Avient Corp Q3 FY2023 Earnings Call

Good morning, everyone, and welcome to Avient Corporation's Webcast to discuss the Company's Third Quarter 2023 Results. My name is Victor, and I will be your operator today. All participants are currently in listen-only mode. We will have a question-and-answer session after the Company's prepared remarks. This conference is being recorded for replay purposes. I will now turn the call over to Joe Di Salvo, Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, Victor, and good morning to everyone joining us on the call today. Before beginning, I'd like to remind you that statements made during this webcast may be considered forward-looking statements. Forward-looking statements will give current expectations or forecast of future events and are not guarantees of future performance. They are 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 the non-GAAP measures and provides a reconciliation 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. I will now hand the call over to Bob to begin.

Well, thanks, Joe, and good morning. Today we reported our third quarter results and adjusted EPS was slightly ahead of our guidance, despite lower than projected sales. We also updated our guidance for the full year, to reflect our current view of the demand environment and weaker foreign exchange. Our prior guidance assumed we would start to see a modest recovery in the fourth quarter, but based on our current orders, that is not the case and we are lowering our demand expectations as we finish out the year. While we have adjusted our revenue projections, you'll see that we are expecting to grow fourth quarter earnings by 12% on a year-over-year basis, as margin expansion more than offsets lower sales. Jamie will cover specifics in a moment, but I wanted to start with some general observations about the economy and markets and what we're hearing from our customers. Destocking appears to be nearing an end. In many industries, with the exception of a couple that I'll touch on first, and I'll start with healthcare. Historically, this is an industry where we see growth nearly every year without fail. So, it's unusual to be reporting healthcare sales are down and I would further characterize this year as unprecedented. Sales in the quarter to healthcare were down about 25%. Our customers are telling us that this is related to their efforts to reduce inventory levels to more normalized pre-pandemic levels, as they simply built up too much over the last couple of years. As a result of COVID response and the supply chain challenges that followed. In the third quarter, you can see the impact of negative mix for engineered materials when Jamie covers our results. And we expect destocking in healthcare to continue into next year. But the good news is that ultimate demand for healthcare services remains positive, and we continue to view it as one of our four key long-term growth drivers. The other industries where we expect weaker demand conditions to continue are those that are sensitive to interest rates, like building and construction and infrastructure projects, which slowed down in the second half of the year. In general, I certainly think there is uncertainty about the impact of higher interest rates, and whether or not countries like the U.S. find themselves in a recession that extends beyond manufacturing and industrials. Fortunately, employment has remained relatively strong and we view that as a positive. And on the good news category, defense and energy continue to perform well, and so far transportation is also holding up. We benefited in the Americas with composite applications in these end markets. We also believe we're benefiting from reshoring trends, particularly in Mexico, where we have been able to move production with ease, based on where our customers ask us to. And lastly, I believe destocking and packaging, our largest end market, is nearing an end. A recent Wall Street Journal article highlighted that P&G expects a return to volume growth in 2024. That bodes well for us, specifically for our European businesses, where 30% of our sales are to packaging customers. I had the chance to meet with our teams in Europe a couple of weeks ago. Overall, the sentiment was more positive than it has been in some time. While the work continues in Ukraine, there is much less concern about energy availability, in sharp contrast to a year ago when the region was worried about having enough natural gas storage to get through the winter. In total, we are expecting to deliver positive EBITDA growth in EMEA for the first time year-over-year in the fourth quarter. In fact, Europe will be contributing significantly to our bottom line results, and the 12% increase in adjusted EPS we're projecting for Q4. Margin expansion is substantial, as we have rationalized our footprint in the region, reduced administrative costs and we are seeing lower raw materials. I think this is a positive development in earnings momentum as we look ahead to next year. I also spent time with the Avient Protective Materials team while I was in Europe, to celebrate the one-year anniversary of our acquisition of Dyneema. Our composites portfolio makes up more than half of our Specialty Engineered Materials segment, and is one of our fastest-growing areas of our portfolio. The integration of APM continues to go very well. Culturally, APM leaders share our commitment to investing in sustainable innovation and a strong desire to leverage all of our technologies, to best serve customers, translating those into new areas. There are natural cross-selling opportunities between the businesses, and year two of integration will focus on accelerating those among our commercial and technical teams. Now, I'd like to share some examples with you. Half of Dyneema's business is in protective materials, providing lightweight ballistic protection and applications, such as vests and helmets. But as you can see, helmets today not only provide important safety and protection, they also serve as a structural foundation for other components, a variety of communications, audio and visual capabilities and other equipment that assist with a mission. The customer relationships and expertise that APM has in this space represent a great opportunity for the broader Avient portfolio to further enhance the value we bring to customers. As shown here, there are multiple components on a helmet they can benefit from our portfolio of colorants, additives and engineered materials, with some examples including high-strength, lightweight monitoring brackets, materials for electronic and communication components, and soft thermoplastic elastomers for ease of fit and use. Defense was not an end market that we have served historically, but with our acquisition of Dyneema we find a valuable foothold in the industry, upon which we can grow, and it's also positive that we are a U.S. headquartered company where we believe we will have further opportunities with the U.S. military. The helmet you see here is just one example, and our portfolio is very well aligned for other applications and law enforcement and military-related products. We also have highly durable strike materials currently enabling rugged outdoor equipment like tents, packs and portable essentials, where we not only see growth opportunities in consumer, but the ability to translate those into military-grade specified versions. The slide here illustrates a combination of legacy Avient and Dyneema applications. The beauty of cross-selling is that it goes both ways. Consider that Avient has long had a strong representation in outdoor high-performance applications, and leveraging these relationships we see further growth opportunities to cross-sell and bring Dyneema technology to consumer. We're early in our exploration process, but we're extremely excited about the potential that this presents and look forward to sharing more with you in the future in this regard. I'll now turn it over to Jamie to provide details on the third quarter results and our fourth quarter outlook, before I make some closing remarks.

