Operator: Good morning, ladies and gentlemen, and welcome to Avient Corporation's webcast to discuss the company's 2022 fourth quarter and full year results. My name is Katherine, 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, 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 give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by a forward-looking statement. 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 non-GAAP measures and provides a reconciliation for historical non-GAAP financial 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. Now, I'll hand the call over to Bob.
Bob Patterson: Thanks, Joe, and good morning. Today, we reported fourth quarter adjusted EBITDA of $107 million and adjusted EPS of $0.42. Orders were slightly better than expected in Europe, and Asia and we saw an uptick in December orders for composites, including Dyneema used in personal protection applications. This, in combination with better margins, led to adjusted EPS of $2.69 for the year, which exceeded our prior guidance of $2.60. That being said, the fourth quarter was certainly a challenging one as global demand conditions and inventory destocking negatively impacted nearly every industry and region, resulting in a year-over-year decline in EPS. We focused on controlling costs and reducing working capital. During the quarter, we generated $120 million of free cash flow, ending the year with total free cash of $290 million.
We've put this extra cash to work by paying down an additional $200 million of variable rate debt. Net debt to EBITDA leverage ended at 2.9 times, which is below our previous expectations of ending the year at 3.1 times. This is really important as the strength of our balance sheet will be an asset while we navigate through these uncertain times. We have no near-term debt maturities, expect to deliver strong free cash flow in 2023 and an objective to keep leverage below 3 times for the foreseeable future. Despite the challenges in the second half of the year, I'm incredibly proud of what we accomplished in 2022. We completed two transformational deals with the acquisition of Dyneema and the sale of our Distribution business. These enabled us to significantly increase the size of our composites platform, which is a key growth driver for the company; allowed us to strengthen our balance sheet by paying down debt; and improved total company EBITDA margins to 16%, the highest in company history.
Growth in investment in composites has been a significant part of our transformation. In the early years, we invested in promising technologies as well as commercial resources to expand the potential of the next generation of wood, glass and metal replacement, often for smaller niche and yet underserved markets and customers. Our reach in applications expanded from outdoor high performance to electrical components and composites for 5G fiber optic cables. With Dyneema, we certainly more than doubled down. With the world's strongest fiber, we added market leading capabilities in personal protection, marine and sustainable infrastructure, and composites now makes up over half of the SEM segment. This really has been a deliberate journey to acquire technologies that expand the breadth of our products.
These include flexible tapes and panels, to engineered fibers that provide design freedom and world-class strength. These applications offer our customers sustainable solutions by providing stronger, lighter and more durable materials. The benefits include increasing longevity, reducing energy use and lowering carbon emissions, while also improving human health and safety. The following slide highlights the performance of our composites platform over the last six years with Dyneema (ph) pro forma in 2022. Clearly, a significant increase in contribution from these technologies, which is underpinned our broader transformation over the last 15 years. That specialty journey began in 2006. It involved the sale of more cyclical and commodity type businesses and investing in specialty technologies that deliver greater value to our customers.
The result has been a substantial expansion of EBITDA margins and adjusted EPS. Another important driver for us has been our increased investment in sustainable solutions. Avient strives for leadership positions in each of our four Ps of sustainability. We measure ourselves against top-tier standard setters such as ACC Responsible Care and the UN Global Compact. And we have set aggressive 2030 sustainability goals with action plans behind each. The positive strides we have been making in this has since been recognized by leading institutions, rating agencies and other third-party organizations. And you can see some of our current scores listed here placing us in the top tier in our industry. We were proud to be named one of America's Most Responsible Companies in Newsweek's annual listing; out of 2,000 companies, Avient ranked 22.
But to be clear, at Avient, we don't just invest in sustainability because it's the right thing to do for people and our planet, we invest in sustainability because it drives growth. And we also invest in our culture by focusing on safety, embracing diversity and inclusion, developing our associates and actively engaging the communities where we live and work. These attributes create a culture where people are proud to work for Avient. This is validated through our annual employee engagement surveys administered by the Great Place to Work Institute. In the fourth quarter, we conducted our latest. And I'm very proud that we were again certified as a great place to work, achieving the highest employee engagement scores in the history of the company.
And this survey included our newest associates from the Protective Materials business, which is really just another point of validation that our integration efforts are going very well. I'm sharing this with you today because we shouldn't underestimate the importance of culture. I believe culture is everything, especially in uncertain times like we face today. Companies with the strongest cultures are better positioned to navigate a recession and come out on the other side even better, and that's what we plan to do. I'll now turn it over to Jaime to provide some additional details on our 2022 results and provide our initial outlook for 2023, and then I'll provide some closing comments.
