Ashland Inc. (ASH) Earnings Call Transcript & Summary

[Audio Gap] Director of Investor Relations. Kevin joined the company in 1987 and was elected Chief Financial Officer in 2013. He oversees the company's worldwide financial functions as well as business development among other responsibilities. Seth joined Ashland in 2012 to help with corporate development during the company's transformation. He was promoted to Director Investor Relations in 2015. Following its multiyear transformation, which culminated with the recent sale of its Performance Adhesives operations, Ashland is now a brand-new company. It has been transformed into an additives and ingredients company, emphasizing consumer-related end markets and sustainability with a focus on customized solutions and high-quality ingredients. These are offered to end markets such as pharmaceutical, food and beverage, personal care, coatings, construction, energy and other industrial applications. Ashland has 57.5 million shares outstanding, a stock price of $85 -- around $85, $86. It is moving on a daily basis, a market cap of $4.9 billion. Net debt is $1.8 billion at the end -- was $1.8 billion at the end of the first quarter. It should decline to around $775 million post the sale of adhesives for a pro forma enterprise value of $5.8 billion. So while I will open again the session with a few questions [Operator Instructions].

Rosemarie, we lost your video, by the way.

I am not.

We got it back for a second.

Okay. All right. Thank you. Sorry. Hi, Kevin, how are you?

I'm Well, Rosemarie, how are you?

I'm hanging in there.

Good.

So starting with a general question, since Guillermo Novo became CEO 2 years ago, the company has gone through a major transformation. I mean, has continued in transformation, but it seems to have accelerated. It is now focusing on a coherent portfolio of Ingredients and Adhesives. Can you touch on the strategy going forward? Where are we going from here?

Sure, sure. Well, first, thanks for the question, and thanks for hosting us, first of all. But first and foremost for us is innovation-driven organic growth. We are, in many ways, a technology company. We're almost exclusively ingredients and additives today. And that's the future of the organization with 3 primary cores to the company. That's pharma, personal care and architectural coatings. And so the strategy going forward is to grow those primary businesses, while also our secondary businesses, the areas such as nutrition and home care, et cetera, in support of the growth of the whole. And the organic piece of that is certainly we're in markets that tend to grow at or somewhat above GDP, areas like Pharma and personal care. As you well know, they're also very resilient markets, which is good given all the issues that the world has had over the past couple of years and certainly what we're seeing in Eastern Europe right now. And so again, first piece of that is innovation. We've made lots of changes in terms of how we manage innovation. As you know, we completely transformed the structure of the business after Guillermo came on board. We went from a more horizontal structure in terms of how we manage the business. We're very vertical now by business unit with Life Sciences, personal care, Specialty Additives and then Intermediates kind of off to the side. It's more of a vertical integration play. And so with that in addition to moving full P&L accountability, a lot of balance sheet accountability. We put all the functions basically into those business units, including and maybe most especially innovation because innovation in our business units, it varies pretty distinctly in terms of what they're trying to do. And so that's why this is such a huge part of the strategy. For us to grow at 200 to 400 basis points over market, market being, call it, GDP to GDP plus, we have to do that through innovation for our customers. And so we put these teams in place within the business units, and they're working hand in glove with the business units and their customers to develop and accelerate the development of new products going to market. Q1 is a great data point and we're hoping to turn into a trend. Our new products introduced in Q1 were more than we've ever introduced in the first quarter of a fiscal year, significantly above prior year. And that doesn't tell us that we're done. It tells us that we're making progress, and we're going to continue to do that. We've also completely changed how we review and evaluate innovation within the company. We're using very much a portfolio approach. Each business unit is accountable for their own innovation strategy and outcomes. But what Guillermo and I want to do is be able to look at the entire portfolio and say, is this going to get us where we want and need to go as a company. And so we've actually started to employ a venture capital-like expected valuation model for the overall portfolio. And it's some pretty sophisticated modeling that we're doing and we still got a ways to go on this yet, but we've made a lot of progress. I mean, in the meantime, we're looking at some things more simplistically. Think of it as on this axis, you have value on this axis, you have time. And so we've plotted all of the innovation projects out. And if you have low value long-time horizon innovation projects, the question should be why are you actually working on those, if they're not very valuable, and they're going to take a long time. Likewise, how are we spending plenty of time on these higher-value, faster turnaround innovation projects. In the end, it's a lot like a financial portfolio. We need stuff in the pipeline that's quick. But we also need larger items that are higher value, and it's okay if they're out in the future a little bit. So to me, that's probably the biggest change we've made from a strategy perspective for all of our business units. The rest of it is more organizational, I would say, but that that's really a transformation and strategy.

