Ashland Inc.

Good day, and thank you for standing by, and welcome to the Ashland Global Holdings Inc. Third Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you'll need to press star 1 on your telephones. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Seth Morozek, Ashland Director of Investor Relations. Please go ahead.

Thank you, Justin. Good morning, everyone, and welcome to Ashland's third 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 June 30th, 2021, at approximately 5 p.m. Eastern Time yesterday, July 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. We encourage you to follow along with the webcast during the call. 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. You can also review our most recent Form 10-K under Item 1-A for a comprehensive discussion of the risk factors impacting our business. Please also note that we will be referring to certain actual and projected 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 third 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 the current economic environment in addition to providing his thoughts and important next steps. We will then open the line for questions. On a final note, we continue to work on planning for an upcoming Investor Day. Our intent is to host this event during the back end of the calendar year. Please turn to slide five, and I will turn the call over to Guillermo for his opening comments. Guillermo?

Guillermo Diaz- Thank you, Seth, and good morning to everyone. Thank you for your interest in Ashland and your participation this morning. Before I start, I would like to clarify that we will not be making any comments or responding to any questions about our ongoing strategic review process for our performance adhesive business. For now, I would just comment that the process is well underway and going well with significant interest. As you will hear during the call, in line with our June 10th update, the major issues impacting our Q3 performance revolved around the supply chain challenges linked to shipping constraints and raw material availability, as well as the pace of raw material cost inflation. For the most part, market dynamics for our underlying businesses business performance behaved in line with our commentary from prior calls. Despite the supply chain headwinds, we continue to operate safely with a clear focus on the safety and well-being of our employees as we manage through the challenges of the pandemic. I'm also pleased by the progress our business units are making as we continue to execute our strategy. Before I comment on our Q3 performance, let me start by summarizing some of the tailwinds and headwinds we saw in the quarter. From the tailwind side, our self-help cost savings activities progressed as planned. We continue to see strong recovery in industrial and market demand, and our nutraceutical and nutrition business continue to deliver improved performance. We saw favorable impact of FX, of the Shopee acquisition, and BDO pricing. And our capital discipline also delivered strong free cash flow and free cash flow conversions. On the headwind side, global constraints on logistics and shipping continue to impact sales and cost. As an example, June confirmed orders for direct shipments to customers on ocean freight were impacted by the significant drop in on-time shipping reliability. This has been a recurring theme for the last few months. For June, we had $20 to $30 million of orders that were at warehouses ready to be loaded on ships but were not invoiced due to delays in shipping arrivals and loading. Most of these orders were invoiced in early July. Indications are that these shipping reliability challenges will persist for the foreseeable future. While material availability continues to be a challenge, causing on-plan shutdowns as well as inefficiencies in our manufacturing productivity that negatively impacted costs. For a performance-adhesive business, volume was strong, but the magnitude and pace of raw material inflation impacted margins. The business continues to act on pricing to cover these cost increases, but the incremental inflation has impacted the timing of margin recovery. Personal care dynamics have not changed much as the pandemic-related impact on consumer behaviors continues to delay demand recovery. Additionally, as we discussed in the last call, we continue to see demand weakness in hand sanitizers and Avoca. Clearly, although the longer-term dynamics remain favorable, managing through these near-term supply challenges and cost inflation dynamics is a critical priority and focus for all businesses. Please turn to slide six. This quarter presented new challenges for our teams and our customers. However, regardless of these near-term challenges, we continue to deliver growth and improve performance. Sales of $637 million were up 11% by continued recovery of our industrial businesses and continued resilience of our consumer businesses. We're also starting to see the benefits of the Shulke acquisition. For INS, the strength was driven by strong BDO pricing. Currency was favorable by 3%. Life sciences continues to perform well. Pharma sales were down compared to a strong prior year period as customers worked to build inventory as the global pandemic took hold. Sales in the quarter were also impacted by ocean freight shipping challenges. Nutraceutical demand remained strong, and the team has demonstrated strong year-over-year growth thanks to the 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 behavior. We have not seen the global demand recovery to date, but we're confident that it will develop once there is broader vaccination across the globe. Specialty additives continues to see strong demand recovery across all markets except energy. Global architectural coatings business demonstrated significant volume recovery driven by both DIY and contractor segments. Our performance adhesive business also saw broad-based growth across applications. However, the availability of certain raw materials continues to constrain sales. EBITDA of $148 million was up 4%. The impact of strong sales And our self-help actions were offset by higher costs from supply chain and raw materials impacting logistics and manufacturing costs, as well as raw material costs and mix. Although we took significant pricing actions, they were offset by additional incremental raw material cost inflation. More pricing actions are already being implemented. Our free cash flow conversion focus continues to deliver strong results generating $210 million of free cash flow in the quarter. Despite these challenges during the quarter, our business priorities remain unchanged, demonstrating organic growth, expanding margins, and improving free cash flow. I'm pleased by the progress made by the Aspen team during the quarter. They managed very well during another difficult external crisis, a challenge ensuring the safety of all our employees, that our customers were supplied, and that we maximize our performance. 