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Hexion FinalQ407
 

Hexion FinalQ407

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    Hexion FinalQ407 Hexion FinalQ407 Presentation Transcript

    • Fourth Quarter and Fiscal Year 2007 Earnings Conference Call March 11, 2008
    • 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
    • Overview of Fourth Quarter and Fiscal Year 2007 Results Craig O. Morrison Chairman, President & Chief Executive Officer
    • Fourth Quarter and Fiscal Year 2007 Summary Performance Hexion Specialty Chemicals Fourth Quarter 2007 highlights: Revenues increased 13% over prior year Operating income of $21 million compared to $59 million. Q407 operating income negatively impacted by $40 million of asset impairments, manufacturing interruptions and planned turnarounds A 30% increase in our raw material index created a negative $16 million lead/lag impact on EBITDA Hexion posted Segment EBITDA (1) of $125 million, a 2% increase over prior year Hexion Specialty Chemicals Fiscal Year 2007 highlights: Revenues reached $5.8 billion, a 12% increase over prior year Operating income increased to $302 million, a 22% increase over prior year results when excluding gains from the sale of businesses Segment EBITDA (1) of $611 million, a 17% increase over prior year Year-end 2007 pro forma adjusted EBITDA of $707 million (1) Hexion remains on track to achieve $175 million in targeted synergies Arkema GmbH transaction closed in Nov. 2007, an Eastern German forest products business Ongoing progress with the regulatory review process for Hexion’s pending merger with Huntsman Corporation (2) Hexion Continues to Execute its Strategic and Operational Plan (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 December 31, 2007, the Company was able to satisfy this covenant and incur additional indebtedness under its indentures. Year-ended December 31, 2007 Adjusted EBITDA includes $55 million of in-process Hexion synergies and $38 million of acquisition adjustments. (2) Transaction remains subject to various conditions, including expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Act, review by foreign jurisdictions and other customary closing conditions. 4
    • Fourth Quarter and Fiscal Year 2007 Summary Financial Performance Quarter Ended December 31 Year Ended ∆ ∆ ($ in millions) 2007 2006 2007 2006 ↑ 13% ↑ 12% Revenue $ 1,480 $ 1,309 $ 5,810 $ 5,205 Q407 operating FY06 operating income included income Operating $40 million of ↓ 64% increased 22% ↑ 6% 21 59 302 286 asset impairments, excluding gain Income planned on the sale of turnarounds & assets manufacturing interruptions Net loss (63) (55) nm (65) (109) nm Segment ↑ 2% ↑ 17% 125 123 611 524 EBITDA (1) Hexion Posted Strong Year-over-Year Revenue and Segment EBITDA Gains (1) Segment EBITDA excludes in-process synergies and the pro forma effect of acquisitions. 5
    • Fourth Quarter 2007 Results Impacted by Raw Material Headwinds Negative lead/lag impact of $16 million in Q407 Hexion Composite Raw Material Index at December 2007 increased 30% compared to Q307 Ongoing focus on pricing actions to compensate for the rapid rise in raw materials Current prices remain volatile; closely monitoring market conditions for 2008 Hexion Composite Raw Material Index 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2007 Source: CMAI data. Key Raw Materials at or near Historical Highs as of Year-end 2007 6
    • Strong Revenue Growth in Fourth Quarter & Fiscal Year 2007 Net Sales Q407 vs. Q406 FY07 vs. FY06 Epoxy & Phenolic 14% 13% Resins Forest & 25% 15% Formaldehyde Products Coatings (3%) 6% & Inks Performance 15% 9% Products Broad Product Portfolio Supports Ongoing Revenue Growth; 58% of Hexion’s Total Sales were from International Markets in FY07 7
    • Fourth Quarter and Fiscal Year 2007 EBITDA Segment EBITDA Q407 vs. Q406 FY07 vs. FY06 Epoxy & (6%) Phenolic 24% Resins Forest & (9%) 6% Formaldehyde Products Coatings 55% 6% & Inks Performance 26% 43% Products Diversified Portfolio is Key to 2007 Performance 8
    • Hexion Remains on Pace to Achieve $175 Million in Synergies Achieved Summary ($ millions) $120 Achieved $15 million in targeted synergies in Q407 All Phase II actions expected to be taken in $70 2008 Synergies continue to contribute toward Hexion’s improvement in gross and operating margins in FY07 compared to FY06 SG&A as a percentage of sales improved to 7.1% in FY07 vs. 7.4% in FY06 FY07 FY06 Targeted Synergy Focus Areas Sourcing Manufacturing SG&A SG&A $37 mm Sourcing As of As of As of $72 mm FY05 FY06 FY07 ($ in millions) Achieved Synergies $20 $70 $120 $66 mm Unrealized Synergies $155 $105 $55 Manufacturing 9
