Metso's (MXTOF) CEO Matti Kahkonen on Q2 2016 Results - Earnings Call Transcript

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Metso Corporation (OTC:MXTOF)

Q2 2016 Earnings Conference Call

July 21, 2016 6:00 AM ET

Executives

Juha Rouhiainen - Investor Relations

Matti Kähkönen - Chief Executive Officer

Harri Nikunen - Chief Financial Officer

Analysts

Antti Suttelin - Danske Bank

Klas Bergelind - Citigroup

Tomi Railo - SEB

Andrew Wilson - JPMorgan

Andre Kukhnin - Credit Suisse

Jonathan Hanks - Goldman Sachs

Michael Kaloghiros - Bank of America

Manu Rimpelae - Nordea

Ben Maslen - Morgan Stanley

Lars Brorson - Barclays

Tom Skogman - Handelsbanken

Presentation

Juha Rouhiainen

Good afternoon or good morning, everybody. This is Juha from Metso’s Investor Relations and I want to welcome you all to this conference call where we discuss our second quarter 2016 results. And the way we do this is the same format as before. So our President and CEO, Matti Kähkönen; and CFO, Harri Nikunen will go through the results presentation first after which we’ll take your questions.

And before starting the presentation, please take a look at the forward-looking statements that can be found on the second slide of the presentation slide set.

With these remarks, we’re ready to being and I’ll be handing over to Matti. Please go ahead.

Matti Kähkönen

Okay, thank you Juha, and good afternoon and good morning, everybody also behalf of me. And let’s start as normally from the safety board of view, safety is the priority and we continue to work on this topic. And the time is when the development is little bit more flat and then there is a time when there is more progress we’re continue and the target is to get this healthy IF measurement closer to zero and to actually it is today. Even to what means that there going be only one incident where we in a whole company, so that gives idea about the level of product what that is main in practice.

But okay, if we go to and when we go to the overall view on the second quarter of 2016, we know that market was challenging as expected so no surprising from that point of view. Nevertheless as we can see later on that book-to-bill was clearly positive second quarter in row and the backlog is right now roughly another 10% higher than in the beginning of the year.

Minerals, one could say positive from that point of view that there was some stabilizing taking place and some work orders also exceeding sales in the minerals equipment. Price pressures continue to be there and that is the same as we have seen in a last quarter, so during the last - this year and last year, so not saying from that point of view. And overall one could say that that satisfactory profitability with these volumes and under these circumstances, so we are pleased about that when taking into consideration the overall market situation.

Then if we talk a little bit more about the markets, obviously the orders were down in mining, roughly 8%, quite a big impact also from the currency’s point of view even though the equipment orders they grew about 6% as we indicated that there was a one loss order in May, June time. Actually a year ago there were couple of a little bit loss orders as well in Q2, almost the same size as such, so that there were some smaller product and orders that we received.

Services orders down overall from this drop, half of that come from the currencies and the other half is coming from them the engineering solution services so meaning the rebuilds and refurbishment and actually indicated already after Q1 that that is part of the services meeting and 24% decline from the comparison period. That it will come back, the timing is a question and difficult to say, it going to be during the Q3 or Q4 or early next year, but we know by experience that it will come back.

Aggregate point of view, no big changes from the demand point of view, Q1 was obviously a big better than the Q2, but it was very much according to expectation, big differences but market there is still the immerging markets where in difficulty except India and the better demand in Europe and North America continued.

And in flow control side, yes it’s a bit down from the last year, the explanation come from the North American oil and gas related transportation base overall and otherwise the orders from the oil and gas markets increase especially from China and Asia - Asia Pacific. And so we saw as we are flat, so more work to be done there and bump orders and to bump demand, the market was quite demanding and obviously there was a year ago one bigger bump order also that the comparison was a little bit challenging from that point of view.

But very much according to the expectation and actually we’re expecting. And then if you look at the orders a little bit from the market area point of view, as you can see there are pluses and minuses, a little bit more positive trend in South and Central America due to one-one big order then also Africa, Middle East and Asia Pacific and Europe if you compare the Q2 and the whole first half of the year. Then on the other hand in North America as said the oil and gas well business demand was down and that impacted, also mining in North America was having an impact to that. China mix picture, flow was good, mining aggregate was a little bit more challenging overall.

Then when we look at our financials and obviously Harri will go through those more in detail. Book-to-bill 1.13, backlog another 139 million more than in the beginning of the year about 10%. More healthy profitably down but this also comes down even though I said that the price pressures are there and they continue to be there obviously the - our cost control measures and productivity improvement actions are yielding on achieving the results from that point of view that we have been managing to predict our margins effectively. And profitability on the services business we are holding on a good level as expected, so that even though the whole [ph] use were down for the certain reasons and from the certain market areas that predict margins and margins were on a good level and that the same level as earlier.

And it was very much about the whole big pictures around the volumes and the net sales and margins and cost structure are as expected and we continue to work on those issues. And I said that we are happy in taking the cost control measures and we will continue until the market will recover. We will continue the productivity action and there are still many things to be done and we continue to do those and take actions as we have done during the last couple of years.

Also as you see the strong cash flow and the balance sheet, no big opportunities, so still very strong position to go forward.

So as such it’s a good platform and good position when go forward even though that we go later on the outlook, so we don’t expect any support of help from the market point of view.

Then the services development and as already said, margins holding up very well, so it is a fundamental strength of this service business and of course volumes are under pressure but we know where they are coming from and this rebuild or refurbishments as we know they are more like, a bit more like CapEx driven activities and the customers have been cutting those quite heavily and basically postponing all those investments. They will do those one there and we are ready for that but there is no way we can accelerate that before customer are ready to do it.

Also wear parts having some more pressures, but profitability and situation was good but there are more heavier competition. Spare parts were doing okay.

In the services aggregate, activity unchanged very much but I said that there are huge regional differences what comes to the aggregate services. And flow control flat and there is more work to be done, but nothing alarming as such. And looking at the last four quarters to services, order intake has been stabilized and almost the same number quarter-after-quarter and now we will see the rest of the year in a way that whether this continues what we have seen now during the last 12 months’ time that the rest the year we’ll go and that will have of course impacted the whole year result as well. But I will come back to that more in detail.

