Good morning to you all and welcome to Kemira's 2021 results webcast. My name is Mikko from Kemira's Investor Relations, and with me here today, I have our President and CEO, Jari Rosendal, as well as our CFO, Petri Castrén. This morning, as you might have seen, we've published our full -year results for 2021, and we reported record revenue. In addition, we published the invitation to the annual general meeting and the dividend proposal for last year. As is the tradition, we'll start with a brief overview of the quarter and the year and the financials from Jari and Petri, and then we'll go over to your questions. You'll have a chance to present your questions either via the teleconference line or then via the tool in front of you. We'll get back to those questions later. With this, I'll hand over to Jari.
Thank you, Mikko. Good morning on my behalf , too. Quite a year behind us, 2021. Good demand continued through the end of the year and revenue for the first time exceeded EUR 700 million for the quarter. Variable costs remained high and utility costs in the fourth quarter were very high and remain high going into Q1. However, added volumes and increased sales prices are compensating for most of the cost increases, but not all yet. Good outcome from the year, I think, where we saw many challenges. A good job from the Kemira team in this volatile situation. Recap: organic growth continued and customer satisfaction was on a high level. Also, employee engagement on a high level. Good growth from both segments.
Profitability obviously impacted from the raw material environment and utility prices, as well as supply chain cost and bottleneck issues. All of these are continuing to this year. We had new manufacturing facilities starting up last year: a dry polymer plant in South Korea, an emulsion polymer plant in U.S., and a coagulant plant in U.K. We also announced the expansion of our ASA sizing line in China and expand that and expand our leading position in that when it's online. Steady operating performance from our plants and supply chain despite all the challenges. Financial highlights for 2021. Revenue almost EUR 2.7 billion for the year, up 11% year-over-year. 7% came from volume and the rest from sales prices.
Although that turned around in the last quarter, 7% from prices and 4% from volume. 2021 operative EBITDA EUR 426 million and 15.9% margin. Our sales prices and volumes were helping, but we're still trailing behind. We made a provision for a pulp plant ownership in Finland, where a customer is stopping operations there in some time from now, and Petri will explain that a bit more in his talk. Earnings per share EUR 0.70, and Board proposes a EUR 0.58 dividend for 2021. Pulp and paper, and I think a good year despite all the challenges. Pulp, board, and tissue demand on a high level. Printing and writing recovering.
Sales prices going through obviously with a lag, and we've been able to keep the customers running, which has been the main thing all the time. Organic growth 8% during 2021 and operative EBITDA 15.7% for the year. As said, we are expanding the ASA line but also constructing the expansion of the bleaching capacity in Uruguay. Q4 revenue EUR 420 million and EUR 61 million of operative EBITDA. I think a good outcome from the team. I&W did also well. Oil and gas clearly recovered. Water business is very strong. Municipal water, strong and solid. Industrial water has recovered and is strong for us. Oil and gas shale market has recovered. Margins are not at a wanted level yet, so that work continues this year.
Organic growth for I&W for the full year 16% and Q4 revenue close to EUR 300 million with a 12.5% margin. It's seasonality if you look at Q4's previous year. It's also raw materials, but utilities impacted quite a bit also in Q4 for I&W. Full -year margin 16.2% and a good outcome in these circumstances. I wanted to talk about a bit more about our water business, and it's about a EUR 900 million business for I&W. 80% of I&W business is water treatment chemistries. We also have water treatment in the pulp and paper customer sites, but that's counted into our pulp and paper segment's numbers. You can see the resilience of the business has, during COVID times, hardly any cyclicality, so the segment cyclicality comes from oil and gas.
Profitability for the segment tends to be countercyclical, coming from the raw material environment. Demand for water chemicals steadily growing, and we have a strong market share in EMEA and in North America. We also have a strong global manufacturing network. We use circular raw materials, and we have a high delivery reliability to our customers. Diversified customer base: We have a lot of small but many customers in industrial side and also in the municipal side, bring some steady business through that. Growth drivers, obviously tightening regulation, and APAC driving more growth, also. There the growth is biggest. Our water business is in good shape. Something about our sustainability and our KPI. Safety, obviously high on our list, definitely in our industry needs to be.
