Ashland Inc. (NYSE:ASH) Q1 2023 Earnings Call Transcript
Ashland Inc. (NYSE:ASH) Q1 2023 Earnings Call Transcript February 1, 2023
Operator: Good day, and thank you for standing by. Welcome to the Ashland Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. And I'd now like to hand the conference over to your speaker today, Mr. Seth Mrozek, Director of Investor Relations. Sir, please go ahead.
Seth Mrozek: Thank you, Chris. Hello, everyone, and welcome to Ashland's first quarter fiscal year 2023 earnings conference call and webcast. My name is Seth Mrozek, Director Ashland Investor Relations. Joining me on the call today are Guillermo Novo, Ashland's Chair and Chief Executive Officer; and Kevin Willis, Senior Vice President and Chief Financial Officer. We released preliminary results for the quarter ended December 31, 2022, at approximately 05:00 PM Eastern Time yesterday, January 31. The news release issued last night was furnished to the SEC in a Form 8-K. During today's call, we will reference slides that are currently being webcast on our website, ashland.com, under the Investor Relations section. We encourage you to follow along with the webcast during the call.
Please turn to Slide 2. As a reminder, during today's call, we will be making forward-looking statements on several matters, including our outlook for fiscal year 2023. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but cannot assure that such expectations will be achieved. Please refer to Slide 2 of the presentation for an explanation of those risks and uncertainties, and the limits applicable to forward-looking statements. You can also review our most recent Form 10-K under Item 1A for a comprehensive discussion of the risk factors impacting our business. Please also note that we will be referring to certain actual and projected financial metrics of Ashland on an adjusted basis, which are non-GAAP financial measures.
We will refer to those measures, as adjusted and present them to supplement your understanding and assessment of the financial performance of our ongoing business. Non-GAAP measures should not be considered a substitute for, or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures are available on our website and in the appendix of today's slide presentation. Please turn to Slide 3. Guillermo will begin the call this morning with an overview of Ashland's performance and results in the fiscal first quarter. Next, Kevin will provide a more detailed review of financial results for the quarter. Guillermo will then provide additional commentary related to Ashland's financial outlook for fiscal year 2023.
We will then open the line for your questions. Now, please turn to Slide 5, and I'd like to turn the call over to Guillermo for his opening remarks. Guillermo?
Guillermo Novo: Thank you, Seth, and hello, everyone. Thank you for your interest in Ashland and for your participation today. As stated in our earnings release last night, Ashland's results in the fiscal first quarter were consistent with the earnings update we issued last week. During these times of continued global uncertainty, we will strive to provide transparency and timely communication on company results and performance. As we planned for the December quarter, we recognized that several external dynamics could impact demand and performance. The impact of central bank actions to combat inflation, the war in Ukraine, and the China, and the COVID reopening in China. Our forecast was based on a more recessionary environment developing and did not include factors that we could not control or forecast.
The drivers of our results for the fiscal first quarter are a great example of how uncertain events significantly impact market dynamics in a very short period of time. I'd like to spend a few minutes providing my perspective on the overall results. First, disciplined pricing led to price versus inflation cost tailwinds in the quarter as we had expected. Our commercial teams moved quickly last year to recover the increased costs we experienced in energy, freight, logistics, raw materials and other input costs. They continued with this discipline in this quarter. On a constant current basis, that pricing carryover and additional new pricing resulted in double-digit percentage price improvements for all segments compared to Q1 of last year. In addition, our three consumer focused segments Life Science, Personal Care and Specialty Additives realized strong mix improvements, which supported the company's overall margins.
Second, the results in Life Science segment was particularly strong. The team saw strong global demand in our leading pharmaceutical ingredients and was able to capture additional market share at leading pharma customers. As you saw in the video, at the beginning of today's call, Ashland continues to expand its leadership position in some of the world's most important pharmaceutical applications. And third, Ashland serves resilient end markets and geographies across the globe. The U.S. consumer and our U.S. customers continued to demonstrate resilience in demand in the face of global economic uncertainty. Many emerging markets also demonstrated growth. The historic long-term resilience of the end markets we serve gives us confidence in our financial outlook for this year and beyond.
