Metso CEO Discusses Q3 2010 Results – Earnings Call Transcript

Nov. 1.10 | About: Metso Corporation (MXCYY)

Metso Oyj (OTCQX:MXCYY) Q3 2010 Earnings Call Transcript October 28, 2010 10:00 AM ET

Executives

Johanna Henttonen – VP, IR

Jorma Eloranta – Chairman, President & CEO

Olli Vaartimo – EVP & CFO

Analysts

Erkki Vesola – Swedbank

Tomi Railo – SEB Enskilda

Tom Skogman – Handelsbanken

Jan Kaijala – Nordea Markets

Ben Maslen – Merrill Lynch

Guillermo Peigneux – Morgan Stanley

Fredric Stahl – UBS

Sasu Ristimaki – Carnegie

Antti Suttelin – Danske Market Equities

Timo Pirskanen – Deutsche Bank

Sanna Kaje – FIM

Andre Kukhnin – Credit Suisse

Johanna Henttonen

Good afternoon, ladies and gentlemen, and welcome to Metso Corporation’s news conference and webcast on our third quarter 2010 financial results. My name is Johanna Henttonen; I am heading Metso’s Investor Relations. Today, we will start with the presentation by our CEO and President, Jorma Eloranta, and after that continue with the Q&A session where also our CFO, Olli Vaartimo will be present.

But before we start, I would like to remind you that certain information we will be discussing today is forward-looking, and thus include uncertainties that may cause our actual results to differ from our current expectations. But please, Jorma, the floor is yours.

Jorma Eloranta

Thank you, Johanna, and good afternoon to everybody. This third quarter results and performance was the key things for me. Firstly, quarter-on-quarter, the operational performance has improved during this year. Secondly, I make a point of the services business which has been very strong and growth has been positive, and thirdly good free cash flow. But let’s take a more careful look to the actual numbers.

So, in the third quarter, as we all know, the gradual recovery of the demand continued in most of our customer industries, especially in emerging markets, and I think it is fair to say that our performance was solid during the third quarter and the whole year. Our order intake during this third quarter was healthy, 1.4 billion Euros, and it was a bit lower than the strong second quarter, which included two large pulp mill orders. However, the order intake level is largely in line with our expectations. Our net sales in the third quarter were about 1.3 billion Euros, up by 11% from the comparison period.

We have ramped up our delivery capability to push through 1.6 billion Euros of net sales during the last quarter. When these materialize successfully, we will reach our guided net sales level of 5.5 billion Euros for the full year. EBITA before non-recurring items was 129 million Euros and margin 9.7%, still satisfactory, very slightly below what we called good.

Non-recurring items were 10.5 million Euros negative in the third quarter. These non-recurring items relate more to capacity adjustment measures which we have taken to adjust our cost to demand and to improve our structural competitiveness. So, if we now take a more look to the trends, this picture here illustrates our net sales and profitability development since 2008. Two trends in my opinion are emerging. Firstly, our net sales volume are slowly picking up and secondly under our underlining EBITA margins are on improving trend after being 7.5% in the first quarter, 9.1% in the second and now 9.7% in the third quarter. Our gross profit margin have also improved.

This graph shows also the very strong margins in the third quarter last year, the pickup, then our SG&A were then at the exceptionally low level due to strict savings method, temporary layoffs, and extended holiday period without pay. In the third quarter last year, we also completed some projects successfully which led to release in contingencies and there were also some currencies which impacted to this situation. This year, we have started to invest in growth again and our earnings have been somewhat negatively affected as the SG&As have been up reflecting the increased market activity, which one can see in the order intake.

This is very typical when cycle is turning up in Metso and our kind of companies. Naturally, we at Metso will continue tight cost control and are also aiming for good balance between growth and cost discipline. If we now take a look to the third quarter development by segment, it is in this picture, first, we have here Mining and Construction Technology, MCT where the intake continues to grow and was 643 million Euros. This was actually seventh consecutive growth quarter in order since low point at the end of 2008.

Net sales in the third quarter were 563 million Euros and EBITA margin before non-recurring items for third quarter was very good, 13.3%. The underlying operational profitability during the first nine months has been improving steadily because of higher capacity utilization rates and price levels. Then our EET, Energy and Environmental Technology, order intake that was up by 36% and amounted to 341 million Euros. Net sales were 312 million Euros, down by 11%. EBITA margin before non-recurring items for third quarter was good, 10.2%. During the first nine months, negative volume leverage on profitability was partly offset by clearly improved project execution in large delivery projects and in that regard, I want to especially mention and I am pleased with the performance improvement in our power business.

For our Paper and Fiber Technology, PFT, order intake was during the third quarter, 470 million Euros and net sales were up 24% and were 443 million Euros. EBITA margin before non-recurring items for the third quarter was 7.2%. During the first nine months, the underlying operational profitability has improved clearly as a result of better financial performance in the services business, and strong net sales growth in the paper business.

