Good morning, ladies and gentlemen, and welcome to the Avient Corporation's webcast to discuss the company's second quarter 2023 results. My name is Katherine, and I'll 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 turn the call over to Giuseppe 'Joe' Di Salvo, Vice President, Treasurer and Investor Relations. Please proceed.

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. Forward-looking statements with the current expectations or forecasts of future events are not guarantees of future performance, 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. 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, which describes the non-GAAP measures and provides a reconciliation to their 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. Now I will hand the call off to Bob to begin.

Thanks, Joe, and good morning. Today, we reported our second quarter results. Adjusted EPS of $0.63 exceeded our guidance driven by better-than-projected margins in both segments. Raw material deflation was a net positive, and our composites portfolio continues to be resilient in an otherwise challenging environment. Composites is an area that we have grown through a series of acquisitions and incremental commercial investment and now makes up about 20% of our business. Composites offer a lightweight option with strength and design flexibility that other materials simply cannot. Since 2012, we invested in six technologies to build out this portfolio that now includes long fiber tapes, laminates, pultrusion, and engineered fibers. Our goal has been to acquire businesses where we can add commercial resources to drive growth. Specifically, in end markets and applications that are underserved or not served at all by composite players today. From a performance standpoint, our composite businesses are holding up well in the current economic downturn, and EMA is the latest addition to our portfolio and couldn't have come at a more important time. It's the world's strongest fiber and utilized in defense and other end markets where failure is simply not an option. Year-to-date demand for personal protection is up 13% and expected to increase as the year progresses. Eighty-five percent of our composite materials serve the following five end markets. Personal protection and defense applications include BODYARMOR and helmets that rely on Dynamic fiber and its unrivaled performance. The lightweight and high-strength combination provide the highest level of protection for women and men in the military and law enforcement while also allowing for ease of physical movement. The industrial end market has many opportunities to leverage the benefits of composites. Composite tapes are reinforcing flat pressure pipes being used for conveyor springs to replace more durable materials. Composites provide significant performance benefits in lifting slings, as they can be tailor-made to deliver strength and stiffness in specific directions depending on use. In line with prevention against corrosion, chemical, and environmental exposures, the possibilities in this end market are endless. In our acquisition of fiber line in 2019, we expanded our solutions into the fiber optic cable and telecom industry. We've since been serving the 4G and more recently, 5G infrastructure buildouts. The most recognized value of 5G is speed, but it's really about connectivity. 5G can power the development of smart cities, remote surgeries, and autonomous driving vehicles. Sustainability benefits like process automation and greater control over water management are also being enabled by this technology. Private wireless networks and manufacturing facilities and warehouses rely on 5G as well to meet the emerging technical requirements of AI, automated, and high-tech production. As you all know, China was an early mover in 5G infrastructure with nearly 3 billion base stations and growing. In the U.S., with the upcoming deployment of funding from the bead program, it will greatly accelerate 5G, and Avient is well positioned to take advantage of this. In the energy end market, there has been an increased focus around the world to improve the capacity and reliability of the energy grid while also expanding more sustainable energy sources. We serve customers that support the traditional electrical infrastructure with components such as primary and secondary insulators, distribution, and transmission poles. These updates often replace materials such as wood and steel. For offshore wind farms, Dynamica ropes and mooring lines are considered the best option for positioning and anchoring windmills. For all modes of transportation, customers are looking to use composites to increase fuel efficiency and battery applications. Recent examples you may not be as familiar with include air cargo panels, railcar doors, and laminates to protect the underside of truck beds for us. What I love about these applications is that they serve as perfect examples of how we have taken composites to new and underserved markets. Winning new business in these areas has helped us navigate the challenging market conditions that we find ourselves in this year. In that regard, our message today about Q2 and the remainder of the year is really about improving margins, offsetting weaker demand conditions, both from a better mix and cost reductions. Jamie is going to tell you more now, and then I'll have some concluding remarks.

