Clariant AG

Ladies and gentlemen, good afternoon. My name is Maria Ivek, and I welcome you to Clariant's Nine Months, Third Quarter 2019 Results Conference Call and Live Webcast.

Joining me today is Patrick Jany, CFO of Clariant. As a reminder, this conference call is being recorded.

At this time, all participants are in a listen-only mode. There will be a Q&A session following later.

The slides for today's presentation can be found on our website along with our media release. I would like to remind the participants that the presentation includes forward-looking statements, which are subject to risks and uncertainties.

Listeners and readers are therefore encouraged to refer to the disclaimer on Slide 2 of today's presentation. A replay of this call will be available on the Clariant website.

Let me now hand over to Patrick Jany to begin the presentation.

Thank you, Maria. Ladies and gentlemen, good afternoon.

Let us begin with the highlights on Slide 3, and please note that all figures discussed refer to continuing operations unless specifically noted otherwise. In the first nine months of 2019, Clariant grew sales organically by 3% in local currency, with both higher volumes and pricing contributing to this expansion.

The sales growth was mainly driven by the business areas Catalysis and Natural Resources. The EBITDA after exceptional items was negatively impacted by the one-off CHF231 million provision taken in the second quarter as a result of further developments in an ongoing competition law investigation by the European Commission into the ethylene purchasing market.

The EBITDA, therefore, decreased significantly to CHF253 million. From an operational performance perspective, excluding the effect of this one-off provision, the EBITDA after exceptional items matched the previous year and remained resilient at CHF484 million with a corresponding margin of 14.8% versus 14.7% in the previous year.

The third quarter results contributed positively to this development with 2% higher sales in local currency, and a 6% increase in EBITDA after exceptional items, despite an increasingly challenging economic environment. Consequently, the corresponding EBITDA margin of 14.5% was a 100 basis points higher year-on-year.

Let us move to Slide number 4, to review the sales development. In the first nine months, Clariant delivered sales of CHF3.3 billion.

Sales grew organically by 3% in local currencies, mainly driven by Catalysis and Natural Resources. Higher prices positively supported sales by approximately 2%, while volumes contributed 1% to the expansion.

Clariant sales growth in Swiss francs was negatively impacted by 3% due to the unfavorable foreign currency development, which led to a practically unchanged sales figure in Swiss francs. In the third quarter 2019, sales grew by 2% in local currency, driven by 1% higher prices and 1% volume growth.

Sales were approximately CHF1 billion with a negative foreign exchange impact of 3%. The main sales growth contributor in the third quarter was Catalysis as expected.

Slide 5 depicts the regional sales development for both of the nine months as well as the third quarter of the current year. In the first nine months, most regions contributed to the sales growth in local currency.

Sales in both smaller regions, Latin America and the Middle East and Africa grew the strongest by 11%. In Asia, sales grew a good 4%, despite the 9% slowdown in China.

And sales in the important European region grew by 2%. Only North America reported a contraction of 4% due in part to the case of force majeure at a key supplier in the second quarter.

Sales growth in the third quarter is in line with the nine months trend, with growth in the Middle East and Africa, Latin America and Asia, while China and North America continued to be negative, growth in Europe stalled and sales contracted by 3% in the third quarter, reflecting the worsened economic environment. Let's start reviewing the business area figures in more detail, starting with Care Chemicals on Slide 6.

First nine months sales decreased by a slight 1% in local currency year-on-year. Consumer Care sales advanced and a good mid-single-digit range with positive contributions from all business lines.

Crop Solutions sales expanded in double digits, while Personal Care and Home Care both delivered a solid progression. However, Industrial Applications sales were softer.

This decrease was related to the more cautious end-market demand, which is attributable to market headwinds caused by the weak economic environment. As a result, the demand development at the base products, industrial lubricants and construction came under pressure.

In addition, in the second quarter, North America was hampered by the prolonged planned shutdown of a key supplier, following a case of force majeure. Although this force majeure situation has since been resolved, the resulting market share losses are still being addressed.

The weaker development in North America is therefore also a reflection of the lingering effects. The same dynamic impacted the third quarter of 2019, where sales decreased by 3% in local currency, and by 6% in Swiss francs, also due to the high comparison base in 2018.

The EBITDA margin after exceptional items in the first nine months softened to 17.5% from 19.2% year-on-year, only in part to the temporary negative effect from the previously explained raw material disruptions in North America, which primarily had an impact in the second quarter. Concurrently, we also saw continued weak end-market demand in industrial applications.

In the third quarter, the EBITDA margin declined to 17.1% from a very high 21.6% in the third quarter of 2018. This is due to inventory devaluation given lower raw material costs, and because of the volume reduction in based products negatively impacted the cost coverage.

The impact of the inventory devaluation on the EBITDA in the third quarter can be quantified in the high single-digit range. At Care Chemicals, we expect to see a return to grow in the fourth quarter and improved profitability in line with the normal seasonality of this business.

Moving on to Catalysis on Slide 7. Sales in the Business Area Catalysis expanded by substantial 10% in local currency, in the first nine month of 2019.

This was mainly driven by robust demand in both petrochemicals and Syngas. In the third quarter of 2019, sales growth accelerated to an excellent 15% in local currency.

As expected, the improved sales performance resulted from increased demand in the Petrochemicals, Specialty Catalyst and Syngas, which all reported significant growth. Nine months 2019 EBITDA margin is at 19.4% still slightly behind previous year.

