Kemira Oyj Ord

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

Good morning on my behalf as well. It's my great pleasure to present Kemera's quarter three 26 financial results. But before going to the results, let's have a brief look at the market environment, which was very challenging throughout the quarter three. And unfortunately, there's no sight of significant improvements going forward either. We've lived already for a long time through the tariffs going up and going down, which causes a lot of uncertainty in the economy. Then we had the conflict broke out in the Middle East early this year, which basically has increased the energy costs, raw material, logistics costs, and caused some uncertainty as well because There's the expectation of what happens to the oil price. Is there an ease of the conflict or is it escalating? What happens to availability of certain raw materials? And this all uncertainty, of course, then has led to the higher inflation rates, the increases of interest rates that we've seen from the central banks. And this all then converts to consumer confidence, consumer sentiment being low. You can see that in the consumer confidence indices, you can see it in the purchase managers indices. So basically this whole uncertainty and untrust into the future is causing the economy to continue to drive at the low gear. And that is then especially visible for us in the pulp and paper related markets where the packaging materials don't move as they used to move, which is converted to the lesser chemical demand. A really good example of that, what we've seen now, are the announcement of our fiber essential business unit customers, i.e. the pulp producers, both in Nordics, but also in North America. There's a lot of announcements of prolonged maintenance breaks during the last quarter. In US and Canada, there's even indefinite mothballing of pulp mills. So this all... is creating an environment which is really, really tough for us. And as mentioned, unfortunately, it looks like the near-term future will be pretty much similar. And this market... background, then moving to our results in quarter three. So the revenue grew year on year, mainly driven by the acquisitions, which I think is a kind of an example of the strategy that we've been executing. So basically building a stronger global water business, and that is then reflected in the increased top line via the acquisitions that we've been making. The organic growth, however, was flat. But the profitability was a clear disappointment for us. Operative EBITDA declined below, and that happened in all the business units. That's mainly driven by the increased input costs, both in raw materials and in terms of logistics costs. And as we've been communicating, we have... Put a lot of effort to mitigate that via price increases, but under the soft market conditions that I described, it's been very challenging. And that is reflected in less than targeted profitability level now in Q3. However, our balance sheet remains to be robust. And on back of that, we've been continuing to execute our strategy. In Q3, we completed two acquisitions. One, a small boat to build on the industrial water services platform that we have created in US. The other one, Repur in Italy, which is building our micropollutants removal platform Repuris activated carbon reactivation business so basically these are exactly on the areas where we have defined that we want to grow into water business the future fast growing markets so small steps to increase our presence on those markets and build the future and we also then during Q3 we and completed the earlier announced Sitra Wasserhemi acquisition in Germany. And that is then again strengthening the core of our water solutions business, the most profitable barter coagulant business in mainland Europe. So that's basically strengthening that part of the business. So I'm very happy with the performance there in building this kind of, executing the, and Jukka Eljas Hakkila. In a bit more detail, so as mentioned, revenue growth was mostly driven by the acquisitions that we made. But when Tuomas will later present in more detail the financials, you will see that the pricing efforts that we have done are bearing fruit. So you see the price increases also contributing to the year-on-year growth clearly. However, the volumes in the soft market environment declined. Revenue increased in water solutions and packaging and hygiene solutions, but we saw a decrease in fiber essentials. As I mentioned, the latter half of this year has been burdened by the maintenance breaks and closures of customer capacity. So it's very clearly visible there. Then if we look at the profitability. There, it was the lowest EBITDA quarter for a long time for us. As mentioned, 15.9% operative EBITDA. And as mentioned, this is really driven by the increased input costs. And in the soft market environment, despite all of our efforts, we couldn't fully pass through the impact. And I will talk a little bit more about that in a minute. The operative EBITDA percentage declined in water solutions and packaging hygiene solutions. We were just a bit below 20%. In fiber essences and water solutions, we were just a bit below 20%. In packaging and hygiene solutions, it was a really bad quarter in terms of profitability, only 9.3% EBITDA performance. And this clearly kind of exemplifies the difficulty on the paper and board market to pass through the cost increases. So that was the weakest area in these terms. We also get the biggest hit of the raw material increases in the packaging and hygiene solutions business. Fixed cost we have been continue to manage down and trim the fixed cost base, which is also visible in the financials and starting to bear fruit there. But it's not nowhere close enough of mitigating the steep raw material increase that we saw. Earnings per share, 21 euro cents. Then... Then looking at our long-term financial targets. So as we have been communicating, these are long-term financial targets. And now we are in a situation after a really tough, difficult year that we are below the target level in all three of these. I've been saying earlier that this can happen. There can be quarters, there can even be years where we don't make these targets, but these targets are the area where we long-term will be operating. Now, we've of course taken a lot of action to mitigate the situation, so we've been executing operational excellence programs, we've been stripping down the and all the business units, all the geographies and we continue the strategic growth efforts that we have. And this all should be putting us in a good position moving forward when the market pickups. And here looking at this, it's important to understand that we are a downstream chemicals company. So basically we get the full hit of all the input cost increases in upstream, but we get practically no benefit or uplift from the situation that we have in the market. Then, as I promised, a bit more details on the Middle East crisis and the impact of that in our business. So as we communicated already earlier in the year, for 26, the gross impact is roughly 100 million euros. of which we still reiterate our earlier assumption that roughly half of that we can mitigate during 50% successful in the water business. So water solutions business have achieved more pass-through, but we've really struggled in the packaging and hygiene solution side where basically we are not reaching the 50% mark. But on a group level, that's roughly where we will be ending the year. Then looking at the outlook, so we reiterate our earlier outlook. The demand environment is and will for at least short-term future stay as it has been. So end markets are weak. The global economic uncertainty and geopolitical turmoil will remain on an elevated level. So that basically then means that there's no other way to look at it the rest of the year but reiterate earlier outlook for it. And then finally, I'd like to say a couple of words about our strategy execution, because that's really kind of the mid-long-term important thing. We will try to manage and we will manage the short-term headwinds that we have. and all aspects, but a strong global growing water business expanding in it. We have evidence of a serious of a programmatic M&A here during this year and already previous year. We invest into additional capacity on the core of the business where we see the regulation driving the growth. So we expand where needed. and we continue to work on our organic growth initiatives of renewable chemistry for the customer industries that we serve. There we have a lot of innovation and research projects ongoing, startup collaboration, different other projects and other initiatives to build the position, our collaboration with IFF and so forth. So really we are building the future there as well. And at the same time we continue to unlock the new growth platforms in adjacent markets where we think that we have good growth potential going forward. So the solid financials. And with this, I would like to hand it over to Tuomas, who will walk you through in more detail of our Q3 financials.

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