Good day everyone, and welcome to today's Ashland Incorporated fourth quarter earnings call. (Operator instructions) At this time it is my pleasure to turn the call over to Mr. Eric Boni. Please go ahead sir.

Thanks Carla. Good morning and welcome to Ashland's fourth quarter fiscal 2009 conference call and webcast. We released our results for the quarter ended September 30, 2009, at 6:00 Eastern Time today and this presentation should be viewed in conjunction with that earnings release. These results are preliminary until we file our 10-K in November. With me here today are Jim O'Brien, Ashland's Chairman and Chief Executive Officer; Lamar Chambers, Senior Vice President and Chief Financial Officer; and Sam Mitchell, President of Ashland Consumer Markets. Before we start, let me note that as shown on Slide 2, statements may be made that constitute forward-looking statements as that term is defined in relevant securities laws. We believe our expectations are based on reasonable assumptions but cannot assure that those expectations will be achieved. Please turn to slide 3. Please also note that during this presentation we will be discussing adjusted pro forma results. We believe these adjusted pro forma results enhance understanding of our current and future performance are reflecting the impact of the Hercules acquisition completed last November and related accounting effects. Our fourth quarter highlights are on slide four. As compared with the prior year September quarter, our adjusted pro forma EBITDA increased 37% to $224 million benefiting from record fourth quarter performances by Ashland Consumer Markets, which is our Valvoline business; and Ashland Hercules Water Technologies. We recorded $1.30 of earnings per share from continuing operations. When adjusted for key items, which I will discuss in a moment, EPS was $0.96. We again generated substantial free cash flow totaling $305 million during the September quarter including $128 million from trade working capital. Additionally, we received net proceeds from the sale of both our Drew Marine and the redundant Shanghai headquarters facility totaling more than $140 million. We used…

Thanks Eric and good morning. Lubricant volume for Consumer Markets Valvoline decreased 3% from the prior year quarter largely driven by a decrease in private label volumes, while Valvoline branded US lubricant volumes increased 3%. Premium brand volumes increased 7% from a year ago. Sequentially, however, volume was up 7% following a very strong June quarter from lower lubricant volumes in the “do it yourself” or DIY market channel. We had a particularly strong slate of promotions with DIY retailers in June and July behind our Valvoline Engine Guarantee launch and most of this volume shift in May and June. Sales decreased 9% versus the prior year quarter mostly from the overall volume decrease and weaker foreign currencies. Gross margins improved from 19.2% a year ago to 35.5% in the September 2009 quarter. September quarter margins improved as a result of pricing actions, cost saving initiatives and a continued increase in sales of premium brands. The gross margin decline from the June quarter was the result of higher raw material costs during most of the quarter. SG&A expenses increased by 6% versus the September 2008 quarter and 9% versus the June quarter primarily from higher advertising expenses in support of the Engine Guarantee program. Earnings improved significantly in all of Consumer Market segments and in all geographies versus the prior year. As a result, EBITDA more than tripled to $79 million. The $24 million EBITDA reduction from the June quarter is the result of lower volumes, increased raw material costs and higher advertising expenses. That said consumer markets achieved record EBITDA for the fourth quarter and for the full year. Slide 13 shows consumer markets EBITDA bridge. It is important to note that the September 2008 quarter suffered from a significant spike in raw material costs and the resulting compression…

Thank you Sam and good morning. Please turn to slide 17. You will note we have added for this quarterly review sequential comparisons to highlight some of the near-term trends we are seeing in our sales and earnings. Turning to Functional Ingredients, metric tons sold dropped by 21% versus a year ago quarter and sales declined by 18%. Regulated market experienced a 10% volume decline as compared with the prior rear quarter largely driven by the food segment. This was roughly the same decline as was experienced in the last two quarters. The energy and specialty business increased versus the June quarter although volume was still down greater than 50% versus the prior rear quarter due to low levels of gas drilling activity. The construction business was down 23% versus the prior September quarter and compares favorably with the 28% year versus year decline experienced in the June quarter. Our coatings [ph] business increased 7% over last year as our new product introductions continued to generate substantial business. Regionally, Functional Ingredients were strongest in Asia-Pacific with only a 9% decline versus the prior rear. Gross profit as a percent of sales increased by 310 basis points over the prior rear quarter. SG&A expenses were 2% above the year ago quarter. And bridging between reported and pro forma results, please remember that there were $9 million in severance expense that affected SG&A. Overall EBITDA declined by 16% to $56 million in the September quarter, and represented 23.6% of sales, a 40 basis point improvement over the prior rear quarter, and 210 basis point improvement sequentially. Let us take a look at Functional Ingredients EBITDA bridge on slide 18. As this chart shows, volume reductions drove the lower EBITDA versus the prior year. Favorable raw material and energy costs versus a year…

