Clariant AG

Ladies and gentlemen, good afternoon. My name is Maria Ivek, and it's my pleasure to welcome you to Clariant's nine months third quarter 2020 results conference call and live webcast.

Joining me today is Stephan Lynen, CFO of Clariant. As a reminder, this conference call is being recorded [Operator Instructions].

There will be a Q&A session following later. The slides for today's presentation can be found on our Web site along with our media release.

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 on Slide 2 of today's presentation.

A replay of this call will be made available on the Clariant Web site. Let me now hand over to Stephan to begin the presentation.

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

It's my pleasure to welcome you to Clariant's nine months results conference. Please note that all figures discussed refer to continuing operations unless specifically noted otherwise, also, please be aware that the numbers, which we previously referred to as EBITDA after exceptional items are simply called EBITDA and will be always the focus when we discuss profitability.

Ladies and gentlemen, in an unprecedented environment, marked by the COVID-19 pandemic, receding global demand, oversupply in oil markets and adverse currency trends, Clariant preserved its EBITDA margin in the first nine months of 2020 in spite of a sales decline, thereby, again, demonstrating the resilience of our specialty core portfolio. As reflected on Slide 3, in the first nine months of 2020, Clariant sales declined by 6% in local currency in an exceedingly challenging environment.

This negative impact was attributable to lower demand in all business areas as a result of the COVID-19 pandemic. As expected and as guided in the third quarter 2020, Clariant saw the most pronounced sales decline of the first three quarters, with 7% decrease in local currencies in continuing operation sales.

The main driver was the weakness in natural resources where all the three businesses were negatively impacted by the global COVID-19 pandemic, and in particular, the decline in oil demand and production. Sales in Care Chemicals and Catalysis softened only slightly during this time period.

Clariant was confronted by significantly lower demand environment in several segments in the first nine months of 2020. These buoyant profitability results are, therefore, particularly noteworthy as they clearly reflect the effectiveness of Clariant's business continuity programs as well as the timely execution of margin, cost and cash measures to minimize the impact of the COVID-19 pandemic and improve the performance in the midterm.

The absolute EBITDA decreased in the first nine months of 2020 to CHF419 million, yet the group successfully defended margins despite the weaker top line development and adverse currencies. The 14.8% EBITDA margin remained unchanged versus 14.8% in the first nine months of 2019, excluding the one-off CHF231 million provision booked in the second quarter of 2019.

Looking at profitability in the third quarter of 2020, the absolute EBITDA reached CHF127 million. The corresponding EBITDA margin remained comparatively stable at 14.2% versus 14.5% in the previous year despite the weaker top line development.

Let's look at the sales results by moving on to Slide 4. In the first nine months of 2020, Clariant generated group sales of CHF2.84 billion.

Sales softened by 6% in local currency, primarily due to an 8% weaker volume development in all business areas attributable to the continued softer demand environment amid COVID-19. Despite the feeble market development, prices were kept resilient at plus 2%.

In Swiss francs, the sales declined by 13% due to the unfavorable foreign currency development, with a negative impact of 7%, mainly attributable to the depreciation of Latin American currencies, euro and U.S. dollar versus the strong Swiss franc.

Slide 5 depicts the regional sales development for the nine months of the current year. The sales development in Asia remains resilient with 2% expansion in local currency.

Both China and India reported double-digit growth. Sales in Latin America also increased by local currency at 7%.

Sales in North America decreased by 14% in local currency in the first quarter. This was primarily due to the mild winter, which had a negative influence on the Aviation business.

The demand environment, especially in natural resources, weakened in the second quarter and third quarter due to the more significant COVID-19 impact and the decline in oil demand and production, which was amplified by hurricanes in the Gulf of Mexico. Europe weakened by 12% in local currency, primarily due to the negative impact from COVID-19 pandemic lockdown measures in the second quarter.

In particular, Germany, the most significant country in the European region, continued to be negatively influenced by the weak demand environment in the third quarter. In the Middle East and Africa, sales declined by 5% in the first nine months of 2020.

Let's review the business area figures in more detail, starting with Care Chemicals on Slide 6. In the first nine months of 2020, Care Chemicals sales weakened by 5% in local currency and by 12% in Swiss francs due to the strong decline in Aviation and the mild winter and the COVID-19-induced reduction in air traffic in the first quarter.

Excluding the Aviation effect, Care Chemicals would have recorded growth in local currency in the first nine months of 2020. The sales development in Consumer Care reflected high single-digit range expansion, underpinned by double-digit growth in Personal Care and Crop Solutions.

As anticipated, except for Paints and Coatings, industrial application sales were lower, primarily due to the weak demand environment in the wake of COVID-19 pandemic and a particularly feeble Aviation business in the first quarter. The lackluster economic environment also resulted in lower construction chemicals, industrial lubricants and base products demand.

Sales in the third quarter of 2020 decreased only by a slight 1% in local currency as a result of growth in Consumer Care. Although it was softer than in the second quarter, Consumer Care sales rose in the mid-single-digit range, yet as anticipated at a slower pace than in the second quarter due to some stockpiling of care products by customer during the second quarter lockdown period.

The demand environment normalized in the third quarter again. The positive development was also supported by strong demand for Crop Solutions.

The sales development in industrial applications improved sequentially. However, sales in the third quarter of 2020 were lower versus the third quarter of 2019 because of the negative COVID-19 pandemic-related impact on relevant end markets.