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 $637 million, up 11% versus prior year. Favorable currency contributed 3% growth during the quarter. Excluding key items, SG&A, R&D, and intangible amortization costs increased modestly to $118 million in the quarter, primarily reflecting increases to incentive accruals and deferred compensation, plus the addition of the Shulkin-Meyer business. In total, Ashland's adjusted EBITDA was $148 million, a 4% increase compared to the prior year adjusted EBITDA of $143 million. Ashland's adjusted EBITDA margin was 23.2%, a 170 basis point decline compared to prior year, again reflecting the items discussed above. Adjusted EPS excluding acquisition amortization was $1.22 per diluted share, up 9% 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 $340 million, down 1% from the prior year quarter. Currency favorably impacted sales by 3%. Within life sciences, pharma sales were down compared to the strong prior year quarter when our customers built inventory levels as the pandemic's impact on the global supply chain was in question. Nutraceutical sales were again up double digits as the team has done an excellent job stabilizing and growing the business. Sales to nutrition and other end markets also grew by double digits, reflecting improved trends for consumer dining behavior. In total, life sciences sales increased 2% during the quarter, inclusive of favorable currency. Sales to personal care end markets were down 6% during the quarter, due to several factors. The global 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. In addition, demand for ingredients used in hand sanitizer formulations have normalized and are below prior year levels. We also closed on the Shulkin-Meyer acquisition during the quarter, which contributed roughly two months of sales and earnings to personal care results. The integration is proceeding as planned, and we're excited about the future growth opportunities that the team and technology bring to our portfolio. For all of consumer specialties, lower manufacturing and SARD expenses led to improved adjusted EBITDA margins of 27.1%, a 90 basis point increase over prior year. In total, consumer specialties adjusted EBITDA increased by $2 million to $92 million. Please turn to slide 10. Industrial specialties had a very strong quarter with sales of $263 million, up 28% from the prior year. Industrial demand was significantly improved compared to the June quarter in 2020, when pandemic-driven lockdowns had been implemented across the globe. We saw broad-based growth across the industrial end markets consistent with industrial demand recovery. In fact, industrial specialty sales essentially returned to pre-pandemic levels last seen in the fiscal third quarter of 2019. Favorable currency contributed 4% to overall sales growth. Our coatings business was up double digits during the quarter, reflecting strong global demand for architectural paints in both DIY and contractor applications. The only exception to strong sales growth in industrial specialties were energy markets, where demand continued to remain weak across the globe. In total, sales for specialty additives grew by 25%. sales for performance adhesives grew by 34 percent, reflecting growth in all three primary adhesive end markets. While sales and demand were strong, the combination of higher raw material costs, raw material availability, and constrained global logistics and shipping availability resulted in increased costs and hampered our ability to meet incremental customer demand. These issues impacted overall margins. Adjusted EBITDA margin for industrial specialties declined by 540 basis points to 20.9%. However, given the strong sales growth, adjusted EBITDA was $55 million, a $1 million increase above the prior year. Please turn to slide 11. Turning to intermediates and solvents, sales were $49 million, up over 30% compared to the prior year period. Pricing for BDO and related derivatives drove the sales growth in the quarter. Extended outages and force majeures at competitors' facilities contributed to the elevated pricing levels. We expect to continue to experience these pricing dynamics for the balance of our fiscal year. Adjusted EBITDA for IMS was $15 million, up from $11 million in the prior year period. Please turn to slide 12. So I've done for the last few quarters, 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 $210 million, a $98 million increase compared to prior year. While we generated higher cash flow from lower capital expenditures, greater earnings, and lower cash interest expense, we also received $90 million as part of the new accounts receivable sales program that we implemented during the quarter. This sales program replaces the previous US AR securitization program. Excluding any inflows or outflows from the new AR sales program, we still expect to convert significantly more than 50% of our adjusted EBITDA to free cash flow in fiscal year 2021. And we continue to expect that conversion rate to push higher in future years, testimony to the free cash flow generation capability of the company. As we've stated, our goal is to consistently convert at least 60% of EBITDA to free cash flow. 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?

