Good morning, everyone, and welcome to Kemira's Q1 2021 results webcast. My name is Mikko Pohjala from Kemira's Investor Relations. With me here today, I have our President and CEO, Jari Rosendal, as well as our CFO, Petri Castrén. Earlier today, we published our Q1 interim report, and we had a good start to the year with strong profitability. As is the tradition in our webcasts, Jari and Petri will start with an overview of the quarter, after which you'll have a chance to ask questions either via the teleconference or then via the webcast tool. Jari, please go ahead.
Thanks, Mikko. Welcome, everyone, on my behalf also. The start of the year was exciting, to say the least, with all kinds of hassles and disruptions, but still the year has started well. Operational challenges with harsh winter weather, logistic issues, material supply issues, and learning to cope with Brexit for the first time, and obviously COVID-19 continuing still in Q1 intensely in many regions. Demand, however, continues to improve in all fronts and can be described as good. Operations have been running well at Kemira, and Kemira organization has been able to find workarounds to most of the disruptions, with the exceptions of availability of our raw materials we have been up against, and therefore, the start of the year has been good. A short summary of Q1, as said, demand continues to recover nicely.
Revenue excluding oil and gas and FX is flat year-on-year. Profitability remains strong. Our AGM was held remotely in March, and the first installment of dividend was paid early April. Our sustainability work has been acknowledged with EcoVadis Platinum level rating, so we're among the top 1% of companies in the world. Outlook for 2021 is unchanged. Financial highlights, main figures. Revenue EUR 606 million, down 6%, but organic growth with FX only - 1.8%. This is quite a good comparison. Period was not affected by COVID-19. That's a good start compared to that. This was the first quarter where sequentially our volume for the first time grew compared to when the COVID-19 started.
Q1 operating EBITDA close to EUR 105 million and 17.3% of revenue. Last year margin was 16.9%, so improvement seen. Earnings per share EUR 0.25 per share, same level as last year. Looking at Pulp & Paper, had a good start to the year. Pulp board and tissue demand continued to improve and then was on a good level. Also printing and writing improved sequentially compared to Q4, actually around 8%. Organic growth year-on-year 2% as sales volumes grew. APAC has seen the fastest recovery, mainly as China is starting to be fairly good situation on COVID-19. APAC revenue grew 11%, which is excellent to see.
Pulp & Paper revenue EUR 370 million with a 17.0% operating EBITDA margin. A good start to the year, still under quite challenging conditions. Industry & Water did also quite well under these circumstances. Municipal market continues to be solid. Industrial water treatment market is gradually recovering. Also, shale market demand continues to recover and compared to Q4, meaning sequentially, it grew 20% in volumes. Organic growth -4% excluding oil and gas also traded. Caustic soda volumes were down in Q1 in I&W. Revenue EUR 237 million and 17.6% margin. We could have sold more, but some raw material availability did not allow it as we do not get as much as we would need.
This should be starting to ease by the summer. It's good to note that we have had some business model changes at the beginning of this year in both segments. You might remember that we closed a power plant, or we had a shareholding in a power plant in Finland, and that has been closed. We have been selling power and steam to a customer as a passthrough with zero margin. This will have about a EUR 20 million effect on top line, but no effect on bottom line. In I&W, we had a customer relationship where we normally manufactured both raw materials and delivered to the customer. Now we went to a model where we toll for the customer. They deliver the raw materials, and we only manufacture.
That takes top line down by about EUR 10 million a year, but bottom line effect is not there. Naturally, relative profitability will improve slightly. A deep dive on oil and gas. As said, shale continues to recover, SAGD market demand expected to be solid as it was last year, and oil sands tailings treatment season is starting now in April, May as the ice smelts in Alberta, and that goes on until October typically. As said, raw material availability and limited volume has limited us a bit, and raw material prices also have gone up, especially for polymers, and we are fighting that fight. Mainly the reason is in North America, the severe winter weather, several days of -20 degrees, and many of our supplier plants were frozen and damaged.
