Clariant AG

SIX:CLN

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Clariant 9 Months 2019 Figures Conference Call. I am Chiara, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ms. Maria Ivek, Deputy Head of Investor Relations. Please go ahead.

[Anja Pomrehn, Head of Investor Relations]

Ladies and gentlemen, good afternoon. My name is Maria Ivek, and I welcome you to Clariant's 9 Months Third Quarter 2019 Results Conference Call and Live Webcast. Joining me today is Patrick Jany, CFO of Clariant. As a reminder, this conference call is being recorded. [Operator Instructions]. The slides for today's presentation can be found on our website along with our media release. I would like to remind the participants that the presentation includes forward-looking statements which are subject to risks and uncertainties. Listeners and readers are therefore encouraged to refer to the disclaimer on Slide 2 of today's presentation. A replay of this call will be available on the Clariant website. Let me now hand over to Patrick Jany to begin the presentation.

[Patrick Jany, Chief Financial Officer]

Thank you, Maria. Ladies and gentlemen, good afternoon. Let us begin with the highlights on Slide 3, and please note that all figures discussed refer to continuing operations unless specifically noted otherwise. In the first 9 months of 2019, Clariant grew sales organically by 3% in local currency with both higher volumes and pricing contributing to this expansion. The sales growth was mainly driven by the business areas Catalysis and Natural Resources. The EBITDA after exceptional items was negatively impacted by the one-off CHF 231 million provision taken in the second quarter as a result of further developments in an ongoing competition law investigation by the European Commission into the ethylene purchasing market. The EBITDA therefore decreased significantly to CHF 253 million. From an operational performance perspective, excluding the effect of this one-off provision, the EBITDA after exceptional items matched the previous year and remained resilient at CHF 484 million with a corresponding margin of 14.8% versus 14.7% in the previous year. The third quarter results contributed positively to this development with 2% higher sales in local currency and a 6% increase in EBITDA after exceptional items, despite an increasingly challenging economic environment. Consequently, the corresponding EBITDA margin of 14.5% was 100 basis points higher year-on-year. Let us move to Slide #4 to review the sales development. In the first 9 months, Clariant delivered sales of CHF 3.3 billion. Sales grew organically by 3% in local currency mainly driven by Catalysis and Natural Resources. Higher prices positively supported sales by approximately 2%, while volumes contributed 1% to the expansion. Client sales growth in Swiss francs was negatively impacted by 3% due to the unfavorable foreign currency developments which led to a practically unchanged sales figure in Swiss francs. In the third quarter 2019, sales grew by 2% in local currency driven by 1% higher prices and 1% volume growth. Sales were approximately CHF 1 billion with a negative foreign exchange impact of 3%. The main sales growth contributor in the third quarter was Catalysis as expected. Slide 5 depicts the regional sales development for both the 9 months as well as the third quarter of the current year. In the first 9 months, most regions contributed to the sales growth in local currency. Sales in both smaller regions, Latin America and the Middle East and Africa, grew the strongest by 11%. In Asia, sales grew a good 4% despite the 9% slowdown in China. And sales in the important European region grew by 2%. Only North America reported a contraction of 4% due in part to the case of force majeure at a key supplier in the second quarter. Sales growth in the third quarter is in line with the 9-month strength with growth in the Middle East and Africa and Latin America and Asia. While China and North America continues to be negative, growth in Europe stalled, and sales contracted by 3% in the third quarter reflecting the worsened economic environment. Let us start reviewing business area figures in more detail starting with Care Chemicals on Slide 6. First 9 months sales decreased by a slight 1% local currency year-on-year. Consumer Care sales advanced at a good mid-single-digit range, with positive contributions from all business lines. Crop Solutions sales expanded in double digits, while Personal Care and Home Care both delivered a solid progression. However, Industrial Applications sales were softer. This decrease was related to the more cautious end market demand which is attributable to market headwinds caused by the weak economic environment. As a result, the demand development of the base products, industrial lubricants and construction, came under pressure. In addition, in the second quarter, North America was hampered by the prolonged plant shutdown of a key supplier following a case of force majeure. Although this force majeure situation has since been resolved, the resulting market share losses are still being addressed. The weaker development in North America is therefore also a reflection of the lingering effects. The same dynamics impacted the third quarter of 2019 where sales decreased by 3% in local currency and by 6% in Swiss francs, also due to the high comparison base in 2018. The EBITDA margin after excepted items in the first 9 months softened to 17.5% from 19.2% year-on-year owing in part to the temporary negative effect from the previously explained raw material disruptions in North America, which primarily had an impact in the second quarter. Concurrently, we also saw continued weak end market demand in industrial applications. In the third quarter, the EBITDA margin declined to 17.1% from a very high 21.6% in the third quarter of 2018. This is due to inventory devaluation given lower raw material costs and because a volume reduction in base products negatively impacted the cost coverage. The impact of the inventory devaluation on the EBITDA in the third quarter can be quantified in the high single digit range. At Care Chemicals, we expect to see a return to growth in the fourth quarter and improved profitability in line with the normal seasonality of this business. Moving on to Catalysis on Slide 7. Sales in the business area Catalysis expanded by substantial 10% in local currency in the first 9 months of 2019. This was mainly driven by robust demand in both petrochemicals and Syngas. In the third quarter of 2019, sales growth accelerated to an excellent 15% in local currency. As expected, the improved sales performance resulted from increased demand in petrochemicals, specialty catalysts and Syngas which all reported significant growth. The 9-month 2019 EBITDA margin is at 19.4%, still slightly behind previous year. The profitability is still recovering from the temporary capacity outages in Asia in the second quarter