Q3 2020 Ashland Global Holdings Inc. Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the Ashland Global Holdings Inc. third quarter 2020 earnings Conference call.
Tom All participants are in listen only mode.
Just because presentation there'd be a question and answer session. Its ask a question. During this session meet the press star one of your telephone.
Please be advised today's conference is being recorded if required you further assistance. Please press star Zero I would note down the conference over to your Speaker today second <unk> director of Investor Relations. Please go ahead Sir.
Thank you Chris.
Good morning, everyone and welcome to Ashland third quarter fiscal 2020 earnings conference call and webcast. My name is Seth Mrozek Director 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 June Thirtyth 2020 at approximately five PM Eastern time yesterday July 28.
The news release issued last night was furnished to the FCC in a form 8-K.
During this morning's call we will reference slides that are currently being webcast on our website Ashland dotcom 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 a 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 of Ashland on an adjusted basis, which are non-GAAP financial measures.
We will refer to these measures to adjusted 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 or superior to financial measures calculated in accordance with gap.
The most directly comparable GAAP measure as well as reconciliations of the non-GAAP measures to those GAAP measures are available on our website and the appendix of today's slide presentation.
Please turn to slide three.
Gamma will begin the call. This morning, with an overview of Ashland's results in the fiscal third quarter.
Next Kevin will provide a more detailed review of financial results for the quarter.
And finally gamma will close with key priorities and planning in the current economic environment. In addition to providing his thoughts on important next steps.
We will then open the line for questions.
Now please turn to slide five and I will turn the call over to Guillermo for his opening comments Guillermo.
Thank you Seth and good morning to everyone before I begin I'd like to thank you for your participation. This morning, I hope that everyone safe and healthy in these unprecedented times.
Since the emergence of the Corona virus in China in January the Ashland team has worked tirelessly to address the impact of the pandemic first and foremost. This has meant protecting the health and safety of our employees second we've continued to supply our customers.
And the critical industries, we serve.
And third we've worked to assure that Ashland is well positioned even in the event of a prolonged impact from the pandemic.
Despite all the challenges presented over the last few months, we have maintained a strong focus on advancing our strategic initiatives to restructure Ashland.
We have heightened our sense of urgency in executing our transformation as it is doing more than just positioning us for future growth and performance. It's also helping us navigate better through this cobot 19 environment.
Operationalize, our new business unit model and the teams are working to improve performance across the portfolio.
The teams have also refreshed.
With respect their respective strategies in order to best serve our customers and profitably grow our businesses.
And we're continuing to drive our self help self help actions to improve ashland's cost structure performance and cash generation.
Please turn to slide six.
In summary, Q3 results demonstrate the value of our leadership position.
In high quality end markets and the importance of the actions we are taking internally.
Our consumer businesses performed particularly well.
Life Science demand continues to hold up across pharma Nutraceuticals and nutrition.
Nutraceutical sales continued to improve with a strong June performance as new business has started to close our share loss impact from prior year.
Overall personal care and household also performed well, but experienced some variation across segments.
The industrial businesses continued to be impacted by Copel.
By the cope at 19 pandemic.
However, given the diverse industries, we serve we have seen significant variation across markets.
As economies have started to reopen.
And industries restart operations, we are seeing strengthening demand.
On the self-help side, we continued to make significant progress on driving our business focus restructuring costs and improving margins. We continue to take actions to reduce cost working capital in capital spending in order to conserve cash and maintain flexibility in this environment.
I would like to recognize the entire Ashland team for their focus and commitment to our success. During these challenging times, it's a real privilege to be part of this team.
Let me now pass the call over to Kevin to review, our Q3 results in more detail Kevin.
Thank you guys and good morning, everyone. Please turn to slide eight.
Total Ashland sales in the quarter were $574 million down 10% from a year ago period due to lower sales in all three business groups.
Negative currency impact represented one point of this decline.
SGN a at R&D costs again declined significantly in the quarter as we realize the positive impact of the cost reduction program and new cost actions that we've taken.
It should also be noted the travel and entertainment and incentive compensation expense were lower due to the Cove at 19 pandemic.
In total Ashland's adjusted EBITDA was $143 million, a 2% increase over the prior year quarter.
Adjusted EPS, excluding acquisition amortization was $1.12 per share up 8% from the prior year.
As a reminder, adjusted EPS, excluding acquisition amortization is a new financial metric, we introduced last quarter and we'll continue reporting in the future.
Now, let's review the results of each of our three business groups. Please turn to slide nine.
I'll begin with consumer specialties.
Demand for our consumer ingredients was resilient throughout the quarter and we demonstrated strong growth in pharmaceutical excipients bio functional ingredients and additives for hand sanitizer.
Sales were $344 million down 1% from the prior year quarter.
The impact of unfavorable currency represented a negative 1% impact.
