Clariant AG

SIX:CLN

Earnings Call Transcript 2022-Q2

[Andreas Schwarzwaelder, Head, Investor Relations]

Ladies and gentlemen good afternoon. This is Andreas Schwarzwaelder Head of Investor Relations speaking. It's my pleasure to welcome you to Clariant's Second Quarter First Half Year 2022 Results Conference Call and Live Webcast.

Please note that all information provided today reference to the reported Q2 H1 2022 results and the restated Q2 H1 2021. For details regarding the restatements, please refer to the half year 2022 financial review available for download on our website along with the Q2 H1 2022 media release and the analyst presentation.

Joining me today are Conrad Keijzer, our CEO as usual and it's my pleasure to welcome and introduce Bill Collins who took office as our new CFO 28 days ago. Conrad will start today's review followed by Bill, who will guide you through the group's financials and will provide some brief business area comments. Conrad will then conclude with a few comments on Clariant's full year 2022 outlook. There will be a Q&A session following our presentation.

At this time, as Sandra said, 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 risks and uncertainties. Listeners and readers are therefore encouraged to refer to the disclaimer on slide two of today's presentation.

As a reminder this conference call is being recorded and a replay of this call will be made available on the Clariant website. As a final housekeeping comment, please note that the figures discussed today refer to continuing operations unless specifically noted otherwise.

Let me now hand over to Conrad to begin the presentation.

[Conrad Keijzer, Chief Executive Officer]

Thank you, Andreas. Good afternoon everyone. Welcome to our second quarter 2022 results conference call. It is a pleasure for me as well to welcome Bill Collins, our new CFO.

Clariant delivered strong sales growth in the second quarter of 2022 with an increase of 29% in local currency versus the second quarter of 2021. The 29% growth included 5% organic volume growth and 4% contribution from the consolidation of our joint venture with India Glycols and from Baraka, our Natural Ingredients acquisition in Brazil.

We are proud to have further improved our selling prices with a 20% year-on-year increase versus the second quarter of 2021. With this increase, we have now fully recovered our year-on-year raw materials, energy, and logistics cost inflation.

Clariant saw continued good demand across all regions and across all of our businesses except Catalysts where we saw a more modest demand recovery. Chemical sales increased 46% in local currency in the second quarter via double-digit expansion in both consumer and industrial applications and especially strong sales in Crop Solutions.

In Natural Resources sales increased 24% in local currency with significant growth in our additive business from framed targets and in our Functional Minerals business for the purification of oils and we saw strong recovery in our oil and gas business.

Our Catalysis sales increased by 8% in local currency with strong sales in specialty catalysts compensating for continued weak sales in petrochemicals.

As you can see on slide number five in the second quarter the reported EBITDA increased by 33% to CHF216 million. The corresponding EBITDA margin rose by 80 basis points to 16.6% exceeding the 15.8% in the second quarter of 2021. We are pleased with the progress of our pricing actions.

Our overall 20% price increase has fully offset the impact of 36% higher raw material cost, an energy cost increase of approximately 34% and an approximate 20% logistic cost increase.

Additionally, -- higher sales and cost savings contributed positively to our margin expansion. Our overall results again have been negatively impacted by disappointing results in our Catalyst business.

The Catalysis EBITDA margin decreased to 5.6% in the second quarter. We saw again an unfavorable product mix with a lower share of petrochemical sales. Margins further have been negatively impacted by the loss of higher-margin business in Russia.

We further saw, again, the negative impact from the delay in passing on higher raw material costs as well as some higher costs from the start of our new bioethanol plant in Romania.

We continue to forecast a recovery for our Catalyst business in the third and fourth quarter based on the strong order book for margin-accretive CATOFIN catalyst. Our new CATOFIN plant in China is currently producing on schedule for order deliveries in the third and fourth quarter.

Last year, we defined our new purpose-led growth strategy, which we presented at our Capital Markets Day in November. An important step to enable the delivery of our growth strategy is the implementation of our new operating model, which we started on the 1st of July.

Our new organization setup will reduce complexity of the organization by removing organizational layers, increasing accountability and improving customer proximity. We are reducing complexity by organizing our group into three global business units instead of five.

We further have taken out a layer of management by having the three global business units directly reporting to the CEO. The announced simplified organization and leadership structure is expected to contribute a significant portion of the CHF30 million rightsizing savings started. This will help us to deliver our confirmed overall target savings of CHF110 million per annum as announced at our Capital Markets Day in November 2021.

Let me conclude by providing some comments about our exposure to potential shortages in the supply of gas in Europe. Clariant does not use gas as a raw material like some of the larger petrochemicals or base chemicals companies are doing. At Clariant, our natural gas supply is mainly used to generate steel and to a lesser extent to generate electricity.

