Ashland Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Ashland Global Holdings first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, please press star 1 on your telephone. Please be advised today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Seth Morozek, Director of Investor Relations. Please go ahead.

Thank you, Sydney. Good morning, everyone, and welcome to Ashland's first quarter fiscal 2020 earnings conference call and webcast. My name is Seth Morozek, Director, Ashland Investor Relations. Joining me on the call today are Guillermo Novo, Ashland's Chairman and Chief Executive Officer, and Kevin Willis, Senior Vice President and Chief Financial Officer. We released preliminary results for the quarter ended December 31st, 2019, at approximately 5 p.m. Eastern Time yesterday, January 27th. The news release issued last night was furnished to the SEC in a Form 8-K. During this morning's call, we will reference slides that are currently being webcast on our website, Ashland.com, under the Investor Relations section. The slides can also be found on the Investor Relations section of our website. we encourage you to follow along with the webcast during the call. Please turn to slide two. As a reminder, during today's call, we will be making forward-looking statements on several matters, including our outlook for fiscal year 2020. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We believe any such statements are based on reasonable assumptions but cannot assure that such expectations will be achieved. Please refer to slide two of the presentation for a more complete explanation of those risks and uncertainties and the limits applicable to forward-looking statements. Please also note that we will be referring to certain actual and projected financial metrics of Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to these measures as adjusted and present them in order to supplement your understanding and assessment of the financial performance of our ongoing business. Non-GAAP measures should not be considered a substitute for or 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 results in the first fiscal quarter. He will then provide an update on the work that has been done to realign the Ashland business structure. Next, Kevin will review financial results for the fiscal first quarter and discuss the debt offering redemption that was completed in January. Finally, Guillermo will close with key accomplishments that have been achieved over the past few months in addition to providing his thoughts on important next steps. We will then open the line for questions. Please turn to slide five, and I will now turn the call over to Guillermo for his opening comments. Guillermo?

Thank you, Seth, and good morning to everyone. It's an exciting and dynamic time here at Ashland, and I'm incredibly energized by what we have accomplished and the opportunities that lie ahead. I want to thank the Ashland team for the strong support and enthusiasm you have demonstrated during this transition. Today, I'll start with comments about the high-level drivers of our performance in Q1, then discuss the business realignment that continues as we speak. Following my remarks, I'll turn the call over to Kevin to take you through the details. Q1 performance was below prior year, driven by softer market demand, prior year carryover items, and our catalyst change at our Lima facility. We experienced no significant surprises in Q1 other than the extended turnaround costs at our Lima facility as a result of an unexpected need for additional maintenance work. We had another strong quarter in terms of EH&S performance, and we continue to advance our sustainability objectives in terms of innovation and operations. As expected, market demand remains soft in the quarter, in both the industrial and consumer markets. In pharma, we had a difficult comp relative to a very strong prior year Q1 and saw some customers adjust their inventory levels. In personal care, we continue to see demand softness in hair care. In oral care, results were stronger than planned, driven by some new product introductions by key customers. For adhesives, We saw general softness across most segments, especially transportation, but the construction market was strong. We continue to see deflationary pressures in both pricing and raw material costs. Coatings demand remained soft during the quarter. As we communicated, we also had the prior year carryover headwinds of business losses and tailwinds of improved costs. From a cost perspective, we continue to realize benefits from the cost reduction program and have begun taking additional cost improvement actions. I will talk more about these actions later in the call. Now I'd like to speak to you about the progress we have made realigning Ashland's business structure. Please turn to slide seven. As we discussed during the last call, we are moving from a functional model to a business-led one. As part of this change, we are putting in place a new business structure to better align strategy, resources, and capital allocation, and improve execution. This change recognizes that we have a diverse portfolio of specialty businesses with different profiles and requirements to drive success. This will move decision-making and accountability to the business units and their leaders. Incentive compensation will be heavily aligned to business unit results. In forming the teams, we are leveraging our internal talent and complementing it with targeted external talent. I'm very pleased with the progress we've made in such a short period of time. Please turn to slide eight. Our business will be made up of the following. The consumer specialties group will include our life science, and our personal care and household business units. Note that the Life Science BU will hold our current pharma and health and wellness businesses. The health and wellness business will include Ashland's core food additives business as well as Pharmachem's nutrition activities. Personal care and household BU will include Ashland's existing businesses as well as the Avoca fixative business from Pharmachem. The industrial specialties group will be made up of our specialty additives and performance adhesives business units. Specialty additives will contain our coatings, construction, and performance additives business lines. Performance adhesives will remain unchanged. We will continue to run our intermediates and solvents business as a separate segment and business. Although we will allocate to the business units some of the corporate managed costs linked to their operating activities, like IT, HR, EH&S, and other functions, we will have a corporate segment that holds all corporate governance costs. Note that in addition to aligning our resources to the businesses, we are also aligning our core assets to them. Each business will be accountable for the operations and performance of the assets in their business and for the supply of all the demand of the other business units. Please turn to slide nine. This business model change will be a fundamental change in how we run our businesses and the company. We expect these changes to increase our focus and in turn improve decision-making, our agility, and build ownership and Business units will own their strategies and be accountable for their operating performance. This is not a one-size-fits-all model. They will have the dedicated resources and full empowerment to make decisions, including their business models and cost structures. The intent is for the new business structures to better align strategy, resources, and capital allocation, and, of course, improve execution. Aligning our incentive compensation to the line of sight of our business units and their teams is also a significant change. Their decisions and actions drive our performance, and as such, BU Incentive Comp will be heavily aligned to the business unit's results. We have accomplished a lot in a short period of time. All the general managers have been selected and will all be in place starting February 1st. We have defined the business units, their teams, and aligned their assets. And we're now in the process of finalizing the financials. As part of the actions taken, we have started to reduce our cost structure. For this coming quarter, we will be focused on operationalizing the new business units. We expect them to update all their strategies and define their business models and cost structures. As the BU's take control of their operations, we will begin the process of rightsizing other corporate structures. Let me now pass the call over to Kevin to review our results, and then I'll come back with some closing comments.

