Earnings Call Transcript - AVNT Q2 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Avient Corporation's webcast to discuss the company's second quarter 2025 results. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Joe Di Salvo, Vice President, Treasurer and Investor Relations. Please go ahead.

Giuseppe Di Salvo, Vice President, Treasurer and Investor Relations

Thank you, and good morning to everyone joining us on the call today. Before we begin, 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 will give current expectations or forecasts 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. We encourage you to review our most recent reports, including our 10-Q or any applicable amendments for a complete discussion of these factors or other risks that may affect our future results. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on the Investor Relations section of the Avient website, where the company describes the non-GAAP measures and provides a reconciliation to their most directly comparable GAAP financial measures. A replay of the call will be available on our website. Information to access the replay is listed in today's press release, which is available at avient.com in the Investor Relations section. Joining me today is our Chairman, President and Chief Executive Officer, Dr. Ashish Khandpur; and Senior Vice President and Chief Financial Officer, Jamie Beggs. I will now hand the call over to Ashish to begin.

Ashish K. Khandpur, Chairman, President and CEO

Thank you, Joe, and good morning, everyone. I'm pleased to report second quarter organic sales growth of 0.6% in an uncertain macro environment where customers in most markets and regions are waiting for clarity on trade policy. Strong operational performance and cost controls helped adjusted EPS to grow 5% to $0.80, slightly ahead of our guidance of $0.79. We also expanded margins on the bottom line with adjusted EBITDA of 17.2%. This 30 basis points of margin expansion was driven by a favorable mix, productivity initiatives, and disciplined discretionary spending, all things we continue to control tightly. As we enter the second half of 2025, market trends are not necessarily improving and uncertainty still remains around trade policy. Q3 is expected to be a continuation of Q2 in this regard. Our customers remain in a wait and see mode with consumer markets, in particular, showing weakness across the globe. Thus far, we have been able to more than offset consumer weakness by strong demand in defense and health care, which remain as bright spots for our business. Overall, for the first half of the year, organic sales grew about 1%, and we expect a similar demand environment for the second half of the year. We had shared our operational playbook for the current low demand, high uncertainty environment on our last earnings call. As a result of our actions from this playbook, we are well underway to realize approximately $40 million of benefits in 2025 versus last year. That is an increase of $10 million from our original estimate of $30 million that we communicated last quarter. These benefits come from a combination of sourcing, Lean Six Sigma plant productivity initiatives, optimization of our manufacturing footprint, and discretionary spending control. We have already realized $17 million of benefits in the first half of 2025. The remaining $23 million will be realized in the second half, primarily from additional sourcing initiatives and further reductions in discretionary spending. These efforts more than offset both inflation primarily from wages and our investments in growth vectors that are critical for advancing our strategy. With respect to tariffs, any direct impact remains largely mitigated and consistent with what we discussed last quarter. We primarily source raw materials and manufacture our products locally in the regions that we serve. Direct P&L impacts to date have been minimal because we can optimize our raw material purchases across regions, use our formulation expertise to identify material substitutions and where appropriate, proactively implement pricing actions. As we are on our journey to evolve Avient from a specialty formulator to an innovator of material solutions, I would like to highlight progress we continue to make along the way. The second quarter results marked the fifth consecutive quarter of organic growth for us. For the first half of 2025, we have grown sales and adjusted EPS by 1.2% and 4%, respectively, excluding the impact of foreign exchange. As a reminder, we grew 4% organically in fiscal year 2024. On the bottom line, so far in the first half of this year, we have already expanded adjusted EBITDA margins by 20 basis points. We expect incremental year-over-year margin expansion in the second half and full year adjusted EBITDA margins should expand in excess of 30 basis points. This would be following 20 basis points of margin expansion we realized in 2024. Our strong cash position and consistent ability to generate cash through an uncertain macroeconomic backdrop allowed us to pay down $50 million of debt during the quarter. We are on track with the plan we communicated last quarter to reduce debt in total by $100 million to $200 million by year-end. We are deleveraging the balance sheet while making investments in our businesses based on our prioritized portfolio, growth vector selections, and our strategic initiatives. As you may recall, we made strategic structural changes to our R&D organization to share and transplant technologies from one business to another, and to hybridize multiple technologies from the same or different businesses to create differentiated products and solutions for our customers. Although early, we seem to be getting good traction on these fronts, which is helping us innovate more purposefully and differently than in the past. Patent filings increased by 50% in 2024 versus 2023. In 2025, we are on pace to exceed year-over-year patent filings again. We are also collaborating on new launches with our customers, offering them unique and differentiated products. Some examples include our low-temperature chemical forming agents for composite backing and flexible film packaging applications, where we use a proprietary blend to optimize the reaction point of the foaming activity with the melting point of the plastic resin. This results in consistent high-quality, lightweight materials with improved product performance that helps our customers reduce their materials and energy usage while making their operations more productive. Another example from our Engineered Materials portfolio is our ability to create inherently lubricious characteristics in health care materials that promote patient comfort. Our patented technology delivers lower friction and enhanced processability in polyethylene tubing, which is expected to have utility in a wide range of important health care applications, including catheters, peristaltic pumps, CPAP machines, and potential extensions to biopharmaceutical manufacturing. A final example is our patent pending advanced flame retardant materials for enhanced fire safety. Here, we leverage our glass fiber and resin capability to create an inherent inorganic film barrier when exposed to high temperatures greater than 400 degrees Celsius. This product line was launched earlier this year at the International Builders Show initially serving the building and construction and transportation markets, with potential future expansion to other high-value applications in different markets. Before I hand it over to Jamie to discuss the details of the quarter's results and our updated guidance for the year, I wanted to provide a special thank you to our global teams. They continue to persist and execute well with eyes and focus on delivering both short-term quarterly results while doing the things to build for the mid- and long-term future that will make our businesses and capabilities stronger, and more relevant to the changing world. In turn, we will be able to grow both our top line and bottom line in a sustainable manner.