Thank you Lamar. This year had been an extraordinary year both for Ashland and the global economy. Like most businesses, Ashland has taken unprecedented action to cut cost and resize itself to fit (inaudible) stepwise reduction in global demand. I'm proud of the work that we have accomplished to position the company to perform well in what maybe an uneven and bumpy recovery. And through this period, we have demonstrated our ability to generate cash even in a difficult economic environment. Our businesses generated over $1 billion of cash flow from these operations this year. This was primarily a combination of cash earnings of well over $400 million for the businesses and driving nearly $500 million out of our investments and operating assets and liabilities, mainly working capital. We took the cash generated and paid down debt and we now have $1 billion less in debt than we did less than a year ago. We have been very focused on aggressively taking costs out of the business, and we have now completed more than $350 million of our $400 million cost reduction program. When this work is finished in fiscal 2010, I don't anticipate introducing any new corporate wide initiatives, although we will continue to maintain our focus on cost efficiency. An important accomplishment in 2009 has been the successful integration of Hercules and particularly the Water Technologies’ business. We had historically suffered from lack of scale in the Ashland water treatment business, which resulted in poor profitability. The combination of Ashland and Hercules’ water treatment businesses and the shifting of resources and improvement of process have delivered quick improvement throughout this year despite the economic environment. We were able to increase EBITDA margins to the mid-teens by the fourth quarter, and we expect our progress to continue. And overall,…

Thank you. (Operator instructions) And we will take our first question from David Begleiter with Deutsche Bank.

Thank you. Good morning.

Good morning Dave.

Jim, in Valvoline we have begun to see some grade of base oil move higher this week. What's the ability of you guys to offset future base oil price increases for Valvoline?

I'll let Sam answer that. Go ahead Sam?

Yes, just this week we did see one announcement made by Valero on group 1 base stock pricing, while we are not heavy group 1 user. You know, there is always potential that group 2 stocks couldn’t move up in the future, and we certainly are confident that you know, we can implement price increases appropriately in the marketplace to recover our cost. We've shown that over the last number of years in an inflationary environment and we continue to be confident of that.

Sam, what do your think normalized earnings are in Valvoline going forward?

Well, certainly we had an impressive year in fiscal 2009, and as we look forward and as I covered in the presentation, you know, we feel very good about the fundamentals on our business. We have good momentum across a lot of our -- number of our business segments. As we look forward to 2010, we don't expect to have another record year in 2010 but we do expect, you know, continued performance at a very high level.

And Jim lastly of the non-permanent cost reductions, how much come back in 2010?

I think a lot of it is tied to growth of sales. So, as sales grow that's going to you know, potentially drive travel, entertainment, those type of cost as we get more and more engaged with growth orientation with our customers, and we are I think changed our perspective of how we view a lot of these costs. I think we've learned how to operate differently, and I think we have a much better highlight, let's say of cost control because of our SAP implementation. We can now have really strong visibility of what's going on. So as we look at people's habits and where cost is actually being applied, I think we can manage it more proactively than we have in the past because we had that visibility. So I'm encouraged that we will do a much better job as we cycle through the next part of the economic growth than we have in the past.

Thank you.

Now open the floor up to Jeff Zekauskas with JP Morgan.

Hi good morning. Gentlemen, in the old days you used to talk about Valvoline as a non-strategic business and-- but Valvoline's characteristics have changed over time. Do you still view it as non-strategic to Ashland or is your view changed?

