Q4 2022 Ashland Inc Earnings Call
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Good day and thank you for standing by welcome to the Ashland, Inc. Fourth quarter 2022 earnings call at this time all participants.
They are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask question. During this session you will need to press star one one on your telephone.
You will then hear an automated message advising your hand as waste please.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Seth Mrozek director of Investor Relations. Please go ahead.
Thank you Bella Hello, everyone and welcome to Ashland's fourth 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 September 32022 at approximately five PM Eastern time yesterday November seven.
The 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.
As a reminder, 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 2023.
These forward looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections.
We believe any such statements are based on reasonable assumptions, but cannot assure that such expectations will be achieved please refer to slide two of the presentation for a more complete explanation of those risks and uncertainties and the limits applicable to forward looking statements. You can also review our most recent Form 10-K under item one a for a car.
Hence a discussion of the risk factors impacting our business.
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 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 performance and results in the fiscal <unk> fourth fiscal quarter.
Next Kevin will provide a more detailed review of financial results for the quarter.
Guillermo will then provide additional commentary related to ashland's financial results in fiscal year 2022 progress made related to our operating strategy our goals for environmental social and governance commitments and an overview of our financial outlook for fiscal year 2023.
We will then open the line for your questions.
Now please turn to slide five and I'll turn the call over to Guillermo for his opening remarks.
Thank you Seth and Hello, everyone. Thank you for your interest in Ashland and for your participation today.
Having spent the last two weeks in Europe meeting with customers and our teams today, we are holding this call from London seems appropriate given the central development in Europe will be critical to the results in 2023 and maybe longer.
<unk> results for the quarter were consistent with our expectations and we delivered sales and adjusted EBITDA for the year at the top end of our expected ranges.
Customer order dynamics remained strong across our core end markets and we continued to make significant progress.
Taking appropriate pricing actions to recover costs across all segments.
Global supply chain challenges have demonstrated some signs of improvement.
Given the tightness in markets globally, our teams have taken steps to improve the mix of high value products, we're selling.
We continue to invest on future forward sustainable innovations to drive profitable growth accelerating the pace and impact of new product introductions.
And our internal investments to expand capacity for high value products in key markets are well underway and on schedule.
Ashwin performed well during this quarter and fiscal year, delivering strong results, which I will review later in the call.
Our ability to respond quickly and operate nimbly is a result of the intentional changes we made to the company over the past three years I'd like to congratulate the entire Ashland team for the excellent results and the progress made.
Let me share with you some of the highlights for the fourth quarter results.
Sales of $631 million grew by 7% compared to prior year against the backdrop of strong global demand all businesses contribute to our growth.
Adjusted EBITDA declined by a modest 1% to $147 million, our strong results were offset by unfavorable foreign currency higher incentive compensation.
And planned facility turnaround cost.
Adjusted EBITDA margin declined 190 basis points to 23, 3% compared to prior year quarter with FX.
Turnaround negatively impacting margins by 310 basis points.
For the full year Ashland achieved an adjusted EBITDA margin of nearly 25%.
Returns to shareholders continue to grow during the quarter with adjusted EPS up 20% to $1 46 per share, reflecting the impact of share repurchases lower interest expenses and favorable effective tax rate.
Please turn to slide six.
As I noticed previously all segments contributed contributed to delivering sales growth in the quarter driven by inflation recovery pricing mix improvement and many products lines remaining capacity constraint.
And segment adjusted EBITDA margins remained strong despite the headwinds I referenced earlier.
In a moment, Kevin will provide more detail on the results for each of the segments. While there are many global uncertainties and the horizon. The Ashland team is performing well and executing on the actions that are within our control.
Look forward to discussing our outlook for fiscal 'twenty, three and reviewing the broader progress.
By the company later in the call in the meantime, I'll turn over the call to Kevin to review Q4 results in more detail Kevin.
Thank you Guillermo and good morning, everyone. Please turn to slide eight.
Total Ashland sales in the quarter were $631 million up 7% versus prior year, driven by continued inflation recovery and mix improvements.
Unfavorable foreign currency negatively impacted sales in the quarter by 6%.
