Metso Oyj (METSO) Earnings Call Transcript & Summary

Good afternoon, good morning, everyone. This is Juha from Metso's Investor Relations, and I want to welcome you all to this conference call where we discuss our second quarter 2024 results, which were published earlier this morning. We will start with the presentation by our President and CEO, Pekka Vauramo; and CFO, Eeva Sipila. And after that, we will be taking your questions. [Operator Instructions] In the beginning of the presentation, we'll be discussing forward-looking statements. Please take that into account. And with these remarks, I'll be handing over to Pekka to start the presentation. Please go ahead.

Okay. Thank you, Juha, and welcome to our second quarter earnings call. If we start with the highlights of the quarter. First of all, we didn't see any major changes in the market outlook. So it was very much in line with our expectations in both of our segments. We saw continued headwind in orders in both of our segments. And since we have had headwinds with the orders already for a couple of quarters, then that starts to be very visible in our sales. So both our top lines, negative development as such for the quarter. What was very positive during the quarter was that our margin development continued to be very resilient. I mean, we are showing almost stable margin with reduced sales levels. And that, of course, shows that we are doing in-house what we can in this kind of situation when there is very much delayed decision-making in equipment orders in Minerals, and at the same time, we've seen some slowdown in destocking in Aggregates equipment. We are seeing some signs of cash flow improving, still not satisfied with the development in that area, but we are moving in right direction with the cash conversion. And the group numbers as such, so both top lines, orders and sales, down, orders 14%, sales 13%. There's a minor currency impact there as well, maybe 2% out of those numbers are because of the currency, but main contribution is obviously the volume. And adjusted EBITA came down, naturally in the millions, from EUR 238 million to EUR 205 million. Margin remained fairly stable in this kind of conditions, similar drop in operating profit. Profit, Eeva will comment a little bit that development later on in her part. EPS came down EUR 0.02, and cash flow shows an improvement, but still room to improve from EUR 150 million to get the cash conversion on the level where it should be. Then looking at segments. Aggregates, orders, EUR 314 million, that's down EUR 16 million from last year. Market activity remained more or less on the same level. We saw sort of earlier geographically wide recovery or signs in the market. Now we see more of a mixed picture in the market at this moment. And maybe the notable situation which became evident towards the end of the second quarter was that the North American mobile equipment market slowed down and, in fact, the destocking of dealer stocks slowed down quite much towards the end of the second quarter. So equipment orders down 5% and services 3%. With the outlook that we have for this part of the business, it's evident that will end up below last year's order numbers and sales numbers in Aggregates, and the situation will be the same for Minerals as well. Sales numbers, EUR 331 million, down clearly from the year before. And that is, of course, because of the thinner backlog that we do have. Margin supported very well by the mix improvement. Services being more stable than the equipment order. Services share being 33%. And the total adjusted EBITA for the segment, EUR 55 million, down EUR 11 million. Margin 16.6% versus 17% a year before. We have continued good cost management and the sales mix is contributing. And like we have said many times, we have done some medium-sized and minor acquisitions in Aggregates area, and we keep on finding more synergies in this area and that contributes to the cost side and margin development as well, despite of the lower volumes in our Aggregates business. Then moving on to Minerals. Major change really the equipment orders down 34%. Really no major orders, or there is one, in fact, order that we booked e-scrap smelter order, but that was the only major 1 that we booked during the quarter. Services down 6%. Some sort of seasonality and lumpiness in services side, but that clearly shows that it's much more stable business as such. We have a good, strong pipeline, but delayed customer decision-making. Decision-making really here is the name of the game, and this is just something we need to live through. Those things will finally come through. We see some signs of that 1 now. But since there's been so many delays, so difficult really to comment and say that they will come now or fourth quarter or so, but we see some possibilities there. Sales follows naturally the lower order intake from the previous quarters. Equipment down 22%, services down 7%, and services share now at 66%, supporting, through mix, the margin development. Same as in the Aggregate side, we have managed, in our opinion, our costs well. In Minerals as well, we made some changes in the way of operating. We have finalized those actions, and that contributes nicely to the cost development in Aggregates. Margin, 17.3%, EUR 152 million, down from 18.2% a year before. But good resilient performance there in the Minerals side as well. Eeva, please.