That situation continues into Q2, but should be easing off during Q2 and during the summer. I would say under the circumstances, a good start to the year in all areas. Looking at our main investments. South Korea, dry polymer plant starting ramp-up now in Q2. This is the first time that we will now have DPAM products available in APAC. We've been shipping from Europe, and obviously that's been with the logistics challenges and the shipping costs are not so competitive. So after that, we start up this plant. We have two plants in Europe, one in North America, and one in South Korea in APAC. Mobile, Alabama, the AMD line is up and running and ramping up. The emulsion polymer line starting also up in Q2.
Actually not a bad timing at all when we think of the shale market recovery. We have a coagulant expansion in U.K. ongoing, and U.K. has strictly their water regulation rules, and that means that the coagulant consumption needs to go up, and coagulant doesn't exist in the market, so we are expanding. Then the newest deal for Uruguay, the bleaching expansion in Fray Bentos, that's in engineering early stage phase and should be completed by the end of next year, ramping up early 2023. I mentioned the EcoVadis, and we've been recognized well here. Highest scores on ethics and labor and human rights.
We've been on a gold level previously, as there was no platinum level, that they now introduced the platinum level, and we immediately were awarded the platinum level and within 1% of global companies. Our sustainability work continues and you remember that we've announced targets in CO2 emission reduction during this decade in Scope 1 and 2. Last year we did the first deal here in the Nordics of buying wind power contracts for 5 MW, and in Q1 we did a second deal to the same amount of power from wind and replacing CO2 sources of energy. We continue to go on this path. This is on our Scope 2 level.
Last as a summary, we continue to mitigate the COVID-19, keeping people and stakeholders safe, and operations running, ensuring deliveries to our customers. Availability and security of availability has been a key during this COVID pandemic. We have performed really well. We work mitigating the impact of higher impact costs. More, I'm a bit worried short-term on the availability issues but then the impact costs, but costs need to be taken into account. We have increased focus on profitable growth, and we continue to maintain good cost control. We also continue to work on more bio-based and renewable product portfolio, and that work continues, and as you remember, we announced a couple of cooperation deals with big players in that front last year.
We run our plants efficiently and are ready to increase for the increased demand and react to that. We continue to build and complete our strategic investment projects and start some of them to soon ramp up. Here's my summary of Q1, and next I'll ask Petri to come give a bit more color on the figures of Q1. Petri, please.
Thank you, Jari. Good start to the year, like the title of the report says. I think the key points, at least the way I see it, are the sequential recovery in demand. It continued even while the year-on-year comparison was slightly negative. Again, like Jari mentioned, good to remember that Q1 essentially was a pre-COVID into 2020. From now on, we will be comparing ourselves against the sort of COVID years from Q2 onwards. Second key point, continued good profitability. Operative EBITDA remained and continued to be at the high end of our financial target, the financial target 15%-18%. For the quarter, we were at 17.3%.
Third point is perhaps, and I'll think we'll come to that in the discussion, in that we're in a way in a turnaround point. Many comparisons have a different sign, whether you are comparing them year-on-year or sequential quarters. Just a couple examples here on market demand. For example, printing and writing chemical demand was down year-on-year as expected, but actually up sequentially. Similarly, Jari talked about shale. Shale demand down year-on-year, but up significantly from Q4. Also, same thing in costs. As you will see, actually we still get the benefit on year-on-year comparison on variable costs, but we know that and have seen the sequential increase in raw material costs, and we'll talk about that as well.
Two things I'd like to point out from this chart. Again, from the revenue bridge, the first positive step is the volume that Jari already talked about. Yes, we are now in Q1 already at sort of a pre-COVID revenue or volume level. I think that's quite important that the market has recovered already to that level. As Jari was talking about, market recovery continues. The second aspect, FX impact. During the quarter, slightly higher sales volumes indicating this market recovery. Then currencies had this 4% negative top-line impact. That explains the majority of the revenue decline Q1 versus Q1. On the negative, EUR 13 million or 2% sales price impact, most is actually ex...
Most of that is actually explained by the caustic soda, which is mostly a traded product. Then, the negative sort of sales price development that has gone towards the oil and gas market. This covers both the formula-based customers as well as the spot- type market that is the shale market. The good thing is that these prices are also the first ones to go up, formula automatically as the input costs go up. The spot market is sort of a we can react more quickly. Looking at the profitability bridge below, the point worth pointing out, perhaps, is also the fixed cost reduction. That gave us EUR 8 million benefit for the quarter. Approximately half of that came through the reduced travel and entertainment cost.
