Spin-off of the fertilizer business fails to go through
- Net sales: EUR 2,612 million (2001: EUR 2,454 million)
- Operating income of EUR 45 million (144 million) includes EUR 78 million of write-downs for Agro
- Income after financial items: EUR 16 million (113 million)
- Net income for the financial year: EUR 8.2 million (70 million).
- Earnings per share EUR 0.07 (0.58).
- Proposed dividend: EUR 0.30 per share (0.30). Cash flow per share: EUR 2.45 (1,03)
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Despite the slowdown in growth in 2002, the Kemira Group's pulp and paper as well as water treatment chemicals and paints businesses succeeded in improving their earnings from operations. In the Pulp & Paper Chemicals unit this was thanks to the acquisition which was made at the beginning of February of last year. The effect of the recession showed up particularly in Industrial Chemicals' sales of titanium dioxide pigments and in the low yield on pension fund investments, which raised pension expenses.
The spin-off of Agro did not go through. Development of its operations is being continued as an independent unit that is part of the Kemira Group. Agro made sizeable non-cash write-downs on assets.
Consolidated net sales increased by 6 per cent on the previous year and were EUR 2,612 million (2,454 million). Operating income was EUR 45 million (144), representing 2% of net sales (6%). Shares in the earnings of associated companies amounted to a total credit to income of EUR 5.5 million. The Group posted an operating loss in October-December of EUR 60 million (operating income of 17 million). The last quarter was burdened by Agro's exceptional non-cash write-downs totalling 78 million. Full-year operating income includes a total of EUR 11 million of other non-recurring business reorganization expenses that are discussed below.
In addition, the operating result was burdened by a further increase in the contributions to the Group's Finnish pension funds as a consequence of weak investment yields in a depressed market. In the last quarter the market revived somewhat, which meant that the situation improved compared with what was forecast in the third-quarter interim report. Contributions over the full year amounted to EUR 43 million, an increase of about EUR 6.5 million on the figure a year earlier.
Income before taxes and minority interests declined to EUR 16 million from EUR 113 million a year ago. Net of the non-recurring expenses for Agro, the figure was EUR 94 million. Income after taxes was EUR 8.2 million (70 million). Earnings per share were EUR 0.07 (0.58) and stripping out the write-down they were EUR 0.61. About 82% of the Group's net sales came from outside Finland.
The return on equity was 1% (6%). The cash flow return on capital invested was 15% (7%).
Cash flow after capital expenditures and income from the disposal of assets was EUR 67 million (146 million negative). Per-share cash flow from operations was EUR 2.45 (1.03). Equity per share was EUR 8.94 (9.35) and gearing was 72% (61%).
Although net income for the past financial year was weak, mainly as a consequence of non-recurring charges, the Group's cash flow was very strong, and the Board of Directors believes that the business areas will be on an upward trend in the years ahead. Accordingly, the Board of Directors is proposing that the dividend to be paid for 2002 be EUR 0.30 per share (0.30), or a total dividend payout of EUR 35.5 million.
DEVELOPMENT OF THE BUSINESS AREAS
In accordance with its strategy that was confirmed in February 2002, Kemira is stepping up its growth in the company's core business areas. Within pulp and paper chemicals as well as water treatment chemicals, the company is seeking to be one of the world's top three companies. This will be accomplished mainly through M&A arrangements. The objective for the paint business is to grow into one of the leading European companies, with a focus on the Baltic Rim operating environment. The industrial chemicals business will be developed by drawing on its present - largely organic - growth potential.
The options for decoupling the entire Kemira Agro business from the Group have been explored in depth. A number of different alternatives have been considered, ranging from a divestment of the Agro business to spinning it off together with an industrial partner or alone. In the present market situation, when Agro's business cycle is judged to be at its weakest in 2003, the spin-off could not be accomplished in a manner that would increase shareholder value. Because at the same time there can be seen in Agro's market certain positive factors which, if they materialize, will lead to an upswing, the Board of Directors has decided to hault the active measures aimed at decoupling Agro from the Kemira Group. The focus of operations will move to devoloping Agro's competitiveness further as an independent unit, whilst strengthening its own identity.
