Clariant AG

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

Joining me are Hariolf Kottmann, Executive Chairman of Clariant; and Patrick Jany, CFO of Clariant. As a reminder, this conference 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 and financial review. I would like to remind all 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, which is a part of today's presentation. A replay of this call will be made available on the Clariant website.

Hariolf Kottmann will first go through the highlights of 2019, followed by Patrick Jany, who will then discuss the results in more detail. Hariolf will finish the presentation with some Clariant insights and our outlook going forward.

Let me now hand over to Hariolf to begin the presentation.

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

2019 was an important year for Clariant in which we firmly progressed with the reshaping of the portfolio and also managed to show a good operating performance in a challenging environment. In a year, which proved to be difficult for the industry, Clariant continued to increase sales in local currency and achieved higher underlying profitability in comparison with the previous year.

Let us go through the highlights of 2019 together, starting with Slide number 3. Please note that all figures discussed referred to continuing operations unless specifically noted otherwise.

For the full year, Clariant grew sales organically by 3% in local currency, with both higher volumes and pricing contributing to this expansion. The sales growth was driven by increases in the business areas, Catalysis and Natural Resources.

Looking at profitability, the EBITDA after exceptionals was negatively impacted by the one-off CHF 231 million provision, which was already booked 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 full year 2019 EBITDA, therefore, decreased significantly to CHF 461 million.

From an operational performance perspective, excluding the effect of this provision, the EBITDA after exceptional items increased by 14% in Swiss francs to CHF 692 million. The corresponding EBITDA margin advanced nicely compared to the previous year, reaching 15.7% for the full year 2019.

The progression we reported in the full year was underpinned by good sales expansion of 3% in local currency in the fourth quarter. The EBITDA before exceptionals improved by a solid 5% versus a strong fourth quarter 2018 and reached a margin of CHF 19.2 million.

Also, the EBITDA after exceptionals reflected a significant 68% improvement due to both higher operating profitability and notably lower exceptional costs, which implied an EBITDA margin progression from 11% to 18.5%. In the full year 2019, the net result for the total group declined to CHF 38 million, primarily due to the one-off provision.

Despite the difficult economic environment, the solid performance of the continuing businesses allows the Board of Directors to propose an unchanged dividend of CHF 0.55 per share. I will now hand over to Patrick for the discussion of the results in more detail.

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

Let us take a closer look at the numbers by moving on to Slide number 4. In the full year 2019, Clariant delivered sales of CHF 4.4 billion.

Sales grew organically by 3% in local currency driven by the Catalysis and the Natural Resources business areas. The local currency growth was achieved through 1% higher volumes and 2% price increases.

In Swiss francs, the sales figure was unchanged as the unfavorable foreign currency development negatively impacted client sales growth by 3%. In the fourth quarter of 2019, sales increased by 3% in local currency as well due to higher volumes.

The growth in local currency was driven by a progression in all business areas. The sales of approximately CHF 1.1 billion remained largely unchanged due to the negative foreign exchange impact of 3%.

Slide 5 reflects the regional sales development for both the full year as well as the fourth quarter of 2019. Almost all regions reported positive sales growth in local currency in the full year.

Latin America and Asia Pacific were the main drivers of growth, achieving 13% and 8%, respectively. Asia Pacific improved in strength as the year progressed, mainly due to the solid business in China, which finished the year at the previous year's level, thanks to a very strong fourth quarter.

Europe, on the other hand, had a good start into 2019 but ultimately only managed to grow by 1%. The performance deteriorated over the course of the year.

Only North America reported a contraction of 5%, largely impacted by one-off effects in Care Chemicals and subdued growth in the other business areas. In the fourth quarter of 2019, Latin America reported strong growth of 22%, and Asia improved by 20%.

The expansion in Asia was driven by a robust improvement in China and continued dynamic demand in India, Southeast Asia and South Korea. In contrast, Europe further deteriorated throughout the year with a 4% contraction in the fourth quarter versus the previous year.

Germany, in particular, was down 10%. The weakness we have seen in North America continued in the fourth quarter, this time being impacted by softness in Catalysis and stable demand in Natural Resources and Care Chemicals.

