How To Grow A Company

Transcription

1 THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT KRA.HE - Q Kemira Oyj Earnings Call EVENT DATE/TIME: OCTOBER 22, 2014 / 7:30AM GMT

2 CORPORATE PARTICIPANTS Tero Huovinen Kemira Oyj - Head of IR Jari Rosendal Kemira Oyj - President & CEO Petri Castren Kemira Oyj - CFO CONFERENCE CALL PARTICIPANTS Markku Jarvinen Evli - Analyst Rauli Juva Nordea - Analyst Panu Laitinmaki Danske Bank - Analyst Oliver Reiff Deutsche Bank - Analyst PRESENTATION Tero Huovinen - Kemira Oyj - Head of IR Welcome to Kemira's third-quarter 2014 results conference. My name is Tero Huovinen and I'm Head of Investor Relations. Results will be presented by Kemira's President and CEO, Jari Rosendal, and CFO, Petri Castren. And after the presentation we will have Q&A session, but let's start with the presentations. Please, Jari, go ahead. Thank you, Tero. Good morning on my behalf also. Our progress during Q3 was according to plan. And we also, during September in our CMD, updated our mid-term targets and set a target for ourselves of EUR2.7b revenue, with 15% EBITDA by the end of If we look at Q3, our revenue accelerated. Our organic revenue grew by 3%, and in the first half of the year it was 1%. Our paper segment continued good growth, with 5% pace. Oil and mining with very good pace of 14%, and with the M&A activity on top of that, meaning 3F, 25% which is excellent result. And our M&I segment decreased still by 6%, but we saw a turning of the situation to the better, and that's a good thing to see. Even with the lower top line of the Group level, our EBIT grew slightly -- sorry, our EBITDA grew slightly and our Q3 margin was 12.9%. Q3 admittedly is a strong quarter for Kemira. In early July, we announced the deal for buying AkzoNobel's paper chemicals business. We expect the closing of that deal in Q1 in -- next year and we made two appointments in the Management Board. Antti Salminen will take over the M&I business as of November 1. Antti has been running for the last three years our supply chain management, which is a complex thing in a company like this. So he will be well-equipped to take over the multi-complex M&I business, with 30 plants and trucks arriving to customer sites every four to five minutes. So I look forward to Antti driving our cash generation from M&I. We also appointed Michael Loeffelmann to run our projects and manufacturing technologies side and a member of the Management Board. We will be doing more investments simultaneously and having projects ongoing, so Michael's role is very imperative to see that those go well and are planned well. All in all, I'm satisfied with the progress we made in Q3. 2

3 As we communicated in our Capital Markets Day in September, our two- to three-year restructuring phase is now mostly over. What I mean by mostly is that we naturally continue to look at efficiencies and look at ways to improve our business. But the big moves and steps from a restructuring point of view for now are over, and we are focusing on growth and improvement of EBITDA margin and getting leverages out of our operation. We did set the targets for 2017 at EUR2.7b revenue and 15% EBITDA. We continue to drive this with organic growth and inorganic growth and finding efficiencies in our operations and making sure that our SG&A costs do not grow in line with our growth and that way gaining bottom-line improvement. We now have the core three segments that we've been aiming more for. All of the segments have their clear role in the business. Pulp and paper business is number one in the world. And with the AkzoNobel deal, we'll be the only global player both in pulp and in paper. And we want to continue this growth that we've been already able to demonstrate. We're number one in municipal and industrial in Europe and North America. We are gaining back the momentum in that business and we want to drive the cash generation from that business going forward and supporting the investment needs that we have in oil and gas and in paper. I'd like to point out that the Q3 EBITDA margin from M&I was 13.2%. In oil and mining we have been growing strongly. The markets are growing strongly, especially in North America, shale gas and oil fields. And we have grown 15% year to date and 23% with acquisitions. And we plan on adding capacity to our oil and mining segment to keep the growth up. Coming back to the AkzoNobel paper chemicals acquisition. It's an excellent step in our strategy going forward. And what we haven't been able to tell before is that now we have progressed in the Works Council negotiation so far, that out of the 16 plants that Akzo has, 6 will transfer over to Kemira; 4 in Asia and 2 in Europe. And the balance of the 10 plants will be important contract manufacturing sites for Kemira going forward. But step by step during the next two years, most of that capacity will be insourced to Kemira existing plants. Some of those sites will probably stay as contract manufacturing sites. We do use tolling sites even today. We estimate that we will invest roughly EUR20m to EU30m of CapEx to increase capacities and doing debottlenecking in our existing plants to insource this capacity. Around 400 experts will transfer also to Kemira from AkzoNobel. Talking about product experts, sales people, manufacturing people, customer service people and such experts. As you can see, our pulp and paper business last -- during last 10 years has progressed well. We have become from number five position to a clear number one. Once we close the AkzoNobel deal, we'll be the only player in pulp and paper and number one. The AkzoNobel deal really supports our strategy well, because 50% of the volume goes to packaging, board and tissue, and a third of the business and you can see the footprint (technical difficulty), which is doubling our business and market share in APAC and takes our suboptimal APAC business forward. Our oil and mining segment has continued to grow well. And combined with the M&A, mainly 3F, which we closed Q4 last year, the growth has been really nice. We are coming to an end to a rather successful integration project of the 3F business. We will continue to drive growth, especially in North America and in the oil and gas segment, where the demand for shale gas and oil chemicals is growing strongly. We're the world's second-largest polymer producer in the world for these type of applications, and the EPAM and DPAM products are mostly used as friction reducers. You can see on the slide the other products that we also combine and deliver through the industry. The next-step outlook is the chemical EOR, or enhanced oil recovery. We don't gain any revenue from that business yet, but that's an excellent opportunity going forward, and a large tonnage of polymers will be needed to serve that market. However, I'd like to point out we don't expect any major revenue from that segment or that market until one to two years down the road. But we are working closely with customers for test cases and test fields to be deployed. 3

