Kemira's (KMRAF) CEO Jari Rosendal on Q4 2015 Results - Earnings Call Transcript

| About: Kemira Oyj (KMRAF)

Kemira Oyj (OTC:KMRAF) Q4 2015 Earnings Conference Call February 11, 2016 3:30 AM ET


Olli Turunen - Head of IR

Jari Rosendal - Chairman, President and CEO

Petri Castrén - CFO


Markku Järvinen - Evli

Mikael Doepel - Handelsbanken

Anssi Kiviniemi - SEB

Olli Turunen

Ladies and gentlemen, welcome to Kemira’s fourth quarter and full-year 2015 result presentation. My name is Olli Turunen, and I’m Head of Investor Relations at Kemira. The presentation will be held by our President and CEO, Jari Rosendal, followed by the financial section by our CFO, Petri Castrén. After the presentation, you will have a chance to ask questions over the phone and also here in the auditorium. Without further ado, Jari, please go ahead.

Jari Rosendal

Thank you, Olli. Good morning. Looking at the full-year of 2015, I’m pleased how the outcome came. We hit our own internal targets and were able to improve our operating EBITDA.

But when I look at the year how we started, we had really low visibility going into the year. We all know how the oil price was coming down. No one knew in the beginning how fast, how low it’s going to go and what impacts it has in various industries. We had also FX rates going drastically last year, some of them were positive to us, some of them were negative to us, but mostly we experienced a positive gains from FX.

Raw materials were strongly on the move also and we didn’t see how - quite how that will impact the industry. For us, we had some mostly benefits from that, but there are some negative impacts from raw materials also last year. There were geopolitical upsets going on. Directly those didn’t affect Kemira, but it could have been that it affected our customer base and the markets much more they ended up doing.

And in the beginning of the year, we were not sure when our AkzoNobel Paper Chemicals M&A deal would close. We saw that there were no major issues, but we didn’t know the timing of the competition official final decisions. Finally, we were able to close in May 1.

This volatile environment was adverse in some areas of our business but beneficial in other areas, and I think our operational execution went well. So the underlying performance of the organization was very good. And therefore, I am quite pleased of the outcome of the full-year and I’d like to thank all the Kemira people for a job well done.

If I now look at about the numbers and go forward from here. So full-year basis, we grew top line by 11% and got close to EUR 2.4 billion, and operative EBITDA grew to EUR 287 million and grew by 14%, so we were able to leverage our fixed costs. I’d like to point out that we guide and we measure ourselves operative EBITDA margin as we are investing to business through M&A and organic investments, our depreciations go up and with a structural integration of the industry, we have some one-times when we do the integration work. So that’s why we focus on operative EBITDA and the margin of operative EBITDA.

So we had some small organic growth in Pulp & Paper; also Municipal & Industrial grew organically; naturally Oil & Mining industry came down with the drastic drop of oil price. But all in all, we feel that the progress was good in these volatile markets.

Strong cash flow in the second half of the year. So we built up some networking capital in the first half of the year. We took that into a focus during this summer and were able to release quite a bit from networking capital and that was a wanted outcome. Petri will open that a bit more in his talk.

Pulp & Paper grew nicely, obviously FX helped and definitely our M&A and AkzoNobel piece helped a lot, but also we were able to grow the bottom line and increase profitability. The integration of the former Akzo business is going very well. I’m really pleased at that. And so I’d like to remind that when we closed that deal May 1 on a full-year basis, we were looking to add bit over EUR 200 million of revenue and at the start of integration, the EBITDA margin was below 10% and we were looking cost savings of EUR 15 million annually plus some sales synergies. And we are well on track with that. That’s good progress.

We continued to reduce complexity. There was a plant in Italy related to the Akzo integration, which we closed during the year, and otherwise we continued to also reduce complexity, though sometimes brings some one-times.

In APAC, our business continued to improve. The Akzo piece gave us four new sites in Asia; One in Australia, one in Thailand, one in Indonesia and one in South Korea on top of our existing two Chinese sites. Our new China site called Nanjing. We got it up and running full capacity, the main line there ASA. That was raw material restricted most of the year, but second half of the year we were able to solve the alpha olefin availability problem and now we are running at full capacity and are even thinking of small investments to increase that capacity but no decisions yet.

