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.

Thank you, Conrad, and good afternoon, everyone. I will now discuss our third quarter development by business unit, starting with Kerr Chemicals. Kerr Chemicals sales decreased by 18% in local currency, with volumes down 2% versus a high comparison base in Q2 2022. We reported an increase in organic volumes, sequentially of 7%, with continued monthly improvements during the quarter. Pricing was 6% lower due to formula-based price adjustments linked to raw material prices, and the scope impact was minus 10% due to the disposals of the North America land, oil, and quartz businesses. Sales rose in the high teens organically for oil services. while we decline in a mid-single-digit range in personal and home care. We continue to record more pronounced decreases, in particular in crop solutions, as well as industrial applications, mining, and base chemicals. In the quarter, care chemicals EBITDA of 91 million Swiss francs resulted in a 17.3% margin versus 19.9% in Q3 2022. Profitability was negatively impacted by the lower volume, and currency impacts. On a sequential basis, underlying profitability increased significantly, with EBITDA the four exceptional items of 99 million versus the second quarter comparable figure of 77 million Swiss francs. Catalysts, sales grew by 8% in local currency versus the third quarter of 2022. Volumes and pricing both increased by 4%. Sales in propylene and syngas and fuels increased by over 40%, while specialties in ethylene declined due to the project nature of the businesses. In the third quarter, the catalyst EBITDA margin increased to 22.3% from 11.5%. Excluding the negative sun liquid impact of 11 million Swiss francs, the EBITDA margin was 26.5%, compared to 16.4%, on a like-for-like basis in the previous year. The strong margin was supported by continued positive pricing, as well as the positive business mix and the improved operating leverage because of strong volume growth. Sequentially, EBITDA before exceptional items increased to 58 million Swiss francs versus 51 million Swiss francs in Q2 2023. Our SunLiquid task force and our dedicated team on-site remains focused on delivering improvements in Podari. The negative impact in the third quarter represents a 2 million Swiss franc improvement year-on-year. Clarion is actively evaluating strategic options for some liquids and will provide an update on this topic by the end of 2023. Absorbance and additive sales. decreased by 19% in local currency in the third quarter. This was driven mainly by a 20% decrease in volumes as very weak demand in key end markets continued in the additives business against a strong comparison base in Q3 2022. Absorbance grew by mid-single digits, driven by the foundry business and supported by scope. EBITDA margin decreased to 12.2% compared with a high 24.3% the third quarter of 2022 profitability levels were impacted by substantially lower volumes and additives in particular which resulted in lower operating leverage and fixed cost absorption the relatively strong absorbance performance led to a less favorable business mix sequentially EBITDA before exceptional items of 30 million swiss francs was above the q2 comparable figure of 25 million swiss francs We delivered cost savings of 14 million Swiss francs in the third quarter from performance programs. We remain on track to achieve our increased total 2025 savings target of 170 million Swiss francs. Thus far, savings of 121 million Swiss francs have been realized from efficiency and right-sizing measures, as well as the initial savings from the new operating model. We continue to expect most of the savings related to the implementation of the new operating model to be realized in 2023 and to offset continued inflation, in particular relating to wages in 2023. With this, I close my remarks and hand back to Conrad.

Thank you, Bill. Let me conclude with the outlook. While we expect to see an easing inflationary environment, we do not expect an economic recovery with macroeconomic uncertainties and risks remaining. Despite this backdrop, we expect to land in our guidance ranges for 2023. This includes a net divestment impact of around 150 million Swiss francs. Related to the Quads, North American land oil and at the Pool Guide transactions, as well as an FX translation impact at the upper end of the published 5% to 10% negative range. We continue our focus on cash and have targeted a reduced capex spend below 220 million Swiss francs in 2023. This will positively impact cash generation towards our 2025 free cash flow conversion target. Our focused specialty chemicals portfolio and our highly committed colleagues leave us well positioned for profitable growth as end markets recover. We remain committed to meeting our 2025 targets. With that, I turn the call back over to you, Andreas.

Thank you, Conrad, and thank you, Bill. Ladies and gentlemen, we will now take your question on both our exciting Lukas Meyer Cosmetics transaction, and our Q3 results. We would kindly ask that you please limit the number of questions to two, thus providing more participants with the opportunity to ask questions. Thank you for your understanding. We will now open the line for questions. Sandra, please go ahead.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on the touchtone telephone. you will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone with a question may press star and one at this time. Our first question comes from Christian Veits from Kepler-Vebreu. Please go ahead.