Kevin? Thank you, Guillermo, and good morning, everyone. If you will, please turn to slide 12. First, I'll begin with a broad overview of results during the quarter. As you may recall, the December quarter is our seasonal trough during the year, as demand tends to be slowest, as our customers manage inventory in anticipation of planned downtime at their facilities. We also schedule much of our planned downtime to coincide with our customers' planning. This quarter was no different, and our results demonstrate the same normal seasonality patterns that we would expect. That being said, and as expected heading into the quarter, global demand in both consumer and industrial end markets remained weak. We also continue to work through the business losses that occurred last year at both PharmaChem and within the personal care end market. We did, however, realize continued improvements to our cost structure as both SG&A and raw material costs were down compared to the prior year. While overall results were consistent with expectations, they were below the results of last year's December quarter. Please turn to slide 13. Total Ashland sales in the quarter were $533 million, down 7 percent from the year-ago period due to lower sales in specialty ingredients. Negative currency represented one point of this decline. SG&A costs again declined significantly in the quarter as we realized positive impact of the cost reduction program, including the benefit of eliminated stranded costs. We did incur higher than anticipated costs during the planned catalyst changeover at the Lima, Ohio facility within intermediates and solvents. In total, Ashland's adjusted EBITDA was $88 million compared to $100 million in the prior year. Adjusted EPS was $0.13, down a penny from the prior year. Our tax rate was favorable due to income mix and the benefit of discrete tax items. Now let's look at the segment results in the first quarter. Please turn to slide 14. Specialty ingredient sales were $505 million, down 9% versus prior year, due primarily to weaker demand in both consumer and industrial end markets, plus the prior year business losses, which I already referenced. Gross profit margin benefited from lower raw material costs, though this was somewhat offset by unfavorable product mix. Favorable price versus raws continues to be a good story for specialty ingredients as the commercial teams have been diligent during a prolonged period of raw material volatility. Operating income and EBITDA both declined versus prior year as lower gross profit was partially offset by lower SG&A costs. All in, EBITDA margin was basically flat at 20.2%. Please turn to slide 15. Turning to intermediates and solvents, sales in the quarter were $28 million, up 22% from the year-ago period, though the December quarter last year was particularly weak for the INS segment. As previously mentioned, the planned catalyst changeover plus the unexpected maintenance work at Lima resulted in $12 million of additional costs versus prior year. As a result, both gross profit and EBITDA were negative during the quarter. The good news is that the plant returned to normal operations during the quarter, and no additional costs are expected related to this maintenance work. Now I'd like to review some important balance sheet work that we've recently completed. Please turn to slide 17. To improve our debt maturity profile and better match the currency of our earnings, assets, and liabilities, in January we issued $500 million of unsecured euro-denominated bonds at 2%. We also finalized a new unsecured U.S. credit facility consisting of a $250 million term loan A and a $600 million revolver. We used these proceeds to retire approximately $766 million of higher rate debt this month. This move extends maturities and reduces our weighted average cost of debt as well as cash interest expense. It also provides a natural hedge for our Euro-denominated balance sheet and income statement. We expect this refinancing to result in approximately $18 to $20 million of lower cash interest expense on an annual basis. This Euro bond issuance debut is an important step as it demonstrates new capital sourcing options for Ashland outside the U.S. Please turn to slide 19, and I will now turn the call back over to Guillermo for his closing comments. Guillermo? Thank you, Kevin.

