Avient Corporation

Good morning, ladies and gentlemen, and welcome to AVN Corporation's webcast to discuss the company's first quarter 2024 results. My name is Livia, and I'll be your operator for today. At this time, all participants are on listen-only mode. We will have 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 DiSalvo, Vice President, Treasurer, and Investor Relations. Please proceed.

Thank you and good morning everyone to join us on the call today. Before beginning, we'd like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectations and involve a number of business risks and uncertainties, any of which can cause actual results that differ materially from those expressed in or implied by the four looking statements. We encourage you to review our most recent reports, including our 10Q or any applicable amendments, for a complete discussion of these factors and other risk factors that may affect our future results. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation in the investor relations section of the Aviant website where the company describes non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures. A replay of this call will be available on our website. Information to access the replay is listed in today's press release, which is available at aviant.com in the investor relations section. Joining me today is our President and Chief Executive Officer, Dr. Ashish Kemper, and Senior Vice President and Chief Financial Officer, Jamie Beggs. I will now hand the call over to Ashish to begin.

Thanks, Joe, and good morning, everyone. I'm pleased to report that we started the year strong with first quarter adjusted EPS of 76 cents, reflecting an increase of 21% over the prior year quarter. This exceeds our first quarter guidance by 8 cents. Our improved performance was driven largely by additional sales and defense applications, as well as further raw material depletion. This was partially offset by lower sales in Europe. Later in the call today, Jamie will provide more details on our first quarter results and the positive revisions we are making to our 2024 full-year guidance. But first, I'll share some of my recent observations about our company and performance in the regions and markets we serve. Over the past two months, I have been traveling around the world, meeting with our employees, connecting with key customers, and touring our facilities. I have also had the opportunity to dig deep into regional market dynamics. In doing so, I learned firsthand from customers about their material science needs and opportunities. And I have held in-depth business reviews with our leaders in the United States, Europe, China, and Southeast Asia. I have done a lot of listening and probing and have been impressed with the quality of our leaders, the strategies serving local markets, and the feedback received from customers. It is also clear that consumer sentiment in each region is vastly different. And for this reason, we will spend some time this morning walking through demand trends to provide context on our results and outlook. We'll start with our largest region, US and Canada, which makes up 41% of overall sales. US and Canada grew 2% in the first quarter, driven by year-over-year growth in consumer, packaging, defense, industrial, and building and construction market segments. More than half of our sales in defense occur in the United States. These sales not only support military applications that protect soldiers from high-power rifle ammunition, but also local law enforcement, including Border Patrol and the Capitol Police. Award of additional defense customer programs exceeded our original estimates for the quarter. Offsetting the growth was a continued and significant destocking in the telecommunications space. Based on discussions with some of our key fiber customers in the telecom markets, it appears unlikely that we will see any meaningful rebound here until 2025. For EMEA, which represents 36% of our revenue, sales continue to be sluggish and were down 6% on a year-over-year basis for the first quarter. Consumer confidence remains weak there, and Eurozone manufacturing PMI continues to signal contraction. On the positive side, we are seeing encouraging signs in packaging and healthcare as we enter the second quarter. Within the quarter, sales for defense and healthcare applications grew. For defense, ongoing geopolitical situations, as well as the recent addition of Nordic countries to NATO, has increased demand for vests and helmets for ballistic protection. In healthcare, there is positive momentum in drug delivery devices, which allowed us to grow year over year in that region. Auto injectors continue to gain momentum, and we have partnered with key pharmaceutical companies in this space to meet the growing demand. Looking forward, the second quarter has started off slightly better in Europe. Easing of inflation and lower interest rates will be important contributors to freeing up household income for food, beverage, and other consumable goods as we progress through the year. Let's move to Asia, which represents 18% of our sales. The region is undergoing tremendous change as China transitions to focusing on its domestic economy. The fiscal stimulus by the Chinese government continues, but the visibility into its impact is still unclear. Approximately 60% of our Asia sales are in China, and 70% of what we do today within China serves local markets. This positions us well to grow, especially when the consumer is incentivized to spend more. With that being said, our sales in China grew 6% within the quarter, driven by strength in industrial and healthcare end markets. This was offset by lower packaging sales in remaining Asia. Overall, total sales in Asia were flat in the first quarter, excluding the impact of foreign exchange. Putting it all together for the entire company, organic sales were down 1.5% for the quarter. We do see demand conditions generally improving across all regions, but there is some variation in how overall end markets are trending. Telecommunications and energy remain the weaker end markets, with first quarter year over year sales down double digits and weakness continuing into the second quarter. However, We are seeing reasonably good demand year over year with improved momentum in consumer, packaging, defense, healthcare, and industrial end markets. With that, I will now hand it off to Jamie, who will provide more detail on our first quarter results and an update on our 2024 outlook.

