Jason Thompson - Director of Investor Relations John E. Panichella - Senior Vice President, Group Operating Officer, President of Specialty Ingredients and Member of Operating Committee Luis Fernandez-Moreno - Vice President and President of Ashland Water Technologies Lamar M. Chambers - Chief Financial Officer, Senior Vice President, Member of Executive Committee and Member of Operating Committee James J. O'Brien - Executive Chairman, Chief Executive Officer and Member of Executive Committee

David L. Begleiter - Deutsche Bank AG, Research Division John P. McNulty - Crédit Suisse AG, Research Division Robert Walker - Jefferies & Company, Inc., Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division Michael J. Harrison - First Analysis Securities Corporation, Research Division Michael J. Sison - KeyBanc Capital Markets Inc., Research Division James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division John Roberts - UBS Investment Bank, Research Division

Good day, ladies and gentlemen, and welcome to the Ashland Inc. second quarter earnings call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Jason Thompson, Director of Investor Relations. Sir, you may begin.

Thank you, Ben. Good morning, and welcome to Ashland's second quarter fiscal 2013 conference call and webcast. We released results for the quarter ended March 31, 2013, 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; John Panichella, Senior Vice President and Group Operating Officer responsible for Ashland's Specialty Ingredients and Ashland Water Technologies; and Luis Fernandez-Moreno, Vice President and President of Ashland Water Technologies. 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 results. We believe this will enhance the understanding of our performance by more accurately reflecting our ongoing business. Please turn to Slide 3 for our second quarter highlights. In the March 2013 quarter, we reported earnings of $0.68 per share from continuing operations. When adjusted for key items, EPS was $1.78 as compared to $1.52 in the year ago quarter, a 17% increase from prior year. Sales during the quarter were $2 billion, a 5% decline versus prior year. We continued to see soft volumes in a few geographies, particularly Western Europe. Despite the soft macroeconomic environment, adjusted EBITDA rose 3% to $339 million with EBITDA margin of 17.2%. During the quarter, we strengthened our capital structure by refinancing our debt. We locked in attractive interest rates, extended and better staggered our maturity schedule and put in place investment-grade covenants. We accomplished this…

Thank you, Jason, and good morning, everyone. Before we get started on the financial results for Specialty Ingredients, I'd like to take a few moments to provide some additional details about guar's impact on our business over the past 2 years. As you know in the first quarter, we incurred a charge of $31 million related to the write-down of straight guar inventories. In the second quarter, we sold this entire inventory at no margin. Looking at the broader market for straight guar, the pace of orders has slowed as frac-ing activity has declined. Given the changing dynamics in this industry, we will only selectively participate in straight guar for the remainder of the year. Despite a typical seasonal upswing in frac-ing activity, we expect volumes in the second half of the year to be roughly equal to the first half. Prices for guar splits have appeared to have stabilized at around $5.50 per kilogram, significantly lower than the highs reached in 2012. Due to these changing dynamics, we expect margins on straight guar to come in below our historical average. Most of our guar-related issues have been centered on our straight guar product line. However, we did experience a decline in our derivative guar volumes and sales during the quarter. This stemmed mostly from reduced energy demand and customer order patterns. We expect performance to return to more historical levels as we move through the balance of the year. Let's turn to Slide 10 and I'll provide a detailed look at our guar performance over the past 2 years. On this chart, we provide quarterly sales for all guar products going back to the first quarter of 2011. As you can see, guar contributed significantly during 2012. Sales increased more than 200% year-over-year, and though not shown here, gross…

