Clariant AG

SIX:CLN

Earnings Call Transcript 2019-Q1

[Anja Pomrehn, Head of Investor Relations]

Ladies and gentlemen, good afternoon. My name is Anja Pomrehn, and I welcome you to Clariant's First Quarter 2019 Results Conference Call and live web cast. Joining me today is Patrick Jany, the CFO of Clariant. As a reminder, this conference call is being recorded. [Operator Instructions] And there will be a Q&A session following later. The slides for today's presentation, they can be found onf our website along with our media release. And I would like to remind the participants of the call that the presentation includes forward-looking statements, which are subject to risks and uncertainties. Therefore you are encouraged to refer to the disclaimer on Slide 2 of the presentation you have in front of you. The replay of this call will be available on our website for 30 days. And with that, I'd like to hand over to Patrick to take us through the highlights of the first quarter 2019 on Slide 3. Patrick?

[Patrick Jany, Chief Financial Officer]

Thank you, Anja. Ladies and gentlemen, good afternoon. In the first quarter of 2019, Clariant grew sales organically by 2% in local currency despite a slow start in Plastics & Coatings. The sales growth was driven by expansion in the business areas Care chemicals, Catalysis and Natural Resources and was underpinned by higher pricing in all business areas. The newly reported absolute EBITDA, after exceptional items, reached CHF 236 million with a corresponding margin of 13.8%. The 8% lower absolute EBITDA after exceptionals is the result of weaker profitability in Plastics & Coatings as well as higher project costs relating to clients that changed into higher-value specialties announced in September 2018, which is progressing well. Despite this development Care Chemicals and Catalysis both reported a significant positive profitability progression year-on-year. Natural Resources also delivered a sound profitability improvement in EBITDA quarter-on-quarter in line with our expectation. Let us move on to Slide #4. In the first quarter 2019, the 2% organic sales growth in local currency compared to a higher comparison base, was driven by an improved sales performance in most businesses as just highlighted, as well as by higher pricing in all business areas. Volumes for the group decreased by 1%, largely due to the decline in Plastics & Coatings, which was mostly the result of the weaker than anticipated automotive and plastics markets, as well as the further economic slowdown particularly in China. Clariant's sales growth in Swiss francs was negatively impacted by 2% due to the unfavorable FX development mainly due to the euro and emerging market currencies. On Slide 5 you see the regional sales development for the first quarter of the current year. Latin America delivered solid synergy growth of 6% in local currency partly as the result of the continued improvement in Oil & Mining services. This robust performance was followed closely by Europe, where sales grew by 5%, driven primarily by Care Chemicals and Catalysis. Sales in the Middle East and Africa increased by 2% while both North America and Asia Pacific reported slightly negative growth of 1%. The reason for this slight slowdown in North America was in part due to the strong aviation sales in the previous year as well as a force majeure at a key supplier. The slightly negative development in Asia is against a strong comparable base. While countries like South Korea, India and Indonesia were expanding, China was -- [ dipped ] down by 18% due to the continued weaker than expected economic environment in the first quarter. However, we see that the underlying demand and order intake in China remains solid, and we are confident that we will see a gradual improvement throughout the current year. As seen on Slide 6, the newly reported EBITDA after exceptional items of the group reached CHF 236 million with the corresponding EBITDA margin of 13.8%. The 8% lower absolute EBITDA after exceptional items is the result of weaker profitability in Plastics & Coatings and higher project costs relating to Clariant's step change into higher-value specialties announced in September last year. On business area level, Care Chemicals and Catalysis both reported a significant progression year-on-year while Natural Resources also delivered a sound profitability improvement quarter-on-quarter as anticipated with a decent progression on the Oil & Mining services business. Reviewing the figures of the business area for the first quarter of 2019 in more detail, starting with Care Chemicals on Slide 7. In Care Chemicals, the first quarter 2019 sales growth was at 2% in local currency year-on-year. The sales were unfavorably impacted by the Aviation business due to the mild weather and challenging comparison base. Excluding Aviation, Care Chemicals rose in good mid-single-digit terms in local currency. Growth was primarily driven by an excellent consumer care development in the high single-digit range. Both Personal Care and Home Care delivered double-digit sales expansion. While Crop Solutions reported a good mid-single-digit growth rate. Industrial Applications sales were slightly weaker due in part to the previously mentioned Aviation business weakness. On a regional level, in Europe and Asia, Care Chemical sales grew in mid-single digits in the local currency. While North America was hampered, as mentioned before, by the Aviation business due to unfavorable