Jason Thompson - Director, Investor Relations Bill Wulfsohn - Chairman and Chief Executive Officer Kevin Willis - Senior Vice President and Chief Financial Officer Luis Fernandez-Moreno - Senior Vice President and President of the Chemicals Samuel Mitchell - Senior Vice President of Ashland and President of Valvoline.

John McNulty - Credit Suisse Brian Maguire - Goldman Sachs David Begleiter - Deutsche Bank Michael Sison - KeyBanc John Roberts - UBS Mike Harrison - Global Hunter Securities Jim Sheehan - SunTrust Dmitry Silversteyn - Longbow Research.

Good day, ladies and gentlemen, and welcome to Ashland Incorporated Third 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 may be recorded.

I would now like to turn the conference over to Jason Thompson, Director of IR. Sir, you may begin..

Thank you, Sonya. Good morning and welcome to Ashland's third quarter fiscal 2015 conference call and webcast. We released preliminary results for the quarter ended June 30, 2015, at approximately 5 PM, Eastern Time, yesterday, July 29. This presentation should be viewed in conjunction with this release.

Additionally, we posted slides and prepared remarks to 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 Bill Wulfsohn, Ashland's Chairman and Chief Executive Officer; Kevin Willis, Senior Vice President and Chief Financial Officer; Luis Fernandez-Moreno, Senior Vice President of Ashland and President of the Chemicals Group, which includes Ashland Specialty Ingredients and Ashland Performance Materials; and Sam Mitchell, Senior Vice President of Ashland and President of Valvoline.

As shown on slide two, our remarks include forward-looking statements as such term is defined under U.S. securities law. We believe any such statements are based on reasonable assumptions but cannot assure that such expectations will be achieved. Please also note that we will be discussing adjusted results in this presentation.

We believe this enhances understanding of our performance by more accurately reflecting our ongoing business. With that, I'll now hand the presentation over to Bill for opening remarks..

Thank you, Jason, and good morning, everyone. During our last quarterly call, I identified four core priorities for Ashland. The first priority was to ensure that we continued to deliver on our EBIT margin target. In this area, during the quarter, we made great progress as a company and most specifically within ASI and Valvoline.

By focusing our people, production capacity and capital allocation on highly differentiated areas of our portfolio, the team improved gross profits by 310 basis points year-over-year. In addition, the businesses and corporate groups have taken out substantial costs, reducing SG&A by 9% year-over-year.

As a result, our adjusted EBIT of margin climbed 260 basis points versus the year ago period to 21.2%. Our second core priority was to take further actions to reduce overall volatility. On this front, while we made progress, we still have some more work to do.

We made great progress in reducing near-term cash requirements associated with key portions of our legacy liabilities. As you know, earlier this year, we established an asbestos trust. In addition, during the quarter, we made a $500-million voluntary contribution to U.S.-qualified pension plans.

This action took the funded status as of the end of the quarter to near 90%. And as a result, we expect to have no required contributions for the next several years.

At the same time, from an operational perspective, we continue to experience earnings volatility driven by changes in the North American energy market, the impact of foreign exchange or FX, and the cyclical impact of our I&S business. While it takes several quarters, clearly we will focus on limiting the impact of these items in the future.

The third core priority was to sustain our disciplined capital allocation strategy. To that end since April, we made capital investments to enhance ASI's leading market position in the personal care and coatings end market. More specifically we brought online the first of two of a two-stage capacity expansion project at our Nanjing, China site.

We also announced that we will be expanding capacity at our Hopewell facility in Virginia to support increased customer demand.

Finally, we announce the acquisition of AkzoNobel's Zeta Fraction technology, which we believe will strengthen ASI's position in the personal care marketplace and also expand our offerings of sustainable natural based special ingredients.

Note that as we invested in areas where we have innovation driven highly profitable market-leading positions, we also decided to exit and monetize two non-strategic product line assets. More specifically, ASI's industrial bio size and Valvoline's car care product businesses.

There divestitures not only generated cash, but we're also EBIT margin accretive. As a result of these combined actions, we have been able to reposition our portfolio while focusing our operating cash flow on returning cash to shareholders.

Accordingly during the quarter, we increased our dividend by nearly 15% and completed the 1.35 billion share purchase authorization announced in February 2014. Under this authorization, the company bought back approximately 11.8 million shares. And this was key in driving Ashland's 17% increase in earnings per share in the third quarter.

Finally in late April, we announced a new $1 billion share repurchase authorization that is good through December 31, 2017. This authorization reflects the boards continued confidence in Ashland's strategic direction, as well as our ability to generate cash and management view that our stock is undervalued and thus an outstanding use of capital.

Our fourth and final core priority reference in our last earnings call was to develop a comprehensive five-year strategic plan.

We've made great progress in this area and I will share some insights from our efforts with you later in the call, but first I want to turn the call over to the team, so they can provide you some insights on our current business performance and outlook.

Kevin?.

Thanks, Bill, and good morning. Yesterday, we reported GAAP earnings of $1.68 per share from continuing operations. When adjusted for key items earnings per share were $1.91, a 17% increase from prior year. This marks the fifth consecutive quarter of year-over-year growth in adjusted earnings per share.

