Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning to you all, and welcome to Kemira's 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. This morning, as you might have seen, we've published our full year results for 2021 and we reported record revenue. In addition, we published the invitation to the Annual General Meeting and the dividend proposal of last year. As is the tradition, we'll start with a brief overview of the quarter and the year and the financials from Jari and Petri and then we'll go over to your questions. [Operator Instructions] With this, I'll hand over to Jari.

Thank you, Mikko. Good morning from my behalf also. Quite a year behind us 2021. Good demand continued during the end of the year and revenue for the first time exceeded EUR 700 million for the quarter. Variable costs remained high and utility cost in fourth quarter were very high and remained high going into Q1. However, added volumes and increased sales prices are compensating for most of the cost increases, but not all yet. Good outcome from the year, I think, where we saw many challenges, and good job from the Kemira team in this volatile situation. So a recap. Organic growth continued and customer satisfaction was on a high level, also employee engagement on a high level. Good growth from both segments. Profitability obviously impacted from the raw material environment and utility prices as well as supply chain cost and bottleneck issues. All of these are continuing to this year. We had a new manufacturing facility starting up last year, dry polymer plant in South Korea, emulsion polymer plant in United States, and a [indiscernible] plant in United Kingdom. We also announced the expansion of our ASA sizing line in China and expand that and expand our leading position in that when it's online. Steady operating performance from our plants and supply chain despite all the challenges. Then the financial highlights for 2021. Revenue almost EUR 2.7 billion for the year, up 11% year-on-year, 7% came from volume and rest from sales prices. Although that turned around in the last quarter, so 7% from prices and 4% from volume. '21 Operative EBITDA, EUR 426 million and 15% -- 15.9% margin. So for sales prices and volumes were helping, but we're still trailing behind. We made a provision for proud ownership in Finland, where a customer is [ stopping ] operating there in some time from now, and Petri will explain that a bit more in his talk. Earnings per share, EUR 0.70 and Board proposes a EUR 0.58 dividend for 2021. Then Pulp and Paper, and I think, a good year despite all the challenges. Pulp, board, and tissue demand on a high level, printing and writing, recovering, sales prices going through obviously with a lag, and we've been able to keep the customers running, which has been the main thing all the time. Organic growth, 8% during '21 and operative EBITDA up 15.7% for the year. And as I said, we are expanding the ASA line but also constructing the expansion of the reaching capacity in Uruguay. Quarter 4 revenue of EUR 420 million and EUR 61 million of operating EBITDA. I think a good outcome from the team. I&W did also well. Oil and gas clearly recovered. Water business is very strong. Municipal water is strong and solid. Industrial water has recovered and is strong for us. Oil and gas shale market has recovered, margins are not at a wanted level yet. So that work continues this year. Organic growth for I&W for the full year, 16%; and Q4 revenue close to EUR 300 million with a 12.5% margin. It's seasonality, if you look at the Q4 previous year, it's also raw materials, but utilities impacted quite a bit also in Q4 for I&W. Full year margin, 16.2% and a good outcome in these circumstances. I wanted to talk about -- a bit more about our water business, and it's about a EUR 900 million business for I&W. 80% of I&W business is water treatment chemistries. We also have water treatment in the pulp and paper customer sites, but that's counted into our Pulp and Paper segments numbers. You can see the resilience the business has, during COVID times, hardly any cyclicality. So the segment cyclicality comes from oil and gas. Profitability for the segment tends to be countercyclical coming from the raw material environment. Demand for water chemicals steadily growing, and we have a strong market share in EMEA and in North America. We also have a strong global manufacturing network. We use circular raw materials, and we have a high delivery reliability to our customers. Diversify our customer base, we have a lot of small but many customers in industrial side and also in the municipal side, bring some steady business through that. Growth drivers obviously tightening regulation and APAC driving more growth also the other [ growth biggest ]. Our water business is in good shape. Then something about our sustainability and our KPIs. So safety, obviously, high on our list, definitely in our industry needs to be. We stepped backward a bit this year or last year, sorry, and probably some COVID tiredness, but we need to focus into that more. People aspect, engagement inclusion, new ones on our list, and we measure those on an annual basis or actually biannual basis and in our last measurement, people engagement level is high. Water, obviously, one for us. We use a lot of water, but we help our customers also to be more efficient with water. And we want to reach a leadership level in CDP scoring for water KPI. Circularity, we use a lot of raw materials, side streams from other suppliers and players and circulating water, and we really want to focus on waste also. And then climate which we announced and Scope 1 and 2 and working on that, we have gotten more for sale free energy into our portfolio and since we announced that target based on 2018 levels, we've come down 8% in our Scope 1 and 2 emissions. Biobased is one area for new products, circularity and fossil-free carbon. We have progressed well in that and have partnerships that we talked about before on proof of concept on those projects have progressed well last year. And PHA being one of the feedstocks we have been able to do the first barrier based coatings on food containing packaging, and those are in testing phase. Last week, we also did a press release on biomass balance products. That's -- we're the first one in the world to introduce an industrial scale, a bio-based polyacrylamide, and that's a good proof that we are going to the right direction and we have a first customer. Obviously, we've been doing laboratory test and pilot test, but this is now industrial-scale customer here in Finland that is using it at their Water works to run without [indiscernible] carbon. So key operating focus for this year, employee and stakeholder safety, traditional safety but also COVID-safety. Really an increase on delivery of market environment, I mean, delivery our product to the customers that we keep them running and maintain a high customer satisfaction. Increased focus on profitable growth and biobased is one area of that and the ongoing investments also. We need to continue to mitigate the impact of continued inventory pressures, so many actions going there and operational agility to capture opportunities in the marketplace, and we continue to construct our ongoing investment projects. Lastly, when we continue to execute our strategy, we have updated our purpose statement for Kemira. Our new purpose statement is chemistry with a purpose better every day. There's also a narrative explaining what our purpose is and what is our reason for existence. I will not read it word to word, but hopefully, you will read it through, and you'll get a good understanding. I think it reflects us and our ambitions really well. I'll conclude here and ask Petri to come and give more color on Q4 and '21 figures.

