Kemira Oyj (OTC:KMRAF) Q3 2011 Earnings Call October 27, 2011 6:00 AM ET
Leena Lie – VP, Marketing and Communications
Pekka Paasikivi – Chairman of the Board
Wolfgang Büchele – CEO
Harri Kerminen – President and CEO
Peter Mackey – MS
Martin Evans – JPMorgan
Good morning everybody. I’m Leena Lie from Kemira Communications Department and I’m very pleased to have the possibility to run the show today on our quarter three results and also regarding our CEO change announcement.
This is both webcast and a conference call at the same time and how we will run the show. First we will have Mr. Pekka Paasikivi, our Chairman of the Board presenting then Wolfgang Büchele, the new CEO followed by Harri Kerminen talking about the Q3 results and after that we will have the questions and answers session at the end of everything.
But now I will give over to Mr. Paasikivi.
Thank you, Leena, and thank you for coming. Ladies and gentlemen, Wolfgang Büchele has been appointed as the CEO of Kemira starting from 1st of April next year following Harri Kerminen’s retirement. Harri started to work with Kemira as a CEO in the beginning of 2008 and at that time the company needed a new prime.
Kemira was very diversified. We had some issues in the balance sheet and also with profitability. Harri has done the company more coherent, more focused and we are profitable today. This has been not an easy task it required the long list of painful decisions but as I already mentioned that all has done very well.
Spinning of Tikkurila and building the joint venture develop order has been two excellent cases how to restructure the company. Today Kemira is well recognized water chemistry global player. And we have even started to generate shareholder value in the long-term, which is of course much more challenging than just to go after a single target number.
To create shareholder value in the long-term needs strong focus on all the stakeholders and that has now seen -- we have started on that and I’m sure that both companies is following that path.
Because we will continue to implement the strategy, we are still in the various but the path is clear and I’m confident that we have all the means to do it. We have a good personnel and we are financially strong.
The Board started to work on succession planning already in spring and we engage the facilitator in the beginning and we’ve worked out certain criteria. Before North Europe and Central Europe, we also looked at the internal candidates and we also asked if Wolfgang Büchele could be available and interested and his answer was, yes. So this process was run very quickly and smoothly and we could run it through in a year’s time, normally people need to reserve two years for such a process.
So quite soon it became evident that Wolfgang is the best candidate and here we are, and I think I will give the word for you and now Wolfgang and you can introduce and talk about your background.
I will do so.
Thank you very much, Büchele. Thank you.
First of all ladies and gentlemen, I’m very pleased and proud to be able to be here today. And I am very happy that the Board of Kemira has extended its trust into my person by nominating me for this job.
I’ve served on the Board of Kemira in 2009, so it’s not completely new to me, what Kemira is doing. I participated in shaping Kemira over the last three years in my capacity as Board member already. Having said that it becomes obvious that you cannot expect now a deserted move because if now certainly everything will be changed and obviously I would have done something wrong in the past three years.
Therefore clearly we will continue with successful water strategy. And this was actually what appealed me very much when I got a call from Pekka Paasikivi asking me whether I will be interested to serve as the CEO of Kemira.
Water is the vital element for mankind going forward. A human body can survive for three weeks without food, but only three days without water. And this will be the biggest challenge on earth, the distribution of water, clean water and making water available when people need it. Not just for their own consumption, but also of course, for food production because food production without water is also not working.
The other challenge which Kemira has taken up already for many years and it’s getting an even bigger threat going forward is that we have to deal with increasing volumes of polluted water. So it’s not just that you can make and have to make fresh water available for the people, you have to find ways and you have to find ever sophisticated ways, more sophisticated ways to turn polluted water into drinkable water. This is where chemistry and modern technology and ultimately innovation come into play where Kemira with the SWEET (ph) project has already put in a great step and a great commitment in order to develop new technology for the challenging not of today, but for the challenges of tomorrow.
So with this respect I am very pleased to have been now nominated and be able to take Kemira further along the path, which has been started by Harri Kerminen. I myself, I’m 52 years old, I spent 25 years in the chemical industry, mostly in specialties, but I also understand standardized products, I understand commodities.
I’ve also spent one year of my career with private equity, so I’m pretty acquainted with the financial issues of the business and I’m currently running (inaudible) and Hungarian chemical company, which is owned since the beginning of this year by a Chinese owner. So I also have some intercultural experience.
