bartels e seizing the opportunities of the crisis

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Seizing the

opportunities ofthe crisis

Dr. Eric Bartels –

Chemical PracticeMcKinsey & Co.

Berlin March 5, 2009

This report is solely for the use of EuPIA participants. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without priorwritten approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

Presentation to the EuPIA



1

Perspectives on the global economic crisis for chemical companies

A

B

C

Perspectives on the crisis, uncertain-ties, and emerging scenarios

How winners emerge post-crisis

Key levers for you to chart your winning course through the crisis



2

• We are now almost 5 months into a sharply deteriorating globalcredit, capital and economic crisis that is different from any ofthe previous recessions of the post-WWII era

• Most companies have taken appropriate initial actions, including: –Shore up financials (i.e., liquidity, balance sheet) –Cut discretionary spending (e.g., Christmas party) –Scale back on initiatives predicated on continuing global growth

–Scan for potential new risk exposures (e.g., forex, commodities) –Freeze new hires in non-essential positions

• However, none of these actions are sufficient if we have enteredinto a multi-year economic slowdown

• The question is, given all the uncertainty, what should a companydo next?

What should a company do beyond initial actions? A



* Does not include debt issued by federal, state and local governments, borrowing by financial institutions, or commercial paper

** Includes multifamily residential and farm mortgages

*** Excluding debt issued by banks and broker-dealers; losses on unsecured debt issued by Lehman Brothers and WaMu are estimated to be $130-140B

$ Billions

U.S.-originateddebt*

Credit cards

Auto loans

Other revolving

Other nonrevolving

Total

outstanding(Q2 2008)

U.S.consumercredit

U.S.commercial& corporatecredit

Total

840

770

130830

590

24,060

High-yield bonds

Leveraged loansInvestment-grade bonds***

All other loans

690

3,140

2,470

Estimated

cumulativelosses (2008-13)

1,370-3,120

100-220

11,300 660-1280

2,570

6,890

6-13%

13-29%

6-11%U.S. realestate

Share ofoutstanding

3,300 170-430 5-13%

290-660 12-26%

240-750 3-11%

70-170

90-240

12-29%

13-35%

100-270 12-32%

20-40 15-31%70-130 8-16%

40-170 1-5%

40-170 2-7%

Commercial**

Residential

14,600 830-1710 6-12%

We probably haven’t seen the worst yet: Estimated futurelosses range from $1.4 - $3.1 tri llion

A



A What makes this crisis, and the resulting US recession,different from past recessions?

What makes this recession different?

• Breakdown in capital markets in September

• Transmitted through the global capital markets to the worldeconomy

• Hitting US and Europe after an unprecedented borrowing spree

• Hitting all "export-to-US" dependent economies

• Global credit/capital market mechanisms remain broken

What are the uncertaint ies that we face?

• Macroeconomic – duration and depth of recession?

•Capital markets – can they be fixed?

• Government intervention – what will they do and can this becoordinated?



Revenue growth profiles under four scenarios

Scenario 2:Battered, butresilientProlongedrecession for 2 to4 years

Very severe

globalrecession

Severe

globalrecession

Scenario 1:Quick fixQuick, butunsustainableUS recovery inlate 2009

Scenario 4:Long “freeze”Recession lasts

for more thanfive years“Japan-style”

Scenario 3: StalledGlobalization-Resurgence of

NationalEconomiesModerate recessionof one to two yearsfollowed by sloweconomic growth

Global credit and capital marketsclose down and remain volatile

Global credit and capital markets

reopen and recover

A



CHEMICALS' CONSUMPTION* (SALES USD BASIS) BY END-USE

Note: Excludes pharma. Chemicals used to make intermediates allocated to downstream uses based on mix of non-ag downstream use by product type* Consumption includes chemicals embedded in – or used to make – imported goods

