Avient Corporation (NYSE:AVNT) Q1 2023 Earnings Call Transcript

Avient Corporation (NYSE:AVNT) Q1 2023 Earnings Call Transcript May 3, 2023

Operator: Good morning, ladies and gentlemen, and welcome to Avient Corporation’s Webcast to discuss the company’s First Quarter 2023 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 would now like to turn the call over to Joe Di Salvo, Vice President, Treasurer and Investor Relations. Please proceed.

Joe Di Salvo: Thank you, 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 measures and provides a reconciliation to their most 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. I will now turn the call over to Bob to begin.

Bob Patterson: Well, thanks, Joe, and good morning, everyone. Today, we reported our first quarter results, which exceeded our adjusted EPS guidance as a result of better than projected margins in both segments. Key drivers included lower than modeled raw material costs, the favorable mix as our composite offerings in end markets such as defense, telecom and energy proved resilient in an otherwise challenging market. Last year, we substantially expanded our composite offerings and presence in these end markets with the acquisition of Dyneema. Dyneema is the world’s strongest fiber and a globally renowned brand, it’s an ultra-lightweight specialty fiber that is 15 times stronger than steel, yet light enough to float on water.

The acquisition closed on September 1 and integration is progressing exceptionally well. Just like everything we do, integration starts with safety. Our operational teams are collaborating on best practices and we both share a common vision to run safely and efficiently. Our commercial teams have been collaborating, sharing technologies, customer needs and opportunities for growth, as well as leveraging our broad geographies and diverse end market presence. Both organizations thrive on solving our customers’ most difficult challenges and I’m certain the complementary nature of our businesses will offer the opportunity for future revenue synergies. Culture is everything and in times like this, it’s even more important and the cultural component of the integration has been exceptional.

I’m very pleased with the engagement between our two organizations and the willingness to come together. For our Dyneema associates, I think knowing they have found a home where they can thrive has made the integration seamless to-date. From a performance standpoint, the business is proving to be resilient in the current economic downturn that’s due to both its unique value proposition as well as its strong position in the defense industry. As a reminder, Avient Protective Materials primarily serves three industries. The largest of which is personal protection or defense, which makes up about 50% of sales. These applications include body armor and helmets that leverage the Dyneema brand, protecting men and women in the military and law enforcement.

This technology is perfectly designed for the demanding applications where failure is not an option. About 30% of sales come from marine and sustainable infrastructure. Dyneema is used in many essential applications including oceanic windmills, aquaculture and hoisting offshore cranes among others. Requirements here are all the same, which is lightweight and high strength. Another growth area includes ropes or lines for ocean vessels, specifically LNG tankers. With the recent energy crisis in Europe, LNG tankers are in high demand. Industry forecasts are expecting 50 to 70 tankers will be built per year through 2030 with Dyneema poised as a leading and preferred brand. The remaining 20% of sales come from consumer applications. Dyneema is known as the longest lasting serious component used to make everything from tents to shoes, to outerwear and if you ask around to those who truly know these industries and the optimal material, they certainly put a premium on a product where it says Dyneema on the tag.

That’s a premium level of trust with differentiated performance. Overall, the Dyneema brand is one that we are proud to call our own and as I said at the onset, we are very pleased with how well the business is performing in the early days of integration. I’ll now turn the call over to Jamie to provide some additional remarks on our first quarter performance.

Jamie Beggs: Thanks, Bob. First quarter sales and overall demand were in line with our expectations. Adjusted EBITDA of $134 million was $9 million better than forecasted and led to the $0.08 beat on adjusted EPS. Improved profitability for both segments drove the bottom line expansion. In fact, EBITDA margins exceeded guidance by 100 basis points as sustainable solutions and composites continued to demonstrate resilient demand providing favorable mix. Decelerating inflation in certain raw materials, particularly hydrocarbon based raw materials along with ongoing cost reduction initiatives also factored into the improvement. The first quarter EBITDA bridge shows the impact of demand, which was in line with our expectations. Customers remain cautious and continue to closely manage inventory levels.