mild weather conditions in this region as well as the prolonged shutdown of a key supplier in the US. The shutdown of this supplier will regrettably also negatively impact sales in the Care Chemicals in the second quarter by an amount estimate to be in the mid-teen-million range. Moving on to the first quarter of 2019 Care Chemicals EBITDA margin. It rose to 19.6% from 18.2% in the same period of 2018. This positive development was primarily the result of an improved product mix as well as operating leverage. Moving on to the Catalysis on Slide 8. The organic sales expanded by 4% in local currency in the first quarter of 2019 against a record previous year. As anticipated, the robust Syngas demand persisted and underpinned this positive development in Q1. This expansion is particularly strong given the previously communicated forward shifts from the first quarter of 2019 into the fourth quarter of 2018. On a regional level, the sales progression predominantly benefited from strong demand in Europe and North America. While sales in Latin America, the Middle East and Africa and Asia, developed less favorably mainly due to the high comparison base. The first quarter of 2019 EBITDA after exceptional items, advanced to 21.7% from 19.8% primarily as a reflection of a more advantageous product mix while the sales contribution from Syngas remained resilient. On Slide 9, we see that in the first quarter of 2019 sales in Natural Resources rose by a good 10% in local currency. The Oil & Mining services business delivered solid double-digit sales growth in local currency in an improving environment with strongly higher sales in most regions including a feasible sales progression in North America. Functional Minerals reported solid single-digit growth in local currency primarily driven by the purification business. While soft automotive market demand had an unfavorable influence on the Foundry business. From a geographic perspective, the positive development in Functional minerals was most pronounced in North America as well as the Middle East and Africa. The EBITDA margin after exception items in Natural Resources lessened to 12.5% from 14.3% in the same time frame of the previous year as the result of weaker demand in the more seasonal Refinery business. And the continuingly challenging price environment in Oil services. However, the margin increased quarter-on-quarter as anticipated. The sequential progression was the result of a good margin improvement in the Oil & Mining Services business. Slide 10 reflects the development in Plastics & Coatings, where sales were 2% lower in local currency against a strong comparison base. Pricing efforts positively influenced this development, while volumes were lower, similar to the previous quarters. However, in the first quarter of 2019, the impact of the volume decrease was more substantial due to the unfavorable automotive and plastic market developments. Although Healthcare Packaging sales increased, the overall sales development in Masterbatches and Pigments continued to be negatively influenced by the global economic slowdown with softer demand in Asia, China in particular. Additives was affected by the softer plastics' demand and certain raw material constraints. However, new business development with solution for smarter homes and smarter cars advanced promisingly.The first quarter of 2019 EBITDA after exceptional items in Plastics & Coatings decreased in absolute value by 17% in Swiss francs to CHF 92 million year-on-year. The economic slowdown especially in China shifted sales towards a less favorable product mix and also decreased capacity utilization. Despite a further economic slowdown in China, partly driven by the VAT regulation change, the underlying demand remains solid, and Clariant expects gradual improvement throughout the remainder of 2019. Let us summarize the first quarter showing as on Slide 11. Care Chemicals delivered a solid performance in the first quarter, both in terms of sales as well as profitability despite a weak aviation season and a planned shutdown of a key supplier due to force majeure. Thus the business area is well on track towards achieving its 2021 target. The expansion in Catalysis continued despite a high comparison based and forward product shifts from Q1 2019 to Q4 last year, resulting in strong sales growth and increasing profitability. Catalysis therefore, took another step towards achieving its 2021 targets. Natural Resources and Oil & Mining services in particular is well on track and progressing towards its 2021 target with strongly higher sales. Many lifted by good Oil & Mining Services demand but also solid growth in Functional Minerals. The profitability is improving sequentially as anticipated. In Plastics & Coatings the performance temporarily deteriorated, primarily as a result of the weaker than expected Automotive and plastic market as well as the further economic slowdown in China as discussed earlier. However, as stated before, the underlying demand and order intake remains solid, and we expect gradual improvement throughout the remainder of 2019. Now let us move on to our outlook on Slide 13, which remains unchanged from our previous communication. Clariant is a focused and innovative specialty chemical company, with the aim of making our customers more successful. We therefore confirm our 2021 guidance to achieve above-market growth, higher profitability and stronger cash generation. With that, I return the call to Anja.