The Care Chemicals' EBITDA margin in the first nine months of 2020 increased by 50 basis points to 18% from 17.5%. The weak Aviation business in the first quarter was offset by stringent margin and cost management as well as overproportionate and more accretive growth in Consumer Care in the second and third quarters.

The EBITDA margin improvement at Care Chemicals was more significant in the third quarter as the margin rose to 21.8% from 17.1% in the previous year. This development was due to performance measures, a more favorable product mix effect and positive special effects year-on-year.

In terms of the short-term outlook at Care Chemicals, we anticipate a continued difficult situation in Aviation amid COVID-19 in Q4 2020, which we expect to result in sales decline in local currency versus the fourth quarter of 2019 in line with the sales evolution of the average of the first nine months of 2020. Mitigation measures remain in place to offset the muted demand outlook and aim to defend the year-to-date margin level.

Let's move on to Catalysis on Slide 7. Sales in business area Catalysis decreased by 3% in local currency and 9% in Swiss franc in the first nine months of 2020 against the strong comparison base.

The sales development in petrochemicals outpaced demand in Syngas and Specialty Catalysts, though all areas were negatively influenced by the subdued demand environment in the chemical industry. From a regional perspective, sales in Asia grew in mid-single-digit range, with clear improvements in India and China.

Sales in Europe, North America and the Middle East and Africa remained comparatively volatile throughout the first nine months of 2020, reflecting the project nature of the business as well as negative COVID-19 pandemic-related market weakness. Sales in the third quarter of 2020 weakened only slightly by 1% in local currency compared to a strong previous year.

Good momentum in India, driven by the booming mobility sector, underpinned this development. Clariant's comprehensive Catalysis portfolio, which makes it unique in the marketplace, successfully mitigated the negative influence attributable to the COVID-19 pandemic.

The first nine month 2020 EBITDA margin weakened to 18.4% from 19.4% in the previous year, as a result of the efficiency program provision as well as lower volumes and less favorable product mix in the first quarter, which could not be offset fully by the accretive growth in the second and third quarters. Excluding the efficiency program provision, the underlying EBITDA margin at 19.2% was closer to the prior year level.

In the third quarter, the EBITDA margin increased by 90 basis points to 20.3% from 19.4% due to decent sales, cost mitigation and efficiency improvement. In the fourth quarter of 2020, we expect slight growth in local currencies at Catalysis versus the fourth quarter of 2019, with lower margins year-on-year given the strong comparison base, but stable margins near current levels.

On Slide 8, we see that in the first nine months of 2020, sales and natural resources declined by 8% in local currency and by 16% in Swiss francs. As anticipated and said before, demand declined due to a particularly softer economic environment, resulting from the oversupply in oil markets and the COVID-19 pandemic.

Oil & Mining Services sales were hampered by lower oil production due to the weakened demand in the third quarter, in particular. As a result, oil services sales decreased by low double digits while mining solutions remained unchanged in local currency, but weakened in the third quarter.

Sales in Europe, the Middle East and Africa and Latin America expanded slightly. North America reported a double-digit contraction driven by weaker oil services demand in the second and third quarter.

Functional Minerals sales declined at a mid-single-digit range in local currency, primarily as a result of the weaker foundry business in the second quarter. Demand in the European automotive industry as well as in the construction sector clearly softened due to COVID-19 pandemic-related weakness, which could not be offset by growth in purification.

Additive sales decreased at high single-digit rate in local currency in the first 9 months of 2020. The decline was largely due to the continuingly weak fiber markets, while the Coatings and Automotive sector demand also remained under pressure.

These developments were, again, attributable to the pandemic-induced economic softness. In the third quarter, sales and natural resources declined by 14% in local currency due to the continued feeble demand in all three business units amid the COVID-19 pandemic.

As anticipated, Oil & Mining Services sales were hampered by the low oil demand and production which was amplified by hurricanes in the Gulf of Mexico and the decline of mining activities in Latin America. Functional Minerals was confronted with a continued weakness in the foundry business.

Despite continued stronger demand in Asia, Additives sales decreased due to the weaker end markets in most other regions. In the first nine months of 2020, the EBITDA margin decreased to 13.6% from 15.6% year-on-year.

Excluding the efficiency program in the second quarter of 2020, the underlying profitability of 15.4% remained largely unchanged. This resilience was the result of stringent cost management in all three business units and a higher sales contribution from value-added applications in Oil & Mining Services.

In the third quarter, the EBITDA margin fell to 12.4% from 15.6% due to lower volumes in COVID-19-exposed segments, such as automotive, textile and, in particular, oil, which could not be offset by the internal performance measures. Looking forward, in the fourth quarter of 2020, we expect natural resources to see continued top line weakness due to the COVID-19 pandemic, the decline in oil demand and production and what we foresee as softer mining activities.

We expect these factors to lead to a continued strong sales decline in the fourth quarter of 2020 versus the fourth quarter of 2019, which will also have some negative influence on the margins in that quarter. Let us continue to the discussion of the EBITDA development for the first nine months on Slide 9.

On an absolute basis, the EBITDA decreased to CHF419 million. However, the business successfully defended underlying margins despite a weaker top line development.

The absolute EBITDA decrease is attributable to the volume reduction and currency effects. The EBITDA margin remained at 14.8%, unchanged versus the previous year.

