Earnings Call: Q3 2020

Nov 3, 2020

Good morning, ladies and gentlemen, and welcome to the Avian Corporation Third Quarter 2020 Conference Call. My name is Crystal, 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 at the end of the conference. As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Joe DeSalvo, Vice President Treasurer, and Investor Relations. Please proceed. Thank you, Crystal. Good morning, and welcome to everyone joining us on the call today. Before beginning, we'd like to remind you that statements made during this conference call may be considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements will give current expectations or forecast of future events and are not guarantees of future performance. 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 statement. Some of these risks and uncertainties can be found in the company's filings with the Securities And Exchange Commission as well as in today's press release. During the discussion today, the company will use both GAAP and non GAAP financial measures. Please refer to the earnings release posted on the Avian website where the company describes the non GAAP measures and provides a reconciliation for the 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 Buggs. Also joining us for his last earnings conference call is Brad Rich our previous Executive Vice President And Chief Financial Officer, who announced his retirement a couple of months ago. Now, I will turn the call over to Bob for some opening comments. Well, thanks, Joe and good morning, everyone. I'd like to start with words of support for those who've been impacted by the coronavirus. The pandemic is far from over and we remain mindful of the many ways it is impacting people around the world. First responders as they continue to play such an important role in the response and recovery effort. This is our first quarter that we are reporting results that include the Clariant Masterbat business, which we acquired on July 1st. At that time, we welcome we welcomed over 3500 associates to our newly named company ABN. And we took a big step forward in our specialty transformation journey. This created tremendous energy internally with our associates Our customers are viewing us as a specialty partner and our performance in this challenging environment is demonstrating the strength of our diverse and resilient portfolio. I'm pleased to report that we delivered 3rd quarter adjusted EPS of $0.54 Excluding the impact of purchase accounting step up depreciation and amortization. Inclusive of the step up D and A, we reported adjusted EPS of 46 dollars. And this is $0.03 better than we expected in our pre announcement in September and exceeds the $0.44 we reported last year. The $0.03 improvement from when we met or talked a month ago was driven by a strong finish to the quarter with September sales growing 6% over the prior year. And particularly encouraging was that the increased demand in September wasn't isolated to one segment or region, all grew sales for the month. The last couple of quarters have been challenging for sure, but we, our customers and our shareholders, have clearly benefited from the execution of our strategy to reposition our portfolio in recent years. Higher value end markets, such as packaging, consumer, and healthcare. These three areas now represent nearly 60% of our sales. The Clariant Masterbat integration is going extremely well. As we announced in September, we have increased our synergy target from $60,000,000 to 75,000,000. The increase is a result of the time that we have been able to spend with a talented management team that came with the business and we were not only able to validate our initial synergy estimate gain confidence as a team and our ability to do more. And I think this is important to remember, we didn't just acquire incredible technology deep customer relationships and well run facilities, we acquired tremendous talent with a passion for innovation, and serving customers with excellence, and they are immediately embracing our strategy and our culture. And that's what is making this the greatest impact in our first quarter together and has to be more confident than ever about our future as Avian. Another bright spot of course is our Specialty Engineered Materials segment. EM had record 3rd quarter operating income of nearly $25,000,000, that's a 27% increase over last year. The growth was driven by continued momentum in our composites platform which has benefited from consumer demand for outdoor high performance products. Recall that our composite business was breakeven only a couple of years ago. In this quarter, our composite business achieved 17% return on sales. We executed our invested growth strategy by making investments in sales, marketing and technology and is paying off and we expect that our composites platform will continue to be a key revenue and growth driver for Avian in the future. To give us more detail in the third quarter, I'm very pleased to introduce Jamie Bags, our new CFO. I'm thrilled to have her join us and thankful for the seamless transition that's been occurring with her