Jan 28, 2008
Executives
Eric N. Boni - Director, IR J.
Marvin Quin - Sr. VP and CFO Theodore L.
Harris - VP and President, Ashland Distribution James J. O'Brien - Chairman of the Board and CEO
Analysts
Laurence Alexander - Jefferies & Company Jeff Zekauskas - J. P.
Morgan John P. McNulty - Credit Suisse
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Ashland Earnings Conference Call. My name is Natasha and I will be your coordinator for today.
At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.
[Operator Instruction]. I would now like to turn the call over to Mr.
Eric Boni, Director of Investor Relations. Please proceed.
Eric N. Boni - Director, Investor Relations
Thank you, Natasha. Good morning and welcome to Ashland's first quarter, fiscal 2008 conference call and webcast.
We released our first-quarter results at eight O'clock eastern time today. These results are preliminary until we file our 10-K in February.
With me here today are Jim O'Brien, Ashland's Chairman and Chief Executive Officer; Marvin Quin, Senior Vice President and CFO; Ted Harris, President of Ashland Distribution and Michael Meade, Assistant Controller, External Financial Reporting. Now let me give you an outline for the call.
I will review our financial results, Marvin will discuss our business performance, Ted will cover Distribution in a little more depth and then Jim will close with our current focus and outlook for the remainder of the year. After that, we will be happy to take your questions.
Before we get started, let me review our cautionary language regarding forward-looking statements on slide two. Statements may be made during the course of this presentation that constitute forward-looking statements as that term is defined in relevant securities laws.
If such statements are made, they will be based on a number of assumptions, such as price, supply and demand, market conditions and operating efficiencies. Ashland believes that its expectations regarding operating performance are based on reasonable assumptions, but it cannot assure that those expectations will be achieved.
Therefore any forward-looking statements may prove to be inaccurate. Let's go to slide three to review the highlights of the first fiscal quarter.
As you can see on this slide, there were both positive and negative aspects to our performance in the December quarter. The declines in our operating income and earnings per share versus the year-ago quarter were substantial.
These declines were primarily due to our Ashland Performance Materials and Ashland Distribution businesses. Volume per shipping day declined 8% in our Performance Materials business and operating income was down 54%.
Distribution’s, 57% reduction in operating income versus prior year is due in great part to a 110 basis points reduction in the gross profit percentage. Marvin and Ted will discuss both businesses in more detail later.
The month of December was particularly challenging for us, negating the relatively improved performance of our businesses in October and November. On the positive side, Valvoline delivered record results for the December quarter.
Overall, Ashland's operating income increased 15% versus the September quarter when adjusted for prior period key items on the improved performances of both Distribution and Valvoline. Also, we generated cash flow from continuing operations of $69 million in the December quarter, which is atypical for our first quarter.
Finally, January sales are tracking in line with October and November levels. As most of you know, we post monthly sales on our website under business fundamentals.
Some of you may be interested to know that we did complete our FIN 48 analysis effective October 1st, and the impact to our balance sheet was negligible, totaling well less than $1 million. So let's look at the financial results on slide four.
Our operating income was $46 million for the first fiscal quarter of 2008. And income from continuing operations was $38 million or $0.60 per share.
This represents a 26% decline versus the December 2006 quarter's earnings per share from continuing operations. One more thing to note, our income taxes of $20 million in the December 2007 quarter reflect an effective tax rate of 34.8% versus 28.6% in the year ago quarter.
The increase in the effective tax rate is primarily due to the significant tax benefit that was included in the year ago quarter from the October 2006 special dividend payment on shares held in Ashland's leveraged employee stock ownership plan. Our Q1 effective tax rate has generally been higher in the full year tax rate.
So one should not necessarily assume a continuation of the first quarter rate. One other item to highlight this quarter is the $5 million downward adjustment to the gain on the sale of APAC, due to tax adjustments, which is shown on this slide as discontinued operations.
Now, let's turn to slide five to review our operating results. Our businesses' results for December 2007 quarter were generally down from the same quarter last year except for Valvoline.
Overall, operating income was down $12 million or 21%. Higher depreciation and amortization accounted for one-half of this decline.
However, versus the September quarter, operating income did increase more than $6 million, adjusted for key items as indicated on the slide. The months of October and November 2007 were encouraging followed by a weak performance in December for all of our businesses.
[inaudible] to last year customers seem to shutdown for the last weeks of December perhaps to an even greater degree. In addition, you may recall that in prior years, we reported results for our non-North American operations on a one-month lag such that the December quarter included the months of September, October, and November.
December, which is typically a weak month was reported in the March quarter. As a result of eliminating this one-month reporting hike, the month of December is now reported in the December quarter.
This complicates comparisons with prior periods as you will hear several times this morning. If we have reported for the prior-year December quarter, on the same basis we are now reporting this most recent quarter, Ashland's operating income would have been $3 million less one year ago, making our year-to-year comparisons $3 million more favorable in the current quarter.
