Clariant AG

SIX:CLN

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the Clariant Second Quarter First-Half Year Results 2023 Conference Call and Live Webcast. I am Xandra, the Chorus Call operator. [Operator Instructions]

At this time, it's my pleasure to hand over to Andreas Schwarzwaelder, Head of Investor Relations. Please go ahead, sir.

[Andreas Schwarzwaelder, Head, Investor Relations]

Thank you, Xandra. Ladies and gentlemen, good afternoon. My name is Andreas Schwarzwaelder, and it's my pleasure to welcome you to Clariant's second quarter half-year 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 second quarter developments and a few comments on Clariant's sustainability transformation commitment, followed by Bill who will guide us 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.

At this time, 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 2 of today's presentation. As a reminder, the conference call is being recorded. A replay and a transcript of the call will be available on the Investor Relations section of the Clariant website.

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

[Conrad Keijzer, Chief Executive Officer]

Thank you, Andreas. Good afternoon, everyone, and welcome to our second quarter half year 2023 analyst conference call.

Slide four provides an overview of Clariant's results. In the second quarter of 2023, we generated sales of nearly CHF1.1 billion, a 7% decrease in local currency versus the second quarter of 2022. Although these figures reflect a strong performance in our Catalyst business units. The challenging macroeconomic environment significantly impacted sales and profitability developments. In our other two business units, Care Chemicals and Adsorbents & Additives. This resulted in EBITDA of CHF175 million, reflecting a 19% decline versus the second quarter 2022 and resulting in a 16.1% EBITDA margin.

Economic conditions have worsened in many geographies, and this has led to lowered expectations and revised forecasts for the remainder of 2023. The European Chemical Industry Council, Cefic, expects the EU27 chemical output to decline by 8% in 2023 due to weakened industry confidence, order book deterioration, and inventory levels assessed as being too large.

Meanwhile, China, the largest chemical market, did not recover as anticipated at the beginning of the year, and the Chinese economy lost further momentum in Q2 2023, with GDP only expanding 0.8% sequentially. This was primarily driven by domestic retail sales and services post-COVID restrictions of industrial manufacturing PMI remains below 50.

Whilst the U.S. economy has held up reasonably well, the global weakness and continued monetary tightening are having an impact. Consequently, the American Chemistry Council, ACC, outlook shows slowing in production after a 2.8% decline in chemical production in June 2023. The production decline in base and specialty chemicals was even more pronounced at minus 5.8%, creating a challenging business environment. Given this economic outlook and weaker current trading, we took further actions in all business units to align our cost base to a lower volume environment as we will outline later.

Given this context, I'm pleased with the group's strong operating cash flow generation of CHF78 million in the first-half, which is almost CHF100 million more than reported in the previous year. This was achieved by maintaining our focus on cash flow optimization through active working capital management and increased CapEx discipline. The resulting last 12 months' free cash flow conversion rate of 56% reflects the success of our efforts.

Slide 5 depicts the sales performance in the second quarter, which amounted to almost CHF1.1 billion, a 7% decrease in local currency. Volumes decreased by 5% in the second quarter despite a 25% volume increase in the Catalyst business, which was driven by the successful execution of our strong order book. Volumes decreased in Care Chemicals and Adsorbents & Additives due to very weak demand, particularly in key end markets such as personal care as well as crop and electrical and electronics applications.

According to Euromonitor, the retail volume forecast for personal care in 2023 was reduced from 2.6% growth to 1.6% growth in the second quarter. Meanwhile, crop solutions is facing an overfilled supply chain in a still robust environment for farmers, which is driving global channel destocking and negatively impacting the demand for our products.

Destocking also continued in the electrical and electronics sector because of easing supply shortages and weak consumer demand. We are observing changed behavior in consumer spending. During the pandemic, consumers spent disproportionately on durable goods such as furniture, electronic devices, and appliances. This spending pattern has changed significantly since the end of the strict lockdown policies, particularly in China at the beginning of the year. Individuals now spend more on travel and services despite the inflationary environment. As a result, demand in the chemical sector remains low.

These developments are underpinned by the following data. International Data Corporation forecasted an 11% year-on-year decline in global shipment volumes of smartphones in Q2 2023. In addition, although the underlying growth trend remains valid, the e-mobility market started slowly into the year, particularly in China. This led to reduced growth expectations for EV production in 2023.

Despite this environment and after nine consecutive quarters with notable year-on-year price increases, we reported flat pricing year-on-year. Both Catalysts and Adsorbents & Additives increased prices by 5% and by 2%, respectively. Care Chemicals pricing declined by 2%, driven primarily by formula-based pricing. This overall performance reflects Clariant's continued to focus on defending pricing in a challenging environment where raw material costs were down around 12% year-on-year, whilst energy and logistics costs both fell 2%.

To put the stable prices in Q2 2023 into perspective, it is important to note that prices had increased by 19% in Q2 2022. The net effect from the recently integrated U.S.-based Attapulgite business assets in Adsorbents & Additives and the divestment of both the North American Land Oil and Quats businesses in Care Chemicals totaled CHF29 million, which had a minus 2% impact on the group's sales in the second quarter. The currency impact on revenue of minus 10% was mainly due to the appreciation of the Swiss franc relative to the euro and other currencies. This resulted in 17% lower second quarter sales in Swiss francs.

Slide six provides an overview of our sales by geography. In the second quarter, sales in the Americas were down by 11%, with around half of this decrease attributed to the divestment of the North American Land Oil business. While volumes in Care Chemicals decreased, Adsorbents & Additives grew in part due to the integration of the U.S. Attapulgite business. Local currency sales were down 10% in Europe, Middle East, and Africa region.

