Q1 2020 Earnings Call
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I would now like to hand, the conference over to your Speaker, Seth Mrozek director of Investor Relations. Please go ahead.
Thank you Sydney Good morning, everyone and welcome to Ashland's first quarter fiscal 2020 earnings conference call and webcast. My name is Seth Mrozek Rector Ashland Investor Relations joining me on the call today, our Guillermo Novo Ashland's, Chairman and Chief Executive Officer, and Kevin Willis Senior Vice.
President and Chief Financial Officer.
We released preliminary results for the quarter ended December 30, Onest 2019 at approximately five PM Eastern time yesterday January 27.
The news release issued last night was furnished to the FCC and a form 8-K.
During this morning's call we will reference slides that are currently being webcast on our website Ashland dot com under the Investor Relations section.
The slides can also be found on the Investor Relations section of our website.
We encourage you to follow along with the webcast during the call.
Please turn to slide two.
As a reminder, during today's call we will be making forward looking statements on several matters, including our outlook for fiscal year 2020.
These forward looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but cannot assure that such expectations will be achieved.
Please refer to slide to the presentation for more complete explanation of those risks and uncertainties and the limits applicable to forward looking statements.
Please also note that we will be referring to certain actual and projected financial metrics.
Ashland on an adjusted basis, which are non-GAAP financial measures, we will refer to these measures as adjusted and present them in order to supplement your understanding and assessment of the financial performance of our ongoing business.
non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP.
The most directly comparable GAAP measures as well as reconciliations of non-GAAP measures to those GAAP measures are available on our website and in the appendix of today's slide presentation.
Please turn to slide three.
Jeremy will begin the call. This morning with an overview of results in the first fiscal quarter. He will then provide an update on the work that has been done to realign the Ashland business structure.
Thanks, Kevin will review financial results for the fiscal first quarter and discuss the debt offering a redemption that was completed in January .
Final year finally gear mill will close with key accomplishments that had been achieved over the past few months. In addition to providing his thoughts on important next steps. We we'll then open the line for questions.
Please turn to slide five and I will now turn the call over to gear among his opening comments Guillermo.
Thank you Seth and good morning to everyone.
It's an exciting and dynamic time here at Ashland, and I'm incredibly energized.
By what we have accomplished and the opportunities that lie ahead.
I want to thank the Ashland team for the strong support and enthusiasm you have demonstrated during this transition.
Today I'll start with comments about the high level drivers of our performance in Q1, then to discuss the business realignment that continues as we speak.
Following my remarks, I'll turn the call over to Kevin to take you through the details.
Q1 performance was below prior year, driven by softer market demand prior year carryover items and our catalyst change at our Lima facility.
We experienced no significant surprises in Q1 other than the extended turnaround costs at our Lima facility as a result of an unexpected need for additional maintenance work.
We had another strong quarter in terms of aviation as performance and we continue to advance our sustainability objectives in terms of innovation and operations.
As expected market demand remained soft in the quarter in both the industrial and consumer markets.
In pharma, we had a difficult comp relative to a very strong prior year Q1 and saw some customers adjust their inventory levels.
In personal care, we continued to see demand softness in hair care.
In oral care.
Results were stronger than planned driven by some new product introductions by key customers.
For adhesives, we saw general softness across most segments, especially transportation, but the construction market was strong.
We continue to see deflationary pressures in both pricing and raw material costs.
Coatings demand remained soft during the quarter.
As we commit communicated we also had the prior year carryover headwinds of business losses, and Tailwinds of improved cost.
From a cost perspective, we continue to realize benefits from the cost reduction program and have begun taking additional cost improvement actions.
I will talk more about these actions later in the call.
Now I'd like to speak to you about the progress we have made realigning ashland's business structure.
Please turn to slide seven.
As we've discussed during the last call. We are moving from a functional model to a business led one as part of this change we're putting in place and new business structure to better align strategy resources.
And capital allocation.
And to improve execution.
This change recognizes that we have a diverse portfolio of specialty businesses with different profiles and requirements to drive success.
This will move decision, making and accountability to the business units and their leaders.
Incentive compensation will be heavily allied to business unit results.
Informing the teams we are leveraging our internal talent and complementing it with targeted external talent.
I'm very pleased with the progress we've made in such a short period of time.
Please turn to slide eight.
Our business will be made up of the following.
The consumer specialties group will include our life science, and our personal care and household business units.
Note that the life Science Bu will hold our current pharma and health and wellness businesses, the health and wellness business will include Ashland's core food additives business as well as far mcadams nutrition activities.
Personal care and household Bu will include ashland's existing businesses as well as the evoke of fixative business from pharma Ken.
