Earnings Call: Q3 2019

Oct 30, 2019

Ladies and gentlemen, welcome to the Clariant 9 Months 2019 Figures Conference Call. I am Shay, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by Q and A session. Maria Ivek, Deputy Head of Investor Relations. Please go ahead. Ladies and gentlemen, good afternoon. My name is Maria Ivek, and I welcome you to Clariant's 9 month Q3 2019 results conference call and live webcast. Joining me today is Patrick Ioannis, CFO of Clarion. As a reminder, this conference call is being recorded. At this time, all participants are in a listen only mode. There will be a Q and A session following later. The slides for today's presentation can be found on our website along with our media release. I would like to remind the participants that the presentation includes forward looking statements, which are subject to risks and uncertainties. Listeners and readers are therefore encouraged to refer to the disclaimer on Slide 2 of today's presentation. A replay of this call will be available on the Clariant website. Let me now hand over to Patrick Jannie to begin the presentation. Thank you, Maria. Ladies and gentlemen, good afternoon. Let us begin with the highlights on Slide 3, and please note that all figures discussed refer to continuing operations unless specifically noted otherwise. In the 1st 9 months of 2019, client grew sales organically by 3% in local currency with both higher volumes and pricing contributing to this expansion. The sales growth was mainly driven by the business areas Catalysis and Natural Resources. The EBITDA after exceptional items was negatively impacted by the one off CHF 231 1,000,000 provision taken in the 2nd quarter as a result of further developments in an ongoing competition law investigation by the European Commission into the ethylene purchasing market. The EBITDA, therefore, decreased significantly to CHF 253,000,000. From an operational performance perspective, excluding the effect of this one off provision, the EBITDA after exceptional items matched the previous year and remained resilient at CHF484,000,000 with a corresponding margin of 14.8% versus CHF 14.7 percent in the previous year. The 3rd quarter results contributed positively to this development with 2% higher sales in local currency and a 6% increase in EBITDA after exceptional items despite an increasingly challenging economic environment. Consequently, the corresponding EBITDA margin of 14.5% was 100 basis points higher year on year. Let us move to Slide number 4 to review the sales development. In the 1st 9 months, Clariant delivered sales of CHF 3,300,000,000. Sales grew organically by 3% in local currency, mainly driven by Catalysis and Natural Resources. Higher prices positively supported sales by approximately 2%, while volumes contributed 1% to the expansion. Client sales growth in Swiss francs was negatively impacted by 3% due to the unfavorable foreign currency development, which led to a practically unchanged sales figure in Sysma. In the Q3 2019, sales grew by 2 in local currency, driven by 1% higher prices and 1% volume growth. Sales were approximately CHF 1,000,000,000 with a negative foreign exchange impact of 3%. The main sales growth contributor in the 3rd quarter was Catalysis as expected. Slide 5 depicts the regional sales development for both the 9 months as well as the Q3 of the current year. In the 1st 9 months, most regions contributed to the sales growth in local currency. Sales in both smaller regions, Latin America and the Middle East and Africa, grew the strongest by 11%. In Asia, sales grew a good 4% despite the 9% slowdown in China. And sales in the important European region grew by 2%. Only North America reported a contraction of 4%, due in part to the case of force majeure at a key supplier in the 2nd quarter. Sales growth in the Q3 is in line with the 9 months trend, with growth in the Middle East and Africa, Latin America and Asia. While China and North America continued to be negative, growth in Europe stalled and sales contracted by 3% in the Q3, reflecting the worsened economic environment. Let us start reviewing the business area figures in more detail, starting with Care Chemicals on Slide 6. The first 9 months sales decreased by a slight 1% in local currency year on year. Consumer Care sales advanced at a good mid single digit range with positive contributions from all business lines. Crop Solutions sales expanded in double digits, while Personal Care and Home Care both delivered a solid progression. However, Industrial Applications sales were softer. This decrease was related to the more cautious end market demand, which is attributable to market headwinds caused by the weak economic environment. As a result, the demand development at base products, industrial lubricants and construction came under pressure. In addition, in the Q2, North America was hampered by the prolonged plant shutdown of a key supplier following a case of force majeure. Although this force majeure situation has since been resolved, the resulting market share losses are still being addressed. The weaker development in North America is therefore also a reflection of these lingering effects. The same dynamic impacted the Q3 of 2019, where sales decreased by 3% in local currency and by 6% in Swiss francs, also due to the high comparison base in 2018. The EBITDA margin after exceptional items in the 1st 9 months softened to 17.5% from 19.2% year on year, owing in part to the temporary negative effect from the previously explained raw material disruptions in North America, which primarily had an impact in the Q2. Concurrently, we also saw continued weak end market demand in industrial applications. In the Q3, the EBITDA margin declined to 17.1% from a very high 21.6% in the Q3 of 2018. This is due to inventory devaluation given lower raw material costs and because the volume reduction in base products negatively impacted the cost coverage. The impact of the inventory devaluation on the EBITDA in the 3rd quarter can be quantified in the high single digit range. At Care Chemicals, we expect to see a return to growth in the Q4 and improved profitability in line with the normal seasonality of this business. Moving on to Catalysis on Slide 7. Sales in the business area Catalysis expanded by a substantial 10% in local currency in the 1st time mark of 2019. This was mainly driven by robust demand in both petrochemicals and CINGA. In the Q3 of 2019, sales growth accelerated to an excellent 15% in local currency. As expected, the improved sales performance resulted from increased demand in petrochemicals, specialty catalysts and syngas, which all reported significant growth. 