Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning everyone and welcome to Kemira's Q1 2022 Results Webcast. My name is Mikko Pohjala from Kemira's Investor Relations. And I'm accompanied by President and CEO, Jari Rosendal; as well as our CFO, Petri Castren here in Helsinki. Earlier today, we published our Q1 report and we had a strong start to the year. First you will hear a short update by Jari and then Petri, and then we have reserved more time for your questions after that, which you can present either via the teleconference or then via the webcast tool. With that, Jari, I'll hand it over to you.

Okay, thanks Mikko. Welcome from my point of view also. As said, we had a good and strong start to the year with good demand from all of our business areas. Inflation continued high and as we have previously said, we expect it to be high for the first half of the year, but obviously doing -- due to the Ukrainian war situation, it will be intensifying during the year. Yet to be seen how it will play out. Sales did catch up with higher raw material cost, but due to the new inflation pressures that we see coming, that game continues, and we need to be vigilant with that. So still a good start to the year. So a summary of Q1, record-high revenue and operative EBITDA in absolute numbers. Due the war started in late February, we announced discontinuing our deliveries to Russia and Belarus on 1st of March, 5 days into the crisis. And on 4th of April, then EU in its fifth sanction package banned exports for most of our goods, so now we can't even deliver. The revenue from mainly Russia from last year was roughly 3% of the group total revenue, so a small impact not a huge one. During Q1, we also had our Annual General Meeting and dividend payment of EUR 0.58 was decided and half of that has been already delivered or paid out in 7th of April. Our '22 full year outlook is unchanged. Then going into the Q1 main figures. So revenue, a new record, EUR 768 million and up year-on-year 27%. Operative EBITDA EUR 120 million, that also a record, with a margin of 15.6%, and goes to show that yes, we have caught up with pricing but not gone above the pricing on catching so much value from that part of drop-through. Sales prices increased completely -- compensated mostly for the raw material prices, but we still have work to do on that area. EPS for the first quarter, EUR 0.26. Pulp & Paper had a strong quarter. Demand was strong from all areas of business and customer segments. Volumes came slightly down mainly due to a prolonged strike here in Finland by a large customer. That strike ended now into -- on 22nd of April. Higher sales prices coming in, but we are working also to -- on contract structures and pricing check intervals with the customers to balance that out better when going up on raw materials. Pulp & Paper revenue for the quarter EUR 447 million and operative EBITDA, EUR 71 million with 16.0% margin. Then Industry & Water did also well, and Oil & Gas now, clearly from a volume point of view, has recovered. Water business continues to be our stronghold and backbone. Municipal market continues to be solid and the industrial market also strong in water treatment. Oil & Gas, shale market demand has recovered. Margins are still not where we want them to be but going to the right direction. Organic growth for I&W, 31%, driven by sales prices and added volumes mainly from Oil & Gas. Revenue EUR 322 million and operative EBITDA EUR 49 million and 15.2% of revenue. Q1 is seasonally a bit weaker for I&W. That's good too note. Then a bit more detail on Oil & Gas which is part of the I&W segment. And this sort of bit more information as the situation due to the war has changed the Oil & Gas energy sector. Shale market in North America continued to grow as oil prices are high, close to $100 a barrel. Demand from chemical enhanced oil recovery customers remained solid. And oil sands tailings business did not happen during Q1 due to the winter weather but now deliveries have started already in April. Growth, obviously, in Oil & Gas very strong year-on-year, but you can see from the graph that the revenue is now exceeding comparable level in 2019. Also from the upper right-hand graph, you can see how the rig count and the frac crew count is developing to positive direction. Profitability for our Oil & Gas business is improving but still work to do in that area. Bit more then on the Ukraine war situation. As said, we discontinued our deliveries to Russia, Belarus in early March, and now we are on the sanctions list as of a couple of weeks back, so that business cannot even anymore happen. We don't have any manufacturing assets in Russia, Belarus or Ukraine. They are pure export markets for us. And we have mainly exported from Finland, but some other European countries have done deliveries to the area also. We didn't have meaningful sourcing from those regions, and we are now using alternative sources and finding alternative sources for raw materials. Kemira uses natural gas in some of -- many of our sites in Europe and some are dependent on it. So we do have exposure, but in our view, the exposure comes more from our supply chain and the customers who use significantly natural gas and some very dependent on the Russian deliveries. So at the moment, accelerated inflation which we didn't really see in Q1, but probably we'll see in the future, is the biggest impact. And I'm really pleased about our organization's capability to react really fast. We were in hours and days in crisis management mode, and we're able to react to this and mitigate the impacts really, really fast. That's the nature of Kemira organization. With my short comments, key operative focus areas for going forward. So following to mitigate the impacts of the war and ensure delivery reliability to our customers, focus on employee stakeholder safety is high on our list. We continue to focus on profitable growth and especially our biobased strategy sort of continuation. And I again mention the delivery reliability because markets are very strong. And now even the Chinese COVID situation, Shanghai lockdown is then the next possible challenge. We didn't see that in Q1 yet. Only 60% of world's biggest port in Shanghai is operational. So mitigate the inflation, ensure operational agility to react to situation and capture market demand. And we continue to construct the expansions of ASA line in China, bleaching line in Uruguay and ramp up then the plans that we started up last year. I'll conclude my short comments here and ask Petri to continue with the financials. Petri, please.

