Metso Oyj (METSO) Earnings Call Transcript

Good afternoon, good morning, everyone. This is Juha from Metso's Investor Relations, and it's my pleasure to welcome you to this conference call where we review our second quarter '26 results. We'll begin with the presentation given by our CEO, Sami Takaluoma and CFO, Pasi Kyckling. After which we'll be taking your questions. And as a reminder, the length of this call is 60 minutes, and we will be making some forward-looking statements, and that's why we have the disclaimer in the presentation deck. But with these short remarks, let's kick off, and I'll be handing over to Sami. Please go ahead.

Thank you, Juha. Good afternoon, good morning also from my behalf. The key message today is that the second quarter was a strong quarter for Metso orders, sales, profitability all improved year-on-year, and our cash generation also strengthened. The strongest momentum was in Minerals, where customer activity remained healthy across both equipment and aftermarket. First, I will summarize the Q2 performance and the main business drivers. Then I will touch our strategy execution and market outlook. After that, CFO, Pasi Kyckling, will cover the financials, cash flow, balance sheet and the segments. Finally, we will then move to the Q&A. In this presentation, we will also address several topics that have been active in the sector recently, including the mining demand aftermarket trends, aggregate development margins and the cash conversation. Let's start with the Q2 performance. Overall, the quarter confirmed that the customer activity remains healthy and particularly in the Minerals segment. We saw strong order growth, continued aftermarket momentum, higher sales and improved profitability. Importantly, the order growth in Minerals was broad-based and driven by both equipment and aftermarket, not by one single large project. The key figures here summarize the quarter quite well. Orders increased by 18%, corresponding 16% in constant currencies. Sales also increased by 6% and 5% of that organically. Adjusted EBITDA EUR 221 million, and the adjusted EBITDA margin improved to 16.6%. Operating cash flow was EUR 206 million and the rolling 12-month cash flow from operations was EUR 915 million, corresponding a 98% cash conversion rate. The main driver was Minerals, where both equipment and aftermarket orders grew at a double-digit rate. And here on this slide, you can see the longer time frame showing that the orders increase. Now the book and bill was 1.1. The order backlog was also increased by 13%, being now EUR 3.7 billion, which gives us a good visibility for the future revenues. Sales grew by 6%, and aftermarket represented now 57% of the group sales, 54% 1 year ago. Adjusted EBITDA, as said, margin expanded to 16.6% with both segments improving year-on-year. I think the important message is also that the cycle is now translating to more clearly into our numbers. In Q1, the discussion we had was partly about the timing and conversion. And now in the second quarter, we have seen the strong order growth, improved sales and also the higher margin and healthy cash flow. During the quarter, we have continued to execute our [ Go Beyond ] strategy and to invest in capabilities that support our long-term strategic targets. Customers are very important part of our strategy, and the proximity to customers remains at one key factor in the success. We have now expanded our presence in San Juan in Argentina, the country that is developing in the future as one of the main mining countries. And we have also had a grand opening in our expanded service center and a new training center, the largest in Metso in U.S., [ Mesa ] in Arizona. And we also strengthened our presence and footprint close to the customers in Western Canadian service center opening. And in Finland here, we have also made a decision in the second quarter to strengthen further the aggregates technology center in Tampere and the second phase was kicked off during the second quarter. These are not, as such, isolated investments. They do support the same structural teams that we see across the market. Customers, they want availability. They want productivity. They need life cycle support, and they definitely need a fast local service response. We have also strengthened our technology portfolio with launches of the new product. And we have also been focusing for the lithium carbonate process developments. These innovations support our role across the Minerals downstream processing, and they will help our customers to improve their own productivity, resource efficiency and sustainability. And save the date here in the slide is a reminder for all of you that September 10, we will have Metso Summit, where we will talk through a lot of these innovations in a very professional ways, recommendation is strong to book the date to your calendars and join the event. As it comes to outlook, our market outlook is unchanged. We expect the market activity in both minerals and aggregates to remain at the current level as it has been in the second quarter. It is important to note that our outlook is defined, it describes what is expected for the next 6 months, and it's adjusted for seasonality. And with this, I pass the microphone to CFO, Pasi.

