Kemira's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 8.14 | About: Kemira Oyj (KMRAF)

Kemira Oyj (OTC:KMRAF) Q4 2013 Earnings Call February 7, 2014 8:30 AM ET

Executives

Wolfgang Büchele – President and CEO

Petri Castrén – CFO

Tero Huovinen – Head, IR

Analysts

Panu Laitinmaki – Danske Bank

Fabio Lopes – Bank of America

Oliver Reiff – Deutsche Bank

Rauli Juva – Nordea

Martin Evans – JPMorgan

Wolfgang Büchele

Hello everybody. The year 2013 and in particular the Fourth Quarter of 2013, were characterized by major steps towards the repositioning of the company. We did a lot of M&A activities in order to turn Kemira into a profitable pure play focusing on water quality and quantity management.

If you look to the slide, we started our repositioning journey in the middle of 2012 by launching our Fit for Growth program. We launched a new organization which is based on RBUs, regional business units, which have full P&L responsibility in autumn 2012. We then launched our new performance management system at the beginning of 2013.

We divested Sachtleben, our share in the titanium dioxide joint venture with Rockwood. We divested our food and pharmaceutical business to Niacet in order then to announce the Sharpened strategy and launched the Sharpened strategy in April 2013.

With the Sharpened strategy we earmarked two segments, paper as well as oil and mining as the growth engines of the company whereas M&I was positioned to run under a cash optimization mode. ChemSolutions was defined to be non-core.

We, in the course of the year considered and embarked on further alignments. The most important was that we also started to look for growth by signing a deal with the owner of 3F. We acquired, we closed the transaction to acquire 3F in October 2013 in order to close strategic gaps and to foster on strengthening our polymer business, which is one of the core businesses of the company. And which is qualified by us as a differentiated product line.

In the fourth quarter, we also sold our coagulants business in South America. And if you recall I guided a couple of times that this is a very challenging market on the one hand. We hardly have any competitive advantage. And at the same time, legislation in the emerging markets for M&I is not in place. And therefore in line with our strategy we sold the business to Bauminas, a local coagulants manufacturer who obviously sees more opportunities in this challenging market than us.

We also signed a deal with Brenntag to divest our distribution business in Denmark, which a deal which was closed at the beginning of January this year. And we also signed a deal with Taminco in order to bring home the strategy by disposing off the last non-core item which is our formic acid business.

Taminco is a large, the largest amine producer. They are looking for diversification. And from that point of view, the formic acid business has a better home with them than what it has with us. And we are expecting to close that deal in the course of the first quarter of this year.

So, as I said, the repositioning was accomplished. Unfortunately and Petri will elaborate a little bit more in detail. We had quite some surprises in the last months of the year. That’s why we had a reduced profit guidance in January. And we were also very disappointed about our business success in oil and mining. For that reason we have announced two weeks ago that we will change personnel.

Randy Owens will leave the company as of the 30 April. And we are currently trying to identify a new management for this segment in order to bring the segment back to the growth path as quickly as possible. And I’m fairly optimistic that we will be able to announce a new segment head in the not too far future.

We also announced post the end of the year the new CEO, Jari Rosendal, whom I’m intensively already in contact with will take the helm from me as of May 1. And I’m sure he will continue in the direction Kemira has started, as the board has already emphasized too in various publications.

In this respect, we are on track. The company is in a very good shape. And you will also see from Petri’s comments, with 2013 we were able to strengthen the balance sheet substantially.

We also finalized with the announcement to relocate the segment management and the RBU management for the Americas from Atlanta to Houston. We are bringing the business where our competitors, where our customers are. Houston Texas is the global center for the oil industry. And from that point of view we will in the course of the second quarter start to relocate from Atlanta with the oil and gas people, so that we are also where our markets are.

This has proven successful when it comes to paper which relocated in the course of 2013 from Finland to Frankfurt. We have consolidated our M&I segment activities also in Frankfort because Continental Europe is the biggest market. And you might remember, we have relocated the paper segment from Helsinki to Hong Kong.

On account of the assumption that for the success of our strategy and for the success of Kemira in paper, it’s extremely important to develop a strong position in the Asian market and in particular in the Chinese market. And that’s much easier than out of Hong Kong than it could be done out of Europe.

Just for the avoidance of doubt, the regional headquarter in North America will remain in Atlanta, so we are just talking when we talk about relocation about the oil and gas part of the RBU and the oil and mining segment management of the group.

We also have announced that we merge South America and North America into the new region Americas. That has to do with the fact that obviously with the divestment of our coagulants business in December 2013, the scope of the business has become much smaller.

And the growth is largely coming from oil and mining and to a certain extent from paper. And we feel that with our strong managements in place in these two segments, we are more efficient if we do that by treating South and North America as one region rather than having individual approaches.