Thank you, Jari, and good morning. Good morning for me as well. So obviously, market environment has become very much challenging and very difficult to predict. And therefore, the agility and responsiveness has become really more important than ever. And against that backdrop, we have really gotten off to a good start for the year. Again, points that I will emphasize during the next few minutes are the inflationary pressures. They have accelerated during the quarter and are expected to continue. So I'll share some data about that. Obviously, on the sort of a net pricing versus variable cost, we have now turned to positive territory for the first time since 2020, and that's a big positive and a very good outcome. And then let's not -- and we will need to touch on some of the external risks that we have considered when we are giving our outlook for the rest of the year. But starting then with a traditional profitability bridge, so 27% revenue increase. 23% of it came out of volume and then about 4% FX impact, which basically means that volume was roughly flat. And volumes were down in our Pulp & Paper segment, but the strike that Jari was talking about was clearly an impact on that as well as some of the Russia deliveries that were sort of lost for the month of March. So if one was to normalize for these impact, we would have had modest volume increase in Pulp & Paper as well. In I&W, we did see volume increase, as again, as Jari was saying, driven by Oil & Gas. Variable cost is obviously a big thing, EUR 122 million year-on-year. That's a well over 30% rate of increase year-on-year. So I've been with Kemira for 8 years and some, clearly the fastest inflation that we have seen and really require a very dramatic pricing actions from our teams, which we have done quite well. And we have seen it accelerating. So from Q4 of last year to Q1, the price increases over 10%. So if you were to analyze that, that's a 40% rate. And in fact, as the market continues to be challenging, so we see another 10% or 10% plus increase for Q2 versus Q1. And that's really as far as we can estimate. The market is so uncertain. We hope to see some stabilization, but really, it's difficult to estimate longer-term inflationary or raw material impacts. Energy alone represents almost EUR 30 million out of the EUR 122 million on a year-on-year increase. Obviously, the big positive is that for the first time since 2020, we have now a positive net, although the drop through margin that Jari mentioned, is still weak. So out of the EUR 160 million of additional revenue, we're getting something like EUR 15 million of additional EBITDA which is sort of a fairly modest drop-through. FX and increased fixed costs played a relatively minor role compared to the price and cost impacts and there's -- those were largely offsetting each other. And in fact, I would -- I'm quite happy that we have been able to offset the inflationary pressures on salary side and on fixed costs quite well. So really the fixed cost increases below the overall inflation as we see so far at least. Jari talked about the operating side of the Russia, a little bit more on the financial side of the Russia and Ukraine war situation to us. Fortunately, our exposure to Russia is relatively modest. So last year, we derived 3% of our revenue from Russia. We have a sales subsidiary with approximately 50 employees and no production assets there. In the quarter we took EUR 3.6 million charge and we took it as an item not impacting comparability. So this is not in our operative EBITDA and this charge covers mostly logistics equipment. Railcars that are at risk of not being returned and also trade receivables where the customer is not paying on the back of the sanctions and are not able to pay. We wanted to be very transparent about our exposure. So the remaining net assets regarding Russia are about EUR 13 million at the end of the quarter. And that's between our Finnish legal entity as well as the local entity in Russia. And that now consists mostly of cash, receivables and some customer equipment that we have on the customer sites. And since end of March, we've been able to receive some payments from Russia, but obviously, it's getting more difficult all the time. This -- we need to soon increase the scale of these charts, so fast is the increase on inflation and on the costs. So again, lumping the last 4 quarters so to demonstrate the impact of the cost the impact is EUR 324 million. And again, like I said it has been helped with an accelerating trend. And at least for the next quarter, we'll expect that this trend to continue to the variable costs. And again, this is highlighting the need that we will need to continue to work with our customers -- customer pricing. And just a sort of reminder, last year when we started to see this trend, we were able to compensate a lot of it with additional volumes as the world was sort of recovering and volumes were increasing on the back of the COVID lockdowns that were easing off last year. But this year any material growth we're really a seeing only in Oil & Gas, otherwise in the rest of the areas the volume growth are relatively modest, and obviously at risk depending on what happens to the macroeconomic situation. Cash flow, Q1, seasonally weak as I often talked about, but obviously now in Q1 the -- we have tied more capital into networking capital and typically -- and obviously 2 reasons. One is the volume impact. So very high sales, obviously, ties up capital in receivables, but also in inventory. We have seen inventory values increase and that ties up capital. There is some inventory built up by design, so we feel that it's important that we are sort of prepared better for disruption so that we can continue to service our customer. And that strategy has sort of served us well during this difficult times. More of a house housekeeping matter, we did receive EUR 10 million of excess capital return from our pension fund Neliapila. This was already mentioned last time we got this meeting. And our CapEx starting off at a modest pace as last year, but we are -- we're keeping our full year CapEx forecast unchanged. Regarding gearing, operative ROCE, which is the main KPI we use for capital efficiency improved on the back of a strong quarter, even as our capital -- or capital tied to the business increased. Balance sheet has a somewhat higher net debt, but leverage ratio remained at the year-end level. Few words about energy, and as obviously energy has become quite a focal point, I guess one can say at this point. So they are increasing and have become a bigger cost item for us. We now have seen in recent quarters energy increases at the rate of 40% to 50%. Fortunately, our direct exposure to gas is significantly smaller than our exposure to electricity. And a portion of the electricity is really hedged through a formula pricing with our customers or through availability of electricity in Finland at production cost. With that in mind good to note that Olkiluoto 3 has already been producing electricity in -- on a trial basis and it's getting ready for commercial launch later in the in the year, now currently scheduled for Q3. This also increases the level of emission-free energy that we have sort of with -- between Olkiluoto 3 and the additional wind purchase contracts that we have done for renewable wind energy. They are actually raising the level of the share of emission-free, clean energy to 75% in Finland. And again, that's a combination of our nuclear, hydro and now wind energy. When we talk about outlook for the year, it's worth noting the uncertainties first, and as they have increased during the quarter. So inflation, I talked a lot about inflation and the rates and the expectations. COVID-19 is certainly a risk particularly in China, what it might do for the global supply chains; and, obviously, war in Ukraine and it impact on energy availability and price. Just today we have seen some news about gas availability in Poland and Bulgaria, which is sort of disturbing a little bit. End markets are expected to remain good as most of our products are used as consumables in our customers' processes. So summarizing, our basis for market outlook assumes no major disruptions from the war or the COVID-19 risk. Inflation pressures are expected to remain strong for the year. Having now the emphasized the risks, we are maintaining our '22 outlook on unchanged, so revenues are expected to increase and the operative EBITDA is expected to be within the 5% -- plus or minus 5% range compared to last year's EUR 426 million. With that, I'm ready to conclude my remarks, and we're ready to move to the Q&A session. Operator, please.

