Good day ladies and gentlemen and welcome to the Q2 2008 Ashland Earnings Conference Call. My name is Lisa and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating the question-and-answer session towards the end of this conference. [Operator Instructions]. I would now like to turn the presentation over to your host for today's call Mr. Eric Boni, Director of Investor Relations. Please proceed sir.

Thank you, Lisa. Good morning and welcome to Ashland's second quarter fiscal 2008 conference call and webcast. We released our second quarter results at 8 o'clock Eastern Time today. These results are part preliminary until we file our 10-Q in May. With me here today are Jim O'Brien, Ashland's Chairman and Chief Executive Officer; Marvin Quin, Senior Vice President and CFO; Lamar Chambers, Vice President and Controller who will succeed Marvin as CFO effective June 1st, Hank Waters, President of Ashland Performance Materials and Ashland Water Technologies and Michael Meade Assistant Controller External Financial Reporting. Before, we get started I will give you an outline of the call. First, I will review Ashland's results Hank will then discuss the specifics of the Water Technologies and Performance Materials Businesses. Marvin will review Ashland Distribution and Valvoline and then Jim O'Brien will conclude with the outline. After that we will take your questions. On slide 2, we provide our cautionary language regarding forward-looking statements. Statements maybe made during the course of this presentation that constitute forward-looking statements as that term is defined in relative Securities Laws. If such statements are made they will be made, they will be made on a number of assumptions such as price, supply and demand, market conditions and operating efficiencies. Ashland believes these expectations regarding operating performance are based on reasonable assumptions but it cannot assure that these expectations will be achieved. Therefore any forward-looking statements may prove to be inaccurate. Please turn to slide 3. Ashland's operating income for the second fiscal quarter declined 15% versus the prior year quarter, if you exclude the impact of key items in both periods. Our 2008 second quarter results did however show sequential improvement in three of our four businesses with the exception of Ashland Water Technologies. Ashland Performance…

Thank you, Hank. Let's look at distributions performance on slide 16. As you heard Eric say, Ashland distribution has achieved some success in improving its operating income and reducing inventories. Volume per day was on 5% versus the March 2007 quarter, due primarily to the combination of a maintenance shutdown at a major hydrocarbon solid supplier, determination of the Dow U.S. plastic supply agreement and then our decision to forgo certain low margin business. The Dow contract terminated as of March 1, 2007, so it will not be impacting our quarterly comparisons as we go forward. Sales increased 7% to 1.1 billion for the quarter. We were able to increase average unit selling price by more than 14% versus the same quarter last year. Our 7.7% gross profit was unfavorable to the prior year by 130 basis points. Our focus on gross profit yielded an increase of 20 basis points over the December 2007 quarter and 70 basis points over the September quarter. We had a slight decrease in SG&A expense versus the year ago quarter, in spite of currency translation impact from our European entities. Operating income of 13 million was down 35% versus the March 2007 quarter, but more than double the December 2007 quarter. On slide 17, you will see that volume from the terminated Dow business and from other volume reductions we discussed on the prior slides was the primary reason that distribution was operating income decline. You remember in a last few presentations of distribution, the earnings decline discussion focused on margins. Improvements we have been making have ameliorated the margin impact. Lets look... lets turn to slide 16 to see our margin trend. As you can see from this chart, average selling price, the top blue line is up 6% sequentially. Our average cost…

Thank you, Marvin. As we look to the remainder of the fiscal year, we are entering Valvoline's traditionally stronger half as the summer driving season begins. Base overall cost increases ranging from 7% to 10% were announced in February and March to take effect this quarter. In addition, addictive cost increase from 7% to 9% were announced mid February. On March 31st we announced price increase of 6% to 10% depending upon the product to market, effective in May and June. These price increases should offset raw material increases although there will be a timing lag during the quarter. Our DIY branded lubricant business experienced some negative shifts in volume in the second quarter due to the timing of our promotions and during the calendar year versus last year. We had some significant promotions during the second quarter last year, while more promotions are scheduled for the third quarter of this year. As a result, we expect favorable volumes in the third quarter. Looking ahead the Valvoline business faces continued challenges in this environment of rising costs and soft lubricants demand. Nonetheless we expect our Valvoline's all change and Valvoline international segments to continue the positive trends of the first half of the year and we remain generally positive about the outlook for Valvoline. Please turn to slide 22 for Water Technologies outlook. In our Water business, we started making changes over a year ago and the progress has been slower than we would like. We are trying to change the culture of the organization, to one that not only focuses on satisfying customers, but also focuses on finding more economical ways of doing so. We have successfully fixed businesses before and we have every reason to believe, we can do it again. It will require a substantial work to…

We have any questions?

