Ashland Inc. Q3 FY2026 earnings call

Overall Financial Performance

• Total third quarter sales were $497 million, up 7% year-over-year, with 6% volume growth and 1% pricing growth overall.
• Adjusted EBITDA was $109 million, down from $113 million year-over-year, with an adjusted EBITDA margin of 21.9% (down from 24.4% year-over-year). Adjusted EPS excluding amortization was $1.02, down from $1.04 year-over-year.
• Free cash flow was $103 million, with conversion above 90%; inventory is down nearly $80 million fiscal year-to-date, and net leverage fell to 2.4x, returning to the company's long-term target range. The credit agreement was refinanced on attractive terms, strengthening financial flexibility.

Strategic Initiatives

• The Innovate and Globalize growth strategies have exceeded full-year targets through the first nine months of fiscal 2026, delivering accelerating momentum in higher-value applications across the portfolio. The opportunity pipeline for both initiatives remains strong.
• Ashland announced a cooperation agreement with shareholder Ancora, adding two independent directors with specialty chemicals experience to the board and forming a new capital allocation advisory committee to improve capital allocation rigor.

Operational Progress

• Manufacturing optimization initiatives are progressing: VP&D optimization is expected to deliver $12 million of structural annual benefits this fiscal year, and small plant consolidation is complete, delivering an additional $3 million of EBITDA benefit this year, for a total of $15 million in structural run-rate savings.
• The planned turnaround at the Hopewell facility was completed, with process control and productivity improvements implemented; the facility is now online, with ongoing work to ramp production rates to target levels.
• Multiple capacity expansion projects have progressed: groundbreaking for a new pharma excipient manufacturing facility in India, and commissioning of a new microbial protection production facility in Europe, both advancing the Globalize strategy.
• The company will host an innovation webinar on September 17 to detail new technology platforms, their market opportunities, and long-term growth potential.

1. Life Sciences: Sales of $180 million, up 11% year-over-year, accounting for 36.2% of total company sales. Adjusted EBITDA increased 11% to $60 million, with an adjusted EBITDA margin of 33% (flat year-over-year). Growth was driven by broad-based pharma demand, the fifth consecutive quarter of volume gains, and strength in high purity excipients and injectables.
2. Intermediates: Sales of $37 million, up 12% year-over-year, accounting for 7.4% of total company sales. Adjusted EBITDA was $4 million, down from $7 million year-over-year. The decline reflects lower advanced manufacturing tax credit benefits year-over-year, partially offset by higher NMP demand from North American EV battery and energy storage applications.
3. Personal Care: Sales of $155 million, up 5% year-over-year, accounting for 31.2% of total company sales. Adjusted EBITDA increased to $45 million from $41 million year-over-year, with adjusted EBITDA margin expanding 110 basis points to 29%. Growth was led by double-digit growth in Biofunctional Actives and microbial protection, with high single-digit growth in skin care and mid-single-digit growth in hair care.
4. Specialty Additives: Sales of $136 million, up 4% year-over-year, accounting for 27.4% of total company sales. Adjusted EBITDA was $20 million, down from $26 million year-over-year, with adjusted EBITDA margin of 14.7% (down from 19.8% year-over-year). Growth was driven by market share gains in coatings and performance specialties, partially offset by continued weakness in construction, Energy and Resources end markets. The margin decline reflects lower fixed cost absorption from earlier operational challenges at the Hubwell facility.

• Management reaffirmed full fiscal 2026 sales guidance (original range omitted from transcript) and maintained the adjusted EBITDA guidance range of $385 million to $400 million.
• Adjusted EPS guidance was revised to low to mid single-digit growth from the prior guidance of mid to high single-digit growth, due to unfavorable discrete items increasing the expected full-year tax rate.
• Ongoing free cash flow conversion is still expected to be greater than 50% of adjusted EBITDA for full fiscal 2026.
• Management expects a further step-up in profitability in the fourth quarter, with reduced operational profitability headwinds compared to earlier quarters, as operational trends improve and pricing actions are fully realized.
• Revenue performance is expected to come in toward the upper end of guidance, while management is more cautious about the near-term pace of EBITDA improvement as operational improvements ramp gradually.