Okay, that was in short summary of the Q1 and the market and the demand and the performance and I will hand over to Harri, who will go through the financials more in detail.

Harri Nikunen

Good morning, good afternoon, ladies and gentlemen. This is Harri. Starting with the group key figures, a few comments, of course the big picture is that it’s a volume game. We didn’t get any surprises, our balance sheet, cash flow, profit and loss statement behaves very logically in line with the volumes.

Matti didn’t say too much about the currencies, but when you look at the table in front of you, you can see that about half of volume change was currency related. And obviously you cannot see EBITA impact but the currency impact was negative on EBITA, nothing major but actually clearly negative these six months.

Then and other element which can be covered here is our adjustments and as you could from the adjustment first six months, we have only six months of adjustments most of them related to minerals restructuring. And you’ve seen from our outlook for the year that we actually expect that number to be - full year number to be higher than last year and we were at the level of 25, which indicates that you will see fairly high adjustments restructuring costs during third and fourth quarter, mainly fourth quarter and they still will be very much related to minerals. Minerals and mining production related restructuring is very much down, so now it’s more about aggregates and engineering and other disciplines within minerals just to make sure that the flexibilities there.

And maybe third thing that can be mentioned here that as you know we report external minerals flow control and other. And other is headquarter plus all our services, internal services activities, shared services centers. So second quarter, our other category showed positive EBITA which comes from our shared services centers being charging a bit too much during the first six months and that will level and out. So it’s a worse from group point of view, business is slightly too low numbers group positive.

And then leaving the key figures and moving to the cost chart. And again I won’t - I’ll cover the details through the coming pages. All I say here that it continues to be a volume game and of course with the expectation that we’ve seen the stabilization of capital and hopefully the other businesses as well obviously it will turn the other way one day and hopefully it’s not too far away.

Then next one is gross margin, gross margins specification. Nothing new here in a way so that the first sentence covers product margins and I think it’s worth stressing that it is in all businesses including mining capital, including aggregate capital. So the product margins are at fairly good level indicating overall competitiveness. And I think there is also visible in the large orders we’ve been able to book in very heavy competition.

Gross margin has been negatively affected in capital businesses, so the volume is too much down to carry all fixed elements of production apparatus despite of all cost cutting we’ve done.

Then as I said earlier, so we have lots of actions ongoing and some new ones coming up, which will be visible later this year when we start to book the onetime cost from them.

Headcount, you see through our reports 1,400, 15% since end of 2014 and even more so if we included 14 in this calculation. And this has not only been sporadic adjustments related to volume but a lot of structural adjustment. And finally keep on working hard with procurement.

SG&A seamless story behind these numbers structural changes 13% down so far 600%. 55% of this SG&A numbers are directly personal related then of course you have indirectly all travelling and so on which is part of the discretionary spend and that has been going down. We haven’t seen any significant credit losses since first quarter even though the market is tight but the countries have managed that well.

And then maybe finally that you look at the SG&A percentage of course you can see the impact of the volume that the percentage tends to creep up despite of cost actions and obviously that is visible in EBITA.

Then next page, minerals. Matti covered quite a few elements on this, so I won’t repeat of all it. Just speaking couple of these equipment businesses is at breakeven with current volumes which of course dramatically down from the peak years and giving an idea that when the volume comes back, we have a chance to sort of turn this other way around starting to make good money again. Cash flow continues to be good and as mentioned earlier, this cost actions are continuing.

Then minerals is a mixture of capital and services. Services was discussed and maybe one thing that was not mentioned which is worth mentioning that we’ve been following that if we’re always getting this pricing question that we’ve been analyzing away apart very much in detail and it looks like that since 2010 roughly 5% per year has been the decline of real prices. So that is obviously part of volume decline and net sales and order decline in Euros and then you had the impact from currencies.

And then a few words about flow. Even here Matti covered the headlines very much of volume game. So what we have here is a mixture of volumes coming down, margin maintained at same level as before and then SG&A slightly up from last year due to investments in new markets. And then of course the medicine for the future is continues cost work actually it will accelerate and on the other hand there are some interesting areas where we can - where we go off the growth as well.

And then maybe one final thing that last year average was, EBITA was 17.5% and now it looks that after three quarters which are visible here, we would be at a level of 13 and that is a result of a sudden volume loss which will be gradually compensated will do work with our cost position as well and this 13 will not be the new normal, new normal will be somewhere between this 13 and last year’s number.

Then balance sheet, again nothing new, so between last year and now of course we paid dividends and cash flow has been good, so we’ve almost covered that whole already. All indicators are good and then at the bottom of the page, you can see that our cash reserves are at the level of 1 billion including the unused revolving credit facility. And credit market as such continues to be good and stable.

Cash flow, just a couple of comments. As I said numbers behave very logically, you have EBITA slight release from networking capital and CapEx we’ve kept down below last year level. And I would say that you will see that during the rest of the year and probably even next year, our assets are in a good shape and we’ve been turning the company into more asset-light.

Just one indicator is that free cash flow was about - has been about 11% so far this year calculated from net sales at the same level of last year and that is probably a good target for us given the market conditions and EBITA margins.

And then finally, capital employed networking capital, you look at capital employed to one kind of jumping up and down is cash, so been cash having though the period. Operational capital employed is slightly below 1.5 billion rotating about 1.9 times. And then when you go to - when you look at networking capital, you see fairly balance makes the following the volume changes past quarter.

So all in all no surprises, numbers are logical and it’s a volume game. Back to Matti.

Matti Kähkönen

Okay, thank you. Now let’s go to the short term market outlook. As we are saying that it’s lastly unchanged and even though that they were book-to-bill has been positive, we don’t see any fundamental change in the market demand. It’s continues to be challenging and uncertainties are there. And from mining point of view, the weak demand continues for equipment and system, system orders and other order pipeline. From that point of view, sort of more like a small and medium size orders and there aren’t any bigger project right now talking about close to 100 million type of things what we have been setting earlier that now it’s more like a smaller ones. It can be also good in a way, so that normally the profitability could be a bit better with those ones.

And then from the services point of - mining services point of view, satisfactory and still the engineering services is soft and it’s a timing issue as I said many times.

