Prepared remarks
Good day, and thank you for standing by. Welcome to the Ashland Third Quarter Fiscal Year 26 Earnings Call. At this time, all participants are in a listen-only mode. To ask a question during the session, you will need to press *11 on your telephone. You will hear an automated message advising that your hand is raised. To withdraw your question, please press *11 again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Sandy Klugman, Director of Investor Relations.
Hello, everyone, and welcome to Ashland's third quarter fiscal year 26 Earnings Conference Call and Webcast. My name is Sandy Klugman, and I am Ashland's Director of Investor Relations. Joining me on the call today are Guillermo Novo, Chairman and CEO; William Whittaker, CFO; as well as our business unit leaders: Alessandra Faccin, Life Sciences and Intermediates; James Minicucci, Personal Care; and Dago Caceres, Specialty Additives. Please note that we will be referencing slides during today's call. We encourage you to follow along with webcast materials available at ashland.com under Investor Relations. Please turn to Slide 2. As a reminder, today's presentation contains forward-looking statements regarding our fiscal 26 outlook and other matters as detailed on Slide 2 and in our Form 10-Q. These statements are subject to risks and uncertainties that could cause future results to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but there is no assurance these expectations will be achieved. We will also reference certain adjusted financial metrics, both actual and projected, which are non-GAAP measures. We present these adjusted figures to provide additional insight into our ongoing business performance. GAAP reconciliations are available on our website and in the appendix of these slides.
Thanks, Sandy, and welcome to everyone joining us. Please turn to slide 5. Overall, we delivered a strong third quarter that reflected strong demand, disciplined commercial execution, and healthy free cash flow generation. Sales increased across all business units and our performance was in line with the expectations we outlined at the beginning of the quarter. These results reflect the team's strong execution and reinforce the momentum we are building across the businesses. Life Sciences delivered double-digit sales growth, benefiting from broad contributions across pharma end markets and ongoing momentum within our Globalize and Innovate strategies. Pharma achieved its fifth consecutive quarter of volume growth supported by strength in high-purity excipients, injectables, and innovation growth momentum. Personal Care generated another quarter of solid performance led by biofunctional actives, high-single-digit growth in skincare, and favorable contributions from haircare and microbial protection. Performance reflected healthy growth across end markets and major regions supported by strong customer engagement and innovation adoption. Specialty Additives delivered encouraging sales growth in line with our expectations. Strength in coatings and performance specialties was primarily driven by market share gains, reflecting strong commercial execution by the team. Regionally, most markets improved compared to prior year. Intermediates delivered higher sales supported by improving merchant sales driven by higher NMP demand in North American EV battery and energy storage applications. Operationally, our third quarter results reflected continued progress on manufacturing performance, with further opportunities to improve. We remain focused on targeted investments and disciplined execution and expect continued progress in the fourth quarter as the benefits of these actions build. We also generated strong cash flow during the quarter through disciplined working capital management and ended the quarter with a net leverage of 2.4x, returning to our long-term target range and strengthening our ability to invest in growth and innovation. Please turn to Slide 6. Our results demonstrated the strength of our execution and the benefit of the actions we have taken across the portfolio. Sales increased 7% year over year, reflecting broad-based growth across the portfolio. Profitability was impacted by production challenges encountered earlier in the fiscal year. Results improved sequentially and were largely in line with our expectations. We continue to make steady progress across the manufacturing network and on our strategic priorities. Our teams remain focused on commercial execution, pricing realization, and cost discipline. Pricing actions continue to gain traction, offsetting higher raw material costs while maintaining strong customer relationships. Please turn to Slide 7. Slide 7 illustrates the breadth of our growth and the quality of our earnings profile. First, our consumer-focused businesses Life Sciences and Personal Care continue to generate attractive margins supported by resilient demand, innovation, and favorable mix. Second, Innovate and Globalize strategies continue to deliver measurable results with accelerating momentum in higher-value applications across the portfolio. For the first nine months of the year, Innovate has exceeded its full-year target, and Globalize has already achieved its full-year target and continues to deliver strong results across the platforms. Third, while margins continue to reflect earlier production rate challenges and cost pressures, the actions we have taken across pricing, manufacturing, and commercial execution continue to gain traction. As a result, we are well positioned for further profitability improvement in the fourth quarter. Before turning the call over to William, I also want to take a moment to share that yesterday we announced a cooperation agreement with Ancora, an Ashland shareholder, with whom we have had constructive dialogue. Under this agreement, we are welcoming Peter Thomas and Alan Spizzo to the Ashland board as independent directors. Both bring significant executive and financial experience in specialty chemicals, and we believe their perspectives will support our continued focus on creating value for our shareholders. The board is also forming a capital allocation advisory committee to bring additional rigor and objectivity to our capital allocation strategy and planning. We value ongoing engagement with our shareholders and look forward to working collaboratively with Peter, Alan, and the rest of the board as we continue to execute our strategy. Now let me leave you with three key takeaways before we get into the financials. Demand remained healthy across our core businesses. Our Innovate and Globalize initiatives continue to generate meaningful growth. And we continue to make progress in addressing the operational challenges we have discussed throughout the year. These are encouraging signs for the business and reinforce our confidence in the opportunities ahead. Now I would like to turn the call over to William to provide a more detailed view of third-quarter financial performance.
