Avient Corporation (NYSE:AVNT) Q2 2024 Earnings Call Transcript

Avient Corporation (NYSE:AVNT) Q2 2024 Earnings Call Transcript August 6, 2024

Avient Corporation misses on earnings expectations. Reported EPS is $0.3644 EPS, expectations were $0.72.

Operator: Good morning, ladies and gentlemen, and welcome to Avient Corporations’ webcast to discuss the company’s Second Quarter 2024 results. My name is Shannon, and I will 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, 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 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 cause actual results to differ materially from those expressed in or implied. We encourage you to refer to our most recent reports, including our 10-Q and any applicable amendments, for a complete discussion of these factors and other risks that may affect our future results.

During the discussion today, the company used both U.S. GAAP and non-GAAP financial measures. Please refer to the presentation posted in the Investor section of the Aviant website where the company describes non-GAAP measures and provides a reconciliation for historical non-GAAP financial measures to the most directly comparable GAAP financial measures. A replay of this call will be available on the website. Information to access the replay is listed in today’s press release, which is available at avient.com in the Investor Relations section. Joining me today is our President and Chief Executive Officer, Dr. Ashish Khandpur, and Senior Vice President and Chief Financial Officer, Jamie Beggs. I will now hand the call over to Ashish to begin.

Ashish Khandpur: Thank you, Joe, and welcome, everyone. I’m very pleased with our second quarter financial performance, which builds upon our strong first quarter results. As I have said on previous calls, one of our main areas of focus is to deliver organic top-line growth with margin expansion, and this quarter we achieved both. Starting with the top line, we delivered sales of $850 million for the quarter, representing 3% growth over the second quarter of 2023 on an as-reported basis. Sales, however, grew 5% on an organic basis, which excludes the impact of foreign exchange. This is particularly noteworthy because it has been seven quarters since the last time the company delivered sales growth. The organic revenue growth was broad-based across all geographies and in both of our business segments, color, additives and inks, and specialty engineering materials.

Both segments benefited from gaining share, winning new product specifications, and inventory restocking in certain end markets. Our team’s ability to grow revenue, control costs, and operate efficiently, as well as raw material depletion helped us expand adjusted EBITDA margins to 16.9%. That’s 100 basis points improvement versus the prior year, second quarter. This all led to adjusted earnings per share of $0.76, which is a 21% increase versus the prior year and exceeded our prior guidance for the quarter by $0.05. Our better than expected performance was primarily driven by the color, additives and ink segment, which benefited from slightly better demand as well as favorable raw material costs. From an end market perspective, growth in packaging and consumer had the greatest impact on the quarter by growing 8% and 10% respectively.

These are two of our largest end markets and both benefited from some restocking, particularly in Europe. We also had strong growth in building and construction and healthcare. This was primarily due to new product specifications and gaining share to deliver above market growth. While macro indicators for building and construction remain somewhat weak, both the SEM and color segment in the U.S. and Canada gained share and won new business. On previous earnings calls, we have noted that healthcare restocking was lagging other end markets. I am pleased to report that we began to see a meaningful improvement in order patterns during the second quarter and grew healthcare sales 10% on a year-over-year basis. Not only do we believe restocking has run its course, we are well-positioned to capitalize in certain medical applications that are currently on trend, most notably in areas of drug delivery and monitoring devices.

We have strategically partnered with key pharmaceutical companies and OEMs developing these devices and we are growing with them as they benefit from strong underlying demand. In the defense end market, demand has been driven by overseas conflicts and specific NATO programs. Our second quarter sales were up modestly over the prior year second quarter and we continue to expect full year sales growth to be in the lower double digits. Telecommunication and Energy, which together constitute 7% of our sales, remain the more challenged end markets with sales down double digits in the second quarter. The telecommunications end market is primarily impacted by destocking in the U.S. and continued weak demand in Europe. As we start the third quarter, U.S. demand, which accounts for more than 60% of our sales, is improving and we expect overall telecommunications sales to return to modest growth in the second half of the year.

It is a similar story in the energy end market where customers have been managing down inventory levels in the first half of the year. We see improving trends as we start the third quarter, in particular for applications designed to harden the electrical transmission grid. Our composites business provides innovative materials in applications such as cross arms and insulator rods which play an important role in ensuring the reliability of the grid in a sustainable manner. We expect the broad category of energy to grow in importance over time and we will continue to focus on developing innovative solutions in this space. I will now hand it off to Jamie to discuss our second quarter results in more detail and to provide an update on our 2024 outlook.