Jamie Beggs: Thank you, Bob. The strength of our culture has certainly been an asset, especially as we have grown through significant acquisitions. It's the foundation of how we execute our strategy and stay the course even when the macro environment is challenging. As Bob shared earlier, the fourth quarter ended slightly ahead of our projections. That being said, demand was down in just about every region. The war in Ukraine and concerns about energy availability negatively impacted consumer sentiment in Europe. China was constrained by its zero-COVID policy, and while the government relaxed its policy during the fourth quarter, the region has yet to recover. Globally, rising interest rates and inflation have further weakened demand.
The EBITDA bridge shown here highlights the negative impact of lower demand, as well as higher energy costs and negative foreign exchange. These were partially offset by the net benefit of our pricing actions, a reduction in SG&A costs, as well as synergies associated with the Clariant Color acquisition. Free cash flow generation has been an enabler for our company with this year being no exception. This slide shows our historic free cash flow generation. The bars on the chart represent free cash flow dollars, while the blue dots represent Avient's free cash flow conversion percentages. For comparative purposes, we also added the free cash flow conversion percentage for the S&P 500 as a green line. The data illustrates that we consistently generate strong free cash flow in any macroeconomic environment and there continues to be an upward trend.
Looking specifically at 2022, disciplined working capital management resulted in $120 million of free cash flow during the quarter and over $290 million for the full year. This has allowed us to quickly delever to below 3 times, providing us with a strong balance sheet to navigate the year ahead. Our performance during the year was really a tale of two halves. We started the year with good momentum coming off a record 2021, but as we entered the second half, the weakening global economy and headwinds from FX resulted in full year earnings of $3.04, slightly better than the prior year. Excluding the negative impact of foreign exchange, we grew sales and EBITDA in the mid-single digits and increased EPS by 9%. Both segments contributed to the growth in sales and earnings year-over-year, excluding the impacts of foreign exchange.
Color's top-line growth was slightly less than SEM as it had a larger exposure to Europe and virtually all of our import sales into Russia that ceased in 2022 were Color applications. Color was able to increase EBITDA 4% year-over-year, driven by pricing excellence as well as lower operating costs associated with the Clariant Color synergies. SEM's EBITDA grew 2% excluding foreign exchange, as growth in composites and improving mix was able to offset lower demand in consumer applications and higher energy costs in Europe. This next slide puts in perspective the full year EPS impact of foreign exchange translation, exiting import sales in Russia and normalizing demand in outdoor high-performance applications. As you can see, each of these factors had a meaningful influence on the year.
Starting at the top of the list, our foreign exchange exposure is primarily driven by the euro, which traded at below $1.00 for several months in the back half of the year. Further, our import sales into Russia of approximately $25 million annually essentially ceased, as I mentioned previously. A combination of these items plus the normalization of certain outdoor high-performance applications were offset by solid underlying performance in the business segments. Earlier, we showed you an EBITDA bridge from a Q4 perspective. The schedule mirrors that format, so you can see those same factors on a full year basis. The majority of the decline in demand occurred late in the third quarter and into the fourth quarter. What's most impressive about this bridge, however, is the magnitude of the raw material inflation we experienced during the year and the impact of significant wage and energy inflation.
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What you will find is that we more than cover these extraordinary costs with pricing initiatives that began early. In fact, we have more than covered inflation since the start of 2021 and this focus on commercial excellence has enabled us to realize a net benefit, which lessened the impact of lower demand. You also see significant benefits from the synergies associated with the Clariant Color acquisition as well as cost control initiatives. Let's now turn to 2023. We are assuming recent demand trends continue into the first half of this year. While energy costs have moderated in Europe, we believe longer-term fears about the war in Ukraine and the future energy availability will weigh on consumer sentiment for the foreseeable future. We think it is a positive that China is in the process of reopening, but that has brought complications of its own with respect to an increase in COVID infections and uncertainty about how businesses will pick up after following the Lunar New Year.
It is also a positive that inflation in the U.S. is moderating and it appears that the Fed is slowing the pace of interest rate hikes. The recent jobs report is also a reflection of the strength of the economy, but is a lagging indicator which doesn't reflect the myriad of recently layoff announcements made by many companies. How certain customers and certain industries respond to these changing market dynamics remains to be seen and likely to be bumpy as the Fed tries to softly land the economy. All of the above factored in to our first half modeling, which has sales and corresponding bottom-line results below the prior year. We expect first quarter sales of $845 million and adjusted EPS of $0.55 per share. Our second half modeling assumes modest growth, so that our full year guidance is just under $3.5 billion of sales and EPS of $2.40 per share.
