Q4 2023 Ashland Inc Earnings Call
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Good day and welcome to the Ashland, Inc. Fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one on your telephone you will then hear an automated message advising your hand is raised.
To withdraw your question. Please press star one again, 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 Abigail Hello, everyone and welcome to Ashland's fourth quarter fiscal year 2023 earnings Conference call and webcast. My name is Seth Mrozek Director Ashland Investor Relations joining.
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 results for the quarter ended September 32023 at approximately five P. M. Eastern time yesterday November 8th.
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. Please.
Please turn to slide two.
As a reminder, during today's call we will be making forward looking statements on several matters, including our financial outlook for fiscal year 2024.
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 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.
For a comprehensive discussion of the risks risk factors impacting our business.
Also note that will be referenced referring to certain actual and projected financial metrics on Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to these measures as adjusted and present them to supplement your understanding and assessment of the financial performance of our ongoing business.
non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The.
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.
Jeremy will begin the call. This morning, with an overview of Ashland's performance and results in the fourth quarter and fiscal year 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 outlook for fiscal year 'twenty. Four we will then open your line for questions now.
Turning to slide five I will turn the call over to Guillermo for his opening comments Guillermo.
Thank you Stefan and Hello, everyone. Thank you for your interest in Ashland and for your participation today the.
The results in the September quarter were consistent with our pre announcement that we issued last week.
Customer demand was generally in line with our expectations, Although destocking has stabilized relative to prior year, we continue to feel the impact across several markets.
Pricing remained favorable compared to prior year across all our core segments in the integrated business.
However, we did experienced price declines in both the merchant business as well as the internal transfer price.
By far the biggest factor impacting Q4 earnings was the proactive inventory control actions. We took these actions are above our original expectations.
Certainly in the outlook and the different scenarios to consider we took the approach to assume a more conservative scenario for acquiring assets.
The resulting lower inventory position and improve cash flow.
Position us better or better operating across multiple scenarios over the next couple of quarters.
These inventory control actions resulted in lower production volumes and nearly $60 million and costly.
The resulting benefit with the reduction of inventory about $86 million compared to June 30, and the generation of $104 million and ongoing.
Well during the quarter.
While the $74 million of adjusted EBITDA was below our original expectations. These actions were necessary to meet our commitment to maintain operating balance sheet and cost discipline during the times of uncertain customer demand.
Please turn to slide six.
Fiscal 2023 was a challenging year.
As I indicated reduced volume, resulting from the unprecedented and extended customer Destocking was the largest single factor impacting top line results.
Great.
Volumes were down 18% during the year due to these impacts.
Lower volumes impacted both sales and gross profit as well as client costs and unit costs.
And while pricing was favorable for the year. It was not enough to fully offset the significant reductions in volume.
The net result for the year with sales down.
Roughly $200 million or about 8% and adjusted EBITDA was down about.
About $131 million were roughly 22%.
The lower demand and inventory Destocking was clearly very challenging and disruptive for our manufacturing operations.
Although the timing of some of the inventory can coax is varied across the year in hindsight. If we average the timing of these actions across the year. The net result would not have changed.
The bottom line the production and manufacturing unit costs for the year increased significantly due to the lower production volumes and resulting lower cost absorption.
Disciplined sard variable expense management helped.
But the broader underlying costs were in line with our original plans the only meaningful cost reduction resulted.
On the reduced incentive compensation based on a lower performance.
Let me close my physical.
We comment with some reflections.
On the positive side, it's good to see that consumer demand remains resilient for the core markets we serve.
As our customers Destocking actions in our demand should align with their underlying production to meet demand.
We are seeing this dynamic starting to flow through with many customers. Unfortunately. It is also clear that destocking dynamics will continue to persist for a longer across some of the supply chains of the industries we serve.
If we look at the first half of the year.
Expectation was that Destocking would be shorter lived on the magic.
Bandwidth normalize sooner.
Unfortunately did not play out that way.
The inventory build across many of the many supply chains in fiscal year 'twenty, one and 'twenty two was much greater than any one realized and it's taken much longer than expected to work now.
There is still significant uncertainty.
When these dynamics.
So the inventory control actions taken by customers has subsided it remains difficult for us to gauge the true end market demand.
Waiting for improvements is not a reliable option given the continued uncertainty. It is vital that we moved proactively to take actions to build resilience against volatility and maximize performance across a range of scenarios.
We also recognize that while near term uncertainties of the current environment presents challenges they do not change our exciting long term opportunity.
The app on both dimensions to improve near term performance and invest.
On a long term profitable growth opportunities.
I'll discuss these in more details later in the call.
Let me now turn the call over to Kevin to review, our Q4 and fiscal year results in more detail Kevin.
Thank you Guillermo and good morning, everyone. Please turn to slide eight.
Before I review the detailed results for the quarter I'd like to provide a bit more color on the customer Destocking dynamics, we experienced during fiscal 'twenty three.
As you can see in the graph to the left Q1, and Q2 sales were actually tracking favorably compared to the prior year.
While some distributors and customers in China, and Europe had begun to reduce their order activity carryover pricing was more than enough to offset these actions.
However, during our fiscal Q3, the persist one customer destocking had expanded to more end markets and customers.
These trends accelerated throughout the back half of the fiscal year.
As Guillermo his stated while we have seen some indications that demand is stabilized we expect destocking to be a factor for at least the next two quarters, hence the more aggressive actions, we took to reduce inventory during the September quarter.
Please turn to slide nine.
