All right. Very warm and sunny welcome to Kemira's second quarter 2019 result presentation. My name is Olli Turunen, and I'm head of investor relations at Kemira. Kemira published strong results again this quarter, today now we'll have a deep dive into numbers presented by our President and CEO, Jari Rosendal, and our CFO, Petri Castrén. After both presentations, we have a chance to ask questions here in the room, also, of course, over the webcast, either by typing to the tool or calling over the phone. Let's begin. Jari please, go ahead.
Thank you, Olli. Welcome everyone. Good afternoon. As the title said, strong earnings improvement continued in Q2. Some key points on top of daily, day in, day out operations. Focus on value over volume, active sales price management continued successfully during the quarter. The price management starting from the turn of the raw material cycle has obviously been the wrong road, but we've been doing systematic work the last four, five quarters on it, you can see the progress, what we've achieved. Markets, I would call generally good. We are seeing some softness in some areas of the market compared to earlier really good markets. Now we call it good, but we didn't see that much direct implication to us, but some. Our strategic event projects, we have continued those obviously, they are on track. Let's look the Q2 numbers.
Revenue EUR 664 million. Organic growth was flat, mostly by our own design, by driving the volume over Sorry, the value over volume, really actively managing our product portfolio on going forward. We continue to see strong year-on-year organic growth in our Oil & Gas business. Successful sales price management at the same time softening raw materials in some areas, helping on some input costs. Operative EBITDA grew to EUR 106 million, the margin was 16.0% of revenue. Actually, the improvement on our profitability came from all of our regions for both segments. Every unit was able to contribute to the improvement. Also, operative EBIT grew nicely by 33%, was EUR 60 million. EPS EUR 0.22 versus EUR 0.14 last year. Looking at the segments pulp and paper revenue eur 373 million.
Organic growth came down slightly due to many of our own planned actions in product mix optimization. As you might remember, we closed down what we call an ECOX production last year, that took down volumes and revenue quite a bit, freeing up the peroxide to the market. One thing that Petri will elaborate also more, we trade a lot of caustic soda, buy in and trade it forward to the Nordics. As the caustic soda prices have come down significantly from last year, it's mainly a top-line effect, not so much a bottom-line effect. Q2 also in pulp and paper is a shutdown season, shutdowns were slightly longer than last year. This time we also had some unexpected shutdowns from customers.
The operative EBITDA margin improved to 14.4%, and also the operative [inaudible] pulp and paper grew by 17%, which is nice to see. If I look at the longer-term market outlook, customers continue to invest into board machines, into tissue machines. That indicates that customers are the long-term believe in demand growth. A lot of pulp capacity additions also are in planning as we have all heard. Moving on to Industry & Water, a very strong quarter. Solid water treatment market, EU continues to review the water treatment regulation. Oil & Gas, performance really good. Like I said, 30% year-over-year organic growth and revenue to EUR 77 million in the quarter. We expected to see some moderation of demand in the Oil & Gas application areas, but that hasn't directly hit us at the full in Q2.
Polymer raw material prices have eased off in North America. Let's see how sustainable that is if we think of longer run. Pulp and raw materials are gradually coming up, and we expect them also to come up during the second half of the year, but we're in a better position now to meet that challenge. In Q2 and Q3, we are delivering to the oil sands in Canada for the tailings treatment campaign during the summer seasons, and this will increase our top line, dilute somewhat of the margin, but we will be accretive to our bottom line and delivery weight will be on Q3, during this year. I&W had an exceptionally good quarter with operational EBIT margin of 18.1%.
Moving on to something that I don't talk about often, but I think it's relevant to also understand. We work hard on keeping people safe and our operations safe. We have about 5,000 people working directly for Kemira and about average 1,000 people as contractors on our sites and laboratories, sometimes even in our offices. We produce roughly 5,300,000 tons of product to the customers from 64 sites, and we have over 1,000 shipments going out from our sites every day, and you can imagine how many shipments are coming in every day. A lot of complexity in our operations, and we need to stay safe every day. With systematic work here today, our total recordable injury frequency per million working hours is 2.5. Naturally, the target needs to be zero, but we start to reach the industry best class performance impact.