which have since been resolved. The third quarter EBITDA margin increased to 19.4% from 17.1% a year ago due to a proportionately higher sales growth contribution from petrochemicals which resulted in a more favorable product mix. For the full year 2019, the Catalysis business area is on track to meet its midterm sales growth expectation of between 6% to 9% and to improve its profitability compared to the previous year. This implies that the fourth quarter could reflect weaker topline development given the strong sales expansion already witnessed in the third quarter which show higher profitability. Let us move onto Slide 8, Natural Resources, which now also includes Additives as you know. 9 months 2019 sales rose by 4% in local currency. Oil & Mining Services reported double digit sales growth in local currency with positive contributions from all 3 business lines. Oil Services and Mining Solutions delivered robust growth while the expansion at Refinery was in the single digit range. Sales in Functional Minerals rose at the low single-digit rate largely due to the continued strength of the purification business. This growth of the purification business for edible oils compensated for the weakness encountered by the foundry additives which was attributable to the soft automotive sector. Additives sales declined for the first 9 months of 2019 against a particularly high base. The more cautious demand largely resulted from the less dynamic Automotive as well as Electrical and Electronic sectors. In the third quarter, sales in Natural Resources remained unchanged in local currency against a challenging comparison base. While Oil & Mining Services continued to expand, sales in the Functional Minerals business decreased slightly due to the weak automotive sector. The Additives business retreated significantly due in part to the record-high comparison base but also because of the difficult business market dynamics. In the first 9 months of 2019, the EBITDA margin in Natural Resources rose to 15.6% from 14.8% in the previous year. This was the result of stronger top line growth in Oil & Mining Services as well as the intensified focus on more value-added applications. Additives partly compensated for volume losses via strict cost control measures. The positive 9 months development was strongly supported by the third quarter in which the EBITDA margin increased significantly to 15.6% from 13.6% last year, mainly due to the targeted growth in higher margin segments in Oil Services and lower exceptional items. Looking forward, sales growth in Natural Resources is likely to be more subdued, but we expect to see a continued profitability improvement on a half yearly basis. Let us take a look at the EBITDA development for the first 9 months on Slide 9. The continuing operations EBITDA after exceptional items was negatively impacted by the known one-off provision of CHF 231 million. Therefore, the EBITDA decreased significantly to CHF 253 million compared to CHF 483 million in the previous year. In terms of the underlying operational performance and excluding the effect of this provision, the continuing operations EBITDA matched the previous year and remained resilient at CHF 484 million which corresponds to a margin increase to 14.8% versus 14.7% in the previous year. The profitability in Natural Resources increased due to stronger top line growth in Oil & Mining Services as well as the intensified focus on more value-added applications. Overall, the EBITDA performance reflects the resilience of our portfolio despite the weak economic environment. Similarly, Slide 10 depicts that in third quarter 2019, the EBITDA increased by 6% to CHF 151 million. The profitability advanced significantly in Catalysis due to the more favorable product mix. Profitability in Natural Resources rose due to the targeted growth in higher margin segments in Oil Services and lower exceptional costs. The corresponding EBITDA margin at the group level increased to 14.5% from 13.5% in the previous year. Please turn to Slide 12, first published on our first of October, including now the Additives business in Natural Resources. As previously communicated, Clariant is continuing with the divestments of the Masterbatches and Pigments businesses. These divestments are expected to be concluded unchanged by end of 2020 while the previously announced sale of Healthcare Packaging is expected to be concluded shortly. The proceeds from these divestments will be used to invest in innovations within the core business areas, to strengthen Clariant's balance sheet, and to return capital to shareholders. Our aim is to continue to follow our unchanged strategy to focus on our core high value specialty businesses. On the one hand, we intend to improve performance by delivering on innovation and through the implementation of further operational improvement initiatives. On the other hand, we will stringently execute our portfolio upgrade, leading to a significant complexity reduction and an improved balance sheet. This brings me to the outlook on Slide 13. Despite the current challenging environment, Clariant expects its continuing businesses to achieve above-market growth, higher profitability and stronger cash flow generation based on our focused, high-value specialty portfolio. With that, I turn the call back over to Maria.

[Anja Pomrehn, Head of Investor Relations]

Thank you for taking us through the presentation, Patrick. I would now ask the operator to open the line for questions. But before we go to the Q&A session, we would kindly ask that you limit the number of questions to 2, thus providing more participants with the opportunity to ask a question. Thank you for your understanding. We will now open the line for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Daniel Buchta from Bank Vontobel.

[Daniel Buchta, Research Analyst]

The first one, maybe on Care Chemicals again. I mean you were giving some comments, Patrick, on what happened here in Q3 again, but still I'm struggling a little bit to understand the full picture. I mean you said the supply disruptions were basically affecting Q2. The industrial business was weak, but that probably also didn't change too much compared to Q2 with automotive demand and other industries being weak also back in the days there. So why is Q3 then still rather weak in terms of organic growth of minus 3%? And then could you back out a little bit more again on the margin contraction? I mean the devaluation on the inventory side you were mentioning, where would you be kind of excluding that, and what of the margin drop was related to the high margin or to the high base last year? And then the second question on the corporate line, I mean if my calculation is right, you have CHF 9 million corporate expenses and while usually you guide for more, like you were saying, 2% roughly to sales, now you are below 1%. And what was driving this low corporate line? Are there any unusual items included in that?

