Corporate Commitment to Sustainability. Renewable Resources. Endless Possibilities. TM

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1 Corporate Commitment to Sustainability Renewable Resources. Endless Possibilities. TM 1

2 About this report This is Arizona Chemical s first Sustainability Report, covering activities through December In early 2010 we conducted a materiality assessment that influenced this report, which also incorporates additional information relevant to the Global Reporting Initiative (GRI) or that Arizona Chemical deemed appropriate. The primary stakeholders for this report are governments, customers, employees, suppliers and the communities in which we operate. Together with its companion website found at GRI-Sustainability-Report, this report follows the GRI G3 guidelines. GRI has conducted an Application Level Check and confirmed Arizona Chemical s self-declared B Level. Arizona Chemical Mission: To optimize the forest products value chain by transforming pine chemicals from pulp into high-value end products. Arizona Chemical Vision: We are the leading, most innovative provider of natural, pine-based chemicals. Table of Contents 1 Message from the CEO 4 Economic Sustainability 11 Environmental Sustainability 23 Social Sustainability We enable our customers to make the world healthier, cleaner, brighter, safer and more efficient. We earn attractive returns on the capital invested in our business. We develop our people to their fullest potential within our diverse and challenging environment. Our communities welcome us as neighbors, employers and environmental stewards.

3 Message from the CEO Dear Valued Stakeholders, I am pleased to introduce Arizona Chemical s first Sustainability Report. The information contained here and on our website demonstrates a longstanding commitment to sustainability a concept that goes to the very essence of our business and its reliance on non-edible renewable natural resources. We trace our renewable roots to the late 1930s, when we set out to satisfy an urgent need to find alternatives to petroleum-based chemicals for use in industrial and consumer products. Since then we have become the leading producer and refiner of pine chemicals, employing as two of our basic raw materials Crude Tall Oil (CTO) and Crude Sulfate Turpentine (CST), co-products of pulp and paper processing. The versatility, effectiveness and environmentally-friendly aspects of CTO, CST and our biorefined pine chemicals offer great benefits to our customers in thousands of everyday applications. The numerous and varied uses of our products for adhesives, roads and construction, tires and rubber, flexible packaging, renewable energy and consumer products serve as a testament that our sustainable materials are not just alternatives, but in most cases are superior to fossil-based materials. We conducted Arizona Chemical s first formal materiality assessment which is the foundation for establishing our objectives, strategies and business practices. The review confirmed that safety and emergency planning are our highest priorities, areas in which we took action by implementing several new corporate safety policies and procedures including internal incident reporting, tracking and corrective action monitoring. The materiality exercise showed that we can improve our efforts in areas such as corporate governance training, longer-term waste reduction strategies and community involvement standards, which will thereby advance our overall sustainability results. As part of the effort to address our global environmental concerns we completed a full carbon footprint analysis, developed an environmental core indicator tracking process and continued to reduce our operations environmental footprint. We exceeded our targets in several areas, including hazardous waste reduction. Although we reduced routine solid waste generation, the benefits were offset by one time events. Whenever feasible, our recycling efforts include reusing by-products as biofuels to meet our company s energy requirements. We have plans in place to further reduce energy usage in our U.S. manufacturing facilities and emissions in the EU. We have lowered our greenhouse gas emissions by 24% over the period This reduction resulted from an increased use of carbon neutral by-product fuels in our plants and, owing in part to the challenges of a weak world economy and lower production levels, a reduction in overall energy use. Our record on environmental issues remains strong with only one significant event occurring in the past three years and no fines assessed in our facilities for the past seven years, the limit of our recordkeeping. We upgraded regulatory compliance programs to facilitate our alignment with national and international standards. Our Company s use of CTO and CST two 100% natural products reflects our commitment to use scarce but renewable resources as efficiently as possible. We continue to challenge policies in which governments support incentives to use these natural raw materials solely 1

