Avient Corp Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to Avient Corporation's webcast to discuss the company's first quarter 2022 results and agreement to acquire DSM Protective Materials. My name is Gigee, and I'll be your operator for today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Joe Di Salvo, Vice President, Treasurer and Investor Relations. Please proceed.

Thank you, Gigee. Good morning to everyone joining us on the call today. Before beginning, we'd like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the 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 statements. Please refer to the investor presentation for this webcast for a number of factors that could cause actual results to differ. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on the 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 measures. Joining me today is our Chairman, President and Chief Executive Officer, Bob Patterson; and Senior Vice President and Chief Financial Officer, Jamie Beggs. Now I will turn the call over to Bob.

Thanks, Joe, and good morning, everyone. We have record results to share today and exciting news about our agreement to acquire DSM Protective Materials. Our performance continues to be underpinned by the investments we've made to transform our portfolio to one that is more specialized and concentrated in less cyclical high-growth end markets. This acquisition will continue that journey we started well over a decade ago. I look forward to sharing more with you about DSM Protective Materials after Jamie covers our first quarter results.

Thanks, Bob. Despite challenging macroeconomic and geopolitical conditions, we grew sales, adjusted operating income, and adjusted EPS by 11% year-over-year. Excluding negative foreign exchange rates, adjusted EPS increased 16%. From a segment perspective, Specialty Engineered Materials led the way, expanding operating income by 18%. While SEM did see some softness in certain outdoor high-performance applications, they delivered a record quarter with significant growth in sustainable solutions as well as other differentiated composite applications. Our Color segment was most significantly impacted by weaker foreign exchange rates as well as the unforeseen and tragic war in Ukraine. The war weighs heavily on our hearts, and our thoughts are with the people whose lives have been disrupted forever by the invasion. Avient does not manufacture in Russia or Ukraine but historically has imported colorants into the region, approximately $6 million in sales and $3 million in operating income per quarter. Sales to the region have effectively ceased, resulting in about a $1 million negative impact on Q1. Clearly, this is not a significant exposure for us but is impacting us presently. In Distribution, pricing more than offset higher logistical costs and lower volumes into transportation. However, we did see some margin compression related to a sequential decline in polyethylene and polypropylene to start the quarter that are starting to reverse itself in Q2. The next slide shows the bridge illustrating the key growth drivers of sustainable solutions, healthcare, and composites, phenomenal results, especially considering the impact of the Omicron variant, which rippled through the Americas and Europe early in the quarter and now COVID is more acutely impacting China, resulting in government-mandated lockdown. Our Q1 EBITDA Bridge highlights the great work by the team to navigate through all of these challenges and ensure we stay ahead of inflation. Price increases for all three segments more than covered raw material inflation and also covered the other supply chain disruption costs incurred to deliver value for our customers. You can also see on this slide the currency impact, primarily driven by the euro, which is more significant than we initially anticipated. The last bridge simply captures the previously described performance in adjusted EPS terms and also shows that a higher tax rate this year negatively impacted EPS by about $0.02 versus the prior year. Our outlook statements today will be brief. As we look forward to the rest of the year, we see customer-driven innovation, expanding our sales in sustainable solutions, healthcare applications, advanced composites, and other key end markets. However, we can't ignore that China has effectively shut down three of our plants in Shanghai and many of our customers' operations, which has impacted Asia demand as well as further complicated supply chain dynamics. For the full year, we assume that the aforementioned import sales into Russia and Ukraine do not resume, but that we are able to offset this as well as weaker foreign exchange rates with stronger full-year growth projections in the Americas. As such, we are maintaining our full-year adjusted EPS guidance of $3.50 per share before any adjustment for the acquisition, and we are introducing guidance of $0.92 per share for the second quarter. We will be happy to take questions about our financial performance and projections at the end of the call, but now we want to focus our attention on the announced agreement to acquire DSM Protective Materials. And with that, I will hand the call back over to Bob.