Yes, thank you. Good afternoon, everyone. I have two questions indeed. First of all, is the weak performance in agriculture within care chemicals still visible in Q4? And are you seeing any early signs of improvement heading into 2024? I would guess a lot of the demand issues have to do with the stocking trends we had seen in Q2 and Q3 in the Northern Hemisphere and all the Q4 issues in Brazil. What are your customers saying on that? And then my second question is on Lucas Meyer. This asset has been on the silver platter for quite some time, I believe. What made you buy it at this point in time? And related to that, how easy will it be to integrate the CRM systems into your own setup? Thank you very much.

Thank you, Christian. I couldn't hear the last part of your question. Could you repeat that on Lucas Meyer?

How easy will it be to integrate the SAP systems into your own, in your view? Thank you.

Yeah, clear. Understood. Okay, well, first on your first question as it relates to agriculture. Yeah, we did see in our third quarter a double-digit decline in this segment. So what we see is that this is actually arguably one of the last segments where we still see destocking going on in agriculture today. In crop protection, the supply chains are very long, as you may know, all the way down to the farmer, with also significant distribution stock points in between. What we're seeing is still elevated inventory levels at our clients, and it is our expectations, based on customer feedback, that destocking in the crop solution segment will continue throughout the season. So talking about an improvement, we expect that early on into next year. What is important to note is that in the end, the end markets still actually are healthy. So there is a solid demand for crop protection. It's just that there was an unusually high inventory level in this supply chain. To your second question on Lucas Meyer, yeah, I will say that Assets like this rarely come up for sale. This is an extremely attractive business, both from a gross and margin profile. To my knowledge, the first information on Lucas Meyer was actually a Bloomberg article which showed up in May, where indeed IFF announced to put up this asset for sale. This was definitely a process which IFF managed very professionally. And there was obviously a lot of interest by various players in this. Your final question on integration. We do expect a smooth integration because the business actually was not that much integrated within the IFF company. This is actually a series of shared deals. It's not an asset deal. So these business were pretty much running on a standalone basis and as such, Thank you very much, Conrad.

The next question comes from Jonathan Jung from Morgan Stanley. Please go ahead. Mr. Jung, your line is open. You may ask your question.

I've got two questions, please. Sorry, Jonathan, we can't hear you.

We can't hear you. So maybe, Sandra, can we take Chetan next and try Jonathan later?

Okay, the next question comes from Chetan Udeshi from J.P. Morgan. Please go ahead.

Yeah, hi, thanks. A few questions from my side. First, I was just looking at your Q, I mean, fully a guidance, which of course you haven't changed, but the range is pretty wide when you consider that there is only one quarter left, you know, it's almost a 30% swing from the low to top end. So can you maybe narrow it down where you are comfortable on Q4? Is the midpoint a right number to think about or do you want us to be in one of the two corridors, whether in the low end or the upper end of the guidance range. That's the first question. The second question I had was, clearly the business you are acquiring has a pretty high EBITDA margin of 50%. I don't know, as part of the due diligence, have you looked at the numbers over a period of time? Is that margin something which is sustainable? Because like you also have experienced in the last couple of years, many companies in chemicals benefited from very high inflation, which has boosted profitability of many companies. So just curious, what is their margin track record over a period of time? And a related question would be, can you help us if you have that information in terms of how much is there R&D to sales in the business, just to get a sense of why their margins might be so high? Thank you.

