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Hercules Annual Shareholders Meeting
Hercules Plaza
Thursday, April 17, 2008
 

Good Morning. I am John Wulff, Chairman of your Board of Directors.

We welcome you, and call to order the 2008 Annual Meeting of Shareholders. It is an honor for me to once again chair our company’s Annual Meeting. It has been gratifying to witness the strong and steady progress Hercules has made over the past five years.

With me are Craig Rogerson, President and CEO, and Israel Floyd, Corporate Secretary and General Counsel.

In the interest of safety, I direct your attention to the exit areas.

If anyone needs assistance for any reason, the ushers will be happy to help.

In the interest of time, I would like to ask that we dispense with reading the minutes of last year's meeting.

Hearing no objection, we will proceed.

As a result of the proxy votes already received, we have a quorum and, therefore, I declare the Annual Shareholders Meeting to be duly convened.

Let me outline our agenda for this morning.

• I will introduce the Board of Directors and then give some brief remarks.
• We will then move on to the formal part of the meeting where we will be voting on the election of four directors, each for a new one-year term, and two proposals that have been placed before us.
• Israel Floyd will conduct that portion of today’s meeting.
• After the meeting’s formal business is concluded, Craig Rogerson will lead the rest of the proceedings. Craig will give a report on the state of the company and the meeting will then be open for general questions and comments from shareholders. The results of the voting will then be announced.

Now I’d like to introduce those members of your current Board of Directors not up for election this year, and I’ll ask each of them to stand.  You’ll find a brief biography of each director in our 2008 Proxy Statement which was mailed to all of our shareholders.

Anna Cheng Catalano. Ms. Catalano is the former Group Vice President of Marketing for BP plc. Ms. Catalano held a number of executive and senior management positions during her 23 years with Amoco, which merged with BP in 1998.

Thomas P. Gerrity – Dr. Gerrity, formerly Dean of the Wharton School, is the Joseph Aresty Professor of Management at the Wharton School of Business of the University of Pennsylvania.

John C. Hunter, III – Mr. Hunter is the former Chairman, President and Chief Executive Officer of Solutia Inc.

Robert D. Kennedy –  Mr. Kennedy is the former Chairman, CEO and President of Union Carbide.

Joe B. Wyatt – Mr. Wyatt is Chancellor Emeritus of Vanderbilt University in Nashville, Tennessee.

And Craig A. Rogerson, President and Chief Executive Officer of Hercules.

The Board congratulates your CEO Craig Rogerson, his management team and the people of Hercules for delivering truly excellent performance in 2007 — earnings per share increased 20% in 2007 and 114% over the past five years, a 16% compounded annual growth rate.

Hercules has achieved this growth at the same time it has reduced the ratio of debt to capital from 61% to 36%, has increased the funding status of its U.S. pension plan from 77% to 96%, and has resolved a substantial portion of its legacy liabilities.

2007 was also highlighted by the fact that we are once again paying a dividend to our shareholders.
The company also authorized the buyback of up to $200 million of common stock.

This is further testament to the solid financial stability and business performance that has been attained over the past 5 years and our confidence for the future.

Craig will discuss these accomplishments as well as other highlights of 2007.

This concludes my remarks and, at this time, I’ll turn the floor over to Israel Floyd who will conduct the formal business of this meeting.

Israel.

[Slide 3 – Meeting and Presentation of Proposals]

Isreal J. Floyd

Thank you, John.

The rules of conduct for this meeting, the procedures for voting by ballot, and the meeting’s agenda, are outlined in the Brochure you received when you came in today. If you need a Brochure, please raise your hand.

The rules and procedures are to ensure a fair and orderly meeting.

You do not need to vote by ballot at this meeting if you have already voted by telephone, via the Internet or by proxy card. However, if you wish to change your vote or if you have not already voted, you may obtain a ballot from an usher by raising your hand.

The polls will remain open until the discussion on all voting matters is complete. At that time, the ushers will collect the ballots and the polls will be closed.

If you wish to ask a question, please raise your hand and wait to be recognized and an usher will bring you a hand microphone. State your name and that you are a shareholder or that you have a proxy from a shareholder, and ask your question.

In order to give other shareholders an opportunity to ask questions, you are asked to limit your remarks to no more than three minutes.

Please note that the rules that apply during this period are also included in the Brochure.

Remarks made by the Company at this meeting may include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.

Please refer to our Annual Report, our Form 10-K or 10-Q for qualifying risk factors pertaining to the forward-looking information. References may also be made to ongoing operations, ongoing EPS (earnings per share) and EBITDA (earnings before interest, tax, depreciation and amortization). These are non-GAAP financial measures.

