Metso's (MXTOF) CEO Matti Kahkonen on Q3 2016 Results - Earnings Call Transcript

| About: Metso Corporation (MXTOF)

Metso Oyj (OTC:MXTOF) Q3 2016 Earnings Conference Call October 21, 2016 6:00 AM ET

Executives

Juha Rouhiainen - IR

Matti Kahkonen - Present and CEO

Eeva Sipila - CFO

Analysts

Max Yates - Credit Suisse

Manu Rimpelä - Nordea Markets

Magnus Engvall - UBS

Jonathan Hanks - Goldman Sachs

Klas Bergelind - Citi

Antti Suttelin - Danske Bank

Ben Maslen - Morgan Stanley

Lars Brorson - Barclays

Andrew Wilson - JPMorgan

Tom Skogman - Handelsbanken

Michael Kaloghiros - Bank of America

Juha Rouhiainen

Good afternoon or good morning, everybody. This is Juha from Metso’s IR, and I want to welcome you all to this conference call where we discuss Metso's Third Quarter 2016 Results. With me are President and CEO, Matti Kahkonen; and CFO, Eeva Sipila, and they will go through the presentation which can be found on our website.

And as always, we'll be making forward looking statements during the presentation. So, that's why we have the disclaimer on the second page of the slide deck.

With these remarks, we'll be ready to start and I’ll be handing over to Matti.

Matti Kahkonen

Okay, thank you Juha, and good afternoon and morning to everybody behalf of me as well. So, let's get started and as normal view -- soft view on the safety issues, and we continue the work on these topics there. So now alluded to plateauing time now start to go down again and that's typically in a way when you start to get to these levels, and safety is more like a cultural issue and not anymore that much so about reporting a follow-up. But it is important to us and we want to give this as a priority always under any market conditions overall.

But let's go to the third quarter, overall, and we'll come back to this more in detail, market continued to be challenging overall. We could say that the performance as started is satisfactory and okay. And minerals improved in relative terms of orders exceeded sales again. And few sort of the small midsized orders were there on the mining side. But business as usual I would say that now, no really signs of any recovery in that respect, and so as we have indicated earlier in the earlier quarters that this is very much about the volume game that when we have good volumes, so that the cost structures are in good condition and volume level is still same.

So, that's overall look also we will go through later on the outlook at the market and lastly unchanged, so that's not big difference. Some things we'll discuss about the Flow Control side. Then when looking at the markets a little bit more in detail, in mining, we saw the order intake as such that small medium size orders, nothing big in the Q3 as such. So, and to demand as such has not changed a lot, so from that point of view, we don't see yet to recover even though that there're a number of the smaller orders or other project has been increasing, but in the pipeline, there aren't any bigger ones, right now.

And the book-to-bill was clearly positive from that point of view and that's of course due to good news as such. So, we see some decline in the wear parts, the rebuilds and spare parts, we're doing okay, even though the rebuilds as we've been indicating earlier they're in a low level, so that they haven't come back, but holding up their level as they are today and the spares have been doing quite stable manner.

Aggregate, small growth, big differences and the demand level varies between the markets for countries, which have been doing well in Nordic and some Europe. U.S. and India have been growing in some nice growth numbers and still in certain emerging markets countries we are still facing the very, very weak situation, so that but overall small growth.

Then in the Flow Control, obviously, we saw a decline in market, partly it was coming from oil and gas; and broadly from pulp and paper. In the pulp and paper, we anticipate it clearly that in that '16 is lower demand from pulp and paper point of view, and the pipeline for the '17 is better than the '16, so from that point of view, no surprises.

In oil and gas, there was certain sudden demand decrease or decline. Too early yet to say that, that one should not keep this as a new normal that we are -- of course about to market, but it happened across the market area, so there were no particular market areas that were hit more harder than the others. But I’d say, that not all the drop was coming from the -- it was not coming from the oil and gas that one could say that one-third pulp and paper, two-third oil and gas; and the pulp and paper was very much expected and anticipated.

