Kemira Group Interim Report for January-March 2008

(Stock Exchange Release)

 

– Revenue in January-March 2008: EUR 683.6 million (Q1/2007: EUR 673.3 million)

– Operating profit excluding non-recurring items: EUR 27.2 million (EUR 48.1)

– Operating profit: EUR 33.0 million (EUR 48.9 million)

– Earnings per share: EUR 0.12 (EUR 0.22)

– Full-year operating profit and earnings per share, non-recurring items excluded, are expected to show an increase from their 2007 levels.

 

 

 

“We saw challenging times in Q1, with substantially higher than expected raw materials and energy-related costs and the continued weakening of the US dollar, eroding our profitability versus Q1 2007.  There was, however, an improvement over Q4 2007, indicating a positive trend forward.  Most businesses have shown reasonably good sales growth in local currencies. General price increases have been announced and wherever possible, contract pricing has been renegotiated to compensate for these higher costs. Measures to reorganize and to improve operational efficiencies are also under way. Based on current market understanding and excluding non-recurring items, we expect full-year profits and earnings per share to show an increase over prior year.”

 

“The strategy review and organizational restructuring work announced in February in connection with the disclosure of financial statements is ongoing and according to plan. The strategy work is based on customer segments and a new business structure reflecting the revised strategy for Kemira Pulp&Paper and Kemira Water will be in place at the end of the year.”

 

 

 

* 12-month rolling average

 

 

 

 

Kemira Group’s revenue for January-March 2008 totaled EUR 683.6 million (Q1/2007: EUR 673.3 million). Demand was healthy in most areas and organic growth in local currencies was 3%. Acquisitions contributed around EUR 16 million to revenue growth, while divestments depressed revenue by EUR 6 million. The currency effect had a 3%, or EUR 20 million negative impact on revenue.

 

 

 

The first quarter was challenging due to the continued increases in already high raw material and energy prices, and the continued weakening of the US dollar. The raw material prices increased more than estimated earlier.. Kemira Group’s operating profit, excluding non-recurring items, for January-March decreased by 43% to EUR 27.2 million (EUR 48.1 million). As a result, operating profit as a percentage of revenue, excluding non-recurring items, fell from 7.1% to 4.0%. However the profitability improved compared to the last quarter in 2007. High raw material and energy prices eroded profitability in all business areas, but paper chemicals and the polymers required for water treatment were most severely affected. Furthermore, Kemira Specialty’s performance was hampered by low sales prices in euro of titanium dioxide. The currency effect had a EUR 3 million negative impact on revenue compared with Q1 a year earlier.

 

 

Operating profit for January-March came to EUR 33.0 million (48.9) and includes non-recurring items with a positive net impact of EUR 5.8 million (EUR 0.8 million).

 

Profit before tax for the period amounted to EUR 21.9 million (37.3) and net profit totaled EUR 16.0 million (27.3). Earnings per share were EUR 0.12 (EUR 0.22).

 

In January-March, the Group reported cash flows of EUR 20.2 million (-30.0) from operating activities. Net cash flow from investing activities was EUR -29.2 million (-110.8). There were no acquisitions in the first quarter. In the first quarter of 2007 the acquisitions accounted for an outflow of EUR 23.2 million. Kemira showed a negative free cash flow of EUR -9.0 million (-140.8).

 

At the end of March, the Group’s net liabilities stood at EUR 1,015.9 million (December 31, 2007: EUR 1,003.4 million).

 

At the period-end, interest-bearing liabilities stood at EUR 1 072.2 million. Fixed-rate loans accounted for roughly 26% of total interest-bearing net loans. The Group’s net financial expenses totaled 5.3%. The duration of the Group’s interest-bearing loan portfolio on March 31 was 14 months (December 31, 2007: 13 months).

 

The unused amount of the EUR 750 million revolving credit facility, that falls due in 2012, was EUR 622.4 million on March 31.

 

On March 31, the equity ratio stood at 36 % (December 31, 2007: 39%), while gearing was 99% due to equity effect of dividends (December 31, 2007: 92%).

 

The Group’s net financial expenses for January-March totaled EUR 11.2 million (12.2).

