Tero Huovinen - Director, Investor Relations
Wolfgang Büchele - President & CEO
Petri Helsky - President, Paper
Hannu Virolainen - President, Municipal & Industrial
Randy Owens - President, Oil & Mining
Frank Wegener - Managing Director
Hilton Casas - Region Head of South America
Joe Chan - Region Head of Asia Pacific
Jyrki Mäki-Kala - CFO
Fabio Lopes - Bank of America Merrill Lynch
Tomi Tiilola - Swedbank
Martin Evans - JPMorgan
Alex Scott - Chemical & Engineering News
Panu Laitinmäki - Danske Markets
Thomas Swoboda - Mainfirst
Markku Järvinen - Evli
Artem Beletski - SEB Enskilda
Kemira Oyj Ord (GM:KMRAF) Capital Markets Day Conference Call September 18, 2012 7:30 AM ET
Good afternoon. My name is Tero Huovinen and I am responsible for Kemira’s Investor Relations. It is a great pleasure to be here in London and on behalf of whole Kemira management team I would like to welcome you to our Capital Markets Day.
Kemira is over EUR 2 billion company focusing on water chemistry. We offer our customer’s water quantity and quality management related products and applications in three different segments, namely paper, municipal and industrial and oil and mining. ChemSolutions is the fourth segment selling specialty chemicals for food and feed chemical and pharma industry as well as the deicers for airports.
The theme today is Fit for Growth; a restructuring program launched in the end of July this year. In various presentations we will tell you what is all about the program and besides the CEO and CFO presentations you will hear a presentation from each segment head and also region heads of Asia Pacific and South America.
We have also reserved plenty of time for your questions and you would get a chance to ask after each presentation, but also during the breaks and then after presentations we have breakout sessions. There you have a better chance to discuss in more detail with segment heads and region heads.
We are webcasting the event and for those of you who are following us through webcast, you have also chance to ask questions by writing the questions in the webcast tool.
With these words, I would like to leave the floor for today’s first presenter, Kemira’s President and CEO, Wolfgang Büchele. Please.
Thank you very much Tero. Good afternoon ladies and gentlemen. Can I have also the slides on the screen please?
Kemira today is well underway to deliver on our financial target EBIT return of 10% as well as to deliver with respect to profitable growth. When I joined Kemira at the beginning of February this year, I had the opportunity to talk to plentiful of people and it became very obvious that the company is rather complex on the one hand, but also very much Helsinki-centric.
The management team and myself agreed rather quickly that we embark on three strategic priorities which we are going to address. The first one is to improve the efficiency of the company which factually means to simplify the company. Secondly, obviously the growth in the emerging markets which we all experienced over the last years and which we currently still experience was not followed by Kemira; we therefore want to substantially grow in the emerging markets and strengthen our presence there. And thirdly, we want to sharpen our strategy in order to enable above market growth.
Kemira in 2008 embarked on the water strategy which is great and was one of the key reasons why I joined the company. However, it was not fully made clear where we want to play and where we don’t want to play; and therefore we have seen the need to clarify that further and to really also sharpen the profile of Kemira as a result of the strategic undertakings in the course of the next months.
Over the last quarters and you are aware of these figures, Kemira was stagnating with a declining profitability. So therefore there was a need to take more stronger action in order to get the company back on-track also from a performance level. This was the trigger to come out with Fit for Growth which we announced in the course of our Q2 release and in this afternoon you’ll have the opportunity from various of my colleagues and also from the CFO to get more insight, how we are progressing, to get more insight, what we are doing under Fit for Grow in order to fully understand what our plans are in the course of the next roughly 1.5 years to finally in 2014 for the first time deliver E-10 for the full year. I will also give you some indication on where we are working and what we are doing in order that you can fully follow-up in our quarterly communications in the future how we are progressing in this respect.
The first step which obviously is well known to you, but will come to life in or on October 1st, is a new organization. We have to decided to simplify the organization on the one hand which means we are taking organizational layers out to make the organization faster and more agile, but at the same time to decentralize the organization in a way that decisions, business decisions, can be taken in the regions rather than everything has to be escalated to Helsinki.
Therefore effective October 1st, each and every segment will have regional business units or regional business management taking care of the business in the respective geography with full P&L responsibility. So the decisions can be made where the customers are, can be made where the markets are and therefore we are much more responsive in comparison to what we are today.
Myself as well as the segment heads will focus largely on strategic leadership setting the framework and helping the organization where help is needed. So in a nutshell, the P&L of a segment which exist today will be broken down in four respective regional P&L which then as a sum of the part come back as a segment P&L.
So overall there will be no change, but the whole responsibility will be one level lower and therefore the agility of the organization will come up and will improve substantially. This is by the way not a completely new invention. There are many other companies who have established these types of business unit driven organizations many, many years ago, so that’s why the proof-of-concept of this organizational setup has been provided by other peers already in the past.
The E-10 margin is the prime target which we now want to achieve rather short term; you all know that since many years Kemira have targeted to achieve and deliver E-10. We have now with Fit for Growth, the determination, but also the commitment of the management team to deliver and we are ready to be measured accordingly.
We have announced that we want to save EUR 60 million in costs in the course of this project and approximately 50% of these cost savings are coming from headcount reduction. You might recall we have announced that globally we will reduce up to 600 FTEs and the respective mostly redundancy payments will be the cash cost of the program and savings will be in the range of EUR 30 million from this measure.
We also said that we have a rather complex manufacturing network, so we want to consolidate our manufacturing network and that will bring some 35% of the EUR 60 million savings. And last but not least, leaner operation and I will show you in a few minutes what this all about; will bring another 15%. So altogether, Fit for Growth is not in a sense the idea, Fit for Growth is a fully fledged program with a respective program management office in place to literally follow-up on these three mainstreams which again are then broken down by a large number of individual measures which are implemented under these three major headlines.
We will have as obviously the price take off this program, overall restructuring cost in the range of EUR 85 million; that is also a published figure. Some EUR 35 million of that will be the cash cost and that as I said is largely related to redundancy payments, EUR 50 million will be asset write-downs and other write-downs in the context of the optimization of the company.
The codetermination negotiations with the employees are currently underway. That’s why I don’t want to give you too much detail in this respect, because I don’t want to interfere into running discussions and I don’t want to preempt anything. But we are talking roughly of up to 500 people in Europe and around 100 people in NAFTA.
Our new organization is fully designed and will go live on October 1st; we have already started to announce in South America and APAC and we will continue with our announcements at the end of September in order to be able to start on October 1st.
We also will then change the reporting structure, as of January1st, we will report four segments. The CEO office will be abolished with the introduction of the new organization and that means the four segments will be the full profit bearing units of the company and that means there will be no other whatever costs which are then disappearing somewhere. You will get the full P&L for the segments and the company, the group is again the sum of the parts of these four reporting segments. Obviously, we will provide you with proforma data in order to give you a comparison prior to the Q1 result presentation somewhere in April next year.
Let’s talk a little bit on our asset footprint. I said a couple of times before we have currently 74 manufacturing assets and that is for an overall revenue of EUR 2.2 billion on the rather high side. Therefore, we have started to categorize our manufacturing sites. Categorization means that we also define clearly where we want to invest, at which locations we want to invest in the future and where not. And one of the drivers for investing in the future is clearly the availability of raw materials. That is a key element for chemical manufacturing going forward.
We at the same time are targeting to optimize our manufacturing costs because obviously efficiency improvement is the rule of the game in the chemical industry. And we have to live up to what our peer groups are delivering on an annual basis. So with the consolidation of our manufacturing network, we will also obviously reduce manufacturing costs and increase our efficiency on the manufacturing side and we have at this particular moment 14 sites under consideration for closure.
So obviously, again I don't want to go at this moment into more details which site this might be or will be, but at least that you have a more detailed picture of what we are planning, so 14 sites are currently under review. If you look to the picture, again, this is mostly referring to Europe and to North America because historically also by a number of acquisitions which have been made in the past, we have the highest number of sites in these two geographies whereas in Asia Pacific and South America we want to continue to build.
I said 15% of our cost savings are supposed to come from a leaner operation. Now we want to standardize our processes which we use within the company and we want also to reduce the complexity of our portfolio. This together again increases speed, increases the agility of the company and makes us and positions us even better towards our customers.
Just to give you a flavor on what I mean when I talk complexity. We have at this point in time more than 5000 so called stock keeping units which means this is a product plus a packaging being it a barrel, big, small, being it bulk whatever. 98% of our sales, however, are generated with just around a 1000 SKUs.
So put it the other way around, 4000 SKUs a hell a lot of work is generating just 10% of sales and if go to the profitability, it’s not looking any different. So there is room for optimization and this is now underway. It’s getting even more interesting when you look to the customer situation.
We are serving at this point in time more than 12,000 customers globally. From these 12,000 customers, 90% of sales are literally done with 2,200. So in other words, approximately 10,000 customers do not contribute much. Now, we do not want to give up on these customers. What we want and what we are looking into is to establish an intelligent channel management where we can keep the customers on the one hand but delivering them, servicing them, not directly but via service partners.
So this is another opportunity where we are heavily working on to segment our customers in a better way and then put the respective service levels and channels into place.
We also are looking obviously in the context of this optimization and this optimization to reduce logistics costs and ultimately when you have less changes in manufacturing ultimately even maintenance costs.
So this so called complexity cost is contributing approximately 15% to the total cost savings or roughly EUR10 million. We have in May started a process which we have announced that we want to sharpen our strategy, and we have in line with what we have announced the first rehearsal with our Board of Directors in August this year to get initial strategic guidance on how to develop further.
In the first step, we have obviously looked in particular into how do we see the market development going forward and how do we see our competition, how do we see competition to change over the years. We have looked into our segments, we have looked into the regions, R&D and M&A. Based on the guidance we have received in August, we are now working on the detailed strategy proposal as well as on risk and contingency plans which we then at the end of November will discuss in the second strategy rehearsal with our board.
And then based on the guidance we get there, we will finalize the strategy and come up with a strategic roadmap including all measures which are required to make this strategic roadmap happen as well as with a strategic business plan. We are seeking in the board meeting in March the approval and we will guide you on the results of our sharpen strategy in the presentation of our Q1 results in April 2013.
Now, obviously, this is not a new strategy, it is as we said a strategy in the water quality and quantity management space, where we are sharpening our portfolio, where we are sharpening our presence in our profile in order to clearly determine where we want to play, but also stay where we don’t want to play.
The playing field itself with water quality and quantity management has been largely defined. We are focusing largely on three areas, we are dealing with a growing concern of our environment, water related issues in this context. We are dealing with mitigation of water scarcity and we are helping to solve the ever growing energy and minerals and metals demand of the globe in a sustainable manner.
In all these three pillars water plays a major role. Therefore, the overall water market in this playing field is approximately 500 billion. Now, this is everything from chemicals to services to equipment to installation, construction and so on and so forth. In a nutshell, the relevant market, the accessible market for us at this point in time account for EUR 26 billion. Now obviously, we have current sales of 2.2 something that is room for growth.
We have clear competitive advantages. Our accessible market and I will give you some flavor to the details of that, it is expected based on our own assumptions to grow until the end of the decade on average by 3.3% for the year.
We have a market share at this point in time of 8.5%, 40% of our business is what we call water quality and quantity management process chemicals. So these are chemicals which are used to either reduce the amount of water needed or to improve the rate of water that can be reused.
Close to 40% of our business is related to water treatment chemicals. This is either the manufacturing of drinking water from raw water to a certain extend the manufacturing of process water for industrial applications but largely also the treatment of waste water being municipal or industrial.
And then we have roughly 22% of businesses, revenues which are non-water quality and quantity management related that is largely related to ChemSolutions and to a smaller part areas in the paper industry which have nothing to do with water but nevertheless, are helping us to be a leading player with focus to the paper industry.
We are today one of the leaders in the paper industry and we want to stay the leader or amongst the leaders in that field. So we clearly commit ourselves to paper. We have capabilities and that’s one of the core strength in comparison and I was asked before what are you doing with the multinational getting ever more bigger. We have the capability to tailor product which these guys typically don’t do.
We can do that, we have the expertise and we have the respective R&D in place and we have the manufacturing know how. So we have a plentiful of room to play based on this capability. We have a strong innovation platform and last but not least, our quality products are well accepted in our customer base and we are considered a reliable supplier which is relatively [drivel] if you hear that but it‘s very vital when you think about what processes we are dealing with.
A paper or pulp mill, today if we mess up with our chemicals and we create shutdowns of a day or two, that’s a huge loss. If we mess up in providing our chemicals for water treatment, the respective municipalities are violating the regulations.
So in other words, this reliability is actually rather relevant in the industries we are dealing with, and we see this as a key strength in comparison, especially also to some of the multinationals who are rather inflexible.
All our four segments as we want to address them in the future have a clear role in the Kemira portfolio. Paper has a strong position and a strong product portfolio already today. We're growing and we plan to grow largely in South America with pulp and in Asia with paper chemicals, but we also want to participate in the ongoing consolidation of the paper markets in Europe and in North America. So we feel that this consolidation based on the position we have already achieved today is a great opportunity to even strengthen what we are today.
Municipal and industrial is a different profile. We're today in a very strong position in what we call the standardized water treatment chemicals in Europe and in North America. In order to be successful, especially in the emerging markets, investments and a largely renewal of the portfolio is required and that will be addressed when we sharpen our strategy.
Oil and mining, this segment was established only in 2008 and has delivered greatly ever since, also from a EBIT return perspective, we are well positioned in the mature markets and we are currently underway to penetrate the emerging markets where more and more focus not just on oil and gas but in particular also on mining takes place.
