Ashland Inc. Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Ashland Inc. Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, William Whitaker. Please go ahead.

Hello, everyone, and welcome to Ashland's Third Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. My name is William Whitaker, and I'm honored to join you today as Ashland's recently appointed CFO. I'm energized to fully embrace this role and lead our finance organization in advancing Ashland's strategic priorities and delivering sustained shareholder value. Joining me on the call today are Guillermo Novo, Ashland's Chair and CEO, 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 making forward-looking statements on several matters, including our fiscal 2025 outlook, which involves 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. That reconciliations are available on our website and the appendix of these slides. I'll now hand the call over to Guillermo for his opening remarks. Guillermo?

Good morning, everyone, and thank you for joining us. Before I start my comments, I did want to congratulate William on his appointment as our new CFO. We're thrilled to have him lead our financial organization. And more importantly, we know he's going to have a huge impact in driving our performance as we move forward. Today, I'll be providing an update that covers three key areas, giving you a clear picture of our recent performance and strategic direction. First, I'll review the highlights of our third quarter performance. Later, I'll provide more details on our strategic priorities, and finally, I'll offer a detailed outlook on our updated fiscal year 2025 guidance. Please turn to Slide 5. Let's begin with a recap of our third quarter performance. We delivered resilient performance in a mixed demand environment with stable trends across most markets. Although volumes fell short of expectations as the anticipated growth inflection points did not materialize. These conditions reinforce the importance of our continued focus on cost savings and operational discipline, which supported strong margins. As a result, we're delivering adjusted EBITDA generally in line with expectations, reflecting solid execution across our businesses. Excluding portfolio optimizations, sales declined 5%, primarily due to lower organic volumes. Pricing remained relatively in line with expectations as our teams executed well. Adjusted EBITDA was $113 million, down 19% year-over-year or 10% excluding portfolio actions. Importantly, adjusted EBITDA margins remained resilient at 24.4%. We delivered nearly 100% free cash flow conversion in the quarter, demonstrating the strength of our underlying business. Please turn to Slide 6. Let me now briefly summarize the performance of our business units. While demand was softer than expected, Life Science maintained pharma growth momentum in VP&D and cellulosics, positioning the segment for continued progress and sustaining strong margins of 33% for the second consecutive quarter. Personal Care operated in a stable but moderate demand environment with microbial protections comping against a strong prior year and ongoing customer-specific softness in biofunctional actives. Encouragingly, we're seeing early signs of recovery across both these business lines. Recent strategic investments are gaining traction, driving sequential growth and helping sustain strong margins. Specialty Additives was impacted by a weak coating season and ongoing pressures in China but saw growth in Performance Specialties and Energy due to share gains. The HEC network consolidation will be a key driver to improve cost efficiency and margins. Intermediates continued to navigate a difficult supply-demand landscape, particularly in Europe. While pricing and production volumes remain under pressure, we secured advanced manufacturing tax credits to partially offset this. While near-term demand remains mixed, it's important to note that roughly 85% of our portfolio is tied to consumer end markets, many of which are noncyclical and more resilient in uncertain macroeconomic environments. Now let's turn to how the strategic actions are positioning us for stronger performance. Our portfolio optimization is complete, and our restructuring program remains ahead of schedule. All four business units achieved strong EBITDA margins demonstrating disciplined execution in a challenging market. We're also making strong progress on our $60 million manufacturing optimization program. As we recently announced, the HEC network consolidation is complete and additional cost actions are ramping into Q4 and fiscal year 2026. While some of our global platforms have been softer than expected year-to-date, we're seeing sequential momentum from recent investments. We remain confident in the long-term opportunity to expand our reach in underpenetrated markets. At the same time, our innovation commitment is exceeding expectations this year, reinforcing our strategy to drive differentiation and margin-accretive growth. In summary, while the external environment remains uncertain, we are executing with discipline and focus. Our streamlined portfolio, ramping cost savings, and strategic growth catalysts are positioning Ashland for long-term resilient performance. Now I'd like to turn over the call to William to provide a more detailed review of our third quarter performance. William?

