Ashland Inc. Q3 FY2022 Earnings Call

Thank you, everyone, and welcome to Ashland's Third Quarter Fiscal Year 2022 Earnings Conference Call and Webcast. My name is Seth Mrozek, 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 preliminary results for the quarter ended June 30, 2022, at approximately 5:00 p.m. Eastern Time yesterday, July 26. 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 2. As a reminder, during today's call, we will be making forward-looking statements on several matters, including our outlook for fiscal year 2022. 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. You can also review our most recent Form 10-K under Item 1A 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 3. 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. Guillermo will then provide additional commentary related to Ashland innovation and product development progress, sustainability goals and environmental, social and governance commitments. Finally, Guillermo will provide his thoughts on important next steps and our financial outlook for fiscal year 2022. We will then open the line for questions. One final note. On August 1, Ashland will change its legal name from Ashland Global Holdings Inc. to Ashland Inc., subject to registration approvals. This name change is the most visible step in our internal reorganization to simplify the company's legal entity structure. Ashland shares of common stock will continue to be listed on the New York Stock Exchange under the ticker symbol ASH and its Committee on Uniform Securities Identification Procedures, or CUSIP number, will not be changing. No action is needed from stockholders.

Thank you, Seth, and hello, everyone. Thank you for your interest in Ashland and for your participation today. As you will hear during the call, Ashland's financial results in the third fiscal quarter were consistent with the earnings update we issued on July 18, demonstrating strength and resilience in a world of uncertainty and accelerating change. Given the high level of external uncertainty we are all facing over the recent quarters, we have chosen to provide earnings updates in advance of our regular earnings release. We plan to maintain this pattern of communication during this period of high uncertainty. Once it becomes apparent that external dynamics normalize, we plan to return to our normal cadence of quarterly communications. Returning to the results of the quarter, customer order dynamics remain strong across our core markets, and we continue to make significant progress on taking appropriate pricing actions to cover costs across all segments. Supply chain challenges have not improved, especially with respect to ocean freight. Given the tightness in markets globally, our teams have taken steps to improve the mix of high-value products that we are selling, which will further drive margin expansion. We continue to invest in future-forward, sustainable innovations to drive profitable growth, accelerating the pace and impact of new product introductions. In short, Ashland has undergone a tremendous amount of change. We are a different company today. The results this quarter and the steps we are taking are enabled by the company we have become. Our ability to respond quickly and operate nimbly is a result of the intentional changes we made to the company over the past two years. Please turn to Slide 6. Let me share with you some of the highlights from our strong third quarter results. Sales of $644 million grew by 19% compared to prior year. Against a backdrop of strong global demand, all businesses contributed to our growth. Adjusted EBITDA grew by 35% to $174 million as all our teams pursued cost recovery and mix improvement while effectively managing costs. Our global network of production facilities continues to operate with strong discipline. Adjusted EBITDA margins reached 27% for the second quarter in a row, an increase of 320 basis points compared to the prior year quarter. It's important to note that on a trailing twelve-month basis through June 30, Ashland achieved an adjusted EBITDA margin greater than 25%. Returns to shareholders continued to grow with adjusted EPS up $0.93 to $1.89 per share, reflecting the impact of both earnings growth and our share repurchases over the past year.

Thank you, Guillermo, and good morning, everyone. Please turn to Slide 9. Total Ashland sales in the quarter were $644 million, up 19% versus prior year. Unfavorable foreign currency negatively impacted sales by 5%. Gross margin improved by 510 basis points to 37.3%, reflecting cost recovery and mix improvements by the commercial teams in the face of significant cost inflation. Excluding key items, SG&A, R&D and intangible amortization costs increased to $127 million in the quarter, primarily reflecting the addition of the Schülke & Mayr business, the elimination of the INEOS transition services agreement and accrued incentive compensation. In total, Ashland's adjusted EBITDA for the quarter was $174 million, a 35% increase compared to the prior year adjusted EBITDA of $129 million. Ashland's adjusted EBITDA margin for the quarter was 27%, a 420 basis point improvement over the prior year. Importantly, for the last twelve months ending June 30, Ashland's adjusted EBITDA margin was greater than 25%, a notable milestone for the company. Adjusted EPS, excluding acquisition amortization for the quarter was $1.89 per share, up 93% from the prior year, reflecting both the increased earnings and the lower diluted share count following our share repurchase activities over the past year. Ongoing free cash flow was $13 million for the quarter, a reduction from the prior year, primarily reflecting an increase in working capital given the inflation in raw material and other input costs we have seen globally. We expect ongoing free cash flow conversion to be positive for the second half of the fiscal year, even as working capital levels will remain elevated, assuming a continued inflationary trend.

