Performance – Clariant’s first brand value – encompasses value creation regarding financial, intellectual, and manufactured capital. By reporting achievements in the fields of innovation and technological advances, digitalization, product stewardship and sustainable chemistry, procurement, and production, Clariant broadens its review of results beyond financial performance, underscoring its holistic understanding of value creation.

In 2018, Clariant increased its sales, profitability, and operating cash flow, thus achieving higher sales and profitability levels, in line with the Group’s positive outlook.

1.1. Business performance summary for 2018

Clariant reported Group sales of CHF 6 623 million in 2018 compared to CHF 6 377 million in 2017. This corresponds to 5% growth in local currency and 4% growth in Swiss francs, which was supported by both higher volumes and pricing. The 5% organic growth in local currency was supported by positive contributions from all Business Areas.

All regions contributed to the sales growth in local currency. The expansion was most pronounced in Latin America. Sales in Asia also increased, bolstered by a particularly positive development in China and India. Sales in North America continued to grow despite the strong expansion during the same time period in 2017. In Europe and the Middle East & Africa, sales advanced in single digits. A slowdown was observed in some markets in the last quarter.

The EBITDA before exceptional items rose by 5% in Swiss francs and reached CHF 1 018 million, compared to CHF 974 million in the previous year. The corresponding EBITDA margin before exceptional items advanced to 15.4%. The profitability improvement was attributable to the positive growth in Care Chemicals and Catalysis.

In 2018, operating cash flow increased significantly by 24% to CHF 530 million from CHF 428 million in the prior year. This increase is due to the improved absolute EBITDA and net working capital management.

1.2. Profit and financial situation

1.2.1. Continued sales growth attributable to all Business Areas

In 2018, Group sales rose by 5% in local currency and 4% in Swiss francs against the previous year to CHF 6 623 million (2017: CHF 6 377 million). The impact of the full consolidation of the joint venture in India as of 1 April 2017 only had an impact in the first quarter of 2018. The organic sales growth persisted at a high level throughout the entire year driven by increases in all Business Areas. Sales were driven by 2% volume growth and by a 3% price increase. Organic sales increased by a strong 5% in local currency for the year.

001 SALES BY REGION in CHF m

¹ Middle East & Africa

002 COST STRUCTURE BY CURRENCIES 2018 in %

¹ LC = Local currency

1.2.1.1. Sales progression driven by all Business Areas

Sales in the Business Area Care Chemicals improved by 7% in local currency (6% in Swiss francs). The notable sales development was supported by both the Consumer Care and the Industrial Applications businesses. In Catalysis, sales grew by 11% in local currency (12% in Swiss francs), with an excellent organic sales expansion of 8% in local currency. This improvement was driven, in particular, by higher Syngas demand. Natural Resources sales advanced by 8% in local currency (3% in Swiss francs). The Oil & Mining Services business exhibited double-digit sales growth in local currency, despite the continuingly challenging market trend in the oil business. Sales in Functional Minerals continued to grow solidly at a single-digit rate in local currency. In Plastics & Coatings, sales expanded by 1% in local currency (1% in Swiss francs), against a very strong comparable base.

1.2.1.2. Positive absolute EBITDA momentum continues in 2018

Clariant’s gross margin softened slightly from 29.8% in 2017 to 29.2% in 2018. This development is largely the result of a less favorable product mix.

The EBITDA before exceptional items rose by 5% in Swiss francs and reached CHF 1 018 million compared to CHF 974 million in the previous year. The corresponding EBITDA margin before exceptional items rose by 10 basis points from 15.3% to 15.4%.

The increase in absolute EBITDA before exceptional items reflects the enhanced profitability in most Business Areas, with the most pronounced improvement in Care Chemicals at 9% in Swiss francs and 6% in Plastics & Coatings. In Catalysis, EBITDA before exceptional items increased by 1% in Swiss francs while in Natural Resources the absolute profitability was 14% lower.

