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Edited Transcript of CLN.VX earnings conference call or presentation 25-Jul-19 1:00pm GMT

Half Year 2019 Clariant AG Earnings Call

Muttenz Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Clariant AG earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anja Pomrehn

Clariant AG - Head of IR

* Hariolf Kottmann

Clariant AG - Executive Chairman

* Patrick Jany

Clariant AG - CFO

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Conference Call Participants

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* Andreas Heine

MainFirst Bank AG, Research Division - MD

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Christian Faitz

Kepler Cheuvreux, Research Division - Equity Analyst

* Daniel Buchta

Bank Vontobel AG, Research Division - Research Analyst

* Geoffrey Robert Haire

UBS Investment Bank, Research Division - MD and Equity Research Analyst

* Ming Lee Tang

Exane BNP Paribas, Research Division - Analyst

* Peter Anthony John Clark

Societe Generale Cross Asset Research - Senior Analyst, Chemicals

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Clariant First Half Year 2019 Results Conference Call. I'm Sandra, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Ms. Anja Pomrehn, Head of Group Investor Relations. Please go ahead, madam.

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Anja Pomrehn, Clariant AG - Head of IR [2]

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Thank you. Ladies and gentlemen, good afternoon. My name is Anja Pomrehn, and I welcome you to Clariant's Half Year and Second Quarter 2019 Results Conference Call and Live Webcast. Joining me today are Patrick Jany, the CFO of Clariant; and Hariolf Kottmann, the Executive Chairman of Clariant.

The slides for today's presentation can be found on our website along with our media release. And I would like to remind the participants and listeners that the presentation does include forward-looking statements, which are subject to risks and uncertainties. The disclaimer can be found on Slide 2 in today's presentation, and you are encouraged to refer to it. The replay of the call will be available on the Clariant website for 30 days.

Patrick will guide you now through the results for the first half of 2019. And Hariolf then will provide details on the strategic direction and efforts Clariant is undertaking towards a more focused, high-value product portfolio.

And with that, I would like to hand over to Patrick for the half year results.

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Patrick Jany, Clariant AG - CFO [3]

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Thank you, Anja. Ladies and gentlemen, good afternoon. Today, we announced a number of news. We updated you on the planned transaction with SABIC, announced a focused portfolio strategy and communicated our half year results.

Let me start with the planned combination with SABIC in the area of high-performance polymers. Due to the current market conditions and after thorough due diligence, we have jointly decided with SABIC to temporarily suspend the planned transaction. To put it plain and simple, it is mainly a validation topic there, where under the current market conditions, we could not bridge the gap between the valuation a seller is expecting to receive and the consideration a buyer is willing to pay. It is a logical consequence of a disciplined acquisition process and the right decision to safeguard the best interest of our shareholders.

Although we are open to renewed talks as the situation evolves, it was for now the right decision to take and I'm sure that you expect no less from us, as there was concern in the market that multiples were high and Clariant would potentially overpay for the specialty business of SABIC.

As a result for the due diligence over the last few months, we also realized the synergies of combining our high-value Masterbatch business with the HPC business of SABIC were less than anticipated. We are therefore taking the decision to proceed with the divestment of the whole Masterbatch business unit in order to maximize value creation. Alongside the already announced divestment process for Pigments and the already signed divestment of Healthcare Packaging, we will generate significant value with the divestments and use the proceeds to enhance growth and return cash to shareholders.

This clarity on the portfolio allows us to now focus on our high-performing core areas of Care Chemicals, Catalysis and Natural Resources. The organic progression part of those businesses, as announced in September 2018, is the other major driver of value creation and is validated by a solid performance in the first half of 2019.

From a reportings perspective, these core businesses are now classified as continued operations and the Pigments and Masterbatch activities as discontinued operations. As it is, the third activity previously reported on the Plastics & Coatings is a high-performing business and has now been included in the business area, Natural Resources. Clariant's new reporting structure is outlined on Slide 3.

With the new portfolio and reporting structure, Clariant will benefit from a stronger focus on differentiated customer-specific products and offerings with attractive growth prospects and above-average value creation potential as can be seen already in the first half 2019.

Let us now move to the financial summary on Slide 4. Please note that figures discussed refer to continuing operations unless specifically noted otherwise. In the first half 2019, Clariant grew sales organically by 4% in local currency. Both higher volumes and pricing contributed to this expansion. The sales growth was mainly driven by the Business Area Catalysis and Natural Resources. The EBITDA after exceptional items was negatively impacted by the one-off CHF 231 million provision as a result of further development in an ongoing competition law investigation by the European Commission into the ethylene purchasing market. The EBITDA therefore decreased significantly to CHF 102 million.

From an operational performance perspective, excluding the effect of this one-off provision, EBITDA after exceptional items was CHF 333 million, down 2% year-on-year with a corresponding margin of 14.9%. The net result for the total group, including discontinued operation, was minus CHF 101 million versus CHF 211 million in the first half year 2018. Again, the net result was impacted by the one-off provision, as already mentioned, as well as by onetime project costs related to the carve-out of the discontinued operations. Looking at our operating cash flow for the total group, this rose by 11% to CHF 113 million.