Jamie A. Beggs, Senior Vice President and CFO

Thank you, Ashish, and good morning, everyone. Executing our strategy and playbook for the current environment enabled Avient's success this quarter to deliver both sales and adjusted EPS growth while expanding our EBITDA margin. Looking at the Color, Additives, and Inks segment. Adjusted EBITDA grew 4% on 2% lower organic sales. Weaker demand in consumer, transportation, building, and construction markets more than offset strong growth in health care. Sales for packaging materials, the segment's largest end market, were muted as growth in the U.S. and Canada, Asia, and Latin America regions were offset by lower demand in EMEA. Despite lower sales, this segment expanded EBITDA margins by 100 basis points through favorable mix and cost improvement initiatives. This included ongoing plant footprint optimization and streamlining the segment's organizational structure to better serve our customers. Our Specialty Engineered Materials segment grew organic sales 6%, driven by strong growth in defense and health care. Health care grew double digits with continued demand in our medical device equipment and supplies portfolios. Defense returned to double-digit growth after the tough first quarter year-over-year comparison. In fact, our defense sales were a quarterly record, supported by the recent new product innovations that we highlighted in our February earnings call. SEM's EBITDA was down slightly versus prior year, primarily due to planned maintenance in our Avient Protective Materials business. The maintenance will primarily impact the second quarter, and we anticipate the SEM segment to deliver margin expansion in the second half of the year. Looking at regional performance. I'll start with the U.S. and Canada, where sales increased 1% year-over-year. This growth was led by health care, where we continue to win in medical devices and drug delivery applications as well as strength in defense. This growth more than offset the impact of weaker demand in consumer, transportation, and building and construction markets. In EMEA, sales were down slightly versus the prior year. While health care and defense sales were robust, packaging sales, the region's largest end market, accounting for 26% of the EMEA sales did not experience the typical second quarter seasonal benefit. Asia delivered 3% organic growth, the fifth straight quarter of growth in the region. Strength was across most end markets, notably health care and transportation. Latin America grew 6%, marking its sixth consecutive quarter of growth, which is also notable, considering it's lapping a comparison where the region grew 19% in the second quarter last year. This consistent performance is attributable to our local team who is winning new business and gaining share with global OEMs in the packaging application space. Turning to our guidance for the remainder of the year, we are narrowing our range. The new range reflects the mixed demand conditions we experienced through the first half of the year as well as anticipated demand levels for the second half. Beginning with Q3, we expect third-quarter adjusted EPS of $0.70, which represents 8% growth over the prior year quarter. The earnings growth will be driven largely by higher margins from favorable mix and productivity initiatives. For the full year, we are narrowing the range for adjusted EBITDA to $545 million to $560 million and adjusted EPS to $2.77 to $2.87. This considers our positive performance to date and productivity gains that will have a larger benefit in the second half of the year. This also assumes a year-over-year tailwind from foreign currencies of approximately $2 million in the second half, which compares to a $2 million headwind in the first half of the year. From a demand perspective, the low end of the range assumes a low single-digit revenue decline year-over-year in the second half. The high end of the range assumes low single-digit growth in the second half. As Ashish mentioned earlier, we remain on track to reduce debt in total by $100 million to $200 million this year, having already repaid $50 million in the second quarter. We still expect CapEx for the year of approximately $110 million and free cash flow to range from $190 million to $210 million. With that, Ashish and I will be happy to take any of your questions. Operator, please begin the Q&A session.