Total Ashland sales in the quarter were $518 million down 18% compared to prior year.
Continued customer Destocking dynamics resulted in reduced volumes for all segments.
Pricing was favorable for all segments, except intermediates.
Foreign currency had a favorable impact on sales of 2% gross margin declined to 24, 9% driven primarily by the $58 million of inventory actions in the quarter.
When excluding key items, SG&A, R&D and intangible amortization costs were $116 million down from $123 million in the prior year, largely reflecting lower incentive compensation accruals.
In total ashland's adjusted EBITDA for the quarter was $74 million.
Down 50% from the prior year.
<unk> adjusted EBITDA margin for the quarter was 14, 3% down from 23, 3% in the prior year again, reflecting the factors I just discussed.
Adjusted EPS, excluding acquisition amortization for the quarter was 41.
Down from $1 46 in the prior year quarter.
Ongoing free cash flow improved to $104 million for the quarter, primarily reflecting changes in working capital stemming from our internal inventory control actions.
Now, let's review the results of each of our four operating segments. Please turn to slide 10.
Within life Sciences demand for our pharmaceutical ingredients remained healthy the volumes were down a bit versus a strong prior year period.
<unk> demonstrated a nice recovery.
Sales to nutrition end markets remain challenged overall pricing for life Sciences was favorable.
In total life Sciences sales declined by 5% to $203 million while.
<unk> EBITDA decreased by 16% to $48 million.
Inventory control actions in the quarter impacted EBITDA by approximately $6 million.
Adjusted EBITDA margin decreased to 23, 6%, primarily reflecting the impact of inventory control actions.
Please turn to slide 11.
Continued customer destocking negatively impacted personal care in the quarter.
For the quarter personal care sales declined by 22% to $146 million, while adjusted EBITDA declined 36% to $36 million pricing continues to hold but margins were negatively impacted by lower volumes driven by customer destocking $5 million of inventory control actions.
And negative mix.
Please turn to slide 12.
Specialty additives was impacted by reduced demand primarily related to continued customer destocking, though the architectural coatings end market was less impacted than others in the business.
Pricing remained positive in the quarter versus prior year, However, volume declines due to destocking, primarily in construction and performance specialties as well as nearly $38 million of inventory control actions by the team negatively impacted profitability in the quarter.
Specialty additives is our highest volume business and is also the landlord for several large manufacturing facilities that also serve the other segments and therefore experienced a larger share of the result of the inventory control actions in the quarter.
For the quarter specialty additives sales declined by 23% to $144 million, while adjusted EBITDA declined by 81% to $8 million.
Please turn to slide 13.
Intermediates reported sales of $37 million down, 42% compared to the prior year, driven by lower pricing and volumes intermediates.
Intermediates reported adjusted EBITDA of $3 million compared to $17 million in the prior year and adjusted EBITDA margin declined to eight 1% inventory.
Inventory control actions impacted earnings by $9 million in the quarter.
Please turn to slide 14.
Fiscal 2023 was obviously a very challenging year.
While pricing remains strong throughout the year customer destocking and the related impacts on revenue and plant loading resulted in decreases in most financial metrics.
That being said it is important to note that in fiscal 2023, Ashland generated strong ongoing free cash flow, which increased meaningfully versus prior year.
Please turn to slide 15.
As of the end of September we had cash on hand of $417 million with total available liquidity of roughly $1 1 billion.
Our net debt was $913 million, which is about two 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.
As discussed we took proactive inventory control actions to reduce inventory by $86 million in the quarter not only due to these actions better position us for continued uncertainty. They also supported generation of $104 million of ongoing free cash flow in the quarter, which was nearly half of our ongoing free cash.
For the fiscal year.
We are investing in our existing businesses and technology platforms 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's balance sheet is well positioned to give us 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 for Jeremy.
Thank you Kevin Please turn to slide 17.
I'd like to spend a few minutes, providing might take on the challenges that we and others in our industry are likely to face during 2024.
From a macro perspective, let me comment on three drivers first demand uncertainty.
There are continuing concerns about the prospect of a global recession, and economic slowdown and there is risk of geopolitical uncertainty across different regions of the world.
Most concern or the potential economic headwinds facing the U S Europe and China.
We don't yet know if or how <unk> will impact the buying patterns of our customers and a global consumer.
The question of when Destocking will end is front of mind for most companies in our industry.
Given the backend of the year recovery expectations.
To be uncertainty regarding the timing of the.
We ended the customer destocking.
And demand normalization.
Based on consumer demand and the good news is that our customer sales volumes are starting to normalize however customers in the end markets we serve.
Continue to hold elevated macro levels of inventory.
Thoughtful may persist longer.
Second is margin management.
Pricing discipline will remain a quick will remain critical throughout the year, depending on demand recovery pricing pressure will vary across different segments.
Although we expect some improvement in raw material cost and cost improvement will take a while to have an impact as well.
<unk> existing inventory.
Even as volumes demand normalizes, the demand is expected to be.
Below prior years.
This will be reflected in higher and more volatile unit conversion costs.
Companies will need to work diligently to maintain margins disciplined actions across the supply chain.
And third is new growth drivers the commercial success of new innovation platform is critical to the long term growth opportunities.
Sure.
We have focused on building a strong balance sheet and financial strength. So that in spite of the near term challenges with Linzess and drive our globalized and innovative growth strategies.
Although we expect most of the impact of these investments to begin in fiscal year 'twenty five.
We'll work diligently to accelerate their impact in fiscal year for the quarter.
