Avient Corp Q3 FY2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Avient Corporation Third Quarter 2020 Conference Call. My name is Crystal, and I'll be your operator for today.

Thank you, Crystal. Good morning, and welcome to everyone joining us on the call today. Before beginning, we'd like to remind you that statements made during this conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're 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 statement. Some of these risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission as well as in today's press release. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the Avient website, where the company describes the non-GAAP measures and provides a reconciliation for the most comparable GAAP financial measures. Joining me today is our Chairman, President and Chief Executive Officer, Bob Patterson; and Senior Vice President and Chief Financial Officer, Jamie Beggs. Also joining us for his last earnings conference call is Brad Richardson, our previous Executive Vice President and Chief Financial Officer, who announced his retirement a couple of months ago. Now I will turn the call over to Bob for some opening comments.

Well, thanks, Joe, and good morning, everyone. I'd like to start with words of support for those who've been impacted by the coronavirus. The pandemic is far from over, and we remain mindful of the many ways it is impacting people around the world. Our heartfelt appreciation goes out to the countless frontline workers and first responders as they continue to play such an important role in the response and recovery effort. This is our first quarter that we are reporting results that include the Clariant Masterbatch business, which we acquired on July 1. At that time, we welcomed over 3,500 associates to our newly named company, Avient. And we took a big step forward in our specialty transformation journey. It's created tremendous energy internally with our associates. Our customers are viewing us as a specialty partner, and our performance in this challenging environment is demonstrating the strength of our diverse and resilient portfolio. I'm pleased to report that we delivered third quarter adjusted EPS of $0.54, excluding the impact of purchase accounting step-up depreciation and amortization. Inclusive of the step-up D&A, we reported adjusted EPS of $0.46, and this is $0.03 better than we expected in our pre-announcement in September and exceeds the $0.44 we reported last year. The $0.03 improvement from when we met or talked a month ago was driven by a strong finish to the quarter with September sales growing 6% over the prior year. And particularly encouraging was that the increased demand in September wasn't isolated to one segment or region; all grew sales for the month. The last couple of quarters have been challenging, for sure. But we, our customers, and our shareholders have clearly benefited from the execution of our strategy to reposition our portfolio in recent years. Through our divestiture of PP&S and organic growth emphasis, we have greater exposure to more stable, higher value end markets such as packaging, consumer and health care. These three areas now represent nearly 60% of our sales. The Clariant Masterbatch integration is going extremely well. As we announced in September, we have increased our synergy target from $60 million to $75 million. The increase is a result of the time that we have been able to spend with a talented management team that came with the business. We were not only able to validate our initial synergy estimate but also gain confidence as a team in our ability to do more. And I think this is important to remember: we didn't just acquire incredible technology, deep customer relationships and well-run facilities; we acquired tremendous talent with a passion for innovation and serving customers with excellence, and they are immediately embracing our strategy and our culture. And that's what is making the greatest impact in our first quarter together and has me more confident than ever about our future as Avient. Another bright spot, of course, is our Specialty Engineered Materials segment. EM had record third quarter operating income of nearly $25 million, that's a 27% increase over last year. The growth was driven by continued momentum in our Composites platform, which has benefited from consumer demand for outdoor high-performance products. Recall that our Composite business was breakeven only a couple of years ago. In this quarter, our Composite business achieved a 17% return on sales. We executed our investor growth strategy by making investments in sales, marketing, and technology. And it's paying off, and we expect that our Composites platform will continue to be a key revenue and growth driver for Avient in the future. To give us more detail on the third quarter, I'm very pleased to introduce Jamie Beggs, our new CFO. I'm thrilled to have her join us and thankful for the seamless transition that’s been occurring with her and Brad over the last several weeks.

