Good morning, everyone, and warm welcome to Kemira's Q1 2025 results webcast. My name is Mikko Pohjala from Kemira's IR, and I'm here today with our President and CEO, Antti Salminen, as well as our CFO, Petri Castrén. We have today published our Q1 results, and we had solid profitability in a soft market environment. We start with a presentation. Antti will cover the main points of the quarter, and after that, Petri will cover the financials. After that, we'll obviously go to the Q&A session, and you can submit your questions either via the teleconference or via the webcast tool, and I will then moderate. With this short intro, I'll hand it over to our President and CEO, Antti.
Good morning on my behalf as well, and as Mikko said, reporting on our Q1 results, which were solid in terms of profitability in a softer market environment, more difficult market environment than probably expected. If we look at the highlights of the Q1, the market uncertainty definitely increased. We can read that from news every day. As we are tied to the consumer-related value chains, the impacts are visible in our demand, especially in the new Packaging and Hygiene Solutions area. On the positive side, our very local business model makes us quite resilient against any direct impact from the tariffs, and Petri will comment that a bit more on his part. I have good confidence that going forward, despite the turbulence on the market, we continue to perform on this solid profitability level.
As a proof point of that, the EBITDA margin on the soft market conditions remained very good at 19.1%, very well within the guidance brackets that we have provided. Also, the growth strategy execution progresses as planned. We have again announced during the quarter several investments, both organic and inorganic, into the growth, and I will comment on those in a bit more detail in a minute. It is good to remind that our AGM approved the increase of dividend to EUR 0.74 per share, which is to be paid in two installments. If we look at in a bit more detail the results, of course, organic revenue slightly declined in Q1, really driven by the Packaging and Hygiene Solutions division, where the organic growth was clearly negative due to the market softness.
Sales volumes were stable, and there was volume growth both in Water Solutions and Fiber Essentials, again highlighting the robustness of especially the water business, but also the Fiber Essentials business. Sequentially, sales prices were stable. I would say that it is a solid performance under these conditions. Of course, margin sequentially improved from the Q4 of 2024 to this over 19% level. Now, if we go deeper into the different business units, Water Solutions, as said, very resilient, robust, strong profitability, steady demand. We see a slight increase in the market demand continuing. Sales volumes increased in both of our main product lines within the Water Solutions, i.e., coagulants and polymers. The main negative impact came from the contract manufacturing, a couple of bigger contract manufacturing deals that we have, which did not provide the kind of volumes that we were expecting.
The base water treatment product lines, coagulants and polymers, both saw a volume increase. As a result, the operative EBITDA of the business unit was over 21%, so really good, steady, profitable performance in the Water Solutions. Now, if we look at the Packaging and Hygiene Solutions, as mentioned already, the end market demand remained soft and remains very uncertain because of the economic uncertainty around us. Market softness was especially clear in China, but also the North American market slowed down significantly during the quarter. Both sales volumes and prices declined, but maybe on the positive side, the sales prices sequentially were stable. No negative change in the pricing compared to Q4. Of course, as a result of this market softness and soft top line, the margin decreased for the business unit, but again, clear sequential improvement from the last quarter of 2024.
Clearly, the Packaging and Hygiene Solutions is the business unit that suffers the most from the uncertainty on the consumer markets today. Looking at Fiber Essentials, very solid overall performance in this business unit. Of course, the softness in the packaging market is then having some impacts on the demand on the pulp side as well, but still the same sales volumes increased somewhat from the previous year. Sequentially, sales volumes increased more significantly, and the operative EBITDA was very strong at over 26%. Really good and robust performance in this business unit as well. Now, if we turn to the growth strategy and growth initiative, we just very recently announced the joint venture investment together with IFF to produce bio-based materials at industrial scale here in Finland, in Kotka.