and Brad over the last several weeks. Jamie? Thank you, Bob. I'm extremely excited and proud to have joined Adient and my 1st few weeks have been fantastic. It's great to be back in the specialty space, one that I know well and part of a company that has tremendous growth opportunities. Most importantly, I moved across the country with my 2 kids and my dog for the culture that Bob has built, a culture that has both an intense focus on winning and excellence, as well as one that is fostering a great place to work for its employees. I've met several of you already on the call and look forward to working with each of you in the future. Let's jump into the specifics of the 3rd quarter. We reported GAAP earnings per share from continuing operations of $0.02. Special items in the quarter resulted in a net after tax charge of $40,000,000. Special items were primarily associated with acquisition related costs and an adjustment to environmental reserves. Acquisition related costs primarily consist of inventory step up and the financing commitment associated with the Clariant Masterback acquisition. Adjusted EPS for the quarter was $0.46 compared to $0.44 in the prior year third quarter. Excluding the impact of the step up depreciation and amortization associated with the Clariant Masterbach acquisition, adjusted EPS was $0.54. Total company revenue increased $219,000,000 to $925,000,000, primarily due to the Clariant Masterbat acquisition, which closed on July 1st. On a pro form a basis for the acquisition third quarter sales declined 5% compared to the prior year primarily due to COVID related demand weakness. While the pandemic continues to have an impact on revenues, overall demand improved significantly from the second to third quarter across all end markets. The 2 end markets that experienced the most significant improvement were transportation and consumer discretionary. Consumer discretionary sales, which account for about 17 of the total company sales was down 28% in the 2nd quarter and grew 1% in the 3rd quarter. As strengthen our composites platform more than offset weak demand for our screen printing ink business. And transportation sales, which primarily consists of automotive applications and accounts for 10% of total company sales was down 15% in the 3rd quarter compared to over 50% in the 2nd quarter. From a regional standpoint, pro form a sales in Europe were down 14% excluding the impact of foreign currencies. This is a modest improvement from the 2nd quarter where pro form a sales in Europe were down 18%. The pandemic has had the greatest impact on the automotive and industrial end markets in Europe. In the quarter. The improvement is reflective of automotive production resuming and increasing demand for consumer discretionary applications particularly in the U. S. And lastly, our Asia businesses grew yet again this quarter, expanding sales 11% over the prior year third quarter. Nearly all end markets in the region grew with the most significant growth coming from health care. Our growth in health care continues as there is a strong demand for our applications used in the co mid-nineteen response. In reviewing our segments for the quarter, SEM grew operating income 27% on slightly lower sales As the segment expanded operating margins, 350 basis points, driven by improved mix and lower raw material costs. As Bob mentioned earlier, this is a record performance for a third quarter. The improved mix reflects strong demand for our composite applications use in consumer discretionary products. With this 3rd quarter performance and demand trends we're seeing to start the 4th quarter, we feel confident that SEM can deliver operating growth for the full year. That's remarkable given all the volatility when it's taken place this year globally. The Color business continues to benefit from healthcare applications as healthcare sales grew 10% over the prior year. These gains in Healthcare were more than offset by continuing pandemic driven weakness, primarily in the automotive and industrial end markets in the screen printing inks business. I realize that may be challenging to follow the Color segment's results with Clariant now additive. So here's a high level review of this year versus last year. Last year in Q3, we reported $49,000,000 in EBITDA for the Color segment. This year, we are reporting $77,000,000 of EBITDA. The Clariant Masterbat acquisition added 33,000,000 which would bring you to $82,000,000. Offsetting this is pandemic related weakness primarily related to automotive and our inks business. Lastly, although distribution segments where sales were down 6% in the third quarter, we are encouraged that volumes were flat year over year. Declining prices that set buyer suppliers account for the year over year change in sales and earnings. This is certainly a big improvement from the second quarter driven by stronger demand in the Despite the impact of the pandemic to our overall company sales and earnings, we have done what we always do that is to control what we can. And this year, it was managing working capital efficiency to maximize cash generation. In the third quarter, we