Clariant earnings to ‘significantly’ increase on performance materials tie-up with SABIC – CFO

LONDON (ICIS)–The planned high performance materials joint venture between Clariant and stakeholder SABIC is expected to “significantly” increase its earnings, as the Switzerland-based producer seeks to pivot to a higher-margin portfolio, its CFO said on Wednesday.

Patrick Jany said turnover for the planned vehicle, which will comprise Clariant’s additives and high-end masterbatches operations with SABIC’s specialty polymers operations, is expected to reach Swiss francs (Swfr) 4bn ($3.97) by 2021, Jany said.

The unit is expected to generate an earnings before interest, taxes, depreciation and amortisation (EBITDA) pre-exceptionals level of 24-25%, he added, compared to pro-forma group margin of 15% in the third quarter 2018.

“We [are] separating the very innovative and high-margin businesses in plastics and coatings groups together with high performance polymers from SABIC to create a very specialised and broad player in the materials area,” Jany said.

The business is focused on sectors such as mobile phones and lightweight vehicles, where demand for new lightweight and durable specialty plastics and coatings is likely to increase.

“You need those highly specialised materials to keep up with the pace of things which are coming our way, and those things are coming in the next five to six years,” he said.

The unit is likely to increase company annual EBITDA by double-digit percentage levels from estimates before the joint venture was announced, according to analysts at Baader Bank.

The bank called the tie-up a “wedding gift” for Clariant after SABIC purchased a 24.99% stake in earlier this year, and likely to cement the company as one of the key takeover targets in Europe.

The venture may be a prelude to SABIC using Clariant as a vehicle for a more significant acquisition or for a full takeover for the business.

SABIC said in September that it currently has no plans to acquire the remaining 75.01% of the company, and Jany declined to comment further.

SABIC’s CEO said to ICIS earlier this month that the two companies would announce more synergies in the first quarter of 2019.

Clariant is expected to take a majority stake in the joint venture but specifics are still in the process of being discussed, with negotiations expected to run through June 2019, he added.

The company is also grooming various lower-margin business, including standard masterbatches, pigments and medical specialties, for sale as a bid to improve the overall profitability of the business.

Collectively worth Swfr1.6bn turnover and EBIT pre-exceptionals of 12% in 2017, the businesses are sufficiently distinct from one another that they will likely be sold separately rather than as a unit, Jany said, with the divestments expected to be concluded by 2020.

“These are very differentiated business which do have different environments in terms of customers, competitors and so on,” Jany said.

The sell-off, combined with the higher-value tie-up with SABIC, is likely to increase Clariant’s average margins, and leave it less exposed to economic cycles, he added.

“The divestment will improve margins for the group because  we will sell lower-margin businesses, so the average goes up, and we will also get a little bit more GDP independent because those businesses [being sold] are more prone to the general economic environment than the one we are focusing on,” he said.

The remaining parts of its business, chemicals, catalysts and natural resources, are core to its operations and will remain so in 2021, according to Jany.

Swiss francs million	Q3 2018	Q3 2017	Change (%)
Sales	1,605	1,566	2.5
EBITDA before exceptional items	241	235	2.6
– margin	15%	15%

The company posted a 3% year on year increase in third-quarter EBITDA before special items on Wednesday to Swfr241m, slightly below analyst expectations on a 28% drop in catalysis earnings.

The weaker catalyst division performance is driven by a slowdown in Asia back to general economic growth levels after an “extraordinary” few quarters, according to Jany.

“We are coming from levels of 30% growth in China, and the [growth] we saw in Q3 is actually exactly on our target range of growth. So from that perspective it is actually very solid growth but looks lower than previously,” he said.

Nevertheless, conditions are likely to become weaker in the closing months of the year, as political tensions, central bank interest rate hikes and a less unified western economic recovery weigh on demand growth.

“We certainly see, as many do, an increase in the level of worries in the economy from tariffs [and other factors]… After having had quite a few years of high growth in many geographies, we now see a  softening of demand [and] is in our view a reduction of growth of growth, but not a crisis,” he said.

The company is guiding for improved EBITDA for the year as a whole compared to 2017, despite expectations of a more bearish few months.

“After Q3 we are flat in terms of margin, with a slight increase in percentage in absolute numbers… [but] Q4 cannot reverse a whole year,” Jany added.

Picture source: Clariant

($1 = Swfr1.01)

Interview article by Tom Brown