9 months 2019 EBITDA margin is at 19.4%, still slightly behind previous year. The profitability is still recovering from the temporary capacity outages in Asia in the 2nd quarter, which have since been resolved. The 3rd quarter EBITDA margin increased to 19.4% from 17.1% a year ago due to a proportionally higher sales growth contribution from petrochemicals, which resulted in a more favorable product mix. For the full year 2019, the Catalysis business area is on track to meet its midterm sales growth expectation of between 6% to 9% and to improve its profitability compared to the previous year. This implies that the 4th quarter could reflect a weaker top line development given the strong sales expansion already witnessed in the Q3, but show higher profitability. Let us move on to Slide 8, Natural Resources, which now also includes additives, as you know. 9 month 2019 sales rose by 4% in local currency. Oil and Mining Services reported double digit sales growth in local currency, with positive contributions from all three business lines. Oil Services and Mining Solutions delivered robust growth, while the expansion at Refinery was in the single digit range. Sales in Functional Minerals rose at a low single digit rate, largely due to the continued strength of the purification business. This growth of the purification business for edible oils compensated for the weakness encountered by the foundry additives, which was attributable to the soft automotive sector. Additive sales declined for the 1st 9 months of 2019 against a particularly high base. The more cautious demand largely resulted from a less dynamic automotive as well as electrical and electronics sectors. In the Q3, sales in natural resources remained unchanged in local currency against a challenging comparison base. While oil and mining services continued to expand, sales in the Frosted Minerals business decreased slightly due to the weak automotive sector. The additives business retreated significantly due in part to the record high comparison base but also because of the difficult business market dynamics. In the 1st 9 months of 2019, the EBITDA margin in Natural Resources rose to 15.6% from 14.8% in the previous year. This was the result of stronger top line growth in Oil and Mining Services as well as the intensified focus on more value added applications. Additives partly compensated for volume losses via strict cost control measures. The positive 9 months development was strongly supported by the 3rd quarter, in which the EBITDA margin increased significantly to 15.6% from 13.6% last year, mainly due to the targeted growth in higher margin segments in Oil Services and lower exceptional items. Looking forward, sales growth in Natural Resources is likely to be more subdued, but we expect to see a continued profitability improvement on a half yearly basis. Let us take a look at the EBITDA development for the 1st 9 months on Slide 9. The continuing operations EBITDA after exceptional items was negatively impacted by the known one off provision of CHF 231,000,000 Therefore, the EBITDA decreased significantly to CHF263 1,000,000 compared to CHF483 1,000,000 in the previous year. In terms of the underlying operational performance and excluding the effect of this provision, The continuing operations EBITDA matched the previous year and remained resilient at CHF 484,000,000, which corresponds to a margin increase to 14.8% versus 14.7 percent in the previous year. The profitability in Natural Resources increased due to stronger top line growth in Oil and Mining Services as well as the intensified focus on more value added applications. Overall, the EBITDA performance reflects the resilience of our portfolio despite the weak economic environment. Similarly, Slide 10 depicts that in the Q3 2019, the EBITDA increased by 6% to CHF 151 1,000,000. The profitability advanced significantly in cathalizza due to the more favorable product mix. Profitability in Natural Resources rose due to the targeted growth in higher margin segments in Oil Services and lower exceptional costs. The corresponding EBITDA margin of the group level increased to 14.5% from 13.5% in the previous year. Please turn to Slide 12, first published on our 1st October, including now the Additives business in Natural Resources. As previously communicated, Clariant is continuing with the divestment of the Masterbatches and Pigments businesses. These divestments are expected to be concluded unchanged by end of 2020, while the previously announced sale of Healthcare Packaging is expected to be concluded shortly. The proceeds from these divestments will be used to invest in innovations within the core business areas, to strengthen clients' balance sheet and to return capital to shareholders. Our aim is to continue to follow our unchanged strategy to focus on our core high value specialty businesses. On the one hand, we intend to improve performance by delivering on innovation and through the implementation of further operational improvement initiatives. On the other hand, we will stringently execute our portfolio upgrade, leading to a significant complexity reduction and an improved balance sheet. This brings me to the outlook on Slide 13. Despite the current challenging environment, Clariant expects its continuing businesses to achieve above market growth, higher profitability and strong cash flow generation based on our focused high value specialty portfolio. With that, I turn the call back over to Maria. Thank you for taking us through the presentation, Patrick. I would now ask the operator to open the line for questions. But before we go to the Q and A session, we would kindly ask that you limit the number of questions to 2, thus providing more participants with the opportunity to ask a question. Thank you for your understanding. We will now open the line for questions. The first question comes from the line of Daniel Buchta from Vontobel. Please go ahead. Yes. Thank you very much for taking my two questions. The first one, maybe on Care Chemicals again. I mean, you were giving some comments, Patrick, on what happened here in Q3 again. But still, I'm struggling a little bit to understand the full picture. I mean, you said the supply disruptions were basically affecting Q2. The industrial business was weak, but that probably also didn't change too much compared to Q2 with automotive demand and other industries being weak also back in the days there. So why is Q3 then still rather weak in terms of organic growth of minus 3%? And then could you back out a little bit more again on the margin contraction? I mean, the devaluation on the inventory side you were mentioning, where would you be kind of excluding that? And what of the margin drop was related to the high margin to the high base last year? And then the second question on the corporate line. I mean, if my calculation is right, you had €9,000,000 corporate expenses. While usually you guide for more, like