The industrial specialties group will be made up of our specialty additives and performance adhesives business units.
Specialty additives will contain our coatings construction and performance additives business lines.
Performance adhesives will remain unchanged.
We will continue to run our intermediates and solvents business as a separate segment and business.
Although we will allocate to the businesses business units some of the corporate manage cost linked to their operating activities like IP HR, each ns and other functions.
We will have.
A corporate segment that holds all corporate governance costs.
Note that in addition to aligning our resources to the businesses. We're also aligning our core assets to them.
Each business will be accountable for the operations and performance of the assets in their business and for the supply of all the demand of the other business units.
Please turn to slide nine.
This business model change will be a fundamental change and how we run our businesses and the company. We expect these changes to increase our focus and in true and in turn improve decision, making our agility and build ownership.
Business units will own their strategies and be accountable for their operating performance.
This is not a one size fits fits all model. They will have the dedicated resources and full empowerment to make decisions, including their business models and cost structures.
The intent is for the new business structures to better align strategy resources and capital allocation.
And of of course improve execution.
Aligning our incentive compensation to the line of sight of our business units and their teams is also a significant change their decisions and actions drive that our performance.
And as such Bu incentive comp will be heavily aligned to the business unit's results.
We have accomplished a lot in a short period of time, all the general managers have been selected and we'll all be in place starting February onest.
We have defined the business units their teams and align their assets.
And we're now in the process of finalizing the financials.
As part of the actions taken we have started to reduce our cost structure.
For this coming quarter, we will be focused on operationalizing, the new business units, we expect them to update all their strategies and define their business models and cost structures.
As abuse take control of their operations, we will begin the process of Rightsizing other corporate structures.
Let me now pass the call over to Kevin to review our results and then I'll come back with some closing comments.
Kevin.
Thank you Gary and good morning, everyone. If you will please turn to slide 12.
First I'll begin with a broad overview of results during the quarter.
As you May recall the December quarter is our seasonal trough during the year as demand tends to be slowest as our customers manage inventory in anticipation of planned downtime at their facilities.
We also schedule much of our planned downtime to coincide with our customers planning.
This quarter was no different and our results demonstrate the same normal seasonality patterns that we would expect.
That being said and as expected heading into the quarter global demand in both consumer and industrial end markets remain weak.
We also continue to work through the business losses that occurred last year of both pharmaco and within the personal care and market.
We did however realized continued improvements to our cost structure as both SGN, a and raw material costs were down compared to the prior year.
While overall results were consistent with expectations. They were below the result of last year's December quarter.
Please turn to slide 13.
Total Ashland sales in the quarter were $533 million down 7% from the year ago period, due to lower sales and specialty ingredients.
Negative currency represented one point of this decline.
As gionee costs again declined significantly in the quarter as we realized positive impact of the cost reduction program, including the benefit of eliminated stranded costs.
We did incur higher than anticipated costs during the plan catalyst change over at the Lima, Ohio facility within intermediates and solvents.
Total ashland's adjusted EBITDA was $88 million compared to 100 million in prior year.
Adjusted EPS was 13 cents down a penny from the prior year.
Our tax rate was favorable due to income mix and the benefit of discrete tax items.
Now, let's look at the segment results in the first quarter.
Please turn to slide 14.
Specialty ingredient sales were $505 million down 9% versus prior year due primarily to weaker demand in both consumer and industrial end markets crust plus the prior year business losses, which already referenced.
Gross profit margin benefited from lower raw material costs, though this was somewhat offset by unfavorable product mix.
Favorable price versus raws continues to be a good story for specialty ingredients as the commercial teams have been diligent during a prolonged period of raw material volatility.
Operating income and EBITDA, both declined versus prior year has lower gross profit was partially offset by lower SGN a costs all in EBITDA margin was basically flat at 20.2%.
Please turn to slide 15.
Turning to intermediates and solvents sales in the quarter were $28 million up 22% from the year ago period, though the December quarter last year was particularly weak for the IMF segment.
As previously mentioned the planned catalyst changeover plus the unexpected maintenance work at Lima resulted in $12 million of additional costs versus prior year.
As a result, both gross profit and EBITDA were negative during the quarter.
The good news is at the plant return to normal operations during the quarter and no additional costs are expected related to this maintenance work.
Now I'd like to review some important balance sheet work that we've recently completed please turn to slide 17.
To improve our debt maturity profile and better matched the currency of our earnings assets and liabilities in January we issued $500 million of unsecured euro denominated bonds at 2%.
We also finalized a new unsecured us credit facility, consisting of a 250 million dollar term loan a and the $600 million revolver.
We use these proceeds to retire approximately 766 million of higher rate debt. This month.
