Deco Media Oy Friday, 27 th July :00 Hrs UK time Chaired by Pertti Korhonen

Transcription

1 Deco Media Oy Friday, 27 th July :00 Hrs UK time Chaired by Pertti Korhonen Good afternoon ladies and gentlemen and welcome to Outotec s second quarter interim report briefing. Before we hear the presentation from President and CEO Pertti Korhonen, I would like to remind you that this will be recorded and the webcast will be available as on demand taping on our website later this afternoon. Now we hear the Q2 presentation from Pertti Korhonen. Pertti Korhonen Thank you Rita, so good afternoon everybody here in Helsinki and everybody there following the webcast. I will first go through the quarterly release highlights and then we can move to the questions and answers. The market continued robust in all of our market areas. Our sales activities continued strong as you can also see from our development of our order intake. Some companies did revise their investment plans somewhat downwards, but investments have continued on a high level. The long term outlook for metals demand has continued positive and of course that means that further investment to minerals and metals processing capacity is needed and that is the reason why customers are continuously making investments, to such competitive landscape has remained relatively unchanged, of course providing by country and technology, the industry consolidation continued somewhat. The tightening environment, regulations, they have actually increased demand for Outotec sustainably, sustainable technologies further, so we are seeing this in many, many areas that more and more the sustainability of the technology is a key criteria in our customer s decision making and of course that gives us an advantage with our advanced technologies. In certain regions, political conditions they have been delaying for us investments in alternative energy solutions that typically require subsidies or some tax benefits. If we go to the financing environment, despite of the uncertainty in the financial markets in general, the financing has continued to be available for our customers and for the investment projects. Of course the solid market momentum turned into orders also in the second quarter for us, so we had a very strong, actually the second strongest order intake quarter that we ever have had, this time Europe, Middle East and Africa was particularly strong, representing 61% of our order intake and of course here it is the Middle East and the large orders from there that caused this strength. Because of the mix, then Asia-Pacific represented 15%, we also got some good orders from there, and Americas was 24% of our announced new orders. All in all in the reporting period for the first half, the order intake increased 33% compared to the last year, and then in the second quarter it accelerated to 38% increase.

2 2 If we look at this picture, on the grey you can see the order book and the development of it and because of the strong order intake our order backlog again increased to an all time high level of billion, which was 33% higher than in the end of the second quarter last year. 44 projects in the order book with value of more than 10 million, represented 73% of the backlog, and we are estimating that approximately 42% of the backlog, meaning approximately 930 million will be delivered in this year, and then the rest next year and beyond. If you look at the order intake by quarter the strength in the Q2 order intake is especially explained by the large ilmenite smelter order from Cristal Global, from Saudi Arabia, but also the underlying unannounced orders, they continued on a very good level. We are very happy with how the order intake continued to develop. Of course this very strong backlog puts us in a very good position towards the second half of this year and also gives us a good basis for If we then look at the profit and loss statement we made very strong progress with all key parameters, so with the successful project execution and service delivery we ended up to very, very strong 74% sales growth. That really is explained by continuous good order intake and especially the very successful execution that we have been able to do in turning those orders from the order book to deliveries and therefore revenues. The operating profit from business operations increased strongly, 133% to 75 million and the reported operating profit after the one-time costs and the PPA amortisations from the acquisitions was 68 million and also growing with a strong rate of 129%. The operating profit percentage from business operations was 8% when a year ago it was 6% and the gross margin was 20.9%. Basically being explained by the change in the mix, although our services business was growing 30% year-on-year, the growth of the deliveries of the Capex type of items, i.e. plants and equipment grew so fast that that resulted into the dilution of the gross margin percentage, but there is a very natural explanation behind this trend and change, and we regard this as being a normal phenomenon. If we then move forward to the business areas, in Non-ferrous solutions, a very strong performance by all metrics. The order intake continued on a good level, the sales growth was very strong due to the very good execution of both delivery projects and services. The profitability strengthened further, despite quite a significant negative impact from unrealised and realised foreign exchange losses, so actually there was a 5 million difference year-on-year in comparison, and therefore really the operating profit developed in a positive manner, so more or less doubled and we had a 10.1% operating profit margin from the business operations. We made acquisitions also in the non-ferrous business areas, so Numcore was a technology acquisition that we did in the first half. Then moving forward to Ferrous solutions, so also here very strong development of performance, very strong order intake, very strong sales growth showing that the large orders that we were winning last year and the first half of this year, they had been progressing very well to the execution, and are delivering this strong sales growth. The profitability improved very strongly because of the sales growth and the scale effect and we made an important acquisition here in Brazil, the acquisition of Demil which is providing services in the area of agglomeration plants, so very strong progress in ferrous also.

