Ashland Inc.

Good day and welcome to the Ashland Inc. fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Seth Morozak, Director of Investor Relations. Please go ahead.

Thank you, Abigail. Hello, everyone, and welcome to Ashland's fourth quarter fiscal year 2023 earnings conference call and webcast. My name is Seth Morozak, Director, Ashland Investor Relations. Joining me on the call today are Guillermo Novo, Ashland Chair and Chief Executive Officer, and Kevin Willis, Senior Vice President and Chief Financial Officer. We released results for the quarter ended September 30th, 2023 at approximately 5 p.m. Eastern time yesterday, November 8th. The news release issued last night was furnished to the SEC in a Form 8-K. During today's call, we will reference slides that are currently being webcast on our website, Ashland.com, under the investor relations section. 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 financial outlook for fiscal year 2024. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but cannot assure that such expectations will be achieved. Please refer to slide two of the presentation for an explanation of those risks and uncertainties in 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 on Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to these measures as adjusted and present them to supplement your understanding and assessment of the financial performance of our ongoing business. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures as well as reconciliations of the non-GAAP measures to those GAAP measures are available on our website and in the appendix of today's slide presentation. Please turn to slide three. Guillermo will begin the call this morning with an overview of Ashland's performance and results in the fourth quarter and fiscal year. Next, Kevin will provide a more detailed review of financial results for the quarter. Guillermo will then provide additional commentary related to Ashland's financial outlook for fiscal year 24. We will then open your line for questions. Now, please turn to slide five, and I will turn the call over to Guillermo for his opening comments. Guillermo?

Thank you, Seth, and hello to everyone. Thank you for your interest in Ashland and for your participation today. The results in the September quarter were consistent with a pre-announcement that we issued last week. Customer demand was generally in line with our expectations. Although the stocking has stabilized relative to prior year, we continue to feel the impact across several markets. Pricing remained favorable compared to prior year across all our core segments in the integrated business. However, intermediates did experience price declines in both the merchant business as well as the internal BDO transfer price. By far, the biggest factor impacting Q4 earnings was the proactive inventory control actions we took. These actions are above our original expectations. Given the uncertainty in the outlook and the different scenarios we considered, we took the approach to assume a more conservative scenario for our planning action. The resulting lower inventory position and improved cash flow will position us better for better operating of resilience across multiple scenarios over the next couple of quarters. These inventory control actions resulted in lower production volumes and nearly $60 million in cost impact. The resulting benefit was a reduction in inventory of about 86 million compared to June 30th and a generation $4 million in ongoing free cash flow during the quarter. While the $74 million of adjusted EBITDA was below our original expectations, these actions were necessary to meet our commitment to maintain operating, balance sheet, and cash discipline during times of uncertain customer demand. Please turn to slide six. Fiscal 2023 was a challenging year. As I indicated, Reduced volumes resulting from the unprecedented and extended customer destocking was the largest single factor impacting top line results during fiscal 23. Volumes were down 18% during the year due to these impacts. The lower volumes impacted both sales and gross profit, as well as plant costs and unit costs. And while pricing was favorable for the year, it was not enough to fully offset the significant reduction in volume. The net result for the year was sales down roughly $200 million, or about 8%, and adjusted EBITDA was down about $131 million, or roughly 22%. The lower demand and inventory destocking was clearly very challenging and disruptive for our manufacturing operations. although the timing of some of the inventory control actions varied across the year. In hindsight, if we average the timing of these actions across the year, the net result would not have changed. The bottom line of production and manufacturing unit costs for the year increased significantly due to the lower production volumes and resulting lower cost absorption. Discipline, SARD, variable expense management helped. but the broader underlying costs were in line with our original plans. The only meaningful cost reduction resulted from the reduced incentive compensation based on the lower performance. Let me close my fiscal 2023 comments with some reflections. On the positive side, it's good to see that consumer demand remains resilient for the core markets we serve. As our customers' destocking actions end, our demand to the line with their underlying production needs to meet demand. We are seeing this dynamic starting to flow through with many customers. Unfortunately, it's also clear that the stocking dynamics will continue to persist for longer across some of the supply chains of the industries we serve. If we look at the first half of the year, the expectation was that the stocking would be shorter-lived and demand would normalize sooner. Unfortunately, things did not play out that way. The inventory build across many of the many supply chains in fiscal year 21 and 22 was much greater than anyone realized, and it's taking much longer than expected to work out. There's still significant uncertainty as to when these dynamics will end. Until the inventory control action taken by customers have subsided, it will remain difficult for us to gauge the true end market demand. Waiting for improvements is not a reliable option. Given the continued uncertainty, it is vital that we move proactively to take actions to build resilience, reduce volatility, and maximize performance across a range of scenarios. We also recognize that while near-term uncertainties of the current environment present challenges, they do not change our exciting long-term opportunity for Ashland. We need to act on both dimensions to improve near term performance, and invest on our long-term profitable growth opportunity. I will discuss even more details later in the call. Let me now turn the call over to Kevin to review our two core and fiscal year results in more detail. Kevin?