Thank you, Bob. I'm extremely excited and proud to have joined Avient, and my first few weeks have been fantastic. It's great to be back in the specialty space, one that I know well, and part of a company that has tremendous growth opportunities. Most importantly, I moved across the country with my two kids and my dog for the culture that Bob has built, a culture that has both an intense focus on winning and excellence as well as one that is fostering a great place to work for its employees. I've met several of you already on the call and look forward to working with each of you in the future. Let's jump into the specifics of the third quarter. We reported GAAP earnings per share from continuing operations of $0.02. Special items in the quarter resulted in a net after-tax charge of $40 million. Special items were primarily associated with acquisition-related costs and an adjustment to environmental reserves. Acquisition-related costs primarily consist of inventory step-up and the financing commitment associated with the Clariant Masterbatch's acquisition. Adjusted EPS for the quarter was $0.46 compared to $0.44 in the prior year third quarter. Excluding the impact of the step-up depreciation and amortization associated with the Clariant Masterbatch acquisition, adjusted EPS was $0.54. Total company revenue increased by $219 million to $925 million, primarily due to the Clariant Masterbatch acquisition, which closed on July 1. On a pro forma basis for the acquisition, third quarter sales declined 5% compared to the prior year, primarily due to COVID-related demand weakness. The impact of foreign currencies on total company sales was very minimal, at less than 0.5%. While the pandemic continues to have an impact on revenues, overall demand improved significantly from the second to the third quarter across all end markets. The two end markets that experienced the most significant improvement were transportation and consumer discretionary. Consumer discretionary sales, which account for about 17% of the total company sales, were down 28% in the second quarter and grew 1% in the third quarter as strength in our Composites platform more than offset weak demand for our screen printing inks' business. And transportation sales, which primarily consist of automotive applications and account for 10% of total company sales, were down 15% in the third quarter compared to over 50% in the second quarter. From a regional standpoint, pro forma sales in Europe were down 14%, excluding the impact of foreign currencies. This is a modest improvement from the second quarter where pro forma sales in Europe were down 18%. The pandemic has had the greatest impact on the automotive and industrial end markets in Europe. In the Americas, sales declined 7% in the third quarter compared to 21% in the second quarter. The improvement is reflective of automotive production resuming and increasing demand for consumer discretionary applications, particularly in the U.S. And lastly, our Asia businesses grew yet again this quarter, expanding sales 11% over the prior year third quarter. Nearly all end markets in the region grew with the most significant growth coming from health care. Our growth in health care continues as there is a strong demand for our applications used in the COVID-19 response. In reviewing our segments for the quarter, SEM grew operating income 27% on slightly lower sales as the segment expanded operating margins by 350 basis points, driven by improved mix and lower raw material costs. As Bob mentioned earlier, this is a record performance for a third quarter. The improved mix reflects strong demand for our composite applications used in consumer discretionary products. With this third quarter performance and demand trends we're seeing to start the fourth quarter, we feel confident that SEM can deliver operating growth for the full year. That's remarkable given all the volatility that’s taken place this year globally. The Color business continues to benefit from health care applications as health care sales grew 10% over the prior year. These gains in health care were more than offset by continuing pandemic-driven weakness, primarily in the automotive and industrial end markets in the screen printing inks' business. I realize it may be challenging to follow the Color segment's results with Clariant not added. So here's a high-level review of this year versus last year. Last year in Q3, we reported $49 million in EBITDA for the Color segment. This year, we are reporting $77 million of EBITDA. The Clariant Masterbatch acquisition added $33 million, which would bring you to $82 million, offsetting this is pandemic-related weakness primarily related to automotive and our inks business. Lastly, although Distribution segment sales were down 6% in the third quarter, we are encouraged that volumes were flat year-over-year. Declining prices as set by our suppliers account for the year-over-year change in sales and earnings. This is certainly a big improvement from the second quarter, driven by stronger demand in the U.S. and Canada automotive and consumer discretionary end markets. Despite the impact of the pandemic on our overall company sales and earnings, we have done what we always do, that is to control what we can. And this year, it was managing working capital efficiency to maximize cash generation. In the third quarter, we generated $107 million of adjusted free cash flow, exceeding our estimates, and we are now increasing our full year projection to $270 million. Working capital management has been the key driver for this performance. Our teams have done an excellent job at managing the demand volatility and uncertainty. As a percentage of sales, we have lowered our working capital investment by 1%, which, on a full year basis, translates to approximately $30 million of cash in the bank. It's a tremendous achievement for this year, but it's also an operational benefit that we expect to maintain as the pandemic recovery continues. This free cash flow performance has strengthened our balance sheet. We finished the quarter with nearly $580 million in cash and are positioned to finish the year with a net debt-to-EBITDA ratio below 3x. This is below what we committed to do when we announced the Clariant Masterbatch acquisition in December of 2019. In summary, we are in an excellent position to navigate the near-term dynamics of the pandemic and execute the very important work of integrating our two companies. That concludes my prepared remarks. But again, let me say how thrilled I am to be with Avient. I'm eager to contribute to our bright future and look forward to meeting with our investors, virtually and eventually in person in the time to come. I'll turn the call back over to Bob now for some concluding comments.

