In the past business year, Clariant was able to significantly increase its growth and absolute EBITDA before exceptional items, thus achieving the highest sales and profitability since the portfolio transformation. Chief Financial Officer Patrick Jany explains how this was made possible, how the »new Clariant« is positioned, and why the company remains an interesting investment opportunity.

1.1. Business performance summary for 2017

Clariant reported Group sales of CHF 6 377 million in 2017 which reflects 9% growth in local currency as well as in Swiss francs. The strong sales expansion was driven by higher volumes and supported by the Kel-Tech and X-Chem acquisitions in North America as of 1 October 2016 as well as by the full consolidation of the Süd-Chemie India Pvt Ltd joint venture as of 1 April 2017. Organically, the sales grew by a strong 6% in local currency.

From a regional perspective, sales growth was most pronounced in Asia, the Middle East & Africa and Europe in 2017. In Asia, demand was strongest in China, Southeast Asia and Japan. Sales in North America grew while Latin American sales were flat, however, showing signs of improvement in the second half of 2017.

The EBITDA margin before exceptional items increased to 15.3% from 15.2% in the prior year. The EBITDA before exceptional items in absolute value was CHF 974 million, which corresponds to an increase of 10% in Swiss francs versus the previous year. The profitability improvement was attributable to the positive developments in all Business Areas.

Operating cash flow declined to CHF 428 million mainly due to temporarily higher cash out for one-off costs and higher net working capital as a result of brisk demand late in the fourth quarter of 2017 and the anticipated strong demand in the first quarter of 2018, especially in Catalysis.

1.2. Profit and financial situation

1.2.1. Continued sales growth attributable to higher volumes, acquisitions and full consolidation of joint venture

In 2017, group sales surged by 9% in local currency as well as in Swiss francs against the previous year to CHF 6 377 million (2016: CHF 5 847 million). The strong performance was driven by higher volumes in all Business Areas as well as by the acquisitions in the U.S. as of 1 October 2016 and by the full consolidation of the joint venture in India as of 1 April 2017. Sales increased organically by a strong 6% in local currency for the year. The strongest organic sales growth was reported in the third quarter, primarily due to an acceleration in demand in the Business Area Catalysis and the good volume growth in Care Chemicals.

1.2.1.1. Sales progression driven by improved demand

Sales in the Business Area Care Chemicals improved by 8% in local currency as well as in Swiss francs. The notable sales development was supported by both the Industrial Applications as well as the Consumer Care businesses. In Catalysis, the weak environment began to recover throughout 2017 and sales grew by 13% in local currency (14% in Swiss francs), with an excellent organic sales expansion of 7% in local currency. This improvement was driven by higher volumes in all Business Lines. Natural Resources sales advanced by 14% in local currency (15% in Swiss francs). The acquisitions in Oil & Mining Services in North America increased sales by 11%. Sales in Functional Minerals grew solidly while Oil & Mining Services reported good single-digit sales growth despite the continued uncertain market trend in the oil business with operating expenditures still being a major consideration for customers. In Plastics & Coatings, sales expanded by 5% in local currency (6% in Swiss francs), reflecting attractive sales progression in all Business Units.

1.2.1.2. Absolute EBITDA momentum continues in 2017

Clariant’s gross margin decreased slightly from 30.2% in 2016 to 29.8% in 2017. This development is the result of pricing pressure in some businesses and a slight initial delay in passing on raw material price increases.

Clariant’s EBITDA before exceptional items climbed by 10% in Swiss francs (9% in local currency) to CHF 974 million (2016: CHF 887 million). The corresponding EBITDA margin before exceptional items rose by 10 basis points from 15.2% to 15.3% to the highest level recorded in the past eight years.

The increase in absolute EBITDA before exceptional items reflects the enhanced profitability in all Business Areas. In Care Chemicals, the EBITDA before exceptional items continued to advance (4% in local currency; 5% in Swiss francs) while the absolute profitability improvement in Catalysis was most pronounced (23% in local currency; 24% in Swiss francs). Natural Resources also rose (3% in local currency; 4% in Swiss francs) amid an uncertain market trend and a correspondingly challenging pricing environment in Oil & Mining Services. In Plastics & Coatings, the improvement (5% in local currency; 5% in Swiss francs) was realized despite a strong comparable base.

The improvement in the EBITDA margin before exceptional items was primarily attributable to higher profitability in Catalysis, reflecting the strong top-line sales improvement. In Care Chemicals, the EBITDA margin before exceptional items declined mainly due to maintenance shutdowns in various locations in the second quarter, the previously communicated ramp up costs for new capacities as well as a temporary delay in passing on raw material price increases in the first six months of the year. The slightly lower EBITDA margin before exceptional items reported in Plastics & Coatings compares well to a strong result in the same period last year.

