Avient Corporation

Good morning, ladies and gentlemen, and welcome to the Aviant Corporation's webcast to discuss the company's second quarter 2023 results. My name is Catherine, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will have a question and answer session following the company's prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would now turn the call over to Joe DiSalvo, 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. 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 of this. 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 the non-GAAP measures and provides a reconciliation to their most comparable GAAP financial measures. Joining me today is our Chairman, President, and Chief Executive Officer, Bob Patterson, and Senior Vice President and Chief Financial Officer, Jamie Begg. Now I will hand the call off to Bob to begin.

Thanks, Joe, and good morning. Today we reported our second quarter results. Adjusted EPS of 63 cents exceeded our guidance, driven by better than projected margins in both segments. Raw material deflation was a net positive, and our composites portfolio continues to be resilient in an otherwise challenging environment. Composites is an area that we have grown through a series of acquisitions and incremental commercial investment, and now makes up about 20% of our business. Composites offer a lighter weight option with strength and design flexibility that other materials simply cannot. Since 2012, we invested in six technologies to build out this portfolio that now includes long fiber, tapes, laminates, protrusion, and engineered fibers. Our goal has been to acquire businesses where we can add commercial resources to drive growth, and specifically in end markets and applications that are underserved or not served at all by composite players today. From a performance standpoint, our composite businesses are holding up well in the current economic downturn. Dyneema is the latest addition to our portfolio and couldn't have come at a more important time. It's the world's strongest fiber and utilized in defense and other end markets where failure is simply not an option. Year-to-date demand for personal protection is up 13% and expected to increase as the year progresses. 85% of our composite materials serve the following five end markets. Personal protection or defense applications include body armor and helmets that rely on Dyneema fiber and its unrivaled performance Lightweight and high-strength combination provide the highest level of protection for women and men in the military and law enforcement, while also allowing for ease of physical movement. The industrial end market is certainly vast, and there are many opportunities to leverage the benefit of composites. Composite tapes are reinforcing high-pressure pipes. They're being used for conveyor springs to replace more durable materials. And composites provide significant performance benefits in lifting slings. They can also be tailor-made to deliver strength and stiffness in specific directions or certain areas depending on use. Combined with being resistant to corrosion, chemical, and environmental exposures, there really is limitless possibilities in this end market. And our acquisition of FiberLine in 2019 expanded our solutions into the fiber optic cable and telecom industries. We've since been serving the 4G and more recently 5G infrastructure build-outs. The most recognized value of 5G simply is speed, but it's really about connectivity. 5G can power the development of smart cities, remote surgeries, and autonomous driving vehicles. Sustainability benefits like process automation, reduction of waste, and greater control over water management are also being enabled by this technology. Private wireless networks and manufacturing facilities and warehouses rely on 5G as well to meet the emerging technical requirements of AI, automation, and high-tech production. As you all know, China was an early mover in 5G infrastructure, with nearly 3 billion base stations and growing. In the U.S., with the upcoming deployment of funding from the BEAD program, it will greatly accelerate 5G and Avian is well positioned to take advantage. In the energy end market, there has been an increased focus around the world to improve the capacity and reliability of the energy grid, while also expanding more sustainable energy sources. We serve customers that support the traditional electrical infrastructure with components such as primary and secondary insulators, distribution and transmission poles, and cross arms. These updates often replace materials such as wood and steel. And for offshore wind farms, Dyneema ropes and mooring lines are considered the best option for positioning and anchoring windmills. For all modes of transportation, customers are looking to use composites to increase fuel efficiency and battery applications. Recent examples you may not be as familiar with include air cargo panels, rail car doors, and laminates to protect the underside of truck bed floors. And what I love about these applications is that they serve as perfect examples of how we have taken composites to these new and underserved markets I previously referenced. And winning new business in these areas has helped us to navigate the challenging market conditions that we find ourselves in this year. In that regard, our message today about Q2 and the remainder of the year is really about improving margins, offsetting weaker demand conditions. This is both from better mix and cost reductions. And Jamie's going to tell you more now, and then I'll have some concluding remarks.