Thanks, Bob. The translation opportunities we have in composites, as well as in the other key growth areas, provide a great segue of how the changes in our portfolio will improve margins over time. Let's start with the third quarter, where continued margin expansion was the highlight. Third quarter adjusted EBITDA margins were 16.3% compared to our guidance of 16%. This reflects a 90 basis point improvement over the prior year. As has been the case all year, we have been able to partially offset weaker demand conditions with favorable mix from sustainable solutions and defense applications, which have proven resilience in the current environment. Lower raw material prices, along with cost reduction initiatives, also factored into the margin improvement. Our adjusted EPS of $0.57 was slightly better than our guidance of $0.56, while sales came in lower than projected due to slower demand and the strengthening of the U.S. dollar. Margin improvement partially offset these impacts. EBITDA was short of guidance, but EPS was higher as EPS benefited from lower depreciation expense associated with restructuring actions, as well as lower interest expense. We paid down $100 million of debt during the quarter and refinanced our term loans, which not only reduce the interest rate but also extended its maturity from 2026 to 2029. The annualized impact of this refinancing will result in $10 million of interest expense savings. The third-quarter EBITDA bridge reflects the impact of demand, price and mix, as well as raw material cost on a year-over-year basis. Starting with demand, customers remain cautious and closely managed inventory levels within the quarter. As Bob mentioned previously, we have started to lap some of the weakness that started in 2022, particularly in Europe and that is reflected in overall demand, which is down less than in the second quarter. Also highlighted on this bridge is the impact of pricing and deflation. This is the second consecutive quarter we've seen raw material deflation on a year-over-year basis, and we continue to hold onto price for a net benefit. You will note that SEM had an unfavorable mix during the quarter, which was primarily driven by healthcare applications. As Bob mentioned, healthcare demand has been significantly impacted this year by destocking as our customers reduced their inventory levels, which increased following the pandemic and supply chain disruptions. We recently did an analysis of our healthcare OEMs who are public, and their inventory as a percentage of quarterly sales is running about 80% today, versus pre-pandemic where these levels were closer to 60%. Most of these customers have made explicit comments about managing down their inventory levels, and we expect that destocking to extend into 2024 before it's complete. Further down the walk, you'll see the impact of certain cost reduction activities taken earlier this year, including targeted European restructuring and reduced discretionary spending, which provided a $13 million benefit in the quarter. Net price benefit and cost reductions more than covered wage inflation. When we started the year, we modeled a modest recovery in demand in the second half of 2023. We are not seeing that and have updated our guidance to reflect lower sales and weaker foreign exchange, partially offset by higher margins. For the fourth quarter, we project adjusted EBITDA and EPS of $112 million and $0.47 per share, which reflects an increase of 5% and 12% respectively over the prior year. Margins are expected to improve by 230 basis points, which more than offsets weaker demand to provide earnings growth for the quarter and for the first time this year. As Bob highlighted, Europe is driving a significant portion of this improvement. This results in full-year revenue of $3.13 billion and adjusted EBITDA of $500 million. 2023 adjusted EPS is now projected to be $2.30 compared to $2.40 as lower EBITDA is partially offset by lower interest and depreciation expenses. The negative impact of our stronger U.S. dollar accounts for $0.03 of the change in adjusted EPS from our prior guidance. We are maintaining our free cash flow guidance of $180 million, as we expect to benefit from working capital efficiency and reduced capital expenditures to offset the change in EBITDA. Through our transformational journey to a specialty Company, our ability to generate strong free cash flow has remained consistent. We are confident in our ability to continue managing through the near term and about our long-term growth prospects, as outlined in our Sustainability Day a month ago. In October, we increased our dividend for the 13th consecutive year. This is an important element of value for our shareholders. I'll now hand the call back over to Bob for some closing remarks.