This move extends maturities and reduces our weighted average cost of debt as well as cash interest expense.
It also provides a natural hedge for our euro denominated balance sheet an income statement.
We expect this refinancing to result in approximately $18 million to $20 million of lower cash interest expense on an annual basis.
This euro bond issuance debut as an important step as it demonstrates new capital sourcing options for Ashland outside the U.S.
Please turn to slide 19, and I will now turn the call back over to gear mode for his closing comments government.
Thank you Kevin.
As we discussed in our last call. Our key objectives are to drive profitable growth driven by organic sales and adjusted EBITDA growth margin expansion and improved cash flow generation.
Please turn to slide 20, my priority is continuing to be to develop and articulate our strategy for our business and the company to improve our operating performance and to align and right size, our cost structures to the needs of our business and run as a best in class company for our size and profile.
And to maintain.
A disciplined capital allocation focus.
Most importantly, we want to move with a strong sense of urgency and and ensure that our actions result, and visible improvement momentum in our performance.
Please turn to slide 20.
Our near term focus is very clear.
First of all is to enable our business units. This that the core of driving fundamental improvement in our results if our business units our focus in performing well this will drive core value creation.
We are targeting to have them fully operational with their new strategies plans and structures by early fiscal third Q3.
We will drive cost improvement actions.
Are we it's important to note that our company has undergone significant portfolio changes for a long time, we recognize that the organization is a bit fatigue with change because of this we want to make sure that we move with urgency on defining our future structures and implementing the cost actions. We plan to take we will be act.
I mean on cost across four levels of the company. The first level is around or be use be used will drive setting their business models and improving their direct cost structures.
Second as the be use define their needs and service levels requirements. We will take action on corporate managed costs that are allocated to the business based on these new service levels.
Third we will ensure we havent place a best in class covered governance structures and costs in line with a $2 billion to $3 billion company of our profile.
It's also important to note that although we are smaller company now we do have some legacy costs from our history.
We will ensure that we have the appropriate cost structure to manage these legacy activities efficiency efficiently and effectively.
And lastly, we're going to focus on driving our operating performance, although the business units will drive the core operations. We do have some specific challenges we plan to spend more time.
One would be addressing revenue growth on a few challenge businesses on other area is about accelerating productivity initiatives.
And the last area is improving our working capital and getting opportunities to impact free cash flow.
Please turn to slide 22.
Because as I've outlined our focus for 2020 is very clear our number one priority is to take the necessary self help actions that will drive near term and long term performance improvement for our company, we will move with focus and a strong sense of urgency we.
We're still finalizing the financials for our new business, which will be critical for the work that lies ahead.
We already have a lot of issues, we need to address but there's still more work to define other actions, we need to take and dimension both their near term and long term impact as such we will not be providing guidance.
In terms of the outlook, we will provide the following insights.
Although there's still a lot of macro uncertainty based on current assumptions.
We expect market demand to start improving especially in the second half of the year.
We continue to make progress on new business development, and innovation, which will support our underlying business.
We expect pricing and raw material dynamics to stay balance.
Out of minimum we expect to see the 25 million dollar SG in a carryover improvement, but we will work to expand that impact throughout the year with new cost actions.
We will begin to act on some working capital improvement initiatives, especially in in on inventory.
This will liberate cash, but we still need to dimension the operating impact these actions may have.
For our Q2 call, we'll plan to present, the new business structures and give further color on our strategy and path forward.
Please turn to slide 24.
Although there is clearly room to improve our performance we are already a premier specialty materials company, we have an enviable portfolio of businesses focused on high quality markets with exciting growth opportunities, we have leadership positions in our core markets with strong and experienced teams customer relations.
Ships and innovation capabilities.
We already have a profitable and high margin portfolio and our businesses generate strong free cash flow. Our focus now is on making a good thing even better I want to thank all of you for your interest and support and I also want to thank give a very special thank you to everyone. It in the Ashland team your support and dedicate.
Patient is greatly appreciated note that together, we will be making Ashland, and even better company, where we can innovate with our customers and grow together.
Your workouts and is critical to our future. So thank you very much.
Operator, let's move to acuity.
Thank you as a reminder to ask your question you wanted to press Star one on your telephone to withdraw your question. Please press the pound key please limit yourself today to one question and one follow up once again star one to ask a question.
First question comes from the line of Christopher Parkinson with Credit Suisse. Your line is open.
Great. Thank you.
Gamma we understand you've only been on the grounds for a few weeks, but we also know you're familiar with some is platforms for your past experiences just given investor concerns regarding systematic systematic business loss due to some pharmakon weakness.