And finally, ChemSolutions is a business which we are driving towards a more and more product driven approach focusing on formic acid where we behind BASF at this point in time are the global number two in the market and we see focusing narrowing down this business a lot of potential to improve and sustain for a long-term high profitability level.
Our environment is competitive. Nevertheless, as we can see here and I don’t want to read that all, we have very interesting market shares in the relevant markets and we play in a field where except in the municipal, where we have a fragmented competitive landscape. We are playing in a field where a limited number of competitors is active, consolidation has in part taken place in the past, however, consolidation will continue and we see quite a lot of opportunities to benefit from that.
We therefore are committed to continue to strengthen our market position in paper. We want to grow in before us most prominent areas of the oil, gas, minerals and metal market. But we also want to as I said a couple of times focus on sub regional segments in the emerging markets. So we will not go with everything everywhere, but we will play where our strengths are and we will be more transparent on what that mean when we talk on our sharpen strategy in April next year.
We have more or less at this point in time eight global competitors we are monitoring very closely and we are also developing scenarios what these folks are going to do in the future in order to be able to preempt moves rather than to be caught by surprises.
We clearly have in the oil and gas business a very intense competition, everybody wants to play there. This business is fast growing, it attracts a lot of new entrants but nevertheless, we’ve meanwhile established a solid position which enables us to act as a growth platform in the years to come.
So overall, we feel rather strong in this competitive landscape and have a lot of opportunities in the next eight years to develop this position further and to do that, just to be clear on a profitable basis rather than just to grow for the sake of growth.
Now, where is the largest growth from a market perspective coming? This is a rather [bitter] slide. First of all, this is, I would suggest not a big surprise but for all our segments the biggest growth comes from South America and APEC.
And what you see here is on the one hand, the growth of our accessible markets in the respective geographies in light blue and in dark blue you see basically the underlying GDP growth. We have now assumed and you can argue back and forth and up and down what is the GDP growth for the next eight years, we have from the various sources taken a consensus of 3.4%.
In South America, we expect 6% to 7% being the GDP growth and in APAC, we expect also the GDP to stay in the range of 6% to 7% being largely driven by the APAC by China and to a certain extent by India.
We have in municipal as I said still the task to renew portfolio in order to meet the requirements of these markets; that’s why, we see currently that our accessible market is growing in these geographies below GDP, because we do not yet have to the full extent the portfolio needed for these geographies.
The other interesting segment for us is oil and gas because oil and gas is not just over proportionally growing in the emerging markets it also continues to grow over proportionally in the mature markets. So therefore for us this business is giving not just opportunities by going into new territories, it also enables us to leverage the position we have already achieved today in the mature markets and we want to leverage that to drive that home in the next five years.
Research and development is the basis for our innovation platform and one of our core strengths. We have at this point in time some 350 scientists in R&D focusing on new product development, focusing on product improvement and also focusing on what we call developing applications which either improve energy efficiency at our customers or help them to run their operation with less energy and/or with less water consumed. We spend around 108% of group revenues for R&D and going forward we want to keep roughly the level at this figure because we feel we need to do what we want to do in order to support our growth ambitions. That is the right corridor.
We have a rather strong IP portfolio. We are trying to patent our developments in order to embark into literally protected arenas, because that is definitely also a way to improve the return on your investments and on your activities and we have at this point in time roughly 1,350 patents pending, granted or underway existing. We are focusing our R&D on the four centers. We have discussed that before.
Clearly, the headquarter for R&D so to speak is in Finland, in Espoo, our second largest R&D center with a very strong on oil and gas but also on mining is in Atlanta, in Georgia. We besides that have two R&D centers, one in Shanghai and one in São Paulo that focus on the specific needs of these emerging markets and work very closely with customers more on the D rather than on the R side. R is largely done in Espoo or in Atlanta; D especially for the emerging markets is done either in São Paulo or in Shanghai.
We are also alongside now with the manufacturing consolidation starting to improve our manufacturing technologies. There is also a lot of room to further improve our processes because at the end of today still manufacturing is one of the capabilities which are key in the chemical industry and we want to foster also on that in order to be able to deliver not just state-of-the-art high quality products, but we want to deliver state-of-the-art high quality products from state-of-the-art processes which also meet sustainability criteria.
A question which I am always asked are about M&A, are you now going out for the next shopping spree, are you trying to buy whatever is around and the answer is clearly is no. Our immediate focus is on the space on Fit for Growth and to deliver the results of Fit for Growth. Beyond that and I have communicated on that before, we have clear criteria when it comes to M&A.
We only are interested in acquiring if we either can strengthen our market position, so if we can out branch into geographies where we are still weak at this pretty moment or if we can gain competencies which we feel we need, but we don’t have at this point. These are the driving forces to look and ultimately select which targets are of interest and what is not of interest to us. So in a nutshell buying more of the same is nothing we are even looking at.
Secondly, we have very strict profitability criteria when it comes to acquisitions. The acquisitions must enable us to be EBIT accretive in the second full year after closing, meaning we are not prepared to overpay. So we are prepared to pay a fair value for an asset if we can get it for that is great, if whatever huge amounts are unnecessary somebody else should do that instead of us. We want to pay fair values.
So what does that mean for us? Obviously, smaller acquisition if we can gain a position in one of the other geography in the defined growth sub-segments can be considered whenever something comes around and we are monitoring the market should something become tangible we will definitely communicate that.
Larger acquisitions can and will only be looked that once the sharpened strategy is approved by the Board. So we are not going now out to immediately start again to buy; we want first of all to define our strategy that everybody understands what is the way forward, we want to deliver on Fit for Growth to be ready for a bigger acquisition, because an acquisition also needs to be integrated. And as you could see from our manufacturing network, integration was not done to the full extent possible with previous acquisitions which took place many, many years ago. So from that point of view larger acquisitions will only be considered at a later stage. So I hope that this clarifies also as a little bit and puts into perspective how we are positioning our self in the M&A market.
What is our roadmap short and long-term? Obviously, now the highest priority is and we’ll stay on Fit for Growth implementation delivery in order to have 2014 as the first full year risk and EBIT return of 10%. Cost reduction complexity reduction is the rule of the game. Sharpening the strategy runs in parallel; we will have in November the next rehearsal with the Board; we will get the approval of the sharpened strategy at the end of March in our Board meeting there and we will then start to communicate also to you and we will guide you what that means for us in our Q1 release in April next year.
Again for the avoidance of doubt this is not a fundamentally new strategy. This is a sharpened strategy in the WQQM space. And then once the strategy has been approved, the strategy has been communicated, we roll it out and we want to grow above the market and we feel that we have the capabilities to do that until the end of the decade.
On the last slide you’ll see the management team. This team is committed to deliver E-10 in the given period. This team is also committed to deliver profitable growth in the years to come and to keep the company from a competency level state-of-the-art. Because one thing is important, you can push everything with a program short term into the right order; successfulness requires that you keep that state and therefore we have to make sure that we’re now not just getting Kemira into the right shape and move in the right direction, we have then to make sure once we are underway that we keep the pace, that we hopefully are a little bit faster and smarter than competition and that we constantly cross check what we have to do from an improvement perspective in order to stay state-of-the-art and this is what this management team is committed to deliver to you, but also to deliver to ourselves not just because we are also shareholders of the company, but because we are also responsible for employment. And if we are successful in the long-term, we also secure long-term employment.
Thank you very much.
Thank you, Wolfgang. We have now time to take questions. Yes [Tyrväinen]. Please wait for the microphone and state your name.
Yes, in your assumptions for global growth, I noticed very difficult to get the right number, but what are the assumptions do you use to get to your 10% EBIT besides just because this means that all the cost cutting will come through besides of course the delay of payments, but is there anything pricing, getting market share, anything else, and the assumption that we don’t know about?
We have for this exercise not considered price increases as a driver for E-10. We want to largely deliver E-10 based on the efficiency measures, because we felt at this point in time, it's very difficult to predict how the economy is developing and we do not want to go back and tell, oh, by the way economy fell apart and then everything is completely different. Now obviously, if the road changes dramatically, this has an impact and then we have to revisit that’s what we are doing as part of our strategy work; we are developing scenarios; what’s happening if the oil price is suddenly going to loose or if the growth in China would fell apart that’s not yet factored in.
So you meant the flat pricing?
We are currently assuming that we ramp through what raw materials are bringing to us, so in other words, we are assuming flat margin, not flat pricing, flat margin.
And looking at and benchmarking yourself in each division, do you have sort of best-in-class competitors that you look at that you want to be on par with or above?
We are always looking and we have started very intensively to look at our competitors and we have defined for each and every segment which competitors we feel are the most relevant to us and which we should look as a benchmark; we are doing that, but I don’t want to speculate on competition in a public audience; but we are doing that.
Fabio Lopes - Bank of America Merrill Lynch
Hi Fabio Lopes from Bank of America Merrill Lynch. How do you compare this new restructuring plan with the restructuring plan that the company had before; it had 25 plants closed; it had a target before on the EBIT margin that was not achieved, so what is different this time?
I think without going into too much detail, a lot was achieved in the past and at the same time the margin level of some of our portfolio was fading away. So we could not keep the margin level and that's why the benefits which were achieved with restructuring program were partly did not via the deterioration of the business and that's why I said, we have underlined flat margin level, so we do everything to keep the margin at the current level rather than to see sacrifices there. So we are really looking which diligently besides focusing now on for Fit for Growth also that we are not loosing the customer interface. And our views, the key structural element of the new organization help us a lot in this context.
Any more questions?
Tomi Tiilola - Swedbank
Tomi Tiilola, Swedbank. I have a question on the incentives, your management team, how do you control that or how do you push it forward, are there any special incentives in place indicates the program will be successful?
Well, first of all the incentives theme for the management team is not set by myself, this is set by the Board of Directors. I think we have a very powerful incentives scheme in place which is largely linked to shareholder value, shareholder value creation and as the management team, all the members of the management team are at the same time shareholders in the company, we are fully aligned when it comes to this delivery. Secondly, the incentive elements are typically awarded in shares rather in cash. So that means that’s an additional trigger for us to deliver shareholder value to and focus on shareholder value.
(Inaudible) Capital. Which division do you think you will have to work hardest to improve margins in?
That’s a question I would like to answer twofold. The biggest challenge obviously very short-term is in M&A and it is in ChemSolutions and if you look through the last quarter’s results, this is pretty obvious. However, the situation is a different one.
For M&A, the challenge for us is less so in the mature markets. We can achieve that rather quickly. What I said before is that in order to be long-term successful also in the emerging markets, we have to renew the portfolio. We have to invest, that’s the more challenging part. So the innovation platform has to focus largely on renewing the portfolio. The so-to-speak efficiency part has to focus on the mature markets.
But these two segments are the ones we are addressing quite intensively and the colleagues and we are in line in precedent of M&A and Frank Wegener responsible for ChemSolutions will also give you a flavor that we have taken that up. So we are not waiting now, we are not sitting there and hoping that everything will improve out of itself, we are taking so to speak our faith into our own hands.
Alright and may be one or two questions, please.
Martin Evans - JPMorgan
Martin Evans JPMorgan. Sorry to return for this 10% EBIT margin target which obviously seems obtainable now with the cost saving benefits coming through by 2014. Just in simple terms this has always been an issue for Kemira this magical 10% target and yet it does seem by the sort of industry standards to be quite a low number. These are the function of the nature of the products you sell and therefore the sort of resistance from customers to price inflation or is it something else that we are missing?
Well, I think, I don’t know why this 10% has been now put with such big letters to the wall. First of all, I think and that’s my way of looking at it. In the chemical industry, the 10% has been a figure which was always discussed what you have to deliver across the cycle in order to be long-term sustainable and that’s why for us now the 10% is the first and the immediate level we want to achieve.
What’s possible thereafter and what’s not possible thereafter, I don’t want to speculate now. Let us first deliver on E10 and then think about what other room do we eventually have, but the 10% to me is neither a question of shareholder driving it nor a question of this is a big target which is on the wall and we have to achieve it. This is based on my 25 years in the chemical industry. The basis to be long-term sustainable and that's why we are striving to get there.
Perhaps just one more question and we have to continue.
Alex Scott - Chemical & Engineering News
Thank you, Alex Scott from Chemical & Engineering News. You mentioned about the 14 plants, is it definite that all will be closed or do you have an idea how many and with regard to the job cuts, you obviously you mentioned the 600 till now, do you have rough idea in the future how many from the plant closes?
Well, obviously as I said, I do not want to preempt running codetermination negotiations. But I would at least give you the following guidance. As we are intensively reviewing 14 sites and you’ve seen the picture I have showed you with respect to the regional distribution off the sites. I don't think I am over stretching if I guide you in the direction there is room for consolidation and you will see this consolidation. But I don't want to get more specific at this point because the negotiations are still ongoing. And we will let you know whenever something is finalized then we will start to communicate. But we are taking that very serious.
And then I would like to hand over to Petri Helsky, who gives you as President of the Paper segment more inside into this fascinating business.
Thank you, Wolfgang. Good afternoon. I am now four years in this current position of mine, but it still happens that what I am Wolfgang said this is 25 years with chemical industry; I am exactly 20 years because I got my first job with chemical American company exactly 20 years ago after graduating from university. So it’s close to these anniversaries. And it’s my fifth Capital Market Day and I am happy to be for the first time in this conduct here in London. It’s also nice to see many familiar faces from either CMD or from other conduct, especially nice to see one person with who we went to serve military service together, who I have not met in the last 26 years.