Thank you. Good morning, good afternoon to all on my behalf as well. If I start with the group income statement, so a few additional comments to what Pekka already mentioned. So the operating profit was EUR 195 million, and it's high relative to the adjusted EBITA of EUR 205 million for the quarter. Now this is due to the adjustments in the quarter being positive. The adjustments were plus EUR 6 million, thanks to a provision release of EUR 13 million, from the remaining tail of the Russia wind-down related provision. We successfully completed settlement agreements in the second quarter for the remaining couple of big projects that were signed before the start of the Ukraine war. And hence, now marking the end of a very long legal process to exit all the business that we had ongoing when the attack in Ukraine happened. Regarding taxes, our effective tax rate for the quarter was 25%, which is in line sequentially and also with last year. And then earnings per share were 16% for the quarter, and this is both for continuing operations as well as including the discontinued operations, i.e., for the fully reported EPS number. Regarding our group balance sheet. So the total is down a few hundred million euros from the end of March or from the beginning of the year for that matter. And the main impact comes from the fact that we paid back the last bit of our '24 public bond. Some EUR 196 million was paid back in June and obviously reduced based on liquid funds as well as the interest-bearing liabilities on the other side of the balance sheet. And our net debt now at the end of June was roughly EUR 1 billion. Moving to cash. So group cash flow from operations before financial items and taxes was on a similar level as in Q1 with EUR 152 million. Cash flow remains supported by the healthy profitability, and our resilience obviously is very important. Unfortunately, the net working capital change was still negative in the quarter. We did manage to achieve a reduction in our finished goods inventories. And work continues with multiple initiatives across our business in the inventory space. However, projects tied more capital in inventories and also had a negative impact on payables in the quarter, and hence, the total of minus EUR 102 million as the change figure. Now such fluctuations as such are part of our business and not easy to predict in timing. But certainly, in this quarter, we were aiming for a better cash flow. So work continues throughout. And then my final slide on our financial position. Liquid funds consisting of cash and cash equivalents amounted to EUR 348 million. And this is taking into account the already mentioned repayment of the bond, but also then our first dividend installment of EUR 149 million that was paid out in May. Both our gearing and equity to assets stand at about 41%. And with that, I would hand it back to you, Pekka.

Okay. Thank you. Eeva. Our sort of follow-up on sustainability KPIs. We are making progress in most areas of sustainability. These are the targets that we have communicated earlier on as well. Planet Positive. We continue to sell relatively more Planet Positive products than year before. Now the differential is quite small, only 2%. It's a sign also of lower order backlog and lower deliveries at this moment, as there is less and less new equipment in our order bookings and sales and especially very few greenfields. But we are in target with that 1 as well. Our net zero. We are very well in target in achieving our net zero by 2030. And the area where we continue to struggle is really logistics. I mean, we have, by the end of 2025, minus 20%, and we are currently at minus 8%. This is sort of absolute target. And when it was set, we did take absolute amount of CO2, not relative to or proportional to our production in any way. So I mean, regardless of our production, we committed to absolute figure. And with the way how, for example, current shipping lines to channels being partially blocked currently in the world, we are shipping longer distances, and there's in sort of short term very little we can do with the logistics. So there we are behind on the rate where we are. Then on the other hand, committing our suppliers to the Science-Based Targets, we are very well on target and above the target there. Very close, in fact, of the 30% by the end of next year there. So altogether, good positive development excluding the logistics part of this one. And our outlook remains the same. We expect the market activity, both in Minerals and Aggregates, will remain at the current level. So there is no change from the previous one in that regard. And now to the Q&A.

[Operator Instructions] The next question comes from Elliott Robinson from Bank of America.

Elliott from Bank of America here. Just 2 questions, if that's okay. The first 1 is what underpins your comment that the speed of decision-making will improve in H2? Obviously, you've spoken about higher copper prices, but is there anything else that you're going off for that? And then the second comment was actually just on something that you said on the call itself regarding the -- it's evident that you will end up below last year's order numbers within Aggregate. Is that definitely the case? I just want to clarify that. Because obviously, Q3 and Q4 was very weak last year due to destocking. So if you had a stable level of orders from now to the end of the year, it might not imply that it would be down year-on-year. So I just wanted to clarify that point.