Given some of the challenges we face this year from foreign exchange and energy markets, that's a pretty good performance. Currency remained a stiff headwind in the quarter, reducing EBITDA by $17 million. Additionally the prior-year quarter included $12 million of income from divested operations and exited product lines.

Excluding these, the underlying performance of the business was strong. There were three primary drivers behind this. First, each of our three business units is delivering strong results in the higher value-added areas of their businesses.

Second, our teams are maintaining a disciplined approach to pricing and margin management and third, we're keeping a sharp eye on costs, both in manufacturing and SG&A in order to sustain the good work done over the past year. Together this led to a 260 basis point improvement in adjusted EBITDA margin when adjusted to a year ago.

That's a solid performance, particularly when you consider the currency translation and divestures including the effects from exit product lines in ASI represented approximately $170 million of headwinds to sales versus prior year.

We continue to seek good volume and revenue growth in the higher value-added areas of businesses and we expect that to remain as we move into the end of the fiscal year.

I want to elaborate as Bill just spoke about it, but I did want to highlight that our February 2014 $1.35 billion share repurchase authorization was recently completed and we have received all of the remaining shares related to the two ASR programs we were running.

Returning cash to shareholders has been an important part of our capital allocation strategy and we expect that to be the case going forward. We also just completed the debt refinancing extending our majorities and lowering our weighted average cost of debt. As part of this debt package, we contributed $500 million of the proceeds into the U.S.

qualified pension plans and we're in the process of conducting a lump sum offering to terminated vested participants in these plans which should be completed by the end of Q4. This will improve our funded status, reduce administrative costs and we expect will result in no required cash contributions to the U.S. plans for the next several years.

With that, I will now hand the presentation over to Luis to provide more color on ASI's results for the quarter..

Thanks, Kevin. Overall ASI had a good quarter. Despite facing persistent headwinds from currency and energy our teams continue to execute well against our strategy of focusing on the higher-margin segments of the market where we create significant value for our customers.

A good example of this is consumer specialties, where sales for personal care and pharmaceutical product lines again posted good growth. We have introduced the number of new products in these markets over the past several quarters. And this has been a strong contributor to our margin improvements.

Across our portfolio products and technologies sold in the personal care market, we are leveraging our expertise in ingredient technology, applications development and consumer science to create enterprise-level solutions for our customers.

We announced acquisition of the Zeta Fraction technology from Akzo will further enhance our innovation capabilities in biofunctionals for our consumer specialty segments. Although our teams drove another quarter of good performance we continue to face some significant headwinds.

The combined effect of currency, our exit from non-corporate lines and weakness in energy markets reduced sales by a combined $72 million in the quarter.

In addition the slowdown in packaging of adhesives and price concessions in some segments impacted by lower materials like the construction addition, offset business growth and higher value added areas of the business. Those margins were strong for the quarter increasing 160 basis points from the prior year.

Overall, market a product mix remain healthy and are teams continue to excel in managing both manufacturing [indiscernible]. Looking to the fourth quarter, we expect that these headwinds from currency and energy to remain. However, we also expect to continue seeing growth - strong results from higher margins, higher value added areas of our business.

Consistent with normal seasonality, we expect revenues to be 3% to 5% below the third quarter and EBITDA margin to decline somewhat to around 23% to 23.5%. Longer-term we will continue to compensate for currency and energy headwinds through disciplined cost execution and growth in core segments.

One key area for us is our new product pipeline that is leading to some exciting opportunities. While we also have additional capacity coming to the market to support our customers growth, and these additions are primary focused in the high margin product lines.

Although, we will continue to see difficult comparisons in the next two quarters due to FX and energy, we should see some favorable comparisons after we begin to lap quarter affected by those headwinds. To summarize, I'm pleased with where we are as an organization. In previous quarters, I've shared with you four-step strategy to achieve our vision.

We've implemented much of those changes and are seeing the benefits. Such as, in our innovation pipeline and new product developments, such as in our improved supply chain and also in bringing our teams into unified share culture. We still have much to do, but we're in a good path to achieving our established goals.

Let's turn to the next slide and I will work through the third quarter results for performance materials. Despite slightly lower volumes versus prior-year, composites margins remain strong in the period.

We saw good growth in Europe for the second consecutive quarter, although this was offset by softness in North America and continued weakness in Latin America. Softness in North America is primarily related to the spillover from the energy markets.

As I mentioned, last quarter, we have been adjusting prices to reflect lower input cost in certain regions. And once again that was the case in the third quarter. However, we're seeing inputs rise in certain areas of the world, particularly Europe. Our teams are doing a good job of managing margins in a fairly volatile raw material environment.

Currency has been a headwind for APM too, reducing sales by about 7%. As we indicated in Investor call in late April both of our I&S plants faced shutdowns in the third quarter. One was a planned turnaround and the other was an unplanned outage.

We estimate the combined cost of these shutdowns are approximately 40 million, which is 6 million better than expectations. Both plants have returned to normal operations as our teams did a great job of getting the plants up and running in a very efficient manner. Compared with prior year BDO prices remained a headwind.

However, prices appear to be stabilizing in our normal range. We expect pricing to remain around these levels for the foreseeable future. Looking to the fourth quarter, underlying performance of composites to remain strong. However, we believe the soft energy market in North America will continue to result in a slightly slower growth rate.

