Looking back and ahead: Analyst interview with Fabio Lopes, Bank of America Merrill Lynch

26/09/2013 News

Fabio LopesWhat are your thoughts on Kemira's new sharpened strategy launched in April 2013?

A clear strategy is a fundamental feature in any organization. The sharpened strategy is a proof that management is focusing its attention on how to allow the company to extract the most from its competitive advantages in terms of product offering, end-markets and geographical focus. Today, the company is in redesign stage, but the market looks ahead, so it likes the idea of having a roadmap with defined goals pursued by management as the ones provided in April.

How would you evaluate Kemira's performance during the year 2013?

2013 was a very important year for Kemira. The company is in the midst of its most radical overhaul in its history. Throughout the year, a number of non-recurring measures had to be implemented, which always generates mixed feelings within and outside the organization.  In addition, management and employee attention get diverted from the due course of the business to the restructuring program. The market is tracking it all very closely, given previous attempts to achieve some of the suggested goals. Looking through the smoke, we believe the restructuring program seems to be well on-track to achieve the proposed targets, with both the product portfolio and the manufacturing footprint looking a lot cleaner after the recent disposals which should allow the company to better control costs and focus on growth.

How do you see Kemira’s position in year 2014?

Firstly, it’s important to remember that 2014 is the year in which the Fit for Growth program matures in the context of the 10 % EBIT margin target. Investors will likely look at this as a proxy of the company’s ability to deliver on future efficiency programs. As we have been highlighting in our research, our analysis of Kemira’s manufacturing footprint suggests there is further room for restructuring. In terms of the business itself, Kemira is currently the only global player dedicated to pulp and paper, which brings opportunities for market share gains. In addition, its focus on the growth areas of packaging and tissue could allow the company to post higher organic growth rates when compared to history. Finally, in areas like oil drilling, new products could prove decisive in improving the growth profile of the group.

In your opinion, what is the most interesting change in the market relevant to Kemira's business within this year?

On the positive side, growth rates in the paper subsector have been strong, especially in areas like tissues and packaging for fast moving consumer goods. On the negative side, growth rates in global water treatment have not been optimum given excess capital committed to the sector in the last few years and with key governments making life tougher for the industry. In the competitive landscape, many of the companies exposed to water treatment and management are currently trying to optimize their operations. What we saw in 2013 was a bit of a reversal of the trend of overinvestment of the previous years. We’ve seen companies shutting down low margin businesses and disposing of unattractive assets.

Sustainability: could you give a concrete example of how sustainability influences analyst's evaluations?

From an investment point of view, I believe sustainability means being exposed to themes that will benefit from the changes in regulation and business dynamics caused by excessive depletion of natural resources and the consequences of humans living a sedentary life with poor eating habits, which to a large extent is a consequence of industrialisation. In Kemira’s case, water scarcity represents a rapidly growing constraint in many parts of the world. China, for example, has a major water constraint, especially in the northern region. That can be a major threat to its growth ambitions. If you think that a paper plant can use more water than a city like Helsinki, you can have an idea of the dimension of the problem there, especially given the size of its population and the lower base from which they are starting the country’s development. In the US, all sorts of regulation from drinking water to water used in shale oil exploration are emerging, and it could represent a big liability to companies that don’t take the appropriate measures. The list goes on. Throughout history, societies have disappeared or had to relocate because of lack of water. It could happen again. The companies that successfully provide solutions to these issues are likely to extract a large benefit.

The interview was conducted in connection with Kemira's Capital Markets Day in September 2013. 

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