Thank you, Guillermo. Please turn to Slide 8. Q3 sales were $463 million, down 15% year-over-year, including a $53 million impact from portfolio optimization. Excluding this, sales declined 5%, primarily due to lower production volumes. Organic volume was down 4%, with growth in Life Sciences more than offset by declines in Personal Care and Specialty Additives. Pricing declined 2% driven by targeted actions in Life Sciences as well as intermediates. Excluding intermediates, pricing was down 1%, and foreign currency provided a 1% tailwind. Adjusted EBITDA was $113 million, down 19% year-over-year or 10% excluding portfolio actions, driven by lower organic sales and production volume. This was partially offset by cost savings, including reduced SARD and production spending, while raw material costs remained stable. Adjusted EBITDA margin was 24.4%, down 120 basis points. Adjusted EPS, excluding acquisition amortization, was $1.04 million, down 30% from the prior year. As noted in our release, we recorded a non-cash goodwill impairment of $706 million related to Life Sciences and Specialty Additives. This reflects the decline in our market capitalization relative to book value. It's important to emphasize this is a non-cash accounting adjustment. It does not affect our liquidity, operations, or our ability to execute our strategy. Meanwhile, we generated strong ongoing free cash flow in the quarter with nearly 100% conversion of adjusted EBITDA, supported by disciplined capital spending and effective working capital management. Liquidity at quarter end was over $800 million. We expect cash generation to remain strong in the fourth quarter and continue to monitor the timing of a potential recovery of our approximately $100 million from our capital loss carryback. With net leverage at 2.9x, we have the flexibility to continue investing in our strategic priorities while maintaining a disciplined approach to capital allocation. Now let's turn to our business unit leaders for a closer look at segment performance. Alessandra, over to you for Life Sciences.

Thank you, William. Good morning, everyone. Please turn to Slide 9 for Life Sciences. Life Sciences sales were $162 million in the third quarter, down 17% year-over-year. The decline was primarily driven by our portfolio optimization initiatives, including the divestiture of the Nutraceuticals business and exit from low-margin nutrition products, which reduced sales by approximately $32 million or 16%. While these actions improve our long-term profitability and focus, they impact year-over-year comparisons. Q4 will be the final quarter affected by these adjustments for Life Sciences. Overall, organic sales declined just 1% year-over-year, with pharma growth offset by softness in other markets, particularly in Nutrition. Pharma volumes grew 4%, supported by share gain, globalization, and innovation initiatives with growth momentum across most regions and technologies. Latin America and Asia remain key growth regions where we are leveraging our strong reputation with local and generic manufacturers and targeted pricing actions to support volume growth. Our globalized business lines delivered another quarter of double-digit revenue growth and completed major strategic milestones. Injectables completed a high-impact launch of Viatel bioresorbable polymer lines for medical devices and dermal fillers. Both businesses continue to perform well with positive relief indicators for sustainable, profitable growth. Life Sciences has advanced our innovation revenue from new product introductions exceeding expectations across all regions in the third quarter. Our platform technologies play a key role in our long-term strategy, targeting enhanced tablet coatings, bioprocessing chemicals, and injectables, as highlighted on our Innovation Day. Turning to profitability, adjusted EBITDA was $54 million, down 8% year-over-year. Excluding a $5 million impact from portfolio actions, EBITDA was consistent with the prior year. This was the strongest adjusted EBITDA margin quarter on record for the business reflecting high-quality pharma growth, cost discipline, and the benefits of our strategic actions. Please turn to Slide 10 for intermediates. The overall market landscape for our intermediates business remains challenging, particularly in Europe. Sales were $33 million, down from $36 million in the same period last year. This included $10 million in captive BDO sales and $23 million in merchant sales. Despite some success with our recent price increase, market pressure forcing overall pricing decline was the primary driver of the year-over-year sales decrease. Turning to profitability, intermediates generated $7 million in adjusted EBITDA, representing a 21.2% margin. This compares to $9 million in the prior year, as continued lower pricing and reduced production pressured margins during the quarter. That said, we were able to partially offset these impacts through advanced manufacturing production tax credits, which we expect the business will remain eligible for through at least 2029. Now I will turn the call over to Jim to discuss the performance of Personal Care. Jim?

Thank you, Alessandra. Good morning, everyone. Please turn to Slide 11 for Personal Care. Personal Care sales were $147 million in the third quarter, down 16% year-over-year. This decline was primarily driven by portfolio optimization actions, including the divestiture of the Avoca business and the exit from low-margin products, which reduced sales by approximately $18 million or 10%. With this work now complete, the business is more sharply focused on care ingredients, microbial protection, and biofunctional actives. Organic sales declined 6%, primarily due to customer-specific weakness in biofunctional actives and a strong prior year comparison in microbial protection. That said, both areas delivered strong sequential growth. In biofunctional actives, sales were up double digits, supported by a robust commercial pipeline and expanding our capabilities in China. We expect this momentum to become more visible as we begin to lap the prior year customer-specific headwinds going forward. Microbial protection also improved sequentially to down year-over-year against a strong comparison. A maturing opportunity pipeline, coupled with the improved cost structure, is enhancing our ability to drive volume growth. We expect to see the early benefits of these actions in Q4. Meanwhile, our Care Ingredients portfolio continues to demonstrate resilience in both hair and skin care. Turning to profitability, adjusted EBITDA declined 20% to $41 million. Excluding the impact of portfolio optimization actions, EBITDA was down 6%, primarily due to lower organic sales and unfavorable mix, partially offset by cost savings. The business delivered an EBITDA margin in line with our fiscal 2025 target in the high 20s and is well positioned heading into Q4. Now I'll hand it over to Dago to review the results of Specialty Additives. Dago?