Jamie Beggs: Thank you, Ashish. I was also pleased with our strong performance this quarter which unfolded largely as expected. As Ashish highlighted, total company sales grew 3% on an as-reported basis and 5% on an organic basis excluding the impact of foreign exchange. Adjusted EBITDA grew 9% and adjusted EBITDA margins expanded 100 basis points over the second quarter of 2023. Margin expansion was held by strong operational and cost control discipline by our teams as well as raw material deflation. Our adjusted EPS of $0.76 translates to 21% growth versus the prior year. In addition to the EBITDA growth, adjusted EPS also benefited from lower interest expense resulting from the $100 million pay down in August of 2023 as well as repricing of a term loan at that time and again in April of 2024.

To share some perspective on regional sales performance, we have provided this slide to reflect organic sales growth by region. Beginning with the U.S. and Canada which makes up 41% of our total sales, the team delivered 5% growth versus the prior year. New product specifications and share gains underpinned the growth in our largest region. The consumer end market was also strong benefiting from restocking of personal care products and household goods. We expect to build on this growth in the U.S. and Canada in the second half of the year as we are also seeing increasing momentum from composite applications that replace conventional building materials and improving trends in the U.S. telecom and energy end markets. Latin America while only comprising 6% of our total sales had a very strong quarter and grew sales by 19%.

Packaging is the primary end market we serve in this region which benefited from strong demand and applications used in food and beverage as well as cleaning supplies. The increased demand for such products was likely influenced by recent flooding in South Brazil as well as high temperatures and drought conditions in Mexico. Our presence in Latin America is also strategic allowing us to serve global OEMs and brand owners who are looking to near shore their supply chains in light of political uncertainty with trade flows and tariffs We are well positioned to participate in this trend and expect to see continued long-term growth in this region. Sales in EMEA grew 4% as the region benefited from restocking and packaging particularly in food and beverage as well as in the consumer end market.

This was partially offset by weaker demand for telecommunication applications. The sales growth in EMEA is a positive sign that we remain cautious, while there has been some favorable inflation signals correlated with a June interest rate cut by the European Central Bank, the manufacturing PMI dropped from May to June which may weigh on business and consumer confidence in the near term. As such we expect year-over-year growth will likely remain muted for the region as we move through the balance of the year. In Asia sales grew 1% as new business gains in health care was largely offset by weakness and building and construction. And while economic uncertainty in China remains, we are seeing share gains and encouraging trends in the order book for the region’s two largest end markets which are packaging and consumer.

Accordingly we expect Asia to grow during the second half of the year. Turning to a review of segment performance, I’ll start with color, additives and inks, which grew 5% excluding the impact of foreign exchange. The packaging end market which represents about a third of segment sales was up high single digits during the quarter. Most of this growth in the end market stemmed from Europe and Latin America as discussed previously. Building and construction also contributed to color’s performance during the quarter. This growth was primarily driven by new business wins using our functional additive solutions and construction materials as well as some modest restocking by U.S. customers. The segment was able to maintain net price benefit from continued raw material deflation along with a focus on cost reduction particularly in Europe, which helped expand overall EBITDA by 15% and EBITDA margins by 200 basis points.

The specialty engineered material segment grew sales 4% organically. The sales growth was primarily driven by restocking in the consumer and health care end market as well as share gains in wire and cable applications which helped grow building and construction sales. Consumer sales primarily benefited from restocking in personal care and household goods, as well as for composite applications used for outdoor sports and other high performance composite fabrics. SEM’s base health care business which was impacted by restocking for several quarters started to see momentum with new orders during the quarter. Examples of applications that showed order pick up included materials for respiratory care and monitoring devices. Weaker demand in telecommunications and energy partially offset the growth in consumer, health care and building and construction.

Adjusted EBITDA grew 7% and EBITDA margins expanded by 80 basis points driven by raw material deflation and favorable mix from consumer and health care applications, which have accretive margins. Turning next to guidance, we’re providing estimates today for the third quarter and an update to our full year 2024 guidance range. We expect third quarter earnings per share of $0.62 which reflects a 9% increase over the prior year. We expect a second quarter trend of year-over-year growth to continue in the third quarter. Regarding input costs, in the first half of the year we realized approximately $35 million in raw material deflation which was in line with our expectations. However, this benefit is not expected to repeat in the second half of the year as we are seeing modest levels of inflation across the majority of our raw material baskets including hydrocarbon-based materials such as polyethylene and polypropylene as well as pigments and certain performance additives.

