Good day, ladies and gentlemen, and welcome to the Ashland Global Holdings Inc. second quarter earnings call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero. As a reminder, this call is being recorded. I would like to turn the call over to Mr. Seth Mrozek. You may begin.
Thank you, Michelle. Good morning, everyone, and welcome to Ashland's second quarter fiscal 2017 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 March 31st, 2017, at approximately 5:00 P.M. Eastern Time yesterday, April 25th. Additionally, we posted slides and prepared remarks 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 the 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. Yesterday was a momentous day as we announced the final step in the Valvoline separation. As you may have read, on May 12th, just a few weeks away, we will be distributing all of Ashland's remaining interest in Valvoline to Ashland shareholders. This represents the final step in our journey to create two great companies, both positioned for success with the flexibility, strategic focus, and financial resources needed to generate revenue and earnings growth. It also represents the beginning of exciting new chapters for both the new Ashland and Valvoline. From a new Ashland perspective, we are focused on Ashland's two core priorities for the year. The first is to position Ashland to deliver against our fiscal year 2017 plan, and the second core priority is to pivot Ashland to reach its full potential as the premier specialty chemical company.
I'd like to first speak to the subject of building the premier specialty chemical company. As a core part of that objective, it relates to continuing to upgrade and enhance our portfolio. To that end, last month, we announced an agreement to acquire Pharmachem Laboratories, a leading provider of quality ingredients to the global health and wellness industries, with high-value differentiated products offered also to fragrance and flavor houses. With this acquisition, we see a number of exciting growth opportunities as it will strengthen our specialty product portfolio, particularly in high-margin end markets. It also enhances our position in fast-growing nutraceutical end markets. It opens new opportunities within flavors and fragrance, and it strengthens Ashland's food ingredients business by adding customized functional solutions.
We believe that by combining Pharmachem and Ashland, we can leverage our extensive sales channels, technical service network, and global application labs to accelerate Pharmachem's growth while also generating significant cash flow. We expect to complete this transaction by the end of June and look forward to welcoming Pharmachem's talented employees to the Ashland team. Returning now to our performance in the quarter, Ashland's overall financial performance reflects significant progress in a number of key areas. Within Ashland Specialty Ingredients, the team delivered volume growth of approximately 4%. Sales were up 3% to $544 million, driven by increased sales in most of ASI's key end markets. Consumer specialties grew 2% year-over-year in sales, with the strongest growth coming from personal care. It is important to note that the personal care team generated stronger results across all of their end markets this quarter.
In pharma, the team worked to optimize our sales mix. To be more specific, what we're doing is we're migrating production assets away from lower-margin products to higher-margin products. Next week when we meet at our Investor Day, we're going to speak more to this type of product mix upgrade activity. Within ASI's Industrial division, the team drove strong volume gains across all of their end markets. From a regional perspective, ASI saw strong customer demand in China. It's important to note the team also did a great job in controlling SG&A, which was down in ASI by about $1 million year-over-year. Despite these gains, overall ASI EBITDA was flat versus prior year, and that was due to negative impact of rising raw materials and currency in the quarter.
Later in the call, I'm going to speak to the actions ASI is taking to sustain revenue growth while improving its profit trajectory. Moving now to Ashland's Performance Materials. The team delivered sales of $262 million, which represents a 10% increase over the same period prior year. Adjusted EBITDA was $23 million, which was consistent with the outlook provided at the beginning of the quarter. This was a good result and a good outcome as the composites team generated 5% volume growth during the quarter, driven by solid demand from customers in North America and China. I'd like to note that shortly after our January earnings call, a major supplier of one of our key raw materials for composite, styrene, announced a force majeure which resulted in dramatic cost increases.
The composites team responded quickly and aggressively, their first priority was to ensure continuity of supply to their customers. At the same time, the composites teams focused on driving price increases to offset these increases in raw material costs. Both of these efforts were successful, although there is a lag in the quarter between the timing of raw material price increases, which were immediate, and finished good pricing, which followed 30 to 60 days laters. That did have a negative impact on composites margins in Q2. Net-net, the composites business drove 10% sales growth, which was more than offset by the increased raw material pricing in the quarter. The good news is that based upon the price increases put in place, the impact of raw material inflation in composites is expected to be fully offset in the second half of our fiscal year.
