Earnings Call: Q3 2018

Aug 1, 2018

Good morning, ladies and gentlemen, and welcome to Ashland Global Holdings, Inc. Third Quarter Earnings Call. At this time, As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Seth Mrozek, Director of Investor Relations. Thank you, Emily. Good morning, everyone, and welcome to Ashland's third quarter fiscal 2018 earnings conference call and webcast My name is Seth Mrozek, 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 June 30, 2018, shortly after 5 pm East time yesterday, July 31st. In addition, we posted slides to our website, ashland.com, under the Investor Relations section and 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 we cannot assure that such expectations will of our performance by Good morning, everyone, and thank you for calling into Ashland's third quarter fiscal year 2018 earnings call. During the quarter, rechemicals company. 1st and foremost, we are delivering on the financial objectives we laid out during last year's Investor Day. Secondly, we have made great progress Finally, we took many actions to stay and the BDO facility in Marl, Germany. During today's call, we will provide you with an update on these three key topics. The common theme is that we are progressing rapidly to deliver on the strategic plans we outlined at Ashland's Investor Day conference last year. So let's move into the first topic, which is delivering on the fiscal year 2018 to 21 performance targets. As you will recall, during last year's Investor Day, we outlined 3 core financial deliverables. The first was to increase Specialty Ingredients EBITDA margins to 25% to 27% of sales. The second was to grow EPS by at least a compounded annual growth rate of 15 percent per year. And the third was to generate $1,000,000,000 of cumulative free cash well. So beginning with the first to increase ASI's adjusted EBITDA margin to 25% to 27% We have focused on 4 key areas. The first is to deliver GDP plus organic ASI revenue growth. To this end, we have revitalized our and price to value. We've also changed our sales incentive program from a team based gross profit dollar metric to one that ties directly to an individual's mix, share shift, pricing and plant absorption targets. With these and other actions taking hold, specialty ingredients has delivered on a year to date basis, 13% year over year sales growth or 4 To improve our gross profit margins, we have redesigned our innovation program by aligning resources closer to the business unit and by leveraging our core technologies to provide rapid solutions to our customers' problems. For example, from combined Ashland and Pharmachem organizations to drive innovation. For example, we've recently helped the Pharmachem customer who has experienced tablet performance issue by introducing our leading tablet film, coding and existing technologies to solve the customer's problem, which also led enterprise wide initiatives to price through raw material inflation. As I just mentioned, delivering in this area is a core part of our sales teams new incentive system. Note that on a year to date basis, ASI has experienced approximately $25,000,000 and aggressively raising prices. Finally, we have put in place a comprehensive Key actions in this area include expanding Klucel capacity while also achieving key product approvals. As a result, we have seeing strong growth in Pharma with sales climbing 12% in the 3rd quarter and 11% year to date. We have also completed China is contributing to our mid single digit growth show their potential as we realized 190 basis point improvement in ASI's gross profit as a percent of sales in Q3. Thirdly, we are committed to lowering SG and ASI's SG and A as a percent of sales was down 70 basis points on an adjusted basis. I will speak more specifically to expansion. Since the acquisition, we have focused on leaning out the cost structure of the organization and targeting a more differentiated mix. On a contribution basis before corporate allocations, the business delivered over $16,000,000 of adjusted EBITDA with margins of roughly 30%. This is a strong indication that our Pharmachem strategy taking hold. As a result of these 4 efforts, Specialty Ingredients EBITDA margins were up 210 basis points year over year in the quarter, to 24.3 percent and approximately 70 basis points on a year to date basis. We Our second core investor financial deliverable is to grow ETS by 15% or more annually. To this end, in third quarter adjusted EPS increased 36% and on a year to date, adjusted EPS is up 57%. The 3rd core Investor Day financial deliverable is to generate over $1,000,000,000 of free cash flow during the planned period. We remain on track to deliver our 1st installment of this goal in fiscal year 'eighteen. We have reduced our debt level substantially this fiscal year and tend to lower it going forward. Kevin will get into more detail on this topic later in the call. So in summary, we are making significant progress towards delivering on our Investor Day financial deliverables. Moving to my second topic, we are also making great progress towards creating a leaner, more customer centric, growth oriented and competitive company. Throughout the Ashland transformation journey, the team