4 As said, we now focus after two, three years of restructuring into growth. We'll continue to look for efficiencies, but growth is what we're driving for. On this slide you can see the actions we've been taking either consolidating our business or doing acquisitions or consolidating of the market, and steps that are driving growth and are coming now online step by step. You can also see the activities that we have announced that will be the next growth engines in the business. And, as said, we'll be investing more into oil and gas and pulp and paper capacity. We also will continue to look at M&A opportunities, and I prefer bolt-on type of cases, but let's see what the opportunities out there might provide. So, as said, I'm quite pleased with the meeting of the plans for Q3. We continue to execute our plans and work on the Akzo pre-integration phase to be ready to take it over Q1 next year. We are driving for our 2017 targets. We have 13 quarters to go, so we are on our way there. So things have progressed the way I have expected. I'll conclude here and I'll ask Petri Castren, our CFO, to come and talk about more of the detailed financials. Petri Castren - Kemira Oyj - CFO So thank you, Jari, and good morning from my side as well. So Q3 performance, clearly a step forward in our plans. We demonstrated our ability to accelerate the organic growth while at the same time turning and enhancing our margins. So clearly the operating leverage, which we have been talking about, is working. So let's start looking at the numbers more in detail. As Jari mentioned, organic growth 3%, clearly a step up from the roughly 1% in the first half of the year. Particularly it's from growth in oil and mining, and in paper, growing organically, where we even picked up pace from Q2. Also the M&I is clearly showing signs of recovering, which we already hinted towards in Q2, but now those are visible in themselves. Organic growth was mostly volume, much less so in price. Operative EBITDA modestly increasing from EUR69m to EUR70m, but sequentially the increase was about EUR10m. As Jari mentioned, Q3 typically is a strong quarter seasonally for us, but clearly this was a good development. Improvement in the margin was about 50 basis points. High volumes were offsetting somewhat higher fixed costs. Also, our portfolio moves have really turned out to be good. We clearly are less than compensating on the top line, so we're only about gaining about half the revenue that we lost through the divestments. But actually in Q3, the businesses that we have acquired already are contributing more EBITDA than the businesses that we sold in the last year. Comparing to previous quarter, Q2, then the impact was about neutral. Those were offsetting each other. Regarding currency, the dollar strengthening clearly is helping us. The most -- most of the dollar strengthening took place in September, so in the quarter numbers that's not really visible. Actually, on top line the currency comparison is still somewhat negative, about EUR1m. But on the profitability, we actually did see a slight positive. And should the currency stay at this level, if dollar stays at the, let's call it, $1.25, $1.28 range, clearly this is helpful for us as we are long in dollars and, i.e., selling more than what our cost base is. Finance expenses, somewhat higher and an unfavorable comparison to last year. Last year we had some valuation items, particularly in our electricity derivatives that were helping the finance costs. So run -- to help guide the run rate of our finance expenses, about EUR5m interest rate expense and then something between EUR0.5m and EUR1m of other finance expenses. So about EUR5.5m to EUR6m actually is the run rate of financing expenses. Similarly, our reported EPS compares very favorably to the period a year ago. There were a number of non-recurring charges that we took in Q3 of 2013 and against much less so this year. 4

