Earnings Call: Q1 2019

Apr 26, 2019

All right, ladies and gentlemen, very warm welcome to Kemira's result presentation. My name is Olli Trunen, and I'm Head of Investor Relations at Kemira. Kemira published strong results this morning, and let's have a deep dive into the Q1 numbers presented by our President and CEO, Jari Rusenthal and our CFO, Petri Kastrin. After both presentations, you have a chance to ask questions here in the room and also over the webcast by typing the question to the webcast tool or over the phone. Let's begin. Yari, please go ahead. Thank you, Olli. Good morning to everyone. We did have a good start to the year in Q1. So let's look at how that went. So market demand during Q1 continued as good. Sales prices, which have been working on for long, long time, are continuing to show momentum. And raw material prices, especially for polymers, eased off at least temporarily during Q1. Hopefully, the up and down long term cycle is now easing off and we enter a bit more normal variability on raw materials. There will be obviously volatility, but hopefully, a bit more balanced We still expect the raw material basket to go up this year compared to last year, but not as volatile as 2017 and 2018 as we have seen. Our capacity utilization is good and our ongoing investment projects are progressing well. Looking at the key financials, so organic growth 2% and revenue at €648,000,000 Operative EBITDA grew to €95,600,000 and the margin was 14.8% from revenue. So we are nearing our mid to long term target window of 15% to 17%. Obviously, the €95.6 has the IFRS 16 benefit in it of €7,700,000 But even if we look at apples to apples compared to last year's Q1, 69,000,000, we made this year EUR 88,000,000 on operative EBITDA. Also, EBIT grew nicely and the IFRS 16 impact on EBIT is very small. We experienced some supply disruptions during Q1. They are still ongoing. We had a minimal effect to Q1 numbers, but we will have some effect to Q2 numbers and this was to polymers in Europe. Looking at Pulp and Paper. Organic growth was flat, but when we take out the EGOX closure last year, then the organic growth on comparable basis was 2%. Sales prices have improved, still work to do especially in process and functional chemicals and optimizing cost to serve and process and functional go mostly to papermaking, tissue making and board making. Revenue $381,000,000 and operative EBITDA €550,700,000 and at 13.3% EBITDA. Market looking quite good and customers have announced a lot of new investments in the board machines, especially So mid to long term, no worries on the market outlook. And APAC showed some softness in the beginning of the year. Obviously, Chinese New Year always has an effect that is hard to predict. When talking to the customers, the pulp demand is often some, but now during March, April, volumes have recovered and then prices have recovered some also. Then looking at Industry and Water and really good start to the year. Solid water treatment market, oil and gas performance really good. Organic growth moderated as expected to 26%. That's nothing more to worry about. Revenue from oil and gas, 62,000,000. We will also see the growth easing off to more normal levels in oil and gas and our capacity utilization remains on a high level. Coagulant raw material prices will increase this year from last year, but we are much better positioned to take on that challenge at this moment than we were a year ago this time. As said, polymer prices, especially in Industry and Water helped a bit with new price increases kicking in also in Pulp and Paper, but also Industry and Water in January. This raw material thing can be a temporary one. For looking out for Q2 and Q3 and Oil and Gas and Industry and Water, we will start the seasonal deliveries continue until September, October time. And that has a dilutive effect on our margins, but will bring euros to the bottom line. So that's good to keep in mind. A really good start from I and W for the year, EBITDA margin, operating EBITDA margin, 16.8%. As a reminder, we have four core product lines in our portfolio: bleaching, coagulants, polymers and sizing chemistries. And these have been the areas also where our main growth investments have been going and are going. So that's good to keep in mind. These form about 80% of our total revenue. We have been investing into pulp. We have been investing into sizing and coagulants not so much because that's in a better situation mostly. We will be continuing with our special polymer investment in the Rotterdam area and ramped up during the second half of the year, targeting the improvement of performance and growth in our CEOR applications at the North Sea. And our Chinese AKD Wax joint venture manufacturing site is under completion. We also will ramp that up during the second half of the year. And as you might remember in the beginning of the year, we announced a new €60,000,000 emulsion polymer capacity increase in United States and that's mainly targeting our shale market, which continues to grow in the future, but can be utilized in water treatment and pulp and paper applications also. That's in short Q1. So looking at the focus areas for this year, we continue to work on the sales prices. We are not there in every pocket yet, so we have to catch up and especially in paper, tissue and board, process and functional chemicals, we still have work to do. We have gained some ground, but work to do. We continue to optimize our capacity allocation to best products and best paying customers. We also continue to shape and improve our own operational performance and how we service the customers that the service cost is on the right level, taking care well care of the customers. And we continue to work on the investments that we have ongoing. There are uncertainties, Brexits and trade wars out there and all kinds of things. We haven't seen the effects yet, but obviously, we are following how the world goes and keep a good control on our fixed cost. But all in all, I'm pleased how the year has started. Next, I'll ask Petri to come over and talk more about the Q1 numbers and details. Very good. Thank you, Jari. So obviously, great start to the year, particularly in Industry and Water segment had a great record quarter. So let's start and take a look at what are the key drivers behind the numbers. 