Thank you, Jim. Please turn to Slide 12. Specialty Additives delivered mixed results in Q3 aligned with expectations. The architectural coating season remains softer, and the majority of the year-over-year volume decline stemmed from last year's share loss and targeted price reductions in China. Persistent overcapacity and weak demand in China continue to pressure both volume and pricing, intensifying competition across the region and in export markets like Southeast Asia, the Middle East, Africa, and India. Outside of China and the Middle East, Africa, and India, the team executed well, delivering year-to-date volume growth in a challenged real estate environment across the Americas and Europe. Performance Specialties and energy end markets grew in the quarter, supported by share gain initiatives. The Construction segment continued to show stable performance in Q3. Overall, sales declined 13% to $131 million with organic sales and volumes both down 11%. Despite the competitive environment, pricing remained generally stable, an improvement from the 2% decline in the prior quarter. Turning to profitability, adjusted EBITDA declined 32% year-over-year to $26 million, primarily due to lower sales in China, the Middle East, Africa, and India, and volume rebalancing across our production network. EBITDA margin was 19.8%, down from 25.3% last year. As part of our $60 million manufacturing optimization program, we recently consolidated HEC production into our Hopewell, Virginia facility from Parlin, New Jersey. This move enables us to better leverage our global network, improve cost structure, and drive long-term operational efficiency. It was a difficult decision, but it aligns with our broader strategy and reinforces our commitment to delivering sustainable performance. With facilities operating in the United States, Europe, and China, our streamlined HEC production network is well positioned to meet global demand. I will now turn the call back to William. William?

Thanks, Dago. Please turn to Slide 14. Let me now expand on Dago's comments with a broader view of our operational optimization efforts. As mentioned, the HEC network consolidation is a major milestone in our manufacturing transformation. The Parlin to Hopewell transition underpins the $25 million in HEC-related cost savings we outlined last December. While operational execution is now complete, the P&L benefit will phase in over time. Because these savings are initially capitalized into inventory, they will be recognized gradually as inventory is drawn down and sales occur in line with our weighted average cost methodology. We'll provide more detail on the expected fiscal '26 impact during our next call, and we anticipate a meaningful step-up in HEC-related savings next year. More broadly, our restructuring program is tracking ahead of schedule. The run rate program is nearing completion, with approximately $20 million in savings expected this fiscal year and an additional $12 million in carryover benefits in fiscal '26. These actions are already helping offset volume softness in select end markets and positioning us well for fiscal '26. Looking ahead, we see opportunity to drive stronger incremental margins as we improve productivity across our consolidated footprint. The strategic imperative is clear: consistent operations at higher utilization rates with additional growth supported by ongoing efficiency gains. We'll share more as we size this opportunity. In the meantime, we remain focused on execution, balancing cost out with strategic reinvestment, and we're confident these changes will support sustainable margin improvement over the long term. Please turn to Slide 15. As we turn the page on our portfolio transformation, Ashland is now positioned for the first time in over a decade with a clean focused platform for growth. We recognize that the portfolio transitions over the past several years have made our financial trends more complex to interpret, but these were intentional actions designed to improve the company's strategic and financial profile. Given the number of moving pieces, we thought it would be helpful to step back and highlight the historical performance of our core portfolio, the businesses we own today. On the left side of the slide, we've separated the revenue from businesses we've exited or optimized over recent years, such as CMC and nutraceuticals from the performance of our current core. These actions streamline the portfolio, improved quality, and reduced revenue by roughly $400 million since fiscal 2019. The core has experienced some volatility over this period, reflecting the impact of COVID, post-pandemic shortages, inflation, destocking, and tariffs. Yet through all of that, the underlying core is stable versus pre-COVID. Life Sciences and Personal Care have each grown at a low single-digit rate. Specialty Additives declined moderately, largely due to the impact of the deterioration of the coatings market in China, and intermediates are currently at a cyclical low. Importantly, during this time, we've improved our EBITDA margins, reduced net tangible assets by over $300 million, and lowered our share count by nearly 25%. While we know we need to accelerate growth, which is exactly what our strategic priorities are designed to support, the business has remained stable during a particularly volatile time. This slide is meant to illustrate the resilience of the actions we are taking today and the strength of the foundation we're building for tomorrow. I'll now turn the call back over to Guillermo. Guillermo?

