Q1 2021 Ashland Global Holdings Inc. Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to Ashland first quarter of fiscal 2021 earnings Conference call. At this time, all participants lines are in a listen only mode.

After the Speakers' presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference of the two your speaker Seth Mrozek director of Investor Relations. Please go ahead Sir.

Thank you Phil.

Good morning, everyone and welcome to Ashland's first quarter fiscal year 2021 earnings conference call and webcast.

Name is Seth Mrozek director Ashland Investor Relations joining me on the call today are Dr. 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 31, 2020 at approximately five PM Eastern time yesterday February 3rd.

This news release issued last night was furnished to the SEC in a form 8-K.

During this mornings 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 during 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 2021 <unk>.

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 two of 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 all of the 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.

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 the 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.

Guillermo will begin the call. This morning, with an overview of Ashland's results in the first fiscal quarter.

The next Kevin will provide a more detailed review of financial results for the quarter.

Finally, Guillermo will close with key priorities and planning in the current economic environment. In addition to providing his thoughts on important next steps we.

We will then open the line for questions.

Now please turn to slide five and I'll 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.

First and foremost this quarter's results demonstrates the overall business conditions are improving and we are successfully executing our strategy.

The continued to operate safely with a clear focus on the safety and wellbeing of all of our employees as we manage through this difficult pandemic.

As we execute our strategy our business priorities remain unchanged, demonstrating organic growth expanding margins and improving free cash flow during.

During the quarter our team successfully delivered on each of these priorities.

Ashland sales grew 4% inclusive of favorable currency most of the consumer end markets continued to demonstrate resilient demand with life science delivering strong growth during the quarter.

However, the global pandemic is still impacting some businesses linked to consumer behaviors, we have not seen demand improve in hairstyling Sun care and other businesses linked to grooming activities impacted by changes in social and recreational dynamics.

We also began the process of exiting lower margin product lines.

We commented on our last call.

We saw continued recovery of industrial demand as well as reduced seasonality.

This demand improvement was broad base across multiple end markets in our industrial businesses executed well during the quarter.

Consistent with our strategy higher volumes improved mix lower <unk> and lower operating expenses led to growth in EBITDA and EBITDA margins.

Our focus on earnings growth and disciplined working capital control delivered significant growth in free cash flow.

Lastly in line with our goal of leveraging bolt on M&A opportunities to support our strategy, we announced the agreement to acquire Silicon Meyers of personal care of preservative business.

I am very pleased with the progress made by the Ashland team to deliver improving momentum in what continues to be an uncertain global marketplace I will discuss how this improvement momentum impacts of our outlook for fiscal year 'twenty. One following kevins review of the Q1.

The results Kevin.

Thank you Guillermo and good morning, everyone.

Let's turn to slide seven.

Total Ashland sales in the quarter were $552 million.

Up 4% versus prior year.

These results reflect continued resilience in our consumer businesses and strong improvement in our industrial businesses.

Favorable currency contributed 2% to growth during the quarter.

Excluding key items, SG&A and R&D costs again declined in the quarter, because we realize the positive impact of our cost reduction programs.

In total Ashland's adjusted EBITDA was $124 million.

Of 41% increase over the prior year quarter.

Note that the prior year included $12 million of cost for an extended plant turnarounds within intermediates and solvents.

Ashland adjusted EBITDA margin was 22, 5% of <unk>.

600 basis point improvement over last year.

Adjusted EPS, excluding acquisition amortization was <unk> 94 per share up a 129% from the prior year.

Now, let's review the results of each of our three business groups. Please turn to slide eight.

I'll begin with consumer specialties.

Sales were $296 million up 1% from the prior year quarter.

Currency favorably impacted sales by 2%.

Within the life Sciences pharma continued to perform well.

Double digits in the quarter driven by strong demand for farm the excipient.

While nutraceutical sales were down modestly primarily due the supply chain and labor constraints gross profit was up and we continue to be pleased with the progress the team is making.

Sales to nutrition and other end markets were up mid single digits and total life Sciences sales increased by 10% during the quarter.

Sales to personal care end markets were down during the quarter due to several factors, while EBITDA growth was strong at 13% versus the prior year quarter due to favorable mix and cost improvements.

As previously discussed we began to exit some lower margin product lines, which accounted for about half of the year over year sales decline, but favorably impacted both mix and margins.

We also continue to work through the previously communicated challenge of et cetera.

While the team is making progress on the scare a lot of product line. There is more work to be done.

And the COVID-19 per day.

Pandemic continues to impact certain consumer behaviors related to areas, such as highs hair styling and Sun care.

Each of these are well understood and previously commuted issues that are being actively addressed by the personal care team.

And total personal care and household sales declined by 8% during the quarter.

The exit of lower margin products and challenges with the Boca and counted for the entirety of the decline.