Thank you, Sami, and good day, everyone, from my side. I will now go through the financials more in detail. Let's start with orders and revenues. The order bridge shows clearly where the order growth came from. The strongest contribution was from Minerals Equipment, followed by minerals aftermarket. Aggregates order intake was stable. Overall, group orders increased 18% to EUR 1.462 billion. In Minerals, equipment orders increased by 50%, driven specifically by grinding and crushing solutions. North America performed strongly from market area point of view. The increase was driven by a broad flow of small and medium-sized orders up to EUR 20 million across commodities and geographies. Aftermarket orders increased by 13%, reflecting healthy activity across our installed base. In the sales bridge, Minerals aftermarket was the main positive driver of sales growth. The minerals equipment sales were lower year-on-year due to timing of customer projects. Mix improvement in minerals supported profitability as aftermarket share increased by 17% and represented 68% of segment sales. Aggregate sales increased 7%, driven by equipment. Overall, our order backlog increased 13% year-on-year or more than EUR 400 million. Let's then move to our result bridge. Adjusted EBITDA increased from EUR 183 million to EUR 221 million, reflecting adjusted EBITDA margin of 16.6%. The improvement was driven by higher volumes and improved gross margin, partly offset by higher selling, general and administrative expenses and other items. The mix was supportive for the EBITDA development. Gross margin improved by almost 200 basis points to 33.3 and it reflects a combination of volume growth, favorable mix and specifically the increase in minerals aftermarket share and overall solid operational execution. Both Aggregates and Minerals improved adjusted EBITDA margins year-over-year. EPS from continuing operations increased to EUR 0.15. Operating profit was EUR 185 million compared to EUR 178 million a year ago, with operating margin of 13.9%. I'd like to also remind all of us that a year ago, we had a positive launch of EUR 27 million from the revaluation of STM sales in our second quarter results. Let's then move forward and look at our cash flow generation. On a rolling 12-month basis, cash generation continues to be healthy. During the second quarter, cash flow from operations improved to EUR 206 million compared to EUR 147 million a year ago. The main driver for that was higher profitability, while the change in net working capital was slightly positive compared to year ago. On a rolling 12-month basis, the cash flow from operations was EUR 915 million, corresponding to cash conversion rate of 98%. As said earlier, we increased our order backlog year-on-year by EUR 400 million, and the book-to-bill during the second quarter was 1.1%, and that is also reflected in our working capital needs. Let's then move and look at our balance sheet. Our balance sheet continues to be strong. Net to EBITDA at the end of second quarter was 1.3x, and that's below of the ceiling of 1.5x that we have set as a target. Gas and cash equivalents at the end of the quarter were EUR 383 million. And we have EUR 700 million revolving credit facility fully undrawn. During the quarter, we exercised the first option to extend the RCF by 1 year, and it is now maturing in 2031. We also maintain an investment-grade credit profile and have the BAA2 rating from Moody's with positive outlook. Overall, our balance sheet continues to be strong, and it gives us flexibility to execute our strategy. We can continue to invest in our service capability, technology, local presence and selected growth initiatives, while at the same time, maintaining disciplined capital allocation. Let's then look at our segments and start with aggregates. The aggregates orders were EUR 333 million during the quarter, broadly stable year-over-year, corresponding to 1% organic growth in constant currencies. In aggregates, demand remained very strong in North America, while Europe was somewhat softer. In Europe, the Iran war and increased diesel costs specifically impacted negatively the aggregate demand. Equipment orders declined by 1%, while aftermarket orders increased by 6%. From a sales point of view, we reported 8% organic growth in constant currencies. Equipment sales increased 12% and aftermarket sales declined 4%. The aftermarket comparison here is affected by the calculation change we implemented in the beginning of the year. And under that certain products were reclassified from aftermarket to equipment. The impact in second quarter was EUR 8 million in orders and EUR 9 million in sales. Profitability in aggregates improved clearly. Adjusted EBITDA increased by EUR 11 million to EUR 56 million, and the margin improved more than 200 basis points to 16.3%, supported by higher volumes, strong execution and overall cost discipline. Let's then look at our Minerals segment, and Minerals delivered a strong quarter. Orders increased to EUR 1.129 billion, corresponding 21% organic growth. Equipment orders increased by 50%, driven particularly by crossing and grinding solutions and aftermarket orders increased 13%, and this reflects healthy activity across the installed base in spares and wears as well as in upgrades and modernizations. Book-to-bill was 1.14, and the backlog increased year-over-year 13% to more than EUR 3.1 billion. Sales increased to EUR 992 million, representing 4% organic growth. The sales growth was aftermarket led with aftermarket sales increasing 14% and representing 68% of Minerals segment sales. Adjusted EBITDA also increased and came in with EUR 182 million, representing 18.3% margin. Here also more -- close to 200 basis points improvement year-over-year. Higher volumes improved mix and strong execution overall, supported the profitability. With that, I'd like to hand back to you, Sami, for a summary.

