Hello, and welcome to Ashland's Second Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. I would now like to turn the conference over to William Whitaker. Sir, you may begin.

Hello, everyone, and welcome to Ashland's Second Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. My name is William Whitaker, Ashland Investor Relations. Joining me on the call today are Guillermo Novo, Ashland's Chair and CEO; Kevin Willis, Ashland's CFO; and our business unit leaders, Alessandra Faccin, Jim Minicucci and Dago Caceres. During today's call, we will reference slides being webcast on our website, ashland.com, under the Investor Relations section. We encourage you to follow along. Please turn to Slide 2. We'll be discussing forward-looking statements on several matters, including our fiscal 2025 outlook, which involve risks and uncertainties as detailed on Slide 2 and in our Form 10-K. These forward-looking statements involve 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. We'll also discuss certain adjusted financial metrics, both actual and projected, which are non-GAAP measures. We will refer to these measures as adjusted and present them to supplement your understanding and assessment of our ongoing business. GAAP reconciliations are available on our website and in the appendix of these slides. I'll now hand the call over to Guillermo for his opening remarks.

Thank you, William, and good morning to everyone. Thank you for joining us today. I'll be providing an update that covers four key areas, giving you a clear picture of our recent performance and strategic direction. First, I'll review the highlights of our second quarter performance. Later, I'll provide more details on our strategic priorities. We will also discuss our proactive approach to the evolving tariff landscape. And finally, I'll take a detailed look at our updated fiscal year '25 guidance. Please turn to Slide 5. Let's begin with a recap of our second quarter performance. We saw a mixed demand environment that trended slower than expected. Q2 sales were $479 million, a 17% year-on-year decrease, including a peak $67 million impact from portfolio optimization. Excluding this, the 5% revenue decline was mainly driven by lower carryover volumes and pricing. Pricing generally aligned with our planned assumptions, excluding intermediates. Adjusted EBITDA was $108 million, down 14% year-over-year or 4% organically. This organic decline was partially offset by the cost savings initiatives and a well-managed production recovery after our Q1 maintenance pull forward. Early cost benefits are already improving margins as segment details show and are laying the groundwork for future profitable growth. Regarding capital allocation, we continue our balanced approach, repurchasing 1.5 million shares as we believe our current share price undervalues our long-term growth potential. Please turn to Slide 6. Now I'll summarize the performance of the individual segments. Life Science showed strong volume momentum and demand recovery due to effective execution and stabilization of customer inventories, reinforcing our renewed Pharma growth outlook. Personal Care core additives were resilient while navigating softer European demand and specific customer challenges. Specialty additives experienced anticipated volume declines in China, and competitive intensity remained high in export markets such as the Middle East, Africa and India. However, strong execution in other markets partially compensated for these headwinds. Intermediates margins were below expectation due to persistent pricing pressures and reduced production amid the challenging demand environment. Importantly, our portfolio optimization is now complete, marked by the sale of our Avoca business and the full identification of our $30 million cost reduction plan in the second quarter. We're successfully delivering on cost savings, exceeding our full-year target with early benefits evident on strong Life Science and Personal Care EBITDA margins despite headwinds. This is the first time we've had both business units above 30% margins at the same time. Our key focus now is on accelerating the $60 million manufacturing optimization given the market uncertainties with increased financial impact through the second half of fiscal year '25 and into fiscal year '26. In summary, while we're effectively managing the second quarter headwinds, increasing economic uncertainty and anticipated softer consumer demand are prompting an adjustment to our fiscal year '25 outlook, which we will discuss later. In response to these evolving conditions, the completion of our portfolio optimization and our cost savings and productivity initiatives are more critical than ever. Our strategic priorities, as outlined at our Strategy Day, continue to guide us. We believe our ability to adapt and execute with discipline and prudence will be key to navigating the near term and creating long-term value. Now I'd like to turn the call to Kevin to provide a more detailed review of our second quarter financial performance.

Thank you, Guillermo, and good morning, everyone. Please turn to Slide 8. Q2 sales were $479 million, down 17%, including a $67 million impact from portfolio optimization. Excluding this, sales declined 5% year-over-year. Our year-over-year organic sales volume declined by 2% as gains in Intermediates and stable Life Sciences volumes were outweighed by decreases in Personal Care and Specialty Additives. Overall, our pricing decreased by 2% compared to last year. This was primarily driven by lower carryover pricing actions in Life Sciences and Specialty Additives, along with price declines in Intermediates. Foreign currency also negatively impacted sales by 1%. Q2 adjusted EBITDA was $108 million, down 14% year-over-year, mainly due to a $13 million impact from Portfolio Optimization and lower organic sales, partially offset by decreased SARD and production costs. Raw materials were generally stable year-over-year. Adjusted EBITDA margin increased 60 basis points to 22.5% in the quarter. Life Sciences, Personal Care and Specialty Additives all improved year-over-year adjusted EBITDA margin by greater than 200 basis points. Excluding portfolio optimization, adjusted EBITDA was down 4% due to the factors mentioned earlier. Adjusted EPS, excluding acquisition amortization, was $0.99 per share, down 22% from the prior year. Reflecting typical Q2 earnings seasonality, ongoing free cash flow was negative $6 million. To conclude my remarks, I want to underscore a point we've discussed previously. With a strong financial foundation of over $700 million in liquidity and a manageable 2.8x net leverage, Ashland is well positioned to navigate the current environment and strategically invest in our key priorities. Now let's hear directly from our general managers for a detailed review of each operating segment's results. Alessandra, let's start with Life Sciences.

