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Hexion
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Hexion

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  • 1. Credit Suisse Chemical Conference September 27, 2007
  • 2. Forward-Looking Statements Certain information in this presentation may be considered forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. This information is based on the Company's current expectations and actual results could vary materially depending on risks and uncertainties that may affect the Company's operations, markets, services, prices and other factors as discussed in filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, industry and economic conditions, competitive, legal, governmental and technological factors. There is no assurance that the Company's expectations will be realized. The Company assumes no obligation to update any forward-looking information contained in this presentation should circumstances change, except as otherwise required by securities and other applicable laws. This presentation contains non-GAAP financial measures. A reconciliation to the nearest U.S. GAAP financial measures is included at the end of the presentation. 2
  • 3. Today’s Presenters Craig O. Morrison William Carter Chairman, President & Executive Vice President & Chief Executive Officer Chief Financial Officer Joined Hexion in March 2002 as Joined Hexion in April 1995 as CFO of President and CEO of Borden Chemical Borden Inc. Previous roles include: Key member of Borden restructuring team President & GM, Alcan Pharmaceutical and Cosmetic Previous roles include: Packaging 20 years at Pricewaterhouse LLP, President and COO, Paxar including role as Engagement Partner for Borden President and GM, Van Leer Containers, Inc. Manager, General Electric Plastics Consultant, Bain & Company 3
  • 4. Hexion Overview Craig O. Morrison Chairman, President & Chief Executive Officer
  • 5. Strong First Half Results Validate Hexion Strategy Ongoing top line growth with a 13% increase in revenue Operating income reached $193 million, a 45% percent increase compared to first half 2006 net of Alba divestiture First half 2007 SG&A as percentage of sales decreased to 7.1% from 7.7% in first half 2006 (1) Segment EBITDA of $324 million in current year period, an increase of 22%, versus $266 million in prior year Adjusted EBITDA of $695 million resulting in an interest coverage ratio of 2.29 Arkema GMBH acquisition continues the accretive bolt-on strategy that Hexion has been pursuing Announced Huntsman merger provides strong value creation opportunity Hexion Posted Strong Year-Over-Year Performance (1) Segment EBITDA and Adjusted EBITDA are non-GAAP financial measures. The closest GAAP financial measure is Net Income (Loss). A table that reconciles these two measures is at the end of this presentation. Management believes that Adjusted EBITDA is meaningful to investors because the Company is required to have an Adjusted EBITDA to Fixed Charges ratio of greater than 2.0 to 1.0 to incur additional indebtedness under its indenture for the Second Priority Senior Secured Notes. As of June 30, 2007, the Company was able to satisfy this covenant and incur additional indebtedness under its 5 indentures. Last Twelve Month (LTM) Adjusted EBITDA includes $80 million of in-process Hexion synergies and $33 million of acquisition adjustments.