I also lived in Asia, back in ‘93 in Hong Kong when I was responsible for certain Asian business operations of the BASF. So therefore I have quite a broad exposure and have a broad exposure to the various geography on this clock, which I would suggest helps me in guiding Kemira when it comes to solving water needs in the different geographies, because obviously the challenges and the attitude of the industry but also of governments in various geographies.
We are moving to Finland, my family and myself. So my daughter, by this year, she is already in the university; my son will go to school in Finland when the school year, next year ends. So we are not just trying and pretending to be applying in accepting this, we will commit ourselves to Finland. We will be here and we will serve Kemira out of Finland. We are really eager to have that experience.
The only downside then I also said this morning to the employees is the average temperature gear up and I think 5.3 degrees to me not the most appealing, 15 would be better, but okay it is what it is. I think Kemira has a great future. I am very proud to be part of this future. I am also very proud that I can contribute my past experience to that business and I am looking forward, not just to continue to guide you in the future on what Kemira is doing, but also to show tangible results alongside is excellent water strategy. Thank you very much.
Okay. Thank you very much, Wolfgang. I wish you all best and the good news is that it is that water is the connection. So the strategic is to stay but it can’t be developed further certainly, so without saying no more in this stay so I will come to this January-September 2011 results and call some main points out of that.
So you have those results, I guess those papers there and it’s -- the headline is stable performance financially of taking some points of that. I will little bit come back into that later on to this project very briefly and try to comment on what Wolfgang was saying, but first of all this result is, by the way, it’s not very visible, it’s something like numbers be.
But anyway, looking at first Q3, so Q3 revenue basically was a bit higher than last year, but when we take divestments and currency impact and clean that because we have in Q3 result optical price [ph] in our business in Germany last year in the same time. So our organic growth was 6% that this, I think quite a good achievement looking up this global economic situation.
Operative EBIT was a bit less than last year. Again the reason being divestment and currency impact and what we have discussed with you every time is this raw material price increases versus our price increases. So we can see that volumes and prices increased a little bit more than variable and fixed cost, but we are very pleased on. So it seems to be that raw material prices and cost, if I may say so are stabilizing and what we have said earlier, we have had a messy price increase initiatives earlier this year that we’ll pay back now.
Profit before taxes was a bit less than last year special and financial expenses, but also these divestments. Financial expenses, the one reason is currency impact, so that is basically not the reason, it’s something else. But cash flow was very strong Q3. €56 million is a large number in the size of this company, so that we get upon very, very well.
There are some messages that I would like to address to you. First of all, looking at this new Kemira based on water has to remember we have 75% of Kemira’s present business is water and 25% is something else. 75% certainly means that we are water company older now and looking at this present Kemira so Q3 looking at revenues were the highest ever and it is very good. A little bit higher than earlier record, that indicates really that the top line is not that deteriorating, so it’s stable and one other message is that compared to Q2 this year then we had a bit we have compensated now that.
So, if I look at that one so we came back to this and this is of course very encouraging and is basically came municipal and industrial and oil and mining businesses that I would address to you later on.
We have based on this really high still continuously high oil, crude oil price globally that’s impacted the dip of EBIT earlier this year because many of our raw materials are all related less and less by the way all the time, but anyway, so it came down quite a lot, but now it’s delighted to see that Q3 result is already better. And I can also say that looking at within (inaudible) months has been all that improving, so that’s one message.
January-September as a whole is a nine months period, organic growth 6% and clean investments and so on, so quiet okay, open better (ph) but little bit better than last year even they had a substantial raw material price increases and profit before tax increased 14% compared to last year nine months period.
Financial expenses in this period were lower but also our associated company (inaudible) that is not our reported in EBITDA. Revenue line contributed in positive €24 million compared to €7 million. So, profit before tax is certainly improved very nicely.
This is the slide that has been shown to you earlier in presentations showing that starting from 2008 all statements outside municipal and industrial has improved profitability. This year we really had a dip in municipal and industrial part but what I said in Q3 is recovered already. We can see that later on, so that’s encouraging.
