Q4 2021 Ashland Global Holdings Inc. Earnings Call
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Good morning, everyone, sorry for the technical difficulties and welcome to Ashland's fourth quarter fiscal year 2021 earnings call and webcast.
My name is Seth Mrozek director Ashland Investor Relations joining me on the call today are Guillermo Novo Ashland's, Chairman and Chief Executive Executive Officer, and Kevin Willis Senior Vice President and Chief Financial Officer.
We released preliminary results for the quarter ended September 32021 at approximately five P. M. Eastern time yesterday November 9th.
The 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.
We encourage you to follow along.
During this 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 2022.
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.
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.
You can also review our most recent Form 10-K under item one a for a comprehensive discussion of the risks risk factors impacting our business. Please.
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 as adjusted and present them in order to supplement your understanding and assessment of the financial performance of our ongoing business non-GAAP measures should not be considered a substitute for or.
<unk> 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 fourth fiscal quarter, including commentary on the recently announced signing of a definitive agreement to sell the product performance adhesives business.
Next Kevin will provide a more detailed review of financial results for the quarter and the fiscal year.
Finally, Guillermo will close with key priorities and planning in the current economic environment. In addition to providing his thoughts on important next steps in our financial outlook for fiscal year 2022.
We'll then open the line for questions.
As a reminder, on Friday of this week, we will host a live virtual Investor day, beginning at nine a M eastern time.
We are excited to tell Ashland story, our plans for sustainable innovation and the strategy for profitable growth and value creation.
We encourage all participants to register for the live event using the link available in Ashland Investor Relations website.
Beginning with the start of the live event, all materials and presentations will be accessible on <unk> website for the next 12 months.
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. Thanks for your interest in Ashland and your participation. This morning.
Before I discuss results for the quarter.
Please let me first acknowledge the performance adhesives.
<unk>.
As we announced during the quarter on August 31, we signed a definitive agreement to sell the performance adhesives business to a chemo for $165 billion.
Our teams are working.
Very well together in planning the sale and future integration at this time, we expect the transaction to close during the March quarter of 2022.
Net proceeds to us from the sale after tax and transaction related fees are expected to be in the range of one two to $1 3 billion.
Given that performance adhesives business is now reported as discontinued operations for Ashland accounting purposes. This is the final quarter in which I plan to specifically address the results of the business I would like to take this opportunity to recognize the performance.
While the absolute and our <unk> teams are working diligently on the transaction closing process performance adhesives continues to execute on their winning strategy.
Our business performed very well during the quarter with sales up 31% compared to prior year adjust.
Adjusted EBITDA also grew by 10% with strong demand and enhanced pricing towards value added adhesive applications being partially offset by continuing raw material and cost inflation.
I'd like again to congratulate the performance adhesive team for building an excellent business adhesives has been an important part of the Ashland portfolio and story and we'd like to thank the team for the contributions made over the decades.
The team great success as they continue their strategy as a future part of our team.
Please turn to slide six turning to Ashland's results in the fiscal fourth quarter.
As you will hear during the call and consistent with our update.
On November 1st sales and earnings results for the quarter and full year were consistent with the outlook. We provided earlier in the year for the most part market dynamics of our underlying business continued to improve and behaved in line with our commentary from prior calls.
Customer order dynamics remain strong across the core end markets and we're making progress on taking appropriate pricing actions across all segments.
However, ongoing supply chain challenges linked to shipping constraints and raw material availability as well as the pace of raw material and energy cost inflation remain persistent.
Despite these challenges our team operated at a high level of to safely deliver products to our customers around the world yielding the financial results you see for the quarter and the year.
The <unk> business also made a strong contribution to results in the quarter as the team is now fully integrated into our core personal care segment.
For all of Ashland sales in the quarter grew by 12% to $591 million and adjusted EBITDA grew by 14% to $149 million.
In addition, cash generation remained strong as we reported $120 million of free cash flow.
Quarter.
Kevin will provide more details on our results for the quarter and the fiscal year in a few moments.
In addition to this strong execution to deliver financial results absent. The Ashland team also made good progress on reshaping the portfolio strengthening the balance sheet and returning capital to shareholders.
I already referenced the signing of the definite agreement to sell the performance adhesives business.
Second we issued $450 million of new senior notes, while retiring the notes that were due next August, thereby lowering our annual interest expense and pushing out our next notable debt maturity to 2025.
Third we established an annual renewable environmental trusts with an initial funding of $90 million.
