Earnings Call: Q2 2019

May 1, 2019

Good morning ladies and gentlemen and welcome to the Ashland Global Holdings, Inc. Second Quarter Earnings Call. At this and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Seth Mozak, Director of Investor Relations. Thank you, Bella. Good morning everyone and welcome to Ashland's second quarter fiscal 2019 earnings conference call and webcast. My name is Seth Mrozek, Director, Ashland Investor Relations. Joining me on the call today are Bill Wilson, Ashland's Chairman and Chief Executive Officer and Kevin Willis, Senior Vice President And Chief Financial Officer. We released preliminary results for order ended March 31, 2019, shortly after 5 pm Eastern Time yesterday, April 30. Additionally, we posted slides to our website ashland.com under the Investor Relations section and had furnished each of these documents to the SEC in a Form 8 K. As a reminder, during today's call, we will be making forward looking statements on a number of matters including our financial guidance for fiscal 2019. 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 yesterday's slide presentation for a fuller explanation of those risks and uncertainties and limits and the limits applicable to forward looking statements. 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. 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 reconciliation of the non GAAP measures to those GAAP measures are available on our website and in the appendix of yesterday's slide presentation. With that, I will turn the call over to Bill. Good morning, everyone. There has been a lot happening this quarter, both internally and externally. So I'm going to make my comments brief and that will allow us to get to your questions quickly. In a moment, I'll discuss the solid progress we have made on very important operating initiatives. But before I do, It's important to profile 3 external factors, which worked against us in the quarter. The first is the continuing strengthening of the U. S. Dollar which negatively impacted ASI revenue by over $25,000,000 in EBITDA by $9,000,000 on a year to date basis. Of which $18,000,000 of revenue $6,000,000 of EBITDA was in Q2. The second is end market demand. Emerging in Q2, we experienced relatively flat demand in coatings, adhesives and performance specialties, which is consistent with is the continuing raw material inflation we're experiencing. Given the lag time between oil price changes and changes to the cost of goods sold, ASI has experienced on a year to date basis over $12,000,000 of raw material inflation $5,000,000 of which was in Q2. In this context, the team did some great work in areas that we could control. From a revenue perspective, in the end markets I just referenced. Please note that as I speak to our sales and my following comments, I'm referring to sales on a constant currency basis and excluding the impact of that for the quarter on a year over year basis, the personal care team increased revenue by approximately 5% based upon solid HEC gains throughout the entire portfolio. The pharma team grew sales by 2% versus the pharma business sales grew by 17% as we brought new cellulosics capacity online. To grow year over drove share gains in Latin America and the rest of Asia and Europe. And finally, the remainder of the ASI team drove solid gains in nutrition, energy and construction. Also of note, from a regional perspective, the team achieved mid to high single digit sales growth in all regions outside of North America with China leading the way by achieving double digit year over year growth. Putting this all together overall volume and mix was negative in the quarter. We had gains in less profitable end markets, And that did not fully Also note that given less certainty in these important markets, we also lowered finished goods inventory, which had a negative impact on our year over year absorption. Now to offset these challenges, the team once again drove price increases above raw material inflation kept total manufacturing costs below prior year and substantially reduced SG And A. Importantly, relating to our $120,000,000 cost reduction program, we hit our Q2 target and are now on a run to the $18,000,000 SG When you consider that roughly $20,000,000 of overhead will transfer with the sale of the Composites and Marrow businesses, We are on a run rate basis over 70 percent of the way through implementation of our $120,000,000 cost reduction program. So adding this all That said, I do feel good that the team drove incremental revenue gains to keep our assets better utilized, albeit with a lower profit mix. That the team priced over inflation and significantly lowered SG And A. By focusing on what we control, in a very difficult context, we enabled ASI to weather the storm far better than we would have just 2 or 3 years ago prior to establishing our current along with expectations that the dollar will remain strong and demand weakness will last at least through the current quarter in the markets that previously referenced. I want to emphasize the team is working multiple cost and sales actions to achieve the best results possible in this context. Switching gears, given our confidence in our business strategy, we believe our stock is a solid investment. And as such, We announced yesterday our intention to commence a $200,000,000 share repurchase program to begin in early May. To be clear, As we take this action, we remain committed to achieving our previously communicated leverage target of approximately 2 times gross debt adjusted EBITDA. Taking into account our cash on hand, strong upcoming cash generation, and our confidence in the impending sale of the Composites And Mile businesses, we expect to finish fiscal year 2019 close to our