Clariant Ltd: Solid performance in a difficult environment - full-year guidance confirmed

The softening demand compared to the previous year and the unusually high comparable basis of the second quarter 2010 is reflected in a 5% decrease in volumes. Local currency sales saw double-digit growth in the Business Units Additives, Industrial & Consumer Specialties and Oil & Mining Services. At the regional level, a mixed performance was achieved with double-digit sales growth in local currencies in Asia, Europe, North America and Middle East & Africa but slightly lower sales growth in Latin America.

Raw material costs increased by 14% compared to the previous-year period. A strict focus on margin management led to an improvement in sales prices of 7%, thereby fully compensating for the increased raw material costs. Sequentially, a 3% increase in sales prices therefore fully offset a 5% increase in raw material costs. Despite successful margin Clariant International Ltd management, the gross margin fell to 27.5% from 28.9% a year ago. This is mainly due to lower volumes and an unfavorable currency development.

The second quarter was marked by weakness in demand in April and rather solid demand in the rest of the quarter, although first signs of a slowdown in demand have been observed in some businesses. The sovereign debt crisis in Europe, the slow economic recovery in the United States, higher inflation rates in the emerging markets and the ongoing unrests in North Africa and the Middle East have led to a certain market caution.

Year-on-year, SG&A costs were virtually unchanged in both absolute terms and in percentage of sales, with CHF 307 million in Q2 2011 (16.4% of sales) compared to CHF 309 million (16.3% of sales). Although costs remained under control, EBITDA before exceptional items decreased to CHF 241 million (margin 12.9%) from CHF 264 million (margin 13.9%) a year ago. The operating profit (EBIT) before exceptional items stood at CHF 178 million (margin 9.5%) compared to CHF 211 million (margin 11.1%) in the second quarter 2010.

At constant currencies, EBITDA and EBIT before exceptional items would have been CHF 69 million (1.4 percentage points) and CHF 62 million (1.6 percentage points) higher respectively, i.e. margins would be virtually unchanged compared to the second quarter of last year.

Net income rose to CHF 40 million from CHF 25 million in the year-ago period, illustrating the lower restructuring and impairment expenses after completion of the 2009/10 restructuring phase.

Due to the slight increase in inventories, the relocation of production to Asia (Textile Chemicals) and Spain (Paper Specialties), and the normal seasonality, the cash flow from operations was minus CHF 101 million, below last year’s CHF 33 million. Net Working Capital as a percentage of sales remained under control with 20.0% compared to 20.2% in the previous-year period.

The acquisition of Süd-Chemie led to an increase in net debt to CHF 1,791 million from CHF 126 million at year-end, resulting in a gearing (net debt divided by equity) of 62% at the end of the second quarter of 2011. With the issuance of two Swiss franc bonds totaling CHF 250 million, the debt maturity profile has been extended at favorable conditions until 2015/17. The size of the bond issue has been increased by another CHF 50 million in July.

Update on Süd-Chemie acquisition
On April 21, Clariant completed the purchase of 96.15% of the shares in Süd-Chemie from One Equity Partners and the family shareholders. A public offer to acquire the shares from Süd-Chemie minority shareholders expired on June 14. Clariant acquired an additional 2.49% of Süd-Chemie, bringing the total shares acquired to 98.64%. The squeeze-out procedure to acquire all of the remaining shares in Süd-Chemie AG from minority shareholders was initiated on June 24 and is expected to be completed in the first half of 2012.

The integration process got underway in April. All project teams are fully operational and the integration is progressing according to plan.

In the second quarter, the consolidation of Süd-Chemie for two months contributed CHF 216 million in sales, CHF 34 million in EBITDA and CHF 17 million in EBIT before exceptional items.

Outlook 2011
At the beginning of 2011, Clariant shifted its focus from restructuring to continuous improvement and profitable growth. While the continuous improvement initiative “Clariant Excellence” will make the competitive cost basis sustainable, the company is now focusing on creating value by investing in future profitable growth.