    • Site Actions Designed to Strategically Optimize Manufacturing Footprint Site actions related to Hexion’s synergy programs include: Hernani, Spain (Phenolic Resins) Santo Varao, Portugal (Inks) (1) Pleasant Prairie, Wisconsin (Inks) (1) Lynwood, California (Coatings) Clayton, U.K. (Coatings) Hamburg, Germany (Coatings) Molndal, Sweden (Coatings) LaVal, Quebec (Forest Products) Virginia, Minnesota (Forest Products) Vancouver, British Columbia (Forest Products) High Point, North Carolina (Forest Products) Productivity and Synergy Programs Continue (1) Sites operational; actions included stopping production of heatset ink vehicles at Pleasant Prairie location and solvent-based coatings at our Lynwood California facility. 10
    • Financial Review William Carter Executive Vice President & Chief Financial Officer
    • Epoxy and Phenolic Resins Fourth Quarter 2007 Segment Highlights Quarter Ended December 31 ∆ 2007 2006 ($ in millions) Ongoing revenue growth enhanced by pricing and favorable product ↑ 14% Revenue $616 $539 mix. Segment Q407 planned turnarounds and ↓ (6)% $62 $66 EBITDA manufacturing outages negatively impacted Segment EBITDA Q407 Sales Comparison YOY Currency Acquisitions / Volume Price/Mix Translation Divestitures Total -- 7% 7% -- 14% 12
    • Epoxy and Phenolic Resins Fiscal Year 2007 Segment Highlights Year Ended December 31 ∆ 2007 2006 ($ in millions) Strong revenue growth reflects pricing initiatives and favorable ↑ 13% Revenue $2,424 $2,152 product mix Ongoing EBITDA improvement Segment ↑ 24% $337 $271 despite inflationary raw material EBITDA environment Segment EBITDA growth supported by positive demand from wind energy, aerospace and international construction FY07 Sales Comparison YOY Currency Acquisitions/ Volume Price/Mix Translation Divestitures Total (3)% 10% 6% -- 13% 13
    • Formaldehyde and Forest Products Resins Fourth Quarter 2007 Segment Highlights Quarter Ended December 31 ∆ 2007 2006 ($ in millions) Revenue growth reflects strong pass-through capabilities as well as ↑ 25% Revenue $448 $357 broad-based international growth Methanol spiked dramatically in Segment ↓ (9)% $39 $43 Q407: EBITDA Sept. ’07: $0.95/gal. Dec. ’07: $2.62/gal North American downturn partially offset by favorable international Q407 Sales Comparison YOY growth Currency Acquisitions/ Volume Price/Mix Translation Divestitures Total (3)% 6% 6% 16% 25% 14
    • Formaldehyde and Forest Products Resins Fiscal Year 2007 Segment Highlights Year Ended December 31 ∆ 2007 2006 ($ in millions) Strong international demand drove year-over-year gains in ↑ 15% Revenue $1,663 $1,440 revenue and Segment EBITDA Contractual pass-through Segment ↑ 6% $165 $156 capabilities offset rapid rise in EBITDA raw materials in FY07 FY07 Sales Comparison YOY Currency Acquisitions/ Volume Price/Mix Translation Divestitures Total (7)% 9% 3% 10% 15% 15
    • Coatings and Inks Fourth Quarter 2007 Segment Highlights Quarter Ended December 31 ∆ 2007 2006 ($ in millions) Ongoing North American housing pressures continued to negatively ↓ (3)% Revenue $316 $326 impact coatings demand Segment Focused cost control programs, ↑ 55% $17 $11 coupled with site rationalizations EBITDA significantly improved cost structure Q407 Sales Comparison YOY Currency Volume Price/Mix Translation Divestitures Total (12)% 5% 7% (3)% (3)% 16
    • Coatings and Inks Fiscal Year 2007 Segment Highlights Year Ended December 31 ∆ 2007 2006 ($ in millions) Ongoing pricing actions helped offset North American housing ↑ 6% Revenue $1,330 $1,254 decline Segment Site rationalizations will continue ↑ 6% $86 $81 EBITDA to optimize cost structure FY07 Sales Comparison YOY Currency Acquisitions/ Volume Price/Mix Translation Divestitures Total (9)% 4% 5% 6% 6% 17
    • Performance Products Fourth Quarter 2007 Segment Highlights Quarter Ended December 31 ∆ 2007 2006 ($ in millions) Strong regional demand for Oilfield products continued in the U.S. and ↑ 15% Revenue $ 100 $ 87 Mexico in Q407 New oilfield technology products Segment ↑ 43% $ 20 $ 14 have dramatically impacted revenue EBITDA and EBITDA results: Proptrac™, XRT Ceramax™ and Prime Plus™ Q407 Sales Comparison YOY Currency Acquisitions/ Volume Price/Mix Translation Divestitures Total 3% 11% 1% -- 15% 18
    • Performance Products Fiscal Year 2007 Segment Highlights Year Ended December 31 ∆ 2007 2006 ($ in millions) Oilfield and Asia Pacific growth contributed to strong year-over- ↑ Revenue $ 393 $ 359 9% year revenue and Segment EBITDA gains Segment ↑ 26% $ 77 $ 61 EBITDA FY07 Sales Comparison YOY Currency Acquisitions/ Volume Price/Mix Translation Divestitures Total -- 8% 1% -- 9% 19