And then some words about the order intake. In this picture, the third quarter orders were up by 37% on the comparison period. In addition to healthy level of base orders for services and unit equipment, we also won some mid-sized project orders. This quarter did not include any new large orders, but they will come, too.

The market situation varies by geographic area and by business. Global, mining, fiber and automation technology markets continue gradually, gradual recovery. At the same time, in the power market, final decisions on new project take quite a long time, and construction equipment demand in the Western Europe and North America continue. Nevertheless, year-to-date order intake on new orders are up by 49%, and on a rolling 12-month basis, we are at 5.8 billion Euros on orders received. There have been a discussion whether this is V, W or L or U curve, and there is one answer in the slide on the right-hand side, and somehow it looks like V to me.

So, the strong growth in new orders is very much coming from emerging markets where business continues to be strong. In the third quarter, 56% of our new orders came from the emerging markets and the outlook continues pretty good strong. One can see from this picture also that although there are quarterly fluctuations in the share of emerging markets, the underlying trend has improved from about 40% in 2006 to more than 50% now. So, that’s starting to be a very clear trend what we have been discussing in many quarterly reports.

Services business, orders in third quarter were strong at 672 million Euros, 47% up from the comparison period and services accounted for 48% of total orders received. So, one of the highest figures which I can recall within Metso. One can see also from the picture that the order received level start to be the same as it was in the good period 2008. Steady growth in services, orders are also now visible in the services net sales growth, too, and also I can comment that the profitability of the services business is on an improving trend.

Order backlog at end of September, our order backlog was about 4.1 billion Euros. This is about 700 million Euros stronger than at the end of 2009. About 1.6 billion Euros of the orders in our order backlog are expected to be recognized as net sales this year. Assuming that everything goes as planned, we have more or less everything in the backlog in order to meet this year’s guidance. So, about 920 million Euros of the backlog are services business orders, a higher figure than earlier. The uncertainty is the backlog have remained unchanged at 395 million Euros, the same we reported last time.

If we then move to cash flows and financial position, thanks to our new policies, new controls over the net working capital and healthy profitability, we delivered good free cash flow of 122 million Euros in the third quarter. Cash conversion, that means our free cash flow divided by net profit was 182%, well over our target, 100%. That also shows that we are releasing capital still mainly from our net working capital. Our balance sheet keep getting stronger, at the end of September, our gearing was 21.3% and we had a cash position, cash something of very close to 1 billion Euros.

Moving to short-term outlook, we anticipate that gradual recovery will continue in most of our customer industries. The growing budget deficits in several European countries and the USA, and the uncertainty caused by currency fluctuations may however slow down the recovery of those markets. In emerging markets, as I said earlier, we believe that the outlook continues to be very strong. Globally, the improving capacity utilization rates in our customer industries are supporting our services business. And that means also that most of our customers are expected to gradually regain the confidence to increase the level of investments in new and existing capacity.

Then, moving to guidance, our guidance for this year is intact, as earlier, we estimate that our net sales in 2010 will grow about 10% and our profitability will be satisfactory. We also have today even our estimate of 2011 development and we said that in our explanation the background that our order received for the first nine months of this year exceeded the net sales for the same nine months this year by 15%. And based on this book-to-bill and assuming that the gradual recovery of the global economy will continue, we estimate that in 2011, our net sales will grow about 10 compared to this year, and we also estimate that our EBITA before non-recurring items will improve.

So, ladies and gentlemen, for closing remarks, I must say that after each quarter of this year, I have been encouraged by our improving solid performance and getting more and more confident that Metso is truly today a more competitive company than before 2008 turmoil. I believe that Metso is in a great position to make the most of the market opportunities. To this end, we continue to strengthen our resource base, especially in the strong growth areas like mining and service businesses where we target to fully leverage the improved market activity.

We also committed to deliver growth now and longer term. Our strong balance sheet, good cash position gives us solid base to develop Metso further. We do this both organically including R&D through and also through complementary acquisitions. We are committed to develop our services business global presence as well as our environment business. By doing so, we are building a sustainable future for Metso.

So, ladies and gentlemen, thank you very much for your kind attention.

Johanna Henttonen

Thank you, Jorma, and I think we are now ready to start the Q&A session. We are start from the Helsinki audience and then continue with the conference call participants. And as usually, I would like to ask you to state your own name and company name before the question, and who has the first one.

Question-and-Answer Session

Erkki Vesola – Swedbank

Hi, it’s Erkki Vesola with Swedbank. Your rolling 12-month SG&A is currently at close to 17%. And, during previous pretty good years, '06, '07, it was hovering between 14% and 15%. Where should we actually expect that to settle going forward in 2011, 2012, either in absolute or relative terms?

