Kemira's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Kemira Oyj (KMRAF)

Kemira Oyj Ord (OTC:KMRAF) Q4 2012 Earnings Call February 6, 2013 8:30 AM ET

Executives

Tero Huovinen - Director, Investor Relations

Wolfgang Büchele - President & CEO

Jyrki Mäki-Kala - CFO

Analysts

Unidentified Analysts

Martin Evans – JP Morgan

Unidentified Analyst

Mikael Doepel - Handelsbanken

Peter Mackey – Morgan Stanley

[Inaudible] – Bank of America

Panu Laitinmaki – Danske Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the **** First Quarter Fiscal 2008 results conference call. (Operator Instructions)

Tero Huovinen

Good afternoon and welcome to the 2012 fourth quarter and 2012 results. My name is Tero Huovinen. I'm responsible for investor relations. We will start by a presentation from Kemira's President and CEO, Wolfgang Büchele followed by a presentation from the CFO, Jyrki Mäki-Kala. And as usual, we have time for questions after these quotations.

Wolfgang Büchele

Welcome ladies and gentlemen to Kemira's news conference. I would like to give you an overview on where we are and what we have done. And then you will then later on get a more detailed introduction to the figures and an interpretation of the various aspects by our CFO, Jyrki Mäki-Kala.

From a financial performance point of view, the year was satisfactory. We grew with 2% what especially made us proud [inaudible]. Paper business is not just doing well in the major markets. It is also making very good in growth in the emerging markets.

From an EBIT perspective, we came home with 154.1 [inaudible] respective level of 2011. The operative [inaudible] gross launched in July, [inaudible]. [Inaudible] came home more or less at [inaudible]. [Inaudible] our operative earnings per [inaudible] from 0.4 and EUR 13 since [inaudible] are the negative impact of joint ventures [inaudible]. So that gives you an idea how in titanium dioxide are under the current circumstances.

The board of directors proposes to the HM. Nevertheless, a dividend of EUR 0.53 per share because we are confident that in line with our forecasts and in line with our promises around 54 gross, we are on track and will be able to deliver substantial improvement in 2013. And from that point of view, the board of directors as well as the management is of the opinion that we can afford to propose such a dividend.

Cash flow after investing activities came down to slightly below EUR 72 million, which to a certain extent was an account of the one-time cash items related to 54 gross. And also to a certain extent related to our gross CapEx investments, which we undertook in 2012.

We have undergone substantial structural changes in 2012 in order to prepare the organization for growth and profitability improvements in 2013. The new organization went operational in October as already announced and discussed. And we are now in directing more intensively with our markets on a de-centralized basis. The RBUs are fully operational. And from that point of view, we are of the opinion that once we also have introduced and presented our sharpened strategy, you will see that the company is embarking on a growth path.

The second element, which drives different to the past our value creation in 2013 is the new performance management system. We have introduced a performance management system, which is based on a so-called value tree. So from the holistic group target, cost as well as marching targets are broken down to the individual roles in the organization. And everybody in the organization based on this value tree gets a pre-defined target, financial target, which he or she can directly influence. And every employee gets a monthly update how he or she is performing relative to this target so that we are not just in the middle of the year's revenue or at the end of the day realize where we have issues, but that we have a constant mirroring in the organization how well value creation takes place and how we are performing.

Our personnel reduction is underway, up to 600 employees as we have indicated. And most of the core determination negotiations meanwhile have been either accomplished [inaudible]. [Inaudible] might be aware from the media currently co-determination negotiations are underway in France. We are discussing with respect to [Inaudible] and [Inaudible].

Manufacturing network optimization is well advanced. Implementation is currently ongoing. And we have at this point almost 20% of our current sites under review. Decisions have been made. Decisions have already been communicated. And we are walking along the lines what we have promised earlier. So overall, we will close down 14 sites or plants in the course for Fit for Growth.

We also made substantial progress when it comes to working capital. We came down from north of 13% networking capital to now 12.8% in 2012. And our target for 2014 is still at the 11% level. And we are currently working on an improved standard as an OP process in order to improve further our supply and demand planning in order to make sure that in the course of 2013, we are constantly moving in the direction of the 11% target.

Our sharpened strategy is in the final stage of being complied. We had as originally planned and indicated, the second rehearsal with our board at the end of November, 2012. And we will see board approval at the end of March. And will then in the context of our Q1 result presentation in April outline in detail how the sharpened strategy is going to look like, what differentiates the sharpened strategy from our previous approach, and what the implications on Kemira are.

