Metso Corporation Unsponsored ADR

Rita Uotila - VP, IR Markku Terasvasara - CEO Jari Algars - CFO, Acting President and CEO

Jonathan Hanks - Goldman Sachs Manu Rimpela - Nordea Andrew Wilson - JPMorgan Daniel Johansson - UBS Tomi Railo - SEB

Thank you, operator, and ladies and gentlemen, welcome to Outotec’s Interim Report Briefing. I will now turn the slides to our new CEO Markku Terasvasara.

Please go ahead.

Thank you. Welcome from my side as well.

As some of you may have not seen information of reports so I thought to start with the quick introduction of myself. I come with biding environment and humanitarian backdrop, my last employer before Outotec was [indiscernible] and there I worked 19 years in different positions within mining and construction and latest early in mining area at various positions of running both our capital equity but also for the last 2.5 years was responsible for our top model service operations.

And for the ones that Outotech needs no introduction but in mining and rock excavation area where I worked previously there we actually shared the customer base in Outotech just upstream on a production chain. So [indiscernible] beginning of the production chain in minerals processing and metal mining while Outotec is on the end of the process.

So a lot of customer and other people are the fact that I met in my previous times. I would like to start our presentation by looking at our safety performance and development looking last year compared to this year there is in lost time injury rate there was good improvement and the protection in perspective I think we roughly combined with our employees and our buyers.

We work roughly 1 million hours every month so in respect to that I think our safety record is on a good level. Going forward what we have agreed since I was not employed in quarter three so we have skipped that in the presentation in different sense we already start little bit introducing myself but also related to my first of Outotec working here and then Jari Ålgars will take us through the quarter three finance and then I come back little bit telling my view on how we should take us forward from here.

So a big reflection first what I believe in general in the companies and running it I think every company should have a clear vision and clear strategy. I think speaks for itself but also very important and all our effort is to clearly understand it and also they can constantly achieving our goals, it's very important.

Also believing very much in interaction or interact well with our customers but also internally to achieve our goals and I think positive work environment so, so very important. As you can performance when the environment around you is supposed to be unsupportive they are very important.

Speaking of importance as well I think both we’re excited with the in long term [ph] and also going up the opportunities we need to react fast, I think that is something that comes from clarity of organization, responsibilities but also an organizational model with [indiscernible]. And then last point of my list is where are -- transparency is important so that we can quickly active more deviation that we see in operations and also I think profit and loss statement relative to get our organization at that level so we can give the performance over the organization and every location.

Little bit about my first question on Outotec, I think what have an opportunity to meet a lot of people, our employees both in here and in Germany but also in North America and Central America and also had opportunity already to meet some of our customers and I think based on these discussions and feedback I think selected these four topics first impression. Talking about clear about that strategy I think Outotec has a very clear and our strategy contains the right element what we can do better in executing our strategy and that is an area where we are looking at the moment.

Also when talking to our people it quickly gets a good understanding that we have high level of technological expertise, lot of knowledge about people that understand the customer operations and the customers processes and add value there also I think a good foundation to build on continue on these observations I'm happy to see this €70 million savings plan that was introduced is progressing as planned, it's not even a bit faster but of course where we are today we need to continue to working on our turnout efficiencies going forward. And then on a opportunity site, I like to lift up the big enhancing install base that we have in this -- installations and then offer a very good potential for service and that is something that we more actively need to go after I think it's just a defining our offering and structuring our operations and our augmentation [ph] in way that we can.

We can add value to our customers in a good way. So having said that I will later on when I wrap up the assessment, I will come back to some of these points in our way forward.

Now over to Jari Ålgars.

So now the Q1 to Q3 interim report. We see times of recovery in the minerals processing market, however the environment remains challenging for metals refining market.

If we go more into details it is we can see that minerals, metals companies continue to invest in their existing plans with best returns and they also focus on efficiency inventory and cash flow management which we obviously have an impact on us especially on the spare part business, interest in acknowledges that minimize environmentally impact is high and smaller equipment orders picked up but mainly in minerals processing so far and gold, copper, nickel I have seen projects were the most active ones. If we look at Q3 specifically in a nutshell we look at the miner site, customers large investments are still developing which obviously have bigger impact on [indiscernible] water segment because that’s where we usually take bigger projects and we also have had weak performance in certain projects in the metals, energy and water which impacted our profitability and cash flow, I will come more into this later.

