Kemira Oyj Ord

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

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

Very good. Thanks, Antti. So really, when you look at the quarter, I think three things are important. Revenues, we increased revenues, again, adjusted for the oil and gas divestment. Profitability improved, both in absolute and relative terms. And like Antti was saying, we had really nice volume growth both year on year, or actually more significant year on year, and then also during consecutive quarters. And I will elaborate on this a little bit more. And on this bridge now I will focus on sort of apples to apples comparisons of meaning for the business that after the adjusting for the oil and gas divestment. Volumes grew considerably. So as Antti already mentioned, the pulp and paper volume growth was approximately 10%. And also, INW grew very nicely around mid-single digits. So the volume growth for the whole group was at 7% year on year. The sales price declined by 6%. As Anssi mentioned, caustic prices and some of the electricity prices were really impacted a year ago in April, so beginning of Q2 in 2023. And if we exclude just the impact of caustic, then the price decline would have been 4%. And the 4% price decline is well within the sort of what we built into this year and what we have been expecting for the year. So within our expectations. And also on the profitability bridge below, you see that the 52 million price decline was almost entirely offset by 48 million variable cost decline. So all in all, we didn't give up margins. So in that sense, as Antti was saying, we defended prices well, we defended our margins in this environment where actually the variable costs were slightly decreasing rather than being just stable. Volume growth was then obviously delivering the profitability improvement and more than offsetting the fixed cost increase, resulting in 7 million EBITDA improvement year on year, or 5%. Some comments on volume and price development against Q1. Volumes grew very nicely in INW quarter-on-quarter, high single-digit quarter revenue, volume growth. remain roughly flat in pulp and paper. And Antti was talking about what I think is sort of a new seasonal trend within our pulp and paper business, that we do have some weakness seasonal weakness in Q2. And this is driven by the maintenance breaks, both our customers as well as our own during Q2. And the second point is that the seasonally, the electricity cost is typically lower in Q2, particularly here in Nordics, and that impacts the chlorate pricing, particularly here in Nordics, and that's visible in revenues as well as profitability in Q2. This is now a third quarter in a row when the impact from variable cost versus sales prices is relatively modest. And I call modest 10 million or below that. And this is, of course, a type of environment which is much easier for us to manage our business. It's much easier to have the customer interaction on pricing and therefore preferable over a very volatile pricing environment or inflationary variable cost environment, which we went through a few years ago. And again, as I said earlier, the modest negative net impact was more than offset with volume growth in the business. And again, we are expecting that volume growth throughout the year. And also, typically, I give out some type of an outlook for variable cost environments for the rest of the year, and it looks to be relatively stable for the rest of the year as well. A few comments on balance sheet. We continue to delever ourselves, leverage now at 0.6 turns and Operative ROSI return on capital employed well over 20%. Average interest rate is increasing with increasing interest rates. But if we look at the actual interest expense or net interest expense that we pay down, it's significantly down due to lower debt, and actually we are earning interest income for cash deposits. So net finance costs were 6.6 million versus about 12 million a year ago. On the balance sheet, also noteworthy that we paid out from cash resources and some short-term borrowings the 200 million bond that matured during the quarter in May without the need to refinance it with new long-term financing. One more thing I bring up from Antti's slides. His first slide mentioned that the EPS was impacted by our decision to close our legal entity Argentina. So the overall impact from closing the legal entity was negative 7 million, meaning roughly 4 euro cents per share. Of this approximately 7 million impact, 2.5 million was above the line, meaning impacting EBITDA. And then the rest of it was between tax lines and financial income lines and reflecting the currency adjustment and some write downs of assets as a result of the decision to close that legal entity. And again, this approximately 2.5 million, which is in the EBITDA line or above the EBITDA line, is an operative item impacting our operative EBITDA. Regarding cash flow, Q2, cash flow continues to be very strong. We have now generated more than 200 million of operative cash flow during the first half of the year. Our capex follows our seasonal patterns, meaning there is low during the first half of the year, but we expect that the full year capex will be approximately at last year's level or slightly above that. On Outlook, we upgraded the Outlook in June. a month ago, and now we are repeating that outlook and the assumptions behind the outlook. Gradual volume recovery of our end markets is expected to continue, and input costs to remain relatively stable. I think those are the key assumptions behind the outlook that I mentioned here. And now just repeating that revenue is expected to be between 2.8 and 3.2 billion, and operative EBITDA between 540 and 640 million. Finally, I'd like to provide an advertisement. We have the Capital Markets Day in Helsinki on September 26th this year. Already a good number of people have registered, and we thank you for that. But I encourage for those of you who are planning to attend or want to attend but haven't registered, please do so. We obviously want to see as many people as possible in person, but that this CMD can also be followed and attended by live webcast as well. With that, I think we're ready to move on to the Q&A session. Thank you.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Martin Rodiger from Kepler Cherv Raw. Please go ahead.

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

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

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

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

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

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

Okay, thank you.

The next question comes from Robin Santiverta from Carnegie. Please go ahead.

Thank you, and good morning, everybody. Regarding volumes, you had really nice growth in the pop and paper segment, around 10% year on year. I was just wondering whether you have a view whether that reflects underlying demand growth, or is there an element of restocking that number? And also, what is the order intake situation at the moment going into the autumn? And this is related to pulp and paper. And then also in terms of volumes, INW, apparently quite strong Q on Q volume growth. Is that seasonality or is it just the markets picking up?

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

Thank you, that is clear.

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

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

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

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

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

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

Thank you very much.

Maybe we'll take a couple of questions from the webcast. So quite a few questions, maybe a couple of questions on the revenue side. So they're both in essence the same. So revenue trend is negative. What gives you confidence for late 2024 and early 2025? Can we expect higher revenue growth?