Our total energy cost is less than 5% of revenue. Clariant has a total number of 80 sites globally and we have identified a total of eight sites in Germany that have an exposure to potential reductions in gas supply from Russia.

Clariant is implementing contingency plans to effectively mitigate the impact of a gas reduction of up to 30%, and we are preparing action planning for a potential impact of a gas supply reduction of up to 60%. The mitigation measures in Germany include switching the fuel from oil to gas or switching from our own gas-generated electricity to external electricity from the grid.

With that, I would now like to hand over to our new CFO, Bill Collins, who will provide an overview of Clariant's financial performance in the second quarter and first half year.

[Bill Collins, Chief Financial Officer]

Thank you, Conrad. Ladies and gentlemen, good afternoon and welcome to today's call. Let me start by saying, I am very excited to be part of the Clariant team and to be back in Switzerland for the second time in my career, very much looking forward to our continued interactions in the months and years to come.

With that said, let's get straight into Q2. On Slide 8, we highlight the fact that Clariant delivered notably higher sales in the second quarter of 2022, with growth of 29% in local currency and an EBITDA margin of 16.6%. This profitability improvement was propelled by accelerating price measures, higher volumes and continued cost management, fully compensating raw material energy and logistics cost inflation.

Looking at our robust second quarter development by business area, let's start with Care Chemicals on Slide 9. Sales in Care Chemicals increased by 46% in local currency, supported by double-digit organic sales expansion in both consumer care and industrial applications as well as in all geographic regions.

In Consumer Care, sales increased in a double-digit range in all three businesses: Personal Care, Home Care and Crop Solutions, where sales more than doubled. In Industrial Applications, all key business lines contributed to the growth, especially Coatings and Aviation, which despite its seasonal nature benefited from late winter weather conditions in specific geographic regions.

Our joint venture with India Glycols and the Beraca acquisition boosted sales growth by approximately CHF43 million in the second quarter. The integration of these businesses is nearing completion, expanding our range of sustainable bio-based products.

Care Chemicals absolute EBITDA increased by a notable 75%, with margin increasing 430 basis points to 24.1% from 19.8% in the second quarter last year. Active price management and volume-related leverage underpins a significant increase, as raw material, energy and logistics cost increases were fully offset.

Profitability was impacted by negative one-off effects, which were more than offset by inventory revaluation, which had a positive impact in the mid-teens million range. Materiality of those effects is expected to be reduced in the second half of 2022. And as a consequence, we expect EBITDA margin to normalize at a lower level going forward.

Continuing with Catalysis on slide 10. Catalysis sales rose by 8% in local currency year-over-year, with strong growth in specialty catalysts and the emission control catalyst businesses, which offset declines in syngas and petrochemicals.

The demand for our CATOFIN solution and propylene value chain remains strong and we expect the production capacity from our new plants in China, which ramped up in the second quarter, to further improve our ability to serve the growing demand in the region going forward.

The Catalysis EBITDA margin declined to 5.6% from 19% last year. There are three main factors influencing this development. The first of which is product mix, derived from the absence of highly profitable sales in Russia, as well as a lower share of margin-accretive petrochemical catalyst sales in the second quarter. Our order book for margin-accretive CATOFIN catalysts reached a record high in Q2, signifying a recovery in the second half of the year.

The second negative factor impacting the Catalysis EBITDA margin was the continued pressure from raw material energy and logistics costs. This was further amplified by the long project lead times for catalysts. We addressed this issue via diligent pricing on existing projects and by adjusting the relevant pricing model for new contracts. We expect these measures to have a positive impact in the second half of 2022. Third and finally, plant ramp-up costs related to the new sunliquid production plant in Romania also had a negative impact on margin.

As you know due to the project nature of the catalysis business, it is normal to see significant profitability fluctuations over the quarters of a calendar year. Therefore, please note that the fundamentals of this business remain positive based on the present demand pattern, the high order backlog, portfolio strength and our proven innovation capability.

Turning to Natural Resources on slide 11. Sales increased markedly by 24% in local currency in the second quarter, due to growth in all regions and in all three business units, with particularly strong expansion in additives.

Oil & Mining Services sales grew in a high teen percentage range in the second quarter. Oil Services sales reflected a year-on-year improvement due to strong market demand, while Mining Solutions increased in the 20% range, supported by particularly successful pricing measures.

Sales in Functional Minerals grew in a mid-teen range, with positive developments in all business lines, especially in purification and cargo and device protection. The foundry business also increased sales at a low single-digit rate, again, exceeding the absolute levels achieved in the second quarter of 2019 prior to the COVID-19 pandemic.

Additives posted the strongest sales within the Natural Resources business area in Q2, thanks to robust demand in all key regions and across all main end markets, including the electrical, electronics, automotive and construction sectors.