Here we are talking about new-to-the-world renewable bio-based polymers, building a real differentiation capability for Kemira in its markets. It's a platform technology which we can apply in many of our application fields in the Packaging and Hygiene Solutions area, in the water treatment as well, and we expect the production to start late 2027. We also have taken other steps in our growth strategy, investing into acquiring Thatcher Group's iron sulfate coagulant business in North America, again in the core of our water strategy, growing in the part of business that is the most resilient and best profitability of our business. Small step, but one in a series of steps that we have been making and are aiming to make in order to constantly grow the water business.
We also announced a capacity increase investment into Thailand to support the APAC growth of Packaging and Hygiene Solutions business, again one in the series of many organic smaller well-manageable capacity increases to support our growth initiatives. If you look at these and some of the earlier announced growth investments, several different coagulant investments, for instance, in Europe in many places, and kind of put that into context. For the coagulants in the water business, we have invested to growth capacity that equals, say, EUR 29 million, EUR 30 million to more than EUR 50 million of revenue. The IFF joint venture investments in the same timeframe will provide us more than EUR 50 million new revenue. The BHS-related capacity investments, clearly about EUR 20 million.
All in all, the investments we have so far already during the growth strategy execution announced and decided on are supporting well over EUR 100 million of new revenue for us. Now, if we then look at the strategy execution going forward, we will continue to invest in, especially in the Water Solutions area, to execute on the growth. Again, both organic and M&A type of investments are to be expected, and we are confident on retaining the strong financial performance of this business. Packaging and hygiene solutions, obviously the focus now will very heavily be on the margin improvement opportunities, both from the top side, but especially from the cost side. Clearly, improvement actions have been started on that area.
On Fiber Essentials, continue to perform and maximize the cash flow, but also actively looking at expansion opportunities driven by the strong growth in the South American pulp business. On the new ventures area, of course, now one key step is the announcement of the IFF joint venture investment into Finland. The execution of that is high on the agenda, but also more and more we are turning the new ventures from developing new opportunities into generating new revenues from these new adjacent markets, and that work continues all the time. These are the main focus areas regarding the strategy execution going forward. With these brief remarks on the Q1 performance, I will turn it to Petri to comment more detailed on the financial numbers.
Thank you, Antti, and good morning from me as well. I typically try to draw your attention in the opening to a couple of things, and it is very much about the same things as Antti already talked about, the resilience of our business model. As Antti promised, I will give you a bit more detail on the tariff impacts or how we actually believe that the direct impact of tariffs is relatively non-material to us. The real issue is the indirect impact. Traditional bridge of revenue and results, revenue and operative profit. Revenue declined roughly EUR 10 million. Practically, volumes were stable, and as the volume decline in BHS and Antti talked about the weakness in packaging market, that volume weakness was offset by volume growth that we had in Water Solutions and also in Fiber Essentials.
In Water Solutions, again, as Antti already mentioned, our growth, volume growth was below the trend line that we have seen because of the contract manufacturing volume and revenue was clearly below expectations, below the previous quarters during this quarter. Packaging market was a disappointment. Going into the quarter, we were hoping to see some signs of market recovery. Those signs are much more difficult to see now, and we'll be eagerly also hearing and listening to the remarks from our customers, some of whom are reporting at this time. Sales price declined slightly more than 2% year on year. Again, if we look at the sort of trend and trajectory of that price decline, that price decline took place last year. Quarterly or sequentially, from Q4 to Q1, prices were essentially stable.
Of course, I think that's a good achievement when the market is or demand is on the soft side. If we look at the profitability bridge, it looks like the sales price decline is the key driver. However, one must note that the sales price year on year was very much driven by the electricity-intensive pulp chemicals, and those were following the price of electricity, particularly here in Nordics. Therefore, the real reason of why we had a softer quarter top line was that the top line was weak, particularly on the packaging side. I will also say a few words about our seasonality. Pre-COVID, pre-Ukrainian crisis or war, our typical seasonality was that the Q1 and Q4, sort of the winter quarters, were weaker in terms of revenue and profitability. This was particularly because on the water side, the consumption of coagulants is lower.
