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Edited Transcript of KEMIRA.HE earnings conference call or presentation 26-Apr-17 7:30am GMT

Thomson Reuters StreetEvents

Q1 2017 Kemira Oyj Earnings Call

Helsinki May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Kemira Oyj earnings conference call or presentation Wednesday, April 26, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jari Rosendal

Kemira Oyj - Chairman of Management Board, CEO, President and MD

* Olli Turunen

Kemira Oyj - VP of IR

* Petri Castren

Kemira Oyj - CFO and Member of Management Board

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Conference Call Participants

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* Anssi Kiviniemi

SEB, Research Division - Analyst

* Ben Gorman

* Johannes Grasberger

Nordea Markets, Research Division - Senior Analyst of Materials

* Markku Jarvinen

Evli Bank plc, Research Division - Analyst

* Mikael Doepel

Handelsbanken Capital Markets AB, Research Division - Analyst

* Panu Laitinmaki

Danske Bank Markets Equity Research - Senior Analyst

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Presentation

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Olli Turunen, Kemira Oyj - VP of IR [1]

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All right. Good morning, ladies and gentlemen, and welcome to Kemira's First Quarter 2017 Results Presentation. My name is Olli Turunen, and I'm Head of Investor Relations at Kemira. Today's presentation will be held by our President and CEO, Jari Rosendal, and financials will be covered by our CFO, Petri Castren. After the presentation, you'll have a chance to ask questions here in the room and also over the phone. We are ready to start. So Jari, please go ahead.

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [2]

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Thank you, Olli. Good morning. The start for Kemira's year was twofolded. I'm pleased how our revenues grew organically for all the segments and oil and gas markets rebounded with good revenue recovery. Profitability, however, was below last year's first quarter, and that's mainly due to 3 main items. Sales prices are still lower than last time -- last year this time, although the decline has sequentially stopped. Tightness in especially ethylene and propylene-based products, which we do not buy directly but are raw materials to our suppliers, they increased clearly. Petri will elaborate that a bit more later. And last February, we said that we're not worried about oil-related products, but now oil price has been flat, but ethylene and propylene has come up quite a bit.

In addition, we had some force majeure and supply distractions, one was the Huntsman Pigment fire in Finland end of January, they are a customer to us and a supplier to us, so that had an effect. We also have had some other supply issues. We have announced several price increases to match the market situation.

I always show this 4 quarter circle on what we are doing in the big picture on growth. We were able to deliver growth. We are working on our investments. We're seizing opportunities to enter new markets and introducing new products to the markets, so that's ongoing. Acquisitions, we always look at very carefully. Akzo integration is going really well, no really new things to report on that. And of cost discipline always high on our list. And now as a new one on top of BOOST. So BOOST go-alive has taken with the Odyssey road transportation in North America beginning of April, so that's now really starting to gradually deliver. Next step is to do the same thing in Europe, so our BOOST program of gaining EUR 20 million to EUR 30 million benefits in 2 to 3 years is ongoing and this road transportation is a big component of that.

In March, we also announced that we will change our organization and go from 3 segments to 2 segments, and that will bring also additional benefits and that's in the efficiency quadrant of this circle.

Looking at the Q1 financials. Revenues increased 5%. Our organic growth on the group level was 2% and Oil and Mining advanced really well, 16% growth.

Operative EBITDA was under pressure. I said sales volumes were at good level, but prices below last year level. We are obviously reacting to this and have already reacted some months ago. Sudden increases in ethylene and propylene were a factor and supply disruptions in Huntsman, I mentioned, the other one is the fatty acid chlorination in China, which is hampering our AKD business.

If I go to Pulp & Paper, APAC and South America were driving growth, while EMEA and North America were stable. Huntsman affected here in topline and in bottom line as they are a customer to us in chemicals and now they're not running. The chlorinated fatty asset is a raw material to our AKD size, wax production. We have the biggest single unit in China that supplies us internally all around the world and then we sell to China and Southeast Asia. And we have not been able to run our plant at full capacity. Actually, we've been running it at times at below 50% capacity and this have had an effect to us. The Huntsman effect was about EUR 1 million negative and the fatty acid chlorination not having it had about EUR 1 million effect and we will see some of these effects also in Q2.

