Ashland Inc. (ASH) Q1 2023 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Ashland Inc. First 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. Please be advised that today's conference is being recorded. And I'd now like to hand the conference over to your speaker today, Mr. Seth Mrozek, Director of Investor Relations. Sir, please go ahead.

Thank you, Chris. Hello, everyone, and welcome to Ashland's first quarter fiscal year 2023 earnings conference call and webcast. My name is Seth Mrozek, Director of Ashland Investor Relations. Joining me on the call today are Guillermo Novo, Ashland’s Chair and Chief Executive Officer; and Kevin Willis, Senior Vice President and Chief Financial Officer. We released preliminary results for the quarter ended December 31, 2022, at approximately 5:00 PM Eastern Time yesterday, January 31. 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 2023. 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 an 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 of Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to those 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 performance and results in the fiscal first quarter. 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 2023. We will then open the line for your questions. Now, please turn to Slide 5, and I’d like to turn the call over to Guillermo for his opening remarks. Guillermo?

Thank you, Seth, and hello, everyone. Thank you for your interest in Ashland and for your participation today. As stated in our earnings release last night, Ashland’s results in the fiscal first quarter were consistent with the earnings update we issued last week. During these times of continued global uncertainty, we will strive to provide transparency and timely communication on company results and performance. As we planned for the December quarter, we recognized that several external dynamics could impact demand and performance: the impact of central bank actions to combat inflation, the war in Ukraine, and the COVID reopening in China. Our forecast was based on a more recessionary environment developing and did not include factors that we could not control or forecast. The drivers of our results for the fiscal first quarter are a great example of how uncertain events significantly impact market dynamics in a very short period of time. I'd like to spend a few minutes providing my perspective on the overall results. First, disciplined pricing led to price versus inflation cost tailwinds in the quarter as we had expected. Our commercial teams moved quickly last year to recover the increased costs we experienced in energy, freight, logistics, raw materials, and other input costs. They continued with this discipline in this quarter. On a constant current basis, that pricing carryover and additional new pricing resulted in double-digit percentage price improvements for all segments compared to Q1 of last year. In addition, our three consumer-focused segments, Life Science, Personal Care, and Specialty Additives, realized strong mix improvements, which supported the company's overall margins. Second, the results in the Life Science segment were particularly strong. The team saw strong global demand for our leading pharmaceutical ingredients and was able to capture additional market share at leading pharma customers. As you saw in the video at the beginning of today's call, Ashland continues to expand its leadership position in some of the world's most important pharmaceutical applications. Third, Ashland serves resilient end markets and geographies across the globe. The U.S. consumer and our U.S. customers continued to demonstrate resilience in demand in the face of global economic uncertainty. Many emerging markets also demonstrated growth. The historic long-term resilience of the end markets we serve gives us confidence in our financial outlook for this year and beyond. In contrast, we also experienced several headwinds during the quarter that yielded overall results that were below our original expectations. First, global macro factors certainly impacted demand in China and Europe during the quarter. The changes in government COVID policies and the resulting acceleration of infection rates clearly impacted demand as well as business and living activities for everyone in China. The speed and impact of these developments were much greater than anyone expected. As a result, sales in China were significantly below our expectations. Although we expected some level of economic downturn in Europe, driven by both recessionary trends and general uncertainty over the impact of the Russia-Ukraine war, demand in Europe was below our expectations. Second, inventory management and destocking primarily by distributors in Europe and China were real and it happened quickly. While sales to distributors only represent about 20% of Ashland's overall sales, distributor inventory destocking actions were a significant driver and roughly 50% of our revenue gap versus the prior year. The vast majority of this was in China and Europe. We also saw certain customers take similar inventory management actions. Though these were isolated, we believe very company-specific with no specific market patterns. The weaker demand in China and Europe, as well as a destocking, impacted mostly Specialty Additives and our Personal Care business. It's important to note that while Ashland's overall margins remained in line with the prior year, margins in our Specialty Additives segment were impacted by plant turnarounds, both planned and unplanned during the quarter. We are thankful that our team in China is healthy and are grateful for the resilience they demonstrated following the outbreak of COVID in December. While the U.S. freeze did impact operations at several plants during December and January, the financial impact will mostly come through in the second quarter. Our teams are working on actions to offset the impact of the unplanned shutdowns and the freeze, including plans to rationalize some of our planned maintenance work companywide in the third and fourth quarters. I will discuss a bit more when we review our outlook for fiscal 2023 later in the call. However, all indications lead us to believe that the China reopening will have a positive impact on demand. But the pace and breadth of the reopening should be an important factor in our financial outlook for the remainder of the year. Finally, foreign exchange rates again had a negative impact on Ashland's overall results. The impact of the strong dollar continues to be realized on our business overseas, though current exchange rates are improving when compared to our original forecast at the beginning of the year. Please turn to Slide 6. Before I ask Kevin to discuss our quarterly results in more detail, I would like to sum up the key takeaways. Despite global uncertainty and macroeconomic volatility, Ashland delivered consistent results in the quarter. Sales growth, EBITDA growth, and EPS growth were delivered along with nearly flat EBITDA margins compared to the prior year. While there are many puts and takes, delivering consistent results is an important component of our long-term strategy. Please turn to Slide 7. As you can see in the chart on the left, year-over-year sales growth in Life Science was very strong, while the top line for Personal Care and Specialty Additives was below the prior year due to the factors referenced earlier. Overall margins for Ashland remain healthy and generally in line with our expectations. While there are many global uncertainties on the horizon, the Ashland team is performing well and executing on the actions that are within our control. I look forward to discussing the outlook for fiscal year '23 and reviewing broader progress by the company later in the call. In the meantime, I'll turn over the call to Kevin to review Q1 results in more detail. Kevin?