    • Balance Sheet Update Hexion generated $174 million in cash from operations in 2007 In FY07, Hexion funded $130 million for the acquisitions of Orica and Arkema GmbH 2007 capital expenditures totaled $123 million Strong liquidity position: cash plus borrowing availability of $485 million at December 31, 2007 Ongoing focus on working capital improvements in 2008 and maintaining a disciplined approach to capital spending 20
    • Summary Craig O. Morrison
    • Summary: Hexion Fourth Quarter and Fiscal Year 2007 Results Hexion delivered strong financial results in FY07 with a 12% increase in revenues and a 17% increase in Segment EBITDA The company remains on track to achieve $175 million in targeted synergies Recently announced site closings will continue to improve overall cost structure December 31, 2007 pro forma adjusted EBITDA of $707 million On March 5, 2008, Hexion announced post-merger senior leaders for the company, contingent on the close of the acquisition of Huntsman (1) Hexion Continues to Execute its Strategic and Operational Plan (1) Transaction remains subject to various conditions, including expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Act, review by foreign jurisdictions and other customary closing conditions. 22
    • Appendices
    • Reconciliation of Non-GAAP Financial Measures ($ millions) Fiscal Year ended Dec. 31 Three months ended Dec. 31, 2006 2006 2007 2007 Segment EBITDA: Epoxy and Phenolic Resins 62 66 337 271 Formaldehyde and Forest Product Resins 39 43 165 156 Coatings and Inks 17 11 86 81 Performance Products 20 14 77 61 Corporate and Other (13) (11) (54) (45) Total 125 123 611 524 Reconciliation: Items not included in Segment EBITDA (1) Transaction costs -- 1 (20) Integration costs (10) (12) (38) (57) Non-cash charges (37) (9) (54) (22) Unusual items: 8 Gain on sale of business -- (1) 39 (1) Purchase accounting effects/inventory step-up (1) -- (3) -- (14) Discontinued operations -- -- Business realignments (5) 6 (21) 2 Other (8) (2) (17) (10) Total unusual items (14) 3 (31) 14 Total adjustments (61) (17) (124) (85) Interest expense, net (73) (71) (310) (242) Loss on extinguishment of debt -- (69) -- (121) Income tax benefit (expense) (1) 27 (44) (14) Depreciation and amortization (53) (48) (198) (171) Net income (loss) (63) (55) (65) (109) 24
    • Fixed Charge Covenant Calculations Year Ended Dec. 31, 2007 Reconciliation of Net Loss to Adj. EBIT DA Net loss (65) $ Income taxes 44 Interest expense, net 310 Depreciation and amortization expense 198 EBITDA 487 Adjustments to EBIT DA Acquisitions EBITDA (1) 38 Transaction costs 1 Integration costs (2) 38 Non-cash charges (3) 54 Unusual items: Gain on divestiture of business (8) Purchase accounting/inventory step-up 1 Business realignments 21 (4) Other (5) 20 Total unusual items 34 In process Synergies 55 (6) Adjusted EBITDA 707 $ (7) Fixed Charges (8) 274 Ratio of Adj. EBITDA to Fixed Charges 2.58 25
    • Fixed Charge Covenant Calculations cont. Footnotes 1) Represents the incremental EBITDA impact for the Orica Acquisition and the Arkema acquisition as if they had taken place at the beginning of the period. Also includes the impact of in-process synergies related to the Coatings and Inks acquisitions. 2) Represents redundancy and incremental administrative costs from integration programs. Also includes costs related to implementation of a single, company-wide management information and accounting system. 3) Includes non-cash charges for fixed asset impairments, stock based compensation, and unrealized foreign exchange and derivative activity. 4) Represents plant rationalization, headcount reduction and other costs associated with business realignments. 5) Includes the impact of the announced divestiture of the European solvent coating resins business as if it had taken place at the beginning of the period, management fees, costs to settle a lawsuit, realized foreign currency activity, and costs for unplanned plant outages. 6) Represents estimated net unrealized synergy savings from the Hexion Formation. 7) The charges reflect pro forma interest expense at March 3, 2008 as if the Orica A&R acquisition, the Arkema acquisition, and the amendment of our senior secured credit facilities had taken place at the beginning of the period. 8) Company is required to maintain 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 December 31, 2007, the Company was able to satisfy this covenant and incur additional indebtedness under this indenture. 26
    • Debt at December 31, 2007 ($ in millions) 12/31/2007 12/31/2006 Senior Secured Credit Facilities: Floating rate term loans due 2013 2,282 1,995 $ $ Revolving credit facilities due 2011 -- 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 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: Australian Multi-Currency Term/Working Capital Facility due 2012 69 -- Industrial Revenue Bonds due 2009 34 34 Capital Leases 12 11 Other 58 64 Total debt 3,720 3,392 $ $ 27