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

Thank you, Eric. Good morning and welcome to Ashland's third quarter fiscal 2008 conference call and webcast. We released our third quarter results at 8'o clock Eastern Daylight Time today. These results are preliminary till we file our 10-Q in August. Our speakers here today are Jim O'Brien, Ashland's Chairman and Chief Executive Officer; Lamar Chambers, Senior Vice president and CFO and Sam Mitchell, President of Ashland Consumer Markets. On slide two, we provide our cautionary language regarding forward-looking statements. Statements made during the course of this presentation that constitute forward-looking statements as that term is defined in relevant securities law. Ashland believes its expectations regarding its operating performance and the Hercules transaction are based on reasonable assumptions, but cannot assure that those expectations will be achieved. Therefore, any forward-looking statements may prove to be inaccurate. You will also see the mandatory additional information we must provide in connection with the proposed acquisition of Hercules. Please turn to slide three. Before we get started, I will give you an outline of the call. First, we will review Ashland's overall results and then get into the specifics of our businesses, including a more in-depth review of Valvoline by Sam Mitchell. We'll then discuss our progress on cost structure initiatives and conclude our prepared remarks with an update on the Hercules transaction. After that we will take your questions. Let's go to our third quarter highlights on slide four. Ashland's overall results for our 2008 third fiscal quarter were solid, with operating income increasing 19% on an apples-to-apples basis, versus the June 2007 quarter, which included certain key items I'll talk about shortly. In aggregate, Ashland's volume was down several percentage points and we experienced approximately $80 million of raw material cost increases during the quarter. We will discuss our plans to…

Thank you Eric and good morning everyone. Let's turn to slide 13 to look at the results of our Ashland Performance Materials business. Volume per day declined 4% as compared with the year-ago quarter, including a greater than 10% reduction in volume in the Americas primarily in our composite polymers business. As you are well aware the US residential, construction and transportation markets continue to struggle, impacting volumes in our largest markets. Sales of larger vehicles such as SUVs and pickup trucks, just proportionally impact Performance Materials particularly in composite polymers unit. The precipitous drop-off in large vehicle sales has had a real impact on our recent performance. That said, we continued to experience significant growth in Asia with a nearly 30% increase in volume versus the prior year. Asia now represents nearly 9% of Performance Materials total volume. We also continue to achieve some volume growth in Europe albeit at reduced levels, primarily the result of strong growth in our casting solutions unit. Additionally, our premium business such as our Derakane and Hetron resins, which are sold into markets such as infrastructure and energy continues to generate strong margins and provide some underlying stability for profitability. Sales of operating revenues increased by 6% to $425 million as currency translation and price increases helped to offset reduced volume. The lag in achieving price increases is the primary cause of our reduction in gross profit percentage. We have also been targeting lower margin business to help recover some of the volume lost due to our customers reduced production, which is also contributing to the gross profit percentage reduction. Selling, General and Administrative Expenses increased 5% versus the year-ago quarter [inaudible] an adjusted performing currency translation, SG&A increased by only approximately 1%, a direct result of severance charges related to our cost…

Thanks Sam. You'll note on slide 25 that as we discussed this spring we're focused on achieving cost structure efficiency throughout Ashland. Our target was to reduce cost by $14 million by the end of fiscal 2008, on an annualized run rate basis and by $40 million by year-end fiscal 2009, also on a run rate basis. In addition, we announced that we're targeting another $25 million of year-end 2009 run-rate savings through changes in our business models in Performance Materials and Water Technologies. We are significantly ahead of plan in achieving our run-rate annualized cost savings of $40 million. Through the June quarter, we've achieved run-rate savings of $22 million primarily in our Water Technologies and Performance Material businesses and we expect to have run-rate savings well in excess of $40 million by the beginning of the December quarter. I've asked Lamar to provide more detail on the proposed Hercules acquisition before we take your questions. So, Lamar?

