Metso Corporation Unsponsored ADR

Good afternoon or good morning, depending on where you are. And welcome to Outotec’s First half year and quarter two result release.

To summarize the presentation, we can say that the market is active. We had strong order intake and our service continuously improved well in line with our strategy.

I know that many of you are interested to hear more about the merger with Metso Minerals. I’ll come back to that a bit later.

But of course, first we look at our numbers. So when it comes to market activity, market continues strong, particularly, for Mineral processing equipment and projects and also for hydrometallurgical plant solutions.

It is still, mainly, brownfield upgrades modifications debottlenecking, but during the second quarter, we also received a few large greenfield orders: one gold processing plant and one copper processing plant, as you have seen. And as mentioned, our service developed well both in terms of order intake, order backlog.

And now when we have seen our supply chain improving nicely, we see the sales developing very rapidly. Copper and gold continue to be the most active metals.

And when it comes to battery, so for battery metals, we are in both in most of the lithium cases that are active for the moment. The copper, gold is also well represented in the announced orders, with the gold processing plant, mentioned in Saudi Arabia, €140 million, which is roughly 50-50 between the Minerals Processing and Metal technologies.

And then we have this greenfield copper concentrator and hydrometallurgical plant in Russia, where 2/3 is that Mineral Processing, 1/3 Metals, Energy & Water. Total value, €250 million, however, during the second quarter order intake, we posted €35 million.

And then of course, related to the water recycling on circulation, in many ways or tailings management, representing that market was defective at the moment, we have this paste backfill tailings over from Australia. Looking at a bit more in details, our segment.

Two segments: MP, minerals processing continued to improve with a high share of services. And of course, looking at the chart, not only the order intake increased, first half year, 30%, second quarter, 39%, we also had a nice growth in service sales.

And the sales mix was near to what 50-50 between sales and CapEx. But looking at the chart below and particularly looking at the order intake, rolling six months, we are ordering at the levels we were during the mining super cycles without having a super cycle at the moment.

So from MP side, I think, orders and backlog including services, developing well. In MEW, we have an improving workload in – on several areas because there are a number of large [indiscernible] projects are – that are on ongoing at the moment and not yet visible in our sales numbers.

However, giving already workload to the organization. And as you saw, three major projects that has been received during H1, have also significant MEW portion.

What is common between Minerals Processing segment is that, even in MEW, the service sales is increasing rapidly. Looking at service a little bit more in detail.

It is a continuous development in all areas on order intake, which you can see from a – from the left – lower hand side corner, the blue part, which is our order intake, is an all-time high level. We have the backlog continuously increasing.

And as mentioned, when we have a – through our work, we have a – had a supply chain and spare parts delivery improving, sales is catching up nicely with the growth of 20% – 27% in first half of the year and 41% in during the second quarter. When it comes to ilmenite smelter project, we have discussion ongoing with the customer, but taking longer time than expected.

Ilmenite market, however, is still supporting this investment. It is a big project for both us and the customer and the negation is taking longer time than expected.

However, we remain confident that our €110 million provision that we booked at the end of 2018 is sufficient. And we will, of course, announce any substantial news going forward.

It was an active month in our product development. A lot of the activities continuously deliver valuable benefits to our customer, as most has been mentioned many times, out of – three out of four new product development are somehow related to work in terms of new type of Filter Press for the quality and quantity management system that you can use in your process plant.

And then of course, the Paste Thickener, both helping customers to maximize their tailings storage facilities, but also helping them to recycle tailings water in a good way. And together with the local quality and quantity management system secure that the processes are – good quality water is returned to the process, in a good way.

And in Metals, Energy & Water side related to [indiscernible] that there is a land motion detection system that actually are more accurate and more precise than conventional manual operation, making sure that [indiscernible] is – are working more productive and with a higher quality. And now I hand over to Jari Algars to go through the numbers.

Thank you, Markku. Now I have the pleasure to take you through the numbers.

Order intake has improved 10% so far this year and 18% compared to Q2 last year. Sales was flat for the quarter, and we are still behind last year’s numbers with 6%.

But as we guided earlier, our sales will be tilted towards the end of the year. Despite the low sales, our result clearly improved supported by solid project execution and high service share.

We have here also for information started to report adjusted EBITDA as of Q2 2019 in light of the forthcoming merger with Metso Minerals. And the definition of it can be found in the second footnotes below.