So I had to come to London for that. Let me now go to this fascinating topic that Wolfgang was referring to and I would want to tackle these in three parts. First part would be to tell something about our current already very strong position in this business. Second would be to shortly go through what this “Fit for Growth” consequences would be for paper and thirdly and probably most importantly, I would go through how we are able to answer to the title of the presentation so how will we be driving growth.
Since for some of you this business of ours might not be that familiar, so very shortly I recap what we actually do. So our customers are really the pulp and paper producers and we really serve in all regions, the major players whether they are producing pulp or whether they are integrated pulp, paper, board producers. We have customers in tissue, in packaging and broad, in printing and writing and in all different types of pulp.
Our revenue last year was about in round figures about EUR 1 billion. We really are one of the top three key players in this pulp and paper chemical business. Our market that is accessible for us is order of magnitude of EUR 26 billion annually, but we have limited the relevant market of that to roughly EUR 7.5 billion for our sake.
We have very comprehensive product portfolio covering the pulp process and especially the wet-end of the paper manufacturing process and this water link is very evident in pulp and paper production because it is really one of the most water intensive industries of various.
There is a poster in the forum area showing an example of a paper machine and its interesting reading and absolutely fascinating for each one of you. So you better have a look during the coffee break. If you have any questions feel free.
So what are our regional positions then? If we start from the wet, so in North America, we have traditionally a very solid position both what comes to pulp, especially the process chemicals part of pulp production as well as the wet-end part of the paper production. And this really gives us a good basis to further develop the business from.
In South America, we are more of a newcomer, so we have less of full scope of offering at the moment. We are strong in pulp and in especially sizing, but we are expanding our offering now to other parts of the process.
And jumping then over to APAC, it’s very similar in that respective the situation for us that again there it’s more of a new territory for us, but we have already been there since years and we have a very solid basis again to develop the business further from because we already are very strong in sizing and certain other paper chemicals while the pulp chemical part again by choice, we have left outside our scope.
And finally coming then to Europe where we have the strongest overall offering, we have really the big pulp chemicals in addition to our paper wet-end and also the pulp process chemicals part. Here is the examples of market shares partly in South America, partly in China and the key message from this slide is say that this Nanjing production site of ours will really drive further growth in Asia especially in China but also in other parts of APAC and we are investing into additional capacity also in South America, we have currently ongoing hydrogen peroxide expansion project in Uruguay. And as Wolfgang was also saying what is true for the group is true for us as well that big part of our sales is coming from the material markets and it will be so in the future as well but the big growth we see coming from the emerging markets.
We then have a look at the development of our business in paper for the last four years. We started in 2008 from pretty poor EBIT level of the just above 4%. And we have been developing that rather continuously from ever since and we have taken many different measures to achieve that. We have been divesting certain businesses that we felt that we could not make profitable and which were really not in the core of our offerings. We have been closing already in the last year several sites more than a dozen sites have already been closed.
We have been continuously shifting our focus more to serve the wet-end parts of the paper offering still three years, four years ago we had a boarder offering partly also including for example pigments and optical brightness. But we are more looking really now to focus on the wet-end and more also shifting resources to serve the growing segment being packaging and board and tissue.
Then longer term there will be also potential business opportunities coming from bio based materials also for Green Chemistry, but that is a bit further down the road. Then the consequences or the savings from this “Fit for Growth” for PaperSmart, they will exceed 20 million, it’s also just mathematically as such because we are 40% plus of the group therefore when the group saves we get a lion share of those and of course as Wolfgang already mentioned, these savings come from leaner organizations simplifying again cutting for example these SKUs further manufacturing network optimization. And a big part of the energy savings come also then for paper because we are by far the most energy intensive segment of Kemira.
Then looking at the market, there is a plenty of tables here, but let’s start by looking in the middle the two bars. You see that’s the material markets, they have a rather modest growth in the coming years, they are not declining, but they are not rapidly growing either while then the emerging markets have order of magnitude of 5% CAGR growth and that of course means that there the opportunities are greatest and the opportunities are such that in APAC it’s really the paper and board production that we have the chances whilst in South America again, it’s in the pulp side.
And looking then at the pie charts, you see the P&B, being Packaging and Board, and T&S being Tissue and Specialties, that they have by far the biggest growth while printing and writing remains more or less stable in the years to come on a global level.
This labyrinth or mace is not meant to be dived in detail. The purpose of this is really to show that we have a comprehensive product offering which we can really back up with the application know-how that we have and this wide competence that we have in pulp and paper application is really the key competitive strength that we have.
Then one could add perhaps here that the ever increasing amount of recycled fiber and also the trend towards what is called light weighting, so to have lighter package but with the same strength properties than a heavier package would have; all that's done in order to save on the fiber cost which is the single highest cost item for the paper or board manufacturer. That really creates opportunities for us as a chemical supplier especially when it comes to strength and sizing chemicals.
The role of bulk chemicals has been occasionally asked and for us it really also allows us to be really a strategic supplier to the major pulp and paper groups, because we have such a big revenue than with these groups that when they are doing their simplification and reduction of their suppliers, we sort of automatically one could say fall into that category because of our high total revenue with these groups and that enables us to develop also the other process chemicals.
And then, again not going into the details, but if we look at the different customer decision criteria, so we as Kemira are very well positioned on the pulp side as well here on the paper side. The decision criteria’s are not exactly the same and the main difference is that on the paper process side this mill service and applications support are really by far even more important than for both.
So to summarize, the Fit for Growth measures will bring us more than EUR 20 million cost savings and then looking at the house, so why we are able to grow is really first of all our existing very strong position that we already have then the capabilities that we have both on the product side and the application know-how on the production side on our geographical reach side and finally it’s the dedication we at Kemira, we really are committed to pulp and paper and we are committed to grow and develop this business.
Thank you very much.
Alright. Any questions to Petri?
Panu Laitinmäki - Danske Markets
Panu Laitinmäki, Danske Markets. To capture the growth in the pulp production market in South America, do you expect to have to make big investments there to bid new chemical island or so?
If we want to part take in some of the coming big projects, then our existing capacity is not enough and therefore to take part in those in the coming years would really require some investments. We do have some chances; while I was already mentioning for example this expansion of ours of the peroxide capacity which is not a huge investment; that allows us to grow in the pulp field already.
Alright, please in here?
Thomas Swoboda - Mainfirst
Thomas Swoboda from Mainfirst Bank; a question on your exposure to emerging markets and how do you want to catch up there; is this something you can do organically or would you need to do more M&A to increase your exposure to those growth markets?
First of all, I think Wolfgang already covered the M&A part to rather high degree, but I would say that we really can grow organically in the emerging markets. We, in paper we have such a basis already to stand on that we can have rather good growth thus organically.
Thomas Swoboda - Mainfirst
And maybe then as follow-up, what would we need to see from you to see to be convincible to stronger growth in emerging markets; would it be that you will be spending CapEx as you already mentioned or do you have already the capacities in place, still in place to grow?
When it comes to CapEx spending, we are currently investing in the Nanjing production in China and that is a great stepping stone than to build in APAC. And then for the rest I would refer to the previous answer of mine when it comes to South America and participating in the pulp chemical field.
Artem Beletski - Enskilda
Artem Beletski, Enskilda. As you showed on your slides and probably everyone knows, packaging and board issue will be sort to say relative (inaudible) in terms of growth. Do you expect this trend to support your profitability development in this division?
I think so; we have really, when you show or when you looked also is a bit slow going, but you saw the EBIT development that we have had that comes really to already high degree from the fact that we have been focusing more on this the packaging on board and also tissue.
Markku Järvinen - Evli
Markku Järvinen, Evli. In the previous presentation it was said that in paper in Europe and North America you would look to improve profitability through M&A; could you elaborate little bit on the potential there and what you would be seeking?
This very much lead to what Wolfgang was saying. So Wolfgang’s exact words were that we are looking into consolidation, but at the same time that the time is not there now to do the M&A; would you like to build on that Wolfgang anymore or…..
Markku Järvinen - Evli
If I can just continue, a consolidation in this sense means that you would be looking into acquisitions as the case always been?
Potentially, we would at least keep our eyes open as to what is out there and to what kind of prices.
Markku Järvinen - Evli
At least give me one hint?
When consolidation is underway, that always is also an opportunity to gain market share. Because the respective company, it has put something on the clock is less committed to the respective market and we are also trying to benefit from these opportunities.
Markku Järvinen - Evli
The proximity of Kemira plants to the customer is very important. If I look at your addressable market, it’s a third emerging market, a third Europe and a third US and then if I look at your revenues, it's 55 EBIT. So what needs to happen, I know that you’re closing down on a lot of factories etcetera, etcetera, but does it mean that from an EBIT margin point of view that's what is going to drive your investments to get closer to those new clients in emerging market or is it more return on invested capital, because you might need to invest less capital, maybe in an emerging market than in the developed market, why is EBIT margin more important than return on invested capital?
Let’s say, I would state it like that the proximity to customers is important from many point of view, it’s first of all that you are more credible as a supplier if you have production in for example APAC, so it’s sort of a must in order to be a seriously taken supplier. Secondly, is of course the total cost which is then a balance of the producing entity and its cost and size, well, the freights of course are the down side if you have very only one central location for example serving the whole globe. And then it’s finally also about the reliability aspect that also Wolfgang was referring to. So especially for the big volumes if we think of pulp chemicals for example and also the structure that especially the South American pulp market has, then in many cases it will require sort of a chemical island being then in better proximate to the user.
All right, thank you very much Petri. And let’s take another next presentation, Municipal and Industrial outlook. Hannu?
Yes thank you. Thank you, Tero and Petri. Yes indeed my name is Hannu Virolainen, I have been, I guess I am today the third speaker here who has 20 plus years experience in the chemical industry and I have been holding this M&I position now since November last year. I want to share with you today few key points here regarding our market situation, our market position and on the other hand elaborate further on our Fit for Growth which is really the key program to enable us to make positive result turnaround.
Our business is very simple. We are making manufacturing and selling water treatment chemicals for municipal and industrial customers for the raw and waste water treatment applications. We have today -- we are operating in a business which is where the market size is about EUR 7.5 billion, whereas our current side is EUR 665 million. Our two key product lines are inorganic coagulants and flocculants, where we have a very solid and good supply position.
The key driver for our business is also very simple one. It's a need for, basic need for water. All of our customers have water going in which needs to be purified either for the drinking water standards or for different industrial water standards. All of our customers also have waste water, which comes out and where the solid needs to be separated which in turn means that there is a lot of sludge coming out, which also need to be treated and make fit for the disposal activities following the process.
In terms of product groups, the two main product groups are coagulant and polymers which are being used today in the conventional water treatment facilities and installed based which is today about 95% of the total water treatment installed based globally. So more than 95% of the water is being treated with the conventional methods implying large settling ponds and implying different kinds of filtration steps.
Our customer base municipalities consist of may be three kinds of customer there, large cities like Montreal or São Paulo or City of Los Angeles who are purchasing their water treatment chemicals directly. There is also purchasing cooperatives like Aquafin which is co-installation of different water treatment entities in the Flemings part of Belgium all then private and privatized utilities like Thames water here in the UK or (inaudible) globally.
On the industrial side, we have variety of customer base consist of variety of industries of course excluding pulp and paper and oil and mining which are our sister segments, but remainder meaning food and beverage, metals, pharmaceuticals and construction is to name a few examples as our customer base there on the industrial side. And again the common denominator for all of those customers is that they get water going in and water coming out and there is sludge which is we treat.
The total market where we are operating, the size of that one is about EUR 7.5 billion and we need to analyze it for different – there is four relevant product groups in that market, what that market consist of. We have polymers, inorganic coagulants where we have today a very solid and good supply base consisting of our supply positioning inorganic coagulants is number one globally at the moment; we are the market leader in the inorganic coagulants and also have a very solid supply positioning of organic polymers. And we are actually in the marketplace the only company who has these two key product lines in the product portfolio in-house and that implies that we can leverage the sales force efficiency clearly with some of our competitors when it comes to conquering the marketplace.
The third important product group is the antiscalants, biocides and defoamers which are very much used in the new water treatment technologies like membrane and membrane bioreactors and desalination as well as in the boiler and cooling water applications both in the mature and the emerging markets.
The final product group which says here miscellaneous chemicals means all kinds of basic commodity chemicals for pH adjustment and disinfection and such applications where we today have just opportunistic position, should we have the local supply base existing for those products.
It's very clear that our development has not been adequate, has not been meeting the standards in the past three years and therefore we're now embarking on a very clearly defined “Fit for Growth” program which will change the trend and which will lead to our profitability and result up to the standard levels of EBIT10 which we have been discussing here before.
Just one common denominator, results for (inaudible) either “Fit for Growth” program consists of a number of already started and ongoing projects and they have maybe one common denominator in them and that denominator is simplification and streamlining and it applies both to the manufacturing footprint of the inorganic coagulant as well as into the organization and way how we’re doing the business.
When we're looking at the inorganic coagulant manufacturing footprint, there is a lot of dots here and it is also a fact that inorganic coagulant as nature of the product implies that the economical distribution radius is about 500 kilometers especially in the EMEA circumstances and that also means that to have in order to be present into market we need to have more than one plant, but it’s also equally clear that the footprint today and given especially the well known facts of the demand reduction in some of the key regions in Europe.
It’s very clear that our manufacturing footprint is not optimal and as a part of this analysis work what we have been doing and what we are doing there it’s very clear that we will close several plants and several sites both in EMEA and in North America, but as Wolfgang already highlighted earlier, we will not go, I cannot go and we cannot go more in detail that which are those individual sites, but we will communicate about that as we progress with the analysis and progress with the negotiations with the unions.
