Ashland Inc.

Thank you for standing by, and welcome to the Ashland Global Holdings, Inc., second quarter 2021 earnings 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 during this session, you will need to press star, then 1 on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, press star, then 0 to reach an operator. I would now like to hand the call over to Seth and Rosie. Please go ahead.

Thank you, Michelle. Good morning, everyone, and welcome to Ashland's second quarter fiscal year 2021 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 March 31st, 2021 at approximately 5 p.m. Eastern Time yesterday, April 28th. 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 2021. 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 Ashland's results in the second fiscal quarter. Next, Kevin will provide a more detailed review of financial results for the quarter. Finally, Guillermo will close with key priorities and planning in this current economic environment, in addition to providing his thoughts on important next steps. We will then open the line for questions. Now, please turn to slide five, and I will turn the call over to Guillermo for his opening comments. Guillermo?

Guillermo Ramos- Thank you, Seth, and good morning to everyone. Before I begin, I'd like to thank you for your participation this morning. First and foremost, I'm pleased by the progress of our business units are making as we execute our strategy. We continue to operate safely with a clear focus on the safety and well-being of our employees as we manage through this difficult pandemic. In addition, our teams responded well to the impact of Storm Uri in the U.S. Gulf Coast in February, which resulted in two of our Texas-based facilities coming offline for several weeks. Not only did we lose production time, we also incurred additional costs of repairing pumps, pipes, and other equipment to get the facilities back online safely and as quickly as possible. The storm and subsequent freeze also impacted supply chain dynamics in the Gulf Coast. And while we have largely worked through many of these challenges, raw material availability has improved but continues to be an issue. As we will discuss in more detail, raw material demand continues to improve as the world slowly begins to merge from the global pandemic. Despite these challenges during the quarter, our business priorities remain unchanged, demonstrating organic growth, expanding margins, and improving free cash flow. For the quarter, Ashland sales declined 2 percent, inclusive of favorable currency. Excluding the planned exit of low-margin businesses, sales were flat with prior year, inclusive of favorable currency. Life science continues to perform well, with pharma sales consistent with a strong prior year period when buying patterns changed as large pharma producers as the reality of the global pandemic began to take hold. Nutraceuticals demand remains strong, and the team has demonstrated strong year-over-year growth thanks to concerted efforts to change the business trajectory. In personal care, The global pandemic continues to impact some market segments linked to consumer, social, and recreational behaviors. We have not seen the demand recovery everyone was hoping for in hair styling, sun care, and other businesses linked to grooming and wellness. For personal care, we also continue the process of exiting low margin product lines we commented on our last call. For our industrial segments, We saw continued recovery of demand. Specialty Additives continues to see strong demand recovery across all markets with global architectural coatings showing significant volume recovery as contractor business picks up globally. Our performance adhesives business also saw broad base growth across applications. In addition to improving demand dynamics, our industrial businesses executed well during the quarter to minimize the potential negative impact from the difficult supply chain dynamics caused by Storm Uri. Consistent with our strategy, lower SART expenses had a meaningful impact on Ashland's profitability. And again, we demonstrated substantial growth in free cash flow generation due largely to the disciplined balance sheet management. Please turn to slide six. As a result of the winter storm and the subsequent freeze, we incurred $14 million of higher costs, driven by $10 million in lost absorption and $4 million in repair costs. Of this total cost, $11 million impacted Q2, as reported in consumer specialties adjusted EBITDA. The storm also impacted our ability to ship and our customers' ability to receive certain orders. As such, roughly $3 million of gross profit shifted from Q2 to Q3. While there will also be the remaining $3 million of costs impacting in Q3, we expect this will be offset by the positive impact of the order shift into the June quarter. Demand trends and orders we have seen so far in April gives us confidence of this offset. So while the $11 million impact from the storm was meaningful, For our consumer specialties and Ashland overall, during the quarter, the impact is largely behind us. I would note that although our intent is to offset the loss absorption as we work to rebuild inventories, the current raw material tightness is making this work challenging. I'm very pleased with the progress by the Ashland team during the quarter. They managed well during another difficult external a challenge ensuring the safety of our employees and that our customers were supplied. Other than the freeze impact, all of our businesses are performing to expectations. Fortunately, as I stated, the impact of the storm and freeze in the golf course are behind us, and I am confident in our outlook for the remainder of the year. Let me now pass it over to Kevin for the financial update. Kevin?