Let us move to Slide #5 to look at the sales development. In the first half, Clariant delivered sales of CHF 2.2 billion. Sales grew organically by 4%, mainly driven by Catalysis and Natural Resources. Higher prices positively impacted sales by approximately 3%, while volumes contributed 1% to the expansion.

In the second quarter 2019, sales grew by 3% in local currency driven by 3% higher prices. We maintained volumes at a stable level, despite production interruptions in Care Chemicals. Sales were around CHF 1.1 billion with a negative foreign exchange impact of 4%. Similar to the development in the first half, the main growth contributors were Catalysis and Natural Resources.

On Slide 6, you see the regional sales development for both the first half as well as the second quarter of the current year. In the first half, almost all regions contributed to the sales growth in local currency. Sales in Latin America were the strongest by 10%, followed by the Middle East and Africa with 8%. In Asia and Europe, the sales development was in mid-single digits at 5% and 4%, respectively. However, sales growth in China was down 9%. North America reported a slight contraction of 3% due to a case of force majeure of a key supplier in Q2.

[The second quarter], sales growth was again strongest in the Middle East and Africa and Latin America. Both regions were in the mid-teens, followed by Asia, which expanded by 8%. In contrast to the first quarter, sales in China stabilized in Q2. On the other hand, Europe was softer, while sales in North America were down 6% as a result of the mentioned force majeure case. This matter, however has been resolved in the meantime.

Reviewing the figures of the business areas in more detail. Let us start with Care Chemicals on Slide 7. First half 2019 sales remained unchanged in local currency year-on-year. Consumer Care sales increased at a good mid-single-digit range, with positive contributions from all 3 business lines, Personal Care, Home Care and Crop Solutions in particular. Personal Care delivered a good mid-single growth rate, while the sales expansion in Crop was in the double digits. Industrial Applications sales, however, were softer. This was related in part to the weaker economic environment, which affected industrial lubricant as well as the challenging comparison base in the Aviation business. Excluding Aviation sales, Care Chemicals advanced by about 2% in local currency.

On a regional level, in Europe and Asia, Care Chemical sales grew in the mid-single digits in local currency, while Latin America was almost flat. North America, on the other hand, was hampered by the prolonged plant shutdown of a key supplier.

Sales in the second quarter of 2019 decreased by 3% in local currency and by 8% in Swiss francs due to the above-mentioned force majeure. Excluding this temporary impact, the sales development in Care Chemicals was in a solid mid-single-digit range, supported by continuous expansion in Consumer Care, in particular, Crop Protection, which grew at a mid-teen range.

The EBITDA margin in the first half softened to 17.6% from 18.2% year-on-year as a result of the temporary negative impact from the raw material disruptions in North America, which mainly had an impact in the second quarter. Consequently, in the second quarter, the EBITDA margin declined to 15.1% from 18.3%.

Moving on to Catalysis on Slide 8. Organic sales in the Business Area Catalysis expanded by 8% in local currency in the first half of 2019. This was mainly driven by the robust Syngas demand. On a regional level, the sales progression predominantly benefited from a good demand in Asia, Europe and North America, while sales remained comparatively volatile in the Middle East and Africa. In the second quarter of 2019, sales climbed by an excellent 12% in local currency and by 11% in Swiss francs, which is very encouraging, given the already robust sales development in the first quarter.

The half year 2019 EBITDA margin decreased from 21.5% to 19.4%, primarily due to the lower profitability in the second quarter, which was attributable to temporary capacity outages in Asia as well as the less favorable product mix. Against a strong comparison base, the Q2 EBITDA margin after exceptional items decreased to 17.5%, primarily due to a fire at a manufacturing facility and a higher pass-through precious metal price increases. As in previous years, margins in Catalysis can fluctuate significantly over the quarters. However, we can confirm that the fundamentals for Catalysis remain positive for the current year given our current order pipeline.

Let us move on to Slide 9. Natural Resources, which now also includes Additives. First half 2019 sales rose by 6% in local currency. The Oil & Mining Services business delivered excellent mid-teen sales growth with positive contribution from all 3 business lines: Oil Services, Mining Solutions and Refinery. Sales in Functional Minerals rose at a solid single-digit rate in local currency with a continuing strong purification business but some softness in the foundry business due to the weak automotive environment.

Additives sales decreased at a single-digit rate year-on-year against a very strong comparison base. The softer consumer electronics market paired with a subdued automotive sector was reflected by more cautious demand.

In the second quarter, sales in Natural Resources climbed by 5% in local currency. Similar to the development in the first quarter, Oil & Mining Services sales continued to expand in the mid-teens year-on-year, which is a satisfactory development.

Function Minerals also contributed to the business areas growth, while sales in Additives were weaker. Additives not only faced a record-high comparison base but also encountered challenging business dynamics, primarily within the automotive, electric and electronics market, which are in the midst of a changing technological cycle.

