Good day, ladies and gentlemen, and welcome to the Ashland Global Holdings Incorporated first quarter earnings call. At this time, all participants are in listen only mode. Later, we will conduct the question and answer session, and instructions will be given at that time. If anyone should require operator assistance, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host for today, Seth Mrozek, Director of Investor Relations. You may begin.
Thank you, Sonia. Good morning, everyone, and welcome to Ashland's first 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 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 December 31st, 2017, shortly after 5:00 P.M. Eastern Time yesterday, January 29th. 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 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 understanding of our performance by more accurately reflecting our ongoing business. With that, I will turn the call over to Bill. Bill?
Thank you, Seth, and good morning, everyone. In the first quarter, the Ashland team took important steps forward to build the momentum needed to deliver our fiscal year 2018 commitments, as outlined during our November earnings call. Each of our three segments showed growth in sales and adjusted EBITDA, even before including the positive impact of foreign exchange and acquisitions. As a company, aggregate price exceeded raw material inflation, asset utilization had a positive impact on earnings, and adjusted SG&A as a percentage of sales was down 110 basis points versus prior year. In addition, as expected, the integration of Pharmachem and the Etain Composites facility both made strong positive contributions to Ashland in the quarter.
As a result, in total, Ashland increased its sales by 20%, improved gross margins, both the gross profit margins by 50 basis points, increased adjusted EBITDA by 25% and adjusted EBITDA margin by 70 basis points, and delivered adjusted EPS of $0.42, which includes a $0.04 per share negative impact from our tax rate. Within Specialty Ingredients, the team focused on driving volume mix gains. As a result, we delivered solid top-line growth across a number of our key end markets. We saw strong growth in the personal care segment, with sales up 5%, driven by significant gains in the bio functional ingredients area. New capacity has enabled us to begin meeting robust demand in pharma, where sales grew by 4% in the quarter. After a slow fourth quarter, we drove 12% sales year-over-year growth in coatings.
This growth was led by key customer wins and favorable order patterns. From a margin perspective, Specialty Ingredients experienced $8 million of year-over-year raw material inflation in Q1, and that's approximately $5 million more than was anticipated at the start of the year. While this had a negative impact on margins in the quarter, we took additional pricing actions. We made great progress in personal care, pharma, and adhesives. That said, pricing within the cellulosic portion of industrial specialty remains a challenge. In the first quarter, the team drove favorable volume mix but did not fully offset raw material inflation. Moving to asset utilization. In the fourth quarter of fiscal year 2017, Specialty Ingredients drove an $8 million benefit from our asset utilization programs.
This initiative had minimal impact in the first quarter of this fiscal year, as we chose to complete multiple shutdowns during what is typically our slowest demand period. The good news is that with these shutdowns behind us, we expect ASI's asset utilization to be strongly positive in the second quarter and for the remainder of the year. The ASI team did a good job in managing costs during the quarter, as SG&A increases were driven primarily by acquisition and currency. Combining the base business and acquisitions, Specialty Ingredients revenue and EBITDA increased 14% and 11% respectively. Also note that excluding the dilutive effect of acquisitions and divestitures, EBITDA margins in the base ASI business was up approximately 50 basis points year-over-year. In addition to gains realized in the base ASI business, the integration of Pharmachem is going well.
We have now identified approximately $15 million of annualized cost synergies to be realized by the end of year two. After owning Pharmachem for just over seven months, its EBITDA contribution, excluding corporate allocations, is approximately $35 million. Moving to composites, the team turned in another strong performance. Volume and mix was positive year-over-year. The team drove strong sales increases in all key end markets and saw strong growth in North America and Europe. The acquired Etain facility in France also made a positive contribution in the quarter and accounted for 10 percentage points of composites sales growth. More impressively, the composites team fully priced through to offset approximately $16 million of raw material inflation versus prior year. Thus, net net, the team did a great job of generating sales and earnings growth, with sales growing 32% and adjusted EBITDA increasing by 10%.
Moving to ASI, the team delivered a 30% increase in sales. Volume and mix improved sales revenue by 7%. Disciplined pricing drove a 16% increase in sales and contributed approximately $9 million to earnings. Asset utilization in the business was up substantially, and that was driven by focused network optimization activities and turnaround timing, which resulted in a positive year-over-year benefit in Q1 by $8 million. This gain will be offset by approximately $5 million of increased year-over-year turnaround expense in our second fiscal year quarter. Together, ASI's adjusted EBITDA climbed to $16 million, up from near breakeven in the year ago period. All in all, Ashland's total sales increased 20% and adjusted EBITDA rose 25% to $136 million.
