Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone, and a very warm welcome to Kemira's Q4 2022 Results webcast. If you don't know me, my name is Mikko from Kemira's IR, and I'm here today with our President and CEO, Jari Rosendal; as well as our CFO, Petri Castren. As you surely have seen, so we have published our financial statements bulletin today for 2022 and with a very strong set of results. First, we will start with a short overview by Jari and then with to Petri's overview of the financials, and then we hand it over to you for some questions. And you have the ability to ask questions either via the teleconference line or then via the webcast tool, and I will moderate those. With this, Jari I'll hand it over to you. All right.

Thanks, Mikko. Good morning on my behalf also. What a year we have behind us. I mean, very challenging operating environment with a lot of disruptions, huge cost inflation, energy crisis, at least in Europe. So, yet the Kemira organization has managed this really well and work around the problems, find workarounds, and solutions really fast, and this has resulted into a record result this year. I'm really proud how our organization has overcome these challenging conditions where we have been operating. Highlights for the year, a record year for us and record high revenue and operative EBITDA, continued improvement in customer satisfaction and employee engagement; smooth operating performance despite all the disturbances. Our delivery accuracy has been really high, and it has taken a lot of effort from the organization. In March, obviously, we exited the Russia-Belarus business, and that went smoothly, and now we're fully out. Strategic focus on new growth accelerator has been formed, and we will drive the biobased and new application areas with the specified team, the 100% focuses on this and helps our regular commercial teams in both segments. Also, during the year, we committed to a science-based target initiative, and that led to increase our Scope 1 and 2 emission targets and we are on way there. We actually decreased our Scope 1 and 2 by 5% last year. If you look at a bit of a longer perspective on how Kemira has been able to improve year-on-year the last 5 years. And you look at the revenue, it's grown. Obviously, last year, the revenue grew much on pricing, not so much on volumes, but still a clear growth. Operative EBITDA in euros, a clear jump ahead and so good progress. Then when you look at the leveraging ratio, so balance sheet is really strong, and we are fit for fight. Then the enablers, why have we been going to this direction since several years is one is the growing employee engagement of them getting self-confidence of being solving these things, managing the pricing. Luckily, our customers have been taking the higher prices also to their prices. So that has worked well and the engagement has helped people to be motivated and solve these problems. Then that has led to a significant increase over 5 years in the customer satisfaction and feedback to us and delivery accuracy, technical know-how, process know-how, problem solving are the issues that we can help our customers with, and they indicate that we have done a good job, and that then has led to this financial performance. And so those are critical enablers also going forward not knowing how the economy now then this year is going to develop. Going to the financial highlights of the year on a group level. So really strong Q4 but if you look at the full year numbers on the right-hand side, quite a robust growth, especially on the EBITDA line and still holding the margin at 16%, which is well in our 15% to 18% window and last quarter was over 18%. So actually, over the window, but our window is for an annual margin, not a quarterly margin. So Q4, EUR 968 million of revenue, up organically 30% and operative EBITDA, a big number, EUR 177 million and 18.3% margin. Both segments improved their profitability clearly so it doesn't come from areas our base business is in really good shape and in an improving trend. Revenue growth is driven mostly by sales prices. And then we have some electricity adders and caustic market price has been high, and we are a producer of caustic here in Finland. So that has benefited us as those will ease off, but we have the other components coming in and contributing more. Cash flow improved clearly. So, we released in the last 4 months of the year, cash quite nicely and net working capital came to a reasonable level in this situation and cash was there. EPS was EUR 1.5 per share, and the Board's dividend proposal is EUR 0.62 per share, really strong end to the year. Then looking at Pulp & Paper and really a record year with exceptionally strong Q4 revenue, EUR 556 million and 28% organic growth driven here also sales prices and in the pulp chemicals, which includes then the caustic sales and where market prices were extremely high because of some disruptions in the value chains. We started to see some softening