Ladies and gentlemen, good afternoon. My name is Anja Pomrehn, and it is my pleasure to welcome you to Clariant's first quarter 2018 conference call and live webcast. Joining me today is Patrick Jany, the CFO of Clariant. The slides for today's presentation, they can be found on our website along with our media release. I would also like to remind the participants that the presentation includes forward-looking statements, which are subject to risks and uncertainties. Listeners and readers are therefore strongly encouraged to refer to the disclaimer on slide two of our presentation. The replay of the call will be available on the Clariant website for 30 days. With that, I would like to hand over to Patrick to begin the presentation.
Thank you, Anja. Ladies and gentlemen, good afternoon. It is my pleasure to have you join our first quarter 2018 conference call. Let us start with the highlights. As you can see on slide four, in the first quarter 2018, Clariant again delivered a strong performance, not only in terms of sales growth, but also in terms of EBITDA improvement. Sales rose by 7% in local currency. Organic sales advanced by 5% in local currency. EBITDA before exceptional items also increased by 7% in CHF to CHF 268 million. The upswings, particularly in Catalysis, but also in Care Chemicals and Plastics & Coatings, led to the profitability enhancement. This corresponds to an EBITDA margin before exceptional items of 15.6%, which mirrors the previous year's high level.
Slide five shows that in the first quarter 2018, organic sales rose by 5% in local currency with good volume growth across all regions. Sales were driven by 4% volume growth, by 2% consolidation effect, and by a supportive pricing development of a good 1%. This resulted in sales of CHF 1.7 billion for the group. Sales growth was most pronounced in Asia and Latin America. Sales in Asia grew by 15%, driven by substantial expansion in China, particularly due to Catalysis, while in Latin America, sales rose by 11% as a result of the recovering macroeconomic environment. In North America, sales advanced by 5%, in the Middle East and Africa by 4%, and in Europe by a solid 2%, despite a very strong comparable base. Looking at the figures of the business areas in more detail, starting with Care Chemicals on slide six.
Care Chemicals reported excellent sales growth of 9% in local currency against a strong comparable base, bolstered by good growth in Consumer Care and a strong Aviation business, mainly in North America, attributable to favorable weather conditions. From a geographic perspective, most regions progressed with very solid local currency growth, particularly North America, as well as Latin America, where the economic environment improved as anticipated, reported double-digit sales growth. The EBITDA margin before exceptional items in Care Chemicals advanced to 18.4% from 18.2% a year ago as a result from an improved product mix and a reduction of ramp-up costs, while the Aviation business was not accretive to the margin. On slide seven, we see that sales in Catalysis soared by 36% in local currency.
Organic sales growth, excluding the fully consolidated Süd-Chemie India Pvt. Ltd. joint venture, was 19% in local currency and was driven by an improved demand across the business lines. From a regional perspective, the robust sales expansion was largely attributable to the continued volume growth seen in China and the ongoing strength in the Middle East and Africa. The EBITDA margin before exceptional items improved to 19.8% from 19%, driven by the acceleration in demand. However, the margin was slightly dampened by the proportionally higher sales growth contribution from syngas. Let us now move to slide eight. Natural Resources sales grew by 2% in local currency. Sales in the Oil and Mining Services business grew in single digit, lifted by the improving demand in oil services in the last month of the quarter, offsetting a temporarily softer mining business.
Sales in Functional Minerals decreased slightly in local currency against a very strong comparable base. The positive development in the foundry business could not fully compensate the slight softness in the edible oil business, which is subject to the quality of the respective crops and hence the weather conditions. However, we expect Functional Minerals to return to a slight growth on a full year basis. EBITDA margin before exceptional items declined to 15.2%, burdened by the continued price consciousness of the oil market. This, however, should improve throughout the year due to the sales pipeline of the business and a generally improving market in the Oil and Mining Services business. Moving to slide nine, sales in Plastics & Coatings increased by 2% in local currency, with growth in all three businesses and against a strong previous year.