Thanks, Bob. Second quarter adjusted EBITDA of $131 million came in slightly ahead of our forecast as lower sales, particularly in Europe, were offset by stronger margins. Adjusted EPS was $0.03 better than expected, driven by the EPIDEP beat, as well as lower interest expense and depreciation expense. Adjusted EPIDEP margins exceeded guidance by 50 basis points, as sustainable solutions and composites continued to prove resilient in the current environment and provided favorable mix in the quarter. Deflating raw material prices, along with our ongoing cost reduction initiative, also factored into the margin improvement. The second quarter EBITDA bridge shown here walks the impact of demand, price, and cost on a year-over-year basis. Starting with demand, customers remain cautious and continue to closely manage inventory levels. Overall demand was slightly below our expectations, and regional trends have evolved since we last spoke. The U.S. and Canada went about as expected with softness across most end markets, particularly in building and construction and consumer. Latin America's demand was slightly worse, but most notably, we saw Europe weaken further, which we thought going into the quarter had stabilized. This was partially offset by a slight uptick in Asia, which was modestly better than expected. Also highlighted on this bridge is the impact of pricing and deflation. This is the first quarter we've seen raw material deflation on a year-over-year basis. Deflation was most prevalent in our hydrocarbon inputs, such as polyethylene and polypropylene, And we have started to see moderation in other raw materials, such as certain performance additives. It, along with price, continues to help us offset weaker demand and cover wage and energy inflation, which remain elevated versus the prior year. Lastly, certain cost reduction activities, including targeted European restructuring and reduced discretionary spend, provided a $13 million benefit to the bottom line this quarter. Turning to page 10 in the webcast slides, we provide another view on sales. this time on a sequential basis from Q1 to Q2 by region, where sales on a global basis are 2.6% lower. In Europe, where we typically see an increase in packaging as our customers prepare for the summer vacation months, but that didn't come to fruition as persistent inflation had a negative impact on consumer sentiment and or some level of destocking remains. Customers in Europe continue to be the most cautious of any region. As we look around the rest of the world, demand in the Americas was largely unchanged from the first quarter. The U.S. consumer has been quite resilient, but we expect weaker demand to continue in the second half. In Asia, we experienced modest improvements in the second quarter with China reopening and recovering from the COVID lockdowns last year. We hope this remains a positive trend going forward. As we mentioned during our first quarter call, ordering patterns have shifted to smaller quantities and shorter lead times. This is true even in traditionally recession-resistant markets like packaging and healthcare. In fact, healthcare has been surprisingly and negatively impacted, more than anticipated, in terms of demand this year. Historically, this is among the more recession-resistant markets. But it seems even healthcare device manufacturers, just like manufacturers in other industries, still have too much inventory on hand. In the first half of the year, major companies like Beck & Dickinson, ICU, and Teleflex all point to reducing inventories this year. Further, rising interest rates continue to have a negative impact on consumer applications in building and construction. Partially offsetting the impact of the macro environment is the resilient nature of our composites business, serving the end markets that Bob highlighted earlier. We have factored all of this into our guidance projections for the balance of the year. Our third quarter guidance is for revenue of $800 million and adjusted EPS at 56 cents. This reflects our current view of demand and higher margins based on the strength in composites, raw material deflation, and cost reductions. We are maintaining our four-year guidance of adjusted EPS of $2.40 on lower revenues of $3.3 billion. While we have slightly lowered our four-year adjusted EBITDA projection, this is offset by lower interest and depreciation expense. We have been consistent all year in saying that we believe that demand conditions weakened beyond our initial model that we would be able to offset that with strength in composites, improving margins, and cost reductions. And that's exactly what we've done so far. With respect to expected cash generation and leverage, we are updating our full year free cash flow to $180 million to include additional costs related to environmental remediation expenditures and timing of tax payments. Projected net leverage at year end is three times. And I'll hand the call back over to Bob for some closing remarks.

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

Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Frank Mitch with Fermium Research. Your line is open.

Thank you. Thank you so much, and good morning, everyone. You know, I have to ask the obligatory question. You're keeping your guide for the full year. Obviously, you've exceeded your bogeys in Q1 and in Q2, so that's a de facto cut. to the second half of the year. So, Bob, are you suggesting that, you know, your thoughts when you first put out the four-year guide, you had a certain expectation on how the second half would play out? And as you sit here today, it's moderately worse than that? Or are we, you know, we still have a couple quarters to go and there's some measure of conservatism that's factored in?

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

Gotcha. Uh, so yeah, Belton suspenders. Um, as I think about Europe, uh, it, you know, the tenor, the tone is, uh, it seems a bit, uh, more negative. than perhaps we might have thought three months, six months ago and so forth. Your sales declines down 10% 1Q, down 8% 2Q, at least that's moderating somewhat, but it's still materially negative year over year. How close are we to bottom? When might we hit bottom in that region or it's still fairly murky?

Maybe a clarifying point on that if I could first, just with the numbers that you cited. That slide that Jamie presented today was actually a change from Q1 to Q2, so it's slightly different.

Wow.

Okay. So Europe got worse, all right, just to be clear. Wow. And that, you know, I think if you went back to our last call, we were probably more optimistic about Europe sort of reaching bottom, and that didn't prove to be the case. Jamie really specifically highlighted some things that have historically happened in the summer months with respect to demand for additives for packaging, primarily around food and beverage, and that really didn't materialize in the second quarter like we thought. So I guess I would put Europe in the sort of negative surprise category.

Understood. And so no scope for, at least as you're looking at it right now, you're not banking on any sort of recovery in the back half of 23?

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

All right. Very helpful. Thanks so much.

Thank you. One moment for our next question.

Our next question comes from Michael Sasan with Wells Fargo.

Your line is open.

Hey, good morning, guys. Nice quarter. Your volumes have been down six quarters in a row, and I think you felt there'd be a bottoming effect. What do you think volumes will be down in the third quarter, and how do you think things shape up as you end the year in the fourth?