Looking first at MP, which showed continuing improvement. Our order intake in MP was very good, improving 30% from last year and 39% in Q2.

Sales was flat as the slow order intake second half last year has impacted CapEx sales. Service improved well and made well up for the difference as market was active and we were able to solve some of the delivery issues in our supply chain.

The improved sales mix, improved profitability. With MEW service sales increased significantly and MEW had a portion in both large greenfield projects Ma’aden as well as Udokan.

Our order intake was €297 million, which is a good number as such, but a decline compared to our strong order intake in H1 last year. Book-to-bill is, however, well over one, which predicts improved sales going forward.

It is imperative that we continue to get good order intake going forward as bigger volumes are required to stabilize the profitability. Despite our low sales, we were able to improve our result in MEW due to solid project execution and improve our recovery due to better workflows and the actions we did last year to improve our grid’s flexibility.

Overall, we have seen solid improvement in profitability from H1 2018. If you look at the bridge, we can see that solid project execution supported by the sales mix clearly offset the low sales volume.

We can also see here that the fixed cost increased due to large projects and related sales and marketing efforts. And coming from here, I’m going to the cash flow.

The improved margin supported the cash flow. When we have a look at the cash flow, collection of trade receivables as well as increased advanced payments in Q2, had a positive impact on net working capital.

This turned our cash flow clearly positive for the half year, despite we had a weak Q1. So now we are well on the positive side.

Going to our balance sheet. Our balance sheet remained stable.

The balance sheet has grown from a year ago due to the implementation of IFRS 16 and also due to the provisions made for the ilmenite project. And the IFRS 16 impacts many of the key ratio figures.

The effect of the IFRS change can be read from the second footnote here. Net interest-bearing debt would be €46.6 million, gearing 12.5% minus.

Equity-to-assets ratio 32%, without the IFRS change. So now over to Markku, again.

Thank you, Jari. And let’s first look at the market outlook and guidance.

Guidance – the market demand drivers are very much the same as we have discussed last time, there is a requirements – apart from metal consumption, of course, there is requirement for efficient technologies because of lower ore grades rates, because of challenges in raw materials and definitely impurities that we need to remove. The regulations out there in the role.

And also as mentioned earlier in this presentation as well, investments in projects for the recycling and tailings are very hot topic for the moment. New use for project FP-S creates a long-term demand and the activity at the moment and even in – expected in the future, is very high in copper, gold battery metals and zinc.

And of course, those are traditionally very, very strong metals over the deck. As well as some pelletizing plants and super added investments that we expect to happen.

Yes, the major activity will be on brownfield side as there are some handful of greenfield investments in the pipeline, but this – the timing of those investments, is sometimes not so easy to estimate. We have stable markets.

Our Minerals Processing business is improving and so is increasing and of course, more orders turning faster into revenue. Together with those facts and the three large projects that we received recently with significant MEW portion, we are confident that we achieve our guided numbers for 2019.

Few words about combination of the Metso Minerals and Outotec. Of course, this is in the industry and even there speaking, a unique combination in a way that how well the businesses complement each other.

So we are combining two companies to create a leading company in service technology equipment and services that will be active in minerals, metals and aggregate industries. And when I mentioned the complementarity, this – it is in many dimensions.

First, of course, we are combining products and process excellence from different companies, but also R&– some R&D and technology development, combined with a very large service footprint and consumables business. On the other axis, we also complement each other well from the value chain, having aggregates in – and in one hand and on the other hand, metals refining.

It will give a different technicality for the value chain investments. Geographically, companies have a little bit different strength and don’t mind those, globally we will have a very good even split of our revenues from different parts of the world.

And that is even applicable for commodities, we are putting the commodities together, we will have a – an even split. Metso was originally strong in aggregate.

And I don’t know why Outotec had a very strong or has a stong position in copper and precious metal, structuring metals in providing that picture will give my complementarity. Expected genesis, as announced July 4th, we are calculating the pretax cost generating from at least €100 million on the cost side, and then €150 million revenue synergies from cross-selling and opportunities of improving the sales network.

These opportunities will be fully realized by the end of the third year, following completion. Timing, expected closing, second quarter next year, of course, subject to customer closing conditions and starting seven steps, one is the shareholders meeting that we set out to be October 29th for both companies.

And then of course, receiving regulatory approval from authorities. So this is the time schedule that we are looking at the moment.

And as this was the last Slide of our presentation, we open the line now for questions.

