RECAPITALIZATION PLAN
APRIL 2006
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements. This document contains forward-looking statements. These statements relate to analyses and other information
that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to future prospects,
developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to
assumptions. These forward-looking statements involve risks and uncertainties, internal and external, that may cause Engelhard’s actual future
activities and results of operations to be materially different from those suggested or described in this document. Risks and uncertainties that
could cause actual results to differ materially and negatively impact us include, but are not limited to, the following: we may not be able to
achieve and execute internal business plans; we may experience changes in market conditions that cause us to consider divesting or
restructuring operations, which could impact future earnings; our future cash flows depend upon the creation, acquisition and commercialization
of new technologies to replace obsolete technologies; we depend upon the operating success of our manufacturing facilities and do not maintain
redundant capacity; we could experience capacity constraints, and should demand for certain products increase, we could have short-term
difficulty meeting the increased demand, hindering growth opportunities; we may experience product quality deficiencies; we could experience
physical inventory losses by theft and manufacturing inefficiency, particularly with regard to precious and base metals; we are currently engaged
in various legal disputes, and unfavorable resolution of these disputes and still unidentified future legal claims could negatively impact us; we
are subject to contingencies related to actual or alleged environmental contamination to which we may be a party; we face uncertainty regarding
the outcome of the BASF offer, which may affect our stock price, future business, employee retention and recruitment, and may negatively
impact supplier and customer relationships; as a manufacturer, we are subject to end-user product liability litigation associated with our
products; we face competitive pricing or product development activities affecting demand for our products; we are dependent upon the markets
for our customers’ products as a supplier of materials to other manufacturers; the solvency and liquidity of our customers could change; we
could face fluctuations in the supply and prices of precious and base metals and fluctuations in the relationships between forward prices to spot
prices; we could face a decrease in the availability or an increase in the cost of energy, notably natural gas, rare earth compounds, substrates
and other raw materials; we are subject to recent adverse trends in benefit costs, notably pension and medical benefits; we face risks related to
higher interest rates and changes in foreign currency exchange rates; geographic expansion may not develop as anticipated; we are exposed to
overall economic conditions and could be impacted by economic downturns and inflation; and we face risks related to increased levels of
worldwide political instability, the impact of the repeal of the U.S. export sales tax incentive, government legislation and/or regulation particularly
on environmental and taxation matters, and a slowdown in the expected rate of environmental regulations and the impact of natural disasters.
1
FORWARD-LOOKING STATEMENTS (Cont’d)
For a more thorough discussion of these factors, please refer to the Appendix to this document and “Forward-Looking Statements” (excluding
the first sentence thereof), “Risk Factors” and “Key Assumptions” on pages 34, 35 and 38, respectively, of Engelhard’s 2005 Annual Report on
Form 10-K, dated March 3, 2006.
Investors are cautioned not to place undue reliance on any forward-looking statement, which speaks only as of the date made, and to recognize
that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from
those anticipated in the forward-looking statements and from historical results due to the risks and uncertainties described above, as well as
others that Engelhard may consider immaterial or does not anticipate at this time. The foregoing risks and uncertainties are not exclusive and
further information concerning Engelhard and its businesses, including factors that potentially could materially affect its financial results or
condition, may emerge from time to time. Investors are advised to consult any further disclosures Engelhard makes on related subjects in
Engelhard’s future periodic and current reports and other documents that Engelhard files with or furnishes to the Securities and Exchange
Commission (“SEC”).
No Offer or Solicitation. This document does not constitute an offer or invitation to purchase nor a solicitation of an offer to sell any securities
of Engelhard. The proposed self-tender offer by Engelhard described in this document has not commenced. Any offers to purchase or
solicitation of offers to sell will be made only pursuant to a tender offer statement (including an offer to purchase, a letter of transmittal and other
offer documents) filed by Engelhard (“Engelhard’s Tender Offer Statement”) with the SEC. ENGELHARD’S SHAREHOLDERS ARE ADVISED
TO READ ENGELHARD’S TENDER OFFER STATEMENT AND ANY OTHER DOCUMENTS RELATING TO THE TENDER OFFER THAT
ARE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION.
Additional Information and Where to Find It. Engelhard also plans to file with the SEC and mail to its shareholders a definitive Proxy
Statement on Form 14A relating to the 2006 annual meeting of shareholders and the election of directors (the “2006 Proxy Statement”) and
other important information. Engelhard and its directors and certain of its officers may be deemed, under SEC rules, to be participants in
soliciting proxies from Engelhard’s shareholders. Information regarding the names of Engelhard’s directors and executive officers and their
respective interests in Engelhard by security holdings or otherwise is set forth in Engelhard’s Proxy Statement relating to the 2005 annual
meeting of shareholders (the “2005 Proxy Statement”). Additional information regarding the interests of such and other potential participants
will be included in the 2006 Proxy Statement and other relevant documents to be filed with the SEC in connection with Engelhard’s 2006 annual
meeting of shareholders that will be filed with the SEC. INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE 2006 PROXY
STATEMENT AND OTHER MATERIALS FILED WITH THE SEC BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. On
January 9, 2006, BASF filed a Tender Offer Statement on Schedule TO, which has been amended (the “BASF Tender Offer Statement”). In
response to the BASF Tender Offer Statement, Engelhard has filed certain materials with the SEC, including the Schedule 14D-9 filed on
February 2, 2006, which has been amended (the “Schedule 14D-9”).
2
Investors and security holders may obtain a free copy of Engelhard’s Tender Offer Statement (when it is filed and becomes available), Schedule
14D-9, 2005 Proxy Statement, 2006 Proxy Statement (when it is filed and becomes available), BASF’s Tender Offer Statement and other
documents filed by Engelhard or BASF with the SEC at the SEC's website at http://www.sec.gov. In addition, investors and security holders
may obtain a free copy of each of the Schedule 14D-9, 2005 Proxy Statement, 2006 Proxy Statement (when it is filed and becomes available),
Engelhard’s Tender Offer Statement (when it is filed and becomes available), as well as Engelhard’s related filings with the SEC, from
Engelhard by directing a request to Engelhard Corporation, 101 Wood Avenue, Iselin, New Jersey 08830, Attention: Investor Relations or at
732-205-5000, or from MacKenzie Partners, Inc. by calling 1-800-322-2885 toll free or at 1-212-929-5500 collect or by e-mail at
Engelhard@mackenziepartners.com.
Risk Factors Related to the Recapitalization. The recapitalization presents some potential risks and disadvantages to the Company and its
continuing shareholders, including the following:
If we complete the recapitalization, our indebtedness and interest expense will increase, and the terms of our future indebtedness may be
adversely affected. As a result of the recapitalization and the related borrowings, our indebtedness will be more substantial in relation to
our shareholders’ equity. After giving pro forma effect to the recapitalization and the related borrowings at June, 2006, the Company
would have had total indebtedness of $1,800 million and shareholders’ equity of $295 million as of December 31, 2005.