In contrast, we also experienced several headwinds during the quarter that yielded overall results that were below our original expectations. First, global macro factors certainly impacted demand in China and Europe during the quarter. The changes in government COVID policies and the resulting acceleration of infection rates clearly impacted demand as well as business and living activities for everyone in China. The speed and impact of these developments was much greater than anyone expected. As a result, sales in China were significantly below our expectations. And although, we expected some level of economic downturn in Europe, driven by both recessionary trends and general uncertainty, on the impact of the Russia, Ukraine war, demand in Europe was below our expectations.
Second, inventory management and destocking primarily by distributors in Europe and China was real and it happened quickly. While sales to distributors only represent about 20% of Ashland's overall sales, distributor inventory destocking actions were a significant driver and roughly 50% of our revenue gap versus prior year. The vast majority of this was in China and Europe. We also saw certain customers take similar inventory management actions. Though these were isolated and we believe very company specific with no specific market patterns. The weaker demand in China and Europe as well as a destocking impacted mostly specialty additives and Personal Care -- and our Personal Care business. It's important to note that while Ashland's overall margins remained in line with prior year, margins in our Specialty Additives segment were impacted by plant turnarounds, both planned and unplanned during the quarter.
We are thankful that our team in China is healthy and are grateful for the resilience they demonstrated following the outbreak of COVID in December. And while the U.S. freeze did impact operations at several plants during December and January, the financial impact will mostly come through in the second quarter. Our teams are working on actions to offset the impact of the unplanned shutdowns and the freeze including plans to rationalize some of our planned maintenance work companywide in the third and fourth quarters. I will discuss a bit more -- I will discuss a bit more when we review our outlook for fiscal 2023 later in the call. However, all indications lead us to believe that the China reopening will have a positive impact on demand. But the pace and breadth of the reopening should be an important factor in our financial outlook for the remainder of the year.
Finally, foreign exchange rates again had a negative impact on Ashland's overall results. The impact of the strong dollar continues to be realized on our business overseas, though current exchange rates are improving, when compared to our original forecast at the beginning of the year. Please turn to Slide 6. Before I ask Kevin to discuss our quarterly results in more detail, I would like to sum up the key takeaways. Despite global uncertainty, and macroeconomic volatility Ashland delivered consistent results in the quarter. Sales growth, EBITDA growth, EPS growth were delivered along with nearly flat EBITDA margins compared to prior year. While there are many puts and takes, delivering consistent results is an important component of our long term strategy.
Please turn to Slide 7. As you can see in the chart on the left, year-over-year sales growth in Life Science was very strong. While the top line for Personal Care and Specialty Additives was below prior year due to the factors referenced earlier. Overall margins for Ashland remain healthy and generally in line with our expectations. While there are many global uncertainties in the horizon. The Ashland team is performing well and executing on the actions that are within our control. I look forward to discussing the outlook for fiscal year 23 and reviewing broader progress by the company later in the call. In the meantime, I'll turn over the call to Kevin to review Q1 results in more detail. Kevin?
Kevin Willis: Thank you, Guillermo, and good morning, everyone. Please turn to Slide 9. Total Ashland sales in quarter were $525 million, up 3% versus prior year, driven by continued inflation recovery and mix improvements. Sales increased by 7% on a constant currency basis. Gross margin remained consistent at 31.4% as cost recovery and mix improvement actions by the commercial teams offset increased input costs and the turnaround expense at a number of our global facilities, which Guillermo previously discussed. When excluding key items, SG&A, R&D and intangible amortization costs of $116 million were essentially flat compared to the prior year. In total, Ashland's adjusted EBITDA for the quarter was $108 million, up 2% from the prior year adjusted EBITDA of $106 million.
It's important to note that unfavorable foreign currency negatively impacted adjusted EBITDA by $14 million while the planned facility turnarounds resulted in $12 million of incremental cost during the quarter. Ashland's adjusted EBITDA margin for the quarter was 20.6% and consistent with the prior year. Adjusted EPS excluding acquisition amortization for the quarter was $0.97 per share, up 10% from the prior year quarter. Ongoing free cash flow was a negative $21 million for the quarter, a reduction from the prior year primarily reflecting an increase in working capital driven by increased inventory balances globally. Now let's review the results of each of our four operating segments. Please turn to Slide 10. As Guillermo referenced at the beginning of today's call, Life Sciences delivered very strong results in the quarter, driven by our global pharmaceutical ingredients business.