CHEMICALS
In the fourth quarter Kemira Chemicals had net sales of EUR 274 million (221 million). Full-year net sales totalled EUR 1,058 million, up 17 per cent on the previous year. All the strategic business units continued to grow, led by acquisition-boosted Pulp & Paper Chemicals, but with Kemwater also performing strongly. Fourth-quarter operating income was EUR 26 million (24 million). Full-year operating income was EUR 75 million (91 million), representing 7% of net sales. The above-mentioned pension fund contributions were EUR 6.5 million greater than a year ago. Earnings were furthermore burdened by the shutdowns required for the extension works at the formic acid plant in Oulu and the titanium dioxide plant in Pori as well as by the strikes in the first part of the year and a lower titanium dioxide price than a year ago.
Pulp & Paper Chemicals. Sales by the Pulp & Paper Chemicals unit, which has been designated one of the Group's strategic growth areas, increased by 41%.
Speciality chemicals for the paper industry have enjoyed the strongest growth following Kemira's acquisition in February of Vinings Chemicals Inc. of the USA. The deal put Kemira on the world map as a major supplier of pulp and paper chemicals. By way of the transaction, Kemira has grown from being a strong European supplier of speciality chemicals serving the forest industry into one of the biggest players in this sector worldwide. The purchase price was 138 million US dollars. On the other hand, the production volumes of the pulp and paper industry have remained at a low level and this has had an effect on the consumption of chemicals.
The profitability of bleaching chemicals fell short of targets, mainly owing to the low price level. Despite the business cycle, the Speciality Chemicals unit has moved ahead according to plan. Sales and earnings generated by sulphur chemicals have decreased in line with the forecast market situation.
The Pulp & Paper Chemicals unit's operating income came in above previous year's level.
Kemira invested 5 million euros expanding in the Siilinjärvi pigment plant, and the new production line for calcium sulphate pigment will lift the plant's total capacity to 100,000 tonnes. The line will start up at the end of 2003. The manufacturing technology for the calcium sulphate pigment is Kemira-developed and the product is unique by world standards. Due to the greater demand for improved sheet quality, mineral pigments are playing an ever bigger role in the paper coating process and as a filler material. A new speciality chemicals production unit went into operation in Brazil.
Over the next few years Kemira's objective is to grow into one of the world's leading suppliers of pulp and paper chemicals.
Kemwater. The Kemwater unit, which produces water treatment chemicals, reported a rise of 7% in net sales. Operating income was at nearly the previous year's level. Kemwater is pursuing further growth and will strengthen its market position, primarily in its present markets. This trend was most pronounced in central and southern Europe, where water treatment capacity is increasing.
Kemira's Swedish subsidiary Kemira Kemi AB and Anox AB have decided to found a joint venture named Akvab to develop and market combined chemical/biological solutions for water treatment. Kemira has a 60% stake in Akvab and Anox owns 40%.
At the beginning of 2002 an agreement was signed with the Russian company Pigment Corporation whereby Kemira will acquire its water treatment chemicals business. The acquisition is estimated to close fairly soon. Second-stage plans call for building a new water treatment chemicals production line in St Petersburg. The total cost of the deal and the capital expenditure will be about EUR 10 million. Water treatment in St Petersburg is a major development step for Kemira, and the agreement will strengthen Kemira's position as Europe's largest supplier of coagulants.
The Industrial Chemicals business unit reported an increase of 1 per cent in its net sales compared with the previous year. The operating result was markedly lower owing to the low price level of titanium dioxide pigment.
Kemira Pigments' sales volumes were 3% higher than in the previous year, but prices were on average 10% lower than a year ago. The titanium dioxide pigment market bottomed out in the summer and product prices headed upward. At the end of the year, prices were at the same level as at the end of 2001. An extensive shutdown was carried out at the Pori plant in August-September in connection with the final phase of an investment to expand capacity. Additional capacity was completed towards the end of the year and it will make possible additional sales of about 20 million euros.The unit's profitability also suffered from production difficulties and the strikes in the first part of the year.