Following our announcement of the recapitalization, we expect our credit ratings will be downgraded by each of the principal rating
agencies, but that we will maintain our investment grade ratings. Should the Company’s rating drop below investment grade, the
Company would experience higher capital costs and may incur difficulty in procuring metals.
Our ability to repurchase our shares in the self-tender will be subject to a number of conditions, including obtaining financing. The
commitment letter we received to provide a one year bridge facility of $1.5 billion to fund the repurchase and related costs and expenses
is subject to a number of conditions, including there being no material adverse change in the Company since December 31, 2005 and
there being no material disruption of or material adverse change in financial, banking or capital markets since April 25, 2006. In addition,
we have to amend our existing credit facilities to permit the increased level of indebtedness.
The expected benefits of the recapitalization plan rely in part on our ability to refinance our bridge facility and the terms of the financing
obtained. The expected terms used herein are based on current market conditions. The terms of any permanent financing will depend on
market conditions at the time we incur the indebtedness, and are likely to be different. In addition, a portion of the permanent financing is
expected to have a floating rate of interest, which may increase over time.
FORWARD-LOOKING STATEMENTS (Cont’d)
3
I.
Introduction
II.
Business Review and Update
III.
Financial Overview
IV.
Recapitalization Plan
V.
Concluding Remarks
Appendix
Table of Contents
4
I. Introduction
Introduction
Background
On January 3, 2006, BASF publicly announced its intention to launch a hostile offer
to acquire Engelhard at $37 per share, and on January 9, 2006, BASF filed a
Tender Offer Statement
On January 23, 2006, Engelhard’s Board announced its determination that the
BASF offer was inadequate and not in the best interests of Engelhard shareholders
Concurrently, the Board authorized Engelhard's management team and
independent advisors to explore strategic alternatives to seek to maximize
shareholder value, including the possible sale of the Company
On April 19, 2006, BASF made a proposal for $38.00 per share in response to
Engelhard’s request for an increased offer following BASF’s access to non-public
information
On April 25, 2006, the Engelhard Board unanimously determined that:
The $38.00 per share proposal was inadequate and not in the best interests of
Engelhard’s shareholders
A recapitalization of the Company represents the most attractive strategic
alternative available to Engelhard for delivering greater value to Engelhard’s
shareholders than BASF’s proposal of $38.00 per share
6
Introduction
Recapitalization Plan Overview
The recapitalization plan (“Recapitalization Plan”) consists of:
The purchase of 26 million shares (approximately 20% of Engelhard’s shares
outstanding including exercisable options) at a price of $45.00 per share
Continued execution of the Company’s business strategy, including an
incremental cost-savings initiative associated with the Recapitalization Plan
Shares to be purchased through a self-tender offer
Committed financing, subject to customary conditions, is in place from Merrill Lynch
and JPMorgan to initially fund self-tender offer; permanent financing expected to
comprise a mix of hybrid securities and floating- and fixed-rate debt
Investment grade ratings profile expected based upon rating agency feedback
The Board will increase its size at the June 2 Annual Meeting from six to nine,
giving shareholders the ability to elect a majority of the Board (without the damage
and distraction that could result from a potentially lengthy consent solicitation that
BASF has threatened) and in so doing, giving shareholders the ability to decide
whether the Recapitalization Plan or BASF's $38.00 proposal (which the Board has
found to be inadequate) serves the shareholders' best interests
7
Introduction
Recapitalization Plan Highlights
The Engelhard Board of Directors strongly believes that the Recapitalization Plan
represents the best value creation alternative and is in the best interests of Engelhard
shareholders for a number of reasons, including:
The Recapitalization Plan should deliver value superior to BASF’s $38.00 per share
proposal
Accretion to EPS and EPS growth commencing in 2007
Expected strong forward price to earnings (P/E) multiple
Provides meaningful liquidity to Engelhard shareholders at an attractive price of
$45.00 per share
Offers Engelhard shareholders the ability to participate in Engelhard’s strengthening
business prospects and realize the Company’s future growth potential through
appreciation of the market price of the stock or a future sale of the Company
Maintains investment grade credit profile
8
Introduction
Timetable
Announcement of Recapitalization Plan
Filing of Preliminary Proxy Materials
Commencement of Self-Tender Offer
Engelhard Annual Shareholders Meeting
Self-Tender Offer closes subject to satisfaction or
waiver of conditions including if BASF’s nominees
constitute a majority of the Board and the Board
determines not to proceed with Self Tender Offer
April 26, 2006
Following Annual
Meeting
________Date_________
______________________Key Event______________________
June 2, 2006
Week of May 1,
2006
9
II. Business Review and
Update
Business Update
Engelhard Business Highlights
Engelhard is one of the largest surface and materials science companies in the world
The Company has made significant investments in recent years in both organic growth initiatives and
strategic acquisitions
Investments already made in new growth initiatives alone are expected to add an additional
$100 million in operating earnings from 2005 to 2007
Engelhard has demonstrated a strong commitment to R&D
Engelhard has streamlined its business portfolio, used the proceeds to invest in higher-margin
businesses and improved the Company’s overall business mix
Over the last several years, Engelhard invested in businesses such as diesel-emission control,
energy & fuel materials, personal care & cosmetic materials and separators & polymers, and exited
low-margin and low-growth legacy precious-metal fabrication businesses
Engelhard expects to benefit from numerous global trends over the next several years which include:
Significant increase in demand projected for sophisticated emission-control technologies as more
stringent regulatory guidelines take effect globally
Worldwide growing demand for energy, energy-related materials and environmentally friendly fuels
Growing demand for personal care and cosmetic products driven by increasing affluence of a global
and aging population
High-Margin, Non-Cyclical Business Portfolio with Strong Growth Prospects
11
Business Update
Engelhard Shaping Value Proposition
Core competencies in surface and materials science
Strategic focus on technology and high-growth markets
Enabled by ingenuity
Enhanced by a passion for productivity
All leveraged by a seamlessly integrated, decentralized operating philosophy
Enterprise wide competencies focused on technologies/markets to fuel
growth through expanded, value-adding served industry market portfolio
Reduced cyclicality, increased globalization and increased cash flow
enhance value of growth from strategic context
12
13
$28
8%
$66
19%
$141
42%
$6
2%
$98
29%
$2,096
45%
$726
16%
$1,009
22%
$79
2%
$687
15%
Ventures (3)
Materials Services
Process Technologies
Environmental Technologies
Appearance and Performance Tech.
