Ashland Inc. Q4 FY2025 Earnings Call

Good day, and thank you for joining us. Welcome to Ashland's Fourth Quarter Fiscal Year 2025 Earnings Conference Call. Please note that today’s conference is being recorded. I will now turn the conference over to your first speaker, Sandy Klugman. Sandy, please proceed.

Thank you. Hello, everyone, and welcome to Ashland's Fourth Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. My name is Sandy Klugman, and I recently joined Ashland as the company's Director of Investor Relations. I'm excited to be stepping into this role at a pivotal time for Ashland and our stakeholders, and I look forward to connecting with many of you in the months ahead. Joining me on the call today are Guillermo Novo, Chair and CEO; William Whitaker, CFO; as well as our business unit leaders, Alessandra Fassin, Life Sciences and Intermediates; Jim Minicucci, Personal Care; and Dago Caceres, Specialty Additives. Please note that we will be referencing slides during today's call. We encourage you to follow along with the webcast materials available at ashland.com under Investor Relations. Please turn to Slide 2. As a reminder, today's presentation contains forward-looking statements regarding our fiscal 2026 outlook and other matters as detailed on Slide 2 and in our Form 10-K. These statements are subject to risks and uncertainties that could cause future results to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but there is no assurance these expectations will be achieved. We will also reference certain adjusted financial metrics, both actual and projected, which are non-GAAP measures. We present these adjusted figures to provide additional insight into our ongoing business performance. 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.

Thanks, Sandy, and welcome to everyone joining us. Today, I'll provide an overview of our fourth quarter performance, discuss our strategic priorities, and share our guidance for fiscal 2026. Please turn to Slide 5. Let's begin with a summary of our recent performance. Ashland's fourth quarter results reflect our disciplined approach and ability to deliver in line with expectations despite ongoing macroeconomic challenges. We maintained strong margins and achieved revenue and EBITDA consistent with our prior guidance. Our continued focus on execution, along with momentum across our globalization and innovation initiatives, helped offset areas of competitive intensity and muted demand. Q4 sales were $478 million, down 8% year-over-year, primarily due to portfolio optimization initiatives. Excluding these actions, sales declined 1%. Adjusted EBITDA was $119 million, down 4% year-over-year, including an $11 million impact from portfolio optimization. On a comparable basis, adjusted EBITDA increased 5% with margins expanding to roughly 25%. Importantly, these results reflect the early benefits of our strategic actions and position us well to improve performance. Please turn to Slide 6. Now let me briefly summarize the performance of our business units. Life Science delivered steady performance, reflecting the benefits of our sharpened focus on higher-value pharma. Demand remained resilient with continued strength in cellulosic excipients, tablet coatings, and injectables. There was some weakness in nutrition in the quarter, but the team has recently secured share gains that support a return to growth next year. Our innovate and globalize strategies are supporting quality growth and strong margin durability. Personal Care generated broad-based gains across end markets and regions while maintaining strong profitability. Disciplined execution and a sharpened commercial focus are driving results in a muted environment. Investments in bio-functional actives and microbial protection delivered momentum with both lines returning to healthy growth in Q4. Specialty Additives executed well in a mixed market, increasing quarter-over-quarter EBITDA. All end markets outside of coatings improved, including performance specialties, construction, and energy and resources. Our gains were more than offset by weaker coatings in China, India, the Middle East, and North America. We continue to direct resources toward high-value applications, strengthening our position ahead of the coatings recovery. Intermediates faced headwinds from lower pricing and production volumes, which impacted profitability. The team remains focused on optimizing its operations against a challenging market backdrop. Stepping back from the segments, I want to highlight how our transformation efforts are shaping Ashland's path forward. Portfolio optimization and restructuring are complete, and the organization is focused on consistent delivery. As we've discussed before, approximately 85% of our portfolio serves consumer-facing end markets. These areas tend to be more stable and less exposed to economic cycles, providing a measure of consistency and resilience in the face of the broader macroeconomic volatility. The $60 million manufacturing optimization program is helping margins, though the timing of the P&L impact is later than what we initially expected. William will discuss the drivers later. In the quarter, Life Science and Personal Care each delivered EBITDA margins close to or above 30%. Specialty Additives achieved its highest margins of the year, while Intermediates continued to face margin pressures in a challenging market. On a comparable basis, adjusted EBITDA increased year-over-year across all business units, except Intermediates. Our globalized platforms returned to healthy growth in Q4, and we outperformed our innovation targets. In summary, even as external conditions remain unpredictable, we continue to drive results through disciplined execution and clear focus on our priorities. With our focused portfolio, cost actions gaining momentum, and growth initiatives taking hold, Ashland is well positioned to deliver resilient long-term value. I'd like to now turn over the call to William to provide a more detailed review of the fourth quarter financial performance. William?

