Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kemira's Q1 2021 Results Webcast. My name is Mikko Pohjala from Kemira's Investor Relations. And with me here today, I have our President and CEO, Jari Rosendal; as well as our CFO, Petri Castren. Earlier today, we published our Q1 interim report, and we had a good start to the year with strong profitability. As is the tradition in our webcast, Jari and Petri will start with an overview of the quarter, after which you have a chance to ask questions either via the teleconference or then via the webcast tool. Jari, please go ahead.

Thanks, Mikko. Welcome, everyone, on my behalf also. The start of the year was exciting to say the least, with all kinds of hassles and disruptions, but still, the year has started well. Operational challenges with harsh winter weather, logistic issues, material supply issues and learning to cope with Brexit for the first time. And obviously, COVID one -- continues still in Q1 strongly in many, many regions. Demand, however, continues to improve in all fronts and can be described as good. Operations have been running well and Kemira organization has been able to find workarounds to most of the disruptions with the exceptions of availability of raw materials we have been up against, and therefore, the start of the year has been good. A short summary of Q1, as I said, demand continues to recover nicely. Revenue excluding Oil & Gas and FX is flat year-on-year. Profitability remains strong. Our AGM was held remotely in March. And the first installment of dividend was paid early April. Our sustainability work has acknowledged with EcoVadis platinum level rating, so we are among the top 1% of companies in the world. Outlook for 2021 is unchanged. Financial highlights. Main figures. Revenue, EUR 606 million, down 6%, but organic growth with FX only minus 1.8%. This is quite a good comparison, period was still affected, not affected by COVID-19. So that's a good start compared to that. And this was the first quarter where sequentially, our volume for the first time grew compared to when the COVID-19 started. Q1 operating EBITDA closed to EUR 105 million and 17.3% from revenue. Last year, margin was 16.9%, so improvement seen. Earnings per share EUR 0.25 per share, same level as last year. Then looking at Pulp & Paper, had a good start to the year. Pulp, board and tissue demand continued to improve. It was on a good level. Also printing and writing improved sequentially compared to Q4, actually, around 8%. Organic growth year-on-year, 2% as sales volumes grew. APAC has seen the fastest recovery, mainly as China is starting to be fairly good situation on COVID-19. APAC revenue grew 11%, which is excellent to see. And Pulp & Paper revenue, EUR 370 million with a 17.0% operating EBITDA margin, a good start to the year, still under quite challenging conditions. Industry & Water, did also quite well under these circumstances. Municipal market continues to be solid. Industrial water treatment market is gradually recovered. Also shale market demand continues to recover and compared to Q4, meaning sequentially, it grew 20% in volumes. Organic growth, minus 4%, excluding Oil & Gas. Also, traded caustic soda volumes were down in Q1 in I&W. Revenue, EUR 237 million and 17.6% margin and we could have sold more, but some raw material availability did not allow it as we do not get as much as we would need. This should be starting to ease by the summer. It's good to note that we have had some business model changes as beginning of this year in both segments. You might remember that we closed a power plant or we had a shareholding in a power plant in Finland, and that has been closed. We have been selling power and steam to a customer as a pass-through with 0 margin. This will have about a EUR 20 million effect on top line, but no effect on bottom line. In I&W, we had a customer relationship where we normally manufactured both raw materials and delivery to the customer. But now we went to a model where we toll for the customer. So they deliver the raw materials and we only manufacture. So that takes top line down by about EUR 10 million a year. But bottom line effect is not there naturally, relative profitability will improve slightly. Then a deep dive on Oil & Gas. As said, shale continues to recover. CEOR market demand expected to be solid as it was last year. And oil sands tailings treatment season is starting now in April, May as the ice melts in Alberta and goes on until October typically. As said, raw material, we are very needy and limited volume has limited us a bit and raw material prices also have gone up, especially for polymers, and we are fighting that fight. Mainly the reason is in North America, the severe winter weather, several days of minus 20, and many of our supplier plants were frozen and damaged. That situation continues into Q2, but should be easing off during Q2 and during the summer. I would say, under the circumstances, a good start to the year in all areas. Then looking at our main investments, South Korea, dry polymer plant, starting ramp up now in Q2. This is the first time that we will now have deep products available. In APAC, we've been shipping from Europe. And obviously, that's been with the logistics challenges and the shipping costs are not so competitive. So after that, we start-up this plant, we have 2 plants in Europe, 1 in North America. And 1 in South Korea in APAC. Mobile, Alabama, the AMD line is up and running and ramping up. The emulsion polymer line starting also up in Q2, actually, not a bad timing at all when we think of the shale market recovery. We have a coagulant expansion in U.K. ongoing, and U.K. has restricted their water regulation rules and means that the coagulant consumption needs to go up, and coagulant doesn't exist in the market. So we are expanding. And then the newest deal for Uruguay, the bleaching expansion in Fray Bentos, that's in engineering, early stage phase and should be completed by the end of next year, ramping up early 2023. I mentioned the EcoVadis, and we've been recognized well here, highest scores on ethics and labor and human rights. We've been on a gold level previously as there was no platinum level that they now introduced the platinum level, and we immediately were awarded to the platinum level and within 1% of global companies. Our sustainability work continues. And you will remember that we've announced targets in CO2 emission reduction during this decade in scope 1 and 2. And last year, we did the first deal here in the Nordics of buying wind power contracts for 5 megawatts. And in Q1, we did a second deal to -- same amount of power from wind and replacing CO2 sources of energy. And we continue to go on this path. This is on our scope 2 level. And last as a summary, we continue to mitigate the COVID-19, keeping people and stakeholders safe and operations running, ensuring deliveries to our customers, availability and security of availability has been a key during this COVID pandemic, we have performed really well. We were mitigating the impact of higher impact cost, more -- I'm a bit worried short term on the availability issues, but then the impact cost, but costs need to be taken into account. We have increased focus on profitable growth, and we continue to maintain good cost control. We also continue to work on more bio-based and renewable product portfolio, and that work continues. And as you remember, we announced a couple of cooperation deals with big players in that front last year. We run our plants efficiently and are ready to increase for the increased demand and react to that. And we continue to build our and complete our strategic investment projects and start to -- some of them to soon ramp up. So here's my summary of Q1 and I'll ask Petri to come give a bit more color on the figures of Q1. Petri, please.

