Q3 2022 Ashland Global Holdings Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
And we consider ourselves to be leaders in the field of rheology modifiers for coatings.
On new innovation that we're bringing to the market called solid Aqua flow, it's basically where we're taking one of our most successful synthetic associates tickner, Washington, we're actually providing it to customers.
Solid for us.
The key drivers for this product really centers around sustainability.
These products are shipped.
20% solid so 80% of the product is water.
A lot of carbon emissions that are reduced as a result of being able to ship them I E. More active dry product because they do not contain any water. They don't need to have any buyer side attitude there.
So this is another way that we can help our customers achieve and not just the sustainability benefit but also other benefits like that.
Removing the need for buy side.
And these rheology modifiers actually enable that so it should be possible.
We bring a couple of things to the table that competitors don't.
And some of the tools that we use for example, and the design of these materials are state of the art techniques.
<unk> see us as a partner and innovation and we actually will bring them ideas and solutions to drive their product forward in the market.
It is a growing market and there is a demand for products that are sustainable.
<unk> that save customers time and money.
There are great opportunities to come up with unique solutions with completely new ways of looking at problems that's exciting.
[music].
Good day and thank you for standing by welcome to the Ashland Global Holdings incorporated third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be 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.
Now I'd like to hand, the conference over to your first speaker for today SaaS Mars at.
Ashland Director of Investor Relations. Please go ahead.
Thank you Mike.
Hello, everyone and welcome to Ashland's third quarter fiscal year 2022 earnings conference call and webcast.
My name is Seth Mrozek director Ashland Investor Relations.
Joining me on the call today are Guillermo Novo Ashland Chair, and Chief Executive Officer, and Kevin Willis Senior Vice President and Chief Financial Officer.
We released preliminary results for the quarter ended June 32022 at approximately five PM Eastern time yesterday July 26.
News release issued last night was furnished to the SEC in a form 8-K.
During today's 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 with the webcast during the call.
Please turn to slide two.
As a reminder, during today's call we will be making forward looking statements on several matters, including our outlook for fiscal year 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.
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. You can also review our most recent Form 10-K under item one a for comprehensive discussion of the risk factors impacting our business. Please.
Please also note that we will be referring to certain actual and projected financial metrics on Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to these measures as adjusted and present them to supplement your understanding and assessment of the financial performance of our ongoing business non-GAAP measures should not be considered a substitute.
For or superior to financial measures calculated in accordance with GAAP.
The most directly comparable GAAP measures as well as reconciliations of 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 third fiscal quarter.
Next Kevin will provide a more detailed review of financial results for the quarter Guillermo.
<unk> will then provide additional commentary related to Ashland innovation and product development progress sustainability goals and environmental social and governance commitments. Finally, Guillermo will provide his thoughts on important next steps and our financial outlook for fiscal year 2022, We will then open the line for questions.
One final note on August 1st Ashland will change its legal name from Ashland Global Holdings incorporated two Ashland incorporated subject to registration approvals.
This name change is the most visible step in our internal reorganization to simplify the company's legal entity structure.
Ashland shares of common stock will continue to be listed on the New York stock exchange under the ticker symbol a S. H and its committee committee on uniform Securities identification procedures are CUSIP number will not be changing.
Action is needed from stockholders.
Please turn to slide five and I will turn the call over to Guillermo for his opening comments Guillermo.
Thank you Seth and Hello, everyone. Thank you for your interest in Ashland and for your participation today.
You will hear during the call Ashland's financial results in the third fiscal quarter were consistent with the earnings update we issued on July 18th demonstrating strength and resilience in a world of uncertainty and accelerating change.
Given the high level of external or uncertainty.
We are all facing over the recent quarters, we have chosen to provide earnings updates in advance of our regular earnings release, we plan to maintain this pattern of communication during this period of high uncertainty.
Once it becomes apparent that external dynamics normalize we plan to return to our normal cadence of quarterly communications.
Returning to the results of the quarter customer order dynamics remains strong across our core markets and we continue to make significant progress on taking appropriate pricing actions to cover costs across all segments.
Supply chain challenges have not improved, especially with respect to ocean freight.
Given the tightness in markets globally, our teams have taken steps to improve mix.
High value products that are selling that we're selling which will further drive margin expansion.
We continued to invest in future forward sustainable innovations to drive profitable growth accelerating the pace and impact of new product introductions.
In short <unk> has undergone a tremendous amount of change we are a different company today. The results this quarter and the steps. We are taking are enabled by the company we have become.
Our ability to respond quickly and operate nimbly is a result of the intentional changes we made to the company over the past two years.
Please turn to slide six.
Let me share with you some of the highlights from our strong third quarter results.
Sales of $644 million grew by 19% compared to prior year against a backdrop of strong global demand all businesses contributed to our growth.
Adjusted EBITDA grew by 35% to $174 million.
As all of our teams pursuit cost recovery and mix improvement, while effectively managing costs.
Our global network of production facilities continues to operate with strong discipline.
