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Executives

Tero Huovinen - VP, IR

Jari Rosendal - President and CEO

Petri Castrén - CFO

Analysts

Panu Laitinmäki - Danske Markets

Markku Järvinen - Evli

Oliver Reiff - Deutsche Bank

Mikael Doepel - Handelsbanken

Fabio Lopes - Bank of America Merrill Lynch

Rauli Juva - Nordea

Kemira OYJ (OTC:KMRSF) Q2 2014 Earnings Conference Call July 22, 2014 8:30 AM ET

Tero Huovinen

Good afternoon and welcome to Kemira's Second Quarter 2014 Results Conference. My name is Tero Huovinen, and I am Head of Investor Relations. Results will be presented by Kemira's President and CEO, Jari Rosendal, who started in May, followed by a presentation by Petri Castrén, CFO. After the presentations, as usual, we will have a Q&A session.

But let's start with the presentation. Go ahead, Jari.

Jari Rosendal

Thank you, Tero, and welcome on my behalf also. Day 83 or business day 56 for me, starting after 1st of May, so steep learning curve and really from day one, things were active on a day-to-day business things, as well as on the -- learning the business, the company, the people, and so on. So lots to learn, and still lots to learn.

I visited about a dozen sites, mostly our fabrication sites, research centers, two of them, main offices and still a lot of visiting to do, but given a good picture where we are. And one thing has been confirmed, which was my perception, that Kemira is truly a know-how house and technology company and application expertise company, not only a chemicals bulk producer. And I think from a strategic point of view, that's really important going forward.

So feels like a really good start, reception from the organization has been really good, and getting to know people and so on. So good start and great to be here.

Moving on to our Q2 development and I could rephrase that in a way that, positioning Kemira for future growth. So number of things have been announced during the quarter, and number of good developments have happened. Obviously, we today updated our guidance, and that's something that we had to do, and we will come back to that later. But I am pleased that our oil and gas business in our Oil and mining segment continued to grow nicely, around 20% digit level. Finally, the Uruguay Pulp Mill started up, and we are delivering chemicals and ramping up our mill there, that started in June, so there was delays compared to our original plans.

We were pleased to win and announced the Klabin pulp mill deal in Brazil, and that's a 15 year contract for chlorate, so that will start up somewhere mid-2016 and places us for future growth.

Naturally, a couple of weeks ago, early July, we were able to announce the Akzo paper chemicals deal, that we are in the process of buying, and that's a good addition and an excellent fit to Kemira's portfolio, and takes us nicely towards the end of the mid mark, strategic mark of 2016. So these are some really nice things and good progress in Q2.

Looking at our strategic four cornerstones, and already earlier I have said that, I don't foresee any big changes. We have looked through our strategy during the couple of months here, and discussed that with the Board, and indeed we don't envision big changes to our strategy going forward.

Naturally, we have to monitor the world and see what changes come, what -- our actions and execution goes and how we need to adjust going forward. But no big changes expected.

We drive for growth in pulp and paper and oil and mining, and our M&I business continues to be an important cash flow producer for us in the future. Our financial targets for our strategy 2016 and 2020 are still in place, and those are what we are driving for.

Looking at our paper business; and packaging and board is really the area, and tissue, where the growth comes from. We all know that printing paper is going down, but our main focus is capturing the growth in packaging, board and tissue. APAC continues to be a really -- also nice growth area for us, and when we look at then recycling fibers and making packaging more stronger, but yet lighter. So that's a demand for further chemicals and further growth for chemicals.

Consolidation happens in the market. Last year, we acquired 3F, this year we closed the BASF smaller deal, and now Akzo. So we are active in the market and in the consolidation, and obviously, these businesses also benefit the other segments, not only paper segment.

Shortly a reminder of the Akzo deal, so a transaction price of €153 million, we expect to close the deal in Q1 2015, normal customary closing conditions, nothing special there. Some of them might take a bit of time, but Q1 is the estimated time.

Last year, the revenue from that business was about €240 million with EBITDA of €23 million. The important part is that half of the business is in packaging, so that really hits us in the areas where we want to grow, and third of the business is roughly from APAC. So we will be doubling our APAC business with this transaction, once closed. So that's an important strategic move ahead.