[Patrick Jany, Chief Financial Officer]

Thank you, Daniel, for your long 2 questions. Looking at both of those, yes, Care Chemicals had a tough quarter in Q3 and we would have wished to have had a better picture. But the plight disruptions were a result in Q2 of the known force majeure in the US. But the effective thing is that we actually lost some sales in the consequence of that and in Q3 proved to be more difficult than the business flow beginning to recover those positions. Therefore, we continued to have actually quite a weak sales development in the US in Care Chemicals. So it obviously was better than Q2 in terms of sales, but it was significantly lower than we would have expected. It is recovering, and therefore, if we look forward as we guided now as well in the speech, the Q4 will actually be quite strong for Care Chemicals. But certainly, Q3 was weaker than we thought from that point of view. Just from the pure geographical, the 2 consequences of the geographical weakness in the US. Now, if you look at the businesses themselves, Crop had an excellent quarter, very, very strong in double digit segments, far above the typical 12% we would refer to as the growth rate for Crop. But we saw some weakening in Personal Care and Home Care, still growing nicely but not at the high single digit pace, but just nicely growing. While we certainly saw a deterioration, more pronounced deterioration in the industrial application in Q3, particularly I would say in the more commodity part of the business, the base product which we don't often talk about because they are basically fillers for the capacity utilization. But as you know, there has been quite a lot of reduction of raw material costs and a lot of competition coming into play and base products were suffering in Q3 under this development in addition to reduction of sales in Lubricants, also icing, braking fluids for automotive. So there were a conjunction of negative factors in the industrial application with reduced capacity utilization and that in turn impacted the EBITDA line obviously. Overall, I would say the deterioration still has to be, as you rightly mentioned, compared to a very, very high base of the previous year. I think Q3 2018 was the record Q3 year ever with I think 21.6% EBITDA margin. So obviously very abnormal for Care Chemicals. I think we all are well informed our seasonality typically Q4 is the stronger quarter, not Q3. Last year was exactly reversed. Q3 was the strongest, Q4 the weakest. So I think this will impact a little bit from the qualitative point of view when you look at the comparison of the quarters. We will revert to normal seasonality which means Q4 will be stronger than Q3 this year just as has been all the years before apart from last year. So don't be too biased by Q3 view because last year was disproportionately high. But notwithstanding, the weakness of Q3 is there. If you look at it from a more quantitative point of view, I would say the inventory devaluation comes from the reduction of price in ethylene and ethylene derivatives which is in the market, we have a strong oversupply of ethylene pushing the oil prices down. We adjusted inventory, including Q3, that is a gain for Q4. As you know, when you reduce inventory and you sell the product in the next quarter, your margin will be improved. And therefore, I would not be worried on the yearly view, because those products won't get sold until yearend and we recuperate this margin differential in the Q4 in terms of increased margins. We quantified it now at a high single digit figure, which basically if you look the deviation compared previously, we are at I think it's 17.1% we compared to a previous year of 21.6% so 4.5% deviation in terms of EBITDA margin. Roughly half of that deviation comes from the inventory devaluation effect which will actually, as I just was mentioning, recover and recuperate in Q4. And the rest is mostly due to less cost absorption through these lower sales on industrial applications. That I think gives you a quite detailed description of what went on in Care Chemicals in Q3.

[Daniel Buchta, Research Analyst]

That's very helpful. And maybe on the corporate line quickly?

[Patrick Jany, Chief Financial Officer]

And your second question on corporate line, indeed. Yeah, we had a couple of reversal of provision pensions and so on in Q3 which makes it a little bit artificial low [indiscernible] in our guidance on that, and as a rough guidance, I think we have communicated our continued figures first of October. You do have there, corporate cost amounts for continued operation, which I think is a very good guidance as well as corporate costs continuing this year. So on a yearly view, that will compensate. Actually, part of the same effect, Q3 is a bit higher and Q4 will be lower and last year was exactly the opposite. But overall the same pretty much.

[Daniel Buchta, Research Analyst]

That's very helpful, and thank you for your detailed response on the first question.

[Operator]

The next question comes from the line of Peter Clark with Societe Generale.

[Peter Anthony John Clark, Senior Analyst, Chemicals]

Yes, good morning, Patrick and Maria. Can I just clarify my corporate charge for the final quarter then? Because I think your guidance on first of October was 2% of sales, so you'd be implying fourth quarter might jump to even what you achieved in the first 9 months which seems excessive to me. But just want to double check what you're guiding for the fourth quarter for that corporate charge [indiscernible]. And then the second question is talking about the margin expectations that you've kept for the division, slightly altered to Natural Resources with Additives, I think. But effectively, if I look at the bottom end of the range of that target guidance, sort of 20% margin for 2021 on EBITDA, you're running the last 12 months obviously significantly below that hit by one-offs. I think it's about 220 basis points below that, on my numbers anyway. Now I was just wondering how you can contextualize these one-offs, force majeure, the sort of fires, you now have the inventory revaluation. These sort of things can happen again of course, but effectively, how much you see of that 220 basis points down to the one-offs you've seen in the last 12 months, and then how you climb back through that 220 basis points, presumably a lot of price mix, but how important volume will be for that for the targets.