Thank you, Guillermo, and good morning, everyone. Please turn to slide eight. Before I review the detailed results for the quarter, I'd like to provide a bit more color on the customer destocking dynamics we experienced during fiscal 23. As you can see in the graph to the left, Q1 and Q2 sales were actually tracking favorably compared to the prior year. While some distributors and customers in China and Europe had begun to reduce their order activity, carryover pricing was more than enough to offset these actions. However, during our fiscal Q3, the persistent customer destocking had expanded to more end markets and customers. These trends accelerated throughout the back half of the fiscal year. As Guillermo has stated, while we have seen some indications that demand has stabilized, we expect destocking to be a factor for at least the next two quarters. Hence, the more aggressive actions we took to reduce inventory during the September quarter. Please turn to slide nine. Total Ashland sales in the quarter were 518 million, down 18% compared to prior year. Continued customer destocking dynamics resulted in reduced volumes for all segments. Pricing was favorable for all segments except intermediates. Foreign currency had a favorable impact on sales of 2%. Gross margin declined to 24.9%, driven primarily by the $58 million of inventory actions in the quarter. When excluding key items, SG&A, R&D, and intangible amortization costs were $116 million, down from $123 million in the prior year, largely reflecting lower incentive compensation accruals. In total, Ashland's adjusted deposit for the quarter was $74 million, down 50% from the prior year. Ashland's adjusted EBITDA margin for the quarter was 14.3%, down from 23.3% in the prior year, again reflecting the factors I just discussed. Adjusted EPS excluding acquisition amortization for the quarter was 41 cents, down from $1.46 in the prior year quarter. Ongoing free cash flow improved to $104 million for the quarter, primarily reflecting changes in working capital stemming from our internal inventory control actions. Now let's review the results of each of our four operating segments. Please turn to slide 10. Within life sciences, demand for our pharmaceutical ingredients remained healthy, though volumes were down a bit versus a strong prior year period. Nutraceuticals demonstrated a nice recovery. Sales to nutrition and markets remained challenged. Overall, pricing for Life Sciences was favorable. In total, Life Sciences sales declined by 5% to $203 million, while adjusted EBITDA decreased by 16% to $48 million. Inventory control actions in the quarter impacted EBITDA by approximately $6 million. Adjusted EBITDA margin decreased to 23.6%, primarily reflecting the impact of inventory control actions. Please turn to slide 11. Continued customer destocking negatively impacted personal care in the quarter. For the quarter, personal care sales declined by 22% to $146 million, while adjusted EBITDA declined 36% to $36 million. Pricing continues to hold, but margins were negatively impacted by lower volumes driven by customer destocking, $5 million of inventory control actions, and negative mix. Please turn to slide 12. Specialty additives was impacted by reduced demand primarily related to continued customer destocking, though the architectural coatings end market was less impacted than others in the business. Pricing remained positive in the quarter versus prior year. However, volume declines due to destocking primarily in construction and performance specialties, as well as nearly $38 million of inventory control actions by the team negatively impacted profitability in the quarter. Specialty Additives is our highest volume business and is also the landlord for several large manufacturing facilities that also serve the other segments and therefore experienced a larger share of the result of the inventory control actions in the quarter. For the quarter, specialty additive sales declined by 23% to $144 million, while adjusted EBITDA declined by 81% to $8 million. Please turn to slide 13. Intermediates reported sales of $37 million down 42% compared to the prior year, driven by lower pricing and volumes. Intermediates reported adjusted EBITDA of $3 million compared to $17 million in the prior year, and adjusted EBITDA margin declined to 8.1%. Inventory control actions impacted earnings by $9 million in the quarter. Please turn to slide 14. Fiscal 2023 was obviously a very challenging year. While pricing remained strong throughout the year, customer destocking and the related impacts on revenue and plant loading resulted in decreases in most financial metrics. That being said, it is important to note that in fiscal 2023, Ashland generated strong ongoing free cash flow, which increased meaningfully versus prior year. Please turn to slide 15. As of the end of September, we had cash on hand of $417 million with total available liquidity of roughly $1.1 billion. Our net debt was $913 million, which is about two turns of leverage. We have no floating rate debt outstanding, no long-term debt maturities for the next four years, and all of our outstanding debt is subject to investment grade style credit terms. As discussed, we took proactive inventory control actions to reduce inventory by $86 million in the quarter. Not only did these actions better position us for continued uncertainty, they also supported generation of $104 million of ongoing free cash flow in the quarter, which was nearly half of our ongoing free cash flow for the fiscal year. We are investing in our existing businesses and technology platforms to grow organically and continue to pursue our strategy of enhanced profitable growth through targeted bolt-on M&A opportunities focused on pharma, personal care, and coatings. Against a backdrop of global uncertainty, Ashland's balance sheet is well positioned to give us the flexibility to pursue our targeted growth strategy as well as reward our shareholders with a strong dividend policy and continued share repurchase. With that, I'll turn the call back over to Guillermo to discuss our outlook for fiscal year 24. Guillermo?