Moving to the Intermediates and Solvents portion of APM. The Intermediates and Solvents team grew volume by 21% and sales by 8% as improved demand offset substantially lower selling prices. As anticipated, I&S earnings were below the prior year as BDO pricing was down versus last year. The good news is that during the quarter, the I&S team increased prices substantially and now expects year-over-year pricing to more than offset raw material inflation in the second half of the year. We are optimistic that this is the beginning of the market recovery we've been anticipating for some time. Finally, moving to Valvoline. This will be the last quarter that we'll be referencing Valvoline's performance, I encourage you to read their earnings release where they profile good gains in lubricant sales on both a sales and gallons basis.
I'd like to congratulate the Valvoline team on another strong quarter, but more specifically, thank the team for all their many contributions to Ashland over the years. I'll now turn the call over to Kevin to discuss some corporate items.
Thank you, Bill, good morning, everyone. In the quarter, we reported GAAP earnings from continuing operations attributable to Ashland of $1.42 per diluted share. When adjusted for key items, earnings per share attributable to Ashland were $1.71, and adjusted EBITDA was $247 million. While these amounts are below the prior year, remember that they do not include the Valvoline net income attributable to Ashland's non-controlling 17% interest, which totaled $0.21 per share on a diluted basis a year ago and $24 million of adjusted EBITDA. As Bill just mentioned, ASI delivered sales and volume growth. Overall, APM earnings were consistent with our outlook as both composites and I&S delivered solid volume growth. With respect to Pharmachem and the balance sheet, as Bill just mentioned, we expect to close the transaction by the end of the June quarter.
We intend to finance the transaction through a combination of bank debt and cash on the balance sheet. We expect the incremental interest expense to be approximately $20 million per year, and paying down debt will be our primary use of free cash flow until we achieve our targeted leverage ratio of 3.5 times gross debt to EBITDA. Based on current projections, we think it will take a couple of years to reach that target. Furthermore, Ashland's liquidity remains strong. As of March 31st and excluding Valvoline, we had cash and borrowing capacity of nearly $1.3 billion. Our effective tax rate for the second quarter, after adjusting for key items, was 24%. This was below our estimate of 28%-29%, due primarily to discrete items and income mix during the quarter.
For the third quarter of fiscal 2017, Ashland expects an adjusted annual effective tax rate of 10%-15%, reflecting Ashland's global footprint and the full separation of Valvoline. In looking at cash taxes, we estimate that post-separation, Ashland's cash tax rate would land in the low to mid-20% range. The biggest difference between the book and tax rate and cash tax rate is related to intangibles that run through the effective tax rate but are not deductible for cash tax purposes. However, cash taxes will also be influenced by income mix and discrete items, not unlike the book tax rate. Our current estimate for free cash flow, excluding Valvoline for fiscal 2017, is now $90 million-$100 million, including $60 million-$70 million of one-time separation and severance related payments. The reduction is being driven primarily by investments into working capital related to the increase in raw material costs.
We should get this back through pricing actions over the course of time. While the team is working to mitigate these effects, it will take some time to do so.
I'll turn the call back over to Bill.
Well, thank you, Kevin. Turning now to our outlook for the third quarter and full fiscal year 2017. Within ASI, we see continued sales growth in the second half of the year. For the third quarter, ASI sales are expected to be in the range of $535 to $565 million. The team is working hard to offset raw material inflation, which is expected to represent approximately $9 million of incremental cost in Q3 and $16 million for the second half of the fiscal year. More specifically, the team is working to accelerate sales of new product introductions such as Endurance, which we will talk about next week at our Investor Day, but was recently recognized with the gold medal at the in-cosmetics show.
The team is also reducing SG&A spending. More specifically, they are working to realize the impact of our price to value initiatives, which we will also discuss next week at our Investor Day. As a result, we estimate ASI's adjusted EBITDA in Q3 to be roughly equal to prior year, which is at the center of our outlook range. Beginning in Q4, we expect to see the positive impact of Pharmachem, which could be in Q4, $10 to $15 million. With this addition for the full year, we are narrowing our outlook range for ASI adjusted EBITDA to $485 to $500 million. For APM, we expect to see the result of our pricing initiatives having a positive impact in the quarter.