On the cost side, the savings program proceeds as planned and the fixed cost has been reduced by 26% year-on-year and there was a intake increase in the minerals processing segment positively. When we look at the order rate intake we can see that gold is one thing which you can see with the process equipment for Goldcorp Mexico, process equipment for greenfield project in Senegal, we also had flotation cPlant for Ma’aden Gold in Saudi Arabia and then also one of our backfill plants where the gold area.

So gold is a very strong theme. Also copper and we have also sync [ph] here in this order intake what we have announced.

If we look at again where have we got these orders, so in EMEA, Europe, Middle East, Africa, we’re about 51% of the orders just more in Africa, some in Middle East and then also in Russia and then Asia Pacific 20% where we have some [indiscernible] plants and in Americas that stood for 29% of the order intake which obviously was with the Goldcorp Mexico's bigger order dimension. We have a stable order backlog as you can see the last three quarters it's stable, it's still over a 1 billion but down 8% year-on-year and roughly $300 million out of this backlog to be delivered, expect them to be delivered in 2016.

Weak performance in certain projects impacted profitability if we look at first three quarters our sales for the first three quarter was $753 million down 16% from last year or 12% in comparable currencies being 895 million last year. Services $320 million compared to $373 million last year down 14% or 8% in comparable currencies, share of service remained the same 42%.

Gross margin came down from 28% to 25% I will come on to this later on and the adjusted EBIT is only to 1 million or 0% for this year when it as 38% or 4% in the same period. Restructuring acquisition related cost were 10 million, BPA amortization 6 million, so we ended up with an EBIT of minus 14 million and the profit for the period is minus 17 million when it was plus six for the corresponding period last year.

And the profitability was impacted by additional project provisions booked in Q3, so if we compare to last year and look at the reach we have 38 million as adjusted EBIT last year same period, the sales decrease has brought the result down to a certain degree then we have on top of that provision impact both from [indiscernible] last year but also additional provisions we have had to make. This year the fixed cost decrease has helped us so we ended with a positive of $2 million .

Minerals processing, order intake grew 18%, sales decreased 10% mainly due to the decline is as per part orders and low order intake what we had later part of 2015 and first half of 2016. We achieved fixed cost savings, however balanced out the lower sales which is quite positive or so going forward.

If we look at the order intake in absolute terms $462 million for the first three quarter when it was $393 million for the corresponding period last year. So up 18% or 26% in comparable currencies.

Sales was $361 million compared to $402 million last year down 10% on comparable currencies 5%. So every sales was 197 million down from 229 million in corresponding period last year, change of 14% on this 14% down 7% in comparable currencies.

However despite the sales came down we were able to produce a better adjusted EBIT so it was up $22 million from $19 million last year which was 6% compared to 5% last year. Their impact of unrealized losses were related to FX, was minus $1 million this year.

Metals, energy, water asset, customers large investment developed slowly obviously has an impact through metals, energy, water which is mainly consisting of our having bigger projects and this led to a decline in the plant orders, we also had low service volumes. We had lower sales and weak performances project which weakened the segments profitability.

This is mainly due to two order projects which were part of the [indiscernible] in 2014 which was mentioned at that time where we have had issues. In one of the projects one sub-contractors components failed, we have to make some rebuilds and in other project we had a major breakdown and we’re discussing with the client who will pay and do this repair, both obviously -- or bring delays to the project.

There are more savings plans ongoing so we have already started and we will continue with savings action obviously due to the lower order intake what we have. The order intake was 263 million for the first three quarters when it was 530 million for the corresponding period last year, down 50% or 49% in comparable currencies.

Sales was 392 million when it was 494 million last year down 21% or 18% in comparable currencies. The service sales was $122 million compared to $145 million last year down 15% or 10% in comparable currencies and adjusted EBIT was minus 70 million compared to 24 million comparable period last year.

So the adjusted EBIT was minus 4%. The impact of OpEx is foreign exchange losses was 3 million.

Service business suffered from postponements of upgrade as you are long term service contracts despite we can see that the service order intake has been growing for the last three quarters still compared to last year we’re on clearly at the lower level and this is mainly due to upgrades and long term service contracts. Changing cash flow due to projects under the executions which a part of more capital, we had lack of large advancement payment this big orders we were talking about usually also big orders have big advance payments and [indiscernible] get this.

