Ashland Q4 2026 Earnings Call Transcript

Ashland (NYSE:ASH) reported fourth-quarter financial results on Wednesday. The transcript from the company’s fourth-quarter earnings call has been provided below.

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Summary

Ashland Inc. reported a strong fiscal 2026 with notable growth in core segments like Life Sciences, Personal Care, and Specialty Additives, achieving a 4% sales increase and a 2% rise in adjusted EBITDA.

The company highlighted successful strategic initiatives, including the Globalize and Innovate strategies, leading to significant sales growth and margin expansion in high-margin segments like Pharma and Personal Care.

Ashland’s fiscal 2027 outlook projects sales between $1.905 billion and $1.975 billion and adjusted EBITDA from $405 million to $435 million, focusing on sustaining growth, improving manufacturing performance, and managing cost inflation.

Operational highlights include improved cash generation with a 61% free cash flow conversion rate, strategic investments in the Hopewell site, and a focus on enhancing productivity and output.

Management emphasized the importance of innovation as a long-term growth driver, with successful commercial launches and strong customer engagement in new technology platforms.

Full Transcript

OPERATOR (Moderator)

Good day, and thank you for standing by. Welcome to Ashland’s fourth quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer. To ask a question during the session, you’ll need to press star 11 on your telephone. You’ll then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. In the interest of time, please limit yourself to one question and one follow-up.

Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Sandy Klugman, Director of Investor Relations. Please go ahead.

Sandy Klugman (Director of Investor Relations)

Thank you, operator. Good morning everyone and welcome to Ashland’s fourth quarter and full year fiscal 2026 earnings conference call and webcast. My name is Sandy Klugman and I am Ashland’s Director of Investor Relations. Joining me today are Guillermo Novo, Chair and CEO, William Whitaker, CFO, as well as our business unit leaders, Alessandra Fassin, Life Sciences and Intermediates, Jim 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 2027 outlook and other matters as detailed on Slide 2 and in our Form 10-K. These statements are subject to risks and uncertainties that could cause future results to differ materially from today’s projections.

We believe these statements are based on reasonable assumptions, but there can be no assurance that the 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. Reconciliations are available on our website and in the appendix to the presentation. I’ll now hand the call over to Guillermo for his opening remarks.

Guillermo Novo (Chair and Chief Executive Officer)

Thank you, Sandy, and welcome to everyone joining us. I’ll begin with an overview of our fourth quarter and full year fiscal 2026 performance. William will then review our financial results, cash generation and fiscal 2027 outlook. Our business leaders will then provide additional insight into their segment performance, and then I’ll return at the end to discuss our innovation platforms and priorities for the year ahead. Please turn to Slide 5. We closed fiscal 2026 with continued strong commercial performance across our core segments: Pharma, Personal Care, and Coatings and Performance Specialties within Specialty Additives. Intermediates delivered solid profitability improvement. Life Science sales increased 4% led by broad pharma growth across major regions and technology platforms. Pharma delivered its sixth consecutive quarter of year-over-year volume growth supported by continued momentum of our globalize and innovate strategies.

Personal Care sales increased 8% with double-digit growth in biofunctional actives, microbial protection and hair care, along with high single-digit growth in skin care. In Specialty Additives, Coatings delivered 9% growth and Performance Specialties 14% growth. China delivered its third consecutive quarter of year-over-year sales growth. Intermediates was stable and profitability improved with favorable merchant mix, pricing and cost performance supporting margin expansion.

Despite raw material and freight volatility, our teams executed well with disciplined pricing action offsetting cost inflation across all our business units. Key process improvements and critical investments are in place at Hopewell, with our focus now on execution to increase output and productivity and to improve Specialty Additives profitability. Cash generation was another area of strength, with lower working capital supporting higher operating cash flow and ongoing free cash flow conversion. Please turn to Slide 6.

On the top line, sales increased 4% with volumes up 3%, led by Life Sciences, Personal Care, Coatings and Performance Specialties, and pricing up 2%, covering cost inflation across all business units. Overall, the fourth quarter was a strong underlying earnings quarter with double-digit adjusted EBITDA growth in Life Sciences, Personal Care and Intermediates, partially offset by Specialty Additives operating performance. Taken together, the quarter demonstrated strong underlying performance across much of our portfolio while highlighting a clear opportunity to convert continued commercial momentum into stronger consolidated profitability through improved operating execution. Please turn to Slide 7.

Looking across the portfolio, two things stand out for the quarter. First, our higher gross Life Sciences and Personal Care businesses continue to perform well. Life Sciences delivered a record adjusted EBITDA margin of approximately 36% while Personal Care delivered a margin above 30%. Both businesses generated strong top-line growth and meaningful margin expansion supported by outperformance for our execute, globalize and innovate priorities. Second, our core Specialty Additives businesses, Coatings and Performance Specialties, continue to outperform their markets.

Strong performance in these businesses was offset by the impact of the Iran war on our energy and resources business as well as our actions to reduce exposure to the construction segment. As expected, Hopewell productivity levels impacted overall Specialty Additives profitability. Intermediates made good progress delivering margin expansion despite challenging market conditions. As we enter fiscal 2027, our focus is on driving growth in our core businesses, maintaining margins and improving manufacturing operating performance.

Before turning the call over to William, I wanted to step back and put our full year performance in perspective. Please turn to Slide 8. Fiscal 2026 demonstrated the underlying strength of our portfolio with strong growth and profitability in Life Sciences and Personal Care and improving commercial momentum in Coatings and Performance Specialties. That momentum strengthened as the year progressed. In the second half, sales increased approximately 6% year over year.

