Filed by Ashland Inc. pursuant to Rules 165 and 425 promulgated under the
Securities Act of 1933, as amended, and deemed filed pursuant to Rule 14a-12
promulgated under the Securities Exchange Act of 1934, as amended.
Subject Company: Ashland Inc.
Commission File No.: 001-02918
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include those that refer to
Ashland's operating performance and expectations about this transaction,
including those statements that refer to the expected benefits of the
transaction to Ashland's shareholders. Although Ashland believes its
expectations are based on reasonable assumptions, it cannot assure the
expectations reflected herein will be achieved. These forward-looking
statements are based upon internal forecasts and analyses of current and
future market conditions and trends, management plans and strategies, weather,
operating efficiencies and economic conditions, such as prices, supply and
demand, cost of raw materials, and legal proceedings and claims (including
environmental and asbestos matters) and are subject to a number of risks,
uncertainties, and assumptions that could cause actual results to differ
materially from those we describe in the forward-looking statements. The
risks, uncertainties, and assumptions include the possibility that Ashland
will be unable to fully realize the benefits anticipated from the transaction;
the possibility of failing to receive a favorable ruling from the Internal
Revenue Service; the possibility that Ashland fails to obtain the approval of
its shareholders; the possibility that the transaction may not close or that
Ashland may be required to modify some aspect of the transaction to obtain
regulatory approvals; and other risks that are described from time to time in
the Securities and Exchange Commission reports of Ashland. Other factors and
risks affecting Ashland are contained in Ashland's Form 10-K for the fiscal
year ended Sept. 30, 2003, filed with the Securities and Exchange Commission
(SEC) and available in Ashland's Investor Relations website at
www.Ashland.com/investors or the SEC's website at www.sec.gov. Ashland
undertakes no obligation to subsequently update or revise the forward-looking
statements made in this news release to reflect events or circumstances after
the date of this release.
ADDITIONAL INFORMATION ABOUT THIS TRANSACTION
Investors and security holders are urged to read the proxy
statement/prospectus regarding the proposed transaction when it becomes
available because it will contain important information. The proxy
statement/prospectus will be filed with the SEC by Ashland, and security
holders may obtain a free copy of the proxy statement/prospectus when it
becomes available, and other documents filed with the SEC by Ashland, at the
SEC's website at www.sec.gov. The proxy statement/prospectus, and other
documents filed with the SEC by Ashland, may also be obtained for free in the
SEC filings section on Ashland's Investor Relations website at
www.Ashland.com/investors, or by directing a request to Ashland at 50 E.
RiverCenter Blvd., Covington, KY 41012. The respective directors and executive
officers of Ashland and other persons may be deemed to be participants in the
solicitation of proxies in respect of the proposed transaction. Information
regarding Ashland's directors and executive officers is available in its proxy
statement filed with the SEC by Ashland on December 8, 2003. Investors may
obtain information regarding the interests of participants in the solicitation
of proxies in connection with the transaction referenced in the foregoing
information by reading the proxy statement/prospectus when it becomes
available.
PRESENTATION
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OPERATOR
Thank you for joining the Ashland conference call to discuss the transfer of
Ashland's interest in MAP to Marathon. With us today from Ashland are Chairman
and CEO, Jim O'Brien; Senior Vice President and CFO, Marvin Quin; and Director
of Investor Relations, Bill Henderson. After the prepared remarks, we will be
taking questions. (OPERATOR INSTRUCTIONS). This call is being recorded. Your
participation implies consent to our recording this call. If you do not agree
to these terms, simply drop off the line. At this time I would like to turn
the conference over to your conference host, Bill Henderson.
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BILL HENDERSON - ASHLAND INC. - INVESTOR RELATIONS
Good morning, everyone. Before we get started, I want to remind each of you
that we will be making forward-looking statements, and those statements are
subject to numerous uncertainties, as we summarize here on slide number two,
and also more fully described in our form 10-K. As you will hear in more
detail later, the transaction we announced this morning is subject to a number
of conditions and approvals, and may ultimately not be completed. While we
believe this transaction is more likely than not to ultimately close, there
are several factors that could cause it to terminate. I also encourage you to
read the proxy statement and prospectus when it becomes available. It will
contain important information. We also have joining us today on the call is
David Hausrath. Not it is my pleasure to turn the call over to Jim O'Brien,
our Chairman and Chief Executive Officer.
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
Good morning, everyone. This morning we announced an agreement with Marathon
which would result in the transfer of our 38 percent ownership in Marathon
Ashland Petroleum, which we refer to as MAP, and two other businesses, in
exchange for cash and Marathon stock totaling slightly more than $3 billion.
Importantly, we have structured this transaction to be tax-free to
shareholders and to Ashland. During this call we will explain to you why we
believe this transaction would be a win for Ashland and its shareholders,
employees, and customers.
First, Marvin Quin, our CFO, will review the transaction. Then I will talk
about the strategy for Ashland, including how we intend to use the proceeds
from the transfer, and why it fits our vision for Ashland's future. Following
that, we will answer your questions. We view this transaction as one in a
series of steps we are taking to position Ashland as a value-creating
enterprise. Our guiding principles now and going forward are -- to foster a
winning culture, to maintain a patient and disciplined approach to growth, to
take a process-centered approach to our businesses, and to sustain a top
quartile cost structure and performance.
Now Marvin will provide an overview of the transaction.
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
Good morning, everyone. As you can see on slide 4, this transaction is
complex, so let me begin by describing its terms.
Under the agreement, Ashland and its shareholders would receive total
consideration of $3,009,000,000, or Ashland's 38 percent interest in MAP, a
maleic anhydride plant -- or business rather -- including a plant located
adjacent to MAP's Catlettsburg, Kentucky refinery, and 61 Valvoline Instant
Oil Change stores located in Michigan and Northwest Ohio. The value of the
maleic business and the Valvoline Instant Oil Change stores is about $94
million. And in fiscal 2003, these businesses contributed $16 million in
operating income, with about 57 percent of that being attributed to the maleic
business.
The maleic plant shares utilities and infrastructure with the Catlettsburg
refinery, and would expand MAP's offerings of petrochemicals, which now
include various althatics (ph), hyuine (ph), zyline (ph) and (indiscernible).
Additionally, this transaction would make MAP the largest VIOC franchisee.
In the transaction, Ashland shareholders would receive Marathon common stock
with a value of $315 million, or about $4.50 per share based on the current
number of Ashland shares outstanding. And Ashland would receive cash and MAP
accounts receivables totaling $2.7 billion. MAP
will not make quarterly cash distributions to Ashland and Marathon between now
and the closing of this transaction. As a result, the final cash amount
received by Ashland in this transaction would be increased by an amount equal
to 38 percent of the accumulated cash from operations prior to closing.
