Metso Oyj (METSO) Earnings Call Transcript & Summary

Good afternoon, and good morning, ladies and gentlemen. This is Juha from Metso Outotec IR, and I want to welcome you all to this audiocast and conference call, where we discuss our second quarter and half year results for 2021 that we published earlier today. Results will be presented by our President and CEO, Pekka Vauramo; and CFO, Eeva Sipila. And after the presentation, we'll have time for Q&A as always. We'll try to limit the length of this call into 60 minutes, so please be brief with your questions when you ask them. And as you can see from our presentation, in the first pages, we have the usual forward-looking statements and then some information about the financial data we have put out in terms of both IFRS-based numbers and illustrative financial information. Without further ado, we'll kick off the presentation. I'll be handing over to President and CEO, Pekka Vauramo. Please go ahead.

Thank you, Juha, and thanks for joining this call, and we'll go straight into quarter 2. We saw, as we said in our outlook, a strong market activity during the second quarter. And I'm sure you have noticed that in our order announcements that we have made several of them during the quarter. And order intake was really strong in all of our three segments. Then when we look at the top lines of segments, Aggregates, we saw really strong order intake, sales and profitability as well. In fact, we are on record level now in Aggregates altogether. It's, of course, a good result. But I have to say that it was something that we were expecting to happen now in this kind of marketing environment. On slight disappointment side is the low sales of Minerals. Good order intake there as well, but low sales primarily because we are now delivering low order intakes that we did book end of last year. And we've been saying all the time that one should not expect our top line start to grow before second half of the year. And that is still the outlook on that side. Metals turnaround program is progressing. And we were able to show black numbers now, though small one, but more important is that we are moving ahead with that plan. And integration as such, we are ahead of the original plan and well on speeds and plan to achieve EUR 120 million cost synergies -- EUR 120 million cost synergies by the end of the year. And clearly, sustainability is gaining importance. And this is visible in many areas, obviously in our own operations, but we are seeing it already in our order intake and the type of orders that we are receiving from our customers. Then on the figures, orders received grew by 43%. So good strong performance as we were expecting second quarter to be very positive and favorable. Sales flat, just like we had been saying that we shouldn't expect top line start to grow before second half of the year. Adjusted EBITA, slightly below last year's [ EUR 131 million ] to EUR 139 million last year. And this is primarily because of the sales -- low sales during the quarter. Operating profit, EUR 97 million, last year, EUR 89 million, we are seeing now a smaller number in our adjustments as we have progressed already quite far in our integration and synergy work. So that is then increasing that line. Cash flow continues to be on a strong side. However, we will see that one going down as we move on and as the top line starts to grow and we start to tie capital -- working capital into our supply chain, primarily. And then in the integration side, cost synergies, we track at EUR 105 million run rate and well on track to achieve EUR 120 million by the end of the end of the year. COVID is still with us as we all know, and by no means, it's not over. Yet we see different variants as we all read about and third waves and fourth waves coming. We are seeing some domestic traveling recovering. The text says here Australia. But the reason from Australia is that parts of the country is in complete lockdown so because of the recent cases there. So situation is still changing. This is affecting primarily our service activity and our Minerals business. Our own operation as such have been running well, well with the measures that we have in place and don't -- we don't -- we haven't had any major outbreaks of COVID in any of our locations. Then going into the segments, Aggregates, really strong order performance, EUR 363 million. That's nearly 70% more than a year ago. And it is the infrastructure packages that is encouraging the industry to invest and have their production machinery in good shape for the upcoming projects. Sales, EUR 320 million, that's up nearly 30%. And obviously, that is basically orders that we did book in the fourth quarter of last year and beginning of first quarter of this year. And that was the basis for higher sales right now. Adjusted EBITA EUR 47 million now, last year, EUR 34 million, record margin level, and to a great extent, thanks to volume growth but also good self-help that we have done, implemented the improvement programs and measures during the past 12, 15 months in our Aggregates business. Then in Minerals, order performance was up from last year's EUR 645 million last year, now EUR 755 million. Good performance in that regard. And if you remember reading from our order announcements, some of our orders, they are joint orders for Metals and Minerals. And that type of orders really contributed nicely in the Minerals order intake. But good flow of smaller orders, medium-sized orders, which is always healthy in the business. And of course, the order line growing so much faster than the sales line, it means that our sales will start to grow as well as we move on. We do have negative currency impact on these top line numbers, but that doesn't really explain the profitability drop as such so much because we do have quite a lot of natural hedging in our system. Sales, EUR 578 million versus EUR 650 million last year, and that is just the timing of deliveries and the low orders end of last year. And of course, yes, COVID is affecting our service sales still and we are somewhat behind. And service naturally has bigger -- lower service sales has naturally a bigger impact on profitability. Adjusted EBITA, down from EUR 110 million to EUR 82 million, margin of 14.2%. And we have some internal issues relating to our integration and merging of our warehouses and things like that in addition to the issues with global logistics that we all suffer from. In the Metals side, orders really grew by -- from EUR 87 million to EUR 243 million, so 3x more orders roughly now than a year ago, and market activity really is improving. And we saw several orders, medium-sized orders in -- from the pelletizing plants. And that is very positive development. Overall, sales, EUR 112 million, flat compared to a year ago. And there as well, timing of deliveries, the big orders that we -- and large order intake end of last year will only start to realize in the second half of this year and beginning of next year. Adjusted EBITA slightly on black side, EUR 2 million, important is that turnaround program is going well. And the orders that we booked during the quarter and, of course, the major order that we booked after the quarter is contributing really nicely to the possibilities to have a nice turnaround for Metals business. Eeva, please?

