Avient Corporation

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Good morning, ladies and gentlemen, and welcome to AVN's Corporations webcast to discuss the company's 2022 fourth quarter and full year results. My name is Katherine, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will have a question and answer session following the company's prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Joe 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 give current expectations of 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 statement. Please refer to the investor presentation for this webcast for a number of factors that could cause actual results to differ. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on Aviant website where the company describes non-GAAP financial 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'll hand the call over to Bob.

Thanks, Joe, and good morning. Today we reported fourth quarter adjusted EBITDA of $107 million and adjusted EPS of $0.42. Orders were slightly better than expected in Europe and Asia, and we saw an uptick in December orders for composites, including Dyneema used in personal protection applications. This, in combination with better margins, led to adjusted EPS of 269 for the year, which exceeded our prior guidance of 260. That being said, the fourth quarter was certainly a challenging one, as global demand conditions and inventory destocking negatively impacted nearly every industry and region, resulting in a year-over-year decline in EPS. We focused on controlling costs and reducing working capital. During the quarter, we generated $120 million of free cash flow, ending the year with total free cash of $290 million. We put this extra cash to work by paying down an additional $200 million of variable rate debt. That debt to EBITDA leverage ended at 2.9 times, which is below our previous expectations of ending the year at 3.1. This is really important as the strength of our balance sheet will be an asset while we navigate through these uncertain times. We have no near-term debt maturities, expect to deliver strong pre-cash flow in 2023, and an objective to keep leverage below three times for the foreseeable future. Despite the challenges in the second half of the year, I'm incredibly proud of what we accomplished in 2022. We completed two transformational deals with the acquisition of Dyneema and the sale of our distribution business. These enabled us to significantly increase the size of our composites platform, which is a key growth driver for the company, allowed us to strengthen our balance sheet by paying down debt, and improved total company EBITDA margins to 16%, the highest in company history. Growth and investment in composites has been a significant part of our transformation. In the early years, we invested in promising technologies as well as commercial resources to expand the potential of the next generation of wood, glass, and metal replacement, often for smaller niche and yet underserved markets and customers. Our reach and applications expanded from outdoor high performance to electrical components and composites for 5G fiber optic cables. With Dyneema, we certainly more than doubled down. With the world's strongest fiber, we added market-leading capabilities and personal protection, marine and sustainable infrastructure, and composites now makes up over half of the SEM segment. This really has been a deliberate journey to acquire technologies that expand the breadth of our products. These include flexible tapes and panels, engineered fibers that provide design freedom and world-class strength. These applications offer our customers sustainable solutions by providing stronger, lighter, and more durable materials. The benefits include increasing longevity, reducing energy use, and lowering carbon emissions, while also improving human health and safety. The following slide highlights the performance of our composites platform over the last six with Dyneema showing pro forma in 2022. Clearly a significant increase in contribution from these technologies, which has underpinned our broader transformation over the last 15 years. That specialty journey began in 2006. It involved the sale of more cyclical and commodity-type businesses and investing in specialty technologies that deliver greater value to our customers. The result has been a substantial expansion of EBITDA margins and adjusted EPS. Another important driver for us has been our increased investment in sustainable solutions. ABM strives for leadership positions in each of our four Ps of sustainability. We measure ourselves against top-tier standard-setters such as ACC Responsible Care and the UN Global Compact, and we have set aggressive 2030 sustainability goals with action plans behind each. The positive strides we have been making in this have since been recognized by leading institutions, rating agencies, and other third-party organizations. And you can see some of our current scores listed here placing us in the top tier in our industry. We were proud to be named one of America's most responsible companies in Newsweek's annual listing. Out of 2,000 companies, Avian ranked 22. But to be clear, at Avian, we don't just invest in sustainability because it's the right thing to do for people and our planet. We invest in sustainability because it drives growth. And we also invest in our culture by focusing on safety, embracing diversity and inclusion, developing our associates, and actively engaging the communities where we live and work. These attributes create a culture where people are proud to work for Avian. This is validated through our annual employee engagement surveys administered by the Great Place to Work Institute. In the fourth quarter, we conducted our latest. And I'm very proud that we were again certified as a great place to work, achieving the highest employee engagement scores in the history of the company. And this survey included our newest associates from the protective materials business, which is really just another point of validation that our integration efforts are going very well. I'm sharing this with you today because we shouldn't underestimate the importance of culture. I believe culture is everything, especially in uncertain times like we face today. Companies with the strongest cultures are better positioned to navigate a recession and come out on the other side even better, and that's what we plan to do. I'll now turn it over to Jamie to provide some additional details on our 2022 results and provide our initial outlook for 2023, and then I'll provide some closing comments.

