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Ashland Inc  (NYSE:ASH)
Q2 2019 Earnings Call
May. 01, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Ashland Global Holdings Inc. Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Seth Mrozek, Director of Investor Relations.

Seth A. Mrozek -- Director, 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 of Ashland Investor Relations. Joining me on the call today are Bill Wulfsohn, Ashland's Chairman and Chief Executive Officer and Kevin Willis, Senior Vice President and Chief Financial Officer.

We released preliminary results for the quarter ended March 31, 2019, shortly after 5:00 P.M. Eastern Time yesterday, April 30th. Additionally, we posted slides to our website ashland.com, under the Investor Relations section and have furnished each of those 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 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. We 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.

William A. Wulfsohn -- Chairman & Chief Executive Officer

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 three external factors, which worked against us in the quarter. The first is the continuing strengthening of the US dollar, which negatively impacted ASI revenue by over $25 million and EBITDA by $9 million on a year-to-date basis, of which $18 million of revenue and $6 million 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 the performance of our customers and peers, but below our expectations.

And third, is the continuing raw material inflation we are 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 million of raw material inflation, $5 million of which was in Q2.

In this context, the team did some great work in areas that we could control. From a revenue perspective, the team made solid gains in the important areas to offset weak demand in the end markets I just referenced. Please note that as I speak to our sales in my following comments, I'm referring to sales on a constant currency basis and excluding the impact of the Colgate oral care reformulation.

With that said, I would like to highlight 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 a very difficult year-over-year comp. As you will recall in Q2 of our last fiscal year, the Pharma business sales grew by 17%, as we brought new cellulosic capacity online. To grow year-over-year in this context, was a strong achievement by the team.

But the Coatings team drove share gains in Latin America and the rest of Asia to offset demand weakness in the US 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 altogether, overall volume mix was negative in the quarter. We had gains and less profitable end markets and that did not fully offset weaker-than-expected growth in the Coatings, Adhesives and Performance Specialty end markets.

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 cost below prior year and substantially reduced SG&A. Importantly, relating to our $120 million cost reduction program, we hit our Q2 target and are now on a run rate basis over $70 million. These reductions contributed substantially to the $18 million SG&A reduction versus prior year in the quarter.

When you consider that roughly $20 million of overhead we'll transfer with the sale of the Composites and Marl businesses, we are on a run rate basis over 70% of the way through implementation of our $120 million cost reduction program.

So adding this all up, to be clear, I am not happy that we came in below our expectations for the quarter. 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. But the team priced over inflation and significantly lowered SG&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 two years or three years ago, prior to establishing our current strategy.

Looking forward, we have adjusted our outlook to reflect our Q2 results along with expectations that the dollar will remain strong and demand weakness will last at least through the current quarter in the markets I previously referenced. I want to emphasize the team is working on 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 million 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 to adjusted EBITDA. Taking into account our cash on hand, strong upcoming cash generation and our confidence in the impending sale of the Composites and Marl 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, in consultation with Neuberger Berman and other shareholders, we have elected Guillermo Novo to join the Ashland Board, and we are excited to have Guillermo join, given his extensive leadership experience in the industry.

I'll now turn the call over to Kevin.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

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 million, down 1% from the year-ago period, including negative 3 points from unfavorable currency. Adjusted EBITDA in the quarter was $142 million, up 3% year-over-year and including a negative $6 million foreign currency impact. The US 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 million 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 and Marl are now being reported as discontinued operations.

Free cash flow during the quarter was negative $22 million compared to negative $3 million in the prior year. These amounts include $15 million in restructuring costs in the second quarter of fiscal '19 and $6 million of restructuring in the year-ago period. 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 to $175 million this year, inclusive of an estimated $40 million 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 INEOS Enterprises to sell the business for $1.1 billion. 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 billion for debt reduction following the close of the transaction in support of our commitment to reduce our leverage to about 2.5 turns.

Turning to Specialty Ingredients, 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 cellulosics facilities. This plant 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 million and $3 million.

As Bill mentioned, we have revised our financial outlook for fiscal ' 19. We will continue to update these ranges during the second half of this fiscal year.