So, as of April 1, 2014, meaning this year, the company will report on a three-region basis and will not report North and South America separately anymore.

With this, we have made a major step forward in further optimizing Kemira in the markets and by positioning Kemira in stronger towards our customers and towards where the growth of the respective industries is.

If you look to our figures, we came home slightly top-line wise, slightly in the reported figures below 2012. However, if you consider organic growth was plus 3%. The impact of foreign currency exchange rate deviations was minus 2% and the impact on divestments was another minus 2%.

So, factually the minus 1% in reported growth still has a gain in market share and an improvement in our position in the markets. And that is part of our strategy. So, from an overall perspective, we growth wise did very well.

With respect to our profitability, we clearly failed to deliver what we expected. Nevertheless, we were able to still grow with 6% year-on-year. And the quality of our operations has improved because some of the underperforming assets have been disposed off. And from that point of view we are looking forward for further EBIT improvements and Petri will elaborate on that in more detail in his presentation.

Also, from a cash flow perspective, considering operating performance as well as M&A activities, we did extremely well. We generated close to €200 million in cash, which helped us to also reduce our net debt. So, from that point of view again the balance sheet of Kemira is much stronger than it was at the year end of 2012.

And we are able to embark on inorganic growth beside organic growth if the right target comes along and if we find suitable objects which meet our strategic guidelines which I don’t want to repeat now again, but which I have elaborated before. So we are not going to buy whatever is around. But we feel that there are possibilities that selectively strengthen our position. The funds are available and we are able to do that.

We also improved with our let’s say focus as I said in the very beginning. We divested overall, approximately €200 million in top line. Again, just for the sake of accuracy, the deal regarding formic acid is not closed but that’s going to close in the first quarter, that’s included in this €200 million. So from that point of view, we have clearly improved the quality of our business in-line with our strategy substantially.

And we are now looking to grow from this consolidated base, organically as well as inorganically in-line with our guidance. And as I said, inorganic growth might come – can come on top if we find the right targets and we’re able to acquire the right targets at a price we consider adequate for the benefit we get.

We are now at the end of our restructuring, meaning we have achieved what we wanted to achieve. And therefore, the major programs are coming to an end. However, I would like to reiterate that continuous improvement will remain part of Kemira’s DNA. And we will constantly look into where can we continue to optimize in order to strengthen the company further.

We also made progress when it comes to the structure of our product portfolio. You might recall that in our strategy, we outlined that we want by 2016 to be at a share of 60% of our revenue being derived from differentiated products whereas in 2016, the commodities are supposed to have reduced their share of the total business to 40%.

We are now midway. In 2013, differentiated products accounted for roughly 50% of our revenue. We are on a good track and I’m pretty confident that we are able to deliver in 2016 on the targets we have elaborated for.

We also make great progress in 2013 with respect to CapEx allocation. Again, you might remember that 65% historically was allocated to commodities whereas only 35% was allocated to differentiated products. And again, there with the new partnership projects which have been approved in 2013 the ratio has already improved substantially. And we are on a good track with the plans we have in 2014, ‘15 to advance in the direction we have guided.

We also completely reshuffled our R&D pipeline. We have in-line with our strategy that paper and oil and mining are earmarked as the growth businesses, revisited all of our R&D portfolio. We’ve discontinued a substantial number of low contributing projects and we have really focused our R&D to a very large extent on the two growth segments.

You can see from the chart that M&I as well as ChemSolutions are playing a minor role when it comes to R&D. And with respect to M&I I just want to reiterate again, the microbial fuel cell which is a strategic project for us to prepare Kemira to be a service provider to the especially APAC mega-cities once legislation on water treatment comes into play. So we are spending quite a lot of efforts to develop the microbial fuel cell as a new technology which we then can market once legislation ramps in and the markets are ready.

Otherwise again, now the focus is besides just aligning the R&D portfolio on commercialization on driving the new results, the new products, the new solutions we have developed into the market as quickly as possible because we also were able in the course of the realignment of our portfolio to shorten the development times quite substantially.

We’re not yet at the benchmark level so there is still further room for improvement but in comparison where we came from historically having on average taken 48 months from the idea to the commercialization. We were able to shorten that substantially. And we continue also in that direction.

Fit for Growth, this will be the last time that you see a slide on Fit for Growth. We have achieved in Q4 a run rate of €14 million bringing us €56 million on an annualized basis. If you consider two closures, two site closures in Spain are still delayed due to Tarragona coming on stream only in April.

We are well on track and once this is finally implemented, we have the full run rate of €15 million. And therefore we will close the project with this analyst briefing. And we’ll just incorporate the savings we have achieved into the normal reporting procedures.

This does not mean, as I said before that optimization has now come to an end. We will continue diligently to look for further buckets of optimization for further buckets of cost reduction in parallel to our growth initiatives which are more important and also helping us to drive the company forward.

