Presentation By Kline to ACS CM&E Forum in NYC June 4, 2009

1. Finding the Upside in the Downturn
A presentation to:
Chemical Marketing & Economics Group - ACS New York Section
Advancing the Chemical Industries
June 4, 2009
www.KlineGroup.com
© 2009 Kline & Company

2. Contents
Background & Situation
Finding the Upside
About Kline
© 2009 Kline & Company 1

3. Background & Situation
Until 2008, the business environment had been good for the chemical
industry
The industry as a whole was doing very well from a financial perspective
Underlying demand was strong and growing
Major expansion programs were embarked upon in multiple regions
Growth and diversification opportunities were available
Debt was readily available and relatively cheap
Many investors left their traditional sectors finding chemicals an attractive
sector with large cash flows and potential for strong exit values
This comfortable regime began to produce some interesting side effects,
particularly evident in M&A :
− Overvaluing of assets on the basis of readily available debt and
debt/equity ratios pushed to what are now seen as uncomfortable levels
− A flattening of the difference in EBITDA multiples paid for specialities
versus commodities, due a continuing convergence of performance
© 2009 Kline & Company 2

4. Background & Situation
The global financial crisis created an environment that many chemical
company executives would consider the ‘perfect storm’
Financial Crisis Chemical Industry
Credit squeeze
- Drastic drop in demand
Fall in consumer confidence Precipitous
- Supply/demand dislocations Fall in Equity
Economic Downturn Valuations
- Energy cost instability
US and Europe in recession
- Exchange rate fluctuations
Asia under pressure
© 2009 Kline & Company 3

5. Background & Situation
From what we have seen to date, tough times will continue in 2009
‘Perfect storm’ will continue for US and European chemical firms
Continued decline in consumer confidence
Growth weakens in Asia
Focus on reducing costs and optimizing supply chains
Many new business initiatives put on hold
Downside risks
© 2009 Kline & Company 4

6. Background & Situation
A full recovery may not be likely until 2012/13 based on Kline’s
analysis of the markets
A Potential Recovery Scenario
A Potential Recovery Scenario
2008 2009 2010 2011 2012 2013
Economic stimulus
packages reach the US and Europe
Perfect storm
markets driving continue to grow,
stabilization and some many markets
growth approaching pre-
Asia growth stabilizes recession conditions
Full recovery
US and European
of US and
Continued markets still
European
retrenchment in US depressed but in
markets
and Europe recovery
Asia growth weakens Asia continues to
grow
Note: Presented by Kline on December 16, 2008 at Chemical Industry Panel Discussion Sponsored
by Young & Partners LLC.
© 2009 Kline & Company 5

7. Finding the Upside
The severity and breadth of the recession has and will continue to
challenge companies to rethink how best to create value
Typical Avenues for Value Creation
Typical Avenues for Value Creation
What should we do? How can we do it better?
t
en
em
ag
Revenue Enhancement
n
Ma
Strategy Organizational Development
ge
an
Cost Management
Ch
Information Technology
© 2009 Kline & Company 6

8. Contents
Background & Situation
Finding the Upside
About Kline
© 2009 Kline & Company 7

9. Finding the Upside
Despite all the bad news, our current experience suggests that there
is an upside to this downturn
Many companies with foresight and vision view the recession as a means to
“changing the game”
In many markets, there is a significant risk that the demand that was lost
during the recession will never return and shuttered capacity may not come
back on line
The resulting new industry structures and changing market dynamics may
cause in a shift in the competitive position of many producers
As companies assess their competitive position and rethink their strategies,
M&A has and will continue to have a dramatic impact on the marketplace
Companies with the most robust strategy that can quickly adapt to the new
environment are likely to come out on top
© 2009 Kline & Company 8

10. Finding the Upside
The chemical industry has long been an area of focus and opportunity
for M&A
60
Total value of disclosed deals ($ billion)
50
40
30
20
10
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
SOURCE: Young & Partners; RSM EquiCo. and Kline & Company estimates.
© 2009 Kline & Company 9

11. Finding the Upside
The ongoing financial turmoil has highlighted the fact that many recent
deals have failed to create value for both strategic and financial players
Improper or Poorly
Overpayment Failure to Integrate
Executed Strategy
Value destruction due to lack Unrealistic projections of how Failure to realize full
of understanding of business acquired company’s position synergies because of
and KSFs could be leveraged perceived risks of poorly
executed integration
Alliances unravel due to Moving forward rather than
misaligned objectives losing face by walking away Executing a roll-up where the
complexity involved greatly
Overlooked negative impact outweighed the benefits
of a divestiture on portfolio
© 2009 Kline & Company 10

