Hexion Q307lEarningsCall

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Hexion Q307lEarningsCall

  1. 1. Third Quarter 2007 Earnings Conference Call November 14, 2007
  2. 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. 3. Overview of Third Quarter Results Craig O. Morrison Chairman, President & Chief Executive Officer
  4. 4. Third Quarter 2007 Highlights Hexion Specialty Chemicals delivered strong results in Q307 Revenues increased 7% over prior year Gross margins of 15%, an increase of 153 basis points over prior year Operating income of $88 million, an increase of 54% over prior year Segment EBITDA (1) of $162 million, a 20% increase over prior year Strong international results and diversified product portfolio continued to offset the softness in North American housing and automotive markets Favorable product mix, decreased transaction expenses, flattening raw material costs (through Q307), and synergy achievement improved Hexion’s YTD bottom line compared to the prior year Looking ahead, Hexion recently announced selective price increases focused on offsetting the volatility of certain key raw materials Hexion remains on track to achieve $175 million in targeted synergies The acquisition of the resins and formaldehyde business of Arkema GmbH was completed on November 1, 2007, further strengthening the company’s international footprint September 30, 2007 LTM pro forma adjusted EBITDA of $706 million Hexion’s pending merger with Huntsman Corporation received Huntsman stockholder approval on October 16, 2007 (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 September 30, 2007, the Company was able to satisfy this covenant and incur additional indebtedness under its indentures. Last Twelve Month (LTM) Adjusted EBITDA includes $70 million of in-process Hexion synergies and $27 million of acquisition adjustments. 4 (2) Transaction remains subject to various conditions, including expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Act, review by foreign jurisdictions and other customer closing conditions.
  5. 5. Improving Top- and Bottom-Line Results Hexion Results Quarter Ended September 30 ∆ 2007 2006 ($ in millions) ↑ 7% Revenue $ 1,427 $ 1,336 Operating ↑ 54% 88 57 Income Net loss (2) (14) nm Segment ↑ 20% 162 135 EBITDA (1) Hexion Posted its 5th Consecutive Quarter of Double-digit EBITDA Growth (1) Segment EBITDA excludes in-process synergies and the pro forma effect of acquisitions. 5
  6. 6. 2007 YTD Results Continue to Compare Favorably to Prior Year Hexion Results Nine Months Ended September 30 ∆ 2007 2006 ($ in millions) ↑ 11% Revenue $ 4,330 $ 3,896 ↑ 24% Operating Income 281 227 Net loss (54) nm (2) ↑ 21% Segment EBITDA (1) 486 401 (1) Segment EBITDA excludes in-process synergies and the pro forma effect of acquisitions. 6
  7. 7. Revenue Gains Driven by Organic Growth and Strategic Acquisitions Net Sales Q307 vs. Q306 YTD vs. Prior Year Epoxy & Phenolic 13% 12% Resins Forest & 8% 12% Formaldehyde Products Coatings 9% & Inks (4) % Performance 8% 5% Products Broad Product Portfolio Supports YTD Revenue Gains 7
  8. 8. Ongoing Growth in Hexion’s Overall Segment EBITDA During Third Quarter and YTD 2007 Segment EBITDA Q307 vs. Q306 YTD vs. Prior Year 51% 34% EPRD (5)% 12% FFP (20)% C&I (1)% PP 38% 21% Hexion’s Overall Segment EBITDA Margins Improved in Q307 (11.4% versus 10.1%) and YTD07 (11.2% versus 10.3%) 8
  9. 9. Hexion Remains On Pace to Achieve $175 Million in Synergies Achieved Summary: ($ millions) $105 Achieved $10 million in targeted synergies in Q307 Actions in place to achieve $125 million $70 in synergies by year-end 2007 Synergies remain a significant contributor toward Hexion’s gross margin expansion and favorable “SG&A as a percentage of sales” comparisons through Q307 9/30/07 FY ’06 Targeted Synergy Focus Areas Sourcing M anufacturing SG&A $33 mm ($ in millions) As of As of As of FY05 FY06 Q307 Sourcing $75 mm Manufacturing Achieved Synergies $20 $70 $105 SG&A $67 mm Unrealized Synergies $155 $105 $70 9
  10. 10. Financial Review William Carter Executive Vice President & Chief Financial Officer
