Full version of stock pitch presentation made to the weIMG club at Chicago Booth

1. weIMG Stock Pitch Presentation
November 14, 2009
richmond@chicagobooth.edu

2. Long Idea: Nalco
• Nalco is a service-based specialty chemical company that provides
solutions to treat water and enhance air quality for industrial &
institutional use
Operates in 3 segments: Water & Process Services, Energy, and Paper
• Capitalization: Ticker: “NLC”
Enterprise value(1): $6.8 billion Current Price: $23(2)
Equity market value: $3.2 billion 1 Yr. Target Price: $28
Adjusted net debt(1) / Enterprise value: ~53% 1 Yr. Expected Return: > 20%
• Recent valuation multiples:
Consensus implied forward P/E: 2010: 18.2x ; 2011: 13.6x (4yr average: ~19x)
Average PEG ratio for the past 4 years: ~0.6
Adjusted EV/EBITDAR of ~ 9.5x in the past 4 years
(1) Includes unfunded pension & OPEB obligations of $497 million and capitalized value of operating lease of $169 million.
(2) Based on the five-day average closing price between 11/06/2009 and 11/12/2009.
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3. Nalco Stock vs. S&P 500 (2008 – YTD 2009)
52 wk High: $8
52 wk Low: $24
Beta: 1.38
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4. Long Thesis: Investment Highlights
Sticky service-based business model misunderstood by the Street
Not all products & services are exposed to economic volatility
Strong earnings power underneath a large debt load
FCF generation increased during the recession
New CEO understands past missteps; focused on reinventing Nalco
Solidifying position in “BRICs+”(1) markets after years of under-investment
Borrowed DuPont playbook: Retraining Nalco’s sales force (mostly P. Eng & PhD)
Innovative new products + Operational Stability = Multiple Expansion
3D TRASAR for boilers has outsize market potential
Nalco is in the epicenter of favorable long-term secular themes in water
treatment, energy production, and air pollution
Essential to support infrastructure required to drive economic development
(1) Refers to the “BRICs” (i.e. Brazil, India, Russia, China) and countries in Europe, Africa, and Middle East
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5. Leading Market Share in All its Segments
Source: Nalco presentation
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6. Water Treatment Industry is Highly Fragmented
Sizeable Opportunity for
Nalco to make selective
“tuck-in” acquisitions
Source: Nalco Presentation “MVA” is Manufacturing Value Added
Nalco has sizeable scale over its competitors – each of which is less than half its size
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7. What the Consensus is Missing
• Upside surprise #1: Growth from “BRICs+” (~42% of ‘08 Revenues)
Recurring business alone has historically grown 3-4% per year
• Upside surprise #2: Robust 3D TRASAR sales (boiler & cooling tower)
High margin offering that reduces customer maintenance CapEx & O&M costs
Unit sales for boiler application in ’09 at same level as ’08, despite the recession
“Foot in the door” for other sales opportunities (e.g., Mobotec)
• Upside surprise #3: Continue to deliver cost savings
Surpassed $100 million goal in 2009 in Q3; raised full year target to $150 million
Employee bonus tied to level of cost savings achieved
• Risk of inability to refinance debt has been laid to rest
Next large repayment ($490 million) not due until Q3 2011
Nalco stock sold off during the credit crisis due to heightened refinancing risk
In addition to the upside surprises, investors need to look past 2010 and realize that
industrial and energy production will not remain idle, especially in BRICs+ markets
7 richmond@chicagobooth.edu