of demand in Central Europe and in China, China still had the COVID lockdowns most of Q4. So that was there but the pulp business is strong and demand and volume demand for us is strong there. Operating EBITDA for Pulp & Paper, EUR 111 million and a margin was 19.9% for Q4. Then Industry & Water performed also in a strong way. Municipal market, as we have said before, really strong and solid and not very volatile. Industrial markets, strong; also, in water and oil and gas, as Perusal has recovered. We still have some work to do with the profitability, but it's going to the right direction. I&W revenue, EUR 412 million, growth of 32% organically and EBITDA of EUR 66 million and if you look at those curves, that's a good number and margin also started to increase in I&W, so good to see. As a reminder, in Q4, when you look at the top line, the oil sands deliveries typically start slowing down and stopping October and so for the winter months, there's no deliveries there until then April, they start again when the ice melts on those tailings ponds that our chemicals are used to treat them. So that's not a worry. That's just the seasonality. That is normal in I&W business. Then sustainability also, which is high on our list. And we watch this as importantly as we watch our numbers. And these are our key performance indicators, the 5 of them. So, people safety, we had a tough start to the year and the weather conditions were very icy in the Nordics and North America and a lot of slip trip and fall type of accidents, luckily none were very, very severe. But by towards the end of the year, we had special programs, and we improved on that. And actually, our TRI was 1.7% in the last quarter of the year so our run rate needs to continue. People. So, diversity and inclusion, we have had several employee groups forming to develop this forward. It's an important thing for us because we are very multinational, I think, over 40 nationalities working for key for us. So, people need to feel that they can be their self and work and express their opinions freely and that's what we want to drive and get everyone's brain into the game. Water. -- obvious one for us as a key KPI. And CDP rating is the same B as previous year, but the expectations have risen. So, we were able to keep that B level and even if we have tougher targets to meet. So, in my book, we improved in that area also. Circularity, we use a lot of circular and secondary products from other industries and turn them into our products and this way, the raw material base is there. Also, the biobased program is going well ahead, and we are driving that, and we have that new technical and commercial unit that will be focusing 100% on these new areas and accelerating the launch to the market. And then climate, which is an obvious one, Scope 1 and 2, I talked about the STPI and we improved 5% on the emissions compared to 2021. So last but not least, so focus areas. We need to retain organization operational agility as well as the high customer satisfaction, and there are really rapid movements in the markets and anomaly. So, our organization is well equipped to take that into account and react when needed. Involuntary pressures, those are easing off now some but, in some pockets, we still have it. And energy, although coming down now in -- especially in Europe, it's still on a higher level than before. So, we need to keep an eye on that and focus on cost consciousness. We have 2 bigger investments ongoing. In Uruguay, our bleaching expansion in the back of the UPM investment that will be starting up this spring. And then ASA sizing line expansion in China. That is not only for China, that's a global source for our ASA sizing product, so that is progressing quite well. And if I look at the strategic priorities, we have many, but growth pockets in our existing business. Obviously, we need to keep taking care of our base business and find those growth pockets, but we are focused more on M&A and especially in the water area is what we are interested in. Biobased I talked about and then explore areas of new application areas and one emerging one is the textile fibers, making wood fibers into textiles, or making other fibers into textiles or recycling textiles. So that's really emerging, and we are talking to a number of players in that area. The other area is services and especially digitalization services, and you saw that we made an acquisition of a digital player here in a few weeks back. We also appointed a new position to the Kemira Management Board. We haven't had a strategy head on that level. We have had segment strategy people and corporate strategy people, but now we get a senior person there, and we just needed to add capacity there and get a senior person from the chemical industry to add there because we are looking at more expansion in our area, and we need just more hands and brains to help us there. I conclude my short-term comments here and ask Petri to come and give more on the financials.

