Kemira Oyj (KEMIRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kemira's Q3 Results Conference. My name is Kiira Froberg, and I'm the Head of Investor Relations at Kemira. Here with me today, I have our President and CEO, Antti Salminen; and our CFO, Tuomas Makipeska. Before we get started with the actual presentation, please take a moment to look at the important notice on this page. Our presentation today includes forward-looking statements. Here is our agenda for the day. Antti will start with the Q3 highlights and the group level performance, after which Tuomas will discuss the financial performance in a bit more detail and we will also go through the business units. After the presentation, we will host a Q&A as usual, and we'll open a line for the questions. And with that, I will hand over to Antti. Antti, please go ahead.

Good morning on my behalf as well. It's my great pleasure to present Kemira's quarter 3 '26 financial results. But before going to the results, let's have a brief look at the market environment, which was very challenging during -- throughout the quarter 3. And unfortunately, there is no sight of significant improvements going forward either. We've lived already for a long time through the tariffs going up and going down, which causes a lot of uncertainty in the economy. Then we had the conflict broke out in the Middle East early this year, which basically has increased the energy costs, raw material, logistics costs and caused some uncertainty as well because there's the expectation of what happens to the oil price. Is there an ease of the conflict or is it escalating? What happens to availability of certain raw materials -- and this all uncertainty, of course, then has led to the higher inflation rates, the increases of interest rates that we've seen from the central banks. And this all then converts to consumer confidence, consumer sentiment being low. You can see that in the consumer confidence indices, you can see it in the Purchasing Managers' Indices. So basically, this whole uncertainty and untrust into the future is causing the economy to continue to drive at the low gear. And that is then especially visible for us in the pulp and paper-related markets where the packaging materials don't move as they used to move, which is converted to the lesser chemical demand as a really good example of that, what we've seen now are the announcement of our Fiber Essentials business unit customers, i.e., the pulp producers, both in Nordics, but also in North America. There's a lot of announcements of prolonged maintenance breaks during the last quarter. There's -- in U.S. and Canada, there's even indefinite mothballing of pulp mills. So this all is creating an environment which is really, really tough for us. And as mentioned, unfortunately, it looks like the near-term future will be pretty much similar. And with kind of this market background, then moving to our results in quarter 3. So the revenue grew year-on-year, mainly driven by the acquisitions, which I think is kind of an example of the strategy that we've been executing. So basically, building a stronger global water business, and that is then reflected in the increased top line via the acquisitions that we've been making. The organic growth, however, was flat. But the profitability was a clear disappointment for us. Operative EBITDA declined to below 16%, and that happened in all the business units. That's mainly driven by the increased input costs, both in raw materials and in terms of logistics costs. And as we've been communicating, we have put a lot of effort to mitigate that via price increases. But under the soft market conditions that I described, it's been very challenging. And that is reflected in less than targeted profitability level now in Q3. However, our balance sheet remains to be robust. And on back of that, we've been continuing to execute our strategy. In Q3, we completed 2 acquisitions, one, a small bolt-on to build on the industrial water services platform that we have created in U.S. The other one, REPUR in Italy, which is building our micropollutants removal platform, REPUR is activated carbon reactivation business. So basically, these are exactly on the areas where we have defined that we want to grow in the water business, the future fast-growing markets. So small steps to increase our presence on those markets and build the future. And we also then during Q3, we completed the earlier announced SIDRA Wasserchemie acquisition in Germany. And that is then again strengthening the core of our Water Solutions business, the most profitable part of the coagulant business in mainland Europe. So that's basically strengthening that part of the business. So I'm very happy with the performance there in building this kind of executing the programmatic M&A strategy to build a stronger global water business. Then if we look at the revenue development in a bit more detail. So as mentioned, revenue growth was mostly driven by the acquisitions that we made. But when Tuomas will later present in more detail the financials, you will see that the pricing efforts that we have done are bearing fruit. So you see the price increases also contributing to the year-on-year growth clearly. However, the volumes in the soft market environment declined. Revenue increased