8. Why the Sell-Side does NOT Understand Nalco
Excerpt from Barclays’ November 3, 2009 research note (pg.3)
Colder weather does not have an affect on the efficiency of a plant’s cooling system
as water is discharged from boilers at very high temperatures. Therefore, the usage
of chemicals to treat a plant’s cooling water is not affected by seasonality
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9. Strong and Consistent Earnings Power
~7% CAGR
~6% CAGR
Source: Nalco presentation 2008: Up 3.7% excluding $23m contribution from
Synfuels division in the prior year (business
closed at end of 2007)
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10. Relative Valuation: Still Below Fair Value
Stock Price Mkt Cap Unadj TEV Net Debt/ TEV/Revenues TEV/EBITDA P/E
Company (in $US) ($mm) ($ mm) TTM EBITDA 2010e 2011e 2010e 2011e 2010e 2011e PEG
Danaher $ 72.00 $ 23,129 $ 24,443 0.7 x 2.0 x 1.9 x 10.9 x 9.9 x 18.5 x 16.4 x 2.35
Ecolab $ 46.00 $ 10,930 $ 11,801 0.8 x 1.9 x 1.8 x 10.0 x 9.2 x 20.4 x 17.8 x 0.68
Pall Water $ 34.00 $ 3,975 $ 4,278 0.7 x 1.7 x 1.6 x 9.7 x 8.7 x 17.5 x 14.8 x 1.09
Kurita Water Ind. $ 32.00 $ 4,117 $ 3,880 -0.5 x 1.7 x 1.6 x 7.9 x 7.1 x 20.8 x 18.3 x 2.12
Tetra Tech Inc. $ 26.00 $ 1,575 $ 1,581 0.0 x 1.0 x 0.9 x 9.6 x 9.6 x 19.1 x 16.8 x nm
Calgon Carbon $ 14.00 $ 784 $ 768 -0.3 x 1.6 x 1.5 x 8.6 x 7.4 x 17.7 x 14.8 x 0.82
Mean 0.2 x 1.7 x 1.6 x 9.4 x 8.6 x 19.0 x 16.5 x 1.41
High 0.8 x 2.0 x 1.9 x 10.9 x 9.9 x 20.8 x 18.3 x 2.35
Low -0.5 x 1.0 x 0.9 x 7.9 x 7.1 x 17.5 x 14.8 x 0.68
Nalco Holding $ 23.00 $ 3,178 $ 6,113 5.3 x 1.5 x 1.4 x 8.5 x 7.7 x 17.0 x 13.3 x 0.29
Variance to Comps 2060% -9% -8% -10% -11% -11% -19% -79%
EV to 2010 EBITDA EV to 2010 Revenues
2010e Revenues
$ 23 8.5 x 9.0 x 9.5 x 10.0 x 10.5 x $ 23 1.5 x 1.6 x 1.7 x 1.8 x 1.9 x
2010e EBITDA
-10.0% $ 645 $ 19 $ 21 $ 23 $ 25 $ 28 -10.0% $ 3,610 $ 19 $ 20 $ 23 $ 26 $ 28
Premium /
(Discount)
Premium /
(Discount)
-5.0% $ 681 $ 21 $ 23 $ 25 $ 28 $ 30 -5.0% $ 3,810 $ 21 $ 23 $ 26 $ 28 $ 31
0.0% $ 717 $ 23 $ 25 $ 28 $ 31 $ 33 0.0% $ 4,011 $ 23 $ 25 $ 28 $ 31 $ 34
5.0% $ 753 $ 25 $ 28 $ 30 $ 33 $ 36 5.0% $ 4,211 $ 25 $ 27 $ 30 $ 33 $ 37
10.0% $ 789 $ 27 $ 30 $ 33 $ 36 $ 39 10.0% $ 4,412 $ 27 $ 30 $ 33 $ 36 $ 39
Because of the significant amount of debt held by Nalco compared to its peers,
comparative valuation using TEV/EBITDA multiple is the most appropriate.
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11. DCF Valuation: Looking Beyond 2010
Terminal
2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e Value
EBITDA $ 717 $ 799 $ 852 $ 903 $ 953 $ 996 $ 1,041 $ 1,067
YoY % Growth 26.2% 11.4% 6.7% 6.0% 5.5% 4.5% 4.5% 2.5%
CapEx (112) (118) (125) (128) (131) (134) (138) (141)
Change in Net Working Capital (14) (28) (29) (32) (36) (39) (42) (45)
Cash Taxes (105) (133) (160) (169) (179) (187) (195) (200)
Unlevered FCFF $ 486 $ 519 $ 539 $ 574 $ 607 $ 636 $ 665 $ 681
Terminal Value Multiple 8.0 x <<< reflects lower growth business
Terminal Value $ 8,532
WACC 9.0% <<< 100bps premium over Bloomberg calculated rate
PV (at 12/31/09) $ 465 $ 456 $ 434 $ 424 $ 412 $ 396 $ 380 $ 357 $ 4,282
Implied Share Price Calculation
FCF to Firm $ 3,324
Terminal Value 4,282
Enterprise Value $ 7,606
Net Debt (2,934)
Equity Value $ 4,672
Shares Outstanding 138.7
Implied Share Price $ 34
Implied EV/2010 EBITDA 10.6 x
On a DCF basis, Nalco’s shares appear to be ~30% undervalued as the outsize
growth in the next 5 years is not reflected in 2010 forward TEV/EBITDA multiple
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12. Owners of Nalco’s Stock
Ownership Summary
Type # Shares Held % of Total Shares Outstanding Market Value (USD in mm)
5
Institutions 116,208,816 84.09 2,657.7
Hedge Fund Managers 4,784,170 3.46 109.4
Insiders 6,491,213 4.70 148.5
3
Public and Other 10,710,389 7.75 245.0
Total 138,194,588 100.00 3,160.5
Top 5 shareholders control
~20% of Nalco’s stock
Top Holders
Holder # Shares Held % of Total Shares Outstanding Market Value (USD in mm) Position Date
Berkshire Hathaway Inc. 9,000,000 6.51 205.8 Jun-30-2009
Shapiro Capital Management LLC 6,034,410 4.37 138.0 Jun-30-2009
Morgan Stanley Investment Management 5,050,165 3.65 115.5 Jun-30-2009
MSD Capital, L.P. 4,841,204 3.50 110.7 Jun-30-2009
The Vanguard Group, Inc. 4,807,602 3.48 109.9 Jun-30-2009
Source: Capital IQ
12 richmond@chicagobooth.edu

