Ashland Inc. (ASH) Q1 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the Ashland Global Holdings First Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker, Seth Mrozek, Director of Investor Relations. Please go ahead.

Thank you, Sidney. Good morning everyone and welcome to Ashland's first quarter fiscal 2020 earnings conference call and webcast. My name is Seth Mrozek, Director, Ashland Investor Relations. Joining me on the call today are, Guillermo Novo, Ashland's Chairman and Chief Executive Officer and Kevin Willis, Senior Vice President and Chief Financial Officer. We released preliminary results for the quarter ended December 31, 2019 at approximately 5 PM Eastern Time yesterday, January 27th. The news release issued last night was furnished to the SEC in a Form 8-K. During this morning's call, we will reference slides that are currently being webcast on our website ashland.com under the Investor Relations section. The slides can also be found on the Investor Relations section of our website. We encourage you to follow along with the webcast during the call. As a reminder, during today's call we will be making forward-looking statements on several matters, including our outlook for fiscal year 2020. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but cannot assure that such expectations will be achieved. Please refer to Slide 2 of the presentation for a more complete explanation of those risks and uncertainties and the limits applicable to forward-looking statements. Please also note that we will be referring to certain actual and projected financial metrics of Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to these measures as adjusted and present them in order to supplement your understanding and assessment of the financial performance of our ongoing business. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures as well as reconciliations of the non-GAAP measures to those GAAP measures are available on our website and in the appendix of today's slide presentation. Guillermo will begin the call this morning with an overview of results in the first fiscal quarter. He will then provide an update on the work that has been done to realign the Ashland business structure. Next, Kevin will review financial results for the fiscal first quarter and discuss the debt offering redemption that was completed in January. Finally, Guillermo will close with key accomplishments that have been achieved over the past few months in addition to providing his thoughts on important next steps. We will then open the line for questions.

Thank you, Seth, and good morning everyone. It’s an exciting time at Ashland, and I am thrilled by our accomplishments and the opportunities ahead. I appreciate the Ashland team for their strong support and enthusiasm during this transition. Today, I will begin with an overview of the key factors affecting our performance in the first quarter, followed by an update on the ongoing business realignment. After my remarks, I will hand over to Kevin for a detailed review. In the first quarter, our performance was below the previous year due to softer market demand, carryover items from the prior year, and changes at our Lima facility. We did not encounter significant surprises in the first quarter, apart from extended turnaround costs at Lima, which stemmed from unforeseen additional maintenance needs. We continued to excel in our environmental health and safety performance and advanced our sustainability goals in innovation and operations. As anticipated, demand in the market remained weak during the quarter for both industrial and consumer sectors. In pharmaceuticals, we faced a challenging comparison to last year's strong first quarter, and some customers adjusted their inventory levels. The personal care sector showed persistent demand weakness in hair care, although oral care performed better than expected, buoyed by new product launches from key customers. In adhesives, we noted general softness across most segments, particularly in transportation, while the construction market remained robust. We are observing continued deflationary pressures in both pricing and raw material costs. Demand for coatings was also soft during the quarter. Additionally, we faced prior year carryover challenges related to business losses, but we benefited from cost improvements. From a cost perspective, we saw benefits from our cost reduction program and began implementing further cost improvement measures, which I will elaborate on later in the call. Now, I would like to discuss our progress in realigning Ashland’s business portfolio. Our business will consist of a consumer specialties group, which will include our life science and personal care and household business units. The life science business unit will encompass our existing pharmaceutical and health and wellness operations. The health and wellness segment will involve Ashland's core food additives business along with Pharmachem's nutrition activities. The personal care and household business unit will include our existing businesses, as well as the Avoca fixative business from Pharmachem. The industrial specialties group will comprise our specialty additives and performance adhesives units. Specialty additives will include our coatings, construction, and performance additives lines, while performance adhesives will remain as is. We will continue operating our intermediates and solvents business as a separate segment. Although we will assign some corporate management costs linked to operating activities such as IT, HR, and environmental health and safety to the business units, we will also maintain a corporate segment for governance costs. As we align our resources to the businesses, we will also align our core assets. Each business will be responsible for the operations and performance of its assets and supply all demands from other business units. This shift in our business model marks a fundamental change in how we operate and manage the company. We anticipate that these changes will enhance our focus, improve decision-making, increase our agility, and build ownership, with business units taking charge of their strategies and being held accountable for their performance. This model will not be uniform; businesses will have dedicated resources and complete authority to make decisions about their business models and cost structures. The goal is to ensure that the new structures align strategy, resources, and capital allocation to enhance execution.