Aggregate outlook satisfactory for equipment and services with huge differences, but the market areas of U.S., India, Europe one could say that it is - it can be say that in some cases even good but then there is extremely weak in some of the immerging market, but overall global demand satisfactory unchanged as we have indicated it earlier.

And oil and gas CapEx related demand satisfactory and from other industry is quite stable even though like in pulp and paper bit low level than last year but stabilize we have communicated the whole year. Good demand for the replacement and services sort of a day-to-day type of thing and North America weakness continues and we don’t expect this transportation business to come back this year could be ‘17, could be even later but that’s too early to say it.

So no trend change and uncertainty continues in a market place. And with these bigger orders what we have received actually we have been quite successful commercially so that we have been successfully awarding those project and from that point of view it’s been good from all those point of view.

Backlog I said 140 million roughly, higher than in the beginning of year, of course that’s good news for the next year. And some of the bigger project cannot moving on right now so that there on whole day are not discussions about cancelation, so anything like that is just a slow moving processes with customers even though you are awarding and you have god down payment still it takes much more time today to move on and start to get net sales out of those big projects. So there are certain uncertainties causing some timing delays and deliveries, otherwise one could say that the backlog is from the margin point of view normal and as healthy as earlier.

And then coming to the outlook for 2016, we one we say this year that Harri was referring already the restricting costs just the only stating a wording and so the some real conclusion are the big picture overall is that this is about the volume, is very much about so called short cycle business and services and flow control that’s going to develop for the rest of the year and then this bigger project deliveries timing issue that held those will go forward.

And the restructuring thing that of course it is indication that we are continuing the productivity improvement actions and taking the cost out and there are some onetime costs associated to those. And we will continue this until the market will recover one day and to make sure that we are doing our best to predict the margins. And overall the focus from the management point of view is very much on the growth side, organic growth but obviously the [indiscernible] as well. And other topic is of course the productivity improvement actions that we want to continue and we will continue. So that was the presentation.

Juha Rouhiainen

Thank you, gentlemen and operator, now we’re ready to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first quarter from Antti Suttelin from Danske Bank. Please go ahead.

Antti Suttelin

Yeah, hi this is Antti from Danske. First of all if I look at your presentation slide number 12 about your gross margin, I can see that gross margin has been stable a few quarters in a row but it’s down from year ago. My question is which business is causing this downward trend versus year ago, I assume it is flow control but is it also the minerals business?

Harri Nikunen

Antti, this is Harri. So as we have indicated actually not only indicated but said that the decline is coming from capital businesses meaning mining capital and then we’ve seen slight, very slight decline in flow control. And as I tried to explain in that chart that product margins which reflect pricing, they are at same level as last year in all business. And then in capital business in our case flows capital and minerals capital, we’ve seen a decline mainly due to cost by lower volume

Antti Suttelin

Okay, so kind of a product margin unchanged but then growth margin which takes also into account capacity utilization is down, is it that the correct way to understand?

Harri Nikunen

It’s the correct way. So between product margin and gross margin, you have to fix production cost and utilization and with the lower volume you get some hit from those two elements.

Antti Suttelin

Okay. And then on the order outlook for mining equipment business, you indicated that the order pipeline is now of small orders, I recall that last year Q4 you had some big orders as well, are you basically saying that the outlook for minerals mining equipment orders is now weaker that it was a year ago in the second half?

Matti Kähkönen

It’s only different, so I am not saying it’s weaker, it’s different and I said that also we have been saying that there have been few bigger orders and we have booked them actually, so we have been awarding those and right now we don’t see such two or three close to EUR100 million type of project in negotiation phase, is of course there are quotations and enquires going back and forth in a way, so that we can see those. But a year earlier refer to that we are negotiating some of the bigger orders and we are right now not doing that and instead of that there are a bit more than earlier small and medium size project, so it’s little bit the safety in a way that the bigger ones are amazing and the smaller and mid-size are bit more.

Antti Suttelin

So you think that increase in small and mix sized orders could make up the gap to compensate for lack of large orders which you had in Q4 last year?

Matti Kähkönen

What we have been saying that this mainly for the mining side that this mining capital order intake last year 400 million, this year 400 million and we don’t expect any big order for the rest of the year. So that it will be smaller orders and we hope that’s many and plenty of show to make this 400 million, but the 400 million is a good number. So from that point of view, you have a certain logic there, but there haven’t been many of those, the last year there were one - basically only one, a little bit bigger, one on this year, only one also bigger one, so that basically next month should be somewhere next year.

Antti Suttelin

Okay, that’s all, thank you.

Operator

And we’ll take our next question from Klas Bergelind from Citi. Please go ahead.

Klas Bergelind

Hi Matti. It’s Klas from Citi. A couple of questions. Firstly on mining equipment, this 90 million order Codelco, this is roughly in line with the two large orders you also booked last year, could we talk about the process of achieving this order? I guess this was part of a discussion six months ago and then the order materialize that commodity prices, is that correct?

Harri Nikunen

Not - this is Harri. Not really. So we’ve been negotiating it at least for a year in tight competition. And then when you - I think that this is very public in Chile. And when you look at what this investment is, it’s a brownfield investment to utilize existing mine ten more years and that sense very large order, very large project, very large order which you don’t do for temporary price increase all permanent prices. So it’s an infrastructure investment that and the timing does not have nothing to do with the short term price fluctuation.

Matti Kähkönen

Basically old monies running of out the run and then they have to go deeper into that and to replace the production with others that’s the main drive for that investment.

Klas Bergelind

Then a follow-up to that is if I look at to reach 400 million mining order for the year and if this is not coming from the large side, then the underlying orders in the second half must be in excess of - all the doubles in the current level which is the highest level that we’ve seen since first half ‘14, my question is really what kind of commodities are driving that underlying development in the second half?

Matti Kähkönen

Yes, good question. Of course our noise is very dry in a way so that - but there are - that it’s called on copper mainly the drivers for that. And we guess with this 400 million basically in two categories, so if150 million to 200 million, this bigger project which basically is almost there and then you have normally another 200 million sort of smaller 5 million to 10 million, 15 million orders and those can happen quite quickly also. Also but not really a big change from the commodity point of view so that that also the basic gold and copper and some of the smaller of course the equipment orders is taking place in iron all the time. So if we are selling one of two crushers or some grinding mills of course that’s goes across the border for the older commodities.

