Metso Oyj (METSO) Earnings Call Transcript & Summary

Hello, everybody. This is Juha from Metso Outotec's Investor Relations, and I want to welcome you all to this conference call where we discuss our second quarter '22 results. Results will be presented by our President and CEO, Pekka Vauramo; and CFO, Eeva Sipila. And after the presentation, we'll be taking your questions. And during the presentation, we'll be making forward-looking statements, and this is why we have the disclaimer in the presentation. And we'll also try and wrap up this call in 60 minutes or so. So with these introductory words, I'll be handing over to Pekka.

Thank you, Juha. Welcome to this call. I'll sort of start with the results, then Eeva will go through financials and I will then finish off with the strategy, sustainability and outlook and followed then by Q&A. But going into the second quarter results, really, we see strong activity continuing in the mining market. This was the case in second quarter. And right now, we don't see a change in that regard going forward as well. Aggregates market -- aggregates is more of a local business. Therefore, the markets are also behaving somewhat differently. Whilst North America is continuing very strong, we see softness in European market, which started from the war, and now of course, all the consequential things including a potential recession in Europe. So that's why we are a little cautious on aggregates in Europe. But really strong order activity, solid sales growth also during the quarter. And then the profitability, which continues to improve. We do have a major currency impact on the results, Eeva will open those. Altogether, EUR 34 million on group level during the second quarter compared with last year, and that of course, [ collapsed ] the numbers somewhat. Sustainability, we are taking good steps forward in that one, both booking orders for Planet Positive products and establishing -- launching new products and technologies to that area. And as we announced in last week, we have booked a non-recurring charge now or provision for Russian wind-down and restructuring costs, and that's now booked in the second quarter results as well. But then looking at numbers, orders really strong growth, 18% on comparison which was already very strong comparison a year ago as well. Solid sales growth as well, 28% altogether. And adjusted EBITA EUR 155 million, 20% -- 19% growth in that one as well. And this naturally includes now all the currency-related things, this EUR 155 million. So that takes the margin to -- EBITA margin to 12% and operating profit negative there, of course the impact of the EUR 150 million charge for Russian wind-down and restructuring is visible in that figure. And the cash flow, as we have communicated earlier, we are ramping up our deliveries at this moment and supply chain naturally requires capital at this moment. And therefore, the cash flow is not as it has been during the previous 10 or 12 quarters. Very strong, but now we are returning to, I would say, seasonally typical numbers when the volumes are growing rapidly. Looking at the segments, Aggregates delivered a strong segment. Altogether, orders remained flat. We have to remember that year ago that was a rebound from the COVID lockdowns. We saw really record level of order bookings in last year. And if we put that one against this year's number, I would say, that this is a very good performance also from orders' viewpoint in the Aggregates. Strong -- North America continues strong. We saw equipment orders declining 6%, services growing by 17%, which is a good result and the continuation of positive trend in that regard. Sales grew nicely to EUR 368 million. And this was naturally coming from the backlog more than from the orders and services share now in aggregates altogether 35%. Adjusted EBITA EUR 48 million, margin of EUR 13.1 million. This is also including the negative currency impact. And then another area which -- where we're not yet through all the adjustments that we need to do because of the inflation consumables, that's contributing in a negative way to the margins. Well, that's below the average margin levels in sort of aggregates and similar impact there is also in the minerals side. But work continues there in consumables as well. Minerals orders, very strong growth. Equipment orders growing 44%, services growing nearly 30% and sales growth in equipment side 63%, services growing 14%. This naturally does have a mixed impact there. Services share now was 59%, while a year ago, it was 67%. Adjusted EBITA, EUR 103 million comes to margin of EUR 12.7 million. Here again, a negative currency impact included in this one. And naturally, the margin was impacted by the mix in this quarter. But after all, it is positive that we can deliver equipment that's the future potential for services anyways. And similarly, the sort of low-performing area was really consumables. And we have discussed already before many times what the reason behind and what the dynamics behind the consumables is starting to be through all of that. But still in this quarter, we had -- that was sort of a low-performing area for us. Metals segment, low orders compared with very strong orders. Last year, we on the other hand, have a very strong backlog and pipeline is strong in metals as it is in minerals as well. So we are not concerned about the sort of order levels in this quarter. We really didn't have anything major that we booked in the metals during the quarter. The biggest orders were sort of in the range of EUR 20 million or so. Sales, EUR 117 million came from the order book, mostly services share declining to 12% because of we're really so busy with the equipment side that service doesn't get now full attention as such. Adjusted EBITA EUR 11 million, margin EUR 9.3 million. There's also a minor negative impact from the currencies. But since the EBITA of EUR 11 million is so small, so we didn't calculate what the actual there is. But we're tracking very well with the turnaround target that we do have for metals. In Russia, we announced, it was at last week, Monday, the EUR 150 million charge -- non-recurring charge to cover the wind-down costs and restructuring of Russian organization. That restructuring is ongoing as we speak. We will complete it during this year the rest of it as we wind-down the businesses. Our deliveries to Russia in the second quarter were EUR 67 million. And if you remember, we had end of first quarter EUR 215 million of order book left for non-sanctioned customers. And out of that EUR 215 million, we delivered EUR 67 million in the second quarter. It was really a slow start of deliveries because of sanctions coming in multiple waves within few days from each other and it was a very moving target before the situation sort of calmed down somewhat and that gave us windows to continue some of the shipments to Russia. We of course wrote off the Russian backlog which was the impact of that one in the order backlog was EUR 380 million at the end of the Q2. And at this moment, I'll hand it over to Eeva, and then I'll come back after a few slides.