[Anja Pomrehn, Head of Investor Relations]

Thank you, Patrick for -- Patrick to take us through the first quarter 2019, and we would like to open the line for questions now.

[Operator]

[Operator Instructions] The first question comes from the line of Patrick Rafaisz with UBS.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Three questions, please. The first is around volumes. You're minus 1% for the quarter. You mentioned in Plastics & Coatings is the main reason here. Does that mean that volumes were at least flat or positive in all other segments or did you have other segments where you had negative volumes? And then the second question on project costs, which you mentioned now affecting Q1, one-offs. Can you give us a guidance here what you expect for -- for the rest of the year, that at one point, will the project costs stop and will go into the scheduled integration costs for the new -- for the new business area. And then the third question, you confirmed the 2021 outlook, can you give us, at least qualitatively, some color on how you see 2019 from today's perspective?

[Patrick Jany, Chief Financial Officer]

Thank you, Patrick. I'll take your questions in their order. So looking to volumes, indeed in Q1, we had a minus 1% volume development in the group, which was very much reflecting the focus on price that we have, we had a plus 3% on price. If you look at the comparison between the business areas, it is indeed actually true that the volume reduction almost exclusively focused on Plastics & Coatings. To give you an idea on Plastics & Coatings, so the price increase was basically the same figures for the group but you see a minus 2% local currency growth so therefore, volumes were obviously negative. The other areas saw good volume growth, particularly Catalysis and Natural Resources driven by Oil & Mining. Care Chemicals was almost flat as you had a good growth in the Consumer Care area, but obviously we mentioned the weakness in the [ IC ] which is quite a volume business. So in terms of volume, that decrease offset the growth in the more value-adding parts, and therefore more or less it was a flat gain for Care Chemicals on that side. Now looking at the project costs, indeed we are actively preparing the separation of the businesses we have indicated back in September, creating [ legal ] entities and so on. This work, we will continue for the next few quarters. It is fundamentally explaining the increase in an exceptional cost from 1 year to the other on the corporate plan that gives you direct guidance on the amount of those costs per quarter. We would expect them to continue.I would say, probably at one stage what will happen is not so much that we'll see these costs as part of the integration of the new business, but rather you will see those costs disappearing as they go into more the discontinued reporting of the businesses as we go forward and closer to natural divestment, which is not the case now but progressively, as we know we have guided by end of -- latest by the end of 2020, those businesses will be divested and at one point in time we will then start to reporting those operations as discontinued and have those costs then normal -- in the normal P&L of the group. If you look at your third question. In terms of outlook, indeed, we confirmed our outlook for 2021. And as you know, I think, the significant progression in terms of profitability of the group towards 2021 comes, half of it from the actual progression of our businesses and another half from the portfolios, which incorporating a high performing business and selling the other businesses. And therefore, for the organic half, so to say, I would still expect that 2019, quantitively speaking, sees a progression in terms of sales and EBITDA and cash flow as well.

[Operator]

The next question comes from the line of Joseph Theodora Lee from Goldman Sachs.

