Kemira Oyj Ord

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

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

Thank you, Antti. So, really, well, actually, just still on this one before I go into the details. So, key points that I see from the report. First of all, organic revenue growth. So, we are continuing to grow, and this growth particularly strong in INW. Very good volume growth and volume growth in both segments, as Antti was already talking about. And then absolute profitability. Increased EBITDA is improving year on year, it's improving sequentially, and it's actually improving for the group and for both segments. So in that sense, it's a check mark in all comparisons. So good starting point in my view. So, Mikko already mentioned that after I go through the financials, I will also, similar to what Antti did, refresh some of the key financial themes from the CMD. Now into this bridge as we traditionally or as I traditionally start the report. So I start with the comments on pricing. So yes, we've seen about 5% year-on-year price decline. And this price decline is pretty much consistent what we have been seeing through the year. And so, yes, there is some market pressure on the pricing. Directionally, the INW has held prices better, so the price decline is less in the INW side, and of course then proportionally higher in pulp and paper. But I think the key point is that we have been largely able to offset that with variable cost declines, as you can see from the bottom of the page, bottom graph. And of course, from the financial results, like I said, which are improving. volumes growing 6%. It's a very good outcome. Our long-term growth in our market is not at that level. So this is a very good outcome during the quarter, particularly considering the weakness that we have seen in the pulp and paper segment and which has been well documented. And some of our customers have offered fresh commentary and fresh data points on that one. And of course, the China pull or lack of China pull is one of the big reasons for that. However, volumes did grow modestly sequentially. Organic growth, 2% fully driven by INW, pulp and paper was flat year on year as there was pretty much an offset between volume increase and the price decline. In IW, while we saw a very good volume growth, there was nothing particular driver for this. Maybe we can highlight a very strong demand in North America. So whereas on the profitability side, you can say that the positives outweigh the negatives, meaning that variable cost reduction and volume growth offset or more than offset the price declines and the fixed cost price inflation, which of course then is the net result is an improving EBITDA. Year on year, the net impact minus 12 million between prices and costs. But I think the really good news on this slide is that the individual components are actually starting to trend towards the horizontal flat line, meaning that we are seeing less dramatic changes regarding variable costs. We're seeing less dramatic expectations on sales prices. And I think that's good for everyone. It's a better environment if we can maintain that towards the horizontal flat line there. Going forward, we are expecting the variable cost decline to end. And across the board of our variable or raw material basket, we're now starting to see a modest increase for raw materials, relatively modest, but still an increase. and of course there is a variation between product groups or raw material groups and regions as well. To offset that pressure and offset the fixed price or fixed cost pressure of course we will need to do our own actions and we do those continuously. But we are, as is our competitors in the industry, have been setting out some price increase notices of late. Talking about balance sheet, so we'll continue to deliver our balance sheet. Leverage is now at the record low, half turns or 0.5 times operative EBITDA and return on capital well above the 20% number. Just to highlight that delevering is not a target on its own, but obviously it's just an outcome of good profitability and good cash flow. Talking about cash flow, again Q3, very solid cash generation. We have now generated more than 300 million operative cash flow through the year. A good level, if not quite at the level of last year. Now, as we are growing, growth does consume some working capital, so that's why the working capital trends are reversing a little bit on year-on-year. A few words on capital expenditures. Now, we expect that the capex will fall slightly below last year's level. The reason is really timing of projects. We're not actively managing the capex to any particular level, but we want to execute on the needed maintenance and needed growth investments that also Antti was talking about. But there is a timing aspect of it where likely we will be less than 200 million in 2024. But the flip side of this, that this may actually put some upward pressure on 25 capex estimate, but we'll come back to that when we report our Q4 and give out guidance for 25. Outlook, totally unchanged, so no change to the financials and neither is there any change to the assumptions behind the outlook. So revenue between 2.8 and 3.2 billion and operative EBITDA between 540 and 640 million. A little refresher on the CMD messages and the financial long-term targets that we published just prior to that. So average annual revenue growth of 4%. This is defined as over time and over the cycle. So we want to achieve a pace which averages more than 4% over the cycle. It is faster than our expectation of market growth. So, obviously, to achieve that, we will need to continue to invest. We will need to continue to invest in capacity expansions, as we have done, and Antti did mention a few of those. And we will likely announce some new ones as time goes. And we are also investing into some of the operating expenses, if you will, so to bring up and bring out some of these new renewable chemistries and these, for example, the digital services that are part of our strategic priorities. So we will need to continue to invest some to be able to achieve this longer term growth level. And then the Operative EBITDA target or the profitability target was increased. It was increased by a meaningful amount from 15% to 18% to 21% but still some people have been asking whether that's an ambitious target as for the last almost two years we've been operating well within this range and actually even above the midpoint of that range like during the most recent quarter. But we really want to set this as a guardrail that we are looking and we see the value creation is through this growth. And because we will need to invest into this growth, however, the investments that we do for the growth, we will be managing it so that we will stay within this operative EBITDA range as the profitability target has been defined. The capital efficiency target, the Operative ROSI target, it's a new target for us. And here again, similarly, it acts as a financial guardrail. So clearly our current Operative ROSI is well above that. But this is sort of in anticipation that if we are to do M&A moves. M&A moves will likely put some pressure on this capital efficiency, but we will always maintain that M&A appetite and that M&A strategy so that the return on capital stays above this 16% level. Absent of M&A, I don't really see any reasons or any issues that would put significant pressure on the capital efficiency target or current level of capital efficiency. Then, as Antti said, we will be publishing or we'll be going into three reporting segments and three business segments beginning of next year. So I think you as financial analysts and investors, this will give you more transparency to our business. and you'll see more transparency on the financials and also the business drivers. So in that sense, that should be good. However, please, we want to highlight that these segments now have different profiles and that's why they will also be managed somewhat separately. And this page is sort of a proxy to describe the key differences between the financial profiles. For example, fiber essentials, typically very predictable customer relationships, very predictable revenues because of the long-term nature of the customers and customer contracts. However, it is more capital intensive, perhaps growth rates somewhat lower, but nevertheless valuable because of the predictability of those cash flows. On the other hand, water solutions, which is really the biggest segment for us, and clearly an area of our strategic focus and strategic investment, it has highest market growth, and we believe that it will continue to have the highest profitability profile and very efficient capital efficiency as well. Those are some examples. Then, at this time of the year, we typically give out a sort of a, if not a teaser, but at least a snapshot of how we are looking into 2025 next year. I offered this already in the CMD, but basically, if I repeat the key points here, is that the We expect that the solid good market demand will continue in the pulp and paper market. We have some, I'm sorry, in the water treatment market, we have some additional capacity coming online, particularly the the ASA line in China. And particularly if we should see a market pickup in China, that would be really a valuable asset in that type of a scenario. Uncertainties, clearly the biggest uncertainty is the recovery of the pulp and paper market. We clearly see that it stalled and expectations for the rest of 24 are really modest. So the recovery has been pushed into 25. But when that will materialize and how strong that is, it is really a question mark that I think everybody is sort of wondering at this time. And then, of course, there are fixed cost inflationary pressures that we need to tackle. And I already mentioned that we need to do our own cost savings there. And some of that will need to be offset by pricing going forward. So I'll stop here. These were my prepared comments, and I think we're ready to move for a Q&A session now. So operator, please.