generated $107,000,000 of adjusted free cash flow, exceeding our estimates and we are now increasing our full year projection to $270,000,000. Working capital management has been the key driver for this performance Our teams have done an excellent job at managing the demand volatility and uncertainty. As a percentage of sales, we have lowered our working capital investment by 1%. Which on a full year basis translates to approximately It's a tremendous achievement for this year, but it's also an operational benefit that we expect to maintain as the pandemic recovery continues. This free cash flow performance has strengthened our balance sheet. We finished the quarter with nearly $580,000,000 in cash and are positioned to finish the year with Clariant Masterbat acquisition in December of 2019. In summary, we are in excellent position to navigate the near term dynamics of the pandemic and execute the very important work of integrating our 2 companies. That concludes my prepared remarks. But again, let me say how thrilled I am to be with Avian, meager to contribute to our bright future and look forward to meeting with our investors virtually and eventually in person in the time to come. I'll turn the call back over to Bob now for some concluding comments. Thanks, Jamie. I'm very proud of our team's accomplishments this quarter and for the entire year for that matter. Most importantly, we kept our people safe, healthy, engaged and inspired. This has allowed us to effectively run the business and serve customers during these challenging times. And despite While synergy capture is a priority for us and key to value creation from the acquisition, I'm even more excited about what the business brings to us in terms of long term innovation to help articulate the story. In it, you will find important messages about Avian, who we are, what we do and why we win. And just last week, we published our latest sustainability report. It is a comprehensive account of our performance on ESG matters. It is our 2nd report and we have significantly increased the amount of information, data and transparency on topics that And as a material science leader, formulator and designer, we're in the early stages of our customers' new product development and we help them achieve their sustainability goals. At the same time, we are running our facilities as an ACC responsible care certified company. Operating safely for our employees, while protecting the environment in our communities. Further as a founding member of the Alliance to End Plastic Waste We have joined in the global effort to eliminate plastic waste and build awareness and infrastructure to leverage the inherent benefits of plastics. You'll see in our sustainability report that we've established our 1st set of sustainability goals for 2030. And we will pursue these goals with the same rigor and intensity that is a trademark of our culture. Let's shift gears to the near term. And focus on the quarter ahead. Look, there is still a lot of uncertainty related to COVID and potential further lockdowns. We can't predict that. What we can say is that based on orders for October November, is that we are optimistic that the economy is continuing to improve and will do so through the balance of this year. So to give you some guidance for the fourth quarter, we want to 1st just ground you on a pro form a number for last year. So Had we owned Clariant last year in fourth quarter, we would have reported $93,000,000 in EBITDA. For this year's fourth quarter, we expect to increase that by 11% to about $103,000,000. And this translates to adjusted EPS of $0.40 inclusive of step up depreciation and amortization, which is 17% higher than last year. This is a big deal when you consider that many companies are reporting EPS to be flat or down in the 4th quarter. And I think this says a lot about the quality of our portfolio, but also the strength of our combination with Clarion. This is an important time for us. And if you've had the chance to go through our investor materials or hear me make some remarks there. And you know that that's the case. A year ago, we completed the divestiture of our PPS segment and shortly thereafter announced our intent to acquire Clariant Masterbatched. Within days of the latter announcement, our stock reached a 52 week high as investors welcome the news. Now these gains and positive sentiment were quickly erased by the COVID pandemic and candidly some specific fears about us and that potentially we would have to complete the Clariant Masterbat transaction under a state of duress. Or maybe there was some fear that the business was impaired as a result of the pandemic. This simply wasn't and isn't true, and our results for the third quarter offer proof. So I'm glad that we didn't listen to the haters telling us to back out at that time. We're about to deliver the highest level of adjusted EBITDA the company has ever achieved with the highest percentage of specialty applications and yet our stock trades at a multiyear low. The last time we came close to this amount of EBITDA was in 2018 when our stock reached an all time high of $46. And as you