Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kemira's Q2 2022 Results Webcast. My name is Mikko Pohjala, 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 interim report for January-June and we reported record high revenue and operative EBITDA. For the webcast today, we will first hear a short update from Jari and then Petri and then we'll go to your questions after that. And you can present your questions either via the webcast tool or then via the teleconference. And with this, I hand it over to Jari.

Okay. Good morning. Thanks, Mikko, and welcome from my side also. So we had a strong first half of the year and demand was good in all areas. Demand stayed good during Q2 also. Good to note, in Q2, typically is a time for maintenance shutdowns by our customers and our own sites and so did this Q2 also. Inflation continues to be high, energy prices are high. We have seen some early signs of pricing flattening in some raw materials, but very hard to yet say how this will continue. So as prices are catching up with higher variable costs, but as you can see from our margin, we're not there yet catching up, still a good H1 under these conditions. So as a summary for Q2, again a record high revenue and operative EBITDA, as Mikko said, our bio-based strategy is progressing as planned. We formed a new growth acceleration commercial unit, a task force meant to accelerate the bio-based and other agency businesses that we're driving. So that people don't do it part time, they do it full-time in this team and that will be up and running late this year, early next year. We are also committed to SBTi climate targets and our exit from Russia, which we discontinued deliveries March 1 and then announced in May that we will exit, is progressing well. And in early June, we upgraded also our outlook for the full year as the year has started well. So let's look at quickly the financials for Q2. Main financials; revenue EUR 861 million, organically up 24% compared to last year. Operative EBITDA, EUR 122 million with a 14.2% margin. Sales price increases compensating mostly for raw material increases, but we still have catch up to do. Some formula pricing is lagging behind as input cost continue to go up, even if the formula follows, but it follows with a delay, especially as seen in energy. Earnings per share, EUR 0.29 and for the quarter and EUR 0.56 for the first half of the year. Then, the segments on Pulp & Paper, strong quarter, even if most of our business in Russia was Pulp & Paper business and we have none of that business practically at all in Q2. Demand was good from all customer segments. Volumes came slightly lower, mainly to the Russian exit. There was also April still a customer strike here in Finland. Higher sales prices are going in and we are also working on contract mechanisms and pricing check intervals, so that we can react faster or go to formula type of pricing. Pulp & Paper revenue, EUR 488 million for the quarter and operative EBITDA, EUR 74 million with 15.1% of margin, which is good outcome in this situation. On the Industry & Water side, they did also well under the circumstances. Oil & Gas continues recovery, more work needed. Our Water business is very strong. Municipal water market strong and industrial also very strong. So those are really our backbones of business on top of bleaching for example in our Pulp & Paper side. Oil & Gas shale market continued to recover, but considering over $100 oil barrel price, share market recovered slower than we had originally estimated. So margins are not there, where we want to see them but going to the right direction. Organic growth, 26% driven by sales prices and volume was stable. Revenue for the quarter, EUR 374 million and operative EBITDA just under EUR 49 million with 13% and diluted a bit by Oil & Gas. We are working to catch-up with inflation and improving the Oil & Gas volume and utilization and price. Then I mentioned the SBTi and we are now committed to reducing to the 1.5 degrees and do it in Scope 1 and 2 by 2030. Our previous target was to reduce emissions by 30%, but going from 2 degrees to 1.5, it increased to 50% and we did a thorough study and have a clear plan how to get there. We are also developing Scope 3 and target to meet the same, but the SBTi organization has not given any guidance to the chemical industry sector on how to calculate the Scope 3. So we are following that and developing as we go on the raw material side. Our ambition remains to be carbon-neutral by 2045. And finally, our focus areas from my side going forward, working to mitigate the inflation pressures, follow the war in Ukraine and particularly relative energy and value chains. We are now quite far along in solving those type of issues from Russia and Belarus. Ensured delivery, reliability in volatile market environment and focus on the profitable growth and continue to progress the bio-based strategy. We need operational agility in order to capture opportunities and react to the ongoing fast changes that we see in the operating environment and we continue to construct to do capacity expansions ASA sizing in China and bleaching in Uruguay. So my short comments here and now I ask Petri to come and give more light on the financials. Petri, please.

