Avient Corp Q4 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to Avient Corporation's webcast to discuss the company's 2022 fourth quarter and full-year results. My name is Katherine, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will have a question-and-answer session following the company's prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Joe Di Salvo, Vice President, Treasurer, and Investor Relations.

Thank you, Katherine. And good morning to everyone joining us on the call today. Before beginning, we'd like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements 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 a forward-looking statement. 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 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. Now, I'll hand the call over to Bob.

Thanks, Joe, and good morning. Today, we reported fourth quarter adjusted EBITDA of $107 million and adjusted EPS of $0.42. Orders were slightly better than expected in Europe and Asia, and we saw an increase in December orders for composites, including Dyneema used in personal protection applications. This, along with improved margins, resulted in adjusted EPS of $2.69 for the year, surpassing our previous guidance of $2.60. However, the fourth quarter was particularly challenging as global demand conditions and inventory destocking negatively impacted nearly every industry and region, leading to a year-over-year decline in EPS. We focused on managing costs and reducing working capital. During the quarter, we generated $120 million in free cash flow, finishing the year with a total of $290 million in free cash. We utilized this additional cash to pay down an extra $200 million of variable rate debt. Our net debt to EBITDA ratio ended at 2.9 times, which is below our earlier expectation of 3.1 times. This is crucial as the strength of our balance sheet will serve as an asset as we navigate these uncertain times. We have no immediate debt maturities, anticipate strong free cash flow in 2023, and aim to keep leverage below 3 times for the foreseeable future. Despite the difficulties faced in the latter half of the year, I am extremely proud of our achievements in 2022. We completed two significant transactions with the acquisition of Dyneema and the sale of our Distribution business. These actions greatly expanded the size of our composites platform, a vital growth driver for the company; allowed us to enhance our balance sheet by paying off debt; and improved overall company EBITDA margins to 16%, the highest in our history. Investment growth in composites has played a critical role in our transformation. In the early years, we invested in promising technologies and commercial resources to tap into the next generation of wood, glass, and metal replacements, often for smaller niche and underserved markets. Our application reach extended from outdoor high performance to electrical components and composites for 5G fiber optic cables. With Dyneema, we notably expanded our capabilities in personal protection, marine, and sustainable infrastructure, with composites now representing over half of the SEM segment. This has been a deliberate effort to acquire technologies that broaden our product range, including flexible tapes and panels as well as engineered fibers that provide design freedom and exceptional strength. These applications offer customers sustainable solutions through stronger, lighter, and more durable materials, resulting in increased longevity, reduced energy consumption, and lowered carbon emissions while also enhancing human health and safety. The following slide showcases the performance of our composites platform over the last six years with the pro forma contribution from Dyneema in 2022. It is clear that these technologies have significantly contributed to our broader transformation over the past 15 years. Our specialty journey began in 2006, marked by the divestiture of more cyclical and commodity-based businesses and investment in specialty technologies that deliver greater value to our customers. This strategy has led to a notable increase in EBITDA margins and adjusted EPS. Another key driver for us has been elevating our investment in sustainable solutions. Avient seeks to achieve leadership positions across our four sustainability pillars. We assess our progress against high standards set by organizations like ACC Responsible Care and the UN Global Compact. We have established ambitious sustainability goals for 2030, supported by action plans. The positive advancements we have made have been recognized by leading institutions, rating agencies, and other third-party organizations. The current scores demonstrate our top-tier standing in the industry. We were honored to be named one of America's Most Responsible Companies in Newsweek's annual ranking, placing 22 out of 2,000 companies. However, at Avient, our commitment to sustainability extends beyond ethical responsibility toward people and the planet; it is also a growth driver. Additionally, we prioritize our culture through a focus on safety, embracing diversity and inclusion, developing our workforce, and actively engaging in our communities. These values foster a culture that makes employees proud to be part of Avient. This is validated by our annual employee engagement surveys from the Great Place to Work Institute. In the fourth quarter, we conducted our latest survey and I am immensely proud that we were once again certified as a great place to work, achieving the highest employee engagement scores in the company's history. This survey included our recent associates from the Protective Materials business, further validating our successful integration efforts. I share this because the significance of culture should not be underestimated. I believe culture is vital, especially during uncertain times like those we currently face. Companies with robust cultures are better equipped to withstand recessions and emerge stronger, which is our goal. I will now hand it over to Jamie to provide additional details on our 2022 results and share our initial outlook for 2023, followed by my closing comments.