12. Finding the Upside
Many players are challenged in the current environment, leading to
concerns that there will be a poor deal flow in chemicals in 2009
Often the result of multiple mergers – many of which have yet to be
Chemical Majors
Chemical Majors
truly integrated
Downturn came four years earlier than expected
Current environment characterized by declining demand and earnings,
increasing competition and high uncertainty about the future
Faced with servicing large debt burdens in an extraordinarily adverse
environment
Portfolio Companies
Portfolio Companies
of PE/VC Investors
of PE/VC Investors
Exit strategies no longer valid under prior assumptions on growth
To realize acceptable exit values need generate returns typical of good
times in the current grim climate
Investment periods being extended
For some, funding for new investment is difficult to obtain
© 2009 Kline & Company 11

13. Finding the Upside
However, Kline believes that the potential still exists for a robust,
though different, M&A environment in chemicals in 2009
What type of deals?
− A wide range of assets will be determined as non-core and become
available:
Divisions
Business units
Plants and product lines
Technologies.
− The best opportunities will be bolt-on, not transformational
− Mid-market deals will dominate
Where?
− Opportunities will originate with both strategic and financial buyers
− Both “Tempting” and “Toxic” assets will come on the market
© 2009 Kline & Company 12

14. Finding the Upside
But companies will still have to barriers that need to be overcome to
take advantage of potential M&A opportunities…
Potential Barriers to M&A Activity
Potential Barriers to M&A Activity
Leadership consumed with day-to-day tactical operational issues
M&A strategy is outdated and does reflect current environment
Most knowledgeable and experienced internal M&A resources have been
lost to head count reductions
Previous acquisitions have been costly and failed to deliver the expected
value
− Little interest in or funding available for additional deals
Despite such obstacles a select group of players are aggressively
generating and pursuing deals
. . . and if companies do not act quickly,
most of the more attractive assets will have already been acquired
© 2009 Kline & Company 13

15. Finding the Upside
Beyond M&A, the current environment also encourages focus on
performance improvement opportunities as well
100 Performance
Performance
Improvement:
Improvement:
Shorter-term payouts via cost
Shorter-term payouts via cost
80 reduction
reduction
Value
Capture 60
M&A and Organic
M&A and Organic
(%)
Strategies:
Strategies:
40 Longer-term payouts,
Longer-term payouts,
typical in top line
typical in top line
20 performance
performance
0
Near-term Mid-term Long-term
<1 years 1-3 years >3 years
Time
© 2009 Kline & Company 14

16. Finding the Upside
Having the right strategy is important, but surviving in the near term
is critical
Increasing competition over reduced demand challenges companies to think
hard about how they can “do things better” to improve their competitive
position
In good times, companies tend to focus externally for growth and margin gains
and often allow operational waste to enter the system
When the markets become soft and cash becomes tight, companies are
forced to look internally for ways to increase top and bottom line growth
Most companies have taken some steps to improve performance, but
questions still remain:
− Has enough been done already to maximize performance and profitability?
− Has the expected value from steps already taken been realized and is it
sustainable?
− Has the company’s capabilities been impaired by short-term cost control
initiatives causing further performance issues?
− Are there fundamentally new ways that the company needs to think about
its strategy as many changes in the market are not cyclical but structural?
© 2009 Kline & Company 15

17. Finding the Upside
Focusing on addressing issues within a company’s “four walls” can
often lead to near-term gains with limited investment
Focus of Improvement Efforts
Revenue Changing the way companies approach sales, marketing, innovation and
Enhancement even their customers helping to improve top line sales performance
Organizational Modifying the way companies organize their businesses, execute business
Development processes, or reduce complexity to be more effective and/or efficient
Cost Initiatives to achieve a lower cost structure focusing on manufacturing and
Management supply chain optimization and other operational improvements
Change Improving how a company handles communication, change implementation
Management and performance measurement to drive performance in the right direction
Information Implementation of new IT systems or tools to enable more effective or
Technology efficient execution and management of business processes and people
© 2009 Kline & Company 16

