Good day, ladies and gentlemen, and welcome to the Ashland Global Holdings Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Seth Mrozek, Director of Investor Relations. Sir, please begin.

Thank you, Norma. Good morning, everyone, and welcome to Ashland's Third Quarter Fiscal 2017 Earnings Conference Call and Webcast. My name is Seth Mrozek, Director of Ashland Investor Relations. Joining me on the call today are Bill Wulfsohn, Ashland's Chairman and Chief Executive Officer; and Kevin Willis, Senior Vice President and Chief Financial Officer. We released preliminary results for the quarter ended June 30, 2017 at approximately P.M. Eastern Time yesterday, August 1. Additionally, we posted slides and prepared remarks to our website, ashland.com, under the Investor Relations section and have furnished each of these documents to the SEC in a Form 8-K. As a reminder, some of the matters discussed today and included in our presentations may include forward-looking statements as such term is defined under U.S. Securities Law. 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 during this call. We believe this enhances the understanding of our performance by more accurately reflecting our ongoing business. With that I'll turn the call over to Bill. Bill?

Thank you, Seth, and good morning, everyone. During our third fiscal quarter, the Ashland team took strong action to drive year-over-year sales and earnings gains. Note that this was our first quarter as a pure-play specialty chemical company following the successful separation of Valvoline in May. Within Specialty Ingredients, the team delivered a 7% sales increase. The acquisition of Pharmachem, which the Ashland team completed earlier than originally anticipated, was a major contributor to Specialty Ingredients sales gains and was also accretive to our earnings in the third quarter. We are on track with the integration and anticipate achieving meaningful cost and tax synergies as we move forward. In addition, beyond our deal economics, we are targeting additional market synergies. We are already beginning to globalize Pharmachem's products, leveraging our sales and manufacturing network and we're also pursuing a number of market and technology based synergies. So, for example, we're preparing to introduce our first combined new product, a multifunctional supplement. It is novel, high efficacy and is iron-based supplement and it has none of the metallic taste present in some of the alternative options. This was the collaboration and a development using certain Ashland products with the formulation and customer expertise of Pharmachem who determine how best to develop a complete nutraceutical system and bring it to market. We are now in the launch phase of this product. And while we expect the sales to be limited, it's a great initial indication of the type of synergies being pursued. Moving back to ASI, in addition to the Pharmachem acquisition, the Specialty Ingredients team focused on actions to improve pricing and mix. Consumer Specialties sales and volumes grew by 16% and 11%, respectively, compared to the prior-year period. These gains were driven by the previously described addition of Pharmachem to…

Thank you, Bill, and good morning everyone. Adjusted EBITDA in the quarter was $161 million compared to $167 million in the year-ago period. The prior-year period included $17 million of pension income and $6 million of a stranded costs related to Valvoline. In the quarter, we reported a GAAP loss from continuing operations attributable to Ashland of $0.26 per diluted share. When adjusted for key items, earnings per share attributable to Ashland were $0.83 compared to $0.78 in the prior year. The net impact to adjusted EPS from the pension and stranded costs was $0.12 per diluted prior year share and is included in the prior year adjusted EPS results. Pharmachem was accretive to Ashland's earning in the quarter, adding $0.02 to our adjusted EPS. We expect Pharmachem to contribute another $0.03 to $0.04 per share in the fourth quarter. We've already begun to integrate the businesses, and going forward, you should expect Pharmachem to be increasingly commingled, both operationally and from a financial reporting perspective with the rest of Specialty Ingredients. Our effective tax rate for the third quarter after adjusting for key items was 11%. We currently expect the effective tax rate for the fourth quarter to be in the range of 15% to 20%, driven primarily by income mix and discrete tax items. For fiscal 2017, we continue to expect an annual effective tax rate after adjusting for key items of 10% to 15%. Capital expenditures were $53 million during the quarter compared to $61 million in the prior-year period. Free cash flow during the third quarter was $79 million compared to $27 million in the prior year. While there can be many balance sheet puts and takes in our fourth quarter, we continue to expect free cash flow in the range of $90 million to $100 million during fiscal 2017. This includes approximately $75 million of one-time separation and severance-related payments. Turning now to the balance sheet, during the quarter, we established a new bank credit facility to support the Pharmachem acquisition. We also refinanced our 2018 notes with a new Term Loan B. These pre-payable loans will help enable Ashland to efficiently repay debt and reach our leverage target of 3.5 times gross debt-to-EBITDA within roughly the next couple of years. Ashland's liquidity position remains very strong. At the quarter end, Ashland had approximately $1.1 billion of available liquidity, including $492 million in cash. The majority of this cash is held outside the U.S. With the Valvoline separation now complete, we have also provided recast Ashland-only adjusted EPS results for the first nine months of fiscal 2017. These results, in addition to the earnings that we report for the fourth quarter will serve as the baseline for the fiscal year 2018 to 2021 EPS growth targets that we announced at our Investor Day in early May. Now I'll turn the call back over to Bill.