Both sales and earnings were up year-over-year in all three reportable segments in the first quarter, setting the stage for us to reaffirm our full-year outlook for each segment in fiscal year 2018. I'll now turn the call over to Kevin, who will share some important financial details from the quarter.
Thank you, Bill, and good morning, everyone. Adjusted EBITDA in the quarter was $136 million, compared to $109 million in the year ago period. In the quarter, we reported a GAAP loss from continuing operations of $0.12 per diluted share. On an adjusted basis, we reported income from continuing operations of $0.42 per diluted share, compared to $0.14 in the prior year. Ashland's capital expenditures were $24 million during the quarter, compared to $33 million in the prior year period. Free cash flow during the first quarter was negative $48 million, compared to negative $93 million in the prior year. These amounts include $23 million in restructuring payments in the first quarter of FY 2018, and $29 million of restructuring payments in the year ago period. There are several areas I would like to focus on this morning. First, the impact of the U.S.
U.S. Tax Cuts and Jobs Act on Ashland. Second, an update on SG&A. Finally, our outlook for the second quarter and the remainder of our fiscal year. Our effective tax rate for the first quarter, after adjusting for key items, was 18%, which was eight percentage points higher than we forecast last November. As Bill noted, this higher rate reduced EPS by $0.04 in the quarter. The increase in the tax rate is primarily attributable to U.S. tax reform enacted in late December. Furthermore, as a result of the new tax legislation, we have reset our expected effective tax rate for FY 2018 to be in the range of 16%-20%. The higher ETR for Ashland may seem counterintuitive to some, as there's been so much discussion and focus on companies that would realize a tax benefit.
However, the increase in Ashland's ETR reflects the global nature of our business. We have provided an overview of the impact of the Tax Act in the slide presentation posted to our website last night. I won't go through all the details provided on that slide, but I do want to call out a few key provisions. First, we do not anticipate a material change to our cash tax rate, meaning the taxes we actually pay. That range is expected to remain at 20%-25%. Second, Ashland will clearly benefit from the ability to repatriate cash that is held outside the U.S. Just this past week, we repatriated over $300 million and used it to repay debt.
While we will pay roughly $160 million of one-time repatriation taxes over eight years, beginning next year, these payments will be largely offset by lower deferred tax payments that were accrued prior to the new tax legislation at the old tax rate. As we have said before, our primary use of cash for the next couple of years will be debt reduction to reach our leverage target of gross debt at three and a half times EBITDA. Keep in mind that this does not preclude allocating capital to bolt-on acquisitions or share repurchases. Regarding SG&A, we remain committed to offsetting inflation with productivity improvements. We have taken comprehensive actions in this area, including headcount reductions, shared service expansions, increased outsourcing, and facility consolidation. For example, we continue to leverage and grow our global business centers in Hyderabad and Warsaw.
In addition, we are consolidating our Columbus, Ohio campus footprint to be done in the June quarter, resulting in an annualized savings of approximately $6 million. During the first quarter for the corporation, adjusted SG&A year-over-year was up $20 million, almost entirely due to the impact of acquisitions and currency. The remainder was more timing issues. I will mention our full-year outlook for each of the businesses in a moment. However, I think it's important to reiterate that managing SG&A costs is a critical component to meeting our full-year commitments. Based upon our current full-year forecast, less the impact of acquisitions, divestitures, and currency, we expect full-year SG&A for the corporation will be flat. Turning to the full business, as you saw in the updated outlook summary we released last night, we have reaffirmed our full-year adjusted EBITDA outlooks for each of our operating segments for fiscal 2018.
Based on the change in the effective tax rate to 18% for fiscal 2018, we have updated our adjusted EPS outlook for the year to a range of $2.90-$3.10 per share. This $0.30 change in the EPS range is due entirely to the new tax rate. For context, if the new tax legislation were applied to fiscal 2017, the full-year effective tax rate would have been 18%, as opposed to the reported 7%. For the second quarter, we expect adjusted earnings in the range of $0.80-$0.90 per diluted share, compared to $0.70 per share in the prior year period. This estimate assumes an effective tax rate of 18% based on the new U.S. tax legislation. Also note that our effective tax rate in the prior year quarter was 1%, reflecting income mix and certain discrete items.
Based on where we are today, we remain confident that we can generate free cash flow north of $220 million during this fiscal year. Lastly, we are currently evaluating possible changes to the way that we make operating decisions and assess performance within Specialty Ingredients. This process may result in additional changes to our management structure and how internal financial information is reported and used in making decisions about the business and certain of its components. Consequently, we will need to determine if these changes will result in the need for further segmentation of Specialty Ingredients results for external reporting purposes. We will provide an update on this evaluation once it is completed. I will turn the call back over to Bill.