Thank you, Guillermo and good morning everyone. If you will, please turn to Slide 12. First, I'll begin with a broad overview of results during the quarter. As you may recall the December quarter is our seasonal trough during the year as demand tends to be slowest as our customers manage inventory in anticipation of planned downtime at their facilities. We also schedule much of our planned downtime to coincide with our customers planning. This quarter was no different and our results demonstrate the same normal seasonality patterns that we would expect. That being said, and as expected heading into the quarter, global demand in both consumer and industrial end markets remained weak. We also continue to work through the business losses that occurred last year at both Pharmachem and within the personal care end market. We did, however, realize continued improvements to our cost structure as both SG&A and raw material costs were down compared to the prior year. While overall results were consistent with expectations, they were below the results of last year's December quarter. Total Ashland sales in the quarter were $533 million, down 7% from the year ago period due to lower sales in specialty ingredients. Negative currency represented one point of this decline. SG&A costs again declined significantly in the quarter as we realized the positive impact of the cost reduction program, including the benefit of eliminated stranded costs. We did incur higher than anticipated costs during the planned catalyst changeover at the Lima, Ohio facility within intermediates and solvents. Total Ashland's adjusted EBITDA was $88 million compared to $100 million in the prior year. Adjusted EPS was $0.13, down a penny from the prior year. Our tax rate was favorable due to income mix and the benefit of discrete tax items. Now let's look at the segment results in the first quarter. Specialty ingredients sales were $505 million, down 9% versus prior year due primarily to weaker demand in both consumer and industrial end markets plus the prior year business losses which I already referenced. Gross profit margin benefited from lower raw material costs though this was somewhat offset by unfavorable product mix. The favorable price versus raws continues to be a good story for specialty ingredients as the commercial teams have been diligent during a prolonged period of raw material volatility. Operating income and EBITDA both declined versus prior year as lower gross profit was partially offset by lower SG&A costs. All in EBITDA margin was basically flat at 20.2%. Turning to intermediates and solvents sales in the quarter were $28 million, up 22% from the year ago period though the December quarter last year was particularly weak for the I&S segment. As previously mentioned, the planned catalyst changeover plus the unexpected maintenance work at Lima resulted in $12 million of additional costs versus prior year. As a result, both gross profit and EBITDA were negative during the quarter. The good news is that the plant returned to normal operations during the quarter and no additional costs are expected related to this maintenance work.

Thank you, Kevin. As we discussed in our last call, our key objectives are to drive profitable growth driven by organic sales and adjusted EBITDA growth, margin expansion, and improved cash flow generation. My priorities continue to be to develop and articulate our strategy for our business and the company, to improve our operating performance and to align and right size our cost structures to the needs of our business and run as a best in class company for our size and profile, and to maintain a disciplined capital allocation focus. Most importantly, we want to move with a strong sense of urgency and ensure that our actions result in visible improvement momentum in our performance. Our near-term focus is very clear. First of all, it's to enable our business units. This is at the core of driving fundamental improvement in our results. If our business units are focused and performing well, this will drive core value creation. We are targeting to have them fully operational with their new strategies, plans, and structures by early fiscal Q3. We will drive cost improvement actions. It's important to note that our company has undergone significant portfolio changes for a long time. We recognize that the organization is a bit fatigued with change. Because of this we want to make sure that we move with urgency on defining our future structures and implementing the cost actions we plan to take.

