Ladies and gentlemen, welcome to the Clariant Nine Months 2019 figures conference call. I am Shire, the conference call operator. I would like to remind you that all participants will be listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star one on your telephone. For operator assistance, please press star zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Maria Ivek, Deputy Head of Investor Relations. Please go ahead.
Ladies and gentlemen, good afternoon. My name is Maria Ivek. I welcome you to Clariant's Nine Months Third Quarter 2019 results conference call and live webcast. Joining me today is Patrick Jany, CFO of Clariant. 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&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 two of today's presentation. A replay of this call will be available on the Clariant website. Let me now hand over to Patrick Jany to begin the presentation.
Thank you, Maria. Ladies and gentlemen, good afternoon. Please note that all figures discussed refer to continuing operations unless specifically noted otherwise. In the first nine months of 2019, Clariant 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 million provision taken 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. The EBITDA, therefore, decreased significantly to CHF 253 million.
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 CHF 484 million, with a corresponding margin of 14.8% versus 14.7% in the previous year. The third 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-over-year. Let us move to slide number four to review the sales development. In the first nine months, Clariant delivered sales of CHF 3.3 billion. 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.
Clariant sales growth in CHF was negatively impacted by 3% due to the unfavorable foreign currency development, which led to a practically unchanged sales figure in CHF. In the third quarter 2019, sales grew by 2% in local currency, driven by 1% higher prices and 1% volume growth. Sales were approximately CHF 1 billion, with a negative foreign exchange impact of 3%. The main sales growth contributor in the third quarter was Catalysis as expected. Slide five depicts the regional sales development for both the nine months as well as the third quarter of the current year. In the first nine 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.
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 second quarter. Sales growth in the third quarter is in line with the nine-month trend, with growth in the Middle East and Africa, Latin America, and Asia. China and North America continued to be negative, growth in Europe stalled and sales contracted by 3% in the third quarter, reflecting the worsened economic environment. Let us start reviewing the business area figures in more detail, starting with Care Chemicals on slide six. The first nine 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 constructions came under pressure. In addition, in the second quarter, 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 third quarter of 2019, where sales decreased by 3% in local currency and by 6% in CHF, also due to the high comparison base in 2018. The EBITDA margin after exceptional items in the first nine 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 second quarter. Concurrently, we also saw continued weak end market demand in Industrial Applications. In the third quarter, the EBITDA margin declined to 17.1% from a very high 21.6% in the third quarter of 2018. This is due to inventory valuation, given lower raw material costs, and because the volume reduction in base products negatively impacted the cost coverage.
The impact of the inventory valuation on the EBITDA in the third quarter can be quantified in the high single-digit range. At Care Chemicals, we expect to see a return to growth in the fourth quarter and improved profitability in line with the normal seasonality of this business. Moving on to Catalysis on slide seven. Sales in the business area Catalysis expanded by a substantial 10% in local currency in the first nine months of 2019. This was mainly driven by robust demand in both petrochemicals and syngas. In the third quarter 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. Nine 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 second quarter, which have since been resolved. The third 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 mid-term sales growth expectation of between 6%-9% and to improve its profitability compared to the previous year. This implies that the fourth quarter could reflect a weaker top-line development, given the strong sales expansion already witnessed in the third quarter, but show higher profitability. Let us move on to slide eight, Natural Resources, which now also includes Additives, as you know. Nine months 2019 sales growth 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 a 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. Additives sales declined for the first nine months of 2019 against a particularly high base. The more cautious demand largely resulted from the less dynamic automotive as well as electrical and electronic sectors.
In the third quarter, 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 Functional 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 first nine 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 nine months development was strongly supported by the third 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, the sales growth in Natural Resources is likely to be more subdued, we expect to see a continued profitability improvement on a half-yearly basis. Let us take a look at the EBITDA development for the first nine months on slide nine. The continuing operations EBITDA after exceptional items was negatively impacted by the known one-off provision of CHF 231 million. The EBITDA decreased significantly to CHF 253 million, compared to CHF 483 million 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 million, which corresponds to a margin increase to 14.8% versus 14.7% 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 third quarter 2019, the EBITDA increased by 6% to CHF 151 million. The profitability advanced significantly in Catalysis 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 of 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 Clariant's 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 stronger 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. Before we go to the Q&A session, we would kindly ask that you limit the number of questions to two, thus providing more participants with the opportunity to ask a question. Thank you for your understanding. We will now open the line for questions.
Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands as well asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Daniel Buchta from Vontobel. Please go ahead.
Yeah, thank you very much for taking my two questions. The first one, maybe on Care Chemicals again. 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. You said the supply disruptions were basically affecting Q2. 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. Why is Q3 then still rather weak in terms of organic growth of minus 3%? 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 excluding that? What of the margin drop was related to the high base last year?
The second question on the corporate line, if my calculation is right, you had CHF 9 million corporate expenses. While usually you guide for more, like you were saying, 2% roughly to sales. Now you were below 1%. What was driving this low corporate line? Are there any unusual items included in that? Thank you very much.
Thank you, Daniel, for your long two questions.
Sorry.
Looking at Care Chemicals. Yeah, indeed. Care Chemicals had a tough quarter, in Q3. We would have wished to have a bit of a better picture. The supply disruptions were resulting Q2 for the known force majeure in the U.S. The effective thing is that we actually lost some sales in the consequence of that. Q3 proved to be more difficult than the business was in the beginning to recover those positions. Therefore we continue to actually have quite a weak sales development, in the U.S., in Care Chemicals. It obviously was better than Q2, in terms of sales, but it was significantly lower than we would have expected. It is recovering. Therefore, if you look forward, as we guided now as well in speech, the Q4 will actually be quite strong for Care Chemicals.
Certainly Q3 was weaker than we thought from that point of view, just from the pure geographical or the pure consequences of the geographical weakness in the U.S. 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 Crop. We saw some weakening in Personal Care and in 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 Applications 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're basically fillers for the capacity utilization.
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 De-icing, braking fluids for automotive. There were a conjunction of negative factors in the industry 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 the previous year. I think Q3 2018 was the record Q3 ever, with I think 21.6% EBITDA margin. Obviously very abnormal for Care Chemicals. I think you all are well-informed of our seasonality. Typically, Q4 is the strongest quarter, not Q3. Last year was exactly reversed.
Q3 was the strongest, Q4 the weakest. I think this will impact a little bit 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. Don't be too biased, let's say, by the Q3 view, because last year was disproportionately high. 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 with a rather 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 product in the next quarter, your margin will be improved. I would not be worried on the yearly view. Those products will get sold until year-end. We'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 previous year, we are at 17.1%. We compare to a previous year of 21.6%. 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'll actually, as I just was mentioning, recover and recuperate in Q4. The rest is mostly due to less cost absorption through this lower sales on Industrial Applications.
Right.
That I think gives you a quite detailed description of what went on in Care Chemicals in Q3.
Yeah, that was very helpful. Maybe on the corporate line, quickly.
Your second question on corporate line, indeed. We had a couple of reversals of provision pensions and so on in Q3, which makes it a little bit artificial low. I would totally maintain our guidances on that. As a rough guidance, I think we have communicated our continued figures on 1st of October. You do have their corporate cost amount for continued operation, which I think is a very good guidance as well for corporate cost in continuing business this year. On the year view, that will compensate. Actually, probably the same effect. Q3 is a bit higher and Q4 will be lower, and last year was exactly the opposite. Overall, the sum will be pretty much the 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.
Good morning, Patrick and Maria. Can you just clarify on that corporate charge for the final quarter then? I think your guidance on 1st of October was 2% of sales, so you'd be implying fourth quarter might jump to even what you achieved in the first nine months, which seems excessive to me. Just want to double-check what you're guiding for the fourth quarter for that corporate charge. I can hear it's up. Then the second question is talking about the margin expectations that you've kept for the divisions, slightly altered the Natural Resources one with Additives, I think. 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 one-offs.
I think it's about 220 basis points below that on my numbers, anyway. I was just wondering how you can contextualize these one-offs, the force majeure, the sort of fires. You've now had the inventory revaluation. These sort of things can happen again, of course, but effectively, how much you see that 220 basis points are down to the one-offs you've seen in the last 12 months, and then how you climb back through that 220 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 the corporate cost, maybe I wasn't clear before. What I was referring to is indeed the Q3 number for corporate cost before exceptional items is very low at CHF 9 million, compared to CHF 23 million 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. 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, the sum will be pretty much the same at the end.