Care Chemicals and Adsorbents & Additives sales weakened, while Catalyst was strong in the Middle East due to CATOFIN projects. Sales in Asia Pacific were stable despite an 8% decline in China, which was compensated by stronger sales in India and Southeast Asia, driven by Catalyst projects. In China, significantly weaker Adsorbents & Additives demand and a decline in Catalysts were not compensated by slightly higher Care Chemicals sales.

Moving to the profitability development on slide seven. We see that second quarter 2023 EBITDA was CHF175 million, representing a 16.1% EBITDA margin, while absolute EBITDA declined by 19%. Lower volumes and business mix in the business units Care Chemicals and Adsorbents & Additives negatively impacted profitability, partially compensated by higher volumes and prices in Catalysts and positive pricing in Adsorbents & Additives.

In Care Chemicals, the positive impact of the CHF62 million gain from the Quats disposal was offset by lower operating leverage, inventory devaluation, and CHF6 million restructuring cost. The strong volume increase and positive pricing in Catalysts was partly offset by CHF17 million impact from sunliquid, of which CHF7 million were restructuring charges. While price increases had a positive impact in Adsorbents & Additives, EBITDA was negatively impacted by lower operating leverage in additives, inventory devaluation, restructuring charges of CHF7 million, and a less favorable business mix due to the sales growth in Adsorbents.

We continue to deliver on our strategic priorities as reflected on slide eight. Our sunliquid taskforce is delivering continued improvements in Podari. The negative impact was further reduced to minus CHF10 million operational EBITDA impact in the second quarter of 2023. Efforts to address the ramp-up challenges in Podari, Romania, are continuing as our dedicated team continues to work hard on these issues. Restructuring charges of CHF7 million were taken in the quarter to bring the cost structure in line with the lower operating level. Clariant is actively evaluating strategic options for sunliquid and will provide an update on this topic by the end of 2023.

We have further expanded our performance programs by implementing new and additional actions in all business units to align our cost base to a lower volume environment. These measures have enabled us to increase our 2025 targeted savings by CHF10 million to a new improved goal of CHF170 million. As of the end of Q2 2023, we have delivered total savings of CHF107 million from our performance programs across the company. The cost savings realized in the second quarter were approximately CHF14 million, which more than offset inflationary impacts, including on salaries.

In the quarter, we completed the divestment of our Quats business to Global Amines Company, a 50-50 joint venture owned by Clariant and Wilmar, Asia's leading agricultural business and oleochemicals business. This is a further step on our path to structurally improve Clariant's leading specialty chemical portfolio. The preliminary gain on disposal of the Quats business is CHF62 million.

On slide nine, we provide an update on the continued progress Clariant has made in improving its Scope 1, 2 and 3 upstream greenhouse gas emissions in the second quarter. In the 12 months to June 2023, the Group's Scope 1 and 2 total greenhouse gas emissions declined by 8%, partly due to the lower production volumes. The total reduction from 2019 baseline is now 17%. An example of our reduction measures includes decreasing the use of coal by 50% thus far in 2023 versus the baseline of 2019. The total indirect Scope 3 emissions decreased by 11%, with a total reduction from the 2019 baseline of 15%.

On slide 10, are some examples of additional ESG milestones achieved in the quarter. Green ammonia plays a critical role in achieving a net zero carbon economy. It reduces the carbon footprint for fertilizer production, and it can be used as carbon-neutral fuel for the shipping industry. Additionally, it provides a way to transport green hydrogen from renewable energy rich regions to those lacking sufficient renewable energy sources.

Our AmoMax-Casale catalyst sets new efficiency standards for ammonia production. It has shown exceptional activity, stability, and energy efficiency in its first three commercial applications for Nutrien, Mosaic, and YARA Sluiskil. AmoMax-Casale has been the catalyst of choice for climate-neutral ammonia production in green ammonia projects. The high-performance catalyst also reduces CO2 emissions by lowering energy consumption in traditional ammonia plants.

Clariant's focus on a sustainable bioeconomy is also reflected in the plastics-free DESI PAK ECO, moisture-absorbing packets, which we have added to our range of natural clay solutions that help manufacturers and distributors protect sealed packaged goods from moisture damage. To further help customers reduce their own Scope 3 emissions, the sourcing of raw materials has been extended with a lower environmental impact to include transport packaging.

In addition, Clariant Oil Services launched PHASETREAT WET to offer more efficient, more sustainable solutions for the oil and gas industry's demulsification needs and to enhance safe operations. PHASETREAT WET reduces chemical volume by up to 75% compared to current solutions, and it optimizes customers' onshore and offshore programs.

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

[Bill Collins, Chief Financial Officer]

Thank you, Conrad, and good afternoon, everyone. I would like to discuss our second quarter development by business unit, starting with Care Chemicals on slide 12. Care Chemicals sales decreased by 17% in local currency as prices declined by 2% due to formula-based price adjustments linked to raw material prices. Volumes declined by 10% as a result of weak demand and prolonged destocking versus a high comparison base.

Sales decreased by 5%, due to the disposals of the North American Land Oil and Quats businesses. Sales rose significantly in oil services, while they declined in a mid-teen range in personal and home care. The decreases in crop solutions and industrial applications were more pronounced. From a regional perspective, sales grew in Asia Pacific but declined elsewhere.

Care Chemicals' EBITDA decreased by 6%, while margin increased to 24.5% from a high 19.2% in the second quarter of 2022. The margin was supported by a CHF62 million gain from the Quats disposal. Underlying profitability levels were impacted by notably reduced volumes, which resulted in lower operating leverage. Also, inventory devaluation and additional CHF6 million restructuring charges in the second quarter of 2023 weighed on the EBITDA.

On Slide 13, Catalyst sales registered a very strong increase of 30% in local currency versus the second quarter of 2022. Both volumes and pricing positively impacted the sales growth by 25% and 5%, respectively. Sales in propylene increased more than 50%, followed by syngas and fuels and ethylene. Sales in Asia Pacific, the largest geographic market grew at a mid-teen percentage rate driven by the new CATOFIN catalyst production site in Jiaxing, China.