All told given the uncertainty this full year 'twenty four it was a difficult year to forecast at this time.
Please turn to slide 18.
To build our clients we analyzed numerous scenarios.
<unk> is the big variables impacting outlook or volume demand and.
And margins.
With demand being the biggest variable.
Primary impact.
On all of the scenarios is the timing of demand normalization.
From a volume demand perspective, three scenarios provided the greatest insights into actions that we should take.
No demand recovery.
Non recovery during the March quarter.
And delayed demand recovery during the quarter each of these scenarios the significant variation in results for the year and they are discrete outcomes you cannot average then to a midpoint performance.
Our objective is to build resilience and pursue actions that best position Ashland to maximize performance across each of these scenarios.
Please turn to slide 19.
On a recent innovation day, we laid out our business model and the strategic priorities that will drive our actions investments and profitable growth expectations.
First disciplined execution across our core businesses.
Investing in them.
For the strength and growth of those the high value segments, where we have market and technology leadership.
And to take the needed portfolio actions to address underperforming business that are not core and.
We do not have technology, our market leadership.
Secondly, globalize some of our high value growth businesses.
To drive innovation across both existing and new technology platforms, and port celebrity bolt on M&A to augment our growth capabilities for our big three big businesses pharma personal care and covenants.
Let me start with the first focus area execute.
Please turn to slide one.
In this environment, just cutting costs will not build the resilience we need.
We will take more targeted actions to reduce volatility.
And performance risk.
We will also position our core businesses to be more for more reliable operations to leverage the eventful.
Recover.
In the last year.
We have been clear that we need to address some of them are strategic.
Russell portfolio gaps with several businesses that are either not a strategic fit.
Structurally underperforming for a long time at a high level.
We have.
Two non core businesses, our nutraceuticals, which are no integration into our core businesses.
And to a lesser degree our intermediate business, which does have Bakken Greg Ken.
Our core businesses.
From an underperforming side, we have three businesses that we've identified our MCC RMC industrial and <unk> businesses.
As we stated last week.
Last week's earnings update.
We're executing on core primary portfolio optimization actions.
Strengthen our base build resilience and improve profitability. Our plan is as follows.
Divest our nutraceutical business second optimize and consolidate our CMC.
CMC business.
Our optimized and consolidate our MSC industrial business and finally rebalance our global HFC production network.
Firstly actions aligned with our business model and strategic priorities.
The nutraceutical business is a good business, however, likely a piece of business that we divested last year, there are higher value owners in the marketplace and Ashland for the states, where this business can thrive.
Part of our core business and strategy.
Our CMC and MFC industrial businesses, even at peak performance have not delivered reinvestment economics.
We're also not the market leaders or technology leaders in the space, Hence the strategic decision to optimize our consolidated there.
Their performance has also been volatile given their profile of low gross profit margin and high cost absorption and margin.
In order to enhance profitability and reduce volatility in the portfolio, we will narrow our participation to core segments, where we can differentiate improve profitability and deliver value for our customers.
On the other hand, ACC has a very strong business that is core and we're absolutely enjoys both technical and market leadership.
We have been investing for growth and see opportunities to drive productivity and optimize our global network.
As we take these actions we will be exploring opportunities to leverage these assets to repurpose and support our core growth initiatives.
Please turn to slide 21.
The portfolio actions, we're taking will impact revenue, but we do not expect them to impact EBITDA once completed.
Although we're still working on the exact timing when completed the actions are expected to have the following annualized impact to <unk> financial results.
The sales are expected to be reduced.
Bye.
200 and $225 million.
We expect lower gross profit impact of approximately $20 million.
Or roughly a 10% margin with nutraceuticals margins be higher.
Nancy and then industrial which are very low gross profit margins.
Strength in manufacturing as Saar will be about $80 million.
The CMC and industrial businesses have largely been run to absorb cost within the manufacturing network, which makes them more volatile given the low markets.
Okay.
As we complete our portfolio actions, we expect to offset the gross profit and stranded cost with no negative impacts of Ashland adjusted EBITDA.
All else being weak equal this will result in additional capital.
From a nutraceutical sales increased free cash flow and reduce working capital and Capex.
Expanding EBITDA margins up 200 to 150 basis points increase return on net assets of 150 basis points and the ability to better leverage our effort and resources to support our core businesses.
We expect to compete complete the portfolio optimization by the end of calendar year <unk>.
Please turn to slide 22.
As I commented the near term challenges need to be addressed.
Not change our excitement about the future, we're confident about our business model and strategy and the opportunities that lie ahead, and we'll invest in.
Sure.
Which brings me to the second focus area of our strategic priorities that we just.
He discussed that innovation day, globalized innovate and acquired property grow the core of asthma.
Please turn to slide 23.
Each of these components of our strategy are linked to our commitment to invest a passion to win.
And a great sense of urgency.
We are investing to globalize score of our higher growth higher margin businesses, namely by functional preservative.
Pharmaceutical injectable and oral solid dose no covenants, we're already commercial and technical technical resources across the globe to accelerate growth in these product lines and expect to invest more than $5 million. This year to support these efforts and will increase our investment in fiscal year 'twenty five endpoint.
Thanks.
We're also investing.
In our innovation pipeline.
For existing technologies, we're keeping a keen focus on scalable high value high impact opportunities and equally we're investing in new technology platforms to accelerate the commercial to accelerated commercialization across end markets by getting products into the hands of our customers faster.
These technologies can expand or expand our addressable market.
Performance within both of our core markets as well as new markets.