6% top line growth, 2% organic growth was driven really by sales prices, as Yari was talking about. We have contracts rolling out throughout the year, but perhaps a higher proportion of those contracts are actually coinciding with the price increases for these contracts. And this is particularly in I and W and both covering the polymer customers as well as customers who buy primarily coagulant products from us. We've given up some volume. You see the negative volume growth there. And Greece has really been conscious strategy as the focus has been on value rather than volume. And mostly, the lost business has come with margins that are below average profitability. And so we're not overly concerned about this and this is not really a market development, but rather like Jari was saying, we continue to see a good market. Operative EBITDA bridge, now this shows the magnitude. Net sales impact of €24,000,000 which is the raw material cost inflation versus the price increases that we have been able to implement. Obviously, a great outcome for Q1. In this context, I think it's fair to remind that Q1 last year was a really difficult quarter. We had very severe severe raw material price inflation in Q1. Also, we had severe winter weather in North America, which actually increased electricity costs dramatically and even we had to shut down our plants in some areas for a few days. So relatively easy comparison in Q1, but nevertheless, this should not take away anything from the huge improvement that we made in Q1. Comment on currencies, I think this shows that there is a tendency to revert to the mean. Last year, first half was really difficult, Q1 also. And now we had positive impact of EUR6 million on EBITDA line. The impact is perhaps a bit more than many expected. And really it is because our North American U. S. Dollar based business is now performing really well, not just oil and gas but also pulp and paper in North America was performing very well in the quarter as well as our water treatment business in North America. So all of that is actually helping. Once we convert this dollar earnings to euros, now the currency impact is relatively significant. Final comment on this page relates to the IFRS accounting change. Gerhard already talked about the €7,700,000 improvement. Again, this is pretty much in line with the 1% guidance that we gave last time we talked about this. And also this year, we promised that as we are not restating our 2018 numbers, we are giving this IFRS bridge so that you can see the apples to apples comparison and this comparison now shows €18,500,000 of improvement, ignoring the impact of the accounting change. Raw materials. I think I already covered the highlights, which typically I spend time on the right hand side of this chart. But I just remind the left and about the left hand side of the chart that how to read this. So as long as the points in the chart are above zero line, we see continue to see raw materials going up and we continue to see price increases going through. Clearly, the pace is however moderating. And in Q1 in particularly, there was a period when we saw the oil based raw materials that go into the polymer products actually declining and clearly that benefited particularly our I and W business, which is predominantly or has a higher share of polymer business. But I guess it's fair to say that for the short term, Q2 looks also relatively benign regarding in the big picture regarding raw material price inflation. Still, almost with the same breath, I want to remind that we have seen oil price picking up really in the recent weeks. And so that's a fair reminder that we may see continuing inflationary pressures coming back and sort of reversal to the trend that we have seen lately. Regarding cash flow, improved profitability of course helped Q1 cash generation. And again, a bit of a reminder, have this seasonality aspect in our cash flow. And Q1 typically, we have a net working capital buildup in Q1. This year, it's sort of exaggerated with the oil sands business where we have a sort of a we have a summer season when we are actually selling to the Canadian oil sands. However, we continue to build up inventories for this season throughout the year. So we're right about now we are at the peak inventory level of finished products that go into the Canadian oil sands. We also have a sort of natural seasonal side of the payables side reducing in Q1. There was also a one particular item regarding cash flow that I want to bring up. It's the €15,000,000 return of capital from our pension fund. It's a supplementary pension fund in Finland, a fund that was already closed in 1991 for new members. So it is in a runoff phase and it has some excess capital right now and we took some €50,000,000 back this year of this excess capital. Finally, on CapEx, a reminder that our CapEx guidance of 180,000,000 to €220,000,000 is clearly higher than the CapEx of 2018. And we have a number of these sizable expansion projects that Jari was talking about. And while Q1 CapEx spend was not really at the rate that our So I just want to remind that we will pick up the capital spend towards the end of the year or towards as the year goes. So we stand by with that guidance. Few comments on ratios. So operative return on capital improved now above 10% and really driven by Industry and Water profit improvement. Regarding our reported debt, the IFRS 16 impact was to increase net debt by €129,000,000 On a comparable apples to apples comparison, actually the debt would have come down. The net debt ratio as we report increased to 2.4. And again, standard here has a sort of a