Earnings Call Transcript - ASH Q2 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Ashland Inc. Second Quarter 2024 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, Vice President of Finance and Director of Investor Relations. Please go ahead.

William Whitaker, Vice President of Finance and Director of Investor Relations

Thank you, Daniel. Hello, everyone, and welcome to Ashland's Second Quarter Fiscal Year 2024 Earnings Conference Call and Webcast. My name is William Whitaker, Vice President of Finance and Director of Investor Relations. Joining me on the call today are Guillermo Novo, Ashland Chair and Chief Executive Officer; and Kevin Willis, Senior Vice President and Chief Financial Officer. Ashland released results for the quarter ended March 31, 2024, at approximately 5:00 p.m. Eastern time yesterday, April 30. The news release issued last night was furnished to the SEC in a Form 8-K. During today's call, we will reference slides that are currently being webcast on our website, ashland.com, under the Investor Relations section. We encourage you to follow along with the webcast during the call. Please turn to Slide 2. As a reminder, during today's call, we will be making forward-looking statements on several matters, including our financial outlook for our third quarter and full year fiscal 2024. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We do not believe any such statements are based on unreasonable assumptions, but cannot assure that such expectations will be achieved. Please refer to Slide 2 of the presentation for an explanation of those risks and uncertainties and the limits applicable to forward-looking statements. You can also review our most recent Form 10-K under Item 1A for a comprehensive discussion of the risk factors impacting our business. Please also note that we will be referring to certain actual and projected financial metrics of Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to these measures as adjusted and present them to supplement your understanding and assessment of the financial performance of our ongoing business. Non-GAAP measures should not be considered as a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures are available on our website and in the appendix of today's slide presentation. Please turn to Slide 3. Guillermo will begin the call this morning with an overview of Ashland's performance and results in the second quarter. Next, Kevin will provide a detailed review of financial results for the quarter, followed by commentary related to Ashland's outlook for our third quarter and full year fiscal 2024. Guillermo will then provide an update related to Ashland's strategic priorities, and then we will open your line for questions. Please turn to Slide 5. I will now turn the call over to Guillermo for his opening comments. Guillermo?