Adjusted EBITDA margins reached 27% for the second quarter in a row and increase of 320 basis points compared to the prior year quarter.
Important to note that on a trailing 12 month basis through June 30th asked and achieved an adjusted EBITDA margin greater than 25%.
Returns to shareholders continued to grow with adjusted EPS up 93.
To a $1 89 per share, reflecting the impact of both earnings growth and our share repurchases over the past year.
Please turn to slide seven.
As I noted previously growth for the company was broad based with all segments, returning double digit sales growth compared to prior year.
Life Science performance remains resilient driven by strong demand for our high value pharma ingredients.
Personal care demand remained robust with a business the businesses drove disciplined pricing recovery.
All the results of the shelf preservative portfolio have continued to exceed expert expectations.
Within specialty additives. The team has leveraged tight global supply to drive both mix improvement and cost recovery.
And for intermediates growth in sales was driven by higher volumes and transfer pricing to captive.
Captured by BDO sales as well as higher pricing in our merchant business merchant market sales for intermediates represents approximately 8% of asset sales.
I am pleased by the progress made by the Ashland team during the quarter and the first nine months of the fiscal year in our earnings update on July 18th we increased our financial outlook for sales and EBITDA in the fiscal year 'twenty two due to the strong year to date performance and our expectations for Q4.
While there are many global uncertainties on the horizon. The Ashland team is performing well and executing on actions that are within our control.
We look forward to discussing our updated outlook for the remainder of the fiscal year and reviewing broader progress by the company later in the call in the meantime, I'll turn over the call to Kevin to review Q3 results in more detail Kevin.
Thank you Guillermo and good morning, everyone.
Please turn to slide nine.
Total Ashland sales in the quarter were $644 million.
Up 19% versus prior year.
Unfavorable foreign currency negatively impacted sales by 5%.
Gross margin improved by 510 basis points to 37, 3%, reflecting cost recovery and mix improvements by the commercial teams in the face of significant cost inflation.
Excluding key items.
G&A R&D and intangible amortization cost increased to $127 million in the quarter, primarily reflecting the addition of the <unk> business. The elimination of the Ineos transition services agreement and accrued incentive compensation.
In total ashland's adjusted EBITDA for the quarter was $174 million or 35% increase compared to the prior year adjusted EBITDA of $129 million.
Ashland's adjusted EBITDA margin for the quarter was 27% a 420 basis point improvement over the prior year.
Accordingly for the last 12 months ending June 30th Ashland's, adjusted EBITDA margin was greater than 25% a notable milestone for the company.
Adjusted EPS, excluding acquisition amortization for the quarter was $1 89 per share up 93% from the prior year, reflecting both the increased earnings and a lower diluted share count following our share repurchase activities over the past year.
Ongoing free cash flow was $13 million for the quarter a reduction from the prior year, primarily reflecting an increase in working capital given the inflation and raw material and other input costs, we have seen globally.
We expect ongoing free cash flow conversion to be positive for the second half of the fiscal year, our working capital levels will remain elevated assuming continued inflationary trends.
Now, let's review the results of each of our four operating segments.
Please turn to slide 10.
Life Sciences had a strong quarter and the team executed well.
There was strong pharma demand favorable product mix disciplined cost recovery consistent operations and continued margin expansion, partially offset by growing currency headwinds.
Total life Sciences sales increased by 18% to $228 million, while adjusted EBITDA increased by 26% to $67 million.
Adjusted EBITDA margin increased meaningfully to over 29%.
Please turn to slide 11.
Personal care also had a strong quarter with good execution by the team.
There was strong demand across all end markets and microbe.
Microbial protection acquisition, we made last year is performing above expectations. The team delivered disciplined cost recovery through pricing and all operations performed consistently.
As with life Sciences. These results were partially offset by growing currency headwinds.
For the quarter personal care sales increased by 17% to $172 million while.
And EBITDA increased 18% to $46 million.
And adjusted EBITDA margin again increased to nearly 27%.
Please turn to slide 12.
Specialty additives had another very nice quarter with excellent execution by the team.
Demand was strong across the board and despite persistent supply chain challenges in growing currency headwind there was disciplined cost recovery through pricing and consistent operating results.
For the quarter specialty additive sales grew by 15% to $194 million, while adjusted EBITDA increased by 46% to $57 million.
Adjusted EBITDA margin grew significantly to more than 29%.
Please turn to slide 13.
Intermediates reported another very strong quarter as pricing has continued to rise across all product lines.
Sales were $73 million up 49% compared to the prior year.
Margins were up meaningfully during the quarter.
The segment reported adjusted EBITDA of $33 million.
An increase of 120% compared to prior year and adjusted EBITDA margin was again over 45%.
Please turn to slide 14.
As we discussed at our Investor Day last November capital allocation discipline continues to be an important component of ashland's value creating strategy.
The actions we have taken over the past year have improved ashland's financial position and created increased flexibility.
Since August of 2021, we have executed on $650 million of share repurchases, representing approximately 11% of our outstanding shares.