In the first half year 2019, the EBITDA margin in Natural Resources rose to 15.6% from 15.4% in the previous year. This was the result of stronger top line growth in tandem with a more optimized cost base in the oil & mining business. This remarkable progression was able to offset the weaker development in Additives.

In the second quarter, the EBITDA margin increased significantly to 15.7% from 14.1% last year, mainly due to the focus on value-added projects within the Oil Services activity but also supported by an uplift in the mining business. Hence, as anticipated, the first half of the year not only reflected the improvement in the margin versus the first half of the previous year despite the seasonality of the Refinery business but also an improvement versus the second half of 2018.

Let us take a look at the EBITDA development after exceptional items on Slide 10. The continuing operations EBITDA after exceptional items was negatively impacted by the one-off provision of CHF 231 million as a result of the further developments in the outgoing (sic) [ongoing] competition investigation by the European Commission. Therefore, the EBITDA decreased significantly to CHF 102 million compared to CHF 341 million in the previous year.

In terms of operational performance and excluding the effect of this provision, the continuing operations EBITDA after exceptional items only slightly decreased by 2% to CHF 333 million corresponding to a margin of 14.9%.

The profitability in Natural Resources improved as a result of the stronger top line coupled with a more optimized cost base in Oil & Mining Services. This, however, could not offset the temporary negative influences in Care Chemicals and Catalysis in the second quarter. Overall, the EBITDA, operational performance showed the resilience of our portfolio.

Similarly, Slide 11 reflects the same evolution in the second quarter 2019, with EBITDA from continuing operations decreasing significantly to minus CHF 82 million versus CHF 160 million in the previous year due to the one-off provision of CHF 231 million for the already mentioned ongoing competition law investigation.

Consequently, excluding the effect of this provision, the EBITDA from continuing operations decreased to CHF 149 million corresponding to a margin of 14%. In terms of operational performance and excluding the effect of this provision, profitability advanced significantly in Natural Resources due to the focus on value-added projects within Oil Services activity. This, however, could not offset the temporarily softer margins in Care Chemicals and Catalysis due to the one-off capacity outages and idle subsidy cost in Additives. All those negative factors were limited to the second quarter.

On Slide 12, we can see the development of our net result as well as the operating cash flow. First half 2019 net result for the total group, including discontinued operations, was minus CHF 101 million versus CHF 211 million in the first half 2018. This result in turn was negatively impacted by the one-off provision and by project costs related to the carve-out of the discontinued operations. The net result, excluding the one-off provision, was CHF 130 million. Operating cash flow for the total group rose by 11% to CHF 113 million from CHF 102 million in the previous year driven by favorable development in inventories as well as lower income tax paid.

With this, I hand over to Hariolf.

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Hariolf Kottmann, Clariant AG - Executive Chairman [4]

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Yes, ladies and gentlemen, good afternoon. At the end, a few remarks from my side. Please turn to Slide 14. As part of the portfolio upgrade announced in September 2018, Clariant will continue with the divestment of the Pigment business and has decided to also divest the entire Masterbatch business, including both standard and high-value Masterbatches.

These divestments are expected to be concluded unchanged by end of 2020. The proceeds from the divestments will be used: firstly, to invest in innovations in technological applications within the core business areas; secondly, to strengthen Clariant's balance sheet; and thirdly, to return capital to shareholders.

With the new portfolio and reporting structure, Clariant will benefit from a stronger focus on differentiated customer-specific products and offerings with attractive growth prospects and average value -- above-average value potential. With this more streamlined portfolio, Clariant will be able to intensify the focus on customer experience and fast, reliable customer fulfillment as well as on the development of innovative and sustainable products and applications. This will generate a competitive advantage for customers and hence, enable Clariant to realize above-market growth, higher profitability and stronger cash generation.

This brings me to the outlook on Slide 15. Clariant is a focused and innovative specialty chemical company with the aim of making our customers more successful. Despite the current challenging environment, Clariant expects its continuing businesses to achieve above-market growth, higher profitability and stronger cash generation based on our focused, high-value specialty portfolio.

With that, I turn the call back to Anja. Thanks a lot.

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Anja Pomrehn, Clariant AG - Head of IR [5]

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Thank you, Hariolf. Thank you, Patrick, for taking us through the presentation and for all the elaboration. I now ask the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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The first question comes from Peter Clark, Societe Generale.

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Peter Anthony John Clark, Societe Generale Cross Asset Research - Senior Analyst, Chemicals [2]

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I've got 3 linked ones. You mentioned that there was a difference of valuation on the SABIC JV. Previously, you gave the impression that you were pretty close to having valuation similar in terms of the multiples, I think, you're putting on the businesses. Just wondering what went wrong in that. Was it something to do with the collapse in performance perhaps of the SABIC business with the auto electronic focus and they wanted the same absolute cash? I don't know. The second question linked to that, you talk about temporarily suspended with the talks. I mean from the first point, it seems quite difficult to reconcile, so if you just have a comment about what you mean by temporary. And then lastly, within -- 18 months ago, you were saying that the business required the Plastics & Coatings for the cash flow and it wasn't strong enough on its own really to lose that cash flow. Obviously, now you're pretty much doing that, and your cash flow is less. So just wondering how you reconcile that one as well.

