Ashland Inc (ASH) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ashland Global Holdings first-quarter earnings call.

(Operator Instructions)

As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. Seth Mrozek, Director of Investor Relations. Please go ahead, sir.

Thank you, Kristy. Good morning, everyone, and welcome to Ashland's first-quarter fiscal 2017 earnings conference call and webcast. My name is Seth Mrozek, Director, Ashland Investor Relations. Joining me on the call today are Bill Wulfsohn, Ashland's Chairman and Chief Executive Officer; Kevin Willis, Senior Vice President and Chief Financial Officer; and Luis Fernandez-Moreno, Senior Vice President of Ashland and President of the Chemicals Group, which includes Ashland Specialty Ingredients and Ashland Performance Materials.

We released preliminary results for the quarter ended December 31, 2016, at approximately 5:00 PM Eastern Time yesterday, January 26. Additionally, we posted slides and prepared remarks to our website, ashland.com, under the Investor Relations section, and have furnished each of these documents to the SEC in a Form 8-K.

As a reminder, some of the matters discussed today and included in our presentations may include forward-looking statements, as such term is defined under US 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 during this call. We believe this enhances the understanding of our performance by more accurately reflecting our ongoing business. With that, I will turn the call over to Bill. Bill?

Thank you, Seth, and good morning, everyone. This is really an exciting time for us as the final and full separation of Valvoline is just a few months away. We remain on track and we expect the distribution to Ashland shareholders of the Ashland-owned shares of Valvoline to occur following the release of our March quarter earnings.

This action represents the culmination of a tremendous amount of work and teamwork by the respective Ashland and Valvoline teams over the last 16 months. Most importantly, it paves the way for the two great companies, both the new Ashland and Valvoline, to reach their full potential by pursuing the shareholder value creation, financial and operating strategies that fit their distinct business and investor profiles. For the new Ashland, that means we will be expanding our operating focus and discipline to achieve the full potential as the premiere specialty chemicals company.

Later in the call, I will speak to our objectives and actions that we are taking to achieve this aspiration. However, before then, I would like to turn the focus of the call to our FY17 Q1 financial results. As explained on our last quarterly earnings call, our FY17 business plan targeted a return to mid-single-digit revenue and EBITDA growth within ASI. To that end, in Q1, ASI is off to a solid start. Led by the industrial team, ASI delivered sales volume and adjusted EBITDA growth.

While we, like many others, encountered some inflationary raw material and also FX dynamics in the quarter, the ASI team took actions to offset and deliver results which were consistent with the outlook we presented in November. Moving to APM, their adjusted earnings, while down from the prior year, exceeded our expectations. This result was led by strong composites volume growth. I&S, while down year over year, took important steps to stabilize margins by pushing through price increases which are beginning to take effect this quarter.

Based upon these trends and the trends we have seen in the market, combined with the actions we are taking, we are confident to reaffirm our previously communicated outlook for ASI and APM for the remainder of FY17. Luis will speak more specifically to the results of the Chemicals business in a few minutes.

As for Valvoline, while we won't speak much of their results on this call, but instead encourage you to reference their release materials, the Valvoline team delivered another strong quarter and is off to a great start to their first fiscal year as an independent public company.

As I mentioned, later in the call, I will speak to additional actions we are taking to accelerate growth, margins, and cash conversion, and also share some comments regarding our focused capital allocation strategy to enhance investor returns. But I would first like to turn the call over to Kevin and Luis to discuss Ashland's overall results for the first quarter. Kevin?

Thank you, Bill, and good morning, everyone. In the quarter, we reported a GAAP loss from continuing operations attributable to Ashland of $0.01 per diluted share. When adjusted for key items, earnings per share were $1.16 and adjusted EBITDA was $215 million. While these amounts are below the prior year, they do not include the Valvoline net income attributable to Ashland's non-controlling 17% interest which equaled $0.17 per year-ago diluted share and $21 million of adjusted EBITDA.