Similarly, revenues would have been lower a year ago and the current comparison more favorable. The opposite is true for the March quarter.
All things being equal, our March quarter results this year should be stronger because it won't be burdened by a weak December. During the 2008 fiscal first quarter, performance materials continued to feel the impact of the downturns in the transportation markets, particularly heavy truck and the construction markets.
Distribution had shown significant improvements in gross margin in the first two months of the quarter, driven by price increases. However, December margins were below October and November due in part to reduced volumes and a number of fixed expenses.
All that being said, in distribution’s historically most difficult quarter, the business earned $6 million. Valvoline achieved increased profitability of approximately 10% over first fiscal quarter last year due to both margin and volume improvements.
Ashland's Water Technology's income decreased approximately 4% versus the year ago quarter. Unallocated and other for the quarter improved from an expense of $4.7 million to income of $3.5 million.
The favorable change was largely due to reduction in expense for certain employee benefits tied directly to the market value of Ashland stock. Now lets move to slide six, which summarizes our operating cash flows.
As we noted in the fourth quarter, depreciation and amortization was expected to rise and you'll see that it increased by $6 million. This was largely due to our GlobalOne SAP system, which we're now depreciating.
You will note a dramatic change in our use of cash in the December 2007 quarter as compared with the prior-year quarter. Changes in operating assets and liabilities reduced cash flow by only $5 million versus $212 million last year.
This primarily reflects a change in our trade payables practices that reduced the fiscal year-end seasonality we typically have experienced. Freight and other payables declined only $105 million in the December 2007 quarter versus a $204 million reduction in the December 2006 quarter.
In addition, we saw a net reduction in accounts receivable and inventories of $71 million versus a net $20 million reduction a year ago. Jim O'Brien will tell you more about our objectives in the area of cash flow, a bit later in the presentation.
Now lets turn to slide seven, to look at some of the macroeconomic trends that affect our businesses. The U.S.
industrial economy has struggled as the sailing statistics shown here indicate. These trends tend to affect the Distribution, Performance Materials and Valvoline businesses to varying degrees while Water Technologies tends to be a little more recession resistant.
Now, lets take a look on slide eight, at how Energy and Feedstock costs have changed during the last year. As you're well aware, already high energy cost continued to rise, specifically crude oil which is ultimately the source of the majority of our raw materials has risen 57% in the last 12 months.
And as you can see from this chart, many of our key feedstocks have increased since December a year ago and the rate of increase accelerated dramatically during the last quarter. Slide nine, shows we clearly have seen a number of substantial increases in our raw material costs.
Here are some of the more significant items that impacted Ashland's first quarter results. As you can see, the impact is not limited to just one or two businesses, but has been wide spread.
The total impact of these and other raw material increases was roughly $15 million in the quarter. We generally experienced a time lag between when we incur raw material increases and the effective date of our price increases to the market.
This can be anywhere from 15 days to three or four months depending on the business, the particular market involved and specific contract terms. We are pleased that during the quarter, we made progress on margins.
As our selling price increase is slightly outpaced, the $15 million increase in our raw material spent. Now this is a positive development, we still have additional raw material costs to recover in order to fully restore gross margins.
We hope this provides some context as Marvin discusses our business's performance. Marvin?
J. Marvin Quin - Senior Vice President and Chief Financial Officer
Thank you, Eric, and good morning everyone. As shown on Ashland's income bridge, the primary driver for operating income declined between the first quarters of 2007 and 2008, was reduced gross margin.
Now, while gross margin dollars rose in the December quarter versus the September quarter as Eric noted, they fell $9.7 million versus the prior year December quarter. This occurred in three of our four businesses with the exception being Valvoline.
Net SG&A increases of $4.9 million, reflect among other factors an additional two months of normal expenses for Northwest Coatings, which we acquired in December of 2006 as well as higher advertising expenses for Valvoline. These increases were partially offset by the favorable effect of the reduction in stock-based employee expense, which Eric mentioned earlier.
You can see here, we are now breaking up the impact of foreign currency translation on operating income. This reflects the fact that our larger global footprint, we will have more foreign exchange volatility as noted here.
The foreign currency impact on earnings has been slightly positive versus the prior quarter, largely benefiting the Performance Materials business. Slide 11 summarizes Performance Materials results, which were down substantially versus the prior year.
Our sales and operating revenues were up 1% over the year-ago quarter, our volume declined 8%. The elimination of the one-month lag for reporting non-North American operations, which Eric mentioned did adversely affect revenues.
This reduced revenues by about $9 million and if we had not made the change, the sales and operating income growth would have been 3% not 1%. During the calendar year 2007, the domestic EPR [ph] market appeared to have a decline greater than 10%.
Our U.S. business was impacted by a similar percentage.
Clients in the transportation market, particularly the heavy truck market, continued to negatively affect North American volume. Our declines appear to be consistent with or less than the overall reductions in heavy truck production in 2007.