[Theodora Lee Joseph, Equity Analyst]

Three again, if I may. So the first is actually in the IFRS 16 impact. Just wondering if you can give a guidance on what you expect for the full year? And any color in how we should think about the distribution between the divisions? The second, which I want to talk on is about the force majeure that -- of one of your suppliers within Care Chems, just wondering, is this is something you expect only in the second quarter? Or should we think about this also in the second half of '19? And how should we think about the drop-through to EBITDA for Care Chems? And lastly as well, can you clarify on the time line regarding this more details around the announcement of the deal with SABIC and what should we be expecting to hear from that event?

[Patrick Jany, Chief Financial Officer]

Yes, right. So taking your questions in their order as well. If you look at the IFRS impact that we have disclosed it in the first slide of the backup on Slide 16, which is an impact of CHF 15 million now for the first quarter, I would expect this impact to be fairly regular across the year. So I think that's a very stable number per se. We have not disclosed the impact by business areas but logically it's fairly well spread with a, I would say, the higher capital intensive businesses bearing a little bit more than the others. So you would expect ICS, you would expect Plastics & Coatings to be a -- the major beneficiaries from that position. Now looking at the force majeure which concerns Care Chemicals for one of our suppliers in the U.S., we have guided, as you have heard, for an [ impacting to ] 2 mid-teen -- impact on sales for Q2, we would expect this to be limited to the second quarter and the operations to be back on line towards the end of the quarter. And therefore, we currently do not anticipate an impact for the Q3 and Q4, so the second half of this year. So it will be a bit -- it will be a limited impact on Care Chemicals but still worthwhile mentioning. On the time line with SABIC, we confirm that we are in active discussions to finalize the steps, we have announced in September 2018. I think we had guided for the first half of 2019, so a few months to go still, but we will be within that guideline and give you then an update on the actual structuring of us incorporating the high-performance material business and creating these business areas by combining it with our activities. So that will include obviously, the scope and the evaluation topics, which [ should go down ].

[Operator]

The next question comes from the line of Andreas Heine, MainFirst.

[Andreas Heine, Managing Director]

Yes. I have basically only 2 questions left. In the charges you mentioned, you were referring very much and that's what we could see that most of the special items were on the corporate line and has to do with the [ car hire ] process. The other business lines were basically 3 of -- only CHF 3 million of special items. You had back end loaded last year, quiet an enormous impact from special items. Is there anything you have in mind, which will come later in the year in charges? Or do we have to look mainly for these roughly CHF 60 million carve-out costs by multiplying this [ 15 with 4 ] on the corporate line? That's the first question .And the second one, could you give some more flavor in Plastics & Coatings, how the business, what you will keep in -- as core business, as developed compared to what you've disposed. So I would expect that as you mentioned, some of the Masterbatches business doing quiet fine that the drop we have seen is more in the to be disposed businesses. Maybe you can put some more flavor on that? These are my questions.

[Patrick Jany, Chief Financial Officer]

So referring to the one-off costs, which we'll report now on -- and we have seen very much are focused on the corporate line because indeed it is -- it is the separation, which drives the cost this year. The business areas are really limited in their one-off costs last year. You're right, we have made a significant effort to normalize the cost base in our Oil business. That is now finished and there is no further costs to come. On the other hand, I will say that in the Plastics & Coatings area, we will certainly -- will look at improving the performance and I will not exclude that some costs occurred during the year to improve the cost base there but I would not be able to dimension them but I would not expect that it's really massive at corporate level but it certainly will have an impact on business area itself as we keep on improving the business and its performance. Now if we look precisely at this Plastics & Coatings area, I would indeed see the impact of the current downturn, as we mentioned, being driven very much in terms of businesses by the plastic value chain by automotive, which will affect primarily the Pigments business [indiscernible] or if it's clearly something, which has an impact, I would say Masterbatches is probably fairly resilient because it's fairly broad as well as a large proportion of packaging for instance as industrial outlet and therefore, is influenced but more stable than the Pigment business if that's of any guidance. While the Additive business is actually doing pretty okay. It has suffered in terms of sales because you cannot escape a downturn in the plastic chain with the electronics. But you know our flame retardants are particularly strong. However, overall, I would say the performance in terms of margin has been particularly good in terms of Additives in this environment. And therefore, the lack of margins probably more coming from Pigments and some parts of Masterbatches indeed.