As Bill just mentioned, ASI delivered sales volume and adjusted EBITDA growth, and overall APM results exceeded our expectations as the composites team delivered strong volume growth. In addition, Valvoline segment income grew year over year in what was another strong quarter. In total, the results in Q1 represent a solid start to the year. Luis will spend more time discussing the Chemical segment results in a few minutes.

Turning to the balance sheet, we continued to pay down debt during the quarter. Through a number of actions, including a cash tender offer and open market transactions, Ashland, excluding Valvoline, reduced book debt by an additional $309 million. As a result, we are reducing our expectations for Ashland-only net interest expense in FY17 to $120 million to $130 million. Ashland's liquidity remains strong. As of December 31, we had cash and borrowing capacity of nearly $1.3 billion.

Overall, we've made good progress on the balance sheet over the past few months, consistent with the objectives we laid out as part of the Valvoline separation. Our effective tax rate adjusted for key items in the December quarter was 30%. This rate was higher than we expected and reflects regional sales mix. We continue to expect that Ashland's tax rate, excluding Valvoline, will be in the range of 10% to 15% in FY17.

From a cash flow perspective, I continue to be pleased with our cash generating capabilities. While we had a net free cash outflow of $31 million in the December quarter, this is consistent with the typical season patterns of working capital within the Chemicals segment and the expected nonrecurring payments related to the Valvoline separation, which amounted to $45 million during the quarter. For the year, excluding Valvoline, we continue to expect Ashland free cash flow to be in the range of $110 million to $120 million. This includes those nonrecurring payments.

Before I turn the call over to Luis, I want to reiterate our plans and outlook for the year. As we stated in November, subject to market conditions and other factors, we presently intend to distribute the remaining Valvoline Incorporated shares this spring, following the release of March quarter earnings results by both Ashland and Valvoline, respectively. As we also stated in November, each quarter we plan to update the full-year EBITDA expectations for both ASI and APM.

We continue to expect ASI to deliver mid-single-digit EBITDA growth and our full-year EBITDA ranges for both ASI and APM remain unchanged. It is also worth noting that in the March quarter, we will continue to consolidate Valvoline results consistent with the reporting practice since the IPO. This means that any net pension and post-retirement related income from Valvoline, which we estimate to be approximately $17 million in the March quarter, will be reported under Ashland's corporate unallocated and other caption.

We're off to a solid start this year and continue to have confidence in our full-year outlook. I will now turn the call over to Luis for his comments about the Chemicals segments during the quarter. Luis?

Thank you, Kevin, and good morning, everyone. This morning, I would like to start with the Specialty Ingredients results during the quarter. We are pleased with the continued progress towards profitable growth. Sales were up 1%, to $482 million, and volumes rose 6% when compared to the prior year. Furthermore, adjusted EBITDA grew by 1%, to $95 million.

These results were driven by a strong execution by our Industrial Specialties team, which drove growth across all industrial end markets. Coatings, adhesives, performance specialties, construction, and energy all showed positive gains. In total, industrial sales grew by 6% and volumes grew by 9% compared to the prior year. Our Consumer Specialties team also drove growth in a number of our key end markets, including oral care and hair care.

Results with our pharma customers were consistent with the strong year-ago period. These gains were offset by lower sales into the skin care market where we continued to proactively manage our exposure to lower-margin sunscreens. In total, consumer volumes declined by 2% compared to the prior year. Sales declined 3%, largely due to mix within the product portfolio, pricing, and the impact of foreign currency fluctuations.

On the topic of foreign currency, we did see some FX movement during the quarter after the November earnings release, especially in the Europe and the Chinese RMB. However, due to the impact of our overall commercial excellence initiatives, we were able to deliver EBITDA growth consistent with our expectations.

During the quarter, we began to see the beginnings of a new inflationary raw material environment, particularly for crude-driven raw materials. We always work actively to offset the impact of rising raw material costs and this quarter was no different. To this end, as you may recall over the past several months, we have announced price increases across many of our product lines and end markets. These price increases are part of our strategy to better capture the value we are delivering to our customers, in addition to offsetting the raw material inflation we have seen.

