In 2019, Clariant increased its sales and improved underlying profitability despite the challenging global economic environment.

1.1. Business performance summary for 2019

Clariant reported continuing operations sales of CHF 4.399 billion in 2019 compared to CHF 4.404 billion in 2018. This corresponds to an organic growth of 3% in local currency and a stable development in Swiss francs due to unfavorable currency fluctuations. The sales increase in local currency was driven by a progression in the Business Areas Catalysis and Natural Resources and was supported by both higher volumes and pricing.

Almost 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 India. Sales in the Middle East & Africa rose solidly while Europe grew slightly. Only North America reported a slight contraction.

Continuing operations EBITDA after exceptional items was negatively impacted by the one-off CHF 231 million provision, which was booked in the second quarter as a result of further developments in an ongoing competition law investigation by the European Commission into the ethylene purchasing market. Therefore, the full year 2019 EBITDA after exceptional items decreased significantly to CHF 461 million, compared to CHF 607 million in the previous year.

Excluding the effect of this provision, the continuing operations EBITDA after exceptional items rose by 14% to CHF 692 million, supported by strong profitability improvements in both Catalysis and Natural Resources, which more than offset the softer margins in Care Chemicals. The corresponding continuing operations EBITDA margin after exceptional items, excluding this provision, increased to 15.7% versus 13.8% in the previous year.

In 2019, operating cash flow for the total Group declined to CHF 509 million from CHF 530 million in the previous year. This decrease was primarily attributable to a lower net result, the net working capital development, and slightly higher capital expenditures.

1.1.1. Solid local currency sales progression in a challenging economic environment

In 2019, continuing operations sales rose organically by 3% in local currency and remained flat in Swiss francs at CHF 4.399 billion (2018: CHF 4.404 billion). The sales development was underpinned by 1% volume growth and by 2% higher prices.

001 SALES BY REGION in CHF m

¹ Middle East & Africa

002 GLOBAL COST DISTRIBUTION

¹ LC = Local currency

Care Chemicals sales declined a minor 1% in local currency and by 4% in Swiss francs. The good sales progression in Consumer Care could not fully absorb the softened development in Industrial Applications, which primarily resulted from a continued cautious end-market demand environment and a weaker aviation business. Sales in the Business Area Catalysis improved by 9% in local currency and 7% in Swiss francs as a result of positive contributions in both Petrochemicals and Syngas. Natural Resources sales rose by 4% in local currency and remained stable in Swiss francs, underpinned by the strong progression in Oil and Mining Services and a slight improvement in Functional Minerals. Additives sales were negatively impacted by the softer electrical and electronics sectors as well as the weak automotive markets.

1.1.2. Clearly improved underlying EBITDA after exceptional items in 2019

Clariant’s continuing operations gross margin improved to 31.3% in 2019 from 30.9% in 2018. This development is largely the result of a more favorable product mix.

Continuing operations EBITDA after exceptional items was negatively impacted by the one-off CHF 231 million provision, which was booked in the second quarter as a result of further developments in an ongoing competition law investigation by the European Commission into the ethylene purchasing market. As a result, the full year 2019 EBITDA after exceptional items decreased significantly to CHF 461 million compared to CHF 607 million in the previous year.

Excluding the effect of the one-off provision, the continuing operations EBITDA after exceptional items rose by 14% in Swiss francs to CHF 692 million compared to CHF 607 million in the previous year.

The increase in underlying continuing operations EBITDA after exceptional items reflects the enhanced profitability in most Business Areas, with a pronounced improvement in Catalysis at 15% in Swiss francs and 13% in Natural Resources. In Care Chemicals, the EBITDA after exceptional items contracted by 10%.

The improvement in the underlying continuing operations EBITDA margin after exceptional items, excluding the one-off provision, to 15.7% from 13.8% was primarily attributable to strong profitability improvements in both Catalysis and Natural Resources. Growth in Catalysis was attributable to solid sales expansion throughout 2019 and an improved product mix while Natural Resources benefited from local currency sales growth and a continued focus on more value-added applications in Oil Services. One-off effects in the second quarter and lower Industrial Applications sales were the primary reasons for the decline at Care Chemicals.