The profitability is still recovering from the temporary capacity outages in Asia in the second quarter, which have since been resolved. The third quarter EBITDA margin increased to 19.4% from 17.1% a year ago due to a proportionally higher sales contribution from Petrochemicals, which resulted in a more favorable product mix.

For the full year 2019, the Catalysis Business Area is on track to meet its mid-term sales growth expectation of between 6% to 9%, and to improve its profitability compared to the previous year. This implies that the fourth quarter could reflect a weaker top-line development, given the strong sales expansion already witnessed in the third quarter, but show higher profitability.

Let us move on to Slide 8, Natural Resources, which now also includes Additives, as you know. Nine-month 2019 sales rose by 4% in local currency.

Oil & Mining Services reported double-digit sales growth in local currency, with positive contributions from all three business lines. Oil Services and Mining Solutions delivered robust growth while the expansion at refinery was in the single-digit range.

Sales in Functional Minerals rose at a low single-digit rate, largely due to the continued strength of the Purification business. This growth of the Purification business for edible oils compensated for the weakness encountered by the foundry additives, which was attributable to the soft automotive sector.

Additive sales declined for the first nine months of 2019 against a, particularly higher base. The more cautious demand largely resulted from the less dynamic automotive as well as electrical and electronic sectors.

In a third quarter, sales in Natural Resources remained unchanged in local currency against a challenging comparison base, while Oil & Mining services continue to expand, sales in the Functional Minerals business decreased slightly due to the weak automotive sector. The Additives business retreated significantly due in part to the record high comparison base, but also because of the difficult business market dynamics.

In the first nine months of 2019, the EBITDA margin in Natural Resources rose to 15.6% from 14.8% in the previous year. This was the result of stronger top-line growth in Oil & Mining Services, as well as the intensified focus on more value-added applications.

Additives partly compensated for volume losses via our strict cost control measures. The positive nine months development was strongly supported by the third quarter, in which the EBITDA margin increased significantly to 15.6% from 13.6% last year, mainly due to the targeted growth in higher-margin segments in Oil Services and lower exceptional items.

Looking forward, the sales growth in Natural Resources is likely to be more subdued. But we expect to see a continued profitability improvement on a half-yearly basis.

Let us take a look at the EBITDA development for the first nine-month on Slide 9. The continuing operations EBITDA after exceptional items was negatively impacted by the known one-off provision of CHF231 million.

Therefore, the EBITDA decreased significantly to CHF253 million compared to CHF483 million in the previous year. In terms of the underlying operational performance and excluding the effect of this provision, the continuing operations EBITDA matched the previous year and remained resilient at CHF484 million, which corresponds to a margin increase to 14.8% versus 14.7% in the previous year.

The profitability in Natural Resources increased due to stronger top-line growth in Oil & Mining Services as well as the intensified focus on more value-added applications. Overall, the EBITDA performance reflects the resilience of our portfolio despite the weak economic environment.

Similarly, Slide 10 depicts that in the third quarter 2019, the EBITDA increased by 6%, CHF151 million. The profitability advanced significantly in Catalysis due to the more favorable product mix.

Profitability in Natural Resources rose due to the targeted growth in higher-margin segments in Oil Services and lower exceptional costs. The corresponding EBITDA margin of the Group level increased to 14.5% from 13.5% in the previous year.

Please turn to Slide 12, first published on our 1st of October, including now the Additives business in Natural Resources. As previously communicated, Clariant is continuing with the divestments of the Masterbatches and Pigments businesses.

These divestments are expected to be concluded unchanged by end 2020, while the previously announced sale of Healthcare Packaging is expected to be concluded shortly. The proceeds from these divestments will be used to invest in innovations within the core business areas to strengthen Clariant's balance sheet and to return capital to shareholders.

Our aim is to continue to follow our unchanged strategy to focus on our core high-value specialty businesses. On the one hand, we intend to improve performance by delivering on innovation and through the implementation of further operational improvement initiatives.

On the other hand, we will stringently, execute our portfolio upgrade, leading to a significant complexity reduction and an improved balance sheet. This brings me to the outlook on Slide 13.

Despite the current challenging environment, Clariant expects its continuing businesses to achieve above-market growth, higher profitability, and stronger cash flow generation based on our focused high-value specialty portfolio. With that, I turn the call back over to Maria.

Thank you for taking us through the presentation, Patrick. I would now ask the operator to open the line for questions.

But before we go to the Q&A session, we would kindly ask that you limit the number of questions to two, thus providing more participants with the opportunity to ask a question. Thank you for your understanding.

We will now open the line for questions.

Yes, thank you very much for taking my two questions and the first one, maybe on Care Chemicals again. I mean, you were giving some comments Patrick on what happened here in Q3 again, but still I am struggling a little bit to understand the full picture.

I mean you said the supply disruptions were basically affecting Q2. The Industrial business was weak, but that probably also didn't change too much compared to Q2 with automotive demand and other industries being weak also back in the days there.

So why is Q3 then still rather weak in terms of organic growth of minus 3%? And then could you back out a little bit more again on the margin contraction?

I mean the devaluation on the inventory side, you were mentioning, where would you be kind of excluding that, and what of the margin drop was related to the high margin - to the high base last year? And then the second question on the corporate line.

