Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone and warm welcome to Kemira's Q3, 2024 results webcast. I'm Mikko Pohjala from Kemira's IR, and here today with me is our President and CEO, Antti Salminen, as well as our CFO, Petri Castren. As you might have seen, we published another set of solid results earlier today with continued strong margin performance. And during the webcast, Antti will go through the main events of the quarter, including the new operating model, after which Petri will go through the quarterly financials, and also the new financial targets that we published end of September. And do remember, if you have any questions, there's a Q&A at the end, so you can submit your questions in the teleconference line, or then you can submit also then via the webcast tool. But with these short introductory remarks, we're good to go. So Antti, go ahead.

Thank you, Mikko, and warm welcome on my behalf as well to this quarterly results webcast, and we are happy to report another really solid quarter. Financial performance, very solid. Organic growth, 2%, driven especially by Industry & Water with the very robust demand in the water treatment markets. Whilst the Pulp & Paper market, as we all know, is a bit weaker and the well-started recovery of the market in Q2 has somewhat slowed in Q3. But despite of that, we had a solid result in both of the business segments. And that led to operative EBITDA margin of 20.3%. And as said, both segments contributing very, very solid in this good margin. In our Capital Markets Day earlier this autumn, we published our new long-term financial targets, reflecting the kind of growth ambition and our idea to be -- to execute on that growth plan, whilst maintaining the current margin levels, which are, as we have communicated, structurally higher than any time previously. And I think this quarter 3 confirms that very well that there's this structural improvement in our margins. We also published during the quarter several investments to fuel this growth, adding coagulant capacity in Europe, in Spain and Norway, and exploring new manufacturing opportunities for our new bio-based chemistries to fuel the longer term growth. And these all are really on our priority to grow in water business, so fueling that growth for the future. Another news from the quarter was the announcement of our emission reduction targets for Scope 1, 2 and Scope 3, where we think that we are kind of sustainability leaders in the industry, being one of the few companies that actually are committed to the science-based targets in regards of the Scope 3 emissions. So strong sustainability drive both regarding our handprint, but also our footprint. And with this performance in Q3, we retain our outlook for both revenue and operative EBITDA unchanged for the full year. Now let's start from the SBTi targets where, basically these are scientifically -- science-based validated targets for greenhouse gas emissions where we are amongst very few -- globally very few chemical companies that have the commitment for the full scale of Scope 1, 2 and 3. Now we have already, earlier had the Scope 1 and 2 target, which is more than 50% reduction by the end of 2030. But now as a new thing, we have the Scope 3 target validated as well. And the Scope 3 target is very easy to remember for anybody. Its Scope 3, 33% by year '33, so 5 3s there. And, of course, kind of behind all this is our commitment to carbon neutrality by '45. Now, then next, let's look a bit at the financial results. Petri will elaborate more on those, but I'll just take a couple of highlights here. So, first of all, considerable volume growth year-on-year, over 5% and coming from both of the segments. I think this is important here. Furthermore, sales prices sequentially, rather stable, so holding on to the prices and pricing levels from Q2. And our organic growth, as mentioned, was 2% and that's highly driven by the solid robust demand in the water treatment chemicals in I&W segment. And operative EBITDA EUR 147 million, and the margin improving to 20.3%. And if you look at the year-to-date EBITDA corrected for the Oil & Gas -- or adjusted for the Oil & Gas divestment, we are almost exactly at par with last year, an inch above in terms of absolute EBITDA contribution. And it's good to remember that '23 was the all-time best year for Kemira. So we are at the same speed at the moment. And, of course, kind of following this then solid cash flow for the quarter. So all-in-all, really good, robust performance. Now if you look at the 2 different segments then, starting from the Pulp & Paper, where volume growth was clear and margin improvement as well. And this despite the slowing down of the recovery of the end Pulp & Paper market. So sequentially, sales volumes were stable. We know that there was some turbulence on the market and some curtailments and so forth, but despite of that, we were able to retain our sales volume stable, and so were we able to retain the sales prices as well, which shows the