Our globalize and innovate strategies outperformed their growth targets and our teams demonstrated strong pricing discipline, recovering cost inflation across the portfolio. Operationally, we recovered from the Calvert City outage, supporting stronger operating and financial performance across the portfolio. We also delivered strong cash generation, further strengthening our financial flexibility. We enter fiscal 2027 from a position of strength with good commercial momentum, disciplined pricing and solid financial position.

Our focus is clear. Sustained growth in our high-value businesses, advance our innovation pipeline, and convert improved manufacturing performance into stronger earnings and cash flow. With that, I’ll turn over the call to William for a more detailed review of our fourth quarter financial performance. William.

William Whitaker (Chief Financial Officer)

Thank you, Guillermo. Please turn to Slide 10. Fourth quarter sales were $498 million, up 4% from the prior-year quarter. Volumes increased 3%, led by Life Sciences and Personal Care and continued growth in Coatings and Performance Specialties. Pricing increased 2% and covered cost inflation across the business units. Foreign currency reduced sales by approximately $3 million. Adjusted EBITDA was $121 million, up 2% from the prior-year quarter. Higher volumes, favorable mix and pricing were the primary drivers of growth, supporting double-digit adjusted EBITDA growth in Life Sciences, Personal Care and Intermediates. These benefits were partially offset by unfavorable absorption in Specialty Additives and higher unallocated corporate expense, primarily incentive compensation. Foreign currency also reduced adjusted EBITDA by approximately $2 million.

Adjusted operating income increased to $77 million from $71 million. Adjusted income from continuing operations excluding intangible amortization expense was $52 million, or $1.12 per diluted share, compared with $50 million, or $1.08 per diluted share, in the prior-year quarter. Cash flow provided from operating activities was $90 million compared with $40 million in the prior-year quarter, driven primarily by lower working capital. Ongoing free cash flow was $74 million compared with $52 million, representing a 61% of adjusted EBITDA conversion versus 44% in the prior-year quarter. As we enter fiscal 2027, we expect working capital to modestly increase from these year-end levels. We ended fiscal 2026 with $480 million of cash, $976 million of total liquidity and net leverage of 2.3 times, supporting financial flexibility as we enter fiscal 2027.

With that, I’ll turn the call over to our business unit leaders for a closer look at segment performance. Alessandra, over to you for Life Sciences.

Alessandra Fassin

Thank you, William. Good morning, everyone. Please turn to Slide 11 for Life Sciences. Life Sciences delivered another strong quarter with sales increasing 4% to $180 million. Pharma sales increased approximately 6%, representing our sixth consecutive quarter of year-over-year. Volume growth performance was broad-based across major regions and technology platforms including VPND, cellulosics, injectables and film coatings. Nutrition sales declined slightly on lower volumes, primarily reflecting the timing of new customer wins in Latin America which are expected to contribute positively during 2027.

Pricing increased approximately 1% compared with the prior year and covered cost inflation. Foreign currency reduced segment sales by approximately $1 million. Our globalize and innovate strategy continues to support pharma growth including strong performance in injectables and film coatings and increasing adoption of recently launched higher value offerings. During the quarter, we launched Promexa Sodium Caprate, a permeation enhancer for oral biologics with more than 60 active customer engagements underway, advancing our strategy to build differentiated solutions for the oral delivery of biologic therapies.

Turning to profitability, adjusted EBITDA increased 16% to $64 million and adjusted EBITDA margin expanded 380 basis points to an all-time high of 35.6%, reflecting the continued shift towards high value applications and strong execution across the business. The increase was driven primarily by broadly higher volumes, favorable product mix, pricing and cost performance. Life Sciences enters fiscal 2027 with strong commercial momentum supported by sustained pharma growth and significant opportunities to expand our differentiated portfolio globally and scale recently launched high-impact innovation.

Please turn to Slide 12 for Intermediates. Intermediate sales were $33 million, in line with the prior-year quarter. Merchant sales increased 4% despite slightly lower volumes, reflecting favorable mix with continued strength in NMP partially offset by lower merchant BDO volumes. Captive sales declined by approximately $1 million reflecting lower downstream production requirements. Pricing covered raw material cost inflation while foreign currency had a negligible impact on sales.

Turning to profitability, adjusted EBITDA increased to $6 million from $5 million and adjusted EBITDA margin expanded 300 basis points to 18.2%. The improvement reflected favorable margin mix, disciplined pricing and strong cost performance partially offset by lower volumes. Importantly, we delivered meaningful margin improvement while broader BDO market conditions remained challenging. Looking ahead, we expect new customer wins to start ramping during fiscal 2027, providing an additional growth catalyst as we continue to manage the business with discipline.

Now I will turn the call over to Jim to discuss Personal Care.

James Minicucci (Senior Vice President, General Manager of Personal Care)

Thank you, Alessandra. I’ll now highlight our Personal Care results. Please turn to Slide 13 for Personal Care. Personal Care delivered another strong quarter with sales increasing 8% to $163 million, representing our third consecutive quarter of mid-single-digit growth. Consistent with prior quarters, performance was driven primarily by broad-based volume growth across all regions and most major markets. Our commercial engine continued to gain momentum with strong execution accelerating growth throughout the year.

Our globalized businesses, Biofunctional Actives and Microbial Protection, both delivered double-digit growth reflecting strong customer adoption and demand. Within Biofunctional Actives, Polypeptil and Etternite continue to deliver strong commercial wins. Microbial Protection continued to gain share, benefiting from investments made to strengthen our regional manufacturing capabilities and cost position. Care Ingredients sales increased approximately 7%, led by double-digit growth in hair care and high single-digit growth in skincare, while oral care and household combined declined slightly, primarily reflecting order timing.