So, clearly there will be a strong focus on growth in 2014 and the years thereafter without sacrificing the potentials we have at the bottom line.

We’ve achieved a lot when it comes to optimizing our bottom line. We’ve clearly done a substantial amount of cost reduction when it comes to manufacturing. Fixed cost, we reduced the manufacturing fixed cost by roughly 7%.

We took more or less 0.5 million metric tons of coagulants manufacturing out of operation by streamlining our asset footprint. And that’s the most important for me, we launched the LEAN manufacturing and ultimately also the LEAN administrative initiative in order to optimize the company from within.

And that’s the most important to me. LEAN is in contrast to Fit for Growth, now targeting to change the company from within by changing the culture rather than running a stringent restructuring program.

And from that point of view, we just launched LEAN in North America in January this year. And I’m very happy how excited the various team were to absorb, to program and to turn this program into a success. And from that point of view, I see LEAN going forward as the basis for our continuous strive for improvement. And I attribute quite a substantial potential to LEAN.

You see that our asset footprint is cleaned to a certain extent. Still, in certain regions it is crowded. And from that point of view, we will, also going forward on a regular basis analyze the various assets we have with respect to what are they contributing to the overall group performance, is there room for further optimization. But as part of the continuous improvement rather than in a project style where we drive to take cost outs in a rather short period of time.

With my last slide, I would like to remind everybody, the second phase of our strategy is headlined Focus. The focus as such has been achieved. And once the formic acid divestment is closed, we are from a focus perspective, the company we want to be. We will then run as a three-segment company. And from that point of view, growth is what is then taking the lead on the agenda. And from that point of view, we are feeling well on track and well positioned with respect to delivering on the overall strategy which we have shared with you in April this year.

With this, I would stop. And would like to hand over to Petri to, give us a better overview and a more detailed overview on the figures.

Petri Castrén

Thank you, Wolfgang. So, if you look at what’s taking place in fourth quarter. So, clearly this was a quarter of a lot of transitional activity. We made – we closed on our first acquisition for quite some time 3F Acquisition closed 1 October. And then we sold business or entered into deals of selling businesses approximating about 10% of our business.

So, clearly a lot of transactional and transitional activity. So, against that backdrop the financial result was stable. I’m not saying that it was satisfactory because it was not but it was a stable financial performance.

EBIT, operating EBIT at €34.5 million was basically flat with last year and a margin of 6.3% just a slight improvement from a year ago. Obviously we recognized that in October we guided the market at the range of €42 million to €50 million. And from the mid-point we missed it approximately by 25%.

And in our January release, we mentioned couple of other things. But let me elaborate a little of the reasons what took place. So, first, I think it’s fair to say that the business performance and the marketplace and the competitive challenges have been tougher particularly in oil and mining and as well as the North American municipal and industrial business.

We were budgeting for a normal winter so we were not budgeting for a lot of winter but the de-icing season because of the very long winter in Europe was – has been very slow. And that brought some surprise on revenue as well as obviously on the profitability side.

We’ve reported out certain costs, I’m pointing out to 3F in the particular. In the early phases of integration, often some things happen, and something happened which are not planned. We did have a product quality issue that’s a temporary one but it actually did impact the revenue and profitability. We also had a planned shutdown of one of the plans in Europe, unfortunately due to the integration it was not in the financial plans. So that didn’t have an impact.

And also, we are working through higher cost inventory and that’s impacting the margins of that business. At the same time we’re happy that the backward integration benefits, we are already seeing in the financial statements so that was one of the rationales why we acquired the business.

So, overall while we had this, chances related to 3F I can easily say that overall rationale of the acquisition holds true and it may take a quarter or so before the benefits really start seeing in the P&L, the benefits will be there.

We also had some other higher fixed costs particularly in the area of pension accruals as well as some of the manufacturing costs. In general, we can say that the €10 million or so miss, for the most part, these are activities that we do not expect to repeat themselves in the coming quarters with particularly the South American business being divested and as well as the formic acid business being divested.

Non-recurring items in the quarter were €73 million and for the year approximately in the last of at €123 million. The more significant was the divestment of the coagulant business in Brazil. We mentioned this already in our press release when we announced the sale at €43 million.

We also took some environmental provisions for the Vaasa site, which was closed by the end of the year. And we didn’t have a various continuous efficiency measures these are related to some still restructuring activities that are going on. These are related to some country exits which we have done. We decided – we exited during the fourth quarter from Mexico, we’re exiting for Columbia. Again, lightening our Latin American footprint and focusing in the areas that Wolfgang was talking about.

In terms of asset efficiency, we have made great strides. Our net working capital ratio to revenue improved – was reduced to 10.9% and particularly this was caused by the good work in receivable reduction as well as inventory reduction.