has successfully managed multiple cost structure in atives. Over the last ten years, the team has executed on 7 restructuring programs, reducing headcount by approximately 3200 people or roughly half of our current organization size That said, as we stated last quarter, with the likely sale of composite and the Marl BDO facility and with organic ASI sales momentum rowing, we believe that now is the time to engage in another aggressive cost reduction effort. In the earnings materials posted last night to the Investor Relations portion of our website, we provided important details about plans and timing to achieve our cost and margin objectives. Our accountabilities are clear. We will eliminate or transfer ability. To achieve this objective, we will need to eliminate approximately 25% of the costs currently distributed to the segments. In addition to accelerate Specialty Ingredients's path to achieve its targeted 25 percent to 27 percent EBITDA margins, we will eliminate at least $50,000,000 or 200 basis points of direct segment costs. Note that after this effort, excluding the amortization and based upon our current sales levels, Specialty Ingredients SG and A would be approximately 16% of sales. But equally as important, our objective in this effort is to create a leaner, more responsive customer centric organization, which will enable Ashland to sustain and accelerate its growth As for the pace and scope of change, we outlined important details in the previously referenced slide deck. In addition, There are several key points I'd like to highlight. We have engaged Baine to help us accelerate the timing and impact of our redesign. We are evaluating all areas of Ashland's operations including every lab, every office, every plant, every clear owners and accountability. Thus far, we've identified $20,000,000 in annualized run rate savings to be put in place by the end of the September quarter. Furthermore, we have in run rate savings by the end of December 2018, bringing the total annualized run rate to $50,000,000 by the end of calendar $20,000,000 to be completed and ready for implementation We are moving quickly where possible and have made some key decisions. We'll be closing our administration or Administrative office in Lexington, Kentucky. In addition, we will be relocating our corporate headquarters from Covington, Kentucky to Wilmington, Delaware, and significantly downsizing the Covington office. Just today, we announced a significant scaling down of operations and specialty ingredients, at our Columbus operation. And also, we have launched a voluntary severance opportunity program, which will impact much of the North American organization and will be completed this August. At the same time, we are taking a thoughtful approach towards redesigning our organization to achieve our to be fully designed and ready for implementation by early November. Before leaving the subject, just a couple of final points. Note that a portion taken within the business. As much of the corporate reductions will go to offset stranded costs related to the expected sale of composite and the Marl BDO facility. Also, we will update you each quarter on our progress. And to better align management fiscal year 2019 incentive compensation with our objectives, we will create a direct tie to this cost reduction effort. And finally, we believe is an aggressive but achievable cost reduction target. And at the same time, we have challenged our team to identify further cost out opportunities. Now moving to our portfolio evolution. It is clear that we are committed to becoming the premier Specially Chemicals Company. So much work has been done in this area. We have exited low margin in non strategic markets, such as Valvoline, the Chianpu joint venture, water treatment elastomers, biocides, and at the same time, we have made target acquisitions to complement our specialty portfolio, including Pharmachem, ZetaFraction, and bioabsorbable for injectable excipients. In addition, in the process, we have returned approximately $2,000,000,000 to shareholders and are focused on strengthening our balance sheet as Kevin will discuss shortly. Now we are focused on the sale of composites and the Marl BDO facility. With the sale of the Marl VDO facility, we will deliver on another Investor Day goal by reducing our exposure to the commodity INS merchant market by roughly 60%. As a result of these actions, we are approaching the point where specialty ingredients will become essentially the totality of our business going forward. So in summary, this is a critical time for Ashland financially and in terms of driving actions to build growth momentum, lower our and A and improve our portfolio and balance sheet position. And as you can see from our Q3 results and our actions, the team is delivering. I will now turn the call over to Kevin to speak to additional details regarding the quarter our strategic initiatives. Thank you, Bill, and good morning everyone. Adjusted EBITDA in the quarter was $189,000,000, up 17% from the year ago period. In the quarter, we reported GAAP earnings from continuing operations at $0.56 per diluted share On an adjusted basis, we reported income from continuing operations of 1.13 per diluted share