Yeah, thank you. Thank you, Tietan. Yeah, first, as far as our guidance is concerned, so yeah, we expect to land within the range. What we basically see is the continuation of the current trading conditions that we are experiencing, and we also see a deflationary environment. I think it might be important to note that overall, we think we have bottomed out in the second quarter. we had a sequential improvement in our volumes of 2% actually from Q2 into Q3, and we do see an improvement both in volumes on a sequential basis in our chemical business and even in our additive business. Now to your question, can we narrow it down, I think it's fair to say that there still was a lot of volatility. We also see quite some volatility on exchange rates, and I'll let Bill comment on that after I answer your second question. As far as margins at Lucas Meyer, I think the range that you quoted, the number that you quoted is actually correct. This is a very high EBITDA margin business. As you can imagine, we very much focused on commercial due diligence. We looked at their historic growth rates. We looked at the historic margin profile. And I can confirm that actually the company has consistently shown a 10% CAGR in recent years, which included some down cycles like COVID. However, the company continued to deliver this strong growth. The company also has consistently delivered these high margins, and maybe I'll make one comment about it. The reason the margins are as high as they are is that this is truly unique technology. We're dealing here with actives that are natural, that actually provide a certain... a certain advantage to your skin or to your hair. And the uniqueness here of Lucas Meyer is that they prove the efficacy through clinical trials. So the products that Lucas Meyer sells do work. And this will continue to be a growth driver. When they say, actually, with our product, you will have less wrinkles under your eye or you will have less hair loss, this is not just No, this is actually a substantiated claim through actually clinical trials, and that makes it very unique and makes it actually having sustainably high EBITDA margins. Bill, perhaps you could comment a bit on the volatility that we're still seeing, including in the outlook for full-year guys.

Absolutely. So as we had mentioned not only in our opening statements but also last quarter, FX volatility has been a real issue. But if you're not just for us, I mean, really, you've seen the earnings releases from many other multinationals. We're all experiencing the same thing. We feel comfortable about the performance of our underlying businesses and how that puts us in the range. I think the challenge is what's going to happen from the translation perspective, certainly with the euro, the dollar. but perhaps more importantly with the hyperinflationary countries like Argentina and Turkey. That's probably where we see the greatest volatility and the biggest impact. To add a little bit on your second question, I will say that we did an exceptionally thorough due diligence on the underlying quality of the LucasMeyer Cosmetics financials, not just from a top line perspective. perspective, but also from the EBITDA margin perspective. And I think on the basis of both of those, both at the top line and the bottom line, we felt very comfortable in the historic growth, the accuracy of the information that was presented to us, and then what we think we can do with that going forward, both in terms of maintaining and growing profitability.

And in terms of R&D, sorry, I don't know if I missed that response to that question.

You cannot disclose that, Chetan.

Okay. No worries. Thank you.

The next question comes from Jonathan Chung from Morgan Stanley. Please go ahead.

Hi. Can you hear me now?

A little bit better.

Okay. Thank you. Thanks for taking my question. I've got two, please. The first one is around your comment around mid-single-digit EPS accretion from year one. So I think in the fifth note, it says it includes synergies. Could you just give us some colors around what synergies are you assuming from this deal? So what sales synergies and what are the cost synergies? And how should we think about the phasing of this synergy? And then the second question is around a bit on outlook. On a divisional basis, can you give us a bit more colors on how these divisions are performing into Q4? Presumably, your aerospace and refinery exposure should help a bit. And seasonally, catalyst is stronger. in Q4. Is this bill true for this year? Just a bit more color would be helpful. Thank you.

All right. Thanks, Jonathan. This is Bill. Let me start with the EPS accretion. So, yes, we confirmed that after the first year, we do expect this acquisition to be EPS accretive. And the reason that we believe that is that, yes, we start to see the revenue and cost synergy start to flow through into the P&L, resulting in higher EBITDA margin, higher overall level of sales than what we see in the base case. But then also there's a very favorable impact that comes from the refinancing of the bridge loan and also the takedown of the aggregate amount of debt that we have in that. So on the basis of that, as we get into 25-26, we're looking at an EPS accretion in the mid-single digits.

Okay, Jonathan, yeah, I think your second question was about an outlook a bit more granular at the division level, what we are seeing in Q4. So, well, let me start with Catalyst. I mean, we obviously had a wonderful Q3 in Catalyst where, frankly, all stars aligned. We had a volume increase versus prior year of 4%. We had a pricing increase of 4%. And then we see some deflation on the raw materials. I also will say that we have the perfect mix. So we have very strong propane to propylene catalyst cells. We also have very strong syngas cells. So in terms of the mix, that's not something that is sustainable. We have really the perfect mix here on catalyst. I will say if you look into Q4, that we'll see a continued strong growth momentum. But if you look at the year-on-year comparison for catalyst, keep in mind we had actually a very strong Q4 last year. Then moving it to care chemicals, what we're seeing in care chemicals is a sequential improvement already in recent quarters. Let me remind you that our volumes in care chemicals actually were up already 7% in Q3 versus Q2. And if you look specifically at the fourth quarter, what we'll see is actually the de-icing business. of the diesel cold flow improvers business. So for chemicals on that note, we expect continued soft sequential improvement. Finally, if you look at additives and if you basically look at our adsorbents, adsorbents very stable business, no real changes here. In additives, we see a small sequential pickup, but based on the order intake that we've seen also in Q3, It's not going to be a home run yet when you talk about sales of laptops, sales of cell phones. Basically, the consumer has not yet started to buy durable goods again in a significant way.