We will invest more than $5 million in new technical and commercial resources to drive enhanced growth within the new technology platforms.
And we're continuing to pursue our strategy to grow organically by acquiring bolt on technologies to enhance.
Our big three core businesses of pharma personal care and coatings.
We will maintain.
Capital allocation discipline.
Pursuing those opportunities.
I want to be clear now please turn to slide 24.
Want to be clear, we recognize that.
These are challenging times for our industry, but we also recognize the opportunities that lie ahead, we will maintain a balance.
To both address the urgency of the moment.
And the commitment to the future.
Please turn to slide 26.
Given all the dynamics at play I would like to provide some high level bridging items to fiscal year 'twenty.
Sure.
First quarter discrete items during the year, we will reset compensation expense, including both merit and incentive which will total approximately $40 million.
We have built our plans and actions around creating more resilient performance across the scenarios.
This permitted the biggest variables being the timing of demand recovery and the resulting plant loading during the year managing margin performance and accelerating impact of portfolio optimization.
Please turn to slide 27.
Our outlook is based on the following.
Recovery, our core business is likely to be backend loaded into the second half of the fiscal year.
We expect lower pricing and intermediates.
And that the impact of this in fiscal year 'twenty four of our portfolio actions will be layered in to our models as we engage with all stakeholders.
Given the overall uncertainty we do not feel its prudent to issue a formal outlook for fiscal year 'twenty four.
Fiscal year Q1 tends to be our.
Our seasonally softest quarter.
Our outlook for Q1 is for sales to be in the range of $470 million to $490 million and adjusted EBITDA in the range of $55 million to $65 million.
Outlook is driven by weaker demand.
With October results slightly stronger than our expectations November building up per our expectations.
And with the risk of potential customer year end destocking.
Actions in December.
Lower production volumes, including some carryover inventory actions will impact the quarter.
And lower.
Yes.
Jimmy it's quite soon.
For the full year the color that we can provide is that we expect fiscal year Q2 demand remained muted muted given seasonality.
Based on the scenarios, we model, which are just that scenarios.
To prepare the actions that we need to take.
High performance.
If demand recovery.
Sooner than anticipated.
We can anticipate adjusted EBITDA margins to be above $500 million.
For the year.
If there is no demand recovery in fiscal year 'twenty core earnings to be below fiscal year kind of brief given the compensation reset this.
A wide range of scenarios and this is what's driving a lot of the actions that we're taking so that we can perform across.
Great performance across all of these scenarios. It is important to note that while earnings up for the intermediate segment are likely to be down meaningfully meaningfully next year.
Due to lower volumes and market pricing, our core businesses are expected to perform reasonably well.
We will provide an update outlook quarter.
Year.
At our fiscal first quarter earnings call.
Please turn to slide 29.
Our approach for our fiscal year is straightforward.
We'll begin by focusing on clarity of action in the face of uncertainty we.
We will stay on strategy operating capital allocation discipline and take appropriate actions to maximize fiscal year 'twenty for performance.
This includes optimizing our portfolio focusing on our core businesses and perhaps more importantly, continuing to invest on a long term growth strategy.
Despite the challenging environment, we remain confident in the quality and resilience of the markets, we serve and our future I want to thank you Ashwin team again for their leadership and proactive ownership of their businesses in these uncertain times.
Thank you for your attention and Abigail if we could move to Q&A.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for your first question.
Okay.
Okay.
Our first question comes from David Begleiter with Deutsche Bank. Your line is open.
Thank you good morning.
Jim or Kevin just on the inventory control actions why the number is so big the $58 million cost reduce inventory in FQ4 versus the $86 million reduction inventory seems seems high.
Is that just under absorption or is there also some write offs that youre taking on the inventory.
So one comment I'll make.
Kevin you can.
Get into a more details there is a bit of carryover into Q1, as we said and some of the inventory also reduction actions are coming through already in October. So theres, just also a quarter to quarter.
Delta, but Kevin do you want to give more color.
Yes.
That's right. There is there is some timing difference in terms of in terms of the overall.
Inventory sizing, we did see $86 million in Q4.
So far in Q1.
We've seen we've seen more.
More inventory come down and so part of that is just timing.
Every quarter, we have we have a certain amount of write offs. In Q4 was no different so I don't think there's really much to talk about there but.
That's always that's always part of the equation for for US just normal ordinary course so.
I would say most of it is going to be timing presuming, we see inventory at the end of the quarter, where we where we ended in October there's more.
More to come on.
On the overall inventory reduction in this quarter not a lot of cost related to that though.
We will we will in the quarter naturally see lower absorption because we're running our plants to demand and demand is down but.
There is a bit of a timing difference between what we saw in Q4 and what we'll see in Q1 relative to the inventory control piece of the equation.
That's helpful. Appreciate that and just on the stranded costs can you talk to the $80 million, you're going to remove how you can get at those.
<unk> costs.
Well theres multiple actions that we're taking obviously as we optimize the one area and I understand theres going to be a lot of questions on that we are engaging all our stakeholders customers.
Are the groups that are impacted so theres a lot of activities.
First households, things of that nature. So we don't want to go into a lot of detail, but it's going to come from cross actions, we're going to take some cost actions I think a lot of productivity and planned activities.
Be a key driver.
The optimization of our networks is going to be probably the biggest driver in it.
It's about the absorption cost.
As I indicated during my comments the gross profit side is going to be lower.
It's lower than most of the gross profit decline.
<unk>.
