Clariant AG

SIX:CLN

Earnings Call Transcript 2023-Q1

[Operator]

Conference call and webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Andreas Schwarzwaelder, Head of Investor Relations. Please go ahead.

[Andreas Schwarzwaelder, executive]

Thank you, Sandra. Ladies and gentlemen, good afternoon. My name is Andreas Schwarzwaelder, and it's my pleasure to welcome you to Clariant's First Quarter 2023 Results Conference Call and live webcast. Joining me today are Conrad Keijzer, Clariant's CEO; and Bill Collins, Clariant's CFO. Conrad will start today's call by providing an overview of the first quarter developments and a few comments on Clariant's sustainability transformation commitment followed by Bill who will guide you through the group's financials and provide some brief business unit specific comments. Conrad will then conclude with the outlook for the full year 2023. There will be a Q&A session following our presentation. [Operator Instructions]

I would like to remind all participants that the presentation includes forward-looking statements, which are subject to risks and uncertainties. Listeners and readers are therefore encouraged to refer to the disclaimer on Slide 2 of today's presentation. This quarter marks the first time Clariant has reported results according to its new operating model and the business units, Care Chemicals, Catalysts, Adsorbents and Additives, as shown on Slide #3.

We have provided the full year 2020 key financial figures here according to our new structure and also the quarterly 2022 sales and EBITDA results in the back half section of the presentation for comparison purposes. As a reminder, this conference call is being recorded. A replay and a transcript of this call will be available on the Clariant website. Let me now hand over to Conrad to begin the main presentation.

[Conrad Keijzer, executive]

Thank you, Andreas. Good afternoon, everyone, and welcome to our first quarter 2023 analyst conference call. As we can see on Slide #5, in the first quarter of 2023, we delivered resilient sales of CHF 1.2 billion, representing 1% growth in local currency and a 5% decrease in Swiss francs. The actions we have taken in recent quarters, including the execution of a strong pricing policy which continued as 7% through sales has allowed us to weather current global economic headwinds.

The global environment has been characterized by a significantly lower global real GDP expectations of 1.7% in 2023 versus 2.9% in 2022 according to the World Bank. According to S&P, March PMIs in the chemical sector for Europe, Asia and global are below 50, indicating a challenging environment. Against this challenging macroeconomic backdrop, our customers have reduced their inventory levels and demand in some key end markets has been weaker.

Our volume development in the first quarter were more mixed with a 7% decrease for the group which included a 13% volume increase in Catalysts, a 9% decrease in Care Chemicals and a 14% decline in Absorbents and Adhesives. The declines were attributable to very strong comparison basis and the aforementioned customer destocking, which accounted for almost half of the volume decrease, as well as weaker development in industrial applications, in particular. The demand trends overall remained stable at Q4 2022 levels. While volumes decreased by 5% sequentially due in part to the seasonality of the Catalysts business.

To put the 7% volume decline in Q1 2023 into perspective, the contribution from the recently integrated U.S.-based Attapulgite business assets in Absorbents totaled CHF 8 million, which increased the group's sales by 1% in the first quarter. The currency impact on revenue of minus 6% was mainly due to the appreciation of the Swiss franc relative to the Euro and other currencies.

Slide 6 gives an overview of our sales by geography. We have strong local currency growth in the Americas at 7% due to positive pricing. All businesses units reported higher results in Brazil, where sales rose by 5%. We reported a notable improvement in Absorbents and Additives in the U.S., which was bolstered by the Attapulgite integration.

Local currency sales were flat in the Europe, Middle East and Africa region as the higher volumes and prices in Catalysts were offset by volume declines in Care Chemicals and Adsorbents and Additives, though the pricing impact was positive. Sales in Asia Pacific were down by 4% due to 16% lower sales in China versus a high comparison base. This decrease was attributable to double-digit declines in electrical vehicles and in electronics production. On a positive note, we recognized continued growth in our Catalysts business. The weakness in China was partly compensated by higher sales in India and Southeast Asia.

Moving to the profitability developments on Slide 7. We see that first quarter 2023 EBITDA was CHF 167 million, a 24% decrease and the group delivered a 13.9% EBITDA margin. Lower volumes and business mix in the business units Care Chemicals and Absorbents and Adhesives negatively impacted profitability, partially compensated by higher prices in both businesses. The strong volume increase in Catalysts was partly offset by an unfavorable product mix at CHF 13 million impact from sunliquids. At group level, a negative CHF 11 million fair value adjustments was made for the Heubach group participation.

Excluding the CHF 13 million negative sunliquids impact and CHF 11 million one-off fair value adjustment, the EBITDA margin was 15.9% in the first quarter of 2023. The unfavorable business mix and lower operating leverage explains the difference to prior year's performance. We continue to deliver on our strategic priorities in the first quarter as reflected on Slide 8. We have generated further cost savings with our performance measures, executed our portfolio optimization and progressed further towards meeting the group's 2030 emission reduction targets. Cost savings of approximately CHF 8 million from our performance programs across the company contributed positively to the margin by absorbing inflationary impacts as well as higher selling, general and administrative expenses that were, for example, related to trade fairs and a pickup in traveling activities.