Let us start reviewing the business areas figures in more detail, beginning with Care Chemicals on Slide 6. In Care Chemicals, full year 2019 sales growth was minus 1%, nearly at previous year level as expected.

The development in Consumer Care reflected good progress and increased in a mid- single-digit range due to solid progression in Personal Care and expansion in Crop Solutions. Industrial Applications sales developed less favorably due to lower demand in all segments, including construction and lubricants and a double-digit decline in Aviation and base products.

Base products remained under pressure due to continued market headwinds. In addition, as previously announced, in the second quarter, North America was hampered by a prolongated plant shutdown of a key supplier following a case of force majeure.

This development negatively impacted the performance in the second and third quarter. In the fourth quarter of 2019, sales in Care Chemicals increased by 2% in local currency and decreased by 2% in Swiss francs due to unfavorable currency fluctuations.

The sales growth was supported by small advances in both Consumer Care and Industrial Applications despite a weak de-icing business. In terms of margin for the full year 2019, the Care Chemicals EBITDA margin softened to 17.6% from 18.9% in 2018.

The profitability was impacted negatively by the previously explained raw material disruptions in North America, mainly in the second quarter. Furthermore, volume reductions in Industrial Applications, resulting from weaker demand, also negatively impacted the cost coverage.

In the fourth quarter of 2019, the EBITDA margin advanced to 18% from 17.7% the previous year due to sales expansion in local currency that was hampered by a less favorable product mix, notably a soft Aviation business in Europe, and therefore, did not meet our expectations. In terms of the outlook, we expect to see low sales growth in 2020 in Care Chemicals due largely to the continued adverse conditions for Industrial Applications, but we anticipate an improved profitability, positively impacted by receding one-off effects.

Moving on to Catalysis on Slide 7. Sales in the business area Catalysis expanded by 9% in local currency in the full year 2019.

This expansion was driven by a good progression in Petrochemicals and supported by a solid increase in Syngas. This sales development benefited from double-digit growth in Asia and Europe and resilient demand in North America.

In the fourth quarter of 2019, Catalysis reported 5% local currency growth, exceeding the high sales reported in the previous year and surpassing expectations. This expansion is mainly attributable to continued sales growth in Petrochemicals, partially due to some forward product shifts from the first quarter of 2020.

The full year 2019 EBITDA margin after exceptional items developed as anticipated and improved to 22.9% from 21.5% in the previous year. This was mainly due to the strong top line growth throughout the year.

Also, the increasing proportion of Petrochemicals sales contributed to the margin improvement. In the fourth quarter of 2019, the more favorable product mix towards the end of the year resulted in a significantly increased EBITDA margin to an excellent 36.1%.

In terms of the outlook, we anticipate continued but slower growth in Catalysis in 2020, below the midterm 6% to 9% target range, following several years of continued strong top line expansion. With three signed licenses for clients, sunliquid cellulosic ethanol technology, the bioethanol business progressed well in 2019 and above our original expectations.

This highlights the attractiveness of our technology. The focus is now shifting to accompanying the plant construction at our customers in order to trigger the ramp-up of the enzyme sale activity and licensing income.

As several constructions are currently delayed, including our own factory in Romania due to permitting issues, we would expect the positive impact of this activity to be noticeable in 2022 rather than 2021 as initially anticipated. Let us move on to Slide 8, Natural Resources, which now also includes Additives, as you know.

Natural Resources sales rose by 4% in local currency in the full year 2019 and remained unchanged in Swiss francs due to unfavorable currency fluctuations. The Oil & Mining Service business reported low double-digit sales growth in local currency for the full year, attributable to robust expansion in sales in Oil Services and Mining Solutions, while Refinery remained largely unchanged.

Functional Minerals delivered low single-digit sales growth in local currency driven by the Purification business. The growth of the Purification business for edible oils compensated for the weakness in the foundry activities, which was attributable to a subdued automotive sector.