Expansion in Greater China underpinned the continued improvement in Masterbatches and Pigments, while sales growth in Additives surpassed the very strong first quarter 2017, mainly due to higher demand in Europe and the Middle East and Africa. The EBITDA before exceptional items continued to advance and increased to CHF 114 million. The main foundation of this development included volume growth as well as pricing measures undertaken in all three business units. Moving on to the overview on slide 10 and summarizing the first quarter 2018. We delivered sales growth of 7% in local currency and organic sales growth of 5%. This growth was supported by all business areas, in particular Catalysis and Care Chemicals. The EBITDA before exceptional items also rose by 7% in CHF to CHF 268 million, compared to CHF 250 in the previous year.
This was driven by the expansion, particularly in Catalysis, but also in Care Chemicals as well as Plastics & Coatings. The corresponding EBITDA margin before exceptional items was a good 15.6%. I now come to the economic outlook 2018 on slide 12. The outlook 2018 remains unchanged from our communication for the full year 2017 results. For 2018, Clariant expects the good economic environment in mature markets, which represent a high comparable base to continue. We also anticipate that the emerging markets will be supportive, especially in Asia, and are more confident that Latin America might improve as there are signs of a recovery. As to our outlook, please move to slide 13. For the full year 2018, we are confident to be able to achieve growth in local currency, to progress operating cash flow and to further improve absolute EBITDA as well as EBITDA margin before exceptional items.
We confirm our target for the midterm to reach a position in the top tier of the specialty chemicals industry. This corresponds to an EBITDA margin before exceptional items in the range of 16%-19% and a return on invested capital above the peer group average. With that, I hand back to Anja.
Thank you, Patrick, for taking us through the numbers of the first quarter 2018. We will now open the line for questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You'll hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands that will ask a question. Anyone who has a question may press star and one at this time. The first question is from Thomas Wrigglesworth from Citi. Please go ahead.
Hi, Patrick. Hi, Anja. Thanks very much. A couple of questions, if I may. Firstly, obviously, you've held EBITDA margins, well in the quarter, and I'm guessing that there was underlying raw material inflation that you've mitigated, in that achievement. Could you detail what raw material inflation you're seeing at the moment? A second question would be on Catalysis. I think we're expecting, and in previous conversations, you talked about how syngas would have a bit of a margin dilution effect, but I definitely haven't seen that either in the first quarter. Were you previously too conservative and you think that actually is there a chance now that the mix effects, and if you could detail those mix effects through Catalysis over the next 12 months, are actually going to possibly lead to a better margin outlook than maybe previously thought? Thank you.
Thank you, Thomas. Starting with your first quarter on the whole group on the EBITDA margin. We indeed held it at a good level compared to quite a strong first quarter in the previous year. Since then, we have been faced with quite a significant price increase last year, which you know we had difficulties in the first and second quarter in some areas to offset, which we improved in the third and fourth quarter. Indeed, the comparison since a year ago was a bit of a tough base, as margin in some areas have deteriorated there. They're bouncing back to your point. We are increasing price by 1%. It's probably a bit more than 1% to be totally frank. We have to round down the figures without decimals. We are a bit higher than 1% in price increase.
We are able, as a company, to offset the raw material push, but not in all the businesses, and we look forward to offsetting the effect on the whole year basis where we still expect further raw material increases. We typically would expect a 3%-4% price increase on raw material this year, which would imply a price increase in the direction of 2% over the year, to compensate for the current increase in raw materials. We are on it. All business units have very swiftly this year, increased prices and are pushing them through. In that element, we are much faster than we were last year and look forward to therefore have not a major hit in the margin, but to be able to compensate this raw material effect.
Looking at the Catalysis, indeed we sold quite a lot of syngas in China. You can see that with the geographical mix, the +36% in China are really driven by an excellent figure in Catalysis. It's the phenomenon we talked about quite a long time ago, which is now taking place. That's according to plan. With such a volume increase, the margin could have been higher, but given that the mix is a bit unfavorable for the margin, we still could manage to have a positive effect. Let's say, if it would have all been petrochemicals, the margin would have been obviously higher than the 19.8. It's in accordance with our guidance. From that point of view, not a real surprise. The order book looks good.