APM expects third quarter sales to be in the range of $260 to $280 million. Adjusted EBITDA in the range of $27 to $33 million versus $30 million in the year-ago period. Perhaps more importantly, we are increasing our full year APM forecast and now expect full year EBITDA for the segment to be in the range of $100 to $110 million. Before leaving APM, I would like to make a quick note on another acquisition we announced earlier this month. In early April, Ashland announced that we have made a binding offer to acquire a composites resin manufacturing facility in Étain, France, from Reichhold. This facility manufactures unsaturated polyester resins, or UPR. They are used in a variety of end markets such as transportation and construction.
The transaction, which is expected to be completed by the end of June, is really a unique opportunity for us to strengthen our cost competitiveness and position the European composites market at a highly attractive price with very compelling terms and conditions related to the purchase. Now in summary, thus far this fiscal year, we have really made some great progress in key areas. I think yesterday's separate announcement that Ashland will be distributing all of its remaining interest in Valvoline to Ashland shareholders on May 12th represents an important and final step in our journey to create two companies. Within ASI, we are driving sales and volume growth in the majority of our key end markets. We must build on that momentum in the second half of the year and fully offset raw material inflation with pricing actions.
Within APM, both the composites and I&S teams have raised prices already to help offset the expected impact of raw material inflation in the second half of 2017. It's worth noting that we've also been taking aggressive actions across the globe to hold our year-over-year SG&A constant through various cost savings initiatives. We have a lot more to share with you about our strategies and performance targets when we hold our Investor Day next Monday. I encourage you to attend or participate by webcast. Thank you for your interest in Ashland. I will now turn the call over to the operator to take your questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, you may press the pound key. Once again, to ask a question, please press star then one. Our first question comes from Laurence Alexander of Jefferies. Your line is open.
Hi, good morning. This is Jeff Zekauskas on for Laurence.
Good morning.
Good morning. If I take the midpoint of the EBITDA range for ASI at $492 million and performance materials at $105 million, take out corporate overhead at $30 million, layer in Pharmachem at, say, $60 million, and adjust for restructuring to fully offset costs related to the spin, is it fair to peg that EBITDA floor for building a bridge to 2018 at roughly $650 million before allowing for organic growth and FX? As a follow-on, what core competency does Pharmachem give you, or is it more of a matter of a broader distribution channel? Thank you.
I'll take the first question. I think it's too early to actually be talking about fiscal 2018. We've got a lot of moving parts right now, as we move through the remainder of fiscal 2017, we'll provide more color around what we expect 2018 to look like. We'll also be talking about broader performance targets over the coming several years next Monday at the Investor Day. Rather than providing what would be or could be a pretty specific number, I'd prefer to hold off on that for a while. It's just too early. As for the addition of Pharmachem, clearly there is a very complementary component of the business. The overlap of the business in terms of augmenting the range of solutions that we can provide to customers, taking our Excipients technology and working in the nutraceuticals area.
They have very advanced manufacturing capability in granulation and co-processing, which is very beneficial to us, actually will allow us to do certain activities in-house that we've had to toll in the past. The flavors and fragrance, that really brings some new chemistries that will augment our existing portfolio where we offer, for example, encapsulation technology that also helps within that broader realm. I think there are specific technologies that they bring, they do have very specific chemistry technology they're bringing, along with their know-how and advanced manufacturing capabilities, will be very complementary to the businesses that we have, most specifically in the personal care and pharma nutrition.
Great. Thank you.
Our next question comes from John Roberts of UBS. Your line is open.
Thank you. Could you talk about some of the ASI raw materials? You transfer BDO into ASI and buy cellulose and propylene and some other derivatives there.