Additionally, as previously discussed, we have also factored in a $30 million year-over-year headwind from variable compensation in the second half of the year. Taking all of this into consideration, expectations for the back half of 2024 are largely unchanged from our previous outlook provided in May. As such, we are adjusting our full year guidance range to reflect the better than expected second quarter results and increasing adjusted EBITDA to a range of $515 million to $540 million and adjusted earnings per share to a range of $2.55 to $2.70. Our full year adjusted EPS guidance now represents 8% to 14% growth over the prior year. Interest expense expectations are unchanged at approximately $105 million for the full year 2024. We do have a portion of our debt maturing in May of 2025 and we look forward to opportunistically refinance it in the near term subject to market conditions.

If we were to refinance this debt during 2024, we do not expect it to have a material impact to our full year interest expense guidance of $105 million. We continue to expect our adjusted — effective tax rate to be between 23% and 25% and our capital expenditures to be roughly $140 million, which are also unchanged versus our prior guidance. Before turning the call back over to Ashish for closing remarks, I wanted to draw attention to the release of our 2023 sustainability report. We just published our updated report online and it details our latest performance metrics and provides examples of sustainability in action at Avient. I’d like to call out a few highlights that we are particularly proud of and that I know are important to all of our stakeholders.

First is our reduction in greenhouse gas emissions. Since 2019, we have reduced our Scope 1 and 2 emissions by 48% and are quickly approaching our goal of a 55% reduction. And second, are the independent rating agencies that recently updated our scores. Since our last report, EcoVadis increased even to gold moving us in the top 5% of all reporting companies and CDP increased our score to an A-, which showcased our alignment with the task force and climate-related financial disclosures. I’d like to thank our employees who contributed to improving our underlying sustainability performance and helped us earn these top-tier scores. I will now turn it back over to Ashish who will share some exciting news about our upcoming Investor Day.

Ashish Khandpur: Thank you, Jamie. Since joining the company, I have been speaking with many stakeholders including customers, employees, and investors. Those conversations along with collaboration among my leadership team are forming the basis of a strategic plan that we are finalizing and will share with investors on December 4th in New York City. Registration details will be forthcoming, but for now please save the date. I want to close by saying a big thank you to the global Avient team who worked tirelessly to deliver a strong second quarter. I am particularly proud of our teams for deliverin g organic growth for Avient after a long seven quarters while expanding margins on the bottom line. That concludes our prepared remarks for today. Operator, we are now ready to begin the question-and-answer session of today’s call.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Mike Harrison with Seaport Research Partners. Your line is now open.

Mike Harrison: Hi, good morning. Congrats on a nice quarter.

Q&A Session

Ashish Khandpur: Thank you, Michael.

Mike Harrison: Ashish, I was hoping that maybe you could share some of your thoughts about visibility into the second half. It sounds like your outlook on demand hasn’t really changed a whole lot from where it was a few months ago. But I’m curious what you’re hearing from customers and maybe what you’re seeing in order patterns in some of your key markets that helps to provide some confidence that you can continue to see some growth momentum into the second half?

Ashish Khandpur: Sure, Mike. As you know, on an organic sales growth basis, we finished Q2 at 5%. And when we look at our order book and how we finished July, we feel like we are right on track meeting our range that has been provided for revenue growth for the year. So, if you think about it, in first half and second half of the year, first half we have grown as printed sales by 0.5%. And so, if you think about it that — the second half range accordingly comes down from low single digits to high single digits. So, let’s take the mid point — mid single digits is the expectation. So, that’s where we finished Q2. And then as we are looking into Q3 with some momentum and our order book, that’s the kind of – that’s very consistent with what we are providing for guidance here.

I just want to also talk a little bit about — in Q2, we had seven of our nine segments that grew year-over-year. And that’s more than 90% of our revenue mix. And then as we look into Q3 and Q4, we expect that trend to continue. So we are coming from a place where we are seeing some market demand come back. Wee are seeing some restocking taking place. But also we are seeing our teams take more share, and win new programs and develop new applications, which is really helping our growth to go into these mid single digits in the second half of the year.

