Good day, ladies and gentlemen, and welcome to the Ashland Inc. Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. David Neuberger. Sir, you may begin.

Thank you, Kate. Good morning, and welcome to Ashland's Third Quarter Fiscal 2012 Conference Call and Webcast. We released results for the quarter ended June 30, 2012, at approximately 6:00 a.m. Eastern time today. And this presentation should be viewed in conjunction with the earnings release. These results are preliminary until we file our 10-Q. On the call today are Ashland's Chairman and Chief Executive Officer, Jim O'Brien; Lamar Chambers, Senior Vice President and Chief Financial Officer; and John Panichella, President of Ashland Specialty Ingredients. Before we get started, let me note that as shown on Slide 2, our remarks today will include forward-looking statements as that term is defined in securities laws. We believe any such statements are based on reasonable assumptions but cannot assure that such expectations will be achieved. Please also note that during this presentation, we will be discussing adjusted and pro forma results. We believe these adjusted and pro forma results enhance understanding of our performance by more accurately reflecting our ongoing business. In addition, we are providing ISP's historical financial contribution, representing Ashland's best estimate of the appropriate cost allocation and shared resource costs. Reporting results in this manner has inherent limitations, and we do not represent that these financial results were calculated using the same methodology used by ISP. Please turn to Slide 3 for our third quarter highlights. Reporting earnings per share from continuing operations were $2 in the June 2012 quarter. When adjusted for key items, which I'll cover shortly, EPS was $2.04, as compared with $1 in the year ago quarter. Let me note that the $1 in the prior year does not include the results of ISP or the related financing costs. This is the only time this morning that we will present data in this manner. For the…

Thank you, David. Good morning, everyone. Specialty Ingredients had another strong quarter with nice growth in sales and earnings. I'm generally pleased with our performance across the division. While on a pro forma basis, volumes were up 2% from the prior year quarter, sales rose 15% with improved pricing in all lines of business. Volume declines were driven by intermediates and solvents, which had unusually large volumes in the prior year quarter, and our MC product line, where the combination of an oversold position and the ability to sell out of inventory last year led to the year-over-year declines. Excluding these effects, our volumes would have been up. Sales growth was broad-based. Our industrial businesses, which include energy and construction, led the way. We have seen tremendous growth in both of these markets since the beginning of the year, and that trend continued through the third quarter. Sales were also up in pharmaceutical, personal care and coatings. In each of these areas, we have held up fairly well despite the macroeconomic climate. Conversely, sales were down within our Specialty Performance business, which includes our intermediates and solvents product line. While we have recently seen signs of reduced demand in these products, the larger contributor to year-over-year decline was a particularly hard comp in the prior year. During the third quarter of 2011, one of our competitors had a major supply disruption. And as a result, we had an exceptionally strong demand. Broad-based pricing efforts led to gross profit as a percent of sales of 34.7% during the quarter. This was a 310-basis-point improvement over the prior year and a 120-basis-point sequentially. SG&A of $119 million was in line with our expectations. Overall, EBITDA grew 29% over the prior year to $224 million. EBITDA as a percent of sales was 28.2%.…

Thank you, John. Water Technologies sales were $427 million, down 13% from the year ago quarter. Approximately $25 million, or 40% of this decline, was attributable to the stronger dollar. Divestitures also played a role. Normalizing for currency and adjusting for these divestitures, sales were off only about 4%. As compared to the prior year, our sales declines were roughly split between the paper and industrial markets. Paper performed reasonably well in light of the overall market conditions, with currency adjusted sales off about 4%. While packaging and tissue and towel held up well, printing and writing markets have remained quite weak and sales were off around 10%. As described last quarter, printing and writing demand has suffered due to accelerated mill closures and extended outages in North America and Europe. Sales declines over the industrial area are primarily attributable to market softness, as well as the loss of certain low-margin accounts and product applications, where we've been rationalizing our portfolio to focus on higher-margin opportunities. Water Technologies sales were even on a sequential basis. Gross profit as a percent of sales was up 240 basis points from the prior year, to 32.1%, an equivalent performance to the March quarter. SG&A was down slightly versus the prior year to $119 million, but has increased significantly as a percent of sales. While we have taken out costs in more developed regions and markets, we have also reinvested for growth in the emerging regions, as well as in the pulp, food and beverage and mining verticals. While sales to date in these areas are below our expectations, we expect these investments to yield improved results over the next several quarters. Regardless, we expect SG&A as a percent of sales to incrementally return to more normalized levels, which would yield a greater than…

