Good morning, ladies and gentlemen, and welcome to the Avient Corporation's Webcast to discuss company's Second Quarter 2022 Results. My name is Katherine, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will have a question-and-answer session following the company's prepared remarks.

As a reminder, this conference is being recorded for replay purposes. I’d now like to turn the call over to Joe Di Salvo, Vice President, Treasurer and Investor Relations. Please proceed..

Thank you, Katherine, and good morning to everyone 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 give current expectations or forecast 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 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 the non-GAAP financial measures and provides a reconciliation for historical non-GAAP measures to their most directly comparable GAAP financial measures.

Joining me today is our Chairman, President and Chief Executive Officer, Bob Patterson and Senior Vice President and Chief Financial Officer, Jamie Beggs. We have another quarter of positive results to share today.

We'll also provide some updates on our recent announcement to acquire the DSM Protective Materials business, which at times we'll refer to as Dyneema, as well as the status of the potential sale of the distribution business, both of which are progressing well. Bob will share more with you after Jamie covers our second quarter results..

Thanks, Joe, and good morning, everyone. Our second quarter performance delivered what was our highest level of sales, adjusted operating income, and adjusted EPS for a second quarter reporting period. Sales grew 5% to $1.3 billion against the backdrop of challenging circumstances.

Demand conditions in Europe were impacted by the uncertainty created by the war in Ukraine, and sales in Asia were negatively impacted by the extended lockdowns in China due to their zero COVID policy. Three of our plants in Shanghai were shut down for all of April and May as were many of our customers.

Despite these challenges, adjusted EPS grew 13% to $0.98 per share, exceeding our prior guidance of $0.92 per share. This was driven by better-than-expected demand in the America and our ability to stay ahead of inflation. From a segment perspective, color grew operating income 16% excluding foreign exchange.

This was driven by 25% growth in healthcare applications, a continued recovery in our screen printing inks business and synergies from the integration of the Clariant Color business. Specialty Engineered Materials results were in line with expectations for the quarter.

Recall that as we began the year, we acknowledged flowing demand for certain outdoor applications, and this remains true in quarter two. Primary difference between Q1 and Q2 is weaker sales in Europe.

What is encouraging for the balance of the year is the uptick in demand we are seeing for composites, for 5G and electrical infrastructure, as well as growth in healthcare sales. The Distribution business delivered another excellent quarter driven by demand for healthcare applications and expanding margins.

As you know, the majority of the businesses in North America where demand trends have been very favorable. The next slide highlights our key growth drivers of sustainable solutions, healthcare, composites and our presence in Asia and Latin America. The previously mentioned shut downs in China obviously impacted the growth in Asia.

In fact, Asia was down, but Latin America was up 15% as we are seeing solid demand in the Americas. The lockdowns also impacted our growth in sustainable solutions. Excluding the impact of those shutdown, sustainable solutions increased 12% in the quarter.

And lastly, we have split out the impact of outdoor high performance solutions within the SEM segment, and you can see very good growth in the other composite applications I just referenced. The EBITDA bridge on the next slide really does three things. First, you can see that we continue to realize price more than offsetting inflation.

Second, you can see the specific pockets of demand decline that most significantly impacted us in the quarter, most notably the lockdowns in Shanghai, loss of sales into Russia, and a broader transportation decline. Lastly, weaker foreign exchange, primarily the euro was a negative of $7 million for the quarter.

To wrap up our comments on Q2 performance on Slide 8, we bridge EPS year-over-year. Here you can see the EPS impact by segment, as well as the effect of weaker foreign currencies. We also highlight that while interest expense was lower, this is offset by a higher tax rate due to a higher percentage of income earned in the Americas.

Truly great work by the team to achieve a record second quarter by navigating through challenging macroeconomic conditions. Before I turn the call over to Bob, we also announced in our press release and issued just today our most recent sustainability report. This year's report is our most comprehensive yet.