targeted debt level. Before I turn the call over to Kevin, I'd like to reflect on some important and recent changes made to the Ashland Board. Earlier this calendar year, we welcomed Craig Rogerson to our Board. In addition, consistent with the path forward that we outlined in January, just Monday we announced additional changes. As anticipated, Michael Ward will retire from the Ashland Board at our May meeting. And I would like to thank Michael for his 18 years of outstanding service. To fill his seat, consultation with Newberger Berman and other shareholders We have elected Guillermo Novo to join the Ashland Board. And we're excited to have Guillermo join Given his extensive leadership experience in the industry. I'll now turn the call over to Kevin. Thank you, Bill, and good morning, everyone. First, let's start with Ashland's results in the second quarter. Sales in the quarter were $667,000,000, down 1% from the year ago period including negative three points from unfavorable currency. Adjusted EBITDA in the quarter was $142,000,000, up 3% year over year and including a negative $6,000,000 foreign currency impact. The U. S dollar was significantly stronger versus the prior year. The negative currency impact was led by the euro, which was $0.10 lower than the prior period and there was also impact from currencies in emerging regions. In the quarter, we reported US GAAP income from continuing operations of $45,000,000, or $0.71 per diluted share. On an adjusted basis, we reported income from continuing operations of $0.83 per diluted share compared to $0.67 in the prior period. This compares to our outlook that we provided in early February of $0.80 to $0.90 per share. Our effective tax rate in the quarter was 6%, well below our expectation of 15% due largely to several favorable discrete tax items. You'll recall that results from continuing operations include earnings from our Specialty Ingredients segment plus our BDO facility in Lima, Ohio. Since composites in Marl, are now being reported compared to negative $3,000,000 in the prior year. These amounts include $15,000,000 in restructuring costs in the second quarter of fiscal As you'll recall, we generate the majority of our free cash flow in the second half of the fiscal year. We currently expect free cash flow in the range of $165,000,000 to $175,000,000 this year, inclusive of an estimated $40,000,000 of separation and restructuring related costs. Now for an update on the divestiture of Composites and the Marl BDO facility. As we announced in November, we signed a definitive agreement with NES Enterprises to sell the business for $1,100,000,000. We continue working closely with INEOS to close the transaction and preparations for the divestiture remain on track. We continue to await regulatory approvals based on where we are right now, we expect to close the transaction by late summer. We continue to expect to use the net proceeds roughly $1,000,000,000 for debt reduction following the close of the transaction in support of our commitment to reduce As you may have heard, a large ethylene oxide supplier has been down and declared force majeure. Just to provide some perspective, this impacts only one of our cellulosic facilities. This plan has been down for about a week and we expect it to be down for several more. Our current estimate of the impact during the quarter is between $1,300,000,000. As Bill mentioned, we have revised our financial outlook for fiscal 2019. We will continue to markets as well as continued US dollar strengthening versus the euro and several emerging market currencies. While we are taking actions internally to offset these items, we believe they will persist through at least the current quarter and potentially into our Q4. Our new forecast presumes the current environment continues through we could potentially hit the high end of our revised EBITDA range. Otherwise, we believe the middle of the range is an appropriate expectation for the business. While we are certainly not satisfied with this level of performance, as Bill indicated, it would represent approximately 4% growth over prior year for specialty ingredients and around 7% adjusted for currency. Last night, we also announced our intention to commence a $200,000,000 share repurchase program under our existing 1,000,000,000 share repurchase authorization. We believe Ashland shares remain significantly undervalued especially based on the actions we have taken to improve the portfolio and our specialty ingredients operations. We intend to use cash on hand plus free cash flow generated by the business to fund this repurchase. I think it's important to reemphasize that this in no way impacts our commitment toward reducing leverage to about Now, I'll turn the call back over to the operator and we'll take your questions. You. Your first question comes from the line of Christopher Parkinson from Credit Suisse. Your line is open. Great. Thank you. So on the personal good morning. How are you? On the personal care side, can you comment on the materiality of the incares growth during the quarter and even more importantly in the next few fiscal years. Obviously, our customers have been lashing on to this, but just how integral are you to their various processes given the growth that they're showing? So I'm just trying to get a sense of your Personal Care growth in the profile now, versus well into the future? Thank you. Yes. Skincare is a very important part of our personal care business and it's actually an area where we've had significant growth with our biofunctionals business really finding sustainable solutions to help enable our customers. So we've seen growth over the last year. We expect to see more growth as we go forward. This will happen. I was in China