Jason Thompson - Director of Investor Relations J. Kevin Willis - Senior Vice President and Chief Financial Officer James J. O'Brien - Chairman and Chief Executive Officer Luis Fernandez-Moreno - Senior Vice President and President, Ashland Specialty Ingredients.

John McNulty - Credit Suisse Jermaine Brown - Deutsche Bank Robert Walker - Jefferies & Company Brian Maguire - Goldman Sachs & Co. Michael J. Harrison - First Analysis Securities Corporation Dmitry Silversteyn - Longbow Research James Sheehan - SunTrust Robinson Humphrey, Inc. Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc. .

Good day, ladies and gentlemen, and welcome to the Ashland Incorporated First Quarter Earnings Conference 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 introduce your host for today’s conference, Jason Thompson, Director of Investor Relations. You may begin..

Thank you, Nicole. Good morning, and welcome to Ashland's first quarter fiscal 2014 conference call and webcast. We released preliminary results for the quarter-ended September 31, 2013 at approximately 5 PM Eastern Time yesterday, January 27 and this presentation should be viewed in conjunction with the earnings release.

Additionally we posted slides and prepared remarks through our website under the investor relations section and have furnished each of these documents to the SEC in a Form 8-K.

On the call today are Ashland's Chairman and Chief Executive Officer, Jim O'Brien; Kevin Willis, Senior Vice President and Chief Financial Officer; and Luis Fernandez-Moreno, Senior Vice President and President of Ashland Specialty Ingredients.

As shown on slide two, our remarks today may include forward-looking statements as that term is defined in securities laws. We believe any such statements are based on reasonable assumptions but cannot assure that such expectations will be achieved.

Please also note that during this presentation we will be referring to adjusted results in the year-ago period. We believe this will enhance understanding of our performance by more accurately reflecting our ongoing business. I will now hand the presentation over to Kevin for a summary of the first quarter results..

Thanks Jason and good morning. As Jason indicated we released our first quarter preliminary financial results yesterday. So we will begin with a brief review before I hand it over to Luis. We reported earnings of $1.42 per share from continuing operations. We had no key items during the quarter.

This compares to adjusted EPS of $1.12 in the year-ago period. Ashland’s overall sales were flat with the prior year, $1.9 billion. These results were negatively affected by guar, intermediates and solvents, and elastomers. Combined sales for these more commoditized products declined $45 million.

Excluding this effect, Ashland’s overall sales would have been up 2% versus prior year. Overall, volumes were up 3% from prior year with each of the commercial units posting gains. Specialty Ingredients was led by solid performances from coatings and personal care.

Within Water Technologies, the industrial water business successfully closed several new accounts in the refining and chemical processing markets. This business has turned the corner, posting the first year-over-year improvement in sales and profitability in several years. Performance Materials turned in a solid quarter.

Excluding elastomers, which remains hampered by a challenging replacement tire market, volumes in the core business grew 6%. Valvoline showed particular strength from two key growth platforms; Valvoline Instant Oil Change and the international business. Combined these two businesses posted volume growth of 8%.

Now for a few corporate items; capital spending was $52 million for the quarter. Our full year 2014 expectation remains unchanged at $275 million. Working capital investments led to a $15 million use of cash in the first quarter. This was driven by customary year-end payments and investments in inventory.

In the March quarter we expect we expect to generate free-cash of approximately $100 million. I'll now hand the presentation over to Luis for an overview of ASI’s strategy. .

Thank you, Kevin and good morning. Before we get to some of the strategic initiatives we are launching I would like to take a moment to highlight the quality of the portfolio within Specialty Ingredients.

We have a unique position within the specialty chemicals market as we are a leader in both cellulosic and synthetic polymers, such as vinyl pyrrolidones. These strategic platforms are supported by strong position in adjacent chemistries such as vinyl ethers, preservatives and guar-based derivatives.

This competitive advantage gives us access to a wide range of customer applications and provides an opportunity to increase our market share over the long-term. Today roughly half of our business serves highly regulated more consumer-facing markets, such as pharmaceutical, nutrition and oral care and skincare.