Turning to our outlook, as Kevin mentioned, I would like to share some insight into our current thinking for FY17. We expect that ASI will continue the trend towards improving growth and profitability throughout the remainder of the year. We expect to leverage our leading technology positions across our core end markets and introduce new products to help our customers win in the marketplace.

We also expect to continue to keep our fixed costs in check while leveraging our commercial excellence initiatives to offset the recent unfavorable trends in foreign currency and raw materials. For this year, we continue to expect adjusted EBITDA to be in the range of $480 million to $510 million, with similar seasonal patterns to 2016. This outlook is unchanged from the outlook we provided in November. For the second quarter of FY17, we expect sales to be in the range of $530 million to $545 million and adjusted EBITDA margin to be in the range of 24% to 25%.

Turning now to Performance Materials, adjusted EBITDA declined to $21 million in the quarter. This decline was driven almost entirely by intermediates and solvents pricing and the impact of the planned catalyst change at our BDO facility in the US.

Composites had a strong quarter, where the volumes grew by 7% and sales were consistent with the prior year. As with ASI, prices for key raw materials began to rise during the quarter, which resulted in some margin compression. While we are typically able to recover the impact of rising raw material prices, there is roughly a three-month lag in timing of the pass-through. As I mentioned, intermediates and solvents results were well below prior year, reflecting the expected lower BDO and the reduced pricing.

Volumes declined by 3% and sales declined by 14%, reflecting this lower pricing. The results also reflect the incremental $9 million of costs associated with the Lima catalyst change, which needs to occur once every four to five years. On a sequential basis, in the first quarter, we began to see the impact of recent BDO price increases as announced by both Ashland and other producers. And while the reduced prices continued to decline through the first quarter, prices appear to have stabilized more recently.

Turn now to the outlook for APM for the full-year. We continue to expect APM adjusted EBITDA in the range of $95 million to $105 million. As with ASI, this outlook is unchanged from what we communicated in November. For the second quarter of FY17, we expect APM sales to be in the range of $230 million to $250 million, with adjusted EBITDA margin to be in the range of 9.5% to 10.5%. With that, I'll turn the call back over to Bill for his closing thoughts. Bill?

Thank you, Luis. With the planned final separation of Valvoline just a few months away, the entire new Ashland organization is squarely focused on delivering against our 2017 plan and positioning the Company for more profitable growth as a pure-play specialty chemical company. As I mentioned at the beginning of the call, in addition to completing the Valvoline separation, Ashland has two core priorities for the year ahead.

The first will be to deliver on this plan and that includes mid-single-digit EBITDA growth within ASI, stabilizing prices within I&S, and also taking aggressive actions to reduce year-over-year SG&A through the previously announced cost-savings initiatives. Also, as you've heard, we are off to a solid start for FY17, and with that, our outlook remains unchanged for the fiscal year.

Our second core investor priority for FY17 is to pivot Ashland to become the leading premiere specialty chemical company. Crucial to achieving this objective is to achieve top-quartile EBITDA margins and growth in excess of GDP. In the quarter, ASI took an important first step in its return to profitable growth. But to accelerate our progress, our formula here is straightforward. Customer intimacy and innovation is essential to our success. And to that end, we have launched a multifunctional engagement team, and that team is tasked with increasing ASI sales from new products by expanding the size of our innovation pipeline and accelerating the rate at which we are commercializing those new technologies.

Another core element is to capture the value we bring to our customers and extend our journey to true commercial excellence. We continue with internal efforts with a focused price-to-value initiative, which is led by our new commercial leaders, and is leveraging new approaches from external experts and we're beginning to see some benefits from this important initiative.

Lastly, to ensure we have leading EBITDA margins, we need to drive cost competitiveness and continued overhead efficiencies. In this area, as our results in the first quarter indicate, we are executing on the plan and we continue to maintain cost discipline across the Company.

In addition, to be the premiere specialty chemical company we envision, we must also ensure that our profitable growth leads to effective cash conversion and that cash is deployed to create shareholder value. As Kevin discussed during the quarter, Ashland reduced its debt by more than $300 million, which further reduces our annual interest expense and gives us greater financial flexibility for the future.