Thank you, Ashish. I also joined the recent trips and meetings around the globe and was able to see firsthand how our teams are managing the current environment in each of their local markets while remaining focused on our long-term priorities. Our attention to execution and serving our customers led to a better than expected quarter. We are extremely pleased to have started the year exceeding guidance with a 21% year-over-year increase in adjusted EPS of $0.76. Adjusted EBITDA was up 7% to $143 million, and first quarter adjusted EBITDA margins increased 150 basis points. to 17.3%. As Ashish highlighted, organic sales were down 1.5%, primarily due to sluggish demand and challenges anemia. These factors were partially offset by volume growth in the Americas, particularly the packaging, consumer, defense, and industrial end markets. Ultimately, our ability to maintain price, capture deflation, and manage costs enabled us to grow EBITDA by 7%. That performance, coupled with the net interest expense benefit from the 2023 debt pay down and loan repricing, resulted in a 21% increase in adjusted EPS. Turning to a review of segment performance, I'll start with color additives and inks, which grew adjusted EBITDA 7% in the quarter on a 4% decline in sales. While demand was down primarily in Europe, the segment was able to maintain net price benefit from continued raw material deflation. We've also been focused on cost reduction, particularly in Europe, which also helped expand adjusted EBITDA margins to 18.8%, an improvement of 180 basis points versus the prior year. We are seeing positive momentum around the globe in consumer and packaging applications, the segment's two largest end markets. In addition, the color segment is benefiting from new business wins in health care, which helped offset most of the impact from customer destocking within this end market. Our specialty engineered materials segment was up 14% in adjusted EBITDA from the prior year quarter on a 1% increase in sales. Defense, which makes up approximately 20% of the segment sales, was up over 35% due to continued geopolitical tensions and overseas conflicts. This is partially offset by weaker demand for fiber optic cable, which we discussed during the last earnings call. As with color, SEM also benefited from raw material deflation, as well as favorable mix from defense growth. Adjusted EBITDA margins expanded 240 basis points to 23.2% for the quarter. Next, let's look at our adjusted EBITDA bridge, where we highlight the impact of demand, price and mix, as well as raw material costs on a year-over-year basis. We've covered demand quite a bit already, but the other key takeaway on this slide is deflation. This is the fourth consecutive quarter we have seen raw material deflation on a year-over-year basis. On last quarter's call, I said that we expected between $20 and $30 million in raw material deflation benefit in the first half of the year, and we still believe that will be the case. As reflected on the bridge, the majority of this benefit was realized in the first quarter. This was driven by better than expected pricing on non-hydrocarbon based raw materials, such as pigments and certain performance additives. This trend is reversing course and I'll provide additional context on the raw material environment in my outlook commentary in just a moment. Our net price benefit more than offset inflation and other input costs, including wages. These items resulted in an increase to adjusted EBITDA by 7% versus the prior quarter despite sales being down 2%. Turning next to guidance, we are providing estimates today for the second quarter and an update to our full year 2024 guidance range. We expect second quarter earnings per share of 71 cents, which reflects a 13% increase over the prior year. This expected double-digit growth is driven by improving demand conditions across most end markets in all regions. We have also taken into account seasonality in Europe a moderating benefit from raw material deflation, and the timing of defense orders. Regarding defense, we did have incremental wins in personal protection applications during the first quarter, but order patterns can be lumpy for this business due to the nature of the large military programs in which we supply. We do expect double-digit growth to continue through the year, but not likely to the same extent in the first quarter. On a full year basis, we are increasing the low end of our guidance for adjusted EBITDA to a range of $510 million to $535 million, and adjusted earnings per share to a range of $2.50 to $2.65 to account for the better than expected results in the first quarter. Our full year adjusted EPS guidance range now represents 6% to 12% growth over the prior year. Demand conditions have evolved where Europe started the year more slowly due to stagnant consumer sentiment, and while demand is improving in this region, especially in packaging and healthcare, overall regional year-over-year growth will likely remain muted. In the U.S., due to persistent inflation, the timing of interest rate cuts will likely come later than originally estimated, which may weigh on sales in building and construction, industrial and transportation and markets. We expect pricing, net of raw materials to drive earnings growth year-over-year, but not to the degree of the prior few quarters as we begin to lap the deflation that started in the second quarter of 2023. The strengthening of the U.S. dollar has also created a headwind, and based on today's rates, would be an unfavorable impact of $8 million to full-year adjusted EBITDA versus the prior year and our prior guidance. Our revised adjusted EPS guidance reflects lower interest expense associated with repricing of our term loan and lower expected depreciation expense based on the timing of capital expenditures. Interest expense is now expected to be 105 million in 2024 as we lowered our interest rate on our term loan by 50 basis points or 3.5 million annually in April. This benefit is partially offset by the expectation for higher SOPR rates in the second half of the year impacting our variable rate debt, which represents about a third of our outstanding debt. We continue to expect our adjusted effective tax rate to be between 23% and 25%, and our capital expenditures to be roughly $140 million. Both of these are unchanged versus our prior guidance. Before we open the lines for questions, I'll turn the call back over now to Ashish for closing remarks.

