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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
I'm Mikko Pohjala from Kemira's IR and I'm here today with our President and CEO, Jari Rosendal; as well as our CFO, Petri Castren. You surely have seen it earlier today, we published our Q1 results and had a strong start to the year with excellent profitability. Today's webcast will start with a short update from Jari and then from Petri as well and then we have plenty of time for your questions. And you can submit your questions either via the teleconference or then you can submit via the webcast tool as well, which I will moderate. With this, we are ready to start and I hand it over to you, Jari.
Thank you, Mikko. Good morning on my behalf also. And as Mikko said, excellent start to the year with strong profitability and cash flow. And therefore, couple of weeks ago we also upgraded our outlook for the year based on the good Q1 and the outlook is now operative EBITDA EUR 550 million to EUR 650 million. So the window went up by EUR 50 million already here in April. Quick summary to first quarter. As said, strong revenue and operative EBITDA. We have also announced that we started a strategic review of our Oil & Gas business, which is performing much, much better today and it might include also a sale of that business. It's in early stages so nothing to really comment on the timeline yet. Also I appointed Tuija Pohjolainen-Hiltunen as the Head of I&W segment and she's today heading Pulp & Paper Americas commercial operations and she's based in Atlanta. And earlier we announced that we are forming a new position to our management team, a Head of Strategy, which we haven't had on the management team level in a long time and Linus Hildebrandt from Covestro will be starting in the role in June. So the management team is fully filled now and fit for fight going forward. Then financial highlights. You can see that in Q1 revenue was EUR 906 million so up quite a bit from last year, prices mainly, and volumes did come down with the market and with the destocking in the value chain. But still good revenue number. And the operative EBITDA EUR 193 million versus EUR 120 million last year and really good margin for a quarter, 21.3%. Also our cash flow came in nicely, which it usually doesn't in the first quarter of year. But thanks to the net working capital management and good profitability, cash flow performed also well. This was a broad sort of improvement in the business so it's not so much relying like in Q4 on getting help from the electricity and caustic. That impact is much smaller in Q1. So that's something that Petri will talk about a bit more in his talk. Pulp & Paper continued margin improvement and really well and, as said, there was some inventory destocking and China was slow to recover from the COVID lockdowns which ended in December. Higher sales prices and, as said, not so much from electricity and caustic. So revenue EUR 505 million and really good margin 21.7%. A great outcome from Pulp & Paper. Our bleaching expansion in Uruguay is being completed and starts to ramp up during Q2. Not a huge impact to this year because the ramp up probably for the European pulp mill and our plant will take time. So the main contribution will start later in the year and next year. Industry & Water strong margin improvement and water treatment, especially municipal, doing really well and pretty steady volumes. Some volume softness in industrial water treatment demand. But Oil & Gas has now reached an acceptable level in revenue, but definitely also now in profitability so the run rate is starting to be a decent one. So sales prices again driven and volumes down a bit except Oil & Gas volumes continue to go up. And now in Q2 April, May also the tailings treatment season is starting in Alberta in Canada. Then a bit more of the strategic review of the Oil & Gas business. So we'll evaluate the options what we can do including potential sale of the business. We have said that we want to grow in water related applications and after couple of difficult years now, the Oil & Gas is in better shape so time to evaluate that. That's in early stages so we will update the progress, but no timetable to communicate at this time. Then our biobased strategy or renewable strategy is progressing. And we set up and announced earlier that we formed a new commercial and technical unit, we call it Growth Accelerator unit, and that unit will focus 100% on launching these new offerings to the marketplace and that unit is now operational as beginning of the year. The partnership on the PHA mainly going to barriers. Technical work and customers' trials have continued and improving performance so really sort of good progress. There's another partnership on a product or feedstock what we call Alfa Glucan and also there customer trials are continuing and proof of concept is being established. And we also want to grow in other areas like textiles and molded fiber and then on top of the water side of things. And you can see that last year, our revenue was roughly EUR 250 million already from the biobased. That comes mainly from our older product portfolio and now we need to get the new products also to the marketplace and get them launched. But I'm quite glad of the progress that we have there. Then focus areas for the rest of the year. It's my last slide. So we need to be operationally agile to react to disruptions that certainly will continue this year and be able to optimize and take the opportunities from there. Inventories pressures maybe easing a bit, but not going away and let's see how the European energy situation will develop next winter when again more gas is being used on the energy side. We have also now Olkiluoto 3 operational and we get electricity here in Finland from there. Investments, ASA sizing investment ongoing in China in Nanjing and, as said, the Uruguay plant is being completed and starting up soon here and ramping up. Driving growth in existing business, in existing pockets and increased focus on M&A especially on the water area. Oil & Gas strategic review ongoing and started and then we continue to progress the biobased strategy and explore new growth areas. So that's what we continue to focus on this year. I'll end my talk here and ask Petri to come and talk about more of the financial details.
