Avient Corporation (AVNT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation investor conference call. My name is Kevin, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Joe Di Salvo, Vice President and Treasurer, Investor Relations. Please proceed.

Thank you, Kevin. 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 statements. Some of these risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission as well as in Wednesday's press release. Joining me today on our call 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, thank you, Joe, and good morning, everyone. The now pandemic COVID-19 outbreak has caused societal, health and market impacts, the levels of which many people have never experienced before. It's influencing every type of business in every region, and that includes PolyOne and our many stakeholders. There is tremendous volatility and uncertainty externally. But there is also a lot of important work being done by governments, organizations and communities and by companies like us. Health and safety has always been our first priority at PolyOne, and it remains so. In unique times like this, the actions we're taking are not only protecting our associates and their families but all of our stakeholders with whom we interact. We are truly an interconnected global community at this point, and we are all in this together. Like many companies and organizations, we have instituted extensive preventative health and safety measures. We're taking what we learned and instituted early with our associates as the outbreak began in China and have been applying additional measures as the virus has spread. That includes restricting visitors and travel, while promoting social distancing, remote working arrangements and more. Our early activation of these measures has also been an important enabler as we have executed business continuity plans, and so far, we have had minimal disruption in Europe and the Americas. Keep in mind that despite all that's going on, the world is still trying to keep working. As you read in our news release Wednesday, we reaffirmed our previous guidance to deliver $0.48 of adjusted EPS for the first quarter, and that's a 10% increase over the prior year. That guidance was initially provided on January 28 when we reported our 2019 results, and it excluded the impact of the additional shares issued in February this year as well as the additional interest income from the cash we received from issuing those shares. The guidance of $0.48 as we are right now is presented on an apples-to-apples basis with as we presented it on January 28. If we included the additional share count, there would be an impact of $0.04 related to that. Looking at February year-to-date, our results have certainly been impacted by the coronavirus in China, as sales in Asia declined 13%. This translated to a $2 million decline in operating income. Europe sales were down 10%, but operating income was flat. And in the U.S., sales have declined 4%, but operating income has increased $4 million. Much of the sales decline in the U.S. has been in our distribution business, where deflation has impacted selling prices. But in distribution, margin expansion has helped to offset that. And in fact, margins have improved in every segment and in every region. And on a year-to-date basis, in total, operating income is up 4% year-over-year. And that growth, coupled primarily with lower interest expense, is driving our expectation for a 10% increase in EPS for the quarter. We continue to see demand for composites and sustainable solutions. And from an end-market perspective, we are certainly seeing an increase in demand for applications in health care, consumer and packaging, including personal care products. I'd like to turn our discussion and discuss our financial position at this time and remind our investors that we are in a very good place with respect to cash on the balance sheet. We expect to end the first quarter with $1.25 billion of cash and approximately $300 million of additional liquidity from our committed revolving line of credit. Now as an investor, you may be saying to yourself, well, that's great. But you're just going to spend it on the Clariant transaction, so what good does it do us? And that is what I want to address now. Earlier this week, we announced some personnel changes to keep our investors informed and give you an update on the progress we are making with regulatory approvals for the Clariant transaction. Our intent was to give our investors confidence that we are putting the right people in the right roles to ensure integration success. That brings us to now, and our intent today is to give you confidence that we are, first and foremost, going to take care of our investors' money, and that's the bottom line. It's not lost on us what is going on in the world right now. There is tremendous uncertainty about almost everything. And in the absence of direct and clear communication from us, investors may assume the worst. With respect to the Clariant transaction, I understand there is concern about whether or not we would do this deal under any conditions. And the answer to that is no. Fortunately, we don't need to make that call right now, but we will if we have to. Let me explain. We are certainly in unprecedented territory with the rapid spread of the coronavirus, and there is fear of a resulting global recession that is known. What is not known is how long will this last or how significant will it be. And that is really important as time is to our benefit. The earliest the Clariant deal could close is June 2, and it still may not happen that fast. Between now and then, we're going to learn a lot more about the spread and the effect of coronavirus and its impact on the economy. Consider what we know about China, where the virus started just a few months ago. Cases there are reportedly on the decline, and China is going back to work. In fact, our facilities at PolyOne in China are near 100% employment capacity with no reported associates having tested positive for the virus. Our customers are near 100% as well, and they are accelerating purchase orders to try and make up for lost time. We are seeing this in our order report for March and for April. We believe this will create much needed supply and demand for the global economy. But that does not mean the world can breathe a sigh of relief, far from it. Things could get worse in Europe and the Americas before they get better. We need to keep following the social distancing protocols and other important measures being recommended. That includes eliminating nonessential travel and meetings, taking care of each other and those around us so that hopefully the world can get back to normalcy soon. I believe returning to normalcy is not a matter of if but when. Accordingly, we need to stay the course and keep our options open, which includes working towards satisfying the closing conditions of the Clariant transaction. Why? Because this acquisition makes sense. With the divestiture of PP&S, and the acquisition of Clariant Masterbatch, we are positioning our company to be truly global and truly specialty. From the time we announced the deal to where we are today, I feel even more confident about the synergy opportunities that exist by bringing our 2 companies together. These include the hard costs we detailed in December but also the opportunity to bring our innovation teams together and create better and more sustainable solutions faster for our customers. And the end result of that is real value creation. But in case I wasn't clear earlier, that doesn't mean we ignore what is going on and proceed under any or all circumstances. We will not do that. We will closely monitor market conditions. We will defer any debt issuance until markets improve and it makes sense to proceed. And we will stay in close communication with our investors during this time so that you know what we are thinking, what we are doing and why. When I joined PolyOne 12 years ago, we were just months away from the greatest financial crisis most living generations have ever seen. Many wondered whether or not we would survive as a company. We did and we're better for it, as the lessons of the past are not forgotten here. What I am most proud of during that crisis was that we remained calm just as we are now. Our words and actions were thoughtful and deliberate then just as they are now. And our goals then were, first and foremost, to protect what we have and then invest for the future just as they are now. That concludes our prepared remarks. We'll now open the call for questions.

