Good day, ladies and gentlemen, and welcome to the Ashland Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jason Thompson, Director of Investor Relations for Ashland. Please go ahead.

Good morning, and welcome to Ashland's Fourth Quarter Fiscal 2013 Conference Call and Webcast. We released results for the quarter ended September 30, 2013, at approximately 6 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 Form 10-K with the Securities and Exchange Commission. On the call today are Ashland's Chairman and Chief Executive Officer, Jim O'Brien; and Kevin Willis, Senior Vice President and Chief Financial Officer. 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 understanding of our performance by more accurately reflecting our ongoing business. Please turn to Slide 3 for our fourth quarter highlights. We reported earnings of $5.13 per share from continuing operations. This includes $3.98 of income related to our standard year-end pension valuation. I will describe this on the next slide. When adjusted for key items, EPS was $1.54 as compared to $1.87 in the year-ago quarter. Ashland's overall sales during the quarter were $1.9 billion, a 7% decline over the year-ago period. Nearly all of the year-over-year decline was concentrated in Ashland's Specialty Ingredients, primarily in the more commoditized product lines of guar and intermediates and solvents. Sales of elastomers, which is part of Ashland Performance Materials, also fell. Collectively, sales for these more economically sensitive products declined $128 million. Excluding this effect, Ashland's overall sales would've been down 1% versus prior year. Adjusted EBITDA was $310 million, and EBITDA margin was 16.2%. Cash flow for the quarter was strong…

Thank you, Jason, and good morning, everyone. Specialty Ingredients' overall results for the quarter did not meet our expectations. Volumes fell by 3% over prior year and 14% sequentially. This sequential decline is partially due to seasonality, as we typically see volumes fall by 3% to 4%. Intermediates and solvents volumes declined significantly due to a change in customer order patterns. Excluding these combined effects, volume would have been roughly flat with the June quarter. On a year-over-year business, coatings, construction and core energy, which excludes guar, saw volume gains. Overall, Specialty Ingredients sales declined 19% from the prior year and were down 17% sequentially. The majority of the year-over-year decline is attributed to guar and intermediates and solvents, with combined sales falling by $102 million. The remaining $36 million is primarily due to issues related to the ERP go-live. Of the $36 million, approximately $10 million is due to missed shipments resulting from ER system -- ERP system-related issues. Half of this amount was lost. The other half was delayed into October and has been shipped. We believe the remaining $26 million is due to prebuying by customers in anticipation of the ERP rollout in early July. To ensure product delivery and maintain customer service levels while working to repair go-live issues, we reduced inventory below our normal target levels. We're now in the process of rebuilding inventory back to normal levels and expect to have this completed by the end of November. Let me note that the ERP-related issues have been resolved. Compared with prior year, pharmaceutical sales were down 11%. Roughly half of the decline is related to our fine chemical product line, which is not a core part of our product offering. The remainder is primarily related to customer prebuying previously described. Excluding these -- excluding…

Thanks, Kevin, and good morning. 2013 has been a challenging year for Ashland. Broadly, Ashland faced a softer global macro environment than we expected entering the year. Guar, intermediates and solvents made for a particularly challenging headwind with Specialty Ingredients. Performance Materials was negatively affected by price swings in butadiene and a soft replacement tire market. Despite these challenges, Ashland had quite a few accomplishments during the year. We 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. Last November, we brought in new leadership to run the Water Technologies business. We were losing volume, and our cost structure was too high. The new team stabilized the business and executed a cost reduction program that has resulted in a dramatic improvement. Water Technologies' fourth quarter annualized run rate EBITDA was $204 million, a 55% increase over prior year. Consumer Markets had a strong year. Full year EBITDA margin was 16.5%, in line with our long-term target of 15% to 17%. This has been the result of an improved base oil market, as well as a 330-basis-point increase in premium lubricant sales volumes. Volume gains in adhesives and composites were a key focus for Performance Materials going into 2013. Combined, volume increased 3%, primarily due to strong gains in China, where we have had success in our business diversification efforts. One of our stated goals we've put the Ashland transformation into place was to significantly increase free cash flow. As you heard Kevin say, we generated $529 million of free cash in 2013, a 115% increase over 2012. Returning cash to shareholders was a primary use of this cash. We increased our annual dividend by more than 50% and executed a $150 million accelerated…

[Operator Instructions] And our first question is from David Begleiter of Deutsche Bank.