Thank you, Bob. The strength of our culture has certainly been an asset, especially as we have grown through significant acquisitions. It's the foundation of how we execute our strategy and stay the course even when the macro environment is challenging. As Bob shared earlier, the fourth quarter ended slightly ahead of our projections. That being said, demand went down in just about every region. The war in Ukraine and concerns about energy availability negatively impacted consumer sentiment in Europe. China was constrained by its zero COVID policy, and while the government relaxed its policy during the fourth quarter, the region has yet to recover. Globally, rising interest rates and inflation have further weakened demand. The EBITDA bridge shown here highlights the negative impact of lower demand, as well as higher energy costs and negative foreign exchange. These were partially offset by the net benefit of our pricing actions, a reduction in SG&A costs, as well as synergies associated with the clearant color acquisition. Free cash flow generation has been an enabler for our company, with this year being no exception. This slide shows our historic free cash flow generation. The bars on the chart represent free cash flow dollars, while the blue dots represent Avian's free cash flow conversion percentages. For comparative purposes, we also added the free cash flow conversion percentage for the S&P 500 as a green line. The data illustrates that we consistently generate strong free cash flow in any macroeconomic environment, there continues to be an upward trend looking specifically at 2022 disciplined working capital management resulted in 120 million dollars of free cash flow during the quarter and over 290 million for the full year this has allowed us to quickly deliver to below three times providing us with a strong balance sheet to navigate the year ahead our performance during the year was really a tale of two halves we started the year with good momentum coming off a record 2021 But as we entered the second half, the weakening global economy and headwinds from FX resulted in full year earnings of $3.04, slightly better than the prior year. Excluding the negative impact of foreign exchange, we grew sales and EBITDA in the mid-single digits and increased EPS by 9%. Both segments contributed to the growth in sales and earnings year over year, excluding the impacts of foreign exchange. Color's top line growth was slightly less than SEM, as it had a larger exposure to Europe and virtually all of our import sales into Russia that ceased in 2022 were color applications. Color was able to increase EBITDA 4% year-over-year, driven by pricing excellence, as well as lower operating costs associated with the Clarion color synergies. SEM's EBITDA grew 2%, excluding foreign exchange, as growth in composites and improving mix was able to offset lower demand in consumer applications and higher energy costs in Europe. This next slide puts in perspective the full year EPS impacts of foreign exchange translation, exiting import sales in Russia, and normalizing demand in outdoor high performance applications. As you can see, each of these factors had a meaningful influence on the year. Starting at the top of the list, our foreign exchange exposure is primarily driven by the Euro, which traded at below a dollar for several months in the back half of the year. Further, our import sales into Russia of approximately 25 million annually essentially ceased, as I mentioned previously. The combination of these items plus the normalization of certain outdoor high-performance applications were offset by solid underlying performance in the business segment. Earlier, we showed you an EBITDA bridge from a Q4 perspective. This schedule mirrors that format, so you can see those same factors on a four-year basis. The majority of the decline in demand occurred late in the third quarter and into the fourth quarter. What's most impressive about this bridge, however, is the magnitude of the raw material inflation we experienced during the year and the impact of significant wage and energy inflation. What you will find is that we more than covered these extraordinary costs with pricing initiatives that began early. In fact, we have more than covered inflation since the start of 2021, and this focus on commercial excellence has enabled us to realize a net benefit which lessened the impact of lower demand. You also see significant benefits from the synergies associated with the clearant color acquisition, as well as cost control initiatives. Let's now turn to 2023. We are assuming recent demand trends continue into the first half of this year. While energy costs have moderated in Europe, we believe longer-term fears about the war in Ukraine and the future energy availability will weigh on consumer sentiment for the foreseeable future. We think it is a positive that China is in the process of reopening, but that has brought complications of its own with respect to an increase in COVID infections and uncertainty about how businesses will pick up following the Lunar New Year. It is also a positive that inflation in the U.S. is moderating, and it appears that the Fed is slowing the pace of interest rate hikes. The recent jobs report is also a reflection of the strength of the economy, but is a lagging indicator which doesn't reflect the myriad of recent layoff announcements made by many companies. How certain customers and certain industries respond to these changing market dynamics remains to be seen and likely to be bumpy as the Fed tries to softly land the economy. All of the above factor into our first half modeling, which has sales and corresponding bottom line results below the prior year. We expect first quarter sales of 845 million and adjusted EPS of 55 cents per share. Our second half modeling assumes modest growth, says that our full year guidance is just under 3.5 billion of sales, an EPS of $2.40 per share. We expect to generate free cash flow of $200 million and end 2023 with net debt to adjusted EBITDA under three times. This is inclusive of strategic investments that will allow us to further integrate our recent acquisitions and provide CapEx needed to streamline operations, particularly in Europe, to lower operating costs. Our efforts to generate cash and reduce leverage are rooted in how we're going to win in this downturn. We are focused on protecting and growing our market share, optimizing our cost structure, and investing strategically in areas that will create long-term shareholder value. I'll now turn it back over to Bob for some additional comments.

