Avient Corporation

Good morning, ladies and gentlemen, and welcome to AVN Corporation's webcast to discuss the company's third quarter 2022 results. My name is Catherine. 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 like to turn the call over to Joe DeSalvo, Vice President, Treasurer, and Investor Relations. Please proceed.

Thank you, Catherine, and good morning to everyone joining us on the call today. Before beginning, we'd like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Please refer to the investor presentation for this webcast for a number of factors that could cause actual results to differ. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on the Aviant website where the company describes the non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures. Joining me today is our Chairman, President, and Chief Executive Officer, Bob Patterson. and Senior Vice President and Chief Financial Officer, Jamie Begg. Now I will turn the call over to Bob.

Thanks, Joe, and good morning, everyone. On September 27th, we issued a press release to provide revised EPS projections for the quarter and the year. Our projections were updated to include the acquisition of DSM protective materials, present the distribution business as discontinued operations, and adjust our outlook to reflect current demand conditions and weaker foreign exchange. At the time, we said the war in Ukraine and related energy supply concerns had significantly eroded consumer sentiment and demand in Europe. And we had not seen a recovery in Asia from the COVID-19 lockdowns in the first half of the year. And also that the economic environment was further challenged by rapidly rising interest rates in the U.S., which have negatively impacted demand trends in the Americas. In addition, we believe current global demand is likely further weakened by customer inventory destocking. And all of this remains true today, with further weakness now expected as a result of recently announced COVID lockdowns in China. And you may have read about that in connection with major manufacturers like Foxconn and the implications for brand owners like Apple. but they are even further reaching than that. And we will certainly provide more color on each of these areas as our call progresses today. From a headline perspective, we are reducing our full-year adjusted EPS guidance to $2.60. There's an additional $0.05 change to the pro forma estimate related to modeling, not demand, which Jamie will cover in her remarks. Economists may debate the technical definition of a recession, but that is academic. we are experiencing lower demand for the reasons that I just mentioned, and that's happening now. And so to help ground us on the state of preparedness, I really want to just spend a few minutes reminding everyone of the portfolio changes that we have made in the last few years and acknowledge the tremendous amount of change that has taken place since we last spoke. I'm extremely proud of what we have accomplished these last few months against this backdrop of challenging dynamic and macroeconomic circumstances. We achieved two key milestones, which are part of a much bigger transformational story. I'm very pleased that we have been able to acquire DSM Protective Materials, now named Avian Protective Materials or APM, and add the world-renowned Dyneema brand to our portfolio. In doing so, we have substantially increased our presence in the composite and fiber space, adding important technologies to our sustainable solutions portfolio. When we announced the deal in April, you'll recall that we also announced we were going to explore a sale of our distribution segment. And we did this for three reasons. First, I believe there was a perception potentially held by investors and potential buyers that we wouldn't sell distribution. Announcing the potential sale was really an effective way to gauge the broader interest in the business. It publicly put all potential buyers on notice that we were going to run a sale process. which quickly became competitive. The second reason was I wanted to convey the sale as a potential next step on our multi-year journey to becoming a pure play specialty formulator. You know, our distribution business had been part of our company since it was created back in 2000. Though it was not a formulation business, it did play an important role in our growth story and certainly helped us fund our specialty investments. As you saw from our announcement yesterday, The divestiture of distribution is now complete. I'm really pleased that distribution has found a good home with HIG Capital as they will continue to represent Avian in the marketplace as a distributor for certain materials in our portfolio. And the third and final reason for announcing the sale and ultimately proceeding with it was so that we could remain modestly levered, which would protect us in a downturn while also providing capacity for future acquisitions when the time is right. And we did what we said we would do. We are using the proceeds from the distribution sale to pay down debt. We remain modestly levered, have no near-term maturities of debt, and substantial liquidity. In short, we are very well positioned to navigate these challenging near-term market conditions. Demand is down, and all signs point to a recession. This is reflected in current equity market sentiment, as share prices are down, including avian. And perhaps some element of our particular situation is effectuated by all these changes in the last few months. Recall that just a few years ago, there was another important portfolio shift we