Ladies and gentlemen, good morning. Welcome to Clariant's conference call and live webcast on the new stronger Clariant. My name is Anja Pomrehn, and joining me today are Hariolf Kottmann and Patrick Jany. A copy of the media releases and the presentation of today's announcements are available on the Clariant website, clariant.com. I would like to remind the participants that the presentation does include forward-looking statements, which are subject to risks and uncertainties. Therefore, listeners and readers are strongly encouraged to refer to the disclaimer on slide two of the presentation. The replay of this call will be available on the Clariant website for 30 days. Now let me hand over to Hariolf to begin the presentation.
Ladies and gentlemen, good morning. Today is a very exciting day. Clariant is making a step change into higher-value specialties by announcing an updated strategy and financial outlook, as well as the signing of a memorandum of understanding with SABIC on a significant collaboration opportunity between the two companies in the area of High Performance Materials. These steps will allow Clariant to expand more strongly by focusing on customer-specific products and solution offerings with attractive growth prospects and above-average value potential. Let us start with the highlights on slide four. First of all, we will create the business area High Performance Materials through the combination of Clariant's Additives and high-value Masterbatches with parts of SABIC's specialties business. The newly created High Performance Materials business area will be a uniquely positioned provider of highly customized high-performance materials and solutions.
Secondly, by 2020, we are to divest the remaining Plastics & Coatings business area, which comprises pigments, standard Masterbatches, and medical specialties. Thirdly, we are delighted to provide you with an attractive updated outlook on Care Chemicals, Catalysis, and Natural Resources. All of these three steps add to a significant portfolio upgrade and allow Clariant to be focused around customer-specific, technologically advanced applications with high growth and value generation. The signing of a memorandum of understanding between SABIC and Clariant presents a significant step in the creation of the new business area, High Performance Materials. Clariant will hold the majority stake in this combination. An equalization consideration will be made by Clariant to SABIC dependent on valuation. Cost synergies and enhanced operational efficiencies of CHF 100 million are to be realized until the end of 2022.
The net debt to EBITDA pro forma 2019 leverage, including pensions, should not exceed 2.4 times based on the current portfolio, which includes parts of SABIC's specialties business and Clariant's current portfolio before divestments. The completion of the combination is expected end 2019, effective as of 1st of January 2020, subject to reciprocal due diligence and regulatory clearances. We also expect significant EPS accretion already in the first year. Following the creation of High Performance Materials and the divestment of the remaining Plastics & Coatings business area, Clariant expects to deliver significantly higher sales of around CHF 9 billion, which represents a sales growth upgrade to 5%-6% per annum, driven by the group's enhanced growth profile. The EBITDA margin should rise to approximately 20% and the operating cash flow to more than CHF 1.2 billion.
On the governance, we will come back on this topic in more details at the end of the presentations. Let us move to slide five, which shows that following the step change into higher-value specialties, the new stronger Clariant will be composed of four core business areas, namely High Performance Materials, Care Chemicals, Catalysis, and Natural Resources. The other business area is the remaining Plastics & Coatings, which is to be divested by 2020. Going forward, we will change our communication regarding the group EBITDA margin target from previously before exceptional items to after exceptional items. Moving on to slide six, which summarizes Clariant's financial outlook. Sales will rise from CHF 6.4 billion in 2017 to around CHF 9 billion in 2021.
EBITDA after exceptionals will augment from 12.7%-20%, and the operating cash flow will surge from CHF 428 million to above CHF 1.2 billion in the same time period. ROIC after exceptional items is targeted to be above peer group average. We will discuss the transaction and its financials on the next slide in more detail. We move on to slide number eight. The combination of Clariant's business unit Additives and high-value Masterbatches and parts of SABIC's specialties business will create a uniquely positioned provider of highly customer-specific High Performance Materials and solutions under the name High Performance Materials. The combined customer-specific and application know-how driven offering of High Performance Materials addresses global growth trends within rapidly expanding end applications and place the business in an advantage position.
The expanded global footprint will not only allow for an accelerated growth via complementary market and customer exposure, but will also further strengthen our position and presence in China and North America. With this combination, we will be able to create a unique R&D and technology platform. The resulting expanded innovation capabilities will establish the basis for increasing win rates. Until 2021, for the business area High Performance Materials, we expect an above-market sales growth of 6%-9% per annum, and notably EBITDA margin range after exceptionals of 24%-25% from 19.4% in pro forma 2017. The resulting synergies from this combination should amount to CHF 100 million realized over three years from closing. The implementation costs are estimated at CHF 80 million over the same time frame. The combination will be significantly EPS-accretive already in the first year.
Let's turn to slide nine for the transaction highlights. Clariant will have the majority stake in the business combination. Depending on the definitive valuation, which is to be determined by both parties in the coming months, an equalization consideration will be made by Clariant to SABIC, which, however, should not lead to Clariant's pro forma 2019 net debt to EBITDA leverage ratio, including pensions, exceeding 2.4x and will leave the current investment grade rating unaffected. In the coming months, Clariant and SABIC will execute the carve-out of their respective businesses, conduct reciprocal due diligence, and continue negotiating the transaction with the target of signing the definitive agreement by the end of the first half of 2019. Completion of the transaction is expected to take place towards the end of 2019, effective as of 1st of January 2020, subject to regulatory clearances.