This transaction would result in the formation of a new corporate entity,
which I will refer to as New Ashland, that would essentially be the
continuation of Ashland minus its MAP interest, its maleic business, and the
61 VIOC centers. However, New Ashland will have a dramatically different
balance sheet.
The detailed steps of the transaction are set forth in the press release
issued this morning, and the final configuration is viewable on slide 5. As
shown, New Ashland will consist of Ashland Paving and Construction, Ashland
Distribution, Ashland Specialty Chemicals minus the maleic business, and
Valvoline minus the 61 VIOC stores. Immediately following closing, New Ashland
would hold 2.7 billion in cash and accounts receivable.
The primary use of the proceeds from this transaction would be to reduce debt.
As Jim will discuss, it is not our intent to use the proceeds to purchase --
to repurchase stock or pay any special dividend. Immediately prior to closing
this transaction, we expect to have debt, leases and other off-balance sheet
debt-like instruments, of approximately 2 billion. We are evaluating the range
of options to retire these obligations, and will pursue the most economical
approach.
The cost of retiring debt will depend on interest rates as well as how much
debt we retire and the method we choose. In the current interest rate
environment, our public debt is already trading well above face value.
However, even if we retire all of these obligations, we would still have a
very material net cash position. In addition, following the close, Ashland
shareholders would receive the Marathon stock I previously mentioned.
Listed on slide 6, there are several conditions to the successful completion
of this transaction. It is contingent upon receiving a favorable private
letter ruling from the Internal Revenue Service. Also, the transaction is
subject to approval of Ashland shareholders, receipt of Hart-Scott-Rodino
clearance, receipt of updated solvency opinions, consent to debt-holders, and
other typical closing conditions. We are not obligated to have closed unless
we receive consents from 90 percent of the principal amount of our taxable
long-term debt. I should add, consent for 2/3 of a series represents consent
of the entire series. If we fail to obtain the 90 percent consent level,
Ashland has the option to weigh this closing condition and still close the
transaction.
Many of you are familiar with Morris Trust (ph) type transactions, which is a
common structure in tax advantage mergers. Our transaction incorporates a
Morris Trust structure, which is a spin-off through a separation merger.
However, our transaction is somewhat different in many details. In particular,
the ratio of cash to equity in this transaction is quite high. This was driven
in large part by our needs to satisfy Marathon's concerns under
(indiscernible) conveyance laws about our asbestos claims. We believe we've
done that. We continue to believe that our asbestos claims are quite
manageable, and I'd like to emphasize to you that there are no new trends in
claims or settlements that have not been previously disclosed.
As I noted earlier, the receipt of a favorable private letter ruling from the
IRS is a condition to closing the transaction. Due to the complexity of this
structure, there is a meaningful risk that we would not obtain a favorable
ruling. Nevertheless, we believe the receipt of the ruling is more likely than
not. The key tax issues to be addressed in the ruling were set forth in the
press release issued this morning. There are other tax issues in this
transaction which we currently expect to be able to (indiscernible) on the
basis of an opinion from our outside tax counsel, (indiscernible).
Please turn to slide 7. Although we expect the transaction to be tax-free to
Ashland and our shareholders, a Section 355-E tax would be imposed on Ashland
if the market value of New Ashland at closing exceeded our tax basis in New
Ashland. Our tax basis will change between now and closing based on a number
of factors, including results from operations of Ashland's wholly-owned
businesses and the accumulated amount of forgone MAP cash distributions.
Based on our current estimates, we would begin paying taxes to the extent
Ashland's stock price at closing exceeds $55.50, based on the current number
of Ashland shares outstanding. This $55.50 includes the $4.50 value for the
Marathon stock that would be issued directly to our shareholders. Any taxes
paid, however, we believe would be modest compared to the size of the
transaction.
Turning to the next slide, let's describe the impact of this transaction on
our future earnings. Going forward, the business of Ashland -- the businesses
of Ashland would be comprised of our four divisions, minus our interest in
MAP, and the two other businesses transferred to Marathon. Because we account
for our interest in MAP using the equity method, our revenues would be
affected only by the reduction in sales from the maleic business and the VIOC
stores, which totaled about $83 million in 2003.
With respect to operating income, we will not have the contribution from our
interest in MAP, which was $285 million in 2003, and the other two businesses,
which totaled 16 million for 2003. After closing we would retain some costs
related to the transfer of businesses, including post-retirement benefit cost
of former Ashland Petroleum and Super America division employees. These costs
are related to individuals who retired prior to the formation of MAP. We would
also have some remaining environmental costs for closed terminals, refineries
or service stations that were never placed in MAP.
In addition, we would have some continuing environmental obligations for
properties placed into MAP, but these would be capped at $50 million. We have
existing book reserves for future employee benefits and environmental
remediation. However, the total (indiscernible) costs for these matters might
be $7 million for the next 12 months, and should decline gradually over time.
Additionally, we allocate corporate costs to the refining and marketing line
of business, as well as to the maleic business and the 61 VIOC stores. The
initial stranded (ph) corporate costs should be less than 10 million, and we
will be working to eliminate these costs over time.
Other income statement impacts would be related to rent and interest expense,
as well as interest income. Interest expense, which is now about 110 to $120
million a year, may well go away entirely. Rent expense should decline
sharply, perhaps as much as $35 million a year. As I mentioned earlier, if we
retire all of our debt, we should still have a material net cash balance.
Obviously, the current low interest rates work against us as we invest in
short-term securities. While Ashland may have excess liquidity for a number of
years, we would expect our capital structure to evolve over time to something
more typical of an industrial corporation.
Finally, I want to emphasize that this transaction will not end our very
productive relationship with MAP and Marathon. As you look at slide 9, this
transaction in fact expands our commercial relationships in a number of ways.
MAP is currently a supplier to our -- to Valvoline, APAC and our chemical
distribution businesses, selling us (indiscernible) stocks, asphalt and
solvents. MAP is also a customer for packaged products from Valvoline and
water treatment chemicals provided by our Specialty Chemical division. MAP
would become the sole supplier of maleic for our domestic unsaturated
polyester business, and as I've already mentioned, would become our largest
VIOC franchisee.
Not let me turn you back over to Jim.
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
Thank you, Marvin. Let me start by making a few comments on our motivation to
enter into this transaction.
If concluded successfully, this transaction will eliminate the uncertainty
around the future of our ownership interest in MAP. As most of you are aware,
beginning January 1st 2005, Marathon has the right to call our interest at a
15 percent premium to fair market value. While we are comfortable with our
rights under the joint venture contract, we felt it was in our shareholders'
interest to structure a highly tax efficient transaction. Given that our
current tax basis in MAP is about 1.2 billion, a cash call would create a very
large tax liability. As you may recall, the federal capital gains rate for
corporations is 35 percent. Additionally, the gain would be taxable at the
state level. This transaction, because it is structured to be tax-free, offers
the best value for Ashland and our shareholders.