It's also the most inclusive in terms of ESG metrics and data that we know are of growing interest to our investors and all of our stakeholders, for that matter. It includes enhanced disclosures that align with current ESG framework and emphasizes our commitment to the UN Global Compact.

In addition, it lays out the details of our sustainability strategy which centers on people, products, planet and, of course, performance. We have made specific investments in ESG initiatives that drive value for the business.

Our efforts have been recognized by ESG rating firms, as well as other research firms, placing us ahead of many companies in our space. With ISS, we are ranked in the top 10% on social and in the top 20% on environmental impact as compared to our peer groups. Likewise, Sustainalytics now has us in the top 16%.

We've also been rated in the top 5% of America's Most Responsible Companies by Newsweek, essentially placing us among the best of the best. We are really proud of these ratings and accolades. It means we have a clean house and a really strong foundation to build upon.

What we're most excited about in terms of ESG and sustainability is that it truly drives growth for our company and positions us extremely well for the evolving road ahead. I highly encourage you to open our latest sustainability report.

We believe that is a true indicator of where we are as a company and how sustainability will continue to create value into the future. I'll now turn the call over to Bob to provide details on our outlook for the year, as well as update on Dyneema and distribution..

Thank you, Jamie. We are pleased with our second quarter performance, yet recognize there is reason for caution in the near-term ahead. The war in Ukraine and uncertainty around energy supply has dampened demand in Europe and could create further disruptions in the future.

It's difficult for anyone to fully predict how demand and supply chains might be affected if energy availability is disrupted. Well, what we can say is that we are controlling what we can and developing contingency plans so that we are best positioned to service our customers.

This includes leveraging the over 30 manufacturing plants we have in Europe specifically and many others around the world to flex and shift production if needed and where we are able to.

We do see improving conditions in Asia, given the fact that all of our plants remained are reopened in June, as well as solid demand in the Americas, which has helped shape our view for the balance of the year.

For the full year, we are maintaining our adjusted EPS guidance of $3.50, and that's before any adjustment for Dyneema or distribution and introducing guidance of $0.80 for the third quarter. We are forecasting demand to be lower in Europe.

However, we see growth in healthcare and advanced composite applications like 5G infrastructure in the Americas, which should help offset some of this weakness. And further, we continue to capture price to more than offset inflation and supply chain challenges, and we anticipate margins to improve in the second half of the year versus the prior year.

For the full year projection, Slide 13 shows that we are increasing our cash flow guidance to $285 million and expect to finish the year with a net debt to adjusted EBITDA ratio of 1.6 times, and again this is before including the impact of the Dyneema acquisition or a potential sale of distribution.

And this is important because this is the foundation upon which we plan to add Dyneema while remaining conservatively leveraged. As you know, in April, we announced our intention to acquire Dyneema. In conjunction with this, we also announced our intention to explore sale of our distribution segment. And let me update you on both.

With respect to distribution, we did launch a process in May, and as we expected, there was significant interest in the business. We received multiple first round bids, and based on preliminary valuations, we invited a smaller set of buyers to proceed to a second round, which is underway now.

We expect second round bids in August, and we should be in a position to decide whether or not to move forward at that time. With respect to Dyneema, all regulatory approvals have been received.

Our engagement with the management team has been incredibly positive, and we are both looking forward to joining forces as soon as September 1.The business is performing well this year in line with our pro forma modeling with upward momentum as demand for personal protective gear for the military is expected to increase.

We will seek to complete our financing between now and then, and let me speak specifically to that. Yes, interest rates have increased from when we announced the deal, and I have heard some investor concern that the cost of financing Dyneema will now be astronomical and/or leverage simply too high, and that isn't true.

As a starting point, we have committed financing in place. Second, we're going to access more international cash on the balance sheet and ultimately, borrow about $200 million less than we modeled in April. On Slide 15, we model the impact of the acquisition of Dyneema and potential sale of the distribution business.