[Patrick Jany, Chief Financial Officer]

All right, just to clarify on corporate costs, I was unclear before, so what I was referring to was indeed the Q3 number for corporate costs before exceptional items is very low at CHF 9 million compared to CHF 23 million the previous year. I was just highlighting that most probably you could probably see the reverse situation in Q4. Therefore, having increased corporate cost position and compared to a very low previous year base. Overall, with some corporate costs for the full year 2018 before exceptional items, with 2019 we'd be very close to the 2018 number. It's just shifting in quarters, but the sum would be pretty much the same at year end. If we now look at your view on Care Chemicals, yeah, 2019 was not the year, and we talked about it early on in the year, where we can make a jump in the performance of Care Chemicals. We have been touching the 18%, 19% in the last year.

[Peter Anthony John Clark, Senior Analyst, Chemicals]

It's more about the whole operating division actually, Patrick, not Care Chemicals. The operating divisions, I have in total about 220 basis points slide to the low end of the range. So I realize a lot of one-off for Care Chemicals, but I think you have one-offs in other segments as well over the last 12 months.

[Patrick Jany, Chief Financial Officer]

Yeah, 20% EBITDA margins on the group level of 2021 refers really to a portfolio which included the SABIC business announced in 2018 guidance. So from that point of view, you have to adjust on that. But if I understand you well, on the whole portfolio you are wondering how we can increase margins. I would say it's quite a logical evolution by business area. If you look at Care Chemicals, as I said, this year is not the year we can do a big jump forward because we had negative one-offs in the Q1 for de-icing, we have the force majeure in Q2. We have this lingering effect in the US market there in Q3. So we will be at best coming, very, very close to previous year. Then obviously the structural improvement in Personal Care, growth in Crop Protection, and also quite improvement in some industrial application businesses. We'll resume the progression of margin in that business area, so I'm not concerned on the midterm at all. Just a matter that in 2019 instead of progressing given the environment and in addition one-offs, we just got hit on different levels there and we couldn't progress in Care Chemicals. But it doesn't change anything to the plan and to the ambition to bring Care Chemicals in this 19% to 21% range we have indicated for 2021. Catalysis is exactly on track. I think that's fine, they're okay. I think we highlighted as well the guidance now in the speech. Looking forward for the next 2 years, there will be progress in terms of margin. The booster there is clearly biofuels, certainly ethanol, that will have to be more concrete in early next year and as 2020 develops on the timing of this development. It's a new business, has an inherent risk with it, but has a tremendous potential and actually the sale of licenses is doing pretty well. So that is the booster factor which brings you from those 25% to 26% EBITDA margin to the 28%, 30% we indicated early on. If you don't have the biofuels business, you would remain in the 24% to 26%, probably on the high end of that range, for Catalysis alone without the biofuel piece. And for Natural Resources, we are just progressing. We are returning to the 16% to 17% where we were. We have upped that guidance now because obviously we put Additives in it, right, which currently is a bit [surfing] because of the macro, but overall, I think we have indicated 18% to 20% EBITDA margin for Natural Resources. That implies -- actually old Natural Resources volume, not functional minerals, coming to 16% to 17% and it's just mathematical addition of this business which is still at 20% in the crisis year and will return to the range of 23%, 24% where it was actually last year when demand situation was more normal. So over the next 2 years, we would expect the market, the electronics market to recover and the supply chain adjustments when production moves from China to Vietnam to Malaysia to be settled. Therefore, custom orders to come back in Additives. And therefore, this margin as well to go back to 23%, 24%. And the rest of that component, as I said before it's just all coming back to where it was and we are on a very good track record this year as you can see from the margin development. And as we just chatted, by the way, we will see further margin improvements running in Q4 in that business as well.

[Operator]

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

[Christian Faitz, Equity Analyst]

Two questions if I may. First of all, any indication of the cash flow development goal for full year 2019? And then second, can you update us on the search for a new CEO?

[Patrick Jany, Chief Financial Officer]

Fair question, Christian. So on the cash flow, obviously we don't communicate cash flow on Q3, so you are putting me in a difficult position there. But no, kidding, I think the cash flow is on line and we'll be from an operations point of view very much developing well second half as usual. First half is typically weak on cash flow generation, it comes as you know in the second part. We will have some impact on the cash flow from the carveout projects within the discontinued operation which is taking now, ramping up pace, and therefore as well increasing its costs as you can see as well in Q3 and you will see in the Q4 results as well. There is a cash component which goes up. On the other hand, you will have the proceeds from the divestment as well of the medical specialties. So it depends whether you look at the operational cash which would show some capital costs, because you know, cash flow is for the total company, we don't have continued or discontinued cash flow. This high increase cash out from the discontinued will be in our operating cash figure in there, but on the other hand, you will have to mentally offset it with the proceeds from the divestments from the medical specialty business which comes on another line. But overall, it will be pretty okay. Now, when you ask on the search of the CEO, quite clearly as was mentioned, it's a matter which is being taken up by our board. We have a Nomination Committee which has started the process. It's an external search. We will have, they will present a list of candidates, there will be a selection process which typically takes a bit of time as you know. But we maintain the guidance that by yearend, early next year, the search should be concluded.

