 if the GDP is the same. Of course, this is a different year than last year. The comps are different, but also the environment is different.
Speaker Change: But given, you know, just to give a context, that's where we are at the midpoint.
Speaker Change: with respect to how much new products so I think what we should think about is typically if you think about organic currency growth that we've been talking about you know that's volume price and mix
Speaker Change: I think typically in a normal year, you know, if there's nothing uncertain like COVID or something going on, we should be able to use price to offset the inflation.
Speaker Change: So, for us, volume and mix should be able to give GDP plus 100 to 200 basis points of growth that we promised at the end yesterday.
Speaker Change: And that's how we are thinking for our business going forward and that's how the teams are operating.
Speaker Change: Of course, in that mix is a new product piece that you asked about and innovation is a key central part of our strategy as you saw in our strategic drivers.
Speaker Change: So, my guess is that it is going to be a significant part of that mix, part of the new business, all the new businesses that we are winning is coming from innovation and I think you will continue to see that ramp up more and more as time goes on over our strategic period.
Thank you very much.
Thanks.
Thank you.
Speaker Change: And our next question will come from Michael Sasan with Wells Fargo. Your line is open.
For more information, visit www.FEMA.gov
Hey, good morning. Nice end of the year.
Speaker Change: You know, it looks like FX will be around a 5% headwind in 25 versus 24. I think you noted that 60% of your sales are overseas. Seems like the new administration wants to bring more manufacturing into the U.S. So, is that, you know, given your mix of businesses, is that a positive or negative for Avian longer-term?
Yeah, Mike...
Speaker Change: Let me just answer this way. I mean, if you look at our two businesses, CAI and SEM, SEM is 55% U.S. based.
Speaker Change: And CAI is 33% or so U.S. based. So the exposure of CAI business for the color business to FX changes is higher than...
Speaker Change: on the SEM side and so and that business is very local we have to play very close to the customer because the response time on that business is of a few days you know 10 to 20 days maximum
Speaker Change: and so if you are working with that kind of scenario you cannot really bring that color part
Speaker Change: very far away from where the customer is so I think on the CAI side FX is going to be continuing to be a headwind if dollar continues to strengthen. On the SEM side, you know, it's more
Speaker Change: business which is packed in like defense and all where you know we have a higher pricing power so to say and innovation going on. So overall our FX exposure is quite large compared to other US companies as you said
Thanks for watching.
we're looking at for 2025.
Speaker Change: Yeah, like we said in the earnings release, it's about a 12-cent headwind on a year-over-year basis.
Ashish Khandpur: and then on an EBITDA basis around $15 million for what we see today and obviously things are dynamic with regards to what's going on in the world, specifically with tariffs and reciprocal-ness between the different countries and as Ashish mentioned before, the majority of what we do in all the countries in which we operate is for local consumption.
Ashish Khandpur: And our exposure outside of that is relatively small, it's less than 5% of our sales. However, how is that going to actually impact demand?
Ashish Khandpur: And if inflation takes off is really what's unquantifiable at this point and it's another reason why we're a little bit more cautious in our guidance because we're not sure how that's going to ultimately impact buying behavior.
Thank you.
Speaker Change: And it's just the other part of the question, Ashish, if there's more manufacturing into the US, is that a net positive?
Speaker Change: You know, I think it should be. I mean, you know, because we would be less exposed to effects and and you know
Honestly, it's easy for us to move our supply chains.
Speaker Change: Really it relies on our customers. You know our exposure from a tariffs perspective and RM exposure perspective is very less as Jamie Said in her prepared remarks, so that's really not an issue for us I think we can serve our customers faster without being exposed to effects if the manufacturing moves here more so
I got it and then
Speaker Change: Just curious on, you know, a lot of the folks who've reported, have talked about Europe being, continues to be really sluggish, if you will.
Any thoughts just on Europe? It's a big
Speaker Change: How's it sort of doing now, and what are the ranges of outcomes for that region do you think could happen in 2025?
