Q3 2023 Ashland Inc Earnings Call
[music].
Okay.
Yeah.
Good day, and thank you for standing by walking to the Ashland, Inc. Third quarter 2023 earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question answer session.
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Please be advised that today's conference is being recorded I would now like to turn the conference over to your speaker today Seth Mrozek. Please go ahead.
Thank you Victor Hello, everyone and welcome to Ashland's third quarter fiscal year 2023 earnings Conference call and webcast. My name is Seth Mrozek director Ashland Investor.
Joining me on the call today are Guillermo Novo Ashland Chair, and Chief Executive Officer, and Kevin Willis Senior Senior Vice President and Chief Financial Officer.
We released results for the quarter ended June 32023 at approximately five P. M. Eastern time yesterday July yes.
Yes.
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 and 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 Sir.
Including our outlook for fiscal year 2023.
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 an explanation of those risks and uncertainties and the limits applicable to forward looking statements. You can also review our most recent Form 10-K under item one a for a comprehensive discussion of the risk factors impacting our business. Please also note that we will be referring to certain actual and projected.
Metrics on Ashland on an adjusted basis, which are non-GAAP financial measures, we will refer to those 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 third quarter.
Kevin will then provide a more detailed review of financial results in the quarter.
Guillermo will then provide additional commentary related to ashland's financial outlook for fiscal year 2020.
And open the line for your questions now.
Now please turn to slide five and I'd like to turn the call over to Guillermo for his opening comments your Irma.
Thank you Sam and Hello, everyone. Thank you for your interest in Ashland and for your participation today.
Results in the June quarter were consistent with our pre announcement that we issued in late June total.
Total sales for the quarter declined 15% compared to the prior year.
Our pharma business continued to perform well and the inflation recovery actions taken last year and early this year continued to benefit overall results.
However, the unprecedented reset impact from customer destocking actions across many supply chain continues to materially impact many of the markets we serve.
As we stated in late June our previous expectations that Destocking would conclude during the fiscal third quarter proved to be optimistic.
There is still significant uncertainty as to when these dynamics will add until the inventory control actions taken by our customers have subsided. It will remain difficult for us to gauge the true end market demand.
Based on information from our customers sales volumes as well as global retailers of consumer products. We do not believe current customer order dynamics are representative of the underlying consumer demand for the high value products in which our ingredients are use.
While this uncertain environment presents near term challenges it does not change our longer term opportunities or priorities I will discuss these in more detail at the end of the call.
Please turn to slide six.
As you can see in the chart in the left sales declined in each of our segments due to the factors I referenced earlier.
As a consequence, we pursued our own internal actions to control inventories. These actions impacted our margins during the quarter and are continuing into the current quarter.
Kevin will discuss how these actions impacted each of our segments in a few moments.
On the positive side. It is good to see that consumer demand remains resilient for the core markets we serve unfortunately.
It's also clear that Destocking dynamics will continue to persist for longer across the supply chains of the industries we serve.
While there are many global uncertainties on the horizon. The Ashland team is performing well and executing on the actions that are within our control, while not losing focus on the longer term opportunities for innovation and profitable growth.
Let me turn over the call to Kevin to review, our Q3 results in more detail and then ill be back Kevin.
Thank you Guillermo and good morning, everyone.
Please turn to slide eight.
Total Ashland sales in the quarter were $546 million down 15% compared to prior year.
<unk> customer Destocking dynamics resulted in reduced volumes for all segments.
These volume declines were partially offset by sales growth within our pharmaceutical business and continued inflation recovery, which is carried over from last year.
Foreign currency had a negligible impact on sales.
Gross margin declined to 33, 3% driven primarily by lower absorption since we ran our plants slower to be in line with lower sales volumes across the segments due to customer destocking.
As a consequence of the continued customer destocking, we saw throughout the quarter, we slowed production for a number of products in order to control our own finished goods inventory levels.
These intentional actions negatively impacted gross profit by approximately $15 million.
When excluding key items, SG&A, R&D and intangible amortization costs were $113 million and down from $127 million in the prior year, largely reflecting lower incentive compensation accruals.
In total ashland's adjusted EBITDA for the quarter was $133 million down.
Down 24% from $174 million in the prior year and in line with our expectations in late June .
Ashland's adjusted EBITDA margin for the quarter was 24, 4% down from 27% in the prior year again, reflecting the factors I just discussed.
Adjusted EPS, excluding acquisition amortization for the quarter was $1 23 per share down 35% from the prior year quarter.
Ongoing free cash flow was $97 million for the quarter, a significant improvement from the prior year, primarily reflecting changes in working capital stemming from our internal inventory control actions and lower sales now.
Now, let's review the results for each of our four operating segments. Please turn to slide nine.
Within life Sciences, or pharmaceutical business delivered mid single digit sales growth pricing held up well and mix was strong despite volumes being down compared to a solid prior year period.