Gross margin was relatively flat at 33, 1%, reflecting cost recovery and mix improvements by the commercial teams in the face of significant cost inflation.
Excluding key items, SG&A, R&D and intangible amortization costs increased to $123 million in the quarter, primarily due to higher variable compensation accruals and total ashland's adjusted EBITDA for the quarter was $147 million down only slightly from the prior year adjusted EBITDA.
<unk> of $149 million.
It's important to note that unfavorable foreign currency negatively impacted adjusted EBITDA by $15 million in the quarter, while the planned turnaround at the intermediate facility in Lima resulted in $13 million of incremental cost.
Ashland's adjusted EBITDA for the quarter was 23, 3% with FX and the turnaround negatively impacting the margin by 310 basis points.
Adjusted EPS, excluding acquisition and amortization for the quarter was $1 46 per share up 20% from the prior year quarter, reflecting a lower diluted share count lower interest expense and a favorable effective tax rate.
Ongoing free cash flow was $93 million for the quarter a reduction from the prior year, primarily reflecting an increase in working capital given the inflation in raw material and other input costs, we have seen globally.
Now, let's review the results for each of our four operating segments. Please turn to slide nine.
Life Sciences had yet another strong quarter and the team executed very well.
Pharma demand remains strong product mix was favorable the team executed on disciplined cost recovery and the plants operated well all contributing to margin expansion.
Unfavorable currency impact was an offset to the strong performance in life Sciences and.
In total life Sciences sales increased by 13% to $213 million, while adjusted EBITDA increased by 19% to $57 million adjust.
Adjusted EBITDA margin increased meaningfully to nearly 27%.
Personal care also had a strong quarter with good execution by the team.
There was strong organic demand across all end markets and the microbial protection acquisition. We made last year is performing above expectations. The team delivered disciplined cost recovery through pricing.
And our plants operated well.
As with life Sciences. These results were partially offset by unfavorable currency headwinds.
For the quarter personal care sales increased by 3% to $188 million, while adjusted EBITDA increased 10% to $56 million adjust.
Adjusted EBITDA margin again increased to nearly 30%.
Please turn to slide 11.
Specialty additives had a solid quarter overall with good performance by the team.
While demand remained healthy and mix improved during the quarter capacity constraints and unfavorable foreign currency limited overall sales growth.
For the quarter specialty additives grew sales by 3% to $187 million, while adjusted EBITDA declined by 9% to $43 million.
Primarily reflecting higher operating costs, including higher energy costs at our European Cellulosic manufacturing facilities. This was partially offset by with inflation recovery.
Adjusted EBITDA margin also declined to 23% due primarily to the higher operating costs.
Please turn to slide 12.
Intermediates reported sales were $64 million up 7% compared to the prior year, driven by higher merchant market pricing and improved product mix management.
As discussed on previous earnings calls the intermediates team performed a planned turnaround at the Lima, Ohio facility during the quarter. The turnaround was executed on time and budget, resulting in costs of $13 million, which impacted segment profitability in the quarter.
Intermediates reported adjusted EBITDA of $17 million, a decline of 19% compared to prior year and adjusted EBITDA margin declined to 26, 6%.
Please turn to slide 13.
As we discussed at our Investor Day last November capital allocation discipline continues to be an important component of ashland's value creation strategy.
The actions we have taken over the past year have improved our financial position and provide for increased flexibility.
Since August of 2021, we have executed on $650 million of share repurchases, representing approximately approximately 11% of our outstanding shares.
And earlier this year Ashland's board of directors approved a new $500 million evergreen.
Evergreen share repurchase authorization.
As of the quarter closed on September 30, we had cash on hand, plus available liquidity totaling roughly $1 3 billion.
Our net debt has reduced to $624 million, which is about one turn of leverage we have no floating rate debt and all of our outstanding debt is subject to investment grade style credit terms.
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 personal care and coatings against a backdrop of global uncertainty Ashland has a strong balance sheet with the flexibility to pursue.
Our targeted growth strategy.
With that I'll turn the call back over to Guillermo to discuss fiscal 'twenty, two results and our priorities and outlook for fiscal 'twenty three Guillermo.