I mean, look, the current guidance has sales down about 9.5% in Q3. The preponderance of that really is demand or volume related. There's a little bit of a positive, I think, on FX year over year, or maybe a little bit of positive on FX. But I think when you look at Q3, Mike, and that projection that we have on sales, that is really primarily underlying demand.

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

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

Got it.

Thank you.

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

Your line is open.

Hi, good morning.

I wanted to ask about Asia. You noted that things there were stronger than you expected. That doesn't really seem to be what the headlines are saying, and a lot of companies are kind of talking about this muted pace of recovery. What markets were leading the strength that you saw in Asia? And do you expect that momentum to accelerate in the second half, given that there's maybe some government stimulus going on in China?

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

All right, great. And then I was hoping that you could give us an update on what you're seeing in the packaging market. I think you referenced some softness that's going on in Europe there. But that's an area where you have some interesting sustainable solutions. You know, the weakness that you're seeing there, is that really related more to destocking or slowing consumer demand? I guess maybe just hoping... that there are signs that demand is starting to stabilize in that important market for you guys?

Yeah, I mean, look, I think that it is still some of both. You know, maybe just to specifically talk about Europe where packaging is our largest segment, I do think, you know, consumer sentiment is impacting what they're spending money on right now. Inflation obviously has dramatically increased the cost of food and beverage prices. And so I think there that there certainly is a consumer impact to demand. Beyond that, I think it's probably still some destocking, at least with what we saw in the second quarter, but possibly some belt tightening in other places of the world as well.

All right, thanks very much.

Thank you.

One moment. Our next question comes from David Wong with Deutsche Bank. Your line is open.

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

Price was a positive for the quarter. That's pretty much what's in there. And then I think what we've been saying is that if you went back to last year, pricing really probably peaked at the end of the second quarter. Maybe a little bit in the beginning of the third. So our expectation is that pricing deltas just starts to decline over the course of the year. So I think you'll see that in the second half. Could be flat. I think that's probably a good estimate to use right now for Q3 and Q4.

Okay. And then cost reduction. How much was it benefiting the quarter if you strip out collateral and synergy? And I guess, how should we think about additional cost savings in the back half?

Yeah, Clarion Synergies was really a small number in that 13. It was about two. And by the end of last year, I think we were at about 75, 76 million of the run rate we expected at 85 in total. So we're pretty much there. So hopefully I'll put that in. The balance of that really was other cost actions, some related to European restructuring and some reduced personnel.

Okay, thanks. Thank you.

And our next question comes from Lawrence Alexander with Jefferies. Your line is open.

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

Sure. So maybe I'll just do this by, you know, end market. So remember, 50% of the business is personal protection. About 30% of that's marine, sustainable infrastructure, and 20% is consumer protection. And personal protection, I think your question was about versus expectations. So obviously when we did this deal last year, we had an expectation that personal protection would start to pick up as demand for defense applications increased. And that is happening. I would say that's probably even higher maybe at the beginning of this year than what we thought. Consumer is down significantly in the same way that the other avian markets are. I'm not sure that's too much different than what we thought or what we know now, just based on what we're seeing in consumer. And marine and sustainable infrastructure is also down some. So that's possibly a slightly different change than we thought. But again, I think that is just what's going on in general with the industry today. But anyway, the whole business is really holding up well, and margins are as good as they have been in the past, and there's really no commentary there on margins to provide vis-a-vis our expectations.

Okay, great. On the destocking side, what are you hearing from customers in terms of kind of where they think equilibrium will be? I mean, in terms of, like, do they expect to sort of push inventories forward? lower than maybe desired and then have a snapback sort of later on? Or kind of is everybody just trying to find a new equilibrium which they can live with and then stop? Can you give us a sense for the flavor of the discussions, like what they're warning you they have in mind?

Yeah, I mean, I really do think it does vary by industry. And I would say that, you know, in the consumer space, I feel like that is one space that is actually starting to improve, meaning, I think, less destocking. I would compare and contrast that to healthcare, which actually was down, I think, the second highest of any market that we had in a quarter, and healthcare companies are still telegraphing that they see more destocking to come. And I think that healthcare really did, you know, out of an abundance of caution for, you know, taking care of people during the COVID era and supply chain issues over the course of 21 into 22, they simply did have too much inventory on hand. And I think they're all really working to bring that down. I think Jamie mentioned that. I mean, that was kind of a negative surprise for us this year because healthcare is typically resilient. I think if it weren't for their de-stocking, it would be, because I don't really think consumers have really changed their healthcare patterns this year. So, I look at healthcare and say, I think that's the preponderance of that's de-stocking, and that's going to continue through the rest of this year.

And then, just lastly, just with the kind of performance you've seen on price mix versus cost, and also kind of how your productivity has been offsetting your wage inflation and energy, you know, how do you think this plays out over five, seven years, is there an upper limit to margins? Should the price cost price mix cost delta narrow over time? Just your sense of because it's a new dynamic for avian compared to kind of the predecessor assets. And you've talked about quite a bit over the last couple of years, but can you give a sense for where you see kind of either the limits or the trajectory?