So a little bit of cycle issue also that the late cycle business, that it's impacting us. But as we say, we remain cautious about that and follow it up, not making any bigger issue out of that right now. We have been taking the cost cutting measures and continued regardless of this situation. And you will see, overall in every market, it was about the same. So in mid-summer after Q2, to market change, and there isn’t any particular incidence or things in the macro or micro level. It's just happened to be like that. And on the CapEx side, we know that there are possibilities that some of the projects will be postponed, and some of that is taking place then some of the day-to-day type of business was also somewhat impacted in certain market areas. But we will keep on following that how it goes on and take the measures to protect our margins.

We obviously see pumps were more stable, even though in pumps, we saw some decline, so that’s as such overall decline in the flow control capital, it was coming not only from the oil and gas, it was partly pulp and paper and broadly pumps. And when looking at the market areas, there are pluses and there are some minuses as you see Europe on the plus side, flow control orders quite stable about the same level as last year, slight growth in aggregate side, some countries growing faster, some not. And then in the mining equipment orders, we’re growing and there was one, let's say medium-sized mining order also in Europe that took place in third quarter.

North American point of view, already commented about the Flow Control and where the impact was of market area was perhaps the biggest in Flow Control side. Then, in Mining services, some decline [indiscernible] overall in the services. But Africa, it's growing double-digit numbers, what we saw already in the Q1, Q2.

China seems to be stabilizing; and then Asia-Pacific countries, there were couple of bigger orders the year of going inflow and mining side of which makes the comparison a little bit more difficult, but no big changes as such. And in South America and Central America, of course, we've booked a big order in Q2, and now, it's a more like a business as usual. And flow control is quite stable, it was a bit slow quarter for mining, but I would say that no big change from the beginning of this year.

And then, if we have to look at the financial highlights, healthy profitability, 12.1. And particularly bearing in mind, the price pressures and the demand situation, so I would guess that we managed to maintain the profitability level on a good level, and the margins to the gross profit and the product margins were holding up well, as well the services, the margins were remaining good. On the mineral, capital, we're slightly on the positive, so that if you remember in Q1 we were on the loss side and then a sort of a breakeven second quarter and small profit in the third quarter.

And the cost control measures, what we've done, we'll continue to do [indiscernible]. We'll see that, it can't and under-construction is still going further down, and a result of overall operational center and activities, strong cash flow and good strong balance sheet just then going forward.

So, in summary, I'd say, I'll now hand it over to Eeva to go through the financial performance and then I'll come back to the outlook for 2016. Eeva?

Eeva Sipila

Thank you, Matti, and good morning, good afternoon to everyone on my behalf as well. I'll start with discussing our segments more in detail, firstly on Slide 9 on minerals. So year-over-year, our equipment orders were up to 19%. The quarter-over-quarter comparison decline is explained by the big order from Chile that we received in the second quarter. It's worth noting that in the fourth quarter, we'll again have a tougher comparison, thanks to the big order from India we received in the final quarter of 2015. So, whilst the market has clearly stabilized the quarterly variations are and will be quite high as we're in absolute terms and levels where single projects are quite visible on the numbers.

Moving onto EBITA -- remained at good levels of 10.8%. We're specifically satisfied that our equipment business was back in the block, and thanks to the heavy cost cutting actions implemented in the past two years. This segment contributed well for the goods, cash flow as well.

Moving onto Flow Control, so as Matti already has said the order intake of 136 million for the quarter was lower than we expected. We saw a change in oil and gas customer behavior in the quarter visible both in the day-to-day as well as projects being postponed. And as you may remember, we are active in oil and gas in the Australian markets. It's too early to draw conclusion based on the one quarter data, but we are somewhat cautious about the Q4 orders, and obviously following quite closely the order trend in the coming months in order to adapt our operations if needed. The net sales developed as expected, following the lower order backlog compared to year ago. We are pleased that despite the profitability it was at a healthy 17.5% EBITA margin, thanks to gross margins holding up.

Moving on to Slide 11, the illustrative order fall clearly shows volume was the biggest single factor in the total Metso level, EBITA being down year-to-date to the €200 million to €210 million. So, you can also note that the SG&A cost actions contributed positively, while the FX impact was marginal.