Thank you, Guillermo. Please turn to slide 9. Third quarter sales were $497 million, up 7% versus the prior year, driven primarily by volume growth across all business units. Volumes increased 6% across the portfolio, led by continued strength in Life Sciences and Personal Care, while Specialty Additives returned to growth and Intermediates benefited from improving merchant demand. Pricing increased approximately 1% year over year, led by Life Sciences and Specialty Additives, reflecting sequential improvement of approximately 300 basis points. Foreign exchange contributed approximately $3 million, or 1%, to sales. Adjusted EBITDA was $109 million compared to $113 million in the prior-year quarter. Growth in Life Sciences and Personal Care was more than offset by lower earnings in Specialty Additives and Intermediates. Profitability continued to reflect the impact of lower production rates earlier in the year and the normalization of incentive compensation from a low base in the prior year. These factors were partially offset by higher volumes, favorable mix, and pricing actions. Sequentially, profitability improved as operating performance gradually improved and commercial actions gained traction across the portfolio. We expect a further step up in profitability during the fourth quarter. Adjusted EBITDA margin was 21.9% compared to 24.4% in the prior-year quarter, reflecting these dynamics. Adjusted earnings per share, excluding amortization expense, was $1.20 compared to $1.40 in the prior-year quarter. Cash generation remained a significant strength during the quarter. Ongoing free cash flow totaled $103 million compared with $108 million in the prior-year quarter, representing conversion above 90%. Inventory is down nearly $80 million fiscal year to date, supporting strong cash generation and positioning us for improved absorption and reduced inventory-related margin headwinds going forward. We ended the quarter with $936 million of available liquidity and net leverage of 2.4x, returning to our long-term target range. During the quarter, we also refinanced our credit agreement, extending maturities on attractive terms and further strengthening our financial flexibility. The balance sheet remains a competitive advantage, providing flexibility to support operations, invest in strategic priorities, and maintain disciplined capital allocation. With that, I will turn the call over to our business unit leaders for a closer look at segment performance.
Thank you, William. Good morning, everyone. Please turn to slide 10 for Life Sciences. Life Sciences delivered another strong quarter, with sales of $180 million, up 11% versus the prior-year period. Performance was driven by higher sales volumes, led by broad-based strength across pharma applications. Pharma achieved double-digit sales growth and delivered its fifth consecutive quarter of year-over-year volume gain. Demand remained healthy across all regions and product categories, including continued strength in high-purity excipients and injectables. We also benefited from customer order timing and supply chain normalization during the quarter. Adjusting for those factors, underlying demand trends remain strong and consistent with our expectations. Pricing contributed positively to results as commercial actions began to gain traction during the quarter, with full run-rate realization expected in the fourth quarter. Foreign exchange contributed approximately $1 million to sales during the quarter. Injectables continued to outperform in the third quarter, delivering exceptional growth aligned with our Globalize strategy. Performance was driven by accelerating adoption of Ashland's high-purity differentiated excipient portfolio, strong customer demand, a growing development pipeline, and increasing new product adoption, which support a strong outlook. We also announced the groundbreaking of our new tablet coating manufacturing facility in India, another important step in our Globalize strategy. Following recent investments in Brazil, this expansion continues to strengthen our regional manufacturing footprint and position us to better serve customers in some of the fastest-growing markets in the world. Turning to innovation, our recently launched products continue to drive above-market growth, led by low-nitrite oral solid dosage excipients and high-purity injectable and bioprocessing products. Strong customer adoption validates Ashland's strategy of investing in differentiated technologies that address increasingly complex formulation and regulatory requirements. Turning to profitability, adjusted EBITDA increased 11% to $60 million compared to $54 million in the prior-year quarter. Adjusted EBITDA margin was 33.0%, consistent with the prior year. Increased volumes, favorable pricing, and product mix offset the impact of lower production rates and higher SAR expense. Volume growth remained a primary driver of earnings improvement, while disciplined commercial execution and favorable mix also contributed to results. As we look ahead, Life Sciences continues to benefit from resilient pharmaceutical demand and increasing traction from our Globalize and Innovate strategies. Combined with pricing realization and ongoing innovation adoption, these trends support our confidence in the long-term opportunities ahead. Please turn to Slide 11 for Intermediates. Intermediates delivered a solid quarter with sales of $37 million, up 12% versus the prior-year period, driven by improved merchant demand. Merchant sales increased to $26 million from $23 million in the prior-year quarter, supported by higher NMP demand from North American EV battery and energy storage customers ahead of a planned fourth-quarter shutdown. Captive BDO sales were $11 million, up modestly from the prior year, reflecting stable internal demand and market-based transfer pricing. Foreign currency had a negligible impact on sales during the quarter. Turning to profitability, adjusted EBITDA was $4 million compared to $7 million in the prior-year quarter. The year-over-year decline primarily reflected lower advanced manufacturing tax credit benefits compared to the prior-year quarter, while underlying operating performance remained relatively stable. Pricing realization and improving demand in electronics, a key merchant application, helped offset a portion of this headwind during the quarter. While conditions across the broader BDO value chain remain below historical levels, we are seeing soft yet encouraging improvement in NMP demand, mostly for energy storage-related applications. Given the volatility we have experienced in this market, we remain measured in our near-term outlook. However, our long-term view remains unchanged and we continue to believe EV battery and energy storage applications represent an attractive growth opportunity for the business. Now I will turn the call over to Jim to discuss Personal Care.