So the other two businesses you can see the volatility that they bring and why we need to take action, because theyre very little upside and more downside if the volumes don't return.
And to be clear in both CMC NMC, we are not the market leaders.
The players are multiples bigger than offset if not one of these are non core technologies. So so honing in on really the higher quality segments, where we do have.
Technology modifications that we've made that we can differentiate and add value for both us and for our customers. Those are the areas that we want to focus.
Thank you very much.
One moment our next question.
Our next question comes from John Mcnulty with BMO. Your line is open.
Yeah. Good morning, Thanks for taking my question.
So I guess just to help us to think about what's embedded in the one Q outlook for EBITDA. It sounds like there's not as much inventory kind of destocking or of your own in there as there maybe it was last quarter or two but can you help us to quantify that so we can kind of think about what normalized is.
At least right now in the demand environment versus how much is being impacted by the Destocking yes.
Yes.
Great question, John and just to be clear because I know I'll use 2023 sort of just to to sort of level level set what everybody is thinking.
Then we can comment on on on our first quarter and Kevin you can comment on any other color later, but if you look at 2023.
We overproduced.
Inventories were high coming in and we overproduced in the first half if you look at it because expectations were higher and.
By the time, everybody realize hey.
The destocking isn't going to be short its long run.
Most of the actions were taken in the second half.
But if we had reduced demand from the beginning of the year. So that was my hindsight comment we just produce the demand. The result would have been the same.
The Destocking actions were just that we have to reduce quite operations to offset the overproduction in the first half now that we have inventories that we brought them down to where we think it's acceptable.
And we target that baseline based on forecast.
Or looking forecast.
So if demand takes longer we might be having a little bit higher if demand picks up we might have a little bit lower so well managed but we feel comfortable with where we are now that we will produce to demand that means that whatever the volume is what's going to get produced.
And right now that production volume is below below historic levels, because the customer volumes have not picked up yet to historic levels.
So so the real issue for US is when these are customers when our there was there destocking going to and so that their demand production demand.
Your lines with their selling.
Demands, which right now it's not a line.
So when those two things and they buy raw material.
That will really drive our loan so I would look rather than talk about talking any more internally. We're talking about what is our production volumes. These are real cost now these are not actions that we're taking.
So volumes.
Kickoff.
That's the challenge that your unit costs and again.
Masters less last question, that's why we're taking action.
Action on some of these.
Lower margin higher cost absorption business, where we do not have competitive advantage because they can bring a lot of volatility in these lower.
Lower volume environments.
But Kevin I don't know if you have any other comments.
Yes, just just just a couple if you look at if you look at the year over year Delta from an EBITDA perspective, it's really it's really driven by two things John.
They're not exactly 50 50, but.
Once I close enough and that is we expect revenue in Q1 of 24 to be down from Q1 of 'twenty three.
And.
That's probably about half the difference and the other half is in is in fact.
Slower manufacturing producing to demand versus what we did in <unk>.
Instead of producing what we thought demand was going to be in Q1 of last year those those two items.
Together make up pretty much all the difference between last year Q1. This year Q1, if you look at it sequentially its really its really two things.
Q1 is our is our seasonally weakest quarter. So we do expect revenue when you look at the mid point can be lower.
Than where we ended Q3, I'm, sorry, Q4 of fiscal 'twenty three.
As Guillermo mentioned resetting incentives would be the rest of it those two items really drives the delta between Q4 of 23 in Q1 of 'twenty four.
Got it okay.
That's helpful that makes sense.
And then I guess, just one follow up question would be on.
The Nutraceuticals business can you just help us to understand roughly what the sales and EBITDA.
Currently is for that business on an annual basis, if you kind of take out the destocking that <unk> that you saw earlier in the year. Just so we have kind of a rough baseline for that.
Yes.
We're starting the process of a more more we'll start sharing more details with the interested parties on this but roughly you can estimate around.
$100 million in sales and gross profits are in the 20% range.
Got it thanks very much for the color.
One moment for our next question.
Our next question comes from Joshua Spector with UBS. Your line is open.
Hi, Good morning. This is like a starwood answer Josh.
So I'm just trying to think about.
What's the normalized environment looks like.
Over the last five years.
How should we sort of had EBITDA, that's kind of range from like mid four hundreds could basically thought.
Hundreds on a like for like prices, sorry, like excluding sort of the divested businesses.
I'm thinking of that kind of this year specifically.
Given all the disruption with Dalian you've exited some volumes in the portfolio has just stocking I mean can you just give us your view on like what is your current view on the normalized earnings power of the portfolio.
Once we get back to I don't want environment. Thanks.
And as I indicated through the scenarios you can see the wide range of when demand recovery would.
What happened. So so if you say look we are normalized and our volumes are more in line with our customers. Most of our customer volumes are now normalizing to flattish versus prior year. So that's a big increase for us so that would put us in no in the above 500.
Million dollar range.
We just look at.
Obviously 2022 and 20.
'twenty one for us the challenge, we're not a normal number because we were out of capacity. So volume we didn't have volume growth and most of that driven by pricing actions that we took.
But if you look at 2000.
2020, as an example, and you look at our growth expectation long term growth expectation mid single digits that would put us around that number also.
<unk>.
Low to mid mid five hundred's would be where we need to.
To be normalized in that.
The one caveat I would say is is intermediates that obviously in may.
Maybe in the future, we'll be talking more about our core business versus intermediate to differentiate with intermediate business, although it's performing better than it has historically, obviously, it's still more of a commodity business.
It has its ups and downs.
