Jason L. Thompson - Director-Investor Relations William A. Wulfsohn - Chairman & Chief Executive Officer J. Kevin Willis - Chief Financial Officer & Senior Vice President Luis Fernandez-Moreno - Senior Vice President and President, Chemicals Group Samuel J. Mitchell, Jr. - Senior Vice President and President, Valvoline.

David I. Begleiter - Deutsche Bank Securities, Inc. Brian P. Maguire - Goldman Sachs & Co. Jeffrey J. Zekauskas - JPMorgan Securities LLC Daniel Rizzo - Jefferies LLC Michael J. Sison - KeyBanc Capital Markets, Inc. Michael Joseph Harrison - Seaport Global Securities LLC John E. Roberts - UBS Securities LLC James M. Sheehan - SunTrust Robinson Humphrey, Inc.

Mike Ritzenthaler - Piper Jaffray & Co (Broker) John P. McNulty - Credit Suisse Securities (USA) LLC (Broker) Dmitry Silversteyn - Longbow Research LLC.

Good day, ladies and gentlemen, and welcome to the Ashland, Inc. Fourth 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. As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Jason Thompson, Ashland's Director of Investor Relations. You may begin, sir..

Thank you, Ronnie. Good morning and welcome to Ashland's fourth quarter fiscal 2015 conference call and webcast. We released preliminary results for the quarter ended September 30, 2015, at approximately 5:00 PM, Eastern Time, yesterday, November 3, and this presentation should be viewed in conjunction with the earnings 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. I will now hand the presentation over to Bill..

first, we entered into a new $1.1 billion term loan, which enabled Ashland to make a voluntary $500 million cash contribution to the U.S. qualified pension plan.

And as a result, we expect no required contributions to the plan in fiscal year 2016; and second, by successfully achieving a significant asbestos insurance settlement, we were able to fund a new $335 million asbestos trust.

It's our hope that this fund, combined with the remaining insurance receivables will meet Ashland's future asbestos claim requirements without needing to tap future operating cash flow. Moving on to my second core priority for Ashland in fiscal year 2015, the Ashland team continued its disciplined capital allocation.

We kept capital spending in line with depreciation. We pursued projects with high incremental returns on capital, and I emphasize incremental, because we're seeking to leverage our existing infrastructure base to cost effectively add capacity to support demand growth in key product lines.

Accordingly, the biggest capital investments were in ASI to expand capacity and support our leading HEC, Klucel and PVP product platforms. Conversely, to enhance cash flow, we limited APM CapEx to roughly 60% of depreciation. While we remain open to acquisitions, we have avoided overpaying in a market where deal multiples are high.

In this context, the focus has been on divesting non-core product lines and businesses such as water treatment, biocides, elastomer, and Valvoline's car care products.

And given that we believe our stock is undervalued and that we have a strong balance sheet and significant cash conversion, we chose to increase our payout ratio to shareholders in fiscal year 2015. In May, we increased our dividend.

We also completed the $1.35 billion share repurchase authorization, approved by Ashland's board of directors in fiscal year 2014. And finally, to enable us to continue our share repurchase activities, our board approved a new additional $1 billion share repurchase authorization in April.

Putting this all together, Ashland leveraged stronger earnings and a reduced share count to increase EPS by 23% to $7.01 per share in fiscal year, while strengthening the business's operating performance and EBITDA margins, investing in our future and improving our future cash flow trajectory.

My third core objective as I came on board this year was to meet with as many investors, employees and customers as possible to listen and learn. To that end, I'd like to thank you for your candid and constructive feedback during face-to-face meetings and also through the investor survey, which many of you participated in, earlier this year.

Your feedback was very helpful. We listened and have incorporated many of your thoughts and ideas into our plans. Then finally, the fourth core objective was to execute and evolve Ashland's well defined strategy.

I have already referenced many of the strategic actions we took in fiscal year 2015 in the areas of portfolio management, capital investment, cost structure management and innovation. But also this year, we spent a great deal of time to define our strategic plans to further strengthen our business and enhance shareholder value creation.

The conclusion of this process was twofold. The first conclusion was that both businesses, Chemicals and Valvoline, are strong, leverageable and have opportunities to enhance differentiation, accelerate growth and continue to improve margins.

The second conclusion that was, because the Chemicals business is so different from the Valvoline business, and given the strength of both businesses' cash flows, the two businesses would grow stronger and create more shareholder value if separated.

So last month, we decided to begin our path to execute a separation plan to create two great companies. We will discuss the business strategies and the separation in more detail at next week's Investor Day.

So in conclusion, as I reflect back on fiscal year 2015, net-net, I believe that while we faced some significant headwinds, the team executed at a high level to drive significant operating, strategic and financial gains. I'll now turn the call over to Kevin to discuss our fiscal year 2015 quarter four financial results..

Thanks, Bill, and good morning. Yesterday, we reported a GAAP loss from continuing operations of $0.88 per share. When adjusted for key items, earnings per share were $1.62, a 14% increase from prior year.

The Ashland team delivered another quarter of strong earnings and margin growth, as we continued to execute at a high level despite some significant headwinds that have reduced our topline results. As you can see on this slide, the combination of foreign currency and divestitures together reduced EBITDA by $26 million when compared to a year ago.