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

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from Frank Mitch with Ferrium Research.

Your line is open.

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

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

But over by the end of the first quarter?

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

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

I think, like in my remarks, I really commented that I think we're being conservative with respect to margins. I think that there is upside potential with respect to raw material deflation. As you know, I've been here for a number of years, and we've typically done very well in that type of an environment. We haven't obviously seen that for a few years, so we'll see how that plays out this year. But then with respect to the guidance and how we put that together, I feel like that is, at this point, just sort of a prudent position to take with respect to where demand is. So at this point, we're kind of modeling that demand is down for the year, as Jamie framed significantly in the first half, but picking back up in the second half. So probably the best way I can just Obviously, we've got second half growth assumptions based on the economy getting better at that time.

Thank you so much.

Thank you. One moment for our next question.

Our next question comes from Michael Sison with Wells Fargo. Your line is open.

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

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

Got it.

And then... You may be clear. By flat, I mean similar.

Sequential.

Yes, yes. And then you gave guidance of 125 EBITDA for the first quarter. You know, implies you need a better second half. And I guess the second half improvements is really just driven by better volume versus anything else? Meaning, is there other things that could help drive that better second half besides, you know, better demand?

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

Got it. Thank you.

Thank you. Our next question comes from Mike Harrison with Seaport.

Your line is open.

Hi, good morning.

Bob, I had a question on the composites business. The pro forma slide that you show says that it's about a 25% EBITDA margin business for 22. Is the plan to grow at that kind of mid-20s EBITDA margin? Or should we think of there being some operating leverage or price cost opportunity to get margins higher over time? Just kind of curious if you have an EBITDA margin target for composites longer term.

Longer term, it should be higher than 25%. And, you know, last year, in particular, our business in Europe was negatively impacted by higher energy costs, including gas. the Dyneema business, and so that impacted margins in 2022. As energy costs abate here or at least flatten out, hopefully that becomes a little bit better comparable in 2023. But as you know, what we presented before on the pro forma basis, Dyneema has historically operated above that, and I really believe the same could be true for the balance of our composite businesses as well.