5 So let's look at visually what were the impacts on top line. I already talked about some of these. So mostly organic growth was driven by volume, much less so on price. Currency did have small negative impact, and I already talked about the -- how the acquisition -- acquired businesses actually were contributing more on the EBITDA line even if the impact on the revenue was still greater on the divestment side. This is perhaps a new slide. And what -- I want to send a few messages with this slide. First of all, about two-thirds of our businesses are currently delivering EBITDA margin of 14% or more. So that's about 65% of businesses delivering that now. We've grown this, and this is the blue bar, the dark blue bar at the bottom, so about a year ago this share was about 60%. So we are growing our business where it actually helps us the best, where we -- in the best places. And particularly this is the oil and gas business in North America, where we have been growing. We also have a small sliver of business which is subscale, and we've basically mentioned that our Asia-Pacific business is one of these. This we are clearly addressing with our new factory in Nanjing. So we're ramping up the factory and we're ramping up the capacity through the end this year and continue to do that next year. Furthermore, the acquisition of Akzo paper chemical business really helps us, because Akzo was relatively very strong in Asia Pacific and actually will help us achieve scale in Asia Pacific. Similarly, we will get additional scale in South America, where we have had a -- somewhat of a lower base and more difficulties of covering costs. Elsewhere, we also need to improve profitability through additional scale and efficiency improvements. And, as said, we continue to grow in the most profitable part of our business, which is particularly our oil and gas business in North America. So let's go into the segment comments. Paper. So paper grew at a -- organically at 5% rate, picked up the pace from Q2. I think the Q2 organic growth rate was 4%. We were alluding to some maintenance shutdowns in Q2. So clearly we're -- paper is clearly delivering what we expected and what we have expected from the segment. We delivered more than EUR300m of revenue, so that was an internal goal of delivering a quarter with EUR100m average monthly revenue. So very good outcome there. And then operative EBITDA was slightly below of that of last year, some 30 basis points lower. That there have been some conscious investments and focus into application sales and some increased fixed through the Nanjing ramp-up are primarily the cause of that. So even as the EBITDA margin came down on a year-on-year comparison, I expect a very good development in the segment to continue. So we expect a good momentum to continue through the quarter, although at this time it's somewhat difficult to say how the year-end customer maintenance breaks typically -- what's the timing of the customer shutdowns that typically are impacting year end. Moving on to the oil and mining, so good organic growth again continued there at 14% rate, reported growth helped by M&A, 25% rate, improving profitability by 90 basis point year on year, and continued strong sequential progression in the profitability through the year. The profitability was also reduced by the -- helped by the reduced A&D imports. You may remember in the last couple of quarters, we've talked about that the oil and mining -- because of the growth, we have had some shortage of A&D and we have had to export that from Europe, and that has come at the expense of higher transport costs. Now we don't need to do that anymore, and that's one of the reasons why we've been improving profitability in the segment. Also some of the price increases that we have announced are delivering results. The growth is supported by market. The last time we looked at oil rig count, it's still up 11%, even with the oil price have come down. So it seems and our -- the evidence that we are seeing that the shale production is very cost-effective even at these oil price levels, and actually can support even lower oil prices and the activity seems to continue at a very high level. To conclude my remarks on oil and mining, let's put -- repeat a caution, the same caution as I did in Q2. In certain product lines we are at or very near our capacity. So until we get additional capacity in 2015, it will be difficult to continue this sort of an organic growth rate, in the mid teens, in oil and mining. 5