Thanks, Jari. So as Jari said, it was a quite an extraordinary year. And now obviously looking back, quite different, what we expected with the market strong recovery, inflation that surprised all including central banks, with its persistent supply chain bottlenecks. And now in Q4, the energy cost spike. And all of this is actually resulting in a very significant variable cost increase, which is sort of a big theme of our report today, and I intend to cover these themes with the upcoming slides. Also, I give a little bit more background on the provision that Jari mentioned in his opening. So starting with this traditional bridge. So another record quarter with more than EUR 100 million reported revenue increase in the quarter. Strong market continues. But obviously, as Jari said, even stronger contributor to our organic growth this quarter was the impact of increased sales prices, EUR 70 million year-on-year, which sounds like a huge increase or a big increase, but actually still falling somewhat short of the almost EUR 100 million variable increase -- variable cost increase that we saw year-on-year in Q4. Perhaps a noteworthy about the variable cost increase that about 30% of this EUR 100 million variable cost increase was the result of the Q4 energy price, not only electricity costs, but also hydrogen and natural gas, which we use in different facilities. And now this is a gross impact. The net impact to Kemira is significantly or less than that as we do have many formula contracts where these price increases are passed on to the customers. But certainly, they do not cover all of that big increase that we saw from the spike in energy costs in Q4 and which is continuing in Q1, although apparently -- or it looks like it's not at the quite same level as we saw in Q4 and particularly in December. About the contract structure, we can directionally say that energy, of course, impacts pulp and paper more. But on the other hand, Pulp & Paper has proportionally a higher share of this contract -- formula priced contracts. And therefore, the utility cost, which you already mentioned, the natural gas and hydrogen, they actually had a fair amount of impact on I&W in Q4 as well and partially explains the somewhat lower quarterly EBITDA ratio. Other parts of the profitability bridge are relatively smaller compared to these 2. But worth noting is that our fixed costs were below Q4 '20 and we also benefited of a higher capacity utilization. This is indicated in the column others. Now that we're looking at the full year, 2 aspects still worth sort of amplifying or repeating. First is to the magnitude of the cost increase. It was EUR 100 million in Q4 almost and almost EUR 200 million cost increase on variable costs year-on-year. And this is quite dramatic. It's 17%. So obviously, it's quite a bit more than the reported inflation ratio -- inflation rates and signifies that the -- some of the input cost, feedstock costs have increased more than the rate of inflation and then on top of that, we have the supply chain bottlenecks, which are actually pushing raw material costs higher. Secondly, looking at the individual quarters. We can see how the variable cost increase has gone and grown bigger through the time. But at the same time, we can see that our price increases have grown, and we are sort of covering a bigger share of the price -- cost increase with our price increases. So in Q2, quickly, it looks like we covered something like 28% of the cost increase with pricing, whereas the number was over 70% in Q4. So I think this is a good indication that we do have pricing power to pass on the cost increases to our customers. However, it takes time. And we have been saying that throughout the year that, yes, we are increasing prices, but because of our contract structure, it usually takes a little bit of a delay. And we have estimated this is about a couple of quarters of delay on average. Now I know many people are looking at already '22. And big question remains how these costs will develop going forward. And as you've seen in our assumptions regarding the outlook, we expect that the variable cost increases, the inflationary pressures will continue in '22 with more emphasis and pressure coming on first half of the year. Energy costs, I think the turnover view is that the energy cost should alleviate once we go to the warmer summer months. But obviously, as everybody knows, there are geopolitical risks and issues that may impact energy prices. And those are obviously impossible to estimate. Jari mentioned the extraordinary provision that we took in Q4. And the background to this is that we are an effective majority owner of a single asset energy company [indiscernible] through our ownership in Pohjolan Voima, PVO, it's a bit complicated. The company is a so-called Mangala company, meaning it means that we get the product at cost, but it also means that we are liable for the costs in proportion for our ownership in the company. And most of that energy in the form of steam has been sold to other industrial parties in that industrial park with one particularly very large industrial player in the park. Now that third party has terminated its long-term energy contract and this will lead to significant underutilization of the asset. And as I said, Kemira, as a majority owner is liable for our share of the fixed costs of the assets. Some of those costs are depreciation and finance costs, which will go down over time. But nevertheless, they are there to be covered. We are now estimating that it will take several years before we have large industrial scale user for this team. And therefore, we are now taking a cost provision -- that onetime cost provision that covers that estimated time before we have an industrial user onsite and for the asset. Having said that, there is a potential for faster solution there as well. For example, there is now a company, a biofuel that is considering -- more than considering planning to build a biofuel plant on site. They actually have received their environmental permits. But nevertheless, if the construction is not yet there, and the site is not ready and we have taken a sort of a conservative view that we want to see -- or we haven't taken these potential opportunities into