Thank you, Jari, and good morning to everyone from me as well. So second quarter was largely a continuation of the trends that we saw already in Q1 and these trends and some of the key points, I'll now cover and those are the strong inflationary trend that Jari mentioned impacting raw materials, but also our ability to mitigate that with price increases. Energy costs, globally high and obviously now in Europe, there is some concern about even availability of natural gas going forward. And then I'll cover our Russian situation, our exit from Russia in general is progressing very well. So as Jari mentioned, impressive headline of 31% growth and organic growth at 24%. Volumes declined by approximately 5%, mainly as Jari mentioned because of the exit from Russia that we implemented already in March and then to smaller extent because of the customers strike here in Finland. Quite strong currency impact as the euro weakness against US dollar is the main driver behind the 7% positive FX impact. EUR 152 million of variable cost increase year-on-year, huge number, but obviously we've been able to offset that quite well and that's key to our financial performance in Q2 with EUR 188 million of price increases. So basically that means that price increases are at the range of 30% year-on-year, but still we have seen raw material increase in the range of 40% -- variable cost increase in the range of 40%. So we have still some work to do and obviously this is the driver for dilution of our EBITDA margin now at 14.2% for the quarter. Energy cost alone increased EUR 30 million year-on-year, although some of that we are able to offset with formula pricing that we have with our customers. Energy cost, we also are seeing increasing on a quarterly consecutive basis and EUR 6 million was the positive impact from the FX as strong US dollar is beneficial to us. These graphs are quite dramatic as they illustrate the unprecedented variable cost inflation that we have experienced during the last 12 months or so. Inflation continued, in fact, it actually accelerated during Q2 as we predicted in our Q2 call. Cost increases if you look at the whole full year or last 12 months, 4 quarters add up to EUR 433 million, which is almost exactly the same what we have been able to get through price increases on a last 12-month rolling basis, again, explaining the margin dilution as a drop-through margin of this price increase is zero. Typically, I also, at this point, give some indication of how we see the near-term future regarding these costs and now it's a bit more mixed picture. So as Jari mentioned, we see some raw materials perhaps peaking, it's difficult to estimate, but certainly for example, oil, has now come down from its peak although there are some raw materials which are continuing to peaking. Energy costs, we see as increasing in the second half of the year perhaps at a faster rate than the raw material basket otherwise. So net-net, we see the variable costs continuing to increase in Q3 and in second half of the year, but perhaps the increase is moderating from the first half, particularly from the Q2 rate of more than 10% per quarter. Few comments on our balance sheet. Our net working capital, continued to grow, primarily because of higher inventories and accounts receivables. Inventory value has obviously increased because of the pricing impact, meaning that the raw materials are now worth more that we have in our possession and also the stronger US dollar has impacted here, but we have also increased our inventory volumes. This is a conscious decision, so that we are better able to serve our customers when we are seeing supply chain disruptions across the board in many areas and then we have also had to resort to some spot purchases when raw material availability through our contracted sources has been either limited or constrained. So that has been increasing inventories and impacting net working capital, longer shipping times for Intercontinental cargoes as well. High electricity price is driving up the valuation of our energy assets. Kemira's share ownership in Teollisuuden Voima TVO and Pohjolan Voima PVO were revalued during the quarter and we are using this discounted cash flow method and it resulted in an increase of EUR 141 million, quite a significant increase. Also, the value of our electricity hedges, these are the type how we hedge our electricity purchases over a period of time here in the Nordics was increased by EUR 75 million during the quarter. So as the electricity prices have increased, over EUR 200 million valuation increase of these assets indicates the value of our backward integration to electricity production as well as the value of our electricity hedging program. Obviously, these increases are reflected in balance sheet only and do not have any P&L impact. Cash flow. Cash flow was impacted, like I said from the net working capital buildup. Also I'd like to sort of remind that typically we are seasonally impacted. So typically the first half of the year is weaker from cash flow generation and we do generate most of the cash flow during the second half of the year. CapEx running roughly at last year's level and we expect that for the full year, we will be within our guidance where we guided at the beginning of the year, up approximately 6% of revenue, excluding possible M&A impact. Regarding Ukraine war and our direct exposure to Russia, it is very limited, pretty limited and now well-defined. Like I said, business was stopped in March, and now most of our products are sanctioned, so we can't even export them to Russia. We have wound down our business in Russia and now our net assets in Russia consist mainly of cash, still some receivables, maybe a little bit of customer equipment and the cash now adds up to about EUR 11 million there. And it's fair to say that the near-term repatriation of those funds is difficult, but indirectly, obviously the biggest impact is felt through high cost and availability risk to energy and obviously this war is triggering the inflation that we are seeing here in Europe. Outlook, we increased on June 8 for the year and the new outlook, which we are now repeating is that both revenue and operating profit will increase from 2021 levels. Previous outlook indicated that the profitability would be approximately at the same level as in '21 and it's still worth pointing out the uncertainties listed in the assumptions page or assumptions part of the outlook, mainly that we're assuming that there will be no major disruptions for the manufacturing operations or further significant supply chain disruptions, whether it's on the customer side or on the supply side, and we assume that the normal energy availability in Europe will continue. Inflationary pressures will also expect to continue through 2022. Finally, a Capital Markets reminder. We will host a Capital Markets Day in London on September 13 and we will start in the morning because we notice that there is a sort of competing or different another value chain event in the afternoon. So this should now allow people to participate and we hope as many people as possible will participate there. With that, we're ready to move to the Q&A session. Operator, please.

