Ashland Inc.
Q3 2011 Earnings Call Transcript

Published: 28 Jul 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ashland Incorporated Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. David Neuberger, Director of Investor Relations, you may begin.

[David Neuberger:]

. Thank you. Good morning, and welcome to Ashland's Third Quarter Fiscal 2011 Conference Call and Webcast. We released results for the quarter ended June 30, 2011, at 6

[John Panichella:]

Thank you, Dave. Functional Ingredients had a strong June quarter. Volumes grew an impressive 12% over the prior year with good growth in all regions and end markets. Sequentially, volume was up 8%, largely due to the seasonal stronger construction market. We continue to push through pricing to recover our costs, and sales increased 33% over the prior June quarter and 12% sequentially. New products introduced within the past 5 years represented 26% of June quarter sales. While not shown on the chart, gross profit dollars for the June 2011 quarter increased roughly 18% over the year ago quarter as compared with volume growth of 12%. Gross profit as a percent of sales, however, declined to 33.1%. This was primarily driven by 2 factors

[Lamar Chambers:]

Thank you, John, and good morning, everyone. Water Technologies sales were $490 million, 14% above the year ago quarter. Roughly half of this increase was attributable to a weaker U.S. dollar in the June 2011 quarter, and the resultant effects of currency translation. Versus the prior year, we achieved the greatest sales increase on our growth markets, which were up 18%. Our base markets were up 12%, while all other markets were up an aggregate 4%. Gross profit as a percent of sales declined 400 basis points versus the June 2010 quarter and was down 160 basis points sequentially. In both instances, the decline was driven by increased raw material costs. As compared with the June 2010 quarter, our raw material costs have increased by approximately $30 million. We have captured roughly half of this increase through pricing, and we continue to take action to capture the remainder. At $43 million, EBITDA declined roughly 10% versus both the prior year and sequentially. The EBITDA margin in the June 2011 quarter was 8.8%, 230 basis points below the prior year. Now let's turn to Water Technologies EBITDA bridge on Slide 15. As you can see, margin erosion was the sole cause of the decline in EBITDA. Volumes were up 3% over the prior year, contributing $5 million. Our reported SG&A increased by $4 million. When we exclude the effects of currency translation, SG&A had a positive $3 million effect. Currency translation was also favorable to EBITDA by $3 million, primarily due to the dollar depreciating against both the Euro and the Brazilian Real. In total, EBITDA declined $5 million versus the June 2010 quarter. Please turn to Slide 16 for Performance Materials. Although Performance Materials' volume per day was down 12% from the year ago quarter, it was up 2% when we exclude the effects of Casting Solutions. As a reminder, Casting Solutions was contributed to the ASK Chemicals joint venture in December of 2010 and is no longer consolidated. Sequentially, volumes were -- per day were flat, despite the typical seasonal pickup one might expect. The softness was due to continued weakness in those segments of the construction market that Performance Materials serves and somewhat weaker demand in both Europe and Latin America. Excluding the effects of the ASK joint venture, sales were up 17% over the prior year. Gross profit of 13.6% of sales was down 310 basis point versus the prior June quarter. Please keep in mind that the ASK Chemical joint venture had a negative mix effect on Performance Materials. This is due to the higher profit margins within Casting Solutions, as well as the low-margin tolling agreement through which we currently support the JV. Thus when we exclude these effects, gross profit was down only 90 basis points. While we've been very successful of recovering our cost on a dollar basis, the denominator effect of higher sales decreased from margin compression on a percentage basis versus the prior year. Sequentially, gross profit as a percent of sales held steady despite a roughly $11 million increase in our raw material costs over this period. SG&A declined $12 million from the year ago quarter, primarily attributable to expenses being transferred to the ASK JV. EBITDA totaled $24 million for the June quarter, equal to the prior year and 20% above the March 2011 quarter. EBITDA as a percent of sales increased 10 basis points over the prior year and 60 basis points sequentially to 6.8%. Now let's turn to our EBITDA bridge on Slide 17. Overall performance was relatively consistent between the quarters. Small gains in volumes and margins as well as lower net SG&A more than offset the negative effect of $5 million of other items during the quarter. Other primarily reflects the effects of our ASK Chemical joint venture and includes roughly $2 million of stranded costs as we have described previously. ASK Chemicals performed reasonably well during the quarter and has improved since its December start-up. Now let's review Consumer Markets results on Slide 18. Consumer Markets placed significant raw material cost increases during the June quarter. Lubricant volume declined 4% from the prior June quarter and was down 1% sequentially. We attribute the volume declines to 2 separate factors