For all of consumer specialties favorable mix and lower Saar of expenses led to improved earnings and margins adjusted EBITDA margin in the life Sciences improved to 26% while in personal care and household adjusted EBITDA margin improved to 27% and total consumer specialties.

Adjusted EBITDA improved to $779 million.

Up 18% versus prior year at a margin of 26, 7% of 380 basis point improvement.

Please turn to slide nine.

Turning to industrial specialties sales were $231 million up 8% from the prior year quarter.

We saw broad based growth across industrial end markets consistent with industrial demand recovery currency favorably impacted sales by 2%.

Our coatings business was up double digits during the quarter, reflecting strong global demand for architectural paints, particularly in the DIY DIY applications.

And while we saw modest growth in construction products, our energy business continues to be down significantly.

Reflecting the lower drilling activity around the globe.

Total specialty additive sales increased by 6% during the quarter.

We generated double digit growth in performance adhesives, which did include some modest volume increases from certain customers preparing for Brexit.

Structural adhesive sales were up demonstrating strong improvement of demand for automotive and building applications and their laminated in coatings adhesives business grew due to strong demand for food packaging and total performance adhesive sales increased by 14% during the quarter.

For all of the industrial specialties favorable mix and lower <unk> expenses led to improved earnings and margins adjusted EBITDA and specialty additives improved to 22% volume performance adhesives, adjusted EBITDA margin improved to 27%.

In total industrial specialties, adjusted EBITDA improved to $55 million and EBITDA margin of 23, 8% of 360 basis point increase.

On the over prior year.

Please turn to slide 10.

Turning to intermediates and solvents sales were up $33 million up 18%.

The year ago period.

The majority of the sales increase was driven by higher intercompany sales versus the prior year adjusted.

Adjusted EBITDA of $5 million for <unk> and this was up from negative $9 million in the prior year period, which included the impact of an extended turnaround at the Lima, Ohio facility.

Please turn to slide 11.

Before I turn the call back over to Guillermo I'd like to spend the few minutes talking about free cash flow in the quarter.

Total free cash flow was $76 million of $139 million improvement compared to last year's deficit of.

The $76 million included $14 million of cash restructuring payments related to our ongoing Cogs and so on cost reduction programs.

This is an excellent result, driven by earnings growth and disciplined working capital management.

Across the business units.

It's also a great example of Ashland free cash flow generation capability.

For fiscal 'twenty, one we expect to convert EBITDA to free cash flow at a rate north of 50% inclusive of cash restructuring costs, which we expect to be around $35 million for the year.

And we are focused on and expect to continue improve our cash conversion rate.

With that I'll now turn the call back over to Guillermo to address our priorities outlook and the strategic focus Guillermo.

Thank you Kevin Please turn to slide 13.

With the first quarter of fiscal year 'twenty, one complete our priorities remain very clear.

Drive margin expansion and enhanced free cash flow conversion.

To demonstrate business and operating resilience and accelerate profitable growth.

To achieve these objectives, we have clear levers that we plan to act on with the same discipline, we showed in 2020.

Capitalized finalize on capitalized on the $50 million, sorry cost savings commitment most of which was completed in 2020 and accelerate the implementation of capture of the $50 million in Cogs reductions we have identified.

Drive productivity and mix improvement from innovation focus on more profitable strategic segment and exit of lower end market lines, we feel we cannot improve.

And align our capital allocation priorities for Capex and working capital consistent with our strategic priorities.

During the fiscal year 2020, we had the opportunity to demonstrate the underlying resilience of our business as well as our improved operating discipline. We will remain focused on driving the continuous improvement of our business centric model and this operating discipline.

Our focus continues to be shifting to accelerating profitable growth drivers both organic and.

And inorganic.

Please turn to slide 14.

A few weeks back we announced the signing of the Deca.

Net to acquire the personal care business from Silicon Meyer.

We're incredibly excited about this opportunity as it broadens the breadth of specialty additive solutions, we can bring to our customers in personal care end markets.

Our combined business will give us a meaningful presence in the personal care preservative market will expand our biotechnology and microbiology technical.

Capabilities and will help us advance our ESG agenda for personal care and household applications. This will enable us to participate in important growth trends for both of our customers and global consumers.

So can monitor how the talented and experienced team that will be at the center of driving this business and we will create a center of excellence to drive our preservative business out of Hamburg.

We look forward to welcoming this team to the Ashland family.

Given this acquisition is focused on a very specific market and technology area. We are very sensitive to sharing specific competitive details about the preservative business.

Although we will not be sharing specific financial information on a transaction. We can comment that we remain focused on our capital allocation discipline and the transaction valuation was in line with the profile of other transaction in the space.

Upon close the business will be immediately accretive to growth earnings and margins as it firmly aligns with our strategic growth and profitability improvement objectives.

We expect to close the acquisition at the end of the June quarter of this year and as I also indicated we look forward to welcoming the Shelton my personal care team to Ashland.