Thank you, Guillermo. Please turn to Slide 8. Sales were $478 million, down 8% from last year, with portfolio optimization actions accounting for a $38 million reduction. Excluding those changes, sales were essentially flat, down 1% with steady demand in most areas. We saw volume gains in Personal Care, which helped balance softer results in Specialty Additives, while Life Sciences held steady. Pricing was down about 2% overall, mainly reflecting targeted pricing adjustments in Life Sciences from Q2 and continued pressure in Intermediates. Excluding Intermediates, pricing was down just 1% and foreign exchange provided a modest 1% lift. Adjusted EBITDA came in at $119 million, a 4% decrease year-over-year. Portfolio actions accounted for an $11 million headwind. But if you set those aside, underlying EBITDA improved by 5%, marking a return to growth on a comparable basis. Lower SARD from restructuring actions contributed to margin expansion alongside improved mix. These gains were partially offset by lower pricing and production volumes, while raw material costs remained stable. Our adjusted EBITDA margin expanded to 24.9%, up 110 basis points from last year. This was our most profitable quarter of the year and in line with our long-term margin target of 25%. Adjusted earnings per share, excluding acquisition amortization, was $1.08, down 14% from the prior year, disproportionately impacted by a higher effective tax rate in the quarter. The increase reflects jurisdictional tax changes and limited use of foreign tax credits. We expect our effective tax rate to be in the mid-20s next year. We delivered another quarter of solid cash generation with ongoing free cash flow totaling $52 million. That's a healthy conversion of adjusted EBITDA, reflecting our disciplined approach to capital spending and working capital. While Q4 ongoing free cash flow is down year-over-year, primarily due to higher accounts receivable from strong September sales, they remain consistent with recent expectations. At quarter end, our total liquidity stood at just over $800 million, providing us with plenty of flexibility. Net leverage was 2.9x and with the $103 million tax refund received in October from our nutraceutical sale, net leverage is now closer to mid-2s. This positions us well to continue investing in our strategic priorities while maintaining discipline in 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 $173 million in the fourth quarter, down 10% from last year. The decline was primarily driven by the divestiture of the nutraceuticals business and exit from low-margin nutrition offerings. On a comparable basis, sales were generally stable, declining 2% year-over-year, reflecting a mix of volume and price. Turning to demand trends. Pharma remained resilient across most regions, achieving low single-digit sales growth year-over-year. This momentum was driven by innovation and demand for high-value cellulosic excipients and sustained growth in our globalized business lines, tablet coatings, and injectables, in line with our long-term strategy and growth objectives. Nutrition end markets were softer, but recent business wins are expected to support a return to profitable growth in fiscal 2026. On pricing, year-over-year headwinds narrowed sequentially with pricing generally stable throughout the quarter. Foreign exchange provided a $3 million tailwind to sales. We continue to advance pharmaceutical innovation, highlighted by the launch of vialose sucrose, a high-purity excipient for injectables and the expansion of our low-nitrite excipients to help customers mitigate nitrosamine risk. The new offerings reinforce Ashland's commitment to delivering high-quality solutions for the evolving needs of the pharma industry. Now let's look at profitability. Adjusted EBITDA was $55 million, representing a 32% margin and a 2% decline versus $56 million last year. The year-over-year decrease primarily reflects a $3 million impact from portfolio optimization actions, which shifted the segment's portfolio towards high-return applications. Excluding this impact, adjusted EBITDA increased $2 million, driven by mix and reduced SARD expenses, which more than offset lower pricing compared to last year. As Guillermo mentioned, reaching an adjusted EBITDA margin above 30% for the full year is a first for Life Sciences. This is a milestone that highlights our strategic focus and disciplined execution and the strength of our margin foundation. Please turn to Slide 10 for Intermediates.