[Operator Instructions] Your first question comes from Frank Mitsch with Fermium Research.

I'm glad to hear that everybody's okay in this pretty crazy time. Bob, first I wanted to say congratulations on receiving the patent fellow award. I know the ceremony is supposed to be next Thursday. I'm assuming that that's canceled or postponed, has it been?

It has. Like just about every other activity on campuses around the country, everything has been postponed. But I certainly thank you for that recognition.

And then obviously, speaking of cancellation or postponement, I really appreciate your comments regarding not ignoring what is going on around you with respect to the economic backdrop and the potential closing of the Clariant Masterbatch transaction. Could you just remind us about the various contractual conditions that may allow the transaction to be postponed or canceled?

Well, certainly, and I really don't want to get into a long dissertation of all the conditions in the purchase and sale agreement between our 2 companies. There is a MAC clause and, again, I don't intend to interpret that today. What I will say, Frank, is that fortunately, and as we are speaking now, we don't need to make a determination in that regard as we have time between now and when a closing would occur. And as I said earlier, the soonest this can take place is June 2. And I may be redundant in saying this, but we are well aware that a lot has changed in the world in the last 2 months, but a lot could change in the next 2 months. So among a number of factors, we'll continue to monitor general business conditions and performance, the status of the coronavirus and credit markets during this time. And I just want to reiterate, we can and will evaluate all our options to ensure that we protect our investors first.

Our next question comes from Mike Sison with Wells Fargo.

I'm glad to hear everybody is safe. I think one of the major concerns is the value of a lot of assets have fallen quite a bit, right? So I mean granted a lot of things can change in the next 2 months, but are there any provisions in the M&A contract to maybe adjust the price of the deal? I know you don't need to make that decision anytime soon. But clearly, with the market's down 30-plus percent, the value of what you want to pay for Clariant likely has come down if you can have that deal in place.

Well, and it may sound somewhat redundant to what I said with Frank, but I don't really want to comment on the specifics of the legal terms and conditions of the document between us -- us and Clariant. And fortunately, we don't have to make a determination in that regard now. I think one of the things that will, of course, be on investors' mind is leverage the underlying performance of the business. And we'll certainly learn more about that with the passage of time. You didn't ask this question, but I think it's kind of helpful to put things in perspective that leverage is ultimately determined by the underlying EBITDA of the business, ours and theirs. And in the first quarter, our EBITDA went up. Now I'm not saying that with a blind eye to what could happen for the balance of the year. That's simply not true, given where things are in Europe and Americas. But when I look at the markets that we serve, Mike, in health care, personal care and food and beverage packaging, I think that there's certainly a lot of opportunity to continue to sustain that level of EBITDA right now. So hopefully, that answers your question and gives you a little perspective on how to think about valuation. Again, we're not making any determination in that regard today.

Understood. And as a quick follow-up, your EBITDA in '19 was a little over 309. Clariant was supposed to be around 130. A lot of people are looking for a recession in 2Q, pretty steep one and then potentially third quarter. If you think about -- and you might not be ready yet, but if you think about a recession case for the rest of the year, where do you think those numbers kind of unfold in a recession case scenario?