Thank you Jim. As we've been now talking about the Hercules transactions... transaction we've heard a number of recurring questions. I hope to provide you with some of the answers in the next few slides. The chart on slide 26 provides the estimated sources and uses of funds for the Hercules transaction. We plan to utilize about $1.4 billion of senior credit facilities, $750 million of notes, $900 million dollars of cash on hand and $500 million of new Ashland stock to fund the transaction. The sources say, we'll presume, we'll continue to hold our $275 million of student loan auction rate securities. To the extent we are able to liquidate these securities, our need for debt financing will of course be reduced. That said, when the transaction is complete we expect to add $2.4 billion to $2.5 billion of debt including $2.2 billion of new debt and $215 million of assumed debt from Hercules along with some or all of Hercules' relatively small amount of foreign debt. The $215 million represents 6.5% junior subordinated deferrable interest debentures due 2029. Hercules other debt is expected to be retired at closing. We expect the debt to trailing EBITDA ratio to be 3.2 to 3.3 times immediately upon close. You will know on the user side of the table that $172 million will be satisfied to retire a cross currency swap arrangement as Hercules has maintained. We plan to pursue our options with these swaps and will consider maintaining some or all of them post closing but for purposes of conservatism we have assumed that we will use funds to close these instruments out at the time of closing. The current expected blended interest rate is 7.25% to 7.5%. Of course, the credit markets continue to move and rates will not be…

Thanks Lamar. I appreciate you going through the details of the Hercules transaction. I know that it's a fair amount of technicalities, but I also know that many of our investors and analysts are interested in these items. So, all that said let me be clear. We plan and we want to close this transaction, we look forward to the combination of Ash and Hercules and the new opportunities that it presents. With that let's go to the next slide and we will take your questions on our third quarter performance or the transaction. Question and Answer

[Operator Instructions]. Your first question comes from the line of Laurence Alexander with Jefferies. Please proceed. Laurence Alexander - Jefferies & Co.: Good morning.

Good morning, Lawrence. Laurence Alexander - Jefferies & Co.: I guess first of all on the water business, can you give a little bit more granularity on the sequential headwind that will be faced in Q4?

As we look at the fourth quarter, the primary focus has been on the pricing model. Again the prices into our customers and look at the segmentation so that we can get as much price as possible. So, we will continue to work that particular issue. As far as the redesign we will continue to execute the decisions that have been made around staffing the size of the business organization. All of that will hopefully be fairly complete through the quarter, and I do not want much to spill over into the new fiscal year that will start on October the 1st. So the headwinds as you saw in the business, the business is doing very well on their volumes, they are executing well at the customer sites, so I think the biggest challenge the business has is doing their pricing. I think they have a good process now and they have good visibility and the achievement of that and the management is taking control of that situation so that they can measure it and monitor and assure that we are getting that. Laurence Alexander - Jefferies & Co.: And, I guess secondly with respect to Hercules assets, I think at the last conference call you discussed the core assets, but what's your view on the JV, the particularly fiber visions?

The fiber vision JV had its purpose and they are trying to achieve a certain result and I would... my discussions with Craig, I would support what they have done, and I would support their strategy going forward on how to resolve that. Laurence Alexander - Jefferies & Co.: Okay. So there is no change in terms of the longer-term objectives?

No. Laurence Alexander - Jefferies & Co.: Okay. And finally on distribution you've given the environment that we are in now what's... how aggressively do you think you can drive margin expansion in 2009, 2010?

The environment that is out there today, as far as pricing is fairly robust, let's say, everybody understands that the crude situation is strong and volatile and that the petrochemical producers and especially the companies that are selling commodities are under great stress and that they are accepting to a great degree the cost increases that are coming through. The challenge next quarter will be as crude kind of settles out not only you recover the actual cost but can you recover more margin and that is what they have to work on the next quarter and I would anticipate that we'll continue to raise prices and the challenge will be to get that additional margin above the cost to get a margin that's more appropriate for returns of the business. And, we think that that's going to take some stability in the marketplace to achieve that and but in the meantime, we plan to add a minimum and get the cost through so that we recover the total cost of the inputs. Laurence Alexander - Jefferies & Co.: Thank you.

Thanks, Laurence.

Your next question comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed.

Hi, good morning.

Good morning, Jeff.

In your corporate other income, I think the numbers for the first three quarters go something like this, positive 3, positive 1 and then positive 10 for this quarter. How did you do that and what's the right ongoing number?