A reconciliation to the GAAP results is provided in our quarterly earnings news releases and additional data is provided on our website, www.herc.com, in our investor review presentation.

At this time, I declare the polls open. Our first order of business is the election of four directors, each for a new one-year term.

• The four director nominees are…and may I ask each nominee to stand as his name is called:

Allen H. Cohen – Dr. Cohen is a former Managing Director with First Analysis Corporation. He was elected to the Board of Directors on February 21, 2008.
 
Burton M. Joyce – Mr. Joyce is the retired Chairman of the Board of Directors of IPSCO, Inc., a leading steel producer. He has been a Director of Hercules since 2005.

Jeffrey M. Lipton – Mr. Lipton is the President and Chief Executive Officer and a Director of NOVA Chemicals Corporation.  He has been a Director of Hercules since 2001.

John K. Wulff – Mr. Wulff is the non-executive Chairman of the Board, a position he has held since December 2003. He has been a Director of Hercules since 2003.

Are there any questions or comments on this proposal? Hearing none, I declare the nominations closed.

• The second proposal is approval of the provisions of the Amended and Restated Hercules Incorporated Annual Management Incentive Compensation Plan.  The proposed amendment is described in the 2008 Proxy Statement.

Are there any questions or comments on this proposal?

• The third proposal is: Ratification of the appointment of BDO Seidman, LLP as Hercules’ independent registered public accountants for 2008.

Representing BDO Seidman today is Mr. Phil Terenzio, Global Engagement Partner. Mr. Terenzio, please stand.

Are there any questions or comments on this proposal?

It appears everyone has had adequate opportunity to turn in their marked ballots, so I now declare the polls closed.

As indicated previously by John, the preliminary results will be announced at the end of today’s meeting, following the remarks by Craig and the general Question & Answer session.

I will now turn the meeting over to Craig Rogerson, our President and CEO.

Craig. 

[Slide 4 – State of the Company]

Craig A. Rogerson

Thank you, Israel. 

Good morning – and thank you for joining us.

I am proud to report on the state of Hercules and on another year of exceptional performance.

Before I begin, I would like to recognize a special guest in the audience -- Mr. Werner Brown, former Chairman and Chief Executive Officer of Hercules. Werner, thank you for being with us this morning and thanks for your ongoing support of the Company.

Furthermore, I would like to thank our retirees for the solid foundation they built over many decades. We have not forgotten your outstanding contributions. Our current employees continue to build on this solid foundation. Our employees delivered another excellent year in 2007 – thank you and congratulations.

We chose the picture displayed on our 2007 annual report cover for a number of reasons.

• First, as a reflection of the exceptional performance our employees have delivered over the last several years, including 2007, that has enabled us to standout.
   
• Second, in recognition of how important renewable resources, in particular, trees, are to Hercules and our businesses.

In our Aqualon business, the largest raw material for the production of our family of water-soluble polymers is cellulose – of which 70% is wood pulp.  Also, in Aqualon, our Brunswick, Georgia plant transforms 50 year and older stumps from pine trees into a family of valuable ingredients for a number of markets including food, beverages and adhesives.

In Paper Technologies and Ventures, our products, technology and applications expertise help our customers transform wood pulp from trees into a wide range of products including, tissues, paper towels, fine paper, packaging and construction materials.

• And third, because we are very serious about our commitment to protect the environment, advocate product stewardship, and operate sustainably. These commitments have been a constant throughout Hercules’ long history.

[Slide 5 – Presidential Green Chemistry Challenge Award]

In 2007, we saw tangible evidence of this commitment in the form of a Presidential Green Chemistry Challenge award, which recognizes chemical technologies that incorporate the principles of green chemistry into chemical design, manufacture and use.

[Slide 6 – Approaching 100th Anniversary]

In four short years, Hercules will celebrate its 100th anniversary. I would like to review how far the Company has come during the past several years and look forward to where we see the Company in our 100th year and our plans for getting there.

[Slide 7 – Progress and Performance]

Hercules today is a much different, much stronger company than it was just five years ago. Five years ago, the Company had considerable debt, had numerous, significant and unresolved legacy issues, and was not generating any cash. We are much stronger today and our financial health continues to improve. Our businesses are growing and growing profitably. We are generating strong cash flow. Our balance sheet continues to grow stronger.

Hercules sales grew 9% in 2007 and has grown at a compounded annual rate of 8% over the last five years.

Earnings per share grew by 20% in 2007 and at a 16% compounded annual growth rate since 2002.