Well, thanks, Jamie. Well the year isn't over and we're obviously focused on delivering in the fourth quarter. But as we look ahead, I am encouraged to see destocking come to a conclusion in many end markets. There remain some question marks related to healthcare and interest rate-sensitive industries. But overall, we expect to return to growth in 2024. And I'm very pleased to see the EBITDA expansion in Europe in the fourth quarter and see that as a positive heading into next year. And lastly, over the last few years, we have done an exemplary job of managing price, initially to overcome significant raw material inflation, and now with lower raw material costs we see that as a potential tailwind heading into next year. Our performance in this regard reflects the specialty nature of our applications, and the important steps we have taken over the years to upgrade our portfolio. We're obviously very positive about our growth potential and in September, we hosted our virtual Sustainability Day to highlight the opportunities we see in this area. The objective was to provide detailed context around the mega trends, supporting long-term demand for our portfolio and specific product examples of where we are helping our customers achieve their sustainability goals. As a reminder, our four key growth drivers now account for 60% of total Company sales. There are sustainable solutions, composites, healthcare in emerging regions. Combined, these growth drivers support a 6% long-term revenue growth rate. These projections are based on our historical performance as well as a deep understanding of the megatrends to support the long-term advancement of these areas. This includes customer sustainability goals and government mandates, that rely on our material science know-how and formulation expertise to achieve them. At our Sustainability Day, we summarized our portfolio in three categories, reduce, renew and preserve and each of our segment presidents talked about the real challenges our customers face as they incorporate more sustainable solutions. We also showcased several product examples that highlight the performance characteristics of our formulations. We provided data from independent sources to support the key megatrends that will drive demand for these applications. For example, we believe we are well positioned to take advantage of the infrastructure investments, such as the broadband equity access and deployment program, that can take hold in 2024 and increase demand for our composite applications and fiber optic cable and related applications. The same is true for the Inflation Reduction Act, which could translate into increased demand for our existing infrastructure, as well as building new renewable energy sources. Other legislation mandates and customer polls are also in play in Europe, driving the increased need for material solutions at a lightweight reduced carbon footprint and enabling recycling. If you didn't watch our Sustainability Day live, I encourage you to go back and do so with a replay. The feedback has been consistent, and it helps investors gain a broader appreciation for the depth of our materials and the underlying external factors that will continue to create demand for them at a rate of 8% to 12%. We also reiterated our long-term objective to expand margins. We've come a long way from the 5.4% in 2006 to 16% margins we have today. The growth in sustainable solutions and composites healthcare will play a meaningful role in further expanding our margins to 20% on a total company basis. Expanding margins to 20% is just one of the strategic objectives that we have as a company, which you can see here and that we shared during our Sustainability Day. With that, we'd be happy to now open the line for any questions.

Our first question comes from Mike Harrison from Seaport Research Partners. Your line is open.

Hi, good morning. Can you hear me okay?

Yeah.

Yeah, Mike.

Perfect, thanks. Wanted to see if you could provide some more detail on what you're seeing in the packaging end market as you acknowledged, it's a very important market for you, particularly in Europe, and it's very encouraging to hear that you expect destocking to kind of run its course. But what are you seeing in terms of order pattern trends, what are you hearing from customers. And I'm curious, are there differences between what you're seeing in the food and beverage side and personal care, and maybe some other parts of that packaging market.