If we move on to slide 10, you see that High Performance Materials' superior ability to meet customer specifications and to provide technological advantages will create the basis for an accelerated profitable growth. This foundation, in tandem with cost synergies and enhanced operating efficiencies, will fuel substantial profitability progression and unlock greater value creation. By 2021, sales of High Performance Materials are expected to grow to approximately CHF 4 billion from pro forma 2017 sales of CHF 3 billion. The EBITDA margin after exceptionals, including synergies to 24%-25% from 19.4% in pro forma 2017. Slide 11 provides you with an overview of the parts of SABIC's specialty businesses, which are to be combined with Clariant's BU Additives, entire value Masterbatches business.
SABIC's specialties offerings are highly differentiated products, which offer a distinct set of physical properties and serve highly attractive niche end applications, including healthcare, consumer electronics, e-mobility, and for example, aerospace. The high differentiation of the physical properties of these materials is a unique selling proposition. Innovations in new businesses allow for significant growth with a strong financial profile. If you turn to slide 12, you can see that the products of SABIC's specialties businesses to be included in the business area High Performance Materials, are positioned in the high-performance polymers area within the plastic pyramid. After having walked you through the future High Performance Materials business, I still want to say a few words on the expected synergies. For this, I ask you to turn to slide 13.
As already mentioned earlier, the combination of Clariant's Additives and high-value Masterbatches with parts of SABIC's specialty business is expected to result in synergies with an anticipated annual run rate of CHF 100 million realized over three years from closing. Service cost and procurement synergies will enable synergies of approximately CHF 50 million, while the remainder will be generated from site efficiency as well as distribution and asset network optimization. Additionally, we can envision that further synergies could be realizable due to our experience accomplishing large-scale integration and synergy projects. The implementation costs are estimated at CHF 80 million over the same time. We turn to slide 14 for an overview of the next steps.
In the coming months, Clariant and SABIC will execute the carve-out of their respective businesses, conduct reciprocal due diligence, and continue negotiating the combination with the target of signing the definitive agreement by the end of the first half 2019. The valuation is to be negotiated and an equalization consideration to be mutually determined in order to achieve economic ownership levels. Closing is expected to take place towards the end of 2019, effective as of 1st of January 2020, subject to regulatory clearances and other customary closing conditions. Pigments, standard Masterbatches, and medical specialties are to be divested by 2020. This divestment decision underlines Clariant's commitment to move the portfolio into higher specialty areas and ensures best ownership for each of its businesses.
Despite being well-positioned and having significantly increased their profitability over the past years, these businesses to be divested do not match the Group's criteria to differentiate through innovation in higher growth and higher profitability areas. Having discussed the combination of Clariant's Additives and high-value Masterbatches with parts of SABIC's specialty business, I would like to turn to the new strategic direction of the Clariant Group. Following our strategic review, which took place over the past month, we today also announced new, well-founded targets for our business areas. Please turn to slide 16 for Group strategic direction. Our strategy is based on leveraging operational efficiency to effectively size the profitable growth opportunities which arise from global challenges.
Clariant has improved and will continue to improve its ability to deliver innovative, sustainable products and solutions which address the higher demand for more convenience, stricter safety requirements. Tighter environmental regulations, as well as improved energy efficiency. We will translate our exemplary customer-specific product portfolio, technology, and solution offerings into above-average top-line growth and profitability progression, coupled with a resilient and improving operating cash flow. Clariant's five-pillar strategy on slide 17 includes continuous developments within each of the five pillars, demonstrating their effectiveness and are tangible illustrations of how Clariant is utilizing these key pillars to successfully implement the strategy.
In addition to the Group's continuous developments, the portfolio upgrade, which we announced today, will not only increase the scale of our operations, it will also widen the scope of our high-margin specialties portfolio and provide additional R&D as well as commercial opportunities, particularly via the formation of the new High Performance Materials business area. These developments will result in a real step change for Clariant into higher value specialties. With that, I hand over to Patrick to take you through the updated outlook for each of our businesses. Patrick?
Thank you, Hariolf. Slide 18 provides an overview of Clariant's innovation pipeline, showing some project examples of our total pipeline worth approximately CHF 2.1 billion. We will go through each business area to look at innovations in more detail, starting with the Care Chemicals on slide 19. The business area Care Chemicals will continue to grow more quickly than the market. The updated outlook represents an additional step up in growth, resulting from offering more sustainable products and solutions, which meet the market's expanding demand for convenience, renewable, and natural products. The expansion of our market presence in strategic regions such as North America, as well as China and Asia in general, will also support this growth. The higher degree of specialties in Care Chemicals and the offering of individualized customer-specific products with scalability will not only foster growth but will also increase profitability.
Accordingly, the midterm guidance for Care Chemicals has been increased to a per annum 2017-2021 sales growth rate of 5%-7%, and a higher EBITDA margin range after exceptionals of 19%-21%. On slide 20, we see some examples of product innovations at Care Chemicals. Genadvance, our new innovation personal care, provides three new conditioning ingredients based on naturals, which enable a much improved hair conditioning performance. The picture on the right side of the slide represents our client, Kemon's, Actyva product range, which includes several of Clariant's sustainable formulations and natural ingredients. Examples of such products include, but are not limited to, Genadvance Hydra in their conditioner, Balsamo Essenziale, and hair mask, Maschera Essenziale. An additional innovative Clariant product within Crop Solutions is Synergen OS. This product reduces the spray drift which occurs during pesticide application.
Spray drift has several negative consequences, which amongst others, include the loss of expensive pesticide and the reduction of the application effectiveness. The benefits of Synergen, in addition to being eco-compatible and non-hazardous, also includes higher crop yields together with reduced drift and the reduction of water consumption. For your information, on the right-hand side of the product innovation slide, you can access detailed information on the mentioned innovations by clicking on the link. Moving on to the business area Catalysis on slide 21. In our business unit Catalysts, we target continued above-market growth rates by capitalizing on our innovation leadership and strong licensing partnerships. This will accelerate the introduction of innovative customer-specific catalysts targeting specific reactions with large-scale potential and be the driver for future growth.