Thanks, Bob. Second quarter adjusted EBITDA of $131 million came in slightly ahead of our forecast as lower sales, particularly in Europe, were offset by stronger margins. Adjusted EPS was $0.03 better than expected, driven by the EBITDA beat as well as lower interest and depreciation expenses. Adjusted EBITDA margins exceeded guidance by 50 basis points, as sustainable solutions and composites continue to prove resilient in the current environment and provide a favorable mix in the quarter. Deflating raw material prices, along with our ongoing cost reduction initiatives also factored into the margin improvement. The second quarter EBITDA bridge shows the impact of demand, price, and cost on a year-over-year basis. Starting with demand, customers remain cautious and continue to closely manage inventory levels. Overall demand was slightly below our expectations, and regional trends have evolved since we last spoke. The U.S. and Canada went about as expected, with softness across most end markets, particularly in building and construction and consumer. Latin America's demand was slightly worse, but most notably, we saw Europe weaken further, which we thought had stabilized entering the quarter. This was partially offset by a slight uptick in Asia, which was modestly better than expected. Also highlighted on this bridge is the impact of pricing and deflation. This is the first quarter we've seen raw material deflation on a year-over-year basis. Deflation was most prevalent in our hydrocarbon input, such as polyethylene and polypropylene, and we have started to see moderation in other raw materials, such as certain performance additives, which continue to help us offset weaker demand and cover wage and energy inflation, which remain elevated versus the prior year. Lastly, certain cost reduction activities, including targeted European restructuring and reduced discretionary spend, provided a $13 million benefit to the bottom line in this quarter. Turning to Page 10 in the webcast slides, we provide another view on sales, this time on a sequential basis from Q1 to Q2 by region, where sales on a global basis are 2.6% lower. In Europe, where we typically see an increase in packaging as our customers prepare for the summer vacation months, but that didn't come to fruition as persistent inflation had a negative impact on consumer sentiment, and some level of destocking remains. Customers in Europe continue to be the most cautious of any region. As we look around the rest of the world, demand in the Americas was largely unchanged from the first quarter. The U.S. consumer has been quite resilient, but we expect weaker demand to continue in the second half. In Asia, we experienced modest improvements in the second quarter, with China reopening and recovering from the COVID lockdown last year. We hope this remains a positive trend going forward. As we mentioned during our first quarter call, ordering patterns have shifted to smaller quantities and shorter lead times. This is true even in traditionally recession-resistant markets like packaging and healthcare. In fact, healthcare has been surprisingly and negatively impacted more than anticipated in terms of demand this year. Historically, this is among the more recession-resistant markets. It seems even healthcare device manufacturers, just like manufacturers in other industries, still have too much inventory on hand. In the first half of the year, major companies like Beck and Dickinson, ICU, and Teleflex all reported reducing inventories this year. Further, rising interest rates continue to have a negative impact on consumer applications and building and construction. Partially offsetting the impact of the macro environment is the resilient nature of our composites business, serving the end markets that Bob highlighted earlier. We have factored all of this into our guidance projections for the balance of the year. Our third quarter guidance is for revenue of $800 million and adjusted EPS of $0.56. This reflects our current view of demand and higher margins based on the strength in composites, raw material deflation, and cost reductions. We are maintaining our full-year guidance of adjusted EPS of $2.40 and lower revenues of $3.3 billion. While we have slightly lowered our full-year adjusted EBITDA projection, this is offset by lower interest and depreciation expenses. We have been consistent all year in saying that we believe that demand conditions weakened beyond our initial model and that we would be able to offset that with strength in composites, improving margins, and cost reductions. And that's exactly what we've done so far. With respect to expected cash generation and leverage, we are updating our full-year free cash flow to $180 million to include additional costs related to environmental remediation expenditures and timing of tax payments. Projected net leverage at year-end is 3x. I'll now hand the call back over to Bob for some closing remarks.

