Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kemira's Q2 results webcast. My name is Kiira Froberg, and I'm the Head of Investor Relations at Kemira. We published our half year financial report today, while revenue remained stable year-on-year, our profitability was burdened by cost inflation. Here with me today, I have our President and CEO, Antti Salminen; and our CFO, Tuomas Makipeska. Before we start the actual presentation, I would just like to kindly remind you that our presentation today contains forward-looking statements. We have our usual agenda for the day, and Antti will start by covering the Q2 highlights, and he will also discuss the group level performance. After that, Tuomas will discuss the financials in a bit more detail, and his part of the presentation includes also the business unit performance. In the end, we will have Q&A. As always, and questions can be asked either in the webcast chat function or by phone. But with that, it's now time to keep the stage to Antti. Please go ahead with the presentation.

Thank you, Kiira, and good morning to everybody. On my behalf as well, it's my great pleasure to present Kemira's Q2 '26 results even if the results themselves are not that pleasant. Let's start with the market environment. So market continued to be extremely soft and weak. And that we, of course, witnessed already last year. So basically, the geopolitical turmoil in the world is causing the great uncertainty and predictability businesses, we as consumers don't have the confidence, we don't consume -- the overall run rate of the industries are low. And it's good to remember that our product is consumable in our customers' processes. So basically, when the customers' processes are running with low utilization, there's less demand for our product and that we have now witnessed already for quite some time. And that these conditions seem to be continuing and continued well into the quarter 2 of this year. And that is then visible in the weak top line performance. However, due to the continuous investments to grow our water business we have been able to maintain year-on-year the revenues on the same level. That's really driven by the acquisition performance. Organic performance due to the soft market was weak. Now of course, the bad news of the quarter is the weak profitability. So 16.1% group level EBITDA performance is far from satisfactory. The main reason behind that was the cost inflation caused by the war in Iran. So the Iran war impacts our input costs, both raw materials and logistics. And that's kind of a perfect storm on top of the already weak demand. And that's what you see in the quarter 2 results of Kemira. I will talk later a bit more about the more detailed level of impact of the war in Iran and our mitigation actions. But of course, immediately when the war broke out, we started price increases and as we have explained earlier, the fact is that these price increases only take effect with the delay. So the real impact in our results of the price increases will be visible only towards the end of the year. And thus, the short-term outlook and this quarter performance is what it is. We increased, of course, then our efforts in efficiency improvement, cost cutting, portfolio streamlining that we mitigate the impact both of the soft demand and the increased input costs to the extent that we can. The positive thing is, of course, that our balance sheet continues to be solid. So we've been continuing to execute on our strategy. We have been kind of in a very decided manner, growing the order business via programmatic M&A, an example of that was the Clearwater Technologies acquisition in Q2 in U.S. We continue to invest in innovation, opening up new adjacent markets. We continue to increase -- actually a very healthy growth in the services business, but as we start from a small base, it's not visible in the group level numbers yet. But really, the strategy execution continues with the full speed. And in quarter 2, we also completed actually ahead of our original schedule share buyback program. And yesterday, the Board decided to cancel those shares. So looking at the revenue in a bit more detail. Of course, the revenue development has not been satisfactory for several quarters. So the soft markets have been impacting us already a long time. The organic growth was minus 2% in the quarter 2. But the overall revenue year-on-year, as I mentioned already, remained stable, mainly due to the acquisitions bringing and thus, the Water Solutions revenue actually grew. Now in Packaging & Hygiene Solutions, the revenue remained stable. And then we saw the decline in Fiber Essentials part of the business. And in Fiber Essentials, it's good to remember that last year, the quarter 2 was still so-called normal in terms of demand. We only started to see the temporary shutdowns and prolonged maintenance breaks of the pulp mills in -- at this time of the year, so for quarter free. So basically, the comparison period was still quite normal. But now we clearly see this situation, and you've seen the announcements by our customers. So we expect that this weak demand will continue later on into the year. And basically, that's what's causing the decline in the Fiber Essentials part. Then if we look at the profitability, of course, very unsatisfactory results for this quarter 2 with the 16.1% operative EBITDA performance. And as mentioned, this is really mostly driven by the cost inflation due to the war in Iran. But there was also a price impact in the profitability. And that price is again an example of this delay in the pricing effect. So this kind of a pricing-driven profitability decline you'll see in quarter 2 is actually pricing decisions that we made in quarter 4 last year, where we basically saw that the demand environment weak, so basically to maintain the volumes, we gave some price concessions to customers with the outlook to this year, which was basically showing that the overall weak economy will bring down the input costs. So against those forecasted downward input costs we gave some price concessions. But now then when they actually realize at the same time, we have the Iran war impact and increased input costs. So basically a perfect storm in a sense hitting this part quarter 2 here. The profitability improved in Fiber Essentials where we've been now kind of running the profitability improvement program already for the year. It was 11.6%. The increase, of course, is against last year's extremely weak quarter 2. So that's good to remember, but step to