Good morning, good afternoon on my behalf. And apologies, I have a slightly lower voice today. Regarding the income statement, our CEO already commented on the operating performance. And as the negative currency impact in our adjusted EBITA is so large in the quarter, I'll start with a few clarifying comments on it. Now we are a global company operating with all possible currencies. So currency volatility is something we're used to. We don't usually bring it up too much. And there are positives and negatives going from one quarter to another. We have for years had a prudent policy of hedging the margin of all incoming orders. One part of this is under IFRS hedge accounting. Most of the product business is non-hedge accounted, resulting in a different treatment as per IFRS. This hasn't changed. What has changed is that our order backlog is significantly up. So any currency volatility in this environment comes with a multiplier, and we certainly had volatility in the quarter. U.S. dollar strengthening in as much -- as such is a medium-term positive for Metso Outotec. But with the euro falling to parity since 20 years in one quarter, it certainly creates a big mark-to-market loss in the books. The interest rates between Europe and U.S. jumping and diverging creates an additional negative impact. Then we had high depreciation in many key mining market currencies due to both geopolitics and their local political situation. South America, leading this trend, which again, hit the books. So whilst I'm sure no one on the line expects FX volatility to disappear, it's just perhaps going to appreciate that the impact in one given quarter was higher than we've ever seen it and by a big margin, which is why we wanted to be very explicit about it. But then coming back to issues closer to our business. So Pekka mentioned the pre-announced charge of EUR 150 million. That was booked as an adjustment item under group items outside of our business segment reporting. This means it is visible in group EBIT and pulling basically the quarter to also EUR 13 million. And just to remind everyone of the size of the Russian business part earlier, it represented some 10% of sales in 2021. Another illustration is perhaps that if our published order intake growth year-over-year was 18%, excluding Russia and the Q2 of last year, to get better comparability considering the zero figure in this Q2. So to the quarter growth actually would have been 25%. So those speak to the strength of oil market and our ability to adapt to the new geopolitical situation and really sort of focus on business elsewhere. The tax row shows a rather low ETR for the quarter. Please pay attention on the first half figure of 28%, which is more relevant than indicative of what we expect for the full year. The big charge made the underlying figures so small, very small items in the tax rate in this quarter. And as we get back to a more normal levels, this impact will disappear. Moving to our balance sheet. So total assets are up almost EUR 600 million from the beginning of the year or EUR 300 million from Q1. Now inflation is actually a pretty big impactor here. A significant part of the higher inventory values are accounts payable, its price and FX. Volume growth impact is bigger due to work in progress, increasing with the mentioned their entire order backlog, but that alone will not explain this high rise. Receivables are similarly reflecting higher sales and prices. Not surprising as such, and we have been cautious on this year's cash flow, but still I think seeing the impact on our net debt on the right-hand side is visually quite strong. However, our balance sheet remains very strong, still with a tight focus and comfortable we can weather the market dynamics. Cash flow for the quarter is impacted by the big charge. The final outcome of how much of the cash impact will be is still not clear. We would expect to be able, for example, to resell some of the inventory, but now we have not made any assumptions. We have treated it as cash neutral in the cash flow. So it doesn't impact the EUR 50 million we see in this table as the outcome of cash flow from operating activities before financial items and taxes. Now that being neutral, it does mean that the quarterly cash flow obviously wasn't much to write about it. Now we do want to continue to grow in the current active market and does type working capital in our business. But naturally, we do need to be very focused on ensuring our cash balance is not compromised. On the financial position, so a few elements to highlight. We extended maturities of some roughly EUR 100 million of debt by drawing on the last year from the Nordic Investment Bank loan and then repaying private placements, which reached their maturity end. Then the first part of our dividend for 2021 was paid in May. Again, this is almost EUR 100 million item there as well, but those are really the bigger swimming blocks. And here, I'll actually leave it -- hand it back to you, Pekka.