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Patrick Jany, Clariant AG - CFO [3]

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Thank you, Peter. Indeed, I think from -- starting with the -- your question on the valuation. You know that we announced the JV structure back in September 2018, and it was based on assumption on both sides of the businesses based on the summer 2018 performance. I think in the meantime, with all due diligence and the market conditions as well evolving, there has been a different evolution of the business as expected and therefore, a divergence of views on valuation that happened. And that is the main reason really of not continuing the project right now, as we just see that it's best for both companies not to do the deal right now.

When we see it right now in this temporary suspension is certainly reflecting the fact that we need a few topics to be cleared and this topic of conditions -- market conditions and performance to resolve. And that is a topic, which we'll continue to address between both companies and see whether the future brings a narrowing of positions or not. But it's something we cannot guide now from a time perspective. We take a pause in the project and we let things evolve consequently.

And that leads us to the fact that we just continue on our strategy to focus on Care Chemicals, Catalysts and Natural Resources, which have actually increased the cash performance. I think Plastics & Coatings was the main provider of the cash flow in the last 2 years, which is why we also decided at the time back in 2015 to keep it in the first place. I think this cash generation of Plastics & Coatings has certainly peaked. They are not, I would say, alone in the world, and the economic environment we just mentioned is also applicable to those activities. And I think the cash generation there is flattening out, while actually the cash generation of Care Chemicals, Catalysis and Natural Resources now is actually picking up.

Back in 2016, '17, we had more issues with Catalysis and followed by the weakness in the oil market at the time. Now all those activities are coming back. Catalysis is doing very well. The oil business is performing better and better quarter-by-quarter as we reported. And Care is fairly solid. So from that point of view, we do have a stronger cash flow profile of the continuing business looking forward and the decreasing contribution of the Plastics & Coatings business, which leads us to the fact that now isn't a good moment to actually continue to implement the strategy we you devised in 2016.

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Operator [4]

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The next question comes from Andreas Heine, MainFirst.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [5]

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I would like also to come back to this temporary suspension of deal. Looking on how you are intending to structure the business that you put your specialty Masterbatches and Additives into -- combining with the SABIC business into a joint venture and seeing now that you sell the total Masterbatches and elaborated that the synergies are not that great, would that then mean that you would look to acquire the total business? I would think that the balance sheet is not strong enough. Or if you go to continue this negotiation, it would end up in being a share deal. That's the first question. And then some operational. On Care Chemicals, you were referring to having an issue with the supply in the U.S. You heard from competitors that they, in general, had quite a tough and weak business in North America. Could you outline whether you have seen this for your Care Chemical business? And my understanding is from your comments that you should assume in, let's say, our models that the margin swings back to what we have seen in recent quarters as of Q3. Is that the right understanding on Care Chemicals? And on OMS, you do not report separately this business. But referring to what you said, is that then that you achieve what you were trying to do that every half year you see an improvement? So the second half '18 was better than the first half of '18 and now the first half of '19 was also better than the second half of '18? These are my questions.

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Patrick Jany, Clariant AG - CFO [6]

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Okay. Thanks, Andreas. Yes, indeed -- I mean you're exactly right. In September 2018, we specified we would look at a joint venture structure by combining the high-performance polymer business of SABIC with our Additives business and the high-value Masterbatch business. Now when we did the due diligence and we looked at the actual overlap of activity, we realized the synergies would probably be less than we thought, which therefore independently now from the temporary suspension of that project leads us to the fact to exclude it from this construction and to actually pursue the sale of the whole Masterbatch activity because we just believe we'll have much higher value creation by divesting the whole activity of Masterbatch than keeping one part and selling only part or the other part, right? So that is, I think, a very clear sentiment, which comes from the lower synergies than expected and from the higher appreciation of potential interest of the total Masterbatch activity than pieces of it. Now therefore, when we look at potentially continuing the discussion with SABIC, we indeed only talk about bringing together the high-performance polymer activity of SABIC with our Additives business.

As you might remember and we have consistently said during the project phase that, ultimately, both parties agreed that Clariant should be the 100% owner of that business. So I think that's something certainly, which I would expect should we continue and renew conversations that is still the framework. And therefore, we would seek to combine and have control of the HPC business of SABIC and Additives together.

On the question on the valuation and whether we'll push our balance sheet or force a share component, that precisely depends on balance sheet. And that you are back to square one, which is why we basically have decided to temporarily suspend the discussion. However, I would highlight that the disposals we are now doing will significantly strengthen our balance sheet and that we probably would expect to be debt-free at one point in time, which always gives you more financing flexibility for whatever kind of expansion you might think of and also probably has enough proceeds to forecast a return of cash to shareholders. But we'll talk about this when we are more down the road.

