Focus On Stability - The last several years have been one of metamorphosis for the American chemical company Ashland. The company, which was founded in 1924 in Kentucky, has little resemblance to its beginnings as a refining arm of Swiss Oil.

With its acquisition of the privately owned specialty chemical manufacturer International Specialty Products (ISP) in August 2011, the company said it considers its transformation into a worldwide specialty chemicals company complete. Brandi Schuster spoke with Ashland Chairman and CEO Jim O'Brien about the advantages of the company's new direction and his overall outlook for 2012.

CHEManager Europe: Ashland has spent the past few years transforming itself into a specialty chemical company. Did the purchase of ISP last year bring this task to completion?

Jim O'Brien: Yes. Ashland's transformation into a high-growth, specialty chemical company is now complete. We have reshaped the company over the past seven years, and today we are a fundamentally different organization. As a company, our focus is on higher-growth, higher-margin businesses that are more stable and far less cyclical, which should enable us to produce strong results and be less affected by volatility in the broader economy.

ISP has been integrated into Ashland's Aqualon Functional Ingredients, which now bears the name Ashland Specialty Ingredients - or ASI - and is the company's largest commercial unit. Has the purchase brought any immediate advantages to the company?

Jim O'Brien: There is no question that the addition of ISP has provided us with a clear strategic advantage. First, it strengthened our position in a number of important high-growth, high-margin end markets. These include pharmaceuticals, as well as hair, skin, and oral care. The acquisition also expanded our offerings in markets such as food and beverage, energy and coatings. Second, it broadened our intellectual-property portfolio of water-soluble polymers, film-former technologies, and our global R&D and applications capabilities.

Along with this enhanced product portfolio, we have a stronger pipeline of new products and product solutions. In addition, we combined ISP's strength in acetylene- and acrylic-derived chemistries with our own strengths in cellulosics and guar. We expect this to generate increased sales as we develop new products. Third, it deepened our relationships with existing customers and enhances penetration of existing markets. With complementary product offerings, we will increasingly be seen as the partner of choice in customers' new-product-development efforts. This partnership-based approach has historically led to Ashland's highest-growth opportunities.

How did the ISP acquisition affect your fiscal 2012 Q1 results?

Jim O'Brien: We're beginning to see the bottom-line benefits from our broadened business portfolio following the ISP acquisition. For example, Ashland Specialty Ingredients, which now includes the majority of ISP, had a very strong quarter with good volume growth and strong margins. On a stand-alone basis, ISP businesses contributed approximately $450 million of sales in the December 2011 quarter, a 16 % increase over ISP's sales for the prior-year quarter. ISP's adjusted EBITDA was approximately $120 million in the December 2011 quarter, roughly 50 % above the year-ago quarter.

Overall, I would say that our December quarter results clearly demonstrate that we are on the right strategic track - especially when you consider that the first quarter is typically our seasonally weakest period. Our improved margins are more reflective of a specialty chemical business. This is the type of performance we expected when we acquired ISP.

Is Ashland eyeing other major acquisitions that would complement its other business units?

Jim O'Brien: I don't anticipate any major acquisitions or divestitures at this point. We're pleased with our current business portfolio. It's possible that there could be some smaller bolt-on acquisitions, likely focused on ASI, but nothing close to what we have done over the past several years. As I have said, our transformation is complete.

The purchase of ISP has also expanded Ashland's R&D clout. What are the most significant areas for Ashland in terms of research and innovation?

Jim O'Brien: Innovation is a pillar of our growth strategy, and new products are a crucial contributor to our business success. We're expecting good growth from new products, and we are investing capital there. Our customers are increasingly looking to us to deliver innovative products and solutions, and close collaboration is one key to being able to do that.

With more than 400 active patents and a team of 275 scientists, ISP has strengthened our product pipeline and enhanced our relationships with leading consumer product and multi-national pharmaceutical companies. We measure the output of innovation by tracking the percent of top-line revenue coming from new products in the last five years. We also measure the number of breakthrough innovation platforms.

In addition to Specialty Ingredients, how are Ashland's other businesses faring so far in 2012?

Jim O'Brien: Ashland Performance Materials and Ashland Consumer Markets both reported improved sequential results in the first quarter on the strength of pricing and improved cost recovery. Since the end of the December quarter, Valvoline's business has begun to come back fairly strong. The combination of pricing and lower raw material costs have helped restore Consumer Markets' gross profit as a percent of sales to more normalized levels.