[Operator]

The next question comes from the line of Christian Faitz with Kepler Cheuvreux.

[Christian Faitz, Equity Analyst]

Yes. Three questions if I may. Can you please be a bit more specific about what is going on in China in terms of demand trends at present. Don't know if you are familiar with a company called Huntsman but they were saying today that China is gradually improving, do you share this view?Second, what signals are you currently getting out of the Automotive industry in terms of demand trends? Again, I'm referring to Q2 trends rather than Q1 trends. And then can you give us an idea how the Syngas margin currently is versus the rest of the Catalysis business?

[Patrick Jany, Chief Financial Officer]

Thank you for your questions, Christian. So obviously it's always a bit difficult to comment on current developments. But if you look at China, really it has been the one element which dragged the group down per se in terms of sales growth and particularly Plastics & Coatings in terms of profits as well. And then if you really look at it at sales evolution, you know that in Q4, China was already negative by about 3%. Now we're negative by 18%. So it's really a continuation of a deceleration we have been observing due to a multitude, I would say, of factors, which we all read in the newspapers. But from that point of view, I think, it was a down deceleration particularly relevant for Plastics & Coatings. If you look at prices at Care Chemicals, they did not see a reduction of sales in China in Q1, right? So quite specific in terms of slowdown. We would anticipate as we have communicated now in the presentation, that actually, China will progressively improve during the year. You know that there are some measures, which have been put in place locally in China by the government to strengthen growth and some incentive funds as well as VAT change by 1st of April. So you could expect for probably that March sales were a bit understated as demand was waiting for the new VAT rates to apply, and April actually, it will probably be a very good month, right? So there's a bit of shifting around but overall, we would see the underlying demand is quite solid. And therefore, we are confident that things are starting to turn in China, and we -- obviously, it's too early to talk about the pace and the amplitude of this improvement but I would certainly feel confident that China will actually start to perform better starting Q2 and progressively improve during this. The Automotive topic is probably more of a long-term topic. I think here we certainly see [ I would say 3 ] coming down in quite a few automotive markets and the supplier industries are preparing for certainly some downturn there. So whether its Foundry or the other suppliers, have been the industries, which have seen a regression in terms of sales. I think probably of the 3 negative factors we mentioned: one being China; second, being the plastic chain; and third being automotive. It's important to see that probably automotive is on the one hand the one which impacts us the smallest because we only have 5%-6% of sales indirectly ending up in the automotive industry but it's probably the one factor, which will remain longer given the structural changes of that industry. We would see China and the plastic chain reacting faster and recovering faster.And in terms of Syngas margins I think we -- as you know, we -- the margins in last year in Catalysis were slightly on the down side of our margin range given the high proportion of Syngas sales. Syngas has continued to grow in the first part of '19, we expect this to turn around during the year and petrochemicals to improve. But overall, I would say Syngas has probably a better margin this year than it had last year, which also helped in the improvement of the margin in Q1.

[Operator]

The next question comes from the line of the Daniel Buchta with Vontobel.

[Daniel Buchta, Research Analyst]

Yes. I would have 2 questions. The first one on net pricing, I mean, you have shown 3% higher sales prices but on the margin side, you were still down even on an underlying basis. Can you say a bit more about whether those 3% were compensating at least the higher input costs or whether you had a net benefit even on the pricing side from that. And given where raw material costs are at the moment, can we expect prices to at least compensate for these rising input costs and to how that picture is here in general? And the second one I mean, with the weaker trends in Plastics & Coatings but especially in Pigments and parts of Masterbatches you mentioned, can you give a little bit insights on how the sales process is running and whether this is a big topic you see at the moment with willingness to pay and interest in general becoming weaker again? That would be my 2.

