Q3 2021 Conference call transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

KEMIRA.HE - Q3 2021 Kemira Oyj Earnings Call

EVENT DATE/TIME: OCTOBER 26, 2021 / 7:30AM GMT

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OCTOBER 26, 2021 / 7:30AM, KEMIRA.HE - Q3 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 Q3 2021 Results Webcast. My name is Mikko Pohjala, Kemira's Investor Relations. And here with me today, I have our President and CEO, Jari Rosendal; as well as our CFO, Petri Castren.

Earlier today, we published our Q3 report with record revenue. And today, as is our typical case, so we'll go through the results, first, by Jari and Petri the figures and the operative summary, and after that, you will have the chance to ask questions either via the teleconference line or then via the webcast tool.

With that, I'll hand over to Jari for the update.

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

Thank you, Mikko. Good morning on my behalf also. Third quarter was a continuation of a good start to the year. And despite the challenges that we see in the marketplace from raw material availability, high cost and logistics costs. Market demand for our products have been good also to our services and have been improving during Q3, which shows in our revenue growth.

Input costs are up strongly, but also sales prices increases are starting to show in the numbers. Added volumes and added sales prices have offset the EUR 100 million added cost from input costs year-to-date. However, capacity utilization is starting to be on a high level in our key product categories.

So summary from Q3, record high quarterly revenue, as Mikko mentioned. It's good to point out that historically, Q3 is our strongest quarter in the fiscal year and Q4, Q1 typically much weaker.

Strong demand continued, as said, and especially sequentially compared to Q2 and even Q1. Raw material inflation, you can see in the EBITDA percentage that was impacted and mitigation ongoing for the increase of raw materials. The new product lines in the United States for emulsion polymer and deep dry polymer in South Korea are ramping up as we speak. And today, we also announced the payment date of the second installment of our dividend from 2020 paid on November 4, and it's 25 -- EUR 0.29, correction. And our outlook for '21 is unchanged.

So here are the main figures for the year -- sorry, for the quarter. Revenue of EUR 693 million, and 16% up year-on-year organically and an all-time record for quarterly revenue. All market segments grew and Oil & Gas recovery was strong, but our core businesses in Pulp & Paper and water treatment grew by 11%. So that was great to see.

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OCTOBER 26, 2021 / 7:30AM, KEMIRA.HE - Q3 2021 Kemira Oyj Earnings Call

Operative EBITDA EUR 116 million, with a 16.7% margin. As said, raw material increases continued and is expected to continue also in the coming quarters, especially in Q4. In July, we expected that raw material prices would start to settle in the second half. That didn't happen. So sales price increased. Volume helped us. But further volume growth, especially sequentially, not that easy as utilization rate is high.

Then Pulp & Paper. A reasonably good quarter. Board, tissue and pulp demand continued as strong. Printing and writing continues to recover sequentially. Sales price increase is going through, and we've been able to keep the customers running, which is very important for us and obviously for the customers as there are disruptions in the value chain. And we did receive a compensation payment for emission rights and it all was booked in Q3 last year, it was booked half in Q3 and half in Q4. So that helped our Q3 in Pulp & Paper on a group level. Petri will explain that a bit more.

As said, for Pulp & Paper, the South Korea polymer investment is ramping up, and we announced in Q3 that we will add ASA sizing capacity to our site in Nanjing, China. That's 1 of our 2 global ASA manufacturing sites. The other one is in Austria. And this is on the back of the increasing demand from -- especially from packaging and board.

Pulp & Paper revenue EUR 391 million, with a EUR 64 million of operative EBITDA, including that emission right compensation. A good result from the Pulp & Paper team.

Industry & Water did very well and water business for us is very strong. Municipal market is solid, and we saw some growth. Also industrial water market strong, and growth was seen.

In Oil & Gas, shale market demand continued to recover, but margins are not on the level we would like them to see. So work needs to be done. Raw materials continue to creep up all the time.

I&W organic growth 23%, but when we look at the water treatment side, which is the big portion of it, 11% growth, which is very nice to see. Sales price increase is also ongoing, but they come through with a lag. Revenue EUR 301 million in Q3 with the 17.4% margin, which one can be very happy about and a strong Q3 performance from the I&W team.