the right direction there. Then if we look at our long-term financial targets, at least, of course, as we have been communicating are kind of guide rails within which we are confident that we can long term operate. I've been saying already earlier that there may be quarters or even several quarters where we are below this in 1 or the other of the metrics. Now due to the weak market environment, we've been below the organic growth target already for quite some time. But now this weakness in profitability, of course, shows that then in the latest 12 months, EBITDA being also slightly below the lower end of the EBITDA target range and lower EBITDA performance, combined with the acquisitions that we have made, then has caused also the return on capital employed being under the guide rail. But again, let's remember, these are long-term targets where basically long term, we are confident that we will return to this and we can operate within these brackets. Then as promised, a couple of words about the war in Iran and the impacts of that. So the war in Iran impacts us via logistics costs, so the transportation via fuel price increases, which is passed on to us and then via the raw materials. We saw the impact of the logistics cost coming in already early in the quarter, that is quite quick chain kind of passing those through and hearing us. Then the raw material impact, we really started to see kind of a mid-quarter and increasing towards the end of the quarter. And it's good to remember that our 1/3 roughly of our raw material base is oil derivatives. So basically, the oil price impacts directly, those raw materials, and it's coming through. But we also have impact on Fiber Essentials, which doesn't really consume oil derivative raw materials. But sulfur is an important element -- sulfur is an important raw material for Fiber Essentials. And the -- more than 40% of global sulfur comes via Strait of Hormuz. So that is out of the question. Then we have been getting some elementary sulfur from Kazakhstan. But as a result of iron war, Russia stopped all the land transportation through the Russian territory, so we don't get the Kazakhstan material either. And that means that more than 2/3 of the global sulfur supply is out of the game. And it's easy to see what that means then to the demand supply balance and as pricing the sulfur prices have several folded during the past 12 months. And that hits the Fiber Essentials business. And even if the Strait would be open tomorrow for good, the value chains are so long that we would still see the impact burdening our Fiber Essentials business going forward to the year as well. So I'm not expecting any great release on that respect from there. Now when looking at the impacts of war in Iran, somebody may be looking at the chemical industry overall and seeing that there are several companies that actually are giving positive profit warnings. It's good to remember that some chemical companies operate in the upstream where they actually benefit from this higher prices of oil derivatives and then companies like us operate in downstream, where it's only a cost burden for us. We, of course, started immediately price mitigation actions when we saw the war breakout because we knew that it's going to be impacting us. The -- what as mentioned, this kind of come through with the delay that we knew already to begin with. But then what actually surprised us negatively is that in this soft market condition, our capability to execute those price increases was lower than we expected. So -- and that basically then led to the profit warning that we gave a few months -- a few weeks back. So basically, a negative surprise to us as well, how this balance overall works. And really, the main driver for the profit warning was the raw material inflation caused by the war in Iran. Our current estimate, just to give you a magnitude, our current estimate of the gross impact of the war in Iran is roughly EUR 100 million for this 2026 for us. And then we currently estimate that we can mitigate roughly half of that by price increase actions. Of course, we fight every day to get the mitigation percentage up and have more price increases implemented. But this is the current view as we speak today. And there you get the kind of magnitude of the kind of financial impact of the situation for us. So then updated the outlook for the year as well. The current outlook is that we expect revenue to be between EUR 2.6 billion and EUR 3 billion, and we expect the operative EBITDA to be between EUR 400 million and EUR 500 million. Of course, some assumptions behind this outlook have been updated as well. We currently see that this geopolitical situation will not very easily kind of vanish anywhere. So the markets will continue to be soft and weak for the remainder of the year. So we don't see any miracle support coming from there. Also, this uncertainty in the world is causing that the raw material markets are volatile. But then also the -- now that the Iran war is continuing and the Strait of Hormuz is not open at midyear means that even if it opens tomorrow, then the impact on the raw material markets will continue for the remainder of the year. So basically, that means that against this, we have estimated this annual EUR 100 million gross impact of the cost increases. Now that said, so I'm not happy with the results. We are fighting hard to get us back on the track. But I'm really happy with the fighting spirit in our organization. The team is really doing utmost and focusing on this everybody has understood the severity of the situation. So we are working on efficiency improvement programs on price increase actions and all the possible levers to improve the situation. I'm also happy with our organization's capability to focus at the same time on the short-term profitability challenges and the long-term strategy execution. So really diligent work on growing the water business, working on the acquisition pipeline, coming out with new solutions and services to our customers to help them solve their problems and opening up new markets. So really good work by the organization, and I'm confident that we will get back on track. It will just take some time. So basically -- not immediate because of this delay effect that I explained already. But really confident that longer the -- midterm, long term, the future will be very good for us. Short term, we will be suffering. And with this, I will hand it over to Tuomas, who will explain in more detail the numbers, finances and how the performance was.