Thank you, John. Before we move into the financials, I'd like to say I am excited to lead a global specialty solutions provider to the pulp and paper and industrial markets. I have no doubt that we have the capabilities within the business to position Water Technologies for systematic growth, value generation and improved competitiveness. Overall, Water Technologies performance has stabilized. Volumes were slightly ahead of prior year while sales declined 1% to $424 million. Normalizing for currency effects and divestitures, sales were up 1% over the prior year. Gross profit margin increased 120 basis points year-over-year to 33.3%. SG&A declined $3 million from the December quarter. Beginning July 1, we expect to fully achieve our target of $20 million in annualized run rate savings from the previously announced global restructuring of the Water Technologies business. I'll describe this realignment as well as our broader strategic initiatives in more detail later. On a sequential basis, EBITDA increased 15% to $39 million, flat with the prior year. EBITDA as a percent of sales increased 110 basis points from the December quarter to 9.2%. The performance of our paper business has improved with year-over-year growth in both sales and profitability. Although industrial water business continues to struggle, we're hopeful for improvement over the course of the year. Much of our reorganization has been focused on this part of the business as we work to restore growth. Geographically, Latin America remains a strong region for Water Technologies broadly, and our paper business is performing very well in Asia. Now let's turn to the bridge on Slide 15. Margin improvement, driven by lower input costs, was the largest contributor to the year-over-year increases in EBITDA. When normalized for currency, higher SG&A expenses roughly offset this benefit. The other column consists of our divested North…

Thank you, Luis, and good morning, everyone. Performance Materials reported volumes declined 6% and sales fell 8% from the year ago quarter, driven by weakness in our elastomers business. Our elastomers were sold primarily into the North American replacement tire market, which has been weak for the past several quarters. Coupled with above-normal elastomers volumes in the year ago quarter, this contributed to the year-over-year decline. Sequentially, volumes rose 6%, roughly in line with normal seasonality. Adhesives and composites volumes increased 9% from the December quarter, with particular strength coming from North America. Gross profit percent was 14.6%. The decline was due to lower margins and elastomers. Adhesives and composites gross profit increased 13% sequentially. SG&A was $41 million, 7% below the prior quarter. While not explicitly shown on this slide, equity income from our Casting Solutions joint venture was flat with the prior year. This includes a favorable $3 million one-time tax adjustment that shows up within Performance Materials' operating income, which was fully offset in the income tax expense caption of Ashland's income statement. EBITDA declined 6% year-over-year, while EBITDA margin improved 20 basis points. Now let's turn to Slide 19. Margin improvement contributed $4 million to the EBITDA but was more than offset by declines in elastomers volumes. SG&A, adjusted for currency, was down $2 million. On this bridge, the effects of the ASK Chemicals joint venture and the divested PVAc business are captured in the Other category, and are up $1 million as a tailwind to EBITDA. In total, EBITDA was down $2 million during the quarter. Now let's go to Consumer Markets on Slide 20. Consumer Markets had another strong quarter, with significant expansion in earnings, driven by lower raw material costs. Lubricant volumes were down 4% versus the prior year but rose 6% sequentially.…

Thanks, Lamar, and good morning, everyone. As you've heard today, Ashland had mixed results in the second quarter. On a year-over-year basis, our performance was disappointing as we were below our long-term targets. However, we achieved EBITDA of $339 million during the quarter, and adjusted EPS of $1.78, a 17% increase over prior year. In Specialty Ingredients, sales and volumes were down year-over-year due mostly to guar and intermediates and solvents. In addition, we saw a continued weak demand for our coatings and construction businesses in Western Europe and Latin America. However, we continued to see solid performance from pharmaceutical, hair and oral care, with a combined 3% increase in sales and 5% in gross profit from prior year. On a sequential basis, Specialty Ingredients reported a significant improvement with sales growing 10%. Within Water Technologies, the paper business had a solid quarter, with particular strength coming from our packaging and tissue and towel businesses. Combined, they reported a 4% increase in sales over prior year. Our industrial water business had another challenging quarter. Luis continues to focus on improving this business, and I have confidence in his team. Performance Materials reported a year-over-year sales decline of 8%. This is primarily due to the elastomers business, which was negatively affected by reduced demand for replacement tires. Adhesives and composite volumes and sales were essentially flat versus the prior year. Consumer Markets continued its strong performance with a record second quarter for EBITDA, driven by lower raw material costs. EBITDA was up 33% versus the prior year. During the second quarter, we also strengthened our capital structure by restructuring our debt. In doing so, we locked in attractive interest rates, extended our maturities and put in place investment-grade covenants. It was also a strong quarter for cash flow. We generated $144…

[Operator Instructions] Our first question today comes from the line of David Begleiter from Deutsche Bank.