The impact of business losses last year, and pharma, Kim and oral care represented an additional three percentage points of decline.
Excluding the pharma Chem, an oral care share losses, and currency impact life Sciences sales were up 4% and personal care and household sales were down 1% both over prior year.
Excluding the known business losses, the life Sciences, and personal care to also businesses performed well in the quarter.
Price mix was favorable during the quarter, which drove improvement in gross profit margin.
Reduce our expenses also contributed to growth in adjusted EBITDA and adjusted EBITDA margins.
Senses improved to 29% while in personal care and household adjusted EBITDA margin remained consistent at 23% in total consumer specialties, adjusted EBITDA margin improved by 210 basis points to 26.2%.
Please turn to slide 10.
Turning to industrial specialties sales were $205 million in the quarter down 23% versus the prior year quarter.
Sales for the performance adhesives business units declined by 20% while sales for the specialty additives business unit declined by 24%.
Much of this decline was due to reduced demand for industrial products during the pandemic related lockdowns across the globe.
Price mix was favorable in both specialty additive and performance of users, which drove strong improvement in gross margin.
Despite the sales declines disciplined cost control led to expanded adjusted EBITDA margins adjusted EBITDA margin performance adhesives improved to 24% while in specialty additives adjusted EBITDA margin improved to 27%.
In total the industrial specialties, adjusted EBITDA margin improved by 290 basis points to 26.3%.
Please turn to slide 11.
Intermediate insolvent sales were $37 million down 10% from a year ago period, primarily reflecting lower pricing.
Intercompany sales of BD owed to consumer specialties totaled $12 million in the June quarter. These sales are recorded that market pricing and are eliminated in the consolidation of total Ashland sales.
Adjusted EBITDA of $11 million was consistent with the prior year.
Please turn to slide 12.
On Monday of this week, we announced the signing of a definitive agreements to sell our Malaya kept hydride business.
The purchase price was $100 million and we expect net proceeds of approximately 85 to 90 million after taxes and deal related expenses.
This business had previously been excluded from the sale of composites at our moral video plant last year.
Results from the BLAIC business.
As has been reported as discontinued operations. Therefore, the transaction does not impact our earnings from continuing operations.
We expect the close the deal.
Before the end of the calendar year.
We're pleased with the outcome reach for them Lake business and note that the receipt of the net proceeds will serve to further strengthen our balance sheet and net leverage position.
With that I'll now turn the call back over to gear mode to address our current priorities and outlook Gary.
Thank you Kevin Please turn to slide 14.
We continue to make significant progress in our transformation changing our business model restructuring costs and improving ashland's profitability.
We completed the business restructuring and the operating model changes ongoing work is now focused on dry driving continuous improvement driving focus ownership and accountability upgrading our management systems and processes and developing our teams.
Our self help initiatives remain on track, we continue to expect to achieve over $40 million of annual run rate of cost savings by the end of September.
For savings above the 40 million, we plan to retain optionality to redeploy the savings to support our growth initiatives or if needed respond to unexpected developments.
To drive additional margin improvement and improve our competitiveness. We have started to work to drive productivity and cost reductions on the cost of goods sold or Cogs side of our business. We will update you as our plans progress.
We're also continuing to act to improve our inventory position to near term inventory management initiatives.
Our plan is to take our more significant actions in Q4 to reduce inventory levels. Therefore, we now expect a fixed cost absorption impact of $20 million to $30 million in the September quarter.
These initiatives will help generate additional cash in Q4 and the beginning of the next fiscal year.
Our intent is to use this transformation as a foundation on which to grow and improve the quality of our company.
In this journey, we're also advancing our planning and strategic next steps.
Please turn to slide 15.
As we look at Ashland, our core business is centered around additives for specialty applications.
This is a unique high quality space, we're innovation is critical to bringing solutions to our customers.
In general and it does tend to be low cost and use but high value in U.S.
We gain scale by leveraging these additives across multiple businesses.
We want to be a premier player in this space and our intention is to grow these businesses and expand our additive portfolio.
Although it's a subset of expanding additives, we will need to build our biotech capabilities.
We will need to be purposeful in building and leveraging these capabilities, which will mostly impact our consumer side of our portfolio.
Asia will continue to be a center growth in our markets. We will focus on accelerating our growth in Asia, and we will continue to invest to expand our capabilities in this region.
As I said specialty additive value is created by understanding are your customers needs and helping them develop new solutions through innovation.
Although customer focus and innovation already part of our DNA, we need to take it to a higher level, we will continue to build where the passion our culture around customer focus and innovation.
Technology, and new digital capabilities continue to transform our world, we will accelerate our digital modernization not only upgrading key operating systems, while building new capabilities around plant operations R&D and marketing.
And lastly, we will remain disciplined around capital allocation and our portfolio management, ensuring alignment with our strategy and our expected operating performance.