Business Update
Overview of The Business Segments
Engelhard technology platforms support growth in expanding markets
2005 Sales: $4,597mm (1)
2005 Operating Earnings: $339mm (1) (2)
(1)
Reflects 2005 financial information from Engelhard’s 10-K filed March 3, 2006.
(2)
Operating earnings do not include unallocated corporate expense ($40 million).
(3)
Ventures sales includes $3 million of Corporate.
Engelhard
13%
Lyondell (1)
7%
Nova Chem
3%
Engelhard’s Operating Margin Consistent Throughout the Cycle
Note: Engelhard’s margins exclude Materials Services and Substrates.
Source: Reflects 2005 Engelhard information from Engelhard’s 10-K filed March 3, 2006. Other information based on Wall Street research.
(1) Lyondell adjusted to include proportionate share of joint ventures.
Dow
14%
Business Update
Strength Throughout The Cycle
Rohm & Haas
13%
Eastman
14%
(10.0%)
(5.0%)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
14
15
Note: As of December 30, 2005.
Source: Bloomberg. Chemical composite includes Air Products & Chemicals Inc., Ashland Inc., The Dow Chemical Co., Eastman Chemical Co., Ecolab Inc., Du Pont de Nemours &
Co., Hercules Inc., International Flavors and Fragrances Inc., Monsanto Co., PPG Industries Inc., Praxair Inc., Rohm & Haas Co. and Sigma-Aldrich Corp.
Engelhard
Chemical Composite
More stable earnings through cycles
Engelhard is at an inflection point as its successful strategic initiatives converge
Business Update
Increased Stability of Earnings
2010E
Operating
Earnings
2005
Operating
Earnings
2000
Operating
Earnings
Business Update
Improving Business Mix
Note: Includes reportable segments and Ventures. Does not include unallocated corporate ($29 million in 2000, $40 million in 2005, and $46 million in 2010) or 2000 special and other
charges ($133 million). 2005 financial information reflects Engelhard’s 10-K filed March 3, 2006. 2010E financial information based on Engelhard Management Operating Plan
developed in August, 2005.
70%
30%
90%
2%
8%
Technology Businesses
Materials Services
Ventures
92%
5%
3%
16
Environmental Technologies
Overview
Marketing Cost-Effective
Compliance
Global presence; diverse markets
& customers
Increasingly stringent
environmental regulations
Technology-driven
products and processes
Sales $1,009 $2,125
’06E - ’10E
Operating
Earnings
Growth
Note: Dollars in millions. 2010 metrics rounded to the nearest $25 million and all financial information includes pass-through
of substrates.
(1) 2010E financial information is based on Engelhard Management Operating Plan developed in August, 2005.
2005A
2010E (1)
Low teens
17
Environmental Technologies
Competitive Advantages
The following provide competitive advantages:
Surface and materials science expertise
Engine application laboratories
State-of-the-art, high-precision manufacturing technology in all major regions
Precious metals management
Business awarded to-date supports majority of projected sales
80% of 2007
70% of 2008
60% of 2009
Robust research pipeline
30-Year Track Record of Leadership & Innovation
18
US-EPA 2004
US-EPA 1998
Euro 3 2000
Euro 4 2005
Euro 5 ’08
Japan ’05
US ’07
US-EPA 2010
Note: Increasingly stringent regulations in emission standards in heavy-duty-diesel expected to drive sectional growth in catalyst technology.
(1) Worldwide Heavy-Duty-Diesel.
Emerging Market Regulations (Euro 4 Proposed)
Turkey: '08
Brazil: '09
China: '10
India: '11-'12
Environmental Technologies
Exhaust Emissions Regulations (1) Drive Growth
19
Environmental Technologies
Growth Opportunities
Increasingly stringent regulations around the world
Approximately 70% operating earnings growth in the heavy-duty-diesel market (1)
Technology leadership
Specific strengths in engine and catalyst technology
Expansion into a broad range of developing markets and geographies
Sustainable productivity gains
Engelhard’s base global auto-catalyst business expected to grow at more than a 5%
CAGR from 2005 to 2010, excluding medium- and heavy-duty-diesel
Environmental Technologies expected to be a significant driver of growth
(1) Based on Engelhard Management Operating Plan developed in August, 2005. Compounded annual growth rate from 2006-2010.
20
Note: 2010E financial information based on Engelhard Management Operating Plan developed in August, 2005.
Numbers rounded to the nearest $25mm.
(1) Automotive includes light duty diesel.
(2) Percentage numbers are 2005E-2010E CAGR of the respective market.
(3) Other includes retrofit, motorcycle, other mobile sources, stationary and Engineered Materials Systems.
Environmental Technologies
Financial Targets
$1,116
Incremental Sales from ’05 to ’10E (2)
2010E Sales Target
2010E Operating Earnings Target of $250 million
Other (3)
Heavy Duty Diesel
Automotive (1)
51%
11%
13%
$437
$565
$114
$1,375
$500
$250
$0
$500
$1,000
$1,500
$2,000
$2,500
$2,125
21
Environmental Technologies
Recent Results
Sales
Selected Highlights
Operating Earnings
Double-digit sales and operating
earnings growth
Growth in auto catalysts driven by
European light-duty-diesel
Strong growth in Asia; continued
strength in joint ventures in Korea
and Japan, which are not included
in the Environmental Technologies
operating earnings
Continued productivity gains
Note: Dollars in millions. Q1 2006 financials based on April 26, 2006 Engelhard press release.
(1) Operating margin includes substrates; excluding substrates, margins were approximately flat Q106 vs. Q105.
16%
13%
Operating
Margin (1)
Q over Q
Growth: 12%
Q over Q
Growth: 35%
$238
$320
$0
$100
$200
$300
$400
Q1 2005
Q1 2006
$42
$37
$0
$10
$20
$30
$40
$50
$60
Q1 2005
Q1 2006
22
Process Technologies
Overview
Marketing Process
Productivity
Technology/market
development
More Stringent Environmental
regulations
Value pricing
Sales $687 $950
’06E - ’10E
Operating
Earnings
Growth
2005A
2010E (1)
Mid teens
Note: Dollars in millions and 2010 metrics rounded to the nearest $25 million.
(1) 2010E financial information is based on Engelhard Management Operating Plan developed in August, 2005.
23
Process Technologies
Competitive Advantages
Surface and materials science:
Distributed Matrix System (DMS) maximizes refinery gasoline yields
Controlled Particle Design (CPD) providing uniform particles and unique morphology for
Fischer-Tropsch Gas-to-Liquids (GTL) technologies
Ziegler/Natta Technology – Fourth Generation (Lynx) improving process economics
through superior activity by increasing the pounds of polypropylene produced per pound
of catalysis
Expertise across a broad diversity of manufacturing operations:
Catalytic manufacturing capabilities ranging from producing kilograms per order for the
fine chemicals market to tons per day of fluid catalytic cracking (FCC) catalyst for the
petroleum-refining market
While maintaining global, low cost positions and excellent quality
24
Process Technologies
Growth Opportunities
Process Technologies is poised to achieve double-digit operating
earnings growth in 2006 to 2010E (1)
(1) Based on Engelhard Management Operating Plan estimates developed in August, 2005.