[Operator]

Next question comes from the line of Alex Stewart from Barclays.

[James Alexander Stewart, Chemicals Analyst]

I'm struggling to make sense of your comments about revenue growth in Care Chemicals. I know there have been a few questions on it, so sorry. In the second quarter, you had local currency growth of negative 3% with the full impact of the force majeure. In the third quarter, you only had a residual impact from the force majeure, yet revenue was down 3% again. In fact, the underlying growth in Q2 was mid-single digit positive according to your release, so that's a swing of almost 10% form one quarter to the next. You also mentioned the comparable was tough this quarter, but made no mention of the comparable in the Q2 release. Yet the comparable Q2 2018 growth is plus 10%, whereas it was plus 8% in Q3, 2018. In other words, it looks like an easier comparable in Q3, not a harder one. Could you just help us make sense of that? Because it's quite difficult to hit all the moving parts there.

[Patrick Jany, Chief Financial Officer]

Thanks for the question, Alex. I think it's not that difficult really. 2018 was a very good year. Whether you take the Q2 or Q3, 8% or 10% growth is a fantastic growth. So in a way, both quarters last year were very good and therefore formed quite a high comparison base the year after when the economic environment was totally changed. Remember that 50% of our business is industrial applications, it's more GDP dependent, and therefore, having quite a good growth last few years with a peak in 2018, mainly Q2 and Q3, which typically are the weaker quarters as you well know for Care Chemicals. From an excellent basis which when the economy turns significantly as it has, you remember our context we were working on in Q2 last year was quite positive. Now already is revising its GDP forecast down month by month. It's a totally different base and therefore it forms a very high comparative base. I think there's no dispute of that and it should be fairly simple to understand. Now if you look at the growth per se per quarter, indeed Q2 was the most affected by the specific US force majeure. Clearly the main impact there. I think we were 25% down in the US for Care Chemicals in Q2 which was very unfortunate. Now we continue to be down, to give you a bit of flavor, in Q3, I think 15% in the US. So yes, we have recuperated a bit, but we are still down compared to this high base and that certainly is a drive on the numbers. In addition, as I tried to explain before, we are actually seeing a contraction in the markets like Lubricants, Construction, braking fluids which are directly obviously for the Automotive market, where it's quite a significant mid to high single digit volume reduction in Q3. And that just drives the figures down, that's all. What we see important is obviously where do we go from here? That in Q4 actually we should have more positive trends. So I think we have been explicit now in the presentation on Q4, I think it's important for everybody on the call to see that we would basically, a bit like we had discussed in London in October, that in Care Chemicals we would expect stronger Q4 compared to Q3. While in Catalysis, we expect the opposite, so stronger Q3 and a weaker Q4. That is just from the rhythm of the quarters. And for Care Chemicals, it just means we are back to a more normal seasonality where typically Q4 is stronger than Q3. I hope that explains your question.

[Operator]

Next question comes from the line of Markus Mayer, Baader.

[Markus Mayer, Lead Analyst of Chemicals]

Good afternoon, Maria and Patrick. Two questions as well from my side. Firstly, on the divestment process, can you update us how the process for Masterbatches is running? And if you expect an announcement on the end of this year? And secondly, on Additives, 15 of October the European Commission has announced the ban of halogenated flame retardants and new information disclosures on electronic displays by March 2021. Could you give us flavor on your exposure of your Additives business toward nonhalogenated flame retardants or for your process-based flame retardants in particular for Europe and for electronics and what kind of effect do you expect from this kind of ban for competitive products?

[Patrick Jany, Chief Financial Officer]

Yes, to your first question, obviously we will refrain from giving you any precise guidance on the timing of any divestments because obviously we all have the same objective here which is to maximize value. So I think we need to keep the cards close in our hands and not put ourselves under undue pressure. I think we will drive the processes as hard as we can to maximize value and that's what you can expect from us. But we are working on it, as you know, both for Masterbatches, Pigments and also as well the main point actually in terms of preparation in the separation of the businesses which will be finished as planned the first of January, 2020 in 2 totally separate holdings, legal entities around the world, IP system which allows to plan for a swift process during 2020. When we go back to Additives, yeah clearly, I think we have been very much favoring and explaining the advantages of non-halogenic flame retardants because they are just better for these types of applications. And I think the market has been moving in that direction for the last few years. If it gets reinforced by some regulatory framework, all the better. It is clear that these types of applications, non-halogenic in principle are the better product and our product in particular. Doing a bit of publicity here, it's particularly good. And we would expect this to further I would say continue the growth in Additives. Which is why you'll remember that back in 2015, we already had taken the decision to separate Masterbatches, Pigments and Additives in 2014 for divestment. Now we changed our view on Additives, I think it was in 2017, and we repatriated so to say, Additives in the core business because it was just so on the one hand, exactly to your point, in electronic applications there is only one way the market can go. It's towards our range of products and some competitors as usual, but in principle, we are very well positioned. On the other hand, in the waxes, which is the second big area, we do have very innovative innovation space on renewable raw materials which allows us to go into totally new areas for the wax business. So the growth, and I would say backed by innovation is quite tremendous in that business. And although it's still a small business, CHF 400 million, it has a consistent performance above 20% EBITDA even in quite a disruptive year like 2019 in terms of volumes. We still maintain a good margin. And we expect this really to turn, so weakness in electronic application should turn because it's just a supply chain rearrangement but the underlying demand can only grow. And that's why we are very positive on the prospects of that business.