Thank you, Jari. So a good start to the year. I'd like to start to look at what the report says. I think the key points, at least the way I see it, are the sequential recovery in demand, it continued, even while the year-on-year comparison was slightly negative. And again, like Jari mentioned, good to remember that Q1 essentially was a pre COVID into 2020. So from now on, we will be comparing ourselves against the sort of COVID years from Q2 onwards. Second key point, continued good profitability. Operative EBITDA remained and continued to be at the high end of our financial target, 15% to 18%. And for the quarter, we were at 17.3%. Third point is perhaps, and I think we'll come to that in the discussion in that we are in a way in a turnaround point. And many comparisons have a different sign, whether you are comparing them year-on-year, or sequential quarters. Just a couple of examples here on market demand. For example, printing and writing chemical demand was down year-on-year as expected, but actually up sequentially. Similarly, Jari talked about shale. Shale demand down year-on-year, but up significantly from Q4. Also same thing in costs. As you will see, actually, we still get a benefit on year-on-year comparison on variable costs, but we know that the -- and have seen the sequential increase in raw material costs, and we'll talk about that as well. So 2 things I'd like to point out from this chart, again, from the revenue bridge, the first positive step is the volume that Jari already talked about. So yes, we were now -- or we are now in Q1, already at the -- at sort of a pre-COVID revenue or volume level. And I think that's quite important that the market has recovered already to that level. And as Jari was talking about, market recovery continues. The second aspect, FX impact. So during the quarter, slightly higher sales volumes, indicating this market recovery. And then currencies had this 4% negative top line impact. And that explains the majority of the revenue decline Q1 versus Q1. On the negative, EUR 30 million or 2% sales price impact. Most is actually is -- most of that is actually explained by the caustic soda, which is mostly a traded product. And then the negative sort of sales price development that has gone towards the Oil & Gas market. And this covers both the formula-based customers as well as the more the spot type market that is the shale market. And the good thing is that these prices are also the first ones to go up formula automatically as the input costs go up. And then the spot market is sort of -- we can react more quickly. Looking at the profitability bridge below. The point worth pointing out perhaps is also the fixed cost reduction. So that gave us an EUR 8 million benefit for the quarter, and approximately half of that came through the reduced travel and entertainment costs. And obviously, again, we are comparing a pre-COVID quarter. So after this quarter, the benefit will be reduced. Mentioned in my opening that we are at the turnaround point. And this chart sort of starts to visualize this turnaround in costs and in our sales prices. Like I said, year-on-year sales prices were negative. And looking at the picture on the left, and looking at the 12-month rolling chart, it seems that the environment where we are is sort of not that different from the times we were back in the chart you saw the turnarounds around 2010, 2011; and then the second one, 2017, 2018. So pretty similar situation there. And on the consecutive quarters, we see the cost pressures up again, although year-on-year, on the right indicates that the cost trend is favorable. Well, actually due to the impact of the traded caustic soda, which has been soft. Again, as sales prices tend to follow cost trend with a short lag. We do not yet see the benefit of the turnaround in this chart. But obviously, very much a focus point to get those price increases through, and we can then see this in the coming quarters in this chart as well. The market turnaround resulted in an increase in the value of our inventories of about EUR 27 million. Well over half of this increase was due to FX and also to the price increase of raw materials. So in a way, market-driven. And the second half of that increase is, we are actually getting prepared for higher volumes. So this as well as some other net working capital changes during the quarter resulted in the reduction of cash flow -- in cash flow from operations comparing to a previous year. CapEx for the quarter was low, but we expect that for full year -- for '21, we expect that to land around the EUR 200 million, which has been communicated earlier. And again, the key projects worth noting