This is actually Ram Sivalingam sitting in for Dave. Jim, just a quick question. Very clear on the use of potential proceeds from Water Tech and elastomers. What's your preference in terms of doing a share buyback? Can we expect another ASR as we get into the back half of calendar '14?

Yes, as we look at buying back shares, we've not made a final decision about how to execute that, so all we're communicating on the call today is our intent to buy back the shares, and at some future time, once we actually have the money, we will make a more definitive statement on how we plan to do the program.

Understood. And then just one quick follow-up. As you continue to evaluate the overall portfolio, how are you guys thinking about MLP options for Valvoline down the line?

As we look at the debt option versus other options of Valvoline -- of course, another option is just to keep it -- is that the MLP is something that we have studied and continue to study, most other alternatives. And as we look at that particular option today, I think there are probably better options than an MLP at this time. I don't think Valvoline has the type of structure that really lends itself for the shareholders to benefit greatly from such an option.

Our next question in queue is from Mike Sison of KeyBanc.

In terms of Specialty Ingredients, given the headwinds that you noted, I mean, can you grow earnings next year? Is it -- I mean, you're sort of starting in a tough hole.

Yes, Mike, this is Kevin. We expect, in Q1, the intermediates and solvents business to be probably about a $10 million-or-so headwind, primarily due to price but perhaps somewhat due to volume as well. At this point, we're baking in around $8 million of higher SG&A, primarily due to -- instead of comp accruals. Obviously, those are fluid and change as the year goes. And there is a couple of million dollars of headwind from foreign exchange as well. In thinking about full year, we think that, assuming the intermediates and solvents headwind plays out as we expect it to and as we've outlined, we think full year operating income for the business should probably be up in the 3% to 5% range. And as we noted in the prepared remarks, we'll keep you up to date on what's going on with the solvents business each quarter as that plays out.

Okay. And then maybe, Jim, you can give us sort of your thoughts. This is certainly a segment that you will need to get margins back to where they were to sort of achieve that first quartile specialty chemical profitability. And I think there was a time you thought the operating income would be double where it ended up this year. Can you just sort of walk us through how you envision getting profitably back to where it hopefully should be over time?

Yes. As you look at the ASI business, a couple of things impacted it this year. One is the -- with raw material costs coming down, they experienced deflation on the top line. Margins weren't affected as a percent of sales, but the total earnings that were created because of that deflation impacted it. At the same time, we increased costs to try to advance some projects faster. That probably, in line with the deflation we experienced, exacerbated the performance, amongst other things that were described in the call. So as you look at our cost restructuring program, partly, it's to get our cost structure right given the current environment, which is slower-growth, and in anticipation that things are going to be a little tougher than we had anticipated a couple years ago. So that's part of the reaction. But at the same time, we have to get our cost structure oriented around how to grow Specialty -- Ashland's Specialty Ingredients. So the restructuring is to -- also enhances competitiveness. So how can we get things done faster, lower costs, less decision-making required to get things done, all those things would be part of the restructuring. The important point around ASI is it does have to be a growth business. So as we look at Asia, we're seeing good growth there, so we're participating well. A big part of our business in personal care, as well as construction, is in Europe. We have to see Europe pick up some. I mean, that's just a fact. I mean, it's a big part of our business. If Europe continues to be flat to declining, that's going to be a very difficult challenge for us to grow. But the -- even despite that, we had some growth in that business of 1% to 2%, so I mean, we're still growing there, but not at the rate that we had hoped. So as we look at ASI, we have to get the new products into the pipeline. We have to replace about 30% of ourselves every year to get the growth. That means new business, new opportunities. That's going to be focused on -- you tend to be focused on and get the costs down and push as hard as we can in areas that are growing, which is primarily the U.S. and Asia, and do our best in Europe.