I said synergy for the Akzo is going well. We had 10 plants that we want to in-source now. We've done 7 and 1 was done in Q1 and we have 3 to go, 2 of those during the summer and the last one in the last quarter, that's when we will be capturing the 20 -- full 20% -- I'm sorry, EUR 20 million run rate of synergies.

Largest investments in Pulp & Paper area are going well. The new bleaching plant in Brazil for Klabin is now running well and our expansion in Finland for bleaching chemicals (inaudible) and on the project is proceeding on time and budget and will be up and running during the fourth quarter of this year.

Oil & Mining, especially the fracking activity has really rebounded. When you look at the rig count, which is an indirect indicator, that's been in line and our volumes have doubled from the bottom now. And profitability still is under pressure. The ethylene/propylene hits Oil & Mining polymers, which is most of the products that are being sold in this business, so that's still there. But pricing is clearly still below and we have now increased price increases.

Oil sands is a positive development. We've been able to grow that business in Canada and in CEOR, we do have field trials ongoing with one major player and as before, we cannot comment this too much, but things are proceeding well in that test run.

Municipal & Industrial, solid performance. Some issues there. Also Huntsman issues hits this area. Volumes grew 3%, which is good and prices are -- on especially the polymer side below last year. We have introduced price increases. North American business has now improved, but still a lot of work ahead of us to get it to a reasonable level and ethylene and propylene hits here, too.

Huntsman is a supplier for iron coagulants in the Nordics and this will be hitting us also in the future. Short to midterm, we are now covered with some increased cost. Longer term, we have to still do some work to cover that. Petri will open up the Huntsman case more in his presentation.

Then in beginning of March, we announced that we will merge Oil & Mining and Municipal & Industrial segments to Industry and Water segment. After this change, we will have 2 roughly equal size and critical mass having segments with less complexity in the way we operate. This change is expected to bring EUR 15 million to EUR 20 million savings and we'll reach the run rate by the end of the year. We are not exiting any businesses, and we are not changing any strategies. We will execute our strategy just through these 2 segments. We will continue to report the oil and gas business revenues separately also in the future under the Industry and Water segment reporting.

The main objective of this change is to simplify Kemira's way of working and further improve our capability to serve our customers. So how does the business roughly look like? If I start from the upper left-hand corner, on the application area, 15% from -- of last year's combined numbers is oil and gas-related business, 75% is water treatment and mining business is mostly water treatment of dewatering and treating the dewatered waters in concentrates and then 10% are other miscellaneous applications.

Left-hand side down, you can see there's geographical split from last year numbers. So 40% roughly to Americas, 55% to EMEA and 5% to APAC. And then if we look at the product split, 45% coagulants, 35% polymers and 20% other specialty products. And you can also see the customer split of industrial of 60% and municipal customers 40% of the revenue.

All of our coagulant plants and all of our polymer manufacturing units will be managed by this new combined segments and part of that production will also go as before to Pulp & Paper customers through Pulp & Paper numbers. We will start reporting the new 2 segment structure as of Q2 this year onwards.

As a summary, we had a strong revenue in Q1, but profitability due to the points I mentioned, was disappointing and below last year. Obviously, we are doing a lot of things to mitigate that and improve profitability. Execution of the new organization is underway and is planned to be operational as of June 1. BOOST and especially the rollout of road transportation is now progressing with the go-alive started in beginning of April in North America and our major investment proceeding according to plans, so no change in that. And repeating our guidance, we expect our operative EBITDA to increase from last year.

This point, I'd like Petri to continue with further number details.

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [3]

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Thanks, Jari. As Jari was explaining what was going on in the quarter, I think the 3 points that are really worthwhile and I try to drill in is that: First is importantly a return to top line growth and that's very important. Profitability was under pressure and again, I'll elaborate a little bit more the reasons behind that. And thirdly, perhaps a bit more less important than that I'll give more detail on the Huntsman situation and how that will play into our numbers in 2017.

