Tikkurila in Russia Senior Vice President, SBU East Janno Paju Swedbank Russian Seminar St. Petersburg, September 3, 2010
Contents Tikkurila Group overview Business environment Business strategy Tikkurila in Russia Russian business environment Conclusions 2
Tikkurila Group overview
Tikkurila in brief Information on Tikkurila Market position in the decorative paint market Customers: Consumers, professionals and the industry Market position: Leading market position in decorative paints in Finland, Sweden and Russia Market area: Northern Europe, Central Eastern Europe, Russia and other CIS countries 1 1 1 Products and services: Decorative paints, industrial wood and metal coatings, phone advisory service (customer hotline), Designer and Contractor Pool, customer training etc. 4
Tikkurila key financials in 2009 Revenue EUR 530.2 million in 2009 Decorative paints accounted for 83% and industrial coatings 17% of the revenue Operating profit (excl. non-recurring items) EUR 50.2 million in 2009 Revenue by segment (2009) Operating profit by segment (2009) * 19% 9% 32% 33% East 30% Finland Scandinavia 30% CEE 20% 27% * Excluding non-recurring items 5
Tikkurila locations Sweden Finland Russia Estonia Germany Poland Ukraine Kazakhstan China Production, logistics centre, sales Logistics centre, sales Distribution centre, sales 6
Revenue (EUR million) EBIT, % (excl. non-recurring) Long term financial development Development of sales and profitability 1996-2009 Major acquisitions and divestments Sale of tinting business in 2000 (Revenue ~MEUR 130) Acquisition of Alcro- Beckers in 2001 (Revenue ~MEUR 190) Acquisition of Kraski Teks in 2006 (Revenue ~MEUR 80) Acquisition of Gamma and Ohtek in 2007 (Revenue ~MEUR 11) 700 600 500 400 300 200 255 349 361 358 345 445 450 439 441 457 563 625 648 530 16% 14% 12% 10% 8% 6% 4% 100 2% 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenue Revenue from acquisitions Divestments EBIT margin (excl. non-recurring) 0% 7
-13.0-4.6 145.2 111.2 119.4 103.5 98.4 4.0 7.5 11.7 205.7 162.4 182.5 158.1 193.7 29.7 24.5 28.4 26.2 30.4 Seasonality Revenue by quarter 2008 2010 EBIT* by quarter 2008 2010 EUR million EUR million 250 35 30 200 25 20 150 15 10 100 5 50 0-5 Q1 Q2 Q3 Q4-10 0 Q1 Q2 Q3 Q4-15 -20 2008 2009 2010 2008 2009 2010 * Excluding non-recurring items 8
Business environment
Factors impacting paint consumption Living standards Local habits and painting methods Construction styles and available materials Trends in interior decoration, colors etc. Level of activity in new construction, renovation and industry Functional paints Markets in Western Europe mature, growth opportunities in areas with increasing income per household Tikkurila has an established presence in areas with expected growth in consumption per capita and changes in painting habits 10
Paint consumption and demand structure Nordic Russia and CIS CEE Estimated paint consumption per capita = High = Medium = Low Standard of living and regional painting habits drive paint consumption The demand for premium products is expected to rise in less developed economies in connection with rise in the standard of living 1) Paint consumption source: Management estimates, IPPIC 11
Business strategy
Business strategy Tikkurila aims to be the leading paint company in the Nordic area and Eastern Europe, including Russia Customer focus Geographical focus Profitable growth Strong brands One unified Tikkurila 13
Strong and well-established brands Tikkurila brand portfolio Strategic Local ОХТЭК Large majority of sales from strategic brands Roughly half of revenue from Tikkurila brand 14
Service concepts and tinting technology Inspiration Ideas Colours Helpline Paint Schools Internet Store Contractor pool Training 15
Deep partnerships with retailers are of crucial importance Creating added value to consumers The strongest brands Marketing support Active product and service development Training for retailers' personnel Developing the category together with the retailers 16
Profitable growth through focus on selected regional areas Finland, Sweden and the Baltic States Strengthening of strong market positions Innovation of new extensive service concepts Russia Strong organic growth Utilization of service concepts Central Eastern Europe & other markets Organic growth Possible acquisitions Ukraine, Belarus, Central Asia, China Growth through differentiation Substantial long term growth potential Ensuring deeper understanding of the regional market needs and trends Long traditions in local brands with strong brand recognition and preference 17