If you'll look to the development of our major segments or of our segments, you see clearly that there are two categories. The first is obviously oil and mining, which is small growing, but still the most profitable part. Paper is constantly improving its' profitability. So paper is clearly on the right track. ChemSolutions in 2012 was hit by an extended shutdown, which we had in summer, 2012, but is now already on the way up. And we are sure that in 2013, ChemSolutions will return to a profitability level we had at least before and which is north of 10%.

The challenge remains still in M&I. We have already addressed M&I by closing sites. We have currently a customer segmentation project underway. And we are also addressing the logistics optimization in order to pay tribute to the challenges in this business where we on the one hand see raw material price increases and on the other hand, an ongoing intensive competition.

If you look a little bit deeper, the decline in M&I has clearly slowed down. What impacted our Q4 result was a disposal of low margin products in order to clear the inventory. It didn’t make sense to push these products any further because there is and was no hope that the markets would recover. So we cleared how if you want, which has to a certain extent asks its tribute. Otherwise, [inaudible] level. But clearly, M&I requires [inaudible] margin to the desired level.

We continue with our asset optimization program. And we are reviewing at this point the final sites, which we have originally earmarked, which might be eligible for closure. And as we are progressing with our decisions, we will keep you posted.

We have also well-at-once with our customer segmentation project where we identified what customers really value. So in other words, we are able going forward to tailor our services to the respective needs on the one hand, but also to the willingness of the customers to reward for services. And not everybody going forward will be awarded service levels at the same level and in the same way. We will tailor that to the readiness of customers to pay.

Raw material costs clearly is a challenge in this business. And you all are aware that the iron ore prices and therefore the iron source has increased quite a bit over the recent months. That hits all the manufacturers of coagulants, so access to raw materials is key. And we are increasing our efforts to secure not just short term, but on a long term byproduct sources for Kemira in order to mitigate our exposure to fluctuations on the raw material markets.

Clearly, we have and we continue to reduce our cost of our footprint. The fixed costs are too high, still too high. And we are currently as you know in the process to reduce over capacity in our network. And ultimately as a consequence of that, reduce our fixed costs associated to the M&I business.

Last but not least, we have initiated a program to optimize freight costs. The business is challenged by substantial freight costs. And to a large extent, water is shipped between manufacturing sites and customers. And we are now allocating customers based on logistics optimization to individual blends rather than taking geography as a decisive point. So we are using tools of forwarders how to optimize cost in the context of our supply chain from the manufacturing site to the customer.

If you go to ChemSolutions, clearly we had issues with raw material prices in summer and with the extended shutdown. We've discussed it in the Q2 and the Q3 results. With Fit for Growth, we are underway to return to a higher profitability on the level we had before. And we are focusing this business based on the divestment of [inaudible]. So the food and pharmaceuticals business based on propionic acid and acetic acid, we are focusing the business [inaudible] a lean operation model on top of that. And drive the Oulu capacity to its limits. We have meanwhile found ways to further increase this capacity. And we had actually even production records in the last two months of 2012. And we are driving that further.

So in the future, ChemSolutions will clearly focus on formic acid and derivatives. And will serve the chemical industry and the feed industry, but no longer the food and pharmaceutical industry where we do not have any benefits.

De-icers, you are aware of as a seasonal business. Currently, the business is doing very well. So from that point of view, especially January seems to be good months for de-icing with all the snowfall. But you know from previous years that this is rather unpredictable. So that's why we take this as when it comes, it comes. And we will of course entertain it. But we are very careful in predicting how it's going to develop long term. But clearly, it will stay part of our petroleum.

Just to give you a flavor of what ChemSolutions has achieved in 2012, I think we've discussed also at the capital markets stay on the complexity of the company the number of SKUs. And clearly ChemSolutions has taken the most aggressive stance in this context. And at the end of 2013, beginning of 2014, ChemSolutions will have reduced their SKUs by approximately 70% leading to 2 million additional EBIT for the segment.

This also helps in the streamlined operation based on formic acid to leverage the Oulu plant in a better way because we are really focused on the large volume mainstream products. So from that point of view, we also get additional capacity out of the plant. And this shows that if you go along a stringent path, there are many aspects, which this is improving your performance. Not just simply by reducing the complexity, but also by freeing capacity in the respective acid footprint.

Paper as I've discussed already at the very beginning continued its growth path. It crossed the 1 billion revenue sales level. And also improved its margin further to 8.6%. The strategy what we explained is working. The share of packaging and board as well as tissue could be increased in 2012 to now 31% of our overall paper business, which is slightly more than 50% of the total segment business. We are continuing to focus on that. And perhaps just as a side remark, newsprint at this point and time accounts for just some 4% of the business, so it's actually minor in the context of our paper strategy. What is clearly the strength is that packaging is getting lightweight. So the industry is looking for less fiber to be used to get stabilized and stable packaging. And the same holds true for tissue. And this is something where innovation comes into play. And Kemira is participating in that. And the second trend is clearly that recycled fiber is getting ever more important, which requires more chemistry. And from that point of view, we are encouraged to stay on track with considering paper to be a core element of Kemira's strategy and continue to move towards packaging and board and tissue.