3 3 In ELE, also very strong sales growth, strong order intake, the sales growth here is also explained by the very good progress in the execution of the long term projects and then also some positive impact coming from the acquisitions and growth in services. We had some successful project completions in ELE, the profitability with 8% from business operations was fair, it was impacted by unrealised and realised FX losses, so actually that explains almost 3 million on the operating profit line. Then moving forward to services, we are very pleased that our services sales continued to grow strongly. It was up by 30% compared to the previous year and this was coming from further penetration to our install base, the new service offerings, such as operate and maintenance and then scaling up our scales and deliver capabilities. Despite of this very strong 30% growth, the share of services diluted to 19% of sales because of the extremely strong growth of our Capex business. As we have commented earlier we are ahead of schedule in reaching our long term services sales target of 500 million by 2015, we set this target to ourselves in November 2010, and the progress towards this target has been extremely good. If we then look at the balance sheet our strong balance sheet strengthened further by all metrics, so if you look at the net interest-bearing debt that is -335 million. Our gearing is - 80%, the working capital is -271 million and this together with further improvement of profitability resulted to very good return on investment and return on equity figures, so ROI almost 30%, return on equity 23%, and then all this delivered very strong improvement of earnings per share, from 0.45 last year to 1.04 in the first half of this year. We can be very pleased with how these metrics have also been developing. Of course when we are growing so strongly, we have been adding people to our payroll, a significant addition was coming from acquisitions, so more than 300 persons we have added as a result of the acquisition, and the rest of the additions mostly have been going into the project implementation to service delivery and then sales and marketing and strengthening our market area network globally. In addition, the temporary person s number and the contracted people number, those have increased. Events after the reporting period, in 10 th July we announced an agreement to acquire from Australia a services company, TME Group which is focusing on grinding mill services, with an annual sales of approximately 35 million, and then regarding the post-reporting period order announcements, on 10 th July we announced that we have been awarded multiple technology orders for Iran totalling in value of 265 million from which we have booked 58 million to our order book in Q3. As we have announced we are doing the booking of the order book in line with the payment, so we only book the value which we have received in advanced payments on our bank account. The revenues will be recognised gradually during 2012 and What comes to the way how we do business in Iran, we are naturally respecting all international trade regulations and the rules and the laws in the countries and the regions where we are operating and we are collaborating very closely with the export control authorities of Finland, Germany and Sweden, making sure that in all aspects we are complying to all laws and regulations with our business. Nothing that we deliver is under the embargo regulations. If we then move forward to our strategic priorities and how our strategic implementation is progressing, all the key focus areas that we set ourselves for this year have been focusing