However, during these few last years, we have sort of gotten used to a different type of a quarterly rhythm because the electricity has been so high, cost of electricity has been so high during the winter months, and we have been able to take advantage of that due to our favorable sourcing of electricity. This has sort of overwhelmed the sort of underlying seasonality which we have there. Now this year, because it was such a mild winter in the Nordics, in Finland, and also very windy, electricity prices were low. We really did not get the benefit on the fiber side that we have typically received during the winter months. You saw that already in the, you can see that in the fiber margins, and you saw the seasonality in the slide that Antti showed, I think it was slide number six.
At this year, it looks like we are starting with a different type of a seasonal pattern. Fixed cost increase was EUR 4 million year on year or about 3% rate, which is sort of in line with the global inflation, maybe even slightly below against the global inflation. It is good to note that fixed costs were down EUR 13 million against the high rate that we had in Q4. I already talked about, but I still want to emphasize that I would not read too much to the fact that the net impact turned from almost stable in Q4 to minus 15 or - 15 during this Q1. I am talking about the net impact between the year-on-year price change and the year-on-year sales price change.
Of course, variable cost changes, again, because so much of that was driven by the electricity-intensive bleaching chemicals, and that was really sort of against a higher comparison period. As noted, sequentially, we are now in a fairly stable pricing environment, and also variable cost, we project to be quite stable across the basket of raw materials that we buy during 2025. This statement has a little bit of a disclaimer for various tariff impacts, which we have seen being changing fairly frequently. Regarding balance sheet, of course, we have continued to deliver ourselves, net debt now including operating leases at EUR 216 million and leverage very low at 0.4 turns. I think that is again new record low for our leverage. Capital efficiency continues to be strong, operating return on capital now slightly below 20% at 19.1%.
Cash flow solid in a typically weaker quarter or seasonally weaker quarter. Typically, we pay our annual incentives during the Q1. We also have a significantly higher share of payables that we pay out during Q1. It follows the rhythm of having a higher amount of capital expenditures and capital expenditure approvals in Q4, and therefore the Q1 tends to be seasonally weakest from the cash flow point of view. This also compares against the very strong cash flow that we had a year ago. Few other sort of events to note regarding cash flow. We received repayments of $50 million vendor note that we had made for the purchaser of our oil and gas business a year ago. That was paid on time in February. We also received again another EUR 10 million capital return from our supplementary pension fund here in Finland.
This pension fund is in a wind down phase. It has been closed over 30 years for new members. As the liabilities are winding down, we are unwinding the overfunding of that fund gradually, and EUR 10 million was something that we took out this year. Capital expenditures again starting at a relatively low rate, at the same rate of last year. However, we expect that the CapEx will be higher this year, approximately EUR 200 million for the full year. The biggest driver for the increase in capital expenditures during the year is the joint venture with IFF, which we announced in March and which Antti was already talking about. I promised to give you a little bit more color on the trade impact or tariffs impacts.
We have 58 plants globally, and most of what we sell, we manufacture within the same country or within the same region. We also source most of the raw materials within the same country or region, depending on what's the case. We have analyzed the impact from these tariffs as they have been announced. We have a sort of a constant evaluation of that, and our assessment is that really the overall net direct impact is not material as the cross-region trade flows are so small. For example, trade flows between China and the USA in both directions, they are actually pretty much equal in size in both directions combined and are less than EUR 20 million in 2024. All trade flows going into the USA are less than 5% of our group revenue, i.e., clearly less than EUR 150 million, and a big bulk of that is from Canada.
The current trade from Canada is all covered by the exemption under the USMCA trade agreement. At this, as of this speaking, those trade flows are not subject to the tariffs. The direct impact of tariffs, as you see, is quite small. Of course, then we have mitigation actions. In some cases, we are already looking at or have been looking at, have been actually implementing alternative sourcing, meaning source from a different location. We have alternative products that we can offer to our customers if a product is impacted significantly by the tariffs, the cost of product impacted significantly by tariffs. We will be passing price increases to our customers. Of course, the ability to pass these price increases depends on the competitive situation, how the competition is impacted by tariffs, whether it is impacted by more or less.