As I noted previously, growth for the company was broad-based with all segments returning double-digit sales growth compared to the prior year. Life Science performance remains resilient driven by strong demand for our high-value pharma ingredients. Personal Care demand remained robust, with the business driving disciplined pricing recovery while the results of the Schülke preservative portfolio have continued to exceed expectations. Within Specialty Additives, the team has levered tight global supply to drive both mix improvement and cost recovery. For intermediates, growth in sales was driven by higher volumes and transfer pricing to captive BDO sales as well as higher pricing in our merchant business. Merchant market sales for intermediates represent approximately 8% of Ashland sales. I'm pleased by the progress made by the Ashland team during the quarter and the first nine months of the fiscal year. In our earnings update on July 18, we increased our financial outlook for sales and EBITDA in the fiscal year 2022 due to the strong year-to-date performance and our expectations for Q4. While there are many global uncertainties on the horizon, the Ashland team is performing well and executing on actions that are within our control. We look forward to discussing our updated outlook for the remainder of the fiscal year and reviewing broader progress by the company later in the call.

Now let's review the results of each of our four operating segments. Please turn to Slide 10. Life Sciences had a strong quarter, and the team executed well. There was strong pharma demand, favorable product mix, disciplined cost recovery, consistent operations and continued margin expansion, partially offset by growing currency headwinds. In total, Life Sciences sales increased by 18% to $228 million while adjusted EBITDA increased by 26% to $67 million. Adjusted EBITDA margin increased meaningfully to over 29%. Please turn to Slide 11. Personal Care also had a strong quarter with good execution by the team. There was strong demand across all end markets, and the microbial protection acquisition we made last year is performing above expectations. The team delivered disciplined cost recovery through pricing, and all operations performed consistently. As with Life Sciences, these results were partially offset by growing currency headwinds. For the quarter, Personal Care sales increased by 17% to $172 million while adjusted EBITDA increased 18% to $46 million, and adjusted EBITDA margin again increased to nearly 27%. Please turn to Slide 12. Specialty Additives had another very nice quarter with excellent execution by the team. Demand was strong across the board. Despite persistent supply chain challenges and growing currency headwinds, there was disciplined cost recovery through pricing and consistent operating results. For the quarter, Specialty Additives sales grew by 15% to $194 million while adjusted EBITDA increased by 46% to $57 million. Adjusted EBITDA margin grew significantly to more than 29%. Please turn to Slide 13. Intermediates reported another very strong quarter as pricing has continued to rise across all product lines. Sales were $73 million, up 49% compared to the prior year. Margins were up meaningfully during the quarter. The segment reported adjusted EBITDA of $33 million, an increase of 120% compared to the prior year, and adjusted EBITDA margin was again over 45%.