During the fourth quarter, the sales volumes, the organic growth 1%. This was driven by the success in paper segment. The currency impact during the quarter had a 3% negative impact. And it one looks at today’s prevailing spot rates. We expect that the currency headwinds will continue at least until the end of first half of the year.

During the quarter, the impact of acquisitions and divestments pretty much offset each other. So, we got benefit from the 3F acquisition for the revenue side to much smaller extent from the Soto Acquisition in Canada. And the divestments was to comparable – during the comparable period, we still have the benefit of the food and pharmaceuticals business. So, all-in-all that resulted, that’s the bridge to the reported 2% decline in quarterly revenues.

In terms of margins, and this does have somewhat of a tie-in to the reported revenue as well. So, we are seeing some improved mix in our product portfolio. And I’ll mention with just one example. In the municipal and industrial segment, we have a commodity product that we used to sell in large volumes, approximately 20% of gross margin.

Now we have a newer product that is actually selling in half the volume in terms of tonnage, is also selling about half the revenue of it but it’s still generating the absolute same, approximately the absolute amount of gross margin. And most importantly the customer is getting is a better product and better service.

So, that one product on a year-on-year quarterly comparison actually had a 2% top-line impact for whole of company not just for M&I.

Generally, the variable costs have remained roughly flat. We have seen some increases particularly the propylene prices are slowly edging up. And that is impacting our polymer business in the oil and mining and M&I municipal and industrial.

But at the same time we are seeing benefits from the electricity prices coming down particularly here in Finland. And that’s helping in the paper segment within the – well, in the bleaching products the electricity is a significant component to the cost of goods sold.

Then lets move on to comments regarding segments. So, as I mentioned, paper segment was clearly continued its excellent performance during the quarter. The 8% reported revenue growth actually if you adjust it for constant currency basis it was 12% so, significant growth. And now we’re starting to see that the scale and the operating leverage is bringing benefits on the profitability on the EBIT side. So, there is 100 basis points improvement in EBIT on a year-on-year comparison.

Some of the things that we have done during the year, we have added four AKD sizing lines; a couple in Europe, one in North America and then one in Asia Pacific. And obviously this is helping us to serve our big sizing customers better.

Then if we kind of look at what’s coming in the future, just Wednesday we heard in Stora Enso’s report that they expect that Montes del Plata should be coming online in the coming months as you know. And we have informed, we have a contract to be the provider of the bleaching chemicals there. And that would be helping our – particularly on our South American, which will now will be then reported as part of Americas paper revenue, revenue growth.

Oil and mining, revenues continue to recover. So oil and mining during the quarter was helped by the 3F acquisition in terms of reported revenue. At the same time, they faced about 4% currency headwinds. So, the organic growth in the segment was about 3%. At the same time, and as Wolfgang was mentioning, we feel that we have not been able to really participate in the growth, in the oil and gas sector specifically. And that’s why we are now taking the actions that Wolfgang was mentioning.

Moving on to our third segment, municipal and industrial. Clearly the strategic most important action during the quarter was the sale and closure of the divestment of the Brazilian coagulant business.

We had flagged this fairly openly in the past quarters that this is a business that we find it very difficult to compete in. And that we’re looking for solutions for that business. We’re happy to report that we were able to enter into that solution just before Christmas or in December and close the transaction.

Now, the focus is and must be in our North American business. As you can see from the kind of the picture there, the profitability is not there and I already alluded to in my earlier comments that we have had some faced even more competitive environment into North America in coagulant business. So the focus is next there.

ChemSolutions, now clearly, ChemSolutions has divested maturity of its business during the year. Earlier in the year, the food and pharmaceuticals business was divested. And just before Christmas we entered into the transaction to sell the formic acid business. This we expect to close during the first quarter.

And once the transaction is closed, we will transfer the remaining sodium percarbonate business to our paper segment and spend starting from second quarter onwards, ChemSolutions as a segment will not exist anymore in our report.

I’ll point just to a few numbers on this cash flow summary chart. So, fourth quarter, cash from operations €72 million and the annual cash from operations €200 million. Significant improvements from the year ago, driven by the earlier mentioned good working capital performance.

We remained in terms of capital expenditures, at €138.9 million it’s still under 6% of revenue range and which we have said earlier that we expect to trend – it will in the future trend towards the 5% of revenue. But at this time it’s still on that 6% range.

The major sites where this capital expenditure has gone into, the new expansions being the sites have been the sites in Nanjing, where we have now started test production. And in Dormagen, where we are already in production, and then in Tarragona, the third of the major sites which we expect to be on commercial production second quarter of this year.

Net debt during the year has been reduced by €75 million. And if you can fast-forward and take into account €240 million that we expect, we contracted to receive from the sale of the formic acid business, you’ll see that we’re in a much improved balance sheet position and as Wolfgang was saying, this actually positions us quite well for the product future growth both organic growth as well as positioned to look at inorganic opportunities.