And just to give you an example, with Fennobond, we are able to get at a lower fiber content, the same tense of strength of the respective packaging. And therefore without sacrificing the stability of the carton box, less raw material can be used, which means a direct saving for the manufacturer. And these figures are not our own figures. These figures are actually results of [inaudible] board, so one of our customers. And we are rolling out this innovation now in the industry. And we have more innovation coming also with respect to saving raw materials when it comes to producing more sophisticated packaging materials.

If you go to oil and mining, the good news is oil and mining continued its success story with respect to profitability. But you also see however, and that happened in the fourth quarter, actually the revenue declined because we are at this point and time very much exposed to shale gas. And shale gas in the United States due to the low gas price has tremendously come down in Q4. And we have seen that in a substantial slowdown in demand.

Secondly in Q4, the overall global mining industry slowed down to declining raw material prices. And this is a little bit of the challenge in these businesses. They are very much depending on supply demand balances in the global markets. And they also very much depending on the overall prices of raw materials as well as oil and gas.

We have finalized in 2012 a capacity expansion for our polymer capacity by various measures of the bottlenecking in our facilities in the United States in order to be ready and to be prepared for the next level of demand rise when the industry pops back. And we are looking currently into smaller acquisitions to gain a stronger market position beside fracking to balance our portfolio more with respect to also wet shale.

The re-bouncing of the portfolio and we have guided that a couple of times has continued. And will be terminated at the end of 2013. And we are expecting a revenue impact, a negative impact, which has to be compensated by growth of 10 million. So we are phasing out another 10 million of low margin products in the course of 2013.

If you look to the revenue bridge, basically we have in 2012 some 66 million new sales coming from products and applications, which have been introduced to the market over the last five years. We have another 11 million general growth. We have 20 million or had 20 million exit of low margin products in oil and mining. And we had 23 million divestments coming from the divestment of the hydrogen peroxide plant in Maitland, Canada at the end of 2011. And also the Galvatek business so all together, minus 23 million. That is how we get to 2.24 billion in revenues relative to the 2011 figure.

We continue to spend also in 2013 roughly 2% on innovation with a clear focus on products where the market is in need. And the largest innovations in the short term will come for oil and mining as well as for paper.

With this, I would hand over to Jyrki Mäki-Kala to give you a detailed insight into the financials before we go to the outlook.

Jyrki Mäki-Kala - CFO

Yes, good afternoon, also on my behalf. [Inaudible] the whole year 2012 first as these ways of positive and negative things that we’ve reported to you that are basically effecting all our figures were really the performance of our Paper segment, it was really great. We had very good achievement during the year last year with our networking capital. We basically reused 100 million in networking capital during the year. It’s not so visible when we look at the quarter’s figures, but it’s very important that we work hard to get these efficiencies element also into our working capital.

And then, of course, this Fit for Growth program that we launched in July, it went according to the plan and we continue to implement that also. Also this year, 2013.

But then the other side of the story that also affected our figures, the negative ones, basically, we’ve already touched some of those, is really the performance of our municipal industry business as well as ChemSoultions and then, of course, the titanium dioxide side situation which is now global [inaudible]. It hit our earnings per sale very clearly as we can see in our figures.

Overall, last year, 2012, we had this revenue growth really driven volume wise by Paper and Municipal. And in Industrial, in the background, like I mentioned earlier, we had this 9% growth in emerging markets. That’s very important because stroke in many places, or in many of our segments really takes place in the emerging markets.

If you look at our EBIT, we get very close to full-year figures to 2011 level, basically, according do our guidance. And the biggest hit that you will see from these figures, the income form the [inaudible] companies, last year, 11 million, the previous year 31 million. So 20 million and that’s basically the biggest hit in our earnings per share if we divide this 20 million by 152 million shares you get $0.13 per share basically as an outcome.

Number of personnel at the end, this table may not give you the full picture because it basically compares to the year and 2011 situations because during the quarter, we added roughly 200 persons, mainly in the emerging markets. So if we take into account that effect, so basically we have reduced sharply 350 persons last year. And like mentioned earlier, that work still continues so we get to the level that we basically announced late July of our target regarding this element also in our Fit for Growth program needs to see the positive element coming from the growth and now, basically, seem quarter three, 2011, we recognized a very positive growth both in volumes and prices when we look – let’s say the development over the period. Last year, 2012, basically we didn’t have growth coming from volumes and prices until we hit the quarter four.