[James O'Brien:]

Thanks, Lamar, and good morning, everyone. As you've heard, continued raw material costs increases in each of our commercial units significantly affected our June quarter results. Across Ashland, sequential raw material costs increased by almost $60 million during the June quarter. This is roughly double the average increase for the prior 3 quarters. We match this raw material cost increase with equivalent pricing recovering our cost on a dollar basis. We have yet to push through enough pricing to recover margins. And as a result, gross profit as a percent of sales declined in the June quarter. We grew organically during the quarter with Ashland's volume on average of 4% and sales up 13% over the prior year. Volume growth was strongest in Functional Ingredients, which was up 12% with good growth in all regions and all end markets. This contrast with Consumer Markets, which was down in the quarter, due to the factors Lamar described. I expect Consumer Markets volume issues to be temporary, and July volumes are now tracking slightly above the prior year. During the June quarter, we generated $194 million of EBITDA. Free cash flow was a negative $46 million, primarily due to the increased working capital that Lamar just mentioned. Let's go to Slide 25 for our outlook. Our principal challenge in the near term continues to be recovery of raw material cost increases. While Ashland has recovered these cost increases on an overall basis through pricing, our commercial units have achieved varying degrees of success. We will remain focused on and continue to take appropriate pricing actions to recover our cost and ultimately, restore margins. I'll also remind everyone that we are now entering our seasonally weaker quarters, but we typically see sequential volume declines in Consumer Markets and Performance Materials. As Lamar mentioned, we are now taking action to reduce our cost structure. This includes head count reductions, initially being addressed through a VSO, reductions of third-party spend and other cost saving opportunities. I am confident that we will achieve the first $40 million of annualized savings by the calendar year end. As I stated numerous times, our general goal has been to return maximum value to shareholders through a mix of options. The June quarter was certainly a great example of delivering on this goal. During the quarter, we purchased 1.2 million shares of Ashland's stock at a cost of roughly $70 million and increased the dividend by 17%. Most important, we announced the pending acquisition of ISP, which we view as the most value creating use of our strong balance sheet and cash flows. Slide 26 shows that before and after view of Ashland based on the 12 months ended March 31st, the acquisition of ISP were more than double the size of Ashland's high margin Functional Ingredients business further expanding our #1 growth platform. A combination of Functional Ingredients and ISP will contribute roughly $500 million, approximately half of our EBITDA on a pro forma basis. In addition, this acquisition would increase Ashland's consolidated margins of more than 200 basis points, leading to a pro forma EBITDA margin of roughly 14.5%. With pro forma sales of $7.6 billion, the Ashland ISP combination will be positioned as one of the top specialty chemical companies in the world. In closing, the acquisition of ISP is a defining transaction for Ashland. It creates a global technology and market-focused leader in specialty chemicals, with the ability to create significant shareholder value. With that, we'll take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Laurence Alexander of Jefferies.

[Robert Walker:]

Good morning, this is Rob Walker on for Laurence. I guess first, on order trends into July and then August, given what your comments on raw material cost being challenging, working the pass-through price and sequentially weaker quarters, I guess, can you comment on order trends? And then will it be more difficult to achieve pricing actions in these quarters?