The addition of more sustainable solutions, such as the reduction of hazardous materials, providing a much improved toxicological profile, also adds to the growth and cost advantages of our customers. The growth accelerations in the business unit Biofuels & Derivatives is mainly driven by the global search for more climate-friendly energy sources and the legal frameworks set out in Europe, the U.S., and China. Clariant is exceptionally well-positioned to benefit from this challenge and development. Clariant expects to generate sales of at least CHF 100 million at an EBITDA margin exceeding 40%. From licenses for the Sunliquid technology and bioethanol sales from the production plant in Romania, which groundbreaking was announced last week. The contribution from both Biofuels & Derivatives and new customer-specific catalysts will significantly expand the profitability of the business area Catalysis by 2021.
Accordingly, the midterm guidance for Catalysis has been increased to a per annum 2017-2021 sales growth rate of 6%-9% at a higher EBITDA margin range after exceptionals of 26%-30%. The product innovations at Catalysis, which I enumerated on slide 22, include the catalyst EnviCat, which is beneficial for reducing harmful emissions by mitigating the greenhouse effect, helping to preserve the ozone layer, and reducing atmospheric pollution with other health and climate-damaging nitrogen oxides. The EnviNOx process contributes to climate and environmental protection. As announced with our full year 2017 results, we already highlighted some insights on our Sunliquid technology. It is indisputable that the reduction of greenhouse gas emissions is vital for the environment, that alternative sustainable sources of energy must be found to reduce the dependence on oil.
Clariant development of the Sunliquid technology is clearing the way for the second generation of biofuels because this unique fully integrated process converts any lignocellulosic agricultural residues into cellulosic ethanol in a highly efficient, extremely economic, energy-neutral and sustainable process. Slide 23 shows that within the Natural Resources business area, the oil mining services activities are expected to build up momentum as general demand and a rebound of the oil market improves the industry output. Differentiated business steering according to the changing business landscapes with a focus on growth in the oil basins of North and Latin America, combined with technology and innovation, will result in sustainable strong growth. Diverse offerings, regional expansion, mainly in Latin America, in tandem with accelerated growth in North America, underpin the strategy outlook for our mining activities.
The main profitability improvement drivers at the oil and mining services include tight cost control and cost reduction. Functional Minerals is expected to grow sales above the bentonite market, which grows approximately in line with GDP. This growth will be driven by regional expansion in North and Latin America, as well as in the Middle East. Moving into new applications through innovations such as smart and active packaging within feed and agro will also underpin this progression. Accordingly, the midterm guidance for Natural Resources has been increased to a per annum 2017 to 2021 growth rate of 6%-7% at a tighter EBITDA margin range after exceptionals of 16%-17%. Examples of remarkable product innovations in the Natural Resources business area are found on slide 24.
In oil and mining services, the highly innovative VeriTrax system allows customers to turn data into actionable information, which is a key consideration to maintain production and improve operational efficiency and reliability. Not only does our VeriTrax product differentiate Clariant from competitors, it also results in tangible benefits for our clients. At Functional Minerals, the introduction of our INVOQUE product into sediment management for the mining industry enables our clients to lower their impact on the environment by reducing water consumption and improving the use of tailing reservoirs, whilst helping them to reduce operating costs and CapEx. Moving on to slide 25. The remaining Plastics & Coatings business area, including pigments, standard Masterbatches, and medical specialties, will continue to be managed using differentiated business steering. Pigments and standard Masterbatches are anticipated to grow in line with GDP.
Sales growth in pigments will be marketing driven via selective innovation projects, growth in preparations with a regional focus on opportunities mainly in China, India, and North America. Standard Masterbatches should benefit from its strong market position and will also focus on more rapidly growing regions, while medical specialties are expected to grow more quickly in accordance with the underlying end market in healthcare packaging. The profitability of pigments and standard Masterbatches is expected to feasibly improve via stringent cost management, while medical specialties will benefit from innovations resulting in profitable growth. With that, I hand back to Hariolf.
Thanks a lot, Patrick. Let us now move to the governance topics on slide 27. The governance agreement that has been signed underlines the commitment of SABIC as strategic anchor shareholder. The extraordinary general meeting scheduled for the 16th of October will decide on the expansion of the Clariant Board of Directors to 12 members, of which four may be nominated by SABIC. It is proposed that I will become Chairman of the Board of Clariant, which will continue to be an independent listed company on the SIX Swiss Exchange. Ernesto Occhiello, SABIC's current Specialties Executive Vice President, was appointed as new CEO of Clariant effective as of 16th of October, 2018. Last but not least, Patrick Jany will continue to serve as CFO of Clariant. With that, I turn back the call to Anja.
Thank you, gentlemen, for taking us through the details of today's exciting announcements on the creation of the new, stronger Clariant. 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 to asking a question. Anyone who has a question may press star and one at this time. The first question is from Peter Clark, Société Générale. Please go ahead.
Yes. Good morning. Well done. Two questions, though. First one, you talk about the step-up in the operating cash flow, I think to about over 13%, which is something you haven't seen since you spun out of Sandoz, I think. Effectively, what about the free cash flow? If I look at the businesses coming in, I'd have thought they require a bit more CapEx and for the growth, and certainly than the businesses going out. Presumably, you see a step-up, but not as strong. The projections on the free cash flow and perhaps a bit of the track record of the businesses coming in in terms of their cash flow record of recent years. Then the second question, looking at the High Performance Materials kicker on profitability that you have even before the synergies.
