Kemira Oyj Ord

Good morning everyone and welcome to KEMIRA's Q1 2024 results webcast. My name is Mikko Poila from KEMIRA's Investor Relations and here with me today is our President and CEO Antti Salminen as well as our CFO Petri Kastren. As you surely have seen we have earlier today published our Q1 results and we had a strong start to the year. And during this webcast and during the presentation Antti will go through the main events of the quarter and also give some reflections from his post as President and CEO. And then we will go more into the financials, into the details with Petri. And as is the case typically, you can present your questions either on the teleconference line or then you can submit them via the webcast tool to me. But with this short intro, Antti, I'll hand it over to you. Thank you, Mikko.

What a way to start. What a way to start the year. What a way to start my stint as a CEO of Kemira. Really strong start for the year, as you've seen from the results. It's a great honor to be able to be here presenting these results as the CEO of the company. I've started the couple of first months touring around, meeting our people around the world, meeting our customers, other stakeholders. And it's been a really great experience to feel the support that I get from the organization, from our stakeholders, people around us, and the unleashed energy that we have in the company. So it's really good starting point. to start turning a new page in the history of Kemira. I'll talk a little bit about the kind of company that I have in a sense inherited and starting to kind of turn into the new era. Kemira today is in excellent shape and we have an excellent foundation to execute on our growth strategy. The financial performance as the Q1 is a good evidence of, but also the record high results last year we pulled in and really good results several years before that are witnessing the resilience of our business model. Also, the oil and gas divestment that we finalized during the first quarter of this year is another step there, kind of focusing the portfolio more and especially reducing the cyclicality of our business model and thus further increasing the resilience of our business model. The customer relationships are really strong. That's evidenced by the customer satisfaction. NPS score record high, way above any industry benchmarks. And also in the practical work, when we talk to the customer teams, there's a lot of co-development projects ongoing with our main customers and so forth. So really building the new future as our strategy outlines, is ongoing, and the really strong, good relationships are the foundation of the success. And also, as I mentioned, the employees, the organization, the people, really highly committed organization and people that... I have the feeling that the Kemira team, the large global team, is ready really to turn the page and go to the new future, executing the growth strategy. Now, when we look at the highlights of the first quarter, of course, me stepping into the CEO position, we have basically a relatively new, refreshed management board in the company. Harri Eronen took over then the pulp and paper responsibility, and we have Tuija leading the INW segment. She's been there for a year, and Linus heading the strategy joined last summer. So there's also some new fresh spirit in the MB of the company. I think that's one of the good ways to kind of start implementing the changes and step into new era. The oil and gas divestment, as I mentioned, was closed on February 2nd, and you can see the benefits of that already kind of short term in the stronger results in INW. So basically the portfolio is stronger in terms of profitability, and in the then mid and long term, that will be visible in the reduced cyclicality of the business. I think one of the main news for the first quarter is the sequential volume growth that we witnessed in both of the business segments. So that's kind of a healthy story telling about the underlying markets being in recovery mode and we being able to benefit from that by getting increased volumes. Even if the top line was shrinking, But the volumes underlying are kind of a giving of good confidence on future growth of the company. The political strikes in Finland had a very limited impact in our result, again witnessing the resilience of our business model. And then, of course, during the Q1, the annual general meeting approved the increase of the dividend, which is in line in our dividend policy of paying competitive and over the time increasing dividends. If we look a bit in more detail, the financial results, so as I commented, the volume growth is what I'd like to focus on here, because that is really kind of telling that the quarter on quarter, the volumes are improving in both segments. And the organic growth that we report is, of course, still declining. But we need to remember that the comparison point a year ago was extremely strong, q1 in 23 uh driven by the energy intensive uh bleaching chemistry and the really high extraordinary high caustic prices so so that should be normalizing as we move forward and get to the q2 the comparison point should be more normalized in a sense so even there's a organic revenue decline, but the volumes, underlying volumes were growing. And what is also really important to acknowledge here is that sequentially, quarter on quarter, our prices stayed