Yeah, sure. Morning, John. In the quarter, we did see some increase in cost related to BDO transfer from within our own company because, as we described, the raw material cost in that business went up. That represented about a million and a half dollars worth of the increase. Some other areas where we're seeing some increases really are around cotton linters, which are up a bit due to supply and demand and some activities within China. In general, dynamics that are going in polypropylene. We do have some things that are going in our favor. I would describe the raw material market as being a little more volatile. The fact that crude oil is up by about 7.5% versus where we were at the end of the calendar year, those are things that are impacting the raw materials for the business.
What's most important is it's our responsibility, and we are taking actions to offset that raw material inflation, some of which is through pricing, other is through cost. Of course, we're trying to drive a premium mix. I hope that answers your question.
Yep. Secondly, does the French deal position composites as capable of being a core specialty business longer term? It just improves its position, but you still, at some point, need to address its role in the portfolio?
I'll try to respond to your question, but I would encourage you to, if you can participate in next week's investor meeting, because we will specifically talk to the role of each parts of our portfolio. I think what's important, first of all, on the acquisition that we're making, again, it was under very attractive terms, and it provides some really great synergies as we try to drive that business more efficiently and while serving our customers. We believe it'll be very positive or have a very positive impact on our overall composites network. As for the role of composites, I think we've been very clear that the team there actually does a really great job of seeking out specialty portions of the marketplace, like the vinyl ester resins that are used in flue gas desulfurization and other activities.
We also recognize that there is a volatility, or if you will, they aren't the same margin profile that you have in a specialty chemical company. At the same time, the team's done a really good job of managing their cost down. They've been able to improve their contributions to our company. Our focus really is to take that business, which, by the way, also has strong cash generation, and really focus on driving greater, if you will, growth from earnings. We're not looking to make it a more sizable business. It may grow a bit, but we're not looking to make it more sizable per se. We do see it as a valuable part of our portfolio. Down the road, we'll assess what makes sense across our entire portfolio.
For today, and for the foreseeable future, we see it as an important part of what we do. Again, I wouldn't underestimate the role that they have in terms of providing cash and cash, a significant portion of that in the U.S. here, where we have some pretty strong cash needs.
The only other thing that I would add to that is that the business also covers a certain amount of somewhat fixed corporate costs that would have to be otherwise managed out if it weren't in the portfolio. There's a pretty strong contribution to the overall financial health of the business with regard to that as well.
Yeah. I would just add, because you were referencing. We're going to share next week a definition of what we think is a true specialty business. The composites business has some attributes of it, not all attributes of what we would consider to be a true specialty chemical company business. I will say that the team is one that has really done a good job of focusing on trying to expand the role of differentiated product sales, which have a higher margin profile within their business. They go at it the right way. I don't think it's To me, it's not your average UPR business. I think we've got something that performs at a higher level.
Our next question comes from David Begleiter of Deutsche Bank. Your line is open.
Morning, David.
Good morning. Bill, in ASI, is it taking longer than you have expected to get pricing through to offset the higher raw material costs?
Well, first of all, the raw material inflation that we saw and are referencing, really, it popped up primarily after the earnings call that we had in January. It takes a bit of a time to respond. We have annual contracts and other things. We do expect to fully offset the impact of raw material inflation. Some of that will be through pricing, others will be through other cost activities. One of the things that we'll touch on next week is there are areas where we have, we'll say, more pricing leverage within our portfolio, and we can move things along more quickly. Pharma, nutrition, personal care would be those areas, and certainly select segments in the industrial market.
There are some other areas where the reality is that we have to work harder and the industry as a whole has to see that inflation ultimately ending in raw materials or price increases. We've got a good split, with the majority of what we do driven by those things where we have some pricing leverage. Like we're going to explain next week, there are pockets where we are somewhat subject to what's going on within our broader industry. As you can imagine, where used cellulosics, and I'm getting into some stuff we plan to talk about next week, but where we sell some of that for specialty grades and pharmaceutical materials, it's a lot easier than when we're providing maybe some MC that goes into concrete applications. That's the scenario or the broader picture.
At the same time, we see opportunities, and especially in some of those more price-sensitive areas, to price to value, which I will wait until next week to go into. Frankly, to make sure that we are running our network very efficiently so that they are not only very competitive, but we can offset inflation of raw materials and make sure we continue to deliver profit growth. I think that was probably more than you were looking for. We're all geared up for our investor day, and these are some of the themes, to the great extent, we do expect to offset it. Most of that will be through pricing. Some will be through some other activities.
