SUMMER 2015 STOCK PRESENTATION MATERIALS SECTOR JULY 29, 2015 ALIX PITTS & JD PISULA AGENDA SECTOR OVERVIEW RECOMMENDATIONS Q&A SECTOR OVERVIEW The Industry Classification Benchmark (ICB) is an industry classification taxonomy launched by Dow Jones and FTSE in 2005 and now owned solely by FTSE International. It is used to segregate markets into sectors within the macroeconomy. The ICB uses a system of 10 industries, partitioned into 19 supersectors, which are further divided into 41 sectors, which then contain 114 subsectors. The Basic Materials Sector consists of the following company types: SECTOR OVERVIEW LARGEST COMPANIES IN MATERIALS SECTOR SECTOR OVERVIEW S&P WEIGHTS Materials Utilities 3% 3.13% Energy 8% Materials Utilities 2.25% 3% Information Technology 20% Consumer Staples 9% Energy 7% Telecommunication Services 3% Information Technology 21% Consumer Staples 8% Financials 17% Industrials 10% Consumer Discretionary 13% SIM WEIGHTS Telecommunication Services 2% Health Care 15% Financials 18% Industrials 9% Consumer Discretionary 13% Health Care 16% TCK – 10,600 shares @ ~$7.30 = $77,380 mkt value ECL – 1,000 shares @ ~113.75 = $113,750 mkt value SECTOR OVERVIEW THREE-YEAR PERFORMANCE SECTOR OVERVIEW INDUSTRY PERFORMANCE ECONOMIC ANALYSIS TRENDS TO WATCH - Commodity prices - Currency headwinds - Low growth in Europe - Slowdown in China - Momentum in US Automotive - US Housing and Commercial Construction - Shale gas investments - Speculation risk RECOMMENDATION - Continue to UNDERWEIGHT - Global growth prospects create uncertainty for this sector - Remember sector sub-segments are not all alike - Avoid Mining and Metals - Avoid value traps - Search for diversified companies that are mildly less cyclical and speculative RECOMMENDATION - Ecolab Inc. (ECL) is a HOLD - Current price as of 7/28/15 is $113.77 - Bloomberg analyst price target = $124 - DCF model target price of $121 provides over 10% upside - Unlike most Materials, only 30% of ECL’s business is exposed to oil & gas - 50% of revenues are earned in the USA and 25% in Western Europe - Diversified product offerings (Hospitality, Healthcare, Industry, Energy) - For a very cyclical sector, ECL is relatively defensive RECOMMENDATION RECOMMENDATION - Teck Resources (TCK) is a SELL - Current price of $7.32 as of July 28 - Bloomberg analyst target price of $11 - DCF target price of $8.12 - Mining sector continues to get CRUSHED - Slowdown in Chinese growth - Lower demand for coal and copper has resulted in over supply - Shares are lowest since 2009 RECOMMENDATION RECOMMENDATION OTHER OPTIONS - LyondellBasell Industries (LYB) - Current Price = $92.46 Target Price = $105 Upside = 14% Target Price = $29 Upside = 57% Target Price = $24 Upside = 10% Target Price = $49 Upside = 7% - Huntsman Corporation (HUN) - Current Price = $18.86 - Owens-Illinois (OI) - Current Price = $20.96 - Mosaic (MOS) - Current Price = $42.76 RECOMMENDATION - LYB is a BUY - Current price of $92.46 as of July 28 - Bloomberg analyst target price of $113 - DCF target price of $109 and weighted target of $106 – almost 15% upside - Over 50% sales in North America, 20% in Western Europe - Obtaining favorable margins due to lower feedstock prices - Capacity advantages in Europe - Accelerating demand in developed markets and outages among competitors - Leader in ROA and ROE RECOMMENDATION So, why not Huntsman? - Not an S&P 500 component -- $5B market cap puts it in Mid Cap - Approx. 25% sales in China and emerging economies - Asia is primary growth driver in Polyurethanes - Uncertainty on looming IPO/spinoff of Titanium Dioxide business (~20% sales) - Shares at lowest in two years - Debt/EBITDA is 5x – relatively high for the industry - Long-term debt rating of BB RECOMMENDATION RECOMMENDATION RECOMMENDATION RECOMMENDATION - Dividend increase by 11%, current dividend yield at 3.3% - 10% share buy back this year with plans to continue for foreseeable future - Q2 EPS is at an all-time high -- $2.81 - Best ROE of large chemical companies – 48% - Effectively managed since 2009 bankruptcy - Ahead of competition in bringing on line capital expenditures - Primarily utilizes Natural Gas feedstocks which remain oversupplied - Sales are mostly long-term agreements - Bottom line: LYB is positioned to capitalize on US and Europe with capacity and cost advantages RECOMMENDATION Summary - Sell 10,600 shares of Teck Resources (TCK) - Reinvest proceeds in up to 1,250 shares of LyondellBasell (LYB) - Hold 1,000 shares of EcoLab (ECL) - Maintain sector weighting near 2.25% which is approx. 75bps underweight