Jim, on Water Technologies, you mentioned in the past this business is on a short leash to improve by year end, or else. Is that still the case? And is the new organization now focused more just on water versus paper and pulp?

When you look at the water business, the improvements we've made in all aspects of it, I think Luis and his team have a much broader appreciation for the challenges in front of them, and they have plans in place to improve it. Pulp and paper is a very strong business for us. We're a leader. But there's still improvements that we made as far as our growth there and the capture of new pulp business and as well as new paper mills in Asia take shape. So a lot of focus there. But the biggest issue is our Water Technologies business. And I think the team that Luis has brought in, I think, has much better appreciation for how to run that business, has much broader experience of success, and I have confidence that this business will improve also. Regardless of all that, the business needs to improve and grow. And we evaluate all our businesses on a quarterly basis as far as how we believe they're performing. And in particular, my statement around -- we're looking at Water Technologies, particularly at our meetings in December with the board, has not changed because we want to assess the progress being made and, more importantly, the future that the team brings forward and our confidence, as myself as the CEO and as our board, in our broader commitment to the business. So that has not changed. But I have 100% confidence in Luis and his team, and I am more encouraged today than I was 3 months ago.

And perhaps just in terms of the improvement you saw in March in Specialty Ingredients, is that continuing into April as well?

When you look at April and May and June, this is the strength of our seasonality and where we make most of our money as far as on a quarterly basis. So as we look at going into the quarter, I think as we outlined in the presentation, we're encouraging with some of these numbers that we're seeing. We expect this to be a better quarter and particularly because of just the seasonality effect of it. Where we see weakness is Europe, concerns us. If you look at Specialty Ingredients, their construction business is heavily skewed towards Europe and Asia. Europe is not necessarily critical to the success, but that's been that way for the last 18 months. But Asia has to pick up. We have to see improvement in Asia for the construction business to do better. And we also have to see improvement in South America. It has been soft, but they're moving into their more broader construction business being their winter. They actually construct more in winter than they do in the summer because of the rain. So we're hopeful that this business will pick up with some strength in the economy. But our HEC business is doing much better. We've had some weakness in the first quarter. They've gone in and worked very hard with their customers. They have some very strong sales plans, and the issue there is more around price than it is volumes. We're holding our own in the market. We're getting good volumes, but we have to give a little on price to achieve that.

Our next question comes from the line of John McNulty from Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: So a clarification on the guar issue, and I appreciate all the details that you gave us because it certainly helps. So if you pull out the impact of selling some of the straight guar at 0% margin, how would the margin have looked in 2Q? Or maybe put it another way, looking at 3Q and 4Q, should we see kind of the EBITDA margins moving back into kind of the 24% to 25% range? Is that the right way to think about it?

Yes, it's the -- the net effect will be roughly $25 million. And margins going forward, like we said there in the scripted remarks, still expected to be a little soft for the next quarter. John P. McNulty - Crédit Suisse AG, Research Division: Okay. And then just as the -- as a follow-up, on the paint and construction side, where you've highlighted some weakness, where you're having to maybe to compete a little bit more on price, is that lapses in discipline from some of the competitors? Is it other products that may be -- if you don't nick the price a bit, it starts to creep in? I guess, how should we think about that? And what are your thoughts on it longer term and how long this may last?