Thank you, Kevin. Good morning, everyone. Please turn to Slide 9 for Life Sciences. Overall, Life Sciences sales declined 23% year-over-year to $172 million. The decline was primarily driven by our portfolio optimization initiatives, including the divestiture of our Nutraceuticals business line and exit from low-margin nutrition products, which reduced sales by approximately $42 million or 19%. These actions improve our long-term profitability and focus but impact year-over-year comparisons in fiscal year 2025. Overall, organic sales declined 4% year-over-year, mainly due to Pharma carry-over pricing from fiscal year '24, generally as expected. Positively, organic sales volume met expectations and was flat year-over-year, supported by improving sequential Pharma demand. The demand improvement was across most regions and technologies as destocking from the previous quarter stabilized and our share gain initiatives gained traction. In line with our strategic growth initiatives, we have inaugurated our new tablet coatings plant in Brazil in early April. This facility enhances our technical support capabilities for customers from formulation to industrial scale, driving innovation and organic growth in this key region. I look forward to sharing our progress as we scale these operations. Our Nutrition business saw positive inflection this quarter, driven by share gains mainly in Latin America with strong commercial execution. Turning to profitability. Overall, adjusted EBITDA decreased by 15% year-over-year to $56 million. Excluding an $8 million impact from Portfolio Optimization, EBITDA was down $2 million or 3%. This decrease was primarily due to carry-over pricing, partially mitigated by lower production costs from our restructuring efforts. Our adjusted EBITDA margin increased by 290 basis points year-over-year to 32.6%, marking one of the business unit's strongest margin quarters on record. We anticipate sustaining a strong margin profile in the low 30s for the remainder of the year. Please turn to Slide 10 for Intermediates. As Guillermo noted, the second quarter presented challenges for our Intermediates business. Sales were $37 million, a decrease from $40 million in the same period last year. This comprised $10 million in Captive BDO sales with stable volume and $27 million in merchant sales. While merchant revenue remained consistent year-over-year with higher volumes offsetting lower pricing, the overall sales decline was primarily driven by captive market-based pricing.

Thank you, Jim. Please turn to Slide 12. Let's discuss the performance of our Specialty Additives segment, which presented a mixed picture in Q2. While the second quarter presented a weaker-than-expected seasonal lift in some key markets, Performance Specialties continued to be a bright spot, delivering solid volume growth across diversified industrial markets. However, overall sales volumes decreased by 12% year-over-year, primarily due to our planned portfolio optimization, which streamlined construction offerings towards higher-margin products. Turning to organic performance. Sales volumes decreased by 6%, entirely driven by continued soft demand and some share losses in China, the Middle East, Africa and India. As we mentioned earlier, low demand and overcapacity in China coatings is negatively impacting both volume and pricing, intensifying competition within China and regional export markets. We were able to partially offset this impact with strong execution and a volume recovery in North America and European coatings. Pricing declined by 2%, primarily reflecting carry-over from prior year pricing actions, particularly in the same challenging coatings markets. Overall, Specialty Additives sales fell by 15% to $134 million, with organic sales down 9%. Turning now to profitability. Our adjusted EBITDA declined by 4% year-over-year to $26 million. However, looking at the underlying performance, excluding the planned portfolio optimization, we actually delivered a 3% increase. Increased production volumes achieved through improved plant operating pace compared to last year and cost efficiencies were the primary drivers of this improvement, more than offsetting lower pricing. Consequently, adjusted EBITDA margins improved by 220 basis points year-over-year to 19.4%. I will now turn the call back to Guillermo.