And earlier this quarter Ashland's board of directors approved a new $500 million evergreen share repurchase authorization.
As of the quarter closed on June 30, we have cash on hand, plus available liquidity totaling roughly $1 4 billion.
Our net debt has been reduced to about $600 million, which is approximately one turn of leverage on a net basis.
We have no floating rate debt outstanding.
Our debt as investment grade style covenants with weighted average cost of debt below 4% and an average maturity of about 10 years.
Also just last week, we extended our existing bank agreement out to five years with no change in term.
Importantly, we are investing in our existing business to grow organically and continue to pursue our strategy of enhanced profitable growth through targeted bolt on M&A opportunities focused on pharma <unk>.
No carrier and carrier.
Against the backdrop of global uncertainty Ashland has a strong balance sheet with the enhanced flexibility to pursue our targeted growth strategy.
With that I'll turn the call back over to Guillermo to discuss our priorities and outlook for fiscal 'twenty to Guillermo.
Thank you Kevin Please turn to slide 16, as I mentioned at the beginning of the call OSM is making excellent progress while operating in a world of significant uncertainty and accelerating change our teams continue to demonstrate operating resilience and are delivering strong results against the backdrop of continued continuing.
<unk> global supply constraints and shipping challenges, we have demonstrated proactive pricing discipline to recover cost.
It's Brad inflationary environment, while also improving our mix management.
And while supply chain challenges have not improved we have improved our global planning to better anticipate how we can be more responsive and efficient our plants continue to run well and we have started to rebuild inventory levels, we still need to make more progress in this area to build up safety stock levels across our warehouse network.
We are maintaining our strategic focus and capitalizing on the things that are within our control. This quarter. We saw strong margin performance driven by cost recovery mixed management and disciplined SG&A cost management.
And while free cash flow generation was below prior year levels. This was due largely to the impact of rising inflation on working capital balances.
Our increased focus and discipline on innovation is paying off we are.
Accelerating the velocity of our innovation, our investment in innovation and growth, especially with sustainable ingredients and additives.
We are aligned with the evolving product requirements of our customers and the consumer and are well positioned to capitalize on these emerging trends across the globe.
We have strengthened our internal innovation portfolio management to both accelerate the pace of new product launches and ensure that these launches create the most value for our customers and for us.
Beginning this year, we're expanding capacity in numerous high value products globally and will continue these events investments over the next couple of years.
<unk> has a flexibility and discipline to execute our growth strategy and reward our shareholders. Please.
Please turn to slide 17.
As we approach each of our priorities in a disciplined way we recognize they are overlapping nature.
Under our new business model, we have empowered our organization, we have driven decision, making to the to those closest to the customer each business leader and the regional teams own their business and circumstances, but all share the same disciplined leaders adopt their priorities to circumstances to unlock profitable growth while.
Maintaining operating discipline.
Our priorities remain focused on growing our business, while maintaining its quality.
Driving profitable growth opportunities margin and free cash flow expansion, while leveraging ESG.
Core value add enabler.
Please turn to slide 18.
I'd like to provide an update on our environmental social governance and sustainability goals.
We plan to publish our ESG report before the end of this fiscal year.
Calendar year 2022, we will submit the science based targets, we are establishing for environmental and sustainability goals and we will announce them as soon as they're approved.
The establishment of science based target is an important milestone.
Furthering our purpose to responsibly solve for a better world and.
And in support of our commitment to the Paris climate accord and to making the UN global compact and its principles part of Ashland's business strategy culture and day to day out for it operations.
The rigorous internal review.
And validation of data continues.
So which will enable us to set new targets.
Additional internal work continues such as integrating ESG metrics into our enterprise risk management system evaluating opportunities for enhanced use of renewable energy solutions in both the U S and Europe and incorporating ESG goals in each of our business units operating dashboards.
As we have stated many times ESG priorities are integral to our future as a company and we continue to make take important steps to solidify our actions and commitments.
Please turn to slide 19.
New product.
Innovations are important.
Our organic growth and a tenant of our profitable sustainable growth strategy.
By narrowing our focus to markets and applications, where we can have a large impact we are solving complex challenges in niche areas, where our innovations really matter.
Is it deliberate focused company, we know exactly where we sit and where we unlock the highest margins because we bring the greatest value for customers.
This year, we will introduce a record number of innovations and we are reaping the benefits of our focus and speed to market.
90% of our new innovations are natural natural derived biodegradable or sustainable in years.
By maintaining discipline in both project and portfolio management, we are increasing the number of new product introductions as well as their expected value impact.
And by meeting the evolving needs of our customers and the consumer we expect the future revenue and margin contributions from these future launches to improve the growth trajectory and profit contribution for asthma.
Please turn to slide 20.
Over the past year asset has continued to be recognized by industry.
Organizations and customers for our conscious.
Two cutting edge innovations.
This month in China, and recently in Korea, Ashland was recognized for industry leading innovations.
And why.
We were awarded three Green Technology awards for architectural coatings and personal care.