So organic growth 2%, really driven by volume growth across the board, but Oil & Mining 20% was the biggest contributor. Volumes grew in other segments as well, but in those segments oil and -- I'm sorry, M&I and Pulp & Paper, the declining prices on a year-on-year comparison were still offsetting much of the volume growth.

Profitability was impacted by the turn in raw material prices. As we compare raw material prices year-on-year, they were about flat. But with a sort of a U-turn -- U-shape that we are clearly seeing and on a sequential basis, the raw material prices during the quarter clearly turned up and I'll elaborate that a bit more when I share my traditional oil -- raw material slide.

As Jari said, Huntsman Pigments in Finland purchases steam and electricity through Kemira and also some other chemicals from us. Obviously, due to the fire, these purchases were impacted and we lost about 5% -- EUR 5 million or 1% of quarter revenue and the loss on the gross margin for us, it was about EUR 1 million and it was primarily hit on the Pulp & Paper segment. And again, I'll elaborate that a bit more later.

And regarding FX, it was the dollar that was helping us. While this organic growth here is about 0, positive 0, the underlying growth was clearly at the 2 point -- 2.5%, 3% organic growth rate. So 2 impacts were here. Like I said, the EUR 5 million in loss of sale to Huntsman and then about equal impact from the chlorinated fatty acid situation. Ignoring those, the organic growth for the segment would have been between 2.5%, 3%, within our target of growing double the size of the market growth. Profitability was also impacted by the raw material trend less so than Oil & Mining and also continuing competitive pressures.

On the positive side, you remember the key customer had a long maintenance break that impacted heavily us on Q4. It still had a minor impact in Q1, but that issue is now over. And as we go forward, we will -- that's going now on a full, smooth run. 20% volume growth was clearly driven by North American shale. Jari already mentioned that the volumes were double from the bottom. We also saw mining improving due to the increased activity in copper mining as well as a new sizable customer win for us. Profitability was disappointing as one would have expected additional volume would have really flowed better to the bottom line.

Oil & Mining business, particularly for oil and gas customers, is really polymer business and which -- and polymer business uses heavily oil-based raw materials like acrylonitrile and various acids. The pricing of these raw materials is typically formula based and the base in the formula is often propylene and/or ethylene. As you will see couple of slides later, there was a sudden, if not even a dramatic increase in these prices, particularly in North America. If you remember carefully, I warned that after Q4, but the impact was even greater than what we expected in -- after January. We have now offset this by announcing price increases, but, obviously, the impact of price increases comes with a delay and so there.

Volumes continue to grow also in M&I with North America being the relative bright spot with both volumes and profitability improving. Some better cost management there. Profitability was negatively impacted by the same raw material development, but to lesser extent, again, than in Oil & Mining as most of the polymer business is in Europe and the raw material price increase was not as dramatic in Europe as it is in North America. Some of our fixed costs were also higher due to maintenance costs during the quarter that they were higher than anticipated or projected.

But let's go into the raw materials slide and let's start with the right side of the slide. Variable cost increase is now, clearly, it is impacting us over the portfolio of products. As you saw from the variance analysis, year-on-year sales prices were about 3% below last year. But again, sequentially, the price development is about flat.

The story and perhaps the surprise for the quarter is the propylene price hike, particularly in the U.S. As I said, we saw it coming in January, but really the magnitude caused a surprise to us. So 68% was the decline -- was the increase in the propylene price between December of 2016 and March of 2017. So dramatic increase and this increase was not -- what's important to remember, the oil price is actually down in the same time frame. So this is not oil driven, but it is a temporary constraint, which are caused by increased demand for downstream derivatives, like polypropylene, ongoing cracker turnaround and production issues limiting supply and particularly delay in start-up of a one new production facility.

So we expect that this is a temporary issue and by summer should return to normalcy or the situation will alleviate. In fact, April prices are down already somewhat from the March level. However, it's still fair to say that we expect the situation will continue to create margin pressure for us through Q2 and then ease in the second half of the year.