We expect to generate free cash flow of $200 million in 2023 with net debt to adjusted EBITDA under 3 times. This is inclusive of strategic investments that will allow us to further integrate our recent acquisitions and provide CapEx needed to streamline operations, particularly in Europe to lower operating costs. Our efforts to generate cash and reduce leverage are rooted in how we're going to win in this downturn. We are focused on protecting and growing our market share, optimizing our cost structure and investing strategically in areas that will create long-term shareholder value. I'll turn it back over to Bob for some additional comments.
Bob Patterson: Thanks, Jamie. I'll offer a little more color on our projections for 2023. From a regional perspective, Europe seems to have flattened out and our team reports improving customer sentiment in the New Year. So, that's a good thing. I think inflation and higher interest rates in the U.S. are impacting consumer demand in Q1 to a slightly greater degree than we saw in the fourth quarter. And in Asia, China really is the main driver for us and it's unclear how the economy is going to respond to the relaxed COVID restrictions. We're certainly optimistic that local consumer demand will improve over the course of the year, which could accelerate with government stimulus. In our model for the year, I also think that we've been conservative with respect to margins as raw material deflation should be a positive.
And candidly, we are just balancing that with the uncertain demand conditions, which I think is prudent at this time. And I expect to have more clarity on that in the coming months. From an end market perspective, our full year view is that defense, energy and telecom will be positive, whereas we'll likely see further weakness in consumer, building and construction and industrial applications. Now, while some end markets and regions are projected to be down this year, that doesn't change our long-term growth rate assumptions for sustainable solutions, composites, healthcare and Asia. These are the four key growth drivers that we outlined in our Investor Day in December of '21. We discussed how they have contributed to our expansion over the years and how they will be a continued source of growth in the future.
Organically and with Dyneema, 2022 really did show the stability and resilience of the composite businesses. There's really a pressing almost urgent need for the high-performance characteristics made possible by composites, particularly for applications that improve human health and safety and provide for more sustainable infrastructure. I'm often asked how customers are thinking about sustainable solutions right now. I mean, for us, the real pull is from brand owners, who have made commitments to use more recycled content in their products and make them more easily recyclable. I have seen no reduction in their interest for these solutions. In fact, customer engagements on these subjects doubled in 2022 over 2021. As the world further aligns around the need for a more sustainable planet, material science formulation will be an enabler and that's exactly where we play.
So, both composites and sustainable solutions are expected to grow in 2023. From a healthcare perspective, what really remains to be seen this year is how inflation and higher living expenses impact discretionary spending, including elective procedures. This may weigh on the market this year, but I don't view that negatively impacting the long-term key megatrends of longer life expectancies, an aging population, remote care and self-management, which all play into the long-term growth rate assumptions we have for this market still. And with respect to Asia, I already commented on China specifically, and accordingly our near-term expectations are muted, but as everyone knows, China can turn quickly and I really believe that this is just a matter of time.
The steps we have taken to leverage these mega trends and strengthen our portfolio over the last decade really have us well positioned. In the near-term, we have taken actions to reduce costs, streamline operations and strengthen the balance sheet, but at the same time, we're investing for the future, and I believe we have much to look forward to. We've transformed our portfolio to be a premier, specialty formulator of sustainable solutions, with leading positions in diversified and high-growth industries. We have over 140 PhDs on the staff to solve our customers' greatest challenges and maintain an innovative product offering with over 35% of sales coming from products introduced in the last five years. We are the Number One color formulator in the world.
We have the Number One position for composite solutions used in outdoor high-performance applications, the world's strongest fiber for personal protection and many other leading positions in niche industries like screen printing inks. And last but not least, we truly have a great place to work culture. The last three years and likely to next will long be remembered for its list of challenges. To be able to improve our employee engagement scores during this time is an incredibly proud accomplishment, but more importantly, and investment in our future. In summary, I believe we are better positioned than ever to get through the near-term challenges in front of us, but more importantly, win in the downturn and accelerate growth as we emerged. It's been a while since we updated our peer comparison slides and they are included at the back of the slide deck that you can find on our website.
I feel these slides offer a good reminder of who we are and the value proposition we offer to shareholders. We're an asset-light business with industry leading free cash flow conversion. Our EBITDA margin is among the highest in the formulator peer set. And we still have a long-term goal to increase EBITDA margins to 20%. Over the last decade, our EBITDA multiple has been expanding with upside to come when we look at where other formulators trade. I encourage all of our current and prospective investors listening to spend some time with these slides in the context of the broader messages we share with you today about Avient. With that, I'll open it up for your questions.
