Clariant AG

Please note, anyone who wishes to ask a question during the conference may press star and 1 on the touch-tone telephone. Ladies and gentlemen, welcome to the Clariant Third Quarter Figure and Proposed Lucas Meyer Cosmetic Transaction Conference Call and Live Webcast. I am Sandra, the course co-operator. I would like to remind you that all participants have been listened on remote and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Andreas Schwarzwald, the head of investor relations. Please go ahead, sir.

Thanks, Sandra. And ladies and gentlemen, good afternoon. My name is Andreas Schwarzwald, and it's my pleasure to welcome you to this call. Joining me today is Konrad Kaiser, Clarion's CEO, who will guide us through the key details of the proposed transaction for Clarion. Both Konrad and Bill, our CFO, will afterwards provide an overview of the third quarter developments, and there will be a Q&A session covering both topics of our presentation. At this time, all participants are in listen-only mode. I would like to remind all participants that the presentation includes forward-looking statements, which are subject to risk and uncertainty. Listeners and readers are therefore encouraged to refer to the disclaimer on slide two of today's presentation. Also, all statements made in respect of Lukas Meyer Cosmetics are related to the proposed acquisition, which is expected to close during early 2024. As a reminder, this conference call is being recorded A replay and a transcript of this call will be available on the investor section of Clarion's website. Let me now hand over to Konrad to begin the presentation.