strength of our business model and capability to perform even if the markets are not optimally supporting the performance. And then, as a result, the margin was 17.7%, which I think is the best ever Q3 for our Pulp & Paper segment. So again, let's remember within year cyclicality that we have, and typically Q3 is stronger than Q2. But if you look at the previous years, this is the strongest Q3 for our Pulp & Paper here. Now, then, if we look at the I&W, of course, there the strong organic growth. This is the spearhead of our growth strategy that continued, and margin performance was continuing on the high level that we have been achieving. Again, just once more underlying and highlighting the structurally stronger margin position where we are. Year-on-year segment grew by around 5% in terms of volumes, and also sequentially from the Q2 the volumes were growing in I&W. And sequentially, sales price is stable, even if year-on-year there is some slight decline. And always good to remind, when talking about our I&W segment, the return on capital employed continuing on the strong level, way above 30%. Then if we look a bit forward for the rest of the year, of course, the operative priority is to maintain the growth track in the water business in I&W, and hold on to the strong margins. And then being able to be agile to adapt to the somewhat unpredictable Pulp & Paper market demands. So being able to cope with this temporary softness on the market and react fast when, hopefully, the next year that the markets are continuing the recovery. More strategically, we continue our work on both organic and inorganic growth opportunities, especially in the water business. And then, of course, we are now finalizing the design and implementation of our new operating model and organization which is planned to be in operation as of 1st of January. Then let's conclude this by revisiting some of the kind of strategy messages we've had then and the focus that we have going forward. So, as mentioned, the margins are structurally stronger than ever before. We are able to hold on to those in better and worse times. At the same time, we have a clear strategy to accelerate the growth, driven especially by the water business and the renewable solutions. And then we are accelerating the execution speed with the new operating model, a new organization and many other internal changes, enabling us to be more agile and fast on the marketplace. As we announced, the new organization will be more customer centric, having 3 business units in terms of 2, the drivers being, as mentioned, the speed and agility at the face of the customer. The main change is that this structural change will lead to as well is centralization of operations. And again, the purpose of that is to gain even more efficiencies out of our strong supply chain, enabling and helping us to hold on to this higher margin levels, whilst we invest in the growth. Now, we also decentralized big part of the product development closer to the customer to be able to faster commercialize on innovation. And then we invest more into the centralized, kind of longer term, especially this bio-based chemistries and the future platforms for longer term growth. And we also, with this change, we strengthen our strategic and especially M&A capabilities as the M&A pipeline, and working on that is very important for our growth. So, then we've also published the new long-term financial targets, and these are really forming a frame or set of guiderails. So our ambition is to grow more than 4% on average per year, whilst maintaining this marching bracket of 18% to 21%. And, of course, growth means investment, so it's important to set the kind of a baseline for capital efficiency as well, and that's why we included the over 16% operative ROCE target here in the targets. Now then, if we quickly look at the strategic priorities that we have communicated. So, first of all, we plan to expand in water, setting the ambition for doubling the water business over the time. There are many good drivers supporting this, both regulatory and market-driven drivers. We will introduce new technologies to this area. We are looking geographical expansion. So, there are many avenues where the growth will come from in the water business. And we maintain our target of achieving more than EUR 500 million of revenues from the renewable portfolio. We are well on track on executing that and that's part -- these renewable chemicals will be supporting both of our current business segments, all of the 3 business units going forward. And then, as the new third strategic priority, we actively work on unlocking the growth potential from new platforms, new businesses to be served which are suitable for our model. So basically, finding these fast-growing market segments, which are out of our traditional core, and building the longer term growth capability of the company. So, with this, I will end my part and hand it over to Petri who will guide you deeper into the financials. And go ahead, Petri.