Thanks, Jamie. I'm very proud of our team's accomplishments this quarter and for the entire year for that matter. Most importantly, we kept our people safe, healthy, engaged, and inspired. This has allowed us to effectively run the business and serve customers during these challenging times. And despite the pandemic, we are off to a fantastic start with Clariant. While synergy capture is a priority for us and key to value creation from the acquisition, I'm even more excited about what the business brings to us in terms of long-term innovation and the resulting revenue growth. In early October, we published a new investor relations presentation to help articulate the story. The presentation remains available on our website, and if you have not had a chance to review it, please do so. In it, you will find important messages about Avient, who we are, what we do, and why we win. And just last week, we published our latest sustainability report. It is a comprehensive account of our performance on ESG matters. It is our second report, and we have significantly increased the amount of information, data, and transparency on topics that are important to all of our stakeholders. Our position in the value chain is a special one, but as a materials science leader, formulator, and designer, we're in the early stages of our customers' new product development, and we help them achieve their sustainability goals. At the same time, we are running our facilities as an ACC Responsible Care certified company, operating safely for our employees while protecting the environment in our communities. Further, as a founding member of the Alliance to End Plastic Waste, we have joined in the global effort to eliminate plastic waste and build awareness and infrastructure to leverage the inherent benefits of plastics. You'll see in our sustainability report that we've established our first set of sustainability goals for 2030, and we will pursue these goals with the same rigor and intensity that is a trademark of our culture. But let's shift gears to the near term and focus on the quarter ahead. Look, there is still a lot of uncertainty related to COVID and potential further lockdowns. We can't predict that. What we can say is that based on orders for October and November is that we are optimistic that the economy is continuing to improve and will do so through the balance of this year. So to give you some guidance for the fourth quarter, we want to first just ground you on a pro forma number for last year. So had we owned Clariant last year in the fourth quarter, we would have reported $93 million in EBITDA. For this year's fourth quarter, we expect to increase that by 11% to about $103 million. And this translates to adjusted EPS of $0.40, inclusive of step-up depreciation and amortization, which is 17% higher than last year. This is a big deal when you consider that many companies are reporting EPS to be flat or down in the fourth quarter. And I think this says a lot about the quality of our portfolio, but also the strength of our combination with Clariant. This is an important time for us. If you've had the chance to go through our investor materials or hear me make some remarks there, and you know that’s the case. A year ago, we completed the divestiture of our PP&S segment and shortly thereafter, announced our intent to acquire Clariant Masterbatch. Within days of the latter announcement, our stock reached a 52-week high as investors welcomed the news. Now these gains and positive sentiment were quickly erased by the COVID pandemic. And candidly, some specific fears about us and the potential that we would have to complete the Clariant Masterbatch transaction under a state of duress or maybe there was some fear that the business was impaired as a result of the pandemic. This simply wasn't and isn't true, and our results for the third quarter offer proof. I'm glad that we didn't listen to the critics telling us to back out at that time. We're about to deliver the highest level of adjusted EBITDA the company has ever achieved, with the highest percentage of specialty applications, and yet our stock trades at a multi-year low. The last time we came close to this amount of EBITDA was in 2018 when our stock reached an all-time high of $46, and as you know, today, we're trading below that. Two weeks ago, we raised our dividend for the 10th year in a row as we expect to deliver record free cash flow this year and feel extremely positive about our growth projections for the future. Now some may say the current discount is due to leverage. And yet our net debt-to-EBITDA, as Jamie just said, will be below 3x by year-end, and that's only about a half a turn more than when we traded at $46. Quite candidly, I just think our story isn't understood, and I intend to fix that. I wear many hats as Chairman and CEO, but at present, I'm very focused on telling our story to get our shareholders the return they deserve, and I will go door to door if I have to, to sell it. As you can tell, I'm very excited about the company's future. I'm very excited about our growth prospects and the future valuation. But don't just do it for me; do it for Brad. Brad is retiring. He'd really love to set up some 529s for his grandkids. As our CFO emeritus, I'd like to give him the last word today.

