Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kemira's Q3 2023 Results Webcast. My name is Mikko Pohjala, Kemira's IR, and I'm here today with our Interim President and CEO, as well as CFO, Petri Castren. Earlier today, we published our January-September interim report with continued strong profitability driven by the Industry & Water segment. During the presentation, Petri will cover the main events of the quarter as well as the financials. And after that, we will have plenty of time for your questions. And as is the case in all of our webcast, you can submit your question either via the webcast tool or then via the teleconference. And this -- with this, we are ready to start. Petri?

All right. Thanks, Mikko, and good morning -- good morning, everyone. So as Mikko said, continued strong profitability driven by record quarter in Industry & Water. So let's -- I think the key points in this report are exactly what are behind this record quarter in I&W and as well how well our Pulp & Paper segment defended profitability in a very -- very difficult market environment. Obviously, we updated our outlook for the full year couple of weeks ago on October 10, when we raised the operative EBITDA outlook to a range of EUR 620 million to EUR 680 million. But of course, the most touching event during the quarter was the -- was the unexpected sudden death of our CEO, Jari Rosendal, after a very short sick leave in July. It touched everyone in the organization. Jari was well liked and respected by employees. We are very respectful of his legacy and legacy of improving profitability and setting the tone for the profitable growth going forward. He was also genuinely worried and concerned about the health and safety of all of our employees. And as such, he will be greatly missed. But the one thing is that Kemira after him is in great shape as the numbers that I will report demonstrate. So again, let's look at the numbers and let's look at what we did. And the numbers prove really the resiliency of our business model. And I'd really want to emphasize and I'll start with that. So our products are almost exclusively used in customers' processes as consumables. And therefore, the volumes are much more predictable and compared to general chemical companies or many other chemical companies, our volumes tend to be much less cyclical. Second point of the resilience is that our variable cost base moves very much in sync with our end market -- end market demand. So now that we are seeing some softness, and clearly, we're seeing softness, particularly in Pulp & Paper market, we are seeing also the variable cost coming down. And this, of course, supports our profitability. Water treatment, particularly water -- municipal water treatment is very predictable. It's based on long-term pricing and very steady contracts, and therefore, is very stable and predictable. And even in the Pulp & Paper segment, we enjoy strong long-term customer relationships, supported by our strong service mindset, which is again supported by improving customer satisfaction results that we have received during the last quarter. Also when we are looking at the Q3 of this year, the comparison period was really difficult or challenging in a way. We started to see escalated caustic prices last year and also some of the energy benefits helped us last year significantly. So, against those comparisons, I think that the improvement over last year as well as a sequential improvement over Q2 of this year is an excellent achievement. Our strategic review of Oil & Gas business continues and progress on that one will be reported in due course. Board declared yesterday, the second installment of our annual dividend and the payment will be done on November 2. And as I said, outlook was updated on November 10 (sic) [ October 10 ]. So regarding financial highlights. The reported revenue decline of 15% is obviously a big number. However, organic growth is 9% of it, as both volumes and prices decreased year-on-year, and this decrease was in the Pulp & Paper segment. So volumes declined along with the market in the difficult Pulp & Paper market. But I think it's important to note that we already saw a modest improvement in volumes from over Q2. So sequential modest improvement. So this is an early sign that the market may have bottomed, although there is sort of a strong recovery or clear recovery is not yet visible. This morning, 2 of our customers, Stora and UPM, reported their revenues, and I think their commentary regarding markets was very much in line of how we see the market. So it looks like it has bottomed. It is perhaps slowly recovering and the recovery led by pulp volumes where we have already seen some spot prices going up. Again, please note when you look at the comparison numbers that the comparison period really benefited of the accelerated or sort of heightened caustic prices and the energy was already impacting both on cost sides, as well as on the revenue side. I will have some additional comments on volumes both -- for both segments. Profitability, very strong at 19.3% EBITDA, which also as a percentage is year-on-year