Guillermo Novo, Chief Executive Officer

Thank you, William, and hello, everyone. Thank you for your interest in Ashland and for your participation today. Financial results for the March quarter exceeded our adjusted EBITDA outlook range issued on January 30, 2024, with revenues at the midpoint. Overall sales declined 5% from the prior quarter to $575 million. Improving sales trends noted in our last conference call continued for the balance of the second quarter, delivering year-over-year volume growth for the first time since the June of 2022 quarter. While still early from a trending perspective, the breadth of our ongoing recovery, as well as the constructive external data, reinforces our belief that demand normalization is underway within the Personal Care and Specialty Additives segments. Looking ahead, April sales are reflective of continued Personal Care and Specialty Additives momentum. Within Life Science, stable demand in pharma cellulosics was more than offset by the normalization of competitive dynamics in pharma PVP. Pharma PVP volumes were stable sequentially, and we expect overall pharma year-over-year comparisons to improve in the second half as we lap our strong prior year cost. Pricing was down primarily within intermediates as the Ashland team worked to strike an appropriate balance with moderating costs and increasing competitive activities. Excluding intermediates, lower prices were largely consistent with favorable raw material costs. The largest impact in our second quarter profitability versus the prior year's quarter were intermediate pricing and the reset of variable compensation. Production volumes were down 5%, primarily related to Specialty Additives and Intermediates, while overall sales were up 3% versus the prior year. Based on current inventory levels and demand forecasts, we expect to produce at or slightly above the sales volume for the balance of the fiscal year. Overall, while adjusted EBITDA for the quarter decreased 13% to $126 million, it was above expectations for the quarter. Reduced income, partly offset with share repurchase activity over the last year, yielded an 11% decrease in adjusted EPS to $1.27. Please turn to Slide 6. Overall sales declined due to the factors that I referenced earlier with the largest relative impact in our intermediates and Life Science business units. Notably, Personal Care sales turned positive for the first time since Q4 fiscal year '22 with momentum in several end markets and regions. Sequentially, overall sales volume increased 30% with a proportional increase in production. This was the key driver of the 710 basis points quarter-over-quarter adjusted EBITDA margin improvement for the company. Life Science, Personal Care, and Intermediates delivered high-quality margins for the quarter. Specialty Additives was able to improve adjusted EBITDA margins by over 1,200 basis points quarter-over-quarter with an opportunity to further expand going forward. While this is a return to a more typical overall adjusted EBITDA margin for Ashland, we believe there's an opportunity to improve to the mid-20s in the second half. Please turn to Slide 7. To take a step back, the broad themes impacting our performance going forward are the normalization of demand, the quality and resiliency of our core markets, and building organic growth catalysts. Normalization is simply the return to customer trend demand following last year's unprecedented and extended destocking. This is about the convergence of our demand with our customers' demand. Even under a flat to low market growth scenario, our volume demand should increase, driving both improved sales and production volumes, which will improve financial performance. From our perspective, demand is normalizing. Kevin will further explain these dynamics impacting our outlook in the presentation. Once demand has normalized, the fundamentals of the core business will drive underlying performance. Our core businesses are focused on high-value and resilient consumer-based industries: Pharma, Personal Care, and Coatings. For most of our customers or the customers we serve, end market demand has been resilient and is expected to remain resilient. All these markets have strong underlying megatrends that will continue to provide profitable growth opportunities. Lastly, we will continue to improve our underlying business mix. Our portfolio improvement actions will improve our portfolio and the quality and resilience of our business mix. Kevin will provide a detailed update later, but our portfolio optimization activities remain on track. Longer term, it's about having strong catalysts to drive our company's future profitable growth. Our strategic priorities of execute, globalize, innovate, and acquire will provide us unique profitable growth catalysts over the coming decade. Many of these opportunities are not factored in or reflected in our current valuation. If we look at execute, we have the opportunity to further strengthen our core businesses through productivity, commercial excellence, and innovation. On globalize, we have four strong businesses that represent 10% of our sales and are well positioned to grow and improve our profitability. We are actively investing in these businesses. Lastly, our Innovate strategic priority presents us with the most powerful growth catalyst opportunity. New differentiated technologies, mostly with a high sustainability profile, can expand our available target markets. I've been personally involved in many meetings with our major customers across our core industries. Customer interest and excitement about these technologies is high. Overall, we're encouraged by our second quarter results, which increased our confidence in achieving our full year outlook. While there still is uncertainty regarding the pace of a complete normalization, stable customer demand, consumer demand, lower inventories in the value chain, and our own order patterns suggest the early stages of demand normalization are underway. We continue to position the company for more resilient operations, with our planning and portfolio shaping actions. And last but certainly not least, we are excited about the potential of our growth catalysts. We recognize that the six drivers and capabilities in the past may not be the ones we need to drive the growth catalysts of the future. We are taking action to strengthen our capabilities. We have been refining our organization, hiring new talent with different experiences, and investing in our people, processes, and technologies to reflect a growth mindset. With that, let me now turn the call over to Kevin to review our Q2 results in more detail. Kevin?

