Company: Magneetto Media Oy Conference Title: Outotec CEO s Q&A Teleconference Presenter: Rita Uotila Date: Monday 22 nd June 2015

Transcription

1 Company: Magneetto Media Oy Conference Title: Outotec CEO s Q&A Teleconference Presenter: Rita Uotila Date: Monday 22 nd June 2015 Outotec CEO s Q&A Teleconference Operator: Good day and welcome to the Outotec CEO s Q&A Teleconference conference call. Today s conference is being recorded. At this time I would like to turn the conference over to Rita Uotila. Please go ahead. Rita Uotila: Thank you. Welcome also from Outotec. We will start the CEO s Q&A session with some questions received earlier on. Here today is obviously the CEO Pertti Korhonen and also the CFO Mikko Puolakka answering your questions. So let s kick off with a question regarding the markets. This is something that is discussed and asked a lot. What is the current market environment and also what are the customers saying about their investment plans and capex and opex plans? Pertti Korhonen: Thanks, Rita. Hello. This is Pertti Korhonen here. So if I would first elaborate the market all in all, so what we have said earlier, the market is today not a monolithic market but actually despite of the fact that in several areas like, iron ore, steel value chain, the market is very slow; also, pockets in the market which actually are quite active. So there are pockets by country or by customer or by commodity where there is good level of activity. And that is also substantiated through our prospectus pipeline, the sales funnel where we have good active cases going on. If we look at the market by business area, as we said in Q1, the minerals processing market continued to be slow, and we have seen the market continuing to move sideways from what it was in the beginning of the year. If we look at the metals, energy and water market, there we have been commenting in Q1 that the market activity improved and we have seen this improvement trend to continue throughout the early part of this year or year to date. So this is the overall perspective and as said there are customer cases where customers are taking Page 1 Ref June 2015

2 investments forward. They are and have been reaching decision-making points and actually we have also been able to announce some orders recently. Rita Uotila: Okay, thank you for that. There was also a recent acquisition completed, Kempe acquisition in the Middle East. What technologies is this actually bringing and how is this benefiting Outotec s overall portfolio? Pertti Korhonen: This Kempe acquisition is actually both a service business acquisition and also a technology acquisition. So it s focused on aluminium value chain and it increases our product portfolio in the aluminium value chain. The offerings of Kempe and Outotec are very complementary. And then especially, this Kempe acquisition gives us a good platform to grow our service business in the Middle East and also in certain African countries and gives us quite a significant installed base, additional installed base in aluminium and basically enables us not only to continue the acquired service business but actually leverage it and grow it further both in the aluminium value chain and then also horizontally in other technologies, especially in the Middle East. So this is a good example of implementation of our M&A strategy where we have said that we are especially emphasizing acquisitions that augment our services growth. Rita Uotila: Okay, thank you. Then moving on to some balance sheet questions, at the end of Q1 the company had roughly 50 million net debt and the gearing was 11% positive, how is this and if so, how is this impacting the M&A strategy and is it impacting the business or ability to deliver projects? Pertti Korhonen: First of all, what comes to M&A we are of course selective and apply certain degree of prudency and carefulness in how do we assess the M&A options that we have. We have continuously quite a significant funnel of M&A activities that we are analysing and assessing and then we will be focusing on those cases where the fit is best to our business, where the outlook of realising synergies is best and which we also can finance, taking into account the limits that we have set ourselves for our balance sheet. What comes to our ability to execute operational business, we have all needed balance sheet resources and also all needed financing lines, credit lines in order to continue to both execute Page 2 Ref June 2015

3 everything that we today have in our pipeline, executing from the backlog, plus also a solid and credible partner to our customers when they are considering choosing ourselves for future business. Mikko Puolakka: Also, as we mentioned in our Capital Markets Day, we have extended also our major credit facilities end of last year, for example the 100 million revolving credit facility was extended for the next five years, and this is an important instrument for us to weather the bad seas and will not be used for M&A purposes. So from that point of view, we have sufficient financing facilities available. What comes to this net debt position also is the fact that our cash is very much dependent on the book-to-bill development, so a few years backwards, we had over 300 million advance payment; currently, end of last quarter, we had 160 million advance payment. This is not because customers would not be making advanced payment but because the order intake has been rather poor in But as we start to see an improvement in our book-to-bill, we also expect that the working capital and the related net debt position will start to improve accordingly. Rita Uotila: Okay, thank you for that. Now we are ready to take questions from the telephone lines. Operator: Thank you. If you would like to ask a question at this time, please press *1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press *1 to ask a question. We will take our first question. Hello, caller, your line is open. Please go ahead. Manu Rimpelä: Can you hear me? Pertti Korhonen: Yes, we can hear you now. Rita Uotila: Now, yes. Manu Rimpelä: Okay, excellent. It s Manu Rimpela from Nordea Markets. Just two quick questions from my side. Firstly on the services side, so are you comfortable that we will be you will be able to see some order intake growth in the services business on an organic basis in the second Page 3 Ref June 2015