We recognize some of these areas will take time to start to impact our performance, but our journey has already started the sooner we make progress the sooner we'll see impact.
Please turn to slide 16.
Although we're excited about the progress we've made and the opportunities that lie ahead near term, we need to stay focus on navigating through the difficult and uncertain times created by Cobot 19.
What have we seen so far in this crisis.
First our portfolio has behave as it should more resilient.
This has been led by our consumer segment.
But our industrial segment has also seen greater impact, but the impact has been mitigated by the diversity of the segments, we serve and some of the more consumer driven segments us are holding up better than expected things that go into packaging on things like DIY coatings.
As the economy's opened and industries restart operation, we have seen some sequential improvement in demand unless the industrys go back to into a shutdown mode. The trough seems to have been in the April may timeframe.
Our self help actions have been important contributors to our performance. These are in our control and we see opportunity to do more in this area.
And we started to see some mitigation of our prior year ship share loss oral care is growing and we've started to capture new business in nutraceuticals.
However.
More work is needed to address some of the of OCA gaps and that is still work in progress.
Given this is a pandemic driven crisis uncertainty continues and it remains very difficult to forecast the future. As a result, we continue to focus on scenario planning to prepare for changes and ensure we can respond quickly to both threats and opportunities rather than predicting the.
Future.
Plan and sure corporate financial stability identified threats and opportunities and build resilience and agility.
As we look ahead the general assumption is that a longer term cobot 19 solution will not materialize until mid to late 2021.
Means uncertainty on developments on how Gov on developments and how governments in society respond to these developments.
In this environment, we assume that.
Although we could see very.
Different end market specific changes, we do not expect our overall portfolio to behave differently.
The highest risk for our business continues to come from supply chain and operational disruptions across the value chain impacting our suppliers us or our customers.
Government stimulus continues to reduce downside risk.
And self help actions continue to be critical to both strengthening our company in this time of crisis as well as repositioning us for the future you will stay focus on executing our plans with urgency.
Please turn to slide 17.
Given the high levels of uncertainty, we will not provide guidance for Q4 or fiscal year 20.
In the in the context of our scenario planning, let me provide you some commentary on our forward looking insights.
We expect no significant change in our consumer macro trends.
While we are working through demand challenges in hair styling and Sun care products. The remainder of the consumer portfolio has remained resilient.
You will however need to continue to work through challenges in our Voca business.
On the industrial side, if the economy continues to open and industries continue to restart operations the demand improvement we've seen should sustain.
However, future sequential month to month improvement for many segments are still difficult to forecast this particularly true for coatings contractors, the construction and the automotive manufacturing segments.
As we previously mentioned, we do expect 20 to 30 million of fixed cost absorption impact in Q4, as we work to rightsize our inventory levels.
We expect to continue to benefit from the ongoing sard cost reduction actions, we're taking.
And we expect to realize incremental benefit from lower raw material prices, but price raw material charges changes are likely to remain balanced.
To be clear, we remain keenly focused on continuing to demonstrate improvement momentum.
The businesses despite the challenges presented by the Coven 19 pandemic.
Please turn to slide 18.
Im confident that Ashland is well positioned for these uncertain times, we have strong foundation for success built on the high value businesses with leading market positions in critical industries with deep customer relationships.
We also have a structure that is optimized to enhance opportunities available to each of our focus business units.
We are pursuing aggressive self help actions to reduce working capital capital spending and operating costs to improve profitability and also generate cash.
And we maintain strong balance sheet with more than $1 billion of favorable cash and liquidity a portfolio of written with resilient cash flow and capital structure that provides ample flexibility in the most stress scenarios.
Finally, we're committed to maintaining our dividend even in these uncertain times.
Please turn to slide 20 in closing I once once again, thank the Ashland team for their leadership and proactive participation in these uncertain in this uncertain environment, we're fortunate to be a premier specialty materials company with a high quality businesses that have leadership position in defense.
Give markets.
I am pleased by the resilience demonstrated by our people and businesses and look forward to the opportunities that lie ahead.
Thank you operator, let's open.
For Q in April.
Thank you.
A reminder, ladies and gentlemen to ask a question really depressed from one of your telephone.
Joe Your question. Please press the pound key.
Please standby kuni roster.
Our first question comes from a line of John the multi with BMO capital markets. Your line is now open.
Yes, Thanks for taking my question and congratulations on another solid performance in a in a tough environment.
I guess a couple of questions just around the margin front. So you had to target of 25% EBITDA margins and you can you pretty much hit them actually this quarter.
But it merely look theres a lot of puts and takes and you know and there are some temporary trends that are helping I would imagine and some that are permanent. So I guess can you help us to parse out how much of what you've kind of delivered this quarter is kind of a sustainable level when and how much maybe we should think there may be some some give back at some point in the next quarter too.
