Earnings Call: Q2 2020

Jul 17, 2020

Good morning, everyone, and welcome to Kemira's Q2 twenty twenty Results Webcast. My name is Mick Bohelen, and I'm from Kemira's Investor Relations. Earlier today, we published our Q2 twenty twenty results, and we had a good quarter. In addition, we have provided an outlook for the rest of the year. And today with me here in Helsinki, I have our President and CEO, Jari Roosendaal as well as our CFO, Maitre Kastrejn. And due to the ongoing COVID-nineteen situation, we will only have a webcast today instead of a physical meeting. After that during the presentation, Jari will give some more color on the Q2 results, and then Petr will go more into the details of financials and provide more details on the outlook for the second half. After that, you'll have a chance to ask questions from us. Jeri, please go ahead. Thank you, Micko. Good morning also on my behalf. We have been performing well despite the special circumstances caused by COVID-nineteen and the economic downturn it has caused. Q2 was really about dealing with the pandemia. And now going forward, it's more about the real economy and the economic impact as many countries are opening up their economies. Naturally, this situation in United States and Brazil is still critical, so we need to watch out for that from a customer perspective, but our own operational security perspective. But all in all, I'm really pleased how we've been performing during these special times and our people have been doing a great job, so big thanks for them for that. So summary of Q2. As said, we have been operating all of our plants and there has been no significant disruption during the supply chain or of material availability. The quarter was a twofold type of a quarter. Our revenue came down from mainly from oil and gas, printing and writing and some from industry and water treatment. But it's been hit by the pandemic and lockdowns partially. But on the other hand, our profitability, however, was good and we get some gain from raw materials, our own actions and fixed costs lower fixed costs. We reached an operative EBITDA about €106,000,000 and 18.1% from revenue, which I really pleased about in this difficult environment. And as said, we published our outlook and Petri will elaborate that more, but really it's based on certain assumptions. And in this situation, that is something that we believe in, but everyone can understand that the environment is not so easy. We also published that we have extended our agreement with UPM Corporation in Uruguay, and we will increase our bleaching capacity to also serve the new pulp mill that UPM is building. This is very much supporting our pulp bleaching strategy. So let's see how we mainly operated and mitigated the pandemic situation. The situation is still very much a reality, so one can't ease off. Most of our customers and chemical industry and us are classified as essential industries, so we have been asked to operate throughout the two quarters here and done it quite well. We obviously have special mitigation actions in place to manage the situation in all regions as the situation country by country, region by region has been very difficult and different. Mitigation has gone well. Out of about 5,100 employees plus hundreds almost 1,000 contractors that we have working on our sites, we have so far twenty one confirmed infection cases. Most have come from outside of the working place from home and hobbies. Due to the oil and gas clear downturn, we have restructured our oil and gas operation to reflect the dropped demand. As Ted said, the pandemic is still not over and will probably continue several months going forward. We are monitoring how the market will now develop and there are still operational risks should we have some internal pandemic at some of our sites or in our supply chain. So we have to be on our toes all the time, so we don't have risk disruptions. As said, so far, we have coped with it quite well. So let's go into the main figures of Q2. Revenue, $583,000,000, down year on year 12%. And as said, most came down from oil and gas, printing and writing and then some water treatment, especially in the industrial side. However, operating EBITDA was good, euros 105,700,000.0 and eighteen point one percent from our revenue. And if you remember, our strategic target has been from 15% to 17%, so one can be really pleased of exceeding our target window. Even if the revenue has dropped, we have some help from raw materials variable cost. Our fixed costs are down and we have some self help from two plants that are ramping up in China, AKD Wax and in Netherlands Special Polymers and those are taking our variable cost down as we have in sourced those value chains. Earnings per share, zero two two. Strong cash flow from operations and that's really important in these special times to have resilience. Pulp and Paper had a strong quarter. Demand has been fairly resilient in the big picture, especially pulp, board and tissue has been resilient and printing and writing down as people are working from home and not in offices, not buying newspapers and magazines and so on. In North America, we are more exposed to printing and writing than in EMEA. In APAC, we actually saw some growth in Pulp and Paper even if printing and writing was weaker. Revenue for Pulp and Paper, $357,000,000, down only 4% in these conditions, that's quite good. Operative EBITDA, 65,600,000.0 and eighteen 0.4% revenue percent from revenue, so really strong outcome and really pleased about that. The new AK dewax plant is ramping nicely in China. And as a reminder, we used to buy some manufacturing steps from outside and now we have in sourced those. And that means that our variable costs have gone down as we are more efficient internally than buying from outside. I mentioned earlier, we announced in May an extension of our long term contract for bleaching chemistries for UPM in Uruguay. They are building the new plant, so we are investing $30,000,000 to expand our capacity to serve the existing pulp mill, the new coming pulp mill that they are constructing and some other customers in that region. This deal is supporting our strategy, execution and pulp bleaching is one of our core areas and core product groups. In the financial figures, it starts to see in 2023, a good deal and a big thank you to UPM for the good cooperation and the continued trust in Us. Then moving on to Industry and Water. Water treatment chemicals are always needed to support and that supported I and W despite the oil and gas demand went down clearly. Municipal drinking water and water wastewater treatment was quite steady. Industrial treatment was down some due to the lower economic activity and lockdowns of non essential industries. Revenue down for the segment 22% year on year. Oil and Gas revenue down clearly 68% and represented sorry, 65% and represented about 80% of the segment's revenue dropped. Still, operative EBITDA reached EUR40 million and was 17.7% from revenue. And I think that's quite a nice defense on the at least on the percentage point of view. The Specialty Polymer line in Bottlek, Netherlands is up and running and ramping up nicely. And that was the same case as the AKD. We were tolling and buying certain manufacturing steps from outside with a higher cost. Now we have in sourced those and that has affected positively our variable cost. And that is proceeding per our plans originally. Then a deeper dive to oil and gas. Shale demand very low at the moment, even if the oil price WTI has now hovered around $40 per barrel. We don't expect that see any meaningful recovery of the demand from shale during the second half of the year. Oil sands tailings treatment also down, which is a bit of a surprise for us, but the customers are saving cash this season and they will return to normal program coming season. So it's a long term thing for us. In CEOR, no major demand changes, still strong. And obviously, that special plant that we have is helping our variable cost and our efficiencies. Due to the clear demand downturn in Oil and Gas, we have restructured our Oil and Gas operation, reflecting to the drop of demand. This resulted in €1,900,000 one time cost booking in Q2. That was more of the short term and historic situation. We obviously continue to work on longer term prospects and development. Over 50% of our products are helping us our customers to improve resource efficiency, meaning water use, meaning raw material use, meaning energy use and so on. Without chemicals, municipalities treat around nearly around three seventy five million people's waters. That's quite a big number. We have increased our R and D focus more on bio based biodegradable recyclable. And this supports our customers' sustainability as well as our own sustainability ambitions. We have number of bio based products already in our portfolio, but recently we have launched a couple of new ones to the markets. One is a ASA sizing product, which is based on crude oil based alpha olefin oil. This new product is based on sunflower oil and therefore is bio based. Another one is a sizing sorry, a strength product, making boxes and paper more strong. And there we have also added more bio based content to take us to the right direction. This development and this megatrends will continue, and we will continue to work on that. And we have several R and D initiatives going on in this area. And as said, we will continue on this path. Then as a last summary, focus continues to be in mitigating the pandemia and the economic downturn. We need to have still many special arrangements in place to stay safe and operational. When possible, we gradually start returning to office as the local conditions allow. We have to focus on managing our operations and supply chain as disruptions are possible. We have to be tight on our fixed costs, gain benefit of the new production lines that we have ramped up and continue to build our polymer lines in South Korea and United States and now start building the extension of the Uruguay line for bleaching. That's the summary for me for Q2. Next, I'll ask Petri to continue with some more detail. Thank you, Jeri. So whereas in Q1, we saw the first impacts of the COVID-nineteen, Q2 was really was really about living through it. Key points, I believe, in the report are our strong profitability and drivers behind it, lower volumes on the other hand, good cash flow and cash improved capital efficiency. Now I'll try to give a bit more additional detail on top of what Thierry already went through. At the end, I will also cover the outlook and the assumptions that we have behind it. Let's start with the profitability bridge and the revenue bridge. So revenue declined 12%, almost all in volumes. Sales prices were down primarily for some of the formal based contracts as well as some traded products like caustic soda. And sort of ignoring those, we even saw some price areas where we even saw price improvement over year on year. So that was clearly helpful. Looking at the customer segment and ranking by euros, the biggest negative impact from to the volumes came from the shale and then next from industrial water treatment customer segment and printing and writing producers within pulp and paper. We continue to gain on variable costs. Here, the story is the same as it was in Q1, a continued decline in variable costs. Almost half of the cost decline was due to our self help actions and pass through items like the caustic soda and North American electricity costs. Obviously, cost of raw materials continued to come down, and the biggest impact was on polymers. Regarding the self help items, and Jari already talked a fair amount of them, we get this really from the Chinese AKD plant and the polymer plant in Netherlands. I think the key point is that the trend continued and actually increased versus Q1. So in that sense, we are really executing the business plan for the investment, very good. We're