Very clear. Just lastly, in ASI, Bill, 4% volume growth in Q2 is a strong Q1 as well. Is that type of volume growth sustainable in the back half of the year for ASI?
Well, certainly we have seen the growth, one of the things we'll show next week is that in our core segments, they have been growing. We've talked about this over the years, now that we have a lot of the static of other items behind us, really, I think you'll continue to see volume growth in the aggregate for the business. Yes, I won't say it's going to be 4%, could be more, could be less, we do expect to see volume growth in the second half of the year.
Our next question comes from Chris Parkinson of Credit Suisse. Your line is open.
Thank you. Can you just give us a quick update on your ambitions for a new core product growth across personal care, pharma, coatings? I think you already had a few things in personal care, specifically hair care, I guess, coatings last year. Just anything else you're looking at which could benefit the end of the fiscal year or into even fiscal year 2018? Thank you.
Yes, you bet, Chris. Good morning. I apologize and I'm not pushing off these questions. Next week, you're going to hear from each one of the business leaders, and in their presentations, you're going to hear about some specific products which are having an impact on our sales today and will in the future. Ultimately, we need to drive, and we're targeting 30% of our sales from new and proprietary products, and we believe that that's essential to allowing us to offset, if you will, other elements of the portfolio that just naturally mature over time. I would say, since we have specific case examples next week, I'd rather talk to them there. The opportunity I referenced before, where Endurance, where we were able to introduce a product which is based upon our hybrid technology, something we've been talking about, and really is unique.
Unique in the terms that it penetrates the hair and actually heals from within. This is different technology, a different approach than other materials which tend to deal with issues on the surface of the hair. We have a number of large end customers who are actively working to formulate that into their end product. If I can, I'll defer more specific detail because that'll be, I think, a pretty important part of our presentation next week, and you'll get that granularity that I think you're looking for.
Still fair. Also, just very quickly on your M&A strategy, can you just give any broad highlights without spoiling anything for next week regarding your new F&F exposure gained from Pharmachem, as well as elaborate on your previous comments regarding the Pharm end market? I guess that's also been a focus. I'm sure you're always searching across your entire portfolio, but these two seem like they could be an area of focus. Do you have any general thoughts as we progress forward? Thank you.
Well, certainly, and it's important to note that as we complete the acquisition of Pharmachem, one of our first and foremost priorities is to onboard that business smoothly to make sure, of course, we sustain safe and responsible operations as they have, and is important to us, that we keep our customers happy, and that we keep our employees engaged. We have lots of ideas for, if you will, commercial synergies, technology synergies, where the businesses can complement each other. I'd also emphasize that as we justified the acquisition, the criteria that we used didn't include any of those potential benefits. It was really based upon cost and tax-based synergies, and feel very good about the associated returns because of that. In the Pharma market, I think what you'll hear is that there really are some new pockets leveraging some of our core technologies.
For example, we've really grown our cellulosics portion of our portfolio in the pharma sales, giving new functionality in the market space. We do see emerging mega trends which allow us to move forward with a variety of new, very close adjacent technologies, which we're working on, and frankly, Pharmachem will help us with. In the personal care area, biofunctionals are becoming a more and more important part of what we do. We think we're very well positioned with the work that's been done over the course of the last several years. I hope I got your question there, and if not, please clarify, and I'll try to clarify for you.
Our next question comes from James Sheehan of SunTrust Robinson Humphrey. Your line is open.
Good morning. With respect to ASI raw materials, it looks like you've got some exposure there to propylene and butane as well as cotton linters that have moved up on you. The propylene and butane prices seem to have fallen in the last few weeks here, and maybe that cost pressure is dissipating. Can you talk about just the overall cost pressure you're seeing and whether in the current quarter, if that has eased considerably since last quarter?