Clariant’s exceptional items in 2017 amounted to CHF 161 million (2016: CHF 102 million). Restructuring, impairment and transaction-related costs (CHF 180 million) include costs for efficiency programs which were initiated to further streamline business processes (CHF 37 million), an impairment charge (CHF 16 million) and one-off costs (CHF 127 million) which include charges generated by the preparation and filing activities for the cancelled merger with Huntsman.

In 2017, the operating income (EBIT) decreased to CHF 496 million (2016: CHF 512 million) as a result of higher exceptional items.

The negative financial result improved to CHF 59 million from CHF 174 million in 2016 primarily as a result of gains on the sale of securities and interest savings due to the repayment of the EUR Bond in January 2017 as well as changes in the debt profile. Income before taxes increased to CHF 437 million (2016: CHF 338 million) and the net income after taxes rose by 15% to CHF 302 million (2016: CHF 263 million), supported by the continued expansion in absolute EBITDA and lower finance costs.

With regard to the performance in 2017 and the prospect of further progression in 2018, Clariant’s Board of Directors has decided to propose an increased distribution of CHF 0.50 per share for 2017 to the general assembly. The corresponding proposal will be presented at the 23nd Annual General Meeting on 19 March 2018.

1.2.1.3. Continued solid balance sheet

As of 31 December 2017 total assets decreased to CHF 8 229 million from CHF 8 365 million at the end of 2016, mainly due to the decrease in cash and short-term deposits.

Net debt remained stable at CHF 1 539 million at the end of December 2017, compared to CHF 1 540 million at the end of 2016. This figure includes current and non-current financial debts, cash and cash equivalents, short-term deposits and financial instruments with positive fair values reported under other current assets.

1.2.1.4. Long-term structured maturity profile secures solid liquidity structure

In the year 2017, Clariant’s financing structure was again on a very sound level. The company has a broadly diversified maturity structure of its financial liabilities with a long-term focus reaching until 2026 and continues to be able to secure this funding with favorable terms.

Current financial debts decreased to CHF 567 million at the end of December 2017 from CHF 957 million at the end of December 2016. A bond issued in 2012 in the amount of EUR 500 million and a bond issued in 2011 in the amount of CHF 100 million reached maturity and were repaid. A bond falling due in 2018 in the amount of CHF 250 million was reclassified from non-current to current financial debts.

The agreement for a CHF 500 million five-year multi-currency Revolving Credit Facility (RCF), which was signed in December 2016, was extended for another year until December 2022.

004 Debt Maturity Profile per 31 December 2017 in CHF m

¹ Financial instruments with positive fair values reported under other current assets

1.2.1.5. Operating cash flow hampered by working capital development and exceptional items

Cash flow before changes in net working capital increased to CHF 759 million from CHF 730 million in the previous year.¹

Changes in working capital including provisions amounted to CHF –230 million in 2017 (2016: CHF –18 million). The ratio of net working capital to sales increased from 18.6% to 20.1%.

Cash flow from operating activities declined for the first time in four years to CHF 428 million compared to CHF 646 million in the previous year due to higher net working capital and temporarily higher cash out for exceptional items such as one-off costs.

005 Cash flow 2017 in CHF m

Cash flow from investing activities advanced sharply to CHF 65 million (2016: CHF –772 million). This figure was mainly influenced by the capital expenditure decrease to CHF 248 million (2016: CHF 297 million) and due to the full consolidation of Süd-Chemie India Pvt Ltd (SCIL). SCIL is treated as a business combination without consideration which resulted in a positive result of CHF 58 million (2016: CHF –421 million). Free cash flow which equates to operating cash flow after capital expenditures and investments in intangible assets declined to CHF 149 million (2016: CHF 310 million).

Cash flow from financing activities came in at CHF –826 million (2016: CHF 411 million). The decrease reflects the repayment of financial debt.

1.2.2. Business Areas

1.2.2.1. Care Chemicals

• Continued strong growth in both Consumer Care and Industrial Applications
• EBITDA margin before exceptional items hampered by ramp up costs, maintenance shutdowns in the second quarter and some delay passing on raw material price increases in the first six months of the year

Sales in the Care Chemicals Business Area rose by 8% in local currency as well as in Swiss francs in the full year 2017. Most regions achieved very good sales growth with Asia, the Middle East & Africa and Europe increasing sales at double-digit growth rates while North America grew in single-digits. Sales in Latin America reflected a negative sales development amid a difficult economic environment mainly seen in the first half of the year which, however, showed an improving trend in the second half of the year.