Yes. Look, what I would fall back on or -- we've obviously gotten questions like that in the past. And many of us, of course, still remember quite clearly the impact of '08 and '09, and many of us remember the recession around '01, right? And it's difficult, of course, at this point in time to say if we have a recession this year, what -- to what extent that would exist. When we had answered that question in the past, I really think that it still applies today, which is that if you were to look at a recession that was somewhere between those 2, that ultimately, that could impact EBITDA by about 20%, Mike. And I actually think that we have some unusual circumstances this year where perhaps some markets will be impacted disproportionately. As you know, we have nowhere near as much concentration in housing and auto as we once did. And the majority of our -- well, much of our sales now are in health care, consumer and packaging. So I think we're in a better spot than we've ever been before with respect to the end markets we serve and how that would play out in a recession.

Our next question comes from Mike Harrison with Seaport Global Securities.

Bob, I was wondering, did your facilities qualify as essential in case of a broader lockdown? Obviously, you've got certain things that your products go into that might not be essential. But as you mentioned, health care, consumer packaging being pretty important right now, given the demand for processed foods and obviously for health care products. So at this point, do you think you'll be able to keep operating if there's a broader lockdown put in place?

Yes, we do. And just a reminder, maybe we'll focus on the U.S. first, where 20% of our sales are into health care. Globally, that number is a little smaller than that. But the largest markets that we serve are health care, packaging and consumer. And when you look at what we do, Mike, as you know, so much of that material is going into applications that we perceive to be must-have. And that is in health care or when you think about food and beverage, packaging, colorant for that packaging or the additives for the food and beverage packaging for preservative purposes. We certainly believe those are must-have. Our initial read against certain government regulations that are beginning to form now in that regard is that is true. So that's our own assessment. And with the best information that I have right now, I think we will stay up and running to the extent that we can. Now listen, if we had a virus situation at a plant and that required us to take action to close it, we would certainly do that. But to answer your question, hopefully I have is with what we know today.

All right. And then I wanted to also ask, just as you're thinking about the integration process, you mentioned the leadership changes that you've made. But if that integration process is taking place in a downturn, do you proceed according to the original plan? Are you putting maybe some alternative plans in place where you could accelerate cost synergies? Or maybe just comment on kind of the challenges associated with realizing synergies and integration benefits in a weaker demand environment.

Well, I think most importantly, Mike, we have to take care of our associates, and we have to take care of our customers and keep that top of mind. So I wouldn't want to rush something that would potentially put either of those 2 stakeholders at harm or a disadvantage. If I could maybe answer that question about PolyOne and how we're thinking about our own operations today, some have said, well, will you lay off employees? Will you have plant closures? And at this point, we don't foresee that. We actually believe because we need to keep our facilities open and running, we actually need to find ways to be more flexible with respect to our workforce and how to deploy them to the greatest effect while minimizing any issues with respect to the virus. So at this point, Mike, I wouldn't say there's any formula change or how we're thinking about proceeding with that. In my conversations with Clariant, I believe they're thinking the same way right now. It's to protect their people, protect their customers and stay in business, particularly in these industries that need us to.

Our next question comes from Colin Rusch with Oppenheimer.

I know you don't want to talk about the terms, but can you give us a sense of any sort of termination fees that are in the agreement for Clariant and how we should think about that?

Right. Well, there is a termination fee with respect to if the MAC arises, some of that being connected to the availability of financing, et cetera. That's $75 million. I mean that's public knowledge. So at this point, that's really what I would say. As I had before, I'm not really going to comment on the interpretation of how that gets applied under what conditions and when, but that's how you can think about that.

Okay. Perfect. And then in terms of inventory levels with your customers, can you give us -- do you have any sense of what plans are? We've heard any number of different things from distributors in terms of wanting to be prepared for recovery and having material in hand. But do you have a sense of where you're at relative to normalized inventory levels and how those -- what information you're getting from your customers in terms of where they want to be as they go into a choppy period?

Yes. I think most importantly, right now, our customers are focused on getting product out where it's needed, particularly in those 3 areas of health care, consumer and packaging related to them. I don't believe anyone's really focused on inventory sort of in that traditional sense of like what do I need to help us in a recovery. Everyone's thinking about what do I need right now to satisfy current demand. And if anyone has spent any time in a grocery store or otherwise walk down the aisles, the demand is real. It's there and it's now. And I think that's what we and our customers are focused on.

Our next question comes from Jim Sheehan with SunTrust.

Could you discuss the financing options you have in place for the Clariant deal? I know you have some bridge loans lined up. And have those financing options changed given the current environment?

Nothing has changed under the current environment. We do have a fully committed bridge loan. The lead banks are Citi, Morgan Stanley and Wells. Then there's been no changes to the terms and conditions of that.

Great. And could you discuss the -- whether Clariant has updated its financial estimates for the business given the recent changes in the economy?