I mean if my calculation is right, you had CHF9 million corporate expenses, while usually, you guide for more like you were saying 2% roughly to sales; now you were below 1%. And what was driving this low corporate line?

Are there any unusual items included in that? Thank you very much.

Thank you, Daniel, for your long two questions.

Sorry.

Looking at our Care Chemicals, - yes, in this - Care Chemicals had a tough quarter and in Q3, and we would have wished to have a bit of a better picture. But the supply disruptions were resolved in Q2 for the non-force majeure in the U.S.

But the effective thing is that we actually lost some sales in the consequence of that, and then Q3 proved to be more difficult than the business beginning to recover those positions. And therefore we continue to actually have a quite a weak sales development in the U.S.

in Care Chemicals. So it obviously was better than Q2 in terms of sales, but it was significantly lower than we would have expected.

It is recovering and therefore if you look forward, as we guided now as well in the speech, the Q4 will actually be quite strong for Care Chemicals. But certainly, Q3 was weaker than we thought from that point of view, just from the pure geographical or of the few consequences of the geographically weakness in the U.S.

Now if you look at the businesses themselves, crop had an excellent quarter very, very strong in double-digit segments, far above the typical 12% we would referring to us so growth rate for crop. But we saw some weakening in Personal Care and Home Care, still growing nicely, but not at the high-single-digit pace, but just nicely growing.

While we certainly saw deterioration - more pronounced deterioration in the Industrial Application in Q3, particularly I would say in the more commodity part of the business, the based products which we don't often talk about because they're basically fillers for the capacity utilization. But as you know there has been quite a lot of reduction of raw material costs and a lot of competition coming into play, and the based products were suffering in Q3 under this development in addition to reduction of sales in lubricants, also icing, braking fluids for automotive.

So there was a conjunction of negative factors in Industrial Applications with reduced capacity utilization and that in turn impacted the EBITDA line for Q3. Overall, I would say the deterioration still has to be - as you rightly mentioned compared to a very, very high base of the previous year.

I think in Q3 2018 was the record Q3 year ever with I think 21.6% EBITDA margin, so obviously, a very abnormal for Care Chemicals. I think you all are well informed our seasonality, typically Q4 is the strong quarter, not Q3.

Last year was exactly reversed, Q3 was the strongest, Q4 the weakest. So I think this will impact a little bit on the - from the qualitative point of view when we look at the comparison of the quarters.

We will revert to normal seasonality, which means Q4 will be stronger than Q3 this year, just as it had been or the years before, apart from last year. So on two bias let's say by Q3 view because last year was disproportionately high.

But notwithstanding the weakness of Q3 is there. If you look at Daniel, more quantitative point of view, I would say the inventory devaluation comes from the reduction of pricing in ethylene and ethylene derivatives which is in the market with rather shot over - strong oversupply of ethylene pushing edible oil prices down.

We adjusted inventory in Q3 that is a gain for Q4, right. As you know when you reduce inventory and you sell the products in the next quarter, your margin will be improved and therefore, I will not be worried on the yearly view, and because those products will get sold until year-end, and you'll recuperate this margin differential in the Q4 in terms of increased margins.

We quantified it now at a high-single-digit figure, which basically if you look at the deviation compared to previous year, we are at 17.1% when we compared to the previous year of 21.6%, so it's 4.5% deviation, right, in terms of EBITDA margin. Roughly half of that deviation comes from the inventory revaluation effect, which you - we'll actually as I just was mentioning recover and recuperate in Q4.

And the rest is mostly due to less cost absorption through this lower sales on the Industrial Applications. So that I think gives you a quite detailed description of what went on - in Care Chemicals in Q3.

Yes. That was very helpful.

And maybe on the corporate line quickly.

And your second question on corporate line indeed. Yes, we had a couple of reversal of provision pensions and so on in Q3, which makes it a little bit artificial low, but totally maintain our guidance on that.

And as a rough guidance, the things we have communicated our continued figures 1st of October, we do have there corporate cost amount for continued operation, which I think is a very good guidance as well for corporate cost with continuing business this year. So on a yearly view, that will compensate.

Actually, probably the same effect Q3 is a bit higher and Q4 will be lower, and last year was exactly the opposite. But overall the sum will be pretty much the same.

That's very helpful, and thanks for your detailed response on the first question.

You're welcome.

Yes. Good morning, Patrick, and Maria.

Just - can I just clarify on that corporate charge for the final quarter then, because I think your guidance on 1st of October was 2% of sales. So you'll be implying fourth quarter might jump to even what you achieved in the first nine months, which seems excessive to me.

But just want to double-check what you're guiding for the fourth quarter for that corporate charge, I can [indiscernible]? And then the second question is talking about the margin expectations that you kept for the division slightly alter the Natural Resources one with Additives, I think.

But effectively, if I look at the bottom end of the range of that target guidance is sort of 20% margin for 2021 on EBITDA, you're running the last 12 months obviously significantly below that hit by one-offs, so I think it's about 220 basis points below that on my numbers anyway. Now, I was just wondering how you can contextualize these one-offs, the force majeure, the sort of fires, you've now had the inventory revaluation, these sort of things now and again, of course, but effectively, how much you see that 220 basis points down to the one-offs you seen in the last 12 months?

And then how you climb back through that 220 basis points presumably a lot of price mix, but how important volume will be for that - for the targets? Thank you.