Thank you, Kevin. Please turn to slide 14. As we look at our market demand outlook, we continue to see positive dynamics. Life science demand is expected to remain strong for pharma, nutraceuticals, and nutrition. Although there's still some uncertainty regarding the pace of COVID reopening, In the U.S., where reopening has started to take place, our personal care business is starting to see some strengthening in demand. Although a small part of our portfolio, I would note that we do not expect to see any recovery in the hand sanitizer application. Industrial demand is expected to continue to remain strong. And although it's a small part of our portfolio, I would also note that we are starting to see demand recovery in the energy sector. and markets. Clearly, the biggest risk and uncertainty to revenue and margins will continue to come from the supply chain and raw material challenges the world is experiencing. As a result, given their broad and uncertain nature, it's very difficult for us to forecast their impact. As we did last year at the beginning of COVID, rather than trying to predict the unknown, we're focusing on building resilience so that we can respond quickly to developments maximizing the positive, minimizing the negatives. Please turn to slide 15. With that context in mind, we continue to maintain our full-year guidance for sales of $2.4 to $2.5 billion and EBITDA of $570 to $590 million range. This outlook is based on expected continued demand in industrial segments, continued stable demand in life science, and no significant acceleration of global demand recovery in personal care. No changes in our underlying operating performance. Pricing actions continue to be implemented to offset higher raw material costs, and the acquired Schuelke business will contribute favorably to the business. Although we have factored in some of the impact of the current supply chain dynamics on our business, we cannot forecast unique one-off events that are unknown. To qualify our guidance, excluding the Shoki acquisition, our outlook would be in the lower end of the range. With the Shoki acquisition results included, our outlook would be in the middle of the range. We are not forecasting any major one-off items caused by supply chain issues, such as plant shutdowns or major raw material shortfalls. Additionally, quarter end logistics uncertainty could have a positive or negative 3 to 5 percent impact on revenue in the quarter. Please turn to slide 16. In summary, I'm pleased to report that regardless of the supply chain and raw material headwinds, Our business units are performing well, continue to drive improvement, and execute their strategy. We are maintaining our long-term focus on growth, business resilience, margin expansion, and free cash flow conversions. However, we do recognize the added focus and urgency on managing through these near-term supply chain challenges, managing pricing and raw material dynamics to recover margins, and building operating resilience to improve planning, communication with our suppliers and customers, and cost management. We managed through higher levels of uncertainty and change during 2020, and I am confident that our business units and teams are ready to manage through the current supply chain challenges. Please turn to slide 23. In closing, I want to thank the Ashland team once again for their leadership and proactive ownership of their business in an uncertain environment. We're fortunate to be a premier specialty materials company with high-quality businesses that have leadership positions in defensive markets. I'm pleased with the resilience demonstrated by our people and businesses and look forward to the opportunities that lie ahead. Thank you for your attention, and operator, let's open up for Q&A.

And thank you. As a reminder, we ask that you limit yourself to one question and one follow-up. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. please stand by while we compile the Q&A roster. And once again, if you'd like to ask a question, that is star 1. And our first question comes from John McNulty from BMO Capital Markets. Your line is now open.

Yeah, thanks for taking my question. So I guess a question on how to think about the fourth quarter, because I think, you know, based on where 3Q ended, you're looking for what should be EBITDA that kind of improves by – you know, 20-plus million kind of even at the low end of the range, and yet it sounds like a lot of these freight issues that kind of plagued you and the rest of the industry, it sounds like a lot of these are still, you know, still really kind of wreaking havoc on things. So I guess what confidence do you have that you can kind of get that incremental improvement and start this kind of catch-up when it comes to the freight side? Can you help us to think about that?