Pharma demand remained strong. Product mix was favorable. The team executed on disciplined cost recovery, all contributing to margin expansion. Unfavorable currency impact was a partial offset to the strong performance in Life Sciences. In total, Life Sciences sales increased by 22% to $207 million, while adjusted EBITDA increased by 44% to $52 million. Adjusted EBITDA margin increased meaningfully to more than 25%. Please turn to Slide 11. Personal Care sales were down by double-digit percentage in China due to COVID policies. Inventory destocking by distributors, particularly in Europe, also negatively impacted sales. As with Life Sciences, the team continued to realize disciplined cost recovery through pricing and favorable product mix. For the quarter, Personal Care sales declined by 6% to $138 million, while adjusted EBITDA declined 11% to $32 million.
Adjusted EBITDA margin also declined to roughly 23%. Unfavorable currency impact was also a headwind to Personal Care results in the quarter. Please turn to Slide 12. Specialty Additives also felt the impact of reduced demand primarily related to inventory destocking among distributors and certain customers in China and Europe. Sales outside of these two important regions were up by mid-single digits versus the prior year quarter. The reduced demand more than offset improved cost recovery and mix for the segment, particularly within the architectural coatings end market. For the quarter, Specialty Additive sales declined by 8% to $143 million while adjusted EBITDA declined by 39% to $23 million. The cost impact from both planned and unplanned facility shutdowns was about $7 million and represented nearly half of the year-over-year decline in EBITDA.
Adjusted EBITDA margin also declined to 16% for the quarter. Please turn to Slide 13. Intermediates reported sales were $54 million up 2% compared to the prior year, driven by higher merchant market pricing and improved product mix management of higher value derivatives. Intermediates reported adjusted EBITDA of $23 million, an increase of 21% compared to prior year and adjusted EBITDA margin improved to 42.6%. Please turn to Slide 14. As we discussed at our last Investor Day, capital allocation discipline continues to be an important component of Ashland's value creation strategy. The actions we have taken over the past year have improved Ashland's financial position and provide for increased flexibility. Last night, we announced plans to execute a new $100 million share repurchase program under Rule 10b5-1.
This program will be executed under the existing $500 million evergreen share repurchase authorization that was approved by Ashland's Board of Directors last year. We expect to begin executing trades under the new program in early February. With the strength of our balance sheet, our growth outlook for the year and the fact that we continue to believe that Ashland shares remain significantly undervalued, now is the right time to begin the new open market purchase program. As of the quarter closed on December 31, we had cash on hand of more than $530 million with total available liquidity of roughly $1.2 billion. Our net debt stands at $784 million, which is about 1.3 turns of leverage. We have no floating rate debt outstanding, no long-term debt maturities for the next four years and all of our outstanding debt is subject to investment grade style credit terms.
We are investing in our existing business to grow organically and continue to pursue our strategy of enhanced profitable growth through targeted bolt-on M&A opportunities focused on pharma, personal care and coatings. Against the backdrop of global uncertainty, Ashland has a strong balance sheet with the flexibility to pursue our targeted growth strategy. With that, I'll turn the call back over to Guillermo to discuss our outlook for fiscal year 23. Guillermo?
Guillermo Novo: Thank you, Kevin. Please turn to Slide 16. I'd like to take a few minutes to provide some perspective on the current fiscal second quarter and the second half of our fiscal year outlook. For the second quarter, first, regarding demand. Our global pharma business continues to demonstrate strong resilience in our order book for personal care ingredients and architectural coatings additives is rebounding so far this quarter. Although, most of the regions are experiencing demand strengthening, demand in China remained weak in January. We expect to see the demand pickup following the Chinese New Year. Additionally, during January, we began to see the regional destocking dynamic stabilizing, notably in Europe. While volume demand levels have not returned to prior year levels, the sequential improvement has been meaningful.
As we exit January, our sales and open orders were slightly above prior year with price up and volume down. Relative to prior months, both volume and revenue were significantly up even with a weak demand in China. Second, as previously communicated, the winter storm that impacted much of the U.S. in December and had significant impact in our facility in Calvert City, Kentucky as well as several other facilities in the U.S. Fortunately, Calvert City and other locations have been back online and fully operational for most of January. While the storm did not have meaningful impact on results in Q1, we expect to recognize approximately $15 million of incremental cost in the March quarter. These costs will most directly impact results in Life Science and Personal Care segments of the business.