These markets require significant technical expertise, investments in research and development and high touch technical and customer service. The other half of our customers business -- of our business serves industrial markets such as coatings, construction and energy.

Although customers in these markets require innovation and technological strength from our products they do not require the same level of regulatory and service report as our consumer-oriented customers. Regardless of where we compete one theme remains pervasive.

We build, sell and support highly technical, tailor-made functional ingredients, specifically designed to address critical concerns in each of the marketplace. As you see in the slide we are making several structural changes to how we operate business.

All of this is focused on aligning our organization to address opportunities within each market in which we participate. In order to accomplish this we are taking four primary steps. First, we're increasing focus on our specialty business.

We are moving intermediates and solvents business over to Ashland Performance Materials and moving the adhesives business from Performance Materials to Specialty Ingredients. The intermediates and solvents business serves a primary role of supplying reliable and low cost components to our vinyl pyrrolidone franchise.

However it also serves the merchant market, supplying BDO and specialty solvents. It operates with a focus on cost effectiveness and asset management. The APM model is consistent with this approach and the APM team is well equipped to run this business.

The adhesives business shares many of the same characteristics of our existing Specialty Ingredients business, including technological innovation, high levels of customer and technical service and tailor-made application development.

By combining the adhesives business with ASI's existing adhesives platforms both will benefit from mutually shared application development and technical expertise. Today the adhesives business generates 90% of sales in North America. Leveraging ASI's global sales channels should enable both geographic and market growth.

The second primary step we are taking is a broad reorganization of ASI into two business units from six today. This will be aligned along customer needs, a consumer specialty business and an industrial specialty business. This will not only reduce cost but will increase our capability to more effectively serve customers with similar needs.

Third, we are moving to a regional management structure and reducing the existing management structure. This gets us geographically closer to our customers and improves alignment of our technical and customer service representatives to capture geographic specific opportunities.

In addition this will reduce cost and enhance growth in key emerging markets. Lastly we are rightsizing the existing support structure to drive efficiency and effectiveness. Today we dedicate too many resources to support lines of business and their customers where a high touch model is not valued.

We're also rationalizing our physical footprint of offices. This will consist of reducing the number of rooftops currently employed and maximizing utilization of the most cost effective units within the system.

The net result of these efforts is a smaller, more customer-centric, nimble organization with higher levels of customer service at a reduced cost while still being well positioned for growth. Let's go to the next slide. I have identified three specific areas of focus for business performance; growth, pricing and competitiveness.

The fundamental market trends supporting strong volume growth have not changed. Emerging markets continue to grow and so does the middle class consumer base within them. This is a key demographic for our technologies particularly for our consumer specialties business where we provide functional additives for hair oral and skincare products.

Within the developed world, particularly North America, Western Europe and Japan and Asian demographics should continue to generate higher demand for our products sold into various healthcare-related end markets such as pharmaceuticals.

Through our regional model foster an increased customer intimacy we can leverage these mega trends to develop tailor-made products designed to meet distinct economic and cultural requirements, ultimately driving top-line growth. The second area of focus is pricing.

By increasing collaboration to develop new products and applications we increase our differentiation in the marketplace. We expect this to result in improved product mix for us and enhance value for our customers.

At the same time increased levels of product availability and higher levels of technical service combined with a disciplined approach should allow us to come on the price that fully reflects the value of products and services offered. Finally, the restructuring will deliver a better cost model.

By leveraging our recent investments in information technology we enable efficient and effective global processes that can be managed on a regional basis, ensuring tailored customer experience around the world. This will be achieved by less management, fewer layers in organization and a simpler equation model.

In summary, the structure of our design increases our regional customer focus and in turn leads to volume growth and higher margins. I will now turn the presentation over to Jim who will provide his closing thoughts..

