Kemira Oyj Ord

Good morning everyone and welcome to Kemira's Q2 result webcast. My name is Kiira Fröberi and I'm the new head of investor relations at Kemira. We issued our half-year financial report today and maintained a solid profitability in a challenging market environment. We have made some changes to our presentation content and flow. Next, our president and CEO, Antti Salminen, will present you the group figures and will also discuss our strategic developments and the outlook. After that, our CFO, Petri Kastreen, will continue with business unit performance and will also discuss the financials in a bit more detail. We also today announced that we will start share buybacks, so Petri will cover the share buyback program in his presentation. But now, Antti, the stage is yours.

Thank you, Kiira, and warm welcome to Kemira. It's really good to have you with us. Yes, it's my great pleasure to present Kemira's quarter two results in 25. really solid 19% profitability amongst challenging market conditions, which I think demonstrates the resilience of our business model and the changes that we have made structurally to the company. As I've been talking about previously, we can perform good times, bad times in the guided 18 to 21% profitability range, which this quarter two is a really good demonstration of. As mentioned, the market environment was challenging. Real headwinds, especially in the packaging and hygiene solutions market, which gets the most impact from the overall global economic weakness, which resulted in a disappointing negative organic growth of 3% for the quarter. which is really, and I will talk more about it later, but which is really coming mostly from the packaging and hygiene part of the business, but also impacted by the exchange rates, especially the US dollar. On July 10th, we updated our outlook. I will talk more about it later. But as mentioned, I think the highlight of the quarter was the strong profitability Overall, and especially in the water solutions and fiber essentials business, which actually increased their profitability in quarter two. And as a result, of course, the balance sheet continues to be strong, which enables us to continue executing on our growth strategy, of which I will talk a little bit more later as well. On the execution of the growth strategy, as we have been several times explaining, it is both organic and inorganic growth. Some examples of that now in the quarter two are the expansion, capacity expansion here in Finland at our Aetza site for the sodium borohydrate powder technology. This continues the kind of track record of small capacity expansions that we've announced in quarter one for the water business. So now this is mostly serving the fiber essential business, but also the powder capacity is helping us to support the growing pharma industry. And as Kiira mentioned in the beginning, the board of directors decided yesterday to launch a share buyback program to optimize our capital structure and serve the interest of our diverse investor base and shareholders. Petri, as mentioned, will talk more about the details of the buyback program, but I will now next turn into some of the leading indicators that give me the confidence to say that the performance will be solid in the future as well. So, we measured this spring, again, as we constantly do, the engagement of our customers, customer satisfaction measured by the Net Promoter Score, which was actually all-time high. And our customers in the reports keep telling that the strongholds of Kemira are the reliability of delivery, good quality of the products, and the professionalism of our service people and sales force. And these are really good baselines to build the future on. Similarly, we of course constantly follow our employee satisfaction, employee engagement, And it remained on a high 80 point level, despite the fact that we went through a major reorganization last year, which always causes some stress in the organization. So despite that, we remain on a good solid high level, which is actually well above the industry norm in this case. So these are kind of leading indicators that give me the confidence that, yes, we are in a good position to invest for the growth strategy execution. But then if we look at the group level finances for the quarter, so as mentioned, revenue declined, being 693 million euros for the quarter. And this really came mostly from the packaging and hygiene solutions side. Then some decline in the water solutions as well, but mostly coming from one single tolling customer that we have there, which had a major impact there. But as mentioned also, the exchange rates play a big role here, so major impact on the decline from there as well. Year on year, both the volumes and the prices declined, but sequentially, quarter on quarter, we saw some increase already in the sales volumes, which I think is a positive sign. Then as a result of the weak top line that basically puts pressure on the profitability performance as well as the fixed costs are not scaling down with the same speed as the revenues in this kind of situation. But we managed to manage the cost base in such a manner that basically the EBITDA performance was steady. If you look at the previous quarters, we are steadily performing roughly on this 19% level now in these weak market conditions. And I just have to express a big thank you for everybody at Chemira, because the whole organization has taken this challenge really seriously, that as the markets are weak, we need to do even more in order to manage the profitability of the business, which this exemplifies. As mentioned, the main driver for the small decline in the profitability is the low top line, but also the currency exchange rates impact here. And as I mentioned already in the beginning, actually the profitability of the water solutions business and fiber essentials business both increased. So we really have the profitability challenge in the packaging and hygiene solutions business, as the packaging chemistry is the one that gets the most direct impact from the global economy. As we as consumers don't buy stuff, as companies don't invest, packaging material is not consumed. And as a consequence, our chemistry that goes into packaging and companies is not consumed. And that hit we get very directly, and we see the weakness there in the profitability. Petri will talk more about the profitability, which