Pricing covered raw material cost inflation while foreign currency reduced sales by approximately $1 million. During the quarter, we launched EasyHance, a super-wetting agent designed specifically for curly hair, enabling faster and more efficient wetting while improving detangling, fiber alignment and product performance across leave-on and rinse-off applications. Turning to profitability, adjusted EBITDA increased 14% to $49 million and adjusted EBITDA margin expanded 160 basis points to 30.1%. Higher volumes and favorable mix, together with disciplined pricing and cost performance, supported margins above 30%. While we continue to invest for growth, Personal Care enters fiscal 2027 from a position of strength. Our commercial engine is gaining momentum, our globalized businesses are growing and our innovation pipeline continues to create new opportunities with customers.

Our focus is clear: sustain the momentum, gain share and translate our innovation into durable, profitable growth. With that, I’ll turn the call over to Dago to review Specialty Additives.

Dago Caceres

Thank you, Jim. Please turn to Slide 14. Specialty Additives sales were $130 million, in line with the prior-year quarter. Coatings sales increased by a high-single-digit percentage and Performance Specialties delivered double-digit growth with continued share gains across regions, despite challenging end market conditions. China delivered its third consecutive quarter of year-over-year sales growth. These gains were offset by softer end market demand in Energy and Resources, while lower construction volumes reflected deliberate portfolio choices to prioritize higher value applications.

The team also continued to execute well on pricing. Pricing increased approximately 5% and covered raw material cost inflation, demonstrating continued discipline in a volatile cost environment. Foreign currency reduced segment sales by approximately $1 million. Turning to profitability, adjusted EBITDA was $20 million, compared with $29 million in the prior-year quarter, and adjusted EBITDA margin was 15.3%. The decline primarily reflected the expected lower Hopewell productivity output. We have addressed key process gaps and completed the critical investments needed to support near-term performance. Our focus is now on execution, with the team working to increase output and productivity over the coming months.

Importantly, the team continues to deliver strong commercial performance across Coatings and Performance Specialties with share gains across regions and disciplined pricing execution. With that, I’ll turn the call back to William.

William Whitaker (Chief Financial Officer)

Thanks, Dago. Please turn to Slide 16. Let me now provide a year-end update on our EXECUTE strategy and manufacturing productivity initiatives. We completed several important structural elements of EXECUTE during fiscal 2026. Our VPND optimization and small plant consolidation initiatives delivered approximately $18 million of benefits, including $15 million from VPND and $3 million from small plant consolidation. VPND outperformed our expectations with strong execution in several areas that contributed to margin improvement.

At Hopewell, we are making progress against our comprehensive plan to improve productivity and output. Actions across people, process and assets are beginning to translate into better manufacturing performance. The plan and key investments are in place and our focus now is execution. Increasing output and asset utilization will support the strong commercial opportunity across our portfolio and drive improved profitability. In summary, our EXECUTE initiatives have reduced the structural cost base and strengthened the operating foundations.

With our footprint actions complete, our focus now shifts to capture the full economic benefits. Please turn to Slide 17. Turning to globalize and innovate Fiscal 2026 was an important proof point for both strategies, with each delivering results well ahead of the goals we established during the year. Together, Globalize and Innovate generated approximately $52 million of incremental sales, nearly 50% above our combined fiscal 2026 target of $35 million. Importantly, the contribution broadened across the portfolio as our investments in new capabilities, technologies and geographic expansion increasingly translated into commercial growth.

Globalize delivered approximately $26 million of incremental sales compared with our fiscal 2026 target of $20 million. Growth was supported by continued momentum across biofunctional actives, microbial protection, injectables and tablet coatings. Reflecting the investments we have made to expand our capabilities and strengthen our presence in key regions, Innovate delivered approximately $26 million of incremental sales compared with our fiscal 2026 target of $15 million.

Performance reflected increasing commercialization and customer adoption of differentiated technologies and recently launched products across our markets. We are very pleased with the progress our teams made during fiscal 2026. These results demonstrate that the investments we made are translating into commercial outcomes while also giving us a broader pipeline of opportunities to build upon. As we enter fiscal 2027, our focus is on building on that momentum by scaling these opportunities with the strongest customer traction, expanding adoption across customers and regions, and continuing to advance new opportunities through the commercial pipeline.

For fiscal 2027, we are targeting approximately $20 million of incremental Globalize sales as well as $45 million of incremental Innovate sales, representing a 25% increase in the combined incremental sales versus 2026. And now I want to take a step back. As Guillermo highlighted earlier, fiscal 2026 showed that the transformative actions we’ve taken in recent years, reshaping our portfolio, streamlining our footprint and investing in Globalize and Innovate have laid a very strong foundation. We saw that in our recovery from the Calvert City outage earlier this year. With adjusted EBITDA margin up roughly 400 basis points from the second quarter to the fourth and including a record margin for Life Sciences and 30-plus margins for Personal Care, Globalize and Innovate beat their combined target by nearly 50%.

BP and D optimization outperformed and our pricing actions are recovering cost inflation across the businesses. We also delivered our free cash flow conversion above our 50% commitment and brought net leverage down within our long-term target range. With that foundation in place, our focus in fiscal 2027 is about execution and converting these gains into durable earnings growth. Please turn to Slide 18 for the outlook for fiscal 2027. Our planning reflects continued commercial momentum and improving operating performance balanced by a measured view of global demand, raw material and freight volatility and a stronger US dollar. For fiscal 2027 we expect sales of $1.905 billion to $1.975 billion and adjusted EBITDA of $405 million to $435 million.

