# To Our Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_ASH_2017/NYSE_ASH_2017.mmd` · pages 2-8_

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To Our Shareholders:

Reflecting on fiscal 2017, I believe it was a year of transition and great progress for Ashland. We completed the separation of Valvoline, a defining moment in Ashland's transformation. We acquired Pharmachem, which was immediately accretive to our earnings and expands Ashland into the important areas of fixatives and nutraceuticals. In addition, we completed the acquisition of a composites manufacturing facility plant in France, which was also immediately accretive and is exceeding our original expectations.
The Ashland team has the vision, products, people, infrastructure, markets and commitment to expand its position as a premier specialty chemicals company. Momentum is building. Fiscal 2018 is a crucial year for Ashland and we are committed to deliver results.

The Specialty Ingredients base business offset $25 million of raw material inflation through pricing and asset utilization actions. The team also drove organic sales and volume growth of more than 2 percent, excluding the effects of currency. Within Composites, our team overcame $50 million of raw material inflation by delivering price and volume, resulting in full-year earnings growth. And within Intermediates and Solvents (I&S), we returned to year-over-year profit growth in the second half of the fiscal year.

For the full year, Ashland's adjusted earnings was \(2.44 per diluted share, compared to \)2.25 per diluted share in fiscal 2016. These results include roughly $85 million in higher raw material costs and unfavorable currency impact. Sales rose 8 percent, to $3.3 billion, with growth coming from all three reportable segments and all regions.

It seems like a long time ago, but we started the fiscal year working to complete the full Valvoline separation. By January, much of this work was behind us. That was a crucial turning point for Ashland as we shifted the fundamental focus of the entire organization to put in place the changes needed to fulfill our vision of becoming the premier specialty chemicals company.

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In early May, we hosted our Investor Day in New York. At that time, we presented aggressive new financial targets for fiscal 2018-2021. Those targets are to:

Grow adjusted earnings per share (EPS) by at least 15 percent in each year of the period;

Improve ASI's adjusted EBITDA margins to above 25 percent; and

Generate more than $1 billion of free cash flow.

This growth will be 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 will be against a backdrop of disciplined capital investment. As a result of this work, we anticipate delivering significantly greater EPS growth in fiscal 2018 than the 15 percent conveyed during our investor day.

## Building momentum

So what has changed and why are we so confident that we can deliver?

Let's begin with organic growth, specifically in Specialty Ingredients, where we are targeting 2.5-3.5 percent annual sales growth. To accelerate profitable growth from 2 percent in fiscal 2017, we have first focused on improving our ability to deliver meaningful innovation to our customers. To do this, we conducted a comprehensive review of our past product launches to determine what worked and what didn't. As a result, we made three important changes to our new product development efforts:

First, we concentrated more of our resources on technical service request (TSR) projects, which are customer driven and have short timelines resulting in quick wins.

Second, we moved project prioritization to the commercial leaders. They now own the pipeline of projects and are accountable for the impact.
Third, we established what we call stage 6 new product reviews. These sessions more closely track the commercialization progress post-product launch to ensure delivery of their full potential.

Innovation is what drives us – it's front and center of everything we do. Ashland today boasts a highly differentiated set of technology platforms, the best scientists in our industry, and world-class laboratory, analytical and manufacturing assets. For example, earlier this year Ashland introduced a handful of innovative personal-care products that include:

A unique hair-care technology that repairs hair from root to tip – and won a prestigious gold award for "best new functional ingredient" at the in-cosmetics show in Paris;

Sunscreen formulations that deliver SPF 50+ UV protection without greasiness; and

A new biofunctional that helps users care for aging skin.

We are bringing this innovation to life under Ashland's new brand promise – always solving \( ^{TM} \)  – which was introduced at the start of fiscal 2017. (See page 8 of this report for a few examples of how we are delivering value to our customers.)

In addition, to accelerate sales growth, we improved our sales force effectiveness. We have established clearer targets, greater individual accountability and stronger incentive for individuals to drive incremental commercial contribution. To accelerate our sales and mix improvement efforts, we have focused our capital to ensure capacity needed to grow in our highest-contributing markets.

Pharma is a great example of what we're doing to drive growth. For example, in China we established local manufacturing capabilities in Nanjing to provide a broader range of Ashland excipients to the local customer base. In addition, we recently completed the Klucel \( ^{™} \)  expansion in Hopewell, Virginia, and dedicated more resources to successfully debottleneck capacity. As a result, our pharma business grew by 2 percent in the fourth quarter of fiscal 2017 versus a year ago.

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More importantly, moving forward we will be unconstrained in all our pharma product lines and expect to return to historical growth rates going forward.

Beyond accelerating sales growth, we are driving key initiatives to improve our operating margins. Our first priority in this area continues to be raising price, especially in these inflationary times. Accordingly, we have strengthened our pricing visibility and governance, and leveraged our global organization and SAP system to quickly identify where we need to increase prices. In addition, we have established tracking mechanisms to drive stronger accountability.

Better asset utilization is another key initiative to improve profit margins. There are two main paths we are pursuing to drive asset utilization gains. The first is to reduce plant spend. To that end, we have expanded our use of Lean Six Sigma tools and developed plans to reduce the number, length and cost of plant maintenance turnarounds – while maintaining our steadfast commitment to safety, quality and reliability.

We also closed or consolidated some of our manufacturing footprint, which will benefit fiscal 2018 by approximately $4 million. We continue to assess our manufacturing footprint to identify projects that we could begin implementing this year and could have a meaningful impact in fiscal 2019 and beyond. This is important as our goal is to ensure we have 15+ percent earnings per share growth in fiscal 2019 and beyond.

Second, in addition to reducing plant spend, our production cost can also be improved through better utilization rates. We will achieve critical gains in this area by delivering on the growth targeted in our fiscal 2018 sales budget and continuing to work aggressively to de-toll currently outsourced products.

To ensure our gross profit gains fall to the bottom line, we are committed to keeping our SG&A expenses flat. We are expanding our use of global business service centers. We are also closing or consolidating nine offices.

Combined, these actions make us believe we can deliver adjusted earnings of \(3.20-\)3.40 per diluted share in fiscal 2018, which would represent a 30-40 percent increase over last year.

Next, we are committed to generating over $1 billion in cumulative free cash flow by fiscal 2021. Earnings growth will be the biggest contributor. In addition, we will spend <6.5% of sales on capital expenditures and change in working capital. We have opportunities to lower working capital and reduce capital investment – especially as we shift our focus from capital expansions to better utilizing our existing capacity.

Capital allocation – or how we spend the money that our businesses generate – is an important element of how we drive earnings and margin growth. Our capital allocation strategy has not changed. The first priority is to pay down debt from the Pharmachem acquisition. In addition, we'll continue to invest in the business and good organic projects, just like we have been doing. Also, the board of directors has given us the authority to purchase up to $500 million of Ashland's stock. We also remain open to bolt-on acquisitions that offer good financial returns and strategic fit. Finally, we continue to assess our portfolio, seeking to reduce our asset intensity and earnings volatility while strategically investing in our most differentiated markets.

In summary, the Ashland team has the vision, products, people, infrastructure, markets and commitment to expand its position as a premier specialty chemicals company. We outlined our plans to get there at our May investor day. Since then, we have put the systems, people and accountabilities in place to make it happen.

Momentum is building. Fiscal 2018 is a crucial year for Ashland and we are committed to deliver results. Thank you for your continued support and investment.

![](images/4_0.jpg)

William A. Wulfsohn

Chairman and Chief Executive Officer
November 20, 2017