Good morning, everyone, and welcome to Kemira's Q1 2022 results webcast. My name is Mikko Pohjala from Kemira's Investor Relations, and I'm accompanied by President and CEO Jari Rosendal, as well as our CFO Petri Castrén here in Helsinki. Earlier today, we published our Q1 report and we had a strong start to the year. First, you will hear a short update by Jari and Petri, and then we have reserved more time for your questions after that, which you can present either via the teleconference, or then via the webcast tool. With that, Jari, I'll hand it over to you.
Okay. Thanks, Mikko. Welcome from my point of view also. As said, we had a good and strong start to the year with good demand from all of our business areas. Inflation continued high and as we have previously said, we expected it to be high for the first half of the year, but obviously due to the Ukrainian war situation, it will be intensifying during the year. Yet to be seen how it will play out. Sales did catch up with higher raw material costs, but due to the new inflation pressures that we see coming, that game continues. We need to be vigilant with that. Still a good start to the year. A summary of Q1.
Record-high revenue and operative EBIT in absolute numbers. Due to the war started in late February, we announced discontinuing our deliveries to Russia and Belarus on 1st of March, five days into the crisis. On fourth of April, EU in its fifth sanction package banned exports for most of our goods, so now we can't even deliver. The revenue from mainly Russia from last year was roughly 3% of the group total revenue, so a small impact, not a huge one. During Q1, we also well had our annual general meeting and dividend payment of 0.58 EUR was decided, and half of that has been already delivered or paid out on seventh of April.
Our 2022 full year outlook is unchanged. Going into the Q1 main figures. Revenue, a new record EUR 768 million and up year-on-year 27%. Operative EBITDA EUR 120 million. That also a record with a margin of 15.6%, and goes to show that, yes, we have caught up with pricing, but not gone above the pricing on catching so much value from that part of our drop-through. Sales prices increased completely compensating mostly for the raw material prices, but we still have work to do on that area. EPS for the first quarter, 0.26 EUR. Pulp and Paper had a strong quarter. Demand was strong from all areas of business and customer segments.
Volumes came slightly down, mainly due to a prolonged strike here in Finland by a large customer. That strike ended now on twenty second of April. Higher sales prices coming in, but we are working also, too, on contract structures and pricing check intervals with the customers to balance that out better when going up on raw materials. Pulp and Paper revenue for the quarter, EUR 447 million, and operative EBITDA EUR 71 million with a 16% margin. Industry & Water did also well, and Oil & Gas now clearly from a volume point of view has recovered. Water business continues to be our stronghold and backbone. Municipal market continues to be solid, and the industrial market also strong in water treatment.
Oil and gas share market demand has recovered. Margins are still not where we want them to be, but going to the right direction. Organic growth for I&W 31% driven by sales prices and added volumes mainly from oil and gas. Revenue EUR 322 million, and operative EBITDA EUR 49 million on 15.2% of revenue. Q1 is seasonally a bit weaker for I&W. That's good to note. A bit more detail on oil and gas, which is part of the I&W segment, and this sort of bit more information as the situation due to the war has changed in the oil and gas energy sector. Shale market in North America continued to grow as oil prices are high, close to $100 a barrel.
Demand from chemical enhanced oil recovery customers remained solid. Oil sands tailings business did not happen during Q1 due to the winter weather, but now deliveries have started already in April. Growth obviously in oil and gas, very strong year-on-year. You can see from the graph that revenue is now exceeding a comparable level in 2019. Also, from the upper right-hand graph, you can see how the rig count and the frac crew count is developing to a positive direction. Profitability for our oil and gas business is improving, but still work to do in that area. A bit more then on the Ukraine war situation.
I said we discontinued our deliveries to Russia, Belarus in early March, and now we are on a sanctions list as of a couple of weeks back. So that business cannot even anymore happen. We don't have any manufacturing assets in Russia, Belarus or Ukraine. They are pure export markets for us. We have mainly exported from Finland but some other European countries have done deliveries to the area also. We didn't have meaningful sourcing from those regions, and we are now using alternative sources and finding alternative sources for raw materials. Kemira uses natural gas in many of our sites in Europe, and some are dependent on it, so we do have exposure.
In our view, the exposure comes more from our supply chain and the customers who use significant natural gas, and some very dependent on the Russian deliveries. At the moment, accelerated inflation, which we didn't yet see in Q1, but probably we'll see in the future, is the biggest impact. I'm really pleased about our organization's capability to react really fast. We were in hours and days in crisis management mode, and we're able to react to this and mitigate the impacts really fast. That's the nature of Kemira organization. With my short comments, key operative focus areas for going forward, following to mitigate the impacts of the war and ensure delivery reliability to our customers. Focus on employee, stakeholder safety is high on our list.