Our performance programs remain well on track to deliver the integrated 2025 cost savings target of CHF 160 million with total savings of CHF 93 million achieved as of the end of Q1 2023. In the first quarter of 2023, we completed the divestment of our North American Land Oil business to Dorf Ketal as expected. This is a further step on our path to structurally improve Clariant's leading specialty chemical portfolio and sustainability profile. The integration of the U.S.-based Attapulgite business assets in Absorbents purchased in the fourth quarter of last year, is progressing on track and contributed sales of CHF 8 million in the first quarter. We expect the closing of the previously announced cost divestments in Care Chemicals to take place in the second quarter of 2023.

I am proud to provide an update on the continued progress Clariant has made in improving its Scope 1, 2 and 3 greenhouse gas emissions in the first quarter. In the last 12 months, from April 2022 to March 2023, the group's Scope 1 and 2 total greenhouse gas emissions declined by 3%, increasing the total reduction from the 2019 baseline to 13%. An example of the measures which Clariant has taken to generate this reduction includes increasing the share of green electricity from 47% to 56% in the first quarter of 2023. The total indirect Scope 3 decreased by 5%, increasing the total reduction from the 2019 baseline to 10%, well on track to deliver the 2030 target of a 14% reduction.

I will now hand over to Bill for further details on our business performance in the first quarter.

[Bill Collins, executive]

Thank you, Conrad, and good afternoon, everyone. Slide 10 shows our first quarter development by business unit starting with Care Chemicals. Care Chemicals sales decreased by 2% in local currency supported by positive pricing efforts of 7%, partly offsetting the 9% volume decline. Sales rose significantly in oil services with less pronounced growth in Mining Solutions and Crop Solutions. Sales decreased at a mid-single-digit percentage rate in Personal and Home Care, while industrial applications was down at a mid-teen percentage rate despite a positive contribution from the aviation business in specific regions.

The quarter was characterized by softer demand against a very strong comparison base. Some continued customer destocking as well as 2 force majeure events at our Clear Lake site in the U.S. and at [indiscernible] in Mexico. From a regional perspective, sales grew in Latin America, but declined elsewhere. Care Chemicals absolute EBITDA decreased by 14%, while margin declined to 18.2% from a strong comparison base of 19.7% in the first quarter of 2022. Continued active price management reinforced profitability, while raw material prices are sequentially easing. Volumes came under pressure with declining industrial demand and customer destocking, which negatively impacted plant utilization.

On Slide 11, Catalysts sales rose by 18% in local currency versus the first quarter of 2022. Both volumes and pricing positively impacted sales growth by 13% and 5%, respectively. Sales in propylene increased at a high 20s percentage rates and in mid-single digits in ethylene. This development was exceeded by the growth in Syngas and fuels against a soft comparison base. Specialty sales also increased at a mid-single-digit percentage rate despite a high comparison base. The project nature of the business had an impact on the regional dynamics in Catalysts. Sales grew at a mid-teen percentage rate in Asia Pacific, the largest geographic market driven by the new in Catalysts production site in Jiaxing, Zhejiang province, China, which came on in the first half of 2022.

EBITDA decreased by 7% with EBITDA margin falling to 6.3% from 7.6% due to a CHF 13 million impact from sunliquid. Excluding this impact, EBITDA margin was 12.9% in the first quarter of 2023, a 360 basis point improvement on a like-for-like basis versus the first quarter of 2022. Volume growth was counterbalanced by a less favorable product mix with a high share of Syngas and fuels and within Specialties, a higher contribution from the emission Catalysts business.

On Slide 12, Absorbents and Additives, sales decreased by 5% in local currency in the first quarter. A 7% price increase was countered by 14% lower volumes as destocking and softer demand continued in the Additives business. Sales increased by 2% due to the recently acquired U.S. Attapulgite business. Absorbents started the year well with higher sales at double-digit percentage rate driven by purification and foundry applications. Additive sales slowed at a double-digit percentage rate against a very strong comparison base in the first quarter of 2022 due to continued destocking, which represents close to 50% of the decline and cautious demand in key end markets.

For example, industry data shows that global smartphone production declined by 18% year-on-year. And automotive sales growth slowed in China after decade-long EV subsidies in January, resulting in a sequential electric vehicle production decline of 29% in Q1 2023 in China and 15% globally according to a report by Global Data Automotive. From a regional perspective, sales growth was particularly strong in the Americas, due in part to the U.S. Attapulgite acquisition, while sales slowed in the Europe, Middle East and Africa region as well as in Asia Pacific, particularly in China, where growth in Absorbents did not offset the decrease in Additive sales.

EBITDA decreased by 35% and margin fell to 18.5% from a record high of 26%. Profitability levels were impacted by softer volumes and continued customer destocking, especially in Additives. The business mix was less favorable due to the strong Absorbents performance. The profitability level in Q1 2022 was positively impacted by inventory revaluation resulting from higher raw material prices, whereas in the first quarter of 2023, the inventory revaluation effect was slightly negative.