And while we are seeing some deceleration in inflation, this bridge highlights that on a year-over-year basis, our input costs remained higher and that our pricing continues to cover this inflation. Certain cost reduction activities, including targeted European restructuring provided an $8 million benefit to the bottom line this quarter. We’ve had a significant amount of change to our portfolio over the past few years with the acquisition of Clariant and Dyneema along with the divestiture of our distribution business. This is the first quarter where those changes are fully represented in our actual results and is a good opportunity to highlight the diversity of our portfolio. Here you see our sales and EBITDA breakdown by our two segments in the bar chart to the left.

You also see the diversity of our end markets and regions represented by the two circle graph to the right. The portfolio transformation has given us broad end market exposure that reduces cyclicality and a geographic presence necessary to serve multinational OEMs. Our foundation is stronger than ever, which is helping us weather the current macroeconomic environment. The following slide reflects the first quarter year-over-year changes in sales by region excluding the impact of foreign exchange. The overall demand environment is fairly consistent with what we projected earlier this year. In Asia, although China ended their COVID related restrictions in December, spiking infection rates at the end of the year and into the first quarter likely played a role in delaying a rebound in economic activity.

We expect moderate and continuous sequential quarterly improvement in Asia as the year progresses. Demand in Europe is relatively stable at the current levels, not getting worse, but not really getting much better with the exception of automotive, which was up double-digits compared to prior year. We’re seeing increased softness in the U.S. across most end markets, particularly in building and construction and consumer markets. The inventory destocking in the U.S. started a little later than other regions and will likely affect the first-half of 2023. In Latin America, specifically Mexico, demand was down only slightly as we believe the region is benefiting from re-shoring from Asia. And as we dig deeper into the end markets within those regions, there are few that are holding up more consistently and better than others.

They include energy, telecommunication, defense and transportation. In terms of energy, there is an increased focus around the world to improve the quality of the electrical grid, including strength, capacity and reliability. Capital investments are being made to update aging infrastructure with a large portion that is over 25-years-old. These updates include replacing materials such as wood and steel with alternative composite technologies that are stronger, more durable and corrosion resistant. We serve customers that support the electrical infrastructure with components made from composites such as primary and secondary insulators, distribution and transmission poles and cross arms. In addition, we provide ballistic resistant protective barriers to improve the physical security of electrical substations.

Recent and unfortunate attacks against substations have the full attention of government agencies and public utilities, which have accelerated their efforts to protect idle power generation and transmission equipment. Telecom is another industry where there is significant worldwide investment especially as connectivity trends require faster speeds and greater coverage. For example, the USB program alone designates $42 billion to close the digital divide by increasing fiber optic cable deployments with a made in America provision that will bring high speed Internet to all. Recall, our Fiber-Line acquisition in 2019 was a strategic initiative to better align us to the growing needs of the major telecom providers. We see this area continuing to grow as connectivity between devices only expands from where we are today.

The roll-out of fiber optic cables and expanding the availability of 5G technology helps drive this growth. We are also providing solutions that are used for ancillary equipment and telecommunications such junction bolt that fiber optic notes using our NYMEX products and our maximum product lines to protect fiber optic cables when they are buried. The defense end market is also expanding given the demand for Dyneema use for body armor, helmets and other safety gear to protect soldiers in place around the world. While the current geopolitical environment is unfortunate, the unparalleled performance of Dyneema is trusted to protect the world’s finest from the realities of war. As Bob mentioned at the beginning of the call, half of our Protective Materials business goes into personal protection with the highest strength to weight ratio of any material and leading protective qualities that makes Dyneema the material choice for environments where optimal safety is the priority.

