Good morning everyone, a very warm welcome to Kemira's Q4 2022 Results Webcast. If you don't know me, my name is Mikko Pohjala from Kemira's IR. I'm here today with our President and CEO, Jari Rosendal, as well as our CFO, Petri Castrén. As you surely have seen, we have published our financial statements bulletin today for 2022, with a very strong set of results. First, we will start with a short overview by Jari. Then we go to Petri's overview of the financials. Then we hand it over to you for some questions. You have the ability to ask questions either via the teleconference line or then via the webcast tool. I will moderate those. With this, Jari, I'll hand over to you.
All right. Thanks, Mikko. Good morning on my behalf also. What a year we have behind us. I mean, very challenging operating environment with a lot of disruptions, huge in- cost inflation, energy crisis, at least in Europe. Yet the Kemira organization has managed this really well and work around the problems, find workarounds and solutions really fast and this has resulted into a record result this year. I'm really proud how our organization has overcome these challenging conditions where we have been operating. Highlights for the year, a record year for us and record high revenue and operative EBITDA. Continued improvement in customer satisfaction and employee engagement. Smooth operating performance despite all the disturbances.
Our delivery accuracy has been really high and it has taken a lot of effort from the organization. In March, obviously, we exited the Russia/Belarus business, and that went smoothly and now we're fully out. Strategic focus on new growth accelerator has been formed and we will drive the bio-based and new application areas with the specified team that 100% focuses on this and helps our regular commercial teams in both segments. Also, during the year, we committed to a Science Based Targets initiative, and that led to increase our Scope 1 and 2 emission targets. We are on our way there. We actually decreased our Scope 1 and 2 by 5% last year.
If you look at a bit of a longer spec, perspective on how Kemira has been able to improve year-over-year the last five years, and you look at the revenue, it's grown. Obviously, last year, the revenue grow much on pricing, not so much on volumes, but still, clear growth. Operative EBITDA in EUR a clear jump ahead, and so good progress. When you look at the leveraging ratio, so, balance sheet is really strong, and we are fit for a fight. The enablers, why have we been going to this direction since several years is, one is the growing employee engagement, of them getting self-confidence, of being solving these things, of managing the pricing.
Luckily, our customers have been taking the higher prices also to their prices, so that has worked well and the engagement has helped people to be motivated and solve these problems. That has led to a significant increase over five years in the customer satisfaction and feedback to us and delivery accuracy, technical know-how, process know-how, problem-solving are the issues that we can help our customers with and they indicate that we have done a good job and that then has led to this financial performance and so those are critical enablers also going forward, not knowing how the economy now then this year is going to develop. Going to the financial highlights of the year on a group level. Really strong Q4.
If you look at the full year numbers on the right-hand side, quite a robust growth, especially on the EBITDA line and still holding the margin at 16%, which is well in our 15%-18% window. Last quarter was over 18%, so actually, over the window, but our window is for an annual margin, not a quarterly margin. Q4, EUR 968 million revenue, up organically 30% and operative EBITDA a big number, EUR 177 million and 18.3% margin. Both segments improved their profitability clearly, so it doesn't come from areas our base business is in really good shape and in an improving trend.
Revenue growth is driven mostly by sales prices, and then we have some electricity adders and caustic market price has been high and we're a producer of caustic here in Finland, so that has benefited us. Those will ease off, we have then other components coming in and contributing more. Cash flow improved clearly. We released in the last four months of the year cash quite nicely and networking capital came to a reasonable level in this situation and cash was there. EPS was EUR 1.5 per share, and the board's dividend proposal is EUR 0.62 per share. A really strong end to the year. Looking at Pulp & Paper, really a record year with a exceptionally strong Q4.
Revenue EUR 556 million and 28% organic growth, driven here also sales prices and in the pulp chemicals, which includes the caustic sales and where market prices were extremely high because of some disruptions in the value chains. We started to see some softening of demand in Central Europe and in China. China still had the COVID lockdowns most of Q4, so that was there. But pulp business is strong and demand and volume demand for us is strong there. Operating EBITDA for Pulp & Paper, EUR 111 million, and a margin was 19.9% for Q4. Industry and water performed also in a strong way.
Municipal market, as we have said before, really strong and solid and not very volatile. Industrial market strong also in water and oil and gas, especially shale has recovered. We still have some work to do with the profitability, but it's going to the right direction. INW revenue EUR 412 million, growth of 32% organically, and EBITDA EUR 66 million. If you look at those curves, that's a good number. Margin also started to increase in INW, so good to see. As a reminder, in Q4, when you look at the top line, the oil sands deliveries typically start slowing down and stop in October.