Thank you. Just on the synergy, is there a number that you can put so that we can model that in our numbers?

Yeah, on the synergies... Jonathan, we did not disclose per se a synergy number, but if you look at our projection where we said, well, we're going to grow this business from 100 million today US dollar revenue to 180 million US dollar revenue in the next five years, you can assume that it is our ambition to actually maintain the very high margins in this business. And that may actually give you some idea on synergy calculation. We also published the historic gross CAGR, which was around 10%, and what you'll see moving forward by combining the product portfolios, by combining the sales force, by actually some real synergy that we see also within the R&D groups, we think we can actually increase that CAGR from a 10% per annum to roughly 12.5% per annum.

Okay, clear, thank you.

The next question comes from Andreas Heine from Stiefel. Please go ahead.

Yes, thanks for giving me the opportunity to ask two questions. The first is on catalysts. Could you share with us a little bit more how your book-to-bill ratio is going forward and how we have to think about business in 2024? And regarding to sun liquid, there was no improvement sequentially, but maybe you can add something what the progress was operationally or whether you are able to understand more how to fix the issues you have there. And lastly, on Lucas Meyer, I would assume that the tax rate is similar to group level. Is that the case or does that business have a completely different tax rate? Thanks.

Sorry, August. Can you repeat the last? Can you repeat the last part of your question?

Yeah, for understanding the conversion rate from EBITDA to free cash flow, I think most important is basically the tax rate, because I would not assume much investment in CapEx or in networking capital. But I would like to understand whether the tax rate is, for Lukas Meyer, as we have it in the group, so 23%, 24% or different.

Sure, I'll let Bill comment on the cash conversion for Lucas Meyer, and then I'll talk a bit about Catalyst and Sun Liquids. Bill? Oh, yes.

Sorry, sorry, sorry. So if I start with the, as you mentioned, the EBITDA conversion rate, to your question specifically on the tax rate, in all of our calculations modeling, we've been assuming 26%, given the countries where they are most active. In terms of EBITDA conversion, it's a highly cash-generative business, and it fits very, very well with, I think, some of the cash flow improvements that we're seeing even on our side. But it should actually provide a very nice accretion for us, not only in terms of our EBITDA margin at a group level, but also from a free cash flow conversion at a group level.

Yeah, Andreas, as far as your question on Catalyst and the order book, I must say the order book is not as strong as it was last year at this point in time. So what you see in actually most of the segments right now for Catalyst is that a lot of the customers are running well below 100% operating rates. Some of the segments as low as 60 to 70% of design capacity. So what this means is, particularly on new builds, there is at the moment an overcapacity in a lot of these segments. So you will see an effect with new builds coming down at some point in time. Now, I will say, if you look at the different segments, whether it is basically propane to propylene, whether it is our syngas catalyst, we do have the most sort of efficient routes here supported by our catalysts. So we also actually see an increased demand and customers switching to Clarion for this reason, especially this is noticeable in our syngas business where the high gas prices actually encourage customers to pay more for their catalysts. And that's one of the reasons we see such a strong demand for syngas. But to your point, yes, there is an overcapacity right now building and that at some point will have an effect on new build rates. As far as your second question on sun liquids, We don't have a lot of news to report here, so we will communicate in Q4. If you look at the operational improvements that we made, we were at roughly minus 11 million this quarter in terms of our cash flow. Last year, this was minus 13. Obviously, this is a small improvement, but it's also clear that we're not happy with this. Thank you.

The next question comes from Peter Clark from Societe Generale. Please go ahead.

Hi, I've got a couple. The first one around Lucas Meyer again. I think they bought this thing back in 2015, so it seems quite a remarkable time, not to have it integrated too much, but I'm assuming you're supremely confident around all the IP and the technology coming with this because of that. And then the second question, back on the seasonality of Catalyst, you've alluded to the fact, obviously, order books are not as strong as last year. But we normally get that big kick in the fourth quarter margin. Are you suggesting now that the fourth quarter margin will be tremendously different from the nine months? Because I think on a nine month basis, when you exclude the sun liquid drag, you're actually above the run rate, the long term run rate. You're running up to 2019 in terms of that nine month EBITDA margin clean. So just those two. Thank you.