Thank you, Antti. So really -- well, actually, just still on this one before I go into the details. So key points that I see from the report. First of all, organic revenue growth. So, we are continuing to grow, and this growth particularly strong in I&W. Very good volume growth and volume growth in both segments, as Antti was already talking about. And then absolute profitability. Increased EBITDA is improving year-on-year. It's improving sequentially, and it's actually improving for the group and for both segments. So, in that sense, it's a checkmark in all comparisons. So good starting point, in my view. So Mikko already mentioned that after I go through the financials, I will also, similar to what Antti did, refresh some of the key financial themes from the CMD. Now into this bridge, as we traditionally, or as I traditionally start the report. So, I start with comments on pricing. So, yes, we've seen about 5% year-on-year price decline, and this price decline is pretty much consistent what we have been seeing through the year. And so yes, there is some market pressure on the pricing. Directionally, the I&W has held prices better, so the price decline is less in I&W side, and of course, then proportionally higher in Pulp & Paper. But I think the key point is that we have been largely able to offset that with variable cost declines, as you can see from the bottom of the page, bottom graph, and of course, from the financial results, like I said, which are improving. Volumes growing 6%, it's a very good outcome. Our long-term growth in our market is not at that level. So this is a very good outcome during a quarter, particularly considering the weakness that we have seen in the Pulp & Paper segment, and which has been well documented, and some of our customers have offered fresh commentary and fresh data points on that one. And of course, the China pool, or lack of China pool is one of the big reasons for that. However, volumes did grow modestly, sequentially. Organic growth, 2%, fully driven by I&W. Pulp & Paper was flat year-on-year, as there was pretty much an offset between volume increase and the price decline. In I&W, while we saw a very good volume growth, there was nothing particular driver for this. Maybe we can highlight a very solid strong or strong rather than solid, demand in North America. So, whereas on the profitability side, you can say that the positives outweigh the negatives, meaning that variable cost reduction and volume growth offset or more than offset the price declines and the fixed cost price inflation, which, of course, then is the net result is an improving EBITDA. Year-on-year, the net impact minus EUR 12 million between prices and costs. But I think the really good news on this slide is that the individual component or components are actually starting to trend towards the horizontal flat line, meaning that we are seeing less dramatic changes regarding variable costs, we're seeing less dramatic expectations on sales prices. And I think that's good for everyone. It's a better environment if we can maintain that towards the horizontal flat line there. Going forward, we are expecting the variable cost decline to end. And across the board of our variable raw material basket, we're now starting to see a modest increase for raw materials, relatively modest, but still an increase. And, of course, there is a variation between raw material groups and regions as well. To offset that pressure and offset price or fixed cost pressure, of course, we will need to do our own actions and we do those continuously. But we are -- and as is our competitors in the industry have been setting out some price increase notices of late. Talking about balance sheet, so we'll continue to delever our balance sheet. Leverage is now at a record low, 0.5x operative EBITDA and return on capital well above the 20% number. Just to highlight that delevering is not a target on its own, but obviously, it's just an outcome of good profitability and good cash flow. Talking about cash flow, again, Q3, very solid cash generation. We have now generated more than EUR 300 million operative cash flow through the year, a good level, if not quite at the level of last year. We have some -- now as we are growing, growth does consume some working capital, so that's why the working capital trends are reversing a little bit on year-on-year. A few words on capital expenditures. Now we expect that the CapEx will fall slightly below last year's level. The reason is really timing of projects. We're not actively managing the CapEx to any particular level, but we want to execute on the needed maintenance and needed growth investments that also Antti was talking about. But there is a timing aspect of it where likely we will be less than EUR 200 million in '24. But the flip side of this, that this may actually put some upward pressure on '25 CapEx estimate, but we'll come back to that when we report our Q4 and give out guidance for '25. Outlook, totally unchanged. So, no change to the financials and neither is there any change to the assumptions behind the outlook. So, revenue between EUR 2.8 billion and EUR 3.2 billion and operative EBITDA between EUR 540 million and EUR 640 million. A little refresher on the CMD messages and the financial long-term targets that we published just prior to that. So average annual revenue growth of 4%. This is defined as over time and over the cycle. And so, we want to achieve a pace which averages more than 4% over the cycle. It is faster than our expectation of market growth. So obviously, to achieve that we will need to continue to invest. We will need to continue to invest in capacity expansions as we have done, and Antti did mention a few of those. And we will likely announce some new ones as time goes. And we are also investing into some of the operating expenses, if you will. So, to bring up and bring out some of these new renewable chemistries and this -- for example, the digital services that are part of our strategic priorities. So, we will need to continue to invest some to be able to achieve this longer-term growth level. And then the operative EBITDA target or the profitability target was increased. It was increased by a meaningful amount from 15% to 18% to 18% to 21%, but still, some people have been asking whether that's an ambitious target. As for the last almost 2 years, we've been operating well within this range and actually even above the midpoint of that range like during the most recent quarter. But we really want to set this as a guardrail that we are looking and we see the value creation is through this growth. And because we will need to invest into this growth, however, the investments that we do for the growth, we will be managing it so that we will stay within this operative EBITDA range as the profitability target has been defined. The capital efficiency target, the operative ROCE target, it's a new target for us. And here again, similarly, it acts as a financial guardrail. So clearly, our current operative EBIT -- I'm sorry, current operative ROCE is well above that. But this is sort of in anticipation that if we are to do M&A moves, M&A moves will likely put some pressure on this capital efficiency. But we will always maintain that M&A appetite and that M&A strategy so that the return on capital stays above this 16% level. Absent of M&A, I don't really see any reasons that would -- or any issues that would put significant pressure on the capital efficiency target or current level of capital efficiency. Then as Antti said, we will be publishing or we'll be going into 3 reporting segments and 3 business segments beginning of next year. So, I think you as financial analysts and investors, this will give you more transparency to our business. And you'll see more transparency on the financials and also the business drivers. So, in that sense, that should be good. However, please, we want to highlight that these segments now have different profiles. And they will -- that's why they will also be managed somewhat separately. And this page is sort of a proxy to describe the key differences between the financial profiles. For example, Fiber Essentials, typically very predictable, customer relationships, very predictable, revenues because of the long-term nature of the customers and customer contracts. However, it is more capital intensive, perhaps growth rates are somewhat more lower, but nevertheless, valuable because of the predictability of those cash flows. On the other hand, Water Solutions, which is really the -- is the biggest segment for us and clearly an area of our strategic focus and strategic investment, it has highest market growth. And we believe that it will continue to have the highest profitability profile and very efficient capital efficiency as well. Those are also some examples. Then at this time of the year, we typically give out a sort of a -- if not a teaser, but at least a snapshot of how we are looking into '25 next year. I offered this already in the CMD. But basically, if I repeat the key points here is that, we expect that the solid good market demand will continue in the Pulp & Paper market. We have some -- I'm sorry, in the water treatment market. We have some additional capacity coming online, particularly the ASA line in China. And particularly if we should see a market pickup in China, that would be really a valuable asset in that type of a scenario. Uncertainties, clearly, the biggest uncertainty is the recovery of the Pulp & Paper market. We clearly see that it's stalled and expectations for the rest of '24 are really modest. So, the recovery has been pushed into '25. But when that will materialize and how strong that is, it is really a question mark that I think everybody is sort of wondering at this time. And then, of course, there are fixed cost inflationary pressures that we need to tackle. And I already mentioned that we need to do our own cost savings there. And some of that will need to be offset by pricing going forward. So, I'll stop here. These were my prepared comments, and I think we're ready to move for a Q&A session now. So, operator, please.