Then shale -- or sorry, Oil & Gas. And as said, shale continued to recover. Oil & Gas is roughly 10% of our revenue. So it's good to keep in context. WTI for shale was and is over $80 per barrel. Volume is back, as you can see from the EUR 75 million revenue on a quarterly basis, but as I said, prices are not there yet and profitability is not there where we want to see it. And raw material availability, especially North America has eased a bit, but not on the cost side.

CEOR market continues solid and we have mostly formula pricing there. And the same formula pricing applies for our oil sands tailings treatment chemistry which goes to Canada. And I'd like to remind that during October, that treatment stops. And in the next winter months, there won't be revenue coming from the tailings treatment part as the waters are frozen.

And already discussed at the EPAM line in Mobile, Alabama is ramping up as we speak. And a year ago, we were worried that is it the wrong time of that big investment to come online this time, but actually now that demand is recovering, the timing is quite good.

From time to time, I talk about customer satisfaction, and you can see from the graph that that's continued to improve, which is good to see, but also a bit of a surprise because we've been pushing sales prices really strongly and continue to do so. But as we have been keeping customers running and our delivery reliability has been high, we get the appreciation from the customers as they seem to have also good demand in the markets for their products.

Our products help to improve customer resource efficiency. In Pulp & Paper, our products are improving, manufacturing process, operativeness, enabling better resource efficiency, improving runability, quality and content of recycled paper.

In water, chemical water treatment has been proven that it is the most compact, thinking of the customer plant size and smallest environmental print.

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OCTOBER 26, 2021 / 7:30AM, KEMIRA.HE - Q3 2021 Kemira Oyj Earnings Call

Oil & Gas, even if it has sometimes a bad name, we optimized the well performance for the customers or the oil well gas, well performance and we substantially reduced the energy need and water use in that operation.

Customers give us their feedback, a good grade for supporting them in their sustainability efforts.

Then EU taxonomy is coming and requirements for reporting start early next year. And based on our very preliminary analysis, the first delegate acts of 1 and 2 are not so relevant for Kemira as they are for high emission type of operations, and we are not very high in those emissions and doesn't concern us at this point. Naturally, we keep on working our own emission reduction.

Delegates 3 and 6 will be more relevant to us as it's related to water and life in water and these type of activities and more supporting us. So our project is ongoing to analyze these and then the taxonomy reporting will start early next year.

As a last summary, gradually returning to new normal after COVID-19, it is taking longer than any of us have expected. Raw material and logistics price pressures are continuing and will continue and getting also quite faster. So it's hard for us to keep up even if we work on sales prices. We ramp up the new capacities of new lines and stay agile to react to any movements in the market conditions.

We have the new bleaching capacity under construction in Uruguay, and that's ongoing, and we will start now to build the new ASA line capacity in China. The bio-based drive for new bio-based products in our portfolio is proceeding well, and we have some positive news from test runs with the customers. And we keep our people safe and secure supplies to our customers. High focus on the increased raw material environment.

I conclude my presentation here and ask Petri to give more insight on Q3 numbers.

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

Thank you, Jari. So from my point of view, I always open this up with sort of key points. And I think the key points in the report really are the strong organic volume growth, also our ability to now move the inflationary pressures to sales prices and thirdly, we are making a sort of a forward-making comment that this inflationary pressure -- inflationary environment is expected to continue.

But looking at the quarter, so record revenue, as Jari said, almost EUR 100 million reported revenue increase, which for us is quite significant. The 16% organic growth splits to 10% volume growth, one can say somewhat volume recovery from the lows of COVID in 2020 and also 6% year-on-year price increase. But even excluding the Oil & Gas, the organic growth 11%, very strong. So growth, very strong across all our businesses.

Looking at the price improvement, EUR 38 million. I think that's quite significant, considering that the same number was EUR 13 million -- actually, I'm sorry, EUR 12 million in Q2. And actually, still in Q1, it was a negative EUR 13 million. So don't want to make a straight line out of this, but obviously, we are now moving in the right direction and have visible sort of proof of the liability to move on these prices to our customers, in a way, indication of our pricing power. Although as you can see from the following slide, this comes with a lag.

Also year-on-year, particularly when the change has been as dramatic is sort of masking the story, we're also following it on consecutive quarters. And this, we don't report out. But Q3 over Q2, we had roughly 3% price increase, roughly EUR 20 million impact on a quarter. So we'll -- that's sort of a demonstration of some of the activities. Still, raw material inflation continued at higher rates, which resulted in the margin depression.