  11. 11. Epoxy and Phenolic Resins Segment Highlights EPRD benefited from Quarter Ended September 30 favorable demand and product mix in several specialty product lines ∆ 2007 2006 ($ in millions) Productivity initiatives and raw material passthrough ↑ 13% Revenue $614 $544 capabilities supported increased segment margins (Q307 EBITDA margin Segment ↑ 51% improvement of 390 basis $95 $63 EBITDA points compared to prior year period) Versatic Acids and Derivatives rebounded from a Q3 ‘07 Sales Comparison YOY force majeure in Q207 for a key raw material to post Volume Price/Mix Currency Acquisitions/ Total improved sales and EBITDA Translation Divestitures (5)% 13% 5% -- 13% 11
  12. 12. Formaldehyde and Forest Product Resins Segment Highlights Ongoing pressure in the Quarter Ended September 30 North American housing market resulted in decreased volumes ∆ 2007 2006 ($ in millions) Positive demand and diverse applications for formaldehyde ↑ 8% Revenue $387 $357 contributed to increased sales Strong international demand Segment ↓ (5)% $39 $41 continued for formaldehyde- EBITDA based resins, specifically in Latin America, Europe and Asia Pacific region Net impact of acquisitions Q3 ‘07 Sales Comparison YOY and divestitures contributed Volume Price/Mix Currency Acquisitions/ Total $3 million in increased Translation Divestitures Segment EBITDA in Q307 compared to Q306 (8)% 2% 4% 10% 8% 12
  13. 13. Coatings and Inks Segment Highlights Coatings demand negatively Quarter Ended September 30 impacted by the N. American housing market, while Inks volumes in the ∆ 2007 2006 Asia Pacific region were ($ in millions) pressured by increased competition ↓ (4)% Revenue $329 $343 Shutdown of Clayton U.K. facility, announced in July, is Segment ↓ (20)% $20 $25 proceeding as planned EBITDA Q307 announcement of production shutdown for heatset ink vehicle products at Pleasant Prairie, Q3 ‘07 Sales Comparison YOY Wisconsin, site to reduce Volume Price/Mix Currency Acquisitions/ Total costs and respond to Translation Divestitures changing market conditions (12)% 3% 5% -- (4)% 13
  14. 14. Performance Products Segment Highlights Quarter Ended September 30 Increasing product sales to a diversified customer base and favorable ∆ 2007 2006 product mix resulted in ($ in millions) positive results for oilfield products ↑ 5% Revenue $ 97 $ 92 Strong demand for Oilfield products stemmed Segment ↑ 38% primarily from the U.S. and $ 22 $ 16 EBITDA Mexico in Q307 Hexion continues to fully leverage its newest facility, the Sturgeon site, near Q3 ‘07 Sales Comparison YOY Alberta, Canada Volume Price/Mix Currency Acquisitions/ Total Translation Divestitures Decreased foundry (2)% 6% 1% -- 5% volumes resulting from sluggish N. American auto demand continue to impact segment results 14
  15. 15. Balance Sheet Update Hexion generated $44 million in cash from operations during the third quarter 2007 and $84 million year-to-date 2007 Net debt outstanding as of Q307 decreased $24 million compared to Q207 (1) In August 2007, Hexion funded available incremental borrowings of $100 million under its senior secured credit facility Maintaining capital expenditure target of $120 million in 2007 Cash plus borrowing availability of $535 million at September 30, 2007 Net debt as of Q307 Totals $3.5 Billion (1) Excludes $100 million in funding requirement for pending Huntsman Transaction. In connection with the pending Huntsman acquisition, Huntsman terminated an Agreement and Plan of Merger with Basell AF. As a result, Huntsman paid Basell AF a break-up fee in the amount of $200 million, of which Hexion funded $100 million in July 2007. 15
  16. 16. Transaction Update & Third Quarter 2007 Summary Craig O. Morrison
  17. 17. Huntsman Acquisition Overview Hexion and Huntsman entered into 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 Huntsman stockholders approved the merger agreement at the special stockholder meeting held on Oct. 16, 2007 (1) While remaining separate companies until the transaction is completed, integration planning is proceeding Governmental anti-trust reviews are underway and both companies are cooperating fully Financing has been secured and the transaction is progressing as planned with closing projected to be in the first quarter of 2008. (2) (1) Huntsman shareholder meeting held on October 16, 2007 for shareholders of record as of the close of business on September 4, 2007 to vote upon adoption of the merger agreement. (2) Pending transaction subject to previously disclosed conditions prior to closing, including regulatory review and other customary closing conditions. 17