  • 6. Hexion Specialty Chemicals – The Global Leader in Thermoset Resins Revenue ($ billions) (2) $5.5 Bolt-on acquisitions (1) $4.7 Rhodia Group Akzo Nobel (3) Rohm & Haas Wax Assets Orica Resins (3) $2.4 Wright Chemical Arkema GmbH $1.7 (pending) LTM 6/30/07 (1) Borden Acquisition Bakelite Acquisition Hexion 12/31/05 8/04 4/05 Over Past Three Years A Revenue CAGR of 50% (1) 2005 Pro forma revenue excludes the Rhodia, Akzo, Rohm & Haas, Orica and Arkema GmbH acquisitions, as well as Brazil Consumer and Taroplast divestiture. (2) LTM 6/30/07 pro forma revenue includes the Rhodia, Akzo, Rohm & Haas acquisition, Orica and Arkema acquisition (pending), as well as Brazil Consumer and Taroplast divestiture. (3) Resolutions Specialty Materials and Resolution Performance Products owned by affiliates of Apollo Management L.P. prior to formation of Hexion. 6
  • 7. Hexion Historical Summary Hexion Pro Forma Revenue Hexion Pro Forma Adjusted EBITDA ($ millions) ($ millions) $5,465 (3) $695 $5,100 (1) $4,652 $583 $4,105 (3) $522 (2) $472 $364 2004 2005 2006 2007 1H 2004 2005 2006 2007 1H Adj. Pro LTM LTM 2007 Revenue CAGR: 12 % EBITDA CAGR: 21 % (1) 2005 Pro Forma Revenue excludes the Brazil Consumer divestiture and Taroplast divestitures as if they occurred on Oct. 1, 2005. (2) Includes the acquisition of Bakelite in April 2005 as if it occurred on January 1, 2005 and excludes the Brazil Consumer divestiture and Taroplast divestitures. (3) Unaudited 2006 LTM Actual Revenue and EBITDA with acquisitions of Rhodia, Rohm & Haas, and Akzo, net of the Brazilian Consumer and Taroplast divestitures. Note: 2003 Pro Forma Revenue and Pro Forma Adjusted EBITDA consists of the combined results of Borden, RPP, RSM, and Bakelite, as if Hexion had been formed on January 1, 2003. 7
  • 8. Hexion’s Diversification Offsets Segment Cyclicality and Provides Growth Opportunities 2007 1H LTM Revenue: $5.5 billion (1) End Use Markets (2) Geographies Food & Beverage Other 2% 5% Architectural 4% ROW Industrial/Marine 13% Construction 18% 4% Oil Field E&P 4% Electronics N. America 6% Consumer/ 49% Durable Goods 14% Civil Engineering 6% 38% Repair/Remodel Europe 7% New Home Construction Graphic Arts 12% Automotive 7% 11% Stable and Diversified Revenue Base: Largest Customer < 3% of 2006 Sales (1) Based on 2006 results. (2) Based on 6/30/07 LTM revenue. 8
  • 9. Hexion’s Value Creation Levers Fuel Top and Bottom Line Growth Core Business Processes •SAP •Six Sigma Achieving Successful •NPD Synergies Acquisitions Value Creation Experienced Management Global Team Footprint Growth Initiatives Hexion Continues to Execute its Strategic and Operational Plan 9
  • 10. Core Business Processes Deliver Tangible Business Results 2007 Six Sigma Targeted Savings ($ in millions) $21 Program Goals Growth (Revenue) Productivity (EBITDA) $11 Cash Flow $6 People $2 $2 Distribution Volume/ Processing Raw Inventories and Other Growth Costs Materials Targeting Six Sigma Savings > $40 million in 2007 10
  • 11. Synergies Have Grown as We Have Identified Incremental Projects Hexion Synergies ($ millions) 200 $175 180 160 SG&A 33 140 $125 120 32 67 Mfg. SG&A 100 $75 80 37 Mfg. 27 60 SG&A. 40 75 23 Sourcing Mfg. 56 Sourcing 20 Sourcing 25 0 2005 2006 2007 Hexion Continues to Achieve Targeted Synergies 11
  • 12. Hexion Provides an Outstanding Platform for Bolt-On Acquisitions Adding $650mm in Revenue Acquisitions Rhodia Coatings Akzo Nobel Coatings & Inks Rohm and Haas Wax Assets Orica Resins Wright Chemical Arkema GmbH 12 (pending)
  • 13. Our Broad Geographic Footprint Allows Us to Serve Customers Around the Globe Europe: 35 Facilities North America: 54 Facilities Asia Pacific: 23 Facilities Latin America: 6 Facilities Hexion’s Global Footprint Provides a Growth Platform Through Global Product Line Management Initiatives and New Product Development Programs 13
