HXN2007Q2ConfCallFinal
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  • 1. Second Quarter 2007 Earnings Conference Call August 14, 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. Overview of Second Quarter Results Craig O. Morrison Chairman, President & Chief Executive Officer
  • 4. Second Quarter 2007 Highlights Hexion delivered strong results in Q207 Revenues increased 10% over prior year, which offset the impact of a 14% increase in Hexion’s raw material index on a year-over-year basis Segment EBITDA (1) reached $154 million, a 15% increase, compared to $134 million posted in prior year quarter Hexion’s global market and product diversification continues to offset the downturn in North American housing and automotive markets Pricing actions, flattening raw materials, synergies and productivity initiatives continue to be reflected in an improving bottom line when compared to the prior year period Synergies are on track to achieve the targeted $175 million Hexion continues to focus on expanding its international footprint Announced acquisition of the resins and formaldehyde business of Arkema GmbH Formation of a joint venture with OAO Shchekinoazot 2007 LTM results delivered a pro forma adjusted EBITDA of $695 million Hexion entered into a definitive merger agreement with Huntsman Corporation on July 12, 2007 Transaction remains subject to regulatory review, approval by Huntsman’s shareholders and other customary closing conditions 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 maintaining a minimum ratio of Adjusted EBITDA to Fixed Charges is a covenant that is contained in Hexion’s 4 loan agreements. Last Twelve Month (LTM) Adjusted EBITDA includes $80 million of in-process Hexion synergies and $33 million of acquisition adjustments.
  • 5. Diversified Portfolio and Increasing International Presence Drive Quarterly Results Hexion Results Quarter Ended June 30 ∆ 2007 2006 ($ in millions) ↑ 10% Revenue $ 1,464 $ 1,326 Operating ↑ 51% 89 59 Income Net loss (4) (75) nm Segment ↑ 15% 154 134 EBITDA (1) (1) Segment EBITDA excludes in-process synergies and the pro forma effect of acquisitions. 5
  • 6. First Half ’07 Results Compare Favorably to Prior Year Hexion Results Six Months Ended June 30 ∆ 2007 2006 ($ in millions) ↑ 13% Revenue $ 2,903 $ 2,560 ↑ 14% Operating Income 193 170 Net income (loss) (40) nm — ↑ 22% Segment EBITDA (1) 324 266 (1) Segment EBITDA excludes in-process synergies and the pro forma effect of acquisitions. 6
  • 7. Strong Revenue Growth Continued in Second Quarter and First Half 2007 Net Sales 2Q ’07 vs. 2Q ‘06 1H ‘07 vs. 1H ‘06 Epoxy & Phenolic 12% 13% Resins Forest & 12% 14% Formaldehyde Products Coatings 17% 5% & Inks Performance 9% 9% Products Across-the-Board Segment Revenue Growth 7
  • 8. Overall Growth in Segment EBITDA During Second Quarter and First Half 2007 Segment EBITDA 2Q ’07 vs. 2Q ‘06 1H ‘07 vs. 1H ‘06 22% 27% EPRD 16% 21% FFP C&I 9% (4)% PP 13% 13% Improving Segment EBITDA Margins in Q207 and 1H07 8
  • 9. On Track to Achieve $175 Million in Synergies Achieved Summary: ($ millions) $125 Achieved $14 million in targeted synergies in Q2 ‘07 $70 Anticipate achieving $125 million in synergies by year-end 2007 Synergy achievement remains an ongoing focus of senior management team Targeted Synergy Focus Areas FY ’07 FY ’06A Est. Sourcing M anufacturing SG&A $33 mm ($ in millions) Sourcing $75 mm Manufacturing As of As of As of FY05 FY06 Q207 SG&A $67 mm Achieved Synergies $20 $70 $95 Unrealized Synergies $155 $105 $80 Hexion Continues to Achieve Targeted Synergies 9
  • 10. Financial Review William Carter Executive Vice President & Chief Financial Officer
  • 11. Epoxy and Phenolic Resins Segment Highlights EPRD results driven by Quarter Ended June 30 robust epoxy demand in higher margin product lines ∆ 2007 2006 ($ in millions) Overall segment volumes ↑ 13% impacted by planned Revenue $612 $542 turnarounds and Versatic Acids and Derivatives Segment force majeure ↑ 22% $84 $69 EBITDA Product mix helped improve segment margins despite volatility in phenol Q2 ‘07 Sales Comparison YOY EBITDA margin Volume Price/Mix Currency Acquisitions/ Total improvement of 100 basis Translation Divestitures points driven by synergies (5)% 13% 5% -- 13% and productivity initiatives 11