It’s a very positive effect that now we are getting through the year of 2013 as well. So it’s important to keep the pace with the volumes and prices going forward.

Over the years, Kemira has been criticized a lot that we don’t respond to the fact that we have raw metal prices. But this is a development over the last four years and in the background with these columns is the price of the oil that has [inaudible]. And in those quarters, you’ll see that whenever there’s a big change in the raw metal prices, it takes a few quarters because – before it starts to hit our figures both in raw metal prices and also in the sales prices.

But now that we are nearing Quarter 4, 2012, you’ll see that we are getting to the point that the raw metal price effect is getting very low, getting close to a zero level and we are still having and keeping our sales prices or the change in sales prices above the change in our raw metal prices.

So actually, this is giving the feeling that – and the very strong evidence that we are able to change our prices according to the markets [inaudible].

Last quarter, 2012 basically landed at the same level as the year before, roughly at the level of 34 million euros. Basically, the story in short is that what we gained in sales volumes and prices, basically 10 million euros, we lost in higher valuable costs and higher fixed cost. And I will get back to you with this higher fixed costing in a few slides a little bit later, but basically that is what happened in quarter 4. So good achievement in the top line, but the cost caused some disappointment during that quarter.

So if we go back to this [inaudible] fix for one quarter, one quarter is a short period in that sense, but 7 million in a quarter, basically, there are many reasons behind it, but to summarize these things, it’s cost inflation mainly relating to wages and salaries that has grown roughly 3% and then some costs were significantly higher in quarter 4 last year compared to the year before and the pension costs, like you all know, the discount rate is nowadays much lower than year before and that [inaudible] our liabilities and that will come into our P&L as well.

And then we have some smaller issues but basically the biggest change, let me explain, to cost inflation and pension costs. So remember these two things when we then look how the fixed cost develops throughout the whole year 2012. There, the increase was 15 million and basically during the first half of last year, the increase was already 13 million and then we started the Fit for Growth program and then we landed at the end of the year to this level of 15 million increase. And these elements I mentioned, wages and salaries, 7 million, pension costs [inaudible] 4 million, [inaudible] plus [inaudible] of variable cost, all these basically explains why the fixed costs were higher.

This is very important for us, like any other company, that you need to manage the fixed costs in order to be competitive and keep your EBIT level at the right level, basically.

If we then briefly look at the segment figures, starting at the biggest, Paper, for the first time, like I mentioned, we keep the 1 billion revenue level, it continued with very strong development in its profit ability; 8.6 the full year figure was an excellent achievement. And it’s most important that the growth roughly 7% growth took place in each of the four segments . So the balance, or the [inaudible] portfolio in that sense isn’t very good shape.

We have invested a lot in this business, especially with the financing ability so the cash flow during the last quarter was slightly negative but mainly coming from the CapEx. Overall, it still remains positive on the year level.

[Inaudible] industry has a little bit different kind of development. We are recognizing a growth in the top line mainly coming from volumes, not so much about the prices. Roughly a year ago we were looking at quarter 4 with the element of what happened in South Europe, Spain, [inaudible] as an example. The volumes are still relatively low over there. But over, [inaudible] the EBIT was a disappointment in quarter 4 at 7.2 million. But what we need to realize there is that we sell a lot of low-margin products really [inaudible] the inventory. So it had a hit in our P&L, without that we would be at the same level of roughly asking 2011 in quarter 4.

That is really what we did. So the cash flow actually in this business was very good in the quarter 4, 20 million, so it accelerates positive cash to the group – group level. But clearly, costs are an issue both variable and fixed costs why we saw lower EBIT at the end of the day.

Oil and Mining, basically, it was [inaudible] the first time that we saw a declining trend in the top line, but that was deliberate because part of it was walking away with [inaudible] in products. And we had this softness in the North American Oil and Gas market. Both these elements made this effect why we saw a lower revenue in that quarter. But overall, the whole year 2012, oil and mining continues to improve the profitability and getting close to the salesperson EBIT which is excellent. And again, very positive cash flow behind, meaning how they manage their CapEx and how they’re managing their working capital.

Then we go to this other combination of ChemSolution and the group expenses. ChemSoultion EBIT has gone down during the last two years, but now in quarter 4 that business came back to a positive EBIT level raising to 10.4 so clearly the trend is going to the right direction. All the actions that they are doing, mainly the oil site is really paying dividend and we are seeing much better profitability than we saw in the early part of 2012.

