Kemira Oyj : Half-year 2021 Conference call transcript

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KEMIRA.HE - Q2 2021 Kemira Oyj Earnings Call

EVENT DATE/TIME: JULY 16, 2021 / 7:30AM GMT

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JULY 16, 2021 / 7:30AM, KEMIRA.HE - Q2 2021 Kemira Oyj Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Jari Rosendal Kemira Oyj - Chairman of Management Board, President & CEO

Mikko Pohjala Kemira Oyj - VP of IR

Petri Castren Kemira Oyj - CFO & Member of Management Board

C O N F E R E N C E C A L L P A R T I C I P A N T S

Anssi Kiviniemi SEB, Research Division - Analyst

Harri Taittonen Nordea Markets, Research Division - Senior Director & Sector Coordinator

Martin Roediger Kepler Cheuvreux, Research Division - Equity Research Analyst

Robin Santavirta Carnegie Investment Bank AB, Research Division - Head of Materials Research & Financial Analyst

P R E S E N T A T I O N

Mikko Pohjala - Kemira Oyj - VP of IR

Good morning, everyone, and welcome to Kemira's Q2 2021 Results Webcast. My name is Mikko Pohjala from Kemira's Investor Relations. And with me here today, I have our President and CEO, Jari Rosendal; as well as our CFO, Petri Castren.

Earlier today, we published our Q2 results and reported strong revenue growth. Today, as is the tradition, we'll start with a brief overview of the quarter by Jari, followed by Petri, after which you'll have the chance to ask questions, either via the audio line or then via the webcast tool.

Without much further ado, I'll hand it over to Jari.

Jari Rosendal - Kemira Oyj - Chairman of Management Board, President & CEO

Thanks, Mikko. Welcome on my behalf also.

Second quarter was a continuation to a good start in Q1. Despite the challenging raw material and logistics environment, Kemira organization has performed really well. Market demand for our products and services has been good and improving while we've chosen our strong revenue growth. Input costs are going up, but so are the sales prices, which are starting to show in the numbers.

Sales price increases are going through nicely as customers are more worried about getting the products availability, and the impact of agreed price increases come with a lag, so -- but we do have some evidence in the numbers that price increases are starting to show. Added sales volume and sales price increases compensated more than the increase of the input costs.

So let's look at the summary of Q2. Strong demand continued and growth was strong, but not only year-on-year, but also compared sequentially to Q1. As said, raw materials are up and availability is easing, but still some bottlenecks, especially in North America.

Sales prices are going through and compensating more than the variable cost increase. And production line in U.S. and South Korea is ramping up. Outlook for the year is unchanged.

Then looking at the figures for Q1, main figures. Revenue, EUR 658 million, up from EUR 606 million in Q1 and clearly up organically 16% year-on-year. Operative EBITDA, EUR 107 million and 16.3% margin, which is a good achievement. All market segments grew. Oil & Gas recovery is strong, but other areas grew also.

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JULY 16, 2021 / 7:30AM, KEMIRA.HE - Q2 2021 Kemira Oyj Earnings Call

We did settle a legacy legal dispute, which I'm very pleased about. It did affect our net profit in this quarter. It is a historic event, and I'm glad that we have it now out of the way. The event is before Kemira time from the '90s.

Then Pulp & Paper, a good quarter. Pulp, board and tissue demand continued strong, and therefore, the chemicals from us -- for those applications. Printing and writing continued to improve sequentially. Sales price increases going through in Pulp & Paper, and we have been able, despite the challenging raw material situation, keep the customers running, and no disruptions there.

APAC growth really strong, and that's actually a comparable number or close to comparable number year-on-year. The South Korean polymer investment comes at a good time now and is starting up as we speak and starting to ramp up. We're also considering adding ASA sizing product capacity to our Chinese plant in Nanjing.

Pulp & Paper revenue was EUR 378 million with a EUR 58 million of operative EBITDA. A good result from the team. As said, price increases come with a lag.

Then Industry & Water, very good quarter. Oil & Gas clearly recovered. Water business is very strong. I'd like to emphasize that the water business is very strong and has been very strong. Municipal water market, solid and industrial market, gradually recovering. Sale market continue in recovery. Margins still not even close to where we want it to be. So more work is needed in that, but the volumes start to be there.

Raw material availability for the polymers has been an issue in North America, but gradually improving. Oil & Gas sales prices are going through, but also in water treatment, prices are being corrected to the right level. But it takes a bit of time for Oil & Gas to get their margins up.