We still have work to do in number of areas, so we need to stay safe every day, every hour, every minute. Why I'm bringing this up is that it has also a link to financial performance. If there is an injury, typically a line or a full plant is stopped. Obviously, the injured person needs to be taken care of, hopefully not a bad injury. Investigations start and so on. Management, staff, operators are involved in non-production type of things, non-business things, and obviously that then is away from the business performance. That's the link that we have to also keep in mind. People safety, operational safety continues to be on top of our mind every day, and getting people home after good days of work are important and has a business link.
Stepping away from the quarterly focus also and reminding of our longer-term strategy focus. We continue to focus on pulp and paper, Oil & Gas, and water treatment. There's enough market opportunity in these for us. We aim to be a market leader or among leaders in the market in these segments. On average, for Kemira, these markets provide roughly 2%-3% annual growth opportunity. We see fiber-based, renewable, recyclable trend increasing, and in Oil & Gas, the production is moving more and more to the unconventional side of producing Oil & Gas, and that's where we are active. Our product portfolio needs to include great products, therefore, we are working on our product portfolio constantly. We invest roughly EUR 30 million a year into R&D and application improvements. We are pruning our product portfolio constantly.
We have four major product groups that bring 80% of our revenue. That's bleaching, that's coagulants, that's polymers, and that's sizing chemistries for modern paper making. These are the strategic product areas that we also have been and are investing in when we think of increasing capacity. Great and experienced people with deep application knowledge, operational knowledge, and technical capabilities is a key on top of the products and excellent end-to-end operations. We drive value through carefully planned investments and continuously improving our operations, these will then drive our top line and especially bottom line. Our mid to long-term financial targets remain unchanged, productivity target in the range of 15%-17% from revenue and gearing below 75%. Returning back onto a bit more short term and the next six months plus and our key focuses. Active price management.
Notice I'm not saying value over volume anymore. Now we start to be there where we want to really start to be conscious on what's happening in the marketplace, balancing also our utilization rates. They are high still, but not that we lose volume for the wrong reasons, especially when prices are right. We continue to work on our product portfolio and our service offering and right-sizing our services so that we don't underserve the customer and the customer is unhappy, but we also don't overserve, which where we don't get the value, and we hurt then our bottom line. We need to right-size the offering. We continuously continue to work on our operational excellence. As I explained, operations are quite complex, so there are always opportunities to improve.
We'll complete the Rotterdam polymer capacity and the AKD sizing capacity in China and get them up and running by the end of the year. They will not contribute to the bottom line or top line too much this year, but we expect to have a full contribution next year. As there are, again, uncertainties out there, we read the trade wars and so on, it's really important we continue our prudent cost control in all areas. That concludes my summary for our Q2 situation. Next, I'll ask Petri to come and give some more details on the numbers. Petri, please.
All right. Thank you, Jari. As you see, profitability improvement continued from strong Q1 and even actually accelerated its pace during Q2. Let's look at some of the drivers that were behind the good, strong performance. As Jari mentioned, growth moderated to 3% as the focus was more on value over volume. Again, some of the softness in the markets that led to about 4% decline in volumes delivered. I would say that we have been very successful with our pricing management, and we've combined that with clearly stabilizing raw material environment has led to this excellent quarterly results. Perhaps some of the highlights in terms of where the pricing management has been really successful are North American shale. We've both seen the growth on that one, but it also has come at a very good profitability.
There we also have differentiating products, that certainly helps in the pricing management. Another area where we have done excellent job in terms of the pricing management is the North American water business. That in the past has been quite challenging for us at times. Even now as it is facing higher raw material costs continuously, it has actually been very successful in passing those costs to our customer base. Regarding variable costs, two areas are perhaps worth mentioning. One is the decline in caustic soda that Jari mentioned. It is a mostly traded product, means that we are selling it at a fixed margin. Really the price of the product does not matter all that much. Then the other area where we have seen declines in the quarter is the cost of electricity.