Thank you, Guillermo, and good morning, everyone. Please turn to Slide 9. Total Ashland sales in the quarter were $525 million, up 3% versus the prior year, driven by continued inflation recovery and mix improvements. Sales increased by 7% on a constant currency basis. Gross margin remained consistent at 31.4% as cost recovery and mix improvement actions by the commercial teams offset increased input costs and the turnaround expense at a number of our global facilities, which Guillermo previously discussed. When excluding key items, SG&A, R&D, and intangible amortization costs of $116 million were essentially flat compared to the prior year. In total, Ashland's adjusted EBITDA for the quarter was $108 million, up 2% from the prior year adjusted EBITDA of $106 million. It's important to note that unfavorable foreign currency negatively impacted adjusted EBITDA by $14 million, while the planned facility turnarounds resulted in $12 million of incremental cost during the quarter. Ashland's adjusted EBITDA margin for the quarter was 20.6% and consistent with the prior year. Adjusted EPS, excluding acquisition amortization for the quarter, was $0.97 per share, up 10% from the prior year quarter. Ongoing free cash flow was a negative $21 million for the quarter, a reduction from the prior year, primarily reflecting an increase in working capital driven by increased inventory balances globally. Now let's review the results of each of our four operating segments. Please turn to Slide 10. As Guillermo referenced at the beginning of today's call, Life Sciences delivered very strong results in the quarter, driven by our global pharmaceutical ingredients business. Pharma demand remained strong. Product mix was favorable. The team executed on disciplined cost recovery, all contributing to margin expansion. Unfavorable currency impact was a partial offset to the strong performance in Life Sciences. In total, Life Sciences sales increased by 22% to $207 million, while adjusted EBITDA increased by 44% to $52 million. Adjusted EBITDA margin increased meaningfully to more than 25%. Please turn to Slide 11. Personal Care sales were down by double-digit percentage in China due to COVID policies. Inventory destocking by distributors, particularly in Europe, also negatively impacted sales. As with Life Sciences, the team continued to realize disciplined cost recovery through pricing and favorable product mix. For the quarter, Personal Care sales declined by 6% to $138 million, while adjusted EBITDA declined 11% to $32 million. Adjusted EBITDA margin also declined to roughly 23%. Unfavorable currency impact was also a headwind to Personal Care results in the quarter. Please turn to Slide 12. Specialty Additives also felt the impact of reduced demand primarily related to inventory destocking among distributors and certain customers in China and Europe. Sales outside of these two important regions were up by mid-single digits versus the prior year quarter. The reduced demand more than offset improved cost recovery and mix for the segment, particularly within the architectural coatings end market. For the quarter, Specialty Additive sales declined by 8% to $143 million, while adjusted EBITDA declined by 39% to $23 million. The cost impact from both planned and unplanned facility shutdowns was about $7 million and represented nearly half of the year-over-year decline in EBITDA. Adjusted EBITDA margin also declined to 16% for the quarter. Please turn to Slide 13. Intermediates reported sales of $54 million, up 2% compared to the prior year, driven by higher merchant market pricing and improved product mix management of higher value derivatives. Intermediates reported adjusted EBITDA of $23 million, an increase of 21% compared to prior year, and adjusted EBITDA margin improved to 42.6%. Please turn to Slide 14. As we discussed at our last Investor Day, capital allocation discipline continues to be an important component of Ashland's value creation strategy. The actions we have taken over the past year have improved Ashland's financial position and provide for increased flexibility. Last night, we announced plans to execute a new $100 million share repurchase program under Rule 10b5-1. This program will be executed under the existing $500 million evergreen share repurchase authorization that was approved by Ashland’s Board of Directors last year. We expect to begin executing trades under the new program in early February. With the strength of our balance sheet, our growth outlook for the year, and the fact that we continue to believe that Ashland shares remain significantly undervalued, now is the right time to begin the new open market purchase program. As of the quarter closed on December 31, we had cash on hand of more than $530 million with total available liquidity of roughly $1.2 billion. Our net debt stands at $784 million, which is about 1.3 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. 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 flexibility to pursue our targeted growth strategy. With that, I'll turn the call back over to Guillermo to discuss our outlook for fiscal year '23. Guillermo?