All right. Thanks, Antti, and thanks, Kiira. Good morning all on my behalf as well. As I said, so I will cover the Q2 financials in more detail and also the business unit performance review in my part as well. So let's start with the drivers behind our second quarter overall performance. Revenue remained stable year-on-year at EUR 693 million. The main positive contributor was the completed acquisitions, which increased the revenue by EUR 17 million. and this offset lower sales prices as well as slightly lower volumes and some negative currency impacts as well. Year-on-year organic revenue growth was minus 2%. Compared to the first quarter, volumes improved while pricing remained stable. Operating EBITDA declined to EUR 112 million. And the main drivers behind the decline were lower sales prices and significantly higher variable costs. The cost inflation had a clear impact across the businesses particularly in raw materials and logistics. And as a result, our operative EBITDA margin decreased to 16.1% as Antti explained. The war in Iran has a major impact on our variable cost and pricing. So let's take a look -- a closer look at these dynamics on the next slide. In this graph, it's illustrated the relationship between pricing and variable costs over time. As we explained earlier, the sharp increase in raw material and logistic costs has put pressure on profitability during the quarter. While we reacted quickly by implementing price increases after the iron-related market disruptions started. There is always the time lag before these increases are visible in our financial results. On average, depending on contracts and business mix, the impact takes up to 2 quarters to materialize. Consequently, the margin pressure from cost inflation was clearly visible in the second quarter, while the benefit from pricing actions is expected to come through more gradually in the second half of the year. Net impact from variable costs and price changes was EUR 21 million in Q2 and close to EUR 30 million year-to-date. Let's then move on to the business units and start with the Water Solutions. Market conditions for Water Solutions remained mixed in the quarter. Demand from municipal customers was stable, while volatility continued among industrial customers due to the uncertain economic environment. As expected, the second quarter was seasonally stronger than the first one following the warm weather in the Northern Hemisphere. Revenue increased year-on-year to EUR 326 million primarily driven by acquisitions. Organic growth was positive at 1% with stable volumes and higher prices compared to last year. Q2 was, in fact, the first quarter since Q4 '24, achieving positive organic growth. Profitability, however, was impacted by cost inflation and operative EBITDA margin declined to 17.4%. The decline was mainly driven by higher raw material and logistics costs which were only partially offset by pricing actions during the quarter. In Water Solutions, the logistics costs have increased significantly despite surcharges to customers. Despite the short-term profitability pressure, Water Solutions continues to benefit from resilient municipal demand and remains our strongest business area in terms of return on capital employed. Turning next to Packaging & Hygiene Solutions business unit. The market environment remained challenging, particularly in packaging and paper markets where economic uncertainty and weak consumer confidence continue to affect demand. Revenue was stable year-on-year at approximately EUR 240 million with organic growth close to 0. Compared to the first quarter, both volumes and prices improved modestly. The positive highlight in the quarter was profitability. Operative EBITDA margin improved to 11.6% and the improvement was mainly driven by cost savings resulting from the operating model changes we implemented in the beginning of the year. And we continue to execute our profitability improvement initiative and have accelerated performance measures in China to further strengthen our competitiveness and efficiency there. Let's look at the Fiber Essentials