And most of this is unchanged from the model that we shared with you in April. We are adding a line to show an estimate of incremental financing costs of approximately $0.22 per share. And after refining our projections, net debt to EBITDA would be approximately 2.8 times on a pro forma basis.

There are more details on leverage on Slide 16 as we have presented our two year leverage projections. And our confidence to achieve this comes from our successful Clariant Color acquisition and integration.

Through our disciplined capital allocation approach, you know that we delevered one year ahead of schedule to create the capacity that we have today to invest in Dyneema and the future. By 2024, following the acquisition of Dyneema and potential divestment of distribution, we expect net leverage to drop to 2.0 times.

In short, Dyneema remains a compelling acquisition for us, and we expect to be able to finance it with a very modest level of leverage. Dyneema is truly one of the world's most remarkable technologies and one that we plan to invest in and to grow.

In combination with the potential distribution divestiture, Avient would become a pure play specialty formulator. Note that the specialty transformation of our company as running a natural parallel path with our goal to improve our end market mix.

And if you went back to 2006 presented in the chart on the left of Slide 18, you can see that the preponderance of our revenue was in housing, auto, industrial and almost entirely in the US. Fast forward to 2022 and the end markets have changed dramatically and so is our company.

And the pro forma view on the right was Dyneema and excluding distribution, you can vividly see this night and day as over half our revenues now come from consumer, packaging and healthcare including the defense business that Dyneema supplies for lifesaving personal and vehicle protective material almost 60% of our revenue going forward, would be industries that are in far less cyclical and are more resilient during downturns.

But I'd like to end the call where we started it and that is that I am really pleased with our second quarter performance, especially in this environment; record revenue, adjusted EBITDA, and EPS.

When I look at some of the charts that we reviewed with you today and the historical performance trends, I am incredibly proud of what we have accomplished over the years. But I'm more proud of the culture of the organization and the people we have at Avient, who make our performance possible. In 2021, COVID created much uncertainty.

We stayed calm, we stayed the course. We completed the Clariant acquisition and dramatically improved the financial profile of the company and strengthened our balance sheet. We invested in our portfolio and our people and we executed. We find ourselves in a similar position now.

These are certainly uncertain times, but what we are certain about is our four-pillar strategy and continuing to stay the course. That's exactly what we've done in the past, and we'll continue to do so going forward.

And I know that at times like this, it's natural for companies, as well as investors to think and plan for downside scenarios that makes all the sense in the world. But we also have to play the long game. And for us, that means completing the acquisition of Dyneema and our review of the distribution business, and both will be done shortly.

It also means continuing to invest in innovation. As we highlighted at our investor day, key areas of focus for us have been sustainable solutions and composites. We're incredibly well positioned to participate in megatrend growth drivers related to each. But we are also looking further into the future.

In leveraging these technologies, we intend to pursue interconnected applications, the longer-term projects related to electronics and healthcare robotics, exciting new markets and opportunities for us. Vinod Purayath joined us a little over a year ago as our new Chief Technology Officer and has been leading our efforts in these areas.

To support these initiatives, we are building a new innovation center in India, which we expect to be completed by the first quarter of next year. Innovation is the engine of a specialty company, and we are very excited about our performance in this regard and what lies ahead.

We certainly look forward to updating you on our efforts in this regard on future calls. And with that, we'll be happy to take any questions that you may have..

Thank you. [Operator Instructions] Our first question comes from Frank Mitsch with Fermium Research. Your line is open..

Good morning, folks and a nice result, and it came in $0.06 ahead of your guidance.

I'm curious as to what did you see went right versus your initial expectations and how should we think about that possibly impacting your Q3 guidance?.

Yeah. I mean, look, I think if you look by segment, really, we had -- Color was up a little bit, Distribution was also up from kind of where we were thinking back in April, which was really primarily driven by the demand conditions that we saw in the Americas. And then SEM was down a little, almost entirely because of the lockdowns in Shanghai..

And these sort of conditions, you don't think will persist in Q3?.