In the second quarter of 2022, the absolute EBITDA increased by a substantial 28% with the margin increasing to 17% from 16.2%, reflecting an 80 basis point improvement. The strong top line advance in tandem with pricing measures mitigated the negative impact from higher raw material costs and rising natural gas prices.

Let's now move on to cover the first half year financials on slide 12. In the first half year of 2022, sales from continuing operations were CHF 2.6 billion compared to CHF 2 billion in the first half of 2021. This corresponds to the 29% increase in local currency, 25% of which was organic. Both pricing and volume growth had a positive impact.

The absolute EBITDA from continuing operations increased by 30% to CHF 436 million as the group improved profitability on the back of notable sales expansion. Continued successful pricing measures offset raw material price increases of approximately 36%, while the execution of the performance improvement programs resulted in additional cost savings of CHF 8 million in the first half of 2022.

Our EBITDA margin increased to a record 17% from 16.5% in the previous year, due to pricing measures, volume leverage and continued cost discipline across the group. The total group net result was CHF 386 million versus CHF 157 million in the previous year. The net result was lifted by the gain on pigments disposal, the strong business performance of the continuing operations and the corresponding margin improvement.

The return on invested capital increased by 270 basis points to 10.9%, due to a disproportionately high increase in the operating profit, divided by a less significant increase in the average net invested capital.

The net operating cash flow declined to negative CHF 17 million in the first half of 2022, as a result of the inventory buildup needed to meet higher demand levels, supply chain uncertainty and higher raw material prices.

Property plant and equipment expenditures totaled CHF 88 million, well below last year's CHF 130 million because the bulk of the growth investments for example Sun Liquid and the CATOFIN plant in China had already occurred in 2021. Net debt for the group decreased to CHF 931 million due to the proceeds received from the Pigments divestment.

Slide 13 reflects the performance programs remain on track with first half year savings of CHF 8 million. This is in addition to the approximately CHF 60 million cost savings already generated in 2020 and 2021. The bulk of the rightsizing program contribution is anticipated in 2023 and 2024, following the expiration of the divestment-related transitory service agreements and the implementation of the new operating model. We are pleased to confirm that we are on track to deliver the targeted savings announced at our Capital Markets Day in November 2021.

So let me conclude my review with a short outlook for the third quarter on Slide 15. In the third quarter of 2022, we expect Clariant's continuing operations to generate strong local currency sales growth in a year-on-year comparison with a modest sequential decline. Our expectation for strong year-on-year sales growth is underpinned by expansion in all three business areas. We also expect to improve the restated group EBITDA margin level on a year-on-year basis. From a sequential perspective, we anticipate that the third quarter EBITDA margin will be lower than in the second quarter of 2022.

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

[Conrad Keijzer, Chief Executive Officer]

Thank you, Bill. In the second half of the year, we expect to report continued sales growth based on higher prices, but weaker volumes, in part due to the higher comparison base, but also because of the sequential weakening of demand that was already visible towards the end of the second quarter. For the full year 2022, we expect to generate strong local currency sales growth to around CHF 5 billion driven by a strong first half of 2022. We expect to improve our year-on-year EBITDA margins through a targeted turnaround in our Catalyst business, continued margin management, continued cost discipline and successful delivery of our performance improvement programs.

We expect the inflationary environment with regard to raw material energy and logistics costs to persist into the second half of 2022. The current high level of uncertainty as a result of the geopolitical conflicts, potential gas shortages in Europe and the resurgence of COVID-19 is expected to negatively impact global economic growth and consumer demand in the second half of the year.

Our performance improvement programs remain on track and we are committed to the implementation of our new operating model. These efforts will deliver meaningful savings in 2022 and beyond. We have transformed the group into a true specialty chemical company and will continue to benefit from our innovation-driven specialty portfolio and from the contribution and synergies generated by our bolt-on acquisitions.

Sales of Sun Liquids second-generation bioethanol will continue to ramp up in the second half of 2022. And the new capacity at the CATOFIN plant in China is expected to contribute meaningfully during the second half of 2022. In our view, Clariant is well positioned to outpace the market and to continue to grow profitably. Our team remains committed to taking the next steps to meet our 2025 targets, which we introduced last November. Meanwhile, we continue to prioritize delivering on our full year 2022 operational performance.

With that, I would like to turn the call back over to Andreas.

[Andreas Schwarzwaelder, Head, Investor Relations]

Thank you, Conrad and thank you Bill. Ladies and gentlemen, before we begin the Q&A session, you would kindly ask that you please limit the number of questions to two thus providing more participants with the opportunity to ask questions. Thanks for your understanding.

We will now open the line for questions. Sandra, please go ahead.