Yeah. I think the important perspective to have is unlike in other markets, other situations, most of the discussions, most of the outlook is based on what is demand, how are our customers positioning in terms of their needs for products. And the fact is, it's still very strong across the board. We have a lot of orders in hand. So we're often in what we have at hand. The issue now, the question is, how do we forecast some of these uncertainties? We have factored in some of the items that impacted our business. or demand, especially around raw material availability. We have some plant closings, those kinds of things that we don't expect to be repeated. So we factored that in. I think as we qualified in our guidance, we do recognize that there's going to be some degree of uncertainty. We cannot plan for a major force majeure by a supplier like we have this quarter. Things are improving, so we expect some of these things to ease off. For us, I think one of the unique things for us, it's about the shipping, really, that's the biggest problem for us. We have constraints in supply chain availability, but we actually were able to produce and deliver a lot of our core demand that we had planned. The shipping is the part that really is out of our control, as I said in the example. we have the material ready and ready to ship. So I think we've captured that in some of the outlook. And frankly, there's potential upside. It's not just downside that we could see in the quarter. You know, we're talking about what's going to happen at the end of the quarter, September, you know, the last two weeks of September is what's going to define things. So it's very hard for us to, you know, forecast that. And it'd be easy to be very negative. if you want to pile all that, but there's no real foundation for that negativity in terms of concrete facts that we have at our disposal at this point in time. So we'll provide additional update if we need to, but this is our best estimate at the time.

I completely agree with that, Guillermo. The only thing I would add is the teams across the board have been taking significant pricing actions, and, John, we would expect – some positive impact during Q4 from pricing actions that have been taken during Q3 and early into Q4. So that should provide us with some improved momentum. And there were some one-off items from an operating cost perspective that could also be a net positive all said and done. But it really is about the shipping.

Current, and to just build on Kevin's comment, current outlook would be, especially in the adhesive business, that margins would recover by the end of the quarter. The part we don't know is, is there more incremental inflation that will come? We'll have to react to that as it comes.

Got it. That's helpful, Colin. It actually goes to the final question that I had. When you think about the raw material inflation that you saw in the quarter and the price increase, difference from that? I guess, can you quantify that? And maybe you just answered it a little bit on the last answer, but how much of that do you think you actually get back as we look into 4Q?

Yeah, I think in raw material, I mean, I would look at, you know, some, what are the core drivers? And then, you know, there's noise across the board if you look at the broader things on smaller items. But the two big items are the adhesives and that's pretty very you know it's very clear across the the industry and it's really about you know the pass on ability to pass on and the speed more than the ability the speed of passing on we have been moving on pricing we've recovered most of the past increases it's just that the pace of these new pricing rum show increases we just need to catch up with that so that's that's that's being played out I think the other big big impact that and it impacts mostly life science and personal care, but mostly life science, is BDO, which is a core raw material, and we are transferring at market. So we're seeing the inflation coming through, and they're moving on pricing too. Obviously, we're seeing the benefit in the INS segment at this point in time. But those are the two areas that are the biggest drivers. The rest I would classify as just broad-based inflation on secondary raw materials, and freight and those kinds of things which we're also managing through.

Great. Thanks very much for the caller.

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

Thank you. I know you're not taking questions on the adhesive review process, but what would be the priority for the proceeds?

John, we'll be communicating all that once we have our plans for next year and once there's clarity on what's going to happen. But obviously, growth is a major priority for us as we look at where we want to invest. And our capital allocation to reward our shareholders is also going to be important. a big part of what we do. So more to come there. But that is a very important part of our longer-term plans for the portfolio.

Okay. And although some of us, I guess, would like to see INS at least deconsolidated, this was probably a pretty good quarter to have it in the fold. What's the outlook for that business? I mean, it had the highest earnings, I think, since you've been reporting that segment. Does it stay up for one more quarter or does it spike back down?

You know, I think we see continued strength at least during the fourth quarter. I think we'll see how things play out starting 2022. I think, you know, some of the shipping dynamics and things like that as we look at global supply chains will have an impact to how the pricing evolves. But I think into 2022 we'll see some softening on pricing there.