Now let's talk about how this transaction also represents a continuation of
our vision for the Company. While this is certainly a major transaction for
Ashland, our fundamental strategy remains unchanged. I view this as another
step toward accomplishing the goals I established in October 2002 toward
improved profitability. The transfer of our interest in MAP fits our strategy
of transforming the fundamental performance and financial dynamics of Ashland.
(indiscernible) the results of our new business processes, we are seeking to
change Ashland's businesses to be more consistent and predictable. While very
profitable, MAP could also be cyclical, and depending on the regulatory
environment, require a lot of capital investment. We think MAP will continue
to be a top quartile performer, but we also believe we have captured its full
future value in the purchase price.
Shortly after beginning -- shortly after becoming CEO in October of 2002, I
announced my 8 point profitability improvement plan, which you can see on
slide 10. We have accomplished or made significant progress on every goal
listed, and this transaction represents a significant part of that plan.
First, we vowed to reduce G&A expenses by $25 million. We met that challenge.
And late in 2003, we implemented our top quartile cost structure program,
which helped us to get certain selling, general and administrative costs down
even more by a rate of $100 million in 2004. The second goal I laid out was to
improve returns from Ashland Distribution or seek strategical alternatives.
Our distribution division responded to the challenge by restructuring nearly
everything about its operations, improving sales revenues by 11 percent in
2003, and they continued to grow.
We also promised to increase returns from Ashland Paving and Construction.
After a terrible year in 2003, due in part to higher than normal rainfall,
APAC improved its results significantly during the first quarter of this
fiscal year.
In addition, our restructuring and cost reduction efforts will have a
continued positive effect on the division's performance. To improve
organizational effectiveness, we have implemented a process centered approach
to how we operate. Last month we announced our new unified platform, which
positions our four wholly-owned divisions into two primary cores -- chemicals
and transportation construction. This organization reflects the logical
interrelationship of Ashland's businesses.
Our chemicals sector now includes Ashland Distribution, Specialty Chemical,
and Valvoline, and is led by Gary Cappeline, President and Chief Operating
Officer of Chemicals. Under his leadership, these divisions will leverage the
similarities between their capabilities, functions, processes and best
practices. In addition, we have hired Garry Higdem as President and Chief
Operating Officer, Transportation Construction. Under his leadership, APAC
will continue to perform traditional jobs as well as expanding the division's
major projects capabilities, which include jobs valued at $100 million and
more.
We also have a continuing process to review our portfolio and optimize our
business mix. This resulted in the sale of our Electronic Chemicals business
in 2003, which is a great business, but we felt would generate more value to
our shareholders if it was monetized. During the past 18 months, we also have
sold several small business units for about $20 million.
We also promised to reduce debt. Since 2002, we have reduced total debt by
$233 million and increased cash by $111 million. When the profitability
improvement plan was announced, I shared our strategy to expand in existing or
adjacent markets, and the changes that we have made in the past year have
positioned us well for the future.
Now I'd like to share with you some indication of our second quarter
performance. Please turn to slide 11. In its historically weakest season, APAC
is expecting a loss for the March quarter in the range of 30 million $40
million, compared to the loss of $57 million in the 2003 winter quarter. APAC
will focus on improving its performance in the near-term, and in the
longer-term on major project capabilities and expanding both within and
adjacent to its current geographic markets. APAC's current construction
backlog exceeds $1.8 billion.
The chemical sector continues to perform well, and we anticipate operating
income for the current quarter in the range of $50 million to $55 million.
During the March quarter of last year, these divisions generated operating
income of $30 million. In each of the last four quarters, distribution has
improved its operating income by an average of nearly $9 million compared to
the same period in the previous year. And the division continues to grow
faster than its markets.
Ashland's Specialty Chemicals growth is due in part to new product
introductions, such as the new additions to the MaxGuard (ph) marble clear gel
coat and Polaris resin lines. These products enable Ashland to work
proactively with manufacturers to optimize their entire cast marble, onyx, or
solid surface fabrication process.
Valvoline's momentum is built on its successful premium product strategy. The
division continues to introduce new customer focused products and services,
contributing to their consistent topline growth. For example, VIOC, which owns
and franchises more than 740 stores nationwide, recently launched a fleet
management program that incorporates both VIOC and other vendors' maintenance
records into a comprehensive service history.
The first 18 months of my leadership were about change. Now, we are focused on
execution. And I believe our four wholly-owned businesses and divisions are
positioned well for organic growth. Looking ahead, our primary goal is top
quartile performance. We are going to be proactive about feeding opportunities
as the markets change in all of our businesses, from choosing how distribution
moves goods from suppliers to customers, to what products are developed and
marketed by specialty chemical and Valvoline for the types of projects pursued
by APAC.
The final promise we made in our October 2002 plan was to capture value from
(indiscernible). Since that time, we have dedicated substantial resources to
this matter, and we believe this transaction provides the highest value for
Ashland and our shareholders. So the big question on everyone's mind now is --
where do we go from here? What do we do with $2.7 billion?
Please turn to slide 12. First, as Marvin discussed, we are going to repay
debt, which even if we retire all of our debt, would still leave us with a
very material net cash position. However, we will not relax our investment
standards just because we find ourselves with a large amount of cash and
little or no debt. With the remaining cash, it is our intention to be very
disciplined and patient in our investment approach going forward.
You may have noticed that Ashland has made essentially no acquisitions since I
became CEO. This is partially due to the fact that I insisted we improve our
internal processes before investing more of our shareholders' funds. To the
extent we consider acquisitions, we will again focused on our core businesses
and investing in adjacencies to them. Any acquisition will need to pass a
rigorous screening of whether the provable synergies justify the price, and
whether we can easily integrate systems and processes.
Using those standards, our focus will most likely be on modest sized
acquisitions. However, I don't want to totally rule out larger transactions if
something compelling were to be identified. I would like to underscore that in
order to preserve the tax treatment of the transaction, it is not our intent
to use the proceeds to repurchase stock or pay a special dividend. However, we
do expect to maintain a current quarterly dividend.
Finally, I believe we have created significant value in the formation of MAP,
and have captured that value through the structure of this transaction. I want
to emphasize that the disciplined approach that has underscored the ongoing
turnaround of Ashland will not change because we have greater financial
flexibility. We clearly recognize that the measure of this management team
going forward will be how we preserve, improve, and deliver this value to the
shareholder.
Now we will be happy to answer any questions you may have.
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UNIDENTIFIED COMPANY REPRESENTATIVE
This concludes our presentation. Please be aware that the slides and scripts
in the presentation today will be available on our Website, and will be
archived for the next twelve months. At this point we will now accept your
questions.
QUESTION AND ANSWER
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OPERATOR
(OPERATOR INSTRUCTIONS). Arjun Murphy (ph), Goldman Sachs.