Thank you, Bob. The strength of our culture has certainly been an asset, especially as we have grown through significant acquisitions. It's the foundation of how we execute our strategy and stay the course even when the macro environment is challenging. As Bob shared earlier, the fourth quarter ended slightly ahead of our projections. That being said, demand was down in just about every region. The war in Ukraine and concerns about energy availability negatively impacted consumer sentiment in Europe. China was constrained by its zero-COVID policy, and while the government relaxed its policy during the fourth quarter, the region has yet to recover. Globally, rising interest rates and inflation have further weakened demand. The EBITDA bridge shown here highlights the negative impact of lower demand, as well as higher energy costs and negative foreign exchange. These were partially offset by the net benefit of our pricing actions, a reduction in SG&A costs, as well as synergies associated with the Clariant Color acquisition. Free cash flow generation has been an enabler for our company with this year being no exception. This slide shows our historic free cash flow generation. The bars on the chart represent free cash flow dollars, while the blue dots represent Avient's free cash flow conversion percentages. For comparative purposes, we also added the free cash flow conversion percentage for the S&P 500 as a green line. The data illustrates that we consistently generate strong free cash flow in any macroeconomic environment, and there continues to be an upward trend. Looking specifically at 2022, disciplined working capital management resulted in $120 million of free cash flow during the quarter and over $290 million for the full year. This has allowed us to quickly delever to below 3 times, providing us with a strong balance sheet to navigate the year ahead. Our performance during the year was really a tale of two halves. We started the year with good momentum coming off a record 2021, but as we entered the second half, the weakening global economy and headwinds from FX resulted in full year earnings of $3.04, slightly better than the prior year. Excluding the negative impact of foreign exchange, we grew sales and EBITDA in the mid-single digits and increased EPS by 9%. Both segments contributed to the growth in sales and earnings year-over-year, excluding the impacts of foreign exchange. Color's top-line growth was slightly less than SEM as it had a larger exposure to Europe, and virtually all of our import sales into Russia that ceased in 2022 were Color applications. Color was able to increase EBITDA 4% year-over-year, driven by pricing excellence as well as lower operating costs associated with the Clariant Color synergies. SEM's EBITDA grew 2% excluding foreign exchange, as growth in composites and improving mix was able to offset lower demand in consumer applications and higher energy costs in Europe. This next slide puts in perspective the full-year EPS impact of foreign exchange translation, exiting import sales in Russia, and normalizing demand in outdoor high-performance applications. As you can see, each of these factors had a meaningful influence on the year. Starting at the top of the list, our foreign exchange exposure is primarily driven by the euro, which traded at below $1.00 for several months in the back half of the year. Further, our import sales into Russia of approximately $25 million annually essentially ceased, as I mentioned previously. A combination of these items, plus the normalization of certain outdoor high-performance applications, were offset by solid underlying performance in the business segments. Earlier, we showed you an EBITDA bridge from a Q4 perspective. The schedule mirrors that format, so you can see those same factors on a full-year basis. The majority of the decline in demand occurred late in the third quarter and into the fourth quarter. What's most impressive about this bridge, however, is the magnitude of the raw material inflation we experienced during the year and the impact of significant wage and energy inflation. What you will find is that we more than covered these extraordinary costs with pricing initiatives that began early. In fact, we have more than covered inflation since the start of 2021, and this focus on commercial excellence has enabled us to realize a net benefit, which lessened the impact of lower demand. You also see significant benefits from the synergies associated with the Clariant Color acquisition, as well as cost control initiatives. Let's now turn to 2023. We are assuming recent demand trends continue into the first half of this year. While energy costs have moderated in Europe, we believe longer-term fears about the war in Ukraine and the future energy availability will weigh on consumer sentiment for the foreseeable future. We think it is a positive that China is in the process of reopening, but that has brought complications of its own with respect to an increase in COVID infections and uncertainty about how businesses will pick up after following the Lunar New Year. It is also a positive that inflation in the U.S. is moderating and it appears that the Fed is slowing the pace of interest rate hikes. The recent jobs report is also a reflection of the strength of the economy, but is a lagging indicator which doesn't reflect the myriad of recently layoff announcements made by many companies. How certain customers and certain industries respond to these changing market dynamics remains to be seen and likely to be bumpy as the Fed tries to softly land the economy. All of the above factored into our first half modeling, which has sales and corresponding bottom-line results below the prior year. We expect first quarter sales of $845 million and adjusted EPS of $0.55 per share. Our second half modeling assumes modest growth, so that our full-year guidance is just under $3.5 billion of sales and EPS of $2.40 per share. We expect to generate free cash flow of $200 million in 2023, with net debt to adjusted EBITDA under 3 times. This is inclusive of strategic investments that will allow us to further integrate our recent acquisitions and provide CapEx needed to streamline operations, particularly in Europe to lower operating costs. Our efforts to generate cash and reduce leverage are rooted in how we're going to win in this downturn. We are focused on protecting and growing our market share, optimizing our cost structure, and investing strategically in areas that will create long-term shareholder value. I'll turn it back over to Bob for some additional comments.