Project timing effects drove sales growth in the Europe, Middle East, and Africa region. In the second quarter, the Catalyst EBITDA margin increased to 15.2% from 5.6%. Excluding the CHF17 million negative sunliquid impact, of which CHF7 million was for bioethanol restructuring, the EBITDA margin was 21.3%.

Pricing as well as the business mix had a favorable impact on profitability, while the operating leverage improved, because of strong volume growth. On sunliquid, as mentioned by Conrad, the EBITDA impact, excluding restructuring charges, further improved to negative CHF10 million compared to negative CHF13 million in the first quarter of 2023. The Clariant team has continued its efforts to address the mechanical, biochemical, and operational challenges involved in the ramp-up of this first-of-a-kind technology.

On Slide 14, Adsorbents & Additives sales decreased by 12% in local currency in the second quarter. A 2% price increase was countered by 17% lower volumes as the prolonged destocking cycle and very weak demand in key end markets continued in the additives business against a very strong comparison base in the second quarter of 2022. Sales increased by 3% due to the recently acquired U.S. Attapulgite business. The positive trend in adsorbents persisted across the globe with higher sales at a lower double-digit percentage rate, driven by foundry and purification applications.

From a regional perspective, sales in the Europe, Middle East and Africa region were down by a low-double-digit percentage rate. Asia Pacific reflected a weaker development with a significant decline in China. In the Americas, sales grew slightly, particularly in the U.S., given the impact of the acquisition of the Attapulgite business assets. EBITDA decreased by 77% and margin fell to 6.8% from 24% in the second quarter of 2022.

Profitability levels were impacted by substantially lower volumes and continued customer destocking, in additives in particular, which resulted in lower operating leverage. Restructuring charges totaled CHF7 million, whilst the strong adsorbents performance led to a less favorable business mix.

In the same period of the previous year, raw material price volatility caused a positive inventory revaluation, which together with the strong operational performance in 2022, resulted in an elevated level of profitability. In the second quarter of 2023, the inventory devaluation effect was negative.

Slide 15 shows, as Conrad mentioned earlier, that we delivered cost savings of CHF14 million in the second quarter from performance programs. We have increased our total 2025 cost savings target by CHF10 million to CHF170 million. Thus far, savings of CHF107 million have already been realized from efficiency and rightsizing measures as well as initial savings from the new operating model. I'm pleased to confirm that we continue to expect most of the savings related to the implementation of the new operating model to be realized in 2023 and to more than offset continued inflation, in particular relating to wages in 2023.

Now let's move on to cover the first-half year financials on slide 16. In the first-half year 2023, sales were CHF2.3 billion, compared to CHF2.6 billion in the first-half year 2022. This corresponds to a 3% decline in local currency, 2% of which was organic. Pricing had a positive impact on the group, while volumes were down.

In the first-half year of 2023, EBITDA decreased by 22% to CHF342 million, negatively impacted by lower volumes, the negative CHF23 million impact from sunliquid, the minus CHF11 million impact fair value adjustment of the Heubach group participation in the first quarter, restructuring charges of CHF20 million, as well as inventory devaluation.

Pricing effects overall remained positive. Raw material cost decreased by 5% and the execution of the performance improvement programs resulted in additional cost savings of CHF22 million in the first-half year of 2023. As a result of these factors, EBITDA margin decreased to 15% from 17%.

In the first-half year 2023, the net result from continuing operations was CHF230 million versus CHF189 million in first-half 2022. The net result was lifted by the strong business performance in Catalysts, the CHF62 million gain on the Quats disposal, as well as the positive impact on the tax rate from the reassessment of provisions related to prior years.

Cash generated from operating activities for the group increased significantly to CHF78 million from the negative CHF17 million as a result of active working capital management. The net cash used in financing activities was negative CHF423 million in the first-half year 2023, compared to negative CHF419 million in H1 2022, driven by the annual distribution to shareholders and financial debt repayment. Group net debt increased to CHF 908 million from CHF750 million due to the payment of the shareholder distribution.

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

[Conrad Keijzer, Chief Executive Officer]

Thank you, Bill. Let me conclude our review with the outlook on Slide 18. We do not expect to see a substantial economic recovery in the second-half of 2023, while uncertainties and risks related to the economic environment remain. We are confirming our outlook from the trading update on July 7 for full-year 2023.

We expect sales of between CHF4.55 billion to CHF4.65 billion. We expect a net top line impact of around CHF150 million from the completed divestments of the Quats business and the North American Land Oil businesses. This sales decrease will be partly offset by the completed acquisition of the U.S. Attapulgite business. We anticipate the full year 2023 reported EBITDA to be within the range of CHF650 million to CHF700 million, which implies an EBITDA margin range of 14.3% to 15.1%. We expect continued growth in Catalyst to offset lower sales in the other business units.

We also expect an increased negative annualized sunliquid impact, an easing inflationary environment given the current economic outlook, plus the continued positive impact from the savings benefits generated by our restructuring programs. We will continue our focus on cash in the second-half of the year and have targeted a reduced CapEx spend of CHF220 million in 2023. This will positively impact cash generation towards our 2025 free cash flow conversion target.

Clariant has rapidly reacted to the current economic environment and is well positioned to benefit from an economic recovery. We remain committed to meeting our 2025 targets.

With that, I 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, we would kindly ask that you please limit the number of questions to two, thus providing more participants the opportunity to ask a question. Thank you for your understanding.

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

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andreas Heine from Stephen. Please go ahead.

[Andreas Heine, Stephen]

Yes, let's start then with two. The first is actually on the net working capital, looking on that there was still quite an outflow in the first-half, mainly due to the lower payables. I would like to understand how you see the net working capital going forward, especially inventories, which seems to be still up in the first-half?