Thank you, Eeva. A few slides about our development regarding strategy, sustainability, and then finally, the outlook. As you know, we do have the review of the metals business underway. We are expecting to complete it -- complete the review part within this year. And then we'll move on in the implementation, which of course, depends on the final outcome of the review. But as you saw, I mean, business has developed favorably and the outlook for metals is good as it is and strong as it is for minerals as well. So I think we have many options and alternatives how to move on with the metals, but we'll come back to that one when we're ready with our review. Market is very active for M&A as well. For us, there's nothing major in the pipeline, but small M&A cases we do have. We announced during the quarter, acquisition of Tesab Engineering in Northern Ireland. And we acquired it at the end of April. And it's now -- I think it closed at the same time when we signed it and the integration work is ongoing. There's great synergies within Northern Ireland with the earlier acquired McCloskey business out there. And we'll continue to have those -- both plants in there, but we do some product transfers between the plants both ways, and that will simplify and streamline the production and we'll get the cost synergies from that one. We also completed divestment of metals recycling during the quarter. And that was a lengthy process, but it's done now and now we continue then with these 3 segments that we have left. On sustainability, we continuously launch new things and promote our Planet Positive offering consisting of more than 100 different products or technologies. We're also taking steps to reduce the CO2 footprint of our own operations. We are looking at our supply footprint as a part of our strategy work going forward. And there of course, logistics and related CO2 is one of those things as well as availability of green energy in various regions and markets. And we also published the Sustainability-Linked Finance Framework recently. The Planet Positive highlight really was a first full Planet Positive comminution order that we booked during the quarter. This includes the high-pressure grinders and vertimills. And with this kind of technology, the energy consumption in comminution is reduced dramatically from the traditional crusher and horizontal mill solution. We are also working actively to launch new products, new solutions in all of our areas and we are tracking our Planet Positive sales. These are there on the right-hand side bottom of the slide. These are rolling 12 months' numbers for last year for the situation at the end of February and situation at the end of May. And you can see that our Planet Positive sales is really growing at a rapid rate as we promote the products and as we launch new products to that area. And then we already discussed the elements of the market outlook. We expect market to remain at the current level with the minerals market and then aggregates market declining slightly, and this mainly comes from Europe, this cautiousness on aggregates market. But with this one, we're ready to Q&A.

[Operator Instructions] And our first question comes from the line of Klas Bergelind of Citi.

So first I want to start on the FX impact. I get the part with the hedges that this varies as you invoice more out of the backlog, but I wonder assuming on the operational part of the EUR 17 million. I mean, lots of mining currencies came down sharply. This hit you by I think half of that EUR 34 million, it was volatile quarter. I guess this part should normalize here into the third. Could you comment, Eeva, how you see things now? To what extent we should add back this totally impacting or if we see any negatives also into the third?

Sure, Klas. So I think there's really many moving elements, but maybe the sort of good to understand that there is an operating loss element in those FX hedges coming from the forward points. And obviously, as we saw such a big jump in interest rates that kind of element is what we were partially referring to. But then of course, the main point of the FX hedging is really that it does create the timing hedging when it's not hedge accounting as per IFRS. And hence, to me that we expect to see in the coming quarters kind of reversing. Now then, obviously, the mining -- key mining markets, currency volatility when it is partly really reflecting their own political environment and not only the sort of general risk aversion of investors from sort of more -- I would think more emerging market currencies, it's of course, hard to predict which way it goes, but I think we've certainly seen changes in operating in South America for decades and certainly we've seen very big changes now in one quarter. So in that sense, I'm perhaps a bit more optimistic that we don't see a similar quarter. But again, your guess is as good as mine obviously on which route those currencies take.