Thank you, Jari. I'll also try to keep my comments relatively short so we have time for Q&A. But really, regardless of sort of which primary statement you look, I think our report is very strong. Record profitability, as Jari mentioned, driven by our ability to pass on price cost increases to prices, very strong cash flow, and then balance sheet is strong, which gives us strategic optionality and optionality to drive our business further. But let's start looking at the profitability drivers. Organic growth, 30% in Q4. FX was a positive 5% that gets to the 35% reported growth rate. Volumes did come down 8% in Q4 and pretty much for the same reasons as we said in after Q3. So basically, the exit from Russia and Belarus, like Jari mentioned, the China and APAC volumes came down because of the COVID lockdowns in China. And also, there was some impact from the macro economy -- so pulp & paper industry clearly faced some customers face curtailments, some were energy-driven in Europe. And there were also some areas of where our customers or their customers in the down in the value chain, there was destocking of product. We flagged in Q3 that high caustic prices were known already at that time and that they would be impacting Q4. And indeed, we benefited of caustic in terms of higher revenues and higher profitability. But if you look at our cost price performance, that was very good across the board, and it was visible in the profitability improvement in both segments. And we improved margins sequentially in just about all key product areas and product lines, particularly as the input costs started to level off, again, sequentially year-on-year still going up significantly, but sequentially, there was leveling off and even some decline in some areas. Fixed costs increased by EUR 31 million during the quarter and more than EUR 70 million for the full year. About half of that is actually higher incentive accruals so it's sort of obvious that incentive accruals are high in a year like this when we did exceed our targets and particularly if you look at where we thought that the year would be at the beginning of the year. Travel also increased from '21. Obviously, '21 was impacted by COVID-related travel restrictions. So that was an artificially low level in terms of travel, and it started to rebound, particularly on the second half of the year. And full year cash flow really shows how good this performance was EUR 900 million of additional revenue with an increase of EUR 150 million roughly in terms of profitability on EBITDA line. And this actually indicates more than 16% drop-through margin. And if you sort of look at it, that's a big improvement in the drop-through margin over the year. So initially, the drop-through margin was around 10% but now we are actually really helping our results there. Now if you look at in Q4, obviously, a significant gap opened between the sales and cost curves. And again, when worth repeating that when you look at particularly the chart on the right, even as the dark blue line is climbing down, it's still above the horizontal line. So, meaning that the costs increased EUR 10 million, EUR 141 million to be exact year-on-year. It's just that the pace is slowing down. Energy costs came down during the quarter, particularly in December, and actually this trend has continued in January. And this will, if it stays that way, it will impact the pricing of our formula and market priced products, particularly those which are highly energy intensive now in '23. and caustic price, which Jari already quoted or mentioned, we know really know that the market price is coming down from February onwards. So, this will start to have a leveling impact from the high levels where it was in Q4. Regarding balance sheet, I mentioned very strong balance sheet and gives us optionality. Net debt came down by EUR 80 million in a year. And I think this 1.3 leverage ratio is probably the lowest it has been for a long time if ever in Kemira history and there's just 0.5 turn improvement in 1 quarter alone. EUR 100 million net working capital improvement in Q4, obviously helped capital efficiency and drove cash flow from operations to EUR 400 million, and that's the number you can see here. Cash flow typically is quite seasonal for us, and I've been saying this for a number of times, and you see the seasonality in the -- for the last 4 years but obviously, this year was even amplified. The seasonality was amplified because of the high increase or very rapid increase of raw materials and the supply chain difficulties, which particularly impacted the first half of the year. So, there was a fair amount of net working capital buildup in the first half of the year, and we were able to release some of that in the second half. So quite a strong seasonality in terms of our cash flow but really no special tricks there in just the seasonality that we have. And as a forward-looking statement, I think we can say that the seasonality will probably continue next year as well or this year, 23%. We already know that on the back of the very good year. We are facing significant cash outflows for tax payments. We already actually made a significant tax payment in Finland in January. And obviously, also the higher incentive accruals will be paid out mostly in Q1. So that will impact negatively Q1 cash flow, but nothing out of the ordinary in a way there. Cash flow was also helped by a sale of a manufacturing unit to a customer. This was in the quarter and that also resulted in a gain, which is reported as an item affecting comparability. So, it's not part of our operative result, but as one of the IAC items that we are disclosing in the release. Capital expenditures landed where we expected around EUR 200 million. And again, it's a little bit of a guidance for '23, we see somewhat of an increase there, maybe 10%, 15%, again, depending a little bit of the timing of projects, but it's also impacted by general inflation. So, all the costs, as everybody knows, whether it's labor costs or piping costs, everything is going up. And that's the guidance on CapEx. Jari mentioned the CapEx projects coming to completion this year and early next year, the bigger ones. Then I have a slide. I think I have this roughly once a year about our off-balance sheet, supplementary pension fund. And here, I think the key statement is that regardless of a challenging investment year, our fund continues to be very well funded. In fact, I would say, overfunded. And also, background, this fund was closed already in more than 30 years ago in '91 and it is in a run-off phase. Our liabilities will go down roughly EUR 10 million each year. Currently, market value of assets held by the fund exceeds the liabilities by EUR 90 million. So, there's an expectation that over coming years, there will be capital returns to Kemira as the liabilities come down. I want to also mention as a highlight for the fund. We received zoning approval for a real estate project that we have here in Finland, in Espoo. It's almost or approximately 5-hectare real estate development and it will be developed into almost 90,000 square meters of residential space and 25,000 square meters of office space in 2 phases. Our Kemira R&D facility is currently located there, and it will also be anchoring tenant of the new office complex. And a further advertisement for the project, it's actually a very interesting concept with R&D chemical shared lab. So, it's a good place for start-ups and both for established businesses. And this first phases of the sales for residential and office space were all both completed now in January of '23. Dividend according to our dividend policy of paying a competitive over time, increasing dividend. We are increasing the dividend to EUR 0.62. And again, it will be paid in 2 installments, like in the past few years. And the Board will only decide on the payment date of the second installment. So, it's not in any way conditional on board approval, again, assuming that the AGM accepts the Board's proposal. Then outlook. First of all, I think it's important to note that we see end market demand for our businesses as resilient regardless of the significant uncertainties related to the macro environment. And because of this macro environment, there is an expectation that our volume demand or market demand measured in volumes overall will decline somewhat. Regardless of this good performance in '22, we still have places where we can improve profitability. One such business is our oil and gas business. Jari already mentioned that it's improving, but it's not quite where we want to be. So, this is an area where we expect the business to grow with growing market and it needs -- and we expect a clear improvement in profitability in the range of EUR 15 million, EUR 20 million EBITDA improvement year-on-year. As a summary, we are giving a fairly broad guidance on outlook because of these uncertainties. Revenue expected to be between EUR 3.2 billion and EUR 3.7 billion and operative EBITDA between EUR 500 million and EUR 600 million. With that, I guess, we are ready to move on to the Q&A session.