As we discussed at our Investor Day last November, capital allocation discipline continues to be an important component of Ashland's value-creating strategy. The actions we have taken over the past year have improved Ashland's financial position and created increased flexibility. Since August of 2021, we have executed on $650 million of share repurchases, representing approximately 11% of our outstanding shares. Earlier this quarter, Ashland's Board of Directors accrued a new $500 million evergreen share repurchase authorization. As of the quarter closed on June 30, we have cash on hand plus available liquidity totaling roughly $1.4 billion. Our net debt has been reduced to about $600 million, which is approximately one turn of leverage on a net basis. We have no floating rate debt outstanding. Our debt has investment-grade style covenants with weighted average cost of debt below 4% and an average maturity of about 10 years. Also, just last week, we extended our existing bank agreement out to five years with no change in terms. Importantly, we are investing in our existing business 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 the backdrop of global uncertainty, Ashland has a strong balance sheet with the enhanced flexibility to pursue our targeted growth strategy. Thank you, Kevin. Please turn to Slide 16. As I mentioned at the beginning of the call, Ashland is making excellent progress while operating in a world of significant uncertainty and accelerating change. Our teams continue to demonstrate operating resilience and are delivering strong results. Against a backdrop of continuing global supply constraints and shipping challenges, we have demonstrated proactive pricing discipline to recover costs in a widespread inflationary environment while also improving our mix management. While supply chain challenges have not improved, we have improved our global planning to better anticipate how we can be more responsive and efficient. Our plants continue to run well, and we have started to rebuild inventory levels. We still need to make more progress in this area, to build up safety stock levels across our warehouse network. We are maintaining our strategic focus and capitalizing on the things that are within our control. This quarter, we saw strong margin performance driven by cost recovery, mix management and disciplined SG&A cost management. While free cash flow generation was below prior year levels, this was due largely to the impact of rising inflation on working capital balances. Our increased focus and discipline on innovation is paying off. We're accelerating the velocity of our innovation investment and growth, especially with sustainable ingredients and additives. We are aligned with the evolving product requirements of our customers and the consumer, and are well-positioned to capitalize on these emerging trends across the globe. We have strengthened our internal innovation portfolio management to both accelerate the pace of new product launches and ensure that these launches create the most value for our customers and for Ashland. Beginning this year, we're expanding capacity in numerous high-value products globally, and we'll continue these investments over the next couple of years. Ashland has the flexibility and discipline to execute our growth strategy and reward our shareholders. Please turn to Slide 17. As we approach each of our priorities in a disciplined way, we recognize their overlapping nature. Under our new business model, we have empowered our organization. We have driven decision-making to those closest to the customer. Each business leader and their regional teams own their business and circumstances, but all share the same discipline. Leaders adopt their priorities to circumstances to unlock profitable growth while maintaining operating discipline. Our priorities remain focused on growing our business while maintaining its quality, driving profitable growth opportunities, margin and free cash flow expansion while leveraging ESG as a core value and enabler. Please turn to Slide 18. I'd like to provide an update on our environmental, social, governance and sustainability goals. We plan to publish our ESG report before the end of this fiscal year. In calendar year 2022, we will submit the Science-Based Targets we are establishing for environmental and sustainability goals, and we'll announce them as soon as they are approved. The establishment of Science-Based Targets is an important milestone, furthering our purpose to responsibly solve for a better world and in support of our commitment to the Paris Climate Accord and to making the UN Global Compact and its principles part of Ashland's business strategy, culture and day-to-day operations. The rigorous internal review and validation of data continued which will enable us to set new targets. Additional internal work continues, such as integrating ESG metrics into our enterprise risk management system, evaluating opportunities for enhanced use of renewable energy solutions in both the U.S. and Europe and incorporating ESG goals in each of our business units operating dashboards. As we have stated many times, ESG priorities are integral to our future as a company, and we continue to make important steps to solidify our actions and commitments. Please turn to Slide 19. New product innovations are important for organic growth and a tenet of our profitable, sustainable growth strategy. By narrowing our focus to markets and applications where we can have a large impact, we are solving complex challenges in niche areas where our innovations really matter. As a deliberate-focused company, we know exactly where we fit and where we unlock the highest margins because we bring the greatest value for customers. This year, we will introduce a record number of innovations, and we are reaping the benefits of our focus and speed to market. Nearly 90% of our new innovations are natural, natural-derived, biodegradable or sustainable in use. By maintaining discipline in both project and portfolio management, we are increasing the number of new product introductions as well as their expected value impact. By meeting the evolving needs of our customers and the consumer, we expect the future revenue and margin contributions from these future launches to improve the growth trajectory and profit contribution for Ashland. Please turn to Slide 20. Over the past year, Ashland has continued to be recognized by industry organizations and customers for our conscious cutting-edge innovations. This month in China, and recently in Korea, Ashland was recognized for industry-leading innovations where we were awarded three Ringier Technology Awards for Architectural, Coatings and Personal Care. The Technology Innovation Awards for Personal Care are among the most prestigious in China's beauty industry and recognize innovative products and technologies that contribute to improved production efficiency, cost-effectiveness, user convenience and sustainability. Ringier Technology Awards for industrial manufacturing recognized a select group of coatings innovations both upstream and downstream. Each year, the awards recognize the industry's more innovative pioneers that have made outstanding contributions to the industry, encouraging more companies to invest in technology innovation to improve productivity, convenience and green or sustainable developments. As we highlighted in the video at the beginning of the call, Ashland recently introduced a line of rheology modifiers called Aquaflow Solid, thickeners for the architectural coatings market. Our first grade with this line has been recognized with the Ringier Technology award in 2022. The award recognizes that Aquaflow ECO-300 is meeting the needs for fireside free rheology auditors because the product is shipped in 100% active, solid dose form. It enables a lower carbon footprint in transportation. We're incredibly proud of the progress made by our research and development team to accelerate the pace of innovation across our global businesses. These recognitions are testimony to the successes that we're having, responsibly solving for mega trends, and customer and consumer needs in the marketplace. Please turn to Slide 