Now let's go to the bit more on the Huntsman fire impact. The raw material that Huntsman supplies to us is copperas and as Jari mentioned, it's a key raw material for production of iron coagulants. We also sell electricity and steam and other chemicals. Huntsman has officially, or has themselves said, that they expect to gain full capacity of the facility by end of 2018 or actually approximately -- around the end of 2018 and with output around 40% by end of Q2 or within Q2 of 2018.

As I said, our estimation that in Q1 we lost EUR 5 million revenue and approximately EUR 1 million profit because of this. In the coming quarters, we expect that this margin loss will be between EUR 3 million to EUR 4 million, before insurance coverage and this is important to note. As Q1, first of all, the impact was only 2 months rather than 3 months. And secondly, we had raw material storage and now the raw material issue is starting to be more problematic starting from Q2 onwards.

We have a business interruption insurance policy that supply -- that covers supplier force majeure issues up to EUR 10 million. So far -- and we have a good dialogue with our insurance company, not formal decision yet, but it is our estimation that we will receive compensation for most of the gross margin loss for 2017. So there will be perhaps some impact in 2017 because of the delay issues of getting insurance coverage, but most of the loss we expect to be covered. In Q1, we did not receive any insurance coverage, so we didn't recover or recognize or receive any compensation in Q1.

Finally, on CapEx. Q1 CapEx was somewhat higher than in Q1 '16. However, this is sort of a timing of projects and we expect that full year '17 CapEx will be around EUR 200 million. So no change in that guidance.

With that, I'll finish my remarks, and we're ready to take some questions with Jari. Thank you.

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Questions and Answers

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Olli Turunen, Kemira Oyj - VP of IR [1]

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All right. Let's take questions here first and then over the phone and before asking a question, please wait for the microphone and state your name and your company. Any questions here? Markku?

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Markku Jarvinen, Evli Bank plc, Research Division - Analyst [2]

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Markku Jarvinen, Evli. Could you comment on the raw material development now going through further quarters? I mean you are sort of -- year-on-year, you are now flat in raw materials. Do you expect that to start moving up as we move ahead in 2017?

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [3]

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I think we have communicated that we expect a small increase in raw material basket. Actually overall through the basket, the raw material prices increased Q1 versus Q4 about 3%. We expect a further increase Q1 over Q1, a lot much driven by the propylene and issue that I mentioned and then starting to ease on the second half of the year.

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Olli Turunen, Kemira Oyj - VP of IR [4]

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Next question here.

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Anssi Kiviniemi, SEB, Research Division - Analyst [5]

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Anssi Kiviniemi from SEB. You highlighted the AKD issues in China. Could you elaborate a little bit more what is the impact? How will it come? And how long lasting is the issue?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [6]

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There is a raw material o a [throttling] process there where we chlorinate fatty acids and this chlorination capacity has been limited in China. And therefore, we haven't been able to produce as much as we could sell. The impact was roughly EUR 1 million in first quarter to our profits and loss of several million of sales. We have now worked really hard to mitigate this and during end of second quarter, we start to see now it easing off, but we will have some effects from that during Q2.

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Anssi Kiviniemi, SEB, Research Division - Analyst [7]

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Okay, great. Then one question on Oil & Mining and I guess, looking at the figures, the U.S. shale seems to be really booming and supporting your [folios], but kind of the margins are somewhat disappointing. So how should we think about the mix going forward on that segment? Does the Q1 development give a accurate picture for what will be happening or what we should be expecting for Q2? Or how should we kind of look at that segment?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [8]

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Well, maybe booming is not the right word yet, because we're still on a lower level than in the boom times. But certainly, it has now recovered and shale is part of that. But on a comparable basis, oil sands also has contributed to that. And sales prices due to the lower raw materials, obviously, have come down since last year. And now we are on an upward trend, but it takes 1 quarter or 2 to start getting those to bite and that's where we are working hard.

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Olli Turunen, Kemira Oyj - VP of IR [9]

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Do we have further questions here in the room? If not, operator, we are ready to take questions over the phone.

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Operator [10]

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(Operator Instructions) Our first question comes from the line of UBS Ben Gorman.

