Transcripts
Metso Outotec Oyj (OUKPF) Q1 2023 Earnings Call Transcript
Operator
[Operator Instructions] The next question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind
Thank you. Hi, Pekka and Eeva, Klas from Citi. So, my first one is on the service growth, looking at the orders. We had this tough comb for onsite services last quarter. At the time, however, Pekka, you were pretty confident that service orders could grow in 2023, and here we are off to a very strong start. I’m just trying to understand what is driving this. Is this onsite service all of a sudden accelerating again? Is it new annual contracts? Is it spares and wears? Are we seeing certain commodities driving it? If you could help us with the drivers and to what extent did the improvement here is sustainable next couple of quarters [of starter] (ph)?
Pekka Vauramo
Yes, we are at good speed in our services. I would say in all product lines. We might see some novation of annual contracts in the beginning of the year, but that really doesn’t explain the full peak. I think it’s a strong robust activity across the board, across the markets as well in our services. So, this is how I would put it, I don’t have any further insight.
Eeva, anything that you would comment here?
Eeva Sipila
Well, maybe of course this is a very, very strong number indeed, and perhaps you can then draw a bit the conclusion that some of these orders perhaps could have come in December now came early this year. And certainly, we had a very strong March, which in my view I think indicates that the April being a shorter month with Easter, so partly probably taking some orders from that. But obviously, I think this clause what’s driving is the fact that the metal prices are strong and for our customers are very focused on getting everything out, what they can. And it is very much of course around copper, very much around the battery metals. So, nothing really new from that point of view, but just a very broad focus on productivity and really getting every possible amount of material processed.
Klas Bergelind
Great. Then, my second one is on the margin. You know going through the Citi community here ahead of the summer like you always do and given the solid trading, you’re probably thinking about the next level for your margin target. You obviously have peers and aggregates like Sandvik delivering margins of 16%/17%. You’ve done a higher margin this quarter. Your margin targets in minerals are already pretty ambitious there at 20%. But can we talk about when, Pekka, you think that you will have an update here for the market on potential new targets, X metals, and if you would give us a little bit more of a horizon of these ambitions this time, only you’ve said for example that the margin target is more of the cycle. And so, yes, that would be helpful to get some clarity on that.
Pekka Vauramo
We, of course, it’s a boards review after which we then may update the [guide] (ph) or the margin targets, but we still don’t know exactly what the timing of the metals carve out as such or those businesses will be. At one point, yes, we will report them, start reporting them as a discontinued business, and that is of course the natural point when we do the mechanical upgrade of our targets. If it then happens sometime later in the year, we might combine that one then with the upgrade of the targets, if the board so decide. But we will be transparent then what is the impact of the businesses to be divested on the margin and then what is the actual and real increase of the targets. In what shape and four of the targets will be — I mean, the future will show us that then what the current targets are over the cycle and we are of course reviewing that one as well, that is the right way of setting the targets.
Klas Bergelind
Good. My quick final one is just on product mix because obviously there are some people out there that think that when you deliver out more equipment versus service, that will start to eat into the mix in the margin. But obviously, Planet Positive at least historically has been higher [OV] (ph) margins and a higher share of orders relative to sales. I’m just wondering whether that gap is now closing and whether product mix in minerals help them out in this quarter and whether that will help the margin going forward as well as you invoice out more planet positive orders out of the backlog.
Pekka Vauramo
They do contribute to our profitability, but it’s a fact that over the years, over the past couple of years despite of inflation, we have been able to improve our margins. We have taken actions both in a cost side. We continuously improve. We have this year cost reduction or productivity improvement plan as we call it internally ongoing. We will have it next year. We had it year before. So, that contributes to our result. And naturally, we have been taking actions in the pricing side as well in those areas where the market pricing has allowed us to make moves, and the end result is that we’ve been able to improve the margins across the board.
Klas Bergelind
Thank you.
Operator
The next question comes from Antti Kansanen from SEB. Please go ahead.
Antti Kansanen
Hi, guys, it’s Antti from SEB. A couple of questions regarding aggregates actually and follow-up on the earlier discussion on margins, I mean, you’ve been above 15 for a couple of quarters now, and now a very strong 18 at Q1. So, how should we think about this? Is there anything extraordinary now behind this Q1 number, leading to deliveries out of backlog as the supply chain has been easing that there’s been an unfinished good sitting in there which you are now releasing? I mean, what I’m trying to guess is that is this as good as it gets or have you seen a structural improvement on the profitability profile of the business, what can it actually do longer term? So, may be a discussion around that, please.