were executing, and this kind of reminds me of this similar dynamic. In 2019, we divested a legacy business segment of the original Avian called Performance Products and Solutions, primarily constituting our GM brand and PVC-based materials. A few months later, we announced our agreement to acquire Clearance Color Business. You know, at the time, both transactions were very well received. That is, until the pandemic hit in early 2020. Although it was a different impetus, A very similar environment ensued with market disruption, volatility, and uncertainty. Despite prevailing market fears during the early days of the pandemic, we confirmed that we would stay the course with respect to Clarion and our strategy. We knew that the Clarion color acquisition was the right one and that it would create value for the near-term and long-term. And it certainly has. We bought a business that generated around $130 million of EBITDA. And today, the acquisition plus synergies are adding just over $200 million two years later. EBITDA margins have expanded from around 12% to over 16%. And in terms of our purchase price, it has dropped as a multiple from 10.8 to just over six times. What I think is most compelling about the deal, however, really is the combined strength of the Legacy Clariant and Legacy Poly One businesses and that we've been able to create an enterprise that was better prepared to take care of customers during the COVID pandemic and take share. We are the number one provider of specialty color and additive solutions today. And it's an important reminder to stay the course in good times and bad, just as we are right now. Clariant Color and APM are the two largest acquisitions we have done, but we've also established a track record of bolt-on acquisition success, from thermoplastic elastomers to specialty colorants and performance additives to building a now thriving composites business from scratch. Acquisitions have played an important role in transforming our portfolio, and so have divestitures in which we exited businesses along the way that were more commodity and volume-driven. The following slide provides a snapshot of Bolton acquisition performance for established deals that we've had for over seven years. And the value creation story is similar to that of Clarion, but it's also rooted in our invest to grow approach to integration. We invest heavily in commercial excellence. This is often an under-invested area of smaller companies that we identify. Yet it offers tremendous opportunity for Avian and our customers. We increase sales, marketing, and R&D resources, then train employees and provide them the tools they need to serve customers with the highest levels of innovation, service, and delivery. The growth and value creation of those businesses are significant. And when combined with the historic change in culture, philosophy, and the way we go to market, we really are now a pure play specialty formulator of sustainable solutions. It's what we've been aiming for all these years, but not because it's a finish line. In fact, I really view this as a launching off point for us as a preeminent global leader in sustainable solutions. Not many people could have imagined back in 2005 we'd be where we are today. And that specialty transformation of our company ran in natural parallel with our goal to improve our end market mix. If you went back to 2006, presented on the chart on the left, you can see that the preponderance of our revenue was in housing, auto, and industrial. Fast forward to 2022, and the end markets have changed dramatically. In the pro forma view on the right, over half our revenues now come from consumer, packaging, and healthcare. And with Dyneema, we add protecting men and women in the military and law enforcement with defense applications. Here's another telling illustration of what moving from volume to value looks like as segment EBITDA margins have expanded substantially. This is aggregated on slide 13, where you can see the total lift in EBITDA and margins over this time period. And on the next slide, you can see that as earnings have expanded, so has the cash we have returned to shareholders. A few weeks ago, we announced our 12th consecutive year of annualized dividend increases. an impressive record we're extremely proud of. With the recent and significant acquisitions of Clarion and APM and our focus on delevering, we haven't bought back a lot of shares in the last couple of years, but over a longer time horizon, we certainly have. All told, we have returned over $1.5 billion in cash and dividends and buybacks. It's quite a story of growth and transformation through periods of immense macroeconomic and geopolitical and personal stress beginning with the Great Recession in 2008 and 2009, including the COVID pandemic, which continues to challenge the world and now the events of today. And I think this is an incredibly important context to remember as we consider the current market conditions. I believe we've never been in a better position to handle challenges like the ones before us. And the reality is that business is down and we're not immune to it. I think this is exacerbated in the near term by these COVID lockdowns in China and customer inventory to stocking, which is taking place to a degree I have not seen before. I think much of this may be a correction in post-COVID buying behavior as well as the real effects of inflation and the impact that is having on consumer spending and sentiment. Jamie is going to provide more details on our financial performance as well as how we are navigating these current trends. Jamie?