We step backward a bit, this year or last year, sorry, and probably some COVID tiredness, but we need to focus into that more. People aspect, engagement, inclusion, new ones on our list, and we measure those on an annual basis or actually biannual basis. In our last measurement, people engagement level is high. Water, obviously, one for us. We use a lot of water, but we help our customers also to be more efficient with water, and we want to reach a leadership level in CDP scoring for water KPIs. Circularity: we use a lot of circular raw materials, side streams from other customers or suppliers or and players and circulating water, and we really wanna focus on waste also.
Climate, which we announced, and scope 1 and 2, and working on that, we have gotten more fossil-free energy into our portfolio. Since we announced that target based on 2018 levels, we've come down 8% in our scope 1 and 2 emissions. Bio-based is one area for new products, circularity, and fossil-free carbon. We have progressed well in that and have partnerships that we talked about before on proof of concept on those projects have progressed well last year. PHA being one of the feedstocks, we have been able to do the first barrier-based coatings on food -containing packaging, and those are in testing phase.
Last week, we also did a press release on biomass balance products. That's, we're the first one in the world to introduce in industrial scale a bio-based polyacrylamide, and that's a good proof that we're going to the right direction. We have a first customer. Obviously, we've been doing laboratory tests and pilot tests, but this is now industrial scale customer here in Finland that is using it at their waterworks to run without fossil carbon. Key operative focuses for this year, employee and stakeholder safety, traditional safety, but also COVID safety. Really an increase on delivery, I mean, delivery of product to the customers that we keep them running and maintain a high customer satisfaction.
Increased focus on profitable growth and bio-based is one area of that and the ongoing investments also. We need to continue to mitigate the impact of continued inflationary pressures, so many actions going there, and operational agility to capture opportunities in the marketplace. We continue to construct our ongoing investment projects. Lastly, when we continue to execute our strategy, we have updated our purpose statement for Kemira. Our new purpose statement is "Chemistry with a purpose, better every day." There's also a narrative explaining what our purpose is and what is our reason for existence. I will not read it word to word, but hopefully you will read it through and you'll get a good understanding. I think it reflects us and our ambitions really well. I'll conclude here and ask Petri to come and give more color on Q4 and 2021 figures.
Thanks, Jari. As Jari said, it was quite an extraordinary year, and now obviously looking back, quite different what we expected with the market's strong recovery, inflation that surprised all, including central banks, with its persistence, supply chain bottlenecks, and now in Q4, the energy cost price spike. All of this is actually resulting in a very significant variable cost increase, which is sort of a big theme of our report today and I intend to cover these themes with the upcoming slides. Also, I give a little bit more background on the provision that Jari mentioned in his opening. Starting with this traditional bridge. Another record quarter with more than EUR 100 million reported revenue increase in a quarter. Strong market continues.
Obviously, as Jari said, even stronger contributor to our organic growth this quarter was the impact of increased sales prices, EUR 70 million year-on-year, which sounds like a huge increase or big increase, but actually still falling somewhat short of the almost EUR 100 million variable cost increase that we saw year-on-year in Q4. Perhaps noteworthy about the variable cost increase that about 30% of this EUR 100 million variable cost increase was the result of the Q4 energy price. Not only electricity costs, but also hydrogen and natural gas, which we use in different facilities. Now this is a gross impact.
The net impact to Kemira is significantly less than that, as we do have many formula contracts where these price increases are passed on to the customers. But certainly they do not cover all of that big increase that we saw from the spike in energy costs in Q4, which is continuing in Q1, although apparently that looks like it not at the quite same level as we saw in Q4 and particularly in December. About the contract structure, we can directionally say that energy, of course, impacts pulp and paper more, but on the other hand, pulp and paper has proportionally a higher share of these formula -price contracts.