I mean, look, I think we're at the beginning of a positive trajectory with respect to margins. And if I look at how much they compressed in 2020 and 21 and then into 22 because of inflation, you know, that's an opportunity for, you know, that to reverse itself with deflation and, you know, hanging on to price. We have long said that our goal is ultimately to get EBITDA margins to 20%. If we simply got back to where we were on a pro forma basis in the middle of 2022, that's about just under 18%. And then I think with improving mix in the four key growth areas, we can get to 20. So I don't feel at all like we're getting to some limit. I feel like we're at the beginning of getting to where we want to get to, which is closer to 20%. Thank you.

Thank you. One moment for our next question. We have a question from Kristen Owen from Oppenheimer. Your line is open.

Hi, good morning. Thank you for the question and all of the incremental color that you've provided. I wanted to ask a little bit about the comment you made about the shorter order timelines, maybe some smaller orders.

just ask you to expand on that a little bit how that is impacting you know your planning horizon what that means from a from a planning perspective for avian and then i'll have a follow-up i'll tell you the one thing that it impacts more than anything else is just our you know visibility to you know performance and i have always said that based on orders order patterns we had pretty good visibility know for the upcoming month maybe 45 days and i feel like that's been cut in half with respect to shorter or shorter lead time and also smaller quantities so that's just made it more difficult for us to you know project what's going to happen in the short term a lot of ancillary issues with that with production scheduling and planning and so on but that really is the biggest impact is just effectively how we can plan for running the business.

That's helpful. And then sort of tying that into some of the longer-term discussions about sustainable solutions and sort of customer timelines for those solutions, those seem like very different types of conversations. So if you could just help us understand what the tenor of the sustainable solutions conversations are. how those have trended just given the environment.

Yeah, I mean that's an important part of what we want to share on September 20th is that the brand owners are still very keenly focused on achieving their sustainability goals. And I really feel like the level of engagement with them is still very high. So despite, you know, destocking and generally what's going on with the manufacturing sector right now, I don't feel like that's waned. So that's a good thing. Some of those things are longer lead time projects. They really are, you know, development projects and innovation. And I think it says a lot. Look, if you look at the color segment, I mean, 100% of our innovation portfolio is dedicated to sustainable solutions. 100%, right? So, I mean, that just tells you how important that is.

If I could sneak in one final follow-up to that last bit and sort of tying into the previous question, what does that mean in terms of your pricing ability sort of over this longer-term horizon? I mean, is there a floor on what you anticipate to capture from those sustainable solutions on a pricing side? Thank you.

Yeah, I mean, one, I think there's value to be had there from a pricing standpoint. But I would also tell you that there's a cost aspect of that. And right now, sustainable solutions oftentimes have a higher level of cost just based on the cost of recycled content and or the additional additives and so on to help get those colors that the brand owners are looking for. In general, I would just say that that pricing will continue to move forward and up, I think, as sustainable solutions grow.

Any others?

Okay, one moment.

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

Thank you, and good morning, everyone. Wondering if you could talk about cash flow. Looks like with EBITDA down 5 million, cash flow from operations is now going to be 320 instead of 350, and free cash flow is going to be 180 instead of 200. I see on the balance sheet or cash flow statement that working capital or inventory in particular is up, but can you just help us understand what's going on from the cash flow perspective and what actions you're putting into place to try to improve this situation?

I mean, I guess really the primary changes from our previous guidance really related to some environmental expenditures and timing of tax payments. I'm not sure what working capital information you're looking at. But in general, our working capital as a percentage of sales has actually declined this year versus last year. We've done a really good job of managing inventories. One of the things that you just have to look at with respect to cash flow and working capital is just the timing of when those things happen. We had a pretty significant influx of cash in November and December of last year. And that obviously factors into our percentage of sales. We don't have the same thing built into this year. So that might help you when you compare and contrast 23 versus 22.

Yeah, I was looking at the increase in inventory. But anyway, and this is a follow-up question. Where do you think your customers are? I mean, I know you talked about the healthcare situation and they were overstocked just sort of as a function of COVID and so forth. But do you think customers in general are now at very lean levels? As I know, obviously, there's a lot going on with interest rates and just broader macro concerns. But do you think that they're at sort of you know, levels where it just can't go on that much more so that when we get to 4Q, we maybe won't see the same level of seasonality that we typically would see? Or do you think that's still a risk in the fourth quarter?

I mean, I think that is, you know, part of our assumption is that we don't see the level of seasonality. I mean, if you look at our revenue projection for the fourth quarter, it's not that much higher than what it was last year, but last year was significantly below where it's been in the last two to three years. I think you're right on with that assumption. I think it does vary by industry. I think in the outdoor space, which is one that we've talked about a lot, I actually think that there are some green shoots in that area that will start here in the second half of this year. We're seeing a little bit of that now. Dealer and retail inventory is very low still. That tells you maybe that is lean. but and then in other industries like healthcare, we said that apparently with what our customers are saying, both publicly and to us, their inventory levels are not lean. And so we see further destocking there.

Thanks very much.