Really, so as I look towards Q3, the way to think about that is that we do see Europe being down more. I mean we've really modeled that in from a sales and EBITDA perspective. Asia will be up slightly in Q3 from what we did in Q2, partially just due to the shutdowns abating and then we basically got Americas flat Q2 to Q3..

All right. Awesome. And I was struck by Avient buying back stock in the second quarter given the M&A and the need for cash to pay for the transaction.

I was wondering, if you could talk about the philosophy there in terms of buying back stock during the second quarter and does that imply anything for 3Q and beyond?.

Yeah. Well, it doesn't really imply anything for Q3 and beyond. And I think it's important that we remain modestly levered, and we are obviously going to need to finance the Dyneema acquisition here shortly.

As we did go through the leverage projections today, back in April, we modeled I think around 2.9 times and now, we're modeling at about 2.8 times, which was inclusive of those share repurchases.

So, we felt comfortable doing that really just kind of in line with what our plan was kind of starting at the beginning of the year and that our leverage is actually now projected to be a little lower than where we thought it was three months ago..

Awesome. Thanks so much..

Thank you. We have a question from Michael Sison with Wells Fargo. Your line is open..

Hey. Good morning. Nice quarter. I guess with the Dyneema acquisition, if I take a look at that slide, I think it was 15, you initially thought the deal would be $0.35 accretive, I guess, minus the $0.22 is like $0.13 accretive.

And I sort of sense that depending on how the bids come in for August, that you will sort of decide what to do with the business.

So can you maybe go through some of the thoughts there, multiples and is there a still potential that you keep the business if the pricing is at where you want it to be?.

I'm sorry you kind of like, tailed off there a little bit.

I think your question is really around sort of the decision making process around distribution?.

Yes..

Thanks. Yeah. Look, we were very encouraged by what we saw in the initial first round bids and just the overall level of competition for the business, which is something that we really did expect. We wouldn't have moved forward with the second round if that wasn't the case.

So, I mean just based on what we see today, I think there is a high probability that we can get something done..

Great. And then I guess I had a follow-up on Slide 7, the Q2 EBITDA bridge. CAI, your price mix is 87, inflation was minus 58 and similarly, SEM price mix is 36, inflation minus 24.

So, just curious how you're able to get that price mix above inflation to such a degree and then, is there a difference between the price of the mix in that sort of -- in those numbers?.

Yeah. One thing I I'd actually encourage everyone to just do is to put this in historical perspective. So that net price benefit for the quarter was 45, it was 40 in Q1. If you went back to Q4, I think it was 27 or so. So we're actually getting momentum here, and we started reporting it basically in this similar format, I think, a year ago.

So, we should have a few quarters out there upon which we can do that. So one is, I think we're still getting really good pricing, but I do think in some respects, you are also seeing some moderation in inflation -- in terms of wage inflation, over time and supply chain costs as well. So look, there is still strong demand for these materials.

Supply chain challenges do persist and just I think as a result of that plus the end markets that we serve, we've been able to continue to get the pricing that we have..

Great. Thank you..

Thank you. We have a question from P.J. Juvekar with Citi. Your line is open..

Hey. Good morning..

Good morning..

Bob, as recession fears grow, can you give us some idea that how your new sort of specialty portfolio is likely to perform? Like, for example, maybe packaging may hold a better but maybe industrial markets could go down and have you seen any meaningful impact in the portfolio so far with the slowdown?.

Yeah. I mean, one of the things that we've done and there was a slide in our deck today that really just illustrated how the end markets today compared to where they were in 2006. That 2006 point is relevant because obviously, that was our portfolio heading into a great recession of '08 and '09.

If we take those two different -- those two end-market profiles and we model, let's say, a mild recession like '01, we'd see a downturn of say 6% in sales, but they were more severe like '08, '09 and something closer to '12. And what we actually experienced in '08, '09 was something closer to 30, 35 because of the end markets we were in.

