Ashland Inc. (ASH) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the third quarter earnings call. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, Mr. Jason Thompson, Director of Investor Relations. Sir, you may begin.

Thank you, Vincent. Good morning, and welcome to Ashland's Third Quarter Fiscal 2014 Conference Call and Webcast. We released preliminary results for the quarter ended June 30, 2014, at approximately 5 p.m. Eastern time yesterday, July 31, and this presentation should be viewed in conjunction with the earnings release. Additionally, we posted slides and prepared remarks to our website under the Investor Relations section and have furnished each of these documents to the SEC in a Form 8-K. On the call today are Jim O'Brien, Ashland's Chairman and Chief Executive Officer; Kevin Willis, Senior Vice President and Chief Financial Officer; and Luis Fernandez-Moreno, Senior Vice President and President of Ashland Specialty Ingredients. As shown on Slide 2, our remarks 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 we will be discussing adjusted results in this presentation. We believe this enhances understanding of our performance by more accurately reflecting our ongoing business. I'll now hand the presentation over to Kevin.

Thanks, Jason, and good morning. First, let me start by announcing that late yesterday, we completed the sale of Ashland Water Technologies to CD&R for $1.8 billion in cash. As we have said before, this divestiture allows us to focus on our core specialty chemicals business. Net proceeds from the transaction are a little more than $1.4 billion, which we intend to use primarily to repurchase shares under our existing $1.35 billion repurchase program. Under this program, we executed a share repurchase program with a third party to repurchase in excess of 760,000 shares, for a total investment of approximately $80 million. These shares will be retired by the end of next week. We also announced yesterday that we will initiate a $750 million accelerated stock repurchase program and a 10b5-1 program that will allow us to repurchase up to an additional $250 million of stock. We expect to reduce share count by approximately 6 million shares during the fourth quarter as a result of these 2 programs. Both programs are expected to be completed by June 2015, and reflect our continued commitment to accelerating return of capital to shareholders. Moving now to our third quarter results. We reported earnings of $0.90 per share from continuing operations. When adjusted for key items, earnings per share were $1.63, a 24% increase from prior year. This excludes $0.35 per share of earnings from discontinued operations, most of which came from Water Technologies. AWT continued to execute well, posting a 17% increase to EBITDA versus prior year, driven by a 1% increase in sales and a 70 basis point improvement in gross margin. Due to mix, Ashland's overall sales were down slightly from prior year at $1.6 billion. Lower selling prices in guar, and lower volumes and selling prices in intermediates and solvents, were the primary drivers to the year-over-year decline. Excluding guar and intermediates and solvents, sales were up 2%. On a sequential basis, Ashland overall sales rose 4%. Adjusted EBITDA was $298 million, a 9% increase year-over-year. Specialty Ingredients was led by a solid performance from Industrial Specialties, as adhesives, coatings and energy all produced year-over-year gains in sales and profitability. Additionally, Consumer Specialties posted good growth in skin care, where we had several new customer wins. Performance Materials had another good quarter. Although good volume gains in both composites and elastomers were offset by lower sales volumes of intermediates and solvents, Performance Materials benefited from higher-than-expected butanediol prices in the market. Valvoline posted volume and profitability gains in each of its channels it serves and continues to execute well. Now for a few corporate items. Our effective tax rate for the quarter was 23%, in line with our prior expectations. We still expect our full year tax rate to be 21%. This translates into an expected tax rate of 26% to 27% for the fourth quarter. Capital spending totaled $56 million for the quarter, and free cash flow amounted to $155 million. We have made good progress on working capital. And when combined with better business performance, we now expect full year free cash flow to be in the range of $300 million to $350 million. This excludes $40 million to $50 million of restructuring-related cash costs. I'll now hand the presentation over to Luis.

