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Q4 2021 Ashland Global Holdings Inc. Earnings Call

EVENT DATE/TIME: NOVEMBER 10, 2021 / 2:00PM GMT

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NOVEMBER 10, 2021 / 2:00PM GMT, Q4 2021 Ashland Global Holdings Inc. Earnings Call

CORPORATE PARTICIPANTS

Guillermo Novo Ashland Global Holdings Inc. - Chairman & CEO

John Kevin Willis Ashland Global Holdings Inc. - Senior VP & CFO

Seth A. Mrozek Ashland Global Holdings Inc. - Director of IR

CONFERENCE CALL PARTICIPANTS

Christopher S. Parkinson Mizuho Securities USA LLC, Research Division - MD and Senior Industrials Equity Research Analyst Jeffrey John Zekauskas JPMorgan Chase & Co, Research Division - Senior Analyst

John Ezekiel E. Roberts UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals John Patrick McNulty BMO Capital Markets Equity Research - Analyst

Michael Joseph Harrison Seaport Research Partners - MD & Senior Chemicals Analyst

PRESENTATION

Seth A. Mrozek Ashland Global Holdings Inc. - Director of IR

Good morning, everyone. Welcome to Ashland's Fourth Quarter Fiscal Year 2021 Earnings Call and Webcast. My name is Seth Mrozek, Director, Ashland Investor Relations. Joining me on the call today are Guillermo Novo, Ashland's Chairman and Chief Executive Officer; and Kevin Willis, Senior Vice President and Chief Financial Officer.

We released preliminary results for the quarter ended September 30, 2021, at approximately 5:00 p.m. Eastern Time yesterday, November 9. The news release issued last night was furnished to the SEC in a Form 8-K. During this morning'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 during this 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 2022. 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 a more complete 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 in order 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 results in the fourth fiscal quarter, including commentary on the recently announced signing of a definitive agreement to sell the Performance Adhesives business. Next, Kevin will provide a more detailed review of financial results for the quarter and the fiscal year. Finally, Guillermo will close with key priorities and planning in the current economic environment in addition to providing his thoughts on important next steps and our financial outlook for fiscal year 2022. We will then open the line for questions.

As a reminder, on Friday of this week, we will host a live virtual Investor Day beginning at 9:00 a.m. Eastern Time. We are excited to tell Ashland's story, our plans for sustainable innovation and the strategy for profitable growth and value creation. We encourage all participants to register for the live event using the link available on Ashland's Investor Relations website. Beginning with the start of the live event, all materials and presentations will be accessible on Ashland's website for the next 12 months.

Now please turn to Slide 5, and I will turn the call over to Guillermo for his opening comments. Guillermo?

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NOVEMBER 10, 2021 / 2:00PM GMT, Q4 2021 Ashland Global Holdings Inc. Earnings Call

Guillermo Novo Ashland Global Holdings Inc. - Chairman & CEO

Thank you, Seth, and good morning to everyone. Thanks for your interest in Ashland and your participation this morning.

Before I discuss results for the quarter, please let me first acknowledge the Performance Adhesives team. As we announced during the quarter, on August 31, we signed a definitive agreement to sell the Performance Adhesives business to Arkema for $1.65 billion. Our teams are working very well together in planning the sale and future integration. At this time, we expect the transaction to close during the March quarter of 2022.

Net proceeds, cash from the sale after tax and transaction-related fees are expected to be in the range of $1.2 billion to $1.3 billion. Given that the Performance Adhesives business is now reported as discontinued operations for Ashland accounting purposes, this is the final quarter in which I plan to specifically address the results of the business. I would like to take this opportunity to recognize their performance.

While the Ashland and Arkema teams are working diligently on the transaction closing process, Performance Adhesives continues to execute on their winning strategy. The business performed very well during the quarter with sales up 31% compared to prior year. Adjusted EBITDA also grew by 10% with strong demand and enhanced pricing for its value-added adhesive applications being partially offset by continued raw material and cost inflation.

I'd like again to congratulate the Performance Adhesives team for building an excellent business. Adhesives has been an important part of the Ashland portfolio and story. And we'd like to thank the team for the contributions made over the decades. We wish the team great success as they continue their strategy as a future part of Arkema.

Please turn to Slide 6, turning to Ashland's results in the fiscal fourth quarter. As you will hear during the call and consistent with our update on November 1, sales and earnings results for the quarter and full year were consistent with the outlook we provided earlier in the year. For the most part, market dynamics of our underlying business continued to improve and behaved in line with our commentary from prior calls. Customer order dynamics remain strong across the core end markets, and we're making progress on taking appropriate pricing actions across all segments.