Right, Yes, I think John as you.
Pointed out I think theres two two lines of impact one are those driven by actions that we're taking.
And there are clearly having impact where.
The mix improvement has been part of the contribution.
We have.
Been focusing on higher parts of a higher quality parts of our portfolio pruning already started doing some pruning of lower end businesses.
Managing our costs are contributing the run rates are starting to pick up we should hit that by the end of the quarter.
So theres a lot of actions that that have helped US. There is also some that we need to recognize our.
You know that Kobin related.
In terms of travel so there are some lower costs that all also impacting so what I look at as we look at this transformation is the trend line, moving where we're going and it is.
We're going to go we'll have some some quarter to quarter ups and downs in that trajectory just based on some of the situational things.
Like the travel and all that is hope hopefully once the the covert situation improves we will see things like TNT and other costs and increased but that should come with higher revenue as the economies improve so.
We feel a significant part is really fundamental and driven by the actions that we're taking.
For next year, the part that we still haven't seen pool impact is as we start looking at our cost of goods sold side.
That's helpful. I, maybe can you give us some color as to how you're thinking about the opportunities that they are whether it's whether its.
The size of them or even just some buckets in terms of where where the improvements maybe on the cost of goods side because it is something you've been you've been pretty excited about for the last quarter. So.
We said to get to that toward target of over 25%.
EBITDA margins, we'd need to get around 400 basis points. So.
On the sorry.
Sorry in R&D side, I think we already have half of that so are the minimum target would be to hit the other half out of of cost that's a much bigger.
Bucket of spending.
And there are lot of opportunities there. So it's it's how we structure ourselves how we want to plans looking or footprints.
Our network of warehousing logistics raw material. So there's a lot of different different areas that we are working on and we're going to take the same approach. We did with Saar just start doing it and we'll report as we go and hopefully.
The improvement.
Starts contributing throughout throughout the year.
Great. Thanks, very much of the color.
Yes, John I mean, where where we're an early days of that but as Gary said, we're very focused on just moving moving forward and taking action.
As we move more deeply into it I mean, you mentioned this but one of the things, we're certainly looking at or things like.
Where warehouse costs and how to right size those anyway and it.
Wouldn't be unreasonable to expect more inventory actions to occur as we move into Q4, but those will be anything we do in that regard with would likely be noncash and called out so wont wont be an impact to adjusted EBITDA just like most of the of the restructuring and improvement work that we have.
Been doing so the other the other thing I would mention your very aware this I know, but everybody on the call is but as we move into Q4. This the other action that we're taking around inventory.
That is going to impact our fixed cost absorption by 20 to 30 million well for obviously have an impact on margin as well, but that's that's more of a onetime thing to get inventory levels, where where they need to be it'll generate.
Roughly two X that much cash.
And and then.
As we all know our Q1 tends to be a light quarter. So as you as you think about EBITDA margin. The work we're doing to move forward.
Here My reference to 400 basis points, that's based on Ashland being.
When you when he came on board about a 21% EBITDA margin business on a full year basis. So we're working we're working to get that get to that minimum level of 25 and make that a very sustainable thing. We've made really good progress, but theres still theres still more work to do obviously in the Cogs work is going to be a big part of that.
Got it sounds like it sounds like you've got pretty clear line of sight is that something that you think you can deliver on on the next say 12 to 18 months, so thats kind of a reasonable timeframe to think about that.
Definitely John we're going to move.
With urgency I think.
And with Theres multiple drivers for that the crisis itself from the I think that just strengthen our our performance and allows us to not have to do other things short term things that are more cobot related so so focusing on our fundamental strategy is very critical.
I think it also helps on our growth I mean.
Some of the segments will be more competitive.
We can drive growth. So so this is about running our business moving forward and.
Nobody's Nobody is confused on what the the upside. This is not just about improving margin. This is about driving the quality of the company and.
Contributing to our strategy great. Thanks, a lot.
Thank you.
Our next question comes from the line of David leader with Deutsche Bank. Your line is now.
Thank you good morning.
I'm hearing though.
In the industrial segment, how much was volume down in June and where it is stand in July.
So so.
Kevin can can give you the specific numbers, but June we did see some pickup.
Across multiple multiple segments and understandably I mean the.
April may some industries, just basically shut down.
If you look in our adhesive business transportation and construction were were significantly down.
Much more than our average.
The DIY why was very strong.
And as other companies have reported the contractor segment was softer we did see start seeing a pickup in the June.
Quarter, hopefully that that that continues.
But that's those are probably the construction the the transportation and the contractors are probably the hardest ones that they are improving so I do think that will sustain but I'm not that it's very difficult.
Forecasts, how much better sequentially up or down you could be up or down of.
Single digits.