Moving on to Metso level, gross margin for the quarter was 28.4%. Gross margin is holding up as a result of continuous work on cost and pricing management. We have taken significant actions to develop our structure and operations, and these actions are clearly paying off and would be obviously even more visible with some volume leverage. We are on track on both the headcount and procurement savings, so headcount reported as part of -- cost of goods sold is down by over 600 people in the year-to-date. And as said on the procurement, the gross 50 million savings targets we are on track with that program as well.

Moving onto SG&A, it was 19.6% of sales in the quarter. Headcount reductions here are more than 300 people year-to-date. We have some sizeable cost cutting actions on growing, which will incur further restructuring costs in the fourth quarter. In total, the net adjustment items for the full year 2016 will be some minus 30 million, and this net number includes the 10 million gain booked in the third quarter from the head office property sales. So the corresponding year-to-date figure you should be looking at is around minus 50 million.

Moving on to Slide 14, EBIT for the quarter was 63 million and earnings per share at €0.24. When you’re looking at the nine months year-to-date figures, please keep in mind that in the 2015 comparison the gain from the sale of that PAS business is included and obviously affecting comparison. Free cash flow was a healthy 106 million in the quarter, supporting our solid financial position. Return on capital employed, before taxes, was 11.2%, a level which means we have considerable work ahead to get close to our target of 30%.

And when looking on the next page on the capital employed components more in detail, if you know it's worth mentioning you see the tangible assets decreasing slowly following very limited CapEx. Our operating model is much more asset-like today than it was a few years ago especially in mining, and this is really a permanent change irrespective of the market conditions. The healthy cash flow in the quarter increased our cash position, which at the end of September was €620 million in total.

Networking capital at the end of September was €550 million, this continues a positive trend of networking capital decreasing in absolute euros; and when you look at the right-hand chart, you see the more detailed breakdown. In the challenging market, we've and are putting a lot of emphasis on AL collection and that is paying off, but it's obviously is something that we need to continue on a daily basis. We cannot be fully satisfied on the level of inventory, but there are no quick fixes to this, so this will be an area of focus going forward in order to support the improvement in return on capital employed that we're seeking.

And with that, I hand it back to you Matti.

Matti Kahkonen

Okay, thank you Eeva. Then coming to the outlook -- short term market outlook, largely unchanged as we're seeing and that's because of the mining aggregated very much in line what we've been indicating earlier, so the weakness continues in the mining equipment, the system businesses and as also mentioned by Eeva that quarter number. So, now bouncing up and down; and this quarter, it was clearly positive, but in the fourth quarter most probably we'll see other way round when -- because the year ago we booked around €70 million to €80 million, pick up process Q4 and that didn't -- that won't take place this year. So, the pipeline is small-and mid-sized orders, and some of those are happening quite quickly, also that there are many things in with our customers what they have been planning, but they have put on hold and they got to start and restart those quite quickly and some of that happen in Q3 as well. So, those are taking place more currently then earlier.

And demand for service is satisfactory, still the engineering services to rebuild and refurbishments are still soft than that as we said from the beginning of this year that they will come back when the timing is the question. They didn’t come back in Q3 even though there were couple of those orders, but hopefully it's some that you cannot yet show the conclusion that its' getting clearly better, so quite stable in that respect. And aggregate, first quarter was good, second quarter was little bit down, third quarter once again a little bit better. So there's some -- not the seasonality, but some cyclicality, but satisfactory, and some growth can be seen in some comp region as we've already said, I think U.S., the aggregate equipment is good double-digit growth what we're seeing. And Brazil is not yet showing up any greater order, but it looks like the Brazilian economy is stabilizing and politically and economically step-by-step, and we hope that '17 would be the better year than this year, obviously, this year is so low level, same cost for some other countries.