Thank you, Kevin. As outlined at our investor day last year, Ashland has a clear strategy to drive strong sales and earnings growth in fiscal year 2018 and beyond. As a reminder, we established the following financial targets for fiscal year 2018 through fiscal 2021. We intend to grow adjusted EBITDA by at least 15% per year, improve Specialty Ingredients adjusted EBITDA margins to above 25%, and generate more than $1 billion of free cash flow. Our performance in the first quarter reflects important progress we're making. While we have more work to do, we are working hard to accelerate our progress and increase our momentum. The second quarter is an important period for Specialty Ingredients. To that end, we expect to see sustained volume mix improvements.
In the second quarter, we also expect to realize the benefit of pricing actions taken, particularly in personal care, pharma, and adhesives, and take additional pricing actions in the cellulose portion of industrial specialties. ASI margins in Q2 should also be positively impacted by our asset utilization programs as we begin to see the impact of previously announced closure of four operating facilities, our de-tolling efforts, which are gaining greater traction, and we lower turnaround expenses as many of our plant shutdowns were completed in Q1. Last but not least, the Ash team is working aggressively to drive our Pharmachem synergy action plans. From a composites perspective, we continue to see healthy demand in the second quarter. Just last Friday, we announced another round of price increases to help offset raw material inflation, which resulted from reduced production from several styrene producers. INS has again raised prices.
The benefit of this action will be partially offset in Q2 by the impact of the planned maintenance shutdown in Marl, Germany. We view this as just a timing impact as we saw the offsetting benefit with a turnaround in Q1. In the aggregate for the fiscal year, excluding acquisitions and currency, we expect Ashland's SG&A to be flat versus prior year as we continue to drive productivity programs. Combined, these actions make us confident that we can deliver on our previous EBITDA guidance. More specifically, we are reaffirming our guidance for Specialty Ingredients EBITDA, composites EBITDA, and INS EBITDA. As for our EPS guidance, we are adjusting our fiscal year outlook to reflect the new tax rate. This impact is estimated to be approximately $0.30 per diluted share. Thus, our adjusted EPS guidance for the year is $2.90 to $3.10.
Fortunately, as Kevin described, while tax reform will have an impact on our book tax rate, we expect no material change to our expected cash tax rate of 20%-25%. As a result, we believe we remain on track to drive more than $220 million of free cash flow in fiscal year 2018. In summary, all three of our operating segments remain on track to deliver their key financial targets in fiscal year 2018. We have more work to do, but momentum is clearly building. Fiscal year is an important year for Ashland, we remain committed to delivering on results. With that, I say thank you for listening and your interest in Ashland, I'll turn the call over to the operator to take your questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Due to time constraints, we ask that you please limit yourself to one question and one follow-up. You may re-enter the queue with any additional questions. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Christopher Parkinson of Credit Suisse. Your line is now open.
Thank you. Given your comments in your PowerPoint, that there was roughly a $4 million net EBITDA contribution from acquisitions and divestitures, which I guess includes Pharmachem and exiting the China JV, can you just quickly parse out the various moving parts, including the corporate costs you mentioned? We're just trying to get a sense of where the Pharmachem came in versus expectations, and the implied margin or EBITDA contribution for the remainder of the year. Thank you.
Sure, Chris. This is Kevin. If you look at Pharmachem, I'll first talk about the seven months. As Bill mentioned, approximately $35 million of what I'd call contribution EBITDA, so ex any corporate allocations that the business produced over that period got $2 million-$3 million probably of JV EBITDA that was not there. The delta between that would be corporate allocations. With Pharmachem in the mix, we basically apply our methodology for allocating corporate costs to each of the businesses, and Pharmachem participates in that. The way to think about it is, on average, $5 million-$6 million a quarter of corporate cost would be ultimately allocated to the Pharmachem number. If you want to apply that to the first quarter, that would imply, call it $10 million-$11 million or so of EBITDA on ex corporate cost basis.
Clearly seasonality in the business during the December quarter as we delved into it. Thinking about it on a full year basis, it makes us, on an overall basis, pretty confident that we're going to be able to meet our targets within that business from an economics perspective. We very much remain committed to managing those SG&A costs. As I indicated in my comments, on an overall basis, we expect the corporation to be flat for the year. The movement of corporate costs is really just kind of pushing water around in the balloon, if you want to think of it that way.