Overall life Sciences sales declined by 4% to $219 million, while adjusted EBITDA increased by 7% to $72 million.
The nutrition and Nutraceuticals businesses remained challenged due to continued customer destocking.
We took appropriate actions to control inventory levels during the quarter impacting EBITDA by approximately $5 million.
And EBITDA margin increased meaningfully to nearly 33%, reflecting enhanced segment mix due to strong pharma results and weaker sales in low margin areas like nutrition and Nutraceuticals.
Please turn to slide 10.
Continued customer destocking negatively impacted personal care in the quarter.
For the quarter personal care sales declined by 15% to $146 million, while adjusted EBITDA declined 24% to $35 million.
Pricing continues to hold but margins were negatively impacted by lower volumes driven by customer Destocking, our proactive inventory control actions and a negative mix sale.
Sales into the hair care market were a bright spot with sales down only modestly compared to the prior year.
To the oral care and skin care markets were meaningfully impacted by Destocking actions.
Thanks.
Okay.
Please turn to slide 11.
Specialty additives also felt the impact of reduced demand is primarily related to continued customer destocking.
Pricing remained positive in the quarter versus prior year, However, volume declines due to destocking, primarily in coatings construction and performance specialties as well as nearly $8 million of proactive inventory control actions by the team negatively impacted profitability in the quarter.
For the quarter specialty additives sales declined by 22% to $152 million, while adjusted EBITDA declined by 49% to $29 million.
Please turn to slide 12.
Intermediates reported sales of $43 million down 41% compared to the prior year, driven by lower pricing and volumes internal captive sales were about 30%.
The year over year sales decline, while customer destocking of our higher value merchant market solvents, including MMP, Belo and TSA THF accounted for nearly 60% of the remaining year over year sales decline.
Although pricing declines in this business more than offset raw material tailwind. The continued de linking of our high value saw once from BDO, which represents a very small part of our third party revenue contributed to strong margin performance in the quarter.
Intermediates reported adjusted EBITDA of $16 million, a decrease of 52% compared to prior year and adjusted EBITDA margin declined to 37, 2%. Please.
Please turn to slide 13.
As we reported in late June Ashland's Board of Directors approved a new $1 billion every evergreen share repurchase authorization, which replaced the existing authorizations Ashley.
Ashland had completed $300 million of share repurchases under the previous authorization during this fiscal year.
As of the quarter close on June 30, we had cash on hand of about $350 million with total available liquidity of roughly $1 1 billion.
Our net debt was $979 million, which is about one eight turns of leverage we have no floating rate debt outstanding no long term debt maturities for the next four years and all of our outstanding debt is subject to investment grade style credit terms.
We are investing in our existing businesses 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 the backdrop of global uncertainty Ashland has a strong balance sheet with the flexibility to pursue our targeted growth strategy as well as reward our shareholders with a strong dividend policy and continued share repurchase.
With that I'll turn the call back over to Guillermo to discuss our outlook for fiscal year 'twenty three Guillermo.
Thank you Kevin Please turn to slide 15 as.
As we look ahead into Q4 and fiscal year 2020 for the major question is the volume outlook as.
As we mentioned earlier the good news is that customer sales volume.
To indicate continued customer resilience for the markets we serve.
Clearly, there's a big disconnect between our customer sales volumes.
Our sales volumes and our suppliers sales volumes as an example, our suppliers continue to feel a bigger impact of destocking actions from both our customers and our own destocking actions.
To state the obvious the challenge for us our peers in the industry and our suppliers is continued impact of destocking actions across our supply chain.
Big question is when will Destocking at <unk>.
When will our customers volume demand be in line with their sales and production volumes.
Please turn to slide 16.
We do not have a clear view on when Destocking in black for our June update.
Q4 performs in line with Q3, we expect to have sales of $2 2 billion and EBITDA of around $500 million.
Although the global consumer remains resilient as evidenced by our customers sales volumes.
Preliminary July results indicate continued destocking.
Reported inventory levels by some of our customers would indicate further destocking actions may be expected if demand does not pick up.
We currently anticipate about $25 million of internal inventory control actions in fiscal Q4.
Global demand trends.
We will drive potential further actions.
Risks to the outlook in Q4 with.
Would come from extended.
Destocking continues in specific end markets or regions and the need for added.
Inventory control actions.
Packing our own absorption.
There is a potential global recession impact on consumer demand.
Price versus cost balances if something changes.
Growth in China, and the escalation of the Russia, Ukraine what was.
As I've stated before this is a time for caution we will continue to operate with strong capital allocation discipline. So that we are in a strong financial position to invest and grow our core businesses.
On the positive side.
What we see is that our.
<unk> demand remains resilient and that is more in line with our customers' volte.
Volume sales volumes.
We will remain focused on the things.
And our control driving innovation, maintaining operating discipline, managing pricing mix cost productivity and capital allocation.
Turning to slide 17.
In spite of the near term challenges our long term growth drivers remain unchanged.