Can you give us a quick review of your perspectives.
On the longer term competitive positioning of the anti portfolio by end market, but particularly in the life Sciences and PC in each platforms.
Okay, Yes, I would highlight two two big items in terms of some of the events that happened last year.
Inter and I think we talked about a little bit in the last call and first is yes, we had some business impact in our portfolio, but we did not.
Lose share.
To competition, it's not like we're not playing our game, we lost business because some of our customers made reformulations and took some of the business internally. So if you look at actually the core businesses across the portfolio. We are still in a very good positions. There is the normal puts and takes of share share wins share loss.
Does that happen, we don't go into that level of detail on ongoing basis, but I'm pretty confident if that if you look at some of our core business in pharma in coatings and in adhesives, we're doing very well and a lot of our traditional construction.
And other such such segments.
So I am not as concerned that theres something systematically broken now.
The oral care, we are addressing it's now capacity, it's done we actually versus our plans weve had a better quarter.
Than we had planned through innovation new products customers are taking some of our newer newer technology. So so other teams now thats one of the areas that I want the new business units and leadership teams to focus and really make sure that we're getting more traction I think we can get much more leverage out of our innovation investments that we're making that I don't think.
We are where we need to be in those.
In those areas.
On the farm can side I. This is one of the areas that I need to spend more time, we have an issue there I mean theres no no doubt this is a more structural and I'd rather comment that in the next calls as we move forward but.
Clearly we have some good businesses that are stable, we look at our active ingredients business the margins can improve but but stable business that we can we can grow in some of our fixative business in some of our custom manufacturing obviously we've had.
Some bigger challenges.
Theres a lot of great technology, there, especially if you look at our Voca.
Business to grow into taken into new directions, but this is going to take a period of time. So this is definitely an area, where we will spend a little bit more time and effort.
Okay, and just as a corollary of that question for then those investors that concerned about the long term growth profile. The anti platform. What do you believe or the overall macro key semantic topline drivers, we should be monitoring monitoring and what's your general thought process regarding how long it will take senior management the new business.
Unit heads to better align the company's cost structure with that outlook. Thank you.
I think on the cost and organization.
The expectation is that we'll move quickly on those so within this year I'd like to see most of those things in place.
I think the ones that youre going to have probably it.
A broader timeline some things we can do now some things it'll take a year some things that might take a little bit longer is more on the corporate side, we can structural things we can do.
Certain footprint changes or even if we want to change our t. strategy think things are those nature take a little bit more time, so that area I think youre going to have a broader spectrum, but definitely on the business side. The cost part will be be very critical I think we should be getting much more benefit on the on the revenue side.
On focus and Thats been the experience that I've had with other businesses that we've gone through this transformation.
Obviously the innovation. One is is the part that is a longer lead time and that's why we're moving with urged the sooner we can get to it the better the good news there is that we actually do have really great capabilities every lab facility. They go the projects that were working on I think it's about getting more.
Traction.
But theres a lot of exciting things that are going on that are probably not as visible to the outside and thats. One of the things that we want to show our investors and our customers on the things that we're doing these are things like innovation around sustainability about biodegradable products, it's about natural products.
New new.
Pharma products to help our customers improve productivity in the manufacturing of their pills expanding into markets on bio and Injectables.
In the pharma area in coatings, we have a real premier group and rheology.
I have competed against them for a long time, they're expanding into other technologies to expand the portfolio. So that theres a lot of exciting things. That's why I'm very excited the sooner we can get through some of these cost actions and restructuring the sooner we can get to the real exciting stuff, which is really about innovation and.
And organic growth.
Thank you very much.
Thank you and our following question comes from John Mcnulty with BMO capital markets. Your line is open.
Yes, thanks for taking my question.
With regard you had indicated there there was some opportunities around the working capital side I guess can you give us some preliminary thoughts on where you think you can actually make the improvements there and if you can quantify it at all.
Well, that's the part of quantifying is why we're not being specific on on some targets yet, but if you just look at our balance sheet and the inventory levels relative to others. Other companies, we have a high inventory levels.
And especially if you look and some are bigger asset plants, that's where we want to focus on it's not an insignificant amount now the issue is what actions do we take commercially moving the material. If we if it impacts running our plants. That's the balance of things that we want to do and this is something I need the new business.
It's really to own and drive so that's part of the the timeline issues that we need to work through.
Got it and then just as as a follow up so when you think about the key issues that have maybe that it may be caused the company to struggle a little bit in certain areas. Do you think it's a lack of focus or do you think it's a lack of investment and if it's on the investment side how much how much do you think you have to put into actually kind of revitalize the platform or is it really.
Just getting the right people in the right places.