Thank you Kevin and now please turn to slide 15.
I'd like to take a few minutes to recap ashland's very strong results in the recently completed fiscal 'twenty two.
We experienced strong resilient demand from our consumer focused end markets. Following the global pandemic impact of 2020 and 2021.
Given the strong demand we are largely sold out across many product lines, resulting in capacity constraints for our segments.
Our commercial and operations teams were able to continue with a stated strategy of mix improvement and we're also able to drive productivity improvements.
Global supply chain and logistics challenges remained elevated throughout the year, though are now showing some encouraging signs of easing.
Cost inflation, particularly for raw materials freight and energy were significant throughout the year and our teams did an excellent job on recovering inflation and maintaining our overall margins.
Our operations team executed at a high level to drive robust plant loading and operating discipline.
Innovation has been a central theme of our strategy and of who we are as a company during the year, we launched a record number of new products, which also have.
Significantly higher sales growth potential in line with our goal of increasing innovation speed and impact.
And we are aligned and they are all aligned with our sustainability goals.
It is very rewarding and encouraging to see these new technologies received so many awards and recognition from our customers and the industries we serve.
In addition to these factors changes in the global economy, and the strengthening of the U S. Dollar drove significant unfavorable currency foreign currency impact to both sales and earnings.
In spite of the challenges faced Ashland delivered sales and earnings growth for the year that surpassed our original expectations.
Furthermore, Ashland completed numerous steps this year to further strengthen and enhance our balance sheet. We closed the sale of the performance adhesives business earlier in the year and use the proceeds to repurchase a significant significant number of our shares and reduce our outstanding debt as a result, we now have.
<unk> low net leverage with no floating debt outstanding and we remain.
Ill remain with significant liquidity.
Also substantial cost inflation resulted in an increase in working capital balances and lower ongoing free cash flow for the year, we expect those trends to moderate next year, enabling cash flow generation more consistent with our stated targets.
As we've discussed on past earnings calls, we began numerous large capital investments to increase capacity for key product lines to support our pharmaceutical personal care and architectural coatings businesses. These expansions are well underway and we continue to expect production to come online.
Towards the end of calendar year 2023 and into 2024.
And finally, we continue to work to rebuild inventory levels in key regions not only in response to the supply chain challenges, but also in preparation for some of the challenges the global marketplace is experience.
In summary, Athens balance sheet gives us a strong footing in an uncertain world and we have the flexibility and discipline to execute our growth strategy and reward our shareholders.
We continue to strengthen our internal innovation portfolio management to both accelerate the pace of new product launches and to ensure that those launches create the most value for our customers and for Ashley.
Please turn to slide 16.
Before I turn to our financial outlook later in the call I would like to review.
Key financial highlights for the year Ashland sales grew 13% for the year to nearly $2 4 billion each.
Each of our operating segments return double digit sales growth.
As discussed the strong results were driven by resilient and market demand mix improvements.
Among capacity constraint assets and disciplined cost inflation recovery.
Partially offset by significant foreign currency headwinds of $77 million.
Please turn to slide 17.
Earnings growth also greatly outperformed our prior fiscal year Ashland adjusted EBITDA.
$95 million or 19% to $590 million, which was well above our outlook at the beginning of the year.
All segments grew adjusted EBITDA by at least double digits, reflecting early cost recovery action sustained quality margins and continued mix improvement by our commercial teams.
And as I stated before our operations team executed at a high level running our facilities efficiently and productively.
And as with sales results adjusted EBITDA for the year was partially offset by significant foreign currency headwinds of $38 million.
Adjusted EPS, excluding acquisition amortization for the year was up was five.
Five.
$5 70 of.
52% from prior year.
Let's turn to slide 19.
Our priorities remain focused on growing our business, while maintaining its quality.
Driving profitable growth opportunities margin and free cash flow example.
Expansion, while leveraging ESG as a core.
<unk> at enabler.
From all the comments I share our teams continue to demonstrate strong progress on all fronts.
<unk> operating resilience strategic focus innovation and growth and capital allocation discipline.