In the last 2 quarters, the year-on-year increase has been actually over EUR 100 million. Actually, throughout the year, it has been EUR 100 million increase. And this has now accelerated in Q3. So it makes quite remarkable trends if you sort of look at the last few quarters.

And as Jari said, variable costs include this onetime specific item, EUR 7 million. So this is the compensation -- or emission rights compensation here in Finland, EUR 7 million, which was all received and accrued in Q3 of this year. Whereas last year, this was received in Q3 and Q4 and at a smaller rate. And why this way? This is a site specific, so all of our manufacturing sites, which are eligible in Finland did receive a positive decision in Q3 of this year. And I think it's good to note here that this compensation scheme is actually ending after this year. So we won't see this same number in '22.

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OCTOBER 26, 2021 / 7:30AM, KEMIRA.HE - Q3 2021 Kemira Oyj Earnings Call

Currency, another big issue at [1.16] euro-dollar which is the biggest impact for us, and that comes from translation. And so therefore, a smaller impact as you -- compared to what you have seen in previous quarters.

This -- actually, you can compare the increase in raw material costs to the time of 2010 and 2011 after the financial crisis. And similarly, as then, as you can see from the chart on the sort of the early years 2010, 2011, we also had quite significant sales price increase following the cost curve. But due to the magnitude of the curve increase that we are seeing now the net impact was EUR 24 million negative for the quarter, which again is visible here on the right.

And as Jari mentioned, after Q2, we were hopeful that we would have been seeing the peak of the raw material pressure during summer months. But indeed, that's not the case, and we see the continuing inflationary pressures for Q4 and the coming quarters. Both of these trends are expected to continue, meaning the inflationary pressures as well as our ability to put these prices to our customers. This is really a high priority for us at this time.

And as Jari mentioned, Q-on-Q or quarter-on-quarter, we're now, in most of our product lines, very close to capacity. So following volume increases will not be easy. So as this year, a lot of the inflationary pressure was compensated by volume increase, next year, that will be somewhat more challenging. And as a reminder, Q4, Q1 will be seasonally lower months.

Cash flow. Last time I spoke to a bit more about the net working capital and how it impacts our cash flow. And the simple truth is that growth consumes net working capital. And as our inventories and receivables offset or the impact more than the offsetting payable increase. What I -- as a CFO, I'm still happy that our inventory rotation is actually faster than it was last year, and our receivables rotation is very stable at around 45 days and has remained there constantly and it's a good quality and relatively short rotation period for receivables.

Also reminding that during Q3, we paid out the CDC settlement payment, EUR 22 million, and this was accrued already in Q2 and announced in around that time.

For CapEx, we are making a slight adjustment. So up to now, we have been guiding towards roughly EUR 200 million of CapEx. Now we believe that because of some delays and slowness in some of our projects, we will be falling slightly below EUR 200 million CapEx for the year.

Capital efficiency remained at a good level. So 12% is sort of a level where we have been saying it's good and in terms of return on capital efficiency. And really balance sheet, nothing really to report out, no new financings during the quarter.

This time, we decided to bring this chart on our electricity and energy costs because of the global sudden and rapid increase in electricity costs across the board. And as you can see, energy and electricity represent about 10% of our costs, about EUR 170 million. And from the middle, you see how it splits. So almost 40% is Finland and 30% in U.S., where we have the biggest chlorate plants, which are electricity consumers; and then third, 30% is rest, meaning South America, Asia and Europe, of course, rest of Europe.

And we are relatively well protected. So in Europe, about 2/3 of our electricity costs, it comes either at cost or is it at hedge. And elsewhere, we also have. So in Finland, we do get this electricity at cost from our ownership in Pohjolan Voima, PVO and Teollisuuden Voima, TVO and that's sort of the Mangala concept where we get the electricity at cost. And obviously, that helps now.

In U.S., we don't -- I'm sorry, and also the additional point is that the -- some of the open part, which we don't get at cost is then hedged in with [Pohjolan] A bit longer-term electricity forwards. In U.S., there is no effective hedging market as far as we know. But the customer contracts are formula-based. So here, the electricity costs are passed on to the customers whether they go down or up. However, this comes with a lag.

And then in South America, where most of the electricity and energy is consumed in the chemical islands, we actually have a fixed price, very symbiotic relationship with the pulp mills where we get the electricity. So we don't have an open position there for electricity cost. But nevertheless, roughly 30%, 40% of our electricity costs is sort of an open position and rest of it is either hedged or at fixed term.

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