For the winter months, there's no deliveries there until then April, they start again when the ice melts on those tailings ponds that our chemicals are used to treat them. That's not a worry, that's just a seasonality that is normal in INW business. Sustainability also, which is high on our list. We watch this as importantly as we watch our numbers. These are our key performance indicators, the five of them. People safety, we had a tough start to the year. The weather conditions were very icy in the Nordics and North America and a lot of slip, trip, and fall type of accidents. Luckily none very severe.
Towards the end of the year, we had special programs, and we improved on that. Actually, our TRI was 1.7 in the last quarter of the year. Run rate needs to continue. People, diversity and inclusion, we have had several employee groups forming to develop this forward. And it's a important thing for us because we are very multinational. I think, over 40 nationalities working for us. People need to feel that they can be their self and work and express their opinions freely. That's what we want to drive and get everyone's brain into the game. Water, obvious one for us as a key KPI. CDP rated us B.
It's the same B as previous year. The expectations have risen, so we were able to keep that B level and even if we have tougher targets to meet. In my books, we improved in that area also. Circularity, we use a lot of circular and secondary products from other industries and turn them into our products. This way, the raw material base is there. Also, the bio-based program is going well ahead and we are driving that, and we have that new technical and commercial unit that will be focusing 100% on these new areas and accelerating the launch to the market. Climate, which is an obvious one, Scope 1 and 2.
I talked about the SBTi, we improved 5% on the emissions compared to 2021. Last but not least, so focus areas, we need to retain organizational operational agility as well as the high customer satisfaction. There is really rapid movements in the markets and anomalies. Our organization is well equipped to take that into account and react when needed. Influx and delivery pressures, those are easing off now some, but in some pockets we still have it. Energy, although coming down now in, especially in Europe, it's still on a higher level than before, so we need to keep an eye on that and focus on cost consciousness. We have two bigger investments ongoing.
In Uruguay, our bleaching expansion in the back of the UPM investment, that will be starting up this spring. Then ASA sizing line expansion in China. That is not only for China, that's a global source for our ASA sizing products, so that is progressing quite well. If I look at the strategic priorities, we have many, but growth pockets in our existing business, obviously we need to keep taking care of our base business and find those growth pockets, but we are focused more on M&A and especially in the water area, is what we are interested in.
Bio-based I talked about. Then explore areas of new application areas and one emerging one is the textile fibers, making wood fibers into textiles or making other fibers into textiles or recycling textiles. That's really emerging and we're talking to number of players in that area. The other area is services and especially digitalization services. You saw that we made a acquisition of a digital player here in a few weeks back. We also appointed a new position to the Kemira Management Board. We haven't had a strategy head on that level.
We have had segment strategy people and a corporate strategy people. Now we get a senior person there, and we just needed to add capacity there and get a senior person from the chemical industry to add there because we are looking at more expansion in our area. We need just more hands and brains to help us there. I conclude my four short no- comments here and ask Petri to come and give more on the financials.
Thank you, Jari. I'll also try to keep my comments relatively short so we have time for Q&A. Really, regardless of sort of which primary statement you look, I think our re-report is very strong. Record profitability, as Jari mentioned, driven by our ability to pass on price cost increases to prices. Very strong cashflow and then balance sheet strong, which gives us strategic optionality and optionality to drive our business further. Let's start looking at the profitability drivers. Organic growth, 30% in Q4, FX was a positive 5% that gets to the 35% reported growth rate. Volumes did come down 8% in Q4, and pretty much for the same reasons as we said in after Q3.
Basically the exit from Russia and Belarus, like Jari mentioned, the China and APAC volumes came down because of the COVID lockdowns in China. Also there was some impact from the macroeconomy. Pulp & Paper industry clearly faced some customers faced curtailments. Some were energy driven in Europe and there was also some areas of where our customers or their customers in the value chain, there was a destocking of product. We flagged in Q3 that high caustic prices were known already at that time, and that they would be impacting Q4, and indeed, we benefited of caustic in terms of higher revenues and higher profitability.
If you look at our cost price performance, that was very good across the board and it was visible in the profitability improvement in both segments. We improved margins sequentially in just about all key product areas and product lines, particularly as the input costs started to level off again sequentially. Year- on- year still going up significantly, but sequentially there was a leveling off and even some decline in some areas. Fixed costs increased by EUR 31 million during the quarter and more than EUR 70 million for the full year. About half of that is actually higher incentive accruals.