Thanks, Lamar, and good morning, everyone. As you heard today, our overall business did quite well during the quarter. We achieved significant increases in earnings and EBITDA despite reduced sales in a number of our commercial units. I am particularly pleased with our overall profitability. We reported EBITDA margins of nearly 18% during the quarter, very much in line with our long-term expectations. Improved margins during the quarter were driven by a number of factors. This included pricing discipline in our commercial units, with each business more than recovering its increased raw material costs versus the prior year. We're also doing a good job of controlling our operating expenses. Thanks in part to our overall corporate cost reduction program, total SG&A is down $11 million from the prior year quarter. In addition, we have a much stronger business mix today. Our high-margin Specialty Ingredients business contributed nearly 60% of Ashland's consolidated EBITDA in the quarter, up 250 basis points from the year ago. Taken together, this performance serves as another great step toward our long-term financial objectives. While earnings and profitability were strong for the quarter, Ashland's volumes declined 6% versus the prior year, after normalizing for the effects of divestitures and joint ventures. Pro forma sales declined slightly to $2.1 billion. However, when we normalize for currency and divestitures, sales would have been up 12%. This reflects the pricing actions taken by our commercial units. We achieved EBITDA of $381 million, a 24% increase over the prior year and a 16% increase sequentially. Free cash flow for the quarter was $34 million. Let's turn to our outlook Slide 24. We are occurring a lot of momentum as we enter our fiscal fourth quarter. Through July, demand trends are generally holding up well and in line with our expectations. In…

[Operator Instructions] Our first question comes from the line of John McNulty with Crédit Suisse.

This is actually Alina Khaykin that's sitting in for John. Quick question. How should we think on raw materials sequentially in Performance Materials, Valvoline and Water Tech, because I know there's a lot of moving parts in all 3 of those?

When you think of Performance Materials, they've achieved a quite significant benefit already from the raw materials. So we would expect next quarter that they would be flat to -- styrene is starting to move up a little bit. So that may be something we'll have to react to during the quarter. But at this stage, it hasn't had a material effect. On Water Tech, they have done a great job increasing their pricing to catch up on all of their costs. And I would say that they're totally caught up at this stage. So any benefit we get from propylene or any type of derivatives through the quarter should be a benefit to us through the quarters. We'll see how that plays out. And in Valvoline, we gave you, I think, a pretty detailed chart. So there it's pretty clear what the benefit is, and we fully expect to achieve those benefits as the quarter progresses. We won't achieve 100% because it takes about 3 months to fully roll through the system. But directionally, you will see that we'll achieve all that benefit through our raw materials and through our EBITDA as the quarter progresses.

Okay. And just one other question. In thinking about the 2014 targets, it appears that most of the segments are actually on track except for water treatment. So how should we think about the margin progression in that business and maybe what management, you guys are doing internally to meet the target?

Yes, as far as our progress toward 2014, when you look at the Specialty Ingredients business, they're basically there on many of the metrics. So we're quite proud of that team's integration and what they have accomplished. And John and his team have worked very hard, and the organization, I think, has rallied around becoming a unified Ashland. And we're well on our way there. When you look at Performance Materials, they made a lot of improvements into capturing their raw material costs, as well as position themselves to win. I mean, they're running at 90% utilization rates as staffed. And I think that's why when you compare us against others in the market, why we've done much better, because we took actions early and we continue to take actions to position this business to make it win profitably through very difficult markets. Valvoline, of course, continues to work hard on getting this pricing through a very volatile energy market. And they've been successful. Water Tech is the one that we are trying to make the biggest change to near term. And although we're not pleased, as Lamar said, with its earnings to date, what we are pleased with is we're taking very serious action on repositioning its business and trying to get better positions in key markets, where we have historically not had great positions. So I think there, it's more of a repositioning story, and we're taking the right actions, having some patience with it. Although, we could be criticized as taking way too long, and I can't defend that; it has. But I think that what we see today, we've downsized the business. We've repositioned business. I think we're in the right markets, have the right strategies. Now it's all around execution. And we're starting to see some traction take place. Hopefully, next quarter, we'll show some of that improvement. But we're -- it's a great space. It's one that we have to win in. I think long term, if we can get ourselves a better position in some of these better key markets, it'll be a winner for us. So I'm really pleased what they're doing, although I'm not pleased with the performance to date.