We're taking actions to offset rise in raw material costs in certain areas of the world, but we do expect negative lag to impact margins in the fourth quarter. I&S margins should return to a around the same level reported prior to the shutdowns.

In total we expect sales between $255 million and $265 million and EBITDA margin of 8% to 8.5% for the fourth quarter. Over the longer term we continue to believe that the composites market will remain healthy. We are well positioned for growth and we will invest in new product and application development to drive both sales and earnings expansion.

We also expect a volatile raw material environment to remain. Our focus will remain on overall margin management, ensuring we pass through raw material increases quickly while also working to reduce costs. I will now hand it over to Sam for a summary of Valvoline's third quarter..

Thanks, Luis. Valvoline posted another quarter of record earnings with improved profitability across each of our channels as our teams continue to execute at a high level.

Within DIY, strong promotions during the quarter lead a 4% volume increase, although we do expect another good performance in the DIY channel in the fourth quarter, we also expect the results to normalize from a very strong third quarter. The Valvoline Instant Oil Change team had another exceptional quarter with key metrics improving from prior year.

Oil changes per day were up 7%. Average ticket increased 2% and same-store sales for company-owned sized rose 9%. Our franchise system also delivered similarly strong results evidence of consistent execution across our customer service model and marketing program.

In the international channel, volumes grew 8% as growth has normalized following the customer destocking that we had experienced during the first and second quarters. This is a higher than we would normally expect than partially reflects the destocking dynamics.

At the same time our international team is doing a good job of developing key channels in marketing strategies which are leading to higher growth. Premium product sales remain strong across Valvoline and accounted for nearly 41% of total branded lubricant sales.

This strong operational performance coupled with good margins led to EBITDA growth of 17% from prior year. Looking to the fourth quarter, we expect continued strong results, strong performance across all channels. However, typical seasonal patterns should result in a sequential decline in both sales and profitability.

We also expect the DIY, international channels to normalize from an exceptionally strong third quarter. As a result, we expect sales to be in the range of 475 million to 485 million and the EBITDA margin to contract somewhat to around 19% to 20%. Our longer term outlook remains unchanged.

We expect to continue driving volume growth within Valvoline Instant Oil Change and our international and installer channels. Within DIY, we will work on market segmentation and digital marketing efforts to drive consumer preference and enhance our brand strength.

And more broadly, we look to invest in our marketing capabilities, developing creative and more efficient ways to reach consumers. I will now hand the presentation over to Bill for his closing remarks..

Thank you, Sam, and congratulations to you and your team on delivering another great quarter. To summarize, when I step back and look at our Q3, the team did a great job of improving our EBITDA margins.

They worked hard to sustained discipline and cost control and to drive margin improvement with a laser focus on our highly differentiated products market. That said, neither I nor the team is satisfied with our top line performance in the quarter.

While I recognize that our sales were negatively impacted by FX, energy and the strategic portfolio decisions we made to improve our margin to mix, I know that the chemicals and Valvoline business units are two outstanding business platforms with attractive growth prospects and experienced leadership teams.

Thus our challenge going forward is to sustain our margin improvement while increasing our focus on driving top line growth. Not surprisingly this was a major focus of our recent strategic planning process. We look forward to sharing our plans with you during our November 11 Investor Day.

And while time is limited during today's call and we want to leave time for your questions, I want to share a few high-level details with you today. As we developed our plans we looked at our business through two core lenses.

First from an operational and second from a capital allocation perspective, using the operational lens, we see significant avenues to accelerate profitable growth in both Valvoline and the highly differentiated portions of the Chemicals Group.

In Chemicals, we have established commissions to create the world's leading specialty Chemicals Company, focus on leading unique technologies that enable our customers to formulate great consumer and investor products.

We intend to leverage our operational strength and technology leadership positions by allocating people and capital to grow and focus applications and market.

More specifically, we want to focus our broad set of technologies to provide full solutions to attractive and growing markets like the pharma, personal care, coding [ph] as well as highly specialized areas of the industrial market where our products provide solutions to customers that place value on innovation and performance.

To win we will capitalize on our core capability in terms of first; innovation, and by innovation I mean using our know how to develop innovative proprietary solutions for customers we're seeking performance differentiation.

Second, through commercial excellence, and by commercial excellence I mean, employing a customer intimate model in partnership with our customers so as to understand their needs, provide solutions and get paid for the value we create.

And third, in terms of world-class operation, by world-class operations I mean of course safety and responsible operations. That should go without saying.

But this also means having industry-leading quality systems and capabilities combined with outstanding customer service while driving continuous cost improvement to ensure we have a competitive cost structure. In Valvoline we have an outstanding premium consumer branded engine and automotive maintenance business.

Our vow is to bring hands on expertise for the benefit of our customer's, every day moving the business forward with speed and excellence.

We intend to drive growth by expanding our Valvoline instant oil change store network, increasing our focus internationally, investing to enhance our digital marketing technologies to enhance our values to both consumers, our installers and through distributors.

And finally across all of our channels, expanding the penetration of her synthetic lubricant technology platform.

From a corporate metrics you point, we will continue to drive to meet the previously established EBITDA margin target while increasing our focus on growth in a manner that drives strong less volatile and more sustainable cash generation with investments that lead to higher levels of return and invested capital.

