Good day and thank you for standing by. Welcome to the Q1 2021 Avient Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to our speaker today, Joe Di Salvo, Vice President Treasurer and Investor Relations. Please go ahead.

Thank you, Juan and good morning and welcome to our first quarter 2021 earnings call. Before beginning, we'd like to remind you that statements made during this webcast may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They are based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Please refer to the Investor Presentation for this webcast posted on Avient’s website for a number of factors that could cause actual results to differ. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the presentation posted on the Avient website where the company describes non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to their most directly comparable GAAP financial measures. In addition, unless otherwise stated, comparisons to prior year will be proforma for the Clariant Masterbatch acquisition, as if the business had been together during all periods referenced. Joining me today is our Chairman, President and Chief Executive Officer, Bob Patterson; and Senior Vice President and Chief Financial Officer Jamie Beggs. Now I will turn the call over to Bob for some opening comments.

Well, thank you, Joe. And good morning, everyone. We have record results to share today, as well as increased optimism for the rest of the year, as demand conditions are stronger than previously expected. While the world still has a long way to go with respect to combating COVID-19, we are optimistic that as an increasing percentage of the world's population receives the vaccination, this too will help drive demand. We start today and begin by reviewing our results for Q1, where we achieved the highest level of organic sales growth in the last 10 years. Certainly, we're benefiting from a pandemic recovery but our results are also a result of many things and a lot of hard work. Our performance is underpinned by the investments we have made to transform our portfolio to one that is more specialized, focused on sustainable solutions and concentrated high growth end markets. And our team delivered these results despite supply chain disruptions that have impacted most everyone in the industry. We thank our suppliers and our own supply chain leaders for exemplary work to make this possible. I'm also pleased we were able to expand operating margins by 200 basis points during a period of inflation by being on top of pricing, capturing synergies, ahead of schedule and an improving mix of product sales. And this is all translated to adjusted operating income growth 43% and adjusted EPS growth of 68%. All three of our business segments contributed to our success, each delivering record revenue and operating income for the quarter. Our core business grew operating income 39% due to robust demand for consumer applications as well as sustainable solutions. We're also benefiting from early synergy capture related to the Clariant Masterbatch acquisition. Specialty engineering materials expanded operating income 55% driven by continued…

Thank you, Bob. We're pleased to provide an update on our second quarter and full year projections for 2021 and things have improved since our last outlook we provided back in February. Just as we finished the first quarter with strong results, we are seeing robust demand for formulations continue into the second quarter. So, for Q2, we expect total company sales of $1.1 billion, which is an increase of approximately 26% over the prior year. As we saw on Q1, we expect the healthcare and consumer end markets to drive a large portion of this growth. This is truly impressive when you consider that total company healthcare sales increased by 12% in the second quarter of last year, and now we will see double-digit growth in the second quarter of this year. Recall that last year, our healthcare sales benefited from COVID response application such as facemask. Well, this year we expect healthcare sales growth to be driven by new business gains and applications such as glucose monitoring devices, antigen test kits, and drug delivery applications. We also see recovering demand for applications use an elective procedure such as lab wear and medical equipment. Consumer sales would benefit from continued underlying demand for specialty technologies used in outdoor high-performance applications. This would include things like off road vehicles and sporting equipment. All in, we expected adjusted EPS for the quarter to be approximately $0.80 per share, which is a 90% growth over the prior year. For the full year, we now expect total company sales to increase 14% to $4.3 billion. Current demand patterns would suggest a continued recovery into the third quarter as our customers are still trying to keep up with their orders and replenish low levels of inventory. We expect seasonally lower sales in the fourth…