Klas Bergelind

Then on rebuilds in minerals service orders now flat quarter-on-quarter, how do the rebuilds move within that, they collapse last quarter, where we at year-over-year Caterpillar is talking about rebuilds picking up quarter-on-quarter, did you see that as well?

Matti Kähkönen

We see the need and the activity that for the rebuilds but they didn’t - capitalize to realize and for the Q2. And as I said that whether they will from the timing point of view they place in Q3 or Q4 early part of next year, so it’s ever to say because to customers or are still looking at those very carefully. But the demand is there and we can see the places, but the timing is the question.

Klas Bergelind

Okay. My final question on construction, it seems like aggregate services seems to out 15% versus mining services down 15%, about currency, is that correct and the services and aggregates, what construction market geographically droved it?

Matti Kähkönen

Construction market, it is those normal suspect in a way that the U.S. was doing okay, Europe was doing okay, of course in Europe there are differences from country to country and then India as well and there were downward trends still in the China and Brazil, country like Africa almost that development from the aggregate point of view, but most probably go a little bit up also year-on-year comparison.

Klas Bergelind

Did you repeat quarter-on-quarter?

Matti Kähkönen

If I remember correctly on Africa, so I remember that it was a little bit higher but I don’t have a full figures right now with me.

Klas Bergelind

Thank you, Matti.

Matti Kähkönen

Thank you. Thank you, Klas.

Operator

Our next question is from Tomi Railo from SEB. Please go ahead.

Tomi Railo

Hi. Tomi Railo, SEB. Just coming to the mining equipment logic, you actually said that you would expect big orders of 150 to 200 million and then booked 90 million for the second quarter. So - and on the other hand you said that you are not expecting bigger orders still the second half, so where are these orders, have you booked those and are you still going to book those in the second half or how does the logic go?

Matti Kähkönen

When we are talking about the big orders then we are talking about those 80 to 90 to 100 million size and those have been now booked and when we book this Codelco order. And if you remember last year, there were only one - the one if I remember correct, somewhere 60 million-70 million, the other one about the same size but now more than that in a way. So from that point of view you start to have sort of smaller 5 to 10, 15 million and then you could have somewhere 40-50 million some of the medium size orders and that makes the difference.

Tomi Railo

Okay, got it. Then you said that mining equipment is at breakeven level, can you comment that balance of flow control equipment business side, is that making some profits or is it breakeven or was is that loss in the second quarter?

Matti Kähkönen

Flow capital is making good money and the only the drop is coming from this North American transportation business and oil and gas in North America a little bit live lastly is impacting, but overall the flow capital business is absolutely been all the time on the black numbers and positive and profitability, so that we haven’t seen a red numbers, I can’t remember basically ever.

Harri Nikunen

This is harder, so maybe just to clarify that the minerals capital consist and you guys know all this that consist of three product lines, minerals - mining capital, aggregate capital and then our recycling activity. And today mining capital and aggregate capital are about the same size, more or less exactly same size. And when you look at minerals capital, minerals capital is currently at breakeven which we have a negative number in mining, the others are carrying it up. And then of course what we are working towards is to further improve aggregate capital and lift mining first to breakeven and then starting to make money again. So that’s in a way the big picture of minerals capital.

Tomi Railo

To come back on that, in this case, my calculation suggest that the services profitability has slipped below the 7% to 19% range you have been commenting earlier, can you comment on that?

Matti Kähkönen

Yes, we can comment and we are between 17% and 18%.

Harri Nikunen

It’s a Metso Services now once again that what we have been indicating earlier and with the 17% to 19%, so Metso Services, so including the flow mining aggregate services there we are and it’s a fairly stable and it’s fairly stable all the businesses. So that’s not the big picture in the profitability of the services.

Tomi Railo

In this case, it doesn’t really adopt because 100% of the profits are made by services and if mining equipment or minerals is breakeven then flow control capital cannot be making profits. If it’s making profits then services profitability is below 17?

Matti Kähkönen

So again back to basic, so our services has three components, mineral services are internal, MSE, then our flow services and then our recycling services is inside the capital line, so that’s a small piece. And then when - and that is what we call Metso Services and that is the one we’ve given guidance. Then when you look at minerals, minerals are reporting segment. Then I assume that when you calculate, so you look at the mineral segment and you heard us saying that mineral capital is breakeven then obviously the rest is minerals capital. And that - and profitability in minerals capitals has actually slightly improved from the last year and then Metso Capital, Metso Services combined is still in that 19 to 17 bracket. Don’t ask for more details.

Tomi Railo

Okay, thank you.

Operator

And out next question from Andrew Wilson from JPMorgan. Please go ahead.

Andrew Wilson

Hi everyone. Just few questions from me, from the cost side, I think there was sort of explanation in the presentation around the head office cost line, I am not sure I understand exactly why I assume we’re talking about guided number about 11 million also the year sort of flat on last year, it seem you were really quite a long way better than that the half way, so I am just trying to understand what we should expect for the second half in the group head office and other line please?

Harri Nikunen

Yeah, this is Harri. So what I said that our shared services entities which are reported in that head office or other line have been over judging during the first half, so what we will do second half that you will start to see the normalized level of headquarter cost and that overcharge will be kind of compensated to the business. So for the headquarter, you can expect normal level during the second half of the year which is a normal - a couple of let’s say 2-3 million per quarter that is the normal level for the headquarter.

Andrew Wilson

Okay, so the full year run rate then it’s going to be something like 6?

Harri Nikunen

Yeah, probably that’s a good number.

Andrew Wilson

And then should we expect that number going forward or?

Harri Nikunen

No, no, this is - it’s a 2016 specialty. We were - again so let’s not go into details, we trust - when the budgets were prepared, we had some spending plans for our sales services units and the charges were based on that, then actually we’ve been running same cost activities there as in all other parts of the company, so it’s just budget related thing during the first half and we’ll correct it during the second half.

Andrew Wilson

Okay, but it’s going to be at that lower level of 16?

Harri Nikunen

Yeah.

Andrew Wilson

Okay, prefect. And can I just ask around the additional restructuring that you flagged and when and what size of penetration we’d be expecting to come through second half of this year or next year, or was that included within the 50 million year-on-year benefit, we talked about in the year, can you just clarify exactly whether a traditional to where you were before or just extra cost to get to where we thought you are going to be?

Matti Kähkönen

Some of that was included because of timing issue that some let’s say the processes have been taking a bit longer. There are some different types of union discussions and from that point of view. It’s a little bit difficult to disclose any more in detail. Impact for this year we at least, it’s not any more - cannot be any more big show that is mainly for the next year impact. And of course there are new ones also that which we are not included in the early part of that and those will be having a good impact for the next year but of course the new ones are not to deliver 50 million additional ones. But you will see that headcount will go down and the cost structures will get lighter throughout this year and benefiting the decision what we are now taking and we - as soon as we can make them public, so you will see that what’s the magnitude and size of those.

Andrew Wilson

Okay, so at this stage we can just be building some benefit and then you’ll be able to give us a better idea in time?

Matti Kähkönen

Yeah.

Andrew Wilson

Perfect, thank you.

Matti Kähkönen

Thank you.

Operator

And our next question from Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin

Yes, good afternoon, everybody. Thanks very much for taking my questions. I’ll just go one at a time as well. Firstly on flow control, just running sort of analogy to what you described in mining and looking at a capital business that 61 million that we go down to now, is that the run rate that the reasonable run rate to think off as going forward or is this of normally depressed as anything in there that still at risk?

Matti Kähkönen

You were talking about the net sales or?

Andre Kukhnin

Sorry?

Matti Kähkönen

You were talking about the net sales or?

Andre Kukhnin

It was related to flow control equipment the orders in Q2.

Matti Kähkönen

Okay, okay, I am just looking at Q2 orders. As I say that what’s been missing is this North American transportation business and that continues to stay away for this year. The oil and gas pipeline is a little bit more unclear for the rest of the year, so it is trending also quite quickly but I wouldn’t forecast any better pipeline for the rest of the year than the begging of this year what comes to the flow control order intake in any of the customer industries. But then I said that pipeline can change also as we have seen many times that there is still time for the rest of the year to change that to want more clear and more project orders.

It seems to be quite stable anyhow but difficult to see that it would be improving by the end of the year.

Andre Kukhnin

Right and that step down in Q2 versus Q1, is because I think that U.S. transportation segment was already missing in Q1 ‘16 or have we now got kind of full quarter effect of that?

Matti Kähkönen

Yeah, it was meeting in Q1, it was meeting in the Q2 and it is meeting whole year that it was so around 60 plus million last year and more probably we are looking at somewhere 15-20 million for this year, for the whole year.

Andre Kukhnin

Yeah, okay, thank you very much. And on your comment on pricing that you made for minerals wear parts, you said real terms that means adjusted for FX but not adjusted for raw material prices, would that be right?

Harri Nikunen

Yeah, this is Harri. So I was the one who mentioned it. So real - maybe the expression is a little bit incorrect from my part, so what it means that we’ve been analyzing the prices realized, we have a price list and then we start from there. But anyhow the end result is that roughly 5% per year, it has come down. And then if and when our margins has have stayed flat, we’ve been able to compensate that 5% through our cost of which raw material is part of.

Andre Kukhnin

Okay. So these are nominal prices than just FX adjusted or?

Harri Nikunen

Yeah.

Andre Kukhnin

Okay. And relative to that, the other segments of minerals would you say other parts of service was better than not in terms of price performance and capital was worse, would that be right way to think about this?

Harri Nikunen

If you look at the first of all other components of services then you don’t have the let’s say the same level of standardized product, a bit more difficult to analyze but I think it would be logical to assume that actually represents the other products fairly well as well. And capital aggregate, no change, pricing has always been tied. And I would say in mining capital, it has stabilized for the kind of a daily business and obviously all those - there are so few loss order out there that pricing is all over the place. But as we’ve said earlier, the orders we’ve taken have had accept the below margin level, no suicide orders.

Andre Kukhnin

It’s very helpful. Can I - sorry it’s late, but just double check, the minus 5 per annum is what you saw x-effects but not adjusting for anything else, is that the right way and I am sorry it’s late but I just want to make sure.

Harri Nikunen

Yeah, I think it’s easiest to see them as nominal prices not clean with anything, so just nominal prices and then there is a little bit currency here and there, but just use them as nominal prices.

Andre Kukhnin

Got it. Got it, thank you. And just very last one, on cost cutting, the step up that you implementing compared to the previous efforts, should we think of any change in terms of the ratio of what’s the upfront cost is versus future savings i.e. is it becoming more expensive maybe to take out costs or not?

Matti Kähkönen

Yeah, so the answer is yes for two reasons that as I said, we are partly in aggregate but we still do work in mining and we start to - now we are dealing with engineering and let’s say more expensive pieces of the organization and then you have the geographical impact as well. So all in all the answer is yes, so the cost is more expensive now than earlier.

Andre Kukhnin

Got it. Thank you very much for both of you.

Matti Kähkönen

Thank you.

Operator

And our next question from Jonathan Hanks from Goldman Sachs. Please go ahead.

Jonathan Hanks

Hi. Hi Matti. Hi Harri. Just wanted to clarify that minus 5%, is that still the current run rate in kind of wear and spare parts pricing pressure?

Matti Kähkönen

Yeah. No, it is not the raw materials have started to turn - raw material prices have turned up and in that sense, the pressure is slightly off. So prices are still a topic discussed all the time and under the gun but the change has started to slow down, we don’t see the same phase as 14, 15, which we are logical because of raw material costs going down fairly rapidly.

Jonathan Hanks

Okay, thank you, it was helpful. And then just on the maybe just very granular, but did you see much change in the demand awareness that pass throughout the quarter, did it pick up a lot the back end of the quarter or was it pretty stable?

Matti Kähkönen

It was quite stable, no big change here from month-to-month, no not really.

Jonathan Hanks

Okay, great. And then just lastly obviously with the news of joint label, I just would to curious to hear sort of some consolidation in the mining from the space more generally, I mean are you surprise maybe that we haven’t seem more consolidation than we have?

Matti Kähkönen

It’s a good question and we have I guess we all have been wondering and discussing about that. And somehow feel that it could be that the next 12, 18, 24 months that something is happening in a way and this was one example out of that how much and what will happen, it’s very difficult to say but obviously that’s been expected and on my mind it should happen. But at least what is the surprise that commercial both to a global, I don’t know but this consolidation overall, I am so surprise about that it would start to happen and it is happening.

Jonathan Hanks

Okay, brilliant, thanks.

Operator

And our next question from Michael Kaloghiros from Bank of America. Please go ahead.

Michael Kaloghiros

Yeah, good morning, good afternoon, everyone. My first question on mining equipment, I think I mean just mining, it looks like you are delivering or you would be delivering this year less than EUR300 million sales, can get that from your chart on your report. You know I think orders in the last 12 months were probably 370 or something around, you know when you get those volumes back in 2017, I mean what does it mean for your mining equipment margins, I mean you are losing money at the moment, can you breakeven with those margins backup, can you go up back to margins where you were before, I think you know when you were making 400 million of surge, you are making margins of roughly 5%, I mean what’s the outlook when volumes come back on pretty low I mean capacity utilization at the moment?

Matti Kähkönen

Good question obviously, what we have been doing that form the supply point of view that we don’t have any manufacturing units in mining equipment side, so that it’s a little bit less volume fancy deal from that point of view. But obviously the volumes will have impact to the profitability clearly that if you are now in the minerals capital on a breakeven level and I thought I was saying in aggregate some plus mining, some miner so that it will start to go up.

And typically you don’t end up anyhow for the anything like the double digit number, so that’s something which is not possible, but it will have a major impact and the volumes will come back, then I would not like to start to forecast what is the percentage overall when the volume will go up. But that’s the way how we have built up the structure and the processes that we don’t have to start at resources immediately in a way when the volumes are starting to compact, so that we have more effective processes. So the current cost level can take higher volume and it will have a positive impact to the bottom level, but I would not try to start to give any number for you.

Michael Kaloghiros

Sure. And I just that we’ve seen you know Q2 and Q1 you know the positive impact that volumes can have on that business so that’s why I was wondering.

Matti Kähkönen

Absolutely you have a good point and it is a good example in a way that’s where we ended up from the quite big losses in the Q1 to the breakeven in Q2.

Michael Kaloghiros

Sure. Second question maybe on flow control, I think I remember you talking about margins of 14%-15% for the business now that the wear parts business has come down a little bit and maybe you know pricing in that segment is down a bit. I heard your comment on investment you are doing at the moment and the margin of 13% in the first half. You know are we still up for margin of 14%-15% this year or this is maybe something more to think about next year?

Matti Kähkönen

It’s a question about the volume and I said that the last year 17.5 was last year actual and one could think in those terms that let’s say that under this circumstances let’s say the new normal could be to all 3% little over than the last year, so we end up to this 14%-15% or plus or minus 15% level so that this 13% is not the artificially low but it is low because of the very low volumes and when looking at the orders and they say so that it should be higher volume for going forward. And then it’s a question about the volume development that we’ve if the order the market is developing well, so that obviously there is a room for going forward. But this 17.5 last year let’s keep in mind that it was a very good year from the North American oil and gas transportation. If that comes back obviously that will have a major impact other way around that’s what we are now seeing.

Michael Kaloghiros

Sure. But assuming that you - I mean that volumes stays at joint level, I mean Q1, Q2 earnings you know 117 quarter, I mean you are - I mean you are still comfortable with 14%-15% margin this year?

Matti Kähkönen

No, I said this volumes that the performance is somewhere 13%-14% and then some volume gain because we see the cost structure is there and of course we will take some cost out in a way but most probably that taking the cost out what we are now doing in a flow side and also in the serving side, they will mainly have impact for the next year so that they don’t have a big impact anymore for this year.

Michael Kaloghiros

Okay, so just coming back to the question on the central line just so that just understand well, is it just a cost allocation thing meaning that you know whether it was minus 3 or plus 3 million this quarter, the total average for the group would have been the same, is it what I should understand or am I wrong?

Harri Nikunen

Yeah, so the answer is yes that it’s a zero sum game and now during the first part of the year business has have been charged too much compared with the costs in the central structures. And as I told you that we will kind of rectify during the second half of the year.

So the group number would have been the same then the question is that there is still little bit more but it cost to the reporting segments and less in headquarter all the way around in a way that if you would see the 5 million or 8 million headquarter that much weather the minerals and flow control would be have been.

Michael Kaloghiros

Understood. Just last one on the cost out you know restructuring that you are doing, I think earlier in the year what you are talking of you know it’s 300, 400 you know headcounts reduction, you’ve done 500 already, I mean with the extra restructuring I mean what should we think in terms of cost out?

Matti Kähkönen

Cannot give any exact number for that but obviously it’s not going to be another 500 for the rest of the year and then it’s a little bit timing issue. Couple of hungers anyhow it will go down.

Michael Kaloghiros

Okay, understood. Thanks very much.

Matti Kähkönen

Thank you.

Operator

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

Manu Rimpelae

Good afternoon, it’s Manu from Nordea. Can I just get back to the refurbishment and the amortization orders in minerals, you mentioned that you are seeing that your clients need to do this about you really have any visibility on when timing of these orders could come in. So first trying to understand what type of discussions are you having with your customers and what are they saying about those investments?

Matti Kähkönen

The nature of that business always so that you - in many cases you recognize to get with your customer that there is bottleneck or there is a quality or there is a production issues that it needs to be solved and then the size of the refurbishment normally start from couple of millions is the 3 or 4-5 million up to 10-15-20 million, but anyhow that sizable investments that in a current environment customers are scrutinizing those very carefully and looking at how they are spending their money. And it’s very difficult to forecast that what’s the timing for those day. Clearly there is a good payback and there is a need for those and they will start to do those not in such in way that it will rapidly grow another 20% or 30% but step by step.

But - I said that there are those and then as we have many times earlier that the timing difficult to flow that last time somewhere in early 2013, it took between six to nine months before they came back is this now the days always is nine to 12 months’ time. So we don’t really have an answer on that. So it’s so much in there on internal approval processes.

Manu Rimpelae

Can I just ask you to clarify, when you that six months so you referred to from what point of time or what this is expense referred?

Matti Kähkönen

And it could be somewhere that they would earlier start to come back somewhere in the end of this year, somewhere in the Q4. But I said that it’s almost importable. It won’t be year for that is - that if it won’t take place this year somewhere in the first half of the next year, we would most probably start to see that they will start to come back.

Manu Rimpelae

Okay, and then just my final and second question. Can you just remind me of the flow control margins, why is there always in Q3, or the last two years meaningful increase in the margin, what’s driving that, at least there is a normal seasonality this year as well?

Harri Nikunen

Yeah, this is Harri. So it’s about the production structure that typically and the cost structure typically costs are at the lowest point that during the third quarter lots of vacations in the Northern part of Europe where we have lots of production. And typically we have a normal the volume at the same level. What comes to this year and so obviously we will see the same cost seasonality but we don’t expect the same sizes of swing this year as we’ve seen the early the other years. Volume is more uncertain this year than it has been earlier.

Manu Rimpelae

Okay, thank you.

Operator

Now our next question from Ben Maslen from Morgan Stanley. Please go ahead.

Ben Maslen

Thank you. Good afternoon, Matti and Harri. Just firstly just a question on kind of customer behavior is has commodities have picked up a little bit so far this year, you know to start with your tender pipeline as commodities have rallied, have you seen more projects added to the pipeline of funnel or is it still at pretty similar to where it was you know at the start of the year?

Matti Kähkönen

It’s a good question. As regarding that from our new sales system and it’s a fairly stable in a way. There have been all the time quite a few of those enquires, quotations and the problem has been that not too many of those have could realize. But overall, actively level and the project level as such it’s fairly stabilized, it’s been stable for a quite a long time.

Ben Maslen

Got it, thank you. And then on the - just coming back to the kind of the pricing of it, I mean as commodities have picked up and maybe some of the financial pressure has come of the miners, have you seen that you know intensity of around cost cutting and looking for savings moderate at all or is it still very much as intense it was six to 12 months ago?

Harri Nikunen

Yeah, this is Harri. So I think we’ve seen two that restructuring has taken place to a decrease or so some assets have changed the hands and that has eased the miner situation and they will also close the weakest assets. So that’s clearly a plus for us and then what comes to their behavior is that that we haven’t got those leathers anymore, we got last year and year before directly from the headquarter. So some stabilization, but obviously cost is very much still in their agenda but less aggressive behavior than say six or 12 months ago.

Ben Maslen

Great, thanks Harri. Then just finally on some of the minerals margins, I am just trying to you know get your comments maybe on just seasonally how we should think about that. I mean last year you know the margin seasonally improved as you went through the year, the year before that it was relatively flat. I know you still was around purpose, you went through the year, but volumes are lower now. So how of this higher base, is 10.8% you’ve done in the second quarter, what should we think about the margin progression seasonally as we go through the year? Thank you.

Harri Nikunen

I think it’s - you just think that we expect somewhat higher net sales for the second half of the year and our cost base is what it is, so that sort of and give some indication that the margins could be actually holding up as best indication. And then as Matti said already earlier while discussing kind of the outlook for the year that services is still the one that is delivering most of the money and in services is about how short cycle business will run and short cycle means orders coming in and out as net sales same month or same quarter. So that is critical element of this discussion.

Matti Kähkönen

And overall if - as we have seen in the Q1, Q2 that if also in a capital side, volume start to develop positively and the now it’s question about this how fast if project are moving on. And if they are moving on and this will go up of course, that is supporting the margin development also.

Ben Maslen

Okay. So you need revenues to sequentially pickup for the margin?

Matti Kähkönen

Yeah, in a way that’s the way how we see it because we have been in some cases what comes to the mining and minerals capital side, we have been taken quite a lot of cost out of cost, there are still some things to be finalized, but the big work has been done and we see it very clearly in a way that when the volume is bit back as it was in a Q2 so that we ended up from minus Q1, we ended up to the breakeven and of course if the project would start to move on, we would see the similar type of development in the margin side.

Ben Maslen

And on that and you mentioned delays, I mean do you have visibility on how fast these projects you develop as you go through the year or you know you are the mercy of the customers and you don’t really know at this stage in terms of the delays that you mentioned?

Matti Kähkönen

No, on the mercy on this, these customers we normally we got sum down by a mid and then we don’t do any work or getting any cost involved, so that from that point of view we are not losing anything in a way, anything else but the net sales. It’s very difficult to predict their processes little bit the similar type as this refurbishment timing issue that went. Those are moving, of course not all of them are sort on hold like this bigger order from Chile in Q2 that seems to be progressing as one could as normally in a way but some of those last year Chinese or some other, other projects they are very slowing moving on and difficult to predict that that when they will kick off.

Ben Maslen

Got it, okay. Thanks very much.

Operator

And our next question is from Lars Brorson from Barclays. Please go ahead.

Lars Brorson

Hi Matti, thanks for taking my question. Matti, can I just ask you slightly bigger picture question on copper, it’s obviously a key mining exposure for you, key pointing to relative strength here also for the rest of the year if I understood you correctly. I wonder whether if you take a step back, you know you give us a sense of where you think we are in the copper CapEx cycle, I mean I see copper having held up very well in the last three, four years relative to other commodity in this mining down cycle. But I look at miners budgets now I see copper go from being perhaps the best performing commodity to the weakest from a CapEx standpoint in ‘16, I see a lot of the large greenfield, brownfield projects coming toward and of course copper price is struggling, we need to much of recovery this year, I don’t see many expense in projects either.

So again and I appreciate of course production growth is accelerating so that should be supporting your aftermarket, but on the OE side, can you give us a sense of what you are seeing if you look a little bit further out into ‘17 and ‘18? Thanks.

Matti Kähkönen

It’s a good question. As we have saying earlier, obviously that is true that in iron ore side there is still lot of capacity and some new capacity has been installed during the last couple of years and the copper has been the more active as we have also seen that those project that we have been awarded has been on a copper side. And also right now we don’t see that there is any new bigger ones coming through but it’s not a little bit coming back that the nature of the product, it doesn’t have to be that is something greenfield adding new capacity, it can be exactly as this one what I mentioned that there is an old one which is - it needs sort of running out and bearing out and they need to replace the existing capacity because the lifetime of the mine is running out. And that will be helping in of course in all the commodities in the next coming years and all the time right now.

But it could be that there is a little bit more silent period for the copper for the bigger 100 million type of project but I would see that at least there is a small activity calling on even today.

Lars Brorson

That’s helpful. Can I just a quick follow-up on your comment that you see mining consolidation pick up in the next 12 to 18 months, I thought that was interesting. I wonder what you think is driving that, is that really just confidence gradually returning to the sector as we see demand sort of stabilize and therefore companies willing to take on larger M&A risk or what do you are seeing outside of that in terms of what’s driving M&A? Thanks.

Matti Kähkönen

I guess that this has been such a long story already starting in 2011, 2012, three, four, five years that it’s been downward trend. And most probably in some cases, some companies have come - gone to the bankruptcy already in a way smaller ones some mine in financial troubles and of course that double things are forcing the owners and the boards and the management to rethink how to go forward. And obviously the longer the time is the more there are that will thinks in a way.

And I think that could be the one driver. Of course then every day the recovery is closer, so that it won’t be, nobody is saying that is going to take another five years before the recovery will start to take place. If it’s one year, two years or three years but anyhow it’s a closer to, obviously everybody is trying to look at the sort of an optimum time in a way.

So I think that there is both side in a way that sellers and buyers that those who are willing to sell normally they might have some financial issues and then the buyers or companies with balance sheets are in a good shape and they are capable to do it. And I think it makes perfect sense as such.

Lars Brorson

Thanks Matti.

Matti Kähkönen

Thank you.

Operator

And our next question is from Tom Skogman from Handelsbanken. Please go ahead.

Tom Skogman

Yes, hi Matti and Harri. I was just wondering given your planed cost to SG&A cost, how much lower will be incrementally in 2016 compared to 2015 and then in 2017 compared to 2016 in million or Euros?

Harri Nikunen

Tom actually you can see from the chart in our presentation how it sort of evolve from ‘15 to ‘16, so you can calculate that, actually it goes down quite a bit. And then I would expect smaller change between ‘16 and ‘17 because even though we have said that still a lot of things happening but they are more COGS oriented than SG&A oriented, but still down 2017 compared with ‘16.

Tom Skogman

But if I look at this chart number on page 11, they are down around EUR30 million now in the first half of this year, year-on-year, so but you said you will accelerate the savings towards the end of the year if I understood you correctly?

Harri Nikunen

Yeah, the acceleration means in this case primarily talking about flow and asset, it’s a combination of COGS and SG&A mainly COGS both in inflow and minerals as well. So you will not see a dramatic change in SG&A between ‘16 and ‘17 but you will see a downward trend.

Tom Skogman

Okay, just EUR20 million-EUR30 million downward. And then I wonder about these spares and wears now and commodity price have turned up, I mean it’s a large shareholder cost and in spares and wears are raw materials and have you factored that into your product so you feel comfortable for the next quarters when you have sales coming from higher raw material price as spares and wears?

Matti Kähkönen

Obviously we have been following and we are following up to raw material price development to our sales also that how that can and will really impact to the product cost and obviously with all the procurement activities and other activities, we are mitigating that all the time. But of course right now this having an impact but and we have been taking that into consideration so that it’s not yet too high, too big impacts right now but it is impacting.

Tom Skogman

Okay, thank you.

Matti Kähkönen

Thank you.

Operator

And our next question from [indiscernible]. Please go ahead.

Unidentified Analyst

Hi, thank you. My question was what was behind the fall in services sales of flow control given that’s under two tenth be operating at full capacity?

Matti Kähkönen

Obviously on a comparison there was a year ago some fairly large repairs and that were service product that the timing was they were there. Otherwise the service is continued to develop reasonable well in a way and we saw the good development and but there were some bigger sort of services project and could say the rebuilds or repair work that we had a year ago so that was having an impact to the comparison but otherwise it was quite okay.

Unidentified Analyst

Okay, thanks. And just quickly on, I mean are you seeing a different behavior downstream from the independence to competitive integrated refiners?

Matti Kähkönen

Of course the independent ones are say - okay, let me think about that. I don’t know do we really see a big difference as such in a way. So from our point of view that those guys who are buying the raw material - to raw material in the low prices of course their refinery margins are very high. The thing what we have been waiting and partially have been only happening but not to that extend that we were expecting was this North American refinery, they seems to be somehow postponing and doing minimum and driving to refineries with the full capacity and that might be a little bit timing point of view that it’s there I think for us.

Unidentified Analyst

Okay, thank you.

Matti Kähkönen

Thank you.

Operator

Now we will take our last question from [indiscernible]. Please go ahead. Your line is open.

Unidentified Analyst

Hi. Good afternoon, everyone. I just wondered if there was any particular catalyst that of course you did to increase the restructuring efforts.

Harri Nikunen

Yeah, this is Harri. It’s project based, so we have a number of I mean restructuring projects coming up I know decision phase or we maybe have taken the decision already and always part of that decision is a calculation how much it will cost us. So it is based on known facts or planned projects. The only thing that can vary is of course a little bit whether it’s 10 million or 9 million and when the timing can vary a little bit.

Matti Kähkönen

But there are no any particular triggering events coming from externally that we would have. We start look at the portfolio and the cost issue and the productively needs and then we decided that let’s do a little bit more on certain businesses, but it was not coming from the any demand picture or any other type of thing. We just decided that let’s - the better get done this right now, even though we have been restructuring a lot and it has taken for one or two years. So from that point of view we were a little bit wondering in the beginning of the year that should we do all these and we decided that less could it done all and that was the reason for the increase in the restructuring activities and the costs.

Unidentified Analyst

Great, thank you very much for explaining.

Matti Kähkönen

Thank you.

Matti Kähkönen

Ladies and gentlemen, we are running out of time, so we must conclude this conference call. Here we want to thank you for your participation and questions. And we’ll be back later with third quarter results, but in the meantime enjoy your summer and good bye.

Harri Nikunen

Thank you. Bye.