Swiss Clariant prioritises US, Asia expansions over low-growth Europe – CFO

Interview article by Jonathan Lopez

LONDON (ICIS)–Clariant’s expansions in Asia and the US seek to capitalise on both regions’ growth while its European capacities are enough for a market which, despite making a return as of late, is still growing at low rates, the CFO of Swiss chemicals major Clariant said this week.

Patrick Jany added that despite “sluggish” growth in the US as of past quarters, Clariant still expects its Natural Resources division – which sells chemicals for the crude oil extraction and production industries – to bounce back in 2017 or early 2018, proving the firm’s investments in the country worthwhile.

On 27 October, Clariant published its third-quarter financial results which showed falling sales and earnings at all its divisions apart from Plastics & Coatings, although CFO Jany highlighted how in local currency (Swiss franc) both indicators had risen.

Chemical equity analysts at Bernstein Research said on Friday the results for the July-September quarter had been “disappointing” and lowered its estimates for Clariant’s 12-month share price.

Earlier this month, Clariant said it had closed the acquisition of US’ Kel-Tech, a specialty chemicals producer for the crude oil onshore production. At the same time, on 18 October it said it had opened a new polypropylene (PP) catalyst plant in the country’s Kentucky state.

“In the US, we are generally seeing a weak economic environment, but although actual growth is proving disappointing and some industries are really down, others are doing well. The general picture, however, shows sluggish growth,” said Jany.

“In the third quarter in particular, weakness in the catalysis and oil businesses affected us as those two sectors are Clariant’s main operations in the US. However, the oil sector’s temporary weakness was a good opportunity to expand.

“While the last two years have seen contraction in the industry, sometime in 2017 or early 2018 production will start recovering. Clariant just needs production to be stable in order to be very profitable – with stable production the use of chemicals in oil production increases in the range of 6% and 7% per year.”

While the focus in the US has been in the crude oil industry, Clariant has embarked in an Asian spree of acquisitions to expand its Care Chemicals division, targeting the cosmetics and healthcare industries.

In September, it announced it was to acquire South Korea’s BioSpectrum, a producer of cosmetics ingredients, while in 2015 it acquired a stake at Indian peer Vivimed Labs.  

The company’s CEO said in February this year Clariant’s future was in Asia, despite current Chinese woes as the country moves towards a services-based economy, side-lining manufacturing.

Originally a Switzerland-based company, Clariant currently only has in the country its headquarters and administrative functions, with around 700 employees of 17,000 in total, said Jany, adding that is not a proof the company is giving up Europe as one of its main markets.

“But those areas which are growing bring good returns, there volumes are there. Personal care, detergents, healthcare, and home care are all quite high value segments. Moreover, we are also seeing growth in the automotive industry, in construction, in other industrial sectors, so the broad picture is quite solid,” said Jany.

“Europe is coming back, and you can see it in countries like Italy, Spain, Greece, the UK is doing quite OK, the same as the Nordic countries. Expanding in Europe, however, does not come as a priority since we have already the capacity to serve growth of 1% or 2%.”

Clariant’s CFO went on to say the growth to go after is to be found in Asia or Latin America.

While at the beginning of 2016 Clariant’s carve out of its divisions into three legal entities was understood by analysts as a hint the firm might divest its Plastics & Coatings division, adding it was rather a drag for the overall operations, the CEO emphatically denied at the time that possibility, as did the CFO this week.

“The carve out of our Plastics & Coatings division is working, and we are increasing EBITDA [earnings before interest, taxes, depreciation and amortisation] and EBITDA margins and improving cash generation, as we are focusing in delivering good cash flows from that business area – and we are happy about the way it’s working,” concluded Clariant’s CFO.

Analysts at Bernstein, however, said there are risks associated to keeping Plastics & Coatings and advised the company to divest it in a “timely” manner.

“We see risks of further restructuring should Plastics & Coatings remain part of the group and would prefer a timely exit. This is not reflected in [analysts’] consensus and current valuation [which is] trading at all-time highs,” said Bernstein.

“After a disappointing 3Q16 [third quarter] we retain our Underperform rating on Clariant shares as we also see a tough 2017 ahead. Raw materials headwinds will cause the first margin decline since 2012 and will strongly affect areas that are already feeling pricing pressure.”

The analysts lowered their 12-month share price target forecast to Swiss francs (Swfr) 15.20 (€14.07).

Clariant’s stock was trading on Friday afternoon at Swfr16.52, down 0.66% compared to its close on Thursday.

(€1 = Swfr1.08)