We were encouraged by the strong performance in several areas of the business in the first quarter. Specialty Ingredients posted volume gains in five of the six segments. Only Performing Specialties posted a decline. Personal care had exceptional performance out of Europe. Their volumes grew 18%.

This volume growth was primarily concentrated within our skin and oral care lines. The inventory challenges we faced in Europe last fall were resolved in the first quarter and inventory levels are now balanced to meet customer needs. Water technology continues to improve. This was the third consecutive quarter of year-over-year sales and profit growth.

Industrial water’s performance improvement coupled with pulp and papers consistently strong performance highlights the quality of the business. Performance Materials had a strong quarter.

The Adhesives business experienced a significant increase in both volume and profitability driven by growth in automotive, housing and packaging and converting markets. Successful diversification efforts in Asia led to a 5% year-over-year increase in composite sales. Ashland consumer markets international business had another solid quarter.

Overseas markets are particularly important for growth in Valvoline. The team had another strong quarter, executing on our international strategy, growing volume by 10% versus prior year.

Another key area for growth in the Valvoline business is within quick lubes, especially our Valvoline Instant Oil Change network of roughly 900 company-owned and franchise stores. Year-over-year company-owned same-store sales growth was 4.7%, which led to a $2 million increase in earnings.

When considering Ashland’s overall performance I am encouraged. While sales were flat due to weaknesses in some of our more monetized businesses each of our core commercial units reported volume gains over the prior year. As we look to the second quarter we expect sales to increase leading to a slight improvement in EBITDA margin.

Let’s turn to slide seven for final thoughts. As we move into the new calendar year we will maintain our focus on executing initiatives to create shareholder value. We have several initiatives underway and I am pleased with our progress on each of these.

I am encouraged by the level of interest in the water technologies business and continue to expect we’ll have a formal announcement on the sales of business during the March quarter. We expect the primary use of the net proceeds from the sale to be a return of capital to shareholders in form of share repurchase.

We provided a substantial amount of information on the global restructuring program in yesterday’s release, so I will not elaborate in great detail here. I will say however that I am pleased with the progress. Once fully executed Ashland will be well equipped to serve our customer’s needs in a more efficient manner.

We will be a smaller, more nimble organization managed on a more regional basis getting us much closer to the customer. Pushing the supply chain out into the businesses will improve customer and market focus and increase operational accountability.

Ultimately the streamlined Ashland will operate at a lower cost position while also being better positioned for growth. With respect to our overall corporate strategy, management and the Board will continue to review our portfolio in order to best position the company for long-term value creation for our shareholders.

Our goal is to create the world's best specialty chemicals company and we are committed to taking the necessary steps to make this happen. With that I'll hand it over to Jason for Q&A. .

Thanks, Jim. Nicole -- before we begin, let me note that we would like to limit each participant to one question and one follow-up. Nicole I'll hand it over to you..

Thank you. (Operator Instructions). Our first question comes from the line of John McNulty of Credit Suisse. Your line is now open. .

Yeah, good morning and thanks for taking my question.

I guess for the first question, with regards to the restructuring and in particular around the Performance Materials segment, it looks like you have migrated up, kind of what I would have viewed as maybe the crown jewel of that business and you've put maybe one of the more difficult businesses, your BDO platform into that.

And I guess I am wondering what kind of potential you may have in terms of maybe separating yourself from the Performance Materials into the unit, that maybe something that you would consider or can consider even structurally kind of going down looking out over the next few years or so?.

As we look at the reasons behind the reorganization we are taking today we are focused primarily on how do we operate these businesses.

And when you look at the skillset that Performance Materials has they can take the businesses like BDO and put it into the low cost model and operate it in a manner that we believe will optimize its results and give us the best chance to run in a good strong manner for our shareholders.

The focus that we've had is that business created a lot of uncertainty around ASI. It’s more volatile, its margins are going up and down based upon the price of BDO.

So we think by putting it into that segment it won’t change certainly the volatility but it will isolate it into a business that is used to having that type of volatility and I think it will enhance the ability of our shareholder base to understand how ASI truly is growing and operating and it won't be masked by the changes in the BDO.

