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Edited Transcript of AVNT.N earnings conference call or presentation 22-Jul-20 12:00pm GMT

Q2 2020 Avient Corp Earnings Call

AVON LAKE Aug 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Avient Corp earnings conference call or presentation Wednesday, July 22, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley C. Richardson

Avient Corporation - Executive VP & CFO

* Giuseppe Di Salvo

Avient Corporation - VP of IR & Treasurer

* Robert M. Patterson

Avient Corporation - Chairman, President & CEO

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Conference Call Participants

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* Colin William Rusch

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Frank Joseph Mitsch

Fermium Research, LLC - Senior MD

* James Michael Sheehan

Truist Securities, Inc., Research Division - Research Analyst

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Michael Joseph Sison

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Rosemarie Jeanne Morbelli

G. Research, LLC - Research Analyst

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Avient Corporation's Second Quarter 2020 Conference Call. My name is Sarah, and I will be the operator today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. At this time, I would like to turn the call over to Joe Di Salvo, Vice President, Treasurer and Investor Relations. Please proceed.

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Giuseppe Di Salvo, Avient Corporation - VP of IR & Treasurer [2]

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Thank you, Sarah. Good morning, and welcome to everyone joining us on the call today. Before beginning, we'd like to remind you that statements made during this conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statement. Some of these risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission as well as in today's press release.

During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the Avient website where the company describes the non-GAAP measures and provides a reconciliation from the most comparable GAAP financial measures.

Joining me today is our Chairman, President and Chief Executive Officer, Bob Patterson; and Executive Vice President and Chief Financial Officer, Brad Richardson.

Now I will turn the call over to Bob.

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [3]

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Well, thanks, Joe, and good morning, everyone, and welcome to our second quarter 2020 earnings call, the first ever as Avient Corporation. I'd like to begin our call today with an acknowledgment of support for those who have been impacted by coronavirus. Our heartfelt appreciation also goes out to the countless frontline workers and first responders as they continue to play an important role in a response and recovery effort. At Avient, our first priority remains the health and safety of our associates, customers and all stakeholders. We continue to adhere to government guidelines and protocols as well as other preventative measures to help stop the spread of the virus. As we do, we continue to serve our customers as an essential supplier and partner.

On June 16, we held a mid-quarter investor call, during which we commented on our second quarter expectations in light of the pandemic. As we now share our actual results, we report we delivered adjusted EPS of $0.39, which is $0.03 better than we expected at the time. Recall that to provide an apples-to-apples comparison to the prior year, these results exclude the impact of the financing for the Clariant Masterbatch acquisition, including the additional shares from the equity offering in February, and the debt raised in May, our adjusted EPS for the second quarter was $0.28. The improvement was driven by an uptick in the sales in Asia, in the last 2 weeks of the quarter and better-than-expected margins in Color. We believe Asia is recovering from the pandemic, but also is a leading manufacturer of products that are specifically aiding in the world's response efforts. Sales in the region increased 13% over the prior year. This was not enough to offset weaker demand in Europe and the Americas, however, and overall, second quarter sales declined 18.6% or 17% on a constant currency basis. That's a challenging decline for sure, but we have benefited from our historic efforts to reposition our portfolio with a greater emphasis on health care and packaging.

Sales into these markets were up 7% and 3%, respectively, in the quarter. With the acquisition of Clariant Masterbatch, we take an even bigger step forward toward a more specialized and more sustainable portfolio. And the numbers speak for themselves. While we didn't known the Masterbatch business in the second quarter, they achieved adjusted EBITDA of $37 million in Q2, up slightly from what they reported in the prior year. Like us, they were deemed essential in the COVID response and recovery. And their associates continue to serve critical industries such as packaging, consumer care products and health care. Recall that approximately 75% of their sales are into these end markets. And they also benefited from a strong presence in Asia, where they achieved EBITDA growth just as we did. For months now, investors have been concerned that we might be buying a business in distress from the pandemic. That simply isn't true. Here is what is true.