Thank you, Kevin, and good morning, everyone. ASI reported [indiscernible] results in the third quarter and accomplished several of the objectives that we had previously laid out. But we have more work to do in order to meet our growth and earnings targets. Back in January, I outlined the strategic vision for Ashland Specialty Ingredients. I highlighted the quality of our product portfolio and provided a high-level view of how we will position ourselves to win in the marketplace. That discussion focused on what we were doing to build a foundation for the business that would support strong growth and healthy margins. Today, I'd like to say -- to share some additional details on the actions we're taking to meet our sales and margin targets. Let's briefly review the structural changes we've made to position ASI for growth. First, we moved intermediates and solvents over to Ashland Performance Materials and moved adhesives from Performance Materials to Specialty Ingredients. This realignment sharpens the focus on ASI's specialty portfolio. Second, we reorganized ASI from 6 business units down to 2: Consumer Specialties and Industrial Specialties. This improves our ability to serve customers with similar needs. Third, we introduced a new regional management structure that moves us closer to customers and better positions our technical and customer service teams to capture specific geographic opportunities. Last, we rightsized our support structure to drive efficiency and effectiveness. This should lead to $75 million in cost savings. The net result of these efforts is a smaller, more nimble organization that will provide higher levels of customer service and position us for growth, all while reducing our cost structure. Before we move to the 4 primary steps we are taking to drive growth and profitability, I want to take a moment to remind you how ASI is uniquely positioned among global specialty chemical companies. Today, ASI has a product portfolio built on 6 platform technologies serving 7 key growth markets. This enables us to develop and deliver a broader product offering to our customers, capturing growth opportunities through both new technologies and enhancements to existing lines. Particularly exciting is our capability to synthesize new hybrid polymers, where we combine 2 or more platforms to create new products. We have world-class R&D facilities that bring together our scientists in a highly collaborative environment, driving technological innovation across each of our platforms. To deliver these capabilities to the market, we differentiate ourselves through high levels of customer intimacy and market-specific innovation. We work closely with our customers on a global and regional basis to understand local needs and deploy appropriate formulation and application expertise to develop products to meet those needs. We do these with keen focus on operating our business as efficiently as possible, ensuring we are cost-competitive, offering our customers the highest level of value. As you can see, we provide unique exposure for our investors to technologies and markets, and we are well-positioned to compete and win. Next slide. To achieve our objectives, we must execute on the 4 steps you see in this slide. The first step is the business redesign, which I just described. We're now working on steps 2 and 3. Manufacturing and supply chain are now embedded in the business, and we are beginning to see the benefits across our global network of 29 plants. We continue to develop new opportunities to drive supply chain and operational efficiencies. These will be key drivers to our EBITDA improvement. The third step focuses on developing specific strategies to enhance profitable growth in the markets where we participate. We are doing this by focusing on our core technologies, where we have significant sources of competitive advantage. These technologies represent nearly 85% of our sales and an even higher proportion of our EBITDA. The markets we serve with these technologies are growing faster than the global GDP. As a result, we're targeting to grow those core technologies at 1.5x to 2x GDP. It is here where our global and regional marketing focus drives improved innovation and customer intimacy. Research and development efforts are critical, and process improvements in this area are also leading to faster new product introductions. For example, in the third quarter, we launched 2 new polymers for hair care that included novel technology and featured our first hybrid chemistry. The final step is optimizing the business for sustained, long-term revenue and earnings growth. Put simply, our objective here is to identify the best projects available to us, then commit appropriate human and capital resources to them. We're analyzing our working capital needs to ensure we have supply available to our customers, when and where they need it, in the most efficient, cost-effective manner. We're also reviewing our long-term capital needs, anticipating marketing dynamics in the future to ensure we are where our customers are so that we continue to have a world-class supply chain. Finally, as part of this step, we're developing detailed plans to optimize our product and business portfolio. This will likely include some pruning of current technologies and product lines, and some addition of new technologies and product lines. Ultimately, we want to be the best possible supplier for our customers, offering a suite of value-added products and services with unmatched technical expertise. Over the next few quarters, I'd like you to focus on a few key areas when considering our successes in achieving these objectives. As I mentioned a few moments ago, we're currently rationalizing our product portfolio to focus on the best opportunities. We do expect to grow the underlying core areas of the business faster than GDP. These are the more profitable areas, and if we're successful, you will see gross margin increase as business mix improves. Another key focus for us is cost control throughout the supply chain. We continue to find opportunities to improve asset utilization and reduce costs. Last, you should focus on our execution of the global restructuring program. We aim to remove around $75 million in costs within ASI by the middle of fiscal 2015. These savings will mostly appear in the SG&A line. In summary, these are the 4 key steps that we serve -- that will serve as a foundation of our business model and drive sales and earnings growth over the long term. Over the next several quarters, our focus will be on growth in the underlying core areas of the business and on healthy margin improvement. We have a lot of work ahead of us, and we expect our teams to deliver against these targets. I'll now hand the presentation over to Jim for his closing thoughts.