Clariant expects a more difficult but nevertheless solid business environment in H2 2011, characterized by a softening demand. Exchange rates for the major currencies are expected to remain volatile. Commodity prices look set to continue to rise in the second half-year 2011, leading to an increase in raw material costs in the mid-teens compared to 2010.

For 2011, Clariant – including eight months of consolidated Süd-Chemie figures – expects sales in the range of CHF 7.8 to 8.0 billion and an EBITDA margin before exceptional items of 13.5% to 14.5%.

Business Discussion Second Quarter


BU Industrial & Consumer Specialties
Sales in the Industrial & Consumer Specialties Business Unit rose 12% in local currencies but declined 4% in Swiss francs versus the same period in 2010. As in the previous quarters, demand for chemicals in the construction, paints & coatings, industrial lubricants and agrochemicals industries remained strong. The latter was supported by the successful launch of new adjuvants and dispersing agents that meet the agrochemical industry’s need for both advanced performance and sustainability as the products are derived from renewable resources and are biodegradable.

Regionally, ICS achieved double-digit sales growth in local currencies in all major regions, with sales growing strongest in Asia/Pacific, followed by North America, Latin America and Europe. Demand was particularly high in China. ICS will tap this growth and will continue to strengthen its market position in China with the new exthoxylation plant in Dayabay (South of Guangzhou, China) which has come on stream in the second quarter.

The integration of the US-based de-icing specialist Octagon Process LLC, acquired in March, is on track. Octagon will significantly strengthen the market position of ICS in North America and make a positive contribution during the coming winter season.

At constant currencies, the EBITDA margin was higher due to a positive contribution from an improved mix effect, a better cost structure and higher sales prices, fully compensating for the increased raw material costs. Despite the operational improvements, EBITDA declined slightly year-on-year as a result of the unfavorable development of the currency markets.

BU Masterbatches
In the Masterbatches Business Unit, sales grew 2% in local currencies. This compares to a high sales base in the previous year which was inflated by restocking effects. In Swiss francs, sales were 14% lower.

Underlying demand from customers in all end markets including automotive, packaging, and textiles remained at good levels, but softened towards the end of the quarter. Sales grew in all regions excluding Latin America which was impacted by a weak domestic market in Brazil. Sales growth was driven by emerging countries in the Middle East, particularly Saudi Arabia and Turkey. Additionally, Chinese growth contributed strongly to growth in Asia. The Business Unit will continue to participate in growth from these markets through capacity expansions in Turkey and in Saudi Arabia.

Raw material cost inflation was amplified by supply constraints for specific pigments and additives. In this environment, the Business Unit was mostly able to compensate higher raw material costs with increased sales prices. Going forward, rising raw material costs will continue to have an impact, particularly for additives and titanium dioxide. The Business Unit will therefore continue to adjust its sales prices selectively to compensate for this effect.

The EBITDA margin declined in the second quarter compared to the same period of the previous year as higher sales prices and an improved productivity were not enough to compensate for the unprecedented currency impact as well as for the higher raw material and reorganization costs.

BU Pigments
Sales in the BU Pigments were flat in local currencies and 15% lower in Swiss francs. This compares to a second quarter in the previous year which was boosted by restocking activities. Additionally, volumes in the reporting period were impacted by the strategy to focus on high value-added businesses and to withdraw from some low-margin businesses.

In Coatings, underlying demand from the decorative segment – particularly in the repaint market – and for pigments used in industrial coatings also remained at good levels. Volumes in Printing applications fell as the BU continued to optimize its mix shifting away from high volume/low profitability applications. Demand was also affected by weaker sales in Japan, especially in non-impact printing applications. Demand for pigments and pigment preparations remained robust in Plastics and was particularly strong in the Special Applications segment. Executing on its strategy to move forward in the value chain, Pigments acquired Italtinto SrL, an Italy-based company active in tinting systems and technology. Integrating the Italtinto technology with the existing Coatings business, will increase revenues contribution from point of sale tinting systems in the future.