Well, thanks, Jamie. We're very excited to announce our agreement to acquire DSM Protective Materials as the next step in our specialty transformation. The foundation of the business is the renowned technology and globally admired brand of Dyneema, the world's strongest fiber, and you will hear us refer to the business interchangeably with this brand name today. The ultra-lightweight specialty fiber is 15 times stronger than steel while still being light enough to float on water. It is used in a number of demanding applications that we will cover in more detail shortly. From a headline perspective, the purchase price represents an 11.4 times multiple of projected Dyneema sales of $415 million and EBITDA of $130 million in 2022. The business includes six production facilities, four R&D centers, and 1,000 employees located around the world. With EBITDA margins north of 30%, it is truly special. Dyneema will be reported within our Engineered Materials segment, significantly expanding our composite and fiber portfolio, which we have long stated our intentions of doing. The acquisition is immediately accretive to adjusted EPS, adding $0.35 on a pro forma annualized basis for 2022, excluding intangible amortization. From a strategic perspective, Dyneema is a perfect fit with complementary strengths in each of our four pillars and includes an impressive leadership team. Theirs is a culture passionate about innovation and solving customer challenges just like ours. Dyneema serves three key industries today: personal protection, marine and sustainable infrastructure, and consumer. Application examples include fiber materials for personal protection, such as vehicle and body armor with the primary end-users being the military and law enforcement. Marine and sustainable infrastructure includes high-strength mooring lines, ropes, and slings for heavy lift applications, offshore wind farms, and sustainable aquaculture. Consumer applications include high-performance ropes and lines for sailing, yachting, and ultra-low weight, high-strength outdoor applications for archery, backpacking, fishing, and other outdoor activities. Another well-known application is cut-resistant gloves, which are made possible by this incredible technology, reducing risk and improving safety in countless work and home environments. Ultimately, each of these applications is backed by best-in-class technology, which is well protected with over 1,300 patents, more than doubling the total patent portfolio for Avient as a whole. The properties of Dyneema are unmatched when it comes to the ratio of strength versus weight. Combined with its many other unique characteristics, it is designed for end uses where failure is not an option. The chart on this slide shows the relative performance of Dyneema versus other competitive materials as it relates to personal protection applications. Dyneema is presented in dark blue squares on the graph. The large oval in the upper right illustrates a range of performance, inclusive of recent innovations in a lab environment, representing the next generation of technology. Like Avient, Dyneema is focused on formulations and material science. By combining polymer and fiber, it customizes various shapes and forms to be used by fabricators to produce high-performance applications. We illustrate this on the next slide, where you can see sheets being converted to ballistic panels and fiber being spun to create ropes for sustainable marine applications. This is quite similar to what we do at our PolyStrand and Fiber-Line facilities today. Fiber, sheets, and tapes are customized for each fabricator, who then produces interim products for key OEMs, who specify the performance required for each application. And as with Avient, Dyneema works across the entire value chain to formulate solutions to solve customers' most challenging problems. Demand trends for these solutions continue to grow. Recent events have created momentum around increased military spending, not to mention the growth expected from investments in next-generation technology. Solutions around sustainable infrastructure, such as floating offshore wind farms and aquaculture also continue to advance. In fact, offshore wind installations are expected to quadruple over the next five years. Lastly, in a space we know very well, outdoor high-performance applications are expected to grow double digits, which is aligned with the growth expectations we have for Avient's composites portfolio. From a sustainability standpoint, Dyneema aligns very well with how we help our customers achieve their sustainability goals. This includes reducing weight and energy use as well as protecting human health and safety. Avient's sustainable solutions portfolio has grown at a 12% organic CAGR since 2016, with revenues reaching $915 million last year. We have committed that our future investments in innovation will concentrate on enabling sustainability for our customers in the world. Dyneema puts us in an even stronger position to do just that. In 2012, we completed our first acquisition in the composite space. Since then, we have strategically added complementary technologies through a series of bolt-on acquisitions to create a unique portfolio of solutions. Early returns have been impressive. But as you can see, Dyneema will bring us substantially more size and scale as well as increased profitability. We are very excited about this newest addition and the step change in specialization for the company overall. I view this as an important next step in a total portfolio transformation that began over 15 years ago. In this regard, we are considering a sale of our Distribution segment. As you know, the Distribution business was part of the original formation of PolyOne in 2000. Since that time, the business has grown into a leader in North American plastic distribution with a world-class supplier line card. It has built an unmatched position in the healthcare space and developed leading technology in digitally interfacing with customers. Lastly, it has been a cash flow-generating machine, cash that we have put to work to fund our specialty growth. With our announced acquisition of Dyneema, we are at an inflection point, as we can leverage future cash flows of the business or accelerate that with a potential sale, which we are going to explore. A sale process could ultimately unlock even more value for shareholders as Avient would then be viewed as a pure-play specialty company. I will now hand the call over to Jamie to review the transaction financials and related modeling, and then I will make some closing remarks before we take your questions.