Thank you, Pasi. So to summarize, strong minerals demand drove the orders growth in the second quarter. Healthy pipeline in minerals also continues. We delivered margin improvement in both of our segments and remained strong in the cash conversation at and we have continued to invest for our future growth. So to summarize all that, I think the second quarter demonstrates that the positive market drivers in the minerals, especially, are now translating into stronger orders and higher aftermarket business, resulting in improved margins and also healthier cash generation for meds. And with that, back to you, Juha.

[Operator Instructions]. The next question comes from Edward Hussey from UBS.

A couple for me. So the first one is you talked about the new service center in Argentina and an expansion of the service center in Arizona. Obviously, there are some big copper projects expected to FID in these 2 regions fairly soon. So should we see these investments in service centers as a potential lead indicator that you might be winning some of these orders?

Thank you and excellent question and excellent logic. Obviously, we wouldn't be doing investments in this scale if we wouldn't be knowing that there's going to be a good usage of those resources and facilities in the future. So this is in line of our expectation of the future orders when it comes to the new projects.

Okay. That's very helpful. And then maybe just one other. So obviously, very strong underlying growth rate in equipment orders. Do you sort of have a number that we should think about as the sort of underlying run rate of equipment orders going forward? I mean, for example, should we now think the EUR 400 million, excluding any large orders, is the sort of number we should pencil into our models going forward?

Yes. Thanks for that. And I mean if we first look at second quarter a little bit more in detail. So indeed, we had very strong sort of what we call the base business. So orders in value below EUR 5 million. And we had also very strong in the sort of a basket from EUR 5 million to EUR 15 million. And if I look at '25 and first quarter this year, this was the strongest quarter in these baskets. I wouldn't directly draw the conclusion that we continue quarter after quarter at this level. Even in the smaller ones, it will be somewhat lumpy. However, what we take internally from this is that -- the underlying demand is there. Like I said, it's broad-based. We also, this time, highlighted our stronghold. I mean, crossing and grinding. Many of these orders came from that -- but again, just penciling the same going forward, wouldn't be the right logic market activities there, et cetera, but we expect to see some volatility also in the smaller orders going forward.

The next question comes from Christian Hinderaker from Goldman Sachs.

I want to start on crushing and grinding orders in Minerals OE. When we think about those as base orders or small or midsize is that replacement? Is that expansion? It's obviously brownfield? And then when we think about the scope, i.e. the broader combination circuit and sort of downstream equipment classes, should we read this as being customers upgrading specific pockets of their process? Or are they upgrading the whole setup and that you've just won share, particularly in those product areas and somebody else has been winning elsewhere? That's the first one.

Yes. It's a combination. Of course, they are brownfield majority of them and both replacement and then capacity increasement by debottlenecking, typically flow sheet starts from the crushing and screening. And that's the first place that certain investments start to happen when there is a need to stabilize the production levels to the new levels or making sure that the future production is trouble free. So in that sense, I don't draw that kind of conclusion, as you suggested, that we have been winning this part and somebody else has been winning the rest because those discussions continue with some of them with these same customers.

Okay. Understood. Can I ask then what we should think about in terms of the aggregates business? We had a pre-buy effect that you flagged in the context of the Section 232 tariffs in Q1. You're suggesting that growth in North America was actually coming through in the second quarter still, but the weakness was on Europe, which I presume is the negative. What's happening in the U.S., I guess, in particular, how should we think about that through the back half?