you were saying, 2% roughly to sales, now you were below 1%. And what was driving this low corporate line? Are there any Thank you, Thank you, Daniel, for your long two questions. Looking at Care Chemicals, yes, indeed, Care Chemicals had a tough quarter in Q3, and we would have wished to have a bit of a better picture. But the supply disruptions were results in Q2 for the known force measure in the U. S. But the effective thing is that we actually lost some sales in the consequence of that. And Q3 proved to be more difficult than the business, though, in the beginning to recover those positions. And therefore, we continue to actually have quite a weak sales development in the U. S. In Care Chemicals. So it obviously was better than Q2 in terms of sales, but it was significantly lower than we would have expected. It is recovering. And therefore, if you look forward, as we guided now as well and in the speech, the Q4 will actually be quite strong for Care Chemicals. But certainly, Q3 was weaker than we thought from that point of view, just from the pure geographical or the few consequences of the geographical weakness in the U. S. Now if you look at the businesses themselves, Crop had an excellent quarter, very, very strong in double digit segments, far above the typical 12% we would refer to as the growth rate for COP. But we saw some weakening in Personal Care and Home Care, still growing nicely, but not at the high single digit pace, but just nicely growing. While we certainly saw a deterioration, more pronounced deterioration in the industrial application in Q3, particularly, I would say, in the more commodity part of the business, the base products, which we don't often talk about because they are basically fillers for the capacity utilization. But as you know, there has been quite a lot of reduction of raw material costs and a lot of competition coming into play, and the base products were suffering in Q3 under this development, in addition to reduction of sales in lubricants, also icing breaking fluids for automotive. So there were a conjunction of negative factors in the industrial application with reduced capacity utilization, and that, in turn, impacted the EBITDA line for Q3. Overall, I would say the deterioration still has to be, as you rightly mentioned, compared to a very, very high base of previous year. I think Q3 2018 was the record Q3 ever with, I think, 21 point 6% EBITDA margin. So obviously, very abnormal for Care Chemicals. I think you all are well informed about seasonality. Typically, Q4 is the strongest quarter, not Q3. Last year was exactly reversed. Q3 was the strongest, Q4 the weakest. So I think this will impact a little bit on the from the qualitative point of view when you look at the comparison of the quarters. We will revert to normal seasonality, which means Q4 will be stronger than Q3 this year, just as it had been all the years before apart from last year. So don't be too biased, let's say, by Q3, Q3 view because last year was disproportionately high. But notwithstanding, the weakness of Q3 is there. If you look at now a more quantitative point of view, I would say the inventory devaluation comes from the reduction of price in ethylene and ethylene derivatives, which is in the market. We will have a short over strong oversupply of ethylene, pushing EO prices down. We adjusted inventory in Q3. That is a gain for Q4, right? As you know, when you reduce inventory and you sell the products in the next quarter, your margin will be improved. And therefore, I will not be worried on the yearly view because those products will get sold until year end, and you'll recuperate this margin differential in the Q4 in terms of increased margins. We quantified it now at a high single digit figure, which basically, if you look at the deviation compared to previous year, we are 17.1% when compared to a previous year of 21.6%. So it's a 4.5% deviation, right, in terms of EBITDA margin. Roughly half of that deviation comes from the inventory devaluation effect, which we will actually, as I just was mentioning, recover and recuperate in Q4. And the rest is mostly due to less cost absorption through this lower sales industrial applications, right? So that I think gives you a quite detailed description on what went on in Care Chemicals in Q3. Yes. That was very helpful. And maybe on the corporate line quickly? And your second question on the corporate line, indeed. Yes, we had a couple of reversal of provision pensions and so on in Q3, which makes it a little bit artificial, low. I would totally maintain our guidance on that. And as a rough guidance, I think we have communicated our continued figures on 1st October. You do have there corporate cost amount for continued operation, which I think is a very good guidance as well for corporate cost in continuing business this year. So in the year, that will compensate? Actually, it's probably the same effect. Q3 is a bit higher and Q4 will be lower and last year was exactly the opposite. But overall, the sum will be pretty much same. That's very helpful. And thanks for your detailed response on the first question. You're welcome. Next question comes from the line of Peter Clark, Societe Generale. Please go ahead. Yes. Good morning, Patrick and Maria. Just can I just clarify on that corporate charge for the final quarter then? Because I think your guidance on 1st October was 2% of sales. So you'd be implying 4 quarter might jump to even what you achieved in the 1st 9 months, which seems excessive to me, but just want to double check what you're guiding for the Q4 for that corporate charge. I can hear it's up. And then the second question is talking about the margin expectations that you've kept for the division slightly altered the Natural Resources, one with additives, I think. But effectively, if I look at the bottom end of the range of that target guidance is sort of 20% margin for 2021 on EBITDA. You're running the last 12 months, obviously, significantly below that, hit by 1 offs. I think it's about 2 20 basis points below that on my numbers anyway. Now I was just wondering how you can contextualize these one offs, the force mature, the sort of fires. You now have the inventory revaluation. These sort of things can happen again, of course. But effectively, how much you see that 2 20 basis points down to the one offs you've seen in the last 12 months? And then how you climb back through that 2 20 basis points, presumably a lot of price mix, but how important volume will be for that for the targets? Thank you. All right. Just to clarify on corporate costs, maybe I was unclear before. So what I was referring to is indeed the Q3 number for corporate costs before exceptional items is very low €9,000,000 compared to €23,000,000 the previous year. I was just highlighting that