compared to $0.83 in the prior year. This compares to our outlook at the beginning of the quarter of $0.95 to $1.05 per diluted share. Free cash flow during the third quarter was $88,000,000 compared to $80,000,000 in the prior year. These amounts include $8,000,000 in restructuring costs in the second quarter of fiscal 2018 and $21,000,000 tax rate for the third quarter We continue to expect our effective In any given quarter, the rate can fluctuate based primarily upon income mix and discrete tax items. Our outlook for the fourth quarter assumes an effective tax rate of approximately 19%. Assuming our effective tax rate in the 4th quarter is 19%, the full year effective tax rate would be approximately 15% or the middle of our range. Now for an update on the sale process for composites in Marl. We are pleased with the progress thus far. Bilts were distributed in July, management presentations with interested buyers are currently underway. We anticipate that at the time And we continue to be on track to have an agreement signed by late this calendar the sale process as appropriate. We've made excellent progress reducing our leverage since the Pharmachem acquisition last May. During the 1st 9 months of this year, we have reduced our gross debt to EBITDA leverage by about a turn to 3.8 times. During the third quarter, we we believe it is appropriate to further reduce our leverage. Our new target for gross debt to EBITDA leverage following the planned composites and Marl divestiture is about 2.5 times, which we will achieve through a combination of EBITDA growth and debt reduction, leveraging the proceeds from the Composites and Marl divestiture. We will provide quite a lot of detail about our plans to reduce costs as well as what we have done historically. And there's more detail in the slide deck that he referenced. Just for perspective, during the transformation, annual SG and A peaked at just over 1.5 $1,000,000,000 per year. Once the $120,000,000 program is complete, total aspirant SG and A is expected to be approximately $520,000,000, representing a decrease of just over $1,000,000,000 from the peak Inclusive of SG And A, we have acquired and transferred throughout the course of the transformation. We're confident the $120,000,000 cost out program is achievable and will ultimately make us a stronger company, and we are committed to getting this done. Turning back briefly to the outlook for the remainder of this year, we are again raising our adjusted earnings guidance for fiscal 2018 to a range of $3.50 to $3.60 per share based on the strong results in the 3rd quarter and our outlook for Q4. For the fourth quarter, we expect adjusted earnings in the range and which assumes an effective tax rate of approximately 19 We also reiterated our outlook for free $70,000,000 includes approximately $50,000,000 of separation and restructuring related costs that we expect to incur for the full year. As we communicated operation or restructuring related costs. Now, I'll turn the call back over to Bill. Thank you, Kevin. We are by the strengthening momentum for our business and believe that our continued actions will accelerate our journey to becoming the premier specialty chemicals With that, I will turn the call over the operator to And our first question comes from the line of Carison from Seaport Global Securities. Your line is open. Hi, good morning. Good morning, Mike. We appreciate the breakdown that you guys provided on slide 10 of the deck there with the SG and A costs Just wondering if there are some opportunities within the distributed costs beyond the $70,000,000 that you called out for composites and I and S. I'm wondering if there's an opportunity to work down some of that $162,000,000 for ASI or the $50,000,000 worth of legacy unallocated costs? Certainly, we have challenged our team to look at avenues to drive for further cost savings. And we see opportunities ultimately that could help us achieve, a larger number, but the program that we have put forward has a very specific timeframe associated with it. The costs we've identified or the targets we have set are really related to that period. And some of the additional costs that we may be able to take out over time may require more structural work path, but we do believe that these are objective or aggressive and achievable targets within the timeframe that we have laid out. Yes. Mike, ultimately, this is a process that in effect never, never really, never really ends. I mean, you have programs along the way. And it's certainly our objective to make the company as competitive as possible. And we've laid out these objectives I think, pretty, pretty clearly. Probably one thing worth noting is we would expect, I mean, this is a trailing 12 number based on June 30. We would actually expect the corporate unallocated to come in squarely within the range that we've put out there. So that number, we would expect the total to come down total SG and A to be closer to $700,000,000 for the full fiscal 2018 year. And like Bill said, we're gonna continue after this. I mean, it does get more difficult as you get smaller, but, you just have to, you just have to be more thoughtful about things. And so clearly, clearly, we're going to continue to