However, we expect the timing of the offset actions will be mostly impacting our third and fourth quarter. And finally, for the next few months, there continues to be an elevated level of uncertain globally. What happens over the next two months from China's reopening to geopolitical and economic developments in Europe, to central bank actions across the globe, will have important implications for the global economy and Ashland results. All these factors could further influence our modeling and outlook for the remainder of fiscal year '23. As we move into March, we expect to have increased visibility into many of these factors and the actions that our customers are taking heading into the second half of the year. For the second half of 2023, as we look at the back half of our fiscal year, some of the key issues that we look at are, the expected magnitude and impact of the recessionary momentum.
Will there be more recent impacts? As we move from a high demand and tight supply to a more recessionary environment. And the uncertainty around the impact of China's COVID reopening and potential changes in Russia -- in the Russia Ukraine war dynamics. With regards to the recessionary environment, in the absence of new data, we believe that the markets our business serve will continue to perform in line with their historic resilience. Our question is more about the reset developments as we move from the 2022 tight supply demand dynamics into a more recessionary 2023 environment. This reset driven by China's COVID reopening and destocking clearly impacted demand in the first quarter, but should be transitory. Note that several of our key technologies, -- several of our key technologies capacity for the industry and Ashland remain tight with operating rates above 90%.
While I'm not ready to say that destocking is over, trends in January show significant improvement. Unless there are new developments, we expect them to pay it off by the end of the second quarter. The impact of China's reopening or changes in the Russia Ukraine war dynamic is more difficult to forecast given the lack of clarity on how they will develop. For China's COVID reopening, we do expect improved demand developments in China. What broader impacts could develop will depend on the pace and the magnitude of the reopening. Uncertain environment -- in this uncertain environment, we will continue to focus on what we can control while planning and building resilience to react quickly to developments similar to what we did in 2022. Notwithstanding our current outlook, as we did during the uncertain times of COVID, we will continue to look at a more conservative outlook for our internal assumptions that will drive our actions and plans.
Our priorities will be on, while, we do not ultimately control demand, we will remain nimble to react to positive or negative developments and we'll continue to focus on innovation and share gain activities to support growth. We will maintain focus on disciplined pricing, mix and cost management to support -- to sustain margins. We demonstrated this ability in a very challenging inflationary environment in fiscal '22 and we will maintain this discipline in fiscal '23 and beyond. We will drive actions to offset incremental costs from unplanned shutdowns and the freeze. We will monitor market developments and take appropriate actions to maintain inventories in line with developing supply demand dynamics. Please turn to Slide 17. Consistent with our earnings update from last week, we are maintaining our financial guidance range for sales and adjusted EBITDA margin for the fiscal year 23.
As indicated, our current models put our EBITDA outlook below the midpoint of our range. We expect to have better visibility on the impact of China's reopening, post winter Europe and Central Bank actions to combat inflation at the end of the second quarter. Critical deliverables in our models are clear to sustain price margin management discipline. To offset the unplanned shutdowns and freeze impact in Q3 and Q4 and to continue to invest in our innovation pipeline and capacity to drive growth. Critical assumptions in our model are, we assume that the reset items like destocking are transitory. We assume that demand in our core markets perform in line with historic recessionary resilience. We assume that demand in China picks up and normalizes with the ongoing reopening.
And as we did in 22, we continue to build resilience to react quickly to uncertain and unplanned external developments. Our outlook for the year takes into the account the known macro operating environment and Ashland's unique position within that landscape. Speculation on the potential impact of highly uncertain macro factors that are out of our control or ability to forecast are not factored into our models. Please turn to Slide 19. Overall, the last decade, Ashland's journey of transformation has sharpened our focus as an additives and specialty ingredients company. As we systematically identify and tackle the thorniest problems, we concentrate on areas, rich in opportunities to innovate and drive value for our customers, where innovation and expertise in one business unit can be leveraged in others.
In closing, I want to thank the Ashland team again for their leadership and proactive ownership of their business in an uncertain environment. We have solidified our portfolio as a global additives and specialty ingredients company with exceptional businesses that have leadership positions in resilient, high quality consumer driven segments. I'm pleased by the resilience and execution demonstrated by our people and our business and look forward to the opportunities that lie ahead. Thank you and operator, let's open it to Q&A.
See also 12 Biggest Ocean Cleaning Companies in the World and 13 Cash Rich Penny Stocks That Hedge Funds Are Buying.
To continue reading the Q&A session, please click here.