I had two. Firstly, given the large impact that we’ve seen on the margin recovery from improved sales mix, notably service growth being much higher.

Would you be able to quantify that impact for us so that we can see what impact on the margin you had from, just, generally, running the projects better, executing stronger, but also having improve your fixed-cost absorptions? That’s my first question.

Yes. Sorry, it was a lengthy question, so I try to take it in pieces.

So if you start with the service. Service mix impact and then also the improvements from the project execution.

Both have been more or less giving roughly the same amounts or both have had a strong impact, maybe more in Q1 project – from projects and a little bit more in Q2 from the service side clearly. But kind of if you look at it on the aggregate, it’s probably about the same.

And then, sorry, you had some other questions as well. Was it on…

No. I wanted to understand the margin impact from – that the sales mix has had, so then I can work out what the remainder impact has been – has come from improved project delivery and – or improved fixed cost absorption.

Yes, usually not quite for the service margins separately from the CapEx margins. So this is, obviously, we will continue with.

But if – from the service, we can say we have more of the spare parts compared to the field service and shutdown service job, and then the impact is even bigger. Because as we’ve stated earlier, our parts business is clearly the most high-margin business what we have, and then modernizations, shut down service, field service work is more CapEx like in its margin.

Yes. Okay.

So will it be fair to say that the most of the impact in the margin improvement in the second quarter has come from improved sales mix from service growth and the new equipment sales growth being slower in the second quarter?

Yes, absolutely. Because the volume was down on the CapEx as you compare it and service was up.

So definitely, yes, in the second quarter, there was much bigger impact from the mix than in the first.

Yes. I mean for those who are interested in following your improved fixed-cost absorptions and project delivery capabilities that – what can use it to help us in quantifying that?

Or at least in – to some extent, closer to the understanding, how those are developing directionally?

I – as said that the first quarter was stronger on the CapEx side because, obviously, service was not so significant in the first quarter. Now you could see that the service really had stepped up during this second quarter and we had a lot of service volume compared to the previous year.

So majority came from service this year – this quarter.

But I’ll be adding – I kind of read that you want to understand it. But we can say that both, of course, the CapEx projects margins increased, but also there is a mix impact from having more service revenue.

Yes. Okay.

And my second and final question was, in relation to your cost-saving initiatives, one that you kicked off last year. Now in light of the announced combination with Metso Minerals business, what changes have you already made to this – to these plans?

Have you reset the details for it? Or just where are we with this, given the recent changes anticipated ahead?

I think most of that simplification project that we had, most of the benefits as already been achieved. However, of course, when knowing that the merger will come, we will at the moment, of course, review possible investment and activities that we do in the company.

But as we have not yet passed neither the extra shareholders meeting or get the approval from all the trust authorities, then of course, it’s business as usual for Outotec and our people.

Yes, absolutely. Great thanks very much for answer my question.

Magnus with UBS. A couple for me.

First on Metals, Energy & Water. With your current backlog, how long can you sustain this level of workload?

And do you think it can be sustained till year-end, back of these two recently announced projects?

Yes. I think what’s important for us is as we have stated that we continue to get good orders.

These two orders, obviously, will help a lot, but as one of the orders is more tilted towards MP because 2/3 of the Russian order is MP, 1/3 is MEW, we need also more orders going forward. So yes, we are in a good situation.

But yes, we also need more orders to keep that good situation.

Okay. And following on, in Q1, you talked about doing engineering work on a number of projects with the value of more than €100 million, which might turn into orders later this year.

Have you seen any progress of any of these orders?

All of them are progressing in their own way. But obviously, it’s behind customers decisions, so all of them.

So we are really not the driver here, but we are continuing to do engineering on the orders and we’re continuing to negotiate for them. When they will decide it, that remains to be seen.

We are obviously optimistic that they will continue to progress and turn into orders at some point.

Got it. And finally, I mean in a project like, for example, the Baikal copper concentrator how long time would it take, for you to say, from you to get order until it is fully ramped up in production?

Doesn’t have to be this specific project, but generally a project of that size?

Okay. It’s a little bit on, is it the Metals, Energy & Water project or is it Minerals Processing.

But here, as we have both, Minerals Processing usually turn faster into manufacturing. There are more long-lead items, more equipment, which – where we have to order parts and start to do manufacturing.

In minerals process – or in Metals, Energy & Water, we first have to design the process. So usually, base curve is a little bit kind of slower start in MEW, generally.