[Patrick Jany, Chief Financial Officer]

Daniel, thanks for your questions. So if you look at the price evolution, indeed we had a 3% price increase compared to previous year quarter, which is quite a good development and in line with the progression in pricing that we have seen last year quarter-on-quarter. Overall, you know that as we aim to focus more on specialties, we want to be less dependent on the raw material costs and price products according to the value add they create at the customer and having sufficient margin [indiscernible ] volatility of raw materials here and there. I think if you look at the first quarter itself, we actually have been able to totally overcompensate the increase of raw material costs. And therefore, we are -- we are starting to have a positive impact on the gross margin, in terms of relationship between sales and raw material input costs. The volume decrease, however, certainly has also increased our [ higher facility ] costs and therefore, overall on the gross margin we will not see totally yet the benefit of the higher pricing, which has accumulated, I would say, since the second half of last year. But should volume, as we expect, hold down or slightly recover in some geography as we just talked about, its impact should become visible later on during the year. If you look at your second question in terms of dynamics, in terms of Pigments and Masterbatches, I think the businesses are holding on quite well, given the environment. And if we directly compare to their competitors as far as communication has -- have been made up to today, I think, we are faring quite well and therefore, we feel confident that the businesses remain attractive and will benefit from quiet a significant demand. Once we actually start the divestment process, as I mentioned before, we are currently separating those businesses in stand-alone entities, which are really autonomous in terms of IT, [ indiscernible ] and steel and so on. So if you can really have a nice carve-out financial setup and have a swift process later on, a bit of a learning certainly from our previous divestments a few years back where we had a very fast process at the beginning, but then we spent almost a year in separating the business. We are doing it the other way around this time, separating the businesses first. Also having time to improve performance here and there, I was alluding to before, and then we'll see who is the best owner for these businesses later on.

[Operator]

[Operator Instructions] Your next question comes from the line of Markus Mayer with Baader-Helvea.

[Markus Mayer, Lead Analyst of Chemicals]

Three remaining questions. Firstly, on your Natural Resources business. I am a little puzzled that you referred to the Saudi business as I thought you have sold majority of that 5 years ago and this business can't be -- not anywhere that big. Maybe you can quantify how big this business is from Natural Resources as this automotive impact has impacted you negatively? That's the first question. And the second question is on Catalysis. Maybe you can quantify what was the portion of Syngas project over the last years versus now and what is right now the portion of Petrochem projects to get a better feeling, what could be a potential positive product mix effect for this business? And then lastly, again on gross margin improvement. This gross margin improvement on Oil & Mining Services, can you maybe help us to understand when the new contracts are come in place and is this when this improvement at the Natural Resources business should be obvious then in the gross margin line?

[Patrick Jany, Chief Financial Officer]

Thank you, Markus. So in National Resources, clearly, we typically we always talk about the Purification business, as you know, which is the main part of the business. Nevertheless, we have kept quite a significant Foundry business particularly on the Automotive sector, which is a good probably 1/5 or 1/4 of the business overall. And I think, we mentioned it this quarter because it's in the line of the weakness in Automotive, which we have seen across the board in the various business areas, which deliver to this industry, and that goes as you know, from Care Chemicals to Pigments to Masterbatches but also at Functional Minerals. So it's a common thread, a common theme which we wanted to highlight. In terms of Catalysis, I would say the growth that you see this year is exclusively really coming from Syngas. And therefore, the proportion has further tilted towards Syngas compared to previous year. And we would expect as we have to guided for the year to have Petrochemicals swinging back progressively, starting during '19 but more pronounced in 2020. So we are peaking and slowly then coming off the peak of Syngas during 2019. Typically, in a normal proportion of things, you would have, roughly speaking, 50% Petrochemicals and 25% Syngas and 25% specialty catalysts. But you know that these can swing quite a lot from 25% to 40% easily, depending on the year and the project. So we are -- we will revert to a more normal pattern looking at 2020, 2021. Now looking at the Oil & Mining improvement, we highlighted that you really have to consider profitability improvement on the Oil & Mining and Natural Resources really on a half year basis, right? You always have. I would say and then a good mix between a strong quarter and a week quarter because Q1 and Q4 are strong; Q2 and Q3 are typically weaker from the mix with Foundry for instance is missing in Q2 and Q3. So you need to have those half years to really be able to actually see the pace of that business. Then me confirm our guidance as you would see the second half -- or the first half of 2019 improving on second half of '18 and continuing the tendency. I think that the ramp-up in terms of sales is nice and encouraging in terms of trends. And you will see the margin progression coming through during 2019 so keep on watching.