During the March quarter, we saw pressure on earnings from weakened demand in several key end 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 the end of the fiscal year. If we see an improvement in the second half, 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 million share repurchase program under our existing $1 billion share repurchase authorization. We believe Ashland shares remain significantly undervalued, especially based on the actions we've 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 2.5 turns following the closing of the Composites Marl divestiture.

Now I'll turn the call back over to the operator, and we'll take your questions. Thank you.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Christopher Parkinson from Credit Suisse. Your line is open.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Great. Good morning.

Christopher Parkinson -- Credit Suiise -- Analyst

Thank you. So on the Personal -- good morning, how are you? On the Personal Care side, can you comment on the materiality of the skin care's growth during the quarter, and even more importantly, the next few fiscal years? Obviously your customers have been latching on to this, but just how integral are you to the various processes, given the growth that they're showing? So I'm just trying to get a sense of Personal Care growth in the profit profile (ph) now versus well into the future. Thank you.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah. Skin care 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 all happened when I was in China meeting with one of our major customers (inaudible) 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.

Christopher Parkinson -- Credit Suiise -- Analyst

Got it. And just turning quickly to Pharma, you had pretty decent result on it, I'd say a fairly healthy comp. I know you're still posing to grow in the mid-single digit growth range on an annualized basis. But can just add us a little -- give us a little more color or comment on any 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 can take to kind of further drive momentum here? Thank you.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Sure. Certainly, I would say that the additional capacity we have brought on in the cellulosics area has enabled us not only to have continued growth, but we've seen increased customer interest in that product line area with the understanding that we now can more effectively supply them, and I would say that's on a global basis. So we put out a few press releases over the last three months, four 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, we had the opportunity to meet with one (inaudible) in China for dinner a couple of weeks ago, and they are 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, well, it certainly isn't related to Pharma. We are 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. And on the past, that would have been out of the question, because we needed every pound. We had to supply the Pharma customers, but it has applications in multiple market zone and there is -- marine paint that's been 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 business.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

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 US and globally, we should also see some improvement from an overall excipient growth perspective through that particular end market as well.

Christopher Parkinson -- Credit Suiise -- Analyst

Thank you very much.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Welcome.

Operator

Your next question comes from the line of John McNulty with BMO Capital Markets. Your line is open.

John McNulty -- BMO Capital Markets -- Analyst

Yeah, thanks for taking my question.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Good morning.

John McNulty -- BMO Capital Markets -- Analyst

Good morning.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Sure.

John McNulty -- BMO Capital Markets -- Analyst

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 -- and -- or the business lines that you're most concerned with at this point to guide kind of as conservatively as you have been? What sequentially gets worse, and how should we think about that?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah. I think first of all, when you look at the change in the guidance, it represents Q2, the 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 a bad 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 margins.

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 will 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 is some caution in terms of what they are expecting for this 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, OK, we balance out what otherwise might be a contraction in that area.

John McNulty -- BMO Capital Markets -- Analyst

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, like how should we be thinking about the sequential benefit from 2Q to 3Q, as far as the cost cut's rolling in?

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Yeah, we -- John, we should continue to see the cost structure improve within this quarter and the next. We will 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 '20 or the December quarter, 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 have yet to come at the end of the 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 $50 million a quarter ago, we're $70 million now, you will really start to see the full impact of that extra $20 million 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&A.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Very helpful. Thanks very much.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Sure.

Operator

Your next question comes from the line of David Begleiter with Deutsche Bank. Your line is open.

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Good morning.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Good morning.

David Begleiter -- Deutsche Bank -- Analyst

Kevin, what was the impact of the reduced plant absorption in the quarter?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah. So it was -- I mean, I'm going to be directional here. It was in the, kind of, like the $5 million to $7 million 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.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Yeah, sequentially we took inventories down about $20 million. So directionally it builds number around $5 million to $7 million for absorption is correct. Yeah, mix -- really the other piece of the earnings compression was related to overall mix as we've talked about.

David Begleiter -- Deutsche Bank -- Analyst

That's very helpful. And Kevin, just what was actually pricing in ASI in the quarter?

William A. Wulfsohn -- Chairman & Chief Executive Officer

We were actually a couple of million dollars ahead in the quarter on 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 we're really trying to recover some of that margin compression that we've seen in the past. So we're very encouraged by that.

David Begleiter -- Deutsche Bank -- Analyst

Thank you.