Excluding these, the underlying performance of the business was strong. There were three primary drivers behind this. First, all of our business units are delivering against their stated strategic goals. Second, each unit is reporting strong results in some of the higher value-added areas of their businesses.

And third, our teams are maintaining a disciplined approach to pricing and margin management. Together, these factors contributed to a 300-basis-point improvement in adjusted EBITDA margin when compared to a year ago.

In addition, EBITDA margins for each of our three business units met or exceeded the expectations we outlined at the beginning of the fourth quarter.

We're encouraged by that performance, particularly when you consider that currency translation, divestitures and weak energy markets together represented an approximately $216 million headwind to sales versus prior year.

We continued to see good volume and revenue growth in some of the higher value-added areas of the businesses, and we are working to build on that process as we move into fiscal 2016. Now, for a few corporate items. Our adjusted effective tax rate during the quarter was 23%.

We had severable favorable discrete items that lowered the effective rate for the quarter compared to our previous expectations. For fiscal 2016, we expect our full year tax rate to be 24% to 26%. Capital spending in the fourth quarter totaled $118 million, bringing the full year total to $265 million.

We expect to increase capital spending next year to $320 million to $340 million. This increase is driven by our previously announced capacity expansions at Hopewell, Virginia and Nanjing, China to support growth in our value-added cellulosic technologies. In addition, we are making investments to upgrade Valvoline's digital marketing infrastructure.

Free cash flow in the fourth quarter totaled $130 million, bringing the full year to $324 million. Free cash flow for 2016 will be impacted by several items.

We expect operating cash flow to increase by approximately $90 million versus 2015 through earnings growth, reduced pension contributions and the completion of the global restructuring earlier in 2015. Increased growth capital spending, as I just outlined, combined with some investments in working capital will offset much of the increase.

Based on this, we currently estimate 2016 free cash flow of approximately $325 million to $350 million. As you're aware, we currently have a $1 billion share repurchase authorization in place that expires on December 31, 2017. We intend to execute on the first $500 million of the authorization in the December quarter.

While we aren't providing full year guidance, given the macro environment we've been in, I think it's appropriate to note that our underlying business fundamentals remain solid and our current full year EBITDA estimates are generally in line with Street estimates. We should lap FX and energy headwinds by the end of Q2 and see a stronger second half.

With that, I'll now hand the presentation over to Luis to provide more color on results for the Chemicals businesses for the quarter..

Thanks, Kevin. ASI reported another quarter of year-over-year margin improvement, driven by better business and product mix, good cost control and positive price over cost. Despite facing continued headwinds from currency and energy, our teams were able to execute well in driving growth within a number of our higher-margin product lines.

A good example can be found within our pharmaceutical ingredient lineup, where we saw particularly strong demand for our value-added cellulosics. We also saw improved demand for Ashland's proprietary hair care products, where we have introduced a number of technological innovations over the past year.

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

Also during the quarter, Ashland completed acquisition of AkzoNobel's patented Zeta Fraction technology, which will enhance our innovation capabilities in biofunctionals. On the industrial specialty side, within coatings, we are seeing good volume growth supported by our recent capacity increases.

We are supporting that growth through the ongoing expansion of our manufacturing plants in Virginia and China. Our value-added products in coatings and construction adhesives are benefiting from a recovery in the U.S. housing market. We also saw growth in our additives lines as we have launched new products into the construction market.

Although our teams drove another quarter of good performance, we continued to face some significant headwinds. The combined effect of currency, our exit from non-core product lines and weakness in the energy markets reduced sales by $84 million in the quarter.

Gross margins were strong for the quarter, increasing 240 basis points from the prior year, as overall market and product mix remain healthy. Looking to the first quarter of fiscal 2016, we expect to see continued growth from the higher margin, higher value-add areas of our business.

However, we are also facing headwinds from currency, energy and divested product lines. We estimate first quarter sales to be in the range of $490 million to $510 million, and EBITDA margins are expected to be in the range of 20% to 21%. These results also incorporate the impact from normal seasonality.

As stated during the June quarter earnings release, we expect to see difficult comparisons in the first quarter due to FX and energy. Looking out over the balance of 2016, we should see progressive improvement in year-over-year comparisons.

Assuming foreign exchange rates remain at the current levels, we expect to lap the headwinds we have faced beginning in the third quarter. Let's turn to the next slide and I'll walk through the fourth quarter results for Performance Materials. APM reported results that exceeded our expectations.

Lower raw material costs and good pricing discipline led to strong margin improvement. We also benefited from a favorable year-over-year comparison in I&S. Composites posted a strong year-over-year margin growth, driven by good price over cost, and it's a strategic focus on product innovation and applications development.

From a volume perspective, we saw better penetration in Europe from the value-added products sold into the residential construction markets. Volume strength in Europe was offset by softness in the North American energy market.

While the slowing industrial growth in China had a drag on volumes, we also faced a tough year-over-year comparison from strong sales of products for pollution control systems in China in the prior year. Overall, composite sales declined 18% for the quarter.

As I mentioned last quarter, we have been adjusting prices to reflect lower input costs and once again, that was the case in the fourth quarter. However, we are 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 (20:59) has also been a persistent headwind for APM, reducing sales by about 6%. One of our biggest success stories has been Derakane, an industry-leading resin, which this year celebrates its 50th anniversary.