The technology Innovation awards for personal care are among the most prestigious in China's beauty industry and recognize innovative products and technologies that contribute to improved production efficiency cost effectiveness user convenience convenience and sustainability.
Bring your technology awards for industrial manufacturing recognize a select group of coatings innovations, both upstream and downstream.
Each year the awards recognize the industry's more innovative pioneers that have made outstanding contributions to the industry encouraging more companies to invest in technology innovation to improve productivity convenience and green or sustainable developments.
As we highlighted in the video at the beginning of the call Ashton Ashland recently introduced a line that rheology modifiers called Aqua flow solid thickness for the architectural coatings market.
Our first rate with this line has been recognized with the bring your Technology Award in 2022 award recognizes the Aqua flow equal 300, it's meeting the.
The needs for buyer biocide free rheology outages, because the product is shipped in a 100% active.
Solid dose form it enables lower carbon footprint and transportation.
I'm incredibly proud of the progress made by our research and development solvers to accelerate the pace of innovation across our global businesses.
Recognitions are.
Testimony to the successes that we're having.
Responsibly solving for mega trends and customer and consumer needs in the marketplace.
Please turn to slide 22.
As we continue in a period of great uncertainty on a global scale I'd like to provide an update on the tailwind and headwinds.
That week.
Currently face.
Tailwind have not changed demand remains resilient customers still need to rebuild inventories and the COVID-19 reopening is having a favorable impact across many parts of the world.
Our manufacturing plants continue to run well and raw material availability has started to improve.
Asset pricing actions have positioned us well relative to the past and current inflation inflation pressures.
And we are prepared to take further action as needed.
Although supply chain reliability remains a challenge we have started to see some improvement on the trucking side.
Headwind risks are clear the challenge is predicting their potential impact, which ones will happen when will that happen and what impact they will have.
The war in Ukraine, and the potential for energy rationing in Europe , and the supply chain chain challenged it would pose.
Are the most significant risks for Europe , and the global economy.
The potential for additional Covid lockdowns in China's still exist. These factors in addition.
To widespread cost inflation combined with the actions of central banks across the world increase the potential to recessionary or stagflation conditions across the world economies.
It is very difficult for us to forecast these risks.
If they will happen when they will happen.
What magnitude and potential impact it will have.
As such we are not directly factoring them into our outlook.
As we did during Covid, we are focused on the things we can control for these uncertain events were focused on improving our contingency plans to build resilience react quickly to minimize potential headwinds and capitalize on opportunities.
The nature of our business the profile of our portfolio. The actions we have taken the plans we have in place and the diligence of our teams gives us strong confidence despite the global challenges.
Please turn to slide 23.
Our confidence in the face of global uncertainty is driven by three factors.
The first is the resilient nature of our.
The end markets.
In the face of global economic disrupt disruption.
During the most recent downturns the great recession in 2008, 2009, and the Covid impact in 2022, 2021, Ashland's core end markets are pharma personal care and coatings coatings demonstrated strong resilience.
Ashwin sales to each market actually grew during those periods and then recovered quickly when economic conditions normalize.
While every recession is different the resilience of our end markets and customers has been demonstrated.
Second our relatively low exposure to petrochemical base.
Price volatility limits, our exposure to some of the more volatile.
Broad based raw material cost inflation.
Only approximately 25% of our cost of goods sold is tied to volatile energy.
And petrochemical based raw materials. Most of these raw materials are also very fragment and individually do not represent a significant overall cost.
While we're not immune to the rising cost of energy globally as a company, we are far less exposed than others in the marketplace.
Finally, our growth strategy is enhanced by the incremental profitable growth opportunities, we outlined in our Investor day.
Last November we.
We believe these factors will be important contributors to growth irrespective of any recessionary dynamics <unk>.
Factors, such as end market Mega trends and accelerating innovation pipeline, we focus on meeting the evolving ESG requirements of our customers and consumers our broad geographic diversity.
Bolt on M&A strategy, all position us well to grow profitably despite any macroeconomic headwinds.
While <unk> is not immune to the world risks and uncertainty we believe we're incredibly well positioned to successfully weather any potential storms on the horizon.
Please turn to slide 24.
As we mentioned earlier, the worn Ukraine and the potential for energy rationing in Europe , probably represents the greatest risks given the potential impact to European and global supply chains.
As such let me provide some additional clarity to ashland's overall exposure to the continent.
Europe is an important market for our business and represents approximately 30% of our annual sales.
This percentage is roughly the same for each of our life science personal care and specialty additives businesses.
We operate seven production facilities in Europe , we do not have any significant manufacturing operations in Germany, we have three sizable facilities one in the Netherlands, one in Belgium, and France, and we also operate four smaller facilities in the UK, France and Ireland.
Specialty additives and ingredients produced at these facilities and sold globally account for approximately $500 million of annual asset sales, which includes our customers in Europe .
We have additional office operations in Europe , although none are directly impacted by the current war.
In short Europe is an important region and market for the company and we're paying very close attention to how macro events unfold and how governments respond.