Great. Just a quick follow-up. As it pertains to increasing your pharma capacity at Hopewell, as well as some of the mix improvements you're targeting out of your Belgium facility, can you simply comment on what ending you believe you're in regarding your pharma initiatives that you're no longer capacity constrained, as well as the consequent mix benefits on an annualized basis? Then also just if you could very quickly touch on, given the desire to place that new capacity in the market, can you confirm that you're comfortable doing this without any concern on pricing? I know that's the initiative, but just any confidence to that would be appreciated. Thank you.
Sure, Chris. Thank you. That's good questions. In fact, we do see the momentum building from a demand standpoint in these key product areas that you mentioned out of Doel with Benecel and also out of our Hopewell expansions, and Klucel is one of the products. These are some of our most differentiated products. With that, really the gains that you see in Q1 are the result of those activities. We see demand building in those areas. Our customers who we weren't able to supply effectively or consistently now understand and have the confidence to have more of that business with us. I would say that a significant or great amount of our current and targeted growth are in these more differentiated platforms. In these areas are very few competitors, and our products are differentiated even by the nature of how they perform.
We still have plenty of upside opportunities as it relates to utilizing that capacity. In fact, we're still in the process of qualifying our additional Klucel capacity with customers. While we're able to use it today, we'll be able to use it more and even improve the mix running through those assets as we go forward. Basically, I think what it does is it has taken the cap off in terms of limitations, at least from a production standpoint, on our growth in the pharma market.
Yeah. We saw really good volume mix out of that business in the core. Very strong performance. We've been bullish on pharma. We remain bullish on pharma, really it just comes down to the team executing on the new capacity and continuing to drive that value through the system.
Thank you.
Thank you. Our next question comes from John Roberts of UBS. Your line is now open.
Thank you. If the volume mix benefit to the specialty segment was about 9.5% at the EBITDA level, what was the volume mix contribution at the sales level in specialties?
Hey, John. Good morning. It's Seth. You've pointed out correctly, volume mix was a positive contribution, certainly, at the profitability level. It was also a 2% contributor to the top line for specialty.
Okay. Should the tax rate in fiscal September 2019 come down from a full year of reform, or not really since the U.S. taxable earnings are still going to be at a modest loss even after the debt reduction?
Yeah, John, it's a great question. It's going to take us, I think, a good bit of the fiscal year to work through that. The new tax provisions really pile a lot of complexity on top of what was already there. The idea of simplification is really, in fact, not true. We have to work through that. Each new provision of tax reform is going to drive, in some cases, benefit, and in some cases, not. A couple of small examples. There's interest deductibility. That's probably going to be something that we have to deal with because not all of our interest is likely to be deductible in the U.S. However, we have new provisions around CapEx deductibility as the capital is spent in the U.S. There's offsets to be had there.
Those are just a couple of examples of really many that our internal team and our third-party advisors are working through as we try to figure this out. I think a lot of companies are frankly in the same boat if they're as global as we are. What we'll commit to is certainly providing an update as soon as we have one. I think the way we think about it, based on where we are right now, I wouldn't expect the range to get worse. I think it remains to be seen if the ETR range can in fact improve from the 16%-20% that we're currently using.
Again, we see no material impact on the overall cash tax rate, absent the one-time repat cost that we'll be paying over eight years, which is largely offset by reduction in deferred tax liabilities due to the lower rate.
Okay. Thank you.
Thank you. Our next question comes from Mike Sison of KeyBanc Capital Markets. Your line is now open.
Hey, guys. Nice start to the year.
Good morning, Mike.
In terms of ASI, your guidance would imply that you're going to need $150-$160 in EBITDA per quarter after a seasonally slow first quarter. Can you maybe help us understand how you get that ramp, particularly in 2Q? Then, is there any seasonality between that number for the rest of the other quarters?
Well, Kevin, why don't you speak to the seasonality, and I'll speak to the ramp, if you will. Yeah. Really what we should see is frankly positive seasonality coming out of Q2 and Q3, which basically gets at the ramp concept as well. Those are typically the strongest two quarters within ASI, and frankly, Q4 isn't typically far behind if you look at it on an overall basis. Q2, Q3 will be our strongest quarters. So it really comes down to the team continuing to execute on an overall basis. I think manufacturing is stepping up and doing what they need to do. We've seen good benefits from that. We should see that accelerate through the course of the year.
The volume mix equation is very positive, and really I think it comes down to executing fully on pricing initiatives and driving that through the system, and that's primarily in the industrial area.
Kevin stated it very well, so no need to repeat it at all. I think the parts that we feel very good about, of course, is that we're seeing improvement in the volume mix area with a particular focus on mix. Good SG&A control. Manufacturing, we see the momentum building there. What's really going to be key for us is to make sure that, especially in the cellulosics portion of the industrial specialties business, that we drive the pricing needed to fully offset raw material inflation. By the way, they were the group that saw the biggest impact from the increase year-over-year.
