Metso Oyj (METSO) Earnings Call Transcript & Summary

Hello, everyone. It's Juha from Metso's IR, and I want to welcome you to this conference call where we discuss our second quarter '23 results, which were out earlier this morning. Results will be presented by President & CEO, Pekka Vauramo; and CFO, Eeva Sipila. And after the short presentation, we'll be having your questions. And in the presentation slides, we also have the forward-looking statements that you need to take into account and remind when listening and following this presentation. And we intend to limit the length of this call to 60 minutes. So hopefully, you can take that account as well. But with these introductory words, I'll hand over to Pekka to start the presentation. Please, go ahead.

Okay. Thank you. Thank you, Juha, and welcome to this second quarter call. We enjoy still continued healthy market activity and environment around us. Of course, there are uncertainties because of macro, but when we drill down to our customers' businesses and to the segments, most of the segments are enjoying really strong and robust trading environment despite of this concern. I'll come back to that one a bit later. We delivered a very high sales growth, and that's obviously from our backlog, which has been on a high level and still is on a high level going forward. We delivered record high profitability on group level, 16.6% EBITA, and that is well in line with our target to deliver 15% EBITA for the -- as we have set in our sort of financial -- as we set as our financial target. What is very specific for this time is that green transitioning is really driving our business now. All metals that have a role in electrification, there's a lot of activity around them, including orders and then a lot of research activity, lot of work that we do -- front-end work that we do for our customers in sort of lithium and many other metals, including also battery recycling, which is starting to be visible there in the front-end work that we do for our customers. But this work is not yet visible so much in new orders, even though we have a few sort of lithium programs that we have in our order book at this moment. Then when we look at the group numbers, orders received, just a couple of million short of EUR 1.4 billion. We have a really tough comparison from a year ago. We had bigger orders there and that contributed to EUR 1.6 billion a year ago. This time, we had very few orders that were larger than EUR 20 million. For example, in June, we didn't have a single order that exceeded EUR 10 million in our minerals side, and that's very typical for this time. Bigger orders take longer time to decide and that they are -- as they always have been very difficult to forecast. But those bigger orders, they are in our funnel as well. And of course, remains then to be seen when they come through. Some of these are already signed contracts that are waiting for down payments to come. And in some orders, that is a criteria, which need to be fulfilled before we report it into orders received. So we don't -- we are not concerned about the sales funnel, what we have ahead of us. But, of course, understand that EUR 1.4 billion is somewhat short of the expectation. The difference to the expectation is either 2 or 3 bigger orders. It's not more than that, that we were not able to move over the line during the quarter. Sales, 15% increase from last year. And that, of course, is visible then in our profitability and in the margin. Adjusted EBITA, EUR 246 million. That's nearly close to 60% more than a year ago and 16.6% as a margin. Operating profit, good, healthy growth in there. Of course, the biggest part of the growth came from comparison since we booked last year EUR 150 million provision for Russian wind down, which is still ongoing. We haven't consumed all the provision yet, but we feel that we will need that provision before the final settlements have been made and reached with our previous customers there in Russia. Earnings per share is the same drop-through naturally to there now EUR 0.18. And cash flow still on low side, we would like to see somewhat higher, but we do have inventory reduction programs ongoing in a company now, and that we can expect that one to firm up as we move on to the second half of the year. Then looking into segments, Aggregates, we have said that, first of all, there is seasonality in Aggregates and seasonality is visible already in the second and even more so in the third quarter of the year. So therefore, we have slightly reduced our guidance for Aggregates outlook in general. And we are seeing slightly slower second half than what we had at year ago for Aggregates. But orders, EUR 330 million, about 10% below last year's order bookings, mainly because of the European softness and North America continued stable. Equipment came down 8%; services, down 11%. Good execution of the order book, nearly EUR 380 million of sales, and services share declined because of more rapid decline in services to 28%. There we see some destocking of consumables, mostly and spares by our dealers at this moment. Adjusted EBITA, EUR 66 million for the segment, margin of 17%, good, healthy improvement from a year ago because of the -- naturally volume and strong execution as we have seen from Aggregates over the past several months. In the Minerals side, orders EUR 980 million, short of what we would like to have seen. But like I said, I mean, there are bigger things in the pipeline, which we're not able to move over the line. Activity as such is very healthy. And what I said earlier about the electrification and related metals, that's where the activity is at this moment. We see somewhat slower activity in iron ore, not in the services, but in the equipment side. And then metals like zinc that play a smaller role in electrification, there we see some slowness. But that is then compensated with very high activity in copper and nickel and the other battery metals. Sales EUR 978 million (sic) [ EUR 979 million ]; equipment growth, 9%; services growth, 29%. So a very healthy services growth and mix absolutely contributed also to the margin of the segment. But services share 63%, which is growth of about 4% from year ago. Adjusted EBITA on record level, EUR 178 million. That corresponds to EUR 18.1 million and it's a clearly sign that we do have potential, what we have said that our target is to deliver towards 20% EBITA margin in Minerals, and I think signs are there that the potential is out there. Good execution altogether from good price and cost management also from Minerals as it was in the Aggregates segment as well. Metals segments suffered a little bit in orders the same way as Minerals. There are bigger things in the funnel, but we were not able to report those in the orders yet. They are there to come. Sales, more or less on the same level as year before. Services share, very stable, just above 10%. And adjusted EBITA of EUR 14 million, translating to 12.2% margin. So good execution there as well from the Metals team. And then I'll hand it over to Eeva for more details in financials.