The calcium chloride business has been stable and capacity utilization rates high. From time to time there has been a shortage of products and the price level was slightly higher than it was the year before.
Within the formic acid business the capacity utilization rates at the plants have likewise been high and there has been a shortage of formic acid and its derivatives on the market. The price level was slightly better than a year ago. A new formic acid production line was completed, several months ahead of schedule, in Oulu at the end of the year. The total costs of the project came to 17 million euros. The plant's capacity rose from 60,000 tonnes to 80,000 tonnes a year. The increase raised Kemira comfortably to the position of the world's second largest producer of formic acid.
Last year saw the completion of an expansion to the plant that manufactures sodium percarbonate, which is used as a raw material in detergents. The expanded facility has been in full use, sales volumes have risen and the unit's profitability has improved compared with the previous year.
In February 2003 a fire occurred at the titanium dioxide plant in Pori. It did not cause personal injury but did damage the plant's roof structures. Following a brief shutdown, 2/3 of the plant's production went back into operation, and deliveries of goods to customers continued without disturbances. The insurance policies cover the greater part of the property damage and the financial losses caused by the interruption of production.
Kemira Fine Chemicals' sales grew markedly on last year and profitability improved.
PAINTS AND COATINGS
The paint business continued its stable development also in the latter part of the year. Due to the seasonal nature of the business, this is the slowest time of the year. In the fourth quarter Paints and Coatings had net sales of EUR 85 million (83 million). Full-year net sales were EUR 450 million (445 million). Paints and Coatings reported a fourth-quarter operating loss of EUR 9.7 million (operating loss of 9.1 million) and full-year operating income of EUR 25 million (17 million), or 6% of net sales (4%). The savings generated by combining the operations of Tikkurila and Alcro-Beckers, which was acquired at the beginning of 2001, began to show up in earnings. Efficiency-boosting measures resulted in a non-recurring cost of about 7 million euros during the financial year. The item mainly burdened the fourth-quarter result.
Net sales reported by the decorative paints arm, Tikkurila Deco, were up 3%. Strong growth has continued in the Baltic countries and in Russia. Operating income was burdened by non-recurring expenses connected with winding up the Benetton business, changes made in the Alcro-Beckers distribution chain in Sweden and the disposal of a plant unit that was closed in Finland.
The industrial coatings manufacturer Tikkurila Coatings reported a 3% drop in net sales because investments by industry and agriculture have remained at a low level owing to the poor economic outlook. Sales growth in the markets of eastern Europe did not suffice to offset the fall in Great Britain and the Netherlands. The decision to close the plant in the Netherlands and the one-off expenses of the reorganization of operations in Great Britain cut into operating income, but on the other hand the changes will bring results.
Towards the end of October Kemira acquired Akzo Nobel Coatings' general industrial liquid coatings business in the Nordic countries. The business had sales of 17 million euros in 2001.The deal will strengthen significantly the position of Kemira's industrial coatings business in the Nordic countries and the Baltic area.
AGRO
Agro, which produces fertilizers, animal feeds and process chemicals, had net sales of EUR 294 million in the last quarter (312 million) and EUR 1,165 million over the full year (1,158 million). Following the record low sales volumes caused by the exceptional weather conditions in the previous year, fertilizer sales volumes grew by 9 per cent last year. Sales volumes in the fourth quarter were up 7 per cent on the same quarter of 2001. Towards the end of the year, fertilizer stocks fell back to the usual level.
Agro reported an operating loss of EUR 34.4 million (operating income of 49 million). In the fourth quarter Agro made an operating loss of EUR 74.2 million (operating income of 9 million). The figure includes EUR 78 million of non-recurring write-downs on the impaired assets of subsidiaries and associated companies. These items do not have an effect on the Group's cash flow. In addition, EUR 4.3 million of one-off expenses due to other structural arrangements was booked (1.8 million). Agro's operating income was at the same level as in 2001.
