Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kemira's Q2 2024 Results Webcast. I'm Mikko Pohjala from Kemira's IR. And as always, I'm here today with our President and CEO, Antti Salminen; and our CFO, Petri Castren. As you have surely seen, we've earlier today published our Q2 results with solid performance. And in the webcast today, Antti will cover the main events of the quarter, after which then Petri will cover the key financials. And after that, we'll have plenty of time for your questions, so you can submit your question from the webcast tool or then via the teleconference. With these short interim remarks, I'll hand over to Antti.

Good morning on my behalf as well. I'm really happy to be reporting on my first full quarter as the CEO of Kemira. What a great company to work for, operating in the heart of the sustainability transition of the world, working on the water and fiber economy. So really, really good feeling after the first half year roughly in this role. And as Mikko mentioned, happy to report steady strong quarter 2 results for the business, and we're greatly advancing on the trajectory that we have defined for the company. I feel kind of very positive rhythm in the whole company. Some highlights of the second quarter. First of all, clearly, the end market demand continued to recover on both segments. Most importantly, in the Pulp & Paper where the markets were down, so recovery is evident, which is evidenced by the volume growth. And we were able to make really strong margin and cash flow holding on to the price as well. And also started to execute with small steps on our growth strategy by investing into additional capacity, making first acquisitions on the micro-pollutants removal area. So progressing pretty much as planned. If we look at the -- then some underlying factors. I'm really happy we had another round of the customer satisfaction, Net Promoter Score, which was all-time high. And employee engagement also in the latest survey stayed on a really strong level. And these are really the assets we can build the future success on. Happy, satisfied customers, engaged employees, this is the basis that gives us confidence in long-term future strategy execution of the company. Now if we look at the financials a bit and Petri will of course dig much deeper into the numbers. But again, volume growth was continuing, and margin improvement also very important thing. Year-on-year both segments margin improvement, solid cash flows and really holding on to the prices very well in an environment where the raw materials are coming down. So I would say a steady good performance for the second quarter. But if we look a little bit deeper then into the segment, so Pulp & Paper, the end market recovery continued. Volume up year-on-year 10%, significant increase and improvement there. Second quarter is seasonally a low quarter in Pulp & Paper due to the maintenance shutdowns of customers and our own facilities, which is evidenced in the numbers. And the price decline there was modest, but that kind of backing on the clear decline in the raw material costs. And also, the comparison period in '23 still had April, which was higher entry prices on caustic. So that's also impacting there. But I think the Pulp & Paper segment did a good job in this environment to hold on to prices and pulling these really good results. And if we look at then I&W, which was super strong in Q2, organic growth, 3%, margin holding over the 22% level. And the return on capital employed, which we are reporting on Q1 continued over to 35%. So very, very good performance there. And clearly, we see also from the markets, the regulation, which is driving the water treatment chemicals demand being implemented not only in Europe but also in U.S., which will again fuel growth for the future for the water segment. Then as I mentioned in the start, we announced during the quarter a couple of investments, small investments into growth. First of all, expanding our coagulant capacity in Tarragona in Spain. This is on top of the tightening EU phosphorus recovery requirements, which drives the demand and also on the biogas investments, which are driving also this demand. So clear growth drivers. And thus, we invest to support that growth by expanding the capacity. We also announced the entry to the micropollutants removal market by a small acquisition in U.K., an activated carbon recovery facility, which is one of the first steps to enter really into that fast-growing market. The activated carbon market for water treatment is roughly 2 billion market with over 7% annual growth rate. So a really important growth area for us in Kemira. And if we then look at the overall focus areas for the rest of the year. So I think it's all about maintaining the margins, maintaining our pricing capability and investing into growth with small careful steps so that we keep the fundamental good performance of company, and on top of that, create the growth that we are after. But with these words, I would like to hand it over to Petri, who will go deeper into the numbers then.