here are the Mobile, Alabama polymer plant as well as our expansion of our fleeting chemical capacity in Uruguay. Gearing slide, so I mentioned the capital efficiency here. And we're looking at our capital efficiency by this operative return on capital employed. And I made an earlier comment that 12% is a good level, and we remained roughly at that, now slightly below at 11.99%. Return on capital employed in Pulp & Paper up significantly. Towards the target range where as in I&W some of that softer demand historically has been visible, obviously, in I&W numbers as well as the capacity underutilization, which Jari talked about from the raw material supply problems has resulted in reduction in this return on capital efficiency, particularly in impact in Industry & Water business segment. Balance sheet continues to be solid, well within our financial guided range. Next slide, I talk about our refinancing transaction, which we concluded during the quarter. So we successfully sold EUR 200 million 7-year bond to the market with a 1% coupon. The yield ended up being 1.12%. And half of those proceeds were used to redeem our -- early our 2022 maturing bond that has a higher coupon. And here's worth noting that this bond exchange was accounted for as a modification as the -- the terms of the 2 bonds were similar rather than the interest rate. And because of this modification accounting, we reported a EUR 5.6 million net financing gain for the quarter. And this EUR 5.6 million reflects the difference in the present values of these 2 bonds. And that gain actually explains the low financial expense for the quarter. And obviously, on its own right, was also contributing positively towards the EPS, which came at EUR 0.25 per share, flat with or level with the previous year. Also, we used our second option to extend our EUR 400 million extended maturity of our EUR 400 million revolving credit facility to '26 -- 2026. And as a consequence of these transactions, our liabilities are well spread out all the way to 2028 with limited near-term maturities. Next, I'll talk a few words about our supplementary pension fund, Neliapila, in Finland. And I wanted to bring this to attention because of 2 reasons. First, it was in the news in Finland late March that we have -- as we have made a preliminary contract to sell a piece of real estate in Espoo near Helsinki. This is a site where the R&D center of Kemira is located, but the land is owned by this pension fund. And we made a preliminary contract, subject was loaning, but preliminary contract to sell this land for real estate development. And majority of that real estate development will be residential. But it also includes sort of a commercial office park, which is called Green Chemistry Park. And this is a site where Kemira will be locating in sort of a future state of the art R&D center once the construction of that site continues after the zoning process is done. We also included this new -- this liability in the footnotes for our Q1 financials. Secondly, we took a small capital contribution from Neliapila in the quarter. And this, sort of, overall Neliapila is in very good financial position. According to FAS, Finnish Accounting Standards. The overfunding currently is approximately EUR 80 million. And as this fund has been closed for new members for the last 30 years, it's now in a runoff phase, its liabilities are reducing roughly EUR 10 million per year. Therefore, I think it's fair to assume that as the plan for the zoning is approved or confirmed and the real estate projects start to materialize, and as liabilities wind down, absent of remarkable asset value decrease, the Kemira will -- should expect to see some future capital contributions from this fund as well. Outlook, unchanged from the February release. So assumptions also the same. End market demand expected to recover, and this we already saw in Q1. And in this context, Jari already mentioned some of the modeling help for you. The EUR 10 million business model change that actually impact I&W revenue from moving towards the tolling agreement. And then the EUR 20 million electricity sales or steam sales that we will be not having any more. That's impacting Pulp & Paper segment. Perhaps one more comment to help modeling for those. Typically, we see a small seasonality impacting our revenues with typically Q2 and Q3 revenues higher than Q1. Last year, this was not the case because of the COVID-19 situation. And this year, we would expect that we will see that type of seasonality in our revenues, sort of a return to normal, if one will. With those comments, I'm done, and we're ready to move to the Q&A session. So operator, please?