Demand in the European fertilizer market has not recovered as forecast following the exceptional weather conditions of 2001.
The specialty fertilizer unit reported a marked increase in net sales compared with last year. The volume of NPK fertilizer sales rose by 10%. The unit reported especially strong growth in deliveries to the Baltic countries and eastern central Europe as well as to markets outside Europe. Prices of fertilizers were about 5% lower than in the previous year. The fall in prices was offset in part by the low price of ammonia, which is used as a raw material, as well as by a decrease in fixed costs thanks to efficiency-boosting projects. Operating income was better than a year earlier.
A capital expenditure in Uusikaupunki aiming at raising the level of automation was seen to completion during the year. In Spain, Kemira Agro acquired the entire shares outstanding in the sales company Coferlisa SA, whose principal product is speciality fertilizers. The company was previously a joint venture with a local partner.
Net sales of the unit which manufactures nitrogen fertilizers fell 13% below the previous year's figure, even though the volumes of fertilizer delivered rose by 8%. The price level weakened markedly and at the beginning of the autumn season was on average 10% below the previous year's price, though the price level of nitrogen fertilizers began to firm up again towards the end of the year. Operating income was clearly weaker than last year.
The year saw the completion of the transfer to Tertre, Belgium, of the nitric acid plant that was closed in the Netherlands towards the end of 2000. The transfer investment helped to improve the efficiency of nitric acid production. Agro sold part of the equipment and warehouse facilities of the fertilizer plant in the Netherlands that was closed towards the end of 2000. Negotiations on the sale of the remaining parts are continuing.
The feed phosphate business has developed favourably both in terms of net sales and profitability. The unit's operating income improved. The animal feed business is being strengthened by building a 40,000 tonne feed acid plant in Helsingborg, Sweden. The plant started up in the second half of the year. The product is believed to have good growth possibilities, especially owing to the widening scope of restrictions on the use of antibiotics in animal feeds. A plant that will manufacture potassium nitrate and feed phosphates which is presently under construction in Jordan on a joint venture basis will go into operation in the first part of 2003.
In mid-October, Kemira Agro acquired Kynoch Feeds of South Africa. The company delivers high-quality feed phosphates and other products for animal nutrition. Kynoch Feeds has net sales of 45 million dollars and it employs 233 people. Thanks to the acquisition and the new plant in Jordan, Agro's position will be bolstered significantly, particularly in the Middle East and Asia, where the markets are growing.
A new company, Verdera Oy, was established to handle the biological pesticides business. With a staff of 17 employees at present, Verdera develops, manufactures and markets biological pesticides. After the company was founded, a 20 per cent stake in it was sold to a fund run by BioFund Management Oy. A search is under way for new business partners to strengthen Verdera's operations. Verdera has net sales of 1.7 million euros and it is the largest company in its field in the Nordic countries. Kemira Agro raised its holding in Farmit Website Oy, which produces an electronic service channel for farmers, to 50%.
The shares in Mykora Oy, Agro's subsidiary which grows and markets champignons, were sold to a domestic entrepreneur who will carry on the business. Mykora had net sales last year of about EUR 7 million and employed 60 people. Operations of the loss-making liquid fertilizer plant in Rozenburg, the Netherlands, were wound up.
Process chemicals continued to have good sales and profitability.
OTHER UNITS
Kemira Metalkat, which manufactures catalytic converters, reported a decrease in net sales of 13%, to EUR 34 million. The company posted an operating loss of EUR 2.4 million. A year ago it made an operating loss of EUR 2.7 million.
CAPITAL EXPENDITURES
The Group's capital expenditures, including acquisitions, totalled EUR 243 million (298 million), or 9% of net sales. Depreciation on fixed assets amounted to EUR 176 million. Disposals of fixed assets and subsidiaries yielded EUR 21 million (27 million). The Group's investments in environmental protection came to about EUR 12 million (14 million).