Operator

Your next question comes from the line of Mike Sison with KeyBanc. Your line is open.

Mike Sison -- KeyBanc Capital Markets -- Analyst

Hey, guys. In terms of the -- you obviously need a better second half in EBITDA growth. Can you maybe walk us through by product, meaning, is it mostly in cellulosics or PVP that Pharmachem that really needs to recover in the second half to hit your outlook?

William A. Wulfsohn -- Chairman & Chief Executive Officer

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 our perspective and a reflection that the Adhesives, Coatings and Performance Specialties would remain soft from -- at least for a good part of the year, and I think that's what 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 privacy 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.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

And Mike, as you look at our second half and the guidance that we're providing around that, what we are presuming is those end markets like Coatings, Adhesives and Performance Specialties won'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 toward the middle at this stage of the game.

Mike Sison -- KeyBanc Capital Markets -- Analyst

Right, OK. And then when you think about 2020, which I know for maybe you'd barely give 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?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah. So you did a good job as you outlined the question there really with the answer. 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, 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 a hang on over on that, but essentially we will have lapped that and we've put the price in place. So when you put that together, I mean we're seeing growth in the Personal Care market that's consistent with our growth rate, if you were excluding the currency and the Colgate impacts.

So we would expect that, that would continue, biofunctionals, some of these very good solutions that we provide 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. I'm -- again, I'm kind of leaving the Colgate reformulation side on that one. So we think we'll be lapping those. We will have significant SG&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 the operations focus, the SG&A, the pricing. So that's what gives us confidence that we can return to what we'd consider a more normalized growth rate of sales and earnings as we get into fiscal year 2020.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Yeah, I think on a 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% or 9% in 2020.

William A. Wulfsohn -- Chairman & Chief Executive Officer

And if you look at it, we did that last year. It was our intention to do it 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.

Mike Sison -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.

Laurence Alexander -- Jefferies -- Analyst

Good morning. I guess, first just to clarify the inventory workdown that you've done. Is that over or is that (technical difficulty) Q3?

William A. Wulfsohn -- Chairman & Chief Executive Officer

I would say, for the most part, it's over. I mean, our inventories can fluctuate a little bit quarter-to-quarter. Kevin referenced with this EO 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 -- 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.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

And running the plant as full and as hard as possible doing it.

Laurence Alexander -- Jefferies -- Analyst

And I guess then, can 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 two years to three years out if we look out into early next decade?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Sure. So that's a potent question and it's hard to give a simple or a 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 two primary points. One of them is to debottleneck and expand the output, which we've done by the way. And as you recall, we added about 3,000 tons last year in our Nanjing facility with our change to our dryer system. So that, and then secondly, upgrading the mix, selling more differentiated product, selling more Pharma, which may be over Nutrition products or over certain Construction products. That would be essentially in the cellulosic.

In the Adhesives and biofunctionals area, the capacity, we can be challenged at times, but it's easier to add more incrementally the capacity there, but the Lima facility is full. So it really comes down to the cellulosic (ph) . I think we have opportunities to address and drive more volume through that part of our system, which is something we're going to focus on technically, commercially, because we do have some extra capacity in that area that we'd like to leverage.

Laurence Alexander -- Jefferies -- Analyst

And then just to understand the mix effects this quarter and then thinking about the dynamics in terms of lumpiness going forward, 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 1,000 basis points?

William A. Wulfsohn -- Chairman & Chief Executive Officer

It would be more than 500 basis points between, say, an Energy product and a Pharma, 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. It is profitable to us, but it certainly is at a lower profitability, which is why we say, in spite of, well say, FX constant revenue going up, that we saw an unfavorable volume mix impact.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

And it's also important to remember that -- 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 in function and that it supports our Pharma business, particularly the Benecel line that's coming out of Doel, Belgium. So the first priority there is to produce and sell as much Benecel pharma grade cellulose as possible, and then to optimize that facility with the balance of the material coming out of their (technical difficulty) primarily to the Construction end markets. So there is a symbiosis involved in all of this too that we have to keep in mind as we operate these facilities.

Laurence Alexander -- Jefferies -- Analyst

Okay. Thank you.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Sure.

Operator

Your next question comes from the line of John Roberts with UBS. Your line is open.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Good morning, John.

