ANNUAL REPORT 2010

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• Completion of the restructuring phase

Completion of the restructuring phase

Clariant’s short history has been characterized by a number of restructuring phases, which have had varying degrees of success. As a result of changes in the business portfolio and internal structural issues, many of our performance indicators lost ground against our competition, a situation that was accentuated by the recent financial crisis.

The management has reacted and taken a number of measures since 2008 to advance the restructuring and reorganization of the Group at all levels. By clearly focusing on the core themes of cash generation, cost savings, and the reduction of complexity, decisive steps have been taken to restore Clariant’s profitability and position it on a course towards profitable growth. The results of these efforts already started to show in 2010.

Although the current measures to further increase efficiency will continue until their final implementation by the end of 2013, the Clariant Group’s restructuring phase can now be considered as complete.

Many difficulties date back years

Providing historical context for the situation prior to the last restructuring phase (begun in 2008) requires a look back at the company’s beginnings.

The company’s history began in the summer of 1995 when its Swiss parent company, Clariant Ltd, was created in a spin-off and subsequent IPO of the Chemicals Division of Sandoz. A key milestone was reached in 1997 with the purchase of the specialty chemicals business of Hoechst AG. In 2000, Clariant took over the business of British company BTP, a specialist in life science chemicals – a high-priced debt-financed acquisition which overstretched the financial capacity of the Group. At that time, Clariant had around 31 000 employees – almost twice as many as it does today. The Group’s complexity quickly became problematic. High leverage, reduced profitability, and changing global operating conditions led the company into a severe crisis in 2003. This resulted in a strict program aimed at cutting costs, increasing efficiency, and significantly reducing headcount.

From 2001 to 2006, Clariant sold a number of Business Units, mainly  to create more financial room for maneuver. However, costs could not be sufficiently reduced to compensate for the constant decline in profitability that the businesses were experiencing at the time.

Global financial crisis calls for a shift in mindset

Despite past efforts to reduce costs and a largely strong competitive position, in 2008 our earnings and thus our profitability remained weak compared to the competition in many operating areas and in the Group as a whole. This became increasingly evident as the global financial crisis intensified at the end of the year. For a number of years, many of our performance indicators had lagged behind the competition. Clariant’s sales per employee, SG&A costs, sales growth, and net working capital ratios were all consistently in the lower third for the sector. As a result, profitability measured in EBITDA (earnings before interest, taxes, depreciation, and amortization of intangible assets) and ROIC (return on invested capital) remained low.

Project Clariant and Clariant Excellence: Strategic cornerstones of the realignment

In 2008 and 2009, we launched Project Clariant and Clariant Excellence, two initiatives that have played a decisive role in the Group's ability to handle the impact of the economic crisis and make progress in terms of cost management. They created a sustainable basis for putting Clariant back on the path to profitable growth.

• Project Clariant. Initiated at the end of 2008 as a restructuring program, Project Clariant was developed with the aim of increasing cash generation and reducing costs and complexity. It was designed to systematically reshape all areas of the company in 2009 and 2010.

• Clariant Excellence. Clariant Excellence was launched in March 2009 to systematically introduce a culture of continuous improvement throughout the company.

Project Clariant

Project Clariant comprises a range of work streams divided into three parts. The main focus areas are Cash, Cost, and Complexity.

Generation of additional cash flow

In 2009 and 2010, cash generation reached record levels thanks to the “Cash Performance” initiative, which focused on reducing inventories and trade receivables. Strict, ongoing inventory management is vital to managing net working capital effectively. In addition, credit periods were increased through the renegotiation of contracts. The sharp economic upswing in 2010, which led to an increase in working capital in the Group due to growing demand, had little impact. Despite this counter-effect, it was possible to decrease net working capital as a percentage of sales from 23.8 percent at the end of 2008 to 15.9 percent at the end of 2010. This figure is even lower than the already low goal of 20 percent for 2010 set by the company.

The generation of additional cash flow made it possible to reduce consolidated debt drastically, allowing net financial liabilities to be decreased from CHF 1 209 million to CHF 126 million since 2008.

Cost efficiency is the top priority

The high cost base of 2008 represented a clear competitive disadvantage for Clariant. To address this fundamental weakness, Project Clariant focused on decreasing costs in all areas, with a particular focus on SG&A. By consistently implementing efficiency improvements, the own personnel costs have been reduced by approximately CHF 180 million, compared to 2008.

The downsizing of the workforce by more than 3 900 from the end of 2008 to the end of 2010 was substantial; 2 566 took place in 2009 and 1 360 in 2010. This reduced the total number of employees to less than 16 200.

Project GANO results in annual cost savings of around CHF 100 million

Structural weaknesses and overcapacities have considerably impacted Clariant’s cost base in the past. Project Clariant established the Global Asset Network Optimization (GANO) Project to address these production issues. Each site was analyzed in light of its capacity and appropriate rationalization programs were subsequently introduced where necessary.

In total, GANO was implemented in around 20 Group sites on all continents. The last phase of this process was announced in October 2010. In addition to the final measures involving the operational units, the consolidation of global research and development activities in Frankfurt was announced. GANO will lead to a closure of 14 sites and an additional downsizing of six sites. A total of three sites were closed by the end of 2010 and their activities moved to more suitable locations.

The various efficiency improvements will be implemented by the end of 2013. Cost savings already had a positive effect on operating income before exceptional items in 2010. After completion in 2013, we expect annual cost savings of around CHF 100 million from GANO.

Reduction of complexity

The number of products, customers, and countries in which we operate creates a considerable level of complexity. To be successful, we had to manage this complexity better.

Simplifying our structures has not only helped close the performance gap with our competition, but also promote entrepreneurship and accountability, thereby building a platform for sustainable increased profitability.

The restructuring implemented in 2009 involved the following key elements:

1. Redefining the role of the Group Executive Committee, which has overall responsibility and accountability for steering the organization both strategically and operationally.

2. Redefining the functions of the Corporate Center in Pratteln and its 100 employees, who support the Executive Committee by setting objectives and providing the necessary resources and structures.

3. Replacing the previous structure consisting of four central Divisions with ten newly created Business Units (BUs), which bear full responsibility for their operational results (see Annual Report page 33).