The Group spent about EUR 46 million on research and development, or about 2% of net sales. The figure does not include capital expenditures.
ENVIRONMENTAL PROTECTION AND MANAGEMENT OF RISKS
Environmental protection is an essential part of the Group's operations. The company publishes an Environmental Report annually.
The Group continually pays close attention to ensuring that its operations are safe and that its plants run without disturbances. Functions and operations are evaluated by both internal and external experts. During the year the 13 largest production sites were evaluated in this connection.
FINANCING
The Group's financial position remained stable. Interest-bearing net debt at the end of 2002 stood at EUR 768 million (686 million). The growth was attributable primarily to the acquisition of Vinings Chemicals Inc.
During the year one new long-term loan of EUR 75 million was taken out, and the amount of short-term loans decreased by EUR 39 million.
Cash flow before financing was EUR 67 million (–146). The Group's equity ratio was 43% at the close of the year (46%). The gearing ratio (net debt as a ratio of shareholders' equity) was 72%. At the end of the year liquid funds amounted to EUR 81 million and unused agreed credit facilities totalled about EUR 292 million.
Net financing expenses were EUR 29.5 million (EUR 31 million). Foreign exchange differences resulted in a net gain of EUR 10 million. The proportion which fixed-interest loans represented within the total amount of the Group's interest-bearing loans was about 37% at the end of the year. Pension loans are considered to be floating rate loans. Owing to the exceptionally low level of interest rates, the change in the market value of interest rate hedging instruments was EUR 9 million negative.
PARENT COMPANY'S FINANCIAL PERFORMANCE
The parent company's net sales come only from the sale of energy in Finland, both within and outside the Group. The parent company had net sales of EUR 23 million (21 million). The parent company reported an operating loss of EUR 36.3 million (a loss of 14.8 million). The loss was exceptionally large because it includes an EUR 22 million loss booked within the Group as a consequence of the ownership arrangements connected with the decoupling of Agro. The parent company bears the costs of Group management and administration as well as part of the expenses of the research centre in Espoo.
The parent company's net financial income amounted to EUR 127 million (11.6 million). The figure includes large items within the Group: a dividend of EUR 172 million paid by Tikkurila Oy and EUR 56 million of losses on the write-down of internal loans. Income before taxes and appropriations was EUR 185 million (109 million). Capital expenditures amounted to EUR 17 million, including increases in the equity of subsidiaries.
PERSONNEL
The Group employed an average of 10,377 people, or 170 more than in the previous year. Of the total personnel, an average of 5,696 people were employed by Group companies outside Finland.
The parent company had an average payroll of 257 employees, 22 more than a year ago.
In order to achieve Kemira's strategic objectives, a project aiming at developing the organization was launched. The project will seek to improve operational efficiency and develop the organization in line with the requirements for promoting the growth and transformation of the Group's business operations.
The cornerstones of the organizational remake are the formation of a new and smaller Corporate Centre and the establishment of a joint administrative services centre. The Corporate Centre will concentrate on active strategic management. Establishment of Kemira Service will improve the efficiency and quality of administrative and support functions as well as yield Group-wide advantages of scale.
A large part of the Group's personnel are covered by various bonus systems that vary from country to country. In addition, the Group has a share option system for top management.
The Annual General Meeting resolved to amend the Articles of Association such that the general meeting of shareholders elects the company's Board of Directors and its chairman and that the Board of Directors elects the company's president and his deputy. During the year under review the following persons served on the Board of Directors of Kemira Oyj: Sten-Olof Hansén (Chairman), Niilo Pellonmaa (Vice Chairman), Ritva Hainari, Eija Malmivirta, Anssi Soila and Tauno Pihlava, the last-mentioned up to 3 April 2002, when the Annual General Meeting elected Matti Packalén to replace him. The other members were re-elected for the term of office beginning from the Annual General Meeting and extending up until the next Annual General Meeting. None of the members of the Board of Directors is an employee of the Group.