Good morning, good afternoon on my behalf to everyone. Pekka already presented our strong operative figures. I would only add a comment on the group items in adjusted EBITA. We had EUR 11 million group items related costs in the quarter, which is on the high end of the typical EUR 5 million to EUR 10 million per quarter. And whilst we expect that quarterly range to hold in the second half of the year, our full-year estimate is slightly up from previous guidance. Net financial expenses were also slightly up sequentially to EUR 20 million as our debt and interest rates are slightly higher. Effective tax rate for the first half was at 25%, a level we expect to be a good proxy for the full-year rate as well. Our earnings per share for continuing operations were EUR 0.18 for the second quarter. And year-to-date, we are at EUR 0.35. Moving to our balance sheet. Total assets are up some EUR 150 million from the beginning of the year. A small decrease in intangibles was matched by a similar increase in plant and equipment, following ongoing CapEx projects. But otherwise, the changes are in working capital items and liquid funds. A few words on them in the next slides. Before moving on, noting that net debt at the end of June was EUR 840 million, up from the start of the year. This next slide gives a few figures on the working capital items. So net working capital at the end of June was EUR 874 million. At the start of the year, it was some EUR 600 million; at the end of March, around EUR 700 million. So the trend in the second quarter was still up on all items, as you can see from the graph on the right. Still due to our strong sales growth, this results in an okay-ish working capital percentage over sales of 11% visible on the left-hand side. We have continued to see global logistics improving. And hence, we have continued to slowly reduce buffer levels, but the progress admitted is a bit slow. Reflecting the strong sales growth, we continue to focus on the turn rates of the working capital items rather than the absolute values. Nevertheless, we do want to see progress in reducing working capital going forward to support a better cash generation in the second half of the year. Cash flow in the second quarter was an improvement year-over-year. And also looking at the 6 months, we are making progress compared to a year ago, thanks to strong profitability. Net cash flow from operating activities was EUR 62 million for the quarter and EUR 173 million year-to-date. The year-to-date cash impact from increased net working capital was EUR 344 million. Moving on to my final slide and main points on our financial position. There's not really much change on this from our last quarterly call, when it was already public that in April, Standard & Poor's Global upgraded their rating on Metso to BBB with a stable outlook. Looking at the table, liquid funds are down from the year-end, as we paid the first part of the '22 dividend in May. Net debt being up, as mentioned a few slides earlier, moves gearing at the end of June to 35.5%. However, debt to capital is down to 31.7%. And with that, handing back to you, Pekka.