[Operator Instructions] And the first question is from Martin Roediger from Kepler Cheuvreux.

I had some technical issues. So therefore, I apologize if you have already mentioned that, but I had difficulty to understand the reason for the financial result in Q1, which was unusually low. Is that in the relation to this EUR 5.6 million gain from the bonds, which? And as a follow-up, is that financial results we saw in Q1 a reasonable run rate going forward? That is for Petri. And maybe also a follow-up question for Petri. You mentioned the future capital funds you expect to receive from this real estate project in Espoo. Can you help us to quantify what you expect from that in the years to come or maybe on a yearly basis? And then the third question that is more ESG-related. And here in concrete on the CO2 emissions or greenhouse gas emissions. We are right now in Phase 4 of the European trading scheme. What is the amount of certificates you have to buy annually? And how many of the certificates do you get for free this year?

At least take the two first ones. So the financing, yes, it is tied to. So I think you're right on the spot. So this was a onetime sort of for this quarter. So the Q1 does not reflect a run rate. So you need to adjust that for the EUR 5.6 million gain. So we reported a gain as the bonds were exchanged. So the net present value was different. The lower interest rate in the new bond sort of producing a lower net present liability. And that difference was a gain for Q1. We will actually amortize that EUR 5.6 million over the 7 year life of the bond. So Q1 finance cost does not reflect a run rate. Run rate is more like than the EUR 7 million, EUR 7 million, EUR 8 million, which is sort of more typical for us. And then a question was about Neliapila, the pension fund. I sort of hesitate to comment on the sort of expected level of capital contributions. And certainly, I wouldn't point out the gain from the real estate transaction but the already the existing sort of surplus, EUR 80 million. And obviously, this is a regulated process. So anything -- any capital contributions that we take from the fund will need to be approved. And with the prudence, there's sort of a caution. But I think I sort of wanted to highlight that the magnitude is clearly more than the EUR 3 million that we took last year. But I hesitate to give any more precise answer. And it may take over this sort of a decade and we have not made any sort of desires whether we want to do -- take that annually or whether there's perhaps one bigger lump sum that we could take during the next number of years.

And the emission certificates, I don't even know the number. It's so small. We buy some certificates in Europe, but we also sell certificates. So the balances in our numbers, insignificant, mostly the -- it's incorporated into the power that we buy from the markets. Our own power sources where we own shares are mostly CO2-free electricity. So hydro and nuclear here in Finland. Our CO2 scope 1 is 0.9 and a bit below 0.9 million tonnes a year globally. So not a big number. We still take it seriously, and a big portion of that comes from United States from the southeast where there's not much CO2 free power yet available. But the certificate dealing is not a big number.

And the next question is from the line of Anssi Kiviniemi from SEB.

It's Anssi from SEB. I have 3 of them. I will take them one by one, if that's okay. Firstly, you have announced a bunch of price increases during the past 4 months, I believe, and steel prices are coming down. I acknowledge that there is accounting effect and caustic soda effect there. But in a larger scheme of things, when should we expect to see positive pricing environment and positive pricing impact for Kemira? That's the first one.

