Outotec Oyj (OTC:OUKPF) Q4 2019 Earnings Conference Call February 6, 2020 7:00 AM ET
Markku Teräsvasara – President and Chief Executive Officer
Jari Ålgars – Chief Financial Officer
Rita Uotila – Vice President, Investor Relations
Conference Call Participants
Magnus Kruber – UBS
Hello, everyone, and welcome to Outotec’s Financial Statement Review. Throughout this call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session.
Today, I am pleased to present CEO, Markku Teräsvasara; and CFO, Jari Ålgars. Please go ahead.
Thank you, and good afternoon all. Let’s start our results review. And this year, as we have even written in the title, 2019 was a year of many notable achievements. There was events like agreeing on a merger, combining our company with Metso Minerals. We had tied up some divestments decided at the end of the year. But we also had a lot of improvements in our business performance. And from that list, we can definitely say that from order intake point of view that it was a good year.
Our service continued to develop. We said in 2017 that our plan is to grow our service business by 10% per annum in average, and 2019, we followed that plan and actually have been following that all the way from 2016. Service growth in last year was 60%. Our project performance has continued to improve in a good way. We also had people engagement increasing, customer satisfaction increasing, and one topic I’m very happy about and I’m proud of is that our safety record was the best ever in the company history.
So there were many, many dimensions that went ahead and improved. And of course, also related to that, the financial performance in terms of adjusted EBIT made a good leap forward. Main explanation for the financial service improvement was, of course, our must-win battles program that is contributing well to improve profitability. And if you lift three things towards the end of the year, I already mentioned project performance improving, we had service that continued to improve, and then in quarter four, and that is that – this last topic is maybe a bit of a lumpy, we had the – a closing of few projects, which contributed to the quarter four MEW result in a good way. But all in all, good improvement in many different areas.
Just to remind you about the fact that the figures we present here for 2019 and 2018 and quarters prior to quarter four 2019 have been restated due to this business divestment in Metals, Energy & Water segment. At the same time, just for the sake of clarity, we also decided to rename this segment to Metals Refining only. When it comes to figures 2017 or earlier, they have not been changed. So a little bit about the business development, the market was still very much around brownfield investments, and they continued on 2018 level.
We saw some larger greenfield investments moving ahead. And I think you all remember these good orders that we received from Russia and from Saudi Arabia in copper, and both contributing nicely to order intake, particularly on MP side, but also on the hydrometallurgical technologies, which actually enjoyed similar growth as the whole MP area.
We also saw activity improving towards the end of the year in smelting technologies, while as iron ore and pelletizing and sulfuric acid plants, there was projects but of course, in that area, we could do more. However, this gives a good starting point for the company for this year. Our order backlog went up by 29%. So I think you all remember discussions we had ahead of 2019, where the order intake in the second half of 2018 was on the low side.
Now we start the year in a completely different situation, thanks to these orders that we received. When it comes to quarter four, order intake, specifically, not so many announced orders, not – also not so much significance in value. All-in-all, good development, both on CapEx and service, both area – in both areas, order intake grew in quarter four. When it comes to different businesses, we see – and thanks to these greenfield orders, we actually saw all-time high order intake in Minerals Processing segment and very rapid growth of – strong growth of 46%.
Service continued to grow in both segments actually, and also in MEW side, as I mentioned earlier, the hydrometallurgical technology was enjoying similar growth to MP, maybe even somewhat faster. When it comes to Metals Refining portfolio, that is a lumpy business. And large orders, larger investments do not come every quarter. We have had some lower activity in some of the segments I mentioned previously.
However, in MEW portfolio, we have orders – let’s say, projects in the pipeline, but as always, exactly when the decisions will be made is not easy to foresee. When it comes to services, as said, we are on track with our 10% growth target, all the way from 2016, and we expect service to continue to grow even going forward.
When it comes to sales distribution, no dramatic changes. This shows the sales by region – the regions, where there was some shift in geographies. EMEA getting – Europe, Middle East and Africa, getting somewhat smaller; Americas and Asia Pacific, increasing. But if you turn that the other way and start looking at the order intake during the year, it – the development is exactly the opposite.
When it comes to metals exposure, coal and copper continued to be very strong part of our business, basically, no change. Where we saw growth in 2019 was in nickel, in ferroalloys and in zinc, while iron ore declined somewhat. Battery metals continue to be an important part of our portfolio, or look, at around 12% of the sales was coming from battery metals.
Maybe just to mention a few things. Our product development continued active – addressing that the customer challenges that our customers face, but also seeing where the company – Outotec had growth opportunities. This example shows very much development in water recycling and tailings area. Many of our customers are focusing on improving their water recycling and also taking better care of the tailings, and that is reflected in our product development as well as maybe lifting up this polymer bearings on grinding mills which is definitely improving the total cost of operation for our customers.
