# To Our Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_ASH_2018/NYSE_ASH_2018.mmd` · pages 2-8_

---

To Our Shareholders:

Eighteen months ago, having just completed the Valvoline separation, we presented our Investor Day thesis, which included three performance targets that would be driven by seven core operating levers.

We have now completed our first full fiscal year since establishing those long-term targets and I am pleased to share clear evidence that our value creation plan is working. In fiscal 2018, sales grew 15 percent, to \(3.7 billion. Operating income was \)227 million, compared to \(146 million a year ago. Net income attributable to Ashland was \)114 million, or \(1.79 per diluted share, compared to \)1 million, or \(0.01 per diluted share last year. Income from continuing operations was \)105 million, or \(1.66 per share, versus a loss from continuing operations of \)105 million, or \(1.69 per share, in fiscal 2017. Adjusted EBITDA rose 20 percent, to \)683 million, compared to a year ago.

We also made great progress against the three specific performance targets for fiscal 2018-2021 that we established at our Investor Day:

Our first target is to grow adjusted diluted earnings per share (EPS) by at least 15 percent in each year of the plan period, which runs from fiscal 2018 to fiscal 2021. In fiscal 2018, we grew adjusted diluted EPS by 47 percent, to $3.58 per share.

Our second performance target is to improve Specialty Ingredients' adjusted EBITDA margin to 25-27 percent. In the fourth quarter of fiscal 2018, we achieved an operating income margin of 14.5 percent and adjusted EBITDA margin of 25.2 percent. This was our highest adjusted EBITDA margin in six years.

Our third target is to generate more than \(1 billion of free cash flow over the four-year period. In fiscal 2018, cash flows provided by operating activities were \)344 million and we delivered free cash flow of \(159 million, which included \)39 million of restructuring payments. This puts us well in line with our target.

<--- Page Split --->

This growth is being driven by specific actions to sustain and grow Ashland's premium mix, such as through new market strategies and successful product introductions. It also includes specific initiatives to improve our competitiveness, such as through better asset utilization, price-to-value focus and cost management. All of this is against a backdrop of disciplined capital investment.

Within Specialty Ingredients, sales increased 11 percent year over year, or 4 percent excluding the impact of currency, divestitures and acquisitions. This growth was broad based. Personal Care sales rose 4 percent, driven by a very strong year for our innovative biofunctionals skin- and hair-care technologies. Pharma sales were up 11 percent due to incremental sales from our new Klucel \( ^{™} \)  capacity and our successful de-bottlenecking activities. Adhesives sales rose 5 percent for the year, largely driven by healthy pricing and strong product mix improvements. Coatings sales rose 5 percent as we sustained strong relationships with key customers, continued to drive innovation with the successful launch of Aquaflow \( ^{™} \)  XLS, and
expanded our manufacturing capacity in Nanjing, China, by roughly 30 percent. Construction, Energy and Performance Specialties sales were up 9 percent for the full year, driven by improving market conditions. And finally, Nutrition and Other sales climbed 8 percent due to focused asset utilization programs.

For the full year, Specialty Ingredients' operating income was \(314 million. Operating income margin grew 220 basis points, to 12.7 percent. Adjusted EBITDA margin grew 100 basis points to 23.2 percent, despite approximately \)40 million of raw material inflation. This growth was generated through aggressive pricing actions, multiple product launches to improve product mix and profitability, targeted volume initiatives to drive positive absorption, and good cost discipline. We also had great success integrating Pharmachem and upgrading their mix, allowing us to improve margins and free up capacity to grow sales from a more profitable base.

Taken together, all these actions delivered $574 million in adjusted EBITDA for Specialty Ingredients. This is a 16 percent increase over prior year.

Also noteworthy in fiscal 2018, Composites and Intermediates and Solvents (I&S) reported strong results. Within Composites, sales grew 21 percent. Operating income rose \(6 million, to \)73 million, and adjusted EBITDA came in at \(95 million, up 7 percent. Within I&S, sales climbed 25 percent and operating income was \)31 million, compared to a loss of \(12 million last year. Adjusted EBITDA finished at \)61 million, up 135 percent from the prior year.

In addition, we kicked off a plan to sell our Composites and Marl I&S businesses to complete our path to becoming a pure specialty chemicals company. We recently

announced a definitive agreement to sell these assets to INEOS Enterprises in a transaction valued at approximately $1.1 billion. The transaction is expected to close prior to the end of the June 2019 quarter, contingent on customary approvals. We expect net proceeds from the sale primarily will be used for debt reduction.

We also took proactive action to offset stranded costs related to a Composites/Marl sale and to accelerate EBITDA margin improvement in Specialty Ingredients by announcing a $120 million cost take-out program. This program – which is also intended to make us a nimbler, more customer- and growth-oriented organization – is

<--- Page Split --->

fully on track. We met our first major milestone by capturing the targeted $20 million in annualized run-rate savings by the end of the September quarter.

We have completed our organizational redesign and are on track with all cost savings targets. We remain on track to be at a $50 million annualized run rate by the end of December 2018 and on schedule to deliver the $120 million run rate savings by the end of calendar 2019.

In all, Ashland delivered strong results in fiscal 2018, as we offset significant raw material inflation through pricing actions, mix optimization and a successful focus on asset utilization and absorption. All three operating segments met or exceeded the outlook ranges we presented at the beginning of the year.

The results of these efforts can be seen in Ashland's stock performance versus the Standard and Poor's 400 over the past one, three and five years.

One final note on fiscal 2018: Safe and responsible operations are the foundation of all that we do. It's a core value and a key tenet of what we call the Ashland Way. That's why it was so gratifying to learn that Ashland was recognized as the American Chemistry Council's Responsible Care Company of the Year in 2018. In addition, we were named one of America's Safest Companies for 2018 by EHS Today, the magazine for EHS leaders. While we will never be satisfied until we achieve our vision of zero incidents, we are proud of the important work being done by our global teams to promote a zero incident culture at Ashland, and we appreciate this recognition.

## The Year Ahead

Looking to fiscal 2019, we expect Specialty Ingredients to deliver 2-3 percent organic sales growth. We are very confident we can continue to leverage the playbook from fiscal 2018 to deliver solid execution driving mix improvements, a focused pipeline of new value-creating products, asset utilization and aggressive pricing actions. We expect continued growth in Pharma, our highest-margin business, as well as our industrial businesses. In Personal Care, we anticipate continued growth in our skin and hair care end markets. However, we expect reduced demand in the oral care end market.

In addition, we intend to complete the sale of the Composites business and Marl BDO facility while implementing programs to eliminate roughly $70 million of stranded costs.

In conclusion, the Ashland team delivered in fiscal 2018 and we intend to deliver again in fiscal 2019. We have a clear strategy to drive strong earnings growth, and our performance in fiscal 2018 shows that we are making good progress toward the financial commitments we outlined to investors 18 months ago. We are taking aggressive action to accelerate results and the team is executing at a high level. As a result, we are creating significant comparative value for our shareholders.

I would like to thank Ashland's board of directors for their continued support and direction. Their insights and perspective have been essential to Ashland's successful transformation into a high-performing specialty chemicals company. I also want to recognize Ashland employees around the world who have done so much over the past year to live up to our brand promise of "always solving."

Sincerely,

![](images/4_0.jpg)

William A. Wulfsohn

Chairman and Chief Executive Officer
November 19, 2018