The other side of the coin here of course is it’s not only cutting sites but we are working in Germany and in Spain to develop, we have two CapEx investment projects which has one common theme in them and that’s a fact that we are building a site which is integrated to the byproduct raw material source together with buyer material [science] with long-term supplier agreements which then in turn guarantees a long-term sustainable presence of that production unit.
So it’s a kind of in the manufacturing side, we are doing minimizing the footprint, optimizing the footprint either by closing sites and at the same time focusing the investments and effort on those sites what we believe that will be there sustainably on the long run.
The other side of the coin in the “Fit for Growth” program is clearly the simplification and streamlining of our activities and how we are doing business number of SKUs, number of organizational layers, number of customers, the 80:20 rule applies very strongly in many areas and we are taking a hard look at how we are doing the business in that respect and also then deciding and defining what to do with say rest of the 80% streamline handle that business with distribution partner, reduce SKUs and so forth. And these are again already today dressed up and turned into very clear projects with clear project management and clear dead lines and clear targets.
I have been so far talking about the “Fit for Growth” program. In the growth side, we need to before addressing that we need to understand and I will go back to these four product groups what I highlighted earlier into inorganic coagulant domain that product group is not growing very much. It may be growing at the rate of the global GDP in each country as it is driven by the economic activity.
Polymers are growing a bit faster, driven by the industrialization especially in the emerging markets as well as by the sludge treatment challenge which is an ever increasing challenge by what our customers are facing these days.
The fastest growing product groups and antiscalants, biocides and defoamers here on the left side are the ones where the market growth is driven by the emergence of these new water treatment technologies, membranes, desalination, membrane bioreactors and so forth.
And then the miscellaneous growth, again at the rate of GDP, when going concrete, what are we then doing to capture that growth? There is two ways to look at it. One is the geographical initiatives and there we have clearly chosen APAC as a region to go deeper especially go into these new water treatment technologies which are there growing at the double digit rate and we are making an market entry to India with coagulants. We're localizing the product sourcing in China. We're increasing the resource base in our application expert base in APAC region overall to make sure we are able to capture the growth which is coming from there.
In the coagulant side, when looking at the product line, specific growth in the coagulant side, we're making sure that our manufacturing base is sustainably, competitive and keep capturing the market growth as it comes along but we do not have any special targets there to radically increase the market shares in that product group at the moment.
Polymer product lines will grow faster than the GDP and faster than the other product groups and actually here you can see this example of the EMEA industrial growth which has been in the past three years or four years over 7% annually and that growth has been very much driven by the polymer applications and the polymer product development and knowing our customer needs and being closer to the customer and this is the general recipe what we are aiming to utilize then when also developing and growing the business in the emerging markets especially in the APAC area.
From the R&D perspective, we have focused our efforts clearly into the new water treatment technologies and products supporting those new water treatment technologies meaning antiscalants, biocides and defoamers and especially their formulations which are then application specific and require a close touch with the customer to being able to bring to the market and make a business out of it and we have in the past two years, now increased gradually increased our R&D input and R&D expenditure and focusing specifically to capture the growth from this new water treatment technologies, i.e. kind of product range renewal if you like.
To summarize, we are aiming to grow by renewing our product line, increasing our exposure and increasing our business in the product lines relevant for the new water treatment technologies especially in the APAC and emerging markets and at the same time we are committed and we will bring home the annualized savings of EUR 20 million from the “Fit for Growth” program with a very clearly defined ongoing action plan.
I am happy to entertain any questions should you have before the break.
Looking at the pie chart over your four different products polymers etcetera, if you look at the profitability in two years time and you achieve your target for your group, could you breakdown which product would roughly be at which margin, so which one is a big driver of that margin?
It’s hard to say, answer that question because actually all of these products there is a certain cycle to them in a sense. So you cannot put it, you cannot say that it’s specific for coagulants or specific polymers would be the drivers in two years time in terms of the margins but you may take it into a perspective and look at it over the cycle. Having that, the key point there with the “Fit for Growth” program, is they are ready to take out cost out of that whole system, then in such a way that this over the cycle profitability will be at the target level which it clearly has not been in the past.
Could you indicate polymers from 8% to 12% and coagulants from 6% to 8%?
It very much depends also on the market side then if I could give you a snapshot from Finland or from EMEA which would be different from North America. So I cannot answer that question actually. Again only thing what I can say there is that we take costs out of the system to make sure that this over the cycle EBIT levels for the key product groups will be above 10% and that's what we committed to do.
Thanks. Just referring I think to page 37 in that chart where you very honestly showed the recent performance. In order to understand the future we need to get a sense of what went wrong in the last three years on the margin and is that simply a cost issue and inefficiencies in having too many (inaudible) or is it more of the demand structural market you are selling into has become much tougher?
But like usually in this kind of things you cannot or it’s not possible to point out one particular reasons, so it’s a combination of many things and actually all the elements what you have just highlighted there are present there in some sense, one fact also what we need to remember is the thing that in 2008 those of you who have been following chemical industry longer, you remember 2008 when everything went way up sulphuric acid was costing a $1,000 or something like that and that then pushed the market conditions in such a way that the price levels of all the products were very high also our end products and then giving the fact that the biggest chunk of our customer base is municipality that of course has been positively impacting also in 2010 and 2011 but that is not.
I hope to say this is not the explanation on anything, the fact is that we need to make sure and we are making sure that we are now making the structural actions which guarantee that the profit will stay over 10% over the cycle.
Sorry it’s (inaudible) again. There must be some simple explanations why it went from 11% to 5% because it is a big jump just to understand it?
Well, the overall gross margin levels on some of the key product groups and then the other one is the structurally reduced demand in some of our key market areas including South Europe and some of the US or some parts of US too to the economic downturn, may be say those are the two main reasons what has happened here.
And you feel those ones now at the bottom and they can’t go any further?
Well, that’s a question for a major, it requires a major economic analysis to answer that because of the reason why South Europe and some other parts of America went down was for purely macro economic reasons. There you know the Spanish situations and all that kind of stuff. So if you can answer that question that pretty well extrapolates then what would happen on these markets with the one year time lag?
And it’s also a fact today that we feel bad about some of our Spanish customers for example because you have operator there, you have a manager running a waste water plant. He simply does not have money from the government budget to pay for the coagulant and he pay for the product and he is running at the border line of legality by running the operation and violating the permits but by doing it. So these are really serious situation there though.
I have just one addition for a clarification and then also relates to the question of polymers versus coagulants. In a nutshell, the polymer market is a rather stable market and it depends obviously on the oil price and therefore ultimately on propylene and so on and so forth. The coagulants market is a rather volatile market because as Hannu Virolainen has pointed out, we're using byproducts of other processes and depending whether these processes running at full speed or running at a reduced rate, the cost of these byproducts change dramatically.
Secondly, the hurdle rate on the coagulant side to set up a new shop is rather low. So if you want to set up a coagulants manufacturing and are willing to spend around $3 million, you can enter that business and that has happened in the last couple of years. So a lot of these mom-and-pop shops have been appearing especially in Eastern Europe but also somewhere in the United States on the back of the availability of large volumes of these byproducts and that has driven market margins down.
Now, obviously with our consolidation you saw the two plants one in Tarragona, the other one in Dormagen next to bio TDI facility that will enable us to stay competitive and stay ahead of these mom-and-pop shops that’s the strategy behind.
And I failed to get my question and missed the brief at the end of your presentation, but I was wondering whether I could present now just before the break. On your website I noticed that there are a number of competition related issues and there are references to occasionally Helsinki and Amsterdam and I was wondering whether you could make some comment on whether Kemira has set funds aside to deal with these issues or whether Kemira wants to settle these things and lastly why does Kemira not comply with competition rules?
Obviously, I cannot comment on history. I can only guarantee that as long as I am the CEO of Kemira there is zero tolerance for violation of any -- of legal environments. Legal compliance is key for us. Now with respect to the cases which we have been announced, these have been charges brought forward to us, these are pending cases and therefore I don’t want to comment on pending cases. But clearly, and this is an assurance I am giving everywhere where I am asked for, Kemira under my leadership is fully legally compliant.
Coming back to my question of your 10% EBIT target, because it’s quite important that this today to understand the detail how you get there. You promised that you’ll get to 10% and how you think you exceed EUR 20 million. So how can you then manage if you say you are dependent on the cycle, you are dependent on input prices, on the raw materials prices. So where, how confident are you about the 10% or is that just one quarter 10% and then you don’t know; I mean what is in your head about that 10%?
Only disclaimer there is of course again on this general economic cycle that if that is -- if that goes to really haywire so that aside we are very confident, it’s not only me but it’s also our management team in the EBIT side is very confident that we can reach that 10% EBIT. And again this number EUR 20 million which is there it’s not just you out of the air or coming to through some allocations or anything like that, it’s very specific itemized projects with a number price tag attached with clear responsible persons with the clear deadlines to get it through and just mathematically that will bring the number.
Yes, and just assume that everything stays as it is and then you are two years through the restructuring in yard of 10% could you then give me an idea where polymers would be versus coagulants etcetera; would polymers be at 14% and the other at 9% or what's the difference in profitability?
Again, I would need to again reply to that question regionally. In Europe, the coagulants would be probably a bit higher than the polymers while as enough that would be the opposite and depends that it is again a derivative of our raw material positions on both of these product groups as well as the manufacturing asset competitiveness as a whole.
Alright may be, yeah here.
Thomas Swoboda - Mainfirst
Thomas Swoboda from Mainfirst; I have two questions; your access to byproducts in China that was a problem for you over the last years; did anything change there, do you have enough access to byproducts to keep you cost low and to accelerate growth there?
No, we are not, actually today we used to have four-five years ago inorganic coagulant manufacturing joined or linked to byproducts but that was not competitive and we exited that and we have not made reentry in the Chinese coagulant markets until now. We have only in APAC, we have Indian coagulant manufacturing unit there, development ongoing plant; we’ll be opening up later this year and that is situated close by to the byproduct hydrochloric acid sources. But in china we do not have that.
Thomas Swoboda - Mainfirst
So this is limiting actually your gross potential in China, the limited access to byproduct?
Yes, it is, in a way you can say yes, in a way not really because how we see that the Chinese when they are building a infrastructure for the water treatment in general they are kind of jumping one step ahead of what EMEA did. So they are looking for the new water treatment technologies; the grow of membranes, the membrane bioreactors for the waste water is in access of 10% in the Chinese market and that means that the product mix which is used for these installations is quite different and it requires clearly less inorganic coagulants and I mentioned on water treatment factories that's why we are saying that really the key thing for our sustainable growth is to have a presence and develop our position in these so called other products meaning bio site defoamers and antiscalants and the coagulants are kind of less relevant in that game.
Thomas Swoboda - Mainfirst
And the second question if I may, on your municipal clients, I mean the financial crisis is going on already for quite a while and your Spanish customers seem to survive quite well with half of the water chemicals they have been buying from you in the past. Do you see the risk that overtime these customers are getting used to lower levels of your product coming around regulations with other methods and that the volumes will never come back?
First of all I would like to, it’s not the half of the volumes; its somewhere between 10% and 20% lower volumes in those regions, so it’s not so drastic that it would be half of the volumes only. And yes, the other part of your question, it’s a very clear risk that they learn to live with it and also maybe the legislative bodies are also going to giving some what levy there into those customers that it is real risk and that’s why we are – but we are not waiting for that to materialize; that’s why we are acting on this Fit for Growth now and we are adjusting our operations accordingly. And then of course should the market recover in those more depressed areas of today, we have now, we are building stretch in the capacity in our remaining key units that we can rather easily supply that.
Thank you. Alright, I think it’s high time to take a coffee break and other refreshments will be served in the room right. And you should be back here at 02.30 sharp.
Okay good afternoon. My name is Randy Owens and I am responsible for this Oil & Mining business within Kemira. We have as Wolfgang alluded to earlier, we first began our operation in 2009, so I appreciate you being here and my presentation is titled profitable growth and so for the presentation I want to relate to you really three key messages. The first, I want to give you insight into how we see the industry growing and how we see the industry developing. The second is I want to share with you how water is growing inside of the industry, so we really have – we see ourselves with two opportunities for growth, not only the industry, but also the water growth inside of the industry. And then the final is to share with you our strategy and how we aim to capture that growth that we see on a go forward basis.
For those of you who are not familiar with this segment, I’ll let you read these items on your own in your booklet, but really there are three key points; who you are selling to; what we are selling them and then why they buy from us? So let’s start with who we are selling to first.
We are selling in the drilling and cementing and stimulation space principally, so if you are familiar with the oil and gas value chain, there are really three distinct cuts to the value chain. The first, those that are reaching the oil, the second are those that are producing the oil and then the final is those that are refining the oil and turning it into petro. So we are in the front end of that, the drilling cementing and stimulation space and that’s the – it’s a more dynamic space to be in. it tends to be more stable when you are in the areas of production and refining, but the drilling and cementing space tends to be very active and very driven by the price of oil and also by the price of gas. And so in that space we are selling to companies such as Halliburton, such as Schlumberger as an example.
And then on our mining business our aim is to move into core metals and those are very well known companies, companies like the [Avarle] companies like the Somarco. And then what we are selling to these two group of customers is much like the other segments have presented to you earlier today, it is these processed water chemicals. It is these chemicals that help them discharge their waste in a safe manner. It is these chemicals that allow them to then take that waste and repurpose it and use it into their production process.