Source:Probe Economics, Cefic, McKinsey analysis

End-use segmentsGlobal sharePercent Demand sensitivity to downturn/rationale

Construction 18 Major housing oversupply

Automotive 14 High uncertainty about companyviability; limited budgets

Computers and telecom 6 Somewhat discretionary

Household and office – major appliances,equipment, furniture

4 Somewhat discretionary

Household and office – consumables, packaging

12 Swings with general commerce

Industrial goods andservices

10 Swings with general commerce

Consumer services 16 Some components discretionary;

some unlikely to see declines

Textiles and clothing 6 Shift to lower price goods but smallportion of volume is discretionary

Agriculture 8 Limited decline (less than expectedgrowth due to diet change, biofuels)

Food processing anddistribution

6 No decline likely

ROUGH ESTIMATES

Chemical end-use sectors vary in their exposure to thedownturn in demand

A

Our scenario modelsproject chemical demand

to decline by 6% to 12%versus the historical trend

until 2010



* Companies classified as "winners" or "challengers" on the basis of average EV/IC for pre-recession (1997-99) and post-recession (2004-05):Top quartile companies considered as "winners", the remainder as "challengers"

Source: McKinsey analysis, CPAT database

49

51

Winners(25%)

13

87

Challengers(75%)

Winners

Challen-

gers

Post-recession

Pre-recession

Only 49% of pre-

recession winners*

retain their leadershipposition

Key driver:

Fast, proactive,

flexible cost &cash mgt.

13% of challengers*

are able to gain

leadership position –

Distribution of companiesPercent

Key driver:

Fast, proactive,

flexible cost &

cash mgt. PLUS

smart M&A

strategy

Recessions lead to a significant reshuffl ing of industry leadersB

McKinsey studyof 4,020

companiesworldwide in 78industry sectors



• Successful winners – tend to maintain lower CAPEX compared to unsuccessful peers,

who maintain high CAPEX too long into recession – have considerably lower CAPEX in absolute figures during

the recession• Successful challengers – tend to maintain CAPEX on comparable level as peers, while

lowering it in absolute numbers during recession – They accelerate CAPEX growth only early post recession

Investment strategy

• Make strategic moves that leverage relative advantages vs.Peers/build exposure to growth geographies/build market-share

• Drive commercial and operational levers that support costleadership and preserve liquidity. For costs – Improve working capital efficiency (particularly inventory and

receivables turnover) – Maintain flexible workforce and adjust headcount as needed – Be able to flexibly cut overhead costs if necessary

Operating efficiency

Source: McKinsey

Previous recessions show us that successful companies sharecommon strategies in tough t imes (1/2)

B



• Adjust performance measures towards cash, capital and liquidityindicator; non-financial health indicators

• Seek to reshape company operational risk profile e.g. stabilizesupplier base, monitor customer liquidity, operational risk• Keep debt levels below peers before and during recession to be

able to finance opportunistic moves

Financial manage-ment and flexibility

Acquisition strategy

• Divest non-core high-performing assets with limitedgrowth/improvement potential/a better natural owner early

• If financial flexibility is there, acquire businesses from distressedsellers to build exposure to growth geographies/build market-sharelater in the cycle

• Successful challengers did more acquisitions than competitors

Source: McKinsey

Previous recessions show us that successful companies sharecommon strategies in tough times (2/2)

B



Shape up yourfinancials

Ring the till –immediate cashflow and P&Limpact 2009

Institutionalizeperformanceimprovements for2010+

Orchestratestrategic moves forgreater strengthpost-crisis

• Cash war rooms

– Inventories

– A/R, A/P

– Capex reviews

• Optimize financialsetup

• Build compellingcredit story

• Sourcing quick wins(e.g. repricing)

• M&S adjustments(pricing, incentives,..)

• Utilization mgmt inproduction

• R&D to boostproduct margins

• Reduce G&Aexpenses

• Build uniqueMarketing and Salescapabilities

• Pursue excellence inProduction

• Stimulate innovationperformance

• Lift the organizationto a new perfor-

mance level

• Seize attractivegrowth opportunitiese.g. through M&A

• Refocus businessportfolio and strategicdirection

• Develop new winningstrategies

Short-term survival Make use of crisis for performance boost

Key levers for you to chart your winningcourse through the crisis

C ANIMATION TO BE DONE!

bartels e seizing the opportunities of the crisis

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