Thank you, Jim. Please turn to Slide 12. Specialty Additives sales were $131 million in Q4, down 9% year-over-year and consistent with Q3. The exit of low-margin construction business reduced sales by approximately $4 million or 3%. Excluding these actions, segment sales declined 6%, reflecting continued coating weakness in China, competitive intensity in export markets, such as the Middle East, Africa, and India, and softer demand in North America. Most of the volume decline was due to last year's share loss in China, where overcapacity and weak demand continue to weigh on volumes and intensify competition. While coatings demand remained soft, most regions saw stable sales sequentially. Performance specialties, construction, and energy outperformed the market supported by share gain initiatives. Pricing remained stable year-over-year, and foreign exchange contributed a favorable $2 million impact to sales. Adjusted EBITDA was $29 million, consistent with the prior year and up $3 million sequentially as favorable cost offset lower volumes, resulting in the strongest margin of the year at 22.1%. Portfolio optimization actions reduced EBITDA by $1 million. Excluding this, adjusted EBITDA increased $1 million with improved cost efficiencies, driving the year's strongest margin performance. Following the HEC production closure in Parlin, we rebalanced the network and prioritized high-value applications to stabilize margins in a lower demand environment. Looking ahead, Specialty Additives is well positioned to capitalize on a coatings recovery, driving outsized margin gains as demand improves. With that, I'll turn the call back over to William for some additional commentary.

Thanks, Dago. Please turn to Slide 14. As we conclude fiscal '25, I want to emphasize the significant progress our teams have made. We successfully completed our $30 million restructuring program, achieving $20 million in savings this year, with an additional $12 million anticipated in fiscal '26. Our $60 million manufacturing optimization initiative is progressing well, with $5 million in savings this year and $18 million projected for next year. A significant achievement was the complete closure of Parlin, which consolidated our HEC operations. Our VP&D cost actions continue to advance, and we are on track to meet our fiscal '26 run rate target. We have also shut down two smaller plants as part of our consolidation efforts and expect to finish this process in fiscal '26. Productivity enhancements are ongoing throughout the VP&D manufacturing chain. As we've communicated over the year, while strategic initiatives are mostly on track, P&L realization is taking longer than initially expected, reflecting current operational realities. First, cost improvements are coming through more gradually due to weighted average inventory accounting and elevated inventory levels related to consolidation and tariff mitigation. Our initial timing assumptions proved overly optimistic, and we are adjusting our expectations. Second, increased costs at our consolidated site, partly related to the accelerated HCC timeline, are affecting unit costs. We are actively addressing these challenges. Third, decreased volumes in the Asia Pacific have reduced plant utilization. While we have shifted network volume to maintain capacity, this has lowered U.S. production and additive savings. Overall, we expect the benefits of manufacturing network optimization to be between $50 million and $55 million under current conditions. We still aim for the full $60 million opportunity, which remains achievable as China volumes recover. Despite the timing adjustments, the program is already contributing to margins and remains a crucial factor for future enhancements. These actions are reinforcing our cost position and aiding in margin expansion. We are staying flexible in response to market changes, and our restructuring efforts are already helping to mitigate weaknesses in certain end markets. Additionally, we are improving our financial systems and forecasting capabilities to enhance accuracy, promote accountability, and strengthen operational performance. Looking ahead, our priorities are clear: finalize the cost savings program and continue to enhance productivity and operational excellence through our streamlined structure. With that, I'll now turn the call back over to Guillermo.