Thank you, Kevin. Please turn to slide 17. I'd like to spend a few minutes providing my take on the challenges that we and others in our industry are likely to face during 2024. From a macro perspective, let me comment on three drivers. First, demand uncertainty. There are continuing concerns about the prospect of a global recession and economic slowdown, and there is risk of geopolitical uncertainty across different regions of the world. Of most concern are the potential economic headwinds facing the U.S., Europe, and China. We don't yet know if or how these headwinds will impact the buying patterns of our customers and the global consumer. The question of when the stocking will end is front of mind for most companies in our industry. Given the back end of the year recovery expectations, there continues to be uncertainty regarding the timing of the end of the customer destocking and demand normalization. Based on consumer demand, the good news is that our customer sales lines are starting to normalize. However, customers in the end markets we serve continue to hold elevated macro levels of inventory, so some may persist longer. Second is margin management. Maintaining pricing discipline will remain critical throughout the year. Depending on demand recovery, pricing pressures will vary across different segments. Although we expect some improvement in raw material costs, any cost improvement will take a while to have impact as we work through existing inventories. Even as volumes demand normalizes, the demand is expected to be below prior years. This will be reflected in higher and more volatile unit conversion costs. Companies will need to work diligently to maintain margins to discipline actions across the supply chain. And third is new growth drivers. The commercial success of new innovation platforms is critical to the long-term growth opportunities for the company. We have focused on building a strong balance sheet and financial strength so that in spite of the near-term challenges, we can invest and drive our globalized and innovative growth strategies. Although we expect most of the impact of these investments to begin in fiscal year 25, we will work diligently to accelerate their impact in fiscal year 24. All told, given the uncertainty, fiscal year 24 is a difficult year to forecast at this time. Please turn to slide 18. To build our plans, we analyzed numerous scenarios. As I indicated, the big variables impacting the outlook are volume demand and margins, with demand being the biggest variable. Primary impact on all the scenarios is the timing of demand normalization. From a volume demand perspective, three scenarios provided the greatest insights into actions that we should take. No demand recovery, demand recovery during the March quarter, and delayed demand recovery during the June quarter. Each of these scenarios yield significant variation in results for the year, and they are discrete outcomes. You cannot average them to a midpoint performance. Our objective is to build resilience and pursue actions that best position Aslan to maximize performance across each of these scenarios. Please turn to slide 19. On a recent innovation day, we laid out our business model and the strategic priorities that will drive our actions, investments, and profitable growth expectations. First, discipline execution across our core businesses. investing in them for the strength and growth of those high-value segments where we have market and technology leadership, and to take the needed portfolio actions to address underperforming business that are not core and where we do not have technology or market leadership. Second is globalize some of our high-value growth businesses. Third is to drive innovation. across both existing and new technology platforms, and fourth, to leverage both on M&A to augment our growth capabilities for our big three businesses, pharma, personal care, and COVID. Let me start with the first focus area, execute. Please turn to slide 20. In this environment, just cutting costs will not build the resilience we need. We will take more targeted actions to reduce volatility and performance risk. We will also position our core businesses for more reliable operations to leverage the eventual volume recovery. In the last year, we have been clear that we need to address some of the strategic and structural portfolio gaps with several businesses that are either not a strategic fit or have been structurally underperforming for a long time. At a high level, we have two non-core businesses, our nutraceuticals, which has no integration into our core businesses, and to a lesser degree, our intermediates business, which does have back integration into our core businesses. From an underperforming side, we have three businesses that we've identified, our MC, our MC Industrial, and our Avoca businesses. As we stated last week, In the last week's earnings update, we are executing on four primary portfolio optimization actions to strengthen our base, build resilience, and improve profitability. Our plan is as follows. First, divest our nutraceutical business. Second, optimize and consolidate our CMC business. Third, optimize and consolidate our MC industrial business. And finally, rebalance our global HC production network. The first reactions align with our business model and strategic priorities. The nutraceutical business is a good business. However, like the adhesive business that we divested last year, there are higher value owners in the marketplace than Ashland where this business can thrive if it's part of a core business and strategy. Our CMC and MC industrial businesses, even at peak performance, have not delivered the investment economics. We're also not the market leaders or technology leaders in the space, hence the strategic decision to optimize and consolidate. Their performance has also been volatile, given their profile of low gross profit margin and high cost absorption margin. In order to enhance profitability and reduce volatility in the portfolio, we will narrow our participation to core segments where we can differentiate, improve profitability, and deliver value to our customers. On the other hand, HTC is a very strong business that is core and where Ashley enjoys both technical and market leadership. We have been investing for growth and see opportunities to drive productivity and optimize our global network. As we take these actions, we will be exploring opportunities to leverage these assets to repurpose and support our core growth initiatives. Please turn to slide 21. The portfolio actions we're taking will impact revenue, but we do not expect them to impact EBITDA once completed. Although we're still working on the exact timing, when completed, the actions are expected to have the following annualized impact to Ashland's financial results. The sales are expected to be reduced by between $200 and $225 million. We expect lower gross profit impact of approximately $20 million, or roughly a 10% margin, with nutraceutical margins being higher than CMC and NC Industrial, which have very low gross profit margins. Stranded manufacturing and SARG will be about $80 million. The CMC and MC industrial businesses have largely been run to absorb costs within the manufacturing network, which makes them more volatile given the low markets. As we complete our portfolio actions, we expect to offset the gross profit and stranded costs with no negative impact to Ashland adjusted EBITDA. All else being equal, This will result in additional capital from the nutraceutical sales, increased free capital from reduced working capital and CapEx, expanded EBITDA margins of 200 to 250 basis points, increased return on net assets of 150 to 200 basis points, and the ability to better leverage our assets and resources to support core businesses. We expect to complete the portfolio optimization by the end of calendar year 2024. Please turn to slide 22. As I commented, the near-term challenges need to be addressed, but they do not change our excitement about the future. We're confident about our business model and strategy and the opportunities that lie ahead, and we'll invest in our future, which brings me to the second focus area of our strategic priorities that we discussed at Innovation Day. globalize, innovate, and acquire to properly grow the core of Ashland. Please turn to slide 23. Each of these components of our strategy are linked to our commitment to invest, a passion to win, and a great sense of urgency. We are investing to globalize core of our higher growth, higher margin businesses, namely, bio-functionals, preservatives, pharmaceutical injectables, and oral solid dose film coatings. We are adding commercial and technical resources across the globe to accelerate growth in these product lines and expect to invest more than $5 million this year to support these efforts and will increase our investment in fiscal year 25 and 26. We're also investing in our innovation pipeline. For existing technologies, We're keeping a keen focus on scalable, high-value, high-impact opportunities. And equally, we're investing in new technology platforms to accelerate commercialization across end markets by getting products into the hands of our customers faster. These technologies can expand our addressable market opportunities within both our core markets as well as new markets. We will invest more than $5 million in new technical and commercial resources to drive enhanced growth within the new technology platforms. And we are continuing to pursue our strategy to grow organically by acquiring bolt-on technologies to enhance our big three core businesses of pharma, personal care, and coding, but we will maintain capital allocation discipline as we pursue those opportunities. I want to be clear. Please turn to slide 24. I want to be clear. We recognize that these are challenging times for our industry, but we also recognize the opportunities that lie ahead. We will maintain a balance to both address the urgency of the moment and the commitment to the future. Please turn to slide 26. Given all the dynamics at play, I would like to provide some high-level bridging items to fiscal year 2024. First, for discrete items. During the year, we will reset compensation expense, including both merit and incentive, which will total approximately $40 million. We have built our plans and actions around creating more resilient performance across the scenarios we previously commented. The biggest variables being the timing of demand recovery and the resulting plant loading during the year, managing margin performance, and accelerating the impact of portfolio optimization actions. Please turn to slide 27. Our outlook is based on the following. Recovery of core business is likely to be back-end loaded into the second half of the fiscal year. We expect lower pricing in intermediates, and that the impact of this in fiscal year 24 of our portfolio actions will be layered in to our models as we engage with all stakeholders. Given the overall uncertainty, we do not feel it's prudent to issue a formal outlook for fiscal year 24. Fiscal year Q1 tends to be our seasonally softest quarter. Our outlook for Q1 is for sales to be in the range of 470 to 490 million and adjusted EBITDA in the range of 55 to 65 million. This outlook is driven by weaker demand. With October results slightly stronger than our expectations, November building up per our expectations, and with the risk of potential customer year-end destocking actions in December. Lower production volumes, including some carryover inventory actions, will impact the quarter. And lower intermediates pricing. For the full year, the color that we can provide is that we expect fiscal year Q2 demand to remain muted given seasonality. Based on the scenarios we modeled, which are just that, scenarios, to prepare the actions that we need to take to drive performance, if demand recovery occurs sooner than anticipated, we can anticipate adjusted EBITDA margins to be above $500 million range for the year. If there is no demand recovery in fiscal year 24, earnings could be below fiscal year 23, given the compensation reset. This is a wide range of scenarios, and this is what's driving a lot of the actions that we're taking so that we can perform across, drive performance across all these scenarios. It is important to note that while earnings up for the intermediate segment are likely to be down meaningfully next year, to lower volumes and market pricing our core businesses are expected to perform regionally very well we will provide an update outlook for the full year at our fiscal first quarter earnings call please turn to slide 29 in closing our approach for our fiscal year is straightforward build resilience by focusing on clarity of action in the face of uncertainty We will stay on strategy, maintain operating capital allocation discipline, and take appropriate actions to maximize fiscal year 24 performance. This includes optimizing our portfolio, focusing on our core businesses, and perhaps more importantly, continuing to invest on a long-term growth strategy. Despite the challenging environment, we remain confident in the quality and resilience of the markets we serve and our future. I want to thank the Ashland team again for their leadership and proactive ownership of their businesses in these uncertain times. Thank you for your attention, and Abigail, if you could move to Q&A.

Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. Our first question comes from David Beglitter with Deutsche Bank. Your line is open.

Thank you. Good morning. Guillermo and Kevin, just on the inventory control actions, why are the numbers so big? The $58 million cost-reduced inventory in FQ4 versus the $86 million reduction inventory seems high. Is that just under absorption, or are there also some write-offs you're taking on the inventory?

So, one comment I'll make, and Kevin, you can get into the more details, there is a bit of carryover into Q1, as we said, and some of the inventory also reduction actions are coming through already in October. So, there's just also a quarter-quarter delta. But, Kevin, do you want to give more color?

Yeah, that's right. There is some timing difference in terms of the overall inventory sizing. We did see 86 million in Q4. So far in Q1, we've seen more inventory come down. And so part of that's just timing. Every quarter we have a certain amount of write-offs, and Q4 was no different. So I don't think there's really much to talk about there, but that's always part of the equation for us, just normal, ordinary course. So I would say most of it is going to be timing. Presuming we see inventory at the end of the quarter where we ended in October, there's more to come on the – on the overall inventory reduction in this quarter. Not a lot of cost related to that, though. We will in the quarter naturally see lower absorption because we're running our plants to demand, and demand is down. But there is a bit of a timing difference between what we saw in Q4 and what we'll see in Q1 relative to the inventory control piece of the equation.

That's helpful. I appreciate that. And just on the stranded costs, Can you talk to the $80 million you're going to remove? How are you going to get at those stranded costs?