Growth initiatives include:
Increased product offerings to previously unserved refining markets including diesel,
distillate and petrochemical feedstock markets
Continued expansion of gas-to-liquids market with Fischer-Tropsch and syngas
technology; continued leveraging of those technologies in the emerging gas economy
Expansion into previously unserved petrochemical markets based on current
commercial agreements
Increased synergies from leveraging DMS technology platform to expand refinery
catalysis
Leverage Lynx polypropylene success in polyethylene catalyst market
25
Process Technologies
Financial Targets
2010E Sales Target
$263
Incremental Sales from ’05 to ’10E (2)
Note: Above financial information based on Engelhard Management Operating Plan developed in August, 2005. Numbers rounded to the nearest $25mm.
(1) Precious Metals revenues included in Chemicals.
(2) Percentage numbers are 2005-2010E CAGR of the respective market.
Chemicals (1)
Refining
Polyolefins
8%
5%
9%
2010E Operating Earnings Target of $200 million
$450
$375
$125
$0
$200
$400
$600
$800
$1,000
$1,200
$950
$45
$78
$140
26
Process Technologies
Recent Results
Sales
Selected Highlights
Operating Earnings
Double-digit sales and operating
earnings growth and margin
expansion
Continued strong demand for
technologies for petroleum refining,
including strength in additives
Strong pricing power in chemical
process market; capacity utilization
rates approximately 90%
Note: Dollars in millions. Q1 2006 financials based on April 26, 2006 Engelhard press release.
Operating
Margin
13%
15%
Q over Q
Growth: 16%
Q over Q
Growth: 38%
$171
$148
$0
$50
$100
$150
$200
Q1 2005
Q1 2006
$26
$19
$0
$5
$10
$15
$20
$25
$30
Q1 2005
Q1 2006
27
Appearance and Performance Technologies
Overview
Enabling Marketing of
Enhanced Image &
Functionality
Develop markets
Leverage assets
Enrich product mix
Pricing and sustainable
productivity gains
Sales $726 $1,000
’06E - ’10E
Operating
Earnings
Growth
2005A
2010E (1)
Double-digit
Note: Dollars in millions and 2010 metrics rounded to the nearest $25 million.
(1) 2010E financial information is based on Engelhard Management Operating Plan developed in August, 2005.
28
Appearance and Performance Technologies
Growth Opportunities
Worldwide leadership position in personal care and cosmetics
New product development and technological focus
Globalization
Continued growth in developing markets, especially Asia-Pacific
Return of investment in Company’s personal care business gaining momentum
Focus on Japan yielding results as Engelhard anticipates growth of 30% versus 8%
market growth (1)
Significant margin improvement in minerals
Improved product mix – less dependence on paper market
Improved pricing
Appearance and Performance Technologies Is Positioned for Double-Digit Growth
(1) Based on Engelhard management guidance. Compound annual growth rate from 2006-2010.
29
Appearance and Performance Technologies
Sales and Operating Earnings Growth Drivers
Personal Care
Sales:
Asia (ex China): Market-share expansion in large, mature
Japanese and Korean markets where
predecessor businesses had low penetration
China: High organic growth on low base
NAFTA: Organic growth only, due to high penetration
Europe/Latin America: Organic growth supplemented with
share expansion where predecessor US
business had low penetration
Operating Earnings:
Better utilization of assets, particularly Long Island facility
Grow sales with little SG&A additions
Earnings from sales expansion
Effects/Colors
Sales:
Base business growth
Asia growth
New effects/colors technologies/products
Major paint customer geographic expansion
Operating Earnings:
Productivity, largely manufacturing & supply chain
Grow sales with little SG&A addition
Earnings from sales growth
Performance Minerals
Sales:
New products: Favorable inter-material substitution
Non-paper, specialty growth in diversified markets
Price increases/energy surcharges/contract improvements
Operating Earnings:
Margin recovery
Productivity, largely manufacturing & supply chain
Earnings from sales growth
Business Transformation
30
Appearance and Performance Technologies
Financial Targets
Incremental Sales from ’05 to ’10E (2)
2010E Sales Target
$274
Note: Above financial information based on Engelhard Management Operating Plan developed in August, 2005.
Numbers rounded to the nearest $25mm.
(1)
Specialty Minerals includes kaolin and attapulgite.
(2)
Percentage numbers are 2005-2010E CAGR of the respective market.
Specialty Minerals (1)
Effects Materials and Colors
Personal Care Materials
7%
18%
4%
2010E Operating Earnings Target of $175 million
$450
$425
$125
$0
$200
$400
$600
$800
$1,000
$1,200
$1,000
$71
$117
$86
31
Appearance & Performance Technologies
Recent Results
Sales
Selected Highlights
Operating Earnings
Double-digit gains in sales and operating
earnings growth
Continued positive impact of recent
acquisitions in cosmetics and
personal care
Continue to optimize mix by
successfully redirecting mid-Georgia
assets to higher margin specialty
kaolin and refining catalysts markets
Higher pricing and energy
surcharges offset higher natural gas
costs
Operating
Margin
Note: Dollars in millions. Q1 2006 financials based on April 26, 2006 Engelhard press release.
10%
11%
Q over Q
Growth: 19%
Q over Q
Growth: 19%
$206
$174
$0
$50
$100
$150
$200
$250
Q1 2005
Q1 2006
$18
$22
$0
$5
$10
$15
$20
$25
Q1 2005
Q1 2006
32
Enabling Technology
Businesses
High returns on invested
capital
Source of cash
Risk management
Enabler for catalyst sales
Sales $2,096 $2,425
2010E (1)
2005A
Note: Dollars in millions and 2010 metrics rounded to the nearest $25 million.
(1) 2010E financial information is based on Engelhard Management Operating Plan developed in August, 2005.
Materials Services
Overview
33
Materials Services
Core Strengths and Risk Management
Experienced management team with
knowledge in specific markets
Assay Services
Inventory management
Logistics and security
Precious metal-based solutions
Refining and recycling
Core Strengths
Procedures and controls are in place and
followed carefully to minimize:
Price risk
Credit risk
Errors in location, quantities, currency,
or value
Over limits
Improper transactions
Risk Management
34
Materials Services
Recent Results and Long-Term Plan
Selected Highlights
Operating Earnings
Increased volume and
improvements in recycling process
results
Strong demand for platinum and
rhodium related to pending diesel
regulations
Long-Term Plan
For planning purposes, long-term
projected operating earnings
approximate $15 million annually
This compares to $28 million for the
full year of 2005 and $17 million for
the first quarter of 2006
Our core strengths, which have driven
recent results, expected to continue to be
strategically pursued and provide
upside to the long-term plan
Note: Dollars in millions. Q1 2006 financials based on April 26, 2006 Engelhard press release.