Great. In terms of the raw material inflation for ASI, the basket of raw materials that go into ASI, what's the increase in cost that you need to offset to low single digits, mid-single digits? Can you just remind us what the major inputs for the cellulosics are that you need to overcome?
Just in general within ASI, some of the key raw materials are butane which can go into BDO, of course. Cotton linters and wood pulp, which goes into cellulosics. You have other key materials. Polypropylene ultimately works its way through as well. Those are some of the key raw materials that have been impacted, if you will, in the, we'll say last six months or so. Just to put it in perspective, with the way things are right now, the raw materials that we've realized to date that versus prior year, raw material costs will be up about $26 million year-over-year. That's assuming that prices don't go down or they don't go up further. That's the amount that we need to overcome with our pricing activities.
Great. Thank you.
Thank you. Our next question comes from Laurence Alexander of Jefferies. Your line is now open.
Good morning. Two questions. Can you flesh out a little bit your thinking about the ASI asset utilization, and how we should think about the benefit in the back half of this year compared to in next year? Is it a steady cadence, or is there a bit of a hockey stick effect? Secondly, can you give some sense of the trends you're seeing in your construction and energy markets?
Sure. From an asset utilization standpoint, we will see from quarter to quarter some variations just because when you do have a shutdown in a quarter, depending upon whether you had one in the prior year. In general, we really break it out into several key buckets, fairly straightforward. One is spend and the other is absorption. If we're better utilizing the assets, that lowers the cost across all units. Of course, if we can reduce the overall spend rate, that's another way to make improvements, kind of numerator and denominator math there. We're focused on, for example, in the cost portion, being better, more precise with our shutdowns, making them shorter in duration and focusing on reducing their costs, also consolidating facilities in our footprint where possible.
We have Lean Six Sigma programs, which are also helping not only to drive productivity, but to reduce the cost. Then you have the absorption effect, which really comes from selling incremental volume through the system. In that regard, what you're seeing so far, you saw in Q4, and we expect to see in Q1, you'll see really more of the impact of managing the cost side of that equation. Ultimately, we expect to and need to drive greater volume growth. While our focus is on mix over volume, we do expect to see our business grow, and with that will help on the absorption equation. I would say overall, we anticipate it continuing through this fiscal year.
Again, it may be a little lumpy from one quarter to another, there's no reason why it shouldn't continue next year at a rate, I'll say, at least at this point, in a similar kind of fashion. From a market standpoint, in the energy area, we saw demand increasing in the U.S., which of course is good news. In Europe, it was a little bit softer. Overall, we saw construction down versus prior year.
Thank you.
Thank you. Our next question comes from David Begleiter of Deutsche Bank. Your line is now open.
Thank you. Good morning.
Morning.
Bill, just in cellulosics, any more details on what's causing the pricing issues? Is it competitor intensity? Is it excess supply? Any more color on that in cellulosics?
Sure. This is how I would characterize it is, we have a lot of very differentiated products and a lot of contracts associated with those. Some of those contracts, we have cycles to them. It takes a little time to pass those prices through or those raw material inflations through with some of our larger key customers with some of our more differentiated products because of that structure. In general, I think it's fair to say that in the spaces, say, portions of the construction market, maybe the mid to lower end of the coatings market, you do see a little bit more global competition, and we're trying to fight the right balance between having the right mix, the right volume, but also offsetting the raw material inflation.
I would like to highlight, not as an excuse or anything like that, but this is where we saw really significant increase in the quarter versus what we anticipated coming into the quarter in terms of raw material costs. The team is out there working the equation hard. Frankly, as Kevin alluded to, as we look forward on the business, we run a highly integrated ASI business today. We're going to increase our focus on the strategic imperatives in this part of the business where, to the extent there is some greater cost sensitivity, we're going to be more aggressive working to make sure that we are truly competitive on a global scale, regardless of the segments that we're competing in.
Very good. Just on BDO, off to a strong start for the year. I know you have some turnaround costs in Q2, can you give us your view of the BDO cycle, and is there some bias to the upside for INS EBITDA guidance for the year, given the BDO cycle?
Sure. We really wanted to highlight the turnarounds, mainly because given the timing, it could look based on Q1 like we should have a number that's much bigger for the year end. Again, you do need to factor in now versus last year, we'll have this turnaround in Q2. Overall, we have been able to consistently increase prices in the marketplace kind of step by step. Our last increase was in January, and taking place or taking effect in February. Since then, actually, one of the other suppliers in the market has had a force majeure, making the supply-demand dynamic even tighter. We want to make sure that we're appropriately and fairly valuing our product, and we're working hard. We don't want to presume that there's upside at this point because we need to see how the dynamics play out.