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

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

All right. Thank you very much.

Thank you. And our next question comes from Angel Castillo with Morgan Stanley.

Your line is open.

Hi, thanks for taking my question. I was hoping you could give us a little bit more color just on the order trends as they kind of have developed, you know, in January, February, and just roughly what you're seeing kind of in terms of early orders for March.

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

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

Yeah, look from an energy standpoint, and I'm going to kind of give you a global view of this. Okay, so clearly it varies by region, but total energy costs were up 35%. That was actually about $20 million in 22 versus 21. In fact, we probably could have split that out on slide 17 of this deck that we had. That's in the segments right now. We have energy costs going up about 6% in total for 23 versus 22. Obviously, that has some level of skewing here in the first half compared to last year, and then we'll see how that plays out in the second half. Obviously, right now, I would say Europe is feeling a lot better with respect to getting through the preponderance of this winter and where energy stores are right now, and hopefully that provides some relief in that region. And then, look, with respect to raw materials and, you know, we are obviously seeing some deflation as we go into this year. We've modeled a little bit of that. I really couldn't put a quantification to it, but would say that there is more opportunity there. And, you know, as I said in my prepared remarks, we're just kind of balancing that with uncertainty around demand. So we'll see how that plays out in the next, you know, couple of months and hopefully can give some more clarity on that on our first quarter call.

Got it. And then on the cost savings side?

Oh, I'm sorry if I missed that latter part of that thing. So in total, there is about, if I just look at reductions in costs, there are some things that we have as inflationary costs. If I look at the net of cost reductions and some inflationary items, that's about $24 million. As I said, that kind of really starts to play in here in the second quarter with respect to the timing of those and then through the balance of the year.

That's very helpful. Thank you.

Yeah, sure.

Thank you. And our next question comes from David Wong with Deutsche Bank.

Your line is open.

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

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

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

Really, the expectation is that, you know, we kind of maintain a level of working capital commensurate with sales. So we look at that as a percentage of sales. I don't really see that changing meaningfully as a percentage through the course of this year. Obviously, we did generate a lot of cash here in the fourth quarter of 2022. I think our free cash flow number for the year is 200. That's what we have. Sorry. For 23. For 23, yeah. Yeah, so a little bit of working capital on that, but mostly it's just EBITDA converted.

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

The modeling assumes basically flat working capital for the full year. Okay, thanks.

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

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

Yeah, I guess in the, remind me if I don't get the second half of your question answered as I address the first. So, I think really one of the things that, you know, we did well was that we went early and often really going back to, you know, you know, the end of 2020, the beginning of 21. And, you know, just we're routinely getting price. And I think that was across the board in all regions and all businesses. So there wasn't any moment in time where we just really raised prices in a particular quarter. I think we just did that steadily over time. In our prior quarter remarks, it really said that I think peaked in the third quarter. Obviously, with demand coming down and changes in supply dynamics, and now you're kind of seeing raw material deflation as a result. So that just kind of, I think, puts things into perspective with respect to what we did over time that helped us to deliver the results that we did in 22. So it wasn't necessarily just something in 22, but things that started even before that. We do have a small, I think, positive price mix. number in the model right now. And look, as I said, that if we do better from a raw material standpoint in 23, that could be better than what we have modeled today, being conservative in that regard.