We believe the potential for growing our strong cash conversion for the new Ashland is significant and are confident that the actions we are taking will accelerate our results in these important areas. As we move to become a more focused specialty chemical company, we have also refined our targeted metrics and capital allocation strategies.

It's difficult to explain the comprehensive nature of our forward plans and value-creating capital allocation strategies on a conference call. And as such, we have scheduled an investor day for the morning of May 1 at the JW Marriott Essex House in New York City. We look forward to discussing Ashland's strategy metrics and financial outlooks in greater detail at that session. We will share more details about the event as we get closer to the date.

In closing, we are excited about the separation into two great companies, on time, as expected, and we believe that this will enable the new Ashland to pivot its focus to driving the operating and financial imperatives which are necessary to realize its full potential as the premiere specialty chemical company.

We do thank you for your interest in Ashland, and I will now turn the call over to the operator to take your questions.

(Operator Instructions)

John Roberts, UBS.

Thank you. Excluding the catalyst change in the first quarter, could you give us some guidance on what the normal seasonality is for the new Ashland ex-Valvoline?

Yes. This is Luis. What we have is, over all new Ashland, about 23% of our sales come in the first quarter, so we have definitely lower number of sales in the quarter. And as such, we see lower profitability. This is consistent with the previous years. And because of the high level of the depreciation that we have in our plans, that has an impact on EPS. As we expect to see moving forward, Q2 is stronger, Q3 is our strongest quarter, and then Q4 is similar to Q2.

Bill, last quarter, Bill, you mentioned a renewed emphasis on an assessment of the role of BDO in Ashland's portfolio. I didn't see anything in the prepared remarks on that. Could you give us an update?

Sure. Sure. That is an important part of our forward orientation. We know that to be the premier specialty chemical company we envision, you have to have a true specialty chemical type portfolio where you can really differentiate through innovation and adding value to customers. And we know that the intermediates business has more of a commodity dynamic. We do try to add value to our customers with the quality and services we provide.

But it's clear that it is more of a commodity dynamic. And so we do continue to look at that and are active in our thinking on the topic. As you can imagine, it's a challenging and important assessment to make because, first of all, BDO supply and consistency and quality of that cost competitiveness of that is important for the ASI business.

Also, as you hear from the results, this is a business that cyclical as it is, has been going through a downward cycle, and ultimately, we believe, is at the bottom of that cycle. And so making sure that we're making the right discipline decisions about how we, if you will, remove the commodity dynamic from our earnings, whether that be through any sort of specific actions related to contracts or other activities that we could take, we want to make sure that we are balanced, that we are driving towards ultimately reducing our exposure to that commodity dynamic, but also recognizing that, being at the lowest part of the cycle, you want to be very balanced with your approach and timing as to how to complete that.

Thank you.

Mike Harrison, Seaport Global Securities.

Good morning. Luis, you mentioned this sort of inflection that has happened in the raw material dynamics within the ASI business. Can you talk about what you are seeing specifically on the cellulosic side of the business? And then on the legacy ISP business, can you just remind us, as BDO prices are going up, how does that roll through the P&L and how does that impact ASI margin?

Sure, Mike. Let me start with your first question. We started to see that when we saw the inflation on cellulose specifically on one of the raw materials that is related to cotton. But the impact of raw materials in, I would say, most of the ASI business is more muted. The area where we have more of an impact is adhesives and composites just because they are a much more significant portion of the cost. And those are very much related to oil.

I'm confident that we can always recover the increase and in fact there's always margin opportunities when that happens. But there's always a lag, which indicates composites is about 90 days. In terms of your second question on BDO, we are fundamentally, we see the inputs for us into ASI and we transfer at cost. That's one of the benefits of having the integration of this product in our portfolio. The only impact that we see is that the impact of raw materials impacting the manufacturing of BDO, not the impact of prices going up on the marketplace.

Understood. I was also hoping that you could give a little more detail on the skin care market. You referenced that you were intentionally walking away from some of the lower-margin sunscreen business. Can you just give some detail on how the sunscreen business is structured? How much of it is higher-margin and we're keeping? How much of it is lower margin and something you're going to walk away from? And what are your longer-term strategic plans for that product line?