Finally, sales for transportation applications have grown double-digits over the prior year first quarter. Automakers are continuing to work through the backlog that was created by significant supply chain issues over the past year. In addition, regulations continue to accelerate fuel efficiency where applications decrease energy usage and lower emissions. For example, our Engineered Materials primarily through our composite applications provide lightweight solutions that increased fuel and battery efficiency and help transport material safely and efficiently. Our carbon formulations are used in vehicle interiors where manufacturers look for durability consistency and style. Our portfolio transformation has been purposeful to allow for the breadth of end markets you’ve heard about today.

As we navigate through the current macroeconomic environment, the diversity of end markets and geographic presence will help us perform through the cycle. It also puts us in a position to accelerate growth as things improve. Now I will turn it back over to Bob to discuss our outlook for the second quarter and the full year of 2023 guidance.

Bob Patterson: Thanks, Jamie. Our second quarter guidance is for revenue and adjusted EPS of $845 million and $0.60, respectively. This does reflect slightly higher margins than we projected at the beginning of the year based on the mix and impacts of decelerating inflation we experienced in the first quarter. We are maintaining our full-year guidance of $530 million of adjusted EBITDA and adjusted EPS of $2.40. This factors in a more conservative growth rate in the second half given the uncertainty around demand levels and timing of economic recovery. Jamie provided a number of comments about regional and end market observations in her remarks and I will just emphasize that many customers continue to tell us that they are sitting on more inventory than they’d like so that we assume some level of destocking remains particularly in end markets like building and construction in the U.S., but we’re also seeing this in traditionally resistant markets or recession resistant markets like packaging and health care.

With respect to expected cash generation and the balance sheet, we reaffirm our prior estimate of full year free cash flow of $200 million and to end the year with net debt to adjusted EBITDA of 2.9 times. While we are focused on the near-term macroeconomic environment, nothing has changed our view on the four key long time growth drivers that we discussed at our Investor Day in December of 2021. They were sustainable solutions, health care, composites and high-growth regions such as Asia and Latin America. At the time, we did a deep dives into the mega trends that support why we expect these areas to provide long-term revenue growth above GDP. The largest of which is sustainable solutions, which now represents one third of the total company sales.

We frequently get questions about how customers are viewing sustainability in light of the economic downturn. To address this in detail and provide a more contemporaneous update on our technology, we will be holding a Virtual Sustainability Day for investors on September 20. We will provide a deeper look into our sustainable solutions portfolio, not just the what we offer, but the how our materials are solving our customers’ challenges. You’ll hear about consumer trends and customer sustainability goals that are shaping and driving our material science innovation. Despite a myriad of economic, geopolitical and public health impacts to business around the world, our sustainable solutions portfolio has grown substantially since 2016. We’re excited for what’s ahead as sustainability needs apply that every industry, each with its own set of demands or challenges.

Common themes are reducing CO2 emissions, eliminating plastic waste and increasing the use of recycled content that each industry requires different specifications and certain attributes to achieve the desired effect for the end consumer. Our diverse portfolio backed by our deep material science know-how positions us well to capitalize on these shared goals. This helps our customers and leaves our planet a better place. At our Sustainability Day, we will discuss the eight ways we help our customers meet their sustainability goals and how our investments in this space will drive long-term growth. Over 80% of our new product pipeline is dedicated to sustainable solutions, which will enable us to meet not only the needs of today, but also the challenges our customers face in the future.

So to wrap up, our team is aligned and executing as we manage through this downturn. We are doing so by optimizing our cost structure, staying close to our customers and prioritizing free cash flow. As Jamie said, our portfolio is stronger than it has ever been to perform through this cycle and we are positioning ourselves for long-term success by continuing to invest in the future and aligning our innovation platforms through our four key growth drivers. With that, I want to say thanks for your time today and we’ll open up the line for questions.

Q&A Session

Operator: Our first question comes from Frank Mitsch with Fermium Research. Your line is open.

Frank Mitsch: Hey, good morning. I’m not going to lie Bob, Aziz and I are a little bit disappointed that the sustainability day is virtual. You guys have been known for giving us some pretty good swag. So just wanted to throw that out there, but of course, we’re going to be excited to hear what you have to say on that day. You’re guiding 2Q sales to be flat, Jamie, in the preamble if I listen to the geographies. It seems like Asia is getting better. Just curious as to why you’re thinking that sequentially your sales will be flat with 1Q.