Our cost of electricity is a portfolio of long-term hedges, we hedge up to five years in terms of electricity prices. Also, we source some of the electricity from Tallinn Vormsi TBO and Pärnu Vormsi TBO, where we actually get electricity at production costs, then some of it is sourced at spot rates. The mix of that is actually was quite favorable during the quarter. Favorable currency development is another factor to our EUR 26 million year-on-year EBITDA improvement. Some of you may remember that we were struggling with the explained negative currency situation a year ago. First half 2018 was really difficult for us, or caused negative EBITDA variance. This time we are pretty much recovering what we saw negative on that line a year ago.
Now if I'm sort of looking at what's the remainder for the year if currencies stay at the roughly current levels, we'll see some much smaller numbers from the currency valuation. Perhaps a slight positive, though. On the cost side, if one adds up the fixed cost line and the right of use leases, you see that the costs are up about EUR 8 million year-on-year. That's actually for a very good reason, because with the good performance, we have actually had the chance to have to increase some of our incentive accruals. Most of that increase that you see in those combined lines is actually coming from the increased incentive accruals due to the good performance. Again, other than that, we have been quite successful in terms of offsetting the inflation by managing our costs.
EBITDA improvement adjusted for the IFRS 16 improvement, that comes to EUR 17.6 million, and that's sort of apples to apples comparison and over 20% year-on-year improvement. Finally, I repeat my comments here from Q1 relating to the IFRS accounting change, make sure that it's understood correctly. IFRS impact on year-on-year comparison was about EUR 8 million, EUR 8.3 million precisely. That's in line with the guidance that we gave early in the year, about 1% positive EBITDA impact from the IFRS change, maybe slightly higher now, around 1.2 points. Moving on to the raw material picture. Key points I think were already covered from this chart. On the right, the favorable net impact continued and actually even grew in Q2. Perhaps I know that people will be asking of what do we see in terms of raw materials going forward.
The declines in electricity costs and the caustic soda, those are sort of aberrations. If one looks at the other raw material costs for the rest of the year, we basically see flat to very modestly increase in raw material environment. The active price management that Jari was talking about still remains a valid strategy. One area where we have benefited, and which obviously has contributed to the Industry & Water good result, is that the propylene costs have been at low levels and in recent months compared to the longer-term recent history, and has clearly had a positive impact to our polymer product profitability. Oil & Gas and Industry & Water has a higher share of polymers compared to the paper segment of the paper. Cash flow. Improved profitability obviously helps cash flow in Q2, and also obviously for first half.
Also remind that in Q1 we received EUR 15 million excess capital return. That is sort of a one-time and will not be repeated, at least in the near term. Another comment on the seasonality of cash flow. Last year, we generated less than 30% of operating cash flow during the first half, and it is indeed a seasonal pattern that we expect to repeat itself. This year, it's caused by some of the seasonality in our business. It is caused by or amplified by the expected capital expenditure rhythm that we have, and it's also further amplified by the sort of net working capital rhythm that we have in the business. That takes me to our CapEx. While the CapEx year to date is roughly at last year's level, we do expect that the CapEx rate will accelerate towards the end of the year.
Much of it is actually invested into the strategic projects that Jari mentioned, we are expecting to land within our EUR 180 million-EUR 220 million CapEx guidance. Operating return. ROCE or return on capital employed now improves to 10.8%, driven obviously by Industry & Water profit improvement. Comment on debt. IFRS 16 impact on net debt and reported debt is an increase of EUR 135 million. The net debt ratio, as we report, is increased to three and a half terms. This change and how we report this, it exaggerates the ratio as we take the last period debt level, that is higher because of the IFRS 16 change, but only two quarters with an EBITDA, with a positive IFRS 16 impact, and then still two quarters with pre IFRS 16 numbers that do not have that.