Pekka Vauramo
If we take a longer-term view on how the business in aggregates has developed, I mean, this is – of course, this current jump seems like a high one, but it’s a continuation of good work that has been done over the years in aggregate. I would say starting from McCloskey acquisition, good integration of that one, some other smaller acquisitions that we’ve done as well, and they are all performing well. And the integration has gone really well into Metso Outotec aggregates business. So, altogether, I would say that that is the biggest contributor.
Then, we felt and we sensed that the inflation early on when that one started to sneak into business, that was in fact during the third quarter of 2020. And we initiated right away the actions because we foresaw that we cannot anymore look at the rear-view mirror where we come from when it comes to costs and we needed to go to the future costing model, we needed to take actions to control our costs which we did well during the pandemics, and then naturally pricing is the other side. And then, when activities picked up in end of third quarter, end of fourth quarter of 2020, that was really good timing with all of these actions and effort, and those good times have continued until very recent times. So, I would say, if there’s anything extraordinary, it’s a good execution by our aggregates team over the period of several past years. And this is what the result is now there, nothing extraordinary during the quarter.
Antti Kansanen
Good. So, in terms of gross margin, you feel that your pricing is now aligned with cost equation, not that you’re getting some type of extra benefit for a quarter or two.
Pekka Vauramo
Yes. Well, both actions work on the cost side and pricing side are behind this development.
Antti Kansanen
Okay. And then, a couple of questions on demand, I mean, first, if we can talk about Europe, obviously, the comparison period is still in January and February, so it’s a tough one. But sequentially, have you seen any trends in the European demand? And then, the second is on the services, which has been declining for a couple of quarters now. Is that more of a European business on the equipment side? Does that exporter explain why the service is a lagging behind a little bit now?
Pekka Vauramo
It is very, very much a European thing and maybe in a service’s side there is to some extent the destocking that we see with our dealers, I mean, they feel that the stocks might be full of wear parts, for example, and we’ve seen some of that one but not to the level that it would be alarming.
Antti Kansanen
And then, on the equipment demand in Europe, are we just continuing with the same or trends?
Pekka Vauramo
Continuing on the same sentiment where we have been for the past several quarters now in Europe.
Antti Kansanen
All right, thank you, that’s all for me.
Operator
The next question comes from Christian Hinderaker from Goldman Sachs. Please go ahead.
Christian Hinderaker
Good morning, Pekka, Eeva, Juha. Thanks for the time to take questions. I want to start about pricing, maybe. I wondered if you can quantify or at least comment on how much of the top line progression has come from pricing. And then, also you talked about successful pricing, cost management is providing that boost to gross margins. I just wonder whether we should think about now a structural step up in incremental margins and begin modeling high drop throughs in terms of the price cost dynamic for the rest of the year. That’s my first question. I’ll come back to the other two.
Eeva Sipila
Yes, Christian, I think the pricing really there is no one number as Pekka was answering the previous question. So, in fact, it’s really been a process of a couple of years where we’ve been moving, I think. Well, ahead of the curve of the inflationary pressures and that’s then being very visible in the margin development. And obviously, we continue on that. Clearly, there is less inflationary pressure in the materials, still continues on the labor side, if we look at just this more recent experience. And then, of course, as you can imagine in Europe, in aggregate, so obviously we are in a situation where customers start to be much more price sensitive due to the overall business situation.
So, you have to move in all directions all the time. And I think the best success is really around being ahead of the curve and then compensating and the backlog equalities is a such good, but I think the – I said the biggest spikes are in a way behind us that was really pretty much at this time, the previous year when things were very much going through the roof when the war started and that really did a lot of volatility in the market. So, I don’t necessarily – not quite sure what you mean with a step up, but I don’t see any additional step up per se right now. I think this is really a lot of hard work over lengthier time that’s demonstrated. And obviously, we have all intention to keep delivering on now that we’re starting to enjoy the exceeding 15%. So, we like being here and they intend to be on this side.
Christian Hinderaker
Thank you, Eeva. You mentioned I guess wage inflation. You had an 8% increase in headcount year-on-year. Obviously, the 22% growth in revenue implies some productivity growth. I guess thinking back to a few months ago you were talking about wage inflation running at much higher rates than was historically the case. I think labor is around 21% to 22% of your cost base. I just wondered if you can talk about the cost changes you’re seeing both as it relates to inflation, I guess per head, as well as some of the efficiencies and cost actions that you’ve mentioned in the call. Thank you.