Regionally, sales were strong in North America while Europe and Asia were essentially flat. Sales in Latin America were weaker, especially in Brazil where the stronger Brazilian real impacted the local plastics and printing industries. In Asia, sales growth in China was offset by the lack of sales of products pruned during the closure of several facilities. To support ongoing good demand growth in China, the BU started production of Pigment Preparations at a new state-of-the-art plant in Dagang at the end of June.

The Q2 2011 EBITDA margin was lower year-on-year due to unfavorable currency effects. Operationally, the Business Unit benefited from an improved cost structure. This is the result from the completion of restructuring and a full compensation of higher raw material costs through higher sales prices.

BU Textile Chemicals
In local currencies, sales in the Textile Chemicals Business Unit were 9% below last year’s level. In Swiss francs, sales declined by 23%.

Growth was solid in North America and still positive in Europe and Japan, but most other markets have been negatively impacted by cotton prices which are virtually at an all-time high and by softening demand. Particularly Brazil, the Business Unit’s biggest single market, experienced very weak demand in the second quarter of 2011.

Despite an ongoing focus on further cost reductions and compensating for higher raw material costs with increased sales prices, the EBITDA margin decreased compared to the same period of the previous year. With a still substantial asset base in Switzerland – mainly the production plant in Muttenz – the Business Unit was by far the worst hit in the group by the rapid appreciation of the Swiss franc. Going forward, exposure to the Swiss franc will be reduced as the Business Unit is currently transferring its production to Asia. The transfer is on schedule, with more than half of the chemicals produced in Switzerland already relocated to Asia and qualified by the customers. Additionally, the Business Unit headquarters is currently being transferred to Singapore and will be fully operational by August 2011.

For the second half of 2011, an improvement in business conditions is anticipated as cotton prices – currently close to all-time highs – are expected to ease in the coming months.

BU Oil & Mining Services
In the Oil & Mining Business Unit, sales grew by 11% in local currencies driven predominantly by the oil business. In Swiss francs sales were down by 5%.

Oil Services performed well in most regions. North America was particularly strong due to high oil prices and the continued investment in unconventional oil & gas development. The successful integration of Canada-based Prairie Petro-Chem, acquired in April, will allow Oil Services to take advantage of the growth in unconventional production in North America’s number one oil and gas region in the Bakken Shale (Saskatchewan, Canada). In Mining Services, business continued to improve, helped by contract wins and a new technology currently being introduced in Brazil. Further investments into the development of Mining Services are expected to result in new opportunities in flotation globally in Asia and Africa, and in particular with the launch of new products and technologies in collaboration with mining companies.

Sales growth was strongest in the Middle East and in North America, the latter supported by the acquisition of Prairie Petro-Chem. In Latin America, the BU further strengthened its market positions in most markets but experienced a slow-down of growth in Brazil.

The EBITDA margin was impacted by adverse currency effects and was below the previous year’s level although sales price increases minimized the effect of higher raw material costs. Additionally, SG&A costs increased as the Business Unit continues to invest heavily into mining and oil to support future growth in these businesses.

For the second half of 2011, Oil & Mining Services expects higher sales and profitability levels compared to the first half-year, resulting from new contract wins – particularly in Brazil and Australia – the start of the seasonal refinery business as well as the favorable development of sales prices.

BU Leather Service
Leather Services sales declined 4% in local currencies and 20% in Swiss francs compared to the previous-year period. This was due to a strong base effect year-on-year with Q2 2010 benefitting from restocking. In addition Leather Services continued to focus on high value segments and the elimination of other low-margin businesses.

Demand from the automotive industry was robust but weakening in North America as exports were impacted by the Japanese earthquake in March. In the shoe segment demand remained solid while the upholstery business declined. Raw hide prices remained at high levels so that alternative materials to leather became more competitive. The successful introduction of new services and value-added products such as the new chromium free tanning technology (Easy WhiteTan) gained further momentum.

From a regional standpoint, sales in local currencies were slightly up in Asia whereas the other regions did not reach last year’s levels.

The Business Unit increased sales prices and expects to compensate the higher raw material costs in the second half of 2011. A current slight margin squeeze and the negative impact from the appreciation of the Swiss franc led to a lower EBITDA margin compared to the previous year. Leather Services will continue to pass on raw material through further sales price increases.