All right. Just to clarify on the corporate cost, maybe I was unclear before.

So what I was referring to is in the Q3 number for corporate cost before exceptional items is very low, CHF9 million compared to CHF23 million in the previous year. I was just highlighting that most probably you could probably see the reverse situation in Q4, therefore, having increased corporate cost position and compared to a very low previous year base, right.

Overall, the sum of corporate costs for the full year 2018 before exceptional items with 2019 will be very close to 2018 number.

Yes.

Just shifting in quarters, but the sum will be pretty much the same at the year-end. If we now look at your view on Care Chemicals.

I think, - yes, 2019 was not the year and we talked about it early on in the year where we can make a jump in the performance of Care Chemicals. We have been touching the 18%, 19% in the last two-three years.

But it's more about the whole - the operating divisions actually, Patrick, not Care Chemicals. The operating divisions I have in total about 224 basis points light of the low end of the range, so I realized a little one-off for Care Chemicals, but I think you had one-offs in other segments as well over the last 12 months.

Yes. I mean 20% EBITDA margins on the group level of 2021 refers clearly to a portfolio, which included the SABIC business in asset than the 2018 guidance, right.

So from that point of view, you have to adjust on that. But if I understand you well, on the whole portfolio, you're wondering, how we can increase margins.

Yes.

But I would say it's a quite a logical evolution by efficiency generation. If you look at Care Chemicals, as I said, this year is not the year we can do a big jump forward because we had negative one-offs in the Q1 for the icing, we had the force majeure in Q2.

We have the lingering effect in the U.S. market there in Q3.

So - yes, we will be at best very coming very, very close to previous year. And then obviously, the structural improvement in Personal Care, growth in Crop Protection and also quite an improvement in some Industrial Application businesses will resume the progression of margin in that business areas.

So I'm not concerned on the mid-term at all, just a matter of that in '19 set of progressing given the environment and in additional one-offs we just got it on different levels there, and we couldn't progress in Care Chemicals. But it doesn't change anything to the plan and to the ambition to be in Care Chemicals and in this 19% to 21% range we have indicated for 2021.

Catalyst is exactly on track. I think that's fine.

They're okay. I think we highlighted as well the guidance now in the speech.

Looking forward for the next two years, that will progress in terms of margin. The booster there is clearly biofuels, second-generation ethanol, there we'll have to be more concrete in early next year and as 2020 develops on the timing of this development.

It's a new business and have risk with it, but has a tremendous potential. And actually the set of licenses is doing pretty well.

So that is the booster factor which brings you from those 25% to 26% EBITDA margin to the 28%, 30% we indicated early on, right. If you don't have the biofuel business, you would remain in the 24%, 26%, probably on the higher end of that range for Catalysts alone without the biofuel boost, okay.

And for Natural Resources, we just progressing. We are returning to the 16% to 17% where we were.

We have upped that guidance now, because obviously, we put Additives in it, right, which currently a bit suffering because of the macro. But overall I think we have indicated 18% to 20% EBITDA margin for Natural Resources.

That implies let's say the old Natural Resources, Oil & Mining, and Functional Minerals coming to 16% to 17%, and it's just mathematically addition of Additives business which is still at 20% in the crisis year, and will return to the range of 23%, 24% where it was actually last year, when demand situation was more normal. So over the next two years, we would expect the market - the electronics market to recover.

The supply chain adjustment giving production moves from China to Vietnam to Malaysia to be settled, therefore custom orders to come back in Additives and therefore this margin as well to go back 23%, 24%. And the rest of that component as I said before, it's just oil coming back to where it was and then on a very good track record this year, as you can see from the margin development.

And as we just guided, by the way, we will see a further margin improvement as well in Q4 in that business as well.

Sure. Got it.

Thank you.

You're welcome.

Yes, sir. Good afternoon, Maria, and Patrick.

Two questions if I may. First of all, any indication of your cash flow development might go for a full year 2019?

And then second, can you update us on the search for a new CEO? Thank you very much.

Thanks for your question, Christian. So on the cash flow, obviously we don't communicate cash flow Q3, so you're putting me in a difficult position there.

But no, clearly I think the cash flow is line and will be - it's an operational point of view, very much you're looking when second half as usual and the first half is typically weaker and the cash flow generation comes as you know, in the second part. We will have some impact on the cash flow from the carve-out projects within the discontinued operation, which is seeking now ramping up pace and therefore as well increasing its cost as you can see as well in Q3, and you will see in the Q4 results as well.

That is a cash component which goes off. On the other hand, you'll have the proceeds from the divestments as well of medical specialties.

So it depends whether you look at the operational cash, which will show some carve-out costs. Because you know cash flows for total Company, we don't have a continued or discontinued cash though there is high increased cash out from the discontinued will be in our operating cash figure in there.

But on the other hand, you will have to mentally offset it with the proceeds from divestments from the medical specialty business, which comes on another line, but overall, if you look it's pretty okay. Now, when you asked the search of the CEO, as we mentioned, that's a matter which is being taken up by our Board.

We have a Nomination Committee, which has started the process. It's an external search.

We will have - they will present a list of candidates, there will be a selection process, which typically takes a bit of time as you know. But we maintain the guidance that by year-end, early next early the search should be concluded.

Very helpful, Patrick, many thanks.

You're welcome.