Thanks, Jamie. I'll offer a little more color on our projections for 2023. From a regional perspective, Europe seems to have flattened out and our team reports improving customer sentiment in the New Year. So, that's a good thing. I think inflation and higher interest rates in the U.S. are impacting consumer demand in Q1 to a slightly greater degree than we saw in the fourth quarter. In Asia, China really is the main driver for us and it's unclear how the economy is going to respond to the relaxed COVID restrictions. We're certainly optimistic that local consumer demand will improve over the course of the year, which could accelerate with government stimulus. In our model for the year, I also think that we've been conservative with respect to margins as raw material deflation should be a positive. Honestly, we are just balancing that with the uncertain demand conditions, which I believe is prudent at this time. I expect to have more clarity on that in the coming months. From an end market perspective, our full-year view is that defense, energy, and telecom will be positive, whereas we'll likely see further weakness in consumer building and construction and industrial applications. Now, while some end markets and regions are projected to be down this year, that doesn't change our long-term growth rate assumptions for sustainable solutions, composites, healthcare, and Asia. These are the four key growth drivers that we outlined in our Investor Day in December of '21. We discussed how they have contributed to our expansion over the years and how they will be a continued source of growth in the future. Organically and with Dyneema, 2022 really did show the stability and resilience of the composite businesses. There's really a pressing almost urgent need for the high-performance characteristics made possible by composites, particularly for applications that improve human health and safety and provide for more sustainable infrastructure. I'm often asked how customers are thinking about sustainable solutions right now. For us, the real pull is from brand owners, who have made commitments to use more recycled content in their products and make them more easily recyclable. I have seen no reduction in their interest for these solutions. In fact, customer engagements on these subjects doubled in 2022 over 2021. As the world further aligns around the need for a more sustainable planet, material science formulation will be an enabler and that's exactly where we play. So, both composites and sustainable solutions are expected to grow in 2023. From a healthcare perspective, what really remains to be seen this year is how inflation and higher living expenses impact discretionary spending, including elective procedures. This may weigh on the market this year, but I don't view that negatively impacting the long-term key megatrends of longer life expectancies, an aging population, remote care, and self-management, which all play into the long-term growth rate assumptions we have for this market still. And with respect to Asia, I already commented on China specifically, and accordingly, our near-term expectations are muted, but as everyone knows, China can turn quickly and I really believe that this is just a matter of time. The steps we have taken to leverage these mega trends and strengthen our portfolio over the last decade have really positioned us well. In the near term, we have taken actions to reduce costs, streamline operations, and strengthen the balance sheet, but at the same time, we're investing for the future, and I believe we have much to look forward to. We've transformed our portfolio to be a premier specialty formulator of sustainable solutions, with leading positions in diversified and high-growth industries. We have over 140 PhDs on the staff to solve our customers' greatest challenges and maintain an innovative product offering with over 35% of sales coming from products introduced in the last five years. We are the Number One color formulator in the world. We have the Number One position for composite solutions used in outdoor high-performance applications, the world's strongest fiber for personal protection, and many other leading positions in niche industries like screen printing inks. Last but not least, we truly have a great place to work culture. The last three years and likely the next will long be remembered for its list of challenges. To be able to improve our employee engagement scores during this time is an incredibly proud accomplishment, but more importantly, it's an investment in our future. In summary, I believe we are better positioned than ever to get through the near-term challenges in front of us, but more importantly, to win in the downturn and accelerate growth as we emerge. It's been a while since we updated our peer comparison slides and they are included at the back of the slide deck that you can find on our website. I feel these slides offer a good reminder of who we are and the value proposition we offer to shareholders. We're an asset-light business with industry-leading free cash flow conversion. Our EBITDA margin is among the highest in the formulator peer set. We still have a long-term goal to increase EBITDA margins to 20%. Over the last decade, our EBITDA multiple has been expanding with upside to come when we look at where other formulators trade. I encourage all of our current and prospective investors listening to spend some time with these slides in the context of the broader messages we share with you today about Avient. With that, I'll open it up for your questions.