Thanks, Dago, and please turn to Slide 14. Now let's turn to our strategic priorities, where we remain focused on enhancing financial performance through controllable factors, independent of macroeconomic environment. The recent finalization of the Avoca divestiture completes our strategic portfolio realignment, enabling a sharper focus on profitable growth. Our top priority is achieving the $90 million cost savings target, and we're making significant progress on both key components. Starting with the $30 million restructuring. Our restructuring efforts are complete and delivered ahead of schedule. We've identified $30 million in opportunities and plan to realize $18 million in savings this fiscal year. The remainder will carry over into fiscal year '26, and these actions have offset the EBITDA impact of our Nutraceuticals, CMC and MC exits. Second, regarding our $60 million manufacturing optimization. The primary focus is strengthening our HEC & VP&D businesses with significant operational planning and execution completed this quarter. We are supplementing these efforts with small plant consolidation as well. Our initial commitment centers on the consolidation of manufacturing activities. We're also aggressively identifying process productivity improvements that could generate further savings beyond our initial targets. We anticipate $6 million in savings this year from VP&D consolidation. Note that the recognition of savings from productivity improvements has a timing element due to the initial capitalization in inventory. We will provide further updates on these important areas as we progress. Overall, we are on track to exceed our fiscal '25 target, demonstrating strong momentum towards our $90 million target as we move into fiscal year '26. Please turn to Slide 15. At Strategy Day, we set ambitious $100 million incremental revenue targets for both globalize and innovate initiatives by fiscal '27. We strategically completed most of our planned investments in key assets and talent. This has led to positive customer development, market penetration and production scale-up activities in China and Brazil. This will position us well for significant growth. Our year-to-date globalized performance has been impacted by near-term headwinds in our personal care base business, driven by softer European demand and customer-specific weakness. Our conviction on our strategy remains strong, supported by the proven long-term success and leading position of our high-value markets. In addition, we're actively driving operational improvements to further enhance already attractive margins in these business lines. For example, gross profit margins increased 500 basis points year-over-year despite revenue declines. Let's shift to innovation, our most significant long-term growth driver. I'll be brief as we have our dedicated Innovation Day later this month. Our financial goal is $100 million of incremental sales by fiscal year '27, primarily leveraging our core technology innovation. We had strong launches this year, including expanding our cellulosic, pharma and biofunctionals portfolio contributing to our year-to-date results. We're on track with $5 million in incremental sales year-to-date. However, this near-term progress is just the beginning. The real potential lies in scaling our new technology platforms for substantial future growth. As you'll hear in detail at Innovation Day, we're consistently identifying and developing revolutionary business cases across these platforms, which support a much larger long-term growth vision. Please turn to Slide 16. Now let's address tariffs. We are not immune to the global trades and economic pressures, and Ashland is proactively navigating this evolving landscape. Despite our ongoing uncertainty, our experienced leadership team has a proven track record of navigating similar challenges. Our strategy focuses on what we can control, an approach that has proven effective over the past 5 years through events like COVID and supply chain disruptions as well as other macro headwinds. With that context, our direct exposure to U.S. or China raw material tariffs is limited to the minimal cross-border trade and our localized sourcing. The current duty structures persist; we currently estimate the EBITDA impact for Ashland in the second half of fiscal year 2025 to be in the $3 million to $5 million range. We are actively implementing mitigation actions and anticipate only a modest increase in our annualized basis thereafter, if nothing changes. Next, the vast majority of our U.S. sales are domestically sourced. For the small portion we import from Europe, we largely benefit from Annex II exemptions. We are closely monitoring the recent initiated Section 232 investigation to understand any potential future implications. For context, if Annex II exemptions were not in place, our estimated annual tariff exposure would be $4 million to $6 million, with $1 million impacting fiscal year 2025. Most of our China sales are produced outside of the U.S. However, approximately $70 million are U.S. produced. These U.S.-produced China sales generate roughly company average gross profit margins and mostly fall within potential tariff's scope. Although this continues to evolve with exemptions, our primary exposure here is in the Life Science and Personal Care segments. We have a tariff response plan in place to offset a significant portion of this business at risk. It's also worth noting that approximately 1/3 of our gross profit comes from products where we are the sole supplier. Given roughly 90 days of finished goods inventory in China, we anticipate any potential impact on fiscal year '25 to be weighted towards the fourth quarter. We've analyzed the current and potential tariffs and developed tariff response plans. Our global footprint and diversified portfolio are key advantages here. We're actively optimizing our supply chain, including production and shipping, collaborating with partners and making pricing adjustments where possible. While tariffs present challenges, we also see potential share gain opportunities. Our goal is to minimize the impact on all stakeholders as we monitor and react to changes in global trade policy. The outlook, which I'll cover shortly, reflects our current estimate of the tariffs impact for this fiscal year based on the information we have today. Please turn to Slide 17. Now let us turn to our financial outlook for the fiscal year 2025. As highlighted in yesterday's press release, we are adjusting our full-year outlook. This shift is becoming increasingly apparent across several key areas. First, we are observing meaningful reduction in consumer sentiment. The growing global macroeconomic and geopolitical uncertainties are clearly impacting consumer confidence. This decline in consumer confidence is leading to softer demand from parts of our Ashland customer base, especially in the coatings segment. Our outlook reflects this lower sentiment, but does not include recessionary conditions. Second, while European markets have stabilized, the anticipated moderate recovery has not yet materialized. Demand in this region remains subdued. Third, the intermediates market continues to present challenges. The persistent supply-demand imbalance is putting pressure on the segment. And while we have implemented price adjustments to improve second half performance, overall pricing is expected to be below previous expectations. As a result, Ashland now anticipate flattish organic sales volume growth for the full fiscal year. This adjustment reflects our expectation of a positive inflection in organic sales volume in the second half, led by Life Science. We anticipate that year-over-year pricing headwinds will lessen in the second half as we move past prior pricing actions. Overall, we currently anticipate raw materials to remain stable compared to the previous year, excluding the noted tariff impact. We've included the expected direct financial impact of current tariffs in our outlook, which are generally offset by FX gains from a weaker dollar. In response to the weaker demand environment, our focus is intensifying on areas within our control. We are accelerating restructuring and productivity gains to enhance our business mix and improve profitability through the rest of the fiscal year, anticipating roughly $13 million in cost savings realization in the second half. Excluding Intermediates, we anticipate strong second-half margin, reflecting these actions. Based on these factors and the risks and opportunities you see outlined on the right side of the slide, we are now projecting full year sales in the range of $1.825 billion to $1.9 billion and adjusted EBITDA in the range of $400 million to $420 million. Please turn to Slide 18. We remain steadfast in our long-term strategy and core priorities, which we believe will drive sustainable value. You can count on our relentless commitment to improving results and optimizing our strategy in this evolving global trade environment. Please turn to Slide 19. We continue to believe that innovation is a critical driver to our future success. On that note, as we mentioned in our last call, we're excited to showcase how our technology platforms have evolved and expanded at our upcoming Innovation Day. Join us on Thursday, May 29, at 9:00 a.m. Eastern Time at our Bridgewater facility. We'll use the focused innovation time to delve into specific examples to bring our technology portfolio to life. You will have opportunities to hear from a broad set of our leaders, including a moderated Q&A session. For those attending in person, we will also offer a valuable lab tour to experience the real-world application of our innovations across our various business units. Please turn to Slide 21. In closing, I want to focus on the key messages as we look ahead. As we discussed today, we are adjusting our outlook for fiscal year '25 to reflect the increasing macroeconomic uncertainty and softening consumer demand we're observing globally. This is a critical factor shaping our near-term expectations. Ashland is leveraging several fundamental strengths. Our completed portfolio optimization provides a more focused and agile business better positioned for long-term profitable growth. We're accelerating our cost savings and productivity initiatives, which are essential to enhancing our profitability and mitigating the impact of the current environment. The early benefits are evident in our margin performance and trajectory. We operate in resilient consumer stable markets, providing a degree of stability even amidst broader economic fluctuations. Our healthy financial position with strong liquidity and a manageable debt level offers the flexibility needed to navigate uncertainty and pursue strategic opportunities. And finally, we have a diverse set of advancing growth catalysts that unlock transformative opportunities for us. Looking ahead, our commitment remains firm. We are taking a proactive approach to managing tariff impacts through strategic adjustments in our supply chain and pricing. We will maintain a disciplined capital allocation strategy, balancing investments for future growth with returning value to our shareholders. Above all, we are confident that our long-term strategy and core priorities will continue to be the foundation of sustainable value creation. I want to extend my sincere gratitude to the entire Ashland team for their dedication, their resilience and their commitment to navigating these dynamic market conditions. Operator, let's go to Q&A.