Now switching to the capital allocation lens, we do not believe we will need high levels of capital to sustain our growth plans. We will target stay-in-business capital expenditures at roughly 78% to 80% of depreciation and amortization.

And even when we factor in growth investments over the planning period, total capital is expected to be around our current depreciation and amortization levels.

Looking forward, a capital allocation strategy related to business development focuses on one, we believe we have completed the majority of our product line divestitures from within ASI and Valvoline.

And on the other side of the coin, we believe that while there are many attractive acquisition targets which fit our core criteria, the multiples are high in the market today.

The criteria we have used are focusing on areas that are close in complementary to our core capabilities and highly attractive especially sub-segments with high risk weighted return on capital, based upon cost-based synergies with sales synergies being upside to the base case.

We've passed on several potential opportunities due to high multiples and we will continue to use discipline to avoid overpayment.

Thus given our strong balance sheet and projected cash flow, limited organic capital requirements and high acquisition multiples in the marketplace, we continue to see returning cash to shareholders as a primary capital allocation focus.

While we're on the subject of capital allocation, I know many of you have questions and ideas regarding the future direction of our portfolio of businesses. Let me first say that during our strategic planning process, our first priority has been to go deep into the core strength and organic opportunities within the businesses.

At the same time, we will continue to look at all aspects of our portfolio to consider how each of our business and product lines fit with Ashland's long-term strategy. The company and the Board have shown a willingness to be very active on this front.

And while I'm still early in my tenure, I am confident that going forward we will continue to be proactive and make important and tough decisions.

Our time today is limited and accordingly, please join us on November 11, so that in our Investor Day you can learn more as to why we are so excited about our business, future and the investment opportunity Ashland represents. With that, I will turn the call over to the operator to take your questions. Thank you..

Sonya, before we get started, I just want to remind everybody for Q&A, just to limit it to one question and one follow-up. Feel free to open it up, please..

[Operator Instructions] Our first question comes from John McNulty of Credit Suisse. Your line is now open..

Good morning and thanks for taking my question. A couple of questions, so, on the Valvoline front, certainly the numbers look like they were almost off the charts. I mean everything seems to be humming really well.

At the same time, when I look at your guidance despite it being kind of normally relatively seasonally strong quarter, it looks like you are guiding to a pretty big drop-off from 3Q, but even at to a level that's in line with the first quarter and below second quarter.

So, I guess, can you walk us through what's driving that conservatism because it does seem just given the growth rate that you are seeing etcetera that that maybe a little bit on the low side..

John, this is Sam Mitchell. And primarily the guide has to do with some shifts that we see in the business as we look into the fourth quarter. The DIY business tends to be the more seasonal part of the business. And - so we'll see a bit lower volumes in DIY based on our forecast on promotional scheduled with some of our major retailers.

So that's probably our biggest factor. The other parts of the business are still looking to be quite from strong. Valvoline Instant Oil Change, we expect those positive trends to continue into the fourth quarter and also expect international to continue to perform. They're not at the same level that they did during the third quarter.

You have - finally, you have a little bit of a pricing effect too. We've had a positive price lag effect on our margins, both in Q2 and Q3. Some of those price adjustments that were passed through to customers in Q3. Therefore we'll have impact on the fourth quarter margin.

So we'll see our gross profit margin drop off a bit and then we'll also see an impact from lower DIY volumes..

Okay. Great. And then maybe just shifting over to ASI, maybe a question or two kind of linked. I guess, one, it looks like you've done a lot of capital investment, putting in some decent expansions.

Are we at the end of that? It sounded like in, maybe, Bill's comments toward the end there - maybe we are, but I guess can you kind of quantify how much you've been spending and then how that should kind of normalize as we look to 2016? And then also looking to 2016, if energy is bottomed here, are we at a point where we'll actually start to see real core growth again in the business.

Because it's obviously - it's been a little bit disappointing with FX and energy working against you? So maybe you can walk us through that a little bit. That would be hopeful..

Yeah. Hi, John. How are you? This is Luis. On your first question and regarding the capital allocation, we've announced a variety of expansions, the first of which was the Nanjing plant expansion which came on board on Q1. All of these expansions would happen between now and the next actually three years.

So they are part of our capital forecast that Bill referred to in terms of overall expenditures. But we're definitely not done, and we need some of those expansions coming along in 2016, 2017, and 2018. So if I say, they are part of our current plan that we referred to, but they are still coming along through the pipeline.

And as you know, it takes time to build some of these manufacturing facilities. On your second question around energy, as this has been a pretty disappointing situation for us in the quarter. Since we play mostly on the drilling portion of the market, which again is drilling simulation and cementing.

We are - we were heavily disappointed with the results in the quarter. Fundamentally, our energy business serves complex applications. That means where it's difficult to get to the product, and high temperatures, high pressures. And that's the area of the market that has been impacted the most.

And I would say, I probably underestimated the degree of reduction. I don't think the energy market is going to get much worse than what it is today. We've seen already a significant reduction. But to be honest, I don't think that there is a significant upside in the next, at least, six months to a year.

So what we are doing is we're taking significant actions in reducing our costs. When it comes to energy market, we have multiplied one of our plans that services that market. We'll be ready to start again as soon as the market comes back. And we are taking actions on our cost control in other areas.