In good position to grow further in Russia, other CIS Countries and CEE countries Tikkurila's production capacity Russia 45% Other 5% Finland 25% Sweden 9% Production in 7 countries, annual capacity ~300 million litres Local production increases flexibility, clear advantage specially during unstable market conditions Production of water-borne products increasing; ~60% of total, ~70% of decorative paints Sweden Finland Poland Ukraine Romania Russia Kazakhstan Poland 16% China Raw materials Prices affected mainly by oil prices, supply capacity and currencies ~75% of raw materials from western suppliers In Russia ~50% of raw materials from local suppliers Production, sales, logistics centre 18
Tikkurila Strategic Business Units (SBU) East Finland Scandinavia CEE Operational area Russia and other CIS countries Finland Sweden, Norway, Denmark CEE countries and other counties incl. China Production sites St. Peterburg, Russia Stary Oskol, Russia Kiev, Ukraine Tikkurila, Vantaa Nykvarn, Sweden Tallinn, Estonia Ansbach, Germany Debica, Poland Current demand structure Economy price and quality segment products Premium and medium price and quality segment products Premium and medium price and quality segment products Medium and economy price and quality segment products Expected demand structure Premium price and quality segment products are expected to rise Premium and medium price and quality segment products Premium and medium price and quality segment products Medium and premium price and quality segment products Competitors Akzo Nobel, Lakra-sintez, Empils, ABC-Farben, Meffert, Caparol Akzo Nobel, Teknos, Nor- Maali 2, Becker Acroma 2 Akzo Nobel, Flügger, Jotun, Becker Acroma, Teknos Akzo Nobel, PPG, Large number of local and regional suppliers Distribution channels Deco: DIY retailers, independent retailers, wholesalers Industry: direct sales, Temaspeed Deco: DIY retailers, independent paint retailers Industry: direct sales, Temaspeed Deco: DIY retailers, Alcro- Beckers professional stores 1, Beckers Nya Hem chain 1, Colorama retail chain 1 Industry: direct sales, Temaspeed Deco: DIY retailers, independent retailers Industry: direct sales, Temaspeed 1) In Sweden 2) Industrial coatings 19
Tikkurila in Russia
Tikkurila in Russia Overview Tikkurila is the leading decorative paints supplier in Russia Tikkurila products are sold in over 5,000 retail outlets The product range consists of decorative paints and coatings for the wood and metal industries Products are sold under the well known brands: Teks, Finncolor, Gamma, Ohtek, Tikkurila and Tikkurila Coatings Tikkurila has four paint factories in St. Petersburg and one in Stary Oskol Personnel 1,427 at year-end 2009 PREMIUM Tikkurila paint brands in Russia ОХТЭК ECONOMY Decorative paints Market share by volume 2009 1 Tikkurila 18% Empils 7% Others 69% Lakra 6% Tikkurila is the market leader in decorative paints with a market share of 18% in 2009 1) Chem-Courier 21
Tikkurila the best-known paint brand in Russia Brand awareness Tikkurila has been steadfast in strengthening its brand particularly in Russia According to TNS survey, Tikkurila is the best-known paint brand in Russia (awareness rate 40.3%) Source: TNS Marketing Index, Russia, 100,000 people, aged + 16 years (2009) 22
Decorative paint brands in Russia Segment Trends Shelf Price Tikkurila Empils Farben Akzo Nobel Lakra Russkiye Predpriyatie Dekart + ICI kraski VGT Caparol Khimik Holding Prestizh Eskaro Meffert Premium > 6 EUR Medium 2-6 EUR Value 1-2 EUR Low / Economic < 1,0 EUR 23 23
Tikkurila supply chain in Russia Moscow St. Petersburg Stary Oskol Chelyabinsk Novosibirsk Production, sales, logistics centre Sales, logistics centre Representative office In Russia, Tikkurila transports 30% of its products by rail and 70% by land. 24
New logistics and service center in Mytishchi near Moscow Started operating in February 2009, official inauguration in April Total area 9,900 m 2 storage area 5,400 m 2 office area 4,500 m 2 Storage capacity of approximately 7,500 pallet places 3 million liters of paint All Tikkurila's operations in the Moscow area are concentrated to a single site Also houses facilities for customer training, an integral part of Tikkurila's marketing Efficient supply chain gives a competitive edge Sign of long-term commitment to the Russian market 25
Distribution channels Tikkurila SBU East Customer segments Consumers Professionals Industry Direct customer groups DIY big boxes Regional wholesalers Color studios Dedicated distributors Temaspeed Industrial customers Indirect customers Traditional retail outlets Professional painters Small/medium industry 26