Our first question comes from Laurence Alexander with Jefferies.

This is Kevin Estok standing in for Laurence. My first question is about order volatility. I'm curious to know how much it has increased over the last few quarters. Additionally, what have customers expressed they need to see in order to return to more stable order patterns?

Okay. Thank you for the question. I think overall, we've seen a reduction. I mean, Q3 and Q4 last year where we saw a lot of the changes, the dynamics in China in VP&D, some of the bigger competitors come back in. That's where we had most of the volatility. As we look at the last 2 quarters, things have been stable in line with what happened. If you look at volumes, volumes are actually picking up as we're going. Pricing is coming in line with what we put in our full-year guidance for China for some of these markets that were impacted. So there's no surprises there. I don't think there's as much volatility right now. It's really more about the sentiment in certain markets that are getting impacted. As an example, in coatings, we're actually not surprised on the downside in China and some of the export markets. We're managing through them, but they're coming in line or slightly even better than what we had expected. The softness is more coming from U.S. and Europe, where it's just been a bit more muted, especially starting March on, and we're seeing it still in April. The paint season is a little bit softer. Our paint season ends at the beginning of September. So if it doesn't start picking up, that's the bigger adjustment that we're doing. I'd also say in intermediates, although we're talking about the pricing not improving, it's not changing either. It's stable. The issues we had more of an expectation of improvement. So what we're toning down is more the expectation the outlook expectation of improvement, given the environment we're seeing. I think it's better to be a little bit more conservative on those two aspects.

Got it. Okay. Regarding the $70 million in U.S.-produced sales in China, I wonder how much risk you think could be mitigated by the fourth quarter. Can you provide a quantification of that?

Great question. We're receiving numerous inquiries about those details. We maintain inventory in China, and the primary products we export from the U.S. include our VP&D, Klucel business, some Personal Care additives, and a few specialty coatings materials. Klucel is particularly noteworthy as it is a unique product with limited global capacity, which allows us to manage the situation. We are collaborating with our customers to address immediate needs. While the long-term resolution may take time, we aim to work alongside our customers, understanding that reformulating certain products is challenging for them. Our focus is on our partnership with customers as we navigate these difficulties. Additionally, we are observing the impact of new restrictions in China on some of our Pharma products. We will be closely monitoring this situation. VP&D seems to face the most exposure, representing a significant portion of sales, though margins in China are considerably lower, making it more challenging for us to manage. Other products allow for some flexibility; for instance, we operate several plants in the coatings sector, enabling us to eventually shift production and optimize our network. We have options for over half of our offerings, while less than half of VP&D has the same flexibility. The latter presents more challenges but yields lower margins. On a broader note, we have ample data to assess the risks, and while we can mitigate much of the direct impact, there will still be some effects. Our primary concern involves our Pharma, Personal Care, and coatings products, as many additives cannot be changed without prior approved alternatives. Therefore, we aim to be a reliable long-term supplier for our customers, collaborating closely with them to manage these challenges.