We see the greatest potential risk for European headwinds in the form of energy rationing impacting production raw material supply and customer production activities.
As I've stated before we are not immune to these risks and our global teams are planning and building contingency plans in.
In the event the <unk>.
Water situation in Europe deteriorates further.
Please turn to slide 25.
Taking all of these factors.
We have discussed into account on July 18th we increased our.
Financial outlook for sales and adjusted EBITDA for the full fiscal year.
We now expect sales in the range of 235 to $2 4 billion, which represents 13% growth over prior year at the midpoint.
In addition, we expect adjusted EBITDA for the fiscal year.
At $580 million to $590 million, which represents 18% growth over the prior year at the midpoint.
As we have laid out in detail in today's call. There continues to be a large amount of global uncertainty even in these last few months of our fiscal year.
Our outlook presumes that we do not see significant additional inflation in raw material freight or energy.
Such dynamics would require additional pricing actions beyond those that have already been planned and for which there would be a time lag and realization.
At this time, we do not anticipate meaningful rationale of energy in Europe in the September quarter.
Let me be clear as we did in 2020, when Covid emerged and uncertainty was high we're being pragmatic and focusing on the things we can control and forecast for.
While we cannot control, we will focus on planning and building resilience, we do not see a lot of value and being overly optimistic or pessimistic based on external factors, we cannot control or forecast as this would only create more noise in our planning process.
As external developments become clearer, we will maintain our current level of transparency and we will communicate any changes to our outlook as appropriate.
Ashford is well positioned we have confidence in the company's business portfolio market focus global team and our plans and the actions that we're taking.
We have demonstrated resilience in the last two years and we are confident that we will maintain that resilience in 2022 mbo.
Please turn to slide 27.
Over the last decade, <unk> journey of transformation has sharpened our focus as in the additives and specialty ingredients company.
As we have systematically identified and tackled the thorniest problems, we concentrate on areas rich in opportunities to innovate and drive value for customers, where innovation and expertise is one in one business unit can be leveraged and others.
In closing I want to thank you Ashwin solvers once again for their leadership and proactive ownership of their businesses in an uncertain environment.
We create our destiny as a global additives and specialty ingredients company with exceptional businesses have leadership positions in resilient high quality consumer driven segments I'm pleased by the resilience and execution demonstrated by our people and our businesses 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 keypad. Please standby, while we compile the Q&A roster.
Your first question comes from the line of Christopher Parkinson from Mizuho. Your line is now open.
Thanks, so much Jim.
I feel a little awkward asking it this way given the progression you've.
<unk> already made on margins, but when we look ahead over the next 12 to 18 months in terms of.
BDO pricing transferred at market.
As well as your Cellulosic portfolio.
How should we think about the margin potential upside from both Pvp polymers as well as Cellulosic just broadly speaking over the next 18 months or so thank you.
Thanks, Chris.
I think we got to look at it business line by business line I think in Cellulosic Youre seeing.
Margin recovery.
In our pricing.
I think the team has done an excellent job there, but the real long term improvement we're not just.
Tried to increase prices on the older product, it's really about the mix improvement the innovation the capacity expansions that we're bringing on so if you look at where we're putting some of these new capacities, it's in our core plants.
So we'll get both with new products that hopefully will bring in new better margins, but also we will drive productivity and a lot of those investments.
In the.
And the <unk>.
<unk> product line, obviously, the BDO markets have.
They have changed.
Given some of the global dynamics.
Sure.
We've said in other calls we don't sell a lot of BDO, our core businesses are more.
The internal transfer to our personal care and.
Life Science businesses and there we're doing our mix improvement. This has really proven very useful for us in terms of reliability of supply, but we are maintaining that we want to make sure that the businesses are creating value over market prices and I think that will continue what we are seeing in the in the.
And the merchant part of the portfolio is.
These are mostly in MP.
Yellow some some specialty solvents. These products go mostly to semiconductor to the electronic vehicles to active ingredients and AG and then.
In.
Pharmaceuticals and to coatings a lot of these industries are moving to the U S. We're trying to in source. So what our expectations over the next few years theres still going to be some volatility in this raw materials are more commodities, but as the industry.
The industry is moving to the U S.
Why would you bring your products here and then buy all your raw materials from across the continent would sort of defeat the purpose. So we're one of the few suppliers here in the U S. We have a good position, we're very reliable so I think you.
You will see long term.
Volatility will continue but the magnitude will change and I think the bottom will be higher than it was in.
In prior monthly security of supply will be very important and I think in other parts of the portfolio with biobased products, you're going to see the same things innovation a lot of these new products.
Highlighted in one of the slides, we're very excited about them. They have significant growth potential. If you look at some of our hair styling polymers that are natural and biodegradable.
I think they have a lot of room for growth and are being very I am excited that they're being very well received by the market.
Got it and just a quick follow up in terms of the new portfolio, how you're really analyzing things on the free cash flow conversion I think the vast majority of investors understand.
<unk> had to obviously ensure the fluidity of supply to your customers in terms of working capital.