Well, thank you, Bob. And I do appreciate that final comment about doing it for Brad. I wanted to just say a big thanks for the support and friendship over the last seven years. I've had a little bit of time to reflect, and I have great memories of our travels together with the sell-side community. There are a lot of smiles around the table right now as I'm talking about this. Frank and Aziza, the annual Christmas dinner in New York, I will miss that. Some of those went into the wee hours of the night, but just great memories. Mike Sison, I remember traveling with you after the Cavs won the national championship. There was no suit to be found, just Cavs gear, and some of the stares that we got in the elevator are just priceless. Dinner with Ben Kallo in Portland, I can't really say more about that. And Mike Harrison, I still want to understand how at an important dinner in Chicago that we got off on an hour-long discussion on whose cheesy potatoes were better, yours or Bob's. So anyway, I just want to thank you so much for the great memories and support. Some of you know I like to boat, and there's a favorite quote of mine about a sailor. And it goes like this: "The pessimist complains about the wind; the optimist expects it to change; and the realist adjusts the sails." And though our four-pillar strategy remains the bedrock, it remains our beacon, our true north, we have adjusted the sails with extensive portfolio changes over the last seven years, with Specialty Solutions focused on consumer, packaging, and health care, which, as Bob mentioned, makes up over 60% of our portfolio. Think about where we were seven years ago when we were building a construction-focused company. We've adjusted the sails to focus on R&D and M&A to give us a full breadth of sustainable solutions, and those markets are growing at high single digits. We've adjusted the sails, certainly accelerated by Clariant, to give us meaningful presence in high-growth emerging markets: Asia Pacific and India. And we have focused on the development of our culture, which Jamie spoke to, the development of our team being certified as a Great Place to Work. And I have to say, and I've said this so many times to Bob, I just am so appreciative of being a part of the best team that I have ever worked with. And certainly, with Jamie joining the company, you can see it's only going to get stronger. So as I disembark for my next port of call, I'm not sure where that's going to go, I do so though with great confidence in the future of our company and our leadership team, and certainly, Joe, in our Investor Relations function, you've done a superb job, and I'm very, very proud of you. So I wish everyone all the best, and thank you very much.

Thanks, Brad. You're absolutely going to be missed. We really appreciate all your contributions to the company over the years. Thank you very much. So we now have time to take calls, and who knows, maybe Brad will take one or two of those.

Our first question comes from Bob Koort from Goldman Sachs.

Best wishes, Brad.

Yes, I think the primary goal is to get net debt leverage down below 3x. And we're just above that as of September 30, and expect to be below it by year-end. So I think once we pass that threshold, we could be in a place to consider doing that again.

I'm curious, the fourth quarters traditionally are pretty unkind to the chemical industry. You tend to see destocking and inventory management by customers. And 2020 is obviously a very different year. You guys have thousands of customers. Do you have any sense; should these lockdowns accelerate through the end of the year, is there a big drawdown risk at your customer level, at your own level? How do you assess sort of the channel inventories at the moment?

Yes. I mean December has always been a wild card. And I've always said it's difficult to draw a conclusion from December and/or January by itself. But if you put the two together, you get a sense for how well things are going. Look, with an increased level of lockdowns or conservatism related to the pandemic, anything, I think, could happen in December, and it's very difficult to predict. With respect to our own projection to grow EBITDA year-over-year, we've got a conservative estimate in there for the last month. So if that doesn't happen and things go better, we could do better. I'll tell you, it's also been a challenge to think through a forecast for this fourth quarter because to some extent, the recovery is offsetting historic seasonality. So some of the things that we would have perhaps modeled in the past and said, "here's how I think Q4 will look," just simply don't seem to be playing out, at least with respect to what we've seen in October, which was a really good month. So that's as clear as we see things right now, Bob. Obviously, the COVID pandemic is still to be determined how that impacts the year.