Thank you, Kevin. Looking ahead to our outlook for the fourth quarter within Specialty Ingredients, we expect sales to be in the range of $590 million to $610 million compared to $532 million in the year-ago quarter. Adjusted EBITDA is expected to be in the range of $135 million to $145 million versus $126 million in the year-ago quarter. And those increases are driven by the addition of Pharmachem along with increasing momentum from pricing initiatives. Note that these gains will be partially offset by the exit in our fiscal fourth quarter of a joint venture in China which served the construction market. The full-year impact of exiting this joint venture will be a little over $40 million in sales and about $3 million in adjusted EBITDA. For the fiscal year, Specialty Ingredients expects adjusted EBITDA to be at the upper end of the previously communicated range of $485 million to $500 million. For Composites, we're expecting sales in the fourth quarter to be in the range of $200 million to $210 million. Reflecting continued volume growth, disciplined pricing and a full quarter contribution from the Etain Composites facility. This compares to $162 million in the year-ago quarter. Adjusted EBITDA is expected to be in the range of $20 million to $25 million compared to $14 million in the year-ago quarter. Within I&S, we expect sales in the fourth quarter to be in the range of $75 million to $85 million, reflecting continued mix and price improvements. And that's compared to $60 million in the prior year-ago quarter. Adjusted EBITDA is expected to be in the range of $10 million to $15 million compared to $3 million in the year-ago quarter. While we're speaking about I&S I'd like to provide an update on the segment status. As you will recall,…

Operator: Thank you. Our first question comes from David Begleiter of Deutsche Bank. Your line is open.

Thank you. Good morning.

Good morning, Dave.

Good morning. Just on ASI, the volume growth did decelerate from the prior quarter to 1% for the entire segment. Can you give a little more color, I know you mention architectural, a little more region, maybe products, a little more detail as to why the decel in Q3 versus Q2?

Sure. Well first of all, as you mentioned, the demand for materials going into architectural coatings has softened. And so that we'll say quieted some of the positive impact that we have been seeing in the industrial segment that had been a big source of volume gain through the first half of the year. We had a pretty tough comp after a really strong growth in the prior-year period in the Hair Care segment, so that was relatively flat. But all in all, I would say that we don't see any fundamental shifts outside of what you read about the architectural coatings market in terms of our position or our end markets.

Do you expect volumes to pick up in Q4 in this segment year-over-year?

It's a little bit difficult to predict because of the dynamics that we mentioned, just – or that I mentioned just a couple of minutes ago. Good news is we will have, at least it appears, FX, helping us on an FX adjusted basis, so that should help to accelerate sales growth. But we're focused on the things that we can control, and the things that we can control are things like pricing, asset utilization, introducing new products, and those are the things that we're focused on. The demand profile of the market is always a little bit difficult to predict in advance.

Thank you.

Thank you. Our next question comes from Christopher Parkinson of Credit Suisse. Your line is open.

Good morning.

Good morning, Chris.

This is Kieran on for Chris right now. Can you walk us through some of the trends you're seeing in hair care, coatings and adhesives? I understand that there have been some difficult comps to the strong sales last fiscal year, but just walk us through what you are seeing and hearing from customers. In particular, as one of your competitors, I think, mentioned that they were seeing some share gains.

Sure. The adhesives sales on FX adjusted basis were up about 1%, relatively flat without the benefit of FX. Certainly, we haven't seen any fundamental changes in the dynamics of that market space or our respective position. And from a coatings demand profile or architectural coatings, of course, I'd rather -- you may want to read what some of the companies are saying in terms of their demand profile. And as they have increased demand, we tend to increase with it. And when their markets are a little slower, we follow them as well. So that's why I emphasize really nothing that fundamental that I see in terms of shifts of our position. So, I'd like to provide more clarity, but if you'd like to ask a little more, I hope that provided an answer for you.