  18. 18. Summary: Hexion Third Quarter 2007 Results Hexion delivered strong financial results in Q307 with a 7% increase in quarterly revenues and a 20% increase in Segment EBITDA Favorable product mix, decreased transaction costs, flattening raw materials and synergy achievement drove our 5th consecutive quarter of double-digit EBITDA growth The company remains on track to achieve $175 million in targeted synergies September 30, 2007 LTM pro forma adjusted EBITDA of $706 million The pending merger with Huntsman, which recently received Huntsman stockholder approval, will create one of the world’s largest specialty (1) chemical companies Hexion Continues to Execute its Strategic and Operational Plan (1) Huntsman shareholder meeting held on October 16, 2007 for shareholders of record as of the close of business on September 4, 2007 to vote upon adoption of the merger agreement. Pending transaction subject to previously disclosed conditions prior to closing, including regulatory review and other customary conditions. 18
  19. 19. Appendices
  20. 20. Reconciliation of Non-GAAP Financial Measures ($ millions) Nine months ended Sept. 30 Three months ended Sept. 30 2006 2006 2007 2007 Segment EBITDA: Epoxy and Phenolic Resins 95 63 275 205 Formaldehyde and Forest Product Resins 39 41 126 113 Coatings and Inks 20 25 69 70 Performance Products 22 16 57 47 Corporate and Other (14) (10) (41) (34) Total 162 135 486 401 Reconciliation: Items not included in Segment EBITDA (1) Transaction costs -- -- (21) Integration costs (8) (21) (28) (45) Non-cash charges (2) -- (17) (13) Unusual items: 8 Gain on sale of business 4 (1) 40 -- Purchase accounting effects/inventory step-up -- (1) (3) (1) (14) Discontinued operations -- -- Business realignments (6) (3) (16) (4) Other (9) (5) (9) (8) Total unusual items (11) (11) (17) 11 Total adjustments (21) (32) (63) (68) Interest expense, net (84) (61) (237) (171) Loss on extinguishment of debt -- -- -- (52) Income tax benefit (expense) (10) (11) (43) (41) Depreciation and amortization (49) (45) (145) (123) Net income (loss) (2) (14) (2) (54) 20
  21. 21. Fixed Charge Covenant Calculations Sept. 30, 2007 LTM Period Reconciliation of Net Loss to Adj. EBIT DA $ Net loss (57) Income taxes 16 - Interest expense, net 308 Loss from extinguishment of debt 69 Depreciation and amortization expense 193 EBITDA 529 Adjustments to EBIT DA Acquisitions EBITDA (1) 27 Integration costs (2) 40 Non-cash charges (3) 26 Unusual items: Gain on divestiture of business (7) Business realignments 10 (4) Other (5) 11 Total unusual items 14 In process Synergies 70 (6) Adjusted EBITDA 706 (7) Fixed Charges (8) 306 $ Ratio of Adj. EBITDA to Fixed Charges 2.31 21
  22. 22. 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. 2) Represents redundancy and incremental administrative costs from integration programs. Also includes costs related to implement 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, costs to settle a lawsuit, 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 September 30, 2007, the Company was able to satisfy this covenant and incur additional indebtedness under this indenture. 8) LTM Period fixed charges reflect pro forma interest expense as if the Orica acquisition, the Arkema acquisition, and the amendments of our senior secured credit facilities, which occurred in November 2006 and June 2007, had taken place at the beginning of the period. 22
  23. 23. Debt at September 30, 2007 ($ in millions) 9/30/2007 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 2,287 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 125 64 Total debt 3,722 3,392 $ $ 23

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