The EBITDA margin was successfully preserved despite the negative COVID-19 pandemic-related impact on the back of the stringent execution of performance measures. Overall, the profitability performance in the first nine months of 2020 reflects also the resilience of our specialty core portfolio despite the particularly weak economic environment.

Slide 10 reflects that in the third quarter 2020, the EBITDA declined to CHF127 million with a corresponding margin of 14.2%, close to the 14.5% in the previous year. This development is attributable to the fact that profitability advanced in both Care Chemicals and Catalysis due to more favorable product mixes, cost mitigation and efficiency improvements.

But in Natural Resources, the margin reduction is due to lower volumes in COVID-exposed segments like automotive, fiber and the oil decline, in particular, which could not be offset by internal measures. Please turn to Slide 12 so that I can explain what we are doing to preserve and improve Clariant's performance going forward.

Clariant's nine month 2020 results once again clearly reflects the resilience as well as the potential of our three core business areas: in the current particularly turbulent environment, in comparison to our 2019 results and in comparison to the specialty chemicals industry. Although sales declined by 6% in local currency in the first nine months of 2020, we nevertheless succeeded in maintaining the operating EBITDA margin at last year's level.

Our measures reflect our continuing ability to mitigate the effect of the pandemic. The group task forces will continue to focus on safety of our employees, support to our communities, ensuring business continuity to our customers and maximizing performance improvement.

In terms of Clariant's transformation program, as you know, we have already successfully completed the health care packaging divestiture in 2019. In the beginning of the third quarter of 2020, we have completed the Masterbatches divestment at the previously communicated terms and shared that success by distribution of the extraordinary dividend to our shareholders.

Clariant's transformation program remains our priority, and we, therefore, restarted the Pigments divestment process as part of our ongoing portfolio upgrade. With the divestments, much of the complexity will lead the company and Clariant will have the opportunity to adapt the organization to the new setup.

Therefore, while the Pigments divestment process is progressing, we are currently preparing for the rightsizing of the organization. We will provide an update on this topic in due course.

In terms of Clariant's short-term outlook, looking at the fourth quarter of 2020 specifically, we anticipate a slightly less negative impact from the COVID-19 pandemic on sales and profitability than the average of the first nine months of 2020. We will be continuing our successful mitigation programs going forward.

Although just in these days, the uncertainty around the resurgence of this pandemic remains high, Clariant will continue to generate resilient performance and execute its transformation program. Our midterm guidance for above-market growth, higher profitability and stronger cash generation remains unchanged.

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

Thank you, Stephan, for taking us through the achievements reached thus far in 2020 and for providing us with an insight into Clariant's outlook [Operator Instructions]. We will now open the line for questions.

Just two quick ones, please. The margins held up quite well in Care Chemical and Catalysis.

From a group perspective, could you provide some comments around the temporary cost savings that you saw within the third quarter? And how we should think about those going forward in terms of the taper down as the volumes come back?

And then secondly, on the price increase that you saw in the third quarter of 3%. Can you break out where those came through in terms of which division?

And were those to offset the decline in FX? Or were these price increases that we will see stick through going forward regardless of how the FX moves?

So let me start with some comments on how we were able to preserve EBITDA margins after nine months compared to previous year level. You're totally right, it's a combination of the portfolio, which has now changed to a higher specialty degree and more resilience, which has also been contributing by our strong margin management.

So the decline in raw material prices in the beginning of the year, the higher competition for lower volumes in these markets, we were pretty strong in defending our price levels and our margin levels from a gross margin standpoint. And finally, yes, of course, of saving programs.

And the saving programs basically are two dimensions. One is, yes, the direct mitigation of COVID-19 impact, and that's where we talk about reduction in travel cost, reduction of overtime accounts taking out temporaries, reprioritizing projects and stopping some which are not feasible in these times as well as work flexibilization, such as short-term labor.

And those effects accumulate to a significant amount of savings, but will, of course, not be fully sustainable in volume recovery times, but then again, the volume recovery and the contribution will overcompensate share of the potential comeback of those mitigation action savings. The second dimension in the saving is in particularly in regard to our announced efficiency program.

As you know, we have announced a program of reduction of 600 positions, the 600 positions refer to the continuing business alone. The measures will contribute to a saving of CHF50 million.

We have provided cost of the dimension of CHF58 million in the second quarter already. We started the implementation already in the beginning or in the end of last year.

We have put it on hold in the first lockdown season in Q2 because we also saw our moral commitment that we have to have a direct interaction with the employees concerned. After the first lockdown, we have taken up that initiatives and execution once again.

And we are now on a very good course that from the CHF50 million, we already will see a sizable contribution in 2020. And at the end of 2020, I believe from the 600 position, we have more or less -- most of them reduced by the end of this year so that you can expect the -- yes, I would say, north of 90% run rate in 2021.

And as I said, already a considerable share in 2020. Can you quickly repeat your second question?

It was on the price increases that you saw in the third quarter. I think you said that there's 3% price increases.

So I just wanted to get a feel for where those price increases came through in which divisions? And were they to offset the FX impact that you have seen?

Or are these kind of genuine price increases which will stick going forward?

Yes. I mean as much as I would like to market as active significant price increases, I would rather refer to a very strong margin management.

The pricing is always attributed to two factors; one is active price increases and second is also the mix effect when you sell more accretive products or sell into more accretive segments. And it's a combination of both.