Hello. Good afternoon.

I'm struggling to make sense of your comments around revenue growth in Care Chemicals. I know there's been a few questions on it, so sorry.

In the second quarter, you had local currency growth of negative 3% with the full impact of the force majeure. In the third quarter, you only had a residual impact from the force majeure, yet revenue was down 3% again.

In fact, the underlying growth in Q2 is mid-single-digit positive according to your release, so that's a swing of almost 10% from one quarter to the next. You also mentioned the comparable with tough this quarter, but made no mention into comparable in the Q2 release, yet the comparable Q2 2018 growth was plus 10%, whereas it was plus 8% in Q3 2018.

In other words, it looks like an easier comparable in Q3, not a hard one. Could you just help us make sense of that because it is quite difficult to get all the moving parts to the fit?

Thanks.

Yes. Thanks for the question, Alex.

I think rather difficult, really. The 2018 was a very good year, whether you take Q2 or Q3, 8% or 10% growth is a fantastic growth.

So in a way both quarters last year were very good and therefore form quite a high comparison base the year after when the economic environment is totally changed, right. Remember that 50% of our business is Industrial Applications, which is more GDP dependent, and therefore having quite a good growth last few years and with a peak in 2018, in the Q2 and Q3, which typically are the weaker quarters as you well know for Care Chemicals form an excellent basis which when the economy turns significantly since it has if you remember our context we were working on Q2 and Q3 last year was quite positive, now everybody is revising its GDP forecast down month-by-month, it's a total different base, and therefore it forms a very high comparable base.

I think there is no dispute to that and it should be fairly simple to understand. Now if you look at the growth per se per quarter, indeed, Q2 was the most affected by the specific U.S.

force majeure, clearly, the main impact there. I think we're 25% down in the U.S.

for Care Chemicals in Q2, which was very unfortunate. Now we continue to be down to give a bit of flavor in Q3, I think 15% in the U.S.

So yes, we have recuperated a bit, but we are still down compared to this high base. And that certainly is a drag on the numbers.

And in addition, as I tried to explain before, we are actually - yes, seeing a construction - contraction in the markets like lubricants, construction, braking fluids, which are directly obviously for the automotive market, whether it's quite a significant - yes, mid to high single digit volume reduction in Q3 and that just drives the figures down, right. That's all.

So what we see important is obviously what - where do we go from here is that in Q4 actually, we should have more positive trend. So I think we have been explicit now in the presentation on Q4.

We want to things important for everybody on the call is to see that we would basically a bit like we had discussed with the analysts in London in October that in Care Chemicals, we would expect a stronger Q4 compared to Q3, while in Catalysts, we expect the opposite, so a stronger Q3, and then a weaker Q4, right. That is just from the rhythm of the quarters.

And for Care Chemicals, it just means we are back to a more normal seasonality where typically Q4 is stronger than Q3. I hope it explains to you - answer your question.

Thank you.

Yes. Thank you.

Thank you.

Hey, good afternoon, Maria, and Patrick. And two questions as well from my side.

Firstly, on the divestment process, can you update us how the process from this - that is running, and if you expect an announcement until the end of this year? And secondly, on Additives, beginning of October, the European Commission has announced the ban of nonhalogen flame retardants in enclosures and stands for electronic displays by March 2021.

Could you give us a flavor on your exposure of your Additives business toward the non-halogen flame retardants or your sources based flame retardants in particular for Europe and for electronics, and what kind of effect do you expect from this kind of ban for competitive products? Thank you.

I guess your first question, obviously, we will refrain from giving you any precise guidance on the timing of any divestments, because obviously, we all have the same objective here, which is to maximize value. So I think we need to keep the cards close to our - in our hands, and not put ourselves under undue pressure.

I think we will drive the processes as hard as we can to maximize value and that's what you can expect from us. But we are working on it as you know, both from Masterbatches and Pigments and also as well the main point actually, in terms of preparation in the separation of the businesses, which will be finished as planned by 1st of January 2020 in two totally separate holdings, legal entities around the world, IT system which allows us to plan for a swift process during 2020.

When we go back to Additives, yes, clearly, I think we have been very much favoring and explaining the advantages of non-halogenated flame retardants because they're just better for this type of applications. And I think the moving - the market has been moving now a direction for last few years.

If it gets reinforced by some regulatory framework all the better. It is clear that this type of application non-halogenated in principle, the better product, and our product, in particular, doing a bit of publicity here is particularly good.

And we would expect this to further I would say, continue the growth in Additive, which is why you remember that back in 2015, we already had taken the decision to separate Masterbatches and Pigments and Additives into Plastics & Coatings for divestment. Now we changed our view on Additives, I think it was in '17, and we repatriated so to say Additives in the core business because we just saw that on the one hand exactly to your point in electric and electrical applications, there is only a one way the market can go, it's towards our range of products, and some competitors as usual, but in principle, we are very well positioned.

And on the other hand, in the waxes which is the second big area, we do have very innovative innovations based on renewable raw materials, which allows us to going totally new areas for the wax business. So the growth - and I would say, backed by innovation is quite tremendous in that business.

And although it's still a small business, CHF400 million, it has a consistent performance above 20% EBITDA, even in the - quite a disruptive year like 2019 in terms of volumes, we still maintain a good margin. And we expect this really need to turn, right.