Thank you, Jamie. The AVN team executed well in the first quarter as we navigated the changing demand environments in each geographic region. I am confident that we will carry this momentum through the rest of the year as the underlying macro environment improves. During the last earnings call, I shared a few top of mind areas that are forming the basis of our long term strategy that we will build out and share later this year. The first of these, is driving profitable organic top line growth with margin expansion on the bottom line. We have the portfolio and material science expertise to do this. Part of our portfolio is aligned to high growth end markets with attractive secular trends. Another part of our portfolio is focused on delivering exceptional service and quality solutions in more established markets. Both are important to the overall AVN business, but require different tactics to win and help us grow profitably in a sustained manner. In particular, the high growth portions of our portfolio may need higher investments to realize their full potential faster. Conversely, more mature portions of our portfolio may need to drive efficiencies to generate the high cash flows expected of these businesses. Beyond prioritizing our portfolio, there is room to maximize what we already have. by translating and replicating our success faster in the market where we already play. Further, our commercial teams have a unique advantage in the market. They can leverage the full Avian portfolio from colors to additives to composites to engineered materials every time they knock on a customer's door. The breadth and depth of our solutions is unmatched by others. We have the portfolio and the foundation to win in the marketplace and gain share. With that being said, the only way to stay relevant is to continue to innovate. There is a path to play bigger and bolder on certain secular trends, such as lightweighting and recyclability. Additionally, the fast-changing world is creating new opportunities for a material science company like Aviant every day. We will be agile to capture the most relevant and important opportunities that will create value for our stakeholders. I am energized by my recent travels visiting our employees and customers around the world. I'm also excited about the growth potential of our portfolio and how we will win in the marketplace. More details to come, but we have a bright future ahead. That concludes our prepared remarks. Jamie and I are happy to answer any questions you may have.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telethon and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Frank Mitch with Permian Research. Your line is open.

Thank you, and good morning. Nice start to the year. And obviously, like, wow. on 35% growth in defense. Ashish, you just mentioned that some of these higher growth regions might require higher investments. Can you talk about where we are on a utilization basis? I mean, is this something that you're going to need to invest some more capital very quickly? And Jamie mentioned that you're expecting double-digit growth for the rest of the year. Any more color on that? Because that really kind of jumped off the page.