Thank you, Alessandra. I will now highlight our Personal Care results. Please turn to slide 12 for Personal Care. Personal Care delivered another quarter of growth reflecting broad-based performance across end markets and continued strength in our higher-value applications. Sales were $155 million, up 5% year over year, driven by robust volume growth across the portfolio, new commercial wins, and favorable mix. Biofunctional actives delivered another quarter of double-digit growth supported by an expanding customer base. Colipepto continues to experience accelerated adoption due to its multifunctional benefits and ability to instantly improve skin radiance, hydration, elasticity, and provide visible wrinkle correction. Building on this momentum, biofunctional actives is also starting to see early commercial wins with Essernonite, our 2026 flagship ingredient. Microbial protection also delivered solid growth driven by double-digit volume gains across all regions. In the third quarter, we inaugurated and commissioned our new microbial protection production facility in Europe. This investment strengthens our regional manufacturing capabilities, improves supply chain resilience in the region, and represents another major step in globalizing microbial protection. Within Care Ingredients, the portfolio delivered solid gains with positive momentum across hair and skincare markets. Overall, skincare delivered high-single-digit growth, haircare delivered mid-single-digit growth, and oral and home care generated low-single-digit growth. On a regional basis, growth was led by the Americas and China. Pricing improved sequentially as commercial actions continued to gain traction during the quarter, while modestly below the prior year. To clarify on pricing, price actions more than offset cost inflation. Specifically, in microbial protection, our globalized investments have reduced our cost structure, enabling share gains. Foreign currency contributed approximately $1 million to segment sales. Turning to innovation, in the third quarter we successfully executed our first industrial production of multifunctional starch, marking a pivotal step toward our planned calendar 2026 launch. Personal Care continues to make strong progress across our Globalize and Innovate strategies, supported by strong customer engagement and innovation focus. Turning to profitability, adjusted EBITDA increased to $45 million from $41 million in the prior-year quarter, and EBITDA margin expanded 110 basis points to 29.0%, reflecting broad-based growth across all business lines. Improved profitability was driven by higher sales volume and favorable product mix. In summary, Personal Care delivered both mid-single-digit growth and margin expansion in the quarter, demonstrating disciplined execution, strong customer focus, and continued adoption of differentiated and innovative technologies. With that, I will turn the call over to Dago to review the results of Specialty Additives.
Thank you, Jim. Please turn to slide 13. Specialty Additives delivered sales growth in the quarter despite continued mixed demand conditions across end markets and regions. Sales increased 4% year over year to $136 million, driven by share gains, pricing realization, and strong commercial execution in coatings and performance specialties, our most strategic industrial segments. Coatings' recovery was driven by higher volumes from share gains across all regions, successful innovation implementation, and pricing discipline. Performance specialties also delivered year-over-year growth supported by favorable demand trends and commercial execution. These gains were partially offset by continued weakness in construction and energy and resources, where market conditions remain challenged and generally in line with recent trends. Construction volumes continue to reflect both softer end-market demand and the impact of deliberate portfolio management actions to preferentially serve more attractive regulated segments. Regionally, growth was broad based, with nearly every region delivering year-over-year improvement. Worth highlighting is that the Middle East, Africa, India, and China delivered growth despite challenging market conditions and supply chain disruptions. Pricing actions continued to gain traction during the quarter and, together with favorable product mix, supported growth despite a muted demand environment. Foreign exchange contributed approximately $1 million to sales. Turning to profitability, adjusted EBITDA was $20 million compared to $26 million in the prior-year quarter, while adjusted EBITDA margin was 14.7% compared to 19.8% in the prior-year quarter. The results were generally in line with expectations and reflected lower fixed-cost absorption associated with earlier and reduced production rates at our Hopewell facility. These headwinds were partially offset by favorable pricing and product mix. From an operations standpoint, we successfully completed the planned turnaround at our Hopewell facility and implemented a number of process control, productivity, and operational robustness improvements. While we are encouraged by the trajectory, we view this as an operational improvement journey to achieve our long-term productivity targets. The performance of our broader cellulosics and acid-base businesses remains solid, and we are leveraging our unique global manufacturing network to increase supply flexibility, optimize production, and strengthen overall supply reliability. We are also making solid progress across our balanced innovation portfolio, from regional solutions designed for local customer needs to core innovations that strengthen and expand our existing product lines to transformative technologies such as our novel additives, which continue to advance toward commercialization and represent a significant long-term growth opportunity for Ashland. Overall, while end-market conditions remain mixed, we are encouraged by the progress being made across the business. Continued price realization, strong commercial execution, and ongoing operational improvements support our expectation for improved profitability over time. I would like to recognize the team's strong execution and cost discipline in what remains a challenging market environment.