First we're expanding capacity of our key technologies, where we have leadership positions.
Crucell benefit enact with world all segments, where we were sold out over the last two years.
We're going to globalize, our high value businesses in sarcoma, preservatives or bio functional or oral solid dose dose coatings business and our injectables business innovation will be central to our growth.
And as Kevin said bolt on M&A opportunities.
We will continue to take actions to maximize near term performance, while not losing focus on our longer term growth opportunities in many cases, our focus is on accelerating these exciting long term initiatives innovation will be a central point.
Our growth focus.
Please turn to slide 18.
I am pleased to announce that <unk> will host a live innovation day.
At our Wilmington, Delaware headquarters in research campus on September 12, 2023.
This event will showcase showcase how technology is playing a critical role in ashland's long term profitable growth strategy and highlight the company's innovation playbook and portfolio of scalable technologies.
The event will include presentations prepared remarks, and moderated Q&A sessions with members of Ashland's executive leadership team.
The event will also include poster sessions and guided tours of Ashes research and development laboratories poor in person attendees.
Additional details and registration information will be provided later this week.
We look forward to sharing our exciting innovation driven growth strategy with you in September .
Please turn to slide 20.
Despite the challenging environment, we remain confident in the quality and resilience of the markets, we serve and the future.
Want to thank the Ashland team again for their leadership and proactive ownership of their business in an uncertain environment.
Thank you for attention today, and Victor let's move to Q&A.
Sure as a reminder to ask a question. Please press star one on one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, we compile the Q&A roster.
One moment for our first question.
Okay.
Our first question will come from the line David Bill data from Deutsche Bank. Your line is open.
Thank you good morning.
Guillermo as Destocking and how should we be thinking about operating leverage and earnings power of the <unk>.
The company heading into 'twenty four.
If you look at it David.
Thank you for the question.
The Big question as I've said as volume and where the demand is.
You look at the Delta between where our customers sales volumes are.
All the supply us and all of the suppliers in the industry. It's a big Delta. So the issue is.
When we normalize the Destocking goes away the.
The trend would be to come back up to where our customers volumes would be.
And production demand.
So theres a lot of leverage all the things that you are seeing negative today it will be the positives of tomorrow. So we will go.
Our next call when we start talking about 2024.
<unk> tried to go through the reset there is gonna be items like incentive comp and things like that to get reset for the full year, but then the assumption really is going to be based on what the volume outlook and I think this quarter, we will see will be important to see how things evolve, but theres a lot of leverage in terms of volume return both gross profit.
As well as absorption.
Alright, Great and then just for you and Kevin how should we think about share buybacks in both Q4 and perhaps next year.
No.
Go ahead Kevin.
Go ahead go ahead Jeremy.
No I was going to say, we're going to continue to be very balanced on on.
Our approach to rewarding our shareholders.
Kevin said, our primary focus is on that innovation on growth and those initiatives that I laid out.
I think on the Capex, we're well well defined on where we're going.
On the globalization of businesses or several investments.
Sure.
Oral solid dose and coatings.
And our bifunctional in China that we're bringing up in Brazil, and in India those areas that we're investing.
Production facilities, but thats, all well within our plan and more asset light to a degree so the real question and we'll talk about it in September is innovation, we have a really exciting portfolio of scalable technology, they're not just here's a nice.
Product cool product and here's what it does these are technologies think of about about them Hec, it's not a product. It's a technology you can make multiple products from multiple markets. So as we launch these technologies over the next three 510 years, there's going to be significant growth potential. There. So the question. We're asking is do we need to invest more.
<unk> be increasing R&D investments should be doing so so thats our number one priority in terms of our allocation of capital because that's very high return for.
And for our shareholders, but given our cash flows and where we are even today.
We're in a good position to do both to reward our shareholders and invest.
Invest in the business, but Kevin do you want to give us some other color.
Yes, just to just a little bit you know we've done $300 million. This year. So far over the last 10 years, we've done over $3 billion of share repurchase and I think the important point is we.
We can do that along with all of what Guillermo just mentioned and we've demonstrated that in the past and you can expect us to demonstrate that into the future as well we're going to strike a balance we we don't think its wise to.
The balance sheet up for share repurchase, but we do think that our shares remain undervalued and we will continue to invest in them as well as promote a strong dividend policy now and in the future.
Thank you.
Sure.
Thank you one moment for our next question.
Yeah.
And our next question comes from the line of Christopher Parkinson from Mizuho Group. Your line is open.
Great. Thank you so much Guillermo on Slide 15, you gave a very helpful breakdown I wanted to focus on personal care.
Just given everything in your portfolio right here right now and given the market dynamics with your customer volume trends down mid single digits.
A very simple question how comfortable are you that you ultimately have the right portfolio, specifically in skin and hair across <unk> bio functional schulte.
<unk> I would love an update there, but just in terms of that normalization process and thinking about fiscal year 'twenty four and 'twenty five everything you are long term holders are looking at just what gives you the confidence that you ultimately have the right tools to snapback and ultimately gain share in that portfolio and grow over time. Thank you.