You touched on the moving pieces, which is the back half of the question. What's the spread?

um throughout the year but i i guess if i could ask then just my follow-up is um your ability to maintain that degree of pricing capability in a deflationary environment and obviously from your own cost perspective you're going to manage what you can but just how you view that pricing capability in this type of environment

Yeah, I mean, look, when demand is down, I think that's when you see the most pressure on price. And, you know, I think that historically, you know, we have made accommodations where we have needed to or felt like that was prudent to do. You know, we've also visited formulations with our customers to look at lower cost alternatives if that is an option for them as well, which can sometimes happen. maybe a lower price but better mix or a change in mix anyway. So look, historically, I think we've done very well in periods of deflation in terms of maintaining and or lowering prices at a slower pace than what we see from a deflationary standpoint. It really does vary greatly by end market and application. It's kind of hard to paint a broad sweeping generalization around it, but that's the best thing I can probably say in that regard.

That's very helpful. Thank you so much.

Our next question comes from Lawrence Alexander with Jefferies.

Your line is open.

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

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

Thank you.

Yep.

Thank you.

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

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

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

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

Could you give me that timeframe? Did you say for a quarter?

Yeah, during the quarter, how utilization declined and then what you're expecting for first half for master batch operating rates.

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

Thank you.

Yep.

Thank you.

And we have a question from Vincent Anderson from Stiefel. Your line is open.

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

Yeah. I mean, look, some of our businesses do have a seasonal pattern to them, and I don't know that that necessarily applies to historically what we've seen for personal protection. I think that is sort of demand agnostic, if you will, across the quarters. That's probably not the right word, but I don't really think there's a seasonal element to that. I do think that there are trends that are resulting in higher levels of personal protection gear, particularly with respect to the military and war in Ukraine, for example. Many countries have been stepping up the level of investment that they're making in their own defense applications, and we are really just starting to see that, I think, in the fourth quarter. In fact, as we were discussing Dyneema through the course of the year, there was some potential that that might have started to happen earlier. It didn't, but I think maybe Q4, we started to see a little bit of that, and that has got upside potential for us in 23.

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

Yeah.

I couldn't actually break the portfolio down for you by elective versus non-elective. really it's actually hard for us to even determine where things go but for the most part you know we are in medical devices drug delivery devices minimally invasive catheters and applications like that as well as some pharma and pharma related packaging right which is respect to health care so i do think that there is a fair amount of that that is exposed to uh discretionary spending So not necessarily just elective procedures, but also the amount of money that people are willing to spend, you know, on related healthcare, almost personal care type items. So right now I'm kind of viewing that as a potential challenge for 23. That's what we've actually built into the model. I don't think it looks like it did in 2020 when people just flat out didn't go anywhere, but I think it's a possible challenge for 23.

Okay. Understood. Thank you.

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

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

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Thank you. Thank you. Thank you.

Good morning, ladies and gentlemen, and welcome to AVN's Corporations webcast to discuss the company's 2022 fourth quarter and full year results. My name is Catherine, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will have a question-and-answer session following the company's prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Joe 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 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 or 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 Avian website where the company describes non-GAAP financial 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'll hand the call over to Bob.