Concerning the second part of your question will it make it either easier or more difficult to look at alternative values for that, as I stated in my summary the Board continues to look at all aspects of the portfolio to find the right mix of assets and the right form of the assets as we go forward.

We don't rule anything out but we are also very focused on getting things done in this particular time frame. And our primary focuses today are getting the cost take out and the restructuring done, so we can become a better competitor in the marketplace at a lower cost.

That will take a lot of effort and a lot of focus by the management team and we want to get that right because we think that this year going into '15 that's going to be critical to our success.

So that's going to be our primary focus as well as we sell the water business, turning that into a different ownership and extracting for the company will take a lot of effort and focus as well. So our plate is pretty full.

So as we look at the strategy going forward we are not ruling anything out but we have a pretty important set of assets and initiatives underway today that we've got to get right. .

Okay. Now thanks very much for the color and that's definitely helpful. Just one as the follow-up. On Valvoline it looks like the raw materials are starting to become a decent tailwind for you and I know there is a bit of a lag benefit that you should be getting.

I think in your comments or in part of the release yesterday it indicated that FX was going to largely eat a lot of that up. Looking at kind of your geographic mix I am not exactly sure why that would be the case.

So can you help us to understand what maybe kind of driving that in terms of some of the FX challenges, is this kind of one-off around Argentina or something like that maybe we are not considering?.

Yeah really a big part of that’s driven by the Australian dollar and the weakness that we have seen there, plus continued expected weakness. Obviously if the Aussie dollar stabilizes, then I believe you are right we would see a tailwind in the Valvoline business.

We’re just trying to be cautious about world currencies given the level of volatility that we’re seeing there but that’s the biggest impact..

Great, thanks very much for the call. .

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

Hi, good morning. This is Jermaine Brown filling in for David Begleiter.

Relating to ASI on a pro forma basis how would the segment have performed if you included adhesives and excluded I&S?.

That’s actually not something that we’re prepared to disclose at this point. We don't tend to get into the individual components of our operating segments. That’s not really an area we can go with you..

Okay.

Regarding the restructuring benefits, how do you see it flowing on a segment-by-segment basis?.

Well as you heard and Luis talked through the restructuring around ASI I think what you should assume is that a large portion, the majority of the restructuring benefit would accrue to ASI.

You will see the largest change from a commercial perspective in the ASI business as ASI also uses a large portion of what’s currently our global ingredient supply chain. You will see benefit flow through from that as the supply chain organization is integrated into ASI.

Likewise from an overall support perspective ASI currently picks up an outsized share of the overall support structure. So I think as we execute on the restructuring and see the benefits of that start to roll through the P&L ASI will be the beneficiary of a good portion of that.

Looking at the other units obviously Performance Materials runs pretty lean today. So you would see them as probably being the least beneficiary of that, then Valvoline somewhere in the middle. The other part that I will bring out as further point part of the emphasis for this restructuring is that we’re increasing our water business.

As we’ve indicated we would expect to see about $70 million of stranded cost once that business is executed. For a period of time that will be offset to some degree as we offer a support structure to the ultimate buyer of that business for a period of time.

So there will be something to offset in the mix but that do have to cover all of those stranded cost plus significantly more to arrive at $150 million to $200 million. But we have good solid plans in place to do that and I am confident that we will achieve the objectives. .

Thank you. I will hop back in the queue..

Thank you. Our next question comes from the line of Laurence Alexander of Jefferies. Your line is now open..

Good morning this is Rob Walker in for Laurence. Hi guys.

I guess first, given the slow start to ASI and your outlook comments on Q2 can you give us an update on your full year outlook for profits for that segment?.

Yeah I mean obviously we expect to see continuous improvement on the business both I mean as you know Q4 is our seasonally lowest. So we expect to see continuous improvement, especially starting with the next quarter where we expect our margins to get back into the 20% range.

And as start seeing the benefits of the redesign, not only from a cost perspective but from an operational model perspective, we expect to see improvements on a quarterly basis.