most probably, you could probably see the reverse situation in Q4, therefore, having increased corporate cost position and compared to a very low previous year base, right? Overall, the sum of corporate costs for the full year 2018 before exceptional items, 2019 will be very close to the 2018 number. Just shifting in quarters, but the sum will be pretty much the same at year end. If you now look at your view on Care Chemicals, I think, yes, 2019 was not the year and we talked about it early on in the year where we can make a jump in the performance of Care Chemicals. We have been touching the 18%, 19% in the last quarter. But it's more about the whole the operating divisions actually, Patrick, not Care Chemicals. The operating divisions I have in total about 220 points light at the low end of the range. So I realize a lot of one off Care Chemicals, but I think you have one offs in other segments as well over the last 12 months. Yes. I mean 20% EBITDA margins on the group level of 2021 refers clearly to a portfolio which included the SABIC business, right, in our September 2018, 2019. So from that point of view, you'll have to adjust on that. But if I understand you well on the whole portfolio, you're wondering how we can increase margins. But I would say it's quite a logical evolution by business area. If you look at Care Chemicals, as I said, this year is not the year we can do a big jump forward because we had negative one offs in the Q1 for de icing. We had force majeure in Q2. We have this lingering effect in the U. S. Market there in Q3. So yes, we will be, at best, very coming very, very close to previous year. And then obviously, the structural improvement in Personal Care, growth in Crop Protection and also quite an improvement in some industrial application businesses We'll resume the progression of margin in that business area. So I'm not concerned on the midterm at all. Just a matter that in 'nineteen, instead of progressing given the environment and in addition, one offs, we just got hit on different levels there, and we couldn't progress in Care Chemicals. But it doesn't change anything to the plan and to the ambition to bring Care Chemicals in this 19% to 21% range we have indicated for 2021. Catalyst is exactly on track. I think that's fine. They're okay. I think we highlighted as well the guidance now in the speech. Looking forward for the next 2 years, there will progress in terms of margin. The booster there is clearly biofuels, 2nd generation ethanol. They will have to be more concrete in early next year and as 2020 develops on the timing of this development. It's a new business, has inherent risk with it, but has a tremendous potential. And actually, the sale of licenses is doing pretty well. So that is the booster factor, which brings you from those 25 percent to 26 percent EBITDA margin to the 28%, 30% we indicated earlier, right? If you don't have the biofuel business, you would remain in the 24%, 26%, probably on the higher end of that range for catalysts alone without the biofuel boost, yes. And for natural resources, we are just progressing. We are returning to the 16% to 17% where we were. We have upped that guidance now because obviously, we put additives in it, right, which currently is a bit suffering because of the macro. But overall, I think we have indicated 18% to 20% EBITDA margin for Natural Resources. That implies, let's say, the old Natural Resources, Oil and Mining and Functional Minerals coming to 2016 to 2017. And that's just mathematical addition of an additive business, which is still at 20% in the cryo this year and will return to the range of 23%, 24% where it was actually last year when demand situation was all normal. So over the next 2 years, we would expect the markets in the electronics market to recover. The supply chain adjustment between production moves from China to Vietnam to Malaysia to be settled. Therefore, custom orders to come back in additives and therefore this margin as well to go back to 23%, 24%. And the rest of that component, as I said before, is just oil coming back to where it was and they're on a very good track record this year, as you can see from the margin development. And as we just guided, by the way, we will see a further margin improvement as well in Q4 in that business as well. The next question comes from the line of Christian Faitz, Kepler Cheuvreux. Please go ahead. Yes. Good afternoon, Maria and Patrick. Two questions, if I may. First of all, any indication of your cash flow development might go for full 2019? And then second, can you update us on the search for a new CEO? That's a great question, Christian. So on the cash flow, obviously, we don't communicate cash flow in Q3, so you're putting me in a difficult position. But no, clearly, I think the cash flow is online and will be it's an operational point of view very much. You're not being weighed in the second half. As usual, the first half is typically weak and the cash flow generation comes, as you know, in the second part. We will have some impact on the cash flow from the carve out projects within the discontinued operation, which is thinking now ramping up pace and therefore as well increasing its costs as you can see as well in Q3 and you will see in the Q4 results as well. That is a cash component which goes off. On the other hand, you'll have the proceeds from the divestment as well of Medical Specialties. So it depends whether you look at the operational cash, which will show some carve out costs because cash flow is for total company. We don't have a continued or discontinued cash. So this increased cash out from the discontinued will be in our operating cash figure in there. But on the other hand, you will have to mentally offset it with the proceeds from divestments from the Medical Specialty business, which comes on another line. But overall, it will look pretty okay. Now when you as I add the search of the CEO, well clearly, as you mentioned, that's a matter which is being taken up by our Board. We have a nomination committee which has started the process. It's an external search. We have a they will present a list of candidates. There will be a selection process, which typically takes a bit of time, as you know, but we maintain the guidance that by year end, early next year, the search should be concluded. Very helpful, Patrick. Many thanks. You're welcome. Next question comes from the line of Alex Stewart from Barclays. Please go ahead. Hello. Good afternoon. I'm struggling to make sense of your comments about revenue growth in Care Chemicals. I know there have been a few questions on it, so sorry. In the second quarter, you had local currency growth of negative 3% with the full impact of the force majeure. In the Q3, you only had a residual impact from the force majeure, yet