We have acquired a business that is effectively achieving a run rate EBITDA of $130 million, which is what we estimated when we reported in December when we announced the acquisition. We are inheriting a very talented management team in an organization with a passion for innovation and customer service. We have quickly validated our initial synergy estimate of $60 million and identified potential upside that we believe, we can deliver even in a COVID environment. We expect the acquisition will be immediately accretive to adjusted earnings per share in the third quarter, or first together. Excluding amortization step-up, which we have not finalized, we expect Clariant will add approximately $0.10 of EPS accretion in Q3. This approximates what we expect Clariant will deliver from a cash perspective. And recall from our December presentation that our 3-year goal for EPS accretion on the same basis is $0.85. So $0.10 in the initial quarter of ownership is a great start. This is an exciting time for us, and it is an important inflection point in our specialty journey.

Brad is going to provide some further details on the second quarter and then I'll make some closing remarks. Brad?

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Bradley C. Richardson, Avient Corporation - Executive VP & CFO [4]

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Bob, well, thank you very much, and good morning, everyone. As I always do, I'm going to start with our GAAP results. In the second quarter, we reported GAAP earnings per share from continuing operations of $0.25. Special items in the quarter resulted in a net after-tax charge of $2.6 million. Special items in the second quarter were primarily associated with acquisition-related and restructuring costs, which were largely offset by insurance reimbursements from previously incurred environmental cost and a mark-to-market pension adjustment. Adjusted EPS for the quarter was $0.39, as Bob noted, which excludes the impact of the financing for the Clariant acquisition. Total company revenue declined 18.6% in the second quarter compared to the prior year, with weaker foreign currencies impacting total company sales by 1.3%. Automotive and consumer discretionary markets accounted for 70% of the sales decline. This is not a surprise given the shutdowns that took place for much of April and May in the automotive and retail spaces. From a regional standpoint, sales in Europe were down 22%, excluding the impact of changes in foreign currencies. This was primarily due to weak demand in automotive and industrial applications. Unfavorable foreign currencies negatively impacted the region's overall sales by 4%.

In North America, sales declined 21%, primarily due to the automotive production shutdowns and demand for consumer discretionary applications. These include things like outdoor high-performance sports, electronic accessories, such as cell phone cases and sporting and leisure apparel. The regional performance in North America and Europe are in stark contrast to what we experienced in Asia, where sales increased 17% for the quarter on a constant currency basis. Growth in the region was driven by new business wins in health care applications for the COVID-19 response, along with continued strong demand for our barrier additives used in food and beverage packaging. We certainly hope Asia can serve as a road map for what is possible and ahead in the pandemic recovery for the other regions of the world.

In reviewing our segments for the second quarter, SEM sales and operating income were down 19% and 32%, respectively. Lower sales were partially offset by cost containment actions, which reduced SG&A expense 12% versus the prior year second quarter. The SEM segment was primarily impacted by the automotive and wire and cable end markets in Europe and North America. Our composite businesses were also negatively impacted as demand for transportation and oil and gas declined. Sales and operating income for the Color, Additives and Inks segment declined 15% and 24%, respectively. Lower sales were partially offset by improved mix and cost containment actions, which reduced SG&A expense 11% versus the prior year's second quarter.

As we previously commented, the Color business benefited from health care applications used in the COVID-19 response as well as continued strong demand for its packaging applications. For the Color segment, packaging sales were up 5% and health care sales nearly doubled over the prior year second quarter. The increased sales in these end markets provided a better-than-expected margins, driven by improved mix. Please note that the Color segment's performance I just discussed does not include the impact of Clariant's Masterbatch business since the acquisition closed on July 1. The acquired business performance will be included in our Color segment results beginning in the third quarter.

Lastly, sales and operating income declined 22% and 27% within our Distribution segment, again, primarily due to the automotive shutdowns. Lower sales were partially offset by improved mix and cost containment actions, which reduced SG&A expense 11% versus the prior year second quarter.

From a cash flow perspective, we generated $80 million of free cash flow in the second quarter, in line with the prior year as reduced working capital offset lower earnings. During our last call, I emphasize our cash flow as a significant strength for us, and it certainly is. Pro forma for the Clariant acquisition and tax payments made in July associated with the PP&S divestment, we have $450 million in cash on the balance sheet and over $700 million in available liquidity.