But ultimately, it means that in these times, overall, volumes are not bullish, except in very specific segments like in hygiene articles, of course, where it's really booming on personal care, where it's booming in body care, where it's booming also in purification, where we're growing or in certain hygiene-additive articles where we are growing. But overall, we see, of course, a strong decline in volume, and you saw it at minus 8% after nine months.

And the most strongest action, when we look at the 2% pricing, I would call, is to defend our margin levels and pricing levels. Here and there maybe manage or lift our unique value propositions where we could even raise prices, but it's more or less a defense of price levels and growth with more accretive products.

And the defense is strong because you have that 8% volume decline and you have a stronger competition for the smaller cake in these COVID-19 and oil decline time.

Stephan and Maria, several questions on the outlook. You anticipate in the fourth quarter a small sequential improvement versus third quarter, is this basically meant from the relative side, i.e., that you expect the normal seasonality in the fourth quarter.

But the year-over-year decline is less than it was in the third quarter? Or is this more seen as in absolute terms, i.e., that the fourth quarter volume is slightly better than the third quarter in EBITDA terms or in absolute terms.

That would be my first question. And the second question would be on your comment on the Catalysis business that you expect stable margins, whereas those current levels for the fourth quarter does mean you basically expect the EBITDA margin around 20% for the fourth quarter?

I mean definitely not easy, not difficult, not easy to give an outlook just after yesterday's announcement of additional lockdowns in certain countries. But we want to be as precise and transparent as we can.

And let me take that question also for maybe giving more transparency to everyone here in the call. When we talk about the Q4 outlook, let's say, first on a continuing Clariant level, what we mean is with a slightly less negative impact.

We don't see that COVID-19 has a less negative impact on the economic environment. But we see our resilience to be stronger to net off that impact on us better than in the third quarter or so.

And that means precisely -- and look at our development in Clariant over the course of 2020. In the first quarter, we had a sales decline in local currency were minus 6%.

And the biggest contributor was actually the Aviation in winter part. In Q2, we've seen the first really rising impact from COVID-19 with minus 5%.

And then in the third quarter, we came to minus 7%, with a combination of COVID-19 and oil, right? And if you aggregate that, that means for the first nine months, we look at the minus 6%.

And what we are saying in the first place is that we would see today, fourth quarter slightly better than this minus 6% decline. So it's an expression to the relative terms.

But actually, if you look on our normal seasonality, that actually also would mean that we would expect absolute sales also higher than the third quarter. But our guidance, particularly, it's easier to understand that we say, okay, if it's minus 6% after nine months in local currency, plus, of course, the FX deviation, then it would be better than the minus 6%, but only slightly.

That's the first on the top line, to be very precise. And again, where does it come from?

Maybe I'll say that question a little bit longer because there will be maybe follow-up questions. Why and where does it come from?

Well, we definitely see, as I said in my speech, we see a still stress momentum on the Natural Resources business because we still see the oil pressure around us. We still will have a negative effect from Aviation in Q4, a deviation at least year-on-year.

Last year, Q4 was not COVID effected. So whatever the climate does or the winter as such does, just the air traffic will have an impact.

And that is considered in my guidance. So the main positive impact comes from Catalysis, where we still see, despite some rollovers of orders from Q3 to Q4 or from Q4 to Q1, we see a very strong commercialization of projects in the fourth quarter.

And at a certain point of time, you have to change your catalyst, right? And we are very close in communication with our customers when to do that.

So this is the main reason why we see a slightly better performance on top line in the fourth quarter versus the minus 6% of the first nine months. If we come to EBITDA margin, we had last year in Q4, really one of the record performance quarters in Clariant, a very high Q4.

You remember the EBITDA margins reaching 19%. And that means we had there a very strong business development in accretive businesses plus some extraordinary effects.

For example, you remember when I commented on the full year results still together with Patrick, we said that we had some Catalysis orders pulled from Q1 into Q4. So any comparison of Q4 on EBITDA margins will definitely not stand up to the performance, which we have reported Q4.

So year-on-year, we will have a strong erosion in margins from that angle. But when we look again on the year-to-date and run rate performance, we are now after nine months at 14.8% EBITDA, all-inclusive, as we said, all exceptional items included.

And what we believe is with the slight improvements versus the top line and our mitigation actions, we could bring that at least this EBITDA margin home and over the run rate or over the finish line of December. So what our guidance this year that despite the additional uncertainty from the resurgence of infections and potential lockdowns, we should be able to bring the 14.8% over the finish line at the end of the year if potentially very, very slightly better.

But that's what we would guide for as of today. And your second question, I took a bit longer for this first question because I noticed -- or I can imagine that you wanted to have a little bit more substance to that guidance.

So on Catalysis, particularly, the Catalysis, as I said, will be a bit more positive. We might see a slight growth Q4-on-Q4.

And the EBITDA margins, if you look what we have been reporting here after nine months, I would look at the nine month run rate, it was 18% and we should be in that ballpark also by year-end, maybe, again, very slightly better, but I would probably see us close to the 18% of the first nine months.

Two questions, please. The first one, around the comments on Aviation.

I know there was a slightly weaker quarter in Q4 '19 for the comp. But I would have thought, obviously, not much is flying.

So therefore, Aviation year-on-year is going to be worse than maybe even Q1. I'm getting the indication from what you're implying with the numbers, maybe you don't have that.

I just want to clarify that. Aviation is still very bad, but maybe not as bad as Q1 is what I'm sort of getting from the sort of commentary you're indicating?