There's multiple actions that we're taking. Obviously, as we optimize, you know, the one area, and I understand there's going to be a lot of questions on that. We are engaging all our stakeholders, customers, the groups that are impacted. So there's a lot of activities, works councils, things of that nature. So we don't want to go into a lot of details. But it's going to come from cross-actions. We're going to take some cost actions. I think a lot of productivity and plant activities will be a key driver. The optimization of our networks is going to be probably the biggest driver. And it is about the absorption costs. As I indicated during my comments, the growth profit side is going to be lower. It's lower. Most of the gross profit is coming from nutraceuticals. So the other two businesses, you can see the volatility that they bring and why we need to take action because there's very little upside and more downside if the bonds don't return. And to be clear, in both CMC and MC, we are not the market leaders. Other players are multiples bigger than us. These are not core technologies. So honing in on really the higher quality segments where we do have technology modifications that we've made that can differentiate and add value for both us and for our customers. Those are the areas that we want to focus on.

Thank you very much.

One moment for our next question. Our next question comes from John McNulty with BMO. Your line is open.

Yeah, good morning. Thanks for taking my question. So, I guess just to help us to think about what's embedded in the 1Q outlook for EBITDA, it sounds like there's not as much inventory kind of destocking or of your own in there as there maybe was of last quarter or two. But can you help us to quantify that so we can kind of think about what normalized is, at least right now in this demand environment first, how much is being impacted by the destocking?

Yeah, and a great question, John, and just to be clear, and I'll use 2023 sort of to sort of level set what everybody's thinking. Then we can comment on our first quarter. And, Kevin, you can comment on any other color later. But if you look at 2023, you know, we overproduced. Inventories were high coming in, and we overproduced in the first half, if you look at it, because expectations were higher. And by the time everybody realized, hey, the destocking isn't going to be short, it's long run, most of the actions were taken in the second half. But if we had produced to demand from the beginning of the year, so that was my hindsight comment, if we just produced to demand, the result would have been the same. You know, the de-stocking actions were just that we had to reduce plant operations to offset the overproduction in the first half. Now that we have inventories set, we've brought them down to where we think it's acceptable, and we target that based on days on forecasts, forward-looking forecasts. So if demand takes longer, you know, we might have a little bit higher. If demand picks up, we might have a little bit lower. But we feel comfortable of where we are now that we will produce to demand. That means that whatever the volume is, is what's going to get produced. And right now, that production volume is below historic levels because the customer volumes have not picked up yet to historic levels. So the real issue for us is when is our customers, when is their stocking going to end? so that their demand, production demand, aligns with their selling demands, which right now it's not aligned. So when those two things and they buy raw material, that will really drive our load. So I would look, rather than talk about stocking anymore internally, we're talking about what is our production volumes? These are real costs now. These are not actions that we're taking. And until volumes do pick up, That's the challenge that your unit costs. And again, same answer as the last question. That's why we're taking action on some of these lower margin, higher cost absorption business where we do not have competitive advantage because they can bring a lot of volatility in these lower volume environments. But Kevin, I don't know if you have any other comments.

Yeah, just a couple. If you look at the year-over-year delta from an EBITDA perspective, it's really driven by two things, John. And they're not exactly 50-50, but let's say close enough. And that is we expect revenue in Q1 of 24 to be down from Q1 of 23. And that's probably about half the difference. And the other half is in fact slower manufacturing, producing to demand versus what we did instead of producing what we thought demand was going to be in Q1 of last year. Those two items together make up pretty much all the difference between last year Q1, this year Q1. If you look at it sequentially, it's really two things. Q1 is our seasonally weakest quarter, so we do expect revenue, look at the midpoint, to be lower than where we ended Q3, I'm sorry, Q4 of fiscal 23. And as Guillermo mentioned, resetting incentives would be the rest of it. Those two items really drive the delta between Q4 of 23 and Q1 of 24.

Got it. Okay. No, that's helpful. That makes sense. And then I guess just one follow-up question would be on the nutraceuticals business. Can you just help us to understand roughly what the sales and EBITDA currently is for that business on an annual basis? If you kind of take out the destocking that you saw earlier in the year, just so we have kind of a rough baseline for that.

Yeah, we're starting the process. We'll start sharing more details with the interested parties on this. But roughly, you can estimate around $100 million in sales, and the gross profits are in the 20% range.

Got it. Thanks very much for the call.

One moment for our next question.

Our next question comes from Joshua Spector with UBS. Your line is open.

Good morning. This is Lucas Bowman on for Josh. I'm just trying to think about what the normalized environment looks like. So, I mean, over the last five years, Ashland sort of had EBITDA that's kind of ranged from like mid-400s to basically high 500s. on a like for like basis. So like excluding sort of the divested businesses. So without thinking about kind of this year specifically, you know, given all the disruption with volumes, you've exited some volumes in the portfolio, we've had the stocking. I mean, can you just give us your view on like, what is your current view on the normalized earnings power of the portfolio once we get back to a normal environment? Thanks.