So when I just think about what the impact of that looks like, that's a good way to think about it from a top line standpoint, but candidly, when you look at the second quarter performance, demand is down, granted there is some uniqueness to that demand because of sales to Russia seizing, China lockdowns and so on.

But it gives you some perspective, I think, on what our performance can look like with a 6% drop in demand..

Great. Thank you. And then, I have to say that your cash flow from operations was up nicely in this kind of inflationary environment when other chemical companies are seeing cash flows decline.

What kind of steps did you take to protect your cash and can you just give us some idea about your good performance in cash flow?.

Yeah. I'm not sure if you're looking at the cash flow relative to a prior projection or not for the second quarter. Team did a really good job managing working capital. I think one thing that we've been very thoughtful about this whole year are the inventory levels. Candidly, I thought we started the year a little high.

And I think the team was very proactive in starting to work that down relative to sales levels, and so I think just from a working capital standpoint, that ended up being a little bit of a good guy in the second quarter plus CapEx is a little bit lower than what we were planning starting the beginning of the year..

Great. Thank you..

Thank you. Our next question comes from Angel Castillo with Morgan Stanley. Your line is open..

All right. Thanks for taking my question. I was hoping to go on back to composites strength a little bit more on things like the momentum there is continued and that’s part of the strong performance.

So curious, what you saw in 2Q that was driving the continuation there despite pretty difficult comparison last year and how should we think about that kind of flowing through into 3Q, maybe a little bit more color there on SEM kind of level for operating income for the quarter would be helpful?.

Yeah. So on Slide 6 of the deck, there you can kind of see the two elements of composites. One is just the specific impact of the outdoor space being down year-over-year and then good growth in the balance of the portfolio. That really was from electrical infrastructure, as well as 5G and composites related to infrastructure associated with that.

Those are the two really primary drivers of composite growth year-over-year. I think as we look to the second half of the year, we see both of those actually continuing to pick up based on our orders. So we're encouraged about that..

It's very helpful. Thank you.

And then on energy, I fully cognizant of the difficulty in assessing maybe with the risk there might be, but I was wondering if you could talk a little bit more about maybe you exposure to maybe particular areas that might be of concern, whether it's Germany, whether -- based on assets? And also, as we think about pro forma business with Dyneema, where do you see the kind of risks and areas of mitigation there from an energy perspective?.

Angel, we've done quite a bit of work at looking at contingency plans, but -- so maybe to ground, we have 30 plants in Europe that Bob mentioned on the call and 21 of those are located in countries that actually import gas from Russia.

It's about $800 million of sales, but it should be noted that our primary source of energy is in the form of electricity and not in natural gas. And most of the countries in which we operate generate less than 30% of their electricity from natural gas and some have capacity to reduce reliance if needed.

You just mentioned Germany, well, that generates approximately about 15% of their electricity from natural gas, and they've stated that they have the ability to switch completely to another energy source if needed.

So, when we take these in account through these factors and our ability to switch production to other sites within the region, we estimate less than $150 million of our sales would be impacted if those countries lose access to natural gas from Russia. With regards to Dyneema, they are located in the Netherlands.

They also have contingency plans in place as well in order to mitigate the risks in case there site goes down as well..

Yeah. The other thing I would add to that is that I think some of what you're hearing with respect to natural gas, restrictions, of course, would be the implications for chemical and base resin manufacturers. To us, that’s a more significant risk because it would impact our ability to get raw materials.

So, if we looked at the major chemical base resin manufacturers in Europe who could be at risk if natural gas were cut off, it's roughly $700 million of sales kind of attached to that, of which we could probably mitigate $300 million to $400 million with raw material sources from alternative locations or manufacturing at other places.

So to us, it's really not about the natural gas because we're using electricity, but it is I think a bigger risk on the raw material side..

Very helpful. Thank you..

Thank you. We have a question from Mike Harrison with Seaport Research Partners. Your line is open..

Hi. Good morning. And let me add my congratulations on a nice quarter in a challenging environment.