The impact that our cash flow we also have restructuring related costs from the plan we started last year. So the net cash from operating activities was 173 million when it was plus 22 in the corresponding period last year.

And as we did less capital expenditures had less acquisitions and we ended up with cash flow after investing activities of minus 90 million compared to minus 49 million last year. [Indiscernible] under equity remained solid the net interest bearing debt was minus 21 million at the end of Q3, the hearing was minus 4% above to last year and equity concentration was 42 also even improved from last year.

Return on investment was minus 6% return on equity, minus 8% and the working capital at the end of the period was minus 10 million and it was minus 12 last year. The balance sheet came slightly down being 1.42 billion when it was 1.57 last year.

If we go to the fixed cost savings we have achieved as we were planning so for the first three quarters now compared to last year, we’re now at a similar savings of 56 million and we are actively working on improving our performance especially in the metals, energy and water segments. So I said we have orders ongoing to continue this plan and some have already been taken and some will be taking forward.

Key events after September 30, 2016, [indiscernible] Markku became the CEO. On October 4 we announced represent for this nomination which get from [indiscernible] and the Chairman of our Board.

On October 10 we celebrated our 10th anniversary which was 10th of October 10 years ago and we also launched a history book 150 Years Evolution Towards a Greener Future, The Outotec Story and on October 24 to support these changes we need to see in the metal, energy, water segment, Kalle Harkki was appointed President of that unit. Forward-looking we expect increased activity in minerals, process to continue but we’re also expect the metals refining market to remain weak.

We see increased interesting technologies that minimize environmentally effect which is good for us considering that we have quite sustainable technology. We also see that the markets in the Middle-East, Southern and Central America and Russia are expected to continue active in the same markets, we saw being active during the last quarter.

We also expect continue to be active, customers need for productivity improvements we expect to stay strong and this also creates opportunities for our performance solutions. And the development of gold, copper, nickel and zinc projects are expected to continue more active than aluminum and iron ore which is what we already saw in the third quarter.

So we expect the Q2 to continue in a similar way. If you look at the financial guidance for this year we have narrowed it the guidance, it's narrowed and due to the continued challenges in the metals, energy and water segment the adjusted EBIT is expected to be at the lower end of the guidance range.

So the sales will get approximately €1 billion to €1.2 billion when it previously was guided at €1 billion to €1.2 billion and this comes from that we have already have €753 million in phase from the first three quarters we expect sales from our backlog of about 300 million and very little new sales strong quarter intake going forward because they start to be quite close to the year-end. Adjusted EBIT will be approximately 2% to 3% when we previously guided it to 4%.

If we look at our profitability roadmap from 2015 to 2016 the savings obviously has been quite necessary and helped us a lot to being where we are obviously again [indiscernible] and we will have to continue with the savings, the sales reduction has been significant and we have also had some market risk which impacted the result has come down. We have had provision impact both looking in comparison from 2015 but also in 2016 having to make more provisions and depreciation is due to the reinvested quite a lot in those systems last year were increasing and this is how we end up into our guidance level but we’re stating at the moment.

And now again handing over to Markku for some closing remarks. Thank you.

Thank you, Jari. We will have one slide to look I want to summarize the situation we are in at the moment, I can take up three things, I think in our processing business unit is has improved profitability quite a lot and it's also growing, so I think the outlook is positive.

On the other hand metal, energy, and water business unit is profitable at the moment and we clearly need to fix that and the third thing I think that we said earlier we have a large install base for our service, so I think now it's improved with the understanding of the customers processes and operations which we have in account I think we just need to activate ourself and increase the speed out in the customer base to get bigger share of that opportunity. And I think in a way it's just a hardwork with more well-defined service and past portfolio and competent and the rest is hardwork.

Couple of other things that I want to lift up as an opportunity for us going forward. So as have spoken about already but also I see modernization and [indiscernible] an opportunity not only to support our service business where it is needed but also I think shortening our lead times both in the define base but also in employee execution and of course at the end it also gave us benefits when it comes to quality and cost and so forth.

Sourcing also an area and I think there we all have a good improvement in certain areas in best cross country sourcing where we see that activities doing is getting traction and we get benefits on a cost side. Also important I think is to see through our product and service portfolio.