We expect to get about €50 million in annual synergies, once integration is completed and integration starts early next year, and continues through 2015 and 2016. We obviously start preparing that already now, in order to take over that business, beginning of next year. I think this is a great step in going forward with our strategy, and getting back on the growth path.

We then look at Oil and Mining; mainly driven in the second quarter and year-to-date with business coming from the Americas and oil and gas, and nice double digit growth there. We already announced the new head of Oil and Mining segment and he started in May, so an important step, and we also opened the Houston, Texas, Oil and Mining head office in June, to get our people and our organization closer to the Oil and Gas customers, right next door, and that's already providing good feedback and good business opportunities through that move.

Increased activity is seen in enhanced oil recovery; that's not a big revenue generator for us right now yet, but that's coming in the future next few years, and it's showing us really promising signs with the activity in the market.

M&I, where revenues were naturally lower compared to last year, due to some pruning of the business, divestments in Brazil and so on, but the efficiency improvements that have been taking place are contributing to the EBIT improvement, in percentage point of way, and that's good. We continue to improve efficiencies for M&I, and look at how we find the pockets and identify the areas where we need to improve, and as such, M&I continues to be an important cash flow contributor to the business.

So looking at strategy and looking at the recent history from restructuring, the redesigning, now we want to go on a growth path, and that obviously comes from three areas; organic growth, we continue to push for growth and investing into new capacity and existing capacity, beginning of the year, investments were roughly €60 million, and we continue on that, and have even accelerated in areas. Investing into R&D and technology also in the future, I see this continued as a technology-house, as a know-how house, not as a bulk tonnage type of chemicals producer only, and obviously developing the organization skills and expertise of the people.

M&A continues to be important in the growth and this Akzo deal shows an example of this. However, we want to be cautious on whenever evaluating cases, so that we don't do mistakes and get ourselves into a buy [ph]. Efficiency improvements remain on the agenda all the time, and that's where we are.

On a -- I use the word in comparable basis, so carving out the divestments and closures last year, our numbers develop nicely. So top line grew, but especially the bottom lines weren't going to the right direction. Obviously, we cannot be happy, because we had to change our guidance, but on a underlying basis, I think the business is going through the right direction and these scope changes have impacted things a lot. So I think a good start and good strategic during Q2.

On 9th of September, we will have a Capital Markets Day in London, so I hope to see many of you there, and then we elaborate more on our strategic steps and do a deep dive on the segment progress and so on. So it would be very nice to see you in London on 9th of September.

With this short summary, I will hand things to Petri, and he can go over the financials.

Petri Castrén

Thank you, Jari, and good day from me as well. So obviously with today's revision to this year's profitability guidance, we cannot be totally happy about the quarter and its performance. However as Jari said, lots of positives in the quarter, which help us position well for future growth.

So let's start looking at the numbers in more detail; next slide. So organic growth was flat for the quarter, adjusted for currency movement and adjusted for M&A. We experienced very good growth, actually very high growth in Oil and Mining, at 17% organic rate, as well as good above market growth in paper segment, at 4%. However, there are some weaknesses and competitive pressures in municipal and industrial, so the growth in paper and oil and mining was just about offsetting the weakness in M&I.

Operatives EBIT decreased reported; operative EBIT decreased 8% from €40 million to €37 million, and it's worth noting couple other reasons that impacted that.

First, is the currency; so we will continue to see the weakness of the dollar, as well as some other dollar linked currencies, so that has continued to impact negatively both our top line as well as profitability.

Pricing was €5 million impact this quarter; I already mentioned competitive impact in the M&I, the coagulant business and some of the commodity chemicals in our paper segment, also saw the market prices decline. Main areas, it was also -- it was raw material driven, so it did not have that huge impact on profitability, but it did have some. We saw volume increase, and we continue to be more efficient with our fixed costs.

The revenue bridge, if you look at this clearly, the biggest item impacting the reported revenue declining from €569 million to €518 million was the currency movement. So the currency movement I mentioned, 3% on the top line, and the small sales volume increase. But also, I think it's important to note that the acquisitions brought about 4% of revenue of top line compared to the 10% of loss to top line from the divestments. However, from the profitability point of view, those two neutralized each other. So I think that is also -- tells us that we were at the right time, and where we are investing into the right things and doing the right thing when we are divesting those commodity chemical businesses.