Congratulations, Brad. Don't be surprised if Fermium pays a visit to you out west in the future. We'll definitely miss you, and it's nice to meet you again, Jamie. Bob, regarding the Clariant business, I believe you mentioned that the EBITDA for the second quarter was $37 million and for the third quarter it was $33 million. Based on your guidance, it seems like the fourth quarter will be around $29 million. How should we consider the seasonality of that business on a more normalized basis? Also, the pandemic has clearly affected the top line. How should we view the top line trends for that business moving forward?

Yes. In the fourth quarter, there is some seasonality in the Clariant business that resembles our own Color business. If you look back at our historical performance in Q4, that gives a good indication of how Clariant should perform in a typical year. There are some COVID-related impacts this year that may affect that seasonality in Q4, but that's likely the best way to consider it. From a revenue standpoint, the same applies regarding seasonality. It was down slightly year-over-year in Q3, and I expect it to be similar in Q4.

All right. Great. And Jamie, I believe you said that the free cash flow for 2020, you're targeting $270 million. I assume that that's just a half a year of Clariant in it. If Clariant had been part of the portfolio from January 1, where do you think that free cash flow number would have gone to?

Frank, this is Joe. Clariant probably adds around $30 million to $35 million of free cash flow. We got a big benefit this year coming from working capital, obviously, with declining sales, so that's been helping us this year. So that's where you'll see the Clariant half-year next year should offset some of the benefit we got in the working capital improvement this year.

All right. That's very helpful. And Joe, just remember, do it for Brad.

Nice quarter, and Brad, congratulations. I do have a nice Browns outfit if we ever do get to the Super Bowl. But Bob, in terms of 2021, can you maybe help us frame what the growth potential could be next year? How much synergy comes into place? You do have other cost-saving programs, and then if there's continued momentum in EM, how do you think we see EBITDA growth next year?

Yes. I'm going to put specific guidance related to 2021 kind of in the parking lot for now, Mike. I feel comfortable with what we just said about Q4, but want to give a little bit more time to pass. So I expect us to say more about the full year when we come out with our end of year results. But I can answer, I think, maybe the last part of your question, which is synergy expectations. So we have sort of talked a little bit about run rate achievement over periods of time and have said, let's call that $30 million of run rate by the end of next year. And I think that, that means that about, let's say, $15 million to $20 million could actually benefit the bottom line next year calendar-wise. So maybe that's a good estimate or a way to think about a starting point with that level of Clariant synergies.

Great. And then when you announced the deal, I think you all talked about a $500 million EBITDA potential. Synergies are coming better. You sound incredibly enthusiastic about the combination. Is that still the marker? Or has that potentially gone up as you have spent more time with the company?

Yes, okay. That was a pro forma number looking at putting '19 together. Yes, that's correct. With the increased synergy estimate, I believe we can achieve that sooner than we originally projected. We haven't provided further details regarding timing, but you can see the results for this year. I think we will be ahead in terms of timing.

This is Angel Castillo for Vincent. I have a quick question about the fourth quarter. Could you provide more details on the guidance and how much of it might be synergies? As we consider October, you mentioned ongoing improvements and that sales grew 6% in September. Should we expect high single digits for October, or could it be better? Additionally, how are you viewing November?

Yes. We're not forecasting a 6% sales growth for the fourth quarter. While September was strong, October is likely up about 1%. For the fourth quarter, you can expect sales to be flat to down approximately 1%. Regarding synergies, we have some administrative costs that are already in place from associates that didn't join with the deal. We'll still see some benefits in the fourth quarter, but the significant advantages will start to materialize in the first quarter of next year. You can likely anticipate around $2 million in Q4.

