Metso Oyj (METSO) Earnings Call Transcript & Summary

Hello, everybody. Welcome to Metso Outotec's Third Quarter 2020 Results Conference Call. I'm Juha Rouhiainen from Metso Outotec Investor Relations. And with me here are our President and CEO, Pekka Vauramo; and CFO, Eeva Sipilä. And they will present the results shortly. But before that, I would like to say and point you to the forward-looking statements disclaimer we have in the slide deck and also a reminder that we intend to limit this call to approximately 60 minutes in total. With these words, I'll hand over to Pekka. Please go ahead.

Thank you, Juha, and welcome to this call. And we'll go straight into third quarter of the year. How we see market activity, largely unchanged compared to the end of second quarter. However, COVID is around us. As we all know, orders and sales are affected, as we can see, different businesses in different ways. I'll come back to that one later on. Overall -- and we have now the first time the new segments there. They are Aggregates, Minerals and Metals and Recycling, 3 segments that we are referring to in this one. Overall performance in Aggregates and Minerals segments was healthy, as you can see in the numbers as well. We'll go through them a bit more in detail later on. Integration has started quickly with good progress. We have a solid plan that we are executing, following it step-by-step with very high sort of discipline. And that's our plan to continue as well. At this moment, we are in cost synergies at EUR 31 million annual run rate. That's end of the quarter. And our target that we communicated is to achieve EUR 50 million mark at the end of the year, and we are well online -- in line with that target. Metals business was a disappointment, and the markets are suffering in metals business from -- on the other hand, overcapacity that was put in place during the metal super cycle some years back. And then with the COVID impact, we really haven't been able to turn the pipeline into orders. And we are facing a situation that with the current performance, we'll immediately initiate restructuring and turnaround actions. And the focus will be in metals on those ones during the coming 12 months. We've also started planning of recycling business as it's not seen as synergistic with the rest of the group. So these are basically the first set of highlights. Then into group numbers, more so orders below last year's level. We had, however, very high benchmark from a year ago. We have seen now postponements of orders. They are there, and we look forward to announcing some of these orders in any time, basically now, but it didn't happen during the third quarter. So numbers are therefore down. Sales also down. This is a consequence of order bookings being slightly below the previous periods also earlier on. Adjusted EBITDA 11.1%, EUR 109 million and down from last year. If we just look at -- we take, for example, the Metals business alone, there's about EUR 40 million difference between the performance, current EUR 10 million negative. And last year, I think it was EUR 28 million or EUR 29 million positive. So that comes to difference of about EUR 40 million. So clearly, we can see where the issues are, and that's why we talk about actions in that area. EBIT. Because of the adjustment, restructuring costs, PPA-related things, 4.8% of the sales; earnings per share EUR 0.03; net debt at EUR 940 million and gearing 47%. So these are the group numbers. Then on COVID particularly, yes, this is affecting businesses, anything big. Bigger projects takes longer time to prepare. It's complicated to prepare and takes also longer time for customers then to finally commit to these ones. But we do have a good pipeline there. We are not concerned about other than the time factor here at this moment. Our own operations are running well. There's no disruptions as such currently with our own factories and supply chain. Aggregates demand has -- the recovery that was well on its way up until June, then it has stabilized around 75%, 80% level of normal. But good growth in China. Also positive development in North America happening at this moment with the Aggregates. This is -- maybe the recoveries dampened a little bit with the second wave of COVID in some of the markets. But we'll see, once we get towards the end of the year, how the demand picks up for the upcoming spring, a season in the Northern Hemisphere. We should start to see that in numbers in -- during the fourth quarter, of course, subject to COVID situation. The bigger projects, I commented already, and that's affecting both Minerals and Metals market. And then the comparison is really harsh because of large bookings last year of Ma'aden gold project in Saudi Arabia and Udokan copper project in Russia. And those are sort of joint packages between Minerals and Metals segments. Service somewhat affected primarily in the labor part in professional services and then, on the other hand, in modernization and upgrades. Standard spare parts, consumables, that continues, probably better than ever at this moment. It's improving slightly, the mix as well, because these are the higher-margin things. And we have seen really good performance in our consumables business. Overall, I mean, it really has shown its potential, and we look forward to developing that business further. Starting from aggregates segments. Orders slightly up, thanks to McCloskey acquisition. There, organically, we were 14% down. And on the growth, almost 30% came from McCloskey's side. Sales, up as well, but organically 12% down, just COVID impact here on both of these numbers, and McCloskey contributing nicely into these numbers. EBITDA adjusted EUR 26 million versus EUR 28 million last year, despite of lower organic volume and integration of McCloskey. I think this is a good result, what we've been able to achieve. Good adjustments on a cost base, rapid actions that are still in place in Aggregates and also long-term improvement actions in place. So we can expect this segment to develop reasonably well when COVID, at one point, then leaves us. Minerals side. In addition to project issues that we have had the delays there, we have also major currency impact there on orders, 8% on sales, 9% altogether. We see also the currency impact. It comes through -- primarily through our services, but there is an equipment -- capital equipment side in that one as well. So orders are down, but harsh comparison. Sales down as well, currency impact being really a major contributor to that one organically, not so much. Adjusted EBITDA exceeding 15% for the segment with a good mix and already commended really strong performance in our consumables business. Adjusted EBITDA, just slightly below last year's numbers. And even though we are -- this is, of course, the area where we have most of the synergies in the minerals. And yes, our run rate is currently EUR 31 million, but there's not so much yet in the numbers because that is a run rate and forward-looking number, the EUR 31 million. But really nice good outlook combined with our synergy targets that are primarily in this area. And then Metals and Recycling. Really EUR 40 million difference in the EBITDA line to last year. And with our new financial targets -- strategic targets, it's clear that we will immediately initiate actions to restructure this business and work on turnaround. And we will hear about that one a bit later on. The planning has already started. There are projects in this area that are still within reach that we can sign in this year. But the order backlog is such a low that there's already an inflow of goods from some of our locations and operations into SG&A as we cannot keep all of them busy. And on the other hand, we are in such locations that we cannot use temporary layoffs that flexibly as we can in Finland, for example. Next one. Okay. And I will hand it over to Eeva to go through the numbers more in detail, and then I'll come back later on.