In summary, we are in an excellent position to navigate the near-term dynamics of the pandemic and begin the very important work of integrating our 2 companies. It is important to note that it's still too early to predict when and how the markets will recover. Accordingly, we don't plan to provide specific EPS guidance for the third quarter. What we can tell you is that orders for the month of July are down about 15%. This is an improvement sequentially from Q2, but still off from the prior year, for sure. We are seeing some early signs of automotive business picking up as well as spending on discretionary -- consumer discretionary items, but these appear to be returning gradually. We expect Clariant will add $250 million of revenues in the third quarter, and as Bob mentioned, it will be immediately accretive, adding $0.10 of EPS. This excludes the impact of depreciation and amortization from the step-up in the asset values associated with purchase accounting. We are in the middle of the process to complete the allocation of the purchase price. We believe this immediate EPS accretion is incredibly relevant for our investors to assess our cash return on our investment. I think what is also relevant is the quality of the business we acquired, its specialty composition and resiliency during this challenging economic environment.

Bob will now provide some comments, including an update on Clariant.

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [5]

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Thanks, Brad. I'm very proud of our team's accomplishments this quarter, navigated the COVID-19 pandemic, while at the same time, completing the acquisition of Clariant's Masterbatch business, the largest in our company's history. We have been very purposeful and clear in our initial communications, just as we are being now in our early integration. And that is, this is a joining of 2 great companies to make an even better one, an even stronger organization that is more global and more innovative. As good as the legacy PolyOne and Clariant organizations were separately, were better together as a new company with a new brand. Avient is rooted in l'avenir which means the future; and vie which means life. In it, you can hear environment and invention, 2 important areas of focus for us as we emphasize sustainable solutions. Quite simply, it's a new name for a new company. I've been with the company now for 12 years and have always respected Clariant Masterbatch. We've been the best of competitors in both legacy PolyOne and Clariant shared a passion for innovation, customer service and for taking care of our associates. I never viewed the goal to acquire Clariant, but rather to build a new team together. This is the opportunity that we now have in front of us. And I believe with our new collective brand, that's exactly what we will do. The new brand is about the cultural integration of over 9,000 talented, passionate and proud associates as it is about anything else.

Over the past several decades, legacy PolyOne and Clariant Masterbatch have each built a strong legacy of success, and it is important that as we come together, we learn from each other and harness the best of our 2 organizations. This is a time when the world craves a path forward out of the pandemic. As green shoots begin to emerge, the world will once again prioritize sustainability, innovation and economic growth. We will rely on strong relationships and partnerships and demand a more inclusive society. By joining our 2 incredible and complementary businesses into one, I feel like we are better positioned than ever before to help in the response and recovery and to create future value for all our stakeholders. Having closed the acquisition on the first of July, we have hit the ground running with integration efforts well underway. Despite the challenges brought on by the pandemic, we are confident that we will be able to execute our plans and achieve our synergy targets. We plan to provide a more thorough update on integration progress and synergies on our next call.

As we look ahead, we believe there are encouraging economic signs. You heard our performance in Asia versus the other regions. Our plants are fully operational, commercial activity is picking up. And again, China, in particular, has demonstrated that COVID could be managed and economic growth can return. Automotive plants around the world are reopening, and there appears to be demand for passenger vehicles. In the consumer space, production of products like off-road vehicles really came to a halt in the second quarter. But toward the end of the quarter, our customers were finding that dealers were running short on inventory as consumers rush to buy them. Many people have turned to the outdoors as a respite from the confines of COVID lockdowns. Now no one is waving the recovery flag yet, but following the considerable declines for the last 3 months, these are positive signs.

That being said, we expect any recovery in the U.S. and Europe to be gradual. Unlike the rapid spread of the virus and then the swiftly ensuing shutdowns throughout Europe and the Americas, recovery will take time. And if there's one thing that we have learned or relearned about people during this pandemic is that individual attitudes and behaviors vary drastically. I make this comment because when there is a more consistent and higher level of individual comfort that the pandemic can be managed, I believe that's when consumerism and commerce will likely return to pre-COVID levels. The addition of Clariant will certainly help our performance. We have highlighted and I expect the business will fare well in the second half of the year. And this is a main factor in what attracted us to the business in the first place. They have market-leading technology and specialty less cyclical end markets. And though I say they have, it's really we have because they are us and we are them. And together, we are Avient. A new kind of specialty materials company, a great place to work for our associates and an investment opportunity poised for growth and value creation for our shareholders.

With that, I'm happy to take any questions from anyone on the call. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mike Harrison with Seaport Global.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [2]

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Bob, I was wondering if you can comment a little bit on customer inventory levels. I know you just mentioned that in some places, you're seeing that there's been demand and maybe the dealers or the stores don't have enough inventory to keep things on the shelves. At this point, do you feel like you're seeing essentially real-time demand? Is there still some destocking going on? Is there any restocking going on? Maybe just walk through some of your key end markets and let us know what you're seeing.