Q over Q
Growth: 240%
$17
$12
$5
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
Q1 2005
Q4 2005
Q1 2006
35
Ventures
Overview
“Develop the white
space, expand the core”
Platform identification
Opportunity development
Funding & staffing
Start-up & incubation
Sales $76 $210
’06E - ’10E
Operating
Earnings
Growth
2005A
2010E (1)
Double-digit
Note: Dollars in millions and 2010 metrics rounded to the nearest $10 million.
(1) 2010E financial information is based on Engelhard Management Operating Plan developed in August, 2005.
36
Ventures
Pipeline
Note: Proppants and Water projects are reflected in the Engelhard Management Operating Plan developed in August, 2005. Net Present Value of Proppants projects and
water projects estimated to be $80 mm and $50 mm, respectively. Financial impact of other projects in the pipeline are not reflected in the Engelhard Management Operating
Plan developed in August, 2005. This graph indicates the year in which these projects (represented by the bubbles) reach first $1 million of annual operating earnings.
30
30
30
$50
NPV
30
$80
NPV
30
30
30
30
0
1
2
3
4
5
6
7
2005
2006
2007
2008
2009
2010
2011
2012
Year of $1 million Operating Earnings
Scratch Resistant Coatings
Battery Materials
Photovoltaic Inks
Water
Aseptrol
Proppants
Fuel Cells/Portable
Fuel Cells/Hydrogen
Fuel Cells/Electrochem
Fuel Cells/Prereforming
37
Ventures
Growth Opportunities
Drive to become the leading global supplier of non-carbon separation and purification
technologies to the gas, fuel and water markets to generate $200 million in revenues in
2010
Oil and gas well stimulation materials should allow for additional earnings growth, given
supply shortages and strong exploration and production activities
Increased cost of fossil fuels expected to provide growth opportunities in alternative
energy sources including fuel cells, photovoltaics, biofuels and battery materials
Ventures systematically develops adjacent-space opportunities that leverage attractive
markets and new technologies
38
Ventures
Financial Targets
Incremental Sales from ’05 to ’10E
2010E Sales Target
$134
Note: Above financial information based on Engelhard Management Operating Plan developed August, 2005.
Numbers rounded to the nearest $10mm.
(1) Energy Materials includes Proppants and Fuel Cell.
Programs commercialized to date expected to yield $14 million in operating earnings in 2006
2010E Operating Earnings Target of $40 million
Alumina/Silica
Energy Materials (1)
Water Treatment
$140
$50
$20
$0
$50
$100
$150
$200
$250
$210
$15
$49
$70
39
Ventures
Recent Results
Sales
Selected Highlights
Operating Earnings
Ventures group expected to
contribute $14 million in operating
earnings for the full year 2006
Acquired adsorbents and catalyst
business of Almatis in 2005,
expanding the Company’s
technology portfolio to include
catalyst supports and alumina-
based adsorbents and dessicants
Obtained customer commitment for
new proppants
Operating
Margin
Note: Dollars in millions. Q1 2006 financials based on April 26, 2006 Engelhard press release.
5%
7%
Q over Q
Growth: 131%
Q over Q
Growth: 200%
$30
$13
$0
$5
$10
$15
$20
$25
$30
$35
Q1 2005
Q1 2006
$2.1
$0.7
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
Q1 2005
Q1 2006
40
III. Financial Overview – Before
Recapitalization Plan
2006 (1)
Double-digit earnings growth from technology segments
13% return on average total capital
Maintain financial capability
2006-2010E (1)
EPS CAGR of approximately 16%
Approximately 300 bps operating margin improvement between 2006-2010
Sales 8% CAGR
Average ROAC 14%-15%
(1) Based on Engelhard Management Operating Plan developed in August, 2005. Please refer to assumptions in Appendix. Forecast reflects announced regulations and plant constructions leading
to peak growth rates in 2008. Growth rates then return to low double-digit levels. Outer plan years do not include impact of new regulations, such as Off-Road HDD, or new customer plants not
yet contracted.
Financial Overview – Before Recapitalization Plan
Financial Goals
42
Financial Overview – Before Recapitalization Plan
Engelhard Today and in the Future
Sales Perspective
2005A Operating Earnings: $339 Million (1)(2)
2005A Sales: $4,597 Million (1)
2010E Sales: $6,710 Million
2010E Operating Earnings: $680 Million
Operating Earnings Perspective
Appearance & Performance Tech.
Environmental Technologies
Process Technologies
Materials Services
Ventures (3)
Note: 2010 financial information based on Engelhard Management Operating Plan developed in August, 2005.
(1)
Reflects 2005 financial information from Engelhard’s 10-K filed March 3, 2006.
(2)
Operating earnings do not include unallocated corporate expense ($40 million in 2005 and $46 million in 2010).
(3)
Ventures sales in 2005 include $3 million of Corporate.
15%
2%
22%
16%
45%
29%
2%
42%
19%
8%
14%
3%
32%
15%
36%
29%
6%
37%
26%
2%
43
Financial Overview – Before Recapitalization Plan
Recent Earnings Perspective
Wall Street Estimates Have Increased Versus Expectations Prior to BASF Offer
2006E
2007E
(1)
Buckingham Research suspended coverage for Engelhard in January.
(2)
No change in estimates.
$2.35
$2.25
$2.20
$2.20
$2.27
$2.14
$2.13
$2.20
(1)
As of December 31, 2005
As of April 21, 2006
$2.46
(2)
Mean as of 12/31/05: $2.39
Current Mean: $2.49
Mean as of 12/31/05: $2.13
Current Mean: $2.22
$2.10
$2.20
$2.25
$2.00
$2.20
$2.20
$2.06
$2.05
$0.08
$0.15
$0.08
$0.10
$0.10
$0.25
$0.02
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
$2.45
$2.40
$2.40
$2.33
$2.50
$2.50
$2.75
$0.13
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
44
IV. Recapitalization Plan
Recapitalization Plan
Overview
Self-tender offer at $45.00 per share in cash
The purchase of up to 26 million shares or approximately 20% of the shares outstanding including
exercisable options
Self-tender offer will be initially funded through a bridge facility which is to be refinanced with a mix
of hybrid securities (ICONs) and fixed and floating rate debt after closing the self tender offer
Merrill Lynch and JPMorgan have committed, subject to customary conditions, to provide
Engelhard with a $1.5 billion 364-day bridge credit facility to be used for the self-tender offer
Targeted investment grade ratings outcome
Recapitalization Plan cost savings initiative
Incremental $15 million in annual pre-tax savings
To be implemented in 2006 and fully-reflected in 2007 results
Savings primarily in SG&A, including warehousing expenses
Cash costs expected to be approximately $20 million during the second half of 2006
46
Recapitalization Plan
Financing Detail
Sources & Uses (1)
Pro Forma Capitalization (1)
Note: Dollars in Millions.