13. Key Risks to the Investment Thesis
• Further and prolonged deterioration in the economy
Nalco’s “stickiness” is limited to a plant (or rig) being operational
Diversified client base (largest customer accounts for < 3% of revenues)
• Sudden increase in raw materials cost
Equates to ~30% of expenses, with no single component >3.5% of the total
• Inability to pay or refinance ~$500 million of debt maturing in 2011
Nalco’s ability to tap the credit markets was evident during Q2 2009, when it
successfully refinanced $1.2 billion of debt
• Adverse changes to the US pension legislation could require Nalco to
make additional contributions (estimated at ~$200 million)
Pension plan is currently ~ 80% funded
Employees is legacy pension moved to defined contribution plan
The biggest risk is that the global economy will enter into a prolonged period of
negative growth – which will curtail output in sectors that will drive Nalco’s expansion
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14. Appendix
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15. Water, Water Everywhere… NOT
Global Water Supply
Volume % of % of
Water Source (M km3) Total Freshwater
Oceans 1,337.928 96.528% 0.000%
Icecaps & Glaciers 24.062 1.736% 68.700%
Ground water 23.399 1.688% 0.000% Though the earth is comprised of 70%
Fresh 10.528 0.760% 30.100%
Saline 12.871 0.929% 0.000% water, ~2% is available for residential,
Ground Ice & Permafrost 0.300 0.022% 0.860%
Lakes 0.176 0.013% 0.000% industrial, and agricultural use. Of the
Fresh 0.091 0.007% 0.260%
Saline 0.085 0.006% 0.000%
~2%, less than 33% is accessible
Soil Moisture 0.165 0.012% 0.050%
Atmosphere 0.013 0.001% 0.040%
Rivers 0.002 0.000% 0.006%
Biological Water 0.001 0.000% 0.003%
TOTAL 1,386.047 100% 100% Key drivers of increasing water demand:
Source: USGS
Global Trends in Water Usage: Withdrawals
1) Population growth
2) Economic development
3) Rising affluence
Investments in BRICs+ during the recession
will position Nalco to assist industrial clients
manage an increasingly constrained resource
Source: Jefferies Intl, Unesco, Aquastat, IFPRI
15 richmond@chicagobooth.edu

16. Nalco’s Rationale for Investing in BRICs
Source: Nalco Presentation “MVA” is Manufacturing Value Added
In developing countries, water treatment costs grow faster than GDP, adding to the
already high industrial growth rates – both of which serve as opportunities for Nalco
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17. Coal, Oil, Gas & Nuclear to meet Energy Needs
Incremental Primary Energy Demand by Fuel Type (2006 to 2030)
* Includes biomass and waste, and other renewables
Source: IEA World Energy Outlook 2008
“Mtoe” refers to “Mega tonne of oil equivalent”; 1 Mtoe translates to ~12,000 GWh,
which represents ~1% of the total power generating capacity in the US today
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18. Cheap Sources of Power Require a lot of Water
Source: California Energy Commission
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