In my view all the business is an order of business lines that we’re involved in into being profitable and we need to [indiscernible] see okay, how we can achieve that installation in every business that we’re in. And of course people important engage here, sustainable -- Outotec has done a lot of investment in our operations when it comes to processes and ISIP in a way creating platform for the next level and I think now we need to have harvest and platform and put our efforts back to customers to really activate those -- and of course the line point is also related to utilize a good knowledge and confidence we have in our organization to drive our business in an active way.

So I think in the basement platform is good, I think we have an idea we know what this really is to make Outotech back to progress again. Thank you.

And now I think it's time to open the Q&A.

Just maybe a first one on the guidance, I'm just curious you know the low end it looks like you got a pretty high margin in 4Q, my calculation is up 7.5% which is obviously you’ve not done that quite margin for a long time. I'm just wondering you know if you can give a little bit more color about your confidence in achieving such high margin in the fourth quarter.

As the moment [Technical Difficulty] we guided for the full year in the beginning of the year. We expected that we would get higher revenue and watch the end of the year and this obviously really impacts us to begin [indiscernible] will remain at the certain level anyway, so this is how [Technical Difficulty].

Okay. So just clarify, presumably that’s the certain projects you are expecting to close in the fourth quarter which allows you to book revenues.

Yes, we expect certain projects which have -- in the engineering phase how it has not impacted our revenue.

And is it dependent on provision releases from certain projects which gets a such decent margin.

We are not [Technical Difficulty].

And Markku I just found kind of your initial impressions again clearly you are experiencing scope for the biggest [indiscernible] is on the service side. I'm just interested, do you think it's the best in having kind of more feet in the street if you like to chase the aftermarket opportunity?

I think that is something that we’re looking in for I think I have it only for four weeks so maybe not having the complete picture but I think that we can work in many areas of service by clearly defining the service and product portfolio and also making sure that whatever business we decide to begin in service that we have a good availability of resources as well because at the end of today the service side exclude the big maintenance and upgrades on alliance it gets -- customer satisfaction have founded few things having a past information of services was available and then being able to deliver competition across the corporation and then I think when we see which part of the operations where we can add value I think then adjust [indiscernible] that’s more clearly to go up with these opportunities. These are good opportunities.

My first question would be on these project write-downs or what do you want to call them that you took in the metal business. You mentioned that they were related to these projects that were already entering right balances and losses into those in '14.

So can you elaborate a bit more because I thought those issues were already behind us and also the follow-up question on that will be that are you able to quantify that you mentioned in the risk that there is more potential risk for write-downs or provisions in these projects to kind of get us an understanding of what the total size could be if things still continue to detest our--

We have stated that these are the part of the projects which we reviewed during the week and where we had [indiscernible] already in 2014. Obviously we’re gaining it now and they focusing as planned but now again we came into the stage where we had certain problems which I addressed one of them being this sub-contractor components which based to our definition down we have to make some rebuilds or we will have to make some rebuilds and obviously when you make rebuild we assume it will work.

If it does not work we then have to continue with that -- could come in at this moment, we’re expecting that the new solution will work but we cannot comp on [indiscernible] coming into the picture. With the other project obviously as said we had a major breakdown and we’re discussing at the moment with client on who is going to pay it for this, this is pushing the project more over because this repair will take some time and then secondly obviously when we come into quite we start up again, this is -- there is no guarantee that there would not have something you again had that [indiscernible] so this is why we want to state that we made provision for what we see at the moment and that what we know but obviously we cannot know what might have done in the future therefore we have had this -- we want to make this clear.

Okay and are you able to help us within estimate of when this projects will be complicated that if no further issues appear?

One of them will be completing not really [indiscernible] but the other one is a bigger reveal so it will take quite some time.

Okay. My second question would be on the cost savings plans, so would you be able to -- I think you said over 56 million that you’ve been able to cut cost so far but can you give us the P&L impact for 2016 and how of that will lowered to 2017 or have they kind of -- is that already all 66 million in the P&L for the full year?

Obviously as the cost savings have come during the year which has been good for us so we have seen the impact obviously when we get the full impact next year we would expect that the impact would be more in addition to that.

Okay. And then this new cost savings actions, you mentioned that you’ve already been looking in the energy [ph] business.