know today, we're trading below that. 2 weeks ago, we raised our dividend for the 10th year in a row. As we expect to deliver record free cash flow this year and feel extremely positive about our growth projections for the future. Now some may say the current discount is due to leverage. And yet, our net debt to EBITDA, as Jamie just said, will be below three times by year end. And that's only about a half a turn more than when we traded at $46. Quite candidly, I just think our story isn't understood and I intend to fix that. I wear many hats as Chairman and CEO, but at present, I'm very focused on telling our story to get our shareholders the return they deserve and I will go door to door if I have to to sell it. As you can tell, I'm very excited about the future of the company. I'm very excited about our growth prospects and the future valuation. But don't just do it for me. Do it for Brad. Brad's retiring He'd really love to set up some 529s for his grandkids. And as our CFO, Meredith, I'd like to give him the last word today. Well, thank you. Thank you, Bob. And I do appreciate that final comment about do it for Brad. I did want to just say a big thanks for the support and friendship over the last 7 years. I've had a little bit of time to reflect And I have great memories of our travels together with the sell side community. There are a lot of smiles around the table right now as I'm talking about this. Frank and Aziza, the annual Christmas dinner in New York. I will miss that. Some of those went into the wee hours of the night, but just great memories. Mike Sison. I remember traveling with you after the CAS won the national championship. There was no suit to be found just calf gear. And some of the stairs that we got in the elevators are just priceless. Dinner with Ben Klo in Portland, I can't really say more about that. And Mike Harrison I still want to understand how at an important dinner in Chicago that we got off on an hour long discussion on whose cheesy potatoes were better. Yours or Bob's. So anyway, I just want to thank you so much for the great memories and support. Some of you know, I like to vote and there's a favorite quote of mine about a sailor. And it goes like this, the pessimist complains about the wind. The optimist expects it to change and the realists adjust the sales. And although our 4 pillar strategy remains the bedrock, it remains our beacon our True North, we have adjusted the sales. With extensive portfolio changes over the last 7 years, with specialty solutions focused on Consumer Packaging And Healthcare, which as Bob mentioned, makes up over 60% of our portfolio. Think about where we were 7 years ago, where we were building a construction focused company. We've adjusted the sales to focus on R&D And M And A to give us a full breadth of sustainable solutions and those markets are growing at high single digits. We've adjusted the sales certainly accelerated by Clariant to give us meaningful And we have focused on being certified as a great place to work. And I have to say and I've said this so many times to Bob, I just am so appreciative of being a part of the best team that I have ever worked with. And certainly with Jamie joining the company, you can see it's only going to get stronger. So as I disembarked for my next port of call, not sure where that's going to go. I do so though with great confidence in the future per job and I'm very, very proud of you. So I wish everyone all the best. And thank you very much. Thanks, Brad. You're absolutely going to be missed. We really appreciate all your contributions to the company over the years. Thank you very much. So we now have time to take calls. And who knows? Maybe Brad will take 1 or 2 of those. Thank And our first question comes from Bob Koort from Goldman Sachs. Thank you. Good morning and best wishes, Brad. Thank you, Bob. Bob, that was quite an impassioned, a bit of enthusiasm for the company and what you see I guess I'm curious, your free cash flow looks pretty darn robust. Do you think you could flip to buying back some of that undervalued equity sometime in the next couple of quarters? Yes, I think the primary goal is to get net debt leverage down below 3 times. And we're just above that that has a September 30th expect to be below it by year end. So I think once we pass that threshold, we could be and a place to consider doing that again. I'm curious here. The 4th quarter is traditionally pretty unkind to the chemical industry. Tend to see destocking in inventory management by customers. In 2020 is obviously a very different year. You guys have thousands of customers. Do you have any sense should these lockdowns accelerate through the end of the year? Is there a big drawdown risk at your customer level at your own level? How do you assess sort of the channel inventories at the moment? Yes. I mean, December has always been a wildcard and I've always said it's difficult to draw a conclusion from December January by itself, but if you put the 2 together, you get a sense for how well things are going. Look, with an increased level of lockdowns or conservatism related to the pandemic, anything I