4 quarter and the second half of the year after the softer Q1, which you said that was maybe partly timing-related? So that one Pertti Korhonen: Okay, so thanks for the question. So actually, also with services, our order intake tends to be quite lumpy, so our services business is consisting from yes, more smooth spare parts business but then the other part of the services business tends to be behaving almost like project business in the sense that when customers commit to modernisations or upgrades or let s say shutdown and refurbishment of their plant assets, those orders tend to come in quite lumpy nature. So in that sense, the services order intake has been and will continue to be volatile and the real measure for the services growth is actually the services sales revenue growth, which where we were, in the first quarter we were able to demonstrate a growth in services sales and we are on track to continue to continue to growth the services sales revenues. Manu Rimpelä: Okay and then the second question is that I think you mentioned at the start of the call that you or when we discussed the balance sheet, that you would be hoping for the book-tobill to get above 1 in order to start getting more pre-payments. So did I understand it correctly that you assume that your book-to-bill will increase above 1 towards the end of this year or in the coming quarters? Pertti Korhonen: We didn t give any explicit number there but I think that, as you have seen, our order book has stabilised now for some quarters, so you'll see clearly a stabilising trend there and basically what you can read from the comments is that we also see that certain parts of the markets are improving and then if you add that to the comments that we see a very solid sales funnel, we are starting to reach a point where getting the order intake or the book-to-bill ratio towards the level of 1 and beyond starts to materialise step by step. Manu Rimpelä: Okay, if I may just follow upon that, can you just because you, a few times you ve, in the previous calls, you also talked about the strong sales funnel but maybe can you just tell us if the funnel is very good but then we still see order intake coming down, so where is then the where is the weaknesses and what is the kind of balance still negative? Page 4 Ref June 2015

5 Pertti Korhonen: track. Outotec CEO s Q&A Teleconference Well, in the first quarter the order intake was already year-on-year on a growth Manu Rimpelä: Okay but I think you've been talking about the sales funnel being positive for quite some time, for several quarters, and if you can just look at the last couple of quarters so the well, the order intake organically has been going up and down, but so what you are kind of signalling is that we are nearing the trough. Is that the correct way? Pertti Korhonen: Yes. Yes. So as I have said, as quite correctly pointed out that I have said for many quarters that the sales funnel is strong and it certainly hasn t gone any weaker. So it s been strong and actually even strengthened. And, as the market activity is improving, especially in the metals, energy and water area, we are expecting that good order funnel or prospect funnel would also start to materialise in orders and in Q1 there was a year-on-year improvement already. Manu Rimpelä: Okay, thank you. No further questions from me. Operator: We will now take our next question. Johan Eliason from Kepler Cheuvreux, your line is open. Please go ahead. Johan Eliason: Yes, hello, this is Johan Eliason. Just a question on this order in April actually from, for the iron ore pelletizing plant in Iran. I understood you have only recognised some 10 million, but you indicate that the total net value would rather be million. Why is this not recognised as a firm order? Is this because of the difficulties for getting pre-payments out of Iran or the sanctions going on, or how will this develop? For example, if the sanctions would potentially be lifted vis-à-vis Iran in the near future, would that imply that you would then have a better probability to immediately recognise the full order value or? Pertti Korhonen: Right, so thanks for a good question. So we have been, now, for many years following a policy that what comes to business in Iran, we are only recognising or booking that part of the order to the order book for which we have received the pre-payment. So we book it to the order book with the flow of pre-payments coming in, and this is to recognise that the Page 5 Ref June 2015

6 business conditions of doing business in Iran are special and as you said, they are also under sanctions and that means that there could always be a risk of disruptions in the payment from the customers. So therefore we don t want to take a risk into our order book that we would somehow need to write off or cancel anything in our order book. We only book the monetary value of the order which corresponds to the pre-payments. And we have been doing business in Iran for 40 years and we have been able to continue to do the business. We always disclosed everything to full detail to the export control authorities in those countries from where we are exporting to Iran, those countries being Germany, Finland and Sweden, and for everything that we do in Iran, we have full permission and approval from all the authorities, and we have also taken the policy that we publish all these deals so nothing goes under any cover, so to speak. So we are fully transparent with how we do business in Iran. Johan Eliason: Good, and then I understand. So what you did recognise was a bit less than 10 million, which implies that obviously what you have pre-payment for is around 10%, but isn't that a lower than normal average pre-payment level? Isn't it typically more 15% or maybe 20% that's pre-payments when you get orders? Pertti Korhonen: No, I think it can vary from zero to 20-25% dependent on the case. For business in Iran, this is normal, and what we also do is that we pay a lot of care and attention to making sure that we manage the cash flow of the project in such kind of a manner that we are always covering our risks and commitments from the cash flow perspective. So that s how we do. Johan Eliason: Okay and then a separate question. I listened to you here I might have missed the first minute or so of your remarks initially, but I understand the minerals processing you say is slow and moving sideways demand, while metals, energy and water there are pockets of improvement and you have a decent sales funnel there. Can you say anything about sort of what type of minerals you are seeing some pockets in? Is it zinc, aluminium or copper, or any indications on where activity is in that perspective? Pertti Korhonen: Okay. It s an excellent question. So base metals generally are the stronger area but we also have cases, good cases maybe surprisingly of in the iron ore value chain. So there are Page 6 Ref June 2015