Industry analysts are forecasting that heavy duty truck sales will increase modestly in the latter half of calendar 2008 with total projecting increases of 2000... of 10% to 15% over the depressed 2007 levels.
Truck sales in 2009 are expected to reflect significant pre-buying ahead of the new emissions regulations, which go into effect in 2010. Some industry observers are suggesting that 2009 increases might be in the range of 50% above the 2008 projected levels.
The North American recreation marine market was down about 15% in 2007. Ashland has partnered with high quality boat builders who are not off as much as the overall market and North American boat business is down less than 10%.
Ashland's business is also aided by a presence in the European marine market which is experiencing modest growth of 2% or 3%. In the construction market, sales volumes for products like our ISOSET adhesive, which are used in the manufacture of wooden I-joist were down 6% versus a year-ago quarter.
Overall, it is very possible that the marine and building, and construction market may not exhibit much growth until 2009. Fortunately, our other resin markets such as windmill blades and our involvement in other geographies like Asia and Europe are mitigating some of the dramatic declines in the U.S.
housing, truck and marine markets. Now let us move to slide 12 to the factors affecting performance material's operating income.
As shown on this income bridge, our volume decline resulted in $8.9 million reduction in operating income for the first quarter of fiscal 2007 to the first quarter of 2008. Our gross margin percentage declined 290 basis points.
Among other factors affecting performance materials was the elimination of one-month international reporting delay. If we have reported the same months in the year-ago quarter, the income gap would have been $2.4 million less than shown here.
The $1.6 million of other income is largely an improvement in equity income. Taken all together, these factors show...
these factors shown contributed to the $13.9 million decline in operating income in the first quarter. Approximately 6% of this decline took place in our Performance Materials business unit, composite materials with the remaining decline coming from our specialty polymers and adhesives business.
Now let’s turn to slide 13 for look at Valvoline's performance. Valvoline achieved a record December quarter with operating income of $20.1 million, 10% above the record set in the year-ago December quarter.
Lubricant volume improved in all lines of business especially our ‘Do it Yourself’ segment, which increased by 8%. We believe we increased share with this growth.
Sales increased by 8%, driven by higher average selling price and the volumes increased by 4%. Valvoline was not impacted by the elimination of the one-month delay so there really should be no adjustment to these numbers.
Gross profit as a percentage of sales improved by 90 basis points, which still remains below historical levels. Valvoline Instant Oil Change earnings more than doubled driven by an 11% higher average ticket and an increase in the number of oil changes per store per day, and a larger percentage of premium oil changes.
But premium oil changes now represent more than 50% of all of our changes... oil changes that Valvoline performs.
Valvoline International also achieved a record for the December quarter, nearly quadrupling its income albeit from a small base, largely attributable to significant increases in gross profit per gallon. Now let's look at the factors affecting Valvoline's operating income on slide 14.
As you can see here, increased margin was offset by increases in selling, general and administrative expenses, which were mostly higher advertising expense. Let's move on to Water Technologies on slide 15.
As you can see, sales and operating revenues for Ashland Water Technologies grew by 15% in the quarter, roughly half of which is attributable to foreign currency translation and this is our most global business. Also starting this quarter about $4 million of sales previously reported in Performance Materials was reclassified to Water Technologies.
This was another factor in the weak sales of Performance Materials noted earlier. Overall, Water Technologies experienced sales growth in the Americas, with flat sales in Europe, following the implementation in Europe of our new GlobalOne SAP system.
Please turn to the slide 16 to review the factors affecting Water's operating income. The December 2007 quarter operating income was reduced versus a year ago quarter by both the lower gross profit percentage and higher SG&A expenses.
The lower gross profit percentage was partially attributable to increased raw material cost really across all of Water Technology's lines of business. The SG&A increase was due partly to $1.1 million of cost previously reported in Performance Materials and an addition of $1.2 million of cost related to the implementation of our new unified management structure.
Now, I would like to introduce Ted Harris, the President of Ashland Distribution to give you some perspective on our Distribution business. Ted?
Theodore L. Harris - Vice President and President, Ashland Distribution
Thank you, Marvin and good morning. I appreciate this opportunity to give you a more in-depth view of the Distribution business, starting with slide 17.
Approximately 85% of Ashland Distribution’s business is in the U.S. Thus it goes without saying that conditions in the U.S.
market whether good or bad affect Distribution. As you have heard you say over the past several quarters, our primary markets for Distribution include, building and construction and transportation, which comprise roughly 50% of our domestic revenues.
Given the weak conditions in these markets in the U.S., many of our customers are experiencing production and sales decline. Meanwhile the European and Asian markets continue to be relatively strong, boosting overseas demands from many chemicals and plastics.
As a result of this demand, coupled with the weak U.S. dollar, manufactures of the products we buy are often able to sell products at a better price and profit internationally, that can be achieved in the United States.