Please turn to Slide 16. As you heard from Alessandra and Jim, our globalized platforms, injectables, tablet coatings, microbial protection, and biofunctional actives are central to our long-term growth strategy. That said, we're currently behind plan for the year. Year-to-date sales in these business lines are down approximately $10 million versus our full year target of $20 million in incremental growth. This shortfall is primarily due to base business softness in microbial protection and biofunctionals. Despite these headwinds, we're seeing encouraging signs. Our investments are beginning to take hold, and both microbial protection and biofunctionals are delivering healthy sequential growth since Q1. For example, in our new biofunctionals facilities in China, it's already approaching 10% of our segment sales mix as we ramp localized solutions in this important market. Importantly, comps are beginning to ease as we lap the unique challenges that began impacting performance late last year. This should make the momentum of our investments more visible in the quarters ahead. Meanwhile, Life Science continues to perform well, with injectables and tablet coatings maintaining strong growth. We remain confident in the long-term opportunities to expand adoption for our high-value solutions in underpenetrated markets. Turning to our innovation strategy. We're ahead of plan. We're already delivering $10 million in incremental innovation-driven sales, meeting our full year target with a quarter still to go. This reflects the strength of our core innovation platforms, particularly in pharma, where demand in oral care delivery remains strong. Our Innovation Day in May was a powerful moment for Ashland, showcasing the depth of our technical capabilities and the momentum behind our new platforms. The themes that emerged: scalability, sustainability, and differentiation are exactly what we're building towards. We remain focused on executing our innovation roadmap with a clear priority on platforms designed for large, high-growth markets. The pipeline is strong, and we're motivated by this opportunity. Please turn to Slide 17. Now let me walk you through our financial outlook for the remainder of fiscal year 2025. As we shared in yesterday's release, we've narrowed our full year guidance to reflect the ongoing muted demand and continued caution across customer channels. While we're tightening the range, our current assumptions are anchored towards the lower end, reflecting a prudent stance in light of the near-term demand dynamics while underscoring the durability of Ashland's business model. Demand patterns remain mixed across the portfolio. Pharma is steady, recovering, and continues to demonstrate resilience. Personal Care is beginning to show encouraging signs of company-specific momentum. Meanwhile, Specialty Additives and Intermediates are still facing headwinds. We're maintaining a balanced outlook. Innovation is pacing ahead of target, and our globalized platforms are improving, and we're executing well in our self-help initiatives. These actions are helping cushion the impact of softer volumes and are positioning us for stronger performance over time. On the regulatory front, tariff-related uncertainties remain. We're actively monitoring developments, and while final rules are still pending, we do not anticipate a material direct impact on our fiscal year '25 results. At this time, we're seeing some signs of stabilization. Raw material costs are holding steady, and pricing pressure is easing as we cycle past prior year actions. We expect these trends to persist through the fourth quarter. We remain focused on the levers within our control. Our restructuring program is now complete, and we're expecting to realize approximately $7.5 million in cost savings in Q4. We're also making solid progress on the $60 million manufacturing network optimization initiatives. Together, these efforts, combined with disciplined execution, are expected to support continued margin strength. Free cash flow was strong in the third quarter, and we anticipate healthy conversion again in Q4. Taking all this into account, we now expect full year fiscal 2025 sales of approximately $1.825 billion to $1.85 billion, and adjusted EBITDA in the range of $400 million to $410 million. Please turn to Slide 19. In closing, I want to highlight a few key messages as we look ahead. As we discussed today, we're tightening our fiscal year 2025 outlook to reflect the persistent sluggish growth. While these conditions are pressuring near-term volumes, they do not change our long-term view of the business or the opportunities ahead. Ashland is operating from a position of strength in a difficult environment. Our portfolio optimization actions are now complete, and we've emerged as a more focused, agile business aligned with high-value, resilient markets. We're ahead of schedule on cost savings and restructuring initiatives, with early benefits already visible in our margin performance. All four businesses delivered healthy margins this quarter, a clear sign of disciplined execution. Innovation is gaining traction with year-to-date sales already at our full-year target. On tariffs, we continue to monitor the development and await final guidance on long-term implications. While the regulatory picture is still evolving, we do not expect significant direct impact in fiscal year 2025. In the meantime, we remain agile and proactive, adjusting our supply chain and pricing strategies as needed. Looking ahead, our commitment remains firm. We will continue to focus on what we can control, driving productivity, executing cost actions, and advancing our innovation and globalization roadmap. We will maintain a disciplined capital allocation strategy, balancing investment in growth with shareholder returns. Above all, we remain confident in our strategy, our people, and our platforms that will continue to drive long-term sustainable value creation. I want to thank the entire Ashland team for their continued dedication, agility, and focus as we navigate through these dynamic conditions. Operator, let's open the line for Q&A.

And our first question comes from Christopher Parkinson of Wolfe Research.

Jim, I realize you're obviously not going to give us a number for '26. But as we're approaching the end of the fiscal year, and as the buy sides conceptualizing the different buckets of what we should be considering. I'm seeing the restructuring, obviously, ex the $7.5 million you just went through, the network and the manufacturing rationalizations and kind of as a tangential theme and then like the end of destocking on revenues, like can you just kind of walk us through your own thought process now that you should have greater visibility into fiscal year '26? And then also in terms of the markets coming back and when we think about the incremental margins, for instance, of like PC coming back, should it be in the historical ranges that you've already been giving us when volumes eventually return?