We continue to focus on profitable growth and especially our bio-based strategy execution sort of continuation. I again mention the delivery reliability because markets are very strong and now even the Chinese COVID situation, Shanghai lockdown is then the next possible challenge. We didn't see that in Q1 yet. Only 60% of world's biggest port in Shanghai is operational. Mitigate the inflation, ensure operational agility to react to situation and capture market demand. We continue to construct the expansions of ASA line in China and bleaching line in Uruguay and ramp up then the plants that we started up last year. I'll conclude my short comments here and ask Petri to continue with the financials. Petri, please.
Thank you, Jari Rosendal, and good morning. Good morning from me as well. Obviously market environment has become very much challenging and very difficult to predict, and therefore the agility and responsiveness has become really more important than ever. Against that backdrop, we have really gotten off to a good start for the year. Again, points that I will emphasize during the next few minutes are the inflationary pressures. They have accelerated during the quarter and are expected to continue. I'll show some data about that. Obviously on the sort of a net pricing versus variable cost, we have now turned to positive territory for the first time since 2020 and that's a big positive and a very good outcome.
We'll need to touch on some of the external risks that we have considered when we are giving our outlook for the rest of the year. Starting with the traditional profitability bridge. 27% revenue increase, 23% of it came out of volume and then about 4% FX impact, which basically means that volume was roughly flat. Volumes were down in our Pulp and Paper segment, but the strike that Jari was talking about was clearly an impact on that, as well as some of the Russia deliveries that were sort of lost for the month of March. If one was to normalize for these impacts, we would have had modest volume increase in Pulp and Paper as well.
In I&W, we did see volume increase as again, as Jari was saying, driven by oil and gas. Variable cost and is obviously a big thing, EUR 122 million year-on-year. That's well over 30% rate of increase year-on-year. I've been with Kemira for eight years and some, clearly the fastest inflation that we have seen and really requiring fairly dramatic pricing actions from our teams, which we have done quite well. We have seen it accelerating. From Q4 of last year to Q1, the price increase is over 10%. If you were to analyze that's a 40% rate.
In fact, as the market continues to be challenging, we see another 10% or 10%+ increase for Q2 versus Q1. That's really as far as we can estimate. The market is so uncertain. We hope to see some stabilization, but really, it's difficult to estimate longer-term inflationary or raw material impact. Energy alone represents almost EUR 30 million out of the EUR 122 million on a year-on-year increase. Obviously, the big positive is that for the first time since 2020, we have now a positive net, although the drop-through margin that Jari mentioned is still weak. Out of the EUR 160 million of additional revenue, we're getting something like EUR 15 million of additional EBITDA, which is sort of a fairly modest drop-through.
FX and increased fixed costs played a relatively minor role compared to the price and cost impacts, and those were largely offsetting each other. In fact, I'm quite happy that we have been able to offset the inflationary pressures on salary side and on fixed cost side quite well. Really, the fixed cost increase is below the overall inflation as we see so far at least. We talked about the operating side of the Russia, a little bit more on the financial side of the Russia and Ukraine war situation to us. Fortunately, our exposure to Russia is relatively modest. Last year we derived 3% of our revenue from Russia. We have a sales subsidiary with approximately 50 employees and no production assets there.
In the quarter, we took a EUR 3.6 million charge, and we took it as an item not impacting comparability, so this is not in our operative EBITDA. This charge covers mostly logistics equipment, rail cars that are at risk of not being returned, and also trade receivables where the customer is not paying on the back of the sanctions or not able to pay. We wanted to be very transparent about our exposure, so the remaining net assets regarding Russia are about EUR 13 million at the end of the quarter, and that's between our Finnish legal entity as well as the local entity in Russia. That now consists mostly of cash receivables and some customer equipment that we have on customer sites.
Since end of March, we've been able to receive some payments from Russia, but obviously it's getting more difficult all the time. We need to soon increase the scale of these charts, so fast is the increase in inflation and in the costs. Again, lumping the last four quarters sort of to demonstrate the impact of the cost impact is EUR 324 million. Again, like I said, it has had an accelerating trend. At least for the next quarter, we'll expect that this trend to continue in the variable costs. Again, this is highlighting the need that we will need to continue to work with our customers on pricing.
Just a sort of reminder of last year when we started to see this trend, we were able to compensate a lot of it with additional volumes as the world was sort of recovering and volumes were increasing on the back of the COVID lockdowns that were easing off last year. This year, any material growth we're really seeing only in oil and gas. In the rest of the areas, the volume growth are relatively modest and obviously at risk depending on what happens to the macroeconomic situation. Cash flow, Q1, seasonally weak, as I often talked about, but obviously now in Q1, we have tied more capital into net working capital than typically. Obviously two reasons. One is the volume impact.