Please turn to Slide 15. As we wrap up fiscal 2025, I'm proud of the resilience and agility Ashland has demonstrated. Our teams exceeded our innovation targets and advanced our globalized agenda, which began delivering visible results in Q4. We saw steady sequential momentum in our globalized platform throughout the year as investments took hold. While the base business was down on the year in Personal Care globalized segments, Q4 marked a turning point, growing double digits in the quarter. We have clear goals to sustain and accelerate this momentum in fiscal 2026. Regarding our innovate strategy, our teams outperformed our innovation targets driven by core technology advancements. As showcased at the recent Innovation Day, we continue to strengthen our new technology platforms that are central to Ashland's long-term potential. The energy around our innovation pipeline is growing, and we're pleased with the traction we've established. These achievements reinforce our confidence in the long-term value of our portfolio. Looking ahead, we will continue to disclose targets transparently. We believe openness around the goals is essential as we pursue high-quality growth. We are committed to sharing both successes and challenges openly. This approach is fundamental to building credibility and confidence in our strategy, ensuring you have a clear view of our progress and the path forward. For fiscal 2026, we are targeting $20 million in incremental globalized sales and $15 million in innovation-driven growth as we scale platforms and advance recent launches. Please turn to Slide 16. As we look ahead to fiscal 2026, our focus remains on disciplined planning and consistent leverage. This marks our second consecutive quarter of meeting EBITDA commitments, an important step in building credibility going into the new year. Our guidance is grounded in prudent assumptions and reflects a continued emphasis on execution, consistency, and transparency. Importantly, our planning reflects a return to growth, signaling a constructive shift in trajectory and renewed momentum across our businesses. Ashland expects full year sales of $1.835 billion to $1.905 billion, representing organic growth of 1% to 5%. Portfolio resets are minimal, roughly $10 million due to owning Avoca for Q1 of fiscal 2025, making this year's result easier to baseline. Adjusted EBITDA is projected between $400 million and $430 million, with free cash flow conversion of 50% and CapEx near $100 million. This supports an attractive free cash flow yield and provides flexibility for capital deployment. Next year, we expect adjusted EPS to grow double digits plus and meaningfully faster than EBITDA, driven by operating improvement and lower depreciation from portfolio optimization. Our assumptions reflect current market realities. Life Science and Personal Care remain resilient, supported by globalize and innovate momentum. Specialty Additives and Intermediates, Specialty Coatings continue to face pressure. While macro factors like interest rates and housing turnover could support recovery, we've tempered upside in our outlook. We expect to outperform underlying markets through share gains, innovation, and disciplined execution. Tariff-related uncertainties persist. We're actively managing sourcing, production, logistics, and pricing. Input costs remain stable with steady raw materials and well-functioning supply chains. On the cost side, our manufacturing network optimization program continues to advance. Most plant actions are complete, and we remain on track to deliver $50 million to $55 million in savings under current conditions. The full $60 million opportunity is still intact and achievable as China volumes recover. As William noted, timing shifts will reduce the impact in fiscal 2026, but the contribution remains meaningful. Key factors included in our 2026 guidance, approximately $30 million of restructuring and network optimization from our $90 million program. About $20 million related to resetting performance-based compensation and merit increases, approximately $10 million impact driven by repairs and network-wide operational and working capital efficiency measures following the Calvert City outage. We're also increasing our R&D investment by $4 million to accelerate innovation in some of the leading disruptive opportunities. Overall, our fiscal 2026 guidance reflects a prudent view of market conditions. We remain focused on advancing innovation, scaling globalized platforms, and driving cost and productivity initiatives to support high-quality growth even in muted markets. With consistent execution, mix improvement, and disciplined capital allocation, Ashland is well positioned to deliver resilient performance and long-term value creation. Please turn to Slide 17. In closing, I want to highlight a few key priorities as we look ahead. Fiscal year 2025 ended on a healthy note with our teams delivering on operational and strategic goals despite the challenging macro. The completion of portfolio optimization and network consolidation has made Ashland a more focused, resilient business, well positioned for growth in high-value markets. We enter 2026 with momentum. Cost actions are yielding early margin gains with full P&L impact expected to follow. Innovation remains a growth catalyst. We're focused on accelerating commercial success. Recent investments are driving renewed progress in our globalized platforms, reinforcing our confidence in the long-term opportunities. Our priorities for fiscal 2026 are clear: delivering on safety, profitable growth, free cash flow and asset returns, advancing network optimization and inventory performance, accelerating innovation, scaling globalized platforms and fostering a productivity culture, strengthening systems such as S&OP, costing, planning and leveraging AI, prioritizing talent and organizational stability, and engaging our investors through transparent and consistent execution. Fiscal 2026 will be about converting transformation into sustained performance. With a focused platform and resilient core, Ashland is positioned to deliver greater value across stakeholders. Our core businesses have demonstrated stability through challenging periods, and we've strengthened our margins and improved our asset returns. The foundations we've built give us confidence as we pursue our strategic priorities. Thank you to the entire Ashland team for your resilience and teamwork. We're focused on translating opportunity into performance. Operator, let's open the line for Q&A.