Okay. Thanks, Eeva. I will say a few words about sustainability and then finally, outlook before going to the Q&A. And like I said earlier on in the beginning that electrification or sustainability is really driving our business as we speak. Planet Positive sales, which we have followed up for now for quite some time already, this is a rolling 12-month follow-up that we do provide. Year-on-year growth with that measure is now at 43%, and that translates to nearly EUR 1.5 billion of Planet Positive sales. And we have seen very steady, roughly 40% to 50% growth throughout the time that we have provided this KPI. It's really guiding -- it's also guiding our activities, and it's a clear sign that our product development efforts for Planet Positive products have been rightly sort of sized and allocated to sustainable products. We are also progressing in -- with our suppliers as part of our science-based targets, we have committed to increase the share of suppliers having a similar program -- either science-based target or similar. And now we have 23% of the spend with suppliers that are committed to these programs. There's more than 400 suppliers that have rolled into science-based or similar programs. We continue with our implementation of our top priorities. And one of those is our performance culture. And we do measure that one on a quarterly basis. Amongst the employees, we have a very high response rate. The latest, one just a few weeks ago -- that ended a few weeks ago, we had 87% of all our employees responding to that one. And our employee NPS -- eNPS score continues to grow, and we are firmly now in the top 10% of our benchmark group of companies -- international companies in similar business where we are, there's nearly 100 companies that we are benchmarking our sort of ratings. And it's clearly a sign and a good tool to see what shape and form the organization is and how well they perceive the efforts that company is doing in all areas of business. The market outlook, we sort of retained the same outlook for Minerals, so strong activity there and healthy activity in that market. But then in the Aggregates market, we see a slight decline comparing with the second half of year before. So with this guidance, we can move now on to the Q&A side and start that one.

Thank you. So operator, we can now open the conference call lines.

[Operator Instructions] The next question comes from Christian Hinderaker from Goldman Sachs.

I'd like to start with the Aggregates business, please. I recall from your CMD regional split here for the top market is around 37% for North America, 34% Europe, 7%; India and 6% China. Just wondering how we should think about your revised outlook statement as it relates to those regions, given Europe's been weak for some time, and we might view China as potentially approaching some form of recovery. And then you mentioned destocking here. Is that region-specific or global? And how should we view the sell-in versus sell-out dynamic?

Yes. The destocking was mainly referring to the aftermarket that we see. But to some extent, there's some new dynamics that we saw specifically in North America. Our dealers, they also run the rental fleets and the rental fleets are very busy at this moment, but the machines are not moving or changing ownership. Very often the rental agreements, they lead to the sale of the machine. And when dealers, when they sell a rental machine, then they normally place an order for a new piece of equipment. And these rental fleets are not typically moving at this moment. So this is what we see. In North America, market has been stable there, but we are a little bit cautious about really the next quarter or so. And then it, of course, remains to be seen how the seasonality kicks in -- the high season kicks in. Normally, it does -- it is visible in our December orders. But for that, we need to wait, of course, until end of the year before we know that one. European market has really been the slow, and particularly Northern Europe. Central Europe has been in a few countries on quite normal level. And then again, Southern Europe has been very, very slow in Europe. Some signs in China, but like well known, the -- from the macro, China seems to be returning slower than expected from the pandemics.

That's very helpful. And then I think you mentioned last quarter that European customers in Aggregates becoming a bit more price sensitive. I wonder if that's still the case. And if so, whether you would intend to hold price and forfeit volume or look to be more competitive, maybe put some discounts in to be commercial? And then also just given the sort of subassembly model for this business, how should we think about fixed cost absorption as volumes decline and the potential impact on margins?