in Water Solutions and Packaging & Hygiene Solutions, but we saw a decrease in Fiber Essentials. As I mentioned, the latter half of this year has been burdened by the maintenance breaks and closures of customer capacity. So it's very clearly visible there. Then if we look at the profitability, there, it was the lowest EBITDA quarter for a long time for us. As mentioned, 15.9% operative EBITDA. And as mentioned, this is really driven by the increased input costs. And in the soft market environment, despite of our efforts, we couldn't fully pass through the impact, and I will talk a little bit more about that in a minute. The operative EBITDA percentage declined in Water Solutions and Packaging & Hygiene Solutions, we were just a bit below 20%. Sorry, in Fiber Essentials and Water Solutions, we were just a bit below 20%. In Packaging & Hygiene Solutions, it was a really bad quarter in terms of profitability, only 9.3% EBITDA performance. And this clearly kind of exemplifies the difficulty on the paper and board market to pass through the cost increases. So that was the weakest area in these terms. We also get the biggest hit of the raw material increases in the Packaging & Hygiene Solutions business. Fixed cost, we have been continued to manage down and trim the fixed cost base, which is also visible in the financials and starting to bear fruit there, but it's not nowhere close enough of mitigating the steep raw material increase that we saw. Earnings per share, EUR 0.21. Then looking at our long-term financial targets. So as we have been communicating, these are long-term financial targets. And now we are in a situation after a really tough difficult year that we are below the target level in all 3 of these. I've been saying earlier that this can happen. There can be quarters, there can even be years where we don't make these targets, but these targets are the area where we, long term, will be operating. Now we've, of course, taken a lot of action to mitigate the situation. So we've been executing operational excellence programs. We've been stripping down the fixed costs. We've been working on the price increases in all the business units, all the geographies, and we continue the strategic growth efforts that we have. And this all should be putting us in a good position moving forward when the market picks up. And here, looking at this, it's important to understand that we are a downstream chemicals company. So basically, we get the full hit of the -- all the input cost increases in upstream, but we get practically no benefit or uplift from the situation that we have in the market. Then as I promised, a bit more details on the Middle East crisis and the impact of that in our business. So as we communicated already earlier in the year for '26, the gross impact is roughly EUR 100 million, of which we still reiterate our earlier assumption that roughly half of that we can mitigate during this financial year. Now we've seen clearly that we've been more than that 50% successful in the water business. So Water Solutions business have achieved more pass-through, but we've really struggled in the Packaging & Hygiene Solutions side, where basically we are not reaching the 50% mark. But on a group level, that's roughly where we will be ending the year. Then looking at the outlook, so we reiterate our earlier outlook. The demand environment is and will for at least short-term future, stay as it has been. So end markets are weak. The global economic uncertainty and geopolitical turmoil will continue. At least I don't have any other signals from the market and the raw material and logistics costs will remain on elevated level. So that basically then means that there's no other way to look at it the rest of the year, but reiterate the earlier outlook for it. And then finally, I'd like to say a couple of words about our strategy execution because that's really kind of the mid- long-term important thing. We will try to manage and we will manage the short-term headwinds that we have and improve the business in all aspects, but the strategy execution continues as planned. So we continue to build a strong global growing water business, expanding in it. We have evidence of a series of a programmatic M&A here during this year and already previous year. We invest into additional capacity on the core of the business where we see the regulation driving the growth. So we expand where needed. And we continue to work on our organic growth initiatives, cross-selling and upselling in the water business. We also continue to build our position as a leading provider of renewable chemistry for the customer industries that we serve. There, we have a lot of innovation and research projects ongoing, start-up collaboration, different other initiatives to build the position, our collaboration with IFF and so forth. So really, we are building the future there as well. And at the same time, we are continuing to unlock the new growth platforms in adjacent markets where we think that we have good growth potential going forward. So the solid financials of the company despite of the short-term headwinds are enabling us to continue full speed with our strategy execution. And with this, I would like to hand it over to Tuomas, who will walk you through in more detail of our Q3 financials.