But just to confirm, half of it was basically backlog hedges. As you're invoicing, that half should at least normalize with high deliveries?

Yes, it's a rough split, it's 50-50. But just to sort of make it rather easy for you. So certainly sort of we're comfortable that that half is absolutely timing. But then just to indicate that it's there, a sort of real settlement obviously from those forward points in that regard is we've lived in sort of zero interest rate environment class for so long that I think most of us know how things work when we have inflation and interest rates. So yes.

My second one is on aggregates and the outlook, Pekka, pretty clear that Europe construction is softening down. I think the messaging has been clear from you here at various investor conferences and at the pre-close calls. Could we talk about the forward guide in relation to other regions? I just want to make sure that you're not seeing any weaker demand at the exit of the quarter also in North America into the third and elsewhere?

We had a very strong finish of the quarter in aggregates orders. So no weakness in that regard out there. I mean, China has been slow-ish all along this year, starting already last year. Last year, the super quarries segment active, but all the others less active in China. India has remained the same as it is, but North America continues probably stronger than ever before.

That's good. My final one is on the cash flow. You didn't have, if I understood it correctly, a big impact from the China lockdown. But despite this, the working cap is quite big. We know demand is strong, but we're also hearing of lead times easing. If you could comment, Eeva, on how we should think about net working cap into the second half? Where do you see bottlenecks easing, which should perhaps free up some cash flow?

Well, I wouldn't perhaps celebrate on things getting better. I would agree with you that they're not getting worse. And hopefully, we don't have any other sort of external shocks impacting the supply chain. Partly, the working capital is this inflationary element in it. And of course, we do see some of that sort of settling down as well. So we are more optimistic on the net working capital development that it would imply as much in the second half, mainly as both from that sort of volume and price point of view. But we're still sort of cautious because you see our backlog there, the rate of orders that we took in, obviously, there will be a lot of work in progress going and we do need to work around availability and ensuring our customers a decent lead times, and that is unfortunately requiring some additional inventory just to make sure that we don't have a stoppage for a very small something missing. So it's really about all the time on between these 2.

Our net working capital is naturally also dependent on large orders and down payments relating to those. And in fact, we booked only one larger order during this quarter. So it really depends then on the timing of the future major orders as well.

Our next question comes from the line of Magnus Kruber at UBS.

A couple of questions from me. I mean, mineral saw a decent margin progression year-over-year adjusting for the FX impact despite cost inflation and adverse mix. Could you add a little bit of color on what you saw specifically on price cost and mix respectively on a year-over-year basis? I mean, how does that sort of each looked on the margin side? And what you expect in sort of second half?

Eeva, can you take that one as well?

Sure. So Magnus, obviously, the mix if one speaks of the sort of share of services versus equipment is that is going from a margin point of view into a negative direction still and the share of services in minerals was only 59% in the quarter. But of course, now we're seeing good growth in the orders, so it will be better balanced going forward, but what we've seen sort of so far. Then I would say that on the sort of price element certainly is significant that we've been working very hard on that also to sort of -- to really balance the increase in cost. And I would say that overall we're quite happy with where we are. When we have such a sort of quick spikes and certainly the war caused a lot of very sort of big sort of turbulence. And it is very hard to sort of be prepared for that type of volatility and end up being a bit late in pricing. And clearly, in some of the areas where we have longer lead times, it has an impact. But we're certainly happy with how we've been able to push overall, I would say, be it productivity and margin development on the equipment side because some years back with this heavy equipment mix, I think it would have been -- the margin would have looked different. So I think there's been a tremendous amount of good work from the team on really on that.

So as it stands now, we shouldn't expect any broad-based difference from what we see in Q2 into the second half from this point of view?

I think, again, sort of your guess is as good as mine on sort of what happens on the inflationary front and we've seen some settling down. But of course, it's still, I would say, it's quite jittery. So it's difficult to sort of call it sort of which, but that's kind of the sense. And of course, if that eases, it would -- that's the kind of, I would say, the base case we would assume. And then I said somewhat sort of stronger growth coming through than the aftermarket going forward.

