Exhibit 99.1
FINAL TRANSCRIPT
ASH - Q2 2007 Ashland Earnings Conference Call
Event Date/Time: Apr. 25. 2007 / 8:30AM ET
CORPORATE PARTICIPANTS
DEAN DOZA
Ashland - Director, IR
TED HARRIS
Ashland - President, Distribution
JIM O'BRIEN
Ashland - Chairman, CEO
MARVIN QUIN
Ashland - CFO
MIKE MEADE
Ashland - Assistant Controller
DARAGH PORTER
Ashland - VP - Fin., Treasurer
CONFERENCE CALL PARTICIPANTS
JEFF ZEKAUSKAS
JPMorgan - Analyst
MIKE JUDD
Greenwich Consultants - Analyst
JOHN MCNULTY
Credit Suisse - Analyst
MIKE SISON
KeyBanc - Analyst
LAURENCE ALEXANDER
Jefferies - Analyst
ROBERT FELICE
Gabelli and Company - Analyst
PRESENTATION
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OPERATOR
Welcome to the second quarter 2007 Ashland earnings business conference
call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being
recorded for replay purposes. I would now like to turn the call over to Mr.
Doza, Director of Investor Relations. Please proceed, sir.
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DEAN DOZA - ASHLAND - DIRECTOR, IR
Thanks. Good morning, and welcome to Ashland's fiscal second quarter 2007
conference call and webcast. We released our second quarter results at 7:00
Eastern daylight time today. These results are preliminary until we file
our 10-Q in May. With me here today are Jim O'Brien, Chairman and CEO;
Marvin Quin, Senior Vice President and CFO; and Daragh Porter, Vice
President of Finance and Treasurer of Ashland. Also with us today are Ted
Harris, President of Ashland Distribution; and Michael Meade, Assistant
Controller responsible for financial reporting.
Ted joined Ashland in 2003 from FMC Corporation and served as General
Manager of our composite polymers business for three years before assuming
responsibility for distribution last October. Mike came to Ashland a few
years ago, having served in a similar capacity for Fifth Third Bank Corp.
and succeeds Bill Thompson who had previously joined us on these calls.
Bill retired at the end of February, and we suspect he is out in the woods
right now looking for his golf ball. Now, let me give you a just quick
look, or quick outline for the call. I will review our financial results
and other businesses performances, Ted will discuss distribution's results
and the position in the marketplace, and Jim O'Brien will wind up with a
few corporate items and his outlook for the remainder of the year. After
that, we will all be happy to take your questions. Next slide.
Before we get started, let me review our cautionary language regarding
forward-looking statements on slide two. Statements will be made during the
course of this presentation that constitute forward-looking statements as
that term is defined in relevant securities laws. Such statements will be
based on a number of assumptions such as price, supply and demand, market
conditions, and operating efficiencies. Ashland believes its expectations
regarding operating performance are based on reasonable assumptions but it
cannot assure those expectations will be achieved. Therefore, any
forward-looking statements may prove to be inaccurate.
Let's go to slide three to review the highlights of the second fiscal
quarter. The March quarter was highlighted by continued strong recovery at
Valvoline. In addition, Ashland Water Technologies achieved a better
performance versus the prior year with both marine and industrial
businesses showing improvements. Also, the successful implementation of our
GlobalOne system at Water Technologies and Ashland Performance Materials
completed the unification of all our North American businesses on one
enterprise resource planning system.
Let's look at our operating income on slide four. Our businesses results
were again mixed in the second quarter. The decline in Performance
Materials income versus the prior year quarter is largely due to an
inventory adjustment and expense related items. In addition, strong results
out of Europe and Asia were offset by margin and volume compression in
North America. Distribution's income of $20 million also reflects softness
in the North American market in the March 2007 quarter. By contrast, the
March 2006 quarter reflects record results which benefited from the post
hurricane market environment.
On a positive note, however, and although not shown on this slide,
distribution's income increased 44% sequentially as compared with the
depressed December quarter. Valvoline delivered solid operating income of
$22 million for the fiscal second quarter after posting just $2 million of
income in the March 2006 quarter, and Water Technologies reported income of
$6 million as compared with a loss of $1 million in the year ago quarter.
Earnings benefited from significant improvements in the marine and
industrial businesses. Unallocated and other for the quarter was a negative
$5 million, excluding the $25 million charge for Ashland's voluntary
severance offer to corporate employees.
For the prior year unallocated and other was a favorable $3 million
excluding the $12 million of corporate costs formally allocated to APAC or
Ashland Paving and construction which was sold in August 2006. It is
important to remember that GAAP reporting requires that corporate costs
previously allocated to a discontinued operation like APAC be retained
within continuing operations. Before accounting for the impact of these
items our businesses delivered $66 million of income in the March 2007
quarter, an 8% increase over the $61 million of income for our businesses
earned in the same prior year quarter. We believe the use of these adjusted
operating incomes are appropriate to enhance understanding of our current
and future performance.
Now, let's look at slide five and our overall financial results. During the
March 2007 quarter we had two unusual items, the voluntary severance offer
just mentioned reflected in operating income and a favorable adjustment of
$18 million resulting from the improved credit quality of our Equitas
limited insurance receivable which is included in discontinued operations.