Thanks, Dago. Please turn to slide 15. Let me briefly update you on our Execute strategy and manufacturing optimization initiatives. As Dago just discussed, progress across our HEC network optimization has been slower than originally planned. That said, the quarter unfolded largely as expected: operating performance improved, and we continue to advance the actions needed to improve productivity, reliability, and network performance. Beyond HEC, our manufacturing optimization initiatives remain on track. VP&D optimization efforts are now expected to deliver approximately $12 million of benefits this fiscal year. We also completed the final phase of our small plant consolidation initiative during the third quarter, delivering approximately $3 million of EBITDA benefit this year and further simplifying our manufacturing footprint. In total, VP&D optimization and small plant consolidation are expected to deliver $15 million this year. Importantly, these are structural run-rate savings rather than one-time gains, and they position us to enter next year with a leaner, more competitive cost base. Execute remains a core component of our strategy. While we still have work to do, the broader portfolio of manufacturing initiatives is delivering results and we remain confident in the long-term value and profitability improvement these actions can generate. Please turn to slide 16. Our Globalize and Innovate initiatives continue to generate meaningful results and remain an important driver of growth across the portfolio. Through the first nine months of the fiscal year, Globalize has already achieved its full-year growth target, with Innovate having exceeded its full-year objective. Innovation highlights include continued momentum in high-purity excipients within Life Sciences, skin longevity technologies in Personal Care, and formulated rheology solutions for stone paint within Specialty Additives. As you heard from Alessandra and Jim, we are seeing tangible returns from the investments we have made to expand capabilities and strengthen our regional presence. These initiatives are increasing our exposure to higher-value applications, strengthening customer relationships, and improving the quality and durability of our growth profile. Just as important, the opportunity pipeline supporting both initiatives remains strong, reinforcing our confidence that Globalize and Innovate will remain meaningful contributors to growth and value creation in the years ahead. Please turn to Slide 17. Turning to our outlook, which remains largely unchanged: we continue to see growth across the portfolio, ongoing momentum in higher-value applications, increasing realization of pricing actions, and strong cash generation. We expect another step up in profitability during the fourth quarter. While operating performance remains below historical levels, the impact on profitability should be less pronounced than in the third quarter as operational trends improve and pricing actions continue to gain traction. As a result, we are reaffirming our fiscal 26 sales and adjusted EBITDA guidance. We continue to expect sales of $1.835 billion to $1.870 billion and adjusted EBITDA of $385 million to $400 million. We are revising our adjusted EPS outlook to low- to mid-single-digit growth from mid- to high-single-digit growth reflecting a higher tax rate associated with unfavorable discrete items. We continue to expect ongoing free cash flow conversion of greater than 50% of adjusted EBITDA for the fiscal year. With that, I will turn the call back over to Guillermo to discuss how our technology platforms are creating value across the portfolio before we open the line for questions. Thank you, William, and please turn to Slide 18. Innovation remains a core driver of long-term value creation and an important differentiator across our portfolio. The progress we have made across our Globalize and Innovate strategy is a direct reflection of the strength of our technology platforms, customer partnerships, and R&D capabilities. We are very excited about the progress we are making on our new technology platforms. These new technologies have strong value propositions and target large scalable growth opportunities. With strong customer engagement and validation, we feel very confident in the profitable growth potential of these platforms. With over 52 patents filed, they also present a great opportunity to build sustained differentiation. We are also expanding the range of products and applications these technology platforms can target. We are accelerating the commercialization of new products. To provide investors with a deeper look at these opportunities, we will be hosting an innovation webinar on September 17. During that event, we will provide additional insight into our innovation strategy, our progress in developing and commercializing them, and the opportunities we see to create long-term shareholder value. We believe these technology platforms represent a meaningful source of future growth, margin expansion, and value creation beyond our current planning. Please turn to Slide 19. As we conclude today's call, I would like to reiterate what gives us confidence in the opportunities ahead. First, growth is returning across the portfolio as the actions we have taken to optimize the business and improve the quality of our mix continue to gain traction. We delivered broad-based sales growth across all business units and regions, supported primarily by volume growth, strong customer engagement, and disciplined commercial execution. We expect that momentum to continue through the fourth quarter. Second, we remain focused on disciplined pricing execution. Pricing actions are gaining traction across the portfolio, helping address cost inflation while maintaining strong customer relationships. I would also like to recognize the efforts of our team who have managed through a dynamic environment. Third, our Globalize and Innovate strategy is working. Globalize and Innovate continue to generate meaningful results and we are seeing increased returns from the investments that we have made to expand capabilities, strengthen our regional footprint, and accelerate growth in higher-value applications. This is the type of high-quality growth that enhances the long-term strength of our portfolio. Fourth, operational performance remains an area of focus. While we are not yet where we want to be, we are making progress and remain committed to improving our performance. We continue to see meaningful opportunities to strengthen profitability as these efforts advance. And finally, we are extremely excited about the progress we are making on our new technology platforms. We look forward to sharing more about customer validation in the coming weeks, and we remain encouraged by the progress we are seeing across our innovation pipeline and the opportunities it creates across the portfolio. Ashland is a company with resilient end markets, leading technology positions, strong customer relationships, and a growing pipeline of innovation opportunities. The combination of improving demand trends, increasing pricing realization, advancing technology platforms, and ongoing operational improvements reinforces our confidence in the opportunities ahead. I would like to thank our employees for their continued commitment and thank our shareholders for their ongoing support and engagement. Operator, please open the line for Q&A.