think could happen in December and it's very difficult to predict. With respect to our own project, to grow EBITDA year over year. We've got a conservative estimate in there for the last month. So If that doesn't happen and things go better, we could do better. I'd say it's also been a challenge to think through a forecast for this fourth quarter because to some extent, the recovery is offsetting historic seasonality. So some of the things that we would have perhaps modeled in the past and said, here's how I think Q4 will look just simply don't seem to be playing out. At least with respect to what we've seen in October, which was a really good month. So That's as clear as we see things right now. Bob, obviously, the COVID pandemic still, to be determined how that impacts the year. Got you. Thanks very much and good luck, Brett. Thank you. Our next question comes from Frank Mitsch from Fermium Research. Your line is open. Thank you so much. And congrats, Brad, don't be surprised if Fermium pays a visit to you out west down the line. So, yeah, man, we'll miss you. And of course, nice to meet you again, Jamie. Bob, if I want to come back to the Clariant business, the EBITDA in the 2nd quarter, I believe you said, was $37,000,000 for the 3rd quarter. $33,000,000 and based on your guidance, it looks like the 4th quarter is $29,000,000 or something like that is how do we think about the seasonality of that business on a more normalized basis? Number 1, number 2, The pandemic obviously has played some havoc with the top line. How do we think about the top line of that trending for that business as well? Yeah. So, the 4th quarter, there is some seasonality in the Clariant business in the 4th quarter. I'd say it looks very similar to our own color business. So as you if you look back historically at how we performed in Q4, that's how I think you can think about Clariant performing in a normal year. I mean, obviously, there is some COVID related impacts this year that could offset some of that seasonality in Q4, but that's probably the best way to think about it. And then from a a revenue standpoint, I'd say the same thing from a seasonality perspective. So it was down a little bit year over year in Q3. Expect that could be about the same in Q4. Okay. All right. Great. And Jamie, I believe you said that the free cash flow for 2020, you're targeting $270,000,000. I assume that that's just have a half a year of Clarion in it, if Clarion had been part of the portfolio from January 1, where do you think that free cash flow number would have gone to? Frank, this is Joe. Client probably adds around $30,000,000 to $35,000,000 of free cash flow. We got a big benefit this year coming from working capital. Obviously, with declining sales, so that's been helping us this year. So that's where you'll see the current half year next year should offset some of the benefit we got on the working capital improvement this year. All right. That's very helpful. And Joe, just remember, do it for Brad. Thank you. Our next question comes from Mike Sison from Wells Fargo. Your line is open. Hey guys, nice quarter and Brad. Congratulations. I do have a nice brown outfit as the suit week ever do get to the Super Bowl, but Bob, in terms of 2021, can you maybe help frame what the growth potential could be next year? How much synergy comes into place? You do have other cost saving programs then if there's continued momentum in the M, how do you think we see EBITDA growth next year? Yeah, I'm going to put specific guidance related to 2021 kind of in the parking lot for now. Mike, I feel comfortable with what we just said about Q4, but want to give a little bit more time to pass. So expect us to say more about the full year when we come out with our end of year results. But I can answer, I think maybe the last part of your question, which is synergy expectations. So, we have sort of talked a little bit about run rate achievement over periods of time and have said, let's call that $30,000,000 of run rate by the end of next year. And I think that that means that about, let's say, $15,000,000 to $20,000,000 could actually benefit the bottom line next year, calendar wise. So maybe that's a good estimate or way to think about a starting point with that level of clearing and synergies. Great. And then when you announced the deal, I think you all talked about a $500,000,000 EBITDA potential synergies are coming better. You sound certainly enthusiastic on the combination. Is that still the marker or has that potentially gone up as you have spent more time with the company with the new company? I missed the very first part of that was what's still the marker? I'm sorry? The $500,000,000 EBITDA that you all talked about when you announced the deal? Yes, that was, okay, that was pro form a number looking at putting 2019 together. Yeah, that's right. So, yeah, I mean, I think with the center the increased synergy estimate, I think we've got an ability to get to that faster than what we previously projected. We haven't said anything else yet with respect to timing, but You can see where the numbers are coming out this year. I think we're