Avient Corporation (NYSE:AVNT) Q4 2023 Earnings Call Transcript
Avient Corporation (NYSE:AVNT) Q4 2023 Earnings Call Transcript February 14, 2024
Avient Corporation beats earnings expectations. Reported EPS is $0.52, expectations were $0.47. Avient Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to Avient Corporation's Webcast to Discuss the Company's Fourth Quarter 2023 Results. My name is Norma 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 like to turn the call over to Joe Di Salvo, Vice President, Treasurer and Investor Relations. Please go ahead.
Giuseppe Di Salvo: Thank you. And good morning to everyone joining us on the call today. Before beginning, I'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 forecast of future events and are not guarantees of future performance. They are based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Please refer to the investor presentation for this webcast for a number of factors that could cause actual results to differ.
During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on the Avient website where the company describes the non-GAAP measures and provides a reconciliation or historical non-GAAP financial measures to their most directly comparable GAAP financial measures. Joining me today is our President and Chief Executive Officer, Dr. Ashish Khandpur, and Senior Vice President and Chief Financial Officer, Jamie Beggs. We also have Bob Patterson, who is serving in a transition advisory role with the company. Bob will briefly make some opening remarks before we start the discussion on performance. I will now hand the call over to Bob to begin.
Robert Patterson: Thanks, Joe. Good morning, everyone. Last November, I announced my plans to retire and pursue my lifelong passion for teaching and spending more time doing that at the University of Michigan, my alma mater. Today, I have the privilege of introducing Dr. Ashish Khandpur, who succeeds me as Avient's new president and chief executive officer. Ashish took over on December 1, and brings a fresh perspective to our specialty portfolio that has undergone a tremendous transformation over the past decade. Ashish joined us from 3M where he spent 28 years. A chemical engineer by education and trade, he began his career there and rose to become chief technology officer of the company. Over those nearly three decades, he distinguished himself as a brilliant scientists, innovator, and ultimately, a proven business leader and operator.
His last role at 3M was group president of transportation and electronics, a $9 billion business. It's a business he took into high growth end markets with new technologies and applications, which is exactly where Avient is focused. I have been with the company almost 16 years in total, and nearly 10 as CEO. During that time, we have upgraded our portfolio by divesting commodity businesses and reinvesting the proceeds in two transformational and 17 bolt-on acquisitions. We are the number one leading color formulator in the world. We have built a composites portfolio from scratch, which includes Dyneema, the world's strongest fiber. We've completely transformed where EBITDA is generated from and now have 100% of our businesses dedicated to formulating specialty solutions.
I look back on my time with the company with a lot of pride and appreciation for what we accomplished. The transformed portfolio is a perfect springboard for Ashish to elevate Avient to the next level of performance. I'm confident he will drive profitable growth and create long term value for our shareholders. His background and experiences are perfect for the next era in Avient's journey. To our associates, shareholders and board of directors, I thank you for your support and trust during my tenure. I now leave you in very capable hands with Ashish, Jamie and the 9,500 associates at Avient I've had the pleasure of working with.
Ashish Khandpur: Thank you, Bob. And congratulations on your retirement. A transformation of any kind is difficult, difficult for an organization to go through, but even more challenging for the person leading it. These achievements of transforming Avient to 100% specialty portfolio took commitment, talent, and certainly leadership. Bob has provided all three. It is a retirement well-earned and I wish him the very best in health and happiness. In the first two months I have been with Avient, I have had a chance to meet with several stakeholders, including investors, customers, and of course, our talented associates. A common question I get is, why did I join Avient. While there are many factors to consider when changing roles, it ultimately boils down to the tremendous potential I see to profitably grow the company.
Doing so requires a culture of strong customer focus and a relevant portfolio of technologies, both of which Avient possesses. Leveraging these, along with amplifying innovation in high growth market segments or around secular trends will help us grow profitably in a sustained manner. This will also require some bold thinking, prioritization and acting with courage, which are all leadership traits I have personally developed and honed over the years, and that I will be purposeful to instill in my teams as well. Over the last several years, the company has highlighted its four key growth drivers of sustainable solutions, composites, healthcare and emerging regions. I see these as secular growth areas, and they currently make up 60% of our business.
The team did a great job laying out the market dynamics underlying sustainable solutions, as well as showcasing many of our differentiated formulations at last September's Investor Day. I'm also impressed with the trajectory of our composites portfolio as it continues to displace wood, glass or metal in an increasing number of applications. And while a smaller portion of our portfolio currently, the healthcare business is sticky, profitable, and an area that will continue to grow steadily as our population ages and people trend towards more self-care. Now, turning to our earnings announcement this morning, I'm extremely pleased to finish the year with fourth quarter adjusted EPS of $0.52, reflecting an increase of 24% over the prior-year quarter.