Thank you, Jari, and Good morning from my side as well. So excellent financial performance during the quarter and I will again focus on few key drivers and I think there are 3. First, the 3 key topics for today. First of all, the drivers behind an excellent quarter. Secondly, I will also perhaps give a little bit of a guidance on the drivers that we see impacting the rest of the year. Why we are more optimistic about the year than we were just a couple of months ago? So reasons for the change in the outlook. Thirdly, as Jari mentioned, we did have a very strong cash flow and this is typically during a quarter that we seasonally have a weak cash flow. I'll point to that. But looking at -- sort of starting with the profitability bridge as I usually do. So organic growth 17% in Q4, slowing down from the level or rates that we saw in Q4. The slowness was led by some of the volume decline in our Pulp & Paper segment due to destocking and slowness in the market and this is evident in some of the market commentary by our customers as well. Profitability driven by price increases and year-on-year this is evident across the board. But here I think the interesting part is that sort of now we are looking at the annual bridge so comparing Q1 '23 to Q1 '22. However, if there was a bridge here or variances between Q1 of '23 versus Q4 of '22, it actually tells quite a bit different story. So year-on-year price increase is very significant as you can see and indeed we are still achieving sales price increases for contracts that we negotiate annually, particularly for example in our water treatment business where we have a lot of municipal customers with annual contracts. On consecutive quarters and again excluding caustic and EMEA bleaching chemicals sales prices, there's actually still increase but only in a very modest way. And then again if you look at the variable cost side on annual bridge, you can see that it's a very significant increase in costs. However, in comparison to Q4, we already see that this increase has turned downwards and we saw a decline in variable costs from Q4 last year to Q1 this year. Energy and utilities is 1 area where it's highly visible, but in many other product groups as well. And this variable cost decrease is clearly faster than what we saw in February and it's one of the drivers behind the improved outlook for the year not only for this quarter. I'll give you a bit more color with an example on this comparison to last year versus Q4. In comparison to last year, in Q1 we saw a positive impact from caustic and electricity heavy bleaching chemicals in EMEA roughly around EUR 20 million. But then when we compare Q1 to Q4, this actually turns negative almost to the same amount. And as we already know the selling prices for caustic and we sort of can estimate quite well where the cost of electricity will be during Q2, we will actually expect that this trend will continue in Q2. And that is one of the reasons why we did mention and perhaps the key reason why we did mention that the operating margin -- operating profitability will decline somewhat from the exceptionally strong Q1 of 21.3%. Still, profit improvement sequentially was very widespread as other sales prices still increased and variable costs came down and this was particularly benefiting our Industry & Water segment where we saw 4.5% EBITDA improvement sequentially. Regarding fixed costs: we did have higher incentive accruals now in Q1 versus year-ago, travel costs are higher after COVID restrictions and also general inflation impacts are visible in fixed costs. Variable costs increased by EUR 75 million year-on-year. But what's not really visible here is the phenomenon that I was talking about meaning that the variable cost started to turn down in Q1. So now we are seeing what we often see impacting Kemira when the variable cost trend turns down. Kemira benefits from expansion in margins in sales prices as sales prices typically follow variable costs with a time lag and this time lag we're estimating 1 to 2 quarters and we saw the opposite when variable costs were increasing from 2020 until late '22. But important to note that this sort of a simplification, it's only a simplification this historical trend and it ignores very much the important work that we have done to improve our commercial excellence, the scale benefits that we have achieved as we have grown our business, the value created by our focus on customer service. Again this is evidenced by our customer feedback surveys through our product innovation. Jari was talking about biobased chemistries. And also our continued efforts to look for efficiency