Our next question comes from the line of John McNulty with BMO Capital Markets.

This is Bhavesh Lodaya for John. Thank you for the detailed information about the tariff impacts, particularly regarding the U.S. and China. We also have the $90 million in U.S.-produced sales to China. How do you view that? Is it still too early to assess? I'm curious about how much risk you think could be mitigated by the fourth quarter. Could you provide some quantification on that?

If you look outside of China, that's currently the most significant area. There isn't much impact since most of our raw materials are sourced locally. Therefore, the effect on raw materials is minimal. We do export a substantial amount from the U.S., particularly with VP&D, but we also have options for cellulosics available in Europe and we are beginning to export from China in some regions. Thus, the impact in Latin America, Mexico, or Canada is quite limited at this time. Additionally, many items in the U.S. are currently exempt. It's crucial to keep an eye on Europe, which is a major manufacturing site for some of our products. We don't anticipate any significant changes at this moment, but it is something we will be watching closely.

And we also tend to keep a lot of finished goods inventory in Europe, which would push out any tariff impact for frankly, quite a while. And we've been doing that intentionally for a bit now.

Got it. Have you noticed any reduction in competitive pressure from China in the Specialty Additives segment? Also, could you provide an update on whether we have completed the capacity additions in that area or if we have achieved a balance between supply and demand?

Let me give a quick comment and I'll ask Dago. He's been traveling through a lot to China and a lot of the regions, so he can give a little bit more color. But if we look at the big issues impacting right now, one is the whole dynamic. The #1 issue is China slowing down and China overcapacity, what it's doing to export markets. So it's the market in China and the competitive intensity around the world. I would say that's actually the biggest challenge, and we got the big hit. For us really was last year in Q3, Q4 that we talked about. The other two are the tariffs, which I think are moving around, we don't really have a full plan, and we just need to manage it. And then the last one is, what's going to happen longer-term recessionary impact and all that, which we have not really factored in. And I want to be clear on that. The reduction that we're doing is more driven on softness in specific markets, and I'll talk a little bit about that later. But specifically to SA, you want to talk a little bit about what you're seeing on the competitive intensity.

Thank you for the question. Over the last few months, I've traveled to several regions including China, Mexico, Europe, and just returned from the Middle East, Africa, and India. In China, I see stability at the bottom; I don't anticipate any further decline in volumes and prices remain unchanged despite fluctuations in supply. In Europe, the situation is flat with some concerns, particularly in the property sector. Although there's slight price pressure due to a soft market, it remains within normal limits, and there is a strong emphasis on quality, service, reliability, innovation, and sustainability. In the United States, the key takeaway is uncertainty, but we maintain a strong position with stable prices. Other regions like the Middle East, Africa, India, and Southeast Asia are mostly experiencing volume growth. India is a notable example; while it may pause this year, it's expected to continue its growth trajectory next year. We do anticipate ongoing pricing pressure but are proficient in managing it, focusing on balancing volume and price to maximize profitability.

One comment I want to make is related to the issue of capacity, which is relevant not just for us but for the entire industry. Currently, there is excess capacity in the market. Similar to the tariff situation where increases no longer have any impact, we need to consider whether more capacity will truly come into play. The existing excess capacity is the major challenge we face right now. Additionally, as I’ve heard from Dago and other business leaders who are meeting with customers, if one country has a lot of excess capacity, it could disrupt the entire supply chain. We've experienced this when we exited our CMC business, and recently other producers in Europe have announced shutdowns similar to what we did with our MC construction. Customers are worried that if production continues to shift to China due to this excess capacity, it could lead to significant consequences. They are eager to collaborate with us as they assess the situation, recognizing the need for a balanced approach across markets. We stand out as one of the few large Western producers in VP&D, while much of the production is concentrated in Europe and China. Our customers want to work with us to balance their supply chains, and we must address the pricing and volume pressures they are experiencing. However, I am encouraged that we have seen stability for nearly two to three quarters, which provides a positive outlook from our perspective.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

Your cash flow from operations for the 6 months was negative $20 million. What are your cash flow expectations for the year now or free cash flow expectations for the year?

I believe there are a few key factors to consider. First, our EBITDA figure will be crucial for the overall numbers. Another important aspect is our working capital. We've purposefully increased inventory in certain regions due to the tariff situation, which we feel is the right strategy. Additionally, we've been focused on optimizing specific product lines like HEC and VP&D, which has also led to an intentional inventory buildup. These factors combined may slightly impact our free cash flow. Currency fluctuations will also play a role; while they usually benefit our EBITDA, a weaker dollar can influence our inventory situation. Finally, the restructuring efforts we've implemented will have an impact as well. Ultimately, how these elements unfold will determine our outcome, and we expect variability throughout the fiscal year due to the uncertainty surrounding free cash flow and earnings, influenced by tariff developments and other factors.