Very good. Thanks, Antti. So really, when you look at the quarter, I think three things are important. Revenues. We increased revenues, again, adjusted for the oil and gas divestment. Profitability improved, both in absolute and relative terms. And like Antti was saying, we had a really nice volume growth, both year-on-year or actually more significant year-on-year and then also on -- during consecutive quarters. And I will elaborate on this a little bit more. And on this bridge, now I will focus on sort of apples-to-apples comparison, so meaning for the business that after the adjusting for the oil and gas divestment. Volumes grew considerably. So as Antti already mentioned, the Pulp & Paper volume growth was approximately 10%. And also I&W grew very nicely around mid-single digits. So the volume growth for the whole group was at 7% year-on-year. The sales price declined by 6%. As Antti mentioned, caustic prices and some of the electricity prices were really impacted a year ago in April, so beginning of Q2 in '23. And if we exclude just the impact of caustic, then the price decline would have been 4%. And the 4% price decline is well within the sort of what we built into this year and what we have been expecting for the year, so within our expectations. And also on the profitability bridge below, you see that the EUR 52 million price decline was almost entirely offset by EUR 48 million variable cost decline. So all in all, we didn't give up margin. So in that sense, as Antti was saying, we defended prices well, we defended our margins in this environment where actually the variable costs were slightly decreasing rather than being just stable. Volume growth was then obviously delivering the profitability improvement and more than offsetting the fixed cost increase, resulting in EUR 7 million EBITDA improvement year-on-year, or 5%. Some comments on volume and price development against Q1. Volumes grew very nicely in I&W quarter-on-quarter. High single-digit quarter revenue -- volume growth, remained roughly flat in Pulp & Paper. And Antti was talking about sort of what I think is sort of a new seasonal trend within our Pulp & Paper business that we do have some weakness, seasonal weakness in Q2. And this is driven by the maintenance breaks, both our customers as well as our own during Q2. And the second point is that seasonally, the electricity cost is typically lower in Q2, particularly here in Nordics, and that impacts the caustic -- chloride pricing, particularly here in Nordics, and that's visible in revenues as well as profitability in Q2. This is now a third quarter in a row when the impact from variable cost versus sales prices is relatively modest, and I call modest EUR 10 million or below that. And this is, of course, a type of environment, which is much easier for us to manage our business. It's much easier to have the customer interaction on pricing. And therefore, preferable over a very volatile pricing environment or inflationary variable cost environment, which we went through a few years ago. And again, as I said earlier, the modest negative net impact was more than offset with volume growth in the business. And again, we are expecting that volume growth throughout the year. And also, typically, I give out some type of outlook for variable cost environment for the rest of the year, and it looks to be relatively stable for the rest of the year as well. Few comments on balance sheet. We continue to delever ourselves, leverage now at 0.6x and operative ROCE, return on capital employed, well over 20%. Average interest rate is increasing with increasing interest rates. But if we look at actual interest expense or net interest expense that we pay down, it's significantly down due to lower debt. And actually, we are earning interest income for our cash deposits. So net finance costs were EUR 6.6 million versus about EUR 12 million a year ago. On the balance sheet, also noteworthy that we paid out from cash resources and some short-term borrowings, the EUR 200 million bond that matured during the quarter in May without a need to refinance it with new long-term financing. One more thing I bring up from Antti's slide. And his first slide mentioned that the EPS was impacted by our decision to close our legal entity Argentina. So the overall impact from closing the legal entity, it was negative EUR 7 million, meaning roughly EUR 0.04 per share. Of this approximately EUR 7 million impact, EUR 2.5 million was above the line, meaning impacting EBITDA. And then the rest of it was between tax lines and financial income lines and reflecting the currency adjustment and some write-downs of assets as a result of the decision to close that legal entity. And again, this approximately EUR 2.5 million, which is in the EBITDA line or above the EBITDA line is an operative item impacting our operative EBITDA. Regarding cash flow. Q2 cash flow continues to be very strong. We have now generated more than EUR 200 million of operative cash flow during the first half of the year. Our CapEx follows our seasonal patterns, meaning that it is low during the first half of the year, but we expect that the full year CapEx will be approximately at last year's level or slightly above that. On outlook, we have upgraded the outlook in June, a month ago. And now we are repeating that outlook and the assumptions behind the outlook. Gradual volume recovery of our end markets is expected to continue and input costs to remain relatively stable. I think those are the key assumptions behind the outlook that I mentioned here. And now just repeating that revenue is expected to be between EUR 2.8 billion and EUR 3.2 billion and operative EBITDA between EUR 540 million and EUR 640 million. Finally, I'd like to sort of provide an advertisement. We have the Capital Markets Day in Helsinki on September 26 this year. Already a good number of people have registered, and we thank you for that. But I encourage for those of you who are planning to attend or want to attend, but haven't registered yet, please do so. We obviously want to see as many people as possible in person, but that this CMD can also be followed and attended by live webcast as well. With that, I think we are ready to move on to the Q&A session. Thank you.

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

Yes, thank you for taking my three questions, please. The first question is on Pulp & Paper. Can you quantify the effect from the annual maintenance breaks? Second question, again on Pulp & Paper. You mentioned the sequential margin decline following seasonal patterns. And I agree that was the case in 2021, 2022, 2023, but not in the years before, for example, 2014 until 2020. What has changed in the seasonality? And can you provide a bit more color on that sequential margin drop because you mentioned that electricity prices being low in the second quarter, but that is normally released both on the cost side but also on the denominator side. So maybe some clarification would be helpful on that. And then -- sorry, a question on your financial communication. You upgraded your guidance for this year a month ago, but these results, you say they are good, but in this, let's say, context of this upgrade, I guess the market was hoping for more. Why did you feel under pressure for this upgrade a month ago? Or in other words, why was it not possible to wait for this upgrade of the guidance until, for example, today?