Now we’ll still see the headwinds on the I&S business so net-net I mean we still expect the combination of those two, their improvements when they sit together with the I&S headwinds to put the total business roughly flat with prior year..

As a follow on to that as Jim indicated we do expect to be able to announce the water transaction in the March quarter.

As part of that it will be our expectation that we would move all of the water business into discontinued ops and as a result of the work and effort required to do that it’s the same team that actually recasts our segment reporting, so we would expect to continue to report I&S, the intermediates and solvents within ASI for the March quarter and adhesives -- [inaudible] for the March quarter and then flip those in to June quarter as we move down the path of restructuring and have the resources to get that done in appropriate way as we have to recast our prior results as part of that effort.

.

Hey, thanks, and then just on the restructuring how much of the relocated personnel will be in sales or R&D?.

Very, very little. The vast majority of role relocation will be more support related and in fact if you look at the restructuring on an overall basis there will be pretty minimal impact on an overall basis for customer facing roles.

As Luis indicated this is about how we support the business, it's about getting closer to the customer and the importance of that, then ultimately the way we support the business we have to get streamlined and much more efficient about that. .

Thank you. .

Thank you. Our next question comes from the line of Brian Maguire of Goldman Sachs. Your line is now open..

Hi, good morning. Maybe just a follow-up to that last question, just the absolute numbers of headcount that you are talking about are pretty large and as a percentage of the company I think a little bit more than 10%.

I am guessing some of that will be for water but just a level of a sense of your comfort that, that is the right number to be taking out of the system and that won't have any impact on the customer service levels and are you expecting any negative impact on sales on at all or do you think that you are comfortable that this will go through without any disruption to the customer orders?.

When you take a look at the effort that we are putting to this and the thought that's already gone into it and planning the primarily focus has been how can we improve our relationship with our customers and our service to our customers, and get our products and services that they demand and the right position.

So where we started with was how we improve that relationship.

So the focus then is on how do we get sales person more engaged, how do we get the supply chain more engaged so that these needs are being communicated down to the plant level so that we can produce the right level of inventory and get orders on time, and get the right products delivered on time, have the right products in inventory.

So all this is by improving service levels and improving the sales person's ability to walk into a customer and say not only have I serviced you well in the past I intend to service you better in the future.

And frankly that's been an issue for us during the reorganization that we took putting ASI in the old, putting these businesses together and using the same processes and procedures that we had encumbered the business. So we are going to unchain so to speak from the businesses and then the outcome is fewer layers.

We're going to have fewer, a much smaller metrics if any metrics on certain parts of the business. So the biggest impact is going to be on the supply chain.

And by taking water out of the processes and not having this big service component with water, changes our whole approach about how we can now interface with our customers and the whole business model changes.

So this is an opportunity for Ashland to actually set together a business design that truly is for a singular business model, primarily for ASI, how can we run ASI the best way. So that’s how we thought about it and then the outcome of that is the job eliminations that you saw.

We didn't take the job eliminations and then tried to do a design we did the design first and the outcome is the job eliminations. So as I sit here as a CEO I am less worried about our ability to service the customers.

The whole purpose of this is to make it better and more streamlined and have the customers actually feel a difference of how they are being served. .

Great, thanks for that explanation and then just a follow-up for maybe for Kevin if I could, I think a big portion of your BDO \sales are internal to ASI. I am just curious as that shifts to a different segment how the transfer pricing will flow between segments at cost to the market? Thanks. .

All right. Typically the way we do transfer pricing on a U.S to U.S transfer within the segments is, it’s typically a cost plus arrangement. Frankly we are still discussing exactly how we will do that but at the end of the day any inter-company profit gets eliminated anyway.

So what we want to be is fair and transparent about that as possible internally. So I don't expect that to be an issue is the short answer. .

Okay. Thanks very much. .

Thank you. Our next question comes from [Permet Ruslan] of KeyBanc. Your line is now open. .

