Business CasePreliminary Findings

XXXX Chemical Analysis & Design

February 18, 1993

© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Business Case Version 1.4 - 2 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Agenda

• Purpose

• Top-down perspective

• Polyols

• Dylark

• R&D Portfolio

Business Case Version 1.4 - 3 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

The Business Case in Another Key Activity in the Analysis and Design Phase

CurrentInitiatives

Review

ProductDevelopment

ProcessAlignment

ProductDevel.

EffectivenessProbe

CustomerInterface

DiagnosticsCustomerInterviews

Value ChainProbe

OpptyCharting/

Sizing

ProjectDesign

XXXX Chemical/Gemini JointImprovement

Project

ExecutiveInterviews

FocusInterviews

InternalFunctionalInterfaceSurvey

MarketFocus

Assessment

BusinessCase

Business Case Version 1.4 - 4 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Purpose

• To thoroughly understand the financial drivers of XXX’s automotive Polyol & Dylark Businesses

• To establish the sizing or relative magnitude of opportunities

• To provide financial analysis needed to uncover business opportunities

• To quantify opportunities and provide cost/benefit analysis

Top-DownPerspective

Business Case Version 1.4 - 6 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX (XXX) Marketed ThreeCo-products and Their Derivatives in 1992

XXXX Americas -- Lines of Business $2 Billion

PO - Merchant*

$262 MM

PO - Derivatives(includes Polyols)

$626 MM

Styrene - Merchant *

$197 MM

Styrene - Derivatives(includes Dylark)

$223 MM

MTBE

$703 MM

* Excludes inputed value of Propylene Oxide in Tolling Business.

Business Case Version 1.4 - 7 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Polyols Represent $364MM in Sales and $60MM in Variable Contribution, Excluding “PO Profit”

Variable Contribution = Rev - Var Cost - Distribution

XXXX Earns an Additional Variable Contribution of 23¢ on Each Pound of PO Consumed by Polyols — $101 Million in Total

XXXX Earns an Additional Variable Contribution of 23¢ on Each Pound of PO Consumed by Polyols — $101 Million in Total

Propylene Oxide Sales -- $888 MMPolyols Automotive

$74 MM

Merchant PO

$262 MM

Captive Non-Polyol

$262 MM

Polyols Non-Automotive

$290 MM

Business Case Version 1.4 - 8 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Findings

• XXXX earns a variable contribution of $60MM on Polyol sales, in addition to variable contribution of $101MM from PO consumed

• Dylark sales of $68MM provided a variable contribution of $33MM

Polyols

Business Case Version 1.4 - 10 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX Recognizes Contribution at Two Distinct Points in the Production of Polyols

Production ofPropylene Oxide Production of

PolyolsInternal Sale of

PO to Polyol Units

Sales = $159MMSales = $364MM

Customer

XXXX Earns A Variable Contribution Of 23¢ On Each Pound Of PO Consumed By Polyols

Variable Contribution = $60MMVariable Contribution = $101MM

Business Case Version 1.4 - 11 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Commodity Slab Represents The Majority of Polyol Revenue . . . .

Rigid $4MM

Commodity Slab$184MM

CASE$32MM

Molded$100MM

Perf Slab$45MM

Business Case Version 1.4 - 12 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

. . . . But Only a Small Portion of Variable Contribution . . . .

Rigid $1MM Commodity Slab$3MM

CASE$10MM

Molded$34MM

Perf Slab$12MM

Business Case Version 1.4 - 13 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

. . . . As Variable Contribution Per Pound is Highest for Molded and Lowest for Commodity Slabs

CommoditySlab

Molded Rigid CASE PerformanceSlab

22.922.2

18.9

0.3¢

24.1

Business Case Version 1.4 - 14 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

However Because Commodity Slab Consumes the Majority of the PO Used in Polyol Production . . . .

