Q2 2024 Summary
Published Feb 3, 2025, 6:13 PM UTC- Ashland's robust innovation pipeline across Life Sciences, Coatings, and Personal Care segments, including products like bioresorbable polymers, super wetters, and transformed vegetable oils (TVOs), offers significant growth opportunities that are not currently reflected in the company's valuation.
- The company anticipates normalization of demand as destocking ends, with volumes expected to converge with customer demand, leading to increased revenue and gross profit in the higher seasonal parts of the year.
- Ashland's Biofunctionals business is showing strong sequential improvement, particularly in China, supported by the inauguration of the Nanjing plant and investments in leadership and resources, positioning the segment for further growth.
- The Avoca business continues to underperform, as customers have shifted from plant-based to lower-cost bio-based materials. The company is assessing options to address this underperformance, indicating ongoing challenges in this segment.
- Customer restocking may not occur until 2025, with the company stating that current growth is driven by normalization rather than restocking. This suggests that near-term growth could be limited by the absence of inventory rebuilding.
- The company's free cash flow conversion is expected to be around 50% for the fiscal year, which is lower compared to previous years. This decrease is partly due to higher cash taxes, potentially impacting the company's financial flexibility.
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EBITDA Outlook
Q: Will EBITDA dollars be above 2021 levels when normalized?
A: Management expects that once normalization occurs in both demand and production volumes, EBITDA will exceed 2021 levels. Fiscal 2021 EBITDA was $495 million; the midpoint of the current outlook is $485 million. Assuming the outlook for the full year holds, they expect fiscal 2025 EBITDA to be higher than both 2024 and 2021. -
Volume Normalization
Q: Is the 5% volume gap the amount left to reconnect to guidance?
A: They anticipate volumes will continue to improve as they progress toward normalization. The convergence of their demand with customers' demand is ongoing and should continue to ramp throughout the fiscal year. By the end of the fiscal year, they hope to be pretty much at convergence. The 5% gap represents the remaining reconnection to reach normalized volumes. -
Specialty Additives Pricing
Q: What are the pricing trends in Specialty Additives going forward?
A: While they maintained margins during inflation by adjusting prices, they didn't expand margins. Currently, there's near-term pricing pressure in regions like Asia and Latin America due to competitive pressures. However, in the longer term, they expect to maintain margins and keep pricing stable. The normalization period may bring some choppiness in timing of pricing versus raw material shifts. -
Pharma Business Growth
Q: What is the normalized growth rate for the Pharma business?
A: The Pharma business, specifically PVP, historically exhibits low to mid-single-digit growth consistently. They expect this trend to continue going forward, excluding any impact from platform innovation technologies. The recent dynamics, including competitor outages and China export pricing, are expected to normalize as the value chain cost structure stabilizes. -
Innovation Pipeline
Q: What are you most enthusiastic about in new product portfolios?
A: Management is excited about the significant growth catalysts in their innovation pipeline across all segments. In Life Sciences, they have great opportunities with cellulosics (Benecel, Klucel) and bioresorbable polymers, with new products expected to launch in 2025. In Personal Care, they're focusing on performance with sustainability, with positive customer feedback on new technologies like TVO and novel cellulosic starches. In Coatings, they've transformed their business beyond rheology into areas like super wetters and dispersants, opening doors to significant market opportunities. These innovations are not yet recognized in their valuation, presenting great potential for future growth. -
Customer Inventory Restocking
Q: Will customers need to rebuild inventory levels in 2025?
A: The destocking phase is over, and customers are now maintaining appropriate inventory levels by replenishing as they sell. Significant restocking is expected when their sales increase, likely making it more of a 2025 issue. Currently, the focus is on normalization and aligning demand with customers. -
Avoca Strategic Plan
Q: What is the strategic plan for Avoca going forward?
A: The Avoca business has been challenged since 2018–2019 due to customers moving to bio-based technology. As the trend continues toward lower-cost bio-based production, they are assessing their options for this part of the portfolio. While they don't have specific details to share at this time, it's an issue on their radar screen. -
Leadership Changes
Q: How are you managing leadership changes across segments?
A: The recent leadership changes are part of a purposeful shift to bring in new experience and talent aligned with their growth direction. They're investing in innovation and bringing in new skills to drive growth. The business is well-positioned with a clear strategy, and they're in the process of hiring new leaders to continue advancing their objectives. -
Biofunctionals Business Performance
Q: What drove the weakness in the biofunctionals business, and do you expect improvement?
A: The biofunctionals business saw a sequential improvement in Q2 and is starting to recover. Factors like increased travel in Asia and recovery in China are contributing to improved demand from major customers. With the inauguration of their biofunctionals plant in Nanjing and investments in leadership and regional capabilities, they expect continued growth in this high-value segment.