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ARJUN MURPHY - GOLDMAN SACHS - ANALYST
I have several questions. The first would be, you mentioned that you can't buy
back stock or pay out extraordinary dividends related to the tax-free nature.
Is there a period of time, 18 months, 24 months, that that's applicable? Would
you also be precluded from normal dividend increases? Most companies, yourself
included I think, have generally been looking to increase regular dividends.
And then, would the tax-free nature, if that's approved, also preclude you
from selling other divisions, if for some reason you decided to do that or
someone approached you to buy another division?
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
Let's start with the first question. To preserve the tax-free nature of this
transaction, we have no intention to buy back stock or to have an
extraordinary dividend. The second question you had -- why don't you repeat
that second question for me.
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ARJUN MURPHY - GOLDMAN SACHS - ANALYST
Are you still allowed to increase dividends to shareholders as one normally
would? Not an extraordinary dividend, but a normal dividend increase?
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
Ashland's board sets our dividend policy. And our intention is to maintain
the dividend of $1.10 per year.
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ARJUN MURPHY - GOLDMAN SACHS - ANALYST
Okay. And regarding the tax-free nature, does this preclude you from selling
other divisions, whether you wanted to, or if someone approached you and said
we would lead like to buy a division, would you be precluded from doing that
as a result of wanting to preserve the tax-free nature of this transaction?
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
As we look at operating our business in the future, we are very pleased with
the direction our businesses are taking and the improvement that they have
accomplished in the last 18 months. We have put a lot of energy in this time
to really transform these businesses, I believe, into two high performing
businesses -- being the chemicals business, as well as our Transportation
Construction business, APAC. And we are going to position them for top
quartile performance and grow these businesses into the future. So I believe
that we have before us is an opportunity for Ashland to take two very focused
operating companies and transform them into high performing businesses into
the future.
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ARJUN MURPHY - GOLDMAN SACHS - ANALYST
In terms of the risks related to the tax-free nature, can we assume the risk
is primarily around the cash equity split?
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FRED GREENWOOD - ASHLAND INC. - TAX COUNSEL
This is Fred Greenwood; I'm in-house tax counsel for Ashland. It's around the
cash equity split, and it also deals with in the press release, the appendix,
you could see the tax issues -- the key tax issues that we have, and the
treatment of contingent liabilities that are assumed by New Ashland in the
transaction is off. So another key tax area.
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ARJUN MURPHY - GOLDMAN SACHS - ANALYST
This will be my final question. I assume the tax-free nature would preclude
you from taking the Company private if that was something you desired to do?
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
We have no intention of going private.
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OPERATOR
Robert Kessler, (indiscernible) & Co.
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ROBERT KESSLER ANALYST
Just to follow up on the use of the proceeds from the sale, I believe Marvin
had mentioned $2 billion worth of possible debt repayments. Does that include
any off-balance sheet items, and could you quantify those, please? And if you
would, any estimate on the amount of cash that would be left on your balance
sheet and your default scenario?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
First of all, as far as -- I think you probably have a copy of our balance
sheet from December 31, it shows debt of 1.574 billion. We do have off-balance
sheet obligations, financial obligations, (indiscernible) two buckets. One is
leases, we have a couple hundred million dollars, what we would think of as
financial type leases. And we have the accounts receivable capco (ph) program,
which is about $150 million. So overall -- and I should add as I said in my
remarks, that our debt is trading of course above book value, as most
industrial corporations are today. Did that (indiscernible) respond to your
question?
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ARJUN MURPHY - GOLDMAN SACHS - ANALYST
Yes, it does. If I could just have sort of a follow-up, and this is more of a
theoretical question than anything else. With very low interest rates right
now, it doesn't seem to pay to have practically no debt on your balance sheet
and a decent sized cash position. You mentioned small and medium-sized
acquisitions with -- being very leery of any big deals that might be dilutive
to your base business returns. But I can't imagine that the lack of debt and a
large cash balance would generate more than, say, 3 percent. So can you
comment on how quickly you could redeploy this capital?
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
We have taken a very measured approach to how we are repositioning our
companies and get them performing in a high performance manner before we look
at trying to invest more capital into them. As I anticipate the future and
look at the future, I think that acquisitions will be part of our plant and
part of what we study in our strategic position or strategic intent. But first
these businesses have to demonstrate that they have the strength and the
performance and the measure to take on additional capital and additional
opportunity. That day will come, but we're going to have patience, and we're
going to be determined on how we evaluate projects so that when we do a
transaction it will be very favorable to our shareholders and be high
performing as part of our business.
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
My colleague Bill Henderson just pointed out I didn't fully answer your
question. You asked also about what cash might be on the balance sheet, and if
we assume that we were able to repurchase all of our debt, and we were able to
repay all of these off-balance sheet debt-like instruments -- and that may be
an optimistic assumption -- but we still might have $500,000,000 in cash, plus
or minus, on the balance sheet.
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OPERATOR
Steve Belgart (ph), Cap A Financial (ph).
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STEVE BELGART - CAP A FINANCIAL - ANALYST
I had two questions. The first is, I was under the impression that the IRS was
no longer issuing the private letter rulings. Could you tell me if I'm
mistaken, or why you're under the impression that they still are issuing
these?
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UNIDENTIFIED COMPANY REPRESENTATIVE
They announced last summer that there are certain issues they won't rule on in
tax-free spin-offs any longer, but they still issue rulings on the basic
transaction.
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STEVE BELGART - CAP A FINANCIAL - ANALYST
Second question, not being too familiar with the structure of the LLC, I'm
just a little confused by the statement in Marathon's press release that says
that the consideration is that 315 million in Marathon stock, the 794 million
in cash and accounts receivable to Ashland, and then approximately 1.9 billion
in assumed debt. Given your levels of debt, was some of that debt held by the
LLC, or what's -- how do you explain that?
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UNIDENTIFIED COMPANY REPRESENTATIVE
If you look at the transaction structure that's outlined in the appendix to
the press release, that debt would be new debt incurred and assumed by
Marathon, the cash of which is transferred to Ashland, which will be used to
primarily repay Ashland's existing debt.
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OPERATOR
Fred Leuffer, Bear Stearns.
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FRED LEUFFER - BEAR STEARNS - ANALYST
Most of my questions were just answered, but maybe you could clarify for me on
the tax issues section of the press release, this third point here. I'm not
sure exactly what this refers to, which is either the New Ashland or Marathon
will be entitled to tax deductions for future payments for liabilities, etc.
Can you interpret that for us?
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UNIDENTIFIED COMPANY REPRESENTATIVE
Sure. There is a concern that the IRS might rule that -- let me back up.
There are contingent liabilities that we have with respect to businesses that
we no longer operate, say for example our asbestos liability. Those
liabilities will be transferred to New Ashland in this transaction. And
there's some concern that the IRS may take a position in the ruling process
that New Ashland doesn't get those tax deductions, that in fact they would
belong to Marathon. And we just want to be sure that one of the two companies
is entitled to the deduction. And if in fact Marathon is entitled to the
deductions, we've reached an agreement with them where they would transfer tax
benefits back to Ashland for those deductions.