Thank you, Pekka. Good morning, good afternoon, on my behalf. On the financials. So following the closing of the Metso Outotec transaction on June 30, so we continue to have several sets of numbers for you for the remainder of this year. The official IFRS numbers have some limitations as they ignore the Outotec history altogether. So for estimating run rate, the illustrative combined figures hopefully give some more insight to you. Then again, they do combine the history of 2 separate companies. So they are, as their name says, illustrative. The pro forma figures are provided as a third set to give you a combined view following the conventions of pro forma reporting that will be familiar to some of you. So I will try to clarify the main differences during the following few slides, just so that you know which numbers to look depending, as said, a bit on what the purpose of your thinking is. On the IFRS income statement. So the third quarter is the first quarter where the IFRS income statement provides you the full detail on Metso Outotec. As you may remember from Q2, under our IFRS, the first half of 2020 consists only of Metso Minerals. So to clarify, the EUR 985 million of sales is the sales from Metso Outotec, whereas the January-September sales of EUR 2.432 billion is a combination of EUR 985 million for Metso Outotec and Metso Minerals January-June sales. The last year comparison figures under IFRS are solely Metso Minerals figures. Unfortunately, the earnings per share number is even more complex as not only is the numerator a combo of 2 sets of financials as per the earlier mentioned logic. Also, the denominator, i.e. the number of shares that is used to calculate the EPS, is not that straightforward, as it is based on the average number of outstanding shares during the period and is hence the lower number when it calculates an average from a lower number of shares for the 6 months and the current Metso Outotec number of shares for the 3-month period. But when looking at Q3, you're on clear ground. This is the first quarterly earnings report from Metso Outotec. EUR 985 million of sales; adjusted EBITDA of EUR 109 million; and then, as Pekka mentioned, the operating profit burden by adjustments and PPA amortization totals EUR 47 million and 4.8%. As you may remember from our earlier guidance, so the Metso Outotec-related PPA amortization for the second half of 2020 will be EUR 58 million, of which half was reported in the Q3 figures. In addition, we have less than EUR 10 million per quarter of amortization from earlier acquisitions such as, for example, McCloskey. So the total amortization of intangible assets figure for Q3 is EUR 37 million. Here, I would like to repeat our earlier guidance that the Metso Outotec-related PPA amortization drops to EUR 38 million annually from next year onwards. So significantly less in a quarter for next year when the number for 2 quarters this year was EUR 58 million. An additional point on our tax rate. It is very high for the third quarter as the Metso demerger at midyear caused some extra costs in the quarter from a tax point of view. Our effective tax rate, ETR, for the 9 months is 29.5%, and we would expect for the full year that the ETR would be in the 28% to 29% range. Moving forward. The next page has the illustrative combined figures, which are useful when you want to look at the 9 months of Metso Outotec, as here the first half 2020 includes also Outotec in the figures. These are hence better indicating a run rate for us. Here, the adjusted EBITDA margin of 11.1% for the quarter compares with a 9-month figure of 11.4%. As we indicated in connection with our Q2, we knew we would face additional costs in the third quarter from having to end most of the temporary cost-saving measures and then not yet having benefit from the synergy cost savings. Regarding last year's Q3 margin of 14.3%, I would note that we don't consider that as comparable with this quarter due to, at that point, Outotec Metals Refining segment results, including material positive one-offs, which have not occurred this year. My final comment on this slide would be to highlight that the EUR 0.15 earnings per share on this slide is calculated based on the illustrative combined net result divided by the actual number of shares at Metso Outotec. That is some 830 million altogether. The higher denominator gives a 2% -- EUR 0.02 lower EPS than shown on the previous page, but as said, perhaps more illustrative, this one, to our shareholders. The next slide gives the highlights on our balance sheet. And here, we have the benefit of having full comparability with the end of September and end of June figures, illustrating the assets and liabilities of Metso Outotec. Only the end of December figures are for Metso Minerals only. As you can see from the figures, there was minimal change during the quarter, a slight reduction of the balance sheet total to EUR 5.511 billion. I'll walk you through the net working capital and liquid fund shortly. Before that, just to summarize on the cash flow, where you can see that net cash flow from operating activities for the 9 months was EUR 317 million. The same figure after Q2 was EUR 303 million. So we had a positive cash flow for the quarter of EUR 14 million. Despite additional profit for the period, we had a negative impact from a change in working capital of EUR 55 million and also a negative impact from net financials and taxes paid. As you may remember from Q2, the Outotec cash is accounted in this graph on the row of business acquisitions net of cash. This number here, EUR 203 million, being slightly lower than the EUR 216 million reported in Q2. This is due to now the Q -- end of -- now this 9-month figure also including the impact of our Davies acquisition in August of this year. Moving to our net working capital. So a few comments there. Inventories at the end of September were EUR 1.098 billion, which is slightly further down from the EUR 1.106 billion at the end of June, showing further results from our actions to better manage our supply chain and logistics. Trade receivables, EUR 612 million, slightly up from June. And payables up similarly and there to a figure of EUR 504 million. Also, Advances slightly up from June. The other noninterest-bearing liabilities, which consist, for example, all the provisions and project-related items totaled 450 -- EUR 496 million in the graph. Now we continue to focus on actions to improve cash flow and impact -- and work with various actions affecting the net working capital. And we do see opportunities in harmonizing our ways of working in this area for the group. My final slide would be on our financial position. Our liquidity position is solid. In addition to liquid funds amounting to EUR 477 million on the balance sheet, Metso Outotec has committed an undrawn revolving credit facilities of EUR 790 million at the end of September. This consists of a syndicated EUR 600 million revolving credit facility, EUR 100 million revolving credit facilities maturing in 2021 and an additional EUR 90 million maturing in 2022. During the third quarter, we repaid Outotec's EUR 150 million hybrid bond in July and Outotec's EUR 150 million bond in September, with bank term loans having clearly lower interest rates. From immediate cost-savings actions, we are moving our focus to extending the maturity structure of our debt as well as reducing the overall amount of debt through cash flow from operations in the coming quarters. And with that, I would hand it back to you, Pekka.