All right. Good morning, good afternoon on my behalf to everyone as well. One year since the closing of the Metso Outotec transaction, our financials are getting easier to read. Similar to Q1, the actual Q2 figures are straightforward as is any sequential comparison or comparison to year-end in the case of, for example, balance sheet numbers. However, please do remember that on the comparison to 2020 first half or second quarter under IFRS, that year-over-year comparison is only to Metso Minerals' numbers. So for operationally better comparison, I recommend using the illustrative combined figures when it comes to second quarter 2020 or first half 2020. Earlier words of caution still apply that they do combine the history of two separate companies, so they are, as their name says, illustrative. But moving to the sort of income statement. So Metso Outotec sales in the second quarter were just over EUR 1 billion, so flat year-over-year. Sales are, however, over 9% up sequentially. I do appreciate that even if we have highlighted that the backlog composition, especially in Minerals and Metals segments, after several weak order quarters last year in the midst of the COVID-19 is very second half-weighted this year as that backlog only got more support from orders from Q4 last year onwards. This sales number of just over EUR 1 billion is on the low end of expectations. Only in our Aggregate segment is the revenue recognition more immediate following order intake. And overall, of course, lead times from order to delivery are much shorter in that segment. Now fortunately, this is a timing issue. Our order intake is very encouraging for future revenue growth. However, you should more expect in Minerals and Metals segments that the sales growth to start moving up over the coming quarters rather than sort of assume any abrupt leaps. We did face some unplanned delivery issues due to having a few bigger footprint moves in our supply and warehouses coincide with a quarter with overall very challenging global logistics availability. And even small misses get big if the availability and cost of a new routing is far from normal. It was not a big number in volumes, the fixing was not free either and hence, gross profit is also slightly impacted and does not really reflect the good work done in most of the company. Nevertheless, EUR 131 million translating into 12.9% adjusted EBITA margin is 50 basis points up from Q1. And we are pushing on many fronts integration and business-specific improvement measures to mention the two main drivers to continue towards our margin target of 15%. Adjustments were EUR 13 million in the quarter, mainly from the integration. PPA amortization was another EUR 13 million and other amortization, EUR 8 million, which all then leads to an operating profit of EUR 97 million. We have an unchanged guidance for the integration-related adjustments for this year, so you can expect some of that still to come through in the second half. But thereafter, you only then need to model the noncash amortization elements. Moving to the P&L elements below operating profit on the next slide. I would perhaps just note that we're delivering integration benefits also in our effective tax rate, which is at a 25% level year-to-date. Earnings per share for continuing operations were EUR 0.07 for the quarter and EUR 0.15 year-to-date. Thanks to a small capital gain from our divestment of the aluminum business in April, the year-to-date EPS, including discontinued operations, is EUR 0.02 higher, so EUR 0.17. Moving to our balance sheet. So total assets are up some EUR 100 million from the beginning of the year. You still see a modest growth in inventories and receivables, however, clearly indicating the direction we see when you sort of remember the strong order intake that we've seen in the first half. Now we were able to pay back debt as well as the first installment of our dividend and still maintain a solid level of liquid funds. A few highlights on our cash flow. Firstly, obviously, very happy to see continued healthy cash flow in the second quarter. Since the merger of Metso Outotec, we have delivered solid cash flow in every quarter, which has helped to quickly strengthen our balance sheet. As we move forward, we do expect sales growth to affect our working capital increasingly. But similar to Q2, where in addition to profit from continuing operations, we saw a positive contribution from divestments under discontinued operations, we do expect to see further support on that row also in the second half from the divestment announced. Looking then at our net working capital by item. The balance of the items is really similar to earlier. Inventories stood at EUR 1.154 billion at the end of June. Trade payables continued to exceed trade receivables also in Q2. We've seen the advances increase slightly as we've booked some bigger orders, where they typically form a part of the payment structure. Lastly, on our financial position. As mentioned, healthy cash flow has improved our balance sheet KPIs since the merger. During the second quarter, we canceled 2 revolving facilities which would have become short term and were signed when the COVID-19 uncertainty was highest, and we didn't feel we would need them anymore. The base revolver of EUR 600 million is more than sufficient for our needs. Also, we had a strong cash position -- as we had a strong cash position, we made an early repayment of EUR 50 million on our term loan. So net debt totaled EUR 686 million at the end of June and our debt-to-capital was 33.4%. And with that, I would hand it back to our President and CEO, Pekka, please.