That's a somewhat difficult portion of our segment breakdown to predict as you might imagine being the unallocated category of our corporate expense that includes a variety of costs related to matters like incentive approvals, legacy environmental issues, all of our... a host of our support functions so we do have certainly a challenge predicting that from period to period, our basic philosophy is to try to achieve breakeven level results through the allocations that we charge to our commercial operating segments. If we look at the... at the quarter we can see that SG&A overall for Ashland was down about $12 million and most of that difference did show up in our unallocated and other line and that difference in the quarter-over-quarter comparison was a combination of reduced resource group expenses where we have been able to trim back our ongoing costs of supporting the businesses through [inaudible] and staffing reductions we've been focusing on over the last year or so frankly and we had some unusually favorable effects from lower incentive compensation and deferred compensation costs in the quarter. So looking forward, we would expect that line to be more in the range of zero which is our philosophy.

Secondly, the Water business also has had income volatility and that I think in Q1, 5 million and 2 it was negative 2 and this quarter it was positive 12? What's sort of the normal run rate right now of the Water business going forward?

As we mentioned in the discussion earlier, we believe about 5 million of the 12 million in earnings for the quarter for Water was somewhat non-recurring items, contracts that got closed out that had normal effect, positive effect on the earnings plus some adjustments to accruals for various liabilities when we add those items up, about 5 million of that 12 would be on the abnormal levels of earnings, so I think you can take that off the top. In the other direction though as Jim mentioned in his discussion around our cost structure and the expense reduction initiatives we are seeing a significant progress made quickly in that business and we believe we're at about an $8 million run rate on those expense reduction initiatives for the Water business itself. So that's kind of counterbalancing that looking forward.

Jeff, I think we have kind of turned the corner on our Water business as far as all the initiatives that we've been talking about for sometime. In the second quarter we had production issues, because of how we handle polyacrylamide being produced in Europe and being shipped around the world. We changed our processes for a sourcing from various parts, we've arranged other contracts, I think we have gotten that fairly settled out, so we are not taking the currency as a moving production out of Europe through the rest of the markets that we serve. So that was a big improvement that really hurt us in the second quarter. So that's been fixed, the other was our pricing issue. We have been really focusing on our pricing processes and getting our pricing right and I think this quarter is the first one that we can fully accurately report that we've actually made progress and starting to show up in our results. So I think that's a change that should be sustainable going forward and as the margins talked about, we are just now getting some benefit of the restructuring and cost reductions, which will continue to be ongoing but we've already made some changes there and that's starting to show up. So in our Water business, I think, the first time in some time I can report that we have positive momentum built in this business and I certainly hadn't felt that way for sometime, I know that you personally have challenged us in our reporting on that but I think that that's the big change we actually have some momentum built in the business and so we are on pricing, cost structure and getting our production right around the world as far as currency issues.

That's helpful and just lastly, it sounds like the fourth quarter is a little... is weaker than third on a sequential basis. Is the EBIT likely to look more like the first quarter or the second quarter, sort of what's the order of magnitude of weakness you expect in Q4?

I think the guidance we're trying to give you in our talk and the language we've used, is the third quarter reflects the price increases and the changes in the business that reflected crude until the last big run-up in the last really four or five weeks. So what we're facing through the fourth quarter is the magnitude of pricing that hasn't been taken to the marketplace is going to take as probably two to three months to fully recover that. So what we're trying to communicate in the fourth quarter is that's what's going to take place. So if we had a bigger choice one of the orders I would take the first quarter.

Okay. Thank you very much.

Your next question comes from the line of Robert Felix with [inaudible]. Please proceed.

Hi, guys. Just a couple of quick questions. First, I wanted to follow up on the Water business. You have talked about the near-term goal of getting that business to an 8% EBIT margin and you just mentioned that you think you have turned a quarter in terms of some of the initiatives. What kind of underlying run rate EBIT margin you think that business is at?

Today? Well, I think it's constantly changing month-to-month. So I think as we continue to get our pricing up, continue to get our cost down. I am hopeful that we're going to see continued improvement, what we've communicated in presentations in the last several quarters and months is our initial objective is to get it to 8% and that would be a threshold that I would hope that on a run rate basis we would be able to achieve by the end of this year EBIT. Then the forecast would be as we continue to improve that business and I am hopeful that once we combine it with Hercules business here in... sometime in the fourth calendar quarter, we should improve that even more, as it was actually additional change that we made to the business with the size and scale that Hercules brings and I will leave that up to Paul Raymond as he gets into it after we close in and he starts setting objectives for him going forward, as far as the integration team I would expect more. So a minimum of eight, and I think it goes to double-digit into the future. But yet we still like to have I think the initiatives in the combination with Hercules to achieve that. But I think it's something that can be achieved, because it is cost reduction, it's organization, and it's positioning and I think we'll have the pricing model in place to understand how to price and get price. So I am much more encouraged today than I have been for some time.