So thank you, Eeva. And I'll move to integration strategy and to our outlook for the next 6 months. But integration, first, a few words about that one. We are progressing well, in line with our plan. The cost synergies that we have been so far able to execute, EUR 31 million, basically come from an organization. We have completed all the nominations. Now we have organization fully in place. We have made a big part of the layoffs that we'll make at this moment. A few countries are still pending, where we haven't been able to proceed because of the local regulations and legislation that is in place. They will follow a little bit later on. But we are slightly ahead of our, sort of, target level, which is EUR 50 million at the end of this year. And still the outlook at the end of next year, EUR 120 million accumulated at that point, is well achievable. And that basically summarizes the integration at this moment. And then we'll move on to the strategy work that -- the work that we initiated beginning of the quarter. And we worked really looking first into portfolio part of the strategy, then the business areas that are the units that are driving really; our development, our sales, our growth and our profitability improvements. They have their own strategies then. And we will be communicating about more details of strategy then in our Capital Markets Day on November 11. But we stated our purpose statement, enabling sustainable modern life. We feel and are excited about this purpose -- the purpose clause. I mean it very well describes existence, why do we exist? And what makes our existence meaningful? We are in the middle of many megatrends, and we can contribute to these megatrends in a positive change, which is in a positive manner. Positive change is part of our brand promise there as well. But we know that urbanization requires infrastructure. Infrastructure needs construction materials. Climate change needs electrification. Electrification needs more metals. And we all know this story, and we feel that we are important contributor now as Metso Outotec in that one. On our vision part, we want to say we are the #1 choice for sustainable use of natural resources for our customers. And we also say that we want to deliver service reliability, innovation and results and have all of this safely. So this is towards our stakeholders. And then we have strategic priorities, 4 of them all together, starting from customer-centricity; sustainability, which we see, of course, important thing for ourselves, for our supply chain, for our own operations, but we see that we can contribute to our customers' sustainable development through our offering; and then performance culture, which is important driving force towards improving financial performance and integration that we're in the middle. We've also worked on our values that are stated there in the bottom of this chart. The top priority is really 4 areas. I commented already shortly of them, but our aim really is to become industry-leading company in the eyes of all the different stakeholders. Performance culture, we need as a driving force here. That's a program that we will put our organization through. We will build it bottom-up such culture and such activities, such way of working for the company that supports us achieving the financial and strategic targets. Customer-centricity. We want to secure that our customers are really getting from us what they have ordered from us and with high degree of satisfaction. And sustainability, really at the core. 90% of our R&D will have sustainability targets going forward. We also commit ourselves to 1.5-degree global -- maximum global warming target. And we have already approved science-based KPIs for that development. And then integration is really the most important thing that we drive at this moment in the organization with the announced targets. We also do have other stand-alone -- what we call stand-alone improvement targets, where we step-by-step are restructuring our footprint -- supply footprint, our logistics, our distribution center footprint. And they -- integration together with the business area strategies, their growth actions, their profitability improvement actions will contribute to the financial performance of Metso Outotec. The new targets. Adjusted EBITDA margin, over 15% over the cycle. We are in cyclic business. That's why the latter part of the statement, meaning that at the peak of the cycle, we should be above 15%. And at the bottom of a cycle, we should see better sort of resilience and recession-proof performance than in the past we've been able to achieve. Our target is to maintain investment-grade rating. We have it currently, and aim is to continue to maintain that one. Dividend payout of at least 50% of earnings per share, fairly similar to what we have had in the past, is also in the horizon. And then progress in sustainability and alignment with the 1.5-degree commitment that we have given and backed up by really the science-based targets there. Then in the area where we do have a concern and really, as you saw in the numbers, major difference in the metals from last year's almost EUR 30 million adjusted EBITDA to this year, EUR 10 million negative. So difference being EUR 40 million. The situation has become even worse where Metals was earlier on even worse during this year. And with those targets that I just mentioned, it's clear that we will start immediately the restructuring and turnaround actions. And focus is very much on those during the next 12 months in our Metals business. And we will look at both business scope, meaning continue to do the strategic review and of the portfolio and the cost structure that we will address further in that business. We also took a decision that we'll start the divestment process of recycling. Planning is currently going on. We felt that recycling is not synergistic enough for the rest of the group now that we are becoming a more focused group. So we feel that this is right time to divest the recycling business and find itself for a more suitable home and place to grow and further develop the business. And then the outlook. Same outlook that -- what we had at the end of second quarter. The situation is very much the same despite of lower order intake, but we see that very much as sort of postponements of some of the important potential orders that we have and look forward to getting back on the right track very soon in that regard. Second wave of COVID is affecting us and the rest of the world where -- that are still in the first wave, so to say. Many countries are still at the peak of it. And of course, it's always possible that things do get worse. But at the same time, we see that we all are learning to cope with and live with -- live in a different world in this regard, and business is less affected now because of that. But possible that it will cause some negative turns in business. But currently, we don't see that in the horizon. Thank you.