Okay, but not in the September quarter?

Not in the September quarter. Thank you. It should continue to be strong.

Thank you. And our next question comes from from JP Morgan. Your line is now open.

Thanks very much. Can you talk about the pricing trends in your industrial businesses? What were prices up in the quarter? What are the price increases that you're trying to put through? How much were raw materials up? Can you supply some granularity of detail?

Yeah. So we've been moving on pricing across the board. I would say the biggest area, obviously, is the adhesive side of the equation. And the issue, as I said, is not The recovery, it's reacting to the new inflation that has come through in the quarter, but we've been moving very aggressively on pricing. I think we didn't cover all of the pricing in the quarter, but a lot of it, I would say 90% of it, we were able to cover in the quarter. And the same thing for Q4. So our expectation right now, unless there's another wave of raw material inflation, is that we'll be caught up by the end of the fourth quarter on the pricing side. As I said in the prior – go ahead.

Yeah, no, that's correct. And, again, just to reiterate, most of that is in – most of that's in adhesives. There's a little bit in some of the other businesses, but it's mostly adhesives. And the team there is doing a great job on the pricing front. It's just margin recovery that's going to be the question. And by the end of the Q4, we should be there.

I think the other one is, as I mentioned in the prior question, is BDO. We've moved on pricing, and it will be very favorable. It was favorable this quarter. We expect it to be very favorable next quarter in the INS side. On the consumer side, you know, we're passing on. There is a little bit more of a lag there, just the way our contracts are set up and how we pass on pricing. So that will take a little bit longer than the fourth quarter to catch up on pricing. But those are the main two. I think broader base, you know, freight costs, secondary raw materials and all that, we are moving on pricing as needed, but that's much more – specific to product line, specific product line, so it's harder to make generic or high-level comments here.

What was your organic volume growth in consumer specialties and industrial specialties in the quarter?

The organic growth of... Volume, yeah. Yeah, so for total volume growth, Kevin, do you have just the organic side of it? Because we had the exits, and we had a few of the other items. Now we'll get back to you with a specific volume number. But the majority, if you look at it, Versus prior year, as we said in the call, the nutraceutical and nutrition were the parts that were up organically and in the double digits, so very strong. The pharma, I think it's much more of the comp versus prior quarter. It's not demand per se. It was the inventory building that occurred last year. I think you'll see the next quarter will be much stronger versus the prior year comp for us. And in the personal care, most of the businesses, if you look at hair care, skin, oral, they were slightly down. We're talking basically the marks have been fairly flat. The biggest headwinds for us in volume, really, although it was small, it's been just a significant drop, is the hand sanitizers and the Avoca. So net-net, we didn't have a lot of organic growth, but within each segment, we had significant variation by segment.

That's right, Guillermo. And total company volume growth is organic volume growth is up 10% year over year with the industrial piece being up more than 10%. And like you said, due to some hand sanitizer evoking some other items on the consumer side, driving that part of the equation. But overall, up 10% year over year.

Thank you very much.

Thank you. And our next question comes from David Big Leader from Deutsche Bank.

Thank you. Good morning. Guillermo, as we approach 2022, do you have an early view on how we should think about next year's earnings cadence versus this year?

I think, you know, overall demand and overall conditions are still very favorable. As you heard in the call, I mean, we're really talking about reacting to some of these dynamics. If I look at the longer-term dynamics for each of the businesses, they're all very positive. So as we look at 2021, you know, we'll have to see how the supply chain situation, especially the ocean freight, I think that's going to take the longest time. to clarify how it improves. I think raw materials, barring a big storm or something that causes a supply disruption across the entire industry, we should continue to see recovery in that part of it. So our focus is going to be more on normalizing our business activity around the growth. And that means organic growth is the top priority, and it's about innovation and, you know, what we're going to be launching. That's going to be a lot of the focus of what we want to cover in our investor day, but it's really focusing on some of those longer-term dynamics. And we're very excited. On that side, we've been making significant progress. You know, look at the R&D. portfolio changes that we've made, you know, as we go into the back end of the fourth quarter and into the early part of 2022, we're going to be making a lot of significant, you know, launches of new products. And, you know, that's when the new second time comes. So more to come there, but we're very positive overall in terms of the longer term outlook. I think the supply chain is the part, like everybody else, we're going to have to manage through.