Today, we issued a minimum 5% price increase notice for all products sold in the U.S. for our Water Solutions and Packaging and Hygiene Solutions starting in May. Of course, the indirect impacts can be much more difficult to estimate. As most of the Water Solutions business is water treatment, that by its nature is very resilient. We have seen the volumes actually being very resilient in previous economic downturns and upturns, not very much. Of course, the demand for packaging chemicals is likely to be much more impacted if there is a downturn or if there is a longer-term decline in consumer confidence. We have kept our outlook unchanged, but we have adjusted some of our assumptions for the year. The main changes in the assumptions are softer volume demand, particularly for our packaging markets.
Water treatment market, however, we expect to grow in all regions. On the positive side, if you will, the raw material environment, we expect to remain quite stable. If you remember, at the beginning of the year, we were describing it as a stable or slightly inflationary. Now we see a more moderate pricing environment, or let's turn it another way, less risk for inflationary pressures on the cost side. Reflecting U.S. dollar weakness of late, now we assume that the average rate for the year will be higher than the average rate for last year. As a reminder for that, we do not have much of transaction exposure. Really, the currency exposure comes to us through translation impact. Of course, we earn a good part of our profits in U.S. dollars in the U.S. With that, we are ready to move to the Q&A session.
Thank you very much, Antti and Petri. As mentioned, you can submit your questions via the teleconference or from the webcast tool. There were a number of questions on the webcast tool, but maybe we start with a teleconference and then go to the webcast tool after that.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Anssi Raussi from SEB. Please go ahead.
Hi, all, and thank you for the presentation. I have a few questions, and I go one by one. Firstly, you have been maybe downplaying the role of electricity prices in earnings growth during the recent years, but now it seems to be the explaining factor in Q1 sales price decline. Maybe can you confirm that sales prices won't decline more year over year in the coming quarters as the electricity price will be maybe less meaningful in the coming quarters? That's the first one.
Let me address that, and I think confirm is a strong word regarding anything future-oriented. I think your analysis is absolutely correct. The price decline is really reflecting higher electricity prices a year ago, which were reflecting towards higher prices for our bleaching chemistries. Of course, that we did not see in this first quarter. Yes, I think you are directionally correct, but I refrain from confirming anything.
That's enough, thanks. Of course, I have to ask about your guidance. You comment that the market recovery, I think you said it is much more difficult to see now. If you look at your EBITDA run rate and think about typical seasonality, what would need to happen that you could actually reach the higher end of the EBITDA guidance range? I think it seems like maybe challenging to reach the lower end this year. Can you give us some details?
Again, I'll take that because it's a little bit of a sort of a governance question. We never sort of, we don't have a habit of guiding where we are within a range. You know that in the past, whether we have been in lower or higher end, we haven't guided the position in the range as long as we are within the range. I made a comment about the seasonality that this year doesn't look seasonally like the last few years when we have really benefited of this high Fiber Essentials profitability. You see, if you look at slide six in 2023, it was a very high profitability. I think it was well over 35% or in that range, the EBITDA range. Even a year ago, it was significantly, it was the highest quarter in terms of profitability or very high quarter of profitability.
This year does not seem like it will repeat that seasonality, but could potentially be much more like the pre-COVID type of seasonality because the water chemistry volumes are higher in the summer months when the hot weather is hot. When it rains more, there is more volume to be water treated, and more chemistry is needed in the higher temperatures. That is a very sort of repetitive seasonal pattern that we see in the water treatment, that there is a higher volume in Q2 and particularly higher in Q3.
Okay, thanks. One more is about that your board has a mandate to repurchase your own shares. Can you comment anything or any indication if this mandate would be used in the near future?