For ongoing free cash flow, we expect a conversion greater than 40% of adjusted EBITDA. This reflects an expected modest increase in inventory as well as capital expenditures of up to approximately $140 million. Demand in Life Sciences and Personal Care is expected to remain resilient, supported by continued pharma momentum and growth across our higher-value Personal Care applications. Within Specialty Additives, we expect Coatings and Performance Specialties to build on recent commercial momentum. While Construction and Energy and Resources continue to face soft end markets, year-over-year comparisons begin to ease in the first quarter as we lap prior-year declines.

We have our planned maintenance across our cellulosic assets in the first quarter this year resulting in some additional weighting of Specialty Additives earnings towards the balance of the year. In Intermediates, recent customer wins provide additional growth opportunities in fiscal 2027 with the timing and pace of new volumes dependent on customer production ramps. Across the portfolio, we expect Globalize and Innovate to build on the strong progress from fiscal 2026 and continue contributing to growth.

We also expect continued volatility in raw material and freight costs. We will continue to manage pricing with discipline in response to changes in input costs, and our outlook assumes pricing offsets anticipated inflation over the course of the year. For fiscal 2027, Ashland is targeting approximately $10 million of net productivity and manufacturing optimization benefits driven by continued progress across HEC and VPMD networks and full realization of the Small Plant Consolidation Initiative, partially offset by the carryover impact of lower Hopewell output in fiscal 2026.

At Hopewell, we expect to continue to build on recent progress we discussed earlier with improving output and asset utilization supporting progressively stronger Specialty Additives performance throughout the year. First-half results are also expected to benefit from lapping the prior-year Calvert City operational impacts, supporting improved margins in Life Sciences, Personal Care and Intermediates. Our outlook also reflects a stronger US dollar based on recent spot rates, resulting in estimated headwinds of approximately $20 to $25 million in sales and $7 to $10 million on adjusted EBITDA.

With that, I’ll turn the call back over to Guillermo to discuss our innovation pipeline and our priorities for fiscal 2027. Guillermo,

Guillermo Novo (Chair and Chief Executive Officer)

Thank you, William. Please turn to Slide 19. Innovation remains a core driver of Ashland’s long-term growth and differentiation. As we discussed during our September Innovation webinar, we have made significant progress advancing our technology platforms from technical and commercial validation towards commercialization. Customer engagement remains strong and we are increasingly working with our customers to translate these technologies into specific products and applications.

We have also advanced the regulatory and manufacturing capabilities needed to support commercialization and scale of these technologies. Across our seven scalable technology platforms, we have filed over 50 patents and launched 23 products including 12 launches since May of 2025. These technologies create opportunities across pharma, personal care and coatings. We’re also seeing tangible commercialization progress across the portfolio. Several platforms have moved beyond validation phase into commercial launch and broader commercial adoption, giving us multiple paths to growth.

Our focus is now on commercialization, customer adoption and disciplined scaling. We are prioritizing opportunities with the strongest customer validation and clearest paths to scale. Importantly, we are taking a disciplined approach to investment. We can support the early stages of commercialization largely through existing manufacturing capabilities and infrastructure, with additional investments aligned with customer adoption and demand. The breadth of the portfolio, strong customer engagement and continued progress towards commercialization reinforce our confidence in innovation as an important long-term growth driver for Ashland. Please turn to Slide 20. As we enter fiscal 2027, our priorities are clear. We will build on the differentiated growth we are seeing across pharma, personal care, coatings and performance specialties and continue expanding our higher-value business globally.

We will advance our progress across our manufacturing network, translating our optimization actions into greater reliability, productivity and profitability, with continued improvement at Hopewell remaining a key priority. We will accelerate commercialization and customer adoption across our innovation platforms and continue scaling our Globalize initiatives. And we will maintain our focus on cash generation and disciplined capital allocation supported by our strong balance sheet and financial flexibility. Fiscal 2026 demonstrated that we can deliver even against a challenging market backdrop. We generated strong commercial momentum, made meaningful progress across our strategic initiatives, and delivered strong cash generation. As we enter fiscal 2027, our focus is on carrying that momentum and converting the progress we have made into sustained growth, improved profitability and strong cash flow.

We have the right priorities, a strong portfolio and clear opportunities within our control to continue improving performance. I want to thank our employees for their continued commitment, customer focus and execution throughout fiscal 2026 and also want to thank our shareholders for their continued support and engagement. Operator, please open the line for Q&A.

OPERATOR (Moderator)

Yes, thank you. As mentioned, at this time we’ll conduct a question-and-answer session. As a reminder, to ask a question you’ll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question and one follow-up, and stand by while we compile our Q&A roster. Your first question comes from the line of Chris Parkinson with Wolfe Research. Your line is now open.

Reid (Analyst at Wolfe Research)

Hi, this is Reid on for Chris. Thanks for taking my question. I’m wondering if you could talk about personal care markets. Seems like they’re inflecting after some years of choppiness, and I’m just wondering how sustainable you think this is and what you’re hearing from your customers.

Guillermo Novo (Chair and Chief Executive Officer)

Jim, do you want to take that question? I’ll just comment. Overall it’s pretty robust across all the regions and areas, and obviously, as Jim said, a lot of the growth are things that we’re controlling in terms of new innovations and Globalize and Innovate side. So there’s a lot of levers that are favorable to us moving forward. But Jim, you want to go in more detail?