[James O'Brien:]

Well the comment about the seasonality is that as we go into our final fiscal year-end quarter, that's typically weaker than the quarter we've just completed. So on a comp basis, we will feel, I think, as good as if not better as we look at trends going into that quarter. So it's not so much a sequential issue. It's just more comping against a weaker quarter. So when you compare that on our pricing actions, pricing continues to rise on several of our businesses going through June, July, August, September. So we will have to continue to raise our prices in spite of whatever the market requirements will bear, and we'll be more successful, I think, in some areas than others. Water's been the most challenging. I think Aqualon will be successful in meeting their requirements. I think Valvoline has already met their June, July increases, and we'll see that translate into better margins going in through the quarter. And Performance Materials has been successful the whole period. So as I look at the business, I think it's going to be very much played out as we had did this last quarter. There'll be some pressures. We'll have some delays in getting full margin recovery, but I think ultimately, we'll get the pricing through and it's that typical 3-month lag that we face historically.

[Robert Walker:]

And then just on Aqualon, 2 questions. On volumes, so they were up 8% quarter-over-quarter. Was any portion of the Nanjing expansion in that number? And then kind of updated thoughts on whether or not current demand is strong enough to require an additional expansion there? And then on the margin side on Aqualon, given the pullback in cotton, how long before that could flow through potentially the segment margins?

[John Panichella:]

This is John, I'll try to address those. Yes, we did have the volume included from Nanjing approximately 2,300 tons in the quarter. We sold out of our Nanjing facility, and we are planning to make some announcements within the next several months on our plans to continue to expand our capacity as demand remains strong. So we're finalizing those actions, and we'll be prepared in the next 30 to 60 days to be communicating what we plan to do with regards to HEC capacities. As far as your question around cotton pricing, obviously, cotton has significantly changed in price. Although cotton lint has not followed that trend, and it is remaining relatively elevated, although we see it's stable going forward. So it has kind of bucked the trend in aligning cotton prices and cotton linter prices, primarily based on demand for linters. And we think that the linter pricing will remain stable to where it is now going forward unless cotton makes another really significant move.

[Operator:]

Our next question comes from John McNulty of Credit Suisse.

[John McNulty:]

Just a couple of quick questions. On the Water Treatment business, it looks like that this is continuing to struggle on the pricing versus raw materials. And it does seem like, at least, on one of the preannounced numbers that at least one of your competitors seems to be doing maybe a better job in terms of offsetting some of those headwinds. So I guess, I'm wondering, what is the issue there and is it an internal issue? Is it a competitive issue? How should we think about the Water Treatment business going forward?

[James O'Brien:]

As we look at Water and it's performance, we've been disappointed as well. And -- but primarily, it comes down to one factor

[John McNulty:]

Okay, great. And then one last question, just with all the puts and takes on Valvoline, did the -- if the April base oil hike, has that already been accounted for by the end of say, this past quarter? Did you already account for that in price increases or not?

[James O'Brien:]

Yes, the price increases for the April increase have been passed through, we'll have the full benefit of that by the end of the quarter. So probably by end of August, first part of September, we'll see that full recovery take place and it'll be built into our margins. The one area that we haven't recovered yet, we had another increase in July, which was I believe around $0.50, and that price increase is yet to be announced. And we are still working through the technicalities of how to do that. And our anticipation is that we're hopeful that the market will move some time in the near future so we can recover that hopefully by the end of November, first part of December. That's our expectation, and that's what we're hoping to achieve.

[Operator:]

Our next question comes from David Begleiter of Deutsche Bank.

[Unknown Analyst -:]

This is actually Rob [ph], I'm sitting in for David. Just a quick question for Aqualon EBITDA margins going forward, propylene's come off significantly in June and July. Is there material upside to margins over the next couple of quarters and how should we kind of think about that?

[James O'Brien:]

I would think about more cotton and cotton lint. And what we see is both in propylene, ethylene and cotton, pretty stable to where we are today. So from a cost perspective, we don't think they'll change that dramatically over this quarter.

[Unknown Analyst -:]

Okay, that's helpful. And then just to follow-up on the Nanjing HEC plant, where are utilization rates running?

[James O'Brien:]

The quarter just reported, we ran at 90% of capacity and we expect to be at full capacity in the subsequent quarter.

[Operator:]

Our next question comes from Mike Harrison of First Analysis.

[Michael Harrison:]

Jim, I was wondering if you could maybe share your thoughts on how Ecolab's acquisition or planned acquisition of Nalco changes the competitive landscape in -- for your Water Technologies business?