Pekka Vauramo
Yes, we have dimensioned our continuous improvement of productivity improvement plan that we do annually, which should correspond to roughly the labor inflation. And that labor inflation including this year, it’s roughly 50 million that we see at this moment. Of course, there’s a lot of movement in the labor market and it’s not guaranteed that it will stop at that amount, but we have actions already in place for this year to reduce our cost base at least for that amount, and that’s a way how we want to look into the future and we want to install that culture of continuous improvement, and we already planning areas for 2024 at this moment where we’re going to take some of these actions, but it is a multitude of actions. Entire organization is involved, all our businesses, all our market areas are involved, and it mainly consists of small streams of really different things.
It’s a mixed bag, but we are applying same methodology that we used when integrating Metso and Outotec. It’s a gate model where we start from idea, we verify the idea, we established action plan, we follow implementation of the actions, and then we verify the results. So, gate model, very simple model but requires a certain culture that it can be applied. We have that one and thanks to integration process that we went through and we don’t want to lose that culture and those capabilities from the company.
Christian Hinderaker
Thank you both. Maybe then to finish I guess just to follow-up on Klas’ earlier comment with regard to order intake, in particular in minerals aftermarket, in the first nine months of last year, you’re averaging 20% organic growth, that declined around 10% in 4Q, I knew at that stage we’re talking about normalization in refurbishment and large-scale activity as possible driver. You’ve then had more than 30% growth in Q1, and they’re effectively guiding that that current run rates which bear in mind is 26% higher in euro terms than the average of the last 12 months is the outlook for the coming quarters. Just interested to understand what you think was behind the softness in Q4 and then whether Q1 is now the new normal? Thank you.
Eeva Sipila
Well, I think first to be very clear, our outlook guidance is on market activity not our orders per se. And clearly, we see market activity continuing strong has been that in mining for quite some time, and with the visibility we have had, we don’t see any change on that. Then, orders of course it can always be a bit timing dependent and like you rightly say comparisons obviously, vary as well. So, the percentages are always a bit tricky to comment on.
I think as such we have no reason to change our earlier comments that really there was a post-COVID, a very high degree of refurbishment and bigger retrofits, and right now we are busy delivering those and the customers busy ramping them up. So, quite naturally, that slowed down a bit late last year and then again, the opportunity on productivity is still great, so we don’t expect any long-term issue with that but it’s just a bit how also customers able to digest certain investments. And perhaps it certainly is a very strong growth number now in orders in this first quarter, as I was indicated not necessarily expecting something similar as a percentage, but again I said activity to continue good on this very strong level.
Christian Hinderaker
Understood, thank you.
Eeva Sipila
Thanks.
Operator
The next question comes from Panu Laitinmaki from Danske Bank. Please go ahead.
Panu Laitinmaki
Yes, thank you. I have three questions. Firstly, on the mineral’s equipment orders outlook, you already commented on the aftermarket, but what about the equipment, can you describe like what you are seeing in the pipeline? Is it more small orders or big ones, and any comments on what you are seeing?
Pekka Vauramo
Yes, the small order inflow is very convincing currently in minerals. There are bigger orders also in the pipeline or bigger potential orders in the pipeline. But like we always said, timing of these ones, it’s always difficult to forecast when they come in and for sure we will see some of those coming in in this year. But the same talking the inflow of small and medium size orders is really robust at this moment and we like that profile of orders because there is profile, it’s totally different, it’s mostly product sales and the project specific tailoring is minimum in the smaller orders normally.
Panu Laitinmaki
Thank you. Secondly, just on the mix of orders in terms of metals, I think you previously gave us a chart showing the exposure to copper, battery metals and so on. Has this changed a lot from 21, which is the last year when you gave this chart, just thinking how has the share of copper increased and the battery metals?
Pekka Vauramo
Yes, I wouldn’t say that from last year the change hasn’t been that big, but we see and that same comment what I remember commenting after the fourth quarter was that we do see more and more lithium and these really the battery metals, battery grade nickel projects coming up. So, that is something where we at least see a number of projects growing and a lot of interest and a lot of activity in them.
Copper as such is a major item currently so is gold as well, what is in the equipment side and project side almost nonexistent is I don’t know or at this moment a very little activity there in pelletizing there is activity and we’ve announced several orders lately or lately on pelletizing, but nothing on mining site referring to crossing and grinding on that part of the combination part of the process, but copper, gold, battery, metals.