Thank you. Our first question comes from Frank Mitsch with Fermium Research. Your line is open.

Thank you, and good morning, and thank you for the recap. I was curious about the destock impact in 4Q and what you're seeing in 1Q, and where does that stand within your portfolio?

I mean, I certainly don't think that destocking is finished. I think that's yet to play out here in the first quarter. I feel like customers are very cautious with respect to their inventory levels and really don't want to add to their positions until they've got a better sense that growth is going to be there and the economy is going to pick up. I do feel like Europe has flattened out to some extent. As I mentioned in my remarks, I'm just encouraged by the sentiment and the statements that I'm getting from my team and how they feel about conditions there. Whereas I feel like the U.S. has maybe a little bit further to go here in Q1.

But over by the end of the first quarter?

We'll see. I think that even if destocking ends, that doesn't necessarily mean that buying begins. So, I think that's a dynamic that we just have to see play out likely in the first half.

Appreciate it, Bob. And then, looking at the 2023 guidance, interestingly, kind of similar to where the Street is right now. I was wondering how you frame your expectations on the upside and the downside case relative to your point guidance?

I mentioned that we are being cautious regarding our margins and believe there is potential for improvement due to raw material deflation. Having been with the company for many years, I can say that we usually perform well in such environments, although we haven't experienced that in recent years. We'll see how this year unfolds. Regarding our guidance, I think it's a sensible position considering current demand. At the moment, we're anticipating a decline in demand for the year, particularly a significant drop in the first half, followed by a recovery in the second half. Therefore, our growth assumptions for the second half are based on the economy improving during that time.

Thank you so much.

Thank you. One moment for our next question. Our next question comes from Michael Sison with Wells Fargo. Your line is open.

Hey, good morning, guys. In the fourth quarter, what was your volume delta year-over-year? It looks like it was down. And was there a big difference between October, November, and December? And then, what's your outlook for the first and second quarter for volume growth or volume declines?

Yes. So, it was about 14% in the fourth quarter. If you recall from our announcement back then when we were looking at our sort of November view on orders, that was going to be down even more. December ended up being a little bit better than we expected, which really accounts for sort of the change in EPS we delivered versus what we said at that time. When I look at the first quarter, Mike, it's actually pretty similar. The only thing that I'd say is maybe a little different is, the U.S. is down a little bit more, but Europe and Asia are flat, if you just kind of think about how that is proceeding from Q4 to Q1.