At the same time, we are speeding up our innovation and growth in the high-value markets, which are in the consumer, pharmaceutical and coatings. So those of the actions we are taking to compensate versus the downside we're seeing in energy..

Great. Thanks very much for the color..

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

Hey, Bill. I appreciate the comments around use of the cash going forward and would agree with you that the stock was at a great value, at the levels. I'm just wondering why that ledger did not repurchase any shares during the quarter? I know you still have the ASR going on.

I would've thought you would do maybe something with the new purchase reauthorization. I just wondered if there is anything that whatever prevented you from doing any buyback in the quarter and how should think about the cadence and pace of the new buyback..

Sure. Brian, thank you first of all for the question and the comments. I will provide a brief insight and then pass over to Kevin to give little more detail. But we were in essence over the last quarter limited by the fact that we had two active ASR programs in place and so we couldn't do anything further.

We are clearly now moving beyond that and so this is the time where we will be mapping out our strategy as to how to most effectively utilize the current authorization..

And just as a reminder, those two ASR effectively terminated at the very end of the quarter. The shares were delivered first business day or two of July. So effectively we were out of the market other than those ASRs during the June quarter.

As we've stated, it would be our objective to primarily use cash generated of operations to fund the share repurchase over the course of time. We do believe that our shares represent a really good value. As Bill outlined from a capital allocation perspective, clearly multiples are very high this week.

And so we see our shares as a good value and would intend to execute on that over the course of time. As I think most people are aware, while we do have sizable amount of cash on the balance sheet, the vast majority of that is located outside of the U.S.

and over the course of time we would expect to be able to repatriate sums of cash in a tax efficient way. But as that occurs, we would certainly look at our options at that point. But to be clear, number one, we do see our shares is a good guy you. Number two, we plan to use cash flow from operations to repurchase shares.

And again number three, as we would normally do we will provide you an update on our activity at the next earnings call..

Okay, great. And just as follow-up, I was wondering if you could expand a little bit on the recent debt and pension moves that you've made.

Just maybe philosophically how do you think about the trade-off and what you've accomplished there and then maybe financially how should we expect that to impact net income, interest expense, pension expense and cash flow going forward. Thanks..

Okay. First and foremost, the project in terms of depositing or funding $500 million voluntarily into the pension trust was very positive for a variety of reasons. The two primary being administrative costs associated with maintaining the pension trust and number of participants at we have in the trust.

And second and also not at all inconsequential our periodic changes to the mortality table that tend to have a relatively significant impact from a value perspective on the liability as people continue to live longer which is a great thing for humanity, but does impact cause the pension liability to increase.

And so first and foremost for us, it was the analysis around whether or not it was an MPV positive thing to do and it was in our view very NPB positive. The other aspect of the analysis was around what I would call regret factor. I mean everyone expects interest rates to rise over the course of time. We believe that will happen as well.

The Fed is talking a little bit about that at least at the short end of the curd.

As we thought about this, looking at and putting 500 million, rates would still have to climb pretty significantly before we would find ourselves in a funded status positioned that would have - that would cause us to say, we wish we hadn't done that tour hadn't done as much or whatever.

Looking at it from near-term impact on the business, total debt is obviously higher, at least you think about it just from an as reported balance sheet perspective, we really traded $500 million of pension debt for $500 million of bank debt, that's a way we view it economically.

Between that and the retiring of the $600 million of 3% notes, actual cash interest increases by $4 million per year pre-tax on a net basis. So, pretty inconsequential in the grand scheme of things. Obviously, weighted average cost of debt goes down. And you look at the rest of the financial picture. We accelerated a tax asset, U.S.

statutory rate plus state rate for us is 39%, so contributing that $500 million represents the ultimate acceleration of nearly $200 million of tax assets that we'll be able to use near-term which is also a positive thing. Other part of the equation is ongoing contributions. This year we'll put between $80 million and $90 million into the U.S.

qualified plan with this $500 million voluntary contribution that will - or at least should cause us to not have to make contributions to the U.S. qualified plan for at least the next four or so years. Obviously that depends on how the discount rate moves.

It depends on how the assets perform, but call it all things being equal, free cash flow effectively would go up by that $80 million or $90 million year for the next four or four, five years at least.

Did I answer all your questions in there?.

Very thorough answer. Appreciate it..

Sure..

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

Good morning.

Bill and Luis looking at ASI for next year, I know it's early but in terms of margins, can they expand next year given some of the uniqueness this year and so what are the drivers for margin expansion next year in ASI?.

Hi David. Thanks for your question. And obviously it's certainly in our funding process, but we're actions that continually drive margin improvement towards our stated target. So I do expect that as we continue moving forward that we're going to continue to improve margins as we have a healthier mix of products.

We do see growth, higher growth in our higher margin areas of the business. So we do expect to see continuous improvement versus the previous year. Obviously, the one thing that I have to factor in is FX. And as long as FX remains where we are we definitely should see those margins improve.

And having said that, as I said, we are taking actions to do self-help in order to improve our margins. Some of the things that will impact there are expansions that will be in the line. That would again provide growth that we have not been able to capture that because we doesn't have the capacity.