More comments about this Fit for Growth, this is the slide we have basically shown earlier in July and also on Capital Market Day in September. Basically, we are looking at about 16 million in savings, 10 million loss [inaudible] this year and then the final 10 in 2014, both are in the 60 million. Nothing has changed, that is the plan, that is what we are doing. And then the restructuring charge is basically 85 million, a little bit higher in the last quarter, basically last year. Again, this 85 million is the ballpark where we will land with all this actions that we are doing with Fit for Growth program. So the program is heading nicely forward.

If we then move to these [inaudible]. This year basically, [inaudible] portfolio and business model, basically, if you look at our segments and sub-segment, basically we have two sub-segments that is more vulnerable with the changes in the economic conditions or what’s happening in the marketplace and that’s Oil and Gas in North America. The others are more safe in the terms of what’s happened in the marketplace with economic cycles. So that’s very important to remember.

Another big thing is about the operating expenses. It’s roughly 25% of our revenues on fixed costs. It’s a little bit less if you take it company by company, but that’s how we classify and that is always something that the cost inflation has a meaning. [Inaudible] a year and you need to be that with your actions of improvement, it’s just something you have to do.

And the oil price overall, we have seen high oil prices during the last three years, basically, but Canada starts is only 20% of our raw metal spend that [inaudible] to relate to oil price, and that is something we have to tackle with our pricing systems, et cetera, et cetera.

But overall, I think that we have really – let’s say toleration to manage these changes in the business environment and based on these comments, basically, I turn to this last page of my presentation concerning about the overall EBIT for 2013 and the revenue, the [inaudible] in the local currencies and exploiting the divestment will increase between 0 and 5% compared to previous year and then the overall EBIT increased more than 15% this year compared to last year.

So with these words, I end my presentation.

Question-and-Answer Session

Tero Huovinen

Thank you very much, Wolfgang and Jyrki, and now it’s time to take some questions. Let’s start from the floor, is there questions there please. State your name and company before.

Unidentified Analyst

[Inaudible]

Wolfgang Büchele

Comment to fix cost development, so on that net fix cost we’re increasing in Q4, even if we include Fit for Growth program. I do expect a rapid traverse sign at the beginning of 2013 coming through Fit for Growth program and also some efficiency measures.

Jyrki Mäki-Kala

I tried to explain the quarter four fix cost development, of course, they’re in the background. There are elements of certain that will not repeat itself. So they were like the pension cost, it was more like one-time item in that sense in the quarter. All these things that we are doing with Fit for Growth, a big portion of that is about fix cost. So we are confident that in this development, what we need in order to improve our profit ability also means that we have to keep the fixed cost in very, very tight control.

Wolfgang Büchele

And I think, if I may add. If you look to our guidance, then we give a clear message. Plus, as I said before, the Board proposes to keep the dividend on the 2011 level, and the management supports that. So, we are very strong on the profitability improvement we have guided you before, and nothing has changed in this respect.

Unidentified Analyst

Okay, and maybe secondly on [inaudible] been seen recently high gas prices and also [inaudible] has been this bottoming out to some extent on the gas side, so could you elaborate more this, just what kind of [inaudible] it is likely to impact you? So should it be seen immediately of when you are expecting this business to bottom?

Wolfgang Büchele

Well obviously you are right, and we saw in January indeed that the volumes are starting to comeback. If you talk to the major oil companies, they see the breakeven level, and we’ve discussed that before, somewhere between $3.5 and $4 US per million Btu. The gas price is now approaching that level again. Volumes are coming back. The key issue is the supply and demand.

So, the infrastructure in shale gas is starting to be increased, to be built, but there is always quickly too much shale gas available, and then the whole cycle swings down again. So, it very much depends how the oil companies are running the shale gas production going forward.

But at this point in time, the volumes are indeed coming back.

Unidentified Analyst

Okay. And maybe lastly, on the emerging markets and growth of 9% in 2012, how do you see this year? Do you expect growths there to accelerate, which should be these growth areas for 2013?

Wolfgang Büchele

I think if you look back to the strategic pillars we have outlined, also at the very beginning when I started. Gross in the emerging markets has to be accelerated, and from that point of view we are fully committed, and we will especially also in the mining business, which is largely an emerging market business, make much bigger inroads in 2013 by moving out of the U.S. into the various geographies in order to boost that business.

So, clearly we want to grow well above GDP growth in the emerging markets.

Unidentified Analyst

Okay, thank you.

Wolfgang Büchele

Are there other questions from the floor?

Unidentified Analyst

Could you just give an update on the investment projects? When are the site stream projects coming on stream, and what’s [inaudible] progressing?