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Ben Gorman, [11]

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And two quick ones from me. And first of all on specifically Pulp & Paper and competition, how are you seeing that develop? And is that still quite a negative impact on pricing and do you think that is going to continue through the year and with this little offset, obviously, of the raw material pressure? And secondly, in terms of saving of the EUR 15 million, EUR 20 million from the cost -- from the restructuring. And do you have any more information in terms of when you expect some of this to hit in Q2 and beyond? And how much of this is particularly related to the headcount?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [12]

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Okay, I'll take the first one, if Petri takes the second one. So there was really tight competition, especially in APAC and North America last year. Obviously, competition in the markets hasn't gone anywhere, but I don't see the intensity has increased. And then some of these supply disruptions, obviously, play into our cost base. So we are also trying to introduce price increases in the Pulp & Paper, or at least certainly in the polymers area. So those are actions to mitigate that. Petri on the?

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [13]

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I'm assuming the question was referring to the cost savings that we get from the organizational efficiency. So that we have announced that it will be between EUR 15 million and EUR 20 million and we have estimated or calculated really the savings that we will get by the end of the year. So at the end of year, we are at the full run rate. I would say that you'll see benefit of perhaps 1/3 of that in the second half of it and rest of it will be the benefiting in 2018.

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [14]

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And the onetime costs -- typical onetime costs start mostly hitting in Q2 when we book them, some might slip on to Q3.

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [15]

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There was a question whether this is mostly headcount. If you allow me, I'll just confirm that it will be mostly cost -- headcount savings.

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Olli Turunen, Kemira Oyj - VP of IR [16]

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Please go ahead.

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Operator [17]

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Our next question comes from the line of Danske Bank, Panu Laitinmaki.

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Panu Laitinmaki, Danske Bank Markets Equity Research - Senior Analyst [18]

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I have three questions. Firstly on the Akzo synergies, you are guiding them to be a EUR 20 million run rate at the end of this year. What is the current run rate that you are at now?

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [19]

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We are -- no, I didn't follow it for this -- we're probably around three quarters of that, about 75% run rate of that. So let's say around EUR 15 million out of the EUR 20 million.

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Panu Laitinmaki, Danske Bank Markets Equity Research - Senior Analyst [20]

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Okay. Secondly, you mentioned the higher fixed costs and specifically, manufacturing costs as one reason for impacting margins in most divisions. Why is that?

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [21]

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Well, what we would like to say that there was perhaps a couple million of extra costs that were coming out of number of areas. Some of it is really maintenance costs for some plants management -- plant maintenance and there was really nothing major, but I think the only thing that I'd like to say here is that if there was about EUR 3 million of this extra cost, it's something that shouldn't keep repeating itself, but rather there was a couple million of this extra costs in the first quarter.

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Panu Laitinmaki, Danske Bank Markets Equity Research - Senior Analyst [22]

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Great. And the final question is on the guidance and how should we look of the remainder of the year. You are now EUR 4 million behind last year in EBITDA and are guiding the full year to be higher. And then the Huntsman might impact you by EUR 3 million to EUR 4 million per quarter, which is EUR 12 million at worst. So could you go through what are the positive drivers and how confident are you on the guidance at this point of the year given the unplanned headwinds that you're having with, for example, Huntsman?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [23]

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Obviously, we are not changing our guidance and we will increase. The Huntsman case was prior to insurance coverage where we have a fairly good line of sight that we will get up to EUR 10 million of coverage. So the Huntsman impact is rather small at the end of the day. We still have some of the supply issues hampering us in Q2. But then those should be easing off and as we roll these price increases, which we started in Q4 already continued in Q1 and we'll look at carefully when to do the next ones. When they start rolling into the prices, second half we're expecting to be then stronger and we meet the guidance.

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Panu Laitinmaki, Danske Bank Markets Equity Research - Senior Analyst [24]

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Can I have a one follow-up related to that. Have you -- already in Q2, they are now well in the quarter, have you seen improvement in the trend in terms of prices increasing and how the raw materials are being compensated?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [25]

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I'll just put it this way that we have introduced price increases. We are getting some movement through as they go and as contracts roll over. Obviously fixed-price contracts those stay in the original price levels and once they roll over, we negotiate new prices. Not everything will go through to every customer, but certainly, we are pushing to get as much through as we can.