Thank you, Pekka. Thank you, Eeva. And operator, we are now ready for questions, and you can open the conference call lines.

[Operator Instructions] Our first question comes from Klas Bergelind from Citi.

Yes. Pekka and Eeva, it's Klas from Citi. So my first one is on Services and Minerals. You say that you were able to realize cross-selling synergies, Pekka, but this also seemed to have led to short-term disruption on the -- to the business. So service order seems to have been weaker as you were aligning responsibility in the front end and so forth. Orders are down 17% quarter-on-quarter. So how much of that was that short-term disruption owing to the integration relative to weakness in demand? Of course, there are differences upstream versus mid and downstream, but those upstream highlighted an improved service business quarter-on-quarter. So I guess underlying demand was at least stable for you? That is my first question.

Yes. It is mainly -- I would say the difference comes from the COVID situation that we are. There are restrictions for visiting our customers. Customers don't accept visitors, and it's difficult to perform anything that requires involvement -- direct involvement from us, either in preparation or delivery of modifications and upgrades. I think that is clear. But at the same time, normal spare part orders, they are going as well as before. And consumable business goes probably better than ever before at this moment. It's just sort of sign that customers are concentrating on producing and making profits because prices are high. And they don't even plan to have maintenance shutdowns at this moment, as they are difficult to plan. And instead, they want to generate more gas and strengthen in their own balance sheet. So that is probably the big picture. Yes, we have made layoffs during the past month, 1.5 months and that has been -- of course, it's always disturbing factor in the organization, but I don't really see too much of that impacting in the activity.

Okay. Fair enough. Then my second one is on the equipment side also in Minerals. Obviously, a tough compare year-over-year from the big greenfield order in old Outotec. But orders rolls weaker sequentially versus the second quarter, and you said that bigger investment projects were being planned and prepared, that the decision-making was slow. So this is a timing issue. So I guess 2 questions in one. First, what size are we talking about here when you talk about these projects? Is it similar to the greenfield last year or more like EUR 30 million, EUR 50 million-type orders? And then second, as I said, we've seen a lot of momentum upstream from others reporting. Do you still think that the strength that we see at -- in Epiroc and at Sandvik, is that's still a good lead for your orders in the Minerals business?

It can be. Of course, there's somewhat different dynamics between us and those 2 companies that you mentioned. And my sort of experience from the industry shows that at this moment, when gold price is extremely high on record levels, and that is a segment that moves very fast and that opens business opportunities to Sandvik's and Epiroc's, probably more than for us -- immediately for us further down the road, but not at this moment. But this is, of course, something for them to comment rather than us. We do have good pipeline of projects. Normal orders that we would call sort of EUR 10 million, EUR 20 million, EUR 30 million. That pipeline is really healthy, and we are booking that kind of orders. But we haven't seen the EUR 100-plus million orders. We don't have too many of such things in the pipeline either, but we have a healthy pipeline of, say, between EUR 50 million and EUR 100 million size of projects at this moment. And those are the ones that we expected some of these to come through in a quarter, but we didn't get them. But they have not disappeared. And day by day, we're getting closer with them as well.

Okay. That's good. My final one is on the new targets and the cost cutting on the Metal side. The above 15% target is through the cycle, as you said. And that would mean that you're aiming for a high peak than 15% on top of realizing sort of the synergies, which we get -- at least the 2019 sales, we can get to a 15% margin adding that in. Are you also already starting with the increased standardization of the design of the equipment, increased throughput in the factories and so forth? Or is that work starting after you have realized the synergies? Just so we understand that a little bit better.

That work has started already. That's a journey that Metso has been on. Outotec had made already moves in that area, and we will further strengthen that part of it. We want to reduce the project impact overall. And yes, we want to be involved in the projects, not playing really the principal role as a supplier in the projects, but we want to participate them. And the way how we want to participate and will participate more in future is through standardized offering that is preengineered and manufactured, either in our own plants or our supplier plants.

Our next question comes from Magnus Kruber from [ USB ] (sic) [ UBS ].

Pekka, Eeva, Magnus here from UBS. So a couple of questions for me. So first on the new targets. Obviously, I noticed that growth is not among them. Maybe you could expand a little bit on why you left that out.