No, as I indicated through the scenarios, you can see the wide range of just when demand recovery would happen. So if you say, look, we're normalized and our volumes are more in line with our customers, most of our customer volumes are now normalizing to flattish versus prior year. So that's a big increase for us. So that would put us in the above $500 million range. If we just look at, you know, obviously 2022 and 20 and 21 for us, the challenge, we're not a normal number because we were out of capacity. So volume, we didn't have volume growth and mostly it was driven by pricing actions that we took. But if you look at 20, you know, 2020 as an example, and you look at our growth expectations, long-term growth expectations, mid-single digits, that would put us around that number also in the, you know, low to mid-500s would be where we need to be in normalized demand. The one area of caveat I would say is intermediates, that obviously, and we'll, you know, maybe in the future we'll be talking more about our core business versus intermediates to differentiate, but the intermediates business, Although it's performing better than it has historically, obviously it's still more of a commodity business and has its ups and downs. We've improved it a lot by focusing in on regions where we have competitive advantage and unique supply positions. But the real growth for us there is in NMP and it's around the EV battery investments that are going on in the US and Europe and those probably will be more of a 2025 startup for what we're hearing from many customers. So that part will be a little bit more, more volatile right now, but the rest of it should follow the model. I just, I just mentioned.

Right. Thanks. And then just sort of focusing on pricing. I mean, it sounds like from some of your comments in the deck that you're anticipating potentially the prices will be lower this year. So, I mean, are you seeing any declines across the portfolio? Yes. I guess, like, what's your visibility on your ability into, like, holding price into this year? And if you think you can hold it, I just wonder if you could kind of elaborate for us on, like, what the dynamics there are as to why that's achievable for Ashland, like coming off volumes kind of being down a mid-teens percentage, which for most other businesses you'd usually sort of see. Yeah. downwind pricing pressure there, you know, if that was happening?

Well, I mean, you have to look across the portfolio of different segments. As I said, obviously, intermediates is where we see more volatility, and that's already being seen in the results, and we're managing through that. I think, you know, especially in Asia, we're seeing more of that, where there's a lot more producers, and that's not our core markets. But if you look at in the rest of the portfolio, again, one of the reasons we're taking actions on CMC and MC Industrial, we are not the market leaders there. We're a small player. We see potential for much more volatility there. I mean, if I just look at historic performance, we managed pretty well in the last two years to improve the mix, to optimize in the environment we're in. This is a different environment. So the risk is higher. And that's why I think rather than wait for things to happen, we're taking control of our destiny and we're going to take actions on that. And that should minimize the impact of that kind of volatility, which is probably what we saw most of it in the past. And then the rest of the business, our core, historically, we've tended to maintain margin, right? As we communicated in 2022, we did very well on pricing. But most of the improvement did not come from price increase in terms of margin improvement. We increased price to maintain margin. And the improvements were about mix and other things that we were doing in our portfolio, growing some of the higher end segments and those kinds of things. So as we move forward, we would maintain that, you know, the model that we've had in the past where we are able to maintain margins. We'll see how costs and pricing move through. And, you know, depending on the segment, some have much more differentiation, less price sensitivity. Others will probably move more with margin over time. The challenge that we have this year in the transition is goes back to the inventory level. The pricing would have an immediate action and cost improvements will take a little bit more time to flow through because we have to work off the existing inventory that we have, which was purchased at a different cost level.

All right, thanks very much.

One moment for our next question. Our next question comes from John Roberts with Mizzou. Your line is open.

Thank you very much. Many of your personal care applications are fragranced. It seems like the stocking has been a lot less in the fragrance area. And I assume you watch this because I know you have some ingredients that actually go into fragrances. Is that correct, and why would your ingredients be seeing much more destocking than the fragrance market?

So two separate things. I think most of the destocking, and for our fragrance business, the Avoca business I talked about, so that's a different dynamic. For most of the other areas, it's really more about the destocking and specific customer dynamics. As I said, some of the customers we're already seeing that are demanding is trending back to their, you know, we look at their volume sales, our sales to them are starting to align with that. Others are still having impact on sales in different parts of the world. So it varies by customer. And I would say it's improving, but there's still time for that stocking alignment to happen. Specifically to fragrances. Most of our businesses and fragrances is from our Evoca business. This is a business that came from our PharmaChem. And as we've said in the past, that has not been performing well for a long time. We've stabilized it, we've improved it, but that's still an area that we need to take action on and pivot. These are fermentation biotech assets, so our intention is to move and focus them on other areas. But clearly, the scleroli business, which is the core part of it, has been challenged. We lost business in the end of 2019 when one of the people developing, one of our customers developing fermentation technology versus natural extraction technology. And that's been probably the biggest challenge for us. So I would treat the Avoca, Sclerilite different from everything else. The other parts are really more about the market dynamics.

And then at the investor day, I think you had a couple of new chemistries, one targeting silicones, I think that was biodegradable and zero VOC, and you had a new pH control buffer technology. When do you think you'll actually tell us what those chemistries are?

Well, we're starting to introduce, officially we just introduced the super wetter for starting in the coatings area. We're now taking it out to a lot of other markets. I've personally started to visit some of our major customers meeting with their, you know, chief technology officers, taking them through our technology portfolio, not just trying to, you know, here's a good product. You're really presenting the technology. What's the potential to see engage interest and how we can adapt these technologies to their specific needs. And I'm very excited that the response has been very positive. So obviously early days, but so far it's been very well received. So the launches right now, I would say, First priority is the super wetter. We continue to launch and develop products on our modified vegetable oil. We are working with customers around our liquid cellulose injectables, as we said, is doing very well. And we're trying to accelerate some of the other projects, the buffer, so that we can launch it in 2020, in calendar year 24, and try to do it in the earlier part. But we're already engaging beta customers to start doing testing and working with them. So a lot of excitement there. And even, by the way, where we're testing and the customers like and so we present it by one different performance. What's exciting for us that we're finding modifications that we can do so that there are going to be, you know, it's not a one product launch. These are technologies. So we're launching Gen 1, but we expect to see multiple products coming out of some of these technologies. So we're very excited to And that's why we're increasing our investment in these areas. Thank you.