Obviously, again, we are comparing a pre-COVID quarter, so after this quarter, the benefit will be reduced. I mentioned in my opening that we are at the turnaround point, and this chart sort of starts to visualize this turnaround in costs and in our sales prices. Like I said, year-on-year sales prices were negative. Looking at the picture on the left and the 12-month rolling chart, it seems that the environment where we are is sort of not that different from the times we were back in the chart. You saw the turnarounds around 2010, 2011, and then the second one, 2017, 2018. Pretty similar situation there.
On the consecutive quarters, we see the cost pressures up again, although year-on-year on the right indicates that the cost trend is favorable, largely due to the impact of the traded caustic soda, which has been soft. Again, as sales prices tend to follow cost trend with a short lag, we do not yet see the benefit of the turnaround in these charts. Obviously, very much a focus point to get those price increases through, and we can then see these in the coming quarters and in this chart as well. The market turnaround resulted in an increase in the value of our inventories of about EUR 27 million. Well over half of this increase was due to FX and also to a price increase of raw materials.
In a way, market driven. The second half of that increase is we are actually getting prepared for higher volumes. This, as well as some other net working capital changes during the quarter, resulted in the reduction of cash flow from operations compared to the previous year. CapEx for the quarter was low, but we expect that for full year or for 2021, we expect that to land around EUR 200 million, which has been communicated earlier. Again, the key projects worth noting here are the Mobile, Alabama polymer plant as well as our expansion of our bleaching chemical capacity in Uruguay. Gearing slide, mention the capital efficiency here, and we're looking at our capital efficiency by this operative return on capital employed.
I made an earlier comment that 12% is a good level, and we remained roughly at that, now slightly below at 11.9%. Return on capital employed in Pulp & Paper up significantly towards the target range, whereas in I&W some of that softer demand historically has been visible obviously in I&W numbers as well as the capacity underutilization, which Jari talked about from the raw material supply problems, has resulted in reduction in this return on capital efficiency, particularly impacting Industry & Water business segment. Balance sheet continues to be solid, well within our financial guided range. Next slide, I talk about our refinancing transaction which we concluded during the quarter.
We successfully sold EUR 200 million seven-year bond to the market with a 1% coupon. The yield ended up being 1.12%. Half of those proceeds were used to redeem our 2022 maturing bond that has a higher coupon. Here it's worth noting that this bond exchange was accounted for as a modification, as the terms of the two bonds were similar other than the interest rate. Because of this modification accounting, we reported a EUR 5.6 million net financing gain for the quarter. This EUR 5.6 million reflects the difference in the present values of these two bonds.
That gain actually explains the low financial expense for the quarter, and obviously on its own right was also contributing positively towards the EPS, which came at EUR 0.25 per share, flat with or level with the previous year. Also, we used our second option to extend the maturity of our EUR 400 million revolving credit facility to 2026. As a consequence of these transactions, our liabilities are well spread out all the way to 2028 with limited near-term maturities. Next, I'll talk a few words about our supplementary pension fund, Neliapila, in Finland. I wanted to bring this to attention because of two reasons.
First, it was in the news in Finland late March that we have made a preliminary contract to sell a piece of real estate in Espoo near Helsinki. This is the site where our R&D center of Kemira is located, but the land is owned by this pension fund. Majority of that real estate development will be residential, but it also includes sort of a commercial office park, which is called EriCa Green Chemistry Park.
This is a site where Kemira will be locating its sort of a future state-of-the-art R&D center, once the construction of that site continues after the zoning process is done. We also included this new liability in the footnotes for our Q1 financials. Secondly, we took a small capital contribution from Neliapila in the quarter. Overall, Neliapila is in very good financial position. According to FAS, Finnish Accounting Standards, the overfunding currently is approximately EUR 80 million. As this fund has been closed for new members for the last 30 years, it's now in a runoff phase. Its liabilities are reducing roughly EUR 10 million per year.
Therefore, I think it's fair to assume that, as the plan for the zoning is approved, or confirmed, and the real estate projects start to materialize, and as liabilities wind down, absent of remarkable asset value decrease, then Kemira should expect to see some future capital contributions, from this fund, as well. Outlook unchanged, from the February release. So assumptions also the same, end market demand expected to recover, and this we already saw in Q1. In this context, Jari already mentioned some of the modeling help, for you.