Kevin Willis, Senior Vice President and Chief Financial Officer

Thank you, Guillermo, and good morning, everyone. Please turn to Slide 9. Total Ashland sales in the quarter were $575 million, down 5% compared to the prior year. Year-over-year quarterly volumes modestly increased for the first time since June 2022, as demand normalizes within the Personal Care and Specialty Additives segments. These volume gains were partially offset by unfavorable Life Sciences volumes. Pricing was softer in a moderately deflationary raw material environment, primarily within the Intermediates and Specialty Additives segments. Gross profit margin increased 20 basis points to 32.9% in the quarter. This improvement was largely due to overall production costs that were favorable in the quarter and product mix. This was partially offset by unfavorable Intermediates pricing versus raw materials. Favorable production costs were a result of generally lower spend across the segments, partially offset by lower absorption. When excluding key items, SG&A, R&D, and intangible amortization costs were $117 million, up from $110 million in the prior year, mainly reflecting variable compensation reset and merit increases. In total, Ashland's adjusted EBITDA for the quarter was $126 million, down 13% from the prior year. Ashland's adjusted EBITDA margin for the quarter was 21.9%, down from 24% in the prior year. Adjusted EPS, excluding acquisition amortization for the quarter, was $1.27 per share, down from $1.43 in the prior year quarter. Now let's review the results of each of our four operating segments. Please turn to Slide 11. Within Life Sciences, sustained demand in pharma cellulosics was more than offset by normalized competitive dynamics of pharma PVP, when compared to a strong prior year period. Nutrition volumes demonstrated moderate sequential improvement but continue to be challenged when compared to the prior year period due to lower demand, while nutraceutical sales remained strong. Overall pricing for Life Sciences was modestly lower. Life Sciences sales declined by 8% to $222 million. Adjusted EBITDA decreased by 12% to $66 million, primarily reflecting the lower PVP sales volumes and unfavorable product mix, partially offset with favorable pricing versus raw materials. Adjusted EBITDA margin decreased 160 basis points to 29.7%. Please turn to Slide 12. Stronger demand positively impacted Personal Care volumes within most end markets. Revenue growth was most pronounced in the APAC region and Europe. Oral Care sales were also positively impacted by order timing with a key customer, which is expected to result in lower buying in Q4, before normalizing again in Q1 of next year. While sequentially improving in the quarter, our Avoca business remains challenged, as customers moved from plant-based to lower-cost bio-based materials. We continue to assess opportunities to improve the underperformance of this business line. Overall pricing for Personal Care was moderately lower. Personal Care sales increased by 1% to $169 million for the quarter; Personal Care sales for the quarter, excluding Avoca were up high single digits year-over-year. Adjusted EBITDA increased 29% to $45 million, primarily reflecting increased sales volumes, favorable product mix, and production costs, partially offset by variable compensation reset. Favorable production costs were a result of lower spend and higher absorption. Adjusted EBITDA margin increased 560 basis points to 26.6%. Please turn to Slide 13. Stronger demand positively impacted Specialty Additives volumes within coatings and Performance Specialties, partially offset by lower energy end market volumes. Sales growth versus the prior year was most pronounced in the APAC region and Europe. Overall pricing for Specialty Additives was lower, primarily reflecting increased competition in APAC but was mostly offset by favorable raw materials. For the quarter, Specialty Additives sales declined by 2% to $157 million. Adjusted EBITDA declined by 21% to $27 million, primarily reflecting unfavorable production costs, moderately unfavorable pricing versus raw material, and variable compensation reset. Unfavorable production costs were a result of lower spend more than offset by lower absorption. Adjusted EBITDA margin declined by 390 basis points to 17.2%. Please turn to Slide 14. Intermediates reported sales of $40 million, down 22% compared to the prior year, driven by broadly lower pricing and captive volumes. Intermediates reported adjusted EBITDA of $12 million, a 30% EBITDA margin compared to $20 million in the prior year, primarily reflecting lower pricing. Please turn to Slide 15. Ashland continues to have a very strong financial position. As of the end of March, we had cash on hand of $439 million with total available liquidity of roughly $1 billion. Our net debt was $889 million, which is about 2.2x of leverage. We have no floating rate debt outstanding, no long-term debt maturities for the next three years, and all of our outstanding debt is subject to investment-grade style credit terms. We have $900 million remaining under the current Evergreen share repurchase authorization. Our balanced and disciplined capital allocation approach has deployed $1.05 billion to share repurchases and retired 11.1 million shares since June 2021. We are continuing to invest in our existing businesses and technology platforms to grow organically while pursuing our strategy of targeted bolt-on M&A opportunities focused on Pharma, Personal Care, and Coatings. Please turn to Slide 16. Ashland prudently managed production and inventory levels as we monitored the normalization of demand. Inventory levels have decreased $180 million compared to the prior year quarter and $38 million sequentially. Our actions should better position us for more resilient performance and profit momentum across demand scenarios as the year progresses. Overall, ongoing free cash flow for the quarter was $4 million and $70 million fiscal year-to-date. For the fiscal year, we expect to generate a free cash flow conversion of approximately 50%. Our progressive dividend policy remains an important part of our capital allocation strategy and reflects our confidence in the company's long-term profitable growth outlook. Ashland has grown its annual dividend every year since 2009, compounding at 18% per year during that time. We target an annual dividend payout ratio of approximately 30% of adjusted income from continuing operations over the long term and are committed to increasing the dividend annually as we've demonstrated.