going to be ahead of that on timing perspective. Great. Thanks. Thank you. Thank you. Our next question comes from Vincent Andrews from Morgan Stanley. Your line is open. Hi, thank you for taking our question. This is Angel Castillo on for Vincent. Just a quick question regarding the fourth quarter. I was wondering if you guys could give us a little bit more color on, as you look at the guidance that you provided in terms of how much of that might be synergies and you think about October, you talked about things continuing to improve. I think you said sales grew 6% in September. So is that then high single digits or could it be better in October and how are you looking at it in terms of November as well? Yes. I'm not we're not forecasting 6% sales growth for the fourth quarter to be clear, while September was strong, October is up probably about 1. And I think for the fourth quarter, you can consider sales to be down probably around flat to down 1 percent. Something close to that, okay? I think about sales overall. And then I think with respect to synergies, we do have some administrative, costs that have already been basically there were some associates that didn't come with a deal that were synergies from day 1. We'll still see the benefit of that here in the fourth quarter. But the real benefit is going to start coming in in the first quarter of next year. So, I mean, you can model in probably like $2,000,000 or so in Q4. Great. And then in terms of, as we look at 2021, so as you noted earlier in our previous question, I guess, start considering buybacks as you get below 3 turns of of leverage, how should we think about bolt on acquisitions and potential to do some of that? Yeah. I mean, look, our priorities from a cash flow standpoint have always been, obviously, to invest in what we need to into the business first. Then we'd like to be able to do acquisitions, increase our dividend. And of course, then we've opportunistically bought back shares What I'd say about the M and A market right now is that there's some real challenges with looking at acquisition outside the U. S. Because candidly, our leadership team here can't travel. And we like to see everything in person. So there are some things in the U. S. That we're continuing to look at, but I do feel like there's some challenges just with respect to moving some things We got 2 that candidly are just kind of on a back burner until we can find a time to travel. So we do hope that next year we can get back to doing some bolt ons and As you've seen historically, we've been able to do all that and buy back shares. And I think next year could be a really good illustration of that. That's very helpful. Thank you. Thank you. And our next question comes from Mike Harrison from Seaport Global Securities. Your line is open. Hi, good morning. And, yeah, I don't know. I still like my recipe, but the potatoes are a family new family favorite here. So Wanted to ask about the variance synergies. If you maybe just talk a little bit more about the integration process so far where have you seen things exceed expectations? And if you could break down kind of that $15,000,000 increase to the synergy number Where did that come from and is there any further upside? So for the most part, the $15,000,000 next year is going to come from sourcing savings. There'll be some administrative cost reductions. But I think the cadence in terms of when we get after the 3 buckets that we've previously published is really unchanged with sourcing really coming first. And as you and I think we put out in the investor deck when we went from 65 to 75 Mike, we increased really our estimates of all three areas. So we see opportunities within each And that was one, I think, just a factor of having a conservative estimate of what we could do when we first announced the deal. But then also the Clariant leadership team coming forward and saying that there were other ideas we should consider and we now are. So think it's a really good combination of our ability to validate what we thought initially, but then also get some new ideas from their team, which is which is how we came up with that new number. All right. And then, I wanted to ask you about the Engineered Materials business and the margin strength there, that 30% plot gross margin number I think is the best you guys have done since 2016. You mentioned the improvement that you've seen in the margin performance of of Composites. Is that the main driver there or kind of how do we think about that gross margin sustainability versus what you guys delivered in Q3? I mean it really is the main driver in Q3. We I'm sure we are benefiting for sure, in an uptick in demand for outdoor applications. Some of that may have been that there were challenges with customers being able to get product in Q2 and companies being able to supply that. And so then that has a pickup in Q3. So there may be some uptick there that's taking place. But either way, if you just smooth it out over Q2 versus Q3 or however you looked at that, the margins the composite space have improved dramatically from where we were a couple of years ago. So no