Operator, Operator

Our first question comes from Frank Mitsch of Ferminum Research.

Aziza Gazieva, Analyst

It's Aziza, on for Frank. My first question was around tariffs. Do you guys see any prebuying activity pulling on some of the sales from the third quarter into the second quarter? And just how are you guys thinking about prebuying in general?

Ashish K. Khandpur, Chairman, President and CEO

Aziza, this is Ashish. We don't believe we have seen any prebuying in our business. Coming out of COVID, customers have gotten very smart with respect to managing their inventory tightly, especially in an uncertain demand environment, and that's exactly what we are seeing now as well. Going forward, we expect the same. We have very little visibility to our sales orders because our customers expect fast turnaround, and as they're managing the inventory very tightly. So we are still looking at 20 to 30 days of order visibility. But based on what we can tell from everything in the order book and the trends that we have seen in Q3 so far as well, we don't expect to see any prebuying activity going on.

Jamie A. Beggs, Senior Vice President and CFO

And Aziza, maybe to add on, the majority of what we do is for local production in region. So we think our exposure in that regard would also be more limited than maybe others in the space.

Aziza Gazieva, Analyst

Got it. Jamie, could you elaborate on your outlook for raw materials this year? I believe we were expecting about 1% to 2% inflation in raw materials. Is there any update on that?

Jamie A. Beggs, Senior Vice President and CFO

Yes. That view is basically the same. We expect 1% to 2% inflation in the raw material basket. We have seen hydrocarbons come down slightly, but we've also seen some increases in pigments and flame retardants. And as a reminder, about 35% of our raw material basket is from hydrocarbon. So while we get a little bit of benefit, we have to make sure that the rest of the basket is not also increasing. So no substantial change from what we provided in the last quarter update.

Operator, Operator

Our next question comes from the line of Michael Sison of Wells Fargo.

Michael Joseph Sison, Analyst

It was a good quarter. I'm curious about your volume outlook for the second half. Many companies are indicating a challenging second half, and some customers are reducing their inventory. I know you have several strong new product initiatives, so any insights on how your volumes might perform in the second half would be appreciated.