Yes.
So Chris first thanks for joining us and thanks for the call the question.
We need to separate whats happening in the short term and the long term and I've been very open about that.
For the last two quarters they are different dynamics.
And I go back to last year, we did very well last year. We moved early on price and we had a very strong year, having a strong year last year did not help our innovation or our growth opportunities equally.
Some of the challenges and Destocking, it's a challenge we need to perform we need to take actions in the short term, but they do not detract from the long term opportunities that we have so I really do separate the two.
The short term issues are broad based there impacting everybody in the industry and all of the segments, it's not a one product or one one category.
As we see.
Our customers' volume versus ours, it's clearly an indication and all this other suppliers to the industry.
This is a destocking event that we have never seen before.
Industry.
We will overcome that sooner or later.
On the innovation side. This is going to be a central part of our discussion in September we're really excited all the innovations that we're working on you will see they are scalable.
If you go back to our November 21 at Investor Day that we talk to sort of the model of additives and ingredients you innovate and then you scale it by developing more products or more applications around markets. We feel very excited about these opportunities that we have.
Their ESG focus most 999% of them that we're launching are going to be.
Greener chemistries, either natural natural drive biodegradable.
They are going to bring functional performance advantage. This is not just screen for green that we can get both performance.
And.
Advance our ESG solutions, they're very elegant we're very excited even from a manufacturing perspective.
<unk> clean processes in many cases cleaner than some other technologies that we've seen very little waste very efficient in how we make them and most importantly, we can.
Leverage existing assets, we don't have to invest a lot more a lot of the capacity that we had empty from from 2019, we're going to start using for a lot of these.
<unk> technology, So I think for personal care. It's all of these technologies are going to have a great fit not and I would say not just for personal care for coatings and pro forma.
You'll see that it's pretty broad based it's very exciting for us and this is a separate growth opportunity relative to just our traditional market growth and normal innovation with just improvements to our technologies. These are add on platforms.
It can really energize growth for the coming decade for us.
Got it and just as a quick corollary is that something you said towards the end of your response in thank you.
How should the street be thinking about the ultimate portfolio in November 'twenty, one you laid out obviously your core on core businesses.
Obviously pharma can you just do pretty well, but when we think about.
Substrates of your business that have not been forming up tier.
Standards <unk>.
Our technologies and the ability to repurpose assets could you just hit a little bit more on that and it seems like you are taking.
The current situation is a bit of an opportunity.
Kind of facilitated transfer more towards those core end markets and away from some of those end markets <unk> been essentially running for cash so any color there would be very helpful.
Okay.
So if you look at the technologies in the businesses that we have now and I would say.
Go back again to the Investor Day, we had two businesses that we highlighted were.
They were related but not integrated to our core additive and ingredients most of the additives and ingredients we have today.
So the low SEC settlement all of these other technologies that we bring in we sell across multiple segments. So those are core and we want to keep that integration, we have our intermediates business, which is a.
Supports our back integration strategy for our Pvp resins.
But it is a separate business and I think what we've done is trying to make it better.
We can at any point in time choose what we want to do is we want to keep it. The last few years has created a lot of value for us, but if we wanted to change that in the future. We are well positioned to do that and what's exciting about that business is where the merchant market that we have in the intermediates is not media, we sell very little BDO.
As Kevin said, it's MMP below all of those are going into EV market into semiconductors active ingredient production for AG and pharma and coatings and we're focused on.
U S and Europe as our core markets were one of the few merchant players with capacity when all of the EV investments come in they need an MP for example for battery production and.
And they need local content, we are the only ones with capacity right now so there's a lot of positivity that where.
Is going through and what we've done is separate we don't when we had a lot of BDO and the focus was low the BDO plants. We just priced everything like video. We've separated these are separate markets separate technologies and with price them Accordingly, and you've seen that even in this downturn that business is actually performing much better than it ever has.
Historically, so we feel very good about that and we have that optionality. The second business is nutraceuticals.
We've stabilized it improved it.
The key issue is whats the fit long term into our portfolio and again.
We want to make it more valuable we're investing to improve the business and we'll decide what we do there in.
In the portfolio of integrated we are looking at all the businesses that we have which assets are underperforming as I've said before if you look at our metrics sales growth margin.
Free versus many of our peers I think we've been that's a big change that we're performing better the part that we havent performed as well as return on capital and some of the investments and we're looking at those areas. We have two businesses that are performing.
Performing below our expectations, even last year, where we had peak performance for those businesses. It wasn't good enough and Thats, our CMC business and RMC industrial business and we are looking at what we want to do with those those businesses because those assets are very valuable and as you'll hear in our invest in.
Our innovation day.
Part of what we want to do is how can we repurpose. Some of these assets. Many of them are in the US For example, these are very valuable assets.