It's a sort of mid-teens growth I think you have on EBITDA through to 2021, against the sales line growing perhaps half that level. That's even before the synergies kick in. Just a bit more again, how you expect to deliver that in the new High Performance Materials. Thank you.
Thank you, Peter. Indeed, when you look at the cash flow, we expect a significant increase. We guide for CHF 1.2 billion cash flow minimum in 2021, which really is a massive increase compared to what we have today. That comes from the fact that we have the benefit of getting business in, which is extremely cash generative, not only profitable, but with a very efficient supply chain, which really improves the cash flow profile. As far as the free cash flow is concerned, after CapEx, we certainly will have some CapEx costs associated with it. I think in particularly High Performance Materials, we will invest in both areas. In our Additives business, which we are contributing, but also in the High Performance Materials business which comes from SABIC. That will increase a bit the CapEx number for the group.
It will not be, I would say, material. The free cash flow increase will be quite similar, in terms of proportion to the free cash flow increment we expect in the next few years. Count about an increase in our CapEx guidance from currently CHF 300 to CHF 400, CHF 450, we'll get there in more detail when we have a precise deal to announce. Significant free cash flow improvement as well. On the increase on the profitability side, indeed, it is I think a good point in time to enter into that combination. I think we are putting in two fairly similar pieces in terms of profitability, but benefit from the growth prospects together. I think on our side, we will have new Additives manufacturing plants coming on stream.
We have announced one expansion of Licocene a few months back, which is a major product with a good profitability in the next years. On their side as well, on the SABIC side coming in, we do have a significant growth in the High Performance Materials area, and within that, with the high-value ones. The PEI-based components will grow significantly in the next few years based on customer contracts and expansion of capacities, which are already underway. Both businesses will contribute to, I would say, if I call it like this, organic growth and profitability increase independently from the synergies as well. Okay. Thanks.
Next question is from Patrick Lambert, Raymond James. Please go ahead.
Hi, good morning, and congratulations. I have a few questions around the deal itself. First, could you give us a bit of flavor on the track record of the HPM polymers, the PEI in particular, of SABIC the past few years in terms of growth and in terms of EBITDA margin? I think from what I've seen, the 2017 is about 20% EBITDA margin. A bit of history of the development there would be helpful. Also, the expected CapEx needs and restructuring, is that fair to say that the new Clariant will take that as a cost going forward? Finally, I think in terms of the clarity of the valuation part of the deal. It's still very difficult for us to very split the value between the assets bringing from Clariant and bought by SABIC.
Can you help us a bit in terms of what type of multiple, what type of exit multiples you're looking, how you're thinking of the cash outflow for the SABIC asset post the, I guess, the timing of the exit too? Thank you.
All right. Thanks, Patrick, for your questions. Looking at the track record of the HPM business, indeed, it has been progressing quite well. It is currently actually capacity constrained. They are doing capacity expansions right now, which has limited growth in the last couple of years. Before that, they were growing, in the area of what we have guided for as well, looking forward. It's always a matter where you're very application driven and close to a customer, so you may lose an application there, and you have to re-win new contracts for your product in other areas. Excellent growth pipeline, and therefore we are confident on the growth being shown here, particularly in electromobility, in aerospace.
All the sensors, if you look at the sensoric applications, it's all about high-performance plastics. That is really an area which is expected to grow tremendously looking forward. Very much based on the PEI application we're mentioning, which is obviously as well driving profitability. I would say a strong past track record with a bit of flattening of sales the last couple of years as the capacity constraint. Now with new capacities coming on stream, development of growth as we show it in our projection for the whole area. I think growth, if you decompose growth, is more or less coming from both pieces. We will grow significantly in Additives as well. Therefore similar, not equal, but similar growth rates for both parts of the businesses being put together.
When you look at CapEx, I'll just give a sort of guidance for the years 2020 onwards. We will have a bit more CapEx. We're obviously in a bit more business as well. From that point of view, it is absolutely okay from the free cash CapEx going towards, let's say CHF 400 million from the CHF 300 million we have today. In terms of exceptional, you mentioned a fundamental change, which we have promised and we had promised before, which means as soon as we get a new strategic update and the significant increase in earnings quality, which we announced today, we also switch to EBITDA after exceptionals and not before exceptionals. Therefore, the numbers you see today are actually after exceptionals, which actually represents quite a step up compared to our account numbers.
That is really driven by the fact that by 2021, after completion of integration of the SABIC piece and divestment of the remaining Plastics & Coatings, we have roughly 59%-60% of our EBITDA being generated by businesses having margin higher than 20%. A very strong EBITDA quality as well, which allows to absorb, let's say, the exceptionals there. On the valuation part where we give you a little bit the comparison of the two pieces coming in, right? We have roughly a CHF 2 billion turnover on 2017 basis. We don't give our current numbers, our projected 2019 when the deal will actually be done. But looking just at actual 2017, the SABIC piece is around CHF 2 billion, CHF 1.9 billion to be precise, with an EBITDA of around 20%.
Our business is a bit more than CHF 1 billion with an EBITDA of 18%.
Perfect.
Additives is growing. Roughly it's double the size. Yeah. Of similar quality in terms of growth, as I just mentioned, and fairly close in terms of profitability as it stands today. We have an agreement of roughly similar valuations as well, which indicates that as one business is double the size from the other, we will need to make an equalization payment to get the majority of the combined business area.