This comes to our dividend policy, dividend decision. So the board is proposing that the shareholders approve a dividend €0.53. This would be remaining consistent with the previous two years. It’s worth noting that the dividend would be higher than our guided dividend policy. But with the de-leveraging that is taking place, with the divestments that we have just made, we feel very comfortable with this dividend.

Then finally, to the outlook, what we are saying about the outlook, we expect that the revenue will grow between 0% and 5% by this organic growth, adjusted for M&A activity and adjusted for currency movements. And the operating EBIT will grow between 5% and 15%.

We are keeping our longer term targets intact. So we are targeting 15% EBITDA at 2016. And this would be based on assumption that the company is at €62.7 billion in size.

Now, that may prompt you to ask that where is the EBIT 10 is that still a target for us. Yes, it is not part of our outlook for 2014. But clearly the company is very much focused on improving it’s profitability on towards meeting the 2016 targets.

With that I’ll stop, and hand it over for Q&A session.

Question-and-Answer Session

Tero Huovinen

Thank you very much Petri, thank you Wolfgang. And now it’s time to take questions. Let’s start from the floor. Please go ahead.

Panu Laitinmaki – Danske Bank

Thank you. Panu Laitinmaki from Danske Bank. I would have a few questions if that’s okay? So firstly on this one-off type costs in Q4 that you had, now we are almost halfway in Q1. So what’s your view on this, especially those related to 3F? So, how things have proceeded there year-to-date?

Petri Castrén

Okay. So you’re actually referring to the what I was saying that our cost – operated costs but should not repeat themselves in the future as opposed to the really one of course which we report separately?

Panu Laitinmaki – Danske Bank

Yes.

Petri Castrén

As I was trying to explain, the 3F cost items related to the plant shutdown, I mean that’s temporary thing. You have the cost related to the plant even if the plant is not producing products and producing revenue. So that shutdown started in mid-December, continued until the first week – through the first week of January. So obviously we’ll have a slight impact in Q1 but then it’s over.

The temporary product quality issue which I mentioned was a temporary product quality issue and that’s history. And then some of the higher cost inventory that was transferred to us as a part, so it will take maybe through first quarter, before that we have to work through with that.

We also are taking some other additional synergy measures which you might expect when you acquire a business. And the benefits of those, was there to flow through probably in the second quarter or so. But like I said, importantly the backward integration benefits are already visible, were already visible in Q4. And all-in-all the whole rationale for the acquisition of 3F holds true.

Panu Laitinmaki – Danske Bank

Okay, thank you. And on the outlook, you are expecting EBIT to be 5% to 15% higher this year. Can you give any color how you expect it to go divisionally?

Petri Castrén

No, we haven’t – we haven’t in the past given guidance on divisional or segment EBIT and we refrain from that, no.

Panu Laitinmaki – Danske Bank

Okay. And then on divestments, you have divested a lot in the past 2 years but you still have the de-icing business, which is bringing some volatility. So do you expect to divest that later on?

Petri Castrén

No, no, no.

Wolfgang Büchele

That’s part of the divestment of the formic acid.

Panu Laitinmaki – Danske Bank

Okay.

Petri Castrén

Yes, yes. So really the ECOX business, what we call ECOX, the sodium percarbonate business, that’s the only thing that will remain after this divestments are done. So, that’s why I was commenting that the volatility that was associated with the de-icing business with the weather that will not repeat itself once the formic acid deal is completed.

Panu Laitinmaki – Danske Bank

Okay, that’s good. And then on the Stora Enso new mill impact, could you – what’s the impact for you roughly?

Petri Castrén

We haven’t guided the revenues, and obviously we do not know the ramp up phase. And anytime you ramp up a major mill like that it will take time some before it’s at full capacity. But it is a major mill and I think it’s one of the largest mills. So it has some same impact.

Wolfgang Büchele

And originally the plan was that Stora Enso starts up already in 2013. So, from that point of view, our expansion in Fray Bentos was ready on time, when the original schedule of Stora Enso was asking for product. So we have the depreciation in the books right now. But we don’t have revenue and margin coming in yet.

Panu Laitinmaki – Danske Bank

Okay, thank you. And finally, on the mining, you mentioned that there will be a management change. But what in practice do you think will be done differently? Has it been a sales issue or lack of products or what do you think will improve?

Wolfgang Büchele

I think we have to – let’s be very frank. We have to improve our understanding of the industry. And that is why we are moving to Houston where the industry sits to become also an industry insider. And from that point of view we then also need to improve our capability to translate industry needs into products we can supply for the various purposes.

And that is what we are looking now for a respective leader who is able to bring this knowledge to the segment and who is able then to drive this segment in-line with our growth ambitions we have expressed in this strategy.