Guillermo Novo, Chief Executive Officer

With that, I will now provide an update on the execute pillar of our strategic priorities in addition to an updated outlook. Please turn to Slide 18. We continue to have four primary portfolio actions underway. The nutraceutical sales process is ongoing and we continue to expect a signing and closing within this fiscal year. CMC production has been shut down at Hopewell and inventory levels are being drawn down while we migrate select production volumes into our Alizay France manufacturing facility. We have also optimized industrial MC by consolidating production capacity in Doel, Belgium. As a result, Ashland will be reducing its volume exposure to several lower value, more cyclical industrial segments, including the construction end market. Ashland will continue to operate its remaining MC production unit at Doel to grow in higher-value segments. Our CMC and MC actions led to $27 million of accelerated depreciation and $20 million in restructuring and separation costs for the quarter. Ashland continues to advance its work to improve the productivity of its HEC business and specific actions will be communicated in due course. We are committed to act with appropriate urgency to deliver on our commitments, including the reduction of all stranded costs to drive an EBITDA neutral outcome and improve overall margins for the company. In summary, all portfolio actions are on track to deliver a more resilient portfolio with stronger performance by the end of calendar year 2024.

Kevin Willis, Senior Vice President and Chief Financial Officer

As we look ahead, the ongoing question is the timing and magnitude of demand normalization. We recognize that our 2023 baseline was subdued on the heels of supply constraints and overstocking followed by a significant destocking. Understanding end market trends is critical to forecasting the recovery. End market demand has remained stable and resilient. As Guillermo mentioned, our current demand patterns and market intelligence suggest demand normalization is continuing. Even under a flattish end market demand outlook, we expect to grow from our 2023 baseline, as highlighted on the right side of the chart. Of course, demand evolution in the coming months will further narrow the range of recovery scenarios for the full year. In the near term, we've had a good start to the quarter and we're expecting this trend to continue with second half year-over-year revenue growth to be high single digits to low double digits, excluding portfolio optimization actions. Our current full-year forecast reflects demand normalization throughout the remainder of our fiscal year and does not contemplate customer restocking. Please turn to Slide 20.

Guillermo Novo, Chief Executive Officer

Personal Care and Specialty Additives are expected to benefit from demand normalization with favorable second half comps. Difficult Life Sciences comps are expected to improve as the year progresses. We are expecting softer overall pricing, mostly offset with raw material deflation, excluding Intermediates. We expect significant year-over-year absorption favorability as production is forecasted to normalize, and we compare against last year's inventory corrective actions. Sequentially, Specialty Additives is expected to demonstrate continued margin growth as production increases to align with improved seasonal demand. Lastly, the portfolio optimization activities are expected to generate 200 to 250 basis points of adjusted EBITDA margin expansion at full realization in fiscal '25 and '26. For the fiscal third quarter, the company expects sales in the range of $560 million to $580 million and adjusted EBITDA in the range of $138 million to $148 million. For the full year, we now expect sales in the range of $2.150 billion to $2.225 billion and adjusted EBITDA in the range of $470 million to $500 million. Key risks and opportunities are listed on the slide. Demand recovery, variability in plant loading, and price versus raw materials continue to be most critical for the full year financial results.

Kevin Willis, Senior Vice President and Chief Financial Officer

And now let me turn the call back to Guillermo to provide an update on our strategic priorities.