James Minicucci (Senior Vice President, General Manager of Personal Care)

Thanks. Thanks, Guillermo. Thank you for the question. So, as you know, as we shared in the prior calls in prior quarters, we continue to see growth accelerate as we move through the fiscal year. And if you unpack just the Q4 growth of 8%, I think the real point to highlight is, one, it was predominantly volume driven. So we were favorable on price versus prior year to cover cost inflation. As we’ve shared in the past, our ingredients are a small portion of the customer cost stack.

We’re really the performance engine, but we took the price actions required to cover cost. But the majority of growth, roughly 7%, was volume driven. And so that’s one of the key indicators that give us confidence in the sustainability of the performance, that it’s volume driven. I think also when you look at the growth of 8%, it’s really broad based across the portfolio. Roughly half of it came from our Globalize segments, biofunctional actives and microbial protection, each growing north of 10%. And then the other half came from our care ingredients portfolio, the polymer part of the portfolio, which was a combination of the innovation launches that we’ve had plus the base business. So really, really broad based.

Reid (Analyst at Wolfe Research)

Got it. Okay, thank you. And then just to follow up on life sciences, could you talk about the margin improvement there? Again, how sustainable do you think it is and, overall, how excited are you about your pharma pipeline?

Guillermo Novo (Chair and Chief Executive Officer)

Sandra, you want to take that?

Alessandra Fassin

Yeah, sure. Basically, from a margin standpoint in Q4, it’s what we talked about. We have strong volumes in pharma and a favorable mix. So definitely the strategy with the growth momentum focused on innovation and globalize. We are seeing the results with top line and now some favorable mix pricing, very similar to what Jim described for personal care. We have implemented price increases to cover inflation, but really the top line and bottom line came from the growth momentum.

Yes, there is certainly excitement with pipeline. This is a business where pipeline is very important and tied to our customers’ pipeline. So the growth momentum we are seeing is a reflection of that. Q4 specifically, overall 1% of growth, 0.4 coming. So definitely we are seeing the reflection of our focus on share gains. Globalize and innovate with wins in cellulosics and injectables as we talked about. Also, VPND in the third and fourth quarter has been positive.

So we have seen the stabilization on VPND, which is very good.

Sandy Klugman (Director of Investor Relations)

Operator, can we please move to the next question?

OPERATOR (Moderator)

Yes, thank you. Your next question comes on the line of Lawrence Alexander with Jefferies. Your line is now open.

Kevin (Analyst at Jefferies)

Hi, good morning, this is Kevin on for Lawrence. Thank you for taking my question. I guess, first one on free cash flow conversion. So you’re calling for about this 40+% conversion in 2027. I’m just curious what we should view as a more normalized free cash flow conversion rate beyond 2027.

Guillermo Novo (Chair and Chief Executive Officer)

Let me make just a high-level comment, and William, you can give the details. We’re not really changing a lot on our capex side. The only major thing we’ve done is in our HEC. With the network optimization, we have two things. One, we’re just working to optimize the productivity of one product line, one plant. That’s been the issue this year. But if we look longer term, we do want to make sure that we’re building capacity, debottlenecking for 2030 right now. The macro demand in coatings has been sort of muted. We had an example this year: we expected some pickup in North America that didn’t happen. For next year, we’re also forecasting sort of a muted environment. The issue is there is a lot of pent-up demand in housing and real estate. There’s a lot of things here. So, equally, we could see a pickup in ’27–’28 of demand.

Rather than waiting to add those debottlenecking projects in late ’27–’28, we’ve just decided we’re going to move them forward so that we’re prepared for any upside that could come in the later years of our planning process. So it’s really more of a timing of the capex rather than anything else. But William, I don’t know if you want to give any more.

William Whitaker (Chief Financial Officer)

Hey, Kevin. Good morning. So, in terms of the free cash flow over time, we still expect greater than 50% free cash flow relative to adjusted EBITDA. Obviously, this year quite strong at 60%. This year we’re guiding greater than 40%. Guillermo highlighted some of it, but on the capex side, it’s an increase from 90 to 140 in the guide. I do want to underscore that’s the up to. We wanted to give ourselves some room on the project timing, so we’ll update you as the year progresses in terms of the timing of those key projects. But really, from a capital allocation priorities perspective, that element doesn’t change. Maintenance capex, disciplined in that front, we’ve continued to have and recognize the savings from some of the asset footprint rationalization over the years.

And so we’ve set the guide prudently on the capex side. And obviously, this year was a tailwind on the inventory side, about $85 million in terms of inventory reduction. In the fiscal 2026, I expect that to have a modest build next year, and it’s select areas, HEC being one of them. And the combination of those two gives us the greater than 40%. But I do expect over time, as capex normalizes, we’ll be closer to that 50% that we’ve guided to in the past.

Kevin (Analyst at Jefferies)

Okay, understood, thank you. And just on pharma durability, just kind of curious what your order books and maybe customer activity suggest about growth in 2027, whether you are seeing any customer inventory normalization that could possibly change that trajectory.

Guillermo Novo (Chair and Chief Executive Officer)

If you look at the overall, the order book is pretty solid, actually. I would say October looks in line with our expectations, no big surprises. If you look at the inventory builds and dynamics over history, normally customers, pre-inflationary environment, maybe build up some inventory, or when there are shortages, they build up some inventory. We are not the biggest, as Jim mentioned. We’re not the biggest driver of costs. Our things are a small portion of their overall cost.