I don't think it's an investment question. If you look at our R&D investments the levels that we have if you look at our the capital investments we're doing our plants are well positioned we're adding capacity as needed.
So thats not the issue I think it is an issue of focus I mean.
It's it's very interesting even before we put all the business in place just changing how we're looking at our income statements and balance sheets by businesses and aligning them. We have smart people that are involved in this businesses. They are seeing the issues and they're already moving on it we're not waiting on on some of these things.
I think the biggest disconnect and when we say focus it's not that people weren't doing their thing is that.
When you have these functional organizations.
Initially business specialty business like these where everything is actually very interconnected our sales our innovation our manufacturing decisions. These are big customers that were working with.
It's much more intimate if you're in the commercial side and you're just looking at revenue and contribution margin.
You will you know you tried to make the right decisions based on those things, but what happens when you generate business that short term inc., we increase the sales and contribution margin, but it cost you.
A lot of extra costs to deliver that and you make no money on on those transactions with the group's don't have that full view of the PNM and thats really the fundamental change.
If you go down it's not that were not focus with marketing people that don't know there's their space or that we have.
R&D people that don't know their technology or the customer interaction, it's connecting all that in a much more one focused one agenda that were attempting to do and frankly, we're already seeing benefits of just changing the narrative internally and and that'll help us bring bring more traction.
Great. Thanks, very much for the color.
Thanks.
Thank you enter following question comes on the line of David.
With Deutsche Bank. Your line is open.
Thank you good morning.
Jim I know morning, putting out good morning targets for the prior team had a longer term margin target for the.
Especially greetings business of 25% to 27%.
Thats still reasonable or is that even to low perhaps the new longer term thinking of the potential of Ashland.
I think as well as we said that in the last call I mean, we're not changing our targets that's still the target I think that there's opportunities to do more than that.
Especially as we look at.
Each of the business units. This is a lot of the discussion of cost as has been really around.
Our corporate structures and all that actually it's really about the business model service levels things that we want to do differently across the different business units. So I think as was the case with with the prior company I was in the bigger surprise really came out of those activities.
Well that were much more intimate to the business and that that provided some upside momentum both in terms of costs and in terms of mix improvement.
Very good interest on the innovation engine and pipeline here ammo when when would you hope that we will begin to really impacted topline is.
A few quarters is a longer than that perhaps what's your timeline for that.
We are.
Yes.
Trying now to.
To support the key initiatives. So we're identifying which are the major projects major initiatives, how do we focus on them to accelerate them.
So that we can increase the level of impact and I think the other issue is offer the business units.
It's.
Not surprising I mean for somebody that look at this across many companies just aligning now.
Our incentive comp and our actions two business units.
I can guarantee you that there is going to be a different sense of urgency for each of those businesses because the majority of their line of sight are there going to be rewarded for it what they do matters and that just creates some very positive sense of urgency across the organization that we want to foster and develop so I think.
We can move much faster I think the the things that will take longer are more as we step back and this is something that all work with our CTO on more of the portfolio is are there is some changes that we want to shift into bigger activities are we doing we've got a lot of great projects on sustainability, where can we do more.
On some of these areas, especially in the consumer side, where this is a business imperative as we move forward.
So so theres a lot of exciting things out I think we have a lot of options because of the core capabilities. We have so that puts us in a good position to choose we're not having to start things from scratch.
This point in time.
Thank you.
Thank you are following question comes from the line of.
Mike.
With Wells Fargo. Your line is now open.
Hey, Hey, guys I'll come back camera.
And just curious I know you've got a lot of things going going on in terms of improving the company but.
Linzer reasonable timeframe to start to see EBITDA growth for Ashland.
CGC. Some this year second half for or is it really at 2021 event.
So so I think to two things that I mean.
Three points at only one is.
We've been focused really on all these things that happened last year, our we stabilize it so that we're not getting any more negative surprises and that this quarter, we've seen that and as the business teams go I might level of confidence increases because we're going to have very focused teams addressing those issues.
I think that that.
The second issues going to be just general market demand that the.
Theres still a lot of uncertainty, but all indications are most of the markets are starting to improve and especially in the second half that will help us drive EBITDA growth.
But the most important part and we don't control that will be the market.
I think is really our self help actions and it's on both the prior question and on the discussion of our cost actions that we need to take.
Making.
Getting the businesses focused so that can drive their portfolio with with what I would call the exciting.
EBITDA growth drivers, which is really the revenue.
And the innovation mix improvement drivers that they have and they're already developing there already identifying things that they can do.
And second is obviously on the cost side of things the actions that when you take so those health self help actions. So if you look at the timeline.