Thank you very much, Antti and Kiira. So -- and good morning, everyone online as well. So as we were prepared, the third quarter was challenging for us due to the raw material cost increases caused by the Middle East conflict. However, we were able to partially mitigate the effect by disciplined execution of price increases and cost efficiency measures throughout the quarter. I'll explain this while we go through the main points of the quarterly results. Let me start with the group level revenue and EBITDA. Revenue increased over EUR 20 million year-on-year. The increase was largely driven by acquisitions that increased the revenue by EUR 18 million. Sales prices and currencies also had a positive impact on the revenue. Sales volumes decreased year-on-year, while organic growth was flat. Compared to the second quarter, both sales volumes and sales prices increased. Operative EBITDA declined to EUR 113 million, mainly due to the higher variable costs. That alone had EUR 35 million negative impact on profitability. This raw material cost increase was partially mitigated by the price increases that supported EBITDA by EUR 11 million. And in addition, reduced fixed costs contributed positively by EUR 8 million, demonstrating really the impact of our cost management and efficiency improvement measures. As we have explained, the Middle East conflict has had a major impact on our variable costs and pricing. So let's take a closer look at this dynamic. This graph illustrates the relation between price and variable cost changes over time. As we saw on the previous slide, our price increases only partially covered the increase in variable costs. The net impact from these 2 components on operative EBITDA was, therefore, negative EUR 24 million for the quarter. But the chart also shows how quickly the price/cost relation has changed in the past. And our current priority is to close the gap between cost and price development through further pricing and performance improvement actions, although the pace of improvement varies across businesses, regions and products. Let's then look at the business units and start with Water Solutions. The market environment remained broadly unchanged from the previous quarters. Demand among municipal customers was stable, while industrial demand continued to be volatile. The third quarter is typically the seasonally strongest quarter for Water Solutions as water treatment volumes are higher during the summer months. Our revenue increased by 5% year-on-year, mainly due to the acquisitions. Organic revenue growth was minus 1%, while sales prices increased, but volumes declined from the previous year. Operative EBITDA was EUR 65 million, and the margin was 19.7%. And the decrease was mainly caused by the cost inflation and underproportional price increases that we have explained. On a positive note, the executed customer price increases started to kick in towards the end of the quarter, and we expect the trend to continue. Overall, we see the cost pass-through rate higher in Water Solutions than in Packaging & Hygiene Solutions, as Antti already explained. In Packaging & Hygiene Solutions, the market environment remained challenging. Economic uncertainty and low consumer confidence continued to affect the packaging and paper industry in general, and demand weakness was particularly visible in Europe and APAC regions. Despite the challenging overall market, our organic growth was 4%, supported by both higher sales prices and volumes. But our EBITDA declined, clearly driven by higher raw material costs that could only partially be mitigated by the price increases. In the current weak demand environment, passing higher costs on to the customer prices remains challenging. The positive impact from the business unit's operating model change and other efficiency improvements were visible in lower fixed costs. However, even customer price increases and fixed cost savings together were not sufficient to offset the negative impact of higher variable costs. In PHS, we will continue our pricing and performance actions with a clear focus on profitability improvement. Also in Fiber Essentials, the market environment continued to be weak. The third quarter is usually seasonally weaker than the other ones, and demand in the Nordics was also affected by downtimes at several customer sites. Organic revenue declined by 6% year-on-year as both sales volumes and prices were lower, really reflecting the soft demand environment. Operating EBITDA declined and the margin decreased to 19.3%. Profitability was affected by cost inflation and lower volumes and prices. And in addition, the downtime at Olkiluoto nuclear power plant had a negative impact on profitability. We don't usually comment on the electricity impact at this level of detail, but now the Q3 was somewhat exceptional. Fiber Essentials typically benefits from the higher electricity prices in Finland. However, the maintenance outage at Olkiluoto 3 had a negative impact of approximately EUR 2 million in the quarter. And the outage started in September and expected to continue until the 7th of November. This covers the business unit section, so let's finally look at the group balance sheet and cash flow. The balance sheet remains very strong, enabling strategy execution and continued investment in long-term growth. Net debt increased to EUR 649 million and gearing to 40%. The year-on-year increase mainly reflects acquisitions and share buybacks that have been executed according to plan. The leverage ratio was 1.4x the last 12 months' EBITDA. Operating return on capital employed declined, driven by lower EBIT and higher capital base. The capital employed increased mainly due to acquisitions and higher net working capital. Net working capital increased during the quarter, driven by higher inventory values and acquisitions. Inventories increased both year-on-year and sequentially due to raw material inflation. The increase does not reflect a buildup of inventory, but rather higher value of the stock. Operating cash flow was EUR 57 million in the third quarter. And the decline from previous year was caused by the lower EBITDA and the mentioned increase in net working capital. Capital expenditure, excluding acquisitions, was closely in line with previous year's level, both quarterly and year-to-date. Roughly 50% of year-to-date CapEx relates to maintenance, while expansion CapEx accounts for around 15%. For the full year, we continue to expect capital expenditure, excluding acquisitions to be slightly higher than the level recorded in 2025 due to the ongoing investment projects. Overall, we remain focused on cash generation and working capital discipline while continuing to fund our strategic growth investments. Then finally, to summarize the Q3. We balance the short- and long-term value creation in challenging markets. The immediate priority is to ensure Kemira's competitiveness in challenging markets while remaining disciplined in the execution of our strategy. Demand remained weak but stable in the quarter, and our focus is on generating organic growth. Profitability was burdened by higher input costs and pricing and performance improvement actions continue across the company. And going forward, our solid balance sheet supports investment in profitable growth. So now it's time for Q&A. So let me welcome Kiira and Antti, you back to the stage.