• Earlier production challenges at the Hopewell facility and prior year operational disruptions (including an equipment failure at Calvert City and weather-related impacts) have reduced full-year adjusted EBITDA margins by approximately 200 basis points, with benefits from ongoing improvement expected to flow through gradually over the next one to two quarters.
• End market conditions remain mixed, with continued weakness in construction and Energy and Resources markets for specialty additives, and broader BDO market conditions for intermediates still below historical levels.
• Progress on HEC network optimization has been slower than originally planned, and ramp-up of new production at Hopewell is taking longer than initially expected.
• Margin pressure persists from prior raw material and energy inflation, offset by ongoing pricing actions, though the company has lower exposure to commodity price volatility than commodity chemical peers.
• Nutrition segment new application growth has been slower than anticipated, with plant-based non-meat application growth failing to materialize as expected.

Q: How will pricing trends evolve in Q4 and early fiscal 2027, and will pricing fully offset cost inflation? / A: Ashland has lower exposure to petrochemical and energy inflation than commodity peers. The goal of pricing actions is to offset inflation and maintain margins, not expand margins. Pricing swung from -2% year-over-year in Q2 to +1% in Q3, with sequential improvement expected in Q4 that will be roughly as large as the Q3 improvement. Pricing is tracking near the midpoint of the previously guided 3-8% range, with full run-rate realization expected in Q4. Personal care has already fully implemented pricing to offset cost inflation, with cost structure improvements from globalization enabling share gains. All inflation impacts to date have been offset, with full benefits flowing through in Q4.

Q: How should investors think about the timeline for manufacturing optimization and Hopewell improvement, and what are the tailwinds for 2027? / A: Most manufacturing optimization initiatives (VP&D optimization, small plant consolidation) are on track and delivering structural cost savings. The main delay is at Hopewell, where a shift to a new product mix required process adjustments that took longer than planned. The recent turnaround was successful, but production rates are still ramping to target, with full benefits expected to flow through over one to two quarters. Overall, operational disruptions reduced full year 2026 margins by ~200 basis points, with the majority of this headwind expected to abate gradually into 2027 as productivity improves. Inventory drawdown year-to-date reduced EBITDA by $30-35 million from lower fixed cost absorption, with clear line of sight to margin recovery in 2027 as production aligns with demand.

Q: What is the sustainability of life sciences pharma volume growth, and what exposure does Ashland have to GLP-1 drugs? / A: Life Sciences targets stable mid-single-digit annual growth, which is on track for 2026. Momentum is broad-based, with strength in OSD, injectables, and bioprocessing products, supported by the Globalize and Innovate strategies. Ashland is seeing meaningful upside from GLP-1 drug growth, through both API production chemicals and oral solid dosage excipients. The company is launching a new permeation enhancer for oral biologics in August 2026, with strong pre-launch customer momentum. Longer-term pipeline opportunities in areas like crop care seed treatments are seeing positive customer testing, providing additional future growth upside.

Q: What is the status of a potential formal sales process following the Ancora cooperation agreement? / A: The top priority for all parties remains executing the company's strategy to drive operational performance and maximize shareholder value. The new board committee will onboard the two new independent directors, conduct its review of strategy and capital allocation, and make recommendations to the full board. There is no set timeline for the committee's work, and the company is not committing to any specific outcome; the goal is to maintain all options (organic or inorganic) to deliver shareholder value, consistent with the existing board's ongoing strategy review process. The company's portfolio has strong underlying fundamentals that will drive value creation regardless of the committee's outcome.

Q: What is the outlook for further Globalize strategy investments, after the current round of projects? / A: Most large-scale Globalize investments are now complete, with regional production capacity in place for microbial protection across all major regions, and new capacity in place for key life sciences products. Remaining incremental investments are relatively small, including adding Biofunctional Actives production capacity in the U.S. to be closer to regional customers. As new technology platforms commercialize, additional investment will be required to globalize production for these new lines, but that is further out. The only large upcoming investment is the new India excipient facility, which is already underway and on schedule.