Equitas provides a significant portion of Ashland's coverage for asbestos
claims and in the prior year quarter as previously noted operating income
was reduced by $12 million due to the APAC allocation. Taking all of these
items into effect, net income was $49 million or $0.77 per share in the
2007 quarter. Net income was also $49 million in the March 2006 quarter.
However, our earnings per share were $0.67 due to the higher number of
shares outstanding at that time.
One more thing to note. Our income taxes of $15 million in the March 2007
quarter reflect an effective tax rate of 32.9% versus 9.9% in the year ago
quarter. The current year tax period was higher than our expectations due
in part to unfavorable tax contingencies. The primary driver behind the
reduced tax rate in the prior year quarter was the reauthorization of the
federal R&D tax credit as well as tax contingency adjustments. We are
estimating an effective tax rate of approximately 28% for the remainder of
the fiscal year.
Now, let's move to slide six and our operating cash flows. Cash generated
by operations less the $31 million invested in property, plant, and
equipment totaled $8 million for the March quarter. Obviously this slide
shows not only net income but also noncash charges, deferred taxes, capital
expenditures, and changes in operating assets and liabilities which is
primarily working capital. Now, let's move onto the next slide for a more
detailed discussion of changes in working capital.
As you can see from the blue line on this chart there is a definite
seasonality to working capital. To further explain what you're seeing in
this chart, let's spend a moment discussing the components of working
capital. Payables are most definitely seasonal, slowing at the end of our
September fiscal year and then accelerating toward calendar year end. This
acceleration of payables which you saw last year resulted in a significant
consumption of cash that reverses as our payables return to a more
normalized rate over the balance of the fiscal year. The increase in
accounts receivable is primarily driven by our sales mix. For example, the
environmental and process solutions business acquired last May generates
the majority of its revenue outside of the U.S. resulting in an increase in
accounts receivable as a percent of sales. As can be seen starting in the
June 2006 quarter.
Much of our revenue growth this quarter is also happening internationally
where pay practices are slower. We will continue to focus on growing our
international businesses while diligently addressing the need to improve
working capital use. Also affecting working capital, but not shown on the
slide is an inventory build as we prepared for the recent SAP
implementation in our U.S. Performance Materials and Water Technologies
businesses as well as higher costs of non-LIFO inventory.
Let's look at our operating businesses starting with Performance Materials
on slide eight. Performance Materials reported operating income of $22.7
for the March 2007 quarter. 16.5% below the $27.2 million reported for the
same 2006 quarter. A number of items led to the decline versus the prior
year. We recorded a physical inventory adjustment of $3 million. Increased
expenses also had an impact on the quarter with a $1.3 million increase in
our accounts receivable reserve and a $1.3 million increase in expenses
primarily related to casting solutions geographic expansion in Europe and
Asia.
Continued weakness in the North American automotive, residential
construction, and marine markets coupled with persistently higher raw
material costs squeezed margins and also contributed to the decline in
income. Volume and revenue growth during the quarter was aided by our
acquisition of Northwest Coatings and a 100% ownership of a former Japanese
joint venture. Even excluding the impact of these businesses, year-to-date
revenues still grew and volume was only off slightly despite the North
American softness.
Now, on to slide nine and Water Technologies. Water Technologies rebounded
from a loss in the prior year quarter to operating income of $6.2 million
in the March 2007 quarter reflecting significant improvements in our
industrial and marine businesses. Income also continues to benefit from the
contribution of the environmental and process solutions business although
to a lesser extent this quarter than the contribution from the improvement
in our other businesses. Our sharp increase in revenue but decline in gross
profit percentage also shows the effects of the E&PS operations. The lower
gross profit percentage reflects the fundamental nature of this new
business as opposed to margin degradation in our industrial and marine
businesses. Actually, the contrary is the case. After a long period of
declining margins in these traditional businesses, which together posted a
loss in the previous March quarter, both as I just noted have improved
margins and results.
Now, let's turn to slide ten and our Valvoline business. After a tough
fiscal 2006, the strong turn around at Valvoline continues. Second quarter
operating income increased from $2 million last year to $22.4 million this
year. You may recall last year that Valvoline's margins were being
compressed as a result of frequent increases in costs and a lag in
recouping these costs from the market. The return of some stability in the
cost environment coupled with the full effect of our previous pricing
actions has now enabled Valvoline to recover its increased costs from the
marketplace. This, coupled with cost saving measures resulting in lower
product costs has led to an impressive rebound in operating results.
However, margins as a percent of sales are still lagging behind historical
operating levels.
While lubricant volume declined 5.4%, the dollar impact of this decline was
actually positive due to an improvement in product mix. A higher volume of
branded products more than offset the decline in private label volume which
provided little if any income.
Let me end by noting that we're seeing very promising early returns from
our new strategy at Valvoline instant oil change. Same-store sales are
showing gains after two years of declines, and customer satisfaction has
improved significantly. I will now turn the presentation over to Ted
Harris, President of our Distribution business. Ted.
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TED HARRIS - ASHLAND - PRESIDENT, DISTRIBUTION
Thank you, Dean. Let's look at slide 11. Distribution reported operating
income of $20.1 million for the March 2007 quarter as compared with $30.4
million for the same quarter in the prior year. Continued softness in North
American industrial production particularly in the automotive and building
and construction markets which accounts for approximately 40% of our market
alignment is pressuring both volumes and margins. As Dean mentioned
earlier, our income comparison also reflects the record results we achieved
in the March 2006 quarter which continued to benefit from unusually high
hurricane related margin gains.