Yeah, thank you, Peter. So first of all, as far as Lucas Meyer is concerned, obviously IP was a key focus during due diligence. I mean, what we're buying here is a lot of intangibles. It is an asset-light model. So clearly IP for us was a very strong focus during due diligence. And yes, this IP is actually owned by Lucas Meyer, and that is confirmed. I think your second question, as far as catalysts and the seasonality and a strong finish, certainly last year we had a very strong finish in catalysts. I think I signaled already this year the finish will not be as strong. It is much more balanced and stable compared to what you also saw for Q3. And in terms of the margins, the EBITDA margin of 26%, excluding some liquids, Certainly it's not going to be the new norm. I mean we are very much pleased that we have been able to get the margins back above 20% EBITDA for Catalyst and that basically should be a little bit of guidance moving forward.

Got it. Thank you.

Thank you.

The next question comes from Jaydeep Pandya from Onfield Research. Please go ahead.

Thanks a lot. Firstly on Lucas Meyer, could you just give us some color on the debt refinancing once you're integrating the asset or closing the deal? I see that you have around 250 million of debt that is at clarion level that you need to refinance next year. And then on top of that, there will be 720. So what sort of interest charge should we be looking at from the combination of these two sort of refinancing rounds? And then related to that, also your sort of 2.8 times net debt to EBITDA ratio. If I do a sort of back of the envelope calculation, I get a free cash flow inflow of around 250 to 270 billion for 2023. Is that fair or is that wrong? Second question is around actually Lucas Meyer doing due diligence on your personal campus. Have they had the opportunity to do that? And if they had to pick up chunks of your personal care, what sort of sales would be relevant from Clarion's personal care into the Lucas Meyer business model? And then the last question really is on additives. Obviously, you've lost quite a bit of sales in this business. I think you have a plant coming up in China next year on Deepal. What is the plan for this plant? Are you going to delay it? or are you confident you can fill it up because the recovery sometimes can be quite dynamic in this? Thanks a lot.

All right, thanks, Jaideep. I will start off on some of your very good Lucas Meyer cosmetics questions. Maybe we start with the interest charge. So we've been cleared that we have a fully committed bridge financing in place, which was actually a very important point as part of the overall transaction structure. to allow us to get this done as quickly as possible. We will refinance that within the first half of 2024. We're evaluating options right now, whether it's most effective to do that from a Swiss bond perspective, a Euro bond perspective. If we're looking at a Euro bond perspective, we're probably looking at somewhere maybe 4.5% to 5% at a top range. I will say that The $810 million purchase price or even what we will commit through the initial bridge financing will be reduced in the takeout financing through some excess cash that we have today, as well as the ongoing strong cash flow that we're generating within the company this year. And without giving a cash flow forecast, your estimate probably is not far off the mark.

Yep. Okay, so I'll take the question on Lucas Meyer and did they do diligence on the Clarion portfolio? A very interesting question, actually. I will say we had phenomenal interactions with the management team of Lucas Meyer. We were extremely impressed, actually, by their knowledge, both from a technical point of view as well as from a commercial point of view. What they were very interested in, to answer your question, what they really liked in the Clarion portfolio is really the business that we acquired not too long ago, the Baraka business in Brazil, where also Clarion has some naturals, some actives from the Amazon, natural clays, natural oils with a certain performance benefit. And actually, they saw actually a good opportunity with clients that we were totally unaware of that actually exists without actually this having been public information. This is obviously a clean team. This is a black box procedure. So we haven't been able, at least I'm not aware of any of these names of customers. But there has been a clean team. And the outcome is that there's clearly a very positive revenue synergy on that. They were also very much impressed with the business that we have in France, where we do the so-called roof milking. These are extracts, natural extracts that help cell regeneration. Also an example of a product line they really liked. Finally, to your point on additives and your questions around market share and our new plant, I think it's interesting to note, yes, we have an overall challenge with consumers right now not spending on durable goods. But we also have a challenge where you do see a pickup in a number of these segments in China. For example, electric vehicles up 36% in China. But what you see is that the local OEMs, the local peers, the Chinese companies, disproportionately are taking market share. You see that in electric vehicles with BYD now emerging as the largest electric vehicle manufacturer. Huawei now actually emerging as the locally most sold cell phone, VFV Apple. So for us, the local plants that actually we brought on stream already for flavor retardants, the fact that we have the full local capability now will position us a lot better to also take our fair share with these local OEMs that are actually doing very well in China.