The indications are now that pricing is holding. We've actually seen it now translate not just in BDO, but into the derivatives, which is an important element of, if you will, that equation. Again, I just bring it up because it's a point to note. Your information is as good as mine. You all read about the tightening that's going on in terms of productions and emissions standards in China and the impact that's having on whether it be cost or access to energy and operations of facilities. We've been studying that and looking at that, and it's going to take some more time, but that, I'll say, has had an impact up to this point because we haven't seen some capacity that we otherwise might have predicted would come back online at these prices.
It may mean that there's some further upside to the cycle just by nature of capacity limitations coming out of the region. I don't want to make too big of a deal out of that because that's uncertain. It's just something that we're watching very carefully.
Thank you very much.
Yeah. What we obviously will commit to is as we get through Q2 and we get more visibility into the rest of the year, clearly we'll update our outlook for the business based on the most current knowledge that we have. You can expect to hear from us on the next call relative to that.
Thank you again.
Sure thing.
Thank you. Our next question comes from Mike Harrison of Seaport Global. Your line is now open.
Hi, good morning.
Good morning.
Going back to the ASI business and some of the timing of turnarounds there. I think it was last year that you guys had made efforts to move all of your maintenance downtime into that seasonally weak Q1. Is that something that we saw all of that impact in this Q1? Can you comment on whether the maintenance cost or the downtime, or however you want to think about it, was that higher or lower or pretty much in line with where it was in the prior year?
Yeah. In the quarter, in Q1, the turnaround expenses were about $2 million higher versus prior year. We do have turnarounds really throughout the year. I'll put that in three buckets. You have the large planned turnarounds. You have kind of shorter maintenance shutdowns, and then you do have from time to time unplanned outages. What I would say is that the great majority in ASI of our planned major maintenance outages have been completed here in Q1. That's why we see some upside associated with that going forward.
Got it. Just looking at the coatings business within ASI, obviously a really nice rebound there, and you referenced some wins with key customers. Just wondering if you can go into a little more detail about what you were seeing in terms of those wins and whether part of what we're seeing there in terms of the 12% growth was some restocking after a year that obviously ended up being weaker than a lot of your customers may have anticipated.
Right. Thanks for that question. There's two, I'd say, important parts in answering that. One is, I recall, as I'm sure you did, a lot of concern coming out of our last quarter because coatings was flat, and we had said that you shouldn't read too much into it because you do have some timing of different order patterns. I'm willing to acknowledge that while we're on the positive side of that coin here today, that some of the orders that maybe we didn't see in Q4, you see in Q1, and that helped to create a very robust growth rate. At the same time, this is an area where the team has been focusing extensively on trying to expand our position, given our available capacity, frankly. There's been a lot of work on the international front.
A lot of work in the Middle East and in the rest of Asia to help drive new customer wins to improve our volume mix equation and better utilize our capacity. It's really, to me, a combination of the two.
All right. Thanks very much.
Thank you. Again, ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your touch tone telephone. Our next question comes from Jeff Zekauskas of JPMorgan. Your line is now open.
Thanks very much. Your Specialty Ingredients tonnage was flat year-over-year at 73,000 tons, and the tons from Pharmachem have to be larger than the exited tons from the China JV. I think your volumes in the quarter were down. How much were they down, and in which areas were they down?
Jeff, it was about an offset. You're right, the Pharmachem volumes were modestly larger, I would say, than the exit JV volumes. Keeping in mind, construction volumes tend to be pretty high for the value. On an overall basis, the base business was pretty flat. Just to provide a little more color around that, this follows very closely and very logically with the mix impact we saw. Higher value pieces of the business, care, pharma nutrition, and coatings, contributed strongly to the mix equation and also from a volume perspective. To provide just a little bit more color to the overall equation, we think about the business oftentimes as a consumer business and an industrial business. We talk about it that way. Our consumer volumes tend to be much lower and higher value. The industrial volumes tend to be much higher and obviously lower value.
It's roughly a 30-70 split between consumer and industrial. The point of that is increases on the consumer side really drive a lot of value to the overall equation. The industrial is going to move around between the lower value materials and the higher value materials. Coatings being typically the highest value material we move on the industrial side. That's really how the overall equation works.
Jeff, just to add a little more color, I think this hopefully will bridge with prior conversations that we've had about the business and some of the changes that we've been making is, we've really expanded the focus by the market facing commercial units to focus on their commercial contribution. That is the combination of the impact of volume, the impact of mix, the impact of pricing versus raw material, and ultimately, the absorption effect versus what's planned in our budget. The equation that we hold our team accountable to is the aggregate of that. We've actually modified our sales incentive programs to mirror that. We would rather drive a richer mix, and earn more money than simply drive volume. On the other hand, if we can drive volume and mix at the same time, all the better.