Pulp bleaching chemicals demand remained high, and you’ve been seeing how the market has announced new investments debottlenecking projects in the Nordics, in Europe and also in South America. Our new plant in Brazil for Klabin is practically complete. We are doing some test runs and waiting for the customer to complete their project and do a startup. We need some inputs from them like steam to do the final testings of our plant, but we are on time and on schedule to start it up in the coming weeks and months.

If you look at the quarter-to-quarter sequential development on our Pulp & Paper profitability, that’s where we start to see that the actions that we have taken in 2014 and ‘15 are starting now to deliver. 2014, the quarterly margin was pretty flat throughout the year at 11.7% and now we start to see the good development and I am glad that it’s now starting to deliver.

Looking at our competitive situation and looking at the integration in the industry that we are doing with Akzo, we had won great deal of new machines, especially in APAC. There are four new machines starting up during this year, one started late last year, and we won all of those total chemical management packages for the work end of the machine.

I was sort of banking that maybe we can have market resistance and we get two or three but we got all of those, so our teams have done really, really good work and shows the strength of our people and shows the strength of our offering.

In total, these deals combined with the European conversions of printing and writing machines to packaging and board, we made an half a dozen new deals there giving us organic growth. On an annual basis, these will bring us roughly EUR 25 million of new revenue and that starts from Q2, Q3 onward, as these machines start to ramp-up and we get that revenue coming in.

Oil & Mining saw a difficult year for obvious reasons. Our mining business continues steady, even some growth there, especially in volumes. And our other verticals through the distributors, when we started this business we used only distributors, now we are using less and less, that business remained unchanged. But obviously the oil and gas was hurt. We got some benefit from raw materials. We got some benefit from U.S. dollar strengthening, but still the top line came clearly down, especially in North America.

What we are now looking at is we entered Chemical Enhanced Oil Recovery. We could call it Polymer Enhanced Oil Recovery, where polymers instead of injection of water-only are put into the injection water and they aid out taking oil from existing fields and give up higher yield from the oilfields than they could get otherwise. We entered this business for the first time last summer and we are now seeing current India deal. We are continuing that. We're working with Chevron. We're working with other people to increase this. We've moved our focus from shale because there was no more growth in shale. It was losing business in shale to EOR.

It takes a while for us to get in there and get the revenue there. We're working hard on that to flatten our revenue out and then get back onto the growth path, but this is a good opportunity for us in the work in the future and we're working hard on that.

M&I delevered a robust year. Growth of 7%. Yes, some help from FX, but still some organic growth, a 22% growth on bottom line and that's an excellent result and good work has been done. The restructuring taken in 2013 and ‘14 is now bearing fruit. We still have opportunities to improve like in North America, but I'm quite pleased of the delivery of M&I last year.

If you look at the return on capital development over the last four years, that's quite self-evident story, so we can be pleased with that. And as I said, the raw materials helped a bit. We don't expect that raw material tailwind to carry too long. We obviously are fighting to keep the benefits to us, but we have to be a realistic that that benefit also aids our competition and some of it really in the role of the new contracts play into the market crisis, but it’s been stickier than we thought middle of last year.

I’d like to point out and remind our targets that we set in September for our segments. Pulp & Paper, we want it to grow double the market growth, and we continue to look at selected bolt-on acquisitions. We did a small one also second part of last year. And on a profitability expectation point of view, meaning EBITDA margin point of view, we want it to be on the corporate target level as our biggest units last year, Pulp & Paper of 60% of our revenue.

Oil & Mining, we want to get back into growth track. It takes some time to get there that we get these EOR deals in and get them yielding, and therefore from a smaller basis we can drive double-digit growth over the cycle and unless you’ll get it that mining and oil is a cyclical business.

Oil & Mining went back on track, has a good opportunity to yield better than average profitability on a group level.

Municipal & Industrial. Last year, we updated what we are seeking small growth in that. We achieved 1% organic growth. We want to keep some more growth there also, and then we realized that this is such a competitive market that it will be slightly below group target on a longer run the expectation from there.