Ashish K. Khandpur, Chairman, President and CEO

Yes, Mike, I'll provide some insights on the markets while addressing your question. Our two main segments, consumer and packaging, represent about 40% of our portfolio. In the first half, consumer was down 4% and packaging was up 3%. We anticipate a continuation of this trend in the second half, concluding with consumer down by 2% to 3% and packaging up by 2% to 3%. Overall, these two segments will likely offset each other, as packaging is a slightly larger business for us. Our growth drivers are health care, defense, and telecommunications, with defense up 5%, health care up 14%, and telecommunications up 7% in the first half. For the second half, we expect high single-digit to double-digit growth in these three segments as well, aiming to complete that 20% of the portfolio in that same range. The other four markets—industrial, transportation, building and construction, and energy—are expected to range from minus 1% to plus 1%, balancing each other out for a flat finish. Overall, for the second half, we forecast growth similar to the first half in the health care, defense, and telecommunications sectors. Regarding volume, we anticipate improvements in the second half, particularly for the SEM business, which showed positive volume and pricing trends even in the second quarter. We expect this positive trend to strengthen as we move later into the year.

Michael Joseph Sison, Analyst

Got it. And then as a quick follow-up, the EMEA portfolio is certainly looking more stable than others. I think your outlook for EBITDA is still up year-over-year, where several are going to be down quite a bit. When you think about demand getting better, if ever, we hope it gets better. What type of leverage do you think you'll get off that volume and EBITDA growth longer term?

Ashish K. Khandpur, Chairman, President and CEO

Obviously, demand is going to help us a lot. As you see right now, a lot of our EBITDA increase in our projections is driven also by productivity, which will continue to be part of the playbook going forward. As you think about our productivity of $40 million, that's about 1.2% of sales. So that's something that we should expect year after year from a company like ours. As our portfolio is changing to a better mix because of our growth vectors, which are more profitable, I expect that a higher leverage to the EBITDA margins is going to come down. So over time, as the volume grows, we expect the mix to get better, and our EBITDA margins to improve as well.

Operator, Operator

Our next question comes from the line of Ghansham Panjabi of Baird.

Ghansham Panjabi, Analyst

I guess just building on the last question on the consumer weakness. Can you just give us a sense as to how that has evolved as the year has unfolded? From a high-level standpoint, have the number of categories you sell into broaden as it relates to the weakness? Or is it a shift geographically or a combination of the two?

Ashish K. Khandpur, Chairman, President and CEO

Yes. So Ghansham, I mean, at a macro level for Avient, consumer was flat in the first quarter, and it is down 8% in the second quarter. If you look at it specifically, the United States and Canada is our biggest consumer market, which was down double digits in both Q1 and Q2. So that's what's driving the consumer results. Essentially, we are seeing weakening of consumer because, in the first quarter, consumer was positive in remaining geographies, except for the United States and Canada. In this quarter, apart from Latin America, we are seeing weakness in consumer in all other three geographies. Consumer is certainly getting worse from our customers' insights, and we see that in our numbers. That's how we have projected in the second half of the year as well; we expect consumer to stay negative year-over-year, and that's built into our numbers.

Ghansham Panjabi, Analyst

Okay. And then I'm sorry if I missed this, but did you quantify the impact of the maintenance on the second quarter on an EBITDA basis for the SEM segment? And then just separately, on the debt paydown target of $100 million to $200 million, why is that range so wide in context of the free cash flow generation for the year net of the dividend?

Jamie A. Beggs, Senior Vice President and CFO

Ghansham, so from a planned maintenance perspective for APM, the impact within the quarter is around $3 million. Like Ashish mentioned earlier, we expect that to basically just impact Q2, and margins will continue to expand when we get to the back half of the year for SEM. Regarding the debt paydown, I think it's just us being a little bit conservative to ensure that the macro environment plays out like we want to. Our goal is to definitely continue to pay down debt in the back half of the year. Still, we are also going to be cautious with our balance sheet and just ensure that that cash does come in. We're confident in that. That's why we made the paydown in the second quarter of $50 million and expect more to come as we get to the back half.

Operator, Operator

Our next question comes from the line of Kristen Owen of Oppenheimer & Company.

Kristen Owen, Analyst

So I wanted to follow up on the tariffs, but maybe from a slightly different angle. I understand that your tariff exposure is relatively limited. But with the uncertainty only increasing, I'm wondering if you're seeing pressure from your customers to help absorb more of their tariff costs. I know Avient has been good at historically pricing for value, but I'm just wondering if that's becoming any more difficult in this environment?