18. Finding the Upside
Companies that came out of 2008 leading the industry quickly
leveraged tools to improve short-term cash position
Aggressive Focus on Short-term Cash
Appointing a senior member of the leadership team as the lead to drive
initiatives to strengthen the company’s financial position
Aggressively focus on cash generation upon the onset of a recession
− Labor:
Workforce reductions necessary to meet the expected business
situation
Eliminating or reducing the impact of wage increases and overtime
during the course of the downturn
Limiting spending on contractors
− Working capital and capital spending:
Aggressively reduce inventory through plant slow/shut downs
Reducing purchasing spending
Focused credit control
Postponing or slowing down projects non-essential to minimize cost
Financing as much of the company’s external cash needs with long
term debt
© 2009 Kline & Company 17

19. Finding the Upside
Companies expected to continue to lead the industry during the
recession also built flexibility into their businesses for the future
Flexibility in Long-term Positioning
Establishing the ability to quickly respond to swings in demand by building
flexibility into the company’s business model
− Operating a combination of internally owned and outsourced
manufacturing and distribution facilities
− Sourcing materials that are not optimally produced in internal assets
− Restructure organizations to be agile and flexible to better respond to
changing conditions
Strengthen overall business portfolio
− Maintain focus on core businesses and shut down or divest poorly
performing businesses and product lines
− Continuing to invest in select strategic initiatives that have been able to
maintain expected value in this market
− Actively evaluating options to create shareholder value such as organic
growth initiatives that continue to be attractive despite the economy and
M&A activity
© 2009 Kline & Company 18

20. Finding the Upside
A challenge for many companies is that significant improvement will
require large-scale, transformational change…
Customer segmentation
Customer segmentation
ILLUSTRATIVE
Sales & marketing
Sales & marketing
effectiveness
effectiveness
FOCUS AREAS
Pricing optimization
Pricing optimization
Product line management
Product line management
R&D effectiveness
R&D effectiveness
t
en
Leadership development
em
Business alignment & Leadership development
g
na
Business alignment & Revenue Enhancement
Establishing motivation &
a
structure
M
structure Establishing motivation &
Business complexity
Organizational Development goals
goals
Business complexity Cost Management Communication planning
e
ng
Capability sourcing Communication planning
a
Capability sourcing
Ch
Business process redesign Performance
Performance
Business process redesign measurement
measurement
Operations strategy
Operations strategy
Manufacturing excellence
Manufacturing excellence
Asset optimization
Asset optimization
Supply chain management
Supply chain management
Manufacturing benchmarking
Manufacturing benchmarking
… however, the recession provides a burning platform from which
to drive forward with some of the more unpopular, but rewarding options
© 2009 Kline & Company 19

21. Finding the Upside
True PI will come from the companies that focus on value creation,
engage their leaders, and leverage an effective communication platform
Business Organization
Establish an organization structure
that best fits with the process
Ensure that processes are owned
and managed by the right people
Focus on Leverage
Value Leaders
True
Performance
Business Process Improvement Change Management
Place primary emphasis on Communication is the key to
the most strategic success; create the right
processes Communicate environment for change
Minimize processes that do Effectively Seek the proper mix of
not add value management and leadership
Take opportunities to to impart change in an
improve when replication organization
seams viable
© 2009 Kline & Company 20

22. Finding the Upside
Upsides to the downturn still exist, but vision and effort will be required
to identify and capitalize on these opportunities
The global financial crisis created an environment that many chemical
The global financial crisis created an environment that many chemical
company executives would consider the ‘perfect storm’
company executives would consider the ‘perfect storm’
But despite all the bad news, our current experience suggests that there
But despite all the bad news, our current experience suggests that there
is an upside to this downturn
is an upside to this downturn
Kline believes that the potential still exists for aarobust, though different,
Kline believes that the potential still exists for robust, though different,
M&A environment in chemicals in 2009
M&A environment in chemicals in 2009
Beyond M&A, the current environment also encourages focus on
Beyond M&A, the current environment also encourages focus on
performance improvement opportunities as well
performance improvement opportunities as well
But in all cases, capitalizing on these opportunities will not be easy and
But in all cases, capitalizing on these opportunities will not be easy and
companies will have to work hard to create value
companies will have to work hard to create value
© 2009 Kline & Company 21

23. Contents
Background & Situation
Finding the Upside
About Kline
© 2009 Kline & Company 22

24. About Kline
Kline is a leading management consulting and market research firm
Kline Kline
Management Market
Consulting Research
Working with individual Generating information
clients to resolve tough and insights for multiple
issues and help implement clients through syndicated
solutions research
One-way flow of people,
ideas and data
© 2009 Kline & Company 23