Looking at the dividend. We updated beginning of last year our dividend policy and said that we aim to pay a stable and competitive dividend. Well, if we look at the proposal of EUR 0.53 per share for 2015, one can say that it’s stable in the history as it would be fifth year in a row that it’s EUR 0.53. I feel it’s also competitive because it’s above 5% yield on the share price, so that’s way above chemical industry average and quite competitive in the Helsinki Stock Exchange.

As a summary, our vision is to be the first choice in chemistry for water intensive industries. We’ve chosen Pulp & Paper, Oil & Mining and Municipal industries and other process industries that are water intensive as our primary target.

We drive both organic and inorganic growth. We are trying to improve profitability by operating improvement, leveraging growth and capturing synergies. And I believe on a bigger picture, we are on track to deliver that growth also in the future.

Next, I’ll ask Petri, our CFO, to give you a bit of more insight into Q4 and the financials. Thank you.

Petri Castrén

Very good. Thank you, Jari. So as Jari was reflecting on the full-year, so let me focus more on the fourth quarter.

So summarizing the quarter, we continued good momentum in Pulp & Paper, so with a good profitability improvement, and Jari already highlighted this and I’ll give a bit more color on the numbers. There was a dip in M&I, Municipal & Industrial profitability, but we continued on the good organic growth path. Clearly, the market conditions were very difficult for Oil & Mining, and I think one of the highlight is clearly good cash flow. So we generated good cash flow driven by great networking capital improvement in Q4. So these are the topics I will elaborate in the next 10 to 15 minutes.

So let's start with the growth. So in Q4, the organic growth for Pulp & Paper was flat and this has to be put in perspective that in Q4 we had a very strong quarter in Pulp & Paper. We grew actually 6% organically in Q4 ‘14. So against that quarter the organic growth of flat was - I don’t think it was too disappointing, particularly as we had a couple of things. We had some longer maintenance breaks by our customers. Also, we did have some storm damage in one of our sites in North America, which impacted our deliveries of sodium chloride to customers in North America. This storm damage by now has been fixed.

M&I, as I said, grew 2% organically in the fourth quarter. And actually this was against declining sales prices, so actually the volume growth in the segment was more like 4%.

In Oil & Mining, the difficult market conditions, in the North American shale particularly, impacted the business so that the year-on-year comparison in local currencies was a negative 25%. So the currency impact offset the volume, the decline and the sales price decline, and really the revenue growth was driven by the acquisitions. And it was primarily the AkzoNobel acquisition, as the other small acquisitions that we completed in 2015 were relatively immaterial in this respect.

The Pulp & Paper growth was strong in EMEA and APAC. Jari was already elaborating on some of the new cross wins and cross-selling wins that we have achieved in APAC. Clearly, the investment that we have done in APAC, both on the acquisition, which almost doubled the size of our APAC business, and also the investment organically into the new plant in Nanjing, which is now operating at good rate is yielding result and we’re improving our top line and profitability significantly there.

And in EMEA, we continue on the same path. As Jari said, we win our share of new opportunities in EMEA and continue to grow organically. So that’s why we are very optimistic as we look at the market, so that the new deals that Jari was highlighting and also we will be getting the benefit of the new sodium chloride project in Brazil once that gets in line we expect to startup to take place in first half of the year.

Moving onto the Oil & Mining. Clearly the decline is driven by the North American shale. So the rest of the business has actually performed quite steady, and we are growing from a small base but we are growing in the new applications of Oil Sands - Canadian Oil Sands and the Chemical Enhanced Oil Recovery. But the North American shale is impacting the business most dramatically.

If one looks at some of the external data, rig count is the most widely used proxy for activity there. The rig count is down to about a third from its peak. So clearly this is impacting us tremendously, and right now this is the new reality that we need to deal with in North America and we are dealing with the new reality by looking at our costs, and have been doing that and that’s why the segment has been able to protect its profitability relatively well recognizing that the second half of the year has been more difficult.

In Q4, we also had some negative surprises, and I’ll bring up one example. One of our top 10 customers went belly-up, I guess is the word, and this is sort of reflecting the dynamic of the business. So this was a dissipater into the shale industry. Everything was current. Then one day, the bank closed their credit lines. Within a week, the company was dissolved. This is the dynamic of the shale business. And cost us about EUR 1 million credit loss. Now EUR 1 million credit loss in perspective at Kemira is relatively minor, and I wouldn’t even mention if the numbers for EBITDA in Q4 for Oil & Mining wouldn’t have been so small.