Good morning guys.

Taking a full sight to the restructuring and the cost savings, are there any opportunities that you might see for investment whether it’s to bolster innovation or R&D pipeline or increased touch points for collaboration with customers?.

Yeah, absolutely. This is Luis.

And one of the things that we are doing with the redesign is by focusing organization more in a regional fashion and having the technical service teams dealing with the customers on a regional basis, even global customers, they have unique formulations that are tailored to the both cultural as-well-as ethnic needs, especially on the care markets.

And that focus of being able to work with a customer on location and then driving them to the centers of excellence in R&D will allow us to innovate closer to our customer, and as I mentioned in my remarks generate more value for them and with also improving our mix.

So there is no question that with a redesign and by having that focus of our technical service teams in a regional fashion will enable us to do further innovation. ASI as a whole has really a tremendous capability to innovate from a technical perspective.

That part is there, so what this enables us to do is to get an existing capability on our understanding of the polymer side or formulation science to have very specific needs of a customer in a region in a location and driving correct rhythm by the consumer needs in that specific market. So tremendous potential there, absolutely. .

Great. Thanks. And just a follow-up, the adhesives business process, you pointed out some business trends there.

Any commentary on what you are seeing currently in the underlying markets there?.

When you look at our broader markets we were encouraged by what we saw coming out of China. You know all the news that you read everything is under some sort of threat, or a downturn that maybe eminent but as far as some of our key markets over there we've not seen lot of change.

And even in Europe as we went into Eastern Europe and parts of Russian Europe with our care products, skin care and oral care we had an increased penetration in these markets. So going through the question you had with Luis as far as are we having success with our innovation and with our relationship with our customers, the answer to that is, yes.

So as we see that being achieved, as we look at the redesign we are trying to make that even better, so that as we go into some of these emerging markets and in growing markets overseas such as Brazil or Asia and eastern Europe, we will be more effective there. And we are seeing results, we will enhance those results and make them go faster.

So the redesign is to encourage that and hopefully we will see that with additional penetration what we saw this past quarter. .

Fantastic. Thanks guys. .

Thanks. .

Thank you. Our next question comes from the line of Mike Harrison of First Analysis. Your line is now open. .

Hi. Good morning. .

Good morning, Mike. .

Just looking at the SG&A cost, you called those out as the headwind year-over-year and it does look like SG&A ticked up in all segments. Is that just normal salary increases that we are seeing kick in there or were there some different issues across this segment.

Just trying to get a better sense of is the Q1 run rate a good number to use for the rest of the year or should we see those move kind of higher or lower?.

Well. As we execute on the restructuring which we have a bias to do as quickly as practical ultimately we should see those number tick down for each businesses. And that would be certainly my expectation is as we do what's necessary to right-size our cost structure, looking at the year-over-year what you really see there, it does vary by business.

Say in the Valvoline business what you see is some marketing spend, advertising spend et cetera. If you look in ASI it’s more of a full year impact of headcount salary type numbers. But again to be clear my expectation is as we execute on the restructuring we’ll SG&A in each business come down.

So that certainly will be ultimately tailwind for us as the year progresses. .

One of the things Mike just to build on Kevin’s statements we announced yesterday to our organization that there is going to be a voluntary severance and that was announced yesterday. So as I see the first phase of reducing headcount that will be a very active program and one that will start almost immediately.

So that’s already underway, so it’s starting already. So as you look at our cost we would expect as we get quarter-by-quarter that our redesign will start taking affective traction. We want to be complete by this by the end of the year so as we get into ’15 it’s behind us.

So this is something we want to do quickly, early and get it done so that we can get the people refocused on the business at hand and get the cost structure. Also in the first quarter you are starting to get effect of salary increases as well as a reset of the incentives. Last year incentives were not that strong.

They were less than half of what we paid out in past years. So the incentives are reset so the accruals you take through quarter to quarter are the assumption that you are going to hit 100% payouts.