So Martin, I'll take question two and three, and I'll let Antti to comment on the maintenance breaks. But I'll start with the electricity price. And when I was thinking how long I spent time on this, I was afraid that this might not be understood by everyone. So when electricity prices started to really go high, we changed a lot of our contract pricing structure so that they have a formula element and electricity is in that formula. Whereas before that, we used to have a lot more fixed price contracts for years because within years, the electricity price did not vary all that much, but we sort of entered into a new environment after '21, particularly '22 and onwards regarding really high electricity prices and peaking at times and with the magnitude of renewable energy, we are sort of in this environment. So we are much more on a formula basis in our pricing. But as you know, we -- our sourcing of electricity is very much dependent on stable nuclear power and stable hydropower. So our costing is not that volatile. So therefore, like in '22, we benefited of high energy prices throughout -- almost throughout the year, but particularly during the winter months. So that's why this is the seasonality that has sort of emerged in the last 3 years or so. Hopefully, that clarifies that. Then on the upgrade. So obviously, we give guidance for the full year. And then we -- perhaps we have a little different environment here in the Nordics under the Finnish Financial Supervisory Authority versus the Continental practice. But here, when we are seeing that our own forecast to start to exceed what the guidance is, we need to give that. That's a regulatory issue. And therefore, the management needs to deal with it at the appropriate time. And secondly, I think some of the analysts were sort of not understanding the rhythm and the underlying profitability of our business during Q2. So that's why I think from the investor service point of view, I think it was also well done. And now also, Martin, I sort of would like to counter that I think our cumulative EBITDA is EUR 303 million. So now, so I think it's well within the sort of -- within what we are guiding for the full year. And therefore, one quarter, a couple of million short of consensus, if that's what you will. And I give you -- have an explanation for this onetime cost in Argentina, I don't see that as a huge issue there. I'll let Antti to address the maintenance breaks.

Yes, we don't -- I mean, don't give a quantification of the impact, but you can probably well calculate it out of the numbers or estimate it. And Petri actually already kind of commented on the change of seasonality, which basically -- I mean, I don't know how much sense there is looking 10, 15 years back in such a business. So basically, what has dramatically changed is the electricity pricing in Nordics. And that then impacts the seasonally because there's a seasonal variation into electricity prices. So that's what changes. But also, there has maybe been some changes in the industry practices on how consolidated the maintenance shutdowns are on 1 month and so forth. So there are several impacts, but this electricity really plays a big role there.

And maybe, Martin, some quantification on the -- so it's single millions are that, and this is really when you have a couple of weeks of non-production, so obviously have fixed costs running and no production.

So the same effect actually as the strike you had in Q1, the effect?

I would need to think about that. I think the strike impact between the 2 quarters was more significant.

The next question comes from Robin Santavirta from Carnegie.

Regarding volumes, you had really nice growth in the Pulp & Paper segment around 10% year-on-year. I was just wondering whether you have a sort of view whether that is sort of underlying -- reflects underlying demand growth? Or is there an element of restocking in that number? And also, what is the order intake sort of situation at the moment going into the autumn? And this is related to Pulp & Paper. And then also in terms of volumes in the I&W. Apparently quite strong Q-on-Q volume growth. Is that seasonality? Or is it just the markets picking up?

Well, if I comment those a bit. So Pulp & Paper, clear market recovery happening. Now it remains to be seen how strongly that continues into year. And of course, always when the markets are recovering, previously, there was some destocking, there is certain restocking element in that as well. But fundamentally, like if you looked at what our key customers reported after Q1, clearly, the signs are there that there's a slow recovery in the market, and that's visible there. So I would say mostly market recovery, and we are optimistic about it continuing, but the time will tell. And the ongoing quarter, I will not comment here regarding the order intake and so forth. And then if you look at I&W volume growth there, it's clear. There has historically been some seasonality in I&W numbers, typically, the quarters 2 and 3 being stronger than the first and last quarter. So that quarter-on-quarter sequentially, there is some impact of that natural seasonality in the I&W numbers. But the underlying markets are also quite strong at the moment, and that is benefiting us.

I also lead you to the 5% or mid-single-digits type of annual growth type number that I was sort of indicating towards.

Yes, points out that demand is good. Another one I have and that is related to the pricing environment. We can see sales prices coming off a bit here now in Q2. What should we expect going forward? Is it sort of -- is it the best guess that we will see a bit more sales price pressure partly perhaps from the declined power prices? Or should we expect a stabilization?