On Slide 13, we would like to provide additional details on the extraordinary factors which impacted the group's profitability in the first quarter. Sunliquid recorded a CHF 13 million loss in the first quarter. This is a notable sequential improvement from the CHF 20 million loss incurred in the fourth quarter of 2022 and is the result of the team's efforts to address the operational challenges involved in the ramp-up of this first-of-a-kind technology.

In the second quarter of 2023, we expect to see sunliquid related costs on similar levels sequentially with further improvements in the second half of 2022. Our dedicated team continues to work hard to commercialize this unique technology and address the increasing demand for second-generation bioethanol. Further, a group -- at group level, a negative CHF 11 million fair value adjustment was made for the Heubach presentation. The reporting method would change to that of a financial asset, which triggered the need for the adjustment. Slide 14 shows that, as Conrad mentioned earlier, we delivered cost savings of CHF 8 million in the first quarter from performance programs. We are making good progress towards our 2025 target of CHF 160 million total cost savings, which we had increased in the fourth quarter of last year due to an additional CHF 50 million contribution from simplified leadership structures and organizational processes.

Thus far, savings of CHF 93 million have already been realized from efficiency and rightsizing measures as well as initial savings from the new operating loan. I'm pleased to confirm that the programs remain on track and that the majority of the savings related to the implementation of the new operating model are expected in 2023 and will absorb continued inflation in particular wages in 2023.

With this, I close my remarks, and hand back to Conrad Keijzer.

[Conrad Keijzer, executive]

Thank you, Bill. Let me conclude our review with the outlook on Slide #16. Our current expectations are based on the continuation of the soft recessionary environment in the first half of the year, followed by a recovery in the second half. However, uncertainties and risks related to the economic environment remain. For full year 2023, we expect sales of around CHF 5 billion. We expect the net top line impact of around CHF 130 million from the disposal of the Coats business and the completed divestments across the North American land Oil business. This sales decrease will be partly offset by the completed acquisition of the U.S. Attapulgite business. We aim to slightly improve the reported group EBITDA margin in the full year 2023 versus the 15.6% generated in 2022 due to continued growth in Catalysts which is expected to offset lower sales in other business units.

We expect an increased negative annualized sunliquid impacts, and we are seeing an easing inflationary environment given the current economic outlook. Counterbalanced by savings benefits from the restructuring programs, we have adjusted our expected CapEx spend to CHF 250 million in 2023. This will positively impact our cash generation towards our 2025 cash conversion targets. We remain focused on cash and noted positive momentum in the first 3 months compared to last year. In our view, with our new operating model, innovation strengths and sustainability leadership, Clariant is well positioned to deliver on the 2023 guidance. Our team remains committed to meeting our 2025 targets.

With that, I'll turn the call back over to Andreas.

[Andreas Schwarzwaelder, executive]

Thank you, Conrad, and thank you, Bill. [Operator Instructions] We will now open the line for questions. Sandra, please go ahead.

[Operator]

[Operator Instructions] The first question comes from Andreas Heine from Stifel.

[Andreas Heine, analyst]

Thanks for the opportunity to ask these 2 questions. The first is actually on the guidance. The 15.6% EBITDA margin, which is a reference for the increase this year. On the slide that you talk about the EBITDA margins, you basically have given 3 different ones. What is the right way to look on where you want to improve the margin? I'm referring to Slide 7, where you have to reported the clean and then the margin adjusted for sunliquid as well. That's the first question.

And the second is digging a little bit more in Care Chemicals. So we see that oil prices came down, gas prices came down and peers also being active in the Oil & Mining business, have seen in part already a decline in the first quarter year-on-year. That seems not to have been the case with you. But what do you see as a sequential trend for Oil & Mining services? Do you see already a flattening or even indicating a decline for the coming quarters for this business? Yes, these are my two.

[Conrad Keijzer, executive]

Yes, sure. Andreas, let me get the second question first actually where you were talking about the impact of the energy prices, which have come down and also our outlook on the Oil & Mining business, and then Bill will comment on the bridge in terms of our EBITDA margins towards the guidance. Yes, if you look at the situation with energy prices, it's been, as you are aware, very volatile. Actually today, if you look at the gas prices in Europe, spot TTF gas prices for LNG are around EUR 35 per megawatt hour. It's obviously down significantly from the peak of EUR 340 million per megawatt hour that we saw in August.

Now mind you, at this level of EUR 35 per megawatt hour, we are still more than double the gas price in Europe as what we have before the energy crisis and also, let's say, from a competitiveness point of view for the industry in Europe, as you're probably aware, in the gas prices, if you look at the U.S., they had [indiscernible] prices. That's actually about 4x lower than EUR 35 per megawatt hour that we're currently facing in Europe. Now putting it in perspective, if you look at the first quarter, we actually did see the gas prices ease. Year-on-year, we're still up. Actually, sequentially, we're down about 4% from the last quarter. I believe year-on-year, we're still up 4%, but we should see the continued easing throughout the coming quarters. And actually yes, we're also planning to hold prices. So you should see some margin expansion from this.