So where is the business mix going? So clearly, we see high growth, double digit growth in our differentiated chemicals. This is consistent with our strategy. The polymers growing at 15% year-on-year and also paper chemicals in the sizing and strength area. We saw the decline in coagulants, the divestment of -- as the primary cause for that, and I already mentioned some of the pricing impact, and there were also some maintenance breaks that impacted the bleaching and pulping chemicals decline on a year-on-year basis.

What's important to note is that, when I started about less than a year ago, we were about 40% differentiated chemicals and 60% commodity chemicals, we are now already 50-50 and pro forma, the AkzoNobel paper chemical acquisition, we will be 55% differentiated chemicals and 45% commodity chemicals. So we are on that strategic metric or strategic initiative, we are actually progressing very well and faster than I think we communicated, when we started following this metric, a couple of years ago.

Then a little bit on the numbers; while we are reporting roughly flat EBIT margin, so only 10 basis point improvement, we are seeing 80 basis point improvement on the EBITDA margin. So clearly, there are some additional costs that that are on the P&L statement below EBITDA, but above EBIT line, and that is caused mostly by the ramp-up and bringing online the new factories in Nanjing, as well as in Dormagen, as well as the amortization related to the purchase price -- in tangible part of the purchase price for 3F and most recently, the BASF transaction. So 80 basis point improvement on the EBITDA margin.

Then looking at the segments in a bit more detail; so as I already introduced, there was good 4% organic growth on the top line, in paper segment, and again we believe that this is faster than the market growth. We haven't seen the market numbers yet, but we believe that this is faster.

Q2 is typically impacted by various maintenance shutdowns. Sometimes, we don't exactly know how long they are, so typically the customer mill shutdowns tend to take place in Q2, starting in may and going into June, and you never -- at the beginning of the year, you don't know how long they are. There is a second shutdown season around the Christmas period and that's also -- always causes some uncertainty for the paper business for the fourth quarter.

This year also -- not this year, but also, we see typically in May, or in Q2, the maintenance shutdown for the nuclear power plants, and we are a large consumer of electricity here in Finland, and while the nuclear power plants are being maintained, we resort to market prices, electricity, and that always has some impact to our Q2 results. Then this year, we had a tri-annual, a maintenance break that we do in our Helsingborg site, our biggest site every three years, so that it has some impact, additional impact on paper profitability, along with increased costs and depreciation from the Nanjing operations.

So those are the reasons why EBIT on reported basis is below last year, on an EBITDA basis, the segment was still ahead of last year. EBITDA margin data point.

Looking at the Oil and Mining; so clearly here, the highlight is the continued strong demand for our polymer products for North American Oil and Gas. Last time we looked at the rig count, the rig count was again up by 7%. So this seems to be a good solid trend that the market is growing and clearly, we have benefited. So 17% organic growth during the quarter.

Now in this context, it's fair to warn, that we are running into the capacity issues here, so we cannot continue at this rate, until we actually add some additional capacity, and so we are already looking at capacity additions, but it will take some quarters before that, those come online. In the meantime, we will focus on margin improvements, so clearly there are issues that we can do with raw materials, with the high demand in North America, we have been shipping AMD acrylamide from Europe to North America, and we will be able to actually move this raw material from Europe to North America and save on transport costs.

On the mining side, the market continues to be soft. We don't foresee a quick recovery on that, and also in the Oil and Gas in EMEA, where we operate mainly in the conventional oil and gas, we don't see the same progress that we have seen in North America.

M&I, so M&I we are -- first of all, I have been talking to you and this -- that we have seen some additional competition and hitting us in North America. I think we are now seeing some early signs of recovery, so I -- we clearly see that the teams are winning contracts, they are winning [indiscernible] contracts based on -- become a bit more aggressive in pricing, but are also based on good service. That's not visible in the numbers yet, but expect that should help. And municipal and industrial is also managing costs very well, so even with the decline in revenue, they have been able to generate good profitability and good EBIT margin at 8.4%.