Thank you, Guillermo, and good morning, everyone. Please turn to slide eight. Total Ashland sales in the quarter were $598 million, down 2 percent versus prior year. Favorable currency contributed 3 percent growth during the quarter. Excluding key items, SG&A and R&D costs again declined in the quarter as we realized the positive impact of the cost reduction programs. However, as Guillermo previously discussed, we experienced $11 million of additional cost related to the U.S. Gulf Coast storm and subsequent Texas freeze. In addition, our legacy environmental reserves increased roughly $4 million more than we expected at the beginning of the quarter. While not anticipated at the beginning of the quarter, these incremental environmental charges do occur from time to time. What's important to note is that cash cost for legacy environmental remediation remains very consistent year after year, and we do not anticipate that changing. In total, Ashland's adjusted EBITDA was $134 million, a 6 percent decline compared to the prior year adjusted EBITDA of $142 million. I'll note that the impact from the freeze and the environmental charges represent more than the entirety of the decline. In fact, X, the freeze impact, all business units generated improved EBITDA year-over-year and, in spite of the freeze impact and related supply chain disruptions, executed very well in the quarter. Ashland's adjusted EBITDA margin was 22.4%, a 90 basis point decline compared to prior year, again reflecting the items discussed above. Adjusted EPS excluding acquisition amortization was $1.05, down 6% from the prior year. Now let's review the results of each of our three business groups. Please turn to slide nine. First, I'll begin with consumer specialties. Sales were $322 million, down 6% from the prior year quarter. Currency favorably impacted sales by 3%. Within life sciences, pharma sales were down only slightly compared to the strong prior year quarter when customers pre-bought as the pandemic's impact on the global supply chain was in question. Nutraceutical sales were up double digits as the team has done an excellent job stabilizing and growing that business. Sales to nutrition and other end markets were down, reflecting the impact of pandemic-driven consumer dining behavior. In total, life sciences sales increased by 1% during the quarter, inclusive of the favorable currency impact. The freeze impact related to Life Sciences adjusted EBITDA in the quarter was approximately $7 million. Sales to personal care end markets were down 14% during the quarter due to several factors. As previously discussed, we continued to exit some lower margin product lines, which accounted for over half of the year-over-year sales decline within personal care, or approximately $11 million. While these self-directed actions impact the top line, They also favorably impacted mix and margins. The COVID-19 pandemic continues to impact certain consumer behaviors related to hairstyling, sun care, and oral care in the context of social activities, leisure activities, and mask wearing. Each of these are well understood issues that are actively being addressed by the team. Later during this call, Guillermo will provide an update on the implications we believe global vaccine administration will have on these consumer dynamics. Finally, Avoca posted some solid sales gains as we began to lap the issues experienced over the past year. The freeze impact for personal care and household adjusted EBITDA was approximately $4 million in the quarter. For all of consumer specialties, favorable mix and lower SART expenses led to improved adjusted EBITDA margins of 27.3% a 90 basis point increase over prior year. Adjusted EBITDA margin in the life sciences declined slightly to 27%, while in personal care and household, adjusted EBITDA margin improved to nearly 28%. In total, consumer specialties adjusted EBITDA declined by only $3 million to $88 million in the quarter, inclusive of the $11 million impact from the Gulf Coast storm and freeze. Please turn to slide 10. Industrial specialties had a strong quarter, with sales at $246 million, up 3 percent from the prior year. We saw broad-based growth across industrial end markets consistent with industrial demand recovery. Currency also favorably impacted sales by 3 percent. Our coatings business was up double digits during the quarter, reflecting strong global demand for architectural paints, particularly in the DIY applications, and we're seeing improved demand for contractor work globally. The only exception to strong sales growth in industrial specialties were energy markets, where demand remained weak in the U.S., and lower construction additive sales following the strike at our Belgian facility earlier in the fiscal year. We're confident that the strike issues at the Belgian facility are now behind us. Sales for performance adhesives grew by 4%, reflecting growth in all three primary adhesives and markets. For all industrial specialties, favorable mix and lower SART expenses also contributed to improved earnings and margins. Adjusted EBITDA margin and specialty additives improved over 400 basis points to 25.3%, While in performance adhesives, adjusted EBITDA margin improved by 150 basis points to 25%. In total, industrial specialties adjusted EBITDA improved to $62 million with a margin of 25.2%, a 310 basis point improvement over prior year. Please turn to slide 11. Turning to intermediates and solvents, sales were $37 million consistent with the prior year period. Growth in merchant sales resulted from continued in-market recovery was offset by reduced intercompany volumes following the U.S. Gulf Coast storm and freeze, which impacted the consumer specialties facilities in Texas. Adjusted EBITDA of $7 million for INS was up from $5 million in the prior year period. Please turn to slide 12. As I did in the last quarter, I'd like to spend a few minutes talking about free cash flow, which continues to be an important component of our value creation strategy. Total free cash flow in the quarter was $40 million, a $30 million increase compared to prior year. The $40 million included $15 million of cash restructuring payments related to our ongoing COGS and SARD cost reduction programs. This is an excellent result driven by the hard work we have done to improve cash flow and balance sheet management, including improved working capital, reduced capital expenditures, and lower cash interests and taxes. It is also a testimony to Ashland's free cash flow generation capability. For the first half of fiscal 21, Ashland generated $115 million of free cash flow. As a reminder, we generated $228 million of free cash flow in the second half of last fiscal year, and we expect to meet or exceed that in the second half of our current fiscal year. For fiscal year 21, this translates to converting EBITDA to free cash flow at a rate north of 50%, inclusive of cash restructuring costs, which we expect to be approximately $40 million for the full year. As we've stated, Our goal is to consistently convert at least 60% of EBITDA to free cash flow post-restructuring. Please turn to slide 13. While there were a lot of moving parts this quarter, I'd like to briefly summarize my three takeaways from the results. First, excluding the impact of the freeze on consumer specialties, all business segments generated strong growth in adjusted EBITDA and adjusted EBITDA margins. Second, while we experienced higher unallocated corporate expenses in the quarter versus prior year, this net result was primarily due to some favorable one-time items in the prior year and some unfavorable legacy items this quarter. Corporate unallocated was $15 million in our first fiscal quarter, and while the March quarter was high due to the items mentioned, we generally expect corporate unallocated expenses, including legacy costs, to be approximately $15 to $17 million per quarter. And finally, despite continued uncertainty related to the timing of global consumer demand recovery, our outlook for the business units this fiscal year remains unchanged. Guillermo will spend more time discussing our fiscal 21 outlook and our underlying assumptions in his closing remarks. With that, I'll now turn the call back over to Guillermo. Guillermo?