We have had the mandate for a long time. The mandate has been always there. It is a tool that we have in the toolbox. You have seen that we have increased the mandate in this AGM. The tool definitely is there. Of course, we cannot comment here whether that will be used now or whenever. That is clearly a tool, and you can look at our balance sheet and these other considerations that we and the board will need to have.
Understand. Thank you. That's all from me.
Thank you, Anssi.
The next question comes from Martin Roediger from Kepler Cheuvreux. Please go ahead.
Hello, good morning. I also have three questions, and I would like to ask them one by one. Sorry to come back to the guidance. You changed quite a bit the assumptions in your outlook, i.e., you now see softer volumes now. You see increased uncertainty. You say there is no recovery anymore expected in packaging and hygiene. The FX effect is becoming negative. This all sounds negative. On top of that, the earnings in Q1 were below at least market expectations and maybe also below your own expectations. My question is, why do you keep your EBITDA guidance unchanged?
If I start, then you'll give the details. Basically, again, I mean, as Petri already earlier commented, we have the guidance. We do not find any particular point on that range. That is clearly a range that we give. Yes, the facts are clear, and everybody who looks at news can see that the world is more turbulent and more uncertain at the moment, and we cannot kind of escape from that. Yet, as we have several times communicated, a big part of our business is very resilient against economic turmoil and so forth, and that gives us confidence. We analyze our numbers and kind of how the year looks like going forward. This gives us the confidence to report what we report.
Yeah, I do not think I have much to add. I think the uncertainty has the, I think it has the potential of upside surprises as well. This seems like it is a man-made crisis. There could be a man-made solution out of this crisis as well. I think the key point is the resilience of our business model.
Okay. Second question. Some companies in the chemical space mentioned that the demand pattern within Q1 was very volatile, i.e., January was strong, February was bad, March was quite good. Did you observe similar volatility in volumes, especially in your more, let's say, normally volatile activities? Because water treatment is more stable, but maybe in packaging and hygiene, for example.
We do not typically comment within quarter changes and fluctuations. We do not do it now either.
Okay, thanks. The final question is, I understood that you mentioned about Water Solutions that you have been disappointed about the volumes in contract manufacturing. Can you provide some background on how important contract manufacturing is for that segment?
If I take that question, of course, and you'll see in the description that the contract manufacturing in the Water Solutions is due to this development of the oil and gas business. This was not a totally clean transaction. We are manufacturing some product for the purchaser, and actually the purchaser manufactures some product for us. Typically, or I would say categorically, the contract manufacturing margins are significantly lower than the margins for the product that we manufacture and sell ourselves. It has much, much less relevance for profitability, those volumes. Of course, they are visible in the top line. Secondly, they do have a role in the fixed cost absorption. As those volumes were lower this quarter, certainly there was some less fixed cost absorption, which was impacting profitability in water.
We have all the belief that in the coming quarters, those volumes will pick up.
Just the quantification, is it 10% of Water Solutions or only 5% or even lower?
Sorry? Say that again.
Can you quantify the importance of contract manufacturing? Is it 5% or 10% of Water Solutions?
I do not think we quantify that. Yeah, let me think about how we can answer that in the future, but I do not have that number in front of me, and I am not sure if we want to. Clearly, on the profitability side, it will be significantly less than on the revenue side.
Okay, thank you.
The next question comes from Andres Castanos from Berenberg. Please go ahead.
Hello. I wanted to ask about maybe the new normal margin in Fiber Essentials. Can you provide some commentary about the current level and what is to be expected in the next quarters where power prices will be lower?
I think you look at Q1 margin, and if I say that there was no sort of help from high electricity costs, so that's as good of a proxy as going forward as any.
Of course, you can look at the seasonality from previous. Obviously, there were some specific items in Q1 last and Q2, but obviously that gives you some kind of guidance on what the previous years in Fiber Essentials have looked like.
Yeah, clearly this business is, by the EBITDA margin alone, it's the highest business that we have. It needs to be because it is the most capital-intensive business.