Questions and answers
Thank you, Guillermo. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Our first question comes from John McNulty with BMO Capital Markets. John, please go ahead.
Yes. Good morning. Thanks for taking my question. Wanted to get a better understanding of the pricing that you are seeing and how we should be thinking about it going into Q4 and maybe early fiscal 27. Do you expect it to largely accelerate from here? Will it vary depending on the segment? How should we be thinking about realization of pricing to cover costs, raw material inflation, and other inflation?
Thanks, John, for the question. Let me first recap just to remind everybody what all this inflation means to Ashland. We are not a petrochemical-linked company anymore after we sold our adhesive business, so we have less exposure to petrochemicals and to high-energy raw materials that require high energy for production. We are not immune, and we do have some impact that we need to capture, but it is a much lower exposure. Do not expect the pricing movements that you see with commodity companies. Our intent is to recover inflation and maintain margins. We are a specialty additives company. Our focus is value pricing through products and technology; that is how we expand. We do not use these moments to expand margins. We want to make sure that we are holding margins. The team has done very well. We have captured the majority of the inflation—both raw material and freight—with the pricing we have implemented. There is a flow-through effect. I think next quarter we will see bigger benefits in terms of pricing ramp rate versus the inflation that we have already seen. But we are basically covering everything that has impacted us, and you will see that in the next quarter flowing through. After that, we will see how markets evolve. Our focus is on moving fast to minimize the impact and maximize the benefits, and the team has done that. We feel very confident at this point. William, do you want to add anything else?
Yeah. Just a couple of specifics. Thanks for the question, John. The important marker for us this quarter is that we swung from down 2% year over year in Q2 to up 1% in Q3. We expect that to continue, and, to Guillermo's point, sequential improvement in Q4 as we get the pricing fully realized. In terms of order of magnitude, I would expect that to be nearly as large as the sequential improvement we just saw in Q3. Overall, as you look to pre-pricing actions to run rate exiting the year, it will be in line with what Guillermo cited on the last earnings call of roughly 3% to 8%; it will depend by region and product line, of course, but we are tracking near the midpoint overall for the company.
Just one other point, John, that I want to make in the prepared remarks—Jim made a comment that I do not want to get lost in translation. For Personal Care, they moved on pricing to recover raw materials and all that has gone through. The team has done a lot in terms of Globalize: as we regionalize our business and infrastructure, we are changing our cost structure, which has allowed us to do a lot of things and helped us gain share. Jim, do you want to comment to clarify whether the lower, quote, pricing in part of your business reflects mix or different dynamics?
Yeah. Thanks, Guillermo. Thanks, John. As William mentioned, sequentially we are seeing improvement and an increase in price. We took actions and started communicating with customers in March when the conflict started. The actions we have taken were price increases as opposed to surcharges, and there was flow-through that came through in the third quarter. We took the necessary actions to cover cost inflation in the majority of the portfolio. Specifically in microbial protection, commissioning our facility in Europe was the last step in globalizing the business; now we have assets in all regions to provide regional supply, which reduced our cost structure and enabled the share gains. So that is part of the mix effect you see in overall pricing impact.
Okay. Got it. That is all very helpful color. As a second question, can you speak to the manufacturing optimization as well as Hopewell? It sounds like you are seeing some decent progress, maybe not where you originally hoped, but decent progress. How should we think about how you end your fiscal year and the tailwinds into 2027 from these optimization and cost-out plans?