And as an example the capacity that we just started in energy, we sold out that in Q2. So every time we're bringing this capacity expansion in higher margin products we have been able to go out and sell them out.

So overall continued trend towards our stated target and I hope not to see more impact from energy because we are pretty much to a minimum now. And the actions that we are taking should get us to that continuing margin improvement..

Very good.

And just on performance Bill, in your brief time here at Ashland versus before you got here, as your view of performance improved or declined in terms of the quality and long-term prospects for this business?.

Thanks for the question. And I would say that my confidence in terms of the ability to drive profitable growth has improved coming on board.

As I've gotten to know better, first of all, the opportunities that exist within the chemicals platform and not surprisingly, more specifically, within ASI, driving the technology components, really working in close partnership with our customers to make sure we provide meaningful solutions.

I've spent a lot of time with customers over the last few months and they are hungry for that innovation and they want to work with us. And not surprisingly, really seeing the potential of Valvoline to not just deliver as they are delivering this year. But become our greater growth engine.

When you look at it and Sam has shared in the past you certainly will in November, the business has had a great track record of moving forward. And with that, it would - we expect that it will continue based upon the plans that are in place. So we have more opportunities to expand internationally.

We have more opportunities to expand the store count and we have more opportunities to expand our share position as the team has done overtime.

So all in all, I feel a little better now that I understand the businesses in a more meaningful way and if I had a chance sometimes not just with the teams but with the customers, that we have some really great opportunities for growth as well as profitable growth..

Thank you..

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

Good morning. This is Dan Rizzoli [ph] for Laurence.

Given the growth you are seeing from your different businesses, are you guys done with portfolio pruning or is there other things you think you probably can divest or potentially sell?.

So first, this is Bill. Let me kind of reiterate what I shared before in terms of, I think the company and the businesses have been very active in terms of looking at the portfolio, pruning the product lines that have less of a strategic fit. I think the majority of that activity has been within ASI and Valvoline business.

And as we've looked at it, we are focusing more energy on growing the real jewels in the portfolio rather than completing further divestitures if you will. So I won't close the door around that. And again I'm speaking product lines within the businesses themselves.

But we feel like it's time to focus more on growth as a way to improve our margins and less on divesting what might be less attractive subcomponents of the business.

From an overall portfolio standpoint, again, I want to just emphasize that I think we're very active in looking at our portfolio and what fits with our strategic vision and we'll continue to be active. Our goal is fundamentally to create shareholder value to get our stock price up. That's really what's driving our actions and our analyses.

What will create that greatest value? So as time goes on just as it has in the past, I think we'll continue to look aggressively at the portfolio..

Okay. Thank you for that. And then in the press release I think you said, obviously there's weakness is energy, but I think you mentioned the construction market for industrial specialties is also been weak.

I was wondering if you could elaborate on that and what you are seeing, just a little color?.

Sure, this is Luis again. Actually the market - the construction market has been weak throughout the year. Having said that, actually for us Q3 was better than we expected. We are starting to see a [indiscernible] of it especially in Europe, although it's coming off from a low base, we are starting to see some improvements.

And again, part of the reason that we - Europe is important for us, a significant portion of our construction market is in Europe. So that's important when you look at the prices. So in that regard, again coming from a lower base, so we are starting to see definitely improvements in that market..

All right. Thanks guys..

Thank you. Our next question comes from Mike Sison of KeyBanc. Your line is now open..

Hi guys, I thought you had a nice quarter. Bill, clearly the market today is in terribly agreeing with your view that stock is undervalue. So maybe you could help out a little bit and think about maybe what we are missing and what the market is missing to some degree.

What metrics do you see in the two businesses that you have that you think is undervalued?.

Well to begin with, I think that the company and the respective business units have done a great job of providing greater clarity as to their ability to execute on actions to drive EBITDA margin improvement.

And so obviously as the businesses have continued to perform on that front, I think there's a better appreciation for the specialty nature of the business that we're in.

I think also at the same time, we importantly need to clarify that while we are truly focused on being the leading specialty chemical company, we do have a real jewel in the Valvoline platform. And that should be given, if you will, fair value within our overall mix. I do think that we need to have a stronger growth portion.

It's been great to divest and cut cost to enable focus and improve margins, but I think everybody would like to see top line growth as well. And I think when we can show that, I think that that would help with the cause.

I think you have expressed, and we are committed to not only reducing the impact of, if you will, from a cash flow legacy liabilities where I think you heard we have taken a lot of actions.

But really in some of the areas where we have more cyclicality, trying to drive that portion of the business to be less meaningful versus the overall results so that we can be a more predictable, if you well. So the strong cash generation and less volatile.

And then finally, I think we need just continue to show that we do have disciplined application or our capital allocation, but we at the same time can invest in growth, while still sending cash back to the shareholders and make smart investments to give high returns on invested capital.

And so once we demonstrate or communicate that further, then I'd like to think our company will be valued as it should. Obviously, when we are together in November, we'll try to touch on each one of these points. And why we feel good about them going forward. But those are my rough thoughts on the subject. I hope that was hopeful..

Great. Thank you. And then Sam, when you think about the - I think you are looking at roughly anywhere around 300 basis points decline in Valvoline margins sequentially in the fourth quarter.