Derakane is used to fight corrosion and today, can be found in hundreds of applications, such as infrastructure development, pulp and paper, chemical processing, air pollution control and mineral processing. There is one example of the type of application development that will continue to drive our business in the year ahead.

Within intermediates and solvents, overall results outperformed our prior expectations due to diligent price control, lower raw material costs and manufacturing cost discipline. However, year-over-year volume growth was offset by weaker product mix and generally soft BDO pricing, reflecting a competitive market environment.

When compared to the prior year, sales declined 22%. As previously noted, a turnaround of Ashland's BDO facility in Marl, Germany in the prior year reduced EBITDA by $8 million during that quarter last year. Looking to the first quarter, we expect APM sales to decline sequentially, consistent with normal seasonality.

The underlying performance of composites should remain strong. However, we believe the soft energy market in North America will continue to result in a slightly slower growth rate. We expect to give back some margin within I&S due to more aggressive pricing in the marketplace.

In total, we expect sales of between $230 million and $250 million and EBITDA margin of 13.5% to 14.5% for the first quarter. Longer-term, we expect to see healthy underlying growth in the composites market. There are favorable market trends supporting several of our end markets and certain regions are beginning to show signs of economic expansion.

To ensure we maintain our strong position and continue to participate in growth, we're investing in new and existing product application development to drive both sales and earnings expansion. I will now hand it over to Sam for a summary of Valvoline's fourth quarter..

Thanks, Luis. Valvoline posted record fourth quarter earnings, as our teams continued to execute at a high level. The Valvoline Instant Oil Change team had another exceptional quarter, with each of the key metrics improving from prior year. Oil changes per day were up 7%.

Average ticket increased nearly 2%, and same-store sales for company-owned sites rose almost 9%. Our franchise system also delivered similarly strong results, evidence of consistent execution of our customer service model and marketing programs. During the year, we continued to expand our overall store network, adding 20 new sites.

At the end of September, we had 942 systems, 42 stores system wide. Within the DIY channel, volume was essentially unchanged. In the international channel, volumes grew 15%, driven by strong execution of our channel building efforts and the effect of customer destocking in the prior-year period.

This is a higher growth rate than what we would normally expect and partially reflects these destocking dynamics. At the same time, our international team is doing a good job of developing key channels and marketing strategies, which are leading to higher growth rates across the regions.

Premium product sales remain strong across Valvoline and accounted for nearly 41% of total branded lubricant sales. This strong operational performance, coupled with good margin management, led to EBITDA growth of 11% from prior year. EBITDA margin rose 330 basis points to 20%.

It should be noted that our profitability in fiscal 2015 was enhanced by a short-term price lag effect of approximately $20 million caused by the lag between falling raw material costs and price adjustments to customers. Looking to the first quarter, we expect continued solid performance across all channels.

However, typical seasonal patterns should result in a sequential decline in sales. We expect sales to be in the range of $470 million to $480 million and EBITDA margin to remain consistent at around 20%. Before I turn it back to Bill, I'd like to share a few comments about the planned separation and what it means to the Valvoline team.

We have a lot of work and planning to do in the year ahead as we work toward the separation, but I'm excited about the opportunities for Valvoline as an independent public company. We have a 150-year legacy of performance and innovation as a globally recognized consumer brand. We have a very strong foundation for growth.

The business model has strength across our channels with our quick-lube and international channels positioned for accelerated growth. On top of that, we've delivered impressive growth in cash and margins for the past several years.

The Valvoline leadership team looks forward to sharing details about our strategic growth opportunities when we get together at the Investor Day in New York City on November 11. In closing, we have the opportunity to build something truly great, to become the global leader in auto and engine maintenance.

I'll now hand over the presentation to Bill for his closing remarks..

Thank you, Sam, and congratulations to you and your team on the outstanding strategic and financial progress made within Valvoline in fiscal year 2015. I want to leave time for your questions, so I'm going to be very brief with my closing remarks.

The Ashland team has made great strides in fiscal year 2015 in terms of making operational improvements, which drove a 320-basis-point improvement in EBITDA and also taking actions to drive cash conversion and enhance our trajectory for the future.

We've also been driving value with our capital allocation, returning $495 million to shareholders, moving forward with an announcement on a new $1 billion share repurchase authorization and making limited, but smart capital investments to support our highly profitable and differentiated product lines; and finally, strategically, where we completed divestitures to enable Ashland to complete its 10-plus-year transformation and developing a comprehensive strategic plan to accelerate profitable growth within Valvoline and Chemicals.

And of course, this assessment led us to the decision that through a separation, we could create two great companies that, from both an operational and a shareholder value creation point of view, will be stronger. We believe Ashland is a great investment, not just for the future, but also for today.

We believe the fiscal year 2015 carryover headwinds will abate over the next several quarters, and that will enable us to show the underlying strength in our business.

In addition, we took actions last fiscal year in terms of the voluntary funding of the pension and the establishment of the asbestos trust, which will enable us as we anticipate to drive stronger cash flow.

And finally, since we believe our shares are undervalued, we intend, as Kevin previously referenced, to continue to leverage our strong balance sheet and confidence in future cash flow to move forward with a significant share repurchase early in fiscal year 2016. With that, I'll turn the call over to the operator to take your question.

Since we will hold our Investor Day next week, we'd like to focus this Q&A session, to the extent possible, on the quarter, the year and our future outlook. Thank you..