------------------------------------------------------------------------------
OPERATOR
John Roberts, Buckingham Research.
------------------------------------------------------------------------------
JOHN ROBERTS - BUCKINGHAM RESEARCH - ANALYST
Congratulations. Could you give us a sense of the petroleum exposure of the
New Ashland, a dollar change in the price of petroleum feedstocks would have
what impact on earnings? (indiscernible) relatively complex mix. I know that
you have good cash flow and distribution, but you've got thermostats and
specialty chemicals, and you've got base lubes in the Valvoline business, and
asphalt of course in transportation. Can you give us some metrics there to
think about?
------------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
We can comment on them; unfortunately we don't have those points quantified
for you this morning. As you would expect, in our road construction business,
APAC, it consumes a good bit of asphalt, it also consumes a good bit of diesel
fuel, and those are material costs to them. In our chemical distribution
business, many of the products they sell are solvents or other crude oil
derivatives. The same is true in specialty chemical. Many of the chemical
intermediates come from various olyphants (ph) or aromatics, which are also
typically derived from hydrocarbons. And finally, Valvoline -- the vast
majority of its raw material is lube stock, which is of course a crude oil
based product. So we are very closely tied and will continue to be very
closely tied to the hydrocarbon markets.
------------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
Let me just add something to that. As we look at our wholly-owned divisions,
and look at New Ashland being chemicals and transportation and construction,
the area we're really focusing on is to make these businesses much more
predictable and consistent. So the predictability piece is, obviously, we have
an exposure to hydrocarbon. So that will go away, because we still -- a lot of
our components are hydrocarbon based. But at the same time we are in markets
whereas hydrocarbon prices change, we are able to pass that through the
marketplace on a much more consistent basis, and less volatile than we were as
an R&M Company. So our focus is to continue to participate in markets and to
produce products which can be much more predictable and consistent into the
future, although they are going to have some impact as far as raw materials
from time to time that we would have to work in the marketplace to pass those
costs through.
------------------------------------------------------------------------------
JOHN ROBERTS - BUCKINGHAM RESEARCH - ANALYST
And as we look for maybe small bolt-on acquisitions, your focus would be away
from petroleum (indiscernible) additions?
------------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
As we look at our acquisition strategy we are very focused on our core
businesses. We believe we have certain strengths that are unique to Ashland
and that we're going to build on those strengths. Strings. And we're going to
strengthen our core, and do that through either right inside of the core are
adjacent to the core as far as acquisitions that we will consider. But the
important point is that as we build the Company, it's going to strengthen our
key strengths and not diversify into new things.
------------------------------------------------------------------------------
OPERATOR
Bob Williams (ph), Lehman Brothers.
------------------------------------------------------------------------------
BOB WILLIAMS - LEHMAN BROTHERS - ANALYST
Since the 1.8 or so billion of borrowing by Hold Co was a borrowing in
anticipation of the merger, is the ruling going to be focused primarily on
addressing the question of whether the assumption of that liability, whether
your principal purpose with respect to the assumption of that liability was a
purpose to avoid tax on the exchange? Is that going to be the central issue of
the ruling?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
That will be one of the central issues of the ruling.
------------------------------------------------------------------------------
BOB WILLIAMS - LEHMAN BROTHERS - ANALYST
Are you going to then argue that since you're going to use the proceeds of
that borrowing to repay New Ashland, are you going to try to make the argument
that the effect of all that is the same as Marathon had assumed Ashland's
historic debt, and therefore the 357-B wouldn't be properly invoked here? Is
that --
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
You are exactly correct. Had Marathon assumed our historic debt, there would
really be no question.
------------------------------------------------------------------------------
BOB WILLIAMS - LEHMAN BROTHERS - ANALYST
No, there wouldn't be any issue at all. And the effect of it of course is the
same, because you're committed to using the proceeds to pay off your existing
debt.
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
That is correct.
------------------------------------------------------------------------------
BOB WILLIAMS - LEHMAN BROTHERS - ANALYST
So this is really a monetizing (indiscernible). And of course, 357-B is
usually the biggest issue there. So I'm glad to hear that's the way you're
approaching it. It sounds to me like you ought to do very well with the IRS.
Have you had a pre-submission conference with them?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
Yes we have.
------------------------------------------------------------------------------
BOB WILLIAMS - LEHMAN BROTHERS - ANALYST
Did it go pretty well?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
I really can't comment (multiple speakers). We're getting ready to file our
ruling request shortly.
------------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
This is Jim. I think your statements are very good and accurate. I think it
really leads to -- one of the principal reasons we're doing this is our focus
in this whole transaction is to create value. We think this transaction
creates the most significant value for investors.
------------------------------------------------------------------------------
BOB WILLIAMS - LEHMAN BROTHERS - ANALYST
There's no question about it, sure. And I think -- you know, based on the
precedents, you ought to be able to (indiscernible) 79-258 revenue ruling
would be a good citation there. You ought to do very well, I think, on this.
And sure, clearly it creates a lot of value. So good luck, and we will be
following it.
------------------------------------------------------------------------------
OPERATOR
Paul Cheng, Lehman Brothers.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
Several quick questions. Marvin, on the Marathon share, the $315 million, is
that a fixed number (indiscernible) fixed on the dollar value?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
It is a fixed dollar value, so the change in Marathon's stock price between
now and the valuation period will not impact our shareholders. They would just
receive more or less shares depending on Marathon's stock price.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
On the (indiscernible) you're saying that going forward it's going to be
lower. Just to clarify -- so right now you have roughly about 80, $85 million
a year. After everything is said and done, that number should drop to 70, 75
million a year?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
I don't want to give that precise of a number. We have calls that show up in
lots of different pockets. If you look at the selling and general
administrative line, we have, as a result of the top quartile cost reduction
program we announced last October, we are well on our way to reducing that
cost, in fact, we think by the end of the fourth quarter. In fact most of the
costs are already reduced. But by the end of the fourth quarter, we think we
will be at $100 million rate of lower cost then we previously were versus '03.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
I understand that. But Marvin (multiple speakers) my question is that if we --
after the transaction, let's say you finish it by year-end (indiscernible)
next year (indiscernible) on going one way with a job on the (indiscernible)
that you've shown in your income statements, or in your (indiscernible) income
statement, (indiscernible) is going to jump (indiscernible) $10 million?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
If you're referring to the stranded costs, we had about $10 million of
corporate costs that's now being allocated to the (indiscernible) and
marketing line of business and to the maleic business and 61 VIOC stores. That
cost does not go with the business, so over time it will be our intent to
reduce that. But (multiple speakers) it will not go away.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
I see. And in MAP, I think, Marvin, you indicate that MAP will not pay any
cash dividend to the current (indiscernible) full year. So I just want to
clarify -- that means that at settlement, let's say if everything goes
smoothly by year-end, the cash amount you'll receive is going to be higher
than the 2.7 billion that you indicate here.