Thanks, Bob. I share Bob's enthusiasm for this great business and the transformational element it brings to our journey. As you read in our news release, the net purchase price for this business represents an 11.4 times multiple on expected 2022 EBITDA. We have committed financing in place with Morgan Stanley and JPMorgan. Permanent financing will constitute a combination of cash on hand, new unsecured notes, and new senior secured term loan. Proceeds from the potential sale of our Distribution business could be used to pay down our 2023 senior notes and/or other pre-payable debt. As is customary, the deal is subject to regulatory approvals and closing conditions, which we expect to be completed in the second half of 2022. We laid out the capital structure, which includes the new debt expected to fund the acquisition. The resulting 2.9 times lever is pro forma for both the potential divestiture of our Distribution business and the acquisition of Dyneema. This structure is aligned with our proven track record of disciplined capital allocation. Our existing dividend policy will be maintained and expected to grow annually with underlying earnings. As you may recall, with the Clariant Color acquisition, we also maintained a disciplined capital allocation policy, which allowed us to delever ahead of schedule to create the capacity we have today to invest for the future. We plan to follow the same playbook with Dyneema by being modestly levered and committed to reducing leverage over time, as we grow and integrate the business. By 2024, we expect net leverage to drop to 2.2 times. This positions us very well to continue to invest in the business and drive future growth. Our pro forma modeling illustrates first, the impact of acquiring Dyneema on a pro forma basis for 2022, and second, a potential sale of Distribution. We are using our current assumptions for 2022 performance but introduce an adjusted EPS metric excluding the impact of amortization associated with intangible assets. The headline impacts are significant with respect to the expansion of EBITDA margins from 12% to 18%, while maintaining a very modest level of leverage at 2.9 times net debt-to-adjusted EBITDA. With that, I'll turn the call back over to Bob.

Thanks, Jamie. I've been with the company for 14 years now, and it has been exciting to see the transformation of Avient and become a truly specialty enterprise. We have done this with a combination of investment in commercial resources to accelerate innovation to drive organic growth, as well as select acquisitions to build out our Color and Engineered Materials segments. From an acquisition perspective, we have a great track record with bolt-ons. I love this slide as it highlights the power of investment to drive specialty growth, better serve our customers, and expand margins. We have done this on a large scale as well. The Clariant acquisition has arguably been our most successful in terms of size, scale, and our ability to integrate two world leaders seamlessly. Since we announced the acquisition, adjusted EBITDA has increased over 50% while expanding margins and delevering faster than originally modeled. As we look ahead to Dyneema, I want to emphasize that this is not a cost-cutting play. This is a capabilities play. We plan to invest in the business to help drive growth as we have with our previous acquisitions, and we also have the opportunity to create a pure-play specialty company. This slide captures that very well and illustrates the mix impact of the pro forma modeling Jamie covered a few moments ago. But to me, it represents something more, as it highlights the multiyear transformational journey we have been on to create a truly special and unique portfolio. I'm incredibly proud of what we have accomplished so far, but more excited about what the future holds. Before we take your questions, many of you have seen our peer comparison slides in the past. I'm replaying one of them here to illustrate that on a pro forma basis, our EBITDA margins will be higher than the comparable specialty formulators on this page. This, in combination with the growth characteristics of sustainable solutions and composites, should provide a compelling case for expanding valuation. None of this would be possible without our associates and the great-place-to-work culture we have created. In this regard, I look forward to welcoming the 1,000 Dyneema employees, who I am sure will help us become an even better place to work and a higher-performing organization. In summary, we are at the next stage of our transformational journey where we feel our momentum is stronger than ever. We are excited about the acquisition of DSM Protective Materials and the management team coming with it. Dyneema adds one of the world's most remarkable technologies to Avient's already diverse specialty portfolio. It's a technology we plan to invest in, to grow, and to add value for all of our stakeholders well into the future. Thank you all for joining today for our exciting announcement. And with that, we are happy to take any questions you may have.