So weakness in the electronic application should turn because it's just a supply chain rearrangement, but the underlying demand can only grow. And that's why we are very positive on the prospects of that business indeed.

But could you quantify your exposure to Europe for this business into electronic? At this stage electronics pretty high, but European end market, how big is it?

Well, you know, there are two components here. We do sell quite a bit to Europe, and our - the biggest - the second biggest market in this business area is - business line is actually China, but a lot of this demand of China goes back to the U.S.

and in Europe, right, so the actual proportion of Europe is actually probably quite significant in that. But it's north of 30% in any case and direct sales, and significantly higher, if you assume that a good part of what is produced in Asia goes back to all the U.S.

or to Europe.

Okay, perfect. Thank you.

You're welcome.

Hi. And thanks for taking my questions.

Actually, it was also - the first one is also on Additives. I was wondering if you explain a little bit more exactly what was driving this weakness on your electronic side in Q3?

And can you help quantify what you mean by retreated significantly? And then thinking about the comp, you said Q3 comp was tough.

And can you explain how the Q4 comp looks? And given the high profitability of this business, I was wondering whether that - if that ends up being a weak by market in Q4, whether that could affect your ambitions to grow this division - core margins in this division half-on-half?

And then the second question was on Sunliquid. You highlighted you signed the second license.

And can you explain when this should contribute to earnings? And can you remind us sort of hurdles for each to pass to eventually hit your mid-term CHF100 sales target?

Thank you.

Yes. Thank Nicola.

So coming back to Additives indeed, I think the business has suffered a lot like you will see in all the major producers of or end customers as well. I think the electronics are down, everybody who does polymers for electronics is down significantly.

All the big European names are significantly down in that area. And our Additives is direct supplier to those.

You could quantify that to a double-digit concerns contraction in Q3 as an example. It's pretty close to what actually half for the year, right, so high-single-digit or low-double-digit, that's the area where we see the contraction, on the back of I think 12% growth back in 2018.

So we had a very good growth for last two, three years, '17, '18, and now we have this construction just because when markets are adapting, there's a lot of uncertainty in terms of tariffs, as we all know, there is uncertainty in terms of technologies, delays in some technologies, which are coming out. and then reshuffling of supply chain because some production is certainly moving out of China into other countries in Asia.

And therefore while logically people will not increase stocks but they rather are emptying the supply chain, and before starting new production sites next year. So from that point of view, it's sequential disruption because supply is updating and a weakness in terms of new technologies coming up.

That will revert, clearly and we are very confident as per the previous question that this will actually be - continue to be a very nice business looking forward. If we look at Q4, clearly we have guided now very I would say precisely on the lower growth dynamic in Q4 in Natural Resources because we expect oil to continue to be doing very, very well.

Functional Minerals is actually pretty flattish or slightly negative like it was in Q3 because of the weakness in the foundry business which is more linked to the automotive - partially into the automotive. And then you have the additive block, which as I just indicated is down high single-digit or low-double-digit, depending on the quarter, and that will obviously offset the growth in, all right.

So we will guide for Natural Resources to very low growth for 2000 - for the fourth quarter 2019, but still a margin improvement. But I think the dynamics are there within oil, within refinery mining to offset additives, which is frankly speaking contracting more in sales than it is in profitability.

So it doesn't create such a big hole in profitability that it could not be compensated by the advances we do in oil services. Now, looking at sunliquid, your second question.

Yes, we are starting to have some success in setting licenses before setting up the plant, we are building. I think we are looking at this project as well with our customers because there is a strong interest here to develop the technology.

The actual P&L effect is really when the plants, which have now signed licenses start to be built or finished and start to operate because you have the license fee structure is just a little bit upfront payment and then you have a significant payment when the engineering package has been turned into reality, and when the plant is actually standing and starting to run, it's another payment. And then you have the ongoing enzyme sales, which is the actual part of the business we actually want to do, because that's obviously enzyme business, we're not in the technology business of selling engineering packages for plant.

It's one nice component in terms of value, but the ongoing business then impacts our figures is really the sale of enzyme. So that is a few years ahead, but we are very much pleased that there is a strong interest in the technologies that people are starting to put money on the ground and building their plant and by investments.

Okay. Thank you.

You are welcome.

Good afternoon and thanks for taking my two questions. The first is on Catalysis.

You talked about the mixed improvement with more petchem helping the margin. When would you expect this business to be back in a normalized mix, right?

I assume there is still a slightly over-proportional share of Syngas here in the mix, given that the margin improvement was good, but not that great, right? We are still below 20% here on the margin.

And the second question is around the discontinued operations, Masterbatches and pigments. And I noticed in the slide here, the EBITDA drop before exceptionals minus 16% looks pretty steep for only minus 2% organic or minus 4% on the top-line.

Can you add a bit more color what happened here? And do you think this will have an impact or is this impacting your disposal process, your negotiations in any way?

Thanks.

Thank you, Patrick. So to the first question, yes I think we are - we started the year still with the mix, which was very much linked to the mix of the previous year, right, with quite a bit of Syngas in the mix.

And as we guided for Petrochemicals is progressively ramping up its proportion of sales over the year. Q3 was a good quarter actually for all segments, so Petrochemicals came back as expected came as a still a bit - even stronger than we thought.

But we are there catching up nicely. I think the margin has progressed according to our expectations, absolutely.