As you all learned in December, we were rearranging our portfolio in MEW side, that has been something that we actually – again, it goes back to our strategy that we communicated 2017, where we said that we will look each business segments separately. And the expectation, of course, are that they are all profitable. However, when you look at the divestment logic, standalone profitability and profit generation is one thing, but also what we looked at, clearly, is whether there are synergies with our main business, main portfolio, what kind of position we have in value chain in those particular businesses, and maybe also one important topic, what service intensity we have, meaning opportunities for recurring revenues.
So these divestments that we decided, aluminum, waste-to-energy and sludge, they have good product portfolio, good technologies, good competence but maybe a common nominator for them are that they are niche and not having so much synergy with rest of our businesses.
When it comes to project – ilmenite smelter project in Saudi Arabia, we are, at the moment, progressing with the project, rebuilding the furnace. The market for ilmenite slag is still very much supporting this investment. There is a need for ilmenite slag on the market. And we remain confident that our EUR 110 million provision that we booked in 2018 is sufficient.
So now with these words, I hand over to Jari on the financials.
Yes. Thank you, Markku, and good afternoon from me, too. I will take you through the numbers. So if you look at the order intake, we can clearly see that we’ve moved up the cycle. We were able to increase the order intake from the previous EUR 1.2 billion level to EUR 1.5 billion level and this clearly came through that the big orders, greenfield orders started to move, and we were able to land a couple of significant orders here.
As Markku also pointed out, none of this happened to hit Q4, but for the year, overall, we are quite happy with the EUR 1.5 billion number we were able to achieve, which meant that we had a growth of 29% for the whole year. Still these big orders have not brought a lot of revenue. So if we look at the sales, it only grew by 1%. So it was more or less flat, what we have indicated in December.
What’s good is that we saw a strong growth in service sales, 60%, up from EUR 472 million to EUR 550 million for quarter – the year, and this obviously means that we – the share of services increased from 39% to 45%. This, but also the fact that we have improved our project execution, and we also were able to finalize successfully a couple of larger orders, meant that our margin improved from – gross margin improved from 70% the year before, which obviously was affected by the ilmenite smelter provision to 30% this year.
And this means that the adjusted EBIT on a continuous business basis is EUR 122 million and 10%, while it, the year before, was minus EUR 32 million and minus 3%. We also had some cost on the – restructuring and acquisition-related cost, roughly EUR 30 million cost out of the merger with – expected merger with Metso, which affected our results for the period.
If we go into MP, it was, as Markku pointed out, all-time high order intake, which is great. Well knowing that we don’t have a super cycle, we still were able to have a super cycle. So – and the growth was the whopping 46%, up from EUR 790 million to EUR 1.49 billion. Here also, we can see that the sales impact was not that dramatic, yet we will see it in this year.
The change was from EUR 758 million to EUR 799 million. And if you look at the service sales growth, you can see that it virtually all came from service sales growth, which was continuing quite well. The adjusted EBIT came down a bit compared to the previous year, but this was due to that we were taking EUR 6 million of onetime costs – write-downs of some old equipment, and then also the fact that we got the over EUR 1 billion sales also impacted our sales cost, which increased by roughly the same number.
So all-in-all, we are developing in the right direction, and we are quite happy with the result of MP. If we go into Metals Refining, we had a significant improvement from better project execution and provision releases from successful project completion. All of this impacted profitability. But before we go there, we should stop a little bit on the order intake, which was more or less flat. So still, we need more orders in Metals Refining something which we also pointed out last year.
There are orders in the funnel in both segments, quite nice orders, but we have to be able to land them, and especially in the Metals Refining area so that this would also impact the sales of the year. As you could see, sales between 2018 and 2019 was going down by 6%. If you look at the services below that, you can see service sales grew strongly from EUR 128 million to EUR 162 million with 26%, which obviously meant that the CapEx sales came down quite a lot when you look at – that the overall sales came down.
Still, we were able to achieve a very strong result, and this was due to the, as said, project execution, provision releases and then, obviously, the growth in the service sales. So this was a very, very, very good year result-wise for Metals Refining, 11% on the adjusted EBIT level.
Next page, we have the bridge, how we came to this result. The adjusted EBIT, obviously, before the restatements were EUR 64 million. With the MEW divestments, it improved EUR 50 million, 2018 result, ending up at EUR 78 million as restated result. Volume was more or less flat, only impact was EUR 3 million. Again, then margin and sales mix, excluding the EUR 110 million provision for the ilmenite smelter, improved by EUR 54 million. And fixed cost and other where EUR 30 million higher, which came from the sales cost and also some variable pay due to the high order intake we had, and the adjusted EBIT ending up at EUR 122 million.