If you look at our Oil & Mining business, it has been doing very well. And when I say that what I mean is that we're up double digits in growth if you look at the first quarter last year, and we actually don't see any signs here of slowdown. So we anticipate this Oil & Mining business to continue to do well, oil even better than mining, but mining also didn't correct as much. So this within Care Chemicals is actually right now the strongest growing segment in terms of volumes and revenues. We've also been able to get some pricing there, which was very much needed. So we're actually quite pleased about the performance in Oil & Mining. Bill, over to you for the guidance and the margin.

[Bill Collins, executive]

Yes. Thanks, Conrad and thanks Andreas. Just to be super clear, our focus is on reported EBITDA. We're showing the bridge here with the adjustments for fair value for the sunliquid impact only to give you a sense of the underlying performance of our business. But our focus -- as a business, our focus with regard to the guidance for the full year is on a reported EBITDA figure.

[Operator]

The next question comes from Christian Faitz from Kepler Cheuvreux.

[Christian Faitz, analyst]

I hope you can hear me. Sound quality and the quality from here is a little wobbly. The Catalysts business is sailing well below its margin potential for quite some time with or without sunliquids. When do you see a turnaround from here on? That's question number one. Second one would be, can you comment on Q2 trading conditions for Home & Care within Care Chemicals? The weaker our Q1 trend in the subsegment, is that more volume driven on the customer side or do you all see customer resistance for price hikes?

[Conrad Keijzer, executive]

Yes. Thank you, Christian, for the 2 questions. So first on Catalysts, yes, we still are targeting obviously further improvements. Unfortunately, we report the negative contribution from biofuels minus CHF 13 million in the quarter in the Catalysts segment that brings the EBITDA margin down. If you correct for that, Catalysts achieved 12.9% EBITDA in the first quarter, which is a 360 basis point improvement on a like-for-like basis versus the first quarter 2022. If you look at the Catalyst business, Christian, the first quarter is actually the weakest. So the CHF 200 million revenue you saw in the first quarter will actually sequentially build up with a step-up if we are looking at the order book in the second quarter and then a further step up in Q3 and in Q4.

So we are actually quite pleased with the margin pickup that we are seeing in Catalysts and also like to note that this is not the full run rate by any means for Catalysts yet. That will actually happen as the bigger quarters come soon. To your second question on the business, Chemicals and specifically also, if you look at Home Care. Yes, what we basically see in this segment is reduced volumes, let's say, mid-single digits in Care Chemicals, which is a much better performance than the double-digit declines in Care Chemicals in the Industrial segments.

If we analyze it, in Home Care, it is primarily destocking. So it's not that people certainly put more laundry in their washing machine or in their dishwasher. No, it is primarily a destocking what we're seeing. And if you look at this effect, this started a little bit earlier in Europe. Certainly in Q4 last year, the volumes in this segment were already affected. We didn't see much of destocking in America in Q4, yes. And in Asia was actually not a real issue to begin with. In the first quarter, we saw significant destocking in Home & Care both in Europe as well as in the U.S.

Your question as to the pickup in the coming quarters, we actually do believe that in Home Care, in Europe, the destocking is now behind us. We still have little bit to go in the U.S., but you would see a sequential pickup particularly in the second half. Now there is one additional element unfortunate, which has hit us, I think, Bill mentioned this in his commentary. We unfortunately had 2 force majeure events, one at our Clear Lake site in the U.S. and one other site in Mexico. And that actually did have also a negative impact on volumes in this segment. But from a demand point of view, we do see that this business certainly will recover in the coming quarter.

[Christian Faitz, analyst]

Okay. Great. Actually, the force majeure would have been my question 3. Since you mentioned it, Conrad, can you elucidate, because you also mentioned the supplier force majeure, so not your own force majeure, but supplier force majeure. What's behind that? And will that still impact Q2?

[Conrad Keijzer, executive]

Yes, Christian, this is a third question. I'm being pointed here around the table. We would only do 2, but it's a legitimate question, Christian. Yes, we have these 2 force majeures. In general, we're actually not seeing force majeures. So if you remember a year ago, when we had the V-shaped recovery from corona with a larger demand than underlying capacities, we had several shortages and actually also suppliers calling for force majeures. What we now see is 2 incidents. The total impact of this was in the low teen million amounts, unfortunately, cost by a key supplier to our Clear Lake site in the U.S. and a key supplier to our Mexico site. And we're dealing here with, obviously, ethylene that we're not making ourselves any one instance, it's also basically the ethylene oxide chain. This is unfortunate and the only positive is that the plans up and running again.

[Operator]

The next question comes from Andrew Stott from UBS.