Actually just to reflect a little bit on the credit loss, so that we keep that in perspective. For the company, we had EUR 2.5 million of bad debt reserves for the full-year. So that’s about one-tenth of a percent of our revenue. So that’s not bad in my mind. The only thing was that EUR 2 million of those credit losses took place in Q4. So in Q4, we did have some extra - in our mind, a bit more concentration of the credit losses.

I’ve been sort of looking and reflecting, is there something that has happened in the marketplace in our credit processes? Absolutely not. So we continue to keep a focus in this area, but sometimes bad things seems to happen in bunches, so we did have a couple million of credit losses across the company, about EUR 1 million of that was in Oil & Mining where the numbers become visible.

M&I, I mentioned that the 2% organic growth, actually like I said almost 4% - above 4% volume growth. The profitability was impacted however in Q4, and there are couple of things why that happened. It is not that the raw material side that would have changed, no. There was a - in North America, we - there was a titanium dioxide plant from which we were getting large quantities of byproducts that we used to sell as coagulant to our customers. That titanium dioxide plant was closed, and we have to sort of reorganize our production streams, meaning that we have to source new raw materials to manufacturer coagulant, also that meant that we have to reorganize the manufacturing plant. So we temporarily lost optimal transport efficiency that we have there, so the transport costs increased significantly in this part of the business in North America. This will take about a quarter or few quarters before it fully sorts out, but clearly the biggest impact of that was already in Q4.

There were also some other, what I would call, temporary cost increases. One of those was credit losses, as I alluded to, on a group level. There were also some other relatively small, but in combination, items that impacted negatively. Some of them were bonus accruals, holiday accruals, some VAT accruals that we have to take in Q4. So overall, I am not hugely worried about that the good profitability cycle would have turned in M&I. On the contrary, I feel quite confident that it continues as it is now. So a bit more on the group level, raw material versus sales cost chart that I used as I have a habit of doing.

And this is actually what I was referring to. So if you look at the right-hand side of the chart and this is the spread is something that we have seen both raw material prices coming down and we have seen sales prices coming down. And so we continue to focus on the spread, so that can we maintain the benefit of the lower raw material prices.

And I think last quarter I said that don’t expect it to widen anymore. However it has remained pretty much stable there, and that’s like Jari said that we have been quite - this has been quite sticky that we have been able to maintain that position in the marketplace. The marketplace is competitive, so we are doing bigger job of doing that. By the way, thanks to our segment folks who see the customer, part of it is thanks to our sourcing folks who are sourcing at good rates.

Currencies. This story has been throughout the year. So the currencies had helped us on a full-year comparison or year-on-year comparison. In Q4, the currency impact helped us some EUR 5 million on the EBITDA line; EUR 26 million for the full-year. I think now that we - as we start looking into 2016, at currently prevailing rates, I think we can see that the currency - positive momentum on the currency is starting to end.

Then some additional disclosure on amortization and depreciation and also on non-recurring items. As Jari said, we are measuring the operating efficiency and operating sort of on the operative EBITDA as a primary line. I know that many others do follow the operative EBIT and even the reported EBIT as measures and here are some of the numbers that help guide the bridge from operative EBIT to - operative EBITDA to reported EBIT in Q4.

So clearly we have invested which have resulted in higher depreciation. So the depreciation expense was a bit more than EUR 30 million on Q4, and the increase was EUR 4 million was due to additional investment, and then this EUR 2 million, which is the FX impact, this is due to the currencies. But the currently run rate of depreciation is slightly over EUR 30 million.

This will slightly increase as the Klabin plant, which is now significant CapEx project, as that will be activated in Q1. So depending - so this will increase slightly. So I would expect - on given numbers, so I would expect that on a full-year basis, the run rate of depreciation will be somewhere between EUR 130 million to EUR 140 million.