As part of our capital allocation discipline is not just about how we invest new capital. It's also about how we manage capital and and these plants are very very valuable we have very experienced teams in those sites and if we can repurpose. It we can get significant return earnings growth revenue growth of it.
Replace old businesses, but earnings growth and returns and you'll hear about that.
September call. There is a lot of these new technologies that we can use in those assets just like some of the technologies that youre going to hear that we're launching now in September we're going to be using assets from the business. We lost in 2019.
That should be very positive to our returns.
Very helpful color. Thank you so much.
Enrollment for our next question.
Okay.
Yes.
And our next question comes from the line of Michael Sison from Wells Fargo. Your line is open.
Okay.
Hey, guys good morning.
Hey, Mike could you maybe just help us think about building up from the 500 million that youre going to do this year it doesn't have to necessarily be in 'twenty four but if it's.
Is the Destocking and.
How do you get that EBITDA back.
What else can sort of get you back on track to.
Cost of $600 million initially at the beginning of this year. So could you just maybe help us think about walking back upward over time.
Alright.
So Mike that's the question.
I mentioned, it's the volume question right and what the implications are for the future. We will talk about that more in specifics in the next call. When we talk about we have the pleasure of being at one of the first ones to talk about 2024.
Sure.
But what I would say is as we look at the numbers.
He said.
Incentive comp reset theres, a few things that we can.
Call out as we do that.
What I would say is.
This thing of the Destocking has evolved in a way that nobody expected overtime just longer.
Bigger than everybody.
Expected.
At the beginning a lot of the questions, we get as well.
Option and it goes away.
You are going to get that all back I think what we're seeing now is look this is more protracted it's not just the actions we take we're running plants slower there's a lot of noise here I think you got to look at volume itself rather than what events happened what they go away. It's what was your volume this year.
The question, we had before what's that leverage and I think the question is.
You can do the math.
If our volumes were in line with our customers.
What would that mean.
And it would be a very different number and I think thats really the indication I would give you is is what.
When volume normalize what does that look like and then what you'd need to.
Estimate as well when will Destocking for every months, what does that mean and that's I think the big question for the entire industry right now volume recovery and timing of that volume.
Got it and then just a quick follow up pharma.
It has continued to do well.
Any thoughts.
How are your customers inventories there could there be a destocking event there.
They are going forward, how do you feel about that business.
Pets are near term.
As we said last quarter and we expected this fourth quarter to demand to start to normalize that we're seeing that I think.
What youre going to see US now it's going to go back to normal growth rates as we move forward.
I don't think that industry built the increase a little bit their safety stocks, they can adjust a little bit, but it's not the same level as some of the other industries and you can see because they've continued while other industries. We're taking actions they've continued so you will see a moderation.
But we don't expect to see the level of actions that we've seen in the other industries.
Great. Thank you.
One moment for our next question.
Our next question will come from the line of John Mcnulty from BMO. Your line is open.
Yes, thanks for taking my question.
So with the level of Destocking that you're seeing in the volume pressure I guess can you speak to the pricing trends quarter over quarter have they been kind of solid still are they off are they down can you give us a little bit of color on that.
So pricing is holding.
I think the question if you look at a lot of our customers.
Earnings commentary.
Our performance is basically the same thing with volume.
Pricing dynamics the cost dynamics in our case, when we look at our margins.
We're less petrochemicals, so I think the Petro chemical exposed are going to get much more of a swing up and down.
As these volumes impact our downstream suppliers and as I mentioned in our call or our suppliers, we've talked to them a lot because they are important to our chain.
They're feeling it much more than we are.
So we're working with them, but we see.
<unk>.
Cotton.
Cellulosic prices are more stable they are improving a little the petrochemicals are coming down a little bit but not significant.
Change in the acetyl Lennox, we're obviously, we see natural gas coming down so it's going to vary but we're not in the same dynamics us of some of the other ones, where they're holding price and raw materials are really coming down significantly we're more stable on that side of the equation I think the question everybody is saying well where these volumes price.
<unk> is going to come down.
Issue is there is no volume.
Youre going to drop prices for what nobody.
It's not like you can go out and try to get share theres not a lot of volume out there. So until Destocking ends if somebody has product why are they going to buy more product at any price.
So I think the issue now is worked through the Destocking.
The poor pricing, we are holding our prices our prices tend to be more sticky as raw material adjusts if theres. Some movement, we're very confident on our margin our ability to maintain our margins.
We move forward.
But you know.
It goes back to the volume question, that's the biggest issue.
For the next few months.
Got it fair enough.
And then I guess the other question is just I know you had been sold out in a whole bunch of product lines and youre, bringing up some hec capacity been a sell crucell et cetera, I guess, Ken just given the destocking speed bump that it seems like we're in the middle of I guess can you speak to first of all.
As these expansions come on are they largely accounted for from a customer perspective, and a demand perspective, and if not do you think about delaying some of the some of the startup of these or pushing it out a few quarters or what have you I guess, how should we be thinking about that.