Clariant’s exceptional items for continuing operations in 2019 amounted to CHF 279 million (2018: CHF 132 million). Restructuring-, impairment-, and transaction-related costs (CHF 281 million) include restructuring expenses pertaining to its continuing operations in the amount of CHF 4 million, mainly pertaining to projects in Europe and transaction-related costs in the amount of CHF 46 million. Exceptional items include a gain from the disposal of activities not qualifying as discontinued operations (CHF 2 million). Additionally, a one-off provision of CHF 231 million was made for an ongoing competition law investigation by the European Commission.

In 2019, the continuing operations operating income (EBIT) decreased to CHF 165 million (2018: CHF 348 million) as a result of the provision of CHF 231 million. Excluding this effect, the continuing operations operating income (EBIT) increased to CHF 396 million.

The net result for the total Group declined to CHF 38 million from CHF 356 million in full year 2018. This decrease is largely attributable to the CHF 231 million one-off provision, the weaker operational performance in the discontinued operations, the carve-out costs of the discontinued operations, and higher income taxes.

Clariant’s Board of Directors has decided to propose an unchanged distribution of CHF 0.55 per share for 2019 to the general assembly. The corresponding proposal will be presented at the 25th Annual General Meeting on 30 March 2020.

1.1.3. Business Areas

1.1.3.1. Care Chemicals

Care Chemicals sales slightly decreased by 1% in local currency and were 4% lower in Swiss francs. Consumer Care sales increased due to a solid progression in Personal Care with a notable expansion in Crop Solutions. Industrial Applications sales developed less favorably due to continued cautious end-market demand and softer Aviation business.

Sales in Asia and Latin America reflected solid progress in local currency while sales in Europe also grew slightly. The development in North America was negatively affected by the force majeure of a key supplier in the second quarter, which has since been resolved.

The EBITDA margin after exceptional items for the full year 2019 softened to 17.6% from 18.9% due in part to the temporary negative impact from the raw material disruptions in North America and volume reductions in Industrial Applications resulting from weaker end-market demand.

For developments and achievements in 2019 concerning Care Chemicals, see the chapter on »How Care Chemicals Creates Value«.

1.1.3.2. Catalysis

In 2019, sales in Catalysis rose by a substantial 9% in local currency and by 7% in Swiss francs. Sales expansion was driven by a very good progression in Petrochemicals and a solid increase in Syngas.

The sales development benefited from double-digit growth in Asia and Europe and resilient demand in North America. Sales in the Middle East & Africa were comparatively volatile in 2019.

The EBITDA margin after exceptional items for the full year 2019 increased to 22.9% from 21.5%. Solid top-line growth throughout the year and the more significant sales contribution from Petrochemicals underpinned this improvement.

For developments and achievements in 2019 concerning Catalysis, see the chapter on »How Catalysis Creates Value«.

1.1.3.3. Natural Resources

Sales in the Business Area Natural Resources increased by 4% in local currency and remained unchanged in Swiss francs for the full year 2019.

The Oil and Mining Services business delivered low double-digit sales growth in local currency. Sales in Functional Minerals grew at a low single-digit rate in local currency, driven by the Purification business. Sales in Additives decreased at a high single-digit rate in local currency against a record 2018, owing to softer end-market demand.

In 2019, the EBITDA margin after exceptional items rose to 16.3% from 14.4% due to sales growth in local currency in tandem with a continued focus on more value-added applications in Oil Services as well as a more streamlined cost base in Oil and Mining Services. Additives largely mitigated the negative margin impact from lower volumes due to rapid and stringent cost control measures.

For developments and achievements in 2019 concerning Natural Resources, see the chapter on »How Natural Resources Creates Value«.

1.1.3.4. Discontinued Operations

As part of Clariant’s portfolio optimization, the Business Units Pigments and Masterbatches and the Business Line Healthcare Packaging, which operated as a part of the Business Unit Masterbatches, were restated for 2018 and reclassified to discontinued operations beginning with the First Half-Year Results 2019.

On 31 October 2019, Clariant sold its Healthcare Packaging business to Arsenal Capital Partners. The final total consideration of the sale amounted to CHF 310 million and the proceeds net of cash amounted to CHF 295 million. On 19 December 2019, Clariant announced that it had agreed to sell its entire Masterbatches business for USD 1.56 billion. This deal is expected to be closed by Q3 2020.

