Ashland Sales, Profit Rise Thanks To New Businesses

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A few years ago, motor oil and specialty chemicals supplierAshland ( ASH ) made a decision to get out of slow-growth businesses and move into areas that could produce better financial gains.

Those efforts continue to pay off for the company as evidenced by its strong sales and profit growth over the past couple of years and its upwardly mobile stock price.

In addition to motor oil and chemicals, Ashland supplies plastics, water treatment solutions and other products through four business segments: Ashland Specialty Ingredients, Ashland Water Technologies, Ashland Performance Materials and Ashland Consumer Markets.

The company is probably best known as the maker of Valvoline Motor Oil and operator of Valvoline Instant Oil Change quick-lube franchises. Its history dates back nearly 90 years when it was founded as an oil refiner.

Ashland has spent much of the last few years diversifying into higher-growth specialty chemical and polymer businesses and divesting businesses tied to petroleum refining, coal mining and construction.

Buying Spree

"Ashland is a more focused company than before," noted Stephen O'Neil, an analyst at Hilliard Lyons. "Management may now concentrate on the core specialty chemical operations."

The company used buyouts to expand its presence in specialty chemicals. Last year, it spent $3.2 billion to acquire International Specialty Products, or ISP, which put Ashland into personal care products, pharmaceuticals, food and energy.

In 2008, Ashland spent $2.8 billion to buy Hercules, a supplier of specialty chemicals used to make paper and water treatment solutions.

Meanwhile, the company's divestitures include last year's sale of its low-margin chemical distribution unit for $979 million.

Ashland now operates in higher-margin segments and across a wider geographic footprint, O'Neil says. Before its Hercules buyout, Ashland only got 30% of its revenue from outside of North America and only 5% from Asian markets. Since the Hercules acquisition, those figures have risen to 47% and 13%, respectively.

"And the addition of ISP increases the percentage of international sales," O'Neil said.

The upshot is that Ashland has recorded two straight years of double-digit sales and earnings growth, the first time that's happened in at least a decade.

Meanwhile, the company's stock price has been trending higher for 3-1/2 years. Shares set an all-time high of 78.62 on Dec. 12 .

Ashland logged revenue of $8.2 billion in fiscal 2012, which ended in September. That was up 26% from the prior year. Earnings gained 85% to $6.63 a share.

The company plans to maintain its momentum by rolling out new products.

"New products are critical to our long-term success. For fiscal 2012, they represented 21% of overall sales," John Panichella, president of Ashland Specialty Ingredients, said on a fiscal fourth-quarter conference call with analysts.

He cited Ashland's new Natrosol Performax technology, which is sold into the coatings industry. The product is designed to enable a faster, more flexible production process.

"Initial customer response has been strong, and we expect this to become a flagship product for the future," Panichella said.

Ashland logged fiscal fourth-quarter earnings of $1.87 a share, up 85% from the prior year and above Wall Street estimates for $1.76. Revenue gained 11% to $2.06 billion, in line with views.

The Specialty Chemicals segment, which includes the ISP business, was the main growth driver during the quarter. It delivered Q4 revenue of $734 million, up 57% from the prior year. The segment benefited from strong sales to the construction industry and oil and gas markets.

Ashland's Valvoline business contributed the second-highest revenue during the quarter, at $522 million. That was up 1% from a year earlier.

In a recent report, JPMorgan analyst Jeffrey Zekauskas said Valvoline "is shaping up to be a bright spot in fiscal 2013." He raised his full-year operating income projection for the segment to $296 million from an earlier projection of $269 million. That compares with $237 million in fiscal 2012.

"(Valvoline) should benefit from the recent decline in base oil prices while holding up to product pricing," Zekauskas noted. "We project the segment's gross margin to widen to 30.5% in Q1 2013" vs. an average of 27.1% in fiscal 2012.

Growth in the Specialty Chemicals and Valvoline segments helped offset lower Q4 revenue from Ashland's Performance Materials and Water Technologies businesses.

Resins And Gelcoats

Products in the Performance Materials segment include polyester resins and gelcoats used to make reinforced plastics for the construction, automotive and marine industries. The business also supplies adhesives used for packaging, structural applications roofing, and fiberglass reinforced plastic. Fourth-quarter segment sales fell slightly to $369 million.

"Volumes have been affected by weakness in the domestic housing and automotive industries, but these industries have been performing better recently with strong North American results," O'Neil noted.

Fourth-quarter sales in the Water Technologies business declined 12% from the prior year to $431 million. In this segment, Ashland provides water treatment chemicals used in manufacturing and food processing industries. It also supplies treatment chemicals for the utility industry and other products.

The Water Technologies segment has been hurt by weakness in printing and industrial markets.

"While the business has stabilized at the sales and gross profit line, the loss of volume has continued to eat into profits," Panichella said on the conference call. "The market potential here is significant, but we must improve our sales efficiency and overall execution to meet our financial targets."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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