and also sequential improvement. Cash flow, very strong as well due to strong profitability and also very successful net working capital management. Pulp & Paper market is obviously weak, particularly in EMEA. Year-on-year, volumes declined in all product groups, highest in pulp and bleaching volumes. Sales prices also declined most in pulp and bleaching chemicals. And again, a lot of this was a reflection of the last year's high energy caustic and -- energy prices and also the caustic prices. But it's also important to note that outside of the bleaching chemicals, year-on-year, our sales prices increased year-on-year, so they held up really relatively well. Looking at consecutive quarters. Again, like I said, volumes increased modestly, and this increase was led by bleaching chemicals. Also like I noted, according to the published data, we have already seen some reduction in pulp inventories as well as some spot prices led particularly by Chinese demand. Important to note that while the segment revenues declined, this is all due to the market, so there is no market share decline. Profitability for the segment, operative EBITDA improved -- rather stable at 17%. Again in this environment, a very good achievement. In Industry & Water, it was a fantastic result, I would say. Market there is rather stable in water treatment, while there is some -- perhaps some softness in industrial demand. Year-on-year, volumes remained stable. The decline in industrial volumes, industrial water treatment volumes was more than offset by Oil & Gas growth and municipal volumes -- municipal water treatment volumes rather stable. Year-on-year, sales prices increased, which obviously drove this 3% organic growth within the segment. Sequentially, some increase in volumes also led by Oil & Gas, while we can say that sequentially, prices have now turned to a modest decline compared to Q2. So I think generally, it is very -- you must carefully listen as we are making both year-on-year comparisons and sequential comparisons. And a lot of those comparisons now are going to different directions. Oil & Gas continues its profitability improvement, and we believe that the volume gains, particularly in share market, a result of very successful product -- new product launches. This all resulted in operative EBITDA of EUR 91.5 million, excellent result and a record quarter. And now for the first time, our Industry & Water segment is actually bigger segment, both measured by terms of revenue as well as by operative EBITDA. Our strategy has not changed. However, we have rephrased of how we are communicating our strategy. And now we are -- we are communicating our strategic intent and the strategic priorities along these three strategic priorities. So we want to expand our business in water, and this is the area where we have talked about both organic and inorganic growth opportunities. We want to build a leading renewable solutions portfolio. This is basically a rephrasing of what we used to call a bio-based strategy. And we changed the terminology to follow with the more widely used renewable chemistry that has been used more -- more widely used in the industry. Going forward, you will hear how we are making progress along these strategic priorities. An example of the progress that we are making in our renewable solutions strategy is the mass-balanced polymers. And you may remember that a little more than a year ago, we announced first commercial customer here in Finland for biomass polymers. And happy to report that now we are delivering product to more than 20 customers in Europe. Now this is again a good demonstration that there is strong demand for sustainable chemical solutions and our sort of -- our strategy focusing on sustainable chemical solutions is the right one. The revenues are growing fast, but they are growing, of course, from a very small base. Let's next shift gears and look at the financials and some of the numbers a bit more carefully. So the 15% reported decline in revenue was 7% volume, 2% price, 4% currency and 2% was the impact of the colorants divestment that we made roughly a year ago. And again, like I said, volume and sales price decline was both -- was driven by our Pulp & Paper segment and the market conditions in that segment. And we already covered pretty much what's happening in the Pulp & Paper market. Industry & Water volumes stable, prices improved year-on-year in water treatment. In a different environment, we probably would be talking much more about the currency -- currency situation. FX was actually quite a big headwind for us with 4% impact on top line and 5% negative impact on operative EBITDA. And just as a reminder, we have fairly little transactional exposure because mostly we are producing and the cost basis are in the same currencies as we are selling, so we're producing locally a lot. But this comes through translation. And the biggest impact, of course, here is the euro-U.S. dollar exchange rate, and strong U.S. dollar helps us. So a year ago, U.S. dollar was close to parity. Today, it is around [ 107 ], I think was today's rate. And regarding the sensitivity, roughly [ EUR 0.01 ] in that currency pair equates roughly to [ EUR 2 million ] on EBITDA line. So that's sort of a reminder on this one. But, of course, the big item we're looking at the variable cost is the EUR 88 million reduction in variable costs. This number also includes some of the caustic impact that we have because we are trading caustic as well. So when the worldwide market price of caustic goes down, it actually reduces our sales prices, but also reduces our variable costs. So we don't net these effects. So they are perhaps exaggerating these slides a little bit. Fixed costs are increasing at a rate of roughly 5%, and which is in line with global inflation. This sort of a fixed cost pressure, of course, is something that we need to be very mindful and very -- we are watching it carefully as we are heading, particularly if the market demand continues sort of at a lower level. Again, these costs are quite a bit amplified by the caustic and electricity impact from a year ago. So again, watch that carefully, as those increased a year ago tremendously and then since then have subsequently declined. Now we can say that we are in that sense in a much more normalized environment, and this quarter did not have any particular benefit or drawback from high energy prices nor high caustic prices. Again, we've been able to support our pricing very well in this environment, particularly in our Industry & Water segment. Sequentially, prices are already coming down, but at the very modest rate and something that we can manage. And is -- we are not seeing at least on near term any sort of extra pressure or surprises there. If one tries to look at the crystal ball and see that what's happening on the variable cost front. So after a period of decline, I think we will be entering into a period of much more stability, at least this is what it looks today. So early signs for next year indicate that it's rather flat in terms of the variable cost development. This, of course, is very much dependent on the macroeconomic view and what happens there. So there are risks in both directions. Looking at the balance sheet. Balance sheet is strongest that it has been. Net debt now below EUR 600 million and our leverage below 1x for the first time ever. Nine-month cash flow already exceeds last year's cash flow, which in itself was at a good level. And again, this was the result of a very strong profitability during the year, as well as a good net working capital management. Obviously, net working capital management is also somewhat helped by reducing volumes and the fact that variable costs are coming down. So the amount of capital that is tied into the inventory levels is reducing. Capital expenditures are running slightly ahead of last year, and we are sort of repeating the guidance and view that for the full year, CapEx will slightly exceed last year's level. Typically, at this time, we're sort of -- we're not giving outlook for next year, but we're sort of what factors are we looking at when we are sort of planning for '24. And we divide them between supporting and -- supporting factors and uncertainties and then negative factors. So clearly, on the supporting side, we have a good visibility to our water treatment. This is again, one of the facts behind our resiliency of our business model. We have also very high retention rate of our customers. We are -- they are long-term customers in our Pulp & Paper segment. And if the market recovers next year, then this will be a clear benefit to us. One factual supporting fact is that the -- one of our customer recently started its pulp mill and which we are supporting from a chemical island in Uruguay. So we will have that contribution coming in full -- full of next year. So that is clearly a benefit. On the uncertainty side, this list is long. So we'll have the uncertainty regarding the timing, timing of the recovery and the strength of recovery in Pulp & Paper market. We obviously have all the macroeconomic risks, also the geopolitical risks that are -- that we are all seeing around. Variable cost development, like I said, right now, it looks like a rather stable environment, but depending on what happens in the macroeconomic environment, there could be risks in either direction. And last year particularly, we benefited of the energy electricity advantage that we have here in Finland. We have not counted in anything like that. So we have counted in modest electricity prices. And this would be a sort of a factor of uncertainty if something would happen in the energy or electricity pricing, particularly here in Finland. And FX is obviously an uncertainty, and I sort of gave a sort of range on the sensitivity of the U.S. dollar euro pair for us. What we certainly need to address head on is the fixed costs that we are seeing in inflation increasing and accumulating. And this is what we will do with the prudent cost management over now and obviously going into next year. Outlook, nothing new here. This was upgraded on October 10. So I'll stop there and let's save some time for questions. And we're ready now to move to the Q&A session. Thank you.