Jyrki Mäki-Kala

We are currently [inaudible] in the commissioning phase. We are waiting for the governmental approvals for operation. And now, unfortunately, we have, first of all, Chinese New Year, so nothing is happening at this point. We are more or less ready, but without approval we can’t startup. And this is currently – this is currently the unclear situation.

Unidentified Analyst

And when can we expect Tarragona and Dormagen to come on stream?

Jyrki Mäki-Kala

Dormagen is on plan, will come on stream in the middle of 2013. And Tarragona, I don’t know whether you have followed the news. During excavation works, Roman ruins have been found, and the archeologists have now taken control of the site. And we are depending on the verdict at this point in time, when the archeologists will clear the site again for further construction.

So, that’s a little bit surprising because Tarragona is in the middle of a chemical industrial park, and there are Roman ruins everywhere. And from that point of view why they now jumped on these Roman ruins I don’t know exactly. But for the time being we are waiting for them to clear the site again. But this was in the media, so it caught everybody a little bit by surprise.

Unidentified Analyst

Okay, thank you. Just to dwell on the fix cost a little bit more. I think you said you expect sort of 3% increase annually that you need to fight. Are you fighting this in addition to the fit for growth program?

Jyrki Mäki-Kala

Yes certainly, you have to fight both fights. Both to get the Fit for Growth, all the actions and all the things implemented. But this annual inflation, you need to fight hard with your emphasis to other improvement. But that’s something you have to do every year basically.

Wolfgang Büchele

In order to give you confidence on that, at the end of March, so more or less in line with the approval of the strategy, a person I’ve worked with very closely in the past will join Kemira as Senior Vice President, to take control of all the efficiency projects. So that once the strategy is approved, the businesses can focus…

Operator

Our first question comes from the line of Martin Evans from JP Morgan. Please go ahead.

Martin Evans – JP Morgan

Yes, thank you very much. It’s just a quick question on, Wolfgang, one of your comments in the press release. I think you’ve answered it regarding the competitive landscape for Kemira changing substantially in 2012 and then you researched the competition coming into quality as well as Oil and Mining. This is clearly, from what you say, a new trend, and it would appear to be in almost all of your business areas expect, I guess, Paper. So can you just explain a little bit more exactly what this is, at least big multi-nationals moving to your area of expertise or is this sort of local competition? Thanks.

Wolfgang Büchele

Martin, thank you for the question. This is the big boys and obviously, especially Oil and Gas is asking for big volumes in the standard chemicals, which are used, for example, for EOR and therefore we see an increasing inroad of the big boys who are capable to produce these chemicals to move into this space. This puts temporarily challenges on the business. However, from our focus, we are not focusing, as you are well aware, on the bulk commodities in this business. We are basically focusing on the differentiating products, so from that point of view, we are confident that we will be able to keep our space margin wise as well as volume wise, but clearly the oil and gas industry is an industry where other companies make inroads.

And I think it’s also clear that some companies or one particular company in the United States completely re-invented themselves by two major acquisitions in the last 18 months. So they haven’t been a competitor in two year before and now they are a competitor in oil and mining as well as in the water space.

So there is movement. We are obviously on alert. We are looking for our opportunities which derive from that and from that point of view, we are clearly seeing what we can do and how we can benefit from these developments. At the same time, interestingly, nobody is moving in Paper and this is clearly where we are leveraging all the opportunities we have as you can see also in 2012.

Martin Evans – JP Morgan

Thank you very much.

Operator

Our next question comes from [Inaudible]. Please go ahead.

Unidentified Analyst

Hi. Quick question, sorry if I missed this earlier, but where are you in terms of talks of the joint venture, the German joint venture? And is the – the price, the evaluation likely to be hurt by the currently weak titanium dioxide market?

Wolfgang Büchele

Well, I think there was nothing new so to speak. This business, the joint venture is neither call for Rockwood or for Kemira. And in line with our strategy to focus on water, if there is an exit possible, we are definitely interested in looking into that exit possibility and we would peruse that exit possibility. As you are well aware, so far all the efforts to exit this business did not materialize. The value of the business, I would suggest clearly has been impacted by the most recent market developments. However, I think we also should be clear, the market environment from our perspective is not expected to change any time soon. So for that point of view, rebounds of the business to 2011 all-time heights in the foreseeable future is rather unlikely.

So in a nutshell, if a deal would be executable, we definitely would look into that but at least in the past, all the possibilities we thought would exist have not materialized.

Operator

Our next question comes from the line of Mikael Doepel from Handelsbanken. Please go ahead.