Hey, thanks, Kevin. Please turn to slide 15. With the first half of the fiscal year 21 complete, our priorities remain very clear. Drive margin expansion, enhance free cash flow conversion, continue to demonstrate our business and operating resilience, and accelerate profitable growth. To achieve these objectives, we have clear levers that we plan to act on with the same discipline we showed in 2020. We're finalizing the capture of our $50 million SARD cost savings commitment, most of which was completed in 2020, and accelerate the implementation and capture of the $15 million in cost of goods sold reductions we have already identified. Between both these cost initiatives, we've implemented over 85% of the planned actions to date. We're going to drive productivity and mix improvement from innovation, focus on our more profitable strategic segments, and exit lower end product lines we feel we cannot improve. And we will align our capital allocation priorities for CapEx and working capital consistent with our strategic priorities. During fiscal year 2020, we had the opportunity to demonstrate the underlying resilience of our business, as well as the improved operating discipline. We will remain focused on driving the continuous improvement of our business-centric model and this operating discipline. Our focus continues to be on shifting to accelerate profitable growth drivers, both organic and inorganic. Please turn to slide 16. As a reminder, earlier this year, we announced the signing of a definitive agreement to acquire the personal care business of Schultz & Meyer. We're incredibly excited about this opportunity as it broadens the breadth of our specialty additive solution we can provide our customers in the personal care and markets. We continue to expect to close on the acquisition during this June quarter. And as I've previously indicated, we look forward to welcoming the Shulkin-Meyer personal care team to Ashland. Please turn to slide 17. As we're seeing with recent developments around the world, COVID remains the biggest uncertainty. Although two different types of drivers, controls versus vaccinations, China and the US are leading other regions in terms of the global recovery. Like the US, most other countries, for most other countries, vaccinations will be the most likely path to sustainable reopening of their economies and the general economic recovery. Government actions to support the economy will continue to promote demand, but the impact will vary across markets. Assuming the current trend line and related uncertainty, our expectations are that the pharma and nutraceutical segments will continue to show strong demand as health and wellness will remain at the center of everyone's attention. Demand for most personal care segments will continue to be resilient, driven by hygiene concerns and stay-at-home lifestyles. However, recovery of segments linked to social and recreational consumer behaviors that depend on the reopening of the economy will take longer to recover globally. Industrial demand will continue to recover, driven by increased consumer spending as well as increased comfort with advancing projects given improved contractor safety protocols. Short-term, the raw material and supply chain tightness will present some challenges that will vary by business. Overall, we maintain our positive outlook on the recovery, but expect to see some mixed changes in recovery across markets. Acceleration of vaccination rates will be the major driver of reopening the global economy. Please turn to slide 18. If we assume vaccinations will be the primary driver of the global recovery at current vaccination rates, it would take over a year for many countries to achieve vaccination rates needed to open their economies, and this will most likely occur in our fiscal year 2020 timeframe. Given the global profile of our business, the acceleration of the global recovery is important to Ashland. Our performance-adhesive business is 85 percent U.S.-centric and should continue to see strong demand recovery. However, our additives portfolio is very global, with roughly 75 percent of our sales outside of the U.S. In the case of personal care and household, roughly 70 percent of our sales are outside the U.S. As I indicated, Most of our business will continue to see demand recovery if current trend lines continue. Our segments that continue to be impacted by the COVID changes in consumer and social recreational behaviors are mostly in personal care. Please turn to slide 19. Although we continue to see robust demand in most of our segments, the segments impacted by consumer and social recreational behavior changes continue to be the same ones we've discussed in prior calls, hairstyling, sun care, denture adhesives, and hand sanitizer. Hairstyling has been impacted by changes in consumer grooming habits given stay-at-home dynamics, as well as concerns with visiting hair salons. This is the largest impacted segment for us. Sun care continues to be impacted by reduced vacation travel. Use of dentures has been impacted by reduced socializing, mask wearing, and some industry destocking. Although hand sanitizer segments did experience significant growth in 2020 due to the pandemic, there was a significant overstock build that is still being worked off. From a demand perspective, personal use of hand sanitizers has stabilized and remained strong. However, the expected increase in demand that was to be driven by the reopening of schools, restaurants, and travel has been delayed. For these segments, we expect consumer demand to be in line with 2020, so the issue is more about the timing of the recovery. Please turn to slide 20. In line with these comments, our forward-looking insights are that we will continue to see overall recovery of demand, but the mix across business may vary. We will see stable life science growth some delayed recovery in some personal care segments. We see continued recovery in industrial segments, especially in the U.S. and China. We expect FX to remain favorable, and we will continue to execute our self-help actions to offset some of the headwinds we encountered in the first half of the year, the strike in Belgium and Storm Uri. Our businesses, especially adhesives, will continue to manage the pricing raw material dynamics as they have in the past. With this, our outlook is for fiscal year 2021 revenue to be in the $2.4 to $2.5 billion, and EBITDA to be in the $570 to $590 million range. Upsides not included in this outlook are the acceleration in raw material availability that would allow us to rebuild inventory and capture higher cost absorption and or incremental demand. The outlook also excludes future contributions from Shilkenmeyer's preservative business, which is expected to close this quarter. Please turn to slide 21. In summary, I'm pleased to report that other than Storm Uri Impact, our businesses are performing in line with our expectations. We are maintaining our focus. We are continuing to advance our strategy, including profitable inorganic growth through M&A, furthering our commercial and innovation activities, executing our self-help actions, and proactively managing pricing and raw material dynamics. While the timing of the global recovery following the COVID-19 pandemic and the raw material supply stabilization are outside our control, we are focused on the things that we can control. We're working to offset the impact of the U.S. Gulf Coast freeze through improved plant absorption as we rebuild inventories. We are expanding our product line offering and personal care segments that have been less impacted by the pandemic. We're executing our strategy of portfolio transformation and profitable growth. And we are continuing to drive our internal self-help actions. We're also excited about the opportunity to share our broader perspective on Ashland's long-term strategy and objectives in an upcoming investor day. While we initially planned to host an in-person event, the pace of the recovery from the pandemic may warrant a virtual event this summer. Our internal teams are working diligently on the planning process, and we plan to announce a date for the event in the near future. We look forward to sharing more details with you soon. Please turn to slide 23. In closing, I want to thank the Ashland team once again for their leadership and proactive participation in an uncertain environment. We are fortunate to be a premier specialty materials company with high-quality businesses that have leadership positions in defensive markets. I'm pleased by the resilience demonstrated by our people and business and look forward to the opportunities to lie ahead. Thank you, and Operator, let's move to Q&A.