[Markus Mayer, Lead Analyst of Chemicals]

Only one clarification questions. Just one, this 1/4 to 1/5 of this Foundry business that is of Functional Minerals not of the Natural Resources overall?

[Patrick Jany, Chief Financial Officer]

Out of Functional Minerals part of it.

[Operator]

Your next question come from Alex Stewart from Barclays.

[James Alexander Stewart, Chemicals Analyst]

Hopefully, it's simple questions to answer. Firstly, could you tell us what the balance sheet impact is from capitalizing your leases, the impact on your net debt, which I don't think you've disclosed today. Secondly, we've obviously moved to reporting and thinking about not adjusted but reported EBITDA. Historically you talked about roughly 100 basis points of exceptional costs. This quarter, you did about that but it was heavily weighted towards the corporate line and heavily weighted towards a separation bill. Have you adjusted what you think those exceptional costs might be in the future or are you sticking by the 100 basis points? And then finally, just in your comments about the VAT in China because the VAT cut was actually quite widespread during the course of the first quarter results. The only companies that have talked about it are you, Akzo, Axalta and PPG, which makes me think that it's primarily limited to the Coatings segment within the chemical industry. Is this -- that cut not happening elsewhere in the sector, and if so what why we're not seeing it in other industries?

[Patrick Jany, Chief Financial Officer]

All right. So looking at the balance sheet impact first, I will come back to that in Q2. I wouldn't have the number readily available but I think you will see that when we have a full disclosure on half year. Now looking at the exceptional dimensioning, I think we guide for 1.5% of sales in 2019. And I think that's a good estimate, obviously it will depend on the pace of the carve-out, it is mainly driven, as you've seen and we talked about, by the actual preparation for the portfolio changes. So it is a -- mainly a corporate line item indeed. And at one point in time it will also pass into the discontinued operation as we advance in processes. On the VAT impact, it's difficult for me to comment on what other companies have been reporting because I haven't been looking at it, frankly speaking. But it's a VAT change for the whole country on several categories, so it should probably affect most of the businesses. But has certainly a higher significance on areas which are closer to the end customer because of the VAT, is then really a trigger of demand and [ not rights ]. It will probably depend on which industry you are serving but that's...

[James Alexander Stewart, Chemicals Analyst]

That makes sense. Just going back to your point on the exceptional -- the one-off costs, although they're obviously not one-offs anymore. You've - if you say 1% to 1.5% of sales into 2019, next year we presumably won't have the carve-out costs. So into 2020 and '21, is there any rule of thumb that we can use, given that it's now much more important.

[Patrick Jany, Chief Financial Officer]

Well we always say that it should be typically below or up to 1% of sales. And we'll maintain that guidance. Currently, I think we've come back on '20 and '21 when we get there but it will not be as significant as it used to be certainly.

[Operator]

Your next question comes Chetan Udeshi from JPMorgan.

[Chetan Udeshi, Research Analyst]

Just a few questions. Firstly, on Catalysts business. I know it's lumpy from quarter-to-quarter but any comment there on how you see the order flow of -- or back log of new projects into your books at the moment, given some slowdown we have seen in the chemical world, in terms of pricing, et cetera, have you seen any change in customer activity in terms of new order flow? That is the first question. Second question is I don't know if you can give any color here but we've not had any disclosure on the SABIC, HPM business besides just the 2017 numbers And in the current environment where things have softened, is 2017 based on sales or margin that I sort of benchmarked to look at in terms of doing our own analysis in terms of potential valuation or a creation from that business will be useful. And the last question is just a clarification on your previous comments around the improvement in Natural Resources' margin in first half versus second half. Just to be clear here, that is based on reported second half margin not the preexceptional margins.