Thank you, Petri and Jari. We actually have already a couple of questions in the webcast tool. So maybe we'll start with them, and then we go to the teleconference line as they have been here for a while. So 4 questions. First one, this is for you, Petri. Could you specify year-on-year volumes in each division?

I'm not sure if we give them out by segment but sufficient to say that it's sort of -- with the strike impact and with the Russian impact on the Pulp & Paper side, they are negative mid-single-digit type of a number. And again, offsetting that positive, so that the net impact for the group is sort of flat 0. But like I said, normalizing the Pulp & Paper impact for the strike, we would have seen a small positive on the volumes on Pulp & Paper side as well.

Thank you. Then the next question is related to sales price increases and variable costs. So sales price increases more than offset the variable cost increases already in Q1. Do you see this trend continuing in the coming quarters? If so, could there be some upward pressure in your guidance?

Well, now the visibility on the inflation side is bigger than we saw a couple of months ago. So it's hard to estimate, but we have to work on the sales prices and contract structures going forward.

The next question is referring to what you, Petri, said during your presentation. So just double-checking, when you mentioned the variable cost trend is continuing in Q2, do you mean that we will see the same kind of increase as we saw from Q4 to Q1?

I thought I was actually pretty specific in saying that we saw Q1 over Q4, 10% plus, and that we would expect 10% roughly plus for Q2-Q1. So that's basically at the same rate on Q2. And all things being equal, the base number is even bigger.

And final question from the tool for now. Could you quantify somehow the impact of Chinese COVID restrictions if the situation remains as it is now? I guess hard to quantify but maybe a bit of background information, Jari?

So at the moment, it's about the Shanghai and potential Beijing lockdowns. Our operations, meaning our manufacturing cities are still operating well and no impact there. More we see that as the logistics value chains, especially the Shanghai port, is partly down, that will somehow be visible and make logistics more difficult impacting the whole world, but to quantify them is not so easy.

Thank you. And with this, I think we're ready to move to the operator.

Our first question from audio is Martin, Kepler Cheuvreux.