I&W revenue, EUR 279 million with a 17.7% margin which is an excellent outcome in these circumstances. As said, polymer raw material prices, especially under pressure, but added volumes and sales prices more than compensated for the input cost increases in I&W. Strong continued performance from I&W.

Then a bit more on Oil & Gas. I also already mentioned that shale is coming back. WTI oil price is a bit over $70 at the moment. Volume is back, but pricing not satisfactory yet. The team is working on that on a daily basis. CEO market, really good and steady. And there, we have mostly formula pricing, so input cost goes into the formula.

Oil sands tailings in Alberta, Canada started in April. Volumes are back in a more normal level. They were curtailing last year. And here, we also, in polymers, have formula pricing, so that's correcting itself as it goes.

As you can see from the bar chart, EUR 66 million of revenue in Q2. And when you think of FX, of U.S. dollar, Canadian dollar, we start to be close to pre-COVID levels from a volume and revenue point of view, not from a profitability point of view. Added EPM capacity, U.S. coming online, really at a perfect time with the best cost point and efficiency as it's a new line, and that's ramping up, bit hampered of raw material availability, but everything is looking good.

Then a bit more of a long-term look and strategic look of where we are and what we intend to do. We have made systematic work last years to fix the fundamentals, and we are fundamentally stronger and more agile to react to the changes in the marketplace. We want to continue to grow in pulp, packaging and tissue, which is in high demand today and will be also in the future. Megatrends, consumer behavior and regulations are also supporting growth in those areas. We also want to grow in water treatment, especially in APAC. Bio-based products, support recyclability, biodegradability is an area of development for us. Plastics will be there and will always be there, but the trend in packaging will go more to recyclable bio-based packaging.

Plastic recycling by the way, is going to increase a lot, especially in Europe due to the regulation changes. But when you circulate plastics, it needs a lot of washing. There's a lot of impurities there. So that's going to be more water treatment needed in that process in the future.

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JULY 16, 2021 / 7:30AM, KEMIRA.HE - Q2 2021 Kemira Oyj Earnings Call

In our CMD, we announced also our ambition to grow more sustainability and focus even more to sustainability than Kemira has today. And one area is the bio-based product line where we want to increase our offering. The progress has been good, and we have now first test runs in sort of a pilot level in big machines with PHA, which is the Danimer partnership, and that's looking promising.

So we will focus on 4 tracks of development in the bio-based arena. First, we obviously sell the products and push the products that we already have in our portfolio. And as a reminder, our recent investment in China for the AKD wax for added capacity and then backward integration in the manufacturing process is a bio-based thing and sort of supporting this. But obviously, it was a product that this was already in our portfolio. We just increased the capacity, and we are undisputed #1 in world capacity in AKD wax.

Second track is to develop our products from a fossil feedstock to more bio-based feedstock as a dropping product, meaning that we can produce those mainly polymer type of products in our own today's assets and the customers can also, with testing, drop it into their machines right away.

Third track is to go through R&D, which is a longer track and develop new chemistries from new feedstocks, and the Danimer example is one of those.

And the fourth track is longer term. We monitor the market, what's happening in early research or in other application areas than our areas and look at what we can adapt from there and, again, develop new ways of developing bio-based products. So we have a good start into the bio-based, and we are very much on track, but it does take time, especially track 3 and not to talk about 4.

And here's a busy slide. I'm not going to read it for you, but you can look at it later. It gives you a sort of a timeline and the roadmap on how we envision -- how the growth story is going to go.

On the top, the green dots, you can see the expansion investments that we have announced and are ongoing, and there will be more. On the bottom side, on the gray dots, you can see the bio-based roadmap and how that goes in steps and what timelines you can expect for us to drive to develop that side of business and grow our bio-based revenue and portfolio.

As a final slide from me, a summary of what we're focusing this year, continuing -- so continuing, obviously, mitigate COVID-19. Situation is not getting easier, actually going to the worst direction in many countries, so we need to keep our people and stakeholders safe, secure our operations and deliveries to our customers.

We continue to mitigate the impacts of the higher input costs. We have increased focus on profitable growth, and we maintain good cost control. Bio-based, I talked about, so that's a high-focus on our agenda at the moment, and we want to drive our plants efficiently and ready to meet the increased demand out there and be agile, so that we can capture the business that is out there and get it into our revenue. And we continue to complete our strategic investment projects and ramp them up when they're in that phase.

I'll conclude my portion here and ask Petri to give more color on the financials for Q2.