Thanks, Frank. It's good to hear your voice, and I just want to say some things about utilization here. I think defense is obviously very well utilized. I mean, I actually got a chance to see the line actually running in Europe when I was visiting there, so it's running full swing, and utilization rates are great, and we are able to produce whatever is in the demand forecast right now. So we don't see any capacity limitations to meet our orders this year at all. In future, of course, over time, we will continue to evaluate the situation. These kinds of lines take some time to build, and typically one to two years is the typical timeframe. And so we have to prepare in advance for those kinds of situations. And we are on top of that with respect to our capex budget as well as planning the capacity expansions where we are seeing the demand growing. But APM or Dyneema line is just one of the examples with respect to other high growth areas as well as we amplify innovation in certain growth areas which have got secular trends and are expected to grow faster. then those are the other areas where we're going to be putting a little bit more CapEx money over the time to make sure that we are able to meet the demand of our customers.

Understood and very helpful. On the flip side of the ledger, Europe has been a bit of a restraint. However, looking at the year-over-year declines, 14% in the fourth quarter only down to 6% in the first quarter. What's your thoughts on Europe flipping to neutral markets and maybe even showing some growth before 2024 is out.

So, Frank, I mean, actually, I'm pretty excited as we move from Q. By the way, Q1 just was unfolded almost largely like what we had projected, except we saw stronger than expected demand and defense orders, but also a little bit sluggish recovery in Europe color. So that was the highlight of Q1 for us. As we look into Q2, we are seeing increased momentum in our demand in many more market segments than what we had seen in Q1. And that is also in projection with how we are thinking. So we are hoping and expect that Q2 is a positive year-over-year quarter for us after seven straight quarters of negative growth year-over-year. And Europe is going to also flip positive in Q2. on the demand side in Q2.

Excellent. Thanks so much, Ashish.

Thank you. One moment for our next question. And our next question coming from the line of Lawrence Alexander with Jefferies. Your line is open.

Good morning. First, I wanted to get your perspective on the M&A environment, what kind of opportunities you might have available and if multiples are coming down to more reasonable levels. And secondly, can you give a bit of sense about kind of the overall caution on North America in terms of kind of restocking? How much visibility do you think you'll have if and when kind of inventory channel dynamics change?

On the M&A side, Lawrence, we mentioned last call, and again, part of our strategy is to focus on driving organic profitable growth and margin expansion. So in the near term, M&A is really not a priority for us. I'm not ruling out M&A altogether, but if we do anything at all, it's going to be small and probably bolt on in nature. So But, you know, we right now, we continue to maintain a pipeline on the M&A side, and I think, you know, some of the areas that we continue to, you know, probe deeper are the ones where we are putting a strategy for our growth. And if you look at our four growth vectors of sustainable solutions, composites, healthcare, and the two areas of Asia and Latin America, those are the four areas. And so our M&A focus is largely around those areas, and still we feel the premiums are pretty high. But again, it's not something that we are looking very aggressively at right now. With respect to North America situation on restocking, you know, we see pretty good momentum in North America right now. Actually, we see consumer packaging, defense, industrial, and building and construction all growing anywhere between 5% to 10% in those kinds of segments for us. The big issue on North America for us is transportation is a little bit of a question mark. And then energy and telecommunication obviously are the two big down market segments, as I mentioned in my prepared remarks. So I think overall the demand is the destocking in those markets is over. I should also mention in some of these areas, although The demand may not be coming back like building and construction, but our team is doing a fantastic job winning share and taking, you know, basically growing the business by taking share from competition. And I think that's something that we are continuing to do in Europe as well, whether it's our drug devices, drug delivery devices in healthcare or, you know, defense applications back in Maine. or wire and cable applications in building and construction. So overall, I think demand is coming back in North America quite well. And in most of the market segments, all the couple of chronic areas like energy and telecommunications continue to be, you know, double-digit negative going into Q2.

And just to add on, Lawrence, from a healthcare perspective, that industry is still destocking. About 55% of our healthcare business is in the U.S. We see that continuing probably to the middle of the year. As Ashish mentioned earlier, we are getting some positive momentum in auto-injection or drug delivery devices, but overall, we expect that to also turn positive once we get into Q3.

Thank you. And our next question, coming from Delaina, Mike Harrison with Seaport Research Partners. Your line is open.