Just 2 questions left from my side. Firstly, on the visibility, not on inflation but on volumes in your order book, do you -- I mean we hear from other companies that the visibility for volumes is reduced now currently compared to the past. Is this also the same for you? And if so, can you provide a figure about what is the visibility on order booking volumes in terms of weeks and how that compares to the past? And secondly, a clarification question for Petri. Regarding this data between the selling price impact and the variable cost increase, so the EUR 16 million on the EBITDA line, in this context, Petri, you said that the drop-through margin is weak. Can you elaborate on what you mean with that?

So volumes outlook, at least coming months is go -- on a same level as we have seen before, unless there are some disruptions. As I said, we're consumable in the customer process, so when they produce a certain part of our products are going in. Water is water, so that's a backbone and a sort of a safe area. And also Pulp & Paper demand, if you look at now the first quarter reports coming through from our customers seem to be solid. And Oil & Gas is, obviously, in the west picking up because of the crisis situation, banning the Russian oil from the west. So volume should be good unless some unexpected disruptions come to play.

Okay. And the clarification on the drop-through margin. So at this time, we used using drop-through as a term for additional revenue and sort of how much you get more profit from the additional revenue. So the drop-through comment that I made was simply adding the -- deducting the net increase in revenue, which is roughly EUR 160 million and the net increase in EBITDA, which is roughly EUR 50 million. So that's just mathematical. Now that may not be quite, in this context, so relevant. And obviously, you mix because particularly, this is not volume increase as we've already talked about. This is pricing. So obviously, everything is mixed. But one would like to see that increased revenue actually in -- at least maintains your profitability, if not even improve your profitability.

Have work to do.

Maybe a follow-up on that. You may also mention that although it looks that the price effect is bigger than the impact from the variable cost, you also said that you are not completely have achieved to pass on increased cost to the customers. So what is still missing? Can you help us a bit to understand what you intend to catch up in the course of this year?

Been a catch-up game already for a long time. So the basket of raw materials have been on a certain level, and we've been catching up to that level, and now we're slightly over, but we're not getting the profitability. So we have to do that. And now the inflation is expected to run away from us again. So it's, again, hard work. And organization has done good work with that, but that work needs to continue.

Maybe if I can -- I'll give you an example. I think our Pulp & Paper segment has done a good job in actually changing some of our customer -- or good part of our customers to more formula pricing and more sort of frequent pricing checkpoints, which is in this type of marketplace is absolutely the right thing to do. In our Industry & Water segment, we have a lot of these municipal water customers, which are tender-based businesses and tend to have this 1 year, sometimes even longer fixed-price contracts and there, the ability to react is more slow. And therefore, we will likely see perhaps more continued pressure on that side until we sort of get further -- get more maturity on this effort. Well, it’d be possibly Q3 before we start to see improving margins in the I&W, municipal segment.

Question of volume allocation also to the customers and between the customers that -- those that are ready to meet us with the sales price checks, obviously, we take good care of those people.

Next question is Harri Taittonen.

Harri Taittonen, Nordea. I guess, it was me. Yes, obviously, very convincing pricing power evidenced, congratulations on that. Related to that, I mean, how would you describe the acceptance for these price increases? And is it -- is it sort of broad-based or is it more proactive than others? And what's kind of the market share competition in that regard? Or is it supporting that some competitors of yours are having to take downtime because of their high cost, which is kind of improving the acceptance of -- but how would you describe this sort of reasons behind this pricing power?

Well, it is not an easy discussion with the customers. That's for sure. But in some, the increments are big. They're not single percentage points, there are tens of percentage points. And as I said, we also allocate volumes. So if we can't get price through, we might walk away and give the volume to customers that are willing to accept those prices. There are 2 other factors. The demand for our customers -- from their customers is good. So -- and they have also seeming to have a good pricing power themselves. And we have been a secure supplier. So we haven't let our customers down in supply security, which gives us at least some backbone to argue the price hikes.

Yes. So it's more about the demand and customers are also doing well, rather than a competition suffering from too high cost and closing down or things like that. So it sounds like -- that sounds good. On the other question, should we raise our absolute CapEx estimates because at the end of the day, the sales was almost 10% higher than expected and price increase is continuing. So is it so that the CapEx estimates would be revised in line with that?

Let me take that. I tried to be specific. We are CapEx estimate. Absolute euro has remained unchanged. So we haven't -- and yes, you're right that we gave the guidance on a percentage term, I actually checked it still rounds up to the same percentage number. But the decimals, you may -- if you had the background data, might be now lower than they were 3 months ago.

So no new sort of investment plans, what we have had. Of course, the inflation goes into some of the inflation projects, but no new sort of initiatives ongoing.

So current plan still rounds up to 7%. I'm giving you that much of a hint.

No more questions from audio. Thank you.

All right. If there are no further questions, I have no further questions from the webcast tool either. So this concludes our call. Many thank you for the questions. And if there are any remaining ones, so please reach out to me. And with this, we wish you a nice week. And I remind you, we publish our Q2 results on Friday, July 15. Thank you.

Thank you.

Thank you.