Also impacting this quarter was the separation from Dow in our North
American plastics business that we previously announced as well as
continued start-up costs related to our successful GlobalOne
implementation. As Dean also mentioned earlier, we are encouraged by the
44% improvement in operating income this quarter versus the December
quarter which was driven largely by both volume and margin improvement.
Let's turn to slide 12, and I will discuss our performance factors in more
detail. The termination of our North American plastics supply contract with
Dow was effective March 1, this year. As a result, a $1.5 million decline
you see in the second quarter income bridge reflects the impact of the
first months of separation. I will get into more detail relative to this on
the next two slides.
GlobalOne costs largely in overtime but also in accounting changes relative
to how we accrue freight impacted us this quarter by $1.5 million as well.
Going forward, these costs, if any should not have a significant impact.
The $4.2 million of other margin and $1.8 million of other volume
quantified the impact of the decline you saw in our gross profit percent. A
year ago post hurricane supply constraints enabled us to fully price our
products in a market that had strong demand. This year the converse is
happening. Commodity materials are more fully supplied and market demand is
noticeably softer. The result is the margin squeeze you see here on lower
volume.
Now let's turn to slide 14, and I will discuss our plastics business in
more detail. As I mentioned before our distribution agreement with Dow
Plastics ended on March 1. Let me emphasize that this is applicable to
North America only at this time. As we have previously announced Europe may
follow. Based on volume losses, but offset by some expected success in
conversion of customers to alternate suppliers, we estimate the mid-term
impact of this event will be 4 to $5 million per quarter. Today we are
working extremely hard together with our customers and suppliers to qualify
alternate products and to convert this business. To aid in this effort and
to further strengthen our supplier base as a whole, we have successfully
added three new suppliers to our portfolio--ExxonMobil, Sunoco, and BASF
are three world class suppliers with strong brand recognition and solid
cost divisions that not only help in the conversion efforts but will
position Ashland to be a stronger distributor of plastics for the future.
We're very excited about the addition of these three suppliers to our
portfolio.
Let's turn to slide 13 where you can see more of our supplier partners for
plastics. You can see that we have a very impressive portfolio of suppliers
to our plastics business. We believe that our supplier base is unparalleled
in the industry, and that we are partnered with the right suppliers to win
long-term.
Now let's look at our current strategy shown in the lower right-hand
quadrant of slide 15. Growth in targeted markets, products, and
geographies, customer satisfaction, and cost control. To achieve growth we
are focusing on global expansion of our plastics business, on developing
our capabilities emerging economies, and on further developing our
specialty chemicals capabilities.
Next, fundamental to this business is the customer experience, and we have
a good track record here. In order to move to the next higher level of
customer satisfaction, we are now focused on executing the perfect order.
The perfect order metric will enable us to better measure that experience
and as a result continually improve in the eyes of the customer.
Last, in order to achieve operational excellence, we must leverage our
significant investments in GlobalOne, salesforce.com, which is our customer
relationship management software, and our Vendavo pricing software which
will be launched first in Ashland's Performance Materials and Water
Technologies businesses this summer. Together these tools will enable
greater transparency into our business, better management of our costs and
pricing, and enhanced support of customer relationships, business
processes, and overall growth. With that, let's go to the next slide and I
will turn the presentation over to our Chairman and CEO, Jim O'Brien. Jim.
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Thanks, Ted. As you've heard, Ashland's results for the March 2007 quarter
were driven by the continuing recovery at Valvoline and improved
performance from Ashland Water Technologies. An important highlight of the
quarter was our successful rollout of our GlobalOne system across North
America so let's take a look at GlobalOne to date on slide 17.
In February Performance Materials and Water Technologies were the final two
businesses in North America to complete their GlobalOne go lives. All of
our operations in the U.S., Canada, and Mexico are now unified and
operating on a single SAP system. While we experienced some challenges in
temporary business disruptions during these change-overs, by most measures
they were quite successful. During the quarter we spent $8 million on the
GlobalOne project, bringing our total spent to date to $118 million of the
estimated $140 million total project cost. Looking forward, we have
consolidated our GlobalOne rollout in Europe to one date in early fiscal
2008. This is important in minimizing the impact on our customers and our
businesses. As a result of what we learned from our North American go
lives.
Now let's turn to our business outlook on slide 18. For the second half of
2007, Performance Materials results will in a large part continue to be
determined by the pace of volume recovery in the North American automotive,
residential housing, and marine markets. In addition, costs for a few key
raw materials remain a concern as soft market demand makes it difficult to
recover higher costs. That said, the third quarter is traditionally the
strongest quarter for Performance Materials and as such results are likely
to benefit sequentially from that seasonality.
Distribution's performance likewise depends upon the North American economy
which of course is difficult to predict. Excluding the impact of any change
in the economic environment, we would expect the quarter to benefit from
the normal seasonality of demand. However, this seasonal benefit will
likely be offset to some degree by the transition away from Dow. As we
stated, we expect the near term impact of this Dow transition to be roughly
4 million to $5 million per quarter. In the long-term, we feel our supplier
base will be much stronger and the financial efforts will diminish over
time.
As to the outlook for Valvoline, we are excited about its improved margins
and resultant turn around in performance that led to a record first half.