Our first question comes from P.J. Juvekar from Citi. Your line is now open.

Great. Thank you. Just a couple of questions on Dyneema. Can you remind us what the trailing EBITDA multiple on that business is of what you're buying? And this significantly increases your exposure to Europe at a time when Europe is facing a multitude of challenges. What's your thinking there? And then I have one more question after that.

Yes, it's 12.4 times trailing 12 months, did about $120 million in '21. And then with respect to Europe, I mean, it's actually a pretty balanced organization in terms of their exposure worldwide with about $175 million of the $415 million in Europe. So to me, I view this as a global business and one where, obviously, the technology helps us expand our composites portfolio. Clearly, these are uncertain times globally, but I feel confident in the numbers that we've put together and our ability to finance the deal.

Great. And I have a question on your base business. How much was the raw material basket up in Q1? It seems like raw materials have continued to go up in Q2 with natural gas now over $7, and polyethylene and PVC all going up as well. Can you just talk to us about what pricing power you have in the sort of remaining two businesses, CAI and Engineered Materials? Thank you.

Yes. In the first quarter, if you examine the specific line items by segment, you will see the impact of raw material costs for each segment. I recommend checking that. From a pricing perspective, we have managed to exceed those costs in each segment. I anticipate that we will continue to achieve this throughout the rest of the year. Regarding your last question, with underlying inputs and hydrocarbon costs increasing, inflation could rise even more quickly, but we are equipped to manage that just as we have since the onset of the COVID pandemic. We have been proactive during this time, and I believe we will maintain that approach for the remainder of the year.

Thanks, Bob.

Certainly. Thank you.

Thank you. Our next question comes from the line of Mike Sison from Wells Fargo. Your line is now open.

Hey, good morning. Really nice deal there. Congrats. In terms of Dyneema, can you maybe talk about what the growth rate for the business has been over the last couple of years, and going forward, what you think the business could contribute in terms of growth? And any sales synergies you think with your current composites business that you can generate.

Yes. I mean, so on the first part of that question, the underlying EBITDA has grown at about 10%, which is really quite in line with our own expectations for our composites portfolio and what we've seen in the last few years. So I think there's good alignment with that, Mike, if you were to go back in time and look at the details. From a sales standpoint, I think, first and foremost, we're really excited about the technology and innovation. I do think there is an opportunity for some overlap with our Fiber-Line business as well as our PolyStrand business to help bring those technologies together. I view really the Dyneema business as bringing a premier technology to the portfolio and expect it could help both those two areas of the business from a sales standpoint.

Right. Great. Regarding Distribution, what is the tax implication? I would assume the basis is quite low. Could you explain the process for potentially selling it? Also, how do you assess the demand for that business?

Yes, I mean I think, first of all, I mean, this is a great business, as you know. It's one that we have talked positively about for years. I do think that there will be a great deal of interest in the business. There always has been since I've been with the company. I expect that to be the case. I think the federal tax rate we're using is 25%. Right? All right. And then you've got to add state and local, et cetera on top of that. So as we've said, probably anytime anyone has asked us this question in the past, I mean, there is a pretty significant tax impact on a direct sale because ultimately, the basis is low in that it's really just working capital in the business.

Great, thank you.