And secondly, on Catalyst, could you elaborate what do you expect from the second-half in the various business segments as trends for until the end. Now I may squeeze in the third, just very briefly, the devaluation you had in Additives & Care Chemicals, could you quantify them, please?

[Conrad Keijzer, Chief Executive Officer]

Okay. Good afternoon, Andreas. Thank for your question. I'll let Bill discuss working capital and briefly comment on devaluation and I'll talk about the outlook for Catalyst.

[Bill Collins, Chief Financial Officer]

Yes. Thank you, Andreas. If I look at the net working capital progression, we saw improvement in the second quarter and the first-half of this year, largely due to a smaller increase in overall net working capital, lower increases in inventory, but also, as you correctly pointed out, also decreases in receivables and payables, which you would expect in this type of environment.

With respect to inventory specifically, we have some of our businesses which are doing really quite well with regard to managing inventory levels in this period of lower volumes. We do have a business or two that is struggling with that, at this point, at the end of Q2, but keep in mind that through the end of Q1 and even the early days of Q2, we had expected still the second-half recovery, and our inventory levels reflected that. Now that we sit at the end of Q2, and we don't see this recovery coming in the second-half of this year, we're pushing those businesses very, very hard to make sure that we reduce the inventory levels accordingly.

While I'm on the line and because it actually relates to the whole inventory devaluation topic, so as you well know, as raw materials are rapidly increasing, that gave us quite some uplift in our P&L in the second quarter of last year. The flipside occurs when you start to see the raw material prices decline as they have rather precipitously in the second quarter of this year. So we went from having an uplift in the second quarter of last year to EBITDA to having a negative impact on EBITDA this year. In terms of the overall impact, we're probably maybe talking about -- it's probably a double-digit number, but it's not something we're really going to go into by business.

[Conrad Keijzer, Chief Executive Officer]

Okay, Bill. So let me briefly comment on Catalyst. So first of all, we obviously are extremely pleased with the current performance in Catalyst where we delivered to 30% growth in the second quarter, 25% volume, but also very important, 5% pricing. So where we see the growth right now, and this is also very positive, is in the PDH units. So it is actually CATOFIN sales that are driving the growth, but we also actually see very strong growth in our syngas business.

So we have actually been awarded projects in terms of ammonia for, let's say, traditional ammonia, considering the high gas prices, customers really are willing to pay for the best and the most efficient catalysts. But we've also been awarded projects actually for green ammonia. So the large projects that have been announced in Australia, in Oman, we will actually supply the catalysts for these projects.

Further, important to note for our syngas business, if you also basically look, this is something we're extremely proud of. It's actually the first green methanol in Europe, in Denmark, which is starting up now, 30,000 tonnes of green methanol, which is going to be used actually for green shipping fuel, a climate-neutral shipping fuel for A.P. Moller-Maersk. They have 20 ships on order. Here, again, uniquely supplied by Clariant Catalyst. So I think both the current performance we're very pleased with, but also the order book for the remainder of the year very solid. So it is all about the delivery of the order book. I think you will see this year, Andreas, a more balanced distribution between Q3, Q4.

Normally you saw relatively strong Q4, a much weaker Q3. Here that is more evenly balanced this year. And finally, maybe in terms of the profitability, yes, for the second quarter, the EBITDA margin increased to 15.2% from 5.6% last year, a nice pickup. If you take out sunliquid, we have now an EBITDA margin in the second quarter of 21.3% for Catalysts, and I think you should be able to expect margins around 20% or so for the remainder of the year.

[Andreas Heine, Stephen]

Thanks a lot, that’s helpful.

[Operator]

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

[Christian Faitz, Kepler Cheuvreux]

Yes. Good afternoon, everyone. Two questions if I may. First of all, related to working capital evolution, how do you see the free cash flow evolution into year end? If you could give us any rough idea from here on?

Second would be, I understand that agrochemical precursors are a rather important portion of your Care Chemicals activity. The demand issues you had in Q2 were understandable, but how is demand going at present with the Brazilian season being in full swing? Thank you very much.

[Conrad Keijzer, Chief Executive Officer]

Yes. Thank you, Christian, I'll let first Bill comment on OWC and then I'll comment on agrochemicals.

[Bill Collins, Chief Financial Officer]

Yes. As I just mentioned in the response to Andreas that we would continue to expect inventory levels to further improve as we move throughout the balance of the year. So from an overall working capital perspective, I feel pretty good actually in terms of the direction that we have. In terms of where we're going to land on cash for the end of the year, well, that's probably a more difficult one. But I will say that we do expect still solid free cash flow for the balance of the year.

I would say that from a cash conversion standpoint, and this goes back to even guidance that we had given before, the overall percentage will likely be less this year than what we had seen in 2022. But I still expect it to be very strong. We've put enormous focus on cash throughout the organization really over the course of the last year.

And I think we've got some really positive momentum there and the working capital figures, the cash flow figures is something that we talked about in our meetings at every executive leadership team, with all of our businesses on a monthly and quarterly basis. So again, I think we'll make sure that we land the end of the year with a strong free cash flow position.

[Christian Faitz, Kepler Cheuvreux]

Thank you, very much.

[Conrad Keijzer, Chief Executive Officer]

Thank you, Bill. Yes, Christian. So on your second question on crop solutions, maybe good to put this a little bit in perspective. So this is for us an important segment that's very attractive, but it's obviously within Care Chemicals by far not as large as personal care and home care. What we've basically seen in crop solutions, since last year, we had a very strong year, very strong volumes as well as pricing and conditions were, at least for crop protection chemical sales, close to perfect, and both from a volume and a pricing point of view. What we see actually this year is that in terms of volumes, they're not as strong as last year.