And in Flow Control satisfactory for production as we have said, but with increased uncertainty in oil and gas; but as I said, that presently it's wide more we saw, and we saw the bigger drop in pulp and paper, but that was expected because last year we had quite a few big pulp and paper project, and that we knew that they won’t take place this year. But there is a pipeline for that for the next year. So that is very much in line with expectations. But it is impacting the numbers when looking at the numbers, so that the orders went down. In the oil and gas, as said, we are following up that, and taking the actions accordingly. But we have seen it many times also earlier that it comes and goes very fast. And as we all know, that there were no major incidences or things in the global market taking place, which would have directly impacted to the oil and gas situation. But as you have recognized also that there have been some comments from the other companies as well that the demand has been on the global level, and that’s what we are witnessing also in our case. And of course, we have been holding up very, very well in downstream and midstream, so the comparison is also tougher than for those upstream players.

Then on backlog side, there was a slight decrease, still we are higher in the ton compared to the 2015. And some of those where some adjustments to the backlog and some currency issues most probably. But there were some projects that they were not postponed, but the scope was somewhat different than earlier. And that is happening in the current market situation that the customers are also taking the scope, and sometime there might be a little bit bigger scope and sometimes with smaller scope. But when the orders are booked already earlier, and if that scope changes, obviously, it will have an impact to the backlog. But overall, quite stable and healthy net of the backlog, one could argue that it is at least as good as earlier, so that there is no, nothing from that point of view to really to think about.

And then, already most probably stated many times, the test was in the flow control, that in the services, and day-to-day type of thing, we think that from good to satisfactory and with increase uncertainty, otherwise very much in line with what we have said already, already earlier. So, the overall Q3 on our mind, very much according to the expectations, volumes are sometime difficult to predict in the current market situation, some project postpones, some made a little bit earlier. And on the minerals side, things very much according to the expectation, and as we were estimating internally and planning that internally as well; and then sort of a small trace-in or impact on the flow control, oil and gas part. But that said, that part of the decline in orders came as expected from pulp and paper where the projects are missing and that had impact to the numbers as well. So perhaps, we are absolutely cautious about oil and gas. But too early to draw the conclusion and we should not traumatize that too much. That was all I have.

Juha Rouhiainen

All right. Thanks Matti and thanks Eeva. And operator, now we are ready to open the conference call line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instruction] And our first question comes from Max Yates of Credit Suisse. Please go ahead. Your line is open.

Max Yates

Thank you. Two questions from me. Just firstly on the Flow Control order run rates, when you look at the business and your conversations with customers, do you see that any kind of small-or mid-sized orders were pushed out due to uncertainty or do you think this is a sort of representative run rate of orders as we move into Q4?

Matti Kahkonen

Too early to say yet, and as I said that this around of time €36 million that shouldn’t be seen as a new normal when going forward, but obviously it won't be on a level of 160 million, 170 million, 180 million as it was in the early part of this year, that is something that it won't happen either, so that’s something between. And I'd say that, this business is changing also quite quickly, but not to new normal, but not on that level as it used to be in early part of this year or during the last year.

Max Yates

Okay and maybe just on the orders that you did taken in the quarter given sort of lower demand and seemingly tougher conditions for you and most of your competitors as well, have conversions on pricing regarding the orders that you took this quarter become more difficult with customers?

Matti Kahkonen

Not really that those project businesses which have been where, they are same, so that’s why -- there have been heavy competition overall. And in day today type of service, type businesses, the pricing is much more stable in a way. And you cannot say what we see that the orders what we are received in Q3, somehow would be materially lower from the pricing or margin bonus. It is a business as usual.

Operator

We will take our next question from Manu Rimpelä of Nordea Markets. Please go ahead. Your line is open.

Manu Rimpelä

My first question would be on the backlogs that you mentioned that you are expecting to deliver on 618 million of revenue from backlog this year in Q4, so just asking on that last year you delivered slightly less from the -- in terms of sales than you were expecting to deliver from the backlog in Q4, so how much do you see that is it at risk, not to be postponed into 2017 on that 618 million?