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

I want to highlight two significant points regarding the events from last year, which we touched on briefly in our last call. First, while there was some impact on our portfolio, we did not lose market share to competitors. The business we lost was primarily due to customer reformulations and internalizations, not because we are not performing well. Our core businesses, particularly in pharmaceuticals, coatings, and adhesives, remain in a strong position despite the usual fluctuations in market share. We don't provide detailed ongoing updates on these shifts, but I am confident about our performance in traditional construction and associated segments. As for oral care, we have addressed the capacity issues and exceeded our planned performance through innovation and new products. I want our new business units and leadership teams to focus on gaining more traction in this area, as we have the potential to leverage our innovation investments more effectively. On the Pharmachem side, I recognize that we need to dedicate more attention here. There are structural challenges that I prefer to discuss in future calls, but we have stable businesses we can grow, particularly in our active ingredients segment. While margins can improve, this area is stable. However, we have faced significant challenges in our fixative and custom manufacturing businesses. There is promising technology in our Avoca division that we can develop, but this will require time and effort.

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

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

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

I want to reiterate that our targets remain unchanged as mentioned in the previous call. We see opportunities to exceed those targets, especially when we evaluate each business unit. Much of the cost discussions have focused on our corporate structure, but the real focus should be on the business model and service levels, as well as the changes we want to implement across different business units. From my previous experience, the most significant surprises often come from closer engagement with the business, which can drive both cost efficiencies and improved product mix.

Thank you. Could you provide insight into the special ingredients and the organic growth rate excluding Pharmachem? I believe you mentioned it was relatively stable, but with the Pharmachem business loss taken into account, was your organic growth rate better or worse this quarter compared to the previous quarter?

Now, if we were down versus the prior quarter, if you remember we had the oral care was an issue. And then just, general demand pharma as an example we were down but it's really the comp that was a very tough one. On the other ones, I would say a few percentage, a percent or two and it's more macro driven than anything else. If you look at specialty additives and talking in terms of some of the businesses they way we are going to be talking about it in the future, coatings was definitely slightly down just in market demand. But it's a business that we have very strong positions in. Well, I think you'd look at it in several different areas, one is our business in China and like everybody else, I mean if demand gets impacted obviously it is an issue. Obviously now just movement of people and things is impacting operations. We don't really export a lot from there. So I don't expect that that's going to be a big issue. But we're monitoring our customers. I mean at the end of the day, I think this is much more of a macro market issue, very different from other industries that are having structural issues around supply or customer bases there plus that's not so much the case.

Thank you, first a manufacturing question and then I have an R&D question. But will the industrial segment manufacturers Cellulosics for the consumer segment so that most of the manufacturing assets are going to end up over in industrial and you chose not to merge the BDO or intermediate insolvent business into industrial, I guess you could have done that, it's kind of small but maybe talk about how the manufacturing is going to work in the new organization?

We are focusing on identifying the major volume drivers of the assets and the best owners who can handle the full profit and loss as well as management responsibilities. The specifics will differ by business. Generally, Cellulosics will fall under the specialty additives sector, which has higher volumes. It's crucial that we effectively utilize the assets, ensuring that any available capacity is fully utilized. In contrast, the pharma and personal care segment has niche products that cannot be sold off; the focus here is on innovation and creating customer formulations. They will take ownership of that. For the indeterminate assets, the emphasis will shift more toward the consumer side, where there are greater drivers. Each segment has its distinct assets; for instance, adhesives are significant, along with many of our acrylics and polyurethanes, while specialty additives is broadening its offerings with new rheology modifiers and products. Thank you all for your interest. I'm really looking forward to seeing all of you in the coming weeks, and I thank you all for your support and again to everybody from the Ashland team that's listening thank you for all your help, so looking forward to seeing you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may now disconnect.