We plan to further fund the truss using proceeds from the planned sale of Remediated real estate over the coming years.
With <unk>, we expect to fund all future environmental related costs without using operating cash flow.
In addition in addition to mitigating some of the volatility we recognized from time to time in our adjusted results.
Last but not least during the quarter, we initiated a $450 million accelerated share repurchase program with an initial delivery of three.
$8 9 million shares which were retired.
We expect the ASR to be complete by March 2022 at the latest at which point there will remain $350 million under our existing share repurchase authorization.
I am very pleased with the progress made by the Ashland team during the quarter and the year and look forward to discussing our outlook for the next fiscal year later in the call.
The meantime, I'll turn the call over to Kevin to review, our Q4 and fiscal year results in more detail Kevin.
You, Gary and good morning, everyone. Please turn to slide eight.
Before I begin I'd like to remind everyone that the results of the performance adhesives business are now reported as discontinued operations for Ashland and will not be included in my discussion of adjusted results from continuing operations. However, as a reminder, even though we still own the business and expect to until sometime in the March quarter stranded cost related.
To adhesives are included in our corporate unallocated expenses.
Total Ashland sales in the quarter were $591 million up 12% versus prior year.
Favorable currency contributed 1% growth during the quarter.
Gross margin for the quarter declined modestly to 33, 2%, primarily reflecting higher raw material freight and energy costs.
Excluding key items, SG&A, R&D and intangible amortization costs increased modestly to $113 million in the quarter, primarily reflecting the addition of the <unk> business.
In total ashland's adjusted EBITDA for the quarter was $149 million.
A 14% increase compared to the prior year adjusted EBITDA of $131 million.
Ashland's adjusted EBITDA margin for the quarter was 25, 2%, a 40 basis point improvement compared to the prior year again, reflecting the items discussed above.
Notably all four of Ashland's operating segments reported adjusted EBITDA margin above 25%.
Adjusted EPS, excluding acquisition and amortization for the quarter was $1 22 per share up 18% from the prior year.
Now, let's review the results of each of our four operating segments. Please turn to slide nine.
I'll begin with life Sciences.
The team executed well in the face of continued supply chain disruptions and raw material inflation.
Sales were $189 million up 5% from the prior year quarter.
Currency favorably impacted sales by 1%.
Demand for pharma and nutrition ingredients was healthy and was only partially offset by lower nutraceutical sales due to labor shortage issues.
Life Sciences gross margins declined by 9% due primarily to raw material cost inflation during the quarter. The vast majority of this inflation came from higher BDO transfer pricing.
While the team was able to initiate price increases there is more work to be done to recapture the inflation, we have seen and are continuing to experience.
In total adjusted EBITDA declined by 6% to $48 million in the quarter due largely to the cost inflation I referenced.
Adjusted EBITDA margin in the quarter was 25, 4%.
Please turn to slide 10.
Personal care and household sales were $183 million up 12% from the prior year quarter.
Sales to core personal care end markets were strong across the board as we continue to see improved demand for our ingredients globally. Following the onset of the pandemic last year.
The <unk> business was also a meaningful contributor, adding roughly $22 million of sales for the quarter.
These gains were partially offset by the exit of roughly $10 million of low margin purchase for resale business. In addition to lower sales of additives for hand, sanitizers compared to prior year.
At the end of fiscal 'twenty, one the exit of low margin personal care and household product lines is complete.
The carryover impact of sales of these exits for fiscal 'twenty two is expected to be approximately $35 million with very little EBITDA impact.
Gross margins improved by 60 basis points, reflecting the contribution from the acquisition the exit of low margin business and lower operating cost and total personal care and household adjusted EBITDA increased by 11% to $51 million adjusted EBITDA margin remained healthy at <unk>.
Nearly 28%.
Please turn to slide 11.
Specialty additives had yet another nice quarter with sales up 13% to $181 million demand for architectural coatings additives remains very strong and we are seeing a normalization in DIY volumes and a shift to higher contractor paint volumes as we stated last quarter Glenn.
Demand continues to be very strong and our Hec network as well as the industry is sold out to meet incremental demand one of our key growth projects in fiscal 'twenty two is expanding our global Hec production capacity.
Sales growth remains strong and price versus cost for specialty additives was positive during the quarter, while operating costs were a headwind year over year due to the inventory control actions, we took last year as.
As such gross margins declined by 350 basis points to 26%. However in total adjusted EBITDA grew by 7% to $47 million and adjusted EBITDA for the quarter was 26%.