That's fine. And then, I guess, just within hair care, are you seeing any benefits from new product introductions and how you view that, I guess, accelerating or growing into 2018?

Yes. For hair care, again, I'd like to emphasize, we're really coming off of what we would consider to be a tough comp, but we are certainly increasing and moving forward with some new product launches. I mentioned earlier the hair brands, which I think is important. And in addition, we have a new acrylate-based fragrance encapsulation technology called Method and our customer is using it to help boost, if you will, the scent that's in the products. And it's currently in product that is being sold and sold through Target. So, we do have new products in this area and that's, in general, in personal care. For the hair care product, I would really point to the hair brands. But in general, in personal care, innovation is a core theme and we've had a number of great successes, I think, over the last quarter or 2.

Our next question comes from Mike Sison of KeyBanc.

Good morning. When you say -- I know it's a little bit early probably to give a specific guidance for '18, but when you think about Specialty Ingredients, meaning the greater than 25% goal, you have Pharmachem in there, what else do you think you need to hit that bogey in '18 given what you see today?

Sure. So first of all, I mean, just to be clear, we set out the targets in our long-range plan for the entire periods, not that that's meant to be back end loaded. We expect to make continued progress. I think the levers that we would pull are the ones that we identified in our Investor Day. We've got to continue to drive the value that we're creating in terms of pricing. We need to increase the role of new products and I think we're making a lot of progress in that area. And in terms of driving better asset utilization and lowering our cost per unit, that definitely improves the fundamental economics of our business and will help with our gross margins. And by growing the business and keeping our SG&A flat, you get leverage on the overhead. So, you put all that together and those are really the primary levers that we see in terms of allowing us to get to higher margins and the targets that we've set out.

Great. And then, Composites was pretty impressive. Profitability there looks pretty good. What do you think the growth rate for that business should be on a consistent basis going forward?

I think we view that as kind of a global industrial GDP type of number. It did had a number of nice share gains recently associated with some technology that we have in the kind of the countertop materials where we have some innovations that are helping manufacturers with their productivity. We also have a new gelcoat which is helping in terms of weathering resistance, and that's important to, say, the boat industry. So yes, the overall market should move at that kind of industrial GDP rate. And I would also emphasize that while growth is a good and important component for the Composites business, as we outlined in our Investor Day, really the team has focused most specifically on improving the profitability of the business. You see that in the results this quarter. You see it in the results over the past 4, 5 years and that's really the fundamental focus. And of course, they're also a great cash generator and they're focused on driving that cash flow as well. So, it was a great quarter for them.

Our next question comes from Laurence Alexander from Jefferies.

Two questions. First, for ASI, if you had bundled in the consolidated business on like 100% basis, roughly how are -- how is price mix doing? And secondly, as we think about 2018, if we want to back out the deal amortization, is $92 million a good run rate for next year based on what you pegged for Q3? Or is it -- or should we be thinking of a different number?

So, Laurence, you're asking deal amortization only for Pharmachem or for all of ASI?

Well, just to make it comparable to the -- your comment in your opening remarks about if you had backed out the amortization, the underlying EPS would have been. I just wanted to kind of make a comparable benchmark.

So, I mean, if you look at the entire business, which ASI is the, obviously, the biggest driver, if you had completely backed out deal amortization, EPS would have been $0.23 higher or $1.06 per diluted share in the quarter. And relative to Pharmachem, based upon purchase price allocation and all that, we would expect incremental D&A per quarter to be about $6 million going forward. So, having a full year -- or full quarter, rather, of D&A for Pharmachem in Q4 would be about $6 million higher.

And then, secondly, to your first question, if you will, that we clearly have seen significant raw material inflation through the year. If you look at between raw material and currency, that's been about $20 million for ASI. And we're not talking that much about it because we're really focused more on the things we can control and the actions to offset and drive to meet our targets. The good news is that the team has been working on pricing activities and, obviously, working to upgrade its mix. While it's still was net price versus raw material inflation on the year-over-year basis, negative for us, at least within ASI, in the quarter, we see that that's, I'll say, neutralized, if not becoming a positive by the fourth quarter.

Do you think that sort of roughly one quarter lag as a good rule of thumb for the new portfolio or what's...