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Precisely.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
Okay. And when you're talking about (indiscernible) on pro forma
(indiscernible) previous question was saying that after you pay down all the
total debt, all the off-balance sheet, you think that you have more. And
there's about $500,000,000 of cash on your balance sheet. Does that already
take this particular additional cash into consideration, or no?
(multiple speakers)
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
Did that $500,000,000 on the pro forma cash on your balance sheet, if you pay
off all the debt and everything, is that just counting the 2.7 billion cash
that you're going to receive? Or that is counting that at year-end you also
have the adjustment of the additional cash coming from the MAP contribution?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
That was basically the residual of the 2.7 billion after paying off various
(multiple speakers)
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
So just based on the 2.7 billion.
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Right. I think we had maybe $100 million in cash at quarter end.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
In MAP?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
No, I'm talking about at Ashland now.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
I understand. I'm just trying to understand that the $500,000,000
(indiscernible) 2.7 billion cash or that you also tried to make
(indiscernible) how much additional cash you may receive. So in other words,
when everything is said and done, in theory, you should be half -- more than
half a billion cash?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Let me go back. On the purchase price, we say we would receive roughly 2.7
billion in cash. If MAP accumulates cash as it had in each of the past two
years -- well let me just say each of the last two years, distributions for
MAP have been about $200 million. If that occurs in '04, we would expect the
final cash purchase price to increase by $200 million.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
Okay. Two final questions. One, you said that the rent expense would be lower.
Why the rent expense would be lower?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Of the amount of financial obligations we talked about paying off, there's --
a couple hundred million dollars of that are in leases. As we (multiple
speakers)
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
Oh, that is (indiscernible) you pay off that, it's not because (indiscernible)
you don't have MAP. That's why you have a lower (indiscernible) --
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
As we receive the cash, we would look for lease obligations that we think we
can economically pay off. Now, we're not going to pay off all leases or all
debts blindly. If it makes economic sense to do so, we will do it. If it
doesn't, we won't.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
And those rent (indiscernible) -- do you have a distribution, say, which
business are they hitting?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Yes. Probably the largest portion is within APAC, part would be in
distribution and part specialty. Probably the largest part would be APAC.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
Say 60, 70 percent in APAC?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
I'd like to pass on that question, because I don't have the facts in front of
me.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
Finally, on the IRS ruling -- Marvin, any kind of (indiscernible) I know you
guys think that maybe until the end of the year. What is the earliest possible
time that IRS would come back to you, whether that is (indiscernible) okay,
this is good, this is no good? What is the earliest timeframe? And also, is
there any checkpoint or any timeline that you can share with us that we can
(indiscernible)?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
As far as the IRS ruling goes, a normal ruling takes six to eight months. And
this is a complex transaction, so we're thinking it's going to be at the
longer end of that timeframe to get a ruling.
------------------------------------------------------------------------------
PAUL CHENG - LEHMAN BROTHERS - ANALYST
And the (indiscernible) six to eight months (indiscernible) is it just a total
(indiscernible) or that we would be able to see a longer (indiscernible). Say
for example if you do an acquisition, that essentially the (indiscernible)
after 30 days they will (indiscernible) whether they want a second
inquiry or (indiscernible). Is there something like that or (indiscernible)
this is just we have to wait until the end of the period before we know
anything? So you aren't going to have any news until final decision?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Generally, it is. We have very little news to pass on until we have a final
decision. This is a long process, there's a lot of give and take, there's a
lot of questions asked. And we will be very responsive to those questions, but
it is -- a lot of work goes on during this period of time. I know it sounds
like a long period of time to you, but there is a tremendous amount of work to
be done during that period as we educate and the IRS on our particular
transaction and our particular facts.
------------------------------------------------------------------------------
OPERATOR
Jacques Rousseau, Friedman Billings Ramsey.
------------------------------------------------------------------------------
JACQUES ROUSSEAU - FRIEDMAN BILLINGS RAMSEY - ANALYST
Most of my questions have been answered. Just a couple small things to
follow-up on. Before you had discussed an optimal capital structure somewhere
in the neighborhood of 30 percent or so debt to cap, and obviously things have
changed. But if you go ahead and repurchase most of your debt, you will
probably fall below that. Is there any new guidelines we should be looking
for?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
I think if this transaction closed as expected, it could be zero debt for
several years, a number of years. Ultimately, we think an efficient capital
structure would suggest that we would have 30, 35 percent debt to capital. But
that will not happen near term.
------------------------------------------------------------------------------
JACQUES ROUSSEAU - FRIEDMAN BILLINGS RAMSEY - ANALYST
So the goal here is that you would like -- you think 30 to 35 is the right
area, but you'll wait until the proper acquisitions come along to get to that
target?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Even with the types of acquisitions we're contemplating, I think it would be
many, many years before that would occur. The point that Jim is making is,
we're not going to go out and do a massive acquisition program. Our focus is
on growing our businesses, and growing from the internal strength of our
businesses. And where there are other businesses that fit closely with their
material synergies or with their adjacency, we will have an interest in those
areas. But we are going to be very disciplined and take our time about it. We
don't want to try to rush out and reinvest this capital, we want to do it
wisely. As Jim mentioned, the investors, our Board, our shareholders and
employees will measure us by how well we preserve this value and we reinvest
this value.
------------------------------------------------------------------------------
JACQUES ROUSSEAU - FRIEDMAN BILLINGS RAMSEY - ANALYST
So can we assume that you would not be interested in looking at refining
assets of other independent refiners or so?
------------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
Yes, I would say that's a good conclusion.
------------------------------------------------------------------------------
JACQUES ROUSSEAU - FRIEDMAN BILLINGS RAMSEY - ANALYST
One last one. What is the book value of MAP on the balance sheet?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
I think it's about $2 billion. I have the balance sheet right here. It's in
that range.
------------------------------------------------------------------------------
OPERATOR
Paul Tyce (ph), Lehman Brothers.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Three quick questions. With regard to your appendix and where you go
(indiscernible) of the structure, and you could be borrowing at the Hold Co
level, and then down streaming that cash to pay off existing Ashland debt. It
says in your press release that the amount that you'll be able to pay down at
the Ashland level is subject to IRS approval. Can you walk me through exactly
what calculation or (indiscernible) they would use to determine how much debt
would be allowed to be paid down? And does that apply after the spin-off, or
is that just prior to the spin-off?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
The debt would be paid down just prior -- right after the spin-off, right
after the closing of the transaction. And what we're talking about there is,
we have different types of debt on our balance sheet -- we have balance sheet
debt, we have some off-balance sheet synthetic leases, which is true debt for
tax purposes, we have the cost of redeeming our debt, we also have true
leases. And we just, in coming up with the final numbers on the amount of that
Hold Co borrowing, we want to get IRS confirmation as to which debt they will
allow us to be repaid under that theory the previous gentleman was talking
about, under the substitution of debt theory. So we're just looking for the
IRS to confirm the exact types of debt that we can pay off with that money.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Your (indiscernible) would be, roughly 75 percent of your outstanding debt
would be eligible? I mean, we're talking about the majority of your debt would
probably fall under the acceptable?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
The vast majority of our debt is going to be eligible to be paid off.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Do you need any special approvals from your banks around this transaction?