Let me outline three key areas. We're not providing guidance at this time, but I want to highlight some significant aspects concerning demand, our portfolio, and our actions moving forward. Regarding demand, we have a cleaner portfolio with fewer complexities. Transparency in our priorities is essential, and we will continue to uphold that. In Personal Care and Household Care, we anticipate stable demand. We believe that consumer behavior is reverting to historical patterns, where daily use products, such as shampoo, will see consistent usage even during tough economic times. Therefore, we expect demand to be more stable, similar to the pharmaceutical side, which is also projected to remain steady. In Specialty Additives, it's important to analyze the situation geographically. This year, we anticipated a recovery in the coatings market in the U.S. and Europe, which has not yet occurred. However, there is significant pent-up demand, and the outlook could improve if interest rates shift. We plan to adopt a conservative approach for the U.S. and Europe next year, but we acknowledge the potential for upside given the current demand situation. Latin America and Southeast Asia are stable, with no expected significant changes. The key concern is China, where we expect no immediate improvement and are taking appropriate measures. We have redirected certain operations from China to manage this short-term issue, and we believe the market will eventually recover as demand stabilizes. Looking at our portfolio, the core areas have proven more stable than expected, with decreased operational noise due to our focus on productivity. We've streamlined our assets by closing down underutilized facilities, focusing instead on those that are currently well-loaded. This will not only enhance our cost structure but also reduce operational volatility, as a more efficient portfolio will contribute to smoother operations. Finally, regarding our actions, we are committed to a consistent strategy. We recognize that the environment will remain challenging through '26, so we're planning accordingly with an emphasis on self-help initiatives. We are focused on maintaining momentum in areas we can control. Strategically, we are dedicated to globalized, innovation-driven growth, with many promising opportunities on the horizon. Ensuring a robust balance sheet while managing both profit and loss and long-term investments will be our priority.

I want to add some specifics to what Chris mentioned. The reset is now complete, resulting in a $45 million EBITDA headwind this year, which will be zero next year. Additionally, we have $12 million in carryover restructuring primarily in the first half of the year. In Q1, we made adjustments to our plans that led to an overspend of about $5 million, which we do not expect to recur. On the foreign exchange front, the euro has been fluctuating around $1.15 to $1.16, and each cent change represents approximately $1 million to $1.5 million in EBITDA annually. A crucial point related to Guillermo's remarks is our cost management; we expect to recognize $5 million of the $60 million network optimization this year, leaving $55 million anticipated in the future. This aspect is essential for our profitability outlook. Raw material costs have shown mixed stability, and we will provide more specifics during the Q4 call.

That's very helpful. As a quick follow-up, Guillermo, you mentioned this several times in your prepared remarks. In the Personal Care markets, it appears that some of your higher-margin applications have faced challenges. However, there is a slight positive remark from one customer about hair care, indicating that if not adjusted for travel retail, things would have actually improved. Additionally, there seem to be signals of potential stabilization in Asia, while Europe is still a bit sluggish. Are you hearing similar sentiments from your customers as we move through the rest of the year? Does it look like things are stabilizing and could be more favorable next year, particularly for some of those biofunctionals? Or should we be considering something else?

Yes. When examining the personal care market, there is a distinction between mass brands and the prestige segment. Generally, the mass brand market appears to be holding steady, although there is some variability across regions. Demand seems to be stable overall, but individual companies may experience slight fluctuations based on their specific products. From a market viewpoint, we anticipate continued resilience. However, the prestige segment has shown changes compared to historical trends, which were previously stable. The dynamics have shifted over the last decade, particularly affecting mass brands and travel duty-free sales. Our biofunctional business is largely focused on the prestige side, and the team is addressing these changes. Jim, would you like to discuss some of the dynamics you’re observing?

Yes. So Chris, I mean, I would look at the market overall, and as Guillermo mentioned, we do see stability in the market. Last month in June, I spent the majority of June in Asia, in China, Korea, Thailand, and Indonesia. We see really good traction with our local and regional customers there, a lot of activities, especially in Southeast Asia, in Thailand and Indonesia. I would say Europe has actually been a bright spot compared to how we started the fiscal year. Europe was quite muted in Q1. And versus our expectations, we've seen continued improvement in Europe. In the U.S., from what I've seen and read, I think we're probably maybe a bit contrarian there where we see the U.S. as remaining quite robust and resilient, and we expect that to continue going forward. As we mentioned, with our biofunctional active segment, specifically, this part of our business really focuses on the premium prestige skincare market, anti-wrinkle, anti-aging, and is exposed to travel. And that underscores the strategy and actions that we're taking to expand geographically and expand our customer base. And as now we lap some of those customer-specific demand that we saw last year, our results should come in line with the market, and you're going to start to see the actions we're taking come through externally.

And our next question comes from David Begleiter of Deutsche Bank.

Guillermo, William, just back on the cost side to be crystal clear. Between the restructuring plan and the manufacturing network optimization, the incremental savings in '26 versus '25. Should they be in the $55 million to $60 million range year-over-year?