Rigid 2MMPounds

Performance Slab27MM

Pounds

CASE42MM

Pounds

Molded92MM

Pounds

Commodity Slab216MMPounds

Business Case Version 1.4 - 15 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

. . . . It Accounts for the Bulk of the PO Variable Contribution Generated By Polyols

Commodity Slab$42MM

Molded$14MM CASE

$9MMPerformance

Slab$4MM

Rigid $ 0.4M

Business Case Version 1.4 - 16 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

“Integrated” Variable Contribution Per Pound Captures Earnings From PO Consumption and Polyol Sales

IntegratedVariable Contribution

CASE 21.0¢ 22.2¢ 43.2¢

Molded 15.6¢ 24.1¢ 39.7¢

Rigid 9.5¢ 22.9¢ 32.4¢

Performance Slab 13.6¢ 18.9¢ 32.5¢

Commodity 19.7¢ 0.3¢ 20.0¢

Propylene OxideVariable Contribution

PolyolVariable Contribution

Business Case Version 1.4 - 17 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Short Term Revenues Will Decline as XXX Lowers Volume to Stabilize / Raise Prices

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1992 1993

Slab$229MM

Molded$100MM

CASE$32MM

Rigid$4MM

CASE$43MM

Molded$120MM

Slab$174MM

Business Case Version 1.4 - 18 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Long Term Revenue and Profits Increases are Driven by a Combination of Price and Volume Growth and Improved Contribution margin. . .

Changes in Volume, Price, and Variable Contribution per pound indexed 1992 = 100

100

110

120

130

140

150

160

170

1992 1993 1994 1995 1996 1997

Volume VC Per Pound Price Per Pound

Business Case Version 1.4 - 19 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

. . . . Making Long Term Reinvestment Economics Questionable

Volume, Price, and Variable Contribution 1992-97

0

50

100

150

200

250

300

350

400

450

500

1992 1993 1994 1995 1996 1997

Variable Contribution Sales

Business Case Version 1.4 - 20 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Sales Opportunities in Polyols Are Constrained by Demand, Not Capacity

PolyolProduction

FORSALE

Business Case Version 1.4 - 21 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Automotive Polyols Customers Represent 20% of Total Polyol Sales . . .

. . . . And 71% of Total Molded Polyol Sales

Automotive$74MM

Non-Automotive$290MM

Business Case Version 1.4 - 22 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

. . . added $26MM in Variable Contribution * . . . .

Molded PolyolProduction

Sales = $74MM

Automotive PolyolCustomer

. . . . In Addition To $18MM Of PO Profit

Variable Contribution$26MM

* Based on variable contribution of 23¢ per pound for Molded, 22¢ per pound for CASE and 4¢ per pound for total slab

Business Case Version 1.4 - 23 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Sales to XXX’s 11 Automotive Customers Follow the 80/20 Rule

JCI ($34MM) And Woodbridge ($22MM) Account For 71% Of Automotive Polyol Sales

% of Automotive Customers

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Business Case Version 1.4 - 24 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Findings

• XXXX profits from the sale of Polyols in 2 ways

– Variable contribution of 23¢ for each pound of PO consumed - - $101MM

– Variable contribution of $60MM from production and sale of Polyols

• Molded Polyols generate the highest variable contribution per pound for Polyols - - 24.1¢ - - and the second highest “integrated” variable contribution - - 39.7¢

• Long term projections may be optimistic in light of excess industry Polyol capacity

• Automotive Polyol sales generated $44MM in integrated variable contribution

Dylark

Business Case Version 1.4 - 26 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Dylark Represents $68MM, or 16%, ofStyrene Monomer Sales

Dylark Earned a Variable Contributions of $33MM in 1992

Styrene Monomer Sales -- $420 MMDylark Automotive

$60MM

Dylark Non-Automotive

$8MM

Merchant *

$197 MM

Dylite

$ 155 MM

* Excludes inputed value on Tolling activities

Business Case Version 1.4 - 27 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Dylark Generated Variable Contribution of $33MM on Sales of $68MM in 1992 . . . .

Dylark Production

Sales = $68MM

Dylark Customer

. . . . Or 50.7¢ For Each Pound Sold

Variable Contribution$33MM

* Based on variable contribution of 23¢ per pound for Molded, 22¢ per pound for CASE and 4¢ per pound for total slab

Variable Contribution$1.5MM

Business Case Version 1.4 - 28 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Dylark Commands a Dominant Share of the North American Instrument Panel Market . . . .