Our first question comes from David Begleiter from Deutsche Bank.

Guillermo, just on volumes, what were volumes in Q4? And why are your volume assumptions at the high and low end of the EBITDA guidance range for next year?

Thank you for the question. We saw a notable increase in volume, particularly in our Life Science and Personal Care segments, which were the primary contributors. Regarding Specialty Additives, specifically in the coatings sector, the performance varied by region. Some regions saw increases, some remained the same, and others experienced declines, with China showing the most significant year-on-year drop. The Intermediates segment has stabilized, but pricing remains a significant challenge, with some impact from volume as well. Looking ahead, we anticipate growth at the higher end of our targets driven by globalization and innovation, contributing around 2%. This suggests we're projecting about 1% market growth or share gains. On the lower end, if market dynamics become less favorable and competition intensifies, our rates of growth in globalization and innovation could be impacted. Conversely, if we see a stronger recovery in certain markets, that could lead to better outcomes.

And just on the cadence of next year or this year, should Q1 EBITDA be up versus Q1 last year?

Yes, David, it's William. So a couple of the moving pieces as you compare to last year. In fiscal '25, we pulled forward a lot of maintenance activity, if you recall. So that was a $25 million headwind last year. Q1 is typically where we'll do a lot of our annual compliance shutdowns. So we have about half of that this year, about $12 million. But then we've also shared that Calvert City outage. So that's a $10 million impact in Q1. So as you look at the puts and takes on the manufacturing side, I would expect sales volume to be in line with how we've talked about the guide in terms of year-over-year. Life Sciences should have a nice comp in terms of the sales volume in Q1 as compared to last year. And then pricing trends have been stable. And so year-over-year pricing should be a more modest headwind. So if you put that all together, we're roughly flat, flattish versus the prior year. But I would say that the key element of that is the Calvert City action that we've shared late last month.

So in Life Sciences, you spoke to some weakness in the nutrition side and then also spoke to some wins that will help to offset that. I guess, can you flesh out both of those a little bit more? Where was the weakness on the nutrition side? What were some of the business or parts of the business that were a little bit softer? And then also speak to what drove the wins? Where should we be thinking about that in terms of some of the traction that you're getting there?

John, let me ask Alessandra to answer this question directly.

The weakness was mainly seen in North America and Europe, particularly with one of our customers in Europe losing market share. However, as Guillermo mentioned and I noted in the prepared remarks, we are starting to gain some traction with market share increases. This is primarily related to the Klucel product, and we anticipate this will be evident in our results in the upcoming quarters, with signs of recovery expected as early as the first quarter.

And the share gain we got already, it has already started. So it's not to come. It's already gained.

Okay. Got it. No, that's helpful. And then just a question on the cash flow side. You've got CapEx set for $100 million now. I guess how much of that is growth CapEx? And you had the big Innovation Day where you highlighted a bunch of pillars where some of them are going to need some capital, some of them aren't. I guess, how much should we be thinking about in terms of growth CapEx tied to some of those innovation pillars that look like they're pretty close to turning the corner and starting to commercialize?

So let me just quick comment and William, you can give a little bit more detail. But the big drivers are going to be things around globalize that we're still investing in India and even just finishing some of the projects in Europe. And I would say also, as we look at the HEC projects that we've done getting out of Parlin, there are investments we're pacing them because just the demand is a little bit softer, but there are some capital projects that we're going to be adding to increase capacity in the U.S. Given it's a little bit more muted, we're going to be managing through that at a slower pace, but those are part of the plan. But William, do you want to give a little bit more detail?