So if you look at basically the conditions, the weather conditions, particularly in North America, a very hot environment, and these are not the optimal conditions for spraying out, so slight reductions here on volumes. But the bigger issue for crop solutions this year is really destocking. So we actually have in this business very long distribution channels all the way down to the farmers.

As you can imagine, last year with the very high demand but also, quite frankly, the high inflation that everybody experienced in this supply chain, we had very well filled channels all the way up to the farmer. And what we're seeing now is a massive destocking which really begun also saw a little bit later than in the other segments. It really begun in Q1, and it did continue into the second quarter. And actually we still see that the supply chains are well filled. So this is one of the few segments actually, Christian, where we'll continue to see some destocking in the third quarter.

But again, the underlying conditions are still very robust. The farmers are doing very well and actually we will see continued demand. When actually this destocking is behind us, we will see continued strong demand.

[Christian Faitz, Kepler Cheuvreux]

Thanks very much. Congrats.

[Conrad Keijzer, Chief Executive Officer]

Thank you, Christian.

[Operator]

The next question comes from Matthew Yates from Bank of America. Please go ahead.

[Matthew Yates, Bank of America]

Hi, good afternoon. Sorry, Bill, just to come back to the inventory devaluation in Care Chemicals, why can't you be more specific about that number? Is that commercially sensitive or it's just difficult to quantify? I don't understand why that number can't be disclosed.

[Conrad Keijzer, Chief Executive Officer]

Yes, Matthew, this is Conrad here. You haven't seen I think -- anybody, frankly, in chemicals disclosing exact inventory deval, nor have you heard the exact numbers on purchase price variances. Obviously the two balance each other out. So as Bill explained when the raw material prices come down, yes, you first get a hit on your inventory. But that actually balances out completely with your purchase price variances over time.

Now that obviously depends on a number of things like order books, it depends on days of inventory. So yes, if we were to break that down at a granular level for you, that would certainly not be appreciated by our commercial folks because they're still having intense pricing discussions, as you can imagine, at the moment. We have, overall, Matthew, been able to hold our pricing.

In chemicals, you saw a decline of 2%, but you may also have seen our raw materials down 12%. So you can imagine that it is a huge challenge to hold pricing as we're doing right now. We're successful with it. We're happy about it. I think it's a tribute to a lot of hard work by also our commercial colleagues in the fields. But it's also the specialty chemicals portfolio that really delivers value to our customers and they're willing to pay for that.

[Matthew Yates, Bank of America]

Okay. Second question. If I can ask about additives, I think you said that volumes were down in the low 30s or sales were down low 30s, forgive me. I guess additives go into an awful lot of different applications and end markets, so this might be difficult. But how are you thinking about the degree of inventory that your customers are sitting on or how are you seeing the order book evolve in recent weeks and months to understand that huge decline, at 1 point we start to see a normalization or a pickup?

[Conrad Keijzer, Chief Executive Officer]

Yes. Matthew. So if you look at additives, you're absolutely right. It's a very broad set of applications and end markets. If you look at the big categories, so we have additives for paints and coatings, we have additives for adhesives, and we have additives for plastics. What you are seeing is destocking, just as we see in Care Chemicals. But we're also actually seeing weak underlying demand, so that is clearly a big factor in our additives business as well. So very briefly, if you look at paints and coatings, we actually see weak demand, particularly for industrial coatings. And actually there's weakness even in architectural coatings, considering the housing markets, which have been stronger in the past. So there is a certain weakness in paints and coatings.

Then there is actually much more weakness in additives for adhesives. A lot of these find their application in furniture and that is actually things like wood furniture, but there's also things like, for example, components of the beds, mattresses, these are glued with adhesives and actually Clariant supplies solvent-free adhesives. It's normally a great product with great sales, our Licocene range. But you may have seen numbers of companies like IKEA, the mattresses sales were high during COVID. But as you can imagine right now people spend most of their time outside their houses and are not buying new mattresses. So this is really big -- we see big declines there in that segment.

And finally where we see even bigger declines is in consumer electronics. So here, again, a shift in consumer spending during COVID when people were in lockdowns, they were buying new cell phones, they were buying new computers, they were actually watching Netflix and buying new television sets. And we have seen actually now significant declines in this segment for cell phones. Yes, the number was basically down 18% in production rates in the first quarter.

In the second quarter, the estimates are around minus 11%. So if you if you sort of wrap it up, in additives, yes, we have seen destocking, but we've also seen a serious reduction in demand due to this switch in consumer spending. Now that will come back. So we're very confident that these volumes come back. But we first not only need to see the destocking to a full end, which actually we think has ended in these segments. But we also need a pickup in consumer demand and that needs a few quarters before consumer demand balances out, where now people spend their money in restaurants, on travel, in hotels, and not so much on durable goods. But over time this will come back.

[Matthew Yates, Bank of America]

Thanks very much.

[Conrad Keijzer, Chief Executive Officer]

Thank you.

[Operator]

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

[Markus Mayer, Baader-Helvea]

Good afternoon, gentlemen. Sorry to come back on this inventory devaluation in Adsorbents & Additives. Was mainly related to phosphorus chemicals and therefore flame retardants? That would be my first question.

And then related to this high inventory levels, as you said that you expect their recovery in the second-half. I guess these inventories are on higher prices than the current price levels. So is there still then the effect that basically you're walking through this inventory levels and then the real gross margin improvements from lower raw mats only kicking in, in maybe third or in particular maybe fourth quarter of this year?

And then lastly, maybe a stupid question, but what was the difference of the expected EBITDA range you gave when you pre-released versus the actual reporting, what was basically the moving part there? Thank you.