Thank you. That sounds very promising. I look forward to following the results.

Yes. It's been a lot of work to set it up. But the business units have embraced this. I mean they have accountability, but they also have control. And we've changed compensation system so that the business units are rewarded based upon what they do, the decisions they make and the actions that they take. And that's very empowering. And we've also gotten a lot more focused rather than a group of people kind of focused on multiple markets and multiple businesses. We have largely groups of people that are focused on a business or another business. And that's been very helpful. And I would say it's been especially helpful during the pandemic to help us stay focused on our businesses, on our customers, on our plants, on our people. We've had very little disruption during the COVID environment. And from an internal perspective, I mean, for the last, I don't know, 6 or 9 months, we've all been -- almost 12 months now, we've all been suffering from supply chain related disruptions. And we expect that's going to continue into the foreseeable future for the globe. But even with that, the work the teams have been able to do in terms of overcoming a lot of those obstacles has been just really encouraging.

Great. So that leads me into the next question. So the environment over the past 2 years has been tough. We seem to be coming out of the major impact from COVID, but it is being replaced by geopolitical uncertainties. So before we talk about the new Ashland in more details, I mean, looking at your different segments. Can you talk about the company's exposure to Russia, Ukraine, and of course, in Europe, whether it is West or Eastern Europe and the direct or indirect impact that you're anticipating?

Sure. So direct impact from a Russia and Ukraine perspective is very small for us. We -- and what we do sell into Russia primarily is largely related to our multinational customers. So it's just -- it's branches of those customers that happen to be in Russia. And it's primarily personal care and pharma-related products, which aren't and probably will not be boycotted. I mean certainly, disruptions could exist just based upon what's going on right now. Ukraine is very, very small for us in terms of a revenue perspective. We do have a pretty sizable office in Warsaw, and as you might expect, there's a lot of stress and concern for our people in that office, but we're staying really, really close to our team members and trying to make sure everybody stays safe. The thing that we can't really predict necessarily is around our customers' customer. So we have customers in Western Europe. As you probably know, Europe is actually our largest market. It's about 40% of revenue. And most of what we sell in various Western European countries end up being consumed there, but some does get exported. What we don't know as well at this point is how much of that and how much of our customers' product actually goes into Russia or Ukraine. I'm less worried about that from a top line or a profitability perspective right now because demand is so strong and supply is so short in so many of our product lines and really in the markets that we're in, our competitors' product lines are sold out as well in a lot of instances, cellulosics, especially. So I don't really worry about it from a financial impact at this point because there's plenty of demand for those products kind of around the globe at this stage of the game. But I think it's a bigger issue around just the macro piece. I mean, obviously, we have no control over that part. And we're managing what we can control and watching very closely just like the rest of the world is to see how that unfolds.

Yes. So going back to fundamentals. Ashland just closed the sale of its Performance Adhesives, yes, and before we focus on the financial impact of the transaction, we'll get there. We would like to talk about your remaining operation in their position in the markets they serve. So starting with Life Sciences. This is the -- its largest segment is pharma with about 60% of the segment revenue. It is followed by nutraceutical and nutrition. Can you talk about each of these operations, their product lines, the markets they serve and the strategy that Ashland has regarding their long-term achieving, their long-term potential?