Thank you, Jamie. Sustainable solutions are at the forefront of Avient. It's our future, and it's how we will differentiate ourselves. But sustainability at Avient is about more than just our material solutions. We are committed to an investing in each of our four P's, people, product, planet and performance. These investments are already paying off as you have seen. Our commitment to people and building our culture has resulted in employee engagement scores that now have us among the top workplaces in the world. For the second consecutive year, we achieved a perfect score on the Corporate Equality Index of the Human Rights Campaign. And we were recently recognized in Newsweek as one of America's Most Responsible Companies. These improvements not only help us as an employer of choice, but they also are important as the world moves toward becoming more sustainably conscious with the responsibility of corporations playing a crucial role in the communities where we operate. Disclosing our activities and environmental, social and governance areas has also been a focus for our teams. Our sustainability report is a comprehensive document that highlights our efforts in these areas. We continue to make improvements in telling our story, which recently was recognized by Sustainalytics, who ranked us top quartile in our industry this month. For us, sustainability isn't just about taking care of the planet. It's a growth driver, as revenue for our sustainable solutions portfolio has grown from $275 million in 2016 to $560 million last year. As we look to the future, you can expect that we will continue to focus on our customer’s needs in this regard. We do this in areas like improving recyclability, lightweighting, providing eco conscious solutions, and solutions for sustainable infrastructure. And our most recent sustainability report, we included goals that we…

Thank you. [Operator Instructions]. Our first question comes from Bob Koort with Goldman Sachs. Your line is now open.

Thanks very much. Bob, I wanted to ask you maybe tying into that last enthusiastic outlook you've got. Slide decks helpfully show that you guys are very capital intensive. So why do you ever below two turns? Why not just start buying back your stock before the market recognizes what you see?

Yeah, I mean, look, we have a number of acquisitions that we are looking at. And I do see some momentum in that regard. Obviously, I think last year, things stalled out a bit. And just in terms of our ability to move some discussions forward, so I'm optimistic that we can gain some traction. And that really would be our preferred use of cash to put that to work as Jamie mentioned today, really in the engineering materials segment, and hopefully something in composites.

Okay. And then on Clariant, I think at the time of the deal, the margins there were a 500 bps lower than what you've got in the legacy PolyOne color business or Avient color business. That's close that gap now to 360 something like that. Can you fully close it? What's the timeframe on doing that if you can, or if you can't quite close it, what's the hindrance?

Yeah. I mean, I think we can close it. I think that with a continued capture of synergies, particularly as we get to the next phase of that next year that will go a long way towards doing that. As you know, there are some mix differences between the two businesses that structurally have some differences, but I think they're going to be very close when it's all said and done. First and foremost, we have to capture the synergies. And second, the combined organizations are doing an outstanding job of managing inflation right now and getting price, improving mix. And I think that's going to go a long way towards doing just that.

Thanks very much.

Thank you.

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

Hey, good morning. Really nice start to the year and outlook. Bob in terms of revenue for sustainable solutions, I guess it was 516 in 2020, likely approaching 600 plus in ’21. In terms of growing that business, do you need to? Or can you expand capacity to accelerate that I know one of your goals in one of the slides said 100% of the products the packaging will be recyclable or usable. Can you can you maybe just walk us through how much capacity you have in that type of area? And then what you can do to grow it?

Yeah, I mean, look, we have for the most part, our capacity, and if I just focus on the color business is primarily driven by personnel. We really do have more than adequate capacity to grow. And obviously, by bringing the legacy Clariant and legacy PolyOne organizations together, that's only improved. So, I don't look at fixed assets or machines as a hindrance in any way. For us, it really is about investing in innovation, and tackling some of these changes. And that's why, you'll see in our 2030 goals that the preponderance of innovation is going towards sustainable solutions right now, I kind of view that as the primary area of focus and investment for us to drive that growth.

Right, great. And then in terms of your organic growth outlook for ’21, pretty impressive. It's sort of a step change to understand easy comps in 2Q, what do you think beyond ’21 the sustainable growth rate, organic growth rate for Avient is going forward?

Yeah, I mean, look, I think for now, it's really good to continue to reference these growth drivers that we've had in our materials over the last six to nine months focused on sustainable solutions, composites, and healthcare, all that lending itself to a 6.5% growth rate. Obviously, we're seeing better than that right now. But I think that's still the right way to think about that. And I'm pretty sure our assumption therein was a GDP number of sort of 2% to 3% if you will. So, better than GDP, those being the primary drivers.