Sales in the Additives business decreased at a high single-digit rate in local currency for the full year 2019 compared to a record high 2018. The strong new business generation was unable to offset the softer demand, resulting from a lackluster automotive market as well as the continued weakness in the electrical and electronics sectors.

The sales development in Natural Resources in the fourth quarter developed similarly with 4% growth in local currency. Both the Oil & Mining Services as well as the Functional Minerals business contributed to the expansion.

While Oil & Mining Services advanced in the high single-digit range, Functional Minerals grew at a slower pace. The Additives business was still negatively impacted by the unchanged cautious demand in the consumer electronics market as well as the soft automotive sector.

In the full year 2019, the EBITDA margin after exceptional items rose to 16.3% from 14.4%. This improvement was attributable to sales growth in conjunction with the continued focus on more value-added applications in Oil Services, which was also supported by a more streamlined cost base.

The good progress in Oil & Mining Services more than offset the shrinkage in Additives. Also, Additives partially mitigated the negative margin impact from lower volumes due to a rapid and stringent cost control.

The positive full year development was strongly supported by the fourth quarter, in which the EBITDA margin increased significantly to 18.2% from 13.3% last year, mainly due to sales expansion and the margin improvement in Oil Services. Looking forward in 2020, we expect the sales growth in Natural Resources to slow down as oil growth will normalize, and Additives will still be facing a challenging environment, particularly in the first half of the year.

Profitability should continue to improve. Let us continue to the discussion of our financials on Slide 9.

The full year 2019 continuing operations EBITDA after exceptionals was negatively impacted by the one-off CHF 231 million as a result of further developments in an ongoing competition law investigation by the European Commission into the ethylene purchasing market. Hence, the EBITDA decreased significantly to CHF 461 million compared to CHF 607 million in 2018.

In terms of the underlying operational performance, and excluding therefore the effect of this provision, the continuing operations EBITDA rose by 14% to CHF 692 million. This corresponds to a margin increase to 15.7% versus 13.8 in the previous year.

The profitability improvement was attributable to a more favorable product mix in Catalysis and an intensified focus on more value-added applications in Natural Resources, together with a more streamlined cost base. The strong underlying operational EBITDA performance reflects the resilience of our portfolio despite the weak economic environment.

This picture was actually even more pronounced in the fourth quarter, as seen on Slide 10. The EBITDA increased by 68% in Swiss francs to CHF 208 million on the back of both higher operating profitability and notably lower exceptional costs.

The corresponding EBITDA margin advanced to 18.5% from 11% due to an excellent profitability in Catalysis and also margin improvements in Natural Resources and Care Chemicals. The net results and operating cash flow for the total group can be seen on Slide 11.

The full year 2019 result declined to CHF 38 million. Net result, excluding the one-off provision, was CHF 269 million.

The decrease is largely attributable to the one-off provision we mentioned, but it is also due to the weaker operational performance in the discontinued operations by CHF 45 million, the net exceptional cost of CHF 30 million on the discontinued operations, mainly driven by costs related to the carve-outs, higher income tax of CHF 31 million and a negative FX impact of CHF 25 million. The operating cash flow for the group declined to CHF 509 million from CHF 530 million in 2018.

This development is primarily attributable to a lower total group net result of CHF 87 million, as well as increased working capital of CHF 91 million, given lower payables and increased receivables in the fourth quarter. I will now focus on clients' dividend developments since [indiscernible] and the proposed dividend in 2020 on Slide 12.

Although we operated in a difficult economic environment and had a lower net result in 2019, we nevertheless achieved a solid operational performance. This resilience allows the Board of Directors to propose an unchanged dividend of CHF 0.55 per share to the Annual General Meeting to be held on the 13th of March 2020.

This distribution is proposed to be made from a capital decrease by way of a par value reduction with an expected pay date in June 2020. Clariant has increased its dividend by approximately 7% per year since 2014.

Also, this year's distribution is in addition to the proposal of an extraordinary cash distribution of CHF 3 per share linked to the completion of the divestment of Masterbatches as announced on the 19th of December 2019. Going forward, Clariant's dividend policy remains unchanged, that is to increase or at least maintain the absolute dividend in Swiss francs in correspondence with the net result evolution.