[Conrad Keijzer, Chief Executive Officer]

Yes, Markus, I'll let Bill comment on inventories and the development that we expect to see in the second-half. And then also I think, Bill, you can comment on the EBITDA delta between our trading update and where we now are. I'll then take the flame retardant and also once again this inventory devaluation question.

Yes, so basically, I think on inventory devaluation more broadly, you are correct, Markus. So you first have the deval in inventory, but it gets corrected one-on-one in the purchase price variances and that's basically all we can say right now about it. Then actually, you're very specific question. On inventory devaluation in additives on flame retardants. Yes, I think it's fair to say, and you're well informed here, that last year we saw a very significant cost increase in phosphorus materials, particularly yellow phosphorus there had been shortages at some point in time because of shutdowns of mines in China.

So it is fair to say that we see the biggest inventory devaluation in those businesses, obviously, not only that have the highest inventory, but also that have the biggest reductions in raw material costs. And indeed your assumption is right that we are seeing quite some reductions on the procurement cost here of the phosphorus materials. So with that maybe, Bill, if you can comment on the inventory developments in the second-half and also these EBITDA deltas?

[Bill Collins, Chief Financial Officer]

Yes. Let me start with the EBITDA delta. So we had projected an upper range of CHF165 million. We came in at CHF175 million. The difference was really two items: one, the expected gain on the Quats business came in a little higher than what we had originally expected at the end of June, and our Catalyst business had really a phenomenal shipment pattern in the last couple days of June itself. So those are really the two reasons that why we ended up being higher than what we had in the original projections. The other businesses were spot on.

Coming to the inventories. So if I start with the notion that you expressed that the inventory values in certain products would be inflated because they were produced at times that there was a higher raw material cost, the reality is that because of the inventory revaluation process, we actually relook at the value of our inventories on the basis of the lower of cost or market. It's basic IFRS guidelines. So in those cases, if we produced a product that sits in inventory, when raw materials or labor costs were in fact higher, this revaluation process actually reduces the value of that inventory to current market, and then we take either the hit or the benefit in the P&L at that time.

So now that we've done that through the end of Q2, anything that we sell going forward in Q3 and Q4 to bring those inventory levels down will in fact represent a margin that's reflective of the current market pricing for raw materials. Does that answer your question?

[Markus Mayer, Baader-Helvea]

Yes, understood. Only add-on question on this. So basically, you're not taking the average prices. So the moving average basically take then the price at the end of the reporting period, correct?

[Bill Collins, Chief Financial Officer]

It's a little more complicated than that. We don't take last price paid. We do take an average, but yes, we take an average, not last price paid.

[Markus Mayer, Baader-Helvea]

Okay. Thank you.

[Operator]

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

[Jaideep Pandya, On Field Research]

Yes, Hello. Yes, hi. The first question is on sunliquid actually. What if the strategic options review process? Where are you guys at? And let's say you do go ahead and decide to exit this, what is the minimum cutoff? Are you going to expect the replacement value of the CHF100 million CapEx that you spend? There are market rumors that some of the renewable companies might be interested in M&A. So just want to understand given that we are only six months away now from you giving an update on this, where is the plan B on sunliquid and what happens if you exit the business? What happens to the licenses that you have sold to the four, five plants? Can you keep that or do you have to forgo that as well? That's my first question.

The second question is on Catalysts. Could you give us -- given the visibility of this business, could you give us some color in terms of 2024 outlook? How do you see CATOFIN ramp and then how do you see the other areas like in syngas, in petrochemicals, how do you see growth in that with regards to your new products? Should Catalysts go back to the 7%, 8% growth range next year or could it be even higher because of the momentum CATOFIN has? That's my second question.

[Conrad Keijzer, Chief Executive Officer]

Yes, sure, Jaideep. A lot of questions. Let me start with bioethanol. So, yes, your question on the strategic review and where are we in that process, first, I'd like to actually reemphasize that we're very much committed, and we continue to be committed to a successful ramp. So we are actually very grateful to the team, the task force that is working on this for the achievements that they've actually realized also in the second quarter. The burn rate is now minus CHF10 million in the quarter. That's actually down from CHF13 million in the first quarter, and that was actually down from a burn rate of CHF20 million a quarter in Q4 last year, and I believe it was a similar amount around CHF20 million or so in Q3. So we've basically cut the burn rate in half, and we continue to obviously make these improvements moving forward.

Now as far as the strategic review, this is not so much new. We never intended to own a bioethanol plant. So that is the second question you were asking, what happens to the license business. Well, those are separate businesses. We are very much interested in the license business. We have a unique technology here, but the plant was only built basically as a demonstration of the technology. So that also maybe leads into the question about strategic review and who would be the right partners for this?

Well, we would only partner with someone who actually has the same commitment as us to basically further ramp this up because that is basically for us the objective. And yes, so in terms of your specific questions on replacement value, yes, for us the much more strategic question is who is the right strategic partner that we basically can team up with to make this technology a success.

Yes, as far as your second question on Catalysts, can we continue to see the growth rates moving forward. I think what is very interesting on the Catalyst business is that you have both volume question here as well as a mix question. And what we're very happy with is that. The areas that we find the most interesting, which is petrochemicals and syngas, are also the areas where we actually have most traction right now. That's not a coincidence. We have prioritized these areas. We mentioned that already back at our Capital Markets Day.

And if you look more specifically propane to propylene, there's a continued very strong momentum. You will see a shift, so basically we initially were having a lot of newbuild projects in China. We are seeing the shift we see actually now, a lot of interest and also concrete projects in the Middle East. Yes, but that continues to run very well.

Then on syngas that is actually what I mentioned the efficient catalysts and reliable catalysts for ammonia, for methanol production, and here we've seen also a very strong pipeline coming in. Short-term, this is more gray and blue hydrogen, but actually longer term this is all going to be green hydrogen to a large extent. So, yes, short-term strong momentum; medium term you see a continuation and long-term you really see the green hydrogen economy picking up.