And then the second question, you obviously mentioned the magnitude of the temporary cost is pretty large. Just a feel of how the temporary costs progressed just in a guidance, I guess, in terms of directional, Q3 on Q2, how you see them in Q4?

And then obviously, it's a moving picture day-by-day almost now, but how we see the support in early '21?

I already said when we commented the first quarter, there is hardly a lot of Aviation business left to compare to when you look at Q1 of this year. But yes, you are right, despite being soft, we still had some decent business in the Q4 of 2019.

And therefore, there will be a strong double-digit erosion year-on-year, purely in the Aviation business. That's for sure.

And that will take its impact. And that was already included on the guidance I spoke about before.

So again, if we look on Care Chemicals as such, in particular, after nine months, we look at minus 5%, which was mainly driven by the Aviation factor in Q1. Then remember in Q1, I think we were down 14%, then Q2 6% and then 1% in local currency.

So Q4 would be, obviously, again, it's a nice track, 14%, 6%, 1%. So mathematically, we should turn positive.

But due to Aviation, I would say we'll probably be pretty much in the ballpark of the first nine months where we accumulated and looked at a minus 5% local currency Aviation. And I would assume that, that may be slightly negative could be the dimension for the fourth quarter purely or mainly driven by that Aviation factor.

And your question on the temporary cost, I mean, as I said, we started when epidemic turned pandemic after prolongation of Chinese New Year basically back in April and March, we started what we called an emergency management around that crisis for safety, for business continuity, but also for performance management. So the executive team and the business leadership is running a couple of programs very hands-on to the book.

And so in Q2, we've seen already impact from that buildup of savings in, as I said, travel, work, flexibilization, taking out [temp], et cetera. We have a slight increase in Q3, and that will basically slide now on the Q3 levels into Q4 and was already part of the guidance I have been given before.

I'd like to first to come back on the Catalysis. You have already outlined what you expect for Q4, but I'm not fully get this.

You said that in Q4 you expect sales to be higher than last year. Usually, Catalysis is known for having very high fixed costs.

So it means when sales were up, then also earnings have solid move. If I got you right, you expect that the margin in Q4 will only be when it was in the first nine months, which according to my model is 600 basis points below last year.

Maybe you can help me understanding this? And in Consumer Care and Care Chemicals, at first, I would like to know what the special item in Q3 was, the positive one.

Maybe you can shed some light on that? And when we last time have seen margins being very high, it was also when the oil price was very low.

So driven by lower raw material cost and then margins came considerably down in the years when the oil price recovered. How confident are you that the indeed very solid margins in Care Chemicals can be defended into next year and the year after that?

So a couple of questions. Let's start, Andreas, with the Q4 margins in Catalysis.

Obviously, as I said before, we had a couple of special effects in Q4 '19, not solely from the sales and top line, but also from license income, which we accumulated in the fourth quarter of 2019. And therefore, that's why we will not see margins levels in Catalysis on year-on-year level.

We also have mix effects in the last quarter, which also accreted to the contribution of the sales in Q4 2019. And that's why the comparison for the Q4 EBITDA margin is more the run rate, and that's exactly right and that's what I said before of the first nine months into Q4.

And that's why we said if we are now after nine months at a margin level of 18% or 19.7%, almost 20%, excluding the restructuring provision, but that will distribute over a longer period of time. So that means if we look at the 19.7% EBITDA by underlying, excluding the restructuring provision, that is something which we see we can bring into the fourth quarter as well with slightly better sales, so also accretive and for the group, but not at the Q4 '19 level.

That's the wrong comparison base for those reasons. Second, on the Care part, you're right.

I mean I have a pleasure to manage a part of the business myself for some time in Asia Pacific. The risk is there that in falling raw material price times, you gain and in rising raw material prices, you lose.

But we had both in this year already. If you remember, in the first quarter and the beginning or into this year, we had, okay, a significant decline in oil pricing, started actually already end of last year.

And then you came into a momentum in end of Q2, where you could see oil prices again rising. It's not just oil.

It is at the end propylene ethylene and regional pricing. So shortage long -- also how they run the reactor influence the price, not only crude oil, so we have seen price increases in the third quarter.

And we could still stabilize margins on that behalf. So it's a question -- the risk is there.

I'm not disputing the fact, of course, that for any business that fastly -- in very fast-rising raw material times, you have a problem and in a fast-shrinking raw material prices, you have an advantage. But the question still remains, how do you manage and mitigate it as quick as you can.

And that is a very hands-on approach to manage it. And that's what I referred to before the executive team and the business units have been doing in this year, very close together.

And secondly, it's also the question of the value proposition, which you have, which is anyway, maybe less raw material price in -- or more independent. And that's where I said, referred to the consumer-facing part of the portfolio where we have stronger value propositions and the opportunity to at least -- over average of the total portfolio to be a bit more resilient over the volatility of feedstock prices.

And that's why we could -- yes, not have the same price advantage we had before, but we still can manage it going forward on the expectation or the pricing -- raw material price levels we have today. And then on the special effects in Q4, yes, you're right.

So you could see in the -- sorry, in third quarter, you could see that we actually had in the third quarter a higher exceptional EBITDA margin than the underlying EBITDA margin. So that at least unproved or proves -- disprove the fact that exceptions only have negative items.

Obviously, we had a positive item. And that was largely around CHF9 million -- was two factors actually, and the biggest effect came from a sale of a plant business, which was not core in the area of [cessation].