[James O'Brien:]

I'm sure we'll have some effect either positive or negative as that comes together as most of these things take shape. As we look at Ecolab and the combination, Nalco, we view it as not really changing our competitor. I think the competitor is still the same. The one area that I think could cause some concern going forward will be in the food space. I think that Ecolab has a very strong share, so does Nalco in the food space. So I think that area could be problematic. And today, we don't have a lot of business in that space. But it's one that we see as opportunity. So if I had any concern at all, it would be in the food area.

[Michael Harrison:]

And then was also hoping that maybe you could help frame up the $20 million of NextGen sales that you saw in the quarter. I guess, how did that compare to the plan? How complete was the rollout of NextGen during the quarter? And do you have any sense of how much of that $20 million in sales was cannibalizing nonrecycled oil?

[James O'Brien:]

As we look at the success of NextGen, it's playing out I think really in July, August and September. Some of the $20 million you see there was the sale end to the retail community. And we're watching the lift now take place to the promotions and how the consumer reacts to NextGen. In my view, if it only cannibalizes our own business, it's not a success in my view. I think it will be a success in the eye of the consumer and that they be given an opportunity to buy a recycled oil, but from a business standpoint, that isn't what we're trying to achieve. For me, let's say this is a success, we have to see us gain share, and we have the shelf space I think to achieve that. So really, this July, August, September timeframe will tell us a lot about whether or not we'll achieve this share gain that we hope to achieve from this. And hopefully by the end of this current quarter going into the next, we'll be able to report how we did on that. And because from a Valvoline standpoint, if it's just cannibalization, it's profit neutral. And obviously we're paying a lot of money to promote it. We do get some lift on the promotion and just cross the whole Valvoline brand, but that promotion should drive sales. And NextGen hopefully will pick up some share.

[Michael Harrison:]

And then last question I had was for John. I was just hoping that maybe you could talk a little bit about your estimates for some of the top line synergies with ISP. Maybe give some more details on exactly where those would come from and if you could give any kind of a guess or quantification, I think that would be helpful.

[John Panichella:]

Yes, I think I'll stay away from giving you a specific guidelines, but I can talk in generalities around where the market segments come together around products and technologies, where we expect to have opportunities. So we're really positive about the opportunities we see in the pharmaceutical space. We have nice complementary products in that area. Personal care is another area that we have very complementary technologies, and we think really nice opportunities for growth. So those 2 are high margin and high growth segments, and we think we can accelerate growth there. We also think there's some nice opportunities in the energy space, where we have complementary technologies and in the food and beverage area. So those would be the primary markets that we see growth. They're good in growth markets by themselves, but when we put the combination of the 2 technology packages together, we think we can accelerate growth in those segments.

[Lamar Chambers:]

This is Lamar. Let me just add to that. I think we've clear on this, but just to be sure. We've talked about a $50 million synergy estimate related to the ISP Ashland combination. None of the market kind of synergies, the commercial synergies that John's talking about is included in that -- that $50 million has to do with cost structure improvements primarily support groups, supply chain, a little bit of sales force rationalization, some of that. But it does not anticipate top line synergies.

[Michael Harrison:]

Right, I understand. I was just hoping, as I think about the Aqualon business historically growing at say a high single-digit organic rate. I was just trying to get some sense of maybe what the combined business could grow at once you take into account the cross-selling opportunities.

[Lamar Chambers:]

Our own Aqualon business has been growing at roughly 2x GDP and above that, over the longer term. We think the profile of ISP is one that certainly again we would expect to grow in that same general range over time. And then the combination of the 2 creates a little bit additional opportunity on top of that.

[Operator:]

Our next question comes from Mike Sison of KeyBanc.

[Michael Sison:]

I know you don't have the specific numbers, but ISP did 110 in the first quarter. Any feel for directionally -- should that EBITDA improve in the second versus the first? Any sort of qualitative comments on how the business is doing?