The bridge, EBIT bridge, the measure theory here is it's very simple, sales volumes and prices more than compensate the variable costs in this period. So, that’s positive news and finally outlook we have not changed the guidance that is saying basically that Kemira expects revenue to be slightly higher than previous year and despite the rising raw material prices. Kemira’s operative EBIT this year will be expecting higher than the last year. They have also put now that we have always been very interested in this CapEx expectations that will be between in €100 million to €110 million this year as a new way to consider.
Some comments from the segments about the profit and loss responsible businesses so that Paper revenue decreased, it’s based on the divestments and currency impact basically invest, we had 2% organic growth.
There is some concern in this business as everybody also understand and recognize Pulp demand was stable, however, there is a -- we can see a slightly lowering demand at the moment. We are in paper credits more and more of focusing on packaging board and tissue that are more stable than magazine or normal office paper and that has helped us to keep profitability and sales at reasonable level.
We had operative EBIT decline compared to last year as a small disappointment, but this has only to do the best at in this segment as well the profitability slowly grow. We announced in the morning today that we signed early, early today, very early with Evonik Degussa a transaction of the deal where we sell to Evonik Degussa, our Hydrogen Peroxide assets and business in Canada and following our strategy to focus on our water and it has some positive impact as a one-time item in Q4 in our EBIT. But financially looking at the whole Kemira concern it has not any significant impact financially.
Municipal Industrial now had a 6% revenue increase in the Q3. EBIT improved to €15.4 million and EBIT margin was close to 9% and every month this segment has now improved profitability and I think that this has been a huge positive sign. And this is one reason for that so that this illustrates this raw material price development and we are coming to the stage where certainly this is not showing clearly but anyway let’s go back to this.
This variable cost raw material price increase has stabilized now coming a little bit slightly downwards that helps us to create profitability and improve that. That we discussed also last time, the same connection. Also I can say that earlier it has announced that Ojanpää is leaving ahead of municipal and industrial; Kemira is going to see now 1st of November as the CEO of Lassila & Tikanoja as stock listed company in Helsinki and Kemira’s Board of Directors has nominated Hannu Virolainen to be his successor starting next week in this position.
I think it’s excellent so as the Hannu Virolainen and has been earlier heading in this segment this industrial part. So he will bring continuum and continues this strategy, implementing strategy of this segment.
Then oil and mining in Q3, as I said earlier, revenue increased plus profitability increased profit increased. Nice story. We have very good position in some areas in this -- especially oil and gas business is doing very well but as well mining. Over a period the percentage was already close to 12%, but also absolute EBIT was over 10%. And reason really is successful price increases plus increased volumes, so very good story, very stable continuously increasing performance. We have also so-called specialty chemicals as not so-called but we are not reporting separately, we are reporting as their segment.
Others, and they are serving pharmaceutical, other chemical industry. They are serving, they are producing or are selling it, (inaudible) to airports, also food preservatives as well seed as it is (ph). It’s not water business. This is the biggest part of so called non-water business. And we saw declining profitability so that these margins fell to 1%. But as Q3 normally this is non-cyclical over years, this business, but it has certainly cyclicality within an inside one year and normally Q3 is the weakest one. I expect that the business is performing better now as the de-icing season is starting we have (inaudible) season start here in Finland, so I am not worried about the business. It is stable, has stable performance.
Last time, I said that something about the study. Chart 11 I have nothing new to say about this. In this context the business is doing very well if you have been looking at the Sachtleben Rockwood numbers because they consolidate this JV in their financial figures. It’s doing very well, continuously there has been price increases implemented in the coal industry. It’s doing still very well.
We have after establishing the business, utilizing synergies that has been the second reason why the business is doing very well and we are happy with Rockwood all of this. But we are looking at anyway the strategic options, how we can develop value in the future. So, very much the same story as earlier but the business is performing well.
Something about this market, I hope really that last night European Union countries made really good decisions, tried to capitalize this debt crisis and really also hope that it has sent a positive message to the equity market, that also the whole world economy.
Anyway actually now we have concerns in USA and Europe that the growth and GDP growth will not be strong. It might be very minor, even couple of years. And what is the impact on Kemira is that Paper segment certainly, there the visibility is shorter than it used to be and as our customers are saying their demand is present in some pick up rate are declining.