We've improved a lot by focusing on regions, where we have competitive advantage.
And it makes a lot supply position.
Real growth for us there.
<unk> is an NLP and it's around the.
EV battery investments that are going on in the U S and Europe.
And those probably will be more of a 2025 startup or what we're hearing from any customers. So that part will be a little bit more more volatile right now, but the rest of it should follow the model I just I just mentioned.
Alright, Thanks, and then just sort of guessing on pricing I mean, it sounds like some of your comments on the cash sitting here and.
Anticipating potential losses will be lower this year.
So I mean are you seeing any declines across the portfolio, yes, I guess like what's your visibility.
On your ability until like holding price into this year and if you think you can holiday I was just wondering if you could kind of elaborate for us. Unlike.
What's the dynamics there are as to why that's achievable for Ashland.
Coming off volumes kind of being down mid teens percentage, which from my side of the business is usually so to say.
Downward pricing pressure that was happening okay.
I mean, you have to look across the portfolio different segments as I said, obviously intermediates is where we see more volatility.
Thats already.
Being seen in the results.
And we're managing through that I think especially in Asia, we're seeing more of that where there's a lot more producers and that's not our core markets.
But if you look at.
In the rest of the portfolio.
Again, one of the reasons, we're taking actions on CMC NMC industrial we are not the market leaders there were a small player.
We see potential for much more volatility there I mean, if I just look at historic performance, we managed pretty well in the last two years to improve the mix to optimize in the environment. We're in this is a different environment. So the risk is higher and that's why I think rather than wait for things to happen, we're taking control of our destiny.
And we're going to take actions on that and that should minimize the impact of that kind of that volatility.
Well I'll, probably what we saw most of it.
In the past and then the rest of the business our core <unk>.
Historically, we've tended to maintain market right.
As we communicated in 2000.
'twenty two we did very well on pricing, but most of the improvement did not come from price increase in terms of margin improvement.
We increased price to maintain margin.
And the improvements we're about mix and other things that we were doing.
Our portfolio growing some of the higher end.
Segments and those kinds of things so as we move forward, we would maintain that the model that we've had in the past, where we are able to maintain margins.
We'll see how it cost and pricing move through and.
Depending on the segment some have much more differentiation less price sensitivity, others will probably move more with Martin overtime. The challenge that we have this year in the transition.
Is it goes back to the inventory level the pricing would have an immediate action and cost improvements will take a little bit more time to flow through because we have to work off the existing inventory that we had which was purchased at a different cost level.
Alright, thanks very much.
One moment for our next question.
Yes.
Our next question comes from John Roberts with Mizuho. Your line is open.
Thank you very much.
Many of your personal care applications, our fragrance. It seems like Destocking has been a lot less in the fragrance area and I assume you watch this because I know you have some ingredients that actually go into fragrances is that correct.
Why would your ingredients be seeing much more destocking in the fragrance market.
Yeah, So two separate things I think.
Most of the Destocking, if you look at it.
For our fragrance business via bulk of business I talked about so that's a different dynamic.
For most of the other areas, it's really more.
The destocking.
And specific customer dynamics as I said some of the customers were already seen that our demand is trending back to there. We look at their volume sales our sales to them are starting to align with that others are still having impact on sales in different parts of the world. So it varies by customer and I would say, it's improving but there.
There's still time for that Destocking alignment to happen.
Specifically two fragrances.
Most of our businesses in fragrances.
Our local business is a business came from our pharma Kim.
And as we've said the past that has not been performing well for a long time.
We've stabilized that we improve that but.
It's still an area that we need to take action, one and pivot.
We're mentation.
Biotech assets. So we our intention is to move.
And focusing on other areas, but clearly the sclera life business, which is the core part of it has been challenged we lost business.
And.
In 2002.
2019.
Given the.
People developing one of our customers developing fermentation technology versus natural extraction technology and Thats been probably the biggest challenge for us. So I would I would treat the volkov square are different.
Yes.
The other the other parts are really more about the market dynamics.
And then at the Investor Day, I think you had a couple of new Chemistries, one targeting silicones I think that was biodegradable and zero Boc and you had new ph control buffer technology.
When do you think youll actually tell us what those chemistries are.
Well, we are starting to to introduce officially we just introduced the super wetter.
For starting in the coatings area, we're not taking it out to a lot of other markets I personally started to visit some of our major customers meeting where they are.
<unk> technology offers or is taking them through our technology portfolio not just trying to here's a good product you are really presenting the technology, what's the potential to see engage interest in how we can adopt these technologies to their specific needs and I'm very excited that the response has been very positive.
So obviously early days, but so far it's been very well received so the launches right now I would say first priority is the super wetter.
We continue to launch and develop products on our modified vegetable oil we are working with customers around our liquid cellulose injectables as we said is doing very well.
And we're trying to accelerate some of the other projects.
Buffer.
So that we get to launch it in 2020.
<unk>.
Calendar year, 'twenty, four and try to do it in the earlier part, but we're already engaging.
<unk> customers to start doing testing and working with them.
So a lot of excitement there and even by the way, we're testing and the customers like it so interesting it by one want different performance, what's exciting for us that we're finding modifications that we can do so that there are going to be it's not a one product launch since our technologies. So we're launching gen. One, but we expect to see multiple.
Alex coming out of some of these technology, so very exciting.
Development and that's why we're increasing our investment in these areas.
Great. Thank you.
One moment for our next question.
Sure.
Our next question comes from Jeff Zekauskas with Jpmorgan. Your line is open.