As a reminder, to ask a question, please press star, then 1. If your question has been answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from David Begleiter with Deutsche Bank. Your line is open.

Thank you, Guillermo. And, Kevin, can you discuss the cadence of second half earnings given there will likely be some peaking raw material costs in Q3?

So on the raw material cost, one thing that's important to note is the biggest impact that we've had when we talk about raw materials for especially the additives business is not cost. It's availability. And it's not necessarily the major raw materials. It's, you know, a small ingredient that we need and we can't make the product without it. So, you know, raw materials don't just look at the the raw material pricing cost side of things, dynamics, it's the availability itself that has been the bigger impact for a big part of our portfolio. In terms of the cost side of things, you know, the biggest impact is in adhesives. That's the petrochemical linked side, acrylics and polyurethanes. We're moving on that. Most of that you are going to see in the Q3. I think we had some impact. Raw materials went up in the quarter, but availability wasn't there, so it's not like the procurement was as high. We are seeing some raw materials coming back a little bit already from the peaks of the last quarter. But that's really, you know, the raw material dynamic is really going to be more an adhesive story rather than a broad Ashland story.

Yeah, and I would say on an overall basis, when you look at our outlook versus prior year, price cost is very balanced over the entire portfolio. I mean, as Guillermo indicated, for For a portion of the editor's portfolio, it's more about availability or the timing of availability.

David, one comment I would add sort of to interject because I did see some notes and messages talking about pricing, what's happening, and especially expectations relative to other companies because some of the results are driven by pricing. I do want to make a point that We are not a commodity company. Pricing is not the big driver. We're striving to become much more of an additive with a bend towards the consumer side of the portfolio that has more pricing stability. It's about innovation, value pricing. So some of the comparisons that I've seen are probably not appropriate because we're not a commodity company. So we're trying to look at more other companies. Our peers would be more the additives, the players in other areas. So, again, this pricing raw material story is much more of an adhesive story because it's more of that petrochemical profile. But for the rest, you're going to see a very different dynamic going forward.