Well, if I comment that as well. So I think it's more important to look at the margin development and I keep holding on to the margins rather than what is the actual price levels on the markets because there is a significant variable cost component in our cost structure. And as Petri reported in the bridge is what you saw in Q2, basically, the decline in the variable costs and the slight decline in prices were very well balancing. It sorted out there. So basically, that is the important thing to follow. How well can we hold on to the margins? And that is the task that we have to kind of regardless whether the raw materials go up or down, our capability to hold on to the margins is really important here. And that we have, I think, evidence here that we are able to do that.

And again, if I -- and Robin, please also look at that over the longer term. So you'll see that in some quarters when the -- where we were able to make significant gains, and we've been basically able to hold on to those gains and not giving those up. And I think that's the important, but look at it over the longer period of time and not just 1 quarter.

Yes, for sure. And final one, if I can squeeze one more in related to M&A. I thought Antti I heard you say investing growth in small steps. Is it so that in terms of M&A, you're rather looking at perhaps bolt-on type of acquisitions or did I misunderstand?

No, you didn't misunderstand. So of course, the strategy is grow and acquisitions are one tool on the strategy. We are looking at all kinds of target that makes sense for us strategically and financially. But it is obvious that having bolt-on type of small to midsized acquisitions, it is easier to manage and the risks are smaller and thus kind of keeping the good performance and then adding via these bolt-ons is the kind of, at least to me, the prioritized strategy. But we are, at the same time, looking at more sizable targets as well as we have the financial capability to do that. But those are, of course, typically take longer to materialize and so forth. So you should expect to see more of these smaller medium-size bolt-on acquisitions coming online.

We'll take a couple of questions from the webcast. So quite a few questions. Maybe a couple of questions on the revenue side. So they are both in essence, the same. So revenue trend is negative, what gives you confidence for late '24 and early 2025? Can we expect higher revenue growth?

Well, I like to correct. And of course, it's very difficult to look at our numbers because our first primary statement is clearly a reporting negative revenue trend. But if you adjust for the oil and gas divestment, for the divested business, the underlying business that we have is growing both volumes, it's growing also profits year-on-year. So in that sense, I think it's -- I don't like to -- I think there's correction to the question setting. So yes, we are in a growth mode. Do we want to grow faster? Absolutely, we want to grow faster. And we are looking at how can we find opportunities to grow in this market faster both organically and also look at some of the inorganic opportunities that may arise.

Good. Let's continue. We already touched upon M&A with Robin. But then the follow-up question. Would you consider doing M&A in the second half of this year? And what kind of targets? So maybe a recap of what we are looking at, Antti?

Yes. So the kind of -- what drives the potential M&As are our strategic growth priorities. And there, the #1 priority is in the water area. And we've been talking about this earlier that basically, we are looking after synergistic businesses where either we have -- we are serving the same customer base, or then we can expand the technologies, chemistries we have to new customer applications, and this kind of acquisition. So either kind of expanding our reach in the water segment to some areas which we don't serve today within the water domain or then if it would be outside of water, then there would need to be some product line manufacturing technological synergies. So actually, the kind of space in which we are looking which suits our growth strategies is relatively wide. So also kind of close to what we are doing, there are a lot of different type of opportunities. And of course, it's impossible to comment anything on when the next one would be coming. So we are working on those constantly.

And there is a continuation to this. What could be a new business area that could possibly show unexpected growth potential in the foreseeable future? Any examples? Maybe a short update what is happening on the renewable strategy side.

Well, yes, I mean, a couple of examples. One was this first small step entering into the activated carbon market and the micropollutants removal. So as I mentioned, that water treatment activated carbon market is growing 7% to 8% a year, which is significantly higher than any of the traditional underlying markets that we are serving. On the renewable space, we are looking at -- and we've been talking about working on fully bio-based, biodegradable barrier solutions for the packaging industry. And these are the type of applications which once they are technically and commercially feasible to go into market, the expectation, and that's not only our expectation, you can look at the packaging, the paper and pulp industry and their expectations, the expectations are really high because what we are talking about there is plastics replacement. And that's really important for the whole world. So basically, that's another example of the area that we expect that in the midterm, we'll have really high growth numbers.

I'll continue with one more. If the Pulp & Paper segment demand goes sour, do you have other replacing demand to fill in -- to maintain sufficient revenue levels? Is there a backup plan in place? So maybe to correct, we expect the pulp and paper market to grow. So that is our base case assumption.

That's really the correction there. So basically, pulp and paper market went sour a year ago. I mean, that was the biggest crisis in 20 years of the history of the industry, kind of a really big drop down in demand. And now the market is in the recovery phase. And pulp and paper market is not as cyclical as maybe some of the other markets, but there is some cyclicality and now we are in the up cycle. So there's no such an expectation of here at the moment that there would be something drastic happening on the demand side.