Yes, John, that's a great question. It aligns well with our asset strategy. Firstly, from a capital expenditure perspective, maintenance costs are decreasing. We’ve optimized our operations, so the ongoing capital needs are likely down by $15 million, leaving us with $55 million from the $100 million allocated for ongoing operations. Additionally, there are cost-saving measures that will improve efficiencies, contributing another $15 million. The remaining amount for reaching the $100 million will come from our growth projects, which support our global initiatives, particularly in microbial protection and the OSD tablet coatings segment. Regarding the new technology platforms, we have incorporated this into our plans. A crucial aspect for us is considering how to repurpose our assets for the future as we streamline operations. Currently, we are not at a stage where we need to make significant adjustments, as we can effectively utilize our right-sized internal capacity.

Just when we're taking a step back and looking at the Personal Care markets, the results are pretty good for skin and hair. However, some of your customers are speaking positively about high-end customers, negatively about lower-end customers. In some cases, there are signs of life in Asia for the first time in several years. But it just seems like the overall outlook is still pretty mixed. Is that what you're generally hearing? And how are you thinking about that in the near term versus how are you thinking about the growth algo relative to the market for your portfolio over the intermediate to long term?

Jim can provide more details on that. There are significant differences based on the segments and regions involved, leading to a lot of variation. This can be observed in the earnings calls of other companies; some are experiencing growth in North America while seeing declines in Europe. The impact really hinges on the specific business profile, customer base, and segments. So, Jim, feel free to share how this situation influences us.

Sure. Thanks, Guillermo. Chris, so maybe starting with the last part of your question in terms of near term and then medium to long term. So as we look at our business and what we've shared around our activities and globalize and innovate, we feel we have a lot of levers in the portfolio. We have a very broad product portfolio across different segments where we can outperform the market. That's our medium to long-term view. Specifically, in terms of what we're seeing in the market right now, I think you captured it well. It is a mixed environment where your position with customers can really play into the performance that you're seeing. If you do maybe a quick walk around the world, North America is a bit of a mixed environment. In Q4, we saw stable performance versus prior year there with skin and hair continuing to hold up quite well. In Europe, we've seen a continued acceleration throughout the year, and that continued in Q4, especially in skin and in sun. If you look at sell-in versus sell-out, that channel has really improved in the sun care market as inventories have come down, and we've seen nice growth in our film formers within sun care. Within Asia and in China specifically, we've continued to focus on local regionals. As you mentioned, we are seeing stabilization and some growth in the prestige segment as well. And so there, our biofunctional actives business performed really well in our other segments within skin and hair. In Latin America, I would say Brazil is a bit of a mixed environment right now. Skin was quite strong, and hair is a bit mixed. And Mexico and Argentina were both strong in personal care and home care. When you look at our business specifically, what I'd say is, and we've talked about this throughout the year, our 2 globalized business lines, biofunctional actives, and microbial protection, we've done a tremendous amount of work. The team has done a great job really driving the commercial activities there, and we have been very successful having new customer launches with our biofunctional actives and share gains in our microbial protection. Specifically, in biofunctional actives, as we've shared, that part of the business has been impacted by some customer-specific headwinds. We've lapped that. As we said in the last call, that has stabilized, and we do expect some incremental growth there. Now you're starting to see the new customer wins really come through externally, where it was masked in the past. Similarly, microbial protection, the base has stabilized and the new wins that we've converted throughout the year are coming through in our results, and we expect that to continue as we go into fiscal '26.

Can you comment on the VP&D stability?

Yes. VP&D, you asked the question compared with the competitor that years ago, there was some disruption in the market. Yes, we have seen that stabilize. So it is currently, both from a volume and price standpoint, it is currently stable. We are entering the contract season in Europe. So there could be some plus and minus some movement, but it's currently stable.

I wanted to, I guess, follow up on the Life Sciences pricing piece. Are you able to, I guess, just provide a bit of color around what percent of your, I guess, book or however you want to frame it is coming up for renegotiation each year in terms of price contracting?