side effect that it exaggerates this as we obviously take the last period debt level. But then when we look at the trailing twelve months of EBITDA contribution, we only had one quarter benefiting the IFRS 16 EBITDA, which is higher and three quarters of straight pre IFRS 16, if you will, numbers. And therefore, we give you the sort of a benefit that it's a 2.1 turn would be the comparable number with pre IFRS 16 data. And finally, outlook, no drama, no change here, just repeating our guidance for the year. Our year to date performance, like I mentioned, is ahead of the last year by €18,500,000 on a comparable basis excluding the IFRS 16 change. With that, I think I'll stop my remarks and we're ready to turn to the Q and A session. Thank you. Very good. Let's take questions. First here in the room, and there is a question from Panu Thank you. It's Panu Weidenbachi from Danske Bank. I would have a couple of questions. Firstly, on the pricing, which was a key driver of your earnings in Q1. And just trying to figure out if you got a €34,000,000 benefit from that in Q1, how much would it be going forward? You probably won't give me a number, but just kind of could you comment on what is happening in pricing in your three segments? And then also in the Industrial and Water, how did that split between oil and gas and the kind of water treatment business in Q1? That's the first one. Well, actually, if you look at sequential quarters, we've been step by step increasing. And so this is not a one quarter miracle in a sense. But second half of last year, our operative EBITDA was 13%. And then when you add the IFRS 1% on top of that, we were 14% and now we were 14.8%. Not that significant jump, but a jump to go right direction. If you also look at the bridge, 11,000,000 of increase of raw materials, so tells the story. So we've been able to take over €30,000,000 prices up and that was desperately needed, but it wasn't this quarter that made it happen. So something like this continues, but obviously, price increases in some areas are coming now to the peak and we start to look at the market, especially on polymers is some area where we need to be careful. Cogulants, we still need to work hard. Whereas the price split goes in I and W, we don't give that out that information, but oil and gas business is mostly polymers. So we had good development the last nine months in that area. Okay. Thank you. My second question would be on the raw material outlook. And we know that the oil price has recovered, but then the propylene price seems to be still weak and that probably should be good for you. So can you give any more comments on the kind of you said that Q2 still looks good, but what should we think about kind of the rest of the year with this oil price volatility Well, and so hopefully now, the sort of peaks and downs have eased off. So it's percentage points that we see movement. But I wouldn't focus only on polymer based raw materials. That's less than a €600,000,000 revenue for us annually. So there's €1,800,000,000 of other products out there. So we need to look at that basket. As we have said, this year raw material basket on average, we expect it to be a bit higher than last year average was. But we're in much better position now to take that challenge on and rolling that into the process as the game goes forward. All right. Thanks. And then a question on the sales growth in Pulp and Paper, which was lower than we were expecting because you exited this business. But I understood that you will be using this capacity produce other products. So would you kind of see acceleration in the growth in the coming quarters? Or how should we think of this? Well, that was the one component on the operative EBITA and EBIT improvement in Pulp and Paper. So we took volumes down by two thirds in that business and get one third, but the yield is totally different and some fixed cost was out. We've been doing similar type of things elsewhere. We have been capacity limited in some areas. So if we can't get prices through, we might lose a business semi intentionally. And that takes capacity utilization down, but then we have possibilities to offer that same capacity later to new customers. So like Petri was explaining, it's value over volume at the moment. And so picking and choosing which fights we want to win with our limited capacity. Thank you. My final question is on the earnings contribution from the joint venture and the investments that you are making. Can you comment on those, Like what happens after Q1 during this year? Q1 this year, those investments so the specialty polymer line in Rotterdam area will come line second half of this year. We start ramping up Q3, everything going well. Not much contribution to this year, a full contribution to next year. Same thing for the sizing plant in China for wax ramping up Q3 and then a very little contribution in Q4, full contribution next year. There are actually a couple of questions from Ansi Kibinemi, SCB. So I'll tell them here. Answer is asking, could you give some kind of indication on sustainability of the profitability in Industry and Water? If we go back, Industry and Water margins have never been close to Q1 level. Also taking into account municipal and industrial and oil and gas history, should we expect similar positive trend in group price versus variable cost spread going forward? And in parentheses, euros 20,000,000 spread in Well, it's good to remember that while we are making now the progress we have wanted to make, it's been systematic work for over one year and it's coming in quarter by quarter. And if you look at sequence of quarters, you can see that. We have had two really terrible Q1s last previous two years. So we've had a bad start to the year, and now we had a better start to the year. So the comparison is pretty easy. The 16.8% is at the high end of our 15% to 17% window. And as we now start the OilSense deliveries through Q2 and Q3, we will see some delusion in the