Just based on on specific developments around Corbett.
Can you tell us the exact volume decline in June and what is in July for industrials.
So I own year of June June year over year volumes were down about 25%.
Obviously profitability was was down way way less than that partly due to cost management, partly due to better mix.
But overall volumes were down.
Were down around 25% for the industrial side of the business.
And Kevin what are they running in July.
Right.
Only seen some improvement I would say.
Yes, I think like a lot like a lot of others.
Can't give you a number July is not over so but but it was gamma said, we've definitely seen we've definitely seen.
Things things seem to stabilize and start to pick up so.
I would characterize it the really down segments have started to improve the ones that were already.
Were down, but but more.
In the.
In the teams or low twentys those have stayed more stable, but things like transportation.
Like construction.
And and the contractor pay Mark if those are the ones that we've seen more of the the pickup.
I would say if you if you look at the June quarter.
April and May we're we're really I, what I would call the trough and we started we did start to see some improvement in June and as Gary indicated we've we've seen some of that continue into into July and and while we're we're cautiously optimistic there's a lot of uncertainty in the world out there right now.
I would say.
From my view of of the company I think all the things that we can manage I think I think the near the individual business unit teams are managing those very very well.
In terms of their respective end markets and how they approach them the competitive landscape, it's et cetera, and we're still very focused obviously on on continuing with with the cost improvement and working working working through the Cogs Cogs piece of the equation as well.
Hi, Kevin is a lot of a film.
And for consumer do you have the same volume metric.
For June how much was down in should improve in July as well.
But generally the current the consumer the consumer side was fine I mean, yes, I kind of went through the topline piece of that.
And life Sciences, if you take out.
Previously discussed share losses and and.
And currency lifestyle this was up 4%.
Personal care household was down about one and that's more of an a boca issue.
Yes, and it's really in a really on the on a consumer side. It's it's less about volume it's more about it's more about quality of quality the business quality portfolio.
Okay and piece on consumer tends to be.
Way way smaller than than the industrial it's it's maybe a maybe a third of the volumes actually go through the consumer business, it's actually less.
So.
Dave the one comment I would say on volume just to make a point of that as we look at improvement it's not just cost side.
We are seeing on the nutraceutical side June.
We are very strong in June.
Beating or our prior year with the share loss. So we're we're gaining business we're starting to.
Feel the impact is still a lot more work to do and improving margins things like that that the teams are working on but on the commercial side, we are making big traction same thing oral care.
It's actually performed well some new product introductions that or are contributing so there's a lot also commercial actions that we're taking within the environment.
Obviously.
It is a more challenging environment, just because of the cobot situation, but we are making progress on that front too.
Thank you very much very helpful.
Thank you.
Our next question comes in the line of Chris Parkinson with Credit Suisse. Your line is now.
Great. Thank you.
In terms of the secular move towards natural ingredients and personal care and reality modification waterborne architectural coatings can you talk about your competitive industry positioning and you're just general assessment of your long term growth opportunity, including the potential to expand its more industrial type applications in the latter thank you.
Yeah. So so we don't we're doing a lot on the sustainability side as we start talking moving forward more about the lesser makeover, then and cost reduction all that and more about.
The strategy is that we're rolling out for each business sustainability plays a huge role I think the personal care in household is the spearhead.
Of that initiative, given that that market segment.
In many respects leading.
The customers the consumers are really leading that in a much bigger way. So we're fortunate again as as a specialty additives player. If you look at our portfolio with Cellulosics lot of the technologies by function. We have we actually have a.
Very sustainable portfolio. If you look at natural products at the whole focuses around natural products natural the.
Derived products did biodegradability.
Responsible sourcing, but at the end of the days also all about innovation I mean, we want to be sustainable, but we want to drive it with innovation just to have a non differentiated sustainable products thats going to be just stable stakes, it's not what's going to drive our future.
So we're doing now is really looking at our innovation.
Our portfolio and making sure that we're accelerating those areas that we think we can create.
The highest impact in terms of innovation value for our customers as well as differentiation for our portfolio. So a lot there you'll you'll start hearing about it and I would say personal care at the forefront in the industrial side.
The customer base that is moving a little bit slower in that area.
Again, if you look at our actual portfolio and industrial side.
A lot of products are cellulosics as an example, so cellular space.
Products it puts in a good position there.
And what we're looking in the industrial side is not just the sustainability of our products, but what is the value our products bring to our customers. If you look at adhesives.
We're working a lot into lightweight.
Construct.
Light light weighting vehicles for energy for fuel efficiency. So there's a lot of benefits in the use of our products equally in construction, enabling wood based construction materials.
Yes.
That also drives a lot of the sustainability, so we'll be laying out more of that but huge area.
In terms of our innovation focus and a significant emphasis being placed on that.
Got it.
