Ashland Inc.

Good morning, ladies and gentlemen, and welcome to the Ashland Global Holdings, Inc. Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press Tarabem Zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Seth Morozek, Director of Investor Relations.

Thank you, Bella. Good morning, everyone, and welcome to Ashland's second quarter fiscal 2019 earnings conference call and webcast. My name is Seth Morozek, Director, Ashland Investor Relations. Joining me on the call today are Bill Wilson, 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 March 31st, 2019, shortly after 5 p.m. Eastern Time yesterday, April 30th. Additionally, we posted slides to our website, Ashland.com, under the Investor Relations section and have furnished each of these documents to the SEC in a Form 8K. As a reminder, during today's call, we will be making forward-looking statements on a number of matters, including our financial guidance for fiscal 2019. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We believe any such statements are based on reasonable assumptions but cannot assure that such expectations will be achieved. Please refer to yesterday's slide presentation for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. Please also note that we will be referring to certain actual and projected financial metrics of Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to these measures as adjusted and present them in order to supplement your understanding and assessment of the financial performance of our ongoing business. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable gap measures, as well as reconciliation of the non-gap measures to those gap measures, are available on our website and in the appendix of yesterday's slide presentation. With that, I will turn the call over to Bill.

Good morning, everyone. There has been a lot happening this quarter, both internally and externally, so I'm going to make my comments brief, and that will allow us to get to your questions quickly. In a moment, I'll discuss the solid progress we have made on very important operating initiatives. But before I do, it's important to profile three external factors which worked against us in the quarter. The first is the continuing strengthening of the U.S. dollar, which negatively impacted ASI revenue by over $25 million and EBITDA by $9 million on a year-to-date basis, of which $18 million of revenue and $6 million of EBITDA. was in Q2. The second is end market demand. Emerging in Q2, we experienced relatively flat demand in coatings, adhesives, and performance specialties, which is consistent with the performance of our customers and peers, but below our expectations. And third is the continuing raw material inflation we're experiencing. Given the lag time between oil price changes and changes to the cost of goods sold, ASI has experienced on a year-to-date basis over $12 million of raw material inflation, $5 million of which was in Q2. In this context, the team did some great work in areas that we could control. From a revenue perspective, the team made solid gains in the important areas to offset weak demand in the end markets I just referenced. Please note that as I speak to our sales and my following comments, I'm referring to sales on a constant currency basis and excluding the impact of the Colgate Oral Care reformulation. With that said, I would like to highlight that for the quarter, on a year-over-year basis, the personal care team increased revenue by approximately 5% based upon solid HEC gains throughout the entire portfolio. The pharma team grew sales by 2% versus a very difficult year-over-year comp. As you will recall, in Q2 of our last fiscal year, the pharma business sales grew by 17% as we brought new cellulosic capacity online. To grow year-over-year in this context, was a strong achievement by the team. But the coatings team drove share gains in Latin America and the rest of Asia to offset demand weakness in the U.S. and Europe. And finally, the remainder of the ASI team drove solid gains in nutrition, energy, and construction. Also of note from a regional perspective, the team achieved mid-to-high single-digit sales growth in all regions outside of North America, with China leading the way by achieving double-digit year-over-year growth. Putting this all together, overall volume mix was negative in the quarter. We had gains in less profitable end markets, And that did not fully offset weaker than expected growth in the coatings, adhesives, and performance specialty end markets. Also note that given less certainty in these important markets, we also lowered finished goods inventory, which had a negative impact on our year-over-year absorption. Now, to offset these challenges, the team once again drove price increases above raw material inflation, kept total manufacturing costs below prior year, and substantially reduced SG&A. Importantly, relating to our $120 million cost reduction program, we hit our Q2 target and are now on a run rate basis over $70 million. These reductions contributed substantially to the $18 million SG&A reduction versus prior year in the quarter. When you consider that roughly $20 million of overhead will transfer with the sale of the composites and model businesses, we are on a run rate basis over 70% of the way through implementation of our $120 million cost reduction program. So adding this all up, to be clear, I am not happy that we came in below our expectations for the quarter. That said, I do feel good that the team drove incremental revenue gains to keep our assets better utilized, albeit with a lower profit mix, that the team priced over inflation and significantly lowered SG&A. By focusing on what we control in a very difficult context, we enabled ASI to weather the storm far better than we would have just two or three years ago prior to establishing our current strategy. Looking forward, We have adjusted our outlook to reflect our Q2 results, along with expectations that the dollar will remain strong and demand weakness will last at least through the current quarter in the markets that are previously referenced. I want to emphasize the team is working multiple cost and sales actions to achieve the best results possible in this context. Switching gears... Given our confidence in our business strategy, we believe our stock is a solid investment. And as such, we announced yesterday our intention to commence a $200 million share repurchase program to begin in early May. To be clear, as we take this action, we remain committed to achieving our previously communicated leverage target of approximately two times gross debt to adjusted EBITDA. Taking into account our cash on hand, strong upcoming cash generation, and our confidence in the impending sale of the composites and moral businesses, we expect to finish fiscal year 2019 close to our targeted debt level. Before I turn the call over to Kevin, I'd like to reflect on some important and recent changes made to the Ashland Board. Earlier this calendar year, we welcomed Craig Rogerson to our board. In addition, consistent with the path forward that we outlined in January, just Monday, we announced additional changes. As anticipated, Michael Ward will retire from the Ashland board at our May meeting. And I would like to thank Michael for his 18 years of outstanding service. To fill his seat, In consultation with Neuberger Berman and other shareholders, we have elected Guillermo Novo to join the Ashland board. We're excited to have Guillermo join, given his extensive leadership experience in the industry. I'll now turn the call over to Kevin.