Thanks, Joe, and good morning. Today we reported fourth quarter adjusted EBITDA of $107 million and adjusted EPS of $0.42. Orders were slightly better than expected in Europe and Asia, and we saw an uptick in December orders for composites, including Dyneema used in personal protection applications, This, in combination with better margins, led to adjusted EPS of 269 for the year, which exceeded our prior guidance of 260. That being said, the fourth quarter was certainly a challenging one, as global demand conditions and inventory destocking negatively impacted nearly every industry and region, resulting in a year-over-year decline in EPS. We focused on controlling costs and reducing working capital. During the quarter, we generated $120 million of free cash flow, ending the year with total free cash of $290 million. We put this extra cash to work by paying down an additional $200 million of variable rate debt. That debt to EBITDA leverage ended at 2.9 times, which is below our previous expectations of ending the year at 3.1. This is really important as the strength of our balance sheet will be an asset while we navigate through these uncertain times. We have no near-term debt maturities, expect to deliver strong pre-cash flow in 2023, and an objective to keep leverage below three times for the foreseeable future. Despite the challenges in the second half of the year, I'm incredibly proud of what we accomplished in 2022. We completed two transformational deals with the acquisition of Dyneema and the sale of our distribution business. These enabled us to significantly increase the size of our composites platform, which is a key growth driver for the company, allowed us to strengthen our balance sheet by paying down debt, and improved total company EBITDA margins to 16%, the highest in company history. Growth and investment in composites has been a significant part of our transformation. In the early years, we invested in promising technologies as well as commercial resources to expand the potential of the next generation of wood, glass, and metal replacement, often for smaller niche and yet underserved markets and customers. Our reach and applications expanded from outdoor high performance to electrical components and composites for 5G fiber optic cables. With Dyneema, we certainly more than doubled down. With the world's strongest fiber, we added market-leading capabilities and personal protection marine and sustainable infrastructure, and composites now makes up over half of the SEM segment. This really has been a deliberate journey to acquire technologies that expand the breadth of our products. These include flexible tapes and panels to engineered fibers that provide design freedom and world-class strength. These applications offer our customers sustainable solutions by providing stronger, lighter, and more durable materials. The benefits include increasing longevity, reducing energy use, and lowering carbon emissions, while also improving human health and safety. The following slide highlights the performance of our composites platform over the last six years, with Dyneema shown pro forma in 2022. Clearly, a significant increase in contribution from these technologies, which has underpinned our broader transformation over the last 15 years. That specialty journey began in 2006. It involved the sale of more cyclical and commodity type businesses and investing in specialty technologies that deliver greater value to our customers. The result has been a substantial expansion of EBITDA margins and adjusted EPS. Another important driver for us has been our increased investment in sustainable solutions. ABM strives for leadership positions in each of our four P's of sustainability, We measure ourselves against top-tier standard-setters such as ACC Responsible Care and the UN Global Compact, and we have set aggressive 2030 sustainability goals with action plans behind each. The positive strides we have been making in this have since been recognized by leading institutions, rating agencies, and other third-party organizations. And you can see some of our current scores listed here placing us in the top tier in our industry. We were proud to be named one of America's most responsible companies in Newsweek's annual listing. Out of 2,000 companies, Aviant ranked 22. But to be clear at Aviant, we don't just invest in sustainability because it's the right thing to do for people and our planet. We invest in sustainability because it drives growth. And we also invest in our culture by focusing on safety, embracing diversity and inclusion, developing our associates, and actively engaging in the communities where we live and work. These attributes create a culture where people are proud to work for Avian. This is validated through our annual employee engagement surveys administered by the Great Place to Work Institute. In the fourth quarter, we conducted our latest. And I'm very proud that we were again certified as a great place to work, achieving the highest employee engagement scores in the history of the company. And this survey included our newest associates from the protective materials business, which is really just another point of validation that our integration efforts are going very well. I'm sharing this with you today because we shouldn't underestimate the importance of culture. I believe culture is everything, especially in uncertain times like we face today. Companies with the strongest cultures are better positioned to navigate a recession and come out on the other side even better, and that's what we plan to do. I'll now turn it over to Jamie to provide some additional details on our 2022 results and provide our initial outlook for 2023, and then I'll provide some closing comments.

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

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

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from Frank Mitch with Ferrium Research.

Your line is open.

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

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

But over by the end of the first quarter?

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

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

I think, like in my remarks, I really commented that I think we're being conservative with respect to margins. I think that there is upside potential with respect to raw material deflation. As you know, I've been here for a number of years, and we've typically done very well in that type of an environment. We haven't obviously seen that for a few years, so we'll see how that plays out this year. But then with respect to the guidance and how we put that together, I feel like that is, at this point, just sort of a prudent position to take with respect to where demand is. So at this point, we're kind of modeling that demand is down for the year, as Jamie framed significantly in the first half, but picking back up in the second half. So probably the best way I can just frame that. Obviously, we've got second half growth assumptions based on the economy getting better at that time.

Thank you so much.