If you look at cash flow, it was solid due to positive development in both trade receivables and payables and slightly improving from the year before. And our cash liquidity situation here at the bottom of the page, EUR 267 million compared to EUR 233 million a year earlier is quite solid. And maybe to the cash flow still when we look at this year, I would like to state that we now got the two orders, Udokan and Ma’aden, and now we come into a phase where we have gotten the progress payment to a large degree in 2019. Now we will start to build equipment to be shipped, which will happen first half of 2020.
So we are looking at – that there will be some cash outflow, while we are doing this. And then second half of 2020, we will ship this equipment. And then again, we will be able to get the money from shipping. So we will see a U-shaped curve of the cash flow this year just as a note for you to be aware of.
Financial position remained stable. If we take into consideration the IFRS 16, the numbers improved slightly on net interest-bearing debt and gearing, and then equity-to-asset ratio came down, also partly impacted by this IFRS 16, increasing the balance sheet.
On top of that, net working capital developed quite nicely. We got advances received, but we’ve also delivered projects, which meant that the advances received is actually quite fresh money now compared with the previous advances we had in 2018.
If we go to the outlook, I’ll hand over to Markku to take you through the outlook. And obviously, I’m available for questions then later on, on the numbers.
Thank you, Jari. Moving on first some of the events that we had after year-end closing before the reporting. There are quite many things on the list, but maybe to lift up that on a eighth year in a row, we were included in Global 100 list of most sustainable companies in the world. That is something that has started to be a habit for Outotec, and we are very proud of that. And also, Outotec was awarded a gold level recognition for our corporate responsibility practices, third year in a row.
So I think both of these are demonstrating good work that has been done. And I think maybe on this one, even though it doesn’t show on the record – on the file, but there are six technologies where you have standardized way of measuring the carbon dioxide emissions that our customers avoid by using Outotec technology.
And there, we were actually able to – our customers were able to increase the – improve the CO2 emissions, meaning that the reduction from – only from those six technologies was 6.6 million tons of CO2 during 2019. And if you compare that to, for example, the total CO2 emissions from Finland, which is 56 million tons, that is a significant amount of CO2 that our customers avoid by using Outotec technologies. And we believe that more and more that will be a business benefit going forward.
When it comes to outlook, we expect that the market activity in minerals processing and metals refining, currently – current expectation is that it will remain at present level. Of course, you know all macro uncertainties that there are at the moment. But overall, we expect the market to be at present level roughly, and gold and copper and nickel continue to be the most active.
However, the timing of the large investments is difficult to foresee. This year, for 2020, because of the merger or combining Outotec with Metso Minerals, we will not issue a group financial guidance in numbers.
Our Board of Directors proposed that for – proposed to the 2020 Annual General Meeting that the dividend of EUR 0.10 per share will be paid. Then a few words about the combination of Metso Minerals and Outotec. What was viewed in the announcement, we were a little bit more specific with the timing of the combination. Combination – the planning – merger planning or planning of two companies going together is progressing as planned. But what is difficult to foresee exactly the timing – very difficult to foresee exact timing is the regulatory approval processes.
We have received approval from certain countries, and we are progressing well in line with the planning. And therefore, we actually now announced that our current expectation is that the closing will take place at the end of June, but that is, of course, subject to all approvals and competition clearances.
And just to refresh, we see that this combination or merger is highly complementary in many different dimensions. I think we – our strengths are slightly different and in different areas, and by combining our forces, we will definitely build a stronger platform when it comes to innovation and technology, but also when it comes to our presence in different geographical areas and also our application offering.
So we will be a complete full line supplier for many of our customers by combining our product portfolios. And as I said, we have different strengths in the company. What is common and unique that there seems to be a very strong cultural fit. So the way companies operate and our culture seems to be very similar, and that has been a positive finding in the integration process when we have started planning the integration together.
So maybe before we open up the Q&A session, just a quick wrap-up from 2019. There was, as said, many events. So it was really a year of many notable achievements, and of course, not the least, result improvement. When it comes to Q4 results, specifically what Jari already mentioned, on MEW side, good positive development, strong result, little bit helped by the closing of some of the bigger projects at the end of the year, which is, of course, something that doesn’t happen equally every quarter.
But then again, on the other side, we have MP where we actually decided to write-down some inventory – old inventory from the company and take that cost, together with increased sales activities and related costs. But I think that money was well invested when it comes to the order backlog, because now we will enjoy that when the project starts progressing.
