Earnings Call: Q1 2018

Jan 30, 2018

Good day, ladies and gentlemen, and welcome to the Ashland Global Holdings, Incorporated First Quarter Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your 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 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 December 31, 2017 shortly after 5 pm 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 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 3 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 and A as a percentage of sales was down 110 basis points versus prior year. In addition, as expected, the integration of Pharmachem and the attained 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 was 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 And after a slow fourth quarter, we drove 12% sales year over year growth in coatings. This growth was led by $8,000,000 of year over year raw material inflation in Q1, and that's approximately $5,000,000 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 farm and adhesives. That said, pricing within the cellulosics 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 $8,000,000 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 and A increases were driven primarily by acquisition and currency. Combining the base, business and acquisitions, specialty ingredients revenue and EBITDA increased 14% 11% respectively. Also note that excluding the dilutive effect of acquisitions and divestitures, EBITDA margins in the base ASI business was up approximately 50 The integration of Pharmachem is going well. We have now identified approximately $15,000,000 of annualized cost synergies to be realized by the end of year 2 and after owning Pharmachem for just over 7 months, its EBITDA contribution excluding corporate allocations is approximately $35,000,000. 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 attained 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 $16,000,000 of raw material inflation versus prior year. Gross 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 INS, 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 $9,000,000 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 $8,000,000 And this game will be offset by approximately $5,000,000 Together, INS's adjusted EBITDA climbed to $16,000,000, up from near breakeven in the year ago period. All in all, Ashland's total sales increased 20% and adjusted EBITDA rose 25% to 136,000,000 Both sales and earnings were up year over year in all three reportable segments in the first quarter setting the stage for us to 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 $136,000,000 compared to $109,000,000 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 $24,000,000 during the quarter compared to $33,000,000 Re cash flow during the first quarter was negative $48,000,000 compared to negative $93,000,000 in the prior year These amounts include $23,000,000 in restructuring payments and $29,000,000 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 2nd 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 8 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 Furthermore, as a result of the 16% to 20%. The higher ETR for Ashland may seem counterintuitive to some as there has 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 That range is expected repatriate cash that is held outside the U. S. Just this past week, we repatriated over $300,000,000 and used it to repay debt. And while we will pay roughly $160,000,000 of one time repatriation taxes, Over 8 years, beginning next year, these payments will be largely offset by lower deferred tax payments that were accrued prior to the new of cash for the next couple of years will be debt reduction to reach our leverage target of gross debt at 3.5 times EBITDA. Keep in mind that this does not preclude allocating capital to bolt on acquisitions or share repurchases. Regarding SG and 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 HydroBot and Warsaw. In addition, we are consolidating our Columbus, Ohio campus footprint rent to be done in the June quarter, resulting in an annualized savings of approximately $6,000,000. During the first quarter, 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 and 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 and 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 percent for fiscal 2018, we have updated our adjusted EPS outlook for the year to a range of $2.90 is due entirely to the 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 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 $220,000,000 during this fiscal year. Lastly, we are currently evaluating possible changes to the way that we make operating decisions and assess 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. Now, 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 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 $1,000,000,000 of free cash flow. While we have The second quarter is an important period for specialty ingredients. To that end, we expect to see sustained buy 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 cellulosics portion of industrial specialties. ASN 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 4 operating facilities, our detolling efforts, which are gaining greater traction and we lowered turnaround expenses as many of our plant shutdowns were completed in Q1. And last but not least, the ASH team is working aggressively to drive 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. I and S has again raised prices. The benefit of this action will be partially offset We view this as just a timing impact as we saw the offsetting benefit with a turnaround in Q2 excuse me, Q1. The aggregate, for the fiscal year, excluding acquisitions and currency, we expect Ashland's SG and 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 a and impact on our book tax rate, we expect no material change to our expected cash tax rate of 20% to 25%. As a result, we believe we remain on track to drive more than $220,000,000 of free cash flow in fiscal year 2018. So 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 Ashlene, and we remain committed to delivering on results. With that, I say thank you for listening and your interest in Ashland. And I'll turn the call over to the operator to take your questions. Thank you. Thank Thank you. You. 