Please turn to slide 20.
We opened our call. This morning with a video that coincides with the launch of Ashland's inaugural ESG report.
Reality matrix and experiential web pages, you can access the material, which includes many videos from our leadership team on our website.
The report is a manifestation of our commitment and execution behind our global environmental social and government governance activities.
And includes an interactive materiality matrix.
Transparently shows ashton's agenda relative to ESG and that we consider.
A key competitive advantage.
The report underscores our company's transformation and right sizing.
The integration of ESG into our strategy and within the lenses of the business and profitable growth.
It is also the holistic convergence of everything interconnecting, environmental social and governance as well as sourcing operations and solutions.
The report and many supporting web pages show, how everyone in the company fits into actions ESG program.
As previously mentioned <unk> is in the process of setting science based targets and we expect to share more information in early 2023.
Please turn to slide 22.
As we think about <unk> operations and results for fiscal year 'twenty three.
We recognize that there are many known macroeconomic dynamics impacting not only our company, but our customers suppliers competitors and the consumer.
While some of these factors could be negative some could also be positive.
Known dynamics include global Recessionary trends continued inflation supply chain and logistics challenges.
European energy cost and availability.
Pricing arbitrage in certain areas of the globe.
Rising interest rates and higher cost of capital global currency volatility and a decelerating M&A environment.
We also recognize that there are known factors about how Ashland is positioned in this environment.
These includes a business portfolio that is focused on serving resilient consumer focused end markets with cohesive and disciplined teams.
We have a number of capacity constraints.
Until new investments come on stream.
Our strong operation.
Performance and pricing momentum and reduced exposure to petrochemical linked to raw materials have been important during this period of rapid <unk>.
Cost inflation.
We also maintain a strong balance sheet and are able to pursue growth capital investments many of which are well underway.
Furthermore, we acknowledged that there are risks and uncertainties in the world today that are difficult difficult to assess and quantify.
The more significant a more significant global recession.
Warren Ukraine regional weather impacts energy availability and cost Covid government mandated lockdowns and continued currency volatility are all factors that could have an impact over the coming years.
And these.
These risks could impact us in different ways, both positive and negative.
In the past as.
As in the past, we do not see significant value in trying to forecast it very uncertain events, we will focus on the things we can control and prepare contingency plans to address these bigger uncertainties, if or when they happen.
As such we are not factoring in these high risk high uncertainty events into our outlook.
If and when they occur we will update our outlook accordingly.
Please turn to slide 23.
Our financial outlook for fiscal 'twenty, three takes into account the known macro operating environment and ashland's unique position within that landscape.
Although we are expecting a recessionary environment during 2023 of our businesses and markets. We serve have historically demonstrated resilience.
We do not have any indication that this resilient profile has changed we believe our core markets will remain.
Relatively strong even in this recessionary environment.
We have continued pricing and mix carryover into this year based on the actions taken during 2000 fiscal year 'twenty two.
And we will take additional actions as needed to recover any additional cost inflation.
We expect to be capacity constrained this year until new capacity comes online in late calendar year 2023 and into 2024.
In line with this.
With our demand outlook, we expect no changes in our underlying operating performance and we do not expect and we do expect some improvement in specific raw material availability and cost despite some lingering challenges in Europe .
In terms of potential headwinds, we have factored in several risks.
So resilient, we are not immune to some softening of consumer demand from our global recession, we expect to see some customer destocking in several markets and regions. During the early part of the year.
While energy and labor inflation will be more broad based raw material inflation will vary by technology as such there will be more supply and pricing arbitrage.
Certain parts of the world.
We also expect continued negative impact from unfavorable foreign currency.
Given these risks and.
And the potential for increasing volatility, we are providing a broader than usual guidance range.
Taking these factors into account for fiscal year 'twenty three we expect sales in the range of $2 5 billion.
<unk> to $2 7 billion, which represents nearly 9% growth at the midpoint.
With inflation recovery and mix improvement remaining the major growth drivers.
We also expect adjusted EBITDA in the range of $600 million to $650 million.
Which represent a 6% growth at the midpoint and close to 10% excluding currency impact.