So Europe, you're clearly focusing on to establish that portfolio just what's the long term growth budgets.
Well after the current cost actions and just to clear 2021.
How should the street would just be thinking about cash conversion this year versus your expert expectation for further improvement in 20 122, just what's the basic framework. There. Thank you, yes, I think in this year that youre going to have to two things.
On one side.
All the.
Portfolio quality improvement mix getting our margins up getting cost down so all that will contribute to to our conversion.
Clearly this year and into next year as we deal with our cost of goods sold there will be some.
Cash impact in terms of achieving those cost savings.
So so we'll have to work through that I think this year and next.
It's about laying the foundation for future for that for the future, but there will be some costs.
Impact in achieving the cost savings, but Kevin I don't know you want to comment anything else there but.
Hi level, that's probably the when I'm looking at it.
Yes, I think the I think thats right I mean, the environment that we're in.
But cove it off to the side.
Yes, as we get through the cash cost of of the.
The restructuring on the SGN, a R&D side as well as.
Cash cost associated with the Cogs work, we're going to do I think we're going to be in a really good position from a cash conversion perspective, I mean, you look at you just look at the June quarter, and I would say the June quarter from a cash generation perspective was was stronger than normal but for your free cash flow in the June quarter was $112 million.
As including restructuring.
In the in the low one twentys excluding.
EBITDA base of 143, no granite we've been frankly, we've been cracking down on Capex and a lot of other related things to conserve cash and improve our improve our liquidity position, which is quite strong as you know, but I mean going forward I think we have a clear path to very strong very solid cash.
Conversion in terms of how we're thinking about the business and so I'm I'm pleased with the progress that we've made on that front, there's more work to do.
As Gary indicated but.
We've got the balance sheet in good shape, no near term maturities of any of any significance.
Good handle good handle on on our on our leverage our debt service all that and so I mean, I think we're in a really good spot from from from that perspective, some pretty pretty excited about where we are there.
Thank you.
Thank you.
And our next question comes from the line of John Roberts with UBS. Your line is now open.
Thank you you noted strengthened bio functional ingredients.
Additives for hand, Sanitizers, what chemicals are those and are they in life science are they in personal care and household.
So these are in the personal care and household. So these are plant based the biofunctionals, So Ben client base extracts that very unique.
Extracts that we then.
Our customers take as as key ingredients in some of their skin care products. For example, so a lot of the high end applications. We've had a few important product launches.
And that's been growing as we've said over the last few quarters, that's been a very fast growing area, where we're seeing a lot of differentiation our focus on bio functional is is.
It's bio functional and then this whole biotech that we want to develop is more by a functional and then if you look at the bio pharma.
Side of equation, so enjoy as you get into Injectables and new therapies in.
In the life Science area.
So there it's about extraction from fermentation purification. So we have a lot of those capabilities for example, and our bio functional business out of France, our bonds John's evoke itself is a high volume.
Biotech type type activity and even in the pharma Chem side and nutraceutical, we do some some of these activities fermentation separation those kinds of things.
These groups haven't been really coordinated or talking to each other what we want to make sure is that we're building now bigger capabilities around.
Around this so that we can grow both in the bio functional areas or bio raw materials things like that in personal care space, but really drive more of that growth initiative into the bio pharma area. Later later on so most of the sales today, our personal care.
And obviously in the life sense, we want to develop and the hand sanitizer.
Business most of it is.
It's personal care and then household side.
Okay, and then price was down 10% for intermediates and solvents you purchase video in Europe. So was the European cost for video also down 10%.
No I remember we sold our plants when we did the annual steel we have one plant in the U.S. now the Lima plant. So it's all we're all it captive we sourced from the us.
Issue that we have there I would describe the ins business in two ways. The merchant business. The majority of a video is not the biggest part although we talk a lot of how to it's not the biggest part of our merchant business we have.
Other products or they go into pharma into.
Semiconductors.
That that are the bulk of the volume there that has actually been very stable.
Margins have been stable sales in the sale the video par there's two dimensions to it it's a smaller part of our merchant business. So volumes have been a little bit softer and pricing has been.
Lower and then we do the transfer pricing to the captive business.
And thats at market price, therefore, we've seen thats, where we've seen the lower volumes. So the video is where we've seen the softness the rest of the portfolio is holding up pretty well.
And all of our video usage is in the US said Calvert City in Texas City.
Thank you.
Thank you and our next question comes from the line of Mike Harrison with Seaport Global Your line is now.
Hi, good morning.
Hi, Mike You mentioned, you mentioned the fixed cost absorption headwind that you're expecting in the fourth quarter did you also experienced some fixed cost absorption impact in Q3.
Yes, I'll, let comment a little bit, but the bulk of it when you're trying to take these actions and we're really slowing down plans.
Stopping them from an inventory perspective, and trying to do other activities that we would have normally done.