Mike Harrison: Thank you. And I was hoping that you could talk a little bit about what you are seeing in healthcare. It sounds like maybe the destocking process has run its course, but maybe more than that, it sounds like you are seeing some growing opportunities around drug delivery and monitoring. Can you talk a little bit about some of the partnerships that you have developed and kind of how you see the healthcare segment evolving over the next quarters and maybe next couple of years?

Ashish Khandpur: Sure, Mike. As you said, healthcare, the destocking we believe is finally over and we are seeing restocking both in our equipment maker accounts or OEMs as well as distribution. We are seeing resales grow on both those channels. So that’s a good sign indicating destocking is largely over. We are also — our teams have also pivoted to winning more share and new applications in some of the high growth areas, especially around drug delivery of obesity and glucose monitoring drugs kind of applications. So that pivot to winning applications in areas which are growing in healthcare fast is really helping our healthcare sales to grow at double digits as we showed in Q2. Now, when I look into what’s happening — and both by the way — both CAI providing additives and color and as well as SCM side are growing in healthcare.

So that’s a good sign. And on the specific devices side, medical equipment and devices side, we are seeing good robust demand, again, restocking for our catheters, inhalers and other drug delivery like syringes type devices, which is our conventional stuff. So, we are winning what I would call our core businesses, but we are also building some new applications in these fast growth drug delivery devices. And just as a context in point, we have been growing our healthcare equipment and drug delivery business at a category of 14% since 2019. So it has been a good healthy business. It’s quite profitable and it is growing fast and we continue to innovate in that area.

Mike Harrison: All right. Very helpful. Thanks very much.

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

Frank Mitsch: I’m assuming that’s the legal drug delivery type of businesses that you’re referring to, because a, when you see such high margins, one has to wonder.

Ashish Khandpur: It is also legal, Frank. Thank you for clarifying that for us.

Frank Mitsch: Absolutely. With the star in 1Q is that 38% growth in defense and you mentioned that it was up modest year-over-year in the second quarter. Can you provide a little more color there and what your expectations are for the balance of the year in that business?

Ashish Khandpur: Yes, sure, Frank. So as you know, Q1 was very strong in defense and that helped not only our growth, but also our margins. But Q2 sequentially was down, but year-over-year was modestly up versus last year. As we look into Q3, we still see strong growth in that area and more in line with what our results have been in Q2 from a revenue perspective. But since the comps last year were quite weak, we see double digit plus growth in Q3 for defense. And for the rest of the year included — for full year we expected to finish as Jamie said in our prepared remarks at double digit levels. Again, good solid momentum in that business. We are winning new programs, not just with the NATO countries, but also with specific programs with local law enforcement agencies, capital police, as well as some new applications both in Germany and Spain apart from the other NATO countries that we have orders from, so good momentum there.

Frank Mitsch: Very helpful. Thank you. And Jamie, you talked about raw materials being a positive for Q2, but then expecting inflated impacts in the balance of the year. Is there any way to quantify that? I think order of magnitude was deflation, something like a 10 million benefit in the second quarter and expectations on Q3 as to what you’re going to see?

Jamie Beggs: So Q2’s deflation number was about $15 million. So for the first half it’s about 35, close to $38 million for the first half. The back half we’re expecting between $5 to $10 million headwind. Right now the way the curves look it may hit a little bit more in Q4 versus Q3, but that’s our current outlook.

Frank Mitsch: All right. So flat in 3Q?

Jamie Beggs: I would expect some — I’m sorry, some inflation in Q3, but to me that’s on the lower end of the side. I think we’re going to see a little more in Q4.

Frank Mitsch: Very helpful. Thank you so much.

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

Michael Sison: Hey, good morning, nice quarter. In terms of the second half outlook for sales growth at mid-single digits, will that mostly be volume growth? It sounds like you have good momentum in the third quarter. Hopefully the guardians can keep up there as well. And then just a follow-up in terms of R&D, Ashish, any changes that you’ve made that you’re sort of seeing some momentum there in new product development or such?

Ashish Khandpur: Yes Mike. On the first one, on a second half outlook, even for Q2 all our growth as you see is volume-related growth. So it’s very strong volume growth that we have seen. And then, that momentum will continue in second half. And second half growth is again volume related. So that momentum will continue, and so we are seeing strong program wins, new application wins. And then goes back to your second question really with respect to what changes we have done and how — if anything, is it sparing any results yet? So we have done a lot of pivot around — our sales team really changing our strategy with respect to how we are addressing different regions of the world. So for example in Asia, we pivoted to going to more local key accounts apart from the multinational accounts that we were serving, for example in China, because we were seeing the business move away from some of those, between those two local versus global multinational accounts.