These outlook ranges do not incorporate all unknown risks and uncertainties.
Let me be clear as we have done in the past few years when uncertainty was high we're being pragmatic and focusing on the things we can control and forecast for what 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 this would only create more noise in our planning process.
As external developments become clear, we will maintain our current level of transparency and we'll communicate any changes in our outlook as appropriate.
<unk> is well positioned we have confidence in the company's business portfolio market focused global teams and our plans and actions that we're taking.
We have demonstrated strong sales and earnings growth during the last two years and we are confident that we will maintain that.
That resilience in 2023 and beyond please turn to slide 25 over the last decade asset journey of transformation has sharpened our focus as an in additives and specialty ingredients company.
As we systematically identify and tackled tackle the thorniest problems, we concentrate on areas rich in opportunities to innovate and drive value for our customers, where innovation and expertise in one business can be leveraged across others in closing I want to thank the Ashland team once again for their leadership and pro.
Active ownership of their business in an uncertain environment.
We have solidified our portfolio as a global additives and specialty ingredients company with exceptional businesses that have leadership positions in resilient high quality consumer driven markets.
I'm pleased by the resilience and execution as demonstrated by our people and our businesses and I look forward to the opportunities that lie ahead.
Thank you everyone for joining us and Bella, let's move to Q&A.
As a reminder to ask a question you will need to press <unk> one on your telephone please.
Please standby will compile the Q&A roster.
Our first question comes from the line of Christopher Parkinson with Mizuho Securities. Your line is now open.
Awesome good morning.
<unk> just out of curiosity, just given the wide guidance range can you just talk a little bit more specifics regarding what would imply the lower end of that range and perhaps it would imply the higher end of that range specifically by.
Subsegment, if youre comfortable thank you so much.
Thanks.
Thanks, Chris for the question so on the on the lower side I think.
We're sold out so one of the issues that we have is for the higher side volume is less of a driver. So if you look on the lower side is that.
We do see some more recessionary impact in our businesses or that there is more inventory adjustment from customers. So a volume impact that could impact both gross profit generation and absorption.
Lower.
<unk> mix.
It could kick in obviously for FX.
<unk> is a big challenge and continues to be a big impact for both upside or downside scenarios.
And I think on both it's very interesting I mean inflation is driving a lot of the revenue.
Growth for for everybody in this environment, so depending on how you look at it I mean protecting margins as a high priority but.
The growth in the EBITDA generation will also vary depending on the inflationary outlook.
On the high side it really is more about.
Inflation continued to be strong.
Sure.
Robust movement on pricing.
Recovery and mix improvement and the FX is a little bit more favorable.
I would say mixed understood.
They also have a positive impact on <unk>.
The upside as well.
Alright.
And just going back to the analyst day, which I guess is about a year ago, I mean, theres a lot of debate and discussion around longer term personal care growth.
We've done pretty well you've exited some business lines. It seems like you've launched new products, specifically in hair care and add some preservatives from Schulke could you just gave you.
Your updated let's say intermediate term view of the personal care portfolio, where you stand where you want to be and anything you're particularly excited about thank you.
Yes.
The core.
Parts of the business. The teams are focused we're driving margin recovery and I think it's important to note for most for.
For the core businesses science personal care and coatings.
And in specialty additives.
The.
Inflation recovery maintained our margins any improvement really came more on the side of the mixed impact on those businesses, which is a little bit different from the intermediate side of the equation. So.
They moved to maintain and protect margins.
I think theyre all focus on where we can get share share gains, where we can drive growth with our underlying businesses.
Eliminated some of these underperforming areas, so thats, creating less noise of.
In our portfolio and I think it's about innovation I mean, the real impact now for us.
$1 22 and into 2023 is getting that pipeline moving I mean, we're introducing a lot of new.
Products the revenue of those products really we start kicking in.
In 2024, because between introducing it customers start working them they like the product and they really start introducing into new formulations.
There is a pipeline process. So our what excites me right now is that that pipeline filling is going very well with a lot of very strong launches and I think the personal care team has done a great job on.