------------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
We need no consents from the banks. We, obviously, need consents from the
debtholders.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Any plans -- your revolvers are, I believe, coming due at the middle part of
this year. Any thoughts in terms of the size of those facilities going
forward, given all of the liquidity you're going to have?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
We're going to roll over the revolvers we have. In fact, we were about to
close that transaction on the revolvers a week or two ago and decided to
postpone that until this transaction was announced. But the revolver language
(indiscernible) specifically allows a transaction with MAP and Marathon
without affecting the access to the amounts or availability in any way shape
or form.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Are those revolvers drawn currently?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
No. We have no -- I think we have -- we certainly have no borrowings under our
revolvers, and I think we have almost no short-term debt at all, and we have
close to $100 million of short-term cash securities.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Are you still going to maintain a 364 (indiscernible) on the term structure to
your revolver?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Yes.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Second question. The operating income number for MAP plus the other assets
being included was roughly 301 million. What percentage of the total for 2003
-- I guess that was calendar 2003 -- would that represent?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
Those numbers were actually fiscal --
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Fiscal, okay.
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
And your question was what percent --
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
-- of total consolidated Ashland would that account for?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
2003 was a year of low earnings from our wholly-owned businesses' 4 divisions.
So that represents the vast majority. I think (indiscernible) as you look
forward to '04 and 05, that would be a much smaller percentage.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
So in a normalized year, though, it would still be probably 50 percent or
more?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
It could well be.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Could you just update us with your conversation with the rating agencies
around the transaction?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
The rating agencies, we've had numerous conversations with them, and we expect
that they will be issuing press releases within the next couple weeks, perhaps
even today.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Did they indicate anything in your conversations in terms of the amount of
debt reduction they would like to see?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
I would rather not comment on what they will say. We need to leave -- let them
have their press releases and make their comments. We don't want to comment
for them.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Last quick question, just on asbestos. I know you said that there was no
change, but can you just give us the numbers as of the last quarter end, in
terms of cases pending and the recent settlement trend in terms of payment per
case?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
Yes. We announce at each of our quarterly conference call, earnings release
conference calls, this information. And I have it in front of me. The claims
outstanding at the end of December were 197,000. We had received 7000 in the
quarter, and the number of cases that were dismissed or paid was 7400. And the
cost per claim disposed was 1746. And we have a dismissal rate of about 76
percent, and it's typically been in the 70 percent for a while, for several
years.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
And over the last two to three years, that 1700 per claim, that trend is up or
flat?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
The average in '03 was $1610, and the average in '02 was actually a good bit
lower. But most of that was because we had a lot more claims settled, and a
large part of our costs, our legal defense costs -- approaching 50 percent of
our costs were legal defense costs. So the more claims you have settled, the
average cost per claim declines.
------------------------------------------------------------------------------
PAUL TYCE - LEHMAN BROTHERS - ANALYST
Last question, I promise. Do you have a target date for when you might file
the proxy?
------------------------------------------------------------------------------
JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
Let's ask our general counsel, David Hausrath.
------------------------------------------------------------------------------
DAVID HAUSRATH - ASHLAND INC. - SVP & General Counsel
We obviously will start work on that right away, and there's also an S4
registration statement that goes with this. I would speculate that by the time
we get through to the SEC, we're probably five or six months from now,
roughly.
------------------------------------------------------------------------------
OPERATOR
Tom Yanku (ph), Morgan Stanley.
------------------------------------------------------------------------------
TOM YANKU - MORGAN STANLEY - ANALYST
Can you go over the impact on future earnings? The obvious ones, the MAP
interest of 285 million and the two businesses contributing 16. I've got that,
but I was wondering if you could go through the other details on what kind of
impact this will have on future operating income. And would those impacts come
from the off balance sheet liabilities that you're satisfying? If you could
tie those in, that would be helpful as well.
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
Let me go over that first one, Marvin, and you can finish up with more
specifics. I think that as we look at replacing the MAP earnings, our
principal focus again is to create value for our shareholders in this
transaction. So I believe this is a great start on our transition to the new
Ashland. And we also think again, this transaction creates significant value
for both us and the shareholders. As far as our organic growth, we're going be
very aggressive about growing our current business structure, as far as
chemicals and transportation construction. I will give you some unique
opportunities to grow inside of those businesses, plus their current
performance is remarkably stronger than they have been for the last year and a
half. So I think we're seeing an improvement in their ability to grow, and to
perform. And again, the M&A in the future is going to be small transactions to
support the core, as I mentioned before, and that will supplement and help
grow our earnings in the future. But I think in the near term, they'll be able
to eliminate the debt, and they will have an important impact on our balance
sheet. And that also will contribute to lost earnings because we will no
longer have those debt payments, but our challenge going forward is to grow
the Company, strengthen the Company, and to supplement it with opportunity.
------------------------------------------------------------------------------
TOM YANKU - MORGAN STANLEY - ANALYST
What kind of corporate cost reduction can you realize without the MAP
interest? Is there any reduction in corporate expense that we can expect?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
There is. Let me just kind of restate what I stated earlier. We have -- we
would have a deduction for the MAP interest, the operating income from MAP,
and the two other businesses that we mentioned that would go with MAP.
Offsetting that is we would have 110 to $120 million interest expense,
perhaps, go away, depending on how much debt we repurchased. Rent might
decline by $35 million, and we would have total stranded cost at various
levels of around $17 million. And we would expect that decline over time, and
I cannot give you precise times at which that would occur.
------------------------------------------------------------------------------
TOM YANKU - MORGAN STANLEY - ANALYST
Okay. And the leases that you would consider repaying, can you tell me the
nature of those leases?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
There are various types of leases. Some of them are of a real estate nature,
some of them are properties that were -- service station properties that were
put into MAP. Some of them are trucks and APAC road construction equipment.
It's just a broad range of items.
------------------------------------------------------------------------------
OPERATOR
Eric Connerly, Boston Partners.
------------------------------------------------------------------------------
ERIC CONNERLY ANALYST
Could you use some of the proceeds of this -- some of the cash proceeds to
pre-fund the remainder of the unamortized actuarial liabilities in your
pension plan?