Hi, good morning. Congrats on a nice start to the year. Wanted to start out by asking about the engineered materials business. That gross margin of 34% is, I don't know if it's an absolute high watermark, but certainly since you've acquired Dyneema, it's a high watermark. And I assume a lot of that strength is driven by the strength that you're seeing in defense. I'm just trying to get a little bit better sense of, as we go through the year, is something in that low to mid-30s range for engineering materials gross margin a sustainable level? Or maybe talk a little bit about the dynamics that were going on in the quarter that led to that strength that may or may not be sustainable.

Thank you, Mike. I think, you know, obviously, you know, our EBITDA adjusted EBITDA margins of 17.3% overall for the company and specifically for specialty engineering materials above 23% is really quite exciting for us as well because as part of our strategy of top line, profitable top line growth and margin expansion, it's good to see the margin expansion coming. As you know and we mentioned in our prepared remarks as well, Q1 benefited a lot from a better mix coming from increased defense sales and also the RM deflation. Now, the defense orders are typically lumpy. They are large and they are timing based. We have to ship them out in a certain amount of time. That dynamics is not expected to repeat going into Q2 and further. If it all repeats, it's going to be at a much different level or much smaller level if you see anything of that. I would say Q1 was really a good quarter for us where we saw a good boost in our margins coming from defense, but also from RM deflation as well. As we go through the year, our expectations is that we will continue to grow margin and expand margins in SEM business, but also in the CAI or color and additive settings business, but not to the extent that we are seeing it in Q1. And I think overall for our company, we expect margin expansion anywhere between 0 to 50 basis points for the year at this point in time.

And Mike, maybe to add on specifically for SEM, yeah, 34% was the gross margin for engineer materials. We do expect that to be in the low 30s through the rest of the year. And I would characterize it just as you did. Q1 would be a high mark for SEM, really driven by the strong 38% growth in defense that Ashish talked about earlier in his comments.

All right, great. And then, Jamie, I didn't see a slide on free cash flow or working capital expectations, but can you talk about how those may have changed since your last earnings call?

Yeah, there hasn't been a whole lot of changes other than we did raise the overall guidance. We narrowed the range so the EBITDA midpoint is higher. Working capital really is dependent on how the back half sales growth continues to evolve. Since that's been slightly higher, I would expect that working capital to be a slightly bigger draw than what had originally been communicated. We haven't made any changes to CapEx and so on, so not a whole lot of changes in free cash flow other than to account for the increase in the earnings and maybe a slightly higher working capital draw.

Thanks very much.

Thank you.

Thank you. And our next question coming from the line of Michael Sisson with Wells Fargo. Your line is open.

Hey, good morning. Nice start to the year. As she said, it sounded like 2Q sales is going to be up sequentially from the first quarter. I think you noted some momentum in some of the markets. Why wouldn't EBITDA be up sequentially or EPS? Just were there a couple of things that were maybe – better than our one-time items in the first quarter. I mean, margins were pretty good. So just curious if sales are up, why wouldn't EBITDA earnings be up?

Yeah, Mike, you're right. I mean, sales are about 6 million EBITDA expectations. And I think the EBITDA is down a little bit. It's that likely because I think the raw material deflation impact sequentially is about 5 million EBITDA. And then we have another million or so in some investments in the IT area, which is the main reason why EBITDA is down.

Got it. And then for the full year, it does seem like the first half is coming in better. The margins in SEM look really good. Any reason why the margins there are don't get better as vines get better? Just curious on how that sort of unfolds.

Yeah, Mike. So yes, absolutely. The first half is coming strong, specifically as you saw Q1 results and the mix played a large dynamic as well as deflation. When we get to the back half, there's two primary things that are changing. One, that deflationary aspect is starting to get lapped. As you recall from our bridges that we've communicated out, second quarter of 2023 was the first time we saw deflation. We'll be lapping that once we get into the back half of the year. And as you've seen raw materials evolve, even for the beginning of this year, we expect that deflationary benefit to basically go away in the back half. The other side of that, which we also communicated the last time we were together, really revolves around an incentive reset. So there is some back half headwinds in terms of costs that we expect to come back. So we do see margins continue to improve as we go through the year, but they're seasonally adjusted, and we have to account for some of these dynamics with raw materials and costs as we get to the back half of the year. But on a few-year basis, as Ashish mentioned earlier, we do expect margin expansion in total for the business.