Thank you. One moment for our next question.

Our next question comes from Michael Sison with Wells Fargo. Your line is open.

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

Yeah, so it was about 14% in the fourth quarter. um there was if you recall from our announcement back then uh you know when we were looking at our sort of november ui orders that was going to be down even more december ended up being a little bit better than we expected which really accounts for sort of the change in eps we delivered versus what we said at that time when i look at the first quarter mike it's actually pretty similar the only thing that i'd say is maybe a little different as the U.S. is down a little bit more. But I view kind of Europe and Asia as flat. If you just kind of think about how that is proceeding, you know, from Q4 to Q1.

Got it.

And then... You may be clear. By flat, I mean similar.

Sequential.

Yes.

Yeah. And then you gave guidance of 125. You did that for the first quarter. Yeah. you know, implies you need a better second half. And I guess the second half improvement is really just driven by better volume versus anything else. Meaning, is there other things that could help drive that better second half besides, you know, better demand?

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

Got it. Thank you.

Yep.

Thank you.

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

Hi. Good morning.

Bob, I had a question on the composites business. The pro forma slide that you show says that it's about a 25% EBITDA margin business for 22. Is the plan to grow at that kind of mid-20s EBITDA margin, or should we think of there being some operating leverage or price-cost opportunity to get margins higher over time? Just kind of curious if you have an EBITDA margin margin target for composites longer term?

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

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

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

All right. Thank you very much.

Thank you. And our next question comes from Angel Castillo with Morgan Stanley.

Your line is open.

Hi, thanks for taking my question. I was hoping you could give us a little bit more color just on the order trends as they kind of have developed, you know, in January, February, and just roughly what you're seeing kind of in terms of early orders for March.

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

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

Yeah, look from an energy standpoint, and I'm going to kind of give you a global view of this. Okay, so clearly it varies by region, but total energy costs were up 35%. That was actually about $20 million in 22 versus 21. In fact, we probably could have split that out on slide 17 of this deck that we had. That's in the segments right now. We have energy costs going up about 6% in total for 23 versus 22. Obviously, that has some level of skewing here in the first half compared to last year, and then we'll see how that plays out in the second half. Obviously, right now, I would say Europe is feeling a lot better with respect to getting through the preponderance of this winter and where energy stores are right now, and hopefully that provides some relief in that region. And then, look, with respect to raw materials, and, you know, are obviously seeing some deflation as we go into this year. We've modeled a little bit of that. I really couldn't put a quantification to it, but would say that there is more opportunity there. And, you know, as I said in my prepared remarks, we're just kind of balancing that with uncertainty around demand. So we'll see how that plays out in the next, you know, couple of months and hopefully can give some more clarity on that on our first quarter call. Got it. And then on the cost savings side? Oh, I'm sorry if I missed that latter part of that thing. So in total, there is about, if I just look at reductions in costs, there are some things that we have as inflationary costs. If I look at the net of cost reductions and some inflationary items, that's about $24 million. As I said, that kind of really starts to play in here in the second quarter with respect to the timing of those and then through the balance of the year.

That's very helpful. Thank you.

Yeah, sure.

Thank you. And our next question comes from David Wong with Deutsche Bank.

Your line is open.

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

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

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

Really, the expectation is that, you know, we kind of maintain a level of working capital commensurate with sales. So we look at that as a percentage of sales. I don't really see that changing meaningfully as a percentage through the course of this year. Obviously, we did generate a lot of cash here in the fourth quarter of 2022. I think our free cash flow number for the year is 200. That's what we have. Sorry. For 23. For 23, yeah. Yeah, so a little bit of working capital on that, but mostly it's just EVA debt converted.

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

The modeling assumes basically flat working capital for the full year. Okay, thanks.