So thank you, Eeva. A few words on integration and strategy before we go into outlook and Q&A. Like mentioned already, I mean, run rate basis, the cost synergies, we track at EUR 105 million now. Now this means that our original plan that we announced at the time, when this transaction, Metso Outotec transaction, was announced was EUR 100 million. So we are ahead of that plan both time-wise and in total already. And EUR 120 million remains the target at the end of the year. The remaining work is primarily in the area of IT and procurement for the rest of the year. Restructuring of the organization is almost completed now and -- but we have enough work and enough sort of programs that will contribute to the -- towards EUR 120 million by the end of the year. Then the sales revenue synergies, we have reported in our current sales line year-to-date of EUR 40 million of revenue synergies. And there's additional EUR 91 million that we have in our order backlog. So that number is starting to be already sort of meaningful number and is closer -- getting closer to the -- to our target, which is EUR 150 million by the end of next year. And the estimated restructuring cost, integration cost is EUR 75 million. And so far, we have booked EUR 51 million of that one. Then I mentioned earlier on that sustainability, we are seeing sustainability already in our order bookings. We are developing a measurement, which we will be able to track in the future. We're not able to do it yet, but we already know that the share of Planet Positive products and technologies is increasing. And it's really becoming a criteria for customers when they take decisions and part of justification of projects and investment cases. We are committed to 1.5 max global warming. And we have the Science Based Targets established for that one. We are tracking well in achieving those Science Based Targets. We are, in fact, well ahead in some of those lines, but this is also a volume-related issue, especially the emission side of it. And currently, we are going through a low volume period. And therefore, we are slightly ahead of those targets at this moment. We will sort of get closer to this once the volumes get normalized later on. And we are engaging our suppliers as well into this work. We have set a target that 30% of suppliers spend by 2025 need to have Science Based Targets and that work has started. And we launched the Planet Positive product portfolio. And that is really to make easy for customers to make the right ecological choices or the best ecological choices and to make easy also for external world to track our performance in sustainability. And then in other fronts of ESG, safety work that we have been doing very consistently by addressing things that are not moving in the right direction and addressing those locations where we may have had issues is really bearing fruit now. We are year-to-date -- on a year-to-date basis on LTIF on record low level at 0.6. And just to mention, in the month of June, we didn't have any lost time injuries with our own employees and only one with our contractors. So good improvement and first time for Metso Outotec to be on monthly basis that low level. But the work continues. Any incident or injury is unnecessary, and we keep on working with that. Planet Positive is visible in orders. Orders, pellet plants, several orders as we have booked them, they all contribute towards lower emissions in steel production. The lightweight Metso Outotec truck bodies that we are selling and still in the launching phase of that one, but we are starting to have a very good footprint already globally on -- with those ones. And if you recall, the lightweight truck body means that any ore that is hauled with it requires 10% less fuel and reduces those 10% emissions. And yes, we have some process plants, precious metals recycling plant and lithium plant orders that we have booked and they are naturally in this area. On highlights, really the major one is the EUR 360 million order, which we booked after closing of the second quarter. So this number will be reported in the third quarter order intake. It is a joint order between Metals and Minerals. About 80% is Metals and 20% Minerals. It is a massive project as such, copper smelter, well-known technology, we have delivered Flash Smelting technology-based copper smelters, more than 50, 5-0, pieces to different parts of the world. And therefore, we don't feel that this includes any technological risk as such, so very, very happy about that one. That is a project that has been discussed and debated in Indonesia possibly for 10, 15, maybe 20 years, and now finally then the parties decided to progress with that one. Then we just announced a signing of the agreement with Ahlström Capital to divest waste recycling. We expect that one to close during the fourth quarter of the year. And the metals recycling divestment is in progress. And hopefully, we'll hear something about that one by the end of the year. The market outlook. We are on sort of on relatively high level as our order intake is also indicating that one. We're expecting the high and strong current level to continue and remain. COVID is, of course, around us as we all know. And we will see still impact of that one and especially the changes and the new variants of virus will cause sort of unexpected events in near future as well. But I would say that in a big picture, our industry has shown that it's very resilient against this kind of pandemic, but it does cause some operational issues, which is affecting slightly our numbers as well. But we expect, in general, the environment to remain at the current strong level. Thank you.