stable. So even if we look at the world economy going into this year, it seems that it's softening and a bit soft, which typically is reflected in some release on the raw material sites and so forth. But despite this softness, overall economical softness, we were able to hold to our prices, which is, I think, another evidence of the good work that we've been doing over the past few years on building our pricing capabilities and our position on the market and the strong customer relationships that we have. Operative EBITDA margin stable year on year on the record high level. It's good to remember that even if there was not huge increase in the margins, but we are on the best level ever for this company and steadily above 20% level in terms of EBITDA. so really good performance there as well and the whole organization has contributed really well to this cash flow strong and really at all possible respects really really good strong start to the year if we then look a bit deeper into the pulp and paper Again, just repeating that despite of the strikes in Finland and the say roughly 10 million top line impact of that, the volumes grew. So if it would not be for the strikes, the volume growth would have been even stronger. And that market recovery you've seen also yesterday from many of our big customers announcing their results and commenting on the outlook for the year. So it's very evident from their results as well that the underlying pulp and paper market is at the steady recovery mode right now. And then if we look at the industry and water, also here we had volume growth, and also here we were sequentially able to hold the margins. And here, of course, when you look at the INW numbers, you have two sets of numbers because of the oil and gas divestment, so the external report it, and then internally we are, of course, following the like-for-like comparison without oil and gas, because that's what the management should be focused on. And here I'd like to turn the focus on the extremely high return on capital employed at 35%, which is really not only good for us, but I think it's industry-wide a really stellar performance. And it's again another evidence of the portfolio actions that we've been doing and their impact. divestment of the oil and gas business did not only help us improve the margins, but it's also visible in the return on capital employed, so the portfolio in INW being in that sense much healthier than previously. Then looking a bit forward and our strategy, as mentioned, the strategy as such, which we've of course started to review now, is unchanged. The fundamentals behind that are very valid and we are very confident that executing on this strategy will get us to a growth trajectory in the future. The three main pillars of the strategy are the growth in the water treatment side of the business, then growth in the renewable solutions and growth in the digital services led sales. And there, if we look at the water treatment area, there we are really looking at the geographical expansions to the areas in the world where we are not that strong yet and technological additions into our portfolio. So technologies that help us serve better the same client base, the customer base that we are serving today in the water industry and expanding our reach to the total water treatment chemicals market. us the main vehicles to grow there. When we look at the renewable solutions area, there we are nicely on the kind of trajectory to reach our communicated over half a billion revenue target by 2030 from there. 23 was a bit of a dip there, but that's to a high degree explained by basically the collapse of the pulp and paper market one year ago, spring 23, because a big part of the renewable sales today are going to the pulp and paper markets. But I'm really confident that we are back on the trajectory this year. And there, some of the highlights where we have been progressing very well are the so-called biomass balanced polymers, which especially in the water treatment area are selling now well across Europe, and we are getting a good start in the US as well for those. So replacing a fossil based polymers in the water treatment by biomass balanced equivalents. So that's progressing well. Also, the collaboration that we have with some of our partners in the biobase, IFF and Danimer, those both are progressing really well. And I'm very confident that later going into the year, we come out with commercial launches on really innovative new products for several application areas on this biodomain. And then when we look at the digital services revenue there, we actually, last year, we reorganized a bit and formed a kind of camera-wide platform to accelerate the development of new solutions for the digital phase. During a couple of first months, I've started a review and project on looking at how can we further and better use artificial intelligence to support our service business and innovation in this company. So there's a lot of good work going there as well. And I think these pillars are forming a good basis for future growth of this company, future profitable growth starting from this good profitable level and balance sheet really strong. So that gives us a good basis and good ammunition to execute on the strategy. So with these words, I hand it over to our CFO, Petri Kastrien, who will go a bit deeper into the financials. And the floor is yours, Petri.