Therefore, the utility cost, which Jari mentioned, the natural gas and hydrogen, they actually had a fair amount of impact on I&W in Q4 as well and partially explains the somewhat lower quarterly EBITDA ratio. Other parts of the profitability bridge are relatively smaller compared to these two. Worth noting is that our fixed costs were below Q4 2020. We also benefitted from a higher capacity utilization. This is indicated in the column Others. Now that we're looking at the full year, two aspects still worth, sort of, amplifying or repeating. First is the magnitude of the cost increase. It was EUR 100 million in Q4 almost and almost EUR 200 million cost increase on variable cost year-on-year.
This is quite dramatic. It's 17%, so obviously it's quite a bit more than the reported inflation rates and signifies that some of the input cost, feedstock costs, have increased more than the rate of inflation. Then on top of that, we have the supply chain bottlenecks, which are actually pushing raw material costs higher. Secondly, looking at the individual quarters, we can see how the variable cost increase has gone and grown bigger over time. But at the same time, we can see that our price increases have grown and we are sort of covering a bigger share of the price cost increase with our price increases.
In Q2, quickly looks like we covered something like 28% of the cost increase with our pricing, whereas that number was over 70% in Q4. I think this is a good indication that we do have pricing power to pass on the cost increases to our customers. However, it takes time, and we have been saying that throughout the year that, yes, we are increasing prices, but because of our contract structure, it usually takes a little bit of a delay. We have estimated this is about a couple of quarters of delay on average. Now, I know many people are looking at already 2022 and big question remains: how these costs will develop going forward.
As you've seen in our assumptions regarding the outlook, we expect that the variable cost increases to inflationary pressures will continue in 2022, with more emphasis on and pressure coming on first half of the year. Energy costs: I think the general view is that the energy cost should alleviate once we go to the warmer summer months. Obviously, as everybody knows, there are geopolitical risks and issues that may impact energy prices, and those are obviously impossible to estimate. Jari mentioned the extraordinary provision that we took in Q4. The background up to this is that we are an effective majority owner of a single asset energy company in Pori, Porin Prosessivoima, through our ownership in Pohjolan Voima, PVO. It's a bit complicated.
The company is a so-called Mankala company. Meaning it means that we get the product at cost, but it also means that we are liable for the costs in proportion for our ownership in the company. Most of that energy in the form of steam has been sold to other industrial parties in that industrial park, with one particularly very large industrial player in the park. Now, that third party has terminated its long-term energy contract, and this will lead to significant underutilization of the asset. As said, Kemira, as a majority owner, is liable for our share of the fixed costs of the assets. Some of those costs are depreciation and finance costs, which will go down over time, but nevertheless, they are there to be covered.
We're now estimating that it will take several years before we have large industrial -scale user for the steam, and therefore we are now taking a cost provision of that one-time cost provision that covers that estimated time before we have an industrial user on -site and for the asset. Having said that, there is a potential for faster solution there as well. For example, there is now a company, a biofuel, that is considering, or more than considering, planning to build a biofuel plant on -site. They actually have received their environmental permits. But nevertheless, the construction is not yet there and the site is not ready. We have taken a sort of a conservative view that we want to see.
We haven't taken these potential opportunities into consideration yet at all but rather wait for more certainty about the future steam use before we assess the provision again. Moving on, I think most of the topics that we typically talk about on this slide have been already covered. Wanted to include this slide for continuity, and it visually nicely demonstrates what I would call unprecedente d wind that we have seen and what we have to deal with during 2021. All combined, the sort of net spread from between the price and cost curves in 2021 impacted us by EUR 91 million negatively. As earlier shown, much of it, 73 million , in fact, was compensated by additional volume, but not all.
Cash flow on the surface looks a bit weak and is down from 2019, 2020 levels. However, when you drill into that, I think the reasons are understandable and should be well known. Simply, growth consumes working capital as inventory and receivables increase in value more in absolute terms than the corresponding payables. This is driven by both the unprecedented price increases that we have seen an d also the volume growth; demand also grows, makes us grow our inventories and obviously increases our receivable balance. This has resulted in a EUR 90 million increase in net working capital year on year. Quite significant, of course.