consideration yet at all, but rather wait for more certainty about the future steam use before we assess the provision again. Moving on I think most of the topics that we typically talk about on this slide have been already covered. I wanted to include this slide for continuity and it usually nicely demonstrates what I would call unprecedented headwind that we have seen and what we have to deal with during '21. All combined, the sort of net spread from between the price and cost curves in '21, impacted us by EUR 91 million negatively. And as earlier shown much of it, EUR 73 million, in fact, was compensated by additional volume, but not all. Cash flow on the surface looks a bit weak and is down from 2019, 2020 levels. However, when you drill into that, I think the reasons are understandable and will -- should be well known. Simply, growth consumes working capital as inventory and receivables increase in value, more in absolute terms than the corresponding payables. And this is driven by both the price, the unprecedented price increases that we have seen and also the volume demand also growth -- makes us grow our inventories and obviously increases our receivable balance. So this has resulted in a EUR 90 million increase in net working capital year-on-year, quite significant, of course. But worth noting is that our net working capital rotation has remained at 10%. So basically, our efficiency has remained at the same level during this -- even as we have, in some cases, really on purpose built up inventories because of supply chain issues and in preparation, for example, the Beijing Olympics, which are sort of impacting production at this current time. There are also some smaller impacts on cash flow, which I think are unknown, but I'll repeat. First, we paid EUR 22.75 million settlement during the summer to CDC. Also, our cash tax payments for the year ended up being some EUR 10 million higher than in '21. And this was a result, of course, because of the 2020 result was good, and some of the cash payments were done in early '21. Our incentive payments in '21 also were about EUR 10 million higher than our target level, again, on the back of the good 2020 result. And explained about EUR 10 million above target level. Regarding tax payments, I think I'll also offer the guidance that now in '22, we expect that the cash payments will be more comparable to the '20 levels. Also, you may have seen and I don't have a slide on that one, but you may have seen that our effective tax rate is actually reduced to slightly below 20% for the year. Finally, on cash flow in 2020 -- sorry, 2022, now in first quarter, Kemira will receive a EUR 10 million capital return from our closed pension fund, Neliapila, which has excess capital and is starting to -- or continuing to return that capital -- excess capital to Kemira. CapEx, on the other hand, fell somewhat short of our original guidance for '21. Some projects were delayed and also some scheduled maintenance work was delayed, some of it because of COVID-19-related reasons. Next year or this year '22, we will likely see a catch-up on the CapEx and CapEx to sales ratio will likely increase to around 7% and as we continue our reaching capacity -- bleaching chemical capacity expansion in Uruguay and also the ASA capacity expansion in China. Gearing capital efficiency measured by our operative ROCE, return on capital employed came down a little bit to 11.3% due to lower result and also increased amount of capital employed mostly, mainly driven by net working capital. In the rest of the balance sheet, no particular news, no new financings, leverage well within our financial target range. Net debt increased EUR 91 million, about EUR 15 million of that net increase is the result of increased lease liabilities. During the year, we entered into a number of long-term leases, some supporting our business. Dividend proposal, Kemira updated its dividend policy 2 years ago. And now our poise is to pay a competitive and over time increasing dividend. We increased the dividend previous 2 years, but over time, does not mean we aim to increase it every year. Board is now proposing to keep the dividend stable with last year, meaning a proposal of dividend EUR 0.58 per share. And at year-end closing price, it's a 4.4% yield. Dividend will be paid in 2 installments similarly as during the last 2 years. [ Taxonomy update ] Companies are now required to report taxonomy-eligible revenue, expenses and capital expenditures for the first time under this EU directive covering the environmental objectives 1 and 2. This directive covers the most emission-intensive economic activities. And in the chemical sector, it primarily covers the base chemical producers. And as Kemira mostly produces specialty chemicals the impact is for us is not really much at all. And our taxonomy-eligible KPIs are very low, in fact, close to 0. The only thing that we report out on the revenue side is some site stream hydrogen and energy sales that we have, which represent about 1% of our revenue. And because of the revenues, so low, then the CapEx and operating expenses are obviously low as well or in essence. The environmental objective is 3 through 6, which will be reported first time next year. Those are likely to be more relevant for Kemira's business. But I think we are all waiting to get more information on a more detailed instructions how to calculate these eligibility revenues before we can guide, we probably know how they will end up next year. Outlook, I guess, first, a health warning, meaning the list of uncertainties and macroeconomic assumptions behind this. First of all, COVID is still here, but our assumption is that it will remain under control. It doesn't necessarily go away, but it will not have a major impact on either on our end markets or on our operations. And we are sort of following the economic consensus, which is expecting continuing global macroeconomic growth. Based on these assumptions, we are expecting revenue to increase in local currencies in '22 versus '21. And in terms of profitability, measured by our KPI operative EBITDA, we are expecting it to be at the same level as in '21 with a 5% margin up or down. With that, I'll conclude my remarks, and we're ready to move to the Q&A session.

