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 Third Quarter Results
Craig O. Morrison
Chairman, President & Chief Executive Officer
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 $27 million of acquisition adjustments.
4
(2) Transaction remains subject to various conditions, including expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Act, review by foreign jurisdictions and other customer closing conditions.
5. Improving Top- and Bottom-Line Results
Hexion Results
Quarter Ended September 30
∆
2007 2006
($ 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. 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. 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. 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. 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 $70
9
11. Epoxy and Phenolic Resins Segment Highlights
EPRD benefited from
Quarter Ended September 30 favorable demand and
product mix in several
specialty product lines
∆
2007 2006
($ 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 $63
EBITDA points compared to prior year
period)
Versatic Acids and
Derivatives rebounded from a
Q3 ‘07 Sales Comparison YOY
force majeure in Q207 for a
key raw material to post
Volume Price/Mix Currency Acquisitions/ Total
improved sales and EBITDA
Translation Divestitures
(5)% 13% 5% -- 13%
11
12. Formaldehyde and Forest Product Resins
Segment Highlights
Ongoing pressure in the
Quarter Ended September 30 North American housing
market resulted in decreased
volumes
∆
2007 2006
($ 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 $3 million in increased
Translation Divestitures Segment EBITDA in Q307
compared to Q306
(8)% 2% 4% 10% 8%
12
13. Coatings and Inks Segment Highlights
Coatings demand negatively
Quarter Ended September 30 impacted by the N.
American housing market,
while Inks volumes in the
∆
2007 2006 Asia Pacific region were
($ in millions)
pressured by increased
competition
↓ (4)%
Revenue $329 $343
Shutdown of Clayton U.K.
facility, announced in July, is
Segment
↓ (20)%
$20 $25 proceeding as planned
EBITDA
Q307 announcement of
production shutdown for
heatset ink vehicle products
at Pleasant Prairie,
Q3 ‘07 Sales Comparison YOY
Wisconsin, site to reduce
Volume Price/Mix Currency Acquisitions/ Total costs and respond to
Translation Divestitures
changing market conditions
(12)% 3% 5% -- (4)%
13
14. Performance Products Segment Highlights
Quarter Ended September 30 Increasing product sales to
a diversified customer
base and favorable
∆
2007 2006 product mix resulted in
($ 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. 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
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. 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 $706 million
The pending merger with Huntsman, which recently received Huntsman
stockholder approval, will create one of the world’s largest specialty
(1)
chemical companies
Hexion Continues to Execute its Strategic and Operational Plan
(1) Huntsman shareholder meeting held on October 16, 2007 for shareholders of record as of the close of business on September 4, 2007 to vote upon adoption of the merger agreement.
Pending transaction subject to previously disclosed conditions prior to closing, including regulatory review and other customary conditions.
18
20. Reconciliation of Non-GAAP Financial Measures
($ 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. 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. 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. 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