  • 14. Growth Initiatives Continue to Build With Global Infrastructure and Full Range of Thermoset Resins Global Technology Expansion Reformulation Technology Cross Fertilization Hexion’s Portfolio and Global Expansion Provide a Strong Base for Growth 14
  • 15. Experienced Management Team Provides Necessary Capability and Capacity to Successfully Lead Hexion Chairman & CEO Craig Morrison CFO Bill Carter Human Resources President President President Judy Sonnett Epoxy & Phenolic & Performance Environmental Health Coating Forest Product Products & Inks & Safety Resins Resins Resins Rick Monty Kees Verhaar Jody Bevilaqua Sarah Coffin Chief Technology Officer Divisions structured to optimize assets and Rich Myers market alignment Business Development Elliot Fullen Functional leaders selected for industry leading expertise IT Division Presidents: Kevin McGuire Average 25 years in chemical and resin industry experience Sourcing Nathan Fisher Strong track record of merger integration and growth Six Sigma Management ownership of approximately 7% Dalchand Laljit Legal Mary Ann Jorgenson 15
  • 16. First Half 2007 Continues Improving Performance Trend Hexion Revenue Hexion EBITDA ($ millions) ($ millions) th th Grow Grow 22% 13% $324 $2,903 $266 $2,560 1H06 1H07 1H06 1H07 (1) Segment EBITDA excludes in-process synergies and the pro forma effect of acquisitions. 16
  • 17. Across the Board Growth in Segment Revenue and EBITDA in First Half of 2007 Revenue Segment EBITDA 1H ’07 vs. 1H ‘06 1H ‘07 vs. 1H ‘06 Epoxy & 12% Phenolic 27% Resins Forest & 14% 21% Formaldehyde Products Coatings 17% 9% & Inks Performance 9% 13% Products Improving Segment EBITDA Margins in 1H07 17
  • 18. Financial Review William Carter Executive Vice President & Chief Financial Officer
  • 19. Financial Highlights Highly diversified revenue base Customers, end markets, geographies Stable primary end market demand Strong free cash flow characteristics Low capital expenditures Low annual total capex requirements of $110 - $125 mm Maintenance capex requirement of $65 million or 1-2% of sales Opportunity to optimize manufacturing footprint, reducing capex requirements in longer-term Low working capital requirements with opportunities for continued improvement Favorable tax attributes due to NOLs and tax efficient structuring will minimize cash taxes going forward Significant cross-selling opportunities and cost reduction initiatives will enhance Hexion revenue and EBITDA over the long-term 19
  • 20. Pro Forma Free Cash Flow ($ millions) PF Adj. 6/30/07 LTM Comment Pro Forma Adj. EBITDA $695 Includes $80mm effect of in process synergies and $33mm of acquisitions/divestitures Less: Cash Taxes Highly favorable tax situation due to NOLs, structuring (40) Less: Cash Interest Expense PF effect of 2006 recapitalization; Rapid deleveraging should (300) drive reductions Less: Capital Expenditures $110mm – $125 mm annual target, includes $65mm (120) maintenance capital expenditures and reflects synergy impact Change in Working Capital Significant reduction opportunity over the next two years -- offsets growth impacts Other Pension, OPEB, and other cash costs (25) PF Free Cash Flow ~$210 Strong Free Cash Flow to be Used to De-Leverage and Reinvest in the Business 20
  • 21. Low Capital Intensity Capital Expenditures % of Sales ($ millions) $125 $122 $125 3.5% $115 3.3% $114 3.0% $111 3.0% 2.5% $100 2.3% 2.0% 2.4% 2.1% 1.5% $75 1.0% 0.5% $50 0.0% 2003 2004 2005 2006 6/30/07 LTM Capital Expenditures Capex as % of Sales Hexion targeting $120 million of annual capex in 2007 $65 million for maintenance projects 21