But worth noting is that our net working capital rotation has remained at 10%, so basically our efficiency had remained at the same level during this. Even as we have, in some cases, really on purpose, built up inventories because of supply chain issues and in preparation, for example, the Beijing Olympics, which are sort of impacting production at this current time. There are also some smaller impacts on cash flow, which I think are known, but I'll repeat. First, we paid EUR 22.75 million settlement during the summer to CDC. Also our cash tax payments for the year ended up being some EUR 10 million higher than in 2021.
This was a result, of course, because of the 2020 result was good and some of the cash payments were done in early 2021. Our incentive payments in 2021 also were about EUR 10 million higher than our target level, again, on the back of the good 2020 result and explains about EUR 10 million above target level. Regarding tax payments, I think I'll also offer the guidance that now, in 2022, we expect that the cash payments will be more comparable to the 2020 levels.
Also, you may have seen, and I don't have a slide on that one, but you may have seen that our effective tax rate is actually reduced to slightly below 20% for the year. Finally, on cash flow, in 2022 in first quarter, Kemira will receive a EUR 10 million capital return from our closed pension fund Neliapila, which has excess capital and is starting to or continuing to return that excess capital to Kemira. CapEx, on the other hand, fell somewhat short of our original guidance for 2021. Some projects were delayed, and also some scheduled maintenance work was delayed, some of it because of COVID-19- related reasons.
Next year or this year, 2022, we will likely see a catch-up on the CapEx and CapEx to sales ratio will likely increase to around 7%. As we continue our bleaching chemical capacity expansion in Uruguay and also the ASA capacity expansion in China. Gearing or capital efficiency, measured by our operative ROCE, return on capital employed, came down a little bit to 11.3% due to lower result and also increased amount of capital employed, mostly mainly driven by net working capital. In the rest of the balance sheet, no particular news, no new financings. Leverage well within our financial target range.
Net debt increased EUR 91 million, about EUR 15 million of that net increase is the result of increased lease liabilities. During the year we entered into a number of long-term leases, some supporting our business. Dividend proposal, Kemira updated its dividend policy two years ago, and now our policy is to pay a competitive and over time increasing dividend. We increased the dividend previous two years, but over time does not mean we aim to increase it every year. Board is now proposing to keep the dividend stable with last year, meaning a proposal of dividend EUR 0.58 per share. At year-end closing price, it's a 4.4% yield. Dividend will be paid in two instalments, similarly as during the last two years.
Taxonomy update:, Companies are now required to report taxonomy-eligible revenue, expenses, and capital expenditures for the first time under this EU directive covering the environmental objectives 1 and 2. This directive covers the most emission-intensive economic activities, and in the chemical sector, it primarily covers the base chemical producers. As Kemira mostly produces specialty chemicals, the impact for us is not really much at all, and our taxonomy-eligible KPIs are very low; in fact, close to zero. The only thing that we report out on the revenue side is some sidestream hydrogen and energy sales that we have, which represent about 1% of our revenue.
Because of the revenue is so low, then the CapEx and operating expenses are obviously low as well or close to zero, in essence. The environmental objectives 3 through 6, which will be reported first time next year, those are likely to be more relevant for Kemira's business. I think we are all waiting to get more information on and more detailed instructions how to calculate these eligibility revenues before we can guide; we probably know how they will end up next year. Outlook: I guess first a health warning, meaning the list of uncertainties and macroeconomic assumptions behind this.
First of all, COVID is still here, but our assumption is that it will remain under control; it doesn't necessarily go away, but it will not have a major impact on either on our end markets or on our operations. We're sort of following the economic consensus, which is expecting continuing global macroeconomic growth. Based on these assumptions, we are expecting revenue to increase in local currencies in 2022 versus 2021. In terms of profitability, measured by our KPI operative EBITDA, we are expecting it to be at the same level as in 2021 with a 5% margin up or down. With that, I'll conclude my remarks, and we're ready to move to the Q&A session.