Yes, this is John. I'll try to answer that for you. So what we've seen is for probably for 3 quarters now, we've seen soft demand from coatings global customers. It's not unusual in the long-term trend to have a couple of quarters where that happens, where the long-term trend of growth will come back. But we're seeing softness in Asia and Latin America in the first 2 quarters and the last quarter of the prior year. We're seeing that start to change a bit, and that's why we commented in the scripted remarks that we're seeing our volumes pick back up as customers business gets better in India and in China. And there is some increased competition. But the majority of the issue is kind of supply and demand right now in the marketplace, with the market being softer about 3 quarters, and there's -- the 3 or 4 major producers have capacity to supply that market or they're overcapacity that it puts pressure on the pricing.

Our next question comes from the line of Laurence Alexander of Jefferies. Robert Walker - Jefferies & Company, Inc., Research Division: This is Rob Walker in for Laurence. I guess on personal care, results were up 6% x Europe. But what was it with Europe and how weak was Europe? And I guess were you surprised with the volatility in what should be fairly a noncyclical business?

Yes, so what we're seeing is we participate in a lot of the higher-end products. That's the formulations that our technologies go into. And we've seen some softening in that area. It's really customer by customer, as in that segment, we've got some of the customers that we've grown quite nicely with. So we have some problems that we're trying to address with the product lines going into those high-end kind of materials, looking to get into the midrange, more into the midrange kind of products. So that's probably in our skincare business. We are relatively pleased with the growth in hair care and oral care. So it's primarily a skin care focused situation that we need to resolve, and we've got some plans to deal with that in the second part of the year. Robert Walker - Jefferies & Company, Inc., Research Division: Okay. And in terms of the volume seasonality in ASI, historically the Aqualon business is up around 10% or 20% in Q3 sequentially. I guess roughly, what are you expecting this year overall?

Yes, we're seeing this -- fiscal Q3 and Q4 will be our strongest seasonal quarters. And so we don't have as much seasonality in the heritage ISP businesses, with farm and personal care being the major driver there. But we still think that they're going to have a pretty nice improvement in seasonal volumes in Q3 and 4.

Our next question comes from the line of Jeff Zekauskas from JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: I guess I have a question for John. Prices really fell off in March in your Specialty Ingredients business, so March average prices look like they're about, I don't know, $3.50 a ton lower than your average prices for the quarter. So did something unusual go on in March? And with that degree of headwind, did you think you can grow your EBITDA in the third quarter versus the second?

So let me try to put some perspective around pricing for you. Recall last year we had very significant increases in price, both in guar and non-guar. And that number was in excess of $250 million in the prior year. When you look at the first 2 quarters of this year, we've given back very little of that, okay? So we have given back on price but still have maintained a large percentage of that. What you're seeing in March is more of a product mix than you are seeing price, okay? So we are pretty -- the market's tough. We've given back some of that price, but a pretty low amount compared to what we achieved in prior year. So we are concerned a bit about pricing, but I don't think it's that significant right now compared to what we gained in prior year. And I think what you're seeing in March is more of a phenomenon around mix than it is price. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. And then lastly in Valvoline, I think Lamar said that you thought gross margins would be around 30% in the third quarter. Of the, call it 200-basis-point sequential drop, how much would come from product pricing and how much from raw materials?

We think that things have settled out here with the last price increase that we announced last week. We're kind of back in equilibrium on price versus cost. So what we're describing as far as the margins we expect to see for the remainder of the year essentially are playing out exactly where we are now on pricing, relative to our base oil costs we're currently seeing.

And Jeff, this is Jason. That reflects both the March base oil increase and then the recent price increase, so it's kind of a net effect. That's what we're seeing.