If we can do that while getting price, that's the best of all worlds. The combination that we look at in the aggregate, and that's what we hold our commercial teams accountable for. In the individual levers, there's some flexibility for them to determine what specific customers are in specific marketplaces, what's the best formula to get there. That's just how we're looking at it, and I think it may be reflected in your broader question.
Right. Okay. Thank you for that. Last year, your intermediates and solvents business, I think, produced 139,000 tons. When you look historically, what's the highest tonnage output you've ever had out of intermediates and solvents? Can you say sort of what a normal tonnage level is? First, what's the highest tonnage you've ever produced?
Don't know exactly what the highest tonnage is. Nameplate capacity on our two plants is 160,000 tons on a combined basis. It's 100,000 for the Marl, Germany facility, 60,000 for the Lima, Ohio facility. We have in the past produced in excess of that.
You can think about it in terms of what's possible. 165,000, 100 or so tons is probably about the number. That's a generalization.
Sure
prediction. The difference between what we sell and what we produce is really driven by the internal volume that we use as raw materials to produce the PVP and the VP polymers.
Yep.
Changes in inventory, which can move around by 5,000, 10,000 tons, depending on what demand is, where demand is and time of year and that sort of thing. Those are really the three components. It's production, internal utilization, and changes in inventory.
Do you expect to sell more tons this year than you did last year?
It certainly would be our objective.
Okay, great. Thank you so much.
First priority is to serve our need internally.
Yep.
Obviously, the second priority is to make as much and sell as much as possible over and above that.
Okay, great. Thank you so much.
Thank you. Our next question comes from Dmitry Silversteyn of Longbow Research. Your line is now open.
Good morning. Thanks for taking my call. Couple of questions.
Morning.
First of all, you obviously got very good growth in coatings. I think you said something like 18% volume on some customer gains as well as what you mentioned as timing of orders. Obviously, last quarter 0% was not a good number to use. This quarter's 18% is probably not a good number to use. How should we think about the growth of that coatings business both for the rest of 2018, and have you sort of have some visibility on sort of past 2018 as far as what this business can sustain?
Sure. I think from a revenue standpoint, it was around 12% in the quarter, just to make sure we're talking about the same numbers here. I would think that in the 3%-4% range on average would be a reasonable number. I would say that there are opportunities in the coatings markets in regions that we don't support throughout the globe to help to use or leverage some of our excess capacity. We could see some additional growth as a result of that. If you look at our base business, the core customers on geographies that we serve on, I think that 3% range, maybe 3%-4% would be the targeted range.
With that in mind, for 2018, obviously we're going to see something more than that because of the customer gains that you mentioned having. Can we look at sort of mid-single digit growth for this year?
I wouldn't say that's an unreasonable outlook. That being said, as we've seen, especially over the last few quarters, you do see some volatility that goes quarter by quarter. This is the time of the year where we're going to begin to get a much better read with what our, if you will, many of our core coatings customers. Is it going to be a good season for architectural coatings with our primary, if you will, main customers, or will it be a slow one? I think last year we felt that it was comparatively slower, didn't feel robust. Obviously, we're cautiously optimistic that that will be more positive.
That will certainly help to determine whether we'll be really up towards the higher end of that range that you're thinking in your mind or more towards what we might consider to be a kind of an industry average that I was describing just a minute ago. We should have a good read on that over the next quarter here, I would think.
Okay. As we get into the painting season, makes sense. Just a quick follow-up on the BDO issue. BASF is out this morning with the force majeure on their BDO plant here in North America. You talked about Chinese capacity rationalization perhaps extending the pricing cycle for BDO. It is a regional market. Can you talk about sort of what you're seeing in the markets as far as tightness or availability of supply, even before this BASF force majeure in North America? Is it going to help you with getting better pricing here? Or is it just going to relieve a little bit of an oversupply that may have been in the market?
Well, certainly, the supply-demand dynamic has moved towards a, we'll say, tighter supply situation, which is good for the fundamentals. Just, if you will, kind of anecdotes. We saw over the course of the last couple of months, some customers who maybe they purchased from us a little less consistently and were maybe a little more spot purchase in their nature, where we took a little bit more aggressive stance just because the demand for what we had available was such that it was okay if they did their spot purchases elsewhere. We were positively surprised in a number of incidents to see those companies come and say, "Okay, we'll move forward on those terms." This is one that can change with a supply-demand shift. Right now, there is nothing that makes us feel like the positive trend and the tightening trend isn't continuing.