Petri Castren - Kemira Oyj - CFO & Member of Management Board

Thank you very much, Jari. Typically, I like to open these sessions with what I believe are the key points in each report. Today, I believe they are the raw material increase. This was quite strong, but this should not have come as a surprise to anyone.

I think, the second key point is really that our sales prices increases, which Jari talked about, and combination that -- with that -- with the volume increase actually more than offset the quite significant raw material inflationary pressure that we experienced.

Third one, which I'd like to point out is that while the cash flow was -- operating cash flow was somewhat on the weak side, there are very good reasons behind that, logical explanations. The growth and the inflationary pressure is actually tying up temporarily more capital into net working capital, into inventory and into receivables. And I'll talk about -- more about that in a minute.

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JULY 16, 2021 / 7:30AM, KEMIRA.HE - Q2 2021 Kemira Oyj Earnings Call

So quite a dramatic recovery in revenue and volumes now in Q2. Reported revenue was up by 13%. And actually behind that is the organic growth of 16%, and that was mostly volume. Sales increase impact was 2%. But actually, there was a little bit of the negative impact from traded caustic soda. So if we were sort of excluding that, the price impact would have been about 3%.

Oil & Gas, biggest recovery in volumes and revenue, and Jari talked about that. But I think equally important is that the recovery in volumes was widespread. It actually impacted all businesses globally.

On the profitability bridge here, the EUR 43 million, significant number from the inflationary pressures from higher cost of raw materials, and, to a lesser extent, transport costs or logistics cost in broader sense. But again, as I said, equally significant, if not more, is that we were more than -- we were able to more than offset this with the combination of price impact and the sales volume increases.

And talking about the price impact in -- for comparison purposes in Q1, this price was still negative EUR 13 million, and now it reverted to positive EUR 12 million. Volume impact and the raw material price impact hide a little bit of the smaller items in this bridge. But I'm quite happy and pleased about the fixed cost management, only EUR 2 million increase from prior year, and that's clearly below the rate of inflation that we are seeing, so we are managing the fixed costs quite well.

Travel costs are one contributor to that. They continue at a very, very low rate as business travel is very limited. FX, currency impact, was a negative EUR 3 million on the profitability bridge. And again, this is pretty much in line with the EUR 10 million guidance that we gave at the beginning of the year for the prevailing rates, and the prevailing rates are roughly where we were at the beginning of the year.

We announced in July 8 that we had reached a settlement with CDC for the last of the 3 old infringement claims stating more than 20 years ago. The total settlement value was EUR 22.75 million, and we booked an increase of EUR 11.25 million to an existing provision in Q2. This whole amount, EUR 23 million, will be paid now in Q3. And as Jari said, this claim precedes Kemira's time as owner of Finnish Chemicals.

Originally, there were three claims: two covering hydrogen peroxide; and now this one claim covering sodium chlorate. Anyway, as I said, this was the last of the 3 claims. And while, particularly, I'm not happy about paying this amount, we can be pleased that we are setting this uncertainty behind us and getting over it. The previous two claims were settled in 2014 and 2017 for a total sum of EUR 31 million, approximately.

We also booked another roughly EUR 4 million provision for site closure where cleanup activity is progressing. The chart on the right here shows the sort of a quick turnaround in raw material prices, again, EUR 43 million increase year-on-year, and the speed of the rise is perhaps better understood when one compares it to the chart on the left and the left is looking at last 12 months when the right -- chart on the right is comparing to last quarter versus the previous quarter -- or the year ago quarter.

And so, the average prices, both sales prices and the raw material costs, are still below of the preceding 12-month period time. And that's actually visible from the fact that both of these Dutch end points on the left curve are still below the horizontal zero line. So again, just demonstrating the suddenness and the quickness of the inflationary pressures that have come about our surface now during 2021.

Also, one word of caution when one reads this chart. This chart is always done with constant volumes, so ignores the volume impact. So again, this quarter, we were able to offset the inflationary pressures with the volume increase. Conversely, last year, 2020 when we were in a COVID-related downturn, we saw some benefit from the raw material costs, but that did not all come through to the P&L, because the volumes declined at the same time.

And as a reminder, it is sort of quite evident from these charts that the sales prices tend to follow with a 1- to 2-quarter lag, the changes in price curves, raw material price curve studies.

Moving to cash flow comments. Because of this market turnaround, both the quantity and the value of our inventories continue to increase during the quarter. Now the value of inventory, a total value of inventory is EUR 38 million higher than it was in December 2020. But it's also important to note that well over half of that is caused by FX currency changes and the value of that inventory and to a much smaller extent from the volume of increase, volume of inventories.

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