All right. Thank you, Pekka. Thank you, Eeva. And now it's time to open the lines for questions.

[Operator Instructions] Our first question comes from the line of Magnus Kruber at UBS.

Magnus Kruber with UBS, a couple of questions from me. I guess, first, I'll start where you ended, Pekka, on the outlook. I think to hear what you're thinking about outlook statements in terms of the different business areas, I mean, you shifted from improving to a current strong level. Is there sort of an element here of sustained momentum in mining offset perhaps by a slight tempering or cooldown in Aggregates as we go into the second half? Or how do you think about the different business areas in the context of the updated outlook? That would be very helpful.

Yes, I think it's a very well sort of thought by you. I mean, our Aggregates business is seasonally lower in the second half of the year. And that is, of course, reflected here in the statement as well. Then on the other hand, we are on high level in our order bookings both in Metals and Minerals. Minerals, now it's time really to deliver and execute the order book. We will see nice orders going forward as well but very difficult with the COVID situation to say that we would go much higher than where we are at this moment. In order to climb higher level at this moment, we really would have to clear the pandemic first.

That's very helpful. Actually, just continuing on that point, I mean, if you could talk a little bit about your pipeline for the year in mining overall. Do you have anything similar in the nature as the recent Freeport order? Maybe -- and obviously, if you could discuss if there's any differences between the Minerals and the Metals, that would be most interesting. And obviously, the metals market seems to be heating up quite a bit now.

Yes, that's right. I would say that minerals market is heating up as well. But the nature of Minerals business is different. There are project orders as well in Minerals, but they are smaller orders. Metals orders tend to be bigger ones. And because the business is somewhat lower, it makes the business a bit more difficult to forecast the Metals side and then makes it to look also very lumpy, especially the order intake. But we like the way how Minerals currently is, that the orders are smaller in size. They are well manageable as such. And risk profile is something lower than typically in our Metals businesses.

Got it. And in the Metals specifically, do you have anything in the pipeline that's sort of similar to the Freeport order? I mean, I know there is a Swedish company building something in Norway that's pretty big.

Yes, that's right. But I mean, anything that would start with [ 3 ], no, we don't.

And our next question comes from the line of Klas Bergelind of Citi.