Thank you. Our next question comes from the line of Frank Mitsch from Fermium Research. Your line is now open.

Good morning, and congrats on the transaction. In terms of Distribution, as I'm calculating the pro forma net leverage, it doesn't seem that bad, to be honest with you. And that has been a pretty good business, a pretty good return on capital business for sure. I understand that selling it will get you to that 100% specialty that you're seeking, but it becomes a very small part of the overall company. Can you talk a little bit more about the decision that you want to monetize that business?

Yes. Maybe I'll take the middle comment there first and say it is obviously a very small part of the company and with the Dyneema acquisition, becomes even smaller. It is a very high return on invested capital. As you know, we have long sort of stressed that as an important reason for owning it. So as it is smaller, I think that means that there is less of a need to sell, Frank, but certainly view this as an inflection point to consider doing so. The one thing that we really have in mind is that obviously, a sale process would lower that leverage to below three times. And that actually kind of helps to set us up for more capacity for specialty growth in the future. So we really, as with any decision like this, just weigh where we think the future prospects are of the business, with respect to what that looks like on a present value basis in a sale process. So that process is one that we're going to explore. We'll certainly keep everybody updated as we go forward and learn more.

Got you. Okay. So there’s no reason for panic selling here. If you find a good price, then you should take action on it. I have a question regarding Slide 20. After reviewing the numbers, it appears that you're projecting your base composites business to grow by $1 million in EBITDA in 2022. Could you share your expectations for the growth of composites in 2022?

Yes. The primary reason is that some outdoor applications are expected to decline this year, which we initially accounted for in our guidance. This decline is balanced out by new business gains and other applications. Overall, we anticipated that certain outdoor business segments would be down this year, and that remains true. This is why the figures are reflecting that trend. Frank, during one of the presentations this quarter, you will actually see the outdoor high-performance segment separated from the other composite businesses. We can provide more detailed numbers for the full year as well.

Thank you so much.

Yes.

Thank you. Our next question comes from the line of Angel Castillo from Morgan Stanley. Your line is now open.

Hi, good morning. And congratulations on the deal. Bob, Jamie, I was hoping you could give us a little bit more color on the Dyneema business. As you think about the visibility that that business has with maybe a lot of exposure to government. Could you just give us more color as to maybe what the contract structures are, what the visibility is? And as you think about that $130 million of EBITDA, how certain is that versus maybe how much of a kind of, I guess, range there could be in ultimate outcome there?

Yes. I mean, first of all, I'd refer you back to one of the slides in the deck that just shows the Dyneema and the value chain, because I just want to be clear that Dyneema isn't selling directly into the military or law enforcement themselves. In fact, they've got a sales model that's very similar to Avient's in that really what their manufacturing is a fiber or a unidirectional sheet, which is then ultimately fabricated by a customer, sold to an OEM, who then sells to those end applications. So there's a little bit of a chain dynamic there, Angel, with respect to the connection to some of those end-use applications. I think that you can look at those, though, and say that there is some additional predictability to the business just based on some longer-term contracts that exist with these OEMs and those end users. And that, I think, does help to bring some stability to the business. But overall at this point, we've got a growth rate expectation for the business aligned with really our composites portfolio overall.

That's very helpful. Thank you. And then I was hoping you could talk about kind of the 2Q guide and maybe the Bridge to that. You've talked a little bit about maybe the raw materials and some aspects that we're seeing a little bit more inflation, perhaps at a faster clip. But as you have done over the last few quarters continuing to price ahead of that. I'm just curious, as we think about what's embedded in that $0.92 for the second quarter, I guess, any particular areas you've thought about or performance products or maybe automotive or transportation that's weak within raw materials as well? Or is it just purely a timing thing and we'll get that back with price in 3Q and 4Q?