Jorma Eloranta

I think absolute terms, one need to remember that big impact comes also from the currencies. When we have operations in all over the world, then the currency fluctuation, we have a big impact into absolute terms. Relative terms, I mean, SG&A is related to net sales that don’t have an impact naturally. And we set the target internally that we should keep our SG&A below 18% on sales and at all times. And probably we are now a little bit over and the reason is that we have been activating our sales and efforts and participating to the market activity in order to take more orders and take the benefit from the marketplace. This is a good balance, but going forward, I expect that SG&A with the present structure of Metso should remain below 18% compared to the net sales and orders received level and then gradually when the volumes go up, that should go closer to 15%. That’s the kind of estimate what we have.

Johanna Henttonen

Other questions from Helsinki?

Tomi Railo – SEB Enskilda

Tomi Railo, SEB Enskilda. A couple of questions. Firstly, if you could open up a little bit the currency impact in the third quarter. And then, could you comment, please, the pricing situation, especially in the mining market currently? And maybe, thirdly, if you could give us any indication of the activity level in the fourth quarter in terms of orders? We have now seen quite many paper orders, especially announced. So, if you could give a comment, how does the fourth quarter look like?

Jorma Eloranta

Okay. Olli, take the currency. I will comment on the other ones.

Olli Vaartimo

Yes, the currency impact at the EBITA or operating profit level during the third quarter was little bit less than 10 million Euros and cumulatively from the beginning of the year, it’s somewhat over 30 million and this is just the translation impact.

Jorma Eloranta

Okay. Then the pricing in mining and so forth. There is normal competitive situation in the mining business, but naturally when the demand is getting better, there is room little bit to improve the prices, and hopefully and as it looks at the moment, participants on this side of the table, I mean, our competitors are keeping themselves calm also, that they take the decent prices from their customers as we are doing. What comes to the order intake level, I think it is not fair for me to start to comment how much we can close orders in the fourth quarter, because it depends so much on customer situation, but there is a good, in a normal decent situation, let’s say preparation phase, and very much depends when the customer get the financing on all other details in place and we get the first payment, then it’s our policies, we take it to the order for the backlog. But I don’t anticipate fluctuation to be very big, but order intake in particular is not something one should look at quarter-by-quarter. One should look, let’s say rolling 12 months basis how the trend is looking like. You take too much conclusions, if you take positive conclusions or negative conclusions, you could take all in one quarter. So, that I have said earlier and I speak to that comment, even then when it is positive, and that’s why we wanted to show you also the underlying order intake development.

Tom Skogman – Handelsbanken

This is Tom Skogman from Handelsbanken. Can I have two questions? First of all, how do you see the utilization in the factories? I know that you had very good orders in Q2 in many segments, where you have been having a bit of, slightly lower utilization ratios in many factories, and now we have had two quarters of good order intake. I mean, how is this developing? And the second question, given you said yourself also that, especially in mining, the order intake outlook is very good. Do you feel that it's already too late in this cycle to do some acquisitions to further strengthen your position here? I am not talking about this kind of 20 million Euros acquisition, it’s about bigger acquisitions.

Jorma Eloranta

Utilization rates in factories, it’s not totally even. There are some factories, some units where it is, they are fully booked one could say, then there are some others where they still rule. Factories, I mean, many factories is one aspect equally important in our cost structure is the design engineering phase and how full our engineering capacity is. So, even that reflects still the same situation. So, there are couple of factories where we are facing the positive problem that how we can get everything true. But still we have some smaller units where we have even used temporary layoffs, but they are, I mean, relatively small. More and more of that is getting full.

Acquisitions, when you are a global market leader in certain businesses where we are, so it’s not that easy to make value-enhancing acquisitions in that particular business, but definitely it’s never too late to make an acquisition in any of the businesses. And that’s really, it can be, one need to look to price and estimate how much value we are aiming to. It’s a strategic fit that needs to be always there, but also that the price need to be such that we believe that we can create value to our shareholders. And it’s better walk away from a deal if it's – there's no strategic fit naturally, but even for the price reason, and that is something what we have done. Olli, you would –

Olli Vaartimo

I just wanted to add that, especially with respect to mining equipment segment, so we have stated that we strongly believe on a long-term good outlook, because of the emerging market which will be needing more and more various types of minerals. So, from that point of view, what Jorma just was saying that, I think, with that thinking basis, so this is as good time to make mining acquisitions as the situation was six months ago, or will be six months from now. So, we believe in long-term good outlook for mining.