[Jaideep Pandya, On Field Research]

Can I just ask 1 follow up on sunliquid? Just wanted to check on what is the status with the Shell contract. You I think earmarked that you will sell 50,000 tonnes. So are you selling any volume right now? And what is the patience level from their side with regards to the contract.

[Conrad Keijzer, Chief Executive Officer]

That last question is a question you should ask them and not me. I can only say that the relationship with Shell is very strong and it's a strategic relationship. Both parties are pleased with this. Obviously, there is a commercial sensitivity in terms of specific sales volumes and values, but yes, we are selling to Shell if that was your question. The volumes that we produce in this plant go to Shell.

[Jaideep Pandya, On Field Research]

Thank you so much and good luck with it. Thank you.

[Bill Collins, Chief Financial Officer]

Thank you.

[Conrad Keijzer, Chief Executive Officer]

Thank you, Jaideep.

[Operator]

The next question comes from Andy Schneider from [Zed Capital] (ph). Please go ahead.

[Unidentified Analyst]

Hi, gentlemen. My first question would be again on the inventory devaluations. Bill, you mentioned earlier a double-digit million number that's for H1, right?

[Bill Collins, Chief Financial Officer]

Sorry, it’s double-digit for Q2.

[Unidentified Analyst]

For Q2, okay. And for H1 that would be. Then somewhere around CHF10 million, CHF20 million plus?

[Bill Collins, Chief Financial Officer]

Well, I would say it accelerated in Q2 because that's when we saw the most rapid declines in raw materials. We had a lot more stability in raw material prices in Q1 of last year -- this year. Plus, keep in mind, too, that we're talking about a delta year-over-year, where you had a very significant uptick last year in raw material prices, you see not quite a corresponding downturn in raw materials but it's quite significant what we would expect going forward is for that impact to abate. The amount of inventory revaluation that we saw in the second-half of last year was much more muted because raw materials had basically, for the most part, capped out at the top of Q2.

[Unidentified Analyst]

But the total amount of devaluations in H1, can you give us a number or approximately?

[Bill Collins, Chief Financial Officer]

No, I'm afraid we can't.

[Unidentified Analyst]

Okay. And then the question which might be related to that. If I take out the Catalyst business and look just at the other businesses then, I see a huge margin decrease from not '22, of course, but from 2021 to now H1 2023. Also, when I look at your guidance, I see a 300-plus basis point decrease in the adjusted EBITDA margin for the rest of the business ex Catalyst and ex divestments. And I fail to understand why there is such a big drop? And in my opinion, inventory devaluations are not explaining everything there. Can you help me there a little bit.

[Conrad Keijzer, Chief Executive Officer]

Yes, Andy, let me make some high level comments, but Bill can fill in with more detail. So yes, it's a fair comment. Our margins are down, but this is frankly the situation in the entire chemical industry right now. We are actually seeing significant challenges with volume. Our volumes are actually minus 5% year-on-year. To put it in a broader perspective, if you look at the raw material increases that we've seen in all the recent quarters, we have all more than offset them actually through pricing. So we actually finished this quarter, nine consecutive quarters where we had actually positive pricing year on year, and we have actually been very successful. So you're looking at the contribution margin line, we've actually been very successful in offsetting that entire increase.

Now what you're now seeing is raw materials down; energy, freight down, so we're talking 12% down on raw materials and roughly 2% on freight and energy. And for us, now we try to hold on to prices as much as possible to basically offset, and now I come to that, the negative operating leverage. So what you are seeing from volumes is negative operating leverage. Now what have we done here? Andy, you remember our Capital Markets Day, November 2021, where we announced the target cost savings program of CHF110 million.

Now that was to a large extent focused on addressing also remnant costs from prior divestments. But actually we've increased that target last year from CHF110 million to CHF160 million, CHF50 million entirely coming from the delayering of the company, taking out duplicating managerial roles. And actually, what we find right now and actually you do see that even in the volumes because if you look at the businesses, we're not actually coming down as much as the overall market, so we are much closer to our customers, much closer to our sites. We can actually decide much quicker, with a much better level of accountability in the company.

Now that said, the overall cost savings target is CHF160 million. This quarter, what we said in response to the lower volumes is we're going to further increase the target from CHF160 million to CHF170 million, and that actually addresses very much the lower volumes that we see in plants and in operations. So we have a total program of CHF170 million. What is important to know is we've already delivered CHF107 million out of this cost savings program.

So what you will see? Is actually when volumes return, and they will return, that we have a tremendous operating leverage. And yes, there is the saying, never waste a good crisis, but we clearly in Clariant will come out of this much stronger than how we went in because we've structurally and fundamentally improved our cost base. And we've done it, actually, by not damaging anything in the company. We've not saved anything on R&D. We continue to invest in innovation. It's primarily managerial roles that we've taken out with these new programs. So we will see a tremendous operating leverage.

So yes, please we are in a challenging situation. There have been more than 15 profit warnings in chemicals in the recent weeks. So yes, margins are down, Andy. But please compare it with competitors and take a look at the underlying things that we've done to improve the company. Maybe Bill, if you have any additional details, you can feel free to add.

[Bill Collins, Chief Financial Officer]

No, I think you said it very, very well. The decline in volumes in certain of our businesses, specifically Care Chemicals and on Additives has really been very substantial with regard to the operating leverage. Not to be too much of an accountant here, but it's really your fixed burden absorption that has a very significant impact. And when we thought those volumes were coming back, you don't make as many adjustments, but now we're in an environment where we need to make adjustments.