There's two elements to it. We have a very strong position in a specific molecule that is one of the most advanced molecules in sunscreens and that business continues to be important and significant for us. But in the past, we've chosen to compliment that product line with other materials where we haven't been as competitively advantaged, but where we had an ability to still command the right value for those technologies in the marketplace.

What has happened is that there has been more of a price competition in those areas, so at this time, we're just not getting the value for those. So, two elements. One technology, we're very good at, and that will continue to be the case. There is a portion of the sunscreen market where, at this time, we're not getting the value for the products as we expect.

And that is the fundamentals. It is a portion of our skin care business. We have other elements of our skin care business that are doing well and will continue to do well and it's masking some of the growth that we have on innovation. That is, in summary, what is happening with the skin care market.

All right. Thank you very much.

Christopher Parkinson, Credit Suisse.

Thank you. Over the last three months, you've been instituting some broad-based price increases on various areas of your portfolio, most recently, one in HEC. Can you just comment a little more about these initiatives, initial success rates and how we should think about these in terms of quarterly cadence and what is actually embedded in your guidance? Thank you.

Yes. Clearly, we are expecting success on those price increases and they are in our expectations for the quarter and the year. From a cadence perspective, we started announcing last quarter and we started to see the impact of that in the first quarter, but that was very muted. Because it just takes time because of contractual obligations and negotiations.

We will see more of those flow in through the income statement in Q2. The key for us is to maintain very close attentions to the evolution of raw materials and driving our price-to-value initiatives to continue to show those through the P&L. But in summary, Q1, a very small impact. By Q2, we should start seeing more of them and continuing on in Q3 and Q4.

And maybe just to add that the pricing actions, the structural pricing actions, have largely been related to, if you will, raw material dynamics and demand dynamics in the market space. Those are, to a great part, embedded in our forward outlook. The price-to-value initiatives that we see, those are what we will believe our upside over time to really realizing the full value of what we're bringing to our customers.

Great. And just a quick follow-up on the personal care. Just from an end market basis, it still seems hair is still solid, oral is improving off of a destock last year, skin is challenging. Just based on your longer-term vitality index, can also just give some quick updates on new product growth contribution over the next few quarters and whether or not there are any updates on trends in emerging markets? Thank you.

Let me start with emerging markets. Overall, we are seeing a slight improvement in demand on those, specifically in Brazil, where we are seeing more of a return to the normal consumption over there, both after the new government has been in place, but also as the real has recovered, giving more purchasing power to Brazil. China continues to be improving, or continues to improve. So, in fact, we had a good quarter for us in China. That has been a success area.

When it comes to our innovation efforts and our vitality index, I feel very comfortable about our product portfolio and how it's growing. There's a lot going on in terms of innovation. What I would ask is that we have a full presentation in the May 1 timeframe where we can talk about all what is going on in the innovation side.

The one thing I can tell you, I was, at the beginning of this week, in a trade show with many of our customers and I was very pleased because many of them, in the next three, four or five months, have product launches that will include the technologies and that was a home, personal care type of show. I feel confident that our initiatives are going to pan out in the next two, three quarters.

Thank you for the detail.

Dmitry Silversteyn, Longbow Research.

Good morning. Thank you for taking my call. A couple of follow-ups, if I may. On the question regarding the skin care products, you called it out as the only bad guy in ASI and you have your consumer revenues where volumes were down 2%. Is skin care that big a portion of consumer that it's offsetting the growth of the skin care in the all the others pharmaceuticals and the other things that are going for you? Or is the decline there so great? I'm just trying to reconcile how this one product category can be so impactful on the whole consumer portion of the ASI.

That's a very good question, Dmitry. When it comes to volumes, the one thing that I always qualify that we have to be careful, there may be products that are in the lower price end so it may be a disproportionate amount of the volume, but not necessarily a disproportionate amount of sales. That's the case with some of the mixed issues that we mentioned on the skin care. So they might reflect the higher volume, but they are not as impactful when it comes to sales.

