Avient Corporation (NYSE:AVNT) Q1 2024 Earnings Call Transcript May 7, 2024
Avient Corporation beats earnings expectations. Reported EPS is $61.75, expectations were $0.69. 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 First Quarter 2024 Results. My name is Livia, and I’ll be your operator for today. At this time, all participants are on a 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 Di Salvo, Vice President, Treasurer and Investor Relations. Please proceed.
Joe Di Salvo: Thank you and good morning, everyone that joining us on the call today. Before beginning, we’d like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will be of 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 can cause actual results to differ materially from those expressed in or implied by the forward-looking statements. We encourage you to review our most recent reports, including our 10-Q 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 Avient 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 avient.com in the Investor Relations section. Joining me today is our President and Chief Executive Officer, Dr. Ashish Khandpur; and Senior Vice President and Chief Financial Officer, Jamie Beggs. I will now hand the call over to Ashish to begin.
Ashish Khandpur: Thanks Joe, and good morning, everyone. I’m pleased to report that we started the year strong with first quarter adjusted EPS of $0.76, reflecting an increase of 21% over the prior year quarter. This exceeds our first quarter guidance by $0.08. Our improved performance was driven largely by additional sales in Defense applications as well as further raw material deflation. 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 strategy 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 entered 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-digit 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.
Jamie Beggs: 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 in EMEA. 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 managed 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 re-pricing 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 reductions, particularly, in Europe, which also help expand adjusted EBITDA margin 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 Healthcare, 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 was 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 million 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 a 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 $0.71, which reflects a 13% increase over the prior year. This expected double-digit growth is driven by improving demand conditions across most end markets and 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 US, 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 end 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 US 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 re-pricing 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 SOFR 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.
Ashish Khandpur: Thank you, Jamie. The Avient 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 materials 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 Avient 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 markets where we already play. Further, our commercial teams have a unique advantage in the market. They can leverage the full Avient 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 light-weighting and recyclability. Additionally, the fast-changing world is creating new opportunities for a materials science company like Avient 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.
Operator: Thank you. [Operator Instructions] Now, first question coming from the line of Frank Mitsch with Fermium Research. Your line is open.
Frank Mitsch: 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 jumped off the page.
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