I'll leave you to calculate the numbers, our guidance is that the leverage of the whole group will not be materially impacted. We have a view that it will not be exceeding 2.4x net debt to EBITDA ratio before divestment. Just really on the deal itself, the question that you are mentioning. Therefore, there will be a significant cash out, but it will be just a difference of size, really, between the two businesses. Will not put in danger, I think, our net debt to EBITDA ratio. The divestment itself, and if you as well to simulate the extent it proceeds, we haven't guided on that, and we'll see how the divestment progresses over the next year. We'll then actually reduce our leverage, and we'll be pretty much in an almost debt-free situation by 2020, 2021.
Excellent. Thank you, Patrick.
You're welcome.
Next question is from Christian Faitz, Kepler Cheuvreux . Please go ahead. Mr. Faitz, your line is open.
Yes. Good morning, gentlemen. Good morning, Anja. Congrats on the deal. Three questions, if I may. First of all, talking about the divestment, can you give us an indication of the cash flow generation ability of the Plastics & Coatings activities that will be part of HPM, and the cash flow generation ability of the activities to be divested? Second, given the announcement of the transaction, can you please tell us if you already saw interest by strategic or private equity investors in the assets that you plan to divest? A third question, since we have the pleasure of having management contact pretty much at the end of Q3, could I prompt you to update us on the demand trends you have seen so far in Q3? Thank you very much.
All right. Taking your question in the reverse order, obviously the quarter is not finished now, we will not guide on the quarter. As you know, we don't give guidance on current quarters. I would expect the business to continue in the same growth pattern we have seen until now. Now looking at the divestment itself, clearly the business that we have now called Remaining Plastics & Coatings, which is really the business unit pigments and standard Masterbatches, has a size of around CHF 1.6 billion and a profitability of around 11%-12% EBITDA. I think the cash generation profile is very similar to Plastics & Coatings overall. As you know, Plastics & Coatings has been the main cash generator, with cash flow contribution pretty close to the EBITDA contribution or slightly higher.
That should, I think, surface as a guidance for the cash flow generation for that part of the business. We will start a carve-out as well of those businesses, allowing them then to have a future with a new owner. We have had in the past, clearly some interest being expressed, as it was still, let's say, the former Plastics & Coatings, and they are good businesses. I would expect it to be actually more of a consolidator than being consolidated. Our pigments business is the number one in the world in terms of size and with excellent profitability. Therefore, I think if you want to do something in pigments, you have to have our business as the core. The other piece of masterbatch are certainly in a very, I would say, demanded market as well as plastic conversion continues to grow around the world.
We'll see that in its proper time.
Okay. Thank you very much.
Thank you.
Next question is from Alex Stewart from Barclays. Please go ahead.
Hi there. Good afternoon. Thanks for the presentation. Three hopefully short questions. The first one, why have you decided that the new CEO won't sit on the board of directors? Hariolf Kottmann, I believe you do at the moment, so I'm interested to understand why there's a change. Secondly, your new divisional margin targets are quoted including the exceptional costs, as you've discussed, but those costs are by definition unusual in size and nature. I'm keen to understand what level of exceptional costs you've built into the forecasts for the individual divisions and how confident you are that that level of cost will be met. Finally, you've talked about the relative EBITDA contribution for the new venture with SABIC.
You've also talked about the equity stake that SABIC will take being less than 50%, but you haven't yet discussed how much debt is being contributed by each side, which is the missing link. Without that, it's very difficult to work out the cash transfer because of the equity value. Could you give us some idea how much debt and pension you expect to come from each side? If you're not happy giving numbers, then perhaps just confirm whether they'll contribute roughly the same debt in proportion to their earnings would be great. Thank you so much.
Let me come back to your first question concerning CEO and board membership. We try to position the new Clariant according to the highest standard of corporate governance. With that target, we will introduce a few changes to the new board of directors. One change is that the CEO will focus on the operational execution and be not a member of the board of directors. Taking your second question, I think you're right. The difference between before and after exception has been always a subject, and I think we have had a good progress on that topic apart from last year, where given the projects and then the activist plans, we had quite a high exceptional amount. You know that we guide typically on exceptionals moving towards 1% of sales.
I would say, if you want to have a better quantitative figure of the difference, let's say, in 2021, that's a fair assumption to take. Right. On the original contribution and how much debt is included on our pensions, the basic calculations are always debt and cash free, right? As the carve-out progresses, which is just starting on the SABIC side, we'll probably have a little bit of cash in the countries running ourselves as well. I think it'll probably be the same amount on both sides, not really impacting the equalization payment and maybe some pensions here and there for the employees. I wouldn't expect this to be a major distortion effect on the equalization payment.
Okay, that's really helpful. Just coming back to your margin point, can I assume if I wanted to compare like for like your old guidance to your new guidance, I would add on roughly 100 basis points into a new guidance and that would give me a pre-exceptional level? Very generally speaking, I'm talking about.
Correct.
Thank you.
Next question is from Patrick Rafaisz, UBS. Please go ahead.
Thank you, everyone. 3 questions from me as well. The first is a follow-up on the history of the SABIC assets you're acquiring. Can you give us a bit more color here, let's say over peak to trough cycle, what were the peak margins, what were the trough margins for those assets? Secondly, can you talk about what you think regarding corporate costs for the entire group, including SABIC, but excluding pigments and some Masterbatches assets, what should we model here for 2021 and beyond? Lastly, on the governance statement you made that there's no intention of a full takeover. Will that be formalized in a contract for a certain period of time at one point, or will it remain more of an understanding? Thank you.