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [3]

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Yes. Maybe I'll sort of highlight on 2, that being automotive and then also what we're seeing in off-road vehicles because those are 2 areas where, and specifically with off road vehicles, it's aligned with what you just said, where dealers were running short on inventory. As those operations began to reopen towards the end of the quarter, we didn't see an immediate pickup in demand as a result of that. And our estimation is that there was a lag. And whether or not that was a result of other suppliers in the network still having on inventory or those customers having on inventory to begin production, it's difficult to say which is which. But I do think there is and was some inventory in the system that's being worked through during the start-up. And that we'll see a pickup in demand in the third quarter.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [4]

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All right. And then I know you're reluctant to give EPS guidance. I think maybe a starting point is kind of where Q2 was, and then adding the $0.10 of accretion from Clariant. But maybe can you talk about some of the key variables in the outlook? Is it really just demand related or pandemic related? Or are there some other levers or areas where you feel like you have some more control over how you can perform in Q3?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [5]

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I mean, look, the primary unknown, if you will, really is the pace of recovery, extent of recovery. As you're well aware, of course, there has been a surge in cases, in certain areas of the world, and that could continue to keep demand muted. So I mean that's really the unknown. And as I think about the primary sort of driver of things in the third quarter, that's the biggest. I do think that there are some green shoots emerging for lack of a better description, really around automotive, off-road vehicles, in some areas of consumer discretionary, which we just did not see in the second quarter. So I view that really as a positive. When I look at July orders being down 15%, and that's a little bit better than the year-over-year comparison in Q2, and we think reflects some of that uptick in demand, Mike.

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Operator [6]

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Our next question comes from the line of Vincent Andrews with Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [7]

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If you could just comment, that the $0.10 from Clariant, could you just clarify whether that includes synergies or not? And also on that $0.10, is that $0.10 indicative of sort of a run rate, so you'd be $0.40 towards the $0.85 goal? Or is there something in particular about the third quarter that would make that $0.10 higher or lower than what the run rate would be in terms of just seasonality or anything else?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [8]

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Yes. So the first thing is there's probably about $1.5 million of synergies in there with respect to really administrative costs in terms of employees that did not begin with the acquisition on day 1 just by design of the acquisition. So that's not a big number. It will obviously get bigger as we get toward the end of the year. With respect to the $0.10 number, again, that excludes the step-up in amortization, we're working on that right now. And then the way I think about that is, I'd say, look, there is seasonality in the Clariant Masterbatch business. It's very similar to our own, where the first half of the year is quite a bit stronger than the second half. So when I think about that run rate, if we were just bringing over their business and looking at it on that basis, that accretion would be higher than it is in the first half than it is in the second half of the year, if that helps.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [9]

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That's very helpful. And just as a follow-up, are there any costs that you've avoided in the second quarter just with having things closed or whatever else that will have to come back later in the year, sales return or anything like that? Anything like that we should be keeping in mind for our model?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [10]

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Yes. I mean, look, there's no doubt, as a result of the lockdowns, I mean, travel is just almost completely stopped. Look inside of China, customers are seeing suppliers again and people are meeting again face-to-face, but for the most part, that's inter-nation, if you will. But if I look year-over-year, I mean, travel and entertainment related costs and what I would say are the typical trade shows that we would have attended or participated in. I mean the net balance of that is probably about $5.5 million down in the second quarter versus what we spent in the prior year. Now I don't expect that to actually come back in the third quarter. At some point in time, it will. But as the world tries to figure out what the new normal is, I'm sure we don't ever get back to the same level of travel, at least not in the foreseeable future. So hopefully, that puts that in perspective. We don't expect any of that to come back in Q3.

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Operator [11]

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Our next question comes from the line of Mike Sison with Wells Fargo.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [12]

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Nice quarter there. Can you give us a little bit more color on the $37 million for 2Q for Clariant up year-over-year just that's pretty impressive given your Color business is down quite a bit? Anything that they're doing really well? And maybe just give us some background of why they for -- it sounds like for the full year have done much better.