So this is not for inflation. This is not where they save money. They probably build in other higher-value areas for their cost structure. So that’s the driver right now. For additives, I don’t expect that that’s going to be—we don’t see it and we don’t expect that that’s going to be the big driver because it’s very little value for customers. What we saw was really in 2022 when there were shortages. Additives and ingredients are small volume, and you can’t—it’s like a restaurant: you can’t cook if you don’t have the spices. You don’t want to run out of that. So that’s where we see the inventory build that impacts additives and ingredients.

That’s what we saw in ’22 and then the destocking in ’23. But that’s not the dynamic right now, so we don’t expect that as we move forward.

OPERATOR (Moderator)

Thank you. Your next question comes from the line of John Roberts with Mizuho Securities. Your line is now open.

Edlin Rodriguez (Analyst at Mizuho Securities)

Thank you. This is Edlin Rodriguez on behalf of John. Good morning, everyone. Quick one on personal care. This is for Jim. We are seeing some softness in oral care and household care. Anything specific going on in those markets, or is it, as you say, just a timing thing? And does that mean we should expect to see better comps next quarter once the timing issue is resolved?

James Minicucci (Senior Vice President, General Manager of Personal Care)

Hey, thanks for the question. Yeah, exactly. As I shared in my prepared remarks, it was really just isolated to one region, so it was an order timing specifically in North America. If you looked at oral care and home care across the other regions, they were all up in the other regions versus prior year. And even if you look in places like China, on a full-year basis we’ve seen tremendous growth in oral care with local oral care companies in China through the course of the year.

We had a launch this year, a new thickening polymer for toothpaste, that is getting great market adoption. So overall, really good year for oral care, and we expect that to continue in 2027.

Edlin Rodriguez (Analyst at Mizuho Securities)

Okay, great. And another one on what materials, Guillermo or William, can you talk about what material cost increases you’ve seen and your ability to raise prices to offset that? What’s the conversation been like with your customers? And also, do any of the businesses have an easier or more challenging time to pass through those costs?

Guillermo Novo (Chair and Chief Executive Officer)

Again, let me give just a high-level comment, and William can give you some of the details on the inflation and all that. In general, again, we’re additives. We’re not the biggest driver for our customers. One. Two, we’re not petrochemical. Our exposure to petrochemicals is much lower. So don’t expect us to do price increases like companies that are exposed to propylene, ethylene, all those kinds of chains. Ours is much more muted with 1% to 3% growth depending on the business.

We not only cover inflation; we can cover the margin protection. We do not grow and drive performance by pricing because of inflationary designs. We value price. So this is more about protection. You launch, you position the product well, and then volume growth is what’s going to drive our performance, and this is no different. So we tended to try to go in, do this quickly, get out of the way of customers. They’ve got bigger problems and bigger challenges with other costs and other raw materials. So we want to make sure that they understand that we’re not abusing the situations. We don’t do anything of that nature, and it’s been pretty smooth the last few years. You’ve seen that we’ve been able to do this pretty well. And I think the team did a fantastic job to move quickly to do what we needed to do and adjust with our customers.

But William, if you want to—

William Whitaker (Chief Financial Officer)

More details. Good morning. On the pricing side, I hope it’s clear that going back a couple earnings calls ago when inflation really started to move on this space, we committed to cover that and gave some guidance on what that could look like in terms of the impact, and ultimately we did that. Pricing was down 2 points in Q2, up 2 points in Q4, so it’s a 400 basis point swing over the last couple of quarters, and the team’s done a really nice job across all business units.

I would say the areas in terms of the business units that maybe have the— all of them are experiencing it, but the one with the larger impacts to date has been Specialty Additives and Intermediates, and clearly you can see that in our pricing numbers that we’ve been able to go out and get that. So, as we look ahead to next year, what does that look like? A lot of the actions we took were based on the costs earlier this year, and so while things have been volatile, we haven’t really seen things gap out well above where we were then. And so at this point, we’re assuming we can do what we did this year, and any incremental changes we’ll go out and cover across the business units. So carryover pricing should be a modest tailwind in the first half, but you do have the raw material carryover based on where the raw material basket is today.

So overall, we feel good about our ability to manage pricing in the context of a volatile environment.

Edlin Rodriguez (Analyst at Mizuho Securities)

Okay, perfect. Thank you very much.

OPERATOR (Moderator)

Thank you. Your next question comes in line of Stephen Haynes with Morgan Stanley. Your line is now open.

Stephen Haynes (Analyst at Morgan Stanley)

Hey, good morning, everyone. Thanks for taking my question. Wanted to ask on the EBITDA guide. I understand that you haven’t given any specific quarterly commentary, but could you help us think about the shape of the year a little bit? How you see, maybe at the midpoint, first half versus second half? Anything unusual to call out in that regard?

Guillermo Novo (Chair and Chief Executive Officer)

Nothing major unusual from an external perspective. I think the timing issue—and William, you want to cover just timing of when we do turnarounds and all that—but that’s more timing issues.

William Whitaker (Chief Financial Officer)

That’s right. Hey, Stephen. Good morning. So, some of the moving pieces, I’d say at a high level in terms of the shape of the year, I don’t expect it to be drastically different than what we’ve experienced in the past. Typically, second half for us is 55% to 60% of the full-year EBITDA. I would say in ’27 it should be less pronounced to the second half than it was this year, and that’s because of—one, obviously, we had the Calvert City and weather impact in first half last year.

That was a $20 million number, so quite sizable. So I do expect a nice margin uplift across Life Sciences, Personal Care, and Intermediates in the first half. From a seasonality perspective, nothing unusual. To Guillermo’s point, Q1 is our seasonal low. I do expect that to remain the case. But we do have volume/mix momentum in several areas, as you heard from the team, on the Globalize/Innovate, as well as lapping some of the impact on our secondary markets—both construction as well as energy. Pricing carryover will be most pronounced in the first half of next year as well. And then the other piece too, to Guillermo’s point—and this is typical for us—we tend to do our turnarounds on the cellulosic assets in the December quarter, and that’s the seasonal low for the coating season.