Matti Kahkonen

Impossible to answer to your question in that respect, in the first place, the years are not similar so that most probably there was even more onshore in the backlog a year ago, when we were much more cleaning up the backlog and taking the actions. But for sure, the same situation has continued in a mining side, the customers are easily postponing deliveries for the next year. So I don’t have any particular number for you that how much they would be. But for sure there is something going to the next year, and at the same time there is a sort of a day-to-day type of service business which will be booked this year, and I think was this year, but is that normal with that couple of tons of millions per month are such businesses, which are coming in within the month and then go out in the same month as well. So, how much they are balancing each other quite a lot actually, so that -- but difficult to see that, how much exactly the project will be postponed for the next year, but for sure there is some of that.

Manu Rimpelä

Okay. And second question on the Flow Control, so the margins are very good in the third quarter. So, how would -- how do you see the margin evolution for the fourth quarter and going into next year? And can you explain that what health to improve the margins quite meaningfully in Q3 compared to the second quarter?

Matti Kahkonen

Good question, and the margins are holding up very well as we have been indicating overall. And it's very much the -- of course, the volume gain that if you go back and look at the numbers in a different volume level, so you start to see a different margin levels as well. Last year, we were on the level of 17% to 18% when the volumes were on the 650 million levels. We have indicated early part of this year that, that is not sustainable in this market situation, and one would not say that the new normal. But somewhere, 13%, 14%, 15%, level is something that most probably in the current market situation is more sustainable.

And then of course we are continuing to take the actions to-date to cost out and improve the cost structure. So, that will be impacting -- helping the margin development for next year. But we haven’t given any particular numbers that how much are taking to cost out and what’s the margin impact. But you will see that there are activities in the Flow Control when going forward. They have been already right now and we will continue those to protect the margins.

But it's not surprising it's more like volume for the Flow Control. And Q3 normally, it's a bit higher than the other quarters, if you look at the historical numbers, obviously, we have been working, working to smoothen it out in such a way that the ups and downs are not that heavy in the Q3. But, otherwise, in the Q3 numbers, we see the minerals of low. There were not any particular one-off or sort of one-off items that would have been having impact to the margin. And it was the normal months otherwise, normal quarter otherwise.

Manu Rimpelä

Maybe to rephrase that question, I mean we saw more than 400 basis points improvement in the margin, but the sales were still down compared to Q2. I am just trying to understand that what can explain that changes there was nothing especially in Q3, was that something special in Q2 that drove the margin very low, and now that you’re saying that the new normal margin should be 13%, 14%, 15%, so it's just a big difference that I am not understanding?

Matti Kahkonen

Of course, in Q2, there could have been some mix issues or that we were delivering a little bit more to lower margin project, so that most probably was a one impact and the 17.5 for Q3. For this year, I would give that as a fairly normal Q3, and then the whole year around let’s say 14-15 it's a more like a more on a sustainable base. So, I would look at that Q2 from the mix point of view, there were some issues that, can’t remember anymore, but there were was there something around the bumps, so which we’re having an impact to the Q2 numbers, that they were in a Flow Control, they were a bit lower. So more like in those terms that the Q2 was a little bit artificially low.

Operator

We’ll take our next question from Magnus Engvall of UBS. Please go ahead. You line is open.

Magnus Engvall

Good day, Magnus from UBS. I'd just like to ask you about your guidance for Flow Control equipment which still remains satisfactory. I think you forget the numbers, right, the equipment order intake declined some 45% organically in the quarter, what would that have been if you adjusted for the large pulp and paper orders you had last year?

Matti Kahkonen

Well, I guess that is something that we haven’t really guided that far, so that. But that said that last year, we saw a good demand for the pulp and paper project orders. And obviously, this year has been clearly on the lower level, so that there is a fairly big difference, but I don’t have the exception before you.

Magnus Engvall

Okay, that’s okay. Then, if I could ask you, what was the incremental pay losing from the savings programs I think their respected divisions?

Eeva Sipila

Well, again, it’s obviously in multiple of reason, and the most important is the absolute margin where we’re delivering in the segment. The cost savings absence obviously visible in both most minerals and flow segments as well as other efficiency improvement measures that you can label as cost actions or you can label it something. But overall efficiencies maybe a better word significant and we’ll need to continue our internal work on in those areas.

Magnus Engvall

Okay. And is it possible that you've quantified a number on that flow?