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [13]

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Yes. I mean, look, it really comes down to end market exposure, Mike, and 75% of their sales are into packaging, consumer, staples and then health care. Those were actually very good markets for us in our Color segment as well in the second quarter and up also. The primary difference between the performance of our 2 businesses in the second quarter really was consumer discretionary items. As you know, we have a large screen printing inks business that was down considerably, and then also our exposure to auto. I mean those are the 2 things that I'd say really do differentiate them from us. And again, kind of harkens back to our investment thesis about why we were interested in buying Clariant and bringing into the company, is that improvement in the portfolio. So that's the biggest thing, plus, candidly their exposure to Asia. And Asia had a very good quarter, and a second quarter for them as it did for us.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [14]

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Got it. And then a quick follow-up. You talked about the $0.85, feeling good about that. You also had a $500 million number of EBITDA longer term. Can you maybe help us understand the walk to that again, just as a quick reminder? And given how well Clariant's done thus far, is it still in the same time line as you may be initially thought? Or is it maybe even accelerate?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [15]

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Yes. I mean, look, with respect to synergy capture, we're very confident in the time line and our ability to continue to capture the $60 million even in a COVID environment. In our next call, we plan to give an update on our synergy expectations. The preliminary reviews have all been very positive between our 2 organizations and candidly there's going to be upside to that number. So I think there's -- I still feel very comfortable about the timing, feel very comfortable about the order of magnitude and candidly, what that leaves really with respect to ultimately getting to $500 million is, of course, related to the pandemic and recovery and where our legacy underlying EBITDA performs. But with respect to the ultimate accretion number, Mike, on that $0.85, we believe that's achievable in that same time frame.

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Operator [16]

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Our next question comes from the line of Frank Mitsch with Fermium Research.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [17]

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If I could speak -- Bob, if I could follow-up, candidly, upside on the synergy side. I mean you guys had indicated that sourcing was going to be an early key. And clearly, that's one of the things that you guys can just look at your purchase prices that you're paying for your rows between Clariant and heritage PolyOne. Is that one of the areas that's giving you confidence on that candidly it will be upside on the synergies?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [18]

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Yes. I mean that is -- I mean we see upside potential in all 3 of the cost categories that we shared with everybody initially in December, initially though, and where we think we will get there, the quickest is around those sourcing synergies, Frank. So that's I think correct and the best way to think about that here, particularly in the second half of this year.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [19]

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All right, terrific. And if I could talk about the pace of business, you guys had indicated that April for heritage PolyOne, April was down 15%, May was down 20%, that implies that June was down in the upper teens. So you're saying that July is down 15%. So you're seeing -- are you seeing things getting less bad is on the heritage PolyOne? And to that point, yes, clearly impressive that Clariant was up in the second quarter. What's the Clariant -- what's heritage Clariant's July looking like?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [20]

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Well, first of all, I just want to make sure clear that, look, there were -- from a sales perspective, the Clariant Masterbatch business was down in the second quarter some, but EBITDA was up slightly. So there was some mix effect in there. And our expectation is that their sales are probably going to be down about 7% or so in Q3, but still positive contribution on the EBITDA side. So that hopefully gives you some perspective on their relative sales performance to what we're seeing right now in the July orders for the legacy PolyOne business, which is about 15%. And to be clear, when Brad said that, that was just in reference to legacy -- the legacy or heritage PolyOne businesses.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [21]

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No, understood. But that pace is better than what June was, correct?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [22]

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Correct. Yes. Yes. Sorry.

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Operator [23]

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Our next question comes from the line of Laurence Alexander with Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [24]

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So can you give us a feel for the degree to which you're seeing any change in the types of innovation requests that you're seeing, particularly in the packaging and the automotive channels? Are you seeing a pivot in terms of the types of projects people are working on?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [25]

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Yes. It was -- it's interesting because when everyone initially went into a lockdown mode, I would say that there was pretty significant level of silence, right? And basically, all industries and all organizations, as everyone just tried to really figure out how to continue to provide supply, particularly in these essential industries. But Laurence, it didn't take very long for, I'd say, that to return to focus on innovation. And what we found in our labs were that we were seeing actually almost an increase in requests. And to some extent, we think maybe the reduced activity on the current business afforded customers more of an opportunity to think about long-term revisit projects that they had. Maybe it was just a change in dynamic of working from home versus in the office, we're not sure. But there was a lot of activity in the second quarter around innovation. So I just say that broadly, the themes, however, were pretty consistent with what we've seen in the past, which is around sustainability and lightweighting and packaging, for example, and the same thing can be said for other industries. Maybe less so on the automotive side simply because of those shutdowns, but in those other industries, we saw, again, common themes really around lightweighting and sustainability.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [26]