Petri, probably we will start with the questions on the line. So we hand over to the operator, and then we can take questions if there are any on the webcast tool. So I'll hand over to the operator.

[Operator Instructions] And we have our first question from Martin Roediger from Kepler Cheuvreux.

I have 3. And I would like to ask them one by one. First is on your guidance. Last year, the guidance range was between flat and minus [ 5% of your financials ] was almost [ 500 basis points ]. Today, your guidance range is from minus [ 5% plus -- 5% of your financials on those basis points ], isn't bigger than a year ago. That indicates that the uncertainty has increased, which wonders me a bit. You mentioned that pandemic is almost under control. And I think that you seem to get also the cost inflation under control quite soon. So can you elaborate on the key drivers for these higher uncertainty? Or put in other words, what has held you back for guiding just flat year-on-year EBITDA? Is it the political situation? Or is it any worsening in the supply chain or in fact, even worsening in the inflationary pressure. What is the reason?

We don't see the delta being bigger than how we guided last year. So in principle, the same level. But the logistics issues have not eased and that remains an issue. If it eases, then we go to the plus side, if it gets worse, that's then a negative side. Raw material inflation is not going away. And now we on top have this utility cost that will go on for a number of months here on forward. So those are big question marks, and that's why we said plus or minus 5%. But I don't -- the intention is not to say that we increased the window, it's roughly the same.

Okay. And regarding your EUR 28 million provision in pulp and paper, for this situation from your industrial customer for this power plant having terminated the contract. What has been -- because you have a stake in this power plant, what has been the annual earnings contribution from your stake in this power plant? Or in other words, how much earnings will be missing from that in the year 2022.

We are actually not missing any earnings. This has been passed through revenue, which we have basically sold at cost. So no revenue -- some revenue missed, but no profit missed.

Okay. And is there any risk that this kind of situation at any other of your activities or power plant participations could happen as well with such an industry customer terminating a power supply contract?

I hesitate to say never, never. So of course, that's an absolute term. But I do not see any sort of same type of risk. And obviously, there is an element of history, which I may open a bit here because obviously, there was a sort of a synergy between the industrial use and the power plant, particularly at the time when Kemira owned them both. And this has been divested by Kemira 15 years ago, but the power plant was not. And we -- I don't recall any similar situations anymore. We had a bit similar situation in our other industrial park in Finland, but that has been resolved, and it was a much smaller power plant there.

So we have another question by phone from Harri Taittonen from Nordea.