The improvement in the EBITDA margin before exceptional items was primarily attributable to higher profitability in Care Chemicals, reflecting the top-line sales improvement, operating leverage, and an improved product mix. In Plastics & Coatings, the favorable progression was mainly attributable to Additives and Masterbatches and some income from Stahl. As anticipated, the slightly lower EBITDA margin before exceptional items in Catalysis was due to the change in product mix. The EBITDA margin decline in Natural Resources largely resulted from the unabated price consciousness of the oil market throughout the year as well as a lower contribution from Functional Minerals’ Purification business compared to the previous year.

Clariant’s exceptional items in 2018 amounted to CHF 147 million (2017: CHF 161 million). Restructuring, impairment, and transaction related costs (CHF 93 million) include costs for efficiency programs that were initiated to further streamline business processes (CHF 14 million), and transaction related costs (CHF 79 million). Exceptional items also include a loss from the disposal of activities (CHF 54 million).

In 2018, the operating income (EBIT) increased to CHF 546 million (2017: CHF 496 million) as a result of the Group’s improved profitability but also due to lower exceptional items.

Income before taxes increased to CHF 465 million (2017: CHF 437 million) and the net income after taxes rose by 18% to CHF 356 million (2017: CHF 302 million), supported by the continued expansion in absolute EBITDA as well as lower one-off costs and a lower effective tax rate.

With regard to the performance in 2018, Clariant’s Board of Directors has decided to propose an increased distribution of CHF 0.55 per share for 2018 to the general assembly. The corresponding proposal will be presented at the 24th Annual General Meeting on 1 April 2019.

1.2.1.3. Continued solid balance sheet

As of 31 December 2018, total assets decreased to CHF 7 981 million from CHF 8 229 million at the end of 2017 mainly due to the decrease in current assets driven by lower trade receivables.

Net debt decreased to CHF 1 374 million at the end of December 2018, compared to CHF 1 539 million at the end of 2017. 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 2018, Clariant’s financing structure persisted at a very sound level. The Group maintains a broadly diversified maturity structure of financial liabilities with a long-term focus reaching until 2028. This funding has been secured at favorable terms.

Current financial debts decreased to CHF 529 million at the end of December 2018 from CHF 567 million at the end of December 2017.

On 25 September 2018, four certificates of indebtedness were issued with a total amount of EUR 265 million (CHF 300 million).

003 DEBT MATURITY PROFILE PER 31 DECEMBER 2018 in CHF m

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

1.2.1.5. Operating cash flow boosted by working capital development and lower one-off costs

Cash flow before changes in net working capital rose to CHF 802 million from CHF 759 million in the previous year.

Changes in net working capital, including provisions, amounted to CHF – 55 million in 2018 (2017: CHF – 230 million). The ratio of net working capital to sales decreased from 20.1% to 17.3%.

Cash flow from operating activities increased to CHF 530 million compared to CHF 428 million in the previous year due to the improved absolute EBITDA and net working capital management.

004 CASH FLOW 2018 in CHF m

Cash flow from investing activities declined to CHF – 132 million (2017: CHF 65 million). There were no notable acquisitions in 2018 or 2017 and capital expenditures decreased to CHF 237 million (2017: CHF 248 million). Free cash flow, which equates to operating cash flow after capital expenditures and investments in intangible assets, increased to CHF 273 million (2017: CHF 149 million).

Net cash flow after investing and financing activities was positive by CHF 132 million (2017: CHF – 342 million). This allowed to further reduce the net debt of the Group.

1.2.2. Business Areas

1.2.2.1. Care Chemicals

Care Chemicals sales grew by 7% in local currency and 6% in Swiss francs. Both Consumer Care and Industrial Applications delivered solid growth, which was supported by positive contributions from all three Consumer Care Business Lines and most Industrial Applications businesses.

Most regions achieved good sales growth in local currency with North America and Asia advancing at double-digit rates, Latin America and Europe in single digits. Sales in the Middle East & Africa, the smallest region, reflected a negative growth.

The EBITDA margin before exceptional items increased to 19.0% from 18.4% in 2017 primarily as a result of the good top-line growth, operational leverage, and an improved favorable product mix.