So we are doing that this year. And the last piece I’d add is the Hopewell element. Because it is the seasonal low. This gives us an opportunity to go out and build inventory in that area. And so we do expect Hopewell’s throughput to increase throughout the year. Although we do have a negative carryover impact in Q1 based on how it ran in the second half this year. So I hope that covers it. But those are really some of the moving pieces as we think about the shape of next year.

OPERATOR (Moderator)

Thank you. Your next question comes from the line of Josh Spector with UBS. Your line is now open.

Josh Spector (Analyst at UBS)

Yeah. Hi, good morning. Apologize if I missed this, but I did want to ask on the capex step-up. It kind of surprised us at least because we thought a lot of the innovation-led growth was going to be repurposing, kind of lower capital intensity. So why the step-up now?

Guillermo Novo (Chair and Chief Executive Officer)

Yeah, as we got that question a bit earlier, Josh, the issue is more of a timing issue. As part of our network optimization with HEC, right now we’re focused on just stabilizing and normalizing the productivity at Hopewell and we’ve made investments there. But if you look at longer term, we do need to do some debottlenecking. The plan was to do it in the outer years, more 2029, 2030. We decided that we’re going to move that forward. And the comment I mentioned was really there’s a lot of pent-up demand, especially in coatings, in the coating space. So this year we expected some recovery in North America, Europe. That did not happen. But there is a lot of pent-up demand. The real estate market, construction around the world, especially here in the U.S. So there is a probability that is not insignificant that we could start seeing a pickup in demand after a very muted market, both in the new construction, in the real estate, and I would say in the DIY market.

So we don’t want to risk anything and we’re just saying, look, let’s move it up. It’s just a year, year and a half forward, have the capacity ready and we will move on so that we have, you know, more normalcy in our production planning and we’re not rushing in the last minute to add capacity.

William Whitaker (Chief Financial Officer)

The other piece, Josh, just, I would say just to reinforce, we set the guide prudently, right, that we’re intentional on the up to $140 million. So we’ve given ourselves some room on the project timing. We’ll update you as the year progresses. But I expect this to also normalize once we get through this. And normally we probably won’t be able to spend that kind of money, so there’ll be flow over into the next year. That’s sort of a max level if you just assume 100% of the project is all spent in one year.

Josh Spector (Analyst at UBS)

Okay, I mean, I guess that makes sense. I mean, I’ll follow up later. It does seem like odd timing to be pulling forward for a coatings recovery. No one seems super excited there at the moment. But I can shift gears and ask just on the innovation-led growth, $45 million, how would you break that down between kind of incremental products versus some of the more, call it, new-to-the-world type products you’ve had? What’s that split look like? And does that change your level of confidence at all?

Guillermo Novo (Chair and Chief Executive Officer)

Yeah. So, Josh, two things. One, just to go back on your comment on HEC and what we’re doing there, remember our plants are running pretty well across the board in terms of the capacity utilization rates. You know, we had an issue in one product line, one plant, but the rest is pretty well. So we want to make sure that we’re in a good position from a supply perspective because, you know, any pickup, we do want to be ready for it across our network.

We now have three plants, not four. So that’s part of the logic of that. In terms of innovation in the near term, still, you know, core innovation is a bigger part of the driver. Just, you know, the timing of things and the nature of the portfolio. If you look at life science, it’s a pipeline, right? And new things will take longer to come in. But equally for the other businesses, we’re launching some of these newer products. But a lot of the wins that we’re getting on are things that we’ve been working on in the last two years.

In the globalized especially, that’s a big driver. But also if you look at coatings, a lot of the growth that they’re getting is on new rheology modifiers in the synthetic side, new multifunctional HECs and multifunctionality in the additive base, new additives. So all those are more in the core area. And then obviously the focus with the new technologies is launches, commercialization. The ramp rates will come over time as these new technologies really start getting hit.

But they’ll be more in the outer years, but not so much in the ’27.

OPERATOR (Moderator)

Thank you. Your next question comes from the line of David Begleder with Deutsche Bank. Your line is now open.

Emily Fusco (Analyst at Deutsche Bank)

Good morning, this is Emily Fusco on for Dave. Just wondering if you could maybe provide any color on the potential sale process given some of the recent news, or if there’s been any developments there that you can share. Thank you.

Guillermo Novo (Chair and Chief Executive Officer)

There’s not much we can share. As usual, we don’t comment on speculation and rumors and all the noise that is out there. I think as we said, we’re focused on the things that we can control, on execution of our strategy. You know, the biggest value creation driver in any scenario you want to do is performance. And that’s really where we have the team focused on. It’s about execute, get the productivity going. That has been our challenge in 2026, not the external world.

It’s really that part. And if we fix that, we’ll be in a very strong position in 2027. Drive to globalize and innovate and just execute our portfolio. So that’s the primary focus for everybody at this point in time.

Emily Fusco (Analyst at Deutsche Bank)

Got it. Okay, thank you. And then maybe just to pivot here, and sorry if I missed this, but did you, or can you, quantify the EBITDA impacts from Hopewell in 2026 or Q4, and maybe how much year-over-year improvement, if any, is embedded into the 2027 guidance?