Guillermo Novo, Chief Executive Officer

Thank you, Kevin. Please turn to Slide 22. Our strategic priorities remain unchanged and continue to guide our actions, investments, and profitable growth expectations. As we have discussed before, the priorities include: execute, globalize, innovate, and acquire. As Kevin shared, we're making good progress on our execute priorities and the resulting impact will further strengthen Ashland's financial resilience. Our globalized and innovate priorities are expected to serve as a growth catalyst, extending and expanding improved results from demand normalization and the portfolio optimization actions. We are pleased to report that the Ashland team is making progress in both areas. Please turn to Slide 23. Activities underway to globalize four of our extremely attractive business lines, which currently represent 10% of our sales. They are injectables, OSD tablet film coatings, biofunctionals, and preservatives; two in Pharma, two in Personal Care. We continue to make progress in our globalization efforts for these profitable growth businesses. In Pharma, the injectable business continues to make progress, expanding the innovation project pipeline across early-, mid-, and commercial-stage projects. During the last year, we have grown our pipeline of injectable projects by 50%. Although starting from a small base, our Injectable business performance is nearly 100% ahead of our first half expectations for this year and 180% above the prior year. We continue to invest in both technical and manufacturing capabilities and expect to inaugurate our new Ireland facility this year in Q4. The OSD film coatings business continues to globalize its manufacturing and technical footprint to enhance its ability to address local needs. During the quarter, we successfully acquired land in India to build out our OSD film coatings business, infrastructure in a key region. We're also starting the process of converting an existing nutrition site in Brazil to support OSD coatings, and in addition to support our biofunctionals business. This conversion is a great example of repurposing assets to be more efficient with capital and speed to market to enable growth. And we're innovating with an exciting pipeline of technologies that will provide increased productivity to our customers. Shifting to Personal Care, biofunctionals continues to innovate well, leading the Personal Care segment and new product introduction revenue this year. We have also experienced the recovery of sales into China, an important market and the location of our newly commissioned production facility. We will now be able to innovate and produce locally for our customers. We expect this business to maintain strong growth momentum. The Preservatives business is advancing several projects to optimize our manufacturing and supply chain to reduce overall costs, enabling local supply and further support continued share gains. We're also continuing to innovate, expanding our natural actives portfolio, as well as advancing new process technology to improve productivity. All four business lines took steps to accelerate globalization activities and remain hyper-focused on implementing their respective business plans to deliver highly accretive margins and growth for the company. Please turn to Slide 24. Innovation is a fundamental component of our growth strategy. Underscored in the video on the onset of the webcast, Ashland's new leading scalable technology platforms, paired with market leadership, is at the core of our business model. We are hyper-focused on executing our innovation strategy, launching new products and engaging customers. As we indicated in the last call, we have launched our first super wetters targeting coatings, and we will be launching new variants targeting other markets. We have launched several liquid cellulose+ products and are now developing new products targeting Asia and Latin America as well as exploring the value of this technology in Personal Care applications. In bioresorbable polymers, we currently have a pipeline of over 160 customer projects, and we expect the pipeline to continue to grow as we establish commercial traction on sales from recently launched products such as Viatel and Vialose. Our transformed vegetable oil or TVO technology has probably received the highest level of interest across our customer base given its performance, functional tunability, and sustainability profile. I've personally been involved in many of the customer meetings, and it's truly exciting to see the enthusiasm about the technology and the interest in collaborating with us to develop this technology across multiple markets and applications. Based on additional developments we've made on TVO, I'm also very excited about the opportunities TVO may open for Ashland in existing high-volume, high-value applications. We recognize that innovation can be a longer-term venture in nature. But as we launch more products, we expect to gain commercial momentum, as well as validate the value of these exciting new technology platforms. Our current focus is on developing several joint development agreements or JDAs with our key industry leaders. Please turn to Slide 25. In closing, we will stay on strategy, maintain operating and capital allocation discipline and take appropriate actions to drive fiscal year 2024 performance. We are investing in our innovate and globalized strategy while increasing customer innovation engagement to advance our growth capabilities. We are leveraging the opportunity to refine the portfolio and improve our overall quality and focus on the big three businesses. We're encouraged by the second quarter momentum, and we believe we are poised to capitalize on continued improvement in demand trends, demonstrating continued progress in our normalization, resiliency in our business portfolio, and the value of our growth catalyst themes will be key going forward. We are confident in the quality and resilience of our strategy and business. I want to thank the Ashland team once again for their leadership and proactive ownership of the businesses in a dynamic environment. Thank you for your time. And Daniel, let's move to Q&A.

Operator, Operator

Our first question comes from Michael Sison with Wells Fargo.

Michael Sison, Analyst

Nice start to the year. When you think about the second half run rate and how you grow that into 2025, is that the best way to think about sort of the growth or where your EBITDA margin should be as we head into '25?

Guillermo Novo, Chief Executive Officer

If you just look at the three points that we made on normalized quality of our portfolio and then the growth catalyst, the rest of the year, normalization is going to be the biggest driver of our performance. So we are seeing this as the higher seasonal part of the year. So the demand is working out as expected. So we should be seeing that increase in revenue and proportional gross profit. But the bigger issue is going to be obviously our loading of our plants as that volume comes in; that's sort of the projection. So most of the year, it's about normalization and about managing price versus raw materials to balance out any adjustments in the industry. As we move forward, then the other catalysts really take a forward look. Most of our customers, if you look at our end markets, are expecting more resilience. You have a few customers that were impacted a little bit more that are actually coming out with more positive results in their specific businesses.

Michael Sison, Analyst

Right. And then just a quick follow-up on Avoca and the challenges there. What do you think the strategic plan for that will be going forward?