Great, thank you.

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

Yeah, good morning, and thanks for posting the slides concurrently with the release. Much appreciated. I wanted to follow up on the distribution business. You posted a record here in the first quarter, but you did suffer some logistic issues during the quarter, as well as curious if you could size that and how much of a tailwind might that be for the second quarter in the distribution business?

Yeah, I can't put an exact number on that. But I can say that, I do think the distribution business could have had a better first quarter had it not been for some of these supply chain challenges. Those continue right now. And so, I'm not sure it necessarily moves immediately, just take what we didn't get done in Q1 and add it to Q2, because at this point, those supply challenges persist, and made through the second quarter. So, at the moment, I wouldn't classify that as a tailwind. I think we would look at it as we still got some work to do to catch up to match demand. Right? I mean, look, it's a good thing that we have these orders out there, there is so much demand. It's a very challenging time right now to meet that. So, I guess that's the best way I would characterize that, Frank.

Got you. I was almost going to ask Jamie, since you didn't have an exact number, maybe she did. But I'll pass for now. And then if I think about your guide for the second quarter, it's below the first quarter. And historically, PolyOne would see a modest increase in the second quarter versus the first quarter. Are you being conservative here?

Well, number one is that I think that with the increased presence that we now have in Europe as a result of the Clariant Masterbatch acquisition, that does actually tilt seasonality more towards the first quarter than it has in the past. Combine that with the sale of PP&S 18 months ago, which always had its strongest quarter in Q2. So, I think we need to see this play out a bit. And now seasonality, really factors into our quarters. But like, as I said we've got very strong orders and demand out there with some of the supply chain challenges we have to overcome that to deliver. And we'll see how the quarter plays out.

Thank you so much.

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

This is Angel on for Vincent. Just if I could expand on that last question about conservatism, I guess, as we look at 3Q and 4Q, obviously, there's some seasonality in the fourth quarter. But it seems like the back half is based on your guidance meaningfully below kind of where we're at in the first half. So, could you just provide a bridge as to how we go from kind of that $0.80 in 2Q to kind of 3Q levels that you're kind of implying the guidance?

Yeah, look, I think there certainly is a seasonality element to that. And also, probably very consistent to what we said back in February, in our first call for the year, which is that, I think we're being conservative with respect to the second half of the year. So, I mean, when you just look at the sales growth projections implied for the second half vis-à-vis the first half, I think that would certainly say that's the case. So, I think we'll have a better read on what the second half looks like is this quarter progresses. And hopefully, we are being conservative and can do better than what we projected so far.

And if I could, I guess just expand a little bit. You had a very helpful slide on raw materials. I guess. How are you thinking about that as part of that conservatism based on, I guess, what we're seeing in terms of inflation? And do you feel that you'll be able to kind of offset that with pricing or how you viewing kind of the overall dynamic?

Yeah, I mean, I think the team's done a great job of doing that so far to start the year and feel confident about that for the second quarter. Whether or not some of these supply chain disruptions and other things that may be driving some of this inflation persistent to the second half of the year remains. But our team is really planning for like, hey, look, we've got to go off, capture pricing where we need to. Same thing with respect to freight and freight surcharges and we've added that to our businesses where we need to as well. So, I feel like we're on it. I think we got it covered. I really couldn't say for certain how long that lasts for the balance of the year.

Very helpful. Thank you.

Thank you. Our next question comes from PJ Juvekar with Citi. Your line is now open.

Pete Trane [ph] for PJ. I've been watching some of the sustainable solutions portfolio offerings that you're doing, like rejoin ColorMatrix, [ph] Maxxam could you just talk about how sales growth are in those buckets and peak sales? And then kind of give us a sense of what the larger drivers are in your sustainable solutions sales?