Well, as I talked about the businesses of Ashland, the strategy has been to create a unified core around specialty chemicals and we accomplished that when we brought the Hercules and the Ashland specialty side of the company together. So we defined the company. So it's more around definition of what the company is because as you will know Jeff the -- as we transform the company going from the last three of four years, I think we are getting a much more defined view of what the company is. So as you look at Valvoline and distribution, I've described them as close adjacencies, and by that it has to do with their performance around the metrics that are required for us to see them as being a value creating concept to Ashland. For Valvoline, that metric is free cash flow generation as well as a double-digit return on sales of EBIT, and where Valvoline is performing today and where I think the business has shifted over the last couple of years through the run-up of crude, I think Valvoline has an excellent position in the market and can demonstrate excellent returns for our shareholders. Distribution is the same sort of idea, where they generate a lot of cash through management of their assets. It is more of an asset turnover business and they need a 3% return on EBIT, for us to see a true value creation for our shareholders in that area. As we look at moving forward though I've made it clear that as we continue to transform into a specialty chemical company, I fully expect that we would over time bring assets into the corporation that more true reflect a specialty chemical type design, and I fully expect over time that assets may leave the corporation but it really has to come to the alternative investment thesis versus just to say something fits or doesn't fit. It all comes down to the contribution to cash flow and the returns as it provides opportunities for us to serve the shareholders.

So, if I understand what you just said to me Valvoline is more strategic than it used to be. Is that right?

I would say everything is strategic if it's meeting its return requirement.

Okay, and then lastly in the $100 million of cost you are going to take out next year. That we'll see in the -- we'll see pass through the income statement. How do you allocate the $100 million across your five divisions?

When you take a look at where most of it will come out, lot of it will come out of distribution, and we've already seen some of it really take place in the fourth quarter a little bit, but they've taken a lot of the actions that are required. They will share a big part of it. Performance Materials will be the next big one, and then Water will be the third and then Aqualon will have some and Valvoline will have some.

Okay, thank you very much.

Sure.

Now we'll go to First Analysis Mike Harrison.

Hi, good morning.

Good morning Mike.

Couple of questions on Valvoline. Was curious if you can quantify the additional marketing cost that you've incurred during this quarter and how long those costs are going to stick around?

Well, we'll disclose the marketing cost per se, but Sam can give you some insight on the -- I think the new program we had and the Engine Guarantee program. Maybe incrementally what that might have cost us.

Yes. We have increased our investment behind the Engine Guarantee program. The way we look at that investment though is you know, one in which we expect to pay out in relatively a short time period. So the additional investment, you know, based on you know, the strength of that advertising proposition and its communication and effect with our consumers is one that we expect to pay off with a solid return on that investment, you know, not in the long-term as you might traditionally look at advertising but even contributing to our bottom-line performance in 2010. It is a program that we are very confident in. It reinforces the Valvoline brand proposition with customers. It's timely in that consumers are looking to take care of the cars longer, and therefore you know, it's something that we want to continue to remind our consumers that Valvoline helps them, you know, with their cars performance and keeping their car in the road running appropriately in the advertising campaign does a great job in getting that message across. So it's one that will continue to invest in for the foreseeable future.

Right, maybe let me ask it a different way. Your SG&A cost went up $7 million sequentially on, you know, $27 million decline in revenue. Can I assume that that increase, the delta there, you know, call it close to $10 million was the cost of the marketing?

Not the full cost, but definitely the majority of that SG&A increase was tied to the incremental advertising investment.

All right, got it, and then I was also hoping that you could comment on specifically in September what was going on with respect to volumes and pricing in Valvoline, and if you could provide any comments on what's happening so far in October. It sounds like your pricing increases isn’t going to take effect until November 1st. Is that correct?

That's right. So there weren't any price changes to speak of in September or October.

Right. The question on Aqualon, can you talk about where operating rates are in that business and how those have changed over the past few months?