Obviously revenue is heavily impacted by the divestments. Year-to-date, the organic growth rate has also been negative 10%, somewhat driven by our own measures as well.

Looking at our internal efficiency measures; so return on capital employed is an important measure, with now at that 12% level, and as I have communicated to you earlier, we aim to reach the -- head towards the 15% level, and this will be through both improved profitability as well as improved capital efficiency.

On the -- about the cash flow, cash flow was impacted by some one-off items. You may remember that we announced in May that we settled one of the litigations that was threatening to us, so there was a €20 million one-off charge that we took, and that was also paid at the time, so that's impacting there.

CapEx expansion [ph], other line that I will comment. So we are at €59 million or €60 million, almost exactly at the same pace as we were last year, and basically, one would expect that we will land somewhere near last year's number. Dividends, again paid in the second quarter.

Then I will move over to the guidance slide, and I will be careful here. So you have seen in the press highlights that we have revised the profitability guidance, and it now reads that we expect operative EBITDA in 2014 to be approximately at the same level as in 2013. And just to be clear, operative EBITDA means EBITDA excluding non-recurring items.

So let me give a little bit of a background why we did that. So first of all, we have had two guidances, one on the top line and one on the profitability. So there is no reason to change the top line guidance, so that stays at slight growth, which is zero to 5%. Year-to-date we are now at about 1% growth rate.

Our previous profitability guideline was based on operative EBIT growth of 5% to 15%, and now at midyear, we must note that we are a bit off last year's base. We are off $9 million, and we are -- the main reasons why we are behind it is that on a year-on-year comparison, we are missing the ChemSolutions' excellent business performance, Q1 of 2013. So actually the delta between ChemSolutions in Q1 2013 and Q1 2014 is €11 million. Then on top of that, we have had €7 million already of negative impact from the currency movements against us. And then we must also note that the competitive environment, and hence the financial performance of M&I has been tougher, and these are the reasons why we are behind, and that's why we are updating this guidance now. So the two other segments, good progress, can fully make up those, and then grow by this 5% to 15% which we had guided beforehand.

So having then realize the need to update the guidance, we decided to shift to EBITDA guidance. EBITDA is predominantly used in the global chemical industry, and we have already given our mid-term guidance, our 2016 targets based on it. We also looked at 20 some chemical companies that we looked at and of those that were giving guidance, more than two-thirds were giving their guidance with EBITDA metric, and therefore, we decided to move to the EBITDA guidance already now.

And as this is a new metric, so let me point out some numbers, so that there is no confusion about what it means. So last year, operative EBITDA was €252 million. Year-to-date, we have now made €180 million, €7 million of last year's pace. However, we feel comfortable that the second half will be stronger than the first, supported by normal seasonal trends, and supported by the good momentum in paper and oil and mining, particularly in Americas. And finally approximately we have defined, to mean plus or minus 5% from the base number of €252 million EBITDA.

So with that, I will stop my prepared remarks, and turn it over to Q&A.

Tero Huovinen

Thank you, Jari, and thank you Petri. And let's open the floor for questions. Please state your name and company.

Question-and-Answer Session

Panu Laitinmäki - Danske Markets

Panu Laitinmäki, Danske Bank. I would have a few questions, if I may. Firstly, two questions on paper. So I was wondering, the organic growth was 4% in Q2, which was quite a bit slower than in Q1, so do you see a changing trend there or was it impacted by the maintenance shutdowns. And second question related to paper was that, you mentioned several items increasing costs there, so it would be helpful, if you would have any estimate, how many -- how much of that was Q2 specific and how much is like something that will continue? Thanks.

Jari Rosendal

Maybe, I will start and Petri continues. No we don't see a trend there. It’s a seasonality thing with the shutdowns, maintenance shutdowns and so on, that were a bit different than previously, and there were no major one-off items, some core things [ph] from electricity prices and so on that came in there, and such impacts or multiple smaller movements coming from there. So lot of trends changed, as we see. Petri, any comment from you?

