Ladies and gentlemen, welcome to the Clariant Second Quarter First Half Year Results 2023 Conference Call and Live Webcast. I am Sandra, the call's call operator. I would like to remind you that all participants are in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Andreas Schwarzwälder, the Head of Investor Relations. Please go ahead, sir.
Thank you, Sandra. Ladies and gentlemen, good afternoon. My name is Andreas Schwarzwälder, 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.
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 CHF 1.1 billion Swiss francs, a 7% decrease in local currency versus the second quarter of 2022. Although these figures reflect a strong performance in our catalyst business unit, the challenging macroeconomic environment significantly impacted sales and profitability development in our other two business units: Care Chemicals and Adsorbents and Adhesives. Adsorbents and Additives. Sorry. This resulted in EBITDA of CHF 175 million Swiss francs, reflecting a 19% decline versus the second quarter 2022, and resulting in a 16.1% EBITDA margin. Economic conditions have worsened in many geographies. This has led to lowered expectations and revised forecasts for the remainder of 2023.
The European Chemical Industry Council, CEFIC, expects the EU 27 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, while the 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 -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 CHF 78 million in the first half, which is almost CHF 100 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 CHF 1.1 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 absorbents and, and 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, and 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 9 consecutive quarters with notable year-on-year price increases, we reported flat pricing year -on -year. Both catalysts and absorbents and 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 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 attapulgit e business assets in absorbents and additives, and the divestment of both the North American Land Oil and Quats businesses in Care Chemicals totaled CHF 29 million, which had a -2% impact on the group's sales in the Second Quarter. The currency impact on revenue of -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 6 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, absorbents and 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 absorbents and adhesive 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 absorbents and additives demands and a decline in catalysts were not compensated by slightly higher Care Chemicals sales. Moving to the profitability development on slide 7, we see that second quarter 2023 EBITDA was CHF 175 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 absorbents and additives negatively impacted profitability, partially compensated by higher volumes and prices in catalysts and positive pricing in absorbents and additives. In Care Chemicals, the positive impact of the CHF 62 million gain from the Quats disposal was offset by lower operating leverage, inventory devaluation, and CHF 6 million restructuring costs. The strong volume increase and positive pricing in catalyst was partly offset by CHF 17 million impact from Sunliquid, of which CHF 7 million were restructuring charges. While price increases had a positive impact in absorbents and additives, EBITDA was negatively impacted by lower operating leverage in additives, inventory devaluation, restructuring charges of CHF 7 million, and a less favorable business mix due to the sales growth in absorbents. We continue to deliver on our strategic priorities as reflected on slide 8.
Our Sunliquid task force is delivering continued improvements in Podari. The negative impact was further reduced to -CHF 10 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 CHF 7 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 CHF 10 million to a new improved goal of CHF 170 million. As of the end of Q2 2023, we have delivered total savings of CHF 107 million from our performance programs across the company. The cost savings realized in the second quarter were approximately CHF 14 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 CHF 62 million.
On slide 9, 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 the 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 AmmoMax-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. AmmoMax-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 Desipac 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 three emissions, the sourcing of raw materials has been extended with a lower environmental impact to include transport packaging. In addition, Clariant Oil Services launched Phase Treat Wet to offer more efficient, more sustainable solutions for the oil and gas industry's demulsification needs and to enhance safe operations. Phase Treat 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.
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 America 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 CHF 62 million gain from the Quats disposal. Underlying profitability levels were impacted by notably reduced volumes, which resulted in lower operating leverage. Inventory devaluation and additional CHF 6 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 % rate, driven by the new Catafin 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 CHF 17 million negative Sunliquid impact, of which CHF 7 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 - CHF 10 million, compared to - CHF 13 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, absorbance and additive 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. attapulgit e business. The positive trend in absorbance 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 CHF 7 million, whilst the strong absorbance 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 CHF 14 million in the second quarter from performance programs. We have increased our total 2025 cost savings target by CHF 10 million to CHF 170 million. Thus far, savings of CHF 107 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 CHF 2.3 billion, compared to CHF 2.6 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. The first half year of 2023, EBITDA decreased by 22% to CHF 342 million, negatively impacted by lower volumes, the - CHF 23 million impact from Sunliquid, the -CHF 11 million impact fair value adjustment of the Heubach Group participation in the first quarter, restructuring charges of CHF 20 million, as well as inventory devaluation. Pricing effects overall remained positive.