Good.
Operator, please.
Yeah.
Yeah.
Petri, I propose we start with the questions on the line. We hand it over to the operator, and then we can take questions if there are any on the webcast tool. I'll hand it over to the operator.
Speakers, please press zero and one on your telephone keypad. We have our first question from Martin Roediger from Kepler Cheuvreux. Please go ahead.
Hello. Good morning. Yeah, thanks for taking my questions. I have three, and I would like to ask them one by one. First is on your guidance. Last year, the guidance range was between flat and -5%. So delta was all of 500 basis points. Today, your guidance range is from -5% to +5%. So Delta is 1,000 basis points, even bigger than a year ago. That indicates that the uncertainty has increased, which makes me wonder a bit. You mentioned that the pandemic is almost under control, and I think that you seem to get also the cost inflation under control quite soon. So can you elaborate on the key drivers for this higher uncertainty? Or put in other words, what has held you back for guiding just flat year-on-year EBITDA?
Is it the political situation or is it any worsening in the supply chain or, in fact, an even worsening in the inflationary pressure? What is the reason?
We don't see the delta being bigger than how we guided last year, so in principle the same level. The logistics issues have not eased and that remains an issue. If it eases, then we go to the plus side. If it gets worse, that's then a negative side. Raw material inflation is not going away, and now we on top have this utility cost that will go on for number of months here on forward. Those are big question marks, and that's why we said +/- 5%. The intention is not to say that we increase the window. It's roughly the same.
Okay. Regarding your EUR 28 million provision in paper for this situation from your industry customer or for this power plant having terminated the contract, what has been done? Because you have a stake in this power plant, what has been the annual earnings contribution from your stake in this power plant? Or in other words, how much earnings will be missing from that in the year 2022?
We are actually not missing any earnings. This has been passed through revenue, which we have basically sold at cost. Some revenue missed, but no profit missed.
Okay. Is there any risk that this kind of situation with any other of your activities or power plant participations could happen as well, with such an industry customer terminating a power supply contract?
I hesitate to say never, because that's an absolute term, but I do not see any sort of the same type of a risk. Obviously there is an element of history, which I may open a bit here, because obviously there was a sort of a synergy between the industrial use and the power plant, particularly at the time when Kemira owned them both, and this has been divested by Kemira some 15 years ago, but the power plant was not. I don't recall any similar situations anymore. We had a bit similar situation in our other industrial park in Finland, Oulu, but that has been resolved, and it was a much smaller power plant there.
Okay. Many thanks.
We have another question by phone from Harri Taittonen from Nordea. Please go ahead.
Yes. Good morning, all. Maybe just a couple of small things. I mean, could you say roughly the balance between the volume and price when looking at the organic growth for industry and water just to give a feel of the more than 20% growth? Like, how much is volume and how much is price? And then also it would be interesting to hear the update on the energy. I think the last call you gave sort of indication that EUR 200 million is the total and basically EUR 15 million per quarter of the real exposure. But just give a sort of update on that with the current levels.
Maybe just sort of a last question, if I just follow up on the news earlier this week regarding this sort of polymer based on bio-based feedstock. I mean, can you put a bit more, Kind of into perspective that, you know, how big a role this might play in the sort of target of raising the bio-based products to over EUR 500 million? What's the scalability and associated CapEx and sort of prospects there? Those three. Thanks.
I'll start with the last one. This is an opening and a few first, sort of, commercial industrial contracts. It's a start. This is driven by the municipalities bringing their carbon footprint and handprint down. There is a demand for this. It is a drop-in type of a product that goes into our existing manufacturing network. Really no CapEx needed. Takes a bit of time to scale, but this is a good start from there. There's a definite sort of need from, especially in European municipalities, to drop their fossil carbon use. A good start and a step to the 500 level, but a small, nice start.