In the full year 2019, sales in discontinued operations (Masterbatches and Pigments) decreased by 2% in local currency and by 4% in Swiss francs. The businesses were negatively impacted by the global economic slowdown, mainly by softer demand in China and Europe as well as the weakness in the automotive industry.

For the full year 2019, the EBITDA after exceptional items decreased in absolute value year-on-year due to the sales contraction and higher one-time costs required by the carve-out of the discontinued operations.

1.2. Balance sheet, liability structure, liquidity, and cash flow

1.2.1. Continued solid balance sheet

As of 31 December 2019, total assets changed only minimally to CHF 7.990 billion from CHF 7.979 billion at the end of 2018 mainly due to the introduction of IFRS 16 Leases, the reclassification to assets held for sale of the Masterbatches and Pigments businesses and the sale of Healthcare Packaging business on 31 October 2019.

Assets held for sale and liabilities directly associated with assets held for sale amounted to CHF 1.305 billion and CHF 559 million, respectively, as of 31 December 2019. This mainly impacts the assets and liabilities pertaining to the activities of the discontinued operations.

Net debt remained almost unchanged at CHF 1.372 billion at the end of December 2019 compared to CHF 1.374 billion at the end of 2018. This figure includes current and noncurrent financial debts, lease liabilities (2019, in accordance with IFRS 16, CHF 246 million; 2018, in accordance with IAS 17, CHF 17 million), cash and cash equivalents, short-term deposits, and financial instruments with positive fair values reported under other current assets, including the part reported under assets held for sale and liabilities directly associated with assets held for sale.

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

In the year 2019, 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 on favorable terms.

Noncurrent financial debts decreased to CHF 1.485 billion at the end of December 2019 from CHF 1.711 billion at the end of December 2018, and current financial debts increased to CHF 587 million at the end of December 2019 from CHF 529 million at the end of December 2018. The decrease in noncurrent financial debts and the increase in current financial debts are mainly due to the combined effect of the reclassification to current financial debts of the EUR 150 million certificate of indebtedness maturing in April 2020, of the EUR 212 million certificate of indebtedness maturing in October 2020, and new bonds totaling CHF 200 million which were launched in April 2019. Additionally, a bond amounting to CHF 285 million issued in 2012 reached maturity on 24 April 2019 and was repaid. Due to the implementation of IFRS 16, finance lease liabilities presented as part of financial debts at the end of December 2018 were reclassified to separate lines in the balance sheet.

003 DEBT MATURITY PROFILE PER 31 DECEMBER 2019 in CHF m

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

1.2.3. Operating cash flow hampered by working capital development and one-time carve-out costs of discontinued operations

Cash flow from operating activities before changes in net working capital and provisions for 2019 was CHF 534 million, compared to CHF 802 million for 2018.

Net working capital, including provisions decreased by CHF 96 million in 2019 (2018: CHF – 55 million). The ratio of net working capital to sales slightly decreased from 17.3% to 17.2%.

Cash flow from operating activities decreased to CHF 509 million compared to CHF 530 million in the previous year.

004 TOTAL GROUP CASH FLOW 2019 in CHF m

Cash flow from investing activities declined to CHF – 254 million (2018: CHF – 132 million). Capital expenditures increased to CHF 273 million (2018: CHF 237 million). Free cash flow, which equates to operating cash flow after capital expenditures and investments in intangible assets, decreased to CHF 220 million (2018: CHF 273 million).

Net cash flow after investing and financing activities was negative at CHF – 195 million (2018: CHF 132 million).

1.3. Outlook

1.3.1. Focused portfolio to achieve above-market growth, higher profitability, and stronger cash generation

Clariant is a focused and innovative specialty chemical company that aims to grow above the market and to achieve higher profitability through innovation and sustainability. Clariant has significantly reshaped its portfolio through the divestment of Healthcare Packaging in 2019, the announced sale of Masterbatches, and the planned divestment of Pigments in 2020.

Clariant expects its continuing operations to achieve above-market growth, higher profitability, and stronger cash generation based on a focused, high-value specialty portfolio. For 2020, given the current sluggish economic environment and continued adverse foreign exchange conditions, growth will be more limited, and additional efficiency measures have been defined for each of the businesses to support the margin increase. These measures will lead to a workforce reduction of approximately 500 to 600 positions over the next two years and imply a cost base reduction of approximately CHF 50 million.