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Operator [26]

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Our next question comes from the line of Nordea, Johannes Grasberger.

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Johannes Grasberger, Nordea Markets, Research Division - Senior Analyst of Materials [27]

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It's Johannes from Nordea. First of all, the question on prices as well. Maybe if you could just tell us what the customers are saying back to you after hiking up prices several times the other day, but I suppose, it seemed easier to pass on the increases in Oil & Mining segments because the demand is coming up so strong. Is that a correct assumption and maybe the prices are a bit more sticky in rest of the segments?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [28]

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Well, if we leave the customer comments to customer privilege, but, obviously, they are understanding, but not accepting all the time. And in Oil & Mining, the dynamics are in the oil and gas industry, the dynamics is such that we don't have so many long-term contracts that those are almost order by order. So it's easier there than in M&I and Pulp & Paper where we have more long-term contracts and we then have to wait when the contracts roll over.

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Johannes Grasberger, Nordea Markets, Research Division - Senior Analyst of Materials [29]

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Right. On that note, I'm actually pretty interested about the new organizational change. Because what I'm thinking here is that maybe you could sort of talk about the future sales synergies in combining these 2 divisions, because my thinking is that you have this one unnamed main competitor that who has the core business in the oil markets and now that the oil markets are bouncing, I suppose they are sort of going back to their own core businesses, which could open up some market shares in the North America in Municipal & Industrial segments. And what I'm trying to get here out of this is that when you combine these two divisions are you able to ramp up some volumes in the U.S. markets to Municipal & Industrial segments because basically there is going to be less of pricing pressure from other players, which are going back to Oil & Mining?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [30]

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Well, certainly, competition will not disappear. So that will be there and it differs from region to region. But certainly, we will have many operational synergies from combining these 2 segments on management level, using both sales forces flexibly. And then also looking at where to deploy our capacity from the manufacturing sites. So there has been overlap and there will be efficiencies. For instance, in North America, we haven't been selling a lot of polymers to municipal customers and now that opportunity is more open. I'd like to point out also that this is not only the 2 segment combination, we are also streamlining Pulp & Paper way of working internally, doesn't seem externally that much, but there is a change and optimization on how that structure is going to work and removing some management layers. And we're also looking at all of our support functions to better support these 2 segments in the future.

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Johannes Grasberger, Nordea Markets, Research Division - Senior Analyst of Materials [31]

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And just on the cost savings part, so EUR 15 million to EUR 20 million run rate. So now we're talking about actual fixed costs and no assumptions of sales synergies, i.e. higher capacity utilization at the plants?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [32]

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The EUR 15 million to EUR 20 million is a cost saving and coming from headcount reduction. So we have a good line of sight to that and we have not counted in any possible sales synergies into that.

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Johannes Grasberger, Nordea Markets, Research Division - Senior Analyst of Materials [33]

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All right. And then on the cost measures, can you tell us a number how much was actually visible in Q1 of the plant overall cost measures that are supposed to come in during 2017?

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [34]

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So from the EUR 15 million to EUR 20 million, practically nothing was in Q1. We will see very little in Q2 and then starting to roll it out. And as said earlier, Q2 will be the bulk of onetime severance-related costs and maybe some still in Q3.

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Johannes Grasberger, Nordea Markets, Research Division - Senior Analyst of Materials [35]

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On the Akzo synergies sequentially, was there anything coming in, in Q1 versus Q4?

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [36]

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Well, there was one of the CMA, contract manufacturing arrangement, was ending at the end of the quarter. So the run rate is sort of picking up from the second quarter from the third quarter level, but it is really sort of step changes every time we end up in a contract management arrangements where we get this benefit. So within Q1 not much increase visible, Q2 onwards, yes.