Got it. Thank you.

Thank you. And our next question, coming from the lineup, David Huang with Deutsche Bank. Your line is open.

Hi, good morning. Just going back to the guidance, I guess Q1 exceeded your guidance by $10 million on EBITDA. It sounds like defense is doing better, deflation is getting better. Why did you only increase the four-year guidance by $5 million on the low end? I guess what's the volume assumption embedded in the guidance right now versus three months ago?

So maybe just to clarify, David, so the beat that we had based on our internal estimates was closer to $8 million. We did have some goodness in depreciation and interest expense as well. So about half of that beat relates to mix and demand that we talked about, specifically with defense offsetting some of the sluggishness that we had expected to not come from Europe. And the other half really relates to raw material deflation. Our assumptions for the full year has not changed for raw material deflation. We still expect that 20 to 30 million, primarily in the first half. It just got pulled forward into the first quarter. So that is not something that we see as demand coming through. That's just the timing of raw materials. So in essence, we really beat by 4 million on EBITDA for the first quarter, and that's basically what we raised in our low end of our guidance.

Okay. And just on defense, what type of EBITDA margins are you realizing these days from defense? And I guess given the current events, do you think you're over-earning in defense, which could become a headwind to you next year?

So we typically don't give out margins by applications, but I will tell you from the 150 basis point margin, improvements that we had Q1 year over year. About 50 of that came from mix and defense and about 100 of that came from deflation that comes through. We are mindful that defense can be lumpy. We did have some additional program wins in addition to some of the large military programs on more local law enforcement from Border Patrol and Capitol Police that came through the first quarter. So we do expect there to be some lumpiness as we go through the year. That's inherent in the nature of defense, but we do expect strong double-digit growth for the full year of 2024 and as things evolve in the geopolitical environment that would then play forward and how we think about 2025 and beyond.

Okay, thank you. Thank you. And our next question coming from the line of Kristen Owen with Oppenheimer. We'll let this open.

Hi, good morning. Thank you so much for taking the question. Ashish, I wanted to follow up on some of the comments that you made about sort of outperforming the market in certain end markets, gaining share. If you can help us understand, what are the drivers behind that share gain? Is there some additional investment that you need to put in place from a Salesforce perspective? Help us understand the market share commentary, if you don't mind.

Yeah. Thanks, Kristen. The share gains that I'm talking about really don't need any extra investment. They really are basic blocking and tackling and staying close to customers. Quality, service. Building and construction, I talked about wire and cable business, and they're really maintaining high quality, high services, our differentiator, and that's what's driving us. Similarly, in defense, many more spec and wins, especially for short-term projects with Border Patrol and Capitol Police. And that's all just staying close to key accounts and customers and being in touch with what's happening on a day-to-day basis. And then on the consumer side as well, we've been taking shares, especially on the large appliances side and in different parts of the world. And that's just providing... Good price value, but also good service, which is really a differentiator there. So I wouldn't say there is any extra investment needed, any of these things that we are winning share in. Obviously, as we grow these businesses, and we talked about earlier, and the volumes grow, we'll have to make investments as these businesses grow bigger in terms of making sure we have capacity to feed all these things.

Thank you for that. My follow-up question is related to actually margins in the color segment. You know, you guys have taken some restructuring actions post the master batch acquisition really to bring up the profitability of the European business there. Just thinking as that business flips from negative volume to positive volume, how we should think about the contribution of of MasterBatch in terms of EBITDA accretion? Is that yet at the portfolio level? Just how to think about margins in color going forward as you see Europe modestly improving?

Yes, so I think that the big thing on color in Europe is to drive margin expansion and while we continue to gain share there as well. So the teams that are working hard and We have done a lot of restructuring work there and looked at our plant footprints so that our plant footprint optimization is underway and we continue to drive that as well. Additionally, focusing color in sediments which are more accretive on margin. We talked about healthcare. We talked about certain packaging applications. Those kinds of applications is going to help us grow our margins better in color as well, and not just in Europe, but everywhere else. So we are seeing year-over-year margin expansion in color. You saw that in Q1. We had 180 basis points adjusted with the margin expansion, and we expect pretty good margin expansion for the year for color as well. So I think color is on its journey to drive margin expansion as The demand comes back, and then I think the higher volume will also help with better favorability on the factory side, which will help us drive margins even more.