Jamie Beggs: It’s a great question, Frank. So as we take a look at Asia sequentially progressing slightly better, we also see the U.S. in an environment where things may be slowing down as Bob mentioned in his comments with inventory destocking and consumer demand, as well as building and construction. So when you take those factors together and Europe being roughly flat sequentially that’s how we get with flat sales.

Frank Mitsch: Are you seeing that right now here in the month of April and your order books for May? I’m just curious on that.

Jamie Beggs: Yes. That’s why the guidance is what it is, yes.

Frank Mitsch: Okay, fantastic. And you mentioned the — raws are still a bit of a headwind, but you’re seeing some deflation on hydrocarbon based. How would you handicap that progressing. Into 2Q, 3Q and your ability to hold on to pricing so that your margins expand — continue to expand?

Bob Patterson: Yes. When you look at the EBITDA bridge, Frank, I mean, you can see that there is about $8 million of inflation year-over-year. It’s the same bridge we’ve been presenting now for year or so. So you can obviously look back in time and see that, that is decelerating. I think as we look forward, it’s possible that becomes a little bit of a benefit for us. I think we’re sort of being conservative with respect to how much of that manifest itself over time, but I do think that starts to turn to be a little bit of a benefit. And I think we’re doing a really good job of handling price in an environment. The one thing that’s really important to just to remember is that most of our raw material costs are still anywhere from 35% to 50% higher than they were 18 months ago. So it’s still a pretty high cost environment.

Frank Mitsch: Thanks so much.

Operator: Thank you. One moment. Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.

Mike Harrison: Hi, good morning. Wanted to ask a couple of questions about the Dyneema business. It sounds like that the integration and the contribution from that business are kind of exceeding expectations. Just curious what have been maybe some of the positive surprises as you look at, I guess, the team and the operations or maybe the market and solutions that came with that Dyneema business.

Bob Patterson: Yes. I don’t know if I would necessarily put it in surprise category. Obviously, we had the chance to get to know the management team ahead of completing the acquisition and felt very good about them and what they were bringing to our organization. I just have nothing but positive things to say about them, their passion for the business and culture is everything and we really are fitting together very well, that’s a huge plus. So I don’t put it into surprise category per se, but I think it’s a great reason why the integration is going so well. The defense industry is actually the industry that has grown the most in the first quarter, which I think just reflects demand in those specific areas. So maybe not also in the surprise category, but something that I think is a testament to their technology and their position in that space with a very unique set of offerings in personal protection.

So I’m not sure I’ve got anything necessarily to put into the surprise category, Mike. Things are going really well and that’s what we expected.

Mike Harrison: Maybe let me ask it a different way. You — I don’t believe you’ve given a revenue synergy number, but maybe just talk about how you’re thinking about Dyneema revenue synergies today versus when you acquired it. I know sometimes that those revenue synergies can take time to materialize, but are there some opportunities that are maybe moving faster than you had anticipated?

Bob Patterson: Well, I think the opportunities, there are some that exist with, I just think, a cross sharing of information across our existing customer base, particularly in the consumer space where legacy AV one’s been — or Avient is very solid in that regard. About 20% of Dyneema is in consumer. Obviously, consumer market is down right now for everybody. So that might present a near-term challenge, but one where I see opportunities in very short order. I think it’s really more longer term about bringing technologies together and creating some new solutions that could be used across the Avient advanced composites businesses where we can leverage some of the technology that we have with ultra-high molecular weight polyethylene from Dyneema.

Mike Harrison: And just a quick last one for me. In the Engineered Materials business, it looks like you got only $6 million of price mix at about 2% year-on-year. Is that the segment where we could expect you to get back some pricing if raws are moving lower? I guess maybe just a little more detail on what’s going on with pricing in EM.

