Metso Corporation Unsponsored ADR

Thank you, and good afternoon, everyone, and welcome to Outotec's Third Quarter Results Release. As second quarter, this has also been a promising quarter and actually also the first nine months with an active market strong order intake service growing and at last, but not least, a clear improvement in our project margins.

In the presentation, we will look this more thoroughly starting from business and market development then going through financials, market outlook and guidance and last a few words about Metso Minerals and Outotec combination. But let’s first look at business and market developments.

Market continued strong for Minerals Processing equipment in all categories and also for hydrometallurgical plants. We had in the reporting period, we have two large greenfield projects moving ahead, while still majority of the customers are focusing on a growing existing operations.

Service growing well with improved supply chain and deliveries in all categories. Copper, gold and nickel continued to be most active.

Demand for minerals processing equipment and related services and MEW strong. This demand is coming from -- predominantly from base and precision metals and that demand continued to be solid.

Strong order intake year-to-date, of course, builds a good platform for us going towards 2020. Looking at the different segments.

Minerals processing, you see on the left side. Minerals processing segment view and first one showing -- the orange one showing order intake six months rolling and the gray one showing sales, six months rolling.

So even though we are not experiencing the similar mega boom that we had in 2013 and 2012, we see that order intake in minerals processing segment is already at all-time high level. And for the equipment, third quarter was the best quarter in order intake for minerals processing segment that we have had in the company.

In Metals, Energy & Water side, orders were increased, but only slightly. However, we see that book-to-bill on Metals, Energy & Water side is clearly above one and we have also service business growing in that segment.

And service, as we have our long-term strategy, 3-year strategy on growing our service business, 10% per annum in average. We are well on track in that plan with a good growth in service both for the first nine months, but also in third quarter.

And what is positive is that that growth is coming from various different areas including spare parts, technical services and modernizations and upgrades. And even here, we are at all-time high levels.

When it comes to ilmenite smelter project, there is basically nothing new to report. We are negotiating with the customer and the underlying demand for ilmenite slag is there.

There is interest to have this plant up and running, but the negotiation takes longer, a little bit longer than expected. However, we remain confident that the provision that was booked in 2018 is adequate.

New product development is, of course, vital for us to be able to stay ahead in competition. During the third quarter, we released a number of new products and innovations that help our customers to improve their operations in terms of improving availability, improving product quality and also lowering the total cost for their operation.

So, now, Jari will come and tell a bit more about the numbers.

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

We had a strong order intake, improving 26% from last year and 69% for the quarter. Sales was flat for the quarter and we are still behind last year's numbers.

But as we guided earlier, our sales will be tilted towards the end of the year. As the book-to-bill is strong at 1.33 it supports a strong sales growth going forward.

Services growth was strong at 47% share of sales driving results improvement together with solid project execution. This has brought our gross margin up from 23% last year to 27% so far this year.

Our adjusted EBIT is €52 million when it was €33 million a year ago. Looking first at MP which showed continuing improvement.

Our order intake in MP was very strong improving 46% from last year and 76% in third quarter. Sales is picking up and we are now ahead of last year's sales.

Service improved well as market was active and our supply chain is working better. The improved sales mix and project execution improved profitability from 10% to 11%.

With MEW order intake was also good due to Udokan. Our order intake was €423 million, which is a good number as such and slightly higher than last year.

Book-to-bill is well over one, which predicts improving sales going forward. It is imperative that we continue to get good order intake going forward as bigger volumes are required to further improve the profitability.

Despite our low sales we were able to improve our results in MEW. The result is still negative minus €5 million so far this year, but it was breakeven for the quarter.

This is clearly up from a year ago due to solid project execution, improved service sales and efforts we did last year to improve our flexibility. Overall, we have seen solid improvement in profitability.

Despite the lower sales volume, which you can see on the chart here the impact with average margins €8 million down from a starting point of €33 million a year ago our result is up due to increased service sales and project margins by €27 million ending up at €52 million for the year so far. Our business has developed well which is supporting our cash flow.

Collection of trade receivables as well as increased advance and progress payment from the orders, we have received has had a positive impact on net working capital. Our free cash flow continued as positive and is now €45 million for the year so far.

Our balance sheet remains stable. Our net interest-bearing debt has developed positively due to the many new orders and related advance and progress payments we have received.