Thank you, Petri. As a reminder, so you can either submit your question from the teleconference or then send it to me via the webcast tool and I will then moderate, but perhaps we start from the teleconference.

[Operator Instructions] The next question comes from Martin Roediger from Kepler Cheuvreux.

Thanks for taking my 3 questions. The first question is on Oil & Gas. Can you provide a hint to which extent this business deviated somewhat from the profitability of the segment, Industry & Water? Was it still dilutive in terms of margins or was there also a catch-up in Q3 in terms of profits and profitability? The second question is on Industry & Water in general. I guess, here raw material costs decreased in Q3. Can you disclose which kind of raw materials decrease has surprised you the most? And was that an oil-derived raw material or a metal-derived raw material or any other kind of raw material? And finally, the same goes to Pulp & Paper. Putting the decrease in energy prices and the caustic soda prices aside, was there any other decrease in raw materials, again, oil-derived on bio-based or whatever, which surprised you the most in Q3?

All right. So Oil & Gas profitability has improved throughout the year. And it's on par to deliver sort of a EUR 20 million operative EBITDA improvement over '22. However, Oil & Gas profitability continues to be dilutive to Kemira's overall and obviously, I&W's profitability. So no, it has not caught up, caught up with the rest of the group or rest of the segment. So it continues to dilute. I&W raw materials and Pulp & Paper raw materials, so I'll catch -- I'll catch them together. So I don't think there's anything surprising to us. Maybe there is a little bit of a delinking of oil prices -- oil price versus the downstream chemicals. So in the past, we tended to see a higher downstream chemical prices when oil price was up. But now the -- because of the -- and I would say that it's because of the economic downturn, there is clearly some excess capacity in the supply chain. So some of the acrylonitrile, acrylic acid prices perhaps have not reacted like they have -- would have reacted in the years past when the market was more sort of a supply-constrained. And so that is perhaps something that is helping, and that would -- that applies to both segments as particularly those raw materials are used in polymers which go to the both segments.

The next question comes from Isha Sharma from Stifel Europe.

Firstly, I would like to also extend, again, my condolences on Jari's untimely demise. We will also definitely miss him. On the question side, the first one is on Pulp & Paper. We saw a surprising improvement in Q3 versus Q2. Is this the kind of normalized margin level that we should assume going forward or are there any factors that we should consider? The second one is on water treatment. Of course, there is a lag in terms of pricing because of the longer-term contractual obligations in the segment. So as the variable costs normalize, how should we think of this phasing? When can we -- when -- at what point should we expect or what kind of phasing should we expect into the first half and the second half of next year? If you could give us just some -- even some qualitative guidance there, that would be great? And then the last one is on your balance sheet strength. Of course, you have ambitions of growing externally, but are you also going to consider shareholder return, given the very strong balance sheet and an extremely strong cash generation this year?