4 4 well. We have four key areas in our focus. in order to ensure continuous growth, there are three key drivers that we have been focusing on, order intake naturally continuing to win business, continuing to win market share and strengthen the reach to the market. Then scalability of the operations so that we can then turn the orders into the execution and sales, and I have to be really extremely pleased with the way how our organisation has been able to scale up the delivery, and then of course execution excellence, so that when we are having the strong growth that we are having that we can make a good job in our execution, both in the project deliveries and services. These have been in key focus and the progress has been good, as you can see from our numbers. Then regarding the profitability improvement where we are continuously progressing towards our long term growth of average 10% EBIT margin, over the cycle, the key levels are pricing, excellence, value based pricing and then supply savings coming from the global supply chain network and then the scalability of the operations so that we can grow the revenues and gross profits with a faster rate than the fix costs are growing. Also in this we have been progressing well in line with our plans. Then a third area is related to our strategy and the earnings logic strengthening, so moving more and more being a solution provider instead of providing for example individual equipment, and then also offering services during the lifecycle of our customer s investments, and also here we have been progressing very well. Then the fourth focus area is mergers and acquisitions, and as you can see from the announcements we have also made good progress here and we will continue to pursue focused acquisitions in order to accelerate and enhance our organic growth. All these areas are progressing well. If you then move forward to the market outlook for the rest of the year the market outlook continues to be positive, macroeconomic risks have increased, so really the fact that the Eurozone crisis has been continuing and the solutions have not been coming through yet, this has of course caused uncertainties in the market and also the other uncertainties in the world economy, and on the long term this might cause that our customers may delay their investment decisions. We have not seen this phenomenon happening this far, so the activity level has remained on a good level. The large mining companies have revised their investment plans somewhat, however still those investment levels are remaining on high level, and we expect that good demand from all market areas would continue throughout the rest of the year. The declining ore grade, scarcity of clean water, high energy costs, stricter environmental regulations and then the global relocation of production continued to drive the demand for sustainable technologies, and this is of course an opportunity for Outotec on a continuous basis. As I said already earlier the financial resources have continued to be available for good projects and for companies with good cash flows and good balance sheets. We believe that in that sense this will not be a constraint for the business to develop further in a favourable manner. We have today slightly revised our financial guidance for this year. We have slightly upgraded our sales guidance, our earlier sales guidance was billion for the full year, now the new guidance is billion, and this was especially driven by the good progress in our project revenue recognition. We have kept the earlier EBIT margin guidance of 9-10% before the onetime items and PPA amortisations and of course achieving this guidance is subject to the sales mix and the relative share of services versus the Capex business. The fluctuation of the exchange rates which have been quite significant recently and then of course the progress in our project implementation, timing of the new orders, project completions, incomes and of course all in all the general

5 5 development of the world economy and financial markets, but all in all the outlook for the rest of the year for Outotec is solid. With this summary I think it is time to move to questions and answers, session, so Rita please. Erkki Vesola Swedbank Questions and Answers Two questions I would have. First it is obvious that you need a gross margin improvement in the latter half of this year versus the first half, are you forcing the sales mix change that you were referring to, or how will you achieve this in order to reach the EBITDA guidance. If you look at our margin split between the first half and the second half, normally the second half has been stronger than the first half because of the mix of our deliveries, and then of course the revenues are growing to the scale effect that is coming through to the bottom line. We do not really anticipate or need very significant changes in the gross profit margin in order to reach our profitability window. Then secondly, I want to talk about mining orders here especially. Could you describe your current orders from mining customers, how much is Opex driven, and how much is Capex driven. Do you foresee any change there? Well of course one way to look at the split there is to look at the orders that we have announced and how the sales of Capex and the services have been developing, so we are all the way making inroads to grow our services business and the orders they have been strong, but as you can see also the Capex orders have been progressing in a strong manner, and we have seen a positive momentum to continue in both areas. Pekka Spolander Pohjola Bank You mentioned that some large mining companies have somewhat revised their investment plans, have you seen these revisions take place in the projects that you are already active in or is it a question about the plans somewhere further in the future. There have been no changes in the projects where we are involved, i.e. the projects which are in our order book, so no changes there. If you look at the analysis, some mining companies have put on hold some projects which are more long term and perhaps have a bit lower net present value than the average net present value in their portfolio. They have been perhaps pruning some of the not so attractive projects, but all in all the investment level has been continuing on a very, very strong level. Ilris Kemppainen Carnegie Just to be clear that are you expecting same kind of seasonality in Q3 as last year?