We are reducing the gap towards a previous year and the guidance is absolutely maintained, so no change in guidance that - and the sales growth will be at 6%, 9%, and on the profitability level will be slightly ahead of previous year. So we are catching up compared to that.

It's not yet an ideal product mix, to your point. We still had a lot of Syngas and we have - obviously had some disruption, as you remember, in Q2, in China as well, which didn't help the margin.

So overall, we feel confident we can improve the margins looking ahead, as well as we ramp up as well capacities in terms of polypropylene as well, which is still driving on the results this year. So from that point of view, there is a nice potential to still improve margins in Catalysts.

But we are exactly on track and where we want it to be at this stage of the year in Catalysts. If you look at discontinued operations, indeed we do have a regression of sales of 2% and EBITDA by which has contracted a bit.

I think we are 15%, whatever 16% down in Q3, mainly coming I would say from the Pigment part which is always more and more difficult to react. Masterbatches is doing a decent job or a very decent job actually in adapting its cost base to the lower volumes.

The Pigments, as we all know is more of a real chemistry business where you have very long production cycles of six months ahead. And those obviously get caught a bit up when volumes come down and therefore you always have to play - all you reduce inventory and you shut down your factories, but you will destroy your EBITDA, but you generate cash, or you run full steaming of a nice EBITDA, but you end up within inventory, which is not needed, right.

And this is always the core in Q3, Q4 and Pigments, and that's where they are currently, more targeting cash than actual EBITDA margin in numbers. So not too worried on the performance.

That's a typical development, which is quite difficult to manage actually when volumes come down, but they're doing a good job there. And we focus on cash, right.

We have no intention to increase the EBITDA margin for one quarter effect. I think we run those businesses, as we have run them last few years in terms of cash and whether that implies paying a price and EBITDA margin, while it is the price you have to pay, right.

So does it have a consequence on the divestments? I think people see through that.

I think anybody who buys business, we look at the cash flow generation of that business, and therefore we'll be comfortable with the way we manage it.

Very helpful. Thank you.

You're welcome.

Hi. Thank you.

Just first question sorry, to ask you this Patrick now. I know you're not going to be comfortable with this.

But on the divestment side of things, could you just tell us, - I understand what you're saying, investing in the business, delivering and then cash return. I just want to ask you on the delevering part, what - where would you be comfortable?

Because the balance sheet as it stands today is relatively, okay, so whatever you get - I mean, at what level are you going to be comfortable? And so, therefore, I just want to understand your thoughts behind giving cashback in whatever form it might be.

And then the second part of that question really is with regards to these businesses obviously are let's say, your Masterbatch business has quoted peers and all. So just in terms of interest from parties, are we talking about strategic players or also financial players?

Those are sort of two my divestment related questions. And then just one small catalyst related question.

The big project in China started off in Q3, the Hengli complex. Have you shipped catalyst for that already in Q3, or is it more a Q4 event?

Thank you.

Hi, J. No, I feel very comfortable with your questions.

No worries about my comfort level there. If you look at the divestment topic, well, I think clearly, we expect to - first of all, maximize proceeds - the cycle we're in now, and more you get, the more comfortable you can be on the resulting balance sheet.

So we focus one thing after the other. We try to do a good divestment process first.

Second, clearly the ambition here is to have a strengthened balance sheet in the year, I think, would then be - the three which obviously is not particularly good either, and therefore we totally of consensus in the Board - ultimately it's a Board decision to quantify the amount or the return to shareholders. But there will be returned to shareholders.

We will re-leverage to a normal level. I think the Company should be a true for the Company, and therefore we will make sure that the resulting leverage is where we're having the triple the area, yes.

But again, the more you get, the more you can distribute, so let us focus on the supply.

Sorry, just say BBB would be 1.5 times net EBITDA - 1 times net debt EBITDA way should we think?

Yes. It's pretty much exactly where you indicated, yes.

I think, depending on the rating agencies, we don't have always the same using calculation methods. You will be around 1.5 times net debt to EBITDA, yes.

Okay.

And - now on the process itself, I think, no comments from my side. Both businesses Pigments and Masterbatches are good businesses.

Masterbatch has evidently a good cash flow generation because its low asset intensity, right [indiscernible] fixed assets, low net working capital is moving fast and therefore cash generation is, on one hand, regular and certainly significant as well, which means that you probably and hopefully have not only strategically as interested, but also quite a few part of actually getting upfront. That's a typical business, you can, you can own and be very happy with it for a long time.

So that is, I would say opens the door to a quite a good process indeed. When you look at Catalysts, I - we'll have to come back to you.

I actually don't know whether we have or will deliver our catalyst for that installation.

Okay, all right. Thank you so much.

You're welcome.

Yes, Hi thanks. Just two questions, one Patrick, can you just clarify, all the comments you made about margin improvement, I'm assuming those are based on the reported margins, not the pre-exceptional margins, so just to clarify that?

And second question was on Care Chemicals, when you talked about margin improvement in Q4, are you talking about versus Q3, or should we expect margin improvement also versus Q4 last year? Thank you.

Yes. And also just to clarify, when we talk about margin improvement, you know that we report in after exceptional items, yes, since this year, and we still obviously show you that before exceptional items just to ensure that we have a total transparency of numbers, not to disrupt anything, but clearly we measure ourselves and the whole incentive plan and all the organization is fixed on EBIT after exceptional items.