Publicly, I haven't heard anything to that effect, and there's been no internal discussion between the 2 of us about their expectations for the balance of the year. Like us, Jim, I mean we're coming out with a set of expectations for finishing the quarter, but I think it's premature to say what the impact of coronavirus will be overall longer time horizon, at least the balance of this year. So I think we're waiting to see how things play out in the first quarter with more information to follow after that. And it wouldn't surprise me if their plans are the same.

Great. And in terms of the macroeconomic impacts we're seeing from lower oil prices and recession, maybe you could address how we should think about the raw material cost benefits you would see from lower polyethylene and polypropylene prices? And also, what levers could you pull to avoid cutting the dividend in the recession scenario?

Well, I do believe that lower hydrocarbon-based raw material costs will certainly be a benefit to us and to everyone who's using those as part of their supply chain. So at this point, it's probably a little early to give you an exact dollar impact on what that will be. As you know, it's impacted by ultimately where demand is, too. But if I look at the full suite of what we buy right now, I'd say there is a potential upside from where we are with respect to raw material costs. And I can tell you right now that there's no discussion of or contemplation of reducing the dividend at this point. So at this point, I'm not sure I would sort of entertain a contingency plan in that regard. I think we're in good shape with respect to cash that we have on the balance sheet and cash flow in terms of EPS conversion to cash to support the dividend.

Next question comes from Laurence Alexander with Jefferies.

First, can you just remind everybody the mix of your health care, packaging and consumer-facing business relative to the automotive and the aerospace? What the rough balance is for your current business and how that changes with the Masterbatch acquisition?

Yes. So today, the broad category, Laurence, of transportation is about 13% of sales. I'd say what, probably 10% of that is automotive-related around the world, although the other 3% being other transportation applications. Health care is about 15%. Consumer and packaging are each pretty close to that at 14% and 13%. The combination of us and Clariant Masterbatch actually brings those 3 numbers to over 50% of our sales. That's one of the things that we stressed as strategic rationale for the deals that it does help to bring us a greater presence in those markets that we think are very good for PolyOne and part of our long-term strategic plan.

And can you also discuss a little bit, I mean early days still, but how you see the technical sales cycle being affected by the disruptions? I mean is there a chance to move projects to the forefront as clients come back and they have more spare time? Or is it more just going to be -- or should we think about it more of a disruption that you have to fix in Q3, Q4?

Well, I think right now, everyone really is focused on the here and now. And that really is to address the demand that exists for health care, consumer and packaging applications. So there may be an unintended consequence of that attention that some of the sort of longer sales cycle processes or technology things don't advance as quickly as they would otherwise. And that also may be impacted, Laurence, by just the fact that people aren't traveling to see each other. I mean we're doing business wherever, whenever we can by phone or video. And as you know, it really is hard to drive innovation without in-person collaboration in a lot of respect. So it may be that there's some near-term impact to that, but I think that's appropriate, reasonable given where people have prioritized their time.

Our next question comes from Rosemarie Morbelli with G. Research.

Thank you, Bob, for setting up this call. I was wondering if you could give us a feel for the situation with regulators in Europe. There has been speculation that -- and maybe it is not speculation, it is actual, that they are taking a break during this time and, therefore, no transactions is going to happen anytime soon?

I mean that could be very real. And I know that in at least one country, in particular, just given current lockdown and response to the coronavirus, they've already given us notice that things may proceed more slowly. We did not get a notice that things weren't going to move forward or stop being considered for a period of time. But I think it's very possible that in a couple of countries that could be the case. So right now, we're in a wait-and-see approach to that. And candidly, as I said before, the earliest we could close is June 2, and it may be that those types of delays and regulatory approval and timing push that out as a result.

And then looking at -- pretending for a second that the transaction does not go through, if we look at the end of the first quarter and your cash situation, are you in a net cash position? Or, because you had to pay the taxes on the PP&S transaction, you are still going to have a net debt position at the end of the first quarter?

I mean our debt is about 1.2. Yes, so we're at -- basically at the end of the quarter, we're balanced, right? We're in a net -- our debt is about 1.2. Our cash, as we mentioned, is $1.25 billion. Your point on the PP&S tax payment, that will come in April, albeit -- potentially, some of that will be deferred given what's going on in Washington right now. But as we've talked about in the past, that tax payment is about $150 million. Thank you, Rosemarie, for that question and everyone else who joined the call today. We will stay in close communication with our investors. We'll continue to -- we'll put out updates when and where we think it makes sense. Of course, we will host our regularly scheduled call for the first quarter results in April. But if needed, we'll continue to take advantage of opportunities like this to keep you informed. It is important to us that you do know what we're thinking while we're taking the actions that we are and what we're doing so that there are no surprises. Thank you, again, everyone, for joining us on the call. We certainly wish that everyone does stay healthy. Thank you.

Well, ladies and gentlemen, that does conclude today's presentation. You may now disconnect, and have a wonderful day.