No, very clear. And a second question, just to use that C word, unfortunately, BDO prices are up sharply in the June quarter, contract prices are up. I would expect INS earnings to be up sharply as a result in Q3 versus Q2. Is that a fair assumption?

Yes. Yes, it is. That is more of the commodity type profile, and most of that is happening in the Q3 already. Thank you.

Thank you very much.

Our next question comes from John Roberts with UBS. Your line is open.

Hey guys, this is Lucas Bond on for John. Thanks for taking my question. In personal care, so after adjusting for the exit of the resale business, what was the exit rate on sales there coming out of March and has that turned positive yet in April? And could you just discuss how you see the underlying kind of organic trends there progressing in the second half, please?

I would say, obviously, you know, we expressed some of the segments that the recovery is a bit slower. Obviously, the demand was high, actually, in the last quarter. You know, when we talk about sales being shifted from one quarter to the other, that's based on, you know, our forecasts of what we expected and that we couldn't shift to, to customers. We actually had a lot more orders that came in just because demand is strong, but we couldn't even commit to because of raw material situations. So the market right now, there is a lot of noise because some of those orders are other people couldn't supply either. So there's a little bit more froth, I would say, on the demand dynamics in the short term. But as the raw material situation eases off, I think things will start normalized and you're going to see a pattern more aligned with last year with some of these segments, the upside recovery. That's the part that we're not in control. My view right now is that that'll take a little bit longer, but we are definitely seeing improved demand in the core segments.

Cool. Thanks. And just on coatings, Paint is the largest end market for industrial specialties, I believe. Architectural has been outperforming industrial paint until recently, but that seems like that's going to shift back the other way now with industrial to outperform more as we come out of the pandemic. So I have the perception that you're more exposed to architectural than industrial. Right. But maybe you could help us understand what your outlook is there for the paint markets and then how that dynamic will impact the business.

Yeah. So as you said, our biggest part of the business is architectural coatings. If you look at our results in the business, they've been equal to or ahead. You know, if you go customer by customer, we're very global. We supply everybody in the world. has been equal to or better. I think demand, we've seen the improvement from everybody. We've actually gained share and we're doing a lot of really, the team has done a lot of great work, so we feel very, very good. As we move forward, and the industrial for us is a growth area that we want to get into more in new developments that we're working on. But if you look at the outlook, I do think regardless, I mean, the pandemic impact on the architectural coatings market would require a shutdown. And you see it in some countries, but it's their shorter term at this point in time. But overall, what we're seeing is that, especially the contractor segment, because of new safety protocols, people and contractors both are much more comfortable working. People know they'll leave their house, let the contractors be working. There's not the fear that we had last year I think independent of the vaccination and things like that, the contractor business, which is the bigger business globally, will continue to recover. So I think that we will continue to see strong demand. And for our products, the recovery will continue. DIY is the one that everybody's looking at more. because it was very, very strong and there was some discussion that would soften up a little bit and it would be offset by contractor. I think what we're seeing so far is that they're both remaining pretty robust.

Our next question comes from John McNulty with BMO Capital Markets. Your line is open.

Yeah, thanks for taking my question. So it sounds like the Texas freeze-related issues, it sounds like you feel like on the revenue front you can get it back, and then even on the cost side it sounds like there are, I guess, there's enough other things going right that you can kind of offset that. Can you help us to understand that? what those levers are, whether they're on the revenue side or they're on the cost side, to kind of help you to offset some of the URI-related costs as we go throughout the rest of the year?

So, at a minimum, and it's really about the raw material availability, you know, we have enough availability. We've been meeting our demand, so that's been very good. But, you know, the raw material situation is still tight. The teams are working very actively. The good news is it's improving, and every week it's improving significantly. I would say with the level of improvement we've seen so far, we feel probably the risk to meeting our core demand is lowering significantly. I'd like to see the availability improve a little bit more to where we feel confident that we can really start rebuilding inventory. And I think two things that you're going to see is, one, that we just have the raw materials that we can run our plants and build inventory. That'll be a straight absorption impact. But the other thing is demand still is remaining strong. Other people are also having issues with supply. So there is some incremental demand there that, you know, maybe we don't build inventory and we sell more. And that's not clear right now. It's really going to be dependent on the raw material situation. But the good news, it is we're seeing the improvements there. and we're feeling more and more confident in that area.

Got it. No, that makes sense.