All right. Well, thank you very much for the questions and for everyone listening in today. Hopefully you can make it to our sustainability day on September 20th. We look forward to updating you in that regard on that day. Thank you.

This concludes today's conference call.

Thank you for participating. You may now disconnect. you Thank you. Thank you. Thank you. you

Good morning, ladies and gentlemen, and welcome to the Aviant Corporation's webcast to discuss the company's second quarter 2023 results. My name is Catherine, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will have a question and answer session following the company's prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would now turn the call over to 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. 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 expectations 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 of this. 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 the non-GAAP measures and provides a reconciliation to their most comparable GAAP financial measures. Joining me today is our Chairman, President, and Chief Executive Officer, Bob Patterson, and Senior Vice President and Chief Financial Officer, Jamie Begg. Now I will hand the call off to Bob to begin.

Thanks, Joe, and good morning. Today we reported our second quarter results. Adjusted EPS of 63 cents exceeded our guidance, driven by better than projected margins in both segments. Raw material deflation was a net positive, and our composites portfolio continues to be resilient in an otherwise challenging environment. Composites is an area that we have grown through a series of acquisitions and incremental commercial investment, and now makes up about 20% of our business. Composites offer a lighter weight option with strength and design flexibility that other materials simply cannot. Since 2012, we invested in six technologies to build out this portfolio that now includes long fiber, tapes, laminates, protrusion, and engineered fibers. Our goal has been to acquire businesses where we can add commercial resources to drive growth, and specifically in end markets and applications that are underserved or not served at all by composite players today. From a performance standpoint, our composite businesses are holding up well in the current economic downturn. Dyneema is the latest addition to our portfolio and couldn't have come at a more important time. It's the world's strongest fiber and utilized in defense and other end markets where failure is simply not an option. Year-to-date demand for personal protection is up 13% and expected to increase as the year progresses. 85% of our composite materials serve the following five end markets. Personal protection or defense applications include body armor and helmets that rely on Dyneema fiber and its unrivaled performance lightweight, and high-strength combination provide the highest level of protection for women and men in the military and law enforcement, while also allowing for ease of physical movement. The industrial end market is certainly vast, and there are many opportunities to leverage the benefit of composites. Composite tapes are reinforcing high-pressure pipes. They're being used for conveyor springs to replace more durable materials. And composites provide significant performance benefits in lifting slings. They can also be tailor-made to deliver strength and stiffness in specific directions or certain areas depending on use. Combined with being resistant to corrosion, chemical, and environmental exposures, there really is limitless possibilities in this end market. And our acquisition of FiberLine in 2019 expanded our solutions into the fiber optic cable and telecom industries. We've since been serving the 4G and more recently 5G infrastructure build-outs. The most recognized value of 5G simply is speed, but it's really about connectivity. 5G can power the development of smart cities, remote surgeries, and autonomous driving vehicles. Sustainability benefits like process automation, reduction of waste, and greater control over water management are also being enabled by this technology. Private wireless networks and manufacturing facilities and warehouses rely on 5G as well to meet the emerging technical requirements of AI, automation, and high-tech production. As you all know, China was an early mover in 5G infrastructure, with nearly 3 billion base stations and growing. In the US, with the upcoming deployment of funding from the BEAD program, it will greatly accelerate 5G and Avian is well positioned to take advantage. In the energy end market, there has been an increased focus around the world to improve the capacity and reliability of the energy grid, while also expanding more sustainable energy sources. We serve customers that support the traditional electrical infrastructure with components such as primary and secondary insulators, distribution and transmission poles, and cross arms. These updates often replace materials such as wood and steel. And for offshore wind farms, Dyneema ropes and mooring lines are considered the best option for positioning and anchoring windmills. For all modes of transportation, customers are looking to use composites to increase fuel efficiency and battery applications. Recent examples you may not be as familiar with include air cargo panels, rail car doors, and laminates to protect the underside of truck bed floors. And what I love about these applications is that they serve as perfect examples of how we have taken composites to these new and underserved markets I previously referenced. And winning new business in these areas has helped us to navigate the challenging market conditions that we find ourselves in this year. In that regard, our message today about Q2 and the remainder of the year is really about improving margins, offsetting weaker demand conditions. This is both from better mix and cost reductions. And Jamie's going to tell you more now, and then I'll have some concluding remarks.