In light of this strong year-to-date performance, and quicker than expected
turn around in the face of stiff competition we expect to modestly increase
our marketing and promotional spending in the second half. Generally weak
demand for oil continues to be a factor for Valvoline, as well as the U.S.
motor oil market as a whole, which as we mentioned last quarter is expected
to be stable to slightly declining on an annual basis over the next five
years. Even so, Valvoline should continue to benefit from stable oil costs
and better supply. We expect a continuation of its recent strong results.
We are also pleased with Water Technologies improvement. However, much
remains to be done. Water Technologies continues to work on its business
model redesign as well as its cost cutting efforts. I am very excited about
the future prospects for water when we get these initiatives fully in
place. Just one last note on water. Please bear in mind as you develop your
models for the June quarter that in the 2006 quarter we realized a $7.6
million hedge gain on our acquisition of the E&PS business.
On the corporate front, I wanted to give you an update on our capital
expenditures for the balance of the year. Through six months we have spent
about $66 million of our $193 million budget. While we expect spending on
capital expenditures to accelerate in the second half, we are forecasting
our spending to come in roughly $30 million under our budget. As a result
of our voluntary severance plan which we discussed earlier, we expect a
reduction of 100 corporate positions by fall. When complete, we expect the
annual savings going forward to be roughly 10 to $12 million annually.
As we look forward to the third fiscal quarter, the strength of Valvoline
should more than offset the anticipated weakness from performance materials
and distribution relative to the prior year. As stated in our press
release, we expect our businesses to produce operating income that exceeds
the prior year's quarter. Obviously with Valvoline's poor results last
year, this is a pretty low hurdle. Given the seasonality of a number of
businesses, we expect a much improved quarter.
In closing, let me say we believe Ashland is well positioned competitively,
and we continue to manage our businesses to succeed in the challenging
marketplace and economic environment. Overall, we are quite optimistic
about our future. With that, we'll go to the last slide. Before we
conclude, Marvin Quin has a few closing comments, but first we'll take your
questions.
QUESTION AND ANSWER
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OPERATOR
(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jeff
Zekauskas of JPMorgan. Please proceed.
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JEFF ZEKAUSKAS - JPMORGAN - ANALYST
Hi. Good morning.
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Good morning, Jeff.
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JEFF ZEKAUSKAS - JPMORGAN - ANALYST
I guess a few issues. Two. In the Water Technologies business you're
obviously doing much better than you were year-over-year, but your
operating margin is still 3%. What's the goal? What margin do you hope to
reach, and how soon will you get there?
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Jeff, we have put a new executive in charge of that, and it is Hank Waters
and he has been working with the team over the last six months to redesign
the business going forward. We have a business model redesign taking place,
and I was just there yesterday, and we reviewed their recommendations, and
I approved them, so they're now going to start the phase of
institutionalizing it and starting to executing against them. My
expectation is that we're going to attack it in a couple manners.
One, is you need to increase the revenue on the top line. I think we have
some ideas on how to do that, and the team is actively pursuing that.
Secondly, the margin is not where it needs to be. Much of the activity is
around how we organize around our customers and service them appropriately
and at the same time have that organization structure in a manner that
increases its EBIT compared to sales. We have an objective that we stated
in the past that we want to be in closer to that 8% return on sales for our
specialty businesses, and that is still the target. It is still the
objective. As we continue to work on the business redesign, that is the
objective that they're working toward.
The amount of time it is going to take, I would say that the remainder of
this year will be around the organization and execution of how we organize
and get the business positioned. I would say that it is probably going to
take us another eighteen months beyond that before we see any significant
improvement in our margins and results, but I would expect to be able to
report at the end of this fiscal year going forward some form of
improvement against that goal.
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JEFF ZEKAUSKAS - JPMORGAN - ANALYST
That's helpful. Secondly, in Distribution there is the idea that it is
going to cost you 4 to $5 million a quarter in operating income to replace
the Dow business. Since you've already signed up ExxonMobil and a couple of
other major -- BASF, major suppliers, why does it take so long? Why isn't
just substituting one polyethylene for another, one polypropylene for
another? Why doesn't it take just a quarter or so to get this out of the
way?
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Ted.
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TED HARRIS - ASHLAND - PRESIDENT, DISTRIBUTION
The reason for that is that many of these products are highly specified
products. They're speced into applications. Much of this volume goes in the
automotive industry, and in the medical device industry, and the
specifications are very difficult to qualify a new supplier. Having said
that, we're working very aggressively with our customers and our new and
previous suppliers to do just that, but it is not a one quarter time frame
type of event. It is something that will take several years.
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Jeff, when you think about the automotive market, you think about painting,
plastics, and as you have different plastics, the same paint on them may
have different hues. It is not a quick turn. Our success to date, Jeff,
we've converted about 20%, and that 20% is what you just described. When
you can take a commodity, polyethylene or polypropylene and convert one to
one, we have done that and we've been very successful and our customers
have been very willing to work with us to make that conversion. I would say
the low-hanging fruit has been taken, and that's that 20 some odd percent.
We think there is going to be another 15 to 20% that will be completed by
year end, and this will be more commodity nature where it is more specified
and we'll go in and make the trial runs, and again our customers are
helping us with that, and we will continue to work that part of our
relationship with our customers and get those conversions completed. The
hard part is going to be on the real engineered grade resins, and we have
named BASF as a real strong partner. They are going to be -- one of the
keys moving forward on some of these more engineered products. We have some
other relationships that we have developed on a buy/sell which we're not
prepared to announce any formal relationship but we anticipate some time in
the future we will be able to make further announcements on others that
we're working with that will help us with those conversions.