If one adjusts that, and really the best way to adjust it is to take pre-IFRS 16 numbers, the net leverage would have been 3.2x . Slightly higher than what it was in Q1, but again, clearly lower than what it was this time of last year. The year-on-year, I am sorry, increase from March quarter to June is really caused by our dividend payment, which took place in Q2. Well, it was declared in Q1, but it was paid out in Q2. Our year-to-date operative EBITDA is now ahead of last year by some EUR 36 million on a comparable basis, excluding the impact of the IFRS 16 accounting change. We are quite well on our way to meet our guidance, which is that our operative EBITDA will increase from the prior level on a comparable basis.
Still, for the record, we repeat that guidance in our half-year report. I would like to conclude my slides or my turn with the reminder of the key points in our equity story, why people should and would invest in Kemira. We are targeting profitable growth. We are demonstrating that we are actually improving the profitability with this 35% increase in year-to-date in our EBITDA and even higher 40% increase in EBIT year-to-date. We have now reached our mid-to-long-term target of 15%-17% EBITDA margin both for the quarter and year-to-date. We do provide an attractive and stable dividend yield to our shareholders. Dividend yield in today's share price is still over 4%, which makes it quite attractive in today's low interest environment. Sustainability.
Jari talked about one aspect of sustainability, by the way, which is safety. There are multiple aspects of sustainability. It has always been important to us, but now it has become much more relevant as an investment trend. EcoVadis is a highly regarded independent third party, and the gold rating is their highest rating. The gold rating they have given to us is really an indication of our broad sustainability focus. They actually give that gold rating only to top 5% of the companies that they rate. Indeed, it is a good validation of our sustainability focus. With that, I'll stop my remarks, and Jari and I are ready to take your questions. Thank you.
Very good. Let's first take questions here in the room and then over the webcast. Do we have questions here? Ari. Please state your name and company, by the way.
Ari Raatikainen, Nordea. One question about the pricing and the delta, like EUR 23 million, if one compares to a year ago, would it be possible to think about how much of that is, say, pricing on a like-for-like basis, and how much would be roughly attributed to the mix and your efforts to value over growth?
Yeah.
Especially the EUR 23 million, roughly.
A good question. We haven't actually gone that way of analyzing where it comes from. We rather work on where we can gain it. Some of it is just taking prices up to the raw material environment that there is. A lot comes from working on the product mix, best yielding products to a capacity, working sometimes even with the customer mix. Part of the volume that we have intentionally also lost is walking away from deals that are not worth taking. There are many components in this equation, and we really haven't bottomed up looked at how much comes from where, and that also differs from quarter to quarter. It really doesn't give that much information as long as that number is there and we can see it coming.
The other thing is also that a lot of these things have been negotiated months ago, and they kick in. Typically you can negotiate a new contract and a new pricing three, four months before it kicks in. We also know what has been coming going forward. Same goes on the raw material side. Sometimes we have fixed deliveries there, and we know what's coming in from the raw material side.
Okay, maybe another question. You had talked about the CapEx projects earlier, now that the startup is getting closer, how much can you sort of give a feel of the, say, the top-line impact combining on just on a very rough basis and the schedule of the startup curve, like how long it's going to roughly take for the main parts of the CapEx project?
The special polymer line in Holland, in Rotterdam, we start the ramp-up somewhere in September or something like that, it'll be ramped up by end of the year. That will not have directly so much of a top-line effect, more of a bottom-line effect next year because we are already delivering those volumes, but we're tolling them out at higher cost. We are toll manufacturing them with a partner, so we're taking cost down. The customers that we are serving, they will have gradual growth of demand. That's sort of more organic type of growth, not a step change. The AKD wax site will basically double our AKD capacity, that we then deliver all over the world from China and we'll be a clear number one player in that.