I guess what I am wondering in light of the momentum you see, you are building there, should we expect the path to 8%, to be linear or should we expect a step change in the margin structure in the coming quarters?

I think what you see is kind of a linear movement on the cost improvement. Is that something that is taking place month-to-month. But, on the pricing, I think pricing is more of a step change because, pricing is something you get, it's a lift and you get it pretty much all in the same period. So, I would see pricing as a step change move and cost more of a linear improvement.

So, opportunity as we look to the next fiscal year to see some kind of larger step change kind of improvement in margins?

That would be my expectation. Yes.

Okay. And then I guess looking over to Valvoline, in light of the weak end-market demand there, I was hoping you can delve a little deeper into competitive support, or competitive activity in the marketplace around pricing?

Yeah, I will speak first and then I will turn it over to Sam. He can give you more detail, but the thing that's interesting about that market, it's been a market that's been declining for the last 15 years, it is accelerated through periods like this as people start changing their behaviors, or a number of oil changes, but it shifts between markets, it goes from DIFM to DIY, back to the DIFM. And you also have weakness in several of the players, which are losing share. And as Sam, pointed out we gained 1% growth in a market that we believe declined by 4. So Sam won't say this but I will, but I fully expect them to maintain their volumes through this period, because they can take it from others and they have demonstrated it is that they have achieved that, so I have confidence they will continue to proceed. So with that let Sam give the details how he is going to do that. So Sam, you can give some description how to do that? Samuel J. Mitchell Jr. - Vice President; President - Ashland Consumer Markets: Just say a couple more comments in the marketplace, certainly the market that Jim spoke of is declining, is the Do-It-Yourself market as consumers gradually shift over to the Do-It-For-Me market year after year, so we see that relatively good pricing discipline in the marketplace, competitors have been passing few price increases relative to cost, not so much including margin but definitely recovering cost but it's a very competitive market as some of the weaker brands try to salvage their business so there is quite a bit of promotional spend to be effective in growing the business and maintaining our business in a declining market and we have got…

So it doesn't tell like if I am understanding correctly that you think there is in light of the weak end-market demand there is any change in the time frame in which you would normally close your price cost gap? Samuel J. Mitchell Jr. - Vice President; President - Ashland Consumer Markets: It's been pretty consistent in our work with both retailers in the DIY market and our distributors and installer customers in the Do-It-For-Me market that that time frame for implementing price increase has been pretty consistent.

Okay, and then I guess lastly Jim, I was hoping you can give us an update or progress report on how your SAP implementation is going. How that's progressed sequentially?

Sure, the SAP project for the most part to the operations is complete. We just launched China last month and they came through that very well, their inventories were off, I think $2.10 and the receivables off $1.10 and they took a collection to pay the company back because of their culture they didn't want to have any variance although that was kind of interesting. So they did a great job well so the operations are through it. And what we are starting to see is benefit now through this work, it's really helping us with our pricing models because without this... I think one instance across the world SAP we would have a much more difficult time getting our pricing through and more importantly, understanding what we're getting, so I think that's been a huge benefit by having it also the working capital change that we have experienced this year has been I think helped by having the information systems that we have in place now that we get much more transparency on a daily basis, it's managed more on a daily basis. So, we are starting to see, I think benefit in actual results coming back there. So, it was a big investment and one I think is now starting to pay off for us in how we managed the company. So it's behind us and now we are starting to use it to our benefit.

All right, great, thanks for taking my questions and good luck in the fourth.

Thank you.

Your next question comes from the line of Michael Sison with Keybanc. Please proceed.

Hi good morning guys.

Good morning Mike.

In terms of the fourth quarter, the Delta between what might occur versus the third and the fourth in terms of operating income sounds like it's going to be down obviously, is the Delta largely going to be the squeeze in raw materials?