  • 12. Formaldehyde and Forest Product Resins Segment Highlights Segment results supported by Quarter Ended June 30 our contractual ability to pass through higher phenol, methanol and urea costs ∆ 2007 2006 ($ in millions) Sluggish N. American market conditions and planned ↑ 12% Revenue $415 $370 turnarounds at major formaldehyde customers negatively impacted volumes Segment ↑ 16% $44 $38 EBITDA Strong international demand for resins and overall cost control initiatives contributed to an improved bottom line Q2 ‘07 Sales Comparison YOY Net impact of acquisitions Volume Price/Mix Currency Acquisitions/ Total and divestitures contributed Translation Divestitures $4 million in increased Segment EBITDA in Q207 (8)% 8% 3% 9% 12% compared to Q206 12
  • 13. Coatings and Inks Segment Highlights N. American housing Quarter Ended June 30 market adversely impacting Coating ∆ 2007 2006 volumes ($ in millions) Additional progress in ↑ 5% Revenue $341 $326 site rationalization efforts in Q207 with closure of Segment coatings site in Clayton ↓ (4)% $24 $25 EBITDA U.K. announced in July Q2 ‘07 Sales Comparison YOY Volume Price/Mix Currency Acquisitions/ Total Translation Divestitures (10)% 2% 4% 9% 5% 13
  • 14. Performance Products Segment Highlights Quarter Ended June 30 Oilfield products continued to benefit from strong volumes ∆ 2007 2006 ($ in millions) and product mix ↑ 9% Revenue $ 96 $ 88 Volume improvement from N. American gas drilling activities and a Segment ↑ 13% $ 17 $ 15 new Canadian facility EBITDA brought online in 2006 Decreased foundry volumes and EBITDA Q2 ‘07 Sales Comparison YOY reflect slower Volume Price/Mix Currency Acquisitions/ Total N. American auto Translation Divestitures demand 1 7% 1% -- 9% 14
  • 15. Balance Sheet Update Hexion generated $50 million in cash from operations during second quarter 2007 before one-time items Net debt outstanding at Q207 decreased $29 million as of June 30, 2007 Positive movements in working capital in second quarter 2007 In June 2007, Hexion amended and restated its senior secured credit facility to fund incremental term loans in the amount of $200 million and replenish the amount of incremental borrowings available under its debt agreements to $300 million Reduced the interest rates applicable to the borrowings of term loans by 0.25% Maintaining capital expenditure target of $120 million in 2007 Net debt as of Q207 Totals $3.4 Billion 15
  • 16. Transaction Update & Second Quarter 2007 Summary Craig O. Morrison
  • 17. Hexion & Huntsman: Creating a Global Leader 2006 Revenues = $14.0 billion Combined Company Revenues by Reportable Segments (1) Revenue by Region Huntsman Perf. Produts 14% Pigments Materials & 8% Effects North Hexion Perf. 16% America Products 43% 3% Coatings & Inks RoW 9% 20% Form. & Forest Products EMEA 10% 37% Polyurethanes Epoxy & 25% Phenolic Resins 15% • Strong global positions with significant scale and market leadership • Expanded portfolio of leading products and technologies • Hexion has fully committed financing in place to complete the transaction (1) Reflects Huntsman 2006 PF Revenue of $8.8 billion as presented in February 2007 Analyst Day presentation. Huntsman revenue pro forma for Textile Effects acquisition, butadiene/MTBE, U.S. and European Base Chemicals and Polymers divestitures. Hexion revenue reflects 2006 reported sales of $5.2 billion. While Hexion and Huntsman each have divisions referred to as 17 “Performance Products,” both the products and end-markets served in these segments are different and unique from each other.
  • 18. Summary: Hexion Second Quarter 2007 Results Hexion’s global market and product diversification drove strong quarterly revenue and Segment EBITDA performance compared to the prior year period Continued focus on pricing actions to offset ongoing raw material volatility Actions for $175 million synergy program continue on track Arkema acquisition and OAO Shchekinoazot further expands Hexion’s international footprint Hexion’s results delivered a LTM pro forma adjusted EBITDA of $695 million The announced merger with Huntsman, subject to regulatory review, approval by Huntsman’s shareholders and other customary closing conditions, will create one of the world’s largest chemical companies Hexion Continues to Execute its Strategic and Operational Plan 18
  • 19. Appendices
  • 20. Reconciliation of Non-GAAP Financial Measures ($ 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) 20
  • 21. 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 21
  • 22. 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. 22
  • 23. 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 $ $ 23