Thanks very much.
How do you calculate the <unk>.
Inventory control penalty do you look at last year's level of production and compare it to this year's level of production is that the way you do it or is there some other way so.
So for us.
It is how we are controlling inventory calculate it how do you gave us that number.
Days of inventory I mean, we look at our forecast.
And we have this is a very technical number in terms of hey, we have these plants, how long does it take to ship to different locations around the world, we calculate shipping time.
Safety stocks, so theres a number of factors that we've put in and we say look for this product we should have X number of days of forward looking demand in inventory and that's the issue for us So right now.
We believe we're going to sell 100 units will have.
Over the 'twenty 'twenty eight 'twenty units in inventory.
If the demand comes down our forecast comes down then.
And then we have two high inventory and we have to not produce as much as demand outlook goes up when we had too low of inventory and we have to produce so it's all about days of inventory.
Or how we calculate the inventory levels that we have if you look at.
When we won one thing for sure what happened was many companies increase the days of inventory targets.
Because of the longer supply chain, so that would add days well before the 52 weeks to ship to Europe now. It takes me a month, therefore need another 15 days of inventory to account for that so it's all mathematical and it's all about days, what's what's this should level.
Based on days and safety stocks and then ultimately it's what's your forecast.
To calculate those dates.
So if I understand what you said a few about a hypothetical level of what you think the appropriate inventory is.
And what Youre doing is youre producing to get down to that number.
Halfway to reach that number of inventory days or the inventory days that we're going to get to another level lower and if they are another level lower.
How much lower are they have been where we are today.
We're comfortable where our days are today.
Issue now for US is that we need to produce to demand.
So that we don't build.
More inventory this is what happened.
Lost in the first my comments around the first half of the year. If you look at the first quarter, we had X demand we had production plans we produce.
And.
As demand has started.
Come down our days of inventory went up right. So so that's where in the second half we have to reduce.
The average for the year.
What sort of normalized as we move forward. If we assume we have the right number of days.
And we don't want to we don't want to increase.
Days of inventory based upon demand, we will produce our production will be based on what the actual demand is going to be.
Okay, and then lastly, how much will it cost to remove the $80 million and stranded cost Titus west what are the cash cost to remove what Brent.
Well sure like I said, we have a lot of stakeholders that we got.
To engage and I don't think I think it would be premature and a fair too.
Getting too detailed before we've had the chance to really work through some of these issues, but there are going to be normal normal actions that we want to take some will take cost some of it might be some investments that we need to move due to two <unk>.
Allow for some of these adjustments in where we make products and shifting things around so there's multiple multiple things, but but what we will share more details at the appropriate time.
Okay, great. Thank you.
And Jeff just just just for a little perspective, we think we've done this a lot in the past and.
While we're not ready to share number we would we would expect it to be less than what we've seen in the past on some of the programs that we've done in terms of overall cash costs to do what we need to do but like I said, we're not we're not ready to we're not ready to get into the details of that yet, but it would be that would be our expectation.
Great. Thank you.
One moment for our next question.
Our next question comes from Mike Harrison with Seaport Research Partners. Your line is open.
Hi, good morning.
I was wondering Guillermo if you could answer a couple of questions on specialty additives first of all during your comments you suggested.
But the specialty additives business had kind of comparing plants or some shared assets.
That could be the most impacted by inventory control actions. So maybe just a little bit of additional color on.
What's going on there and why we saw the biggest impact from inventory control on specialty additives.
Okay, Yes, I mean, if you look at the two businesses that we are taking actions on CMC and MFC industrial.
The assets are within the specialty additives business. So empty industrial is mostly in specialty out of the business and the asset. So that obviously has been a big big impact, but the CMC business.
Is in specialty additives.
But it supplies.
Both livestock.
Life Science, so the nutrition business, which is way down and also our personal care business that was impacted so we keep all.
Don't see any value in not just moving allocations around and creating more noise.
But most of that is in specialty additives.
And obviously, especially it is big.
Big Hec volume.
But they are the biggest volume driver of that obviously has been impacted by some destocking, but those are the three biggest drivers.
In terms of the plan, so it's a little bit disproportional impact.
The additives.
But but.
Nearly NMC industrial in nature. They are the biggest volume CMC is much more of a scarcity.
Alright.
Mike Mike specialty additives is over half the volume of the core business. So you would expect it to be a bigger number there.
They produce as Guillermo said volumes for other parts of the business. So that's that's what makes a number of them even bigger than it would have normally been.
Alright Thats helpful. And then my other question is just regarding what you're seeing in terms of Destocking. It sounds like there are some markets where.
Youre seeing destocking continue and other markets, where you are maybe more confident.
Destocking has peaked and is maybe progressing toward it and can you walk through your core markets and kind of differentiate which ones youre feeling better about which one you expect that destocking to continue.
Yes.
<unk> coatings.
Is one that we're expecting to see improvement customers volumes have normalized a little bit more they do still have some inventory and again, we have big customers.
And it's a more concentrated.
Global industry.
So so there as individual customers align youll start seeing seen that impact however.
You all know the last few years, we haven't had seasonality because everything was short.
But as we get back to seasonality.
That that the coating season really starts.
In mid to end of Q2 fiscal year two to cross So February and March. So we don't expect any major pickup and it'll be normalizing at a lower volume during the winter period.
Well that one is clearly improving our nutraceutical nutrition was one of the really nutrition and generalists.
One of the most impacted segments, we're starting to see some normalization, we should start picking up orders in some of these areas. We haven't even sold much at all for months.