Thanks a lot. Thank you.

The next question comes from Ranulph Orr from Citi. Please go ahead.

Hi, thanks for taking my two questions. The first one is just on synergies. Maybe you can just help us a little bit more here. I'm just wondering if no disclosed number means perhaps they're quite small. And I just wonder here, presumably taking LucasMare out of one of the largest consumer ingredients for the platforms globally, perhaps entails some sales dis-energies as well, and how you're thinking about that. And secondly, I'm just curious how you're engaging with or plan to engage with the LucasMare employee base and offer reassurance, presumably, again, kind of moving from a large consumer-focused platform to a more diversified ChemSco, you know, just create some questions for them. Thank you.

Yeah, okay, in terms of synergies, I think we gave some guidance on it. So what you see actually, Ranulph, is that we commit to basically grow their revenue from 100 million US dollars as it is today to 180 million US dollars in the next five years. So on synergies, this is not a cost synergy case. This is almost entirely revenue synergy. And the reason that we're so confident about it is because these businesses are so complementary. I mean, if you look at it from a customer portfolio, very complementary. If you look at the customers that Lucas Meyer was calling on, is calling on, a different set of customers than what actually Clarion is currently supplying into. If you look at the products, Clarion is still very strong, obviously, predominantly, in the traditional products, whether it's dispersants, whether it's reology modifiers, whether it's mild surfactants, whereas actually Lucas Meyer is almost predominantly a product range which is actives. So the actives, the active materials that provide a certain benefit to your hair and to your skin. Obviously, the two of them go hand in hand. You need both of them in a cosmetics formulation to work. Finally, we see a phenomenal complementarity in the regional strongholds, with Lucas Meyer actually strongly represented in the North American markets with a direct sales force there, strongly represented in France, but actually much less strongly represented in Europe and in Asia. So also, they are a very complementary skill set. And finally, if you look at R&D and marketing, RRMD, very much the classical application labs where we do the chemical analysis and formulations and basically make them work. If you look at Lucas Meyer, very much with their pharma background, focusing on these clinical trials and basically proving efficacy of the products through these clinical trials. This for us is an enormous asset. I mean, you may be familiar with many claims that different products make They do this or that to your skin or to your hair. What is increasingly important is actually to prove these products work. And that is very much what Lucas Meyer is able to do. And that is also why they command these premiums.

Thanks. But maybe it's slightly different. What do you think you're offering to Lucas Meyer that IFF wasn't here to help accelerate the top line?

Yeah, I think I mentioned it Ranul. So what we have is the traditional very strong position as a chemical company basically to supply all the chemical editors that are required to make a cosmetics formulation work. So talking about dispersants, talking about rheology modifiers, talking about emollients, I mean all of these products actually ISF doesn't have that product range, whereas actually Clarion obviously is a very strong player in this segment. Okay, thank you. Thank you.

The next question comes from Konstantin Wichert from Badr Helvea. Please, go ahead.

Yeah, hi, gentlemen. Thanks for taking my question. Mostly answered by now, maybe one remaining on the Lucas Meyer acquisition. Maybe you could give us some indication also on how sales for 2023 will look like when i understand correctly um 100 million is for 2022 and i guess at this point in time you should have a relatively high visibility um how 23 will look like so that would be appreciated as well yeah thank you for something for us it's difficult to actually comment on current trading we obviously don't own the business and we leave that to lucas meyer to comment on on current trading

But I can give you a hint, because if you look at our valuations, that actually was based on an LTM last 12-month trading basis. Thank you.

Okay, thanks.

The next question comes from Matthew Yates from Bank of America. Please go ahead.

Hey, afternoon, everyone. Very interesting strategic move you've announced, so congratulations on that. Just a clarification, Comrade. I think you described Lucas Meyer as having unique technology. I won't claim to be an expert on this, but when they talk about long-chain amino acids for peptides, isn't that essentially very similar to what Crota's Sederma business does? So can you elaborate a little bit on the differences between what I guess is the major competitor for the asset? And then two just adjacent questions, please. First one, Just on the CapEx cut, I think we've now gone from 280 million at the start of the year to 220. Have projects been cut or have they been pushed into next year? And then I think you've been clear on catalysis in this call a couple of times that we shouldn't get too carried away with the underlying margins. But can you elaborate a little bit more? Why not? What is it about the MIT? that's currently so favorable that you wouldn't expect to persist, either the good bits going down or the bad bits not going up. Thanks very much.