Which is the most important strategic move also is we will be backward integrated to fatty acid chlorination, and we'll be self-sufficient to our existing capacities and our new capacities. Self-sufficiency means that we have security of supply, which has been a struggle, and second, as a price point, will go through a different price point for us because we're not buying that from outside. We don't give out the numbers and so on, but I can say that both have a nice effect to our numbers above our 15%-17% EBITDA target rate.
Very good. Thank you.
Thank you. Operator, let's take questions over the phone. Meanwhile, I can remind that you can also type the questions to the web chat tool and I'll pick them up. Operator, please go ahead.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad and enter at cue. After you are announced, please ask your question. The first question comes from the line of Martin Rüdiger from Kepler. Please go ahead. Your line is now open.
Good afternoon, Jari, Petri, Olli. I would like to ask three questions, if I may. The first two questions are for Petri on financials. In the segment pulp and paper, you reported -3% organic sales growth in Q2. Do I understand correctly that you enjoyed some price increases of, let's say, +3%, the volume decrease was, let's say, -6% and therefore really more pronounced? The second question is on your statements about raw material prices. Other raw material prices will be flat or modestly increasing, you said. I did not understand the message on the electricity prices and caustic soda, which declined in Q2. How is your view on these items go forward?
The third question is a strategic question more for Jari. It relates to Industry and Water segment. Your exposure to Asia-Pacific in that segment is rather small, only 2%. The impact from this 36% collapse in sales in Asia in Q2 is also very small. You say that you focus on profitable customers, which is fine. What I do not understand. The Asian water treatment market has a huge catch-up potential compared to the Western Hemisphere. Theoretically, it could be a huge business opportunity for Kemira. What does hold you back? Is that the tough competition or anything else?
Okay. The volume and pricing, I don't think we give by segments, but I'll give you some direction on the - 3%. Jari talked about the ECOX, which is the sodium percarbonate business which we closed in Sweden. That was more than half of that 3%. The decline in caustic price, not caustic delivered volumes, that probably explains about one point of that negative organic growth. I would say that if you were to exclude those impacts, we would have roughly flat volume growth. That would be on paper explaining the 3%.
ECOX and the caustic trading, ECOX going out was actually a profitability improvement action.
Yeah.
It's revenue's down, but profit's up.
I'll continue with the second question as well, your question about caustic and energy. Caustic is a huge commodity that is traded globally, and we're not really a caustic player. We don't have much of a view on caustic. We can afford not to have the view on it because we really primarily trade that, and we trade that with fixed margin. Whether the caustic is EUR 500 or EUR 600 or EUR 700 a ton doesn't really impact our profitability. That's why even as the caustic volumes are quite high, they're actually more than EUR 100 million of revenues for us. We don't have a caustic exposure of that much, so I really don't offer much of a view on future caustic prices. On energy prices obviously are much more significant to our business, because it's a significant cost in sodium chlorate manufacturing process.
There I would say long-term trend in energy is up. I mean, there's no denying about that. We have the CO2 emissions and the carbon trading rights, all are pointing out that the long-term trend is up. Just on the short term, we saw a decline in energy prices that was perhaps two main contributors to that were the hydro balance in Nordics. Now it's sunny, but also the springtime, it's been raining quite a bit here in Nordics. The hydro balance has improved, and that actually does impact spot electricity prices in Nordics.
The second is, I sort of alluded to that we actually buy some of our electricity on five-year contracts. If you look at the five year ago electricity prices, which are now rolling off, they were at a higher level than what we are currently buying. The mix of our basket was quite favorable in Q2. Long term, certainly see that electricity costs will be going up.
I'll follow a bit on the caustic because there's been a sort of a technology shift happening beginning of last year. The average prices on caustic in Europe, sort of market price has been roughly EUR 450 a ton before the shift in early 2018. EU banned a mercury-based technology as of January 1, 2018. Not a lot of players invested into the membrane-based technology. We had a sort of a spike going up that caustic went from EUR 450- EUR 700 and above EUR 700, and now it's coming down again. That's sort of settling off that technology shift. That's why I've been talking about this because as Petri said, we trade over EUR 100 million normally. If the price goes up 30%, 40%, obviously our trading revenue goes up, but now it's coming down. It's nothing to be alarmed about in a sense.