Sure, sure. The pharma business is obviously the core of Life Sciences, and it's 1 of the 3 main pillars that we stand on as a company. And the pharma business primarily serves oral solid dosage. And within that, we provide excipients to both branded engineered pharmaceutical companies around the globe -- all of the large, branded companies, all of the large generic companies are customers. And what we do for these customers is provide the delivery mechanism for the active pharmaceutical ingredient. And generally, for most of the products that we make and sell, we are a very small part of the finished product but we provide a lot of functionality and a lot of value to that finished product. Pharma is no different. For a tablet that you might take for maintenance medication for blood pressure or diabetes or cholesterol, we will be 6% or 7% of the finished product in terms of the Ashland product that's in that tablet, but we actually deliver that active to your body the way it needs to be delivered. So if it's fast-acting medication, we make disintegrants that are excipients to deliver that very quickly. If it needs to be timed to release, we also do that so that we gradually release that active into your system over the required time period. And that's the base of that business. We also do pharmaceutical coatings and a few other things in pharma, but that's the core of that business. In terms of the future, we're going to continue to grow oral solid dosage. But strategically, we feel there's a great opportunity for the company in injectable excipients. Call it biopharma, if you will. And these are a whole new range of additives that are coming into the market. They're fast growing. They're very profitable, just like our existing pharma business, but it's -- and it's the same customer base, which is very attractive to us. So we have a very small biopharma business that we bought a few years ago. We're continuing to develop that and build the pipeline for that business. But as we've said, the likely means of mechanism for us to really get into injectable excipients, biopharma, it's likely to be via acquisition and the reason for that is it's all about pipeline. You think about pharma, the active ingredient that's being introduced and commercialized today, was probably an idea 10 years ago. And then it went through this very long development cycle to get it to the point of commercialization. One of the things we really like about the pharma business and what makes us successful and it makes it a difficult place to compete for other folks to come in is that drug that's being introduced today, we started working with that branded pharmaceutical company 5, 6, 7 years ago on an excipient package to deliver that active ingredient. And we've been in that pipeline ever since. So it's very sticky and it's a very long pipeline. And for us to get into what's really going to be a completely new area for us, you almost have to buy the pipeline as well, which is why M&A in that space is going to be pretty important for us and we talked about this in our Investor Day. The way I would think about the Nutrition business and the nutraceuticals business, those are -- those are kind of almost support functions within Life Sciences. And you think -- I mean, nutrition is important because it helps us manage our overall capacity utilization. And those products go into really a wide variety of end markets and within Nutrition, I mean we do clarifiers for beers, wines and juices. We do ingredients for plant-based protein businesses beyond meat, et cetera, and possible foods, those -- we provide additives into those companies and those products. We're in dairy, we're in meat, all kinds of things like that. But I would call those a secondary focus versus the primary focus in life sciences, which is pharma. And the nutraceuticals business is one that we're going to continue to grow that business within North America. Unlikely we'll globalize it, I would say, but there's a lot of opportunity. And 1 of the nice things about the nutraceuticals business is we've actually been able to start to pull through some of our excipients into nutraceuticals to actually improve the way they work in your body. And so we've been able to provide our customers with some new solutions they didn't have before based on some of the ingredients that we actually make in the pharma business. So it's made us more valuable to the customer base. And it's just -- it's just given us some competitive advantage there, which has been good.

But it could be a source of funds if you were to find a very large acquisition helping you not leverage to the hilt.

Fair point. Yes, fair point. No plans for that at this stage. But in terms of it being one of the -- we have 3 pillars to be clear, the pharma, personal care and coatings. So that's a fair point. Now what I will say, though, is the nutrition business is part of an overall integrated portfolio. Nutraceuticals, not so much. It is more stand-alone, just like the intermediates business is more stand-alone, but the nutrition business is largely a cellulosic-based business. And so the products we make there are the same product or part of the product families that we also sell into pharma personal care and coatings. So it is an integrated part of the overall business.

Okay. That is very helpful. So then we will move on to the next large segment, which is personal care. Is there an area within personal care that is more important than another. And what are that segment's long-term objectives?

So I think the biggest objective -- strategic objective within personal care is around ESG. It's the part of our business that has more demands and more excitement around greener products, more biodegradability, et cetera, than really any other part of the business. A large part of our portfolio already checks those boxes because it's cellulosics or our biofunctionals business, which is all plant-based, and it's plant extracts that creates skincare actives that go into very, very high-end skin care products. And even our home care business, the largest piece of our home care business is derived from a plant called clary sage that we sell into primarily the fragrance market as an ingredient that goes ultimately into fragrances around laundry care, colognes, perfumes, et cetera. So we've made a lot of progress there, but probably the biggest imperative is around ESG-driven innovation in that business. What we see coming over the next 2, 3, 5 years is a huge demand to get out of things like microplastics, et cetera, that make up a pretty good chunk of some of the products that go into that space. You think about hair styling products. One of the biggest ingredients in hair styling is carbomer, and carbomer is -- it's not natural, it's not biodegradable. And so one of the big projects that we're working on today is a cellulosics version that could potentially replace that or certainly give customers the option to use a greener product versus a carbomer, just as an example. And I think we're going to see a lot more of that and some acceleration of that in that part of the business. And I think it's going to be true for skin care, hair care, probably oral care as well. We've seen definite formulation changes there, which we were -- we found ourselves in a situation where we -- we were the loser on the formulation side, although we've gained a lot of that back, which is good. Home Care, I think, is also -- it's probably the source of more issues just because the volumes are so big compared to the personal care piece, but that's -- we're seeing it really across the board. A lot of demand for greener products. And that's a big part of our strategy within the personal care business unit. I mean, from an M&A perspective, I mean, we're already big. Our personal care business is one of the biggest in the world as it is from ingredients perspective. And so we're going to look for targeted acquisitions in that space. Schulke & Mayr is a really, really good example. I mean that's an acquisition that has turned out very, very well for us. We think that's going to be really great for our personal care business over the long haul. It's integrated, and it's really reverse integrated. We had a microbial business, a small microbial business within Ashland. The Schulke business is much larger than ours. We've actually integrated our business into theirs. The Schulke team is running that business. Their product lines are much greener from a microbial protection perspective. Our growth rates are really good, and we've actually seen a lot of demand. We've seen better growth rates than we expected. And the margin profile is accretive to the personal care business to Ashland overall. So we're really, really happy with that. If we could find 4 or 5 of those, we'd be really excited. And so that's the kind of M&A that you should expect us to do in the personal care. So it's more adding tools to the toolbox than anything else. But we're really pleased with Schulke.