Panu Laitinmaki – Danske Bank

Thank you.

Wolfgang Büchele

All right. Let’s take the next question from the call. Operator, is there questions?

Operator

(Operator Instructions). We have a question from Mr. Fabio Lopes from Bank of America. Please go ahead sir.

Fabio Lopes – Bank of America

Hi good morning everybody or good afternoon. Thanks for taking the question. I have one question. On the Fit for Growth program there was a target of 10% EBIT margin that wasn’t achieved or it was a lot of moving parts in the company.

The portfolio is looking a lot more cleaner now. But we still have 2016 margin that implies an EBIT margin of about 11% from about 8% which is the EBIT margin implied on your guidance, which is a pretty steep improvement given what the company has done in the past. So I would like to ask from this improvement how much cost cutting is still left to be done and how much do you expect to come from organic growth and how much from M&A if you could break it down how you’re thinking about it? Thank you very much.

Petri Castrén

Okay. So, let me try to address that. Yes, your math is roughly correct. So, if one say that we are about 7.5% on an annual level EBIT to climb towards the 11% it is a fairly steep curve. Now, we do have still some of the cost benefits that we were achieving or we are achieving from the Fit for Growth are not yet fully in the bank so to say that are not in the P&L this year.

I think the number that came through the Fit for Growth program is €46 million benefit for 2013, so there is another €14 million or so to come during 2014. So, that’s one part of the answer.

The second part of the answer is that yes, we need to move kind of balance, if the focus has been perhaps more on the profitability improvement in the past, I think now we need to kind of increase the emphasis on the growth without forgetting the cost side of this. So the emphasis will be on growth.

And you saw that on paper side that once you grow the operating leverage and scale actually improves the profitability as well. That’s how the operating leverage works. We get the plans for operating at better capacity and that improves your overall margins.

So, the focus is perhaps a bit more on growth and that’s what we expect will be helping there as well.

We don’t – if you do the math and from the organic growth to the €2.6 billion to €2.7 billion in target revenue in 2016, yes there is an implicit expectation of some M&A activity but clearly we don’t know what M&A will be done. So we cannot quantify which percentage is of how much that growth comes from M&A and particularly how it will impact the profitability improvement.

Wolfgang Büchele

And again, we have guided now a couple of times already, we are in the market. So, we are looking for acquisition targets. We have found a small piece besides 3F which was Soto industries in Canada, which we acquisition also in 2013. And from that point of view, we’re looking to have inorganic growth to help us to improve but more so to improve our market position.

So the driver is not to buy growth, just to have growth. We are looking really for acquisition targets which help us to strengthen our position. And that’s why we are not guiding right now whether there is something or not simply because this depends on what is available in the market rather than just going out and grab anything that comes along.

Fabio Lopes – Bank of America

Okay. But just a quick follow-up. Would you be able to achieve the 11% margin without M&A?

Wolfgang Büchele

Well, obviously as we have divested €200 million in top-line, I think the math already inclines that we cannot achieve the €2.6 billion to €2.7 billion just out of organic growth. The likelihood unless for example currencies, etcetera would turn around is fairly I would suggest challenging. And from that point of view, you should anticipate that some inorganic growth will help us and will take place in the next three years.

And as we said, our balance sheet is strong. We’re able to do without any problem. So in the scale we are looking for, there is clearly room to do something.

And just to repeat, we said last time we are in the process for example to look to enter the water treatment business in the fracking context which is clearly a market which is currently evolving in the United States that gives you an idea in which buckets we are looking. And this is something which then once you have the seed you can then organically grow from the seed in an over-proportional manner.

I hope that gives you some ideas what we are thinking, which direction we are thinking and what we are planning to do. And of course naturally, as we said, paper and oil and mining are the growth segments, obviously we’re also looking what’s going on in the paper industry. Is there anything which would allow us to strengthen our market position there? So, clearly these are the leading let’s say trades we have when we look for M&A activities on the acquisition side.

Fabio Lopes – Bank of America

Okay. The top line part is very clear. I was just trying to understand from the current portfolio where would – we would be able to get in terms of margins?

Petri Castrén

If I repeat, what Wolfgang was saying it maybe a little different words. So the scenario that is painted with the 2016 long-term target, it does include, it does have an element of inorganic growth associated with it. So that is impacting the profitability assumption, the 15% EBITDA assumption as well.

Fabio Lopes – Bank of America

Okay, thank you very much.

Tero Huovinen

And the next question please.

Operator

Our next question comes from Mr. Oliver Reiff from Deutsche Bank. Please go ahead, sir.

Oliver Reiff – Deutsche Bank

Hi there, thanks for taking the question. If I understand correctly, aside from – M&A growth is one of the main drivers behind hitting your 2016 target. So could you give an indication where operating rates are at and where you need to get to for your plants in order to hit those targets? That’s my first question.