With that, I hand back to Hariolf.

Thank you, Patrick. Ladies and gentlemen, after going through the full year 2019 financials, I would like to showcase in a bit more detail some of our innovations and our focus on sustainability.

As you can see on Slide 14, our sustainable Exolit OP Terra halogen-free flame retardant series is a compelling example of a product which provides superior customer value, and at the same time, mitigates environmental impacts. In general, flame retardants are added to plastics to meet the requirements of various flammability standards.

Exolit OP halogen-free flame retardants provide tailor-made fire protection for thermoplastics in ignition-prone environments. Clariant's Exolit grades show less toxic smoke development compared to conventional halogenated solutions and often have a smaller impact on mechanical properties due to their relatively low dosage.

Our Exolit OP Terra products are the sustainable equivalent to regular Exolit OP products, ensuring the same quality and performance levels. They are based on certified renewable feedstocks, such as waste cooking oil or plant-based oils.

This helps reduce the consumption of fossil resources and fossil-based carbon emissions into the atmosphere by reducing the dependency on crude oil as well. In addition, Exolit OP Terra products are the first flame retardants with stable protection characteristics even after multiple recycling processes.

Furthermore, the production of Exolit OP Terra is in itself environmentally friendly as the entire production side runs on 100% renewable energy. Our high-performance additives series Exolit OP Terra is Clariant EcoTain-certified.

Products that offer outstanding sustainability advantages are excelled with our Clariant EcoTain label and has undergone a systematic in-depth screening process using 36 criteria in all three sustainability dimensions social, environmental and economic. EcoTain products significantly exceed sustainability market standards, have best-in-class performance and contribute overall to the sustainability assets of the company and our customers.

Exolit OP Terra is also a very good example of a product, which promotes the reduction of the consumption of fossil resources. This supports the creation of a value chain cycle that utilize viable and sustainable renewable sources and helps to combat the climate change.

Let us move to Slide 16 so that I can explain to you what we are undertaking to further foster Clariant's progression. Clariant's 2019 results, particularly in the fourth quarter, reflect the resilience of our three core business areas and also in comparison to our peers in the current challenging economic environment.

In 2019, we announced our intention to sell both our Masterbatches and Pigments businesses. On the 31 of October 2019, Clariant announced the closing of the sale of our Healthcare Packaging business to Arsenal Capital Partners.

On the 19 of December 2019, we announced the agreement to sell our Masterbatches business for US$1.56 billion to PolyOne. This transaction is expected to be closed by the third quarter of 2020.

In addition, Clariant expects divestment of the Pigments business to be concluded by end 2020. Clariant will further increase sales, profitability and grow cash through our focus on innovation and sustainability.

We expect to have more limited growth opportunities in 2020 given the current sluggish economic environment and continued adverse foreign exchange conditions. We have, therefore, initiated additional selective efficiency measures within each of the business areas to support the margin improvement.

These measures will lead to a workforce reduction of approximately 500 to 600 individuals over the next two years and imply a cost base reduction of approximately CHF 60 million. We intend to improve performance despite the difficult economic environment by delivering on innovation and focusing on sustainability and through the fast implementation of operational improvement initiatives.

With that, I turn the call back over to Maria.

Thank you, Hariolf. Thank you, Patrick for taking us through the achievements and progression achieved in 2019 as well as for providing us with some exciting insights as to Clariant moving forward.

[Operator Instructions] Thank you for your understanding. We will now open the line for questions.

Yes thank you. Good afternoon.

Maria good afternoon. Two questions, please.

First of all, in the press conference this morning, you seem to have pointed out your openness to future M&A. Can you please elucidate this a bit?

And then second question, can you please make some comments on Clariant's insight into China? What are your people on the ground saying about supply chains in light of the coronavirus?

And how do you see Chinese demand for your product portfolio at present? Thank you.

Yes, we received some questions this morning concerning the future strategy of Clariant. And regarding M&A activities, we just mentioned that, currently, we do have a clear objective 2021.

We have a clear strategy to get there. We call this the base case, that means shrinking the company.