Please turn to slide 12.
Intermediates and solvents reported a very strong quarter as pricing has continued to rise following strong global demand and outages at competitive facilities in the U S.
Sales were $60 million more than double compared to the prior year.
While merchant sales were up double digits due to strong demand and pricing internal captive sales were up even more significantly compared to last year, reflecting the higher BDO transfer price and the internal inventory control measures that were in place during fiscal Q4 of last year.
Margins were up meaningfully.
The segment reported adjusted EBITDA of $21 million compared to $6 million in the prior year and adjusted EBITDA margin in Q4 was 35%.
Please turn to slide 13.
Because I've done for the last few quarters I'd like to spend a few minutes talking about cash generation, which continues to be an important component of our value creation strategy.
Total free cash flow in the quarter was $120 million, a $31 million increased compared to prior year.
While we generated higher cash flow from lower capital expenditures greater earnings and lower cash interest expense. We also received an additional $16 million <unk>.
As part of the new accounts receivable sales program that we implemented during the quarter.
Free cash flow during the fiscal year was also very strong.
<unk> generated $361 million of cash from higher earnings lower capital expenditures lower interest expense and a $91 million contribution from the <unk> sales program.
The discipline around capital expenditures. This year was an important contributor to free cash generation.
Total capex for the year declined by nearly $30 million as we prioritize plant investments and work more efficiently and our maintenance activities. As we look to next year, we plan to allocate capital to important organic growth projects. These high return investments will serve to expand production capacity and some of our key <unk>.
High margin product lines for our core end markets and pharma personal care and coatings and.
In fiscal 2022, we expect to allocate roughly $60 million to use in organic growth projects total capital expenditures next year should be in the range of $160 million to $170 million.
Guillermo will spend more time discussing our over our overall outlook for fiscal 'twenty, two and our underlying assumptions in his closing remarks, please turn to slide 15.
Next I'd like to briefly review our financial results for fiscal year 'twenty, one for the year Ashland generated 5% sales growth across the portfolio in a difficult and uncertain economic environment.
All businesses saw improved topline results over the prior year, including personal care, which also grew net of exited sales related to low margin product lines.
Demand recovery and the Ashland team's execution in the face of raw material availability and freight and logistics challenges were key drivers to the year over year sales growth.
Please turn to slide 16.
Adjusted EBITDA for the year was $495 million.
A 10% increase over the prior year adjusted.
Adjusted EBITDA margin also expanded by 110 basis points to 23, 4%.
<unk> generated strong earnings growth and margin improvement during a challenging macro environment and $18 million of negative impact from the later labor strike at our Belgium facility and winter storm here for the year Ashland generated $361 million of free cash flow inclusive of both $92 million from our <unk> sales.
And $44 million of cash restructuring payments cash generation will be critically important as we execute on our organic growth plans.
Turn to slide 18.
Before Gary discusses our financial outlook for fiscal year 'twenty, two I think it's appropriate to calibrate the results for fiscal 'twenty, one and put them in context for next year.
First as previously discussed beginning with Q4, we are now reporting adhesives as discontinued operations.
With the disc ops reporting a portion of the cost previously allocated to the adhesives business will remain in our unallocated corporate segment.
These stranded costs totaled $14 million in fiscal year 'twenty, one and are included in our adjusted results for the year being reflected in unallocated and other segment of the income statement.
We are also reporting all environmental costs net of asset returns in the renewable environmental Trust as key items for adjusted results reporting.
After making these adjustments fiscal year 2021 results amount to $2 $1 billion of sales and $495 million of adjusted EBITDA with an adjusted EBITDA margin of 23, 4%.
Please turn to slide 19.
In addition, there are several discrete items that reset the baseline for fiscal year 'twenty one.
Early earlier in this year, there were cost impacts related to winter storm Uri and the labor strike at our plant in dual Belgium that impacted earnings.
Cumulative amount of EBITDA impact from these two events was approximately $18 million in fiscal 'twenty one.
We don't anticipate that these events will recur next year, so we factor them into our baseline for 2022 planning.
Second we will have an additional seven months of earnings from the <unk> acquisition in fiscal 'twenty two given that the transaction closed on May one of 2021.
We expect these additional seven months of earnings to contribute roughly $15 million of EBITDA to fiscal 'twenty two.
Finally, the transition services agreement, we had in place with Ineos. Following the sale of the composites business in late 2019 has come to an end we.