And so, our teams pivoted there and one share there. In EMEA, which is, as you know, is a low growth area, low GDP growth area, our team’s focus is now on winning share. And we are doing that with new applications, as well as just basic blocking and tackling in the business. And then, in the U.S., we are seeing momentum with respect to some secular trends with hardening of the electric grid taking place and other applications like that. And we are, our teams are winning there as well with new products and new applications. So I think what you are seeing for our volume growth is a combination of not just restocking some market demand come back in certain areas of the world, but also significant amount of growth coming from new product development and new application development and share wins that is happening across the globe.

Michael Sison: Got it. Thanks. And then in terms of the strategic plan, I know you are probably going to keep a lot of that and they are still developing a lot of it. But what metrics do you think are most important for investors to think about and that you are focused on that you will maybe kind of highlight at the Investor Day in December? And any thoughts about sort of the longer term earnings power as you have been there for — since the beginning of the year?

Ashish Khandpur: Yes. So obviously, I mean, I would ask for some patience until December 4th when we actually come back and give the numbers. But just so that, you know, Mike and I, we have highlighted in our past earnings calls, the three top of mind areas for me is really growing organically the top line while expanding the margins on the bottom line, amplifying innovation, which will feed into that top line and profitable bottom line growth. And then the third thing is building the leadership and talent for Avient of the future. And our strategic plan is really going to address all those things. And really, that’s what I can share at this point in time. But that’s where we are focused on how to grow, how to build, make innovation as a central part of our growth strategy, so that not only are we growing the top line in a sustainable way, but also differentiate ourselves from competition and improve our margins.

Michael Sison: Great. Thank you.

Ashish Khandpur: Thank you.

Operator: Thank you. Our next question comes from the line of David Huang with Deutsche Bank. Your line is now open.

David Huang: Good morning. Hey, Ashish, I did see that you’re hiring a Chief Technology Officer and another person to be in-charge of marketing and new business development. Can you remind us how those organizations are currently structured in your company? And I guess, what do you wish to change or achieve with these new hires?

Ashish Khandpur: Sure, David. So the CTO part currently, we are structured both — the R&D is structured both in the businesses as well as a central team of technology. And so it’s kind of — most of the R&D folks are in the business right now and some are in the center of the corporation. So we want to just actually, when we bring the CTO, we are also trying to see how we can really build a flywheel of innovation that continues to deliver. So we think in terms of horizons, so Horizon 1 could be sitting in business, for example, and Horizon 2 and 3 could be either in the business or being incubated a little bit away from the business, so, while still connected very directly to the customers. So I think that’s an R&D model that we are trying to get going.

And we have started actually consolidating some of our R&D structures, especially in high growth spaces, to build capacity and capability. So we have some of this R&D scattered around different parts of the company, because they came into the company through different acquisitions. But we have now started pulling them together to build enough scale in areas where we really want to grow fast. So we have started doing some organization changes on that front. And the CTO would obviously be part of that story. Then on the marketing side, we are — as we look into some of the new — the world is really changing fast and technology trends are changing the world fast. So if you think about what is happening with artificial intelligence, it’s really going to create a lot of usage for electric power distribution and generation.

And so — and that has a derivative effect on our businesses, because we can supply in those areas. Similarly, semiconductors are needed for AI and we need to — we are a material provider and we can play in that fast growth area once again. So, all these trends are happening, whether it’s mobility, whether it’s electrification, and so on and so forth. And we can become part of those fast growing markets. And so we need to understand those markets in a better way. And also our go-to-market models, we have a lot of technology, but sometimes how do we approach those markets to commercialize these things is equally important. So this new marketing position that we have advertised is going to be helping out in that area.

David Huang: Got it. And then just going back to the share gains you mentioned, I guess how much does share gains contribute to their volume growth in the quarter? Sounds like they’re more related to sustainable solutions and composites. I guess, if you look at the organic volume growth for those two platforms, where are they today? And I guess, is there any fundamental underlying competitive dynamic change that’s contributed to some of the share gains?