Wolfgang Büchele

Well, in our asset footprint, it’s not helpful to discuss one single operating rate. We have certain facilities in the paper area which are in very high utilization rate. And we are currently expanding even and one example is Fennobind.

We have already shared with the market that we have currently a major expansion underway in Austria. The market penetration was much faster than what we originally thought. And we are now into process to roll-out this product into the North American as well as into the Asian market.

In Asia again, to start with it is no problem, Nanjing is now as you have heard in trial operation. So we can start to produce the product in Nanjing immediately. And then, once we need bigger capacities, we will expand Nanjing accordingly.

If you also recall what I have shared with the market is that alongside with 3F acquisition, we got additional capacity for Europe. And we have an expansion of dry polymer capacity which is very important for a stronger market penetration in oil and gas in the United States, currently under implementation.

And we are expecting the trial production of the expanded dry PAM capacity which by the way we didn’t have any in North America before the acquisition took place. That trial operation will take place towards the end of the third quarter this year. So we are getting additional capacity which we need for our main product areas we want to grow into place or have ample capacity at certain places.

We also have the possibility with a limited addition of fixed cost by running some of the plants which are running on a 5-day basis, we can run them on a 7-day basis, so we also have in-built inherent capacity which will not just help us to generate additional contribution margin with our existing asset footprint. It also will help us to improve our return on capital employed further and KPI we haven’t discussed at all yet.

So, from that point of view, we have possibilities to grow organically. We need to penetrate the market better and that’s particularly the case for oil and gas. We’re not expecting too much on the mining side. In 2014, the market seems to be currently continuing to be flattish.

In paper, we are leveraging our capacity much better but still either capacity expansion is underway or we still have certain room. Otherwise we will continue as we have said in investing to support our organic growth.

So, the plans are there and the plans will be kicked off as the market requires the respective products or as we need additional capacity. Therefore, in general, our operating rate is between 70% and 80%. But this is a figure which doesn’t tell anything because as said, we can either increase the shifts or in some areas we are already running at capacity. So therefore this average figure is not the way to look at.

Does that help you in understanding the situation?

Oliver Reiff – Deutsche Bank

Yes. And the second question I had was on M&I and oil and mining. Would you be able to give a bit of color on the competitive environments and if there has been any changes for those two businesses of late?

Wolfgang Büchele

Well, I think we’ve shared with you before that the competitive environment in United States is tougher than what it was couple of years ago. And from that point of view, if you look to the profitability, clearly in Europe we are today at or above 10% EBIT return.

With our business we have a pretty much shared business between coagulants and polymers, whereas in North America where we have today only a coagulants business, high volume commodity business, the situation is different. It’s an intense competition. And after General Chemicals has been acquired clearly the situation is not easing. And that’s why the focus of the M&I management for 2014 is clearly on getting North America right.

In the oil and mining segment, I would dare to say it’s not the market it’s not the intensity of the competition. It was more our own issues. And that is the reason why we decided to look for a new management to drive the business in a different way.

So from that point of view, the growth pockets are there. The competition is, existing everywhere these days. But there is not a specifically intensified competition. In paper you could see that we manage competition extremely well. We increase profitability while growing. And as I said in oil and mining it was to a large extent our own issues rather than anything else.

Oliver Reiff – Deutsche Bank

That’s great. Thanks a lot.

Tero Huovinen

The next question.

Operator

Our next question comes from Mr. Rauli Juva from Nordea. Please go ahead sir.

Rauli Juva – Nordea

Yes, hi, Rauli from Nordea. Two questions from my side, first of all the 10% EBIT margin target you had for this year. You were still out a couple of months ago stating that you should achieve that in 2014. And I was just wondering what has changed given that you indicate that many of the negative items in Q4 are kind of one-off in nature. So your guidance clearly does not indicate 10% margin. So what has changed from late last year regarding that?

Wolfgang Büchele

Let me take that question. I think we are striving to deliver and as high EBIT margin as possible. However, I think considering the performance we have had in 2013, and two profit warnings we had. I don’t think it would have been helpful if we would sit here today being extremely bullish on E10 where the market sees us currently, very different.

You can be sure that performance management is a key driver in the company. With the two departures, we have made it very clear that we are serious, that we are getting serious on performance in contrast to the past. And from that point of view, clearly we strive to deliver as much as we can. But from gaining trust perspective, we felt it would not be too advisable to be too bullish right now having a number of uncertainties also in the global economy.

Rauli Juva – Nordea

Okay. And then secondly on M&I division, there was quite clear drop in sales even on a local currency organic basis in Q4. So can you a bit expand what’s happening there?

Wolfgang Büchele

Well, obviously we had a very tough situation in Q4 in South America. And from that point of view that accelerated our decision to sell the business. Plus obviously as we closed the deal on the 16 December, we had two weeks missing sales in coagulants in South America.