However, I would, at the same time, emphasize that we also had some extraordinary expenses, actually a little bit higher than the positive effects they occurred in the corporate cost in the same quarter. So yes, for the exceptional margin of -- for the reported EBITDA margin of Care, it had an effect.

But even if you take it out and look at the underlying, we would have seen an improvement year-on-year, and we would have been still on a positive trend also over the quarter. And on a group continuing level, it was a low effect because we had other effects, which absorbed that effect and then on a continuing total -- on a continuing EBITDA level in Q3 of Clariant, we had not an accretion from that effect.

Two questions, please. First, simple question, what is your cash flow expectation for 2020 as a whole?

Second question, I just wanted to ask about your agricultural activities within Care Chemicals. As far as I know, you are one of the key producers of the anti-drifting agent for dicamba.

Can you give us any indication of the sales level you are recording for this item on agriculture? Any other innovations in your agricultural pipeline you can talk about?

Yes, of course. So let's start [Technical Difficulty] also, of course, an area of program which we work on.

But we have to look at the net cash flow with certain -- while keeping certain facts in mind in this year of 2020. So if I say positively, we also have a working capital program to -- we could see that Q1, we were still running with very high, tight cash and inventory, particularly because it takes some time to adapt to the new normal of a COVID-19 scenario.

We're better than that now. But we have some time also then for the orders, which we get in Q4 and Q1 in Catalysis.

So that's something which we need to keep in mind for inventory. On the receivables side, we are relatively very fine.

We have not seen any major outfall or anything. So we have a very tight credit control because I think this is still a building risk in the markets, in the financial markets and in certain industries going forward, maybe more into next year than this year.

We have though a super strong shrinkage in payables because while adjusting for the inventory and for the new normal and the demand, and at the same time, work flexibilization, having put certain plants into short-term labor, that has a dramatic decline on payables into account. And then we also, of course, have reduced our CapEx commitment.

Nevertheless, it's still going to be extraordinarily high because this year, next year, we are expanding our -- or we are investing in our biofuel start-up, as you know, in Romania and progressing with that. And finally, - although from the European Union was lower than our provision, and we could release certain part of the provision in the second quarter, we still have to pay in the dimension of EUR 160 million, and we paid a first tranche now in September, and we will pay the remainder tranche in the fourth quarter.

And therefore, I would say from the long or midterm guidance in terms of improved cash conversion, which we will prove with that new portfolio and all the measures which we are taking in the midterm, you will not see the full flavor yet in 2020. And to your second question, on Crop.

Yes, on Crop, we have seen a good growth in this year, also in the first nine months. As I said before, the Consumer Care part was very resilient on personal care, home care, but also Crop.

So Crop grew by just double digits after the first nine months. We see it geographically even stronger outside of Europe.

We see some innovation trends in this area as well. We traditionally come, of course, from crop protection, but we also more present in adjuvant spaces.

And then also into adequate -- yes, to summarize, to increase the effectiveness of plantation, meaning if you take a square yard or whatever area of dimension you take, to increase the yield out of that area over a period. And that means that you, particularly for us, growth regulation or climate resistance, crop protection, these are the areas where we have continued innovation and maybe in one of the next times, I can give you a little bit more detailed briefing on what those are in precise, but that's the area where we are actually pretty strong, and we have invested into that also, we have our own greenhouse in Frankfurt at the innovation center and there's a lot coming out in this space now and we're proffering from that and also in the short-term future.

So the core of my question was the dicamba anti-drifting agent, is that a meaningful sales level within your agricultural sales?

The what…

The anti-drifting agent for dicamba, preventing dicamba drifting into neighboring fields, which is, I believe, one of your products. Is that a meaningful sales number within your echo chemical sales?

Yes. Honestly, we would have to come back to you.

I would say, let's do this by a separate follow-up. I cannot tell you about the significance of it just on [Technical Difficulty].

Although I went, that wasn't so strong at that time.

I just wanted to come back to -- on the side of Consumer Chemicals, the resilience of your margin. Can you remind me the magnitude of the differential between the consumer and the industrial side, please?

And the second question in relation to Catalysis. I understand that you have a product offering which is strong, et cetera, but what do you attribute the resilience of your sales to considering that several competitors reported double-digit declines in the third quarter?

Are you -- do you believe that you're taking shares in this market? Do you see this as sustainable?

And also, still related to Catalysis, could you give a sense of what sales potential you will be able to extract from your Deutschland catalyst facility, please?

I hope I got all the questions. Let me start with Care and the dimensioning of consumer facing and industrial applications.

Traditionally, and this is the same organically, I mean, internally from an organizational standpoint or reporting standpoint also externally, when we speak about consumer business, we speak about Personal Care, Home Care and Crop, right? And the dimensioning of that would be north of -- more than half of the business of total of Care.

But actually, in the industrial part, besides the Lubricants, Construction, Aviation and so on and so forth, you also have a Paints and Coatings business, yes, which maybe from the technology backbone is closer to the industrial space, but actually, in the Care Chemicals arena with Paints and Coatings, we also more go to the consumer-facing paint application, so architecture, deco. And while -- in Additives, we also have a Coating segment, this is more the highly specialized technical industrial applications.

And therefore, if you really look at consumer-facing, it is actually more than half. It's more in the dimensioning of two thirds of the Care Chemical arena, which are really going into consumer-facing industries.