was really unsatisfactory in the packaging and hygiene solutions. And as a consequence, we have launched a self-help program, a profitability improvement program, specifically for the packaging and hygiene solutions, which we expect to yield results in roughly about a year's time and improve significantly the profitability of that business. The earnings per share for the quarter were 35 euro cents. Now then, about the growth strategy. So, yes, the markets are not supporting, but we continue to perform and execute on our growth strategy and growth programs. organic expansions to support the growth in especially water business. Inorganic expansions, we have a strong pipeline which we are working on. Example of that is the Thatcher Group's iron sulfate business in the US East Coast, the acquisition of which we completed in the beginning of the of the quarter, as mentioned already, capacity expansions, the AITSA expansion here in Finland. But we also continue to execute on the longer-term growth, the innovation, invest more into innovation to fuel the longer-term growth of the company. And there, of course, it is internal innovation investments, but also a lot of external partnership type of work that we do to expand our capability technology-wise, geographically. So examples of that now in quarter two were the already mentioned Blufar partnership in China to commercialize fully bio-based materials for the packaging industry for barrier coatings there. but also customer collaboration. So we announced the collaboration program with one of our most important biggest customers, Metsä Group, to help them develop together with them their Kuura textile fiber solutions. But then again, and this is one that I'm really excited about, partnership program with the Cambridge UK based CUSP AI company to work on artificial intelligence based innovation programs to develop new to the world type of materials, especially to the growing needs of the water business. So this is something which I think can revolutionize the old fashioned R&D work in the chemical industry and really exciting work. Early days just starting, but I think really important for our longer term growth strategy. So strong balance sheet, steady profitability. We continue to execute on our growth plans exactly as we have talked about previously. And then finally, as mentioned on July 10th, we updated our outlook for the year, the new one being 2.7 to 2.95 billion euros of revenue and operative EBITDA between 510 and 580 million euros. The assumptions behind the outlook are pretty much stable and as they have been, we really don't see this year any further support coming from the market. So as we all see and read from the news, the global economy is in a very uncertain state. And that is the kind of a major kind of underlying factor for the situation. But really, companies healthy, performing well, steady profitability in quarter two. And Petri will continue and talk more about the business unit specific results, as well as about the share buyback program. Thank you.

Very good. Thanks, Antti. So, as Kiita already introduced, we have changed the presentation flow, so I'll cover the core finance flights, but I also offer some of the directional comments on the business units. I will also give some examples of the resilience that Antti was talking about, how this resilience is actually demonstrated by the continued solid profitability, one can say even good profitability considering the market conditions. I'll also address some of the reasons for the PHS weakness, and finally cover the buyback program. I think those are the key points of today's report. All right. So, looking at the revenue and profitability bridges. So, of course, the revenue declined 40 million a year, which is a big number, but half of it was currency. And, of course, the US dollar weakness has an impact and obviously was one of the key drivers behind our decision to change the outlook for the year. Organic growth was a negative 3%, so there was a small volume decline and there was also small negative pricing impact. However, when we get to the BEU slides, I'll give directional comments, and so this was not uniform, and Antti was already talking about the resilience of our water business, particularly the core water business, excluding the tolling revenue, and then, of course, the resilience and the good performance of our fiber essential business. Of course, these same drivers, price, volume and currency, were the drivers that were impacting and were the key drivers behind the 9 million profit decline in EBITDA line. We were able to get small positive on the variable cost benefit. And as Antti said, fixed costs were below last year's rate. And of course, that helped the Q2 outcome. net impact about six million on year-on-year comparison between the change of price of selling prices and the variable costs. So we are getting to a stage where this curve is flattening and indicating that we are in a very stable or quite stable pricing environment so that overall through the through the raw material basket we don't see much of volatility. There are some individual items that impact, we have some product lines, but through the basket we are seeing relatively stable, or have seen relatively stable in the last couple of quarters, and it actually looks that way in the foreseeable future, which of course in the raw material environment is not hugely long. Then the directional comments on the business units. And I'll start with water solutions. So, Antti was already talking about that the decline in water solutions was really the lower tolling revenue or tolling activity that we have with one of our tolling customers. We don't have many, but this is the biggest tolling customer that we have. There were also some weakness in the industrial demand. But however, if we look at the really core water treatment, the urban, the municipal water treatment business, very steady. And the growth was essentially flat with the small growth in EMEA, offset by a small decline in Americas. So again, this core part of our water business is very resilient and also quite predictable, which helps. Sequentially, from Q1 to Q2, revenues and volumes increased. This is perhaps a seasonal pattern, which I think I was sort of alluding to already in Q1 report. Profitability at a very good level. Margin also somewhat positively impacted by the product mix, meaning again