Thank you. [Operator Instructions]. Our first question comes from Jeff Zekauskas from J.P. Morgan. Please proceed.

Hi. Good morning.

Good morning, Jeff.

Can you quickly talk about the foreign tax item? Did that relate to prior periods or to the current period?

We establish a reserve several years ago for a tax audit related to a European entity and there is further clarity on that audit and it appears that our liability will be materially less than we had originally were concerned.

Thank you. In you performance product area, what was the volume contraction level in the United States in the quarter and can you talk about how that the entire segment is performing in April?

Roughly the decline in the U.S. markets were in the order of 10% that we... the offset that you see in the volume is coming from places like Europe and the Middle East and Asia.

And how did April go for that segment as a whole.

April isn't over.

Well, you guys have SAP right so you could track it on a daily basis. Do you have a good idea?

Jeff generally as we look at this business through the March quarter, the relationships that we talked about, Europe still having some fairly strong demand as well as Asia and the U.S. market being down, that relationship does not change. So I think as you look forward, we have seen in this business as well and it should be stronger in this quarter coming but the softness in U.S. is still there but we are still seeing strength in Europe and Asia.

In terms of acquisitions, has Ashland come close to making any acquisitions or are you far away from making them, sort of how do you stand and what's the size that you are currently looking at?

The situation has not changed since the last call and we are still looking at acquisitions, the $100 million to $500 million as being our primary target, although we would consider larger ones if they would create shareholder value. As far as our ability to execute these transactions we have as we stated several opportunities that we have evaluated fully and we would execute them given the right sort of negotiated deal but again it all is determinant on the creation of shareholder value and that will be the basic determinant of whether something gets done or not.

And then lastly, can you talk about your head count currently and what it was at the beginning of your fiscal 2008 and where are you expected to be at the end of the year?

When you take a look at last year, we had the VSO, which was the voluntary severance and we took out about a 100 people, 100, 120 people and as we sit and evaluate our corporate SG&A that has not changed. We have had a basically a high a hiring freeze the whole year and basically the head count has remained very, very stable, so we are very proud of that. And what I discussed at the end of my preparations are really changes on where to make in the operating side of our business and we have already started as I was talking about SP&A and we have expectations of additional $14 million coming out within a year and we have plans that are being put in place in fact even more materially next year. So the numbers I gave you are more than the operations and not the corporate side of our business.

Jeff we actually have growth in employees in places like Europe and China where our growth opportunities are more and we are pretty much holding it steady or declining in our U.S headcount.

Okay thank you very much.

Our next question comes from Steven Velgot from [indiscernible]. Please proceed.

Thank you. Two questions from me, first I was I wondering if you could talk at all about the rate of increase in crude prices this month and what kind of impact you would expect that to have also on the natural gas side and then I had a follow up question?

Well obviously the cost of crude is impacts materially almost every input that we have across all of our lines of business so for us to be successful in this type of environment we have to push price increases through. And that is our intent and that's what we attempt to do in every market that we serve. The lag effect that we described we have contracts for certain customers as well as just the physical challenge of trying to get your sales force to have all the communications necessary with the number of customers that we have we normally have a month to two months lag in lot of our businesses before the price increase takes effect. So I think as you look at our businesses which you will see as a softening of our gross margin and then strengthening towards the end of a quarter if the price increases were announced in the first part of the quarter. So that's what we faced with to this type of environment is a little compression and then expanding them back to a more normal margin through the period as we push our prices through.

Okay, and just the price increases in crude and to a lesser extent natural gas this month has that changed your view at all about what type of price increases you would need to put through or is there also a lag in terms of how those cost increases effect you?