[Operator]

The first question comes from Georgina Fraser from Goldman. Please go ahead.

[Georgina Fraser, Goldman]

Hi. Thank you so much. Hi, Conrad, hi, Bill. I've got two questions as I'm allowed. The first one is, you mentioned that volumes had already started to slow a bit towards the end of the second quarter. I was wondering if you could give us a bit more detail on which business lines and also kind of global regions that you were starting to see that. And then my second question is, could you give us a feel for how the organization has responded to the new business structure that you've implemented? Thank you.

[Conrad Keijze]

Yeah. Thank you, Georgina. With regards to your question on volumes, what we did see is actually towards the end of the second quarter in June volumes slowing down particularly in Europe. In Europe in some of the markets, particularly the industrial markets we start to see, in fact negative volumes on a year-on-year basis. Examples are, foundry which basically is a product our bentonite product which is used basically for forecasting metals as a binder for foundry and this is a clear industrial application that is tied to automotive metal parts production, but also to sort of production of heavy industrial equipment.

If you look more broadly, globally what we see is actually a mixed picture. So also, in the second quarter strong volumes, strong demand in America, no signs of volume slowdown, yes and also still a very strong order book. In Asia, we did see strong volumes, but weaker volumes in the second quarter, particularly in China. Here in fact for the coming quarters, looking at the order book we see even a bit of a pickup. It is Europe, where we do see the slowdown most pronounced.

As far as your second question on the new operating model, I can say that this actually has been well received by the company and by our employees. Maybe just as a recap, this is all about yes, taking out complexity, reducing the number of layers of management in the organization getting basically to more empowered roles, particularly in the frontline so that we basically increase customer centricity, but also faster decision-making and become a bit more entrepreneurial company. It is all about setting up the company for growth. And after a number of years where we actually did not grow, but became smaller as a company this focus on growth is actually very much welcomed by our employees.

[Georgina Fraser, Goldman]

Very insightful. Thank you.

[Conrad Keijzer, Chief Executive Officer]

You’re welcome.

[Operator]

The next question comes from Christian Faitz from Kepler Cheuvreux. Please go ahead.

[Christian Faitz, Kepler Cheuvreux]

Yes. Thank you. Good afternoon, Conrad, Bill and Andreas and welcome Bill. Two questions please. First can you please give us some guidance on how you see operating cash flow and CapEx evolving for the remainder of this year. I would suspect that the usual pattern at Clariant that the significant chunk of free cash flow is generated in H2. Can you please confirm this?

And then the second question is, I appreciate that you have good visibility on your order book. Is that why you are so confident on finally getting the Catalyst margin up for Q3? And then more general on the order book what is your current visibility on average? Is it six to eight weeks or shorter? Thank you.

[Conrad Keijzer, Chief Executive Officer]

Yes. Thank you Christian. I'll make a broad comment on operating cash flow and then I'll let Bill comment detail. Basically, the operating cash flow, yes, we are basically negative on cash flow in the first half versus a slight positive last year. It is a very different dynamic where our revenues are strongly up this year and it was only a modest pickup in revenue slight growth in the prior year.

As far as the visibility on our order book, in Catalyst what we see is no change in terms of the visibility as far as order intake. Typical lead times for orders, six to nine months sometimes even 12 or up to 18 months. What some of our challenges have been in recent quarters have been movements of orders from one quarter into the next quarter.

What we are particularly pleased with is actually that, if we look at the order book a lot of these now have and are already confirmed orders. This is especially the case in China where this is also visible even in our inventory builds, we are actually building to order and we do expect a firm pickup in the second half. Maybe now back to you Bill on some comments on cash flow.

[Bill Collins, Chief Financial Officer]

Yes. Thanks Conrad and good afternoon, Christian. If I make a couple comments if I might on the Q2 cash flow because I think that sets up a bit of the discussion for where we expect things to go through the end of the year. Our EBITDA was actually very strong in the first half of this year.

And in fact, if you look at the operating cash flow without the impact of net working capital changes, we did see a 10% improvement year-over-year. So I think that's really positive. When we come to the inventory and working capital issues, we did have a marginally higher inventory values in Q2 due to the raw material increases and intentional build due to logistics concerns, as well as some intentional ramp-up specifically because of anticipated demand in Q3 and Q4.

And that is specifically important to kind of your other question as it relates to Catalyst because a fairly good portion of our inventory increase was actually tied to Catalysis in anticipation of that Q3, Q4 demand which is again part why we are optimistic about [indiscernible].

In terms of where we go from here, I would say that for the full year 2022, we do expect to improve free cash flow from the relatively muted level that -- 2021. I would expect our higher EBITDA combined with lower CapEx spend, than what we had in 2021 combined with improved inventory management to see that see that figure improve. And with that said, we did come out last year, with a 40% free cash flow conversion target. And I would say, we would expect to make improvement year-over-year to reach that target by 2025.