Thanks, Jamie. At our Investor Day in 2021, we highlighted four key long-term growth drivers where we focus our investments. Their sustainable solutions, healthcare, composites, and high-growth regions such as Asia and Latin America. These four areas make up over 60% of our sales today and where we expect to provide long-term revenue growth above GDP. The largest of these is sustainable solutions, which has grown at an 11% compound annual growth rate since 2016. Great examples of those solutions are highlighted in our latest sustainability report just released and available on our website. It's a comprehensive publication that provides our many stakeholders with important updates on ESG matters that are important to them, to us, and to our planet. In our report, we have provided updated metrics and highlights for each of our four pillars of sustainability: people, product, planet, and performance. When it comes to products and performance, a third of our revenue now comes from this portfolio. You'll read about how our customers are using these technologies to meet their sustainability goals. Included in the report are several customer case studies, including Dynema-enabling sustainable infrastructure and our work with L’Oréal, where we have helped them incorporate recycled content into their packaging while maintaining the performance and color integrity of this leading global brand. Supporting our planned objectives, you see our progress towards our internal goals of reducing waste to landfill and energy intensity, increasing our use of renewable energy sources, and more. But you will also see how our products help our customers achieve similar objectives. At Avient, this is all made possible by our people. In this section of our report, you'll see why we are increasing our investments in training and leadership development at all levels of the company. Employee resource groups are expanding their outreach, helping to further strengthen our culture of diversity, inclusion, and performance. It's a culture that last year was certified again as a great place to work. In fact, last year, we achieved the highest employee engagement scores ever despite tremendous changes at our company and the beginning of a global economic downturn. I encourage you all to read our report and better understand how we are leading and investing in sustainability. I'm serious. This is the most comprehensive report that highlights who we are and what we do. We frequently get questions about how customers are viewing sustainability in light of the current economy and environment. This much is clear: they are still committed. Brand owners have established ambitious sustainability goals on a range of topics across the ESG spectrum, and they are committed to these goals both internally and publicly, working hard to achieve them. Two common objectives where they are seeking help from us are increasing the use of recycled content and reducing carbon emissions. Our material science directly facilitates both lightweighting, reducing material consumption, and improving performance for post-consumer recycled content, to name a few. It's truly inspiring work. It is a core area of investment and growth for us. How and where we are having success warrant the need for focused time to fully appreciate, which is why we will be holding a virtual Sustainability Day for investors on September 20. On Sustainability Day, we will provide a deeper look into our growing portfolio. We will also hear about the consumer trends and customer sustainability goals that are shaping and driving our innovation. Sustainability is here to stay. The stakeholders are driving demand for sustainable products and from sustainable companies like us. In closing, with respect to our prior guidance, I'll reiterate what Jamie said. We have been consistent all year in saying that demand conditions were uncertain; they were weaker than we initially projected, but we could offset that with cost reductions and better margins. So far, that has certainly been the case. We acknowledge that near-term challenges persist, but I think there should be a growing sense of optimism. From a macro perspective, it is beginning to look like the U.S. rate of motivation is declining, and destocking should begin to moderate in many industries. However, it also seems less likely that recessionary conditions will spread beyond the manufacturing sector. Specific to us, and to repeat what I previously said, the Dynema acquisition couldn't have come at a more important time as demand for defense and sustainable infrastructure applications grows. When combined with our other core technologies, we are well positioned to take advantage of recently announced government-sponsored initiatives, such as the broadband equity access and deployment program, which could take hold in 2024 and increase demand for our applications in telecommunication cables. The same is true for the Inflation Reduction Act, which could translate into increased demand for applications that help to secure existing energy infrastructure and build new renewable energy sources. In short, I am very confident in the portfolio we have built over the last few years to position us for long-term growth. We don't plan to cover the prices today, but on our website, we have refreshed our peer charts and believe we are on the right path to being valued as a specialty formulator. Thank you for listening today. We'd be happy to open the line for any questions.

Thank you. The first question comes from Frank Mitch with Fermium Research. Your line is open.

Thank you so much, and good morning, everyone. I have to ask the necessary question. You're maintaining your guidance for the full year. Clearly, you've surpassed your targets in the first and second quarters, which implies a reduction for the second half of the year. So Bob, are you indicating that when you initially provided the full-year guidance, you had specific expectations for how the second half would unfold? And as you reflect on that today, is it somewhat less optimistic? Or do we still have a couple of quarters left that might incorporate some level of caution?

Yeah. I mean, I guess the best way to describe it at the beginning of the year is we didn't have good visibility to what the second half would look like. I don't know how to best convey that. If demand conditions weakened further from what we initially projected, we would be able to offset that, particularly, if we experience raw material deflation, which we now are seeing. So I think as we stand here in the middle of the year, we've just got a better perspective on what the numbers are going to look like for the balance of the year. And that's really what shapes our guidance. I hope that helps.

Got you. So yes, it sounds like you’re being cautious with your expectations. As I think about Europe, the tenor, the tone seems a bit more negative than perhaps we might have thought three months or six months ago. Your sales declines were down 10% in Q1, down 8% in Q2, at least that's moderating somewhat, but it's still materially negative year-over-year. How close are we to the bottom? When might we hit bottom in that region? Or is it still fairly murky?

Maybe a clarifying point on that, if I could. The numbers you cited were actually a change from Q1 to Q2. Europe got worse, just to be clear. I think if you went back to our last call, we were probably more optimistic about Europe reaching bottom, and that didn't prove to be the case. Jamie very specifically highlighted some things that typically happen in the summer months with respect to demand for additives for packaging, primarily around food and beverage, and that really didn't materialize in the second quarter like we thought. So, I would categorize Europe in the negative surprise category.

Understood. So no scope for any recovery in the back half of '23?

I think things could be bottoming out, but not necessarily recovering. So maybe that's the right way to think about that.