We recognized roughly $8 million of income in fiscal 'twenty. One from this agreement in the unallocated and other segment and this income will not repeat in fiscal 'twenty two as such we are also adjusting this out of the baseline.
In summary, as we look at our 2022 planning our starting point baseline for 2021 does approximately $520 million of EBITDA.
For internal analysis, our expectations for fiscal 'twenty, two will be compared against this baseline as we started the year.
With that I'll turn the call back over Guillermo Guillermo to discuss our priorities and outlook for fiscal 'twenty to Carolyn.
Kevin Please turn to slide 21, as Kevin indicated given all the challenges and changes we have set a clear baseline for 2021.
To build our outlook as we look to 2022.
As we look at 2022 macro trend, we see both tailwind and headwinds we need to address.
Demand remains strong across most of our end markets given our increased exposure to consumer driven segments, we see the strength of the consumer as a positive for us in the coming year.
The normalization of social and economic activity.
As we move past Covid should begin to have a positive impact on demand in key segments.
Pro forma we should start to see improved funding for therapeutic treatments for a broad range of infectious diseases, which have been negatively impacted by lower government and donor funding as they focus resources on the Covid pandemic.
Equally the opening of social activities will likely change consumer activities and behaviors, which should have a positive impact on demand in several personal care segments.
Pricing environment remains positive given high demand supply chain challenges and long term tight supply industry supply and demand balances in key technologies such as Hec.
We acknowledge that 'twenty 2022 will come with its share of challenges and headwinds.
We expect supply chain and logistics challenges to persist at least through our fiscal third quarter.
Broad based cost inflation will continue to be a challenge to everyone for Ashland, we see several cost inflation drivers.
We see cost increases in cellulose driven by poor cotton crop.
Supply logistics challenges as well as high demand for cellulose across all categories.
We continue to see cost escalations in butane driven by higher natural gas costs. This impacts our BDO costs.
And in general we see we expect to continue to see broad based inflation across our small volume raw materials driven.
Driven by product supply and logistics specific factors. This includes higher cost of freight logistics and labor.
In China, we continue to monitor some of the energy use restrictions and the potential impact on our plant operations in China as well as on the operations of our suppliers and customers.
Lastly, although the tight hec industry supply demand balances are favorable for pricing that will place volume growth constraints until we bring online.
The additional capacity we have announced.
Please turn to slide 22.
As you will hear in the coming Investor day, our priority will be on driving profitable growth as we move into 2022.
We will be increasing our growth investments to drive organic growth, we will be investing in our cellulosic franchise to support growth of Hec.
<unk> cel and <unk> product lines, we will invest in our geographic formulation capabilities in pharma and personal care to support our oral solid.
Those.
Business as well as our preservative business.
And we will invest in growing in Asia.
Please turn to slide 23.
The basis for our 2022 outlook.
Is continued strong demand in life science, and specialty additives and improving demand in personal care.
No changes in our operating operating performance.
We expect continued broad based cost inflation this will be offset with strong pricing actions across our portfolio.
Given the strong market recovery supply of our product lines will remain tight until we bring on incremental capacity. This tight supply demand balance will impact the broader industry.
Based on these insights.
Insights our outlook for 2022 is sales of 225 to three 5 billion adjust.
Adjusted EBITDA of 150 to 100.
500 $550 million to $570 million.
As was the case in 2021, there are several risks that are difficult for us to forecast.
We will monitor developments and adjust our plans as needed.
These risk areas include.
Changes in supply.
Supply chain challenges as.
As more.
And more specifically around ocean freight, which is a big driver of our network.
Potential impacts of Chinas energy usage restrictions.
Raw material availability changes acceleration of energy cost increases, depending on weather and geographic dynamics and changes and general inflation trends. Please turn to slide 24.
Although the demand continues to improve we will continue to operate in an environment of uncertainty we will continue to monitor developments and focus on the things we can control.
Our priorities are clear.
Continue to demonstrate operating discipline and resilience maintain our strategic focus continued to drive and accelerate innovation and maintain disciplined capital allocation. Please turn to slide 25.
As Seth mentioned earlier in the call on Friday. This week beginning at nine a M. Eastern time, we will host a live virtual Investor day, we're excited about the opportunity to share our views on Ashland today, and our expectations for Ashland in the future.
We will talk about the company and our focused portfolio, our commitment to ESG priorities and goals are improving financial performance and our premier Premier financial profile.