We are, of course, following the developments, and we have taken already actions in order to balance with the current level of order bookings and expected near-term order bookings. So that's the way how we balance with our both fixed and variable costs, especially in places where we can have temporary layoffs. As for example, in Finland, we can do it rather flexibly. Then when it comes to pricing, of course, we were very active in managing our prices both ways. Of course, we do see cost reductions in the supply side at this moment as well. So it's not only that there is a price pressure there is -- there are clear cost reductions as well, specifically in logistics and some other parts and components. So it gives us a little bit of headroom to protect our margins.

Understood. And then on -- maybe on the Minerals sides, I think if we adjust for large orders at sort of more than EUR 150 million ago and midsized orders of EUR 20 million plus, it looks like order intake down more like 23% year-on-year, book-to-bill for the division overall closer to 1. Just wonder if that's reflecting a more slow pace of equipment demand given effectively a brownfield focused market. Can you comment on the trends in Minerals as it relates to sort of underlying activity?

Yes. I would say that it's a particular issue with bigger orders that -- and it has, obviously, something to do with the discussion on interest rates and things like that, uncertainty relating to that one. That's how I would rather see it than being anything, More of, say, macro-related thing. We really talk about one or 2 orders in Minerals that would have made a big difference here in this debate. And then individual orders, like I said so many times before, we know what we're going to win, but we don't know when the day is.

Maybe I can add, Christian, on that. That actually, obviously, this brownfield focused cycle is nothing new. We've had that for the past couple of years, and we really see a very good healthy activity on the smaller end of deals coming from geographically all areas, from all metals. So actually, very many ways, a very strong and broad health of the market activity in Q2. But as I said, you obviously need very many small ones to compensate for not having any bigger ones and hence, the discrepancy.

The next question comes from Max Yates from Morgan Stanley.

Could I just pick up on the large order point? I think we've seen this kind of across a couple of other companies as well where maybe customers have become a little bit more hesitant on large orders. I mean, when you speak to your customers and you look at the pipeline and discussions that you're having, and I guess acknowledging that commodity prices in kind of some areas are 20%, 25% lower than where they were kind of this time last year, is anything changing? Or do you really put this down to just these are lumpy orders? But is there anything in customer conversations where you're seeing a slightly different approach to maybe the way they were thinking in terms of timing of these orders?

Yes. Well, your comment on metals prices that might be true for iron ore, but we haven't seen too much iron ore activity for quite some time in the new equipment or bigger orders. Zinc is another metal. But everything else that we see are still -- metal prices are still on such a high level that there's -- it's not a question of metal prices being high enough. I mean, copper went in the beginning of second quarter down to very close to 8,000. I think it was $8,100 or something like that at the lowest, but it recovered to current $8,400 quite rapidly. Nickel is holding about $20,000. It has come down from -- I think -- $28,000 where it was right after the pandemic. So there is some drop. But then the nickel volume for us is quite low and most nickel activity is, in fact, in battery grade nickel, which on the other hand is very, very active business for us. So I wouldn't say that it's a concern on metal prices, other than in these 2 areas, but they haven't been really the main drivers for us as before either. So permitting, once again, is an issue there. Even in battery metals and electrification, that seems to be an issue. And I would say that the rest is, of course, uncertainty. I mean, funding is an issue for everyone who needs financing in these days. And especially interest rates. And maybe people are waiting for interest rates to come down or at least waiting for message that they will not anymore go higher. But those are the kind of environmental sentiment that we work within.

That's helpful. Maybe just a quick follow-up on Minerals services. So I mean, the growth kind of slowed to it looks like sort of 3% organically, but in absolute kind of order levels above EUR 600 million is an incredibly good level. Do you -- when you think about how that business has performed coming out of COVID, do you see that division having sort of benefited from any pent-up demand? Any kind of pent-up demand around rebuilds, any restock that means kind of maybe that number is not sustainable or there's anything artificial in that level? Or do you just see that as a kind of a reflection of a very strong underlying environment?