Please turn to slide 15.

As we've done for each of the last quarters I'd like to spend a few minutes discussing what we see as the key performance drivers for the remainder of the fiscal year.

First as we stated before mix improvement is key to strengthening our business. We will drive this improvement by focusing on higher priority businesses, expanding our innovation pipeline and leveraging bolt on M&A.

As we saw this quarter, we expect that favorable product mix will continue to drive earnings growth.

Second we are working to accelerate our self help actions. We believe we can deliver incremental savings from what we indicated in our last call.

While COVID-19 uncertainties persist, we anticipate continued improvement in global industrial demand.

Improving industrial demand and expected favorable.

Foreign currency will be positive tailwind.

On the other hand, we continue to be there continue to be challenges that we must manage.

The Covid pandemic still persist and we're seeing the challenges in both the evolution of the virus as well as the complexities of the vaccination rollout. This uncertainty will probably continue to impact the rate of recovery in specific segments of our business linked the consumer behaviors, which have been impacted by the.

The pandemic.

While these changes in consumer behavior may be temporary it's too early to forecast the recovery of some of the segments.

Hairstyling Sun care and other such segments.

Given the seasonality of some segments the timing of the recovery is important for our fiscal year performance.

The growth in the hand sanitizer business in 2020.

With the significant positive offset to the weakness in demand in some of the consumer behavior driven end markets impacted by Covid.

Although all indications are that this will continue to be a growth business over the coming years, we have seen some near term industry adjustments as demand normalizes and customers adjust production and inventory levels. After the aggressive supply push we saw in 2020.

We expect to see lower demand in Q2, and then more normalized demand in the second half of our fiscal year.

Our prior expectations were that this normalization would happen as other consumer segments recovered, but given current developments, we may see a bit of a disconnect in the next quarter or two.

As we stated at the beginning of the Covid Covid pandemic, we view supply chain risks as one of the greatest uncertainties.

We expect availability of shipping and labor to continue to provide challenges and we will continue to manage these issues, although we're not expecting any significant impact on our business. Nonetheless, nonetheless uncertainty still exists.

Finally, while raw material volatility is very manageable for Ashland as a whole we do expect to see.

Some enhanced volatility within the performance adhesive segment, which is which has a greater exposure to petrochemical derived raw materials.

The adhesive team has an excellent track record of managing through periods of raw material volatility and I'm confident in the strategy that they are pursuing.

Please turn to slide 16.

Regardless of the continued COVID-19 uncertainty, we continue to be confident on our strategic and performance trajectory.

Although we will not be giving specific guidance for fiscal year 'twenty. One let me update some of our forward looking insights.

On the sales growth side, we expect 3% to 5% growth for the year. This is based on continued recovery of the industrial businesses, a mix of resilience and a bit more prolonged recovery and some different consumer end markets and favorable foreign exchange.

It does not include the impact of our ongoing M&A activities.

Although we do expect stronger volumes.

We'll have a favorable impact on our cost absorption.

The are expected to be offset by negative cost absorption impact from the labor strike at our plant in Belgium. The plant is back online and in full operation, but was shut down for part of December and most of January.

Given the continued high level of Covid uncertainty, we're focused on accelerating the impact on yourself.

Self help actions these are non.

Covid related actions, but rather strategic changes that will strengthen our businesses and the company for the long term.

We believe we can increase the net impact of these actions to 25% to $30 million in our fiscal year 'twenty one.

Our path has not changed we are focused on driving the actions, we control and building resilience and agility in our business to capitalize on the market developments for the factors, we do not control.

Please turn to slide 18.

In closing I want I want once again to thank the Ashland team for their leadership and proactive participation in it.

On uncertain environment, we're fortunate to be of Premier specialty materials company with high quality businesses that have leadership positions in defensive markets.

I am pleased with the resilience demonstrated by our people and businesses and look forward to the opportunities that lie ahead. Thank you operator, let's move to Q&A.

Okay.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound the key.

Please stand by while we compile the Q&A roster.

The first question comes from the line of John Roberts with UBS.

Okay.

Sure My last quarter, you talked about pivoting to growth and it looks like you've done a good acquisition here could you talk a little bit about the fitness synergies.

The customer overlap in product overlap and do you have anything else on the pipeline.

So thanks John.

So your question is very very critical to us.

This acquisition just is a perfect fit into our strategy focusing on additives and more specifically on on the consumer side of our portfolio.

Sugar, Myra and I've known them for many years from my history, even rohm and Haas.

There were a big customer.

They have a very strong position in personal care added preservatives.

They've shifted their portfolio to more.

What you would call soft buyer side some more more.

Friendly a lot of this.

Clean beauty.

So it really enhances the portfolio that we have more towards the ESG driven.

On the drivers.

So it's going to be a very good fit for us between their business and ours will have a pretty significant position in the market. This will become probably one of the larger segments within our personal care.

