Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Mike Sison – Keybanc.
Mike Sison – Keybanc
Give us a feel for – if you think about the Ashland businesses on its own and think about the current economic backdrop and potential for [low] raw materials, sort of what the potential you see in the separate businesses heading into ’09 and 2010 assuming let’s say Hercules wasn’t on the table? Just to get a feel what the potential is for the base business at this point in time.
James J. O’Brien
As far as the potential for raw material decreases, obviously Ashland Distribution’s done a very good job moving through the pricing increases and as prices will come down, they will have to react to that in the marketplace as well. Performance Materials I think will benefit the greatest, because they’ve had the most difficulty in getting the pricing through because of the difficult demand structure that that business has experienced over the last 18 months.
So I think Performance Materials captured about 55% of the raw materials increases that we had the last quarter. So hopefully as prices come down, we can get back to more normal margins and as we talked about in the call, we’re also restructuring the cost structure of that business. We took significant cost cuts this last quarter as well as taking capacity out to bring our utilization rates up. So as this business becomes smaller due to the size of the market, hopefully it will be able to retain a level of profitability that will create a return. So that’s going to be beneficial.
Valvoline had a very good series of price increases where they passed through all the costs of the lube stock that went up during the quarter. Now as lube stocks potentially come down in the near future, they will have to work through that with their various accounts and price accordingly, but we feel that the market is structured as such that Valvoline will have good margins going through this period.
Water on the other hand will probably benefit like Performance Materials in that they achieved only about 33% of the capture of raw materials through the quarter. The issue being that they still have a lot of contract business that takes three to four months to get through and we have approximately 30 some odd percent of our contracts coming due this quarter, being the last calendar quarter of the year or our first fiscal quarter.
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