(1) Self-tender offer will initially be funded by a bridge facility.
(2) Assumes 50% equity credit from rating agencies for ICONs.
(3) EBITDA calculated as operating earnings of $299mm plus equity in earnings of affiliates of $33mm and depreciation and amortization of $132mm. EBITDA is used by financial institutions to
evaluate credit worthiness.
(4) Net of option proceeds of approximately $24.3mm.
Year Ended
Year Ended
12/31/2005
12/31/2005
Pre-Recap
Adjustment
Pro Forma
Cash
$42
6
$47
Non-Cash Current Assets
2,110
--
2,110
Other Assets
1,727
--
1,727
Total Assets
$3,879
$3,885
Non-Debt Current Liabilities
$1,468
$1,468
Existing Debt
600
--
600
Senior Notes
--
400
400
ICONs
--
800
800
Total Debt
600
1200
1,800
Other Liabilities
322
322
Equity
1,489
(1,194)
295
Total Liabilities & Equity
$3,879
$3,885
Operating Earnings
$299
$299
EBITDA
(3)
463
463
Total Interest
34
87
121
Total Debt/EBITDA
(3)
1.3x
3.0x
(2)
Total Debt to Capitalization
28.7%
66.8%
(2)
EBITDA/Interest
(3)
13.7x
3.8x
Corporate Credit Rating
A3/A-/A-
Investment Grade
Sources:
Amount
Callable Floating Senior Notes @ LIBOR + 80bps (6.140%)
$200.0
10 Year Senior Notes @ 6.405%
200.0
5 Year Call Basket C Security (ICON) @ 7.6125% - 60 Yr. Maturity
400.0
10 Year Call Basket C Security (ICON) @ 7.9675%- 60 Yr. Maturity
400.0
Total Sources
$1,200.0
Uses:
Amount
Purchase of Equity
(4)
$45.00
per share
$1,149.3
Fees & Expenses
25.0
Restructuring Costs
20.0
Incremental Cash
5.7
Total Uses
$1,200.0
47
Recapitalization Plan
Pro Forma EPS
2007 – First Full Year
Note: Interest rates based on current market conditions. Additional interest expense calculation assumes a fixed rate of 6.140% for the $200mm Callable Senior Notes debt tranche. A one percentage
point change in the LIBOR rate would have an approximate $0.01 impact on EPS in 2007. Per share values rounded to two decimals.
Assumptions
2007 Wall Street Average
$2.49
Wall Street analyst range $2.40 - $2.75
Additional Interest Expense
(0.52)
$200mm of Callable Floating Senior Notes @ LIBOR + 80bps (6.140%)
$200mm of 10 Year Senior Notes @ 6.405%
$400mm of 5 Year Basket C Security (ICON) @ 7.6125%
$400mm of 10 Year Basket C Security (ICON) @ 7.9675%
Cost-Savings Initiative
0.09
$15 mm annual pretax savings fully reflected in 2007
Reduced Shares
0.49
Repurchase of 26mm shares (~20% shares outstanding and
underlying vested options)
Pro Forma 2007 EPS
(Building from Wall Street Average)
$2.55
48
Recapitalization Plan
Market Multiples Have Generally Increased Since BASF Offer Was Made
Source: Factset. Based on Wall Street Research.
49
Du Pont
IFF
Cytec
Rohm & Haas
Albemarle
Umicore
Aldrich
Sigma-
Matthey
Johnson
Air Products
Praxair
20.0x
18.0
16.0
14.0
12.0
10.0
14.4x
14.5x
14.7x
15.0x
15.3x
15.5x
16.2x
17.2x
17.5x
17.6x
14.9x
16.6x
13.0x
13.7x
10.6x
14.2x
13.4x
14.1x
15.0x
17.6x
As of 12/30/2005
As of 4/21/2006
2007 P/E Multiple Analysis
Increase:
1.5x
11.5%
Average:
0.8x
5.7%
1.4x
10.7%
4.1x
38.6%
1.4x
9.6%
0.9x
6.3%
1.9x
14.4%
2.6x
17.6%
1.2x
8.0%
(0.4x)
(2.2%)
1.0x
5.8%
Pts.
%
50
12/30/05
7/1/05
12/31/04
7/2/04
1/2/04
7/4/03
1/3/03
60.0%
40.0%
20.0%
0.0%
(20.0%)
(40.0%)
12/30/05
7/1/05
12/31/04
7/2/04
1/2/04
7/4/03
1/3/03
20.0%
10.0%
0.0%
(10.0%)
(20.0%)
(30.0%)
(40.0%)
3-Year
Avg: (6.9%)
3-Year
Avg: 19.3%
1.0x
6.8%
4.6x
30.7%
2.7x
20.3%
-1.5x
(10.7%)
-0.2x
(1.6%)
-1.1x
(8.5%)
Umicore
Differential
at BASF
Offer
-1.6x
(11.3%)
2005 Average Differential
2004 Average Differential
2003 Average Differential
Recapitalization Plan
EC’s “Unaffected” Forward P/E Multiple Relative to Key Industry Peers over Time
JM
Differential
at BASF
Offer
-4.1x
(29.1%)
2005 Average Differential
2004 Average Differential
2003 Average Differential
Source: Factset.
Note: Johson Matthey and Umicore are the key industry peers to Engelhard.
Recapitalization Plan
Illustrative Market Value Per Share – Based on 2007 and 2010 EPS
Note: JM and Umicore are the key industry peers to Engelhard. Engelhard believes that its standalone forward P/E multiple should reflect a relationship to key industry peers more in
line with historical levels.
(1) See page 50 for derivation.
(2) Applied Johnson Matthey’s long-term projected annual EPS growth rate of 8.0% based on Wall Street research to 2007 EPS of Johnson Matthey to drive 2010 forward P/E
multiple of 13.8x. Applied Umicore’s long-term projected annual EPS growth rate of 10.1% based on Wall Street research to 2007 EPS of Umicore to drive 2010 forward P/E
multiple of 11.6x. Price as of April 21, 2006.