So yes, raw materials have been starting to come up. And one is the availability and the other is just that the supply doesn't meet the demand that is picking up really fast, which is actually good news that demand is picking up. Price increases, we have not dropped our prices in water treatment, and we have not dropped our prices in Pulp & Paper. So these are effects that come from the shale market, that there is some drop in the sale market spot prices. And then some pass-through issues. So it's imperative. Actually, we are increasing prices in Pulp & Paper and in the water treatment as well as in the Oil & Gas. And quite well have price increases going through as the contracts start to be rolled over. That's the point to negotiate new volumes and perhaps even switch of products and then the new prices. And it's gone through quite well so far. And the reason being that as the market is tight for chemicals, the customers more appreciate that they have the availability, then that they squeeze us for the price. And we will continue to work on the price increases going forward. I'd like to point out also that there's input cost increases that are coming in and availability, lack of availability, which I feel the lack of availability Q1 and short-term is more of a component than the price increases. But then on the positive side, demand is good. Volumes are going up. Last year on a comparable basis, when we had lower polymer raw material prices, we had no demand. Now we have higher raw material prices. So the demand is really picking up. So the math is not that straightforward. With higher volume, there is higher utilization rate also in our plants, which brings down unit costs, and that's a component that needs to be factored in. We obviously work on raw material -- sorry, the sales prices, as I said, and then our fixed costs are also in check as the pandemic continues and travel and sort of normal spending is not coming back. So you need to take all of these lines into account and all of these factors into account, not just the input cost factor. We're in a much stronger place than 3 years ago to take on this situation.

Okay. I appreciate that. On raw material availability, which raw material specifically, you have had issues to basically source. And what's the magnitude when we look at Q1. In euro terms, has there been a significant impact from operational perspective from lack of raw materials?

Yes. So twofold situation. The North American Winter Storm Uri that damaged a lot of refineries. And therefore, the oil derivative products, acrylonitrile and acrylic acid have been short. We've been at best getting 50%, 60% of what we have needed, and that's for polymer products. Also logistics and the congestion in Suez and all of that has also resulted to some. And Europe also, there have been mechanical breakdowns due to COVID-19 maintenance backlog in certain plants. And they are still in FM. North American FMs continue even if the damage happened in February, they still haven't been fully fixed. So we probably lost some couple of tens of millions of revenue in this period. Some of it is opportunistic in a sense that we were able to handle most of our contracted volumes, but then the increased demand, especially from shale, there was more spot opportunities there than usually, and we just couldn't cater those orders.

Okay. Then on raw materials. In euro terms, how large is the pressure for 2021? Because when we look at the charts, it gives a pretty bleak picture. So could you give us some kind of hint at least how do you look at the raw material pressure and input cost pressure in euro terms when we look at 2021 versus 2020?

Yes. So one thing is that, that takes constant volumes into account, that chart that we do. And if you think that raw materials for polymers were low last year, but we didn't sell anything, so we didn't get the benefit because the market wasn't there. Now the market is there. So you need to, again, take the volume thing into account. The pressure is in certain areas and mostly in polymers. And there, we have also formula pricing. The -- that holds itself or handles itself without negotiation. We have spot pricing in the shale business, mostly. So deal by deal. And then we have the normal contract pricing. So there is pressure, but we are mitigating those with the actions I have already mentioned. There will be a timing difference. So in Q2, we will see the pressure, but some of the mitigations don't kick in until Q3. So you can take that into account in Q2.

Okay. Then perhaps the last question is on U.S. shale. I mean, when we look at the rig counts, they are going up but kind of mildly. But if I have understood it correctly, the fracking activity, as a matter of fact, has returned quite rapidly. So is this the correct picture? And do you see the whole year for shale business kind of more of a normal year in terms of volumes?