Guillermo Novo, Chief Executive Officer

That's a good question, Mike. We've been discussing this for quite some time now. This business has faced challenges since 2018 and 2019. The issue is that some of our customers have transitioned to bio-based technology. A significant impact occurred a few years ago during that transition. Over the past few years, due to shortages, we managed to stabilize the business. Now, as circumstances normalize regarding everyone’s capacity and direction, we anticipate that the trend toward lower-cost bio-based production will continue. We are evaluating our approach regarding that part of the portfolio, as mentioned in the last call. At this moment, we don't have any specific details to share, but it's definitely something we are monitoring.

Operator, Operator

And our next question comes from Laurence Alexander with Jefferies.

Laurence Alexander, Analyst

First, just on the inventory cycle at the customers, to what degree are you getting feedback that customers feel they will need to rebuild or adjust inventory levels? Are there any end market channels that you see more chance of a restock cycle in 2025?

Guillermo Novo, Chief Executive Officer

No, on that question, I think it's more about the normalization, as we mentioned in our call. The destocking is over. I don't believe anyone is necessarily in a position where they need to adjust significantly, although there may be a customer here or there. Overall, it's about aligning with their demand; for every unit they sell, they need to buy a unit to maintain appropriate inventory levels. What will change is how their sales fluctuate. Currently, most projections are fairly stable, but as their sales evolve, that's when we might see a bit more restocking. However, I expect that to be more of an issue in 2025. So, the primary focus should be on normalization. The alignment of our demand with theirs is the major impact at this time.

Laurence Alexander, Analyst

And then related to that, are you seeing kind of a shift by customers towards pulling forward R&D cycles because now they have more flex time available as demand trends and inventory levels kind of that volatility settles out? Or can you just characterize how much demand pull you have for just reformulation adaptation, innovation, not just in the new growth platform just across the portfolio?

Guillermo Novo, Chief Executive Officer

Yes. I would break it down into the demand pull where people are moving forward with their regular business. I don't expect that to change significantly. I share your excitement about innovation, and I believe we've made considerable progress. As clients begin to reformulate, we can observe that for the past few years, many of our customers' labs were focused on finding alternative raw materials, managing costs, and reformulating rather than being in a peak state of innovation. Now that things are stabilizing for them and supply is more consistent, we expect to return to a regular cadence. There is also heightened interest in speeding up innovation. We have been meeting with all our major customers, introducing new technology platforms across various industries such as Pharma, Personal Care, and Coatings. There is a strong interest not only in the technology itself but also in returning to innovation; clients are eager to grow and launch new products. This is a perfect time for us to present new offerings.

Operator, Operator

Our next question comes from David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Just in Specialty Additives, what are you seeing on pricing trends in this business and potentially going forward?

Guillermo Novo, Chief Executive Officer

As we experienced during the inflationary period, we adjusted our pricing but did not significantly increase our margins, maintaining them instead. The improvements in 2021 and 2022 were primarily due to mix actions we implemented. Looking ahead, with the economic slowdown and increasing competitive pressures, particularly in Asia and Latin America where competitors are becoming more aggressive in trying to gain market share, we anticipate some short-term pressure. However, we expect long-term trends to normalize, maintaining margins while keeping pricing steady. It's primarily a matter of timing. So far, we've managed to balance both well, but as demand picks up, we need to observe raw material trends closely. Many of our suppliers have been operating at lower capacities. The question is when they will start ramping up production as volumes increase. This normalization phase may be somewhat unpredictable regarding the timing of pricing changes relative to fluctuations in raw material costs, both favorable and unfavorable. In the long term, we do not foresee significant changes in pricing dynamics.

David Begleiter, Analyst

Very good. And just on volumes, what do you expect volumes to be up year-over-year in Q3?

Guillermo Novo, Chief Executive Officer

We expect volumes to increase across all businesses, although there may be some challenges, particularly with the PVP lines being significant in terms of loading. PVP, HEC, Benecel, and Klucel are all anticipated to maintain their momentum. We need to achieve normalization, which I would place around the volumes seen in 2021 for those areas. Once we normalize, we expect mid-single-digit growth. This is the primary factor driving our expectations. In other sectors, while there is a volume increase, total comparisons are tricky since the volumes are significantly lower; however, they carry a higher value. For instance, with Biofunctionals, the volume isn't evident, but it commands a higher price per kilo, which will decrease significantly. Some major customers faced disruptions due to travel, and our operations in China have seen a notable decline, making recovery there critical for our volumes. Similarly, the Preservative business experienced comparable impacts, especially with growth in Asia starting to recover. Therefore, while total volume figures may not reflect significant changes, we foresee revenue increasing beyond mid-single digits, especially compared to last year’s performance, which should improve substantially.