However, ongoing supply chain challenges linked to shipping constraints and raw material availability as well as the pace of raw material and energy cost inflation remain persistent. Despite these challenges, our team operated at a high level to safely deliver products to our customers around the world, yielding the financial results you see for the quarter and the year. The Schülke & Mayr business also made a strong contribution to results in the quarter as the team is now fully integrated into our core personal care segment.

For all of Ashland, the sales in the quarter grew by 12% to $591 million and adjusted EBITDA grew by 14% to $149 million. In addition, cash generation remained strong as we reported $120 million of free cash flow in the quarter. Kevin will provide more details on the results for the quarter and the fiscal year in a few moments. In addition to the strong execution to deliver financial results, the Ashland team also made good progress on reshaping the portfolio, strengthening the balance sheet and returning capital to shareholders.

I already referenced the signing of the definite agreement to sell the Performance Adhesives business. Second, we issued $450 million of new senior notes while retiring the notes that were due next August, thereby lowering our annual interest expense and pushing out our next notable debt maturity to 2025.

Third, we established an annual renewable environmental trust with an initial funding of $90 million. We plan to further fund the trust using proceeds from the planned sale of remediated real estate over the coming years. With this trust, we expect to fund all future environmental-related costs without using operating cash flow, in addition to mitigating some of the volatility we recognize from time to time in our adjusted results.

Last but not least, during the quarter, we initiated a $450 million accelerated share repurchase program with an initial delivery of 3.9 million shares, which were retired. We expect the ASR to be complete by March 2022 at the latest, at which point, there will remain $350

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NOVEMBER 10, 2021 / 2:00PM GMT, Q4 2021 Ashland Global Holdings Inc. Earnings Call

million under our existing share repurchase authorization.

I'm very pleased with the progress made by the Ashland team during the quarter and the year and look forward to discussing our outlook for the next fiscal year later in the call. In the meantime, I'll turn over the call over to Kevin to review our Q4 and fiscal year results in more detail. Kevin?

John Kevin Willis Ashland Global Holdings Inc. - Senior VP & CFO

Thank you, Guillermo, and good morning, everyone. Please turn to Slide 8. Before I begin, I'd like to remind everyone that the results of the Performance Adhesives business are now reported as discontinued operations for Ashland and will not be included in my discussion of adjusted results from continuing operations. However, as a reminder, even though we still own the business and expect to until sometime in the March quarter, stranded costs related to adhesives are included in our corporate unallocated expenses.

Total Ashland sales in the quarter were $591 million, up 12% versus prior year. Favorable currency contributed 1% growth during the quarter. Gross margin for the quarter declined modestly to 33.2%, primarily reflecting higher raw material, freight and energy costs. Excluding key items, SG&A, R&D and intangible amortization costs increased modestly to $113 million in the quarter, primarily reflecting the addition of the Schülke & Mayr business.

In total, Ashland's adjusted EBITDA for the quarter was $149 million, a 14% increase compared to the prior year adjusted EBITDA of $131 million. Ashland's adjusted EBITDA margin for the quarter was 25.2%, a 40 basis point improvement compared to the prior year, again reflecting the items discussed above. Notably, all four of Ashland's operating segments reported adjusted EBITDA margin above 25%.

Adjusted EPS, excluding acquisition amortization for the quarter, was $1.22 per share, up 18% from the prior year.

Now let's review the results of each of our four operating segments. Please turn to Slide 9. I'll begin with Life Sciences. The team executed well in the face of continued supply chain disruptions and raw material inflation. Sales were $189 million, up 5% from the prior year quarter. Currency favorably impacted sales by 1%. Demand for pharma and nutrition ingredients was healthy and was only partially offset by lower nutraceutical sales due to labor shortage issues.

Life Sciences' gross margins declined by 9% due primarily to raw material cost inflation during the quarter. The vast majority of this inflation came from higher BDO transfer pricing. While the team was able to initiate price increases, there is more work to be done to recapture the inflation we have seen and are continuing to experience. In total, adjusted EBITDA declined by 6% to $48 million in the quarter, due largely to the cost inflation I referenced. Adjusted EBITDA margin in the quarter was 25.4%.

Please turn to Slide 10. Personal Care and Household sales were $183 million, up 12% from the prior year quarter. Sales to core personal care end markets were strong across the board as we continue to see improved demand for our ingredients globally, following the onset of the pandemic last year. The Schülke & Mayr business was also a meaningful contributor, adding roughly $22 million of sales to the quarter. These gains were partially offset by the exit of roughly $10 million of low-margin purchase for resale business in addition to lower sales of additives for hand sanitizers compared to prior year.

At the end of fiscal '21, the exit of low-margin Personal Care and Household product lines is complete. The carryover impact to sales of these exits for fiscal '22 is expected to be approximately $35 million with very little EBITDA impact. Gross margins improved by 60 basis points, reflecting the contribution from the acquisition, the exit of low-margin business and lower operating cost. In total, Personal Care and Household adjusted EBITDA increased by 11% to $51 million. Adjusted EBITDA margin remained healthy at nearly 28%.