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 a rough a $4,000,000 net EBITDA contribution from acquisitions and divestitures, which I guess includes pharma chem 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 Pharma Campbell, I'll first talk about the 7 months. So as Bill mentioned, approximately $35,000,000 of what I'd call Buchen EBITDA. So, ex any corporate allocations, that the business produced. Over that period got $2,000,000 to $3,000,000 probably of JV EBITDA that was not there. The delta between that would be corporate allocation With Pharmakim in the mix, we basically apply our methodology for allocating corporate costs to each of the businesses and pharmachem participates in that. So the way to think about it is, on average, 5,000,000 dollars, $6,000,000 a quarter of corporate cost would be ultimately allocated to the farm account number. If you want to apply that to to the first quarter. That would imply, call it, $10,000,000 or so dollars of EBITDA on ex corporate cost basis. Clearly seasonality in the business during the December quarter as we delve into it. And so 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 from an economics perspective. And we very much remain committed to managing those SG and A costs. And as I indicated, my comments on an overall basis, we expect the corporation to be flat for the year. So 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. And 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 Belgian facility. Can you simply comment on what inning you believe you're in regarding your pharma initiatives that you're no longer capacity constrained as well as the a significant mix benefits on an annualized basis. And 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 your doing this without any concern on pricing. I know that's the initiative, but just any confidence that would be appreciated. Thank you. Sure, Chris. Thank you. That's good questions. And in fact, it's we do see the momentum building from a demand standpoint in the key product areas that you mentioned out of Dual with Benecel and also out of our Hopewell expansions. And Klucel is one of the products and These are some of our most differentiated products. And with that, really the gains that you see in Q1 are the result of those activities. And we see demand building in those areas. Our customers who we weren't able to buy effectively or consistently now understand and have the confidence to have more of that business with us And so I would say that a significant or great amount of our current and targeted growth are in these more differentiated platforms they're really in these areas are very few competitors and our products are differentiated even by the nature of how they perform. So 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 clue cell capacity with customers. So 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. We saw really good volume mix out of that business in the quarter, very strong performance. And we've been bullish on pharma. We remain bullish on pharma and really it just comes down to the team executing on on the new capacity and continuing to drive that value through the system. Thank you. Our next question comes from John Roberts of UBS. If the volumemix 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. Volley mix was a positive contribution. Certainly, at the profitability level, it was also a 2% contributor to the top line for specialty. Okay. And then should the tax rate in fiscal September 2019 come down from a full year reform or not really since the U. S. Taxable earnings are still going to be in a modest loss even after the debt reduction? Yes, John, it's a a great question and 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 simplification is really, in fact, not true. And so we have to work through that. Each provision, 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 that's probably gonna be something that we have to deal with because not all of our interest is likely to be deductible stability as the capital is spent in the U. S. And so there's offsets to be had there. And those are just a couple of examples of really many that our internal team and our 3rd party advisors are working through as we try to figure this out. And I think a lot of companies are frankly in the same boat if they're as global as we are. And so 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 based on where we are right now, I wouldn't expect the range to get worse. And I think it remains to be seen if the ETR range can in fact improve from the 16% to 20% that we're currently using. Again, we see no material impact on the overall cash tax rate absent the one time repack costs we'll be paying over 8 years, which is largely offset by reduction in deferred tax liabilities due to the lower rate. Our next question comes from Mike Sison of KeyBanc. Your line is now open. Hey, guys. Nice start to the year. In terms of ASI, your guidance would imply that. Need $150,000,000 to $160,000,000 EBITDA per quarter, after a seasonally slow first quarter. Can you maybe help us understand how you get that ramp, particularly in 2Q? And then is there any seasonality between that number for the rest of the other quarters? Kevin, why don't you speak to the seasonality and I'll speak to the ramp, if you will? Yes, yes. I mean, really what we should see is frankly positive season coming out of Q2 and Q3, which basically gets at the ramp concept as well. Those are typically the strongest two quarters within within ASI. And frankly, Q4 isn't typically far behind. If you look at it on an overall basis, Q2, Q3 will be strongest quarters. And 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. Seen good benefits from that. We should see that accelerate as 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 primarily in the industrial area. Kevin stated it very well, so no need to repeat 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 and A control, manufacturing. We see the momentum building there. And 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. And then In terms of the raw material inflation for ASI, what is the the basket of raw materials that go into ASI, what's the increase in costs that you need to offset, so like low single digits, mid single digits. And then can you just remind us what the major inputs for the cellulosics are that you need that you need to overcome? So just in general, within ASI, some of the key raw materials are butane, which can go into BDO, of course. Cotton winters which, which, of course, and wood pulp, which goes into, to cellular 6, you have other key materials, polypropylene ultimately works way through as well. So those are some of the key raw materials that have been impacted, if you will, in the in the, we'll say, last 6 months or so. And just to put it in perspective, we 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 $26,000,000 year over year. That's assuming that prices don't go down or they don't go up further. But that's the amount that we need to overcome with our pricing Great. Thank you. Thank you. Our next question comes from Lawrence Anzer of Jefferies. Your line is now open. Good morning. Two questions. Can you flesh out a little bit? You're thinking about the ASIS utilization and how much of it 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? And secondly, can you give us some sense of the trends you're seeing in your construction and energy markets? Sure. I mean, 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, right? Depending upon whether you had one in the prior year. But 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 asset that lowers the cost across all units. And of course, if we can reduce the overall spend rate, that's another way to make improvements kind of numerator and denominator math there. And so we're focused on, for example, in the, in the cost portion being better more precise with our shutdowns, making them shorter in duration and focusing on reducing their costs. And also consolidating facilities and our footprint where possible. So we have Lean Six Sigma programs, which are also be not