[Christian Faitz, Kepler Cheuvreux]

Okay. Very helpful , Thank you very much.

[Conrad Keijzer, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Markus Mayer from Baader-Helvea, go ahead..

[Markus Mayer, Baader-Helvea]

Good afternoon, gentlemen. Two questions both in the Catalyst area. Firstly, on the higher raw material costs, which have been so far not able to pass on gas in particular metals like little. Should we expect that you need to renegotiate your contracts that you also have passed through for this kind of metals, or is the improvement of the margin? And is this also departing one of the higher costs, than something for new contracts you're signing? And as such, this will take longer until we pass on the higher cost to customers? So, that's the first question.

And the second question, is on the sunliquid startup. Maybe you can give us some flavor, how that's running up -- the startup is running. And for venture, we also expect new license agreements as something for end of this year or more something for next year. Thank you.

[Conrad Keijzer, Chief Executive Officer]

Yes. Thank you, Markus for your two questions. First, on Catalysts and raw material developments and how this works itself through into our margins. Indeed, we have faced unprecedented raw material increases in our Catalyst business. It was last year primarily olefin-based raw material inflation. But towards the end of the year, we did see a pickup in metal pricing. If you look at the first half, we have seen a fair amount of volatility in metal pricing.

Overall nickel up as much as 40%, but there has been moments on the on the Metals Exchange that we saw more than doubling in naval pricing. Also some of the other elements, some of the other metals base metals like copper, aluminum have gone up. Now if you look at the price through mechanism, the challenge that we historically have had in our Catalyst business, is that we confirm pricing at the moment of order received and orders typically has a lead time of six to nine months. And that explains a good part of the margin squeeze, that you saw in our Catalyst business in the fourth quarter but also in Q1 and Q2.

We have changed this. So we no longer fix pricing, at the moment of order received for most of the contracts in Catalyst right now. I would also say, that on positive note we have seen some easing in our metal pricing, towards the end of the second quarter and we expect that to continue possibly in Q3 and Q4 as volumes weaken particularly, in Europe.

As to your second question on sunliquids, this is a very positive development for us. As a reminder, our second-generation bioethanol basically, uses the waste from agricultural production and not the crop itself. So our technology is not driving up full prices, very much the opposite. We give an extra income stream to the farmers, for their rate products, which we then convert into sugars and finally into bioethanol.

We are seeing a decent ramp-up right now in volumes. I'm very pleased, that we were able during the quarter to announce our supply delivery contracts with Shell. This is an offtake contract for all of the volume. And our first order to Shell, did shift in the second quarter. Your final question, as far as a pickup license sales. Yes we do expect that later this year, and hopefully we'll be able already in Q3 to come up with some announcements. But certainly, before the end of the year, we do expect to announce additional licensees to be sold for this technology.

[Markus Mayer, Baader-Helvea]

Perfect. Thanks so much

[Conrad Keijzer, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Andy Snider [ph] from zCapital. Please go ahead.

[Unidentified Analyst]

Hi, gentlemen. I've got two add-on questions regarding slower momentum. First, what can you tell us about the inventory levels in the sector at your clients? You heard about elevated levels, which combined with the sowing demand and thinking input prices, could lead to a quite dramatic slowdown for you. And then second, can you share with us how you prepare for a slowdown? What plans do you have, which can be activated when the downturn hit especially if it should be a severe one?

[Conrad Keijzer, Chief Executive Officer]

Yeah. Thanks for your question and an important question. Overall, we do see industry inventory levels at an elevated level right now. Bill talked about our own inventory levels. They have been higher than usual in the first half simply because we prioritize deliveries to our customers. And we still see supply constraints on some raw materials and still particularly on logistics mostly availability of sea containers as well as trucks for road transport.

Our expectation is for this to ease as volumes come down particularly in Europe in the second half. Also the constraints on some of the raw material availability as well as logistics availability will ease. As a result, there will be a level of destocking. And, yeah, I think this is actually a negative on demand in the second half particularly in Europe. You see a little bit the reverse of what you saw last year at this time. Q3, Q4 restocking filling up inventories even some pent-up demand now in the quarters ahead of us, yes, I think the industry will bring down inventory levels and it will have a negative impact on volumes.

To your second question, in terms of costs, we are preparing additional actions in terms of bringing down our costs, particularly with a focus on Europe where we expect this effect to be the strongest. In fact as a reminder in the US, we still see a very strong demand and also our order books are still very strong for the quarter ahead.

[Unidentified Analyst]

Okay. Thank you.

[Conrad Keijzer, Chief Executive Officer]

You're welcome.