Thank you. And our first question comes from the line of David Begleiter from Deutsche Bank. Your line is now open..

Good morning, David..

Thank you. Good morning, Bill. Bill, just in – and nice quarter, by the way.

Just in ASI, do you and Luis think you can grow EBITDA in 2016 versus 2015?.

Hi, David. This is Luis. One of the key items that we're facing, and I mentioned this in the discussion, is that we should start lapping the effects of both FX and energy by the end of the second quarter. So we should be looking at better comparisons over the year.

Again, as Kevin said, we don't normally provide guidance, but my expectation is that at the end of the year and the combination of that third quarter and fourth quarter would allow us to show EBITDA growth year-on-year..

Very good.

And maybe, Sam, same question for you on Valvoline, given that a lag – the benefit in 2015 on raws versus price, do you think you can grow EBITDA in Valvoline in 2016 versus 2015?.

Yes, we do. Given the one-time benefit in 2015, our percentage growth rate might be a little bit smaller. But we're very confident that our business is well positioned really across the different channels that we compete in, that each of the channels is well positioned for growth in 2016..

Very good.

And just, Kevin, do you have a year-end share count by chance?.

That's 66.5 million..

Thank you very much..

And our next question comes from the line of Brian Maguire from Goldman Sachs. Your line is now open..

Hi. Good morning. Thanks for taking my questions..

Good morning, Brian..

If I try to parse some of the sales guidance you gave, it sounds generally like you expect to return to year-over-year sales growth in the third quarter of this year.

Is that generally the expectation at this point?.

Yes..

Okay. Great. And then the move in raws, it seems like there was another leg lower in several key components, including base oil in the last quarter.

Just thinking about how do you expect to maintain pricing in that environment? What's the kind of competitive dynamic out there today? And what kind of a drag do you expect pricing to be to sales growth in 2016?.

On the Valvoline business, we do expect pricing to adjust downward, given the falling raw material costs and what we're seeing in the first quarter. So as we've shared before, some of our business is on contractual pricing with our large national accounts, certainly some of the private-label business that we do, we're going to be adjusting prices.

And so, that will be a bit of a drag for us at the beginning of the year..

And how about on Performance Materials, any impact on pricing from lower raws there?.

Yeah. Two elements there. One, when it comes to composites, actually, I mean, we've seen now both decreases and increases in Europe. So, I would say the core is very balanced, and we continue to manage pricing effectively.

In Intermediates & Solvents, we have seen a much more aggressive posture in the marketplace, partially driven by a slight further slowdown in China. So, I do expect that we'll be giving up most of the raw material benefits that we had in the fourth quarter during the first quarter of the year. That's included in our expectations..

Yeah. Thanks very much..

And our next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is now open..

Thanks. Given your revenue expectations for specialty ingredients in the first quarter, I imagine that your volumes are falling sequentially.

Which categories are getting weaker, and why?.

Yes. So, this is Luis. The reason why we see declining volumes sequentially is just seasonality. This is our very normal seasonal pattern that we have for ASI. We had it last year and the year before, fundamentally, in the industries like coatings where the paint season in most of the developed world just finished. And so that's fundamentally the areas.

There's a little bit of other elements, like in sun care and so forth that have that impact, too. The other reason why, not sequentially, but on a year-on-year basis, we see volumes declining is for the energy headwinds that I've been talking about.

That doesn't necessarily impact us sequentially, because I don't think there's a lot more that we can go down, but definitely on a year-on-year basis, that has a significant impact on our volumes.

But I don't think, and I'm not concerned from the point of view of that production that we're forecasting because it's very consistent with our seasonal behaviors..

So because there have been so many changes to the segment, it's very difficult to – for an external observer to understand what your level of volume is, because in the old days, the difference between the fourth quarter and the first quarter might be 10,000 tons.

So now that we're at a rate of something like 78,000 tons, what's the order of magnitude, the level of volume that you're running at in the first quarter? Or what do you expect?.

So Jeff, first and foremost, I'll be honest, I don't focus on volume for the reasons that you mentioned. The volumes in products that we sell at $1 a pound versus the volumes that we sell at $150 a pound are very different. So fundamentally, what I do follow is our sales, and on a segment basis, understand that the volumes are coming down.

So really, in the past, I talked about volumes mostly because of the significant changes in the energy prices, but to be honest, I mostly focus on the business – on the sales. Specifically, again, within coatings, there is significant reduction in volumes in the fourth quarter. So – but that first quarter, that's normally the case.

Normally, the first quarter of the year represents about, let's say, 20% of the sales of the total year. So that's the common seasonality pattern for that business. And again, I would not be concerned on the seasonality.

The other thing that it's important as we continue to drive the mix to a higher mix, volumes become less important because we're selling, again, more of those products that are priced at a much higher value point than their cost per pound..

And Jeff, one other point which might be worth noting is that as we look at the different portions of the business, as mentioned earlier in the call, we see clear pockets where we're gaining share, and we don't really identify any areas where we're having any significant share loss.

So, you do have the types of dynamics Luis was referencing, but in general, we're feeling very good about gaining share in our core target markets..

Okay.

And then lastly, is there any meaningful share issuance in the first quarter? Or will your fully diluted shares not really change very much from the fourth quarter to the first quarter, exclusive of your share repurchase effort?.