If you now look at your view on Care Chemicals, I think, yeah, 2019 was not the year. 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 two years.
It's more about the operating divisions actually, Patrick, not Care Chemicals. The operating divisions I have in total, about 220 basis points light at the low end of the range. I realize a lot of the one-offs were Care Chemicals, but I think you have one-offs in other segments as well over the last 12 months.
I mean, 20% EBITDA margins on the group level of 2021 refers clearly to a portfolio which included the SABIC business in our system at 2018, 2019. From that point of view, you'll have to adjust on that. If I understand you well on the whole portfolio, you're wondering how we can increase margins.
Yeah.
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 the De-icing. We had the force majeure in Q2. We have this lingering effect in the U.S. market there in Q3. Yeah, we will be at best coming very close to previous year. Obviously the structural improvement in Personal Care, growth in Crop Protection, and also quite an improvement in some industrial application businesses will resume the progression of margin in that business area. I'm not concerned on the midterm at all. Just a matter that in 2019, 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.
Doesn't change anything to the plan and to the ambition to bring Care Chemicals in this 19%-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 two years, they will progress in terms of margin. The booster there is clearly biofuels, second-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. Actually, the sale of licenses is doing pretty well. That is the booster factor which brings you from those 25%-26% EBITDA margin to the 28%-30% we indicated earlier.
If you don't have the biofuels business, you would remain in the 24%-26%, probably on the high end of that range for catalysts alone without the biofuels boost. Yeah. For Natural Resources, we are just progressing. We are returning to the 16%-17% where we were. We have upped that guidance now because obviously we put Additives in it. Which currently is a bit suffering because of the macro. Overall, I think we have indicated 18%-20% EBITDA margin for Natural Resources. That implies, let's say, the old Natural Resources, Oil Mining and Functional Minerals, coming to 16%-17%, and it's just mathematical addition of an Additives business, which is still at 20% in the crisis year and will return to the range of 23%-24%, where it was actually last year when demand situation was more normal.
Over the next two years, we would expect the markets and the electronics market to recover, the supply chain adjustment between production moves from China to Vietnam to Malaysia to be settled, therefore, customer orders to come back in Additives, and therefore this margin as well to go back 23%-24%. 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. As we just guided, by the way, we will see a further margin improvement as well in Q4 in that business as well.
Got it. Thank you.
You're welcome.
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 the cash flow development might go for full 2019? Second, can you update us on the search for a new CEO? Thank you very much.
Thanks for your question, Christian. On the cash flow, obviously, we don't communicate cash flow in Q3, you're putting me in a difficult position there. No, clearly, I think the cash flow is online and it's an operational point of view very much developing well in the second half. As usual, the first half is typically weaker, 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 seeking now ramping up pace, therefore as well increasing its cost, as you can see as well in the Q3, 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.
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. This increased cash out from the discontinued will be in our operating cash figure in there. On the other hand, you'll have to mentally offset it with the proceeds from the investments from the Medical Specialties business, which comes on another line. Overall, it will look pretty okay. I say at the search of the CEO, quite 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. That's an external search. They will present a list of candidates. There will be a selection process, which typically takes a bit of time, as you know.
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 comment 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 -3% with the full impact of the force majeure. In the third quarter, 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 one 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, whereas it was plus 8 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? It's quite difficult to get all the moving parts to fit. Thanks.
Thanks for your question, Alex. I 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. 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. Remember that 50% of our business is in 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, for Care 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.
Everybody is revising its GDP forecast down month by month. It's a totally 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. If you look at the growth per se, per quarter, indeed Q2 was the most affected by the specific U.S. force majeure. Clearly the main impact there, I think we're 25% down in the U.S. for Care Chemicals in Q2, which was very unfortunate. We continue to be down to give it a flavor, in Q3, I think 16% in the U.S. Yes, we have recuperated a bit, but we are still down, compared to this high base. That certainly is a drag on the numbers.
In addition, as I tried to explain before, we are actually seeing a contraction in the markets like lubricants, construction, braking fluids, which are directly obviously for the automotive market, where there's quite a significant mid to high single digit volume reduction in Q3. That just drives the figures down. That's all. What we see, important is obviously where do we go from here, is that in Q4 actually we should have more positive trends. I think we have been explicit now in the presentation on the Q4 view, and I think it's important for everybody on the call 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 Catalysis we expect the opposite. A stronger Q3 and then a weaker Q4.