So can you quantify what kind of size we’re looking at and timeframe?

Yes, I Markku stated we’re still working on finding [indiscernible] and obviously we would not want to quantify it at this moment. We will do what is necessary in order to fund profitability going forward what is disable — water intake and station [ph] going forward at least we’re not year-on-year.

So obviously we’re just continuing with that cost savings plans.

And final question just on the metal business, so I think you had order intake of almost 700 million last year and I seem to remember you talking about expecting the equipment sales to pick up in the second half of the year and that didn’t happen at least in Q3, so I mean if that’s something we should expect to happen in Q4 and 2017 that you start delivering on the bigger order backlog order intake from last year, so why you’ve the sales so low in the business?

The metals refining business is definitely as we have stated before usually that is likely to be cost than the minerals this is obviously one, the risk activity in place but obviously we need to grow [ph] in order to close the orders. We will be willing to close orders but customers are not yet ready to close orders at this point of time and when they are ready to do it obviously part of detail we hope that things will stabilize here going forward with them we will start to see an increase in overall sales and penetrating of [indiscernible] today's market.

Okay. Sorry, my question was related to the order intake, so you booked $700 million of orders last year and you delivered -- I mean you’re probably going to deliver something, you delivered $300 million and less in equipment sales by Q3 this year.

So I'm just trying to understand is why isn't that turning into sales?

I think our -- sorry about that I answered it a little bit wrongly, metal, energy and water backlog has come lower than the minerals processing. So in the minerals processing the turnaround time from order intake is goes into sales, typically it's lower and also has much of the metals in that the backlog is from older projects usually also see that the percentage of population goes down at the certain point in time when you have all the equipment besides that and you’re moving to start up phase similar.

So its just the sales is coming slower at that point in time.

Couple of questions if I may, at first a clarification on the guidance I think you mentioned that you expect EBITDA at the lower end of the guidance range, is that the new or the old range?

This is at a -- I think it goes for vote.

And then obviously I think you recorded the number of personnel you had employed in the service business but I couldn’t see that in this quarter, could you provide those numbers?

We have reviewed this numbers and as any of our people were both servicing and capital [indiscernible] for rates. So we want them [Technical Difficulty].

And finally given the quantification of any possible additional savings in metals, energy and waters is that something you could possible provider with the Q4 results?

I think when we accounted the Q4 results we said we will do at that time.

Three questions, please. On the backlog in terms of the orders which are coming through.

Can you talk about the pricing within that backlog relative to what we have seen over the last 12 months coming for revenues just trying to think about impacts going to have on the margins.

Could you repeat the question? I'm not sure I understood it.

To clarify it's in terms of the pricing within the order backlog, how does that compare to the orders that we have seen delivered over the last 12 months just trying to understand how that’s going to flow through to the margin the next year.

If you look at our reach and see the impact from the provision releases of last year, as it's been said you should see that the margins have remained reasonably stable. It's something we have seen at the moment.

So obviously we cannot tell this [Technical Difficulty].

Okay. Second question just on the spares you made a number of comment sort of how spares demand or you should move to -- can you just talk about what you think customer inventories are relative to where customers want them to be just thinking if we’re foreseeing destocking impact or and what that might look like over the next 12 months?

I think our view is probably quite a lot along the lines what we said about -- in the future probably will look pretty much like the past quarters that looked like. So we have not expect the customers to start to look more and more stable and remain more in this position that smaller orders that they are doing that all by updating that.

Okay. So the restocking potential is quite limited then?

For the time being, yes this is what we expect.

And just final question just on the cash flow and the working capital, clearly it was a difficult period this time around. I mean it is volatile but can you give u an idea of sort of what we might expect for the Q4 in terms of working capital?

I would not like to guide on that. So obviously that could also mean that we would start to guide on [indiscernible] so we will come to that back fro Q4.

I wonder about provisions, so this year you have much larger provision than last year, could you give some kind of indication, how the outlook is for next year, I don’t want an answer about kind of problematic projects but just about completion of projects and I also wonder if Markku discuss this dependence on large projects. Is that the -- what you want to those have to do in the future and then you will continue with these provisions up and down all the time, or do you see some other way forward in any way?

