Ashland's CEO Discusses F2Q2012 Results - Earnings Call Transcript

Ashland Inc. (ASH)

F2Q2012 Earnings Conference Call

April 24, 2012, 09:00 a.m. ET

Executives

David Neuberger - Director, IR

Jim O’Brien - Chairman and CEO

Lamar Chambers - SVP and CFO

Sam Mitchell Jr. - SVP and President, Ashland Consumer Markets

Analysts

David Begleiter - Deutsche Bank

Laurence Alexander - Jefferies

Mike Sison - Keybanc

Jeff Zekauskas - J.P. Morgan

John McNulty - Credit Suisse

Mike Harrison - First Analysis

Dmitry Silversteyn - Longbow Research

Presentation

Operator

Good day ladies and gentlemen and welcome to the Ashland Inc. Second 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 follow at that time. (Operator Instructions) As a reminder this conference call is being recorded.

I would now like to turn the conference over to David Neuberger, Director of Investor Relations. Please begin.

David Neuberger

Thank you, Lithia. Good morning and welcome Ashland second quarter fiscal 2012 conference call and webcast. We released results for the quarter ended March 31, 2012 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 10-Q in May.

On the call today are Ashland’s Chairman and Chief Executive Officer, Jim O’Brien; Lamar Chambers, Senior Vice President and Chief Financial Officer; and Sam Mitchell, President of Ashland Consumer Markets.

Before we get started, let me note that 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 and pro forma results. We believe these adjusted and pro forma results enhance understanding of our performance by more accurately reflecting our ongoing business. In addition, we are providing ISPs historical financial contribution representing Ashland’s best estimate of the appropriate cost allocation and shared resource cost. Reporting results in this manner has inherent limitations, and we do not represent that these financial results were calculated using the same methodology used by ISP.

Please turn to Slide 3 for our second quarter highlights. Reported earnings per share from continuing operations were $1.13 in the March 2012 quarter. When adjusted for key items which I will cover shortly, EPS was $1.52 as compared with $0.97 in a year ago quarter. Let me note that the $0.97 in the prior year does not include the results of ISP or the related financing cost. This is the only time this morning that we will present data in this manner. For the rest of the presentation and to aide in your analysis we will present results on a pro forma basis which includes the results of ISP in prior periods.

Sales totaled $2.1 billion a 2% increase over the prior year on a pro forma basis. Operating margin was consistent between all periods roughly 10.5% of sales. Our adjusted EBITDA was $329 million 2% above the $322 million of pro forma adjusted EBITDA in the prior year quarter. EBITDA as a percent of sales was nearly 16%.

Once again Specialty Ingredients turned in the strongest performance during the quarter increasing earnings by more than 10% on a pro forma basis.

We generated $141 million of free cash flow during the quarter due to a combination of good business performance and improvement in our trade working capital as a percent of sales.

Slide 4 details our key items. In total three key items had a net unfavorable EPS impact on continuing operations of $0.39 in the March 2012 quarter. The first key item is a $3 million after-tax charge or a negative $0.03 per share related to stepped up inventory values from the ISP acquisition. This key item arose from a refinement of our original purchase accounting calculations.

The second key item is a $12 million after-tax charge or a negative $0.16 per share related to the ISP integration and cost restructuring efforts we previously described. The majority of this charge stem from the consolidation of facilities in the Wilmington, Delaware area. The resultant savings now complete the strategic cost portion of our overall cost reduction program. This key item also included a small benefit related to an update for our Water Technologies severance accrual. But previously described 6 to $7 million cost reduction project in Water Technologies has been completed with the cost to achieve these savings being somewhat reduced.

The last key item is a $16 million after-tax charge or a negative $0.20 per share related to a write-off of pre-construction cost for a previously planned Greenfield manufacturing facility in the north of China. This write-off includes cost associated with upfront planning and design, initial engineering and land. This project has been suspended since 2008 as we evaluated the projects benefits and the projected returns. The decision to write-off this upfront cost will allow us to avoid an estimated $35 million in additional cost while shipping our capital investment focused to higher return projects.

In year ago quarter four key items combined for a net favorable impact on earnings of $1.29 per share. With the largest item being the call out of our actuarial gain on pension and [no PEP] expenses, while pension adjustments will typically occur only in the fourth quarter, the sale of Ashland distribution led to a pension re-measurement in the year ago quarter and to the callout item shown here, to aide in your analysis first that the peer group, Ashland’s results included $29 million of intangible amortization expense during the March 2012 quarter. We carry higher than average amortization due to our corporate transformation and prior acquisitions. Without this amortization earnings would be roughly $0.25 higher or $1.77 per share.

Please turn to Slide 5 for Ashland’s adjusted pro forma results. As a reminder results are presented on a pro forma basis which includes a full quarter of ISP in the March 2011 quarter. The year ago quarter also includes stepped up depreciation and amortization related to purchase accounting. As such Ashland’s March quarter sales increased 2% over the prior year to $2.1 billion, excluding currency sales would have been up roughly 3%.

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