Very good. And just on Shilky, what did it add in Q3, and what do you think it will add in Q4 on both sales and EBITDA?

So, Kevin, you might want to provide the numbers. What I would qualify, this first quarter, obviously, we had it two months, but just the normal transitions, it wasn't the ongoing run rate impact. So it was slightly lower just in terms of inventory transitions and all the normal integration activities, but for the next quarter, it should be a more of a normal, uh, quarter. But Kevin, you want to provide a little bit of color there?

Yeah. On the, on the EBITDA, on the EBITDA front, uh, Dave, it'll be high single digits for the five months, uh, that we've owned it. Again, as Guillermo indicated, you've got some initial, you know, initial costs on, on an upfront basis there that, um, that we've been dealing with, just normal transition stuff, but then more normalized in Q4 from an overall perspective. But you think high single digits for this full year impact. Thank you. And Q4 revenues are going to be, you know, call it mid to high 20s probably for that business, give or take. Great. Thank you very much, Kevin.

And thank you. And our next question comes from Mike Sison from Wells Fargo. Your line is now open.

Hey, guys. How you doing? In terms of your guidance for 2021, the 575-90, and maybe I apologize if I didn't understand your comments, but does that include some degree of negatives from the key risk? I recall that it was something like 5 to 10 million in the third, so... Are you including sort of a negative hit in that 70 to 590? Yeah.

So the 5 to 10 was a Q3 comment. We have the actual results. I would say for Q3, the actual was slightly higher than the top of the range that we communicated in June 10th, maybe a million worse. And it's offsets. We had positives and better costs and things that offset it, but that's included in the numbers. So the 570 to 590 is the range. Without Shulke, it would be in the lower end of the range. With Shulke, which a lot of the numbers now in consensus are more built with Shulke, so with Shulke it would be more in the middle. And as I said, the part that we are not forecasting, because it's Very difficult to predict the unknown is, you know, any major force majeure or shutdowns of major raw material availability issue that's not on the radar screen, you know, would not be included there. And I do think there is a plus minus potential on the revenue side. because of the supply chain challenges. And we'll monitor that during the quarter and report out if there's any need to give any communication. But we have a lot of pent-up demand, and as we saw this month, we didn't have a raw material availability issue for the missed orders. It was sitting in warehouses ready to load, and frankly, the material was in warehouses by mid-month. and did not get invoiced. And it really shows, you know, I think ocean shipping reliability has dropped to less than 25%. And that's the biggest impact, and there's no way we can forecast that.

Got it.

And then for the fourth... Mike, the teams are taking into account what new knowledge we have. So as this has progressed over the last several months, Each of the business units has tweaked their processes to do what they can to offset and mitigate some of these unknowns. That said, the unknown unknowns we still don't know and we can't forecast. But we have forecasted for Q4 what we believe to be our best estimate of what's going to happen. And to Guillermo's point, if we see some big negatives or big positives, either of which could happen coming out of that, we'll let you know. I mean, we'll update if it's appropriate to do so.

Got it. And then in terms of consumer specialties for the fourth quarter, excluding the 25 or mid-20s in Shilka, will organic sales growth turn positive? And then if you think about that business into 22, how do you feel about sort of turning the corner and generating some organic growth? Yeah. Yeah.