It's sort of obvious that incentive accruals are high in a year like this when we did exceed our targets and, particularly if you look at where we thought that the year would be at the beginning of the year. Travel also increased from 2021. Obviously 2021 was impacted by COVID related travel restrictions, so that was an artificially low level in terms of travel, and it started to rebound, particularly on the second half of the year. Full year cashflow really shows how good this performance was. EUR 900 million of additional revenue with an increase of EUR 150 million roughly in terms of profitability on EBITDA line. This actually indicates more than 16% drop-through margin.
If you sort of look at it, that's a big improvement in the drop-through margin over the year. Initially, the drop-through margin was around 10%, but now we are actually really, really helping our results there. If you look at in Q4, obviously significant gap opened between the sales and cost curves. Again, worth repeating that when you look at particularly the chart on the right, even as the dark blue line is climbing down, it's still above the horizontal line, meaning that the costs increased EUR 140 million, EUR 141 million to be exact, year-over-year. It's just that the pace is slowing down.
Energy costs came down during the quarter, particularly in December. Actually this trend has continued in January. This will if it stays that way, it will impact the pricing of our formula and market priced products, particularly those which are highly energy intensive now in 2023. Caustic price, which Jari already quoted or mentioned, we already know that the market price is coming down from February onwards. This will start to have a leveling impact from the high levels where it was in Q4. Regarding balance sheet, I mentioned very strong balance sheet and gives us optionality. Net debt came down by EUR 80 million in a year.
I think this 1.3 leverage ratio is probably the lowest it has been for a long time, if ever in Kemira history. There's just a half a turn improvement in 1 quarter alone. EUR 100 million net working capital improvement in Q4 obviously helped capital efficiency and drove cashflow from operations to EUR 400 million. That's the number you can see here. Cashflow typically is quite seasonal for us, and I've been saying this for a number of times, and you see the seasonality in the last four years.
Obviously this year was, sort of this was even amplified, or the seasonality was amplified because of the high increase or very rapid increase of raw materials and the supply chain difficulties, which particularly impacted the first half of the year. There was a fair amount of net working capital buildup in the first half of the year, and we were able to release some of that in the second half. Quite a seasonal strong seasonality in terms of our cashflow. Really no special tricks there in just the seasonality that we have. As a forward-looking statement, I think we can say that the seasonality will probably continue next year as well, or this year, 2023.
We already know that the, on the back of the very good year, we are facing significant cash outflows for tax payments. We already actually made a significant tax payment in Finland in January. And obviously also the higher incentive approvals will be paid out mostly in Q1. That will impact negatively Q1 cash flow, but nothing out of the ordinary in a way there. Cash flow was also helped by a sale of a manufacturing unit to a customer. This was in the quarter. And that also resulted in a gain, which is reported as an item affecting comparability. It's not part of our operative result, but as a one of the IAC items that we are disclosing in the release.
Capital expenditures landed where we expected, around EUR 200 million. Again, as a little bit of a guidance for 2023, we see a somewhat of an increase there, maybe 10%-15%, again, depending a little bit of the timing of the projects. It's also impacted by general inflation. All the costs, as everybody knows, whether it's labor costs or piping costs, everything is going up. That's the guidance on CapEx. Jari mentioned the CapEx projects coming to completion this year and early next year, the bigger ones.
I have a slide, I think I have this roughly once a year, about our off balance sheet, supplementary pension fund. Here the, I think the key statement is that, regardless of a challenging investment year, our fund continues to be very well-funded, in fact, I would say overfunded. As a background, this fund was closed already more than 30 years ago in 1991. It is in a run-off phase. Our liabilities will go down roughly EUR 10 million each year. Currently, market value of assets held by the fund exceed the liabilities by EUR 90 million. There's an expectation that over coming years, there will be capital returns to Kemira as the liabilities come down.
I want to also mention as a highlight for the fund, we received zoning approval for a real estate project that we have here in Finland, in Espoo. It's almost approximately 5 hectare real estate development and it will be developed into almost 90,000 square meters of residential space and 25,000 square meters of office space in two phases. Kemira Real Estate, or Kemira R&D facility is currently located there, and it will also be anchor tenant of the new office complex. A further advertisement for the project, it's actually very interesting concept with a R&D chemical shared lab. It's a good place for startups and both for established businesses.