I think it's this emphasis to sweat all the assets that customers have today is visible in services. We saw some lumpiness, of course, after the pandemics. And the lumpiness was particularly in an area which is currently in order bookings somewhat slower, and that's modifications and upgrades. So people didn't want to do that one during the pandemics, but there was a sort of backlog of work that needed to be done. We booked those orders. We are currently delivering those. And relatively low activity currently in that area, but all the other areas of services and consumables are going strong.

And maybe just a very quick final one for Eeva. Just on the working capital where you showed that chart of how it's evolved since, sort of, 2021. I mean, when would you expect to see a, sort of, normalization back to historic kind of levels of working capital to sales? And I mean, would you expect that to ever happen or do you think you will run the business, sort of, structurally with more safety stock? Or should we be thinking actually about some pretty considerable working capital inflows over the next, sort of, 12 to 18 months?

Yes. I think, Max, the sort of strong growth combined with the sort of situation we've had in logistics and supply chain, of course, has been a sort of a multiple of events that clearly is taking quite long to unwind out of, especially when the growth continues high. And when we look at the turns, we're sort of very, very happy on both receivables and payables, sign that it's good, healthy progress. And obviously, like Pekka mentioned earlier, customers are doing well. So it's -- in that sense, a good environment. It is really this inventory buffering that we're gradually working to reduce. And I absolutely think that we have to sort of gain back some of the efficiencies to the levels where we were. This is not something we're happy with. At the same time, it is -- one doesn't want to sort of take drastic actions when we are really -- have a full backlog. And, obviously, as you see from the results, we are -- also customers are willing to pay for the availability. So it's a fine line. Then -- and obviously, one can then sort of answer in a very, very long way your question when you can highlight that, I think this -- when we -- we have less of a global environment, unfortunately. We are seeing more politically driven regional environment around. So I think that, obviously, does require certain regional strategies. And I do think over time that, that does imply also a higher working capital. I mean, the whole point of globalization was that it was a very efficient just-on-time type of a world, and we haven't seen that for now for a few years already. But what exactly is that impact? I think that's -- it's early to comment on and something we're obviously working in our strategy work as well. But right now, I think the focus is on that we absolutely need to improve, and that's something we're focused on and also incentivizing our teams to deliver a better cash flow.

The next question comes from Antti Kansanen from SEB.

Its Antti from SEB. A bit of follow-up on the Mineral services side. And I mean, from absolute levels and from a year-over-year growth perspective, it's been a bit of lumpy ride past 3 quarters. So is this kind of only reflection of the lumpiness of the modernization, and project business has kind of the progress, and the spare parts and consumables being more steady? And perhaps, Pekka, you mentioned that the mods demand is a bit slow right now? Or are you just referring to the similar timing issues as on the OE side?

Yes. More of a timing issue, but there is an impact of the pent-up demand that we saw in mods and upgrades area right after the pandemic. So there is a comparison within that one. We haven't opened it and we don't go to that sort of breakdowns. But internally, I mean, when I look at those things, yes, we did enjoy a very strong order bookings in that area after the pandemic, and now it's sort of normalizing that one. There's some seasonality in that one, because it's always linked with the -- with shutdowns, and shutdowns are normally timed with the vacation period and so forth. So delivery takes place during the vacations or right after the vacations and order bookings between the sort of occasion. We are, of course, in Northern and Southern Hemisphere, and these are -- there is a timing difference. There's like 2 seasonalities in that area.

Maybe I wanted to clarify a bit on the timing issues on the OE side. I mean, you talked a little bit about more kind of a slower decision-making, but were you also pointing out that there were some specific deals that actually slipped from a quarter to another, like it's typical in the business or how should we think about that?

Maybe it is a reflection of a slowness in decision making since they slipped. There are some things that we expected to come through, but they didn't come through in this time frame, so.