do that. All right. Appreciate that. And then just a quick question on pharmachem, the $56,000,000 in revenue that you reported this quarter, can you help frame up whether that's growing on an organic basis compared to last year? And if not, what is causing the weakness and maybe what actions are you taking to help get the growth moving in the right direction there? Yes. So first of all, the sales, we have focused very hard from the time that we acquired the business looking through the mix of activities, the mix of business and really tried to focus the organization on those areas, which are more differentiated. And with that, there's some portions of the business that we have chosen to exit. That being said, we see sales momentum in the business growing and at the type of targeted margins that we believe are appropriate for this type of business. And we are also leveraging some of the existing and available capacity actually to support our the EBITDA margins that I referenced before. And we now see that this is a great place for us to grow from in terms of revenue. And, Mike, the thing I would add to that is the way we're reporting this out, this is strictly sales dollars going through, going through the leg Pharmachem systems. Bill mentioned a specific item in his comments about a customer that we worked with because they were having tablet issues And we, we basically pushed through our film coating and our excipient products, which come out of Ashland pharma business. Those revenues would actually be reported as part of our pharma sales. And so we've really bifurcated this when in fact there are commercial synergies that are taking place within the business that aren't as transparent, frankly, but we do have teams working very closely together. And that's part of what's helping leverage a better mix and improve margin in that business overall. Our next question comes from the line of Christopher Parking from Credit Suisse. Your line is open. Great. Thank you. Can you comment on what innings you're in regarding the Benecel product shift in Belgium and also where exactly you stand on meeting specs for Klucel out of Elbow, Virginia? Just trying to get a sense of where you stand now and where you plan to be next year. And also on the personal care side, can you just quickly parse out what you're seeing across skin here in oral? Thank you. So to begin with on the pharma side, in the Benecel and Fussell, as you recall, and you followed, we had a major debottlenecking effort, which was very successful, last year. And that has really given us the upside capacity to pursue significant growth opportunities. You see that represented now in our sales and essentially our commercial team is unconstrained. We have a number of grades of materials in the Klucel area, and we have gotten a majority of those approved for production and sales. And what we're seeing in that area is that as we increase our production, demand is following closely behind it. So I think we'll be very effectively utilizing that capacity. And I think actually something which will be an opportunity for the future in terms of optimizing that mix and looking for further debottlenecking operations in that area. In the consumer area, you really have quite a mix. As you know, we have such a large number of products and large number of customers Lots of things are moving around. We're excited about, some of the new products introductions that we have, fiberHAN's VM is being used now in more hair care applications, bio functional applications are being used in the skin care area So it's hard to say specifically, if you will, the specific trends by by area or, but in general, we are seeing, I think, some really nice development of our focus on innovation helping to drive our overall consumer sales. And you see that in our results. Great. And just very quickly from a strategic perspective, across the ASI portfolio, can you just further discuss your ongoing price discipline efforts certainly in the context of rising raw materials and just whether or not you're still walking away from certain businesses, low price contracts? I mean, it sounds like you are, but can you just, we just want to get a sense of, just viewing price cost on a sub segment basis. As we head into fiscal year 'nineteen? Thank you. Yes. Certainly, that's a great question. And we have seen, as I referenced before, about $25,000,000 of inflation and really each quarter, we've continued to see inflation rise and we've challenged the teams to go out and push through price, which I think they've done on a very effective basis across the great majority of our product lines. A key part of that and this is why sometimes we put the 2 together is when we're negotiating with customers, we push for price. And at the same time, we push for a more optimal mix, which has a greater profit contribution And that ends up being, if you will, a win win for both the customer and for Ashland. So we have some areas of our business, some purchase for resale products and some of some other areas, which we've talked about in the past where, frankly, we move the price or we walk away from the business, but but that's a pretty small percentage Our next question comes from the line of Mike