John Willis, Senior Vice President and Chief Financial Officer

The outlook suggests mid-single-digit volume growth in Q3 compared to the previous year. Sales growth, in general, should match or slightly exceed that for the second half of the year. There may be some fluctuations in Q3 and Q4 due to restructuring efforts related to CMC and MC, which could slightly dampen the top line. However, on an overall volume basis for the core business, we anticipate about mid-single-digit growth.

Operator, Operator

Our next question comes from Chris Parkinson with Wolfe Research.

Christopher Parkinson, Analyst

I just want to turn back to the Pharma business. It seems like you're lapping some comps in PVP based on, I guess, a competitor outage a while back. But can you just take a step back and remind us of what you view the normalized growth rate of that business is? It seems like you've had a lot of solid initiatives over the past few years that have been muted by a little bit of noise in Central Asia, even a little bit in Latin America. So, can you just remind us of how we should be thinking about this business, normalized volumes and then potential areas of upside optionality?

Guillermo Novo, Chief Executive Officer

Thanks, Chris. If you look at PVP in several dynamics that I would highlight. One, as you said, the last year, some players had outages. So as we mentioned last year, the business was doing great, but the PVP business was a little higher and that we expected it to normalize once everybody came back on stream, and this is not a surprise and happening as we speak. What's changed, I guess, a little bit is more the China dynamics on exports and pricing, especially in Asia and Latin America. And I think this is not a Pharma necessarily driven issue only; it's more the whole dynamic of the BDO chain, BDO prices being very down, the non-integrated players being able to buy very cheaply because costs are down and obviously, a lot more pressure on loading their plants and all that. I think as other markets that we're not even in, but polyurethanes, fibers, all this go up and the core BDO demand and costs go up, which is probably going to start happening towards the back end of this year and more into next year. When that part of the demand and the cycle starts normalizing, I think you're also going to see some normalization of competitive activity. I think the next few months, we're monitoring this normalization period anytime when there's changes, when you have the most choppiness, volumes coming up, people reacting to trying to load their plants and all that, that's when we're going to see a little bit of the noise. But the longer-term trend line should normalize as the entire value chain cost structure normalizes and volumes normalize.

John Willis, Senior Vice President and Chief Financial Officer

If you look at that business historically, it's been low to mid-single-digit growth very consistently. If you eliminate some of the noise over the past couple of years, we would expect that to be the case going forward, ex any kind of platform innovation technologies in that business that take hold. That would be an accelerator over and above what we would normally see.

Christopher Parkinson, Analyst

We can look forward to that. Once again, you've experienced a few challenging quarters due to destocking in Personal Care. Guillermo, you've been working behind the scenes on several new product portfolios for years, and it seems like things are starting to improve. While we shouldn't get ahead of ourselves, which products are you most enthusiastic about? Are you excited about biodegradable options, biofunctionals, or bioactives? When we take a step back and assess by end market or product, are there areas where you feel really optimistic, despite the impact of destocking? From your perspective today, what are your current thoughts?