Yes. Very good question as such. But I mean if we look at currently the markets where we are, we do have COVID with us. I mean it's a fairly difficult moment to sort of discuss the growth as such. So I mean markets are somewhat depressed throughout, lot of uncertainty in the area. And then when you look at our list of divestments that we have announced, it means that our top line will de facto come down with these divestments. And then we do have further work with our Metals. And even though we are not saying that we will be divesting some of it or parts of it, it is an option that we'll end up doing that as well. Our first goal is really to restructure the business and find out the true sort of a potential out of them and keep them in the group. But depending on further review, we may end up doing something in that area as well. And that is why we don't talk about growth. For us, more important at this moment is to talk about the margin levels and how do we get into those ones rather than growth. We may come back to that one then, maybe next year once things clear out a little bit.

That's very clear. That's very good. And secondly and specifically, you talked about the cost structure of Metals and Recycling, obviously. Could you comment anything about the sort of the timing and the size of reduction in costs you might see here?

We are in really early stages of planning of that when it starts. Now we will be able to say something during the Capital Markets Day, but I would say more so in the sort of fourth quarter full year results announcement. That is the time frame that we will -- we do know more. But like you see, I mean, it's difficult to talk about 15% if we have a business that's currently running at that sort of loss. So we need to be looking at somewhere 10% EBITDA margin on businesses that we will further develop in that segment.

That's very clear. Just a couple of ones to wrap up. On the Minerals margins, of course, one of your peers published the margin level of the Minerals Processing business a week ago or so, around 16% on an EBIT level last year. How would you say that your comparable business stack up to that margin level? And how much of your Mineral sales would be seen as comparable versus this competitor in particular? And just as a follow-up on that, do you think there is further scope for consolidation in the midstream part of the equipment industry?

Yes. Without knowing really exactly what's included in that one, but I believe it's crushing and screening products that they have and related aftermarket that they have now -- Sandvik now announced it will be its business area of its own for them. That includes crushing and screening for both mining applications and then construction applications. Our offerings are somewhat differentiated in that one. We are not really head on. And our mining crushers and screens, they are in our Minerals. While our Aggregates, that's primarily construction, quarrying activity. So they are not exactly comparable. But those -- that is the first set of numbers, and we, of course, make note out of that one. Further consolidation, as we are talking about ourselves, there are opportunities. But of course, I mean, our market share starts to be reasonably high in some of these areas. And we are not really looking into anything with regards to that particular business with Metso Outotec.

Got it. And beyond your business, do you think there is scope for more consolidation within the industry as such?

That remains to be seen what happens.

Our next question comes from Artem Toriko (sic) [ Artem Tokarenko ] with Crédit Suisse.

That's Artem Tokarenko from Crédit Suisse. I have 3, please. Firstly, on Metals/Recycling business. Considering that we don't have a long-term history of margins, could you maybe talk about what's the mid-cycle level of margin has been in that business and whether the cost savings which you're initiating would allow you to achieve that level at lower volumes?

Well, actually, on the Metal side, if you want the history, so I would recommend you look at the earlier published Outotec financials. It was a separate segment in Outotec. So I think you can go quite a few years back actually. Then for Recycling, obviously, we haven't reported it separately. But based on today's announcement, we would expect it most likely to be reported as a discontinued operation already at year-end. So that may be of less interest to you thereafter.

And just to check on this, Eeva, with Metals [ Energy and Water business ] Outotec reported it, it also includes energy and water and some other bids, which were having a loss-making in the past?

That's correct. But when they announced them to be sold and were moved into discontinued operations a year back, I believe they did provide some information on the -- other than that. And then those were rather small businesses. So I think you got the sort of the bulk of the comments. For us, unfortunately, it is difficult to comment on what the business perhaps has done. We've obviously seen sort of very unsatisfactory numbers during our tenure. And we, as said, we will sort of initiate a turnaround program. And then we will assess sort of that program, we'll assess the potential. And I think it's then we will be rather than talking about the future than the past.

And my second question is around the Minerals margin. Considering that you've seen a lot of mix support in the quarter and the recent weakness in service orders, how should we think about sustainability of margins and minerals into Q4?

Well, I think sort of what we will see as a benefit, as our CEO mentioned, the bulk of the synergy savings, obviously, will impact the mineral segments specifically. And as said, when the sort of underlying service business, spare parts, consumables is doing very well. So in a way, that is a solid base for us also for Q4. So I would be more -- sort of more optimistic about the sort of margin potential going forward, even if the sort of order intake was slightly lower.

Okay. And my last question is around the order intake. I guess do you think rapid testing or any other solutions or are there any other solutions which could allow that situation with having troubles with getting access to customer sites be resolved in the coming quarters?

Well, I think obviously, the vaccine would be important because, of course, sort of any new people sort of pose a risk to the customer operations. And as our CEO mentioned, with today's prices, nobody wants any sort of downtime in the operations because of the virus. So -- but there may be other things. I mean I think we're all learning various health and safety measures better and better in a way to organize operations in a way that limits. But as said, of course, it takes some time and experience. And that's what we're seeing that in the third quarter, if people were able to postpone, it was easier for them to postpone and sort of rather wait, either for a bit more experience on certain safety measures or then the vaccine and that for a certain period of time, you can obviously postpone, but then not for very long, as I'm sure you can imagine.

Our next question comes from Madhvendra Singh from Bank of America.

A couple of questions. Firstly, on the order trends, especially given your outlook statement that you expect market conditions to be stable. Should we extrapolate that to your order trends as well and expect flattish quarter-on-quarter orders? Or should I read more into your earlier statement that you had a few orders, which were still in the pipeline that you were not able to book in third quarter and hence, should actually be booked in the fourth quarter, which basically means that orders for third and fourth quarters would actually be better than what we saw in third quarter? So I just want to get a bit more clarity on how should we think about the order book for fourth quarter? And the second question is on your margin target for just above 15%. So wondering whether that is just being a bit more conservative given your -- I think just adding the synergies will take the pro forma margins above 15%. So are you just being conservative here? And should we expect likely upgrades to this target as well, maybe later on?