------------------------------------------------------------------------------
UNIDENTIFIED COMPANY REPRESENTATIVE
We will probably do so. That is one of the areas we are likely to use cash, in
addition to the debt. Quite frankly, we think of -- to the extent our pension
plans are underfunded versus the ABO, we tend to think that as debt as well.
------------------------------------------------------------------------------
ERIC CONNERLY ANALYST
But the substantial unamortized liabilities, would you pre-fund those to carry
for GAAP purposes a positive balances, but for economic purposes a neutral
position?
------------------------------------------------------------------------------
MARVIN QUIN - ASHLAND INC. - CFO & SVP
I'm not sure I understand the question. Let me just say at the end of our
calendar year, which is not our fiscal year, our assets -- we were about 89
percent funded on an ABO basis, our assets. We do have a post-retirement
medical that is not funded, and would not be funded in the future.
------------------------------------------------------------------------------
ERIC CONNERLY ANALYST
Okay. I understand on the ABO basis, but there's about a 350 million
unamortized actuarial liability. Would you pre-fund it to bring it up well
over the ABO to pre-fund that liability as well?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
We really think -- and I know what you're talking about, the accounting
liability. Our funding policy is driven by the asset liability ratio. It's the
ABO versus the amount of assets we have to service our pension liabilities.
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ERIC CONNERLY ANALYST
So you go with the actuarial estimate rather than the economic value?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
We will go with -- we will fund on the basis of the ABO and try to have -- we
have a policy of funding at about 105 to 110 percent of our ABO.
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OPERATOR
Andrew Fairbanks, Merrill Lynch.
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ANDREW FAIRBANKS - BOSTON PARTNERS - ANALYST
Another debt question, I apologize if it's been asked, I had to hop off the
call. If you think about the potential obligations that you would be able to
pay off with the proceeds, and you include the pension liabilities and
off-balance sheet transactions, etc., I think you mentioned about 2.0 billion.
Is that booked target amount? Is that correct?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
No. The components are we have a capital accounts receivable program that's
about 150 million, leases of a couple hundred million. Our debt at year-end
was 1.574 billion. Our debt currently trades above book value. And then we
have other opportunities such as we may put in 100 million, an additional 100
million in our pension plans or something like that. But those are our
thoughts, and we will be -- I hate to give you too precise a number, because
we're going to try to make this -- we will be making decisions that are
economically attractive to us. And if we can remove a lease at a rate that
makes sense to us, we will do so. If we can't, we won't. And we really don't
know precisely at this point in time the outcome of our efforts to reduce --
to repurchase debt or redeem debt or to redeem leases.
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ANDREW FAIRBANKS - BOSTON PARTNERS - ANALYST
(indiscernible) in looking at those components, you mentioned something
roughly in the $2 billion range, if something looks reasonable. Do you have a
sense for the market premium on the debt that's available for repurchase
that's outstanding? I know we can add it up, but are we talking 100 million,
$200 million worth of premium in the marketplace, assuming interest rates
don't change?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
I suspect there are people at Merrill Lynch who can calculate that much
(indiscernible) tighter than I can.
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ANDREW FAIRBANKS - BOSTON PARTNERS - ANALYST
That's probably true. And I guess -- do you have some sense for the timeframe
for paying down the debt?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
It would be post-closing, and quite frankly, much of it may be at closing.
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ANDREW FAIRBANKS - BOSTON PARTNERS - ANALYST
Okay. And as you mentioned, you'll look at it on a case-by-case economic basis
as you go through (indiscernible). And if you get a big chunk right at
closing, and then the rest kind of dwindles down (indiscernible). Another
question on the operating cash flow from MAP that is being retained until the
transaction closes. Is the definition of operating cash flow for MAP the same
as it is currently for determining the cash distributions? So in effect, what
you're doing is you'll get the same monetary amount of cash distributions from
MAP that you would have otherwise gotten as part of the normal operating
venture agreement?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
Exactly. We have time for one last question. Sorry, Andrew.
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OPERATOR
Gi Chow (ph), PG Parkman (ph).
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GI CHOW - PG PARKMAN - ANALYST
Marvin, could you go over again what environmental liabilities are staying
with Ashland versus transferring them to Marathon?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
Yes. Let me start off by saying there are kind of two buckets there -- assets
that were placed into the MAP joint venture. And there our maximum continuing
liability is $50 million. And we have appropriate reserves there. There are
also liabilities for assets that were never placed into the joint venture,
including refineries that were once shut down and no longer there, terminals
that were shut down, old service stations that were pieces of real estate that
once had service stations on them. So those assets never went into the joint
venture, and we also have reserves for those. And for the most part, our
accounting policy is as we identify a liability or site, and we can quantify
the liability, we establish a reserve.
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GI CHOW - PG PARKMAN - ANALYST
You mentioned remediation, (indiscernible) 7 million over the next 12 months?
Is that correct?
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MARVIN QUIN - ASHLAND INC. - CFO & SVP
I think that $7 million number was associated with both post-retirement and
medical benefits, as well as environmental.
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GI CHOW - PG PARKMAN - ANALYST
Finally, Jim, you mentioned that you're going to be focused on strengthening
the performance of the wholly-owned businesses before looking before at
expansion opportunities. Can you give us your views on how far along you feel
you are in the strengthening process, by each of the business units?
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
I've been giving you some indication through our guidance in this report
today. As far as how they are evolving, I think they're evolving very
positively. Are we 100 percent there yet? No. Is there more improvement to be
made? I believe that we have the momentum now to carry us forward. I think
that's the important thing in any type of turnaround story, is you have to
gain the momentum. And the proof points are quarter-to-quarter, are you
improving against the previous periods, last year and the previous quarter? So
I think that we're starting to see that and we're starting to build that
momentum, and I'm confident these businesses are strengthening.
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GI CHOW - PG PARKMAN - ANALYST
Can you give us any indication, do you feel like you're further along in, say,
distribution versus APAC, or anything like that?
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JIM O'BRIEN - ASHLAND INC. - CHAIRMAN & CEO
I would say that distribution at APAC probably had the farthest to go.
Distribution, I believe, is well on its way. At APAC with the hiring of Garry
Higdem, he has brought a lot of knowledge, capability, and leadership to that
team, that I think will take them to the next stage. So I'm very confident
that we have the leadership team there. And plus, they have completed their
project past project, so they are well positioned now moving into the new
construction season, I believe, to perform.
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UNIDENTIFIED COMPANY REPRESENTATIVE
This concludes our conference call. Please be aware, again, just a reminder
that the slides and the script from the presentation today will be available
on our Website and will be archived for the next 12 months. If you do have
further questions, we certainly will make ourselves available this afternoon
to try to address them for you. So please have a nice day, and thank you for
listening in.
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OPERATOR
This concludes your Ashland conference call. Thank you for your participation
today. You may now disconnect.