Yes. U.S. has remained a good market. There are also good positive signals in the year for U.S. in the future as well. There is a highway bill moving as we speak, in the house. And that typically has been then creating in the midterm future, also activity in the aggregate side. So some amount of work for U.S.-based customers has been also coming from the data center work. So in that sense, the activity level remains good in the U.S. side. And then the Europe, as you reflected, has okay level, but it was impacted mostly for the increased fuel prices as contractor type of customers in Europe started to struggle with the profitability with the high levels. So that was slowing down the investment decisions than in this quarter.

And then maybe just finally, pumps, did that grow double digit?

Sorry, Christian, say it again. I didn't hear you well.

If we think outside of the demand on crushing and grinding to areas like pumps, did they see double-digit growth as well? Or it was really all from crushing and grinding?

No, it's not absolutely all from crushing and grinding also, for example, pumps where you referred to, we continue to see a good growth, and that continues to be a focus area. So it's not only crushing and grinding, but crushing and grinding was specifically strong compared to some of the earlier periods here. But it's certainly [indiscernible]. It's also other parts of the [ flowsheet ] where the orders came in.

The next question comes from Klas Bergelind from Citi.

My first question is on the sales outlook in Minerals. And this is the second quarter now where we have weaker equipment revenues versus expectations. And if we do the [ dip ] in orders and revenues over 6 months, then we should have [ 300 ] more backlog, but the backlog moved up by less than EUR 100 million since end of December. I'm trying to understand if there are any cancellations versus delivery delays, if this is code or any other project, because I'm not sure how we can be linked to your divestments as your numbers have been restated. And then moving over to the service growth and the deliveries of the modernization orders. To what extent should we see a sales acceleration here from current level? I'm trying to sort of see into the second half a bit weaker equipment versus accelerating service. And sorry, one more on the equipment side. These equipment orders that are small and midsized, can these improve the equipment revenue run rate already into the second half?

Yes. So thanks, Klas. That was 3 good questions. And if I may start from the last one. So I mean there, we see the typical turnaround times, but -- but indeed, some of those we expect will result to revenue already late this year, not so much maybe third quarter, but fourth quarter, some of those orders that we got now will start to generate revenue. And then there is some longer lead items as well where it clearly goes to 2027. Then your question on backlog is excellent, and I heard you also discussed this with Juha earlier, we are looking at that. What I can say you right now is that, I mean, we haven't had any larger cancellations. So that's not the factor obviously, in business orders get canceled. But during first half of this year, we haven't had any larger ones there. I mean we have had one customer bankruptcy case where also backlog has been impacted. But there, we talk about a couple of tens of millions. And the delta that you are highlighting is larger than that. This specific case where we have the customer bankruptcy, the order is not received any time recently is closer to the merger than today. So it has been in the backlog already for a good period of time. And now we cleaned it when the customer went through the bankruptcy process. Then -- and we need to get back to you on this backlog development because there is clearly a discontinuation, the sort of basic logic a relatively big gap. Obviously, part of that is FX, et cetera, but we need to look at that, and we'll come back to you. Then finally, you had a question on upgrades and modernizations. There, I mean, we continue to see a good amount of orders coming in. Those orders are typically in service portfolio or aftermarket portfolio, the ones which take a bit longer to translate to revenue. But if we think from activity and order intake level, they continue sort of a similar healthy level as a couple of previous quarters. And then the orders that we started to receive basically a year ago, that they start to contribute to our revenue now and then even more second half of this year.

Very quick final one on inventories. Inventory days continue to increase happened in the first quarter, now again in the second quarter. Did the margin benefit from any overproduction? And how should we think about the days as we go through into the second half?

No. I mean margins did not benefit from the over production. However, where we benefited from the margin is good capacity utilization. So the absorption that we have from our own operation well managed. And some of our own manufacturing is running flat out, which is, of course, good from the overall cost performance point of view. And then you're right, inventories continue to trend up. And that is very much in line with the backlog that we have and working with future deliveries. And when we zoom into different inventory categories, the work in progress, inventories is the one where we see most of the increase. And then when it comes to IO. Our intention is not to sort of increase the inventory and increase the DIO going forward, but it will fluctuate based on the delivery needs that we have for different customer projects.

The next question comes from Max Yates from Morgan Stanley.

Just my question is around margins in the Minerals division. You've obviously had a kind of a nice step-up year-over-year but against an easy comp. Some of that is obviously mix, which is favorable in the quarter. I guess my fundamental question is, when you look at the margin improvement and kind of around that 18% level, is that a fair reflection of the improvements that you've made in the business, the journey to 20% margins? Or is this really just a sort of very strong mix quarter, and we shouldn't kind of extrapolate that too much? So maybe I'll just stop there. How many of these -- how much of this sort of margin improvement being kind of in that 18% plus range? Is the structural improvements versus just mix?

Yes. First of all, you are right that it's a soft comparison. Of course, we had a weaker quarter a year ago. And then we absolutely one did and needed to show a strong improvement from there. And you remember that we had a couple of extraordinary items there last year, which are obviously not repeating. And one item that has been corrected due to sort of a normal -- more normal level is the mix. And we are not thinking that this mix was extraordinarily good but rather sort of normal. And you may remember that in our strategy, overall objective is to grow aftermarket. Many reasons behind that. And then the other thing that impacted is simply volumes. Volumes help and like we discussed just with Klas, the absorption in this quarter was lower. Our facilities are running full, and that is good for our cost performance. So that's the way how we think about it. And again, more normalization rather than anything else. And when we look forward, the order book is there. We expect that we can run flat out also to return to the coming period, thanks to the order book and that should support margin development also going forward.

Okay. And maybe just a quick follow-up on the Minerals aftermarket piece. So another quarter of 10% order growth. I mean, clearly, for most players in the industry, Sandvik as well, we're seeing kind of outsized aftermarket growth rates versus what we would maybe consider normal, whether that's a kind of high single-digit number. I guess could you maybe just walk us through what you think is happening in the industry that's allowing this? Is it that you're getting a bit more price? Is it the rebuilds or maybe to what extent, is it some of your own initiatives, whether that's kind of penetration, attachment rates or higher value of service per machine? Just trying to trade off how much are we relying on the market? Can that continue versus some of your own initiatives around the aftermarket?

Yes. Thank you. Maybe I can shed some light for that question. So first of all, this one as well, it's a combination, of course. Pricing is one element. And we have been doing good pricing strategy and execution as well. So it has a certain impact. But I would highlight in our aftermarket growth journey and story that it's very much the centerpiece of the strategy that we launched third quarter last year, meaning that we have also done inside Metso, certain changes in the focus areas, we have put investments in and the customer base of course, is also in a good condition, meaning the market is a positive for our customers. They want to invest for the aftermarket. And this is also one element that is creating this growth. In our thinking, we are targeting for those strong single-digit growth. But I don't complain that we have been going a little bit beyond that one now in the last 3 quarters.

The next question comes from Vlad Sergievskii from Barclays.

Yes, a few questions, please. And starting with new equipment orders. How should we think about this very big number of underlying orders this quarter? It is about EUR 400 million, it's twice what has historically been for some time. What triggered this base to actually double it suddenly Q2? Is it like a significant part of your pipeline that quickly converted? And why we shouldn't consider this EUR 400 million is perhaps a new level at least for a few quarters?

Thank you, Vlad. It's reflecting the good strong pipeline that has been there and which we have been working very [indiscernible] with the customers. And we are very happy that this work that we are doing all over the world in the different countries, for these cases is yielding the results. And then especially now in the second quarter, it was very successful to close those deals. As Pasi was already in earlier question outlining, we do see very healthy pipeline also for the future. Capital Equipment business is always having certain elements that -- the decision-making is sometimes very fast for this replacement and sometimes, when everything is clear, it can still take some time. So I think the good way of thinking is that there is good pipeline. Metso is doing good work with the customers and is definitely seen as a quality supplier for these needs. And we continue our work on our site with the customers.

That's great, Sami. I really appreciate the color. Can I follow up on this and just say, if you think about the very [indiscernible] pipeline, something which you think is very realistic comes through quickly. Is the pipeline reduced after this quarter? Or it's still as good as it was when you were entering Q2?

Well, of course, from the pipeline, we have converted to the orders, those ones that you also mentioned, at the same time, every week, every month, there is new opportunities starting to develop in the different stages. So in that sense, pipeline remains very good looking and healthy, good looking for going forward as well, despite that we converted very nice amount from the pipeline to the orders in the second quarter.