These first phases of the sales for residential and office space were both completed now in January of 2023. Dividend, according to our dividend policy of paying a competitive over time increasing dividend, we're increasing the dividend to EUR 0.62. Again, it will be paid in two installments like in the past few years. The board will only decide on the payment date of the second installment, so it's not in any way conditional on board's approval. Again, assuming that the AGM accepts the board's proposal. Outlook. First of all, I think it's important to note that we see end market demand for our businesses as resilient regardless of the significant uncertainties related to the macro environment.
Because of this macro environment, there is an expectations that our volume demand or market demand measured in volumes overall will decline somewhat. Regardless of this good performance in 2022, we still have places where we can improve profitability. One such business is our oil and gas business. Jari already mentioned that it's improving, but it's not quite where we want to be. This is an area where we expect the business to grow with growing market, and it needs. We expect a clear improvement in profitability in the range of EUR 15 million-EUR 20 million EBITDA improvement year-on-year. As a summary, we are giving a fairly broad guidance on outlook because of these uncertainties.
Revenue expected to be between EUR 3.2 billion and EUR 3.7 billion, and operative EBITDA between EUR 500 million and EUR 600 million. With that, I guess we're ready to move on to the Q&A session.
Good. Many thanks, Petri.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad.
Good. Many thank you for the update, Jari and Petri. Now we're ready for your questions. As the instructions already were, if you're on the audio line, do press star five to be placed on the queue. We'll start from the audio line. I have some couple of questions here on the webcast tool, we go to the line now.
The next question comes from Martin Roediger from Kepler Cheuvreux. Please go ahead.
Thank you and good morning. I have three questions. Question number one is, can you tell me the reasons for the higher profitability in industry and water in the fourth quarter? Second question is on Pulp & Paper. Can you please again talk about the situation in caustic soda? I know it's a raw material in Pulp & Paper, but mainly a trading material because you produce it partly by your own and you have cheap access to energy in Finland, which is helpful for you. The third question is on the general market, and you already touched on that with the outlook. Can you provide a bit more color on the demand patterns, i.e. what do you see in terms of underlying demand at the beginning of this year?
Do you already see some restocking at customers after Chinese New Year is over and herd immunization is established in China? That would be my questions.
I'll start with the market. Really there's been, in other industries also, but in our customer industry, the de-stocking was. It's normal at the end of the year but it was maybe bigger this time because the inventories were in various value chains were quite high due to the logistics challenges. Now, that de-stocking is taking place still and the word that we get that late Q1, early Q2, things start coming back as the de-stocking has taken base. Our sort of base business demand is calm. It is good. I've said earlier that pulp business, we serve the best players in the industry, not all the players.
They're sort of the last man standing and competitive players. We expect that to be pretty solid. The water treatment business is not gonna go anywhere, so the COVID 2020 spring showed that that's going to be there and the raw material base is not increasing anymore but on a higher level and let's see how it starts to develop. That's there. Maybe the packaging industry is now more of the de-stocking phase at the moment and let's see how it comes back. INW just throughout the year improved their performance on the water side, on the oil side.
There were some big shocks to the business in some contract changes of raw material where long-term contracts for raw material ended with fixed prices and their new prices stepped in so that there was pre-work on taking that on, but the work continued throughout the year and the run rate is now much better in Q4 and demand has been good. This has happened especially in Europe where there's been even lack of certain raw materials due to disruptions in the value chains and we've been able to overcome those in Q3 and improving in Q4 and going into this year. The question on Pulp & Paper.
The base business is in good order, and we know that the electricity adders and caustic will come down but we have other components coming in. Because of the energy thing in U.S. Also we were trailing with our formula pricing all year with ever-increasing electricity prices. When the previous quarter's electricity price went into the next quarter's pricing that was too late. The price was already higher and our profitability there wasn't as good but that has now eased off during December, January and going to the right direction, so we should see benefit from there. As Petri said, we expect the run rate of things going forward to be a different mix of run rate but still on a similar level.
The one follow-up question that Martin had was on the caustic soda. Maybe a brief explanation what do we do with caustic soda and what was the impact on last year?
Petri can answer the numbers or the quantities but there's two things there. We import a major part of it and trade it to our customers. Why do we do that? Because we have the infrastructure to do that. Caustic soda is a funny product because it already freezes at + 10 degrees Celsius so you have to have heated tanks and logistics and so on to deal with that and we have the infrastructure for that, meaning ports and big volume tanks and heated tanks and truck fleets and so on that service us.