So all in all, I think a good year for Outotec. And now it’s time for Q&A.
Thank you, speakers. [Operator Instructions] And the first question is from the line of Magnus Kruber from UBS. Please go ahead. Your line is open.
Hi, Markku. Magnus here from UBS. A couple of questions from me. So first, could you possibly quantify the impact in the Metals, Energy & Water from the project execution or the provision reversal there, first? That would be my first question.
Yes. We are talking about the number that is between EUR 10 million and EUR 20 million.
Perfect, okay. And how does it split between the two? Would you have any that you can offer there?
Sorry, I did not get your question.
Yes. So how does it split down between the execution and the provision releases? Or do you consider into one?
No. This is – this was the provision releases, on top of that came the execution improvements with what – in the current number.
So your comparable to the EUR 10 million to EUR 20 million?
Yes. Slightly above that previous number.
Okay. Perfect. Thank you so much. And then similar on the MP then, the increase in selling and marketing expenses in the quarter, I mean, I think you alluded to the size, but shall we expect that to revert then in 2020?
Could you repeat the question now, so I can answer you in that way?
Yes. Apologies. The selling and marketing expenses, the step-up you saw there in Minerals Processing. Could you quantify that as well? And would you expect that to revert?
As stated, we had, in Metals Processing, EUR 6 million cost of this write-down of equipment on top of that about the same amount coming from the extra sales cost, which then will lead to revenues this year. So this was – these were the two numbers. Yes?
Perfect. Thanks a lot. And then finally, on the services sales, of course, very solid year this year. And could you give us a sense for the sort of the dynamics underlying that? And if they would support the continued growth in 2020? Or is there anything that, we would say, changed between the years?
No. I think what we see is a development in line with what the ambition has been. Of course, the overall demand when it comes to recurring service revenue is related to spare parts and wear parts and service labor. And there, as we improve our operations, we have that going. And that can – you can expect as long as the customers are producing, they need spare parts – may need spare parts or may need services. What is a bit more lumpy in service also is these small service projects and subcon services where the time is not that easy to foresee always. But overall, we see that we have an opportunity to continue to grow in line with our plan, and that is what – which we try to achieve.
Excellent. Thank you so much. Just a final one. How are you seeing the quotation activity progress through Q4? Has it been sort of weaker at the end or better at the end? And what you – have you seen in Q1 so far?
I think when it comes to a number of new opportunities, we have not seen that decreasing. If anything, there was a slight increase in number of new opportunities.
Excellent. Thank you so much.
[Operator Instructions] We have a question from the line of [indiscernible] from Credit Suisse. Please go ahead. Your line is open.
Good afternoon. Thank you for taking my questions. Just the first one on ilmenite smelter. Could you maybe give us a bit more color on the time line? When you expect that project to be finalized and maybe on the progress, which you’re doing there with the first and second furnaces?
What we said is that what happens at the moment is that we are rebuilding the furnace number one, together with the customer. And the ambition currently or the plan currently is to have it start it up during the autumn. That is what we are looking at, at the moment.
Okay. Thank you very much. And in terms of the divestments of those operations in energy and water, which you announced, how advanced are you in that process? And is – what’s the interest from potential buyers there?
Yes. We have seen quite a lot of interest from potential buyers, and we are expecting that some of them can move quite fast, and then for some of them, it can take a little bit longer. We are a little bit taking them in order here. So we are not standing all three simultaneously. But yes, there is interest, and we are still quite confident we will be able to buy them or sell them successfully.
Right. Thank you. And my last question is around your comments on slow decision-making by customers. And at least in metals business, how that decision-making has evolved maybe compared to late – to end of 2019? And do you see any slowness in minerals as well?
No. We don’t see so much slowness in minerals. I think the metals, what we saw last year, and I think, was also discussed in earlier meetings is that the activity in – is increasing, take the smelting as an example, but also in some other areas. What customers have done and maybe a little bit changing the behavior is that they typically release design order first. So before they go into production, they want to prepare all the documentation, and sometimes even complete the design.
And those are mainly engineering work and not the size of projects that we would go out and announce, but that activity and resource utilization has definitely increased. What is, of course, not easy for us to predict is that when the customers are exactly going for the construction investment decision, which then triggers a bigger project opportunities. But of course, that will also happen. It’s about the timing when exactly.
Okay. thank you very much.
And there are currently no further questions registered. So I’ll hand the call back to the speakers. Please go ahead.
All right. Thank you, operator. Thank you for – everyone for participating. And just as a reminder, this call is recorded. Teleconferences will be available later on this afternoon on our website for on-demand use. And from us here, I’d like to say thank you, and have a good evening.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.