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

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

Yeah, I guess in the, remind me if I don't get the second half of your question answered as I address the first. So, I think really one of the things that, you know, we did well was that we went early and often, really going back to, you know, you know, the end of 2020, the beginning of 21. And, you know, just we're routinely getting price. And I think that was across the board in all regions and all businesses. So there wasn't any moment in time where we just really raised prices in a particular quarter. I think we just did that steadily over time. In our prior quarter remarks, it really said that I think peaked in the third quarter. Obviously, with demand coming down and changes in supply dynamics, and now you're kind of seeing raw material deflation as a result. So that just kind of, I think, puts things into perspective with respect to what we did over time that helped us to deliver the results that we did in 22. So it wasn't necessarily just something in 22, but things that started even before that. We do have a small, I think, positive price mix. number in the model right now. And look, as I said, that if we do better from a raw material standpoint in 23, that could be better than what we have modeled today, being conservative in that regard.

You touched on the moving pieces, which is the back half of the question.

What's the spread? um throughout the year but i i guess if i could ask then just my follow-up is um your ability to maintain that degree of pricing capability in a deflationary environment and obviously from your own cost perspective you're going to manage what you can but just how you view that pricing capability in this type of environment

Yeah, I mean, look, when demand is down, I think that's when you see the most pressure on price. And, you know, I think that historically, you know, we have made accommodations where we have needed to or felt like that was prudent to do. You know, we've also visited formulations with our customers to look at lower cost alternatives if that is an option for them as well, which can sometimes be maybe a lower price, but better mix or a change in mix anyway. So look, historically, I think we've done very well in periods of deflation in terms of maintaining and or lowering prices at a slower pace than what we see from a deflationary standpoint. It really does vary greatly by end market and application. It's kind of hard to paint a broad sweeping generalization around it, but that's the best thing I can probably say in that regard.

That's very helpful. Thank you so much.

Our next question comes from Lawrence Alexander with Jefferies.

Your line is open.

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

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

Thank you.

Yep.

Thank you.

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

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

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

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

Could you give me that timeframe? Did you say for a quarter?

Yeah, during the quarter, how utilization declined and then what you're expecting for first half for master batch operating rates.

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

Thank you.

Yep.

Thank you.

And we have a question from Vincent Anderson from Stiefel. Your line is open.

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

Yeah. I mean, look, some of our businesses do have a seasonal pattern to them, and I don't know that that necessarily applies to historically what we've seen for personal protection. I think that is sort of demand agnostic, if you will, across the quarters. That's probably not the right word, but I don't really think there's a seasonal element to that. I do think that there are trends that are resulting in higher levels of personal protection gear, particularly with respect to the military and war in Ukraine, for example. Many countries have been stepping up the level of investment that they're making in their own defense applications, and we are really just starting to see that, I think, in the fourth quarter. In fact, as we were discussing Dyneema through the course of the year, there was some potential that that might have started to happen earlier. It didn't, but I think maybe Q4, we started to see a little bit of that, and that has got upside potential for us in 23.

That's understood. Thank you. That's helpful. And then going back through your healthcare exposure, you know, between COVID-related demand, all while integrating Clarion, you know, I know you mentioned elective care as a potential headwind this year, but can you step back and maybe break down your exposure to health care a bit more between what you would view as the more defensive parts of that portfolio and and what specifically would be more exposed to you know household spending power yeah I couldn't actually break the portfolio down for you by elective versus non elective

really it's actually hard for us to even determine where things go but for the most part you know we are in medical devices drug delivery devices minimally invasive catheters and applications like that as well as some pharma and pharma related packaging right which is respect to health care so i do think that there is a fair amount of that that is exposed to uh discretionary spending So not necessarily just elective procedures, but also the amount of money that people are willing to spend, you know, on related healthcare, almost personal care type items. So right now I'm kind of viewing that as a potential challenge for 23. That's what we've actually built into the model. I don't think it looks like it did in 2020 when people just flat out didn't go anywhere, but I think it's a possible challenge for 23.

Okay, understood. Thank you.

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

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