Great. As we look at 2021, you mentioned earlier that buybacks become a consideration as leverage falls below three turns. How should we approach bolt-on acquisitions and the possibility of pursuing some of those?

Yes. I mean, look, our priorities from a cash flow standpoint have always been, obviously, to invest in what we need to in the business first; then we'd like to be able to do acquisitions, increase our dividend. And of course, then we've opportunistically bought back shares. What I'd say about the M&A market right now is that there's some real challenges with looking at acquisitions outside the U.S. because, candidly, our leadership team here can't travel, and we like to see everything in person. So there are some things in the U.S. that we're continuing to look at, but I do feel like there's some challenges just with respect to moving some things along. We got two that candidly are just kind of on a back burner until we could find a time to travel. So we do hope that next year, we can get back to doing some bolt-ons. And as you've seen historically, we've been able to do all that and buy back shares, and I think next year could be a really good illustration of that.

I still like my recipe, but the Patterson potatoes have become new family favorites here. I wanted to ask about the Clariant synergies. Could you discuss the integration process so far? Where have you observed things exceeding expectations? Additionally, can you explain the $15 million increase in the synergy number? Where does that come from, and is there any potential for further upside?

For the most part, the $15 million next year will primarily be generated from sourcing savings, along with some reductions in administrative costs. The timeline for addressing the three areas we've previously outlined remains unchanged, with sourcing being prioritized. As we mentioned in our investor presentation, when we revised our estimates from $65 million to $75 million, we recognized growth opportunities in all three categories. This adjustment stemmed from having initially conservative estimates upon announcing the deal, but also from insights shared by the Clariant leadership team, which brought forth additional ideas for consideration. This collaboration has allowed us to validate our initial thoughts while also incorporating fresh perspectives from their team, ultimately leading to the revised figure. The main driver in Q3 has definitely been an increase in demand for outdoor applications. Some of this might be due to challenges customers faced in Q2 in obtaining products, which has led to a pickup in Q3. Overall, when comparing Q2 to Q3, the margins in the Composites space have significantly improved compared to a few years ago, indicating that Composites are a major contributor to the margin enhancement. Looking at the rest of the business, sales have declined slightly, which aligns with what we've previously stated: automotive is still down, industrial applications are still down, and there are lingering effects from the pandemic that impact the rest of the business for EM.

Congratulations, Brad. Your contributions are more important than Facebook to me.

Yes. I think everyone recognized that the starting point for the legacy Masterbatch Clariant business is definitely lower than ours. When you compare year-over-year EBIT or EBITDA margins, it's clear that both have declined by about 2 points, primarily due to the integration of the businesses. Additionally, I should emphasize that our Inks business has also experienced a significant year-over-year decline, which is impacting our margins organically. As we've mentioned, we believe we can elevate the Clariant Masterbatch margins to match our legacy Color margins, ultimately achieving over 20% EBITDA return on sales. We aim to reach this target in the near term as we realize these synergies.

Thinking about recycled and renewable materials and the availability of those relative to some of your customers' demand. Can you talk a little bit about both price dynamics for sales and sourcing and then also your process for evaluating the viability of some of these newer processes that are starting to try to ramp?

I think your question was really about recycled content and evaluating the sort of the viability of that going forward. Is that right? Yes, as well as just an update on the pricing dynamics in and around the spaces. Okay. So I mean, as a starting point, I think that all of our customers are looking at using an increasing level of recycled content. That's going to happen. It's moving forward. As you know, there's a challenge with respect to getting it. And for everyone who has set goals out there for the future, they can't be achieved with the present level of recycled content that exists. So a lot's got to be done there. From a pricing standpoint, in a lot of cases, recycled content is actually more expensive and therefore, creates some challenging dynamics around that. Look, this year, that just hasn't played a big factor in our margins. But certainly, it is in the conversations that we have with our customers. At the end of the day, we're providing a formula. And that base resin, if it's recycled or virgin, is really we want to do what's best for the customer, best for the environment, and we'll price accordingly. So look, overall, I view the sustainable solutions platform as a really good margin, good guide for us. And one of the reasons why we should see margin expansion on top of the revenue growth that we have projected for that area. Yes. So I mean, from a capacity standpoint, I think one of the great things about bringing Clariant together with us is that we can take some capacity out. It's a unique business in that each of our plants is a relatively small footprint, often with its small lines, quick-turn batch processing. But there are opportunities for synergies there, which we'll go after. And we really want to harmonize things on a product line basis and go to those locations that are the best of the best. So from a CapEx standpoint, I think close to $60 million this year is a good figure for us, plus Clariant. And if you want to look forward and we think about some CapEx that will take place related to achieving some of these synergies, that may add about $20 million next year, but it's still a little early on figuring out the timing of that CapEx. So that's just a rough estimate of where to start.