And one of the reason that they buy from us is the key reason is yield improvement; if they can extract more oil, extract more gas, if they can take their reserves and increase their production of their ores, that’s how they get paid and they are willing to pay for that, they are willing to pay for that value.
This is a picture of how we have been progressing with the business. We started in 2009. We have managed to move the EBIT from 6% to 13%. We have had been able to generate organically EUR 100 million of growth over that time period and a lot of that is based on this strategy that we have where we are really targeting this industry growth, we are targeting this water growth inside of the industry and then we're able to price and also able to gain value for these applications that we're selling to this customers.
This is our look at the world; we see EUR 4 billion in growth by 2020 we start in 2011 with roughly EUR 9 billion accessible market and as Wolfgang pointed earlier, very important of you also to understand that the mature markets today and in the future will be a material piece of this business. And so from that standpoint, we are in a good position with our asset footprint. You know our assets, our people and our competencies are in Europe and North America. But in the future we have to being to redeploy those assets and get them into APAC and into South America so that then we can capture that growth that’s going to come obviously as time marches on and as we move towards 2020.
Okay. So that was the story with industry and now I want to start off and speak to you about how we see water growing within our industry, okay. And so the first piece of that is we see that produced water in the oil and gas industry will grow by 30% and why is that? And if you think for a moment in the North Sea or if you think for moment in China for an example, as their production begins to decline, their first defense in order to boost that production is to begin to inject water into the formation and they do that for a couple of reasons. It increases the pressure in their reservoir; it begins to sweep the oil to the producing wells and so as these reserves degrade more and more water is going to be consumed and that’s why it’s a fast growing space not within the oil and gas arena.
And then on the mining side, the mining industry doesn’t have the luxury of being able to produce from the sea where like I said in the Gulf of Mexico or the North Sea they are able to take sea water and inject into the formation. The mining side is very much a fresh water story; it is on land and it has been said many times that without water and without fresh water you cannot have a mining business. And so mining in the not too distant past they would open a mine where say 5% of the targeted ore that they were after and another 95% would be gang or ore that they are not intending to use and basically it’s just a waste and it’s something they have to manage.
But as these reserves are now declining, their only opportunity to increase production is to begin to process more, so they move into these degrading reserves, they begin to process more and water is the key element for that processing and that’s why in this mining space we see the growth of fresh water 20%. And so for the strategy piece, we try to be very straightforward with our strategy and play to the strengths of not only Kemira, but also within our segment. We started out by taking these core chemistries that we have within Kemira and then beginning to innovate around them, so our whole strategy is based on differentiation and innovation and I'll say more about innovation in the next slide but the real key is to have our application experts understand the industry, understand the problems of the industry and then be able to take that back in to our R&D community for us to invent and then be able to take that invention and move it into our assets that Wolfgang spoke about earlier and then begin to tailor that chemistry.
So all three of these not only the application but the invention but then also the production capabilities is very key for us to execute our strategy. And I want to say something more about invention. The way we see it, it's nice to invent things but it only becomes an innovation if you sell something.
And so, we spent quite a lot of time measuring how we're doing with invention, and so if we take a look at the second bullet here when we say linking our customers’ needs to our innovation process, we measure how we're doing with the vitality index that means over a five year cycle, what percentage of our sales are coming from new invention and we're on track and meeting those targets.
It's also very important to use this global network of R&D centers that we have as we’ve said earlier in the presentation today, we have centers in Europe. We have Atlanta research center in North America. We have our research center in Sao Paolo, Brazil and in Shanghai, China. And in our industry it is very demanding and time is of the essence and so one of the key components of our innovation strategy is being able to invent and turn to innovation in a timely manner and we do that by having this regional R&D centers.
And as we’ve started out as a new segment, the final point that I would like to relate to you is this becoming a recognized expert and this is probably, it’s a small statistic that’s on the slide and I know in the investment community you are more interested in sales growth and EBIT, but if you can imagine starting out in 2009 with a new segment in oil and gas and mining Kemira not being known for oil and gas and mining, this year we will be up to 41 technical papers in engineering journals and that’s not a small achievement considering in 2009 it was zero. So this is one key metric, how we see that we are beginning to be recognized as an industry expert within the oil and mining space.
So the closing slide I have for you, the three key components here increasing order usage that is definitely occurring within our industry as these reserves degrade, as they move into things like shale gas fracturing, as we move into enhanced oil recovery, all of those elements increase water usage.
And then of course the long-term outlook for the industry is slated to grow. We have said that the relevant market is growing from 9 billion to 12 billion. And then the other part of that is the growth is occurring in mature markets and in emerging markets. And so from that standpoint we are well position to capture the growth. And in the final, there are three key components to our strategy. The first is the applications then being able to take it to invention and than ultimately being able to tailor those chemistries and have a portfolio in order to service that application.
And so, as close for you today, we've had a fairly successful run thus far. We like the position that we're in and we feel that we are in a good position to capture the growth in the profitability in the coming years ahead.
So thank you very much and I'll be happy to entertain any of your questions.
Alright, any questions. Let’s start here.
Hi, what are your key products in oil and gas and how much of it represents of the EBIT? How concentrated is that?
Yeah, it’s fairly diverse, our key products of the polymer chemistries we have and that can either be for things like separation, it can be for preventing scale and so polymers is a very broad category. So, it’s certainly there. In anytime you being to help your customers with processing order like for instance in the paper business, you have to be able to controlled bacteria, you have to be able to prevent water scale. And so many of the same chemistries that we have in our sister segments or we are also leveraging and that said that's one of the key reasons we are really able to get a fast start with this business is to leverage the technology from these core chemistries across Kemira. And those products are listed out on that first page there that shows the key chemistries for us.
Would you be able to split out the revenues for you that go into sort of new wells or new areas where there is drilling or developments? And which one is sort of recurrent where you have a mine or a well continuously need your products and therefore its recurrent revenues?
Yeah, well the reoccurrence even though we are in this drilling and cementing stimulation space, the reoccurrence happens when our in-use customers lock into technology and then as they are drilling in a field, they stay with that technology. So for instance, in the shale gas spaces in North America, they would lock into a package based on a number of changing variables.
So it’s a little bit of a difficult question. I hope I don’t go too deeply with it but for instance the salt water changes meaning the manner produce water that is coming back from the fracking job no matter water they are getting from municipalities or river, the depths, the temperatures they have to go through and so it’s really a tailoring that happens with our applications people on site and or with our customers depending on the job that they are doing.
So what would be 60% of your revenues of that division would be sort of the recurrent business or 18?
If I had to venture to guess on a reoccurrence factor, we would be about between 70% and 80% from a reoccurrence.
And then looking at your operating margin development over the past three years, you're saying now 20% of your revenues are coming from new products and then margin expansion, how much has that been reducing the cost and been able to raise prices or because of the new products. How sustainable is that?
Could you say, could you say it; could you come one more time?
The margin over the past, I mean one of your slides, first slide is margin going from, what is it 6% to 13% for operating EBIT margin, can you split that development in margin being able to price, being able to raise prices and keep the cost there or is it to reduce the cost or is it because of the new products that you’ve launched, that you have 10% new products and now you have 20%. So therefore that’s…
Yeah, it is been a heavy balance on pricing in moving away from product sales and that would be the largest portion of it and then followed by innovation in bring and tailoring and bringing new products to that space but the majority of that would be pricing the value of the applications.
I believe “Fit for Growth” for you mean savings of EURO 12 million. Could you talk a little bit about that?
Yeah. Well, we of course as a segment are using the functions with inside of Kemira and so as adjustments are made and as we simplify our organization, elements of that trickle down to us and so that’s the largest piece of that from our standpoint.
So administration or what do you?
It would be functional cost.
May be last question because mining and oil and gas markets have done very well and recently over the past few years. How sensitive are you to volumes with your operational margin? So if volumes would go minus 10 what margins would you then be achieving?
Yeah, what we have as, we have had some very strong wins in our phase this year. I think if you look at the metal indexes in the last 12 months most on an average is the volumes or the pricing is down 20% and then in North America for instance, shale gas pricing or gas pricing is dropped from the fours into 92. So far this headwind we have been able to grow over that by our new applications and our new inventions in growing market share, and so as you see our revenue being relatively flat this year; we have been able to overcome that softness in volume. So the sensitivity of course is there, but if we keep practicing this strategy focusing on this water growth inside of the industry, we believe we can take out some of the cyclicality.
Okay, may be one question.
Hi, just a quick follow-up question to that. Can you mention a couple of those new inventions that you’ve brought to the market?
Yes, absolutely I can. For instance, in this shale gas space where now we are drilling horizontal laterals up to two miles now. All along that process there what they call [lags] where they drill a certain distance, they fracture with high pressure that water is return to the surface and they continue that process for 30 lags now reaching up to two miles where one, one innovation area is they are after efficiency in energy reduction in that process and what we are able to do is take our polymer chemistry which helps them with efficiency in energy reduction. But then also pattern that and connected with a biocide or a preservative.
So that we can help them preserve the integrity of their gas production by not having micro biocides or microbial activity in contaminating the reservoir. So that’s an example of where, others will look at that as two single applications but we are able to combine that and patterned it in and then ultimately be able to charge higher prices for that invention. And there's also some examples in the back of the appendix. I think there is another one on mining that would give a good indication of that.
I think we have our next speaker Frank Wegener who is the President and responsible for our ChemSolutions business. So Frank?
Thanks, Randy. So, good afternoon everybody; I am very happy to be here. This is my first time in the Capital Markets Day and I am also very happy to present ChemSolutions to you. I would like to answer to big question from my perspective, a big question to-date.
First of all, what is behind ChemSolutions because it has been basically as a segment not really visible for you. Second of all, I would like to answer to the question what value maximization means. But to start with in order to make you familiar with the ChemSolutions business, I would like to show you a small video, a short video which highlights the main markets and main application of ChemSolutions.
So you have seen quite a variety of different application. Just worthwhile to mention in all the applications mentioned here we have a leading position, I would like to mention some of them you have seen in the video, we are active in the pharmaceutical industry, we are active for our customers in diabetes treatment, so our customers which are actually busy with diabetes medication they appreciate our high quality pharma acetate and this pharma acetate are very important for them. So diabetes is growing unfortunately with 9% to 10% throughout the world basically due to unfavorable and lifestyle changes everywhere in the world, so nicely growing application and this is of course reflected in our business.
The feed business we have a leading position especially when it comes to state of the art application of organic acids. Organic acids are used in animal performance. They are used also in feed preservations and especially in animal performance enhancement, they can replace at least to a major extent the antibiotics which are still used to a major extent and which are due to adverse effects on the human bodies are coming under threat in almost all geographies; in Europe they already banned since 2006.
And the last business you have seen in the video, our airport deicing; airport runway deicing business. The smallest business we have for us is the European business; it’s also based on the same type of chemicals that we are using in other customer segments. Europe as a market is relatively flat because the air traffic in Europe is not increasingly heavily anymore, there are the growth is basically taking care in emerging markets and especially in Asia Pacific where the air traffic is growing.
The key question is why our customers are buying from us, what do they appreciate with Kemira; what do they appreciate with ChemSolutions? And to start with, if you look at this slide here, the major, the bulk of our customers buying products from us, products where the people appreciate, where our customers appreciate the positive, the favorable relationship between price and benefits. Our customers appreciate our products in terms of their quality, they appreciate us in terms of reliability, just to mention one example here; pharma customers, they need reliable supplier, they need good standards, they need products which are complying with all regulations and that’s what we are doing.
Only the minor part of our customers they are requiring for example customers, in meat perseveration, they require quite intensive service, because this is a demanding industry where you know different formulations are applied to different challenges the customers have. The reason why I am showing this slide is to really point out cost competitiveness in our operation in ChemSolutions is crucial to be competitive on the market.
And we have one product group and that’s formic acid and Wolfgang has mentioned that in his presentation, formic acid is our group that we have backward integrated with a plant with a state of the art plant in Finland and that’s really where you can see where we have our strong competitive edge, you know in front of our customers.
So answering the question how Fit for Growth will bring us to the event with the group target for Kemira? Before I do that a few words on what has happened in the past few years, you will ask that question anyway, how does the grass look like there? So in some of our product lines we have been faced with a situation that the playground has been changing and to come out with one example here Randy has mentioned the Shale gas situation in North America and the situation that Shale gas is widely available cheaply in North America has actually flavored some of our competitors especially those competitors who are producing chemicals where we are not backwards integrated. So some of our product lines have lost a part of the competitive edge and that’s one of the reason why you know in some parts of our business we are not showing the performance we have historically shown.
How do we kill that? So the management is committed to improve the performance to an EBIT level of above 10% by 2014 by focusing on co-product line and this basically means in our case formic acid and derivatives will be our core focus. We will also focus of course on the associated technologies. The other element which is important to come to E-10 and above is significant reduction of complexity in our operations and significant reduction of complexity, the good example for that is we have already decided to reduce the number of Stock Keeping Units by 80% in our most important product lines. So this complexity reduction will actually lead us to a situation which is easier to manage and also it will enable us to reduce cost significantly.
Last but not least, what Randy mentioned also, there is Fit for Growth program continue in Kemira Group and the functional organization is reducing or is increasing efficiency by reducing complexity as well. Last but not least, ChemSolutions will also benefit from that.
All-in-all and Jyrki will come to that later. We're talking about cost savings in ChemSolutions of about EUR 4 million and this together with the measures we’re taking from segment point of view we're confident that we will achieve and performance increases which we are targeting.
Thank you very much for your attention. If there are questions, I am happy to answer them.
Are there any questions?