margins, but we will see a positive impact on the bottom line from that business. And when you refer to oil and gas, we actually had oil and mining also in there and we had other industries, so it's not really comparable. But we are coming back to the 2013, 2014 levels and above that in our Oil and Gas profitability. And obviously, 2015, 2016, 2017 and part of 2018 was a mess because of the oil cycle that we saw. Very good. And then the next question from Anse Kivinem is, in early twenty nineteen, you saw the raw material price inflation perhaps somewhere at mid single digit territory. Is this still your view? Or are you seeing more pressure on oil price driven raw material basket? Hard to predict because there's a couple of things. There's the oil and gas market price natural gas market price. Then there's the propylene price development, which is a comes from the feedstock, but also supply demand balance is driving that. And now we have had truly some serious availability issues of acrylonitrile because of some supplier plant breakdowns, and we're at FM at the moment. So there are so many components there. But I think the big cycle is over. Now we will see moderate moves one way or the other. Very good. Then the third question is quick and easy. What was the IFRS 16 impact on free cash flow in Q1 versus Q1 twenty eighteen? And the answer is €7,000,000 Operator, let's take questions over the phone. Our first question comes from the line of Ben Gorman from UBS. Please go ahead. Hi, guys. Thanks very much. Two quick ones, that's okay. One on OpEx. The expansions over the course of this year on solar recovery and AT and T, what do you expect in terms of a headwind to the EBITDA line as you're going through this year and next year on those? And also The U. U. S. Plant that you're planning to build as well. If you could just sort of clarify the headwind to earnings in the short term from that. And secondly, I know it's very early days, but have you seen any tangible changes in the market yet from the BASF and Salenis integration? Maybe just the price behavior maybe? Those are those two. Thanks. Okay. Morning, Ben. It was breaking up a bit, but hopefully, we caught everything. So the market competition situation behaving pretty much like we are. Everyone is using the same raw materials. So similar behavior. I won't comment the BASF Solenis situation, but remains to be seen how they behave in the markets. Everyone is announcing price increases as you can see. And we obviously want to be in the lead also in that. So that's what's happening. To the EBITDA from the ongoing investments, I think there's not much negative or positive impact. Some positive in Q4 from the Rotterdam and from the Chinese investments as we get them ramped up, but only a small positive. On the cost side, they're still in CapEx phase. So that's the main situation. Did I miss something? Yes. If I just continue, you're absolutely right on EBITDA level. And I think Ben's question was on an EBITDA level, no headwind. But I like to use the point of reminding that we have started depreciation on the AKD plant in China, and we are already amortizing the purchase price for the Chinese joint venture. So, on EBIT line, there is a clear negative on 2019 and this will turn to positive then once the plant is fully up and running and starts to contribute on the EBITDA line like Jari was talking about from Q4 onwards. So this is partially explaining the dilutionary impact in Pulp and Paper EBIT line. And the next question comes from the line of Harry Tasman from Nordea. Just one question. Talked quite often, you said this sort of volume to from volume to value based selling, and that seems to work. So I'm wondering if you could explain a bit on how has there been kind of a clear change within the organization? Or how do you measure it? Or how do you how concrete this change is? Or I mean, what could you say about that? It's very concrete, and it's been ongoing for over a year. But as we look at the mass of annual contracts that we have, it goes gradually until we start getting momentum of more than half of contracts renewed. So basically, what we're saying that we go into bids in a way that if we don't get our prices, we're ready sometimes to walk away. And especially, we've been applying that a lot in Industry and Water North America, significant price increases, I mean, big double digit price increases have been introduced. And that's the way the market continues. And sometimes we lose a bit of volume, but it's not worth keeping it at a bad price. Okay, okay. And then very recently, there's been some of the forest companies suggesting that, well, in their efforts to cut cost, they could be kind of working to renegotiate some of their chemicals contracts. And so basically so there is obviously, it's an ongoing theme, which happens all the time. But do you see that sort of happening particularly forcefully at the moment or not? Well, it's obviously a delicate balance and negotiations are negotiations. But if the customers are listening to that, you didn't let us raise the prices, so I'm not about to drop them now. Meanwhile, let's take a question here from Petri Kostovsky, Inderes. He's asking, there are indications of short term oversupply in caustic soda market and possibly pressures on prices. Do you share this view? And how do you see this affecting Kemira? Well, the prices have come from excellent to good in the market. And we only sell and produce and trade caustic in the Nordics. So, the Nordic prices are still totally different from the Central European or U. S. Prices where we don't even sell caustic. We produce about 20% of the caustic So we trade the rest. So it's a cost plus business in a sense for us. So I don't see a big impact on that. And our self made caustic is very sought after in The Nordics. That's clear. There are no further questions. So this concludes the complete Q1 session. Thank you for your participation, and have a good day. Thank you. Thank you.