The other component is that we are the only manufacturer of caustic soda and in Finland and obviously our manufacturing cost hadn't go up but if the market price goes up then we get a tailwind. The other thing is that when you make caustic soda, you free up chlorine and we make the chlorine into hydrochloric acid and there was a demand for that also. We had a captive need but we could sell it also in the market.
So, we got a double whammer from that and it will come down to a reasonable level but because of the LNG prices in Europe now at EUR 55-EUR 60 versus EUR 20-EUR 30 before this crisis, caustic soda will stay on a higher level as a market price. Let's see where it settles but it will stay on a higher level because of the natural gas prices staying on a higher level.
Do you, Petri, want to comment on the Q4 impact or last year impact?
Well, like we mentioned it, the caustic impact was really strongest in Q4 some EUR tens of millions. I think we'd sort of decide that we don't disclose individual product pricing or impact. Some EUR tens of millions. Maybe it sort of it helps you to understand that about half of the caustic's annual impact came in Q4.
Thank you for your question, Martin. Hope this was sufficient. I propose we take the next question from the line.
The next question comes from Robin Santavirta from Carnegie. Please go ahead.
Thank you very much, and hello everybody on the line. My first question is related to the Pulp & Paper segment. You have very strong performance, earnings-wise in the quarter. I think when I look back at Q4's five past years, you're three times almost above the past five years' average for Q4. I can see your volumes are down partly probably because of Russia, but as I understand underlying volume is also soft. The question is related to sort of what are the key components, I understand caustic soda, but from the last answer you had, I understand that is apparently not the big part of that quite significant earnings improvement. I understand you have formula-based lags, so profitability is still going up in some areas.
What are the sort of key components driving the profitability then if it's not caustic soda, if you're still lagging in some formula-based areas? Secondly, did you, Jari, say that the current sort of run rate is where you expect to sort of start the year in Pulp & Paper earnings-wise?
Well, not giving a forward-looking thing, but the run rate at the end of the year was quite solid. Yes, some formula price components will Q1 come down, but not dramatically. So, so it goes to show that we don't talk about electricity adders and caustic soda. The base business is in strong situation, and it goes to show that we've been doing a catch-up game like we've been telling previous quarters, catch-up game in the pricing. Every time we raise prices the raw materials run away from us. Now that's like Petri said, that's flattening out on a higher level and in some areas coming down.
Logistics prices have come down drastically and availability has increased. The base business is in good condition in Pulp & Paper.
Let me clarify a little bit if I was too ambiguous with my first answer on the caustic soda. It's not immaterial that with the caustic soda impact. If you look at sort of consecutive quarters from Q3 to Q4, and again, if I remember now Q3 numbers, I think there was an EBITDA improvement of roughly EUR 25 million, EUR 23 million-EUR 25 million or so. I think about half of that sequential improvement is explained by caustic. That gives you a little bit of a, little bit of more guidance.
As you know, Robin.
All right. Thank you.
... the majority is in Pulp & Paper of the caustic soda, just to clarify.
Yes. Yeah. The vast majority.
Yes.
I understand. Thank you very much for that detail. Can I then ask you about the sort of energy setup you have, which seems to be sort of quite attractive, given your stake in TVO? Maybe this is a bit detailed, so if you don't remember exactly, it's okay. But in Pulp & Paper, how much energy do you consume on an annual basis, and roughly what is your self-sufficiency?
If I remember right, and that's in our reports, in Finland and Nordics, we probably consume 1.3 TWh, 1.4 TWh. Now our backward integration, Petri, is 50% or so, 45%, 50%, and then we have some PPAs on wind and so on. It's the hedged market. Obviously when next week, hopefully Olkiluoto 3 starts up, then it goes up quite a bit and goes back to about 80%.
Yeah, I think the Mankala share is slightly lower. I think we're now below 40% before Olkiluoto 3. When Olkiluoto 3 is operating, we are getting with Mankala electricity to about 70% or so. The electricity forwards will take us. I'm sorry, the renewable energy contracts will take us further sort of, fixed of sort of a natural hedged, if you will, or natural, sort of, own cost. Then the rest is looked at either open market spot purchases or on, protected through forwards on the market.
Okay.
Also we are planning to increase the amount of renewable energy that we are sourcing in the coming years.
Robin, you can find it in our reports, quite detailed broken down.
Yeah.
Yep.
... and you can also. I think I gave you some of the numbers in the capital markets day presentation. I don't remember exactly them, but take a look at there.
Yep, yep, yeah, thanks. Can I ask this question then? If I look at bleaching and pulping chemicals and only look at that segment, what is roughly the amount of the cost base that is energy?