And than what’s positive, obviously, is, at the end, it’s stronger. So you always win at some point.

But the Minerals Processing curve is more flat than the Metals, Energy & Water.

But could it be two years or three years for orders until it’s ramped up?

You mean with ramped up when it’s ready at the site or…

Yes. Producing output, essentially.

No, it’s – usually in these big projects, it can be even longer than that. We talk about two – maybe two years to get it mechanically ready, half a year to do the commissioning and then the, let’s say, that up to the third year, you start to really run and operate it.

So I prompt 2.5 years almost.

Erkki from Inderes. Coming back to MEW, of course, it’s early to say it’s – they grew nicely and their shares is up 10 percentage points in this year, but still the division was in the red.

I mean with their current structure, where would you see that the breakeven level, sales level in MEW, call it, just lies approximately?

Yes. I think, in general, if you look at the numbers now, obviously, the margins were good, but we also expect them to be good going forward.

Maybe in general, you can say when there are bigger projects, usually the margins in the bigger projects are somewhat lower. So I think using the numbers you see now, maybe assuming that, kind of, the additional volume is coming in with a somewhat lower average gross margin, I think from that, you can calculate it.

So there is nothing – especially, let’s say, anything hear in these numbers now that would be very different. But when it comes to getting it from smaller orders, maybe the margins are a little bit on average so I would say using that and you should be pretty safe.

Yes. Okay.

And additionally, do you still see possible to reach the MEW. There is a 2015 margin level of 6% to 7% in anytime soon?

Or actually, when annual sales exceed, say, €600 million?

[Indiscernible] Low volume, I think, kind of, the machinery is very, we only need the orders. We still have quite, let’s say, we can definitely through the resources we have available, push through more volume at the moment.

So out of those, but with a a handful of orders, it would be quite good to get orders in the Metals, Energy & Water side, I think it can be quite clear now that the Minerals Processing, we have a quite good workload. But in Metals, Energy & Water, we definitely can do more.

I want to do more than what we have at the moment. And that definitely could lead to those numbers what you’re saying.

Okay. So the breakeven point would probably be somewhere between €500 million to €600 million in MEW?

You are saying that, not I. But we are not guiding for that.

But –

No, of course, sales mix plays a role as well. What kind of orders is in the portfolio.

But our – of course, we are not satisfied with the profitability of MEW and we’ll do activities to improve it.

So it will be quite important now we get new orders and continue to work on the profitability.

Okay, thank you so much.

Yes, hi. This is Tomi from DNB.

Coming back to this recent question, can you say anything about the second half profitability or profits in the Metals, Energy & Water given that the workload is improving? And do you think that you can reach breakeven for the full year?

All right. As you are aware, we are not guiding for the segments separately.

And as said, I think we need – we still need more orders in Metals, Energy & Water to come up to volume levels where we would be well in that profitable area. But it’s a good start what we have seen in the order intake so far this year.

So we are quite content with the order intake what we have, but we definitely would need to see this continuing and rather on an increasing trend and a decreasing trend from the numbers we saw over the first half of the year. But with those volumes, we should already be in safe zone.

And then if you can help a little bit on the €250 million Russian copper order, how much of that could be booked in the third and fourth quarter this year?

Obviously, our plan is that we would be able to book it all.

Okay. And then if I may, you have had a couple of good orders – quarters with the shutdown and modernization orders, and you write also in the report that the inquiries increased.

Should we read this as that there should be further good modernization and the shutdown orders in the coming quarters?

Yes, there is. We believe we will see that also going forward.

It’s been a good year so far, and we have no reason to believe we should not continue in the same way.

Thank you. And finally, fixed cost up in the quarter, is this level of up – increase also something representative for the second half and the full year?

I think it was a little bit, as said here, this was due to that we had quite big orders what were hoping for. And provided there are a number of those, I would say we are not guiding for the fixed cost separately, but our aim is still to keep the fixed cost flat as we have been stating year-on-year.

This is part of our strategy and this is something we are working hard on. So we don’t want to see it start to increase.

That was the reason, I was asking. Thank you very much.

Hi, thanks for taking this questions from me. How has the market demand for the output product of this ilmenite smelter project changed and the issues came to light last year.

No, it has not changed dramatically. Of course, as we have discussed earlier, there is a demand for this production, the capacity is needed as much today as it was needed some months ago.