[James O'Brien:]

We've had some preview of the numbers. And I think the comment we made in the presentation is about all we can make because we don't have clearance to really discuss these numbers at this time. So I think that once we close at the end of August, our intent would be to provide you all as analysts and investors a more thorough review of the performance of the business, both through the quarter also historically. So you get a sense of how the business performed. And then as we get into our new fiscal year in October, obviously we're going to merge this with our Aqualon business. And so transparency will be lost because of that merger. So our intent would be to give you the historical numbers and historical view to give you a sense of how the business performed, then it's going to be merged. And as we report it as a segment, under Aqualon and ISP together, we will have to determine what kind of information is provided at that time. So our intent would be at least give you the historical information through the quarter, so you have a sense of how to expect the future for that business.

[Michael Sison:]

Right. And in terms of -- I don't know if John has a perspective on this. But should the performance sort of mirror what we saw in Functional Ingredients, where you tend to get good volume growth and raw material squeezes were minimal because of the pricing power of the business? Is that sort of -- should it be similar to what we saw in Functional Ingredients?

[John Panichella:]

I think you should look at the long-term fundamentals around the ISP business and the Aqualon business is very similar.

[Michael Sison:]

And then just maybe this one for Lamar. I think there was a plan to repatriate some of the earnings in the emerging market as this acquisition sort of unfolds. And if so, is there a tax headwind if you do that?

[Lamar Chambers:]

Yes, Mike. We -- I think we -- let me just repeat a little bit of what we said when we announced the transaction. Really nothing's changed in our planning at this stage with respect to the tax implications. We're looking -- expecting about a 500 basis point increase in our effective tax rate as a result of the change in our focus around the use of cash. And that was a change in focus as to bring as much cash home as it makes sense to pay down our debt and get to our targeted leverage ratio. So under U.S. GAAP we have to make an election around our expectations on what we're going to do with earnings outside the U.S. and our election expectations at this time is, essentially, will be repatriating a little vast majority of our foreign earnings. Now we are working hard and will continue to be working hard over the next few months and quarters on how to improve on that scenario. We got a lot of work still to be done in the tax arena around structuring of legal entities worldwide and how we can best optimize our use of cash versus our tax cost. And so I would expect the guidance we provided of roughly a 500 basis point increase in our tax rate to be proved to be likely on the conservative end. Certainly, we don't see any downside risk to that. We do see some opportunities to improve on that, but it's too early to speculate the extent that that may prove to be.

[Michael Sison:]

But if you're going to spend some money there for CapEx you would probably just keep enough cash there to do that or...

[Lamar Chambers:]

Absolutely, we'll find our foreign operation to where the cash that's earned overseas. That's the optimal world, and that's what we'll strive to do. It's the excess cash flows from those foreign entities that we would be bringing back home.

[Operator:]

[Operator Instructions] Our next question comes from Dmitry Silversteyn of Longbow Research.

[Dmitry Silversteyn:]

Just want to make sure I did my math correctly. On the Water Technologies business, it looks like you got about 4% to 5% pricing in the quarter. Is that correct?

[Lamar Chambers:]

Yes, that's generally in the range.

[David Neuberger:]

And maybe just to give you a different look at it for the -- this is Dave Neuberger. For the $30 million increase in cost, we got about half of that through pricing, Dmitry. So that's clean to [ph] mix, that number.

[Dmitry Silversteyn:]

Okay, got it. That's helpful. Secondly, when I look at kind of -- you mentioned seasonality in the Valvoline business from June to September and then in September to December. If I kind of look at what impacted your quarter in terms of volumes that you mentioned as well as in terms of profitability with the flooding and everything, how should I think about that seasonality? Is it going to be muted compared to what has been the last couple of years or are you still expected to be just as pronounced?

[James O'Brien:]

I think what you saw this past quarter, there was a couple of things impacting the volume. One was of course, there was a drop when crude went over $100 and gasoline went over $4. There was a drop in driving, so that was about 1% of that -- or 1% to 2% of that drop. And then the other side of that was about the same level of dropping volume due to the river flooding. The river flooding was a temporary result. Obviously, and we had to cut back on production in our Cincinnati plants and our Pittsburgh plants because we couldn't get material off the river to satisfy them, and we had to chase it and bring it by truck. So that made it difficult and raised our costs. That was a temporary effect. That won't be in the quarter that we're going to be experiencing now. And really, the outcome of the year as far as how it plays out, it will be the success of these promotions that we're having in July and August. So they seem to be moving well, and we'll have the total numbers until the first part of September. But then things tail off because the driving season's over and really it's because miles driven comes down as why the seasonality affect is there. More of a miles-driven issue than anything else.