Yes. I mean the Q2 guidance really isn't a matter of inflation. As you can see in our first quarter, we more than covered that with pricing. That's been the case five quarters in a row now if you go back to when inflation really started to pick up at the beginning of 2021. So that's really not what Q2 is about. What Q2 guidance reflects is that four of our facilities in China are currently closed because of COVID lockdowns. That's the single biggest reason for sort of an updated view on guidance there. And then secondly, although the import business into Russia and Ukraine is small, we effectively assumed that goes away. With respect to Asia, I am viewing that as a short-term phenomenon because the orders are there, and the expectation is that when our plants come back online, that we can ultimately catch up. I'm just not sure we can get all that done in the second quarter as the timing of reopening is still a question mark in China.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Mike Harrison from Seaport Research. Your line is now open.

Hi, good morning and congratulations on a good start to the year and on the deal. I wanted to ask about Slide 19 here, where you I think do a good job kind of laying out that you have built this composites portfolio out of a set of different acquisitions. But just trying to get a little bit better sense of how Dyneema fits into your existing offering. I think you mentioned that there are some similarities or overlaps with the Fiber-Line and PolyStrand businesses. But should we think of this as complementary? Should we think of it as filling some technology gaps? And I guess as we go forward here, is this really an enabling acquisition that's going to even fuel some additional bolt-on activity in composites?

Yes. So while you're looking at Page 19, I mean there's a visual depiction there of six different types of composite fiber materials that we do today. The three that best illustrate what Dyneema does are the tapes, the panels, and the fibers. So it's really an exact fit into those three buckets, Mike. I hope that helps visually put that into context in terms of what Dyneema does. Look, we do view this as an opportunity to really obviously significantly expand the composites portfolio. And I would still view that as an attractive area for further investment with respect to additional acquisitions in the future.

All right. And then in terms of the sustainability aspect, it looks like Dyneema is working on some ultra-strong bio-based materials. Also some materials that will fit into the circular economy on the composite side. Can you talk maybe in a little bit more detail about how this acquisition expands the sustainable solutions angle?

Yes. First of all, I would just say that in my time spent with the management team, they have an absolute passion for sustainability and recognize the importance of supporting a circular economy. Using bio-based materials is probably one of the leading innovation ideas that exist over there for some of the ropes, lines, and fibers, particularly those that are used in some of these marine and aquaculture applications. But as you know, Mike, look, bio-based material is in short supply. So kind of like the amount of recycled content that exists today. But I do think that as that supply level increases, there's a real opportunity to help drive growth and really support the sustainable solutions, in addition to simply being a lightweight material. I think there's a lot of different positive angles here with respect to sustainability that Dyneema's all over.

All right. If I can just sneak one in quickly. It looks like the other supply chain costs line that you use in your bridge there came down pretty dramatically in Q1. You're calling out $4 million in Q1 versus, I think, $15 million in Q4. Have those costs continued to trend more favorably as you think about supply chain challenges or have things worsened as you look at March and April between Ukraine and the COVID situation in China?

I mean one of the things I have to go back and look at Q4 is whether or not we had supply chain kind of commingled with wage inflation. I don't remember, we might have. We've now split the two out. So that might be part of the explanation, but I'll have to go back and see.

I would just add that some of the comparisons are improving now, as the issues began last year in the first quarter, so the comparisons are now better.

Yes, thank you. Part of that is that we are starting to improve from the difficult comparisons that affected us in 2021.

Thank you. Our next question comes from the line of Kristen Owen from Oppenheimer. Your line is now open.

Hi, thank you for taking the questions and congratulations on the nice quarter. I wanted to ask about the incremental thousand-person headcount that you're bringing into the portfolio along with some substantial IP. Talk to us about how important the talent acquisition was to bringing in to the table? And Bob I know you said this wasn't a deal based on cost synergies, but given the strength of that portfolio, can you speak to any of the potential for R&D synergies?

I'm really impressed with the management team and what they, along with DSM, have accomplished from a technology perspective. They share our commitment to customer service and are dedicated to addressing customer challenges. The material they're working with is truly exceptional, and I see it as a premier offering. They also have a strong passion for this business. The Dyneema brand is powerful and well-known, and the team's ability to collaborate effectively around that brand is impressive. I'm excited for them to join our company, as cultural fit is a crucial part of our evaluation in any deal. If there's not a good cultural fit, it often means the deal isn't right. I believe we have much in common, and we'll be able to hit the ground running once we start working together. I'm particularly enthusiastic about the potential for innovation and technology. Given the size and scale of Dyneema compared to our smaller composite business, I expect we have a lot to learn from them, and I believe it will be a mutual exchange when we collaborate.