Thanks, Bob. Second quarter adjusted EBITDA of $131 million came in slightly ahead of our forecast as lower sales, particularly in Europe, were offset by stronger margins. Adjusted EPS was $0.03 better than expected, driven by the EBITDA beat, as well as lower interest expense and depreciation expense. Adjusted EBITDA margins exceeded guidance by 50 basis points, as sustainable solutions and composites continue to prove resilient in the current environment and provide a favorable mix in the quarter. Deflating raw material prices, along with our ongoing cost reduction initiative, also factored into the margin improvement. The second quarter EBITDA bridge shown here walks the impact of demand, price, and cost on a year-over-year basis. Starting with demand, customers remain cautious and continue to closely manage inventory levels. Overall demand was slightly below our expectations, and regional trends have evolved since we last spoke. The U.S. and Canada went about as expected with softness across most end markets, particularly in building and construction and consumer. Latin America's demand was slightly worse, but most notably, we saw Europe weaken further, which we thought going into the quarter had stabilized. This was partially offset by a slight uptick in Asia, which was modestly better than expected. Also highlighted on this bridge is the impact of pricing and deflation. This is the first quarter we've seen raw material deflation on a year-over-year basis. Deflation was most prevalent in our hydrocarbon inputs, such as polyethylene and polypropylene, And we have started to see moderation in other raw materials, such as certain performance additives. It, along with price, continues to help us offset weaker demand and cover wage and energy inflation, which remain elevated versus the prior year. Lastly, certain cost reduction activities, including targeted European restructuring and reduced discretionary spend, provided a $13 million benefit to the bottom line this quarter. Turning to page 10 in the webcast slides, we provide another view on sales. this time on a sequential basis from Q1 to Q2 by region, where sales on a global basis are 2.6% lower. In Europe, where we typically see an increase in packaging as our customers prepare for the summer vacation months, but that didn't come to fruition as persistent inflation had a negative impact on consumer sentiment and or some level of destocking remains. Customers in Europe continue to be the most cautious of any regions. As we look around the rest of the world, demand in the Americas was largely unchanged from the first quarter. The U.S. consumer has been quite resilient, but we expect weaker demand to continue in the second half. In Asia, we experienced modest improvements in the second quarter with China reopening and recovering from the COVID lockdowns last year. We hope this remains a positive trend going forward. As we mentioned during our first quarter call, ordering patterns have shifted to smaller quantities and shorter lead times. This is true even in traditionally recession-resistant markets like packaging and healthcare. In fact, healthcare has been surprisingly and negatively impacted more than anticipated in terms of demand this year. Historically, this is among the more recession-resistant markets. But it seems even healthcare device manufacturers, just like manufacturers in other industries, still have too much inventory on hand. In the first half of the year, major companies like Beck & Dickinson, ICU, and Teleflex all point to reducing inventories this year. Further, rising interest rates continue to have a negative impact on consumer applications in building and construction. Partially offsetting the impact of the macro environment is the resilient nature of our composites business, serving the end markets that Bob highlighted earlier. We have factored all of this into our guidance projections for the balance of the year. Our third quarter guidance is for revenue of $800 million and adjusted EPS at 56 cents. This reflects our current view of demand and higher margins based on the strength in composites, raw material deflation, and cost reductions. We are maintaining our four-year guidance of adjusted EPS of $2.40 on lower revenues of $3.3 billion. While we have slightly lowered our four-year adjusted EBITDA projection, this is offset by lower interest and depreciation expense. We have been consistent all year in saying that we believe that demand conditions weakened beyond our initial model that we would be able to offset that with strengthened composites, improving margins, and cost reductions. And that's exactly what we've done so far. With respect to expected cash generation and leverage, we are updating our full year free cash flow to $180 million to include additional costs related to environmental remediation expenditures and timing of tax payments. Projected net leverage at year end is three times. And I'll hand the call back over to Bob for some closing remarks.

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

Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Frank Mitch with Fermium Research. Your line is open.

Thank you. Thank you so much, and good morning, everyone. You know, I have to ask the obligatory question. You're keeping your guide for the full year. Obviously, you've exceeded your bogeys in Q1 and in Q2, so that's a de facto cut. to the second half of the year. So, Bob, are you suggesting that, you know, your thoughts when you first put out the four-year guide, you had a certain expectation on how the second half would play out? And as you sit here today, it's moderately worse than that? Or are we, you know, we still have a couple quarters to go and there's some measure of conservatism that's factored in?

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

Gotcha. Uh, so yeah, Belton suspenders. Um, as I think about Europe, uh, it, you know, the tenor, the tone is, uh, it seems a bit, uh, more negative. than perhaps we might have thought three months, six months ago and so forth. Your sales declines down 10% 1Q, down 8% 2Q, at least that's moderating somewhat, but it's still materially negative year over year. How close are we to bottom? When might we hit bottom in that region or it's still fairly murky?

Maybe a clarifying point on that if I could first, just with the numbers that you cited. That slide that Jamie presented today was actually a change from Q1 to Q2. So, it's slightly different. Wow. Okay. So, Europe got worse. All right? Just to be clear. And that, you know, I think if you went back to our last call, we were probably more optimistic about Europe sort of reaching bottom, and that didn't prove to be the case. Jamie really specifically highlighted some things that have historically happened in the summer months with respect to demand for additives for packaging, primarily around food and beverage, and that really didn't materialize in the second quarter like we thought. So I guess I would put Europe in the sort of negative surprise category.

Understood. And so no scope for, at least as you're looking at it right now, you're not banking on any sort of recovery in the back half of 23?

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

All right. Very helpful. Thanks so much.

Sure thing.

Thank you. One moment for our next question. Our next question comes from Michael Sasan with Wells Fargo. Your line is open.

Hey, good morning, guys. Nice quarter. Your volumes have been down six quarters in a row, and I think you felt there'd be a bottoming effect. What do you think volumes will be down in the third quarter, and how do you think things shape up as you end the year in the fourth?