doubt composites play in a big role in the margin improvement. If I looked at the rest of the business, sales are down slightly and the story kind of resonates with everything else we've said, which is that automotive is still down. Industrial applications are still down. There's still some pandemic effect. And that plays a factor in the rest of the business for All right. Thanks very much. Yes. Thank you. And our next question comes from Ben Kalu from Baird. Your line is open. Hey, thank you. Congratulations, Brad. Thank you, Ben. You're always super important than Facebook to me. Can we talk about the margins on color? I imagine this is a step down just related to the acquisition, but can you talk us through that and kind of where target margins on the operating side go? I'll leave it there. And thanks again, Brad, for everything. Yeah. I think everyone was aware that the starting point with the legacy Masterbat, Clariant Masterbat business is certainly lower than our own. And so when you look year over year, at EBIT or EBITDA margins, obviously, they're both down about two points. And that's mostly just putting the businesses together. So I'd also point out though that year over year, our inks business is still down quite a bit. So that's playing a factor in margins organically for us. Look, as we've said, we think that we can get the Clariant Masterbat margins up to our legacy color margins and ultimately above 20 percent EBITDA return on sales. So that's where we think we can get to here in the near term. We capture these synergies that should come to fruition. Great. Thanks. Our next question comes from Colin Rusch from Oppenheimer. Your line is open. Thanks so much guys. Thinking about recycled and renewable materials and the availability of those relative to some of your customers' demands. Can you talk a little bit about both pricing dynamics for sales and sourcing? And then So your process for evaluating the viability of some of these newer processes that are starting to try to ramp? I think your question was really about recycled content and evaluating the sort of the viability of that going forward. Is that right? Yes, as well as just an update on the pricing dynamics in and around those spaces. Okay. So I mean, as a starting point, I think that, all of our customers are looking at using an increasing level of recycled content. That's going to happen. It's moving forward. As you know, there's a challenge with respect to getting it. And for everyone who has set goals out there for the future, they can't be achieved with the present level of recycled content exists. So lots got to be done there. From a pricing standpoint, in a lot of cases recycled consent's actually more expensive and therefore creates some challenging dynamics around that. Look, this year that just hasn't played a big factor in our margins, but certainly it is in the conversations that we have with our customers. At the end of the day, we're providing a formula And that base resin, if it's recycled or virgin is really we want to do what's best for the customer and best for the environment and we'll price accordingly. So, look, overall, I view the sustainable solutions platform as a really good margin, good guy for us. And one of the reasons why we should see margin expansion on top of the revenue growth that we have projected for that area. Okay. And then the second question is really about capacity and how you guys think about the incremental capacity, what do you need to see? How do you think about repurposing some of your existing capacity for higher margin opportunities and how should we think about CapEx on a go forward basis? Yes. So, I mean, from a capacity standpoint, I think one of the The great things about bringing Clariant together with us is that we can take some capacity out. It's a unique business and that each of our plants is a relatively small footprint, often with It's a small lines quick turn batch processing, but there are opportunities, for synergies there, which we'll go after. And really want to harmonize things on a product line basis and go to those locations that are the best of the best. So From a CapEx standpoint, I think close to $60,000,000 this year is a good figure for us plus Clariant. And if you want to look forward and we think about some CapEx that will take place related to achieving some of these synergies. That may add about 20 next year, but it's still a little early on the figuring out the timing of that CapEx So that's just a rough estimate of where to start. Our next question comes from Laurence Alexander from Jefferies. Your line is open. Good morning. I guess, first, a near term question, in terms of the improvement in trends that you're seeing in Q4, Are you seeing any significant areas of softening the outside normal seasonality? I don't think anything is softening. I do think that in the third quarter, we saw A little bit of change because in the second quarter, there was some higher dynamics for let's say healthcare and packaging and that moderated in Q3 probably will see the similar effect in Q4. But again, that is completely dependent on what happens with