Okay. First of all, the order trends, we are really guiding the market outlook. And market outlook has been, since I would say second quarter, exactly the same. And that's why we sort of repeat our outlook statement. It's not a straight-line connection with our order intake. It's not meant to be that one. There's also other people competing for the same orders. And in most cases, there's only one winner, and everyone else is a loser. And therefore, you cannot draw a sort of direct line between these 2 things. Postponements, they are fact of life that we need to live. And our order line was thin because of that one. And then the comparison from year before with 2 large projects that Outotec booked at that time makes it even sort of more dramatic the drop than where it actually is. And like I said, I mean, these projects that we have ahead of us, they are mixed projects between Metals and Minerals as were the big projects last year that we had. Size-wise, these are not as big as the last year's projects, but there's several of them now. So that for the order trends. Don't take the third quarter as sort of a proxy for fourth quarter orders. Then the margin target, you're right. I mean when you do the maths, you'll end up 15 plus, but we need to remember that this is cyclic business. And when the upturn starts, everyone gets really busy and everyone gets in most of our business, at the same time, busy. And that's true for our Minerals business, in particular. Our customers, they sell their products in world markets in U.S. dollars. And when those prices go up, then everyone cranks up and needs everything immediately. In fact, yesterday, they would like to have the deliveries. So -- and in those circumstances, that is, of course, for us, an opportunity to make much higher margins. But then when a downturn comes, it also hits more or less at the same time. There can be some commodities, like gold seems to be living its own life. It has done it over the years. Currencies can make a slight impact on that one as well. But overall, I mean, downturn hits at the same time. What we can do is take care of our cost base, operate efficiently. It makes us more resilient during the downturn, and it makes us more profitable during the upturn.

Our next question comes from Antti Kansanen from SEB.

It's Antti from SEB. A couple of those. So I'll start -- coming back to the service orders, just the trends Q3 versus Q2. Can I just confirm that the spares and wear orders -- development that you are seeing is quite stable and in line with the customer productions? And there hasn't been any notable, let's say, pre-buying or inventory fill-ups on the previous quarters that would explain part of the Q3 weakness on the services line?

Yes. Correct assumption.

Okay. And then coming back to the margin target and kind of the over-the-cycle nature of it. Kind of in a bigger picture, where do you think we are in the cycle right now? I mean you are seeing quite robust demand on the services side. And then the other hand, the equipment seems to be quite depressed at the moment. So reflecting to that 15% level, what would be suitable in these market conditions? And where do we stand currently?

My view on -- and this is now -- the cycle is, of course, affected by COVID and by the uncertainty caused by it. Therefore, it's really difficult to say where we are in the cycle. But when we look at metal prices, we should be in a sort of getting higher up in the cycle at this moment. But really, I mean, there's multiple factors here, COVID being one of them, some of the delivery issues of some of the metals because of other things. Take iron ore, for example, and iron ore market is surprisingly strong at this moment primarily because of delivery issues from Brazil. And then the longer-term trend for growth in needs for metals, that exists there. And the investments are ongoing. For example, copper, battery metals, all these investments, they are being planned. And currently where they are being also acted on and executed are, for example, in many countries where the currencies are currently very weak. So take, for example, Russia, that market is very active at this moment. It's because of healthy level of metal prices, but at the same time, weakness of the local currency. And it makes the operating margin for potentially for mine operators very healthy.

Okay. And then to the aggregates business, kind of you made the McCloskey acquisition. And obviously, afterwards, the market environment has been exceptionally difficult. So if you -- we think about the synergies related to that and kind of the profitability upside in the Aggregates business, is there still some kind of synergy benefits that you expect to reach in the next up cycle? And in terms of the 15% target, where do you think aggregates as a business should stand compared to that group-level target?

If we sort of look at the mix of businesses that we have and where aggregate sits in that one, so clearly, I mean, we -- in the Minerals, we need to look a journey towards 20, in Aggregates journey towards 15. And then metals, we talk about more once we have the restructuring plan in place. But that's the sort of mindset that we have in these businesses. Aggregates does have more potential. There's good action plans in place. What takes a little bit longer time is to have a more standardized offering between the different brands that we have in our -- primarily in our mobile equipment range. So we can develop product synergies between Metso brand and McCloskey brand in those areas that are not really features that the specific customer segments do need and require. And there's further synergies coming out of it. We can also extend the use of our supply capacity in different parts of the world more efficiently with our multiple brands. And we are initiating some actions now within aggregates, where we are moving assembly of some of the products closer to end customers. And then a huge, big opportunity that we do have is really the markets in the East, both China, and longer-term India as well. The boom is currently on in China. India is waiting for things to clear out after many things, including COVID, but also some political turmoil that we have seen in a country. At the core of everything is that we are -- we have very much standardized offering of crushers. So either stationary crushers or crushers that go into mobile units, they are the same crushers, more or less, regardless of what brand we talk about. And these are really the products that form the core of our offering, either stationary or mobile. And they form also the platform for our aftermarket business. So there's further potential. And like I said, the mindset is towards 15% during the years to come for Aggregates.