When we look at Care Chemicals performance, indeed, the performance was brought down by the weakness in the U.S., which was given or provoked by the force majeure we had. If you look at the Q2 margin decrease in Care Chemicals from 18% -- roughly a bit more than 18% to 15% in Q2, 2/3 of this margin deterioration were caused by the force majeure in the U.S. So that was absolutely the main driver. This has been resolved and you see actually our business in the U.S. being quite nice, particularly in the area of Consumer Care, so talking about Personal Care and Crop in particular, excellent development in the U.S.

So from that point of view, I don't think it's -- in our case, at least, not the weakness of the U.S. per se, but it was frankly because during 8 of the 12 weeks, our plant there did not run. It is now running again, and therefore, we'd expect Q3 to return back to a normal growth pattern, more normal margin pattern. So at least for 2/3 of the margin difference that was exclusively the force majeure. You always have some of other different factors explaining the difference, but I would not expect them to be too significant going forward. So I would expect a return to decent margins for Care Chemicals overall in Q3, Q4 looking forward.

So just unfortunate cumulation of events in Care Chemicals. If you look at Q1, it was Aviation. If it's Q2, it was this force majeure, which we highlighted, I think, by the end of Q1 that turned out to be probably double as long as we thought at the beginning, and therefore, the impact was higher than we thought. But those cases are now done. So if nothing happens further for that business, it should be returned to better visibility patterns looking forward in Q3, Q4.

Looking at the evolution of Natural Resources, very solid development on the whole oil & mining business. We have an excellent business development in mining, which we don't often highlight or not highlight often enough. And the oil business is back. The oil business is growing nicely. Overall, oil & mining is growing by mid-teens. Quarter-after-quarter, profitability is ramping up. As you rightly mentioned, we guide on a half year basis just always rather comparable quarter mix in this comparison, and we have achieved an increased margin compared to the second half of '18 and also, so both sequentially as well as previous year. And we would expect this evolution to continue when we look at Natural Resources in the old configuration without Additives.

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Operator [7]

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The next question comes from Nicola Tang, Exane BNP Paribas.

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Ming Lee Tang, Exane BNP Paribas, Research Division - Analyst [8]

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It's Nicola Tang from Exane BNP Paribas. I just wanted to follow up. Actually, it was the original question from Peter Clark at the beginning. One of the reasons for not divesting P&C in the first place was not just about cash flow but also about [orphan] costs. And I was wondering with moving Masterbatch -- the whole of Masterbatches to discontinued, whether we should expect big orphan costs? And then the second question was on this provision that you've taken for the European Commission case. I was wondering -- I appreciate there may not be a lot you can say. But why you've decided to take the provision now given the case was raised, I think, 2 years ago?

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Patrick Jany, Clariant AG - CFO [9]

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So looking at the year-end, cost was indeed always a topic, why we always highlighted that we wanted to acquire before we would sell business -- I mean like we did at the time with [switching and after the disposed] textile, leather and paper. That was the intent clearly as well now with the discussion with SABIC. There are different reasons we can do it right now. But I think it's not the reason not to continue in the right strategic path of focusing on the main value-add areas. And therefore, we continue with the endeavor to divest Pigments and Masterbatches. As you know, we already sold quite successfully the Healthcare Packaging business earlier this week.

And the question of remnant cost is a question that if you have more time, you can tackle them. So having prepared for that in the last few years, as you remember, we have announced this back in 2016. So we've had a bit of time to prepare the structure. We are now carving out both businesses. So on top of Pigments, which I think we talked about the carve-out back in Q1, we're now doing the same for Masterbatches, which allows you to have a clarity on the costs and allocate people and resources to those businesses and have them as well leave the company with the business itself because they work for this business. And if you look at the actual time of transitory service agreements, we count on having roughly 2 years to 2020, 2021 to have an adaptation of the central cost and therefore, avoid any remnant cost topic because with the natural fluctuation, and as I said before, allocating the right resources to those businesses, we can indeed now minimize those costs and do not expect to have remnant cost post-transitory service agreements, so talking now over the 2022 horizon.

Now when we look at the EU investigation, that's the case indeed, as you rightly mentioned, which we reported back in July 2017 and we've taken on the 25th of July 2017. And it's -- as typical in most cases, it's a very long investigation on which we cannot comment. It's still ongoing, but however, we have in the process received further evidence that now leads us to be able to do a quantification of these proceedings. And therefore, as we have the quantification possibility, we have to take a provision. And that's what we did to be fully transparent now by Q2. That's really all we can say. It's the ongoing investigation is still -- that's ongoing. Therefore, we cannot comment further.

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Operator [10]

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The next question comes from Christian Faitz, Kepler Cheuvreux.

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Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [11]

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A couple of questions, please. Where do you see cash flow developing this year? I.e., obviously, that's an H2 question. Second of all, the rechanged portfolio on a pro forma basis, what was discussed in the previous questions, how -- will your dividend policy change? How will your dividend be -- policy be looking ex the Plastics & Coatings activities?