Consumer Care delivered good mid-single-digit growth with contributions from all three Business Lines: Personal Care, Home Care as well as Crop Solutions. The Industrial Applications business also performed solidly, with the exception of the Aviation business which was flat compared to the previous year.

The EBITDA margin before exceptional items for the full year 2017 decreased to 18.4%. This decline was primarily due to the previously communicated ramp up costs for new capacities, the maintenance shutdowns in various locations in the second quarter as well as some delay in passing on raw material price increases in the first six months of the year.

For 2018, Care Chemicals expects continued solid sales growth. Clariant continues to focus on the strong market demand for innovative and sustainable solutions. For example, Bluemidin™, an innovative Active Ingredient launched at the end of 2017, protects the skin from the blue light emitted by devices such as mobile phones, TVs and various types of screens which individuals are constantly exposed to. The blue light induces clear and visible signs of fatigue such as eye puffiness and dark circles around the eyes which Bluemidin™ can help alleviate.

1.2.2.2. Catalysis

• Strong top-line improvement supported by the full consolidation of the Süd-Chemie India Pvt Ltd Joint venture as of 1 April 2017
• High EBITDA margin before exceptional items reflects the strong top-line sales improvement

In 2017, sales in the Catalysis Business Area rose by 13% in local currency and by 14% in Swiss francs. The full consolidation of the Süd-Chemie India Pvt Ltd joint venture in the second quarter added 6% to the sales growth in local currency for the full year 2017. All Business Lines contributed to the excellent organic sales expansion of 7%. The strong sales improvement in the second half of 2017 benefited from a demand upswing in Asia, Europe as well as in the Middle East & Africa. Sales in North America and in Latin America remained comparatively volatile.

The EBITDA margin before exceptional items increased to 25.8% mainly reflecting the strong top-line sales improvement. Throughout 2017 Clariant upgraded its outlook for Catalysis as the business began to accelerate. For 2018, we anticipate robust growth in Catalysis driven by Clariant’s portfolio strength, innovation capability, global footprint and partnerships as well as driven by the supporting underlying recovery in the Catalysis business environment.

In terms of innovation, Clariant has taken a further step towards the commercialization of bio-ethanol, and the related licenses and enzymes. A new Business Line Biofuels & Derivatives has been set-up and will be part of the Business Area Catalysis from 2018 onwards. Clariant will invest in a new full-scale commercial plant for the production of cellulosic ethanol from agricultural residues using the sunliquid® technology. The plant is anticipated to deliver the first batch of product in 2020.

1.2.2.3. Natural Resources

• Sales growth driven by Functional Minerals, organic growth as well as the acquisitions in Oil & Mining Services in an improved but still challenging oil market
• EBITDA margin before exceptional items weighed down by the current price consciousness of the oil market

In the Natural Resources Business Area, sales rose by 14% in local currency and by 15% in Swiss francs in 2017. Organic growth excluding the acquisitions in the Oil & Mining Service business reflected a 3% improvement in local currency facilitated by the continued expansion in Functional Minerals and the commencement of a recovery in the Oil & Mining Service business.

The Oil & Mining Services business, excluding the acquisitions, reported single-digit sales growth, despite the fact that the market trend in the oil business continues to remain uncertain with operating expenditures still a major consideration for customers. The business was negatively influenced by market headwinds at the beginning of 2017; however, in the second half of the year the beginning of a recovery pared the weak start and augmented organic sales growth for the full year.

Sales in Functional Minerals expanded at a mid-single-digit growth rate in local currency, with all segments contributing to the business’s growth. The positive development was most pronounced in Asia, notably China which reflected a strong sales development, as well as in Europe and in the Middle East & Africa.

In 2017, the EBITDA margin before exceptional items decreased to 15.3%, weighed down by the current price consciousness of the oil market and weaker demand in the Refinery business which was observed throughout the entire year.

In 2018, Functional Minerals expects to continue growing in emerging markets in particular. The Oil & Mining Services business anticipates growth and continuing improvement in the course of 2018 with attractive long-term industry dynamics.

1.2.2.4. Plastics & Coatings

• Sales expansion within all businesses
• Solid absolute EBITDA margin before exceptional items benefited from the positive effect of high capacity utilization as well as ongoing solid top-line growth

For the full year of 2017, sales in the Plastics & Coatings Business Area expanded by 5% in local currency and by 6% in Swiss francs. In Masterbatches, all regions showed attractive sales expansion, with strong sales growth in Greater China, North America and Europe as well as from the Middle East & Africa region. Sales growth was notable in Engineering and High Temperature Resins masterbatches and compounds and in the Packaging segment.