meeting with one of our major customers, Ajala, and they are growing rapidly. And we're a major supplier to them. So we are looking to really continue to focus on sustainable solutions. We believe that's going to help us to grow that portion of the business. Got it. And just turning quickly to Pharma, you had a pretty decent result on a, I'd say, fairly healthy comp I know you're still pleasing to grow in the mid single digit growth range on an annualized basis, but can you just add us a little give us a little more color or comment on upside optionality you see there? Just I know you're obviously no longer capacity constrained, but just given the industry's healthy volume growth, especially in Asia, Are there any other actions you could take to kind of further drive momentum here? Thank you. Sure. Certainly, I would say that the additional capacity we've brought on in the cellular 6 area has enabled us not only to have continued growth, but what we've seen increased customer interest in that product line area with the understanding And I would say that's on a global basis. So we put out a few press releases over the last 3, 4 months, we continue to drive actually innovation by providing new variants of the product. We are and have established local development capabilities. So in places like India and China, we can work with the local often, generic manufacturers. Once again, had the opportunity to meet with 1 while I was in China for dinner. A couple of weeks ago and they're very bullish on the market and where that takes us. And I really do think that our products do enable solutions for our customers, whether it be the disintegration properties or the size of the tablets, other aspects and by blending together some of our existing technologies, changing the particle size distribution, working with customers on solutions. I think that's what's going to continue to drive our growth in pharma. And on the subject of Klucel, while it certainly isn't related to pharma, we're seeing that that material has properties that can be used in other markets and we're really just beginning to explore that at this time. In the past, that would have been out of the question because we needed every pound we had to supply to pharma customers. But it has applications in multiple markets. There's marine paint that's being introduced with Klucel as part of its formula. So, anyway, we feel very good about the team that we have, the footprint that we have, the products that we have. And that's what gives us confidence that we can continue to grow our pharma Pharma Business. And Chris, I would also say that within the nutraceutical space, we're also seeing more uptake from our excipient packages relative to that as well. So as we continue to see growth in nutraceuticals both in the U. S. And globally, we should also see some improvement from an overall excipient growth perspective through that particular end market as well. Thank you very much. You're welcome. Your next question comes from the line of John McNulty with BMO Capital Markets. Your line is open. So the fiscal 2Q obviously was maybe a little bit on the light side, but the guide seems a little bit worse than I guess what we would have expected. So I guess, especially when you consider some of the cost cuts rolling through. So what are the end markets or what are the business lines that you're most with at this point to guide kind of as conservatively as you have and what sequentially gets worse and how should we think about that? Yes, I think, well, 1st of all, when you look at the change in the guidance, it represents Q2 results actually and a continuation of what we saw in Q2 adhesives and coatings. It's possible that we'll see an uptick in demand. And that would be great. As Kevin said, that would help to push us up in the range. Clearly, if there was any weakening of the dollar, that would help as well. But we didn't want to just assume that there would be a demand recovery when it's affected us in Q2. And we're not seeing yet a significant recovery in those areas. I mean, and as I say that, I mean, I would like to point out a couple of things, because I think it's important. And again, I'm going to emphasize, I'm not happy with the results and the changing of the guidance. So I don't want to give up that impression. I mean, we're still talking about being flat to up in those markets. And I think that's an important. And we're also in spite of these changes, whether it be with currency and raw material, some of the market weakness. I mean, our guidance has us growing in terms of sales, earnings and margin. So yes, we have to and we need to and we will do better. But we basically extrapolated what we saw in Q2 and assumed that it would continue as we go forward. And I think as you have followed our coatings customers, especially the ones in North America, I think you've heard that there's some caution in terms of what they they are expecting for the spring coating season That's why we're putting a lot of our energy into places like the rest of Asia, India, and so forth to try to drive additional volume to help us to make sure that Okay. We balance out, what otherwise might be a contraction in that area. Got it. And then just I guess maybe a little bit of clarity on the cost cutting opportunities. When you think about the run rate that you're at, how should we be thinking about the sequential benefit from 2Q to 3Q as far as the cost cuts rolling in? Yes, we John, we should continue to see the cost structure improve within this quarter and the next We'll still have a bit to go by the time we get to the end of the fiscal year. So in our Q1 of our fiscal 'twenty or the December quarter, we'll we'll see the final amounts roll through. But we're