And then also with respect to the outlook for mining at the moment, of course, you reiterated a solid sort of activity in the market. But I mean, typically you start to see a weakening in orders when raw material prices comes down, but I mean, of course, the past couple of years hasn't been normal either. So is there anything specific that you would like to call out that suggest that order activity will remain high in the face of weaker pricing?

Not really yet in this price levels that we see currently. Currently, there's of course another side that we need to look at is also the inflation. And that one moment point in time might sort of take some of the projects or postpone some of the projects. But metal prices are still very supportive of investments. And maybe if they remain roughly on this level where they are today, they are still, I mean, on higher than pre-pandemic levels were. And maybe the war in Ukraine will be seen as a sort of a short-lived price peak in price, after which the prices return to roughly on the same -- still relatively high level. So this is currently how we look at the things. And our proposal pipeline is very much supporting this one as well.

And just one final book-keeping question with respect to the geographic exposure of aggregates. Could you sort of give us some broad-based help on how that stands now?

North America #1, Europe #2, India, China 3 and 4 in that one. And Europe and North America, they represent some 70% of the business altogether.

And our next question comes from the line of Will Turner of Goldman Sachs.

So I've got a handful of questions. My first one is on the aftermarket order intake. Obviously, it was another quarter of very strong growth. And yes, this is despite obviously a period where most of the large listed miners are disappointed on that production growth. So I was wondering what's been the driver behind the order intake growth in the aftermarket? Is it customers stocking fill and spares and parts or they're using this production downtime to do servicing? And could we expect to slow down at some point for the aftermarket business?

I wouldn't sort of say that customers would be stocking. Of course, supply chain is an issue for everyone, but -- and customers possibly would like to do more stocking, but the capabilities to deliver into customer stock are also limited. So that's not the reason. I'm sure that we are seeing some demand coming from the pandemic lockdown times. So some pent-up demand coming from there. Then very high brownfield activity in mining in general. And in our cases, some of this brownfield activity is visible in our services numbers. We have the modifications and upgrades as a part of our service business. They very often include major labor component in addition to engineering component and sort of a supply part. And it's been always part of our service and that's partially driving the demand as well. Then of course pricing does have an impact in service top-line growth as well, mostly through our consumables because there the price pressures have been the highest, but also in the rest of the services.

And is it possible to kind of quantify how much fair is the pricing? Is it the high-single-digits, low-double-digits?

Great variety between the different business lines. And it's rather complicated to come up with an average for the entire scope of services that we have. We have not published that number.

And you mentioned only one large order in 2Q, but the pipeline is so supportive of good activity. How are you seeing the outlook for large orders? Are there many on the pipeline for the second half? And where do you see those orders coming from?

We have, I would say, typically for this type of cycle, typical amount of larger packages, but I would be very cautious with timing because some of these orders we forecast every quarter to come in and then they just happen to come when they come. There's a lot of guesswork relating to that one. But we are in final negotiations in several bigger ones.

Maybe just to add on that. So I think it's maybe to underline that the strength of the minerals order intake is really from the sort of small and medium-sized, I mean, because it was just that one and it is a very strong number indeed, especially if you take into account the comparison. I mentioned that one would take sort of without Russia for the last year's number. So I think that's kind of the type of business we're seeing and maybe something that's also good for you to sort of assume continuing as well?

And then just my final question. When we read through the risk in the interim report, you highlight uncertainty around suppliers' ability to deliver. And there obviously into the scenario you may have some contractual penalties, obviously this impacts your ability to deliver. And then also, obviously, within inventories, a lot of the inventory build-up is from price increases, as mentioned earlier on in the call. How is the -- is there a risk at all with your current order backlog, especially the ones where you have a fixed price that you struggle to deliver in the second half because of a supplier or because of suppliers having to push through extraordinary prices, which you weren't originally agreed to when you first won an order?

Well, I think we're more highlighting the risks from an availability point of view. I mean, basically, we do have contractual agreements with suppliers. So it's not a one-way street or starting them sort of mid-delivery to raise prices. I think everybody is just so [ tied ] that you're sort of hoping every morning that you don't wake up to somebody having a fire or another sort of COVID stoppage of transportation because that's the type of things which are obviously difficult to prepare for. And that's maybe more the -- where we really talk a bit about ability to deliver. Obviously, when we talk about big packages, everything is needed for a final assembly. And whilst one -- in this type of environment, I don't try to put some sort of leeway and buffer time in a way to get things on site, obviously, those things can happen. And that's something really to sort of also a very continuous monitoring from our delivery deals on a day-by-day basis that everybody is up to speed and there is a sort of external sort of shocks.