Our next question comes from the line of Mike Sison with KeyBanc.

In terms of Specialty Ingredients, you noted that you're pretty much where you want to be for '14. Can you maybe help us understand what type of growth beyond this year you could see in the next couple years in that business?

I'll let John answer that specifically. But where we're really focused is we are -- as John pointed out, we are sold out in many of our key chemistries. So we're going to have to expand organically and invest in this business in the near term. So the tension between the ASI group and Lamar and myself is how much money can we get them, and also how fast can they invest it and build it out. So that's where the tension lies. So as we look at the future, I'm quite pleased that there are very nice opportunities that John and his team identified, and we're working very hard to try to give them the support to get them to build it out. So with that, I'll give it to John. He can give you some more specifics.

Yes, I think, when you -- what you should be thinking about in the business is, obviously, we have, I would say, similar growth profile that we shared with you in November. We obviously have got a significant amount of growth this year. But some of the headwinds we shared with you around the intermediates and solvents, et cetera, are still out there. So I think the profile of growth is relatively similar. We just had an exceptional year. And we think that things will flatten out some next year, and we'll be on our way to continuing to see that growth. And obviously, as Jim said, it really depends on how we line up the investment strategy and things we're going to do to grow the business.

Okay. And then when you look at Valvoline, do you feel pretty good about the industry keeping pricing where it's at? Have you heard from customers looking to get price declines? And so I'm just trying to make sure I understand the benefit you can get with base oil falling.

Yes, when you take a look at the history now of going through several cycles of crude coming down, crude going up, and what the industry tries to do during all these various cycles, is price does come down some. But the retailers are still trying to meet their own costs, and they're not looking for dramatic swings in the price of oil because that really hurts them when they compare against previous year comps, and they really are having difficulties trying to reach their sales goals. And motor oil is a very important segment for them. I mean, it's a sector which is a big part of the store's floor space and a lot of the turnover, what brings people into the store. So there is some motivation on all the parts of the supply chain to try to keep motor oil somewhat stable but be somewhat reactive to the price of energy. But what we've seen over the last cycles is that's not dramatic.

Got it. And last question, real quick, John. The new or guar substitutes that you can come up with, will those be as profitable as the guar products themselves?

Well, we're in the early phase of rolling these out. Customers have trialed materials and run jobs using them. So we're at an early phase. I think you should – they're at equal kind of margins that we're getting in that segment. So they're relatively comparable to what we're achieving today.

I think to just add on the guar story. Obviously, it was a very important part of our earnings quarter and really, for the year. And as we look at next year, it's all dependent upon what happens with the yields coming out of the production that's going in the ground in India today. And of course, the monsoons are unclear as far as what they're going to do with yields. And there's a huge question mark there. If you take a look at if guar stays where it is today, if it's off, what, 10%, 20%, 30%, if it stays there, obviously, the earnings in that particular segment will go down. But as we look at where we think that the year will play out, we will have higher volumes because we will actually have more guar than we can synthesize and sell, plus the substitutes will come into play. So we think that guar will probably be lower next year for us. But we think that the other parts of our business are growing at a rate sufficient to overcome that. So if you look at the earnings next year, we think that we'll probably have lower guar earnings but we'll have higher earnings in the other key segments. And in some respects, that doesn't concern me, because I'd rather have the better mix than rely on guar, which is more of an opportunity than it is a strategy long term. So I'm really pleased that our other businesses are going to be able to make up what we see as being perhaps a shortfall if guar stays where it is today.