revenue was down 3% again. In fact, the underlying growth in Q2 was mid single digit positive according to your release. So that's a swing of almost 10% from 1 quarter to the next. You also mentioned the comparable was tough this quarter, but made no mention of the comparable in the Q2 release. Yet the comparable Q2 2018 growth was plus 10%, percent whereas it was plus 8 percent in Q3 2018. In other words, it looks like an easier comparable in Q3, not a harder one. Could you just help us make sense of that because it's quite difficult to get all the moving parts to bid? Thanks for your question, Alex. Think it's not that difficult really. The 2018 was a very good year. Whether you take Q2 or Q3, 8% or 10% growth is a fantastic growth. So in a way, both quarters last year were very good and therefore form quite a high comparison base the year after when the economic environment has totally changed, right? Remember that 50% of our business Industrial Application, which is more GDP dependent and therefore having quite a good growth last few years and with a peak in 2018 in the Q2 and Q3, which typically are the weaker quarters, as you well know, Coker Chemicals, form an excellent basis, which when the economy turns significantly, since it has, if you remember, our context we were working on Q2, Q3 last year was quite positive. Now everybody is revising its GDP forecast down month by month. It's a total different base, and therefore, it forms a very high comparable base. I think there's no dispute to that, and it should be fairly simple to understand. Now if you look at the growth per se per quarter, Indeed, Q2 was the most affected by the specific U. S. Force measure. Clearly, the main impact there, I think, were 25% down in the U. S. For Care Chemicals in Q2, which is very unfortunate. Now we continue to be down to give you a bit of flavor in Q3, I think 15% in the U. S. So yes, we have recuperated a bit, but we are still down compared to this high base. And that certainly is a drag on the numbers. And in addition, as I tried to explain before, we are actually, yes, seeing a contraction in markets like lubricants, construction, braking fluids, which are directly obviously for the automotive market, where there's quite a significant, yes, mid to high single digit volume reduction in Q3. And that just drives the figures down. That's all. What we see important is obviously what where do we go from here is that in Q4, actually, we should have more positive trends. So I think we have been explicit now in the presentation on Q4 view. And I think it's important for everybody on the call is to see that we would basically, a bit like we had discussed with analysts in London in October, that in Care Chemicals, we would expect a stronger Q4 compared to Q3, while in Catalysts, we expect the opposite, so a stronger Q3 and a weaker Q4, right? That is just from the rhythm of the quarters. And for Care Chemicals, it just means we are back to a more normal seasonality, where typically Q4 is stronger than I can say. I hope it explains your part of the question. Thank you. Next question comes from the line of Markus Mayer, Baader Verwer. Please go ahead. WEA. Two questions as well from my side. Firstly, on the investment process, can you update us how this process from Masterbatches running and if you expect an announcement until end of this year? And secondly, on Additives, beginning of October, the European Commission has announced the ban of elevated flame retardant enclosures and stands for electronic displays by March 2021. Could you give us a flavor on your exposure of your Additives business toward the nonheliculated Framatidens, so for your phosphorus based Framatidens, in particular for Europe and for Electronics? And what kind of effect do you expect from this kind of ban for competitive products? Thank you. Yes. To your first question, obviously, we'll refrain from giving you any precise guidance on the timing of any divestments because obviously, we all have the same objective here, which is to maximize value. So I think we need to keep the cards close in our hands and not put ourselves under undue pressure. I think we will try the process as hard as we can to maximize value, That's what you can expect from us. But we are working on it, as you know, both from masterbatch pigments and also as well the main point actually in terms of preparation in the separation of the businesses, which will be finished as planned by 1st January 2020 in 2 Tory separate holdings, legal entities around the world, IT system, which allows to plan for a swift process during 2020. When we go back to additives, yes, clearly, I think we have been very much favoring and explaining the advantages of nonhorogenated flame retardants because they're just better for this type of applications. And I think the moving the market has been moving in our direction for the last few years. If it gets reinforced by some regulatory framework, all the better. It is clear that this type of application, nonallogeneated in principle are the better product and our product in particular, Doing a bit of publicity here is particularly good. And we would expect this to further, I would say, continue the growth in Additives, which is why you remember that back in 2015, we already had taken the decision to separate Masterbatch Pigments and Additives into Plastics and Coatings for divestment. Now we changed our view on additives. I think it was in 2017. And we repatriated, so to say, Additives in the core business because we just saw that on the one hand, exactly to your point, in electric and electrical applications, there's only one way the market can go. It's towards our range of products and some competitors as usual. But in principle, we are very well positioned. And on the other hand, in the waxes, which is the 2nd big area, we do have very innovative innovation space on renewable raw materials, which allows us to go into totally new areas for the wax business. So the growth, and I would say, backed by innovation, is quite tremendous in that business. And although it's still a small business, €400,000,000 it has a consistent performance above 20 percent EBITDA even in the quite a disruptive year like 2019 in terms of volumes. We still maintain a good margin. And we expect this really to turn, right? So weakness in electronic applications should turn because it's just a supply chain rearrangement, but the underlying demand can only grow. And that's why we are very positive on the prospects of that business indeed. But could you quantify your exposure to Europe for this business and to electronics? If you start, electronics pretty high, but the European end market, how big is it? Well, there are 2 components here. We do sell quite a bit to Europe. The biggest the 2nd biggest market in