So if you look at just give some color on the longer-term outlook for the consumer side, and I'll go segment by segment. I think, you know, personal care, pharma never really dropped. So, you know, the recovery here is just, you know, the continued growth, market plus, you know, several hundred basis points that we feel that we can achieve. I think the dynamics and outlook is that that's going to continue. Obviously, the comp, This year, because of COVID dynamics last year, we're going to have several quarters that the behaviors of when inventory was built was different, but we see continued momentum there. As Kevin mentioned, the nutraceutical business, the market has remained strong. The issues we had last year were ours. I think you're starting to see just a good recovery. The teams have really got new business. Marges are improving. you know, this is just hard work from the team and it's starting to pay off. And we do see recovery in the nutrition side of the equation. So Outlook seems, you know, very good, but I wouldn't say, you know, it's a recovery of the market. It's the markets are good and it's really how we play them. In personal care, I do think we're going to start seeing, you know, unless something turns around from the pandemic side, if the vaccination and and continues to roll out, and we continue to see just a phased opening, we will see recovery. As I mentioned, we're already starting to see it in the U.S. Hair care, for example, demand in the U.S. is strengthening, and that is as a result of the opening. So we hope that that will continue. Europe probably will be the next, and then it will carry around. So more positive momentum for us. I think we will have – Behind us, the hand sanitizer dynamics of last year and this year, next year will not be there, so that won't be a headwind for us. So it's really going to be more about the demand recovery and the new product launches. We have a lot of new products that we're going to be launching, so we feel very good about the personal care side of the equation. And industrial, I think The big question for industrial demand continues to be strong is, you know, as we hit the seasonal low that usually comes, you know, in our Q1 and Q2, you know, will it be stronger than normal? Because there's a lot of pent-up demand in projects. So, you know, my outlook right now would be that it will probably be stronger than normal because of that pent-up demand. So overall, you know, it's really going to be dependent on these supply chain questions. Remember, our supply for a lot of these products come out of the U.S. and Europe. So shipping the issues from China to the U.S. are not what impacts us. It's more shipping U.S. out and Europe out. This quarter, the biggest challenge in shipping was Europe. Antwerp, the European ports were the biggest problem for us. So as those things open up into next year, that'll be favorable for us.

Thank you.

And thank you. And our next question comes from Mike Harrison from Seaport Research. Your line is now open.

Hi, good morning.

Hi, Mike.

I wanted to ask a couple questions on your coatings business. You've mentioned that for now DIY and contractor demand remains pretty strong in architectural coatings. Are your additives used more intensively in the types of higher end paints that are used by DIYers, such that if we are expecting to see DIY demand come off and contractor activity improve, that that could actually drag on your additive sales into the coatings market?

Yeah, so if you look at our additive coatings, you know, the rheology is the biggest one, and that's both the cellulosics, HEC being the major driver, and then in the synthetics, it would be the Aquaflow. Aquaflow goes more into the DIY. You know, HEC is broad-based across the board. You know, demand continues to be very strong. We are seeing The DIY market is starting to stabilize relative to a very strong prior year. It's still very strong. We are pretty global, and we're very broad-based in terms of the customer base. Some customers are more DIY-focused. Others are mixed. Some are more contractor-focused. So we'll see a little bit of that dynamic of the contractor market probably being the stronger part of the portfolio market. as we go into next year. I will say, HEC as an example, the entire market is very tight, running out of capacity, so pricing is going up. So we are going to be investing for added capacity and incremental and more fundamental capacity additions in that area. But the industry is tight, especially given the strong demand for cellulosics. both from the recovery of the markets as well as cellulosics. In many of the consumer markets, obviously more natural-based products, the demand and interest from new applications is still very high.

All right, and then not really a question on the adhesives process, but just wondering if there will be any stranded costs associated with a potential divestiture there. Can you quantify that and maybe discuss what actions you would be taking in order to counteract those costs?

Right. So we are taking... you know, actions in terms of our transformation of our portfolio. That's, you know, the big theme for our investor day as we look at it, you know, becoming much more of an additive ingredient company, you know, less petrochemical based, more natural based. So this is going to become a much different company with different dynamics. We are factoring all these issues into some of our plans. If you look at actions we're taking, the Shopee acquisition, we're planning to grow and replace the impact. So all that will be factored in and we'll communicate more at the appropriate time. But we want to present the full picture of what we want to do and what the company is becoming as we do this transformation. All right, thanks very much.

And thank you. And our next question comes from Lawrence Alexander from Jefferies. Your line is now open.

Good morning. Two questions. First, how are you thinking about lumpiness for the next four to eight quarters compared to your normal lumpiness and incremental margins? And secondly, as we think about the innovation tailwind in 2022, is it kind of setting a new cadence for the firm, or is it going to be significantly above or below normal?

Mm-hmm. So to your first question on just the demand outlooks, and I'm assuming from your question it's more around plant loadings and some of the lumpiness that could come there.