[Operator Instructions]

Good. So many thank you for the update. Jari and Petri, now we're ready for questions. [Operator Instructions]

The next question comes from Martin Roediger from Kepler Cheuvreux.

I have 3 questions. Question number one is, can you tell me the reasons for the higher profitability in Industry & Water in the fourth quarter? Second question is on Pulp & Paper. Can you please again talk about the situation in caustic soda? I know it's a raw material in pulper, but mainly a trading material because you produce it partly by your own and you have cheap access to energy in Finland, which is helpful for you. And the third question is on the general market, and you already touched on that with the outlook. Can you provide a bit more color on the demand patterns, i.e., what do you see in terms of underlying demand at the beginning of this year? Do you already see some restocking at customers after Chinese New Year is over and herd immunization is established in China? That would be my questions.

I'll start with the market. So really, there's been in other industries also, but in our customer industry destocking was -- it's normal at the end of the year, but it was maybe bigger this time because the inventories were in various value chains were quite high due to the logistics challenges. So now that destocking is taking place still. And the word that we get that late Q1, early Q2, things start coming back as the destocking has taken based. Our sort of base business demand is -- it is good. And I've said earlier that pulp business, we serve the best players in the industry, not all the players. So, there's sort of the last man standing and competitive players. So, we expect that to be pretty solid. The water treatment business is not going to go anywhere. So COVID 2020 spring showed that that's going to be there. And the raw material basis, not increasing anymore, but on a higher level and let's see how it starts to develop. So that's there. Maybe the packaging industry is now more of the destocking phase at the moment, and let's see how it comes back. I&W just throughout the year, improved their performance on the water side, on the oil side. So, there were some big shocks to the business in some contract changes of raw material, where long-term contracts for raw material ended with fixed prices and then new prices stepped in. So, there was prework on taking that on. But then the work continued throughout the year, and the run rate is now much better in Q4 and demand has been good. This has happened especially in Europe, where there's been even lack of certain raw materials due to disruptions in the value chain. And we've been able to overcome those in Q3 and improving in Q4 and going into this year. And then the question on Pulp & Paper. The base business is in good order. And we know that the electricity adders and caustic will come down, but we have other components coming in because of the energy thing in United States also, we were trailing with our formula pricing all year with ever-increasing electricity prices. So, when the previous quarter's electricity price went in the next quarter's pricing; that was too late. The price was all very higher and our profitability there wasn't as good, but that has now eased off during December, January, and going to the right direction. So, we should see benefit from there. So as Petri said, we expect the run rate of things going forward to be a different mix of run rate, but still on a similar level.