Aqualon has had a fairly stable quarter as far as prizing. They've done a really good job taking cost out of their system on their fixed cost absorption. They worked very hard on running their plants and then shutting them down as they build inventory, then bringing that inventory down and then restarting the plants. We find that much more effective than just throttling back the production rate. The other aspect is they have been able to get pricing through the last call it four or five months. So when you look at the last two quarters, their margins have increased sequentially and then that's because of the ability to get price as well as control cost through the fixed cost (inaudible).

And Mike, you know, volumes sequentially are up a couple of percent. A lot of that has been driven by some improvements in the construction market. So we are seeing capacity utilization. We look better there. We still, you know, we do have a number of product lines where we are fully sold-out as well, but, you know, the big gap if you will on utilization was primarily in the construction area, and we are starting to see those come back, you know, certainly a few percent or so from last quarter.

When you see you have some product lines that are fully sold-out, does that mean, is that based on your lower production rate or does that mean that you're actually capacity constrained again?

Well, on certain product lines we are actually, we are capacity constrained.

All right, and then last question I had is just a question for Lamar around this research and development line that's on the P&L. Is that something that was previously included in cost of goods sold, and are those R&D costs exclusively related to Aqualon or other pieces that you would find they come out of other businesses.

It was previously included in our P&L and the SG&A line as opposed cost of sales Mike. It is found in all of our businesses. The Aqualon piece will be a larger share probably than the average for the rest of our businesses for sure, but that's really across the board from all of our businesses, and we'll be reporting that as we did this quarter as a separate line item in our P&L going forward.

All right, thanks very much.

Very good.

And now we'll hear from Laurence Alexander with Jefferies. Laurence Alexander - Jefferies & Co: Good morning.

Good morning Laurence. Laurence Alexander - Jefferies & Co: I guess a couple of things. First, can give a little bit more detail in Performance Materials, which businesses were most negative in the quarter or contributed to the loss?

You know, as we look at the businesses and their performance in the general, the composite area is still, you know, still pretty weak. We are seeing some sequential improvements in that business. You know volumes were up sequentially, call it 4% or so on the composite side of the business. So we're seeing some improvements there. Of course, the castings business which is pretty heavily tied into the automotive area had a pretty difficult July and August. As we mentioned in the prepared remarks September was much better from a volume prospective, but, you know, those are the you know, two primary areas of that business.

Yes, the area Laurence that tends to be performing for this business is Asia. Asia is up sequentially compared to quarter three, and we continue to expand our customer base there and that business is still robust and growing. So Asia is the bright spot in this business. Laurence Alexander - Jefferies & Co: And given the progress you've made on deleveraging, are you still going to be pushing to sell those smaller underperforming businesses or is that off the table for now?

We still have several negotiations taking place on pieces of business that that we think long-term may fit better someplace else. Those discussions are still ongoing. Obviously the pressure on doing something quickly is no longer paramount. So evaluation is critical in these businesses. So we get the proper evaluation for the business and we can agree to a definite agreement we would complete. Laurence Alexander - Jefferies & Co: And finally just on the cash flow statement, are there any large dreams on cash outstanding, you know, environmental payments or any other items that we should be thinking of for 2010?

You know, we do of course have ongoing requirements for environmental (inaudible) main areas perhaps we didn't highlight in this call as we've talked about in the past and we would expect you know, those cash outflows probably be in the $50 million to $70 million per year range on a net of recovery basis going forward. Laurence Alexander - Jefferies & Co: Okay, thank you.

And now we will hear from Stephen Velgot with Susquehanna.

Yes, a question on the improvement you've seen in Water Technologies margins. I was wondering if you could talk about whether or not you feel that there is further room there for margin improvement. I suppose you know, we had seen gross margins up in the 36% range back in the spring, only to you know, kind of come under some pressure in the summer, but the September margin that you reported was quite good, and I wonder what extent you think it's sustainable or you're looking for, you know, perhaps even better margins within Water Technologies?