So several things on that first bullet on investing.
First two bullets is where we're doing our investments on the second bullet these growth globalization, we're not stopping them.
Like it's about real real growth independent of some of these dynamics, so investing in China, Brazil, and India, we're going to continue doing that on investing in the core assets and some of them.
<unk>.
It's coming online so so we're managing through that.
And we were sold basically sold out so we needed the capacity at ATC.
The project is well advanced and it'll be coming in next year, we're not we're not talking about an acquisition flow we've slow paced. It. So it will come in a few quarters, because DIY market is down and we can push that back.
A little bit and the cross sell is ongoing.
Again, very pharma very very high value and we need that capacity to support our customers. So we're not going to we're not going to stop it but.
I think the important point I'd go back to the volume question.
The Destocking is a major challenge for all of us, but it's a short term issue, what's really exciting for me is that our customers volumes are resilient.
That is the most important message if I can leave one is as long as they're okay.
Really going to be back to what they are doing so to your question are we going to need Hec.
The Hec and coatings is the biggest volume is up.
Single digits.
Plus or minus.
2% to 3% in volume depending on the customer.
And the industry was sold out.
Not just us, but the industry was sold out that capacity is going to be needed.
Now.
It really we got a separate that destocking from what that real demand is so based on real demand the capacity will be needed.
Based on Destocking, we could be off a quarter or two and we can't manage that to that level of specificity.
Got it thanks very much for the color.
Okay.
One moment for next question.
Yeah.
Our next question comes from the line of Josh Spector from UBS. Your line is open.
Yeah, Hi, Thanks for taking my question.
I was wondering if you could separate some of the line between mix and volumes. So I think one of the challenges here is that Ashland never really saw a big volume uplift over the last couple of years, but we've talked a lot about a lot of mix improvement. So is there a way to frame maybe how many tons are volumes went from a lower.
Margin product to a higher margin product.
And is that where there has been some inventory bill and just if I look at this relative to personal care as an example.
My math is your volumes there might be down 25, 30% versus 2019.
Full year basis for this year. So is there some percentage of that volume that you've walked away from as a part of the mix improvement, which means you don't get all that volume back, but we might come back at a higher margin because the mix is better.
Yes.
It's very hard to do because all the different products and technologies. So it's not a simple one explanation you Gotta go with technology by Technology I think if you look at our mix improvements in general pharma personal care architectural coatings are the higher margin stuff. So that's not where we had a negative.
Maybe any specific product categories all of that.
If you step back.
The.
The volume.
Destocking.
Has impacted.
Our secondary businesses and our lower margin businesses more than our high value businesses. Unfortunately, those are also high absorption businesses. So thats, where you see the negativity disproportionately the big impact was CMC. This is one of the questions. We had before where the wins that we want to repurpose assets.
<unk>.
Which goes into nutrition, which was very heavily impacted and it goes into a number of energy and a lot of other markets. The margins there are way below our average for the company and our returns are way below the average for the company.
RMC industrial which.
It's mostly construction.
Mostly in Europe .
Same thing heavily impacted in construction in Europe as a segment has been heavily impacted but again, if you look at margins way below our average.
The absorption impact is bigger than the margin impact in those in those areas. So those are the areas and I would say intermediates are BDO plants, that's a big asset.
That's where the majority of the impact was.
The next one would be Hec.
We have many plants it was an impact, but it's not something I am as.
As worried about that's not as big as in the other areas. We can manage through it volumes will come back quickly in their core markets CMC NMC, we have that's where we did a lot of that mix improvement.
Last year was a much better year than any year, we've ever had.
I'm very open it wasn't good enough. So that's where we really have that.
Strategic work were doing and those are the things, where we're going to talk about.
In September innovation days, how can we leverage these are very valuable assets building a plant like this like these are $100 million plus investments.
So if we can leverage and for other technologies, we can get a lot of value, but those would be that these lower end segments were disproportionately the bigger challenge for us in this quarter are good the higher quality of business Theyre doing fine.
Yeah, Thanks, and just on life Sciences margins within the quarter, and obviously a bit of a bright spot just curious how much of that is just mix of pharma holding in better versus nutraceutical down versus structural improvement there.
Pharma has been good as good as continuing to expect it to be good.
We're selling less of nutrition and Nutraceuticals and that's the the lower margin stuff is the one that got impacted therefore, youre seeing more of that mix improvement.
To the core pharma.
Okay. Thank you.
One moment for our next question.
Okay.
Our next question will come from the line of John Roberts from Credit Suisse. Your line is open.
Hello.
Hi, John .
Personal care business looks like it didn't have any earnings hit from your own Destocking why was that.
I'm, sorry could you repeat the question or the personal care.
Yes, it looked like it didn't have any earnings hit from your own Destocking.
Yeah, I want one item I would point out I mean, they they did get impacted on some areas, but just the way and we've said it and I think the last two calls but important.
Uh huh.