Thanks, Luis. Ashland's strong third quarter results reflect improved operating performance and execution in key areas of our business. At the same time, we are beginning to see the benefits of our global restructuring and related cost savings. Each of our 3 commercial units met or exceeded the revenue and profitability estimates we outlined at the beginning of the quarter. This performance helped drive Ashland's EBITDA margin to 18.6%, a good step toward our goal of 20%, which would place us among the top specialty chemical companies. We posted nice volume gains and saw good mix improvement in key areas of the business. ASI hit revenue and margin expectations, and continue to deliver on near-term targets. We posted solid volume gains in Industrial Specialties, with particular strength in coatings and adhesives. ASI has also done a good job on improving execution, and we are beginning to realize the operational and cost benefits of the restructuring program. Performance Materials posted nice volume gains within composites and elastomers. Within composites, the team continues to execute well by developing differentiated products and identifying new market opportunities. Geographically, we had strong performances in North America and Europe, with end-market strength focused in transportation, marine and engineered stone markets. Valvoline posted another solid quarter, with nice volume gains and margin expansion. Valvoline has showed consistently strong performance over the past several quarters, executing well against each of the growth strategies we have established for that business. We grew premium lubricant sales volumes by more than 4 percentage points from the year-ago quarter to almost 38% of total sales. Unit growth from the international channel was up 10% from prior year, and same-store sales growth for company-owned Valvoline Instant Oil Change stores was 3.3%. We are also making good progress on our global restructuring. As part of this program, we have removed in excess of $80 million in annualized run rate savings through the third quarter. And we remain on course to achieve over half of the $200 million by the end of the fiscal year. Additionally, we completed the business reorganization by moving adhesives to Specialty Ingredients, and intermediates and solvents to Performance Materials. This puts our more stable, higher-growth businesses within ASI and consolidates our more cyclical businesses within Performance Materials. Overall, our teams are executing well, and their efforts are strengthening our businesses. As a result, we have improved our ability to deliver against our expectations. We have some great momentum, and I believe we are on track to continue posting year-over-year sales and profitability improvements as we move into the fourth quarter. As Kevin mentioned earlier, we completed the sale of the Ashland Water Technologies businesses yesterday. This is a pivotal moment in Ashland's history and in our evolution to becoming one of the world's leading manufacturers and suppliers of specialty chemicals. Moreover, the culmination of this transaction further reflects our commitment to creating shareholder value. Over the past several months, the board has been engaged in a full review of the many complex factors affecting a possible transaction to separate the Valvoline businesses. This review included several outside advisers, as well as Ashland's senior management. The board has completed its review and concluded unanimously that the company will not make any additional significant changes to its primary portfolio of businesses at this point in time. Going forward, the board will continue to review its portfolio in order to best position the company for value creation in the future. We have many initiatives underway to continue generating value. ASI continues improving the underlying core of the business, driving growth in both sales and profitability, and is progressing nicely toward our long-term EBITDA margin target of 25% to 27%. Valvoline and Performance Materials are both executing well against our goals, and we expect additional volume and margin gains to lead to earnings growth. Our restructuring program is beginning to deliver results, both through cost savings and improved operational performance. We expect that to continue as we move into fiscal 2015. Each of these initiatives, as well as our broader corporate strategy, should lead to an Ashland EBITDA margin in excess of 20%, which would put us among the top specialty chemical companies in the world. Despite these value-creating initiatives, we continue to believe Ashland's current share price does not reflect the quality of the assets in our portfolio or the earnings potential of this company. We believe Ashland's stock is a good investment, and we intend to ramp up our stock buyback program under the existing $1.35 billion authorization. In the third quarter, we repurchased roughly 760,000 shares for a total investment of $80 million. You heard Kevin say a moment ago that we'll be initiating a $1 billion share repurchase program during the fourth quarter. We expect to have these programs completed by late June of next year. By that time, we will have repurchased shares equal to approximately 13% of our current market capitalization. That would leave us with roughly $270 million remaining under the current $1.35 billion authorization. We expect to complete the entire authorization by the end of calendar 2015. In addition to the stock buyback programs, we will continue to evaluate other uses of our cash, including potential investments in high-return capital projects, bolt-on acquisitions and targeted debt reductions. Our goal remains consistent: To create the world's best specialty chemicals company, and we are committed to taking the steps to make this happen. With that, I'll hand it back to Jason for Q&A.