Certainly. That is good news. I'll point out another one, that last year, the euro was at EUR 1.13, and when we started a month ago, it was down at about EUR 1.05, EUR 1.06. We've seen a nice recovery, which is reflected in our forecast here. From a raw material standpoint, we have projected forward, and we just had a detailed review, what we think is a balanced view as to those prices going forward, and reflected that in our outlook. Like you, we would love to see some of these raw materials continue to go down and have that work its way through to the raw material. We hope that that will be the case, but we also use a phrase here that hope is not a strategy.
We're going with the best information we have right now, and it would be great if we could see some upside, and it's possible. There has been volatility. In January, a lot of what we were talking about wasn't as prominent. We've seen some big spikes up, and then we've seen some relief. Certainly, with the butane, that reduction is helping. That's part of what we were referencing in terms of the BDO business. That will help the BDO business as it goes forward and was part of what allowed us or made us feel more comfortable raising our outlook for that part of the business.
Ultimately, if those lower prices sustain over time, they will work through inventory, as Bill indicated. It's been the volatility of some of those raws up and down that cause us to, I guess, be perhaps a bit cautious in terms of the second half of the year.
In cellulosics, do you have any ability to switch from using cotton linters to wood pulp?
We do have some flexibility, and to a great degree, it depends upon the specific applications that we're working with. In some of the very high performance areas, you're really limited to a specific set of raw materials that you've qualified in the product. Other areas, we do have more flexibility, and as we're referencing, that's part of making sure that even with the type of volatility that you can see in raw materials, that we find effective ways to offset it. That's certainly something the team is looking at. We are also engaging our research team, which is very capable in terms of developing new technologies, but it also has really great capabilities to, if you will, evolve our formulations.
They're spending more time and energy trying to help us improve our manufacturing processes and the related costs and look at raw material substitutions that can optimize our formula from a cost standpoint. We think that's an important component of success going forward.
Finally, are you seeing any rebound in your energy business?
We are. That business was up pretty substantially, if you will, over the prior year. I'm just taking a quick look in quarter two. If you give me just one second here, because I have it. I believe it's around 9% that we saw an increase in energy. Right, I'm just taking a look here. More like 5%, 6% in energy. That's great to see. It's not the portion of our portfolio that it once was, and frankly, because of the cyclicality, we're not trying to make it front and center in our strategic focus. On the other hand, it's really great to help on the volume side. When you see that demand increases, it not only helps us because we get additional revenue, but when you look at cellulosics capabilities around the globe, a significant part of that goes to energy applications.
When demand picks up, that means that there's greater utilization of those assets. When there's greater utilization of those assets, that does affect supply-demand dynamics in some of these areas, which are a little bit more price sensitive. It's a good trend, and I wouldn't say it materially moved the needle for us, but as it continues, it could have a healthy effect on our business in total.
Just to put it in perspective, on a trailing 12 basis, energy is about 2% of ASI revenue.
Thank you.
Our next question comes from Mike Harrison of Seaport Global Securities. Your line is open.
Morning, Mike.
Hi, good morning.
Morning.
Morning.
Bill, I was wondering if you could talk a little bit about the integration process with Pharmachem. If you look back, it predates your time with the company, but when Ashland acquired the ISP business, the integration with the Hercules assets was expected to be kind of a home run, and it really, I think the execution, you could say, didn't go very well. I was wondering if you could talk a little bit about what lessons were learned during that process, how you're going to avoid some of the mistakes of the past, particularly as we look at new product commercialization and that process.
Sure. What I would say is, I wasn't here, I really don't have anything. Perhaps Kevin could comment on the ISP integration. What I can tell you in this case, I referenced our priorities going forward, we think that the businesses that we're acquiring are strong, with strong leadership. We recognize that while they're very complementary, their imperatives are a bit different than the imperatives that we have for success in some of our other markets. We will have an integration manager, of course. We will be, if you will, setting really clear guidelines that our goal is to not make any major adjustments in the business for at least a six-month period.
After that, once the Pharmachem team knows Ashland a little better we know Pharmachem a little better, we'll think of what steps make sense and what the appropriate timing is to get at some of the synergies that we'd like to see, whether they be cost or revenue based. I think we start from a position, again, this isn't in contrast to ISP, it's just in general, of respecting the team and their business, not coming in with the hubris to think that we know their business better we can drive lots of fast synergies. We want to be very methodical about this, the business is a healthy business. We're not looking to overwhelm it and make it Ashlandized. We feel very good about what that means, what Ashland means.