In terms of the sales decline in personal care, really is a combination of that decision with mix and FX. So there's a variety of factors that got us to that 3% decline. Pharma was, again, was consistent with last year and that is after a very strong last year. I'm still confident in our growth potential in pharma. Hopefully that explains the dynamic.

Okay, yes. Thanks, Luis. Second question on the ASI volumes or revenue guidance overall. I think you said $530 million to $540 million, if I'm not mistaken. That that's basically maybe 1% to 2% volume growth or 1% or 2% sales growth year-over-year. Given that the industrial segment seems to have come back as nicely as they have, why are you not more optimistic on the top-line performance of ASI?

Well, we definitely are confident on the growth potential of the business, but we are counting on the impact of the current strength of the dollar and have put, have built that into the expectations.

Okay, so basically, if the foreign exchange headwind is different for you guys, different sequentially. Okay. All right. Got it. And then final question on the performance material side of the story. This is not the first quarter you've mentioned the growth in composites and it's encouraging to hear that that business is growing for you guys.

Are there a couple of end markets or a couple of geographies that are responsible for the good commentary that we've been hearing from composites? Because, frankly, looking at fiber and glass manufacturers and some other people out there in related businesses, they don't seem to be as bullish as you guys and certainly aren't delivering the results that you guys do.

Yes. There's a couple of things going on. Our composites business has proven to be very resilient and part of the reason is that we have introduced new products into new industries and we continue to grow in segments like the construction industry and really developing areas where composites were not used.

The way I see it, why we have been resilient is because we have been able to introduce products in areas where composites were not used, bringing value to our customers, and that puts us in a position where we can grow in a market that, you're right, is very muted. We see that in some portions of our business, but the benefit is that these new product introductions are giving us the ability to grow in a muted environment.

Is there, for lack of a better term, one or two markets or geographies that are driving most of this strength?

Yes. The ones I highlight is construction applications that are actually not fiberglass. They are other types of composites. And both North America and Europe, which is where we have most of our business.

Got it. Okay, Luis. And then one final question on Performance Materials. Your sales guidance for the year-over-year looks flattish depending on where in that range you fall. With BDO pricing going up and sequentially, and I'm assuming they're going to be up year-over-year as well. Again, is it foreign exchange that's holding you back on being more bullish on the top line?

On the BDO side, Dmitry, let's just be very clear, we are starting to see improvement sequentially, but we are still seeing significant year-on-year reductions. The reduction last year was very significant and it happened Q1, Q2, Q3. And as much as we see prices increasing, we don't see that trend changing until Q4. What we do see is that trend starting to abate. So the impact is going to be less in Q2, less in Q3, but at this time, we're still not seeing an improvement versus last year. But we're seeing definitely sequentially improvements.

Okay, got it. All right, Luis. Thank you very much.

Jeff Zekauskas, JPMorgan.

Thanks very much. Can you remind us why your ongoing tax rate is as low as it is and for what period of time that will continue in the future?

This is Kevin. The tax rate is largely due to expected regional income mix in a post-Valvoline world, where a large portion of our pretax income will be generated in much lower-taxed jurisdictions. And something we have outlined pretty thoroughly in our 10-K, you can go take a peek, is our Swiss principal structure, which is a driver of that.

And we would expect that to be the structural tax rate going forward. Obviously, the caveat there would be tax reform and other actions that could occur from a US or non-US perspective could certainly impact that. But based on everything that we know today and can predict today, we would expect that to be standalone Ashland's tax rate going forward.

And your cash tax rate and your book tax rate are similar?

I would expect the cash tax rate to be somewhat higher just because of some of the anomalies that will ultimately run through the numbers. We will get more specific about that over the course of time. We're obviously still in a situation where we are not separate and we'll have to see how all that plays out. But we'll provide more clarity on that as we can.

Is it a meaningful difference or it's a small difference?

It's too early to tell at this point. Like I said, we will provide more detail on that as we go forward.

Okay, good. Thank you so much.

Laurence Alexander, Jefferies.