As Conrad mentioned, we have upped our cost program for the coming year to really optimize on that. And I would say, and again to echo what Conrad was saying is, the silver lining in this low-volume environment is the fact that it really exposes where we still have a lot of opportunities. And we're really capitalizing on those. You see it coming through in the performance programs, not only the overall targets that we have, but also the realization that we're seeing on the savings, so that when the volumes do come back, whenever that is, we are in phenomenally strong shape, so when the volumes come, we're ready.

[Unidentified Analyst]

I can see that. I can totally see that the volumes came down heavily in this year versus last year, but that's why I compared H1 '23 versus H1 '21. And compared to '21, volumes haven't come down because they went up each year. Last year, probably you reported 11% in H1 last year and some of that was M&A, but it didn't come down that much versus '21, if at all. And still there is quite a big margin drop, which I can only explain by a mix effect or really, really high inventory devaluations or probably something else you can tell me.

[Bill Collins, Chief Financial Officer]

Well, and I'll throw back to Conrad in a minute. But the mix is an issue this year because if you look at where we had some of our strongest margins last year, Care Chemicals, personal and home care was doing phenomenally well this time last year, so was Additives. We were really killing it on Additives this time last year. And those are the businesses, the highest margin businesses are the ones that are suffering the steepest volume declines sitting here in 2022. So that mix effect is substantial.

And even if you look at it within the Additives & Adsorbents business unit, the fact that functional minerals remain so strong creates part of that mix effect even there as well. So you're exactly right on the mix because the businesses that are doing particularly well right now aren't necessarily our strongest margin businesses, but compared to 2021, again...

[Conrad Keijzer, Chief Executive Officer]

I can comment on that. It was also before your time, Bill. So basically the comparison to 2021, what is important to realize, Andy, is first of all, if you look 2021-2022, we actually were up substantially in Care Chemicals as well as in Adsorbents & Additives. The problem last year were basically two areas. It was Catalyst and it was also our biofuels business. If you now look where we are this year...

[Unidentified Analyst]

Yes, but I took that out. I took that out. I took that out of my calculations. I'm just talking about the rest of the business.

[Conrad Keijzer, Chief Executive Officer]

Well, if you strictly look Care Chemicals and Additives, they were both actually up substantially in EBITDA margins last year versus 2021. So yes, that is the reality. And then if you look this year, what we see is that we're certainly not out of the woods yet with biofuel, but we are coming back on that also later in the year. But in catalyst, you actually do see the recovery in the second quarter really that was building already in prior quarters, so yes.

[Unidentified Analyst]

Yes, that recovery is quite impressive. It would be really great for 3Q probably if you could give us some more numbers on the mix effect because it's a little bit hard to understand what happened. But thank you.

[Conrad Keijzer, Chief Executive Officer]

We report by segments. We report by segments so you can see actually the EBITDA development by segment. But we certainly can try to provide even more granularity in Q3.

[Unidentified Analyst]

That would be great. Thank you.

[Conrad Keijzer, Chief Executive Officer]

Thank you.

[Operator]

The last question for today's call is a follow up from Markus Mayer from Baader-Helvea. Please go ahead.

[Markus Mayer, Baader-Helvea]

Yes. Thank you. Coming back to Catalyst and also related to Andy's question. So you now have an underlying margin of 21% in the second quarter, which is normally not a strong quarter for Catalysts as Q3 and in particular Q4 are the strongest quarters. And this '21 underlying margin was despite the potential negative product mix effect from syngas catalysts, which normally have a lower margin even if you have high business in petrochems, which have a higher margin.

So we had this theme again or this question over the last calls as well. What is again the underlying margin you're targeting the Catalyst business for? As far as I understood, the high margin joint venture business was sold to SABIC and therefore a certain EBITDA margin from the past is missing. So therefore, again, the question should we now think that this above 20% level maybe 20% to 23% is the new kind of level you should look for, or is there more upside to above the 25% level we have seen in the past?

[Conrad Keijzer, Chief Executive Officer]

Markus, so I think you pointed out correctly. So there is basically two factors that drive profitability in Catalysts, and that is very much volumes, so operating leverage, and it is also mix. Well, if you look at them individually, what you see in the second quarter is obviously a significant sequential improvement in volumes versus Q1. But what you also see is actually a mix that's working really well for us.

So to your question on margins or your observation on margins in syngas and fuels versus CATOFIN and the rest, actually, yes, we see strong margins for CATOFIN, for propane to propylene. But we also actually see strong margins for syngas. The 1 that is actually lower in margins is what we refer to as specialty catalysts. These are things like emission control, particularly for transportation, and these are weaker in margins typically. So we actually are very pleased with the mix that we see right now.

If you then look at Q3, Q4, so let me first mention that second quarter indeed was unusual strong. I think Bill made the comments that we also saw even some orders earlier coming in from the third quarter. But we expect Q3 and a Q4 even slightly above what we saw in Q2. So with that, we think that you can expect margins around 20% in the remainder of the year.

[Markus Mayer, Baader-Helvea]

But is this then a level do you also feel confident for the future or is there further upside as now taking all the negative effects from sunliquid away and all the problems we had with the polypropylene ramp up, et cetera, et cetera, so should we also get go towards the 25% level or is it something around 20% plus?

[Conrad Keijzer, Chief Executive Officer]

Yes. I think you mentioned yourself the very profitable joint venture that we had for EO Catalysts that was divested back to SABIC, so that is not in anymore, so it's not really apples and apples, but we are actually very comfortable with right now the performance around 20%, and we are committed to bring it above that on a like-for-like basis.

[Markus Mayer, Baader-Helvea]

Okay, thank you.

[Conrad Keijzer, Chief Executive Officer]

Thank you.

[Andreas Schwarzwaelder, Head, Investor Relations]

So thank you, ladies and gentlemen. This concludes today's conference call. A transcript of the call will be available on the Clariant website in due course. The Investor Relations team are available for any further questions you may have. Once again, thank you for joining the call. Enjoy the summer and goodbye.