On the innovation front, a lot of not just a lot of products with higher impact.
It's very as I said in the script.
My comments the amount of recognitions that we are getting awards is if that's a leading indicator I think that was very positive that we're hitting the sweet spot of what our customers want.
Very helpful color. Thank you so much.
Thank you.
Okay.
Your next question comes from the line of David Begleiter with Deutsche Bank. Your line is now open.
Thank you. Good morning, Guillermo are you seeing much destocking in your end markets and when do you think if you are when do you think it will come to a conclusion.
Its variance.
It varies by segment.
And this is we're monitoring that very closely.
Because there's two dynamics one.
The pressures working capital for everybody has been a big big issue with inflation. So you have a lot of companies looking at what they do ended the year comes in this first quarter, probably will be the most the noisiest.
In terms of that inventory, but at the same time, there is still some significant challenges of product availability and youre seeing it, especially here in Europe , where <unk>.
<unk> matures the economics are of the situations are bringing down production in certain areas.
And I'll comment on.
Raw materials, probably in some of the questions that I'll get but but.
There is a risk of supply also it's not gone so depending on the industry. If I look at pharma they are much more worried about.
Supply reliability, they're looking to make sure that they are looking at.
Risk management contingency planning they want to make sure we have inventory some of our supply.
The other suppliers already having special European having challenges.
So that part of the portfolio is not moving as aggressively to drive inventory reduction that much worried about security of supply.
On the other side I would say some of the industrial areas are looking much more.
Some adjustments in the inventory and in personal care it depends on the customers and where they where they stand. So it's it really is customer and industry specific depending on where they stand on the risk tolerance of supply issues.
Moving forward.
And what does that mean for F Q1, EBITDA relative to either relative to last year, I assume up but up by how much.
We have the Q1 is probably the one that's going to be a little bit more noisy and it's more of the inventory side of the equation. We still the advantage. We have is theres a lot of carryover pricing and mix momentum. So we have a lot of momentum tailwind coming into the year. So.
I think this is where the the bigger range that we're giving as is.
Having an impact to.
To be very transparent we were looking at do we give annual guidance or do we give a quarterly guidance. It is a very difficult environment right now to forecast because of all of these variables. So we acknowledged that there might be a little bit more variability in terms of inventory and demand in the first quarter, but we also come forward with a law.
We'll be producing two to rebuild inventories and we can always shift supply across regions in different parts of the world.
Were some of the supply is still tight.
Your next question comes from the line of Joe.
Josh Spector with UBS. Your line is now open.
Hi, Good morning. This is Lee.
It's been going on for Josh.
So in the fourth quarter, just trying to sort of work out sort of what you guys had here from sort of pricing and volumes.
So I mean, it looks like sort of outside of rns.
We saw more of a slowdown on the pricing side.
So just in the context of that could you kind of talk about your 9% sales growth next year, and just walk us through what youre, assuming there from a cost and volume perspective.
Okay.
Just a.
Two new specifically to the intermediate segment.
Yes, sorry, all the all the specialty segments excluding in Dominion.
Everything else has been intermediate yes. Thanks.
No I think we still see if you just go down down.
Each of the segments, we still see continued demand.
Pharma I think we're experiencing probably.
The core market is robust.
We're experienced a little bit higher demand because other other suppliers are having problems.
And we've been very reliable. So so I think we've been a go to go to supplier by many of our customers. So we expect that resilience.
Two to continue.
<unk>.
In personal care, it's going to vary by player in region, I think a little bit more noise here in Europe , but in other parts of the world, We still see continued growth.
Again, the segment continues to behave as it has in the past. This is not something that you don't wake up and start stop brushing your teeth in a recession or we're using shampoo conditioners or some of these products. So it should remain resilient and in specialty additives, we do see that scenario, especially in Europe , where we expect.
To see a little bit softer demand there is clearly a shift from DIY.
The DIY normalizing contractor market still remaining pretty strong in the U S and parts of Asia, but slowing down a bit.
In Europe , So our issue as I said, we don't have a lot of volume. So it's really going to be more around that pricing mix impact a lot of it is carryover from prior year. So we should be robust.