Can you help us maybe bucket, how much is from seasonality and volume, how much is from a little bit less pricing and margin and maybe any other factors? And you have been somewhat - and if there's upside potential, where in those buckets do you think there could be some upside? Thanks..

Okay. As I shared before, I think there are really two primary buckets. One is the mix and the lower volume that we'll see in DIY versus the third quarter. And the second is the pricing impact. So they are both pretty meaningful buckets.

And again, it's just the price pass-through that took place in the third quarter we'll see the full effect of that in the fourth quarter..

Okay. Great. Thanks..

Thank you. Our next question comes from John Roberts of UBS. Your line is now open..

Thank you.

Now that the fragrance companies have discovered the cosmetic actives area, do you think that's probably off limit indefinitely in terms of an acquisition area for you?.

This is Luis. Well, no, I don't think so. At the same time that some of them were looking at that space. We were able to acquire new technology, important technology for us to go in that space. And what do we think that we have is we have probably a much better channel to market.

I mean, we are very much present with this consumer products companies - personal care companies in a lot of places when it comes to formulation. And we put together the package to offer a full solution that includes bio functionals, includes other additives that enhance the products that our customers have.

So to be understand, in anyways I welcome their coming into the business, but I personally think that we're in a much better position to continue to grow our higher functional business, both based on our innovation capabilities, our intimacy with the customers, and overall our commercial fan channels that we have there..

Do you think you'll need a strategic alliance with the fragrance company to have that is part of your offering?.

Well, that's not something - again, I consider at this time. It's very, very early in the game [indiscernible] to close on two acquisitions and see how they go. But again they are definitely different parts of the equation when it comes to the formulation in terms of the fragrance to the actual functionality of the products..

And then as a follow-up, how strategic is it to have capital tied up and back integration into BDO or could you be less integrated or nonintegrated source from the market?.

Sure, so I think has been articulated it in the past, have being producer economic and security of supply, high-quality material is really very important to the ASI business.

That being said, there are multiple ways to make sure that we have that supply while meeting our other objectives of limiting the volatility that can come from some of the commodity dynamic in the emerging market.

There are a variety of avenues including establishing long-term contracts, looking at possible ways of venturing in terms of supplies and so forth. And so that something that again, I think we can talk to a little bit more in November.

But we clearly want to ensure we have that supply capability but at the same time find a way to minimize the volatility. Those dual objectives relate - if you will, our perspective on the BDO market..

Thank you..

Thank you. Our next question comes from Mike Harrison, Global Hunter Securities. Your line is now open..

Hi, good morning. Just kind of a follow-up question on BDO, can you talk about the impact of potential China slowing on the BDO business? The set push the trough out a little bit farther and maybe even deeper, you mentioned that you are seeing pricing stabilize there.

Could it get worse of China gets worse?.

That's a very good question. And I mean, clearly part of the reason why we have - lot more BDO in the market today has been because overall the Chinese market has slowed down somewhat versus the predictions were for the uses of raw materials. And I do think that if China is slowing down, it would probably put more pressure in terms of the business.

Having said that, part of the reason why the business stabilizing is because many of those plants that we're operating in China actually started to shut down. In other words, there are people that are already gotten below their variable cost which causes them to shut down their operations, because it is better for them.

Our overall cost position in that space is very good. It's a leading position. So even as demand may drop further, one of the things that we're seeing is again, that's people are starting to get to the point where it's better for them to mothball down the plants rather than sell. We'll need to see how that goes.

I have a certain level of confidence that we are very close to the bottom from a pricing perspective. As again, I start to see people shutting down plans. Obviously a lot of expansions that have been announced, all of them have been delayed or a lot of them have been delayed.

So that's the basis for a comment that we think that we are very close to the bottom..

And then maybe Luis you can continue on this one. You had a big coating customer talking on their call about the impact of weather and specifically on a lot of rain in many regions in the U.S. during April, May, June, even into July. Did you see any weakness in your U.S.

coatings business related to that and is it possible that maybe we see that on a lag as your customers are working that inventories during the September quarter?.

Yeah. I mean, that's a very good question. I mean, as you know the coatings industry makes the lot of painting in the Q1 calendar to be ready for the print season in the U.S. And then if things don't go well people normally slow down their production in the Q2 calendar.

And there's two things to that answer, did we see certain lowness or not as much seasonality in the market as we normally see? I would say, yes, we saw that a little bit. However, because we have not been able to supply all of the needs of our customers, we actually saw growth. So, our situation is slightly different.

I mean, did we see some of the slowdown? Yes. Did that impact us? No. And on the contrary as I said before we were able to start selling much more of our ATC because we now have the capacity available in the marketplace. So, I guess the answer is, yes, we saw it but it didn't impact those on the contrary, we saw growth in that market..

All right. Thanks very much..

Thank you. Our next question comes from Jim Sheehan of SunTrust. Your line is now open..

Thanks a lot. Luis, could you address the energy and industrial parts of ASI that are receiving some cyclical exposure now? You've outlined some of the actions you're taking to counter the downdraft.

But just addressing specifically the energy and industrial portion, what actions can you continue to take here to sort of lift margins or counter the downdraft there?.

As I mentioned before, the first action we took is we took - we have two plans when we make products for this market. We multiple to one of them and that will bring lower costs. Granted we're looking at areas in our SG&A to further reduce our exposure. That is on the one side of the equation. And it's really mostly around energy.