That's right. Yes, we do have a few major packages in our mineral side that we see are heading towards a decision by our customers, and that's why I made the comment that we see some light there. I don't see any sort of, let's say, wider improvement or speed up in decision-making in that regard. But there are a few packages that we feel could be sort of concluded within this year. So that's why the comment was made. In Aggregate side, probably, I meant that in the sales side, we'll end up below last year's numbers. The order bookings, yes, the second half of the year was weak last year already. It continues weak in this year and remains to be seen where we end up then in order intake at the end of the year.

The next question comes from Klas Bergelind from Citi.

My first 1 is on the service business on the orders. It seems like June was weak. Was this a timing issue? And should we see July improving. And linked to this, I struggle a bit to understand why sales in service was weaker as well. And it seems like the issue was linked to modernization, the on-site sort of repairs business, which I thought was longer lead time from orders to sales than spares and wears, which seems to be holding up our stocking.

Well, I think indeed, Klas, June was a weaker month, and we do feel that it is more a timing issue, and hence, expecting, on the Minerals segment side, really the aftermarket side to do better in the coming months. Now on the sales, obviously, most of the project type or the longer lead time deliveries in services are not sort of POCs. So they're complete contracts. And if then for a reason or another, we're kind of not able to push them over the line, we don't get the sales revenue at the month end even if the project as such wouldn't be sort of massively late or is a big thing. So hence, indeed, we had a bit of low sales, but really from different reasons behind orders and sales, but now happened on both. So hence, you see the impact in the Minerals segment numbers.

All right. My second 1 is coming back on the comment you made that you expect decision-making to improve into the second half. And I just wanted to sort of clarify on the previous question. Is this just because of the sort of technical phasing of the projects, or have the conversations with your customers improved, i.e., are the customers -- I mean, obviously, the copper price had an awful week last week, but we're still up versus March. Are they more positive in your conversations following, obviously, the copper price recovering from March? Or is it more a technical effect? And linked to this, is the framework agreement that you talked about in Uzbekistan. It looks like a large project. Will you see some orders from that agreement starting to land here into the second half?

Yes. Discussions are more positive, especially with copper customers, and obviously also with gold customers, even though there's nothing really that major happening in gold mining area at this moment. But more and more copper things are coming back on stream. We're doing continuously work on them, and we are in discussions -- I would say, in advanced stage of discussions with several customers in copper side. And currently, it looks like that we will see decisions being made within this year on those ones. And that's why the comment. And on individual customer cases, I wouldn't like to comment anything in this connection.

Yes, I appreciate that. My very quick final 1 for you, Eeva, is on the inventory on the balance sheet. If demand doesn't come back here in the second half, you probably need to cut production to take the stock out. That could obviously hurt your margin? Or do you think that the layoffs here in Minerals will be enough to offset the Minerals production potentially? If you could comment on that?

Well, Klas, we've actually been cutting on production already. So that wouldn't be anything new indeed. We've sort of -- obviously, some of the union discussions are publicized and this has been very visible in Aggregates, but we've also done that across the board really to match our inventories better to the demand. Of course, it also means that we've been reducing clearly our procurement, because some of the things are not really manufactured by us, but kind of come to us as components, and hence, so really taking that action. So I think we have a pretty realistic view, as Pekka commented already in the beginning of the presentation, the quarter has gone very much in line with our expectations. And hence, I think we have a realistic view on what we need from a production point of view and how we really manage the inventory situation.

The next question comes from Max Yates from Morgan Stanley.

Thank you. I just wanted to ask about pricing in Aggregates, because obviously, this is the industry where I think we've heard about kind of overcapacity at the dealers. I just wanted to understand kind of what are you seeing on pricing in terms of orders that'll be going into your backlog? Are they sort of markedly lower prices or margins than what you're delivering on today? Any comments on, yes, the pricing trends, particularly in North America, where the high inventory issue seems to be most pressing?

Yes. Pricing, obviously, it's in our dealers' hands in North America. And we do not comment in general on price development as such. But we do realize that the market conditions have changed. Also, some of the supply side has eased off. And for us, it's more important that we manage our margin rather than individual sales cases, the prices as such. And I would say that the totality comes really then through our segment report and then development of our margin in both of our businesses.