Ashish K. Khandpur, Chairman, President and CEO

So maybe I can take a stab at it and then, Jamie, if you want to add something. Essentially, if you think about our raw material bucket, overall, yes, we are seeing pressure on the pricing and to lower pricing because of these increased tariffs. We are doing everything from working with our suppliers and for our customers to either qualify new materials or alternatives or try to bring down the cost somehow. In some cases, we are not able to do that. If you look at the raw material perspective, the commodity polymers, the polyethylene and polypropylene raw material side, we are not seeing much price increases on that front. Actually, there's excess capacity. So we are seeing a slight positive favorable price piece on that part. The piece where we are seeing more pressure is on the pigment side as well as certain performance materials, both of which are about 15% each of our portfolio of our raw material purchases. There, we are seeing low to mid-single-digit kind of price increases. In the case of specifically, flame retardants, which is a very specific material that goes into our wire and cable business, we are seeing significant increases because of supply constraints. In such cases, we pass that on to our customers. The price increase we are talking about is almost more than 3x versus last year and more than 6x versus the year prior. That's purely driven because that material largely comes out of China, and there's a tight supply situation there. In most cases, we are trying to work very closely with our suppliers and customers to keep the pricing the same. However, we are unable to cover everything by doing the substitutions. In cases where we are not able to do that, we are able to pass the price on to our customers.

Kristen Owen, Analyst

That's really helpful. And then this is for Jamie. It's a little bit in the weeds, but just following up on the balance sheet piece of this. You guys took out a new revolver in the quarter. My impression when that came out was that, that revolver was perhaps a little bit misunderstood by the market regarding what the function of that was. Can you just provide a little bit of background on that instrument and what that does for your balance sheet?

Jamie A. Beggs, Senior Vice President and CFO

Yes. Thanks, Kristen, for the question. So we basically converted our asset-based loan to a cash flow revolver, and part of that was just an evolution of our debt profile. When we had our distribution business, we had a lot more, I would say, receivables and inventory to be able to secure the asset-based loan. With that divestiture, it took down the total capacity that was available. In order to ensure that we had, I would say, adequate liquidity, cash flow revolver was a better option for us. In essence, it actually did increase our available liquidity, which was to the same amount that the asset-based loan would have been with the distribution business being in the business. The cost between those facilities is roughly the same. It was just a measure to ensure that we had the liquidity that's commensurate with the size and the exposure that Avient has.

Operator, Operator

Our next question comes from the line of Mike Harrison of Seaport Research Partners.

Michael Joseph Harrison, Analyst

Ashish, I was wondering if we could dig in a little bit on the health care portion of your business. Can you give us some color on what portions of that market you're seeing the best growth? I'm also curious, you noted some new product introductions. How long does it take to qualify new materials in health care as opposed to maybe some of the less regulated markets that you serve?

Ashish K. Khandpur, Chairman, President and CEO

Thank you for the question, Mike. The trend in health care has been very positive. Last year, we experienced an 11% growth in health care year-over-year, and we maintained that growth in Q1. In Q2, we saw an increase to 17%, indicating a strong trend. Growth is occurring in both our Supply Chain Management and color segments within health care. If we look at our health care portfolio, 80% is focused on three main markets: medical equipment, medical devices, and medical supplies. This includes items like continuous glucose monitoring devices, CPAP machines, catheters, and tubing, along with drug delivery solutions such as injector pens and inhalers. Each of these three categories has grown over 20% in Q2. We’re benefiting from macro trends related to obesity medications and continuous glucose monitoring. We believe we are in a strong position, as these products are specified, providing good visibility, and demand remains robust. It's important to note that the regulatory approval process for health care products typically has longer cycle times because of FDA regulations. Our teams have been working with customers on new product launches for the past 5 to 6 years. In comparison, product qualification can take just a few months in less regulated sectors.

Michael Joseph Harrison, Analyst

All right. Very helpful. And then on your guidance slide here, you noted one of your potential decelerators is slowing in Asia led by China. Can you talk about the trends that you're seeing in key markets in China right now? What are some signals that you're watching for that may indicate a need for caution in the second half?