I don't mean to imply anything bad, but we've got to make sure we support what has made this business have a really strong track record of continued growth and success. I can't comment so much before, but hopefully you pick up from that attitude the way we're going at it. I think that's a real key to success in this particular case.
I'll comment on the ISP piece. I think if I would probably have one item to put on the table, I think we under-clubbed the cultural aspects of the integration, and the amount of time and effort perhaps that was put into that was less than it should have been. Part of that, I think, had to do with the fact that we were still moving down a transformation path, and that was very much the culture of Ashland at the time. One of the things that I think is very encouraging about where we sit today is we've done a lot of work over the past year and a half, around really looking at what we want the new Ashland to be culturally as one organization, one team, all rowing, pulling in the same direction with the same objectives.
I think that we're in a much, much better position today from a cultural aspect than we were five, six years ago when we pulled ISP into the company. If I would chalk it up to one item, that would be it.
All right. Thanks for the color there. Just curious on the pricing approach in ASI. Was wondering if you can give a little more detail on how that's changed. I think it's been a few years since you had to go out and get pricing. You've had some changes in some of the competitive dynamics, particularly in personal care. Obviously internally, there's an increasing drive toward more specialty products. Can you just talk about how much traction, how confident you are that you're going to be able to get the pricing that you need. Is it something that's going to take a three to six-month type timeframe, or could it be a longer-term timeframe?
First of all, I would say that as we more or less referenced a few minutes ago, that we have a range of products and value propositions. In those areas which are most differentiated, we think that we can reasonably pass along price increases. I think that fits pharma, that fits personal care well, or at least a great majority of it. I think it also impacts the industrial business. In the industrial business, I think you do have some more price-sensitive areas where we are part of the market. We're a leader in the market. We've announced price increases, and we're working hard to get them.
I guess from my perspective, our job ultimately is to get those price increases, or in those areas where there's more sensitivity and we see inflation, to drive the costs so that we offset anything we can't pass along. We look at, and this will be part of what we discuss, things that were offerings that we've done more of in the past because they were extreme premium markets, where we can focus on making sure that customers pay for specific services that we used to give for free. There are a variety of techniques that we can use to sustain and grow the profitability. Much easier where you've got pricing leverage, but I think it's the whole equation as it relates to our business. I think the pricing activities, we should see impact over the next three to six months.
In the cost area and how we operate the business, as you'll hear next week, we're working hard on those today. We think we've got some real action levers in those areas. It's not just cutting SG&A, it's really how we operate the business.
Once again, if you'd like to ask a question, please press star, then one. Our next question comes from Dmitry Silversteyn of Longbow Research. Your line is open.
Good morning, guys. A couple of questions.
Good morning.
If I may. First of all, just looking at the growth that you guys are delivering in composites, mid-single digit volume growth, I think you talked about. You mentioned the flue exhaust as one of the areas of growth and rolling out vinyl resins. Can you talk about what other industries or end markets are driving the composites growth? My understanding is the wind market is not being particularly strong this year, and I think that was an area of growth for you. What is it your team doing in terms of broadening the approach or getting deeper into the markets that's leading to this mid-single digit growth?
Sure. I guess while you're asking about end markets and those do add up and matter. In this particular business, we've really seen some nice growth year-over-year in China and the rest of Asia. I think that that's an important area or region where we're seeing greater strength and activity. In addition, we are a leader and innovator in the area of providing materials for the engineered stone, the countertops we go to pay a premium for in the marketplace. We really work and develop a range of solutions to enable our manufacturers. It's interesting because initially that technology that we provided helped to create the product, and then now it's focused on things like stain resistance, getting more production through existing assets. Really trying to stay ahead and continue to add value to that segment.
That's one where I think we could point and say we've seen some growth. We've seen some growth in transportation-related applications. That's not just because they're creating more vehicles, but because we're specced in on some really interesting applications we'll talk about next week. Again, those are areas where we're more differentiated in terms of what we offer. Between the regional component and some of those niche growth markets that the team has innovated in, I think that covers the 5% we've seen. Of course, the revenue growth also includes impact of increasing prices. That's why there's a differential there.