Our next question in queue is from Laurence Alexander of Jefferies.

This is Rob Walker on for Laurence. I guess just first, a firm and [ph] accounting question. Wondering how the expected stranded costs from the Water sale will flow through over the course of the year.

Well, Rob, this is Kevin. Once we assumably have a Water sale, obviously, those costs that remain stranded will be reported where they exist today. And part of the point of the restructuring effort is to make sure that we get out ahead of that approximately $75 million of stranded costs and then, on top of that, work toward making the rest of the business more competitive, particularly ASI but also Valvoline, frankly, as we move forward. And so yes, those costs will live where they live until we drive them out, and they'll be reported that way.

Also, don't forget, Rob, that it's not uncommon to have TSA to cover a fair amount of those costs for some period of time post the transaction.

Okay. And then just on Valvoline, you've ramped OpEx pretty aggressively this year for the International business. How should we think about OpEx growth next year and, I guess, ultimately, Op profit growth for Valvoline next year?

When you look at the -- the challenge for Valvoline is to grow that business, and it's a very low capital-intensive business, but it's a high sales, marketing-intensive business. So the challenge is always the upfront investment to get into a new market, expand the sales channel, support it with some sort of marketing campaign to create awareness, and those expenses have to pay off. So you saw us invest pretty heavily this year on both the marketing side as well as sales expansion. So what I'm expecting for that business next year is to watch these expenses very carefully and, matter of fact, even lower their expenses; and at the same time, yield some of the investments we made this year in higher sales and profits. So I would expect this business to get a higher yield ratio of sales and profits on a lower expense base.

Our next question in queue is from the line of James Sheehan of SunTrust Robinson.

Kevin, question on the restructuring. You mentioned -- you referenced some of the stranded costs for Water Technologies. I was just wondering if you could provide a little more detail on how the restructuring savings would be allocated by segment.

Yes. The way that tends to work is -- so we have SG&A that's built directly into each commercial unit. To the extent the SG&A within a commercial unit, say, Specialty Ingredients or Consumer Markets, is reduced, that unit will benefit from that on a dollar-for-dollar basis. We have allocated direct SG&A. These are what you'd think of as maybe corporate or supply chain resources that are embedded within each of the commercial units to perform specific functions. To the extent those numbers go down, obviously, that commercial unit will benefit from that, also on a dollar-for-dollar basis. And that's probably 75% of our total SG&A in the company right now, maybe a little more. And the remaining 20%, 25% is allocated corporate SG&A, folks like Jim and myself that aren't directly related to a commercial unit, but we're here. And so to the extend those costs go down, those reductions are allocated out to each of the commercial units more or less on a pro rata basis.

Okay. And another question for Jim. Could you comment on your CapEx outlook for 2014? At $275 million, it's a bit lower than 2013. What types of projects are you looking at now? Is your HEC project in China going along as expected? Have you restarted that yet? And what about your -- some of the other projects that you -- that were being looked at, what is the status of those? Are they being further delayed?

If you look at our CapEx going into the next year, we have a base CapEx, which is probably about $195 million, $200 million of CapEx, that we have to maintain to just keep the plants in good working order. And then beyond that, we have a lot of projects which have already started which need to be completed, and the HE project is one of those that you just described. They could be restarted within 3 months. But what we're paying close attention to is the real demand that we're seeing. So we're trying to get better balance around when we bring certain projects up. And so that necessitates probably several months' delay in how we would look at putting those into the pipeline for construction. So I think this CapEx that you see this year reflects our expectation that demand is going to stay fairly flat to 2% or 3% growth. And with that, we have plenty of capacity. So we don't need to add capacity at this time to service our needs. And we'll watch that quarter-to-quarter and make decisions accordingly. So we have money set aside within that budget to ramp up certain projects quickly if we so desire, if we see the need. So I think the expectation this year is we're going to spend less on CapEx.

Our next question in queue is from the line of Mike Harrison of First Analysis.

With the ERP system implementation behind you, can you talk about how that improves your capabilities to go to market as a single entity in the Specialty Ingredients business?