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Patrick Jany, Clariant AG - CFO [12]

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So I think the cash flow evolution will be pretty similar between this year and previous year. We would expect cash flow to ramp up as usual in the second half. I think the cash flow generation profile of the group is unchanged, roughly speaking, which means the biggest part of the cash flow comes into the second half. We do have some separation costs, which are significant and will be even more significant in the second half. However, we will match them with -- over -- match them with the proceeds of the disposal we have just announced. So on that point of view, the overall cash flow for the group will be -- would actually be quite good by the end of the year of 2019. And if you look at the dividend policy, I would probably -- ultimately, the decision of the Board, but I would probably see it unchanged. We will have significant proceeds and booked gains through the disposals, which I would forecast for 2020, as we have guided for. And therefore, that will be already a separate topic, which we will tackle them when we have a quantification of those proceeds to see to which extent we'll return or not cash to shareholders.

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Operator [13]

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The next question comes from Daniel Buchta, Vontobel.

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Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [14]

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Three questions from my side, please. The first one on the impact you have seen in Catalysis. I mean, here, you had a very good quarter in Q2 with 12% organic growth. But nonetheless, I mean, the margins were soft and you mentioned again that the mix was rather Syngas-biased, while you were indicating before that petrochemical should become more important. Could you quantify a little bit more the impact you had from these one-off events and when the mix actually should change now in 2019? Then quickly, an update maybe on your Romania plant for biofuels. How is that doing, the investments? And also, is the process working stably as it should be as you guided before? And then the last one on your supply situation in U.S. I mean it seems that you are really highly dependent for ethylene oxide from one supplier. I mean is there a way how to overcome this risk of being dependent from one supplier? Or how is the situation there?

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Patrick Jany, Clariant AG - CFO [15]

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Yes. Thank you for your question, Dan. So yes, looking at the Catalysis and the impact on the performance in the first 2 quarters, indeed, we had a very nice sales development. But the margin is a bit lagging when you compare to previous year. But again, a word of caution here, as you know, quarterly margins for Catalysts are just there for reference, but really what counts is the sum over the whole year. But if you look now at the mix in the first half, indeed, it was still very much Syngas. This will start pickup in petrochemicals, which we expect to be very strong in the second half of the year. So we maintain our guidance for the whole year. Petrochemicals will gain in speed and be strong and will actually drive profitability.

The one-off effects in Q2 were that in the petrochemicals side, which came up, you had some significant proportion of Catalysts, which use precious metal, where the prices are higher. And those ones, we just pass through, so it's really margin dilutive. It doesn't really impact the profit per se, but you just have a higher [inbound] amount with the same margin because we only do the margin on the Catalysts and on the precious metal. So this has a pure technical dilutive effect, which I would not overdramatize. It happens, but it's all right. And the second effect was, as we shortly mentioned in our call, the capacity outage in China, specifically where we had a fire in one of our factories, which stopped production. So again, a bit of an unfortunate cumulation of events in Q2.

But overall, looking at the order pattern that we have in Catalysts, I think we can confirm our growth in the range of our typical guidance, 6% to 7%. We will have this growth by year-end, and we will also have a higher margin than previous year. So from that point of view, as usual, don't be too focused on the individual quarters of Catalysts. The full year figures will be there, and they will show an improvement in sales, as always guided, but also an improvement in profitability. So I would say very solid and continued solid development in Catalysis.

On your biofuels question, indeed, the process is still in run. We are having good success with potential interested parties because we remain being, in our view, one of the only ones who actually have a process which is operationally working in our final plan. So that is actually very well progressing on the -- on that front. And I would hope we will be surprised to have some license sales this year, even before we have our plant running.

On the investment itself on the plant, I think the investment itself is doing well. We are on track in terms of costs. I think we have had some delays here and there on permit. We'll have to see how this overall affects the time line or not, but from the project point of view, everything is under control.

Now going to Care Chemicals and our supplier in the U.S., indeed, it's -- Care chemicals has a high proportion of its sales being linked to ethylene, ethylene oxide, Europe being the only place where we actually do our own ethylene oxide. We are reliant on others in the other regions to provide us with that raw material. And that's a pipeline topic. So you are actually dependent on one supplier. You always have emergency cases by rail, railcars in the U.S. that just cannot handle the volumes we handle and on the prolonged basis of the cut-off we have this time because of this unplanned event at our supplier to really maintain production. So the typical contingency plans are in place. But during this half, a reliance here on one supplier, which is something we cannot expect in the short term.

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Operator [16]

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The next question comes from David Symonds, JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [17]

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This is Chetan Udeshi actually from JPMorgan. I had a few questions. First one, is there some sort of a fallout between the SABIC as a shareholder and Clariant post this sort of project where you guys couldn't disagree. And I'm just thinking whether there was some sort of bad feelings, which could mean that the 25% holding of SABIC could be under some sort of a discussion within SABIC. That's number one. Second question was why is it that you guys haven't reported the EBITDA and cash flow of discontinued operations separately. That's number 2 question. The third one was, you mentioned about the pass-through of precious metal prices in Catalysts. Can you tell us how much of that pass-through was the contributor to the 12% organic growth in Q3. And last question is on provision for the European Commission sort of investigation. Of course, this is probably -- I assume this is an estimate that you guys have come up with. It's not a sort of an agreed number. So realistically, when are we talking in terms of any potential cash out from that provision?