Thanks, Jim. [Operator Instructions] Vincent, I'll hand it over to you.

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

Jim, on the review you've just done, why is now not the right time to separate Water Technologies -- I'm sorry, separate Valvoline? I know you talked in the past about the cash flow mismatch of the U.S. Specialty Ingredients business versus U.S. cash needs, but that does not sound like an insurmountable problem. So what is the issue with separating Valvoline from Specialty Ingredients today or now?

As we talked about in the remarks, the board and management took a very extensive review with both outside advisers, and we took many, many months to evaluate all aspects of the issues surrounding any type of transaction around Valvoline. So the board was very thoughtful about this. And then the conclusion they made is that doing any type of transaction with Valvoline at this time was not in the best interest of the company. So I think that's the best I can give you as far as it was a thorough review, and that the board was very thoughtful about it, and they decided that this was not the time to do it.

And on the same track, Performance Materials is also not a specialty chemical business. Is -- first, is the elastomer sale still ongoing? And what's your thoughts on this segment longer term?

Yes, I'll let Kevin speak to the elastomer sale, because it is moving along, and we have some encouragement that, that may actually conclude. So Kevin?

Yes, David, the process is moving along very well for elastomers. We have a number of interested parties, and we fully expect, at this point in time, to be able to announce and close a transaction sometime during the year. So that has not changed.

And our next question comes from John McNulty of Crédit Suisse. John P. McNulty - Crédit Suisse AG, Research Division: So Jim, another question regarding Valvoline. It seems like your -- you and the board are very specific about saying it's not the right decision at this time. And I guess, I'm wondering, what in your mind or the board's mind changes over time that might actually get people to reconsider a transaction here?

I think as you look at the issues that we put forward in the review, talking with our shareholders, we told them that the board would consider the review, and they took an extensive amount of time to look at it. And during that review, there are several things that need to be attended to, to create the value that we all want to create, if and when something like this happens. So what the board is communicating to our shareholders is that they're very thoughtful about this. They want to make sure that when a decision is made to do anything other than to keep the asset, the Valvoline, that when it is decided that it's time to do something different, that it indeed creates the value that we are hoping that it will create. So we're going to be working very hard to create the optionality, that when the time comes, that we believe that it's the right time to do it, the board will reconsider their decision and either decide at that time to do something different or to retain the same decision. So I can't tell you what the board's decision will be in the future. But I can tell you that, at this time, they feel it's best to keep Valvoline in the portfolio than to remove it from the portfolio. John P. McNulty - Crédit Suisse AG, Research Division: Okay, fair enough. And then just a follow-up question, with regard to the CEO hunt, with you retiring at the end of the year, can you give us an update as to where that process stands, and when we may have some resolution around that as well?