Given our current dependence on U.S. markets, this puts pressure on Air margins, as Air customers buy less but we have to pay more, as we are competing with export opportunities for access to the product.
As Ashland and our competitors fight for the remaining U.S. business, there appears to be some downward pressure on pricing to maintain volume.
How do we choose to compete in this marketplace? First let me note that our volume remains relatively flat versus prior year despite the conditions in the U.S.
market. While most of our sales make a positive profit contribution, not all have, so in some situations we are forgoing business and recovering our investment and accounts receivable.
In order to improve profitability we're developing further rigor and discipline around our pricing process. This will better enable Ashland to manage differences in timing between changes in raw material costs and price changes at individual customers to optimize margin.
As Eric mentioned earlier, we've had some success as evidenced by the sequential improvement in our gross profit percent and operating income versus the September 2007 quarter. Within this broad landscape we developed and are working on several key initiatives for fiscal 2008 and beyond.
Let's look at them on slide 18. We just talked about doing a better job of pricing, the complement to that is managing our sourcing to improve profitability.
We've established a centralized network planning organization supported by a planning system to help ensure that we are buying the right products and bringing them into the right warehouses at the optimal pricing. Our SAP platform along with our new info [ph] tool provides some of the analytical tools and transparency into local demand in order to effectively undertake the centralized approach.
By taking a holistic view we can better manage our sourcing across our warehouse network. This organization also provides a framework for better managing our inventory, aiding our ability to efficiently utilize working capital, a key focus for all of Ashland in 2008.
Our success is also dependent upon our ability to leverage our warehousing network. Part of this leverage comes through selling additional products, whether through selling more of what we already carry or finding targeted growth for key products in desirable end markets.
We've chosen to focus on markets such as oil and gas, personal care and household, industrial and institutional cleaning products where we currently have a limited presence. Another portion of this leverage comes from finding efficient ways to sell lower margin commodity solvents.
As Jim announced in our year-end presentation, we've reorganized the business to focus on ways to maximize the profitability of this product segment. With that for background, let's turn to Ashland Distribution's results for the first fiscal quarter on slide 19.
As you can see on this chart, volume on a per day basis declined 2% while revenues increased by 4% to a December quarter record of $990 million as compared with $948 million in the same prior-year quarter. This resulted primarily from price increases in our North American chemicals and European plastics lines of business.
In particular, methanol prices rose dramatically during the quarter. However we've started to see a softening in methanol prices in the beginning of our second quarter.
While selling prices increased, unit gross margin remained constant. As a result, gross profit percentage declined accounting for two thirds of the 110 basis point drop in our gross profit percent.
The rest of the decline is attributable to increases in both our warehousing and delivery expenses. Let's look at slide 20 for details on the factors affecting our operating income, which declined 57% to $6 million in the December 2007 quarter.
As you can see on this first quarter income bridge margin continued to be the most significant factor in our income decline versus the December 2006 quarter. Neither foreign exchange, nor changes in selling general and administrative costs had a significant impact on the change in earnings and the negative impact of the termination of the North American plastic supply contract with Dow, accounted for $3.7 million of the decline showing the diminishing impact of this item as we bring on new customers and suppliers.
Let's turn to slide 21 for a more detailed look at what's driving Distribution's margin performance. As you can see from this chart, average selling price, the top blue line is up $0.03 per pound sequentially.
While our average cost per pound increased slightly less than $0.03 a pound. As a result, our unit gross profit increased by roughly $0.005 per pound versus the September 2007 quarter.
The next slide shows how this translated into sequential earnings improvement. As you can see on slide 22, this income bridge compares our first quarter earnings with those of the preceding quarter.
The only negative item on this bridge is the $6.3 million operating income impact from reduced volumes. This volume reduction primarily reflects the typical seasonal decline in our business in the month of December.
Despite this, our income, excluding key items identified in the prior quarter, increased by $4 million primarily the result of gross margin improvement. Sequentially, our gross profit percentage improved by 50 basis points, driven in part by increased unit margins for our hydrocarbon and methanol product line.
While one quarter does not make a trend, we are more optimistic about what this performance means as we enter our historically stronger spring and summer period. Now, I would like to turn over the presentation to Jim O'Brien to talk about Ashland's key initiatives and the outlook for our businesses.
Jim?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
Thank you, Ted. Good morning.
Slide 23 shows the main areas of focus for Ashland in 2008. First is compliance, that takes [ph] responsible care.
If we don't do these things right then nothing else matters. We work hard to create safe work environments and operate responsibly in our communities.
We require not only compliance but also require employees maintain high ethics in all matters, and we practice environmental stewardship throughout the life cycle of our products. These are the right things to do and they are also a good business.
We have long said that we have a long-term goal of an 8% operating income margin over an economic cycle, excluding our Distribution businesses. Due to its nature as a high volume, low margin business, Distribution's long-term goal is for that metric is 2% to 4%.