Sison from KeyBanc. Your line is open. Thanks, Michael. In terms of, ASI thinking about each of the end markets Can you maybe talk about the momentum for organic growth heading into 2019? And I know a little bit early to give guidance, but just curious when you think about the growth this year, it's been really good. Do you think that growth can to some degree continue next year? Well, that's certainly our objective is to continue the growth. And in a marketplace, which is, We'll say globally, relatively healthy. We do anticipate to grow. As I mentioned before, because we have such a broad range of products and such a broad range of markets, there's going to be areas which we'll see lots of growth like we've seen this year pharma and we expect to continue. And all the other areas that, will grow at a more nominal rate like we've seen also this year. So in the aggregate, we certainly see ourselves continuing on what we see in terms of sales and earnings for the next fiscal year. And then wanted to dig in real quick on the distributed costs for ASI. Can you maybe help us understand what's in that? Is that Is that a lot of just, IT, back office, corporates? Just maybe help us understand what those are? Sure, sure, Mike. Well, a couple of things. Just to, just to put some clarity around it. Total allocated costs for fiscal 2018 are expected to be around $230,000,000. And that those costs are distributed based upon effectively budgeted sales levels. That's where those numbers come from. And yes, that $160 ish 1,000,000 distributed to ASI would include effectively all support costs related to the business. Finance, IT, HR, legal, real estate, the executive team, pretty much we run a pretty much a full allocation model of things, with regard to things that would relate to running and operating the business. We capture those in a central way. And then we distribute them out. A lot of companies do this in a variety of ways. We've looked at a lot of different organizations some don't distribute any, some distribute 100%, most are similar in the middle. And this is the model that we've used for a long, long time. And it's it's consistent has remained consistent. So, but yeah, it pretty much includes everything to support the business. Sure. Our next question comes from the line of John Roberts from UBS. John, your line is open. That. I was on mute. How much did margins benefit year over year from having a full quarter of pharmachem this year versus a partial quarter last year? Are you referring to margins or contribution? Yes, your margin percent Pharmachem was above average, right? Right. Well, we could, let me take a quick look at that because of the relative sales that we have in the sales mix at 30% versus the overall average. Clearly, it was accretive to our margins, just trying to get a little bit of a perspective here. I think for you, it's the Yes. John, it would have been a few a few tenths. The vast majority of the improvement is coming from the overall, kind of, call it, the base ASI business. That's just frankly operating better with better mix and better overall margins plus somewhat lower cost structure on an overall basis. So it's, it really comes down mostly to that. Certainly, pharma can help with a 30% EBITDA margin for that $55,000,000 of revenue $56,000,000. But if you look at overall overall sales north of $600,000,000, while it's while it helps and it's a tailwind, it certainly has taken, you know, taken the over the overall business, to, to really drive that improvement. Okay. And then on Slide 6, with all the different product lines within Specialty Ingredients, after you complete the divestments, do you see them as similar enough in margins to report earnings for just one segment for New Ashland. And I ask that because I think ISP actually used to report a couple different segments within their Specialty Ingredients business before you acquired it? Yes, John, it's a good question. We've talked before about segmentation, and a, that's a topic that we're still, that we're still, I would say, analyzing internally and how to best portray the business going forward. We understand the desire for more transparency within the business and And that's we're very cognizant of that. We're very sensitive to that. And certainly, that that will come into play. I think the way to think about it is as we're going down this path toward a a likely divestiture of the Composites and Marl business. That'll all come into play as we think about how to appropriately report out the business that remains after those, after those are gone. Our next question comes from the line of Lawrence Alexander from Jefferies. Your line is open. Good morning. 