Ashish K. Khandpur, Chairman, President and CEO

Yes. I think there are two pieces. The color business in China is one end and there is a little bit of pressure. As you might have heard, the government is trying to optimize capacity. People are not cutting each other and creating unnecessary deflation in material. The China government has implemented a supplier structural reform policy that they're enforcing, leading to consolidation in automotive and EVs, which are excessive there. The government policy is causing tighter credit along with increased payment durations for suppliers in China, which leads to business consolidations or shutdowns. This impacts our business, so we have to monitor that closely. We predict that in Q3, we will continue to see those pressures in China. However, some good developments are happening in the SCM side where we see stronger growth on high-performance computing with the rise of artificial intelligence, and we are trying to gain more share there to offset any downside from the color side.

Operator, Operator

Our next question comes from the line of Laurence Alexander of Jefferies.

Laurence Alexander, Analyst

Just a question about some of what we talked about in health care and just the new products in general. I was wondering if those longer lead time products have higher incremental margins or if margins in general for newer products are substantially higher than the old ones? How should we think about it in terms of modeling as new products become more prevalent?

Ashish K. Khandpur, Chairman, President and CEO

Yes. Laurence, I think the answer is yes. And that's one of the main reasons why we, when we presented our strategy at the Investor Day, identified health care as one of our growth vectors, specifically the drug delivery part and the core medical part. It's a sticky business. Once you get specified, you keep the business as long as that version or material is available. If well-maintained, good quality and service creates a competitive advantage for us. Overall, it is very accretive to our business, which is favorable.

Laurence Alexander, Analyst

Have you quantified the difference for new products? Is it 10% higher, 1,000 basis points higher? How should we think about it just in terms of modeling as new products become more prevalent?

Ashish K. Khandpur, Chairman, President and CEO

I think overall, our intention of developing new products is to have margin accretive products. I won't talk percentages here, but that's how we are going to improve our margins through both innovation and charging for the value that we create for the customer. That’s a primary reason we expect our margins to continue to expand.

Operator, Operator

Our next question comes from the line of Turner Hinrichs of Morgan Stanley.

Turner Wills Hinrichs, Analyst

This is Turner Hinrichs on for Vincent. I was wondering if you could provide a little bit more context for durability of some of the growth vectors between health care, defense, and telecom. For instance, are there reasons to believe that the health care outgrowth, which has been really fantastic as you described, will continue over the near to medium term? Can you provide some context so that we can get a better handle on the go-forward outlook for these growth drivers?

Jamie A. Beggs, Senior Vice President and CFO

Turner, as we look at the underlying applications that we sell into health care, those include respiratory care, glucose monitoring devices, drug delivery, labware, catheters, and syringes. All of those particular sub-markets provide, I would say, strong long-term growth potential. While I can't promise it will be growing double digits every single year, this has been a good growth opportunity based on innovative platforms Ashish mentioned earlier. We do feel that there is strong growth potential that will continue into the foreseeable future.

Turner Wills Hinrichs, Analyst

Great. One other one unrelated. Margins are down roughly 220 basis points year-over-year in SEM. If I remove the $3 million of maintenance that you mentioned in the second quarter, can you provide a little more color on either mix or spreads in that segment? What's driving the margin reduction on a normalized basis to better understand where margins should be in the second half, in particular?

Jamie A. Beggs, Senior Vice President and CFO

Yes. From a margin perspective, the majority of the decrease on a year-over-year basis is because of the planned maintenance. We also had some higher-cost inventory that flowed through that also compressed margins to some degree. As we look into the back half of the year, we do expect margin expansion. In fact, as I look forward, it would likely be closer to 100 basis points year-over-year. When we get to the second half of the year, obviously, for the full year, that may be tamped down because of the Q2 planned maintenance. However, we expect it to continue to expand because we don't have these one-time impacts that occurred in Q2.

Operator, Operator

Thank you. Ladies and gentlemen, that does conclude Avient Corporation's conference call. Thank you for participating. You may now disconnect.