I would differentiate the network optimization impact and the other headwinds we experienced earlier in the year. There are two different types of issues. The Calvert City event earlier in the year was an equipment failure compounded by weather, and I would treat that separately. If you look at the network optimization, what worked well and where the gaps are: overall it worked well. In our HEC network we are reducing costs, streamlining assets, and improving productivity. It is still early stage; real productivity work is ongoing and we still see opportunities to further improve. The small plant consolidations are complete; we moved production units into larger sites to leverage our cost base. Specifically on HEC, we eliminated a plant, which removed $25 to $30 million of cost. That benefit is realized but some of it was used to rebalance the network as China demand softened, so we are exporting from China now; you see benefit in sustained margins and improvement, but it's not an upside in terms of a one-time benefit. On the Hopewell facility, we shifted production of different product mixes into Hopewell. It is different process technology; you cannot simply turn the plant on and immediately achieve target production rates. We did a turnaround, installed new equipment, process controls, and improvements; the plant is back online and running well. Production rates are still not where we want them to be, and we are working to ramp up. The benefit will take a quarter or two to flow through into the P&L. If I step back for the year, between the Calvert event and weather impacts, overall margins should have been roughly 200 basis points higher—this is the efficiency gap we wanted to close heading into next year.
Thank you so much. Please stand by for our next caller. Our next caller is David Begleiter from Deutsche Bank. Please go ahead. Your line is open.
Thank you. Good morning. Guillermo, just on the Q4 guidance, it is about a $15 million range. Is there a bias at this point in time to either the midpoint or the upper end of the range?
Let me comment and then have William add some specifics. On revenue and EBITDA, we feel good about the revenue side. Markets are improving and core markets have been resilient. Personal Care and Life Sciences, specifically pharma, are doing well. Globalize and Innovate are performing. Pricing actions are covering inflation. So on the revenue side, we feel very confident. On the EBITDA side, it's really about operating performance. We communicated challenges on the last call, and I want to be careful about promising a rate of improvement because the flow-through to EBITDA is not straightforward. We want to be cautious on that side. William, do you want to add more detail?
Yeah. We intentionally did not move the midpoint of the EBITDA guide. To deliver the EBITDA midpoint, we will need a stronger outcome on the sales range; that is actually where our internal modeling sits today. June was a strong exit and July and August order activity is encouraging. Q3 was volume-led; I would expect Q4 to be more balanced across volume and pricing realization. By business: Life Sciences—quarter-over-quarter stability in sales and earnings, which would be another solid and resilient quarter. Personal Care—we continue to see broad-based momentum in sales mix and margin lift. Additives—we are cautiously optimistic but encouraged by commercial execution. Manufacturing—cautiously optimistic; improvement is gradual in Q4. What drives margin lift into Q4 is pricing realization, continued volume momentum with healthy mix, Globalize and Innovate outperforming year-to-date, and gradual operations improvement.
And Guillermo, on Globalize and Innovate, congrats on the year-to-date success. Any early thoughts on targets for 2027 for Globalize and Innovate?
We will provide more updates over time. Internally we want to be transparent on progress. On Globalize, we have made many investments and only some have come on stream, so we'll continue to spotlight performance. On Innovate, we will update in September. Across the businesses, beyond the new technology platforms, we are seeing more core innovation. Each business is doing more to modify cellulosics and other technologies. In September we plan to give more color on key technologies that are scalable, the markets we are targeting, and the potential opportunity ranges. The pipeline is large and this is a portfolio approach, not a single project bet: several exciting projects have significant growth potential for a company our size.
Our next question comes from Reed Halbert with Wolfe Research. Please go ahead. Your line is open.
This is actually Christopher. Switching over to the Life Sciences segment, I would like to drill down to the sustainability of the pharma volume growth. It seems like things have been picking up the last couple of quarters. You have been investing in both OSD as well as injectables. Is there anything on the horizon that underscores a greater degree of conviction, specifically on the OSD side? Anything with GLP-1s? Any new products? I know there could be timeline differences, but it seems like things are moving in the right direction. Thank you.
Thanks for the question. The momentum in Life Sciences and specifically pharma is not just about innovation; Execute has been an important part—getting our cost structure and improving competitiveness in core businesses. That gives us confidence that the base business will perform well. Alessandra, do you want to comment further?
Yes. Christopher, we are targeting mid-single-digit growth in Life Sciences for 2026, and that is how to view it across the quarters. On oral solid dose (OSD), we saw BDP stabilizing, which is positive. We also saw momentum from Globalize and Innovate with injectables, bioresorbable polymers, sugars, and cellulosics. We are excited about launches in other areas such as TVO in crop care; customers are adopting and giving positive feedback—these are not revenue drivers in 2026 yet, but they show momentum going forward. Regarding GLP-1s, Ashland is benefiting and will benefit materially from GLP-1 drugs' growth that we are seeing and expect to see continued upside. This benefits both the chemicals used in API production as well as excipients used in oral solids. In the coming weeks we are launching a permeation enhancer and we are seeing pre-launch momentum; the launch will happen in August. Overall, we see momentum from Globalize, Innovate, and stable market fundamentals.