As we discussed in our last call, our key objectives are to drive profitable growth driven by organic sales and adjusted EBITDA growth, margin expansion, and improved cash flow generation. Please turn to slide 20. My priorities continue to be to develop and articulate our strategy for our business and the company, to improve our operating performance and to align and right-size our cost structures to the needs of our business and run as a best-in-class company for our size and profile, and to maintain a disciplined capital allocation focus. Most importantly, we want to move with a strong sense of urgency and ensure that our actions result in visible improvement momentum in our performance. Please turn to slide 20. Our near-term focus is very clear. First of all, is to enable our business units. This is at the core of driving fundamental improvement in our results. If our business units are focused in performing well, this will drive core value creation. We are targeting to have them fully operational with their new strategies, plans, and structures by early fiscal Q3. We will drive cost improvement actions. It's important to note that our company has undergone significant portfolio changes for a long time. We recognize that the organization is a bit fatigued with change. Because of this, we want to make sure that we move with urgency on defining our future structures and implementing the cost actions we plan to take. We will be acting on cost across four levels of the company. The first level is around our BU's. BU's will drive setting their business models and improving their direct cost structures. Second, as the BUs define their needs and service levels requirements, we will take action on corporate managed costs that are allocated to the business based on these new service levels. Third, we will ensure we have in place a best-in-class governance structures and costs in line with a $2 to $3 billion company of our profiles. It's also important to note that although we are a smaller company now, we do have some legacy costs from our history. We will ensure that we have the appropriate cost structure to manage these legacy activities efficiently and effectively. And lastly, we're going to focus on driving our operating performance. Although the business units will drive the core operations, we do have some specific challenges where I plan to spend more time. One would be addressing revenue growth on a few challenged businesses. Another area is about accelerating productivity initiatives. And the last area is improving our working capital and getting opportunities to impact free cash flow. Please turn to slide 22. As I've outlined, our focus for 2020 is very clear. Our number one priority is to take the necessary self-help actions that will drive near-term and long-term performance improvement for our company. We will move with focus and a strong sense of urgency. We are still finalizing the financials for our new business, which will be critical for the work that lies ahead. We already have a lot of issues we need to address, but there's still more work to define other actions we need to take and dimension both their near-term and long-term impact. As such, we will not be providing guidance. In terms of the outlook, we will provide the following insights. Although there's still a lot of macro uncertainty, based on current assumptions, we expect market demand to start improving, especially in the second half of the year. We continue to make progress on new business development and innovation, which will support our underlying business. We expect pricing and raw material dynamics to stay balanced. At a minimum, we expect to see the $25 million SG&A carryover improvement, but we will work to expand that impact throughout the year with new cost actions. We will begin to act on some working capital improvement initiatives, especially on inventory. This will liberate cash, but we still need to dimension the operating impact these actions may have. For our Q2 call, we'll plan to present the new business structures and give further color on our strategy and path forward. Please turn to slide 24. Although there's clearly room to improve our performance, we are already a premier specialty materials company. We have an enviable portfolio of businesses focused on high-quality markets with exciting growth opportunities. We have leadership positions in our core markets with strong and experienced teams, customer relationships, and innovation capabilities. We already have a profitable and high-margin portfolio, and our businesses generate strong free cash flow. Our focus now is on making a good thing even better. I want to thank all of you for your interest and support, and I also want to give a very special thank you to everyone in the Ashland team. Your support and dedication is is greatly appreciated. Note that together we will be making Ashland an even better company where we can innovate with our customers and grow together. Your work counts and is critical to our future. So thank you very much. Operator, let's move to Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please limit yourself today to one question and one follow-up. Once again, that is star one to ask a question. Our first question comes from the line of Christopher Parkins with Credit Suisse. Your line is open.

Great. Thank you. So, Guillermo, we understand you've only been on the ground for a few weeks, but we also know you're familiar with some of these platforms from your past experiences. Just given investor concerns regarding systematic business loss due to some pharmacant weakness, Can you just give us a quick review of your perspectives on the longer-term competitive positioning of the ASI portfolio by end market, but particularly in the life sciences and PC&H platforms? Okay.