Based on 2010P EPS
Based on 2007P EPS
3 Year Average Discount (1)
1 Year Average Premium (1)
(3 Year Average Premium: 19.3%)
Blended Price Per
Hypothetical
Resultant
Implied Price Per
Share Assuming Pro
Engelhard
2007 P/E
Share Based on
Rata Participation in
Premium/(Discount)
Multiple
$2.55 Projected EPS
Self Tender
Engelhard Relative to
Johnson Matthey
(6.9%)
16.0
$40.87
$41.70
(JM Currently at 17.2x)
Engelhard Relative to
Umicore
6.8%
16.6
$42.24
$42.80
(Umicore Currently at 15.5x)
Blended Price Per
Hypothetical
Resultant
Implied Price Per
Share Assuming Pro
Engelhard
2010 Forward
Share Based on
Rata Participation in
Premium/(Discount)
P/E Multiple
(2)
$4.22 Projected EPS
Self Tender
Engelhard Relative to
Johnson Matthey
(6.9%)
12.8
$54.13
$52.29
(JM Currently at 13.8x)
Engelhard Relative to
Umicore
6.8%
12.4
$52.33
$50.85
(Umicore Currently at 11.6x)
51
Recapitalization Plan
Required Stock Price and ’07 P/E to Deliver Hypothetical Blended Values of $38-$45
Per Share
Based on 2007 EPS of $2.55
2007 P/E Multiple Analysis – Current Multiples (1)
LT Proj. EPS
Growth Rate (1)
10.5%
8.0%
10.0%
10.0%
10.0%
10.0%
10.1%
7.7%
9.5%
10.0%
14.2x
B/E ’07P/E
(1)
Based on Wall street research average 2007 EPS projections and stock price. Average long-term projected EPS growth rate per First Call as of April 21, 2006.
Engelhard First Call LT Proj. EPS Growth:
Engelhard Operating Plan LT Proj. EPS Growth (’05-’10):
Pro Forma for Recap:
10%
14%
14%+
17.6x
17.5x
17.2x
16.2x
15.5x
15.3x
15.0x
14.7x
14.5x
14.4x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
Praxair
Air Products
Johnson
Matthey
Sigma-
Aldrich
Umicore
Albemarle
Rohm & Haas
Cytec
IFF
Du Pont
Hypothetical
Required
Implied
Blended Value
Stock Price
2007 P/E
38.00
36.24
14.2x
39.00
37.49
14.7x
40.00
38.74
15.2x
41.00
39.99
15.7x
42.00
41.24
16.2x
43.00
42.50
16.7x
44.00
43.75
17.2x
45.00
45.00
17.6x
52
V. Concluding Remarks
Concluding Remarks
Proxy Process and Annual Meeting Highlights
Proxy Process:
In Proxy Statement, among other things, Engelhard announces Board of Directors to expand Board by 3 seats
at the Annual Meeting
Engelhard names nominees for those intended seats
BASF will also have opportunity until close of business on May 8, 2006 to name 3 additional nominees;
Engelhard willing to consider reasonable extension to the extent BASF determines it needs a longer period of
time to name additional nominees
Engelhard Annual Meeting:
Proxies tabulated – shareholders supporting Engelhard can submit proxies for Engelhard’s 5 director nominees
(two Class 1 directors whose terms expire plus Engelhard nominees to fill 3 vacancies to be created)
Shareholders preferring BASF Offer can submit proxies in support of BASF’s nominees
Self Tender Offer:
Would close post-shareholder meeting unless:
BASF’s nominees constitute a majority of the Board and a majority of the Board determines not to proceed
with self tender offer
Engelhard recommends acceptance of an amended Tender Offer that BASF may choose to make
Engelhard approves a transaction that it determines is a superior alternative to the Recapitalization Plan
Other customary closing conditions (including financing) are not satisfied or waived
Shareholder Choice: Recapitalization Plan or BASF Offer
54
Concluding Remarks
Recapitalization Plan Highlights and Board Recommendation
The Recapitalization Plan should deliver value superior to BASF’s $38.00 per share proposal
Accretion to EPS and EPS growth commencing in 2007
Expected strong forward price to earnings (P/E) multiple
Provides meaningful liquidity to Engelhard shareholders at an attractive price of $45.00 per share
Offers Engelhard shareholders the ability to participate in Engelhard’s strengthening business
prospects and realize the Company’s future growth potential through appreciation of the market
price of the stock or a future sale of the Company
Maintains investment grade credit profile
The Board unanimously recommends that shareholders:
Vote for the five Engelhard director nominees
Tender into the Company’s $45 per share tender offer
55
Appendix
Environmental Technologies
Light Duty Vehicles
• Light duty vehicle builds will grow globally at 2% over the plan period, from 62 million vehicles in 2005 to 68 million by 2010, driven primarily by increasing living
standards in emerging markets.
• N. America with strictest regulation and largest engines averages almost three catalysts per vehicle. Europe, with increasing penetration rates of catalyzed
soot filters (CSF) will increase to slightly over two catalysts per vehicle. Tightening regulatory standards in developing countries will bring the average in these
regions up to one catalyst per vehicle.
• Increasingly strict regulatory standards and fluctuating precious metal pricing will require more advanced technology with related value pricing.
• Net effect of the above is that the global market for light duty emission control catalysts will grow at a 5% CAGR, from $1.5B in 2005 to $1.9B by 2010. Of the
$1.9B in 2010, $1.4B relates to gasoline with the remaining $0.5B relating to light-duty diesel, primarily in Europe.
• Gasoline:
1. Global segment will grow from 103M catalysts in 2005 to 115M by 2010, a 2.2% CAGR, with an average catalyst manufacturing charge of $12/catalyst.
2. N. America and Europe will show minimal growth with Japan and Korea flat. Most of the growth will come from emerging markets, led by China.
3. Stricter regulations will be adopted in the emerging markets over the plan period. China and India will begin Euro 3 this year and Euro 4 by 2008-10. Brazil
will adopt a US Tier 2 program in 2009. Russia will begin to implement Euro 2 this year and Euro 3 by 2008.
• Light-duty Diesel:
1. Europe, which accounts for 75% of the market, will grow from 9.4M vehicles in 2005 to almost 12M by 2010, a 5% CAGR. A large percentage of the
remaining 25% is produced in Japan and Korea for export into Europe.
2. The biggest driver for this growth is the diesel penetration rate growing from 46% this year to 50% by 2010.
3. The catalyst market for light-duty diesels in Europe is currently forecasted to be almost $400M by the end of 2010. The largest growth opportunity is the
accelerated adoption rate of CSF’s.
4. Euro 4, which began phasing in 2004 (2005 new platforms) has not been filter (CSF) forcing. However, several European countries became aware that
ambient air quality standards were being exceeded in urban areas, primarily due to particulate matter. Driving restrictions on unfiltered vehicles were
discussed as a possible solution which prompted OEM’s to “voluntarily” install filters.