OWNERSHIP
The Finnish Government's holding in Kemira was 56.2% at 31 December 2002. Foreign institutional investors owned 4.6% of the shares and Finnish institutions and mutual funds 29.1%. Private investors' holdings amounted to 6.7% of the shares outstanding.
The Annual General Meeting resolved to authorize the Board of Directors to purchase the company's own shares on the market such that the company can have in its possession treasury shares up to a maximum of 5% of the company's entire shares outstanding, or 6,118,000 shares. Shares can nevertheless be bought back up to a maximum amount of 1,928,000 shares because the company has in its possession 4,190,000 shares that were previously bought back. The Annual General Meeting furthermore authorized the Board of Directors to transfer on treasury shares following this purchase as well as to sell them via Helsinki Exchanges. They can also be used as part of the bonuses which are to be paid to the Group's personnel funds and as employee bonuses (in the event that a decision is taken to introduce them) or else as consideration in acquisitions. The authorization relates to a maximum of 6,118,000 of the own shares bought back for the Company. The authorization is in force for one year from the resolution of the Annual General Meeting and so far it has not been excercised.
CHANGES IN THE GROUP STRUCTURE
A number of companies or participations were established, acquired or divested during the year. The major changes have been discussed in the surveys of the business areas.
OUTLOOK FOR 2003
Pulp & Paper Chemicals. The unit's market outlook will be affected by the continuing weak demand within the pulp and paper industry, which is a consequence of the general business cycle, especially in the USA. The recession is forecast to continue. The acquisition of Vinings of the USA has strengthened Kemira's position in the global pulp and paper chemistry market significantly: the company's geographical presence has been reinforced and it also offers an expanded palette of products and services. Operating income is expected to improve.
Kemwater. The water treatment chemicals business too is expected to show favourable development, and this is likewise a sector in which Kemira is prepared to grow by way of acquisitions. Operating income is expected to remain at a good level.
Industrial Chemicals. The unit has good prospects for the year. New capacity for different products has been completed, thereby paving the way for growth in sales volumes and earnings. The price level of a number of products has developed positively and the market situation is good. Measured by net sales, titanium dioxide pigments are the unit's largest product by far, and an improvement in their price level will show up in the unit's operating profit, which is expected to rise.
Paints and Coatings. Demand for paints appears moderately good and the general slowdown in the economy is not anticipated to have a significant impact on it. The strong growth in demand for paints is anticipated to continue, especially in Russia and the Baltic countries. The synergy benefits arising from combining the paint businesses of Tikkurila and Sweden's Alcro-Beckers will improve the result of the paint business right during this year. This, coupled with ever-growing demand in the nearby markets, is the basis for the expectations in the paint industry of an improvement in operating income.
Agro. Over the longer term it is believed that the structural transformation in the European fertilizer industry will continue because certain producers have already ended up in financial difficulties. The world's grain stocks are at an exceptionally low level. This has already raised grain prices and as a rule it has previously also showed up as a rise in the prices of fertilizers. The near-term outlook remains shrouded in uncertainty as a consequence of the higher price of energy and transports. Prices during the fertilizer season have so far been lower than they were last year and at the same time the price of the main raw material, natural gas, has risen. Agro's full-year operating income is expected to be somewhat less than last year.
Kemira Group Although there appears to be no let-up in the difficulties facing the world economy this year, Kemira Group is estimated to report better operating income than it did in 2002. A number of expansion investments became operational towards the end of last year, and the business cycle for titanium dioxide pigment is improving.
The trend in share prices will affect the Group's pension costs because the investment portfolios of Finnish pension funds include about 100 million euros of listed shares. Financial expenses are forecast to be close to last year's level.
In 2003 the Group structure will be altered such that instead of the Kemira Chemicals business area, the business units will report separately. This means that the reporting units henceforth will be Pulp & Paper Chemicals, Water Treatment Chemicals, Industrial Chemicals, Paints and Coatings and the GrowHow unit, which is Agro's new name.
All forecasts and estimates mentioned in this report are based on the current judgement of the economic environment and the actual results may be significantly different.