very much on track to a little bit ahead of schedule on that. I will say that as we talk about run rates, it's pretty typical. Again, not 100% of the time, but pretty typical for a lot of these amounts that we get to come at the end of a month or at the end of the quarter. And so the flow through tends to be more impactful in the following quarter. So If we were at $50,000,000 a quarter ago, we're at $70,000,000 now, you'll really start to see the full impact of that extra $20,000,000 start to flow through in the next quarter. And so that's kind of the way to think about it from a staging perspective in terms of the overall impact on SG and A. Got it. Very helpful. Thanks very much. Your next question comes from the line of David McGuire with Deutsche Bank. Your line is open. Bill and Kevin, what was the impact of the reduced plan absorption in the quarter? Yes. So it was I mean, I'm going to be directional here. It was in the kind of like the $5,000,000 to $7,000,000 range. So I mean, it was significant enough that we're mentioning it. We're not trying to come up with a laundry list here, but it was significant enough. We thought it was appropriate given some of the things we've seen in the market. And that also potentially gives us the opportunity if we see market recovery to drive our operations to recover that, but that's roughly. Yes. Sequentially, we took inventories down about $20,000,000 So directionally Bill's number around 5 to 7 for absorption is correct. Mix, really the other piece of the earnings compression was related to overall mix as we've talked about. That's very helpful. And Kevin, just what was actually pricing in ASI in the quarter? We were actually a couple of $1,000,000 ahead of raws in the quarter for an overall basis, which is very encouraging. As you know, we've it's taken a lot of time for us to climb that curve as we particularly over the last couple of years have seen a fair bit of raw material cost inflation and I'd say for the last several quarters, the team's done an excellent job of not only catching up, but really trying to recover some of that margin compression that we've seen in the past. So we're very encouraged by that. Your next question comes from the line of Mike Sison with KeyBanc. Your line is open. Hey guys. In terms of the, you obviously need a better second half in EBITDA growth. Can you maybe walk us through by products meeting, is it mostly in cellulosics or PVP that or pharma can that really needs to recover in the second half to hit your outlook? Yes. Well, I mean, all the markets matter. What I referenced before was that we've adjusted our outlook because of the Q2 results, but really with a perspective and a reflection that the adhesives coatings and performance specialties would remain soft, at least for a good part of the year. And I think that's what on a number of people are estimating is that by the second half of the year, you'll begin to see these markets recover But those are the areas. I mean, we continue to grow the Pharmachem business. We have a strategy, which I know you're aware of, which is that While we love to sell as much product as we can into the pharma personal care coatings, adhesives, markets and so forth, when those businesses are a little bit slower, we try to leverage our available capacity in cellulosics, for example, to sell into the construction and energy marketplace which allows us to keep our facilities running efficiently. So it's not so much of a watch out on those segments. It's really are not segments, but end markets. It's really in the areas that we've already identified. And Mike, if you look at our second half and the guidance that we're providing around that. What we're presuming is those end markets like coatings, adhesives and performance specialties don't return to normalized growth rates, but probably somewhere around half that. For the second half to the extent that those end markets end up doing better. There is upside as I indicated in my remarks to potentially get to the high end of the range. But it would require more of a demand recovery than we're currently forecasting, which is why we're guiding more towards the middle stage of the game. Right. Okay. And then when you think about 2020, which I don't know if it may be a liberally specific guidance, but we're not too far away for you given your fiscal year. Can you maybe walk us through what will drive EBITDA growth next year, you've got some cost savings, what the leverage would be if organic growth comes back to a more normalized state and maybe any other areas that help you drive growth in 2020? Yes. So you did a good job as you outlined the question there really with the answer. And I mean, when you look at a couple of factors. We're seeing that raw material prices inflation is abating we thought they might go down a little further given that oil drop, but it's kind of come back up, but at a similar level. The currency really becomes from a year over year comparison unless the dollar changes again. It's a non issue as you get into the first quarter of next year. We've had this Colgate dynamic, which will play out for the most part by the end of the fiscal year. There may be just a little bit of hang on over on that. But essentially, we will have lapped that. And we put the price in place. So when you put that together, I mean, we're We're seeing growth in the personal care market that's consistent with our growth rate, if you will, excluding the current and the Colgate impact. So we would expect that that would continue biofunctionals, some of these very good solutions that we're providing in the marketplace. Adhesives has been a consistent grower and we would expect it to continue to grow coatings. We'd be growing with the coatings