[Operator]

The next question comes from Rob Hales from Morningstar. Please go ahead.

[Rob Hales, Morningstar]

Hi, good afternoon. Thanks for taking my question. I had a couple on margins and one on Care Chemicals in the quarter. You had some negative one-off effects offset by inventory written valuation. Can you tell us the margin excluding those exceptional items? And then on -- just on the Natural Resources segment. You've got a variety of businesses in there. How do they -- how does this business affects the mix impact in there? Can you give us an idea of if the margins are significantly different between the business lines and natural resources?

[Conrad Keijzer, Chief Executive Officer]

Yeah, sure. Thank you Rob. Yeah, as to your first question margins in Care Chemicals this is obviously our star performer right now and we are extremely pleased with the margins that we saw in the second quarter at an unprecedented high level. Now a lot of that has to be accredited to our teams for raising prices, a 28% pricing effect, very strong. But indeed there have been some one-time effects also in terms of inventory revaluation. And I will leave it to Bill to provide a bit more detail on the effects of inventory revaluation and some incidental effects.

As far as your second question on natural resources and mix here, again, on margins in natural resources we're very pleased with developments that we are seeing. We do see a natural resources overall, we were actually pleased with the quarter. And also here we had actually a good strong revenue growth. A recovery in oil and gas when you look at margins, we did see good margin expansion specifically on our additives business, primarily our flame retardant flared business. We're also seeing good margin developments for our minerals business, our bentonite business where we haven't seen the complete margin recovery yes is in oil and gas and we're working on that.

Maybe to you Bill with granularity.

[Bill Collins, Chief Financial Officer]

Yeah. Thanks Conrad. And thanks Rob for the question. So if we're looking at the inventory revaluation aspect, I think we can look at that probably in Care Chemicals in the mid to high-teen million number in terms of impact on the first half of the year, which would then put us at a normalized margin of around 21%.

[Rob Hales, Morningstar]

Great. Thanks very much.

[Operator]

The next question comes from Chaudhry Mubasher from Citi. Please go ahead.

[Chaudhry Mubasher, Citi]

Hi. Thank you for taking my question. Could you break out the decline in Catalysis EBITDA between the three buckets that you had mentioned? So is it the unfavorable product mix energy road map and then ramp-up costs. And then just looking at your guidance for the third quarter for Catalysis, I think strong EBITDA margin increased versus prior year's level. I think prior year was around 11% if I remember correctly, which is still quite a bit away from the annual averages or what this business can achieve.

So do you see it going back to those levels within the second half of the year, or is it going to be within the low double digits, high single digits, is the expectation to have? And just if you could just talk about the third quarter, how you started the quarter as you see in the month of July so far and just in general, some comments on what you're seeing on demand would be very helpful. Thank you.

[Conrad Keijzer, Chief Executive Officer]

Yes. Thanks very much for these questions. So, first, if you look at the sort of breakdown in the reduction in margins in EBITDA for Catalysts. There is some I think first of all, also an effect which is not insignificant from the loss of Russia business for Catalyst. It was a relatively high-margin business. Roughly half of our business in Russia actually is for our Catalyst business. Then we have sort of the big buckets as you refer to them is first of all, the unfavorable product mix. This is a significant effect. There are substantial differences in margins between on the one hand our so-called specialty Catalyst business, which in reality is a bit more a commoditized part of the business, where it's primarily about emission control Catalysts, that typically do not achieve the higher margins that we see in Syngas, in petrochemicals, where we have very unique products with yes -- with much higher margins. So that definitely is a significant part of the reduction.

And secondly, the delay in pass-through on raw materials is also a significant part of the reduction. And finally, we mentioned project costs, sort of one-off costs to the start-up of the new plants, that's actually a small portion. So that is a small single -- low single-digit million figure for the startup of the plant in Romania and sort of relatively higher cost for the plant in CATOFIN, as it's not running at the full run rate yet.

So the two big ones are product mix and margin squeeze from delay pass-through of raw materials. Product mix, we are quite comfortable based on the order book. What we see right now that this will be better in Q3, in Q4. Margin squeeze may still take us into Q4 to fully reflect the higher ROS on metals on some of the orders with longer lead times, but I also indicated some easing on these raw materials. So, I would say that by the fourth quarter, we should be closer to the historic run rates. And you rightfully make the point. Last year's numbers is not for us the bar. The bar is a lot higher than that. It was by the way 12% EBITDA margin that we were running last year.

[Operator]

Our next question comes from Kenny Tang from JPMorgan. Please go ahead.

[Kenny Tang, JPMorgan]

Thank you, for opportunity to ask question. So, we have seen chemical companies cut production rates in China due to weak demand and margin. Just wondering, if there is any impact of this on the Catalyst business.