Performance Chemicals
includes the Additives, Detergents & Intermediates, Emulsions and Paper Specialties Business Units

Sales in Performance Chemicals were 1% higher in local currencies than in the prior-year period and 13% lower in Swiss francs. In line with the previous quarters, Additives continued to contribute double-digit sales growth thanks to strong demand for nonhalogenated flame retardants and waxes. Emulsions experienced low single-digit sales growth while sales in Detergents & Intermediates and Paper Specialties were below those in the same period of the previous year. Additives and Emulsions were successful in increasing their sales prices and fully compensated for higher raw material costs. Profitability in all four Business Units was negatively impacted by the massive appreciation of the Swiss franc.

The business environment for Additives was favorable, resulting in a double-digit sales growth in local currencies. The Middle East, North America and Asia performed particularly well. A new plant for non-halogenated flame-retardants will go into operation in mid-2012 to meet the strong demand for these products. Detergents & Intermediates experienced solid demand but profitability was still impacted by some margin squeeze due to rising costs for key raw materials such as paraffins and acetaldehyde. Therefore the Business Unit will continue to increase sales prices and expects to offset price increases during the third quarter of 2011. Demand in Paper Specialties is slowing down in all regions. The Business Unit was adversely affected by the difficult environment in the paper industry as well as by the high cost basis in Switzerland. This effect is about to be significantly reduced as production will be completely relocated from Switzerland to Spain and the United States by the end of 2011. Emulsions continued to see strong growth in Latin America despite some slow-down in Brazil. Raw material prices for the Business Unit were very volatile and the Business Unit will continue to increase sales prices to compensate for higher raw material costs.

ABU Functional Materials
The Functional Materials Business Unit – the former Adsorbents and Additives business of Süd-Chemie – comprises the business lines Adsorbents and Additives, Foundry Products and Specialty Resins, Performance Packaging and Water Treatment and was consolidated into the Clariant group for two months. As of July 1, 2011, Functional Materials has been reorganized into the Business Lines Adsorbents, Performance Packaging and Water Treatment.

Business discussion for the first six months
Functional Materials increased revenues by 10% in EUR during the first six months of 2011 compared to the previous year-period. With the exception of Water Treatment, EBIT increased in all Business Lines despite an adverse impact from higher raw material and transportation costs. These costs could not yet be fully passed on to customers. However, the businesses are currently increasing prices and will compensate for this effect during the second half of 2011.

A thorough discussion of the results for the first six months is available in the Interim Report for the first half-year, published by Süd-Chemie AG on July 27, 2011.

BU Catalysis & Energy
The Catalysis & Energy Business Unit – the former Catalysts business of Süd-Chemie – comprises the business lines Catalytic Technologies and Energy and Environment. As of July 1, 2011, Catalysis & Energy has been reorganized into a mainly functional organization with a Business Line Battery Materials and the three Catalysis & Energy functions Sales & Key Account Management, Operations, and Research & Development.



Business discussion for the first six month
In Catalysts Technology, sales in EUR were up 2% in the first half of 2011 compared to the same period of previous year. Even though the order intake was very strong, some of the anticipated shipments were postponed until the second half of 2011 which is seasonally the stronger part of the year. EBIT in the first half of 2011 decreased as a result of the delayed orders. Going forward, a much higher order intake compared with 2010 resulted in a forward order book that will generate a sustained improvement in the earnings situation during the second half of 2011. Energy and Environment was driven by a continuing strong momentum in the sales of catalysts for air purification and hydrogen production in fuel cells. This resulted in a significant revenue increase year-on-year. The Industry Group Battery Materials also contributed to this marked business expansion. EBIT improved substantially but is still negative due to start-up costs.

A thorough discussion of the results for the first six months is available in the Interim Report for the first half-year, published by Süd-Chemie AG on July 27, 2011.

Contact
Clariant International Ltd Group Communications Rothausstrasse 61 4132 Muttenz 1 Stefanie Nehlsen Head of Trade Media & Media Spokesperson Phone 061 469 6742 Fax 061 469 6999