Our specialty additives business the way, we do it they own the said the most of the Cellulosic plant. So a lot of like for example, CMC and Hec absorption impact, it's all captured in SA and specialty additives. So some of that really would flow to other businesses, but the way we do.
It's just an MSA so.
It's sort of you know.
So there is an impact it's just not it's captured in another business or the way we do it.
And then John .
It was it was probably a couple of million dollars that flowed through the personal care P&L from an absorption perspective.
And then our customers pulling back on their any of their new product initiatives because of this correction and could you talk a little bit about new win rates.
Yeah.
We're really excited you'll you'll hear some of the stories.
We've been trying to be very transparent with everybody videos on the conferences all done or will do more of these but we're getting awards, we're getting a lot of these products qualified.
To launch a product a lot of these new innovations we started to launch at the end of last 2022.
So we're getting that momentum people are coding them qualifying them, we're very excited.
But all of the new technologies. It just takes time and what we wanted to show is visibility of what we're doing so that you.
You as investors have a little bit of.
Indicators that that it's not just the revenue, but what's happening with some of these products but.
Personal care specifically.
All the innovations have been very well received feedback from customers that were being one of the more innovative.
Players, especially when it comes to ESG natural natural derive biodegradable our portfolio itself lends itself to some of these.
Technologies, but that'll be a central part of our discussion in September and Youll see some of the newer technologies that we're looking at that.
If you look at it over the next decade really they can generate significant.
Growth opportunities when we say scalable, it's we're not just launching a nice product that can sell.
$10 million to $15 million, we're looking at platforms that are targeting.
300, 400 $600 million markets that we can get significant share and if only part of the portfolio impacts.
It'll really provide a very nice growth engine and more profitable than our current technologies.
Thank you.
Thank you well enrollment for next question.
Yeah.
Our next question will come from Ryan.
Jeff Zekauskas from Jpmorgan.
Your line is open.
Great.
How are your cash flows looking this here either cash flow from operations or.
Free cash flows.
Kevin you want to take this one.
Sure sure it was it.
It was strong in the quarter, Jeff a lot of a lot of that was working capital driven.
Unfortunately, part of us from lower sales, which drives lower receivables turns really haven't changed but our receivable numbers are going down for the for the full year.
We're probably looking at 40.
<unk> 45, 50%.
Free cash flow to EBITDA conversion.
As things normalize we would expect that number to.
To creep back up to the call it $55 60, or am I getting a little better percent over over the course of time, which is more in line with our targets.
Call last year, it was probably in the twenties due to pretty significant working capital build just because of inflation.
So it's it has bounced around some just due to do the external environment, but we would expect it to normalize as demand and volumes normalize.
Yeah, and I guess for my follow up if you if your operations were running efficiently where would your inventories.
So you're at 712.
Would they be at 600, it would they'd be at $5 50.
They would be at 500, sorry.
What's the right number as far as you can tell.
I think the issue is not the dollar value right now it's the days because it's not how much we're producing or how we're running our plants, it's what's demand.
Tend to run based on on what our demand outlook what are the days of inventory we need.
It varies significantly by biotechnology. If you have some of these global assets for example, where do you see that you are producing in certain areas and shipping around the world We look at days.
How long does it take to ship what safety stock do you need in the other country and that gives you a number and that's basically so our days of sales or our high that's really the big issue and Thats whats driving all of the production adjustments.
Yes.
If you normalized everything back to again back to where call it demand and volumes were numbers probably in the $6 50 range would be my guess I mean, that's.
I mean, you could be.
Or minus 25 million on either side of that probably both.
<unk>.
And to expand on that a little bit we do we do more.
More of our manufacturing in the U S than anywhere else, but we're very global so from a days perspective.
We do tend to be a little longer.
And then when some of our peers might be but.
But we think that's about the right number can again, that's going to that's going to vary depending on what you know what.
Inflation does or doesn't do et cetera.
Okay, great. Thank you so much.
Mhm.
One moment for next question.
Okay.
Yeah.
Our next question will come from the line of Mike Harrison from Seaport Research Partners. Your line is open.
Hi, Good morning, just wanted to follow up on the capacity of.
Additionally, if you guys have talked about in some of those product lines, where you are moving forward near term.
You guys haven't really given us a whole lot of detail about the magnitude of those additional volumes. So I guess.
How much additional volume should we be thinking about coming in and in areas like better sell.
Where you are moving forward and that's going to contribute presumably early in 'twenty four.
Yes.
This one has come in early 'twenty four and the.
The Hec will be.
Finished coming on stream also.
Q1 Q2.
Of 24, probably early part of calendar year.
The agency about 10% capacity improvement 10000.
Tons.
So we can we can just follow up with you Mike in and share a little bit more on some of the specifics there.
The <unk> is a new plant and we put it in a different site. Some of our customers wanted also just to make sure.
We're more from a supply security more sites since it's an important product for them. So it's not just volume. It's also where we are locating some of these these assets I will say also all these investments are in existing facilities. So we're not building a new plant there just production units within funds. So that will also bring productivity.