Raw material costs decreased by 5%, and the execution of the performance improvement programs resulted in additional cost savings of CHF 22 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 CHF 230 million, versus CHF 189 million in first half, 2022. The net result was lifted by the strong business performance in catalysts, the CHF 62 million Swiss franc 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 CHF 78 million from the - CHF 17 million as a result of active working capital management.
The net cash used in financing activities was - CHF 423 million Swiss francs in the first half year, 2023, compared to - CHF 419 million in H1 2022, driven by the annual distribution to shareholders and financial debt repayment. Group net debt increased to CHF 908 million Swiss francs from CHF 750 million due to the payment of the shareholder distribution. With this, I close my remarks and hand back to Conrad.
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 7th, for full year 2023. We expect sales of between CHF 4.55 billion -CHF 4.65 billion. We expect a net top-line impact of around CHF 150 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 CHF 650 million-CHF 700 million, which implies an EBITDA margin range of 14.3%-15.1%. We expect continued growth in Catalysts 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 a 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 CHF 220 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.
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. Sandra, please go ahead.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands if you're asking a question. Anyone with a question may press star and one at this time. Our first question comes from Andreas Heine from Stifel. Please go ahead.
Yeah, let's start on this two. The first is actually on the networking 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 networking capital going forward, especially inventories, which seems to be still up in the first half. Secondly, on Catalyst, could you elaborate what 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 and Care Chemicals, could you quantify them, please?
Okay, good afternoon, Andreas, thanks for your questions. I'll let Bill discuss working capital and briefly comment on devaluation, and I'll talk about the outlook for Catalyst.
Yeah, thank you, Andreas. If I look at the networking capital progression, we saw improvement in the second quarter, in the first half of this year, largely due to a smaller increase in overall networking capital, lower increases in inventories. 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.
Keep in mind that through the end of Q1 and even the early days of Q2, we had expected still this 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, 'cause it actually relates to the whole inventory devaluation topic. As, 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 flip side occurs when you start to see the raw material prices decline as they, as they have, rather precipitously in the second quarter of this year. 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, I mean, we're probably maybe talking about, I mean, it's probably a double-digit number, but it's not something we're really gonna go into, by business.
Okay. Thank you, Bill. Yeah, let me briefly comment on Catalyst. First of all, we obviously are extremely pleased with the current performance in Catalyst, where we delivered 30% growth in the second quarter, 25% volume, but also very important, 5% pricing. Where we see the growth right now, and this is, this is also very positive, is in the PDH units. It is actually Catalfin sales that are driving the growth. We also actually see very strong growth in our syngas business. 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. We've also been awarded projects actually for green ammonia.
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, and this is something we're extremely proud of, is actually the first green methanol plant in Europe, in Denmark, which is starting up now. 30,000 tons of green methanol, which is gonna be used actually for green shipping fuel, a climate neutral shipping fuel for A.P. Moller - Maersk . They have 30 ships on order. Here again, uniquely supplied by Clariant Catalyst. I think both the current performance we're very pleased with, but also the order book for the remainder of the year, very solid. 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 a relatively strong Q4, a weaker, much weaker Q3. Here, that is more evenly balanced this year. Finally, maybe in terms of the profitability, for the second quarter, the EBITDA margin increased to 15.2% from 5.6% last year. A nice pickup. If you take out some liquids, we have now an EBITDA margin in the second quarter of 21.3% for Catalyst. I think you should be able to expect margins around 20% also for the remainder of the year.
Thanks a lot. That's helpful.
The next question comes from Christian Seitz from Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, everyone. Two questions, if I may. First of all, kind of related to working capital evolution, how, 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, the Brazilian season being in full swing? Thank you very much.
Yeah. Thank you, Christian. I'll let first, Bill comment on OWC, and then I'll comment on agrochemicals.