5. Awareness of particulate matter has forced the EU to accelerate the adoption of Euro 5 for light-duty diesel (now projected for 2009). Euro 5 reduces
particulate emissions by 80% vs. Euro 4 and will be filter forcing for a majority of diesel vehicles.
6. Grow Engelhard’s market share in Europe from 24% to 35% by 2008.
Note: Based on Engelhard Management Operating Plan estimates developed August, 2005.
Appendix
Financial Assumptions
Key Assumptions
57
Environmental Technologies (Cont’d)
Heavy-Duty Diesel (HDD)
• HDD engine demand will increase only 1% per year, from 1.6M engines in 2005 to 1.7M engines in 2010 in the U.S., Europe and Japan.
• However, tightening regulations will increase the catalyst market from 1.4M units in 2005 to 5M units in 2010.
• Market Revenues (ex-PGM/ex-substrate) are projected to grow from $100M in 2005 to $330M-$370M in 2010.
• For On-Road, US 2007 & 2010, Euro 4 & 5 and Japan 2005 & 2009 are “On Track” for implementation.
• Successful fleet testing of US07 emission systems in 2006.
• Non-vanadium SCR will be required in US, Europe and Japan.
• European tax incentive programs will drive early adoption of CSF’s.
• New off-road regulations begin in 2008 and are not included in sales or earnings estimates.
Stationary Source
• The Food Service market will grow from $3M in 2005 to $10M in 2010 driven by pending charbroiler regulations (2007). Addresses fine particulate control and health and safety
benefits for ventless ovens.
• Successful development of differentiated mercury sorbent technology for coal-fired power plants assumed for 2008-2010.
Temperature Sensing
• Market will grow from $225M in 2005 to $300M in 2010, a CAGR of 6%.
• Engelhard will improve on its 8% market share through three growth strategies:
1. Accelerate optical thermometry commercialization by penetrating new markets.
2. Continue Asia geographic expansion.
3. Add wafer thermocouple technology to complete Engelhard temperature measurement portfolio.
Note: Based on Engelhard Management Operating Plan estimates developed August, 2005.
Appendix
Financial Assumptions
Key Assumptions
58
Appendix
Financial Assumptions
Key Assumptions
Process Technologies
Chemicals
• Gas Economy catalyst market forecast to approximate $350M in 2006 with a CAGR of 15%.
• Additional Gas Economy catalyst growth from:
1. Planned expansion from current “gas-to-liquids” (GTL) customer.
2. Leveraging Fischer-Tropsch catalyst technology to other major GTL players.
3. Leverage our syngas position from Nanjing acquisition.
• Successful entry into unserved petrochemical markets, including ethane based styrene, ethane based acetic acid, propane based acrylic acid and propane based propylene
oxide, based on current commercial agreements.
• Growth rates for catalyst markets for oleochemicals, petrochemicals and fine chemicals range from 2% to 10%.
Petroleum Refining
• FCC additives growth approximating 22%:
1. Underlying market growth of 10%.
2. Additional growth from the expansion into environmental and gasoline conversion additive technologies to meet increasing global demands of propylene and petrochemical
feedstocks and regulatory compliance.
• Entry into new refining market areas by leveraging Engelhard technology through prospective licensing agreements, including hydrocracking, deep catalytic cracking and
reforming.
• FCC market growth only projected at 2% with additional income from productivity gains.
• Natural gas price used was $7.25 per MMBTU. Adverse variances are expected to be substantially covered by surcharges and other pricing actions.
Polyolefins
• Polypropylene growth approximating 26%:
1. Assumed growth of 7% in proprietary catalyst representing underlying market growth of 5-6% and remaining growth through differentiation and acceleration of our technology
development into the packaging and film markets.
2. Growth in volume from new licenses.
• Continuation of entry into polyethylene market.
Note: Based on Engelhard Management Operating Plan estimates developed August, 2005.
59
Appendix
Financial Assumptions
Key Assumptions
Appearance and Performance Technologies
Personal Care Materials
• 7% growth per year in delivery systems for personal care through 2009. In the case of commodity vitamins (30% of market) where Engelhard does not participate, the rate is 5%.
For more specialized actives, such as unique extracts from plants, the growth rate is closer to 10%.
• Additional sales/earnings from expanding the product offerings globally from the acquisitions made in the U.S. and France in 2004 and 2005.
• Additional earnings from optimizing synergies in technology, manufacturing and sales as Engelhard continues to integrate the two acquisitions.
Effects
• Market for effect pigments in cosmetics and personal care will grow at 7% per year. The market growth rate for industrial applications will be 4-5%. Growth in the automotive
market will be lower.
• Expanding Engelhard’s innovation track into new programs beyond mica and borosilicate glass, bismuth and film by focusing R&D on technology platforms and away from line
extensions will add $15M to sales.
• Cost reductions will add $10M to earnings by 2010.
• Faster innovation and an applications lab in China will work to counter Chinese competition, as well as pay attention to costs.
Kaolin
• Recover $10M in sales and $4M in earnings from strikes in Finland and Canada.
• $20M in sales in 2010 from Décor Growth Program (decorative laminate paper market with substitution for TiO2).
• Crop Protectants (Surround) will add $32M of sales and $10M of earnings by 2010.
• Cost reduction initiatives will add $12M in earnings.
• Natural gas price used was $7.25 per MMBTU. Adverse variances are expected to be substantially covered by surcharges and other pricing actions.
Note: Based on Engelhard Management Operating Plan estimates developed August, 2005.
60
Appendix
Financial Assumptions
Key Assumptions
Ventures
Alumina business acquired in 2005 accounts for $12M of 2010 operating earnings with modest growth rates.
• Frac Sand accounts for $9M of 2010 operating earnings and depends mostly on continued demand from the energy sector.
• Aseptrol/Water Treatment are slated to generate $7M of operating earnings related to health requirements.
• Nothing included in sales and earnings for Ceramic Proppants and Battery Materials programs.
Corporate
• Share buy-back programs, enabled by operating cash flows, will offset the dilutive impact of equity-based awards under employee benefit plans. Diluted shares outstanding for
Operating Plan period are 122 million.
Share buy-back programs, enabled by operating cash flows, will offset the dilutive impact of equity-based awards under employee benefit plans. Diluted shares outstanding post-
recapitalization plan are 101 million.
• The average effective tax rate for the Operating Plan period on a standalone basis is 24%, with the 2010 period at 25%.
The average effective tax rate post-recapitalization is 25% with the 2010 period at 26%.
• Equity earnings from the Company’s equity method joint ventures, which primarily serve the Japanese and Korean automotive catalyst markets, have conservatively been held
constant throughout the plan period, despite a 25% CAGR over the past three years.
Note: Based on Engelhard Management Operating Plan estimates developed August, 2005, except post-recapitalization items as noted.
61