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Kemira Oyj's Interim Report January-June 2009

Published on 2009-08-04. Author : SpecialChem

Kemira's President and CEO Harri Kerminen: "Kemira's operating profit from continuing businesses, excluding non-recurring items, increased by 52% in April-June from the same period a year earlier, which is a very good achievement in the current market environment. The decrease in sales volumes in several customer segments was for the main part compensated by the sales price increases implemented in the second half of last year. Fixed costs in April-June were some EUR 22 million lower than in the same period a year earlier.

I am particularly pleased with the fact that our cash flows after investments turned clearly positive during the first half of the year. Strengthening of the cash flow has been our main focus for this year, and as part of this effort we reduced our net working capital in the second quarter significantly. Thanks to the strong cash flow, gearing took a turn in the right direction.

Customer demand remains weaker than last year, and in addition there is pressure for increases in raw material prices. This makes our efficiency-enhancement program, which we initiated already mid last year, even more important. However, we are confident that our operating profit excluding non-recurring items in continuing businesses will be higher this year compared to last year."

Revenue in April-June 2009 totaled EUR 650.9 million (April-June 2008: EUR 741.5 million). In extremely volatile market conditions, demand for paints and coatings decreased considerably as new construction, building material sales, and housing sales slowed down in all key markets. Pulp and paper chemical sales declined following weaker demand in customer industries. Demand for municipal water treatment solutions remained healthy, but in industrial water treatment demand fell in some customer industries. The Oil & Mining segment also experienced a decline in customer demand and revenue. The demand and price of specialty chemicals supplied to the food, feed, and pharmaceutical industries remained healthy.

Acquisitions had an approximately EUR 19 million positive impact on revenue. The currency exchange effect had an approximately EUR 15 million negative impact on revenue, and the establishment of the joint venture in the titanium dioxide business in 2008 decreased revenue in April-June by some EUR 55 million.

Operating profit for April-June 2009 came to EUR 51.4 million (EUR 39.3 million). Operating profit excluding non-recurring items totaled EUR 53.8 million (EUR 37.2 million). Operating profit from continuing business operations, excluding non-recurring items, was up 52%. Sales price increases were enforced in the second half last year in response to the significant increase in raw material prices last year, which contributed to the increase in operating profit in April-June compared to the same period a year earlier and compensated for the impact of declined sales volumes on operating profit. Other factors contributing to the improvement in operating profit included cost savings and the healthy demand for specialty chemicals. Fixed costs decreased by about EUR 22 million compared to the same period a year earlier. Variable costs increased in April-June 2009 by some EUR 4 million compared with the same period in 2008.

Acquisitions contributed some EUR 4 million to the growth in operating profit. The currency exchange effect had an approximately EUR 4 million negative impact on operating profit. As of September 1, 2008 Kemira's share of the titanium dioxide joint venture's results is being reported below operating profit. In April-June 2008, the titanium dioxide business made an operating profit of approximately EUR 2 million.

The Group's net financial expenses in April-June totaled EUR 10.6 million (EUR 13.9 million). Net financial expenses decreased from the corresponding period a year earlier mainly due to smaller exchange rate losses.

Profit before tax in April-June amounted to EUR 39.6 million (EUR 25.6 million) and net profit totaled EUR 29.5 million (EUR 18.9 million). Earnings per share were EUR 0.23 (EUR 0.15).

Revenue in January-June 2009 amounted to EUR 1,259.6 million (January-June 2008: EUR 1,425.1 million). Acquisitions had an approximately EUR 28 million positive impact on revenue. The currency exchange effect had an approximately EUR 22 million negative impact on revenue, and the establishment of the joint venture in the titanium dioxide business in 2008 decreased revenue in January-June by some EUR 109 million.

Operating profit for January-June 2009 came to EUR 79.5 million (EUR 72.3 million). Operating profit excluding non-recurring items totaled EUR 81.9 million (EUR 64.4 million). Operating profit from continuing business operations, excluding non-recurring items, was up 34%. Sales price increases were enforced in the second half last year in response to the significant increase in raw material prices last year, which contributed to the increase in operating profit in January-June compared to the same period a year earlier and compensated for the impact of declined sales volumes on operating profit. Other factors contributing to the improvement in operating profit included cost savings and the healthy demand for specialty chemicals. Operating profit was eroded by lower sales volumes, particularly in Tikkurila and in pulp and paper chemicals, as well as higher raw material prices and freight costs compared to the same period a year earlier. Variable costs increased by some EUR 29 million in January--June 2009 compared to the same period in 2008, but have decreased during the first half from the high reached at the end of last year. Acquisitions contributed approximately EUR 5 million to the growth in operating profit. The currency exchange effect had an approximately EUR 2 million negative impact on operating profit. As of September 1, 2008 Kemira's share of the titanium dioxide joint venture's results is being reported below operating profit. In January-June 2008, the titanium dioxide business made an operating profit of approximately EUR 3 million.

The annual savings target of Kemira's global cost savings program is more than EUR 85 million. With the planned measures currently underway, the related savings are estimated to materialize in 2009-2010. These savings will affect the entire Group and will be achieved by streamlining the Group structure, organization, and operating models. Fixed costs in January-June were approximately EUR 25 million lower than a year earlier.

The share of associates' results was EUR -5.0 million (EUR 0.3 million).

Profit before tax for January-June totaled EUR 47.8 million (EUR 47.5 million) and net profit totaled EUR 35.6 million (EUR 34.9 million). Taxes totaled EUR 12.2 million (EUR 12.6 million), representing an effective tax rate of around 25.5% (26.5%). Earnings per share were EUR 0.28 (0.27).