4 Our sustainable materials are not just alternatives, but in most cases superior to fossil-based materials. for energy production which research shows will result in increased overall CO 2 emissions, a significant climate change concern. Another danger of using this resource before extraction of its optimal value is the risk that over the long term, petroleum replacement producers will be forced out of business. This would result in the petroleum industry s having no viable competition. Our financial performance in 2009 was strong and exceeded objectives in spite of one of the most severe economic recessions in our history. To enhance our future economic prospects and ensure our economic sustainability, we established new programs including a focused growth strategy based on six targeted markets, a significant capital investment to expand the Savannah biorefinery and a global business strategy in conjunction with enterprise resource planning to integrate and automate many of our business processes. We filed an S-1 document with the SEC on April 12, 2010 in preparation for an Initial Public Offering. Subsequently, on November 19, 2010, the private equity firm Rhône Capital sold a controlling interest in Arizona Chemical to American Securities LLC, a leading mid-market private equity firm. The principles of sustainability challenge us to meet the needs of existing populations without compromising the well-being of future generations. We are building our business and establishing targets for sustainability with this powerful but simple statement as a guiding principle. This report summarizes how we are working toward ensuring that our employees have a great place to work, our communities are great places to live and the world becomes a cleaner, healthier, brighter and safer place for all. Kees Verhaar President and CEO 2

5 Our leading technology position includes tailored tackifier combinations of strength, compatibility, appearance, heat and water resistance in a broad range of applications. 3

6 Economic Sustainability Business Strengths and Strategies Our Products and Markets Arizona Chemical, a pioneer in developing new and innovative uses for renewable resources, is the world s largest manufacturer of bio-based pine chemicals. Our products tall oil fatty acid, tall oil rosin and derivatives, dimer, distilled tall oil, sterols, terpene resins, terpene monomers, renewable fuels and polyamides are sold to manufacturers who use them as raw materials to create thousands of goods used in everyday life. We derive steady margins and cash flow from our products use in chemical intermediates, adhesives, inks, renewable energy, tires and rubber, roads and construction and consumer products. While our chemicals are used in a wide range of industries, we focus our resources on developing value-added products for six targeted growth markets. We instituted cross-functional teams to assess each market and its potential. In conjunction with a portfolio management system that groups customers and their product needs, the teams led by marketing and technology personnel with support from the manufacturing, environment, health and safety, sales, finance and other departments follow a disciplined and strategic approach to assessing sales and profit opportunities. Materiality Assessment To gain perspective on issues of primary importance to our main stakeholders, we undertook a materiality assessment based on Arizona Chemical s economic, environmental and social aspects. The assessment integrates information obtained from senior managers, key functional leaders, our communities, customers, suppliers, investors, employees and competitors. More detailed information is interspersed throughout the report. We found that our most materially important areas are: Safety and emergency planning Corporate governance Climate and energy legislation Regulatory compliance Business and strategic growth Profitability Waste reduction and continuous improvement Shareholder value Customer value Community involvement Employee opportunities 4

7 2009 Highlights Our goal is annual sales volume growth of 5% and an EBITDA margin of more than 15%. Nearly $800 million in worldwide sales $81.8 million free cash flow 12.2% EBITDA margin Over 1,000 customers in 80 countries Over 1,100 employees globally Nearly 800,000 tons of product manufactured $618 million in total assets Building on our strengths as innovators, we invest in research and development of new products and applications that deliver customer value and generate attractive returns. Examples of ground-breaking products currently giving our customers a competitive advantage are: Extra-light color, low odor rosin esters enabling formulation of premium performance packaging adhesives that replace petroleum-based materials High-solid adhesive dispersions that add performance and manufacturing efficiency to tape and label coaters Naturally-based rosin ester resins that provide superior performance in road marking applications and reduce the use of petroleum-based alternatives Additives that enhance tire tread performance to improve safety, fuel economy and tire life Hard, high softening point polyamides suitable for use in cold seal release lacquer applications for packaging material subject to deep freezing A 100% biorenewable replacement for petroleumbased wax in rapid-starting, combustible fire logs Specialty polymeric gellants with up to 97% biorenewable carbon content that can be used as gelling agents, film formers, water repellant agents, gloss enhancers and sun protection factor boosters in a variety of home and personal care formulations Better-performing heat stable ink resins that have lowered the cost of sheet-fed printing inks. Our Target Markets Adhesives Roads and Construction Tires and Rubber Flexible Packaging Renewable Energy Consumer Products 5