Our next question comes from the line of Olga Guteneva with JPMorgan. Olga Guteneva - JP Morgan Chase & Co, Research Division: If we could just go back to that guar question. So you said that your inventories were up $100 million in the quarter due to guar purchases. It entail [ph] how much inventories you have now in terms of months for guar?

Just one correction on that, Olga. It was up $80 million in inventory value in the quarter, about $100 million or a little over that year-to-date. So it hasn't been a significant use of cash. Our inventories are up substantially in dollar value, as you're talking about here. That's primarily driven by price. Price had tripled from the start of the year through the June quarter. And volumes are up a bit. But that's primarily due to pricing. Olga Guteneva - JP Morgan Chase & Co, Research Division: Right. But if you look at the guar inventories, how much inventories in months, in terms of months do you have? Do you have an...

Yes, we wouldn't disclose that. That's getting to a finer level of our business operations than we want to disclose for competitive and other reasons.

Right. But what we had expected to see for this quarter that we're in is we're selling off a lot of that inventory. So we are expecting that it's going to be a source of cash this quarter versus a use of cash. We're expecting to have much of that inventory be sold through and recovered as working capital decrease, recover that in cash. So I think that's the good news in that. Even though the price has come off, we're rotating down on the inventory. So it's going to be a source of cash for the quarter. Olga Guteneva - JP Morgan Chase & Co, Research Division: Do you disclose the amount of sales of guar-based derivatives per year, per quarter?

This is Dave Neuberger. We do disclose it in the appendix to the presentation. And for the trailing 12 months, it would be roughly $300 million of sales. Olga Guteneva - JP Morgan Chase & Co, Research Division: And for the Specialty Ingredients segment in general, is there any seasonality in demand? And how should we think about demand sequentially from the third to the fourth quarter?

So we think demand sequentially, Q3,Q4 will hold up pretty similar overall across Specialty Ingredients. So we think that there'll be some relaxation, as others have already commented around guar, but the remainder of the business has picked up. And so we think, in general, you should be thinking about it something pretty similar. Olga Guteneva - JP Morgan Chase & Co, Research Division: And on Valvoline, if I may. So just to remind me, what's your longer-term goal for the gross margin for the segment?

This is Dave again. It would be high 20%, as we disclosed previously, at the gross profit line. Olga Guteneva - JP Morgan Chase & Co, Research Division: And for -- in terms of pricing. Did you say that you more than offset the 24% increase in base oil you had back in April?

When you look at the base oil increase, our intention was to have a price increase to fully recover that. Obviously, we put pricing out and we still have pricing that has yet to be recovered from those accounts. The team is working very hard to get that value through the system. Will 100% of that be recovered? I think it's unlikely, but I think we'll recover some. And at the same time, we're getting a benefit of the pricing decrease. So it will average out as far as additional price, additional cost savings to a number that we described in the presentation in the quarter that our margins will move up and then how much will be determined in the quarter when the price cost kind of settles down.

Our next question comes from the line of Mike Harrison with First Analysis.

John, maybe if we can spend a little bit of time talking about ISP and some of the top line synergies you might be seeing now that you've had the business in the fold a year? Initially, the thought was that there was going to be some customer cross-pollination and then, longer term, maybe some R&D cross-pollination between the ISP people and the legacy Aqualon people. Can you just give us a little bit of detail on what you're seeing in maybe both of those buckets a year out from doing the acquisition?

Yes. So I think, as we previously have commented, we have obviously a totally integrated team now. So all that's completed. And we have a single go-to-market strategy in each industry vertical that we compete. So in personal care, we have a team representing the full portfolio of products that we sell, and it's that way for every industry vertical. The same thing in technology now. The technology teams are integrated. So we have an integrated pharma technology team that works across both heritage portfolio. So that's gone extremely well. We see a lot of opportunities in the combined portfolio. And so when you visit with -- I think we've shared in the past personal care, pharma and energy are very attractive, meaning that the portfolio has come together for us to offer much broader solutions to customers. We're seeing that play out in the marketplace, where we're getting lots of opportunities based on that portfolio. And so kind of our thesis of how this would come together and what it would deliver for us is playing out, as I see it in the marketplace. So the integrated approach gives us one channel to customers. And the integrated technical approach gives us lots of opportunities to develop some pretty unique materials based on the portfolio that we have.