And really then the issue is new inflation and I think the part that we're looking at is energy is still a big issue, especially in Europe .
Labor Youre going to see merit increases across the world are going to be higher than last year for most companies and that will include US. Our question is will we have to do more throughout the year, depending on how things evolve all that would higher inflation those broad based inflation I think.
Would push everybody to take action to pass it through the chain.
And even I would say in our from the raw material perspective, and again it drives your question of growth.
Although raw materials, many the general inflation has decided a little bit.
For our segments and all of the players or competitors are here the energy side has a big impact and the specific raw materials, we do see some major.
Pushes on cost and availability, so I would highlight for us.
50% of our new inflation that we're seeing that are coming out of caustic.
And in iodine as an example, so.
For those product lines any competitor is going to face the same world that we do a significant cost take as an example was a non issue raw material for us in 2021, it doubled towards the end of 2022 and now the prices, 5% to six times what it was in 'twenty. One so it has become a major cost item.
Which for our Cellulosic for us for our suppliers is a big cost.
So we're passing it on so that'll be a big a big driver in terms of the pricing.
Dynamic.
And I think the other the other part of it is availability.
Is expensive because of the general demand.
Has come down so the chlorine is not being used by automotive construction. So they can't make caustic. So we're very concerned about availability.
So it's sort of we're still in a micro in some of our product lines in the same world, we were last year, but in a more micro that dynamic.
That impacts certain technologies, and I think thats really for us what's going to drive that revenue.
Growth potential.
Alright, Thanks John .
And just for a little more little more detail Josh.
Pricing realization in Q4 was almost exactly the same as it was in Q3, so pricing remained very strong in Q4.
Great. Thanks, and then just touching on your.
Capital allocation priorities and your leverage is very low you've got the stated target there trying to do the bolt on M&A.
Remind me Youre building cash and.
Just in the context.
Yes, if the deal environment remains challenged and you continue to kind of build.
Cash I mean, you have enough capacity at the moment to do multiple set of Schulke saw its top deals.
How do you think about the cash level, where you would start to kind of do.
Some more meaningful shareholder returns.
If something doesn't kind of adventure and the next.
Six to 12 months thanks.
Yeah no.
I think well said I mean, we have a lot of flexibility and I think the issue now is prudent and how we move obviously being being well positioned from a balance sheet also not just the income statement.
Puts us in a very strong position M&A is softening hopefully some of the prices and multiples expected.
Come back down a little bit so there might be some interesting opportunities. So we want to be.
Patient and focused we don't we want to do bolt on M&A is we don't have to do it.
So I think this gives us an opportunity to invest organically to look at M&A and to reward our shareholders.
We have an authorization in place to do that we have a $500 million share repurchase authorization. The board put in place earlier this year. So.
With the flexibility we have we also have the authorization.
Alright, thank you.
Your next question comes from the line of.
Mike Harrison with Seaport Research partners. Your line is now open.
Hi, good morning.
Hi, Mike.
Oh.
Yeah.
<unk>.
Hoping you could comment on the.
Personal care and household business.
The inability of the margin improvement there.
And I was curious if there is something special about Q4 that leads to higher margins just from a seasonality perspective.
As I look back through history. It seems like Q4 is kind of the peak for the year.
In terms of margin performance in that segment.
Yes.
I think Mike It was <unk>.
Around mix and.
Last six weeks of the quarter with very favorable mix.
In terms of the results and Thats what drove most of the performance.
Alright, and then the specialty additives business.
Some of the lower end segments.
And our own prioritization of segments. So you could see volumes clearly as inventories get reset we see most of that in Europe not not.
And France, so we're in a little bit more advantaged situation than some of the other players that are located in Germany.
Thank you very much.
Yes, thanks for taking my question.
The balance of trying to squeeze cash out of working capital and at the same time, making sure that you have all the suppliers that you need I guess, how do you. How do you think about balancing that as we look to 2023.
Yes, John I'll take that one I think as we look at what we expect to be our growth rate.
In fiscal 'twenty three versus 22.