We have also recently secured refinancing for our loans that are due for repayment during next year. And now Markku, please?

Okay. Thank you, Jari.

Before we look at the outlook, let me summarize our third quarter. So it was a good quarter with strong growth in service – sorry, strong growth in orders and also service.

Service sales continued to grow as well and now must-win battles progressed as planned and clearly contributing to our improvement -- improved performance and competitiveness. When it comes to market outlook, we remain optimistic on long-term drivers.

Of course, there our customers face with challenges with lowering ore grades and challenges with water resources, energy availability, waste and core storage, and of course, tighter regulations and demand for license to operate. So all this calls for efficient production and also technologies and that is something that fits Outotec very well.

We also have added as a new thing, which has been there for some time we see that the tailings dam has been very high on agenda for our customers and we expect quite large investments in process water recycling going forward. New energy alternatives specific talking about electric vehicles, there is a good long-term demand and car manufacturers are increasing their forecast.

We expect to have good continued activity in copper, gold, nickel and zinc, however, still in the near future. Predominantly, we talk about brownfield projects and service continuing to grow.

There are ample of greenfield investments in the pipeline. And of course, let's see how they then turn into projects going forward.

A few events after the third quarter closing. They are mostly related to the merger of the two companies.

However, of course, only roughly one week after the closing of the quarter, we got another significant order from Australia in -- for a grinding application. When it comes to the new company maybe interesting is that that new company future Metso Outotec received credit rating from Moody's and also Standard & Poor's and also our company Outotec has secured its long-term financing going forward.

We see market is stable on a group level. We see our service increasing, mineral processing improving and smaller order intake turning around faster.

And of course, the expectation as Jari already mentioned is that these bigger projects they start to generate sales and we will have stronger finish of the year. So we reiterate our market guidance for 2019 numbers.

And a few words about the merger. Just looking at the time line, we had the prospectus published October 7.

Credit ratings as already mentioned already for some time. We have been working with filing in antitrust documentation in different jurisdictions and that is -- that's on its way.

And of course, the integration planning continues with representatives from both companies. Extra general meetings will be held in both companies next week October 29, and our target date for closing is second quarter 2020.

So, I think now we open the line for questions.

Hi. Magnus Kruber from UBS.

Just on the antitrust filings, will you publish the results after they come back from the authorities? Or will you do that early next year so that you have everything together?

We haven't -- we are in the early phases of the process so we have not commented that yet and we are not prepared to comment on that yet.

Absolutely. On Minerals Processing margins, I think they remained largely flat year-over-year, I think despite 12% organic growth.

I think the mint has also improved. Could you give me some color on sort of the moving parts within the margins year-over-year?

Yes. I think, we have stated earlier that the competition remains pretty tough, so the margins as such pricing is difficult to drive up.

But obviously, as you say the service sales is improving the numbers. And then obviously, the other part also is we have volume coming from CapEx.

This is just due to the mix, so margin as such has not changed a lot in any project or any part.

Yes. So okay.

So pricing was the sort of the key headwind in the trend?

Yes, could you please repeat, so I...

Yes. Sorry.

So what's the sort of the -- was pricing a headwind in the quarter on delivered projects given that you had tailwind in the portfolio volume mix?

It was a headwind, but it has not changed, so it remains -- there is not so many -- so much business out there. The market is good, but all of the projects that are out there also the service business, we have to fight for the business.

So it's not converse, but it's not improved. I think, the overall market has grown and we have been quite successful in getting our share as you could see from the orders.

But as such, margins are improving slowly, but surely and that's mainly due to the better mix and then also the other parties that we have a better project execution, so we have better margins from the CapEx side as well.

Got it. And just finally, I think I saw your fixed cost increase some 8% organically for the period and if I did the numbers right that will be 17% for Q3, if that's right.

I think you talked about selling and marketing cost driving this, but it sounds like a lot. Could you give a little bit more color around sort of the details there?

Yes. I think that it has come from mainly three sources.

It's selling and marketing and I think the reason for that you can find in our order intake because our order intake has grown strongly. And obviously, it requires both tempering work as well as lots of visits and negotiations with the clients.

So this is driving costs. And obviously as long as we don't get the revenue, we just get the orders, it has a negative impact.