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

This is Martin Roediger from Kepler Cheuvreux. I have 3 questions, please. In your written outlook, you say that the input costs remained stable. But Petri, you said in your speech a minute ago that you see a modest increase in the raw material basket. And you announced a couple of price increases already in recent days. So, my first question is a clarification question. Is the primary reason for the price hikes to tackle the rising raw material costs or is it to compensate for fixed cost inflation? Secondly -- sorry, start to answer the question, then I follow up the other 2.

Well, my commentary is that the modest price increase -- modest variable cost increase basket, it is very modest. So compared to the few previous years, you can probably say it's relatively stable when we have seen 30% or 40% annual increases in variable costs. So certainly, stable from that point of view. But we're expecting some very small percentage increase across the basket. Now regarding the price increases announcements that we have put out, my commentary was really applying to the overall variable cost basket and raw material basket, but there can be quite significant changes between raw material sources and regions as well. So, it depends a little bit on the regions and the product lines of how much of that cost increase, that is the driver behind the price increase announcements, is variable costs and how much of that is due to fixed cost increases. But both play a role.

This is my second question related to the raw materials. Can you provide a few examples which kind of raw materials you see already increasing significantly so that they drive the basket up? Is it more silica or Acrylonitrile or amines or any ester products that would be helpful.

Yes. Maybe I'll take that. So as Petri mentioned, there are moves ups and downs, but the overall direction is rather slightly up than down. But then if you want some examples, I think the most clear example is coming from the water side, and we talk about hydrochloric acid and chlorine in North America. I mean that's a clear area where we have much higher increase is expected than for kind of maturity of the basket. And this is kind of a magnitude -- almost magnitude bigger than anything else. So, we have these kind of areas where different drivers are impacting different raw material changes. It's important to understand that we are tapped in very big variety of different feedstocks and raw materials. I mean, starting from the oil derivatives to inorganics, mining outputs, chlor-alkali, you name it. So basically, that's why there is so much variety in the basket.