2 quick clarifications. On the distributed cost, is there anything about what you have in there that makes comparing it as a percentage of sales to other companies sort of SG And A footprints, sort of inappropriate. Anything structurally different because of the way Ashland was put together through so many acquisitions and divestitures? And secondly, on the 15% target that you mentioned earlier, just to be clear, given how this year is shaping up, that is a target where it's resets every year with at least a 15% each year from however well you do. And you're not giving back any ground based on the fact that you're going to be paying down more debt and having less cash available for buybacks. Is that the right way to interpret the comments? Yes, I think with your second question, that's, that's probably, that's probably right. I think for sure, the divestiture will be somewhat diluted, but it's our objective through, through managing our balance sheet as well as the cost takeout to eliminate and frankly improve upon that dilution as much as possible as quickly as possible. So that's how we're thinking about that's how we're thinking about that. And when you look at the distributed costs, I think if you look at the business direct, the distributed, there's probably not much in there that wouldn't be normal for a lot of companies to have. Just keep in mind, all of that, we look at those holistically. We look at them together. So for ASI today, that number would be addressable costs, it'd be $430,000,000. So you that's how we think about that. It's really one big, one big bucket that has to be managed. What we do have, and it's why we called it out separately. We've talked about it before, but $91,000,000 of deal amortization that today runs through SG And A is very different than most companies you would Harris too. And you really have to set that aside. There's nothing we can do to really deal with that number. That's a number that's just going to run through the P and L. Until it doesn't. And it's got a pretty long tail. And one of the ways we address that in the quarterly earnings materials is we actually call out what the adjusted EPS would have been, were it not for that, to give people a better, a better indication. But that's that's the only one that really stands out. That's pretty large compared to about anybody you would compare us to. Just based on all the transactions that we've done. Our next question comes from the line of David Beg later from Deutsche Bank. Your line is open. Thank you. Good morning. Good morning. Bill and Kevin, back to slide 10 on the distributed cost Do you have a rough breakdown at least by percentage of the cost by function? I know it can't be exact, but just is it 15% finance 25% real estate, anything like that would be helpful? Certainly, that is something that we have looked at and we have assessed and we've worked to understand what is optimal for our business profile and what we think are appropriate benchmarks. So that's something that we have a clear eye on and as part of what we've used to set some of the, we'll say immediate near term targets that we have for the respective functions, but We don't have that information to disclose at this point in time in the stocking. Just to give you a little bit of insight in the process. Bill mentioned that we've hired Bain to help us with And, you know, they, they and others, of course, have benchmarks that you, you have to work through those in terms of of how they may apply to the, to the size, scope, scale and complexity of your own business. But for sure, part of what we're doing with all of this is first objective is to, at a minimum, take care of the stranded cost. That's $70,000,000. That's the first thing and foremost thing that we have to do. So that's what's looming most urgently on the horizon. That's what we're focused on. You go beyond that, it really becomes, as Bill mentioned, an extra size in focusing on how we can continue to lean out the business and do that in a thoughtful way. But, but also, you know, but also be as aggressive about that as we can. And that's, that's certainly what we're going to do. And so yes, we by function, we've looked at benchmarks. We know where we stand, generally speaking, we know where some of our opportunities are. And we're definitely focused on achieving those. And that's true, that's true frankly, both, both in distributed cost piece as well as the business direct piece. Understood. And Kevin, just on the ASI EBITDA, maybe the bridge from 2018 to just without being precise. If we take this year's midpoint of $5.75, layer in cost savings, layer in volume growth, layer in at leverage, operating leverage, how should you think about potentially ASI EBITDA for next year without being a no precise given the early nature of this question? Sure, sure. I think one of the things we've committed to is hard dollar savings of $20,000,000 flowing through ASI's numbers in 2019. So in addition to in addition to the stranded cost reductions that we're taking, we expect $20,000,000 of cost out over the course of the year to accrue to ASI's earnings. So there's that piece. Beyond that, again, taking the 5.75 midpoint, And we would expect the business, we would expect the business and would think you would, to grow from an EBITDA perspective mid single digits. And I think that one of the things we have to keep in mind is that would imply EBIT growth of high single to low double digit, given that the dollar number is pretty fixed and frankly, pretty large. So that's the way we think about the business. That's the way we talk about the business internally with the team is this is a specialty business that needs grow like a specialty business. And we've put up a couple of pretty good quarters around that. And the