Appreciate that color. And then if I could just ask on the quarter, a little bit of additional end market commentary, specifically on the consumer side. Certainly, the inflationary environment is causing concerns about consumer spending. Just wondering if you can talk a little bit about what you're seeing on the ground in the various consumer end markets that you touch, sort of outside of that outdoor performance bucket that you've already called out. Thank you.

Yes. Regarding the outdoor industry, there are a few specific areas where we're seeing a decline this year. However, segments like off-road vehicles show continued strength, with original equipment manufacturers facing challenges in meeting demand. Dealerships remain largely vacant, and there are waiting lists for several products. The decline is limited to specific aspects of the outdoor market. Overall, consumer demand has been positive, and in categories like consumer staples, performance has even improved further. I still see the consumer market positively, but most of the growth is occurring in the Americas, highlighting some regional variances. In Asia, the situation has been more complex at the start of the year due to factors like Omicron and lockdowns, making it difficult to distinguish their impact on quarterly results. Overall, the consumer market appears to be doing well, largely driven by trends in the Americas.

Thank you. Our next question comes from the line of Laurence Alexander from Jefferies. Your line is now open.

It's Dan Rizzo on for Laurence. How are you?

Hi, Dan.

Hey, so have we talked at all about the stranded costs that would potentially be associated with the divestiture of the Distribution business?

That's factored into our modeling. It's pretty small. It's probably about $8 million or so.

Okay. And then with the acquisition of Dyneema, does this make you less agnostic on materials used in formulations? Are you going to be shifting to maybe create vertical integration in thermoplastics? How should we think about that?

Well, it's interesting because Dyneema does have some vertical integration with respect to certain areas of supply. I'm not sure that necessarily changes my view on that for the company as a whole because they really do view our core competence and expertise is formulation. So anyway, I think it's a strength for Dyneema. It's an asset. We like it. I'm not sure that necessarily changes anything with respect to the company as a whole, other than possibly just looking at different ideas for the composites platform where that could possibly change once Dyneema is part of us.

Thank you. Our next question comes from the line of Vincent Anderson from Stifel. Your line is now open.

Hi, yes, thank you and good morning. So going back to Dan's question a bit, what is Dyneema's current capacity balance between high molecular weight P resin and the derivatives that they ultimately make from it? And are those facilities configured today to be able to expand resin capacity fairly easily to facilitate future growth?

Yes. There are. So they have capacity expansion plans to really see them through 2024. It is one of the items, I'd say we diligence perhaps most significantly to really understand that. So that also a high molecular weight polyethylene that's coming into the business is really not a bottleneck at all. It's more in the manufacturing side with respect to unidirectional materials and fiber, but there are investments being made right now. That's all inside the existing walls of their footprint. All very doable things. When I look at growth outside of '24, I think there's incremental CapEx to add a line, and that's probably something that we would start to plan on doing once Dyneema is part of us.

Okay. All right. Very helpful. And you've addressed this to some extent already, but maybe to just ask more directly, down the road, does Dyneema as a material have an opportunity to be used in structural applications or tapes? And in a similar vein, you said your thinking hasn't changed on your level of integration into thermoplastics, but given kind of the specificity of ultra-high molecular weight polyethylene, are you viewing that material more broadly as an opportunity to expand on in your portfolio?

Yes. I mean so I think there's an opportunity inside or to go into more structural elements. That's actually aligned with what we do today. For example, in our Glasforms facility, as well as a little bit in our PolyStrand facility. So we have some familiarity with that end market. I'd say for now, the focus for Dyneema is really supporting the growth in the key end markets that they're in today. I think that we can help them grow on the consumer side. That's an area that we know very well, particularly in the outdoor high-performance applications. And then can you repeat the last part of your question because I don't want to mess that up?

