Clariant With Strong Cash Flow Despite Continuing Weak Demand

 

Muttenz, May 6, 2009 - Clariant, a world leader in specialty chemicals, today announced that sales reached CHF 1.6 billion in the first quarter compared to CHF 2.1 billion in the same period a year earlier, a decline of 19% in local currencies and 24% in Swiss francs. The quarter was characterized by a steep decline in demand. Volumes fell 25%, resulting in extremely low capacity utilizations which were accentuated by the company's strong focus on cash flow generation by reducing inventories. The substantial reduction of inventories was achieved by lowering production volumes clearly below sales volumes. The resulting strong operating cash flow came at the expense of a lower gross margin and a negative operating margin.

 

Margins were also negatively influenced by a substantial inventory devaluation resulting from a fast decline in raw material costs during the quarter. Compared to the fourth quarter, raw material prices fell 15% on average and 2% compared to the same period one year ago. This effect is expected to become negligible once raw material price volatility decreases which we expect to take place already in the second quarter this year. While Clariant's margin management was successful with 6% higher sales prices year-on-year, inventory devaluation and underutilization costs led to a decline of the gross margin to 23.6% from 30.5% in the previous year.

 

The contributions of less cyclical businesses such as de-icing, oil services and agrochemicals could not compensate for the overall negative trend in demand. A reasonably good economic environment in Latin America and first signs of stabilization in some Asian countries could not offset the collapse of demand in the mature markets of the United States and Europe.

 

Sales, General & Administration (SG&A) costs were reduced to CHF 357 million from CHF 437 million in the first quarter 2008. As a result of the lower sales the SG&A ratio in percentage of sales increased to 22.2 % from 20.7%. Hence the group reported an operating loss before exceptionals of CHF 13 million and a negative operating margin before exceptionals of -0.8%.

 

The Masterbatches Division lowered its breakeven point and returned to an operating profit after a flat fourth quarter 2008. The Functional Chemicals Division benefited from a satisfactory but weaker demand and the successful implementation of cost reduction measures. Functional Chemicals positively contributed to the operating result. Customers of the Textile, Leather & Paper Chemicals as well as Pigments & Additives Divisions continued to destock their inventories, leading to a significant capacity underutilization therefore to an operating loss before exceptionals in both divisions.

 

In the short term, Clariant will focus its restructuring efforts on the unprofitable divisions. The Pigments & Additives Division will continue to implement cost saving measures and optimize production in order to adjust its capacity to the lower demand. In order to sustainably improve the operating performance of the Textile, Leather & Paper Chemicals Division, the three Business Units will be separated  by the end of the year. This will enhance the operational and strategic flexibility to tackle the performance issues according to the individual needs of the particular Business Unit.

 

In the first quarter, restructuring costs amounted to CHF 51 million compared to CHF 23 million in the previous year. Since the beginning of the year, job positions have been reduced by roughly 540. Personnel costs excluding currency effects decreased by 8%. The Group recorded a net loss of CHF 91 million compared to a net income of CHF 41 million in the previous year. The better financial result, due to a beneficial foreign exchange rate development, mitigated the negative effect from the lower operating income on the net result.

 

Operating cash flow reached CHF 156 million compared to CHF -6 million in the first quarter of the previous year. A stringent focus on inventory reduction and trade receivables were the main drivers of the favorable cash flow development. The cash position of the group improved to CHF 438 million from CHF 356 million.

 

Clariant further strengthened its balance sheet by reducing net debt by CHF 73 million to CHF 1.14 billion since year end 2008. The company has no refinancing needs before mid 2011.

 

 

Currently there is no evidence that the global economy will recover soon from the depressed levels seen in recent months. However, some markets stabilized during the first quarter. The first signs of a partial demand improvement were noted in some Asian and Latin American countries.

 

Based on this scenario Clariant anticipates a continuing weak development in sales during the coming months.

 

In this challenging environment, the company will maintain its focus on cash generation  and adjusting its production capacities to the low demand. The already started significant cost reductions- in particular in the SG&A area - will result in an improved profitability in the next quarters.

 

Going forward Clariant will continue to  restructure forcefully with estimated restructuring costs of CHF 200-300 million in 2009.

 

For 2010, Clariant confirms its target of a sustainable above-industry average return on invested capital (ROIC).

 

 - end -

 

 

Arnd Wagner               Phone              +41 61 469 61 58

 

Ulrich Steiner               Phone              +41 61 469 67 45