objective would be to continue to do that. Thank you very much. Sure. Our next question comes from the line of Jeff Zekauskas from JP Morgan. Your line is open. Thanks very much. In your press release, you talk about strong volumes in specialty ingredients, but at the volumes as you state them are down. That is you're at 83,000 tons versus something close to 84 last year. And you acquired Pharmachem in the middle of the quarter last year. And so those tons should probably offset the loss to JV China tons. So Is that the case? Is your volume roughly 0 for the quarter in specialty ingredients? No, the pharmachem acquisition frankly, the, the, the pharmachem volumes are a fraction of, of the T and P JV volumes. TMP JV was construction business and industrial business, with a fair bit of volume in it. And so, yeah, it's there are really no comparison between the 2. I mean, overall, overall volumes for the year, and what we would call the base ASI business, are up kind of low single digits. And the, the T and Poo divestiture, which we're about flat it does mute that. It does mute that progress that we've made. So that's the best way to think about So you've been providing volume data for 5 years and you've never had a sequential volume decrease in the third quarter over the past 5 years. It seems different. 2nd is there's a $37,000,000 life insurance payment on your funds flow statement. What's that? That's retiring some company owned life insurance that borrowed against, it's basically an interest rate arbitrage opportunity. Is there an EPS effect to that? Very, very small. It's probably $1,000,000 pretax, but worth doing. So much. Please limit yourself to one question and one follow-up question. Our next question comes from the line of Jim Sheehan from SunTrust. Good morning. This is Pete on for Jim. Assuming the planned divestitures go through by the end of 2018, what is your M and A strategy in fiscal 2019 and beyond? And how do you balance that with your target for leverage? First of all, clearly, we have a very aggressive profile of activities that we need to complete separating and supporting. Ultimately, its business through its transition, working to reduce the cost that we've identified and also sustained growth in the core business. I would say that, that makes our strong priority focused on, on, if you will, internal opportunities and actions. And as Kevin mentioned, it would be our desire to deleverage. We think that that's good thing for the company in general as well as a good thing to do at this point in time. So there may be opportunities for bolt ons of some type will enhance our technology base, but, really, our priority is on executing the agenda that we've put forward. Thank you. Yes. And an example of that strategy is earlier this year, we bought a very, a very small, fit a very small amount for some injectable excipient technology that we're rolling into our pharma business as part of our overall excipients portfolio, that's the sort of thing that we'd be looking at. We've got plenty of opportunity with within the business as it exists today. And certainly, the team is focused on tapping into all those opportunities. As we go forward. Question comes from the line of John McNulty from BMO Capital Markets. Your line is open. The first area I wanted to just touch on on the cash flow side. I guess maybe 2 things tied to that. The first is of the $170,000,000 plus that you're for in 2018. Can you give us a ballpark for what the asset divestitures that you're looking contribute to that so we can kind of think about what true cash flow rate as we're looking at 2019 going forward? And then I guess also on the cash flow front, you highlighted a of opportunities for cost reduction. Do you see anything in terms of some of the early work that you're doing that might point to working capital improvement and how you might be able to unlock some cash that way? Yes. To your first question, it's really 0 So it's not impacting that cash flow number. And secondly, as it relates to working capital, clearly, This is, another frontier for us, and we are focusing more energy on that now. That's important because it can help to drive, of course, continued cash flow, but growth, but also, as we look at certain capital projects, which enable us to not only expand, but in certain instances, consolidate operations. We committed during our Investor Day to having 6.5% of our sales between changes in working capital and CapEx. And so we're clearly focusing more more energy on the working capital side. Got it. And actually on the first part of that, I think maybe I wasn't clear. So of the if you get 170,000,000 dollars, 175,000,000 how much this year are composites and I and S contributing to that, not their sale, but the actual, but I would imagine they're generating a reasonable amount of free right now. Got it. Okay, Kevin. Yes, it's probably $50,000,000 to $75,000,000. The tomorrow plan is fairly capital intensive. So it wouldn't generate, it wouldn't generate as much free cash, composites as much much lighter on the CapEx front. So it sits in the neighborhood of 50 to 75. So ultimately, we're going to have to replace that through growth in the business. And a stronger balance sheet. Got