For us to fully recover the volume lost to the Dow, we think it is going to
take us two years. That's going to be a mix of not only replacement of what
we lost but then also growing the business with these new supply base. We
also are given other opportunities we didn't have before inner markets and
customers, so we think it is a two-year recovery to get back to the volume
that would have otherwise been enjoyed through the Dow relationship.
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JEFF ZEKAUSKAS - JPMORGAN - ANALYST
Just lastly a couple of short ones for Marvin. What's the tax rate one
should place on the voluntary severance charge and how much of that is
cash? And secondly if you're going to come in a little bit short on your
CapEx this year, that is 160 versus 190, does that mean that the extra 30
million flops into 2008, fiscal 2008, and what's the CapEx number for '08?
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MARVIN QUIN - ASHLAND - CFO
Let me take them in order. First of all, on VSO, that is all cash over the
next few months. We would expect all payments to go out by the end of
November. I say all cash. There may be some small increase in your pension
and post retirement and medical, and most of the cash goes out. The tax
rate to think about in that is on marginal tax rate of 39%.
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JEFF ZEKAUSKAS - JPMORGAN - ANALYST
39.
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MARVIN QUIN - ASHLAND - CFO
Yes. On the margin this would have a tax impact of 39%. I should point out,
Jeff, that taxes today under the new accounting standards, that's something
that's going to bounce around a bit, so our tax rate was a little bit
higher this quarter. Many quarters we surprised you with a lower number. I
think it is unfortunately one of those things that's going to be greater
volatility, and every time we meet with a tax inspector or in a dispute in
Italy or France or wherever in the world we're going to be adjusting our
reserve. That's the reason for the 31 point whatever it was.
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DEAN DOZA - ASHLAND - DIRECTOR, IR
32.9.
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MARVIN QUIN - ASHLAND - CFO
As far as CapEx, I can think probably over the last 20 some odd years I
think once or twice maybe we've actually spent our capital budgets, so in
my mind that reduction of $30 million is really something that just flows
through to the income statement -- I mean through the cash flow statement.
Next year we'll have a budget and more likely than not we'll probably come
a little short in that budget, and that will flow to the cash flow
statement.
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JEFF ZEKAUSKAS - JPMORGAN - ANALYST
Okay. Thank you very much.
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OPERATOR
Your next question comes from the line of Mike Judd with Greenwich
Consultants. Please proceed.
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MIKE JUDD - GREENWICH CONSULTANTS - ANALYST
Good morning.
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Good morning.
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MIKE JUDD - GREENWICH CONSULTANTS - ANALYST
In Performance Materials if you look at your commentary about the June
quarter, obviously the comparisons versus last year are pretty tough, $41
million in operating profit, but the March quarter was $23, so I am just
trying to get a sense between those two and there is a pretty big
difference between those two. How should we be thinking about the June
quarter?
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MARVIN QUIN - ASHLAND - CFO
Well, we don't forecast precise numbers. What we've tried to use is our
feel. You're correct, last year the third quarter performance materials was
roughly 41 million. This is a seasonal business, and we would certainly
expect to have improvements as Jim commented. Beyond that, I don't want to
go too far. The strength we're seeing, it is almost like they are two
different situations. Domestically it feels weak, but other parts of the
world demand is strong, and it feels very strong. Unfortunately the North
America is a bigger portion of our overall business than international, so
I think you're right to view the prior year numbers as a pretty high
hurdle. We see it that way as well.
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MIKE JUDD - GREENWICH CONSULTANTS - ANALYST
Okay. And then when would we anticipate or expect to receive news about
Dow's decisions about the distribution business in Europe? Would that be
something we would expect to hear something about this quarter?
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
We do not have any new information around Europe from Dow, and we really
don't have any speculation relative to when that might come.
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MIKE JUDD - GREENWICH CONSULTANTS - ANALYST
All right. And for corporate you've been running at sort of a clean number
of about 5 million in expense. Given you're still going to be doing the VSO
work, should we expect that -- that type of run rate to be relatively flat
for the next couple of quarters, because you mentioned it wasn't until the
fall that there would actually be an impact?
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Actually we would expect -- we have already had a number of people retire.
We would expect other things being equal that 5 million to be declining. I
do need to say, though, that the nature of that account is items that tend
to be unusual either increases or decreases and environmental reserves,
things like that may well flow through that. That number will have
volatility. If you kind of cut through that, though, that number should be
declining.
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MIKE JUDD - GREENWICH CONSULTANTS - ANALYST
Great. Just lastly, on the M&A front, given the strength of your balance
sheet, anything we should be thinking about there other than what you've
already stated before that you're looking for things that are reasonably
priced?
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JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Our objective around the M&A front has not changed. We still have the
target of 100 to $500 million, but we will not rule out any value creating
transaction of size, so that's still something that we would consider. As
far as our expectations in the near term, we have spent a lot of time and
effort analyzing the type of targets that we would like to have, the type
of products, the types and technologies, the platforms we're trying to
build, so we understand fairly distinctly about what we would like to
create. Now, obviously the other side of that is finding the right
properties that would meet those criteria and buying them at a price that
create value. That's up and that's where it has been difficult, and the
market has been very strong, obviously a lot of activity in the market, but
as far as our ability at this time to find those value-creating
opportunities at a price that we believe meet our criteria has not
happened. We continue to work. We continue to study, but at this stage we
have not obviously enacted anything at this time of any size and scale for
the quarter, and I can't predict what the future will bring, but all I can
tell you is that we understand what we would like to do, and we're being
very diligent about how we go about it.