  • 22. Significant Opportunities Exist for Working Capital Improvements Each business unit continues to develop specific targets and drive action plans for working capital components – monthly calls to measure success June 2007 DRO DPO DIO One Day Impact EPRD 51.0 45.2 51.2 $6.2 million FFP 36.4 35.8 25.0 $4.5 million C&I 65.9 42.6 40.2 $3.7 million PPD 52.0 30.5 26.1 $1.0 million DRO = Days Receivables Outstanding DPO = Days Payable Outstanding DIO = Days Inventory Outstanding Reduction Opportunity of $150 + million as we Move Towards “Best Days” 22
  • 23. Long Dated Debt Maturity Profile Debt Maturities $2,200 $2,000 $1,800 $1,600 $1,400 ($ in millions) $1,200 $1,000 $800 $600 $400 $200 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015+ Note: Debt maturity graphs exclude capital leases, other debt, and Borden foreign bank debt. Net debt as of Q207 Totals $3.4 Billion 23
  • 24. Hexion LTM EBITDA ($ in millions) LTM Q306 Q406 Q107 Q207 6/30/07 Quarterly $134 $124 $170 $154 $582 Segment EBITDA Acquisitions 33 In-Process 80 Synergies PF Adj. $695 EBITDA Improving Quarterly EBITDA Growth Despite Challenging Raw Material Environment 24
  • 25. Hexion Capitalization (6/30/07) ($ millions) Multiple of PF LTM 6/30/07 Adj. EBITDA (1) Cash $199 Revolver $0 Bank Debt 2,187 3.1 Net Total 1st Lien Senior Secured Debt $2,187 3.1x Second-Priority Senior Secured Notes 825 4.3 Net Senior Secured Debt $3,012 4.3x Sinking Fund Debentures due 2016 78 4.4 Debentures due 2021 115 4.6 Debentures due 2023 247 5.0 Other Debt 157 5.2 Net Debt $3,410 5.2x Adj. EBITDA $695 (1) June 30, 2007 LTM Adjusted EBITDA includes $80 million of Hexion in-process synergies and $33 million of acquisition adjustments. 25
  • 26. Transaction Update Craig O. Morrison
  • 27. Acquisition Overview Hexion and Huntsman reached a definitive agreement on July 12, 2007 for Hexion to acquire Huntsman Corporation (NYSE: HUN) for $28.00 in cash for each outstanding Huntsman share of common stock All-cash transaction valued at approximately $10.6 billion, including the assumption of debt Closing subject to Huntsman shareholder approval, regulatory approvals and other customary conditions (1) Huntsman shareholder meeting scheduled for Oct. 16, 2007 Upon closing, the merged companies will form a global leader in specialty chemicals (1) Huntsman shareholder meeting scheduled for October 16, 2007 for shareholders of record as of the close of business on September 4, 2007 to vote upon 27 adoption of the merger agreement.
  • 28. Pending Huntsman Acquisition Becomes a (5) Transformational Event 20 (4) $14.5 Revenue ($ billions) 15 10 a (2) (3) A $5.5 (1) $4.7 5 aa $2.4 $1.7 A a Borden Bakelite Hexion Hexion Pro Forma Acquisition Acquisition 12/31/05 LTM Combined 8/04 4/05 6/30/07 Companies Increased Size and Scale Presents Strong Value Creation Opportunity (1) 2005 Pro forma revenue excludes the Rhodia, Akzo, Rohm & Haas, Orica and Arkema GmbH acquisitions, as well as Brazil Consumer and Taroplast divestiture. (2) LTM 6/30/07 pro forma revenue includes the Rhodia, Akzo, Rohm & Haas acquisition, Orica and Arkema acquisition (pending), as well as Brazil Consumer and Taroplast divestiture. (3) Resolutions Specialty Materials and Resolution Performance Products owned by affiliates of Apollo Management L.P. prior to formation of Hexion. (4) Reflects Hexion LTM revenues as described in footnote 2 and Huntsman LTM pro forma revenue of $9.0 billion, which reflects the results of the respective acquisitions and divestitures. 28 (5) Pending transaction subject to previously disclosed conditions prior to closing, including shareholder approval, regulatory review and other customary conditions