Okay. Fair enough. And just lastly, from a very simple question on the synergies. EUR 31 million run rate, now EUR 50 million end of the year. So would the kind of the year-on-year P&L impact for Q4 to be around EUR 8 million. Is that the right thinking behind what you announced?

Yes, Antti, I would take the EUR 31 million and divide it by 4 to get the quarterly impact, yes.

Okay. On the P&L, yes?

Yes.

Our next question comes from Antti Suttelin, Danske Bank.

This is Antti from Danske. I'm just trying to look beyond COVID. And I'm not asking you to make a guidance or anything like that but just the way of thinking. If I take Metso Outotec's 2019 order intake and I add McCloskey pro forma, so that it would have been for the full year, I end up with a pro forma order intake of EUR 4.8 billion last year. Then I'm looking into '22, which hopefully is beyond COVID. Do you think it makes sense to think that Metso Outotec could be on that level of order intake in '22, EUR 4.8 billion?

Yes. Without really putting my finger on a number as such, but let's say, if things developing and assuming that COVID is no longer with us and everything else doesn't cause other disturbances, I mean, that's the range where we should be by that time.

Okay. And then secondly, still on this third quarter order intake. It looks to me that you may have lost a little bit of market share, just looking that your order intake fell by 27%. I know that 17 percentage point of that is because of the last contract a year ago. But that still leaves about a 10% decline year-over-year. Then I look at Sandvik, which had plus 2%. So is it that you lost some market share? Or is it that your part of the market, is just weaker compared to Sandvik's market?

We are somewhat in different phases of our cycle always. And then secondly, I mean, please remember also the currency impact. I cannot recall what Sandvik reported on us, but we have 8% on orders -- or was it 9% on sales in our Minerals, just the currency impact. So that is a major one.

Yes. But these were ex-currencies. Everything is ex-currencies.

Okay.

But would you say that you potentially lost some market share?

No.

Because of the integration?

I wouldn't buy into that argument. I mean you cannot draw that conclusion, comparing us with Sandvik and Epiroc. You need to compare with head-on competitors.

Our next question comes from Robert Davies from Morgan Stanley.

My first one was just around some of the [ site ] issues across your Mining and Aggregates business. Just if you could give us a sense of where you're seeing the relative disruptions now maybe versus 4, 5 months ago. Just wondering if things have changed. That was my first one.

Well, I think, Robert, part of the challenge is, of course, it does change. But clearly, certain countries and/or smaller regions are more impacted. So for instance, Southern Africa has been very challenging in the COVID environment with site access. Obviously, it ties to sort of -- if you look at the overall infected people and mortality numbers. Similarly, in Southern America, there are some differences between countries, even sort of sites. Obviously, some remote sites are better off in a sense that there is sort of a less exposure and then where some sites are more heavily impacted. So I think what we see is quite well tied with the sort of overall WHO statistics on where the virus is causing most turbulence. But then as said, obviously, with bad luck, any site can sort of have some impact. We've had cases in Southern -- sorry, Northern Sweden, which were -- which was kind of -- which was a very difficult region and not that many weeks back so -- and that -- but so it's more kind of things are evolving and people are just trying to be very cautious and to the degree that they can really limit any unnecessary visiting any unnecessary people at the site.

And then the second question I had was just around maybe kind of margin mix as you go into next year. Just thinking historically about Metso and Outotec, just if you could give us a little color on the difference between the 2 Minerals Processing businesses on OE versus aftermarket profitability. I know you won't necessarily give us the exact numbers, but can you give us a sense of where the relative profitabilities were on OE and aftermarket across those businesses? Was that -- was the Metso business more profitable in both parts and sort of particular segments that were more profitable? That would be helpful.

Yes. I think -- obviously, sort of on the equipment side, I think it's sort of fairly similar. Obviously, sort of -- it depends a bit on what products you're looking at, what the sort of specific market position of either company was. So I wouldn't say there's -- I think we have a sort of a good base to build on in both companies we can definitely improve. Supply chain has been a big topic in both companies. And obviously, with the scale we have generated, I think -- if anything, we have a better platform that will serve those legacies. I think on the service side, generally, obviously, the fact that Metso was much longer on the service journey with much more scale, that obviously tends to be helpful to the -- and visible in the margins. So again, I think with the sort of additional platform installed base, our target is to improve. But as said, from a starting point there, there was maybe a bit more difference on that side.

Got it. And then my final one was just maybe thinking about the impact, specifically, I don't know if it's possible to quantify. But just in terms of these site active issues, how much of your product sales on the equipment part of your business to your customers depends on having someone on site sort of engaging with the customer and sort of advising them how to -- whether it's better to set up a kind of production flow or where you could put pumps and valves and hoppers? And how you sort of set up the overall layout of the mine site? How kind of important is that? Or I guess I'm trying to get a sense of how disrupted that element of your business is from an OE standpoint specifically, has been from not having access to sort of gown the customer sites and perhaps a sort of thinking into the first half of '21, if that continues. Is there anything you can do to address those issues?

There are things absolutely that we can address. And it has affected our business. It has caused some delays in delivering things and some delays obviously. The delays will reflect then on a sales line as well. But we can prepare ourselves. And we have, of course, started those already in the spring time. We have included various COVID clauses in our contracts and things like that so that we are not exposed to things that are ways beyond ours and also customers' control in that regard. And we have taken that kind of actions. But it's -- I wouldn't explain with that one too many things. I think mainly they have been cash flow issues. Our cash flow has been good and healthy despite of that one, but it would have been even better, the cash flow, if we would have seen a bit faster progress in some of the projects. And normally, it also means that if we can deliver, we see increase in our inventory level at the same time. So it does have in a way double impact as we cannot invoice something and get paid for something. Something sits in our inventory a bit longer time.