We more or less know the mix for the year and are looking into 2019 as far as demand is concerned. We can confirm a good demand environment for 2018 and 2019. From the margin, we will stick to our guidance to the 24%-26% with a bit of volatility in there, depending on the full year basis clearly, with a bit of volatility depending on the actual mix, which we will be able to invoice in those years.
Okay. Thank you very much.
Next question is from Peter Clark, Societe Generale. Please go ahead.
Yes, good afternoon, everyone. Just two, please. First of all, on the Care Chemicals, again, it's coming back on the margin question actually. I was a bit surprised it was only up 20 basis points and in the commentary about aviation actually not contributing, because I thought that was a pretty high margin business. I don't know if there's a regional impact in that business. I'm just wondering if there was a little bit of raw material pressure there, because you made it quite clear not all the divisions are offsetting, so maybe that built again with the cost going up. The second question is around, I guess the Natural Resources division, and you're pointing to getting some price traction with the oil customers as you go through the year. Just wondering, how long do we potentially have to wait for that?
Do you sense it's happening into the second quarter, or is this really going to be a second half thing where you see the margins start to call work? Thank you.
Thanks, Peter. Referring to Care Chemicals, indeed, I think we had a significant growth and a nice 9% growth in local currency. Obviously the aviation business helped, which it didn't do last year. This year was actually quite a good year, particularly in the U.S. in comparison, which we normally have lower margin in that business compared to Europe. Generally speaking, I would say that the aviation business overall did not contribute to the margin, probably slightly eroded the margin in Q1.
On the one hand it's a geographical mix, U.S. stronger, but it's also the fact that this business typically works on a mechanism where you do the contracts and you fix the prices in summer for the next season, which was done and in the meantime, obviously, ethylene and so on have increased a little bit since last summer, and therefore the margin was more compressed when we actually deliver those products than what was the original plan when the contracts were made back in last summer. That's a seasonal. With some years you win, some years you lose a bit. This year was probably a year where the margins were not at their highest to put it there, this in aviation. I would say from the growth pattern, it certainly helped.
Overall, I would say that our Consumer Care business, talking about Personal Care, about Crop Solutions, has an excellent growth, pretty close actually to the 9% as well. From that point of view, I think we are progressing the right mix, and you will see this progression of the mix apparent as we go forward in the year, which means when the aviation effect recedes. Looking at Natural Resources, indeed that was probably the one sector which is still on the way to come up but not really showing it in the numbers. From the contract point of view, new contract signed, price increases passed. I think it looks good for the next quarters. We are still in a phase where particularly in the U.S., the so-called land business in the U.S. was a bit depressed in Q1.
I think you can see that in all the competitors' numbers as well, which are actually sequentially down in the U.S., all the three major ones. Sequentially, we are slightly up. We didn't fare too bad, but the Q1 was not the best for chemical business, service business in the shale. That will pop up during the year, and we expect both volume to increase and margins to increase as new contracts coming to play as the year progresses quarter on quarter. You'll see probably already an improvement in Q2 to your specific timing question, but overall the effect will improve quarter on quarter, so it will be a better picture in the second half than the first half.
Definitely I would say the order pattern, the contract signed, and the pricing levels we are talking about now, not always invoicing, but at least talking about, are definitely better than the previous quarters.
Brilliant. Very clear. Thank you.
You're welcome.
Next question is from Patrick Rafaisz from UBS. Please go ahead.
Thanks. Good afternoon. Three questions please from my side. The Natural Resources business and the Functional Minerals. Can you talk a bit more about the impact of the harvest of the crops and which crops were really driving the lower business here year-over-year? That's not a topic that's come up often in recent first quarters. On Care Chemicals, you mentioned that Consumer Care grew pretty close to 9%. Can you break that down also into the individual components, Personal Care, Crop Solutions, et cetera? Lastly, on one-offs. Clearly, you're not showing them for the first quarter, but can you confirm that you're on track for your guidance with the one-offs so far incurred in the first quarter after we overshot a bit last year?