Yeah. The December quarter is normally when we do our annual grants to the team, and so, you'll see that. But there's no – I wouldn't call that material or significant. So I don't see anything that would cause diluted shares to change all that much..

Okay. Great. Thank you so much..

Thanks..

Thank you..

And our next question comes from the line of Laurence Alexander from Jefferies. Your line is now open..

Hi. This is Dan Rizzo on for Laurence..

Good morning, Dan..

Good morning. You indicated that you reduced SG&A in ASI. That was kind of a benefit in the quarter.

Is that something that we can expect to continue? Is there more than you can take out?.

At this time, we fundamentally have finished the redesign. There is no question that I personally always look at ways to further improve and make our operations more efficient. But when it comes to the effort that we undertook last year, we're done – and we're seeing very little benefit now on a year-on-year basis.

Most of the reductions were done last year in the second quarter and third quarter of not 2015, but 2014. So I'll continue to look for ways to make it more efficient, but there's no further benefits coming from our global redesign..

Okay. And then you also said that you've been disciplined with M&A and the valuations were high.

Is that still the case? Are valuations coming down at all? Is the dynamic changing just given the volatility in some of the markets?.

We only know any time whether we participate in an auction or in a process. And so far, those where we have participated, I mean the reason we mentioned that we're disciplined is because we've fundamentally put offers that we believe would create shareholder value.

And at the end of the day, there is somebody that it's willing to pay more and at significantly higher EBITDA margins – EBITDA multiples. So, we'll continue to pursue those and do the right thing for both the company and the shareholders..

And then, this is Bill, just to reference, I mean I think what you're implying is that on some of the most attractive assets that are out there, you still continue to see very high premiums, but you are seeing in certain pockets the emergence of, we'll say, more reasonable opportunities to take action.

And I'm speaking across the company in general, independent of ASI, APM or Valvoline, but just in general..

Okay. And then finally, I think you talked about Composite sales in China for the year.

I was wondering just what's the outlook for 2016? Are we seeing any signs of a rebound or is there anything I mean showing upwards trends?.

Yeah. When it comes to Composites in China, we had a great year last year overall, mostly because we were driving our higher-value products that go into the corrosion industry. A lot of that goes into pollution control. And with the slowdown that we're seeing in China, at this time, I would say it's a little unclear how that would evolve over the year.

Definitely, we saw a slowdown in Q4 on those segments, but it's unclear to me how things will evolve. I mean the last time I was in China, there was confidence that the government will continue to stimulate the economy. And if that is the case, I would expect us to see that growth.

They continue to be very aggressive when it comes to pollution control, and that should continue to help us drive the high-value portions of our business..

Dan, again, Bill, and you've probably been reading, as we all have, that the new five-year plan seems to have a significant focus in China on controlling emissions, reducing emissions, and so that may create, not necessarily over the next few quarters, but over time a significant opportunity for us in this area..

And I think to maybe add some further perspective, Asia-Pacific, easy for me to say, represents about 16% of our total sales, and about half that is China. And a good portion of the (40:34), that's an overall Ashland basis, that's not a single unit. That's on an overall basis.

And we have a significant portion of that, particularly in the ASI piece of the equation, that are more consumer-related, consumer-focused. So we're going to be less impacted by the industrial issues that could exist in China, and we're continuing to see good growth on the consumer side, as we are with the Valvoline business as well.

So, we actually feel pretty good about our China exposure on an overall Ashland-wide basis..

All right. Thank you. Thank you for the color guys..

And our next question comes from the line of Mike Sison from KeyBanc. Your line is now open..

Hey guys. Good morning..

Good morning..

Kevin, I just wanted to get a couple things on your 2016 outlook, I think you suggested that your outlook for EBITDA, the way you've given us with margins is in line with Street expectations.

Does that include or exclude foreign currency, based on that comment?.

Adjusted EBITDA, as we currently report it, on a total basis, we would expect to be in line with current Street estimates that have been published..

Okay.

And then what is the FX hit this year that you're baking through?.

I'm sorry.

What was the question?.

Foreign currency, what is the impact on EBITDA this year based on your....

The number I'm referencing includes the impact on currency, and again, we expect to lap that after the end of Q2..

And essentially the levels are not much different than where we stand today in terms of our assumption going forward..

Okay. Got it. And then, Luis, in terms of growing ASI this year, can you maybe go through some of the components of what in total will get the growth? Maybe cost savings, mix, or any which way you want to sort of help us understand why the business can grow this year..

Yeah. So throughout even 2015, the one thing that has been very positive, we have continued to grow the high valuers of our (42:59) business. I mean we continue to grow in Pharma, ahead not only of GDP but ahead of the Pharma market. We continue to grow in many of the segments in personal care. Hair care, we grew 10% year-on-year.

Coatings we're growing, especially on HEC side, above the market. HEC didn't grow as much because, again, it was impacted by energy. But in coatings, we're growing at 6%, our HEC volumes. So what I've been seeing is those areas that we've been focusing on have been growing and will continue to grow. It's being masked by the two impacts of FX and energy.

And it's – you can imagine – somewhat frustrating. As we lap the impact of both FX and energy, those businesses should continue to grow as they have in the past. And adhesives has continued to grow. I mean one of the key things I mentioned that we had a little bit of an inventory adjustment in Q3, this was back in full force in Q4.