Got it. And then, you gave guidance of $125 million EBITDA for the first quarter, implies you need a better second half. And I guess the second half improvement is really just driven by better volume versus anything else, meaning is there other things that could help drive that better second half besides better demand?

Yes. Well, I mean, I do think that one is we have taken some actions to reduce costs, which actually will start to kick in here in the second quarter. So that will actually have a greater effect in the second half than in the first half. I also think it just kind of remains to be seen how things play out from a raw material standpoint, but could see some benefit from that as well. But yes, if you look at how the quarters play out, I'd say it follows really some normal level of seasonality to the extent that this year is normal in that regard, but we'll have to see, with some additional cost actions that help the back half of the year.

Got it. Thank you.

Yes.

Thank you. Our next question comes from Mike Harrison with Seaport. Your line is open.

Hi. Good morning.

Hi.

Bob, I had a question on the composites business. The pro forma slide that you show says that it's about a 25% EBITDA margin business for 2022. Is the plan to grow at that kind of mid-20% EBITDA margin? Or should we think of there being some operating leverage or price-cost opportunity to get margins higher over time? Just kind of curious if you have an EBITDA margin target for composites longer term?

Longer term, it should be higher than 25%. Last year, in particular, our business in Europe was negatively impacted by higher energy costs, including the Dyneema business. That impacted margins in 2022. As energy costs abate here or at least flatten out, hopefully that becomes a little bit better comparable in '23. As you know, what we presented before on a pro forma basis, Dyneema operated historically above that, and I really believe the same can be true for a balance of our composite businesses as well.

All right. And just curious with your leverage below 3 times, congratulations on the strong free cash flow and working capital management by the way, can you give some thoughts on how you're thinking about capital allocation for 2023? Are you going to continue focusing on getting that variable rate debt paid down? Are you going to be looking at share repurchases? Maybe comment on whether the M&A market is getting more attractive? Any thoughts there would be helpful. Thanks.

Yes. I mean, first and foremost, we have some important investments that we want to make in the business to accommodate and capture some of the remaining Clariant synergies. As you know, there were some that we had delayed as a result of COVID and plan to effectuate those in this year. There are additional investments we're planning to make to help actually drive growth for our composites. In some cases, we're bumping into some capacity limits that we'll solve this year. I view operating the business as priority number one. Candidly, in terms of priorities thereafter, I think keeping that leverage below 3 times takes priority over share repurchases or anything else. Every year, we've been increasing the dividend for the last 11 or 12 years. We hope that we could do that again next year, but that would be something we would announce sometime in the fourth quarter.

All right. Thank you very much.

Thank you. And our next question comes from Angel Castillo with Morgan Stanley. Your line is open.

Hi. Thank you for taking my question. Could you provide more insight on the order trends as they developed in January and February, as well as what you're seeing in terms of early orders for March?

I mean right now, I don't think there's anything unique or special to highlight about what we've seen so far. It's in line with what we're projecting. As is typical for us though, March is typically a bigger month than the other two, as we head into the second quarter. To some extent that is actually baked into our analysis as well. So, nothing really helps to report on January specifically.

Got it. And then, you talked about some potential upside from deflation or just margin and the conservatism baked in there. Could you just, I guess, give us or help us quantify maybe what are the assumptions underlying your guidance in terms of raw materials, whether it's energy prices or just basically what the assumptions are there? And then, also on the restructuring and savings front, what the kind of expected benefit of that is throughout the quarters?

Yes. From an energy standpoint, I want to provide a global perspective. Energy costs increased by 35%, which equates to around $20 million from 2021 to 2022. We expect a total energy cost rise of about 6% in 2023 compared to 2022. The first half of the year may show some variation compared to last year, and we will observe the situation in the second half. Currently, Europe seems to be in a better position as we approach winter, with energy storage levels looking more favorable, which may offer some relief in that area. Regarding raw materials, we are noticing some deflation as we enter this year. While I can't quantify it precisely, there is potential for improvement. As I mentioned in my prepared remarks, we are balancing this with uncertainty around demand, and we hope to provide more clarity during our first-quarter call in the coming months.