Yeah. As I just mentioned, in, in the response to Andreas Schwarzwälder, that we, we would continue to expect inventory levels to further improve as we move throughout, throughout the balance of the year. From an overall working capital perspective, I, I feel, I feel pretty good, actually, in terms of, of the direction that we have. In terms of where we're gonna land on cash for, for the end of the year, well, that's, that's probably a more difficult one. 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. I mean, we've put enormous focus on cash throughout the organization really over the course of the last year. I think we've got some really positive momentum there. The working capital, the working capital figures, the cash flow figures are something that we talk about in our meetings at every executive leadership team with all of our businesses on a monthly and quarterly basis. Again, I think we'll make sure that we land the end of the year with a strong free cash flow position.
Thank you very much.
Thank you, Bill. Yeah, Christian, on your second question on, on crop solutions, maybe, maybe good to put this a little bit in perspective. This is, for us, an important segment. It's very attractive, but it's obviously within care chemicals, by far not as, as large as personal care and home care. What we've basically seen in, in crop solutions is last year, we had a very strong year, very strong volumes, as well as pricing and conditions were, were, at least for crop protection, chemical sales, close to perfect, and, and both from a volume and a pricing point of view. What we see actually, this year is, that, that in terms of volumes, they're, they're not as strong as last year.
If you look at basically the conditions, the weather conditions, particularly in North America, heat, a very hot environment, and these are not the optimal conditions for spraying out. Slight reductions here on volumes. But the bigger issue for crop solutions this year is really destocking. 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. What we're seeing now is a massive destocking, which really begun also 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, that the, that the supply chains are, are well filled. We, this is one of the few segments, actually, Christian, where we'll continue to see, some destocking in the third quarter. Again, the, the underlying conditions are still very robust. The farmers are doing very well, actually, we will see continued demand when actually, this destocking is, behind us. We will see continued strong demand.
Thanks very much, Conrad.
Thank you, Christian.
The next question comes from Matthew Yates from Bank of America. Please go ahead.
Hi, afternoon, everyone. 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.
Yeah, yeah, Matthew, this is, this is Conrad here. You, 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. I mean, obviously, the two balance each other out. 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. That obviously depends on a number of things, like order books. It, it depends on days of inventory. 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 care chemicals, you saw a decline of 2%, but you may also have seen our raw materials down 12%. 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.
Okay. Several questions. If I can ask about additives. I think you said that volumes were down in the low 30s or sales were down in the low 30s, forgive me. I, 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, you know, that, that huge decline at one point, we start to see a normalization or a pickup?
Yeah. Thank you, Matthew. Yeah, if you look at additives, you're, you're absolutely right. It's a very broad set of applications and end markets. If you sort of look at them, sort of the, the big categories is 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, we're also actually seeing weak underlying demand. That is clearly a, a big factor in our additives business as well. Very briefly, if you look at paints and coatings, we actually see weak demand, particularly, particularly for industrial coatings. Actually there's weakness even in architectural coatings, considering the, the housing markets, which, which, which have been stronger in the past.
There is a certain weakness in paints and coatings. 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 it'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 Lyocell range. You may have seen numbers of companies like IKEA. I mean, the mattresses sales were high during COVID, as you can imagine, right now, people spend most of their time outside their houses and are not buying new mattresses. This is really big. We see big declines there in that segment.
Finally, where we see even bigger declines is in consumer electronics. 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, and buying new television sets. We have seen actually now significant declines in this segment for cell phones. The number was basically down 18% in production rates in the first quarter. In the second quarter, the estimates are around -11%. 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.
That will come back, so, we're very confident that these volumes come back. Yeah, 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. Over time, this will come back.
Thanks so much.
Thank you.
The next question comes from Markus Mayer, from Baader Helvea. Please go ahead.
Good afternoon, gentlemen. Sorry to come back on this inventory devaluation in absorbents and additives. Was this mainly related to phosphorus chemicals and therefore flame retardants? That would be my first question. Related to this, this high inventory levels, as you said, that you expect the recovery in the second half. I guess these inventories are on higher prices than the current price levels. Is there still then the effect that basically you're walking through these inventory levels, and then the real cross-margin improvements from lower raw materials only kicking in maybe third or in particular, maybe fourth quarter of this year? 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.
Yeah, Markus, I'll let Bill comment on inventories and the development that we expect to see in the second half. 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. Yeah, so basically, I think on inventory devaluation, more broadly, you are correct, Markus. 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, we can say right now about it. Actually, your very specific question on inventory devaluation in additives on flame retardants...