So the segments that we're focusing on and that we normally don't pay a lot of attention, they continue to grow. And I expect those to continue to grow through the year. So, as we lap the impacts of FX and energy, assuming that FX stays at around the current rates, we should be looking to not only EBITDA growth, but sales growth..

Okay.

Then just, so on a constant currency basis, adjusted EBITDA should grow, what, double-digits like it normally would?.

Yeah. I don't know that I'm ready to put a number there other than what Kevin said that in general, the company is consistent with the Street estimates as they are today..

Got it. Thank you..

And our next question comes from the line of Mike Harrison from Seaport Global. Your line is now open..

Hi. Good morning..

Good morning, Mike..

Luis, I was a little bit surprised to hear you say that you're less focused on the volume aspect within ASI.

I definitely think of that business as, in the past, being fairly sensitive to utilization, and that's part of the reason that we have to pay attention to seasonality is that you do have some fixed cost absorption issues in the weaker seasonal quarters.

Is that – is utilization becoming less of an issue than it had been in the past?.

Well, not – I mean, I think that you have a very good point. When it comes to our cellulosic operations, yes, I mean, the more that we run our plants less than fully occupied, we're incurring significant costs. But most of those plants have been running at capacity.

Let me mention that one of the impacts that we will have in Q1; we have now moved all of our maintenance shutdowns to the low end of the season to avoid any problems in terms of supplying customers. So we're having a significant higher number of days of shutdown in our cellulosic network, but that was by design.

So that's having a little bit of an impact this quarter. But the vast majority of those operations are running at capacity. Definitely, HEC is running at capacity. Klucel is running at capacity. Same thing with our PBP network. It's running very close to capacity. So we do manage those.

The reason I mentioned that I don't measure volume is because, again, even in our cellulosics network, there are products that sometimes we sell at $1 a kilo and others that we sell at $60 a kilo.

So my focus is, as we continue to operate our assets efficiently utilized, we need to make sure that our mix continues to improve, hence our sales and our margins continue to improve. But make no mistake, we continue to pay attention and be very careful about how we utilize those large assets.

Does that clarify the comment?.

Definitely. Thank you. And then just curious, on some of the other pockets of weakness that you called out, you mentioned skin care and oral care. It sounds like oral care was related to a tough comp.

But what's going on in skin care? What's going on in nutrition that drove volume weakness year-on-year?.

Yeah. So you're right; oral care was mostly a tough comp on a great fourth quarter last year, and we continued to grow there. Skin care was mostly related to a very strong competitive environment and probably a slower sun care season than what we expected. Nutrition has been the same thing all year long.

In our – nutrition exposure is fundamentally with one product. That product is also utilized heavily into the energy markets. As the energy markets collapsed, there has been a huge flow of product all over the place in nutrition.

So the slowdown has been – more than the slowdown has been an overcapacity in the product line that services both oil and nutrition. Once again, as we lap those effects, we expect to get the growth back in nutrition..

All right. And then last one is on Performance Materials.

Just curious, how much of the improvement you saw in Performance Materials is coming from the recent BDO turnaround and kind of better manufacturing costs? And do I understand correctly that the maleic anhydride turnaround took place during Q4 and was actually a $5 million headwind to EBITDA during Q4?.

Yes. You understand correctly. The maleic shutdown happened, that happens every – the maleic anhydride – sorry – shutdown happened in the fourth quarter, that happens every four years. But it has – partially compensated by the fact that we had a huge shutdown on Marl last year.

So they sort of not only eliminated each other, it was a benefit from a shutdown perspective..

Yeah. The Marl shutdown last year was about an $8 million item in Q4 of the prior year..

Now, from the point of view of operations, definitely we had much better operations in the fourth quarter in Intermediates & Solvents. Our plan is to run as efficiently as they go. And when that happens, we obviously get the benefit from that. And that is partially the benefit that you have seen in the quarter.

And as long as we continue to break those, and I'm confident we will, we should have that better cost position moving forward..

All right. Thanks very much..

And our next question comes from the line of John Roberts from UBS. Your line is now open..

Morning..

Good morning, John..

Sam, how much of the gallons growth was in owned stores in international? And what was the volume growth in the larger franchise in DIY gallons?.

So, looking at the fourth quarter, obviously, the international business had a very strong quarter with 15% growth. And as I mentioned in the comments, roughly – probably about half of those are due to the weak quarter that was prior year due to customer destocking.

So, good solid growth in the international business still when you look at the fundamentals. The DIY business, as I mentioned, is roughly flat. The quick-lube business had an outstanding quarter, but given its overall size it's not a big volume contributor to our overall 5% growth.

So, the volume growth in the quarter, largely driven by the strength of the international business..

Okay. And then secondly, I believe you were investigating alternative models for your butanediol needs.

Any update on any strategy progress there?.

We continue to look at ways to, if you will, minimize any earnings volatility related to that merchant market. And so we – that's a general objective. I think we know where we are in the overall cycle for that product line area.

And so we just continue to be open to alternatives and options, and it's something we will continue to do until we find the right solution, which could be long term contracts or could be capacity management. There are a variety of different options that we have..

Thank you..

And our next question comes from the line of Jim Sheehan from SunTrust Robinson Humphrey. Your line is now open..

Good morning. In Performance Materials, you suggested that EBITDA should be down sequentially due to passing through raw material costs and having lower prices. But it seems like with 13.5% to 14.5% margins it might not be down very much.