And my final question is, I understood from your Capital Markets Day that you want to be financially disciplined when it comes to acquisitions. What does that mean, this financial discipline?

Financial discipline means -- I think Petri put it very well when he described the kind of framework of the long-term financial targets. So, we want to grow. That growth means investment both inorganic and organic. And in terms of inorganic actions, we have set these guidelines on kind of that we want to retain the profitability as we grow.

If I can sort of elaborate on that one. And Martin, I know that you're asking -- and this is a tough one. So basically, we see that financial discipline in 2 ways. Both, what it means the group, the financial profile. What it means our -- absolutely, how much could we lever ourselves, and we talked about the financial guidelines. We always want to maintain a solid investment-grade credit profile. The second aspect is what can we pay for an individual deal. There, we say that we want to be prudent, but it's difficult to put a financial profile because some of the acquisition targets can have really different -- they can be in a very different stages of maturity. And of course, if you are acquiring hypothetically a PFAS start-up that has a unique technology, but is just going to the market, that might not have any profitability, hypothetically. Whereas, if you were to do a coagulant consolidation, you might have a very solid frame of what coagulant companies are trading at.

Thank you, Martin. I'll take one question from the webcast tool as we talked about variable costs. So, the question from Antti Koskivuori from Danske was, what level of increase do you see in variable costs? That we already talked about slight increase across the basket. But do you see the increase starting already in Q4? Or is this more of a 2025 issue? Just to clarify.

Well, I think we are now in the kind of -- we've seen -- as Petri showed in the slide, I mean, in the variable cost, we saw really high spike and increase, then variable cost coming down after that, and it's now leveling off. I think it's very evident. So basically, we are exactly now living the times of when basically the tide is changing in a sense.

Good. Let's go back to the audio conference.

The next question comes from Tomi Railo from DNB.

It's Tomi from DNB. Starting with the first one. On the Pulp & Paper side price pressure, do you think that there is further pressure or intensifying price pressure from the customers in the fourth quarter? Or kind of is it accelerating from the kind of a consistent 5% what you mentioned throughout the year?

Well, I mean, if you talk about pricing pressure from our customers, we are dealing with the leading Pulp & Paper companies of this world, and you've seen their results announcement. They are always tough negotiations. But we need to understand our position in the value chain. So, kind of price pressure is normal for us. That's the name of the game in industry. And I think we have evidenced over the couple of last years that we can quite well operate in that environment and pull in good results instead of -- in spite of the pressures.

But just kind of a follow-up. Maybe the sentiment there weakened further, as you said, kind of recovery is stalling. Is it fair to assume that also the pricing negotiations get tougher?

Again, price negotiations with our dear customers in this industry are always tough. And of course, I mean, this environment, which is now at the moment, not looking that positive may have some impact. But then again, the whole industry is viewing that the recovery will continue. It's just stalling for a moment. So, we are expecting kind of cautiously the recovery continue next year. And if we are talking about price negotiations now, we are talking about next year's prices, not this quarter's prices. It's not spot trade that we do there.

And that actually leads to my second question that, to what extent is these price increases and what you see in the variable cost increases as well kind of preparation for '25 rather than just kind of a short-term fourth quarter management?

The price increases, is this also preparation for next year? Or was it sort of more shorter term sort of preparation --

Meaning our price increase announcement?

Yes, this is how I understood the question, Tomi, right?

Yes.

Yes. If I take that, I'll give Antti a breather. So, if you read the announcement carefully, I think they all say that price increases as the contracts allow, and as we are really in contract business. So obviously, this will be a sort of when you start negotiating the next contract, that's how you start it. So certainly, like -- and Antti said, we don't do spot trade. So, these price increases will have very little, if any, impact on Q4. But it's really how do we -- in APAC, they may have some, because APAC is -- there is a little bit of spot nature, that's very short-term pricing nature in the APAC market. But everywhere else, much more longer term or sort of annual types of price validity. So, this is sort of impacting and preparation for next year.