Source: ARCO Internal Document

And Controls 79% Of The 50MM Pound Soft Instrument Panel Market

1991 Total = 85MM Pounds

ACC45%

Other7%

DOW10%

GE38%

ACC: DylarkGE: Noryl, PC, ABS/PCDow: ABS/PC, PC, ABS

Business Case Version 1.4 - 29 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

U.S. Automotive Customer Overlap

Johnson Control – DWoodbridge D DDavidson D DLear Seigler D DGoodyear I DUTA D –Van Dresser D –Aeroquip D –

Tier I

PolyolDylarkOEM

Ford D DInland (GM) D –Chrysler I –Toyota D –NUMMI (Toyota/GM) I –Nissan – –Mazda I –

D = Direct SaleI = Indirect Sale

Business Case Version 1.4 - 30 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

In the Past Dylark Results Have Been Inconsistent

0.0 ¢

20.0 ¢

40.0 ¢

60.0 ¢

80.0 ¢

100.0 ¢

120.0 ¢

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

Sales Price

Var Contrib

Cents PerPound

Business Case Version 1.4 - 31 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

. . . . And Future Sales Opportunities are Constrained By Limited Capacity

0.0 ¢

20.0 ¢

40.0 ¢

60.0 ¢

80.0 ¢

100.0 ¢

120.0 ¢

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Sales Price

Var Contrib

Capacity Constrained

Cents PerPound

BudgetsActuals

Business Case Version 1.4 - 32 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Current Dylark Business Strategy

Maximize Operating Income• Manufacturing Efficiency• Test Price Elasticity

Incremental Product Change• Improved Toughness

Exploit Existing Product Successes• Processability, Heat, Adhesion• Application Development Focus• External R&D Support

Establish Capacity Expansion Plan

Current Strategies Follow A “Cash Cow” Approach Until New Capacity Can Be Justified

Source: Focus/Executive Interviews & ARCO Internal Documents

Business Case Version 1.4 - 33 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Findings

• Dylark Represents a profitable niche product

• Dylark and automotive Polyols share many common customers

• Sales growth will be capacity constrained by 1995

• Business approach focuses on increasing profitability with little incremental investment

R&D Portfolio

Business Case Version 1.4 - 35 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX Spent 32% of Its Approximately $53 Million R&D Budget on Dylark and Polyol Projects

NOTE: Based on YTD 11/92 spending.

Dylark

11%

Polyols

21%

Other Products

39%

Gen'l Research

29%

Business Case Version 1.4 - 36 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX Invested 50% of Its R&D Dollars in Supporting Existing Businesses or Finding New Applications for Existing Products

NOTE: Based on YTD 11/92 spending.

38%

12%

22%

19%

6%3%

20MM 39% 105 193M

6MM 12% 23 279M

12MM 22% 50 235M

10MM 19% 68 147M

3MM 6% 25 124M

1MM 3% 23 63M

53MM 100% 293 180M

Supporting ExistingBusiness

New ApplicationExisting Product

New Product orProcess

ManufacturingExcellence

Developing TechnologyBased BusinessOpportunities

Other

AverageProject Size%

Numberof ProjectsR&D ($)

Business Case Version 1.4 - 37 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

In Contrast 82% Polyols R&D Focused on Supporting Existing Business. . .

NOTE: Based on YTD 11/92 spending.

66%

16%

14%

4%

7MM 65% 28 0.3MM

2MM 16% 3 0.7MM

2MM 14% 6 0.3MM

0.5MM 4% 5 0.1MM

11MM 100% 43 0.3MM

Supporting ExistingBusiness

New ApplicationExisting Product

New Product orProcess

ManufacturingExcellence

AverageProject Size%

Numberof ProjectsR&D ($)

Business Case Version 1.4 - 38 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

. . . . and The Same Held True for The Approximately $6 Million Spent on Dylark R&D

NOTE: Based on YTD 11/92 spending.

68%

7%

5%

20%

4MM 68% 11 0.3MM

0.4MM 7% 1 0.3MM

0.3MM 5% 3 0.1MM

1MM 20% 9 0.1MM

6MM 100% 24 0.2MM

Supporting ExistingBusiness

New ApplicationExisting Product

New Product orProcess

ManufacturingExcellence

AverageProject Size%

Numberof ProjectsR&D ($)

Business Case Version 1.4 - 39 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Findings

• R&D spending at XXXX is heavily weighted toward investing in existing products and away from developing new products

• Polyol and Dylark research is even more heavily slanted toward incremental development rather than creating new products

Business Case Version 1.4 - 40 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Molded Polyols Consume a Disproportionate Share of “Supporting Existing Business” R&D