8 Economic Sustainability Corporate Governance Ensuring that we have strong and effective corporate governance policies and practices ranks high on our materiality assessment. Since private equity firm Rhône Capital purchased Arizona Chemical in 2007 from the International Paper Company, we have continually evaluated and, as appropriate, redesigned and implemented the systems needed to fortify our oversight and transparency. This process will continue under the ownership of American Securities. Arizona Chemical currently operates with a unitary Board of Directors structure consisting of eight members, three of whom qualify as independent Directors under New York Stock Exchange (NYSE) and SEC rules. With the exception of our President/CEO, none of the Directors is a member of the senior management team. Our senior management team consists of our President/ CEO and five Vice Presidents who conduct formal monthly meetings to discuss performance against Key Performance Indicators (KPIs), financial goals and social, economic and environmental issues. Team members are responsible for review of risks, opportunities and environmental, health and safety (EHS) audit results and follow-up actions. They benefit from our formal policy requiring notification of EHS incidents and access to the robust data generated through our global business process platform. The Board of Directors reviews senior management performance against preestablished targets on a monthly basis. Our Code of Business Conduct is the worldwide backbone of Arizona Chemical s corporate governance process. The Code addresses EHS, compliance requirements, confidential information, insider trading, conflict of interest, gifts and gratuities, political activities, competitive practices, financial integrity, external relationships and duty to act. Implementation of supporting systems for the Code continues throughout our operations. We plan to implement similar corporate governance standards and establish a proactive Board of Directors under American Securities ownership Business Achievements We met our goals of: Implementing disciplined systems for working capital reduction Establishing procedures to ensure predictable, long-term raw material and energy contracts Building stronger relationships with leading customers Reducing our manufacturing and logistics footprint Deploying new products and technologies according to our strategic priorities Launching robust global business processes 6

9 We developed pine-based resins that improve adhesion of both glass beads for better nighttime visibility and colored aggregates applied to paved surfaces for non-skid safety enhancement. 7

10 Economic Sustainability Market-driven Business Strategy Arizona Chemical s business plan for future growth relies on four strategic elements: Organic growth Geographic expansion Business and asset management Continuous productivity improvement. Organic Growth Historically, new product development has led to strong revenue and profits. We derived approximately 10% of our net sales in 2009 from products developed in the last five years. In 2009, our research and development (R&D) spend was 1% of annual net sales. Within the next three years we plan to significantly increase R&D, marketing and related spending. We are undertaking capital investment to support growth in high value, high margin markets and product applications. In addition, we expect to expand our product offerings through select licensing and/or purchasing of new formulations, technology and products from third parties. Geographic Expansion Given their rate of growth and our existing customers expansion in Brazil, Russia, India and China (BRIC), we are strengthening our business in these countries, including by opening a representative office in Shanghai, China. In the BRIC and other emerging markets, we are carefully managing growth with additions of sales and marketing, technical service and development-related personnel, while investigating major infrastructure investments. In 2009 only 2.7% of our net sales were generated in these four countries, but we intend to increase our business significantly going forward. Business and Asset Management We plan to accelerate profitable growth by positioning ourselves in higher value applications, by acquiring companies and/or assets that bring synergies to our six target markets and by complementing our current product offerings and capabilities. In 2009, for example, we strengthened our position in the tire and rubber market when we acquired Abieta Chemie GmbH ( Abieta ), a company located in Gersthofen, Germany. Abieta specializes in natural resin products and has secured access for us to new products and technology that can be leveraged in other strategic markets. We entered into a strategic cooperative agreement with Orgkhim, a resin manufacturer in Nizhny Novgorod, Russia. In 2010 we established a strategic cooperative agreement with Socer Brazil, a leading pine chemicals manufacturer serving Latin America. The Socer technical and commercial engagement combines geographic expansion with development and commercialization of new products. Productivity Improvement We have a significant track record of driving costs from our business and are constantly seeking ways to improve productivity. We pursue operational efficiencies including optimization of available technologies, maintenance of a lean organizational structure, reduction of fixed costs, leverage of our global procurement organization, rationalization of capacity and efficient capital spending. In 2009 we initiated closure of our Port St. Joe, Florida manufacturing facility and reduced operations at the Valdosta, Georgia plant. At the same time, we expanded operations at our Savannah, Georgia plant. The enhanced flow of information from the global business processes we implemented in the first half of 2010 will enhance our efforts to improve margins, drive down costs and generate increased profit. Our natural-based adhesive tackifiers enable a greater proportion of recycled content to be used in packaging by virtue of their superior compatibility with a wide range of materials. 8