market So we don't see a fundamental disruption or change in the market. And again, I'm kind of leaving the Colgate reformulation aside on that one. And so we think we'll be lapping those. We'll have significant SG and A cost reduction carryover from the programs that we've put in place based upon the timing. We've been able to price above raw material inflation as we've experienced today. So We remain bullish on our strategy and bullish on where the business goes. I'm not here to deliver excuses because like I said, I'm not pleased. It's our job to work different levers to get the right results we've really had a trifecta as it's come in in terms of the things that have challenged us. And the one thing I do feel good about in that context is we're still driving improvements in the business based upon other aspects of our strategy. And we're going to continue to do those, whether that's that's the operations focus, the SG and A, the pricing. So that's what gives us confidence that we can return to what we would consider a more normalized growth rate of sales and earnings as we get into fiscal year 2020. Yes, I think on all things being equal basis, We'd expect the business to organically generate kind of mid single digit EBITDA growth. On just on a stand alone basis and you layer in the impact of carryover cost out that's going to get you several more percentage points. So I think again, all things being equal, it wouldn't be unreasonable to expect the ingredients business to grow 7%, 8%, 9% in 2020. And if you look at it, we We did that last year. It was our intention to do this year. As mentioned, we've had some things that have weighed against that. And as we lap those things and get beyond them, There's no reason why we believe that we can't get back to what we would have anticipated at the start of this year and what we achieved last year. Great. Thank you. Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open. Good morning. I guess, 1st, just to clarify, the inventory work down that you've done, is that over or is that also in Q3? I would say for the most part, it's over. I mean, our inventories can fluctuate a little bit quarter to quarter. I've Kevin referenced with this E. O. Outage that there'll be some adjustments to our cellulosics inventory. And in parts of our market, we're seeing heavy demand. So that's pulling on it. I think the challenge will be to actually drive increased production to ensure that we have the right inventory levels in the right locations. And so while we'd always like to see lower inventory levels, that's not really a core part of our strategy for the rest of the year. We're really focused on getting more product out to help support sales. And running the plan is as full and as hard as possible doing it. And I guess then you tie that last comment into how you're thinking about capacity utilization or asset utilization and mix? And where you think margins from a mix effect standpoint should be trending over say the next 2 to 3 years, right, if we're looking out into early next decade? Sure. So, that's a potent question and it's hard to give a simple or concise response to that we've done a very good job of filling up our cellulosic assets. And when you get in that situation, you really focus on 2 primary points. One of them is to debottleneck and expand the output, which which we've done by the way. And as you recall, we added about 3000 tons last year in our Nanjing facility with a change to our dryer system. So that and then secondly, upgrading the mix, selling more differentiated products, selling more pharma, which may be over nutrition products or over certain construction products. That would be essentially in the cellular cellulosics area. In the adhesives and biofunctionals area, the capacity we can be challenged at time but it's easier to add more incrementally the capacity there. The Lima facility is full. So it really comes down to through that part of our system, which is something we're going to focus on technically commercially. And because we do have some extra capacity in that area that we'd like to leverage. And then just to understand the mix effects, this quarter and then thinking about the dynamics in terms of lumpiness going forward, when if we take the basket of lower margin businesses that you call out, is the differential in margin around 500 basis points or is it north of 1000? It would be more than 500 basis points between, say, an energy product and a pharma, yeah, much, much more than that, and we'll be communicating more in the near future around that. So you have a better perspective, but there really is a significant, difference between those top end products, versus the products that fill in the capacity. So that's why upgrading the mix is really an important part of what we do in the context of what we saw this quarter. We did the right thing because you don't want to strand those manufacturing costs. The it is profitable to us. But it certainly is at a lower profitability, which is why we say, in spite of, we'll say, FX constant revenue going up that we saw an unfavorable volume mix impact. Yes. And it's also important to remember And then construction is probably our lowest margin business in the portfolio, but it's also important to remember that our construction business serves a very, very important role and function in that. It supports our pharma business, particularly the Benecel line that's that's coming out of dual Belgium. So the first priority there is to produce and sell as much Beneocel pharma grade cellulose as possible. And then then to optimize that facility with the balance of the material coming out of there going primarily to the construction end market. So there's a symbiosis involved in all of