I think, in this particular case, what we've seen is that, for example, in Composites where you had a fundamental event that structurally changed the price, it was about a one quarter lag to kind of work that through the system. I think when you see a general trend of raw materials increasing, it depends upon the end market, but what we've seen is actually it takes a couple of quarters to kind of get the full benefit of what you're pushing forward.

Our next question comes from John Roberts of UBS.

Thank you. On Slide 25, in the appendix, the majority of I&S sales are derivatives. Is that dominated by one or 2, like THF? Or is that a diversified set of derivatives?

It's primarily one or two.

Yes.

It's a relatively small group.

THF and NMP would be the 2 primary.

Got it.

In addition to the BDO sales.

And then, on Slide 15, the bridge for I&S, price was up 6% or about almost $4 million year-over-year, but margin was only up $1 million. Was it settling up a lot? Or what's the driver of the raw's change there that offset most of the price?

We did see raw materials negatively impact on a year-over-year basis. And I think that it's -- we use a variety of raw materials depending upon the plant that we're producing out of, but certainly butane has been one that has contributed to that year-over-year raw material inflation.

Yes. And the plants ran well in the quarter and SG&A has been very consistent in that business. It's really raws-based.

And then, lastly, as you sort of delay taking strategic actions here with I&S, what do you think you can do? And how much can you improve the profitability and/or reduce volatility in that business?

Sure. Well, the good news is, again, we believe the fundamentals, supply/demand appear to be moving in a more positive direction. This is pretty consistent with what we've been saying the way along. And if you look at the trailing 12 months in that business, through quarter two, we have about $15 million of EBITDA in the business and we had $10 million in Q3 and we're saying between $10 million and $15 million in Q4. So that's one of the reasons why we say it's important. We believe that, and we've said all along, that this is actually can be a great business through the cycles. It's just different because it has that cyclicality. So, it's important that we take whatever action we choose to take at the right time to kind of maximize the benefit that's associated with the business.

Our next question comes from Jeff Zekauskas of JPMorgan.

Thanks very much. Just a couple of questions on Specialty Ingredients. My guess is that, with Pharmachem at $36 million in revenues, maybe that would have added 5,000 tons to your volume and so maybe your organic volume was 79,000 tons or down about 3.5%. And for the fourth quarter, your revenue expectation of $610 million is -- I'm sorry, of -- in the midpoint at $600 million is $10 million higher, but you had a $36 million benefit from holding Pharmachem for half the quarter. So, you would think that the sales would be far stronger. Is your organic volume and ingredients shrinking at about 3.5%? And if it is, why is it doing that?

Yes. So -- and maybe this is -- well, let's try to find a way to provide just a little more clarity because there was not a contraction in the ASI organic, if you will. It was relatively flat quarter-over-quarter. And we did, if you will, within the Consumer Specialties area, we saw that it was relatively flat; and with Industrial, it was down 1%, but one -- relatively flat. So, I'm not sure how you're coming up with the contraction that you're outlining there. And Pharmachem volume was about 2,000. So, I don't know if that helps you with your math. If you could go to the second part of the question just because it was -- I want to make sure it was a little detailed.

So, the -- so, I guess, another way of asking it is how many tons did Pharmachem contribute in the quarter and...

It's about 2,000 tons, Jeff.

2,000 tons? Okay.

Yes, right around that.

Okay. And if the -- if your midpoint of the revenues for the fourth quarter is $600 million and you did $591 million in this quarter and you got a $36 million benefit for owning Pharmachem for half the quarter, presumably there's an additional $36 million that would get in the fourth quarter, order of magnitude. So, you're -- like, even if you didn't grow your revenues in the fourth quarter, it should be something like $626 million. So, $90 million to $610 million seems low given you're going to have an additional $36 million or $30 million or something of Pharmachem revenues in the fourth quarter.

Right. If you look at the business, there's some seasonality that starts to come into play in our fiscal fourth quarter. So that's every year. And so, if you look at it on a year-over-year basis, you will see that. The other piece of the equation would be the joint venture that we exited. A round number is that's around $10 million or so of sales per quarter and so that would also come out of the number. And you are correct. We would expect incremental sales revenue from Pharmachem to be additive to the quarter as well.

Okay. And then, lastly, the cash flow from operations that you show in your press release is $114 million for the nine months, but in your Q for the second quarter, it was $62 million for the first two quarters and now you add $132 million. So, like it should -- so without restatement, it should be $194 million, not $114 million. How do we get from $194 million to $114 million?