Yes.

And then in terms of Care Chemicals, yes, I think we clearly would see an improvement there because of the market dynamics and then return to normal seasonality I mentioned before, that would allow us to be basically - yes, above previous year in terms of Q4, and obviously, as above Q3 2019 as well. And I would just like to highlight that it is a very decent performance.

If you look at our competitors in the market environment, I think we are very proud of the performance of our businesses. One thing is to be CHF1 million or CHF2 millions of by business area on an expected number, our own expectations as well.

But the other ways to look out of the reality of the market and I think we're doing a great job there in improving the margins and as we have and as we will continue to do.

Understood. Maybe again follow up.

A few of your competitors have highlighted in catalysts some disruptions in Q4 from the fire or the sort of - the Saudi oil disruption. Have you guys seen any of that in your Catalyst business?

No. We have noted that.

We are not in the refinery business, yes. So from that point of view, we are one step behind the value chain and typically our catalysts are not consumed in the chemical reaction that they are delivered ones and do you have a lifetime of three to four years.

So if you disrupt production of downstream product for a couple of months because you're missing a bit of supply from the refinery, it doesn't really change the renewal date of your - of the catalyst.

Thank you.

You're welcome.

Good afternoon, and thanks for taking my questions. This is Peter, actually.

I have only one left on Natural Resources was there a meaningful contribution from new Oil services contract in the quarter that potentially supported profitability in the division, and what do you expect from here? Thanks.

Thanks for your question, Peter. Indeed, we are going through a triple process in Oil which is why this business is now really performing better as we had expected a year and a half ago, and delivering on its promises.

And first we had a reduced cost Q3, Q4 of last year, which gives us a very sound base in terms of operating leverage in Oil, it's a SG&A business, so you have to cut SG&A to get a good base. We did that in the second half of 2018.

The second element is we are not favoring sales growth for sales goals. We actually retreating and not re-tendering contracts where we do not earn a sufficient margin, which is particularly I would say, in some areas of the shale business in the U.S.

where we had after buying couple of businesses three years ago. The effort was obviously to maintain the top line and to ensure that we had a market position, probably that was taken as we explained it a couple of quarters ago, a bit to the extreme.

And you still have to make some money, right? We're here to make money, and therefore not only sales line is important, but the margin is more important.

And therefore we are letting go of some contracts where there is just I would say not enough differentiation factor through a better technology. So if you can do the same result for our customers with a non-differentiated chemistry, we have no real advantage there.

We will focus on areas where it's more difficult, where you need a better chemistry to achieve improvement that typically goes as well with a higher margin. So we are quite selective on letting - on seeing where do we actually gain contracts.

And therefore we are more letting Gulf contracts than what we are gaining contracts is that I'm trying to say here. And - but certainly, we do have very interesting contracts, which have been signed, are starting in Q3 and also in Q4.

And I think that's why we are confident as well that the oil business on its own will continue its growth in the Q4 and into 2020 in a nice manner as well.

Thank you.

You're welcome.

Yes. Two follow-up questions.

Firstly, on the polypropylene catalyst plant in the U.S. And maybe I have missed it, but can you update us where you stand in terms of ramp up?

And secondly, there is more a kind of around modeling or forecast question for this kind of new Clariant or [indiscernible] how are you call it, what is the automotive exposure and what is the new forex sensitivity for this new Group?

Part of your question on PP catalyst plant, clearly, we have worked hard to, first of all, make it run, which is now running, have a product which is registered and accepted by the market. This is actually a very nice development.

The quality of the products we are now producing is higher spec than what we expected at the beginning of the project. Therefore, I would say from the actual sales price and value-add, we are favorable compared to what was the base of the business plan.

The major part of 2019 has been to mark more the production itself in terms of ramping up volumes. I would say we have most probably, I mean, we are still in - not finishing the year.

But we had communicated a goal of getting breakeven in the plant. We probably, I would say not achieve that single objective of being breakeven because we are a bit behind in volumes and that would be surprised that we can close everything up into Q4.

But it is ramping up. There are technical solutions, which have been tested positively, and therefore I would say it's a delayed ramp up again compared to what we promised.

It makes the figures of catalysts a better, because as I was mentioning before leaves it more room to progress as we finally get our hands around that production plant. So as the end market exposure of our core client, that's a very good question, Markus, which we will be looking at.

I would not expect. We always see Automotive is around the 5% to 10%, I think we had a figure of 7%, 8% in the past, Automotive exposure.

It has certainly not gone up, rather come down overall. Yes.

Sorry.

Sorry. I didn't mean to interrupt you, Markus.

What was your question, again?

The currency sensitivity, you still expect that to change?

Yes. I would not expect it to change too much, which means we will be still long in dollars, given that most of the catalyst business is done in dollar.

We'll be more breakeven in euros as we will have less costs in euro, Pigments is ready, I would say. Europe dominated in terms of production cost structure that will move out and therefore we'll be - we should be balanced in terms of euros.

So the net exposure is rather long dollar and still short in Swiss francs, even after the headquarter continues to do so.

Okay, great. Thank you.

All right. Thank you very much.

Ladies and gentlemen, we've reached the time limit of our conference call today. I apologize that we didn't have time to respond to all the questions in the queue.

The Investor Relations team is still available for any further questions you might have. Thank you for joining the call today.

Have a nice day and goodbye.