Eeva Sipila

I don’t think it's necessary even meaningfully, the bottom-line is what counts.

Matti Kahkonen

Little bit coming back to this earlier question that, if let’s say the pulp and paper projects difficult quarter last year, in average of course there were some difference. And it was around €10 million, so that on project business. In Q3, this year started because of the order timing, it was zero. So that, they were not one single pulp and paper project in Q3, which is not reflecting the decline in demand, but the timing issue for pulp and papers. So, that gives you a one some type of understanding that the pulp and paper did have an impact to the Q3 order intake numbers as well.

Magnus Engvall

Excellent, thank you very much. Can I ask just one final question on what we should expect for the full year group adjusted EBITDA for 2015. Is it still the same as 2016 and 2015 or what we’ll see for Q4 there?

Eeva Sipila

If you’re talking about the group cost, so we’ve had certain efficiency by improvement actions also in the group level, but I think the best number perhaps is really that’s what they’re comparing the year-to-date numbers, and we should be -- we’re not very, very far necessarily from the '15 numbers.

Magnus Engvall

Okay, so little bit lower than '16 then?

Eeva Sipila

Correct, yes.

Operator

We will take our next question from Jonathan Hanks of Goldman Sachs. Please go ahead. Your line is open.

Jonathan Hanks

Just on minerals equipment. Obviously, the year-on-year number looked pretty good. Just wondering, if that was driven by any secured commodity or region in particular? Thanks.

Matti Kahkonen

As we said that, the pipeline consists of small or medium sized project and equipment orders. And there was one sort of 20 million to 30 million orders, but I am just trying to think about that, but not really any commodity or any market area. But of course always that as of you equipment orders that somehow the one market area there you might get a little bit more focused, but it's not something that many of the market areas would be developing better than the others. They are the same and then the projects are such happening, sometimes it's Asia, sometimes it's not Northern Europe, or South America. And this time, there was a little bit more activity as usually in the European numbers overall that not on the European mining was contributing to those numbers quite positively.

Jonathan Hanks

And then just one on more general strategy, I mean, obviously it's been quite clear that you would like to do small to medium sized M&A, you've recently got the balance sheet. Does what do you see in Flow Control or oil and gas change the priority in terms of which end market you would think about doing M&A?

Matti Kahkonen

Not really any change in that respect because the M&A status, how the long-term activity or long-term strategy in a way that -- of course, if there would be a longer term decline in oil and gas, that would make some assets a little bit more less valuable or multiplayer to come down. But most probably, it's not really having an impact that how we are thinking about the priorities, that how to go when to, and how to go forward. So not really in this sort of -- I would say anyhow the short-term, sort-term market impact, this is not having impact on our M&A status.

Operator

We will take our next question from Klas Bergelind of Citi. Please go ahead. Your line is open.

Klas Bergelind

A couple of questions please. Firstly coming back to Flow Control and the margin, a sharp fall in equipment orders this quarter will obviously weigh on revenues going forward. I can see the consensus margin is up 60 basis points next year. That is a bit punchy. You said that you already have cost cutting in place, but don’t you have to accelerate the cost cutting now. I mean the volume drop through that we saw on EBIT and minerals in the past has been big, so shouldn’t this impact flow control as well?

Matti Kahkonen

Good question, and our philosophy overall is that has been and continues to be that regardless actually of the market we do whatever we can do on the cost side. And we actually accelerated the flow control activities already earlier this year. And we're now going to those and you will see result out of that but we have decided that even though that the market would be as good as it can ever be in a way. There's opportunities for the cost cuttings and we continue to do those this year and also next year. And it'll have a impact, but I wouldn't that we -- we accelerate it that actually already earlier.

Klas Bergelind

Secondly on services and mining down 3% year-over-year, its stable sequentially, can we walk through what happened to the different segments to spares and wears, rebuild, lifecycle? And in particular on rebuild, how much were rebuilds down this quarter and what share of revenues, please?