11 Global Processes In a landmark undertaking, we developed and implemented an enterprise resource planning system to automate and integrate the most critical business processes associated with our operations. The new global approach is a key element of Arizona Chemical s strategic plan for revenue and profit growth. It supports ten functional processes that define our business, each of which is championed by a corporate leader who drives the respective process. The rigorous enterprise resource planning system by SAP and the processes it supports provide a single source for information on product profitability, customer value, market behavior and financial results. This approach enables us to have greater and more immediate visibility into the metrics that drive our success. With ready access to consistent business measures and KPIs worldwide, employees throughout the company have the tools to facilitate and enhance planning and decision making. Using this process we are able to make better business decisions related to new product development, product line extensions, product modifications and other investments. We implemented a single global software platform to enable immediate integrated visibility into operations. Customer Relationships Arizona Chemical has cultivated longstanding relationships with its customers. We identify leading customers based on their: Global footprint and growth potential Desire for differentiated products and superior value Participation in our target markets Ability to derive mutually-beneficial economies of scale. Our leading customers have access to a wide range of resources across all functions, channeled through our account management teams. As partners, we bring our technical resources to bear at the customer interface and collaborate to recognize market opportunities before developing new, sustainable product solutions. These customers especially value: The consistency of our products, which we are able to achieve despite the natural variability of our feedstocks The scale and effectiveness of our global sourcing capability which enables us to provide similar products in sufficient volumes across different regions Our commitment of resources in Latin America, Asia Pacific and Russia to support their global reach The depth and strength of our long-term relationships with suppliers Our ability to develop and commercialize value-added products for target markets. 9

12 10 Our resins for tires modify rubber compounds to help manufacturers achieve improvements in safety, fuel economy and extended tire life.

13 Environmental Sustainability Renewable Natural Resources Sustainable Raw Materials Sustainability is at the core of Arizona Chemical s business. We pioneered the use of crude tall oil (CTO) some 80 years ago to meet market needs at that time. Today, 90% of the primary raw materials we use to make our chemical products come from CTO, a term evolving from the Swedish for pine oil tallolja with tall being the word for pine and olja the word for oil. In addition to using CTO, we use crude sulfate turpentine (CST) and limonene as primary raw materials. Limonene is a co-product of citrus processing and CTO and CST are co-products of the Kraft pulp and paper manufacturing process. We also use castor oil, gum rosin and some hydrocarbon-based raw materials to produce our specialty products. Our biorefining processes convert the co-products of pulp production CTO and CST into value-added uses for several markets. Optimizing Resource Utilization There is widespread agreement among environmental experts and scientists that natural resources must be used to their full potential in the most efficient and sustainable way. In accordance with this principle, we believe that it is most efficient to refine natural materials rather than use them directly as fuel. By utilizing the full potential of CTO and CST down our value chain, Arizona Chemical s products contain an average of over 80% biorenewable content as determined by the international standard ASTM As an example of our efforts to optimize the full use of these resources, our Sandarne, Sweden facility collects by-products from its manufacturing processes and ships them to our Oulu, Finland plant for recovery of turpentine, a 100% renewable raw material. After maximizing the value of CTO and CST for the products we sell, we then recover fuel value from the residual by-products. This two 11

14 Environmental Sustainability We extract all the useful components from these materials so our products typically contain about 80% biorenewable content. step approach to product reuse enables us to satisfy a significant portion of our energy requirements after we have created our core products. Arizona Chemical actively supports and contributes to the reduction of greenhouse gases. From our perspective, it is clear that CTO and CST yield significant benefits when used as the basis for a range of specialty chemicals with numerous practical applications. The added benefit of these raw materials is that after the biorefining process, we generate renewable fuel. As responsible CTO refiners, we caution against some governments consideration of economic incentives and publicly-funded subsidies to promote use of CTO for direct energy consumption. Such incentives, which are required in order to make CTO-based fuel production cost effective, would lead to CTO s use for only one purpose as an FULL LIFECYCLE OF CTO Renewable raw material replaces fossil fuels SUSTAINABLE PINE FOREST ENERGY/BIOLOGICAL DEGRADING CLEAN MANUFACTURING End-products are burned as household waste or they decompose naturally SUPPLIER CUSTOMER ENERGY/BIOLOGICAL DEGRADING CLEAN MANUFACTURING Additional value from pulp industry by-products END-USER SUPPLIER Strict EHS and sustainable high technology biorefining END-USER CUSTOMER Green alternatives for versatile industry uses Low emission fuel additives, natural base for cosmetics, biodegradable hydraulic fluids, household cleaners, inks and paints 12