Thank you, Kevin. Please turn to Slide 16. I'd like to take a few minutes to provide some perspective on the current fiscal second quarter and the second half of our fiscal year outlook. For the second quarter, first, regarding demand. Our global pharma business continues to demonstrate strong resilience in our order book for personal care ingredients and architectural coatings additives is rebounding so far this quarter. Although most of the regions are experiencing demand strengthening, demand in China remained weak in January. We expect to see the demand pickup following the Chinese New Year. Additionally, during January, we began to see the regional destocking dynamic stabilizing, notably in Europe. While volume demand levels have not returned to prior year levels, the sequential improvement has been meaningful. As we exit January, our sales and open orders were slightly above prior year with price up and volume down. Relative to prior months, both volume and revenue were significantly up even with weak demand in China. Second, as previously communicated, the winter storm that impacted much of the U.S. in December had a significant impact in our facility in Calvert City, Kentucky as well as several other facilities in the U.S. Fortunately, Calvert City and other locations have been back online and fully operational for most of January. While the storm did not have meaningful impact on results in Q1, we expect to recognize approximately $15 million of incremental cost in the March quarter. These costs will mostly impact results in Life Science and Personal Care segments of the business. However, we expect the timing of the offset actions will be mostly impacting our third and fourth quarters. And finally, for the next few months, there continues to be an elevated level of uncertainty globally. What happens over the next two months from China's reopening to geopolitical and economic developments in Europe, to central bank actions across the globe, will have important implications for the global economy and Ashland results. All these factors could further influence our modeling and outlook for the remainder of fiscal year '23. As we move into March, we expect to have increased visibility into many of these factors and the actions that our customers are taking heading into the second half of the year. For the second half of 2023, as we look at the back half of our fiscal year, some of the key issues that we look at are the expected magnitude and impact of the recessionary momentum. Will there be more recent impacts as we move from a high demand and tight supply to a more recessionary environment? And the uncertainty around the impact of China's COVID reopening and potential changes in the Russia-Ukraine war dynamics. With regards to the recessionary environment, in the absence of new data, we believe that the markets our business serves will continue to perform in line with their historic resilience. Our question is more about the reset developments as we move from the 2022 tight supply-demand dynamics into a more recessionary 2023 environment. This reset driven by China's COVID reopening and destocking clearly impacted demand in the first quarter but should be transitory. Note that several of our key technologies, several of our key technologies capacity for the industry and Ashland remain tight, with operating rates above 90%. While I’m not ready to say that destocking is over, trends in January show significant improvement. Unless there are new developments, we expect them to pay off by the end of the second quarter. The impact of China's reopening or changes in the Russia-Ukraine war dynamic is more difficult to forecast given the lack of clarity on how they will develop. For China's COVID reopening, we do expect improved demand developments in China. What broader impacts could develop will depend on the pace and the magnitude of the reopening. In this uncertain environment, we will continue to focus on what we can control while planning and building resilience to react quickly to developments, similar to what we did in 2022. Notwithstanding our current outlook, as we did during the uncertain times of COVID, we will continue to look at a more conservative outlook for our internal assumptions that will drive our actions and plans. Our priorities will be on, while we do not ultimately control demand, we will remain nimble to react to positive or negative developments. We will continue to focus on innovation and share gain activities to support growth. We will maintain focus on disciplined pricing, mix, and cost management to sustain margins. We demonstrated this ability in a very challenging inflationary environment in fiscal '22 and we will maintain this discipline in fiscal '23 and beyond. We will drive actions to offset incremental costs from unplanned shutdowns and the freeze. We will monitor market developments and take appropriate actions to maintain inventories in line with developing supply-demand dynamics. Please turn to Slide 17. Consistent with our earnings update from last week, we are maintaining our financial guidance range for sales and adjusted EBITDA margin for the fiscal year '23. As indicated, our current models put our EBITDA outlook below the midpoint of our range. We expect to have better visibility on the impact of China's reopening, post-winter Europe, and central bank actions to combat inflation at the end of the second quarter. Critical deliverables in our models are clear to sustain price margin management discipline. To offset the unplanned shutdowns and freeze impact in Q3 and Q4 and to continue to invest in our innovation pipeline and capacity to drive growth. Critical assumptions in our model are: we assume that the reset items like destocking are transitory. We assume that demand in our core markets performs in line with historic recessionary resilience. We assume that demand in China picks up and normalizes with the ongoing reopening. As we did in '22, we continue to build resilience to react quickly to uncertain and unplanned external developments. Our outlook for the year accounts for the known macro operating environment and Ashland's unique position within that landscape. Speculation on the potential impact of highly uncertain macro factors that are out of our control or ability to forecast are not factored into our models. Please turn to Slide 19. Overall, the last decade, Ashland's journey of transformation has sharpened our focus as an additives and specialty ingredients company. As we systematically identify and tackle the thorniest problems, we concentrate on areas rich in opportunities to innovate and drive value for our customers, where innovation and expertise in one business unit can be leveraged in others. In closing, I want to thank the Ashland team again for their leadership and proactive ownership of their business in an uncertain environment. We have solidified our portfolio 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 business and look forward to the opportunities that lie ahead. Thank you, and operator, let's open it to Q&A.