When we look at this Q3, our result is still quite okay. So that is of course a certain kind of concern but now our sales still increased ultimately in Q3. The rest of Kemira's businesses, I still believe they are even. We have this kind of low GDP growth in coming years, should be very stable because municipal lanes are still stable business as you know, it’s only a raw material, our price volatility that I explained earlier, but all in all, the demand is stable.
Oil and Mining has been stable, steadily growing. I believe it will continue like that. Even the GDP growth is not so high and cancellations certainly has demonstrated a stable business performance, meaning that all in all, Kemira strategy should be very okay even in the conditions that the growth is globally not so big. We have some concerns, but we have many businesses that like we have demonstrated in Q3 was rather stable. So that is good news.
What we have really focused on, as one action, we have done a lot of different things during previous years, but one action that always has had a big interest of you is this sales price variable cost connection. And this slide try to illustrate that we have improved a lot, improving our internal processes from demand to raw material supply so that when variable cost anyway are dependent [ph] on our actions are changing our sales price are very much following them. So the cap is, there will be always cap. It’s not zero, but I’m happy about showing this because it’s close to, it’s minimized now and we can still improve that.
Balance sheet is an extremely important normally when so much talking about and this conference [ph] is about that and certainly cash flow has big impact on that and we have many years in the past of Kemira’s balance sheet starting even from earlier than 2005 was net appeal meaning that our gearing increased to the level of almost 120 in 2008 when we started this new focused strategy. And now our gearing was something like 35% and can be improved and cash flow has been positive. I think it’s nice to show that we have changed that fully.
Wolfgang Büchele said about this water demand, some megatrends and so on; our strategy is based on of course two factors. I think we understand and recognize that water will be a bigger and bigger issue in the world and it's many times in industrial applications connected to energy, certainly also but in our life, energy and our whole business strategy is based on building a common technology platform using common product lines towards selected customer segments that are basically oil and mining, biomass, meaning paper and something else outside paper and then is municipalities and cities and some selected industrial sectors.
There are many other water incentive markets that Kemira is not serving at the moment because the strategy is all about choice. So we have also selected what we are not doing. Oil and mining is important because oil and [ph] water continues rising and our position in the market has been one to four, meaning that we should have a good pricing power and that we have demonstrated.
Paper business is €10 billion market. We have good position in selective geographies and selected customers and also offering. What has been changed within last three, four years is that we are more and more focusing on water chemistries, retention system, waste water treatment, salt water purification and basically we are using exactly same chemicals and chemistries here that we are using here.
And then we have municipalities and industries basically our position, we are number one in coagulants and certainly like serving municipalities it is the only company that can offer basically all chemicals needed. So the differentiation is important, not only a market position.
We have also changed the brand given the Kemira has 90-year-old history. I believe that within this and last year Kemira’s limits has changed and we are recognized water company meaning that many statistics and also on management understanding is that we are number two in water chemistry market anyway along three biggest players.
We have an application business model so we are not focusing on selling single chemical entities. We are rather try to solve customer problems through application and where customer loyalty is a critical factor and then we got now the latest customer survey result. They really indicate that customer loyalty in Kemira’s case is number one compared to our peer group.
And investor perception is of course important and even the stock market has had quite volatile environment in previous month. I think that my personal opinion is that Kemira stock price has performed in that respect pretty well.
So we have had lower, but we had also coming back end [ph]. And so these are important other things that we are building on with a opening in Times Square ringing the bell some months ago and opening a stock exchange and I must add a bag of (inaudible) it was nice to say that in the end of this peak I heard that this is the favorite city New York, because it is my favorite and I love you and right now we are treating your waters because New York is one of the big customers of Kemira like Los Angeles. So, we are there in big cities.
Finally, this is the last one. So the value creation point of view, the profitability has been an issue still in Kemira. We need to improve that. And there is potential to improve it. We have a pricing management and this raw material cost management is a big issue here and we have several projects in this phase.
The product and customer mix has been changed and can be developed further to increase profitability and we have about 200 different activities to increase productivity, because productivity needs to improve every year minimum 3%. Last year it was 6%. SWEET, Wolfgang already referred to SWEET. It’s profitability of this to build our successes in the fields around innovation. We cannot trust on and only continue on commodity base. Innovation is critical, SWEET is there; SWEET may [ph].