[Dmitry Silversteyn:]

Got it. Would it be fair to say that the seasonality will be more likely to be maintained on the top line, but the bottom line -- because you don't have these disruptions in -- from the flooding and getting additional traction on pricing, whereas the July price increase in base oil may not really start impacting you until late in the quarter? Does the seasonality on the gross -- on the profit line will be not as pronounced?

[James O'Brien:]

Won't be as pronounced, but as I said, we're not going to get full recovery until the end of July and August on those 2 price increases. So really, when you look in the quarter, September will be the only month that will have that full margin recovery. So only 1/3 of the 3 months in the quarter we'll have full recovery. So as you look at it across the period, it will be softer, but it's moving up. The direction is up.

[David Neuberger:]

And just one clarification Dmitry, the month that Jim recorded on the $0.50 increase, that was the effective date. So it is hitting us effective July 1. That wasn't the announced date.

[Dmitry Silversteyn:]

Right. No, I understand that, but I mean, I'd also assume that you have some inventory that you will not be paying that price as of July 1st?

[James O'Brien:]

That's right.

[Dmitry Silversteyn:]

Okay, then just a bookkeeping question. From your slides, when you talk about incremental interest expense after the ISP acquisition of $150 million. Do I understand it correctly that it's incremental to $100 million or so that you're going to have an interest expense in 2011? Without ISPs, in other words, should we be looking at $250 billion in interest expense in 2012?

[Lamar Chambers:]

Yes, I mean, the $130 million expense guidance is the cost of the new financing. So I think you take our current capital structure and the interest cost we're reporting now and later on top of that, the $130 million of additional expense.

[Dmitry Silversteyn:]

Got it. Okay, that's what I thought, I just wanted to confirm. And then the corporate expense has been really volatile number quarter-to-quarter and year-to-year. I know there's a lot of things that go in there, and you can't always predict all of them. But to the extent that you see in your special items perhaps or a few of your [ph] items impacting the September quarter, is there anything that we need to watch out for?

[David Neuberger:]

This is Dave Neuberger. I'll take that one. The 2 items that were in the corporates that we had given some guidance on shortly before quarter end, we do have the Ashland Distribution stranded. So you can rest assured that, that number will remain although you need to start banking in the reductions that both Jim and Lamar had described. And right now, that was about a $10 million negative -- $9 million or $10 million. In addition to that, we have the pension expense related to the former Ashland Distribution employees. I think, we had previously guided to a number there of about $4 million to $5 million. I believe the actual came in slightly better than that. So it is your baseline type assumption and from there, as you'd mentioned, we had some -- a couple of items we think corporate [ph] this quarter that happened to offset it.

[Dmitry Silversteyn:]

But as far as looking forward to -- okay, so all of these should stay with you through the balance of the year is what you're saying?

[Lamar Chambers:]

Pretty much, we'll start to see a little bit of tail-off on the stranded costs as we begin executing our initiatives there as we described through September year end. As of that time, we'll get about $10 million of savings. We believe as of year end on an annual run rate basis. So it wouldn't be much effect on the quarter.

[Operator:]

Our next question comes from Jeff Zekauskas of JPMorgan.

[Olga Guteneva:]

Actually I had basically the same questions as Dmitry just asked. So just to be clear, in corporate you are -- so you have Distribution stranded costs, you have pension expenses. And going forward, you will have some expense for associated with the cost reduction initiatives. Is it correct?

[Lamar Chambers:]

Yes, the expenses associated with cost reduction, which will be primarily severance. We will call out, isolate those separately. So there will be some onetime charges associated with employee acceptance as of our voluntary program and any involuntary terminations.

[Olga Guteneva:]

And this is the $15 million to $20 million you mentioned?