also getting a significant contribution to profitability from fixed cost management. As an example, our travel costs are almost €5,000,000 down in Q2 versus the same period last time. But it's not only travel costs. We are also managing costs with other measures. And there you see the €11,000,000 cost reduction on fixed cost versus last year's Q2. Already talked about the biggest drivers behind these charts. Now for the first time, the sales price came down on a year on year comparison after 2017, only slightly EUR4 million. And really, that is roughly the magnitude of the caustic price impact, which, again, like I said, is a traded product. Variable costs came down, and the net from these drivers continued to be positive and obviously supporting profitability during the quarter. As we look towards the rest of 2020, We expect that we'll continue to see the self help benefits, these primary backward integration benefits. On the other hand, certainly, we expect that the decline in raw material costs is coming to an end. We may have seen the bottom. The bottom maybe right now. And therefore, we expect that the decline will certainly stop, and we may see flat or slightly increasing raw material environment in the second half of the year. This all depends quite a bit, of course, by the economic activity overall and its impact to raw material environment. During Q1 call, we also flagged a possible concern about raw material availability as a concern. Fortunately, the supply chains have operated well, And this concern has had much smaller impact than feared at the beginning of the pandemic. So supply chains and raw material availability continue as items for concern, but we believe that the industry and we have managed this quite well. Looking at cash flow. Q2 cash flow was very good, like Jeri commented. And year to date, we are now ahead, if you ignore the €15,000,000 capital return, which was onetime nature, which we had last year. I'm particularly pleased about our receivable management account receivable management. We have been able to maintain the receivable turnover at very constant even as we have seen decline in sales. So that sort of vouches and talks about the asset quality of our customer portfolio and the receivable portfolio. On the other hand, we have seen some inventory buildup, particularly during Q2, driven by slow demand, and that has resulted in higher inventories. Another big concern, and this can be addressed during the second half. As a reminder, generally, our net working capital and capital expenditure cycle sort of make our cash flow half to or second half weighted. CapEx is going as planned. No changes there. And we expect the full year 2020 capital expenditure will likely land roughly at the same level as it was last year and again, in line with our earlier communication. Looking at capital efficiency, nice improvement there, driven by particularly by Pulp and Paper profitability improvement and 1% improvement in almost 1% improvement in twelve months. So very nice improvement there. From balance sheet point of view, I think we're also at a very good position year on year. We have reduced our net level both on absolute and relative terms and are well within our financial guidance target and gearing target. Also, we see no concerns about the liquidity for us or any concerns about our near term debt maturities. We brought for this time sort of a reminder and answer on the question of our contract types. We often get this. So for Pulp and Paper customers, you'll see that most of our business is contracted with one year or longer contract terms typically. And in around 70% of the price is fixed. Big part of the rest is formal based pricing models, which adjust to raw material price fluctuations, electricity being, for example, one example of this. And typically, these contracts are longer than one year in duration, in some cases quite a bit. For Industry and Water, around 70% is fixed price contracts. The majority of the rest is mostly formula based, particularly at current time as the shale business is so significantly down and shale is typically the area where we have spot type contracts. Good. So outlook. You remember that at the concurrently with our Q1 report, we withdrew the outlook. Now concurrently with the Q2 report or half year report, we are giving an outlook for the rest of the year. In the box on the right, we are summarizing the assumptions on which we base the outlook. And we are comparing expected demand during the second half against what we saw happening in Q2. And we believe that this is the most helpful way of helping investors as Q2 was already quite a bit different from Q1. And certainly, the environment was different in second half second quarter compared to 2019, and we expect that the rest of the year will be quite different from because of the global pandemic than 2019. Obviously, there's a lot of uncertainty around us and the global impacts of the pandemic and various economic measures and lockdowns. So there's inbuilt quite a bit of uncertainty regarding these assumptions. In summary, the outlook is that we see overall demand in Kemira's end markets and for both segments to be approximately at the same level as during Q2. We make specific notes that the printing and writing market, which declined significantly during Q2, will remain weak in the second half. Also, as Thierry already mentioned, we do not expect meaningful or significant recovery in the shale market yet in 2020. Also, we base our assumptions that we don't see major disruptions to our own operations or to the supply chain. And with that profitability measured by our operative EBITDA, we expect to be lower in second half compared to the first half of the year. Finally, a reminder, we have skipped Capital Markets Day for the last year or two, and now we intend to hold one this year. So please mark your calendars for the November 19, and more information about the format will come closer to the actual date. With