Thank you. Our first question will come from Christopher Parkinson from Mizuho Securities. Your line is open.

Great. Thank you so much. Guillermo, can you just give us a little bit more color on your remarks in January and how you see the quarter shipping up on the destock, focusing on Europe and China? Perhaps just as important, the U.S. seems to be holding in on a relative basis; can you just also hit on your expectations there and where you would assess inventory levels with your distribution as well as direct customers? Thank you.

Well, let me start with the general markets, and then I’ll comment on China and Europe and some of the headwinds we saw and how they're changing. Overall, if you look at it, we did a lot of analysis in the first quarter and looking into January. For most of the world, the U.S. and a lot of the demand actually remained pretty solid, especially if you look at our core customers. It was softer than we had expected overall, but relative to prior years, they were able to hold up. By market segments, it was pretty general. A lot of the destocking actions at our customers were very specific to certain customers and specific markets. One customer brought down inventories but others did not. I would say, even if you look at coatings and some of the Specialty Additives business that we get a lot of questions about. In the U.S. we saw softness in the DIY market, but in other areas, we saw strength in some of our major customers. So again, we sell additives; we're not the main high-volume ingredients, so some of the dynamics that happened to us are a little different than other players. For China, obviously, the reopening has had a big impact. I don't think we're any different than anybody else. We saw it with our plants; at one point in time, 95% of our team in a plant reported infected, so we shut down for an extended period of time. I think that happened to our customers, to a lot of our suppliers, and even distributors. So I think what's happening in China is more about the COVID. There was some destocking, but I assume that even across the chain, everybody had the same problem. We did in terms of shutting down operations, and we continue to see that in January. We saw significant improvement in demand in our orders and sales in January, but China was down significantly. So we're hopeful that as we get now past the Chinese New Year, we'll see that pickup. The same thing in Europe: we're seeing it stabilize, especially the distributor destocking. I think most of that should be behind us. The demand at the customer level was customer by customer. If you look at the core market resilience, this is why we're talking about the resilience of the market versus these reset items? Obviously, the reset items were the bigger driver and clouded a lot of the underlying dynamics in many of the markets. So our take is that things have slowed down, but the dynamics are solid in many of the markets. It's just an issue of where each player was in terms of how they were managing last year with tight supply, demand, and their inventory positions, and that should be transitory as we said.

Understood. I have a long-term question. Given the recent disruptions from storms, outages, and maintenance, how has your pricing strategy been affected? It appears you are experiencing growth in key areas, benefiting from changes in the market mix. It seems that the inflationary pressures faced over the past fiscal year are starting to ease and even improve in some cases. Could you provide a brief update on your current assessment of margin potential across your entire portfolio and your level of confidence in that? Thank you.