It's better to do it in a coordinated base. So most of those actions are really taking place in in.
In the fourth quarter the whole issue now and this is part not just on the inventory side I think as we move to these business units.
That I mentioned in my prepared comments the issue now is really focusing on our management systems and processes.
So that we have operating discipline, both for day to day PNM management, but also strategically so things like our SLP Prost sales and operations management process, all the businesses meeting reviewing the man.
Inventory supply plans all the issues that they need to run the business and make sure that we're running to a balanced plan.
Which in the past, we didnt have that coordinated effort. So we could have demand and production activities being a little bit disjointed, we're bringing that altogether. So that we can do it so as demand odd did slow down.
We do adjust or production so there could be some some impacts.
But but the big ones will be being in the fourth quarter. Similarly, I would say different totally different area, but.
On the process discipline is our innovation. So all the businesses now are doing the same thing looking at their portfolios.
It's not run by R&D only it's all these teams and we're trying to get that same discipline and all our processes that we work.
All right and then maybe another kind of operational related question is at one point in the past you guys had made a decision to move a lot of your plant maintenance and overhaul activity.
Into I believe the fiscal first quarter.
A seasonally slower time when you knew that you wouldn't have to be running your plans as.
As intensively anyway.
Is that going to continue to be the case that theres a coordinated effort to do most of the maintenance during Q1 or is it going to be on more of an as needed basis.
We're going to do it if we're shutting down plans now are in fourth quarter, we'll try to do as much as we can now so the issues being.
Aligning all those activities to your operating plan and right now the operating plan.
Is focused on bringing down our inventories in the fourth quarter. So we will try to do as much as we can in the fourth quarter.
Understood Thanks very much.
Thank you and our next question comes in the line of Laurence Alexander with Jefferies. Your line is now.
Hi, there two questions first on innovation side.
I guess peers, who have been on a similar path of trying to sort of refocus and upgrade their capabilities often seemed to have a multi year campaign of.
Bolt on M&A targeting technology platforms should.
Should we expect something similar from you and if so can you give us a sense for like what the magnitude of.
Spend in that direction might be to reinforce your in house capability.
All right.
No I think its most.
First and foremost who as much as we can do organically through innovation through our own investments. Obviously those are the ones that are more in our control. So so thats a big part of our focus a good example is the when I gave of really bringing together several of our businesses that are already involved in those areas and try to me.
Make sure that we're leveraging the capabilities we have to.
The maximum potential but in some areas M&A will will be an important part of the strategy.
In areas.
And I look at personal care, we are already one of the largest players in that space if not about critical mass. So there we would probably look at more targeted bolt ons I think in the pharma space.
In the Biopharma, we'd probably look at some some areas there.
Think it's too early to talk about values and what targets, but having those are going to be the priority areas that we look at.
And expanding in an expanding the overall audits of portfolio I mean, some of these things you can you can try to grow organically others.
Additives it's.
To be an additive company of our scale takes a long time to build and Thats why its very difficult for most companies to really playing in this space. So once you have the critical mass leveraging that is a competitive advantage that we want to use.
And can you give a sense as you look to the additive landscape.
What you would categorically not to do not look kind of not touch all can vote.
You know I think the issue that we need to look at an all the things, it's about technology differentiation and value.
When I would say even on the sustainability side, just doing sustainability, but being me too.
Those are going to be stable stakes things that you do but we want to make sure that we're focused on innovation and differentiation with sustainability as we do that so no.
Yes, there are segments that are out at the segments that are.
Not necessarily additives that they go into they're much more competitive.
In this in the scope between commodity companies specialty companies additives I think is that the at the extreme of more differentiation theres a lot of specialties that today are more.
Semi specialties, a little bit more competitive lower margin, that's probably not the area of interest we really want to use like some of these unique chemistries that are nishi that are hard to build and that you need to have the operating discipline of an additive centric company.
Thank you.
Thanks.
Thank you and our next question comes in a lot of Jessica Jeff Zekauskas with JP Morgan. Your line is now open.
Thanks very much.
You said, you've got 20 to 30 million.
Cost pressure in the fourth quarter from lower inventories how much do you have to lower your inventories.
On a dollar basis and what are the inventories that you have too much of and why do you have too much of those and.
Okay. I you know I think we haven't given specific numbers and all that but if you look at just general metrics of our inventory levels based cost it's high compared to what I would say peer groups or other areas.
I think it's part of.
So we're going to bring it down it's and it's a significant number so we look at inventories levels you should have.
Again with a disciplined process here's your your radical inventory that you need to run your business you add a safety stock and attributes of an inventory levels, we are considerably higher than those levels.
And I think you know how we got there it's what I was mentioning of having a robust S&P process.
Where.
Each business has a total view of what's happening in their business demand planning.