only to drive productivity, but to reduce the cost. And then you have the absorption effect, which really comes from selling incremental volume through see in back 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, that will help on the absorption equation. So I would say overall, we anticipated continuing through this fiscal year. Again, it may be a little lumpy from one quarter to another and 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. And 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 and overall, we saw construction down versus prior year. Thank you. Our next question comes from David Begleiter of Deutsche Bank. Your line is now open. Bill, just to 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, sure. And this is how I would characterize it is. We have a lot of very differentiated products and and a lot of contracts associated with those. And some of those contracts, we have cycles to them. So it takes a little time to pass those prices through are those raw material inflations through with some of our larger key customers with some of our more differentiated products because of that structure. But 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 value, but also offsetting the raw material inflation. And I would like to highlight, Tom, not in 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. And 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 working to make sure that we are truly, competitive on a global scale regardless of the segments that we're competing in. Very good. And just on BDO, you offer a strong start in, for the year. I know you have some turnaround costs in Q2, but Can you give us your view of the video cycle and is there some bias to the upside for I and S EBITDA guidance for the year given the video cycle? Sure. So, and we really want to highlight the, of 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. But again, you do need to factor in now we'll have last year, we'll have this turnaround in Q2. But overall, we have been able to consistently increase prices in the market place 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 is at a force majeure making the supply demand dynamic even tighter. And so 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 is upside at this point because we need to see how the dynamics play out. But but 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, of if you will, that equation. And again, I just bring it up because it's a point to note. And 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 that's having on whether it be cost or access to energy and operations of facilities. And we've been studying that and looking at that And then 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. And it may mean that there's some further upside 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. Yes. And what we'll obviously commit to is as we get through Q3 and we get more visibility into the rest of the year. Clearly, we'll update our outlook for the business based on most current knowledge that we have. And so you expect to hear from us on the next call relative to that. Thank you. Our next question comes from Mike Harrison of Seaport Global. Just going back to the ASI business and some of the timing of, 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? And 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? In the quarter in Q1, the turnaround expenses were about $2,000,000 higher versus prior year. And we do have turnarounds really throughout the year, the you have I'll put that in 3 buckets. You have the large plan to turnarounds. You have and 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. And so that's why we see some upside associated with that going forward. Got it. And then just looking at the coatings, 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 twelve percent growth was some restocking after a year that obviously was, ended up being weaker than a lot of your customers may have anticipated. Right. And thanks for that question. There's some 2, I'd say, important parts in answering that. And one is I recall is 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. And 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, and 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 volumemix equation and better utilize our capacity. It's really to me a combination of the 2. Thank Our next question comes from Jeff Zekauskas of JP Morgan. Your line is now open. Your specialty ingredients tonnage was flat year over year at 73,000 tons. And the tons from Pharmachem has to be larger than the top the exited tons from the China JV. So I think your volumes in the quarter were down. How much were they down and in which areas were they down? So, 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. And this followed very, very closely and very logically with the mix impact we saw higher value pieces of the business care, farm nutrition and coatings contributed strongly to the mix equation and also from a volume perspective. And to provide just a little bit more color to the overall equation, we think about the business often times as a consumer business. And in industrial business, we talk about it that way, our consumer volumes tend to be lower and higher value. The industrial volumes tend to be much, much higher and obviously lower value. Roughly it's roughly a thirtyseventy split between consumer and industrial. So the point of that is increases on the consumer side really drive a lot of value to the overall equation. And 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 we move on the industrial side. And that's really how the overall equation works. So, and Geoff, just to add a little more color, and I think this hopefully we'll 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. And 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. And the equation that we hold our team accountable to is the aggregate of that. And we've actually modified our sales incentive programs to mirror that. So we would rather drive a richer, richer mix and earn more money than simply drive volume. And on the other hand, if we can drive volume and mix at the same time, all the better. And if we can do that while getting price, that's the best of all worlds. But the combination that we look at in the aggregate, and that's what we hold our commercial teams accountable for And then 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. So that's just how we're looking at it. And I think it may be reflected in kind of your broader question. Right. Okay. Thank you for that. And 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 And can you say sort of what a normal tonnage level is? But first, what's the highest tonnage you've ever produced? I don't know exactly what the highest tonnages nameplate capacity on our two plants is 160,000 tons on a combined basis. It's $100,000 for the Marlborough, Germany facility, $60,000 for the Lima, Ohio facility. We have in the past produced in excess of that. You could think about it in terms of what's possible 165,100 or so tons is probably about the number. But that's a generalization, the best piece of information. 