The positive impact will then come in the next, let's say months and years when we will get the revenue and then the cost is already taken now. So this is kind of something which is -- you cannot really go around.

Service obviously growing. You cannot really expect the cost to stay completely flat because that's very much a people business.

And then the third one is what we also had mentioned that we also see some variable cost components increasing due to the improved results. This is not much, but I would say the main reason is really that our CapEx sales is down at the moment and we are still doing a lot of work on sales.

I would say that is probably the number one reason that therefore when you compare our costs to our sales, they don't look good. Going forward, they will look better and needless to say, we still continue to work on finding ways to lower our cost that work us got nowhere.

Perfect. So if I can just have one final one.

In terms of the end of the year, you alluded to some pretty back-end-loaded revenue recognition there. I mean, should we expect a similar sort of seasonality on the revenue side on equipment and service that may have done in the past?

Or is it even more pronounced now given your comment on it?

I would say, obviously now when we got the big orders and they start to tick, we should see them even more pronounced. Obviously, that trick players that orders progress as we are planning at the moment.

But yes, we have a lot of big orders now and they would start to tick revenues from now on.

That’s okay. Brilliant.

Thank you, so much.

Service is always strong going towards the end of the year. That's kind of -- you could say, it's even seasonal in that respect.

Quarter four is always the best quarter.

Brilliant. Excellent.

Thank you, so much.

Thank you. Just one question from me.

We have heard from your peers and competitors that especially the larger mining orders have been under postponement or are being deferred. Is this something you confirm as well?

We know that you have been successful in the nine-month period in large contracts but what's the outlook now going forward?

I think in general they are slow. But we have been successful in getting the ones at least that has been moving ahead.

So of course it would be good if they would move even slower, but I would not say that we’ve seen specifically any postponement as such. They have just been slow.

Yeah, I think you meant that they would – we would like them to move faster.

Yes. I don't know what I said.

Yes that was the beginning.

Yes. But I think what we said earlier during the presentation is there are some Greenfield projects and eventually we expected to get some of it but of course as always the timing is exactly – it's very difficult to foresee.

But yeah, I think your conclusion is right, it's not yet a mega boom in that sense, mostly Brownfield.

Yes. But the point for asking was that you don't think there's an overall new kind of wave of postponement to potential orders because there is more uncertainty time, that everybody else keeps talking about?

No not really. They are moving slow.

Yes we see some postponements here and there but they have kind of specific reasons maybe financing is not ready yet or something else. So they are taking longer as expected but there is nothing that you could say that they would be slowing significantly down or customers making postponement just for the sake of making postponement.

There is fair reason behind if there is some of the projects postponed.

I think we also say that that varies from region-to-region from commodity-to-commodity from customer-to-customer. So I think it will then materialize for different companies likely in a different way.

So I think that also is to take that into the picture and account for. But I think comparing with last year which is quite easy to make there we saw a clear step change in May, when suddenly we got less order intake and activity at least from our part went down.

Now, so far up until today we are not seeing that.

Antti, Thank you.

Hello. Can you hear me now?

Yes.

Yes.

Right. Yes.

So I wonder about this ilmenite smelter project. How large is the cash flow impact in the third quarter?

And how much is it since you took the provision?

Well we have not disclosed that separately. But as we have stated, we are still in negotiation mode.

As Markku stated there has been some preparatory work made, but it's very, very insignificant not a lot still.

So but is it -- I think you said that in Q2 that it was like around €5 million, so it's still below €10 million that they have used out of the provision work?

I don't remember we have ever disclosed any numbers, but we are talking about small kind of -- per quarter we are talking kind of low-singles numbers.

And what is really going on at the moment?

What is going on? Of course, the negotiations are -- they may be surprised that they are taking a bit longer.

There is a customer who wants to have plant up and running and that there is a customer for that ilmenite slag. It is integrated part of the vertical value chain that they have.

We are doing and they are equipped. There are already ongoing some preparatory work, so it's not that the growth is in complete standstill.

The work are proceeding and of course at the same time we will continue our negotiations.

Okay. Thank you.

Okay. Thank you, operator.

Thanks for everyone -- for participating in this Q3 teleconference. I wish all of you a very good weekend.

Thank you.