Yeah, I, I think it's fair to say, and you're well informed here, that last year we saw the 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. It is fair to say that we see the biggest inventory devaluation in those businesses. Obviously, not only that have the the highest inventory, but also that have the biggest reductions in raw material costs. Indeed, your assumption is right, that we are seeing quite some reductions on the the procurement cost here of the phosphorus materials. With that, maybe, Bill, if you can comment on the inventory development in the second half and also these EBITDA deltas.
Yeah, let me start with the, the EBITDA delta. We, we had projected an upper range of 165. We came in at 175. The difference was really two items. One, the, the expected gain on the quats business came in a little higher than what we had originally expected at the end of June. Our catalyst business had really a phenomenal shipment pattern in the last couple of days of June itself. Those are really the two reasons that why we ended up being higher than what we had in the original projection. The other businesses were, were spot on. Coming to the, the inventories.
If I, 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 higher, or 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, on the basis of the lower of cost or market. It's just, it's basic IFRS guidance. 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 the, either the, the hit or the benefit in the P&L at that time.
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, will in fact, in fact, represent a margin that's reflective of the, the current market pricing for, for raw materials. Does that answer your question?
Yeah, understood. Only, add-on question on this.
Great.
You, 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?
It, it, it's a little, it's a little more complicated that we don't take a, a last price paid. We, we do take an average, but yeah, we, we take an average, not last price paid.
Okay. Thank you.
The next question comes from Jaideep Pandya from On Field Research . Please go ahead.
Yes, hello? Yeah, hi. The first question is on Sunliquid, actually. You know, what is the strategic options review process? You know, where are you guys at? Let's say you do go ahead and decide to exit this. I mean, what is the minimum sort of cut-off like? Are you going to expect the replacement value of the sort of $100 million CapEx that you spent? I mean, there are market rumors that some of the, the renewable companies might be interested in M&A. Just, just want to understand, you know, given that we are only six months away now from you, you giving an update on this, you know, where, where is the plan B on Sunliquid? What happens if you exit the business?
What happens to the licenses that you have sold to the 4 or 5 plants? I mean, can you keep that, or do you have to forgo that as well? That's my first question. The second question is on Catalyst. I mean, could you give us, given the, you know, visibility of this business, could you give us some color in terms of 2024 outlook? How do you see CATOFIN, you know, ramp? 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? I mean, should Catalyst 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. Thank you.
Yeah, sure, Jaideep. A lot of questions. Let me, let me start with bio, bioethanol. Yeah, your question on the strategic review and where are we in that, 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. 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 CHF 10 million in the quarter.
That's actually down from $13 million in the first quarter, that was actually down from a burn rate of $20 million a quarter in Q4 last year, and I believe it was a similar amount around $20 million, also in Q3. We've basically cut the burn rate in half, we continue to obviously make these improvements moving forward. As far as the strategic review, this is not so much new. I mean, we never intended to own a bioethanol plant. 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, the plant was only built basically as a demonstration of the technology.
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. Yeah, so in terms of your specific questions on replacement value, yeah, 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? Yeah, as far as your, your second question on, on catalysts, can we, can we continue to see the growth rates moving forward?
I think what is very interesting on, on the Catalyst business is that you have both a volume question here as well as a mix question. 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. If you look more specifically, propane to propylene, there's, yeah, there's a continued very strong momentum. You will see a shift. Basically, we initially were having a lot of a new, new built projects in China. We are seeing a shift.
We see actually now a lot of interest, and also concrete projects in the Middle East. That continues to run very well. On syngas, yeah, that is, that is actually what I mentioned, the efficient catalysts and reliable catalysts for ammonia production, for methanol production, and here we've seen also a very strong pipeline coming in. Short term, this is more sort of gray and blue hydrogen, but actually longer term, this is all gonna be green hydrogen to a large extent. Yeah, short term, strong momentum, medium term, you'll see a continuation, and long term, you really see the green hydrogen economy picking up.
Can I just ask one follow-up on Sunliquid? Just wanted to check on what is the status with the Shell contract. You, I think, earmarked that you, you will sell 50,000 tons. Are you selling any volume right now? I mean, like, what is the patience level from their side with regards to the contract?