Portfolio.

So it's a really nice acquisition, we see synergies in the manufacturing will be moving some of the manufacturing into our own sites.

They have a very strong team, we want to keep that team theyre going to be a central part of the activities here that have a very good.

Not just experienced with proven track record so we're going to be.

Keeping the team in Hamburg, and enhancing those capabilities.

I think what we can bring us scale global scale, leveraging our labs around the world to support the business.

We have a lot of things in the pipeline that we're working on on new new.

New actives, new products, we want to bring in and I think there'll be able to help us accelerate the commercialization of <unk>.

The new formulations.

And I'll say, they have a very strong reputation with customers.

So thats all very positive for us.

I guess I had forgotten you had experience with the case on business at Rohm and Haas Thats now part of the Dupont and now of new ISF I guess yeah.

Finally, this is a business cycle looks like so finally of.

Remember again secondly.

<unk> sales actually had turned up last quarter, because you had anniversaried I think the beginning of the decline that they had it sounds like you've had of relapse.

There.

Just your comments about challenging maybe you could elaborate a little bit more on that.

Yeah.

The big message, we have I wouldn't say so much of relapses I mean, it's the continuation we're working through the issues the.

When we talk about of Volcker, we have different product lines.

The challenge from the legacy side was the sclera Allied business that was the fragrance carrier business, while we had.

One of our customers of develop on Alt.

Turn of technology, and that sort of disrupted the market and we communicate that.

Came into the Ashland that was that was already going on.

So the business is stabilizing.

We're not seeing the.

The improvement level was a little bit slower than we expected, but it's getting stable the issue that the focus that we have is developing new business using the capabilities that of Volcker has.

And this is more biotech capability extraction for mentation purification to develop new new applications and that's coming so we're doing a lot of.

Purification of development of new products for other other companies.

And we're getting the business, but it's the scale up has been a little bit longer. So it's just more of a ramp up time.

As we said before.

It has been an issue, but the of Vocus side of it we see a path forward and it's just about executing and we've had just some timing issues.

But I'm confident that that will overcome I would say the other the other message I would say is look there hasn't really been much of a change of view here just the commentary on the markets.

In the personal care obviously.

A lot of the questions on on.

On the growth there.

It's really just the market hasn't changed that much of the consumer Covid is impacting so the strong segments remains strong the.

The softer segments.

Haven't recovered the people arent going to salons cut hair styling going out socializing. So it's more about that consumer habit. So it's about when the recovery will happen then.

We'll be ready when the.

The other question you had or do we have more on the pipeline in our M&A and as I said in the last call, we're making that a priority and we are working we do see the opportunity for bolt on M&A opportunities as we move forward.

Alright, thank you.

Your next question comes from the line of Chris Parkinson with Credit Suisse.

Great. Thank you I'll, just kind of a corollary of what Youre just discussing within the PC portfolio of you're clearly, making a concerted effort to.

Three of the portfolio away from some lower margin businesses, you've ultimately the size Youre just discussing in terms of avenues into additional natural ingredients of the acquisition.

In addition of your legacy platform data fraction of et cetera.

As it stands today when you think about your current and future positioning and core skin and hair care.

How should we be thinking about the actual normalized growth algo and also just the E.

ESG component.

Peer to be coming all of the more incremental to your growth.

The growth trajectory. Thank you right.

Great question I think if you look at the personal care space again.

The growth dynamics going on have to look at.

The core market demand growth and obviously the recovery from Covid will impact that and then what are the actions that we're taking so that we can ride that growth better.

I would say on the.

The demand side.

<unk> continues to be very strong for us hair care I think is the one that's been impacted on on just.

Consumer behaviors, so that we will wait to see just of a broader base recovery I think what is driving everything in the space is about ESG.

The portfolio of technologies. So the work we're doing our approach has been look let's use our first two years 2021 2020 in 2021 to get our house in order to do all of the self help actions, we can deliver significant EBITDA growth improve the profitability of the business change our strategy.

Change our innovation portfolio and use this time the.

The growth drivers for the future of going to be innovation and some of these bolt on activities that we want to do on the innovation front of the both take time to do so we want to use. This these first two years to really reposition so that as we come out of this.

We're going to have a better portfolio of new technologies. So what are the things that we're doing on the innovation side is on.

Obviously, expanding our natural based products I think the.

The ore naturally derived products, we have a lot of capabilities.

And hopefully with some of these bolt on as we can bring it more.

Biodegrade ability is going to be of big area. So a lot of our areas. We already have a pretty strong portfolio. There on given the nature of Cellulosic and other parts of our portfolio, but we're putting a lot more emphasis there so.

As we end this year, what we hope is that we can start rolling out commercialization of a much stronger portfolio.

And some of that will happen.

We're doing that this year itself, but I think of lot of the.