Jan Kaijala – Nordea Markets

Jan Kaijala, Nordea Markets. I would just like to ask specifically about the fiber business. And how would you describe or elaborate on the number of potential pulp projects of the sort of major size that it would be coming to a decision within this year or next six months or next nine months or something like that? How many projects there would be of the decent or of good size now that might fall to you or the competition? And my second question relating to that is that mid-August or somewhere around there, we saw this period of uncertainty and the fears of the double dip, which has since pretty much faded away. Was that visible in any of your businesses at the time in any way, or did it affect any of your business-making within the quarter?

Jorma Eloranta

Well, the supply base was a little bit delicate to comment, firstly because it is our customer who are making the decision and they don’t like too much if we are starting to comment too much, but what I can guarantee that each and every project that exists there, we are there also and as one potential bidder, and they are too. So, we are there, then it depends on how much we want to take. If we look at the history now, this year, there have been two projects which have been rewarded and we have taken them both. Whether they are sizeable or not, but anyhow triple-digit number, or millions. So, there will be several projects, and there are several projects, which are under preparation at the moment. Let’s say several means more than two. And how many will be closed, how many deals will be closed depends very much on the customer situation and market situation and their decision-making, not only in Latin America.

I am sorry, answer to the third quarter and so, if I first take this recession, when it had hit, we had a Plan B, and the Plan B meant that in the booming period, we were not able to reorganize or restructure ourselves because all the facilities were full. If I may utilize the good downturn by closing roughly 20 units and by doing that, we didn’t take equally from each place, but we made our structure different, and we believe more competitive. And those actions have been now implemented from the fourth quarter or even third quarter of 2008. And they have caused some one-offs non-recurring expenses that you have seen. But by doing those, we have been able to improve already our competitiveness and performance, but double dip or something like that, that we haven’t seen to be that would affect the fourth quarter. But yes, there are some uncertainties and the biggest uncertainty I see is that European governments’ indebtedness. The countries have increasing debt, and they would be much more difficult to start any kind of stimulus activity in case they would come something. That’s why we have kept ourselves in a very strong financial position. We don’t see that there would be double dip or even W or so, but in case we are ready to meet even that kind of situation.

Jan Kaijala – Nordea Markets

Still two questions if I may, your rolling 12 months gross margin is around 25%, while your capacity utilization is too far from optimum. Should we expect you to reach that historical peak levels of say 27% considering which you already know about your future product mix and as capacity utilization goes up again?

Jorma Eloranta

Well, at least what one can say that services share has increasing and services gross margin is better than solution business or project business gross margin, materially better. So, that will have a positive effect, but Olli can tell about –

Olli Vaartimo

And then if you take the last quarter now, it was 36.9% already. So, we are already as almost 27% and still basically the activity level during the third quarter was not where it can be over the coming quarters when the volumes will be ramped up.

Jorma Eloranta

I want to remind you, if the solutions volumes are getting higher, then the gross margin is going down. And don’t get panicked or excited on these kinds of changes.

Jan Kaijala – Nordea Markets

Okay. Thanks. And secondly, should we expect any restructuring expenses in Q4?

Olli Vaartimo

We had about 6 million out during the third quarter, and are not expecting restructuring costs during the fourth quarter to exceed that number. It may be roughly at that level.

Johanna Henttonen

Are there further questions here in Helsinki? If not, at this time, I think we are ready to take questions from the conference call participants. I would ask the participants to ask one question at a time, because the phone line quality may be bad or decent. Operator, please, we are ready.

Operator

(Operator instructions) The first question comes from the line of Ben Maslen. Please pronounce your location.

Ben Maslen – Merrill Lynch

Hi everyone, this is Ben Maslen from Merrill Lynch in London. A couple of questions. I will do them one at a time. Firstly, on the balance sheet, as you say, you are in quite a strong position now, the lowest level of gearing you have had for a number of years. What's the level of gearing you are happy running the business at? And if you have surplus cash, what is your preference? Is it to return the cash to shareholders or M&A?

Jorma Eloranta

We have said that the normal gearing would be between 40% and 80%, and now we have a little bit better. So, that doesn’t mean that we are in panic because we have too much money or too good gearing. It doesn’t kill any company. So, what is there in the preference, we have said also that we have earmarked certain amount of money roughly for, bit more than 400 million for repayments for next year, from this cash. We have little bit taken in advance those longer-term debt for the repayments. So, definitely we will meet those applications and so we are in, I believe luxury position that we don’t need to put, for example dividends or acquisitions as alternatives. So, we will not make any acquisition based on the fact that we have a strong balance sheet or we have money.

We only make acquisitions when we believe that we can create value. They are value-enhancing to Metso shareholders and we are more attractive supplier to our customers. But even if we make acquisitions, we need to be able to meet our obligations to our shareholders which is to fulfill our dividend policy, at least 50% to be distributed as dividend or other expatriated in other means to our shareholders of the annual earnings per share.