it. Great. And then just as a follow-up on the pricing versus raw materials equation in ASI, I guess as Have you caught up at this point? And I guess how should we be thinking about the momentum as you're going into 2019 as if you've got a flat raw material environment, is there more lift that we should be thinking about in 2019? And I guess, how should we be thinking about that at this point? We were able to cover, we'll say, essentially, all the raw material inflation we had realized up to the beginning of our our quarter, we saw some incremental raw material inflation, which then we took actions on in the quarter to further off set. So there's been kind of a 1 quarter timing to absorb the raw material inflation and get it out in front of customers make sure that we deal with that. So, we're staying on top of it. It's still a dynamic raw material environment that's our commitment to make sure we price through raw material inflation. Got it. Perfect. Thanks very much. Our last question comes from to follow-up on the last question. I mean, you talked about $25,000,000 in raw material headwind. I'm not sure if it was for the company overall or for ASI specifically. But if you just look at ASI, that's basically just over 1% of your sales. I'm assuming you've got more than 1% in price in aggregate on ASI year to date. So would it be fair to say that you're through recapturing raw material pressures and now we're working on story margin, or am I wrong in my analysis? First of all, the 25 is correct, and we're referencing that relative to ASI. We have obviously focused on a number of levers and been able to drive improved margins by really leveraging all of those. As I just mentioned with raw material prices continuing to go up, we've priced our way through those items that, that have come in. As new items come in, we've put new challenges before our team as I also mentioned earlier, when we're negotiating with customers and working through issues, what we'll do is we focus on the price equation, But we also focus on areas where we can get, enhanced margin through mix to enhance our gross profit dollars as well as percent, even in an inflationary environment. So that's really been the core strategy. And it's our intention to continue to price through raw material inflation. It's been continually growing throughout the year. And we've been working continually to offset it. The gap keeps narrowing as the kind of pace of raw material price increases as slowed down substantially. Okay. And then just as a follow-up, the reasons for relocating to Wilmington as far as your headquarters are concerned, I mean, is it going to be just a, sort of a paper relocation or a physical relocation? And if the ladder what's the reason for that, other than cost savings, I guess, is it the end to take over, production at the Delaware operations offers? Is it lower taxes? I mean, how are you looking at that HQ move physical versus paper and then the reasons for it? So Kevin has a comment here, and I'll turn it over to him in a second. But I'd just like to go back, to what we've said, that, yes, In fact, we are focused on reducing our costs. And yes, as we reduce our footprint, that not only reduces, if you will, our costs associated with, having multiple operations. But more important, our goal is to drive greater cohesion between our team to to make more rapid decision making to really work in a central location where we can drive actions that can help us to grow the business and do so in a more cost efficient manner. And that is the core objective of our activities. So, Kevin, I don't know if that was something else you want to add. Sure. Just around the, around the incorporation piece, we did the Valvoline transaction. We actually reincorporated the company in Delaware. So we've been a Delaware corporation for a couple of years, give or take. But, and in terms of the headquarters piece, as you'll recall, we did the Hercules acquisition, just almost 10 years ago. That's where Hercules was headquartered. We have a pretty large presence there from a commercial supply chain, R and D, and to an extent back office perspective, although we have a lot more back office in Dublin, Ohio today. And so that's these are all drivers in addition to cost. I would just mention My apologies. Oh, I was just going to add on to Kevin's comments. I would just say that as it relates to Covington. And I think that's also indicative of the fact that we really are looking at everything we do, every location that we operate we're not, holding certain parts of what we do or where we do it as a special outside. We are taking a fundamental look at what's the best way to operate the company going forward. And obviously, Covington is an important part of what we do today and what we've done in the past. So that's I think it's an important signal also in our commitment to focus on real change in the company. And I am showing no further questions at this time. I will turn the call back over to Mr. Mrozek. Thank you, Emily. Thank you all for your time today, and thank you for your interest in on. Have a great day. Ladies and gentlemen, this concludes today's conference. Thank you for participating and have a wonderful day. You may all disconnect.