 

The Group’s most important exchange rate risk arises from the USD denominated exports from the euro area. Approximately 70% of the exchange rate risk, annually equivalent to EUR 56 million, due to exposure to the US dollar, was hedged during the quarter. In addition, the company is exposed to a USD risk when USD denominated items are converted into euro in the financial statements.

 

Gross capital expenditure, excluding acquisitions, amounted to EUR 38.6 million (55.1) in January-March. Maintenance investments represented around 15% of capital expenditure, excluding acquisitions.

 

Group depreciation came to EUR 34.6 million (33.7 million).

 

Cash flow from the sale of assets was EUR 9.4 million (-32.5). The Group’s net capital expenditure totaled EUR 29.2 million (110.8).

 

In January-March, reported research and development expenditure totaled EUR 15.5 million (EUR 16.0 million), accounting for 2.3% of revenue (2.4%).

 

Kemira’s Asian Technology Center in Shanghai was inaugurated on April 15, 2008. In addition to Asia, Kemira’s network of the R&D centers includes Europe and North America. Once completed, the planned technology center in Latin America will bolster Kemira’s strategy of enhancing its business in the growing markets. With the technology centers up and running, customers will receive full R&D services on all continents. Kemira engages in development work with customers and other cooperation partners, e.g. in process technology and automation. In addition, close contacts with universities and research institutions are valuable. Kemira is intensifying its cooperation with China’s leading universities, the first among these being South China University of Technology in Guangzhou and Nanjing Forestry University.

 

The number of Group employees totaled 10,138 on March 31 (9,045).

 

 

 

* 12-month rolling average

 

 

In the first quarter, Kemira Pulp&Paper’s revenue remained on the previous year’s level. Organic growth in local currencies was 5% but the currency effect and divested businesses brought reported growth practically to zero. The currency effect had a 3% negative effect on revenue. While pulp chemicals showed good demand, the competitive environment for paper chemicals was challenging and sales figures fell short of last year due to customer paper mill closures, particularly in Europe and North America.

 

As a result of higher raw material and energy prices as well as the increase in transport costs, operating profit for the period excluding non-recurring items was down by 28% from the previous year to EUR 15.6 million (21.6). These raw material price hikes reflected particularly strongly on the profitability of the paper chemicals business. However, operating profit, excluding non-recurring items, was higher than in the final quarter last year.

 

The start-up of Kemira’s chemical plant, built next to Botnia’s pulp mill in Uruguay, has gone well. Its deliveries to the pulp mill are proceeding according to plans. Furthermore, the Kemira plant has also initiated chemical deliveries to other South American customers.

 

In January, Kemira announced its intentions to start a new company in Indonesia, which is a growth area for the pulp and paper production. PT Kemira Indonesia launched operations in January, offering pulp and paper chemicals solutions and products to customers in South East Asia.

 

 

 

 

* 12-month rolling average

 

 

Kemira Water’s revenue in the first quarter improved by 14% to EUR 179.5 million (157.9). Sales were good in all areas and organic growth in local currencies was 13%. The currency effect had a 5% negative impact on revenue. Acquisitions contributed around EUR 9 million to revenue growth.

 

The dramatically increased raw material prices taxed Kemira Water’s profitability in the first quarter. Operating profit excluding non-recurring items remained on the same level as in Q4 last year, EUR 6.8 million (12.0). The increase in raw material costs weighed particularly heavily on the profitability of water treatment polymers. Profitability of water treatment coagulants remained despite the increase in costs.

 

The operating profit of EUR 9.2 million for the first quarter includes EUR 2.4 million worth of non-recurring income.

 

At the beginning of January Kemira announced that a Finnish pulp manufacturer Savon Sellu Oy had selected Kemira Water as its partner responsible for managing and developing Savon Sellu’s waste water and sludge treatment.

 

In early April, Kemira announced its intention of increasing its water treatment chemicals production capacity in central China. Kemira’s 80%-owned Kemira Water Solutions (Chongqing) Co. Ltd will invest in a new production line for the manufacture of polyaluminum chloride. The plant extension is scheduled to be taken into use in the first quarter of 2009. Kemira Water Solutions (Chongqing) mainly serves the water treatment needs of the Chongqing autonomous area in terms of both drinking water and industrial wastewater. The new investment will allow the expansion of the customer base both in the Chongqing area and in the neighboring Sichuan province. In addition, the company aims to invest in municipal wastewater treatment in the future. Kemira is committed to strengthening its water treatment chemicals business in Asia.