I believe the team has been very focused on this area, which is a critical deliverable for our models regarding outlook. We have limited capacity, so volume has never been a major factor for us. While we are concerned about potential decreases in volume, it has never significantly driven our upside due to our current capacity constraints. Most of our capacity will come online in 2024, which we need. Even with a slowdown, production rates in many key technologies remain high, so this capacity is essential for growth. Managing pricing and margins is crucial, and I think we are in a good position because we've secured what we needed from last year and taken decisive actions in the first quarter. The main concern now is how prices will evolve, especially with the reopening of China and its impact on global demand, which adds some uncertainty. We anticipate that the reopening will boost demand in China, but the pace and magnitude could have broader implications that we will monitor. On the pricing and margin front, the freeze did not negatively impact our revenue or sales. While we had inventory, the main effect was from the financial implications of maintenance shutdowns that impacted margins, but the underlying margins, even in Specialty Additives, are expected to recover and were fine for the quarter aside from the additional costs incurred. In areas we can control, we feel positive. Our current challenge is to align our performance with our peers since we all sell to the same markets. If we consider product X, for instance, we may offer different ingredients, but we should perform similarly to others focused on these resilient market segments. We are confident we are doing so, but like last year, we must be prepared to adapt to changing dynamics. Our previous year's results were strong, but we had to adjust frequently to meet evolving expectations. Over the past three years, we've learned to be nimble as assumptions change rapidly in this uncertain environment. I am confident that the team has performed well and will continue to do so as we move forward.

Thank you, as always.

Thank you.

Thank you. One moment for our next question. Our next question will come from Josh Spector of UBS. Your line is open.

Yeah. Thanks for taking my question. Just on the mix improvement, it's a big part of your earnings growth over the last year. You talked about markets remaining tight. They were tight last year. You had limited capacity. Just wondering, given the double-digit volume decline, I think you saw in some of your segments this quarter, if we see more of a prolonged destocking or a longer period of weaker demand, does that change that mix dynamic? Do you give some of that back or how do you react to that?

I believe this situation offers us some flexibility. We may need to revisit certain markets if our volumes decrease, and this is a flexibility we have. However, for most of the essential ingredients, particularly in the industry, the outlook remains quite constrained. Producers in Europe continue to face significant challenges, and we are well-positioned in that market. ATC still remains tight even with reduced demand. This will differ by segment and product line, but we continue to see strength in our critical areas. The key issue will be how we respond if volumes decline and we need to adjust inventories. We will not accumulate unnecessary inventory just for the sake of absorption and will take steps to reduce that. While our outlook is based on the resilient market conditions that have historically existed, our internal planning and cost management actions are adopting a more cautious approach. We need to be proactive as we were in 2022 and prior years. Our strategy is to plan carefully, remain conservative, and avoid changing our outlook based on speculative information, instead adapting to developments as necessary.

Thanks, Guillermo. And if I could just ask specifically on Personal Care. I mean, it was interesting double-digit pricing. So that stepped up from where you were. I think a lot of other specialty markets, we've seen pricing more level off. I guess, is there any risk that you're losing share going after that additional pricing?

No. I think if you look at the numbers, and we're already seeing this in January, our initial view was that the quarter was down and assumed it was due to the market. We tried to align this explanation with market trends. The markets are down, so it must reflect that. However, our analysis revealed that the majority of the issue was with distributors in China and Europe. About 50% of the gap originated from China, and the other 50% from the distributors, with some overlap. These reset items significantly impacted us compared to the previous year. While we have noticed some softening in demand, January showed a rebound in orders for Personal Care. If we evaluate demand within our control limits, we see that it has returned to the midpoint for Personal Care in January. In contrast, Specialty Additives has improved, but demand has only bounced back to the lower end of the control limits. We believe that pharma remains strong, Personal Care will normalize moving forward, and as we move past these reset items, performance should align more closely with historical trends. Specialty Additives will continue to improve but might be softer than we initially anticipated at the start of the year.

Okay. Thank you.

Okay.

Thank you. Again one moment please for our next question. Our next question will come from David Begleiter of Deutsche Bank. Your line is open.

Thank you. Good morning. Hi, Guillermo. Just on price cost tailwinds, what were they in Q1? What do you expect for Q2 and what's embedded in the guidance for the full year?