First of all, customers have indicated that they anticipate a weak performance for the remainder of the year, and we have incorporated that into our guidance. However, they are also expressing that the emphasis is shifting from merely reducing inventory to better managing it. This suggests that they do not have a specific target for cutting inventory beyond what is necessary, which I view positively. I believe they are generally planning for growth. For example, when I mention a company like P&G, it represents just one of our numerous customers, including those in personal care and consumer food and beverage packaging. I expect to see positive trends in these areas, which traditionally hold up well during economic downturns. Food and beverage packaging has historically been resilient, and I think that will be evident as we move into early 2024.

All right. And then just in terms of the healthcare destocking that you're seeing, obviously a very unusual dynamic and your analysis suggests that that's going to continue. Is this a consumables issue, is it an equipment issue, is it both? And I guess just maybe give us a sense of what keeps you confident that healthcare should continue to be one of your strategic growth areas.

Yeah, I mean, look for the most part, you know what we do can be viewed as probably part of the consumable or disposable space in terms of minimally invasive catheter tubing drug delivery devices and related packaging. We do some medical equipment but the prior descriptions of what we're doing really make up most of what we're doing in healthcare. And I mean, look, I just think overall the system just had too much inventory of all those things on hand, largely in response to COVID and then of course the supply chain challenges that followed have had some conversations in the healthcare industry, where, you know, look we're encouraged. We know that people are still actually seeking medical care. I think with employment numbers being strong, that's going to continue to be the case as long as people have access to insurance and so on. So I think the real demand is actually there. Systems, hospitals themselves, as well as OEMs are just trying to work down their inventory.

All right. Thanks very much.

Yeah.

Thank you. One moment for our next question. Our next question will come from the line of Frank Mitsch from Fermium Research. Your line is open.

Thank you and good morning. Appreciate the level of details. I was wondering if I could drill down a little bit more into the sales miss for 3Q and the 10% down guide for 4Q. You know, at the last conference call, Bob, you, you indicated that you thought pricing would be flat in the back half of the year and in fact that's how it looked like the third quarter came in. So that 5% delta on the sales line, can you talk a little bit more about how much of that might have been volume versus FX because I know I think FX was also an issue there. And then on the 10% down, I assume you're still calling for flat pricing in the fourth quarter. So then, so then, how much of that is also kind of volume and FX in terms of a decline.

Do you want to say something on the FX number?

The FX for the quarter, it's about $5 million of the total, you know, I have to look at the for the fourth quarter. I think that was in total $0.03 of total from an EPS perspective and that's combined in the back half and $45 million in the fourth quarter for bringing it down.

Okay. So that sounds larger in the fourth quarter. Regarding the 10% decline in sales for the fourth quarter, how clear are you on orders for the quarter? What expectations have you factored in, especially considering potential shutdowns in Europe or any insights you can share on how you arrived at the 10% decline would be appreciated.

This year, our visibility has been shorter than usual, and we don't operate with a backlog. Typically, we have good visibility around 30 to 40 days out, so let's say around 30 days. Looking at our orders for October and November, they match our expectations. The guidance we provided today takes into account the anticipated plant shutdowns at the end of the year, particularly in Europe and due to the holidays, which are factored into the numbers we shared.

Okay. And then in terms of the planned shutdowns, I know you were talking about your customers, which is what I was asking about. But in terms of your own planned shutdowns, there was a 3% sequential decline in PP&E. I assume that that's a result of planned restructuring in Europe, where do you stand on those shutdowns?

Yeah. So those are really all related to the timing of previously announced facility closures that finally came to a conclusion and now you're seeing the benefit of less depreciation expense. We're really through that. There's one last facility that we continue to work on as part of the legacy Clariant and PolyOne combination that could come into next year. And then I am sorry, I wanted to just come back to one of the very first things you said about price because that assumption is correct, you know, that we basically have that assumed to be flat as we go through the end of this year. We did have some unfavorable mix that we highlighted for engineered materials that will probably be the case for Q4 as well. And the pricing should be about a push.

Great, thanks so much.

Yeah.

One moment for our next question. And our next question will come from the line of Michael Sison from Wells Fargo. Your line is open.

Michael, if you could please disconnect and try dialing in using the U.S. toll number or use the Call Me feature that would be great. Thank you. We'll go ahead and move on to our next question. One moment. Our next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is open.