The revenue impact we will start more in the next year. So then you can look at market growth and then in those segments, where youre, bringing greener.

The more ESG driven technologies, you can expect those segments to grow more I think of good example of that is our.

A buyer of functional.

Segments that have been growing in the teens even in the <unk>.

Last few years. So we wanted to make sure that we're clearly positioned to capture of that that higher growth in those specific segments.

That's very helpful thoughts on.

The second question it.

It does appear that you've made very very solidly on the free cash flow per share front.

During the quarter.

Which most of one of the expected during the timeframe.

Can you speak to your current and future conversion target as a percent of EBIT that we saw obviously the 50 percentage of the Powerpoint.

Now the three should be forecasting free cash flow growth over the intermediate to long term and Kevin I just want make sure I heard you correctly. The did it sounds like the current estimate still includes $35 million of restructuring.

Thank you.

So let me make a quick comment and then Kevin I'll, let you give more details, but obviously free cash flow conversion has has been the priority for us we've been talking about it a lot and I think you've seen the discipline I think.

In last year and in this year the self help actions we're taking.

Impacting EBITDA is clearly very critical for us, it's the base of the quarter cash generation.

And then.

Changing.

Our capital allocation perspective.

Aligning everything to our strategy, we know where we want to.

Invest in which segments.

Frankly, a lot of the the improvements that we're doing on.

Not just that we want to increase margin and reduce costs. We're looking at specific segments businesses production areas that are not.

Giving of the return or justify continued investment.

And taking the opportunity really to turn them around and we believe we can improve a lot of them.

There'll be core parts of our long term growth that we can't we will exit them.

So so both the self help actions and the capital discipline very critical for Us and then.

Obviously, then growth profitable growth will be the bigger driver of longer term, while we keep that discipline going forward, so getting our free cash flow above.

No.

The 50% in <unk>.

And we're really targeting higher over time to get it into the above 60.

That's really the objective and the charters, we have but Kevin I'll pass it onto Hugh you want to.

Give some better color.

Sure sure.

In the quarter.

Really points of several things I mean, obviously.

EBITDA was well above prior year, so that that was a that was a major contributor.

Working capital discipline was huge in the quarter.

We ended we ended the quarter with the about the same inventory level that we ended the September quarter up just a little bit maybe.

Put that on perspective, if you look at 12 31 of.

Of 2020 versus 12 31 of the 19 inventory was about $100 million lower so the discipline.

Continued in the quarter. We also saw a nice contribution to free cash flow from accounts receivable, we've talked about this a bit on the last call.

We're really focused on on working the accounts receivable side of the equation of our collections are fine.

Just on but we're really we're really working on the overall cash cycle. We're looking at that all of the components of the cash cycle and continuing to manage that so yes.

Those those those were all the good solid contributors during during the quarter and obviously made a huge difference versus the prior year.

Guillermo comments being.

The 50% threshold is I would say the bare minimum that were that were looking for and clearly clearly we're internally we're looking to push that.

The much higher than 50%.

As we look at the first at the full fiscal year.

The current expectation is around $35 million of cash restructuring costs.

Yeah that could be plus or minus three or $4 million in either direction, perhaps depending on the timing of certain things, but generally speaking that's going to be a good number to use on just as a reminder, $14 million of that day.

Did occur.

On the December quarter.

So.

Thank you very much.

Sure.

Your next question comes from the line of Mike Harrison with Seaport Global Securities.

Hi, good morning.

Hello, Mike.

Well. Thank you Guillermo looking at some of the new guidance puts and takes it looks like you increased the net.

Cost of self help actions number by about $5 million at the midpoint.

You increased the sales number by a percentage point.

But now we have this issue in the in Belgium, So I guess, given those puts and takes.

It was your intention to increase the full year guidance by by kind of a.

10 million type of EBITDA number or is it more like $5 million, maybe just talk about some of those flow nordics.

I think Mike your math is the right one to two positives increased revenue.

You can calculate the normal gross profit.

And EBITDA margin.

And.

And the increased self help I think the.

The.

The the of.

Absorption would've been higher I think it already impacted actually because we could ahead of higher.

Better quarter, even in Q1.

<unk>.

That has been an impact that's behind us so it'll be more of a Q <unk>.

Q1 part of Q2.

Impact, but I did want to make sure the law.

Last call.

It was a lot of focus on absorption and the volume impact is.

Is there I think for 2022.

The.

The rollover, but there will be an impact.

In the high <unk>.

I'd say, probably another high single digits.

And the.

<unk>.

The strike impact will have on on offsetting that.

<unk> absorption.

But it is there and it will flow into next year.

If we don't have obviously this offset that we had this year.

And then in terms of the raw material picture, you recently announced a cellulosic price increase.

Maybe talk a little bit about how you're expecting raw materials versus pricing play out on both the cellulosic MD of settling in ex side of the business.

Right now I think on the on the additive side both of these.