Ben Maslen – Merrill Lynch

Okay. Thank you. And then, the second question is about your EBITA margin. As you say in the statement, it's trended up sequentially over the last three quarters. What would you expect in Q4, when you are going to have much stronger deliveries? Would you expect the EBITA margin to go higher or go back down? And secondly, your 12% target for the EBITA margin – you are doing 9.7% now. Do you feel you are on track to reach 12%, and what level of volume do you need to get to 12%? Thank you.

Jorma Eloranta

Well, I normally turn to Olli, and I should answer something which I may not answer according to the Finnish rules. Olli?

Olli Vaartimo

You recall that we have not been disclosing our EBITA, expected EBITA margin levels for the coming quarters. Volumes will be high 1.6 billion in order to reach our full-year net sales guidance. So, that should bring some positive volume leverage. On the other hand, like Jorma just said, that will mean more project deliveries which will have somewhat negative mix impact. So, I think one should let’s say be a bit cautious when thinking about the fourth quarter volume, let’s say EBITA performance because of the mix changes. But, let’ say, on a rolling 12 months basis, also we definitely expect the financial performance to continue to improve about towards the 12% EBITA margin target that we have set to ourselves, and we have said earlier that we have to be at over 6 billion level up in net sales in order to be at that level. I think we are trending nicely at the moment towards our target. How long time would it take, so that remains to be seen and depends very much on that how the volumes will evolve next year and year after that.

Ben Maslen – Merrill Lynch

Great, thank you.

Operator

The next question comes from the line of Guillermo Peigneux. Please go ahead announcing your name and location.

Guillermo Peigneux – Morgan Stanley

Good afternoon. It’s Guillermo Peigneux from Morgan Stanley. Maybe a couple of questions, I will ask them one by one. First, regarding paper and fiber, are you seeing a chance in the pattern of growth from what we basically saw in 2009 and 2010 with a lot of paper projects into what could be the next growth driver in pulp equipment?

Jorma Eloranta

Well, from our perspective, the main growth driver naturally is our customer’s decision to start new projects. And that depends very much on their expectations on pulp prices and their expectations on competitiveness of the new mills. And what we have seen pulp development and the price level, and also the inventory levels of the pulp. So, it is encouraging for them to make decision for new projects.

Then what is the pulp needed for is a different issue. It is naturally needed for paper and for production. And so, China continues to grow and there is also less recycle paper available. And also, there are some, could I say, legislation of policies towards to use more virgin pulp in for example packaging and those kind of things. So, those have an impact when our customers are evaluating the need for pulp and the future demand picture. And then to their own decision-making.

Guillermo Peigneux – Morgan Stanley

Thank you. A second question, regarding your savings from the restructuring programs, could you remind us of the total target and how much of that target is temporary savings? And how much of those certain price savings have already flowed back into the cost line? Thank you.

Jorma Eloranta

Olli?

Olli Vaartimo

Yes, the total savings targets that we set to ourselves was roughly 400 million Euros – 400 million Euros to 450 million Euros, of which last year about 250 million Euros already materialized. We have said that about half of the targeted savings we expect to be say more permanent by nature and also, let’s say permanent type savings mainly coming from the headcount reductions what we have implemented over the past 24 months, meaning about 15% of our headcount. Of course now gradually when our volumes are increasing, when we get closer to 6 billion Euros level, we have to start to partly rehire people, or we have to start to use more temporary workforce, also, part of that will be gradually starting to come back as well.

But the big part of the savings was also coming from temporary layoffs, very strict SG&A policies, very little travelling, no participation in trade shows, those type of things are behind us now and then market activity is improving of course, they are investing in various type of sales promotion, market promotion issues. And that is visible already today like we discussed earlier in our SG&A costs. But it’s not truly visible yet in our net sales, which materialized with some delay. So, we are expecting that way also the SG&A or net sales to start to come own gradually. That we have made the investment a bit ahead and net sales are now picking up. So, the relative share of SG&A is expected to come down.

Jorma Eloranta

I will just elaborate a little bit further. Those roughly 20 smaller units, which we have closed, they are close forever. And they have a structural impact to our performance. Second issue is that one of the themes of our strategies is global presence. It means in practical terms that when we are now ramping up our capacity, we naturally are looking those areas where we have operations in cost-competitive countries. We have a Metso Park in India; we have just opened a new factory in China, in Shanghai and so forth. So, also that will have an impact to the cost level of Metso.

Guillermo Peigneux – Morgan Stanley

Thank you very much.

Operator

The next question comes from the line of Fredric Stahl. Please go ahead and answer your name and company.

Fredric Stahl – UBS

Yes hi, it’s Fredric Stahl here from UBS. Can I ask you regarding your services? You have obviously been booking significantly higher orders than revenues for the last three quarters. And I suspect that, is it fair to expect that there will be a rather significant step-up in revenues in the coming quarters, or is it maybe, the case that your customers have started putting in orders for services earlier than they have historically? Can you explain the profile here of your revenues and services, especially considering also that, that the service revenues flat line quarter-on-quarter here into Q3 over Q2? Thank you.