Consumers are increasingly looking for personalized products based on natural ingredients. Clariant’s Genadvance^® range of forward-looking hair care technologies consists of three silicon-free hair conditioning ingredients each targeting different hair issues: Genadvance^® Life – for thin hair, Genadvance^® Repair – for damaged hair, and Genadvance^® Hydra – for dry hair. Genadvance^® Hydra, e.g., is based on an entirely naturally derived, ethically sourced ingredient, that is biodegradable 2 – 3 times faster than traditional products. This product thus not only meets the market’s rising focus on naturality as well as safety and health, but also the demand for more recyclable, sustainable application formats and products made from renewable sources, while not compromising, and in some cases even improving, the performance.

1.2.2.2. Catalysis

In 2018, sales in Catalysis rose by 11% in local currency and 12% in Swiss francs. The strong organic sales expansion of 8% in local currency was primarily attributable to Syngas but also due to good progression in Specialty Catalysts.

The solid sales development benefited from good demand in Asia, the Middle East & Africa, and Latin America while sales in Europe and North America remained comparatively volatile throughout the year.

The EBITDA margin before exceptional items decreased to 23.1% from 25.8% in 2017 mainly as a reflection of the product mix, which remained largely unchanged throughout the year. The proportionally higher sales from Syngas compared to last year and the ramp-up in Biofuels & Derivatives had a dampening effect on the margin.

Clariant offers a process to remove high levels of NO_x from the air with its EnviCat^® NO_x SCR catalyst. NO_x is the product of fossil fuel combustion and industrial processes. It also contributes to the formation of smog, ground level ozone, acid rain, and other hazards. Air purification catalysts such as EnviCat^® therefore meet the market’s rising focus on safety and health. Furthermore, Clariant’s emphasis on resource efficiency and sustainability in tandem with future regulations is reflected in the progress made on the construction of the first large-scale commercial sunliquid^® plant in Romania for the production of cellulosic ethanol.

1.2.2.3. Natural Resources

Sales in Natural Resources increased by 8% in local currency and by 3% in Swiss francs.

The Oil & Mining Services business exhibited double-digit sales growth in local currency in a slowly improving environment. Sales in Functional Minerals grew at a single-digit rate in local currency, primarily driven by the Foundry business.

In 2018, the EBITDA margin before exceptional items declined to 12.8% year-on-year. This largely resulted from the persistent price consciousness of the oil market as well as a lower contribution from Functional Minerals’ Purification business compared to the previous year.

The Oil & Mining Services activities address the increasing requirement for intelligent electronics with the VERITRAX™ real-time chemical management system. VERITRAX™ turns data into actionable information that is key to maintaining production and improving operational efficiency and reliability. Functional Minerals’ Purification business for edible oils addresses the nutritional demand linked to the growing population and higher standards of living, while the low emissions technology for the foundry industry focuses on and anticipates the intensification of regulations and sustainability.

1.2.2.4. Plastics & Coatings

The Plastics & Coatings Business Area increased sales by 1% in local currency and in Swiss francs in 2018.

In Masterbatches, the sales growth in local currency was underpinned by increased demand in Latin America and Asia. Sales increased mainly in Consumer Goods and Automotive. Moreover, Healthcare Packaging also reported an attractive sales development in 2018. Sales in Pigments remained flat, but still grew in Latin America and Asia driven by China and Japan. On a Business Line level, Coatings and Plastics reported continued sales growth. Additives sales remained very strong, supported by all Business Lines and also by solid demand in almost all regions, North America, China, and Europe in particular.

The EBITDA before exceptional items in absolute value rose by 6% in Swiss francs to CHF 412 million despite a strong previous year. The profitability improvement was primarily attributable to Additives and Masterbatches and some income from Stahl.

Additives develops products such as halogen-free flame retardants, which are patented and provide environmentally compatible protection compliant with the demanding fire safety standards. In addition, Healthcare Packaging offerings include desiccant canisters that contain sorbent components that help maintain drug stability and prolong shelf life inside Healthcare Packaging containers.

1.3. Outlook 2021

1.3.1. Above market growth, higher profitability, and stronger cash generation

Clariant is a focused and innovative specialty chemical company. We aim to provide more than just customer-oriented products. We strive to provide the best customer experience and fast, reliable customer fulfillment in the industry by setting the right priorities.

Our aim is to make our customers more successful. We therefore constantly focus on timely and rewarding innovations, products that are difficult to imitate, sustainability, agility, and ethical practices. We will only be satisfied with the highest level of excellence in every function within the Group. Our success will be realized through the execution of our strategy.