On the raw materials of our initial we're managing it we're moving to pricing do we see other interest in and freight and so it's not just raw materials. This activities given the tightness of some of the markets and we're managing through that I don't think that is going to be the biggest headwind for us.

I think what we're seeing a little bit more of the.

The changes going on in the market as more of the pet Chem.

Drive raw materials, and that's more for adhesive business.

That's not a new thing we've written through those changes over the years and the team is very well positioned but propylene based chemistries acrylic polyurethane are the big ones that we that we use we are seeing some changes.

And the issue that we have there is more timing of some of these things and how they will.

Proceed because part of it is demand the supply has been impacted.

Across the chain as the.

The the demand has increased across multiple markets. It's gotten tighter prices are going up but you will see some some more capacity going on so I think over over the next few months and quarters, we will just see a little bit of volatility there and our team will manage through that that's the biggest area on the raw materials side.

Alright, and just quickly.

The question for Kevin What's the capital projects that you guys took an impairment charge on during the quarter.

It was Hec related we had done some work.

Two three years ago, and was kind of ongoing primarily engineering related activities.

Around around the the Hec project.

We've really just gone the other direction.

Our agency strategy.

Rather than keep all of that on the shelf.

The value that it was we decided to go ahead of them.

On write that off.

The work is still valid and could potentially be valuable in the future but.

Just using conservative accounting principles, we felt that it was the right thing to do just to go ahead of them and write that off.

Understood Alright, thanks very much.

Sure.

Your next question comes from the line of David Begleiter with Deutsche Bank.

Oh, hi, Thanks for taking the question I think Katherine Griffin on for David. So first is on the exiting the lower margin business day. Thanks.

Thanks for quantifying the impact.

In fiscal Q1, but just wondering how we should think about that impact on <unk>.

Going forward and maybe just how that plays in.

Vacation.

Does that kind of the right run rate or just how should we be thinking about that going into next quarter and on kind of play out.

Yes, the the 3% to 5% includes already factors in the exit of that business. So that's already baked it baked in.

We will be managing all.

On the exit on on some of the that part of the lower margin business through this year and probably into next year by the end of next year, we'll be out of them, we're managing through it.

Obviously exiting the the.

The least profitable businesses, we have contracts. So it's just the process by which we're going on we're going to manage it through.

But I think the bigger message is look we're focused on the.

The strategic segments. This is not just about selling anything you want to sell the.

On the right materials and that is are the areas that we see sustainable differentiation ESG differentiation.

Where we think we can get better returns and continuing to invest in our future.

And that's really the the.

The priority areas for us.

Okay, Great and then.

Just curious if you could talk about the flow through.

The temporary cost savings from 2020.

Flow through in the second half and then how that relates to your expectation for <unk>.

So the.

The value that we are going to get we've identified I mean, most of most of the first phase the sad faces done we have a few laggards I'll, let Kevin comment on a little bit on the timing on some of those.

But it's just related to activities that were we've communicated people know what's going to happen.

It's just an issue of timing because we're finishing off work and specific area. So that's pretty pretty well defined on the Cogs side, we're doing the same thing.

Obviously, we need to work through that.

The different regions.

At different paces.

And we're engaging people explaining what we're doing I mean, obviously, we had a strike in and in.

In Belgium, and that's part of the changes that we're doing.

I think the part that we're working with everybody.

Making it clearer.

We are doing with our investors, we're doing it with our employees with our customers being very transparent on.

On these are this is our strategy. This is what we need to do for our future.

Explain the changes.

So that everybody understands them and I think even as we saw with the Dol situation. There were questions on cost reductions on things like that I think we've been very clear of.

Need to do this or some of these operations are not sustainable on the long term I think everybody realizes that we're back to operations, but its a process and it's really the timing of going through that but Kevin do you want to comment a little bit more on the timing side of things.

Sure sure I mean on the I would say on the <unk> piece we are.

Right on target right on schedule in terms of of our of of our initial plans, where the vast majority of the way three of that we have some specific areas.

On that but we're.

It will be closing out as kind of certain other things wind down with them.

Within the business better.

That'll happen this fiscal year on the I would say on the Cogs side. We're ahead of schedule, which is part of why we're increasing the midpoint of our range for.

Net sales helped benefit for the full year.

The team's done a really nice job with that and continues to execute well.

I'm confident we're going on we're going to do on their Inc.

Part of your part of your question was around was around let's call it cost savings or maybe cost avoidance that our pandemic related and it's an interesting question and it's something we've been talking about a fair bit internally.

I think part of what it comes down to as I think of lot of the a lot of companies were initially thinking hey, when the pandemic is over and we're back to normal whatever that means then everybody is going to travel again and the of the budgets are going to reset back to normal in 2019 levels et cetera.

We don't think that's the case, we're thinking about that on talking about that very actively internally and I think I think of lot of that is going to be there's going to be pretty permanent.