Sorry, go ahead. John, you look at the math in the quarter. So 134 reported. We had 11 specifically in the quarter for freeze. As Guillermo said, likely to be able to recover a chunk of that if RAS do what we would expect them to do. You can call it 4 to 8 million of legacy corporate stuff, environmental being the biggest chunk of that. and about $3 million or so of pushed GP into the current quarter. And it really gets you, as you look at the March quarter, just to emphasize this, it really gets you right on top of, if not above, the consensus numbers if you kind of weed through all of the noise. And as Guillermo indicated, demand remains robust. We don't see that changing in the industrial segments. Um, we've talked about what we expect out of the consumer segments in terms of the puts and takes. So, um, I think, you know, I think we're, you know, we're confident that we can, you know, that, that we can offset a chunk of that freeze impact, uh, over the course of the year, presuming raw material availability continues to improve.

Got it. Got it. Okay. Um, that makes sense. And then Kevin, maybe a question or another question that, that maybe you can help us to fill in the gap on, um, So on the cash flow front, certainly the first half of the year, you're off to a much better start than usual. And I think the 1Q maybe had some bigger benefits than usual. It looks like you're on target to kind of exceed even kind of your longer-term target of kind of a 60% cash conversion cycle. Is that fair, or are there other kind of puts and takes that we should be thinking about that maybe temper that down a little bit as we look throughout the rest of this year?

So it's a good question. It's the really two big moving pieces for this fiscal year. We're going to have about $40 million of restructuring-related cash costs that will pay out over the course of the year. So that's obviously negative to the overall number. We've talked about that. On the positive and more or less offsetting that is we're continuing to work on working capital. And so especially with the exit of some of this low-margin product line business and personal care, we're primarily selling out of inventory as we do that. And so we should continue to see incremental improvements in working capital. So, you know, there are puts and takes to that, but I don't disagree with your math in terms of where we will likely end up, assuming things play out as expected over the remainder of the fiscal year. And, yeah, it's probably fair to say that Q1 was maybe – a bit stronger than would be quote-unquote normal. But I think it's also fair to say that we're continuing to focus very clearly and very closely on the working capital dynamic, and not just inventory, but also receivables, and to a lesser extent payables, because we're pretty much in line on payables anyway. But for sure on the receivables front, Each team continues to make progress in its own way in terms of reducing days outstanding. We don't have any problem with collections, but our terms are on an overall basis too long. And each business unit is working on that in their own way. And I'm pleased with how they're approaching it and the progress they've made. So we should continue to see a bit of tailwind on the working capital side over the course of time. And then once we get to the restructuring piece, the numbers will be a lot cleaner.

Got it. Very clear. Thanks very much for the help. Sure.

Our next question comes from Mike Harrison with Seaport Global. Your line is open.

Hi, good morning. Hi, Mike. Within the PC&H business, you quantified the lower margin volume that you actually did Maybe give us an update on where we are in that process. Are we almost to the point where we're going to stop seeing that headwind? And then can you maybe give us some examples of the non-pandemic impacted applications where you're looking to expand your presence and your product offering within PCNH?

Okay. Yeah. So the... The exit will take, I mean, we're working through it. You know, a lot of this is with some major customers, so it's all planned out, but we need to be sensitive to their needs in terms of changing supply and all that. So it'll be through this year and into next year. The majority of it happened in this year, but specific customers, specific areas, we have specific timelines that we're working on. And, again, this is, you know, we're exiting. This is not what's driving our business, so we want to do it in a responsible way for our customers, too, just given the other activities we have with them. I think your question on the personal care, you know, what are the segments, what are the things we're doing, and it really comes back to the whole work that we're doing around rebalancing our innovation initiatives. As you know, personal care, it's all about ESG-driven innovation, then that's going to drive both growth opportunities as well as replacements, just reformulations with new ingredients. But there's some very good examples. If you look at hair care as an example, the majority of the hair care market, 80%, is shampoo and conditioner. The styling is probably more around 20%, a little bit less than 20%. There's a few other segments. For us, Hairstyling is the biggest segment. It's almost half our business. It's a big part of the portfolio. We're seeing, for example, the whole ESG moving from liquids to bars, as an example, for shampoo and conditioners. There's a whole number of other products that we're repositioning. It's a small segment still, but a growing segment driven by ESG. We can reposition a lot of our ingredients to really help customers improve their offering in that area. So we're excited about it. This is expected to be a very interesting area. But they need to improve their products. The issue is going to be reduced packaging, reduced shipping. So there's a lot of ESG-driven things. But that would be a great example of areas that we can do more on. And then we're working on specific ingredients, things that we want to do, cross-selling and cross-segments as we develop new products for biodegradability or... Specific performance criterias in in oral care some of these products and you know we can use in in hair care other areas So we're looking at all that and the team is working both long term and short term Long term is the innovation some of these core more platform driven innovations that we're working on and then in the near term It's how do we you know quickly? Redeploy our existing products. You know the short-term tech service the the on-site and regional labs that we have to work with our customers, how do we reposition our existing portfolio to solve some of the new opportunities that we see in the market? So there are some interesting, they'll take time, but they're going to be very interesting opportunities for the coming years.