Cash flow from operations grew 77% in 2007 to $300 million. This is an enormous improvement compared to 2002 when cash flow from operations was a negative $215 million.

Our return on invested capital improved by 180 basis points in 2007, and by 280 basis points since 2002.

Financial leverage, measured as the ratio of net debt to EBITDA, has improved by nearly 2 turns over the past five years. Debt decreased by $200 million in 2007 and by $710 million over the last five years.

[Slide 8 – Progress/Performance]

Just this month both ratings agencies, Moody’s and Standard and Poor’s, recognized our solid progress and upgraded the components of our debt across the board.

The Board of Directors reinitiated our common stock dividend in 2007 and authorized the repurchase of $200 million of stock.

[Slide 9 – Share Price Performance (vs. S&P 500)]

The ultimate measure of our success and recognition of our performance is the value we create for you, our shareholders -- our owners. Over the five years ending December 31st, 2007, the Hercules share price is up 121%, significantly outperforming the broader market as measured by the S&P 500, which was up 83%.

[Slide 10 – Looking Forward]

Obviously, I’m proud of all of our recent achievements and substantial progress. I’m also very excited about the opportunities that we see in front of us.

For the balance of my prepared remarks this morning, I would like to highlight several of the key elements that will drive our performance and success as we approach our 100th year.

[Slide 11 – Investments in the Future]

At the core of our strategy is the goal of continuously improving to better serve our customers and extend our competitive advantage. To achieve this, we are investing in innovation, emerging market opportunities and acquisitions to accelerate profitable growth and increase our return on invested capital. We also are investing significant amounts in capital expenditures, a large portion of which is for expanded production capacity.

During 2007, we completed several projects and initiated others, which should continue to deliver profit and cash flow growth.

•  We started up a major 8,000 metric ton methyl-cellulose expansion in our Hercules Tianpu Joint Venture in China. This positions us to meet increased demands in construction markets in that region.
   
• We also began work on expanding our capability to produce pharmaceutical grade methylcellulose at our facility in Doel, Belgium.
   
• We completed a carboxymethylcellulose (CMC) expansion at our Hercules Jiangmen, China plant. The output of this facility is targeted mainly at the growing food market in China.
   
• We started up our expanded synthetic lubricant capacity at our MCW plant in Louisiana, Missouri, doubling our capacity to serve this fast-growing market.
   
• Our new Paper Technologies Applications Laboratory in Shanghai was dedicated in October. This will allow us to better serve the needs of the growing paper industry in Asia
  .
• Design and engineering work began on a 10,000 metric ton hydroxyethylcellulose production facility in Nanjing, China for the coatings market. This will be a significant investment over the next two years.

[Slide 12 – Capital Investments by Region]

We are well positioned globally and have been investing in many high growth regions through acquisitions, as well as capital expansions. China is now the fourth largest economy in the world and has surpassed many countries over the past 5 years.  We are investing a significant portion of our capital in Asia—to date mostly in China—and expect to continue that heavy investment trend in Asia over the next 5 years to support the projected high level of economic growth there.

[Slide 13 – Fast Growing Markets]

In addition to China, we are focusing on other fast growing regions and countries of the world, such as India, Eastern Europe, Indonesia, the Middle East, Brazil and Argentina. Our sales have grown in these regions to $472 million up from $239 million in 2002. This is a compounded annual growth rate of 15%.

[Slide 14 – Investing for Future Success -- Innovation}

Innovation has always been part of Hercules’ history and remains the cornerstone of our ongoing success in differentiating our businesses and achieving our profitability growth targets.

• We are increasing our investment in research and development, technical service and process innovations to extend and enhance our product lines.
   
• We are investing in innovative technologies by forging research and development ventures with organizations and universities whose technology and resources complement our own expertise and core product portfolio. In 2007, we invested $63 million in technology.
   
• We are also committed to making our products in a cost effective and environmentally responsible and sustainable manner. All of these aspects are critical success factors for our innovation strategy.

Two new products are great examples of how we are reducing the impact of our products on the environment and how we are expanding into other markets.

[Slide 15 – Soyad Adhesives]

We have high expectations for our cost-competitive, environmentally friendly SOYAD® Adhesive Systems offered to leading manufacturers of decorative plywood, particleboard, medium density fiberboard and engineered wood products.  SOYAD® Adhesive technology combines our proprietary resin chemistry with renewable soy flour and, as I noted earlier, was recognized in 2007 with a Presidential Green Chemistry Challenge Award from the U.S. Environmental Protection Agency.

During 2007, we invested in the formation of H2H Innovations, a joint venture to accelerate the development and commercialization of these novel adhesives for today’s demanding interior wood products market.