I mean will there be resets, yes of course, I mean, there will be more travel because they are basically non right now but.

But I.

I don't think we're going to see 2019 levels maybe ever again.

And so I think I think a chunk of that is going to remain permanent in the P&L.

Just like we and many other companies sort of thinking about those sorts of things differently than perhaps we were at the beginning of the pandemic, partly because it's been such an extended period and it looks like it's going to continue to be for a while.

So just wanted to put the part of portfolio.

Great. Thank you Tom ex.

Yeah.

Okay.

Your next question comes from the line of John Mcnulty with BMO capital markets.

Yes, thanks for taking my questions. So I guess I know youre not putting out a lot of in terms of financials on the on the acquired business, but I guess could you give us at least some thoughts on what the growth of that business has been say over the last three years. The so it's just so we can get maybe a better understanding of how to think about it.

So as <unk> been having solid growth.

The mid.

Sure.

Mid single digits make the high single digits of over 5%.

So the.

They've really got a good traction.

Around some of these newer preservatives.

The the <unk>.

Personal care industry is Valerie more so.

I think when we say it's accretive it's accretive to growth that's accretive to margins it's accretive.

On to our strategy of SG.

So a lot of the positives of.

This is a really nice nice fit for us.

Got it fair enough on that in the definitely definitely helps.

And then I guess, just when we think about the the seasonality and sequencing of the margins normally your first quarter is noticeably lighter than everything else and then you get them whatever another $3 to 400 basis points as you kind of go throughout the year it sounds like.

It sounds like that's largely on track other than maybe <unk> just given the given the strike, but is that the right way to think about it or is.

Is the strong numbers that you put up this quarter or are they maybe a little bit of.

The unusual blip if you will.

So let me give some comments and Kevin ill ask you would also comment here.

But if you look at the revenue side I mean longer term the seasonality is there just.

Vacations for.

Unscarred Sun care businesses or coatings.

Our well established seasonality, we have seen less seasonality right now on I think there's just pent up projects and things that have moved a little bit more so on on the revenue side I think it's probably been a little bit stronger than normal. So we will see what happens next year.

But clearly it's been a very positive thing on especially on the industrial side of.

Of the equation, if you look at it at an EBITDA side the impact I mean, the important part to recognizes.

Self help.

It has been the major driver for us and that it is not seasonal.

So the cost actions.

The mix improvement actions all of these things are coming now because we've taken the action so that I.

I think the.

Below the earnings side of things.

Youre not going to see the seasonality, we will get it as we get it.

And I think the revenue side of the one that the.

As more of the seasonal impact.

It has been less but Kevin I don't know if you would provide any other other color.

No.

Totally agree with with with.

Your commentary I mean, we're looking at we're looking at of 400 basis points.

Terms of sales take out from a cost perspective.

And granted there's some resets that come with that but that's a real step change in the overall EBITDA margin profile of the business and again that.

That's a permanent change.

I think on top of that the work that we're doing around mix improvement is definitely starting to show through and it's by no means just about exiting lower margin.

On the lower margin product lines that certainly helps but it's really of focus across the portfolio.

The two to grow those parts of our business that do improve our mix and to improve our profitability and in many cases are more sustainable in the long term.

And we're seeing that and my expectation is that we're going to continue to see margin improvement as we continue to execute on self help and as we continue to focus on these higher margin parts of.

All of our business units.

Got it thanks very much for the color.

Sure.

Your next question comes from the line of Edlin Rodriguez with Jefferies.

Thank you good morning, guys.

Quick question on.

Quick question on on personal care I mean, some of the issues you've been having wary of the businesses that have been impacted by Covid.

What are you doing or what can you do to mitigate that risk like like how you're managing the softness in the business.

Okay.

No I think there's two things I mean, the things we control one of the things we don't control so core demand.

Has been softer so there's not much we can do that until people start going out.

People arent going to salons on.

The social activities have changed and obviously the personal care and grooming has a lot to do with People's activities.

So the issue is using the time on the things we can control and what is that.

Strengthening our position in the areas, where we are seeing strong growth I think in 2020, we saw that with hand sanitizers as of now.

Area as an offset.

Launching new products in the Biopharma area has been on other areas.

Repositioning of lot of our new offerings more more environmentally friendly.

We have a lot of new formulations for a variety of applications, including hand, sanitizers, but it goes into there as well.

Avoiding micro plastics use of micro classes, we have a lot of.

Formulation additives in the rheology space for example that can give solutions for our customers. So it's about positioning that ESG driven side of the equation.

And that can drive growth both in the non impacted areas as we're seeing with bio functional and skin.

But also as we introduce more ESG driven alternatives to our customers even in the segments that have been impacted you can achieve higher growth rates of you come with these products and technologies.

Can differentiate here so a segment can grow at 2%, but you can have a product line that grows at <unk>.