15 energy source. This single use approach to CTO processing is highly unsustainable socially, environmentally and economically. To make this point, Arizona Chemical has undertaken a communications and public affairs effort over the last two years to inform political decision makers, media and other opinion leaders in Belgium, Finland, France, Germany, the Netherlands, Poland, Sweden, the United Kingdom and the United States about the inefficiencies of offering financial rewards for CTO-based biofuel production. Should CTO be diverted from high-end refining to direct energy use, our sustainable alternative to existing hydrocarbon-based products would become economically unsustainable. This is of serious concern in light of customer demand for an increasingly responsible and transparent supply chain that uses natural, renewable raw materials. According to a 2009 Arthur D. Little study for Arizona Chemical, the total carbon footprint of CTO-based and CST-based production is far less than that of products made from substitute raw materials such as petroleum, gum rosin derivatives and edible oils. This and other research have shown that when Arizona Chemical products are compared with alternative products, our cradle-to-gate process results in an annual reduction of 410,000 tons of greenhouse gas (GHG) emissions. While most of the competing specialty chemicals are made with petroleumbased substitutes, not all can be. Some are made from gum derivatives and edible oils. Crude Tall Oil product use 13

16 Environmental Sustainability Greenhouse Gas (GHG) Emissions Arizona Chemical proactively assessed and independently verified our operations GHG emissions as early as 2007, before any regulatory mandates were in place. During the period from , we realized a reduction in GHG emissions of approximately 24% or 95,000 MT- CO 2 e. We went from approximately 391,000 in 2003 to 296,000 in 2009 (calculated using primarily default GHG emission factors). The reduction of our GHG emissions ties directly to our increased use of carbon neutral by-product fuels in our plants, per the World Resources Institute (WRI) protocol. For example, we utilized our by-products to reduce our carbon footprint when our Sandarne, Sweden plant converted one boiler s fuel source to 100% biomass. In addition, reduction in GHG emissions is closely linked to total energy use, so the decrease in our emissions also results from greater efficiency and lower production rates. To further our commitment and delivery on the full gamut of our environmental, social and economic improvement activities, we created the position of Sustainability Director. This individual is actively engaged in our efforts to maximize resource utilization, reduce GHG emissions, promote green chemistry, improve EHS standards and undertake initiatives that enhance our position as a responsible corporate citizen. The manufacturing of our CTO-based products results in significantly lower CO 2 emissions than when petroleum, gum rosin derivatives and edible oils are used. LOWER CO 2 emissions kt CO 2 e Emissions associated with Arizona Chemical production Edible Oils Gum Derivatives Petroleum-based Substitutes Emissions associated with substitutes of Arizona Chemical products 14

17 GHG EMISSIONS AND ENERGY MTCO 2 e TJ 400 8, , , , GHG Emissions Energy Responsible Supply Chain Arizona Chemical is striving to continually improve our supply chain management, as this affects our sustainability efforts as well as our ability to satisfy customer needs. We are in the process of developing a global policy to integrate sustainability criteria as part of our purchasing process. We expect to implement this keystone project in We value our supplier relationships and consider them partners in meeting our objectives. As a result, we: Maintain a formal process for evaluating our suppliers on the basis of quality, value, logistics, environmental compliance and financial performance Employ full-time engineers whose sole function is to work with our primary raw material suppliers to minimize waste, improve material recovery and support best practices To improve sustainability throughout our supply chain we are developing a global policy for our suppliers practices as part of our purchasing process. Participate in regular technical meetings with our transport providers to improve product safety and environmental performance Perform EHS audits on contracted storage tank terminals to ensure compliance with appropriate EHS standards and all applicable regulatory requirements. 15

18 We developed pine-based resins for flexible film inks with deep freeze, grease resistant, substrate compatibility and overprint properties for a range of packaging applications. 16