Well, we don't disclose the unit prices or anything like that, but the bleaching chemicals, by the way, caustic is a pulping chemical also. Those consume huge amount of the total amount. Our other plants are not that energy-intensive, whereas these really are.
Yeah.
Right. Right. Basically that is the segment where you have a very good competitive situation with the current set-setup.
Correct.
I think we have given a guidance that roughly one ton of sodium chlorate consumes 5 MW of electricity.
Good. Thank you very much for that detail. It helps. The final question I have, and maybe sort of, was Martin had already sort of touched upon this, but what we can see in Pulp & Paper in the at least in Nordic companies, is that they talk about destocking now, so Q4 volumes, as we can also see in your numbers, a bit on the soft side. What... Perhaps in Q1, they have said still some destocking. The question I have is what is your view? Is this a destocking cycle basically European Pulp & Paper, which then sort of would point to a bit better demand, in Q2 or at least H2?
Is this then underlying sort of softness or weakness that just first is in the form of destocking?
Well, it's still hard to say which is which, but there are two components. There is the industry and consumer demand for packaging and obviously consumers have been a bit more careful with the energy prices inflation and so on, interest rates going up. There has been definitely the destocking in the value chain on the producers, boards, distributors, customers. We haven't been fully able to quantify it. We know that there has been couple of weeks shutdowns of some packaging lines or board lines, but they have now started up again. Did they shut them down because of demand, or did they shut them down because of high gas cost?
Again, that's hard to say because there are several hundred machines out there in Europe. Those are the components that resulted to this. I think the destocking will be there, and it hasn't happened so much in pulp. It has happened more in board.
Right. Thank you very much, and congrats for a very strong quarter.
Thank you.
Thank you, Robin.
Thank you.
I believe we still have questions on the line, but I have a couple of questions here on the webcast tool, part related to what Robin asked from the sort of raw material side. This from Antti Koskivuori: "How do you see variable costs progressing near term? Should we expect Q1 cost level to be lower than what it was in Q4?
Well, where we're laying out the assumptions for the year, I think we are saying that we expect that the raw material environment or variable cost environment will be leveling off and depending a lot what happens to the energy because that energy drives a lot. It could come down already in Q4. Clearly, for the year, we expect them to come down, and some areas where we already see continued coming down in Q1. We probably mistakenly started calling off the peak I think last summer, and we were wrong. I'm cautious of calling that peak is behind us, but now it looks like it is.
Thank you, Petri. I'll take one more question from the webcast tool, then we can go back to the line. The next question is from Cesare Colombo: "Please could you elaborate on your 2023 guidance? What could drive the lower or the top of the range?
Well, I think it sort of follows what I just said 'cause we do have a fair amount of formula-based pricing and market pricing, which is driven by energy costs. Energy cost in the last couple of months, both spot prices and forward prices have come down significantly. As consumers and as we certainly hope that that's the case. I think there's a lot of good news being built into those forecasts. There is probably some downside on that which could impact again more negatively on the energy costs so that the energy costs could go up during the year. That would drive input costs and because of our link prices are linked to input costs, that would drive revenue.
I think that's clearly one, what happens to input costs, particularly energy. The second of is market demand. As we note, we expect volumes decline somewhat. If you read and follow the various economists, some time ago, couple few months ago, people were expecting are we heading towards a severe recession or just a mild recession? That has now turned that increasing amounts of people are perhaps more optimistic that Fed may be successful with the soft landing in the US and even Europe may avoid recession perhaps entirely. Highly uncertain. I think we are sort of still rather on the conservative side on the macro picture, that's what drives our volume market decline assumption.
If that ends up to being too conservative, that could drive volumes and then obviously, revenues up. I think those are the two key ones.
Thank you, Petri. I think with this we go back to the audio line.
The next question comes from Anssi Raussi from SEB. Please go ahead.
Thank you and hello everyone. I have a few questions and of course first congratulations for your great results. I go one by one, and the first one is about your EBITDA level. I understand your margins will be supported by longer term contracts and still elevated prices in 2023. If you had to speculate, how do you see 2024 like? I mean, if the spot prices remain at the current levels, would you have lower overall prices in 2024 in your contracts? Basically how much we are still seeing the impacts of 2022 prices in your latest guidance?
Look.
Trying to figure out the long-term levels here.