Our next question comes from Tomi Railo from DNB.

This is Tomi from DNB. Coming back to the market and order intake development, would you say that you have walked away from some projects?

Yes. We can say that we have walked away from some of the projects, without being any specific in that one, for reasons that we felt were good and genuine reasons.

So that you have become and try to be more strict on the, let's say, pricing or profitability levels, what the project can offer to you?

Various terms, I would say.

Okay. And secondly, given the metals outlook and timing perhaps of the orders, would you say that the losses could worsen going into the fourth quarter from the third quarter levels?

I would say that it depends what kind of orders we book. Currently, the order backlog is very thin in our metal side, which means that any order that comes in, we will start to work on them. And through POC, we will start the sales coming in fairly rapidly in that one. But it's dependent on these orders coming on time. We have initiated already actions earlier in our Metal side, but we won't see the impact in the cost side before sort of first quarter of next year and end of first quarter of next year.

Our next question comes from Manu Rimpelä from Nordea.

It's Manu Rimpelä from Nordea here. Getting back to the Metals business. So is it so that the only issue you have currently is related to the utilization rate, that there is no problems with the old backlog projects delivering losses?

There's no new news in that front as such. I mean, yes, we know that we have some of the legacy projects where we have issues, but there's nothing new as such that we would report at this moment. It's primary reason is that there's no orders and then the genuine situation, that margin levels in those projects is questionable. And some of the other terms are not -- just unacceptable at this moment.

So does that mean that the competitive situation is so fast that you decide not to take those orders?

I don't know whether it's competitive situation or whether it's then customers' assessment on the situation. But we have -- like I said earlier, we have walked away from some of the opportunities.

Okay. And could you remind us about the remaining Metals business, how that is roughly split between the different businesses within that house?

It's very much sort of order-driven. We have certain resources that are fixed per sort of technology and -- but certain part of resources are then moving according to orders. So it's fairly difficult to give you a split. But over time, Eeva, do you have anything we could share on that one?

Yes. To be honest, not quite sure what -- how Outotec has described it earlier. But as -- I mean I guess you will know that there is a hydro-related business. There is a smelting-related business. There is a ferrous technology. And then there is a host of other technologies, which you can group under various names more on the sort of chemical side of things. But as Pekka said, it's -- you can, of course, look at numbers 5 years back and have a certain view on the size of the business. Right now, sort of situation looks very different. So I think we want to sort of pursue now the restructuring turnaround and kind of assess that we have a more healthy cost structure that can generate reasonable margins with the current volumes and -- rather than sort of hope that volumes will somehow cure the problem. I think this is a structural issue needs to be handled. And then let's see where we are with sort of with the size and scoping of the business thereafter.

It's about 5 businesses within the Metals segment, excluding now recycling. And I think they are size-wise, and like I said, driven by order intake, between EUR 50 million and EUR 150 million, I would say, annually, the size of the business.

Okay. And then final question on the Metals business. This big problem project in Saudi Arabia. So how possible is it for you to dispose parts of the Metals business as long as you have this problem project ongoing? Or are these 5 business units completely separate from each other?

In that regard, they are separate. That issue is within the smelting part, and that is one of the businesses within the metals. And it's obviously that divesting business, where we have a project like that, I mean, it's not realistic to expect that we would be able to divest that one with any sort of foreseeable terms -- feasible terms.

Our next question comes from Societe Generale.

I have 3 questions, and we'll go one at a time. Again, sorry to belabor on the order intake in the third quarter. But if you exclude the Outotec orders last year, the orders were still down double digit. So I was wondering how much of it could be attributed to the projects being postponed, as you said? And how much was maybe due to you losing some market share in the quarter?

Like I said, I mean, I will not quite buy the argument of us losing the market share. Big projects are there. So that is clear. They were there a year ago. The rest, I would say, to a great extent, that is COVID impact, what we've seen there.

Okay. Got it. And also, we have been hearing about the customers postponing decisions even before the COVID as well. Do you think there are any other factors we should be aware of apart from the COVID, which is still making customers hesitant on taking decisions on the large orders?

I think the businesses with bigger projects, they tend to be very lumpy. And single decisions and timing of them is very crucial to these ones. And even though we do have experience on how the decision-making cycle in projects in general go, it's always difficult guesswork that when finally all the pieces are in place, so that the Board's level, these are very often Board-level decisions to proceed with our customers and how the timing then goes. So there's a difficulty to forecast. It's a different ball game to forecast something standard products that we are selling in big quantities, where there's hundreds, maybe thousands of customers. There, you can reach much more reliably from macro data the sort of order bookings than in projects.

Understood. And lastly, just one of bookkeeping questions in terms of the service orders. So could you share what is the split in the services business, particularly for the professional services and mainly the part of the service, which requires your presence in the mines?

Yes. If your question was on how much of our service business is more labor-related, then that would be sort of 10%, 15% of the total -- from the services total.

All right. Ladies and gentlemen, we need to conclude this results conference call now. We thank you for being with us today. And as has already been mentioned, we will arrange a Capital Markets Day, a virtual one, November 11. And for more information, please check out our website, mogroup.com. So we'll hope to meet you there. And for the time being, we say thank you, and goodbye.

Thank you.

Thank you.