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

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

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

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

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

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

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

Longer term, I'd like to mention what we don't see as a replacement, but rather as an additional growth area, is that we believe in sustainable textiles. The sustainable textiles, meaning both fibre-based textiles as well as textile recycling, has perhaps had more technical and commercial challenges than people thought a few years ago. But over the long term, there is a mandate, there's a high consumer demand, high regulatory demand to improve the sustainability of the whole textile industry, and therefore we believe in that. And many of the same technologies or same chemistries that we are currently serving to our traditional forest products companies, is applicable in the textiles, whether it's the bleaching chemistries or strength chemistries, those same chemistries apply for that. And we see that not as a replacement market, but rather actually as an adjacent growth market that is still very difficult to quantify and difficult to say when it will emerge in big time.

And one more question from the tool, then we can go to the teleconference. And this is related to bleaching pricing. So, on electricity prices and pricing formulas, are the formulas set for realized electricity spot prices or, for example, on rolling average electricity prices? Maybe a high-level answer here, Petri.

High level, it's spot prices. And depending on the contract, whether it's... Typically, it's monthly spot prices. High enough.

The next question comes from Andres Castanos Mola from Burenburg. Please go ahead.

Hello. Thank you very much for taking my questions. I had some on M&A, but I wanted Also ask another one on pension. So on M&A, just briefly, a little bit more information on expected revenue synergies from plugging these small assets into your platform. How much can we expect to see the revenues of a target company grow? And then on pensions, can you give us a sense of the size of the pension port and how much excess capitalization is there? And in terms of cash flows to the company, how much can we expect to see and when? Thank you.

Shall we start from the acquisition first?

Okay, so again it really depends on the target, but if you talk about these kind of small, really small bolt-on type of things like the one that we did now, I mean these are typically like they're adding maybe 10 million or in that range 15 into our revenues and then typically we target them on areas where the growth rates are then much higher than our underlying growth rate. So that would be maybe kind of putting a bit more around that. But as I mentioned earlier, we are also working on clearly more sizable ones. So basically there's kind of a wide range of what would be added. But the common denominator then always being that we are looking at those on high growth areas.

There was some static on the line. If I heard the second question correctly, it was about pensions. First of all, in Finland, we mostly pay as you go. benefit plans. We do have one supplementary benefit plan that was closed to new members 33 years ago in 1991. So there we have actually a surplus. Last time we contributed funds to that fund, I think it was 2006, since then investment returns have been able to maintain that. and it has roughly 100 million of excess capital surplus at the current time. And we have said that as time goes, we expect to return that capital. Now, obviously, we want to maintain sufficient cushion, so this 100 million excess capital will not be or can and even cannot be immediately return. So I think this year we returned 12 million or so, last year maybe 15 million. So that's the type of annual capital receipts that one can expect from that fund. And then we have some pension funds in countries in UK and some other countries, but those are really not material in the scheme of things.

They are detailed, Andreas, in the financial statements if you want to have a look.

So I guess I understood your question correctly and answered it correctly.

Thank you very well.

The next question comes from Henri Parkkinen from OP Irritus Banki. Please go ahead.

yes first of all good day for everyone i had a question regarding the maintenance activity which already was discussed earlier but just more or less fine-tuning question and in addition what you said about the pulp and paper seasonality so when During the third quarter, so if we compare third quarter to second quarter, what do you expect regarding your maintenance activity? Are we talking about some couple of million euros or how should we think about this season and the pattern of maintenance costs over the year? Thank you.

Henri, I would rather say that there's always some maintenance. One should always expect there to be some maintenance. One should not think about the impact against no maintenance cost, because that's sort of theoretical. possibility even, but we'd rather say that if there is a heavier concentration of maintenance breaks, heavier than on average, and that's why we pointed out that Q2 is seasonally heavier. And actually this year we had longer maintenance breaks in Olkiluoto, in the nuclear power, So those were additional impact on Q2. And so that's what I'm referring to. So I don't like to point out any number on Q3, because Q3 should not be an exceptional from that sense.

Yes, thank you. Very helpful. The background was that if your customers are, let's say, behaving a little different now compared to past history, just to get the idea that if there might be, from your point of view, some seasonal, some significant difference between third and second. But yes, that's very helpful. Thank you.

And I think we, first of all, we don't know our customers' unscheduled or extra maintenance breaks. And even if we did, I think it's appropriate that they talked about them rather than us.

Yes, that makes sense. Thank you. Thank you.

The next question comes from Tommy Raylo from DNB. Please go ahead.

Hi, this is Thomas from BNB. Just a clarification on the closure of the entity in Argentina. Did you say that in the clean EBITDA or operatively EBITDA in the second quarter, the impact was 7 million or 2.5 million?

5 million on EBITDA and then what is it about 4 million slightly more than 4 million under the below the line and that was spread between finance and tax items so two and a half million was the impact on operating costs.

Okay and second just the clarification also what did you talk about the industry and water pricing and volumes in the second quarter. Volumes, I think you said, up mid-single digits.

I think I said that volumes, consecutive quarters, were up high single digits, year-on-year mid-single digits in terms of volumes.

And prices...

Prices, I mean, they were slightly down. The 4%, which I offered as a proxy for the group, I don't think there's a whole big difference between the segments. There may be some, but not a big difference. So I think that 4% is a pretty good proxy for both segments year on year. and we said that the price decline was there was some slight price decline Q on Q as well but the four percent for annual price decline is I think it's a more reflection on what we are sort of seeing in the market all right thank you

And there are no more questions from the teleconference, neither from the webcast tool. So this concludes the webcast. Thank you for the questions. And with this, we wish you a very nice summer and hoping to see you all at the CMD end of September. Thank you.

All right. Thank you.