Thank you and good morning. You know, raw materials have been a good news story in the back half of this year, in particular, helping drive some nice margin improvement. Is it fair to say that that rise will probably continue to be a benefit through the first half of next year and then probably flatten out maybe just start there.

I think a lot of this ultimately depends on what happens with demand. We're currently in a low-demand environment, and I would expect the benefits we're seeing now to carry into the first half of next year. The bridge schedule presented shows a significant benefit and support for our position. Hopefully, that will hold true, but we do anticipate growth in 2024, which might slightly impact that.

Okay. And just, you know, as we think it's obviously early to talk about the full year 2024. But, you know, as we think about 4Q, the way that it's going to come in, you know, do you think that's the sort of starting point for 2024 that 1Q may be just a bit better than 4Q, or do you think 1Q could actually have a nicer step up from the 4Q exit rate?

I mean, look, typically, our first quarter and second quarter are the strongest of the years. Europe is typically the strongest in the first quarter. I am expecting a good first quarter, so you would see a step up from Q4 to Q1, simply because of seasonality and demand patterns that we see there. You know, as I said in my prepared remarks, you know, I'm really pleased with what we're seeing right now. I know anybody else is saying that, but a lot of it's been because of what we can control, you know, with the facility closures, with the cost reductions and doing what we're doing with price margins are overcoming the lower sales. So, I see that as a positive on 2024.

Okay. Great. Thank you very much.

Yeah.

One moment for our next question. And our next question comes from the line of Kristen Owen from Oppenheimer. Your line is open.

Great. Thank you so much for taking the questions. Wanted to follow up on that last one, and just sort of outline some of the puts and takes for the margin coming into 2024. I'm looking at the adjusted EBITDA margin bridge that you provided at Sustainability Day here on Slide 19. Just thinking about the puts and takes for 2024 sort of those items within your control on the margin side.

Yeah, I mean, so there. One is, I mean, kind of just do the math right and maybe as a follow on in my previous response. If you just look at where we are on the EBITDA bridge in Q3 and assume flat raw materials going into next year, you know, you should see some similar comparisons until you get to really the middle of next year, which I think is true. There's a little bit of cost action that has yet to, you know, come into 2024 because those actions came into fruition this year, partly through the year, later in the year. And then lastly, just one additional facility that we're looking at that was always part of the original Clariant, PolyOne sort of synergy plan, those are things that I look at right now. I'd also say, as pricing, I think we've done a really good job of that over the last few years. I view that as a strength. I think that's a great sign in our portfolio and think that's in our control for next year as well.

Fantastic. That, that was part of my follow-up question. So I'll ask a different one then. We've spent a lot of time talking about Europe, but I recall you mentioning some potential green shoots out of Asia earlier in the year. I'm just wondering if you can provide an update on that region. Thank you.

Yeah, I mean, look, I think you know, at the beginning of this year, everybody was really optimistic that, you know, when Asia sort of came out of the COVID protocols, specifically China, you know that we would see a return to growth. A little bit of that, we did see at the beginning of the year, we saw an uptick and requests for color design, color match and so on, which is usually a pretty good leading indicator that additional business is coming. But China has really kind of had some fits and starts this year and has largely not reached what we thought would happen. So I kind of view that as sort of flat or unchanged probably to where we were just a few months ago, so not much to report there at this point. I know there is some discussion around, you know, government stimulus ultimately that could always take place, which should be a positive, I would think if that happens, but until it does we'll see.

Thank you so much.

Sure.

Thank you. One moment. For our next question. And our next question comes from the line of Laurence Alexander from Jefferies. Your line is open.

Good morning. So wanted to touch on kind of the longer-term growth targets you laid out at the Sustainability Day and you've been talking about, you know, for several quarters. How has the destocking affected your confidence and that maybe another way to put it is how much of the sales lost to destocking this year, do you expect to get back in 2024, 2025, you know, if and when demand trends normalize? Or do you just see kind of that longer-term target now being applied to a lower base.

I believe this will unfold over a cycle where the growth rates we presented, including those for 2023, will be achievable moving forward. In some cases, we are down in 2023, and to give you perspective, total sales were down 15% in the third quarter. This year, Sustainable Solutions has decreased by about five or six percent, which is disappointing, but it's holding up well. I think this supports the long-term growth rate, as the decline in 2023 is not as significant. The impact of destocking on demand is still uncertain, and I can't provide specific numbers for 2024 at this point. However, I remain optimistic about composites and sustainable solutions returning to growth next year.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Vincent Anderson from Stifel. Your line is open.