Bob Patterson: I think we always have to be flexible with respect to price and consider the competitive dynamics that exist. As I mentioned maybe a moment ago to Frank, look, we’re still sitting on substantially higher costs than we were 1.5 years ago, so we have to be mindful of that, too. But I wouldn’t draw any distinction between EM or Color in terms of which — in terms of their price elasticity, if you will. I’m sure there’s a real demarcation between the two.

Mike Harrison: Alright. Thanks, very much.

Operator: Thank you. We have a question from Vincent Anderson with Stifel. Your line is open.

Vincent Anderson: Yes, thanks. So I was hoping to dig in maybe a little bit more on BEAD just because all these government initiatives kind of have their own nuances. So curious what this looks like from kind of a timing of fund disbursements, any minimums in that spending plan specifically designated to things like hardware? And can you detail the domestic sourcing benefit component?

Bob Patterson: And I think the business of ours that benefits the most from that will be the Fiber-Line business, which supplies composites into fiber optic cable and infrastructure build-out. Obviously, we are excited about the incremental investment that’s coming. I’m not sure how much of that’s going to find its way into ’23. My sense is that we’ll see more of that in ’24 just with respect to how long it takes for those kind of things to actually make their way into the spending universe. So hopefully, that helps.

Vincent Anderson: Yes. No, that’s good. And then I wanted to maybe break down the restructuring efforts in a little more detail if possible. I think this is around the time after a large acquisition that you would start to see things like footprint rationalizations. And then maybe just related to that, it wasn’t long ago we were talking about labor shortages. So curious if headcount is a significant component of those restructuring efforts?

Bob Patterson: Yes. So first of all, just to be clear, I mean, the restructuring efforts have nothing to do with Dyneema. Restructuring efforts really relate to bringing together the legacy PolyOne and Clariant businesses and things that we had always to do with respect to some facility consolidation. That was really delayed because of COVID and what was going on with supply chain challenges and issues in ’21 and so on. And so now we’re finally doing those things. And that’s really the preponderance of what makes up the restructuring costs in Q1. From a labor standpoint, I do think that things are improving. And obviously, that was incredibly stressful in — at the end of ‘20 but certainly throughout ‘21. And I feel like we’re finally getting some relief there.

Vincent Anderson: Alright, perfect. Thanks so much.

Operator: Our next question comes from Michael Sison with Wells Fargo. Your line is open

Michael Sison: Hey, good morning. Nice start to the year, Bob. It sounds like 2Q volumes go down a lot again, similar to the first quarter. What do you think fundamental demand is sort of running at now? And how do you think about the destocking efforts? I mean, when do you think it will sort of subside? And are you assuming it subsides heading into the third quarter?

Bob Patterson: So our demand assumption is we were down about 14% in Q1, assuming roughly the same level in Q2. So it’s really kind of flat if I just think high level in terms of how that’s playing out. Look, from a destocking standpoint, it seems like many customers really still feel like they’ve got a lot of inventory on hand. I know some of that’s anecdotal. I can’t tell you what percentage of customers that is, but we certainly hear that routinely. And so I think that, that’s going to weigh on things for Q2. There are maybe as an end market or 2 like building and construction, where there’s still more to come, particularly in the U.S.. And one of the, I think, themes of our observations over the last few months has been that we still think there’s more to come in the U.S. versus Europe and Asia, which has probably flattened out. So I guess that’s the best way I could answer that by region and end market, Mike.

Michael Sison: Okay. And then longer term, if you do get — or at some point, I assume volumes will come back, let’s hope, and do you still feel good about the sort of the longer-term EBITDA levels that you wanted to hit when you were doing the Dyneema deal? And can you maybe just walk us through sort of what needs to happen to sort of get to that level?

Bob Patterson: Look, I do. I think that when we put the businesses together, we had a pro forma view of about $650 million of EBITDA. That was at the beginning of 2022. And we also would say that, that was at a margin level of about 17.5% to 18%. I think both of those are achievable within a reasonable amount of time as the economy recovers. That’s not our stopping point on margins. As you know, our long-term goal is to get to 20%. I felt like we made good progress this quarter with respect to doing better than expected in that regard.