I also wanted to ask about what drove negative volumes in packaging. It seems like a clear underperformance versus everything else. Is it about losing market share? Is it about stock dynamics? Can you give us a little bit of color of what is going on in the packaging and hygiene volumes front? Thank you.
Yeah, definitely. I mean, we have not lost market share at any region. Basically, our market share is firm, and we have been able to hold on to that. It's about the ultimate demand in the value chain. Basically, again, what drives our chemical demand in the packaging segment is the demand for packaging materials. Basically, those numbers, you can look at them when you look at our customers and what they report. Basically, it's to a high degree driven by the softness in the consumer sentiment in China and the turbulence and disruption in the global trade flows because China has been the manufacturing hub, i.e., the packaging hub of the world. All this has impacted the demand. There's actually very low levels of inventories in those value chains.
Basically, whatever disturbance there is in the end consumer demand very quickly reflects into demand in our end.
Simply put, some of our bigger packaging customers took downtime during the quarter.
Okay, thank you.
There are no more questions at this time, so I hand the conference back to the speakers.
Thank you. I have sort of a couple of questions from the webcast tool. One of these from Joni Sandvall from Nordea was answered already on the contract manufacturing that we have covered. A second one from Joni Sandvall. Given the current market conditions, how successful announced price increases are, and how do you expect variable costs to develop sequentially? If we start from the sales prices.
Yeah, it's of course always impossible to say how successful any price increases will be. We have proven over the past years that we have actually quite good and effective pricing processes and systems and market positions. We have been able to kind of implement the price increases that we have been after. Of course, especially in the Packaging and Hygiene Solutions area where the market is soft, it is the most difficult environment to implement price changes. We have to understand that for instance, the impacts coming from the tariffs are impacting everybody in the value chain, all the competition as well. Impossible to say, but I would be confident on our capability on getting at least some of the announced price increases into the actual prices.
Yeah. Regarding variable cost, we already noted that we expect across the basket a relatively stable environment. It is stable.
Thank you. I will continue with a question from Quentin de Streel. The volumes declined sequentially in Packaging and Hygiene Solutions while they increased for the Fiber Essentials division. Given the fact that your client bases are similar in these two divisions, what explains the difference? Are the sales mix of customers shifting to more commoditized product categories?
Let's correct first that it's not the fact that, well, it depends how you say similar, but the client base is not the same. It's important to remember that the Fiber Essentials product goes into the pulp manufacturing. Pulp is used as a feedstock or raw material for many different types of wood fiber-based products, packaging being one of those, hygiene products being one of those, the printing and writing grades and other paper grades, molded fiber being one of those. Basically, pulp has much wider usage. Of course, kind of pulp also travels across the continents quite well. We are well positioned especially in the Nordics and in Latin America in terms of our Fiber Essentials business. You can't just draw the direct link between those. It's more kind of indirect.
Of course, at some time in the world, there might be connections. If there's a continued depression of the packaging demand, then it will be somehow visible. There is not a direct link, and the customers are not exactly the same.
Thank you. I will continue with a question from Andrew Noel. Could you talk about Kemira's PFAS removal ambitions and predict when this business will be a material contributor to revenue as well as earnings?
Again, one of these crystal ball questions that are impossible to answer in terms of when it will be material. The business is already there, and we have revenue streams coming out of it. There are several technologies that are applied. The regulation is changing all the time. We are working both with the so-called traditional technologies used in our investments and plans in terms of activated carbon, which is the most used technology at the moment. We are also working with many technology startups in terms of developing completely new technologies for that domain. We are actively following how the regulation in different regions develops. It is going to be a major important part of the business, but when exactly and how important, impossible to say today.
Good. Thank you. There are no more questions from the webcast tool, and I think there are no more questions from the teleconference either. This concludes the Q1 webcast. Thank you for participating. Thank you for the questions. If there are any further follow-up questions after this, please reach out to me, and we're happy to help. Thank you and have a good weekend.
Thank you.
Thank you.