Yeah, so...
Speaker Change: You know, I just want to start by saying that on an organic revenue growth perspective, we have had positive growth printed in Europe, EMEA, for the last three quarters in a row now.
Speaker Change: and you know it has overall you know Q1 was a negative growth there and that's why overall for the year we ended up plus 1% but for the last three quarters they've been winning in Europe. I think we on our organic local currency basis we should continue to
Drive on the color side
Speaker Change: We should continue to drive growth there. I think on the SEM side it depends on a lot of things including defense and other parts of the business.
that whether
Speaker Change: I guess what I'm trying to say is it's more clear for us on the CAI side to drive organic growth there. On the SEM side, it could be a little bit lumpy one way or another.
Speaker Change: And so, but when you look at it from 2025 perspective, the GDP expectations of that region are close to 1.3, 1.4 percent, you know, based on our revenue exposures.
Speaker Change: And so, that's much better than what they were last year, which was 0.8 or 0.9 percent. So, I'm expecting that our teams will do better this year in Europe than they did last year, based on just the GDP projections.
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Got it. Thank you.
Vincent Andrews: And our next question will come from Vincent Andrews with Morgan Stanley. Your line is open.
Speaker Change: Hi, this is Steve Haynes on for Vincent. I was hoping you could help a little bit with the full year EBITDA guide and bridging it, maybe just kind of at the segment level, kind of, you touched on volume before, but maybe just from the margin side of it, how we should be thinking about that. Thank you.
Speaker Change: Yeah, I would say that the guidance that we presented today really represents our best view based on the macro dynamics that are there.
Ashish Khandpur: Ashish mentioned real broadly on how we expect volume to evolve over that time frame and especially with some of the macro dynamics that could influence that.
Ashish Khandpur: From a margin expansion, we do expect to expand margins, similar to what we had mentioned during our investor day, where we expect to get operating leverage from the increase.
increase of sales.
Ashish Khandpur: Some mixed impact based on the innovation that we expect to continue to grow in excess of GDP
Ashish Khandpur: And then lastly, some productivity measures that are also in flight.
Ashish Khandpur: So we do expect some margin expansion. I would say expectations on a year-over-year basis would be in that 25% to 75%.
Ashish Khandpur: BIFs that are out there. Maybe another piece to consider is that we do expect inflation to continue roughly about 2% or so as we go forward on the raw materials side, but we do expect to offset that with pricing as needed.
Ashish Khandpur: Hopefully that gives a little bit more color of how we expect the EBITDA and EPS to fall through.
Yes, thank you.
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Speaker Change: And our next question comes from Kristen Owen with Oppenheimer. Your line is open.
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Good morning, thank you for taking the question.
Speaker Change: She mentioned in your prepared remarks, January, you started a new compensation strategy. It's really related to taking these bigger shots on goals, some of the strategy that you outlined at Investor Day.
Speaker Change: So I'm wondering, how is that manifesting through your sales organization? What are some of the KPIs that you've aligned that incentive structure to? And how should we, as sort of the outsiders, be tracking those KPIs?
Speaker Change: Yeah, I mean, I think it's, as you said, January was just last month, so it's, we have been pushing it down, you know, like from mid-January we rolled it out and so the communication has been going out. So far, the response has been quite positive. Of course, we have not seen
Speaker Change: It's too early to say the results and so on and so forth, so I won't comment on that part right now, Kristen.
Speaker Change: You know, I think the big thing that we made the change was that we
had done extensive portfolio prioritization and based on that
Speaker Change: Different businesses were in different buckets. We had businesses that had to grow faster.
Speaker Change: much faster than the macro was. There were businesses that would be growing GDP plus, and then there were businesses that we expect to drive more income and focus more on cash generation.
Speaker Change: versus growth. And so the new incentive plan kind of drives those behaviors and rewards each of those businesses differently versus having one standard package for the entire company.