 

 

* 12-month rolling average

 

 

Kemira Specialty’s revenue in the first quarter picked up by 3% to EUR 107.0 million (103.5). Revenue growth was held back by the ongoing weakening of the US dollar and the market environment for titanium dioxide, which continues to be very challenging. Organic growth in local currencies was 3%. In addition the acquisition of Tri-K in 2007 contributed to revenue growth. The currency effect had a 3% negative impact on revenue.

 

Operating profit in the first quarter amounted to EUR 3.8 million (10.3). The decline from the previous year could be attributed to the weaker US dollar, sustained low sales prices in euro of titanium dioxide, and increases in raw material and energy prices. However, operating profit excluding non-recurring items increased from the final quarter of 2007. The weakening of the US dollar has continued to improve the competitive position of US titanium dioxide producers in Europe, which is making it increasingly difficult to raise sales prices in Europe. The demand for, and price level of, formic acid remained at a good level.

 

An announcement was made in early January on the awarding of a new environmental permit to Kemira Pigments Oy’s Pori titanium dioxide plant. Until now, part of the iron sulfate formed at the plant as a by-product in the production of titanium dioxide has been pilled on the site and part has been sold for use as water purification chemicals or in the production of such chemicals. In the future, sales volume will be increased and customer base will be expanded from water treatment to other segments, such as the cement industry.

 

Kemira Oyj has concluded the evaluation of strategic alternatives for its business unit Chemidet. The business unit will continue to run as a part of the Kemira Specialty business area and will focus on maximization of profitability and cash flow.

 

 

* 12-month rolling average

 

 

Kemira Coating’s revenue in the first quarter rose by 7% to EUR 145.2 million (135.8) with organic growth at 5%. In addition, acquisitions completed in 2007 contributed to revenue growth. The timing of Easter in March and the cold and rainy weather in Northern Europe during the same month had a negative effect on sales growth compared with Q1 a year earlier.

 

Operating profit in the first quarter amounted to EUR 11.7 million (12.8). Increases in the costs of some raw materials and packaging materials affected profitability.

 

Following its strategy, Kemira Coatings continue investments in development of infrastructure in order to secure further growth in the CIS countries. The logistics and customer service center that is being built in Moscow will be ready in the second half of the year. Furthermore, Kemira Coatings has decided to build a paint plant near Kiev, Ukraine. The plant premises in Ukraine will also house a logistics centre, offices and a painting school. The new paint plant near Stockholm started operation in the beginning of this year.

 

 

 

During January-March, Kemira Oyj shares registered a high of EUR 14.77 and a low of EUR 8.28, the share price averaging EUR 9.67. On March 31, the company’s market capitalization, excluding treasury shares, totaled EUR 1,175.5 million.

 

On March 31, 2008, the company’s share capital totaled EUR 221.8 million and the number of registered shares was 125,045,000. Kemira holds 3,854,465 treasury shares, accounting for 3.1% of outstanding company shares and voting rights.

 

 

In accordance with a resolution made at the Kemira Oyj Annual General Meeting, a dividend of EUR 0.50 per share was paid for the financial year 2007. Dividends were paid out on April 2, 2008.

 

The Annual General Meeting elected seven Board members. As proposed by the Nomination Committee, the current members Elizabeth Armstrong, Juha Laaksonen, Ove Mattsson, Pekka Paasikivi and Kaija Pehu-Lehtonen were re-elected, and Jukka Viinanen and Jarmo Väisänen were elected as new members. Pekka Paasikivi was elected to continue as the Board’s chairman and Jukka Viinanen was elected as vice-chairman.

 

KPMG Oy Ab was elected the company’s auditor, with Pekka Pajamo, Authorized Public Accountant, acting as chief auditor.

 

The AGM decided that Article 4 of the current Articles of Association should be amended such that references to the Finnish titles “pääjohtaja” (English translation in the current Articles of Association “Chief Executive Officer”) and “varapääjohtaja” (English translation in the current Articles of Association “Deputy Chief Executive Officer”) are deleted.