business unit next. The market environment remained weak throughout the quarter. Demand for bleaching chemicals in the Nordic market was seasonally lower following a strong first quarter. Our bleaching demand follows the capacity utilization at our customers' pulp mills. In addition, as Antti explained, sulfur availability and pricing were negatively affected by supply chain disruptions linked to the Iran conflict, since the large part of global sulfur volumes is transported through the trader farmers. Revenue declined year-on-year to EUR 127 million. Organic growth was negative 12%, reflecting lower volumes and lower prices compared to the Q2 last year. Volumes and prices also declined sequentially from the strong first quarter. As a result, profitability weakened clearly. Operating EBITDA margin declined to 21.4% and the decrease was directly driven by lower volumes and weaker pricing. Last year, the Q2 was the last fairly normal quarter for Fiber Essentials in terms of customer demand. The market environment weakened significantly in Q3 when many of our Nordic customers had downtime in their pulp mills. And customers have scheduled maintenance breaks for the second half of this year again and the visibility of coming months and quarter remains low. So the -- so this concludes now the part of the business unit review, and let's now get back to the group level figures. Our balance sheet remains strong, and it continues to provide flexibility for strategic investments and growth initiatives. Our net debt increased year-on-year to EUR 622 million, primarily reflecting acquisitions and the share buyback. During the quarter, we completed the share buyback program repurchasing a total of 5 million shares between February and June. Gearing increased to 39%, while leverage remained at 1.3x, still at a comfortable level. Both buybacks and acquisitions are something that have been high on our agenda, intentionally resulting in a higher net debt and leverage ratio. Operative return on capital employed decreased to 13.5%, mainly due to the lower earnings level and the impact from acquisitions on the capital employed. Among the business units, as I said, Water Solutions continued to generate the highest return on capital at 18.2%, although the Water Solutions ROCE has decreased as a result of the acquisitions. Overall, we remain well positioned a solid financial profile. Let's finally look at the cash flow and working capital. Net working capital increased to EUR 316 million, corresponding to 11.6% of rolling 12-month revenue. And the increase was driven mainly by acquisitions as well as higher inventories resulting from raw material inflation. Operating cash flow in the quarter was EUR 59 million, while rollover profitability weighed on cash generation. But overall, the cash flow remained on a solid level. CapEx, excluding acquisitions, was EUR 41 million during the quarter, broadly in line with last year. And looking ahead, we continue to expect full year CapEx, excluding acquisitions, to be slightly above 2025 level. Overall, our cash generation remains healthy and continues to support our growth investments and shareholder returns. So finally, summarizing the Q2. Demand remained broadly stable compared to the recent quarters, although the overall market environment continues to be soft and characterized by uncertainty. The main challenge during the quarter was the sharp increase in raw material and logistics costs. And while we have taken pricing and productivity measures to offset these impacts the benefits will materialize gradually over the coming quarters. As Antti mentioned, we are not expecting the customer price increases to fully cover the inflation impact. And on top of them, we have profitability improvement initiatives ongoing. At the same time, cost efficiency, operational excellence and long-term growth investments. Supported by a solid balance sheet, we continue to strengthen Kemira's competitiveness and position the company for sustainable value creation. And with that, I'll conclude the presentation and hand it over to you, Kiira. Thank you.