If you meet your EBITDA guidance, what should your free cash flow be, let's say around $150 million? Assuming you hit your guidance, what can we expect for your cash flow or free cash flow?

It will depend on how inventory and foreign exchange develop throughout the year. Expecting around $150 million to $200 million seems reasonable based on our current position. However, it is important to note that our current situation is uncertain, so things will likely change as policies and the tariff situation evolve.

In terms of your Intermediates business, did you get any pricing increase in March or April? And what are the prospects for that business going forward?

Good question. Alessandra, do you want to comment a little bit on the outlook for pricing in Intermediates?

Yes. As Guillermo mentioned, prices have remained stable and flat from the end of fiscal year 2024 until March. We took action by announcing a price increase in March. However, overall prices are lower than expected, as noted by Guillermo. There was indeed a price increase announced in March. Regarding Intermediates, from a margin perspective, the plants are operating adequately. We reduced production in the second quarter to manage inventory and align with demand. On the cost front, we are implementing productivity improvement measures within our continuous process of VP&D, expecting to achieve reduced unit costs. Keep in mind that some of these cost reduction initiatives will be capitalized in the second half of the year, meaning some benefits may not be realized until 2026. Nonetheless, we are actively working on both productivity improvements and pricing strategies.

And Jeff, I would also mention the other competitors in North America, and our focus is much more regionally concentrated in the U.S. and to a lesser extent, Europe. Other competitors have also made moves. So now it’s really just about how that process unfolds. I think the larger issue is not only the pricing; it's the demand. Our primary markets are NMP, which is used for semiconductors, batteries, and active ingredients. That's where we're experiencing a lot of pressure from Asia. However, in areas like BDO, we don’t sell much, and it’s affecting our margins. For others, BDO is primarily a raw material for polyurethanes in segments that have not improved. Thus, until demand stabilizes along with the integrated players, I believe that will present a challenge.

I guess lastly, again, for Kevin, your Inventories year-over-year were pretty flat. And I think your sales maybe were down in the high teens. So should a normalized inventory level be, I don't know, closer to $450 million or $425 million?

For Intermediates or you...

No, your overall Inventories were $542 million this quarter, compared to $550 million in the same period last year, but your sales were down.

We expect inventory to remain relatively flat for the rest of the year, with the caveat being tariffs and similar factors. Our current inventory number includes approximately $15 million from foreign exchange impacts due to currency fluctuations, mainly in euros, given our significant inventory in Europe. We have strategically positioned some inventory in anticipation of tariffs, which may cause inventory levels to decrease depending on how those situations evolve. Additionally, as part of our optimization efforts, we have been deliberately increasing inventory in certain key product lines, which will gradually adjust over time. Looking at current currency levels, and assuming stability, we believe the inventory number is close to what it should ultimately be. However, it will take some time to achieve that as we navigate through tariffs and our ongoing optimization initiatives.

And Jeff, regarding the inventory situation, we have strategically increased some inventory in advance, particularly in China. On the optimization front, we recognize that changes can affect our plants and personnel, and we haven't been able to provide detailed information on that yet. However, it's important to note that as we optimize our network, customers will require time to requalify and adjust their product sourcing. This means we need to build inventory at current locations to allow for a transition if they move to different products. These optimizations involve significant changes. For instance, in VP&D, we have already implemented changes in our Intermediates chain. Previously, we operated two plants at lower utilization rates, but we have since shut down one plant and consolidated operations into the other. This has resulted in improved unit costs and higher loading, leading to reduced variability in our absorption and overall site loading. While these changes are part of our network optimization, they may temporarily displace inventory. Most of these adjustments are already in motion, and we have been building the necessary inventory. Therefore, I expect inventory levels to decrease over the next few quarters as new supply sources are integrated and we stabilize our supply chain with the updated network.

Our next question comes from the line of David Begleiter with Deutsche Bank.

Guillermo and Kevin, in Personal Care, margins expanded, I presume, based on the low-margin exits. They're now roughly 30%. Is that a good number for the back half of the year in terms of EBITDA margins for Personal Care?

Let me provide some comments and then I'll ask Jim to share his thoughts. As we mentioned, through our network optimization, we are moving away from many low-margin businesses, which is going to positively impact us. When considering all the initiatives we're implementing, including network optimization and productivity—which have not even been fully accounted for yet—these efforts will continue to enhance our margins. Additionally, the changes in our product mix as we globalize in certain areas are favorable. For instance, our high-margin activities are doing well, while high-end cosmetics have seen a decline, which has slightly affected us negatively. Our margins would have been even stronger if that segment performed better. Everything is unfolding as we anticipated. Jim, could you provide some additional insights on what you're observing?

