Interim Report 1 January – 30 June 2003
- Net sales: EUR 1,371 million (January-June 2002: 1,364 million)
- Operating income: EUR 76 million (79 mn), April-June 45 mn (26 mn)
- Net income: EUR 45 million (43 million)
- Earnings per share: EUR 0.38 (0.36)
- Full-year operating income expected to be higher than last year.
> Tables (.pdf)
The Kemira Group’s net sales in the January-June period of the current year were EUR 1,371 million, slightly exceeding the same period a year earlier (1,364 million). Consolidated operating income in the second quarter was EUR 45 million, almost doubling the operating income for the second quarter last year (26 million). Operating income in the January-June period was EUR 76 million (79 million), or 6% of net sales (6%). Income before taxes and minority interests was EUR 65 million (68 million) and income after taxes was EUR 45 million (43 million). Earnings per share were EUR 0.38 (0.36). Cash flow from the sale of assets was EUR 8.1 million (7.8 million). Cash flow after capital expenditures and the sale of assets was EUR 59 million negative (6.2 million positive in Jan.-June 2002). Per-share cash flow from operations was EUR 0.03 (1.10). Equity per share was EUR 8.87 (8.94 at the end of the previous year) and the gearing ratio was 81% (72% at the end of the previous year).
The average number of the Group’s employees in January-June was 10,339 (10,298).
GROUP STRATEGY
Kemira is seeking to be one of the world’s top three companies within pulp and paper chemicals as well as water treatment chemicals. The objective for the paint business is to grow to become 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 GrowHow business will be developed as an independent unit that is part of the Group and its cash flow will be partly used to fund the growth of the other units.
PULP & PAPER CHEMICALS
The Pulp & Paper Chemicals unit’s second-quarter net sales were EUR 123 million (125 million) and EUR 244 million for the first half of the year, growing by 4% over the previous year (234 million). Sales growth has been slowed down by the low production volumes of its main client, the pulp and paper industry, which continues to suffer from the depressed economy, as well as by the lower dollar. Operating income for the second quarter was EUR 6.5 million (2.5 million) and EUR 16 million for the six month period (11 million), which is a 52% increase and represents a margin of 7% (5%) on net sales.
Kemira further increased its presence in North America through the acquisition of the pulp and paper chemicals business of Vulcan Materials Company. The business has sales of USD 80 million and the purchase price was USD 43.5 million. The number of Kemira personnel increased by approximately 150 people. The product lines manufactured at the acquired plants include emulsion polymers, defoamers, wet and dry strength resins and a variety of custom manufactured products. This acquisition is an important step in growing Kemira’s pulp and paper chemicals business and significantly enhances Kemira’s ability to serve the pulp and paper industry globally. The transaction was finalized on 3 July.
In Europe Kemira has acquired the paper chemicals business of Klebstoffwerke Collodin Dr. Schultz & Nauth GmbH, located in Frankfurt, Germany. The acquired paper chemicals business represents sales of about EUR 3.5 million per year, mainly in Germany and France. The acquisition includes the transfer of manufacturing and application technology for rosin sizes - a significant part of the acquired business - and wet end chemicals to Kemira. The sales personnel within the paper chemicals business transferred from Collodin to Kemira. Production of rosin sizes will be transferred to Kemira in Krems, Austria. The acquisition reinforces Kemira’s market position in continental Europe as a provider of paper sizes and other specialty chemicals for the paper industry. Paper sizes are used to improve the printability and water resistance of paper and board.
The construction work on the new specialty paper chemicals plant in Washougal, Washington on the west coast of the US as well as the extension to the calcium sulphate pigment plant in Siilinjärvi, Finland, are progressing according to plan. This year the capacities of the different sizing plants in Krems, Austria, will also be expanded.
KEMWATER
Second-quarter net sales of the water treatment chemicals unit, Kemwater, were EUR 47 million, 2% higher than last year (46 million), bringing net sales for the first six months to EUR 90 million (91 million). Operating income for the second quarter was EUR 4.9 million (4.1 million) and for the six month period EUR 9.2 million (8.9 million), giving a margin of 10% (10%).
Kemira has signed an agreement with Ageco in Lucca, Italy, to utilize Ageco’s plant for ferric chloride production and take over Ageco’s water treatment business. This will make Kemira one of the leading companies within ferric coagulants in Italy, with production facilities in both Cremona and Lucca and net sales of about EUR 10 million. The agreement is also in line with Kemwater’s business strategy of expanding its activities in continental Europe, where Kemwater is today one of the major suppliers of coagulants to the water sector and operates 18 plants for the production of coagulants.
Kemira has started the production of water chemicals in St Petersburg. Kemira has acquired the production plant of Pigment Corporation of Russia in its entirety and Kemira’s plans call for developing further the existing production. The St Petersburg plant manufactures 70,000 tonnes of liquid aluminium sulphate a year and nearly all of its output goes for treating the city’s drinking water.