Could you just explain what the dynamics are there for the first quarter?.

Could you repeat the last part of your question?.

I'm sorry. Yeah. Just trying to understand, the EBITDA for Performance Materials.

Is it likely to be down sequentially from the fourth quarter due to your lowering prices?.

Yeah. I mean, the biggest impact there is in Intermediates and Solvents. We had, to be honest, a great quarter in the fourth quarter when it comes to managing our prices effectively and managing our volumes effectively on a lowering raw material perspective. And we just don't see that that's going to happen in Q1 and that's – that has an impact.

Other than that we expect to be roughly flat..

Okay. And then for the full year....

We also won't have the maleic – yeah, we won't have the maleic anhydride in there..

Right..

If you take the midpoint of the range of sales and EBITDA margin, it would suggest that EBITDA dollars would be roughly flat Q1 versus Q4..

Thank you. And then just for the full year outlook on EBITDA margins of being around 12%.

Could you explain what causes the compression in the margins from that point? Do we – are we continuing to see lower pricing in I&S? Or what is it?.

Yeah. Definitely that's one of the reasons why we see that. I mean obviously we've been successful in managing that differently. But definitely one of the impacts that we're seeing is that we still expect to see margin compression in the I&S business.

The other thing is we did have a good gap, just as Sam had, as raw materials decreased and we took our time to reduce prices. This year we had the benefit of a favorable price gap that we are not counting on for this year..

Thank you very much..

And our next question comes from the line of Mike Ritzenthaler from Piper Jaffray. Your line is now open..

Yeah. Yes. Good morning. Just a couple of follow-ups....

Hi, Mike..

... on ASI, if I could. As it pertains to the economic situation in China, I guess I'm curious about how your expectations may have changed through returns from investments in Nanjing, if at all.

And then I guess underneath that, what's the right way to think about growth from some of these targeted investments in things like HEC and PVP as 2016 progresses versus the benefit from lapping FX and energy and some of the other impacts that you outlined?.

Sure. So let me answer the first question. I mean regarding China, Kevin, actually was very good in pointing out that the vast majority of our exposure in China is to consumer goods. The investments that we made in China are fundamentally going for paint and for hair care. And we are not seeing a significant reduction on those.

Even if we were to see a reduction in paint, we continue to operate the network pretty much at capacity. And we use that plant as a center of export across the globe and rest of Asia continues to be very – a very good market for us. Places like Vietnam, India for sure, Philippines, Indonesia, continue to grow.

So even if the market were to slow down somewhat in China, we have outlets for those products in the rest of Asia. So, when it comes to lapping the FX, I mean, fundamentally we expect our target to grow 1.5 times to 2 times GDP over the long-term continues to be there.

And as we lap those effects and we are growing those segments, I mentioned I mean hair care 10%, HEC coating 6%, and so forth. You can see that we have a portfolio that would allow us to do that. But we need to lap those effects.

And I don't know if that answer your question, but it's both the market that we're playing and we're gaining share, supported by the capacity that we're increasing. And granted in the case of HEC and Klucel the newer capacity, not the one that you just put in Nanjing, but the new capacity that we announced is going to be on stream until 2017..

Great. Okay. Yeah. I was just trying to tease out the difference between some of the targeted investments versus just lapping tougher comps. I mean – and I think that frames it up.

And I guess as a second question on, as progress is made toward the separation of Valvoline, I guess, how does that affect targets for ROIC and return on net assets within the Chemicals business, and maybe how philosophical investments might be thought of in things like people, innovation, that type of thing?.

Yeah, really, I don't – this is Kevin. I don't really see capital allocation strategy changing in the Chemical business pre or post-separation. I think our focus is going to continue to be on organic growth both through innovation and share. We'll continue to look at inorganic opportunities, paying very close attention to multiples and value creation.

And obviously return of capital to shareholders when and as appropriate is also going to be a pillar of that..

And Mike, this is Bill. Just to add, I think that as we move forward, there will be more clarity on the capital structure of the two businesses and so forth. And clearly return on invested capital is a core metric that we think is an important one. When we invest, we look at the risk weighted returns that we expect versus our cost of capital.

And so I think this is a subject that there'll just be a lot more to talk about and focus on as we get a little bit closer to the separation..

That makes sense. All right. Thanks, guys..

And our next question comes from the line of John McNulty from Credit Suisse. Your line is now open..

Yeah. Good morning. Thanks for taking my question..

Good morning, John..

The first one is on ASI in the first quarter. The – I guess, the margin target that you're putting out there or margin range for EBITDA seems, it seems like there's a bigger than usual seasonal dip from 4Q to 1Q.

I guess, I'm wondering what's driving that and if that's something we should be kind of thinking about going forward as kind of the normal seasonality for it, or if there is kind of a one-off in the business or if you're just being conservative or what have you?.

Yes, I mentioned before, John, yeah, we're having – we decided to move the vast majority of our turnarounds to the first quarter because that's the low end of the season and that allows us to not interrupt product supply. That was not the case in previous years.

So when you look at the EBITDA, we're having a – compared to previous years an unusually high number of turnarounds, especially in our cellulosic network, fundamentally again because it's the lower end of the season. I would expect that pattern to continue moving forward.