We don't disclose the specific business mix by customer. However, I can emphasize that Europe is significant, as large players in that region often engage in similar practices simultaneously. This encompasses our entire portfolio, including VP&D and cellulosics, which are the primary components of our mix. Tablet coatings and injectables represent our newer offerings with distinct technologies.

I think you expected $100 million from your innovation pipeline in 2027. What do you expect from it in 2026?

For the '26, what we've outlined right now is it was $15 million of new innovation and mostly still core. The launches, as we said in the Innovation Day for the newer technologies would probably be starting more in the '27 and beyond range just based on the developments with customers.

And Jeff, it's a cumulative target for incremental sales. So we did $13 million this year plus the $15 million, totaling roughly $30 million in cumulative commitment at this point through 2026 since the Strategy Day.

And just to clarify, we've kept it simple on the globalized side. We’ve included everything there, including injectables, which have a lot of innovation. We aimed to present a clear narrative because our investment approach in globalization is different. There are unique assets and other factors that we need to consider for all the areas involved. This gives you a complete picture of how things are progressing. Tablet coatings, biofunctionals, and microbial protection all involve significant R&D and technology efforts. Currently, when we refer to innovation, we mean both core innovations and new technology platforms that don’t fit into our four main segments.

First, I wanted to just ask on the pricing side. I mean you kind of hit it on the Life Sciences side earlier, saying that you're seeing stabilization there. But on the Specialty side, I mean, year-over-year, you said pricing was flat, but I think you alluded to potentially increased pressure. Do you think about that more on the volume side of things? Or do you still see some downside risk on pricing as you're looking into fiscal '26?

Let me make one comment. In my personal view, pricing pressure is occurring in China, and exports are currently very low, which means that no one is making money. There is a limit to how low it can go; it eventually becomes unviable. I believe there is some stability, but the bigger concern will be export markets. This is a significant issue, particularly regarding the impact on exports to Europe across various products, not just in Specialty Additives, but in other sectors as well. Would you like to elaborate on this?

I believe the United States, particularly North America, will remain a fairly stable market in terms of pricing. The same can be said for Europe, our two largest markets. In these regions, we expect typical performance regarding volume and pricing, and overall it appears stable compared to fiscal year 2025. As for other parts of the world, we are exercising caution, regularly assessing the balance between volume and pricing to decide where it's appropriate to maintain prices. This approach is why we did not see a decrease in pricing last quarter, as we're also considering strategic opportunities for market share growth and network optimization. I anticipate continuing pressures in 2026, particularly in areas like the Middle East, Africa, and India, but so far, the situation seems consistent. Fortunately, customers highly value what we offer, including our quality, innovation, and overall value proposition. With the right strategy, we believe we can retain our position.

I’ll let William provide more details, but we currently have flexibility. As William mentioned, we can pursue both strategies. We'll continue to be practical as we have in the past. There is currently value in the share price, but in this uncertain environment, we need to ensure that we balance that with our debt management. Would you like to add anything further?

Thank you, Josh. Our capital allocation priorities remain the same. Our first focus will be on funding high-quality organic growth investments included in the $100 million capital expenditure and productivity initiatives. This is crucial for enhancing our cost structure at the plants. Additionally, maintaining leverage within our target range is important to preserve flexibility on our balance sheet. After that, we will return excess capital to shareholders. Our established dividend policy is a 30% payout, and we are currently slightly above that, so I anticipate that future dividend increases will be moderate. After accounting for dividends, we'll aim for a balanced approach to capital deployment, similar to our past activities, including occasional share repurchases. Based on our outlook, we expect to generate strong free cash flow in the upcoming year. If we project forward the tax return we discussed alongside the free cash flow, we should be in the low 2s while delivering the midpoint of our EBITDA guidance. This gives us ample flexibility, and we will maintain a balanced and disciplined approach moving forward.

I just wanted to confirm timing on portfolio optimization headwinds. When should we expect to see those fully lapped?