Suntory planning supply planning their network new business development all of those activities that we do it on a month to month basis.
That was not necessarily a robust process.
Therefore, if your demand plant is not accurate or have your manufacturing plan is not tied into.
Some of the market developments slowing down you end up building inventory over overtime.
So I think it's more about the discipline that we're putting.
The to.
I think what we've shown right now, especially with the crisis is fundamentally.
Our business our company is focused on high quality, we have leadership position in high quality businesses that are more resilient and that's a very good thing it's a good ponder fish.
The second thing I hope everybody, saying is that we are taking our actions.
To improve ourselves not just in costs, but an operating discipline. It's also having impact. So we're in a good space and we are becoming a much more disciplined operating company both day to day operations and also.
In terms of strategy and direction. Those are the two things that I think we're starting to show what we need to now as we move forward is show that that discipline that we can maintain this level of operational performance as we move forward and more importantly that we can now shift to gross and and higher quality growth in our portfolio.
Hi, Jeff direct Directionally, it's going to be about two X cash generated four.
Every every dollar of of lost absorption there I mean, so to extend we slowed us down.
20 million in the quarter that should generate around $40 million of cash from inventory.
No that's not necessarily all in the same quarter, but but rule of thumb.
Yes, that's how you should think about it okay, great and then lastly, how big is your hand, sanitizer business and how fast.
Again, we tend for competitive reasons not to give that level of segment.
Specific information, but we have a significant and growing business, obviously think about it hand sanitizers a lot of it now is that the rheology the thickening capabilities the additives that go in there.
Ill now people are using them much more if you if anybody goes to restore sometimes you put it on and it's very liquidity or you have residue salts.
Formulations arts aren't stable.
A lot of the products that we're bringing in now are not just giving the rheology, but they give you better feel in hand sanitizer better stability.
Hi heat as an example, so so I think now it's not just about.
The first few months is just produce something I think now that it is a product that people are using more.
We're seeing a lot higher focus on the quality and the other properties and Thats, what we do in personal care. So it really plays well into our portfolio, but especially around the realogys side of the equation.
Okay. Thank you so much.
Thank you.
And as a reminder, ladies and gentlemen, if you'd like to ask a question test the Star then one.
On your telephone into a draw your question. Please press the pound key.
And last question comes from the line of Mike Sison with Wells Fargo. Your line is open.
Hi, guys nice quarter.
Given it sounds like you're working on are starting to work on some growth initiatives here for each of the segments and you think about.
Yes, Tim, especially as industrials what type of growth you think you can get these businesses to outside of.
So the coated issues that we are having now.
So so I think the first step we're looking at is get the quality up so our margins the quality of the portfolio that we have clearly which are the high end segments that we really want to drive.
And that's what we're doing now as we look at growth these markets.
Pharma, it's very long cycle to innovate in general we would have seen.
3% to 6% growth the year.
In some of these segments.
Personal care again, the fundamental market is is.
Not a booming market in terms of double digit growth rates awesome sub segments are so our whole view is look our based markets are going to grow.
At or above GDP. Our objective is can we grow at 100 to 300 basis points above market and that's really so we can get too.
A company with above 25%.
EBITDA margins margins high cash flow conversion and a growth rate of.
100 to 300 basis points above market I think we have.
Very.
Exciting and profitable machine and then we'll augmented with.
Portfolio actions that we can do some step by step changes in the middle.
Great and then one quick follow up on maybe 21 can you maybe give us a little bit of help of what you have sort of in your favor you've got SAR, you've got the cost of goods how much of that flows through and 21, and then did you start to get back the impact on Cogs in 21 as well so it looks like you have a lot of.
Sort of momentum as you head in 21 on your own.
And when we started this.
Before covert really.
Became.
An issue I mean, our whole premise was that we would get the improvement of.
400 minimum 400 basis points.
Based on our existing business not assuming that we're going to grow into it all that just make sure that were structuring ourselves for that so I think that will help us well during this year and into next year, just getting the quality of our portfolio and we control that I think that those are actions that are driven by us how much of it.
It will flow through.
The value will be there but.
The market's pick up obviously, we'll do a lot better the part that we don't control is demand and the I don't think anybody has a 100% clarity of where that part is.
So our issue is making sure that we focus our portfolio on these high end segments that are more resilient, that's our core position and we will go with the market there and then focus on our performance of things we control.
Our operating discipline, our strategy focused on sustainability all these hard core things that will both.
Impact short term results, but also position us for the future.
Thank you.
And from thank you.
Thank you.
This does conclude today's question and answer session I would now just on the call back to give them an over for closing remarks.
Well just wanted to say then thank you to everyone for your time in interest I know that we'll have an opportunity to connect with many of you over the coming weeks Im looking forward to that.
And for now please stay safe and we look forward to connecting with you in the near future. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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