19 Environmental Sustainability Environmental, Health and Safety Policy and Practice Safety and Emergency Planning W hen Arizona Chemical says Nobody Gets Hurt, we take into account our employees and the communities we serve. This vision is most important to senior management, with safety and emergency planning ranked #1 in our materiality assessment. Our corporate policy specifically promotes employee safety at work and at home. It encourages and empowers employees to actively participate in safety on and off the job. It embraces strong, open and cooperative relationships with our communities. Safety performance is overseen by the Global Director of Environmental, Health and Safety (EHS) who reports directly to the President/CEO. To achieve safety excellence, we have developed and are implementing a five-year EHS strategy that moves us into a proactive management mode rather than a reactive mode. The Protect process, a component of our global processes, provides structure for our EHS excellence system and is the backbone of our efforts to achieve 0.3 Total Incident Rate (TIR) by We marked our fourth year with no fatalities in Throughout our first year of the EHS strategy implementation in 2010 we have been devoted to formulating and implementing global processes and performance targets. Initial processes undertaken include: Policy development Risk management Auditing Failure analysis Best practice sharing Training Corrective action monitoring. EHS Strategy Implementation Our worldwide EHS strategy implementation has put in place: Consistent risk assessment methodology A Permit to Work/Safe Work Permit policy Comprehensive systems for incident tracking and evaluation of incident investigation quality, with evaluations of incident repetition and severity. First aid cases and near misses count as incidents. Central monitoring of Priority #1 corrective actions Widespread and deep employee involvement is a critical prerequisite for the strategy to be successful. Over 75% of our workforce is represented by formal joint management and worker health and safety committees. Each of our facilities has at least one such committee. We have an employee led Safety Initiative Team in Savannah, Georgia, an OSHA-qualified Voluntary Protection Program (VPP) Team in Pensacola, Florida and a Behavior-Based Observation Team in Valdosta, Georgia. 17

20 Environmental Sustainability Our EHS Excellence Strategy and the Protect process support achievement of our corporate safety vision: Nobody Gets Hurt. Environmental Performance Measures Arizona Chemical s EHS Corporate Policy sets the standard for company performance and we have experienced significant improvements in our environmental operations over recent years. Most notable are declines in environmental events, hazardous waste generation rates, energy use, GHG emissions, volatile organic compound (VOC) emissions and odor complaints. Senior management supports specific long- and shortterm goals to reduce environmental impact overall, while individual facilities establish and have responsibility for achieving additional objectives for site-related issues. We collect company data to monitor progress and in 2009, we elevated the position of Global Director of Environmental, Health and Safety to report directly to the CEO. Accepted protocols guide the audit and assessment processes which trigger corrective action planning, implementation and monitoring. We formulate and measure our global business standards against internationally recognized standards. All facilities have implemented an Environmental Management System (EMS). In the U.S. we adhere to the EPA s Performance Track model, consistent with ISO In Europe all our sites are certified in accordance with the ISO standard. Our facilities at Sandarne, Sweden, Oulu, Finland and Chester-le-Street, United Kingdom are active members of the Responsible Care Program, the chemical industry s voluntary, self-regulatory initiative to continually improve EHS performance and communication about products and processes. Waste Management Operational wastes represent a risk factor, disposal cost and environmental concern for Arizona Chemical. We therefore target continued waste reduction within our operations as an ongoing goal. Whenever possible, we reuse material that historically was disposed of as waste in order to eliminate the need for disposal. We reduced solid waste originating from operations over the last four years but our gains were offset by one time events such as hurricane damage, plant shutdowns and process decommissioning. Routine waste reductions were accomplished by reducing and reusing off-spec products, identifying viable uses for some wastes and capital investment in additional waste treatment processes. Looking forward, we seek to advance our solid waste reduction through the reuse of materials, minimal generation of offspec materials and improved processes. In the U.S. we achieved our goal of reducing hazardous waste generation by 25% per year from Our efforts resulted in a total U.S. hazardous waste 18

21 reduction of nearly 70%, from over 8.9 million pounds in 2003 to approximately 2.5 million pounds in This success results from a variety of waste minimization and resource recovery efforts that were aligned with the regulatory agencies. Our efforts included identification of process changes and new commercial markets that recycle our waste materials. Notably, during this same time period, our U.S. production levels stayed about the same. Our accomplishments led to the 2010 reclassification of our individual U.S. plants to small quantity generators from large generators. We seek a further 10% reduction in hazardous waste in In Europe our hazardous waste reduction results have also been substantial. In 2003 we generated approximately 15 million pounds of hazardous waste. By 2009 we had reduced this amount by over 33% to less than ten million pounds. One example of a program leading to these gains is the use of a hazardous by-product as fuel to produce steam in our Niort, France plant. Due to its high heating value, over 98% of our hazardous waste worldwide is sent off-site for incineration, primarily as a fuel for industrial facilities. The remaining 2% is recycled or placed in landfills as required by law. While we have made tremendous progress in hazardous waste reduction, we readily acknowledge that further decreases are desirable. Therefore we are always looking for new opportunities to reduce this waste. We are in compliance and have not been assessed a monetary environmental penalty over the last seven years, the limit of our record-keeping. 19