Got it. And then, on the cost savings side?

Oh, I apologize if I missed that last part. Overall, if I focus on cost reductions, we have some areas with inflationary costs. After considering the net impact of cost reductions and inflationary items, that's approximately $24 million. As I mentioned, this begins to influence the second quarter regarding the timing and will continue through the rest of the year.

Very helpful. Thank you.

Yes, sure.

Thank you. And our next question comes from David Huang with Deutsche Bank. Your line is open.

Hi, good morning. For '23, what would the carryover pricing be from your prior price increase initiatives?

Yes. We have, I think, in the front half, it's about 6%. If you look at Q1, a little bit lower than that if you get to sort of the full year assumptions.

Okay. And then also, what's your expectation for working capital this year?

The expectation is to maintain a level of working capital relative to sales, viewed as a percentage of sales. I don't anticipate any significant changes in that percentage throughout this year. We generated a substantial amount of cash in the fourth quarter of 2022, and I believe our free cash flow for 2023 is expected to be $200 million, contributing a small amount to working capital, but primarily it comes from EBITDA conversion.

So, would working capital be a source of cash or use of cash in '23, I guess?

The model we assume is basically flat on working capital for the full year, David. So, really...

Okay. Thanks.

One moment for our next question. We have a question from Kristen Owen from Oppenheimer. Your line is open.

Thank you. Good morning, everyone. So, really strong price-cost performance all year and in particular, in the fourth quarter in Color. Just two questions around that. What's working in the pricing playbook? And we've talked a lot about the cost side of the equation in 2023. Given some of the moving parts, how we should think about the spread between price and cost moving throughout 2023?

Yes. Please remind me if I don't fully address your second question while answering the first. One thing we did well was proactively adjusting prices starting at the end of 2020 and into early 2021. We consistently raised prices across all regions and businesses, rather than making significant increases in any particular quarter. This approach allowed us to steadily increase prices over time. In our previous remarks, we indicated that price increases peaked in the third quarter. Since then, demand has decreased, and supply dynamics have shifted, leading to a deflation in raw material costs. This context helps us understand the reasons behind our performance in 2022, which was influenced by actions taken even prior to that year. Currently, we have a slight positive price-mix number in our model. If raw material costs improve in 2023, we could see better outcomes than what we have currently anticipated. We are being cautious in our projections.

You touched on sort of the moving pieces, which is the back half of the question, what's the spread throughout the year. But, I guess, if I could ask then just my follow-up is your ability to maintain that degree of pricing capability in a deflationary environment, obviously, from your own cost perspective, you're going to manage what you can, but just how you view that pricing capability in this type of environment?

Yes. When demand is down, that's when we see the most pressure on price. Historically, we have made adjustments when necessary or deemed it prudent. We've also explored options with our customers for lower-cost alternatives, which may involve a lower price but could also lead to a better mix or a change in product mix. Overall, we've performed well during deflationary periods by maintaining or even lowering prices at a slower rate compared to the deflation we observe. However, this can vary significantly across different markets and applications. It's difficult to generalize broadly, but that's the best perspective I can offer on the matter.

That's very helpful. Thank you so much.

Our next question comes from Laurence Alexander with Jefferies. Your line is open.

Good morning. I have two questions. First, on the kind of longer-term 20% target, do you think your current portfolio can get there? Or do you need scale or a further shift in mix? Just can you give us a sense of kind of what you think is the most likely available path? And secondly, to what degree have you screened your products for PFAS content, particularly with respect to, for example, the EU potential ban on PFAS, how much of your products would be challenged to meet that just in terms of contamination from intermediate chemicals?