this area business line is actually China. But a lot of this demand of China goes back to the U. S. And Europe, right? So the actual proportion of Europe is actually probably quite significant enough. But it's north of 30%, in any case, in direct sales and significantly higher if you assume that a good part of what is produced in Asia goes back to all the U. S. Or to Europe. Next question comes from the line of Nicola Tang from Exane. Please go ahead. Hi. Thanks for taking my questions. Actually, it was also well, the first one was also on additives. I was wondering if you could explain a little bit more exactly what was driving this weakness on the electronic side in Q3? And can you help quantify what you mean by retreated significantly? And then thinking about the comp, you said Q3 comp was tough. Can you explain how the Q4 comp looks? And given the high profitability of this business, I was wondering whether that if that ends up being a weak market in Q4, whether that could affect your ambitions to grow this division, grow margins in this division half on half? And then the second question was on Sun Liquid. You highlighted you signed the 2nd license. Can you explain when this should contribute to earnings? And can you remind us of the sort of hurdles we need to pass to eventually hit your midterm CHF 100 sales targets? Yes. Thank you, Nikkad. So coming back to Additives, indeed, I think the business has set a lot like you will see in all the major producers of our end customers as well. I think the electronics are down. Everybody who does polymers for electronics is down significantly. All the big European names are significantly down in that area. And our Alta is a direct supplier to those. You could quantify that to a double digit sales contraction in Q3, as an example. It's pretty close to what actually they have for the year, right? So high single digit or low double digit. That's the area where we see the contraction on the back of, I think, 12% growth back in 2018. So we had a very good growth for last 2, 3 years, 2017, 2018. And now we have this contraction just because when markets are adapting, there's a lot of uncertainty in terms of tariffs, as we all know. There's uncertainty in terms of technologies, delays in some technologies, which are coming out and then a reshoping of supply chain because some production is certainly moving out of China into other countries in Asia. And therefore, well, logically, people will not increase stocks, but rather are emptying the supply chain before starting new production sites next year. So from that point of view, it's a sequential disruption because supply chain is adapting and a weakness in terms of new technologies coming up. That will revert clearly, and we are very confident as per the previous question that this will actually be continue to be a very nice business looking forward. If we look at Q4, clearly, we have guided now very, I would say, precisely on the lower growth dynamic in Q4 in Natural Resources because we expect oil to continue to be doing very, very well. Functional Minerals is actually pretty flattish or slightly negative like it was in Q3 because of the weakness in the foundry business, which is more linked to the automotive, partially linked to the automotive. And then you have the additive block, which, as I just indicated, is down high single digit or low double digit depending on the quarter. And that will obviously offset the growth in oil, right? So we would guide Financial Resources to very low growth for the Q4 2019, but still a margin improvement. I think the dynamics are there within oil, within refinery mining to offset additives, which is, frankly speaking, contracting more in sales than it is in profitability. So it doesn't create such a big hole in profitability that it could not Oil Services. Now looking at Sun and Liquid, your second question. We're starting to have some success in sending licenses before setting up the plant. We are building. I think we are looking at this project as well with our customer because there's a strong interest here to develop the technology. The actual P and L effect is really when the plants, which have now signed licenses, start to be built, are finished and start to operate because you have the license fee structure is just a little bit upfront payment, and then you have a significant payment when the engineering package has been turned into reality and when the plant is actually standing and starting to run. It's another payment. And then you have the ongoing enzyme sales, which is the actual part of the business we actually want to do because that's obviously an enzyme business. We're not in the technology business of selling engineering packages for plants. It's one nice component in terms of value, but the ongoing business, which then impacts our figures is really the sale of Ensign. So that is a few years ahead, but we are very much pleased that there is strong interest in the technologies that people are starting to put money on the ground and building their plant and buying vessels. Okay. Thank you. You're welcome. Next question comes from the line of Patrick Rafaisz, UBS. Please go ahead. Good afternoon. Thanks for taking my two questions. The first is on Catalysis. You talked about the mix improvement with more petchem helping the margin. When would you expect this business to be back in a normalized mix, right? I assume there's still a slightly over proportionate share of Syngas here in the mix given that the margin improvement was good but not that great, right? We are still below 20% here on the margin. And the second question is around the discontinued operations, Masterbatches and Pigments. I noticed in the slides here the EBITDA drop before exceptionals, minus 16% looks pretty steep for only minus 2% organic or minus 4% on the top line? Can you add a bit more color what happens here? And do you think this will have an impact? Or is this impacting your disposal process, your negotiations in any way? Thanks. Thank you, Patrick. So the first question, yes, I think we are we started the year still with a mix which was very much linked to the mix of the previous year, right? There's quite a lot of Syngas in the mix. And as we guided for Petrochemicals, this is progressively ramping up its proportion of sales over the year. Q3 was a good quarter actually for all segments. So Petrochemicals, Skimba, as expected, Skinny Urz was still a bit even stronger than we thought. But we are there catching up nicely. I think the margin has progressed according to our expectations, absolutely. We are reducing the gap towards previous year, and the guidance is absolutely maintained. So no change in guidance. That on the sales growth will be at 6%, 9% and on the profitability level will be slightly ahead of previous