[Conrad Keijzer, Chief Executive Officer]

Yes. Thank you, Kenny. Actually, if you look at our performance in Asia and particularly in China, I think it's fair to say that we have done better than some of our peers. When I talk to payers, they have seen severe impacts in Q2 from the lockdowns, particularly in the Shanghai area. I think we've been somewhat fortunate, but it's also attributed to our people that we have been able to keep all of our plants up and running in the second quarter including the plants in the Shanghai area, which includes the Catalyst plant that we have there and as well the new CATOFIN plant.

So, if you look overall at our revenue developments in the second quarter, our overall revenues were up 25% in China, clearly not showing the slowdown that some of our peers have seen. I will say though that Q3, Q4 you may even see a pickup from the second quarter because on the demand side, we did see an impact on China. But yes, we've been able to run well. And I think Bill mentioned that, we've also been able to build some inventory for the CATOFIN order book, which we see in China right now as strong.

[Kenny Tang, JPMorgan]

Okay. Thank you.

[Conrad Keijzer, Chief Executive Officer]

You’re welcome.

[Operator]

The next question comes from Jaideep Pandya from On Field Research. Please go ahead.

[Jaideep Pandya, On Field Research]

Thanks. A question actually for Bill and maybe Conrad can also give you thoughts on this. How important for you Bill when you were [indiscernible] Clariant and your future employer that this remains on a listed company. And...

[Bill Collins, Chief Financial Officer]

Jaideep, sorry to interrupt. Your line is very bad. We couldn't get the question so far.

[Conrad Keijzer, Chief Executive Officer]

Maybe you can call back.

[Jaideep Pandya, On Field Research]

Is that better now?

[Bill Collins, Chief Financial Officer]

Yes.

[Jaideep Pandya, On Field Research]

Yes, I will start again. This question actually for Bill.

[Bill Collins, Chief Financial Officer]

Jaideep, it's not better. Maybe you dial in again and we take another question and you come back.

[Jaideep Pandya, On Field Research]

Okay.

[Operator]

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

[Andreas Heine, Stifel]

Yes two questions, I would like to ask. The first is on CATOFIN, where you said your order book is strong and you said also that, it will contribute in the second half. What do you mean by this contribution? Is that only the contribution to sales, or is the utilization rate already high enough that it contributes positively to EBITDA? That's the first question.

And then, I really would like to understand, what the Care Chemicals how we should understand the Care Chemicals business. It has done for a number of quarters very well and was a stand performance not only in this year, but also last year. But it is very strong increase we see in earnings as always fear that there is quite some over earnings in there which potentially are not sustainable. You may be able to split out a little bit or give us some flavor what you think is what you have improved structurally and where you just benefit from the tight situation in the market right now?

[Conrad Keijzer, Chief Executive Officer]

Sure. Yeah, thanks for the two questions. First, on CATOFIN order book. This will be actually incremental for both sales as well as EBITDA margin. So, this is clearly accretive on margins, but it will also be accretive and an addition in terms of sales. Just for your information, we are literally sold out in CATOFIN. There is a strong demand for this, yeah, very unique technology. And the startup of the new plants in China will allow us to shift all of these orders that we have on our books.

We were actually extremely pleased with the ramp-up during COVID times in the second quarter of this new plant. It is running fully according to our expectations. So we have, I would say, an elevated confidence level on our order book in Catalyst very much indeed also due to the strong order and order intake that we see on CATOFIN.

To your second question on Care Chemicals. Yeah, we are very pleased with the development of this business. And I think the good – yeah, the good news is that, a lot of these are structural improvements that actually have structurally repositioned the business. You remember, our presentation at the Capital Markets Day last year, you remember, the new growth strategy that we put together earlier in the year last year for Care Chemicals and that we have been executing on already. It is very much about outgrowing our peers in the most attractive segments.

So we are repositioning this business more towards the consumer-facing segments attractive segments like cosmetics, personal care, where actually clients are willing to pay for sustainability performance. And also, if you look at the acquisitions that we did last year, the joint venture that we set up with Indian Glycols, this is very much about bio-based surfactants.

If you look at the Baraka acquisition, this is about natural materials, natural oils, natural clays from the Amazon. And then, we actually tweak that product and sell it to customers like L'Oreal, who very much this value proposition of bio-based cosmetics. So I think, if you look at our Care Chemical business it is structurally better positioned towards the more attractive markets segments.

Now, I think Bill made the comments about the real strong Q2 margins, and some of the one-off effects. So we do need to take them into account. But certainly, I think we have positioned the business at a structurally higher level of EBITDA margin and also at a structurally higher level of growth.

[Operator]

The last question is from Jaideep Pandya from On Field Research. Please go ahead.