Thank you to Tuomas, and thank you, Antti. Maybe we can all stay here. So now it's time for the Q&A after the presentations. We have already received several questions through the webcast chat. So those will be covered here as well. But I would now kindly ask the operator to open the line, please, for the telephone questions. So please, operator, let's go ahead.

[Operator Instructions] The next question comes from Anssi Raussi from SEB.

[indiscernible] couple of questions from my side. And firstly, on your volumes. So did you see any recovery when we had these maybe thin hopes of these in Iran or was the demand situation basically the same throughout the quarter?

Well, thank you, Anssi. We don't really comment intraquarter things. And basically, that's it. So -- and these are so quick these movements that even if we would comment I couldn't say anything because it's 1 day up and 1 day down. And these are really kind of a quite, I would say, slow value change to move. So these kind of very quick movements don't typically sell through.

Yes, I understand. And my second question is on your price, sales prices. And I think the impact on earnings was something like EUR 25 million, EUR 26 million negative during the first half of the year. So just to double check that that's your guidance on the impact of raw mats and prices mean that the earnings impact of sales prices will turn sharply positive in the second half despite the pricing cycle now being longer than before? And is it fair to assume that this will happen in -- mostly in Q4? Just thinking about the starting point going into 2027.

Yes. So as I mentioned, basically the delay typically is up to 2 quarters. And basically, you would see the full impact of the price increase actions done now in quarter 4. Of course, we started some of those already early in the in this quarter and then accelerated towards the end of -- so there's not a given date that you can count from, but they would be kind of fully impacting the quarter 4. And similarly, like results, as I explained, that's mainly due to pricing decisions made in quarter 4 last year, and that you see now then.

Okay. Got it. And my last question is on your water treatment segment. So could you give us any more in detailed view like which industrial subsegments are especially under pressure in this segment right now?

Yes. So just good to remind that the water business. And basically, we serve any industry that consumes water and practically any industry consumes water. So it's a really wide variety of different industries that we serve. And like when the overall economy is down, then of course, all of these are impacted. Now like the car industry in Europe, for instance, very good example of an industry that is still kind of struggling a lot and will continue to struggle. Now it would be probably easier to kind of pinpoint a couple of industries within the portfolio, which are doing better than the rest of the economy. And there, you see really the kind of data centers, which are using a lot of order, which is 1 of the kind of still emerging things or not the big thing, but basically, that would be 1 of the benefiters of the current economic situation. You see some positive signs on the mining side because, again, this kind of data boom consumes a lot of kind of minerals and so forth. So there are a couple of examples, which you can read from the newspapers every day that are doing well. But really, the rest of the economy is quite subdued at the moment.

The next question comes from Martin Roediger from Kepler Cheuvreux.

Yes. I will ask them 1 by one. In total, 3, if I may. In packaging and hygiene, you mentioned cost savings explaining the earnings increase in that segment. Can you quantify these cost savings in that segment? And if there are cost savings in the other segments, if you -- can you quantify them as well? That's my first one.

Yes. I mean we don't go to the business unit level, quantifying the cost saving impacts. But we've been doing several different changes in the structure, reducing the overstaffing in certain areas to match the demand and so forth. So those are relatively significant on the Packaging & Hygiene Solutions level. And then on the group level, the only thing that we have openly communicated is about workforce reductions now during the spring time, where we communicated the -- roughly EUR 15 million impact of those. So these are...

Second question is the delta between selling prices and input cost costs and EBITDA drag of minus EUR 21 million in Q2. You said that the Iran war will cause a drag of EUR 100 million in the full year 2026, and you expect to compensate half of that with price hikes? Does a net effect of minus EUR 15 million in 2026. That means another 29 million drag is to come in the second half. Is that math correct? Or is it wrong because the EUR 8 million drag in Q1 is also related to the Iran war.

That's kind of, give or take, right, you have your math correct there. So basically, of course, there are always other things that move around. So it's not a clean-cut case and I said these are approximate numbers. But ballpark-wise, yes, I mean, your math is correct.

Okay. And finally, is the border between Russia and Finland closed? And to which extent has that impacted your sourcing, your selling activity? I understood that you mentioned sulfur supply from Kazakhstan is also now interrupted. I guess that is also coming via land. Is there other items, other effects also from that potential closure.

The border between Finland and Russia has been closed for years now and continues to be so. And we basically walked away from any business in Russia at the second day after they attacked Ukraine, and we remain solid on that. We will not be returning during the current regime in the Russian markets. We don't get any raw materials from Russia. So basically, the impact is just the transportation via their territory. So -- and basically, as I mentioned, they have now stopped all the energy and raw material-related deliveries via their territory because they are partly short of those materials themselves. So this is the situation.

Thank you, Martin. We are ready to take the next question, please.