The Delta is specifically just a timing that it takes... it takes such a large chunk of cost increase and move it through the market. So the decrease that we're going to experience is not because of any other particular change in the market. It's just the process that it takes to get our customers to accept the price... to take the price and then to start paying us at that level.

So, the Delta will come back in the first quarter?

That's right. So the whole point is, I think what the third quarter demonstrated is that we do get it. And it does show up in your earnings and it does show up in your performance but everybody has talked about this, it's almost old news now. This slug of cost everybody announced 3 or 4 weeks ago but the fourth quarter is going to be the time frame by which you have to actually execute it and what we're trying to communicate is that we will get it, we are confident we are going to get it because the pricing is going through, it's being supported, all that is not the difficulty, it's just the time lag of getting it in, getting the price and having it show up on your books. So, as you look at it month to month, it will get better as each week goes by but it's going to be pretty ugly and in the first couple of months of that quarter because you are not getting it in those months.

And for the fourth quarter do you have a number or sort of a sense that you can share with us in terms of what the cost you have to recover is in total?

In total? Maybe Eric has.

As we look at what happened in the third quarter, we talked about the raw material increases of roughly $80 million or so that we... that came through and as we look at this quarter and certainly oil has started to come up a little bit and want to see exactly how that impacts some of the potentially announced increases in August and September. But they are certainly; only to the macro level seems to be some momentum, which would suggest a number would not be that order of magnitude for the fourth quarter.

They would not be as big?

They would not be as big as [inaudible].

I got you, okay. Then Sam, I am curious the... you are certainly outperforming the market in Valvoline on a volume basis, congrats there. When I take a look at 2006, when you had a difficult year, it was largely due to the inability to get pricing and the margins for the industry sort of got squeezed and I wonder if your market share gains might cause backlash, if you will and maybe just you can sort of answer it, is profitability really driven by the volumes or is it really driven by sort of the margins out there that the industry can attain?

Mike, the big differences in our profitability in 2008 versus 2006 has a lot to do with the work that we have done on our cost structure, we have driven a lot of supply chain efficiency and improved our cost structure quite a bit. The other big differences in our Valvoline Instant Oil Change, which was really struggling in 2006, the profits are many times greater than what they were in 2006 in the current environment. That business continues to grow for us as we report on a monthly basis. The international business is also performing much higher and so our portfolio businesses is just a lot stronger than it was in 2006 and then I am also confident that as I at look at our core business in the U.S. business with DIY retailers and independent installers that we're making solid improvements in that business. But we still have a lot of opportunities to continue to improve that business in the years ahead.

So the business is certainly better on a structural basis than it was back than allowing you to get the better profitability, near term.

Yes, much better and that's why we're confident as we get these price increases through that we'll be in good shape as we start a new fiscal year and really expect to continue to grow the business.

Okay, great. Thanks, guys.

We have time for one more call.

Your next question comes from the line of [inaudible]. Please proceed.

Just a couple of quick question from me. In terms of looking at fiscal 2009 by your different businesses, where would you expect terms like in Water Technologies is probably where you have the greatest opportunity to expand margins. But, I would just look year-over-year, where would you say you would have the most difficulty in raising margins year-over-year?

I would say that the areas that we will have probably the best chance will be in our distribution business, our water business, and I think Valvoline continues to perform as it is. Probably the business that has even most difficulty, because it's been probably the biggest impact volume wise has been our composite business. I would say that that's going to require us to probably focus more and more internationally both in Europe and Asia, because as you look at the U.S. marketplace I don't foresee any recovery there in the near-term in the marine market or the automotive market or in the housing market. So, for that business to perform and get stronger, we are going to really focus on our European business and Asian business and put broader objectives there in investments in those areas.

And then one other question about the deal and if there are issues where you are not able to close the deal by year-end. I think you said you would need to try to secure similar financing, and I think if that's Ashland's discretion as to how similar the financing needs to be, is that the case?

Yes. I mean that was the whole purpose of that particular clause was to give us the flexibility to find financing that we believe was comparable and that we would be able to run our returns off of and give our shareholders the type of returns long-term based on how we would finance it initially.

Okay. Thank you.

Well, thanks everyone for your interest and we look forward to speaking with you soon. Bye.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.