Over the past several years, a great deal of energy has been absorbed by the implementation of our GlobalOne SAP platform. With most of our businesses now on GlobalOne, we could shift our full attention to improving our business fundamentals.
This means improving growth by emphasizing service and customer relationships, focusing on markets rather than products and identifying segments where we can generate greater returns. We continue to build our presence globally and as our performances past quarter demonstrates, our international operations were showing solid growth.
Cost containment continues to be a focus. In our business units, resource group leaders are developing specific plans to optimize our cost spending and with such focus such as travel and entertainment being one of those.
A key emphasis for Ashland is cash flow. As you heard me state during our last presentation, every employee's incentive compensation, mine included, rise on improving our cash flow and working capital efficiency.
Totally 40% of our variable pay weighted [ph] is tied to improving cash flow. As you heard, our cash flow performance for the December quarter showed a significant improvement.
That said, we've invested a lot of money in working capital over the past few years, certainly driven by rising energy and raw material costs among other factors. It's now time to tackle the growth we've experienced in working capital, accounts receivable, inventory and trade and other payables.
We're attacking these three drivers, trying to find the proper balance that will enable us to generate levels of operating cash flow. Our objective for the year, which may or may not be achieved, is to reduce working capital levels back to where they were in 2006, which is a reduction of roughly 1.1% of sales.
While cash flow did improve for the quarter this year versus last year, driven primarily by working capital improvements. We did so, from a higher working capital base at the beginning of the quarter this year.
Thus, at the end of the first quarter, working capital as a percent of sales is still higher than the prior year by 0.08 of a percentage point. So, we still have our work cutout for us.
The challenge to reduce our working capital percentage has been put out to our employees and I am counting on their efforts to focus not only on serving our customers, but also in generating cash for our shareholders. I have every confidence that they'll raise to the challenge.
With that, lets turn to slide 24, to talk about our outlook. As you know, perhaps better than I, the U.S.
industrial economy continues to struggle and this affects our businesses to varying degrees. While we don't know how difficult our end markets will become, we've made changes in our business since the last downturn that should help temper the effects of a weaker economy.
Performance Material’s geographic profile has changed substantially with almost half of our business now outside North America. The business is also selling a higher percentage of premium products due in part to acquisition such as DERAKANE, vinyl ester resins, and the Northwest Coatings' radiation-cured adhesives business.
As a result, we now generate a higher unit contribution margin, which may be another factor in cushioning the impact of economic downturns. Our distribution business clearly experiences the impact of business cycles.
However, we are encouraged that the efforts that are being taken have generated sequential improvements in gross margin in the December quarter. We are further encouraged to see January sales tracking at the same pace as October and November providing some comfort that the severe weakness in the month of December was a year-end anomaly.
That said, distribution’s performance remains subject to the economic cycle in the U.S. And we remain cautious on our expectations and this point.
With the exception of fiscal 2006, Valvoline has been and continues to be a steady contributor to Ashland's operating income. During the quarter just ended, we received two base oil cost increases ranging from 10% to 12%.
In response to these and prior increases in December, Valvoline announced selling price increases on lubricant products, effective early in the second quarter. This increase should help solidify Valvoline's performance in the coming quarters.
It's important to note that our competition has also announced similar price increases varying by product line and supplier. The Water Technologies business is by nature much less cyclical than our other business segments and therefore provides less downside risk and an economic trough.
The business recently announced an increase of selling prices reflecting market conditions. This is the most impactful action we can take to make progress on achieving our long-term goal of generating an 8% return on sales for this business.
That said, Water Technologies will need to accelerate its improvements to achieve our expectations. This will include increasing the efficiency of this business in order to reduce our selling, general and administrative expenses.
As I look at Ashland as a whole I remain optimistic about our opportunities. We're number one or number two in many of our businesses and are generally positioned well to whether economic storms.
While the global economic outlook may be uncertain, Ashland's ability to effectively compete in a liquidity constrained environment is not. With cash and short-term securities of more than $1 billion and essentially no debt, we look to strengthen Ashland's competitive position in the quarters ahead.
With that let's open up for questions. Question and Answer
Operator
Operator: Thank you. [Operator Instructions].
And your first question comes from the line of Laurence Alexander with Jefferies. Please proceed.
Laurence Alexander - Jefferies & Company
Good morning.
Eric N. Boni - Director, Investor Relations
Good morning.
Laurence Alexander - Jefferies & Company
I guess first of all on the Performance Material segment, do you feel you have the right mix in that segment? I don't mean in terms of bolt-ons, but in terms of...
are any of the assets there look weak... structurally weaker than they were last cycle?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
When we take a look at the Performance Materials side of our business, as we mentioned in the prepared remarks, our commodity piece is less than it was for the last cycle. So we still have a big impact with commodities, both our specialty side through DERAKANE and also looking at more worldwide markets has improved dramatically.