And there isn't anything that's particularly concerning at the moment or a deterioration versus the first quarter?

I think we're having a sort of -- survived the sort of immediate impacts of the war and then obviously the China recent lockdowns. I think things do look a bit better now. But obviously, as we all know that sort of there's no certainty on that there wouldn't be new lockdowns in China, for example. So I think it's just a very sort of continuous monitoring required.

Our next question comes from the line of Andreas Koski of BNP Paribas Exane.

First on your adjusted EBITA growth from EUR 131 million to EUR 155 million year-over-year despite you have this FX loss of EUR 34 million. That implies that your organic EBITA contribution is EUR 58 million, which corresponds to an organic operating leverage of 27%, which I think is quite good given supply chain issues and cost inflation. So does this mean that you're now able to more than offset cost inflation with cost savings, sales growth and synergies? And is there any reason why your organic drop-through should not stay strong also in the coming quarters?

Obviously, I think what comes to my mind first is the mix development, a mix development that is something we need to pay attention to. But our service volumes are growing nicely and it's almost like a progressive growth as we have seen. Maybe they are leveling off now on a level where we currently are and understand, but it depends very much on mix where we end up with that one. Any other views, Eeva?

I think, Andreas, I think you're analysis is correct that I think the challenge in really what we've seen the past sort of 3 quarters, I would say, is really on kind of being quick enough with pricing to react to sort of changes in the cost environment. And of course, the environment really having sort of had more volatility than in a long time for these very many exogenous shocks. And so I think, as such, we're quite happy with our ability to sort of run behind that sort of -- behind all at the speed of that moving train, and I would think it would get a bit easier. I think we're in certain areas that the limits were in all industries, the customer demand will continue and maybe will ease some of the inflationary pressure than for those of us working in environments where it's still sort of, obviously, the environment is sort of more benign.

And then the business that we need to clearly improve is our consumables business. We've spoken about it so many times, in this one as well. And if you remember, end of last year, the fourth quarter performance, we were hit really surprisingly high and rapid cost increases, freight charges, energy, raw materials, all came in like a major Tsunami at that moment. And then if we look at our sort of supply chain throughput time, we should be now through those most difficult times and current costing and pricing is based on new normal levels. And we work at the same time with our life cycle contracts where there's always a delay with the -- even though there's the price review points negotiated and more frequent ones negotiated, but there is always a slight delay. But we should be through the most difficult time in that one. And that of course I think translates into organic drop-through as well.

Sounds good. And then as you cancel your Russian order book, could you please help us to better understand how sales will develop in the second half of this year? Maybe give us a number on how much of your backlog is expected to be delivered in H2 this year compared to the corresponding number last year or how will the cancellation of the Russian battery impact your sales in H2?

Well, Andreas, at this time of the year, when it's only 6 months to go, so of course, most of the backlog is well into 2023 and '24. I think the best indication perhaps is that kind of looking at the sequential development, we've been able to demonstrate now between Q1 and Q2. And as our service aftermarket order intake has improved over the past couple of quarters, that's slightly sort of more shorter lead time. So that kind of helps. So I would expect us to be able to show some growth, but really partly limited by the availability of components. So not expecting sort of dramatic changes in the sequential development.

And then lastly, a straightforward question on FX. Based on today's spot rates, what should we expect the FX impact to be on EBITA in Q3?

I haven't looked at what they are today, sorry. [indiscernible] But I think if things kind of hold and we don't see sort of further sort of appreciation of the dollar or further depreciation, then obviously things should be kind of sort of net zero. But any sort of -- and of course, again, some reversal, i.e., positive if they would move back. But that's kind of sort of by and large. But as I said now, I will compare yesterday's rate with the quarter and close directly.

And the net zero comment that include the operational losses that we survived and that's -- it was not definitely on the hedging side, it's including the...

Yes, I think that's maybe the trickier part, as I said. For a couple of years, we did really have to worry so much about interest rates and forward points. And hence, the modeling obviously need some brushing up. We have now seen obviously ECB move on to interest rates as well. And I guess that helps if everything moves in the same direction. It's a divergence that makes it and that makes those losses typically sort of become bigger. And that divergence obviously was there in Q2 when different central banks taking different type of action at different points.