[Slide 16 – Tablet Coatings]

In Aqualon, from our traditional position as a supplier of binders and ingredients for tablet coatings, we invested in a business and a facility to produce and market fully formulated coatings for the pharmaceutical and nutraceutical industries. This investment allows us to be closer to the end customer, achieve greater growth and profitability, while tapping into the much larger down stream market.

[Slide 17 – New Products Metric]

Our sharpened focus on innovation has driven our new products metric to a five-year high. Both businesses have aggressive innovation strategies to introduce new products with the goal of improving margins and sustainably differentiating our products from the competition.

Paper Technologies and Ventures ended 2007 with sales of products less than 5 years old as a percentage of total sales at 24%. They expect to maintain this high level going forward.

Aqualon has set an aggressive goal for new product sales of 27% by 2012, up from 20% in 2007.

[Slide 18 –Aqualon – Expanded Growth]

The last key element of our strategy is to grow via acquisitions. Both businesses have a vigorous process to identify and evaluate target opportunities while ensuring that financial discipline is exercised throughout the process.

Over the last few years we have aligned our businesses from a product focused to a market based organization.  By looking at the markets we serve versus the products we offer, we broaden our opportunity base with adjacent products and technologies. This is where we see the real growth potential for our company.

In Aqualon we see many adjacent opportunities. With our in-depth knowledge of these markets and technologies, we are able to utilize our broad know how and global presence to expand and grow our product offerings. The combined target market opportunity for Aqualon’s businesses is over $9 billion. 

As an example, in 2007 we purchased a specialty surfactants business for the coatings industry. With Aqualon’s extensive coatings formulation knowledge and strong channel to market, we expect to be able to leverage this business outside of its historical North America market to our coating customers globally.

[Slide 19 – PTV – Expanded Growth]

In the Paper Technologies and Ventures business there is a broad range of opportunities. In some adjacent markets we find an attractive fit with our current capabilities. Examples include adhesives, electronics, bio-refining, pulp, and lubricants. These markets represent a combined $23 billion opportunity.

We are actively investigating and anticipate making bolt-on acquisitions for both businesses in 2008 as an important component of our growth strategy.

[Slide 20 – Safety and the Environment]

Throughout the decades, Hercules has been committed to providing a safe and healthful environment for our employees, customers and communities.

The number of our employees injured on the job, as measured by the total recordable rate or TRR, has steadily dropped over the past several years; however, we will not be satisfied until none of our employees suffer injuries on the job.

Likewise, our environmental metric has shown significant improvement over the past several years, but we can do even better.  We are fully committed to the American Chemistry Council's Responsible Care® initiative. We consider the entire lifecycle of our products—from development, manufacture and sale through use, recycling, or disposal—focusing on the health and safety of people and the protection of our environment.  We have a good environmental story to tell and in 2007, published an Environmental Overview Report on our internet site. We invite you to read about our progress in the Social Responsibility section of our web site, www.herc.com

[Slide 21 – Operational Targets]

Our ultimate goal is zero harm to our employees and zero harm to the environment. This is not just an operational goal; it is a core value of Hercules. Within our own processes and our overall manufacturing footprint we are working to become more energy efficient, reduce greenhouse gas emissions, minimize water usage and waste generation, and prevent pollution. And, we continue to develop a strong, talented, diverse team of global business and functional leaders. These leaders are at all levels of the organization and are the critical component of the successful execution of our proven growth strategy.

[Slide 22 – Financial Targets]

2007 was a year in which we continued to make excellent progress against our stated goals of growing revenue, growing EPS and improving our return on investment. 

We have created a culture focused on cash and cash flow generation. By achieving these goals we are able to both support the growth of our businesses and reward our shareholders.

We certainly recognize the challenges facing us in 2008 led by the softening economy in the U.S. as well as signs of a slow down in Western Europe.  In spite of these challenges, we have aggressive goals that are targeted to drive shareholder value creation and, as importantly, the strategy and foundation in place to achieve these goals.

[Slide 23 -- Conclusion]

Just as we are committed to environmental stewardship, we are committed to the stewardship of your company. Its future is highly dependent on the success of its leaders and employees. I am confident that they have the talent, motivation and determination to continue delivering exceptional performance.

Throughout its history, the men and women of Hercules have risen to every challenge and I believe that the Hercules employees of today will carry on that tradition. I am confident that your Company is well positioned for the future due to both the actions taken in the past and the quality of the people we have executing our strategy as we go forward.

John Wulff and I would now be pleased to take your questions.

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