Was hoping that maybe we could continue talking about Europe here, curious what you're seeing in terms of demand trends and have you seen any differences between consumer oriented markets as you think about kind of the May, June, July period and what you're seeing in industrial and [Technical Difficulty] oriented markets as you think about kind of the May, June, July period and what you're seeing in industrial and transportation markets in Europe?.

Yeah. Look, so all in, I'd say, demand in Europe was down 5% for us in the second quarter. I think it was around 4%, 5% in the first quarter. And we're effectively modeling that being down about 11%. So that's all just sort of an underlying volume unit basis, if you will. Obviously, we've got pricing and that's not the total sales impact.

So, transportation really was already down. So I don't say there's much of a change there. But I do think that there is a shift in consumer sentiment and, of course, fears about energy and inflation that in general are reducing, spending across the broad spectrum of industries.

So there isn't any one thing, Mike, that I would point out to you as being proportionately greater than one or the other with respect to what we're seeing there..

All right. And then, just curious on the raw material picture. It sounds like there are some buckets where costs are stabilizing or even coming lower, and it also sounds like availability and maybe logistics or supply chain impacts are improving.

So wondering if you can talk about, are you actually seeing that and if there is some improvement, how is that affecting your productivity as we get into the second half to the extent you're able to better plan some of your manufacturing runs et cetera..

Yeah. Look, I think that the overall basket of stuff that we're buying is still inflating, right. So I think that was true in Q2, still anticipate that to be the case in Q3, but maybe the pace of that is coming down. I mentioned sort of wage inflation, supply chain costs and so on, that seems to have moderated.

So when you look at that bridge on seven, some of those bridge items are actually lower than they've been for the last three quarters. And yeah, hopefully, things do get a little bit better on the supply chain side and that can only help from an efficiency standpoint for the balance of the year. So, I hope that's the case for us going forward..

All right. Thanks very much..

Yeah..

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

Good morning. So, two related questions on visibility. Can you give a sense for your backlog in the more short cycle businesses? And then in the healthcare, aviation and military, do you have any sense or line of sight to what growth rates next year might be looking like as a base rate? And then just the other question on electricity in Europe.

If you mark-to-market current electricity prices to the headwind would you have next year?.

I don't know that I can give a mark-to-market on electricity or where we're at relative to our current contracts and pricing for next year. We can….

We know in total, we spent around $50 million a year, which is on electricity, but, yeah, that's [Multiple Speakers].

Okay. Great. No. That's helpful..

Yeah. Look, with respect to healthcare, we actually saw good growth there through the course of this year, and we expect that to continue into the second half of this year. It's really across just about all of the categories, medical equipment devices, drug delivery, labware, and medical supplies. If I look at all of them, they're really all up.

So my expectation is that continues into '23, but I really couldn't give you a good estimate on that. Obviously, our long-term projection is that sales drawing that space is about 10%. Clearly, we're getting a lot of that in price this year that is typically the case for that industry as well.

And then, what was the first part of the question, again? I'm sorry, I missed the front end..

Just in terms of the level of backlog that you're seeing now compared to where backlogs were last quarter?.

Yeah. Look, I just -- we've only really -- we really don't have backlog in the traditional sense. We've just got an order book that usually gives us pretty good insight for about 45 days. So, when I look at what we have from a 45 days perspective right now, pretty much aligns with what we've got in our EPS projection for Q3..

Okay. Thank you..

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

Hi. Good morning, guys. Bob, you called out sustainability be negatively impacted because of China and shutdowns. Could you just talk through that and then talk about, I think you said it was -- if we take it out, it's like plus 12% growth. Could you just talk about where the strength comes from? Thank you..

Yeah. So I mean that bridge that we had on Slide 6, I think just shows you the total growth in sustainable solutions.

And look, obviously, a lot of what we do and certain application is coming out of China may find its way to other parts of the world, but a large connectivity to sustainable solutions and I think that was right actually that, it was about 12%. So we are trying to coming back online, that should be a good guy for us in the second half of the year.