It's Klas at Citi. So my first question I had is on the margin drag from the supply chain issues in Minerals. And part of this relates to the integration of Metso Outotec. And so firstly, what impact was this on the margin in Minerals? And do you think this effect will last in the year-end? And I would also assume that the listing of the mobility restrictions eventually should help the service business quite a bit into the second half. So if you could perhaps help us also with the pent-up effect there, how much below normal levels is the service business? So several questions in one, sorry for that. But impact first on the margin pressure because of the integration, will it stay until year-end and then likely pent-up effect in services?

Thanks, Klas. If I try to answer that, I mean, we're not talking about a huge number per se from the -- as a drag from the actions. Now clearly, sort of we have had challenges in being on time in some of our supply units and hence then we've had to use air freight, for instance, to compensate to kind of catch up to make it still on time or less late to the customer and these type of things. Now obviously, we wouldn't be talking about them if they weren't millions, but it's still a sort of more single million issue. We try to sort of estimate kind of how much sales we lost on the aftermarket side from the hassle in the consolidation actions. We've basically been moving and consolidating inventories from several locations to fewer locations and kind of gearing up in the new location, then the operations is where we've sort of had the issues. Maybe it's around sort of roughly EUR 15 million of sales. So it's, of course, money in the quarter. But I think the sort of big -- perhaps bigger impact really to the sort of consensus sales was really from the backlog. And we were just not clear enough in our communication on the sort of order backlog composition perhaps earlier. Then the actions are now complete. I mean, sort of we are in the locations we want to be and ramping up operations. So in that sense, we're well on track. Of course, it takes a bit of time to catch up, but we're not really expecting or planning for disturbances in the second half. We do need to sort of just fix the issues and in that sense, sort of move forward. Then you had a question on the mobility. Yes, that's, of course, when sort of the news is daily changing on what restriction one has and where were, difficult to answer. But as we write in the report, when the restrictions have eased, we have sort of seen then the possibility and the willingness from customers to meet us at site and get kind of a bit back to normal. But of course, it is subject to the number of changes back to restriction mode as well. So it's -- I think that is something that I assume we'll see for the rest of the year, partly, of course, we're learning to move around it. But there's just an element of things that actually have to happen on the site and hence sort of that we just need to sort of follow sort of where the pandemic takes us.

Have we done anything, Eeva, in terms of looking at how much pent-up it could be once restrictions are lifted to services? Because I would assume that we're trailing the very strong activities from a mobility point of view.

Well, obviously, you kind of look at the installed base and sort of average consumption and average demand and these type of indicators and, of course, sort of plan together with our customers. I mean, clearly sort of the challenge for both of us will then be that if then sort of demand leaps, the availability question will come. We now see the availability problems already in components and in many fronts, not only in our industry. And of course, that's something that we together need to manage and prepare with our customers. And I think kind of we've been trying to sort of caution on that, that not everybody can at the same time and that's something. But really sort of, as said, when there's so many moving elements now on, as said, on a daily basis in some countries, super difficult to be more -- sort of quantify it more.

Yet I would assume that we are maybe 10% below in our service, excluding really the consumables. That has sort of gone almost like normal now. But in the rest of the services, we are probably 10% behind with the volume. And I would estimate that this volume comes back at one point.

My very final one is on the mix between equipment and services. Now when equipment will be a bigger part of sales into the second half, and I'm referring to Minerals here, do you think, Pekka, you have enough self-help efforts to lift the gross margin in equipment? Or shall we expect a big negative effect from higher equipment sales into the second half? I know that it is difficult to guide on magnitude, but we have inefficiencies because of supply chain a little bit. And then obviously, the question is will we have another impact on the margin as we invoice out more from the backlog?

We also need to remember that we do suffer from underabsorption at this moment. And with the higher volumes in equipment side, that will reduce and that will sort of mitigate the impact of margin and the mix impact in that regard. I'm expecting our services to recover. Like I said, I mean, we are about 10% below where we should be in a normal sort of course of a year. And once that returns, so I'm not too concerned about that we would see margin drop. That would be too dramatic in that one. We see also volume growth at the same time.

Our next question comes from the line of Artem Tokarenko of Credit Suisse.