On top of that we lost some business in North America which also reflects itself in-line with what I said before about the intense competition we see in some areas in North America. And this is now addressed, so clearly North America is the focus for M&I whereas on the other hand Europe is doing very well.

Rauli Juva – Nordea

Were not -- not related to any strategic decisions to withdraw from certain products or clients or anything like that?

Petri Castrén

Well, let me continue elaborate a little bit on that one. So, clearly you covered inorganic activities. So the reported revenues were somewhat impacted by the Brazilian divestitures already and there were some smaller divestitures that had impacted or reported year-on-year decline was about 11%.

I give an example of this product mix issue that actually took place in M&I. So, where we replaced a product on a year-on-year comparison that actually reduced as mentioned 2% came in at group revenue. So if you look at and do the quick math, I think its 5% or 6% of revenue – segment revenue. So that explains that one product mix topic explains half of the negative decline on revenue for the segment M&I.

So, perhaps the product mix is there and it was amplified by this one instance but also mentioned that we do have issues in North America that we need to address.

Rauli Juva – Nordea

And these product mix issues and lost customers, is it fair to assume that it will continue to impact at least in the first half of this year?

Petri Castrén

Well, the product mix is, and again, I reemphasize that the strategic goal for the segment is to be profitable, improve profitability and improve cash flow. So the revenue, if we have a product mix issue and we’re still generating the same amount of absolute margin with a happier customer, I’d rather take the happier customer and with the same level of absolute gross margin even if there is a decline in the reported revenue. Because the reported revenue doesn’t drill at the end of the day, does not mean much.

In this business, the municipal industry business is mostly tender business. So, customer contracts are won and lost every year, every time there is a tender. And we have been perhaps more selective in terms of not entering into a marginally profitable or even – or non-profitable contracts at all. And according to the strategy for the segment, we’ll continue to be on that level, continue to hold that line in a way.

Rauli Juva – Nordea

Okay, thank you.

Tero Huovinen

Is there…

Operator

Our next question comes from Mr. Bens Carlos from JPMorgan. Please go ahead sir.

Martin Evans – JPMorgan

Yes, actually it’s Martin Evans from JPMorgan. Just a quick one, looking in the light of what has been achieved, the various issues, the restructuring, the recent profits warning, the issues with margins and now the sales growth of 0% to 5%. I mean you’ve obviously done quite a lot so far, but have you looked at more radical ways of possibly unlocking value for your shareholders in terms of selling off bigger bits of a Group or even in fact possibly putting the whole business up for sale?

Wolfgang Büchele

Well, management has the obligation together with the board to generate value for the shareholders. And I cannot see right now that putting the whole group up for sale would generate a lot more value to the shareholders than what we have right now.

We have not been approached by anybody who would have shown interest in Kemira. And from that point of view, we have no idea and no inclination why such a step would generate more value to the shareholders than implementing diligently on our strategy which we have outlined so far.

Should somebody approach us then obviously we have to discuss with our board how to take that further. But as this has not happened, we do not see any merit, if we now unilaterally would start to market the company.

Martin Evans – JPMorgan

Okay, that’s very clear. Thank you.

Petri Castrén

Let me address the second part of that – or the segment. Now, I’m only five months into the company but I’m already seeing the synergies between the segments. So, we have the same polymer technology being implied in different segments. We have same plans are serving different segments as well. So really it does not make sense to look at segments separately that we will see A, B or C segment.

We have been following very much the strategy that has been designed some years ago and sharpened earlier in 2012. And this is the strategy that the management is executing.

Wolfgang Büchele

If you look into Kemira from a carve out perspective, the only business which could be easily carved out, because it’s from an asset based totally separate is coagulants. Everything else is not easy to be carved out. You have a similar situation as you had when Clariant sold its textiles, detergents, etcetera business they are using the same assets for different outlets. And that’s exactly the same what Kemira is doing.

So, therefore, the only thing what you could do is to carve out the coagulants business. As I said in Europe, we are north of 10% EBIT return in our M&I business. So, we don’t see any reason why it would be value creating to carve out that business and try to sell it nor would I see any potential buyer for that business.

And pretty much the same as currently the situation in United States, we have no indication that anybody would be interested in buying our coagulants business.

If you would take the rest of the asset footprint, we would ultimately have a value distraction. If you put part of the assets out and sell them, because then synergies as Petri Castrén has pointed out, synergies between the segments would be lost.

Martin Evans – JPMorgan

Okay. Thanks very much.

Operator

(Operator Instructions).

Tero Huovinen

If there is, no more questions I think it’s time to conclude the conference. Thank you very much for participating. And we’ll see you again in April with Q1 results.

Wolfgang Büchele

Thank you very much for your interest.

Petri Castrén

Thank you.

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