The second question, I understood, was our -- yes, as I said it before, I mean, we're happy that you also bring it here the peer comparison of our performance. That's how we should be measured.

And in Catalysis, we have been outperforming in the first six months and also look not bad with minus 1% in Q3 in the Catalysis space. The main reason here is that we have probably in the market -- or let's say, we have a very comprehensive portfolio.

We are not strongly into a single market. We are not strongly exposed to emission control automotive applications.

We have several fields of applications. We have -- also, you're totally right, like, phthalate-free propylene catalyst recently launched, a nice assortment of more sustainable catalysts.

And therefore, I think the combination of the width of our portfolio of the comprehensiveness, the specialized character, so not exposed to too much commoditized applications and then the innovation and sustainability differentiation factors are the reasons why our portfolio is performing the way it does and did perform and will perform. And then on your last question, you were asking about, I think, our announcement about the Deutschland investment.

Well, yes, listen, first, I mean, we -- as you could see, we really struggle in this volume decline in market pretty much in the historic core market of North America and Europe. Yes, that's where most of the deviation came from, from a country side or region perspective.

But in Asia Pacific, we were up 2% after nine months, and in China, even 10%. So as you know, we have, in our 5-pillar strategy, a clear focus on China because we believe that for the midterm and long term, the future of our company and the future of specialty chemical industry and chemical industry will be decided mainly in that region.

And therefore, we have been investing in that region, and that actually also -- we took into [Technical Difficulty] with reporting the results as we did for nine months with the increase in China and in Asia. And the Deutschland investment is very simple, focusing on purpose made propylene such as PDH and other ways, where we are particularly strong, but where China has particularly by far the biggest market share and the most activities from anywhere over proportional growth are happening.

And that's why we did the investment here. And despite as you know we already have propylene facility in U.S.

as we had some [Technical Difficulty] in the beginning. We're ramping that up.

We're approaching breakeven by maybe end of next year or -- by end of next week and then we see now -- from the demand standpoint, we also see the necessity to have more and then we need to be close in one of the strongest growing, appetizing and investing market for purpose made propylene in China. I will not and cannot give you a detailed guidance what the magnitude of that investment is, but what you can see is in our midterm guidance on the growth of Catalysis, this is included and it's -- of course, also biofuel investment is included.

But also this stronger presence of Catalysis in China is a part of the core strategy to deliver the growth, midterm guidance of Catalysis, which we have announced.

I had a couple, if I can. To the first question, I'm sorry to come back to the Catalysis guidance, but I wasn't -- I just wasn't clear on it and it's probably my mistake.

So every year since you bought [Technical Difficulty], you had fixed step-up in Q4 and you're saying that revenue is not a problem sequentially and yet you can see here an absence of that massive step-up in typical terms, somewhere between 500 basis points to 1000 basis points. So I'm a bit of loss as to understand why and I know that question came up already, so apologies.

Second question was a simple one. You've relaunched the Pigments process at disposal, I just wondered if you could give us an idea as to where we are with that time table when you say relaunch?

Has that just happened, for example?

Of course. So back to the Catalysis.

Hello?

So I will proceed answering the question. So your first question was about Catalysts in Q4.

The magnitude of quarterly performance in top line and EBITDA is a combination of factors. One is definitely the commercialization of projects in that quarter, is that really then the takeoff and is that then commercialized in that quarter.

So that gives you the sales dimensioning. As I said, we should see a slight growth opportunity in Q4 year-on-year in that regard on the top line.

The other factor is -- the second factor, for example, is how much did you actually then produce in that quarter? How much are you utilizing your assets?

And here, from a COVID-19 pandemic, we have been balancing the production better in -- or differently in this year, also in Q3, Q4, et cetera. So whether you produce strongly in Q4 and then also the question is how big is your Q1 demand, right?

So you could have a very strong -- you're right, super strong step-up in EBITDA margins, but that would correspond to a higher inventory for Q1 demand. And we are very careful that we don't see Q1 getting back to normal, and there is no more COVID-19 after 31st of December, and therefore, this utilization factor in Q4 is also not playing that strong.

And thirdly, there is other aspects, as I said, also license income, et cetera, which play a role in EBITDA margin. And the combination of the three factors, give you what I have said before in the guidance, the reality why we believe -- yes, compared -- let's talk about the run rate EBITDA BI, which was before exceptional item, which was around 19.7% after nine months.

That's something which we should be able to repeat in Q4, but I would not see the significant upstep or step-up from that because the normal -- the other factors, which you could have, we will not have. To your second question on the Pigments process, well, as I said before, we have -- in March, April, where we initially planned the marketing or launch of the marketing campaign, we have not done that at that time because, again, epidemic turned pandemic and the marketing timing was, according to textbook, not the perfect timing, but there was a second reason as well.

We needed to give Pigments some time to mitigate COVID-19 impact and take its own measures. We've been speaking all the time about the 600 position and the CHF50 million savings, and I kept on pronouncing that this goes to the continuing business.

We also had and have an efficiency program in Pigments, where we've provided more than CHF20 million in the first quarter and discontinuing, which is ramping up the EBITDA month-by-month. And that's a very important value accretion driver, of course, specifically important in these difficult times.

And that was the second reason why we have postponed the timing in the marketing of -- or the launch of the marketing. We have now restarted and launched the marketing process again.

We are collecting a potential buyer universe. It's still wide and deep.

So there is high interest. There is private equity.

There's strategic interest and other interest in the market. And we are collecting that.