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Hariolf Kottmann, Clariant AG - Executive Chairman [18]

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This is Hariolf. Just let me make a short comment on your SABIC-related questions. Please take into your consideration that yesterday in our Board meeting in the presence of the 4 SABIC representatives, we had a very open and very collegial solid discussion about the current situation concerning the project. And we came to the conclusion, which was public this morning -- announced this morning from the SABIC side as well as from the Clariant side that we both agree to temporarily suspend the discussions on the project. Therefore, from the SABIC side, there are no tensions and no frictions in our relationship. We still -- and this is what I said many times, especially when Ernesto Occhiello came onboard, we really appreciated the support of Yousef Al-Benyan and of Ernesto Occhiello in specific.

When it come to -- came to the acquisition of the shares of White Tale, it was a strategic investment. It is a strategic investment from the SABIC side. And we are sure, and this is what I hear and what we hear from SABIC representatives in our Board as well as from the several meetings I had one-on-one with Mr. Yousef Al-Benyan, the CEO of SABIC, that this solid relationship is well on track. And we now give us just the time to reflect on the current situation to discuss a few more topics, which are currently unclear related to the project. And then we will continue with the discussion on many other areas. This was always mentioned by us that the relationship and the cooperation with SABIC not only focuses on this, let me call it, acquisition or transaction of the HPC business. SABIC is a large customer of Clariant and a very important customer for us in Catalysts. We have common ideas to further develop this business. Ethylene oxide is a key raw material for SABIC and it's a core raw material for us. Therefore, there are several discussions in this area as well as in Additives as well as in other areas. Therefore, there are no signals from the other side, and there is no intention from our side to this very solid relationship.

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Patrick Jany, Clariant AG - CFO [19]

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Following on, on your other questions, particularly the second one on the reporting. Typically, on the discontinued, and that's accounting standard, when we discontinue operation, we don't report on them separately because basically are no more part of your operations. They are summed up and you only show sales and net result. So we have sticked to that because those operational [progress] is sold. Healthcare Packaging is already signed and will leave the group by latest Q4 this year, and we will expect further dynamic development of our project, and we maintain the guidance that everything will be sold by the end of 2020. So it won't make too much sense now to report on those businesses and discuss the operational ups and downs of those businesses.

Now when we -- when -- to your question on the pass-through of Catalysis, it's an interesting question. Let me give you a little bit -- hopefully a bit of more detail on that and try to give some color on the margin impact. I think if you look at the pass-through of margin, it is typically not a very big topic for us, but when you cumulate in 1 quarter a lot of those sales, then certainly it has a certain impact. That's what we always say about those quarterly views on Catalysts. It's a little bit -- not always giving the right view and therefore, don't get disturbed by it. Look it on a 4-quarter view, and you have a very, very solid picture.

If you look at the single quarter, however, to give you a bit of color, typically, I would say that's probably 1/4 of this margin deterioration -- margin dilution, to put it like this, was driven by the raw material effect, so the precious metal effect. And the rest was several different elements, but the vast, vast -- biggest one of them was the capacity outage in Asia due to a fire, as we just discussed previously.

So I won't be able now to guide you [on the Q3] impact because it really depends on the single deliveries. But if you look at it from our order perspective independently in our, of course, scheduling of the deliveries for the full year, as I mentioned, and I repeat, will show a very nice growth in Catalysts and the margin progression compared to previous year. So we are very well on track on that business.

Now considering the EU investigation, clearly, it's something we cannot comment now on the timing of a final decision nor therefore on the cash flow impact of it. And therefore, we will keep you posted as we have done this quarter. As soon as we can do something, we'll talk about it, but for now, we cannot comment any further.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [20]

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Just a quick follow-up. Are those outages now resolved in both Catalysts and Care Chemicals?

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Patrick Jany, Clariant AG - CFO [21]

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Yes, absolutely. As I tried to highlight in the speech, all those one-offs are basically gone. They hit us more in April and May. And in June, we were -- mid-June, we were back on track on all those operations.

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Operator [22]

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(Operator Instructions) We have a follow-up question from Andreas Heine, MainFirst.

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Andreas Heine, MainFirst Bank AG, Research Division - MD [23]

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Yes, please, a couple of small ones. Effectively, the first is not small. The CEO position is now open. Maybe you can, Hariolf, give some more ideas how you will proceed or the Board will proceed to find a new CEO. And may I ask, it was said that it was for private reasons, but as it was yesterday and you mentioned that the supervisory board was yesterday, I would assume that it has to do with the decision not to proceed at this time with the SABIC deal. Could you put -- elaborate a little bit on that? The other smaller ones, maybe an update on the propylene -- polypropylene catalyst plant. Is that now fully operational and contributing positively to the EBITDA? And then you have reported pre-special items, after-special items, very detailed in this report. Will you continue to do so by segment? And the last, referring to the fire on catalyst. Is the impact of the fire, is that booked -- reported as special items of this CHF 4 million? Or is it a combination of pre- and after-special items? Maybe you can give some more details on that one, please.