It's good to understand when we do these bridges. About APAC and the water treatment, also there we have been applying value over volume. We have discontinued some of our not so profitable or even zero profit contract with our customers unless we get the prices through. We do not manufacture inorganic coagulants in APAC. That's too low entry barrier. We only focus on the specialties which are polymers. At the moment, we also bring the polymers in mainly from Europe. We have the time delay on delivery, and we have then the additional cost. You might remember that we have a minority on a South Korean polymer JV, and that JV is building a polymer line into South Korea, and we'll be off-taking all of that capacity.
Once that line is up and running in 2021, we have for the first time also local supply, and then we can start working more on the water opportunities. We'll be always a niche player and not pulling to the big mass players in Asia Pacific, but staying on the high-end side of things. We supply two of the Shanghai four water treatment plants, for instance, in China with polymers. We've supplied Singapore and these types of things. That's our main focus and some industrial players and so on. It is a growing market, so we'll play along with it, but only specialty, because we can't compete our deliveries from here in Europe.
Thank you.
Thank you. Our next question comes to the line of Anssi Kiviniemi from SEB. Please go ahead. Your line is now open.
Thank you. It's Anssi from SEB. First question I have a couple of them, I will take them one by one. First question is basically a follow-up on Harish's question. You highlighted the ramp-up in chemical enhanced oil recovery plant in Netherlands and some AKD capacity in China. Could you elaborate a little bit on the cost effect during second half of 2019, what kind of increase we should expect in EUR terms in fixed cost and what will be the effects on EBITDA? That would be really helpful if you could go back there.
Okay. The last one I'll say it will be nice, it will be not just EUR 1 million or EUR 2 million, but bit more on the bottom line next year. The cost base actually is in our cost already. At the moment in China, we have staff there. We are preparing for a startup. We are training the staff. It's actually roughly 250 people that are who run that plant 24/7, five shifts and 50 people roughly a shift. We are carrying that cost already, not getting any revenue or margin for it. Cost won't go up more, but we'll start covering that cost when we get it up and running. The same is for Rotterdam or our Botlek site, that cost is mostly in.
There might be some ramp-up costs, a few first batches might be that they're off-spec and so on, those are not significant in that sense. We talk about maybe if there are quality issues with the first batches, we talk about EUR 100,000 or EUR 200,000 or those types of ranges, we don't move the needle. The question is really that how fast, how reliably can we get it up and running those both sites?
To clarify and give a bit more detail on the China site. Because the site already can manufacture AKD, although its chlorination facility is not yet completed, we have decided to start amortization and depreciation of the assets already. That is an impact that actually dilutes pulp and paper EBIT margin [inaudible] because we take something like EUR 1 million a month, EUR 3 million a quarter of depreciation and amortization on that site while it is not really delivering any margin. That is one explanation, and because we have already started it, that will not. Sometimes, often, typically you start depreciating when the site is in commercial use. Technically, it is in commercial use, but it is not delivering yet, so that is why the depreciation is already in the books.
That is clear. Thanks. A second question relates to pulp market and perhaps in water [inaudible] or pulp and paper division and your demand there. Have you seen an impact on slowing production, especially in the forms of extended maintenance breaks from your customers? Because we have seen a couple of announcements that directly impacted you, but how do you see your deliveries going forward? Will we see a negative volume development on that side in pulp and paper? if you would give us something on that would be helpful.
Yes. We all read from the media on what the development has on the pulp development. You go to South America and hardwood pulp, those companies that have higher inventories, they are not our customers. If they are curtailing as they say they are curtailing production, has no impact on us. We are looking at the number of customers that we are serving, and in South America, no meaningful things beyond a few shutdowns. Nothing that has really moved the needle. The surprise shutdowns or mechanical problems and so on have been more of an impact than the shutdowns. As I said, across the board, our customers have had longer shutdowns this season than last year, because last year they were running pipes red hot, and this year not so much, but not a big impact yet. We are obviously following the situation.