[Andrew Stott, analyst]

It's actually just one question. It's more on the guidance for full year. I mean, I'm going to be broad brushed because, obviously, the world is a volatile place as we know. But if you take your full year guide and assume 30, 40 basis points of margin growth, broadly would imply a 15% improvement in EBITDA versus the first half and the second half and my assumption there is that you do a bit better in Q2, but not a lot better.

First of all, if you got any difference of opinion on the math, then let me know. But mainly, what's behind that confidence on your part that you can see such a big improvement. So Conrad, I heard you on the order book in Catalysis. So obviously, that's registered. But are there any other, should we say, bottom-up Clariant-specific factors that we need to think about?

[Conrad Keijzer, executive]

Yes. Thank you, Andrew. First of all, your math is highly accurate, so nothing to add there from our side here. Yes, we do see the margin pickup in the second half. A brief comment on Catalysis. This is very much based on operating leverage and even in Catalysts, the mix can be better than what we saw in the first quarter. The order book reflects right now a sequential build through the year, and yes, unlike prior year where we had quite some shortages also in visibility or shipping containers, things like that, we're actually quite confident that we will be able to deliver this whole order book.

Yes, then actually, if you look at Care Chemicals and Absorbents and Additives, like I mentioned, in Care Chemicals, particularly on the consumer side, a lot of the decline in volumes was explained by destocking and actually that is mostly behind us now, and you may even see some level of restock in the second half on that business. I'd also like to point out here in terms of margin expansion, we see easing of raw material costs, and we expect this to continue. Our outlook for the full year is now mid-single digit declines in our raw material costs. And hopefully, we can see some of that coming through also in margin expansion, that is certainly our target.

And then finally, on Additives and Absorbents. We had an unusual start of the year in China. You may have picked this up, but if you look at consumer electronics production numbers, if you look at cell phone production numbers, down double digits; and even electric vehicle production in the first quarter in China down double digit from the fourth quarter. So certainly, there came and end to what was almost a decade long of subsidies for electrical vehicles, which actually pulled some of this business into the fourth quarter last year and certainly caused a slow start here in China.

We do expect some of these incentive programs to come back in. We also expect at some point in time, electronics and cell phone demand to pick up. So we should see Additives coming back. We had actually quite a large destocking in the Additive business, particularly around flame retardants, which were really short in supply last year. So that is also a part build in build in terms of the business improvement towards the second half.

And finally, in Adsorbents, we see continued strong momentum, particularly for Absorbents in the U.S. where we're talking about biofuel and basically the purification here specifically of diesel. Last, but not least, we increased our cost savings targets at the end of last year from CHF 110 million to CHF 160 million. And maybe Bill can provide some color here as well because this is also part of the bridge to our full year profitability guide which we indeed confirm. Bill?

[Bill Collins, executive]

Yes. Thanks, Conrad. And Andrew, so if you remember at the end of last year, early this year, we mentioned that we had basically a supplementary restructuring program focused on implementation of the new operating model within the company. We took a CHF 40 million charge for that in Q4. And that is already starting to produce savings, and we will see a sequential ramp-up in those savings over the course of this year.

So from a cost program perspective, we're doing quite well. Certainly, given macroeconomic environment, we continue to scrub all of our cost structures and make sure that any opportunity we capitalize on, we'll continue to look at that, but we're quite happy with where we are, and we're very confident that what we have in the hopper today will more than cover the expected inflation that we'll see this year.

[Andrew Stott, analyst]

Just one follow-up to very, very coherent list. It was really around the sunliquids. Are you expecting in that guidance any further improvement in sunliquids or not?

[Conrad Keijzer, executive]

Yes. Well, it is actually part of it, Andrew, but don't expect miracles here. I mean, this is a highly challenging ramp. We are pleased that we see a sequential improvement from the fourth quarter where we had a CHF 20 million drag on EBITDA last year in the fourth quarter. This first quarter, we see a CHF 13 million drag. We are working ourselves through the various issues. In the second half, we should see an improvement here though.

[Operator]

The next question comes from Jaideep Pandya from On Field Research.

[Jaideep Pandya, analyst]

First question is really on Catalysts. How is your R&D or new product pipeline, if we sort of ignore CATOFIN as a product for a second, what are the other sort of CATOFIN-like products that you have? Because my main worry is when you finish your first fill in CATOFIN, if there an [indiscernible] then that is developing in Catalysts with regards to growth. So whilst margins may come up, but growth may start to sort of weigh off. That's really my first question.

And the second question really is on the answer you gave to Andrew. What I'm confused is, it seems like you had a lot of operational issues in Q1, yet you did sort of 184 clean EBITDA. So should we not see a market improvement in Q2 already? Or what holds you back for Q2 because if I just look at your price of 7% and look at the raw material cost increase of 4%, that gap already in Q1 was quite meaningful. So I'm sort of scratching my head as to how EBITDA dropped $54 million despite such a big price versus raw material gap?