Michael Sison: Thank you.

Bob Patterson: Yes.

Operator: Our next question comes from David Huang with Deutsche Bank. Your line is open.

David Huang: Hi, good morning. First, I guess, how much of the $8 million cost reduction in Q1 is related to color and synergy? And I guess, how should we think about that in Q2 and maybe second half?

Bob Patterson: Yes. So I think it’s about maybe $3 million or so that are incremental specifically related to Clariant, and the other is just a more broad-based set of cost reductions.

David Huang: Okay. And then, I guess, the current guidance implies a 9% EBITDA improvement in the second half. Assuming demand stays at the current level, do you expect price cost will be enough to drive that type of growth? And if not, I guess, what other levers do you have to offset weak demand situation?

Bob Patterson: No. Look, I do think that there’s — I think we’re continuing to be conservative with respect to our margin expectations. Things play out the way they have here in the first quarter, and there’s a possibility that we would do better in that regard. We have continued to balance that, though, with just uncertainty around the demand environment. So there’s more to come, I think, with respect to margin improvement that could help us offset that, which I think are the primary things that we’re focused on executing in the near-term. To the first question about where some of these cost reductions are coming from, more of that will come into the second-half of the year with some of the plant rationalization that we had planned.

David Huang: Okay, thank you.

Operator: Thank you. Our next question is coming from Kristen Owen with Oppenheimer & Co. Your line is open.

Jason Vernoff: Hi, this is Jason on for Kristen Owen. I was wondering if you can walk us through your free cash flow assumptions for the remainder of the year.

Jamie Beggs: Sure. So from a free cash flow perspective, there is a slide in the webcast which talks about cash flow from operations of $350 million. There’s a slight benefit in working capital, but most of that came through in the fourth quarter of 2022. And then as we take a look at CapEx, we do have some additional expenditures that we’ve assumed in 2023 primarily related to the synergy capture and plant rationalization that Bob mentioned on the last question, in addition, an investment in our IT systems. So that really is the high-level overview of cash flow for 2023. So that we’ll end up with $200 million of free cash flow. Those assumptions are not changed from our first quarter guidance that we provided.

Jason Vernoff: Got it. And just as a follow-up, in your prepared remarks, you talked about some of the end markets where Avient wins. And it’s interesting to see that industrial transportation and telecom were favorable contributors in the quarter. Can you provide a bit more color on what you’re seeing from a demand perspective in those categories? And maybe if you could talk about the sequential trends in those end markets from 4Q to 1Q. Thank you.

Bob Patterson: Yes. Maybe just one clarification. Industrial was not positive. That was actually down. We focused on defense, transportation, energy and telecom. And in terms of them being up in the first quarter, that is the sequential order of that. So defense was up the most, followed by transport, energy and telecom. Hopefully, that kind of clarifies that defense was up the most at about 20%, 25%, transportation being up 11% and energy, telecoms low on single-digits.

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

Daniel Rizzo: It’s Dan Rizzo on for Lawrence. Just a couple of questions on Dyneema. You did talk about the revenue synergies. I was wondering what the — kind of how the sales process works where — how long it would take really to kind of see the benefit of potential revenue synergies between your business and the new Dyneema acquisition?

Bob Patterson: I think it’s a spectrum of things. I think there’s an opportunity in consumer to do things in relative forward order. That’s really just taken Dyneema and/or Avient technologies into existing customers where specification challenges are not as significant. I expect that, that specification period is longer. That can take over a year in a number of applications, particularly in defense or energy. So it really does depend, Dan, I think, on which end market that is. So certainly, more to come, but they can be time consuming.

Daniel Rizzo: So I guess, your traditional products can be used in personal protection, there is revenue synergies there? Or I mean, I understand how their products could potentially cross over. I was wondering just how it goes both ways.