Thomas Swoboda - Mainfirst
Thomas Swoboda from Mainfirst; sorry if I have missed that, but the key raw materials you have mentioned that were limiting your competitive edge. Could you name just two or three?
Yeah we are basically working with formic acid and derivatives and their salts; with acetate sort of acetic acids and propionate, sort of propionic acid. And especially if you look at the competitive situation of manufacturers of propionate and propionic acids you come to the conclusion that those producers who produce in North America have a competitive advantage due to the availability of cheap or low priced shale gas and that’s what was happening. So since we are producing in Europe, we couldn’t enjoy that benefit of the shale gas advantage which some of our main competitors in North America have.
Thomas Swoboda - Mainfirst
A quick follow-up from and then another question. The synergies you get from being within Kemira, how would you describe this?
Well, I mean the set up in Kemira is so that we have a segment organization which is very lean in the case of ChemSolutions and we have a functional organization taking care of supply chain management, taking care of HR and other functional arenas. So ChemSolutions as a full segment at the 1st of October is part as before, but now visible is part of that functional or takes benefit of the functional organization of Kemira. So in the same way as Randy, as he pointed out before is benefiting from increased efficiency and reduced costs in the functional organization, ChemSolutions is doing the same.
Panu Laitinmäki - Danske Markets
Panu Laitinmäki, Danske Markets. About this complexity reduction, how many products and customers do you approximately have; just to get an idea of how much of this customer and product rationale and say it is coming from ChemSolutions? Thanks.
Well, I don't want to comment too much on customers, but if you just focus on product we are having several 100, you know we've seen both ambiguous number of more than 5,000 SKUs. And if you look at ChemSolutions, ChemSolutions is 10% of Kemira’s turnover and this is roughly the number of SKUs we have in our segment as well. We have seen, I mean the 1820 rule is here applying as well, that by reducing the number of SKUs in our main product line by 80% you do not tap your revenue actually. But what you can do is you can use the, how to say, the product which is then available for other applications, for other customers, for other products, you can use them either to migrate or to, how to say, to move other regions with that for example. I mean with other words, by reducing the complexity drastically you do not only reduce your cost, you also create an opportunity to move for example to more valuable products.
Looking at your contribution in revenues of total it grew a bit sort of 10% and how important is your division from a scale point of view; do you, if you could double the revenues which would be easily at 10% back again or how much is scale for you, how important is that production scale and distribution scale?
Well, I mean you need to distinguish between our core product lines and the rest we have in our segment. Every core product line being formic acid and derivative we have a state of the art facility; we are the number two in the world; (inaudible) is more than double the size as we are. So we have a state of the art facility. If you would double that production facility for example, you would create an oversupply situation, so I mean doing that in Europe is any way not an issue and doing that somewhere else is creating how to say at least if you do it with the same size it would create an oversupply situation.
How easily do your products travel around the world; if you would produce in Europe and settle in Asia or do you need to build facilities in Asia or somewhere else?
I would like to answer in the following way; we have one production facility in Finland and we export quite profitably to basically all regions in the world. So these products formic acid and derivatives travel quite well, the same is accounting for our production facility for propionates and acetate in the Netherlands also from there we export into all parts of the world. So from value point of view, we are talking about products which are around EUR 1 per kilo so they typically travel rather well.
Okay, thank you very much.
Thank you very much.
And before we continue to the third set of presentation, I suggest we take just a short 10 minutes break and then continue.
Okay. Welcome back ladies and gentlemen and I would like to present to you more interesting part of the world which is the most fast growing and also a lot of opportunities for us, for Kemira as a whole. And there are two key messages which I would like to present to you today.
One is, what are the big potentials? Where are the potentials which are of interest to Kemira? Second is how are we going to capture this fast growing market which are of interest to us these are the two key message which I am going to present to you.
First, let’s have a look at the upper part there, as you can see here our sales here of year-to-date is only 6% of our total Kemira sales which is a very small part of our total global sales there. Whereas when we look at the potential of the water chemical markets in the year 2015, there you can see that the APAC region has a potential 37% which is very big which means there is a big potential and ample room of growth opportunities for us here in this part.
Now let’s have a look at the lower part of the chart here, you can see that in the year 2011 here that’s the total accessible market to us is EUR 6.1 billion here and according to our analysis we have segmented it into a way which is following our Kemira portfolio here.
And as you can see here in the year 2020 there, we have a very big growth rate here compared with the rest of the world, we have the highest growth rate in the region which is 5.2% here and as you can see here, in the year 2020 we will be reaching around EUR 10 billion there.
And the biggest growing part here is in the paper and also in the mining and oil and gas business there. These are the most interesting part for us.
Have a quick look also at our operation in Asia-Pacific region here and based in Shanghai and that’s been there based for 15 years already and I must say I can see the market is really growing very dynamically in the past 15 years, the time when I was there. And now have obvious for the Asia pacific region is also in shanghai there.
In the APAC region we’ve got four production facilities as you can see in the red line. They are three major ones, the one in Singapore it’s a very small one, but we've got three major one, one is in a place called (inaudible) which is producing AKV and then we’ve Nanjing one which you’ve heard a few times already earlier that is coming up very soon as of first quarter of next year, we will start the production there.
And then we have another one coming in also in India there, we are producing and then you’ll be starting operation also in the third quarter I mean in the fourth quarter this year. So it’s coming very soon. And in the APAC region here, you appreciate that there are so many different cultures in there and also different language and also different interest of the business for us here.
So in APAC here, we sold out that which on a most interesting part for our business to go. So we chose to grow into this market there of which business that ones which is most beneficial to us. In China, we had all segments there, whereas in Indonesia it’s mainly paper and mining which is the most interesting part for us there. And in India is the M&A which Hannu has presented earlier, and then with paper. So these are the growing segments which are off interest in these three most important markets in APAC.
These are the production facilities in APAC region here. As mention earlier, we have got this (inaudible) plant which we have started operation as of Q4 in 2009 here. AKV is a kind of sizing product for paper and this is one of the very important firm stepping stone of Kemira entering into the market there which really give us a very big footprint in the paper industry there to assure the market that we are coming. We are serious about this market here and this is a very big footprint in this industry and this plant is producing AKV which is now the biggest in the world.
The AKV is biggest in the world. Second one in Asia-Pacific region here we got the Indian coagulant plant which is coming up very soon. It will be next month, that this plant will start operation as of and here is the Indian plant which we would be making progress there and it is a 51% joint venture of Kemira.
This one we have early bird or first move vantage in this area here, whereas in the sizing here when we have this Nanjing production plant coming up there which we are producing the ASA product here. This is another sizing product which Kemira is very strong at and is giving us a very strong leading position in Asia-Pacific in the whole of the sizing market in Asia-Pacific region there.
So here, this is the Nanjing plant and here is the India plant there. So let’s have a quick look also at this growing market also. As you can see here on this left hand side or from your there, you can see that this expanding this global middle class part here in the whole world. You can see this big growth here this is you can see here, this to-date and middle class number is 1.8 billion globally.
Whereas in 2020 here you can see that it is also jumping up. So we expect growth here, what you can see is also that 85% of this growth is coming from the Asia-Pacific region, which represents a lot here, which means they will be demanding better living standards, better clean water and also the demand for the paper also which in the case here would be say some like the packaging and board and also tissue say for somebody in the family there. Nowadays, we're using less and less handkerchief and we're using more tissue paper and also the per capita consumption is very low still in APAC there which offers a big opportunity also for us to grow there.
On the right hand side, here you can see this relationship between the GDP growth and also the CPI percentage for the next five years there and as you can see here, you can (inaudible) China, now which is now the second largest economy after USA is representing a GDP growth percentage of around 8% there and you can see India, Indonesia both are here on this side, which means they are all growing nicely at least in the next five years, according to the World Bank projection here.
So here you can see that Japan is up here with low growth and also with a high CPI there. So our focus market is really here. This is where we have focused so far and we focus these markets with a very good reason.
China, which is the biggest within the APAC region here, of course we said China but even within China, we realize that it's not a unified market. It's a unified country but it's not a unified market here and you can see that we have this so called East Region and if you look at the East Region here, their GDP compared with the rest of the country is actually three or four times higher.
So of course when we look at the GDP per capita of China, its give you a figure well of course the GDP along this coast here would also be a significantly higher than the rest of China or the GDP per capita of the whole country. So here you can see here of course you know they have different regions and well of course what is important for us in this east region here where we have our plant and production and also our focus of our sales force based along this line here.
The other thing which we used also perhaps to look at is that when you talk about China, we always was not be easy to what we are talking about this so for the five year plan. And in China they always come up with this five year plan. This period of time from 2011 to 2015 is that what they called a 12 five year plan. And in this 12 five year plan period there, they clearly say that the economic growth here is $0.07 or higher than 7% which in most cases would be 7% and 8%.
And also the CPI will be under control of around 4% or even lower, that would be what the government is aiming at. I've been working with the China market for more than 20 years. And what I have seen is that you know, in the past so for this five year plan, they always able to deliver what the government want. And this is something which is very good for China, so it’s always predictable in a certain case here.
The other thing which I will like to share with you is the organization here. As you can see here, the urbanization now which is the Chinese government is also now pushing very hard is that here the urbanization rate is 47.5% but then it will be jumping up to 51.5% in a year 2015 here.
So with this big jump here, the urbanization right here which would demand a lot of the waste water treatment there because in China a small city or a small town say for example (inaudible) there are 5 million people which is the same size as Finland already, and of course Shanghai is a much bigger city there and of course when you talk about mega city there they have a lot of mega cities in China.
And there when you talk about say for example, the waste water treatment plant which we are working with. Therefore, waste water volume of about 2 million tonnes a day which is huge and this kind of mega city waste water treatment plants is not everywhere. So we have big opportunities there.
The fossil energy here we have now also this is going to have more energy and they are going to build more power plants in China because of this what I mentioned earlier, the economic growth and also the middle class requirement etcetera. So the power plant, the building of that new power plant also offer us a lot of opportunities also especially in the industrial water for example there because we do have our antiscalant corrosion inhibitors defoamers, biocide. For example, we have one customer in Indonesia; they are using the water by sea water as a coolant in the cooling tower there for their power plant.
And they’ve faced a lot of problems there because I mean of all the sea and all these little animals from the sea there so our power sites have helped them a lot and also this corrosion inhibitor there. So those give us a lot of opportunities there in this new emerging market there. And also the last point but not least it is water consumption. Chinese government also declared that they would like to reduce their carbon dioxide emission, the energy usage and also the water consumption there. So the reduction in consumption of the water actually reflect an opportunity in our WQQM. By now I am sure you would be very familiar with the WQQM already.
So with this quality and quantity management here actually gives us a very good opportunity because like say for example, in the paper mill. Paper mill, a huge part of the paper production is using water. Now we helped them to use less water or reuse the water there during the production process there and this is very helpful and the customers do appreciate that. So we are not there just to sell the product, just to sell the chemical, we are there also to offer our application know how which the customer appreciate there in the market. So our (inaudible) in the medium-term for us is the sludge treatment. Here we are talking about dewatering, the sludge dewatering. As I mentioned earlier on with this urbanization there they are going to have a lot of this waste water treatment plant in China and also in India.
Also these are coming up, now with these dewatering there, we have know how advantage also in the sludge dewatering. The government in China is asking now for 80% of the water content and now because of all sorts of problem and landfill and others and they are now asking to reduce this water content of this sludge from 80% to 60% which is not everybody can do that. And we are in a very advantageous situation that we can offer this kind of know how to the customer and the customer and the government do appreciate this, because now the sludge they are not using it for the landfill, they are using this sludge into their incinerators there, which somehow also can produce energy there. So that helps them a lot there. The other thing which I have mentioned earlier is this industrial water there and a waste water treatment which I have mentioned earlier. There we will also put more emphasis into this power plant especially there and also in coal plant, in the coal mining business there because there they are using a lot of coal there and coal washing for example, we have fossil business in that area there.
Shale gas. Shale gas is one area which China has claimed to be having a very high shale gas reserve. I think America, China and I can’t remember the third one there --, Argentina, yeah. They have highest shale gas reserve in the world and they also gives a very big advantage because we have got a lot of know-how from North America which can then applied into China because those customers are mainly the big guys there. The Halliburton and the others. So there we can use those connections and then bring it into our part of the world there.
R&D Center, we have already seen this slide a few times already I think and I am not going to repeat more, but what I would like to throw your attention to is the two points here. The sludge, dewatering and the membrane technology, which the R&D center in Shanghai, we are keeping this two lead projects there, because in our part of the world there, these are the most important projects for us, which we can also take the lead and also share this kind of technology with the rest of the world, because say for example this membrane technology and then I think Hannu mentioned about this earlier, that actually in Asia there, most of them they have this new plant, which are not using some of the technologies which are rather matured in the West. So they are jumping into a new technology there which also gives us extra advantage to bring this new technology into the region there.
Last slide, but not least, and here we have got this as I mentioned earlier a very strong position in sizing. Now with AKD and with ASA here that give us a very strong position in the sizing in the whole of Asia-Pacific region there. And also in India we are very successful desalination and this desalination is going on there and the drinking water plant and is not just India, but of course also in the Middle East also these are the important regions also for us.
And also I mentioned already this I am not going to repeat here the sludge treatment and also this industrial water and the shale gas. These are all the important growing areas for us here. And this the last here you can see that we have also significant growth in the year 2009 because there we have acquired this AKD plant and started production there as of 2009 there, so there we have a big jump. And there early next year we will have our Nanjing plant coming on board and very soon we will also have another wave also for our growth in the region there.
So that ends my presentation and I would be very happy to take any questions if you have.