Josh Spector -- UBS -- Analyst

This is Josh. 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 just wondering in terms of longer-term expectations, is that about the level you were expecting or do you expect topline to be potentially higher over the next couple of years?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yes. I would say that the -- what you see with a couple of percent growth is really representative of the 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 at the end of our fiscal year. As a percentage of sales, it went up dramatically. I have to recall that I think it was initially from 20% to roughly about 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.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Yeah, given -- I mean, given the opportunity to globalize that business means vast majority of Pharmachem is North America for us. And given the opportunity to globalize the business, there is no reason that we shouldn't see mid-single digit growth rates over time in 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. It's the opportunity to leverage our global footprint to grow it in a more global way.

Josh Spector -- UBS -- Analyst

Okay, thanks. And just in terms of the divestment, it seems like the time is a little bit later than you originally thought. And I think some of the updated EPS guidance reflects interest being higher, assuming that you've had debt paydown later. One, I want to check if that's right. And then two, just in terms of how much interest could be down after that $1 billion paydown, is like $40 million a reasonable number or is there some other number you are tied to?

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Yeah, I'd say it's probably closer to $45 million and that 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 might retire. But $45 million is a pretty good estimate, presuming the entire $1 billion goes to debt paydown, which would be our current presumption.

Josh Spector -- UBS -- Analyst

Okay. Thanks.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah. And from a timing standpoint, I'd just say that, really as we said, we remain on track. We are just waiting for our regulatory approvals, so we can complete the process, right.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

And another thing to note is, and you have to look at -- and you have to look both above and below the lines, we have net interest -- some of our interest expense is running through discontinued operations. So as you think about your modeling, you will need to take a peek down in that part of the balance sheet as well to understand how much is down there.

Operator

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan. Your line is open.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Thanks very much.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Good morning.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Hi, good morning. Were your ASI volumes down flat or up in April?

William A. Wulfsohn -- Chairman & Chief Executive Officer

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 and the -- before cash that we have.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

And the big drivers for what we saw in Q2 were really Construction and Adhesives. I mean, not only was that a topline and a profitability impact, but it was a pretty sizable volume impact as well. Those are probably our two highest volume businesses or end markets in the portfolio. And particularly in North America, we saw volume pressure there.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Which is what we saw in Q2 as well. So we tend to focus on the volume mix as you know, but from a volume standpoint, we were down in Q2, which is what we're -- we saw essentially. We haven't closed yet on May -- or April, excuse me, but that's the trend that we've seen extend.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Okay, and your SG&A in the Specialty Ingredients in the quarter was -- your SG&A expense was $119 million. Is there any reason why that number should be larger in the third and the fourth quarter, or should that be a number which stays the same or decreases through the remainder of the year?

William A. Wulfsohn -- Chairman & Chief Executive Officer

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-out flow-through, we should continue to see SG&A on an overall basis continue to decline. I mean, that's -- our current estimates would indicate that.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Okay, thank you.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

When you look at it, the FX impact had a -- was very significant obviously. And 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&A line.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Okay, good. Thank you so much.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Sure.

Operator

Your next question comes from the line of Mike Harrison from Seaport Global Securities. Your line is open.

Mike Harrison -- Seaport Global -- Analyst

Hi, good morning.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Good morning.

Mike Harrison -- Seaport Global -- Analyst

Just wondering if you have been taking any incremental additional cost actions in response to the end market weakness. 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 G&A expense or incentive comp or anything like that ? Did we see any of that in Q2?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah. So to that end, we certainly are taking action and we've been working on that with the team. We were, as I mentioned, about 70% through the existing cost reduction program and we need to get through that and we need to transfer for 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 shareholder. So we're aligned in that regard.

Mike Harrison -- Seaport Global -- Analyst

And then a couple of questions related to Coatings. I guess first 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. I'm wondering also if you can maybe expand on your efforts or on your -- the comment on selling more coatings into emerging markets, maybe a little more detail and how big that opportunity could be.

William A. Wulfsohn -- Chairman & Chief Executive Officer

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, are our customers. And so it's hard for me to specifically comment there. They have an internal expression that hope is not a strategy. So we don't want to put something out there that assumes that we will 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'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 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 them, the largest paint manufacture or coatings manufacturer in China, and there are different things that they look for. Their stone texture is more important in many instances than a smooth type coating. So the rheology (ph) , differences in 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've got some really great programs that are in place. So that's what we're doing to offset it.