Great. And if I can maybe ask a question on Performance Materials. You gave a little bit of detail on the stronger performance in Composites and Adhesives. And it sounded like the main driver there was better mix. But you also said past utilization was up around 90%. So how much of that better performance from Adhesives and Composites is fixed cost leverage? How much is better mix? And kind of where do you stand in terms of capacity? If you needed, if we saw some kind of recovery, would you be able to just increase shifts? Or would we see capacity constraints if we saw a sustained recovery?

On the fixed cost utilization piece, the reference I made to the 90% was as staffed. So as you just pointed out, the way you would get additional capacity, would be to increase staff and basically increase your capacity that way. If you looked at just the pumps and pipes that we have, those are being utilized about 65%. So if we had a big turnaround, we had to go out and had the opportunity to get more business, that would be how we would do it: add more shifts, utilize the pipes better and run them. The area that we have spent a lot of time in is really getting this business reoriented and trying to go after the higher end of the market, and not chase a lot of the commodity businesses and run a lot of plans at very low rates. Because I think that's a loser's bet right there. And we have spent the last 5 or 6 years repositioning this business so that as it continues to be challenged with lower demand and just a tough market, I think that we have done as well as anybody in the marketplace. And I think that I'd put our business up against anybody as far as profitability. And as a consequence, this business is performing very, very well, in spite of a very, very difficult market. And the primary reason is mix and price, and the 2 kind of go together. If you're in the higher end of the market and you have a good technology that in high demand by your customers, you'll get higher value for it. And as raw materials came down, they've been able to get the full benefit of that. So I'm quite proud of what the team's done there.

And then last question is on Valvoline and the delays that you cited in routine auto maintenance, not just oil changes, but kind of across the board from the auto parts guys. Do you have any sense that this is more than economically driven? We've talked in the past about increasing change intervals. Are we seeing some kind of a meaningful shift in consumer sentiment toward auto maintenance? Or it is it just economically driven?

My experience has been through these various business cycles, especially in the DIY side, normally, you have customers that fairly well maintain their cars. So it would be more of a "fix before it breaks." And then when economics start enter into it at a higher degree, you get more into a break-fix. So they don't fix the car until it breaks. And that's kind of the difference. I think we're kind of more in a break-fix mode right now, and that cycles for a while. And in motor oil, it's no different. They will kind of look at what they're going to do and they'll delay it by months, 45 days, stretch it out, because they just don't have the dollar to spend. So ultimately, they have to spend the dollar though. And this cycles for a period until the economy improves, then they go back to their previous behavior, which is try to fix it before it breaks and be much more attuned to trying to stay on a certain schedule. And I think that's what we're facing right now.

And -- this is Dave Neuberger. I'd add one point to that just to reinforce what Jim said. If you look at the DIY, that's certainly where to volumes have been concentrated in terms of the declines. If you look at the broader installer channel and the Do-It-For-Me segment, that's up in volumes mid-single digits year-over-year. So arguably, the part of our business mix that's less affected by the macroeconomic environment, that part's doing quite well.

Our next question comes from the line of Laurence Alexander with Jefferies. Robert Walker - Jefferies & Company, Inc., Research Division: This is Rob Walker on for Laurence. I guess after being elevated for all of 2011 versus it's kind of regressed value on oil, base oil has finally gone back in line, has the market shifted long yet? And do you expect prices will fall below kind of that regressed value with oil noticeably in 2013?