Yeah, that, that last question is a question you should ask them and not, not me. I can only say that the relationship with, with Shell is very strong, and it's, it's, it's a strategic relationship. Both parties are, are pleased with this. Obviously, there is a commercial sensitivity in terms of, of, of specific sales volumes and, and, and values, but, yeah, we are, we are selling to sell-- to Shell, if that was your question. The volumes that we produce in this plant go to Shell.
Thank you so much, and good luck with it. Thank you.
Thank you. Thank you, Jaideep.
The next question comes from Andy Schneider from DED Capital. Please go ahead.
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?
Sorry, yeah, the, it's double digit for Q2.
For Q2, okay.
For Q2, yeah.
for H1, for H1, that would be then somewhere around CHF 10 million, CHF 20+ million?
Well, I, I, I would say, I mean, 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, so where you had a very significant, you know, uptick last year in raw material prices, you see not quite a corresponding down turn in raw materials, but, but, but it's quite significant. What we would expect going forward is for that, that impact to abate.
I mean, 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.
The total amount of devaluations in H1, can you give us the number or approximately?
No, I'm afraid we can't.
Okay. The question which might be related to that, if, if I take out the Catalyst business and all the divestments, and look just at the other businesses then, I see a huge margin decrease, from not 2022, of course, but from 2021 to, to now, H1 2023. When I look at your guidance, I see a 300+ basis point decrease in, 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. In my opinion, inventory devaluations are not explaining everything there. Can you help me there a little bit?
Yeah, yeah, Andy, let me make some high level comments, but Bill can fill in with more detail. Yes, our, it's a fair comment. Our, our margins are down, this is frankly, the situation in the entire chemical industry right now. I mean, we are actually seeing significant challenges with volumes. I mean, our volumes are actually minus 5% year-on-year. To put it in a, in a broader perspective, if you look at the, the raw material increases that we've seen in, in, in all the recent quarters, we have all more than offset them actually through pricing. We actually finished this quarter, nine consecutive quarters, where we had actually positive pricing year-on-year, and we have actually been very successful. You're looking at the contribution margin line.
We've actually been very successful in offsetting that entire increase. what you're now seeing is, is raw materials down, energy freight down, so we're talking 12% down on raw materials and roughly 2% on freight and energy. 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. what you are seeing from volumes is negative operating leverage. what have we done here? I mean, Andy, you remember our capital markets day, November 2021, where we announced a target, a cost savings program of CHF 110 million. that was, to a large extent, focused on addressing also remnant costs from prior divestments.
Actually, we've, we've increased that target last year, from CHF 110 million to CHF 160 million, CHF 50 million entirely coming from the delayering of the company, taking out duplicating managerial roles. Actually, what we, what we find right now, and, and actually, you do see that even in the volumes, because if you look at the businesses, we're not actually coming as down, down as much as the overall market. We are much closer to our customers, much closer to our, our sites. We can actually decide much quicker and with a much better level of accountability in the company. That said, the overall cost savings target is CHF 160 million.
This quarter, what we said in response to the lower volumes is we're gonna further increase the target from 160 to EUR 170 million, and that actually addresses very much the lower volumes that we see in plants and in operations. We have a total program of EUR 170 million. What is important to know is we already delivered EUR 107 million out of this cost savings program. What you will see is actually when volumes return, and they will return, that we have a tremendous operating leverage.
Yeah, there is, there is the saying, "Never waste a good crisis," but we clearly, in Clariant's, 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, yeah, not, 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. We will see a tremendous operating leverage. Yeah, please, we are in a challenging situation. There have been more than 15 profit warnings in chemicals in the recent weeks. Yes, margins are down, Andy, but please compare it with competitors and, 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.
Well, I think you, you said it, 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. I mean, not to be too much of an accountant here, but it's really your fixed burden absorption, that, that has a very significant impact. When we thought those volumes were coming back, you, 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, for the coming year to, to really optimize on that.
I would say, and again, to echo what, what Conrad was saying is, the, the silver lining in this low volume environment is the fact that it really exposes where we still have, you know, a lot of opportunities, and we're really capitalizing on those. You see it coming through in the performance programs, not only the, the overall, targets that we have, but also the realization that we're, that we're seeing on the savings. That when the volumes do come back, whenever that, whenever that is, we are in phenomenally strong shape. I mean, when the volumes come, we're, we're ready.