Mike Harrison -- Seaport Global -- Analyst

All right, thanks very much.

Operator

Your next question comes from the line of Dmitry Silversteyn with Buckingham Research. Your line is open.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Good morning. Thank you for taking my call. Just wanted to bring -- 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 (inaudible) to get your volumes and absorption. I take it to mean that nutritional products are not among your higher margin portfolio of products?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah, 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 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's less differentiated than you would have in the other spectrum of our products.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Whereas on the other end, you've got things like clarifiers for beer, wine and juices that tend to be much more specialized in higher margin. I think if you look at the three end markets we're referencing, Nutrition on an overall basis, tends to be certainly better than -- 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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Got you. Okay, that's helpful. Secondly, you mentioned that your HEC sales were up 5%. My understanding was that, at least a good chunk of HEC growth came from the Coatings market and yet the Coatings market was one of the markets you identified as being weak. So can you reconcile those for me, please?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah, 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, and making up the difference from a relatively flat coatings dynamic to our growth on the HEC. HEC was, I believe, (inaudible) we had a record production and 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. You know, we always look by markets 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 of PVP, and say how is -- how is that asset or a 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.

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

I think just to add to the commentary, the volumes that we run through areas like Personal Care tend to be much, much smaller than what -- it makes perfect sense, but they'd be much, much smaller than what we tend to run through the Coatings end market. But the profitability difference 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, certainly the Pharma space, which we're maybe the only company that actually moves HEC through the pharma space, that will help us to improve the overall mix. Whether you see it in the volume numbers or not, it 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 we have and HEC is a nice advantage for us in that regard.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Got you, got you. One final question, if I may. My understanding was that your Adhesives business is sort of leaning toward 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 asked -- the weakness in Adhesives demand is not North American Construction weather-related. What is it related to?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah. First of all, we do have Adhesives that go into Construction. I mean that's important here. 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 high beams and as a result, yeah, as that market grows, so will demand. I think the other point is, 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 feel like the business is strong and will continue to get back fairly quickly to what we consider to be more historical growth rates.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Okay. Bill, so if I understood 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 who weren't willing to pay off to the side?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah, I mean I wouldn't attribute any of this to share loss. I'd have to go through every win and loss we had and so forth. But there is nothing that comes to mind in terms of any share loss, what it can do is, it can affect timing sometimes. You know sometimes customers will buy some material before a price increase or when you're raising 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.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Okay. Fair enough. Well, Thank you.

William A. Wulfsohn -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jim Sheehan with SunTrust. Your line is open.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning. 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 North America or one region weaker than the others?

William A. Wulfsohn -- Chairman & Chief Executive Officer

Yeah, I would say that in -- as it turns out, I would say that North America really is probably the weakest end market that we -- 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 of this whole equation has been in North America.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay. And then on 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?

William A. Wulfsohn -- Chairman & Chief Executive Officer

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.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

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?

William A. Wulfsohn -- Chairman & Chief Executive Officer

We have limited visibility on orders out that far. Our confidence is really in just the discussions that we have on an ongoing basis with our customers. You see and read and -- you talked about some of our customers and suppliers and you pickup a sense of optimism that this is less fundamental, 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 on 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 toward 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. And just as we're indicating it to you, our customers have the same dialog with us.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Seth Mrozek.

Seth A. Mrozek -- Director, Investor Relations

Thank you, Bella. Thank you all for your time this morning and for your interest in Ashland. Hope everyone has a great day.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.

Duration: 42 minutes

Call participants:

Seth A. Mrozek -- Director, Investor Relations

William A. Wulfsohn -- Chairman & Chief Executive Officer

J. Kevin Willis -- Senior Vice President & Chief Financial Officer

Christopher Parkinson -- Credit Suiise -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Mike Sison -- KeyBanc Capital Markets -- Analyst

Laurence Alexander -- Jefferies -- Analyst

Josh Spector -- UBS -- Analyst

Jeff Zekauskas -- J.P. Morgan -- Analyst

Mike Harrison -- Seaport Global -- Analyst

Dmitry Silversteyn -- Buckingham Research -- Analyst

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

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