Yeah. So, I mean, you may have seen in a plastic news, I think that came out this week, we're just highlighting some of the recent technologies that were out there. So, in those particular areas, those are all new technologies and just getting started. When we look at the areas for sales growth this year, if I were to broadly categorize them, they are in the areas of barrier, which includes food and beverage containment, and enabling the use of last materials. Secondly, would be around lightweighting. For a broad range of applications, perhaps most focused on transportation has probably being the two key leaders. You know, right now, there's a lot of attention given to sort of what I describe is eco conscious materials or bio based materials. That's still pretty small. I think the growth rate opportunity is there. But that's when I just look at delivering revenue this year, as still a pretty small component of what we expect.

Okay, helpful. And then secondly, your emerging sales growth was pretty strong with 20% plus in gross margins, could you discuss what regions deliver that growth in the end markets?

Yeah, so I mean, look, for the most part that's coming out of Asia, and by far and away had the highest sales growth in the company. Think about that last year, it was about 13% of total company sales, this year it's about 17%. So, Asia has grown quite a bit. Latin America was up only about 4%. To some extent, we actually think that's COVID related and having some supply chain disruptions as well. But when I really think about where that growth is coming from, it's certainly by far away strongest in Asia.

Thank you.

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

Thanks so much. If you guys are looking at your pipeline of acquisition targets, can you speak to how much of that is really within your existing segments? Or how much is this going to move into some of the adjacent areas that are next year businesses?

Yeah, I mean, everything that we're looking at right now, I'd say, look, my sort of philosophy on that is you don't want to get too far away from your core competence with respect to considering acquisitions. So, I think everything is very close to what we do. Maybe one or two can be described as an adjacency, but not too many – not more than probably one turn away from what we do today. But look, there's a number of things we're looking at primarily in engineering materials.

Great. And then if you think about growth and having kind of a foundation that's stable to support that growth, could you talk about organizational capacity that you need to add and your manufacturing capacity and how you evaluate adding manufacturing capacity?

Yeah, I mean, from a capacity standpoint, this kind of consistent with a comment I made earlier around sustainable solutions. We have plenty of capacity with respect to footprint and machines. The real dynamic that's challenging for us right now, and I think a lot of companies are experiencing this is just getting enough people, and some of this is COVID related, some of this is demand related as other industries have grown as well. So, for us the primary gating factor, really as human resource related and getting enough associates in to our facilities to meet that demand.

Okay, thanks so much guys.

Thank you. Our next question comes from Ben Kallo with Baird. Your line is now open.

Hi. Good morning, guys.

Hi Ben.

Congrats on the results.

Thank you.

So, what I heard you say is that second half, you're being very conservative. These numbers don't make sense to me.

You said they don't make sense to you.

No, no, just like, the seasonality idea, usually you have a very strong quarter in Q4. And you did last year as well. But we have to have a big kick down in the second half to kind of get within your guidance.

Yeah, I'm not exactly sure if all the words you replayed right there. Sorry, I had hard time hearing you. But yeah, I mean, I don't think we're being conservative in the second half. And I really do hope that as more of the world gets vaccinated and we do get control of COVID, there continues to be really good demand through this. There was a – I mean, another way of thinking about this, there was a good report that I read yesterday on one of our customers in the outdoor industry, and just how little inventory there is right now and how long it's going to take to catch up. And I think we're being conservative in that regard as well. So, if that's true, and these consumer industries continue to do well, we could do better in the second half and what we have projected right now.

And then I had just two questions. So, EM looked like that, that your margins are good there. And maybe that has something to do what you just alluded to about your outdoor equipment. But maybe also, could you talk about the composites and what you're seeing there from that side? And then my last question is just on lightweighting. Because it's a big deal for people asking us about the auto industry and electric vehicles, and everything. And how much lightweighting growth that you guys are seeing for different applications out there that might be a year from now or 18 months or two years. Is that picked up at all? Thank you very much.