1.4. Stock market 2019

1.4.1. Clariant share price development 2019

In 2019, Clariant’s share price development largely followed general market trends, political events and uncertainties as well as corporate announcements. In January, Clariant’s share price started the year at CHF 17.90 and continuously improved throughout the month, reflecting the general market trend.

On 13 February, Clariant released the full year 2018 results and confirmed the mid-term guidance. The results were broadly in line with expectations, and the share price remained largely unchanged, moving from CHF 20.00 to CHF 19.75.

Clariant’s Annual General Meeting on 1 April was well attended, and all proposed agenda items and resolutions were approved. Clariant’s share price reacted positively and increased to CHF 21.35. On 23 April, the share price advanced to its highest level in 2019 of CHF 22.40.

The first quarter 2019 results, which were published on 30 April, missed market expectations due to lower profitability in the Natural Resources and Plastics & Coatings Business Areas. Consequently, the share price decreased from CHF 21.55 to CHF 20.95 on reporting day. After decreasing to CHF 18.20 at the beginning of June, the share price gradually started recovering again throughout the month. On 23 July, as a consequence of the announcement of the agreement to sell Clariant’s Healthcare Packaging business the prior day, the share price reached CHF 20.20.

On 25 July, the first half year 2019 results and the announcement of the suspension of the potential High Performance Materials cooperation with SABIC resulted in a share price drop. The numbers came in below the consensus, which was disappointed primarily by the profitability in Care Chemicals and Catalysis. The share price dropped to CHF 18.00 on reporting day from CHF 19.90, a negative reaction that was more pronounced than the overall subdued sentiment in the chemical sector. The sector weakness was primarily attributable to the continued global economic slowdown and persistent political risk around global trade uncertainties.

The Clariant share price also came under pressure from repeated profit warnings and forecast downgrades within the chemical industry, which unsettled investors and led to the sale of chemical shares on a broad front during the summer months. Consequently, Clariant’s share price decreased to its low point in 2019 of CHF 17.10 on 15 August.

Beginning in September, the general market sentiment began to gradually improve due to increasing signs of easing in the trade relations between China and the USA. In mid-October, positive signals for an improvement in the trade relations between China and the USA fueled market optimism and drove Clariant’s share price back up to CHF 21.45, its highest level in the second half of 2019.

On 30 October, the third quarter results 2019 were below market expectations in the Care Chemicals Business Area but broadly in line with the chemical sector trend. Clariant’s share price dropped to CHF 20.80 from CHF 21.10 on reporting day but recovered again shortly thereafter.

Throughout November, Clariant’s share price fluctuated between a range of CHF 20.20 to CHF 20.90, tracking the global stock market and reflecting the changing status of trade negotiations between China and the USA.

The share price increased to CHF 21.35 on 19 December, following the announcement of the agreement to sell Clariant’s Masterbatches business. In tandem with the generally positive stock market trend, Clariant’s share price rose further and closed the year at CHF 21.60.

005 CLARIANT SHARE PRICE DEVELOPMENT 1 JANUARY – 31 DECEMBER 2019 in CHF

Clariant has been included in several notable indices, such as the MSCI Equity Switzerland Index. Clariant’s inclusion for the seventh consecutive year in the Dow Jones Sustainability Index, which benchmarks the sustainability performance of leading companies in environmental, social, and economic terms is a recognition of Clariant’s best-in-class achievements in these fields. In 2019, Clariant was awarded the SAM Bronze Class award for its sustainability performance. The repeated listings in other sustainability indices, such as the SIX Switzerland Sustainability 25 Index, FTSE-4Good Index Series, Euronext Vigeo Europe 120 Index and Ethibel Sustainability Indices (ESI), further validate Clariant’s commitment to create value through sustainability and innovation.

1.4.2. Distribution

Since 2014, Clariant increased the distribution per share by an average of 7% per annum. Despite the difficult economic environment, the solid performance allows the Board of Directors to propose an unchanged distribution of CHF 0.55 per share to the Annual General Meeting, following a 10% increase the year earlier. This distribution is proposed to be made from a capital decrease by way of a par value reduction.

This distribution is in addition to the proposal of an extraordinary cash distribution of CHF 3.00 per share linked to the completion of the divestment of Masterbatches as announced on 19 December 2019.