Sure. Coming with Natural Resources, indeed, Functional Minerals had our customers to have very good numbers, so we typically don't talk about it when the numbers are very good. I think they're performing at an excellent level. They have now achieved 17%+ EBITDA consequently. Nevertheless, in terms of growth, the first quarter was a bit of a reduction compared to the high base of the previous year. Particularly because of the edible oil business. The edible oil business is when you use this bentonite clay to actually do the filtration of vegetable oils before they are bottled and delivered to the customers. The amount of bentonite used depends on the quality of the original crop. That can be soy, it can be canola oil, for instance, in the U.S. The crop has improved in 2017, not the quantity, but the quality. Right?
Therefore, for the filtration process, you just need less bentonite than you used a year ago. That's a sequential issue. I think the new crop will have a new level of quality coming to the second half of the year, so the game is open for the second half. We are confident that Functional Minerals will not be dragging growth down, so we will return to growth on the full year picture.
Would you say soy and canola are the main crops here relevant for Functional Minerals?
Yes, all the different crops for edible oils. The quality in Latin America was particularly improved in the end of 2017. It's North America with particularly Latin America in that effect. Therefore, there was less consumption by all the oil processors in Latin America of bentonite clay.
I think it's a small deviation. I think if you look at Natural Resources, you have to look at the fundamental driver, which is oil. We just talked about it before. That will significantly progress in the course of the year. I think we are past the low. The low was probably somewhere in Q4 and early Q1. March as a single month looked good already. I think we'll see those numbers ramp up as we had forecasted for the year, right? We said for 2018, 2019, the main driver of improvement of the EBITDA margin will be oil which has depressed everything and that will actually then pull everything in the coming quarters. Right? From that point of view, that's a major delta. In Q1 specifically, also mining was not particularly good.
We have a pipeline which is not running from a major customer that will use consumption. You have a few single effects which in addition of the Functional Minerals we just talked about, didn't really look or let's say, counter-affected the actual improvement of oil. Yeah.
That's a temporary measure. Now, sorry, long answer. Going to your Care Chemicals question, I think Consumer Care in general is pretty close to nine. It's higher than five and lower than nine. It is driven by Personal Care, but in particular in Q1 by Crop, where we had another very good progression there. Yep.
Okay.
On the third question on the one-offs, clearly we overshot last year out of different reasons, environmental and/or the project costs. Our guidance this year is that we will stick and reach 1.0% of sales. That is certainly what we are in the rhythm to achieve in terms of cash guidance, which implicitly comes there along, which is important to see that we have also or we will have in the second half impact of a tax penalty we have to pay in Germany, and that will be quite a significant one, double-digit tax impact in Q2. Overall, I would say it's not a P&L impact, it's a cash impact. We have provisions for that. That will be, I guess, the only biggest one-off we talk about.
Great. Can I just ask you, sorry, one fourth small question. Just reading here on the Bloomberg, the headline, Clariant says September strategy could have add-on boost from SABIC. What do you mean by that?
I think it's totally in line with what we have said in full year and in the months since then. We have two processes this year. One is clearly the new strategy we are doing. You know that 2018 is the last year of our strategic plan, therefore, independently of any additional ideas, all the BUs are working on a new strategy, designing their go-to-market and results for the next few years, say, horizon 2021, 2022. That will be ready by early autumn, which is really the new step for the group for the next few years, revised guidance.
On top of that, as you know already, we are currently looking at a few projects with SABIC, going into a bit of a detail on where can we actually create value for both groups with new business ideas, given that we can have a bit of maybe better cooperation between the groups in the diverse areas where we can have common businesses. That is still at the preliminary level. As you know, we are still in the antitrust phase, where SABIC has, first of all, to acquire the shares after having the antitrust approvals. That will take us in June, July. Never really know when the whole process is finished. That will then allow us to actually share more information. For now, the amount of information shared is very limited, because out of legal reasons we cannot share too many detailed information.