that, I believe we are ready to turn over to the Q and A. Operator, please? We will take our first question from Anstel Kiviniemi from SEM. It's Anstel from SEBIN. Three questions from my side. Will take them one by one. First of all, starting with the volume, the situation and outlook. They impacted quite heavily Q2 results in a negative way. Now you guide for basically approximately similar demand in second half for the year compared to Q2. So is it a good assumption to assume flat volumes and essentially flat top line going forward and basically similar magnitude negative impact to earnings? Or how should we read the comments? That's the first question. Thanks. Well, as you said in your question, we assume that the demand will be approximately on the Q2 level during second half. But obviously, it's a volatile situation. So individual products or offerings, there might be ups and downs. But that's clearly our assumption at the same time. And we have been down on fixed costs. So probably there will be some fixed cost increase as we start returning to offices and start at least in country travel, meeting customers and suppliers. And as Petri explained, we don't expect the raw materials anymore helping us, but they will be flat compared to Q2 or slight increase during H2, depending on how the economy start to fire up. Okay. Then the next question was on fixed cost and kind of the resiliency of them. You had that €5,000,000 gain from Traveling. Well, that can be kind of approximated that some of the benefits will remain in second half of the year. But the rest, 6,000,000, where do they come from? And should we expect some of those benefits or savings to continue also during the second half of the year? Well, obviously, we do have lower manufacturing activity. And obviously, we also did some restructuring in our oil and gas business because of the downturn. So I think it's fair to say that we should see some continued fixed cost benefits on those areas. And it doesn't really stop there. Obviously, we're looking in this sort of a current environment everything from planned headcounts and the types of recruiting that we plan to do, whether we need to implement that those or whether we can delay them in the current environment. So there are more than just the travel behind that. And obviously, one of the measures that we can and must do when the volume drop is as significant as it has been and continues to be. Okay. Thanks. Then the last question is on oil and gas and essentially shale business. Do I read it correctly that even though we have seen a small rebound in oil prices, you have not seen any significant increase in activities coming from clients or orders coming from clients. So it's pretty much non existent business currently. Yes, it's down quarter to quarter around 90 percent, which you could say it's at standstill. We have started to see some activity and discussion from the customers, but no orders yet and there might be some small recovery, let's see. But really, don't bank on any significant recovery in shale. Okay, that's fair. Thank you. That's all for me. We will take our next question from Martin Rojager from Kepler Cheuvreux. Please go ahead. Yes, Thanks also for I have a few questions. Just starting with the question about cost management, 5,000,000 travel costs. And regarding the remaining GBP 6,000,000, is that also that you got some reimbursement by governments for short time work? Or did you cut work time and thus also salaries? Because you said that some of the fixed cost reduction was because of the lower manufacturing. And in this regard, is that also because you have laid off people in the oil and gas division, therefore, you have saved costs there? So just want to understand how that worked out with the fixed cost cut. The oil and gas benefit is really not in there yet. So those are recent moves that we made in May, June and now early July also. Mainly it's from our operations. You can understand that it's from maintenance cost that we've been careful of letting contractors on our sites because of the infection risk. So that's been down a bit. We haven't been able to use even if we wanted to use some of our extra help external consultants and so on for some of our development and strategic projects, because we've been home based. Travel is one, all kinds of meeting costs and so on. So and traveling to customers and meet customers, so it's been phone and Teams and Skype, really low cost on that. But also we are working hard as Petri said on finding pockets and mapping out where we can be more prudent now that the visibility has been, especially during Q2, bit hazy. We've fared well and there will be some fixed cost that needs to come back. But as Petrik said, we will probably see year on year lower level. And regarding the question of whether we have gotten any government subsidies, not of any significance at all. There may be some I think in China, there was some program which benefited a little bit, but nothing of major sort. And outside of our oil and gas, we have not resorted to any layoffs or furloughs or anything of that kind. It's really reduced shifts in plants and those type of things and then headcount management. Okay. And the second and final question is regarding the Pulp and Paper segment. I guess the order of the three reasons you provided for this strong EBITDA margin increase is an indication about the relative importance of the three reasons. Can you give us a hint how the 400 basis points margin improvement is split over these three reasons: low arrival cost with fixed cost management and efficiency improvement from the AKD WEX investment? Yes. I think I already said that of the €20,000,000 or so variable cost reduction, almost half was derived from self help items and sort of self pass through items like the caustic and some of the electricity costs are also pass through nature, which means that about half or slightly more than half of the variable cost benefit came from