Alessandra, can you comment briefly on permeation enhancers for investors who may not be familiar?
Yes. Permeation enhancers help with the absorption of biologics into an oral format. That is what we are launching in August, and we are seeing encouraging pre-launch interest already.
Got it. And quick follow-up on Personal Care: the portfolio has gone through many adjustments over the past periods. It seems like you are building momentum, specifically in skin and hair. How much of that is a lack of destocking by customers or other transient effects? How confident are you that this is sustainable into fiscal 27, and what underpins that confidence?
Christopher, if you look at the year: in Q1 we highlighted some customer-specific outages, mainly in North America. Adjusting for those, Q1 was low-single-digit growth, Q2 mid-single-digit growth, and Q3 mid-single-digit growth. We expect to remain in that same range into next quarter and finish the year mid-single-digit versus prior year. The momentum is driven by volume conversion of the pipeline we built. Biofunctional actives grew almost 30% in Q3. We have strong technology and are building the team, pipeline, and customer engagement, and now converting that pipeline. Colipepto, exosomes, PDRN, and a new ingredient we will introduce—we are filing IP—are examples of what we see as significant opportunities. Microbial protection is delivering double-digit volume growth across regions; our investments are in place to regionalize supply and gain share. In Care Ingredients, we are doing well with guars, cellulosics, and BPD. The momentum is broad-based and we expect it to continue into next year.
Thank you. Our next question is from John Roberts with Mizuho Securities. Please go ahead. Your line is open.
Thank you. I believe the activists wanted Ashland to run a formal sales process. Was there an agreement to run a formal sales process, or is that still to be determined by the new committee of the board with the two new board members?
John, thanks. First and foremost, our team is focused on executing our strategy. From discussions with investors, including Ancora, it is clear this is a valuable portfolio with strong fundamentals that will drive future value creation. That is the number-one priority. Our board is experienced and regularly reviews strategy. We engaged constructively with Ancora and agreed to add two experienced independent directors. We see this as reinforcing the board with additional perspectives. The capital allocation advisory committee will bring additional rigor. We will let the board and the new committee do their work and make recommendations as appropriate. The priority remains execution and creating optionality for value—organic or inorganic. We do not want to be prescriptive about processes; the board will make recommendations as they see fit.
Okay. Second, earlier you referenced advanced manufacturing tax credits in the Intermediates discussion. I do not think NMP itself qualifies. Is this a derivative effect from battery customers downstream?
John, we discussed this around this time last year. The tax credit is an incentive around domestic production in key sectors, including battery production, and it improves domestic cost position. The eligibility was clarified last year. Year over year, this is about a $3 million headwind for the Intermediates business, but sequentially it is stable. We would expect eligibility through at least 2029, with a phased phase-out thereafter.
Our next question comes from Joshua Spector with UBS. Please go ahead. Your line is now open.
Hey, good morning. I wanted to follow up on the cost savings and the flow-through to 2027. You mentioned the year could have been roughly 200 basis points higher from a margin perspective, about $40 million in EBITDA. Your comments on Hopewell seemed somewhat more encouraging this quarter. Would you expect more of that $40 million to flow through in 2027, or is that still a multi-year path?
I think we will start seeing flow-through within quarters. We should start seeing those benefits probably beginning in the second quarter of next year. This fourth quarter and first quarter will have some noise due to recap and timing, which is why we are cautious. After that, benefits should begin to flow through. Some benefits, such as replacing lost production from Calvert, will show up quicker. Our biggest focus now is Hopewell: improving productivity, kilos per hour for certain products. Once we hit the desired production rates, the benefits will flow through into the P&L over time.
If I could follow up on Specialty Additives: you seem more confident about volumes there. You have been discussing new wins for a while, but they have not been visible. Architectural coatings demand is not particularly strong. What is inspiring confidence that you'll see stronger volumes over the next few quarters or year?
The good news is markets have stabilized since 2024. Share gains are occurring. Dago can comment on regions and where we see conversion.
If I go region by region: China remains stable but is declining in new construction; however, industrial applications such as electronics are doing quite well. The secret sauce in China is team execution converting regional innovation into revenue. Europe is flat, driven by weakness in Germany and France; we remain disciplined on market share execution. North America remains the key question—new construction is still slow, and the timing of recovery will depend on interest rates and consumer sentiment. The good news is innovation is advancing across regions, and commercial discipline is high. The pipeline execution is critical to outcompete the market. Overall markets are stable, architectural coatings is muted, and performance specialties are doing better than expected.
Our next question comes from Jeffrey Zekauskas with JPMorgan. Please go ahead. Your line is open.
Thanks very much. It sounds like you optimized cash flows this year by reducing operating rates. How much did that penalize your EBITDA so far this year or for the entire year?