Yeah, I would highlight two big items in terms of some of the events that happened last year, and I think we talked about it a little bit in the last call. And first is, yes, we had some business impact in our portfolio, but we did not – lose share to competition. It's not like we're not playing our game. We lost business because some of our customers made reformulations and took some of the business internally. So if you look at actually the core businesses across the portfolio, we are still in a very good position. There's the normal puts and takes of share wins, share losses that happen. We don't go into that level of detail on an ongoing basis. But I'm pretty confident that if you look at some of our core business in pharma, in coatings, in adhesives, we're doing very well. And a lot of our traditional construction and other such segments. So I'm not as concerned that there's something systematically broken. The oral care we were addressing, it's now a capacity. It's done. We actually, versus our plans, we had a better quarter than we had planned through innovation, new products. Customers are taking some of our newer technology. So the teams now, that's one of the areas that I want the new business units and leadership teams to focus and really make sure that we're getting more traction. I think we can get much more leverage out of our innovation investments that we're making that I don't think we are where we need to be in those areas. On the farm camp side, I, you know, this is one of the areas that I need to spend more time. We have an issue there. I mean, there's no doubt that this is a more structural, and I'd rather comment that in the next calls as we move forward. But, you know, clearly we have some good businesses that are stable. We look at our active ingredients business. The margins can improve, but, you know, it's a stable business that we can grow. In some of our fixative business and some of our custom manufacturing, obviously we've had some bigger challenges. There's a lot of great technology there, especially if you look at our Avoca business to grow into, take it into new directions, but this is going to take a period of time. So this is definitely an area where we'll spend a little bit more time and effort. Got it.

And just as a corollary of that question, for those investors that are concerned about the long-term growth profile of the ASI platform, what do you believe are the overall macro key thematic top-line drivers we should be monitoring, and what's your general thought process regarding how long it will take senior management and the new business unit heads to better align the company's cost structure with that outlook? Thank you.

I think on the cost and organization aspect, The expectation is that we'll move quickly on those. So within this year, I'd like to see most of those things in place. I think the ones that you're going to have probably a broader timeline, some things we can do now, some things that will take a year, some things that might take a little bit longer, is more on the corporate side. Structural things we can do, certain footprint changes, or even if we want to change our IT strategy, things of those nature take a little bit more time. So that area I think you're going to have a broader spectrum, but definitely on the business side the cost part will be very critical. I think we should be getting much more benefit on the revenue side on focus, and that's been the experience that I've had with other businesses that we've gone through this transformation. Obviously the innovation one is the part that is a longer lead time, and that's why we're moving with urgency. The sooner we can get to it, the better. The good news there is that we actually do have really great capabilities. Every lab facility they go, the projects that we're working on, I think it's about getting more traction. But there's a lot of exciting things that are going on that are probably not as visible to the outside, and that's one of the things that we want to show our investors and our customers on the things that we're doing. These are things like innovation around sustainability. about biodegradable products. It's about natural products. New pharma products to help our customers improve productivity in the manufacturing of their pills. Expanding into markets on injectables in the pharma area. In coatings, we have a real premier group in rheology. I've competed against them for a long time. they're expanding into other technologies to expand the portfolio. So there's a lot of exciting things. That's why I'm very excited. The sooner we can get through some of these cost actions and restructuring, the sooner we can get to the real exciting stuff, which is really about innovation and organic growth.

Thank you very much.

Thank you. And our following question comes from John McNulty with BMO Capital Markets. Your line is open.

Yeah, thanks for taking my question. You had indicated there was some opportunities around the working capital side, I guess. Can you give us some preliminary thoughts on where you think you can actually make the improvements there and if you can quantify it at all?

Well, the part of quantifying is why we're not being specific on some targets yet. But if you just look at our balance sheet and the inventory levels relative to other companies, we have a high inventory level. And, you know, especially if you look in some of our bigger asset plants, that's where we want to focus. And it's not an insignificant amount. Now, the issue is what actions do we take commercially moving the material? If it impacts running our plants, that's the balance of things that we want to do. And this is something I need the new business groups really to own and drive. So that's part of the timeline issues that we need to work through.

Got it. And then just as a follow-up, so when you think about the key issues that have maybe caused the company to struggle a little bit in certain areas, do you think it's a lack of focus or do you think it's a lack of investment? And if it's on the investment side, how much do you think you have to put in to actually kind of revitalize the platform or is it really just getting the right people in the right places?