22. As we continue in a period of great uncertainty on a global scale, I'd like to provide an update on the tailwinds and headwinds that we currently face. The tailwinds have not changed. Demand remains resilient, customers still need to rebuild inventories, and the COVID reopening is having a favorable impact across many parts of the world. Our manufacturing plants continue to run well and raw material availability has started to improve. Ashland's pricing actions have positioned us well relative to the past and current inflation pressures, and we are prepared to take further action as needed. Although supply chain reliability remains a challenge, we have started to see some improvement on the trucking side. Headwind risks are clear. The challenge is predicting their potential impact, which ones will happen, when will they happen and what impact they will have. The war in Ukraine and the potential for energy rationing in Europe and the supply chain challenge that would pose are the most significant risks for Europe and the global economy. The potential for additional COVID lockdowns in China still exists. These factors, in addition to widespread cost inflation combined with the actions of central banks across the world, increase the potential for recessionary or stagflation conditions across the world economies. It is very difficult for us to forecast these risks, if they will happen, when they will happen or what magnitude and potential impact they will have. As such, we are not directly factoring them into our outlook. As we did during COVID, we are focused on the things we can control. For these uncertain events, we are focused on improving our contingency plans to build resilience, react quickly to minimize potential headwinds and capitalize on opportunities. The nature of our business, the profile of our portfolio, the actions we have taken, the plans we have in place and the diligence of our teams give us strong confidence despite the global challenges. Please turn to Slide 23. Our confidence in the face of global uncertainty is driven by three factors. The first is the resilient nature of the end markets in the face of global economic disruption. During the most recent downturns, the Great Recession in 2008 to 2009 and the COVID impact in 2021, Ashland's core end markets of pharma, personal care and coatings demonstrated strong resilience. Ashland sales to each market actually grew during those periods and then recovered quickly when economic conditions normalized. While every recession is different, the resilience of our end markets and customers has been demonstrated. Second, our relatively low exposure to petrochemical base price volatility limits our exposure to some of the more volatile broad-based raw material cost inflation. Only approximately 25% of our cost of goods sold is tied to volatile energy and petrochemical-based raw materials. Most of these raw materials are also very fragmented and individually do not represent a significant overall cost. While we're not immune to the rising cost of energy globally as a company, we're far less exposed than others in the marketplace. Lastly, our growth strategy is enhanced by the incremental profitable growth opportunities we outlined in our Investor Day last November. We believe these factors will be important contributors to growth irrespective of any recessionary dynamics. Factors such as end market mega trends, and accelerating innovations pipeline, the focus on meeting the evolving ESG requirements of our customers and consumers, our broad geographic diversity and a bolt-on M&A strategy all position us well to grow profitably despite any macroeconomic headwinds. While Ashland is not immune to the world risk and uncertainty, we believe we are incredibly well positioned to successfully weather any potential storms on the horizon. Please turn to Slide 24. As we mentioned earlier, the war in Ukraine and the potential for energy rationing in Europe probably represents the greatest risk given the potential impact on European and global supply chains. As such, let me provide some additional clarity to Ashland's overall exposure to the continent. Europe is an important market for our business and represents approximately 30% of our annual sales. This percentage is roughly the same for each of our Life Science, Personal Care and Specialty Additives businesses. We operate seven production facilities in Europe. We do not have any significant manufacturing operations in Germany. We have three sizable facilities, one in the Netherlands, one in Belgium and one in France. We also operate four smaller facilities in the U.K., France and Ireland. Specialty Additives and ingredients produced at these facilities and sold globally account for approximately $500 million of annual Ashland sales, which includes our customers in Europe. We have additional office operations in Europe, although none are directly impacted by the current war in Ukraine. In short, Europe is an important region and market for the company, and we're paying very close attention to how macro events unfold and how governments respond. We see the greatest potential risk for European headwinds in the form of energy rationing impacting production, raw material supply and customer production activities. As I've stated before, we are not immune to these risks. Our global teams are planning and building contingency plans in the event the broader situation in Europe deteriorates further. Taking all of these factors we have discussed into account, on July 18, we increased our financial outlook for sales and adjusted EBITDA for the full fiscal year. We now expect sales in the range of $2.35 billion to $2.4 billion, which represents 13% growth over prior year at the midpoint. In addition, we expect adjusted EBITDA for the fiscal year at $580 million to $590 million, which represents 18% growth over the prior year at the midpoint. As we have laid out in detail in today's call, there continues to be a large amount of global uncertainty, even in these last few months of our fiscal year. Our outlook presumes that we do not see significant additional inflation in raw material, freight or energy. Such dynamics would require additional pricing action beyond those that have already been planned and for which there would be a time lag in realization. At this time, we do not anticipate meaningful rationale of energy in Europe in the September quarter. Let me be clear, as we did in 2020 when COVID emerged, and the certainty was high, we are being pragmatic and focusing on things we can control and forecast. For what we cannot control, we will focus on planning and building resilience. We do not see a lot of value in being overly optimistic or pessimistic based on external factors we cannot control or forecast, as this would only create more noise in our planning process. As external developments become clear, we will maintain our current level of transparency, and we'll communicate any changes to our outlook as appropriate. Ashland is well positioned. We have confidence in the company's business portfolio, market focus, global team, and our plans and the actions that we are taking. We have demonstrated resilience in the last two years, and we are confident that we will maintain our resilience in 2022 and beyond. Please turn to Slide 27. Over the last decade, Ashland's journey of transformation has sharpened our focus as an additives and specialty ingredients company. As we have systematically identified and tackled the thorniest problems, we concentrate on areas rich in opportunities to innovate and drive value for customers, where innovation and expertise in one business unit can be leveraged in others. In closing, I want to thank the Ashland team, once again, for their leadership and proactive ownership of their businesses in an uncertain environment. We create our destiny as a global additives and specialty ingredients company with exceptional businesses that have leadership positions in resilient, high-quality consumer-driven segments. I'm pleased by the resilience and execution demonstrated by our people and our businesses, and look forward to the opportunities that lie ahead. Thank you. And operator, let's move to Q&A.