All right. And then I believe you mentioned that you feel like you're about 85% of the way on the SARD and cost of goods sold productivity actions. It sounds like the SARD is all complete, but maybe an update on kind of what further progress needs to happen on the cost of goods sold side.

I think most of it has been worked through and communicated. You know, we're working through some of the final sites. You know, in Europe it takes a little bit longer with just working through the process, but everything is working very well and we're confident we're going to meet our timeline. So no big concerns. I think if you step back just on the results, the businesses actually are doing as we expected. There is no surprises there. The self-help actions, no surprises there. Everything is moving. So we feel very good about the underlying performance and outlook. The challenges on the recovery, we know what they are. We're working them We're going to manage through them. So I think it's some of these external things that are happening. The storm obviously was the big impact. And I also want to point out the environmental, it's mostly legacy things. And by definition, these are going to be chunky. And you can't forecast them because if you could forecast them, you have to take the charge. So by definition, this is a technical process. Whenever they do the work, they get the data, they have to then take action to adjust to the reserves. It's not, you know, it's a reserve. So, you know, these are not things that really are reflective of the underlying performance of the businesses.

All right. Thanks very much.

Thanks.

Our next question comes from Mike Sisson with Wells Fargo. Your line is open.

Hey, guys. Hey, Mike. I was wondering, so if you think about the midpoint of your outlook for EBITDA in 21, up $50 million from 2020, and I just want to make sure I have sort of the EBITDA walk down. Could you maybe walk us through, you know, cost savings, contribution, volume leverage, FX, and then obviously you gave us the storm negatives, but I just want to make sure the walk is better understood.

Mm-hmm.

Okay. Let me make a few comments and then, Kevin, maybe you can go through a little bit of the details on some of the walk drivers. Obviously, as we talked about when we did the fourth quarter, the beginning of the year call for the outlook of the year, we felt very good in terms of the self-help was a big driver for the year and an improvement. And that gave us a lot of confidence that, look, there was going to be significant improvement. So definitely I would say that has been a major driver. The recovery on the industrial side obviously is the other big driver, which is happening and we're taking actions on very well. You know, the other parts are, you know, those are the more robust businesses that have held up last year, and I think that's more, you know, the details of the puts and takes on on share, new products, development, mix improvements, those more nuanced activities that we're driving. But Kevin, do you want to go into any specific or more specific comments?

Yeah, I think in terms of our outlook that we talked about earlier in the year, which we actually upsized, I think we upsized last call, was on the self-help 20 to 25 million. was our expectation. As Karen indicated, I'd say the industrial recovery has been more robust and continues to be that way, which is a plus. Looking at it from a mix perspective, we've definitely seen improved mix in the business. Each business unit has done a really nice job of driving higher-value product lines, so we're seeing uplift there. That's playing a positive role when you look at the overall. Net-net, our expectations for corporate for the full year are pretty much on target, maybe a smidge high, but not much. So that's a bit of a negative on an overall basis, but just a bit. And I think the other thing that's important to point out is we talked about storm impact, and that's going to be all in, $14 million to the negative. And so to be clear, our range does not project any recovery of that. It also doesn't project any upside from the Shulkin-Meyer acquisition and integration, which there will be some. We just don't know how much. And we also had the dual strike, which is part of our process to execute on the cost of goods sold program. And that was an $8 or $9 million negative impact in total to the financials for the year. So you look at 570 to 590, considering the better part of $25 million of headwind from URI and the impact of the strike at our dual Belgium plant, I think I think it all adds up to be a pretty strong year. Again, not presuming any upside from recapturing storm cost, which we believe it will be, and also not including anything for the acquisition and integration of the Shulkin buyer deal.

Got it. And a quick follow-up, Guillermo, in terms of consumer specialties as a whole, when do you think we see growth? and just straight up year-over-year growth for the businesses excluding Shulker Meijer and what type of growth do you think the segment should do at some point down the road?

If you look at the underlying demand and internally we tend to take out what we're going to exit because that's sort of defined the timing of it might be a little bit of a noise but but it's been pretty much on target. Our overall target, these segments, underlying market will be market plus a little bit of growth, so 2% to 5% underlying market. That's the segments we're selling into. So we'd like to be above that over time, but that will require all these innovations, the portfolio shifts, really getting all that. I think this is true this year. We will still see some noise. If you look at the, you know, the segments that I highlighted, the four segments that are impacted, you know, they're not the biggest part, but, you know, roughly maybe 30% of the business. So that part of it is not getting the resilience that we would like to see. And that's the part that we're working through at this point in time. And I can't really predict, you know, when the recovery is going to be because I do think, you know, this is really about the opening up of the economy. You see it around the world. As an example, we got new business with customers to supply schools in a certain European country. Well, the orders are delayed because the school system is closed. So we're going to have to manage through that. But, you know, I think definitely in 2022, we will start seeing that global improvement as vaccinations really start hitting the rest of the world. I think that's the biggest challenge. I hope it's clear. I mean, we're not a U.S.-centric business in a lot of these portfolios. The U.S. is performing very well. But the other parts will really do need a little bit more of a pickup in the opening up of the economies.