improvements and fix areas where the business is perhaps not performing to its full potential. Jari already mentioned few times the considerable improvement in Oil & Gas, but also looking at the longer term we've seen significant improvement in our Pulp & Paper performance in APAC region and perhaps even more in our North American water business. First comment about balance sheet. Our leverage has declined significantly. Our net debt down about EUR 200 million in a year and over EUR 60 million during the quarter. This was accomplished at the same time when we reduced payables by EUR 100 million. This is the seasonality trend that we do, including paying out last year's incentives to our employees. We also paid out cash taxes more than EUR 40 million for the good result of last year during the first quarter. So all in all, we actually drove about 18% more revenue in Q1 versus Q1 of last year with almost the same level of net working capital so EUR 410 million versus EUR 407 million so roughly the same. So clearly that's an efficiency improvement in terms of our net working capital management. Leverage came down almost a full turn in a year and further 0.2 during the quarter. So now we are at all-time low of 1.1x net debt to operating EBITDA. So from the balance sheet point of view, Kemira is stronger than ever. Already covered the net working capital part of the cash generation. Obviously our strong profitability contributed to cash flow as well. And the EUR 100 million cash flow improvement is behind our balance sheet strengthening during the quarter. Capital expenditures they were seasonally low in Q1 again similarly as in last year and we expect that this will accelerate during the year. And for the full year the expectation is that it will exceed last year's level by some 10% to 15%. Some comments about the electricity positioning in Finland. Last year we were talking lot about the value of the electricity assets that we hold in Pohjolan Voima and Teollisuuden Voima. During those times -- during those presentations, there was always sort of an asterisk regarding our asset ownership in Olkiluoto 3 as it was still in test phase and obviously faced continued delays. Now in Q2 Olkiluoto 3 has finally reached its commercial operations and partial takeover has taken place. So that removes a lot of the uncertainty regarding the electricity sourcing from that facility, helps long-term plan our electricity sourcing significantly. It's a big important step for Kemira. From the accounting point of view, it also means that we will be looking at the valuation of the asset in our balance sheet during the quarter. So now it is valued on a cost basis at relatively low valuation of EUR 21 million if I remember correctly. So during the quarter we will be looking at it, we will be changing this valuation methodology to discounted cash flow basis as we are doing for the other assets as well. And this we will do during the Q2 unless there's really something -- surprises regarding the asset. And directionally suffice to say that it will increase the value of the asset in our balance sheet. However, this will not have any P&L impact. Also another big step towards our sustainability goals was recently achieved when we signed a new long-term wind power deal in Finland. This deal and it comes with an option and we have exercised the option to acquire additional guarantees of origin from the supplier means that Kemira will be fully decarbonized in our electricity sourcing in Finland by 2025. Outlook, Jari covered this quickly so I'm sure everyone is aware that we recently increased this. And again just repeating behind this outlook change is our quite resilient business and somewhat faster variable cost decline than we expected in February. So revenue outlook we kept the same between EUR 3.2 billion and EUR 3.7 billion while the profitability outlook was increased this EUR 550 million to EUR 650 million range. Worth noting is that this outlook is based on our current business portfolio, including the Oil & Gas business regardless of the announcement that this business is under strategic review. And indeed 1 of the drivers for the improved outlook is the improved profitability and expectation of financial performance of the Oil & Gas business. With that, we're ready to move to the Q&A session. Thank you.
Many thanks, Petri and Jari. So as you know, there are 2 options to ask questions so either from the teleconference or submitting your questions to the webcast tool. There are some questions already on the webcast tool, but I propose we start from the teleconference line first. So we hand it over there.