All right. Very helpful. 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. Nice quarter. Your volumes have been down six quarters, and I think you felt there would be a binding effect. What do you think volumes will be down in the third quarter? And how do you think things shape up as you end the year in the fourth?

Look, the current guidance has sales down about 9.5% in Q3. The preponderance of that really is demand or volume related. There's a little bit of positive from FX year-over-year, but primarily when you look at Q3, that projection we have on sales is really primarily due to underlying demand.

Got it. And then in terms of deflation, when you look at the second half, what type of level of deflation do you think you're going to see?

One way to actually think about that is if you look at the changes to our guidance, we took $60 million of sales out of the third quarter, but really only changed EBITDA by about 10. So that kind of gives you a sense for the magnitude of what we see as incremental benefit from price and raw material deflation. Hopefully, that kind of helps you. With the bridge schedule that we have for second quarter, you can probably move that to Q3 and Q4 and start to put that together.

Got it. Thank you.

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

Hi, good morning. Let me ask about Asia. You noted that things there were stronger than you expected. That doesn't really seem to match up with the headlines, as a lot of companies are talking about this muted pace of recovery. What markets were leading the strength that you saw in Asia? And do you expect that momentum to accelerate in the second half, given that there may be some government stimulus going on in China?

I think we would agree with some of the headlines that the recovery has not been as significant as hoped for as a result of reopening from COVID lockdowns, but it was still better going from Q1 to Q2, and that's also a good thing. There was, in general, demand for personal products, consumer and packaging. Packaging is one of the largest markets we have there, as well as products that are getting distributed back into the U.S. and Europe. I think one of the things that—I don't know if we mentioned this on the last call or not—but we are starting to see an uptick in customer requests for new color designs. That usually is a good leading indicator that there's positive momentum. So hopefully, that does continue in the second half of the year.

All right, great. And then I was hoping you could give us an update on what you're seeing in the packaging market. I think you mentioned some softness there in Europe, but that's where you have some interesting sustainable solutions. Is the weakness you're seeing related more to destocking or slowing consumer demand? I guess I'm hoping to see some signs that demand is starting to stabilize in that important market for you guys.

Yes. I think that it is still a growth area. Specifically, in Europe, where packaging is the largest segment, I do believe consumer sentiment is impacting what they're spending money on right now. Inflation has dramatically increased the cost of food and beverage prices, and I think there is a consumer impact on demand. Beyond that, there’s probably still some destocking, at least based on what we saw in the second quarter, but possibly some belt tightening happening in other parts of the world as well.

All right. Thanks very much.

Thank you. Our next question comes from David Wong with Deutsche Bank. Your line is open.

Hi. Good morning. Just on pricing, I know price mix was up a bit in the quarter and mix was positive. Does that mean pricing by itself was negative in the quarter? And as I mentioned last quarter, there were some competitive dynamics there. Do you expect any further price declines in the back half?

Price was a positive for the quarter. That's pretty much what's reflected in there. If you go back to last year, pricing likely peaked at the end of the second quarter or maybe a little bit at the beginning of the third. Our expectation is that pricing will decline over the course of the year, so I think you'll see that in the second half. It could be flat, which is probably a good estimate for Q3 and Q4.

Okay. And regarding cost reduction, how much was the benefit in the quarter as you strip out Clariant synergies? And how should we think about additional cost savings in the back half?

Clariant synergies represented a small number at about 2 million. By the end of last year, we were at about $75-76 million of the run rate we expected, 85 million in total, so we're pretty much there. So I have accounted for that. The balance of that really consisted of other cost actions, some related to European restructuring and some reduced personnel.

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

Good morning. Just a couple of different odds and ends. First, with Dynema, can you give a sense of where the margins and volumes are compared to where you thought you'd be when you first closed the acquisition?

I will address this by highlighting that 50% of the business is in personal protection. About 30% of that is Marine in sustainable infrastructure, and 20% is consumer. In terms of personal protection, when we did this deal last year, we expected demand for defense applications to increase, and that is happening. I would say that's probably even higher at the beginning of this year than we thought. Consumer demand is down significantly, similar to other Avient markets, but I don't believe that is too different from what we had anticipated. Marine and sustainable infrastructure also have shown some improvements, which is more favorable than our initial expectations. However, overall, the business is really holding up well, and margins are as good as they have been in the past.

Okay, great. Regarding destocking, what are you hearing from customers about where they think equilibrium will be? Do you expect to push inventories lower than desirable and then see a snap-back or are companies just trying to find a new equilibrium?