Okay, thanks. Then opportunities in pulp and paper. it is a typical seasonality that Q3 is the strongest quarter of the year. Are there any factors why this should not be the case in 2019?
Last couple of years, the profitability development has been tail-weighted to the second half. This year the profile won't be that way so much because we had last year the currency issues and the raw material swings, which we've then started to catch up and so on. Not as much tail-weight. Yes, historically, our Q3 has the strongest delivery. Let's see what happens now this Q3.
Okay, thanks. The last question is about Industry & Water. To what extent the earnings growth has been driven by Oil & Gas, and to which extent by the water treatment business that you have? If you could give some kind of split or indication, that would be really good.
We always, in our quarterly report, give the revenue of Oil & Gas. Now it was EUR 77 million, and that was up organically by 30%, and I believe before it was up 36%. You can do the math from there. Our water business is more steady business with low single percentage growth. Now we have also been optimizing value over volume. We've been giving up also contracts that eat our volume but give us no bottom line. If we haven't gotten, for instance, in polymers, the pricing through, we might have walked away from some of the volume. Quite a bit of that comes from Oil & Gas.
Okay, great. That's pretty clear. Thank you. That's all from me.
Thank you. Our next question comes from the line of Panu Litmanen from OP Bank. Please go ahead. Your line is now open.
Thank you. Firstly, I'd like to ask about this margin expansion driven by higher pricing. Q2 was a rare quarter when you had higher pricing but lower variable costs, and sounds like you are expecting lower inflation going forward than before. The question is that how do you see this impacting your pricing? Are you seeing that it will get a bit more difficult to increase or keep the pricing, for example, in the Oil & Gas chemicals, given the kind of decline in the propylene price?
Overall, can you comment how you see the margin expansion proceeding in the second half compared to the first half? Maybe finally on this topic, you mentioned that the profitability in Industry and Water was exceptional. What do you mean by that? Does it mean that Q2 was the peak or 2019 overall will be kind of higher than what's achievable longer term?
Thanks, Panu. Like I said, price management, we need to be sensitive now what's happening in the marketplace. When we're talking about the whole basket of products, not so easy to answer. On polymers, of course, price increases, unless we have contracts that are totally out of date, in general, price increases are pretty much here. Let's see where the raw material also will be sensitive about that. As I said, in coagulants, for instance, there continues to be a premium on acids and ferric and aluminium hydroxide. There we need to continue that.
It really is dependent on which product, which market are we talking about. Not a clear answer. Exceptional is the best ever, you could sort of say that that's exceptional. Obviously, I've asked Petri to keep it as it going, but let's see how the market goes. We've guided that both segments need to be in the 15%-17%. I'm not going to ask Petri to drop it to 17%, but let's see how the competitive environment goes forward. We are over the range at the moment.
Thank you.
Panu, if you want me to elaborate a little bit on the cost side. I tried to talk about the electricity and caustic just for the reason of give you background to your question, meaning that the EUR 5 million raw material decrease that we saw was primarily caused by these, and those are temporary or not benefiting us. Overall, we see that we still are at flat to modestly growing environment. The sign on that may well change. It may still be the same next quarter, but it may as well change. I think the general direction still continues to be fairly favorable for the short term.
Okay. Thank you. Secondly on pulp and paper, you mentioned short-term demand softness in the market. What do you mean by that? Do you refer to these longer maintenance shutdowns that you saw, or is this something that you expect to happen? Maybe also on track, pulp and paper, last year, you said that the longer contracts in that business were postponing price hikes and then you would catch up this year. Is the margin expansion in that division going according to your plan that you had when the year started?