Yes. Let me make a comment before handing it over to William, who will discuss the network optimization and the $60 million. We have $30 million allocated for restructuring and $60 million for network optimization. The restructuring is progressing ahead of schedule. We initially targeted $30 million, but we expect to exceed that for the full program. This year, we're anticipating around $20 million, which is an increase from our original estimate of $15 million. The flow-through has been quite strong. Regarding the $60 million, all actions have been completed, and costs from initiatives like HEC and the Parlin closure will no longer be incurred. The current focus is on how this impacts our profit and loss statement. As mentioned in William’s comments, since Ashland employs average costing, the flow-through process is more complex in terms of timing, but we are managing that. The actions concerning VP&D, HEC, and small plant consolidation are nearly all completed at this stage. William, would you like to address the flow-through related to the $60 million?

So yes, on the $30 million first, so that's the $12 million of carryover that we expect next year. So that will be a period expense related to SG&A. We have a lot of line of sight to that. On the COGS side, right, so keep in mind, to Guillermo's point, the $60 million is related to production, that's in COGS. And so it's dependent on where we finish the year from an inventory perspective, but then also our S&OP process for next year, so demand and production schedule for next year. So we're going to continue to share more and we'll be transparent with it. We expect a meaningful step up going into next year, but to quantify it at this stage would also be an indication of what our guide is for next year. And so we'll share more as we go. But I think to Guillermo's point, good news is operationally we're done, and we'll continue to share more on the financial flow-through as the inventory is sold down and recognized through COGS.

Got it. No, that's helpful. And Guillermo, just back on China and Specialty Additives, can you explain again why this is a market you want to be in or should be in long-term, given the pressures we're seeing right now and perhaps longer-term?

We should distinguish between our current operations and our future plans. Our plant is strong, and we have an excellent team in place, making it very cost-effective. We are currently exporting efficiently to many regions. Having a well-balanced network is important, and it makes sense to maintain our plants in the U.S., in addition to our facilities in Europe and Asia. We are likely the most geographically diverse player in the market, which is beneficial for us in the short term. With the optimization efforts we've implemented, the next step is to adjust our export strategy and balance local markets accordingly. This presents an opportunity for us as we refine our operations. Historically, we have been successful and profitable in a competitive market, but we are now in a period of transition due to a market decline and widespread overcapacity affecting various industries. I anticipate that there will be industry consolidation, and while we are feeling the impact, many local competitors are also struggling with liquidity issues. Changes are starting to occur in the industry, and if we can leverage export opportunities, we can reposition and enhance our network. We have plans for how and where to expand our capacity globally, so I believe we will navigate these challenges effectively. Dago, do you have any additional comments regarding China?

You summarized it well. Additionally, I visited China about a month ago and observed that new segments are emerging. Some segments in coatings are demonstrating significant value innovation and are seeking high-quality, reliable suppliers. This positions us favorably. Firstly, there are numerous changes occurring in the market, some of which benefit us. Secondly, the demand for innovation is crucial, so we are adjusting our strategy to focus on regional innovation, which we believe can yield valuable results. Lastly, while China has faced challenges in recent years, it has been growing for decades and remains a substantial market that will eventually recover. I believe they will appreciate suppliers that provide excellent service.

Can you comment also on the portfolio expansion even beyond rheology? Because I think that's an area that not just with the new technology platforms, but even in the core, you have a lot of work with.

Sure. I mean, very briefly, we were known as rheology modifier experts in the region. But over the last few years, and more and more so these days, we continue to expand our portfolio into many other additives that are relevant not only in architectural coatings but also industrial coatings. And again, customers value the formulation expertise that we bring to the table. We see a lot of possibilities to develop new products that can very much solve some of the unmet needs in the industry. So we're very excited about that. We don't see our participation as a cellulosics-only participation. We see it as a much broader participation moving forward.

Our next question comes from Josh Spector of UBS.

I have more of a near-term question here. It's just when I look at your updated guidance, your sales seem to imply that you're going to have about maybe $15 million to $40 million higher sales in the fourth quarter than what you had in the third quarter. And a lot of your comments through this call have been more stability and various items there. So just curious on your level of conviction on that step-up and where within the segments are you seeing that level of increase?

Let me share my thoughts, and then William can add his. First, Personal Care is significant for us. The oral care market, as you know, tends to be more concentrated, with larger orders coming in. We anticipate an increase here. This past quarter, we didn't see strong orders, but we have a robust backlog in oral care that we expect to drive growth. On the pharmaceutical side, we're innovating significantly, developing new products. In our Benecel Klucel plants, we haven't optimized production as effectively due to the introduction and scaling of these new products. However, we're now moving forward, which will result in increased volumes in the fourth quarter. Overall, it's more about our specific product portfolio; we don't anticipate a significant surge in underlying demand, but rather improvements related to our efforts and activities.