William Whitaker (Chief Financial Officer)

Yeah, of course. Hey Emily, it’s William. So in terms of the impact for the full year in terms of operating — let me start there and then I’ll translate that to the financial impact. But in terms of the operating performance, we were under-absorbed versus our initial plan this year, about $17.5 million. That doesn’t all sit in Specialty Additives, but the vast majority of it does. The key piece to keep in mind, a portion of that does roll over in the next year.

So about $5 million of that 17 will impact us in Q1 based on how the site ran in the second half. But then I think what’s really important is the operational ramp from here, right, and what we do from here in terms of driving throughput and productivity at the site to support existing sales, existing demand. And so as we look out for ’26, ’27, ’28, that trajectory, we expect to increase output by about 25% roughly, and then another order of magnitude similar in the following year.

And so the plans are in place and that’s really a key part for us. And so then as you look at fiscal ’27, you have the $5 million carryover. We do expect to more than offset that for the balance of the year. So it should be an incremental positive for fiscal ’27. And then really where you get the EBITDA leverage is going into fiscal ’28 as you’re producing at that higher output on the fixed cost base.

Guillermo Novo (Chair and Chief Executive Officer)

So that helps. And Emily, the other part is the other impact. The total impact was significant because it was another $20 million. If you look at the outage, the equipment failure in caliber was about 15 and the weather was another 5. So those two we blocked and production is normalized. As William said in his comments, that one is already behind us. So, you know, the year-on-year is this year. All the external things, all the execution of strategy went according to plan.

You know, the miss was in the operating side. I think we’ve lapped 60% of it already. And now really focus on the Hopewell side on one technology that we want to increase productivity.

Emily Fusco (Analyst at Deutsche Bank)

Perfect. Thank you.

OPERATOR (Moderator)

Thank you. Your next question comes in line of Mike Harrison with Seaport Research Partners. Your line is now open.

Mike Harrison (Analyst at Seaport Research Partners)

Hi, good morning. In the Specialty Additives business, you noted that there have been some deliberate actions to reduce your exposure to lower margin sales, I think particularly in the construction market. Maybe just give us a little more detail on what you’re doing there and maybe what the revenue and kind of the timing looks like as you’re walking away from some of that lower margin business.

Guillermo Novo (Chair and Chief Executive Officer)

Thanks for the question. This is an area that we really do want to clarify, and as we said in our comments, energy and resource and construction are the two areas that they’re gap — they’re smaller businesses within the portfolio, but the movement has been significant. I would say if you look at energy and resource, it’s about the Iran war. It’s really disrupted a lot of demand there. Again, probably impact — about small business, but impact probably around 30 million overall in the net impact.

And so now we’re pretty — the business now pretty much at the bottom. So we expect, you know, as we move forward that that’ll be a recovery. Construction is different. I mean we were at, you know, 120 million plus when we were running, you know, the business for absorption and just trying to load the plant. That is now much smaller in terms of our overall portfolio. We — now the purpose of this, we have some very good businesses within construction. So the higher end, we’re committed to those customers and we want to make sure that we have the demand and supply. But there’s still a margin that we use to fill up the MC unit that we have.

The priority is pharma. So we will make sure that the volumes — we use this as a filler, right. So construction is never going to grow for us in a significant way. When we talk about construction market not growing, that’s not the driver. This is just going to be, you know, a sort of a steady-state business that’ll go up and down depending on our need to load the plant. And we’ll try to keep the higher end portions of construction that we like and that we’re committed to the customer base.

William Whitaker (Chief Financial Officer)

And, Guillermo, just to add too, I think another perspective here is it’s not a new dynamic. I think it became apparent in Q4 and Q3 because the team has been doing such a nice job in Performance Specialties and Coatings. And so you do have some offset on the construction side, clearly. But one of the things I think is important is it’s not new. And so we are going to lap that impact in Q1 in terms of some of these choices. Because you’d asked, you know, how much are you ex amateur?

This has already happened. And so I would expect the construction business to be relatively stable year on year going into Q1 of fiscal ’27, just to be clear on that.

Mike Harrison (Analyst at Seaport Research Partners)

All right, thanks. Very helpful. And then second question is on the Personal Care margin. From here it seems like maybe we’re seeing some benefits from the volume leverage from plant optimization. Maybe mix is getting better. But just wondering where margin can go from this kind of 30% EBITDA margin level as we’re thinking about the next year or two. Thanks.

Guillermo Novo (Chair and Chief Executive Officer)

I’ll let Jim take this. I mean obviously, as you said, mix is a big driver. There’s a lot of really good stuff coming out of our biofunctionals or microbial protection, and even the new projects that they’re launching — all those have higher than average margin. So the mix is a big part of the story as we move forward based on our strategy. But Jim, you want to give any other color.

William Whitaker (Chief Financial Officer)

Thanks, Kim. Thank you for the question. So as you said, yeah, I mean we’re really happy to have 30% margins in the quarter. As we’ve been talking for the past couple of years, that’s really something that we’ve been working towards, to get into that high-20s to 30% margin range. We still see upside and additional headroom to go from here. So clearly, in the first half of 2027 we should see some margin uplift and benefit versus prior year due to the one-time items not repeating, specific to the Calgary city event and the weather event from last year.

And then going forward, as we said, our commercial engine is really taking hold. We’re seeing really robust growth. Our high-margin businesses, biofunctional and active microbial protection, are growing at double digits, which we expect to continue in 2027 and beyond. So we’re going to get favorable mix through volume growth that will add additional margin uplift. And so now we’re focused on getting to that mid-30% range.

OPERATOR (Moderator)

Thank you. Your last question comes from the line of John McNulty with BMO Capital Markets. Your line is now open.

Margarita Margulis (Analyst at BMO Capital Markets)