year. So we are catching up compared to that. It's not yet an ideal product mix, to your point. We still have a lot of Syngas, and we obviously had some disruption, as we remember, in Q2 in China as well, which didn't help the margin. So overall, we feel confident we can improve the margins looking ahead as well as we ramp up as well capacities in terms of polypropylene as well, which is still dragging on the results this year. So from that point of view, there's nice potential to still improve margins in Catalyst, but we are exactly on track and where we want it to be at this stage of the year in CapEx. If you look at discontinued operations, indeed, we do have a regression of sales of 2% and EBITDA by which has contracted a bit. I think we are 15%, whatever, 16% down in Q3, mainly coming, I would say, from the pigment part, which is always more and more difficult to react. Masterbatch is doing a decent job or a very decent job actually in adapting its cost base to the lower volumes. But Pigments, as we all know, is more of a real chemistry business where you have very long production cycles of 6 months ahead. And those obviously get caught a bit up when volumes come down. And therefore, you always have to play oil, reduce inventory and you shut down your factories, but you will destroy your EBITDA, but you generate cash. Or you run full steam, you have a nice EBITDA, but you end up with inventory which is not needed, right? And this is always the core in Q3, Q4 in Pigments, and that's where they are currently more targeting cash than actual EBITDA margin in numbers. So not too worried on the performance. That's a typical development, which is quite difficult to manage actually when volumes come down, but they're doing a good job there. And we focus on cash. We have no intention to increase the EBITDA margin for 1 quarter effect. I think we run those businesses as we have run them in the last few years in terms of cash and whether that implies paying a price in EBITDA margin, well, it is the price you have to pay. So does it have a consequence on the divestments? I think people see through that. I think anybody who buys a business will look at the cash flow generation of that business and therefore will be comfortable with the way we manage the business. Very helpful. Thank you. You're welcome. Next question comes from the line of Stadeep Pandya, Millennium. Please go ahead. Hi, thank you. Just first question, sorry to ask you this Patrick now. I know you're not going to be comfortable with this. But on the divestment side of things, could you just tell us I understand what you're saying investing in the business, delevering and then cash return. I just want to ask you on the delevering part. What where would you be comfortable? Because the balance sheet as it stands today is relatively okay. So whatever you get, I mean, at what level are you going to be comfortable? And so therefore, I just want to understand your thoughts behind giving cash back in whatever form it might be. And then the second part of that question really is with regards to these businesses obviously are, let's say, your Masterbatch business has quoted peers and all. So just in terms of interest from parties, are we talking about strategic players or also financial players? Those are sort of to my divestment related And then just one small catalyst related question. The big project in China started off in Q3, the Hengly complex. Have you shipped catalysts for that already in Q3 or is it more a Q4 event? Thank you. Hi, Jade. I feel very comfortable with your questions. No worries about my comfort level there. If we look at the divestment topic, well, I think clearly, we expect to, 1st of all, maximize proceeds in the cycle we're in now. And the more you get, the more comfortable you can be on the resulting balance sheet. So we focus one thing after the other. We try to do a good divestment process first. 2nd, clearly, the ambition here is to have a strengthened balance sheet. In theory, I think, would then be debt free, which obviously is not particularly good either. And therefore, we totally have consensus in the Board and ultimately, it's a Board decision to quantify the amount of the return to shareholders, but there will be a return to shareholders. We will re leverage to a normal level. I think the company should be a BBB company, and therefore, we will make sure that the resulting leverage is where within the BBB area. But again, the more you get, the more you can distribute. So let us focus on the flip side. Sorry. So just to say BBB would be 1.5x net debt EBITDA, 1x net debt EBITDA, where should we think? Yes. It's pretty much exactly what you indicated, yes. I think depending on the rating agencies, which don't have always the same use and cancellation methods, you'll be around 1.5x net debt to it. Now on the process itself, I think no comments from my side. Both businesses, Pigments and Master Badges, are good businesses. Masterbatches has evidently a good cash flow generation because it's low asset intensity, right? And FX assets are low, net working capital is moving fast, and therefore, cash generation is, on the one hand, regular and certainly significant as well, which means that you'll probably and hopefully have not only strategic payers interested but also quite a few part of equity. I mean, that's a typical business you can own and be very happy with it for a long time. So that is, I would say, opens the door to quite a broad process indeed. When you look at catalysts, I would really have to come back to you. I actually don't know whether we have or will deliver our Catalysts for that installation. Okay. All right. Thank you so much. You're welcome. Next question comes from the line of Udayesh Chaitan, JPMorgan. Please go ahead. Yes, hi, thanks. Just two questions. One, Patrick, can you just clarify all the comments you made about margin improvement? I'm assuming those are based on the reported margins, not the pre exceptional margins. So just to clarify that. And second question was on Care Chemicals. When you talked about margin improvement in Q4, are you talking about versus Q3? Or should we expect margin improvement also versus Q4 last year? Thank you. Yes. No, sure. Just to clarify, when we talk about margin improvement, you know, that we report in after exceptional items, yes, since this year. And we still obviously show you the before capital items just to ensure that we have a total transparency of numbers, not to disrupt anything. But clearly, we measure ourselves and the whole incentive plan and all the organization is fixed on EBIT after exceptional items, yes. And then in terms of Care Chemicals, yes, I think we clearly would see an improvement there because of the market dynamics and the return to normalcy, as I mentioned