Bob Patterson: I want to be careful there because look, obviously, Avient didn’t have anything that was like Dyneema and isn’t going to be doing a revenue synergy in that direction to do something that they do for personal protection, vehicle and body armor and so on. I don’t mean that. But there is an opportunity, I think, with other technologies for different applications in those industries. So that’s where I think some potential can exist.

Daniel Rizzo: Okay, alright. Thanks a lot.

Operator: Thank you. One moment. We have a question from Davis Sunderland with Baird. Your line is open.

Davis Sunderland: Hey, good morning team. Thanks for taking my question. I wanted to ask another question about end markets and specifically the call out for transportation. Could you just maybe expand a little bit more on the opportunity there and maybe any long-term changes that we should expect in the end market mix? Thank you.

Bob Patterson: Certainly, I mean, for us, transportation is, let’s say, 8% to 10% of sales roughly. And it’s one where we really focus on, I think, two –, two things in particular. A lot of that is the color and aspects of the interior packaging just so as there are incremental vehicles produced, we benefit from that. I also think there’s a lot that goes into that from a sustainable solutions perspective. And then more broadly around lightweighting and materials from an Engineered Materials perspective. So in general, I think like the automotive industry, transportation industry is performing well. We benefit simply from that demand improving, but also with respect to material replacement.

Operator: Thank you. And it looks like we have a follow-up from Mike Harrison with Seaport Research Partners. Your line is open.

Michael Harrison: Hey, just a couple of other follow-ups. And on the Q2 guidance with the revenue being flat compared to Q1, but it seems like you expect earnings to be a little bit lower than what we might have expected even though you might be getting some benefits from deflation. So can you help us understand, I guess, what’s baked into the margin outlook for Q2?

Bob Patterson: Yes. So first of all, I think that we are being conservative with respect to our raw material assumptions and margins in that regard. There are some things that actually will go up a little bit as we project them today, like possibly higher interest expense in the second quarter versus the first quarter. I think we mentioned perhaps at the last quarter that it’s just sort of part of our cost reduction plan that we had that senior executives and directors were not getting merit increases this year. However, the preponderance of our population is below the director level, and that all kicks in, in April. So there’s just some things like that, that really create that difference between roughly $134 million of EBITDA to $130 million of EBITDA from Q1 to Q2.

Michael Harrison: All right. And then on the sustainable solutions opportunity, obviously, that’s something you’ve talked about for some time. But you’ve talked in the past about being constrained by the availability of recycled plastic material. I was hoping maybe you can give an update and maybe a little bit of a preview on the September event just talking about how you’re seeing that recycled content opportunity play out.

Bob Patterson: I mean, I still think that is true. I mean, it is a major constraint. I think that with the — with investment in additional infrastructure around mechanical recycling, that gets better. I think that takes time and probably has some level of exponential effect as those things come online. So I just sit here and I look at ‘23 versus ‘22, there’s no real significant change to that. But I do think that happens in the outer years. But we will spend more time talking about that at the September 20. That was something that we covered back at our Investor Day, which was to talk about the sustainability goals of brand owners and OEMs and the gap to meeting that because of the lack of recycled content. So that will be front and center as part of what we talk about.

Look, the compound annual growth rate of sustainable solutions through ‘22 was 10% or 11%, and honestly, I think if we actually had that recycled content, it would be even better. So it’s one of the reasons why I continue to feel good about that long-term growth rate. I think that was our last question. So we appreciate everyone’s time on the call today. Obviously, there will be an opportunity to connect after our second quarter results, and look forward to also hosting those who can join us for our Investor Sustainability Day on September 20. Thank you.

Michael Harrison: Alright, sound good. Thanks very much.

Bob Patterson: Okay, thank you. I think that was our last question. So we appreciate everyone’s time on the call today. Obviously, there will be an opportunity to connect at through our second quarter results and look forward to also hosting — those who can join us for our Investor Sustainability Day on September . Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.