Got you. That's very helpful. Just a broader question, I guess, on the quarterly results. Your revenues in both segments sort of exceeded the high end of the guidance that you provided heading into the quarter, but your EBITDA margins were below the low end of the guidance that you provided for the quarter. Is it all just a function of raw material pricing timing? Or is there some mix or, I don't know, inefficiencies or yields or something creeping in why the results were what they were?
Yeah. I certainly would point to raw materials and FX as being important drivers of what we do. I also just say we want to talk about the actions that we take to overcome the challenges that come before us. Yes, we can provide you a bridge and show you that those were things that offset the impact of volume, or at least significantly. We have other levers that we need to pull, that's really what we're focused on.
Okay. All right. Fair enough. Final question on the ASI segment. I haven't heard you guys talk about the adhesives business, the sealants and adhesives business you have. That was an area of strength in the past. Can you sort of touch on what's going on there now and how does it work in your outlook and for the second half of the year?
Yes, certainly. When we go through the market section next week of our businesses, we're going to share our broader thesis and then go a little deeper into the respective markets. We'll break out adhesives because it really is different than a lot of the other things we do within the industrial business. This is a business that has had, or we anticipate having continued sales growth. We're continuing to grow it. It's been a good growth story, which you'll see. It faces its own challenges when it comes to raw material inflation. There's some raw material inflation. We have to make sure that that's fully digested and appreciated, that dynamic with our customers.
They continue to grow their sales and do it through. We break it into market growth and share gain, and the markets are growing, but we also see us picking up some share in those spaces as well.
Our next question comes from Mike Sison of KeyBanc. Your line is open.
Hi, guys. Nice quarter there. When you think about ASI, the guidance was, I guess, trimmed a little bit, despite pretty good volume growth. Is that more a function that you'll sort of get what you need in pricing and you either pick that up in the December quarter or maybe in early parts of fiscal 2018?
I think in that area we obviously for the year took the bottom end of the range up, but we're including what we think will be some contribution from Pharmachem in the fourth quarter. We, like you, would've anticipated being more towards the middle of our range. Right. Which we put out earlier in the quarter. As we mentioned, we've had some dynamics that have gone against us. Some of those are a little less prominent now. It's good to see the dollar strengthening, even though for this quarter, this calendar quarter last year, the euro average, I believe, was $1.13, and we're still a bit below that. Our actions are to drive things we've talked about, including pricing, and offset those. We didn't see it in this quarter. We're going to have some impact next quarter, more than we had this quarter.
I think it'll take a quarter or two if we look just on the pricing front to kind of work that through the whole equation. The other dynamic is it could come a little quicker if what we were talking about earlier, if raw materials start to fall a little bit because of these other dynamics. That takes that pricing challenge, it's a little bit different in terms of the degree. I'd emphasize, sometimes when you don't move these things forward day one, it's because a lot of our business is done through quarterly contracts or annual contracts. They're not spot purchases, which you know.
We can't. In an extreme, I suppose we can go to customers, it's hard to go in and say, "We got an increase today, tomorrow your price is going up." It takes real work, hard work and to justify it, as there are always competitors out there who, for whatever reason, are hungry to be opportunistic because it's incremental to them.
Right.
I think it will build, it's our job to offset it.
Okay, great. Just a quick follow-up. The $10 million-$15 million, I think you talked about Pharmachem. Is that a good run rate on an annualized basis for the addition?
Yeah. We've sized that to be around $60 million at this point based on our diligence and the things that went into us ultimately agreeing to buy the business. We don't feel like there's, number one, cyclicality, and frankly, number two, not much seasonality in the business either. We'll give more color on that as we move forward with closing it and getting to know it much, much better. That's probably the way you should think about it at this point.
There are no further questions. I'd like to turn the call back over to Seth Mrozek for any closing remarks.
Thank you very much, Michelle. Thank you very much, everyone, for your time this morning, and thank you for your interest in Ashland. I hope everyone has a great day. Bye-bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.