  • 29. Hexion & Huntsman: Creating a Global Leader Pro forma Revenues = $14.5 billion Combined Company Revenues Revenue by Region by Reportable Segments (1) (2) Huntsman Perf. Produts 14% Pigments Materials & 8% Effects North Hexion Perf. 16% Products America 3% 43% Coatings & Inks RoW 9% 20% Form. & Forest Products 10% EMEA 37% Polyurethanes Epoxy & 25% Phenolic Resins 15% Hexion has Fully Committed Financing in Place to Complete the Transaction (1) Reflects Huntsman 2006 LTM Revenue of $9.0 billion as presented in September 2007. Huntsman LTM revenue pro forma for butadiene/MTBE, U.S. and European Base Chemicals and Polymers divestitures. Hexion revenue reflects LTM reported sales of $5.5 billion. (2) While Hexion and Huntsman each have divisions referred to as “Performance Products,” both the products and end-markets served in these segments are different and unique from each other. 29
  • 30. Hexion and Huntsman Transaction Creates a Strong Value Proposition Full Technology Portfolio Cross-fertilization technology Competitive Full Technology Portfolio Cross-fertilization technology Competitive (1) Global Footprint Cost Structure Global Footprint Cost Structure Amino Resins Adhesives & Structural Adhesives & Structural 43% of pro forma Technological Epoxy combined sales in Innovation Amino Resins N. America Urethanes Phenolics Overhead 37% of pro forma Consolidation Epoxy combined sales in Polyester Plant Optimization EMEA Phenolics Economy of Polyamide Polyester 20% of pro forma Scale combined ROW Vinyl resins Customer Benefit sales UV Resins Customer Benefit Best Practices Carboxylic Acids Solution delivery Coatings Leading Technology Coatings Vinyl & Acrylic Resins Global Capabilities Pigments Amino Resins Competitive Cost Position Vinyl acrylics Urethanes Surfactants Epoxy Alkyd Resins Polyester Amines Additives & Building Blocks Surfactants Additives & Building Blocks Maleic Anhydride Amino Resins Amines Pigments Surfactants Textile Dyes Textile Dyes Textile Chemicals Textile Chemicals Maleic Anhydride Acrylics (1) Reflects Huntsman 2006 LTM Revenue of $8.8 billion as presented in February 2007. Huntsman LTM revenue pro forma for butadiene/MTBE, U.S. and European 30 Base Chemicals and Polymers divestitures. Hexion revenue reflects 2006 reported sales of $5.2 billion.
  • 31. The Hexion & Huntsman Pending Merger Transaction Summary “Newco” forms a new Specialty Chemical leader with $14.5 billion in revenue Creates an opportunity to select best-in-class management and business processes from both companies Provides an opportunity to optimize the cost structure across both companies Delivers a broad array of technological platforms to develop new applications in a wide variety of end-use markets Creates a global footprint with a strong presence in all major geographical regions “Newco” Establishes an Industry Leader with Strong Top and Bottom Line Growth Potential 31
  • 32. Summary Craig O. Morrison
  • 33. Hexion - Summary Hexion continues to deliver on its original value creation premise Diversified end use markets and geographical footprint offsets end use market cyclicality Continued focus on pricing actions to compensate for a volatile raw material environment Diversified technology and global footprint provide an ongoing basis for growth On track to meet $175mm synergy commitment Huntsman merger creates significant value creation opportunity for combined entity Hexion Continues to Execute its Strategic and Operational Plan 33
  • 34. Appendices