By, I would say, the same early autumn, we will then have two aspects, the fundamental new BU strategy for every single business unit. As we have guided for, a few concrete ideas of where the cooperation with SABIC can deliver added value to our shareholders by concrete business opportunities, which will then add up to the normal strategy. That's what's meant by that.
Understood. Thank you very much.
You're welcome.
Next question is on Theodora Joseph , Goldman Sachs. Please go ahead.
Hello. Hi. Thanks for taking my question. My first question is actually in the Care Chemicals division, because if I'm looking at margins, it's roughly flattish year-on-year. I'm just thinking in terms of contribution of one-off costs, it seems like it's much less this quarter. You hinted in an earlier question that the aviation impact was probably slightly dilutive on margins. Can you give some color on what the underlying margins for the division actually is, excluding the aviation impact? Maybe I can take up my question on Natural Resources later on in the second bit after you've answered. Thanks.
I think, as we just talked about Care Chemicals, we do have a good fundamental evolution in Consumer Care, which is typically driving the margin up. I think in terms of volumes, we have gained quite a lot of commodity business during the last year to fill the capacities that we have put into place to fulfill demand until 2020, 2021. I think we have created quite a few capacities, as you may recall, back in 2016, which dragged a bit our profitability in 2017, and we filled progressively during the year. We filled them with products with lower margin, and now we are replacing those products with lower margin through higher value products. Actually, the products the plants were made for in the first place.
That is a switch, which in gradual improvement of the portfolio, which happens, and therefore will increase the margin of Care Chemicals. I think last year we had an 18.2% margin. That gives you a point of reference, because last year the deicing was not particularly big. It was accretive, but not particularly big. This year, you have a deterioration effect because aviation is much bigger, but lower in margin, so that pulled us a bit down. The progression that you see there is a bit diluted, I would say, by this dilution effect of aviation.
Okay.
There's a sequential improvement or year-on-year improvement.
Is 4Q17, kind of 19.4% margin, is a good base to think about for the underlying business? Excluding Aviation.
You have the seasonality of the business. Q1 and Q4 are always the biggest quarters for Care Chemicals. Therefore, I think you always have to have this view that you cannot compare, for instance, a Q2 with a Q4, right? I mean, that's always a different business. On a quarterly basis, I think, yeah, you have a good progression, and we are marching towards a higher level of our margins.
Okay. Very good. Thanks. My second question actually is for the Natural Resources division. You mentioned that there was a temporary effect in the mining business.
I was just wondering if you can give us a good sense of what the underlying growth rate of the oil business actually is. If we look at U.S. onshore oil versus the rest of your portfolio in oil, is there a huge difference in the growth rate?
I think if you look at the actual oil business, without mining and so on, we actually have higher single-digit growth. We are above the 5%, which is already good compared to previous evolution. We are rebounding on that. The U.S. per se has not contributed at all. It is rather flattish, slightly positive. It just really came back slightly in March. There's an increasing dynamic in that figure. That compares to what I was saying before, that if you indeed take a look at the press releases of our major competitors in the oil industry in the U.S., you'll actually find that they are sequentially Q1 versus Q4 decreasing in the actual oil shale business. They have a land business. We are slightly increasing. Flattish, still increasing. We are certainly not doing worse.
The actual driver of oil growth for now has been mainly Latin America and Europe. This is the time delay we talked about. First of all, you have the drilling picking up, you have the oil production picking up. The new wells are typically wells you don't really need too many chemicals or too much chemical treatment. It's the deterioration of the years which increases the use of chemicals on a specific oil well. The actual use of chemicals is slightly delayed compared to both the drilling and the ramp-up in production. That is now coming. In terms of, I would say, contracts, new fields which are being won or lost, we actually quite a nice hit rate.