The EUR 10 million business model change that actually impacts I&W revenue from moving towards the tolling agreement and then the EUR 20 million electricity sales or steam sales that we will be not having any more, that's impacting Pulp & Paper segment. Perhaps one more comment to help modeling for those. Typically we see a small seasonality impacting our revenues with typically Q2 and Q3 revenues higher than Q1. Last year, this was not the case because of the COVID-19 situation. This year we would expect that we will see that type of seasonality in our revenues. Sort of a return to normalcy, if one will. With those comments, I'm done and we're ready to move to the Q&A session. Operator, please.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero and then one on your telephone keypad now. The first question is from Martin Roediger from Kepler Cheuvreux. Please go ahead, your line is open.
Hello, good morning, Jari, Petri, Mikko. I had some technical issues, so therefore I apologize if you have already mentioned that. But I had difficulties to understand the reason for the financial result in Q1, which was unusually low. Is that in relation to this EUR 5.6 million gain from the bond switch? As a follow-up, is that financial result we saw in Q1 a reasonable run rate going forward? That is for Petri, and maybe also a follow-up question for Petri. You mentioned the future capital funds you expect to receive from this real estate project in Espoo. Can you help us to quantify what you expect from that in the years to come or maybe on a yearly basis?
The third question that is more ESG related. Here in concrete on the CO2 emissions or greenhouse gas emissions. We are right now in phase IV of the EU Emissions Trading Scheme. What is the amount of certificates you have to buy annually, and how many of the certificates do you get for free this year? Thank you.
All right. Let me at least take the two first ones. The financing, yes, it is tied to. I think you're right on the spot. This was a one-time sort of for this quarter. The quick Q1 does not reflect run rate. You need to adjust that for the EUR 5.6 million gains. We reported the gain as the bonds were exchanged, the net present value was different. The lower interest rate in the new bond sort of producing a lower net present liability, and that difference was a gain for Q1. We will actually amortize that EUR 5.6 million over the seven-year life of the bond. Q1 finance cost does not reflect run rate.
Run rate is more like the EUR 7 million-EUR 8 million, which is sort of a more typical for us. Question was about Neliapila, the pension fund. I sort of hesitate to comment on the sort of expected level of capital contributions, and certainly I wouldn't point out the gain from the real estate transaction, but already the existing sort of a surplus, EUR 80 million, and obviously this is a regulated process, so any capital contributions that we take from the fund will need to be approved. With the prudence, there's sort of a caution.
I think I sort of wanted to highlight that the magnitude is clearly more than the EUR 3 million that we took last year, but I hesitate to give any more precise answer. It may take over this sort of a decade, and we have not made any sort of decisions whether we want to do that annually or whether there's perhaps one bigger lump sum that we could take during the next number of years.
The emission certificates, I don't even know the number. It's so small. We buy some certificates in Europe, but we also sell certificates, so the balance is in our numbers insignificant. Mostly, it's incorporated into the power that we buy from the markets. Our own power sources, where we own shares, are mostly CO2 free electricity, so hydro and nuclear here in Finland. Our CO2 Scope 1 is 0.9 and a bit below 0.9 million tons a year globally. Not a big number. We still take it seriously and a big portion of that comes from United States, from the Southeast, where there's not much CO2 free power yet available.
The certificate dealing is not a big number.
Thank you.
The next question is from the line of Anssi Kiviniemi from SEB. Please go ahead. Your line is open.
Hi, guys. It's Anssi from SEB. Thanks for taking my questions. I have three of them. I will take them one by one, if that's okay. Firstly, you have announced a bunch of price increases during the past four months, I believe. Still prices are coming down. I acknowledge that there is accounting effect and caustic soda effect there. In a larger scheme of things, when should we expect to see positive pricing environment and positive pricing impact for Kemira? Thanks. That's the first one.
Okay. Yeah, raw materials have been starting to come up, and one is the availability and the other is just that the supply doesn't meet the demand that is picking up really fast, which is actually good news that demand is picking up. Price increases, we have not dropped our prices in water treatment, and we have not dropped our prices in Pulp & Paper. These are effects that come from the shale market that there is some drop in the shale market spot prices and then some pass-through issues. It's imperative. Actually, we are increasing prices in Pulp & Paper and in the water treatment as well as in the oil and gas.