Sure. Thanks, David, for the question. So I think for us, delivering 30% margin this quarter, I think it's a milestone really for the business, something we're very excited about. As we talked about when the business was in the mid-20s, we said, 'Hey, we see upside to the margin.' We're now seeing that upside, and we feel that this is a very attractive and profitable business. For us, it's really about driving robust growth while maintaining profitability. We've seen the upside roughly 100 basis points from the Avoca exit. As we've discussed on the call, we're taking actions on the cost side through optimization, that's improving our cost position. We've also been taking action in some of our globalized businesses, microbial protection, primarily as we're improving our raw material cost position and in-sourcing. And then as we continue to drive growth in both biofunctional actives and microbial Protection, they'll have a favorable contribution to our overall margin.

Okay. So sorry, to be clear, this is sustainable in the back half of the year, 30%?

Yes, we expect the Personal Care business to continue performing in the range of high 20s to 30%.

Thanks, Dave. Based on what we're seeing right now, we expect to see Q4 to be better than Q3. That's a smidge counterintuitive based on how our earnings tend to flow. But part of that will have to do with restructuring that's going to roll through. That's going to be a tailwind for us, and we will see more of that in Q4 than we'll see in Q3. And so that's part of the driver. It will be about $13 million of restructuring in the second half of the year, so that will be a bit more heavily weighted to Q4. So that's a big driver. And just generally, how we see demand flowing, et cetera, we just expect Q4 to be a bit stronger than Q3 this year.

Our next question comes from the line of Josh Spector with UBS.

I wanted to ask on two things, and I'll just ask them together. First, on the Personal Care side, I just want to understand, I mean, what you're seeing and what your mark-to-market here is weaker demand. I just want to confirm that you're not seeing destocking. We talked about oral timing be moving from one quarter to the next perhaps. But really, what I'm getting at is, are customers talking about reducing inventories to weaker demand? Is that the recession scenario when we're seeing that? And the other question is just around the comment around some of the coatings additives. I think you talked about share loss within parts of Asia. Is that new? Or was that within some of the plan to begin with?

Let me provide a brief response, and then you can discuss Europe specifically. Firstly, we haven't experienced any share loss compared to what we indicated last year. The situation in Asia and export markets remains as expected. As Dago mentioned, the situation is still challenging, requiring us to navigate carefully. It's essentially a volume and pricing strategy we're employing, aligning with our expectations. The most significant changes have occurred in North America and Europe, driven by market demand. If our assumptions are incorrect, demand may actually be stronger. Currently, we are trying to interpret what we observe and what our customers communicate, along with the anticipated start of the paint season. Additionally, in the first quarter, the oral care segment tends to have more variability due to larger orders. This leads to occasional timing shifts from one quarter to another, so while it might seem like a concern, it is primarily a quarterly, not an annual, issue. Do you want to share your perspective on Europe and what you’re noticing?

Yes. I think, Josh, as Guillermo mentioned, it's important to note that this is not widespread. In North America, we experienced strong demand, and the same goes for Asia. Our emphasis on local and regional customers continues to yield positive results. For the quarter, oral care is somewhat of a timing factor, as the order sizes tend to be larger and there can be variations from quarter to quarter. In the case of biofunctional actives, the situation was more customer-specific. We noted in Q1 that demand in Europe softened after the summer, which is connected to both the macroeconomic climate in Europe and the ties between European customers and demand from Asia and China. This trend has persisted into Q2, as we mentioned on the last call, and we are keeping an eye on it. This is not a destocking issue; rather, it is more about the softness we are observing in certain segments.

Our next question comes from the line of Michael Sison with Wells Fargo.

Yes, at the last Innovation Day, you discussed reaching a solid EBITDA range of around $600 million in a couple of years. This year, you're expected to be around $400 million. Do you still believe that this target is achievable? Will it need to be adjusted downward, or will it simply require more time due to the current macroeconomic conditions?

We categorize our focus into three areas. In today's context, it's important to distinguish them, particularly when considering year-over-year comparisons, as compounded growth rates can vary significantly. Our primary focus is the base business; much of our reduced outlook pertains to this area. We're primarily concerned with maintaining our market share and managing our relationships with existing customers. Our insights are based on their sentiments regarding whether the market is slowing down or not. If the situation improves, our outcomes may also improve. When it comes to globalization, it consists of two main components. The first component is the base business, where we're aiming to expand overall growth. For example, in Personal Care, we face specific challenges in Europe with certain customers, and our performance with them will directly impact our growth. We need to navigate these dynamics, as they affect our outlook. The second component involves new initiatives within globalization. Recently, we established a bifunctional manufacturing plant in China and several production facilities for tablet coatings in Brazil. These developments are new, and while they could benefit in a positive market environment, they are also designed to produce favorable outcomes even in challenging conditions by helping us gain market share and strengthen our positioning. Our investments in these areas have been positively received. Additionally, when discussing globalization, we refer to a strategy focused on regionalization, which is currently performing well since the global landscape is increasingly regionalized. Regarding innovation, I encourage everyone to attend the upcoming May meeting to see our progress. This is where we see significant potential for growth. It’s essential to highlight that our strategy isn't reliant on a single technology or opportunity but rather encompasses a diverse portfolio of various technologies. Some will exceed our expectations, while others may fall short. However, within our portfolio, we're now applying our technology across eight or nine different markets, demonstrating substantial progress. As we move forward after optimizing our portfolio, the next five to ten years will focus on three key areas: first, managing through current challenges, similar to how we navigated the COVID situation, anticipating some difficult years ahead; second, executing our globalization strategy; and third, driving innovation. By concentrating our efforts in these areas, we believe we can achieve growth. The primary disruptions we face are not related to long-term strategic aspects but rather stem from near-term market conditions, and we aim to maintain transparency in addressing these challenges.