- ---------------------------------------------------------------------------
MIKE JUDD - GREENWICH CONSULTANTS - ANALYST
Thanks for the help.
- ---------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of John McNulty with Credit Suisse.
Please proceed.
- ---------------------------------------------------------------------------
JOHN MCNULTY - CREDIT SUISSE - ANALYST
Good morning. Just a few quick questions. On the private label volume that
you lost at Valvoline, was that just a supply/demand -- or was that a
demand issue or is there a contracted that may be disappearing here? What
should we be thinking about on that?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
On the private label business, the volume that we described as being lost,
we from time to time will contract with nonbranded type of companies that
need product produced, and we'll do that on an opportunistic basis based
upon how we're buying lube stock and the price and the broader margin, so
that business is not key to us. It is really helps us defer over head at
the plants. Where we really focused over the last six months is getting our
branded business up and focusing in our market share up, and also getting
our margin situated so that we can create that leverage and drive it to the
bottom line. Private label is more of a cost absorption issue where as
right now the real opportunity lies in margin leverage on the gallons that
we can produce and the branded gallon is worth tremendously much more than
a private label gallon. At this stage we're sacrificing some private label
gallons because we have sufficient branded gallons, and we're growing the
branded gallons and it has much higher leverage.
- ---------------------------------------------------------------------------
JOHN MCNULTY - CREDIT SUISSE - ANALYST
So this wasn't the one big private label customer that you have?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
No. We have several. It is opportunistic. It isn't key to the strategy.
- ---------------------------------------------------------------------------
TED HARRIS - ASHLAND - PRESIDENT, DISTRIBUTION
John, if you'll notice, think of it as an income bridge, that lost volume
actually improved our profit which said on a full cost basis it wasn't
recovering its full cost.
- ---------------------------------------------------------------------------
JOHN MCNULTY - CREDIT SUISSE - ANALYST
Okay. Fair enough. On your CapEx, the coming in $30 million lower, I mean,
I understand fiscal responsibility and you want to be as tight as you can
but you guys have more cash than you almost know what to do with. Do you
just not have the opportunities there or what's kind of holding back your
CapEx because you're one of the few companies that really doesn't
necessarily have to worry about that.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
We look at our CapEx obviously we're going to spend it on projects that
meet the return, but I think the issue will not be able to fully extend
what we forecasted for CapEx this year is more around how the projects have
been through the design process, getting all the materials prepared to
actually start construction, getting the construction crews on site. It is
more of a planning and a permitting process, so I think it is more around
the execution of the plan versus trying to reduce the actual expenditure,
so it is more around not being able to get it done versus just trying to
reduce the amount of cash that we're expending, so I would look at it more
that way. So as you go into next year these projects will be deferred in
next year's budget. So depending upon what we see as new plans, the budget
may go up slightly. We haven't done our 2008 budget yet in detail, so I
can't give you precise numbers, but those projects are being basically
deferred into future months for completion.
- ---------------------------------------------------------------------------
JOHN MCNULTY - CREDIT SUISSE - ANALYST
Okay. Great. The last question is I believe your '05 IRS ruling is
supposed to come sometime this summer. That, if I remember correctly is
what will help to free up the cash that you have sitting on your books
right now for other opportunities over and above just acquisitions. Can you
give us some thoughts as to what your priorities might be for that cash at
this point?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
You asked a couple questions. Let me start off. First of all, we don't have
any ruling requests into the IRS. I think what you're referring to is that
we said that we expect to close out the tax year, the short tax year of
June 30, 2005, the period in which the transaction occurred hopefully this
fall, and obviously that audit is going on now, and it is pretty much as
expected, and I can't be precise on the timing because that's very much up
to the IRS. I think the context of your question is if we had made certain
representations to the IRS as it relates to our intended use of the
proceeds and once that tax year is audited, completed, the effect of those
representations in essence is pretty much null. I think we've certainly
indicated, our reputation was our intent, and we clearly intended to
reinvest proceeds, and we've done a tremendous amount of effort and time
trying to find those reinvestment opportunities.
As far as liquidity, we have, John, both the cash and the debt capacity we
would hope to redeploy that. If opportunities do not come up at some point
in time we'll certainly consider returning that to shareholders. That could
be done either through a dividend or stock repurchase. But at this point in
time it is our intent to maintain that liquidity and look for opportunities
to grow the Company.
- ---------------------------------------------------------------------------
JOHN MCNULTY - CREDIT SUISSE - ANALYST
Okay. Great. Thanks for clearing that up.