this too that we have to keep in mind as we operate these facilities. Okay. Thank you. Sure. Your next question comes from the line of John Roberts with UBS. Your line is open. Good morning, John. Hey, good morning. This is Josh Spector on for John. So just a question around Pharmachem, growth there has been kind of stable low single digits for the past few quarters since you've acquired the business. I was wondering in terms of longer term expectations, is that about the level you were expecting or would you expect top line to be potentially higher over the next couple of years? Yes. So the I would say that the what you see with a couple of percent growth is really representative of fact that we as we stated have changed our mix running through that business. We've gotten out of some low margin business last year. And that's why you saw the substantial pickup in EBITDA when we last reported it at the end of our fiscal year as a percentage of sales at it went up dramatically. I'd have to recall, but I think it was initially from 20% to roughly or above 30%. So the contribution is much greater. Now that being said, our objective is to grow the business and to accelerate the growth there there are opportunities both in North America and globally. So over time that mix improvement will have worked its way through. And kind of the carryover impact of that in terms of growth. And then the focus will be on very profitable growth from there. Yes, given, I mean, given the opportunity to globalize that business, I mean, vast majority of Pharmachem is North America for us, And given the opportunity to globalize that business, there's no reason that we shouldn't see mid single digit growth rates over time. And that and I would expect that to persist for a period of time as well as we go through that globalization process. It could be lumpy. But in the end, that's one of the opportunities that we acquired with that business is the is the opportunity to leverage Okay, thanks. And then just in terms of the divestment, it seems like the time is a little bit later than you originally thought. I think some of the updated EPS guide reflects interest being higher assuming that you have debt pay down later. 1, I want to check if that's right. And then 2, just in terms of how much interest be down after that $1,000,000,000 pay down, is that $40,000,000 a reasonable number or is there some other number you tied to? Yes, I'd say it's probably closer to 45. I mean, it kind of depends on how some of our variable rate stuff pays out and how quickly we do that versus maybe the mix in the bond portfolio that we that we might retire. But 45 is a pretty good presuming the entire $1,000,000,000 goes to debt paydown, which would be our current presumption. Okay. Thanks. Yes. And from a timing standpoint, I'd just say that really, as we said, we remain on track. We've just waiting for the regulatory approval so we can complete the process. Right. And another thing to note is and you have to look at it. You have to look both above and below the lines. We have some of our interest expenses running through discontinued operations. So as you think about your modeling, you'll need to take a peek down in that part of the balance sheet as well to understand how much is Your line is open. Thanks very much. Good morning, Jeff. Hi, good morning. Were your ASI volumes down flat or up in April? In April, of course, we've still got to kind of close out the month. So we'll be getting better clarity. It takes us a couple of days to kind of get that information. But I would say that directionally what we saw was consistent with what we saw in Q2. And so, that's really reflected in the forecast that we have. Yes. And the big drivers the big drivers for what we saw in Q2 were really construction of adhesives. I mean, not only was that was that a top line and a profitability impact, but it was a pretty sizable volume impact as well. Those are those are probably our 2 highest volume businesses or end markets in the portfolio. And particularly in North America, we saw volume pressure there. Which is what we saw in Q2 as well. So, We tend to focus on the volume mixes, as you know, but from a volume standpoint, we were down in Q2, which is what we're you saw essentially. I mean, we haven't closed yet on May or April, excuse me, but that's the trend that we've seen extend. And your SG and A and the specialty ingredients in the quarter was your SG and A expense was 119,000,000 Is there any reason why that number should be larger in 3rd fourth quarter? Or should that be a number which stays the same or decreases through the remainder of the year? It should probably decrease a bit through the rest of the year. FX will have an impact on that. But in terms of the cost outflow through, we should continue see SG and A on an overall basis continue to decline. I mean, that's our current estimates would indicate that. Okay. When you look at it, the FX impact had a was very significant obviously in the sales line And on the gross profit line, we in the current context, we actually do get a benefit from currency when you look at it in the SG And A Your next question comes from the line of Mike Harrison from Seaport Global Securities. Your line is open. Just wondering if you have been taking any incremental additional cost in response to the end market weakness. So I'm wondering if you're accelerating some of the existing programs or maybe initiating some new programs or even taking more temporary action like pulling back on T and E expense or incentive comp or anything like that. Did we see any of that in Q2? Yeah. So to that end, we certainly are taking action and we've been working on that with the team. We're, as I mentioned, about 70 percent through