During the second half of the years, where we're going to see the biggest benefit what we've been trying to do as you've seen now is to show.
I know there has been a lot of.
Concern of.
Our has the company when moving to slow on some things and what we want to make sure as if we can show at yet on the financial results that we are showing it externally that we're taking actions that we are moving with a high level of urgency.
In all these activities. So next quarter you are going to see hear more about the actions. We're taking I think we will see some benefits on costs and on revenue, but the bulk of that will come in the second half of the year.
Got it and then in order to get to that mid Twentys type of EBITDA margin total company.
It is getting there primarily from your your own actions or do you need a little bit of growth and sort of organic growth to get there.
I'd like to target through our self help actions, but obviously organic growth is the bigger driver what I don't want to use is organic growth.
As a reason not to do things I think right now, it's really about our self help actions and moving with urgency.
I know I don't think it's healthy for the organization given our history.
To six months eight months from now a year from now to be talking about this again, let's get it behind US, let's move forward, it's not going to be easy.
But but it's something we need to do and then we can focus on more of the positive story moving forward. So self help is at the top of our list.
Of of drivers for our performance.
Got it thank you.
Okay.
Thank you and our next question comes from the line of Laurence Alexander with Jefferies. Your line is open.
Hi, Good morning is that Kevin I think on for Laurence Alexander.
They kept my first question.
So my first question if you do the end markets.
You mentioned that there would likely be it.
Section likely coming into second half in 2020, and I'm just curious to know if you've already seen can those inflections happen.
So which specific end markets.
Yes, I think we're this is always sort of our seasonal.
Low if you look at it and Thats a normal type of the year.
But we are seeing already indications if you look at.
As I said pharma had a tough comp, but there was a lot of actions in Q1 from customers around inventory things that they did.
And we're starting to see the pickup of that we saw a few in personal care a few customers delay orders just because it for as an example in the in the Sun care area. It was a softer year for our customers last year. So there was some inventory impact, but we're seeing those orders already coming in now and for coatings.
I think the indication is more for us seasonally it's more of the back half of the year.
And indications is that that'll start picking up architectural coatings are the big big driver for us and Thats more of a seasonal a seasonal driver. We also saw some nice momentum in oral care and set the set the business losses. Aside there were still working through we have some new product introduction there that that drove drove some.
Topline and bottom line growth for that business.
Okay, great. Thanks, James will helpful. I guess my second question has to do with all your restructuring effort you talked about just curious to know.
Just a relationship between different realigning the different segments versus cost cutting and Rightsizing I guess.
She most of the cost cutting be done in 2020, and then sort of realigning kind of still working working progress.
So so we are already realigning the businesses I think the essence, what once once we define these businesses as we've laid out to you.
We are building the PNM was each leader now is looking at it and as as no surprise, we have a very diverse portfolio of businesses are all nice healthy, but they're not all the same some are much healthier much nicer than others in terms of margins potentials, but the cost structures are also very different. So you you might have some that have very high.
Gross profit margins, but higher R&D costs.
Others that are.
Good gross profit, but not as high and lower R&D more productivity driven so each business now needs to align their structure to the PNM sales in the past you know a lot of these the support costs have been and we try to lined them, but they have been much more across the company everybody gets there there.
Charge.
We're now enabling the businesses to say, Hey, I don't need that service I don't know thats not important.
I want to reduce it or increase it in some cases, they might want more services in certain area, we were going to give them that that freedom, but we would like to get most of that done. This year I think on the business side. These are not things that we need to delay. This about structure. This is about how we focus I think the structural size it take time.
Our some of those more systems process related activities.
And that's probably more on the on the corporate corporate side.
Okay, great. Thank you.
Thank you and your next question comes from John Roberts.
Your line is open.
Thank you first the manufacturing question that I have an R&D question, but we'll be industrial segment manufacture cellulosics for the consumer segment. So that most of the manufacturing assets are going to end up over in industrial and you chose not to merge the BD.
Or intermediate and softens business into industrial I guess, you could have done that it's kind of small, but maybe talk about how the manufacturing is going to work in the new organization.
Okay. Yes. So so we are aligning who are we look at who are the big volume drivers of the assets in who are the best owners in terms of taking the full TNL and management accountability. So all of the of the assets, it's going to vary by business. The Cellulosics in general tend to be also will be.
Falling into the specialty additives business as they are the bigger volume.
And they need to really make sure that we're running the assets that if there is capacity that they are they're the ones that need to fill it out.
The other pharma.
The personal care you can't sell out those assets I mean, those our specialty varied nishi.
Products, and it's really more about innovation and getting into customer formulation. So theyre going on that in India settling makes its going to be more on the consumer side.