[Operator Instructions] Our first question comes from the line of Martin Roediger of Kepler Cheuvreux.

I have a couple, sorry for that. Jari, you mentioned flattening of some raw materials and Petri, you talked about oil price peaking, so which raw materials do you see flattening?

Well, some of the oil derivatives have come slightly down or flattened acrylic acid, acrylic nitrile, especially in North America. And so it's spotty here and there, but for the first time now really in June, we've seen some of this effect.

Okay. And Petri, you mentioned perhaps some moderating in variable costs, are energy costs further rising and raw material costs easing and you mentioned 10% per quarter figure. What do you mean with this 10% figure?

Meaning what I said basically. During the quarter our variable cost basket increased by 10% on constant volumes. So on a quarterly -- I mean, I mentioned it was over 10%. I also mentioned that year-on-year, we've seen a 40%. So this hasn't been exactly the same in each quarter and probably the last quarter was one of the faster -- when we saw the faster increase in the variable costs. So that's what I was referring. There was a more than 10% variable cost increase in one quarter alone.

Okay. Then regarding the gas availability and also gas prices particular in Germany, I know you have some operations, i.e., in Dormagen for example, would your site be critical for the infrastructure in Germany and thus may get some prioritization in supply of natural gas?

Well, you mentioned Dormagen, so that's water treatment coagulant. So I assume that we will get some priority there and Germany and EU is at the moment planning these things on how they prioritize if they have to prioritize. But about the gas, I don't see us so hugely exposed. Of course, we are somewhat exposed, we're more exposed through our suppliers and potentially our customers, so that the customers cannot run either because of lack of gas or high prices of gas and the same then for our suppliers, but on the supplier side, the risk is the biggest.

Okay. And staying with Dormagen, are you concerned about the low water level of the Rhine river causing eventually the same headaches we had 4 years ago when it comes to transportation via the Rhine?

Yes. Following it, not much we can do about it, except the rain dance, but, yes, that's one other thing that if then Ludwigshafen doesn't get crude in and product out and these type of things. So then that's a logistics issue on top of potential gas issues.

And do you or your customers need cooling water from the Rhine river for the production?

We don't, certainly our customers do and our suppliers.

Our next question comes from the line of Anssi Raussi of SEB.

It's Anssi Raussi from SEB, and thank you for the presentation. About volumes, I think you said that the group level volumes came down 5% and this was coming from Pulp & Paper and that the main reasons were exit from Russia and UPM strike. So did we see the full impact of Russia exit already and how should we think about Q3 and H2 this year?

So yes, we've exited Russia, during March and April didn't export anything to Russia anymore. We had some local inventories and those have been practically emptied now. So this would be the run rate going forward. One thing I forgot to mention in my talk is that, also the lockdown in China is something that is a third component in the volumes as a lot of industries, people stayed home for 75 days in the Shanghai area and a lot of industries were down.

For business last year, if you think about euros was roughly EUR 70 million to EUR 80 million on an absolute basis last year.

Okay, thanks. And if I continue on this gas price and availability topic, have you heard anything from your customers like, are they reacting already somehow or what is the breaking point here, not the easiest question.

We do see some curtailment in Southern Europe, because of gas prices and availability, not material to us and short periods, but avoiding gas spikes and probably thinking on what inventory levels they have, but it's in individual board machines that we have heard of.

Have you heard anything like that at this and at this point we would like halt our production or anything like that, like in a bigger scale?