Thank you, Andreas. Good afternoon, everyone, and thank you for joining this call. We are delighted to confirm that Clarion has agreed to acquire Lucas Meyer Cosmetics for $810 million. This acquisition will have a compelling strategic fit for us. It is fully aligned with our purpose-led growth strategy. It will expand our reach into the high-value cosmetic ingredients space. It will advance our sustainability and innovation agenda. And it will be accretive to our gross margins and cash flow. I will elaborate on these important aspects in more detail in the next few minutes. Lucas Meyer Cosmetics, headquartered in Quebec, Canada, is a leading player in the high-value, active, and functional cosmetic ingredients market. Its high-quality customer base includes multinational blue-chip customers, regional, and independent brands. It also has a highly experienced leadership team with an excellent track record. Its competitive edge stems from its superior innovation capabilities, including global R&D and regional application centers. In addition, Lucas Meyer Cosmetics has a unique customer-centric business model, resulting in strong brand recognition amongst customers around the world. In fact, because of this, our intention is to continue with this valuable brand after closing, In the next 12 months, Lucas Meyer Cosmetics generated around 100 million US dollars in revenues with a highly attractive profitability profile. This business is also highly cash generative due to its asset-like business model and outsourced production. I will now briefly touch on the compelling rationale for our agreed acquisition of Lucas Meyer Cosmetics in the following slides. This proposed transaction will strengthen our position as a true specialty chemicals company. Lucas Meyer Cosmetics has an attractive, market-leading, contract manufacturing operations model. This transaction will further enhance our sustainability and R&D profile. It will increase our exposure to fast-growing, high-value consumer end markets. Lucas Meyer Cosmetics will be the perfect complementary fit for us across customers, products and regions. All of this means that this transaction will generate significant shareholder value. Our ambition is to grow Lucas Meyer Cosmetics annual sales from around 100 million US dollars today to around 180 million US dollars by 2028. The transaction value reflects Lucas Meyer's cosmetics high growth and high profitability profile, with an acquisition multiple of 16.3 times EV to reported EBITDA. The transaction is also expected to be mid-single-digit percentage, EPS accretive, for Clarion from year one onwards. The funding for the acquisition has been secured by a fully committed bridge facility, which we intend to refinance soon after completion, increasing our net debt leverage moderately and not impacting our investment-grade credit rating. We expect the acquisition to close in the first quarter of next year, subject to customary closing conditions. The transaction will further advance Clarion's ongoing portfolio transformation to focus on specialty businesses in line with our purpose-led strategy. At our Capital Markets Day back in 2021, we stated our key criteria for value-enhancing M&A. The proposed acquisition of Lucas Meyer Cosmetics ticks our objectives for all of these metrics. The transaction will build on Clarion's track record of pursuing and successfully integrating hold-on acquisitions to enable value creation and profitable growth. As a result of this transaction, Clarion will further increase its portfolio weighting to the most attractive segments of consumer end markets, to approximately 45% of current sales. underpinned by accelerating demand for sustainable products. Lucas Meyer Cosmetics has a unique customer-centric business model with distinctive customer interaction expertise across actives and functional ingredients, botanicals, as well as delivery systems, driving innovation and increasing customer stickiness across these applications. Lucas Meyer Cosmetics is a market leading player in this high value cosmetic ingredients space and has built a competitive advantage through superior innovation, speed to market and intimate relationships with the key cosmetic brands. In addition, the business offers a very promising innovation pipeline with attractive natural based ingredients that will be launched in the upcoming years. The cosmetics ingredients market globally is significant, at an estimated 81 billion US dollars, with Lucas Meyer Cosmetics addressable market of high end active and functional ingredients at around 6 billion US dollars. The growth drivers and outlook for this market are highly supportive, with an expected 7% volume CAGR over the next four years, driven by sustainability and cosmetic-related megatrends, such as natural products and personalization, plus accelerating consumer demand for quality and technological enhancements. In addition, Lucas Meyer Cosmetics' own CAGR of around 10% in recent years demonstrates its track record of outgrowing underlying market growth. Varian's business unit Care Chemicals and Lucas Meyer Cosmetics will be a perfect strategic fit with strong complementarity in terms of customer and product portfolios, regional strongholds, plus matching capabilities in R&D and marketing. As a result, Care Chemicals and Lucas Meyer Cosmetics will be able to grow faster together than either one could do on its own. Combining the two product portfolios will unleash immediate cross-selling opportunities. Lucas Meyer Cosmetics is a leader in high-quality peptides and botanical-based active ingredients, while our Care Chemical business has a rapidly growing natural focused actives and extract portfolio with more basic ingredients for personal care. The customer basis of Lucas Meyer Cosmetics and Care Chemicals show limited overlap. Lucas Meyer Cosmetics has a close proximity to premium international customers and independent brands. While we have a broad portfolio of large corporates as customers. This will make Care Chemicals a uniquely positioned solutions provider for cosmetics brands. The regional footprint will be also highly complimentary. Lucas Meyer Cosmetics has a strong sales footprint in North America and France, which are key markets for active ingredients, while we are well established in APAC and Latin America. Given Lucas Meyer Cosmetics' footprint, this acquisition also demonstrates Trallion's diversified investment strategy by strengthening its presence in the important North American market. Lucas Meyer Cosmetics is headquartered in Canada and generates around one third of its sales in the region. Lucas Meyer Cosmetics' financial profile will be accretive to Clarion's gross margin and cash flow profile and exceeds Clarion's 2025 financial target metrics. It will add around US dollar 100 million in sales with a highly attractive EBITDA margin profile and strong cash generation due to its asset life business model. Both metrics clearly exceeding our targets. The financing structure also allows us to maintain our investment-grade credit rating, and the transaction will also be accretive to EPS after year one. In closing this section of our presentation, we are excited by the opportunities brought to Clarion by this agreed acquisition. This will strengthen our position as a true will create significant value for shareholders. With that, I will now turn to the Q3 financial results. In the third quarter, Clarion delivered a strong performance in catalysts, while we saw stabilization in care chemicals, despite a continued challenging market environment. In the third quarter of 2023, we recorded sales of around 1 billion Swiss francs. In local currency, this corresponded to an 8% organic decrease or a 13% decrease, including scope impacts, versus the third quarter of 2022. The currency impact was 8% in the reported figure of 1.03 billion Swiss francs. Economic conditions remain challenging in many geographies, resulting in a weak demand environment. The European Chemical Industry Council, CEFIC, reported that the EU27 chemical production declined by 11.2% in the first eight months of 2023 versus prior year, and by 5.9% in August 2023, compared to August 2022. despite slight sequential improvement. Given demand for chemicals is still in decline, they expect the EU27 chemical output to reduce significantly in 2023, with the expected 2024 recovery likely to be postponed. In China, the largest chemicals market, the recovery remains slow with industrial output growing by 0.5% in August compared to July 2023, according to CEFIC data. The U.S. economy continues to be impacted by global weakness and monetary tightening. In August 2023, the American Chemistry Council, ACC, reported a 2% decline in the chemical production regional index. compared to the previous year. Against this challenging macroeconomic backdrop, our volumes decreased by 5%, despite the positive performance in catalysts. Volumes declined in chemicals and absorbents and additives, where we continue to experience very weak demand, in particular in key end markets like crop solutions and electrical and electronics applications. Crop solutions continue to face a well-filled supply chain in a relatively robust environment for farmers, which is driving global channel restocking and negatively impacting the demand for our products. Weak consumer demand continues in the electrical and electronic sector. The International Data Corporation IDC expects global notebook and PC production to decline by 13% in 2023, compared to 2022, with demand experiencing a delayed recovery in the second half of 2024. Smartphone shipments grew sequentially in Q3 2023 by 7%, given the upcoming holiday season. while remaining noticeably negative at minus 9% on a year-to-date basis. Following a period of notable year-on-year price increases, we reported a 3% decrease in pricing in the quarter. Whilst catalyst pricing increased by 4%, hair chemical pricing declined by 6%, driven by index-based contracts. and absorbance and additives was down 1%. To put the third quarter figure in perspective, it is important to note that prices had increased by 18% in the same period last year. We remain focused on defending pricing in this deflationary economic environment. The net effect from our acquisition of the US-based At The Pool Guide business in absorbance and additives and the divestment of both the North American land oil and quartz businesses in chemicals totaled 67 million, which had a negative 5% impact on group sales in the third quarter. The currency impact of minus 8% was mainly due to the appreciation of the Swiss franc relative to the Argentine peso. Euro and other currencies. This resulted in 21% lower third quarter sales in Swiss francs. Moving to the profitability development, we see that third quarter 2023 EBITDA was 159 million Swiss francs, 28% lower year on year and resulting in a 15.4% EBITDA margin. Excluding the notable FX impacts in the quarter, the decline in absolute EBITDA was 14% year-on-year. Carryout achieved higher volumes and a favorable product mix in capitalists. This, as well as our cost savings from our performance programs, made a positive contribution to our profitability. However, this only partially offset the impact of lower volumes and unfavorable business mix in chemicals and absorbents and additives. The net operational impact from sun liquid was slightly higher sequentially, but improved by 2 million Swiss francs year on year. Looking at the sequential development of sales and underlying profitability in the quarter, we achieved stable organic sales in a challenging market environment. Volumes increased by 2% sequentially, driven by a 7% improvement in care chemicals. Pricing was slightly down by 2% due to index-based price adjustments. The scope impact from the quads divestment was negative 2%. Overall, therefore, sales were down by 2% in local currency. In Swiss francs, sales decreased by 5% sequentially. Our profitability is improving, with EBITDA excluding exceptional items increasing by 21% sequentially. This was driven by our very strong performance in catalysts, the volume increase in chemicals, and the strong performance in adsorbents, although volumes were lower in additives. We also had a positive contribution from our ongoing cost measures. I will now head over to Bill for further details on our business performance in the third quarter.