Petri Castrén

I just like to point out that, we are still growing above market, and while we have growing 7%, 9% organically in the quarters, I'd be always cautioning everybody that you cannot expect for us to grow at almost 10% in a market that is relatively flat. And this is during the quarter, where we had not only those maintenance shutdowns affecting customers, and ours as well, but some of the high volume raw materials, and high volume commodity chemicals, the prices were reduced in the marketplace quite significantly. I mentioned caustic soda as an example, which faced actually during the quarter, double digit decline in market prices, and that is a very much of market traded commodity, where I mean -- we make some of it, we trade some of it. So on the trading product, we make fixed margin on it, on what we make, that does impact our profitability, but that's really something that was happening in the marketplace, and so again, I wouldn't be worried about this as a starting -- reversing a good trend, let's put this way.

Panu Laitinmäki - Danske Markets

Thank you. And my final question was about the currency impact to EBIT. It seems quite big compared to the impact on revenues, so could you explain where it comes from? Thank you.

Petri Castrén

It comes -- partially it’s the U.S. dollar, it’s the Swedish Krona, its also the Canadian dollar, so we have had an open position basically because we supply Canadian paper market from the -- mostly from the U.S. and the Canadian dollar has weakened against the U.S. dollar as well.

Markku Järvinen - Evli

Markku Järvinen, Evli. I wanted to ask about the M&I business. Organic revenue declined 14%; could you open up that a little bit there, what's -- typically there is a very strong Q3 there, do you see that turning around or what is the outlook?

Jari Rosendal

Thanks Markku. Its partly seasonality that we see, North America, and dryness also in Europe, then it’s the competitive pressures that are there. And then, some of the optimization that was done last year in the network. So we have taken top line down, knowingly that we are taking down, but fixing our bottom line in that respect. So some of these moves were planned and intentional to boost our bottom line. Petri, anything else?

Petri Castrén

Yeah, I think it’s a combination of this -- some kind of, I hate to say this weather thing, but there is still this weather issue in North America, in the western part of the U.S. We have had, and we still have a good market share in the Californian Municipal Water Treatment business, and as long as the dryness continues, that does have a little bit of an impact. Actually, we did not see the normal seasonal pickup, that we typically see. Typically, the second quarter should have been clearly a bit better than the first quarter, that was part of it.

Second part of it is, and I -- we have to say that openly, because of the ample availability of some of the byproducts. So there is price erosion in the marketplace, and there is also the large supply of the byproduct is allowing also, some of the competition to become more aggressive. So there is clearly -- that is impacting the competitive environment as well, particularly we have seen that already some quarters in North America, there is perhaps a bit more of that in Europe as well.

Markku Järvinen - Evli

So say as price drops --

Jari Rosendal

Takes that revenue down. Still our margins have been okay, so it’s a volume -- Euro volume type of drop, and obviously our North American business is also impacted by the weaker U.S. dollar.

Petri Castrén

If I continue, some of the byproducts that are really being ample in the marketplace, in North America, pickle liquor -- as pickle liquor is readily available and is impacting on the iron coagulant market there. In Europe, its mostly the hydrochloric acid, that's plentily available and at much lower prices than in the past, and coal price [ph] is also coming down in price. So obviously, we get the benefit of that also from the margin point of view. But it does allow some of the competition to become more aggressive, and that's showing in the volumes.

Markku Järvinen - Evli

Okay, thank you. I had a second question about increased depreciation and then the investments. Dormagen, Tarragona, Nanjing, are they now fully depreciated in Q2 already or they still increase in Q3?

Petri Castrén

Dormagen and Nanjing, we started depreciation in Q2. We started them during the quarter, so they may not be fully reflected there, and Tarragona, the same. So they are not quite at full run rate, but close to it. I think we started depreciating one in April and the other one in May, I don't remember the months.

Markku Järvinen - Evli

And then further on, the investments, I guess on the site visit in Dormagen, it was implied that was sort of close to breakeven, and would now start contributing positively. What about the other plants? Also [indiscernible], when do you expect these assets to sort of reach breakeven and start contributing?

Jari Rosendal

I will take the plants. Dormagen, you're absolutely right. So Dormagen was basically -- we were shifting manufacturing from other sites to Dormagen, so it was easier to load up the factory relatively quickly, and hence its now contributing. Nanjing is more of a greenfield project. So we need to -- we have presold some of the capacity we need to, and we are continuing to sell. So the capacity utilization is not at the same level in Nanjing yet. So Nanjing for the quarter did not fully cover its fixed costs and depreciation yet, so that's why we are continuing to load up the factory, and this is typical, when you build a major plant, greenfield plant, even if once you take the factory online, it does not immediately start contributing to the bottom line. So this is -- and will take probably a couple of quarters to do that.