Yeah, thank you. So maybe, Bill, you could first comment on CapEx.

Absolutely. So you're right. I mean, at the beginning of the year, we were foreseeing an overall CapEx spend of about $280 million. which, as it normally is at the beginning of the year, is a combination of firm-approved projects, continuation of spend that we knew we would have, as well as kind of a placeholder for maintenance capex, new projects, et cetera. As the year has unfolded and the volumes did not materialize as we had expected, the businesses themselves basically took the decision that well you know maybe now's not the best time to do this particular type of of capex project so it's not that it necessarily got pushed into 2024 but we're sort of selectively holding off on certain other uh certain other projects uh you know pending volumes so that's where we say that we'll probably end the year in the low 200 million range And to be honest, in that respect, we've not cut back on anything that is absolutely important in terms of our growth program in China, for example.

Okay. Matthew, maybe first on your question on Lucas Meyer and sort of the competitive arena here. You mentioned one of our competitors. Actually, yeah. So it is a different set of competitors that you see in this segment versus the, let's say, traditional, more commodity-type chemicals that go into cosmetics. I think what you see here is when you talk about products like peptides, yeah, there is obviously also others that are in this arena, but what you will see is that these are high-margin, high-gross contributors to these companies. So for us, peptides is an entirely new product range in Clarion. For us, actually, the actives that provide a certain benefit to your skin or to your hair, they are entirely new products to our range. And as you've seen the metrics in terms of growth, in terms of EBITDA margins, this is arguably one of the most attractive segments in specialty chemicals. And there's no reason to believe that it will become less attractive over time. If anything, consumers get more and more educated and they basically want products that work, products that truly perform a certain benefit. If you look at things like anti-age cream, they're very expensive products, and it is very important that the actives actually do work. Secondly, your question on the catalyst mix and why is this not the new normal, the 26% EBITDA margin that we saw in the quarter. Well, let me say, first of all, we were extremely pleased with this performance. We're very pleased with the turnaround that you now see several quarters already for catalysts. Back at the time of our Capital Markets Day, November 2021, we indicated for catalysts a range above 20% in the low 20s. We are still very confident that we actually structurally can deliver that. But it's also fair to note that there is, within catalysts, there are segments with a different level of profitability. Obviously, the propane to propylene catalyst where we have such unique products that provides such big benefits to customers. Here, we see very, very attractive margins. I think I alluded to the fact that syngas actually has become a very attractive segment for us. Short term, because of the elevated gas prices, customers really are willing to pay premiums for their catalysts, and medium to long term, green hydrogen economy, and then actually the role that our syngas catalysts play in the conversion from hydrogen to ammonia and ethanol and these kind of products. Now, it's also fair to say that the mix that we saw in Q3 is a unique one, and over time you actually see a different ratio where also specialties and ethylene and some of the other segments typically are a bit stronger than they are right now.

Thanks for taking the questions.

Our last question for today's call comes from Sam Perry from UBS. Please go ahead.

Hi there. Thanks for taking my question. Just one, please. How do you think about the payback or what do you think the payback is on a return on invested capital basis, just given the initial transaction ROIC is quite materially below the group? Thank you.

Yeah, thanks, Sam. I'll take that one. We haven't published any ROIC figures associated with this particular transaction. But what we will say is that we find this transaction enormously financially attractive. I don't think we can be enthusiastic enough about how excited we are to have Lucas Meyer as part of the Clarion family and how excited we are to have it at this multiple EBITDA. As a result, and as I mentioned already, the shareholder value that we expect to get from this is, in fact, accreted. And after the first year, we expect that to really come into fruition. So even though there is a significant multiple tied to this very important and highly profitable business, we do expect it to be accreted to our earnings per share and, therefore, to our shareholders.

Thank you. Ladies and gentlemen, this is Andrea speaking. This concludes today's conference call. Transcripts of the call will be available on the Clarion website in due course. The investor relations team are available for any further questions you might have. Once again, thank you for joining the call today and goodbye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Coral's call and thank you for participating in the conference. You may now disconnect the lines. Goodbye. Thank you.