25. About Kline
Kline Management Consulting combines industry expertise with world
class service delivery
Kline
Management
Consulting
Industry Practices
Chemicals Consumer Life
Energy
& Materials Products Sciences
Strategy and
M&A
Consulting Services
Technology and
Innovation
Manufacturing &
Supply Chain
Customer
Relationships
© 2009 Kline & Company 24

26. About Kline
Our industry practices have deep expertise in their areas of focus
Industry Practices - Overview
Chemicals and Materials Energy Consumer Products Life Sciences
Polymers & rubber Lubricants Consumer products in Agricultural products
Our Expertise
Petrochemicals Petroleum specialties all distribution channels Biotechnology
Specialty/fine chemicals Fuels Personal Care Pharmaceuticals
Additives-antioxidants Additives Home care
Electronic chemicals Power Home improvement
Packaging Gas Automotive products
Catalysts New energy sources Food and beverages
Minerals & Inorganics
Chemicals, polymers, Lubricant blenders Manufacturers Agricultural product
and rubber suppliers suppliers/manufacturers
Our Clients
Refiners Marketers
Customers: Suppliers Retailers Biotech firms
– Automotive/ Additive manufacturers Suppliers Healthcare suppliers/
transportation manufacturers:
Utilities
– Building and – OTC/prescription
construction Power companies drugs
– Industrial goods – Medical devices
– Electronics – Diagnostic tools
– Personal care – Managed care
© 2009 Kline & Company 25

27. About Kline
Our consulting services address clients’ most pressing issues
Consulting Services - Overview
Technology and Manufacturing and
Strategy and M&A Customer Relationships
Innovation Supply Chain
Corporate strategy Technology strategy Supply chain strategy Sales and marketing
Our Expertise
Business unit strategy Portfolio optimization Manufacturing strategy
New business entry Technology evaluation economics Customer satisfaction
Mergers, acquisitions and commercialization Operational Value-based
and divestments Technology search effectiveness/ cost segmentation
reduction Customer relationship
Strategy process Accelerated Stage-Gate
development Logistics optimization management/retention
R&D organization
What is the optimal mix How should we balance Should we treat our Which segments and
Typical Issues
of businesses in our short, medium and long major suppliers as customers represent the
portfolio to meet our term R&D investments? vendors or partners? highest value?
financial objectives? What is this critical How does our How do we move from a
How do we double the technology worth and manufacturing cost product-centric to a
size of our business in how should we structure compare with customer-centric
five years? commercialize it? our competitors, and organization?
Does it make more How should Corporate what are the drivers? Will improving the
sense to make an Technology be How can we reduce customers’ buying
acquisition or form an organized to improve costs by 5%+ without experience result in
alliance? business alignment? undermining morale? higher profitability?
© 2009 Kline & Company 26

28. About Kline
We are genuinely global – not just in terms of our office locations, but
in the way we work
Office Network
Oxford Prague
Brussels
Little Falls, NJ Tokyo
Philadelphia, PA
Shanghai
Houston, TX Dubai
Delhi
Typical Project
São Paulo European client asks
Kline to support new Kline team delivers
growth initiative recommendations to
senior management
US-based team
assesses global
competitive drivers Team in China
meets potential
M&A candidates
Team in Brazil
evaluates joint
venture opportunity
© 2009 Kline & Company 27

29. About Kline
Why Kline?
Kline Management Typical Consulting
Consulting Firms
Highly experienced people …experienced partners,
at all levels… inexperienced consultants
Leveraging our experience …leveraging consulting to
to resolve clients’ issues… sell other services
Stay as long as you …stay as long as
need… they can
© 2009 Kline & Company 28

30. Kline is a worldwide consulting and research firm dedicated Americas
to providing the kind of insight and knowledge that helps ____________
companies find a clear path to success. The firm has served
the management consulting and market research needs of
organizations in the chemicals, materials, energy, life Asia Pacific
sciences, and consumer products industries for nearly 50 ___________
years. For more information, visit www.KlineGroup.com.
If you require additional information about the contents of this document or the Europe
services that Kline provides, please contact: ___________
Eric Vogelsberg Tom Aldred
Senior Vice President Director, Strategy Middle East
Phone: +1-973-435-3466 Phone: +1-973-435-3371
Mobile: +1-914-391-2950 Mobile: +1-845-238-0344
Eric.Vogelsberg@KlineGroup.com Tom.Aldred@KlineGroup.com
Kline Global Headquarters
Kline & Company, Inc.
Overlook at Great Notch
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Little Falls, NJ 07424-0410
Phone: +1-973-435-6262
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www.KlineGroup.com