We will have opportunity you will have opportunities to hear directly from our business unit general managers and their respective strategies for profitable growth.
And we will review our priorities strategies and outlook for results over the coming years. Following a live Q&A session with securities analysts, we will highlight 12 different product and technology innovations and wish you will have the opportunity to interact with <unk> leaders.
Via live Q&A chat sessions, we anticipate.
Rent will be while attendance and look forward to the days event.
Please turn to slide 26 in closing I want to thank the Ashland team once again for their leadership and proactive ownership of their businesses in an uncertain environment.
As you will see on Friday, we have changed.
We are fortunate to be a premier additives and ingredients company with high quality businesses.
That had leadership position in resilient high quality consumer driven segments.
I'm pleased by the resilience demonstrated by our people and business and look forward to the opportunities that lie ahead.
Thank you and operator, let's move to Q&A.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby will be compile the Q&A roster.
And our first question comes from John Mcnulty from BMO capital markets. Your line is now open yes.
Yes. Good morning. Thanks, Thanks for taking my question, maybe a couple of them Firstly, just kind of getting some of the some of the noise of freight out of the equation I guess can you help us to understand.
What the impact of freight either availability <unk> costs were on the quarter and I guess, how are you going to manage through that as you kind of look to 2022 have you kind of just either locked up more afraid availability or I guess, what what prevents that from capping some of the some of the growth that you could otherwise see in 2022.
Let me comment on when we look at the whole supply chain logistics side, just whats impacting us and then I'll pass it to Kevin to talk maybe about the costs in freight, but our biggest issue right now.
We look at it let's say.
In simplistic terms, 75% of our sales are local we have inventory around the world and it's just local.
Shipping.
And 25% is indent. So the biggest issue that we have is more the on time.
Scheduling of ships and Thats really where we see a lot of this end of the month ended the quarter.
Yes.
Surprises of did the ship arrive on time to be loaded.
The availability is the biggest issue for us most of our shipments are coming out of the U S and Europe to the rest of the world we're not in.
The dynamic that other companies have of shipping in from Asia into the U S. So we have availability. It's the on time side that it's the biggest impact.
On the land transportation I would say we have some issues in Europe, but the bigger issues are here in the U S. On truck availability drivers those kinds of things, but frankly speaking that's going to be less and less of an issue as the adhesive business leaves the portfolio Ocean freight is one of the biggest issues for us.
But Kevin you want to comment on that cost, yes, Q4, this year versus last.
Freight freight and logistics costs were up call. It mid single digit millions of dollars in 'twenty two versus 21 full year, we'd expect it to be.
$15 million or so of inflation based on the environment that we're in today.
So not insignificant, but you have to get it through pricing.
Which we got it.
And then maybe just as a follow up can you speak to you. So you do have a number of headwinds on the freight side. You also spoke to the BDO impact in particular on the life Science segment, but even a little bit in personal care I guess can you speak to the ability to get the pricing through that you need and when you think about 2022 what level of price.
Do you need when you think about the at least the consumer related portions of the business.
No.
On pricing across the board I would classify this as a much broader general inflation.
Hitting everybody, it's not just us.
So we're able to pass it on I think in the pricing dynamics.
The HFC network the industry is tight right now and demand is very strong so its favorable as I said to pricing.
So the growth will come more from pricing that from from volume in that part of the portfolio until new capacities coming on stream. So it's favorable dynamics of the issue is more of that whole timing. This is very different than when we talk about adhesives, which is much more volatile in terms of the petrochemical side we are.
Our exposure right now if you look at the three buckets I mentioned cellulose is baked because we have this big cellulose franchise that tends to be very very stable I mean, what we're seeing right now we have probably haven't seen in 10 years.
So it's a little bit more unprecedented I don't think its we're already seeing some signs of softening towards the back end of the year, but we will be tracking that usually we can pass on pricing, we're able to hold onto that for much longer.
The butane dynamic as a normal dynamic on our BDO part of the portfolio and it's really driven right now by energy and the rest we don't have any major large raw material.
It is.
I look at the list of.
$1 million up here and there.
A lot of little things and it's just a holistic increase which is impacting everyone. Therefore, I think we have favorable pricing environment in terms of the entire industry moving on price.
Got it no. That's helpful. Maybe I can if I can sneak one last one in youre going to with the sale of the adhesive business Youre going to have what is arguably a mountain of cash or flexibility in and that has only increased with with some of the improvements you made on the cash conversion. So I guess can you speak to the M&A opportunities that you see out there.