By 2021, Clariant intends to achieve above market growth, higher profitability, and stronger cash generation.

1.4. Stock market 2018

1.4.1. Clariant share price development 2018

After a strong increase in 2017, the share price development in 2018 generally followed the market trends and was impacted by corporate announcements and changes in the shareholder structure.

At the beginning of January 2018, the share price traded in the range of CHF 26.07 to CHF 29.38 amid break-up speculations along with White Tale’s request for a strategic review of Clariant. On 25 January 2018, SABIC purchased the 24.99% stake from White Tale, which prompted some analysts to adjust their valuation to a stand-alone basis (no M&A or break-up premium) and to reflect the fact that White Tale considerations were no longer relevant. On the announcement day of the change in main shareholder, the share price dropped from CHF 28.38 to CHF 26.07.

On 13 February 2019, Clariant released the full year 2018 results and the guidance for 2021. The results were in line with market expectations and analyst recommendations remained largely unchanged, so that the Clariant share price remained largely stable.

In March and at the beginning of April 2018, the global stock markets vacillated between gains and losses based upon the debate between the U.S. and China on the potential introduction of tariffs. The Clariant share price decreased during this period to a low point of CHF 22.33, in line with the chemical sector. The price recovered amid an improved market sentiment as investors focused on the start of the first quarter reporting season. Some analysts reduced their target prices based on expectations of a slower EBITDA development in 2018. The Clariant share price declined due to the slight EBITDA margin miss (20 bps versus consensus) in the first quarter results. This weakness was in line with global stock markets and the chemical sector, which was impacted by the oil price trend and the continued trade tensions between China and U.S.

On 25 July 2018, the first half year 2018 results came in slightly below consensus, which was somewhat disappointed by the further margin decline in the Natural Resources Business Area and lower than expected cash flow generation. The share price declined from CHF 23.82 to CHF 23.10 on the reporting day; however, it began to recover again the following day.

The Clariant share price, along with the market in general, was weighed down by the dampened market sentiment amid concerns over a Turkish currency crisis in August.

On 18 September 2018, the financial market initially reacted positively to the announcement of Clariant’s strategy update and the Governance Agreement, with the share price increasing from CHF 24.04 to CHF 25.93.

005 CLARIANT SHARE PRICE DEVELOPMENT 1 JANUARY – 31 DECEMBER 2018 in CHF

During October 2018, the Clariant share price dropped due to general market concerns on the global economy, tariffs, supply chain issues, and raw material prices, which lead to a sell-off in the market.

The overall perception of Clariant remained positive despite slightly lower than anticipated third quarter sales and a somewhat softer economic outlook for 2018, published on 31 October 2018. The share price increased from CHF 21.09 to CHF 21.71 on the reporting day. Clariant’s results were broadly in line with the trend seen in the chemical sector.

In November 2018, the disappointing earnings season and other geopolitical risks put pressure on markets, which also had a negative impact on the Clariant share price development.

The Clariant share price came under pressure in December 2018 in tandem with the chemical market and the Swiss stock indexes and closed the year at CHF 18.09.

Clariant has also been included in a number of notable indexes such as the MSCI Equity Switzerland Index. Clariant has also been part of the Swiss Performance Index Select Dividend 20 Index basket since 2017. This basket consists of the top dividend delivering Swiss stocks. Both these achievements are confirmation of the success of Clariant’s strategy and its positive performance result.

The inclusion of Clariant in the Dow Jones Sustainability Index, SXI Switzerland Sustainability 25^®, FTSE4Good Index Series, Euronext Vigeo Eiris Indices, and Ethibel Sustainability Indices (ESI) also reflects the continued progress made in various fields of sustainability as well as the outstanding, solid performance that has been achieved in economic, environmental, and social dimensions.

1.4.2. Dividend payment

Clariant aims to increase or at least maintain dividends. Since 2013, 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 0.55 per share for the 2018 financial year at the Annual General Meeting on 1 April 2019. This proposal reflects an increase of 10% compared to the previous year. The distribution is proposed to be made from the capital contribution reserve that is exempt from Swiss withholding tax.