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. And changes in inventory, which can move around by 5,000, 10,000 tons, depending depending on what demand is, where demand is, and time of year and that sort of thing. So that's those are really the 3 components It's production, internal utilization and inventory 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. First priority is to serve our need internally. And then 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. And our next question comes from Dimitri Silversteyn of Longbow Research. Your line is now open. Good morning. Thanks for taking my call. A couple of questions. First of all, just, you obviously had a very good growth in coatings. I think something like 18% volume on some customer gains as well as, which you mentioned is timing of orders. Obviously, last quarter 0% was not number to use this quarter's 18% is probably not a good number to use. So 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. 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. And I would think that in the 3% to 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. So we could see some additional growth as a result of that. But if you look at our base business, the core customers on geographies that we serve, I think that 3% range maybe 3% to 4% would be the targeted range. So with that in mind, for 2018, I mean, obviously, we're going to see something more than that because of the customer gains that you mentioned having. So can we look at some single digit growth for this year? We I wouldn't say that that's an unreasonable outlook. That being said, as we've seen, especially over the last few quarters, you do see some volatility that grows 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 won't be a slow one. Think last year, we felt that it was comparatively slower. It didn't feel robust. Obviously, we're cautiously optimistic that that will be a more positive but 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 kind of an industry average that I was describing just a minute ago. So we should have a good read on that over the next quarter here, I would think. As we get into the painting season, makes sense. And then just a quick follow-up on the BDO issue. BSF 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's a regional market. Can you talk about sort of what your what you're seeing in the markets as far as tightness or availability of supply, even before this BSF 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 a tighter supply situation, which is, 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 purchase from us a little less consistently than and we're 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 stock spot purchases elsewhere. And we were positively surprised in a number of incidents to see those companies come and say, okay, that's if that's we'll move forward on those terms. So this is one that can change with the supply demand shift, but right now, there's nothing that makes us feel like the trend the positive trend and the tightening trend isn't continuing. And with that, we believe that I mean, you look at the pain that we took when there was an excess of supply, act to just 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. So we're not shy about that. And we've been doing it consistently. And we'll continue to press forward. Yes, Dimitry, the team's been, I would say, pretty aggressive in the market and appropriately. So as we've 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. I mean, 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 4 to 6 months, let's say, but 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 is a it's a positive side. So, more to come as we work through, as we work through the next few months of this business. But 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 in the customer base. Thank you very much. That's very helpful. Thank you. Our next question comes from Jim Shannon 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. So I want to ask you about the cadence of the earnings for the rest of the year in 2nd quarter, 3rd quarter. I mean, if we think about it as a $60,000,000 EBITDA type business, and it did about $5,000,000 in the December quarter. Does that mean it should do about $20,000,000 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? So in terms of the $5,000,000, I think the thing to keep in mind is that is inclusive of 5,000,000 dollars, $6,000,000 of corporate cost allocation. So on a contribution basis, you should think of it as, call it, $10,000,000 to $12,000,000 for the quarter. And that's what gets us to the $35,000,000 of contribution margin or contribution EBITDA for the year. We would expect both the March, the March quarter, June quarter, to be stronger. So as we move into the warmer months of the year, we would expect that to improve. Yes, I think the key, Jim, as I like we said, if you net out the shampoo and the role of the corporate allocations through 7 months or about $35,000,000. And 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. So That's basically the math associated with it. And 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 stansive effect from the reallocation of the corporate expenses that we put on the business just like we put on all businesses. And as I mentioned 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 But ultimately, our spend across the corporation is expected to be flat year over year. And so that's not incremental and increased And I'm excluding FX and the direct cost of acquisitions, but we're not increasing our spending where it's just the way it gets allocated across the businesses. And Pharmachem is part of Ashland now. Great. And then 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? So last week, we did repatriate a little over $300,000,000 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. So there are a couple other components. So we now have largely unfettered access to cash globally, although there are pockets where it's still difficult to get cash out of China as 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 to reduce debt with that cash as we bring it home. And so when I say there's probably some upside in our overall interest rate range for the full year, assuming availability of that cash. Absolutely. There's upside in that. I think the caveat to that would be we have about call it, around $700,000,000 of floating rate debt. And the remainder fixed rates bond. So that obviously, the coupon doesn't move on that. But to the extent LIBOR were to put some pressure on rates then that could obviously be go the other way for us. So 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 of 100,000,000 that we feel like we We'll 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 in all and also reduces interest rate risk, which is also a positive. So that's just that's where we are right now. Thanks a lot Kevin. Sure. Thank you. And ladies and gentlemen, this does conclude today's conference call. I would now like today's and A. I would now like to turn the call back over to Seth Mrozek for any closing remarks. Thank you, Sanu. Thank you all for your time and interest this morning and your interest in Ashland. Hope everyone has 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.