Mikael Doepel – Handelsbanken

Thank you. Good afternoon, gentlemen. A couple of question. Firstly, in terms of the part of the games solutions that you know have sold, could you give some indication on the profitability of this business? And secondly, in terms of [inaudible], I think the earnings in Q4 were clearly lower than guidance for…

Wolfgang Büchele

I think – let’s start with ChemSolutions. Obviously, as we sold this business, the EBIT contribution is substantially less than 10% - 10 million, sorry, 10 million euros. And obviously, form a margin perspective, below 10%, otherwise we wouldn’t have divested. And going forward, we see this business could be – even becoming more challenging and that’s why we felt that with Niacet, the business has a better home than with Kemira.

If you go to Sachtleben, I think we, individually never guided on this business because we felt so far that as the junior partner, we shouldn’t speak too much and we left this role to Rockwood. Now, obviously, the market environment forces us to be more specific on this whole thing, but clearly the fourth quarter development was a disappointment for everybody. And we see the pressure and you saw what [inaudible] has guided. Improvement is, earliest to be expected, if at all, in the second half of 2013. So from that point of your business in the immediate future, will remain challenging. But clearly, the need is with Rockwood. We are the junior partner in this whole game and therefore at the end of the day we have to wait how Rockwood guides going forward.

Mikael Doepel – Handelsbanken

Thank you. That’s very clear. Then perhaps a little bit more broader question. You mentioned Oil and Gas demand perhaps picking up a little bit, but if you look at the other divisions and segments that where you operate, what kind of a demand and pricing trends are you seeing right now and what do you expect for the full year?

Wolfgang Büchele

What we see currently, the pricing trend in paper, we are able, in certain product areas to increase our margin at this point. So from that point of view, it started rather favorable. In Europe, the margins are flat, so we do not expect any major change in the immediate future. Where we see some change is in the United States. You most likely are aware that in particular, the polymer price is increasing and as you know, this hits us with a three-month delay so we are trying, of course, to prevent that now and to pass that through to the market. But clearly, the U.S. polymers is something where we see price increases.

Where we also see some price increase, which we try to mitigate from the raw material mix, and I’ve said that during my introduction is on the coagulants part with the iron source as the iron ore prices have increased. Obviously, the iron source prices have increased and we are trying, on the one hand, to pass that through to the market but we are also playing with the mix as we have as well iron sources so we have some possibility to mitigate that.

Mikael Doepel – Handelsbanken

Okay, and then in terms of volumes, demand across the divisions?

Wolfgang Büchele

I think the demand in paper, as you could see, was generally very good. So from that point of view there, we are satisfied. In ChemSolutions, I indicated that we were running production records in Oulu in November and December and as obviously the inventories didn’t go up as you have also seen. We can sell all these volumes so we are selling basically our capacity. Growth potential is very limited. It only comes as we can expand and squeeze out more from the Oulu plant, otherwise that will be more of a flattish business. In oil and mining, especially in the oil and gas part, volumes are coming back, so we are currently rather optimistic. In M&I, even in the fourth quarter, volumes were good. We could increase the volumes there, the issue is with the margin.

So from a volume perspective, we are currently rather optimistic and that the key challenge – the key challenge is the margins in M&I for us short term.

Mikael Doepel – Handelsbanken

Okay. Well, then finally, when you looked at 2013, you talked about the fixed costs that needs to be, you need to get – you have the Fit for Growth program and so on. So on a net basis, how much would you expect cost to come down this year?

Wolfgang Büchele

Well, we have guided and there has nothing been changed, that on top of 2012, we will see another 40 million in cost savings, cost improvements coming from Fit for Growth. That figure stands and we will deliver on that figure.

Mikael Doepel – Handelsbanken

But you don’t have any other costs to take out, fixed costs because you made a [inaudible] provision in Q4.

Wolfgang Büchele

I think I made it very clear that the chemical industry with efficiency improvements has to make up for inflation. And therefore, you should expect additional measure to come because we have to make up for inflation in 2013. And the fact that somebody is joining from outside to help focus on efficiency improvement also perhaps gives you some indication how serious we are around this aspect.

Mikael Doepel – Handelsbanken

Great. Thanks, that’s very clear. Thank you very much.

Operator

Our next question comes from the line of Peter Mackey from Morgan Stanley. Please go ahead.