22 The U.S. Department of Agriculture recognized a major customer using our all-natural energy product to replace petroleum-based wax. 20

23 Environmental Sustainability We achieved our goal of reducing U.S. hazardous waste generation by 25% per year from , while over a six year period our European operations reduced this waste by over 33%. Energy Consumption Arizona Chemical reduced energy use by approximately 22% as a result of targeted efforts undertaken from We experienced a year-over-year total energy use decrease from , simultaneous with increases in our global production levels. Our energy use dropped more dramatically over the last two years with the global economic downturn and lower production levels. To realize these improvements, we created an energy team to address U.S. manufacturing energy use, which remains significantly higher than in our European operations. The team instituted a system of monitoring and monthly reviews that are supported by senior management. This effort has led to the start-up and optimization of new, more efficient equipment, an operating strategy to shut down production capacity in light of weakened demand and a partial relocation of one plant s capacity to another. Collectively, these efforts reduced energy consumption by 14.5% in 2009 compared to the prior year. Going forward, our goal is to reduce volume-adjusted U.S. energy use by 5% annually through In Europe we accomplished energy use reductions by matching onsite energy production directly to demand, replacing older, less efficient equipment and tightening management procedures. This resulted in a GHG emission saving of almost 1,700 metric tons (CO 2 equivalent) from the previous year. Specific programs include: Use of low temperature operational heat to generate hot water and heat tanks at the Sandarne, Sweden facility Expanded use of electrical inverters to reduce electricity use for motors Customized computer control systems to monitor and adjust energy use in manufacturing. Arizona Chemical has identified and taken advantage of opportunities to capture and reuse heat sources, link heat production to operational requirements and implement heat recovery projects. In a highly efficient approach to energy generation, two of our facilities meet approximately 90% of their energy needs by reusing the by-products from our operations. As of 2007 we obtained 28% of our energy from our own renewable resources, although currently we are experiencing a decline in that rate. This decline results from our reduced production volume and subsequent decrease in renewable fuel by-products. Our electricity supplier changed one plant s utility energy source from 100% renewable hydroelectric power to non-renewable, carbonfree nuclear energy. Company-wide, energy obtained from renewable resources averaged about 20%. TJ 7,500 7,000 6,500 6,000 5,500 5,000 Energy TOTAL ENERGY USE Production Indicator Production Tons 1,100,000 1,000, , , , ,000 21

24 Environmental Sustainability Water Use We emphasize individual plant initiatives to reduce the quantity of water we require to operate. While we have upgraded water use controls, reduced make-up water use and begun reusing non-contact cooling water, our total water use has been reduced by approximately 10% since 2003 largely as a result of decreased production levels. Across our company, we have reduced the contaminant load of our wastewater and are continuing to explore ways to reduce our biological oxygen demand (BOD). In Savannah, Georgia, where our wastewater is ultimately discharged to Savannah Harbor, initial efforts reduced BOD in one wastewater stream by approximately 85% on a daily basis. Air Emissions We have successfully undertaken numerous efforts to reduce our air emissions, including installation of new emission controls, reduced process venting, improved leak detection and better repair procedures. An example of our success is the reclassification since 2003 of three of our U.S. plants to minor source status from major. Tons 2,000 1,500 1, AIR EMISSIONS A new pollution control system at our Savannah facility reduces our hazardous air emissions from approximately 190 tons to 2 tons annually. Regulatory Compliance We manufacture products in both the U.S. and Europe for global sale and various end uses. As a result, the regulatory environment in which we operate is highly complex and ever-changing. Our regulatory compliance reviews include evaluation according to national, regional and international regulations of all purchased raw materials, as well as of commercial and experimental products including intermediates and by-products. We have longstanding management systems in place to assess the health and safety impacts of our products at every stage of their life cycle to ensure that we remain compliant. These systems ensure compliance with REACH, the European Community regulation on chemicals and their safe use, the U.S. Toxic Substances Control Act (TSCA) and a range of national regulations including: International inventories of Australia, Canada, China, Korea, Japan, Philippines, New Zealand, Taiwan Food contact regulations such as U.S. FDA, EU food contact VOCs SOx NOx Cosmetic regulations Hazard communication regulations such as Material Safety Data Sheet (MSDS) and labels. 22