[Conrad Keijzer, executive]

Yes, sure, Jaideep. Thank you very much, especially also for your first question, the innovation pipeline and Catalysts. And I can say, this is actually a highly promising innovation pipeline. And we were even debating if we should pull in some slides, but we actually do need permission here by clients to communicate about it. But the big opportunity, obviously, for Catalysts is about the energy transition. You probably have seen an announcement by one of the largest shipping companies about their new ships based on methanol. It is actually very encouraging that actually we got there actually our first fill order confirmed. So this is very promising.

So just maybe for everybody on the call, shipping for it to become carbon neutral, either should move to green ammonia or green methanol. And some companies like [indiscernible] for example, I think I can say this because it's a public announcement, they have said green ammonia is the direction to go. Others have said the green methanol. So it is extremely promising for us, this development. As you know, if you convert from gas to liquids, you need to do this with Catalysts, Syngas technology. So the chemicals based on green hydrogen can only be produced with the aid of Catalysts of Clarion and we have only a very limited number of competitors in this area, as you probably know.

So we are actually seeing good traction. We also see a very promising projects announced on green hydrogen in North America. And here also, we don't have here yet the orders received, but we are definitely, I think, in a very good position to also get some new business here in the U.S. And finally, as a broader comment on Catalysts, it's certainly indeed not just CATOFIN, we actually see solid refill business right now, very good plant activity levels in the Middle East.

Your second question on Q2 and operational issues in Q2 and improvements relative to Q1. Yes, the operational issues certainly to force majeures I mentioned in Care Chemicals behind us. There is unfortunately one other force majeure which is going to hit in Q2, which is affecting our Additives business, our mountain wax business that is not a very significant impact, but it is an impact. The big topic for us, Jaideep, for Q2 is not so much the operational issues, but it is that we don't see top line recovery yet. We do see that later in the year and yes, as a reminder, the comparison base in Q2 is very steep. That was actually our strongest quarter by far last year.

[Bill Collins, executive]

Yes. Maybe if I could add just a point on that. In addition to the fact that the first half was really an exceptionally strong start to last year. And with that, in the environment of rising raw material prices, we did have some positive inventory reval. So I wouldn't call that an operational issue at all. That is just the accounting side effect of increasing or decreasing raw materials. We've already talked about the biofuels impact, which is actually better than -- a little bit better than what we were expecting. And we've talked about the declining volumes.

And I think as we come into Q1, we start looking at Q2 and also the balance of the year. The year is shaping out pretty much exactly like we were expecting it to. We knew that the first half was going to be a very difficult comparison because the first half of last year was so strong. We had already modeled into our guidance the impact of this revaluation, for example. We already knew the impact of inventory. So I wouldn't exactly call it operational issues, but there are issues that we are definitely focusing on, not the least of which is cash.

I mean, I think that is a very positive story to bring forward. We're actually cash positive on a free cash flow perspective as of the end of the first quarter as compared to a triple-digit negative number in the first quarter of last year. And I know we don't disclose those figures on the odd quarters. But at the same time, we're very happy with the progression that we're making, especially with regard to the operating working capital. This is one where we talked about it before, we put a lot of focus on this last year. And even with the decline in overall volumes, which you would expect to see in terms of your receivables in your inventories, we're actually performing even better than what the volume decline would suggest, which really means that the actions of our business is to get really better at, really integrated business playing, really bringing your operations together with your sales and marketing teams to understand the forecast and manage that appropriately. So we're very happy with the progress that we have made.

[Operator]

The next question comes from Peter Clark, Societe Generale.

[Peter Clark, analyst]

I've got 2. The first one is around the pricing and particularly in Care Chemicals, I know it's very difficult with the restructuring and Oil & Mining going in. But it looks to me like pricing in that segment sequentially was potentially down. So I'm just wondering if you could discuss that and also potentially the amount of formula pricing in that division now? And then the second thing is the Additives business, you alluded to, obviously, the Q2 being tough. That's got very tough comps certainly until the third quarter, and it's a very margin accretive business. I know it's relatively small in the scheme of things. But just how long you see that remaining a drag on your margin ambitions?

[Conrad Keijzer, executive]

Yes. Sure, Peter. Yes, so I'll make a few comments on pricing in Care Chemicals, and maybe Bill can take the sequential pricing in Care Chemicals because I don't have that data here in front of me. But I can assume more general comments on pricing in Care Chemicals certainly also your question on Additives. What you see in Care Chemicals is that a part of the business where this is actually more challenging is where we have formula-based pricing. Now this is sitting in the more commodity type products. Some of it actually also in Home Care, but much more pronounced you see this in the OMS business, in the Oil & Gas business for chemicals. So if you look at the Care Chemical business, roughly 1/3 of it is formula based. If you now bring in the Oil business -- the Oil & Gas business, I'd say it's roughly 40% of the business that is formula-based. Here, it's not easy to hold prices, as you can imagine, because we simply have to come down with pricing as and if and when raw materials come down.