I think Valvoline was probably included in those first ones. So, you got to back that out.

Okay. So that's...

It's a little messy at this point.

Yeah. Okay, great. Thank you so much.

[Operator instructions] Our next question comes from Mike Harrison of Seaport Global.

I was wondering if you can talk a little bit about the pricing environment, particularly in the Specialty Ingredients business? We've heard some companies talk about challenges getting pricing as quickly as they had hoped. Were their areas where you were more successful and areas where you struggled? And is there a chance that your efforts to get pricing maybe meant that you sacrificed some volume growth there?

I would say that within industrial, it is less. It's always a challenge, but it's less pronounced that challenge in the personal care and pharma and nutrition area. It's really more in the industrial space where, as you can imagine, it's challenging. And any time you go forward with price increases or take a lead, it's important to sell the value and you're never going to get price unless you are willing to take some risks in terms of volume or share. That being said, that's not our strategy to lose volume or share for price. We're really focused on the value-added products that we can provide, the value-added services and, ultimately then, selling that value. And it takes time, but -- and there's always risk. I mean, that's why we put a range into our forecast, but we're not viewing that at this moment as being a problem in the quarter going forward.

Got it. And then, in terms of the Pharmachem business, you mentioned $0.03 to $0.04 contribution for the fourth quarter. Is that $0.03 to $0.04 EPS contribution, is that the right run rate for accretion for -- as we move through fiscal '18 or should that accelerate? Any thoughts there?

I would say, ex-synergies, that's a good number to use roughly.

I guess, I'm looking for -- including synergies, kind of where do we accelerate that $0.03 to $0.04 number to over the course of fiscal '18?

I mean, synergy should be modestly accretive to that, but generally speaking, I'd call it $0.03 to $0.04 is probably the right number to use.

What we stated previously is that we're targeting about $10 million worth of synergies. And it takes a little time to get that. I think it's, as you asked that question, it's important time to take a pause and say that one of the things that will be challenging for us is that we really are integrating the businesses. And with that, the financials with ASI are going to be becoming increasingly intertwined. I think we'll have pretty good visibility on the revenue because we can track that as we move forward, but it's going to be more difficult in terms of calling out the specific contribution of Pharmachem. And so, we'll really be focusing more on the aggregate for the system from an earnings perspective.

All right. Thanks very much.

Our next question is from Jim Sheehan of SunTrust.

With regard to ASI, I'd like to ask you about your gross margins, ex-Pharmachem. I understand your Pharmachem margins are probably below the average. How did your margins look just on a core, excluding acquisitions, basis? And also, if you could comment on how pricing developed during the quarter. It probably takes two full quarters to fully offset raw materials. Did you see your pricing versus raw materials spread in the quarter at the run rate you basically expected?

Okay. So first of all, in terms of the Pharmachem and its contribution relative to our gross margin, I don't think it had a major shift on the gross profit margins itself. And in general, we were able to maintain our gross profit margins on the context of that raw material inflation. And I think that that's important because that took action for us to take on other parts of the business. And so, I'd like to, first of all, emphasize that. And I'm sorry, the second part of your question -- the momentum at the end of the quarter. I think when you look at it, we see momentum building. I mean, that's what we said and we also talked about raw material prices versus prior year. And I believe roughly about this time last year, you began to see some raw material price increases. So, when we compare on a year-to-year basis, those two factors kind of come together and converge. And that's why, right now, in our view, ASI should have better price to raw material costs in the aggregate for Q4.

Great. And you mentioned some of the trends you're seeing in coatings, pharmaceuticals and energy. Can you also comment on your end markets in construction and nutrition? What did organic growth look like there? And how does your innovation pipeline look for the next several quarters?

Yes. The construction market was not strong in the quarter. It has actually down. So -- and as you heard, going forward, I mean, ultimately, we're going to be exiting the joint venture in China that was focused on construction. In terms of the nutrition business, it was down a little bit, but not a lot, relatively flat year-over-year, a percent or 2 down.

Great. And a competitor of yours mentioned an Easter shift this year, which hurt sales in the current quarter or the quarter just past. Is that something that would have impacted Ashland as well?

I can't call that out. I'd like to say yes, but I can't call that out specifically.

This concludes the Q&A portion. I'd like to turn the call back over to Seth Mrozek for closing remarks.

Thank you, Norma. Thank you, all, for your time this morning and your interest in Ashland. Have a great day.