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

A couple of questions for Luis, and I guess I'd also like to hear Jim comment on it. But I'm a little bit surprised to see acquisitions not mentioned as an aspect of the strategy. And it also seems like we're kind of abandoning some of the growth efforts around some of the higher-growth verticals like food and beverage, mining, institutional. I think it's been our view for a long time that the water business outside of paper has been kind of under scale and that's been part of the issue in terms of trying to improve that business. So I guess the question is kind of, are you prepared to go forward with this portfolio as it stands? Would you be pushing for some acquisitions if the opportunity arose, and kind of how do you stand on growing, either through acquisition or organically, outside of the paper vertical?

This is Luis. Yes, a couple of things. Obviously, we are not abandoning the growth in some of the high-growth verticals, but it is clear for me that we need to focus organization when it comes to mining or food and beverage, which are mostly around our industrial water business, to put all those together so we can be actually more effective. I think that your comment in being soft scale is an issue, especially in the way we were focusing on the different segments. By bringing them all together, we're able to bring better scale in terms of going after those little verticals and really making the right choices when it comes to which segments within the industrial water market segments we're going to go after, as opposed to go after every one of them. And those decisions we're making with an organization, with the talent that we have, and that reflect where we have a competitive advantage based on our equipment and product platforms. So definitely, there's a lot more focus that will go into which verticals we will focus on in terms of the industrial water business. And as I mentioned before and Jim mentioned before, we do have a very strong position in paper. We lead in that market, and we participate in growing segments within paper, within packaging and tissue and towel, and we expect to continue to grow there. That's a question that my focus in the short term is improving the performance of the business. We need to get it to a place where it's more consistent with the margins that we expect from it. So my focus at this time is in leveraging what we have, which is very good. I mean, we have tremendous technologies. We have a good position in the marketplace. We need to first improve the performance capabilities of this business before I personally start thinking about acquisitions. That would be my comment, Mike.

And Mike, concerning acquisitions, the company is constantly focused on a pipeline of opportunities. We have very serious pipelines. We've used -- it seems like weekly on various aspects of that. When it comes to water or any of our businesses, the way the executive committee and the board looks at deployment of capital, we deploy capital where we get the highest return on invested capital. Today, with the performance of the water business, where it stands, could it possibly improve and add more scale? Probably. Has it earned the right to have more invested capital? No. So that's where the tension is right now. And the first step is to get the business stabilized and get it positioned so that if it makes sense to put more capital into it that we have confidence it's going to get the returns that we demand. So that's kind of where we stand.

Our next question is from the line of Mike Sison from KeyBanc.

John, when you take a look at Specialty Ingredients, you're close to $500 million in op income in 2012. Certainly you're going to be down a lot in 2013, maybe as much as $100 million depending on how the second half goes. Can you help us maybe understand how you'll get back to at least 2012 levels? What needs to happen to sort of rebuild that loss this last year?

Yes, there's really 2 things. One is, I think we've tried to give you as much color as we can around guar and the impact that, that had, and that the underlying business grew EBITDA 8% in the prior year. And we think that's what we should be capable of doing. And so we have the guar impact that we're trying to position to -- obviously, we're not going to repeat that in guar. And then it's really emerging markets that are impacting us. We're seeing slowdowns in emerging markets that we did not anticipate. India is quite a bit different than it was prior year, Brazil, et cetera. And so we're working with those teams to try to reposition our approach to get back some of that growth we're losing in emerging markets. And so that's what we're focused on.

Okay. And then Jim, regarding your 2014 goals, when you think about the individual segments, sort of the goals you laid out there, are they all falling short? Are there some that still might have a chance of hitting it? Can you sort of just give us a feel qualitatively where the shortfall is coming from by segment?