So as we look at our sell-through this cycle, we are going to be impacted by the boat business, we are going to be impacted by the transportation business, but there are new environmental businesses which did not exist through the life cycle that we are participating in, such as windmill blades and inserts for few liners [ph] for coal burning power plants. Businesses like this are starting to take off in much greater quantities and we have expectations that they will help dampen the effects as we go in through this next cycle.
Laurence Alexander - Jefferies & Company
And with respect to raw materials, if you look back over the last 12, 18 months what is roughly the cumulative gap between the rise in raw materials and your pricing, or to put it another way, how much do you expect to recoup over the next 12 to 18 months if raw materials stabilize?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
One of the issues that we tried to demonstrate in the slides was if you just look at strictly raw material costs, we for the most part have recovered those as just a total cost of raw materials, but as we all know, you have to capture more than the actual raw material to maintain your margin. So, the real impact here has been our ability to maintain gross profit percentages, which would imply that we have to continue to increase pricing and particularly look at the segments that we compete in and to assure ourselves that we are getting the full value of the service that we are providing to several customers.
So, as we look at our challenge this quarter, our managers are significantly paying attention to the segmentation of their markets with the real raw material cost are in this particular segments and re-evaluating their pricing strategies and models to assure that we can get the maximum price that the market will avail in those segments. So, we are not satisfied yet with our recovery of that and we are pushing very hard and trying to get pricing up.
Marvin?
J. Marvin Quin - Senior Vice President and Chief Financial Officer
Yeah, Laurence, let me give you some few facts. If you look at our business fundamentals, we show the gross profits for each of our businesses there.
And if you go to the Performance Materials growth profit page, you will see that for the quarter just ended, our gross profit percent was 18.2%. Last year, at this time, it was 21%.
So, we certainly expect perhaps the higher prices, if they stay as high, we don't go up to 21%, but certainly well above the 18%.
Laurence Alexander - Jefferies & Company
And lastly, on the M&A environment, can you discuss both the pipeline that you might be seeing and also some color in terms of your preference for all cash versus mixed payments?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
As we look at the M&A opportunities that may or may not come to us, we have focused on several opportunities we think would be value creating for our shareholders and we continue to evaluate that in light of the alternatives, which is return cash to shareholders via a stock buyback or special dividend. So, all these various opportunities for deployment of the cash in our balance sheet are always being evaluated and considered.
And as we look at the opportunities, we think that the pricing of some of these may have come down, but this economic downturn hasn't had enough time yet for people to level set their expectations as far as what they may or may not want for certain properties. So, while we are very active as far as evaluating what we think would be excellent opportunities for us.
We still don't believe at this stage that the opportunities we made available at a price that would create the value that we think is necessary to create that value for our shareholders.
Laurence Alexander - Jefferies & Company
Thank you.
Eric N. Boni - Director, Investor Relations
Thanks Laurence.
Operator
Next question comes from the line of Jeff Zekauskas of J.P. Morgan.
Please proceed.
Jeff Zekauskas - J. P. Morgan
Hi good morning.
James J. O'Brien - Chairman of the Board and Chief Executive Officer
Good morning.
Jeff Zekauskas - J. P. Morgan
Just a couple of short questions. Your corporate expense was an income of $3 million versus expense of $5 million last year.
Why is that?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
It is primarily to do with the compensation element that is tied to Ashland's stock price. So it’s primarily focused on that area that was almost all of that change… compensation.
J. Marvin Quin - Senior Vice President and Chief Financial Officer
Let me give you… Jeff, an example might be, our long-term incentive program is denominated in stock.
Jeff Zekauskas - J. P. Morgan
Yeah.
J. Marvin Quin - Senior Vice President and Chief Financial Officer
It goes down the liability we have proven in our books goes down. We also have deferred compensation that people like ourselves [ph] invest in National Stock through to the extent that stock price goes down, the liability of the company goes down.
Jeff Zekauskas - J. P. Morgan
So is that a one-time corrective or is that, so long as Ashland's, so if Ashland's stock stays where it is in the next quarter, are you going to book income as well?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
If it stayed where it is, this would be a neutral item, if our stock rises this will be a cost item... there as we always have in this other category, there are a number of small items in there which might...
we could actually have a rising stock price and still that item could be positive just again from what other adjustments flow through.
Jeff Zekauskas - J. P. Morgan
Okay. The second question is your SG&A was up about 5.5%, your SG&A expense was up about 5.5% from $266 million to $281 million, are you satisfied with that?
Doesn't that seem rather fast given that you've got a relatively soft operating environment?
J. Marvin Quin - Senior Vice President and Chief Financial Officer
There is two things that impacted it through this quarter. We finished the European Go Live in the October, November time frame and we had many people traveling over there, so that we had a lot of expense associated with European, Go Live.
That was one impact. The other is that we've had several growth initiatives that we put in place which I believe are starting to bear some fruit as far as our research and how we've done our market segmentation work on trying to identify future opportunities.
So that was an investment we made and the other area that we made some investment is in our China and European marketplace. We've added some people in the area.