Most companies are public companies, so they don't come out with those type of things until they do it.

Okay. And maybe the last one from me about oil and gas activity and you said that activity was maybe surprisingly weak during Q2 and volumes actually declined. So how do we or how do you see the situation going forward and how should we think about that?

Well, we are trying to not push volume further because we have the new line and the under-utilization of that and then low volumes, I mean you need to optimize that, but we were anticipating a higher demand because of the spike of the oil price, but at least so far it has increased, but maybe not as much as we hoped for. So, let's see how the future then develops. Certainly, US needs that oil and gas because imports from outside is tough as you have seen from the news.

Question here in between from the webcast tool, since is related to the topic we just discussed. So Jari, can you elaborate more on the margin of I&W, to what extent is this drop in margins linked to Oil & Gas?

Well, we don't want to give that out and help competition, but like I said, Oil & Gas was a diluting factor in the margin for I&W.

Good. Actually one more question from the webcast tool. This is related to our climate target. So our aim is to be carbon-neutral by 2045. Is there a particular reason for such a slow timetable.

Yes, so 2030 Scope 1 and 2 neutral, that's [indiscernible] what we can do. We have the issue that Scope 3 for chemical industry is harder to come to grips. Our suppliers can't even yet give their footprint to us. So it takes time for developing that, plus SBTi needs to also give the guidance on how these things are calculated for the chemical industry, which they're in the works of doing, but haven't done yet. Our issue is Southeast US where we consume a lot of energy for the bleaching products and its electricity and there is not that much ongoing yet of decarbonizing that electricity supply. So that's why we need to give it a bit of time. Obviously if that speeds up, then we can move the 2045 forward.

Thank you. Then we can go back to the line, operator. Please.

Our next question comes from the line of Robin Santavirta of Carnegie.

I have a question related to recent development of business looking at your H1 numbers, they are really strong especially when it comes to the absolute level of earnings. What is the most recent sort of indications from customers about demand and business activity. We hear about potentially a bit weak because of the general economic activity now towards the end of the summer and maybe going into the autumn. Have you seen anything like that or is the indication still strong for customers and any sort of differences between your key markets.

So at least, our Nordic customers have indicated that demand, at least short to mid-term seems to be very strong. Obviously, they're very competitive players too and let's see what they say when they come out with their Q2. Like I said, some curtailment now seen in Southern Europe, Italy, Southern Germany because of gas prices or some other reasons, they haven't been articulated, but certainly gas price is one thing. So if you think of a board machine, the drying end is run with gas, so that's the situation. Our water business is very resilient compared to anything else. And you can compare 2020 and spring of 2020 how that hardly went down, some softness in the industrial water treatment side, but the legislation doesn't let you not treat water. If it comes in, you have to treat it, so that's resilient. I'd like to point out that we are a consumable in the customer process. So if they produce, they need our product or our competition product, they cannot produce without these products. So I see as our customer base, Pulp & Paper water treatment as a resilient side and not really indications of yet, but let's see how it goes forward. Certainly it's really hot market now, so maybe some cooling down might be even a bit good.

I understand that. Thank you. And then still one question related to the gas situation. How would you consider your position when it comes to the competitors? Do you have an advantage or a disadvantage when it comes to your largest competitors, if you would run into a situation where they will be sort of gas allocation in Europe?

I don't think we have a disadvantage or an advantage. Here in the Nordics, we use already LNG quite a bit and so and so. But to go that detail, we don't have that data.

Robin, if I may continue from there. I pointed out to the revaluation of our electricity assets because of our backward integration to electricity production as well as our hedging portfolio. I think there we clearly have an advantage over some of our competition because of that.

I understand and I agree. Finally just, Petri, you touched upon sort of still a bit of a headwind when it comes to variable costs, perhaps related mostly to energy. I guess we can assume that there is still some tailwind then from sales prices Q-on-Q in Q3 sort of offsetting to some extent the higher variable costs.

Yes. Our efforts to mitigate inflationary pressures absolutely continue and particularly on the water treatment side where we have perhaps some weakness in the margin. So clearly we there have more of this annual contracts, which are sort of trailing and as they are being renewed, they are being renewed at higher prices. So yes, absolutely it will continue there.

Our next question comes from the line of Harri Taittonen of Nordea.