Good question, Jeffrey. It ties to Guillermo's earlier comment about the 200 basis point impact. Anchor that as about $80 million of inventory drawdown year to date. Of that, the absorption-related impact on EBITDA is probably $30 million to $35 million. Going into next year, this is the clearest line of sight to margin recovery—producing to demand. We do not expect meaningful inventory swings at the Ashland level going forward; we've brought inventory down and will be disciplined about rebuilding only as demand justifies it.
Earlier in the call, did you say you had a turnaround in the Intermediates and solvents business in the fourth quarter? If so, is that a meaningful event for EBITDA?
The turnaround I referenced was at Hopewell: we shut down for a planned turnaround to install equipment and improve processes. The plant is back online and producing; we are monitoring production rates as they ramp. On the capital allocation advisory committee question, the two new directors were just named and will need onboarding. The board has been working on strategy for some time; adding these directors brings additional viewpoints. I won't speculate on timing; it's their job to evaluate and make recommendations to the full board.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead. Your line is now open.
Hi. I wanted to ask about the feedback you are getting from customers about the different innovation platforms. Beyond near-term technology trends, what are customers saying about the size of potential applications and what you would need to deliver for them to consider more aggressive arrangements, such as funding capacity, JVs, or other partnerships? Or is Ashland intending to do everything on its own?
Great question. We will provide more detail at the September 17 innovation event, but broadly the feedback has been very positive. I have visited major customers and seen increased engagement from their technology and marketing teams. Customers validate the technology and are looking to see if we can deliver the right formulations and meet their reformulation timelines for major brands. Examples: silicone replacements in Personal Care look very exciting; multifunctional starch has broader applications than we originally thought, including skin as well as hair; super-wetters have found homes in additional markets such as ethnic hair care; TiO2 spacer technology is progressing and could be significant if it delivers TiO2 efficiency improvements; and there are large opportunities in rheology and acrylic replacement—these are very large addressable markets. Silicones in Personal Care represent a substantial market, and our view is that these are large, scalable opportunities. We will discuss which platforms are most scalable and the market sizes in September. Importantly, this is a portfolio of opportunities, not a single bet. As technologies advance and customer validation increases, we will consider the appropriate investment and partnership strategies, which may include collaborations when it makes sense to accelerate commercialization and scale.
Our next question comes from Stephen Haines with Morgan Stanley. Please go ahead. Your line is now open.
Hey, good morning. Thanks for taking my question. In the materials you mentioned customer order timing benefited the quarter. Just to clarify, was that capturing something pushed out of the second quarter, or was that pulling forward something from Q4?
To some extent it reflected orders from the second quarter. But looking across Q2, Q3, and Q4, we are targeting mid-single-digit growth in Life Sciences and that is what we expect across the year and quarters. The underlying fundamentals are stable and we see momentum from Globalize and Innovate and growth in injectables and cellulosics.
Our next question comes from Abigail Eberts with Wells Fargo. Please go ahead. Your line is now open.
Hi there. Thanks for taking my question. Could you speak more regarding the end-market fundamentals you are seeing in the Nutrition business and what led to the decline you mentioned more specifically?
On Nutrition, we are focused on new applications and improving mix toward higher-value products. New wins are developing, but they are coming in at a slower pace than anticipated. The alternative-protein or non-meat opportunities we discussed previously have not materialized at the scale we expected. In the third quarter specifically, Nutrition revenue was stable versus the prior year; it was not a decline. Overall, wins are lower than anticipated but there is still progress in other application areas for the Nutrition portfolio.
Our final question of the day comes from Mike Harrison with Seaport Research Partners. Please go ahead. Your line is now open.
Hi, good morning. One question: in the Globalize portion of your strategy, it looks like you're getting good traction with the current investments you made over the past few years. Do you still see gaps or areas that will need further investment, and what could the timing look like for an additional round of Globalize investments?
We have made many of the large strategic investments already. For microbial protection, we now have regional supply in Brazil, North America, Europe, and Asia, which improves competitiveness and allows local formulations. For biofunctionals, we have capabilities in Europe and Brazil and are considering additional capacity in the U.S. for closer customer proximity; those would be smaller investments and timed to customer demand. In tablet coatings, the India plant groundbreaking was recent and should be in production by mid-next year; it is an important local-market investment. On injectables, investments in Ireland and high-purity excipient capacity in Columbus, Ohio, are ramping, so we are well positioned. As we commercialize new technology platforms, we will evaluate additional investments to globalize those product lines as needed. In short, small-to-moderate investments remain possible in specific areas as products scale, but many of the major investments are already in place.
This concludes the question-and-answer session. I would now like to turn the call back to Guillermo for any closing remarks. Guillermo?
Thank you, everyone, for your participation and questions. We look forward to connecting over the coming weeks and updating you on our innovation webinar on September 17, where we'll provide more detail on progress with new technologies. Thank you.
Thank you for your participation in today's conference. This does now conclude the program. You may now disconnect.