Now that may or may not happen and you adjust those as you see results quarter to quarter, but right now we anticipate that we’re going to hit our plan and that will require 100% payout. That’s also a change that you saw from the results from last year. .

Okay and then couple of questions for Luis. Just in terms of the strength on the industrial side, the volumes being up by I think 13%.

Can you give us some color on how that looks between coatings, construction and energy and I am specifically interested in the energy piece? Were you still selling some straight guar in Q1 or is this primarily derivatives that we -- guar derivatives that we’re seeing growth in..

So let me answer the three questions. On the construction side we’re seeing benefits from penetration of our new products, especially in places like China but we’re also seeing the benefits of the slight improvement in the oil industry.

But it’s really a combination of both, what we’ve been doing in the marketplace in terms of our ability to penetrate the space as well as improving in markets.

When it comes to coatings, a very similar situation, I mean definitely our customers like our products both on the cellulosic as well as on the synthetic side and that has led to increase penetration in certain geographies.

But it’s also combined with an industry that although not growing as fast as people would like, still growing year-on-year basis. So we’re benefiting from our own actions as well as the market situation.

In terms of energy, when it comes to our straight guar that business is much smaller than we got last year and it’s really managed in a way that we minimize the volatility of the business. We’re selling derivatized guar and that business actually from a volume perspective is actually doing better than it was doing in the previous quarters.

But compared to last year it’s a very different level of profitability as last year the derivatized guar business was still benefiting from very high, both selling prices and raw material prices, something that obviously we didn't see this quarter.

So the volumes are healthy but when it comes to year-on-year comparison the profitability of the derivatized guar business is very different than last year..

All right, thanks very much..

Thank you. Our next question comes from the line of Dmitry Silversteyn of Longbow Research. Your line is now open..

Good morning guys.

Just a couple of questions if I may, the first one a follow-up and my first question looking to ISI business and the decline in profitability we saw versus two years ago when the guar issues started and then you had the I&S issues so I am just trying to understand of the $50 million or so negative delta year-over-year on that profit line how much of that was guar-related, how much of it was I&S related, was there any other culprits so to speak on year-over-year basis or was there a strong improvement on other businesses that are just being hit by these two issues?.

Sure let me take the question. The way I see it is I mean we reported $116 million of EBITDA in the quarter. If you add back the guar price to market adjustment last year that was $31 million and we reported this year $110 million of EBITDA. So that's really a difference of about $37 million versus last year quarter.

About $12 million of those was related to this lower profitability on derivatives that I just mentioned. Again the volumes are strong but last year we were still benefiting from significant high prices on the derivatives and that is a -- makes a difference of about $12 million.

Those comparisons as the year evolve would become less relevant because as you know that the prices of the guar derivatives and guar products were coming down rapidly so those comparisons will improve as the year goes along. In the reports we already discussed that intermediates and solvents provided a headwind of about $11 million.

It was both a combination of price which actually was better than expected but it was also combined with the planned shutdowns that we had scheduled for this quarter and those shutdowns took a little longer. So net-net the impact to intermediates and solvents was $11 million.

On a non-currency adjusted basis SG&A had a negative impact of $4 million and then we already talked about a one-time impact of air freight that we had to deal with as we improved our inventories in Europe. So that was $3 million.

With that it reminds then to explain about $7 million of the rest of the core business and the impact there was both a combination of mix and price cost balance or margin, if you look at it that way.

And as I mentioned before, during my remarks a lot of the actions that we are taking will enhance our mix moving forward and our capability to capture price.

So hopefully that explains the difference between Q1 last year and Q1 this year in terms of what were the headwinds that we faced in the guar I&S space as well as the specialty additional effect we had. And then how the actions that we are taking on SG&A, mix and pricing will minimize this into the future as we move forward. .

Got it. That's actually very helpful. Thank you. Just as a follow-up question I guess for booking purposes you had about a $4 million after tax gain on the divestiture of asset, it looks like you just ran through your regular P&L.

Why was that not called out as a special item, do you expect that to be repeated going forward?.