Typically, there's a delay. Typically, you don't have to give the whole thing back. But yes, here you will see pricing coming down. In the other segments in Care Chemicals, we are actually holding prices very well. So I think that's important to mention that all segments, if you do the year-on-year in Care Chemicals, all segments in Care Chemicals are up in pricing. So the number that you see that we dropped down to 7% up in Care Chemicals that is own of the segments. As far as the Additives business, yes, what we're seeing here is I think 2 key issues. The first is, the first quarter unusual weak sales and production of electric vehicles in China. So what you saw is that electric vehicles production in Q1 actually is down 29% sequentially from Q4 in China.

Here, the issue is very specific to China. There was a subsidy. It could be as much as $16,000 actually per car when you would purchase an electric vehicle versus a conventional car. In Shanghai, you can see this very well. You have the green number plates for electric cars and the blue ones for the conventional ones. And actually, for a new car number plate, it cost you USD 15,000 for a conventional car. Now what happened actually on the subsidy and stimulus side because on top, there was stimulus even available for electrical cars. That was stopped by the end of this year. That's the key reason for this slowdown, a lot of orders were improved into Q4 last year, this should recover in the quarters ahead.

The other key element for Additives is basically consumer electronics. Here, we see globally, production numbers coming down. Smartphone production down globally. If you look year-on-year, 18%. This will take a bit longer to recover. So on Additives, yes, I think in terms of the markets, we do see a pickup not immediately, but sequentially over the year and certainly in the second half. And finally, inventory. So these were products that literally were sold out last year, a number of them. So here we saw higher inventory build than in other areas. So the destocking now is also a bit bigger there than in other things. I don't know, Bill, if you can comment on the sequential pricing of Care Chemicals?

[Bill Collins, executive]

Yes, glad to. So as we look at the Q1 pricing in Care Chemicals versus Q4 of last year, we actually did see about a percentage point improvement quarter-over-quarter. Within the Personal and Home Care, this was relatively flat with a very nice improvement in the Oil & Mining services pricing.

[Operator]

The next question comes from Matthew Yates from Bank of America.

[Matthew Yates, analyst]

Let's go back to Catalysts, please. I guess, Conrad, you're comparing the margin to a year ago when you had those issues with the PGM contract seems quite a generous view of the results. I think it's still well below the kind of 18% to 20% margins that it was traditionally doing in Q1. And I know it can be a lumpy business from quarter-to-quarter, but it feels like it's been a sustained period now of disappointing results.

If we put sunliquids to one side and just look at the rest of the portfolio, is there a persistent mix problem within the order intake? Or is it just a matter of randomness from quarter-to-quarter? I'm curious if something like refill rates, for example, were particularly low compared to normal. Just curious to understand whether anything structurally has changed in the mix of this portfolio?

[Conrad Keijzer, executive]

Yes, sure. Thanks for the question, Matthew. No, I think structurally, there is not a change here. What we had last year primarily as the key issue in the first half was a delayed pass-through of the higher metal prices at the beginning of the year, and that continued actually in Q3 and Q4, but you did see sequential improvements. Now yes, we have mix topics from quarter-to-quarter, and it is not always coming in equally by segment. But I certainly wouldn't say that we have structural mix issue.

So if you -- yes, your question on the margin, not being satisfactory. Again, please keep in mind, the first quarter is the weakest quarter this year. You will see a build in the coming quarters in terms of revenue. You will see significant operating leverage coming from that. I mean, we do have quite a large sort of fixed cost base in this business, the support levels are higher. Actually, the required support levels are higher than in some of our other businesses. So you will see operating leverage from that revenue build.

Finally, on margins, we also are expecting continued easing on raw materials. It was interesting. At the beginning of the year, you saw commodity prices pick up because people didn't expect a strong rebound in China. Those expectations are now much lower and we are seeing actually metals prices coming down right now. We're certainly not going to lower our pricing on Catalysts. So we also should see some margin expansion coming from that.

[Matthew Yates, analyst]

And to follow up, sorry, come back to mix. What are the higher-margin mix parts of the portfolio? And why would they get better over the coming quarters or coming years given the outlook for the chemical industry?

[Conrad Keijzer, executive]

For the portfolio, you refer to Catalysts, Matthew or to the overall portfolio?

[Matthew Yates, analyst]

No, just for Catalyst, just for that division.

[Conrad Keijzer, executive]

Just the Catalysts business. Okay. Yes. No, if we look at our order book, we actually see a solid amount of petrochemical orders in that order book. I think we've commented on this before. That is actually the most profitable part of this business. We see a decent level for Syngas. And actually, what we saw certainly in the beginning of last year, that we had a disproportionate amount of emission control catalyst in there. That's not what we're seeing right now.

[Operator]

The next question comes from Markus Mayer from Baader-Helvea.

[Markus Mayer, analyst]

Hopefully, my questions have been answered, but I had technical issue. So my first question is around the Heubach joint venture write-down. Can you give us more reasons for the impairment besides this change in reporting structure, also the underlying business overall, then the recent the business plan was or -- and also what is the varying book value of this joint venture and also an update on your plans for this asset. That's my first question. And the second question is on the CapEx cut. Can you give us some more flavor on why this was the case? Was it just that you have delay of projects? Or have you become more cautious on potential growth prospects?