Yeah. We gave a EUR 500 million-EUR 600 million range, and that's what we can tell you at this point. Hopefully, when the year goes forward, we can improve that guidance. That's the situation where we are now based on what Petri just explained on the various triggers that are in the market, which are many.
Yeah. I think the good thing is that we don't have to speculate here on 2024. Once the year progresses, at some times when we get closer to 2024, we start again sort of identifying or spelling out the factors which may impact positively or negatively, 2024. I think the macro is the first thing we need to understand where we're going before we start speculating on 2024.
The key points which we try to beyond this sort of a speculation where short-term profitability is going, is that fundamentally our business is in good shape. Our end markets are quite resilient. Our oil and gas business is on a growth mode. And the water business is long-term growth mode. Pulp & Paper business perhaps long-term more modest growth. We see good strong end markets for a long time, and we're in good shape with good customer mix and going strong.
The other thing is that it seems that Europe has now solved this gas crisis, and the mild winter has helped, and the flow of LNG coming in has surprised everyone how efficiently that has happened.
Let's remember that gas prices were EUR 20-EUR 25 and now they're EUR 50-EUR 60 , and that's not gonna go away. And that goes into the value chain of energy-intensive raw materials in our products and so on. The other thing for 2024 is the war still on or not? Who can say, and that might have if it's not on anymore, it might have a effect on European economy.
Yeah, I understand long way to go before 2024, just trying to figure out because like your EBITDA level is something like EUR 150 million higher than your original guidance entering into 2022. Just thinking if this is the new normal or not. Yeah, difficult to estimate at this point.
Well-
Uh-
Yeah, you can look at our guidance EUR 500 million-EUR 600 million. That's the best we can give. At least it starts with a 5 and not a 4 anymore. It's gone up, then you can look at that window.
Yes.
Twent-
The second question is about-- Yeah, sorry.
No, I was just commenting that 2021 we were exiting a severe COVID year with lots of uncertainty of where COVID is still going on, so. All right, the next question.
Yeah, I understand. Yes, you mentioned your real estate project in Espoo.
Mm.
What kind of financial impacts this project has, and when do we see these impacts?
This is project that is actually in our pension fund, so it's off balance sheet right now. What I was saying is that we have EUR 90 million mark-to-market value, sort of over-funding currently. Therefore, as the liabilities wear off or phase out or over time, the excess capital will be returned to Kemira. Simple math. Today, if all the liabilities would wear off, that would be EUR 90 million. So there's probably, let's call it a EUR 50 million-EUR 100 million capital return over coming years. It's the coming years is probably between five to 10 years. So it's not an immediate. The Kemira, on Kemira's P&L, it will be only visible when the capital is returned.
The obviously other benefit of that is that as long as the pension fund is in good shape, there are no sort of, I forget what the English term is, but no payments going into the pension fund for the 2,000 pensioners that are still benefiting of this supplementary pension. Yeah, maybe that's it.
Anssi, for your consideration, we've done a number of returns in recent years. EUR 10 million last year, and then a couple of sort of, two in addition to that during the past five years. Let's go to your next question.
Actually, that was all from me.
Okay.
Thank you.
Thank you.
All right. Thank you, Anssi. Let's take the next question from the audio line, if we still have.
The next question comes from Isha Sharma from Stifel Europe. Please go ahead.
Good morning, gentlemen. Thank you for the presentation. I just have three questions left, please. The first is, it's more of a statement, and I just wanted to confirm it based on all the comments that you have made. If we look into 2023, is it fair to say that industry and water, you still have some lag effect on the pricing because of the long structure of contracts? Just like we have seen in the last cycles.
Mm-hmm.
like 2018 and 2019, the pricing still to come in 2023 and the falling raw material costs then allow you to have higher profitability, which should contribute to earnings. That's the first confirmation that I request. The second one is, if we think about your structural or cost advantage because of the electricity backward integration in Finland, is it fair to say that on a medium-term basis as well, we are talking about structurally higher profitability than Kemira has been able to deliver in the past? The last one is on your balance sheet. You have a very low leverage now, as you also pointed out. Can we expect acquisitions acceleration during 2023? Can we expect something bigger, or would you stick to more technology-driven bolt-ons?
Okay.
Thank you.
Your first as-assumption is, pretty correct.
Yeah. If I take the first two questions and leave the strategic question to Jari. The first question, long question, the answer is yes. The second question, now I forgot. Please, quick summary of the second.
The structural cost advantage on and the impact on your profitability.
Paper
... on a medium-term basis.