6 6 Well in our business the quarters can have very, very significant fluctuations between themselves, especially what comes to the order intake. If you look at the order intake picture you can see that really the quarters are not sisters with each other because the timing of the timing news sales orders can really vary a lot, so there is always a lot of fluctuation in the order intake. The sales revenue is normally quite small, because that is coming from the combination of large project execution, equipment deliveries and services, but then again if you go to the cross profit margin and you go to the EBIT margin, again there is a significant fluctuation, which is simply coming from the project completions and the project timings, and then from the licensing fees. In some quarters, we can have some licensing fees; in some other quarters, we may not have them if we don't make such kinds of deals, orders, and then the completion of large projects when we make a successful completion and we can then release the risk provisions, can positively impact the margins in a significant manner, and then the timing of this between the quarters, they are causing a lot of fluctuation, so one should really look at the trend and more or less on the average figure to get the full picture. And still on orders, could you just tell about what kind of mix are you expecting for the second half in terms of larger orders and smaller business? Well, we continue to have all kinds of prospects in our pipeline, in our sales pipeline, so from continuous service orders to equipment orders to also large project orders, so the pipeline continues to be well balanced, and it continues to be healthy. Sampsa Karhunen DNB Continuing on the orders, in connection with the Q2...sorry, in connection with the Q1 result, you were commenting that you saw that the base level of orders was still developing nicely and we can see that it happened on the Q2, do you have a comment on how do you see that the base orders are continuing currently? So from what we see regarding the market dynamics today, as we speak, so the activity level has continued on good levels, so unless the card house in Europe collapses and somehow the nervousness in the markets again increases, I don't see a reason why this good level would not continue. Even though the orders were very good on the Q2, did you see any kind of a hesitance among the clients in kind of turning the order enquiries into orders? Was there anything that would have been seen in the business in that commodity prices have been coming down over the spring? Perhaps in some individual customer cases, but not as a phenomenon all in all. Financing, like it has been for the last two years, that has been more complex for our customers, so even if the financing has been available, often it has taken a longer time to put it together, because of the risk adversity of the investors and so on, so that has sometimes delayed some of the decision making, and then of course another factor, which we also have commented earlier, is the increasing environmental regulations, which of course are very good that's happening, but sometimes that causes also delays to our customers investment decisions when they are facing more complex regulations and it takes more time to get the permits and so on. It s also these kinds of things that can impact the decision-making schedules.

7 7 As the last question, I know that you are entertaining some sort of a pipeline of different kinds of orders coming in. Do you currently see that the pipeline is getting shorter or longer? What is the kind of interest level coming from the market? Well, we are having a very systematic sales process and we keep track of our sales funnel on a continuous rolling basis, and the total number of sales prospect cases that we have in the pipeline that has not gone down, actually we had been adding some new things to the other end of the funnel. Of course, one has to notice that this sales funnel, it s a very long funnel, so it s from zero to several years and that s the nature of the business here, so in some cases we need to work 4, 5 to 7 or even 10 years for an order to materialise and then the service orders, they are materialising in the short cycle, so there is anything between a few weeks or days to several years of cases there, but the mix has stayed on a very healthy level and inductions are positive for the outlook. Rupesh Madlani Barclays Three questions for me please. First, at the end of the reporting period you had 4,500 employees. The new employees were listed primarily for project implementation, the service business, could you give an idea as to the breakdown between service and project implementation for the employees are added? Second, with respect to the complexity of industrial water treatment increasing, do you think that could translate into an average large EPC project size for you in the future? Lastly, you mention in your statement that the ELE division is seeing solid demand in the area of alternative energy solutions. Could you provide some colour on that and also your expectations for the remainder of the year? Thanks very much for the question, so what comes to the headcount increase from the 3,500 to 4,500, of course, acquisitions have a big role to play here, and then regarding the services and projects, the increase of services, the increase of services personnel has especially been strong actually, no, services is requiring frontline resources and it is very much in our focus to continue to grow and strengthen our bench strength and the field strength in the services, so that represents a significant part of the resource increase. Then also in projects with this success that we have had in the sales of large projects, we have also significantly increased not only the subcontractors, but also our own personnel in the project implementation, so these two areas are explaining a significant part of the increase and then a third significant chunk is coming from the further strengthening of our marketing and sales network around the world. Then your questions regarding water, so that could the water opportunities realise into large EPC orders? Yes, indeed, so we have prospects in industrial water and the wastewater areas, and of course we are delivering equipments to this area, but we also have some cases and prospects for solution deliveries in the area of water treatment. Then alternative energy, so, yes, we do see that the alternative energy is a good further growth opportunity for us. This was the logic behind the acquisition of energy products of Idaho half a year ago and we see attractive growth opportunities also there and that, of course, nicely augments our business portfolio and has nice synergies what comes to our technology platforms of fluid aspects. Edward Stacey Espirto Santo