Artem Beletski - SEB Enskilda
Artem Beletski, SEB; APAC was 6% of Kemira sales year-to-date; how much of sales what you are generating in APAC is actually chemicals which are produced locally?
At the moment, we have about now half, maybe little less than half of that is being produced locally.
Artem Beletski - SEB Enskilda
Okay. And what comes to this investments coming upstream in India, in China how much those will be boosting let's say your chemical capacity in the region, because it is likely to be filtered or will be seen presumably quite rapidly also in sales growth?
You are talking about just the capacity there, yeah?
Artem Beletski - SEB Enskilda
Okay, well the Yanzhou plant is already running at full capacity already. And because of its operating already for three years since now. The Nanjing plant we will start production as of Q1 next year, which would also maybe according to our projection it would take about two years to run into this, not full capacity by then, probably around 85% there; that would be in our projection there. And the India plant there which we are starting as of October there and there as I said you know we have a first disadvantage there and there I can't remember exactly the figure there, so I would say it was about two to three years also you know to ramp up to its significant capacity level there in APAC, in India I mean yeah.
Artem Beletski - SEB Enskilda
And when this capacity is up and running at full speed what kind of like if you don't assume any additional exports, what kind of revenue levels you would be expecting to generate in APAC?
Well, we have of course the first thing of course the reason why we build a plant there is not just to take advantage of the cheap labor or because in the chemical industry there that's not relevant, but really the our intimacy and closeness to the customer to the market there and that’s the most important part there. Now your question is, I mean how much more revenue we will be generating there with all this plant up and running? The first one Yanzhou is already up been running already the next two plants would be EUR 20 to EUR 30 million in the next periods will be coming up and of course I mean it’s not ending here you know we have also new products going to introduce also in the plant there.
Markku Järvinen - Evli
Markku Järvinen, Evli. Can you just highlight the new organization you will have in Asia and how that will change the way you operate?
Okay thank you for the question. And as Wolfgang mentioned earlier now is more of this regional business unit up-gradation and then you know with this operation there we would be making quicker decisions to the market there. So we have had got all these assessments there we have a RPU or what we call RBM where those they do not have the manufacturing units there in the APAC region there. But then most of this we will be having this direct autonomy; we will be empowered to do as instruct and agreed by the management board there and those are the very important decisions.
Yet I mean so far in the past it was always rather centralized in Helsinki there. But now a day you know the region is not different and permanent autonomy to do these things and decisions and those would be quicker and of course there is a framework of margin requirements etcetera and also an agreement of which kind of products to enter into which market there. But then overall speaking is I would say is a good thing that this is moving in this direction there; because the world is now changing much faster so we have also to move at least the same pace as the world is doing.
Markku Järvinen - Evli
And would you say that you’ll be making more decisions on regional basis than on segment basis or how is the set of, does that change now or……?
Well, of course, we're not just making decision there of course, we are making decisions based on the global requirement by the segment there and of course we have agreed on something and within that framework there, we can make quicker decisions there. That would be the idea.
Panu Laitinmäki - Danske Markets
Panu Laitinmäki, Danske Markets; what do you think is the biggest challenge for you when you try to achieve your growth targets; is it finding the right people, product development, competition or something else? Thanks.
Yeah, finding the right people of course, this is always not easy for everyone and also the thing which we’re doing now of course, we are also expanding in the region there of course to find the right people, that's always important there and also I forgot to mention about R&D and thank you for asking that.
In R&D, one of the major part of that job there is also to do the local adaptation, customize products which are suiting the market need there. So it's more of the small hour but a bigger deal in that part there and this is serving the purpose of the market and also the idea of having this in Shanghai there, to serve the whole APAC region there and we also are building up our application team there in the region. Say for example, in Shanghai and also in Indonesia and in India; building up this application team which can serve the market better by not just selling the product at a price and compete on the price there. So the application surface with our experts and that’s very important there.
Panu Laitinmäki - Danske Markets
And just another question on competition, so which one worries you more, the emergence of local players or the big western players entering the market? Thanks.
Of course you know it’s a different playground I would say; with the local players there most of the time they do not off shore the HS issues there and they sometimes compete on more advantageous situation in a short-term there. So I mean in certain area they might have advantage there, but most of our customers there like the paper business for example these are the big paper mills and they could not afford to buy a lower cheaper local product and then at the expense of nearly a $1 billion of this paper running machine and that’s stopped for an hour, it will cost them a lot more. So most of our customers actually they are buying products from us because they feel much more confident as a reliable supplier and which we are going to also to be in this business for long-term. So those are the customers which we are targeting at there.
Thank you very much.
So ladies and gentlemen, I hope your energy level is still high. My name is Hilton Casas, I am the Regional Head for Kemira in South America; I am based in São Paulo, Brazil. Likewise China, South America is a very interesting growing region for Kemira. And during my 10, 15 minutes presentation, I would like to give you two messages. All segments where Kemira is present are growing faster than global average. And my second message is to say that Kemira is very established in South America and we are ready to capture this growth.
Let me start by the later statement, so we are relatively new in South America. We have established our operations in 1996 and today we are generating about 8% of group turnover. Kemira invested to the extension of amount of money right into the region about EUR 108 million to show the commitment of Kemira to grow in the region.
In terms of sales off seam, we are present in five different countries with this at top we are covering more than 8% of the region GDP. We are in Colombia and from there we are covering all the Andean region; we are in Chile, Argentina, Uruguay and Brazil. We do also have manufacturing facilities. We have three production facilities for paper. Uruguay perhaps the most relevant chemical island in the road from there we are supplying customers in Uruguay, Argentina and Brazil. We have also a paper chemical manufacturing in Brazil and supply all Brazilian customers from there, but also Argentina, Paraguay, Chile and Uruguay.
In Argentina, we are only operating one dedicated production to an important customer there. From municipality point of view, we have four manufacturing sites. They are all located in the most relevant part of Brazil where we are supplying coagulants to the municipalities, but also for paper and for oil and mining. And last but not least, we recently opened our R&D center in São Paulo and I will come to this point later on.
I said that South America is a interesting region for growth and let and try to give you rational and I am sure that you are very familiar because you are coming from the financial segment and you know the figures better than I, but just to show you that South America is a region of $4.7 trillion of GDP using the purchasing power parity methodology. Brazil being about 50% of this total and the Andean countries, they represent roughly $1.3 trillion followed by Argentina.
So in terms of GDP we are about 40% of China, 20% to 25% of European Union or North America so that is a relevant market South America. But the good news for us is related to the growth, as already mentioned here many countries are growing in the rate of 4% to 6%. If you see the average expected for future for the years to come is roughly close to 6% in South America. So Brazil with 4% Andean region close to 4% countries like Chile, Uruguay and Paraguay growing above this rate.
Another important element for us is related inflation, so you see that there are still some concerns in Argentina and Venezuela, but all other countries inflation is relatively under control and so the bank interest rates. So this is giving more power to the industry to invest in the region.
As a consequence, both the international risk agencies, they are gradually improving the situation from the region. They’re saying go there and invest there. So, stable economy is present in the region. Coming to the point of the segments where we are present in the region. I would like to start with paper.
If China is our region for paper growth, South America is a region for growth of pulp production. Although in paper, we're also growing nicely, we're following the local GDP. So expectation of paper growth is about 4% to 5%, but for pulp its much bigger because we're are producing pulp to export mainly to Asia and the reason why South America is growing faster in pulp is very easy. So we're very cost efficiency in short fiber eucalyptus pulp.
So South America has developed a very high technology in forestry of eucalyptus. So climate is helping and then you can see from this chart here, the total land needed to produce one million tonnes of pulp short fiber in South America compared to other regions. So in South America its needed 100,000 hectares and in order to get count seven times more, Iberia region three times more. So this shows very clearly why the region is so competitive in pulp.
So there are many investments that are in place in new pulp facility. So old customers of Kemira important customers of Kemira they are really interested in this opportunity. We have many investments we are expecting 7 million tonnes of new capacities to come by 2014, local, bigger companies and also international companies, they are investing there and there are expectations for more 3 million tonnes to come by 2020.
So each of these investments if you are familiar they are ranging from $2.5 billion to $3.5 billion very, very important. So in total, we have today about $12 million investment in Brazil and Uruguay. And what is important to mention they are all Kemira customers, we are supply to this segment there.
Other important growing segment for Kemira in South America oil and mining. In oil, in Brazil new reserves have been discovered and the state owned company in Brazil Petrobras they are producing today about 2 million barrels of oil per day and expectation is that by 2020, they will be doubling this production close to 4 million barrels per day.
Also mining, there are huge investments coming to the region, expect by 2020, [$108 billion] investment in different countries or different types of minerals there. What is important to mention here that, all these new production will acquire innovative products, not only simply transferring the existing technology but adapting our technology to meet their local requirements.
So that's very important and we have [disposability] and I would like to mention also Argentina even with all this political issues today in Argentina, they have recently discovered the third most important shale gas reserve there and have it to produce. They need to capture this benefit and it will be also a very interesting very important segment for Kemira.
Another element important to mention here is regarding environment. So unless you get it tighter and tighter, so they also need to take care of the environment. There are a lot of concerns regarding supply, handling and reuse of water. So then again innovation you play a very important role in this segment.
Another important area for us is municipality. I like very much of this chart here. Because this chart shows is comparing the infrastructure in Brazil to all countries or many countries. In all countries that are above this red line, they have a much better infrastructure than Brazil.
So in average if we compare to the road only in electricity Brazil has a relatively good infrastructure. This is the problem, this opportunity. Because there are many pressure so the government they know they need to capture. They need to improve the infrastructure there. Pressure coming from the society, pressure coming from the legislation, Brazil it will be hosting two important events in future FIFA World Cup and Olympics. So they needed to invest in infrastructure. So there are many investments that are coming to improve infrastructure especially in waste water treatment.
I would like to give you a very interesting example in this area of municipality where Kemira is improving the overall quality of water in Sao Paulo. So this is the case of our lake restoration. These are even for me quite difficult to pronounce (inaudible) is a drink water reservoir located in the metropolitan area of Sao Paulo.
So this reservoir is responsible for supplying 3 million people drink water. For many years, the municipality is suffering with the formation of (inaudible) because of over nutrition of phosphorous there.
So they have tried many different technologies like copper sulphate, hydrogen peroxide and they failed. So since April this year, Kemira started an operation with the municipality with different technology based on aluminum coagulants but not only supplying the products but taking care of the application.
So we had boats on the lakes. So we are monitoring and endorsing the products there and the initial results are very, very promising. So we have already more other two lakes where we are applying the same technology and we are convinced that this technology will be approved by the municipalities and then we have opportunity to roll out this technology to introduce this technology in many other lakes in Brazil.
So this is one very remarkable example where our technology is really helping the municipality to solve issues in the region.
It's very important to mention like my colleague in Asia said, we also have our R&D center there and Wolfgang already said, is more they depart because we're adapting the existing technology to meet the local requirement but we're also developing global expertise, especially in areas where Brazil is leading this technology like bioethanol, biomass utilization and especially mining. As I show you, mining is growing very fast and has become a very important segment for Kemira in future.
My last slide is to show that we’ve been growing fast during this period at present in these 50 years of presence in South America. So we show our capability to grow fast. We see many investments coming in future that you will boost our growth there and we’re ready to grow.
So thank you very much. Any questions you may have. I will be more than glad to answer.
On your first slide, you mentioned over the past 15 years, Kemira has invested EUR 180 million and the revenues today EUR 162 million. Can you maybe highlight the EUR 180 million? Do you know where that is? Is it plant, is it R&D and because that wouldn’t be from the point of view that the returns on investments are not as great?
In total, if we see from the beginning, we have asked that in Greenfield investments, in paper production or paper chemicals production, the most relevant investment was Uruguay for this chemical island. I mentioned to you perhaps the most relevant chemical island today in the world.
In our paper chemicals in Brazil and in this small manufacturing facility in Argentina those were Greenfield investments. In (inaudible) M&A, we acquired companies there, so and then other minor investment we are right now expanding capacity in Uruguay to take this opportunity in pulp. In terms of return these investments they are giving the return especially the Greenfields they are giving the returns back by the company.
Could you get feel for the existing investment that you have, how much can you grow your revenues because it’s a fast growing area without spending a one-for-one so a $1 investment will give you a $1 of revenue, so the capital turn how?
With existing investments we are having in our target to grow 7% in average and I think we can grow, it’s not only with the existing investments but we are also selling important products there. We have the products that we can sell into region and we have important sales of important products in the region. But of course, if we want to capture especially and the Petri had mentioned, the future growth in pulp we need to invest there.
I think we go on. Now let me invite Jyrki Mäki-Kala our CFO.
Okay and ladies and gentlemen, it’s great to see a room full of people who are interested in Kemira and Kemira’s future. So I have been the CFO in Kemira for 16 quarters not years. And during the next 20 minutes I will go through some of the financial items and maybe especially proposing on the Fit for Growth” program.
Creating shareholder value that's one of the most important things for our company, and we as a management we have defined three major items on that road.
First is the earnings potential second is the growth opportunities and then the third one is that we have a strong balance sheet. If we look first on earnings potential, we will discuss a little bit more about the “Fit for Growth” program and what that it really means.
You have heard a story is now about the new organization what it means in the regions and how it will force to the (inaudible) also in the high margin businesses like oil and gas as an example.
And then cash flow management, price balance between investments, dividend, cash flow is very important going forward. We need to grow and the organic growth going forward we have excellent possession in the markets to further strengthening that position but we have seen and witness the growth in our portfolio like in Asia with packaging and board and like in South America Brazil in the pulp side.