Financial Position and Cash Flows

In January-June 2009, the Group reported cash flows of EUR 87.7 million (EUR 14.6 million) from operating activities. Inventories declined from the year end by 19%, or by EUR 60.0 million. Cash flow after investments was EUR 49.5 million (EUR -65.7 million). The cash flow effect from expansion and improvement investments was EUR -26.4 million (EUR -67.8 million). Cash flow from acquisitions was EUR -3.7 million (EUR -3.9 million).

At the end of June, the Group's net debt stood at EUR 1,033.7 million (December 31, 2008: EUR 1,049.1 million). Net debt declined mainly due to the stronger cash flows. Currency exchange rates fluctuations reduced net debt by some EUR 4 million.

At the period-end, interest-bearing liabilities stood at EUR 1,195.1 million. Fixed-rate loans accounted for 49% of total interest-bearing loans. The average interest rate on the Group's interest-bearing liabilities was 5.7% (5.2%). At the end of June, the duration of the Group's interest-bearing loan portfolio was 16 months (December 31, 2008: 17 months).

The unused amount of the EUR 750 million revolving credit facility that falls due in 2012 was EUR 313.3 million at the end of June, or 42% of the total amount. Short-term liabilities maturing in the next 12 months amounted to EUR 159.7 million at the end of June, with commercial papers issued in the Finnish markets representing EUR 100.3 million and repayments of long-term loans representing EUR 44.4 million. Cash and cash equivalents totaled EUR 161.4 million on June 30, 2009. Based on its current structure, the Group will encounter no significant refinancing needs in 2009-2010, since the current loan arrangements cover its financing needs. The terms of the revolving credit facility and other major bilateral loan agreements require that the Group's equity ratio must be more than 25%.

At the end of June, the equity ratio stood at 35% (December 31, 2008: 34%), while gearing was 104% (December 31, 2008: 107%). Gearing declined as a result of the decrease in net liabilities and the increase in equity. The net impact of currencies on shareholders' equity was approximately EUR 2 million. In April, after the Annual General Meeting, Kemira Oyj paid out EUR 30.3 million in dividends.

The Group's net financial expenses for January--June totaled EUR 26.7 million (EUR 25.1 million). The increase in net financial expenses from the comparison period can be attributed to higher average liabilities.

Capital Expenditure

Gross capital expenditure, excluding acquisitions, amounted to EUR 36.1 million (EUR 87.5 million). Expansion investments represented around 44% of capital expenditure excluding acquisitions, improvement investments around 29%, and maintenance investments around 27%. Full-year capital expenditure excluding acquisitions is expected to remain below depreciation.

Group depreciation came to EUR 59.8 million (EUR 67.0 million).

Cash flow from the sale of assets was EUR 1.6 million (EUR 11.1 million). The Group's net capital expenditure totaled EUR 38.2 million (EUR 80.3 million).

Research and Development

In January-June, research and development expenditure totaled EUR 25.0 million (EUR 30.9 million), accounting for 2% (2%) of revenue.

Human Resources

The number of Group employees totaled 9,139 at the end of June (10,673).

Near-Term Risks and Uncertainty Factors

The key risks and uncertainty factors affecting Kemira's business are related to general economic developments and their impact on the demand for Kemira's products.

Sharp fluctuations in global electricity and oil prices will affect raw material prices and, therefore, be reflected in Kemira's performance.

If the industrial by-products Kemira uses as raw materials were to be in short supply or even run out entirely, this could have a negative effect on Kemira's results, especially in Water.

With progressive implementation of the REACH legislation, the number of raw materials and their suppliers may be reduced, which could raise Kemira's raw material costs. Also, registration of Kemira's own products under REACH may be more expensive than anticipated, especially if costs cannot be shared with other companies.

Furthermore, currency exchange rate volatility in Kemira's key currencies may affect the Group's figures.

The Board of Directors' Nomination Committee

Kemira Oyj's Board of Directors has assembled a Nomination Committee to prepare a proposal for the next Annual General Meeting concerning the composition and remuneration of the Board of Directors. The Nomination Committee consists of the representatives of the three largest shareholders as of May 31, 2009, and the Chairman of Kemira Oyj's Board of Directors as an expert member. The members of the Nomination Committee are Jari Paasikivi, Managing Director of Oras Invest Oy; Kari Järvinen, Managing Director of Solidium Oy; Risto Murto, Chief Investment Officer, Varma Mutual Pension Insurance Company; and, as an expert member, Pekka Paasikivi, Chairman of Kemira's Board of Directors.

Damage Claim for Violation of Competition Laws

It has come to Kemira Oyj's attention that Cartel Damage Claims Hydrogen Peroxide SA (CDC), commissioned by hydrogen peroxide industry customers, has filed an action against six hydrogen peroxide manufacturers, including Kemira, for violations of competition law applicable to the hydrogen peroxide business in the period 1994--2000. CDC issued a press release to this effect on April 23, 2009. Kemira Oyj has not received a summons.

Outlook

In 2009, Kemira will continue the performance improvement measures launched earlier. The key focus areas in 2009 will be profitability improvement and reinforcing cash flow and the balance sheet.

The annual savings target of the announced global cost savings program is more than EUR 85 million. These savings are expected to be realized in 2009--2010. Tikkurila accounts for EUR 25 million of the savings target.

The market situation is challenging in many of Kemira's customer industries. General economic trends are generating major uncertainties in customers' and Kemira's business operations. Kemira's revenue in 2009 is expected to fall compared to 2008 due to reduced demand in customer industries, especially in Tikkurila and in pulp and paper chemicals. In 2008, Kemira's operating profit in continuing business operations, excluding non-recurring items, was EUR 126.3 million. In 2009, operating profit in continuing business operations, excluding non-recurring items, is expected to increase from the previous year's level.

Source: Kemira


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