- ---------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Mike Sison with KeyBanc. Please
proceed.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Hey, guys.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Good morning, Mike.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
In terms of Performance Materials I haven't heard many companies have
reported in my space that is looking for much of a recovery here in the
June quarter from residential housing, marine markets. You have three
businesses there in that segment, adhesives, thermo start resins, and the
foundry business. Could you just give us a sense sort of what the
assumptions are, where you see the sequential improvement in those three
businesses?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
I think what we've tried to communicate in the call and in the release is
that we see softness in the market generally, so if you had to comp against
last year, we're saying we're not going to hit that comp.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Right.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
What we're also saying -- we're also entering the more seasonally high
production part of this particular economic cycle in the year, so we would
anticipate that at the consumption of these types of products even though
the market is weak, this is the highest consumption period of these types
of products.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
You're sensing to some degree sort of a seasonal up trend from customers
going into the June quarter?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
That's right. There is a seasonal up lift that will result in the
performance of these businesses being higher than the previous quarter but
because of the demand constraints, we don't anticipate it seeing as strong
as last year.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Right. When you think about the three businesses, they're pretty much
different. Any of the three seeing a more pronounced seasonal up lift, all
about equal?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
When you take a look at the three, the one is probably being hurt the most
is the casting solutions.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Okay.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Primarily there it isn't necessarily volume per much. It is kind of around
a margin because the automotive, as we all know with what automotive is
going through, it is very difficult to get pricing, but it is not
disastrous, but that's probably where we're getting the most difficulty,
and of course performance with composites is related to housing, and marine
to a certain extent, but we also have some very strong DERAKANE positions
where infrastructure is still being built is using these products, and
adhesives is a combination of consumer as well as industrial. So it is kind
of mixed, but our broader guidance I think is probably the best we can do
to help you out.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Okay. Then Valvoline with lubricant gallons being down, I just wanted to
make sure I understood. Your branded volumes were up year-over-year VIOC,
same store sales were up year-over-year, and it was just simply the private
label volumes that were down, and they must have been down pretty big to
have the down quarter?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
You mean as far as the volume?
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Correct.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
I mean if you look at private label, private label as a component of the
total production is sizable. We produce a lot of private label gallons, so
to lose 5% or to gain 5% in our view isn't that dramatic on the private
label side. If that was branded product, that would be a very serious
situation, but in private label it is not because again as I said it is
more used as absorption of overhead than it is derive of margin.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Going forward, with the promotional efforts, the improvements in customer
service to VIOC, those two businesses will continue to see up volumes while
branded will remain down year-over-year for the rest of the year?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
You mean private label will remain down.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Right.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
But we fully expect the branded business in the VIOC business to continue
to improve.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Okay. Last question. Corporate expense, I think you guys were looking for a
minus 7 to 10, it came in at minus 5. What sort of improved there in the
quarter and I guess I am just trying to get a feel the number keeps
fluctuating every quarter.
- ---------------------------------------------------------------------------
MARVIN QUIN - ASHLAND - CFO
And it likely will unfortunately. The very nature of that is in your
closing process that's one of the last things that we really get a good
feel for. Any adjustments as we go through our closing periods we look for
where perhaps the reserve is needed, are they adequate, are they excessive,
for all kinds of different items, so you are really into your closing
process before you get a good sense for that number.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Wasn't most of that distributed to the segments and I guess why is it going
to be up in '07 versus '06?
- ---------------------------------------------------------------------------
MARVIN QUIN - ASHLAND - CFO
Well, obviously the VSO, if you're looking at total, the VSO is--.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Excluding the VSO.
- ---------------------------------------------------------------------------
MARVIN QUIN - ASHLAND - CFO
Go ahead, Mike.
- ---------------------------------------------------------------------------
MIKE MEADE - ASHLAND - ASSISTANT CONTROLLER
Yes, Mike, one thing to consider is we did have a credit in the prior year,
approximately about 5 million from an NOIL recovery. That's impacting the
comparison a a little bit there as well.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
On an annualized basis, sort of maybe 25 to 30 million is maybe an easier
way to look at it?
- ---------------------------------------------------------------------------
MARVIN QUIN - ASHLAND - CFO
I would hope we would do better than that, but it could be that high.
- ---------------------------------------------------------------------------
MIKE SISON - KEYBANC - ANALYST
Okay. Thank you.
- ---------------------------------------------------------------------------
OPERATOR
(OPERATOR INSTRUCTIONS) Your next question comes from the line of Laurence
Alexander with Jefferies. Please proceed.
- ---------------------------------------------------------------------------
LAURENCE ALEXANDER - JEFFERIES - ANALYST
Good morning.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
Good morning.
- ---------------------------------------------------------------------------
LAURENCE ALEXANDER - JEFFERIES - ANALYST
I guess first question is on casting solutions. Can you discuss the margin
trends on a regional basis that is North America versus the international
business?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
We don't really go to that level of detail, but the real issue around
castings is just broadly the automotive marketplace is under a lot of
stress, and it is becoming more difficult just to pass through costs, but
it isn't dramatic. We're not talking about huge margin differentials, but
there is a softening taking place. As the castings business, the way it
operates is the business is a worldwide business. Part could be made in
Mexico this year, it could then move to China, it could move to Eastern
Europe, so it moves quite dramatically, and as the automotive companies
decide where they're going to produce their parts, we follow that, and we
have an extensive network of operations that we can capture that business
almost any place it lands in the world. Overall, the -- I think the
business is performing well in light of the issues being presented to it
through the automotive industry.
- ---------------------------------------------------------------------------
LAURENCE ALEXANDER - JEFFERIES - ANALYST
But if we look out three to five years, what's your confidence level that
margins in that business will be flat or up?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
I would say from knowing where the automotive industry is today, I would
say that depends upon what raw materials do, they could improve with a raw
material improvement. If everything stayed exactly the way it is today, it
would be flat.