Two of these plants.
Alright, and then I apologize if I missed this but kind of a broad question about whether you are taking any additional cost actions.
As a response to some of the weakness weakness that you're seeing right now and I guess more specifically as you talk about CMC and the EMC industrial business being.
Below expected returns are where you want the margins to be what what specific actions can you take in those businesses.
Would would help near term or is it not that simple.
Yeah, So I think two things.
That we're doing one is on on the structure cost side, we are taking some actions.
Not just to reduce costs, but also to reallocate resources.
Mentioned, we'd like to increase investments, especially in R&D.
And marketing commercial resources in some of these new platforms rather than add just like we were talking about on the asset side.
Are there initiatives that are less critical to us that we can shift some of the resources around so we have been restructuring.
And realigning some of our businesses. So we moved for example.
Intermediate now is reporting into other.
The same leaders in our life science business.
So that the entire.
A subtle and it changes.
Owned by one group that can see point to point.
What we're doing we're consolidating some of the management.
And and resources, that's really where we want to shift a lot of the new technologies.
In personal care and specialty additives.
So that we can share some some resources more efficiently.
And free up some resources to support growth.
And then we're putting a team together, we announced that we had added a person that's really looking at the portfolio really to drive some of these platforms that you will be.
Hearing about in September and by drive I mean, it's really help coordinate because a lot of these things cross businesses. So that we have clarity on you know not just introducing a product in a certain segment in selling it how to really build a business plan around getting that scale that we want.
We need to move forward with these technologies across multiple areas. So.
So that will deliver both cost and.
Allow us to shift resources around.
Part, we're still working on is the part that you mentioned is on assets.
And clearly it's not just about shutting things down these are valuable assets and the good news is we can leverage.
As an example, we are launching in September a new Super whether this is a very high end.
Surface.
Changing wording technology for it goes around multiple multiple markets very high and competes with silicones.
We're planning to make this in the assay, where we used to make some of the products for oral care that we lost 22.
<unk> thousand 19, so we're not limited very limited assets.
We're launching some we already launched in personal care, but now we're taking it to other markets oil on them.
<unk> oil based polymers.
There's a whole category of products that can go into all of our segments very exciting technology, we're using existing assets, but as we grow them out we can do things you'll hear about technologies that we can make in our CMC or empty assets.
Around.
Free.
So the low six.
H C type type products, but feel free.
We can look at starches that we're looking at I mean, there's just a ton of technologies that we're looking at but we need to do that in an organized way, we're not just going to shut down and move things around there is a real value creation opportunity. If we do this with discipline and Thats, what we got to lay out.
For all of you in terms of where we're going and then the pace of that will depend on that innovation agenda that we're going to drive.
Alright, Thank you for the color there.
One moment for our next question.
Okay.
Our next question comes from the line of Kevin Estok from Jefferies. Your line is open.
Hi, This is actually Kevin Estok on for Laurence Alexander. Thank you for taking my question most of them are actually asked but I guess.
Maybe you could talk a little bit about maybe like the regional differences and Destocking that you're seeing maybe between Europe Asia, and North America, and maybe anything on the customers. Thank you.
Clearly Europe is still the one that's the softest.
If you look at <unk>.
Coatings as an example.
Pretty.
A step down in terms of.
Demand and you know where I'm spending my time is looking at our customers frankly, where they're they're they're selling their demand is probably reflective of the end market demand and I think we see that also in their numbers that that Europe is a bit softer.
So there's no surprise there China has not recovered to the to the rate that everybody expected, we do see significant bearing very variability by customers example, in China. The big players are actually doing better than some of the smaller players.
In terms of.
Their volumes and ability to gain share in this kind of.
Environment Pharma is it's pretty global and both the the the big pharma players as well as generics.
<unk> are pretty uniform around around the world.
So I think it's really more the.
Customer specific in Europe that we're seeing.
The dynamics for our business.
Got it thank you very much.
Yeah.
Thank you.
And I'm not showing any further questions in the queue on uninteresting to turn the conference back to Guillermo for closing remarks.
Okay. Thank you very much Victor and thank you all for participating.
The two big messages if I can leave you with one we all know the Destocking dynamics, we will work through them with the two important messages one our customers' volume sales volumes are healthier and and really show more resilience of the end markets. We serve we're very excited about that that's really it.
The end of the day, what's going to drive our own demand.
In the mid to long term, we will work through the short term, but that is a really good.
Perspective, I think.
The markets are still healthy.
And to that regardless of this short term situation. The long term growth opportunities have not changed we're very excited about them and thats really where we wanted to really spend our time and energy. So we will continue to manage the short term to maximize near term performance without losing traction and momentum.
On some of these important longer term initiatives. So thank you for your attention and we look forward to seeing many of you in September in Wilmington.
Thanks, everyone.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Okay.
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Yeah.
Okay.
Yeah.
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