There is a bigger driver on that and then each one has their own assets adhesives.
As an example is a big driver of a lot of our acrylics are a lot of our polyurethanes, but as specialty additives expands their portfolio of new rheology modifiers new products.
There is going to be that enter into relationship Ivan.
If you look at companies and business that I've been involved in in the past this is running coatings and but prior prior company. We ran the network. It's very efficient you have one owner you can make sure that you're running things very efficiently. The part that you need to work with your other businesses and make sure that demand planning.
Is robust and there is a good dialogue of understanding.
The their needs so that we can service them appropriately.
And then R&D as a percent of sales just under 3% for all of the company do you have in mind to target for the consumer specialty segment.
For our I mean, each one of them are going to have now drive their agenda. So I don't want to speak for them.
This is about empowering them.
To on this so I don't want to.
Put put put boundaries on what they're going to do but clearly we have different businesses and they're going to spend differently and it's not just the dollar spend the questions that were asking them is where are you investing your your money.
When we look at our portfolio we're looking at.
New product development, which are some really big new platforms that were investing in what are you investing in and process technology productivity. So some businesses should be investing more on productivity as an example, other should be more on.
New products as they have a robust portfolio others, Hey, we should be looking at some of these longer term initiatives and developing new platforms.
In the consumer segment, a great example is biodegradable.
That's one area that we're making a lot of progress, but we need to do we'd like to do more.
One area that we've done very very well and now we're trying to get more products out the door is the bio functional.
That part of our business had been very good so not one size fits all and each business will will drive their agenda.
Thank you.
Thank you. Our next question comes from the line of Jeff. This is Scott with JP Morgan Your line is open.
Thanks very much.
Earlier in the coal.
Karen you you spoke of there being structural issues at farm income what's happened structural issue.
And how did it arrives.
Well.
I think it's clear to say that we know we have been we've lost some some so important pieces of business and it's not across the board. If you look at the core.
The three buckets of activities within pharma can one of them of OCA, we've moved to household.
We've had issues there, but that technology actually they have a robust roadmap of things that they can do taking that technology and other areas and they're working and so working with them to make sure until we are able to leverage that extraction and and purification technologies that we have.
In that area is is good thing, but it is a change so thats a structural change that we that they're doing.
In the active ingredients I think that part is okay. Its margins could be higher that's we need to improve we're bringing some new products, but how do we leverage that in our food additives business in a more more systematic way we need to restructure how we do things.
Part of that is structural is you know the custom manufacturing type activities that we had pharma Ken that has been hit that's where most of the assets are it's a more of a us based business and we need to address that so far MCAM.
To be very direct relative to our expectations.
How it's turned out has been very different and we need to address that in a more specific way so I need a little bit more time to work with the team on them.
We're pharma can volumes down.
20% in the quarter.
Actually more than that.
The volume were significant.
GAAP for us in terms of the overall company if you take out pharma Cam.
Thank you would see abreast of the businesses have been pretty stable and you wouldn't really we wouldn't have be having a lot of these conversations and in terms of the overall performance at this point.
So the other businesses inside of specialty ingredients for maybe flat to down and large decrement in revenues really cannot PHARMAQ.
So so yes, if you look at specialty additives.
And talking in terms of some of the business as a way we've been talking in the in the future.
Coatings was definitely a slightly down just and end market demand, but we know its a.
Business that we have very strong positions and I think the part that probably we didn't spike out as much is we had nanjing.
That we talked about at last call that did have some costs in not so much revenue but costs.
In the quarter and then last year, we did close down a CMC plant in China that impacted revenue, but not.
Not so much profit. So if you combine the two it looks like the business is down but it's two different things. So I would say coatings, it's much more market driven at this point in time, if you look at some of the big customers here that have merged in some of their activities.
Just seasonality around the world with weather and things like that so we're I'm not that concern on that part of the portfolio.
And then lastly does the Corona virus make any difference to Europe business does that affect.
No no supplies of raw materials or does it affect demand can you see any alteration in your business patterns in any way from the onset of the virus.
I think you'd look at in several different areas. One is our business in China and like everybody else I mean, if demand gets impacted and.
Obviously is an issue obviously now just movement of people things is impacting operations.
We don't really export a lot from there. So we I don't expect that that's going to be a big issue, but we're monitoring our customers on at the end of the day I think this is much more of a macro market issue.
Very different from other other industries that are have structural issues around supply or a customer bases. There Ross that's not so much the case.
Okay, great. Thank you so much.
Okay.
Thank you. Our next question from Jim Sheehan with Suntrust Robinson Your line is open.
Thank you could you please give us a sense for.