I guess, first, a near-term question. In terms of the improvement in trends that you're seeing in Q4, are you seeing any significant areas of softening outside normal seasonality?

I don't think anything is softening. I do think that in the third quarter, we saw a little bit of change because in the second quarter, there were some higher dynamics for, let's say, health care and packaging, and that moderated in Q3. Probably, we'll see the similar effect in Q4. But again, that is completely dependent on what happens with respect to coronavirus, right? So I'm basically just sharing with you what I've seen so far in Q3 and in October. That's the best way I can describe that. Well, look, I think first of all, this year, customers have focused very much on meeting demand for their essential businesses. And I'd say probably in the last month or so, we started to see some pickup with respect to next-generation projects, which is encouraging. We're finding a way to do that virtually between our sales folks, our technology teams, and our customers. But I don't really see anything changing with respect to maybe the timing of approval, except that for sustainable solutions, I think that moves faster because everyone is trying to get better solutions in that regard. So if I just kind of think about that's probably one of the biggest trends that's out there, as I think that stuff moves faster. Yes. I don't know if we've mentioned it recently, probably due to everything surrounding the pandemic, but we have continued to invest in and build a new manufacturing facility in Suzhou, China. This will be our largest facility and will play a crucial role in our growth. At the start of 2019, we were facing some capacity constraints. With the new facility and Clariant joining our team, we believe we will have the footprint we need. From an organic perspective, I think sales can continue to grow at 8 percent or more. To achieve more than that, we may need to consider acquisitions.

Congratulations both to Brad and Jamie. Quick question on EM products. What was the impact of 5G as the networks are getting rolled out? Was there any significant impact in the quarter? Or is it just getting started and you should see that, I'm just curious?

Yes, the fiber optic business supported by our Composites platform serves all technologies, including legacy systems, and has accounted for the majority of our sales thus far. Our involvement with 5G is just beginning, especially since we have a strong presence in the U.S. and Europe. Our operations in Asia, however, fall outside this Composites area. So, while 5G contributed minimally in Q3, we anticipate growth as more locations adopt the technology. We expect this segment to grow at an annual rate of 10%.

You seemed a bit cautious about Europe in your comments. Was that specifically related to the automotive sector? I know COVID cases are rising everywhere. Also, regarding North American auto production, you appeared optimistic for Q4. Usually, auto companies tend to take downtime around the holidays, but there’s some speculation that due to low inventories, they might continue production without breaks. Could you share your thoughts on auto production in the U.S. and Europe?

Yes. Based on what we've observed in October, the outlook for the U.S. is positive, and similarly for North America. Historically, the industry has managed the fourth quarter well. Although anything can happen, the current trends are encouraging. However, Europe appears to be relatively weaker, as we haven't seen a recovery there as significant as in the U.S. To put things in perspective, sales in North America were down about 14% in the second quarter, they improved to a 5% decline in Q3, while Europe still experienced a decline of around 10% in Q3. The recovery has not been as swift in Europe. I believe that summarizes the performance in both regions. Thank you for your time. I understand that was our last question, and I appreciate everyone participating in the call today. We are genuinely excited about our business and growth potential. Nevertheless, we must acknowledge that we are still in a pandemic, and at Avient, we will prioritize health and safety, and we hope everyone will do the same. Thank you all, and have a great day.

Ladies and gentlemen, thank you for your participation in today's call. This does conclude the conference, and you may now disconnect. Everyone, have a wonderful day.