The other thing which would, like I too sort of guide to is this PPA, purchase price amortization. So part of the acquisition price, particularly in the recent acquisitions, we have allocated to intangible items, which we are amortizing on a relatively short timeline, three to five years competition clauses or non-compete clauses, customer relationships at Kemira [ph]. This PPA amortization as we call it is roughly EUR 5 million a quarter and this will continue, so annual pace EUR 20 million or so.

We had EUR 23 million of non-recurring items for the full-year; EUR 15 million or so was during the Q4. Pulp & Paper numbers are restructuring from the - to make sure that we get the synergy capture. So clearly we said that when we acquired the AkzoNobel Paper Chemical business that we will need to go through some restructuring activities to get full benefit of those synergies. The bulk of the synergy restructuring activities are booked now in Q4. Some of it was booked already earlier. There will be some, but bulk of it is now done in Q4.

Oil & Mining. There were some assets that needed to be written down, and like Jari said, in M&I area, we’ve decided to close one site. So we have started procedures, employee consolidation process here in Europe to close down one site, and so what we can say is that we think in 2015 each segment has closed one site or has started actions to close one site. And this is part of what we have said that complexity reduction and manufacturing footprint optimization that we need to go through.

Cash flow. So this is clearly one of the highlights of the quarter and for the year as well. So we released almost EUR 60 million of networking capital in the quarter, so great achievement. In fairness I guess it’s fair to say that in anticipation of the Akzo acquisition, we allowed inventories to build up to some extent to make sure that there are no disruptions in the supply chain. Similarly, the raw material shortage in Nanjing caused some inefficiencies in the raw materials, and those we have been now been able to work through 2015 and get the inventories closer to the level where we actually want them to be. Why I say that way because I think there is still some ways to improve as we go into 2016 and onwards.

One item perhaps also pointing out there is the cash taxes. So clearly the taxes that we paid this year; EUR 12 million for the full-year and EUR 2 million in the quarter is abnormally low. We actually paid some extra in 2014, where we got some refunds 2015, so the ongoing cash taxes rate will be somewhere between those two numbers at the current level of profitability.

Yes, one thing is that there is a seasonal nature for our networking capital. So I would expect that there will be some reversal in Q1. Our CapEx tends to be seasonal and there will be also some incentive payments that we will need to make in the first half of the year.

We are investing in to growth. So you see that the 25% increase in capital expenditures and now this is CapEx without M&A, is significant. Bulk of it is - bulk of the increase is in Pulp & Paper where clearly the investment in the sodium chloride plant in Brazil really approximates the increase there.

We’re also giving guidance now in numeric terms rather than percentages about our future CapEx plans, and we’re saying that in 2016, CapEx will be approximately EUR 200 million. So we are continuing to invest into growth. We continue to need the CapEx investments in manufacturing synergy capture regarding the AkzoNobel Paper Chemical acquisition, really would kick in, in 2016. We’ll need to finalize the CapEx in Klabin. And then we are reserving capacity to invest into CEOR growth and into pulp chemical growth. We made even a press release earlier or end of last year that good demand for pulp chemicals is something that will necessitate or allow us to invest in more capacity to pull pulp chemicals in the Nordics.

So market environment. Really the way we’re looking at the market is obviously we’re looking at the market where GDP growth is only modest, volatility will continue. We right now look at input costs, i.e. raw material costs, will remain at low level. The activity in shale not immediately picking up. There is a growth driven by regulatory enforcements in water treatment and we’re seeing good opportunities to grow in Pulp & Paper, and hence have positive long-term market growth expectations.

So I guess that market environment we’re giving our outlook for 2016, which is simply that revenues and operative EBITDA will increase in 2016.

With that, I’ll stop my remarks and hand over to Olli. Olli will now manage the Q&A session.

Question-and-Answer Session

Olli Turunen

We are ready to take your questions. So please ask your questions, and before that, state your name and company. Do we have questions here in the auditorium? Markku?

Markku Järvinen

Markku Järvinen, Evli. So just start with Oil & Mining. Are you still of the view that the business will grow this year regardless of oil price?

Jari Rosendal

Well, obviously its dependent on that we get the erosion on the shale business to stop and then we can advance the CEOR deals. And at the moment it’s still looking positive but we obviously have to get those to a delivery phase. Our underlying mining business is doing fine and the other verticals is doing walk-line [ph] so that’s the situation.