One of the things to put that 20% EBITDA target into perspective is if you went back to the initial modeling that we had in '21 for what the business looks like pro forma with Dyneema added and with Distribution out, we were actually pretty close to 18%. That has come down, of course, in 2022 as demand declined in the second half of the year. Growth is obviously an important part of that characteristic. Improving mix now that we have these businesses and they are the fastest-growing being composites and sustainable solutions, which all have higher margins, I really believe that, that 20% is something that we can get to for the company as a whole. Obviously, managing costs in terms of the corporate side and everything else helps in that equation too. We view our sort of PFAS exposure as minimal and specifically in Europe. I don't view that as a significant risk of any kind. We review that as well as a number of other regulatory changes every quarter, and that's been one of the things that we've reviewed that we've I think categorized as minimal.

Thank you.

Thank you. Our next question comes from Eric Petrie from Citi. Your line is open.

Hi. Good morning, Bob.

Good morning.

Your sustainable solutions sales increased roughly 50% year-over-year. How much of that was attributed to Dyneema? And then, can you talk about kind of the main segment drivers and how they grew on an underlying basis?

Yes. So, Dyneema, for the most part, we have, if you look at the business recall that about half of that is human health and safety for personal protection, then maybe 25% to 30% is in sustainable infrastructure. So largely, we're capturing that as part of the sustainability portfolio. Some of the consumer applications that are in consumer products and such may not be in there. Looking at '23 over '22, sustainable solutions were up about 3.5% on a constant dollar basis, which reflects the decline in demand in the second half of the year for even things like food and beverage packaging, which I didn't read through as a direct pull through from consumers so much as I think it was destocking. Not a lack of interest in those particular applications, but just the overall level of, I think, inventory reduction that was taking place at the time.

Helpful. On masterbatch operations, can you just give us an update in terms of how utilization fared particularly in Europe for the quarter and what you're expecting in the first half?

Yes. I mean, look, typically, we don't cite utilization rates. One of the reasons for that is that look, if you were to visit our Color facilities, you'd actually see that they're all relatively small. We've got small lines largely for a myriad of niche batch processing applications, often which have a fair amount of turnover time. I don't really look at it so much per nameplate capacity in that respect. Obviously, with demand being down as much as it was in the fourth quarter, you can assume that we had more capacity as a result. I do think there is opportunity for some capacity reduction in Europe. That's not news to anybody. That's just part of what we had been modeling all along with respect to some of the Clariant synergies. Those are in process right now, but I don't really expect to see cost benefit from those until the second half of the year.

Thank you.

Yes.

Thank you. We have a question from Vincent Anderson from Stifel. Your line is open.

Yes, good morning. So, you mentioned strong personal protection demand in Dyneema out of the gate. Can you just refresh our memory on the order patterns for that business, and so far as what you saw in 4Q might be helping you derisk your 2023 outlook there?

Yes, some of our businesses have seasonal patterns, but I don't think that applies to personal protection. That demand seems to be consistent throughout the quarters. There are trends leading to increased demand for personal protection gear, particularly in the military sector. For instance, the war in Ukraine has prompted many countries to boost their defense investments, and we are beginning to see this take shape in the fourth quarter. Throughout the year, there was potential for this trend to emerge earlier, but it didn't materialize until recently. However, I believe we started to notice some of that demand in Q4, which presents upside potential for us in 2023.

Understood. Thank you. That's helpful. And then, going back through your health care exposure, between COVID-related demand, all while integrating Clariant, I know you mentioned elective care as a potential headwind this year. But can you step back and maybe break down your exposure to health care a bit more between what you would view as the more defensive parts of that portfolio and what specifically would be more exposed to household spending power?

I can't break down the portfolio into elective versus non-elective categories. It's challenging to determine where things fit. However, we mainly focus on medical devices, drug delivery devices, and minimally invasive catheters, along with some pharmaceutical and related packaging connected to health care. A significant portion of this is subject to discretionary spending, not just elective procedures, but also how much people are willing to spend on health care and personal care items. Currently, I see this as a potential challenge for 2023, which we've factored into our model. It doesn't resemble 2020 when people simply didn't go out, but I think it could pose a challenge this year.

Okay. Understood. Thank you.

Okay. That was our last question. We appreciate everyone's time and attention this morning, and look forward to updating you on our next call following our first quarter. Thank you. Take care, everyone.

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