I don't think it's an investment question. If you look at our R&D investments, the levels that we have, If you look at the capital investments we're doing, our plants are well-positioned. We're adding capacity as needed. So that's not the issue. I think it is an issue of focus. I mean, it's very interesting. Even before we put all the business in place, just changing how we're looking at our income statements and balance sheets by businesses and aligning them. We have smart people that are involved in these businesses that They're seeing the issues, and they're already moving on it. We're not waiting on some of these things. I think the biggest disconnect, and when we say focus, it's not that people weren't doing their thing. It's that when you have these functional organizations in niche business, specialty business like these, where everything is actually very interconnected, our sales, our innovation, our manufacturing decisions, these are big customers that we're working with. It's much more intimate. If you're in the commercial side and you're just looking at revenue and contribution margin, you try to make the right decisions based on those things, but what happens when you generate business that short-term increases sales and contribution margin, but it costs you a lot of extra costs to deliver that and you make no money on those transactions? The groups don't have that full view of the P&L, and that's really the fundamental change. You know, if you go down, it's not that we're not focused with marketing people that don't know their space or that we have R&D people that don't know their technology or the customer interaction. It's connecting all that in a much more one focus, one agenda that we're attempting to do. And, frankly, we're already seeing benefits of just changing the narrative internally, and that will help us bring more traction.

Great. Thanks very much for the call. Thank you.

Thank you. And our following question comes from the line of David Biglitter with Deutsche Bank. Your line is open.

Thank you. Good morning. Guillermo, I know you're not putting out targets, but the prior team had a longer-term margin target for the special ingredients business of 25% to 27%. Is that still reasonable, or is that even too low, perhaps, in your longer-term thinking of the potential of Ashland?

I think as we said in the last call, I mean, we're not changing our targets. That's still the target. I think that, you know, there's opportunities to do more than that, especially as we look at, you know, each of the business units. This is, you know, a lot of the discussion of cost has been really around, you know, our corporate structures and all that, actually it's really about the business model, service levels, things that we want to do differently across the different business units. So I think as was the case with the prior company I was in, the bigger surprise really came out of those activities that were much more intimate to the business and that provided some upside momentum, both in terms of cost and in terms of mix improvement.

Very good. And just on the innovation engine and pipeline here, Mo, when would you hope that we would begin to really impact the top line? Is it a few quarters? Is it longer than that perhaps? What's your timeline for that improvement?

You know, we are trying now to support the key initiatives. So we're identifying which are the major projects, major initiatives, how do we focus on them to accelerate them. so that we can increase the level of impact. And I think the other issue is for the business units. You know, it's not surprising, I mean, for some of you that look at this across many companies, just aligning now our incentive comp and our actions to business units, I can guarantee you that there's going to be a different sense of urgency for each of those businesses because the majority of, you know, their line of sight, are they going to be rewarded for it? What they do matters, and that just creates a very positive sense of urgency across the organization that we want to foster and develop. So I think we can move much faster. I think the things that will take longer are more as we step back, and this is something that I'll work with our CTO, on more the portfolio. Are there some changes that we want to shift into bigger activities? Are we doing more? You know, we've got a lot of great projects on sustainability. Where can we do more on some of these areas, especially in the consumer side where this is a business imperative as we move forward? So there's a lot of exciting things. You know, I think we have a lot of options because of the core capabilities we have. So that puts us in a good position to choose. We're not having to start things from scratch at this point in time.

Thank you.

Thank you. And our following question comes from the line of Mike Faison with Wells Fargo. Your line is now open.

Hey, guys. Welcome back here. Just curious, I know you've got a lot of things going on in terms of improving the company, but when's a reasonable timeframe to start to see EBITDA growth for Ashland? Should you see some this year, second half, or is it really a 2021 event?

So I think two things that – I mean, three points that I would make. One is we've been focused really on all these things that happened last year. Are we – you know, stabilize it so that we're not getting any more negative surprises. And that – this quarter, we've seen that. And as the business teams go, my level of confidence increases because – We're going to have very focused teams addressing those issues. I think that the second issue is going to be just general market demand. There's still a lot of uncertainty, but all the indications are most of the markets are starting to improve, especially in the second half. That will help us drive EBITDA growth. But the most important part, and we don't control that, that will be the market, I think is really our self-help actions. And it's on both the prior question and and on the discussion of our cost actions that we need to take. Getting the businesses focused so they can drive their portfolio with what I would call the exciting EBITDA growth drivers, which is really the revenue and the innovation mix improvement drivers that they have. And they're already developing. They're already identifying things that they can do. And second is obviously on the cost side of things, the actions that we need to take. So those self-help actions. So if you look at the timeline, you know, I think the second half of the year is where we're going to see the biggest benefit. What we've been trying to do, as you've seen now, is to show, you know, I know there's been a lot of concern of, you know, has the company been moving too slow on some things? And what we want to make sure is if we can't show it yet on the financial results, that we are showing it externally that we're taking actions that we are moving with a high level of urgency in all these activities. So next quarter, you're going to hear more about the actions we're taking. I think we will see some benefits on costs and on revenue, but the bulk of that will come in the second half of the year.