In other words, we'll have a slightly lower Q1, which would be, obviously, supporting higher quarters, Q2, Q3 and Q4. But that's the reason why you see a slightly higher dip than normal in the EBITDA margin for Q1 versus previous years..

Okay..

Our full year expectation for ASI is around 24%, so we do expect EBITDA margin to accelerate throughout the course of the remainder of the year and provide some improvement over fiscal 2015, which ended at about a little over 23%. So we expect to continue to see EBITDA margin improvement in 2016..

Okay. Got it. Yeah, sorry. I missed part of that. And then I guess just a question on 2016 in total, I know, you don't give kind of explicit EPS guidance, but you've certainly indicated the EBITDA is roughly in line with kind of where the consensus is. Looks like you're buying back stock much more aggressively than the consensus in general.

Are there other puts and takes we should be thinking about? Or the consensus EPS, is that kind of the right range, as best you can tell at least at this early stage, where the Street should really be for 2016?.

Yeah, there's still a lot of moving parts I think in that calculation. We're not really prepared to talk through that. And the EBITDA dollar number, we're comfortable that we're in line generally with Street estimates, and we'll – we're going to hold comment on the EPS piece..

Okay. Fair enough. Thanks very much..

Thank you..

And our next question comes from the line of Dmitry Silversteyn from Longbow. Your line is now open..

Good morning. A lot of my questions have been answered, but I'd just like to follow-up on a couple of things. First of all, from point of view of Valvoline, you saw I think you said 9% same-store sales in North America. That's quite a significant growth in what typically is a not a very fast growing market.

So is this sort of share gains within Valvoline do-it-for-me store chains versus other outlets? Or is it a bunch of – the DIY market shrinking and the do-it-for-me market growing? Can you talk a little bit about the strength in volumes you're seeing in Valvoline same-store sales?.

Yes, Dmitry. The strength in Valvoline Instant Oil Change is driven by very strong execution of our team in delivering great customer service in the stores. Some of our digital marketing programs are really helping to attract new customers and drive trial within our stores, but the key thing is we're – do good execution in the store.

We're driving that loyalty that's really benefiting our same-store sales and driving oil changes per day growth. So, as far as the source of that growth, we believe it's primarily through share gains within both the quick-lube segment and probably attracting new customers from other DIFM outlets..

Okay. Okay.

So your programs are basically delivering the results that you're hoping for and it's not the market doing better, it's you doing better within the market?.

That's right. I mean, the one positive factor in the market, over the last year, just impacting overall U.S. demand is that falling gas prices have contributed to miles driven being up. And the number of cars on the road is up too. So while the overall market is very mature and in a slow long-term decline, this past year has been pretty solid..

Got it.

Did you – did I hear you mention that there was a – that you got new business, and have some channel fill in international operations during the quarter in Valvoline? And is that something we should be mindful of as we look forward to the fourth quarter of 2016 to remember that you have this tough comp going up against?.

Actually, the new business that we – if you break down the 15% growth, roughly half of that growth is just coming from good solid execution and channel building efforts across the different regions. So that is a focus of our business really in each one of our regions that we compete in. So we're fully expecting that to continue..

Okay.

So this wasn't a one-time large customer win, this was sort of part of your continuing strategy?.

Definitely not..

Okay..

And Dmitry, the other piece of that, the other half of that was the impact of destocking in the same-year quarter – sorry, the prior-year quarter rather. And if you – I think, if you looked at international business over the course of time, mid to high single-digit growth has been delivered pretty consistently in Valvoline's international business..

Yeah. No, it certainly has been, once you figured out that it's a growth part of the company. One last question.

In sort of looking at capital deployment between now and the proposed split-off of the company, I'm sort of curious about your decision to spend $1 billion on buying back shares versus perhaps paying down debt, which at least on gross levels is about 3.5 times EBITDA. I think, it's about 2.5 times net.

But still, I'm just trying to understand, sort of, the rationale of chewing up through cash now versus perhaps letting the two companies make a decision of how they want to best invest the cash..

I think, it's a couple of things. First of all, we have a lot of conviction that our shares remain significantly undervalued and as part of our strategy around capital allocation, taking advantage of that by returning capital to shareholders through share repurchase is something that we have done and we continue to do.

We have a strong balance sheet today, and while we're not going to get into a lot of separation discussion on this call, at the end of the day, the strategy and the plan is at the time of separation, each of these two great companies will have a balance sheet roughly equivalent to that of Ashland today in total from the standpoint of the balance sheet structure on an overall basis, leading to our belief and intention that each of these companies will have a mid to high BB credit rating consistent with where Ashland is today.

So I guess the short answer is we feel like we can do both, and so we're executing on our faith in our balance sheet and our cash flows..

Yeah. And this is Bill. Just to emphasize a point or two, I mean, Kevin said it. We think our stock is undervalued. And while we think there's going to be a tremendous amount of value creation, both operationally and from a general shareholder perspective through the separation, we're committed to creating value for the shareholders now this year.

That's our focus because we're talking about a year from now in terms of the separation, we want to create a lot of value between now and then..

Okay. So – okay. Thank you..

And I'm not showing any further questions. I would now like to turn the call back to Mr. Jason Thompson for any further remarks..

Yeah. I just wanted to say thank you. We appreciate your interest. Seth and I will be around today to take your calls, so please give us a call. Thanks..

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..