[Conrad Keijzer, executive]

Yes. Thank you for the question. I must say the quality of the sound was not perfect, but I think we got most of it here. Yes, on Heubach, I will ask Bill to fill you in with some details. But just as a reminder, we have a 20% stake in this business, which is owned by SK Capital and the Heubach family and the fact that we -- yes, that we kept this stake, it was more -- it was basically structured as an earnout over time.

Yes, on CapEx, we are definitely looking with much more scrutiny at CapEx. I think the key difference with the past year is that we differentiate very much on what our businesses where we want to outgrow our markets, where we want to disproportionately invest, those actually get more CapEx. But likewise, some of the businesses where we don't have the strong top line growth aspiration, they get substantially less CapEx and the balance of it is actually a lower overall CapEx envelope. Maybe Bill, you can fill in on the Heubach, the SK Heubach technical details?

[Bill Collins, executive]

Yes, certainly. So as Conrad mentioned, as part of the divestment of the pigments business to SK Capital Heubach Group, we retained a 20% equity interest in that company. As Conrad said, it's predominantly designed to be an earn out. As we were looking at this participation in the accounting for the participation over the course of last year, it was really always intended to be a financial investment for us. We don't exert any control over that business. We don't exert any control or influence over how they run the business. We're really looking at it as a long-term investment as part of the earnout framework.

So given that's the case, given that we only have 20%, it makes much more sense, and certainly from an accounting perspective, it should be classified as financial asset as opposed to basically an investment and equity method. So what you see here in the first quarter is simply the reclassification of that to a financial asset, which then also triggers a revaluation.

[Operator]

The last question for today's call comes from Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

Two quick ones. One, just on second quarter. I think usually the seasonality for Clariant is second quarter earnings tend to be lower than Q1, but did I hear you in response to couple of previous questions that you actually think Q2 earnings will be higher than Q1, which is counter seasonal. And the second question was just given the news today around German electricity, subsidy, et cetera, et cetera, can you remind us how much electricity does Clariant generate and consume and also purchase in Germany, if you have it to hand? Or let's say, I mean, if you have that -- I think there is a number in the annual report in terms of total energy generation or total energy consumption, how much of that would be in Germany for Clariant?

[Conrad Keijzer, executive]

Sure, Chetan. Well, first, on seasonality and Q2 versus Q1. Yes, Q2 typically comes in lower than Q1. And that is because some of the businesses typically are stronger in Q1 and we have businesses like Crop. And overall, if you look at the portfolio, typically Q2 comes in lower. I was more talking about our Catalysts business, and I was actually talking about the sequential build in the quarters. So Q2, we very much see actually and recognize this seasonality. It's not going to be strong on top line. It indeed typically comes in below Q1. On top of it, we have divestments. We guided for those as a total top line impact of CHF 130 million lower revenue this year, that is the balance of the divesting -- the divestment of the Oil Land business as well as the Crops business and then the incoming Attapulgite business.

Please be aware that the Attapulgite business came in. But in the first quarter, you don't see any of these divestments reflected yet. So we actually will see them coming in, in the second quarter. We closed the North America Oil Land business the end of the first quarter, so the effect is not visible yet. That will become visible in Q2 and also in Q3 and Q4 and in the end of Q2, we're actually targeting to close the Crop business. To your question on the breakdown of electricity by site and by Germany, yes, that's the level of granularity that we typically would not disclose.

But I can tell you that we have applied for this new arrangement. I personally think it's a very good thing that the German government starts to differentiate between the cost for electricity for business and for consumers because arguably electricity prices in Germany are almost the highest in the world right now for the industry. So this certainly is a positive action. I will say the cap to me looked rather high, with roughly EUR 130 per megawatt hour, we're certainly buying below that right now. So it wouldn't bring in a lot of money right now to answer that question. And secondly, yes, be aware that the majority of our energy is obviously gas, and it's only the minor part that is actually the electricity. So for us, not a meaningful impact, and certainly not a material impact for the company.

[Chetan Udeshi, analyst]

Yes, I think the question was made because today, the Energy Minister in Germany proposing CHF 60 per megawatt hour price until 2030 for electricity. That's right. But anyway, just on first question. So if I understood you, there's no reason to believe the seasonality will not hold in Q2. So in other words, Q2 should still be expected to be somewhat below Q1 on EBITDA. Is that fair assumption for the group?

[Conrad Keijzer, executive]

We're not guiding by quarter, but it is a fair assumption that Q2 due to seasonality, but also due to ongoing weak trading conditions, I have to add that, will come in, yes, weaker than Q1. But corrected for seasonality, we see similar trading conditions. So it is seasonality that brings it down, correct.

[Andreas Schwarzwaelder, executive]

So Andreas speaking. Ladies and gentlemen, this concludes today's conference call. The Investor Relations team obviously is available for any further questions you might have. Once again, thank you for joining the call, and goodbye.