I'll take your question in the order, Patrick. I think we cannot really give you concrete data on the historic part. I think the general business description we have seen as we looked into the business. You have to remember that this business is actually just starting to be a carve-out, right? I think for the last two, three years, this business has been separated from more commodity applications within the former GE Plastics business, to call it like this. Therefore, we are really talking of a carve-out of a carve-out. Yeah. Therefore, I think it would not be representative now to do huge simulations in the past. What we are combining now is the high-value, High Performance Materials part, which is an extract of the specialty, a part of the specialty business of SABIC, right?
It is not the whole, this process is just now being started. We looked at the product, at the sales, at the structural cost, and so on, but you don't have really a one-on-one historical official figure that you can compare to. I would say, if you compare the similar pieces, it is running currently at a level in line with past performance, the second wave of growth, as I explained earlier on, is really coming because of that capacity constraint right now.
Now, on the corporate cost, we currently do not forecast that the corporate cost will have any significant increase because of the size difference. We grow by CHF 2 billion, we also divest CHF 1.6 billion, the rest is organic growth, which typically does not demand for higher corporate costs. Clearly there, the guidance is that we should come at the CHF 9 billion turnover in 2021 with more or less the same corporate cost as we have today. In terms of governance, I think obviously there are two aspects here. One, we have a governance agreement, which is communicated in part of the board participation of SABIC. That's one point. SABIC today also in their release confirmed that they do not have the intention of taking over Clariant, that's a separate topic which obviously cannot be put into a contract.
It is an understanding, and it's SABIC to answer on that question.
Okay. Thank you.
Next question is on Daniel Buchta from Vontobel. Please go ahead.
Yes. Thank you very much. Gentlemen, for taking my question.
Daniel, can you speak up, please? We can hardly hear you.
Can you hear me better now?
Yeah, perfect. Thank you.
Sorry. Thank you very much for the hint. The first question would be on the financials after the deals, the 2.4x net debt to EBITDA, including pensions, and excluding the disposal proceeds from the non-core Plastics & Coatings part. Can you elaborate a little bit on how you derive these 2.4? As far as I understand, there is no capital increase involved in that. Could you confirm that as well? The second question on the synergies you have identified, the CHF 100 million. Could you here also a little bit elaborate on how you derive these CHF 100 million? What can I expect, example, from workflow harmonization or consolidation of assets? I hear a bit more details on that. The last question would be on oil mining services.
Here you were mentioning a differentiated steering in oil mining services with a focus on North America and South America. Is this different to the guidance before and what is about regions like Middle East and Africa or Europe in that regard? Thank you very much.
All right. Thanks, Daniel. Looking at the net debt to EBITDA ratio, which we stipulate for 2019 as a maximum of 2.4 after integration of the SABIC business, but before disposals. It is very similar to the current net debt to EBITDA ratio, which is 2.3. If you take the pension out, you're part of 2.3 with the EBITDA before. You'll have not a material change there, which really is a good indication, I think for the sizing of the equalization payment when you look at the numbers we discussed before. The CHF 2 billion business at 20% and CHF 1.1 billion, that's close to 20. Assume any multiple that you want, you'll have to pay a delta.
Yep.
Maybe with a bit of a difference in multiple that gives you an equalization payment, which is totally able to be financed by the cash payment, and therefore it is fully in debt, without significantly over-leveraging the group at all. Comes in a second step or during that time as well, but as a separate transaction, the sale of the different pieces of the remaining Plastics & Coatings, which actually will then de-leverage the group significantly when you look at the end of 2020 horizon. From that point of view, I think it's as far as we can go today in terms of guidance for values, because we will have still to negotiate final valuation topics until June 2019.
Just a quick follow on this. It means that within two years you are assuming that you have paid down all the debts you need to take up to finance the equalization payment, right? Because you were mentioning we are currently at 2.3x, then it will be 2.4x, so almost the same level.
Well, you receive a lot of EBITDA as well, right?
Of course.
the numbers are a bit bigger. You really de-leverage more by the proceeds of the divestments of the remaining Plastics & Coatings.
Thank you.
Looking at the synergies, I think we give you a chart in the additional information package, which gives an indication of the tentative synergy breakdown. I think the main important piece here is to see that we are integrating a CHF 2 billion piece. We feel absolutely confident we can leverage the services and the shared service centers we have. A significant part of it will come from service cost synergies as we can take over the additional volumes without having a significantly higher cost administration. There will be around CHF 25 million, there will be a bit CHF 25 million as well in procurement order of magnitude, always. A bit of site efficiency as well as we can certainly leverage our plant excellence operational efficiency into the 14 sites coming in. That is probably the biggest part of the synergies.
An additional one is on the distribution element. We do have a significant distribution network through Masterbatches, which is compounding and ultimately delivers the same OEMs as the high-performance part of SABIC as well. There we will be probably able to cut on distribution costs on that side by distributing the newly incorporated products from SABIC into our distribution networks, giving you some cost savings as well here in a CHF 10 million-CHF 15 million range. That gives you the breakdown of synergies as it stands today. In terms of your oil mining questions, we highlighted differentiated steering as a topic to improve the performance in Natural Resources and particularly obviously in oil and mining.
On the one hand, a rebound in volumes in oil, which we all see, which leads to an increase in growth as well as we gain new contracts as well. On the other hand, we also need to be very cost efficient and we still have to work on the cost, particularly in North America on the integration of the two purchased businesses. Therefore, there is a cost aspect as well, which we highlight as well in the presentation on improving profitability. It's about growth with new contracts, with higher margins, but also on a very strong cost discipline in some geographies.
Okay. Thank you much. That was very helpful.
You're welcome.
Next question is from Alexandra Buberl, UBS. Please go ahead.