That being said, those were the investments we've made and we're starting to take a harder look now of the benefits of GlobalOne. And what GlobalOne should do for us, is in a couple of areas.
One is going to help us with our management of our working capital, which I think Ted gave you some specific examples of how he is using GlobalOne, to manage those receivables and inventory. So that's one benefit, the other is around efficiency and also transparency of our markets and how we do our segmentation work.
I think it should help us with our pricing and also should help us with the numbers of people that we have to do certain work, so all of our Presidents have a challenge to them this quarter to look at how we move up our margin basically as a net margin at 8% for the specialty side and 3% for the Distribution side. How to make significant improvements in doing that?
It's going to be a combination of both pricing and also cost containment. So, your observation is correct, we understand some of those effects and we are working on it.
Eric N. Boni - Director, Investor Relations
The other thing to keep in mind as well is there is a large foreign exchange, foreign translation component to that increase as well and we believe roughly two thirds of that increase has to do with foreign exchange.
James J. O'Brien - Chairman of the Board and Chief Executive Officer
Yes. Jeff, that SG&A, if you exclude with part of that Eric is talking about the currency, it was less than $5 million and when you look at the higher advertising expense we had in Valvoline, the additional two months of expenses from having Northwest Coatings two more months, you know that's a pretty modest increase.
What we're doing is finding some of these growth initiatives Jim is talking about, at the same time reducing corporate and other costs. All that being said, we still have a very strict eye on it and we want to have some impact and through this year and so it's something that we have talked about in the past with the GlobalOne, what benefit it was going to bring.
We're going to bring in some of those benefits through this year.
Jeff Zekauskas - J. P. Morgan
That's helpful. Lastly, are your acquisition efforts now really, I guess put on hold and that your stock price is down, call it 35% over the past three to six months.
And so, and so far as you measure acquisitions as relatively attractive versus buying back your own company. I would think that your own company would be much more appealing?
Now I realize that you are frozen because of some tax reasons but again doesn't this change your acquisition strategy a little bit or no?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
It doesn't really because our strategy always has been to find the opportunities that are the highest value creating for our shareholders. So, we've always had in our mix, the opportunity to have acquisitions as far as buy another divisions, companies, whatever as an alternative.
We also have the opportunity to buy back stock and we also have the opportunity to have a special dividend. I think, our past behaviors demonstrated that, we take that very seriously as we make our decisions, because up to this point, we have made acquisitions, we have given back stock, we have bought back stock, we have given back a dividend.
So, we've kind of used all those levers through the past and as we continue to evaluate the future, these will have to be taken into account and the environment will somewhat dictate, what is the most value-creating one to take that into consideration.
Jeff Zekauskas - J. P. Morgan
Okay. Thank you very much.
Operator
Next question comes from the line of John Mcnulty with Credit Suisse. Please proceed.
John P. McNulty - Credit Suisse
Yes. Good morning.
Two quick questions. The first one, with regard to your Performance Materials business and the heavy truck opportunities there, can you give us some color as to how much of a lead you have in terms of when you sell your product to the major truck manufacturers versus when they're actually delivering them themselves?
Just if we can get a feel for how we should be thinking about the 2010 environmental or truck change and standard changes and when you're going to start to really feel them?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
Yes. Ted used to run Performance Materials on the commodity side and also specialty.
I will let him comment on his experience.
Theodore L. Harris - Vice President and President, Ashland Distribution
The lean time is probably shorter than you might think. From the time that we sell products to the time that the part is made and then on a truck.
We really are talking something like three to six months from my recollection. So, it's relatively short supply chain.
John P. McNulty - Credit Suisse
Okay. So, assuming 2009 becomes a big truck buying year, you're really not going to see until the second half of 2008 and arguably maybe a little bit later then that, is that fair?
Theodore L. Harris - Vice President and President, Ashland Distribution
I think that's probably a fair assessment. Yes.
John P. McNulty - Credit Suisse
Okay. Great.
And then, just on the acquisition side of things with a lot of kind of major assets having come down on price as well as some of the smaller ones but maybe not quite as much on the small side. Has your appetite for larger acquisitions, would you say changed at all either gotten more aggressive, less aggressive or is that roughly the same?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
Well, I think in the past, we have always stated that our target was 100 to 500. That hasn't changed.
If a large acquisition would create a tremendous amount of shareholder value that we believe would benefit some sort of merger whatever we consider it. But, where we stand right now with our stock price and also with the conditions at the marketplace.
I would anticipate that, 100 to 500 is still the target range that we would find available opportunities.
John P. McNulty - Credit Suisse
Okay. And then, just the last question, with regard to the IRS reviewing the '05, I guess, the tax status of your refinery sale, I know you were hoping to get the...
their kind of review back, or their kind of blessing, if you will, back by the end of December, and it seems like its dragged down a little bit. Can you just give us an update on where that stands and when you might be thinking about getting it back?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
Sure John. We actually had discussions last week with the IRS and your point about it having dragged on is indeed accurate.