I think we saw a little bit of a slowdown in adhesives, but I think that that's mostly temporary. I don't think that's a long-term trend. The rest of the industrial markets, again, either they are growing or we're able to grow above market, because of our capacity expansions.

So really the focus for us is on growing the high-margin portions of our business, both on the industrial side coatings. There is couple of others Metro side, coatings, there are some other areas in specialties that we are growing. As I mentioned construction is getting better.

But also in our consumer side where we are just seeing both the growth in the industry and we continue to capture shares through innovation.

Those would be the key items, so if I were to summarize these two items, growth at more than markets in the markets that are growing and make sure that we're cost conscious in those markets that we're seeing headwinds..

And I would just add to what Luis has said. If you think about it, some of the materials that go into those markets start with the same underlying assets as other portions of our business and the team has been very active and essentially redeploying that capacity into other segments of the marketplace that's taking hold, which is certainly helping.

And with that, that helps on a buying site, but it also helps on the margin side as well..

Terrific. And also on Valvoline, I think your tone has shifted a little bit to referring to it as a jewel that you want to invest in the growth of.

So given that, maybe the value of Valvoline is not fully being recognized within the portfolio and in your stock price, do you see Ashland has been the best owner of this asset long-term? Are you viewing this as a core part of Ashland now?.

Well, I am going to be apologize - just a little bit repetitive here from just expressing the first few point is back to what other requirements that are associated to allow the business to meet its full potential.

And then I think after that, it's important for us to look at the role of the Corporation, the operational synergies that come from us working together. We work on some common platforms. We use some common resources. Cash flows and our structure globally can be complementary.

And we have to weigh that against the issues associated with the capital markets and whether the businesses, through a more focused lens or just through the broad light of day can ultimately create more value.

And while you asked that question about Valvoline, I would say that's my answer is meant to be brought about more or less everything that we do. And so I think we are very open to looking at what is the right answer, the right answer for the businesses, the right answer for the shareholders.

And the board has been consistent in making those types of decisions. And as I said earlier, I don't see that changing. So it's an important thought and it's not lost on us..

Thank you..

Sonya, we will take one more question..

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

Thank you for making room for my question. Actually I have a couple leftover. In some of these, and maybe revisiting or trying to get more granularity on your earlier answers. But there was a question around BDO [ph] excuse me, pricing, where China is falling down.

My concern is actually - my question is actually is about the Chinese slowdown impact on your waterborne paint sales or coating sales with your HST product that you talked about in the very growing terms and expanding capacity and [indiscernible] that you expanded.

If we continue to see, sort of, declining growth rates and less government emphasis on new construction, and construction in generally China - is there penetration of waterborne technology into the Chinese market both in paints and coding going to be enough to allow you to deliver strong top line and bottom-line results even if the market itself gets soft overall?.

Yeah. That's a very good question. And definitely that's something that would worry us from a perspective of importance of the Chinese market in architectural coatings. And to be honest, we did see some of our customers taking actually shutdowns during the quarter. Not because the market is not growing. It is growing at a slower pace.

Now, one of the benefits of having the global network of plants that we have and most important the ability to service customers all across the globe, what we are doing again is, as growth may be lower in China, actually their place in the world is incredibly well. I mean India continues to grow, Southeast Asia continues to grow.

And as we see the expansion. Again at this time that is the only that we have even if the growth in China would slowed down, has with - meeting all of this capacities that we're adding. Even as we speak, we feel buying materials to try to deliver the amendment, we're seeing from our customers and I don't see that stopping.

Because of again the strength of our both our product line, our customer context, and there are markets that are actually still growing. And, again, China is declining. It's just growing at a slower pace..

And just to maybe add a little color, Luis and I visited one of our coatings customers during the quarter. And one of the things they focused on was our ability to supply more material, more consistently throughout the globe. And so that was just, if you will, an illustrious case where there is an appetite for our product out there.

And as the markets slows, fortunately, we have that dynamic as well..

Excellent. And then just to close the loop on the couple of ASI product lines that are struggling in the second half of the year. You talked about the energy market, and I think that's been pretty well addressed. But packaging adhesives - you mentioned that was an area of weakness as well.

Is it geographic? Is there an inventory correction going on in packaging, in general? Is it just the end market itself? Sort of what's - your adhesives business has been kind of a standout performer over the last four quarters.

So where is the headwind to growth coming from in the third and what looks to be fourth quarter as well?.

That's a good question. I mean, as you know, our adhesives business is mostly a North American business. And as such, the slowdown that we saw was in North America. I see it a little bit like an inventory correction more than anything else, as again some of people may have some high inventories both on the labels as well as on the flexible packaging.

But I don't see this to be a consistent trend that will go over for a long period of time..

Okay. So this is basically a few months, as people right-size inventory, given lower growth expectations going forward. And then we should get the active level of growth after that..

Yeah. At this time, that's exactly what we are seeing. Yeah..

Thank you..

And this concludes our answer and question session at this time. I would now like to turn the call over to Jason Thompson for any further remarks..

Yeah. Thank you, everybody, for joining the call today. I will be around 859-815-3527. Feel free to give me a call. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now all disconnect. Everyone, have a great day..