[Patrick Jany, Chief Financial Officer]

Yes. So looking at Catalysts, I think, as you say, in the first quarter it was actually quite good because the 4% growth was quite significant, taking into account that we had a shift of orders from the Q1 into Q4 last year as we highlighted by the end of the year. So the underlying -- it will reflect the fact that the underlying demand is actually quite solid, the backlog case is fine and we can confirm our guidance on Catalysts' growth and therefore, I would say no change to our view on that basis nor [ of overall ] development of sales in this year but also looking at our guidance for 2020. When you look at the second question, well we currently cannot communicate any number on SABIC business. We have a nondisclosure agreement so I'm unfortunately not be able to give any flavor on that. We will obviously, give you more flavor once we have signed that in the next few months but it will have to wait until that moment, I'm afraid. And you third question was on Natural Resources?

[Anja Pomrehn, Head of Investor Relations]

Natural Resources, improvement on Natural Resources for [ already based and after exceptionals ].

[Patrick Jany, Chief Financial Officer]

Yes. Well, we report now on after exceptionals. So obviously, it is based on after exceptionals but typically it should come from [ as I say ] before the before exceptional items [ looking for ] and interest flow through. There is not too much exceptional costs in that business looking forward.

[Operator]

[Operator Instructions] We have a follow-up question from Mr. Andreas Heine with MainFirst.

[Andreas Heine, Managing Director]

Very small stuff only, can you give an update on the polypropylene Catalysts plan, how that's progressing? And secondly, in the Oil & Mining business, I understand these improvements mainly come from the oil part and that the mining businesses is rather stable. Is it still the case? And lastly, also on the oil business, another company in the chemical business is -- has seen in Q4 and even more in Q1, a slowdown in that business because of the oil price drop we have seen in Q4. You are more linked to the production and the other volatility might be less important. So I would assume that the recent volatility in oil prices has not affected your business in your incoming orders and that it was really pretty smooth than what you have seen in Q1 that what you reported and what you can expect from Q2?

[Patrick Jany, Chief Financial Officer]

We are glad to hear you [ setting terms to address ] an issue. Looking at polypropylene Catalysts, yes, as we have mentioned, now we have ramp-up in terms of sales. So I think they'll be on track to achieve our guidance which is to achieve a breakeven position in that plant for 2019 before contributing in terms of margin in 2020, 2021. So there we are in the market, we are starting to produce, products have been specified, [ a customer places ], and therefore we are starting to have the commercial phase of these investments. And technical topics are behind us and we actually have a very nice quality of PP Catalysts there on the market. If we look at Oil & Mining, I would say the one part oil is certainly growing as we mentioned. Refinery was a bit lower, which also affected a bit of profitability in Q1, specifically there is a [ awarding ] business systems of margin. And mining has picked up and is actually growing quite nicely and I would expect it to grow with some variation on the copper in Latin America, but overall we have had a nice growth in mining which we would anticipate to continue in 2019. As far as the growth quality is concerned in terms of oil, I think it's been very, very smooth. We are, as you rightly mentioned, very much linked to contracts and therefore the actual production of oil has been very stable and increasing. And that is the fact in the very constant growth that we can see in our oil business. Therefore, we are quite confident to continue to see this growth looking forward in 2019 as well.

[Operator]

Ladies and gentlemen, there are no more questions at this time.

[Anja Pomrehn, Head of Investor Relations]

Well, ladies and gentlemen, that concludes today's conference call. I think despite the temporary weakness we saw in Plastics & Coatings, overall Care Chemicals, Catalysis and Natural resources delivered solid numbers and are progressing towards our 2021 target as we have announced in September last year and have reiterated for full year and now again. Should you have any further questions, please do not hesitate to contact the Investor Relations team, we will be very happy to answer any questions you still may have. So thank you very much for joining and bye-bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thanks for participating in the conference. You may now disconnect your lines. Goodbye.