It's great, Kevin. We have a question from the audience. [ Duane ], do you want to read it or someone?

Yes. I'll read it, and it ties into one of our questions that we had prepared. So just looking ahead at Ashland overall, can you touch on the innovation pipeline? And then given the renewed focus on ingredients and additives what you're going to spend on R&D, what the focus is there, but then also CapEx expectations this year and going forward, maintenance versus growth organic versus inorganic investments. If you could just go over cash priorities in those areas.

Okay. Okay. You may have to remind me of some of that. There's a bunch of questions there, which is fine. I'll talk about the CapEx piece first. I mean as we said during the Investor Day, and you've seen some announcements come since for, call it, fiscal '22, '23, '24, you're going to see us spend about $150 million to $200 million in expansion CapEx. Essentially, all of that is going to be in our cellulosics network. We've made an announcement around HEC. We've made an announcement around our methylcellulose facility in Doel, Belgium. We're going to build an aqua flow plant, which is not cellulosics in Calvert City. And so we've made some announcements around that, and there's probably 1 or 2 more to come. We expect -- again, it's going to be about $150 million to $200 million. These are all expansions at existing facilities. There's no greenfield. We'll be leveraging a lot of the current infrastructure, both human and within our manufacturing facilities. So these will be -- should be very, very accretive investments for us. They tend to be the lowest risk investments we make. They tend to be some of the highest return investments. These are markets we're already in, products that we already make and sell. And so there's just not a lot of risk there. And the markets are completely sold out in these areas. And so actually getting there sooner rather than later should provide us with some competitive advantage and some enhanced growth opportunities. So that's kind of the organic capital piece. Nothing has really changed around maintenance capital. That's a change that we made when Guillermo came in, rather than having 1 CapEx budget that we would inevitably spend every year, we've really broken it down into 3 pieces. So there's the stay in business capital. That's the stuff that we have to do to keep our plants safe and functioning correctly and all of that. And that's 1 bucket of cash. And that varies by business unit in terms of what the entitlement is. And we look at that every year. We plan out these projects that we do. It can be lumpy because sometimes you have larger products, sometimes smaller ones, but that's bucket 1. Bucket 2, I would call the efficiency capital and kind of debottlenecking and that kind of thing. So it could be cost savings, could be some debottlenecking to get a little more capacity out of it -- out of a facility, out of a product line. So that's bucket number 2. And that would -- those 2 buckets would typically constitute our annual CapEx budget. And that last year was about $105 million is what we spent. Now on top of that would be these larger expansion capital projects, which, again, as I mentioned -- as we mentioned at the Investor Day, we're going to spend, we expect, around $150 million to $200 million over the next, call it, 2 to 3 years to get these expansion projects done and producing. So easily, we'll do all of that with free cash flow and still have plenty of free cash flow left for inorganic opportunities. And I'll talk about that just in a minute. But in terms of the innovation piece, we don't really see a need necessarily to spend more on innovation than we were before. We have definitely changed the mix of how we spend the money and where it goes, and how we're thinking about it. And that's part of this overall portfolio review and management process that I talked about, giving Guillermo and I a view of what's going on across the business units so that we can think about where we might want to allocate more or less innovation spend based on what's going on in a particular business unit. One of the things that we've encouraged the business units to really, really think about and focus on a bit is again, that portfolio mix, you need some -- you need your technical service requests that tend to be pretty quick hits, they turn over pretty quickly and you move on to the next one. And then you need sort of those medium-term things that you're doing where you're tweaking molecules. But then there's this whole idea here of how can we create new platforms within the business. And the way we define that is a platform is a product or a product line or a strategic business unit, however you want to call it, that is initially developed to probably serve 1 business unit and maybe even a limited number of business lines within 1 business unit, but then it becomes expandable. So maybe we develop it for personal care. Maybe it's even hair care. But then we figure out, okay, we can also do this in skin care. This project will also translate into some coatings applications or maybe some pharma applications or nutrition or nutraceuticals. And so by doing that, you actually create a richer opportunity from the standpoint of being able -- and that's hard to do, by the way. I mean, creating a new additive maybe not that tough, building a $5 million, $10 million, $15 million business with that, creating a platform, HEC is an example. I mean we have an HEC platform. It primarily goes into the coatings end market, but it also goes into nutrition, pharma, personal care, all parts of personal care and in the home care and in the energy and resources. And that's incredibly valuable to us. So being able to focus some of our resources on activities like that is also going to be important going forward. In terms of kind of longer term, call it, use of cash. Again, we talked about this at Investor Day, we want to strike a balance for first of all. There are inorganic things that we want to do. And in the pharma business, we feel like we need to do. we don't really need to do anything in personal care. We're already big. We can do a lot of things organically there. And we have some ideas around the coatings area because we do tend to be focused on rheology modification and coatings. And there's a lot of opportunity out there to add ingredients and additives to our toolbox that we would sell to the same customers around the world. And so expanding that business inorganically by adding some of those tools to the toolbox would be desirable in our view. And those tend to be much less expensive acquisitions to do and there's a lot of synergies because a lot of that we can make within our existing facilities. The personal care business already talked about from an inorganic perspective, deals like Schulke really interesting to us. Those are -- they're bolt-ons. You flip the switch, day 1 you're already creating value, which is great. The pharma piece, again, for injectable excipients. Those are bigger dollars. Those are higher multiples, but they also tend to be very, very high growth when you get into those. But again, the key is to understand what you're buying from a pipeline perspective. As we said at Investor Day, we want to do a mix of -- obviously, the organic stuff we want to keep doing that like we have been. The inorganic things, we want to do those. Those are more serendipitous in terms of how and when they come. Then the third piece is returning capital to shareholders. We just closed out a $450 million accelerated share repurchase plan, retired 4.6 million, 4.7 million shares as a result of that and these are not mutually exclusive activities. They haven't been in the past. They're not today, and they won't be in the future. We've been able to do really all 3 of these things simultaneously in the past. And there's no reason we can't continue to do that into the future.