Really, the number one thing that we saw is growth was light weighting, and I think that was partially connected to demand in Americas for composite applications, as well as some other in terms of food and beverage downsizing or down-gauging, if you will, materials for those items.

Probably, the two biggest things that we have with late fall in that light weighting category. Second would be then just recycled content. I mean, we still continue to see really good inquiries from customers on that where everyone is trying to use more recycled content.

Packaging it's still at the top of the list of the customer inquiries and that is also in a positive category for us..

Great. Then maybe just sneaking here one more, just on price increases off rate inflation.

Could you just talk about your capacity to continue to do that and how you view that going forward from where you see further inflation?.

Yeah. I mean, I think we've got a really good track record for the last really year and a half, and I think one of the reasons why that's the case is because we just got ahead of it early and haven't had to play catch up. At this point, I think for the markets that we serve, there continues to be good demand for what we're offering.

Obviously, with Europe slowing down, that changes that dynamic to some extent, but if I think about the ability to continue to get price in the Americas and Asia, I don't think that's changed at all. So, anyway, we've been able to continue to push that forward. We actually announced even more price increases in July.

So for now, we're able to continue to do that, and we really do see continued inflation, again, the basket of stuff that we buy although maybe that inflation level is moderating, but still something that we felt was necessary to cover with further pricing..

Thank you, guys..

Yeah..

We have a question from Kristen Owen with Oppenheimer. Your line is open..

Great. Thank you for taking the question. Follow-up on sort of the pricing strategy. There is obviously some benefit in the overall shift in the portfolio where you're seeing growth, but I'm wondering if you can talk about your pricing strategy.

How you've addressed that internally? How you're setting guidelines to price for value and maybe it's more of a cultural question around how you're training your sales force to price for the value that you're adding? And I'll have a follow-up. Thank you..

I mean the first thing I'd say, look, culturally, I mean we changed this a long time ago. Pricing responsibility really falls to our marketing organization and has for a number of years. So that is in the hands of the sales force.

Clearly, the sales force plays a significant role in conveying the price increase to customers, but set by again the marketing organization. So I think it's good that we have that split so that we can genuinely think about the market value of what we do and what the prices that we should get for that.

Both organizations can only do a great job when there are two roles. I think the sales force has done a great job of just articulating the need for these increases, given the levels of inflation that we've been seeing and candidly, as you know, these bridge schedule is kind of below the line items of wage inflation, supply chain cost and so on.

So I think just culturally, this goes back a number of years. So I think the most important thing for us was that we just decided to move early, really towards the end of 2020. And that momentum has really helped us for the last couple of years..

Thank you for that. And then, I noticed in your bridge for CapEx, you have outlined some IT system CapEx. If I recall from Investor Day, you talked about building some predictive capabilities to digitize some of your formulations, help spin the flywheel a little bit faster on that innovation.

Can you just talk about the progress that you're seeing in that area and how that is helping you on your innovation cycles as you start to approach these other tangential markets like semi and robotics that you've outlined?.

Yeah, Kristen. Great question. I mean, it's something that we're really interested in and furthering our capabilities there. There is a lot of great tools that are available and ready to be used, and we are not very passionate about using those tools.

We have made some specific investments into this group in order to enable some of the longer dated technologies that Bob mentioned on the actual webcast. So we're definitely putting some investments there.

The cap -- the larger CapEx then that we talked about Investor Day is really the integration between legacy PolyOne and legacy Clariant and there is an opportunity for us to really take a fresh look at what data that we're capturing as a company in order to make better decisions and that's a longer term project..

Thank you so much..

Our next question comes from Vincent Anderson with Stifel. Your line is open..

Yeah. Good morning. Thanks. I wanted to kind of beat that price mix horse just a little bit longer, particularly on CA&I, just the strength there relative to other segments.

Just maybe reminding us if there is anything structurally different about that or is it just that maybe you're COGS basket there hasn't been moving quite as rapidly as the rest of your basket and you're just writing the broader inflation wave on the price side, capturing that difference?.