Good morning. It's actually Dan Rizzo on for Laurence. How are you? Just a quick clarification for your guidance for next quarter for the operating income, so the $4 million to $6 million range in operating income, that includes already the $13 million from pension expense, or sorry, from pension?

That is correct, Dan. It's roughly $17 million estimated from a pension and post-retirement benefit income standpoint. That $4 million to $6 million range does include that number, that is correct.

Okay. And then for just looking at the back half of the year, in terms of what you are giving for segment guidance for ASI and APM, am I wrong that you're expecting kind of a big ramp, given the FX and raw material headwinds that are probably developing? Are you expecting them to lessen or just what's the thought process there?

The way I would characterize it is we would expect normal seasonality in terms of business performance. As Luis indicated, Q1 is and has always been our weakest quarter due to seasonality. FX and that sort of thing we will certainly continue to provide context around that. As we indicated, the team did a nice job in Q1 of overcoming those hurdles year-over-year, if you will.

As you well know, the dollar versus significant other currencies is continuing to move around a fair bit. We're obviously paying close attention to that and, like I said, we will provide the appropriate context around that. But it's our expectation that whatever currencies do, that the team will manage through that to ultimately produce the results that we have projected. We have a lot of confidence and faith in the projection for both those businesses where we sit today.

Thank you very much.

James Sheehan, SunTrust.

Good morning. I was wondering if you could comment on some of the structural reforms and policy changes you see coming in Washington and how they might affect you. Specifically, I would like to know about your sunscreen formulation that has kind of been held up at the FDA for UVA and UVB protection. I think that's been stalled for some time. Do you see any hope that some movement on that front is close?

Sure. So, this is Bill here. The changes that are taking place in Washington, I think, we all know are unfolding and a little bit difficult to predict in terms of the full direction and impact. In particular, though, it's been unfortunate that there hasn't been further progress in moving the sunscreen protection act and the related testing and approvals through the FDA.

And quite obviously, given the lack of progress to date, any changes that occur in that front would most likely have a beneficial effect. So we are optimistic that this change or these changes will be to our advantage, if you will, and to the advantage of the public, because this is a product that is good for people and we believe should be out there helping to protect people. That is one of positive effects we see.

Certainly, as you see a more robust environment for construction, whether that be infrastructure or it ultimately relates to other commercial and residential construction, that will be good for our composites business. And so there are a number of areas that feel like they could be positives since we are a significant exporter of materials.

We don't have a lot of materials that we produce, for example, in Mexico, that we import into the US. We don't feel like we're going to be impacted by that type of dynamic or trend. It's really difficult to call what will play out in Washington. But we don't see indications that are problematic on the surface from where we're sitting at this point in time. If anything, the opposite. Hopefully, they will be beneficial.

Great. In terms of you're lag in getting pricing versus raw material costs escalation, I think you mentioned what it was in composites. What specifically would that lag be in ASI?

So, in composites and adhesives, as I said, it tends to be about a 60 to 90 day timeframe. In the case of ASI, again, the impact, first and foremost, is much more muted just because of the impact of raw materials on the overall cost. There is a lot of value added on what we put. Some other materials have some much lesser impact into them. I think the key for us is to continue to drive our commercial excellence initiatives and price-to-value.

I that think part of the reason we're able to compensate for that is because even before raw materials were going up, we were implemented some of those commercial excellence initiatives. And again, the dynamic is slightly different. If there was a huge impact, it also takes us between 60 to 90 days, but again, it's much more muted in the rest of the portfolio with adhesives and composites being the ones that are highly impacted.

Thank you.

David Begleiter, Deutsche Bank.

Thank you. Luis, on performance materials, again, the fact that earnings were down sequentially Q1 to Q2 adjusted for the Lima, Ohio catalyst outage or change, is that just due to the lag in recapturing raw materials or is there something else driving that sequential lag or decline?

Yes, again, sequentially speaking, we do expect to see some improvement in terms of BDO pricing, but we also expect to see some level of raw material increases and the impact of FX. The only other thing that I would mention is that as we did the calculations, we are seeing much more muted impact on the BDO derivatives, things that are not quite BDO, but are still intermediates.