That is just from the rhythm of the quarters. For Care Chemicals, it just means we are back to a more normal seasonality where typically Q4 is stronger than Q3. I hope it explains it.
Okay. Thank you.
Thank you.
Next question comes from the line of Markus Mayer, Baader-Helvea . Please go ahead.
Good afternoon, Maria and Patrick. Two questions as well from my side. Firstly, on the investment process, can you update us how this process for Masterbatches is running and if you expect an announcement until end of this year? Secondly, on Additives, beginning of October, the European Commission has announced the ban of halogenated flame retardants in enclosures and stands for electronic displays by March 2021. Could you give us a flavor on your exposure of your Additives business toward the non-halogenated flame retardants, so for your phosphorus-based flame retardants, 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.
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. I think we need to keep the cards close in our hands and not put ourselves under undue pressure. I think we will drive the processes as hard as we can to maximize value, and that's what you can expect from us. We are working on it, as you know, both for 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 of January 2020 in two totally separate holdings, legal entities around the world, IT system, which allow us to plan for a swift process, during 2020.
When we go back to Additives, clearly I think we have been very much favoring and explaining the advantages of non-halogenated flame retardants, because they're just better for this type of applications. I think 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, non-halogenated in principle, are the better product and our product in particular. Doing a bit of publicity here is particularly good. We would expect this to further, I would say, continue the growth in Additives, which is why you remember that back in 2016, we already had taken the decision to separate Masterbatches, Pigments and Additives into Plastics & Coatings for divestment. We changed our view on Additives, I think it was in 2017.
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. We have some competitors, as usual, but in principle, we are very well positioned. On the other hand, in the waxes, which is the second big area, we do have very innovative innovations based on renewable raw materials, which allows us to go into totally new areas for the wax business. The growth, and I would say backed by innovation, is quite tremendous in that business. Although it's still a small business, CHF 400 million, it has a consistent performance above 20% EBITDA, even in the quite a disruptive year like 2019, in terms of volumes, we still maintain a good margin.
We expect this really to turn. Weakness in electronic application 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.
Could you quantify your exposure to Europe for this business and to electronics? I suppose electronics is pretty high, but the European end market, how big is it?
Well, there are two components here. We do sell quite a bit to Europe. The second biggest market in this business line is actually China. A lot of this demand of China goes back to the U.S. and Europe. The actual proportion of Europe is actually probably quite significant enough. It's not a 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 or the U.S. or to Europe.
Okay, perfect. Thank you.
You're welcome.
Next question comes from the line of Nicola Tang from Exane. Please go ahead.
Hi, thanks for taking my questions. Actually, 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? Thinking about the comp, you said Q3 comp was tough. Can you explain how the Q4 comp looks? Given the high profitability of this business, I was wondering whether if that ends up being a weak market in Q4, whether that could affect your ambitions to grow margins in this division half on half. The second question was on sunliquid. You highlighted you signed the second 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 target? Thank you.
Yeah, thank you, Nicola. Coming back to Additives, indeed, I think the business has suffered 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. Our Additives are a direct supplier to those. You could quantify that to a double-digit serious contraction in Q3 as an example. It's pretty close to what actually they have for the year. High single digit, although double digit, that's the area where we see the contraction on the back of, I think, 12% growth back in 2018. We had a very good growth for the last two, three years, 2017, 2018, and now we have this contraction just because oil 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 reshuffling of supply chain because some production is certainly moving out of China into other countries in Asia. Therefore, well, logically, people will not increase stocks, but rather are emptying the supply chain before starting new production sites next year. 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 continue to be a very nice business looking forward.
We look at Q4, clearly we have guided now very, I would say, precisely on the lower growth dynamic in Q4 Natural Resources because we expect Oil to continue to be doing 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. Then you have the Additives 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. We would guide for Natural Resources to very low growth for the fourth quarter 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 be compensated by the advances we do in Oil Services. Looking at sunliquid, your second question. We're starting to have some success in signing 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&L effect is really when the plants, which have now signed licenses, start to be built, are finished, and start to operate.
The license fee structure is just a little bit upfront payment, 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. 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 enzymes. That is a few years ahead, but we are very much pleased that there is a strong interest in the technology, that people are starting to put money on the ground in building their plant and buying licenses.