I think, Kristen, we have an overall goal for both the segments to be north of 20% so that we can have total company margins above 20%. They're well on their way to be able to do that. Part of that, obviously, is in the synergies related to the clearing acquisition, which we still have a couple more plant closures that we are working through to be able to drive some additional margin expansion. But the majority of that going forward, as Ashish talked about, is really growing underlying volumes and also expanding in innovation areas such as in sustainable solutions and additives that I think will also expand margins for the space. But 18.8% is closing that gap to be above 20%, and we expect further margin expansion as we look through the strategic plan that we hope to, I guess, to talk more about later in the year.

Great.

Thank you so much. Thank you. And our last questioner, coming from the line of Vincent Andrews of Morgan Stanley, Yolanda Selvin.

Thank you, and good morning, everyone. I'm wondering if you could drill in a little bit more to telecom on a couple of scores. First, Ashish, I think I heard you say your customers are saying it's not going to get better until 2025. So what is it that they're telling you in that regard? And from our perspective on the outside, what do we need to see to kind of help us understand that that inflection is finally going to come there?

Yeah, so that specific comment was for telecommunications. And, you know, in the telecommunications area, we see it is really a two-piece situation. If you look at the market, the biggest markets are in U.S. and Canada and then also in Europe. And we are seeing that market stabilize, the telecom market stabilize, not yet grow, but stabilize in U.S., But Europe continues to not stabilize right now. So when we talk to some of our big customers who are in this 5G and telecommunication area, there is a lot of destocking still happening. There's a lot of inventory in the channel. And on the demand side, it's still low. And these are capital-intensive businesses, so the interest rates are not helping deployment of fiber optic cable and so on and so forth. So I think in the end, based on our assessment, we believe that this market overall is going to turn around in 2025. Okay. No, go ahead, Ashish, please. I was going to say that earlier on we were expecting it to turn around in second half of this year. That's one change from our previous earnings call. We feel like it's going to go longer than we thought.

Okay, that's really helpful. If I could follow up on the raw material costs, you know, no surprise, it's flattening out in the back half of the year. So maybe two questions. One, could you help us understand that 38% of your raws that are non-carbon based that are a little harder for us to track on the outside, could you help us understand how those are trending? And then just secondly, you know, as I run some sort of generic raw material models these days, I'm starting to see modest inflation, you know, low single digit, what have you, for 2025. And obviously, a lot can change between now and then. But if we do get back to an inflationary environment, what is your plan? Do you think you'll sort of proactively go after some further productivity? Or do you think there's still the ability to price to offset it as well as getting price for mix and innovation?

Yeah, on the other raw materials, those are more stable raw materials. They really call off the ones in the charts in the back of our deck that have a little bit more volatility in terms of market dynamics swinging them. So we don't expect a whole lot there other than just the general comment that you said before that there is some inflation. That would be in the single digits. Really what we've been watching is the ones that are highlighted in the back. We do expect inflation to come in the back half of the year. The total for the company, 20 to 30 million is what we anticipate. Most of that being recognized in the first half with some inflation in the back half, which is causing some of the headwinds that I think Mike talked about from the standpoint of margins. We've always been really good about pricing. The team is very attuned to watch how that works. We do price based on value. That's the first avenue that we always look at. And then second, if If raw materials are moving on us in a material way, we also make sure that we're aware of that to maintain the margins. And as you've seen through the bridges that we provided over the last, I don't know, eight to nine quarters, we've been able to always have a net positive impact from the deflation or inflation based on our pricing initiatives. And we expect to continue to be able to cover that through 24 and 25 as these conditions continue to evolve.

Thanks very much. Thank you. I'm showing no further questions. I will now turn the call back over to Dr. Ashish Kanpur for any closing remarks.

Yeah, thank you very much, everybody, for joining this morning. That concludes this call, and goodbye, and see you next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.