% Total “SEB” R&D% ACC Revenues % ACC R&D

Dylark 2.4% 11.3% 18.7%

Polyols 13.0% 21.0% 35.7%

Molded Polyols 3.6% 7.3% 14.9%

Source: Based on YTD 11/92 R&D spending annualized

Business Case Version 1.4 - 41 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

WB-OntarioFairless Hills Kansas City Mexico City

Total “ACC” Plants

St PeterTilbury Whitby Romulus Atlanta

Capacity: 7.8%Thru-Put: 10.0%Util. Factor: 1.28

Capacity: 6.3%Thru-Put: 6.0%Util. Factor: 0.96

Capacity: 7.8%Thru-Put: 6.0%Util. Factor: 0.77

Capacity: 15.6%Thru-Put: 25.0%Util. Factor: 1.6

Capacity: 15.6%Thru-Put: 12.0%Util. Factor: 0.77

Capacity: 15.6%Thru-Put: 6.0%Util. Factor: 0.38

Capacity: 7.8%Thru-Put: 10.0%Util. Factor: 1.28

Capacity: 7.8%Thru-Put: 8.0%Util. Factor: 1.03

Capacity: 7.8%Thru-Put: 12.0%Util. Factor: 1.54

Brodhead

Capacity: 7.8%Thru-Put: 5.0%Util. Factor: 0.64

PIPA

788(Formerly Dow)

788(Formerly ACC 731)

731(² to 788 by 3/29/93)

Dow(² to 788 by 3/15/93) PIPA

% Cap: 76%% TP: 70%

Note:Capacity = % of 10 plant total capacityThru-Put = % of plant total raw material consumptionUtilization Factor = Thru-Put ÷ Capacity

788(Formerly ACC 731)

788(Formerly Dow)

788(Formerly Dow)

731(² to 788 by 3/7/93)

Woodbridge Plant Utilization and Raw Materials Supplier

Business Case Version 1.4 - 42 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

There are Many Sources of Tangible Payoffs From Partnering and Market Focus

• Forestall / Avoid Commodity Status for Today’s Performance Products

• Reduce Frequency / Likelihood of Unproductive Product Development Initiatives (e.g. AR-Set?)

• Hold Share at Major Customers / Avoid Price Reductions to Maintain Share

• Gain Increased Access / Share to Current Customer’s Operations Outside North America

• Avoid Costs of Punitive Temporary Share Losses

Business Case Version 1.4 - 43 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Forestall / Avoid Commodity Status for Today’s Performance Products

Worldwide

Molded Polyol Variable Contrib 20.4 ¢ / #

Commodity Slab Variable Contrib. 3.6 ¢ / #

Differential 16.8 ¢ / #

With Molded Polyol Sales of Over 200 million pounds, that Represents a Loss of $34 million in Variable Contribution

Business Case Version 1.4 - 44 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Reduce Frequency / Likelihood of Unproductive Product Development Initiatives (e.g. AR-Set?)

Business Case Version 1.4 - 45 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Hold Share at Major Customers / Avoid Price Reductions to Maintain Share

Cost of Price Reduction at Woodbridge

Current Position

Pounds 31,000 M

1 ¢ Price Reduction $310 M

Contribution at Risk

Required PriceReduction ????

Lost VC $?,??? M

Cost of Losing Share at Woodbridge

Current Position

Pounds 31,000 M

VC per Pound 40¢

Contribution at Risk

Pounds 15,500 M

VC per Pound 40¢

Lost VC $6,200 M

Business Case Version 1.4 - 46 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Gain Increased Access / Share to Current Customer’s Operations Outside North America

Current Position

Pounds ?,??? M

Percent Total ??%

VC per Pound 40¢

Total VC $??,??? M

WoodbridgeOutside North America

Current Position

Pounds 31,000 M

Percent Total 70%

VC per Pound 40¢

Total VC $12,400 M

WoodbridgeNorth America

Business Case Version 1.4 - 47 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Avoid Costs of Punitive Temporary Share Losses

Cost of Temporary Share Loss at Woodbridge

Revenue 3,500 M x 74 ¢/# = $2,600 M

Variable Contribution 3,500 M x 24 ¢/# = 840 M

PO Contribution 3,500 M x 16 ¢/# = 560 M

Integrated Contribution Lost = $1,400 M

Business Case Version 1.4 - 48 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Other Opportunities on the Horizon Further Mulitply Potential Benefits

Major step-outopportunity

$74 MM

System costreduction

$5 MM

Worldwidepartnering

$?? MM