I think the story that we have around our water team is probably one of the outstanding stories along with Valvoline this year as far as what they've been able to accomplish. They pulled together these two companies, Hercules and Ashland, and made the right decisions around who the management team is going to be taking the cost out, and it did that very quickly which enabled them over the last four months to really get focused on the marketplace, and we probably got there I would say six or seven months sooner than our original plans would have dictated. So as I got more engaged with the marketplace, the decisions we are making now is around which mix are they going to sell, which product lines, how they're going to build the story about support of the customer and they're doing a much better job I think of providing a real value creation opportunity for their customers through the offering and how they service that and the methodologies using about, going about I think we are much more competitive than we ever have been. So, as a consequence we've been able to I think bring a better product mix to bear. As you look at the whole sales mix it has improved, and I think that as we have gone in service to customer, we got a larger share of wallet, which has helped us through our service costs and that service leverage, which was really the biggest detriment we had in the model previously. So I think there are a lot of different changes and this is one of the primary reasons we did the Hercules deal is to bring these business together to give us a much better foothold in this very important marketplace, and I'm convinced that we have a competitive model now that's going to deliver double-digit EBITs, which is one of our primary objectives, and create the cash flow out of this business that I think you can, again deliver. So our water team, I think is just beginning to show performance. So I'm very encouraged of what I saw in the last quarter and I think 10 should continue to improve from there.

And just a follow up on your answer to the question about the strategic rationale for Valvoline. I suppose, I'm still little confused as to you know, now that some of the other businesses you know, are showing some traction whether or not long-term you think Valvoline belongs as part of Ashland to even if it is generating the kind of returns that you think help shareholders, why it doesn't (inaudible) Ashland shareholders to, you know, potentially have that as a separate security.

Well, I think that that's always something that we review and so we understand your question and it really comes down to alternative value and the value creation idea. I think what Ashland has demonstrated over the last seven or eight years, we are very active with and analyzing how we can create value for our shareholders and we're not reluctant to make change what it truly does create value. I think the environment that we are in today with alternatives for assets, the value creation just is up there in today's market.

Thank you.

And now we'll open the floor up to Keybanc for Mike Sison.

Hi, good morning guys.

Good morning Mike.

Hi Sam, if I did the math for gross margins for Valvoline, did you end up in September somewhere in that 32, 33 given that you're running at 37 through August, and if you get the price increases in November that offset that $0.40 increase, wouldn’t gross margins go back to that 36%, 37% range?

I noted in my comments earlier, you know, we do have no other factors that put pressure on margins, and certainly the private label businesses is one significant factor that the business that we have with a number of warehouse distributor customers because, you know, where we don't have the leverage at evolving brand. Certainly, you know, the competitive pricing environments puts more pressure on those margins, and so, you know, the margin strength that Valvoline has does vary somewhat from one part of the business to another, and so that's reflected in our outlook for fiscal 2010.

Right, all else being equal, it would have went back to $37 though. We assume you got the price increases.

Yes, over time, yes. You know the issue with you know cost increases hitting the business, you know, we tend to have a bit of a price lag in fully recovering those margins.

Your assumption for gross margins for 2010 given that you have a very easy comp in the first quarter obviously.

Right.

Would-be what somewhere in the low 30s at this point to get to that sort of down from 2009 type of outlook?

You know, I think you're in the right range. We certainly do have a favorable comp versus the first quarter. Our margins improved, you know, last year in the second and third quarters, particularly you know spiking into some timing in the third quarter. So, you know third quarter will be a pretty tough comp, but, you know, I think in general you are in the right range.

If you actually catch up with pricing throughout the year given, you know, some of the offsets you talked about, the good odds if oil, base oil doesn’t incrementally go up every quarter, you would actually probably could do a little bit better than that type of outlook.

Mike, this is Jim, I think (inaudible) think about Valvoline for 10. We think that what they produced last year was just a phenomenal performance, and we think it's going to be very, very good. Well, we don't think it is good as last year.

Got you, and then could you give us a little bit of insight on, you know, water treatment and Aqualon, Performance Materials in terms of sort of, you know, given that there should be hopefully some recovery in economic demand over the next 12 months, given cost savings and would you expect you know, maybe some color on whether earnings would improve versus '09 and maybe to some degree?