Yes, sorry. So just given that ultra-high molecular weight polyethylene is already a fairly highly specified material on its own, even if it's still a base resin. Do you view that more broadly as something to grow on from a commercial perspective?

Oh, I see. At this point, we really view that as an input for the Dyneema business. Some of that has been sold into the marketplace. However, I see that more as serving the capacity for the growth we expect in those end markets rather than selling it separately.

Thank you. Our next question comes from the line of Jaideep Pandya from On Field Research. Your line is now open.

Thank you. Your first question is about the sales growth and top-line growth of this business, which has remained around EUR300 million over the past four to five years, despite market fluctuations. What do you think is the fundamental growth potential of this business based on your due diligence? Similar to the Clariant acquisition, which was a part of a larger group that received less focus, do you believe Dyneema has not received enough attention from DSM, a nutrition-focused company, and that you can unlock its growth potential? My first question is answered. The second question is about the acquisition process. Have you been exploring opportunities in this area? This business has not been officially on the market, but there have been rumors about its availability for a few years. Was this a business you were always interested in acquiring if it became available? Lastly, can you provide comments on the current conditions in key end markets like automotive, electronics, and construction based on your recent sales data? Thank you.

To start, I want to emphasize that this acquisition has been on our radar for quite some time. We have had discussions with DSM over the years. There are parallels to Clariant in that they also seemed to have considered it a potential sale candidate, and timing was a factor for them. We were consistently told that if they decided to go to market, we would be notified, and we were involved in that process. This is something we have contemplated for a long time. In 2018, some capacity constraints likely contributed to limited revenue growth when viewed over a three or four year period. However, DSM has made additional investments that have resolved those issues. I don’t believe DSM has been underfunding this business, but I view this as a significant opportunity for us as it will be integrated into our core operations. Businesses tend to thrive when they are part of a core focus. Reflecting on the past, I believe DSM has managed the protective materials business effectively. It is beneficial for us that DSM is shifting its focus to health and nutrition, providing us with a chance to pursue an area that is central to our strategy. Regarding your question about products and end markets, I think we can illustrate that effectively, particularly with Slide 12. In the personal protection segment, about two-thirds is military, and one-third is law enforcement. The marine and sustainable infrastructure categories can be broken down further, but they align closely with the descriptions provided. In terms of consumer products, what you see here relates to safety gloves and high-performance outdoor applications.

Sorry, apologies. I was asking more from an Avient core point of view. Have you seen like any signs of a slowdown because of the war in Europe or rather Russia and Ukraine or China COVID, some of your important core markets in recent weeks, given that your business is such a good indicator of economic activity?

We have definitely been affected by lockdowns in Asia, especially during the latter part of the first quarter. This impact was not limited to China but was also due to COVID, particularly the Omicron variant, which affected specific areas of the region. Sales in Asia declined during the first quarter, which is the first occurrence of this since I joined the company. The decline appears to be driven by COVID-related issues. We currently have unfilled orders, and we hope to catch up once they are fulfilled. In Europe, the situation is mixed. Transportation has declined there, as it has globally. This is particularly noticeable, though Europe is not a major market for us. Overall, Europe is feeling somewhat uncertain due to the war in Ukraine, which we have taken into account in our earnings per share projections for the year. The primary impact being that we are no longer importing into Russia or Ukraine, which amounts to about $0.10 or $0.12 on an annual basis.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Bob Patterson for closing remarks.

Great. Well, thanks, everyone, for your time and attention today. Happy to answer the questions that we were able to. Certainly, if you have more, we'll be able to take care of those offline. We'll be at some conferences here up in the first week in May, where we'll update all of our investor slides with this new information, our outlook statements, and so on. So look for that information as it comes out. For now, just know we're very excited about the Dyneema acquisition, about our specialty portfolio, transformation journey continuing, and we thank you for your support and investment. Take care. Bye for now.

This concludes today's conference call. Thanks for participating. You may now disconnect.