Jorma Eloranta

Yes, as I commented in my presentation, I note and make a point that services order backlog was a bit higher than it was earlier, which means that the net sales has not fully materialized. In the second quarter, one could see that our net sales increased and in line with the increased order intake the earlier quarter. That didn’t materialize now, but nor it is what more like a normal that the fluctuation in the services are not that big as they were now. They have been hugely high, the services order than a year ago, which means we are ramping up our capacity in that. I think one, when it is stabilized again, then the order intake and the net sales are pretty much equal or if that market is getting a bit more order intake than net sales when going forward. But in some cases of in services project, services order, the delivery times have come a bit longer.

Fredric Stahl – UBS

And can I ask you just a follow-up on the previous question regarding savings there? Do you, maybe I missed it, I apologize, but did you say how much of your savings program are still to come through and be realized?

Olli Vaartimo

Basically, all positive results of the savings programs are there already. Nothing material, we are not expecting nothing additional material savings rather the other way that some of the savings what we had last year. So, it will not be there anymore now when the market activity is improving.

Fredric Stahl – UBS

Of course, very good. Thank you very much.

Operator

The next question comes from the line of Sasu Ristimaki. Please go ahead announcing your name and company.

Sasu Ristimaki – Carnegie

Yes, it’s Sasu Ristimaki from Carnegie here. I have got three questions rather. I will take them one by one, if that's okay. Firstly, it looks as if the outlook statement for power has changed. I guess you are wanting to highlight a change in the financing circumstances. But can you just put a little bit of color on that?

Jorma Eloranta

The color is that there is a good number of projects, but when there have been longer time needed, longer time to close the projects. Partly this has been financing, but there has been also uncertainties of the local subsidies, and nobody wants to close a project before they know of the subsidy situation that they are not losing something which is coming behind the corner. And that has created some delay. When the politicians want to do something good, they normally can cause something bad. That’s which is not surprise to anybody.

Sasu Ristimaki – Carnegie

Okay, thanks. Then, on the issue of gross margins, on a sequential basis, your Group gross margin is flat. In mining and construction, you are commenting about positive pricing helping margins, which I guess, indicates gross margin there would be developing favorably. Does this lead to a fair interpretation that gross margins in energy and environment and paper and fiber would have some sequential downward pressure?

Jorma Eloranta

No, I think it’s not supposed to be. For example, I commented also to our power business, we have been fairly successful, but probably Olli can elaborate it.

Olli Vaartimo

Yes, basically in our energy and environmental technology, so we have had clearly lower volumes than what we had during the comparison period, I am talking about nine months now basically also applies to the third quarter only. And the volume drop is coming specifically from our automation and recycling business, and they tend to have fairly strong volume leverage impact. So, they have definitely been causing some gross margin deterioration in that business, even so like Jorma said so, power has been improving. But as a whole, I would say that I would more be looking at let’s say now the last two quarters, our gross margin is now clearly trending up at the moment, and especially during the last quarter so when we had 36.9% gross margin, I think it’s a good sign of that, that we are gradually getting back to those levels where we were two or three years back.

Sasu Ristimaki – Carnegie

Okay. Finally, more of a housekeeping question to Olli. When you were talking about the FX impact on EBIT, you said it was only translation issues. Can you just confirm that there is nothing like kind of gains from unrealized FX hedges that would be above the EBIT line?

Olli Vaartimo

We have there actually. So, if you look at our corporate office operating profit for this quarter and compare that with the first quarter of last year, so you see a big difference there. So, this year, we had minus 11 million and last year third quarter, we had plus 5 million. And that big 16 million difference there is of course partly causing the deterioration between our third quarter financial performance this quarter and the comparison quarter. Our of that, this is mainly caused by the fact that this year we have in our Group head office numbers included about 4 million Euros negative foreign exchange losses from foreign exchange hedging contracts with the businesses and last year third quarter, we had plus 8 million Euros, the same impact. So, especially if you compare this quarter and third quarter last year, so you should take into consideration this !2 million Euros impact which is about 1 percentage point as a whole, which is really totally caused by the foreign exchange losses related to the hedging arrangements what we do between the corporate head office and the businesses. And that’s all above the operating profit line.

Sasu Ristimaki – Carnegie

Is that a gross number that's visible in the head office line? Is it something, because the question, is this something that is netted out if we look at just the Group EBIT, or is there actually an impact we should adjust for in the Group number?

Olli Vaartimo

This has an impact on our Group number, Group EBITA – EBIT or EBITA.

Sasu Ristimaki – Carnegie

Very clear. Thank you, very much.

Operator

The next question comes from the line of Antti Suttelin. Please go ahead and answer your name and company.