Very high sales obviously ties up capital in receivables, but also in inventory. We have seen inventory values increase, and that ties up capital. There is some inventory build-up by design, so we feel that it's important that we are sort of prepared better for disruptions so that we can continue to service our customer. That strategy has sort of served us well during these difficult times. More of a housekeeping matter, we did receive EUR 10 million of excess capital return from our pension fund, Neliapila. This was already mentioned last time we had this meeting.
Our CapEx starting off at a modest pace as last year, but we're keeping our full-year CapEx forecast unchanged. Regarding gearing, operative ROCE, which is the main KPI we use for capital efficiency, improved on the back of a strong quarter, even as our capital or capital tied to the business increased. Balance sheet, a somewhat higher net debt, but leverage ratio remained at the year-end level. Few words about energy as obviously energy has become a quite focal point, I guess one can say at this point. They are increasing and have become a bigger cost item for us. We now have seen in recent quarters energy increases at the rate of 40%-50%.
Fortunately, our direct exposure to gas is significantly smaller than our exposure to electricity. A portion of the electricity is really hedged through formula pricing with our customers or through availability of electricity in Finland at production cost. With that in mind, good to note that Olkiluoto 3 has already been producing electricity on a trial basis. It's getting ready for commercial launch later in the year, now currently scheduled for Q3. This also increases the level of emission-free energy that we have. With between Olkiluoto 3 and the additional wind purchase contracts that we have done for renewable wind energy, they are actually raising the level of the share of emission-free clean energy to 75% in Finland.
Again, that's a combination of our nuclear, hydro and now wind energy. When we talk about outlook for the year, it's worth noting the uncertainties first. As they have increased during the quarter. Inflation, I talked a lot about inflation and the rates and the expectations. COVID-19 is certainly a risk, particularly in China, what it might do for the global supply chains. And obviously war in Ukraine and its impact on energy availability and price. Just today we have seen some news about gas availability in Poland and Bulgaria, which is sort of disturbing a little bit. End markets are expected to remain good as most of our products are used as consumables in our customers' processes.
Summarizing our basis for market outlook assumes no major disruptions from the war or the COVID-19 risk. Inflation pressures are expected to remain strong for the year. Having now emphasized the risks, we are maintaining our 2022 outlook unchanged, so revenues are expected to increase and the operative EBITDA is expected to be within the 5 ± 5% range compared to last year's EUR 426 million. With that, I'm ready to conclude my remarks, and we're ready to move to the Q&A session. Operator, please.
Thank you, Petri and Jari. We actually have already a couple of questions in the webcast tool. Maybe we start with them and then we go to the teleconference line, as they have been here for a while. Four questions. First one, this is for you, Petri. Could you specify year-on-year volumes in each division?
I'm not sure if we give them out by segment, but sufficient to say that it's sort of on with the strike impact and with the Russian impact on a Pulp and Paper side, they are negative mid-single-digit type of a number. Again, offsetting that positive so that the net impact for the group is sort of flat zero. Like I said, normalizing the Pulp and Paper impact for the strike, we would have seen a small positive on the volumes on Pulp and Paper side as well.
Thank you. The next question is related to sales price increases and variable costs. Sales price increases more than offset the variable cost increases already in Q1. Do you see this trend continuing in the coming quarters? If so, could there be some upward pressure in your guidance?
Well, now the visibility on the inflation side is bigger than we saw a couple of months ago. It's hard to estimate, but we have to work on the sales prices and contract structures going forward.
Good. The next question referring to what you, Petri, said during your presentation. Just double-checking, when you mentioned the variable cost trend is continuing into Q2, do you mean that we will see the same kind of increase as we saw from Q4 to Q1?
I thought I was actually pretty specific in saying that we saw Q1 over Q4 10%+, and that we would expect roughly 10%+ for Q2 over Q1, so that's basically at the same rate on Q2. All things being equal, the base number is even bigger.
Good. Final question from the tool for now, could you quantify somehow the impact of Chinese COVID-19 restrictions if the situation remains as it is now? I guess hard to quantify, but maybe a bit of background information, Jari.
Yeah. At the moment, it's about the Shanghai and potential Beijing lockdowns. Our operations, meaning our manufacturing cities, are still operating well and no impact there. More we see that as the logistics value chains, especially the Shanghai port is partly down. That will somehow be visible and make logistics more difficult, impacting the whole world. To quantify them is not so easy.
Thank you. With this, I think we're ready to move to the operator.
Thank you, management. Our first question is from Martin at Kepler Cheuvreux. Please go ahead. Hello, good morning, Jari, Petri, Mikko. Just two questions left from my side. Firstly on the visibility, not on inflation, but on volumes in your order book. I mean, do we hear from other companies that the visibility for volumes is reduced now, currently compared to the past? Is this also the same for you? If so, can you provide a figure about what is the visibility on order book volumes in terms of weeks and how that compares to the past? Secondly, a clarification question for Petri. Regarding this delta between the selling price impact and the variable cost increase, so the EUR 16 million on the EBITDA line.