And maybe just an extension of this. I mean, quite a few of your kind of mining equipment peers, we've seen a sort of dynamic where they put up prices quite aggressively in '22 and '23, and now they're putting up prices less and costs are now catching up and margins are coming down. I mean, you've obviously been the exception where you've managed to keep margins relatively stable. I guess my question is also, would you expect a similar dynamic in the coming quarters, where there is a bit more of a catch-up on cost, it's harder to put up prices to the same extent, and therefore, kind of potentially your margins get worse before they get better. Is that the right way to think about the business? Or do you see this kind of 17% margin level, 16.9% as broadly sustainable in the coming quarters?

Considering that we are squeezed by the volume as well, I think this kind of margin performance what we have right now shows that we have not given up our margin targets. And our pricing is done very much differently in our Minerals packages than what we do, for example, in the aftermarket side or how we do pricing in our Aggregates, and it's more of a cost-plus model that we do apply in Minerals packages, and we tend to work with our suppliers as well with fixed prices, not always 100%, but let's say, majority of our costs are fixed at the time when we book the order with our suppliers. So it doesn't expose us too much on inflation during the project. I think the most important thing is that how well we are able to execute things during the project than the individual pricing.

And maybe just, Max, to add on that. So I don't think we see a lot of additional sort of cost pressures in the market in our Aggregates business. I mean, obviously, labor has been an issue early this year, but it is easing out. And on some logistics lanes, there is some pressure. But other than that, I think there's actually sort of also deflationary opportunities that by procuring in the right locations that we can take advantage of. And as you well know, the sort of order to delivery time line is very short. We talk about 3, 4 months. So it's not in that sense. What we see now is very much what we expect to deliver in 3, 4 months. So that's just kind of the nature of the business. So it really is not 1 where you sort of would hide costs in.

Okay. Understood. Maybe just 1 very quick final one. One thing I'd like to kind of understand a bit better this quarter is, in your Minerals equipment, obviously, there's issues of lower orders, but there's also an issue of kind of timing of deliveries. I guess I'm a little bit confused about why your sales are going down as much as they are, because your 2021 and 2022 orders were materially above your sales level, roughly by around EUR 800 million in Minerals equipment. So I would still think that you have a very healthy backlog to be delivered on through this year. So I guess what I'm trying to understand is, kind of going into the second half, is there any kind of help you can give us what a normal sales level would be? How much maybe revenue sort of slipped this quarter and whether we should expect kind of sales to be kind of more flattish and up? Because I guess on my numbers, I would look at it, and it would suggest that you still should have quite a lot of backlog in Minerals equipment to deliver.

Yes, I think you're right, Max, and I appreciate that certainly from the outside, it can be a bit tricky. The answer really lies in sort of the composition of that, that we have had some of the shorter-cycle Minerals equipment parts where the sort of lack of orders roughly a year ago now came through. And I believe we did mention already at the sort of turn of the year in a way that the second quarter from a sales point that will actually be more challenging than the first quarter just because of the sort of how the composition of the backlog is built and that is now very visible. What I would say is that, that obviously means that then there is a clear portion of the backlog that is indeed then weighted to the second half and into 2025. So I think we will have a slightly better balance in the second half. And obviously, now sort of this quarter, the impact is more visible also because of a slightly lower performance in aftermarket sales in Minerals, and that we do think will also be improved slightly, but obviously, nothing in [indiscernible] with the order backlog.

[indiscernible] in terms of customers delaying deliveries, customers actually pushing out deliveries, or is this just a timing effect? Customers actually saying to you, "We don't want this stuff right now. Can we delay delivery?" Or is this just kind of backlog composition?

This is backlog composition. As said, it was already at the beginning of the year visible that this will materialize. So in that sense.

I think we communicated in the third quarter of last year that our backlog is fine up to second quarter. And in case we don't get any major packages, then we will start to see our top line coming down in the Minerals side.

The next question comes from Panu Laitinmäki from Danske Bank.

Just continuing on the same topic. So can you kind of comment how much sequential improvement should we expect on Minerals equipment sales in second half compared to Q2, like directionally?

I don't think we want to go that close, Panu. I mean, you have the backlog numbers. And yes, as I said, we don't provide quarterly sales guidance.

Okay. Then secondly, on Aggregates. I mean, in February when you reported Q4, I think you sounded quite optimistic on the outlook, and then after Q1, you changed it, and now you talk about continuing destocking in the U.S. So I'm wondering kind of what's happened in the market? And how long do you think the destocking in the U.S. will continue, and what are your thoughts maybe going into '25? So like what has changed? And what is your view on how will Aggregates market develop from here?