Actually, it is going pretty much to our plans. Obviously, last year when we started price hikes, the raw materials continued even after the price hike to increase. We needed to go for a second round. We are there. The other side is the product mix and optimizing the volumes and what we manufacture and where we deliver that. On the pulp side, I'd like to also point out that when our customers have shutdowns, we can sell that product and take it. Sodium chlorate travels quite well.
From a number of sites, we produce dry product. If a customer is down, we can also think of taking some spot business from Asia or somewhere else because we can be shipped around the world. From our Uruguay site, we, for instance, ship to Asia Pacific, we ship to South America, to India. It doesn't really mean that we are not delivering when someone is having a maintenance shutdown. We take the opportunity to deliver it somewhere else.
Thank you. Can I just ask about the comment on the demand softness? Were you referring to what you saw in Q2 or kind of what you expect in the second half?
More what we saw in Q2, and mainly through the shutdowns and then maybe more of the market noise. Softness in the market that didn't necessarily hit us. For instance, the huge inventories in the hardwood pulp in South America hasn't hit us in the sense, but it's something that impacts the ecosystem and that was more of a comment that way. That's why I said that there was softness in the market. Pulp prices have come down, it really didn't hit us on our demand.
Without giving any numbers, would you expect the organic growth to be better in the second half than the kind of flat, excluding the issues that you mentioned seeing in Q2?
It looks so complex and so on. That's what we're pushing for, but it's a complex thing. The underlying growth there is still okay.
Okay. Thank you.
Thank you. Just as a reminder, if you would like to ask a question, then please press zero one on your telephone keypad. Our next question comes to the line of Ben Gorman from UBS. Please go ahead. Your line is now open.
Hey, guys. Just a quick two from me. One would be on the dividend, obviously a long time since we've seen growth in that and this year looking towards if we annualize things then closer to some two times coverage. Just wondering at what point you'd be comfortable to grow some of the dividend then. In terms of the market in particular, it sort of related to some of the questions earlier, but what are you seeing from competitors in terms of pricing? Is it a particularly tight market, and that's why you're able to have such big differentials versus variable costs at the moment? Really we should start to see this normalizing as others try to take share in this sort of environment. Thanks.
First one on the dividend. I don't start to speculate what the board of directors will discuss on that. If you look at our track record, our payout ratio has been really high by the previous years compared to our net profit. Even if we are improving and would keep it on this level, which I'm not speculating, still we have CapEx ongoing, maybe that fits with the environment that we talked about, EUR 180 million-EUR 220 million CapEx sort of range for this year. Maybe we can get some net debt down even then, but I'm not speculating on the dividend. Markets on the prices and so on.
As I said, we need to look at case-by-case competitiveness and situation. It's not a general market situation. It's also what your other competitive advantages are. For instance, in the shale side, we do have differentiated products. Even if we see some general softness in that market, we haven't felt it yet because our products are in nice demand.
Okay, thanks very much.
Thank you, Ben. There is a question here over the webcast from Andrew Noël. He is asking two questions. Could you please comment on some of the technology and market gaps you see in your portfolio that you would like to fill either organically or inorganically? The second question is, what sort of growth rates are you getting in food and beverage, as Ecolab has made very positive commentary about this market recently?
Food and beverage is really not our target market. We are not present there except through our customers from food and beverage packaging that goes into that market. That's a bit far away from us in the value chain. No presence in that area. Maybe some adjacent spot business, but I don't even know the value going there. We have ongoing R&D projects and joint projects with customers and partners where we are filling some gaps. For instance, in barriers, we're at the moment launching some new barrier products that are non-plastic barriers, and that sort of thing.
We can strengthen ourselves in some areas. It's not that we're present there, but maybe our mix could be higher, for instance. That's why we are investing into these four categories of bleaching, pulpal and not so much pulpal ones, but then polymers and sizing. There we are adding and developing things. Don't see sort of huge gaps at the moment, but some small ones are always there. That would be nice.
Thank you. Okay. There are no further questions. This concludes the Q2 result presentation. Thank you very much for your participation, and have a very sunny weekend.
Thank you.