Strong cash flow despite continuing weak demand at Clariant

Clariant, a world leader in specialty chemicals has announced sales of CHF 1.609 bln in Q2-2009, compared to CHF 2.121 bln in the same period of the previous year. This represents a 24% decline in Swiss Francs, and 21% in local currency. The second quarter was characterized by continuous weak demand in most businesses. Although volumes came down 23% year-on-year, the gross margin increased to 29.3% from 28.9% in the previous-year period as a result of successful margin management. • Sales in Q2 down 21% in local currencies and 24% in CHF • Operating income before exceptional items decreases to CHF 69 million from CHF 143 million in the second quarter 2008 but improved from CHF -13 million in the first quarter • Cash flow from operations improved to CHF 184 million, from CHF 33 million in the previous-year period • Net debt reduced to CHF 985 million from CHF 1 209 million at year-end 2008 • Outlook: For the full year 2009, Clariant expects sales in local currencies to decrease 16-20% compared to 2008. Cash flow is expected to remain strong as a result of ongoing stringent net working capital management and further improvement of the operating income before exceptional items compared to H1-2009 Compared to Q1-2009, the gross margin was 5.7 percentage points higher as the measures to adjust capacity to lower demand levels have started to kick in. In addition, destocking along the value chains eased in some customer industries. As a consequence, Clariant has started to increase production output in some businesses with the effect of reduced costs for underutilization of capacities. Also, the stabilization of raw material costs has led to less devaluation of inventories. The company’s efforts on cost savings favorably impacted Sales, General & Administration (SG&A) costs, which decreased in absolute terms to CHF 371 million from CHF 434 million. However, due to the drop in sales, the SG&A ratio increased to 23.1% from 20.5%. Based on higher capacity utilization, ongoing cost savings and a stabilizing raw material cost environment the operating income before exceptional items reached CHF 69 million in the second quarter, compared to CHF 143 million in the previous-year period. However the operating income before exceptional items improved from CHF -13 million in the first quarter. All divisions contributed positively to operating income before exceptional items. The decisive cost-saving measures in the Textile, Leather & Paper Chemicals Division positively impacted the profitability of all three businesses. The Pigments & Additives Division significantly reduced its costs for the underutilization of capacity due to the fact that destocking had eased and order intake had stabilized. The Functional Chemicals Division continued to be the most resilient against the decline in demand. The Masterbatches Division further lowered its break-even point. Net income remained negative (CHF –61 million) in the reporting period mainly due to the restructuring and impairment costs of CHF 74 million but also resulting from the weak operating income. The previously announced reduction of 1350 job positions was already completed with 1423 job positions reduced. An additional 500 job positions to be made redundant in 2009 were identified and implementation has begun. Further reductions in 2009 and 2010 will follow in line with the company’s goal to close the performance gap to its peers and to adjust the company’s structure to the global recession. Operating cash flow reached CHF 184 million in the second quarter of 2009, compared to CHF 33 million in the comparable previous-year period. This substantial increase has been achieved through a stringent reduction in net working capital, in particular due to tight inventory management. The cash position in the group improved to CHF 545 million from CHF 438 million at the end of the first quarter of 2009. In addition, Clariant’s cash position and debt maturity profile have been further improved by launching a CHF 300-million Convertible Bond shortly after the closing of the second quarter. The available financial headroom remains at more than CHF 2 bln. The Bond has a coupon of 3% and matures on 7 July 2014. The conversion price was set at CHF 8.55 per share, a premium of 30% to the prevailing share price on the date of issuance. The bond will be booked in the third quarter of 2009. The company has further strengthened its balance sheet by reducing net debt by CHF 224 million to CHF 985 million compared to year-end 2008. The gearing – net debt divided by equity – was at 51% on 30 June 2009. In line with Clariant’s focus on cash generation as well as cost and complexity reduction, the company intends to simplify its operational structure effective January 1, 2010. The divisional management layer will be removed. 10 Business Units will have full profit and loss responsibility including ownership of their assets. The new structure will create more operational and strategic flexibility. This move will not only foster entrepreneurship and accountability, but also create a platform to improve Clariant’s profitability Business Unit by Business Unit and – going forward – facilitate portfolio measures where applicable. Clariant assumes that the global economy will only slowly recover. Consequently, Clariant sales in local currencies are predicted to remain weak until the end of the year, approximately in the range of 16-20% below the previous year. The company will maintain its focus on cash generation by decreasing its net working capital. At the same time, the cost-saving and restructuring measures will continue to favorably impact the operational result, which will then also increasingly contribute to cash generation. Based on this scenario, Clariant anticipates a further improved operating income before exceptional items for the full year compared to the first half of 2009. Going forward Clariant will continue its restructuring efforts with estimated restructuring costs of CHF 200-300 million in 2009 and further job reductions in 2009 and 2010. For 2010, Clariant confirms its target of a sustainable above industry average return on invested capital (ROIC).
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