before, that would allow us to be basically, yes, above previous year in terms of Q4 and obviously as well above Q3 2019 as well. And I would just like to highlight that it is a very decent performance. If you look at our competitors and the market environment, I think we are very proud of the performance of our businesses. One thing is to be 1,000,000 or 2,000,000 of by business area on an expected number, our own expectations as well. But the other way is to look out at the reality of the market, and I think we're doing a great job there in improving the margins and as we have and as we will continue to do. Understood. Maybe can I follow-up, a few of your competitors have highlighted in catalyst some disruptions in Q4 from the fire, that in your catalyst business? No, we have noted that. We are not in the refinery business, yes. So from that point of view, we are 1 step behind the value chain and typically our catalysts are not consumed in the chemical reaction, that they are delivered once and do have a lifetime of 3 to 4 years. So if you disrupt production of a downstream product for a couple of months because you're missing a bit of supply from the refinery, doesn't really change the renewal date of your Avi catalyst. Thank you. Next question comes from the line of Rachel Kessel, Goldman Sachs. Please go ahead. Good afternoon and thanks for taking my questions. This is Peter actually. I have only one left on Natural Resources. Was there a meaningful contribution from new oil services contracts in the quarter that potentially supported profitability in the division? And what do you expect from here? Thanks for your question, Peter. Indeed, we are going through a triple process in oil, which is why this business is now really performing better, as we had expected 1.5 years ago, and delivering on its promises. First of all, we reduced cost Q3, Q4 of last year, which gives us a very sound base in terms of operating leverage in oil. It's an SG and A business, so you have to cut SG and A to get a good base. We did that in the second half of twenty eighteen. The second element is we are not favoring sales growth for sales growth. We're actually retreating and not retendering contracts where we do not earn a sufficient margin, which is particularly, I would say, in some areas of the shale business in the U. S. Where we had after buying a couple of businesses 3 years ago. The effort was obviously to maintain the top line and to show that we had a market position, a worry that was taken, as we explained a couple of quarters ago, a bit to the extreme. And you still have to make some money, right? We are here to make money. And therefore, not only same lines is important, but the margin is more important. And therefore, we are letting go of some contracts where there's just, I would say, not enough differentiation factor through a better technology. So if you can do the same result for our customers with a nondifferentiated chemistry, we have no real advantage there. We will focus on areas where it's more difficult, where you need a better chemistry to achieve improvement. That typically goes as well with a higher margin. So we are quite selective on letting on seeing where do we actually gain contracts. And therefore, we are more letting go of contracts than that we're gaining contracts, is what I'm trying to say here. And but certainly, we do have very interest in contracts, which have been signed, are starting, starting Q3 and also in Q4. And I think that's why we are confident as well that the oil business on its own will continue to explore that in the Q4 and into 2020 in a nice manner as well. Thank you. Next question comes from the line of Markus Mayer, Baader Lea. Please go ahead. Yes. Two follow-up questions, certainly on this polypropylene capitalist plant in the Really have missed it, but can you update us where you stand in terms of ramp up? And secondly, there is more kind of modeling or forecast question for this kind of new clarion or core clarion or however you call it, what is the automotive exposure? And what is the new ForEx sensitivity for this new group? Well, to your question on PTE Catalyst plant, clearly, we have worked hard to, first of all, make it run, which is now running, have a product which is registered and actually accepted by the market. This is actually a very nice development. The quality of the products we are now producing is higher spec than what we expected at the beginning of the project. Therefore, I would say from the actual sales price and value add, we are favorable compared to what was the base of the business plan. The major part of 2019 has been to mark more the production itself in terms of ramping up volumes. I would say we have most probably, I mean, we are still not finishing the year, but we had communicated a goal of getting breakeven in the plant. We probably, I would say, not achieve that single objective of being breakeven because we are a bit behind in volumes, and I would be surprised that we can close everything up into Q4. But it is ramping up. There are technical solutions which have been tested positively. And therefore, I would say it's a delayed ramp up again compared to what we promised. Makes the figures of Catalyst all the better because as I was mentioning before, leaves it more room to progress as we finally get our hands around that production plant. Towards the end market exposure of our core client, that's a very good question, Markus, which we will be looking at. I would not expect we always say automotive is about 5% to 10%. I think we had a figure of 7%, 8% in the past of automotive exposure. It has certainly not gone up rather come down overall. The foreign sensitivity? Sorry. Sorry, I didn't mean to interrupt you, Markus. The currency sensitivity, U. S. Dollar versus Yes. I would not expect it to change too much, which means we will be still long in dollars given that most of the Catalyst business and so on is done in dollar. We'll be more breakeven in euros as we will have less costs in euro. Pigments is very, I would say. Europe dominated in terms of production cost structure. That will move out and therefore will be we should be balanced in terms of euros. So the net exposure is rather long dollar and still short in Swiss francs even after the headquarter continues to be in Switzerland. Okay, great. Thank you. All right. Thank you very much. Ladies and gentlemen, we've reached the time limit of our conference call today. I apologize that we didn't have time to respond to all the questions in the queue. The Investor Relations team is still available for any further questions you might have. Thank you for joining the call today. Have a nice day and goodbye. Ladies and gentlemen, the conference is now over. 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