There's quite a lot of new fields, which means the people are earning money in that industry and investing to more production capacity. It actually looks pretty good if you look a few quarters ahead.
I see. Okay. Correct me if I'm wrong. The impression I'm getting is that within the U.S. oil itself, it seems that it's pricing that's partially offsetting any early increments in volumes. As we move on to the next few quarters, as pricing recovers, you should see more volume improvement as well as the lag impact kind of dissipates. Am I right?
It's not really the pricing. It's that you are locked in with contracts which have been done the last two, three years. Because the contracts has a duration of life of one, two, three years, normally. Therefore, the sales we're having today are the consequence of contracts we signed two, three years ago, in the midst of the crisis. I'm not saying the prices are going down, but we are locked in into a rather low level, and that is now improving when you gain new contracts at new pricing levels.
I see. Very clear.
All right.
Thank you, Patrick.
You're welcome.
Next question is from Patrick Lambert, Raymond James. Please go ahead.
Hi, good afternoon, everybody. Three questions for me. First, regarding Catalysis, just to a quick wrap-up on polypropylene catalyst, if any contribution there. Second, staying on catalyst, the margins. Could you tell us about the dilution of the bioethanol, if any, in Q1, and how you see that for a full year since you integrated that into the division? Finally, effects on margin per se. With the acquisition of in the U.S., that may have changed a bit, but if you could help us update our sensitivity in terms of cash costs, how long you are in euros versus Swiss francs and other currency that matters, US dollar, euro, and I guess Swiss franc. Thank you, Patrick.
Yeah. Starting with catalyst, I think, indeed, the PP plant is now running. I would say it has had no significant impact in terms of sales. It is still probably costing us more than it earns because of the ramp-up of capacity. We'll see. I would say the effect diminish over the year. It still remains a business which is in the startup phase.
Yeah, okay.
Looking at the margin of Catalysis per se, indeed, there's a slight dilution there, you're absolutely right, from the new activity of the business line of sunliquid of bioethanol. I think at the time we have guided for quite a good portion of the central R&D cost being allocated to that. We talk about between-
Yeah
CHF 15 million-20 million, more or less, order of magnitude. Which over the year are now under Catalysis and are no more under corporate costs. That is consequentially the cost burden without too much sales right now, because we are obviously working still, and the sales of licenses are more one-time effect. I think there will be a ramp-up effect here, but for the first quarter, there was no really sales associated with that activity. On the more the currency positions, right, and the potential erosion and gains, I think you have two effects there. First of all, we are still long in USD. The $400 million-$500 million long position is still valid. Therefore, we are certainly living better with a strong USD, which is not exactly the case right now.
We are short in EUR, having more costs in EUR than sales. The recent appreciation of the EUR has certainly not, let's say, totally played to our advantage. But at the end of the day, it is an evolution which you have to offset by pricing. It's currently in the proportions, not a major imprint. It doesn't help compared to previous year. It's probably one element of margin dilution. But I think it's something which over the year you have to be able to compensate. If it stays in those order of magnitudes today, it shouldn't have a major impact on the yearly results.
Perfect. Thank you.
Yeah.
Next question is from Daniel Buchta, MainFirst. Please go ahead.
Yes, thank you very much for taking my two remaining questions. The first one would be on catalysts. Obviously, a very good quarter, especially in terms of organic growth of 19%. You mentioned before, that you have a quite good order book visibility. Is this 19% in 2018 kind of a new normal, as I would say? Or is there, like in Q3 and Q4 last year, a bit of order pattern that is to be have in mind? How can we see that? Then in Plastics & Coatings, we have seen a sequential slowdown. You mentioned a higher comparison base, and if we see what the 6% in Q1 last year, obviously it is higher. Do you see any underlying negative trends here? How was pricing versus volume in Plastics & Coatings?
Especially, I think the Pigments part is having significantly higher from titanium dioxide and other raw materials. Just to understand here. Thank you very much.