<unk> and the potential pipeline that youre looking at in terms of in terms of ability to deploy some of that capital. Thanks very much.
So John I'm going to have to leave you with a little bit of a cliffhanger so that you'd have to come in and see our investor day on Friday.
But yes.
To answer your question I mean, we obviously have the resources and it's not just from the sale I think have you seen the strong.
Cash flow generation that the core business has.
Our issue now is going to be to refocus on growth and we'll talk a little bit more about that.
In terms of.
The Investor day.
You've seen the attention we've had a free cash flow conversion.
We're fine tuning that even more who really want us split out what is the cash flow.
We're maintaining our business.
Just the normal operations and and refocus so that we're investing more of our resources on growth be it organic growth and we have some specific areas that we want to accelerate growth because we see we're very well positioned and demand is very good there is M&A bolt on M&A opportunities and we will talk about that at the.
Investor Day, and where we're focusing on and as you've seen we are also rewarding our shareholders.
And I think Fortunately, we're in a position that we can do all of the above and we'll remain balanced in our approach.
Great. Thanks, very much for the color looking forward to Friday.
Thanks, John.
Thank you and our next question comes from Chris Parkinson from Mizuho. Your line is now open.
Great. Thank you very much so Guillermo when you put it side all of the noise the raw material.
P&L pressures in fiscal year, 'twenty, one and you assess your current ingredients portfolio of specialty specialty materials et cetera, et cetera, where does it ultimately stand in terms of growth pricing power and margin potential versus your original assessment CEO. Thank you.
So I am extremely excited that thats going to be the theme of our call on Friday.
We have now and I think one of the things we want to do is take away, especially on the growth side. Some of the history and noise. I mean this is a company that has gone through a massive transformation over over the last decade and longer it's not just reducing the size and noise. It's that portfolio itself is change.
A lot so when I hear things well ask one of the past X y Z.
That refers to a distribution business to a water business to a composites business too.
Valvoline, just a lot of things and you will see on Friday, we'll try to give some transparency of whats happened to the core business. Our business right. Now is a 10 year old portfolio, it's not a 100 year old like the old national It is very different and.
And it's I think it very high quality.
<unk> strategically coherent additives and ingredients portfolio with leadership positions and some high quality markets personal care.
Pharma and architectural coatings, most of which 70% 75% is consumer driven.
In terms of the demand profile that we have so very very healthy and the majority of the rest is really integrated on how we can leverage our technologies and capabilities for scale.
For scale and profitability. So on growth, we still stay focused on our objective of growing 200 to 400 basis points over over market and there'll be.
These are steady market growth was very good.
Macro trends supporting the change and we'll talk about that.
So that's the type of growth that we're still committed to in terms of our underlying.
Core businesses in terms of margin improvement, we still see opportunities to improve margins I mean, you've seen the top down actions. We've taken we continued to improve now through better management.
And that includes productivity in crude includes mix improvements that we're doing and and we continue to edge up some of our margin and I would say as we look at growth that we gain greater scale that we.
Can bring in.
New businesses through innovation or through M&A.
Can tend to be higher margin than what we have today, we're not going to invest in lower margin businesses. So all those things will tend to push our margins. So our long term and I wanted to steal my Thunder for Friday, but we really want to start continued pushing on that road to greater than 30%.
Sure.
EBITDA margins to the future.
Okay, and I'll take Mcnulty for stealing my cash works, Yes question and we'll wait till Friday.
I Couldnt help but notice on slide 22, you mentioned expansions include sell banner sale.
Many of those are called does expansion from that.
Confused it's one was in Virginia, and one was a conversion in Belgium is that ultimately where the extensions will be if you can.
Confirm that and then just also mentioned the longer term growth outlook for life Sciences, specifically excipient and how that ties into Asia. If at all thank you.
No.
We're being very prudent in planning out our capacity expansions not just.
For these next expansions, but even for the future where do we want to bring them, so balancing out where the most efficient.
<unk> are going to be so that we can leverage infrastructure and profitability.
Also we want to look at longer term, where we want to go so.
I would assume the first series of investments, we will leverage our cost position.
And our infrastructure for value.
But we have a longer term plan. So that we have a series of investments that we will try to use our leverage especially in Asia.
So for those Cellulosic I would say that core base will be the big driver, but we are using our network. If you look at for example, biopharma channels that were.