8 8 Two questions, firstly just on the second half, the first half number the earnings were a lot stronger than certainly I had expected at the start of the year, but your full year guidance you are only raising a little bit, so actually it would be kind of a cut to what I had into the second half. Of course, that s just my model, but I was wondering if there is anything actually in the second half that is kind of a headwind more so than you'd expected earlier in the year? The second question is on one of the slides you say certain regions, political conditions have been delaying the investments in alternative energy solutions. I wonder if you could just kind of give us a bit of a list of what issues exactly and where. The first half/second half split, one way to look at that is that the execution that we have done from our order book in the first half has been faster than we were anticipating or planning, so we have really been able to exceed our own expectations what comes to the execution performance and, therefore, perhaps this year the year halves are more balanced compared to what they have used to be in the past. This explains most of the dynamics change. Of course, in addition to the continued very strong services growth, and if we look at our slightly revised guidance, the reason for the upwards revision of the sales is really coming from this faster than anticipated execution of the large projects. That is the reason there. Then regarding the alternative energy question, so as I think I was commenting already during my presentation, these alternative energy, biomass to energy, waste to energy investments; they are new things in many market regions in many countries, and very often there are changes in the regulations related to those and then also taxes and investment subsidies, and those kinds of things are a factor there, and sometimes the political decision making regarding these kinds of factors can be slower, so we believe that there is a significant opportunity in the alternative energy markets, but the timing can fluctuate market area by market area, depending on how the regulations and how the political decisions are done. James Rutland Goldman Sachs I've got three questions. Going back to the gross margin comment you made, it ticked down 50 BPS year-over-year, and you mentioned service had driven this. Now, looking at the difference in the service share of the Group, it fell by about 7%. I was just wondering was there anything else in the numbers that we should be aware of to drive that full, and then given that you're going to be in an equipment-intensive phase in the second half, should we continue to assume that the gross margins will be under pressure? Secondly, given the large nature of some of the recent orders, your backlog is getting increasingly long-dated, I think stretching out as far as 2016, could you tell us how much of your backlog is for 2013 please? Finally, are the large orders you're beginning to take something we should continue to expect in the future? I mean are there are load more 250 million plus orders out there to be won and how does the margin compare on these orders versus something of, say, 20 million? Thank you. Regarding gross margin percentage, really the very, very significant factor there is this change of mix between services and then the Capex business, because the Capex business growth has just been so phenomenally strong, and then the question are there are underlying factors? No, it s about the normal timing of project completions and then also the timing of the licensing fees. Those are explaining the gross margin dynamics. Then, of course, related to the first point of large project execution, and actually related to your last question of the profitability of the large orders, of course, typically in the large orders,