PAINTS AND COATINGS
Second-quarter net sales in the paint business were EUR 127 million, 6% lower than a year earlier (135 million). Since the start of the year, net sales were nearly the same as last year, EUR 233 million (236 million). Second-quarter operating income was EUR 14 million (15 million) and in the January-June period it reached EUR 20 million (19 million), or 9% of net sales (8%). The savings resulting from combining the operations of Tikkurila and Alcro-Beckers as well as other productivity improvement measures are clearly reflected in reduced fixed costs.
Net sales of the decorative paints business in January-June were 4% lower than last year. The reduction was due to unfavourable weather conditions in the spring and early summer. Otherwise development has been good in the main market areas. Strong growth has continued in Russia.
The industrial coatings business showed a 7% increase in net sales in January-June, driven by good development in the Nordic countries and Poland. The increase was to a large degree a result of the acquisition of Akzo Nobel Coatings’ general industrial liquid coatings business in the Nordic countries at the beginning of the year. The market has continued to be particularly weak in Great Britain, where consultations have been started with the workforce over a proposal to move to a single site operation in the UK. The company currently has manufacturing and administrative sites at Bury in Lancashire and West Bromwich in the West Midlands.
INDUSTRIAL CHEMICALS
The Industrial Chemicals unit is a supplier to the paint, printing ink, detergent, road maintenance, sileage, textile and fine chemicals industries as well as other sectors. The unit’s second-quarter net sales were 4% higher than last year at EUR 117 million (112 million). January-June net sales were EUR 217 million (214 million). Operating income for the second quarter was significantly higher than last year at EUR 13 million (4.9 million) and EUR 21 million for the first six months (16 million), even though the weakness of the dollar against the euro had a considerable negative impact. The January-June operating income was 10% of net sales (8%).
Roughly half of the unit’s sales are generated by the titanium dioxide pigments business, which saw the trough of its business cycle last summer, with prices rising until the first quarter of this year and slipping into a small decline towards the end of the second quarter. Average prices in the first half of the year were 3% higher than in the same period last year. The weakening of the dollar lowered the average selling price in Europe and also improved the position of those competitors whose costs are in US dollars. Sales volumes decreased by 1% compared with the first half of last year.
Kemira is investing close to 8 million euros in its Pori, Finland, plant for expanding its manufacture of specialty anatase products and for a new packaging system. The investments are planned to be completed in December 2004. The investments support the central objectives of the Pigments’ strategy to be the global leader and supplier of titanium dioxide products in selected product application areas, such as in the cosmetics, pharmaceuticals and food industries.
The demand for both calcium chloride and formic acid have remained at a good level, although some calcium chloride deliveries were deferred until later in the year. After the cold weather conditions at the beginning of the year, formic acid production has been running well and the expanded capacity has been in full use. Sodium percarbonate, which is used as an environmentally sound bleaching agent in the detergent industry, has improved its performance from the previous year. The timing of certain major deliveries in the fine chemicals unit will be in the second half of the year, whereas last year the majority of the deliveries were in the first half of the year.
GROWHOW
Kemira GrowHow, the plant nutrient business, had net sales in the second quarter of EUR 289 million (315 million), with first-half net sales totalling EUR 632 million, an increase of 1% on the previous year (626 million). Fertilizer sales volumes in the first half of the year rose all in all by about 11% from last year’s low level.
GrowHow reported second-quarter operating income of EUR 14 million (11 million) and a first-half figure of EUR 18 million (38 million), 3% of net sales (6%). Operating income includes EUR 7 million from a reversal of the provision made last year. It also includes a non-recurring charge of 1.9 million for the personnel arrangements in Finland.
The business unit Food Chain Partner supplies compound fertilizers, crop protection chemicals and services to agriculture in northern and eastern Europe. The unit’s net sales grew in January-June by 9% from last year. Sales volumes of compound fertilizers grew by 9% from the same period last year; prices were stable in the Nordic markets and increased by close to 10% in some other European markets. Of raw materials, the price of ammonia was markedly higher than a year ago.
Kemira Agro Nitrogen supplies fertilizers for agriculture in the UK and continental Europe. Net sales of the unit in January-June were up significantly on last year. Volumes increased, showing strong development over the previous year’s poor performance both in the continental and UK markets. Most of the deliveries in the first quarter were at lower prices than in the first quarter last year, thus delaying the impact of the improvements in the market prices, which in the second quarter were about 10% higher than a year ago. The cost of natural gas, which is the main raw material, was significantly higher than last year.
The Specialty Crop Care unit markets customized plant nutrients for specialty crop growers globally. The unit’s January-June net sales decreased substantially from last year. The decline came mostly from overseas exports, partly due to the weakening of the US dollar against the euro as well as in European markets after the liquid fertilizer production in the Netherlands was shut down last year. Increased freight rates burdened the margins. The new joint-venture production unit for potassium nitrate in Jordan in the Middle East has been successfully started up after the war in Iraq.
The Animal Nutrition unit supplies feed phosphates and acids to the animal feed industry globally. The unit’s January-June net sales grew clearly from last year due to the acquisition made in South Africa. Profitability has been depressed, with lower feed phosphate prices due to strong competition in the markets. The Kemphos unit’s sales and profitability were hurt by the weakening of the US dollar against the euro.