Growing very very well for us in personal care at its very profitable, we're expanding and putting capacity in our Nanjing plant. So we're leveraging that footprint. So that we can start producing not just to supply Asia, but this will allow us now to develop products with our customers in Asia using different raw materials.
Different.
Development opportunities that our customers are interested in that region.
The broader growth is not just in cellulose on some other areas that tend to be lower asset intensity, but we do still need to make the investments and leverage the infrastructure we have.
Great color as always thank you very much. Thank you.
Thank you and our next question comes from Mike Harrison from Seaport Research. Your line is now open.
Hi, good morning.
<unk>.
Obviously appreciate the.
The outlook on fiscal 'twenty, two but you don't provide any quarterly guidance. So I was wondering if you can give us some thoughts on the cadence of earnings as the year progresses.
Is it fair to assume that there are some headwinds on the margin front to start the year and then better margin performance later in the year and also maybe comment on when we start to see the contributions from the capacity expansions.
Alright, So let me start with the last one the contributions will come more towards the back end of the year. I mean, we are making debottlenecking investments and all of that that will bring on throughout the year, but the bigger things will start coming in a bit.
A bit later in the year.
Full transparency on on the.
Margins in some of the headwinds and this is might take there is a lot of noise right now in the market.
So I do think the front end is where we see it.
More frothy right now I will tell you even as we looked at our plans.
For 2022.
Between the original plans, we were working on two months ago.
And the one that we've locked out now we saw a significant increase in raw material and cost inflation and we are obviously moving on price and I'll tell you as we move that now we're seeing some softening in other areas. So it is very volatile I think the issue right now is to understand the directions.
And to be agile and moving so I think.
What you need to what we all companies need to do and this is our mantra right now is make sure that we're moving with speed and agility to address what we see and the challenges that are ahead of us. So we're moving on price, making sure that we're moving but it is going to remain volatile I think the front end will be more volatile as we get into the back end where supply.
Jane.
Dynamic start easing off will be better I think the other part that will monitor in the in the early part of the winter.
And it's really two things.
How will that behave and what it does.
And demand in the coming months.
And two is energy.
And some parts of the word that's still it's still a lot of volatility around the energy side.
Alright, when you you mentioned within the pharma business.
Funding has been directed to Covid.
Italy is COVID-19 runs its course, it's going to be shifting back to some other areas that could be a little bit more advantageous for you.
We've also heard other pharma related companies talk about.
Some reductions in demand because fewer people are getting sick as we continue with social distancing and Max mask wearing.
So maybe just I guess give some thoughts on the pharma business as we kind of transition to this post pandemic.
Environment and.
And how you see the growth opportunities going forward.
Well I think two things one we're seeing opening up and whatnot.
Not not.
Sam a medical expert.
There are.
Obviously drops and some therapy, just because people are not going out and not getting is exposed at the same time. We are hearing that as people do things are spiking, just a simple flu and other things are also speaking so I think that we'll have to see how it plays out I think for US I mean, it's a pretty broad based portfolio in terms of the therapy.
So we go into.
I think that the part that we'd point out is that we do have good business, especially with a lot of the generic customers around the world.
Funding and I would say age is a great example of some of the therapies that we are in.
H treatments have suffered.
During the last year as funding has shifted to COVID-19.
And this is mostly driven by government and donor funding.
So I think as that normalizes, the broader portfolio in which we sell into we will benefit from that.
I think also as we see more elective procedures done there should also be an uptake and the related therapeutics that go along with those because those are still very very muted it really across the world today.
Thank you and our next question comes from John Roberts from UBS. Your line is now open.
Thank you.
You transferred BDO at cost not market just wanted to confirm if that's true and therefore, the integrated margin compression was even more relative to market BDO and as good as the Ians earnings where I guess it would've been even higher if they were all priced at market.
No actually I would say we are transferring.
It's a transfer price that is based on a large.
A large buyer.
We have some big customers that we tried to set our pricing with a similar type of formula recognizing some producer economics to it but also market price. So this is this is a bit of a pocket switch for us. If you look at the headwinds in our life science and personal care the majority.
When we say inflation and cost the majority of the impact in 2021 was BDO transfer pricing, it's not the general cost.
It is that transfer pricing. So what we've done is put an edge on the businesses. So that they have moved on price, we probably did that to your point performed better because we moved on price we didn't cover it all but we have not if we had been transferring at cost we probably would not have moved as aggressively on price and the net for the company would have been lower so.