We combine this with efficiency measures in all business areas to improve the profitability of our business. And we have started so-called right-sizing project, which we will report maybe midyear in order to rightsize the company with respect to the new size.

This is our base case. Nevertheless, this was our response this morning, and that's what we usually respond to that, Clariant still have all strategic options available.

That does not mean that we do have several transformational acquisitions already on the priority list or several bolt-on acquisitions or this or that. I just want to remind the media and press representatives this morning that going into 2021 from today's point of view, this is not the end of the world.

This is just the base options, and all strategic options are available to Clariant. That was all what we said

Referring to your second question on China, yes, we certainly have seen some impact. Our own factories have been stopped for a few weeks.

We intend to restart the factories, most of them, next week, which means that after a very strong Q4 for China, we are currently seeing, obviously, a lower level of sales in January and probably February, which means that we should not expect too much growth in the first quarter. Obviously, it is unknown to us and, I guess, to everybody, how long the situation will continue in China and how fast the recovery is.

Our current assumption is that during the year, we'll be offsetting what has been lost now in the first few weeks of the year, and we are confident to do so as the year progresses.

Thank you very much.

Yes, thank you for taking my two questions. The first one would be on the EBITDA bridge for Care Chemicals, or at least indicatively, can you quantify a bit what the delta was for your Aviation business?

And I also recall from the third quarter call where you have some inventory devaluations, that this should positively impact EBITDA in Q4? Did that happen?

And if so, how big was it? The second question would be around the the efficiency program.

You mentioned CHF 50 million. Can you add a bit more color around the timing of this and the phasing?

And will there be one-off costs related to this program? Thanks.

Yes, sure. Well thanks for your question Patrick.

So going for the first one, clearly, the EBITDA slightly progressed in terms of margin in Care Chemicals, which hasn't happened since Q1 after the difficult Q2 and Q3 that this business area has faced in 2019. So we saw an improvement in the general business conditions, particularly as well in the U.S.

in the fourth quarter. Nevertheless, I think raw materials still came down, so we still had a bit of inventory devaluation effect in that quarter.

So the full reversal did not come to our P&L in Q4. We have to wait for the second part to come in Q1.

And I guess, the most important element here, which did not allow for further margin expansion, and that's why we mentioned in the call that we were a bit disappointed as well is that the Aviation business, well, did not really materialize in Q4. And therefore, we had a strong weakness here in Europe in the fourth quarter, given the warm weather, which compared to the previous year, opened a hole when you look at of the comparison year-on-year.

We nevertheless managed to increase the margin showing that we – there was some positive impact there, but it could and should have been a bit better. Now looking at the efficiency measures in the different business units, we guide for savings of CHF 50 million.

Typically, I would say you have to count that the cost of personnel measures are a modest 1:1, which means I would expect the expenses and severance payments and so on to be roughly in the same amount as the saving guidance of CHF 50 million, which will be probably mostly in 2020 with a remnant part in 2021. So there will be split between both years but with a more heavy impact in 2020 than in 2021.

Overall, I would not expect the exceptional line to be above 1% for the year. So if you go in a bit more in detail to your question, if you want to model that, I would expect that for the different business units, and actually particularly for Catalysis and Natural Resources, we should be close to the 1% of exceptional items and less of an impact in Care Chemicals.

Okay, thank you for that.

You are welcome.

Thank you. A question on catalysts to start with.

Obviously, a good Q4. So if I just look through your product pipeline, there's a lot of PDH plants coming in 2020, 2021.

And then, I guess, the refill cycle from a U.S. catalyst should also start to kick in.

So I just want to understand, how do you see 2020, 2021 with regards to product mix and growth in catalysts? And then just on sunliquid, you have three licenses now.

So again, what should we expect for 2020, 2021 within this business? And what is your scope for more collaboration, more licenses here as well?

And then finally, Mr. Jany, goodbye, and very sad that you are leaving.

But obviously, wish you very well for Maersk, and good luck to Stephan.

Thank you very much Jaideep. It's always a pleasure.