Well the ....I guess the good news of having crude so visible and there maybe news almost every night as our customers are totally aware that this pressure exists. So that standpoint is more of market reception knowing that energy has to be reflected in the price of the products and then the discussion that we gave we talked about even in the forward-looking look we have seen for the coming quarter and in this quarter as far as the cost increases that we have incurred and then how much we are going to raise our prices to reflect those increases. So our standard pricing model as we want to recover the price of our materials because of necessary margin to cover our services and the growth that's required for re-investment. So that's how we look at it, so you have to get more then just the raw material cost.

And then one last question, you described the new pricing process within your chemicals distribution business has been implemented and as far as plastics and composites and the rest of the distribution business what's your time frame on implementing those new or that new pricing process?

Yes, this kind of goes back to SAP where we talked about in GlobalOne the ability of having some higher transparency into our cost as well as to be able to segment our customers better. Its more of a segmentation model and having our sales people have better transparency and to how costs have impacted their margins, how it impacts particular customers, existing customers and we've been fairly successful in the chemical line and through this quarter, we are going to continue to roll it out through our plastics and composites and environmental. So the bigger test sort to speak was done through chemicals and our rolled out through the rest of the distribution businesses. So this was one of the primary benefits that we see of the investment we made in GlobalOne is the ability to do the segmentation work, get better transparency and the profitability of our customers to help us value price, segments versus just having a gross price increase across all segments where you may or may not be successful, so it think it's a little more sophisticated and its gives us a higher probability of success and we've seen that through the quarter as we did it in chemicals.

Thank you.

Thanks.

And your next question comes from Mike Sison from KeyBanc. Please proceed.

Hi good morning.

Good morning Mike.

Can you sort of discuss a lot of negative issues that you where in the Water treatment in the second quarter, can you just sum up with the total impact from all those where in and how much of that reoccurs going forward or maybe how much of that sort of you work through and doesn't become as a negative as we had for the rest of the year?

Yes, the operating issues summed up to $5.5 million.

Okay.

The two issues related to the invoice accuracy and the margin issue we have related to shipping German product around the world. Those two issues we believe we can have significantly mitigated by the end of the year. The other issue is the restructuring types of things. You were still in the midst of our restructuring so I would expect a couple of more quarters of those kinds of costs.

Okay. Okay. And Jim, when you think about water treatment, may be if you can just revisit why is this scenario that makes sense for Ashland, it was an area that you had talked about historically, may be a focus for acquisition, do you think that's the case, and then you sort of alluded to the fact that you saw a significant potential here and may be can you just sort of give us an idea of what the potential is?

Sure. When you look at the water space general, obviously it's going to be an area of concern for the world as far as sourcing fresh water and from an industrial point of the world, how to use less of it, and when you do use it, how you clean it and put it back into use. So we see it as far as just the gross economics of the business being very, very favorable over a much long period of time. So it's something that we think as an attractive marketplace. We have an opportunity here to participate. Now, our feeling now to this point is that we have not effectively and efficiently operate inside of that space, so the trials were going through right now was really changing the culture as Hank described and getting the management team in place that we believe can lead this organization in a manner that we could be profitable and get a return on the investments that we have made. So, I think operationally is really the challenge that we have. Its not a structure issues as far as the marketplace, it's not really an issue around whether we need different products or different services, its more around us, more effectively operating. So its sort of a good news in a sense, its all inside our control and the bad news is, is we haven't effectively achieved it yet. So we keep making changes and try to accelerate this change and more we change the business obviously the more impact it gets and we put a lot of change on this business over the last year and half to two years. So, some of it is self inflicted, I will admit that and we are getting more and more focused. I think the management team is becoming more effective, so I am encouraged as I look forward that we are going to get this right. So it's a great market place. I think we have a very strong position as far as the products or services that we offer. So worldwide business, two-thirds is outside the U.S., so its something we want to strengthen and build but, we don't have the right yet.

So if I think about may be two years out or so and you work through the issues that you talked about I mean how should we measure your success in your margins be at a certain level, should you be at $80 million up income sort of, is there a sort of number out there that we can sort of track?

Well as we have stated in the past we believe as a minimum, this should business should have 8% margins, EBIT margins. So that is the near term target. That's all the work that's been done is trying to get a business structure that delivers as a minimum 8% EBIT margins. Now if we achieve that, it becomes even more effective obviously, it could grow as high as double-digit type margins. I think that's exhibited some businesses like ours in the market place so I don't think it's out of the question. But, first we got to the get to the point that we deliver at least high single-digit margins and all the work that's going on today in the change in the structure, in the focus of the market place to pricing, all the things that Hank discussed is to drive the business to 8% EBIT margins as a minimum.