7 certain countries where actually there is activity also in the iron ore. We all know that countries like Brazil or Australia, they are pretty much dead what comes to level of new investments, but then there are countries where there are activities, and investments are and will be going on for the domestic reasons, so for, to serve the growing domestic consumption and then also to capture the value within the country. Johan Eliason: And how about precious metals? Is that something you are exposed to? Pertti Korhonen: Yes, we are exposed to precious metals also and we are having cases also in precious metals, that s true. And then sulphuric acid plants, off-gas treatments, that is a market segment which is quite active because the producers need to upgrade the environmental performance of their plants. So that's not driven by the end product demand but actually that s driven by strengthening environmental regulations. Johan Eliason: Yes, and of shale gas and that sort of thing, you have a little bit exposure I understand. Any activities there? Pertti Korhonen: We re actually not participating in shale gas directly, yes we sell a little bit of equipment in that area for water treatment and so on. But our activity in shale has been in the oil shale, so for people who have been following us know that we have built the first new generation modern plant together with Eesti Energy in Estonia and that plant, that technology has now been proven and the plant has already reached quite good levels of production, and also Eesti Energy has publicly said that they are contemplating making a decision for further investments next year. So that s our involvement in the oil shale area. Johan Eliason: But there's no other customer basically in the oil shale than Eesti? You are not managing to sell technologies like this to other nearby countries for example? Pertti Korhonen: There are also other countries and also other customers existing in that area but Eesti Estonia is furthest developed in this matter and their energy infrastructure or their whole energy paradigm is very much relying on their rich oil shale resources, and they have decided Page 7 Ref June 2015

8 that the nation to modernize the utilisation of those assets. So that s where we see the most imminent market. Johan Eliason: Okay, thank you very much. Pertti Korhonen: Thank you. Operator: We will now take our next question. Guillermo Peigneux from UBS, your line is open. Please go ahead. Guillermo Peigneux: Hi, good afternoon, it s Guillermo Peigneux from UBS and I wanted to ask two questions actually. Regarding the margin mix, when it comes to minerals and metals, how should we think about your margins going forward if metals is stronger than the minerals part? And I will ask the second one in the second part. Thank you. Pertti Korhonen: Yes, thank you and so as you remember, we had a big issue with our margins in metals, energy and water last year so actually the whole business area ended up to negative figures for the full year last year, and of course our priority has been to improve the margin structure there, both the structure of new orders but then also our execution from the backlog because we had execution issues last year, and of course this year the goal is that we are able to improve the profitability of metals, energy and water continuing the turnaround that already started to be visible in the second half of last year. In minerals processing, of course what is challenging the markets margins in the minerals processing side is that how will the capex market develop. We expect that there we can continue to do good services business in the minerals processing side, but what comes to the capex side there of course, we have been scaling our costs in line with the lower level of activity and all this in order to ensure that we can continue to make some decent margins on the minerals processing side, but certainly at this point of time it would be difficult to improve the margins in minerals processing until we get some more growth there. Page 8 Ref June 2015