Yeah, I mean, from a composites really has been the key, one of the key draw drivers in the engineering materials segment. I think when I – sort of bifurcate composites versus the rest of our solutions, that's probably half the growth that you see in the quarter. As you recall from the past, because of how much investment we have made in composites, the growth there is driving, I think, a disproportionate amount of margin expansion, which is a good thing. Lightweighting is certainly an element of that. Actually, I think the lightweighting has even more opportunity when the transportation industry can really pick up. Everyone's aware of supply chain challenges impacting it as well. And I think when that recovers, we can do even better from a composite’s perspective. So, look, I think there's a good level of demand primarily in consumer applications right now, but longer term, we view this as a double-digit grower for us, just again, based on replacing heavier less structurally let's say design from the materials with these composites. So, we like it a lot as you know, I think it's got really good growth projections.

Great, thanks.

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

Good morning. Two questions. One, can you talk a little bit about how your firm handles labor inflation, rather than commodity inflation? I think you've done a good job passing through the feedstock inflation. And secondly, on the sustainability side, should we be thinking about this as a fairly steady CAGR over the next few years? Or are you seeing a difference in the scale of decisions that customers are contemplating given the shift in the incentives for them in the last couple of years?

Yeah. I mean, so first, with respect to how we think about pricing, we take all of the costs of production and freight into consideration and setting that and that does include all labor costs. I think what I would highlight though is that, look, we are a great place to work. And I think that part of being a great place to work is paying a competitive wage to coincide with where people live and the work that they're doing. And we are moving that forward and upward. We need to be competitive in the areas where we are. I mean, there really are labor shortages and challenges in so many places that that is an increasing cost for the business, but I believe we have that covered from a pricing standpoint. With respect to your second question, I think that consumer, there's so much consumer excitement and pull for sustainable solutions that brand owners are getting all over this. And that's a good thing for us with respect to working with us to help develop solutions for them that are more sustainable. So, I think that's factored into our growth rate assumptions. But it could get even better as things get adopted more quickly. So, I think we are sort of projections right now around 10% growth. That's a good way to think about that. But could be even better, as there's greater consumer adoption, or only on brand owner adoption.

Okay, thank you.

Thank you. And next question comes from Mike Harrison with Seaport Global. Your line is now open.

Hi, good morning. Can you hear me okay?

Yes, Mike.

Great. Wanted to ask about the Clariant synergy number and the increase that you made there, does that mean that you're finding additional projects or should we think about it more as an acceleration of the savings that you were expecting? And can you maybe also comment on whether you're seeing some revenue synergies from the Clariant business?

Yeah, I mean, right now, I'd say it's just an acceleration of our capture rate, if you will. I mean, starting the year, I would have said it would be maybe around 8 or 9 for the quarter, we're doing a little bit better than that is we had in our bridge schedule. And look, right now, I'd say, the primary focus of our commercial teams is just taking care of our customers, right. We just dropped two really big organizations together. We want our customers to genuinely believe and feel like it's business as usual. Or if not, then better. That's number one. And then I think we can start to move forward on some of the revenue synergies, particularly to large last question around sustainable solutions. I think that's the greatest opportunity for synergies between the two organizations is focusing on those sustainable solutions, particularly in the area of packaging.

All right. And then speaking of packaging, I think you kind of addressed that it’s a 5% grower this quarter when other areas are double-digits. And obviously, that's because you're up against more challenging comps. With the reopening that's going and going on in the vaccine rollout, are we going to see that business come up against challenging comps, and maybe be one of the weaker growers? And can you maybe also discuss your share position in that market and whether you've gained any share over the past three quarters? Thanks.

Yeah, I mean, the first way I think about our packaging and market exposure is one that is very stable, right. And then obviously, necessary, important, a lot of demand for it and played well during the pandemic last year. That's an important way of thinking about it. The way that kind of played out last year candidly, was a little lumpy in terms of looking at some spikes in demand at the end of March, and in April of last year, maybe a little bit again in the fall in different regions. But so, some of that will play out and the comparisons as it already did in the first quarter. But I don't think it's going to really be anything we would view as a negative. And I, again, certainly look at our presence in that end market as a positive. We've got confidence in our projections here for the second quarter, which are very strong. And so, I don't view that as a headwind of any kind.

