CEO's Review

 

There were some noteworthy changes in our business environment during 2011. Our competitive landscape changed as a result of our competitors’ M&A activity. However, these moves do not cause changes in Kemira’s strategic priorities or business targets. Our customers increased their focus on water, energy and raw material efficiency. This trend is an opportunity for Kemira to further develop our offering and work closely with our customers to improve their profitability and sustainability.

The market conditions were highly volatile throughout the year. In the beginning of the year customer demand developed favorably and Kemira successfully implemented price increases to compensate the increasing raw material prices. The prices of oil and other key raw materials continued to rise or stayed at a high level throughout most of the second half of 2011. Simultaneously, the economic volatility resulted in extended maintenance breaks in the paper industry and reduced demand among municipalities with severe financial constraints.

 

In line with our strategy, about 78% of our revenue comes from water chemistry sales. The revenue in this business grew 6% from 2010. Sales in Oil & Mining grew over 13% and the growth was strongest in the Oil & Gas customer segment. Also the industrial sales in Municipal & Industrial progressed well. We succeeded in keeping our fixed costs slightly lower than last year despite the inflation. 66% of our strategic capital expenditure was spent in projects in emerging markets. Gearing decreased slightly from the previous year and we have means to strengthen the balance sheet even further in the future. In profitability, we have not reached our target yet. Thus, improving profitability towards EBIT 10% remains one of our key targets. This will require decisive and persistent work. But I believe that we have all the programs in place to achieve this goal.

 

We continued our journey to develop our capabilities and market position in selected segments and markets. The fastest penetration happened in the Oil & Mining segment, where the advanced water treatment business grew fast especially in the unconventional resources like the shale gas, especially in the US. The Paper segment made great progress in its repositioning. Paper is now recognized for its comprehensive offering for water management and wet-end as well as pulp processes for the paper industry. This enabled us to win new customers in both mature and emerging markets. In Municipal & Industrial we achieved strategic entries into new application areas across the customer base. During the year, we also proceeded in building our presence in selected emerging markets, especially the BRIC countries. Our manufacturing plant investments in China and India will be operational in 2012 and we are thus able to expand our portfolio and improve our cost position.

 

In March, Kemira sold the rest of its Tikkurila shares and the gross sales proceeds amounted to EUR 97.6 million. Kemira also owns a minority stake (39%) in Sachtleben, a major titanium dioxide (TiO2) producer. The performance of Sachtleben continued to be very strong, contributing significantly to our bottom line. Although we are happy with its performance, we continue to evaluate strategic options for this business in the long term together with our joint venture partner Rockwood Holdings. In the past few years both Kemira and Rockwood have stated that they do not consider the TiO2 to be a long-term core business.

 

Kemira owns shares in two energy companies Pohjolan Voima and Teollisuuden Voima. In December, Kemira Oyj bought 2.5% of the shares of Pohjolan Voima from Kemira’s pension fund. Kemira now has a full control of its energy assets. The transaction price was EUR 103 million.

 

The Center of Water Efficiency Excellence (SWEET) is a key vehicle for us to accelerate our own technology development and to build further expertise in water technologies. We collaborate with numerous partners, customers, research institutions, and suppliers globally. In 2011, the SWEET portfolio consisted of more than 30 projects. We ran promising pilots in several projects and were able to generate the first new revenues. In 2012, we will commercialize several new products and applications.

 

Our global customer satisfaction survey was carried out in the spring, and we landed 18 percentage points above competition in customer loyalty. The most appreciated attributes were ease of cooperation, quality of products, and meeting commitments. These are all strengths that we will use to further improve the value we deliver to our customers.

 

Since 2008, we have changed Kemira’s focus from a diversified chemical supplier into a water-chemistry business. At the same time, we have worked hard to develop a values based culture and unified ways of working, as we see highly engaged and skilled people are one of our most valuable differentiating factors. I am proud to say that our employee engagement has improved from the previous year and it exceeded the engagement index of our external benchmark companies.

 

To summarize, I believe the company has a clear strategic direction and all the possibilities to continue creating value for our different stakeholders. In our chosen customer industries, there is a growing need for water treatment and reuse and this gives us excellent market opportunities. All our segments run profitable businesses driven by a well-functioning shared core: common water chemistry technology, a broad product portfolio, and a streamlined production and logistics network. And finally, we have lots of energy, ability, and passion in the organization to reach our shared goals. This is a good starting point for the new CEO, Wolfgang Büchele. To conclude my long career at Kemira, I want to thank our employees, customers, owners and other stakeholders for the decades filled with a variety of events and changes.

 

Harri Kerminen
President and CEO