9 9 the gross margin percentage is lower than in the small orders, which are predominantly consisting of, for example, also that equipment and so in the large orders there is more third party content. We are doing systems integration by putting together third party content and there is also more construction and these kinds of elements there, so the percentage level is naturally lower than, for example, in the pure equipment deliveries, but then if you look at the impact to the bottom line and to the earnings in Euro, and then also in the EPS, of course, that is then very positive. Then to your question about the timing of the order book, so we are not disclosing...we are only disclosing the expected revenue for the current year and we are not disclosing the split then of the future years, but one way for you to estimate that is to think that typically the service orders are delivered in, let s say, a few weeks to up to two quarters equipment orders from, let s say, six to twelve months and then when you say a large project order, typically those are, let s say, two to three years in length and that s one way to estimate the timing of the backlog content. I hope these were helpful answers, James. Yes, thank you and just one quick follow-up, when you talk about these large orders, is that going to pose a significant headwind to you achieving your margin target going forward, if you keep getting...? You mean our strategic market targets of 10% on average. Yes, yes, the 10%, yes. Well, of course, if you look at the materials that we provided in our last capital markets day, we have there one picture where we are describing the factors that are, let s say, margin percentage dilutive and then the factors which are margin percentage accretive, and then what are the factors that are causing turbulence in the market percentage fees and, yes, the more we take large orders, the more there is pressure on the margin percentage, but then on the other hand we have several other elements where we can then enhance the margin percentage and those are, full example, the growth of services, the lifecycle services, which steal from Outotec s revenues, is on a quite low level and we have an opportunity to grow that. Then, of course, we have other levels that we are pulling like, for example, pricing excellence and then also the supply chain work that we are doing to achieve surplus savings, so we also have factors that are balancing it. I do not see any reason why we couldn t, with our strategy that we have in place, reach our longterm profitability targets. Tom Skogman Handlesbanken Looking at your fixed costs, they are now twice as high as the peak in I was just wondering how big a part of this growth of more or less 100 million is coming from service, which is now a big part of the other, or the growth is coming more related to the project business? My second observation here in the report of it looks like basically all the big orders are coming from emerging markets and we don't really see any large orders from old, traditional mining countries like Australia or Canada. Is this like a signal that the market is really slowing down in these kinds of...or Western mining markets? We are not splitting the fixed costs by, let s say, service business and the rest of the business, but naturally when our business is growing so much as it is growing, we are not able to run this kind of a business with exactly the same fixed cost level as we have had,

10 10 so we have to increase our fixed costs. A big part of that is strengthening our market access, especially in the emerging markets you are mentioning, so it is very important that we have a strong sales and marketing, and the local presence in the emerging markets, then we are investing quite significantly to the building of our global platforms for operating and running the business, so that we can be an effective operation. We are investing into the global supply chain and we have increased our investments to R&D and technology development, because as a technology company, it is very important that we are doing that. However, our strategy is not to grow the fixed costs with the same rate as the business is growing, so we are expecting to get some leverage and the scale effect, and if you look at the fixed cost as a percentage of sales with our good growth rates, we are actually on a pretty nice trend there. Then regarding your second question, the emerging markets, absolutely, it is not a surprise that in the stagnating or old economies of North Americas and Europe the activity level is much lower than it is in the emerging markets, where there is still a bit of growth and the economies are developing strongly, and that's how the world is today. Yes, there are investments also in the old world, but those tend to be more like replacement investments and refurbish investments, and yes, we are participating in those, but for us it is important that we are strongly there in the emerging markets and we are very happy and pleased with the position that we have there, so such a big part of our business is today coming from the emerging markets and we, of course, are very pleased that we are there, and are able to capture that opportunity. That would be my comment there. Tomi Railo SEB Enskilda Can you comment a little bit on the pricing environment currently? Secondly, you have earlier given sort of a full year range for the gross margin, would you be able to comment that this time? So regarding the pricing environment, I think there has not been any significant change in the pricing environment. What we have tried to do with our own actions is to, let s say, further develop our pricing capabilities, so that we could really better price the value that we are delivering to our customers when measured from the investment lifetime, and I have to say that we have actually been able to do some positive developments there, but all in all I would say that the pricing environment hasn t materially changed. Then your next question sorry, Tomi, I missed, could you please repeat? No, it was on the gross margin. Oh, in the gross margin. Yes, as Ritta commented earlier, some ranges, but... Yes, so I think that we have earlier said that when we were on the high levels on the gross margin in the levels of 27% also, we said that when the Capex deliveries are starting to progress and the deliveries going forward we expect that the margins would cause somewhere 22 to 24% and I think this was during the second half of last year when we commented that, and now I don't think that we have said anything regarding the gross margins for this year, but there is a very natural explanation why the gross margin is now on that 21-ish level, and that is really coming from the mix and from the fact that we had been so successful in capturing these large solution deals, so this is in line with our strategy and there is nothing abnormal here.

11 11 Closing Comments Rita Uotila I think that was all the questions from the telephone, so if there are no further questions from here, we will say thank you and see you next time.