My guess is that where we are today, it's possible we could get it done in the March quarter, but it... I would say it's a higher probability that it will slide over to the next quarter.
It's a… no particular issues or it just… it's a matter of priorities within the IRS, the team that's working on it and it’s just... as you say its dragging on and but there is nothing, no particular issue that is creating some concern on our part.
John P. McNulty - Credit Suisse
Okay, great. Thanks a lot.
Operator
[Operator Instructions] Your next question comes from the line of Steve Schuman [ph] with Ashland. Please proceed.
Unidentified Analyst
Hi, good morning guys.
James J. O'Brien - Chairman of the Board and Chief Executive Officer
Good morning.
Unidentified Analyst
On... the comment on your Distribution business, why is that primarily construction and building driven?
I would imagine that's more consumer products, your sort of commodity polymers if you will?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
We're very strong in the coatings market, and so… and primarily are an important part of coating certainly is residential or architectural coatings. So that is a big part of our chemicals business.
But we also, in our composites distribution business, a significant amount of what we supply goes into building and construction as well as in our plastics business, with pipes and parts for electrical circuit breaker boxes and things like that, a significant amount of all three of our product lines, chemicals, composites and plastics go into building and construction.
Unidentified Analyst
Okay. So that's not going to be as recession proof as some of the consumer product lines going forward.
On the Water side, you did mention your Water Technologies, is somewhat recession resistance... resistant.
We don't have data going back that far from the last recession, but percentage wise how does that business typically swing, and which part is it, is it the original Ashland Water Technologies or is it the Degussa purchase?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
When you look at the Water business, whether it be municipal water treatment or if you look at plants that may run at lower rates. They still have to run their cooling towers and run their performance side of their business.
So, as we look at the business, of course the Marine is doing very, very well with trade still continuing to be at a high rate. That business has enough exposure to various parts of markets and worldwide markets that it is somewhat tempered by the U.S.
manufacturing segment, and that's what makes it so much more recession proof, it's more its breath of worldwide market and breath of commercial real estate plans and it’s just so broad in what it touches that it is in so many different markets it just doesn't have as much cyclicality to it.
Unidentified Analyst
On a percentage basis, is it, plus or minus, 15%, 20%, 15%?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
From trough to… no, I would say it's fairly steady. It's more like Valvoline where it's going to...
behaves more like a consumer product, I guess and it does an industrial product.
Unidentified Analyst
Okay.
J. Marvin Quin - Senior Vice President and Chief Financial Officer
Let me also add, it’s one of the factors driving its profitability on a short-term period will be what's happening to raw material prices and should propylene derivatives decline in price that would be very beneficial, conversely when prices are going up quite a bit that's a drag. So I'd say we are probably driven more in the short-term by what has happened in raw materials than we are by ultimate demand or the economy.
Unidentified Analyst
Okay. And a final question for you.
The Degussa purchase probably is not going as well as you had expected. I actually missed your comments on Northwest Coatings, but you are going to have some money at some point this year, do you feel your business leaders have sort of earned the right to go out and do acquisitions or do they need to cleanup their own house first?
James J. O'Brien - Chairman of the Board and Chief Executive Officer
There is no question that we... always our primary focus is to have the current business that we are operating to perform at its highest level.
So there is always pressure put on the commercial unit leaders to… that is their foremost, the primary responsibility is to get assets they are currently managing at the highest possible performance. That goes without saying.
The acquisitions, the Degussa acquisition is done very well and we're very pleased with it and the position in the marketplace and how that business is performed and the cash being thrown for that business has been very, very good. So I'm very pleased with that personally and in that business this is going to be expanded over time in my estimation.
When you look at other opportunities the decision to acquire is one that is strategic and opportunistic. One you must have a strategic reason that to be in this business we must strengthen either assets we have or other ideas we have moving forward how we want to develop in certain marketplaces.
And then the business that have been acquired has to be a good strong business in its own right. So as we acquire it that its performance can be enhanced by our management of it versus the attracted firm.
So, as I look at our decision it is how we make our decisions and I think types of acquisitions we've made over the last four years have demonstrated our ability to do that well and I'm very pleased what we've done.
Unidentified Analyst
Fair enough. Thank you.
Operator
I show no further questions in the queue. I would now like to turn the call over for any closing remarks.
James J. O'Brien - Chairman of the Board and Chief Executive Officer
I think that I appreciate everybody being on the call today and although this has been a challenging quarter, as we have tried to demonstrate in the remarks, sequentially I think we are making some improvements in some very difficult markets that we are facing. So as we go into the next quarter we can't give you any type of forecast what our expectations would be, but certainly over the last three months we've made improvements.
Eric N. Boni - Director, Investor Relations
Thanks everyone for participating.
Operator
This concludes the presentation. You may all now disconnect.
Good day.