Thank you, Tuomas, and thank you also, Antti, for your presentations. I think we are now ready to take the questions. So let's open the line, please. Operator, you can go.

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

I have 3 questions, and I go one by one. First, about your price hikes, like what's the nature of these price increases? Like are these fixed? Or have you implemented some kind of oil-related surcharges in your prices?

Yes, good question. We typically try to increase the prices in contractual basis, so not with surcharges. But then again, the transportation costs are something where we and many other companies in the industry typically use these surcharges as it's kind of a more direct pass-through mechanism there. So it's a bit of both.

Okay. Got it. And the second one on your estimate of this raw material headwind, like you keep this estimate of EUR 100 million intact. So of course, we have seen that the oil price has increased again. So are you keeping this estimate unchanged as the impact will be seen next year? Or have you included these kind of price levels already in your initial estimate?

Well, again, it's good to understand the delay in the value chain that we have. So basically now we are in late October already. So basically, even if the oil price now gets to $120, we hardly see the kind of increase still this year. Thus, we retain the EUR 100 million for this year. But then again, of course, if the oil stays at this level, we need to kind of thoroughly relook at next year and what's the impact because it comes directly through. So there's no denying of that. But for this year, for the majority of the year, the oil has stayed around $100, and that's basically what we kind of put into our estimates as well and numbers.

That's clear as well. And finally, on the Packaging segment. So as you mentioned, EBITDA margin was a bit weak there. So was this something which has changed permanently? Or is this something just Q3 related, just thinking about the coming quarters?

Well, I'll let Tuomas maybe give you more details. But all in all, I mean, we all know that the Packaging & Hygiene business unit has been struggling, and we've been doing this steps to increase the profitability by cost cuts and so forth. But as I mentioned earlier, the Packaging & Hygiene Solutions got really the most severe and maybe kind of bigger-than-expected hit from the raw materials. And then again, there, the end market was the softest. So also our capability to pass through the cost increases was the weakest. And that kind of equation then led to this weaker-than-expected quarter.

Nothing to add.

The next question comes from Martin Roediger from Kepler Cheuvreux.

I also want to ask 3 questions and step by step or one by one. First one is on Fiber Essentials. You mentioned lower selling prices, but rising input costs. Can you explain the delay in the formula-based pricing? And when does it improve?

Yes. I mean there's -- you would need to go to a lot of detail to explain the full portfolio of Fiber Essentials. We have formula-based pricing where we get with a certain delay depending, some contracts have a monthly, most of them quarterly delay mechanism in the pass-through mechanism. But then we have kind of freely negotiated contracts as well. We've seen and then we have in the portfolio of commodities that basically trade at the kind of global commodity prices. And these all are kind of creating this situation where now on this quarter, the balance was what it was. We had some product lines where the prices increased significantly. We have some where they came down and the kind of a net of that is what you see in the numbers.

Okay. So difficult to say when, let's say, the formula-based pricing mechanism then improves in favor for you?

Yes, it will be as we go forward. So we'll see some of that in the quarter 4. That's how the mechanism works. But then again, at the same time, when you look at the Fiber Essentials numbers, you don't know what happens, for instance, the caustic price in quarter 4. You don't know kind of how much we can push the sulfur-related prices in the sulfur product line. So all this kind of looking at certain part of the business where we have the formulas doesn't really maybe give the full picture of that.

Second question, the downtime of your nuclear power plant started in September, and you said it will last probably until the 7th of November. Should we, therefore, expect a minus EUR 3 million EBITDA impact in Q4?

I can comment on that. So as we explained, only from that, the impact for the third quarter was EUR 2 million. And as we can read from the media, so now the stoppage or outage was delayed until 7th of November. We have the similar kind of effect for the last quarter, but we are -- from the quarterly guidance, we are not giving business by business, but we have the same impact for the fourth quarter based on the timing of the outage, yes.

Okay. And my third question, currencies had a positive impact of EUR 6 million on group sales in Q3, but minus EUR 1 million on group EBITDA. Can you explain that mismatch?

Well, shall I take this one? Yes. So it is -- again, here, it is pretty complicated. We sell to the 100 countries and have operations in 40 countries and based on the cost, manufacturing and input costs are in different currencies than the sales prices, and that's the overall effect that we got to sales prices. You're right that the EUR 6 million on sales and minus EUR 1 million on profitability, but it's solely related to the complexity of the operations that we run.

The next question comes from Joni Sandvall from Nordea.

Maybe continuing on the PHS, how you actually -- and Fiber Essentials, how you actually view your pulp and paper-related production footprint in Finland currently if the demand situation remains as it is currently? I'm just thinking about your operating rates in the Finnish business.

Yes. We have a quite well-positioned manufacturing footprint in Finland. And basically, for the time being, if this level remains, that's okay. But of course, if there would be a kind of a further decline in the demand volumes, we would need to look at that as well. That's one tool that we have in toolbox in that situation. But for the time being, I think we are really well positioned, both kind of location-wise where we are and capacity-wise to capture what we think is the kind of a longer-term demand pattern in the Nordics.