25 Social Sustainability Societal Responsibility Community Relations A core tenet of our Corporate EHS Policy and our social responsibility activities is to be welcomed in the communities in which we operate. This principle is reinforced in our materiality assessment, which identified community involvement as a key issue. Typically, we engage with our communities through formal meetings, community advisory panels and direct responses to specific concerns. The most common questions that arise involve our environmental footprint, odor emissions, noise, traffic, emergency preparedness and employment opportunities. Odor emissions are an area that we have addressed particularly aggressively. We have made a concerted effort to reduce odors at all our sites, and the number of external odor complaints received has fallen from 57 in 2003 to 11 in 2009, an 80% reduction. In Chester-le-Street, UK, we made a significant investment to minimize the number of times the plant s foul vapor collection system vented. This effort resulted in reduced odor complaints from the community from 35 in 2003 to only six in Our efforts to reduce air and odor emissions include upgrading storage and processing tanks, redirecting hot well vents to control devices, covering open sources to reduce venting, improving equipment cleaning and rerouting process scrubber emissions. We continue to explore new methods of reducing odorous emissions such as collection of vapors from heated tanks. We strive to go beyond regulatory compliance as a way to ensure that we do the utmost to fulfill our commitment to be a valuable community citizen. Arizona Chemical was one of only three local industries chosen to participate in a collaborative community exercise with residents, industry, elected officials and the EPA in a program called Savan- We have aggressively addressed odor emissions and reduced complaints by 80%. nah CARE (Community Action for a Renewed Environment). Funded through a 2007 EPA grant, the program enabled us to better align our EHS efforts with local needs. Arizona Chemical takes a proactive approach by participating with local organizations such as Chambers of Commerce, school systems and the United Way. Each of our manufacturing facilities maintains a budget to provide financial support for local causes which is often supplemented with employee volunteers. To ensure that community involvement remains a strong and consistent element of our operational efforts across our businesses, we are currently developing a more robust and consistent community outreach and involvement policy. 23

26 Social Sustainability Our Waypoint system maintains a consistent link between our corporate goals and individual objectives in support of our pay-for-performance culture. Employee Relations Arizona Chemical is committed to championing a culture of employee engagement, innovation, creativity and empowerment to continually improve business results. We know our employees are our greatest asset, and we nurture them to enable a nimble and proactive workforce. We strive to hire, develop and retain our employees in an inclusive and diverse workplace environment in which people feel they can grow personally and professionally. We incentivize exceptional performance through reward systems that are directly linked to the achievement of clear and measurable business objectives. To accomplish these goals, we are refining our human resource approach in conjunction with our global business processes. Our Hire to Retire process specifically outlines procedures for recruiting, on-boarding, performance management, compensation and communications. We define policies and procedures in employee handbooks that address Equal Employment Opportunity, an open door policy, dispute resolution, violence in the workplace and anti-harassment policies. Employees participate in annual reviews, succession planning, career development, skills improvement workshops and tuition reimbursement programs as a means of enhancing their development. Our annual performance management and employee development system, known as Waypoint, is designed to maintain a consistent link between our business strategy and individual annual goals. The system helps sustain our pay-for-performance culture in which employees at all levels, including our executive officers, develop formal objectives, receive quarterly coaching, participate in a mid-year review with their immediate managers and engage in a formal performance evaluation which is directly linked to our annual merit reward plan. Arizona Chemical has established a comprehensive wellness program for its employees that includes health risk appraisals, health fairs, flu shots, first aid and CPR training, fitness facility memberships and wellness screening programs. Participation in these employer-sponsored initiatives is strong and continues to grow. Individual facilities offer additional support for employee welfare. For example, in Sandarne, Sweden, employees receive a free hour every week to participate in health and physical activities. Safe Harbor Statement This report includes forward-looking statements that deal with future events. Forward-looking statements are identified by words such as anticipates, projects, expects, plans, intends, believes, estimates, targets and other similar expressions that indicate trends and future events. These statements are not guarantees of future performance and involve certain risks and uncertainties. Therefore, actual future results and trends may differ from what is forecast in forward-looking statements due to a variety of factors. 24

27 The biorenewable content, viscosity modification, gloss and water repellency of our specialty polymeric gellants are increasingly attractive features for applications as diverse as air fresheners, mascara, lip gloss and sun screens. 25

28 Arizona Chemical 4600 Touchton Road East Building 100 Jacksonville, FL Tel: Transistorstraat CE Almere The Netherlands Tel: Renewable Resources. Endless Possibilities. TM