One moment for our next question. Our next question comes from Jeff Zikoskis with JPMorgan. Your line is open.

Thanks very much. How do you calculate the inventory control penalty? do you look at last year's level of production and compare it to this year's level of production? Is that the way you do it or is there some other way? No.

So for us, the question is how we're controlling inventory.

How do you calculate it? How do you calculate it? Where does the number come from?

Days of inventory. I mean, we look at our forecasts and we have, this is a very technical number in terms of, hey, We have these plants. How long does it take to ship to different locations around the world? We calculate shipping time, safety stocks. So there's a number of factors that we put in. And we say, look, for this product, we should have X number of days of forward-looking demand in inventory. And that's the issue for us. So right now, if we believe we're going to sell 100 units, we'll have, you know, whatever, 20 units in inventories. If the demand comes down or our forecast comes down, then we have too high inventory and we have to not produce as much. If demand outlook goes up, then we have too low of inventory and we have to produce up. So it's all about days of inventory for how we calculate the inventory levels that we have. If you look at during 21, when things were short, What happened was many companies increased the days of inventory targets because of the longer supply chain. So that would add days. Well, before it took me two weeks to ship to Europe. Now it takes me a month. Therefore, I need another 15 days of inventory to account for that. So it's all mathematical and it's all about days. What's the should level based on days and safety stocks? And then, you know, ultimately it's what's your forecast to calculate those days.

So if I understand what you said, you have a hypothetical level of what you think the appropriate inventory is. And what you're doing is you're producing to get down to that number. So have we reached that number of inventory days? Or are the inventory days that we're going to get to another level lower? And if they are another level lower, how much lower are they than where we are today?

I think we're comfortable where our days are today. The issue now for us is that we need to produce to demand so that we don't build more inventory. This is what happened in my comments around the first half of the year. If you look at the first quarter, we had X demand. We had production plans. We produced. And as demand started to come down, our days of inventory went up, right? So that's where in the second half we had to reduce, but then the average for the year was sort of normalized. As we move forward, if we assume we have the right number of days and we don't want to increase of the days of inventory. Based on demand, we will produce, our production will be based on what the actual demand is going to be.

And then lastly, how much will it cost to remove the 80 million in stranded costs? That is, what are the cash costs to remove stranded costs?

We'll share. Like I said, we have a lot of stakeholders that we got to engage in. I don't think it would be premature and unfair you know, getting to details before we've had the chance to really work through some of these issues. But there are going to be normal actions that we want to take. Some will take costs. Some might be some investments that we need to move due to allow for some of these adjustments in where we make products and shifting things around. So there's multiple, multiple things, but we will share more details at the appropriate time. Okay, great. Thank you so much.

Jeff, just for a little perspective, we've done this a lot in the past, and while we're not ready to share a number, we would expect it to be less than what we've seen in the past on some of the programs that we've done in terms of overall cash costs to do what we need to do. But like Gary said, we're not ready to get into the details of that yet, but that would be our expectation. Great.

Thank you.

One moment for our next question.

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

Hi, good morning. I was wondering, Guillermo, if you could answer a couple questions on specialty additives. First of all, during your comments, you suggested that the specialty additives business had kind of some parent plants or some shared assets that led that to be the most impacted by inventory control actions. So maybe just a little bit of additional color on that. on what's going on there and why we saw the biggest impact from inventory control on specialty additives.

Yeah, I mean, if you look at the two businesses that we are taking actions on, CMC and MC Industrial, the assets are within the specialty additives business. So MC Industrial is mostly in specialty additives, the business and the assets. So that obviously has been a big impact. But the CMC business is in specialty additives, but it supplies both life science, so the nutrition business, which is way down, and also a personal care business that was impacted. So we keep all, you know, we don't see any value in just moving allocations around and creating more noise. But most of that is in specialty additives. And obviously, the specialty additives has the big HEC volume, but they're the biggest volume driver, and that obviously has been impacted by some of the stocking. But those are the three biggest drivers in terms of the plant. So it's a little bit disproportional impact in specialty additives, but clearly in MC Industrial and HEC, they are the biggest volume. CMC is much more distributive.

My specialty additives is over half the volume of the core business. So you'd expect it to be a bigger number there. But then they produce, as Guillermo said, volumes for other parts of the business. So that's what makes the number even bigger than it would have normally been.

All right. That's helpful. And then my other question is just regarding what you're seeing in terms of destocking. It sounds like there are some markets where You're seeing the stocking continue and other markets where you're maybe more confident that the stocking has peaked and is maybe progressing toward an end. Can you walk through your core markets and kind of differentiate which ones you're feeling better about and which ones you expect the stock to continue?