We are going through the process now. The process with the difficulty of physical visits also will be a bit longer than normal.

I mean we will take that time to give the buyers also the insight into the business and into the full potential here because we believe and strongly see that potential. And then what we will see is that we will turn into probably mid of next year or before that, where we could potentially, if the value is right, see a signing, and then depending on who the buyer is, is it strategic, is it private equity, we could proceed to closing potentially depending on regulatory processes towards the end of next year.

Yes I just wanted maybe some help in understanding the -- can you maybe help us understand the split of Natural Resources sales by different end markets, which like oil, mining, what else is in that business? And how big is it?

And also, the same thing for Care Chemicals. I heard you say the consumer-facing markets are more than 50%, but it would be useful if you were to let it into Personal Care, Consumer Care, Home Care and Crop, et cetera, just to get some flavor.

The sort of last question was we've been hearing this commentary about preparing for rightsizing now from start of this year. Why is it still not formalized as a process?

Are you waiting for something? Is it to do with the fact whether you are waiting for [Technical Difficulty] to do or is it just the process itself, it takes time because it feels like we've been hearing it now for two or three quarters, but it still doesn't seem to have been formalized.

Okay. Well, done, that was at least in fact four questions into the round.

But fair enough. So on the Natural Resources mix, let's start from there.

We have three business areas, right? Oil & Mining Services.

Then we have the Functional Minerals, and then we have the Additives. The Oil & Mining Services are going into three end markets into oil, mining and refining businesses, while oil being the dominant one.

The functional minerals going into 2 big applications and then a few smaller ones, the biggest one being foundry, automotive-related mainly, but the biggest one, purification. Purification, again, a bit more consumer-related than the other piece, which I also said purification was positive after nine months.

And then in Additives, you have a couple of end markets. The biggest is plastics, but that's not the normal plastics, which you might think of.

The majority of that is very sophisticated plastics for E&E and special applications going also into the space of a digitalized world, where you want to have autonomous driving sensors, high camera resistancy, mechanical recycling in that part. The second part in Additives is Coatings, which is more the high-tech industrial coating.

And the third part, also in Additives you have a consumer-facing area, which also goes into more adhesion and hygiene application. And then if you put all together, so the weight in Natural Resources is roughly that the Oil & Mining Services is a little bit less than half of the whole Natural Resources business.

While within oil and mining, the dominant part is oil. Then the Function Minerals makes a little bit less than a third, and the Additives part makes a little bit less than Functional Minerals of the total.

And back to Care Chemical and your question, as I said before, purely from a consumer definition, when we talk about the way we report, it will be north of 50% on consumer. If we also include the consumer-facing elements of the industrial side, it's more like two thirds.

The biggest one in that whole arena is the Personal Care segment. But I will not give more -- I cannot give more split than I just mentioned.

Then you had a question about the rightsizing and also about M&A. On the rightsizing side, no, there is no program -- problem, and we're not waiting on anything.

With the full year results in February, we were already announcing that we started a progress -- or program to define the rightsizing dimensioning and what we want to do and how we want to do it. Let's keep in mind that we have based on our CHF6.5 billion sales and turnover in 2019 on a total level, with Healthcare Packaging, Masterbatches and Pigments, we basically divest almost a third of the business.

But actually, it stands for much more of the complexity. If you think about amount of customers, logistical model, amount of plants, it's more than that 30% or 33%.

And therefore, rightsizing means to, yes, of course, to avoid remnant costs in a more focused Clariant, but it also means to adjust the operating model to take advantage of the simplicity and also to do more -- to focus the activities and not just to refocus the workforce. So that is the reason why it takes some time to define that, but that was always the plan, and that's not a surprise because the biggest -- first biggest divestiture was in July 1 with Masterbatches, but we have a couple of transitory service agreements still running.

So it means you have to have the back office still in place to support that sold business and Pigments we haven't even sold yet. So the timing of the adjustment process as a result of the right saving depends on the divestiture, not the closing date, but the completion date of the transitory service agreements.

And there we're in total perfect timing. The only thing is that we say, okay, we need to give some more details, of course, also to the market.

And we plan to do that with a communication. Initially, I said we do this with the full year results in February next year.

I believe that we could probably a little bit earlier, maybe before end of the year, already give an update with a little bit more of the dimensioning of that rightsizing program. And finally, to your at least underlying question of M&A, no, we're not waiting for anything there.

I would say we have our clear priorities right now. The number one is really to fight off this unprecedented time COVID-19, to really fight it off and show the resilience of our specialty portfolio with a couple of strong program execution.

Second one is then to bring these three core business areas to their full potential and towards the midterm targets. That's the second priority we're working on.

And the third one is then to run the divestitures, accrete in value back to Clariant for strengthening our balance sheet and improving our opportunities to -- for investments and also rightsizing the company, as we just talked about. And in all these priorities, of course, we are actively monitoring opportunities on the market also for inorganic growth.

And it might be that we come up with something fast or it might not be, we will communicate if we are at that stage, and we have the ability because our balance sheet is super strong. Already now, it is at the levels of precrisis.

And we will -- with all our programs, we will even expand it even more that capability and that option. And if we find something very interesting on an inorganic side, we will step up and come forward.

But there's nothing ahead of us tomorrow.

Ladies and gentlemen, this concludes today's conference call. The Investor Relations team remains available for any further questions you might have.

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

Thank you. Bye-bye.