Yes, thanks, good morning. So not to deliver the price versus raw material conversation too much more. But you know, as I'm working through expectations on your mix on a mix that now includes significantly more pigment than historically. I'm kind of curious if you're able to optimize your color offerings around maybe a lower cost pigment mix in a way where intrinsic physical properties on a resin input wouldn't allow that kind of flexibility on your part.

I'm not sure I completely understood that question.

Make rate cheaper.

So look what I would say is that, I mean, first and foremost, you know, I would say our customers are very much focused on and we're just talking about the color space. So they are very much focused on sustainable solutions being able to use more recycled content and making things easily recyclable, that's certainly the brand owner's focus. But they're also focused on costs. So to the extent that they want to look at alternate materials that could result in some cost savings, I mean, we've always been agnostic candidly where the underlying base resin they want to use or the formulation, it's really just ultimately up to them you know, with respect to what formula works for down to achieve the performance characteristics they're looking for. I don't really see that as a meaningful headwind at all really price, I think that's still fine as long as we're delivering what they need as to specifically again around those two areas of sustainability.

Okay, all right. Helpful. Thank you. And then, this will be a little bit simpler. When I think about your cross-selling opportunities in Dyneema, you know, would you expect to focus really around expanding sales where you've already commercialized Dyneema into a specific application or would these be more novel? And if so, just kind of curious what kind of prototyping capabilities you have or would consider investing in to drive adoption in the new applications.

I mean, look, fortunately, I do think there is a lot of opportunities there and maybe specifically if you're just looking at pulling, you know, Dyneema into a more consumer space, it really starts with customer introduction and increasing awareness of the material and its capabilities. You know, we have a great design team that just really looks at how to use different materials for customer needs, and so that is getting increasingly, to be more incorporated into that analysis. From this idea of prototyping, a lot of times, our customers have that capability and like to do that just to see how materials perform themselves, so oftentimes, I'd say that's a partnership with our customers. But it really starts with awareness in terms of what the material can do and how it can benefit down, particularly as it relates to increasing strength or reducing waste.

All right. Excellent. Thank you.

Thank you. One moment for our next question. And our last question comes from the line of Michael Sison from Wells Fargo. Your line is open.

Hey, good morning. Bob, would you, I apologize, if I missed this, but what was volume down in the third and implied volume for the fourth?

Yes. So that's down about 15% in Q3, implied is about 10% in Q4. Really kind of that sales reduction is principally demand is a little bit of an FX could go, I think they're catching about 9% in Q4.

Got it. And then for the fourth quarter, you know, if I take your EBITDA outlook and annualize it. You're running, you know, fairly below, you know, 2023 levels, But it did seem like you felt you can grow EBITDA in 2024 how we think about, you know, improving on that run rate as we head into the first half of the year? And then, is there anything else that you have, you know, to generate growth into 2024?

Yeah, I mean it's like, well look at the fourth quarter it's obviously the first quarter this year, where we are showing year-over-year EBITDA growth. I just really can't emphasize enough again like sort of how I'm feeling positive about Europe and what we've been able to do in margins there. So, I see that probably as the first thing just going into next year as a positive and so, we've got good momentum in that regard. I might be redundant here but raw material staying where they are, that is also positive going into the first part of next year and then there is a little bit probably on the cost side, really if it just comes down to what we can control. But anecdotally, you know, customers are giving us feedback, they do think that destocking is coming to an end, and I think that bodes well for the sales side picking up in the first quarter.

Right, okay. And then do you have sort of deflation that sort of helps you in the first half of the year, that just sort of flows through?

Yeah, I mean that's what I'm saying like raw materials sort of stay flat where they are and we're just looking at year-over-year comps. So I mean you can take the EBITDA bridge that we had for the quarter and kind of look at that and know that second quarter was the first time we really had any deflation this year. Third quarter is obviously a bigger number saying kind of model out how that will flow into the first half of next year.

Got it, okay. Thank you.

Thank you all for joining us this morning. We appreciate your time and attention, and we look forward to sharing our year-end results with you. We'll also be attending several conferences this fall, so we hope to see some of you in person then. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.