Please turn to Slide 11. Specialty Additives had yet another nice quarter with sales up 13% to $181 million. Demand for architectural coatings additives remains very strong. And we are seeing a normalization in DIY volumes and a shift to higher contractor paint volumes. As we stated last quarter, global demand continues to be very strong. And our HEC network as well as the industry has sold out. To meet incremental demand, one of our key growth projects in fiscal '22 is expanding our global HEC production capacity.

Sales growth remains strong and price versus cost for Specialty Additives was positive during the quarter while operating costs were a headwind year-over-year due to the inventory control actions we took last year. As such, gross margins declined by 350 basis points to

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NOVEMBER 10, 2021 / 2:00PM GMT, Q4 2021 Ashland Global Holdings Inc. Earnings Call

26%. However, in total, adjusted EBITDA grew by 7% to $47 million. And adjusted EBITDA for the quarter was 26%.

Please turn to Slide 12. Intermediates & Solvents reported a very strong quarter as pricing has continued to rise following strong global demand and outages at competitor facilities in the U.S. I&S sales were $60 million, more than double compared to the prior year. While merchant sales were up double digits due to strong demand in pricing, internal captive sales were up even more significantly compared to last year, reflecting the higher BDO transfer price and the internal inventory control measures that were in place during fiscal Q4 of last year. I&S margins were up meaningfully. The segment reported adjusted EBITDA of $21 million compared to $6 million in the prior year. And adjusted EBITDA margin in Q4 was 35%.

Please turn to Slide 13. As I have done for the last few quarters, I'd like to spend a few minutes talking about cash generation, which continues to be an important component of our value creation strategy. Total free cash flow in the quarter was $120 million, a $31 million increase compared to prior year. While we generated higher cash flow from lower capital expenditures, greater earnings and lower cash interest expense, we also received an additional $16 million as part of the new accounts receivable sales program that we implemented during the quarter.

Free cash flow during the fiscal year was also very strong. Ashland generated $361 million of cash from higher earnings, lower capital expenditures, lower interest expense and a $91 million contribution from the AR sales program. The discipline around capital expenditures this year was an important contributor to free cash generation. Total CapEx for the year declined by nearly $30 million as we prioritized plant investments and worked more efficiently in our maintenance activities.

As we look to next year, we plan to allocate capital to important organic growth projects. These high-return investments will serve to expand production capacity in some of our key high-margin product lines for our core end markets in pharma, personal care and coatings. In fiscal 2022, we expect to allocate roughly $60 million to these organic growth projects. Total capital expenditures next year should be in the range of $160 million to $170 million. Guillermo will spend more time discussing our overall outlook for fiscal '22 and our underlying assumptions in his closing remarks.

Please turn to Slide 15. Next, I'd like to briefly review our financial results for fiscal year '21. For the year, Ashland generated 5% sales growth across the portfolio in a difficult and uncertain economic environment. All businesses saw improved top line results over the prior year, including personal care, which also grew net of exited sales related to low-margin product lines. Demand recovery and the Ashland team's execution in the face of raw material availability and freight and logistics challenges were key drivers to the year-over-year sales growth.

Please turn to Slide 16. Adjusted EBITDA for the year was $495 million, a 10% increase over the prior year. Adjusted EBITDA margin also expanded by 110 basis points to 23.4%. Ashland generated strong earnings growth and margin improvement during a challenging macro environment and $18 million of negative impact from the labor strike at our Belgian facility and winter storm Uri. For the year, Ashland generated $361 million of free cash flow, inclusive of about $92 million from our AR sales program and $44 million of cash restructuring payments. Cash generation will be critically important as we execute on our organic growth plans.

Please turn to Slide 18. Before Guillermo discusses our financial outlook for fiscal year '22, I think it's appropriate to calibrate the results for fiscal '21 and put them in context for next year. First, as previously discussed, beginning with Q4, we are now reporting adhesives as discontinued operations. With the disc ops reporting, a portion of the cost previously allocated to the adhesives business will remain in our unallocated corporate segment.

These stranded costs totaled $14 million in fiscal year '21 and are included in our adjusted results for the year being reflected in unallocated and other segment of the income statement. We are also reporting all environmental costs net of asset returns in the renewable environmental trust as key items for adjusted results reporting. After making these adjustments, fiscal year 2021 results amount to $2.1 billion of sales and $495 million of adjusted EBITDA with an adjusted EBITDA margin of 23.4%.

Please turn to Slide 19. In addition, there are several discrete items that reset the baseline for fiscal year '21. Earlier in this year, there were cost impacts related to winter storm Uri and the labor strike at our plant in Doel, Belgium that impacted earnings. The cumulative

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