On the I&W volume versus price. I don't have that number on my head, but I said for the full year for the corporation, it was 7% on volume, 4% for price. Last quarter it was the other way around. I don't think I&W is so much different in that.
Okay.
Yeah. I think the oil and gas volume growth has been significant.
That's true.
I think it's a bit more skewed towards volume.
Right
for all of I&W.
Yeah. Harri, what was his third one?
I was just wondering.
Energy
data energy.
Let me take the energy cost. Harri, I offered you, I think what you in a way will help you. 'Cause I gave you the fact that about 30% of the EUR 100 million variable cost increase in quarter was –
Yeah
... was energy-driven, energy- and utilities-driven. Thirty per cent of 100 is roughly EUR 30 million plus. If that's in one quarter, you can do the math and what it would be in a run rate basis if annual run rate, if it continued. Now we don't expect that to be continuing; particularly I think we feel that this is a winter energy price spike. If you look at the energy forwards, they are moderating; even if they are staying at a relatively high level, they are moderating by spring and summertime.
Some of the offset is in the sales prices. That '30' is not a net-net.
Mm.
Exactly. Yeah. Right.
Okay. Thank you.
We h ave another question from Robin Santavirta from Carnegie. Please go ahead.
Thank you very much. Good morning to everybody. Now I have a question related to input costs, and especially when it comes to raw materials. Is availability. I understand availability is some kind of problem, and therefore the prices are going up and have gone up. Are you sort of facing a situation or threat of situation now where simply you cannot produce because you don't have enough. You cannot run capacity at utilization because you don't have enough raw material? Have you seen that in Q4? Is that a risk when it comes to the start of the year? That's question number one.
Question number 2 is related to could you somehow try to sort of provide some kind of color or information related to, in a sense, the sales margin or the margin Q4 versus start of the year? Was Q4 now the bottom in a sense or I know there's moving parts but you know this and see this closer than we do. How should we look at the margins of development when we go into 2020, the early quarter versus Q4? The third question is related to UPM mostly. The Uruguay plant is now postponed a bit. Does that affect CapEx? Does that impact you more than a bit of delay? The UPM strikes in Finland.
Question about question, but I hope you can answer at least to some extent. Thanks.
Raw material availability is not an issue so much anymore as it was early part of the year. We are getting raw material. The question is the supply chain bottleneck. There are delays in shipping and so on. That can sometimes delay. Our utilization rate at our plants has been on a good level, so no real stoppages because of lack of raw material. That's not a factor. More is the volatility and then getting it in time, and that's partially why our inventories are also on a higher level – that we try to mitigate any bottlenecks that there might be. I would say delivery risks are now higher than availability risks.
Regarding UPM, one of the things our Uruguay is continuing. They had announced some delay. Doesn't really affect us a lot. Gives us a bit of a room to also start up then eventually our units there. As you can imagine, we also have had slight delays due to COVID delivery issues, but nothing major there to report. Yes, there's a strike going on in UPM, but I can't open up on that a lot because it's one single customer for us. But obviously it's a rather big customer for us in Finland. What was the third one?
That was sort of an effort to get a sense of how the year has started. I think I need to play the bad cop here again. We've sort of been holding this firm that we will not, like, sort of, project further or future even if we have seen the January result. Let's wait until April.
Maybe, Petri, yeah, it sort of is fair to assume that nothing drastic has changed maybe up or down early this year, and then we just need to sort of get the prices up to cover the cost along the year.
Well,
We are working on sales prices as we go along, so.
Yeah, I would say that obviously we have seen the January results now that we are issuing our guidance.
I understand. Thank you very much.
Thank you.
We have no further question by phone.
No other questions?
No other questions.
All right. There are no questions either from the webcast tool. This concludes our webcast. As a reminder, our AGM will be held on Thursday, March 24, and the Q1 result will be published on Wednesday, the 27th of April. Many thanks for following. Thank you for the good questions. With this, we wish you a happy weekend.