Hi. I just have a follow-up question to the below. I'm still struggling to see how you want to get to the 2.4x net debt to EBITDA, given that you stand at 2.7 as per end of 2017. The second question is, you state that you intend to remain investment grade. This is based on what kind of ratios, given that Moody's still has a sub-investment grade rating on the company? Thank you.
Yeah. I think if you start with the leverage side, you have to see that it's on 2017 numbers, right? Last figures we published. By 2019, we'll have obviously a progression both on our side, let's say, to call it like this, the old Clariant side, but also from the SABIC business coming in, right? The absolute EBITDA numbers are actually higher and reduce the leverage, if you combine both entities like this. I think as I said before, it depends a bit on the valuation multiples you put in your simulation, but you'll come to a very digestible cash payment to be done within the 2.4x net to EBITDA. That, in turn, makes us confident that we will continue to be BBB. The main parameters here being the 2.5x net to EBITDA leverage.
The cash flow performance itself in terms of free cash flow generation, right? Which is the other criteria, being vastly better than it is today, given the increased cash flow performance, which we highlighted at the beginning of the call. You are actually improving the quality of the business and the cash flow generation quite significantly without really changing the leverage of the group. That makes us confident to be a BBB, which is really S&P based. Moody's per se, is still doing a rating on us, but more on the bonds which have been emitted. They are no more officially evaluating the company per se. Yeah. They don't have access to the business plan and so on.
Okay, can we move on to the next question then, please?
The next question is from Gunther Zechmann, Bernstein. Please go ahead.
Hi, good morning, everyone. First of all, Mr. Kottmann, congratulations to 10 years of leadership as a CEO of the company. Can I ask two questions? One is dare I ask about the Clariant legacy business. What gives you the confidence in the more narrow guidance at this point to 16%-17% EBITDA margin for Clariant standalone that you put in the additional financial information? The second one is more around strategically how you think about the cyclicality of the new Clariant. About half the business will be in the High Performance Materials and you have been reluctant or not willing to provide information about the peak to trough margins of the HPM business that comes with SABIC. Is it a similar logic to what you had around Huntsman that the size of the business, the scale, will give it more resilience?
Is there anything about the HPM business that we should know that makes it more defensive, compared to the end markets that it serves?
All right. Looking at your topic first on the 16%-17%, we added information to be totally transparent. That is, let's say the Clariant standalone without any portfolio. As it stands today, we would reach around CHF 8 billion by 2021 and have an EBITDA margin of 16%-17% after exceptionals. Which is really coming through the increase in Care Chemicals. You'll note that we have increased the guidance there in terms of profitability guidance to 19%-21% after exceptionals, yeah. That's a significant step up as well, as we go into more higher value application parts of the active ingredients and the cosmetics area we highlighted here with a few examples.
That's certainly an area where we have been investing consistently in the last eight years as we continue to very consistently improve performance in that business area, and we expect it to continue in the next few years. You have the catalyst being upgraded because of just innovation with customer specific catalysts as well. As you can probably see one big bubble in the innovation chart, which is coming on stream pretty soon and will allow catalysts to progress in profitability until 2021. Obviously the biofuels, which we guided for by year-end last year, which per se adds CHF 100 million at a very high profitability as well. We pass now to a guidance of up to 30% EBITDA margin for the whole Catalysis area, which helps to lift the group, obviously, compared to current levels.
While Natural Resources maintains more or less the same EBITDA margin there, we count first on the rebound of sales and cost discipline to go back to those levels. As you know, this is the one area where we are today a bit behind our original plan. If you take our original commitment, we would be there if Natural Resources, specifically oil and mining, would be performing at the levels we had expected to. That plan implies they're coming to those levels by increasing sales and being cost disciplined. To make it short, removing, let's say, the drawdown of oil and mining by getting them to the performance level they had anticipated to be, and further progression in Catalysts and Care Chemicals, which lifts the group, without now considering any portfolio, to the 16%-17%.
We put this as a transparency for you to get a good flavor of a comparison with the previous plan, then put obviously the upgrade in terms of portfolio we have announced today in addition.
The midpoint of the guidance hasn't changed, though. If Care Chemicals and Catalysts are upgraded and Natural Resources more or less the same, would the delta come from the legacy, the standalone remaining Plastics & Coatings or the corporate costs? Where does the balancing figure come from?
I think Plastics & Coatings has certainly reached a certain maximum in terms of profitability in the standard Plastics & Coatings areas of pigments and standard Masterbatches. That's leveling off and not contributing to the additional profitability. Always remind that this is now after exceptionals and before it was before exceptionals. It is at least 1% up. When you look at the cyclicality, I think, cyclicality is improved clearly by having a higher quality of business. We will have after portfolio changes, as I was mentioning before, 59% of EBITDA being generated by businesses with intrinsically high margins like Catalysis, like High Performance Materials. I don't think you do have a strong volatility on the new High Performance Materials business. Thanks for coming back on that. I should have highlighted it before. You do have, not comparable, but other players in that plastic pyramid that you have.
You have Victrex, which is right on top with one material, but it's fairly small. You have very close to us here in Switzerland, EMS, which also has different set of materials, but are consistently improving profitability and sales every year. That's really the area we are playing with different materials, different applications, not in automotive, but much more in electronics and in aerospace and sensors. These are areas which I expect to grow. I would say, are also part of the megatrends we see today. I don't see cyclicality increasing, but on the opposite, significantly being reduced for the group looking forward.
Thank you, Patrick.
Okay.
Next question is from Andy Schneider, VZ Capital. Please go ahead.