Peter Mackey – Morgan Stanley

Yes, thank you. It’s Peter Mackey here from Morgan Stanley. A couple of questions left from my side if I could, please. One is just going back to this whole issue of cost mitigation and the balance of cost savings from Fit for Growth, et cetera, et cetera and the one-off nature of the pension costs you mentioned. I mean, Jyrki, you talked about that pension impact being one-off, is that – are you saying that it was the one-off effect to the change in discount rates or is it an increase in some way in the annual pension charge that relates to a different pension liability? Because I’m trying to understand your fixed cost space rose by 6 million in the first quarter, 7 million in the second quarter and then it fell actually by 5 million in Q3 plus 3 million of Fit for Growth savings. So it effectively fell by 8 million in the third quarter. And now you’re talking about a 7 million gross, net of Fit for Growth cost savings in the fourth quarter, or 3 million if I strip out the pension effect. And if I think that in Q4, on an annualized basis, you included virtually half of your Fit for Growth cost savings, 28 million, 7 million times 4. Then it suggusts to me, in deed, that further cost inflation in 2013 will more than offset the further Fit for Growth cost savings. So I wonder if you could just clarify issues around that please?

And then on municipal and industrial, you talk about selling low-margin products, in fact, they must be loss making products if they actually negatively impacted your absolute EBIT. What status are you in that – in that inventory liquidation process? Is it done or is there more to come in the first quarter?

And then finally, in oil and mining, is there anything you can do to change the volume dependence upon the shale gas price. I realize that you’re expanding your offering and there’s things like that and changing your – or shifting your – the focus of your portfolio, but fundamentally, will your volume performance always be dependent upon the gas price because obviously it’s an expectation that shale gas will keep gas prices very low for the foreseeable future? Thank you.

Jyrki Mäki-Kala

Okay, I’ll start with the fixed cost part. Really, the quarter four fixed costs were 7 million increase and then having included the 4 million savings coming from Fit for Growth expansion because this from my point of view, one time, in a sense, the 2011,the quarter four, we had very growth and we got certain pension breaks and now the pensions are slightly higher and so the net effect between these two quarters was really just 4 million, which we have reported. It was not the early part in 2012, it was just the quarter four issue.

And then overall, this reclassification on the annual basis, the 3 million, so totally this pension issue and reclassification is basically, it takes half of this 15% - or 15 million euro increase. And then all [inaudible] is what we are basically investing in in emerging market resources on an annual basis, higher maintenance, et cetera. And then this cost inflation relating to wages and salaries. So I think overall on an annual basis, this comes together pretty nicely. And in quarter four, we really need to think this pension costs, [inaudible], the one-time item that you don’t see existing taking place next year in a sense like it happened in quarter four this year, I mean, 2012, sorry.

Peter Mackey – Morgan Stanley

Okay, thank you.

Wolfgang Büchele

What we are trying, of course, is to get into every closer relationship with the pumpers directly so the Halliburton’s and the [inaudible] who are at the respective site and who are operating there. Companies like [inaudible] is another one where we have very close relationships in order to try to be as independent as we can. Reality, however, is that when the gas price is low, then the production shifts to red shale because the [inaudible] components. So the higher molecular rate components, which are actually liquid, so the condensate part is getting more interesting and therefore the production is shifting away from [inaudible] shale gas and then you need products like [inaudible] modifiers, which at the point in time we don’t have in the portfolio so that’s why we are trying to enlarge and broaden our portfolio to be able to follow that shift and therefore be less vulnerable.

From a technical point of view, somebody who is in shale gas and is literally producing shale gas can immediately with the same equipment produce shale oil. So they have the flexibility. From a chemical standpoint you need other chemicals and that’s why we try to enlarge our portfolio as quickly as possible and we have talked on that already in previous calls. This is key priority for us now in order to be less vulnerable.

We cannot – if less shale gas I produced, there is not suddenly a need for more chemicals. So the chemical demand, unfortunately, is directly proportional to the amount of gas produced. So the only thing is to enlarge the customer base, to have more customers where we are present, that’s what we are working on as one direction and the other one is to follow them when they shift to red shale by also enlarging an entering into a portfolio which is suitable for red shale. These are the two – let’s say approaches we take to mitigate the exposure we have at this point.

From the M&I, low margin product, obviously you want to clear house in 2012. So from that point of view, that is cleared.

Peter Mackey – Morgan Stanley

Okay. Thank you. So – right, because you mentioned that you’re still – you are still concerned about margins in M&I in the early part of this year and so is that a slightly different issue to the inventory liquidation that you saw in Q4?

Wolfgang Büchele

Well, yes. There – that has nothing to do with each other. As I also indicated, the iron source, prices are going up. And the challenge is always to what extent can you pass that through and as you are aware in M&I we have a, on a simple side, tender business, so on average, it takes up to six months so price increases have been completely past through to our kids and from that point of view we are on the one hand now pushing through with price increases and at the same time playing with raw material mix in order to mitigate for these increases. That’s the challenge we face and that’s how we are mitigating this challenge.

Peter Mackey – Morgan Stanley

Thank you very much.

Wolfgang Büchele

All right. Thank you very much.

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