As well as we could characterize it as free cash flow conversion or Capex or you are taking proceeds from adhesive towards some of your growth expansions, but when we take a step back putting those aside and we think about later on in fiscal year 'twenty three 'twenty four question for Kevin I would have is how are we thinking about the ultimate intermediate to long term.
<unk> free cash flow conversion.
All of the new portfolio in terms of management Dare I say once things normalize. Thank you.
Yes, Chris I would.
I would say our expectations have not changed.
And if anything.
As we get through the capital expansions of existing facilities, we create more leverage there.
We should see.
Ultimately again, we normalize we should see some margin expansion because we will have productivity.
These facilities.
And again, our view on multi portfolio can and should do from a free cash flow conversion perspective has not changed and we do have to go through the current situation, we're likely to see continued raw material and other inflation and to fiscal 'twenty three.
And we will have to be nimble around that in terms of.
How do we execute and cash we invest whether it's in working capital or other things.
Yes.
To be clear our expectations of what this portfolio should be able to do from a cash conversion perspective have not changed.
55% to 65% of free cash flow conversion should be the norm.
Once we get to a place where we can call things normal again.
Thank you for the color.
Sure.
Please standby for our next question.
And your next question is from Joshua Spector of UBS. Your line is open.
Yeah, Hey, guys. Thanks for taking my question.
Just wanted to zoom in on the specialty additives and the margin performance. There specifically curious if there was anything unique that occurred to drive the margins to such a high level in the quarter I know some of it's been mix in some tight markets I'm just curious how much of that you think you can kind of hang on to here over the next year or is this a structural.
Yes, there is something else going on.
Thanks, Josh for the question.
Business is running very well I mean volumes have been very steady.
The industry in a lot of our products Hec being one of them, but it is a significant part of our Cellulosic platform.
We sold out so we're out of capacity, but the industry is also.
So <unk> been working very diligently and improving the mix.
We're getting that productivity out of our plants.
So it's really been on the fundamentals that they're driving.
Margin improvement and we have we have been able to recover all the cost increases as we move forward.
Increasing capacity that capacity will really come in only in 2024. So all through 'twenty three will be in the construction phase I don't think theres any other capacity really coming in.
Next year so for us.
The market is slowing down it doesn't really impact as much we don't have that much more volume to sell.
So we're going to optimize the continued to optimize the portfolio.
As we go.
Thanks, I guess just to follow up on the hypothetical scenario demand worsened versus your expectations I think in the past Ashland is focused on more the asset utilization side of things it kind of accept that there's some lower mix that you would sell into.
That philosophy changed what you hold back that capacity to maintain that mix or how would you operate in that area.
So I think as I've said another call I mean, we're focused on spectrum is we're focused on high quality growth, we get it that we need to run our plants, we need to load them, but thats not what drives our business those are things that we do.
Two.
And this is linked to the prior question on our investments that we're making we are investing in high quality growth. Our capital is going to go either to reward our shareholders or to invest in things that will reward our shareholders in the future.
So we have a lot of clarity on the on some product lines, we are not investing in and we're not expanding we're going to optimize we want to bring in new technology. So that we can substitute old products with higher margin products and we know the areas that really we see are our strong leadership a lot of growth potential and a lot of the new innovations bring.
The Hec or cross sell our burner sell so we're being very selective of where we do so we have plenty of room.
For upgrading our portfolio.
We are not going to pick up.
<unk> no at no margin just to fill capacity.
We want to operate with discipline.
Those things if you look at them use a lot of working capital.
We'll do what we need to do short term, but those incremental actions as they become long standing then that's your business and that's not the businesses that we want to be in.
Got it thank you.
Once again, you May press star one to ask a question.
Your next question is from John Mcnulty from BMO capital markets. Your line is open.
Yes, good morning, and thanks for taking my question.
Maybe a question you had commented about 90% of your new products or are now tied to the natural side is sustainable.
Can you help us to understand what percent of your sales right now kind of make up that fit into that category and also maybe give us a little bit of color as to how to think about the margin premium that those that those kinds of sales are bringing in.
Yes, if you look John .
Thanks for the question.
If you go back to the Investor Day, we had a slide I think we've used it in another another calls that sort of breaks down our global sales and we tried to show it in two in three buckets, one is which are natural natural derived and biodegradable that our products meet the.
A lot of the standards for sustainability, but we also recognize that.
We are enabling.
Yes.
Other customers achieve their sustainability goals that create a lot of value.
Saving lives in the pharmaceutical area, we also capture which are sustainable and use and then which are the ones that we need to work on over the long term, but it's over 75%.
80% of our portfolio is more than that.
Sustainable are sustainable and use so it's a significant part of our portfolio and if you look at the.
The lower exposure that we have to petrochemicals the.
The two foundations that will give us confidence on where we are is very resilient markets.
The portfolio of technologies that we have that has less petrochemical exposure a lot of that is because we already have a pretty significant base in more sustainable think Sally low six.
A lot of these polysaccharides chemistries buyer functional.
Neutral.