Yes. Maybe just sort of a couple of small things. I mean could you say roughly the balance between the sort of the volume and pricing when looking at the organic growth for Industry & Water, just to give a feel of the more of over 20% growth, like is it sort of how much is volume and how much is price? And then also, it would be interesting to hear the update on the energy. I think the last call, you gave sort of indication that sort of EUR 200 million is the total and basically EUR 15 million per quarter as the real exposure, but just give a sort of update on that with the current levels? And maybe just sort of last question, if I just show -- on the news earlier this week regarding the sort of polymer based on bio-based feedstock. I mean, can you put a bit more kind of in perspective how big a role this might play in the sort of target of raising the bio-based products to over EUR 500 million? And what's the scalability and associated CapEx and sort of prospects there?

I'll start with the last one. So this is an opening and a first sort of commercial industrial contract. So it's a start. And this is a driver by the municipalities of bringing their carbon footprint and handprint down. And so there is a demand for this. It is a drop in type of a product that goes into our existing manufacturing network. So really no CapEx needed. It takes a bit of time to scale, but this is a good start from there. And there's a definite sort of need from -- especially in European municipalities to drop the fossil use -- fossil carbon use. So a good start and a step to the EUR 500 million level, but a small, nice start. On the I&W volume versus price I don't have that number on my head. But as said, for the full year for the corporation, it was 7% on volume for price and last quarter, it was the other way around. And I don't think I&W is so much different in that.

Yes. I think the oil and gas volume growth has been significant. So I think it's a bit more skewed towards volume for all of I&W. So let me take the energy cost. So Harri, I offered you, I think what you, in a way, will help you. So because I gave you the fact that about 30% of the EUR 100 million variable cost increase in quarter was energy-driven. Energy and Utilities driven. So 30% of EUR 100 million is roughly EUR 30 million plus. And if you -- if that's in one quarter, you can do the math and what it would be in a run rate basis if annual run rate, if it continued. Now we don't expect that to be continuing, particularly -- I think we feel that this is a winter energy price spike. And if you look at the Energy forwards, they are moderating even if they are staying at a relatively high level, they are moderating by spring and summertime.

Some of the offset is in the sales price. So that's not -- that EUR 30 million is not a net-net.

So we have another question from Robin Santavirta from Carnegie.

Now I have a question related to input costs and especially when it comes to raw materials. Is availability, I understand availability is some kind of problem and they have gone up, but are you sort of facing a situation or [ create a ] situation now where simply you cannot produce because you don't have enough your you cannot run capacity at utilization because you don't have enough raw material. Have you seen that in Q4? Is that a risk when it comes to the start of the year? That's question number one. Question number 2 is related to -- could you somehow try to sort of provide some kind of color or information related to, in a sense, the sales margin or the margin Q4 versus start of the year? Was Q4 now the bottom in a sense? Or I know there's moving parts, but you know this and see this closer than we do. So how should we look at the margins of development when we go into [indiscernible] postponed a bit? Does that affect CapEx? Does that impact you more than a bit of delay and then the UPM strikes in Finland. So a questionable question, but I hope you can answer at least to some extent.

Raw material availability is not an issue so much anymore as it was early part of the year. So we are getting raw material. The question is being said so and so that can sometimes delay. But our utilization rate at our plants has been on a good level. So no real stoppages because of lack of raw materials. So that's not a factor. What is the value inventories are also on a higher level that we try to mitigate any bottlenecks that there might be. So I would say delivery risks are now higher than availability risks. Regarding UPM was one thing, Uruguay is continuing. They had announced some delay doesn't really affect us a lot, gives us a bit of room to also start up then eventually our units there. As you can imagine, we also have had slight delays due to COVID delivery issues, but nothing major there to report and yes, there's a strike going on in UPM, but I can open up that a lot rather big customer for us in Finland. And what was the third one?

That was sort of an effort to get a sense of how the how the year has started. And I think I need to play the back up here again and we sort of project further or future even if we have seen the January results, but let's wait until April.

But maybe, Petri fair to assume that nothing drastic has changed, maybe up or down or early this year and then we just need to sort of get the prices up to cover the cost along the year.

We are working on sales prices as we go along. Yes. And I would say that, obviously, we have seen the 10-year results now that we are issuing our guidance.

So we have no further questions on phone.

All right. There are no questions either from the webcast. So this concludes our webcast. As a reminder, our AGM will be held on Thursday, March 24, and the Q1 results will be published on Wednesday, the 27th of April. So many thanks for following. Thank you for the good questions. And with this, we wish you a happy weekend. Thank you.