With that, we believe that, you look at the pain that we took when there was an excess of supply back to just the appropriate economics in the business. This is the time where we need to get the price back up to where we get good returns on the investments that have been made over. We're not shy about that, and we've been doing it consistently, and we'll continue to press forward.
Yeah, Dmitry, the team's been, I would say, pretty aggressive in the market, and appropriately so. We've seen outages in various places, and it's caused tightness. It is a regional business, as you've indicated, and clearly, those things have helped. The environmental restrictions around coal-fired plants in China are, we believe, helping that business and going to continue to help that business. One of the positive signs, and Bill mentioned this earlier, that we've seen is some pricing power in the derivative side. The pricing around BDO has been steadily increasing for the last four to six months, let's say. We have not seen that until very recently in derivatives such as NMP and THF. We're now seeing pricing opportunities in those derivatives, which I think it's a positive sign. More to come as we work through the next few months of this business.
rest assured, the team is very attuned to what's going on in the marketplace. They're very experienced, and they do a great job managing this business and the customer base.
Thank you very much. That's very helpful.
Thank you. Our next question comes from Jim Sheehan of SunTrust. Your line is now open.
Thank you. A question on Pharmachem. I think that I was a little confused about the seasonality of that business last quarter. I want to ask you about the cadence of the earnings for the rest of the year, second quarter to third quarter. If we think about it as a $60 million EBITDA type business, and it did about $5 million in the December quarter, does that mean it should do about $20 million a quarter in the second and third quarters? And just if you could, when you comment on that, also indicate what degree of EBITDA margin improvement should we expect sequentially in ASI overall?
In terms of the $5 million, I think the thing to keep in mind is that is inclusive of $5 million, $6 million of corporate cost allocation. On a contribution basis, you should think of it as, call it $10 million to $12 million for the quarter. That's what gets us to the $35 million of contribution margin or contribution EBITDA for the year. We would expect both the March quarter, June quarter to be stronger. As we move into the warmer months of the year, we'd expect that to improve.
Yeah, I think the key, Jim, is like we said, if you net out Tianpu and the role of the corporate allocations through seven months, you're about $35 million. If you just extrapolate that with, as we mentioned, there was some seasonality in Q4 that puts you right at about the run rate that you're talking about there, more or less. That's basically the math associated with it. As we look at the results in what will be our Q2, what would be a run rate to get us to the $60 from the $35 will have the same stamp and effect from the reallocation of the corporate expenses that we put on the business, just like we put on all businesses.
As I mention that, just want to emphasize again what Kevin has said earlier in this call, which is it's important as we talk about, we have a normal allocation methodology, but ultimately our spend across the corporation is expected to be flat year-over-year. That's not incremental and increased. I'm excluding FX and the direct cost of acquisitions. We're not increasing our spending. It's just the way it gets allocated across the businesses, and Pharmachem is part of Ashland now.
Great. Quickly on interest expense, you're using some repatriated cash to pay down debt, I assume. Should we expect interest expense to be falling throughout the course of the year?
Last week we did repatriate a little over $300 million, and we reduced debt with that cash. As you will recall, we talked about as we did the Pharmachem acquisition, the potential to move a large portion of that term loan A offshore and use non-U.S. cash to reduce that debt. Part of that was in fact included in our full year outlook from an interest expense perspective. There are a couple other components. We now have largely unfettered access to cash globally, although there are pockets where it's still difficult to get cash out of. China's an example. We should be able to more consistently repatriate cash that is generated outside the U.S., and it would be our intent, of course, to reduce debt with that cash as we bring it home.
Would I say there's probably some upside in our overall interest rate range for the full year, assuming availability to that cash? Absolutely. There's upside in that. I think the caveat to that would be we have about, call it around $700 million of floating rate debt, and the remainder's fixed rates bonds. Obviously the coupon doesn't move on that, but to the extent LIBOR were to put some pressure on rates, then that could obviously go the other way for us. We will continue to update throughout the rest of the year. We're pleased to have access to the cash. We've got another couple hundred million that we feel like we will be able to repatriate over the course of the year.
You should expect us to reduce debt with that, which not only reduces absolute interest rate expense, it also reduces interest rate risk, which is also a positive. That's where we are right now.
Thanks a lot, Kevin.
Sure.
Thank you. Ladies and gentlemen, this does conclude today's Q&A. I would now like to turn the call back over to Seth Mrozek for any closing remarks.
Thank you, Sonia. Thank you all for your time and interest this morning and your interest in Ashland. Hope everyone has a great day. Take care. Bye bye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.