These are all products that aren't involved with the chemistries that we would have used in our old adhesive business written up.
Got it got it fair enough.
And then I guess, just I understand that your volume constrained in a number of product lines I guess when you. When you look at your sales growth that you saw for the quarter I guess can you break out how much was tied to the price mix versus how much was tied to the volumes and how as we go forward.
Is there when.
When should we start to see the ability for volumes to pick up as you kind of start unlocking capacity it sounded like the Hec want it really isn't until 2024 I think there are some others that you are bringing on that may come on a little bit sooner. So maybe you can help us to think about that.
Yes, so the majority of the improvement we have had a little bit of volume some of the volume growth are in areas, where the volumes are smaller like <unk> preservative. So when you look at the metric ton numbers to the overall company probably sales would be a better number to use so.
But but the bulk of it has been the price mix.
And.
In our core businesses.
If you look at our Cellulosic franchise, as we said as I said before 2024 would be the Hec.
<unk> cel and <unk>, our MCP platform are areas that we're also improving to increase capacity.
I think we are.
Fine where we are in terms of our settled Linux chain.
So a lot of <unk>.
<unk> are going to be in these higher end areas that we want to grow of our Cellulosic portfolios and then really shifting more of the growth into some of these.
Based.
Products that we use the other product that I would highlight that we're also investing in this asset flow.
Expanding our capacity to.
The supply they continue to grow well.
Got it thanks very much for the color.
Thanks.
Please standby for your next question.
And our next question will come from David Begleiter from Deutsche Bank. Your line is open.
Thank you good morning.
Kevin on the implied fiscal Q4 guidance at the low end EBITDA will be down roughly 20%.
Quarter over quarter, what's driving that potential.
Quarterly decline from up from Q3 levels.
Let me make some comments and Kevin if you want to follow up.
And the biggest the biggest issue obviously, we have the turnaround that's coming through.
The incentive comp we've had.
Some some increases there but.
But the rest of the business is really about the mix.
Flow through on as we've talked in other calls the flow through of cost and pricing.
It isn't always.
Aligned with.
The increases happen how they flow through so it's just that regular part of.
Noise, but theres nothing major.
Obviously, we don't want to get ahead of ourselves.
We feel that we're going to do well in the quarter.
But given all of this level of uncertainty.
We don't want to get ahead of ourselves in some areas, but Kevin you want to add some other color.
Yes.
That's right I would say, it's all normal operating flow based on based on whats going on one specific item.
Typically we do a Calvert city turnaround in June every year, we didn't do one last year.
We got back into that cycle again this year.
But turnaround the impact of that was recapitalized and so.
I mean, it was it was there.
Our full year forecast already but it'll it'll flow through into Q4 impact of that is probably around $8 million versus prior year. So that's yeah, that's an impact.
We also obviously are experiencing some currency headwinds.
That'll flow through those will be a little worse in Q4 than they were in Q3 on an average basis.
Really there is nothing specific again. This is just the operating operating statistics flowing through the financials.
In Q4.
Okay. That's very helpful. Appreciate that and as you might know 'twenty three is uncertain, but any any way to think about potential growth.
And so maybe it's the other core specialty segments.
And better earnings growth next year at this early time frame.
No I think it's too early for us to really comment on 2023.
Especially I think this quarter.
What's happening in Europe that will be a very critical.
To see how things go so I'd probably keep comments.
Till the next call.
What I would say what's in our mind as we look at the future obviously recession inflation.
Energy hedges are going to be.
Did not.
Not being carried over so we're looking at what we do there any new inflation.
The European situation with energy rationing, Covid lockdowns in the supply chain, which I think.
Slowdown that should improve.
So we're focused on that that our core strategies, we know what we're going to do we know what we're not going to do we're not going to invest in certain areas that we don't feel that.
Core to our future, but we think that there is growth opportunities I think of some of these products that we're launching that are biodegradable natural products. We can replace these are not going to be the only new growth, so you're going to replace old technologies ours or other peoples.
That said our customers are committed to the changeover.
And being bio base I think cost per there's going to be a lot more interest in those areas.
Looking.
The big capacity expansion are coming towards 2024, and a lot of debottlenecking and trying to expand capacity. So that we can sell more.
In the coming years and some of these products where demand continues to be very hot.
Our customers are still using it.
Let's say some of these things are just slow down.
We're going to continue to be tight people.
Want to make sure that we are a reliable supplier, especially given our cost structure, we've built with them over the last year.
So innovation will be debate.
The big driver for Us in terms of the neighborhood that additional growth.
Great. Thank you very much.
Thank you.
And our next question will come from Mike Harrison from Seaport Research Partners. Please go ahead.
Hi, good morning.
Mike.
Guillermo It sounds like you are still seeing a lot of issues around the logistics side in ocean freight.
Hoping to get maybe a little bit more color on what youre seeing there and also if you can talk about kind of do you have inventories, where you need them in order to manage through these issues that youre seeing around shipping and ocean freight.
So trucking as I mentioned, we're seeing some improvement.