Also I’d like to reemphasize after ‘14 we said that of that revenue of EUR 380 million, less than half was shale business. But now that business is come unfortunately down so much that the half is much smaller. So the impact there is not any more that big, but I believe that having successful EOR deals and starting the deliveries, we have an opportunity to get back on growth path.

Markku Järvinen

Okay, thank you. And further on that, U.S. business on shale side has been on a declining trend throughout 2015, sort of from external point of view it doesn’t look like the business is improving going into 2016. What’s your sort of experience sort of going from October to December and now that January? Is it weakening further and do you expect to see more bankruptcies on your client side?

Jari Rosendal

Bankruptcies are sort of hard to estimate. I am actually surprised how little there has been that we experienced one and there hasn’t been that many more. So in that way, the industry has been quite resilient. We saw decline from Q3 to Q4, but then it starts to be such that we get orders that are quite sizable to the relative monthly sales so it fluctuates. So we can see a bit decline. I expect it to bottom out at some point, and then get these Oil Sands deals that we have now already made and continue the EOR deals and the new EOR deals.

Let's remember that it’s a EUR 350 million segment. So in EOR deal, we are talking tens of millions, so 10 million, 20 million, 30 million a year type of deals. So one deal is already quite a big improvement to the overall segment volume because it’s such a small base at the moment.

Markku Järvinen

And the segment for Q4 fell to EBIT loss. Is the view now that you can sort of replace the volume that you’ve lost through EOR and rather than start to sort of restructure cut costs?

Jari Rosendal

Well, obviously we have to look at cost and we continued to look at costs. So we did in the second half the closure of one of our sites in U.S. and consolidated that. We did some other capacity adjustments in our remaining three sites in North America and took out cost, not all of that cost impact is in the full-year numbers yet. And then we are growing in Oil Sands that we know. We are growing in EOR, but obviously we have pending deals that we need to get active. So that’s the outlook there and Petri then was alluding to some of those one-timers that are not non-recurring items but rather things that took it to a negative thing. Yes, Oil & Mining situation wasn’t easy in Q4 and I would follow it and I follow it myself rather than how do month-on-month does it develop because the basis for following Q1 last year and following today’s situation Q1 that’s not a meaningful comparison at all.

Markku Järvinen

Okay. Then, still if I could ask on Paper. First, AkzoNobel, did you - I’m sorry, if I start with Nanjing. Did you reached breakeven at Nanjing in Q4? And then on AkzoNobel. I’d like to ask, did you achieve any of the EUR 15 million synergies in 2015? And then third on Klabin. Do you expect positive EBITDA contribution in 2016 versus 2015?

Jari Rosendal

Well, I’ll start from Klabin. Obviously, we only had costs from Klabin last year, because we had the manpower already hired and training and prepping up for the startup and testing. So no revenue from Klabin last year, but yes, some costs and that’s operating cost, so we don’t put them into one-timers. So definitely when we start in the coming months and start generating revenue and then ramp-up the full capacity on the back of customer ramping up, we expect it to contribute already next year and then the full contribution in 2017.

In Nanjing, we were only able to ramp it up to full capacity, the main line ASA in the last months of the year. So it’s going to the right direction. We don’t follow Nanjing profitability assay [ph].

Petri Castrén

If I may continue on that one. So we don’t disclose plant profitability simply. We do follow it though obviously, but we have a wider organization that sells not only Nanjing product in Asia Pacific, so still bring product from Europe. We still use the Akzo sites that we got from former Akzo sites. So in a sense, our main sort of thing is the APAC profitability for Pulp & Paper and it took a major jump forward during last year.

Markku Järvinen

And the synergy number, was it still sort of...

Petri Castrén

We were able to gain some single millions of synergies last year, but the main bulk starts coming in this year and tail-end in ‘17. What we now are doing is we’re investing into our existing sites to in-source those 10 contract manufacturing sites that’s staying in the Akzo Group, and one by one when we get those investments ready, we’ll move the manufacturing to ourselves, obviously when we’re buying the services from Akzo our margins are quite moderate and when we get to our own production, we gain the synergies.