the existing cost reduction program. And we need to get through that and we need to, transfer the business. So we're looking at what we can do to accelerate the cost outs in that area. And we've had some progress on that we have quite a list of things that we've put together as it relates to hiring, as it relates to travel, as it relates to aspects of what we sell within our plant. We have an extensive list of things that we're working on to try to achieve the best results in this context. And yes, at this level of performance, it does negatively impact our incentive compensation. Some of that's reflected on a year to date basis, but that would continue through, as we go through. Now we would like to have that expense go up, but that expense will only go up if we can deliver a better result for you, the shareholders. So were aligned in that regard. And then a couple of questions related to coatings. I guess, 1st of all, a lot of the coatings weakness that we're hearing about in North America appeared to be weather related in other words, should be more temporary, yet you guys seem to be a little bit more cautious on the outlook for North America. And wondering also if you can maybe expand on your efforts on your the comment on selling more coatings into emerging markets, maybe a little more detail and how big that opportunity could be? Yeah. So it I mean the people who can speak best to the dynamics that they're seeing and the impact of weather or other factors our customers. And so it's hard for me to specifically comment there. We have an internal expression that hope is not a strategy. So we don't want to put something out there that assumes that we'll have a sunny spring and that will trickle through to a high demand. If it does, that's awesome. That's why we have a range and that would help us to go to the upper part of the range. But for now, we think that that's a good thing to hope for, but we can't count on that. Secondly, as it relates to other parts of the globe, I think there have been a number of developments and it's been a very focused effort We've focused on trying to develop grades that are most relevant for the very specific customer needs. I keep going back to this trip I had to China a few weeks back, met with the largest plant manufacturer or coatings manufacturer in China. And there are different things that they look for. Their stone texture is more important and many instances than a smooth type coating. So the rheology differences and the products we have are different So we're enabling the team to develop more localized formulations to meet those needs. The importance of sustainability in places like Europe is increasing, which creates opportunity for us. So it's been a focused effort to really leverage the infrastructure we have and make sure we're focusing on the local needs that the regional customers have. And that's been a big part of it. I think in China, you don't see a ton of or a groundswell of construction. That may change over time. But the team still has been working to gain share in that context. And we have we have we've got some really great programs that are in place. So that's what we're doing to offset it. All right. Thanks very much. Your next question comes from the line of Dmitry Silversteyn with Buckingham Research. Your line is open. Good morning. Thank you for taking my call. Just wanted to clarify a couple of things. First of all, you put your in discussing sort of what was growing and what wasn't growing in the quarter, you talked about nutrition as something that you leaned on to get your volumes and absorption. I take it to mean that nutritional products are not amongst your higher margin portfolio products? Yes, that's That's correct. I mean, of course, we have some of our very niche products, which would have a more specialized nature, but literally, CMC can go into, tortilla chips and it can go into, in some parts of the globe, fillers that go into meat and sausages and things like that. And as you can imagine, that that's less differentiated than you'd have in the other spectrum of our products. Whereas on the other end, you've got things like clarifiers for beer wine and juices that tend to be much more specialized and higher margin. I think if you look at the 3 end markets we're referencing, nutrition on an overall basis tends to be certainly better than construction and I would say marginally better than energy. But we would put it in our call it lower third of end markets from an overall profitability perspective. Got you. Okay. That's helpful. Secondly, you mentioned that your HSE sales were up 5%. My understanding was that at least good chunk of HAC growth came from the coatings market and yet the coatings market was one of the markets you identified as the week. So can you reconcile those for me, please? Yes. The biggest difference is that we have seen a greater amount of that product going into hair, skin, home care, So that really is the difference in making up the difference from a relatively flat coatings dynamic to to a growth on the HEC. HEC was, I believe, I'm practicing saying we had a record production sale of HEC as a product in the month of March. So the team is making progress. And If you don't mind me just using this as a digression because it's just consistent with our strategy. We always look by Mark because that's where our products are most relevant and we've got to meet the needs. But what we've done is we've established the product technology platform teams that really look, for example, across all of HEC, across all of CMC, across all PVP and say, how is that asset or series of assets performing? What are the key needs that we have and what are the opportunities so that we can allocate capacity, we