Speaker Change: And I think that's a big difference. So based on what the business is supposed to drive, that's the primary KPI or metric we have set for that business, whether it's sales growth or operating income growth or whatever the case might be.
Speaker Change: You know apart from driving their own businesses are they're also helping the company drive what the whole company needs to drive
Speaker Change: So it's a balance of those things, it's a little bit more complex plan than what we had previously but I think it's the right plan and it's a more customized plan for each businesses where they are on the life cycle of their portfolio.
Speaker Change: Thank you for that color. My second question sort of relates to that cash generation piece of this. Just an update, Jamie, on the free cash flow outlook just from an EBITDA growth perspective but also in light of the decision to pause the ERP spend.
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Speaker Change: So from a free cash flow perspective, the range that we're anticipating at this point is between $180 million and $200 million.
Speaker Change: Some of the key components of that would be, as you mentioned, earnings growth, so assuming the midpoint of the range.
Speaker Change: That's about a $20 million increase on a year-over-year basis. You may have also seen in our press release and the attachments that we also
Speaker Change: expect to receive insurance proceeds from one of our environmental sites in the first quarter, which will also be a tailwind as we go into 2020.
Speaker Change: The net of that on a year-over-year basis should be approximately $40 million. And then the other piece to think about is that we do have an incentive payout that was different than 24 versus 25, and that will be a headwind. Some of those parts really get you the $180 to $200 million on a year-over-year basis.
Thank you for watching!
Okay, anything on the CapEx? Sorry.
Speaker Change: You know, we expect about $120 million or so. We're still evaluating that number because we want to make sure, as Ashish mentioned, we're really focused on growing the top line.
Speaker Change: That's in our estimate at this juncture, it may swing a little bit depending on what growth factors that we plan to fund this year. And that would be partially funded by some of the CapEx avoidance from the S4 project that we had mentioned.
Speaker Change: Bob Patterson, Giuseppe Salvo, Bob Patterson, Giuseppe Salvo, Bob Patterson, Giuseppe Salvo,
Great, thank you so much.
Speaker Change: And our final question will come from Lawrence Alexander with Jeffries. Your line is open.
Speaker Change: Hey, good morning. This is Kevin on for Lawrence. Most of my questions have been asked, but I guess I'll focus a little bit on markets. I just want to get an initial sense of what you were seeing in terms of demand in China after the new year and separately maybe what you're seeing in automotive and markets.
Speaker Change: Yeah, so let me just say that China for us in Q4 grew 7%, greater China area and pretty strong growth, you know, much higher than the GDP.
Speaker Change: and most of our business there is for local. About 30% goes outside for export.
Speaker Change: So, we are seeing pretty good growth there and I think Q1 should be...
Speaker Change: Also growing quite well. We are also gaining ground in some of the new technologies of semiconductor and servers for digital. You know, you hear all this noise about AI and everything and we are a small part of.
Speaker Change: and playing into that with some of the customers, putting the servers together. So, you know, we are getting into digital economy in China as well, greater China area, but also Southeast Asia, which is a big hub for digital.
Speaker Change: And so I think from that perspective, I expect good growth in China, Greater China Area and Southeast Asia going forward, which is, you know, about 80% of our Asia sales is Southeast Asia and China.
Got it. And then just on auto.
Speaker Change: Yeah, auto continued to grow. We had very good growth in transportation area in China in Q4 close to 20%.
Speaker Change: sandwiches, here over here. And you know, I think the EV market there is still in Q1 positive, although we did not see the same story in
Speaker Change: USAC and EMEA, but in China EVs continue to grow and and so we are continuing to getting specked into that and winning.
business there.
Speaker Change: So, I would say a little slower in EV production versus last year, but still...
You know I would say
Speaker Change: around mixing or digit kind of production numbers, volume production numbers.
Understood. Thank you.
Speaker Change: Thank you for participating. This does conclude today's conference call. You may now disconnect.