Sales in Pigments rose in particular in Asia, driven by China and India. On a Business Line level, Plastic Applications and Special Applications reported continued attractive sales growth and are largely attributable for the sales improvement. Additives continued to reflect very strong sales growth which was supported by all Business Lines and also by solid demand in almost all regions, China and North America in particular.

The EBITDA before exceptional items rose by 5% in local currency to CHF 388 million despite a strong comparable base. Plastics & Coatings continued to benefit from the positive effect of high capacity utilization as well as ongoing strong top-line growth.

Plastics & Coatings continues to develop solutions and products for the needs of its end markets. These solutions in combination with the focus on differentiated business steering are expected to continue to enhance growth opportunities in the businesses and to further contribute to the overall performance of Clariant.

1.3. Outlook

1.3.1. Continued progression in growth, profitability and operating cash flow generation

Clariant successfully increased sales and absolute EBITA before exceptional items in 2017 by focusing on the requirements of its customers and by providing them with enhanced and sustainable solutions to enable them to create further value. Clariant was able to make further progress in becoming an even more profitable and resilient specialty chemicals company. This was achieved as a result of the stringent execution of our strategy by means of innovation, sustainability, portfolio repositioning and seizing growth opportunities.

Clariant expects the good economic environment in mature markets, which represent a high comparable base, to continue. Emerging markets are expected to be supportive with Latin America showing signs of a recovery.

For 2018, Clariant is confident to be able to achieve growth in local currency, as well as progression in operating cash flow, absolute EBITDA and EBITDA margin before exceptional items.

Clariant confirms its mid-term target of reaching a position in the top tier of the specialty chemicals industry. This corresponds to an EBITDA margin before exceptional items in the range of 16% to 19% and a return on invested capital (ROIC) above the peer group average.

1.4. Stock market 2017

The share price development started modestly in 2017 with a share price of CHF 17.57 in January. At the beginning of 2017, the Clariant share price mirrored the general market trends.

The Clariant results for the full year 2016 and the first quarter 2017 exceeded expectations and were well perceived by the financial markets. The share price advanced to CHF 20.18 towards the end of April as a consequence of upgraded analyst recommendations.

In May 2017, the announcement of a planned merger of equals with Huntsman propelled the share price up to CHF 21.59. The initial market reaction was positive and the majority of analysts increased their price targets based on the potential value creation proposed by the merger. During the summer months, the market echo remained positive although political uncertainties in the U.S. and geopolitical tension with North Korea weighed down the share price temporarily.

As a result of the announced merger, Clariant’s shares received increased attention from the financial markets. On 20 July 2017, the activist investor vehicle White Tale announced it had purchased a 10 % stake in Clariant with the purpose of opposing the planned merger. The share price maintained its positive direction based on high trading volumes and strong quarterly results. On 19 September 2017 the share price reached CHF 23.68 and White Tale announced that their stake in Clariant had reached 15 %.

In October 2017, White Tale crossed the 20 % threshold and it became increasingly clear that the two-third majority of the represented votes required by Clariant for the approval of the merger at an Extraordinary General Meeting was unlikely to be obtained. On 27 October 2017, Clariant and Huntsman announced the termination of the planned merger with a mutual agreement. The share regained early losses and closed at CHF 25.30. In the last period of the year, the share price continued to increase and closed at its highest level of CHF 28.00 on 27 December 2017. The Clariant shares closed at CHF 27.25 on 29 December 2017.

Clariant has been included in the Dow Jones Sustainability Index since September 2013 which reflects the continued progress made in various fields of sustainability as well as the outstanding, solid performance which has been achieved in economic, environmental and social dimensions. In March 2017, Clariant was selected to be included in the Swiss PerformanceIndex (SPI®) Select Dividend 20 Index basket. Since the end of November 2017, Clariant has also been included in the MSCI Equity Switzerland Index. Being included in the (SPI®) Select Dividend 20 Index, an index consisting of the top dividend delivering Swiss stocks, and in the internationally renowned MSCI Equity Switzerland Index are confirmation of the success of Clariant’s strategy and its positive performance result.

1.4.1. Dividend payment

Clariant aims to increase or at least maintain dividends. Since 2011, Clariant increased the dividend by an average of 9% per annum. The continued improvement in performance allows the Board of Directors of Clariant Ltd to propose a dividend distribution of CHF 0.50 per share for the 2017 financial year at the Annual General Meeting on 19 March 2018. This proposal reflects an increase of 11% compared to the previous year. The distribution is proposed to be made from the capital contribution reserve that is exempt from Swiss withholding tax under certain conditions.