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Hariolf Kottmann, Clariant AG - Executive Chairman [24]

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Yes, Andreas. First of all, talking about Ernesto Occhiello, Ernesto had this personal and private reason to ask for the possibility to leave the company at the end of July 2019. I think we have to respect his decision. And I can crystal clear assure you it has absolutely nothing to do with the development of our negotiations in the HPP project with SABIC. The Board had a 2-day session and the personal discussion and everything related to the CEO and other personal issues were already discussed and decided and accepted 2 days ago.

Therefore, we deliberately separated the message and the announcement regarding Ernesto from the announcement regarding project and our financials. The process now to find the new CEO is a standardized process. Clariant operates based on Swiss corporate governance. We do have a Nomination Committee with 2 representatives of SABIC and 2 representatives of Clariant. Since yesterday, we do have an Independent Lead Director. That's Eveline Saupper. She will be a member of this Nomination Committee as well. And I would assume in 1 or 2 weeks from now, we start officially the process of selecting a firm just to find suitable candidates within the next -- yes, assuming 3, 4, 5 months. Usually, such a search, you can expect 3, 4 months. I can guarantee and promise that I will do my very best to do this together with the members of the Nomination Committee and finally with the members of the Board as soon as possible.

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Patrick Jany, Clariant AG - CFO [25]

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Continuing with your other questions on the more operational topic. The polypropylene plant in Catalysts is now online. It is ramping up. I would say our goal for this year, as we communicated, is to achieve breakeven. It is our goal for the year. I think it's not yet totally there, but that's what we want to achieve this year. So we'll keep you posted on that. But we are running and the quality actually of the product is absolutely excellent.

Now if you look at the reporting, indeed, we chose to -- for 2019, to report both the before-exceptional and the normal EBITDA, so the so-called after-exceptional item, just to provide you with the transparency that we can compare things with the previous year in a simple manner. And therefore, if you were to -- we would continue to do that for Q3, Q4 just to give you the transparency that you need to analyze our figures. And I do respect the difficulty that you have now to readjust the base of calculation as we have continued in this continued concept.

That is not the easiest, but it was, I think, the right thing to do to ensure already swift change internally and externally to the new portfolio and focus everyone on the new company. But it has its complexity from the numbers point of view. And therefore, we are totally open to -- and we will provide further transparency to help you.

Now if we look at the impact of Catalysts and the fire in Asia -- in China, it is actually not in the difference between exceptionals and -- before and after in the Q2, the CHF 4 million we mentioned. The main part of this CHF 4 million charge is actually the remnant settlement of a customer complaint of a few years back. The actual impact is quite significant. It is -- I was mentioning before that the precious metal effect was 1/4 of the margin dilution of Q2. You can probably see that the vast majority of the remainder dilution is actually coming from the cost from the fire, which in principle comes from the product -- the interruption of production. The cost of remediation of this impact that you saw was booked for in Q2. That is in the before exceptional if you look at those.

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Operator [26]

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The next question comes from Haire Geoff, UBS.

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Geoffrey Robert Haire, UBS Investment Bank, Research Division - MD and Equity Research Analyst [27]

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This is Geoff Haire from UBS. Just 2 very quick questions. I was just wondering when you expect to be able to give us some financial targets for the continuing business. And as you said that the JV has been temporarily suspended or the talks have, could you give us a little bit more detail on what needs to happen for those talks to restart, please?

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Patrick Jany, Clariant AG - CFO [28]

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Yes. So I think we'll obviously now work on readapting the strategic plan we communicated on September 2018 to readapt it to the market condition and more importantly, to our portfolio. And we'll guide you on new targets as soon as possible, next quarter or later in the year. But I would say, it is a very, I would say, logical evolution of our guidance that we had previously that our core businesses of Care, Catalysts and Natural Resources continuing in unchanged manner. And as -- if you remember, we say that half of the value creation that we highlighted for the group was coming from those businesses and the other half from the transaction. So the one half is continuing as it is, that's Care Chemicals, Catalysts, Natural Resources, with a bit of additional flavor because we've got Additives, which has quite a nice growth plans next few years. So that is certainly reinforcing, let's say, the organic growth and profitability improvement on the core portfolio.

The transaction is temporarily suspended. So we cannot count it on the guidance anymore. That is true. On the other hand, we are continuing with the divestments. So from a pure cash proceeds economic profit, you'll have a different pattern because you indeed will realize some significant value add in proceeds from the divestments. And then we'll take it from there.

For the talks themselves, I would say that's a topic, obviously, we will take up with SABIC. So we cannot share too much. But as Hariolf was highlighting, there's the valuation topic we discussed at the beginning, and there are a few other issues we need to clarify. And we can see whether we can start discussion on a new base or not.

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Anja Pomrehn, Clariant AG - Head of IR [29]

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So ladies and gentlemen, this concludes now today's conference call. If you have any further questions, my colleagues and myself, we are available. So thank you very much for your participation today. And have a nice day, and goodbye.

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Operator [30]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.