[Jaideep Pandya, On Field Research]

Hi. I'll try it, again. Can you hear me now?

[Conrad Keijzer, Chief Executive Officer]

Well, let's try.

[Jaideep Pandya, On Field Research]

Hello? Can you hear me now?

[Conrad Keijzer, Chief Executive Officer]

Not really good Jaideep to be honest.

[Jaideep Pandya, On Field Research]

Okay.

[Bill Collins, Chief Financial Officer]

Maybe talk slowly. We can try to get this.

[Jaideep Pandya, On Field Research]

I'll just ask one question then. I will just ask one question. So the question is really for Bill. When you were doing the due diligence on Clariant as your future employer, how important was it for you that this company remains public – actually it is not public in the future given that we have a very strong shareholder, which may strategically want to take over Clariant. And Conrad, maybe you can also give your views when you because you're not very old in Clariant.

And then the second question, if I may is on Sun Liquid. You have six licenses, if I count them correctly on Sun liquid on plants that are currently being built. Do you have any idea when are they going to complete? And once they complete, what is the trajectory of enzyme sales and licensing income which we can expect in the next 12 months to 18 months? Thanks a lot.

[Bill Collins, Chief Financial Officer]

Thanks, Jaideep. I think I got your question. I guess, what I would say, when I was looking at Clariant from a due diligence perspective my real interest was based on the transition, and the transformation that the company is going through.

So as part of my due diligence, I had a lot of discussions with friends in the chemical industry and they all came back and said "Listen, Clariant is a great company, great products, really great people." And following the divestments of the last, I don't know, five to 10 years, it's really at an inflection point where the company really wants to grow. And I think that came out loud and clear in the Capital Markets Day presentation last fall.

Looking at the bolt-on opportunities, looking at the additional revenues from innovation and sustainability the regional growth platforms there's a lot of really exciting -- a lot of exciting topics there. And given my background, what I really like doing is, being part of those transformations.

And I would say in my first 28 days with the company, that's exactly what's happening. We have a new leadership team, a new operating model that really sets up this company for I think tremendous growth both in terms of top line and bottom-line going forward.

I see the opportunities in terms of how we organize ourselves globally, in terms of finance, in terms of the functions, in terms of the segmentation of our businesses. So that's what really attracted me to Clariant. I don't care really, who the shareholder is.

[Conrad Keijzer, Chief Executive Officer]

Yeah. Okay. Jaideep, not too much to add from my side, I mean I was brought in actually as a new CEO 18 months ago, very much to set up the company for growth and to deliver the growth. And I think that's very much what we've been working on in the last 18 months.

And I'm very pleased and as Bill mentioned that, we actually are seeing this growth already coming through. As a reminder last year 15% top line growth, first half 29%. And it's not just pricing. There's actually a strong level of volume in this growth. And I'm very pleased with that and half of it is sort of organic and half of it is bolt-on.

As far as your question on the anchor shareholder, I'm actually very pleased that anchor shareholder SABIC, but also the former [indiscernible] German family shareholders we have more anchor shareholders in the company that they actually maintain this long-term perspective that they actually are fully supportive of the strategy that we summarized that announced last year in November at the Capital Markets Day which is all about stepping up growth, boost organic first and foremost I would always say organic, complemented by bolt-on acquisitions and then finally, to get the margins up to basically leading performance in the industry.

And I think it's a very exciting strategy. And I also want to reiterate you that our anchor shareholders including SABIC are fully behind this growth strategy, yeah, maybe a final sort of to really conclude it. We are obviously committed to create value for all of our shareholders. So we have anchor shareholders very supportive also with their public statements around our growth strategy. But for us it is about delivering shareholder value for all of our shareholders. For me, they're all equally important.

Yeah. So the question on Liquid as far as plant build and the schedule, so first I believe you mentioned a number of six plants or six licensees, Jaideep. It's actually five right now. They're all in different phases. Yeah, unfortunately it's not up to me to comment on the exact dates of when plants will be built and where. This is obviously up to the yeah, to our customers in this area. The model is clearly -- they are the ones building the plants. We provide technology. We provide the enzymes. And that's basically the setup.

[Jaideep Pandya, On Field Research]

Okay. Thank you so much.

[Conrad Keijzer, Chief Executive Officer]

You're welcome.

[Andreas Schwarzwaelder, Head, Investor Relations]

So with no further questions in the queue, we have reached the hour. So ladies and gentlemen, this then, concludes today's conference call. The Investor Relations team obviously remains available for any further questions you may have.

We look forward to continuing the dialogue and latest with the disclosure of our third quarter results on October 27th. As you rightly said we are back to our normal corporate calendar. So looking forward to, talk to you on the 27th of October for the Q3 results. Once again, thank you for joining and goodbye.