Artem from Credit Suisse. I have three, please. My first question is about synergies. Could you help us understand what was the P&L contribution in H1? And with a faster delivery, what should we expect in terms of P&L contribution for H2, please?

Sure, Artem. So we tried to clarify it in our report now. We made reference to Q3 and Q2 specifically. But they're basically sort of, I would say, that the -- if you use the run rate number we have given out at the end of every quarter and then as it is an annual number, you kind of divide it by 4 to get the impact on the next quarter. So now we were at EUR 105 million. So we're going on roughly EUR 26 million impact for Q3. We were at just above EUR 80 million in end of March. And hence, it was around EUR 24 million for Q2. And I believe we were at EUR 60 million-ish at year-end. So again, that will be then sort of [ EUR 50 million ] roughly for Q1. So that's kind of the speed you sort of you -- the progress has been adding roughly EUR 5 million sequentially from quarter to another.

My second question is around your comments on the reports around supply chain and the logistics costs. I guess, could you maybe talk a little bit about whether that's something temporary or whether that's more structural, like your supply chain raising prices, cost inflation, et cetera?

Yes. There's two things. Logistics is one area. And yes, we have seen freight charges going up. Just read a report of a shipping company, and they said that their container charges have gone up by 59%, if I recall correctly, the number from a year ago. And of course, we are seeing this cost. We are carrying some of it. And some of it, our customers are carrying, of course. So that is one part of it. Then inflation, we do see the inflation, of course. But we have taken different mitigation actions in that one. We have the synergy work ongoing in the procurement area, where we are combining the volumes of the past two companies, and we have gained benefits out of that program. And then of course, we have been very active in our pricing. And I would still say that most of the inflation is still in the supply chain. But most of the price increases are in our order backlogs at this moment. But inflation is there. And it's sort of a reason to be cautious about that one but not overly concerned. Our customers are also enjoying good business as Metals are contributing quite a lot to this inflationary picture and it makes them -- makes it easier for them to justify new investments and new expenditure.

And my last question, maybe could you help us quantify how much of that inflation you've seen in the quarter in terms of the EBIT bridge? And as a follow-up -- as a quick follow-up to this question, I guess, in terms of the contracts which you already have in your backlog, do you have any price escalators, which would allow you to pass over some of that inflation? Or are contract prices that firmly set?

Well, I think the majority of the inflationary impact, Artem, is actually on the balance sheet. I mean, the very inventory value, of course, is based on sort of the -- sort of prices at which goods have come in due to the sort of rapid change really. And how quickly then the sort of certain component prices have changed haven't really drilled through the P&L much in the -- the logistics Pekka mentioned, of course, that comes more immediately, what comes to these other areas. So that's something we kind of expect to see. I mean, we've been very actively managing prices because, of course, this is an environment, this is no news to the customers, no news to us in kind of preparing in that sense. That's, of course, how we should sort of prepare for it and balance it. There are cases where the sort of -- it makes sense for both the parties really to have a certain sort of index close on that. But of course, the sort of less typical in product type of business, where it is -- a customer is kind of agreeing on the price at the time of purchase and then it's for us to manage from order to delivery period as kind of a normal course of business. Something to certainly sort of be attentive to and some -- not an easy fight, but I would still say that it's a positive challenge to have the -- because we also have Metso Outotec do benefit from the inflation, as Pekka mentioned.

And our next question comes from the line of Nick Housden at RBC Capital Markets.

My first one is about the revenue synergies that you mentioned of EUR 40 million so far with more in the backlog. Is this all from cross-selling products? Or has any of this come from increasing the service penetration of the old Outotec business, which obviously had a much lower penetration level than the Metso business? I'll start there.

There's both of it, yes. I don't have a breakdown for that one, but there's quite a number of consumables that go into grinding mills and really sort of aftermarket consumable deliveries, which Outotec wasn't really participating at all. But then cross-selling is there as well. The pumps typically that Outotec sourced from other than Metso, and now of course, we are supplying to most of the cases and offering very sort of actively Metso pumps into the new proposals. But there's both, cross-selling and really new areas as well.

Okay. Great. And my second question is about the large acquisition that one of your peers announced last week of a well-known European mining equipment business. And I'm just wondering how you see that and how it affects the competitive landscape from your standpoint.