We have had price increases going through quite well as the contracts start to be slowly rolled over. That's the point to negotiate new volumes and perhaps even switch to products and then the new prices. It's gone through quite well so far, and the reason being that as the market is tight for chemicals, the customers more appreciate that they have the availability than that they squeeze us for the price. We will continue to work on the pricing cases going forward.
I'd like to point out that there's input cost increases that are coming in and lack of availability, which I feel the lack of availability Q1 and short-term is more of a component than the price increases. On the positive side, demand is good. Volumes are going up. Last year on a comparable basis, when we had lower polymer raw material prices, we had no demand. Now, we have higher raw material prices, so the demand is really picking up. The math is not that straightforward. With higher volume, there's higher utilization rate also in our plants, which brings down unit costs, and that's a component that needs to be factored in. We obviously work on raw material under.
Sales prices, as I said, and then our fixed costs are also in check as the pandemic continues and travel and sort of normal level spending is not coming back. You need to take all of these lines into account and all of these factors into account, not just the input cost factor. We're in a much stronger place than three years ago to take on this situation.
Okay, thanks. I appreciate that. On raw material availability, which raw material specifically you had issues to basically source? What's the magnitude when we look at Q1 in Euro terms? Has there been a significant impact from operational perspective from lack of raw materials? Thanks.
Yeah. A twofold situation. The North American Winter Storm Uri that damaged a lot of refineries and therefore the oil derivative products acrylonitrile and acrylic acid have been short. We've been at best getting 50%-60% of what we have needed, and that's for polymer products. Also logistics and the congestion in Suez and all of that has also resulted to some. Europe also, there have been mechanical breakdowns due to COVID-19 maintenance backlog in certain plants, and they are still in FM. North American FMs are continuing. Even if the damage happened in February, they still haven't been fully fixed.
We probably lost some couple of tens of millions EUR in revenue in this period. Some of it is opportunistic in a sense that we were able to handle most of our contracted volumes, but then there was increased demand, especially from shale. There was more spot opportunities there than usual, and we just couldn't cater to those orders.
Okay, thanks. On raw materials, in Euro terms, how large is the pressure for 2021? Because when we look at the charts, it gives a pretty bleak picture. Could you give us some kind of a hint at least how do you look at the raw material pressure and input cost pressure in Euro terms when we look at 2021 versus 2020? Thanks.
Yeah. One thing is that that takes constant volumes into account, that chart that we do. If you think that raw materials for polymers were low last year, but we didn't sell anything, so we didn't get the point benefit because the market wasn't there. Now the market is there. You need to again take the volume thing into account. The pressure is in certain areas and mostly in polymers. There we have also formula pricing. That holds itself or handles itself without negotiation. We have spot pricing in the sale business mostly, so deal- by- deal. Then we have the normal contract pricing. There is pressure, but we are mitigating those with the actions I have already mentioned.
There will be a timing difference. In Q2 we will see the pressure, but some of the mitigations don't kick in until Q3. You can take that into account in Q2.
Okay, thanks. Then perhaps the last question is on U.S. shale. I mean, when we look at the rig counts, they are going up, but kind of mildly. If I have understood it correctly, the fracking activity as a matter of fact has returned quite rapidly. Is this the correct picture? Do you see the whole year for shale business kind of more of a normal year in terms of volumes?
Not to 2019 level in volumes yet, but getting to that direction and improving. We saw sequentially over 20% recovery in volume demand from Q4 to Q1. That continued from Q3 to Q4. Going up and we missed deliveries because of the raw materials. There also pricing needs to be worked on, not only volume. The rig count is not the right, it is a sort of a semi-good indicator because they have what they call DUCs in the backlog. Drilled but uncompleted. They haven't fracked those holes. They have drilled them but not put them in production.
Now when the oil price hovers a bit over $60 they make good cash from those areas, especially in the Permian Basin, which is our main area in Texas. We expect that those uncompleted wells will also be completed. They don't need to be drilled again, so that's why the drill count isn't a linear comparison.
Okay, great. That's all from me. Thank you.