Ashland Water Technologies faced a more challenging demand environment, and we are focused on returning this business to more profitable levels. The Water Technologies team has a strategic plan in place to help return the business to more profitable levels through pricing and mix improvement. On a positive note, our targeted growth segments - pulp, mining, and food and beverage - outperformed the broader business. And we racked up 100 new business wins for our OnGuard monitoring and control platform.

For Ashland as a whole, overall volume trends should improve as we move through the fiscal year. While raw-material costs remain a mixed bag, they should be less of a concern, especially since Specialty Ingredients - our largest and most profitable commercial unit - has been so successful in recovering its costs. Today we operate in markets that are much less cyclical and less affected by volatility in the broader economy.

With the integration of ISP, about half of Ashland's overall revenues are expected to come from outside of North America. What regions are most significant for Ashland?

Jim O'Brien: Ashland today is a truly global company, selling to customers in more than 100 countries. Nearly half of our sales come from outside the U.S., with approximately 20 % coming from fast-growing regions like Asia Pacific and Latin America. By comparison, in 2004 88 % of our sales came from North America.

How does Europe fit into Ashland's strategy?

Jim O'Brien: Europe is a part of a bigger region that also includes the Middle East and Africa (EMEA). EMEA as a region is a significant portion of our company. Europe as a whole represents almost 30 % of Ashland sales, so it definitely is an important part of our business. Western Europe is a solid market with significant growth opportunities for our technologies, notably for our specialty ingredients business supplying advanced chemistries for personal care products.

But our Western European operations also provide a strong foothold for us to capitalize on the surrounding growth regions, such as the Eastern European countries, and Russia. It is our long-standing experience in operating in the culturally diverse European markets and our outstanding expertise in developing innovative and market-driven products that make Europe an ideal starting ground to push growth in the surrounding markets.

How concerned are you about the economic state of Europe?

Jim O'Brien: Like many companies, we are closely monitoring the unfolding economic situation in Europe. Clearly there are some tough issues that are being sorted out, but overall we are optimistic about growth opportunities in EMEA.

In which emerging regions do you expect the most potential?

Jim O'Brien: Regions such as Asia Pacific, India and Latin America offer exciting opportunities. We have a number of capital investment projects taking place. For example, our ASI plant in Nanjing, China, recently produced the first batch of redispersible powder (RDP), a new product in ASI's product portfolio which will serve the China/Asia Pacific construction market. This new production line was built inside the Ashland manufacturing campus in the Nanjing Chemical Industrial Park.

Zack's recently picked Ashland as a top-value stock, and analyst Tracey Ryniec wrote, "For investors looking for both growth and value in the chemical sector, Ashland is one company to keep on the radar." Where do you see Ashland's growth and value going over the next 12 months?

Jim O'Brien: We don't provide annual earnings guidance to analysts. But clearly our first-quarter financial results were better than Wall Street expected. The consensus forecast for adjusted earnings was 99 cents per share, and Ashland reported $1.20 per share. Since then, seven analysts have raised their EPS forecasts for fiscal 2012. In fact, of the 12 analysts following Ashland, 11 currently rate us a "buy." And our shareholders have been rewarded, as Ashland has generated more than $1.2 billion in new shareholder value since completing the acquisition of ISP last August.

What are your expectations for the coming year?

Jim O'Brien: We're squarely focused on driving earnings expansion through organic volume growth, margin improvement, cost efficiencies and strategic capital investment. We're off to a good start in fiscal 2012, with overall pricing efforts generating significant improvement in margins and profitability. We are on track for more consistent, predictable earnings and cash flow. As we told investors at our analyst day conference in New York in November, our goal is $1.7 billion n EBITDA by fiscal 2014 and EPS of $9.50-$10.50. We have our plans in place, we're taking the right steps and I am confident that through proper execution, we can deliver these results.

How does Ashland handle the balancing act of bringing shareholder value while also staying daring and innovative?

Jim O'Brien: I believe one leads to another. If we are delivering the innovative products and service that our customers expect, we are creating real value for the company and our business will grow. If we can do that consistently and better than anyone else, then the stock price should take care of itself. Over the past 12 months - through December 2011 - Ashland stock outperformed the broader market and our peer group.