Got it. And then in order to get to that mid-20s type of EBITDA margin for the total company, is getting there primarily from – your own actions or do you need a little bit of growth and sort of organic growth to get there?

I'd like to target through our self-help actions, but obviously organic growth is the bigger driver. What I don't want to use is organic growth as a reason not to do things. I think right now it's really about our self-help actions and moving with urgency. I don't think it's healthy for the organization given our history. to six months, eight months from now, a year from now, to be talking about this again. Let's get it behind us. Let's move forward. It's not going to be easy, but it's something we need to do, and then we can focus on more of the positive story moving forward. So self-help is at the top of our list of drivers for our performance. Got it. Thank you.

Thank you, and our next question comes from the line of Lawrence Alexander with Jefferies. Your line is open.

Hi, good morning. This is Kevin Esbeck. I'm for Lawrence Alexander.

Hey, Kevin.

So my first question has to do with the end markets. So you mentioned that there would likely be an inflection likely coming in the second half of 2020, and I was just curious to know if you're already seeing some of those inflections happen, and if so, which specific end markets?

Yeah, you know, I think this is sort of our seasonal low, if you look at it, and that's the normal type of the year. But we are seeing already indications. If you look at, as I said, pharma had a tough comp, but there was a lot of actions in Q1 from customers around inventory, things that they did, and we're starting to see the pickup of that. We saw a few in personal care, a few customers delay orders just because, as an example, in the sun care area, it was a softer year for our customers last year, so there was some inventory impact, but we're seeing those orders already coming in now. And for coatings, I think the indication is more, for us seasonally, it's more the back half of the year, and indications is that that will start picking up. Architectural coatings are the big ones. the big driver for us, and that's more of a seasonal driver.

We also saw some nice momentum in oral care. I mean, set the business losses aside that we're still working through. We had some new product introduction there that drove some top line and bottom line growth for that business.

Okay, great. Thanks. That was really helpful. And I guess my second question has to do with your restructuring effort that you've talked a bit about. I'm just curious to know – I guess the relationship between just realigning the different segments versus cost-cutting and rightsizing, I guess, should most of the cost-cutting be done in 2020 and then sort of realigning kind of still a work in progress?

So we are already realigning the businesses. I think the essence, once we define these businesses, as we've laid out to you, We were building the P&Ls. Each leader now is looking at it, and it's no surprise. We have a very diverse portfolio of businesses. They're all nice, healthy, but they're not all the same. Some are much healthier, much nicer than others in terms of margins, potentials, but the cost structures are also very different. So you might have some that have very high gross profit margins but higher R&D costs, others that are good gross profit but not as high, and lower R&D, more productivity-driven. So each business now needs to align their structure to the P&Ls. In the past, a lot of these support costs have been, and we try to align them, but they've been much more across the company. Everybody gets their charge. We're now enabling the businesses to say, hey, I don't need that service. That's not important. I want to reduce it or increase it. In some cases, they might want more services in a certain area. We're going to give them that freedom. But we would like to get most of that done this year. I think on the business side, these are not things that we need to delay. This is about structure. This is about how we focus. I think the structural side that take time, are some of the more systems process-related activities, and that's probably more on the corporate side.

Okay, great. Thank you.

Thank you. And our next question comes from John Roberts with UBS. Your line is open.

Thank you. First a manufacturing question, and then I have an R&D question. But will the industrial segment manufacture cellulosics for the consumer segment so that Most of the manufacturing assets are going to end up over in industrial. And you chose not to merge the BDO or intermediate insolvency business into industrial. I guess you could have done that. It's kind of small. But maybe talk about how the manufacturing is going to work in the new organization.

Okay. Yeah. So we are aligning who are, you know, we look at who are the big volume drivers of the assets and who are the best owners in terms of taking the full P&L and management accountability. So of the assets, it's going to vary by business. The cellulosics in general will be falling into the specialty additives business. They're the bigger volume, and they need to really make sure that we're running the assets, that if there's capacity, that they're the ones that need to fill it out. The other, you know, pharma, personal care, you can't sell out those assets. I mean, those are specialty, very niche-y, and it's really more about innovation and getting into customer formulation. So they're going to own that. In the acetylenics, it's going to be more on the consumer side. They're the bigger driver on that. And then each one has their own assets. Adhesives, as an example, is a big driver of a lot of our acrylics or a lot of our polyurethanes. But as specialty additives expands their portfolio of new rheology modifiers, new products, there's going to be that interrelationship. I've been, you know, if you look at companies and businesses that I've been involved in in the past, this is, you know, running coatings in a prior company. We ran the network. It's very efficient. You have one owner. You can make sure that you're running things very efficiently. The part that you need to work with your other businesses and make sure that demand planning is robust and that there's a good dialogue and understanding there. their needs so that we can service them appropriately.