Which leads me into really the last question given the time. You sold the Adhesive business to Arkema for $1.65 billion you expect net proceeds of $1.2 billion to $1.3 billion. So you have already and completed -- already announced and completed the accelerated share repurchase program, but even after that, you will have around onetime net type of net leverage. So you have talked about acquisitions. We know you are raising dividend, can you give us a feel for your appetite for more share repurchases? I know you have said or Guillermo has said in the past, don't expect us to buy $1 billion worth of stock. But looking at what you see in terms of what you need for the next acquisition or 2 or 3, what do you think will come on the buyback side?

Right. And part of this is just Kevin's philosophy. I mean, by any metric, Ashland stock is cheap right now. I mean it's come down as a result of what's going on between Russia and the Ukraine as have a lot of companies. So we just kind of ridden with the market, I think. And again, as we look at this, we want to take a balanced approach, and that's what you should expect us to do. Clearly, if we see a nice bolt-on, we want to be able to do that. But we have plenty of capacity and plenty of resources to do both of those things. It's like I just said, from a -- we're going to be underlevered from a balance sheet perspective. Net leverage is going to be by the end of the fiscal year, depending on what free cash flow is, net leverage will be less than 1x if we don't do anything. And certainly, our shares are cheap. So we have appetite to do both. I mean, we want to find some inorganic opportunities that help improve the overall value and growth prospects of the business. We want to be really disciplined about that. Schulke is a good example. It needs to be not only accretive in the typical sense of the word, but we want to acquire businesses that are going to improve our margin profile and going to improve our growth profile. And so we can do both of those things. I mean it's -- and because, again, Kevin's philosophy, buying back shares is not the answer to multiple expansion. I think it's a great way to reward shareholders and frankly, make a statement that, look, the stock is very undervalued, which is why we're buying it because it's a no-brainer. But I think ultimately, we've got to also be able to grow the business organically. And so investing in these things we're doing for that, I think, is important. And then to the extent available and to the extent the value makes sense because multiples have been so high, bringing some bolt-ons into the fold, I think, also helps with that. And ultimately, it's going to be consistency of performance that's going to drive multiple expansion.

Well, Kevin, I really, really appreciate your input. It was really, really informative.

It's great to see you.

It was great to see you one of these days in person.

Hopefully soon.

Yes. Thank you very much, and thank you, Seth, for sitting in the background, ready to bail him out.

Very well from Rosemarie, always a pleasure.

Thanks for that.

Thank you all so much. Take care.