I believe it varies by industry. In the consumer space, I feel that is one area where things are starting to improve, meaning less destocking. I would contrast that with healthcare, which experienced the second-highest decline among the end markets we had in this quarter. Healthcare companies are still indicating they see more destocking to come. They really accumulated too much inventory during the COVID era, and I think they're all working to reduce that. Jamie mentioned this, and it was a negative surprise for us this year, as healthcare is typically resilient. I think if it weren't for their destocking, healthcare would be faring much better. So I view healthcare as having a preference for destocking, and that will continue through the rest of this year.

And lastly, how do you think pricing dynamics will evolve over the next five to seven years? Is there an upper limit where the cost-price delta narrows over time? Can you give a sense of the new dynamic for Avient compared to the predecessor assets?

I believe we are at the beginning of a positive trajectory with respect to margins. If I look at how much margins compressed in 2020, 2021, and into 2022 because of inflation, there's an opportunity for margins to reverse themselves with deflation while maintaining pricing. We've long stated that our goal is to ultimately achieve EBITDA margins of 20%. If we could simply return to our pro forma margin levels from the middle of 2022, that would be about just under 1% improvement, but with a better mix in our four key growth areas, I believe we can reach 20%. Therefore, I don't feel we are hitting any limits. Instead, I feel we are just beginning to approach where we want to be, which is closer to 20%.

Thank you. Our next question comes from Kristen Owen from Oppenheimer.

Thank you for all of the incremental color you provided. I wanted to inquire about the shorter order timelines and smaller orders, and ask you to expand on how that is impacting your planning horizon.

The primary impact is on our performance capabilities. I've always said that based on orders, we had pretty good visibility for the upcoming month, maybe 45 days. But I feel that this has been cut down due to shorter lead times and smaller quantities. This has made it more difficult for us to project what's going to happen in the short term, along with various ancillary issues regarding production scheduling and planning.

That's helpful. I'm tying this to the longer-term discussions about sustainable solutions and the customer timelines for those solutions. It seems like they are very different types of conversations. Could you provide insight into the tenor of the sustainable solutions discussions?

Yes. That is an important part of what we want to share on September 20. The brand owners are still very keenly focused on achieving their sustainability goals, and I feel that the level of engagement with them remains high. So despite destocking and the general conditions in the manufacturing sector right now, I don't think it negatively affects us. Some of those discussions are longer lead time projects, primarily development and innovation. It's noteworthy that 100% of our innovation portfolio is dedicated to sustainable solutions.

Lastly, what does that mean for your pricing ability in the long term? What do you anticipate capturing from those sustainable solutions on the pricing side?

There is definitely value to be captured there from a pricing standpoint. However, I would also mention that there is a cost aspect involved. Currently, sustainable solutions often have higher costs due to the recycled content and the additional additives required to achieve the desired colors. In general, I would expect that pricing will continue to increase as sustainable solutions grow.

We have a question from Vincent Andrews with Morgan Stanley. Your line is open.

Wondering if you could talk about cash flow. It looks like with EBITDA down $5 million. Cash flow from operations is now $33 million and free cash flow is projected to be $10 million instead of $200 million. I see on the balance sheet or cash flow statement that working capital or inventory in particular is up. Can you help us understand what's going on from a cash flow perspective and what measures you're implementing to improve this situation?

The primary changes in our previous guidance are related to some environmental expenditures and the timing of tax payments. I'm not sure what specific working capital information you are referencing, but in general, our working capital as a percentage of sales has actually declined this year versus last year. We've managed our inventories well. One aspect to remember regarding cash flow and working capital is the timing of these occurrences. We had a significant influx of cash in November and December of last year, which factors into our percentages for sales. We don't have the same influx built into this year, which might clarify the comparison of 2023 versus 2022.

I was looking at the increase in inventory. But anyway, as a follow-up, where do you think your customers are? I know you talked about the healthcare situation. They were overstocked due to COVID. But do you think customers are at very lean levels now?

I believe part of our assumption is that we won't see the same level of seasonality this year. If you look at our revenue projection for the fourth quarter, it's not much higher than last year, but significantly below where it has been over the last two to three years. I think you're correct with that assumption. It does vary by industry. In the outdoor industry, which we've discussed a lot, I believe there are some improvements starting in the second half of the year, with evidence that dealer and retail inventories are indeed very low, which suggests that levels are lean. In contrast, in other industries like healthcare, customers have signaled that they still have excessive inventory, and we foresee continuous destocking there.

Thank you very much for the questions and for everyone listening in today. Hopefully, you can make it to our Sustainability Day on September 20. We look forward to updating you in that regard on that day.

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