Thanks.
Next question is from Harri Taittonen from Nordea. Please go ahead, your line is open.
Yes, good morning, and thanks for taking the questions. Maybe we should. You made this comment on the printing and writing side, which is quite interesting and seeing this sort of sequential improvement. Is it in your slides, the share of printing and writing is about 20% of Pulp & Paper. Is that still more or less valid or has it sort of has it come down to below that? What's your feel of the sequential recovery when we move on to the second quarter now that there's at least in some countries, the lockdowns are clearly easing and that seems to have some correlation to the printing and writing activity.
Yeah. Thanks, Harri. We round up to the closest 5% at 20%. It is below 20% and dropping all the time as the other areas, packaging and pulp is also going up.
In the ballpark.
Yeah.
For the full year. Right.
For the-
This was only for Q1. Last year, for 2020, it was also around 18%, maybe a bit more.
Okay.
Yeah.
Okay.
goes to show that we recovered 8% and are down only 5% year-on-year in printing and writing. We are serving the strong customers, the last man standing type of customers.
Yeah.
That is, that has also not reflected as the market is down clearly more than the Kemira customers are not down so much. We expect that, I mean, I would take a proxy that we stay roughly on this level going forward. I don't expect very big recovery. Maybe some, but then we like that it comes, but we're not counting on that.
You made a summary of the four CapEx projects there. I remember this, well, two of those investments amount to $90 million in total for Uruguay and Mobile. Can you remind what is the combined CapEx related to these four investments all in all?
The U.K. one is between EUR 10 million and EUR 15 million. We are minor-
Yeah.
Minority shareholder through our equity investment in the Korean one. That was only EUR 5 million. I would say a very good return will come from that.
Okay.
That gives you an idea.
Okay. Okay.
Yeah.
Very good.
Consolidate to our number. Yeah. It's 35%. It doesn't consolidate, so it's only a-
Exactly.
Shareholding. Yes, yes. Okay, okay. Well, thank you. Thanks for this.
Next question is from the line of Robin Santavirta from Carnegie. Please go ahead, your line is open.
Thank you very much, and good morning to everybody. First of all, I would like to ask about fixed cost or rationalization measures. If you look at the past 5+ years, you have actually been quite successful in improving earnings from cost-cutting and streamlining efficiency improvement. I know that you have some measures in North America in the Pulp & Paper division, but is there something else going on at the moment? Secondly, are you working at launching something that could improve the productivity or cost position of the company? Thanks.
Well, we did restructure, and that was non-COVID related. It was in the plans earlier. In November, we restructured the North America, as you mentioned, commercial and support organization, and made efficiencies there. Obviously, I can't comment if we have anything else ongoing. We tell if there's something ongoing, but maybe we have demonstrated that we do care and maintenance all the time and not wait for big bangs.
All right, thanks. Secondly, now looking at the guidance, we're obviously now in April, and there's a lot of moving elements up and down. Could you provide one key upside, one key downside to the guidance so as to understand how you see sort of the main risk and the main potential?
One upside is continued strong demand from the markets, all markets, and us able to deliver also on the demand. Downside is then the delay and possibly lack of delay of getting prices, and mitigations for the increased raw material prices or then the lack of raw material prices that we can't deliver, or lack of raw materials.
Thank you very much. Yeah, yeah, I understand. Thank you very much. Thanks.
Just as a reminder, if you do wish to ask a question, please press zero and then one on your telephone keypad now. There are going to be no further questions in the queue, so I'll hand back to the speakers. Please go ahead.
Thank you. There is one more question from the webcast tool. Can you remind us of the revenue impact from the Mobile ramp- up, and when will the plant contribute positively to earnings? How does profitability compare to whole segment profitability?
We don't give revenue numbers for individual projects. If you add up those four projects that we have, once they are fully running, they should contribute some EUR 110 million-EUR 120 million when all four projects are fully up and running. Obviously, depending on the market price of polymers, for instance. Mobile and also the South Korean should start contributing late Q3.
Good. Thank you, Jari, for the answer. There are no more, no further questions from the webcast tool either, so this concludes our webcast. Many thanks for participating. If there are any follow-ups, please reach out to me. With this, I wish you a nice day. Thank you.
Thank you.
Thank you.