I mean, look, the current guidance has sales down about 9.5% in Q3. The preponderance of that really is demand or volume related. There's a little bit of a positive, I think, on FX year over year, or maybe a little bit of positive on FX. But I think when you look at Q3, Mike, and that projection that we have on sales, that is really primarily underlying demand.

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

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

Got it. Thank you.

Thank you. One moment.

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

Hi, good morning. I wanted to ask about Asia.

You noted that things there were stronger than you expected. That doesn't really seem to be what the headlines are saying, and a lot of companies are kind of talking about this muted pace of recovery. What markets were leading the strength that you saw in Asia? And do you expect that momentum to accelerate in the second half, given that there's maybe some government stimulus going on in China?

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

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

Yeah, I mean, look, I think that it is still some of both. You know, maybe just to specifically talk about Europe where packaging is our largest segment, I do think, you know, consumer sentiment is impacting what they're spending money on right now. Inflation obviously has dramatically increased the cost of food and beverage prices. And so I think there that there certainly is a consumer impact to demand. Beyond that, I think it's probably still some destocking, at least with what we saw in the second quarter, but possibly some belt tightening in other places of the world as well.

All right, thanks very much.

Thank you.

One moment. Our next question comes from David Wong with Deutsche Bank. Your line is open.

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

Price was a positive for the quarter. That's pretty much what's in there. And then I think what we've been saying is that if you went back to last year, pricing really probably peaked at the end of the second quarter. maybe a little bit in the beginning of the third. So our expectation is that pricing deltas just starts to decline over the course of the year. So I think you'll see that in the second half. Could be flat. I think that's probably a good estimate to use right now for Q3 and Q4.

Okay. And then cost reduction, how much was it benefiting the quarter if you strip out collateral and energy? And I guess, how should we think about additional cost savings in the back half?

Yeah, Clarion Synergies was really a small number in that 13. It was about two. And by the end of last year, I think we were at about 75, 76 million of the run rate we expected at 85 in total. So we're pretty much there. So hopefully I'll put that in. The balance of that really was other cost actions, some related to European restructuring and some reduced personnel.

Okay, thanks. Thank you.

And our next question comes from Lawrence Alexander with Jefferies. Your line is open.

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

Sure. So maybe I'll just do this by, you know, end market. So remember, 50% of the business is personal protection. About 30% of that's marine, sustainable infrastructure, and 20% is consumer protection. And personal protection, I think your question was about versus expectations. So obviously, when we did this deal last year, we had an expectation that personal protection would start to pick up as demand for defense applications increased. And that is happening. I would say that's probably even higher maybe at the beginning of this year than what we thought. Consumer is down significantly in the same way that the other avian markets are. I'm not sure that's too much different than what we thought or what we know now, just based on what we're seeing in consumer. And marine and sustainable infrastructure is also down some. So that's possibly a slightly different change than we thought. But again, I think that is just what's going on in general with the industry today. But anyway, the whole business is really holding up well, and margins are as good as they have been in the past, and there's really no commentary there on margins to provide vis-a-vis our expectations.

Okay, great. On the destocking side, what are you hearing from customers in terms of kind of where they think equilibrium will be? I mean, in terms of, like, do they expect to sort of push inventories forward? lower than maybe desired and then have a snapback sort of later on? Or kind of is everybody just trying to find a new equilibrium which they can live with and then stop? Can you give us a sense for the flavor of the discussions, like what they're warning you they have in mind?

Yeah, I mean, I really do think it does vary by industry. And I would say that, you know, in the consumer space, I feel like that is one space that is actually starting to improve, meaning, I think, less destocking. I would compare and contrast that to health care, which actually was down, I think, the second highest of any market that we had in the quarter. And health care companies are still telegraphing that they see more destocking to come. And I think that healthcare really did, you know, out of an abundance of caution for, you know, taking care of people during the COVID era and supply chain issues over the course of 21 into 22, they simply did have too much inventory on hand. And I think they're all really working to bring that down. I think Jamie mentioned that. I mean, that was kind of a negative surprise for us this year because healthcare is typically resilient. I think if it weren't for their stocking, it would be because I don't really think consumers have really changed their health care patterns this year. So I look at health care and say, I think that's the preponderance of that's the stocking and that's going to continue through the rest of this year.

And then just lastly, just with the kind of performance you've seen on price mix versus cost and also kind of how your productivity has been offsetting your wage, inflation and energy. You know, how do you think this plays out over five, seven years. Is there an upper limit to margins? Should the price cost, price mix cost delta narrow over time? Just your sense of, because it's a new dynamic for Avian compared to kind of the predecessor assets. And you've talked about quite a bit over the last couple of years, but can you give a sense for where you see kind of either the limits or the trajectory?