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? I assume there is still a slightly overproportional 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. The second question is around the discontinued operations, Masterbatches, and Pigments. I noticed in the slide here, the EBITDA drop before exceptionals, -16%, looks pretty steep for only -2% organic or -4% on the top line. Can you add a bit more color what happened here? Do you think this will have an impact, or is this impacting your disposal process, your negotiations in any any way? Thanks.
Thank you, Patrick. To the first question, I think we started the year still with a mix which was very much linked to the mix of the previous year. With quite a lot of syngas in the mix. As we guided for petrochemicals, is progressively ramping up its proportion of sales over the year. Q3 was a good quarter actually for all segments. Petrochemicals came as expected. Syngas was still a bit even stronger than we thought. 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. No change in guidance. On the sales growth, we'll be at 6%-9%, and on the profitability level, we'll be slightly ahead of previous year. 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 you remember in Q2 in China as well, which didn't help the margin. 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. From that point of view, there is a nice potential to still improve margins in catalysts. We are exactly on track and where we wanted to be at this stage of the year in catalysts.
If you look at discontinued operations, indeed, we do have a regression of sales of 2% and maybe Dubai, which has contracted a bit. I think we are 15%, whatever, 16% down in Q3. Mainly coming, I would say, from the Pigments part, which is always more difficult to react. Masterbatches is doing a decent job or a very decent job actually in adapting its cost base to the lower volumes. Pigments, as we all know, is more the real chemistry business where you have very long production cycles of six months ahead. Those obviously get caught a bit up when volumes come down and therefore you always have to play or you reduce inventory and you shut down your factories, but you will destroy your EBITDA as you generate cash.
Or you run full steam, you have a nice EBITDA, but you end up with inventory which is not needed. This is always the call in Q3, Q4 in Pigments. That's where they are currently more targeting cash than actual EBITDA margin in numbers. Not too worried on the performance. That's the typical development, which is quite difficult to manage actually when volumes come down, but they're doing a good job there. We focus on cash. We have no intention to increase the EBITDA margin for one quarter effect. I think we run those businesses as we have run them the last two years in terms of cash, and whether that implies paying a price in EBITDA margin, well, it is the price you have to pay. Does it have a consequence on the divestments? I think people disagree with 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 Jaideep Pandya, Millennium. Please go ahead.
Hi. Thank you. First question, sorry to ask you this, Patrick, now. I know you're not going to be comfortable with this. On the divestment side of things, could you just tell us? I understand what you're saying, investing in the business, de-levering, and then cash return. I just want to ask you on the de-levering part, where would you be comfortable? The balance sheet as it stands today is relatively okay. Whatever you get, at what level are you going to be comfortable? Just want to understand your thoughts behind giving cash back, in whatever form it might be. The second part of that question really is with regards to these businesses, obviously, let's say, your Masterbatches business has quoted peers and all.
Just in terms of interest from parties, are we talking about strategic players or also financial players? Those are sort of two my divestment related questions. Just one small catalyst related question. The big project in China started off in Q3, the Hengli complex. Have you shipped catalysts for that already in Q3, or is it more a Q4 event? Thank you.
All right, Jaideep. No, I feel very comfortable with your questions. No worries about my comfort level there. If you look at the divestment topic, well, I think clearly we expect to, first of all, maximize proceeds in the cycle we're in now. The more you get, the more comfortable you can be on the resulting balance sheet. We focus one thing after the other. We try to do a good divestment process first. Second, clearly, the ambition here is to have a strengthened balance sheet. In theory, I think we can be debt-free, which obviously is not particularly good either. Therefore, we totally have a consensus in the board, and ultimately it's the 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 Triple B company, and therefore, we will make sure that the resulting leverage is well within the Triple B area. Again, the more you get, the more you can distribute, so let us focus on the plan.
Sorry to interrupt. You say Triple B would be one and a half times net debt to EBITDA, one times net debt to EBITDA? Where should we think?
Yeah. It's pretty much exactly where you indicated, yeah. I think depending on the rating agencies, which don't have always the same use and calculation methods, you'll be around one and a half times net debt to EBITDA. Yeah.
Okay.