Okay. And last question, you sort of outlined a lot of run rate savings for '08, '09 and some additional, the additional $25 million, could you give us an idea of where those savings will come from by business?

Yes. We are looking at through our operations of our that business so primarily, it's going to be in the water business, SP&A and composites. As I mentioned it is $14 million that we have actually identified which would take place this year and then upwards as a total aggregate about $65 million run rate by the end of next year. So, that would imply that there is some pretty aggressive change in the model as well as supply-chain that supports it. Supply chain is a big part of this as well. And all that together will have to change the business models and we will have to make significant change in how we operate internally and we are going to be close, somewhat aggressive on this because we think, once we cleared SAP, we have the I think the ability now to operate differently and we are going to make those changes through this year and then the next.

Right. Thank you.

Thanks, Mike.

Our next question comes from Laurence Alexander from Jefferies. Please proceed.

Good morning, Laurence.

Hi, this Lindsey Watson speaking for Laurence. I just had a question with respect to your inventory reduction, what is your expected impact in the back half of the year?

We are not forecasting but I think we have talked about. In general, we would like to reduce our overall working capital as a percentage of sales of by roughly 1% over the year and we don't want to get into and try to forecast any one component. But, I think it's fair to say in the case of inventory, we still have further to go, as we get into this so I think we are feeling more optimistic about our abilities to drive working capital, it's a question of timing and effort and process and we have all three at this point.

Okay and going back to the Valvoline segment, have your price increases exceeded raw material pressure and can we expect the margins to continue at this run rate, through the back half of the year?

What you'll see through the period is that you will get some contractions of margins as we lag the price increases to us. And as these price increases are moved through the marketplace you will see them expand back to the levels that you have seen over the last six months so that's the, how we are playing our pricing and where we want the pricing to land when we are done.

Thank you.

Thanks.

Our next question comes from, Robert Bliss [ph] from Kedon [ph] and Company. Please proceed.

Hi guys just two follow up quickly on Valvoline. Given the timing lag between the cost increases and base oil and additives which have been pretty massive and the pricing that you have implemented, on an absolute basis, do you think third quarter operating income will be up year-over-year, and if so, what are the offsetting factors to the price cost gap which seems as though its going to widen?

I think that the, whether we exceed last years number is going to be determined on the ability of that Valvoline's more time to continue its performance, because that business is doing very, very well, well positioned to market place, has an excellent value proposition and I think that they are really achieving a high performance. Other part will be the international business if they continues to perform and grow and that will be mitigating circumstance, and will affect the U.S business. When you look at our total volumes, our volumes have shifted somewhat much less to do it yourself, to much more to do it for me. So that marketplace we've been successful with having the pricing be transferred more quickly into the DIY, so really kind of our business mix has changed over the last couple of years and net loss would be a helping factor, so determining how all these components come together will be kind of, will decide the outcome of how the earnings come in, but I think the mix we have is less sensitive to the DIY business that has been in the last several years, so at that standpoint I am little more confident that we will be able to maintain our earnings and continue to grow the earnings, but there is still variability, so I really cant give you a definitive answer there.

Okay and in terms of the pricing that you've implemented or announced, is it enough to offset both the cost and re-coupe the margin or just the cost?

No re-coupe the cost in the margin, but it will have to go through that lag I described just about two months, so you will see a... like you see in the past, the margin will peak, it will slide off and it will start peaking backup again to a... normalization, was different this time then we had a couple of years ago is the leap of price increases, are spaced about a quarter apart, when we ran into trouble with Katrina we had price increase that we happening, weeks apart and that was the big difference.

Okay and then lastly slipping over to distribution, you've continued to make nice sequential progress there, I am kind of wondering at what point we should expect to see your year-over-year improvement, does that happen in the third quarter or should we expect it in the fourth quarter when you have pretty weak comps?

No we don't forward forecast, but obviously one think in our favor is the Dallas [ph] contract will be on the same basis going into next year, so I have that headwind to discuss as far as having that business lost, now we been to build the business backup through our new suppliers and getting new customers. So that part will be helpful, and I think that we will be kind of showed from last quarter to this quarter. The business seems to be building back to momentum which I'm pleased to see and we will see how it plays out in the next quarter.