In the U S, especially a little bit still more noise in Europe ocean freight and a little bit of improvement, but it's still not not.
Not significant but I think.
Things start slowing down and we should start seeing a little bit of improvement I think certain lines shipping to into certain regions like Latin America, and the latter is still a little bit complicated. So we're monitoring that.
I don't think the on time reliability has improved that much it's still in the no.
Maybe improvement in the Twenty's to maybe in the 30% so still way below the historical 70, 80% on time.
So I think the issue there is us continuing to build inventory. This some of our numbers you see now we built inventory.
Because of our BDO turnaround, so that'll be coming down some of the inventory hopefully, we'll be able to build that up.
Some of the room.
The more remote regions in Asia, Latin America, where we need to build that safety stock.
Or local reliability.
Shift there that b cell from local warehouses there.
Last year last year has been challenging because orders come up so fast that you.
You sell it before you are able to review rebuild the inventory. So I think youll start seeing progress we'll start seeing progress on during the next few months probably more into 2023, then in this quarter itself.
Alright, and then.
I was hoping that you could also walk through just in terms of the cost picture, obviously, nobody knows what's going to happen in terms of energy supply in Europe , but just as you look at some of your key buckets and particularly around sorry. Your low six are you seeing signs.
Some of those costs are going to be declining or at least stabilizing.
It's going to vary our big buckets of raw materials cellulose on one side.
For our Pvp as butane in Lima, those are the two big ones, we have the transfer pricing internally for BDO.
The rest really gets very fragmented.
<unk> cost I mean, these are not core ingredients their process chemicals that we use.
And none of them are big so it's very hard to predict at this point in time because of the <unk>, we see some improvement.
The supply has improved is improving the <unk>.
<unk>.
Are there going to be any hiccups that come through these risks that we talked about.
As we move forward. So we're monitoring that I think our current pricing actions position us well.
To recover.
As we move forward, but anything new that happens, we're going to have to take some additional action I.
I think on the energy side.
For everybody I think the biggest challenges if you were hedged this year what are you doing for next year. So we're looking at all these mitigation strategy, especially around Europe building inventories, how do we do our hedging things.
Things of that nature to position ourselves in a strong position, but I think in the slide that we show on the Pie chart you see that.
Our exposure is much lower than other companies in a lot of these more petrochemical or high end.
Energy intensive.
Products so.
So we should be good.
And my view is if there is a big broad inflation, everybody is going to move on price. So.
The environment.
Everybody's going to have to cover.
This.
Broad based inflation if the inflation is brought down in their specific inflation on specific products for whatever reason, we're less exposed because none of these products are really huge for us I think cellulose and butane out of the two things that we look at a little bit more the rest will be able to manage through.
Alright, thanks very much.
Thank you.
And for our final question, we have Michael Susan from Wells Fargo. Your line is now open.
Hey, guys nice.
This quarter there.
Thank you.
Yes, you got a nice slide on onset of resilient growth drivers if if this.
If a recession is unfold that mean do you think the segments.
How do you think they perform could they grow a little bit.
Flattish down ish, and then what's sort of the right EBITDA.
EBITDA level for it.
Kelvin.
Alright.
So Mike.
Don't have a crystal ball I mean, I think what we're pointing out is to look at history look at when we looked at Covid.
These are resilient markets is not just us if you look at our customers. They tend to be very resilient to pharma guys. The personal care and even in the architectural side of the coatings business very resilient overall so.
I think we look at Covid what happen in Covid.
The historic performance of these segments has been good I don't see why we would be any different.
If there are unique situations I think.
What changes here is not just the recession side of the equation I think their history should be a good <unk>.
Parameter for us to look at.
Is supply its supply side issues and that's why I think the energy rationing in Europe is the bigger issue for everyone not just Saar segments for everybody else, that's a different type of problem.
And I think it's not just that you will have problems in supply in Europe . It will destabilize global supply chain, because look at what happened with LNG.
Natural gas.
It will flow to where the prices are going to be higher so if Europe needs product youre going to see higher demand in the U S and other parts of the world. So that's the part that we're monitoring I think.
From a recession perspective, a pure recession perspective, I think we're well positioned given the portfolio that we have given that our are our markets right now.
From a technology perspective are also sold out I think as an industry, we should be in a good place.
That supply side and inflation side is the one that I am looking at more.
Great. Thank you.
Great.
There are no further questions at this time I would now like to turn the conference back to Guillermo Novo for closing remarks.
Thank you everyone for your interest your questions. We look forward to connecting with all of you in the coming <unk>.
As in weeks.
Obviously a very.
Interesting time for everybody.
But.
Leave you with the thought that I think we have a very strong portfolio.
Both in terms of markets and the technologies that we have our team is very focused we know who we are we know what we're going to do we know what we're not going to do so as we did in Covid I think staying focused on the things we can control staying calm and preparing ourselves to react to minimize any headwinds in maximizing the opportunities is.
Our mindset is right now so I look forward to talking to all of you in the coming days and thank you for your support and attention. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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