Jamie will provide more details on some guidance for 2024 in a moment, but first I'm going to share a few observations on the demand trends we are seeing across the end markets and the major regions of the world that we serve. As we noted in our earnings release, our two largest end markets of packaging and consumer benefited from the slower pace of destocking during the fourth quarter. They make up a little more than 40% of our sales. And while still down year-over-year, they are much less sold than in previous quarters. It is worth noting that both packaging and consumer sales were down sequentially only 4% and 3%, respectively, from the third quarter to the fourth, despite the fact typical fourth quarter seasonality we experienced in our business.
This, along with the order trends to start the year and insights from our customers, gives us confidence that destocking has largely come to an end in these areas and that orders are more of a reflection of underlying demand. We discussed the healthcare end market in detail in our last quarterly earnings call. While fourth quarter sales in healthcare were down 9% year-over-year, the pace of destocking has also started to slow. Q4 sales were up sequentially 3% from Q3. Fundamentally, the underlying demand from consumers for health care applications remain steady. Examples include the increased use of self-injection pens for drug delivery, continuous glucose monitors to manage diabetes, as well as catheters and tubings used in surgeries. And while some of our healthcare customers continue to manage the inventory levels to start the year, we expect to see improvement in demand as we progress through 2024.
In industries which are sensitive to interest rates and are more capital intensive, such as building and construction and industrial, we do see continued softness, both from destocking and overall demand. There are new business gains in composite applications replacing conventional building materials, which should provide some offsets to the industrial and building and construction end markets. Telecommunications was the weakest end market for us in the fourth quarter, and we expect softness to continue in the first half of 2024. Rising interest rates and destocking have definitely impacted demand here, as has the delayed timing of projects flowing from the BEAD program. Jamie will cover more details on this topic when we discuss SEM's performance.
Rounding out the end markets, sales and defense applications continue to be strong, as demand remains high in light of continued geopolitical tensions and recent conflicts overseas. The primary growth is in personal protection where Dyneema plays a significant role in protecting soldiers with ballistic vests and helmets. Moving on to the regional observations. Each of the regions have different fundamentals that have resulted in varying performance in 2023 and will continue to influence how we look ahead to 2024. Starting with our largest region, we expect the US and Canada to continue to improve as the year progresses, given consumer sentiment appears to be resilient despite higher interest rates. This region does have slightly more exposure to health care, which implies potentially sluggish growth in the near term, but should ultimately drive greater growth as destocking ends.
Telecommunications will also be a significant tailwind once destocking ends and when the federal funding is fully allocated to states to expand the installation of fiber optic cable under the BEAD program. In EMEA, demand remains tepid with consumer staying cautious due to prolonged geopolitical issues, higher interest rates and the lack of government stimulus or infrastructure spending compared to other regions. However, defense is a bright spot and destocking appears to have ended for packaging, which is the largest end market in the region. In Asia, our outlook remains cautious due to uncertainties in the China economy, and it remains to be seen how the new government stimulus package will translate to spurring the economy in 2024. While Latin America only represents 5% of our business, we do view it as an important region not only to tap into local market opportunities, but also as a region where our global customers look towards shifting production.
Our sales were up year-over-year in Latin America in the fourth quarter in our largest end market, packaging, and we expect that momentum to continue into 2024. With that, I will now hand it off to Jamie, who will discuss our fourth quarter results as well as our initial outlook for 2024.
Jamie Beggs : Thank you, Ashish. Your overview provides good context to now dive deeper into our results. As Ashish mentioned earlier, we delivered adjusted EPS of $0.52, exceeding our guidance of $0.47. This was driven by a slight beat in sales and favorable net interest expense. Fourth quarter adjusted EBITDA margins of 15.9% was also slightly ahead of our guidance and reflects a 240 basis point improvement versus the prior year. This margin expansion was driven by favorable mix, deflating input costs and prudent cost management. Favorable mix came from improving demand in packaging and consumer end markets, as well as certain applications in our composites platform, such as defense. Regionally, Europe was the key contributor to the margin expansion and drove the year-over-year earnings growth in the quarter.
Looking at performance versus the prior year fourth quarter, sales were down 9%, mostly due to weaker demand, with some offset in price and mix and a marginal benefit from FX. Ultimately, our ability to price effectively, capture deflation and manage costs allowed us to grow EBITDA by 7% and adjusted EPS by 24%. From a segment perspective, Color, Additives and Inks grew EBITDA 20% in the quarter, driven by the earnings improvement in Europe. As we discussed before, many of the remaining cost synergies related to the Clariant acquisition were to come from Europe, as we rationalized operations and adjusted staffing levels. These cost reductions helped the bottom line as well as the impact of raw material deflation. Color also benefited from improving demand in consumer and packaging market, which has a favorable impact on mix for the segment.