I think we'll see each other in a few days time looking forward. All right, so coming back to the questions, looking at catalysts, indeed, a very good quarter, which has been exactly as we commented previously during the year.

As you all know, the ramp-up of Petrochemicals during the year, increasing margin was totally there. A bit of too much sales almost, they were above expectations in terms of pulling forward a couple of Petrochemical contracts.

But we would expect this trend to continue in 2021 for the whole Petrochemical for the whole Petrochemical offering. The question was referring more to PDH.

I think for PDH, we probably will see a very strong demand with a further horizon looking 2021 to 2025. The plants coming on stream are actually quite impressive, and therefore, we would expect to be on that particular catalyst on a very good growth pattern for the next few years.

And we are also thinking of expanding capacity on that specific line. Now when you look at sunliquid, as we mentioned, we had a good success in 2019, including the first sales of the licenses to China.

So very happy on the licensing part of the business. We are obviously continuing to be in negotiations and discussions with a lot of partners as the deadline for the EU regulation, for instance, has been pushed back from 2021 to 2022.

There's a certain time now or so as well, but we would nevertheless expect that we continue to be successful in licensing in those years. As far as the P&L impact is concerned, and we guided now in the call, this delay in the inventory as per the new EU regulation plus construction as well delays will probably push the real big impact on the P&L from the 2021 aspect to 2022.

So we'll see some positive impact in 2021. We'll come back to that during the year to guide you better.

But the real strong impact of the EUR 100 million with 40% margin, which you will recall in terms of guidance is more 2022 event.

Okay. And just sorry, if I may ask just one quick follow-up.

On the SABIC deal on plastics, just to sort of reconfirm, this is still off the table, Mr. Kottmann?

Yes, as we said already in July, it is off the table.

Thank you. Operator [Operator Instructions] The next question comes from the line of Andreas Heine from MainFirst.

Please go ahead.

Yes only two small ones. Could you give some insight how the Aviation business was since the beginning of this year?

It used to be in the heavy range of profits in the first quarter, and according to what I see, it is a pretty warm winter. And maybe on the cash flow, is it possible to give some indication how the cash flow was split between the continuing and the discontinuing business on operating cash flow and free cash flow, please?

Andreas, referring to your weather observations, I can only confirm that, indeed, the beginning of the year was pretty warm, particularly in Europe. And therefore, without getting on precise numbers, but up to today, I think the Aviation business is lower than previous year.

So which speaks – and if you combine that with the China topic I was mentioning before, that Q1 will not be a tremendous growth element, but we would expect to catch up in Q2 and then have a decent evolution of the year. Now if you look at – on the cash flow, yes, it's always difficult to guide.

As you know, the cash flow is – just from a pure accounting point of view, on a total company basis. If you look at the cash conversion and the operating cash of the businesses, I have been very positively surprised – or confirmed in the cash generation of catalysts has exceeded excellent cash flow conversion, Oil & Mining as well.

And Care Chemicals certainly has some way to go just because of the EBITDA, not because of the working capital in working capital in 2020. So if you look at it, looking forward, I would expect increasing profitability and in cash flow generation from Care Chemicals being the main element of progression actually for the group in 2020.

And may be – allow me one more question. Special dividend, is that exactly after the completion?

Or it's the normal dividend in 2021, so CHF 4.20 in 2021?

No, correct. Actually, it's a good question.

The special dividend of the CHF 3 will be paid very soon after the receipt of the proceeds of the Masterbatches sales. We will be likely using and recommending to the General Assembly to use the capital contribution reserves, so ensuring a swift payment after receipt of funds.

While for the normal dividend, this is why we switched this year, we use a par value reduction, which is a more lengthy procedure. But that allows us – and therefore, normal dividend will be paid in June, as I mentioned in the speech.

But the advantage is that for the special dividend, we'll be able to use everything from the capital reserves, and therefore, we have a swift payment here in – whenever the closing is, I would say Q3 2020, following our current expectation of antitrust approvals.

Thanks.

Ladies and gentlemen this concludes today’s conference call. The Investor Relations team is still available for any further questions you might have.

Once again, thank you for joining us all today, and goodbye.

Thank you.