Yeah these do roll through periodically based upon agreement that we have with Marathon. That's a recycling tax credit, it varies in terms of amount by year but we don't typically call that out. .

Okay.

So that's an ongoing thing that this relationship with Marathon that will periodically recourse so there is no reason to call out a special item, got it?.

Right. .

Got it. That's all questions I have. Thank you..

Thanks, Dmitry..

Thank you. Our next question comes from the line with James Sheehan with SunTrust. Your line is now open..

Thanks for taking my question. .

Thanks James..

I am just wondering if you could talk about some of the capital investments you are making in ASI this year, the timing of them and what your expectations are for growth that comes about as a result?.

Sure I mean there is a combination of factors. Obviously we need to do the maintenance of the facilities. These are very large chemical facilities that require significant -- certain amount of work. And specifically this year we had as we mentioned a couple of turnarounds and whenever that happens, that capital is used for maintenance.

Having said that we're also using very specific investments for certain specific growth. A variety of our lines actually are operating at very high levels of capacity utilization. So we're investing certain product lines to make sure that we have available capacity as we see growth coming into the marketplace.

Some of them are in the ceramic, side some of them are in the cellulosic side depending on the technologies in the specific geographies.

I wouldn't want to specify each one of them but it's -- we're still seeing the market growth and we're still investing on it at a lower pace that we have done in the past, but we are definitely bringing new capacity online as we see the market growth accommodating for those increases. .

So on the cellulosics and also on the PVT just a follow-up do you still see most of this coming on line in 2015 or do you have any that would be online in 2014?.

We actually have some of them that are coming at the end of our fiscal year. So yes, definitely will come in by 2014 or by our 2015 fiscal year. .

Okay. Thank you very much. .

Thanks, Jim. We will take one more question, Nicole. .

Thank you. And our last question comes from the line Chris Shaw of Monness, Crespi. Your line is now open. .

Yeah, good morning everyone. Thanks for taking my call. I was just curious, I mean maybe you could talk a little bit more about that 18% growth in Europe in personal care, I assume that's a big number.

I was just curious there was some sort of make up or was that all new products introduced in the market or what's been the underlying growth in the European market.

And then can you also just remind me how big personal care is to the whole global ASI business, like what percent?.

Yeah. Let me first talk about Europe. Yes, we had two things on at the same time. Number one we did have a little bit of tailwind based on the fact that in the first quarter, on third, fourth last year we couldn't ship everything that was needed. So we actually had some of that growth related to catching up versus Q4.

But that was not the vast majority of it. It really is a lot of self-help in terms of growing our market share and penetrating specifically the eastern European markets, sometimes with new products or sometimes making sure that our products are specified in applications that are growing in those markets.

So I would agree that this is somewhat unique to the work that we've been doing to be successful in penetrating the market more so than the growth of the European market per se. And that's very good for the process as we can show that we can grow even in an overall difficult environment. And that mostly is in oral care and personal care.

I don't think -- do we disclose Kevin the specifics of our biggest…?.

We do. If you look at it on trailing twelve basis, our care specialties represents about 23% of ASI in the total from a top line perspective. .

Thanks. And then can I just have a quick follow-up.

You are targeting top quartile specialty chemical margins, have you guys have a sense what that top quartile represents, what percent of the margin?.

Yeah. If you look at it, I think from an ASI perspective what we've said in the past is in the 25% to 27% range. If you look across the spectrum of high quality top quartile specialty chemical companies I think that's what you would expect to find and see.

And with the growth profile that kind of also goes along with that and that's exactly what we are creating here. .

Great. Thank you. .

Thanks, Chris. .

And I am showing no further questions in the queue. Now I will turn the call over to Jim O'Brien for any further remarks. .

I want to thank everybody for joining us today. As I said in my remarks I am encouraged with the quarter and I am excited about how we are going to redesign this company to be a very strong specialty chemical company. Thank you for joining us today. .

Thanks everybody. .

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today's call. You may disconnect. Have a great day everyone..