Panu Laitinmaki
All right, thanks. My final question is on the margins. Can you comment on the profitability of services and equipment in minerals and aggregates? I mean, without going into numbers, can you comment on the levels? And reason for asking this is that you actually achieved this very good margin in aggregate while the services sharing that business came down to 31? And then, in minerals, it was about double that, but it had lower margin as a whole. So, just wondering how does the split between the equipment and service profitability in these divisions?
Eeva Sipila
Sure, sure, Panu. So, like we’ve commented early on, so we’ve been able in aggregates to really do a very good work for uninterrupted good work on the modularization and really on the product profitability, also a lot of footprint changes on what we produce, where, and that really is a major lever in the profitability improvement because we, like you rightly point out, the service growth is not behind because we really haven’t seen a service growth in that business. And hence, I think it’s fair to say that we believe we are really at the top end of the companies when thinking of this type of a productized business. Then, again on minerals, we’ve said that we’ve obviously been much more busier with the integration. And then, once there’s a lot of good work on going on the modularize and productization of the offering, we have still much more work to be done. And hence, the difference between aftermarket profitability and equipment profitability is still material, but we’re working on both. So, it’s really improving on both elements rather than [indiscernible] chasing one or the other, so to say.
Panu Laitinmaki
Okay, thanks. Can I just have a follow-up? So, clearly aggregates like equipment profitability is higher than minerals at the moment, but is the service profitability similar?
Eeva Sipila
Typically, in a business where customers are more 24/7 focused, obviously the downtime cost is much higher in mining than aggregates and that does impact customer’s willingness to pay for avoiding downtime. And then, of course it puts tougher requirements on us to deliver, but that explains why the aftermarket tends to be more profitable in mining.
Pekka Vauramo
And they are structurally different. The different businesses, aggregates most of the go-to market, the most common is wire distributors and then we do sell spare parts and wear parts to distributors naturally with the discount, which means that upfront margin is lower, but at the same time we don’t engage ourselves to professional services labor component, it’s much lower without our dealer business. So, therefore it’s quite difficult to compare them. We participated the aftermarket with the most profitable part of our service offerings, spare parts, the aggregates business while we have a full offering in the mineral side, but the volume is much greater and percentage of aftermarket is much higher there.
Panu Laitinmaki
Okay, thank you.
Operator
The next question comes from William Mackie from Kepler Cheuvreux. Please go ahead.
William Mackie
Yes, good morning. Thanks for the time, Kepler Cheuvreux. But my first couple of questions relate to aggregates please. From how you observed the trends in Q1 and looking to Q2, how would you describe the distributor inventory levels by region and perhaps the distributor behavior in Q1, if there was any pull forward of these spares and consumables or equipment, and perhaps how you’re reading the distributor stock levels and how they may behave going into the second quarter or the second part of the year? And then, my second question again relates to aggregates. So, just to really understand what you’re communicating, the success of all of the work on the pricing actions and cost actions and the benefits of perhaps a normalization of the supply chain, we should be anticipating you can sustain this level of profitability for at least the foreseeable one to two quarters ahead. So, it’s how we should perhaps specifically think about that margin level that you’ve now achieved.
Eeva Sipila
On the distributor behavior, I think that there is a regional difference and I think so there is not necessarily a big difference between distributors and customers per se, they are both much more cautious in Europe and both customer groups are more bullish in North America. And this very much relates to the underlying demand and availability of funding and the whole picture.
So, in Europe, there is clearly visible caution and said volumes – in unit terms, volumes are clearly down from a year back, just the fact that inflation in a way when we report in euros masks part of that volume drop. And obviously, it means that they are more focused on their inventory and so are we because it’s not in our interest either to push anything into a pipeline that doesn’t move. So, we also need to manage our risks very much in the same way as we did in 2020 when there was a caution in the market. And then, to your question on aggregate, so yes, indeed, when we are able to really run the operations on a full level, we think that there’s nothing extraordinary in the quarter. But of course, there is uncertainty now on that volume outlook towards the second-half of this year. And that will then obviously have an impact on how well and efficiently we are able to run the operations.
William Mackie
Thank you. And my brief follow-up again, sticking with aggregates, when you look over a longer time period and take into account the success of pricing, I mean, in aggregate, if we were to look at the changes that you achieved in equipment pricing over that two-and-a-half year period, what price increase across the group should we be thinking of? Is this 10%, 15%, 20% in terms of the quantum?