  • 35. Reconciliation of Non-GAAP Financial Measures ($ millions) Six months ended June 30 Three months ended June 30 2006 2006 2007 2007 Segment EBITDA: Epoxy and Phenolic Resins 84 69 180 142 Formaldehyde and Forest Product Resins 44 38 87 72 Coatings and Inks 24 25 49 45 Performance Products 17 15 35 31 Corporate and Other (15) (13) (27) (24) Total 154 134 324 266 Reconciliation: Items not included in Segment EBITDA (1) Transaction costs -- (18) (21) Integration costs (11) (13) (20) (23) Non-cash charges (10) (6) (15) (13) Unusual items: 4 Gain on sale of business 4 4 41 -- Purchase accounting effects/inventory step-up -- (1) (2) (13) (13) Discontinued operations -- -- Business realignments (4) (1) (10) (2) Other 1 (2) -- (4) Total unusual items 1 (13) (6) 20 Total adjustments (20) (50) (42) (37) Interest expense, net (77) (56) (153) (110) Loss on extinguishment of debt -- (51) -- (51) Income tax benefit (expense) (12) (11) (33) (30) Depreciation and amortization (49) (41) (96) (78) Net income (loss) (4) (75) -- (40) 35
  • 36. Fixed Charge Covenant Calculations June 30, 2007 LTM Period Reconciliation of Net Loss to Adj. EBIT DA Net loss (69) $ Income taxes 17 Interest expense, net 285 Loss from extinguishment of debt 70 Depreciation and amortization expense 189 EBITDA 492 Adjustments to EBIT DA Acquisitions EBITDA (1) 33 Transaction costs (2) 0 Integration costs (3) 54 Non-cash charges (4) 24 Unusual items: Gain on divestiture of business (2) Purchase accounting effects/inventory step-up 1 Discontinued operations 1 Business realignments 6 Other (5) 6 Total unusual items 12 In process Synergies 80 (6) $ Adjusted EBITDA 695 (7) Fixed Charges (8) 303 Ratio of Adj. EBITDA to Fixed Charges 2.29 36
  • 37. Fixed Charge Covenant Calculations cont. Footnotes 1) Represents the incremental EBITDA impact for the Orica Acquisition, and the announced, but not completed Arkema acquisition, as if they had taken place at the beginning of the period. 2) Represents the write-off of deferred accounting, legal and printing costs associated with the Company’s proposed IPO, as well as costs associated with terminated acquisition activities. 3) Represents redundancy and plant rationalization costs, and incremental administrative costs from integration programs. Also includes costs related to implement a single, company-wide management information and accounting system. 4) Includes non-cash charges for impairments of fixed assets, stock based compensation, and unrealized foreign exchange and derivative losses. 5) Includes the impact of the announced divestiture of the European solvent coating resins business, one-time benefit plan costs and management fees. 6) Represents estimated net unrealized synergy savings from the Hexion Formation. 7) The Company is required to have an Adjusted EBITDA to Fixed Charges ratio of greater than 2.0 to 1.0 to incur additional indebtedness under its indenture for the Second Priority Senior Secured Notes. As of June 30, 2007, the Company was able to satisfy this covenant and incur additional indebtedness under its indentures. 8) LTM Period fixed charges reflect pro forma interest expense as if the Orica acquisition, the announced, but not completed, Arkema acquisition, and the amendment of our senior secured credit facilities, which occurred on February 1, 2007, had taken place at the beginning of the period. 37
  • 38. Debt at June 30, 2007 ($ in millions) 6/30/2007 12/31/2006 $ $ Revolving Credit Facilities 0 23 Senior Secured Notes: 9.75% Second-priority senior secured notes due 2014 625 625 Floating rate second-priority senior secured notes due 2014 200 200 Credit Agreements: Floating rate term loans due 2013 2,187 1,995 Debentures: 9.2% debentures due 2021 115 115 7.875% debentures 2023 247 247 Sinking fund debentures: 8.375% due 2016 78 78 Other Borrowings: Industrial Revenue Bonds due 2009 34 34 Capital Leases 11 11 Other 112 64 Total debt 3,609 3,392 $ $ 38

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