Looking at the Catalysis growth rate, indeed we had a 19% organic growth. That is the strong first quarter we talked about back in Q4. I think it is obviously not a guidance for the full year. You know that Q1 is typically the lowest quarter, in Catalysis, then you have a normally a decent Q2, Q3, and the absolute margin and sales growth driver comes through Q4.
From that point of view, the 19% looks big in percentage, right? Over the year, it will get diluted by just stronger quarters, right, in absolute numbers. We confirm our guidance of good growth for 2018 and 2019, for the two years. For Catalysis, in the range of our guidance, which is 6%-7% for the business. We will see effectively then during Q3, Q4, function of deliveries, what gets invoiced this year or next year, whether we are in this guidance or a little above, that will depend on the actual delivery schedule of the orders. The orders are strong, and I think we are in for quite a couple of good years in Catalysis. Look, 2020, 2021 don't look bad either. From that point of view, I think it is a very regular evolution.
If you look at it on the yearly view, on the quarterly, you always have those effects up and down.
Of course.
that's normal. From the Plastics & Coatings business, indeed, we have achieved quite a good level of performance in some businesses. Additives is running extremely high level, probably quite full already, limiting a bit growth potential, but excellent profitability while Pigments and Masterbatches are more in the mode of increasing prices, as you rightfully say. We're not looking too much at the volume there or whatever. What we want from them is an increase EBITDA and increase cash flow generation. They certainly have a big challenge of increasing prices. I think they have started strong, much better than last year, where they lost a bit the Q1, Q2. I think there we are in the market with broad price increases across the board.
I think in Masterbatches, we started really 1st of January with, I think, a 8% price increase, which is now coming progressively through the whole customer landscape in the different regions. That is the business which has to offset increased components. The titanium you mentioned is a raw material for the white Masterbatch. In terms of Pigments, evolutions are much slower. They're further down the value chain, raw material increases are much smaller and are far in between each other. You have actually less dynamic on the raw material and pricing level in the Pigments area than you have to have in Masterbatch.
Okay. Thank you very much. That's very helpful.
You're welcome.
Next question is from Paul Walsh, Morgan Stanley. Please go ahead.
Yeah. Thanks very much. Afternoon, Patrick, Anja. Just a couple of questions from me. Do you think you can get into the lower end of that EBITDA margin target range as you move through this year? It sounds to me like you started on a good footing and that there are opportunities at the margin-- not at the margin, but for the margin to continue to make progress through the year, given that you had some headwinds in the first quarter. That is my first question. My second question is just, I am not sure I particularly understand the dynamics of the Natural Resources business, i.e., the lower margins because of the price conservatism in the oil market. Is it just simply a fact of weaker mix in the first quarter in Natural Resources driving that lower margin? Thank you.
All right. In terms of general EBITDA guidance, I think we maintain our guidance that we will increase EBITDA in absolute terms in terms of margin. The question whether we get to the 16% this year will depend, I leave that open, I think. The guidance is the guidance. I think certainly we have two elements which dragged us down. As you know, in the previous couple of years, which was very low Latin America and oil business, which was dragging us down in terms of reduced sales and reduced profitability.
Yeah.
Now reversing. It will depend a little bit on the pace of the reversing. If you look at the 2018, 2019 period
Yeah
Just to roll them up a few quarters more, I think you certainly see a gain in speed in oil implying an improved Natural Resources, which then will help to lift the group margin. That is certainly something which we can confirm today because it is what we see in the business, but the translation into actual figures and improved profitability will take a few quarters.
It is also fair to say, though, Patrick, that your highest margin business is growing much faster than the other segments as well, which at a group level, if that continues, that is constructive to the margin bridge as well, is it not?
Absolutely. I think it is certainly not damaging. Again, I think as we said, we do actually have catalysts, as we just talked before. We will have actually a good run in 2018, 2019. 2020 do not look bad as of us. We can judge it from now with interesting new contracts coming as well. That is, I would say, the most profitable business on a good track. Then we need to remove the underperformance of the last two years, which is why we are a little bit behind our plan, which was clearly oil in terms of business, and Latin America in terms of regions.