If it helps, I'm really just getting at the level of unpredictability. Okay. You know, sort of it used to be, you know, sort of you'd have like a 2% lumpiness. I think you called out like 3% to 4% just on logistics. So how do you think about the total swing factors quarter by quarter in the current environment and what it normalizes to?

Okay. So, you know, the bigger lumpiness that we're seeing right now would have been manufacturing and loading of our plants more than, you know, the – Supply chain costs, you know, logistics costs, I think that's not going to be as lumpy as, you know, it's inflating and we're managing through that. But with regards to our manufacturing side, you know, a lot of our demand is very strong in many of our products, and we're running the plans full out. HCC is a great example. I mean, the market is very tight at this point in time. So from an operating and some of the lumpiness that used to come from that, that'll level off because we'll be producing as much as we can across the year. So the issue is really going to be more about the demand side of the equation. In terms of revenue, and as I said, especially on the industrial side, I do think that we're going to see continued strength into the first and second quarter, which tend to be the, you know, from a lumpiness perspective where a lot of the seasonality comes in, and we might not see as much seasonality this year. And the second question on innovation, I think the issue now is the pace of launches. We talked in the last calls. We've changed the portfolio. There's a lot of activity. What we're focusing right now is accelerating. How do we, you know, which are the areas that we can accelerate, launch a lot of new products. If you look at some of the trends in personal care, especially around ESG, it is starting to get more, And most of what we're doing is really in that lane. So it's about launching them and then working it through customers. So a lot of new innovations. Very excited about the portfolio there.

Thank you. And thank you. And our next question comes from Vincent Anderson from Stiefel. Your line is now open.

Yeah. Good morning. Thanks for taking my question. Um, so I just wanted to touch on a VOCA, uh, quickly, you know, how much of that drag currently is a fixed cost issue. And at what point does it make more sense to maybe just walk away from Clary Sage for awhile, contract the capacity, you know, the capacity out and then, you know, until you find a better longterm solution.

Right. Yeah. So, so I would say, and the issue is, as you point out, it's on, on the Clare, uh, the Sclera line, uh, side of the portfolio. The team is developing new business, new applications, so that part of the equation is going well. I think the issue, actually, last year, it was more of the production loading this year. That actually, you know, we've worked off inventory, so production is stabilized. The issue is more it's a lumpier order pattern, and bigger customers that place bigger orders. As an example, the fourth quarter, You know, there is some very strong orders in that part of the portfolio, so we're monitoring those very closely, especially around shipping. A lot of that goes to Europe and other regions, so it's really about monitoring that. You know, I think that's stabilizing. I think the longer-term view is, you know, growth and innovation is going to come through new applications, and that's what the team is working on. And we are making very good progress there.

Okay, great. So, yeah, just more of an order timing perspective. And then I guess so just quickly, you know, to end on something a bit more forward-looking, you know, in the flavors world, as an example, you know, there are some pretty obvious products you kind of need just to have a seat at the table in customer conversations. Is there anything like that? in nutrition that you're lacking and that, you know, your product pipeline, development pipeline is specifically geared towards trying to address?

Yeah. So, you know, if you look at the nutrition side of it, a lot of, you know, the growth that we're focused on right now is on plant-based protein. So a lot of the cellulosic products and other additives that we have for that area, that's growing very well. Um, you know, so, so, you know, this is sort of, you know, as we look at our markets, pharma, personal care, coatings are like the major ones. This would be that second tier of, uh, of markets where, you know, we leverage the additive and innovation activities from these bigger parts of the portfolio. So we continue to see, uh, good, good opportunities there. But, you know, this is not our major business. It's a, it is a secondary market, uh, We're not in the food and flavors. You know, that's not the core of what we do.

Right. All right, well, thank you. I appreciate it.

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Guerno Novo for closing remarks.

Okay, thank you. Well, I want to thank everyone for your interest. As I hope you've seen, you know, the challenges for this quarter and for the near term is about some of these external dynamics. But if you look at some of the longer-term trends and outlooks, we're very excited. I think we're in a very good position. And as I said, the teams are really doing a great job in managing through this continued uncertain environment. But thank you very much, and we look forward to talking to you in the coming weeks.

This concludes today's conference call. Thank you for participating. You may now disconnect.