Special ingredients organic growth rate, excluding farm Occam I said I think you just said it was relatively stable, but excluding the farm Mccann business loss.
Where's your growth rate in organic growth rate better or worse in this quarter relative to the prior quarter.
No. It we were down versus the prior quarter. If you remember the we have the oral oral care was was an issue.
And then just general demand pharma as an example, we were down.
But it's really the comp that was a very tough on on the other ones I would say a few percentage <unk> percent or two and it's more macro driven than anything else.
Okay and could you. Please quantify the proportion of EBITDA that represents the more challenge structural portion of of.
Farm MCAM or any other way to estimate the proportion of that business that you think needs attention.
Well I guess will outline that as we rollout the new businesses and and finance, but I would say you know it's not an insignificant.
Now.
To be very direct I think if you look our voca business was sizable so some of the impacts.
Having significant.
Think towards the back end of the year. Some of these new developments will will come in an offset so thats good news.
On the nutrition side of.
A farm income that's going to take a little bit more time time at work, but it's it's not an insignificant amount of revenue or.
Or EBITDA.
Thank you very much.
Thank you and ladies and gentlemen, once again that is start one to ask a question.
Our next question comes from Mike Harrison with Seaport Global Securities. Your line is open.
Hi, good morning.
Hey, Mike Guillermo you made a comment that the organization was somewhat strategic change and obviously there is that.
A lot of change from a portfolio standpoint, I think maybe you know some changes while at the management level or strategic standpoint.
But can you give a little bit more detail on the how that's factoring into your approach to.
The restructuring and reorganization.
How do you how do you overcome that fatigue and churn it any too.
An organization that is more energized about the path forward.
Okay I think the first action that we're taking is focusing on the business and I used the example of.
In airplanes when when there's an emergency the got the air mass comes down and they say put it on first and then help others in our case put it on the business.
And they will help us so so energizing our strengths, which is really strong.
Business capabilities, and enabling that has to be at the forefront of what we do and how we're going to move forward in terms of driving performance and that also generates excitement because that's where innovation thats were engagement with customers, so making that much more visible.
And enriching because I think as people get the freedom to take action, they're the ones that are going to drive the actions, we're not going to do a top down realignment of businesses. It's the business teams. Their leadership groups are really going to define where we go.
Thats difficult work, but it is also very energizing because there they are able to see where they want to go they are able to see why they're doing things in a much more clear line of sight way and that that generates.
Excitement and clarity and the majority of the reality is the majority of organization things aren't going to change, it's really more to the to the better not to the cost reduction side I think on the other parts is.
We're just going to be very honest and direct on on what we need to do and.
That's not not easy not not.
Huh.
The things that people want to do and wake up in the morning, but it's something that we need to do for the better good of the company and the future.
And we're just going to be honest and direct about it and make sure that we're treating everybody in a fair way. The other part is that this is not about just cutting costs on people on its about driving simplicity.
And right sizing to accompany our size.
The hardest part when you are moving from.
8 billion dollar company to five to three is that you're not starting with a blank piece of paper you are sort of evolving what you have and that is.
Very difficult emotionally more hard I think what we want to try to do is.
Where are we today, what do we need and start with that blank piece of paper and then then connect that too.
But I need to have these discussions internally with our teams I don't think it would be appropriate to go into details with.
The external world without giving the benefit of the discussion and communications internally, so we need a little bit more time.
To to really give more details on that area.
Okay understood. That's good that's good color on the my other questions on the coatings business you mentioned down.
Modestly and it sounds like that was related more to a market weakness.
Just wanted to get your sense, if theres any inventory de stocking.
That happened during the quarter are still is yet to come.
Do you feel like Theres been any any de formulation or any any other share movement going on.
Just as we head into this seasonal period of potentially rebuilding inventories I think a lot of the coatings guys, you're going to talk about relatively easy comps related to weather and so I just wanted to get a sense of how your view your position in that market.
Heading into the spring season. Thanks.
Yes, no we're very well position I mean, if you look at.
Especially the Realogys side, but also the other additives, but in reality clearly Ashland is.
As a strong position in Cellulosics Aqua flow also extremely well positioned for some of the higher end paints.
And they're doing more I think this is an area that we have.
I think I mentioned last call our capabilities are higher than the portfolio. We have we can do more and thats. What the team is doing trying to expand the number of products that we have two to bring to the market. So as a market improves we should see this business to very well.
Thanks very much.
Thank you.
Thank you.
And at this time not showing any further questions.
Good.
Okay well.
Thank you all for your interest I'm really looking forward to seeing all of you in the coming weeks.
And I. Thank you all for your support and again to everybody from National team is listening. Thank you for for all your help so looking forward to senior.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.