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And have you seen sort of any opportunities or significant opportunities or shift in the landscape or evidence of disarray at competitors in the sense of talent acquisition? How your -- the pool of available salespeople and researchers, and how you think about your talent pool versus where you would like to be when the dust settles in a couple of years?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [27]

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I mean, well, first of all, let me just say, I'm really proud that through the pandemic, we have taken care of our associates, reiterated our commitment to them and the type of organization that we're trying to create and the culture we have here. So I'd first comment positively with respect to our own retention. I'm not sure that I'm seeing anything, so to speak, a massive disarray or dislocation, if you will. Potentially, that could be a result in certain industries that are off significantly from a demand perspective and that are contemplating layoffs or reductions in force, and that could be an opportunity for us in certain technical areas such as composites, for example. So -- but not much else I can really comment or say in that regard.

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Operator [28]

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Our next question comes from the line of Colin Rusch with Oppenheimer.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [29]

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Guys, I want to follow-up on that same thread around potential premium for advanced materials or higher performance materials that are coming from recycled inputs. And I'm curious what you're seeing in terms of the supply chain on recyclable polypropylene or polyethylene? Any innovation there that you're hopeful about as you look at incremental sourcing and the potential for you guys to get a premium for those products with recycled material?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [30]

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Yes. I mean, look, first, we're a founding member of Alliance to End Plastic Waste. And our participation in that organization has given us a lot of really good insight into and helping to actually invest in and drive some pretty significant infrastructure projects that will improve the capture of plastic waste and the ultimate recycling of it. I mentioned that first because there really is a supply issue with respect to access to recycled content. And companies are stating goals in terms of how much they want to achieve by certain years in the future. But the first thing we have to really resolve and provide is supply. So there are a number of projects underway that I think will drive that. Those have continued, albeit perhaps a little slower as a result of COVID. But I think that's the most important observation is that very important and necessary infrastructure is going into places like Indonesia, Southeast Asia, for example, that I think will provide necessary supply. When that's the case, I think you will see a higher degree of recycled content.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [31]

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Great. And just shifting gears a little bit with [FiberNet]. There's a lot of different views on the cadence of 5G growth. But what are you seeing right now? There's a potential for some acceleration here starting in the back half. But what are you seeing from your customers on that 5G opportunity?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [32]

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The cadence of 5G…

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [33]

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Of growth. Yes.

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [34]

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5G is another one. Thanks to my colleagues here better than I do. So yes, so there definitely was a slowdown in the first half of the year. And if I look at our Fiber-Line business, for example, and what we experienced with respect to it, they have all year-over-year sales decline, but it wasn't significant. And we actually view potential upside here with respect to 5G because as the world has worked from home in such a broader fashion than it ever has in the past and utilize technology to connect with each other. There's a need for more bandwidth, right? There's a need for faster, better connections. I think that's going to drive an acceleration of 5G and infrastructure build-out in the U.S., which is a real good guy for us. So we're hearing that from our customers. I think that's a reasonable trend of a conclusion to draw is, candidly, I don't think people are going to go back to traveling in the traditional way anytime soon.

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Operator [35]

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Our next question comes from the line of Jim Sheehan with SunTrust.

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James Michael Sheehan, Truist Securities, Inc., Research Division - Research Analyst [36]

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So on the Clariant Masterbatch business, could you talk about also the performance of the first quarter of 2020 and how maybe that compared to legacy PolyOne Color business? And also with respect to the synergies on there, what adjustments are you making for the pandemic that maybe you didn't expect to make?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [37]

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Yes. So if you -- if you're looking at our Color segment results for the first quarter, sales were down slightly, but EBITDA was up slightly. That actually was pretty consistent with their results as well. And I'd say that really was, as you know, for us, for the most part, we didn't experience much in the way of a pandemic impact until really in April. So I think they were very much aligned between our 2 businesses in the first quarter. With respect to an assessment of the pandemic impact on the Clariant side of the equation, we have looked at this by end market in the same way that we look at it for our own businesses. And fortunately, because of the proponents of the sales going into packaging, these consumer staple type products, there can be some impact, but not anything to the extent that we've seen in automotive and consumer discretionary. So there will be a sales decline. I have mentioned that to, I think, Frank, one of his questions about sort of our estimation of their business in the third quarter. But again, not to the extent that we're seeing in other industries that are impacting us.