And the share gain?

Look, I think at the moment, I think again, as I would maybe was just commenting earlier around bringing legacy Clariant, legacy PolyOne together and this is kind of how I feel about the pandemic in general. I really think costumers have just been so focused on surety of supply, ensuring that they have quality, on time delivery, which is so difficult right now. I can't really point to something and say there's been some immediate share gain outside of what might just be related to these supply disruptions where we've been able to step in and serve them better, but I think it's been a small number so far this year.

Alright, thanks very much.

Thank you. [Operator Instructions] Our next question comes from Jaideep Pandya with On Field Research. Your line is now open.

Thank you. Firstly, can you just explain to us like, what are the main sort of areas that you serve into healthcare and like, as we see vaccine rollout, what are the areas that you're sort of benefiting from? Is it really vials? Are you at all linked to some of these packaging materials for critical material for vaccine? So, we'll be very curious to know what's going on in your healthcare portfolio? The second question is really just around the 5G rollout for your cables business. Is it more 2022, 2023 story for you or is this really going to kick in in the second half of this year? That's my second question. And then, just thirdly, when you look at the Clariant portfolio, and you're doing a great job on the cost side of things, but when you look at the fundamental growth side of things, what are the most exciting areas for you in terms of growth opportunities as Avient now? Thanks a lot.

Yeah. Sorry about that. My phone just sounded off. For some reason I had a quiet but heard you not. So maybe replay the second question, but I'll take the first one. And that is around healthcare. And, I mean, look, there are probably 15 different sort of sub markets, if you will, inside of healthcare, when we look at those, the biggest being medical devices, drug delivery devices, and packaging around those that can include vials and testing and test kits and related packaging. There's really, it's interesting, because for us, healthcare is so similar to the broader business, right, where each application is pretty small. But some of our healthcare customers are some of our biggest customers and an array of different applications like that. What do we think we're seeing, obviously, last year, we had really strong demand for face mask, we don't think that replays to the same level this year. But it's been more than offset by I think, more elective procedures. Certainly, some of the testing that's going on right now is doing that. But I think that's where that that growth is coming from. Can you repeat the second question for me? Again, I'm sorry, that

Yeah sure, no that’s fine. It was just related to 5G and your fiber optic cable business? Have you started seeing growth already this year or is it more 2022, 2023 story as 5G rolls out?

No, we are seeing growth in that. And actually, I think that when I look at growth this year, to some extent, look wire and cable industry, in general, last year was impacted by shutdowns related to COVID. Not necessarily anything related to demand, but just being able to operate facilities. So, I think this year, with those facilities being fully operational, we're going to have good growth related to 5G and for our fiber line business. So, we have a really long way to go with respect to participating in that market and the growth related to it. As we sit here today, and we see 5G pop up on our phone, it's really not all the way there yet, because it's really still using 4G infrastructure, and there's so much investment yet to take place. If you just think about really 1000s and perhaps millions of many towers and antenna that are yet to be installed, that's going to be a growth driver for us for the next seven to 10 years, easily. Historically, when I look at our participation in our market, that's been 8% to 10% sales growth this year, and I've heard in the past, I think that will continue to be the case. Outside of that, like when I think about these areas where I'm most excited about growth, that really comes back to the bridge schedule that we've been using to articulate how we think about 6.5% sales growth, which is really by end market, of course, healthcare. We capture consumer, a lot of that in the composite space. And from a from a technology standpoint, because composites and sustainable solutions are really at the top of the list.

Okay, thanks a lot.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Bob Patterson for closing remarks.

All right. Well, thank you. And thanks to everyone who was able to join us on the call today. If we don't see you at a conference between now and then we look forward to provide an update for our second quarter results at the conclusion thereof. Thanks everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.