I can see that. I can totally see that the volumes came down heavily in this year versus last year. That's why I compared H1 2023 versus H1 2021. Compared to 2021, volumes haven't come down because they went up each year. Last year, probably, I mean, you reported 11% in H1 last year, and some of that was M&A, it didn't come down that much versus 2021, if at all. Still there is a quite a big margin drop, which I can only explain by mix effect or high, really, really high inventory devaluations, or probably something else you can tell me.
Well, I'll, I'll throw it back to Conrad in a minute. The mix is, is an issue this year. I mean, 'cause if you look at where we had some of our strongest margins Last year, Care Chemicals was personal and home care was doing phenomenally well, this time last year. Was additives. I mean, we were really killing it on additives, this time last year. Those are the businesses. The highest margin businesses are the ones that are suffering the steepest volume declines, sitting here in, in, in 2022. That mix effect is, is substantial. Even if you look at it within the Additives and Absorbents Business Unit, I mean, the fact that functional minerals remain so strong creates part of that mix effect, even, even there as well.
You're exactly right on, on the mix, because the, the businesses that are doing particularly well right now aren't necessarily our strongest margin businesses. Compared to 2021, I.
No, I can comment on that. It was also before your time, Bill. basically, in the comparison to 2021, what is important to, to realize, Andy, is, first of all, if you look 2021, 2022, we actually were up substantially in Care Chemicals, as well as in absorbents and additives. The problem last year were basically 2 areas. It was, catalysts, and it was also our biofuels business. If you now look where we are this year-
Yeah, I took that out. I took that out. I took that out of, out of my calculations. I'm just talking about the rest of the business.
Well, if you, if you strictly look Care Chemicals and additives, they, they were both actually up substantially in EBITDA margins last year versus 2021. Yeah, that is the reality. 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. In, in catalysts, you actually do see the recovery in the second quarter, really, and that was building already in prior quarters.
Mm-hmm.
Yeah.
Yeah, that recovery is quite impressive. It'll be really great for 3Q, probably, if you could give us some more numbers on the mix effect, because it's, it's a little bit hard to understand what happened. Thank you very much.
We report by segment. We report by segment, so you can see actually the EBITDA development by segment, but we, we certainly can, can, can try to provide even more granularity in Q3.
That would be great. Thank you.
Thank you.
The last question for today's call is a follow-up from Markus Mayer, from Baader Helvea. Please go ahead.
Yeah, thank you. Coming back to catalysts, and also, related to Andy's question. 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 quarter. This 21% margin, underlying margin was despite the potential negative product mix effect from syngas catalyst, which normally have a lower margin, even if you have a high business in petrochem, which have a higher margin. We had this, this theme again, or this, this, 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. Therefore, again, the question, should we now think that this above 20% level, maybe 20%-23%, is the, the new kind of level you should look for, or is there more upset to above the 25% level we have seen in the past?
Yeah, thanks for the question, Markus. I think you, you pointed out correctly. There is, there's basically 2 factors that drive profitability in catalyst, 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. What you also see is actually a mix that's working really well for us. To your question on margins or your observation on margins in syngas and fuels, versus Catafin and the rest, actually, yes, we, we, we see strong margins for Catafin, for propane to propylene, but we also actually see strong, strong margins for syngas.
The one 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. We actually are very pleased with the mix that we see right now. If you look at Q3, Q4, let me first mention that second quarter indeed was unusually strong. I think Bill made the comments that we also saw even some orders earlier coming in from the third quarter. But we expect a Q3 and a Q4, even slightly above what we saw in Q2. With that, we think that you can expect margins around 20% in the remainder of the year.
Is this the level you also feel confident for, for the future, or is the further upset as now, taking all the negative effects from Sunliquid away and.
No.
All the problems we had with the polypropylene ramp up, et cetera, et cetera.
Yeah.
Should we also get go towards the 25% level, or is it something around 20+?
Yeah. I think you mentioned yourself, the, the, the very profitable joint venture that we had for EO Catalyst that was divested back to, to SABIC. That is not in anymore. It's, 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. Yeah, on a like for like basis.
Okay. Thank you.
Thank you.
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.
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