The other thing is that we have this cross-selling thing that is now proceeding really well. I’m really pleased about that how the team is doing and then we have overlapping products that we combine the product portfolio, and then step by step convert our customers to the products that we want to keep and then kill that and get the cost and complexity out. So those are the actions that we are now focusing on, and yes, some single millions last year and then more this year.

And on the EUR 50 million, we are on track and on the cross-selling we are definitely on track.

Markku Järvinen

Okay. Thank you.

Olli Turunen

Thank you. And then we’re ready to take questions over the phone. Operator, please go ahead.


Thank you. [Operator Instructions] And the first question comes from the line of Mikael Doepel from Handelsbanken. Please go ahead. Your line is now open.

Mikael Doepel

Thank you. Good morning everybody. A couple of questions. First of all, in terms of the Oil & Mining business. Would you say that in terms of earnings, we have seen quite a bit of declining earnings obviously in that division now came down and the EBIT line did a minus 2.4 in Q4. Would you say that this is the low point in terms of earnings for this division going forward, or do you still seeing further downside risk going to 2016?

Jari Rosendal

I think the first and second quarters still will remain soft. Whether is this the bottoming out? Visibility is not very good to be honest, but I would say that if we look at the three or four areas of the business meaning mining, the other verticals, traditional oil and then shale, the question is around shale and the volumes from there are not huge any more. The other areas are unaffected and then we get the Oil Sands and EOR compensating. But to give a specific answer, we’d be looking into a crystal ball at the moment. The drop won't be significant if there is further drop from shale.

Mikael Doepel

Okay. Well, that’s fair enough. Then in terms of the Pulp & Paper, what’s the timeline on fibrous [ph] project and what percent that’s going to look like?

Jari Rosendal

So you’re referring to the project in Brazil?

Mikael Doepel

No. The [indiscernible].

Jari Rosendal

The [indiscernible]. Sorry, I couldn’t make it out. I believe they are starting up in ‘18 - ‘17 or ‘18 their production.

Mikael Doepel

Yes, I know that. But in terms of making additions on chemical supplier, what kind of a timetable we’re looking at here?

Jari Rosendal

Well, we won't comment on ongoing negotiations, but at the moment we have renewed our contracts through the Nordic players for next couple of years and then the additional capacities are under negotiation as we speak. Then their time schedules will dictate our time schedules but it’s self-evident that revenue streams won't start up until the new capacity comes on line.

Mikael Doepel

Sure. Okay and then just one final question with regards to your guidance. What kind of a visibility do you have for the full-year and what would you say are the key risk or risks to that guidance?

Jari Rosendal

Well, I’m quite comfortable on the outlook of our Pulp & Paper, and we’ve indicated that we have quite a few growth initiatives ongoing. We have the Brazilian pulp chemicals plant starting up bringing growth, and especially bottom line growth. We have now APAC running and Nanjing running in China at full steam. The Akzo deal will come in at full-year basis, was only eight months last year and the cross-selling growth which is roughly EUR 25 million a year of the cases that we told about today, those will start kicking in middle of the year. So I feel quite good about our Pulp & Paper outlook is going.

The same in M&I. There might be some price erosion coming from the raw material basis, but at the end of the day, like Petri was saying, the volumes went up quite nicely last year. Situation is calm as it can be. There is some changes in the raw material, secondary raw material kind of feed climate or environment relating to the titanium oxide industry, but short-term that can be thing to the industry, but long-term it takes over supply away from the industry and that’s relative experience for us. So this year, M&I, I feel quite comfortable, obviously we need to watch that as we do Pulp & Paper. So the main question is then how do we improve our operations and how do we improve our operational excellence? That continues to be high on our radar, not only in Oil & Mining but across the board.

We want to grow but we don’t want to grow our fixed cost base in the same ratio as the top line growth. And then the question is that when do we get good grip on Oil & Mining and get to advanced and the Oil Sands and EOR deals further and expect that starts to be visible some time middle of the year and we’ll keep you posted as we progress in that.

Mikael Doepel

And just a follow-up from a continuation on that. What would you say are the key risk for 2017 targets?

