The quarter was characterised 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.

They made an operating loss before exceptionals of CHF 13 million ($14.8 million). The division, which includes the Leather Business Unit, was one of weaker performing parts of the business and is currently undergoing a restructuring process.

Cash flow from operations are up to CHF 156 million ($177 million) from CHF -6 million (-$6.8 million) in the first quarter of 2008 due to strong focus on net working capital reduction. Net debt reduced to CHF 1.14 billion ($1.29 billion) (from CHF 1.21 billion at the end of 2008 ($1.37 billion))

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 significant capacity underutilisation 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 optimise 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 ($58 million) compared to CHF 23 million ($26 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 (-$103 million) compared to a net income of CHF 41 million ($47 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. 

Overview

Clariant expects demand to stabilise at current low levels and will continue to focus on cash generation and further cost reductions. 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 they expect to take place in the second quarter this year.

While Clariant’s margin management was successful with 6% higher sales prices year-on-year, inventory devaluation and underutilisation costs led to a decline of the gross margin to 23.6% from 30.5% in the previous year.

Operating cash flow reached CHF 156 million ($177 million) compared to -CHF 6 million (-$6.8 million) in the first quarter of the previous year. A stringent focus on inventory reduction and trade receivables were the main drivers of the favourable cash flow development. The cash position of the group improved to CHF 438 million ($497 million) from CHF 356 million ($404 million).

Clariant further strengthened its balance sheet by reducing net debt by CHF 73 million ($83 million) to CHF 1.14 billion ($1.30 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 stabilised 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. 

Outlook

In this challenging environment, the company will maintain its focus on cash generation and adjusting its production capacities for lower demand. The continued significant cost reductions will result in improved profitability in the next quarters. Going forward Clariant will continue to restructure forcefully with estimated restructuring costs of CHF 200-300 million ($227 – 341 million) in 2009.