Russian DIY market Top ten retailers in Russia Comments on DIY market Obi Leroy Merlin Castorama Maxidom Metrika Baucenter Starik Khottabych 15 14 12 8 13 8 38 185,658 145,000 108,000 96,000 87,100 Stores Retail area (m2) 77,600 66,500 Tikkurila is represented by all major retailers in Russia. ~20% of Tikkurila's sales in Russia come from the DIY market. The importance of the DIY market to Tikkurila is on the increase as the number of retail stores is growing. K-Rauta Home Center Iskrasoft 3 10 2 2,000 30,400 52,500 Source: Retrospective 2010 27
SBU East Q2/2010 EUR million 4 6/2010 4 6/2009 Change % 1 6/2010 1 6/2009 Change % 2009 Revenue 64.3 54.0 19.2% 92.7 79.6 16.5% 167.1 EBIT* 11.2 8.3 35.7% 11.2 8.0 39.6% 17.7 EBIT*, % 17.4% 15.3% 12.0% 10.0% 10.6% Capital expenditure excl. acquisitions 1.2 2.4-51.3% 1.8 4.5-59.6% 7.2 Different factors impacting the revenue development of SBU East, Q2/2010 vs. Q2/2009 Increase/decrease, EUR million 12 10 8 EUR 4.8 million EUR 10.4 million 6 4 2 0 EUR 1.7 million EUR 3.9 million EUR 0.0 million Volume Volyymi Price/Product Hinta/Tuotemix mix Exchange Valuuttakurssit rates Yritysostot Acquisitions/ tai -myynnit Yhteensä Total divestments The figures on the graph above have been rounded to one decimal, which should be taken into account when analyzing the numbers. * Excluding non-recurring items 28
SBU East Q2/2010 Comments on the review period Revenue Q2/2010 Increase primarily due to exchange rate changes and sales volumes Sales volume +7% EBIT excl. non-recurring items Q2/2010 Improvement mainly due to lower variable costs, as well as increased sales prices and volumes The exchange rate changes increased EBIT by EUR 0.6 million The positive development of the economies in the region, as well as stronger consumer confidence boosted the demand Demand shifting to some extent from economy to premium products * Excluding non-recurring items 29 EUR million 180 160 140 120 100 80 60 40 20 0 EUR million 20 15 10 5 0-5 Revenue by quarter 2009 2010 Total EUR 167.1 million 31.8 55.7 54.0 64.3 25.7 28.4 2009 2010 EBIT* by quarter 2009 2010 Total EUR 17.7 million 0.3 9.5 8.3 Q1-Q2: EUR 92.7 million Q1-Q2: EUR 11.1 million 11.2-0.3-0.1 2009 2010 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Russian business environment
Russian economy % 10 8 6 4 2 0-2 -4-6 -8-10 Growth (%) of Russian GDP in 2007 2012F 8.1 5.6 6.0 5.0 4.0 2007 2008 2009 2010F 2011F 2012F -7.9 Russian economy outlook In 2H09 the Russian economy recovered strongly. Overall growth trend expected to continue; the consensus forecast expects 3 5% year-onyear growth for 2010. Unemployment is not expected to ease until 2011. Consumer confidence is rising. % 5 0-5 -10-15 -20-25 -30-35 -40 Russian consumer confidence 2005 2010 2005 2006 2007 2008 2009 2010 I II III IV I II III IV I II III IV I II III IV I II III IV I II Source: Rosstat (April 2010, July 2010), BOFIT estimate (March 2010), East Office (April 2010) 31
Decorative paint market in Russia Market size (million litres) 1 Litres (million) Growth % 700 30 600 500 457 571 622 615 515 25 20 15 400 300 283 300 358 411 10 5 0 Market size Growth 200-5 100-10 -15 0 2001 2002 2003 2004 2005 2006 2007 2008 2009-20 1) Chem-Courier, Management estimates 32
Construction in Russia 2006 2015F EUR million 450,000 Value of Russian construction market 2006 2015F 400,000 350,000 Optimistic scenario 300,000 250,000 200,000 150,000 Pessimistic scenario 100,000 50,000,0 2006 2007 2008 2009E 2010F 2011F 2012F 2013F 2014F 2015F Growth % 2010F 2011F 2012F 2013F 2014F 2015F Optimistic forecast 10.9% 16.2% 21.1% 27.5% 33.1% 36.4% Pessimistic forecast 3.2% 9.5% 14.1% 18.3% 22.1% 24.3% Source: Global Research & Data Services, March 2010 33
Conclusions
General Conclusions Tikkurila in Russia Undeniable market opportunity Tikkurila well set for future growth Potential for efficiency improvement All sources indicate growth on medium long term Drivers, such as construction and increasing living standard, give further support Consumers and consumption follow more and more western patterns Market leader position Good coverage of the distribution and own operations Portfolio of strong and well recognized brands How to operate with different customer groups, DIY, large, small, distributors, etc. How to adjust the assortment to selected customer groups How to find the best integration synergies of acquisitions 35
Tikkurila's future in Russia Tikkurila is committed to the Russian market and wants to make actions that secure the competitive edge as soon as the market picks up. We believe that market growth in Russia will be robust also in future, clear growth potential in per capita consumption. Russia serves as a good base for enlarging business to adjacent markets. 36