I wanted to [indiscernible] that we are supplying from our own Chemical Island in Fray Bentos. So that's not a new factory, its an expansion to an existing factory. It has much more to do, how much chemicals the plant in [indiscernible] plant actually need, the pulp mill needs. I think Stura gave actually yesterday guidance that they will use 300 to 350 kilotons -- or produce 300, 350 kilotons of pulp during this year. That's 20%, 30% of its annual capacity. So annualizing it from the full year -- half year, basically would mean that they are operating at 50% to 60% capacity. Similar sort of ramp up issues that we have in our own facility. But that's covering its fixed costs, and will start contributing positively to EBIT immediately.

Markku Järvinen - Evli

And Tarragona would also reach profitability this year or you expect?

Jari Rosendal

Tarragona is being loaded up, I was alluding to some of the market situation, the competitive environment in the Southern Europe, it’s a bit tougher. And again, I don't want to give factory by factory profitability numbers. But that's kind of a direction [ph] for you.

Markku Järvinen - Evli

Okay. Thank you.

Tero Huovinen

All right. Let's check from the call. Operator, is there questions in the call?

Operator

(Operator Instructions). We have the first question from Mr. Oliver Reiff from Deutsche Bank. Please go ahead, sir.

Oliver Reiff - Deutsche Bank

Hi there. Two questions for me. The first one is on the M&I business and the increasing European competition. I am just trying to understand, on the hydrochloric side, why that hasn't resulted in a benefit to margins, because I thought that, given relatively long term contract lengths, short term you should see a benefit, and you should take time for pricing and pricing to erode in that business. My second question is on your synergy targets for the Akzo paper chemicals business. 6% of the company sales is quite ambitious; could you just explain how you get to those synergy levels, and is there any specific measures where you expect to take the low hanging fruit? Thanks.

Jari Rosendal

You take the M&I, and I will take the Akzo.

Petri Castrén

Okay, I will start with the M&I European competition. Our strategy for raw material sourcing and also, because our large volumes has to be fairly long term. So we cannot rely on buying our hydrochloric acid on spot prices, and actually, what we are doing is, we have built both Dormagen and Tarragona next to sites where we actually take the hydrochloric acid through pipeline, and so we have longer term contracts for our hydrochloric acid. So that perhaps explains partially at least why, not all of the raw material release has flown into margins.

I would like to point out that the margins in M&I are not bad in anyway. So margin is not the issue, I think the issue is much more to going forward, stop or lower the rate of decline that top line.

Jari Rosendal

Okay. Oliver on the Akzo deal, we use the word initial signing in our announcement, and that means that we have or Akzo has; the Works Council process is still ongoing, and we are there for not talking too much of the details until the Works Council issues are over, and we can expand on those in the CMD.

However of the €50 million that -- after the two year integration, we see most of it coming on cost overlaps and internal efficiencies and in-sourcing some of the production that they will be eventually tolling for us, and this way, getting our own capacity utilization up. And some of it comes from market synergies, going with the wider portfolio to the same markets. I believe our penetration to the market is really good, and we can then take Akzo products better to the market and get sort of sales synergies further. So that's why we believe on the €50 million per annum synergy number.

Oliver Reiff - Deutsche Bank

Thanks very much.

Operator

The next question comes from Mr. Mikael Doepel from Handelsbanken. Please go ahead, sir.

Mikael Doepel - Handelsbanken

Yes, thank you. A few questions, I could actually continue on the AkzoNobel acquisition. Do you see any issues with the competitive authorities? I.e., do you have -- you mentioned previously, the overlaps and obviously you have overlaps in Europe, especially I would guess -- any -- international market shares for example? What's your market share right now in Europe, and where will it go?

Jari Rosendal

We will be filing on half a dozen countries roughly, and we don't see major issues there. There might be, may be one country or two countries, where the share of business out of the 240 isn't very big, where we have to see where it goes, but that work is now being prepared and a bit early to comment, but we don't see major issues from the competitive officials.