So, it sounds like we hopefully should get a quarter of year-over-year improvement in the third quarter?

I think in the presentation, I said I am encouraged by the progress, so I continue to be encouraged.

Right. Thanks for taking the question.

Okay.

Our next question comes from John McNulty from Credit Suisse. Please proceed.

Yes, good morning.

Hi John.

And also just a quick congratulations Marvin. You have been a lot of help over the years, so I definitely appreciate it. Couple of questions on the water treatment area. With regard to the portion that is marine focused exclusively, should we assume that the operating margins in that business are in a double digit area and as the rest of the business it's dragging down. Is that a fair assumption at this point?

Yes.

Okay and then with regard to the and it's my understanding that the industrial portion of your water treatment sector is about 40% of the total operating sales for that business. Is that business big enough on its own at this point even with the five initiatives that you are really pushing in that area to hit the targets to get that business itself to kind of an 8% EBIT margin or do you really need to make acquisitions in this area to kind of improve the scale overall?

I think we can get there with the business that we have and we're the third biggest player in the market at this point in time. Obviously more scale will be great, but we got what we need to make that business successful in my opinion.

John I ... there was a question asked earlier about acquisitions in this area and you are kind of implying that, as we really need to get this business model operating well before we try to grow it rapidly.

Fixed first, growth second.

Okay. Fair enough. And then just to be clear to make sure I understood what you were saying before. In terms of the cost cuts that you are initiating across the firm right now, you would hope to be at a $14 million run rate by the end of this fiscal year and a $60 million run rate by the end of '09, so an incremental $40 million in '09, is that right?

If everything comes together as we described, this $14 million that we would achieve this year and then there is a run rate which includes the $14 million and $40 million and we have an additional change in business model, we could bring another $25 million. So if you look at the total program, there would be a total of $65 million run rate if we can get everything. And then obviously, that we were communicating at this stage that we are highly confident to get us the 14 and we are working on plans to move aggressively against the 40 run rate and we hopefully by that early part of next fiscal year to have the 25 identifiers are acting against that.

Okay, great. Thanks for clearing it up.

[Operator Instructions]. Our next question comes from John Roberts from Buckingham. Please proceed.

Best wishes Marvin.

Thanks, John.

Could you update us on where we are in the discussions with the IRS on the review at Marathon transaction and if there is any updated thoughts on the timing for resolution?

Well as we said in the prepared remarks, we are expecting in two to four months, I would say it's, if you talk to try tax people, they think it will be resolved this quarter. We had one small issue come up with the IRS which is totally covered by our indemnity with marathon and there are really no major issues and its just the time that takes to work through it. But our best estimate would be roughly three months, we should have this or last we should have this resolved. It's just that there is obviously uncertainty because we don't what... we only control one half of this.

Great. I jumped on late. Thanks for the update.

Thanks.

We kind of conceded an hour. Just kind of close out here if we could, and I think as we look at the company, we have really challenging environment but we believe our businesses are well positioned to compete and be rest assured that we are taking the decisive actions to prove our Water Technologies before this material businesses and to lower our overall cost. And obviously our solid balance sheet enables us to strengthen our competitive position in the quarter ahead and we look to the remainder of the year with some tempered optimism. But before we close, I get this opportunity to thank Marvin Quin, who as we, I have announced earlier is retiring at the end of the May for his outstanding service to Ashland. And Marvin you have had a remarkable carrier over the last 16 years as CFO and your influence on Ashland has been and will be significant and lasting. You have been a teacher and mentor to many and I have personally gained much from your council [ph] over the years and I wish you and Terry all the best.

Thank you, Jim. After 36 years of Ashland, I do feel its time to pursuer some of my personal interest. I will turn 61 this summer and I would like to spend more time with my family, perhaps more time sailing and if I can convince my wife to go sailing that will be great, get two berries with one stone. It's never easy to pick the time to retire but I do have a lot of confidence in the financial team here, I have confidence in the company, I will continue to be a large shareholder and it's really been a pleasure working with you the analyst investment community. You challenged me, you provided valuable perspective and I have really enjoyed and hope you continue to provide that with Lamar. Jim?

Thank you again Marvin and thank you everybody for joining us today on the call. We look forward to speaking again in the future.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you very much.