Sure. The board has formed a special committee, which we communicated, that committee meets frequently. We have an outside group that's helping us with the search, and we have identified several candidates. Those candidates have gone through initial reviews. They're going through more formal review with these candidates. And we have both candidates from outside the company, as well as inside the company, and all are being considered. And I'm hopeful that we can have this resolved before I retire December 31. So that would be my personal desire. And I think the board is working very actively to try to have it resolved, certainly, before the end of the fiscal year -- I mean, not fiscal, it's going to be the calendar year.

And our next question comes from Brian Maguire of Goldman Sachs.

Jim, I was hoping you might comment on how this decision on Valvoline will impact the way that you view the business strategically. And specifically, I'm thinking about, I think, historically, it's been used as a source of cash to fund some of the growth in the other businesses. I think those businesses are kind of at the point where they're standing on their own now. But at the same time, it seems like there's a pretty good untapped growth opportunity at Valvoline. So does this decision indicate some kind of a strategic change in how you think about investing in that business? And should we expect a little bit of a different growth rate in it going forward?

The decision to invest or not to invest is all based upon the returns to the shareholders, as far as the invested capital. We've always invested in the projects which have the highest return on capital. And ASI has some of the best returns. And if they are superior to other options within the corporation, they'll continue to get the bulk of the capital. Valvoline, as far as its growth capabilities, if you look at where growth can occur in Valvoline, it's internationally. And we have continued to invest in the channels of distribution internationally, and the growth rate this past quarter was 10%. So I think we have invested appropriately to take advantage of that growth internationally within Valvoline. We'll continue to invest in that growth. But most of the investment is around people, training and gaining better and broader distribution and training those people to help serve the broader markets. So that will continue, and it doesn't take an extensive amount of capital. When you look at Valvoline Instant Oil Change, that industry is consolidating, and we have made several transactions with our franchise organization, where they have bought large groups. One large group was bought in California last year, and we helped them do that. That was very profitable for them, as well as for ourselves. They continue to build new stores. We would be interested in consolidating people that want to get out of business in our core market, which is basically the Midwest and the Southeast. So we'll be interested in consolidating there as far as company-owned. And we would support those types of projects, if they would meet our cost of capital requirements, as far as exceeding the returns that we need. So that would be something that we would continue to consider and we have done in the past, we'll continue in the future. So as I look at Valvoline, it isn't so much that we have not invested appropriately in the business, I think we have. We will continue to invest in that business, it's just that it doesn't require a lot of capital. And I think that we have opportunities within ASI, where it is a more capital-intensive business, that we could deploy that cash in a very productive way in growing that business, as well as using the cash to help continue to pay down debt, where appropriate, as well as continue to buy back stock. So we have many, many ways to, I think, create shareholder value, and Valvoline helps contribute to that in its current form.

And just as a follow-up, it looks like even after the ASR, you'll still be running with a higher-than-normal level of cash, and you're generating a whole lot of cash, obviously, as well. Can you comment on, I guess, the M&A environment right now, how you see multiples in the space and whether there might be a few bolt-ons that you could put that cash to work to kind of add to the portfolio?

Well, the M&A environment, obviously, it's better trying to be a seller than a buyer. And multiples are high and debt is inexpensive. So as a consequence, you can get pretty good values for things that you want to sell. When we look at things to buy, we have a list of opportunities that we would like to participate in. If they became available, we would try to compete for them, but the multiples are high. I mean, everything that's being transacted is being done at a pretty high multiple these days. And we would look at it very hard and -- but it would have to -- we have to be able to get a return on it. And that's always the final decision the board looks at is the return possibilities and how we deploy our cash. And right now, we think our best opportunity is buying back our own stock. And that's why you're seeing us take the proceeds from our Water business. And we've created the ASR and the 10b5-1, and we're going to be in the market and fairly aggressive in the market.

And our next question comes from Robert Walker of Jefferies.

In terms of your 1.5x to 2x GDP target in ASI, does assume share gains? And what level of CapEx will you need to drive that?