[Operator Instructions] The next question comes from Anssi Raussi from SEB.
A couple of questions from me and I go one by one. The first one is about pricing cycles so could you remind us about these pricing cycles in your most important products like I think it was 3 months in caustic soda and a lot of annual contracts in water treatment for example. But can you give us any additional comments?
Well, yes. Caustic soda in the Nordics is 3 months and it's not exactly hitting quarter so that's there. Then water is more longer term although during the last couple of years we have shortened some of them. And as things stable, probably will go towards back to the longer-term things because obviously negotiating more often is a lot of work for the customer, but also for us as a supplier. But then it's good to remember that we have increased amount of formula-based pricing that is typically a quarter-to-quarter type of cycle of checking the price. And again those don't necessarily hit exactly the quarter schedule, they go mid-quarter or something like that.
Okay. And actually if I continue on that and if we think about the recent news from pulp and paper industry and the comments about cost pressure and declining volumes there, how do you see the situation? And what I mean is that is there something surprising or is the industry doing as you have expected all the time and maybe is there any risk that selling prices could actually come down faster than you're expecting now?
Well, 2 customers came out today and totally different type of performance. But the volumes didn't come down so much as maybe some of the financial numbers might have indicated. So they have different businesses and let's remember that they have wood product businesses also, which we are not involved at all. So we're involved with the pulp making and the packaging side of things. So let's see how it develops. But both of these customers emphasized destocking in the value chain as we talked about also in February. So there's been a lot of product in the value chain due to slowness of the logistics network in the world. So customers and distributors have accumulated products. So there were some comments from them today that in the next few months the destocking is expected to ease off, but let's see how that goes.
Okay, great. And the last one from me is a more simpler one like what kind of average interest rate we should model in for this year? Is it that 2.5%?
Yes. For the quarter, I think it is 2.5%. I would say that for the full year, that's pretty much a good proxy.
The next question comes from Martin Roediger from Kepler Cheuvreux.
I have 3 questions, I also want to ask them one by one. Your Oil & Gas business is under strategic review. Why is it not anymore a core business? Is it due to the sustainability aspect because ESG investors do not like that business or is it due to the dilutive margin in the past, which today is not anymore correct because I understand that the recovery in earnings and margins was so strong that it's not anymore such a dilutive business? That is my first question.
Well, ESG thinking is one area, but the cyclicality over the last 7, 8 years has been really high. So that's why we want to have a look at it. It has improved in performance, but it's still below the I&W reported margin, but well recovered. So we need to think on what to do. And then at the same time, we're looking to expand in water and possibly within M&A. So there might be portfolio changes that way.
And sticking to Oil & Gas. In case that business is out of your portfolio, do you face dissynergies because A, you use 1 coagulant, 6 polymers, 1 defoamer, 1 biocide in oil and gas which eventually you also use in water treatment; and B, eventual dissynergies because some admin costs do not shrink proportionately when you eventually have disposed the business, I mean so-called stranded costs?
Yes. So we probably will see at least short to midterm some stranded cost if we exit. The small chemistries, coagulants and so on really don't bring dissynergies so those are used elsewhere also. Mainly we sell polyacrylamides and that we will -- as part of that would go with a potential sale, but we will still have polyacrylamides products and manufacturing portfolio.
And the last question that is more difficult to answer. You lifted the guidance 12 days ago and the share price did not really move on that day. Today, you published strong Q1 earnings beating expectations and also your cash flow was very strong, but your share price drops by 5% underperforming the chemical sector by quite a lot. What do I miss here?
I don't know, you tell me. We are wondering about the same thing.
The next question comes from Andrew Noel from chemicalESG.
I'm sorry if I'm on the wrong track in my thinking here. But I was wondering if you could talk about whether you need to move into new technologies in water. Obviously your skill set is in flocculants and coagulants. But if I look at a company like Ecolab and they bought Nalco and got into coagulants that way, but they kicked on and went into ion exchange and they seem to be doing really well in areas like biopharma and life sciences. So yes, I mean I don't think you're in ion exchange, but that market has just got 4 players or something so that's difficult to get into. But I wanted to ask you if there are kind of key technologies that you're missing now that you wanted to get into or feel like you need to? And sort of related to that, you reiterated again today the importance of M&A and highlighted water. Could you talk about sort of the availability of assets and the valuations? You've got Ecolab, I mean DuPont is talking very loudly about building out its water portfolio. So it must be a tough environment to land these trophy assets as it were.