Great. Thank you.

Our next question comes from Jeff Zacoskas with JP Morgan. Your line is open.

Thanks very much. I think your SG&A cost was $106 million in the first quarter and I think it was $84 million in the second quarter. What happened there? And what's a normal SG&A cost for a quarter?

Kevin, do you want to take this one? I'm sorry.

Yeah, no, it's okay. Yeah, I would say where we are right now, we should continue to see the positive impact of the cost out program roll through. I would say normal SG&A for the quarter is going to be around $100 million going forward in total. That's a good place to peg it for total SG&A.

So why was it so low this quarter? Did you cut management comp? What led to such a large sequential decline?

I would say it's more of a timing thing than anything else at this point. I mean, we didn't make any major changes to comp or anything like that, no.

Okay, thank you.

Our next question comes from Rosemary Morbelli with G Research. Your line is open.

Thank you. Good morning, everyone. I was wondering if you could talk about the size of your naturally derived products and what do you think it could be two to three years out. I understand that Solke is going to add to it. And linked to that question, do you think that customers are willing to pay more and therefore are the margins going to be above your traditional product lines?

No. So first, excellent question. And frankly, this is going to be a big focus when we do our investor day to showing a little bit more details both at a company level as well as business unit level. So a significant part of our portfolio I would describe as, you know, sustainable-based, natural, naturally derived, biodegradable. And you see just on the nature of some of the products, cellulosics, the nature of our materials. So we're starting with a very strong base, especially in our additives business. If you look at the adhesive side, that is mostly petrochemical, so it's acrylic and polyurethane. So there it's more we use our technology to help our customers more understand develop ESG value through their products, so composite light weighting, those kinds of things, wood, enabling wood in construction. So it's more about our customers' products. But I would say in the consumer side, it's much more also about our own sustainability. And customers are willing to pay more for value. It's not just pay more for product. see companies develop more ESG-driven technologies is performance. You know, the products need to perform. So just creating, as an example, a biodegradable hair gel or, you know, it's nice, but if it doesn't work, nobody's going to buy it. So it's a balance, and I think that's where the excitement comes, where there's a lot of opportunities for innovation. and for value creation, both to replace your own existing technologies with newer, more IP, hopefully IP-differentiated products that customers will pay a premium for, and also capture, share, or enable new categories. I think, as I said, the example of solid shampoo and conditioner is a very exciting. A lot you're seeing now before was a niche little product. Now you're seeing some of the major players coming in. So the ingredients that they want to use in those more ESG will by nature be, you know, the focus is on more sustainable type products. So I think the short end is we have a significant part of our portfolio as a company and we're developing it even more. So that'll be a an exciting part of our portfolio transformation. And as an example, the whole Avoca part that we were mostly focused in the past on plant extracts, as an example, for fragrance carrier, probably you'll hear us talk less about Avoca per se, and now it's really about extraction capabilities to develop and expand the portfolio. So we're looking at ways to bring in new products, new offerings to our customers in that area. That will be the center of a lot of the personal care focus for us.

Thank you. And then just following up on the hair or other type of categories on the personal care, which have been affected by a change in consumer behavior, I was wondering if you could share with us the difference between what you see in the U.S. and what you see in Europe. I mean, the U.S. is opening up, so are you seeing the benefit, even though it is a smaller part of your overall business?

In general, we are seeing for all categories that are consumer behavior, we are seeing some benefit opening up on this. I think the issue is how much is the opening up. You know, I think back to office is still much lower because regardless of I think a lot of companies are also taking other actions. So, you know, I think there will be a readjustment in terms of the work side of things versus the social side of things. Definitely on the social side, we're seeing a little bit more of a pickup. On the work side, I think there's still a lot of companies still working remote. So a lot of those day-to-day uses, you know, it's not as been as strong as historic in those areas. But restaurants, I mean, the social aspects of it, if you go to cities where the opening up has happened more, you do see people, you know, getting back into some of their older habits. But as you point out, Europe, we still see a lot of it's slower. And definitely in parts of Asia, we see it slow down because of the pandemic. Brazil, those places definitely are down.

All right. Thank you.

There are no further questions. I'd like to turn the call back over to Guillermo Novo for closing remarks.

Okay. Well, I want to thank everybody for your interest in our results this quarter and your participation. As Kevin summarized, I think we're very excited about where we are with the businesses, their underlying performance, the execution of our strategy, and we look forward to meeting with all of you in the coming weeks and talking to you to share more details. And more importantly, we're really looking forward to our investor day so we can lay out more of the long-term growth opportunities and margin improvement opportunities that we see for our future. So thank you very much for your interest and stay safe.

Ladies and gentlemen, this does conclude the conference. You may now disconnect.

Everyone, have a great day.