I can take it. Yes. So Abigail, the positive news heading into next year is that there will be a slight impact in personal care in the first quarter, amounting to about $10 million in sales and $1 million in EBITDA. Beyond that, it's a clean slate. For the first time in a long while, we have a very clear baseline for reporting, meaning if we grow by 2%, we simply grow by 2%, without needing to adjust for items we've previously rationalized or sold. So, we're entering next year with a very clear setup.

So nutrition, as Guillermo mentioned, is already happening in October. Those wins, specifically with Klucel, have taken place. We started receiving orders towards the end of fiscal year Q4 and have already been delivering products in October and now in November. It's real and happening already, and we expect to see nutrition help close the gap that we saw in Q4. As I mentioned, there was a share gain with our customer in Europe, but consequently, we also lost some share. However, Klucel is bringing in new wins, which are profitable.

And I would highlight that the mix that what we lost is more lower margin material. What we're gaining is better quality material in terms of the margin profile. So net-net, it will be positive.

Just wanted to follow up a little more on the network optimization. My question is more on the time line of the benefits that you kind of pushed out here. But I'm just curious, what needs to happen in order to realize some of those benefits more quickly? Is it as simple as better demand? Do you need better demand in specific regions or product lines? Or are there any other actions? I know you mentioned it sounds like maybe some incremental VP&D actions. Are there other actions you can take to maybe help accelerate some of those benefits?

Yes. Looking at the actions, the small plant has a minor impact. Most of that will be completed in the first half of this year and will flow through. HEC, as we mentioned, is causing more timing issues with the flow-through. This involves three stages: the action is completed, but our initial assumptions regarding the flow-through from an average accounting perspective were likely too optimistic and delayed. However, inventory and revenue are key. Sales will be critical and act as a major catalyst. If sales increase, we can move much more material, which would speed up the flow-through. We want to be transparent that about one-third of the HEC volume is beneficial but is holding back our position in China. Instead of providing an incremental benefit, it has helped prevent a decline in our business in China. However, to realize its full incremental potential, we need improvements in China or another area to balance the network. This situation has the most timing complexities since the action is complete. Regarding VP&D, we are collaborating across two plants; work is underway on one, and we'll soon begin on the other through various actions and timing. The results of these efforts will determine the timing of those benefits.

Yes, absolutely. And a very good question and very much at the heart of what we're doing at the heart of this strategy, which is innovation. We're doing a couple of things. First, we're looking at quick wins. And what we mean by quick wins is that we already have a pretty robust portfolio where what we really needed was application data that can be used into industrial coating applications. So we're doing a lot of that. And with the portfolio that we have, we want to go after those industrial customers. We know who they are, we know how to get there, and we have an existing portfolio. So that for us is really a quick win, an area that we're looking into a little bit more to accelerate the monetization of our innovation efforts. And then longer term, it's twofold. It's also the core business. It's also the core portfolio. But then we have areas like easy-wet. For instance, we just launched another product a couple of weeks ago, and it's ready to go, and we are already seeing pretty good traction from our customers. It's one customer at a time. It's talking to the customers, making sure we're meeting their needs. But I would say that area is advancing quite well. And hopefully, more to come on that one. Thank you for the question.

Well, thank you, everyone, for your participation and interest. As I said, I want to congratulate the team, a lot of a very dynamic external environment. And I think we've delivered on a lot of the things that we committed to. So we feel very good about that. We still expect the external environment to remain volatile and with a high degree of uncertainty. Positive and negative. So there could be some positives as well. I don't want to be just looking at the negative. There is just uncertainty. I think this really drives us to focus on the things that we can control. We go back to our strategy is relevant for this environment. I think the actions we took on our execution, the portfolio optimization, even if they're delayed are helping us in driving performance in the near term, making us more competitive in all our core businesses. So we're focusing on the things we can control. That's about the execution of our portfolio optimization and productivity and operating discipline. It's about driving globalization and driving innovation to really drive top-line growth. And if we do that, we feel very confident about the future even in these environments. If things get better, we have a huge potential for higher leverage of our manufacturing assets and all that. So that would be really the bigger catalyst that we would see in terms of momentum if we see some market recovery there. But with that, we look forward to seeing you in the coming weeks, and thank you.

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