- ---------------------------------------------------------------------------
LAURENCE ALEXANDER - JEFFERIES - ANALYST
And I guess secondly on distribution, now that you have the North American
GlobalOne implementation done, can you discuss just with respect to North
America how GlobalOne will affect distribution over the next three to four
years?
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
When you look at GlobalOne, I will let Ted answer for distribution. I will
just talk generally about GlobalOne. The whole concept of putting the
Company on GlobalOne was to get it on a single ERP so that we could create
some leverage in how we approach our costs and understand our raw materials
and our margins so that we can price better and all of the things that go
with that with transparency of data. The next phase that we're going to
move into next year is actually doing things that will affect our inventory
turns, our ability to collect receivables, and actually start getting the
benefit of GlobalOne as we put other systems on top of it that will provide
tools to help us manage the business better.
I am quite pleased that we have been able to demonstrate that Ashland as a
company as diverse as it is can operate on a single ERP. That's giving us
initial cost savings, just some initial efficiency, but I see the next two
to three years really being able to impact the real reason why we did this
which is improve our business processes and lower our costs and increase
our cash flow. I will let Ted demonstrate what he thinks it is going to do
for his business.
- ---------------------------------------------------------------------------
TED HARRIS - ASHLAND - PRESIDENT, DISTRIBUTION
I think what Jim said for Ashland really holds true to Distribution.
Distribution was already on SAP, so we had some benefits from having a
single ERP system in our North American business, but the real value will
come in the coming years as we add increasing capabilities to SAP to really
focus on better working capital management. I think that really will be the
opportunity that will be unleashed with the better processes and the better
transparency that comes with the GlobalOne system for Distribution.
- ---------------------------------------------------------------------------
LAURENCE ALEXANDER - JEFFERIES - ANALYST
With these initiatives over the next few years is there any reason why your
SG&A won't converge to closer to -- as a percentage of sales to closer to
your peers?
- ---------------------------------------------------------------------------
TED HARRIS - ASHLAND - PRESIDENT, DISTRIBUTION
Well, our businesses are very different, and I think it is dangerous to
make assumptions on our SG&A versus peers. Also, you will find that
companies define certain costs in cost of goods sold and others do it in
SG&A, so I don't think we want to make those comparisons.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
You probably don't want to compare against our peers. But absolutely what
we're trying to do is one of the primary focuses of GlobalOne is to reduce
our costs and increase our efficiency. Directionally that is one of our
primary objectives as a company. We will continue to put pressure on that
and continue to work the necessary opportunities that we had before us to
achieve that. That is still a strong objective of ours.
- ---------------------------------------------------------------------------
LAURENCE ALEXANDER - JEFFERIES - ANALYST
Thank you.
- ---------------------------------------------------------------------------
OPERATOR
(OPERATOR INSTRUCTIONS)
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
If we don't have any more questions, Marvin has got a quick few comments
here we would like to take an opportunity to have him state those before we
close out the call.
- ---------------------------------------------------------------------------
OPERATOR
It looks like you have one person that just queued up.
- ---------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND - CHAIRMAN, CEO
We'll take that as the last question and then Marvin will close out the
call.
- ---------------------------------------------------------------------------
OPERATOR
Your final question is from the line of Robert Felice with Gabelli and
Company.
- ---------------------------------------------------------------------------
ROBERT FELICE - GABELLI AND COMPANY - ANALYST
Most of my questions have been answered. Just one quick one. Trying to get
my hands around the size of the Dow Europe relationship and really just
wondering what's the potential revenue and operating income that's at risk
if they choose to end that relationship in Europe?
- ---------------------------------------------------------------------------
TED HARRIS - ASHLAND - PRESIDENT, DISTRIBUTION
Our purchases from Dow in Europe total approximately $60 million U.S.
- ---------------------------------------------------------------------------
ROBERT FELICE - GABELLI AND COMPANY - ANALYST
Okay. I would imagine that's a similar margin to the overall level of the
business.
- ---------------------------------------------------------------------------
TED HARRIS - ASHLAND - PRESIDENT, DISTRIBUTION
That's a reasonable assumption, yes.
- ---------------------------------------------------------------------------
ROBERT FELICE - GABELLI AND COMPANY - ANALYST
You thanks so much.
- ---------------------------------------------------------------------------
MARVIN QUIN - ASHLAND - CFO
Thank you, Robert. Let me just take a few minutes here and make a little
bit of an announcement. After 30 years with Ashland, Daragh is going to be
retiring at the end of May to spend a little bit more time sailing, maybe a
lot more time sailing and a little bit more time volunteering. You're
probably thinking that she seems awfully young to be retiring, we must have
hired her out of middle school. Well, that's her story. Daragh has held
several positions of leadership throughout the Company. She has had
leadership jobs in accounting, HR, internal audit, and now she is our
Treasurer. She was the first Treasurer of the Marathon joint venture and
later President of the Pipeline Company. I know from comments that I've
received from a number of you, you have enjoyed working with her and will
wish her well in her new endeavors. With that, we wish you well, Daragh,
and we thank you all for joining the call and look forward to speaking to
you in July.
- ---------------------------------------------------------------------------
DARAGH PORTER - ASHLAND - VP-FIN., TREASURER
Thank you.
- ---------------------------------------------------------------------------
OPERATOR
Ladies and gentlemen, that concludes the presentation. You may now
disconnect. Have a great day.
- ---------------------------------------------------------------------------
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