So Pulp & Paper profit, I'll start with that. I started the presentation talking about the resiliency of our business model. So I guess this is a proof of that. And I sort of emphasize that it's really a resilient model that our variable cost, they move largely in tandem with market demand. And I think this is where we differ from -- particularly from some of our customers, for example. It's not perfect. So particularly when raw materials are moving very fast, then there is some lag. But we tend to sort of benefit of that. There is nothing special in the Pulp & Paper profit. So there is no, what you might, Isha call excess profits from caustic or excess profit from electricity intensive benefit. We had nothing of that sort. So in that sense, it is a simple good performance during the quarter. And we are -- we enjoy very high customer satisfaction. Our NPS scores well over 50, which is of a -- which is a net effect of promoters and not supporters. So it's a very high number when typically, [ 30 ] is already a good number. So again, it shows that we do have -- I don't like to use the word pricing power, but something like that, because we serve our customers well. Our customers know that they can rely on us in different environments. And again, that is part of the resilient business model that we have. So is 17% normal? It's not a normal, it's not abnormal. So in that sense, it is my best reflection. It is at sort of a normal level. Now, of course, we will have continued to face some pricing pressure from the market, from the competition. We are having probably still going into Q4 somewhat declining raw material costs. So that gives us some room to match our customer expectations there. So it's not abnormal. Next year, I think we'll hold the comments on next year until we report full year and Q4 in February. So we are still in the planning phases of next year. And therefore, I would not like to give sort of early commentary sort of whether it's by quarters or halves. But I already sort of indicated what type of factors one should consider when we are looking at next year. And balance sheet strength, yes, it is a strong balance sheet, and it obviously gives us some optionality in terms of our investments, whether those would be organic investments or inorganic investments. And we have talked about our desire to strengthen the business portfolio, particularly on the water side with M&A. So this gives us more tools to do that. So, obviously, the Board should -- would decide on capital returns, whether it would be in the form of anything extraordinary or dividend. Again, we'll be looking at the dividend proposal for February, but I don't think you should be expecting anything out of the ordinary in terms of capital -- extraordinary capital returns or special dividends or buyback programs.

The next question comes from Anssi Raussi from SEB.

I have a couple of questions, and I understand that you're not willing to comment too much about the next year. But if we think about your operative EBITDA margin, especially in Industry & Water segment, should we still think that this margin will come down to back to, let's say, normal levels, let's say, think about your financial targets, for example?

Obviously, once -- when you have a record quarter, it would be pretty bold to say that this is the new normal. So I'm not saying that's a new -- that this is a new normal. But I think I'll hold sort of giving again, anything prognosis on where the level ought to be. I think we have learned quite a bit and we have improved our business quite a bit since we set the original 15% to 18% long-term EBITDA margin. And let's leave it at that.

Okay, I understand. And then about your guidance range. When I think about the date when this guidance range was given, and you already mentioned that you have quite a good visibility on Q4. Like what is the main variable element here? Like, I guess you are targeting the midpoint of the range, what could change?

Well, again, I'm not even -- I cannot confirm the midpoint because that's not our view. That's your interpretation. I think the key uncertainty is what happens in the Pulp & Paper market. And some years past, some of our customers in markets have had significant extra downtime around the Christmas time when they often do their maintenance breaks and they may have holiday breaks. So they may take -- may -- in years past, they have taken extraordinary market-related shutdowns. Today, we don't have any knowledge, any awareness of any extra -- anything extra like that, but that is, of course, something that is an uncertainty on us. And so that perhaps is the one sort of uncertainty. Year-end also tends to have a little bit of its own sort of demand management issues with many of our customers. Some of our Oil & Gas customers in the past have really tried to manage inventory levels really down before year-end. So that may have contributed to some volatility around the sales, around year-end time. So these are the types of uncertainty, but I don't think there is anything extra uncertainty or any extra concern that I would raise here. But those type of market -- market reactions that we don't know whether they will materialize or not.

That's clear. And maybe finally about fixed costs, could you remind us what kind of fixed cost inflation you are expecting for the next year?

Well, I think we are -- if global inflation has been around 5% or even higher this year, this will sort of -- this has resulted in salary increases in that range. So we'll need to carry that towards next year. And many other fixed costs have increased similarly, whether it's professional fees, whether it's audit fees or anything like that, everything has gone up by that type. So I don't want to give you exact guidance, but I think one would expect that the global inflation or inflationary pressures sort of continue at the rate where they have been this year. And this is not implying any sort of actions one way or another.

The next question comes from Andres Castanos-Mollor from Berenberg.

Congratulations on the results and condolences to the team that work most closely with Jari. What was the process and rationale for the guidance increase? It was the fact that consensus was sitting in the bottom half or was the range itself -- of the EBITDA range itself that you thought it was too wide or inaccurate?