And just to build on that. I think that's right. So on the Personal Care side, the other element to that Jim spoke to earlier, is around lapping some of the company-specific items that we talked about last year for biofunctional actives, for example. And then microbial protection continues to deliver against some of the investments that we've made on the team in converting that pipeline. I would say the other piece, too, on Specialty Additives, the team has had some nice wins on the industrial side, Energy & Resources as well as performance specialties. We'd expect that to continue to be maintained. But just to dimensionalize it on a year-over-year basis, Josh, it's about a plus minus low single digit on volume overall is the range. And then where we've anchored the midpoint is around flattish overall on organic sales volume. So it's very much in sync with how we're talking about a stable but muted demand environment. We do expect pricing overall to be relatively stable quarter-over-quarter. That implies that it should narrow meaningfully on a year versus last year. And then FX should be a modest sequential tailwind as well. So those are the parts and pieces that get us to the fourth quarter guide on sales.

And maybe slightly different but related just in Life Sciences. I mean, obviously, the margins have been quite strong. Is there any mix component there? So like when we're looking at 33% average EBITDA margins in the last couple of quarters, if you grow low single digits next year, does that margin expand kind of with the incrementals? Or does the mix have a negative impact? Can you help us think through that?

So let me high level and then Alessandra, if you can provide some comments. Cellulosics are doing very well and the margins there are very, very solid. And even in the VP&D side, prices have stabilized, we've regained share, and the productivity is really targeting some of those areas on the cost side. So there's, actions that are driving the mix and the stronger parts of the portfolio are doing better, and the ones that we got impacted are much more stable. But Alessandra, do you want to comment also?

Yes. So yes, we are seeing competitive dynamics on the P&D as we expected. So this is in line with our expectations. And the growth momentum, as Guillermo was talking about, is coming from cellulosic share gains, our traction on our innovation and globalization initiatives. Both the innovation and globalized initiatives come with healthy profitability levels. So definitely, we are focused on our growth journey while maintaining our healthy profitability levels and EBITDA above 30%.

And just to add, Josh, we're also excited about some of the changes occurring in the industry. There's a significant increase in production coming into the U.S. with more customers entering the market. This presents great opportunities for us given our presence and location. Even if the industry remains stable or grows, these shifts tend to benefit our portfolio.

And our next question comes from John McNulty of BMO.

Congratulations again, William, on the new role. Guillermo, I wanted to dig into the innovation side. So this year, you're looking for kind of $10 million kind of a conservative start. But based on what we heard at your Innovation Day, it looks like a lot of these like the innovation wheel and the commercialization really start to kick in, in '26 and then maybe more into '27. I guess can you give us a little bit of color as to how that target changes from $25 million to $10 million to, say, your 2026 target? Is it something where we could see all being equal a couple of points of growth for the core? How should we be thinking about it?

I think the way you're framing this is important, and as we discussed during our Innovation Day, we are focusing on core innovation as well as new platform innovations. We have placed significant emphasis on the platform because we believe these are the major factors that could drive long-term growth. Our situation is quite unique compared to many other companies, as we have substantial long-term growth drivers that can transform our future given our size. We're gaining momentum. Looking toward the longer term, especially around 2026 and 2027, we will share our progress with you. In 2026, it will still be about which projects we are advancing, which segments we are engaging with customers for joint development agreements, and what successes we are achieving. All of these elements will begin to accelerate, which we believe will validate the technologies gaining commercial traction. The financial benefits will follow later. We do not want to overlook our core operations, as there are significant activities within each of our businesses. For instance, Dago mentioned our phosphate ester surfactant business, where we have many innovations, as well as improvements in deformers and wetting agents. We have a history of collaborating on various technologies, and we are increasing our efforts in that area. This regional innovation is vital for us. The same applies to our Life Science and pharmaceutical sectors, with products like Klucel and Benecel driving growth from our core operations. These products are highly profitable, and we are leaders in those markets, which is fueling our near-term momentum. For example, in tablet coating, we have a promising oil-based product, TBO, that has generated excitement among customers, and we are also introducing the Genesis generation, which offers numerous benefits. Our teams are already engaging with customers to build momentum. Similarly, in personal care, we have several innovations in biofunctionals and preservatives that are currently making an impact. Much of this innovation is aligned with our global initiatives. Additionally, I want to emphasize the importance of process innovation. We are actively enhancing our raw materials and manufacturing processes, not just focusing on productivity but also integrating new process technologies into some of our raw materials for preservatives, which is yielding significant benefits for us.

Got it. No, that's really helpful color. And then maybe just a quick question on the intermediate side. It sounds like you've got some tax credit benefits kind of rolling through or some positives that you're getting just given the kind of the environment. And it sounded, if I heard right, that's going through 2029. So can you help us to understand or quantify what that specific benefit is and how it may flow through the P&L going forward?