So we already talked about this in the CMD, then Q3 and Q4 announcements that yes, we are looking to expand our offering. So we have a certain offering portfolio; coagulants, polymers, specialty chemicals that are used in the water treatment; and so that's a strong portfolio and a really strong customer access. So we have 2 ways of expanding our offering either widening and adding technologies to our portfolio and then consolidating the market for instance in coagulants. And then thirdly, we are looking at how can we be bigger in Asia Pacific in water than we are today. So that's the main answer. I won't go to technologies or anything like that, but it doesn't need to be -- it can have some equipment components in it, but it's basically access through our network to the thousands of customers that we have. Valuations one, I won't go there. At this point, it depends on a case. But obviously this interest rate situation now has maybe turned the situation around a bit that previously was with low interest rates, private equity was in advantage to strategic players. And maybe now we could see some private equity thinking of exiting their investments from a few years back. So that might create an opportunity in the future.
Question from the webcast tool. Some of them have been answered already. The first one was on sort of an update on the Oil & Gas strategic review, but that has been answered already. So we move to the next question from Petri Gostowski from Inderes. What are your expectations on destocking in Pulp & Paper in the short term?
Well, I've been talking as late as yesterday to some of our customers and they just say destocking, but there's no way of quantifying that. There's no statistics saying how big and how long it will take. But some of the comments from our customers today when they announced and referring to their comments, they are seeing that next few months it should ease off. Let's see if that's the case. But our visibility is only through our customers and not directly. Our products are not long time in customer inventory so there's no destocking in our products. They rotate quite fast in there as a consumable in their process.
Continuing on the pulp and paper volume trend, Andreas Heine from Stifel is asking a bit similar question. But what does the China recovery look like?
Much slower than the world anticipated. So the industrial side not only our customers, but the industrial side is recovering slower. Some comments from the market is that yes, people are spending. They still have savings. But after the COVID lockdown, they're paying -- spending more on services; going to movies, restaurants, traveling. These type of things that doesn't then consume packaging and pulp so much. So that's what we hear and see.
Good. And then we continue with another question from Petri Gostowski. You mentioned profitability improvement in Oil & Gas. Can you give more color on the Oil & Gas profitability? Is there still a wide margin difference compared to Kemira's average levels?
Well, it's certainly not above the 20% like we saw Q1, but it starts to be in the 15% to 18% window that we guide long term for full year. So it's getting there, but we need to still see that it stays there and can we then pump it up a bit.
Good. And continuing with some questions on the Oil & Gas business from Andreas Heine. Is the Oil & Gas business still growing sequentially excluding the seasonal oil sand tailings impact?
Say it again.
Is the Oil & Gas business still growing sequentially so Q1 versus Q4?
Yes, it's sequentially that we look at it. The year-ago situation in that cyclical industry is not really a comparison so I tend to talk sequentially.
Good. And do you still, Jari, want to elaborate what does it mean for the polymer value chain if the Oil & Gas business eventually might be sold?
We still will be making polymers, not the same volume anymore obviously. But let's see what our strategic review will bring with it.
Good. And one more question from Andreas Heine from Stifel. As the price trend shows a slow quarter-on-quarter in Q1, would it be fair to assume that the price peak might be in Q2?
Very hard to estimate. I don't think it will come down. Certainly no crash and certainly a slow recovery because it's a huge number of customer cases that needs to be negotiated. So let's see how it develops.
Good. There are no more questions from the webcast tool and I understand there are no more questions from the teleconference either. So with this, we are ready to conclude and thank you for participating. Thank you for the questions. And should there be any questions after this, so please reach out to me. Thank you.
Thank you.
Thank you.