6 M&I, again, as we alluded to, very good positive developments there as well. Sequentially we grew. Granted, typically Q3 ought to be the good season, a seasonally good quarter for us, but good to see the growth. The negative organic growth rate significantly slowed in Q2. You may remember this was 14% negative growth rate. Now it was 6%. And if you break that down into our main regions, in EMEA the negative organic growth was 3%. That was primarily driven by price or the raw materials that are then [driving] the price of our products. And even in North America, while the organic negative growth rate was still 10%, that's coming against a really tough comparison. Last year we had a significant project that was particularly strong in Q2 and Q3. And if we strip out the impact of that one particular project, which has stopped; we haven't lost the project, but the project came to an end, the growth is more like 5% or so. So clearly we are now seeing the progress in also in our M&I in a way of arresting the top-line decline. We've done -- that's through being more aggressive on some of our pricing, so that has helped us gain. And against that, it's actually very comforting to see that we have not sacrificed profitability. So 13%, 13.2% EBITDA margin for the segment, clearly showing that they are now on the right execution path. Then let's talk about one-offs, or, I would say, the relative lack thereof. So in the last couple of years, 2012 and 2013, when we were in a restructuring phase, we had significant non-recurring items through the site consolidation and restructuring activities. Now that we have moved over to a growth phase, we've left most of that behind. Now I'm not saying that we will not have any non-recurring charges or not any site consolidation, but clearly as we are focusing on a growth phase, one should expect that we are at a different level than the EUR100m level of 2012 and 2013 going forward. In Q3, non-recurring charges were only EUR2.7m and, as you see, EUR8m cumulative impact through the year. And the biggest items offsetting those were some of the restructuring and then the CDC litigation settlement that was done in Q2, offsetting the capital gain from the ChemSolutions formic acid sale. That's the main items. Some comments on the balance sheet and cash flow. So we continued to improve out net working capital. Even as we ramp up our factory in Nanjing, we are increasing inventories there, but the increase in inventories we were able to offset through management of our receivables and payables side. We're now comfortably below the 11% to 12% net working capital range that we have given and we expect to remain there. For year-to-date CapEx, capital expenditure spend is following very closely last year's levels. However, we expect that the trend will now pick up in Q4. We have -- it's a normal trend that there is a CapEx pickup in Q4. Also the Klabin chemical island, which we're building in Brazil, that's now starting its build-out phase and will start to show in the capital expenditure spend from Q4 and onwards. Operating cash flow. Just one comment there. There was some negative impact again from the currency, as we have a significant US dollar -- US business and a US dollar balance sheet which we hedge. A sudden movement in the currency can often impact cash-flow-wise negatively as the dollar strengthens. So we have an offsetting impact on the cash flow -- I'm sorry, the balance sheet hedges. So that's visible there in the cash flow. Repeating guidance for the rest of the year, and again all eyes and all efforts are now targeted towards our mid-term target of EUR2.7b, 15% EBITDA in So, with that, I'll end my prepared remarks and turn it over to Tero and Q&A session. 6

7 QUESTIONS AND ANSWERS Tero Huovinen - Kemira Oyj - Head of IR Thanks you very much, Jari and Petri. Let's take some questions, starting from the floor. Are there any questions? Markku Jarvinen - Evli - Analyst Thank you. Markku Jarvinen, Evli. I have a couple of questions. I suppose oil price is an issue at the moment. You said you saw no change in activity. What are your expectations if the oil price persists below $90? At the moment we've estimated that most of the shale fields, they operate somewhere between $30 and $70, that they still have no issues whatsoever. We've seen some offshore movement on -- capacity movements and companies making changes in their plans, but those cost levels are totally different from the on-ground things. So even if it would come down from here, we would be getting close to the high-cost fields. So at this moment we're not concerned of that. Naturally we're following that very carefully. Markku Jarvinen - Evli - Analyst Okay. Thank you. And further on oil, does that have an impact on your raw material cost and what kind of flow-through do you expect there? Not particularly. In some product lines, yes, but we have pluses and minuses in there all the time. So as the balance goes, we don't gain anything or lose anything in a sense because the value chains are quite long. But we've been thinking about that and we feel that there are so many pluses and minuses that it's offsetting mostly itself. Markku Jarvinen - Evli - Analyst Okay. Then the Akzo deal. I suppose quite a large proportion of that is now contract manufacturing. Should we expect the profitability of that business to be lower than what it was, let's say, as part of Akzo? We gave the indicative numbers when we announced the deal in July. And those were taking this into account, so this is not new development; this is just that we're now able to talk about what the structure is. So we knew already what the structure is when we went in and that 2013 number was built into there. Now when you think of full year next year, the revenue level that we put there, there's going to be some overlap because we already sell some of Akzo's products through our network today. So we'll be guiding that next year more. But it will be slightly less than the revenues we indicated. But the structure was fully known; we just now can talk about it. Markku Jarvinen - Evli - Analyst Okay. Good. And now that you know the structure, do you have a better view on the related restructuring costs? 7