Very good. Thank you. Thank you, Antti. So excellent performance from 23 continued into Q1. And as typical, I like to point out a few things, and I think the key takeaways from this quarter are volumes, the volume pickup, and I give you a little bit more data on top of what Antti was saying. Our management of pricing, I'll give you some additional data there as well. and also the resilience of our business model and now post the oil and gas divestiture we are really a lot less cyclical and of course the predictability of our pricing based on long-term longer-term contracts and also the predictability of our volume demand really gives us a good basis to really claim that our business model is really resistant or resilient is the word that I was missing for a second. Here's the traditional revenue and profitability bridge based on our reported numbers. When you read our report, you also see that we separately give comments on oil and gas adjusted basis. But here is the bridge on the reported basis. As Antti was saying, management is really looking at the business now, sort of post, sort of perform a basis adjusted for the divestment. And therefore my sort of volume comments and other comments that I offer here are sort of based on that sort of analysis. But still for clarity, the 763 million reported revenue that you see here and the 162 million of EBITDA, this still includes one month of oil and gas revenue. So the closing was February 2nd. So we have the January revenue included in the reported numbers. The adjusted numbers, 719 million revenues and 159 million of EBITDA in the report, those exclude the January oil and gas revenue and related profit. So looking at the revenue bridge, as you move past the divestment impact, next in the bridge, you look at the volumes. And Antti was already talking about the volume growth. So, there's a 1% positive volume growth. And the impact of the strikes in Finland, the political strikes, was roughly 1% on a group level, and about 2% for the pulp and paper segment, because this really impacted pulp and paper segment, not INW really at all. Moving from volumes to pricing. This is sort of the last quarter when we have a tough comparison. You may remember that year ago in Q1 of 23, we still had very high caustic prices. We had very high electricity prices. And that's of course reflected in the comparison period. And that's also reflected in our sales prices, because we were able to pass through a lot of those extra costs to our customers. So the 9% price decline, more than half is explained by those impacts alone, the caustic price, And the electricity price, and actually we're only looking at the electricity price in the Nordics, where we track it separately. So the impact of those is more than half of the 9%. which then of course means that the rest of the portfolio, the pricing was holding up really well and well below 5% annual price decline. And if you compare that to the rest of the industry, and I've been sort of glancing through the various reports that have come out, A number of chemical companies have reported price declines of significantly higher than 5% or so. So I think this is a very nice comparison and obviously a big driver for our good quarterly performance. Of course, there are competitive pressures in the marketplace, but our organization, our sales people, our customer serving teams have really done a good way to demonstrate the value of our products to our customers. Then if we turn our attention to the profitability bridge, sales prices I already commented, then of course the next item besides the divestment impact is the change in variable costs. And then the variable costs then include the mirror image of the electricity, meaning that a big part of the variable costs is also impacted by the caustic, which is partially a pass-through item for us. And then, of course, some of that high electricity was visible in our variable costs. So the key point, I think, which we are paying attention to a lot, and you perhaps should also, is the net impact. And the net impact of minus 10 million, I think it's a good outcome, particularly at this point of the cycle, since we are already sort of a well on the way under the sort of a variable cost reduction cycle, so that we've been able to manage it to this level is really good, particularly as the volumes are picking up. So the net impact, 10 million is almost fully offset and round numbers is offset by the volume growth. So a good outcome. I think the final comment I point out here is fixed costs. So fixed cost increase of 5 million. Again, I think that's a good outcome since we all know that we are all fighting against global inflation, impacting salaries, impacting all the services that we buy. So in that context, it's a very good outcome. So conclusion, the normalization of caustic prices and electricity costs, it has eliminated some of the extra benefit that we still enjoyed in Q1 of 23, yet we're still able to maintain the EBITDA margin at the same level as last year. This is a new slide. Again, trying to prove the point of the resiliency of our end markets. And the slide is about 12 months rolling average of trailing average of our volumes. And now after the oil and gas exit. So obviously over the last maybe eight years, we've gone through a number of cycles. And you'll see that typically the volume changes on this sort of cycle, 12 months trailing period have been less than plus or minus 5%. Now, last year was clearly a bigger one. roughly 10% on the back of what Antti was also describing as a very abnormally bad year for the pulp and paper industry. And also, 23 was also impacted by our exit from Russia, because we exited the Russian business after the Ukrainian war started in 23. So obviously the volume decline was visible in the 23 numbers compared to 22. Having said that, we have managed the profitability through these cycles extremely well. Variable costs, the headline says stabilizing. If you look at the big changes, you might wonder why we are saying that. But if we exclude the electricity costs, We're really and we're looking at consecutive quarters. This really looks a lot more stable. So our forecast for consecutive quarters and also the last quarters of now as a couple quarters of history is already relatively stable variable costs. History, they have been declining still a little bit in the last couple of quarters. Now our forecast is that we will remain roughly flat or roughly stable across the basket of raw materials that we buy. Of course, there are some areas where we have pressures. typically supply issue related, but then there may be some relief on some others. So across the basket, we're looking at the relatively calm variable cost environment. knock on wood, because surprises are always the one thing that we are mindful of, but the surprises are not visible. And again, I sort of commented on our ability to hold on to the pricing. A little more data on the strength of the balance sheet that Antti was already talking about. So 0.6 net leverage and net debt below 400 million, so obviously very strong numbers. And here I would sort of almost have to comment that the strong balance sheet is an enabler, but of course it's not a target on its own right, let alone a strategy on it right. But obviously it does provide us tools to execute our growth strategy, whether it would require external or inorganic investments. Antti was talking about commenting on the high capital efficiency, the 35% return on capital efficiency for our industry and water segment. Of course, it highlights really the value of our efficient manufacturing network in the business. I guess it's fair to say that it also includes somewhat older plants that while they have been very well maintained, I argue, they have been perhaps depreciated below their replacement costs. So that's sort of a comment there. So the 35% is not a threshold for new investments, not even the 21% for the new company, but rather something in the mid to high teens. Cash flow, again, strong quarterly cash flow, basically unchanged from last year. Last few years have been a bit atypical from the seasonality point of view because of the big swings in costs. But if we are sort of in a normal environment, our typical seasonality is that Q1 is weaker from cash flow point of view versus the rest of the year. And this is really driven by that we pay out most of our annual incentives during the Q1. We also pay a little bit higher level of cash taxes based on last year's of performance. And also our capex cycle is also driving the cash flow so that we often have a lot of capital investment completions in Q4, but those end up being cash outflows then in Q1. Our supplementary pension fund, Neliapila, returned 12 million in Q1. And this supplementary pension fund, if you are less familiar with that, first of all, it is a pension fund that was closed more than 30 years ago for new members. So it has all in all, it's 12 active members, but it has still a pool of over 1,000 retirees for which we are managing. But nevertheless, it is in strong financial position. It has a capital surplus of approximately 100 million. And as it's in the run-off phase, we will be gradually reducing the surplus. And that's why I think last year we took a roughly similar amount. And absent of really big shocks, this trend should continue. CapEx again similar to last year and the total CapEx for 24 ought to be similar or slightly more than the CapEx of last year, particularly if you look at the number without oil and gas. And Ananti was talking about our renewable business, renewable chemistries. So this now assumes that we will have a start of some additional investments into renewable chemistries. The assumptions for 2024 are largely the same as when we first published them a couple of months ago in February. volume growth in pulp and paper markets and steady market in water treatment. We assume that there will be no further major disruptions from political strikes in Finland or any other material disruptions to our operations. It is still early in the year and the last couple of months have shown that there have been new risks in the global environment, not particular business, but the new geopolitical risks that I'm referring to, particularly the Middle Eastern crises and tensions is just to mention one. One that has not really impacted us much, but it is there and hopefully it does not escalate. Against this backdrop, We have kept our outlook for the year unchanged revenue between 2.7 and 3.2 billion and EBITDA between 480 and 580 million. Those are compared to slightly below 3.4 billion reported revenue and 667 of reported operative EBITDA or adjusted for oil and gas divestment, those numbers would be slightly below 2.9 billion and 595 million of operative EBITDA. Finally, I mentioned our Capital Markets Day, which we plan to host in Finland in September this year. September 26th is the date, so that's an invitation. Please mark your calendars. I would love to see you here in Finland. That's when we plan to update you on our strategy and priorities, the strategy work that Antti was talking about. And this is also a date when we plan to provide an update on our long-term financial targets. With that, we're ready to move to Q&A session.