And then R&D as a percent of sales, just under 3% for all of the company. Do you have in mind a target for the consumer specialty segment?

I mean, each one of them are going to now drive their agenda, so I don't want to speak for them. This is about empowering them to own this, so I don't want to, you know... put boundaries on what they're going to do. But clearly, we have different businesses, and they're going to spend differently. And it's not just the dollar spent. The questions that we're asking them is, where are you investing your money? You know, when we look at our portfolio, we're looking at, you know, new product development, which are some really big new platforms that we're investing in. What are you investing in process technology, productivity? So some businesses should be investing more on productivity as an example. Others should be more on new products as they have a robust portfolio. Others, hey, we should be looking at some of these longer-term initiatives and developing new platforms. In the consumer segment, a great example is biodegradable. So that's one area that we're making a lot of progress, but we'd like to do more. One area that we've done very, very well, and now we're trying to get more products out the door, is the biofunctional. That part of our business has been very good. So not one size fits all, and each business will drive their agenda. Thank you.

Thank you. And our next question comes from the line of Jess. The Couscous with J.P. Morgan. Your line is open.

Thanks very much. Earlier in the call, Guillermo, you spoke of there being structural issues at Pharmacam. What's a structural issue, and how did it arise?

Well, you know, I think it's clear to say that, you know, we have, been, we've lost some important pieces of business, and it's not across the board. If you look at the core, you know, the three buckets of activities within Pharmachem, one of them, Avoca, we've moved to household. We've had issues there, but that technology, actually, they have a robust roadmap of things that they can do, taking that technology in other areas, and they're working it. So, working with them to make sure that we are able to leverage that extraction and purification technologies that we have in that area is a good thing. But it is a change, so that's a structural change that they're doing. In the active ingredients, I think that part is okay. Its margins could be higher. We need to improve. We're bringing in some new products. But how do we leverage that in our food additives business in a more systematic way? We need to restructure how we do things. The part that is structural is the custom manufacturing type activities that we had at Pharmachem. That has been hit. That's where most of the assets are. It's more of a U.S.-based business, and we need to address that. So Pharmachem, to be very direct, relative to our expectations, how it's turned out has been very different, and we need to address that in a more specific way. So I need a little bit more time to work with the team on that.

Were PharmaChem volumes down 20% in the quarter?

Actually, more than that. The volumes were a significant gap for us in terms of the overall company. If you take out PharmaChem, you know, I think you would see, you know, the rest of the businesses have been pretty stable and you wouldn't really, you know, we wouldn't be having a lot of these conversations in terms of the overall performance at this point in time.

So the other businesses inside of specialty ingredients were maybe slapped down, and the large decrement in revenues really came out of Pharmacan.

So, yeah, if you look at specialty additives, and talking in terms of some of the businesses, the way we're going to talk in the future, you know, coatings was definitely slightly down just in market demand, but, you know, it's a business that we have very strong positions in. I think the part that probably we didn't spike out as much is we had Nanjing that we talked about at the last call that did have some costs in not so much revenue, but costs in the quarter. And then last year, we did close down a CMC plant in China. That impacted revenue, but not so much profit. So if you combine the two, it looks like the business is down, but it's two different things. So I would say Codings is much more market-driven at this point in time. If you look at some of the big customers here that have merged some of their activities, just seasonality around the world with weather and things like that. So I'm not that concerned on that part of the portfolio.

And then lastly, does the coronavirus make any difference to your business? You know, does it affect, you know, I don't know, supplies of raw materials or does it affect demand? Can you see any alteration in your business patterns in any way from the onset of the virus?

Well, I think you look at it in several different areas. One is our business in China and like everybody else. I mean, if demand gets impacted and, you know, obviously is an issue. Obviously now just movement of people and things is impacting operations. We don't really export a lot from there, so I don't expect that that's going to be a big issue, but we're monitoring our customers. I mean, at the end of the day, I think this is much more of a macro market issue, very different from other industries that have structural issues around supply and or customer bases there. For us, that's not so much the case.

Okay, great. Thank you so much.

Thank you.

Thank you. And our next question is from Jim Sheehan with SunTrust Robinson. Your line is open.