This is Luis. Yes, a couple of things. Part of the reason why we believe we can grow at 1.5x to 2x is the markets intrinsically are growing above GDP, due to the megatrends that we see, both in personal care, coatings, where adhesives go, same thing with pharma. And part of that growth is not just coming from the developed geographies, but also from the rapidly developing economies. So the first driver is just the intrinsic growth rate of these markets growing at higher than GDP. The second driver is that in those core technologies, we really have a set of competitive advantages in terms of our ability to manufacture, ability to develop and our customer intimacy with customers, where, yes, we do believe that we can capture share. As the markets grow higher than GDP, we can capture a higher proportion of that share, mostly by getting into the new formulations that both our global and regional customers are placing into the marketplace. So that's fundamentally the belief that -- from a market perspective, that will happen. As you know, we are having certain product lines that we're operating close to capacity. So we are continuously looking at the right capital opportunities for us to, first, improve the productivity of those assets, debottleneck them in the right geographies and the right places, and when appropriate, put new facilities in place. And that will continue to happen and will be continued to be assessed, as Jim said, in a way that we generate value, as long as we meet our profitability and return on investment targets moving forward.

Good. And then can you just talk a bit about your appetite for using M&A within ASI to kind of supplement that level of growth? And looking back, after a few years or so, do you think that M&A could be driving maybe half of the segment volume and profit growth, or is that too high?

I'll let Luis give you specifics, but I think that from the board's and my perspective, we're very interested in doing bolt-ons for ASI. And we have several ideas that we would like to do, if they became available. I'll let Luis kind of talk about specifically about his ideas as well.

Yes, the key here is -- you're absolutely right. By the way, I think we can grow the core technologies 1.5x to 2x based on organic growth. I think we can enhance growth moving forward with future acquisitions. We have a very strong customer relations, customer intimacy. We really have a good coverage of both local and regional accounts, both in industrial and consumer markets. And we have a great suite of technologies. But there's no question that there's opportunities to expand that technology portfolio to further service our accounts better. And as Jim said, we have a set of possible opportunities, that if they will become available, we will look at them very hard and look at ways to work with them. And if they provide the right return on investment, I'm sure the board will support those moving forward.

And our next question comes from James Sheehan of SunTrust.

So you referenced your intention to use cash to invest in some high-return capital projects internally, and we heard some more color today on ASI. I was just wondering if you could give us an indication on your CapEx outlook over the next couple of years?

I think on an overall basis, current outlook would be pretty similar to where we've been, so call it in the 250 range on an ex Water basis, so on an ongoing basis. To Luis' point, to the extent that we see opportunities to grow organically in ASI on very high-return projects, certainly, that number could be a little bit lumpy if we find the right projects going forward, it's the right thing to do and has the right growth and return profile. Generally speaking, we would see CapEx in that 250 range, absent other organic opportunities that we might pursue.

Very good. And also, do you have any update in the skin care market, particularly the sunscreen Escalol? Do you see an opportunity there for getting bigger in the U.S. market with regulatory changes?

Yes, I mean, clearly, we see these materials being used globally. And they continue, actually, to grow globally. That's part of the reason that -- of our skin market -- the skin care business continues to grow outside of the U.S. Obviously, we have seen a tremendous amount of activity in the last month, both taken by Congress and the [indiscernible] people. So yes, as soon as we get further approval for these products, there will be a potential for further growth in the U.S. on our product lines. And as long as there continues to be energy by Congress and our government to move forward, something that we enthusiastically support, there will be opportunities for growth in that area in the U.S.

And our next question comes from John Roberts of UBS.

I'm looking at Slide 11 on the free cash flow guidance. Midpoint of the year is $325 million. That would imply, I think, $73 million in the fourth quarter. And if you add your $93 million of CapEx budgeted for the fourth quarter, that's $166 million from cash from operations. That seems a little low in the fourth -- for the upcoming quarter. And the $50 million range, from $300 million to $350 million, $50 million on that $166 million seems like a pretty wide spread on cash flow from operations.

John, I think based on the current look, we'll probably wind up near the top end of that $350 million range, based on what we see right now.