can allocate investment, we can allocate technical and development time into trying to drive gains from a full system standpoint. And as a result, not be just as dependent when we have some of these bigger assets on one market, even though that one market may be the primary use. I think just to add to that commentary, the volumes that we run through areas like personal care tend to be much, much smaller than what and I think it makes perfect sense that they'd be much, much smaller than what we tend to run through the coatings end market. But the profitability differences is pretty significant as well. So to the extent that we can continue to move more HEC, different grades of HEC through the personal care space and certainly a pharma space, which we're maybe the only company that actually moves ATC through the pharma space. That will help us to improve the overall mix. Whether you see it in the volume numbers or not, won't be as consequential because those volume numbers will be much more impacted by coatings. So we're trying to drive niche plays differentiation and really develop customer solutions for the technologies that we have. And HEC is a nice advantage for us in that regard. Got you. One final question, if I may. My understanding was that your adhesives business is sort of leading towards the semi permanent adhesives, if you will, kind of the tapes and labels and packaging, perhaps much more so than construction related. And this goes to the earlier question to ask. If the weakness in adhesives demand is not North American construction weather related what is it related to? Yes. First of all, we do have, adhesives that go into construct I mean, that's important. I think you're right in your assessment. It's not the primary market, but it is an important part of it. It goes into laminated I beams and as a result, yes, as that market goes, so will demand. I think the other point is we've been We've been pressing hard on the pricing front in that market. And so, I mean, that's good because of the progress we've made. I think that, I think the adhesives business, we've got some timing issues, but I'm, feel like the business is strong and we'll continue to get back fairly quickly to what we would consider to be more historical growth rates. Okay, Bill. So if I just heard you correctly, then there was some impact from construction, but there was also some volume attrition as you were intent on recovering margin and just pushing, I guess, customers that weren't willing to pay off to the side. Yes. I mean, I wouldn't attribute any of this to shareless. I'd have to go through an agreement and loss we have and so forth. There's nothing that comes to mind in terms of any share loss. What it can do is it can affect timing sometimes. Sometimes customers will buy some material before price increase. Or when you're raising the price, they may be a little cautious in terms of the signal they send by purchasing more. So it's a dynamic, but, I don't see it as a structural shift. And as I mentioned, we have had the negative impact that's associated with the construction part, which isn't the majority, but it does impact the business. Okay, very helpful. Thank you. Thank you. Your next question comes from the line of Jim Sheehan with SunTrust. Your line is open. On your end markets, coatings and adhesives, I think you referenced North America coatings being weak, but are you seeing weakness basically across the board in those end markets? Or is it is North America or one region weaker than the others? Yes, I would say that in as it turns out, I would say that North America really is probably the weakest end market that we or not end market, but end region that we have. As mentioned, we've had good growth in China. Europe, Latin America, rest of Asia. We've seen good growth. And so the kind of negative spot in this whole equation has been in North America. Okay. And then raw materials, you talked about oil based raw materials. Can you talk more about cellulosic? Are you getting any relief on cellulosic raw materials? And what is your outlook for that over the next couple of quarters? Yeah. So right now we see it as being, stable. We don't see a big change. Wood Pulp will be down just a little bit in terms of the cost, but we don't use nearly as much as cotton linters. And so that as we see it right now has been pretty stable both in Q2 and as we look into Q3. Okay. And on your comments on the fiscal fourth quarter, you said you thought that demand would normalize What gives you the confidence in making that comment? Do you have any visibility on orders out that far? We have limited visibility on orders out that far. Our confidence is really in in just the discussions that we have on an ongoing basis with our customers, you've seen and read and you talk more to some of our customers and suppliers, and you pick up a sense of optimism that this is less fun mental and will work its way through the system. But that is once again why we have a range out there. And if we see that the markets stay or turn down, that's what leads us to the lower end of our range. Conversely, if we see something come back stronger and sooner, that moves us towards towards the top. But we don't have anything that would say fundamentally, we're confident that our Q4 the demand will be substantially stronger. We need some more time on that, but our customers are not indicating that, as we talk to them, just as we're indicating it to you, that our customers have the same dialogue with us. Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to Seth Mosaic. Thank you, Bella. Thank you all for your time this morning and for your interest in Ashland. Hope everyone has a great day. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.