9 Guillermo Peigneux: Outotec CEO s Q&A Teleconference Yes, thank you and the second question is regarding the minerals processing division. I guess I just want to reconcile your outlook and your comments on the funnel with what the mining companies have been talking about, which if one actually takes, you know, the 5-10 biggest companies, it seems to be pretty consistent that they all see their capex going down until Some of them actually say that the mining capex will go down even in The second takeaway you get is that they seem to be thinking that because there's not much growth capex any more, it's sustainability capex that is going to be the main addressable item. And then the third comment they consistently display is the fact that they're going to try to look for deflationary capex, i.e. trying to get price cuts from the supply chain. So I'm trying to reconcile your business funnel or your sales funnel with these three comments because you know, I want to understand at what point your business starts to improve given the outlook, so to say. Thank you. Pertti Korhonen: Yes, thank you very much. First comment is that if you look at the kind of, the top five guys in that area and the top ten guys in that industry, they tend to be more weighted to iron ore and coal, and also the biggest amount of capex is in those commodities. So of course that means that when the outlook in those commodities is weak or there is so much extra capacity now in the marketplace, it of course takes down the overall industry capex figures and I think that was what you just summarised this very, very logically. So from Outotec s perspective, what is important to note is that in iron ore/steel value chain, there traditionally we have been it has been roughly 10-15% of our business portfolio. So we are less exposed to those commodities. Having said that, there are also countries and customers which are investing even in iron ore value chain, and we have been able to announce also some orders there. So from our perspective, the most relevant areas are base metals and then environmental investments and such kind of niches where the technology intensity is high, and these are also driven by not so much necessarily by the growth of commodity demand but for example by the increasing strictness of environmental regulations. And these are actually the micro-segments or pockets to which I am referring to where we actually see good level of activity and even growth in the capex expenditure. But if we look at the overall markets, I think that the conclusion that you are suggesting is very valid, especially in the iron ore and coal, but if we look at it from Outotec s perspective and look at what are those niches where we are playing, there the situation looks actually much better than what you outlined. Page 9 Ref June 2015

10 Guillermo Peigneux: Thank you. Pertti Korhonen: And then to the supply chain savings and the maintenance capex, etc. so there are many commodities where at the moment, the level of investment is below the maintenance capex levels, which basically means that capacity is disappearing from the market. I was some weeks ago in the Copper Conference in Chile where the outcome was that perhaps today, out of the roughly 22 million of global capacity for copper, there might be 100,000 tons of overcapacity, which is basically pretty negligible. So I expect that in certain commodities, the investments would start to vitalise revitalise, otherwise the demand/supply gap will start to develop, and we are seeing that those companies who are playing in those markets, they have actually started to take their investments off. But I want to repeat that this is really by commodity, by customer, by geographical market where we are seeing this phenomenon. Guillermo Peigneux: Thank you. And last question. How do you understand the outlook for copper? And I think maybe this is a really simplistic question but you know, one sees the copper price which is, okay, holding up better than most commodities but one only hears positive comments about the balance of the market, despite you know, recent information, and yet the price actually goes down. This is despite actually demand being to be in relative terms, the demand being better than for other commodities. So is this kind of the normal kind of price behaviour you will get at this point in the cycle, or is there something else? Pertti Korhonen: I ve been wondering the same phenomenon and the only explanation that I have been able to find is that it is really reflecting the overall volatility and the overall uncertainty of the development of the global economy and especially the development of the China economy and then also let s say the anticipation or nervousness of will US increase their interest rates and what will happen to emerging market economies as a result of that. So I would take this overall volatility of commodity prices in this context rather than that they would reflect the true demand/supply outlook for the next two to four years. Guillermo Peigneux: Yes, agreed. Thank you very much. Page 10 Ref June 2015

11 Pertti Korhonen: Thank you. Outotec CEO s Q&A Teleconference Operator: As a reminder, to ask a question, please press *1 on your telephone keypad. We will now take a further question from Manu Rimpela from Nordea Bank. Your line is open, please go ahead. Manu Rimpelä: Thank you, just a quick follow-up from my side. Can you remind us, do you expect any meaningful currency losses in the second quarter, as there was a pretty big one in Q1? Any comments on that? Mikko Puolakka: Yes, this is Mikko Puolakka. So basically during quarter two, we have not seen necessarily as big movement in euro/us dollar and euro versus other of our main currencies. So, so far at least, the currency losses have not been in that magnitude compared to quarter one. Of course we do the last revaluation at the end of this month, so if euro takes a really deep dive then of course this kind of quarter one numbers cannot be out-ruled at least so far. So far, the volatility has not been so big. Manu Rimpela: Okay, thank you. Operator: There are no further questions in the queue. Rita Uotila: Okay, thank you. Maybe just one last question from previous ones was related to the savings programme and how that is advancing. At the end of Q1 26 million of savings were achieved, still 19 to go. Pertti Korhonen: Yes, thanks, Rita. So we are progressing on plan what comes to this 45 million cost efficiency programme and the focus really here is to reduce our costs, fixed costs and as you said, there is still work to be done but this is progressing as per plan. Rita Uotila: Okay. There seems to be no further questions from the telephone lines either so thank you, all the participants, and thank you, Pertti for answering the questions, and Mikko. And the Q2 numbers will be published on July 30 th. So we ll see you then, thank you. Page 11 Ref June 2015

12 Pertti Korhonen: Thank you, see you then. Mikko Puolakka: Bye. Operator: That will conclude today s conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect. Page 12 Ref June 2015