Ashish Khandpur: Yes. So I think the share gains actually were not as much in composites this time as they were in our traditional engineered materials on the SEM side. Clearly on the color generative side, we saw broad based share gains and taking market. I think we expect composites to play bigger as I was mentioning earlier in my comments with respect to winning share in defense and other things with NATO countries. So composites are going to kick in there. Also we are seeing some products in building and construction area with respect to panels and composite materials that are used in construction of homes that we are seeing momentum in. So I think composites is going to be largely a second half story for us. But in general, we have seen share gains on traditional engineered material side. With respect to your second question, which was –

David Huang: It wasn’t a second question.

Jamie Beggs: So David, maybe just add a bit more, because I think you’re looking for specificity between on the 5%, how much was related to share gain, how much was related to new business wins, and then also we had restocking as well. And like she said, I think the applications that you call that with composites and for sustainable solutions, that’s really more on the new business gain side. Like for instance, in building and construction for the company, it was up 15%, and that really is because of the new applications either in the functional additive space or in certain applications on the composite side that really started to take win with new applications. And then in other cases, also in building and construction, for instance, in the wire and cable space, that’s more of a share gain.

And then, if I go into something like in your packaging, which is up 11% within the region. That really was driven highly by restocking in that space, because the underlying marketing conditions wouldn’t suggest that be the case. So it really is a mix between all three of those buckets for how organic growth grew within the quarter.

David Huang: Okay, got it. Thank you.

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

Unidentified Analyst: Hey, good morning. This is Kevin [indiscernible] for Laurence. I guess about mix, I guess I’m just wondering how you guys expect your mix to evolve in the short to medium terms, and maybe back half of this year and maybe into 2025, 2026? Thank you.

Jamie Beggs: Yes, from a back half perspective, we’re not expecting a whole lot from price mix to come through. As Ashish mentioned earlier, it’s really a volume story in the back half of the year. There may be some mix that comes through, because if defense comes up a little bit stronger in the back half, that may help with margin expansion. But we’re not expecting price mix to be material for the back half. We haven’t come up with estimates for ’25 and ’26. As Ashish mentioned before, we are interested in amplifying innovation and as those programs start to take more hold, we do expect margin expansion to continue. So we expect that to be positive, but we’ll get more specifics when we get to December 4th.

Unidentified Analyst: Okay, understood. And I guess you talked a little bit about pricing, but I mean, just with raw materials coming down, I’m just curious, let’s say, if that trend were to continue into 2025, I mean, would you expect any kind of knock on effects from, let’s say, pricing pressures coming from customers further downstream? Or do you expect to kill about that?

Jamie Beggs: Well, pricing is actually going up in the back half of the year. So like I answered with Frank, we expect five to $10 million in the back half of the year. We have a strong history, if you go back to the last eight to 10 quarters of being able to have a net price benefit, regardless if it’s an inflationary or deflationary environment. The teams have done a really nice job with that. I expect that to continue to be the case.

Unidentified Analyst: Okay. Thank you.

Operator: Thank you. Our final question comes from the line of Vincent Andrews of Morgan Stanley. Your line is now open.

Turner Hinrichs: Thank you and good morning. This is Turner Hinrichs on for Vincent. Can you help us understand what’s going on from a cash flow perspective and what you expect from working capital for the year?

Jamie Beggs: There may be just a little bit of a comparison to prior years. So we had a little over $185 million of free cash flow. And as we look into 2024, our capital expenditures for the year are slightly higher than last year. We estimate about $140 million. So taking that to effect, we do expect two things to change for 2024. One is the CapEx and the other is working capital. We do expect the higher sales level to also be a cash use versus we had about $40 million of a cash good guy in 2023, which won’t repeat in 2024 because of the sales good guy. Maybe as a reminder, our working capital’s percentage of sale averages between 12% and 13%. We expect that to continue through the back half of this year too.

Turner Hinrichs: Great. Thank you. One additional question that I had, what parts of the Ross basket is driving the expectation for additional inflation in the fourth quarter relative to the third quarter? And is this something that you all could see continuing?

Jamie Beggs: Yes. So, what we’re seeing in the back half really relates to pigments, certain performance additives as well as our hydrocarbon basket, which is primarily driven by polyethylene, polypropylene and TPE. That’s really what we’re seeing in the current curves. I mean, obviously that’s dependent on kind of the evolution as we kind of go through the back half, but that’s the best visibility that we have at this point.

Turner Hinrichs: Great. Thanks. Appreciate the color.

Ashish Khandpur: Okay. With that, I think we’ll conclude today’s call. Thank you everyone for joining us. And we’ll see you next quarter.

Jamie Beggs: Thank you.

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