Maybe on the cost side first, I mean again, if one thing it would be interesting if you go back and look at these bridge schedules from prior quarters, I mean you'll actually see that we have that inflation number of 58 is actually the highest we've had of any quarter.

So, to put that in perspective, it's not like the spread widened simply because of that number going down. I just think the Color business has done a really good job with respect to price and execution and I don't know if there's anything else to say about it that's unique to that.

But both, EM and Color, again, if you kind of go back and look over the last six quarters or so, but both have been doing a really good job in that regard, but nothing I'd point to specifically about one end market or another region..

Okay. That's helpful. And then can you just refresh my memory, given how strong outdoor has been for a number of quarters up until recently.

By your estimation, is this still running kind of above those pre-COVID levels? Are we back to more relatively normal -- like a normal sales trajectory and you're welcome to adjust that for any underlying growth you think is sticky?.

Yeah, I mean, the answer is it, like, it depends. So, there certain aspects of outdoor, like off-road vehicles, for example, that are continuing to run at a really strong pace whereas other things like archery, firearm accessories, hunting applications and things like that are actually quite low.

So that really started in the fourth quarter of last year. We haven't quite lapped it yet, but we will by the end of Q3 on some of those narrower applications.

So, hopefully that helps articulate, and I think, in the off-road space, you still have very low dealer inventory, but a lot of demand whereas that's not the case in some of the other applications that I mentioned which are down this year..

All right. No. Thank you. That's helpful. I'll turn it over..

We have a question from Jaideep Pandya with On Field Research. Your line is open..

Thank you. The first question I have is just on the regional demand dynamics. If you look at China to start with, yes, there is expectation post-COVID that there is a recovery, but lot of the end markets are struggling and lot of the chemical prices have taken a further step down.

So, what gives you confident that China will actually be better in Q3 and Q4?And then on the flip side, in Americas or in the U.S. especially, is there a worry that what is happening in Europe today could happen actually in U.S.

as well? And therefore, you sort of have a synchronized weaker demand? If you can give a little bit color around end markets, that would be highly appreciated. And then really the second question is around your distribution business.

In the rounds of discussion that you're having, is there a valuation number that is going to make you say yes or no with regards to going forward with the deal? Or is it really the supplies or rather not supply, the deal security with financing that you are looking for because a few players in the chemical industry in the recent past have actually chosen for a tangible partner on the other side rather than get the best for valuation? So what is it that you're looking for and how confident are you that this will be done? Thanks a lot..

Yeah. First with respect to my previous comments on Asia, most of that was really relative commentary against second quarter performance, meaning that Q3 would be a little bit better than Q2, but primarily driven by the absence of lockdowns that we experienced in April and May.

In total, demand for Asia is actually down, and that's been true all years. So I think we are already seeing that with some of that spillover effect and that's not new, that was true for us in the first quarter and the second quarter.

Obviously, in the second quarter, it's kind of hard to bifurcate demand from the shutdowns, but nevertheless, that's true. And I think Asia is also from a demand standpoint, down in Q3 as well.

So we're just modeling relative performance in Q3 being a little bit better in Q2 and Asia, clearly, that's kind of overshadowed by the weaker though that we see in Europe right now in terms of arriving at our Q3 guidance. And then lastly, on the question on distribution, I mean, look, I can't say anything with respect to valuation.

We're in the middle of a process right now. So hopefully, you can appreciate that as I did say in my prepared remarks, there is a lot of interest in the business. We're encouraged by that level of interest and expect that's a really good chance that we could get something done as this moves forward. We'll know more of in August..

All right. Thank you..

Yeah..

Okay. Great. That was our last question. We appreciate everyone's time and attention today. And look forward to updating you on further progress at our next quarterly call. Take care, everybody. Bye for now..

Bye-bye. Thank you..

This concludes the call. Thank you for participating. You may now disconnect..