And one follow-up question that Martin had was on the caustic soda. So maybe a brief explanation. What do we do with caustic soda and what was the impact on last year?

We can answer the numbers or the quantities, but there's 2 things there. We import a major part of it and trade it to our customers. And why do we do that? Because we have the infrastructure to do that. Caustic soda is a funny product because it already freezes at plus 10 Celsius. So, you have to have heated tanks and logistics and so on to deal with that. And we have the infrastructure for that, meaning ports and big volume tanks and heated tanks and truck fleets and so on that service us. Then the other component is that we are the only manufacturer of caustic soda in Finland. And obviously, our manufacturing cost hasn't gone up, but if the market price goes up, then we get a tailwind. The other thing is that when you make caustic soda, you free up chlorine and we make the chlorine into hydrochloric acid, and there was a demand for that also. We had a captive need, but we could sell it also in the market. So, we got a double hammer from that and it will come down to a reasonable level. But because of the LNG prices in Europe now at EUR 55 to EUR 60 versus EUR 20, EUR 30 before this crisis. So caustic soda will stay on a higher level as a market price. Let's see where it settles, but it will stay on a higher level because of the natural gas prices staying on a higher level.

And Petri you may want to comment on the Q4 impact or last year impact?

Well, like we mentioned, the caustic impact was really strongest in Q4, some tens of millions. I think we sort of decide that we don't disclose individual product pricing impact, but some tens of millions. And maybe it's sort of -- it helps you to understand that about half of the caustics annual impact came in Q4.

Thank you for your question, Martin. I hope this was sufficient. Then I propose we take the next question from the line.

The next question comes from Robin Santavirta from Carnegie.

My first question is related to the Pulp & Paper segment. You have very strong performance earnings-wise in the quarter. I think when I look back at Q4, 5 past years, you're 3x almost above the past 5 years average for Q4. But then I can see our volumes are down probably because of Russia, as I understand, underlying volumes also soft. So the question is related to sort of where the key components, I understand caustic soda, but from the last answer you had, I understand that is apparently not a big part of that quite significant earnings improvement. And then I understand you have formal lags -- so profitability is still going up in some areas. What are the sort of key components driving the profitability then if it's not caustic soda, you're still lagging in some formula-based areas? And then secondly, did you, Jari, say that the current sort of run rate is where you expect to sort of start the year in bottom paper earnings-wise?

Well, not giving a forward-looking thing, but the run rate at the end of the year was quite solid. And yes, some formula price components will Q1 come down, but not dramatically. And so, it goes to show that we don't talk about electricity adders and caustic, so that the base business is in a strong situation. And it goes to show that we've been doing a catch-up game like we've been telling previous quarters, catchup game in the pricing and every time we raise prices, the raw materials run away from us. Now that's -- like Petri said, that's flattening out on a higher level and in some areas coming down. Also, logistics prices have come down drastically and availability has increased. So, the base business is in good condition in Pulp and Paper.

But hey, let me clarify a little bit if I was too ambiguous with my first answer on the caustic soda. So, it's not immaterial that caustic soda impact. So, if you look at sort of consecutive quarters from Q3 to Q4, and again, if I remember now Q3 numbers, I think there was an EBITDA improvement of roughly EUR 23 million, EUR 25 million or so. I think about half of that sequential improvement is explained by caustic. That gives you a little bit of more guidance.