The ERP is something that we put for a single instance for the whole company. So what it allows you to do now is that everybody that is working through the supply chain, working through sales, marketing, the sales force is on the same system as far as how they manage their customer base, so there's uniformity about how we approach the market from a system standpoint. And that -- this creates simplicity and efficiency from the standpoint of how the company operates. We don't operate several systems. So from our standpoint, it's something that's required and necessary just to do our business. So I'm pleased that we have this behind us because every other parts of the company we've completed this, they've gotten better. And I would fully expect the ASI through this year will get better using the system. And then one of the areas that we have to continue to improve, and we have a module that will launch through the year, which is our export system. Right now, that's still a manual system that has to be put on the ERP and put it on the SAP level so that it's more automated and less touches with the human hands. That would help us become more efficient and better of serving our customers through the exports that we provide out of the United States. So that's the next step in our ERP, and that will launch sometime this year, and that will help improve that process.

Right. And in the solvents and intermediates business, the $50 million to $60 million headwind you're talking about, is that a top line impact or a bottom line impact or both? And then you also mentioned you're taking some downtime. How would you expect to benefit from the turnaround activity you're -- you mentioned there? And does it make sense to simply idle this business for a little while until the underlying supply and demand improves?

In terms of the first part of your question, effectively, it would be both top and bottom line because it's basically -- it's mostly price, let's put it that way, at least in the top line part or with the sales we're not going to have because of the turnarounds. And yet, typically, these plants -- and we have 2 of them: there's one in the U.S. and there's one in Germany. The turnaround activity is primarily related to the plant in Marl, Germany. Yes, these turnarounds have to be done periodically, it's 2.5 to 3.5 years, typically, between turnarounds, to reinvigorate the catalysts, recover some lost catalysts, et cetera, and just do general repairs. These plants run hard. They run full-out 24/7/365, pretty much. And that's really how you get good fixed cost absorption, is by running the plants full out. And so turnarounds are absolutely necessary because you will see falloff, and you will see falloff in production if you don't do it, plus things just break and need to be repaired. So in terms of, I guess, idling capacity, even though it's going to be a headwind to earnings, it's still a positive contribution in terms of margin dollars. And so I don't -- the fixed costs would not go away if we idled the plants for a period of time. And we also would have a lot of other operating issues. And just as a reminder, we do use a portion of the BDO that we manufacture in polymer production. It's a critical raw for us in the polymer side, and so we need that production for -- at least a portion of that production to ensure that we have that material for polymers.

All right. And if I can sneak one more in, you mentioned you're going to be ending the monthly business fundamentals update. You've previously said that, that was a little bit in lieu of providing forward guidance. So does that mean you're going to start providing guidance at some point in the future?

Our intention is not to provide EPS-specific guidance, Mike. We'll provide kind of our views on where we see top line and margins going on a more consistent, more visible basis. But we don't have any current intentions of providing EPS guidance.

Our next question in queue is from John McNulty of Crédit Suisse.

This is actually Ernie Ortiz filling in for John. What were the surprises regarding free cash flow for the year that came in above expectations? And can you give us a sense of the cash costs for the restructuring program?

Your first question was...

Surprise on free cash.

Oh, it was the surprise on free cash flow. Working capital came in a bit more than we expected. That was really, I think, the primary driver for that. And as indicated, we do expect working capital to be a use of cash in 2014. So there's some puts and takes in the '14 numbers, and we do expect to be in the $475 million to $500 million range. And in terms of the cash cost of restructuring, too early to tell. The process that we're undertaking right now is to really plan and design the overall restructuring. We're very much in the throes of that right now. And obviously, the ultimate cost of that program will be determined by the numbers and geographies of people, et cetera, as well as other potential costs. So our intent would be to give more overall guidance and an update on where we stand on the January earnings call, so you can expect to hear back from us on the overall restructuring at that point.

Okay, that's helpful. And then on the elastomers sale, should we assume a modest tax set [ph], or if any, for this asset?

It shouldn't be material.

Our next question in the queue is from Dmitry Silversteyn of Longbow Research.