Our balance sheet when I started in this position, our [carrying] was 121 if I remember right. Today is at the level of 40. So we have a strong balance sheet. It enables us to do things in the growth side meaning acquisitions when the time is right there will be acquisition and our balance sheet in the terms of what we have way of joint ventures like (inaudible) and also in the forms that we have the ownership of these energy companies. So it is a very valuable asset in our balance sheet.
So all this leads to the fact that we can create substantial shareholder value and our dividend policy 40% to 60% of our operating net profit further strengthen that approach.
“Fit for Growth” EUR 60 million already this year 2012, we will record EUR 10 million improvement in our [EBITDA] coming from “Fit for Growth” meaning cost savings not top line growth but cost savings. Next year it’s 50 and like I already discussed earlier  full scale. EUR 60 million in [EBITDA] and that’s what we are committed to do.
If we look how these savings will come into different segments basically during the next two years, it’s basically paper and municipal and they will take the value of the share of savings 75% of the savings will be recorded into paper and municipal and industrial and little bit less of oil and mining and for ChemSolutions.
So if you calculate the future profits of this segment you always have to remember that we are recalculating all the segments because concerning this year and last year because this so called CEO office will be dismantled and the cost will be put into the segment, also ‘11 and ‘12. So you need to take that into account, but we will provide you with a set of new figures early in part next year for this year 2011 and 2012 as well.
So you have to break the egg to get an omelet, so that’s basically the story here. In order to get the EUR 60 million euro savings, you need to record, like we have estimated, take the EUR 8 million to EUR 5 million cost; one-time restructuring cost, mainly related to asset write down, roughly EUR 50 million and then thereby provide them roughly EUR 35 million.
Of course you understand that the cash cost mostly goes back to the fact that 600 people is the target that we are reducing our headcount. And the other part, the write downs, well here the message has been that we're looking roughly to 14 different sites and plants what we're going to do with them going further. These 14 plants is 20% of our plants and that is now under review and to be finalized when all this negotiations etcetera will be over later, later this month.
Just go back to this year’s guidance, it remains unchanged what we have announced basically late July. Both the topline in revenues and the EBIT will be at the same level as last year. We have assumed certain things with the oil price and also with the currencies etcetera, but basically besides this our guidance remains unchanged concerning this year.
Going back to Fit for Growth overall, this issue is that Fit for Growth since we have talking about cost savings not fixed cost savings but talking about cost savings (inaudible) etcetera it will address all our cost items coming from raw materials, going to logistic, going to energy and then the others meaning basically maintenance, headcount etcetera, etcetera. So EUR 60 million will be inside of all this four elements that we have in our portfolio.
If you look at our raw materials today top 10 accounts 45% of our raw material spend, last year it was 46% so we have slightly reduced the position. But basically, most of our top 10 raw materials goes back to coagulant manufacturing and polymers, so that’s basically, half of our cost is around those kind of raw materials what we are handling today.
This is an important slide in the terms where the EUR 60 million cost savings will land going forward. When I started in this position back in 2008 there was lot of discussion does Kemira has pricing power in the marketplace. The organization has done a lot of work in the terms of reacting to market prices both in the terms of raw materials and then bringing the price increases with our finished goods and the team has done good work like you can see from the graph, the green one and the blue one basically goes hand in hand today and that is important going forward as the markets are still volatile. If you look at the feedstock prices today as an example there is constant move up and down going in the background; but we have been able to shift our focus understanding the market demand, the changes in the market and getting the understanding that our sites to be able to increase prices, a very good achievement.
Balance sheet; everything comes into the balance sheet that’s how life normally goes. We have a very strong balance sheet today. We have really come down in the terms what our debt has been and how we are seeing our gearing during the last few years. We are stating here basically that we would like to see our net debt to EBITDA stay below 2.5 and at the same time see that the gearing stays in our target range of below 60%, because this is the matter for us because we want to grow so we need to have the balance sheet that enables us to grow, but we are not entering to the area of risky business in that sense that we are jeopardizing our balance sheet.
Currently, our debt structure is very healthy. Last year we renewed our revolver (inaudible) so we have EUR 300 million unused debt in the back pocket if we need to do something. But the important is that we have the tools to invest and keep our balance sheet in good shape and be able to pay dividend to our shareholders.
Networking capital, cash flow; I got some question during the breaks about networking capital, how we are addressing that fact and that is clearly and you see even in today’s world that networking capital is something you need to manage well in order to get the cash flow in the right balance. We are targeting to keep the networking capital at the level of 11%. Last year we said 12%, so we are strengthening our methods, it needs to be 11%. You all understand that there are three elements, what you can do well when managing networking capital, I think that the inventory meaning supply-demand, how you manage your customer payment terms and how you manage your suppliers; 11% we have been there; we need to come back to the right level and again in the sake of getting good cash flow in the background.
So it means lot of things for our organization to get the supply-demand as an example in the right balance, but we have talked a lot about here about the SKUs, stock keeping units and how we are reducing the number of stock keeping units and that alone helps us a lot in the terms how we manage the inventories. So there are a lot of things in the background going how we get the curve back to the right level meaning 11% is clearly a bucket for us.
Next part of the working capital management towards the cash flow is investment; how we manage the investment. At an average, we have spent roughly EUR 100 million a year for investment, maintenance, improvement and then strategic investment in the terms of new facilities or some acquisition. This year the running rate is roughly at the level of EUR 130 million really geared up by Nanjing plant investment and also our investment in India. This is very important in terms of again looking the cash flow management, how you manage your CapEx in order to have the one important target for Kemira we need to have a positive cash flow of the dividend. So one part is how you manage your CapEx and over the years more and more CapEx is we have directed to emerging markets where the growth is like Hilton and Joe explained us a few minutes ago.
And then finally coming to the dividend payout and how it has been during last few years. It has been unchanged as a policy of the last five years, 40% to 60% of our operating net profit and as an example, last year, 2011, based on 2011 figures, we distributed a maximum dividend of 60% in April this year and increased dividend combined with the lower gearing so to tell the story we are not paying dividends by taking debt. We have the cash flow and we have the profitability in place.
Financial targets; basically untouched. If we look our targets for the last few years, the growth targets concerning the material market done in the emerging markets we have things to do and also the Fit for Growth program and that part of the story and like Hilton and Joe mentioned opportunities are over there.
EBIT margin, we will get to 10% through this program, gearing is already there in the comfort zone. Cash flow has been positive after dividends. So in many ways, we have done the right things and now we need to get the final tuning so that all these five targets are met.
So finally, three things to remember ladies and gentlemen, Fit for Growth will bring us to 10% EBIT 2014. That is the commitment very clear. Our addressable market, EUR 26 billion globally. we want to grow above the market figure (inaudible) market. If we meet our growth target in the emerging markets and mature markets, our growth will be higher than the market growth as an average. And finally our balance sheet, it enables us to grow, enables us to take the right actions towards the growth and more profitable company.
So ladies and gentlemen that’s all I had to say and now questions if that’s the case.
It’s [Eric Hauser from ATL Capital]. You guided for an EBIT margin of 7.2% this year and incremental savings in ‘13 and ‘14 and will be EUR 50 million; EUR 50 million over EUR 2.2. billion is 230 bps, so that takes you to 9.5% where does the rest of the EBIT margin improvement come from? Thanks.
Yeah that’s a very good question, I nearly expected that question so thank you for asking the question. Because it’s really, the EUR 60 million it’s about cost savings so we get to 9.5 using that mathematics which is more or less what I calculated as well. The rest we need to have the topline growth like we have seen that we need the more actions in the emerging market like in Asia Pacific and Brazil but also in the mature market and that will bring us. So it’s a margin coming from extra sales.
Just to follow-up, what kind of organic growth do you need to just maintain margins, because all businesses have some cost inflation, salaries go up 2% to 3% every year typically, so most businesses need 2% to 3% organic growth just to maintain current status of growth. So what kind of organic growth do you need to just to maintain things like this?
It would be easy to answer that (inaudible) that we need in order to that tackle the cost of inflation but part of the cost of inflation is that you need to improve your efficiency and that's where you answer the question of how you manage the inflation. Organic growth is important but that is part of this 3% target and 7% target but we have in our target setting. So that’s the way we want to manage inflation side.
Panu Laitinmäki - Danske Markets
Panu Laitinmäki, Danske Markets. A question on your balance sheet you mentioned having valuable assets there like the ownership in Finnish energy company PVO. Do you think at some point of time you might no longer need those if you would have less paper chemical production in Finland which is energy intensive? Thanks.
If I pointed out this is factored in our balance sheet we have really the ownership of both PVO and TVO which are our big energy companies in Finland and I didn't point about in the front that we are planning to get a rid of certain kind of businesses but that’s something when you think of about creating shareholder value that you have assets in your portfolio that really how valuable in terms going forward because its as an example of these energy assets, they are very important as we utilize electricity basically at cost not at the market revenue. So it’s very valuable in that sense both in BNL proposal and in balance sheet.
I was wondering whether you can provide any guidance on what level CapEx would be in 2013 your factories in China and India are clear to completion now and secondly on the 11% guidance for the working capital, do you have an idea by how long it would take to get back on to that level?
So let’s take the first one the CapEx like I said it has been roughly EUR 100 million per year. This year it will be higher because of this growth [graphics] that we are running in Asia-Pacific and it will be [120 million and 130 million] rates probably this year. And going forward we will see depending on the pro sector we are then putting into our project basket going forward. The networking capital element think about year end and position, I would love to see that talking place this year but it may take next year to get to that level that is a target we need to manage in order to have cash flow in all CapEx and for other actions.
Any further questions, if not I think we will proceed to Wolfgang’s final concluding remarks.
Ladies and Gentlemen I trust that this afternoon we demonstrated you that Kemira is well underway to become an agile company in an evermore competitive global market space. In order to be agile, in order to stay agile, fitness is required and “Fit for Growth” is the fitness program for us in order first of all get to the level we want to be but we will not stop there. There were a lot of questions how sustainable is that, how is that going to take you forward? There was the question. There is inflation and Jyrki Mäki-Kala rightfully said, efficiency improvement is the rule of the game in the chemical industry and there are companies who claim they have to achieve 3%. Others claim they have to achieve 4%. And that means, we will not stop when “Fit for Growth” is implemented.
We will constantly challenge our infrastructure, our organizational efficiency, our process efficiency going forward in order not just to one get there now but to say where we are and to constantly improve. Otherwise, a company of our size has no long-term future in this market.
If you see what's happening on the M&A side, there are guys with much larger pockets than ours and they swallow companies like ours in three months if needed. So therefore, if we now just in one big exercise get where we want to be and then slowdown again, they are losing out again, and you will see similar curves as you have seen them today in the years to come. That is what this management team will not let happen.
So therefore, this is a starting point. We're now getting there but we're doing everything to stay there and are not getting complacent once we have achieved it.
We will use resources scarcely. We will not start suddenly to overspend. We will spend money where we have a return. If there is no return, we will not invest, investing for non-profitable growth is a waste of money, it doesn’t get you anywhere and therefore also from an investment point of view be it CapEx being an M&A, we have clear rules what we want to see if projects meet these requirements, we will obviously put them into play, if they don’t meet the requirements it’s better for the shareholder, it’s better for us, it’s better for the company not to do it and we will also have the guts to say no if we feel that the certain project is not suitable for us because it’s EBIT doesn’t give us certain position as I explained or if it doesn’t give us the return we expect.
So in a nutshell, first of all, we now spend the next one and a half years in the fitness studio in order to return what we have promised. In parallel, we will continue and this is something which is very important, we will continue to leverage the mature market.
We have a very strong position there today. There is a lot of opportunities for us and we will leverage these opportunities to the utmost we can. Because of course the growth rates in the emerging markets are much higher but if you see the absolute terms which we have today in the mature market even a 3% growth rate in the mature market is a very sizeable top line growth.
So therefore, we will not walk away from that focus. On top of that, we want to strengthen our position as Hilton and Joe have explained in APAC as well as in South America. Obviously, and this was related to South America. Some of potential investments very much depend on certain projects.
So if we discuss the chemical island, first of all, there must be somebody who builds the pulp plant. Without a pulp mill, no chemical island. If there is a chemical island to be built, there is also competition. As we showed in the presentation, we're not alone in the pulp market. Therefore this is very difficult to plan in the investment plan. This is what I call, an on-off investment. Either you get a long-term contract, pretty much the similar approach as you have it from the gas suppliers like Linde, (inaudible) etcetera.
You invest in something over long-term business return, very sustainable, no risk but it comes or it doesn’t comes and that means when we talk 100 million investments, this is obviously without this opportunity which we will take and participate as we deem appropriate.
Continuous improvement, overall (inaudible) also a key thing for a company and I said in many interviews to me, the vision is to learning organization. The world will keep changing and we see that on a daily basis. If we manage to get to an organization where we constantly try to improve from within, this is much more powerful than whatever projects you can drive from the pulp and this is what I would like to achieve that we get Kemira into a state where change is not a question of concern but change is seen by a large part of the organization as an opportunity because that helps us to stay ahead of the crowd. Thank you very much.
Thank you all the presenters and thank you for listening. We will continue the discussion in smaller groups and we will invite you in three small groups and it is now you have to pay attention to there should be a letter in your name batch either A, B or C and there will be three rooms and you should find your room in the next 20 minutes during which we will have a break and there will be some refreshments and coffee served. The A room will actually be here and we have to sort of build it so please step outside for 15 minutes, 20 minutes and then come back. The others rooms yes you will guide them in that direction.
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