I mean, look, I think we're at the beginning of a positive trajectory with respect to margins. And if I look at how much they compressed in 2020 and 21 and then into 22 because of inflation, that's an opportunity for that to reverse itself with deflation and hanging on to price. We have long said that our goal is ultimately to get EBITDA margins to 20%. If we simply got back to where we were on a pro forma basis in the middle of 2022, that's about just under 18%. And then I think with improving mix in the four key growth areas, we can get to 20. So I don't feel at all like we're getting to some limit. I feel like we're at the beginning of getting to where we want to get to, which is closer to 20%. Thank you.

Thank you. One moment for our next question. We have a question from Kristen Owen from Oppenheimer. Your line is open.

Hi, good morning. Thank you for the question and all of the incremental color that you've provided. I wanted to ask a little bit about the comment you made about the shorter order timelines, maybe some smaller orders.

just ask you to expand on that a little bit how that is impacting you know your planning horizon what that means from a from a planning perspective for avian and then i'll have a follow-up i'll tell you the one thing that it impacts more than anything else is just our you know visibility to you know performance and i have always said that based on orders order patterns we had pretty good visibility for the upcoming month, maybe 45 days. And I feel like that's been cut in half with respect to shorter lead time and also smaller quantities. So that's just made it more difficult for us to project what's going to happen in the short term. A lot of ancillary issues with that with production scheduling and planning and so on. But that really is the biggest impact. It's just effectively how we can plan for running the business.

That's helpful. And then sort of tying that into some of the longer-term discussions about sustainable solutions and sort of customer timelines for those solutions, those seem like very different types of conversations. So if you could just help us understand what the tenor of the sustainable solutions conversations are. how those have trended just given the environment.

Yeah, I mean that's an important part of what we want to share on September 20th is that the brand owners are still very keenly focused on achieving their sustainability goals. And I really feel like the level of engagement with them is still very high. So despite, you know, destocking and generally what's going on with the manufacturing sector right now, I don't feel like that's waned. So that's a good thing. Some of those things are longer lead time projects. They really are, you know, development projects and innovation. And I think it says a lot. Look, if you look at the color segment, I mean, 100% of our innovation portfolio is dedicated to sustainable solutions. 100%, right? So, I mean, that just tells you how important that is.

If I could sneak in one final follow-up to that last bit and sort of tying into the previous question, what does that mean in terms of your pricing ability sort of over this longer-term horizon? I mean, is there a floor on what you anticipate to capture from those sustainable solutions on a pricing side? Thank you.

Yeah, I mean, one, I think there's value to be had there from a pricing standpoint. But I would also tell you that there's a cost aspect of that. And right now, sustainable solutions oftentimes have a higher level of cost. It's based on the cost of recycled content and or the additional additives and so on to help get those colors that the brand owners are looking for. In general, I would just say that that pricing will continue to move forward and up, I think, as sustainable solutions grow.

Any others?

Okay, one moment.

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

Thank you, and good morning, everyone. Wondering if you could talk about cash flow. Looks like with EBITDA down $5 million, cash flow from operations is now going to be $320 instead of $350, and free cash flow is going to be $180 instead of $200. I see on the balance sheet or cash flow statement that working capital or TAB, Mark McIntyre:" inventory in particular is up, but can you just help us understand what's going on from the cash flow perspective and what actions you're putting into place to try to improve this situation.

TAB, Mark McIntyre:" I mean, I guess related primary changes from our previous guys really related to some environmental expenditures and timing of tax payments. TAB, Mark McIntyre:" I not. sure what working capital information you're looking at. But in general, our working capital as a percentage of sales has actually declined this year versus last year. We've done a really good job of managing inventories. One of the things that you just have to look at with respect to cash flow and working capital is just the timing of when those things happen. We had a pretty significant influx of cash in November and December of last year. And that obviously factors into our percentage of sales. We don't have the same thing built into this year. So that might help you when you compare and contrast 23 versus 22.

Yeah, I was looking at the increase in inventory. But anyway, and this is a follow-up question. Where do you think your customers are? I mean, I know you talked about the healthcare situation and they were overstocked just sort of as a function of COVID and so forth. But do you think customers in general are now at very lean levels? As I know, obviously, there's a lot going on with interest rates and just broader macro concerns. But do you think that they're at sort of you know, levels where it just can't go on that much more so that when we get to 4Q, we maybe won't see the same level of seasonality that we typically would see? Or do you think that's still a risk in the fourth quarter?

I mean, I think that is, you know, part of our assumption is that we don't see the level of seasonality. I mean, if you look at our revenue projection for the fourth quarter, it's not that much higher than what it was last year, but last year was significantly below you know, where it's been in the last two to three years. So I think you're right on with that assumption. I think it does vary by industry. You know, I think in the outdoor space, which is one that we've talked about a lot, I actually think that there are some green shoots in that area that will start here in the second half of this year. We're seeing a little bit of that now. Dealer and retail inventory is very low still. So I mean, that tells you maybe that is lean. But, and then in other industries like healthcare, we said that apparently with what our customers are saying, both publicly and to us, their inventory levels are not lean. And so we see further destocking there.

Thanks very much.

All right. Well, thank you very much for the questions and for everyone listening in today. Hopefully you can make it to our sustainability day on September 20th. We look forward to updating you in that regard on that day. Thank you.

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