Thank you. Could you please give us a sense for the special ingredients organic growth rate excluding PharmaChem? I think you just said it was relatively stable. But excluding the PharmaChem business loss, was your growth rate, your organic growth rate, better or worse in this quarter relative to the prior quarter?

We were down versus the prior quarter. If you remember, we had the oral care was an issue. And then just general demand. Pharma, as an example, we were down. but it's really the comp that was a very tough one. On the other ones, I would say a few percentage, a percent or two, and it's more macro-driven than anything else.

Okay, and could you please quantify the proportion of EBITDA that represents the more challenged structural portion of PharmaChem or any other way to estimate the proportion of that business that you think needs attention?

I guess we'll outline that as we roll out the new businesses and finance, but I would say it's not an insignificant amount, to be very direct. I think if you look, our Avoca business was sizable, so some of the impacts have been significant. I think towards the back end of the year, some of these new developments will come in and offset, so that's good news. On the nutrition side of PharmaChem, that's going to take a little bit more time at work. But it's not an insignificant amount of revenue or EBITDA.

Thank you very much.

Thank you. And ladies and gentlemen, once again, that is star one to ask a question. Our next question comes from Mike Harrison with Seaport Global Security. Your line is open.

Hi, good morning. Hey, Mike. Guillermo, you made a comment that the organization was somewhat fatigued with change, and obviously there's been a lot of change from a portfolio standpoint. I think maybe, you know, some change as well at the management level or strategic standpoint. But can you give a little bit more detail on how that's factoring into your approach to – the restructuring and reorganization. How do you overcome that fatigue and turn it into an organization that's more energized about the path forward?

Okay. I think that the first action that we're taking is focusing on the business. And I use the example of in airplanes when, you know, when there's an emergency, the air mask comes down and they say put it on first and then help others. In our case, put it on the business and they will help us. So energizing our strengths, which is really strong business capabilities and enabling that has to be at the forefront of what we do and how we're going to move forward in terms of driving performance. And that also generates excitement because that's where innovation, that's where engagement with customers happens. So making that much more visible and enriching, because I think as people get the freedom to take action, they're the ones that are going to drive the actions up. We're not going to do a top-down realignment of businesses. It's the business teams, their leadership groups are really going to define where we go. That's difficult work, but it is also very energizing because they are able to see where they want to go. They are able to see why they're doing things in a much more clear line of sight way, and that generates excitement and clarity. And the majority, the reality is the majority of the organization, things aren't going to change. It's really more to the better, not to the cost reduction side. I think on the other parts is, you know, we're just going to be very honest and direct on what we need to do. And, you know, that's not easy, not a – you know, the thing that people want to do and wake up in the morning, but it's something that we need to do for the better good of the company and the future. And we're just going to be honest and direct about it and make sure that we're treating everybody in a fair way. The other part is that this is not about just cutting costs on people. It's about driving simplicity and, you know, right-sizing to a company or size. You know, The hardest part when you are moving from an $8 billion company to five to three is that you're not starting with a blank piece of paper. You're sort of evolving what you have. And that is, you know, very difficult, emotionally more hard. I think what we want to try to do is where are we today? What do we need? And start with that blank piece of paper and then connect the two. But I need to have these discussions internally and With our teams, I don't think it would be appropriate to go into details with the external world without giving the benefit of the discussion and communications internally. So we need a little bit more time to really give more details on that area.

No, understood. That's good color. My other question is on the coding business. You mentioned down modestly, and it sounds like that was related more to market weaknesses. Just wanted to get your sense if there's any inventory destocking that happened during the quarter or still is yet to come. Do you feel like there's been any deformulation or any other share movements going on? Just as we head into this seasonal period of potentially rebuilding inventories, I think a lot of the Codings guys are going to talk about relatively easy comps related to weather. And so I just wanted to get a sense of how you're viewing your position in that market heading into the spring season. Thanks.

Yeah. No, we're very well positioned. I mean, if you look at, you know, especially the rheology side, but also the other additives. But in rheology, clearly Ashland has a strong position in cellulosic. Aquaflow also extremely well positioned for some of the higher-end paints. and they're doing more. I think this is an area that we have. I think I mentioned last call. Our capabilities are higher than the portfolio we have. We can do more, and that's what the team is doing, trying to expand the number of products that we have to bring to the market. So as the market improves, we should see this business do very well. Thanks very much. Thank you.

Thank you. And at this time, I'm not showing any further questions.

Good. Okay, well, thank you all for your interest. I'm really looking forward to seeing all of you in the coming weeks. And I thank you all for your support. And, again, to everybody from the Ashland team that's listening, thank you for all your help. So looking forward to seeing you.