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James Michael Sheehan, Truist Securities, Inc., Research Division - Research Analyst [38]

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Terrific. And then maybe you could also address any raw material tailwinds that you're experiencing. I think some key raw materials have declined year-to-date. How much inventory do you still have to go through but before maybe raw materials stop being a tailwind for you? And maybe you could comment on the Masterbatch business in that regard as well.

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [39]

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Yes. So in the second quarter, lower raw material costs were a slight good guide to us in order of magnitude of probably $4 million, $5 million, pretty consistent with what we saw in the first quarter. Our inventory turns over pretty fast, so to the extent that prices move up or down. We experienced that. But one thing I'd point out, though, there's always a lot of focus on maybe some of the majors in the base resins. But again, the preponderance of our spend really is in -- all of the other special ingredients that go into a specialty formulation. So while we're experiencing downward trend in those majors, other things are flat to maybe up slightly. So I expect to still see a small benefit here in the third quarter.

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James Michael Sheehan, Truist Securities, Inc., Research Division - Research Analyst [40]

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Does that go for the Masterbatch business as well?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [41]

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Correct. Yes.

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Operator [42]

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Our next question comes from the line of Rosemarie Morbelli with G. Research.

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Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [43]

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Bob, I was wondering if during the pandemic, whether it is in Asia, Europe, the U.S., how have you changed the way you run your business. How have you adjusted? And which ones of those changes are going to stay forward as you go forward, making you a stronger company post the pandemic?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [44]

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Yes. I mean, just to state the obvious, of course. I mean, the connection between our associates is entirely been by phone or video. I think everybody has gotten infinitely smarter on how to use technology to that effect. And candidly, I think that's going to make us and probably everyone else, a more efficient organization in the future. What I miss, of course, is the in-person contact, the time that I get to spend with our associates and customers in person. And so I do hope that we can get back to some level of travel at some point because those in-person connections are so important. I think from a strategy standpoint, look, the pandemic has reinforced for us, where we want to focus our time and attention from an end market and specialty products standpoint. Specialty products, I think, have performed better than commodities in many cases. And I also think, of course, our end market exposure in packaging and health care speaks for itself. So perhaps, it's more of a reinforcing message out of the pandemic as much as anything else.

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Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [45]

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All right. And when we look at Europe, now as I understand it, a lot of the lockdown has resulted in people taking, well, time off, they didn't have a choice, but that counting as vacation time. So does that mean that in August of this year, we are not going to see half of Europe shutting down, whether it is for you or Clariant or that really hasn't changed?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [46]

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We're not planning really on much of a change. But I have to say that does remain to be seen. Given where demand levels are right now, we're still expecting that there is a seasonal effect in the third quarter versus Q2, which, as you know, is typically down for us, that being one of the reasons in terms of European demand. So at this point, I'm not expecting any change, but we'll see how this plays out here in the next couple of weeks.

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Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [47]

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All right. And if I may just sneak one more. Your SG&A was down at 11% or 12% and year-over-year, and you said that not much of that is coming back in the third quarter. But going forward, how much of that do you think is permanent? Are we going to be looking at SG&A going back to previous level? Or will it stay more or less 5% to 10% lower going forward?

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Robert M. Patterson, Avient Corporation - Chairman, President & CEO [48]

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Well, in total, I mean, the year-over-year decline in SG&A, I mentioned the sort of the travel and trade show related cost element of that. We do have lower personnel and benefits costs, including incentives, which are lower this year than last year. So what I'm basically saying is that for the most part, we're not going to see any change in that in Q3 with respect to the travel and trade show side. And then longer term, obviously our performance will drive benefits and incentives. But I don't think we'll ever have the same level of travel and trade show related expense, at least not in 2021. So maybe when the world gets all the way back to normal, whatever that is, that will be the case, but we don't see it in the foreseeable future.

Okay. Thanks, Rosemarie. And thanks, everyone, for your questions and also for your time to dial in to the call today. We look forward to providing everybody a further update on the Clariant integration, our synergies and our performance on our next call. Take care. Bye for now.

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Operator [49]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.