And as you know, the majority is in pulp and paper of the caustic soda, just to clarify.

Yes, the vast majority.

I understand. Can I then ask you about the sort of energy setup you have, which seems to be sort of quite attractive given your stakes sort of in PVO and PVL. And maybe this is a bit detailed if you don't remember exactly, it's okay. But in Pulp & Paper, how much energy do you consume on an annual basis? And roughly, what is your sales efficiency?

If I remember right, and that's in our report. In Finland and Nordics, we probably consume 1.3, 1.4 terawatt hours. And now our backward integration is 45%, 50% or so. And then we have some PPAs on wind and so on and then it's the hedge market. And obviously, when next week, hopefully, Olkiluoto 3 starts up, then it goes up quite a bit and goes back to about 80%. But...

Yes. I think the Mangala share is slightly lower. I think we're now below 40% before Olkiluoto 3. And when Olkiluoto 3 is operating, we are getting with Mangala electricity to about 70% or so, then the electricity forward will take us -- I'm sorry, the renewable energy contracts will take us further sort of fixed or sort of a natural hedge, if you will, or natural sort of on cost and then the rest is looked at either open market spot purchases or protected through forwards on the market. And then also, we are planning to increase the amount of renewable energy that we are sourcing in the coming years.

But Robin, it's -- you can find it in our reports quite detail broken down.

Yes. And actually, you can also I think we gave you some of the numbers in the Capital Markets Day presentation. So -- but I don't remember exactly them, but take a look at there.

Yes. Can I ask this question then if I look at bleaching and pulping chemicals and only look at that segment, what is roughly the amount of the cost base that is energy?

Well, we don't disclose the unit prices or anything like that, but the bleaching chemicals, by the way, caustic is pumping chemical also. So those consume a huge amount of the total amount. So, our other plans are not that energy intensive, whereas these really are.

Right. So basically, that is the same met where you have a very good competitive situation with the current setup.

Correct.

I think we have given a guidance that roughly 1 ton of sodium chlorate consumes 5 megawatts of electricity.

Good. It helps. The final question I have maybe sort of was Martin had already sort of touched upon this. But what we can see in Pulp & Paper in the -- at least the Nordic companies is that they talk about destocking now, so Q4 volumes as we can also see in your numbers a bit on the soft side. And perhaps in Q1, they have said still some destocking. But the question I have is -- what is your view? Is this a destocking cycle basically European pulp & paper, which then sort of would point to a bit better demand in Q2 or at least H2? Or is this the underlying sort of softness or weakness that just first is in the form of destocking?

Well, it's still hard to say which is which, but there are 2 components. There is the industry and consumer demand for packaging. And obviously, consumers have been a bit more careful with the energy prices inflation and so on interest rates going up but there has been definitely the destocking in the value chain on the producers, ports, distributors, customers. So, we haven't been fully able to quantify it. We know that there has been a couple of weeks shutdowns of some packaging lines or board lines, but they have now started up again. Now did they shut them down because of demand? Or did they shut them down because of high gas cost, again, that's hard to say because there are several hundred machines out there in Europe. So -- but those are the components that have resulted to this. But I think the destocking will be there. And it hasn't happened so much in pulp. It has happened more in board.

Right. Thank you very much, and congrats for a very strong quarter.

Thank you, Robin. I believe we still have questions on the line, but I have a couple of questions here on the webcast tool part related to what Robin asked from the sort of raw material side, so this one Antti asked; how do you see variable costs progressing near term? Should we expect Q1 cost level to be lower than what it was in Q4?

Well, I think where we're laying out the assumptions for the year. I think we are saying that we expect that the raw material environment or variable cost environment will be leveling off and depending on a lot what happens to the energy because that energy drives it could come down already in Q4. But clearly, for the year, we expect them to come down and some areas where we already see continue it coming down in Q1. So, we were probably mistaking, started calling off the peak, I think last summer when we were wrong. So, I'm cautious of calling that peak is behind us, but now it looks like it is.