Yeah, I think that's fair. Because our cost base of electricity, particularly here in Finland, it's pretty much fixed because now we're getting so much of the electricity at fixed production cost. As long as long-term energy prices are higher than the, what they have been in the past, then that will give us sort of relative advantage. Obviously, there are other areas where we need to absorb the costs or pass on the price increases differently, but that applies to the electricity in Finland. I think confirmatory answer there as well.
The volatility will go up here in Finland for electricity because more and more is produced by wind. Yesterday was 40%, 50% of the total need. When the wind goes away, it really goes down. 5,000 MW can go to 100 MW, then the market really sort of the daily or hourly prices in the market, open market will jump. The volatility will be there, the question is about average prices. About our M&A ambition, we've been clear that we are looking at opportunities more than we have before, those are in the bios space, but especially in the water treatment space of adding potential technologies to our portfolio or consolidating our existing existing area.
Too soon to speculate on the sizes, but our appetite is bigger than before.
Thank you so much.
Thank you, Esha, for the question. Maybe now that you asked about capital allocation, Esha, I have one question from the tool here. Given the very... This is from Cesare Colombo. "Given the very good financial position, can you rank your priority for cash flow utilization? Dividend, CapEx, share buybacks, M&A.
Is this a poll?
No, dividend, we have a clear policy, and you see our track record. We will hold to that policy and to that track record. We do not do share buybacks. That's not our in our books. Our CapEx levels have been historically around EUR 200, and then depending on the timing of various bigger projects, it can go a bit over EUR 200 or a bit below EUR 200 if you look at our track record. M&A was mentioned, so that's one possibility of capital allocation.
Thank you, Jari. I believe we have one more question from the audio line, so we take that now.
The next question comes from Andrew Noël from chemical ESG. Please go ahead.
Thank you for taking my questions. I've got a couple, please. Just on oil and gas, if you could give me your high altitude kind of thoughts on this business. Obviously it's in growth mode, but others have come to the conclusion that it's, you know, now is a good time to exit. I wanted to ask, you know, in light of the energy transmission and sustainability, is this something you would sort of look to exit over time and... or is it an all or nothing business in that you feel like you have to offer many products, or could you sort of start with exiting small parts? That's the first question. Just the second is the arrival of Linus.
Just wanted to ask, what sort of impact do you hope that he has? I mean, did you feel like you needed to look broader, deeper, build a bigger pipeline? Or, you know, with Purolite, with Ecolab and Purolite in Japan, targeting this area, do you feel like the competition has increased a notch or two? Thanks a lot.
Yeah. I'll answer the latter one first. As I said, adding resources to our strategy team to analyze and look at our portfolio and how well can we develop, where can we grow, where can we organically invest, we've been more in the improvement and incremental improvement mode. Our strategic planning hasn't been so heavy. Now we add one key resource to help us with that. If we look at, for instance, M&A in the water space, then Petri's and my time is not there, whereas the new person can dedicate 100% of time thinking and analyzing and so on with his team of these things.
It's just adding capacity and adding chemistry understanding, industry understanding, and on a more senior level. Pretty simple that we haven't had a strategy head in the management team in 15 years. Now it's time that we come from the improvement mode to the strategic sustainable growth road, including M&A. Then we need a bit more capacity. Really hard to comment on the possibilities for the oil and gas, but we've been in the improvement road right now, and that's what continues. Everything is in this world is for sale, but everything is there for to buy also.
Let's see how this will develop, but we need to get the profitability in order first.
Maybe on that point, I think we can sort of say that, I think we have said it fairly clearly that we don't plan to do any further investments to add on capacity to serve primarily oil and gas. The current growth that I was referring to is actually really coming from existing assets and obviously that we want to utilize. Oil and gas is heavily on polymers. It's a common technology that cuts across all of our customer segments. There's clearly sort of a synergistic benefits of having a larger polymer business. It actually benefits our water customers. This benefits our Pulp & Paper customers, that we have a higher, bigger volume polymer business.
Nevertheless, we are not investing further, to grow our oil and gas business.
We just couple of years ago completed our emulsion polymer expansion in the U.S., and we have still free capacity there. That's that needs to be now sold out first.
Thank you very much. Thanks.
Thank you, Andrew. I believe now we've exhausted all questions from the line and also from the webcast tool. Many thanks for the question, also for being so active. Before we conclude, I'll take this moment to advertise our annual general meeting on Wednesday, March 22nd here in Helsinki. Please join. With this, we're ready to conclude. Thank you and have a nice weekend when we get there.
Thank you.
Thank you.