And the last one is on the Aggregates margin. And I mean, if I understand correctly, the weaker outlook on second half mainly relates to U.S. coming off from a very high level? So how should we think about the impact on margins? I mean, we've been discussing that the U.S. business has been a mix positive for you and has been supporting the strong margin profile in Aggregates in the past couple of quarters. So is this a notable change that we should kind of factor in?

I don't think we see a sort of any -- any sort of big changes, but we clearly wanted to highlight with the outlook that the market will -- we don't expect the market to grow, just also referring to the relatively high order intake assumptions that the market had also for this quarter. So that people don't just assume that it's seasonality. That there was -- that its -- that's a sequential issue only, but really looking at year-over-year, we expect Q3 orders and activity to be slower and guiding on that. But it's not -- I mean, like Pekka mentioned, the activity in North America is super high. I mean, our customers and rental fleets are super busy. So it's a question more on sort of the willingness then to make equipment orders and that what we wanted to highlight. I think, overall, still the backlog is on a good level. We're quite comfortable that we can manage the fixed cost portion in a way that we'll still be generating solid margins in Aggregates even if -- obviously, not necessarily on the sort of -- on the level that we saw in Q1, like you already saw now in Q2 that were slightly down, but still on a very good level.

And last housekeeping question regarding the group costs. Did I understand correctly that we should think about the EUR 5 million to EUR 10 million quarterly for the second half?

Correct. I mean, that's -- yes, I mean that's -- if you also look at the past, that's where we've typically been. Obviously, then influenced by many valuation and currency type of issues that are really hard to predict. And hence now clearly, we were a bit higher than we originally expected in Q2 with -- but don't really see a reason now to expect that we wouldn't be in that range in the third and fourth quarter.

The next question comes from Andreas Koski from BNP Paribas Exane.

I have 2 questions. First on input cost and pricing. I think we've seen raw material prices coming down over the past 6 to 12 months. I would guess that have given you some support on your input cost. Do you think there is a risk that you will have to lower your selling prices in the coming quarters as a consequence of that?

It's a long answer, which I would repeat from sort of a previous calls. We have so many different pricing models -- 3 basic pricing models. One is in our projects where we work mostly with the cost-plus model. And that, of course, is protecting the margins in input cost fluctuations both ways, and that's a sort of automatic that we do. Then we have products where we have price lists, and then these are typically products that are pre-engineered and we know well the product structure and so forth. We also know the cost structure. And we then use, of course, the market information. We try to price our products into the market, depending on the competitiveness of our product. And then one reference point is, of course, the cost base that is sometimes going up, sometimes going down. And depending on then the market conditions, we either increase prices or lower the prices. And then we have our contracts, that's the third model where we have introduced the index clauses for raw materials. And of course, if input costs are coming down, then over time also the prices are coming down. But they should protect margins quite effectively.

So it sounds like there is some risk to price decreases in the coming quarters. And then my second question is on the free cash flow, and also on the working capital side. Do I read you correctly and that we should expect a working capital release in H2 '23 and also in 2024? And if that's the case, what do you consider a normalized working capital to sales ratio going forward?

Well, I'd be a bit cautious on guiding on a normal -- what's normal in a sort of less normal world as this needs a bit more reflection. But yes, I do expect that, obviously, our AR will go up as long as sales go up -- sales growth. So that -- in that sense -- but then again, of course, it turns. So it's less of a concern. AP, I expect to slow because we are, as I said, reducing on the inventory buffer, so that should impact AP. But of course, it is also partly linked to sort of the sales growth. And then on the inventory side, we would expect that we don't need to -- we don't -- you need to see that grow apart from the sort of project work in progress, which, of course, again, is a reflection of the sales growth. But if we're able to -- and the target is really to sort of impact the other areas where it's more on what we have on stock, for instance. And through that then, at least, see that the working capital is not a drag on the cash flow, if not necessarily a positive.

And if you look at your different businesses, is this mainly related to any specific business? I mean, is it Metals, Minerals or Aggregates mainly driving this working capital tie-up?