Yeah, you know, I think coatings is one that we're expecting to see improvement. You know, customers volumes have normalized a little bit more. They do still have some inventory in it. Again, we have big customers and it's a more concentrated global industry. So there, as individual customers align, you'll start seeing that impact. However, you know, as you all know, the last few years we haven't had seasonality because everything was short. But as we get back to seasonality, you know, that – the protein season really starts in mid to end of Q2, fiscal year Q2 for us, so February and March. So, you know, we don't expect any major pickup. You know, it'll be normalizing at a lower volume during the winter period. So that one's clearly improving. Nutrition was one of the – really nutrition in general was one of the most impacted segments. We're starting to see some normalization. We should start picking up orders. In some of these areas, we haven't even sold much at all for months, given the high level of the stocking. It's not a high margin business for us, but clearly has had a big impact on our absorption for us. The personal care, I think we're starting to see normalization customer by customer. We have some, as I mentioned, that are already sort of ordering what we see in their sales. So in terms of reported numbers, so that's good news. But we have other specific ones that have their own challenges that might take them a little bit more time to work through. And as I said, in the intermediates, is one that we expect a little bit more of a delay, especially around the EV, the timing of EV battery startups. That will be a bit later. We should see some improvement in normalization of demand in the year in the U.S. and Europe, but that's based on existing capacity. The new capacity really starts coming in towards the end of calendar year 24 and really more into 25. That whole chain has sort of delayed by six to 12 months from what the original expectations were.

All right. Very helpful. Thanks.

One moment for our next question.

Our next question comes from Michael Sisson with Wells Fargo.

Your line is open. Michael Sisson with Wells Fargo, your line is open and unmuted.

Michael, please rejoin using the call me feature. One moment for our next question.

Our next question comes from Lawrence Alexander with Jefferies.

Your line is open.

Good morning. First of all, how much of a net headwind do you expect in 2024 from the restructuring initiatives? Would it be like 40, 50 million, or is it going to be less than that? I mean, as an EBITDA headwind.

Yeah, I think the issue here is, again, we need to engage groups. So when we do things, you know, there's a if it impacts Europe, you got to go, what works counts. So we're not in a position really to, to talk about that. You know, I think that some of these things, when we decide or we, when we can take the, the, the actions, the, the, the offsets will be pretty quick on, on some of these areas. You know, as I said, the biggest issue for us right now is that most of these things, CMC, specifically CMC and MC, the margins are low. So, you know, minimizing the volatility is really the bigger priority in these areas. But those benefits should be quicker. The ATC network will happen throughout the year because it really involves all our clients and how we redistribute and where we produce things. So that'll be across the year. But impact-wise, again, for my prior comment, most of the volume really starts in the back end of the year.

Okay, great. And then what's your kind of benchmarking now for the tax rate and interest expense that will flow through the P&L?

The interest expense will be pretty much what it was in fiscal 23. We don't have any floating rate debt. So nothing's maturing for several years. So we're, you know, the cap structure on that side should be very consistent. Tax rate's probably going to be, call it, low to mid-20s. Part of that's going to be driven by mix. As you're aware, we have a Swiss principal organization that generally generates lower tax rates. So depending on the jurisdiction of the pre-tax income, that will ultimately drop the tax rate. But generally, we would expect it to be kind of low to mid-20s.

Thank you.

One moment for our next question. Our next question comes from Michael Sisson with Wells Fargo. Your line is open.

Hey, guys. Can you hear me?

Yes.

Hey, Mike.

How are you doing?

Yeah, sorry about that. Just one question. I wanted to understand the EBITDA margins for the first quarter a little bit. You're going to do about 480 million in sales. You did a little over five in the first quarter of 23, similar in first quarter of 22, 460-ish in first quarter of 21. Your EBITDA margins were all above 20%. I still don't understand some of the issues, but at the same sales level, it doesn't seem to me that the margins should be so low. Are you comfortable there's not structural reasons why the margins are so low for the first quarter?

I think two areas, and I'll let Kevin comment. One is, as we said, it's the loading of production volumes and carryover from prior year. And intermediates, I would say, would be the other ones. But Kevin, do you want to comment in more detail?

No, that's exactly right. Mike, historically, even though Q1 is seasonally weak, we would be producing in anticipation of the spring season. We are not doing that now. We are producing only what we believe demand is going to be for Q1. So that's the big difference. If you look at it year over year, there's probably a $25 million difference between last year Q1, this year Q1, just on the manufacturing loading piece of the equation. So that's really it. I mean, pricing is going to be pretty much flat. in Q1 of this year based on our current estimates. So it's not a pricing issue. It is simply around producing to demand. And as Guillermo said, intermediates is going to be meaningfully lower in Q1 of this year versus Q1 of last year. That'll be the other big difference.

And that's an important point, Mike, in the sense of traditionally everybody sort of generalizes that sales volume equals volume for everything, right? And as Kevin said, that's not necessarily true. A production volume doesn't align necessarily with sales volume. It's about inventories and how we build capacity, peak demands and managing all that. If we're producing to demand, we're taking a much more conservative position. So as demand picks up, the leverage is very big because it's not just we're going to sell more, we ramp our plants much more. So that's why the uncertainty and discomfort for taking a guess of what's going to happen in the second half of the year at this point in time, the variability would be very big. So I think the issue now is understand these dynamics, these scenarios that we've built, and make sure that we're taking the actions that improve our performance across the scenario. You know, if things remain slower for longer, we will produce, we will have more, you know, controlled operations. And, you know, things, we don't have to cut inventories anymore. If things pick up, the ramp rates would be significant. We have a lot of upside. So the actions we're taking will minimize downside and maximize upside potential for us as we move forward. Great, thank you.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. I'm showing no further questions at this time. I would like to turn the call back to Guillermo Novo for closing remarks.

Well, thank you very much, everyone, for your participation and questions. We look forward to engaging you throughout the quarter and appreciate all the attention and interest in Ashland. And Abigail, thank you for all your help.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.