Guillermo, I feel a little awkward asking it this way, given the progression you've already made on margins. But when we look ahead over the next 12 to 18 months in terms of your BDO pricing and transfer pricing market as well as your cellulosics portfolio. How should we think about the margin potential upside from both PVP polymers as well as cellulosics, just broadly speaking, over the next 18 months or so?

Thanks, Chris. I think we've got to look at it business line by business line. In cellulosics, you're seeing margin recovery in our pricing, and I think the team has done an excellent job there. But the real long-term improvement, we're not just trying to increase prices on the older products; it's really about the mix improvement, the innovation, the capacity expansions that we're bringing on. So if you look at where we are putting some of these new capacity, it's in our core plants, so we'll get both new products that hopefully will bring better margins, but also we will drive productivity with a lot of those investments. I think in the acetylenics product line, obviously, the BDO markets have changed given some of the global dynamics. As we've said in other calls, we don't sell a lot of BDO. Our core businesses are more the internal transfer to our Personal Care and Life Science businesses. There, we're doing a mix improvement. This has really proven very useful for us in terms of reliability of supply; we're maintaining that. We want to ensure that the businesses create value over market prices, and I think that will continue. What we are seeing in the merchant part of the portfolio are mostly NMP BLO, some specialty solvents. These products go mostly to semiconductor, electronic vehicles, active ingredients in agriculture and in pharmaceuticals, and to coatings. A lot of these industries are moving to the U.S. We're trying to in-source. Our expectation over the next few years is that there is still going to be some volatility in these raw materials, or more commodities. But as these industries move into the U.S., it would defeat the purpose if you bring your products here and then buy all your raw materials from across the continent. So we're one of the few suppliers here in the U.S., and we have a good position. We're very reliable. So I think you will see long-term that volatility will continue, but the magnitude will change. I believe the bottom will be higher than it was in prior months because security of supply will be very important. In other parts of the portfolio with bio-based products, you'll see the same thing in innovation. A lot of these new products that I highlighted in one of the slides, we're very excited about them. They have significant growth potential. If you look at some of our hair-styling polymers that are natural and biodegradable, they have a lot of room for growth. They are being very well received by the market.