Guillermo Novo, Chief Executive Officer

Let me break down my response business by business, as I believe this is quite important. We are seeing normalization in strong core markets, and there are significant catalysts. I feel confident about our company because these catalysts are substantial, especially considering our size. They present considerable growth opportunities relative to our company’s scale and the market opportunities available, which can indeed alter our future. In the Life Science segment, we have a robust portfolio of core technologies that help stabilize our PVP division. Our cellulosics, including Benecel and Klucel, present great growth prospects moving forward. Our main focus is ensuring that we establish a strong pipeline for the long term to secure growth opportunities, which is very encouraging. For Injectables, we have been developing our bioresorbable polymers and will share more during our next innovation update. The potential in this area is exciting with numerous new high-purity products and market applications that will enhance our portfolio. Our solubilizers are providing significant opportunities, particularly in injectables and consumables, benefitting various processes in bioprocessing and other sectors. Similarly, our PH Neutralizer and TVO represent promising opportunities. In film coatings, we have made advancements that could significantly elevate our market presence, as this segment is larger than PVP, and we are currently a small player. In the Ag business, we have conducted trials on super wetters for leaf coatings and TVO as a binder for seed coatings, yielding excellent results. We plan to launch both products starting in Brazil in 2025, taking into account regulatory timelines. All these initiatives are scalable and very important for the size of our Life Science division, and that is where we are directing our energy and resources. In Personal Care, we have shifted towards sustainability, focusing on performance. Our customers desire sustainable products that also perform well and are competitively priced. Transitioning to new technologies can be challenging if costs significantly increase, as consumers are unlikely to pay more. We are excited about our new developments in areas like TVO and innovative cellulosic starch. Customer feedback on these products has been promising, leading us into new applications across skin, hair, and even oral care, which is a substantial market for us. This also opens new possibilities in household products due to the performance of these technologies. In coatings, we have seen significant transformation. While we have primarily focused on rheology, which is our core area, the new platforms we are developing will allow us to explore a broader range of technologies, such as super wetters and TVOs, leading to new applications. These innovations can improve TiO2 efficiency and serve as co-binders among various possibilities in coatings. Currently, as you've seen, we are making organization changes and investing in new skills because the path forward is distinct from our past. It emphasizes innovation and a fresh approach to customer engagement, which will be vital for long-term growth. The good news is we have the capacity to generate near-term growth while launching new products, making it essential to secure key joint development agreements with customers for co-designing their desired applications, and there's been considerable interest in this. I am genuinely excited about this direction. We're dedicating our energy and resources here, and intriguingly, this potential is not yet reflected in our current valuation, which presents a great opportunity for both the company's growth and the increase in Ashland’s valuation.

Operator, Operator

Our next question comes from Josh Spector with UBS.

Joshua Spector, Analyst

I wanted to come back to the volume discussion a little bit. And if I just put some numbers out there, you're kind of presenting 2021 as maybe the right baseline; your volumes in the second quarter, you're about 10% below. You have a lot of moving parts in the second half. I guess my math is your exit maybe your 5% volumes going away with essentially 0 to very low profit dollars. Does that mean your volumes sequentially improve something like 5%? And where I'm trying to go is if you're saying your end market demand is flat to maybe up versus 2021, is that 5% gap in volumes basically the amount of reconnection that's left to go versus your guidance? Or would you describe it differently?

Guillermo Novo, Chief Executive Officer

Let me share some thoughts, and Kevin, feel free to add. Addressing this issue is challenging since we can't evaluate overall volumes in these businesses uniformly as they vary significantly. We analyze the situation by segments to avoid any distortions in understanding what's happening with the volumes. As you mentioned, the decrease in our portfolio actions will lead to reduced volume, but we are also cutting costs, and those actions weren't generating substantial profit. I believe we will see an increase in sales volumes, as Kevin noted. Our high-volume products like PVP, HEC, Benecel, and Klucel are expected to maintain their momentum. We anticipate reaching a normalization point that aligns with 2021 volumes in these categories. Once normalized, we should see growth in the mid-single digits. This is a key driver for us. In other categories, while volume plays a role, total numbers can be misleading due to significantly lower volumes that hold higher value. For instance, biofunctional products may not show volume growth, but their price per kilo is high. Some major customers have seen declines due to travel restrictions, and China, a crucial market, has also experienced significant downturns. A recovery in that area will be critical for our volume growth. Similarly, the preservative business faced impacts, but we're beginning to see signs of recovery in Asia. Although total volume figures might not reflect this, we expect revenue to increase beyond mid-single digits relative to last year’s performance, which should show more considerable growth.

John Willis, Senior Vice President and Chief Financial Officer

The outlook suggests mid-single-digit volume growth in Q3 compared to last year. Overall, sales growth numbers will be around that or possibly slightly better for the latter half of the year. However, Q3 and Q4 may experience some fluctuations due to restructuring activities related to CMC and MC, which could slightly dampen the top line. Nevertheless, looking at the core business, overall volume should increase by about mid-single digits.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Guillermo Novo for closing remarks.

Guillermo Novo, Chief Executive Officer

Thank you, Daniel. Thank you, everyone, for your time today. As you heard, I think things are normalizing. We're focusing, we're going to manage. We still have work to do during 2024 to make sure we optimize as the normalization dynamics play out, and we'll stay on point on that. But really, the issue now is also to focus on the future. And the future is refining our portfolio, honing in on those high-value markets that we want to participate in and that we want to lead in and driving our innovation portfolio that really can transform the company in the coming decade. So thank you for your time and look forward to connecting with all of you in the coming weeks.

Operator, Operator

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