raw materials. And there, the biggest impact was really on polymers, which have the highest share of oil based raw materials, which continue to be depressed and the markets are clearly long there. Some of the raw material benefits accrue to other product segments as well or product groups as well, but the biggest impact was in polymers. And then the fixed cost benefit is in addition to the EUR 20,000,000 variable cost benefit that I was talking about. We have been able to improve our performance also year on year in APAC. So a number of millions came from there. Remember that the pandemic started there already in February and we're back to office already now and life is close to normal visiting customers and so on. So our APAC steps forward with the AKD, but other development areas have also resulted to the growth of EBITDA. Thank you. Our next question comes from Anu Laitinmaki from Danske Bank. Thank you. I have two questions. First one is on the volume decline in the industrial water chemicals. It seems that this was fairly sizable because if I did the numbers right, it seems that the water chemicals revenue was down by about 6%. And if half of that is municipal, then it means quite sizable change in the industrial part. So question is how permanent do you think this will be? And which industries this came from? It seems that your demand comments may point to discontinuing in the second half at least. Yes. So there might be some volatility and hopefully upwards, a lot industries that were nonessential were in a lockdown. And therefore, the water that they normally produce is not there. The other side on the municipal side is that many small businesses and hotels and restaurants, for instance, they put their waters into the municipal water treatment system. And obviously, hotels were closed down, restaurants were closed down and not the daily washing of linens and towels and so on weren't happening. So this is an effect there. And as people start to travel and use hotels, restaurants and so on, we probably will see some recovery there. Also in North America and in Europe, it's been a really a dry Q2. And when it rains, some of the runoff water from the streets goes into the municipals treatment and now it wasn't there. So that's normal weather related seasonal thing that we see every year. Sometimes it rains more, sometimes less, and this quarter it was less. Okay. Thank you. And the second question is on pricing. You provide this kind of overview of your pricing contract structure, which means that most of them are fixed price contracts. But can you give any color or comments how are the kind of negotiations with customers going with the new prices? Because I guess here the quick question is that what kind of price pressure are you seeing when we go into next year? Well, obviously, there's a price pressure with the declining profits with the customers, especially on the pulp and paper side. In oil and gas, we don't discuss prices because we don't need to deliver anything. So it's on the pulp and paper side. We have honored our contracts when raw material prices go up. So we are expecting our customers on their contracts when raw materials go down. We also are realistic that due to competition, price adjustments will be done in new contracts in H2, but that's still in the making. In Industry and Water, especially in the water treatment side, pretty steady as it goes. Thank you. And our next question comes from Marco Carvinen with Handelsbanken. Please go ahead. Mark, I believe your line is open now. Have a question. Please go ahead, Mark. Hello. Can you can you hear me? Can you hear me? Yes. We can. Yes. We can hear you. Okay. Good. Thank you. Could you talk about going to h two? A lot of the maintenance in the pulp and paper sector has moved from H1 to H2. What kind of impact do you expect from that to your volumes? That's true. So we get sometimes notifications a bit early, but often it's even within days of what the stoppages are. And for safety reasons, especially the maintenance has moved from Q2 because the customers couldn't accept people on their site in fear of infection. So we will see probably a bit more stoppages in Q3, early Q4 than we saw in Q2. There are also stoppages and curtailing production, but we have little visibility on that. We only look at the maintenance stoppages, but are they then keeping mills down a few days longer to balance the market? That decision we see sort of when it's happening, not in forehand. Okay. And I suppose in Q2, the demand was quite weak on the graphic paper side. Do you still see solid demand on the packaging side going to H2? Yes, solid pretty solid on the packaging side. Obviously, towards the end of the quarter, it came down a bit, but now industries are opening up again. So let's see how that develops. Pulp has been quite strong for us. I'd like to remember that about 50 pulp mills form about 80% of our bleaching demand and there's almost 500 pulp mills in the world. So when you read the global pulp thing, you have to think of our 50 customers and how they are faring in this industry. And they have fared quite well, at least from a volume point of view. And Tissue also we're more active with Tissue in North America, so that has been strong. And Printing and Writing was down 12% in Q2 year on year. But if you'll read the news, they talk about globally being down 25% to 30%. So if that's the case, we fared quite well. Now that people are coming back to offices and out of their homes, maybe printing and writing comes back a bit, but we don't count on that a lot. Okay. Thank you very much. It appears there are no further questions at this time. I would like to turn the conference back to our host for any additional or closing remarks. All right. As there are no further questions or comments, this concludes our Q2 webcast. So many thanks, Hari and Petri, and also for those who have been participating on the line, and we wish you a happy summer. Thank you. Thank you.