When you look at the performance that we were hopeful for, the economy was one of the primary requirements that we thought we'd have to have, and we thought that in '11, we were in a growing economy, an improving economy, and a broad-based improvement around the world. And obviously, the world plays out the way the world plays out. And our assumption that we were in a turnaround of the world economy did not come to fruition. At least that's how we see it today. When you look at broader businesses, Valvoline is doing well. I mean, you saw it had a record quarter in EBITDA. I think that things have stabilized from the standpoint of crude in the world. But that can change with political activity as well, so that's never certain. But the way the supply and demand of crude appears today, that business should perform better. So we're pleased with that. ASI hit a bump with this whole guar situation. I think as guar settles out this year and as they continue to position their businesses, and we get the right balance of supply demand on the HEC side, that business gets better. So I'm encouraged that ASI will continue to grow and improve its earnings. So I think that we hit a little bump there, but from what I see in some the projects they have as far as opportunities, I'm encouraged that, that will get back to a higher growth rate than we've seen. Performance Materials is tied to the world economy around construction and auto, and they're doing better this year. But that's not where our growth is going to come from. And in water, we've been talking a lot about water on this call, and they have to get better and grow. So as you think about where the businesses that are doing the best, Valvoline, I think ASI improves as we get past this guar situation. I think the other businesses continue to work on it and improve their performance.

Our next question comes from the line of James Sheehan from SunTrust.

Jim, you mentioned some of the ways you've transformed the business and the strategies you've used about looking at M&A into your higher-margin businesses and on the acquisition side, and then divestitures of underperforming business. And I was wondering if you could just address the latter here. Are there other areas where you might want to divest some things, namely elastomers? Or are there other parts of the portfolio where you're looking at, taking some accelerated action here? And what's your timeframe on stuff like that?

As you look at our history and how we've behaved in the past -- that's probably the best predictor of the future -- is, as I mentioned we constantly review our portfolio and try to understand where we are in various cycles and what the alternative values are for assets. That's a philosophy we've had for the last 8 years. And as we study that, we have a list of assets that, given the right conditions, we'd been willing to divest. But importantly, we want to know where is that alternative value? How are we going to create value for our shareholders if we do that transaction? Is the best opportunity to grow organically? Do we have organic growth that needs more cash? Do we put it there? Do we make other acquisitions, which is the primary use of our cash historically? That we've -- as I said, we always have a pipeline of alternatives. But those aren't totally within your control. They come when they come. And you have to be prepared to take action when they come. So we try to take a balanced view of deployment of our cash into higher-performing assets, and at the appropriate times that makes sense. And one of the things I think has given us the benefit of where we stand here today, if we had rushed through the opportunity when we sold our assets with the joint venture of MAP and just sold that and rushed out and bought a bunch of stuff that was available, we would've made decisions, but would they have been optimum? Would the company looked the way it does today? Who knows? It may have been better, but I think it probably have been a lot worse, because we would have just bought what was available versus bought what we thought was the best asset in the market. So I think that, that's where our focus is and remains to be. It's that we continue to evolve the company, and we want to make it better, and we want to make the right decisions at the right time.

And one last one for Luis. Do you have any targets for EBITDA margins in 2013 or 2014?

Well, obviously, the first target is continuous improvement over a quarterly basis, and that's the commitment that I have. I think that the long-term targets of the business have been changed, and my emphasis is in getting as fast as possible to those targets but clearly showing a quarterly improvement there, more than anything else.

Our final question comes from the line of John Roberts from UBS.

Would the 2 distinct organizations in Water allow you to do JVs or other strategic actions on one side without affecting the other? Just how distinct are the 2 sides of Water now?

Well, let me say the first [ph] comments. I mean, they clearly service distinct markets and distinct customer bases, and that's part of the reason I think it's important for us to separate the 2 commercial organizations. They do share a variety of our product lines and technologies, and in that regard, they are not completely separate. But when it comes to the markets they serve, they are very different. They are both service-intensive industries. Again, I don't think that in this regard the structure will limit our ability to do what is needed to improve the performance of the business. It does change the focus of the organization in improving the execution, but from the other perspectives, I think that we can continue to do the right strategic moves. That doesn't change with the reorg.

Okay. Thank you very much, everyone, for your interest in Ashland, and feel free to get in touch with me at (859) 815-3527. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.