Eeva Sipila
It’s more than any of those numbers.
William Mackie
Brilliant. Thank you very much.
Operator
Please state your name and company. Please go ahead.
Unidentified Analyst
Yes. Hi, [Nick Helston] (ph) from RBC. Thank you for taking my questions. And my first one is a follow-up on the result of the strategic review of the metals business, and I was just wondering if maybe without necessarily being specific about the exact numbers, if you could give us a rough idea of the margin differential between the smelting business that you’re keeping and the roughly €300 million sales in the metals business that you’re carving out? Just looking at the all-year numbers for the division that were close to 11%. So, it does imply that the smelting margin must be quite a good number and correspondingly the margin for the other businesses is probably quite low. Thanks.
Eeva Sipila
Yes, Nick. So, maybe the best way to answer your question is that eventually when our preparations for the divestments advance enough, the two businesses for sale will move into discontinued operations and smelting will then be reported as part of the minerals segment, and we don’t see the smelting business having a negative impact on the mineral segment margin. So, it fits well there, which then tells you that when the total metal is around the 10%, then obviously gives you an idea on the profitability of the two other ones.
Unidentified Analyst
Thanks. That’s really helpful. Then, my second and final question is, maybe just looking down the road and through this mining cycle that we’re experiencing at the moment, one of your peers that discloses aftermarket growth in the mining-related businesses is said that that business over the past decade or so has grown at about 7% a year. I’m just wondering if we’re thinking about modeling for your business, minerals aftermarket sales growth, if that’s a fair starting point in your view mid to upper single digits or if that’s a structural reason why it would be different to that pier. Thanks.
Pekka Vauramo
I don’t see that there’s any structural difference as such we haven’t done the number series, maybe we should do that, do that exercise to firm it up, but I would say that we see fairly similar things happening. What we have done organically is we have grown our life cycle services part of part of the business and there we have been growing faster than the market as such. But other than that, I would say that we’ve very much grown with the market and we’ve grown with the nature of the business as well. Then, of course, there are some drivers when we look into the future that where business is headed, and for example we know that filtration dewatering will be done more, also tailings will be subject to filtration, and that is relatively high aftermarket part of the business. So, we can expect some growth when we take a bit of a longer-term view, medium-term and long-term view on aftermarket.
Unidentified Analyst
That’s great. Thank you very much.
Operator
The next question comes from Antti Kansanen from SEB. Please go ahead.
Antti Kansanen
Yes, thanks for taking a follow-up. Eeva, just a question on the cash flow that you already mentioned the prospects in the coming quarter, so, just coming back, is there any headwinds that would prevent you on reaching a lower working capital per sales going into back half of year? I understand the seasonality, but just a year-over-year comparison would you expect to release cash out of the working capital this year?
Eeva Sipila
That’s very much the target. Of course, the headwinds in a way are that we as you see from our numbers, we are we are growing at very high rates. So, of course we have a natural need for working capital in order to keep our customer promises. And of course, compared to last year, there is a more inflation in the system but definitely working hard to turn the trend as the supply chain and the overall hassle risks have reduced. There’s less need for buffers and extra checkpoints. So, we are very focused on delivering better cash flow this year, and working capital is really the other element that the profitability we have a good start on.
Antti Kansanen
And just to remind, if you remove this excess buffers and extraordinary items, what’s the long-term level of working capital for sales that you are targeting and what are the self-help stuff that you are doing in order to get it a bit lower?
Eeva Sipila
I think the challenge, Antti, is in our business that when it is cyclical business, so there’s not one number that will depend also on the cycle, for instance where we are in the aggregate cycle or mining cycle. But I think now the graph we had in our material, we’re trying to work in a way that this is a business where we shouldn’t be tremendously working capital heavy per se as a lot we work to orders rather than stock, but let’s see if during Metso Outotec we’ve had three crazy years in supply chains, so I’m not sure I can expect the normal ever to come, but as I said, let’s see where we get this year and certainly on a better level and it’ll be easier to discuss if what the perhaps future normal could be.
Antti Kansanen
All right. Thank you.
Juha Rouhiainen
All right. We are approaching half past. And as mentioned, we’ll have our AGM starting momentarily. So, we need to go to the meeting location and greet and welcome our shareholders and start the meeting shortly. So, this wraps up our first Quarter ’23 results conference call. Thanks for participating. Thanks for asking questions, and looking forward to speak to you all soon again. Take care. Bye-bye.