Our next question comes from the line of Vlad Sergievskii of Bank of America.

I'll start with the one on one of the working capital components. I mean a pretty sizable EUR 100 million increase in contract assets on trade renewable. Would you be able to comment on the nature of this increase? And this is specifically linked to some Russian projects where you book revenues, but basically can invoice clients? That's the first one.

Yes, I think that item is now impacted by the EUR 150 million charge. So basically, in order to make it net neutral. So it's visible in the net working capital number and specifically in that element. So I think we have nothing more to state on Russia business today other than we're sort of winding it down as much as we can and we have sort of made the charge on what we assume is the final outcome. But obviously, we'll be a bit wiser in that in the coming months.

If I could clarify then with regards to the bridge between your unadjusted and adjusted going. Would it be fair to say then if unbilled receivables related to Russia going up that you're booking some of the Russian revenue in your recurring journey and then effectively taking out the provision and treating it as non-recurring? Would it be a fair kind of statement or I'm missing something here?

Well, with the charge, we have basically sort of written down operating assets and that really was the impact that we're going to have then. So we're looking at the total outcome. Obviously, there is in ease project, there's different elements, but that's been the approach. So more gross level at this point, and we will be wiser in the coming months on where we exactly land.

And then 2 very quick housekeeping ones, if I may. One is on FX. I mean, the net hedging liability I think increased a little bit by about EUR 50 million over the quarter. Is it an indication that there is some more unrealized hedging loss which we'll cash out later on? And then if you can provide a quick update on where you are on the Saudi project ramp up?

I'll take the first one and Pekka you comment on Saudi. So no -- I mean, what I think the answer is that, I mean, the hedge accounting obviously on a project business is made in hedge accounting, and that volatility doesn't go through the P&L. This is really the product side of business where we don't -- where we're not able to fulfill the hedge accounting requirements by IFRS and that is then mark-to-market. And so by definition, they are mark-to-market as of the rates of end of June. So there is no additional sort of losses anyway, it is mark-to-market and then just sort of very clear sort of as such. But Pekka, on the Saudi?

The ramp-up continues there. Customer needed to change the feed material, the ilmenite concentrate and also the anthracite that they feed into the furnace. And we've stalled the increase of power supply to several weeks to same level -- constant level in order to learn the parameters -- operating parameters for the new quality feed. So this is really something which is not dependent on us at all. It's clearly an issue that customer needed to do because they run out of the material that we originally used. But no major issues during the ramp up, lots of learnings. And I would say that relatively good teamwork at the site between customers, operating personnel and our experts there. And so far, everything looks good with the ramp-up.

And we have one further person in the queue at this time, that's Antti Kansanen from SEB.

Just 2 questions from my side regarding minerals services. Firstly, on the consumable side, could you comment what has been the size of the business during the first half? And how much do you think your margins have been held back by the negative impact from input costs and pricing?

Our volume is slightly below EUR 1 billion in consumables altogether. So that's for the volume wise. And then if I do look at the margin side, we are several percentage points below our sort of last 2 years' performance in consumables at this moment.

And Antti, that EUR 1 billion is an annual figure.

Sure. And then the second one was kind of on the discrepancy between order growth and sales growth in mineral services. So is this kind of a difference being driven by pricing, but that has say a different impact on orders and sales? Is it delivery bottlenecks or has the kind of the order growth came from a longer lead time items regarding modernizations or upgrades or how should we think about the backlog build in services?

I think it's a mix of all of that what you said. We have 5 or 6 business lines within our services that behave in this regard differently. There is very short-cycle business, there's really book-to-bill business, but then there is business which does have a lead time of even more than a year. So it is a mixed bag in that regard.

And would it be fair to assume that those kind of the longer lead time types of businesses have led the growth in the past couple of quarters as we've seen some of the lockdowns trading and so forth?

That is true, yes.

And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.

All right, perfect. Thanks everybody for joining us. This is it for the second quarter results. Just a reminder that we'll be having our Capital Markets Day on 15th of September, September 15th. And more information and registration will be sent in due course after we have had a bit of a break now in early August, but we'll come back to that in the meantime. Thanks again, and good bye.