Hi, gentlemen, and hi, Anja. I would have a question also on the three remaining and existing divisions. As you just mentioned, you formulated slightly higher targets for each division. You mentioned mainly higher margin product R&D pipeline. There was no mention of potential collaboration with SABIC in these areas, potential benefits from having closer relationships or doing business together or even exploring some day synergy potentials, other JVs. Is this in the guidance? A potential collaboration with SABIC for each division? Is that also part of the reason why you formulated higher targets, or might that come on top one day?
You're absolutely right. Thanks for mentioning that. It is actually not part of our current guidance, because we do have, obviously, ideas, whether it's in Care Chemicals or Catalysts, for instance, as we had highlighted before, since in January. We have not included those in the current guidance because they are projects, they are ideas. We don't have the level of definition and concrete realization that we would include them in the plan today. In order to have a solid plan, we have just formulated what the businesses see coming in function of their pipeline and normal business evolution. Those ideas, and there are some, will be on top.
Okay, thanks.
You're welcome.
Next question is from Priya Viswanathan, Société Générale. Please go ahead.
Thank you. I hope you can hear me.
Yeah, very well. Yeah.
Great. Thank you for taking my question. Just don't mean to nitpick, can I just clarify? When I calculate leverage, including pensions and basing it on the LTM EBITDA after exceptionals for the last 12 months, I come up with 2.82 times. Can I confirm that you are basing it off the EBITDA after exceptionals? I think that's something you mentioned also when you're highlighting the 2.4 times target.
Correct. We base it on the EBITDA after. Let's say on the S&P calculation, which always has a bit more adjustment, just the pensions. Overall, it's pretty similar, so it doesn't really distort too much the numbers.
In that case, I need to come back to you a little later offline, maybe why 2.82 is what I'm coming up with at the end of the first half, basing it off EBITDA after exceptionals for the last 12 months, including pensions of the net debt. Just to get a sense of if I just add in, if I take the LTM EBITDA of CHF 895 million at the end of the first half, if I just add in what you've indicated is the EBITDA for the SABIC High Performance Materials business, which is coming in, I come up with something like CHF 1.3 billion or just under that. It sounds to me like there is a lot more other than just the synergies also, which is coming in from the growth prospects elsewhere.
My difficulty is what is in there now, for instance, with respect to the other businesses, for instance, which wasn't there until the first half. What's the big change that has happened, considering that you're not yet taking into account any sort of synergies, for instance, that you may have from greater cooperation with SABIC?
I think you're highlighting one element is that the EBITDA growth of the new High Performance Materials, being the combination of our Additives and high-value Masterbatches and the Performance Polymers from SABIC is actually creating a player which will increase its profitability quite significantly, passing from CHF 3 billion to CHF 4 billion in terms of sales and increasing its EBITDA margin from around, let's say, 20% or 19.4% as it is today, or 2017, actually, it's higher today, than to the 24%, 25% we are guiding for 2021. That obviously from the numbers is not really reliant on the synergies. It is much faster than synergies. This progression has started already in 2018, and is continuing in 2019 by the time we made those pro forma numbers to indicate the leverage.
We expect the transaction to close by end of 2019, on actual 2019 numbers, if we get the regulatory approvals by that time. You have a margin progression between the last 2017 and the actual point of integration of the business. You still have quite a significant project in 2020, 2021. As new capacities, both on the flame retardant s ide, for instance, and our waxes, for instance, but also particularly the PEI part of the new SABIC business are coming online and are shifting profitability as those products have actually the highest margin within the portfolio. There's an intrinsic growth and improvement of profitability in that business, independently from synergies.
Okay. Thank you for that. I just have one other question. If I took the four out of 12 board members as an indication, is that to mean that a third of the company is what SABIC is looking to own? In that case, can I understand if you will be looking to raise financing with respect to the payment that you will look to make to SABIC? Or will you look to raise it from the remaining Plastics & Coatings sale that you're also looking to do in that similar timeframe?
I think from the first question on the board membership, I think the four seats represent a third, effectively, a third of the new board number. That's a number which has been basically agreed, and discussed for a few months independently of what is the actual level of SABIC wanting to ultimately have in Clariant. I think there's no indication for that. We just have, as you see today in the SABIC release, the confirmation of the intention not to take over Clariant. To which level they ultimately want to settle it is up to them. Frankly speaking, their governance is regulated as it is. They are currently, and will continue to be a core anchor shareholder, just as, for instance, the families of the former [Süd-Chemie].
That is the stability we now have, but it's not directly correlated to a percentage of ownership of shares, per se. Now looking at your financing question. I think we'll probably not have an exact timing of having the equalization payment being done on the moment that we divest the three businesses we talk about. Therefore, would have basically a zero-sum game. I think we probably will have some temporary financing to be done as we will progress in the divestment as they go along to maximize value without any pressure on time. On the other side, try to focus our attention to get the new business in. Finalized negotiations, including valuation by June 2019, and then get the business on board by end of 2019.
From that point of view, you'll have a cash-out, which is pretty much hopefully by the end of 2019 as earliest, and the cash in will be a staggered approach. There might be some interim financing there. Overall, that will be not a real topic, I believe.
Thank you for that. I will get in touch offline for the rest. Thank you.
Okay. Thank you.
Ladies and gentlemen, this concludes today's conference call. Should you have any further questions which we couldn't answer due to time reasons, we will see probably many of you during the next days. Otherwise, the Clariant Investor Relations team is also available should you have any additional questions. Once again, thanks for joining the call today. Have a good day, and bye-bye.
Ladies and gentlemen, the conference is now over. Thank you for choosing [chorus call], and thank you for participating in the conference. You may now disconnect your lines. Goodbye.