So no change in that area.

Thank you. I mean, how best would you characterize the strength of that demand?

Demand need, I should say?

They are not so many ilmenite smelters, if you look at the combined depending on if you are counting the numbers of bigger-sized furnaces or if you talk the number of smelters as such, we talk about 10 or even less than 10, depending on how you calculate. And with an annual production, maybe up to 7 million tons.

And if 500,000 tons is missing then, of course, it’s a big piece of that.

Yeah, understand. Okay, thanks very much.

Yes, this is Tom Skogman from Carnegie. I remember you said earlier in the year that if you get good orders this year for Metals, Energy & Water, you can still reach to 2020, 10% EBITDA margin.

Can you still stand behind this? Or does it start to get too late now?

No. We obviously, have our targets where we have them, and we are working hard for that.

And for that, as we’ve said earlier, it requires a certain amount of volume for us. As Markku pointed out already, we are in quite good levels in Minerals Processing and start to reach super cycle levels.

So obviously, Metals, Energy & Water, we are definitely very far from super cycle levels still. So we would need a few significant orders still in MEW.

That paired with some additional ways to improve our profitability, I think we’ll have a good chance of reaching good numbers in 2020. And obviously, our target is, as we have pointed out, 10%.

So we have not made any changes to that, sort of, official target.

And then I wonder about this legacy project, apart from the Saudi Arabian project, I mean, this was supposed to be finalized a long time ago. So I hope you could be a bit more open about this now and the deal with Metso has been announced.

What is really the challenge or the problem with this one? Is it that you are techniques are not working with other customers, have problems with financing?

Or what’s really going on that? Is there any work being done with these ones at the moment?

There is work being done with these ones at the moment. Many of them are already quite more close to finalizing, may be there are still some discussions with the customers on how to really close it out.

So I think there are a number of them that are there, and then there are a couple of ones of which Cristal is one, where we still have work to do. And we are not expecting any material impact from any of these.

But it is very much like with Cristal. You hope things would move faster, than it then eventually does.

Still we are working very hard on the other ones that they would be finalized during this year or at least at the point where we can say that the same thing as with the other projects that we’ve reached a point where we see that there is really nothing to be done anymore, but we have not closed out with the client.

Okay. So is it that they are not performing according to promised, kind of, efficiency levels.

So what are these problems, really?

Obviously, there are always – it’s usually not only one thing so there are many things to be optimizing such a plan. It can be on the customer side, can be on our side.

And it’s just something we are working to finalize with. But usually, there is always some technological things as well.

So it’s always a number of things affecting it, before we have than reached a level where we can say that each – the plant is running as it should.

Do you have any new timetable now and it – a clear delay to start, the rebuild of the agreement announcement is now clearly delayed, do you have any new timetable?

No. I think what we said or what I said already earlier is that we have negotiations ongoing with the customer at the moment, it’s taking more time than anticipated.

So maybe it would be wrong to say a deadline for those. But of course, we are doing it together.

We are also – we know also that the ilmenite capacity is needed on the marketplace. And also, we know that when it comes to that project but also when it comes to other projects, we are provided for the risk that we se.

Talking to investors, I mean, there is a lot of investors that have no patience with the MEW business, and think it should just be divested in the new entity to get a bit with Metso. But I realized there is a lot of good value there in copper smelters, et cetera.

But could you give the good argument for both parts are really – the part in MEW that you see has the biggest value apart from the copper smelters. And have there been any orders taken in the last five years that have created massive headache for yours, or is it all about these old orders?

I think if you talk about this so-called high-impact projects we have said many times that they are all from 2015 or earlier. So is owing that then the reason, or as we are comfortable with the portfolio we have, and we are also comfortable with the provision level that we have against them.

When it comes to MEW business as such, I think, of course, it’s not one single business, it’s a number of different type of businesses. And also, the outlook for them or cycle is exactly not the same.

Hydrometallurgical plant solutions, they are – have been very fast growing and also I think can be compared to MP business as such. We have the smelting competence, we have sulfuric acid plants, pelletizing.

There is a lot of businesses, however, they have different market situation and different cyclicality. And we continuously need to wait and see how we can push them forward.

Okay, thank you.

Thank you, operator, and thank you for everyone for participation and good questions and discussion. And we will close the briefing as of today.

And just as a reminder, this will be a recording on our website for later on-demand listening. So thank you, everyone, and have a good weekend.