Yes. I just wanted to zoom in on the Specialty Additives and the margin performance there, specifically. Curious if there is anything unique that occurred to drive the margins to such a high level in the quarter. I know some of it's been mixed in some tight markets, I'm just curious how much of that you think you can kind of hold onto here over the next year? Is this a structural shift? Or is something else going on?

Thanks, Josh, for the question. The business is running very well. I mean volumes have been very steady. The industry in a lot of our products, HEC being one of them, but is a significant part of our cellulosic platform, is sold out. We are out of capacity, but the industry has sold out. So they've been working very diligently and improving the mix. We're getting that productivity out of our plants. So it's really been on the fundamentals that are driving their margin improvement. We have been able to recover all the cost increases. As we move forward, we're increasing capacity, but that capacity will come in only in 2024. So through 2023, we'll be in a construction phase. I don't think there's any other capacity really coming in next year. If the market slows down, it doesn't really impact us much. We don't have that much more volume to sell, so we're going to continue to optimize the portfolio as we go. I think, as I've said in other calls, we're focused on specialties, we're focused on high-quality growth. We understand that we need to run our plants; we need to load them, but that's not what drives our business. Those are things we do to ensure long-term success, and this is linked to the prior question on our investments we're making. We are investing in high-quality growth. Our capital is going to go either to reward our shareholders or to invest in things that will reward our shareholders in the future. We have a lot of clarity. In some product lines, we are not investing in and we're not expanding. We're going to optimize; we want to bring in new technology so that we can substitute older products with higher-margin products. We know the areas that really show strong leadership, a lot of growth potential and a lot of new innovations, bringing HEC or Klucel or Benecel. We're being very selective about where we operate, and we have ample room to upgrade our portfolio. We are not going to pick up business at no margin just to fill capacity. We want to operate with discipline. As I have noted, those things use a lot of working capital; we will do what we need to do short term, but those incremental actions, if they become long-standing, then that won't be the business we want to be in.

Kevin, you mentioned that 90% of your new products are now related to natural size and sustainability. Can you share what percentage of your current sales falls into that category? Additionally, could you provide some insight into the margin premium that these sales are generating?

Yes. If you go back to the Investor Day, we had a slide that sort of breaks down our global sales. We try to show it in three buckets: one, which are natural, natural-derived and biodegradable products that meet many of the standards for sustainability. We also recognize that our products enable other customers to achieve their sustainability goals, creating value, including saving lives in the pharmaceutical area. We also capture sales that are sustainable in use and identify which ones we need to work on over the long term. It's over 75% to 80% of our portfolio that's in the sustainable or sustainable in use category, so it's a significant part of our portfolio. Regarding the lower exposure we have to petrochemicals, the two foundations that give us confidence are the resilience of our markets and the portfolio of technologies we possess with less petrochemical exposure. Much of this is because we already have a significant base of more sustainable options, including cellulosics, polysaccharide chemistries, bio-functionals, and nutraceuticals. These products are not involved with the petrochemicals we would have used in our prior adhesive business. In terms of sales growth for the quarter, the majority of the improvement has come from price increases rather than volume growth in our core businesses. If you look at our cellulosics franchise, as mentioned, capacity improvements for HEC, Klucel, and Benecel will occur in 2024. Many of the investments focus on higher-end products to grow our cellulosic portfolios and increase growth in these bio-based products. Aquaflow, which we are expanding capacity, continues to grow well.