Antti Suttelin – Danske Market Equities

Thank you. This is Antti Suttelin from Danske Market Equities. I am looking at your energy and environmental business area. I just note that you had an order book at the end of the second quarter, which was clearly ahead of year ago. Still, sales continued to trend down versus year ago. I wonder why sales is not coming through in that business, please?

Jorma Eloranta

I have tried to explain or clarify that there is a good number of projects under discussion, but the customers have not been able to close the deals. Partly it has been financing reasons, I mean their financing issues. Partly, it has been issue of subsidies to some countries, UK, Finland, some others, their subsidy situation has been open or unclear for the customers and they are wanted to wait to see and what will be final outcome. And that has caused the delays in the projects.

Antti Suttelin – Danske Market Equities

Okay. So, would you classify some of the power projects as being uncertain projects, because they are still in your order book?

Jorma Eloranta

No.

Antti Suttelin – Danske Market Equities

They are just moving ahead?

Olli Vaartimo

I think maybe we should clarify your question. I think you asked that our order intake has been stronger in energy and environmental technology. And we don’t see the impact of that yet in net sales, and you were asking why?

Antti Suttelin – Danske Market Equities

Yes, because your order book has been running at levels higher than a year ago, but still, your sales is running at levels lower than a year ago.

Olli Vaartimo

It depends a bit on the mix of the order book. We have in the order book at the moment more power projects, which take longer time to get recognized in net sales. Last year, we had in the order book more automation or recycling orders that are typically pushed through quicker.

Antti Suttelin – Danske Market Equities

Okay. Thank you. And then a second question. I am looking at your order book for the whole group, and I see it's up by 24% now at the end of the third quarter. And I just– doesn't that 10% sales growth guidance which you are giving for next year appear a bit low in this respect?

Jorma Eloranta

Thank you for the comment.

Olli Vaartimo

I think one thing when you are looking at our, let’s say, this year’s net sales, so you should take into consideration that we have been still partly benefiting also from the order books what we had in the beginning of 2009. So, the very low order intake last year actually has a bigger impact on this year’s net sales, and while we have very low order intake last year, so it is deteriorating this year’s net sales and what we have been booking this year. So, they will then have more an impact on next year, but partly also then 2012.

Antti Suttelin – Danske Market Equities

Okay. Thank you very much.

Operator

The next question comes from the line of Timo Pirskanen. Please go ahead and answer your name and company.

Timo Pirskanen – Deutsche Bank

Yes, hi. This is Timo from Deutsche Bank in Helsinki. Actually, all my other questions are already answered. But I have one housekeeping one still left. This is actually more, I suppose, for Olli. So, in the non-recurring items for the first nine months of the year, you do have amortization of intangible assets of 43 million Euros. And out of this, 25 million Euros is basically, I suppose, PPA, i.e., purchase price allocations related to your acquired businesses. But basically, what is the remaining 18 million Euros?

Olli Vaartimo

The remaining 18 million Euros is various type of amortization, what you have related to your other intangible assets. So, of course, let’s say we are amortizing our patents and other IP items for instance what we have under intangible assets.

Timo Pirskanen – Deutsche Bank

So, nothing to worry about, I mean –

Olli Vaartimo

Let’s say we have not had any – if you consider impairments. So, we have not really had any impairments. It’s a normal amortization level what we have in our type of business.

Timo Pirskanen – Deutsche Bank

Okay. That's what I thought. But I just wanted to be sure. Thanks.

Operator

We have a follow-up question from the line of Ben Maslen. Please go ahead.

Ben Maslen – Merrill Lynch

Yes, hi. Two just quick housekeeping questions, if I can. Firstly, on your financial net, or net interest expense came down quite a bit in the quarter. Is there anything one-off in that, and what is the right run rate going forward? And then secondly, Valmet is back in profit during the quarter. Is this a one-off, or do you think it can stay there once the fiscal automotive contract kicks in next year? Thank you.

Olli Vaartimo

We don’t have any, let’s say major one-time items during this quarter. Of course, you always have some foreign exchange losses and gains in the net financial line in these type of currency environment where we are at the moment. The underlining net interest level is about 50 million at the moment.

Ben Maslen – Merrill Lynch

50 million?

Olli Vaartimo

Yes, and then the other question was –

Jorma Eloranta

About the Valmet automotive and how much we love the Chairman of the board.

Olli Vaartimo

It’s really operational improvement that is coming through at the moment. Our capacity utilization rates are now clearly improving while we are getting prepared to start to deliver the bigger volumes of the electric cars, what we have in our program, especially the fiscal Karma [ph] project is coming gradually materialization phase when we are moving to a serial production. When it will happen, so that’s still a bit open, but it will happen gradually. Simultaneously, we have also been able to improve a lot the engineering orders and also engineering orders are contributing currently about 25% of our net sales already. So, that is helping us well.