respect to coronavirus, right? So I'm basically just sharing with you what I've seen so far in Q3 and in October. That's the best way I can describe that. And in the end markets where you have longer qualification cycles or qualification campaigns, or technical campaigns to be accepted into new customers. What's your confidence level on market share gains next year? Well, look, I think 1st of all, this year, customers have focused very much on meeting demand for their essential businesses. And I'd say probably in the last month or so. We're starting to see some pickup with respect to next generation projects, which is encouraging. We're finding a way to do that virtually between our sales folks, our technology teams and our customers. But I don't really see anything changing with respect to, maybe the timing of approval, except that for sustainable solutions, I think that moves fast because everyone's trying to get, better solutions in that regard. So if I just kind of think about that's probably one of the biggest trends that's out there is I think that stuff moves faster. And then just lastly, can you flesh out a little bit ambitions for your presence in Asia, so what percentage of sales in 5 years or how much additional resources you feel you need to put into the region to get to where you want to be? Yes. And as you, I think I don't know that we've mentioned it in the last quarter or 2 probably because of everything going on with the pandemic. But we have continued to invest in and build a new manufacturing facility in Chuzhou, China will be our largest facility. And it's really going to serve as an important area of growth In 2019 or at the beginning of that year, we were really starting to bump into some cap capacity constraints. So with that new facility, with Clearance, part of the team, I think we'll have the footprint that we want. Look, from an organic perspective, I think sales can continue to grow at 8 plus percent or more. And for us to do more than that, we probably have to look at, acquisitions. Thank you. Thank you. And we'll take our final question from TJ Juvekar from Citi. Your line is open. Yes. Hi. Good morning. And congratulations both to Brad and Jamie. Thank you. Good question on EM products. What was the impact of 5G as the networks are getting rolled out. Was there a significant impact in the quarter or is it just getting started and you should see that Yes, for us. So first of all, I mean, the fiber optic business that we support with our composites platform supports all the technologies, including, legacy generations. So That has been by far and away the majority of our sales so far. 5G is really getting started for us in that particular space because we have the largest presence in the U. S. And in Europe. What we serve in Asia, for example, is outside of that particular composite space. So I'd say 5G was pretty small for us. In Q3. But obviously as more and more locations begin to adopt and put that into place, That's going to grow. That particular business, we have an expectation. We'll grow at 10% of 10% sales annually. Great. Thank you for that. And then you sounded a little cautious on Europe in your comments. Was that an automotive specific comment I know the COVID cases are going up everywhere. And then secondly, on North American auto production, I think you sounded positive for 4Q. Typically these auto companies take downtime around holidays, but there are there is some thinking that inventories are so low that maybe production will be they won't take downtime and production will continue to ramp up. Can you just give your comments on auto production in the U. S. And Europe? Yes. I mean, with what we seen so far in October, the U. S. Is a positive. It seems to be or North America, it's a positive. You're right in terms of thinking about how the industry has historically navigated the 4th quarter. I guess anything could still happen, but what we've seen so far has been a positive. And I guess my observation on Europe is just relatively weaker than that. We just have not seen a recovery in Europe to the same extent that we have in the U. S. So maybe this won't just be all automotive, but to put things in perspective, I mean, sales in the 2nd quarter in the U. S. North America were down about 14%. In the second quarter, they were down about 5 in Q3, which in Europe was still down about 10 in Q3. So Things just haven't recovered at the same pace. I guess that's the best way I can describe the relative performance in the two regions. Thank you. Great. Thanks. Listen, I understand that was our last question. I appreciate everyone joining the call today. We're obviously very excited about the business. We're excited about our growth prospects. But we also want to keep in mind that the unmistakable reality here that we are still in a pandemic And at AVN, we're going to continue to keep health and safety first and hope everyone else does the same. So Thanks, and, everyone have a great day. Ladies and gentlemen, thank you for your participation in today's call. This does conclude the conference and you may now disconnect. Everyone, have a wonderful day.