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [37]

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So when we entered the year, we had 4 out of 10 manufacturing contracts still to in-source. Now one has been done and step-by-step, that happens. Please take into account that it's not an on-and-off switch. We have a learning curve of doing that. We also have some double resources. So we are paying for the contract manufacturing, but we have staffed up already the new production at our own site. So it will be a gradual one once we've ramped up and get the quality where we need to. So not an on-and-off switch, but we will be there at the end of the year with the full EUR 20 million run rate.

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Johannes Grasberger, Nordea Markets, Research Division - Senior Analyst of Materials [38]

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All right. My last question is on net debt. So if I now looked at it right, Petri probably can acknowledge whether it's right. But I checked that net debt declined year-on-year in Q1 was basically the first one since 2014 Q1. And my question now is that you had even little bit higher CapEx in this quarter versus last year. What's the sort of the outlook now for '17, and maybe even '18? Are you getting into position where the cash flow is becoming so strong after heavy investment years that we are actually going to see declining net debt levels in, say, next 3 years?

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [39]

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So let me answer it differently. I cannot really sort of confirm whether this was the first time. Obviously, we have sold businesses in the past and received funds. So I would expect that there have been other times when we had even more dramatic changes in the net debt. But I think one that you have to remember is that working capital seasonality that we have and typically -- perhaps unfortunately, we do have this seasonality. So in Q4, we often were able to improve our working capital because our CapEx is -- very much tends to be back-ended towards the end of the year. However, the timing is such that we don't have enough time to pay these CapEx payables, which then are often paid -- typically are paid during the first quarter. Secondly, our employee-related liabilities goes through that that you typically build -- where we build bonus accruals and incentive accruals through the year and mostly pay these off during the first quarter. So the seasonality of such impacts our working capital. So there was in Q4 '16, a big positive development in working capital cash generation through that way, while this reversed mostly but not fully during Q1. And that explains some of the things that you're pointing out.

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Operator [40]

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(Operator Instructions) Our next question comes from the line of Mikael Doepel from Handelsbanken.

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Mikael Doepel, Handelsbanken Capital Markets AB, Research Division - Analyst [41]

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I just have one question left here and just wanted to ask about the Huntsman thing and the insurance compensation that you expect to get from that. Just in terms of the timeline, when do you expect to get that? And how will it show up in your figures because now you had basically a EUR 1 million dent in EBITDA in Q1. You're saying it should be EUR 3 million to EUR 4 million each quarter assuming nothing else happens, but then you're probably going to get the EUR 10 million in compensation. How will you -- when you expect to get this? And how should we model this for the year?

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [42]

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I think the issue when you model the year is that obviously the top line is lost. So the EUR 20 million is lost in terms of the top line in our estimation. And of the roughly EUR 10 million if you kind of sort of combine the EUR 3 million to EUR 4 million of the next three quarters and EUR 1 million for the Q1, roughly EUR 10 million of gross margin loss we expect mostly to be compensated. Not fully, but mostly. So to take your pick of what is not compensated.

I think the line item where it will then show on our own P&L is other operating income, so clearly above EBITDA line but below top line. So that's where it will. Obviously, it depends on the insurance company and how they will react. It is our clearly stated desire that we will get some recovery during Q2 already. So offsetting the impact of Q2, partially, if not mostly, don't know yet because we don't have the answer yet. And it is our intention even -- to recognize this insurance coverage smoothly over the damage time. So not as a onetime payment even if we have received a onetime decision, which I actually don't expect to. Was that enough guidance?

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Operator [43]

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(Operator Instructions)

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Olli Turunen, Kemira Oyj - VP of IR [44]

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Operator, are there further questions?

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Operator [45]

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There are no further questions by the audio system. At this moment, I will now hand the call over to you for any additional or closing remarks. Please go ahead.

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Olli Turunen, Kemira Oyj - VP of IR [46]

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Do we have questions here in the room? No. We're ready to conclude the session. So thank you very much for your participation.

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Jari Rosendal, Kemira Oyj - Chairman of Management Board, CEO, President and MD [47]

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Thank you.

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Petri Castren, Kemira Oyj - CFO and Member of Management Board [48]

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Thank you.