Okay. So why the conservative -- what are you concerned about to open up that range?

Not really concerned about anything specifically. We typically provide a range, because you don't know what you don't know. But based on what we do know today, I would expect us to be near the top end of that range.

And our next question comes from Mike Harrison of First Analysis.

Luis, I was wondering if maybe you could give some more detail on the hybrid polymers and the opportunities there. You mentioned hair care, are you seeing opportunities across all 7 markets? Or are there areas where maybe customers are more enthusiastic to work with something new, and areas where maybe they're more cautious to introduce something new to their formulations?

Yes, that's a very good question. And if you go to Slide 4, you see the 6 core technologies that we have. Each one of these technologies provide specific properties to the products where we participate, either in personal care, pharma, coatings, adhesives would be probably the core markets where they provide the specific properties. One of the things that we're finding is that by molecularly hybridizing these chemistries, we can provide properties that any one of the products alone couldn't do, and even in combination, in simple blends you couldn't do. And in fact, as we said, we just introduced a new one for hair care that does exactly that. And we always see our customers, any time you provide them with something that enhances the performance of the final product in a way that they can either capture higher share or they can capture higher value because the consumers are willing to pay more, they will rapidly try to move into it. In fact, one of these hair products, there was at least one customer in Europe that within 60 days, they introduced a new product. So people are really -- when you provide them with the technology, they really get excited. And from a technological point of view, what we're seeing is that by putting these molecules together, we in fact are seeing results that you couldn't achieve by just blending the materials, which of course, anybody could do.

And then maybe just a question on Valvoline. The mix of premium lubricant is very strong right now. Do you -- it seems like you connect that to your marketing efforts. But I'm wondering if maybe we're seeing a shift in consumer preferences toward a product that really does allow them to go farther between oil changes with a little better peace of mind.

When you look at the trends with new cars, almost every major manufacturer is putting a requirement that they want the engine oil to go 5,000, 6,000 miles, because that's the frequency they want the car to come back in for service. So it's almost a service modeling as opposed to a performance of the oil. So as you continue to do that, that drives the consumer then to go more and more to synthetic. So from our standpoint, the growth of synthetics, as far as the consumer adapting synthetics because of the longer intervals, is good for us, because the profitability of the synthetics is very strong and that interval is not much different than really the broader market value. Used to get 4x, would drop to 3x, now it's a little over 2.5x, is kind of the average oil changes per year. So it's imperative on us, as an industry, as well as a company, to drive more and more toward the synthetics into premium products, because as the interval continues to lengthen, you can increase your profitability by moving to synthetics.

And our next question comes from Dmitry Silversteyn of Longbow Research.

I just wanted to get into a couple of businesses. So the strength that you've seen in composites and elastomers, particularly in the volume side that you commented, just sort of where is that coming from, and what's driving it and how sustainable that is as we get into sort of the -- end of the calendar year and then into 2015?

Well, the elastomers business overweighed North America, replacement tire market, Dmitry, so that market has improved, and our businesses improved with it. So that's the benefit to elastomers. On composites, it was a little bit broader based. Europe showed better performance in many areas, like we said, transportation, marine, engineered stone market. So the resi market's improving, so a couple of little areas. And we think that, that continues. Both of those markets are showing signs of improvement. And we think our business is positioned well to continue benefiting from improvements in those markets.

The elastomers issue over the past year has been the increased imports of replacement tires, where you guys don't have a position with the vendors, given that it is a primarily North American business, as you pointed out. So is that headwind anniversary-ing? Is it diminishing? Is there something changing in the industry where your customers are getting the share back or finding the applications for elastomers? What's going on there?

I would say, from our perspective, that's probably flattening. So the domestic players are -- they've improved their business, and they've started to fend off some of that share that the imports were gaining.