I would say that the way we've managed the company, where it's positioned right now, we will make a profit that would be reasonable given a flat demand curve. So if demand is totally flat, you can kind of look at last year's results and give you some perspective of what you think the business can perform. Now, if there is any growth in the economy what we've been trying to do is have some leverage inside of Ashland, so that as that growth occurs we think that we have a cost structure and margins now that as we put more top line growth on it, it should be very dynamic to the performance of the bottom line. So, you know, as you look at the metrics that we have in the business today, as you put growth on that it should have a very strong you know, downdraft on earnings.

Some pretty decent earnings.

Right, thank you.

Thanks Mike.

And now we'll hear from Dmitry Silversteyn with Longbow Research.

Good morning. A couple of questions that I want to follow up on, when you announced your price increases for Valvoline to offset the increasing in base oil price, are you -- is your magnitude of price increase basically designed to offset what's already been announced or are you trying to anticipate where base oil prices are going to go over the next quarter. I'm just interested in the pricing mechanism.

The market is typically moving after base stocks have increased or additive cost, raw material costs have increased. So, you know, that tends to create that lag effect.

Okay. So you are playing catch up in other words rather than trying to anticipate where the pricing will go and adjust your price accordingly?

Exactly.

Okay, all right, thanks. And then I just want to clarify which you meant by getting (inaudible) down to the level that you were targeting and now using your cash generation to improve liquidity. Are you talking about building cash in the balance sheet for some strategic actions down the line or will you still be paying down debt from these levels?

I believe that where we have achieved our debt pay down, we met our objective. So, what we would do with the free cash flow in the future. We will accumulate that on the balance sheet as cash, and then evaluate our alternatives from there. Do we look at you know, tuck-in acquisitions that may come our way? Do we increase the dividend? Do we buyback stock? I think that we would look at all kinds of alternative ways to increase value for our shareholders, but the first objective is to create some capacity to make those decisions.

Okay, I understand. What do we need to see, you talked about economic recovery. Obviously, you know, (inaudible) specific sectors that are recovering or specific regions. So what do we need to see in terms of economic recovery in 2010 in markets or geographies to improve the performance of the Performance Technologies and the Aqualon businesses?

I think Aqualon, the dramatic growth will come out if there is any improvement in the construction market in Europe and Asia. Any strength there would translate very well into a marked improvement in that business. As you look at performance materials, it's automotive and construction mainly in the United States, some in Europe, but they already have some decent growth in Asia. So for those two businesses and inside of performance materials it is little [ph] of US story, if US improves it will improve more dramatically. Aqualon is more of a European-Asian Story. If that improves, it will get better.

Okay, that's very helpful. And then, final question. You talked about the foreign exchange impact from earnings and profits in the quarter. Can you give us some understanding of a sensitivity of foreign exchange rates to profitability? In other words you know, when the ballot changes by whatever, pick a number of penny. What impact that has on the basket of currencies, on the profitability of the operations?

You know, as you could see, you know, from the bridges that we went through, we had well over $10 million impact on the quarter from the currency exchanges. That's five net I guess altogether. A 1% change roughly in the exchange rate of the dollar against our foreign currency, it gives us about a $2 million affect on our P&L when it is all netted together.

Okay Lamar, that's very helpful. Thank you very much. That's all questions I have.

Very good.

We have time for probably one more question.

And we will take our final question from John McNulty with Credit Suisse.

Hi, this is actually Helena [ph] for John. I was just wondering how long it would take you guys to recover the raw material increase in Performance Materials. So basically can you implement price increases in the first quarter that will largely offset that or will it take longer?

Normally the -- these price increases have lagged about 2 to 3 months by the time you announce them, and you work it through the system. So, and with the demand there being so weak, I would say at least 2 to 3 months to get those prices through.

Okay, that's helpful. Thank you.

Okay.

And I'll turn it back over to Mr. Boni for closing remarks.

Thanks. Well, we thank you for your participation in the call, and we look forward to speaking to you in the future. Thank you.

Ladies and gentlemen that does conclude our conference for today. Again, thank you for your participation.