A couple of questions, but a lot of them have been answered already. First of all, starting with guar, you continue to mention it in this quarter as a headwind. As we get into 2014, how should we think about the straight guar headwind? Is it going to be all gone, or is it going to diminish through the year in terms of comps? Sort of help us frame our thoughts around the ASI business for 2014.

In terms of the straight guar, the commoditized guar that we were buying and lending and reselling out of India, yes, that business is effectively gone. There is a little activity that occurs there, but it's on a small but guaranteed margin basis. And as we look at the more derivatized guar business, yes, derivatized guar demand has been sluggish at best. And we've -- so we've definitely experienced some headwinds there. Margins in that part of the business -- that part of the energy business have been quite low. And at this point, we see that continuing into Q1 of '14 for sure. In terms of the overall outlook for guar in '14, in general, it obviously will be a tailwind to '13, given that we lost money on the guar business on an overall basis in '13, but I don't expect guar to be back up to normal profitability levels in '14, either.

Okay, that's helpful. Switching gears to elastomers. Since you are in the process of getting the sale of the business formalized, have you and Jim had a chance to take a look at the stranded costs that would be left behind if -- when that business goes?

We have, and it's very small.

Okay. All right. So single millions of dollars probably?

Yes.

Okay. And then just your comment on the elastomer volumes being down because of the weak tire replacement market. Is it particular higher grade -- I don't know how to put it. The reason I'm asking the question is we have another company that supplies into the tire market, and they're actually seeing pretty good growth. So I'm just trying to reconcile if it's your market positioning or a particular type of tires that you're supplying that are experiencing the lower year-over-year volumes.

Dmitry, it's primarily the customers that we serve. We provide rubber -- synthetic rubber to the RMA customers, so the Michelins, the Goodyears of the world. So it's just the type of customers that we're servicing versus some of the imports that we don't serve.

Our next question in queue is from Chris Shaw of Monness, Crespi. Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division: I know you already addressed the MLP issue with Valvoline, but I'm just wondering if you have any updated thoughts or if you're considering a potential spinoff of Valvoline at any time?

As we said in the call, we -- the board constantly reviews and looks for the best alternatives to create shareholder value. And at this stage, the intent of the board is to keep Valvoline. And Valvoline provides a very nice contribution to the corporation. It provides a lot of free cash flow, helps service our debt. And at this stage in time, we believe Valvoline creates more value for the corporation within the portfolio than out at this stage.

Our last question will be from the line of Adam Goodwin of Goldman Sachs.

This is Charlotte Robertson on for Adam. My first is, in the past, you've indicated the desire to move towards 2x leverage target and pursue investment-grade ratings. Can you provide any updated thoughts around that? And does IG continue to be a priority for the company?

Well, 2 things, I guess. My first -- the answer to your first question would be that I believe, over time, what will happen is you'll see us grow into, if you will, that 2x leverage ratio. First quarter this year -- first calendar quarter this year, we turned out effectively all of our debt in the bond market. And with that placement came investment-grade-style covenants in that bond package, which we were very pleased to attain. And I think, as you see us go forward, while we don't have, obviously, any control of what the rating agencies do, our intent would be to continue to improve our overall credit metrics because we do believe that, that provides value to our shareholders. But in terms of trying to attain a specific rating, that's something that just happens over time.

Okay, great. And my other question is, you've indicated that the primary use of cash from a potential Water Technologies sale would be towards shareholder buybacks. Can you talk about what the M&A landscape looks like right now and whether there are any acquisition opportunities that might also make sense for the company?

As we look at M&A, we constantly are in the market looking at what we would like to do, and we have a long list of assets that we would like to own, but obviously, it takes somebody that wants to release those assets to negotiate a sale. And the market is -- I wouldn't say nonexistent, but it's real tough to get the type of assets that you want at the price that you want to pay. So I would say that we -- we're constantly reviewing the things that we would like to own and continue to work a process to try to find a way to make that possible. But I think, in the near term, the expectation should be there's probably not a lot of activity right there.

With that, I'll turn it back to Jason Thompson for any final comments.

Yes, thank you for your interest in Ashland, and feel free to give me a call. Thank you.

Thank you. And once again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.