Given what we expect inflation to be et cetera, there is likely to be some increase there, but incredibly modest compared to what it was in fiscal 'twenty. Two again, unless we see a lot of accelerated inflation, which we're not currently planning for that.
John the other part that we are fortunate that we have a strong balance sheet that we are also.
Looking at when we want to take actions, if we want to reduce inventory.
<unk>.
One of the biggest concerns that we have right now is if everybody reduces inventory and then there is a supply problem.
In Germany or any any issue.
Then we go back to 2021, and we start having a lot of issues and we're looking at it through the lens of our markets not not the broad market.
Got it got it all makes sense.
Evident in the market I do think there is a resetting of evaluation that is both from a buyer and a seller side is causing that pause if you have a good asset.
You're probably not going to just.
Move on it immediately so I do think it's going to be a period of time of everybody is taking a breath on what they want to do and move I think part of the challenge that everybody has is.
For the assets that we won they tend to be very specialized higher end type applications.
I think people it takes time for people to change what they want to do over time, but I think thats, where we need to be patient don't rush into something I think the opportunities are going to come up some of these smaller very niche spaces.
There are critical for our bolt ons.
I think people will start reconsidering it through through throughout the year and we're going to be that's where we want to be positioned to be able to take advantage of those opportunities when they come.
Move it.
<unk> prudent we don't want to rush and buy anything.
Quality is the growth with quality, it's not growth just for growth sake.
Got it makes that piece of the equation I think people are also waiting to see what the interest rate environment kind of settled into.
For companies out there with a lot of floating rate debt.
They're probably paying a lot of attention.
Given given that most most bank debt trades off.
Three months rates, which are up 400 basis points this year.
Most bond debt trades off 10 year treasuries, which is up 270 basis points. This year. So I think a lot of companies are kind of in wait and see mode and just just to see if things kind of settle in is this the new normal or do we do we do we pull back.
Got it I appreciate the color gentlemen, thank you.
Good morning, just thinking about the interplay between your expectations for the year I mean, the range and.
The mix shift strategy do you expect in your base case.
Skincare is pretty global business for us. So I think it's not just a U S dollar base.
Position.
Actually that was one that was very strong for us and in the last quarter.
Self help that we that we're looking at doing in that space.
And specifically within Europe are you seeing any.
Yeah.
Your next question comes from the line of John Roberts with Credit Suisse. Your line is now open.
Thank you.
And then Rodriguez.
You've talked about the world.
How the portfolio is very resilient.
It is clearly the case.
Indeed, even if a recession next year.
Businesses would you say would you expect to be the most impacted.
Anything you can do to mitigate that impact.
<unk>.
Alright.
Yes.
We focused mainly our message on the core the three core businesses pharma personal care and architectural coatings I think they are all well.
You look at historically and again, we can just refer back to what's happened in the last recession. They all we're more we're very resilient I would say coatings, maybe at the beginning of a recession. There is a little bit more volatility inventory actions things of that nature, but at the end of day as they are more consumer driven also they're not high ticket out were in architectural coatings.
We're not only in this industrial side, so they tend to recover pretty quickly. So those three pillars are pretty strong.
I think as you look at the other areas that we are selling you have some segments and life science food nutrition, those are pretty robust more consumer oriented and personal care. It's the whole personal care segment in specialty additives. We have the energy side is a small part, but it's actually more robust because.
Just the energy.
Production needs going up but.
But you have areas in our performance specialty specifically that maybe service the automotive industry, Inc. Industry. There are certain applications that we are seeing some softness so they are on the margin right now, but those are the those more.
Thanks, one more into that normal industrial area that we see some of the softness.
Okay. Thank you that's what I have.
Please go.
Hi.
Call back over to Guillermo Novo for closing remarks.
Okay, well everyone I appreciate all your participation your interest in Ashland as always.
But most important message really right now is for our teams and I just want to reiterate this has been three years of.
Surprises after surprises challenges after challenges and they performed.
Extremely well and I think the issue now is safe calm stay focused on the things we can control.
I'm certain we're going to have a good year and that will be able to address any surprises and changes as they come forward. So thank you for your attention and I look forward to seeing you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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