8 As said, we haven't gained any new information. So we're still competitives and we have to be careful on how we do. We do deal and prepare with the oncoming integration. And as we gain knowledge, we'll let you know more. But most of it will then be revealed when we have access -- full access to their data. Markku Jarvinen - Evli - Analyst Thank you. Tero Huovinen - Kemira Oyj - Head of IR The next question, over there. Rauli Juva - Nordea - Analyst Yes. Rauli Juva from Nordea. Continuing on the Akzo issue, can you give any indications of how the business has progressed this year? Akzo has published their nine-month numbers, so should we expect that it has been around the levels you indicated for 2013 or has there been some changes? As far as we know, it seems like we've been able to gain some market share from them, so part of their growth has been there. So, slightly less than last year's numbers, but nothing alarming. Rauli Juva - Nordea - Analyst Okay. Thank you. Tero Huovinen - Kemira Oyj - Head of IR All right. Operator, is there any questions from the line? Operator (Operator Instructions). Panu Laitinmaki, Danske Bank. Panu Laitinmaki - Danske Bank - Analyst Thank you. Just a question on paper. You mentioned that there is still some uncertainty how the customer spend and their shutdowns will impact you in Q4. I was wondering how big is this uncertainty, if you could give some color on that. Thanks. 8

9 Well if you look at our historical numbers from paper's point of view, Q3 is usually strong and Q4 not as strong historically. And we don't see any difference in the trend. And that's partially because there are the yearend shutdowns by the customers and how long and so on they are. So all we are saying is that please keep that in mind when you're looking at things. We don't want to go and quantify it until we know ourselves. Panu Laitinmaki - Danske Bank - Analyst Okay. Thanks. Operator Oliver Reiff, Deutsche Bank. Oliver Reiff - Deutsche Bank - Analyst Thanks. I just have one question on the M&I business. So this business has historically seen quite a substantial benefit when raw material prices decline. And just given what we've seen in terms of oil price development, I just wanted to see whether you had any comments that you'd make over the next few quarters and into next year given that your contracts are pretty long-term for that business. Thanks. Thank you. Oil price, per se, doesn't have very big relevance in our M&I coagulant, mainly coagulant business. It's not a raw material there obviously; it's an energy cost in our transportation and so on. And as we have our own fleet and a lot of transportation in North America, that's a positive impact. But basically it's just taking off some pressure from transport cost that we've been feeling lately with a busy North America. So as it's not a raw material, it really doesn't have an impact, the oil price, to our business. On some other raw materials, like hydrochloric acid, we're seeing some interesting developments. It's balancing itself out, but the lower and -- lower prices and oversupply in Europe is continuing. Not worsening since Q2 but staying roughly on same level. We'll follow up how that develops. There is a lack of hydrochloric acid in the North American market and prices have increased. But mostly our situation is, you could call it, hedged through longer-term contracts with our suppliers. So we're not feeling the pressures. We are hoping that our smaller competition is feeling the pressures, but we haven't seen that effect yet. We estimate that the North American situation will last four to six months going forward from here. But oil price has no big benefits to us really that we can expect. Oliver Reiff - Deutsche Bank - Analyst Thanks. And just in terms of alumina prices and other raw materials, I suppose they've been fairly stable as well. Is that right? And iron prices have not changed that much that it will have a major impact. We also use a lot of scrap material and pickle liquor from the steel mills and so on, so it's not true traded metal prices that we're linked to. Obviously there's some link there, but especially pickle liquor has very little link, so no impact visible there. 9

10 Oliver Reiff - Deutsche Bank - Analyst Okay. Thanks very much. Operator (Operator Instructions). And there are no further questions at this time. Please go ahead, speakers. Tero Huovinen - Kemira Oyj - Head of IR All right. Thank you. Just final check if there is any questions from the floor. And if not, thank you very much for joining us today. Let's conclude here. DISCLAIMER Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. 2014, Thomson Reuters. All Rights Reserved T15:34: