Metso's (MXTOF) CEO Matti Kähkönen on Q1 2016 Results - Earnings Call Transcript

| About: Metso Corporation (MXTOF)

Metso Oyj (OTC:MXTOF) Q1 2016 Earnings Conference Call April 22, 2016 6:00 AM ET

Executives

Juha Rouhiainen - IR

Matti Kähkönen - CEO

Harri Nikunen - CFO

Analysts

Johan Eliason - Kepler Cheuvreux

Andre Kukhnin - Credit Suisse

Jonathan Hanks - Goldman Sachs

Lars Brorson - Barclays

Andrew Wilson - JPMorgan

Klas Bergelind - Citigroup

Ben Maslen - Morgan Stanley

Tomi Railo - SEB

Matthew Spurr - Royal Bank of Canada

Anders Roslund - Swedbank

Manu Rimpelae - Nordea

Juha Rouhiainen

Good afternoon or good morning ladies and gentlemen. This is Juha Rouhiainen from Metso’s Investor Relations and I want to welcome you all to this conference call, where we are discussing Metso’s first quarter 2016 results. And we will begin with presentation given by our President and CEO, Matti Kähkönen and CFO, Harri Nikunen after which we will take your questions. The presentation we are using can be found on our Web site and in the first slide there is the important disclaimer which discusses the forward looking statements that will be made during the presentation.

With these words, we are ready to kick of this conference call and I’ll be handing to Matti. Please go ahead.

Matti Kähkönen

Okay, thank you Juha and welcome everybody, it’s nice to have you all online. So, as normal, let’s start and have a look at the safety, safely is normally is a key topic and so good development continued and that’s the way we want to get it also done in the coming years and we are now on a level where this LDIF is too many that roughly only one accident per week can happen with roughly 13,000 people globally and still we have some work to be done but it’s important to continue on this development.

Okay. If we briefly go to the first quarter 2016 and from market point of view, market continued to be difficult comparing to the last year if you remember the first two quarters were a bit better and then market was declining by the end of the year and basically the market has continued at the same levels that in the end of last year and from that point of view that changes from last year the Q1, Q2 to the last half of the year and can be seen in the comparison numbers.

Some positive highlights anyhow, so orders exceeded sales, particularly in the minerals, equipment orders and the other one that even though the volumes were very low level to services the profitability maintained on a good level or improved somewhat. So I wanted to say that there is a volume challenge and as you can see that the profitability still one would call satisfactory when taken into consideration the market situation, overall that is more or less it’s a volume challenge.

Then if we look into more detail markets in the first quarter 2016 the mining orders, yes they were down, equipment orders were pretty close to Q1 ’15 and there of course there is always a little bit timing issue that most probably we will book roughly €19 million, bigger mining order in Q2 and that obviously could have been taken place also in the first quarter. It is what we have indicated that there are couple of projects going on and then depending on the time they will be booked in a different quarters, but overall equipment orders as such were quite ok.

Services orders, yes they declined. 19% and obviously they were factors that the Q1 last year it was almost all-time high so comparison quarter this 406 [ph] very high number. Currencies were playing a very big role, almost a 5 percentage points hit on the volume side. As well they were some structural changes what we did last year, divested the Tampere foundry and so forth and the biggest let’s say the decline in orders getting from sort of the ETO and rebuilt type of services demand with some more or less little bit more target connected to the mining CapEx customers CapEx decisions and at least in the beginning of the year the customers have cut some of those down further.

There is anyhow activity and quotation activity in that services category as well and let’s hope that timing point of view some of that will be moving on already in this coming quarters. The aggregates side, I said it was positive, equipment orders increased quite nicely 11% growth India, North America, Australia, services yes they were down, but taking into consideration the Tampere foundry and ForEx or currency impact that was also a small growth. Flow control, as we'll go more in detail, otherwise very much as expected but the North American transportation related business was very weak, weak start for the year and clearly much down from the last year level and the numbers and obviously that has also a fairly big impact to the bottom-line otherwise looking at the oil and gas orders excluding the transportation in U.S. store, that was due to even orders increase, increased in the first quarter the comp orders at the same level as Q1 last year. So, as you see, they were positive and there were some more challenging issues. But overall we’ve made a good progress in somewhere else, in some areas market was really-really tough.

Then we’re looking at the look at the order intake for the market areas you can see the minus 18 almost across the regions Asia Pacific perhaps the most almost flat in that respect and it look like good development in India and also Australia aggregate services and minerals capital in the other growing mining services also in Australia, we’re flat not going down, not going up. But the flow control was some 10% up, so Asia Pacific was that point of the overall about the same level as last year.

North America different story, minerals capital we’re growing quite nicely good quarter for the aggregates, equipment and services and as said that oil and gas related transportation business in the U.S. And South America still Brazil continue to be a difficult market and the minerals equivalent down also in some other markets, but equivalent in Brazil flow control very much flat. Europe one could say that there were some positives, some negatives basically fairly flat development. And if you look at Africa Middle, East mining continues to decline obviously they have been postponing their investments but on the aggregate side in the Middle East saw some comps grow as well. China minerals capital flat, no big sales in aggregated services we’re growing as per the flow control, and mining services somewhat down from the last year.

Then when looking at the highlights of the quarterly results one could say that when taking into consideration the very difficult market situation and low volumes adjusted EBITDA 9.3 percentage points. One good argue it's a fairly satisfactory bearing in mind the total environment where we are operating and some of the net sales didn’t realized particularly the mining equipment order side actually that we expected. Services profitability improved actually both segments and we’ll come back to that a little bit more in detail in the next coming slides.

Global net sales in the equipment businesses that was the main reason for the low volumes and the mining equipment net sales went so down to all time low so that was a loss making business right now and the volumes on the net sales, sales wise were so low. Otherwise the structure of the margin is okay as expected but when you start to have a very low net sales numbers then you cannot cover all the fixed costs. Even though we have been cutting cost a lot and still we are and you will see in the coming quarters that we are taking those actions and even announcing one major action also today in that respect.

So good cost control is there and continues to be there. And we generated strong cash flow and the balance sheet can be considered to be very, very strong. And overall when looking at all the businesses, the product and gross margin remained on a good level. Then little bit more in the services as normally we will cover this a little bit more in detail. Bearing in mind that, yes the first quarter last year, it was very strong that and then there were those regions what I mentioned and net sales remained quite low level also. In the services partly also that customers are postponing certain type of ETOs or rebuilds and not all the net sales didn’t take place and there is some postponements in that respect.

But demonstrating also that the overall competitiveness of that business is in a good shape and even though we gain down somewhat in the volumes, we managed to maintain a good profitability level. And obviously mining side, the mining customers continued their cost cutting and from that point that had an impact particularly in this rebuild type of CapEx driven services and the reasons for the past quarter was on a very low level. There were areas where we were flat as compared to the last year, so that not in all the areas that there was decline. And obviously they had very strong headwind from the currencies.

Aggregates, I said the equipments that that was particular. Delightful and good to see that that is going forward and the market is good. But also on the services side, mentioning those, India, Australia, North America business was growing. Brazil for, as we can understand, Brazil is in a fairly challenging situation, it was still declining and that we saw in our number.

Flow control, both net sales and profitability was holding up reasonably well and that should continue. So, as we said, that the services machine, as we call, all businesses in good shape, volumes are somewhat below last year, but I said to first quarter was a very high quarter as well. And also not only in capital side, we are taking the cost cutting actions also in services and flow to maintain and protect our margins. And working hard on the growth initiatives that even though the market is not very positive, there are opportunity for growth and those are in the management actions are very high.

So this was increase the Q1 and Harri will go through the financial performance more in detail and then I will come back to the outlook and the outlook numbers, outlook overall.

Harri Nikunen

Yes. Good afternoon, ladies and gentlemen. This is Harri. I’ll start with group key figures and maybe repeating one more time what Matti say is that, it’s very much volume game, we seem to be pretty good in dealing with cost margins and also balance sheet. And that is really the background how the result comes out. Then I’ll start with currencies, as you can see from this chart, there are quite significant impact negative on volume side and then bottom-line is flattish, so technically no impact in EBITDA. Then when you compare the segments, flow is flattish whereas minerals fairly hard hit, especially services, because a big chunk of services revenue is coming from raw material countries.

Then the other thing maybe that can be noted from this page is, and Matti mentioned that as well that cash flow more than 10% of net sales is at a good level as expected. And I’ll cover that more in detail. Then I’ll jump to next page, which is graphical presentation and of course it more or less repeats what has been said already that margins, SG&A, ForEx are not really issues, the issue is the volume. On the other hand obviously one day it will turn to be a plus, so we start to be at a very low level and then obviously the day will come when the volume turns up.

And then we have gross margin, gross margin page and I’ll start by comparing first quarter last year, first quarter this year. You can see that we are down 0.9 percentage points, very little adjustments in neither last year nor this year, so 0.9 very much coming from capital side as services and flow were more or less exactly at the same level of last year. Then when you look at the equipment margins basically two sources or lower gross margin. Obviously low volume affect all -- I mean affects mining, aggregate and then mining has at this point some clean up from older unfinished projects.

Savings, Matti touched that, so COGS we took down 1,200 people last year, 65 net so far this year. And you will see still several hundreds to leave the company before the end of the year. In purchasing, targeting similar savings as last year. So all-in-all, a clear picture that will improve two ways, it will improve when the volume starts to turn up and of course, costs will still continue to go down.

A similar story, SG&A, you can see that between last year and this year we lost, in a way, 0.8 percentage points at the EBITDA level and again when you look at the comparison numbers almost 20% down from last year and still the volume pushes the percentage of effective EBITDA margin. Not only headcount has gone down all other elements of SG&A spend, well under control, going down. You may remember that last year first quarter we had a couple of credit cases, credit loss cases mainly from North America, so nothing significant lower number. And then finally looking at the quarters to come, you should expect SG&A to be well under control and still going down. Obviously there will be chance between the quarters but the trend will be down.

So those were general comments related to the profitability. I’m now looking more in detail into minerals. And still one more time that this net sales volume for the quarter is very low, so you have to go back to 2009 something to find as low quarter. And again it's a problem now but on the other hand costs are going down as well and volume increase will give big swing when it comes. Equipment deliveries, yes, negative and when we say deliveries negative, we have to remember that book to bill was positive, so booking more orders, booking more than what we have been, shipping and billing which is good news for the quarters to come. Matti mentioned already that yes services volume was down but profitability up then SG&A you can read 20% down from last year. Of course with the volume going down every euro of it is needed.

More saving actions restructuring actions coming and of course getting the full benefit of what was done last year, and then finally balance sheet items in a good shape inventories receivables nothing specific there. Slow to start with product, gross margins holding up well, SG&A under good control and when you combine those two and you look at EBITDA, so obviously the decline of EBITDA is coming from the volume. And as I said earlier, the biggest single element is transportation business in North America. We started cost reduction restructuring, last year it will continue and we will add some elements at as we speak. And finally the same as for mineral that the balance sheet items net working capital in a good shape and also repeating in flow that flow is by nature high margin faster rotating business, so volume effects positively or negatively and the backlog and first quarter in order take gives a visibility that we will see higher net sales numbers in quarters to come.

Just a couple of things about the balance sheet, you've seen the numbers no big changes from yearend actually in improving. So we had 626 million cash at that point then if you add out 500 million revolvers so close to 1.2 billion in cash available if it would be needed. Next loan, bigger loan repayment is in 2018 and of course all-in all funding is in place. And finally credit rating has been reconfirmed, stable relatively. Recently so still going with triple B which is one of the better ones in our industry, a couple of words about cash, obviously starting with EBITDA net working capital slightly up, I touched that in the next page. And then financial items this time positive, we had tax return from North America which was welcomed. And all-in-all 67 million from operations and of course then when you take the investment and repayments back you have 36 million left.

And then finally couple of comments about networking capital, inventory slightly up from the yearend and that is coming from the fact that we did not ship as much as we were expecting. Which is one of the reasons why net sales is so low so part of that is in the inventory ready to go any time soon, or may have gone already. Trade receivables flexing down from year end which is logical with the low net sales, when you look at receivables aging actually their aging structure is somewhat better now than at the year end. And then the rest of the items are very logical with the volume development. Finally, if you look at the indicators so obvious they don't look too good because you annualize first quarter net sales to get the numbers and obviously that gives not to picture. So that was all from me. Thank you.

Matti Kähkönen

Okay, so let's go the outlook and backlog the first statement authorizing the short term mortgage outlook so you have seen the same text as couple of months ago and there are no changes. So the weak demand continues and our equipment, our system businesses in mining. There are a few larger projects negotiated timing is uncertain as we have been indicating. Now hopefully and most probably one of those can be recognized and booked in the Q2. And the demand for services satisfactory, obviously it is impacted by the minor cost cuttings and also that there are regional differences and also product category differences which are there.

Africa, as many times said that the Africa business is more regional or local businesses, so regional or country difference are fairly big right now, US, India, Europe. So positive development and on the other hand the Brazil, China continue to be weak, but as you saw that Africa orders were quite nicely developing. And then not on a flow control side, oil and gas CapEx related demand is satisfactory. Q1 was quite good from that point of view but overall no big change. And demand from other industries pulp and paper and others remains fairly relatively stable overall and one could say good demand for the replacement and services, so no major changes in the short term outlook.

And then looking at the backlog, overall the backlog is at the same level than in the, a little bit higher than at the end of the year and 1.1 billion out of that is for this year net sales and this backlog compared to the previous years if we go back, back in history this backlog is rotating much faster so there is something which we need to keep in mind also, but as we saw for example in the mining capital size that the customers are also to a certain reluctant to receive the equipments and there are some delays in the net sale processes and that's little bit difficult sometimes to forecast. The healthiness of the backlog I would say, no big difference or change from the beginning or latter part of the last year.

And then finally when going to the outlook, the outlook as such has been remained and it's the same and we did some sort of changes in the restructuring cost because we said that they are, earlier we said that they are expected to be below the 2015 , but we decided to take some new actions and one of those we also closed today which is concerning one of our European operations that we are going to reduce the number of the people and then one, some others somewhere else which cannot be publically discussed but there are of course cutting actions that you will see that the headcount still can go down and will go down and we are taking those actions to protect the margin and also to maintain the competiveness and in particular the most important point is that as Harri was saying that the day's closer every day that when the market is performing better and then it’s good to have a good structures in place to get the return on these actions and things what we have been doing. Okay that was all from my side.

Juha Rouhiainen

Thank you gentlemen and operator now we are ready to take the questions from the conference call participants.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Johan Eliason from Kepler Cheuvreux, please go ahead.

Johan Eliason

Yes, hello, this is Johan Eliason at Kepler Cheuvreux. Just a question on flow control. The margin was pretty weak already in Q4 last year and then you sort of explained that with some investments for new offices in Qatar or Abu Dhabi or elsewhere, and now we see another quarter with fairly weak margin development. Is this the new normal now, around 13% going forward rather than the 16% to 18% we've seen historically?

Matti Kähkönen

Thanks for the good question. What we have been saying earlier that the 2016 will be more difficult than 2015 flow control and those Q4 is than this Q1 if you went under, one would argue that this 13% level is not the new normal this North American transportation related business is also so low level that it impacted couple of those percentage, it is 2 or 3 percentages points that was decline into EBITDA margin and that was the only let's say and the main reason for the decline in the EBITDA and right now that business is fairly low level now remains to be seen that how that develop for the rest of the year, but all the business they are stable and we don’t have those that couple through additional of course what we had in a Q4 for the flow control investments.

Johan Eliason

But unless this total North American transport related business picks up we should expect these margins to remain under pressure, is that the correct interpretation?

Matti Kähkönen

It's a demand so that if that volume is away from their so that last year it was on a level of let's say 60 million overall but very high margins had now coming down clearly in a way that there is the huge drop in the volume side. Otherwise it's okay assess to remaining business but the volume is so low that started to impacted to the overall flow control EBITDA but that's why in a Euro.

Johan Eliason

Okay. Then on mining equipment, I understand you had been hoping for higher revenues but the clients have been pushing out the deliveries. Are you seeing any cancellations or what do you think could happen there?

Matti Kähkönen

Not really to cancellation as no not the cancellation so that that's I can't recall, I was thinking about content not to recall any cancellations, but boarding up the processes are slow and the orders won but not in the backlog, or won and in a backlog. There quite a big amount force we saw proceeding very slowly, and there is no discussion about the canceling, but the process starts slow and customers are not room much in a hurry with their products. Than the question is that will there be a sort of but do puddle type effect in the Indian market than everybody start to get a little bit in a hurry and to get the realized, that remains to be seen. But that’s the situation what is it now.

Johan Eliason

Yes, and I think Harri you touched on the subject of the quality receivables, how is the share of overdue receivables developing, was that improving in this quarter was the total deteriorating?

Harri Nikunen

Yes, this is Harri. So just one comment related to earlier question that yes those relatively new projects in the backlog more slowly, but on the other hand we are getting down payments on those all the time, so don’t really see too big cancellation risk. Than what comes to receivables if I remember first quarter we had 3 million to 4 million credit losses, I think the number is now 1 million or credit losses or increased reserves. And then I don't remember by heart the exact numbers for ageing, but ageing improved so the share of overdue or serious over dues went actually down from yearend.

Johan Eliason

Okay, excellent. And then just, you have a pretty strong balance sheet, you have sort of talked about potential M&A, how should we view this vis-à-vis your commitment to maintaining your dividend going forward?

Matti Kähkönen

Good point and obviously we've said it many and continue on those M&A activities and what we hopefully there is that we can come back to you and say something about the outcome but we have been fairly discipline with the evaluation. So that's the reason there that no announcement. Then coming back to the dividend, I only repeat what we have been saying that we are planning and we want to give Metso as a predictable dividend paying and to obviously all ways every year the decision got to be made but we will somehow do those moves in a way that we could do that also in the future, but obviously every year got to be decided but there is no discussions any extra or any new discussion are out dividend otherwise.

Johan Eliason

Okay, thank you very much.

Operator

We will now take our next question from Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin

Yes, good afternoon, it's Andre from Credit Suisse. I'll go one at a time as well. Firstly just a follow-up on this miners' activity, that sounds like something has really changed in Q1 and there was some serious kind of halting of them executing the projects when they're already in the middle of it. So could you maybe tell us maybe some specifics on why this is happening and what are you seeing from customers in terms of indications for second quarter, third quarter? Is this literally a one quarter phenomenon or this is the beginning of the trend?

Matti Kähkönen

I don’t know is there any big appearance in a way that obviously -- last year we were eating up backlog and the backlog was quite same for the -- that type of for -- let's say for the beginning of this year and it's just happened to be that the when the times have been tough, miners have been looking at their timing with the projects and some of those are quite completed already in a way but to getting the final approvals, the final acceptant testing and that type of things normally they have been going faster through -- now it take some more time.

In a radical move anyway, we were not expecting very high initiatives for the mining equipment but it was even lower than obviously we were expecting. I don’t see any bigger trend as already we have any equipment on that.

Harri Nikunen

Actually two comments, assuming that you mean net sales not orders, so what comes to mining, it is exactly as Matti said and that’s a bit lower than expected due to postponement. Then when you look at the quarters to come the area that actually will start to go up, is aggregates. Aggregates, today is bigger than mining. In first quarter, we took orders, we didn’t ship much, those will start to go out quarters to come.

And then if your question was related to order intake. So it is possible that those few last orders start to actually move, it is possible and that we can book something that we haven't booked due to uncertainty.

Matti Kähkönen

Maybe once in a way, not all to sort of here to be finish up a product but there was an expectation that some of those the new product received last year, that they could have been moving faster for what event, they haven't been move so fast actually expect.

Andre Kukhnin

Got it. Thank you. And just further on this, that comment you made on the inventories ramping up because of stuff effectively sitting there ready to ship or may have been shipped already, inventories were up about 10 million and we were missing about 50 million of sales in minerals. So could you help reconciling this?

Harri Nikunen

The answer is, I cannot, but if they -- this ramping up is probably wrong expression that especially in services side when you sell spares and wares, we do have them into inventory and the obviously if you don’t ship something you expected they will be sitting in the inventory. So the inventory has been built up earlier and it's just didn’t move as it should. It's more an issue on flow side where you have to build up inventories over the months for larger project delivery and then in the last moment, EPC or whoever it's between us or the customer themselves say that lets take the delivery next month, those are the one I refer to.

Andre Kukhnin

Okay, got it. And just on another topic of taking costs out, so you said that you plan to take another 50 million out through purchasing, which is very helpful. And on the more headcount reductions, kind of footprint rationalization, I can see there's overrun of what you did last year still benefiting this year and then it sounds like you're doing more and about to announce more. Can you maybe help us with what we should be thinking about in terms of annual savings year-on-year from the headcount expurchasing for 2016?

Harri Nikunen

Matti referred to something that came out internally. We haven't made any bigger announcement, but all in all if you look at last year decisions, some of them are still cooking so people haven't left and then we have new ones. So if we say that we still expect probably 300, 400 people still leave this year that probably a good number. Then technically it may not be a net number if our services business gets large LCS contracts where we have to hire people. But as a restructuring measurement you should be looking at 300, 400 plus then the full swing of saving from last year and that’s a pretty earlier so we don’t really give detailed numbers, the detailed euro numbers, what the targets are. It can be around some tails that seems to be happening sort of the first quarter 2017.

Matti Kähkönen

Yes, what we said earlier already two years ago that we stopped announcing any cost-cutting programs so that, but we assured that we continue those cost-cutting actions and we have been doing that and you can see that in the numbers and we haven’t slowed down the process. Of course some of the big changes and the big closures have been made but you will see and hear that there are still more to come and some smaller consolidation will be taking place and that number 300 or 400 is a good number.

And then obviously we are looking at also in the flow of services that how to streamline the processes, how to make the work more easy and more simple and then those will have impacted to the cost structure as well or other way around. Let’s hope that we can use those resources for the growth more and more. So there are, but anything else, we haven’t really guided or this close to any specific number.

Andre Kukhnin

Got it. Thank you very much.

Operator

We will now take our next question from Jonathan Hanks from Goldman Sachs. Please go ahead.

Jonathan Hanks

Just wondering if you could comment on how pricing has developed within your minerals service order intake, if there’s really been much move there? I think you commented in the presentation that gross margins were still very high on the sales. Just checking that’s still the case on orders.

Matti Kähkönen

Yes, while we said that these rebuilds and ETOs have been less of those, so there’s not very much to comment on those and normally, there is not any one specific market price for the rebuilds or ETOs. Now on a spares and wears and transactional base type of services, no major changes since latter half of the last year. Of course, there are all the time some discussions going on with the customers and they want to have discounts but when we follow after the price legacies and how the prices are developing against we have sort of a global list price, you cannot draw any conclusions going up or going down. They are, there is a certain volatility from month-to-month but there is no particular trend right now.

Jonathan Hanks

Okay, thank you very much. And then just one follow-up. I’m just wondering, and maybe this is the wrong way to think about it, but I’m just wondering on the rebuild and CapEx type services, are they maybe a little bit more commodity price sensitive, i.e. during the beginning of the year when commodity prices were exceptionally weak you saw demand decline and perhaps given the rally you’ve seen over the last month or two that you maybe expect that to come back a little bit on 2Q or 3Q.

Matti Kähkönen

That’s an interesting way to look at it. So we haven’t seen really that its commodity dependent because it’s normally productivity approach is dependent and that can happen in iron or copper or gold or any other mining processes. So not really seeing any sort of commodity dependent on the rebuilds.

Jonathan Hanks

Okay, thank you very much. Super clear.

Operator

We will now take our next question from Lars Brorson from Barclays. Please go ahead.

Lars Brorson

Thanks very much. Good morning, Matti, good morning, Harri. Sorry. Just a couple of follow-ups and then a question on mining services. In terms of the flow control transportation business in North America, Matti, can you remind us of the size there? I was a little bit surprised to see there to be an incremental in Q1. I think you said you started restructuring the business there already last year. What’s the order delivery times here and, just to be clear, how do you expect that to develop over the course of 2016?

Matti Kähkönen

As we have said earlier, the size of that business last year was roughly sort of €60 million plus/minus and we haven’t disclose any particular margin numbers. But it’s a good high margin comparable to the good services margins in a way and obviously then the drop-through is very effective. And if you say that sort of put that put that into the quarter so the quarters were basically between €59 million and €50 million, €70 million, €80 million last year. And now volume-wise we are clearly, in the first quarter we were clearly below 10 million. Only a couple of millions of that was invoiced net sales and then the forecasting that when going forward. So it’s very difficult that we haven’t done.

So that, but nevertheless seems to be that if moving up and down quite fast so the changes can be fast, but we are not ready to give any forecast for that, for the full year. But the first quarter one could argue and say that it was very, very low number, it had a major impact to the EBITA percentage on a flow control level as well as at the same time the other businesses were holding up quite well.

Lars Brorson

And what’s the lead time did you say in the business?

Matti Kähkönen

Most probably somewhere around 8 to 12 weeks I would guess. It’s quite fast moving business and we have a good inventory for that as well, it's not very long, it's fast moving. It's not within the month and some deliveries can be done even in couple of weeks time, but I would guess somewhere in around 8 weeks plus/minus.

Lars Brorson

Just on aggregate separately, your aggregate OE orders are up some, what is it, 15% organically or so. Can you put some numbers around the OE growth you saw in Europe and North America and also perhaps just remind us how big is India in aggregate specifically and what sort of order growth do you see there?

Matti Kähkönen

Let's see. North America the big growth was actually last year and year before and then this year aggregate capital growth in North America. I don’t see a number here but I guess that it's up to 10% that is North America is currently our biggest market. And then when you go to India so India it's a double-digit growth but compared with North America it's a smaller market. Though tens of millions but no hundreds of millions. And you may remember that the total annual volume of aggregate equipment is at the level of 350-some million North America is the biggest chunk upto100 million and then India might be tens of millions, but not more than that. But obviously growing fast and offering still good size opportunity.

Lars Brorson

Just one final one from me, I mean within your mining services outlook you talk about still a satisfactory outlook for ‘16. I wonder whether you could help us with what that means. Mining services are down some 15% organically in the quarter from a flattish development in Q4. You're saying you don't see any significant changes in activity as far as the mining market is concerned. But surely a satisfactory mining service outlook would need to be predicated on quite a significant sequential improvement from here.

Matti Kähkönen

Yes, as we said in services overall in mining services the main thing was that those rebuilds were missing ETO type of things and obviously yes there were no major LCS in the Q1 and that was the main impact. And then of course in particular the mining services, the currency playing a big role and the sum of those structural changes that we divested some of our for example this number of foundries which was more on the aggregate side but had a small impact to the mining as well.

So from that point of view we see the similar type of activity in the marketplace that with that comment that these rebuilds and those would be we’re expecting to happen in the first quarter they didn’t happen in the first quarter, so a little bit timing issue and of course they are that much bigger decisions that they have to buy the wears of spares as normal business. But then when starting to decide is it the 5 million or 15 million rebuild of course they are looking at that much more carefully than earlier. But the demand and activity itself we don’t see such a big chase of course there were mine closures which were impacting to the businesses as well, but about to say much as in the latter half of the last year.

Lars Brorson

Just to be very clear, I understand the rebuild market is obviously very challenging, but your wear and spare parts business also deteriorated sequentially relative to what you saw in Q4. Is that correct?

Matti Kähkönen

Yes, but there was some decline, yes, and then there was some currencies within that respect. And might be that some areas build up the mine closures continue to be and that was impacting to the wears and spares. Otherwise, I don’t believe that we would have the moving market sales or anything like that.

Operator

We will now take our next question, Andrew Wilson from JPMorgan. Please go ahead. Mr. Wilson your line is open.

Andrew Wilson

Apologies, everyone, I am hoping you can hear me okay now.

Matti Kähkönen

No, it's okay.

Andrew Wilson

Just to follow up on the profitability on the service businesses, I think in the statement you talked about the possibility having improved in both minerals and flow control. I presume that's just a result of the cost actions then if we're talking about pricing being fairly stable? Or is there anything I guess to add to that?

Matti Kähkönen

It's a costing to bit of the mix issues as well, but obviously the prices we all agree that they haven’t been going up. So from that point of view it's a mix issue and cost issue as such.

Andrew Wilson

Just on the mix, can you just elaborate on exactly which bits have been stronger then in terms of helping to support that margin?

Matti Kähkönen

Normally of course that when you look at that, even though that an order intake of course rebuilds but ETOs were missing, but we were in the net sales side you saw those and then the spares are more profitable than wear parts and from that point view they were more sort of higher margin net sales in Q1.

Andrew Wilson

Perfect. And just on the mining side, you talked a little bit about pricing, but can you also talk if you've seen any changes in payment terms in terms of what the customers are looking for, or I guess in contracting terms more generally?

Matti Kähkönen

No there was -- ask me, also there publically also some debate that one of the mining giants were let's say doubling their payment term and they pay to give back, perhaps that extreme example that even take place, but obviously as we are ordering, our suppliers they're asking longer payment. But so far we are quite successfully defending our positions and our payable terms are well stable.

Operator

We will now take our next question from Klas Bergelind from Citigroup. Please go ahead.

Klas Bergelind

My first question is on services in mining as well. I get this business down 13% ex currency. It's obviously quite a lot. But if everything is stable ex the rebuilds and upgrades, which is 15% of sales, it must be the case then that that business has completely collapsed in the quarters and down 80% there. Is that correct?

Harri Nikunen

It hasn't collapse but it has gone down quite a bit specially compare it with first quarter which was, last year first quarter was very good, but it is at low level and when we were discussing this need and looking at what has happened, it clear that the miners they compared with last year they are better organized centrally to watch out anything that goes to CapEx budget which is the case with rebuilds and sometimes larger lifecycle services because they iron away in the same bucket. Not collapsed, but at very low level.

Matti Kähkönen

If you look at that mineral service overall it was a more than 400 million last year and if you had no life that's always €1.6 billion and obviously it's much above for example the last year. Total numbers which were somewhere around if I remember, was the 1.3 billion or 1.4 billion, but it was a very strong quarter last year. And comparison makes it difficult from that point of view that there is a big different but bear in mind that it was a very stronger last year.

Klas Bergelind

Yes, I just mean that 15% of sales because obviously you have five different businesses within services. But my second question is on the margin in services. Now you obviously say it's the case you're improving margins right now but this is obviously I would assume current backlog. When do you expect the weaker service orders to impact margins? Is this normal short cycle lag of one quarter or is this backlog longer where things got weaker? And if you could help us understand the margin on these few orders here that were weaker. I guess this should eventually start to hit the P&L.

Harri Nikunen

When you look at and this is Harri, so looking at mineral services because that's what we're talking about. So out of my head 20%-30% of invoicing for any given month has been -- the order has been taken the same month. So to any let's say one quarter, one-third of the business is very faster updating same month in and out. And the average rotation, backlog rotation is stay roughly three times a year. So we have always a mixture of fresh prices than a little bit older prices and then the oldest one would be related to ESS that is ESS where you have ETOs and the others. So for spaces and wears, we actually see all the timer also the latest price so somehow whatever number or our gross margin numbers it includes also a chuck of very late prices.

Klas Bergelind

Okay. My absolute final question is -- and I will actually put my bullish hat on -- when the iron ore when we look at this is the strongest commodity today, the oil price is also recovering. What are you seeing on quotations right now when you look at the sales funnels? So not exactly what you see on orders but in discussions. Have you seen anything in iron ore which sort of makes you a little bit more positive in the medium term? Because the larger contracts I understand that will land in the second quarter is more copper, they have been pending for quite some time. So are you seeing anything in iron ore Matti?

Matti Kähkönen

It's a good question really and as a bigger project so that practically we don't see -- there is one which have been there for some time in a way, but you cannot draw any conclusion out of that that is the something because of the trend or is something changing. But practically we don't see, and I don't know any such movements so that we could give a sort of a material substance at the pace that the real trends taking place.

Operator

We will now take our next question from Ben Maslen from Morgan Stanley, please go ahead.

Ben Maslen

Yes, thank you. Hi Matti, hi, Harri. Maybe a follow-up on Klas's question in terms of Q1 orders in that it's been unusual compared to the development in the last few years where equipment year on year has been flat with a positive book to bill and services has been down organically quite a lot. As that feeds into revenues is that going to give you a negative margin mix or it's the drag on the gross margins given overall service profits are much higher than equipment at the moment? That's the first question. Thank you.

Matti Kähkönen

Harri may add something also, I don't really a big difficulty with that one because right now the capital volumes in the mining side are so low and obviously as we said it's making losses, so there's certain amount of the under absorption what comes to the project management and engineering and with these projects what we are now having actually we are improving that situation quite a lot so that when we start to get the volumes and whenever it happens depends on the customers, but when the volumes start to go into that capital pipeline internally and obviously we start to get a good sort of a payback on the under absorption variance point of view and most probably this will mitigate that issue what you said about the sort of mix of the capital or service revenue chase.

Ben Maslen

Got it. Thank you. And then if I could just come onto flow where I think you're seeing a weaker development in oil and gas driven businesses compared to paper and slurry pumps. When you look at the -- does that have any impact on margins? Is there a big difference in profitability between the different verticals there?

Matti Kähkönen

There are always some in a way, but as we said that in, if you exclude this North American oil and gas transportation business so actually the rest of the world oil and gas business was increasing in the Quarter 1 so that actually it was developing quite positively and those margins what we have been now receiving recently in this year they are sort of average in a way, they are not good, they are not extremely bad, and overall the oil and gas product business is less than a 100 million business for us so that obviously it’s not such thing in a way but nevertheless that was increasing in the first quarter and doing perhaps better than we expected.

Ben Maslen

And then finally just your end market comment was interesting I thought about the lower oil price has already been impacting the upstream investments but you're seeing projects being put on hold or postponed in downstream. Can you just put a bit more color around what you see in midstream, downstream markets and has -- is there a lower level of tendering or postponements which is yet to come into your oil and gas business, even though it is small, just more a comment on the market? Thank you.

Matti Kähkönen

The big, I guess the big things happened already a year ago so when there was a I can’t remember was it early 2015 or even earlier that they put on hold quite a few project and then they released those last year and last year was sort of up and down that the certain quarters were down certain quarters were up and from that point of view we don’t see that there is a sort of growing trend of any sort of a putting on hold type of things in the project side and the pipeline what are quoting and what we are working still it looks reasonable good, of course there has been better days and we are down from the 2014 level for sure in the volumes, but comparing to the last year in average quarters were different so that the pipeline was quite good for the first quarter it’s not that bad for the second quarter then the rest of the year third and fourth quarter, very difficult to say yet because the situation can change very, very fast.

Operator

[Operator Instructions] We will now take our next question from Tomi Railo from SEB, please go ahead.

Tomi Railo

Thank you. Some of my questions have been talked about but Matti, you said that mining equipment orders were sort of okay for the first quarter. Can you just give the number please?

Harri Nikunen

Well this is Harri, so I'll give the number but I need to say first the orders were not okay. Because the number was around 50 million year mining, so around 50 million below 50 million so not okay. And I think what we've indicated that we hope to when we move into quarter 2 that we can book in at least one larger order and list up that year to date to a better level.

Matti Kähkönen

Well, I guess more fully I talked about the aggregate orders that they were okay, so OE orders was an aggregate where all good.

Operator

We will now take our next question from Matthew Spurr from Royal Bank of Canada. Please go ahead.

Matthew Spurr

I had a question on the backlog rotation and I appreciate you've sort of answered it piecemeal as we went through the Q&A. But the Q4 you said 1.1 billion expected delivery in 2016. Now it's still 1.1 billion but over 9 months instead of 12 so that sounds quite a big speed-up in conversion. Can you just outline what the main driver of that is, whether it's on divisional or whether it's to do with some of the orders you've had versus deliveries that have gone out? Thanks.

Harri Nikunen

Yes this is Harri, so there are two reason, one reason is of course that we didn’t ship during the first quarter as much as we expected. So somehow the whole 2016 estimate will be heavier on year -- on second, third and fourth quarter. And then the shape of the estimate -- full year estimate changes a little bit all the time towards more faster rotation, less slow rotation, product business. So those are the two main reasons.

Matthew Spurr

Okay. And I had one follow-up on the oil and gas transportation business. What area is that particularly that you're seeing the softening in? Is it pipelines, is it rail or are there different drivers for different parts of that?

Matti Kähkönen

Not really I mean, the bigger difference is its starts in a way and I said that it impacted overall and any of those segments no big differences.

Matthew Spurr

Okay. And the final one, you had about a 5% headwind on currency on the top line. In basis points, what was the impact of that on EBITA margin at the Group level if there was any?

Matti Kähkönen

Yes, I think I said that it's about zero.

Matthew Spurr

Okay fair enough. Okay thanks.

Operator

We will now take our next question from Anders Roslund from Swedbank. Please go ahead.

Anders Roslund

Yes, hello. I had a question regarding flow control. The outlook there, you say that demand remains satisfactory for flow control products related to customers' new investments. Is that covering everything else than flow control services? Or is it just a part of the flow control?

Matti Kähkönen

We were saying that oil and gas CapEx related demand is satisfactory. And the other industries are remain quite stable and then the good demand for the replacement, I am sure obviously it's sort of replacement we are referring to sort of day to day type of activity in the other industries.

Anders Roslund

Okay. Thank you.

Operator

We will now take our next question from Andre Kukhnin from Credit Suisse. Please ahead.

Andre Kukhnin

Yes, hi, it's Andre again. Can I just follow up? Firstly on the mining, the rebuild activity, have you actually seen any evidence of that coming back on as we got to the end of the quarter or maybe during April?

Matti Kähkönen

Obviously not going to the April numbers, but yes there is some more activity in that respect and there is some positive development. So let's see how this timing will turn out to be for the rebuild center. At least, as we expected as normal we have seen this happening already earlier in some many, many years and many times in a way that this sort of rebuilds timing might be quite difficult to predict them and because this investments are normally, that type of investments that the customers want to do and they need to do and it's a good payback time for them. And then we have confident in a way that they will come, then it's a timing. But, yes that seems to be a bit more activity right now in that segment.

Andre Kukhnin

Got it, thank you. And just a quick follow-up. On the corporate central line that was somewhat abnormally low in Q1. What should we expect for full year?

Matti Kähkönen

You should expect relatively low amount of that, but without looking any statistic corporate number is normally, I mean the corporate cost is 20 some million net because we send out some invoices. So probably that could be something you can use in your model as you wish.

Andre Kukhnin

It just looks like it was zero in Q1 versus 6 million in the Q1 2015 and I think in 2015 full year you only had 11 million while before it was running at --.

Matti Kähkönen

I would say that full year you could use similar number you saw last year.

Andre Kukhnin

Got it. Thank you very much.

Operator

We will now take our next question from Manu Rimpelae from Nordea. Please go ahead.

Manu Rimpelae

Okay, excellent. Just two questions from me. Firstly on the services business, so can you just give us a bit of more indication what your clients are doing in terms of negotiations? I mean the year has started, I'm sure you're renegotiating a lot of the contracts in the services so if you exclude the rebuilds that you talked about already quite extensively. So are you seeing the clients are taking a different approach this year compared to previous years?

Matti Kähkönen

Good question and I'm not really seeing a difference from that point of you that's the similar type of discussions are there and I have been there and most probably continue to be there and some customers are little bit more aggressive than the others but that's the way it's been all the time so not really seeing a change from that point of view. I guess the reason for that is that the mining market has been down for a long time that they have put their together already some time ago in a way and they have a little bit of broader fees and tools and to see and that has been backed it to negotiation orally during the last couple of years not really trends in the beginning of this year.

Manu Rimpelae

Okay. And then in terms of the one off costs, was there any one off cost included into the adjusted EBIT? I think last year you were able to provide us with some numbers.

Harri Nikunen

Yes I think you actually can find that still from the numbers section but we had a roughly 1 million which is related to the restructuring. So we will continue to provide that this year as well.

Manu Rimpelae

Okay. And the full year expectation is to be higher than last year?

Harri Nikunen

Yes, well that's the level of last year and restructuring it was 22 million. So something like that. And last year you saw some other items but restructuring cost run -- restructuring cost was 22 million and that's a good number for this year as well.

Manu Rimpelae

Okay, perfect. Thank you.

Operator

As there are no further questions in the queue. That will conclude today's question-and-answer session. I would now like to turn it back to your host for any additional or closing remarks.

Matti Kähkönen

Okay, thank you very much for your questions and discussions and this concludes our first quarter 2016 results presentation and conference call. Will be back with the second quarter numbers and that will be disclosed in July 22nd. So in the meantime we'd say thanks once again. Good bye.

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