But we're not seeing yet the price increase. Those are some of the elements, and again, quarter-to-quarter, we also have certain shutdowns that impact the business. The one issue on Q1 is that it was one of those shutdowns that only happens every four to five years. But that does not mean that we don't have some level of shutdown activity, that it's normal, let me put it this way, on Q2.

Understood. And just on ASI, nice guidance for Q2 on the margins. Would you expect that margin range in the back half of the year or is there potential to even go above 25% do you think for ASI in the back half of the year on an EBITDA margin basis?

Well, we traditionally have much stronger margins in Q2. Q3 is our strongest margin, Q, thank you, for our strongest margin in the year and that again has to do with both demand as well as maintenance activities in our plants. We expect to see the same system and pattern that we've seen in previous years. In order for us to get the average of 23%, obviously, the Q2, Q3, Q4 have to have strong margins in the 24% to 25% range.

Thank you very much.

Mike Sison, KeyBanc.

Hey guys, nice quarter, there. When you think about ASI, I'm encouraged that your outlook, at least near-term, is still on track. When you think about the industrial specialties business and the volume growth recovery, a lot of folks in the space have not really seen much of a recovery or looking for a recovery. So it sounds like a lot of that is within your control. Do you expect volumes to remain fairly good for the next couple of quarters?

Yes, I mean, obviously, we're happy to see what happened in Q1. We're optimistic about the future quarters and we see that. I think that there's three elements that are impacting our industrial business. Number one, innovation is faster to implement in industrial business, that means that in regulated business just because of the nature of regulations.

We are seeing the benefit of some innovative products that have been implemented by our customers a little bit faster. We are seeing faster also results from our pipeline. We said about six months ago that we were improving our pipeline opportunities and we can see those panning out. But I would tell you, there are industries where we see improvements in demand and the coatings industry is one that I think the US is doing better overall.

So is the demand in China. The combination of better demand consumer for downstream markets together with innovation and pipeline management is what's driving the results. I think that most of those strengths are still solid for this quarter.

This is Bill here. I would just add in that when we talk about driving and moving towards a more focused operating company with this transition, there is a real change in terms of how we're managing the Company, the metrics that we're looking at, the cadence of review. We've talked about some changes in leadership that have occurred.

I would not underestimate it because we have always felt, as I think you have, that the potential for real growth, whether it be the revenue growth or margins, is there. And while the team has done a great job over time by being able to focus on really a substantial part of our daily effort to reach in that peak performance, we think that is something that truly will pay off and not just today, but over time.

Great. When you think about each of the businesses within ASI, your balance sheet is going to be in a good shape, is still in pretty good shape. You are nearing the spin of Valvoline here. What areas make sense to really focus on continue to grow via maybe bolt-on acquisitions and maybe fortify? Anything in particular you would like to add to the portfolio longer-term as you continue to grow the business?

What I would say, and I think it will be a little clearer when we have our investor day coming up here, is, and last time in our investor day, we talked a lot about the chemistry platforms and how those basically took us into spaces which were very attractive like the pharma and personal care and coatings and others. I think what you'll hear a bit more about in May is the real value and the real differentiation that we have in those industry areas.

What is the value equation that we bring specifically in pharma and in coatings? And we can articulate that a bit now, but the point is that we would be looking for acquisitions that clearly have the right financial economics associated with them and that's a whole separate discussion, but I think, hopefully, that is fairly straightforward what our thinking would be on that point. There's been a lot of discipline in the past and there certainly would be going forward.

But to your question, in areas that would have value propositions to the customer that would extend the solutions that we provide, thematically within those spaces. And so that is how I would put it. I mean, clearly, we would concentrate our efforts in the areas which we view as core and in certain very differentiated niche areas, but it would really be to extend the range of solutions that we can provide within those market spaces.

Great, thank you.

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Seth Mrozek for any further remarks.

Thank you, Kristy. Thank you, everyone, for your time this morning and your interest in Ashland. I hope everyone has a great day. Take care.

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