Our assumption is that we will continue to address any inflationary pressures we encounter. We managed it last year, particularly in the first quarter. This time, it's more targeted to specific product lines. Cost increases were significant for us in the first quarter, and we took the necessary actions. As we progress, our approach will be much more precise. If required, we might see a slowdown in inflationary pressures, but we will need to respond proactively. Most of the inflation has been related to energy, especially in Europe, and certain raw materials where supply and demand imbalances were pronounced, primarily in Europe. We're in a strong position, as we’re not trying to catch up—we are keeping pace. Last year, we implemented measures to protect our margins without relying on inflationary pricing; we simply did what was necessary to maintain stability, and the improvements were largely due to a better mix. Moving forward, the improvement in our mix is not only influenced by supply and demand but is an integral part of our long-term strategy and investment focus. This mix improvement is steering our portfolio towards areas where we will be making significant capital investments in the next year.

Thank you for that. And just on your outlook slide, you talked about the potential need for more inventory control and absorbing actions. Could you give a little more color on what you mean by that?

I believe that while we expect demand to remain steady this quarter, we've previously indicated that we wouldn't engage in significant destocking due to the uncertainty in the market. We want to avoid a repeat of the situation we faced in 2021. The main concern arises if demand decreases. One aspect not accounted for in our forecast is the potential need to cut production to match lower demand, which would be a challenge not reflected in our projections. We aim to be transparent in light of this uncertainty and allow our investors to form their own perspectives. If the situation continues to deteriorate, absorption could become an issue for us, although this isn't reflected in our current model. We consistently monitor this scenario but do not plan to rebuild or increase absorption through inventory buildup. Maintaining discipline in working capital is crucial for us.

Thank you.

Thank you. One moment please for our next question. Our next question will come from the line of John McNulty of BMO. Your line is open.

Yeah. Thanks for taking my question. Guillermo, I know last year, a lot of the big issues you had were around freight and logistics, and it looks like those channels or those issues have largely been resolved. Can you speak to what kind of cost relief you're seeing there? I know we've seen the availability of things like freight improve, but on the cost side, I guess, I'd be curious how much of a tailwind that actually might be for you at this point.

We have definitely seen improvement in the last quarter of last year, and that trend has continued into this quarter. In this first quarter, we are still observing positive developments. This has helped stabilize our inventory, allowing us to rebuild our inventory levels significantly. However, it's important to note that we are not back to normal yet. On-time shipments are still recovering, and the pace of recovery can vary by product line, but the improvements are notable. We are also seeing some progress on the cost front. Remember that our shipments primarily come from Europe and the U.S., so the high export costs from China have not been our main issue. The greater challenge has been on-time reliability within our supply chain. While there is improvement, it may not be as significant compared to other companies, considering the nature of our distribution channels.

John, those costs continued to ramp through a lot of '22 just based on energy prices, etc. So for our Q1, freight logistics was still higher than the prior year, probably around $10 million, give or take. So that continued to be a negative from a cost perspective. But again, obviously, that's slowed down, and as the year progresses, those comps should get better.

Got it. Okay. Fair enough.

Sure. In terms of the value, we are committed to the $100 million. I mean strictly speaking, these plans can be turned on and off, but our intention is to spend the $100 million. In terms of how long it will take, it will be a function of price and the volume of Ashland shares that are traded. The way these programs work is we will have an agreed price and volume grid with the bank that's executing this buyback for us, and they'll be in the market each day, and the amount of shares that they buy will be dependent on how many shares are trading and at what price. I would expect us to be able to complete this by the end of the quarter. That would be my expectation, but it will remain to be seen. If not by the end of the quarter, certainly by early in the June quarter.

Got it. Okay. Thanks very much for the color. That's actually a bit faster than we were thinking, so good to hear. Thanks very much.

Thank you. And again, one moment for our next question. Our next question will come from Mike Harrison of Seaport Research Partners. Your line is open.

Hi. Good morning. I was wondering if you can give a little bit more color on the strong demand that you're seeing in the pharma business. Is this increasing penetration or share of wallet with existing customers, new customers, or new products? What are you seeing in terms of underlying market growth? Really just trying to get a sense of whether this growth that you're seeing there or strength is sustainable through the rest of fiscal '23?