Now on the process itself, I think no comments from my side. Both businesses, Pigments and Masterbatches, are good businesses. Masterbatches has evidently a good cash flow generation because it's low asset intensity, right? In effect, assets are low, net working capital is moving fast, and therefore, cash generation is, on one hand, regular, and secondly, significant as well, which means that you'll probably and hopefully have not only strategic players interested, but also quite a few private equity. I mean, that's a typical business you can own and be very happy with it for a long time. So that, I would say, opens the door to quite a broad process indeed. When you look at Catalysts, we'd 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 Chetan Udeshi, JPMorgan. Please go ahead.
Yeah. 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. Just to clarify that. 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.
No. Sure. Just to clarify, when we talk about margin improvement, you know that we report in after exceptional items since this year. We still obviously show you the before exceptional items just to ensure that we have a total transparency of numbers, not to disrupt anything. Clearly, we measure ourselves and the whole incentive plan and all the organization is fixed on EBIT after exceptional items. Then in terms of Chemicals. I think we clearly would see an improvement there because of the market dynamics and a return to normal seasonality I mentioned before, that would allow us to be basically above previous year in terms of Q4 and obviously as well, above Q3 2019 as well. 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 one or two millions off by business area on an expected number, our own expectations as well. 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 as we have and as we will continue to.
Understood. Maybe can I follow up? A few of your competitors have highlighted in catalyst some disruptions in Q4 from the fire, or the Saudi oil disruption. Have you guys seen any of that in your catalyst business?
No, we have noted that. We are not in the refinery business. Yeah. From that point of view, we are one step behind the value chain, and typically our catalysts are not consumed in the chemical reaction. They are delivered once and do have a lifetime of three to four years. 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 other catalyst, I think.
Thank you.
You're welcome.
Next question comes from the line of Rikin Patel , 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? What do you expect from here? Thanks.
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 a year and a half ago, and delivering on its promises. First of all, we reduced costs Q3 before last year, which gives us a very sound base in terms of operating leverage in Oil. It's a SG&A business, you have to cut SG&A to get a good base. We did that in the second half of 2018. The second element is we are not favoring sales goals for sales goals. We're actually retreating and not re-tendering contracts where we do not earn a sufficient margin, which is particularly, I would say, in some areas of the sales business in the U.S. where we had, after buying a couple of businesses three years ago.
The effort was obviously to maintain the top line and to show that we had a market position, probably that was taken, as we explained a couple of quarters ago, a bit to the extreme. You still have to make some money, right? We are here to make money, and therefore, not only sales line is important, but the margin is more important. Therefore, we are letting go of some contracts where there's just, I would say, not enough differentiation factor through a better technology. If you can do the same result for our customers with a non-differentiated 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 improvements. That typically goes as well with a higher margin. We are quite selective on seeing where do we actually gain contracts.
Therefore, we are more letting go of contracts than that we're gaining contracts is what I'm trying to say here. Certainly, we do have very interesting contracts which have been signed, are starting Q3 and also in Q4. I think that's why we are confident as well that the oil business on its own will continue its growth path in the Q4 and into 2020, in a nice manner as well.
Thank you.
You're welcome.
Next question comes from the line of Markus Mayer. Baader-Helvea , please go ahead.
Two follow-up questions shortly on the polypropylene catalyst plant in the U.S. Maybe I've missed it, but can you update us where you stand in term of ramp up? Secondly, this is more kind of modeling or a forecast question. For this kind of new Clariant or core Clariant 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 polypropylene 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 product we are now producing is higher specs than what we expected at the beginning of the project. 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 master more the production itself in terms of ramping up volumes. I would say we have most probably, we are still not finishing the year, but we had communicated the goal of getting breakeven in the plant.
We probably, I would say, not achieve that same objective of being breakeven because we are a bit behind in volume, and I would be surprised if we can close everything up in 2024. 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 catalysts 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. What's 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 around 5%-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. Yeah.
The forex sensitivity? Sorry.
Sorry, I didn't mean to interrupt you, Markus.
What was your question?
The currency sensitivity. U.S. dollar versus CHF.
I would not expect it to change too much, which means we will be still long in dollars, given that most of the Catalysis business and so on is done in dollar. Will be more breakeven in euro, 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, therefore we should be balanced in terms of euro. The net exposure is rather long dollar and still short in CHF, even after the headquarter continues to be in CHF.
Okay, great. Thank you.
All right. Thank you very much.
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