less tolling revenue. I would call that a sort of lower quality revenue, this tolling revenue. And so therefore the mix was favorable from the margin point of view. Packaging and hygiene solutions, of course, this business unit was clearly impacted by the challenging market conditions. We've already seen and heard some comments from customers about the continued soft environment in EMEA. On the other hand, there are some early signs that the market may be picking up in America, particularly North America. However, the weak spot for us, particularly in this quarter, was APAC. This quarter, perhaps the financial outcome was even more impacted, because we did have some maintenance breaks in two of our key sites in China, in APAC. And of course, when we had longer maintenance breaks in those sites, we don't get the associated production, we get so-called fixed variances, and they were impacting the result quite negatively. We also had one good-sized customer cease operations. and we have not been able to yet replace that lost revenue. So there is a little bit of that situation as well. So the biggest profitability challenge, therefore, is in APAC. In fact, if you exclude APAC and look at the rest of the world, meaning EMEA and Americas, we are already operating at, even in this quarter, in mid-teens, EBITDA profitability, which again shows that even in this difficult time, This business is quite resilient. It's just that the APAC business is not able to scale down costs with the decline in market as quickly as it should. And this is, of course, something that needs to be addressed. The business unit profit improvement that Antti was also talking about is a broad program. It addresses our fixed cost base. It also addresses some of the variable costs that we do, but it also has to address some of the top line. And with this program, we are also looking how to get some additional volume to the system. And like Antti said, we clearly expect significant improvement on that by next year. Then fiber. Fiber market was stable during the quarter. In fact, we had 3% organic growth for the quarter. When we addressed the market conditions, and market gave the assumptions for the rest of the year last week. We noted that along with the weak packaging market, we are seeing some signs of weakness in the pulp market, and this was of course referring to some of the customer announcements of market-related downtime. However, this business is quite resilient and I'm not hugely worried about, but of course, the potential reduction in top line impacts. Profitability, very good. We did see some formula. related price increases, particularly in North America, as the electricity cost in Q1 was quite high in North America. And a reminder, there's a pass-through mechanism or formula mechanism in our caustic prices in North America, but it lags a little bit. It lags about a quarter of the cost. So the previous quarter's cost base impacts the next quarter's revenue. So we did get some benefit of that now. On the balance sheet, really, really no change. We continue to have very strong balance sheet, arguably suboptimal amount of leverage, as we are now starting to address with the buyback program that was announced, particularly if we consider the overall capital structure and the cost of capital. Operative ROSI now below 20%, clearly because of the operating profit EBIT has reduced the last trailing 12 months. There's really no change in the capital base. Cash flow from operation 64 million during the quarter. Not quite at the level that we have seen it in the last few years. We have had some networking capital build up. We haven't been quite able to scale down the level of inventory or one could say inventory effectiveness with declining revenues. So this is obviously something. that will need to be addressed during the second half of the year. There is a seasonal pattern in our cash flow generation, as those who have followed us longer time have noticed. We have clearly over 50% of the cash flow is generated on the second half of the year, in a typical year. and oftentimes concentration under Q4. Some of the seasonal patterns that drive this are, of course, that we tend to have a higher share of capital expenditures that get final acceptances to trigger payments in the fourth quarter, and then actually those payments are then made in the Q1, But those payables are created in Q4. Also, the incentive cycle is such that you accrue payments and then you pay annual incentives in the beginning of the year. About the capex, no change in our forecast, so we expect that the capex will be slightly higher this year, or somewhat higher than last year. So that's there. And then about buyback. Our board has discussed the merits of share buyback program in many of its meetings in the recent past as the company's balance sheet has increased and the question has become more relevant. We recognize that the capital structure is not the most optimal now. and that we actually could benefit of some additional leverage from the current half turn of leverage that we have. During these considerations and discussion, it has been always very important to stress that any buyback program will not impact our dividend policy. also that it cannot impact our ability to execute our growth strategy, whether it's organic investments or whether it's inorganic programs and opportunities that we want to take advantage of first. I think we can safely and very comfortably conclude that this program, which has now been announced with the maximum amount of 100 million, will not impede with either one of these objectives. So, this will not impact dividend policy. This will not prevent us from executing any of the M&A opportunities that we see otherwise fit. And so, therefore. Of course, this buyback program is also a recognition that we have different shareholders and different interests between different shareholders, particularly regarding the taxation of dividends. Many of our foreign shareholders get much more heavily taxed for dividends, and this sort of addresses their needs as well. The program can earlier begin next Tuesday, will likely take some time to execute. So based on the recent trading volume, it will be 9 to 12 months or something in that range. So this will be a lengthy execution that we will be executing. Santi already covered the outlook. We are now ready to move to the Q&A session. Operator, please.