Ben Maslen – Merrill Lynch

Okay, thank you.

Operator

We appear to have no further question at this time. I will hand the conference back to you.

Johanna Henttonen

Thank you. Are there any more questions here in Helsinki? All right.

Sanna Kaje – FIM

Sanna Kaje, FIM. Still about the foreign exchange hedge contracts. I mean, you said that there were 12 million Euros of foreign exchange that should be – I mean, the Group EBITA should be adjusted for that. But then, in the report, it says that the corresponding exchange losses are included in the operating results of the reporting segments. So is it or how should we understand this?

Olli Vaartimo

Actually, I said that there is 12 million Euros difference between this quarter and last quarter. Let say, corresponding quarter last year. So, this quarter, we had about 4 million Euros negative impact.

Sanna Kaje – FIM

But is that on the Group level or is it –?

Olli Vaartimo

That is what we have at the Group level and last year, so we had about 8 million Euros positive at the Group level. So, when you are comparing these two quarters, so you should take into consideration that 12 million Euros impact. I was more basically explaining that when you are looking at our, let’s say, corporate head office numbers, and when you are comparing third quarter this year and third quarter last year, you should take into consideration there is this type of let’s say 12 million Euros difference between these two quarters. Of course, let’s say, the businesses have that item. If we have 4 million Euros negative here so, businesses have 4 million Euros positive. But then with this transaction what we have booked in the head office, we have actually moved the impact of the exchange losses from the financed net line to the operating profit line, so that it basically meets with the booking what the businesses have done, because these transactions relate basically to that type of foreign exchange hedging contracts where we have not been hedging things out at all.

We have been using natural hedging our neutral position, and that’s why we want to eliminate at the operating profit level, the positive or negative booking that the business has made because there has actually not been any external transaction. But what I was explaining, it’s more basically explaining that, that this is something what you have take into consideration when comparing the third quarter this year and third quarter last year.

Sanna Kaje – FIM

But we shouldn’t adjust the Group EBITA for the 4 million Euros?

Olli Vaartimo

No.

Sanna Kaje – FIM

That's the way I understood it. Thanks.

Jorma Eloranta

And if I may add, that is something which we follow very carefully on various levels including audit committee with the audit person, and we have clear policies how we are doing. It’s not management opinion issue, it’s something which is IFRS is relatively clear and strict, and we follow that and report that carefully also to audio committee and auditors go through [ph] that the bookings are correct to clarify. We are not very clever in that sense. We just follow the rules.

Johanna Henttonen

From Helsinki, questions, and then we also have some on the lines.

Tomi Railo – SEB Enskilda

Tomi Railo, SEB Enskilda. In the 9.7% EBITA margin in the quarter, was there still a drag or negative impact from, in a way, lower-quality order book you started the year, or did we see the impact basically in the first and second quarter?

Jorma Eloranta

I would say so because if you look at the mining and construction where we commented that the problem maybe there so. We already delivered 13.3% underlying EBITA margin. So, I think it is a good indication of that, that the pricing issue is behind us now.

Johanna Henttonen

From Helsinki, no more. All right. We will take one question, I think, there is on the line. Operator, please.

Operator

The question coming from the line of Andre Kukhnin. Please go ahead announcing your name and company.

Andre Kukhnin – Credit Suisse

Good afternoon. It’s Andre from Credit Suisse. Just a quick question from me on your raw materials and components pricing. What are you hearing from your suppliers, and is this something that we should worry about for next year?

Jorma Eloranta

Component, could you please repeat, components pricing?

Andre Kukhnin – Credit Suisse

Yes, Your raw materials and (inaudible) components pricing.

Jorma Eloranta

Each and every project, we make, let’s say hopefully are based on offers on most important elements and in that regard, if the prices go up or down, then that is reflected in our prices. On the other hand, steel and some others, we have normally longer-term contracts where we have been able to in a bigger portion to safeguard our position going forward. And I don’t anticipate at least at the moment that there is such a boom like 2008 when really component prices went up very, very rapidly and in particular, the delivery times became crazy, I mean, extremely long and at least at the moment, I don’t see that kind of boom in front of us. Naturally, mining is an area where we are mostly looking these kind of issues because of the demand picture. On the other hand, mining companies have some understanding and even information to, in case there is raw materials like steel and other metals increases. So, that makes it more reasonable to get also those kind of increases through in our pricing if they materialize.

Andre Kukhnin – Credit Suisse

Okay, thank you very much.

Operator

We appear to have no further questions. Thank you.

Johanna Henttonen

Thank you. I think there are no further questions here in Helsinki either, so I thank you for this webcast. All of the details of the report can be found in our Website, and just to remind that full-year report will be published on February 3rd. Thank you.

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