In this context, Petri, you said that the drop-through margin is weak. Can you elaborate on what you mean with that?
Okay.
Thanks.
Volumes outlook at least coming months is go on the same level as we have seen before unless there are some disruptions. As said, we are consumable in the customer process. When they produce, a certain part of our products are going in. Water is water, so that's a backbone and a sort of a safe area and also Pulp and Paper demand. If you look at now the first quarter reports coming through from our customers seem to be solid. Oil and gas is obviously in the West picking up because of the crisis situation and banning the Russian oil from the West. Volumes should be good unless some unexpected disruptions come to play.
Okay. The clarification on the drop-through margin. At least I'm used to using drop-through as a term for additional revenue and how much you get more profit from the additional revenue. The drop-through comment that I made was simply the net increase in revenue, which is roughly EUR 160 million, and the net increase in EBITDA, which is roughly EUR 50 million. That's just a mathematical. Now, that may not be quite in this context so relevant. Obviously it's a mix because particularly this is not volume increase as we've already talked about, this is pricing. Obviously it's everything is mixed. One would like to see that increased revenue actually it at least maintains your profitability if not even improve your profitability. Have work to do.
Maybe a follow-up on that. You may also mention that, although it looks that the price effect is bigger than the impact from the raw material cost, you also said that you have not completely achieved to pass on increased costs to the customers. What is still missing? Can you help us a bit to understand what you intend to catch up in the course of this year?
We're in a catch-up game already for a long time. The basket of raw materials have been on a certain level, and we've been catching up to the level, and now we're slightly over, but we're not getting the profitability. We have to do that. Now the inflation is expected to run away from us again. It's again hard work and organization has done good work with that, but that work needs to continue.
Maybe if I can continue, I'll give you an example. I think our Pulp and Paper segment has done a good job in actually changing some of our customer or good part of our customers to more formula pricing and more sort of frequent pricing checkpoints, which, in this type of marketplace, is absolutely the right thing to do. In our Industry and Water segment, we have a lot of these municipal water customers, which are tender-based businesses and tend to have these one year, sometimes even longer, fixed price contracts. There, the ability to react is slower. Therefore, we will likely see perhaps more continued pressure on that side until we sort of get more maturity on this effort.
Yeah.
Well into possibly Q3 before we start to see improving margins in the INW municipal segment.
It's a question of.
Okay.
Volume allocation also to the customers and between the customers, those that are ready to meet us with the sales price checks. Obviously we take good care of those people.
Mm-hmm.
Thank you very much. Next question is Harri from Titan.
Yes. Hi, Harri Eronen in order. I guess it was me. Yeah, obviously very convincing pricing power evidence. Congratulations on that. Related to that, I mean, how would you describe the acceptance for these price increases? Is it sort of broad-based or is it more proactive than others? What's kind of the markets or competition in that regard? Or is it supporting that some competitors of yours are having to take downtime because of their high cost, which is kind of improving the acceptance? How would you describe this sort of reasons behind this pricing power?
Well, it is not an easy discussion with the customers, that's for sure. In some-
No
some increments, the increments are big. They're not single percentage points, they're tens of percentage points. As I said, we also allocate volumes. So, if we can't get price through, we might walk away and give the volume to customers that are willing to accept those prices. The two other factors, the demand for our customers from their customers is good. They have also seemed to have good pricing power themselves. We have been.
Yeah
a secure supplier, so we haven't let our customers down in supply security, which gives us at least some backbone to argue the price hikes.
Exactly. Right. Yeah, it's more about the demand and customers also doing well, rather than competition suffering from too high cost and closing down on things like that. It sounds like that sounds good. On the other question, should we raise our absolute CapEx estimates? Because at the end of the day, the sales was almost 10% higher than expected and price increase is continuing. Is it so that the CapEx estimates should be revised in line with that?
Let me take that. I tried to be specific. Our CapEx estimate. Absolute euro has remained unchanged, so we haven't. Yes, you're right that we gave the guidance on a percentage term. I actually checked it still rounds up to the same percentage number. But the decimals you may, if you had the background data, might be now lower than they were three months ago.
No new.
Okay
No new sort of investment plans, what we have had. Like of course the inflation goes into some of the inflation projects, but no new sort of initiatives ongoing.
Current plans still rounds up to 7%. I'm giving you that much of a hint.
Mm-hmm.
Okay. All right. Okay. Clear. Thank you.
Hearing no more questions from audio. Thank you.
All right. If there are no further questions, I have no further questions from the webcast tool either. This concludes our call. Many thanks for the questions. If there are any remaining ones, so please reach out to me. With this we wish you a nice week. A reminder, we publish our Q2 results on Friday, July fifteenth. Thank you.
Thank you.
Thank you.