Mikael Doepel - Handelsbanken

Okay. Great. Then in terms of the supply in the Klabin mill in Brazil, has the hydrochem products supply been already announced?

Petri Castrén

Not by us. All joking aside, I don't know. We are in the chloride side of it, so I don't know the answer to that. You need to ask that from Klabin.

Mikael Doepel - Handelsbanken

The supply in hydrogen peroxide as well?

Jari Rosendal

Yes, well we haven't announced that. We've done the other side of the business, also I am not aware, if someone else has announced it.

Mikael Doepel - Handelsbanken

Okay. Thank you.

Operator

(Operator Instructions). Our next question comes from Mr. Fabio Lopes from Bank of America. Please go ahead, sir.

Fabio Lopes - Bank of America Merrill Lynch

Hi, good afternoon. Thanks for taking the questions. I have two questions. One, the dividend policy remains at 40% to 60% payout ratio, and because it looks like today, the €0.53 of dividends are flat on last year. It would imply a pay out ratio much higher than that. Would you be willing to go higher than the 40% to 60%, so I just would like to clarify, what is the priority?

The second question would be, could you give us an indication for full year depreciation? I understand Q3 should be a little bit higher than Q2, and Q4 more in line with Q3. Does it make sense? Thanks a lot.

Petri Castrén

I will take first the depreciation. If I remember correctly, our depreciation was about €23 million this quarter. You are absolutely right, that's a bit higher than the Q1 and Q3 may be a bit higher as well. I would expect that the second half is in the neighborhood of €50 million of depreciation. So about €25 million per quarter.

Jari Rosendal

And on the dividend policy, we haven't updated that, so that policy stays as is, until if we do have a change, we are looking at our investment things. I am not implying on a change there, but we haven't even discussed that with the board at this time. So we will probably come to that in the CMD and confirm these and then the other guidances for our future steps forward.

Fabio Lopes - Bank of America Merrill Lynch

Okay. Thank you.

Operator

There are no further questions on the telephone at this time. Please go ahead, speakers.

Tero Huovinen

Let's just check if there is any more questions from the floor?

Panu Laitinmäki - Danske Markets

Thank you. Its Panu Laitinmäki from Danske Bank again. Still coming back to the costs in paper, I am just a bit interested, why the fixed costs were up by €3 million, because you have just recently completed a €60 million program, reducing costs. So is it like again going up, and should we expect a program to follow, to reduce it again?

Jari Rosendal

Please remember, we also acquired the business in the mean time, so we acquired the AKD emulsion business from BASF, so that is partially the reason for the fixed cost. The other big part -- perhaps a bigger part, is the additional cost, fixed costs from the Nanjing plant. So obviously, when the plant is in a build-up phase, you don't capitalize it, you don't amortize it -- you don't depreciate it, but you don't also recognize the fixed cost from the employees. So that is the other big reason for the additional fixed costs in paper segments.

Panu Laitinmäki - Danske Markets

Okay. Thank you.

Rauli Juva - Nordea

Rauli Juva from Nordea. Hello. One question on Oil and Mining, so you said you are at the limits of your capacity, so have you already been able to be selective on the business you take as the capacity constraint impacting there?

Jari Rosendal

Exactly. We are being selective on where we apply our capacity. We are also de-bottlenecking our capacity, and we are also looking at price increases.

Rauli Juva - Nordea

Should that then -- maybe I should ask it how -- how long has it been this constrained for -- throughout this whole year, or just recently they have been --?

Jari Rosendal

Just the last couple of months, the constraints have shown, and its not across the border nor product lines, its on some product lines, and some actions have been taken, but like Petri said, some will take a bit more time to have a real incremental increase in product output.

Rauli Juva - Nordea

Okay. Thank you.

Tero Huovinen

All right. Is there more questions? If not, I think we can conclude here. Thank you very much for participating in Q2 results.

Jari Rosendal

Thank you.

Petri Castrén

All right, thank you.

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Source: Kemira's (KMRSF) CEO Jari Rosendal on Q2 2014 Results - Earnings Call Transcript

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