 

The Annual General Meeting authorized the Board of Directors to decide upon the repurchase of a maximum of 2,397,515 treasury shares (“share repurchase authorization”). Shares will be repurchased using unrestricted equity either through a direct offer with equal terms to all shareholders, at a price determined by the Board of Directors, or otherwise than in proportion to the existing shareholdings of the company’s shareholders in public trading on the OMX Nordic Exchange Helsinki Oy (“the stock exchange”) at the market price quoted at the time of the repurchase.  Shares shall be acquired and paid for in accordance with the rules of the stock exchange and the Finnish Central Securities Depository Ltd. Shares may be repurchased for use in implementing or financing mergers and acquisitions, developing the company’s capital structure, improving the liquidity of the company’s shares, or implementing the company’s share-based incentive plan. In order to realize the aforementioned purposes the shares acquired may be retained, transferred further, or canceled by the company. The Board of Directors will decide upon other terms related to the share repurchase. The share repurchase authorization will remain valid until the end of the next Annual General Meeting.

 

The Annual General Meeting authorized the Board of Directors to decide on the issue of a maximum of 12,500,000 new shares and transfer a maximum of 6,252,250 own shares held by the company (“share issue authorization”). The new shares may be issued and the treasury shares held by the company may be transferred either against payment or, as part of the implementation of the company’s share-based incentive plan, without payment. The new shares may be issued and the treasury shares held by the company may be transferred to the company’s shareholders in proportion to their current shareholdings in the company, or, by way of derogation from the shareholders’ preferential rights, through a directed share issue, if the company has a weighty financial reason for doing so, such as financing or implementing mergers and acquisitions, developing its capital structure, improving the liquidity of the company’s shares or, if this is justified, for the purpose of implementing the company’s share-based incentive plan. The directed share issue may be carried out without payment only in connection with the implementation of the company’s share-based incentive plan. Furthermore, the subscription price for the new shares must be recognized under the unrestricted equity capital fund and the consideration payable for treasury shares shall be recognized under the unrestricted equity capital fund. The Board of Directors will decide on other terms related to share issues. The share issue authorization will remain valid until the end of the next Annual General Meeting.

 

At its meeting, the Board of Directors of Kemira Oyj elected members from among the Board for the Audit Committee and the Compensation Committee.

 

The Board’s Audit Committee members are Juha Laaksonen, Jarmo Väisänen and Kaija Pehu-Lehtonen. The Audit Committee is chaired by Juha Laaksonen.

 

The Board’s Compensation Committee members are Pekka Paasikivi, Jukka Viinanen and Ove Mattsson. The Committee is chaired by Pekka Paasikivi.

 

Based on current market understanding and excluding non-recurring items, we expect full-year profits and earnings per share to show an increase over prior year. Kemira Group’s growth is expected to be moderate and primarily fueled by organic growth in 2008.  Continued actions on price and on-going improvements in operational efficiency are key. However, the volatility in the global economy and especially if there are further energy-related and raw material cost increases or a continued weakening of the US dollar will create challenges to Kemira.

 

It is estimated that demand for pulp chemicals in Kemira Pulp&Paper’s customer industries will remain high, while the operational rearrangements carried out in the customer industries in North America and Europe will have an adverse impact on the demand for paper chemicals. Growth in this business area is expected mainly from the developing markets, such as Uruguay, where the chemical plant constructed at the site of a pulp mill will be in operation for its initial year. Kemira Water is expected to show good organic growth. The forecast for Kemira Water’s polymer business is overshadowed particularly by the increase in raw material prices. In the Kemira Specialty business area, demand for titanium dioxide, organic acids and sodium percarbonate is expected to be high. No increase is expected in average sales prices in euro for titanium dioxide in the first half despite some price increases implemented in the US dollar markets. Kemira Coatings expects sustained healthy demand in most market areas, with the strongest growth anticipated in Russia and other CIS countries.

 

 

Helsinki, April 29, 2008

 

 

 

 

 

 

 

Kemira Oyj

Timo Leppä, Executive Vice President, Group Communications

Tel. +358 10 862 1700

 

Kemira Oyj

Andreas Langhoff, Investor Relations Manager

Tel. +358 10 862 1140

 

Kemira will hold a press conference on its January-March 2008 results for the media and analysts at its head office (Porkkalankatu 3) today, starting at 10:30 a.m.

Presentation material will be available on Kemira’s website at http://www.kemira.com/Group/Suomeksi/Sijoittajat/Esitykset/Tulosesitykset/.