Not to 2019 level in volumes yet, but getting to that direction and improving. We saw sequentially over 20% recovery in volume demand from Q4 to Q1. So maybe that gives you -- and that continued from Q3 to Q4. So going up, and we missed deliveries because of the raw materials. So there also pricing needs to be worked on not only volumes, so -- but the rig count is not the right -- it is a sort of a semi good indicator because they have what they call DUCs in the backlog. So drilled but uncompleted. So they haven't fracked those holes. They have drilled them, but not put them in production. But now when the oil price hovers a bit over $60, they make good cash from those areas, especially in the Permian Basin, which is our main area in Texas. So we expect that those uncompleted holes will also be completed. And they don't need to be drilled again. So that's why the drill count isn't a linear comparison.

Next question is from Harri Taittonen from Nordea.

Maybe you made this comment on the printing and writing side, which is quite interesting, and seeing this sequential improvement. But is it -- in your slides, the share of printing and writing is about 20% of Pulp & Paper, but is that still more or less valid? Or has it sort of -- has it come down to below that? And what's your feel of the sequential recovery when we move on to the second quarter now that, at least in some countries, the lockdowns are clearly easing and that seems to have some correlation to the printing and writing activity?

Yes. Thanks, Harri. So we round up to the closest 5%, that's 20%. So it is below 20% and dropping all the time. As the other areas, packaging and pulp is also going up. I don't have -- got the right...

In the ballpark.

For the full year?

Right.

This was only for Q1. But last year, for 2020, it was also around 80, maybe a bit more. Yes.

Also goes to show that we recovered 8% and are down only 5% year-on-year in printing and writing. So we are serving the strong customers, the last-man-standing type of customers. So that's -- that has also not reflected as the market is down clearly more than the Kemira customers are not down so much. And we expect that -- I mean, I would take a proxy that we stay roughly on this level going forward. I don't expect very big recovery. Maybe some, but then we like that it comes, but we're not counting on that.

Okay. Okay. Right. And then you made a summary of the 4 CapEx projects there. And I remember -- well, 2 of those investments amount to $90 million in total for Uruguay and Mobile. But can you remind what is the compound CapEx related to these 4 investments all in all?

The U.K. one is between 10% and 15% and the -- we are minority shareholder through our equity investment in the Korean one. So that was only EUR 5 million. So I would say a very good return will come from that. So that gives you an idea.

Jari, [indiscernible] to consolidate our number.

Yes. It's 35%. It doesn't consolidate. So it's only a shareholding.

And next question is from the line of Robin Santavirta from Carnegie.

First of all, I would like to ask about fixed cost or rationalization measures. If you look at the past 5-plus years, you have actually been quite successful in improving earnings from cost-cutting and streamlining efficiency improvement. I know that you have some measures in North America in the Pulp & Paper division. But is there something else going on at the moment? And secondly, are you working at launching something that could improve the productivity or cost position of the company?

Well, we did restructure and that was non-COVID related, it was in the plans earlier. But in November, we restructured the North America, as you mentioned, commercial and support organization and made efficiencies there. Obviously, I can't comment if we have anything else ongoing. We tell if something is ongoing, but maybe we have demonstrated that we do care and maintenance all the time and not wait for big banks.

All right. And secondly, now looking at the guidance, we're obviously now in April, and there's a lot of moving elements up and down. Could you provide one key upside, one key downside to the guidance? So as to understand how do -- how you see sort of the main risk and the main potential?

One upside is continued strong demand from the markets, all markets, and us able to deliver also on the demand. And downside is then the delay and possibly lack of -- delay of getting prices and mitigations for the increased raw material prices for then the lack of raw material prices that we can't deliver. Or lack of...

[Operator Instructions] And there being no further questions in the queue, I'll hand back to the speakers. Please go ahead.

There is one more question from the webcast tool. So can you remind us the revenue impact from the Mobile ramp up? And when will the plant contribute positively to earnings? And how does the profitability compare to whole segment profitability?

So we don't give revenue numbers for individual projects. But if you add up those 4 projects that we have, once they are fully running, they should contribute EUR 110 million, EUR 120 million when all 4 projects are fully up and running, obviously, depending on the market price of polymers, for instance. And Mobile and also the South Korean should start contributing late Q3.

Good. Thank you, Jari for the answer. And there are no further questions from the webcast tool either. So this concludes our webcast. Many thanks for participating. And if there are any follow-ups, so please reach out to me. But with this, I wish you a nice day. Thank you.

Thank you.

Thank you.