[Markus Mayer, Lead Analyst of Chemicals]

But could you quantify your exposure to Europe for this business and to electronics? Electronics could be higher by the European end market, how big is it?

[Patrick Jany, Chief Financial Officer]

There are 2 components here. We do sell quite a bit to Europe. However, the biggest, second biggest market in this business area, business line is actually China. But the relative demand of China goes back to the US and Europe, right? So the actual proportion of Europe is actually probably quite significant. But it's not 30% in any case in direct sales. And typically, higher if you assume that a good part of what is produced in Asia goes back to either the US or to Europe.

[Operator]

Next question comes from the line of Nicola Tang from Exane.

[Nicola Tang, Analyst]

Actually, the first one was also on Additives, so I was wondering if you would explain a little bit more exactly what was driving this weakness on the electronic side in Q3. And can you help quantify what you mean by retreated significantly? And then thinking about the comp you said Q3 comp was tough and can you explain how the Q4 comp looks? And given the high profitability of this business, I was wondering whether that, if that ends up being a weak market in Q4, whether that could affect your ambition to grow this division, grow margins in this division half-on-half? And then the second question was on the Sunliquid. You highlighted you signed the second license. Can you explain when this should contribute to earnings? And can you remind us of the sort of hurdles you need to pass to eventually hit your midterm CHF 100 sales target?

[Patrick Jany, Chief Financial Officer]

Thank you, Nicola. Coming back to Additives, indeed I think the business has developed like you would see in all the major producers or end customers as well. I think electronics are down, anybody who does polymers for electronics is down significantly, all the big European names are significantly down in that area. And our Additives is a direct supplier to those. You could quantify that to a double-digit sales contraction in Q3 as an example. Pretty close to actually what we have for the year, so high single digit or low double digit. That's the area where we see the contraction. On the back of I think 12% growth back in 2018. So we had a very good growth for the last 2, 3 years, 2017, 2018, and now we have this contraction just because while markets are disrupting, there's a lot of uncertainty in terms of tariffs as we all know. There's uncertainty in terms of technologies, delays in some technologies which are coming out, and then a reshuffling of supply chain, because some production is certainly moving out of China into other countries in Asia. Therefore, well logically people will not increase stocks but are rather emptying the supply chain before starting new production sites next year. So from that point of view, it's a sequential disruption because supply chain is interrupting and a weakness in terms of new technologies coming out. That will revert clearly and we are very confident as well to your previous question that this will actually continue to be a drain going forward. If we look at Q4, clearly we have guided now I would say precisely on the lower growth than in Q4 for Natural Resources because we expect oil to continue to be doing very, very well. Functional minerals is actually pretty flattish or slightly negative like it was in Q3, because of the weakness in the foundry business which is more linked to the automotive, partially linked to the automotive. And then you have the Additive block which as I just indicated is down high single digit or low double digit depending on the quarter. And that would obviously offset the growth in our guide. So we would guide for Natural Resources to very low growth for the fourth quarter 2019 but still a margin improvement. I think the dynamics are there within oil, within refinery mining to offset Additives which is frankly speaking contracting more in sales than it is in profitability. So it doesn't create such a big hole in profitability that it could not be compensated by the advances we do in Oil Services. Now looking at Sunliquid, your second question, we are starting to have some success in selling licenses before setting up the plant. As you know, we are building, I think we are looking at this project as well with our customer because there is a strong interest here to develop the technology. The actual P&L effect is really when the plants, which are now assigned licenses, start to be built, are finished and start to operate. Because you have the license fee structure is just a little bit upfront payment and then you have a significant payment when the engineering package has turned into reality and when the plant is actually standing and starting to run, there's another payment. And then you have the ongoing enzyme sales which is the actual part of the business we actually want to do because that is obviously the enzyme business, not the technology business of selling engineering packages or for plants. It's one nice component in terms of value, but the ongoing business is what impacts our figures is really the sale of enzymes. So that is a few years ahead, but we are very much pleased that there is strong interest in the technology, that people are starting to put money on the ground and building their plants.

[Operator]

Next question comes from the line of Patrick Rafaisz of UBS.

[Patrick Rafaisz, Director and Chemical Research Analyst]

The first is on Catalysis. You talked about the mix improvement with more PetChem helping the margin. When would you expect this business to be back in a normalized mix? I assume there's still slightly overproportionate sale of Syngas here in the mix given that the margin improvement was good but not that great, right? We were still below 20% here on the margin. And the second question is around discontinued operations, Masterbatches and Pigments. I noticed in the slides here the EBITDA drop before exceptionals, minus 16%, looks pretty steep for only minus 2% organic or minus 4% on the top line. Can you add a bit more color what happened here? And do you think this will have an impact or is this impacting your new disposal process, your negotiations in any way?