The Specialty Engineered Materials segment was down $6 million in EBITDA from the prior-year quarter and $5 million of this reduction is due to exposure in the telecommunications end market where demand was significantly down. Specifically, this impacted our fiber line business that provides composite applications using fiber optic cable. This end market has been impacted by inventory destocking and timing of the funding related to the BEAD program. For those who aren't familiar, BEAD, also known as Broadband Equity Access and Deployment, is a $42 billion program to expand high speed internet access by funding infrastructure and adoption programs in the US. States submitted plans to the government and approval is imminent. We anticipate fiber optic cable demand to improve in the second half of 2024 as the states began receiving funds for their broadband deployment projects, and then become more significant in 2025.
Similar to color, SEM also benefited from raw material deflation and favorable mix, driven by certain composite applications in the building and construction space, as well as in defense. These items, along with cost actions, partially offset the reduction in demand. Moving to the fourth quarter EBITDA bridge, we highlight the impact of demand, price and mix, as well as raw material costs on a year-over-year basis. Starting with demand, it is down less compared to previous quarters as the pace of destocking slowed in most end markets. Also highlighted on this bridge is the impact of pricing and deflation, which more than offset lower demand. This is the third consecutive quarter we've seen raw material deflation on a year-over-year basis, and we expect that to continue as we start 2024.
Further down, you'll also see the impact of certain cost reduction activities that were initiated at the beginning of 2023, including targeted European restructuring and reduced discretionary spend, which provided a $13 million benefit in the quarter. These cost control efforts more than offset wage inflation. All in all, we were able to grow EBITDA 7% despite sales being down 9% for the quarter. Turning to 2024, we're providing guidance today for the first quarter and full year. We expect Q1 earnings per share of $0.68, which would reflect an 8% increase over the prior year. This takes into account the end market and regional trends Ashish commented on earlier. To reiterate, we are seeing improving trends in our largest end markets, packaging and consumer, and strong demand for defense applications.
Balancing this is the continued destocking in telecommunications and healthcare as well as end markets that are more sensitive to higher interest rates, such as building and construction and transportation. On a full year basis, we anticipate adjusted earnings per share between $2.40 to $2.65 and adjusted EBITDA of $505 million to $535 million. We're providing a range to account for different scenarios of how demand could ultimately play out in 2024. We are optimistic that demand in the US will strengthen as destocking comes to an end across all markets. We also see growth in emerging regions such as Southeast Asia and Latin America, but we are more conservative on our view of China since their growth will be dependent on increased consumer spending and sentiments.
Lastly, Europe's underlying demand is likely to be muted, but we can confidently say destocking is done and we believe sustainable solutions, especially in packaging, will help us grow year-over-year. We do expect raw material deflation to provide a benefit in the first half of the year. Conversely, in the back half, we have some headwinds associated with an incentive reset. Interest expense is expected to be between $105 million and $110 million in 2024. This is slightly lower than 2023 based on the most recent SOFR curves and the full year benefit of the $100 million paydown that we did in August of last year. In addition, we expect our effective tax rate to be between 23% and 25%. We are taking a balanced view of 2024, where we are optimistic that demand will improve, but also mindful that there are certain economic factors that could influence particular end markets and regions.
Before we open the lines for questions, I'll now turn the call back over to Ashish for a few closing remarks.
Ashish Khandpur: Thank you, Jamie. I'm very pleased that we finished the year better than expected, and we view that as positive news as we head into 2024. It has been a couple of months since I joined Avient. I have spent much of my time in great discussions with investors, customers and employees, digging into our businesses, portfolio and the innovation pipeline. Timing was perfect, in that just two weeks ago we hosted our annual leadership conference where we brought together our top 150 leaders to engage and align on expectations, as well as increased collaboration across businesses. Among my many encouraging takeaways from the conference is that we have a customer focused team that loves to win and is fully committed to doing so going forward.
What's next for me is to continue having robust dialogue with our many stakeholders. Given the diversity of our customer base and technology portfolio, these conversations are proving to be extremely valuable, as we further evolve how and where we serve our current and future customers to profitably grow our business. Which leads me to a few top-of-mind things that will become core themes of our thinking as we evolve our strategy. First is driving profitable organic top line growth, while expanding our margins on the bottom line. We have ample opportunities to drive profitable growth by focusing on our customers, leveraging secular trends, combining our technology platforms, and winning share in the marketplace. The second is amplifying innovation.
This is an area of great interest and opportunity as well. Robust customer driven innovation is near and dear to my heart, not just because of my background, but because I've seen firsthand how it powers business and delivers growth and margin expansion. We are an innovative company and, in our future, we will be even more so. And the third is around continuing to build and invest in our leadership and people. Avient has a highly competitive and collaborative culture. We live our brand of challenge accepted and embrace the world required to deliver on those challenges. Our next chapter at Avient will challenge us in new and exciting ways. So we will continue to ensure our teams are prepared for future success. Again, I will have more to share as our strategy and plans are built out.
But let me close with this. In my short time here thus far, it has clearly solidified my very first impressions that Avient is a fundamentally strong company and we have significant growth ahead of us. That concludes our prepared remarks. Jamie and I are happy to answer any of your questions now.
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