Yeah. The underlying market has remained resilient. So it's not that the overall market is growing at the same pace. We clearly have gained share. This segment, as we said last year, we did not expect a lot of reset there. Significant concerns remain about the availability of product; both the supply chain was a headache last year, but the situation in Europe, specifically in Germany, has had a lot of impact on the availability of product and reliability of supply. This has been the big driver, and we saw that as we move forward. Now looking out, we expect demand to continue to remain strong. We probably will not see significant resetting of stocks or things of that nature; we think we will continue to do well as we look out. Will things normalize in Europe and supply? I'm sure toward the back end of the year, there could be some improvement, which will normalize some of our growth rates toward the back end of the year. The question is going to be what's going to happen in Europe? I don't think there's a lot of certainty, so we've made a commitment to our customers and them to us to make sure that we're guaranteeing as best we can the supply reliability.

All right. And then a question on the Calvert City disruption that you had. Is part of the $15 million impact related to winterization or backup power or other measures to help make sure that facility is more resilient in future cold weather? And then do you expect any insurance recoveries associated with that outage?

Most of it relates to maintenance efforts to repair and bring the facility back up to speed, along with the absorption impact. This plant is not new; it has experienced similar weather before. The recent weather was not the worst we've seen, but we faced a very unique issue with one of the units that had subsequent effects on others. The maintenance required and the downtime were much greater than we anticipated. The issue was particularly tied to a unit in our compressed air system, which in freezing weather typically raises concerns about liquids. However, air usually isn't the main focus, and we experienced a failure in a specific area that affected the boilers and other components downstream. This was the primary reason for the challenges we faced. Historically, the plant has performed well in such weather, making this situation quite unusual. Kevin, if you would like to provide additional details on the numbers.

Yeah. The biggest chunk of it is lost absorption. Repair costs are going to be a smaller piece of the equation. From an insurance perspective, we actually maintain pretty high deductibles to keep our rates as low as possible. We have historically been very, very comfortable with that simply because we just haven't had that many issues over the course of time. And so we've banked a lot of saved premium as a result of that, but it's probably three to five percent of the total impact that is going to be repair costs, and the rest is going to be lost absorption.

And this is where, for the third and fourth quarters, we had plant shutdowns, obviously. Since we had shutdowns, we try to do as much other maintenance as possible too. The team is working on what work was completed, what can we avoid in terms of future shutdowns? The timing of the offsets will be not in the same quarter; it's going to be more around when we had some of those other activities planned.

And sorry, Kevin, just to clarify...

The Calvert plant typically undergoes a turnaround that lasts several weeks, and part of our current efforts, as Guillermo mentioned, is to figure out what we can postpone later in the year due to the repairs we are making at the Calvert City plant.

Yeah, sorry. I just wanted to clarify on the insurance recovery. Are you saying that the deductible is so high that you're not going to get any recovery or it will just be very modest compared to the $15 million?

Yeah. There's no expectation of recovery. There are multiple categories of deductible involved in an event like this. So you've got the property piece, and you've got the business interruption, and you've got to hit those limits on both. It's not an either-or kind of thing. So we don't expect any insurance recovery from this event.

Okay. Understood. All right. Thanks very much, gentlemen.

Thank you.

Thank you. One moment for our next question. Our next question will come from John Roberts of Credit Suisse. Your line is open.

Thank you. Well, most of the business saw destocking, do you think pharma ingredients saw any restocking activity? I know you had some logistic issues last year, and do you think there was any timing issues that helped pharma? Because sometimes, you know, shipment falls one quarter or the other, and these are large high-value shipments that occur.

If we look at just January, I mean, we continue to see strong demand. I think it's more that share gain was the bigger impact. I don't think there was overstocking; it was more ensuring our customers ensuring that they have the stock in the right place. I think between COVID and the European situation, there is a lot of uncertainty around supply in some of these areas, and for this type of industry, risk management has been a top priority. I think in the last call, I mentioned that when I was in Europe in November at one of the big events for the pharma industry, it was very clear that most customers were very focused on for 2023 risk management in terms of supply, given all the uncertainty that existed then, and I think still remains now with some of the developments. But we're monitoring that closely, and we haven't seen any change in January.

On Slide 5, under the resilient U.S. demand, you listed architectural paint additives. I believe most of the paint companies reporting so far have had weak architectural volumes. So how do we reconcile that?

Again, it’s several things. We did see weakness in the DIY space. I think the contractor space remained more resilient, and we don't necessarily follow 100% dynamics with additives. When you see a lot of destocking, we're not the main ingredients to drive inventory levels and things of that nature. So there's just unique situations. We’re working with a lot of our customers. Supply remains tight around the world even with the softening. So we're working to make sure this is not just about a quarter; it's for the whole year of how we work to ensure they have the right products. The issue without it is, if you don't have them, it doesn't matter what you have with the other raw materials; you can't produce. So they are very focused to make sure that they don't have the same problems they had last year.