Yes, this is Dave Neuberger. It's due to regression of base oil versus crude. Clearly, crude's your best indicator of long-term base oil value. And you'll confirm that regardless of what time period that you look over. Based on the models that we've run, I'd say base oil is still a little bit long versus crude. So that would imply that if crude stays where it is, base oil, all else being equal, would have a tendency to keep coming down. The other piece that I'd add to that, which is a fairly big change coming on within the base oil environment, and as we've noted in the past, there is a lot of capacity coming online within base oil the next 3 years. So the Group 2s are expected to go up around 20% the next 2 to 3 years, and the Group 3s are expected to nearly double. So it'll be interesting just to see how that affects those normal comparisons as well. Robert Walker - Jefferies & Company, Inc., Research Division: And then just briefly, given the recent change in the pension law, can you just give us a preliminary outlook for what you're thinking about in terms of how that could be impacting your underfunded status at the end of the year and your required contributions next year?

That's a good question. Just going to put the numbers in perspective and then get back to your question. This year, we would expect our pension funding to total about $160 million. This is for global pension funding, not just the U.S. plans. At the start of the year, we had anticipated that number would be about $120 million. So as we noted in our commentary, we did have about $40 million in the June quarter of catch-up funding related to ERISA requirements for our fiscal 2011 year end, and it just takes time to get all the actuarial information finalized to determine that amount. So we're at a level currently about $160 million per year. We're in an environment where the discount rate has moved down about 90 basis points, by our math, from where we were at fiscal year-end. And that by itself, absent the legislative change, would have increased our funding requirements for next year and going forward until the discount rate moves to more historical norms. What we have seen, we think is a good thing, is legislation's relaxed the available or the opportunity to relax the competition of your discount. It's set out as an option, not a requirement to do that. But we're looking at that legislation with our actuaries to try to determine exactly what that means. I wouldn't want to put a specific dollar amount on it. At this point, we don't have that. But it would be a meaningful reduction in our pension funding requirement. It could keep, even if discount rates stay where they are today, could keep our funding approximately in the range of where it has been this year as we look forward into the next year.

Our last question comes from the line of Jim Sheehan with Deutsche Bank.

John, I was just wondering if you could help give us a sense of proportion for how much of the margin increase in Specialty Ingredients this quarter was attributable to guar-based products versus some of the other main product lines?

Yes, usually, we don't give out that level of detail. But guar, more broadly in the industrial business, it was a pretty significant contributor to the sequential improvement. But for Q4, it's starting to -- the price will come down and our volumes will likely be off a bit, and that'll be a headwind, but not a real significant one that we think that will offset with the other Specialty Ingredients businesses and products that are taking traction. So that's kind of how we're looking at it. In long term, what happens around the cost on guar will obviously depend on the crop and the drilling activity that occurs with our customers.

And just to add a number to that to put in perspective, the gross profit increase as a percent of sales sequentially for John's business, it was about 100 basis points. So that should put that in context.

And John, on some of the other Specialty Ingredients, more in the construction side, do you believe you're taking share in Europe? And what's driving the success of your business in construction overall?

Actually, it's probably not so much share in Europe, but other parts of the world. And so we do believe we're taking share. And we have had a strategy for the past 2 years to improve this business segment via new products and optimizing the cost in the facilities. And that strategy has taken hold. So we're launching new materials and we're getting costs out of the manufacturing operations. And that combined is really starting to come through, and we're seeing nice performance in this business.

And a question for Jim, just on the Water Technology. You're talking about efforts to increase sales growth in industrial areas. How much of that is dependent on the macro situation versus how much that you can control?

Yes. The macro situation, obviously, is going to be important. But in spite of that, there are -- in the areas that we're trying to compete, our share is so low that I think regardless of what the macro situation does, the expectation is they have to go out and win some new accounts. And the work they've done with new product development, as well as some of the equipment that they have designed to compete with, I think is world class and will be the reason why they gain new business. And obviously, that takes some time. But we've worked at it now for several months. So I would fully expect that this quarter should start showing some traction. And we'll be able to report on that, hopefully, at the end of this quarter on our progress.

This is David Neuberger again. Thank you for your time this morning and for your interest in Ashland. If there are any additional questions, please contact me at (859) 815-3527. Thank you.

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