[Lamar Chambers:]

That's correct.

[David Neuberger:]

And that was the cash number, just to be clear, Olga.

[Olga Guteneva:]

So as an offset, you will start having benefits from the ISP acquisition in the future, as an offset to your corporate expense? I'm sorry, you have so many different moving parts in that corporate line. It's a little bit difficult to forecast going forward. So if you could just summarize what you have, what may be like the timeline of this additional expenses or benefits that would be helpful?

[Lamar Chambers:]

We can -- let's just quickly walk through that again. For our corporate expense, our normal philosophy, the one we employ as we account for our support cost is to push all those costs out to our promotional units. So those costs are ultimately allocated to the commercial units with the except of major program costs, such as our major restructuring or cost reduction initiative and certain legacy costs related to discontinued or previously sold businesses. So all that's really left in the corporate area in terms of ability to forecast would be the stranded costs associated with our distribution business, which we have sized to be in the roughly $10 million per range. That will tail off and safely be eliminated by the end of December. The additional printing cost that we will have on an ongoing basis, as Dave said, we've sized that in the $4 million to $5 million range. And previously, it looks like it's turned not, not be a little less than that. And then any onetime costs associated with restructuring, particularly employee severance are, let's say, lease termination or things of that type that relate to a major company-wide restructuring program. So those are the really only costs that we can anticipate in the unallocated and other. It is an area where other things can rise, plus or minus, that we would normally forecast to be zero just because that's our best estimate.

[Olga Guteneva:]

And just quickly on the interest expense, so for -- so you have to step down from the second to the third quarter. And do you expect interest expense going forward at this new lower levels? Or it will just like bounce around given the debt pay downs you're planning?

[Lamar Chambers:]

There's 2 things things going on. One, is we reduced our debt outstanding at the end of March after we sold our Distribution business. We used that cash to pay off our Term Loan A, close out our receivables program. So that had an effect of reducing our interest expense in the quarter by about $5 million. So as with any other changes in the business, the current level that we reported for the June quarter, we're kind of been our expectations going forward. Now you layer on top of that the effect of the borrowings to purchase ISP and that's $2.9 billion of drawn borrowings at closing. We sized that to be $130 million of additional interest expense to the company going forward, $115 million roughly on a cash basis.

[Olga Guteneva:]

And you are planning to pay down debt as you get cash. That's the plan, right?

[Lamar Chambers:]

Yes, our free cash flow, we're going to use essentially all of that for debt reduction in the near term until we get much closer to our target at 2.0. You have to have a dollar [ph] average ratio..

[James O'Brien:]

And we probably have time for one more question.

[Operator:]

Our final question comes from Scott Kintz from Ascend.

[Scott Kintz:]

I was just wondering, are you expecting a headwind on the working capital side from the ISP deal?

[Lamar Chambers:]

No, as we've looked at there working caital -- it's quite similar to the way Aqualon's business manages working capital in the same kind of levels relative to sales. So we don't see anything particularly unusual there.

[Unknown Analyst -:]

And then last question, in terms of the $50 million of synergy on the ISP side, how much should we expect in 2012 or how do you think about that?

[Lamar Chambers:]

That will come in heavier in the second year as we're able to address systems changes and yes actually, get a lot of that rolled together. So we don't expect much of that $50 million in the first year but by the end of the second year of ownership, we would expect it all. Let me go back because there have been a couple of questions I want to be sure we're clear on this interest expense item also. Let me just push forward numbers again. The incremental effect of the borrowings for the ISP acquisition, we've sized at $130 million, P&L expense show on our interest expense line of our financial statements. We're running at roughly $100 million. I think for the quarter, we reported net interest and other financing expenses of $22 million for the June quarter. So if you annualize that, you would add the $130 million to that roughly $90 million that we're currently reporting. So in total, you're talking about roughly $220 million of interest expense going forward for Ashland after the ISP acquisition. Just wanted to be sure we reported on that.

[David Neuberger:]

Okay. This is David Neuberger. Thank you for your time this morning, and thank you for your interest in Ashland. If you have any additional questions, please give me a call at [phone]. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.