Good morning, ladies and gentlemen, and welcome to the Avient Corporation’s Second Quarter 2020 Conference Call. My name is Sara, and I will be the operator today. At this time, all participants are in a listen-only mode. We will have a question-and-answer session at the end of the conference. 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.

Thank you, Sara. 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 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 for 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.

Well, thanks, Joe, and good morning, everyone and welcome to our second quarter 2020 earnings call, first ever as Avient Corporation. I'd like to begin our call today with an acknowledgement 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 uptake in the sales in Asia in the last two 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, in overall second…

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 costs any 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 cellphone 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 healthcare applications for the COVID-19 response, along with continued strong demand for our Barrier additives used…

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 two great companies to make it even better. And even stronger organization that is more global and more innovative. As good as a legacy PolyOne and Clariant organizations were separately, we're better together as a new company with a new brand. Avient is rooted A, in Europe, which means the future and B, which means life. In it, you can hear environment and invention, two 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 I've 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 the strong legacy of success, and it is important that as we come together, we learn from each other and harness the best of our two organizations. This is a time when the world…

Thank you. The call lines are now open. [Operator Instructions] Your first question comes from the line of Mike Harrison with Seaport Global. Your line is now open.

Hi, good morning.

Hey, Mike.

Good morning.

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, or 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?

Yeah. Maybe I'll sort of highlight on two that being automotive and then also we're seeing in off-road vehicles, because those are two areas where -- and specifically with off-road vehicles, it's aligned with what you just said where dealers we're running short on inventory. As those operations began to reopen towards the end of the quarter, we didn't see an immediate pick up 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 hand inventory or those customers having on an 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 startup, and that we'll see a pick up in demand in the third quarter.

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 the 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?

I mean, look, the primary unknown, if you will, really is the pace of recovery, the extent of recovery as is -- as you 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 today. 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%, 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.

All right. Sounds good. Thanks very much.

Yeah.

Thank you. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is now open.

Thank you and good morning, everyone.

Morning, Vincent.

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, it would 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?

Yeah, 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 one, just by design and 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 and amortization we're working on that right now. And then the way to think about that is I'd say, look, there is seasonality in the Clarinat 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.

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 and anything like that we should be keeping in mind for our model?

Yeah. I mean, look, there's no doubt as a result of the lockdowns. I mean, travel has 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 -- and that 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 what 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.

Okay. Thanks very much, guys.

Yeah.

Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Your line is now open.

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

Yeah. I mean, look, it really comes down to end market exposure, Mike, and 75% of their sales are into packaging consumer staples and then healthcare. 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 two businesses in the second quarter really was consumer discretionary items. As you know, we have a large screen printing inks business that was a down considerably, and then also our exposure to auto. I mean, those are the two things that I'd say really do differentiate them from us. And again, kind of hearkens back to our investment thesis of exactly [ph] why we were interested in buying Clariant and bringing in the company, is that improvement in the portfolio. So, that's the biggest thing, plus candidly there, exposure to Asia and Asia had a very good quarter in the second quarter for them as it did for us.

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

Yeah. I mean, look, with respect to synergy capture, we're very confident in the timeline 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 two organizations, and candidly there's going to be upside to that number. So, I think there's a -- I'm still feel very comfortable about the timing. I 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 timeframe.

Great. Thank you.

Thank you. Our next question comes from the line of Frank Mitsch with Fermium Research. Your line is now open.

Good morning, gentlemen. If I could follow-up candidly upside on the synergy side. I mean, you guys had indicated that sourcing was going to be 40 and an early key and clearly, that's one of the things that you guys can just look at your purchase price is that you're paying for ROS between Clariant and the heritage PolyOne. Is that one of the areas that's giving you a confidence on that quote candidly, there'll be upside on the synergies.

Yeah, I mean, that is -- I mean, we see upside potential in all three 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.

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 yeah, clearly, impressive that Clariant was up in the second quarter. What's Clariant -- what's heritage Clariant's July looking like?

Well, first of all, I just want to make sure I clear that, look, there were -- from the 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 I'd be clear when Brad said that that was just in reference to legacy -- the legacy or heritage PolyOne businesses.

No. Understood. But that -- is that page is better than what you was, correct?

Correct. Yes. Yes. Sorry.

All right. No worries. Thanks so much.

Yeah.

Thank you. Our next question comes from the line of Lawrence Alexander with Jefferies. Your line is now open.

Good morning. So, can you give us a feel for the degree to which you're seeing any change and the types of innovation requests that you're seeing, particularly in the packaging and the automotive channels?

Yeah.

Are you seeing a pivot into the types of projects people are working on?

Yeah. It was -- it's interesting because when everyone initially went into lockdown mode, I would say that there was a pretty significant level of silence, right? And basically, all industries and all organizations is everyone just tried to really figure out how to continue to provide supply, particularly in these essential industries. But Lawrence, 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 hadn't, 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.

And have you seen sort of any opportunities or significant opportunities or shifts in the landscape or evidence of disarray at competitors in the sense of talent acquisition? How you are -- 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?

I mean, well, first of all, let may 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 and 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 a certain technical areas, such as composites, for example. So -- but not much else I can really comment or say in that regard.

Okay. Thank you.

Yeah.

Thank you. Our next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much, guys. I want to follow-up on that same thread around potential premium for advanced materials or high 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, 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?

Yeah. 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, is supplied. 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.

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 potential for some acceleration here starting in the back half, but where are you seeing from your customers on that 5G opportunity?

The cadence of … A - Unidentified Company Representative 5G growth.

Yeah.

I didn't hear that very well. Thanks. My colleagues here hear better than I do. So, yeah. 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 it, there was a 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 or conclusion to draw. Candidly, I don't think people are going to go back to traveling in the traditional way anytime soon.

Great. Thanks so much.

Thank you. Our next question comes from the line of Jim Sheehan with SunTrust. Your line is now open.

Good morning. Thanks for taking my question. So, on the Clarinat Masterbatch business, could you talk about also the performance of the first quarter of 2020 and how maybe that compare 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?

Yeah. So, 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 there were very much align between our two 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 preponderance 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 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.

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 to -- 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.

Yeah. So, in the second quarter, lower raw material costs were a slight good guy 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, is 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.

Does that go for the masterbatch business as well?

Correct. Yeah.

Thank you.

Yeah.

Thank you. Our next question comes from the line of Rosemarie Morbelli with G. Research. Your line is now open.

Thank you. Good morning, everyone.

Good morning.

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?

Yeah, I mean, on -- just to state the obvious, of course, I mean, the connection between our associates has entirely been by phone or video. I think everybody's got an 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 healthcare speaks for itself. So, perhaps it's more of a reinforcing message out of the pandemic as much as anything else.

All right. Thanks. 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's 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, Clariant or that really hasn’t changed?

We're not planning really on a 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 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.

All right. Thank you. And if I make -- just make one more. Your SG&A was down either 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?

Well, in total, I mean, the year-over-year decline in SG&A, I mentioned the -- sort of the travel and tradeshow 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 tradeshow side. And then longer term, obviously, our performance will drive benefits in incentives, but I don't think we'll ever have the same level of travel and tradeshow 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.

Thank you.

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.

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