Our next question comes from the line of John Roberts with Mizuho.

I'll just ask one here. When Trump comes out with this new pharma tariffs in 1 to 2 weeks, do you think that will cause any of your customers to take any actions that might affect Ashland?

Well, I'll let Alessandra share what she's learned from some of our customers. Some are reallocating investments to different regions, which I think will have a positive impact. The current situation varies by country, depending on which tariffs are applied to which products, and it's quite complicated right now. There are some inconsistencies with certain products being included while others are not, and those are the issues we're addressing. But I would like Alessandra to discuss further what our customers are considering.

We have observed some customers announcing plans to bring manufacturing to the U.S., but many are still engaged in scenario planning. During my recent travels in India and Brazil, it became clear that there remains a significant advantage to manufacturing in those markets. At this stage, it's primarily about scenario planning, although we have seen some recent announcements of customers setting up new manufacturing in the U.S. Overall, I would say that the focus is still on planning, and there continues to be benefits to manufacturing in various parts of the world.

In my conversations with customers around the world, including those beyond the pharmaceutical sector, there is a significant concern among them. Many are closely observing the situation between the U.S. and China, especially as China seeks new markets and the resulting implications for businesses. Initially, they can purchase materials at lower prices, which is leading to downward pressure. The next phase involves the question of why they should sell lower-cost raw materials when they could export the finished products instead. I anticipate that many markets will respond similarly, expressing that they cannot fully accommodate the export situation. We're constructing plants, and our customers desire us to be located closer to them in Brazil and India, which is also part of our strategy. I believe some stabilization will be necessary, as customers are prioritizing their manufacturing interests in their home countries.

Our next question comes from the line of Mike Harrison with Seaport Research Partners.

Jim, you've mentioned a few times these customer-specific issues in the biofunctionals business. Can you give us a little bit more color on exactly what's going on? And I guess, do you expect these issues to continue into next quarter or for coming quarters?

Thank you for your question, Mike. In our biofunctional actives business, this segment primarily focuses on skincare, particularly in the high-end luxury market and is also associated with travel retail. We've noticed some weakness in this segment, especially within luxury and travel. On the other hand, the remainder of our business is performing well, though there are a few customer-specific challenges related to travel retail. As we progress through the year, we're maintaining frequent communication with our customers to understand their perspectives as the situation stabilizes. We are observing some stabilization, particularly in the travel sector, but we are keeping a close watch on it. Currently, we do not anticipate a significant recovery in this area over the next few quarters. I hope this information helps.

Go ahead.

Hopefully, that provides the color that you're looking for.

Yes, that's helpful. And then my other question is on the globalize opportunity here. You guys opened new facilities, but you saw a sales decline associated with this globalize effort. Can you just help me understand how to think about that? And I guess, is the $20 million target still attainable given kind of where you stand today?

So Mike, as I mentioned earlier, we need to consider the globalization aspect. We're maintaining a straightforward approach with four businesses, focusing on total sales and their growth, aiming for a specific annual percentage increase. There are essentially two categories: the core business we currently have and the new business. The new business is performing well; we're making investments, increasing engagement with customers, so that's not a concern. As Jim pointed out, the core business has declined. When it rebounds, we can expect a significant increase, similar to previous patterns. It's difficult to predict exactly when this will happen, but within our three-year plan, as long as the new initiatives are progressing well, we will keep an eye on it. We hope some of the core brands that have historically been strong will recover from their current challenges, and we will benefit from their improved performance.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Guillermo for closing remarks.

Thank you everyone for your questions. The key message is that the business has stabilized after some challenges we faced last year in our coatings and VP&D segment. With this stability, we are seeing a rebound in volumes and pricing is becoming more stable. We are gaining momentum in returning our business to the profitability we aim for, which is largely driven by our efforts to improve costs and productivity. This is already having a positive effect and we expect it to become even more significant as we move into 2026 and 2027. Regarding the adjustments made for this outlook, there are three main factors. First, we've lowered our expectations for paint season demand in North America and Europe, which will still see growth, but not as much as we initially anticipated based on customer feedback and market data. Second, in terms of Intermediates pricing, we are striving for higher prices but need to remain realistic given the current complexities of the market. Third, as Jim mentioned, there are certain specific segments, like luxury brands, that are impactful. Aside from these, everything else is progressing as planned. The potential for upside in our guidance stems from four aspects: the possibility that our market assessment may be off and conditions improve, which is out of our control. Pricing management remains our biggest focus, and it is going well. Additionally, we are concentrating on self-help initiatives, driving down costs, improving productivity, and enhancing those areas within our control. I believe these efforts will yield good results. Thank you for your time, and I look forward to our future discussions.

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