Kevin, on the implied fiscal Q4 guidance of low end, EBITDA would be down roughly 20% quarter-over-quarter. What's driving that potential quarterly decline from Q2 levels?

Let me make some comments, and Kevin, if you want to follow up. The biggest issue, obviously, is the turnaround that's coming through, and the increased incentive compensation. However, the rest of the business is really about the mix flow through. As we have talked in other calls, the flow-through of cost and pricing isn't always aligned with how the increases happen. There's a level of variation that comes with these dynamics. That said, we feel that we will perform well in the quarter, but given the uncertainty, we don't want to get ahead of ourselves in some areas. Kevin, do you want to add some other color?

Yes. That's right. At the end of the day, it's all normal operating flow based on what's going on. One specific item is that typically, we do a Calvert City turnaround in June every year. We didn't do one last year; we got back into that cycle again this year, and the turnaround has been recapitalized. The impact of that is probably around $8 million versus the prior year. That will influence our numbers; we are also experiencing some currency headwinds. That should continue into Q4, likely to be greater than those we faced in Q3 on an average basis. So really, there's nothing specific; it's just operating statistics flowing through to financials for Q4.

I think it's premature for us to comment on 2023. The current impacts in Europe will be a determining factor in our outlook. We'll save comments for the next call, but what I can share is our strategy remains unchanged. We are looking at recession and inflation, while ensuring our energy hedges are sustainable. We remain focused on what we can control and we will not invest in non-core areas. Despite the uncertainty, we believe our innovation will be the key driver for growth.

Guillermo, it seems like you are still encountering several challenges related to logistics and ocean freight. Could you provide more details about your observations in that area? Also, do you have the necessary inventory in place to navigate the shipping and ocean freight issues you are facing?

We are seeing some improvement in trucking in the U.S., and a bit more noise in Europe. Ocean freight has had minor improvements, but it's still not significant. However, as things start slowing down, we should begin to see some advancements. Certain lines shipping into regions like Latin America are still complicated. Our on-time reliability has not improved much and remains well below historical averages. We are focused on building inventories, and some of the numbers you see now reflect our BDO turnaround. Moving forward, we'll rebuild inventory, particularly in regions where we need to maintain safety stock to enhance local reliability. Last year was challenging as orders arrived quickly, and products sold out before we could replenish inventory. I expect some progress in the coming months, likely more in 2023 than this quarter. Regarding the cost picture, our major raw material buckets are cellulose on one side, while PVPs like butane and lima make up another. We have internal transfer pricing for BDO, and the rest is quite fragmented. It's difficult to predict the costs due to rationing, yet we see some improvement in supply. Our pricing actions have positioned us well for the future. The biggest challenge is planning for next year's energy costs. We're looking at hedging strategies, especially in Europe, and will work to maintain low exposure in those areas. If large broad inflation persists, everyone will need to adjust pricing across the board. Our exposure to specific products that are not significant helps mitigate risk.

It was a solid quarter, and there was a noteworthy slide showing resilient growth drivers. If a recession does occur, how do you think the segments would perform? Could they potentially be flat or decline? Also, what would be the appropriate EBITDA level for intermediate developments?

We don't have a crystal ball, Mike. I think the key is to look at historical performance. Our core end markets, including pharma, personal care, and coatings, showed resilience during past downturns. It should not surprise us if we see similar results in the event of a recession. However, supply side issues, the energy rationing in Europe, are a significant risk. We'll need to monitor that carefully. Our position in the marketplace, our technology, and our product mix all lend us strength, even amidst uncertainty. We will stay focused on managing our resources while addressing supply chain and inflationary challenges. Our plans and the actions our teams are taking give us confidence in our business trajectory. Thank you, everyone, for your interest and your questions. We look forward to connecting with all of you in the coming days and weeks. It's a very interesting time for everyone. I want to leave you with the thought that we have a strong portfolio, both in terms of markets and the technologies we possess. Our team is clear on our direction and the actions we are taking. Just as we did during COVID, we remain focused on the things we can control, staying calm, and being prepared to manage headwinds while maximizing opportunities. We look forward to talking with all of you in the coming days, thank you for your support and attention.

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