Okay.
Coming precisely back to Natural Resources, I think you just have there a few one-timers, which then have masked a little bit the progress of the oil business. That will be, I would say, removed in the next quarters. One, as we said, was Functional Minerals, which have extremely well-performed the last two years at a good level. Now in Q1, have a bit of a consequence already of a different mix and therefore slight deterioration. Not substantial, but still, it does not help. Then you had a mining temporary situation that will resolve itself. Latin America customers will fix their pipeline and volumes in principle and prices are good for iron ore and copper, there is no, I would say, structural issue there.
Coming to the oil itself, I think it's a matter of, as we just discussed, to really have both improving volumes from our customers, new contracts, and those new contracts being at higher margins of the contracts that we made.
Sure
at the worst of the crisis two, three years ago.
Just to be clear, Functional Minerals and the mining business are by definition slightly higher margin than today's Oil and Mining Services activities. That's the point, isn't it?
Absolutely. Yeah, correct.
Right. Okay. Thank you.
You're welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Chetan Udeshi, JPMorgan. Please go ahead.
Yeah. Hi. Thanks. Just maybe two question, one just follow up to Paul's question. Without getting into numbers, within that range of 16%-18%, 19% that you've given for the midterm, do you expect just a normal course of business, in the sense, Catalysis continuing to grow over the next 2 years, delivering the margin that you aspire to have? Because some could argue that maybe in 2 years' time, Catalysis might be at peak again. So you might achieve that level of margin only for a year or 2 rather than sustainably. What are the key drivers to get to that level on a sustainable basis? Was the question I had. Number 2 question is, are you seeing any material changes in demand trends from any of your end markets at this point, looking into 2Q versus, say, Q1 or last 6 months? Thank you.
To reach the 16%-19%, I think is clearly, as we just discussed before, the improvement of the mix of the businesses, but the relative weight, I would say, of the businesses within the total share of sales and share of EBITDA. Clearly, Catalysis has to grow. It is the highest margin driver and then getting above CHF 700 million, CHF 800 million, going towards CHF 900 million is certainly something which improves the mix. Fundamentally, as you know, Natural Resources is a growth factor where we can differentiate ourselves, particularly in the oil business. The mining has a very good profitability. Those things, when they grow, are naturally giving the group already at least the lower end of the margin on a very sustainable base.
What has happened the last two years or last three years, actually since 2015, was that oil, instead of progressing as was in our plan, was obviously confronted to the whole crisis of the industry, which instead of having increases at higher profitability had slightly decreasing sales at slightly decreasing profitability, which is still much better than all the peers, but compared to where the group wants to be when we talk about the 16%-19%, is a major deviation. From that point of view, this is reversing. It cannot reverse in one or two quarters. The business just started to improve during Q4. As we talked about the business in the U.S., actually really just, I would say, in the last month of Q1, starting to recover. It is progressively gathering speed, and we need this to continue to really get then to this level.
It is absolutely sustainable. There's no reason why with this portfolio we shouldn't be in that region at all. Looking at specific demand trends, I think we still see quite a good demand across the board. I think the plastic industry is still going strong. I think that, at least in our case, Crop Solutions delivers a regular growth. The Personal Care markets have been supported for many years, and with innovation, I think there's still a lot more to come. That's where probably market and innovation are two factors, right? Sometimes the market is not as buoyant, but if you can replace competitors' products with better technology, your sales can still advance, right? For that point of view, I would not see a significant sign that there is a slowing down. I think geographically, it is clear that Europe will grow less in 2018 than 2017.
I think we have 7% growth in Europe last year. You cannot grow in Europe 7% every year, right? It's not possible from the market point of view. On the other hand, there's a lot of room to grow in China. The U.S. is actually doing pretty okay. Latin America is bouncing back. You'll probably see a shift in the regional mix. Overall, I would say markets remain supportive.
Okay. Thank you very much.
You're welcome.
That was the last question.
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