The Process Chemicals unit mainly sells nitrogen-based chemicals to other industries. The unit’s net sales were lower in January-June than last year and profitability fell somewhat short of last year due to the higher cost of natural gas.
OTHER OPERATIONS
Net sales by Kemira Metalkat, which manufactures catalytic converters for vehicle exhausts, amounted to EUR 22 million in the first half of the year (17 million) and the unit reported an operating profit of EUR 0.1 million (a loss of 0.9 million in Jan.-June 2002).
Kemira has its own electricity generation as well as holdings in Finnish power companies, which make the Group more than self sufficient in electricity in Finland. The excess is sold on the market, providing a natural hedge against costs outside Finland. Thus the high cost of electricity seen in the market last winter has not impacted Kemira's total energy costs significantly.
PROFITABILITY IMPROVEMENT
During the last year Kemira has launched several projects with the aim of improving profitability. These include improving logistics, procurement and efficiency at the production sites as well as establishing the Corporate Centre and the shared services unit called Kemira Service. Together these projects are slated to have a savings potential of over EUR 100 million over the next 2-3 years and they involve all strategic business units.
Additionally, discussions will be started with the personnel in Helsingborg, Sweden, regarding the possibility of reducing the production of potassium sulphate and calcium chloride as well as closure of the dicalcium phosphate production. Also, GrowHow has an agreed plan to reduce the number of its personnel in Finland by 170 by 2005. The Coatings unit is consulting with its employees to combine its two production units in the UK into one to address the difficult market conditions.
CAPITAL EXPENDITURES
The Kemira Group’s gross capital expenditures in the cash flow statement amounted to EUR 70 million (132 million). Disposals of shares and assets amounted to EUR 8.1 million (7.8 million). Full-year gross capital expenditures are estimated to exceed EUR 200 million (243 million).
FINANCING
The Group’s financial position remained stable. Interest-bearing net debt at the end of the quarter was EUR 865 million. Due to the seasonality of some major businesses, net working capital is at a high level at end of June and thus increases net debt.
The Group’s equity ratio was 42% at the end of the quarter (43% at the end of the year). The gearing ratio (net debt as a ratio of shareholders’ equity) was 81% (72% at the end of the year). At the end of the quarter, liquid funds amounted to EUR 75 million and unused agreed credit facilities totalled about EUR 387 million.
Net financing expenses in the January-June period were EUR 11 million (11 million). Gains on foreign exchange were EUR 7.0 million (6.2 million). The proportion which fixed-interest loans represented within the total amount of the Group’s interest-bearing loans was about 38% at the end of the quarter. Pension loans are considered to be floating rate loans.
The Revolving Credit Facility from 1997 was refinanced in June with a new EUR 506 million facility signed with eleven relationship banks for a five year term. In addition, a bilateral loan of EUR 35 million was signed for a term of ten years.
FINNISH PENSION FUNDS
The current estimate for company contributions payable into Finnish pension funds is about EUR 34 million, which is based on investment returns up to June 30. The second-quarter charge was EUR 8 million, bringing the January-June charge to half of the full-year estimate, or about EUR 17 million.
FULL-YEAR OUTLOOK
The depressed phase in the cycle of the pulp and paper industry is estimated to continue. The Group's geographical presence has strengthened and its product range and scope of services has expanded, particularly following the acquisition of Vinings, Inc. of the USA, which now is being complemented by the acquisition of the Vulcan paper chemicals business. The operating income of pulp and paper chemicals for the full year is expected to improve from the previous year.
Demand is expected to continue developing favourably within water treatment chemicals, and operating income should remain at last year’s level or improve.
The demand for paints and coatings is improving as the summer painting season has started after a fairly cold spring. The general slowdown in the economy should not affect demand to any significant degree. Growth is expected to be strongest in Russia. Synergy benefits arising from combining Alcro-Beckers of Sweden with the Kemira Paints and Coatings business together with other productivity improvement measures initiated last year and this year are expected to further improve operating income for the financial year even if there may be some one-time restructuring charges.
The outlook for industrial chemicals remains positive although somewhat cautious. New capacity has been brought on stream, e.g. in sodium percarbonate in Helsingborg, formic acid in Oulu, and titanium dioxide pigments in Pori. The slow global economic development and the weakness of the dollar have affected the titanium dioxide pigment markets, reversing the upward trend in prices. In spite of these developments, the operating income of the industrial chemicals business in 2003 is expected to improve from the previous year.
GrowHow's fertilizer prices have improved as the season has progressed, and the published prices for the new season are significantly higher than last year on the UK and continental markets. On the other hand, overseas exports continue to suffer from the weak dollar against the euro, and the price war combined with the weak dollar in the animal nutrition markets is cutting into profitability. For these reasons, GrowHow’s operating income for the full year is expected to fall below last year's level.
The Kemira Group’s operating income is expected to improve on last year’s operating result before the impact of the one-time impairment. The operational net result is also estimated to improve.
Helsinki 30 July 2003
Board of Directors
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.