Let me address the last part of your question regarding our business perspective, and then I'll have William share some numbers. From a business standpoint, this is enhancing our competitiveness. The initial phase is essentially a credit for past achievements. Moving forward, it will help reduce our costs and improve our ability to serve customers. The electric vehicle market is beginning to gain traction in the U.S., with significant projects being bid for which we are well positioned. This will strengthen our competitive stance. It will become part of our bidding cost structure as we progress, but it serves as a necessary adjustment. William, would you like to add to that?

Yes. Yes, John. It's a good question. So that's right. So this is tied to as being a western producer. This is a tax credit used to incentivize domestic production into key sectors. And so for us, this was introduced a couple of years ago, but the eligibility around it was recently defined. And so that's how we're able to now go out and get this. And so just order of magnitude, it's very much dependent on production and sales, but we're expecting about $5 million to $6 million of incremental savings per year, generally recognized ratably throughout the year. And we would expect this to continue to be eligible for us through 2029, and then there's a phasing out through 2033.

Our next question comes from John Roberts from Mizuho.

Were both Hercules and ISP goodwill impaired? And was that the result of a regular annual goodwill review? Or was there some other triggering event?

So this is more a technical process. Let me pass it to William. It's really about the market cap, and that's the driver here.

Yes, that's right. So John, the way goodwill is tested at a reporting unit level, so it's not necessarily allocated to one acquisition or the other. But yes, the vast majority of this is tied to Hercules and ISP. As you think about that basket of purchase price allocation, most of those intangibles have been amortized, right, whereas goodwill isn't amortized and it's tested annually. The event that this quarter required the testing and the impairment is around the valuation, the market cap relative to your carrying value. And so a key piece on how you think about that, right, as you think about valuation. One is, of course, the income-based approach. But the other is a market-based approach where you look at valuations across the sector. And so for us, that was a key element for the underlying impairment. And the other thing I would say, too, when we resegmented the businesses 4 to 5 years ago now, I would think about it in that case, Life Sciences as a part of that resegmentation wasn't touched. And so I would think about this as more of a financial artifact that's being recognized relative to stock based today, but obviously not something that impacts operations, strategy, or the financials or the liquidity position of the company.

Okay. And then secondly, do you expect to be impaired as your pharma customers react to the new Section 232 tariffs? If you have an impact?

Right now, we need to gain more clarity regarding the situation in Europe and the U.S. There isn't much visibility on these matters currently, and many aspects have been exempted for now. We require a bit more time to analyze the situation, but it is not prompting any immediate actions from what we are hearing. The focus of our discussions with customers is not primarily on the tariffs, but rather on manufacturing shifts and an increase in investments within the U.S. Many of these investments are considering our technologies as a suitable option. Alessandra, do you have anything else to add?

Yes. I mean talking to customers in Europe, Asia, and other parts of the world, it's some of the announcements that the pharma companies have made recently, those are investments that we're already in part of the plan with Biologics and into the U.S. But really, they are on a wait-and-see mode and really they're planning, but we're not expecting meaningful changes at this point. That's what we are hearing from our pharma customers.

Our next question comes from Laurence Alexander of Jefferies.

In terms of innovation, as you've been engaging with customers about the new platforms and potential structures needed for commercialization, do you have an idea of how much you might experience an increase in SG&A or technical service support for customers as sales begin to grow? Additionally, could there be a delay of a couple of years between the growth in business and the subsequent increase in EBITDA contribution? Can you elaborate on your thoughts regarding this?

I believe it will depend on the specific technology. As mentioned, we are fortunate to be repurposing many assets for this purpose. The focus will be on getting products approved and formulating them, which will take some time, but we won't need to make significant investments. The two areas where we need to carefully plan our resources are TBO and novel cellulosics. For TBO, we have enough for a launch, but if demand increases in different regions, we will need to invest regionally. On the novel cellulosics front, we can repurpose an asset, but timing is a critical issue that we need to address. We will make the necessary investments soon, and we will move quickly as our customers begin increasing their volume. As I mentioned during Innovation Day, as our customers commit to specific projects, we are ready to enhance R&D and technical resources. This focus is more on technical support rather than commercial aspects. We have the capability to add those resources, but we want to ensure our efforts align with our customers' priorities regarding which technologies to emphasize moving forward.

This concludes our question-and-answer session. I'd like to turn it back to Guillermo Novo for closing remarks.

I want to thank everyone again for your participation and attention. We're really excited about the progress that we're making as the point that we have made that portfolio transformation is over. This is a big change for us. It's an exciting change for us. The clarity of the quality of the portfolio, the markets that we have and the catalysts that we've been working on over the last few years to develop our strategy, our focus is very clear in the short term. We're going to focus on self-help to navigate through the uncertain environments, but we have clarity about the future, and we're excited about it, and we're going to continue to invest and grow the company. So thank you for your participation and for all the Ashland team that's listening. Thank you for all the work you're doing.

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