We have lot of potential to develop and go and enter more and more emerging markets, because 2030 50% of world global water business, size of the business is $500 billion is going to be in Asian markets; India, Indonesia, China. So we need to be there. But also major markets offer many new possibilities, we have always increased sales every year in Eastern European markets. We are even growing in North America like in shale gas or oil sands. It’s interesting that finally now USA is requiring prosperous removal. That is one of the core issue that Kemira is doing in Baltic Sea investment area. That they say, looking at the society point of view.
Finally, we need to also do something localizing our business, have more people in growth area and so on but that is more that we can do in years to come. Strong balance sheet can be strengthened further leaving market positions to have a pricing power different yet but [ph] offering, critical things, and then finally of course, the people competencies are also important and dedicated in case people, based on last personal survey, the engagement in Kemira, our employees is pretty high.
So this is linked to this, the fact that in long term the most critical thing for successful companies is a culture, innovative culture and there’s lot of potential in Kemira to build on more and more do innovative culture where speed is one of those vehicles in practice.
So this was Kemira’s story and at the end of the day that I will be almost half year, five months here still working heavily every day. So Kemira fighting continues. So it’s not stopping here. And after I'm retiring from Kemira, I certainly will not retire from working life. So my vision is to still be 10 years in business and be active mentally and finish business life [ph] in this space and so that I will see [ph] is but a certainty. Thank you very much.
So, thank Harri, Pekka and Wolfgang. And if you can stay up here and both other misters also would join us for the Q&A part and we will start here in the room with questions and we have one mic and we need to use that for the conference call and webcast purposes. And please state your name and company also when you do the question. So please any questions?
(inaudible) Ålandsbanken. In terms of Q3, any fixed price in terms of your expectation either positive or negative?
Any surprises, I think that the Q3 all in all was very much according to our expectations. So those things positive and some challenges [ph] I think we saw already earlier and so I’m pretty confident. So not big issues at all.
Okay. And looking forward in terms of demand, you already mentioned, for example the paper division and we all hear (inaudible), those kind of companies are staying. What are you seeing now both in terms of the different business units as well as regionally across the globe in terms of demand right now looking forward?
About, you mean, paper all in all?
No, paper and then it’s…
And all in all, okay. So in paper certainly I think that our customers that has announced this, these things knows the best. From our point of view what we have seen lowering demand is especially here in Nordic countries, perhaps a bit in continental not South America, not in Asia. And our business in paper in North America has been very stable.
The rest of the business is very much what I said; oil and mining improving, performance and growing also in North America, but elsewhere as well and municipal and industry pretty stable. Industrial issues like biomass and so on, we are having increased performance. So that’s the story.
Then finally in terms of the guidance, how confident are you on the guidance? You look at the year-to-date figures; you’re still kind of flattish for example in terms of earnings?
The guidance is (inaudible). So I cannot say anything more and I understand your interest in it, but guidance of cost, we have carefully thought about that and speaking.
So do we have any questions on the line operator?
Thank you. Our first question comes from the line of Peter Mackey from MS. Please go ahead with your question.
Peter Mackey – MS
I’ve got several questions if I can please. Firstly I believe Harri, you made a comment that the Municipal and Industrial margin have been improving every month. Did I understand that correctly and am I correct in interpreting that the sort of exit margin at the end of the quarter was higher than the average level and we should reflect that into Q4 expectations?
Secondly, just going back to the other reporting line and cancellations within that, I seem to recall at the second quarter stages you felt that Q2 volumes tended to be the weakest point in the year and that the de-icing business kicked back in during Q3 and Q4 and that you felt that you were beginning to recoup raw material costs towards the end of the second quarter. So I wonder if you could just sort of talk us through the dynamics of that during the third quarter please in the context of those sort of expectations from Q2.
And then finally I guess this is a question for Mr. Büchele. The sort of two big strategic issues I guess, which remain outstanding for the Kemira. One of those is developing Kemira’s activities in Asia and clearly there’s been an issue in China, the competitive environment in the Chinese water treatment market is pretty tough from what I understand. Given your experience in Asia, how do you see that evolving?
And then the other issue is Harri has a strategy I think of pulling other industries out of the municipal and industrial divisions to sort of try and replicate what you’ve done in oil and mining. Just wondered if you could give us your thoughts on that processes and the sort of timing that you might have in mind. Thank you.