You mentioned that you have going to shortened the contract length and sort of improve the sort of speed for sort of adjusting pricing to the rising cost, but I think we have talked about it a bit before as well that if costs are to decline, I mean, how is it then so that perhaps the prices will not hold as much as they have done in the previous cycles when costs have turned down from the peak or is it too early to comment on that.

Well, they're different mechanisms. In principle, that's the case. So it's a win-win with the customer that they accept faster price increases, but then they don't have to hang on too long with them, but there is always a time delay.

Yes, sure. And about the volume loss, I mean perhaps a stupid question, but I mean is there any part of that sort of 5% that you could compensate for kind of finding markets elsewhere or transferring or is it simply out, so that we should look at Q2 as the starting point for the new available kind of capacity.

When it comes to Russia and the UPM situation is obviously over, that's not the 5%, but that's in the 5%, so that's a net because we have found some other outlets for those products that travel well.

Okay. And then finally on the -- I mean it's interesting we talked about this as well before, about the CapEx guidance. I mean 4% of sales versus 5% last year. After this point of the year, you indicated 6% of sales and sales are sort of increasing by 30%. So is there something in the CapEx side that is sort of is following the sales inflation or it seems that it's a bit sort of back-end loaded CapEx anyway, but fixing it to say with such high increase in sales prices, is it so the CapEx really follows the sales?

So Harri, first of all, I am not sure if I heard the percentages correct. Last year CapEx to sales was about 6%. In the first half of the year, we are below that, but as you rightly noted, our CapEx tends to be back-end loaded, so second half and even fourth quarter loaded. So yes, I think last year, now of memory CapEx excluding M&A was something like EUR 170 million. So the 6% at the beginning of the year was already perhaps indicating and we were already seeing that the revenues will increase, was indicating a higher CapEx than last year, but still as a lower percentage because if you look at past years, we have had 7%, 8% of sales going into CapEx. But having said, obviously the inflationary trends that are impacting our business is impacting our sort of a CapEx as well. So steel and that you need to build new pipes, it's more expensive than it used to be. So it doesn't necessarily follow the sales, but yes, we are seeing inflationary trends for our CapEx projects as well.

Harri, there are other factors also. So there are delays and availability issues, shipping delay. So it's a timing issue also and we are managing our projects also. Some projects will not be started this year which we planned to start this year, talking about smaller projects, maintenance and improvement type of things.

Okay. And then finally maybe on the more strategic level than thinking about the sort of investment environment and CapEx outlook, say after the 2 lots of projects that you are now working on, but how does it look, does the -- for example, the sustainability targets or sort of where do you see the openings for new sort of CapEx projects beyond the already known projects?

Well, the bio-based certainly will be a program where we need added capacity or new type of capacity, either partnering, tolling or investing ourselves. So that's being developed and first we just need to get the products out there and proven and then when we have those type of products, the new technology, certainly CapEx will come from that area. We still have our maintenance and improvement CapEx and then we have areas of pockets of growth and some new green ideas that we are looking at. We are quite a bit hydrogen producer for instance in Finland as a side product and then as I said earlier, we're more looking into also potential M&A.

[Operator Instructions] And we have no further telephone questions at this time. Please go ahead.

Thank you. We have one question from the line. The question is why did our fixed costs reduce. So there's probably a misunderstanding. So our fixed cost increased by EUR 18 million. Anything to comment there, Petri, general inflation very low comparison point, anything else?

Yes. I think it's generally inflation. So we are seeing inflation running globally 3%, 4%, in some regions much higher. So clearly, it's impacting salaries. We are seeing also somewhat increasing travel costs. We are back to traveling even though, not yet at fully pre-COVID levels, but for sort of over the last couple of months, we have seen travel up to 75% of the pre-COVID level. So in that sense, some of those costs, which were came down during the COVID times are coming back, but not fully and I don't expect them to come back at the full level, but those are probably explaining year-on-year trends.

And that is without FX rate. So the other thing is that we had a couple of bigger shutdowns this quarter which don't happen every year and those bringing [down] CapEx, I'm sorry -- fixed cost when we do the maintenance shutdowns.

Good, thank you. No more questions from the webcast tool either. So many thank you for your questions and many thank you for participating. As a reminder, we will publish our Q3 results on Tuesday, October 25 and as Petri mentioned, before that we will arrange our Capital Markets Day on September 13. So hoping to see as many of you there as possible. But with this, we conclude the call and wish you a very nice weekend and a very nice summer as well. Thank you.

Thank you.

Thank you.