Our focus not right now on which pocket gets the money is on making sure that we're getting the money and we're getting that movement across the businesses.
One comment that I will make on the IMS business, because it will not be a big focus of our discussion on Friday.
But as we said in other calls this is about integration. So we want to leverage and integration not just cost security of supply.
And making sure that we have a smooth operation for our core businesses, but fundamentally it's about value.
Is that integration doesn't create value then we will consider our strategic alternatives, but if we look at the business it's changed a little bit. So we are doing the transfer price. So.
It is a little bit.
The profit of one side or the other depending on the pricing dynamics, we do recognize right now that for BDO. This is pretty unique situation in terms of pricing, we expect pricing to remain strong in.
In the early part of 2022 and 2022, especially in the early part, but then over time you will start normalizing just because of the global demand balances.
BDO.
But I would think.
We have a very very unique business, one we have a very valuable asset.
To build a new BDO plant and we're one of three producers.
In the U S.
To build a new plant in the U S would be extremely expensive and our asset is not in the Gulf Coast States actually.
And during all the Hurricanes and all of that we've actually performed very well and we benefited from that so so we're very well positioned.
Other point is the majority of our merchant business. The BDO side of it we can transfer pricing and a lot of how we want to manage that internally, but the majority of our merchant business is not video. It's the derivatives. The intermediates that we sell most of those intermediates are going into spaces like <unk>.
Any conductor.
Batteries production.
Pharma and AG active ingredients and coatings.
And with a lot of the in sourcing projects that the U S is working on longer term, the pricing will come down and and stabilized, but our view is they might stabilize for those derivatives at a better place than they were historically, where we had to sometimes ship to other parts of the world. So the business we will continue to.
To evaluate when we want to do with it long term, but it is in a good position and I think some of the macro trends.
Also favor that part of the portfolio in the long term.
Okay, and then back to the pharma business.
That seems to have similar supply chain problems with its pharma excipient business and I think that the two of you as two of the largest suppliers. So what are the pharma customers doing is two large suppliers both have issues or is the demand for pills and gel tabs and so forth down enough debt.
There is not they don't need as much product.
So two things that I would say is to not confuse ability to meet demand.
Ability to meet safe.
Sales recognition.
The problem that we're having is getting on ships. So if it doesn't get on the ship on.
On September 27.
It's an issue for us in terms of recognition in the revenue for our company, but if we ship it on October 3rd for our customers. Its a five day. So our issue of the timing is not that we can't get the material will get into our customers. It just creates a lot of noise for us in terms of how we can we can deliver.
So our bigger issue is is that supply side of the equation with ocean freight.
And then we are managing through yes, we have issues with small raw materials and those kinds of things that impact our operations, but that part actually that we've been managing very well, it's more of that and the end of quarter.
Loading of ships.
Really the part that's out of our control.
The actions we've taken is building inventory in our warehouses around the world accelerating shipments intercompany shipments working with our customers that are buying in that so that we can accelerate their orders in and get them on ships on time and make sure. The inventory is ready when the ships are there that we can load them.
Sure.
Thank you.
Right.
Thank you and as a reminder to ask a question at this time. Please press Star then one on your Touchtone telephone.
And our next question comes from Jeff Zekauskas from Jpmorgan. Your line is now open.
Thanks very much.
Your your.
BDO operation the intermediates and solvents earned about.
$20 million in EBITDA in the fourth quarter.
And so if you annualize that thats about $80 million.
And your EBITDA this year in that segment was about 50.
So what you said is that.
Prices are going to be strong going into next year. So order of magnitude theres, a $30 million increase in EBITDA.
From BDO operation alone.
But your guidance.
At the bottom of the range is $5 50. So if you go from $5 20 to $5 50, you can do that on BDO alone.
So is the meaning of your guidance that there's a lot of growth in BDO and theres, a little bit of growth elsewhere, and theres only a little bit because raw materials are up a little bit and you are not growing as fast as you can normally yet so that's the way to understand your guidance or do I understand it in a different way.
No we would understand it a different way if you look at what we're forecasting is.
The front end of the year, we will continue to have strong pricing, we do see some some softening as we move forward there is noise there.
But as we look at our plan, it's sort of a curve that starts coming down.
Butane is a huge.
Part of our partner.
Raw material inflation in the year. So that was this year. It was big next year. Although there are there are balances there the rest of the portfolio is doing well.
The BDO transfer price is an issue for the other businesses and we're moving on price.