[Patrick Jany, Chief Financial Officer]

Thank you, Patrick. So to the first question, yes, I think we are -- we started the year with a mix which was very much linked to the mix of the previous year. With quite a lot of Syngas in the mix. And as we guided for petrochemicals, it's virtually ramping up its proportion of sales over the year. Q3 was a good quarter actually for all segments, so petrochemicals was impacted as expected and was even a little bit stronger than we thought. But we are there catching up nicely and the margin has progressed according to our expectations absolutely. We are reducing the gap towards previous year and the guidance is absolutely maintained. So no change in guidance on the sales growth that we had 6.5% and the profitability level will be slightly ahead of previous year. So we are catching up compared to that. It's not yet an ideal product mix, to your point. We still have a lot of Syngas and we obviously had some disruption as you remember in Q2 in China as well which didn't help the margin. So although we feel confident we can improve the margins, we're looking ahead as well as we ramp up as well capacities in terms of polypropylene as well which is still driving the results this year. So from that point of view, there is a nice potential to still improve margins in Catalysis. But we are exactly on track and where we wanted to be at this stage of the year in Catalysis. If you look at discontinued operations, indeed we do have regression of sales of 2% and [indiscernible] which has contracted a bit, I think we are 15%, whatever 16% down in Q3. Mainly coming I would say from the pigment part which is always more difficult to react. Masterbatch is doing a decent job, a very decent job actually in adapting its cost base to the lower volumes. But pigments as we all know is more a real chemistry business where you have very long production cycles of 6 months ahead and those obviously get caught a bit up when volumes come down and therefore you always have to play all your reduced inventory and you shut down your factories, but you reduce your EBITDA and generate cash. Or you run full steam, you have a nice EBITDA, but you end up with inventory which is not needed. And this is always the code in Q3, Q4 in pigments and that's where they are currently more targeting cash than actual EBITDA margin in the numbers. So not too worried on the performance, it's a typical development which is quite difficult to manage actually when volumes come down, but they are doing a good job there. And we focus on cash. We have no intention to increase the EBITDA margin for a one quarter effect. In fact, we run those businesses as we have grown them the last 2 years in terms of cash. Whether that implies being paying a price in EBITDA margin, it is the price you have to pay. So that is as a consequence on the divestments. I think people sift through that. I think anybody who buys a business will look at the cash generation of that business and therefore we feel comfortable with the way we manage it.

[Operator]

Next question comes from the line of [ Sandeep Pandya, Millennium ].

[Unknown Analyst]

First question, sorry to ask you this, Patrick, now. I know you are not going to be comfortable with this. But on the divestment side of things, could you just tell us -- I understand what you are saying, investing in the business, de-levering and then cash return. I just want to ask you on the de-levering part, where would you be comfortable? Because the balance sheet as it stands today is relatively okay, so whatever you get, I mean at what level are you going to be comfortable? And so therefore just want to understand your thoughts behind giving cash back in whatever form it might be. And then the second part of that question really is with regards to these businesses obviously are let's say your Masterbatch business has quoted peers and all. So just in terms of interest from parties, are we talking about strategic players or also financial players? Those are sort of 2 of my divestment related questions. And then just one small catalyst related question. The big project in China started off in Q3, the [Huangli] complex. Have you shipped catalysts for that already in Q3? Or is it more a Q4 event?

[Patrick Jany, Chief Financial Officer]

Hi, Sandeep. No, I feel very comfortable with your question, no worries about my comfort level there. If we look at the investment topic, I think clearly, we expect to first of all maximize proceeds under the cycle we are in now. And the more you get, the more comfortable you can be on the resulting balance sheet. So we focus one thing after the other. We try to do a good investment process first. Second, clearly the ambition here is to have a strengthened balance sheet. In theory I think we can be debt free which obviously is not particularly good either. And therefore, we totally have consensus in the boardroom to make the board decision to quantify the amount of the return to shareholders. But there will be a return to shareholders. We will re-leverage to a normal level. I think the company should be a BBB company and therefore we will make sure that the resulting leverage is well within the BBB area. But again, the more you get, the more you can redistribute, so let us focus on what is most important.

[Unknown Analyst]

Sorry, would you say BBB should be 1.5x net debt EBITDA, 1x net EBITDA? Where should we think?

[Patrick Jany, Chief Financial Officer]

It's pretty much exactly where you indicated, yeah. Depending the rating agencies which don't have always the same use in calculation methods, it will be around 1.5x net to debt. Now on the process itself, I think no comments from my side. Both businesses, Pigments and Masterbatches are good businesses. Masterbatch has evidently a good cash flow generation because it's low asset intensity and FX assets are low, net growing capital is moving fast and therefore cash generation is on the one hand regular and certainly significant as well. Which means that you probably and hopefully have not only strategic players interested but also, quite a few actually, that as a typical business, you can own and be very happy with it for a long time. So that I would say opens the door to quite a broad process. When you look at catalysts, I will have to come back to you. I actually don't know whether we have or will de-lever our catalysts for that installation.

[Operator]

Next question comes from the line of Udeshi Chetan, JPMorgan.

[Chetan Udeshi, Research Analyst]

Just 2 questions. One, can you just clarify all the comments you made about margin improvement? I'm assuming those are based on the reported margins, not the pre-exceptional margins, so just to clarify that. And second question was on Care Chemicals, when you talked about margin improvement in Q4, are you talking about versus Q3 or should we expect margin improvement also versus Q4 last year?