Given the high level of Destocking thats, not a high margin business for us.
But clearly.
<unk> has had a big impact on on our absorption for us.
The personal care.
Spaces, I think we're starting to see a normalization customer by customer and we have some as I mentioned that are already sort.
Sure.
Ordering what we see in their sales. So so in terms of reporting numbers. So that's good news, but we have other specific ones that have their own challenges that might take them a little bit.
More time to work through.
I said as I said in the intermediates is one that we expect.
A little bit more of a.
Yes.
A delay.
Especially around the EV the timing of EV battery.
Startups that will be a bit later, we should see some improvement in normalization of demand.
<unk>.
In the year in the U S and Europe, but that's based on existing capacity the new capacity really starts coming in towards the end of calendar year, 2004, and really more into 'twenty five.
That whole chain has sort of developed delayed.
By six to 12 months from what.
The original expectations were.
Alright very helpful. Thanks.
One moment for our next question.
Our next question comes from Michael Sison with Wells Fargo. Your line is open.
Michael Sison with Wells Fargo. Your line is open and on muted.
Okay.
Michael Please rejoin using the call me feature one moment our next question.
Hi.
Our next question comes from Laurence Alexander with Jefferies. Your line is open.
So good morning first of all how much of a net headwind you expect in 2024 from the restructuring initiatives.
Would it be like 40 to 50 million or is it going to be less than that.
EBITDA headwind, yes, I think the issue here is again, we need to engage group so when we do things.
Yes.
Impacts Europe you Gotta go works Council. So we're not in a position really to talk.
Talk about that.
I think that some of these things when we decide when we can take the actions the offsets will be pretty quick.
On some of these areas as I said the biggest issue for US right. Now is that most of these things CMC, specifically CMC NMC the margins are low so.
Minimizing the volatility is really the bigger priority.
In these areas, but those benefits should be quicker.
Hec network will happen throughout the year, because it really involves all our clients and how we redistribute and where we produce things so that will be across the year, but impact wise again.
Promote prior comment most of the volume really starts in the back end of the year.
Okay, Great and then what's your kind of benchmarking now for the tax rate and interest expense that will flow through the P&L.
The interest expense will be pretty much what it was in fiscal 'twenty three.
We don't.
Any floating rate debt.
So nothing nothing's maturing for several years so we're.
The cap structure on that side should be very consistent.
Tax rate's, probably going to be call. It low to mid twenties part of thats going to be driven by mix.
As you are aware, we have Swiss principal organization generally generates lower tax rates so depend.
Depending on the jurisdiction.
The pretax income and that will that will ultimately drop drop the tax rate, but generally we would expect it to be kind of low to mid twenties.
Thank you.
Okay, one moment our next question.
Yes.
Our next question comes from Michael Sison with Wells Fargo. Your line is open.
Hey, guys can you hear me, yes, Hey, Mike how are you doing.
Yes, sorry about that just one question for you.
I just wanted to understand the EBITDA margins for the first quarter a little bit.
Youre going to do about $480 million in sales you did a little over five in the first quarter 'twenty three similar in first quarter 'twenty to.
460 ish for any first quarter 'twenty, one your EBITDA margins were all about 20% so.
Yes.
I mean, I sort of understand some of the issues, but at the same sales level. It doesn't seem to me that the margins should be so low is there are you comfortable theres not structural reasons why the margins are so low for the first quarter.
Yes.
I think to two areas and I'll, let Scott coming out one is as we said it's the loading of production.
That's exactly right, Mike historically, even though Q1 is seasonally weak we would be producing in anticipation of the spring season. We are not doing that now we are producing only what we believe demand is going to be for Q1. So that's the big difference if you look at it.
Year over year.
Theres, probably a $25 million difference.
Between last year Q1. This year Q1, just on the manufacturing loading piece of the equation. So.
That's really yet I mean pricing is going to be pretty much flat.
In Q1 of this year based on our current estimates so.
It's not a pricing issue as it is.
Simply around producing to demand and as Guillermo said.
Our median intermediates is going to be meaningfully lower in Q1 of this year versus Q1 of last year that'll be that'll be the other big difference.
And that's an important point, Mike in the sense of traditionally.
Everybody sort of generalize as that sales volume because volume really for everything right.
And as Kevin said, Thats not necessarily true production volume doesn't align with sales volume, it's about inventories and how we build capacity.
Peak demands and managing all of that it.
We're producing to demand, we're taking a much more conservative position so as demand picks up.
The leverage is very big because it's not just we're going to sell more.
Ramp our plants much more so that's why the uncertainty in our discomfort for.
Taking a guess of what's going to happen in the second half of the year at this point in time, the very variability would be very big So I think the issue now is.
Understand these dynamics these scenarios that we built and make sure that we're taking the actions that improve our performance across the scenarios. So.
If things remain.
Slower for longer.
We'll produce we will have more.
Controlled operations.
And things, we don't have to cut inventories anymore.
If things pick up the ramp rates would be significant we have a lot of upside. So so the actions, we're taking will minimize downside and maximize upside potential for us as we move forward.
Great. Thank you.
Mhm.
Thank you as a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Withdraw your question. Please press star one again.
Yes.
I'm showing no further questions at this time I would like to turn the call back to Jim Lenovo for closing remarks, well. Thank you very much everyone.
For your participation and questions, we look forward to engaging you.
For the quarter.
<unk>.
I appreciate all the attention and interest in Ashland and Abigail. Thank you for all your health.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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