Jari Rosendal

Obviously our Pulp & Paper is well on track and I have no concerns there. We do have work still to do and good opportunities. I’d say M&I is ahead of our schedule and now we need to keep that ahead of our schedule. And when we look at the 2.7 we jumped in one year to 2.1 to 2.4, we’ve got two years to go to 2.7. So I feel that is a realistic target. Now we’re for the first time in a long, long time over 12% in operative EBITDA margin, it’s still far away from our level of 15% but obviously this oil change hasn’t really helped us, and not giving up yet. We need to push there and get to the next levels. We have two years to do it and the Oil Sands, EOR, going into mining and perhaps maybe some shale at some point at least leveling off or maybe even coming back, but still have a good chance of getting there, but it hasn’t gotten any easier.

Mikael Doepel

Okay. Thank you very much.


And the next question comes from the line of Anssi Kiviniemi from SEB. Please go ahead. Your line is now open.

Anssi Kiviniemi

Yes, hi. This is Anssi from SEB. Just couple of questions, mainly regarding Oil & Mining. Assuming that these oil prices prevail also in 2016, how comfortable are you stating that you will be on a flat figures in 2016? Thanks.

Jari Rosendal

Well, as said before, we don’t expect the oil price to recover this year. We don’t bank on that. That’s not our plan. We’re looking at 30s and so where it will go we won't even take estimate on that because there are professionals that are trying to take an estimate, even they can't do that. So what we are now looking is that our mining business is going well, our other verticals are going in, we are investing now into winning more business from Oil Sands and EOR and that’s the game we want to turn around. I would not this year follow on versus last year’s quarters. I would follow sequentially on how the development is and that’s how we will be prevailing the information on that are we turning the both around and getting back on the growth path.

Anssi Kiviniemi

Okay, thanks. Then the growth businesses, have there been any delays on your initial thoughts how you’re going to roll out the EOR business or Oil Sands, or are there some projects that are postponed or on hold? Thanks.

Jari Rosendal

Actually they came on last year faster than we felt. Our first focus was because we can't be everywhere that we focus on shale but when that ship turned, we immediately shifted our focus also deferred all of our CapEx. So we didn’t put any CapEx into the shale market side. And then these deals that we now have, they came on faster than we thought. We are now developing the other deals that are in the working. Some are going in schedule, some are going a bit late, but I would say on average, there is still good potential and the companies are looking at these on a longer run. They are not looking at the quarter basis. They are not looking at an annual basis. They would be bumping for years or decades or they look at the longer term.

One project we did had that we expected that could deliver couple of million this year, that was put on hold in Argentina, was it, or South America. So there are projects that are put on hold. And the industry seems to be like so that those projects that are ongoing and are already bumping polymer, they continue, that’s at least what they are telling us. Perhaps there is more consideration are they going to be new ones, and we are more focusing now on those ones that are already doing it and then bringing our technology there.

Anssi Kiviniemi

Thanks. Then my last question regarding Municipal & Industrial. The margins didn’t improve in Q4 in a similar way that they have been improving in 2015, and can you give me some kind of a ballpark or indication that how much did kind of Q4 specific reasons sales mix and elevated cost affect the margins so that I could get a better feeling of how 2016 and onwards would look like? Thanks.

Petri Castrén

Yes, this is Petri. So we probably tried to address that and given you some flavor. Obviously Q4 is impacted by seasonality as well. So if you take the sequential view from Q3 to Q4, off memory now Q3 was 14.5% or something like that EBITDA margin and we dropped to 11.5% or 11.6%, so three points of drop. One was clearly of seasonality and then maybe couple of points of these temporary issues, which like I said.

Anssi Kiviniemi


Petri Castrén

Part of it meaning the transport issues related to this raw material stream will take a quarter or two to sort out and then perhaps one point of it was really sort of that should not repeat itself.

Jari Rosendal

The underlying strength in M&I hasn’t really changed. So this is more of what happened in the matter of 10 weeks.

Anssi Kiviniemi

Okay, great. Thank you.


[Operator Instructions] There are no further questions registered. I hand the call back to you.

Olli Turunen

Thank you. There are no further questions here in the auditorium. So this concludes the presentation. Thank you for the attendance and have a good day.

Jari Rosendal

Thank you.

Petri Castrén

Thank you.

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