Okay. Thanks very much. Very good question. So if I start with this, to say briefly, Municipal and Industrial Q3 show that it was better that Q2 and so that recurring [ph] this every month improving it's quite I think logical that after this Q2 you are little a bit lower and then you are climbing up when the whole Q3 was better.
So there’s nothing magic but I’m happy to see that our pricing initiatives taken earlier and stabilized raw material price have driven the profitability at the level we in average see. The ChemSolutions Q2, Q3 I’m afraid that of course de-icing and some pilots [ph] business today, they are not explaining everything, but we suffered in Q2 and still Q3 increased raw material prices present in import business and now all price initiatives implemented are paying back and so the Q4, any guidance, so I will not begin to speculate Q4. But if you look at the pattern the business has had earlier, we think here is the only thing what I can say. And now all is complete.
Let’s briefly touch on your question regarding China. First of all, I think we all agree China is a very competitive market these days when it comes to basic products. And I don’t think that in the future, the answer of Kemira, the Asian market and in particular the Chinese markets use the basic products.
What China needs and that is increasingly also on the radar screen of the Chinese government is pollution. Because the water pollution, not the waste water, but if you look to lakes, if you look to rivers, the water pollution is so expensive that the Chinese government has to implement new technologies which has to be brought to China from outside because they don’t have it and there, in the discussion with the respective municipalities, with the local and the central government’s Kemira can bring substantial value and I’m sure we can turn that finally into profitability for Kemira to China.
And I just want also to emphasize Asia, when it comes to water is not China alone. There is also India and there are many other countries where water is a serious issue and we will definitely not in the future only look for China, but we look to Asia as Kemira did it already ever since. Does that answer your question?
Peter Mackey – MS
Absolutely. The last was relating to other industries to separate out and focus on, like you have with Oil & Mining, so.
Well, I think first of all, Oil & Mining is to me not other industries. This is a very water intensive business. Either its exploration or its gas production or it’s what is done in South America, what is done in Africa, what it done in Asia. It's leaching ore by literally water or by acids in order to recover the mineral.
And there clearly this is one of the core businesses of Kemira and you could see from the figure that Kemira was extremely successful over the years to now build a sustainable portfolio for that market and grow that business continuously year-on-year. So this will clearly remain a focal point.
I think the other industry or the other segment is a contributor to Kemira and we will overtime look how that is going to develop, but don’t expect currently an answer from me what we finally will do in the one or other direction. That’s too early. There are clearly no specific plans to do something now right away.
Thank you. Do we have any other questions on the line operator?
Yes, the next question comes from the line of Martin Evans from JPMorgan. Please go ahead with your question.
Martin Evans – JPMorgan
Just again on that Oil & Mining division where I think your margin is now an all-time high. going forward do you think that peak level could be surpassed by further growth in terms of demand for water related activities or are we sort of essentially at the highest level it could get to. And is it at all contingent upon oil price or the relationship between crude oil and demand for your products? Thanks.
So I think we have demonstrated that this growth connected [ph] increased profitability is positive because the business is growing and I’m still confident that we can keep ball moving on. I will not begin to speculate any growth or profitably increased numbers but business they have been in a strong position in the business and they can develop further.
Of course there are conditions that if crude oil price level is very, very low normally the activities in production and cash production is lower. That’s one thing. But energy consumption as such is anyway there and in our world it’s connected to water totally. So this business I'm pretty confident we need to be sure of course that we have, if we grow we have also capabilities from capacity point of view to do that.
Martin Evans – JPMorgan
Okay. And just secondly very quickly shale gas. How you evolved in the extraction of shale gas in the U.S. through your Oil & Mining division?
If I understood Martin, your question right, so shale gas, we have not disclosed what is the sales in shale gas but I think that shale gas have been growing very well. It's in North America; certainly it’s a key element at the moment in the business. But it’s not all about shale gas, so we have established the business as a conventional and also enhanced oil recovery businesses, but shale gas offers options to grow.
Thank you Martin. Now operator, are there more questions?
We have no further questions at this time. So I'll hand the conference back to you.
Thank you. And still do we have questions in the room. If not, I thank you all. Thank you for attending and see you again at full year results session in February. Thank you.
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