[Patrick Jany, Chief Financial Officer]

Yeah, just to clarify, when we talked about margin improvement know that we reported after exceptional items this year. And we still obviously show you the before exceptional items just to make sure that we have total transparency of numbers, not to disrupt anything, but clearly, we measure ourselves and the whole incentive plan in the organization is fixed on EBIT after exceptional items. And then in terms of Care Chemicals, yeah, I think we clearly would see an improvement there because of the market dynamics and a return to normalcy as I mentioned before that would allow us to be basically above previous year in terms of before and obviously above Q3 2019 as well. And I would just like to highlight that it is a very decent performance. If you look at our competitors and the market environment, we are very proud of the performance of our businesses. One other thing is to be one or two million off by business area on an expected number, our own expectations as well. But the other way to is to look out at the reality of the market and I think we are doing a great job there in improving the margins as we have and as we continue to do.

[Chetan Udeshi, Research Analyst]

Understood. Maybe can I follow up? A few of your competitors have highlighted in catalysts some disruptions in Q4 from the fire or the Saudi oil disruption. Have you guys seen any of that in your catalyst business?

[Patrick Jany, Chief Financial Officer]

No, we have not. We are not in the refinery business, so from that point of view we are one step behind the value chain and specifically our catalysts are not consumed in the chemical reaction. But they are delivered once and renewed every 3 to 4 years. So if you disrupt production of a downstream product for a couple of months because you are missing a bit of supply from the refinery, it doesn't really change the renewal data of your catalysts.

[Operator]

Next question comes from the line of [ Richard Castle ], Goldman Sachs.

[Unknown Analyst]

This is [ Peter ] actually. I have only one last on Natural Resources. Was there a meaningful contribution from new Oil Services contracts in the quarter that potentially supported profitability in the division? And what do you expect from here?

[Patrick Jany, Chief Financial Officer]

Thanks for your question, [ Peter ]. Indeed we are going through a triple process in oil which is why this business is now really performing better as we had expected a year and half ago and delivering on its promises. First of all, we reduced costs in Q3/Q4 of last year which gives us a very sound base in terms of operating leverage. In Oil, as you enable it, so you have to negotiate to get a good base. We did that in the second half of 2018. The second element is we are not favoring sales growth for sales growth, actually which we think, and not retendering contracts where we do not earn a sufficient margin, which is particularly within some areas of the shale business in the US where we had, after buying a couple of businesses there 3 years ago, the effort was to maintain the top line to ensure that we have a market position. This was taken as we expanded a couple of quarters ago to the extreme. And we still have to make some money, right? We are here to make money and therefore not only sales line is important, but the margin is also important. And therefore, we are letting go of some contracts where there's just I would say not enough differentiation factor for the technology. So if you can do the same result for our customers with a nondifferentiated chemistry, we have no real advantage there. We will focus on areas where it's more difficult, where you need a better chemistry to achieve improvement. That typically goes as well with a higher margin. So we are quite selective on letting, on seeing where do we actually gain contracts. And therefore, we are more letting go of contracts than in gaining contracts is what I'm trying to say. And but certainly we do have very interesting contracts which have been fine as starting in Q3 and also in Q4 and I think that's why we are confident as well that the oil business on its own will continue its growth in the Q4 and into 2020 in a nice manner as well.

[Operator]

Next question comes from the line of Markus Mayer.

[Markus Mayer, Lead Analyst of Chemicals]

Two follow-up questions. Firstly, on the polypropylene catalyst, maybe I missed it, but can you update us where you stand in terms of the ramp up? And secondly, this is more kind of modeling or forecast question, for this kind of new Clariant or core technology, however you call it, what is the automotive exposure and what is the new ForEx sensitivity for this new group?

[Patrick Jany, Chief Financial Officer]

Your question on PP catalyst plant, clearly, we have worked hard to first of all make it run, which is now running. Have a product which is registered and actually accepted by the market. This is actually a very nice development, the quality of the product we are now producing is higher spec than we expected at the beginning of the project. Therefore, I would say from the actual sales price and value-add, we are favorable compared to what was base of the business past. The major part of 2019 has been to master more the production itself in terms of ramping up volumes. I would say we have most probably not finishing the year, but we had indicated a goal of getting breakeven in the plant. We probably I would say not achieved that single objective of being breakeven because we are a bit behind in volume and I would be surprised that we can close everything up into Q4. But it is ramping up, there are technical solutions which have been tested positively and therefore I would say it's a delayed ramp up again compared to what we promised. Makes the figures of catalyst all the better because as I was mentioning before, gives it more room to progress as we finally get our hands around that production plant. So what's the end market exposure of our core client, that's a very good question, Markus, which we will be looking at. I would not expect, we always say automotive is about 5% to 10%, I think we had a figure of 7%, 8% in the past of automotive exposure. It has certainly not gone up, rather come down overall.

[Markus Mayer, Lead Analyst of Chemicals]

And for the ForEx sensitivity?

[Patrick Jany, Chief Financial Officer]

Yeah. I wouldn't expect it to change too much which means we will be still long in dollars given that most of the catalyst business is now developed. We'll be more breakeven in Euros as we will have less costs in Europe. Pigment is very I would say Europe dominated in terms of production cost structure. That will move out and therefore we should be balanced in terms of Euro. So the net exposure is rather long dollar and still short in Swiss francs even after [indiscernible].

[Anja Pomrehn, Head of Investor Relations]

Ladies and gentlemen, we have reached the time limit of our conference call today. I apologize that we didn't have time to respond to all of the questions in the queue. The Investor Relations team is still available for any further questions you might have. Thank you for joining the call today. Have a nice day and goodbye.

[Operator]

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.