Obviously we have quite a lot of project quarters, backlog which are progressing quite well then we have few ones as we have been mentioning where we have challenges. Then we do obviously -- this part of the [indiscernible].

So obviously we’re working hard on improving our performance, improving our management of this big orders and with that we aim to stabilize the situation in metals, energy and water. So going forward obviously we do not want to see these type of things happening that we have these let's say volatility downward especially.

I think we can take this provision really but not the downside. Projects always have an element of risk and these might sound [indiscernible].

And Markku answered this question as a part of the question related to the size of project. I think we will also in the future offer all kind of projects both smaller and large where we feel that we have approach competitive technology and we feel profitable with the projects and I think we have a good experience and confidence on running projects on a general level of course, everything I think what we look at of course everything that we have done better, so we will also look into other management trading and this kind of thing, but generally speaking we will look into all kind of projects we receive all that can add value.

And I just understand about next year. Do you expect more or less projects completions 2017 compared to 2016?

I think we’re in a position now we’re getting full project is kind of getting late and let's say we’re getting quite a lot of new orders in minerals processing. So we are in a period where we will be finalizing projects for the foreseeable future.

I mean the new orders plus we have got -- but we will getting and they will again bring in new things. The backlog is kind of being renewed in these parts because the old backlog is going out and that as we come into a new.

I would not like to use the cycle because I don’t know if we have seen the beginning of this as we come into that, we will be building our dream projects and the situation will improve.

And then I just wonder about flotation levels in that minerals processing. I mean you’re quite optimistic on the back of the orders percent but can you give some numbers on changes in flotation's, minerals processing.

Has it really changed? Some customers will have to close orders now then.

We said that we had mandate, we expect the market to remain active so we don’t see this as just being a cure let's say something which just happened occasionally and the market will go down again, but we’re expecting to remain on the same level going forward. So there is activity.

I would like to go back to minerals processing if I may, you had a very impressive margin of over 9% in the quarter despite private low sales and how should we think about that going forward when we start delivering on those quite the larger order intake that you had

I think I agree with you that it's good despite the sales came down and obviously we expect to see that better numbers when the sales group due to get orders that we have been [indiscernible]. We really feel we have done all of the right actions in -- obviously that can be done further but much of the things we have done during the last year has really been in the right direction.

This is what we’re starting to see and we expect [indiscernible] going forward.

So. If we think about this in terms of number of employees, I think your employee count went down to the lowest in 4.5 years.

So do we need to ramp in terms of employees, do we need to hire more people to be able to execute this or do we have the number of people that we need?

I think it's probably both of the first things you stated, obviously we’re still seeing as well we probably have further improve efficiency but we also see it as where we might have to have some resources. So all this solve the -- not like the guide but same in minerals processing we’re in a good efficient situation overall and we aim to improve that further.

Still a couple of questions, can you just quantify the impact of the sort of problem projects in the main business for the third quarter, had it been profit making without this project for a couple of--

Would not like to go into those details, we have roughly or we have now information we want to state above this -- we don’t want to quantify that number.

And then perhaps on the fourth quarter order view, I think Tom was also asking about that, are you suggesting as you did during the third quarter that’s the market activity is represented by the current order intake level what you have reported?

This is what we stated yes. The market is to continue as is--

And then on the service outlook converting still you are expecting nominal changes soon. How should we understand that in absolute terms or relative terms, are you still expecting activity to decline year-on-year as it did for example in the third quarter.

Sorry could you say that question again, I'm not sure I catch it.

You’re commenting about service activity, not the changing or remaining unchanged in the [indiscernible], can you comment if that means that the activity is still year-on-year as you did in the third quarter or are you more looking like at absolute level?

I would not like to or say what we have commented is that we don’t expect any major changes in the service market. We remain with the [Technical Difficulty].

Is it possible to get the number for service personnel at the moment?

No, as stated we have been looking through in detail as part of the service of this restart coming, we have been doing, we have been going more than one into the details of the people and what they are working at and we have noticed that this number what we have been -- we have a good number going forward to reflect how -- what is the right number of people because they have so many people who are working on double roles of bringing sales in technology and many other areas. So we feel we would not like to go into that anywhere.

We will see that going forward the Bill at some points we have a more relevant project [ph] we can use.

Okay. Thank you everyone for participating and for great questions and thank you Markku for presenting the Q3 results.

Thank you.