<unk>, 15% to 20% as we saw with Biopharma <unk> and skin.

That you can get that growth. So that's part of the strategy and I think the mix focus that Kevin was talking about it's making sure that we're taking action on those areas.

With new technology, it takes a little bit more time, so we want to use this time that we're getting some of the tailwind of our self help actions to position ourselves. So as you know.

Is that part of the work levels off we can kick in with the growth of new products and innovation and I think the M&A will be another area that will help us on that.

Of that space.

Okay, that's great and one quick one in terms of yes, you've started to exit some of the lower margin product lines.

Great. So when you look at the current portfolio as it is right now.

The mall business business lines, where you think Oh.

That might be candidates for exit the even if you don't have to name names, but just let's.

Let's see.

Our self help actions is that as I said this is not just about squeezing in trying to get cost out we're being very purposeful on where we're going and I think especially if you look at some of the cost actions that we're taking and the Cogs side look going plant by plant production unit by production units. We do have some units that are not.

Giving the right returns.

Frankly somehow have lower margins than the businesses that we're exiting now the differences that we see that we can take actions and improve those businesses.

Not just on cost, but process technology changes growth that we can increase loading. So there are things we can do so and some of them were identifying those lower margin segments. The issue is we really feel we can fix it will exited but if we feel we can fix it. That's our first approach is to try to take.

And if we can then we'll follow up with the other actions and I think this is the.

The the situation.

In our Belgian plant is it was a clear example, we had some significant production units that look we're not going to invest in it we can turn them around I think we were very transparent about it everybody realized that that was really the driver.

And we are grateful that all of the team there recognize it and they're working with us and getting that.

That whole business not just back in production, but let's get it to a place that not only has a nice return, but that we can invest and drive growth I mean at the end of the day, we like some of these businesses and.

I can say just from my past experience in the last company of it was in we exited plants and.

And then two years later, we reinvested because but we reinvested with different technology differently.

A different approach that made it sustainable and more profitable and I think that's the the work that we're doing and that's the core part of the self help and so it's an important message that self help is not just about cost cutting it's about adapting our company to the business model that we have business led not all businesses of the same so it's.

One size fits all everybody has a different value proposition is about right sizing ourselves to a smaller company. We're now of pure play $2 $5 billion specialty materials company. So we have to have a structure for that not carryforward of structure for a $5 6 billion company and then on specific businesses make sure that we're doing.

The turnaround and we are being purposeful because ultimately what we want is profitable growth.

Makes sense. Thank you very much.

Your next question comes from the line of Mike Sison with Wells Fargo.

Yeah.

Mike Your line is open.

Alright, guys.

Just one question on the shelf and Meyer acquisition Guillermo what's what's the annualized sales run rate for that business that will contribute and then what's the.

One of the overlapping sales synergies between between your business and their business no longer term, yes, yes, so Mike.

Thanks for the question like I said, we're not giving specifics of of the business itself. What I would say is the combined business have the majority of which will be the sugar Meyer of part of it.

We will be.

And it'll.

It'll be probably our largest segment and personal care over let's say of 100 and.

$125 million to $140 million.

So just to give you a range.

On very profitable in line with what our longer term expectations are you selling to the same customers same areas.

So we see opportunities for synergies on the manufacturing side. So that we can leverage of a lot of our production.

People their talent is very important to us so we want to make sure.

Not only that we're keeping them, but they become a core part of driving the business forward. They have a lot of experience.

The faster growing more.

More on.

More advanced more ESG align product offerings that we're interested in.

So on.

On that side, we're not looking for significant synergies there.

And I think theres going to be a lot of growth synergies I think globally. The synergies that we have is we have we have a much bigger global footprint, we have labs and much more regions. This is of much smaller company not just the personal care of preservative business, but overall.

So this really can give us a lot of more and more momentum and it's it's really a plug and play for us.

And in this case, we're going to plug in some parts of our business into their areas, but then.

Bring and allow them to leverage on.

Our overall infrastructure and capabilities to drive growth.

Got it thank you.

Okay.

At this time there are no further questions I would like to turn the call back over to Guillermo Novo for closing remarks.

Thank you Phil.

Just wanted to say thank you to everybody for your interest as I Hope Youre seeing were very excited about non.

Not just the performance that we've had but more about the outlook.

There is light at the end of the tunnel in terms of.

Post COVID-19 and it seems to be.

Improving.

And we're seeing that.

Some segments that maybe it will take a little bit longer, but it's an issue of timing. It. So it's about when not if these improvements will come in I think in the meantime, we're taking actions on the things we control and we're very happy with the progress, we're making and I think it's going to really position us well not just for the rest of 2021, but even as we look at 'twenty to 'twenty two.

'twenty, two and beyond it'll be a very exciting time for all of US. So thank you for your interest and look forward to talking to you in the near future. So thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Yeah.

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