Thank you.

Thank you. And one moment for our next question. Our next question will come from Jeff Zekauskas of JPMorgan. Your line is open.

Thank you very much. In your press release, you mentioned that currency had a negative impact on your EBITDA of $14 million, and I believe the effect on sales was approximately $24 million to $25 million. Why wouldn't the impact on EBITDA align more closely with the sales impact, resulting in just $4 million or $5 million? And could you provide insights into the trends for your margins in the Intermediates and Solvents business? Is that sector becoming weaker, stronger, or remaining stable?

Sure. Let me discuss the intermediates first, and then Kevin can talk about the currency. The Intermediates segment has remained stable. Most of our Intermediate business consists of downstream products. We have a captive use for NMP, BLO, and BDO, with around 20% to 25% of our merchant business being BDO. In BDO specifically, the market is currently oversupplied and prices have been decreasing. Our Pharma business remains robust, and in Personal Care, our core business with customers instead of distributors continues to perform well. While our internal captive volumes have been solid, transfer pricing has not performed well this quarter, and we anticipate a decline due to the longer market conditions. This will negatively impact Intermediates but should benefit our downstream businesses throughout the year. We don't expect the BDO market dynamics to change significantly in the near future; a recovery will likely depend on market improvements later in the year, especially for sectors like fibers and polyurethane. These markets are important, but they aren't the largest portion of our business, though we will see some effects on margins in the next quarter. As for NMP and BLO, they are influenced by different market factors, and we are not pricing them as aggressively as we have in the past. We are focusing more on our portfolio in the U.S. and Europe and less in Asia. Demand is increasing, and there is not enough product, so we are collaborating with our customers and investors to ensure we supply what they need as they increase production. The pricing and supply-demand dynamics are quite different now.

Understood. Thanks.

Thank you. And one moment for our next question. Our next question will come from Michael Sison of Wells Fargo. Your line is open.

Hi. Good morning. Just one question. You talked about adding a lot of capacity this year. How much growth does that provide you over the next couple of years in either sales growth or EBITDA? And depending on how quickly that fills up, when will you need to add more?

So we're adding capacity in our core segments. HEC, which is very tight globally, not just for us but for the industry, will come on. We’re expanding in hope well, and that will be a significant capacity increase. Of course, we probably won't need new capacity there for several years. We're expanding capacity in our Benecel lines, targeting our mix toward pharma and nutrition, a lot of the plant-based protein type applications, as well as Klucel driven by pharma and Aquaflow on the coating side. We need the material and the capacity. The next tranche will vary by each of the product lines, but this will cover us for several years. Capacity addition is an important aspect, and as our mix changes and focus changes, we’re going to focus on strategic areas that are higher growth and higher value.

So if demand is there, you'd be able to grow your mid-single-digit type of growth for several years.

Last year and this year, volume is not driving growth. We don't have any more products to sell, and any setback could leave us short again. Despite the softness, capacity utilizations in the industry remain relatively high. The next two months are crucial, particularly the reopening of China over the next month to a month and a half.

Okay. Thank you.

Thank you. One moment for our next question. Our next question will come from Laurence Alexander of Jefferies. Your line is open.

Good morning. To elaborate on the reset concept, can you confirm if the volume across most business lines fell more than 10% in the quarter, excluding Personal Care and Oral Care? Considering the inventory adjustments observed in Europe, what do you predict based on your historical analysis for this portfolio in the event of a U.S. recession? Additionally, what do you consider to be a reasonable range of variability from quarter to quarter given the fluctuations in inventory levels?

I think to address your points in the order mentioned, we still see demand maintaining its strength. When we examine the underlying historical demand, we acknowledge that we are not exempt from potential effects. At the onset of a recession, there could be some slowdown; however, in general, we operate in Personal Care, which tends to be more resilient compared to home care markets. You might observe market declines in the low single digits, but they could also remain steady in the mid-single digits, which aligns with our historical data. Currently, we are monitoring our performance both in absolute terms and relative to the market. Our goal is to maintain a performance level of 200 to 300 basis points above the market, targeting the mid-single digit growth area. This range may vary somewhat. Many companies are attempting to benchmark against our additives ingredients sector, which has proven to be quite resilient. Looking ahead, we are confident in our strong portfolio. I think we can end there, operator. Thank you. Thanks for the time and interaction.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.