Okay. All right. And then on Valvoline, just a follow-up on a previous question. You've been delivering pretty good growth, all things considered, mid- to high-single-digit type of year-over-year growth this quarter, and you've seen like-for-like margins there. Obviously, growth in international is a good driver of that, and you talked about competing in products, sales. Are any of these trends accelerating or decelerating? I mean, again, as we look out, it's pretty atypical to see this level of growth for this business for a long period of time. But can we at least see a couple of more quarters of this type of growth before returning back to sort of low-single-digit performance?

Well, the growth rates quarter-to-quarter are going to be influenced partly by the seasonality of the business. So typically, the -- our second and third fiscal quarters are our best quarters, because that's where the consumption of motor oil, because of the summer requirements and the high travel season, takes place, and you get the highest consumption there. So your growth rates will be higher there. Then as you enter the winter and -- late fall, winter and early spring, it tails a little bit. So it depends on when you're looking. But we just now are now leaving probably the best period for sales for motor oil. And it's going to start softening, as each month goes by now, going into the winter. So next quarter, typically, is not as strong as the quarter we just left because of that. Because of this, the consumption rates fall.

I understand the seasonality. I'm just looking at -- you had 4% and now, almost 7% growth in that business the last couple of quarters on a year-over-year basis.

Right. And primarily, that's coming from our international business. So as international continues to gain position and share into Asia and South America, that's the primary growth areas, we'll continue to do well. And we seem to be positioned ourselves well in those markets, our distribution is growing. And the business is having, like I said, 10%-plus rates.

Okay. So then sort of a 3% growth that, that business is probably going to deliver for you this year, that looks to be a sustainable level going into 2015.

I would think so, yes.

We have one more question from Mr. Jeff Zekauskas of JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: I guess one last question on Valvoline. Is Valvoline or Consumer Markets, is it a strategic business or is it not strategic over the next 5 years? Or does its strategic position really depend on your acquisition opportunities?

I think Valvoline, as we stated in the past, has demonstrated important returns to the company. And as we've mentioned before, it has great cash flows, contributes well to the corporate demands for cash and M&A and retirement of debt, buying back stock, paying of taxes, paying our dividend, all these things are important, because a lot of the cash is domestic cash. So that's important. As we look strategically, as far as looking at our primary goals, being a strong -- one of the best specialty chemical companies in the world, Valvoline does not fit that description. So as the board sits and determines the importance of Valvoline in the portfolio at any given time, all these things are weighed in their thinking. But if you look at just the broader strategic issue, is it a specialty chemical company? The answer to that is no. There is no debate around that. So that would lead you to say, just as the board has, in their communication to our shareholders, is not at this time are they willing to effect a transaction with Valvoline. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: And Jim, sort of your legacy in running Ashland over time has really been to de-commoditize the company and to create or to unlock shareholder value in the process. When you look over the next 5 years, what do you think the major challenge will be for the -- for your heir, for the new CEO of Ashland?

Well, Jeff, I think that your description, as far as what we've accomplished as a company up to this stage, is important, is that we were trying very hard to move out of businesses that had more of a commodity bent to them and where we did not have technology advantage and high growth rates, good margins, good reinvestment economics. And I believe that we have made decisions that lent themselves, that as we acquired new businesses, they had those traits. They had good growth rates, they had good reinvestment economics, they had good margins, and they were well-positioned and had good structures, as far as how we competed in the market. And we're competing now on technology more than we are on just product. The product is important, but the technology is more important. So as I look at the next CEO, where we have to become even better is become a deeper technology company, continue to increase our position in markets, based on technology, make additional acquisitions on broader technologies that reinforce our position in those markets and continue to build a company based on those premises, versus just growing for the sake of growing. So we have to be very specific and understand how these things will fit together, how we will defend and grow our markets and make good decisions around that and be patient to get the right assets. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Do you think Ashland will look very different from what it looks like now, 5 years from now?

Yes, I think it will. I think my hope for the company would be, it would be the best specialty chemical company in the world. That's my hope for it.

Thank you. And at this time, I'd like to turn the call back over to you, Mr. Thompson.

Thank you, Vincent. Thank you, everybody, for your interest in Ashland. Give me a call, I'm around today. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may all disconnect. Everyone, have a great day.