Matti Kahkonen

The rebuilds, and that was flat in the way, so that there were no big change from the -- on year-on-year basis, so that -- it was stable even though lower level. And what do we otherwise see in the mineral services, as said the spare parts demand and the development has been, let's say positive. And that's been going according to the expectation of plans, and that's good because it's a good high margin business. Wear parts, we see some competitive area, obviously that where we can see some of the decline in the next stage. Most probably, there's some -- as there have been already many years that still the prices are under pressure in the wear parts and higher competition, so that is having some impact. But otherwise, the margin levels in wear parts, we have managed to compensate all those price pressures quite effectively.

In the lifecycle contracts, there were one or two if I remember correctly in Q3 not very -- we lost once, but a little bit more activity, and that is something also participating the MINExpo as you, Klas, I tell you, you saw it and heard it. Mines are, of course they are looking very-very carefully all the productivity type improvements and that's -- it is the up time or other productivity type of things. There's a growing interest for the lifecycle contracts as we see that, that many discussions in that event and of course every day that we see -- because there seems to be that, that's the next wave of step in a way how they can improve more there productivity than only looking at what's the wear part price or spare part price or.

We see a growing interest on the rebuilds and lifecycle contracts, but the point is that it's a slow process and today getting the approval in customer, and it takes much-much longer than couple of years ago for even for a smaller lifecycle contract. So, the lead time or the acquisition time for the lifecycle contract is clearly longer, so that I don't expect that it'll have a big impact for the rest of the year. But for sure, I'm positive that it'll start to have an impact for the next year, is it the Q1 or Q2 remains to be seen, but somewhere during the next year that we should start to see the result out of those discussions what we're now having.

Klas Bergelind

Just a quick follow-up on that, if rebuilds are flat year-over-year, we obviously had a very big decline in earlier in this year, was this just an easier comparative or do you actually improvement on rebuild sequentially?

Eeva Sipila

You'll see last year, it was quite low actually. So if you remember that, that was a little bit impacting to that. But I don’t, if there is some seasonality also.

Klas Bergelind

My final question is on equipment margin in minerals the second quarter I think we’re breakeven. I am trying to think about the operational gearing when volumes come back next year. The margin usually in the beginning of an upturn jumps quite a lot here, incremental are high. What kind of margin do you think is possible here, is it up 5% or maybe even higher 10% when volumes come back?

Matti Kähkönen

I’ll try to get answer the question. But anyhow it's a good question. Yes, you are right that it's a good volume leverage, but if you look at the minerals capital business, equipment business. So in good situation you obviously there is the possibility to make double digit EBITA margins, but that means that the volumes are good and the market is good. Now, in the Q2 we’re breakeven a small profit in Q3 on the minerals capital side. So that, it's something between one on 10, but there is of course, there is leverage from that point of view. But don’t want to start to guess or quantify or give guidance for the next year in the rest capital EBITA.

Operator

Our next question comes from Antti Suttelin of Danske Bank. Please go ahead. Your line is open.

Antti Suttelin

Two questions on Flow Control. First one, with your indicate base like [EPC] phase channel and customers CapEx plans. It feels that you are going in line with the market or is there is a market share change that explained part of this weakness in order?

Matti Kahkonen

The line is a little bit bad, but obviously, we have seen some decline in EPC backlogs and their order intake which have a direct impact to us as well. I don’t see, if I heard correctly, I don’t see any big changes, and the market area gaining or losing in recent market situation. We have been doing quite might be that with the last couple of years we have been more successful with some of the businesses in flow control. But right now it's not very much as said moving on, so that’s not really a big change in the market share.

Antti Suttelin

Hope, the line is better now. I think you said, you’d expect better order intake for pulp and paper related segments in 2017. I just wonder what is that based on because when I look at the original manufacturers order intake for pipelines for example, I mean there was a big boom in 2014, but they declined. And I don’t see a recovery. So I wonder why is it that you expect better pulp and paper business next year?

Matti Kahkonen

Everything is relative, but if you look at the 2015 numbers in pulp and paper, and I gave already one example that if we say that the average quarter somewhere around 10 million plus minus for the pulp and paper project in 2015. Now in '16, it's been only couple of millions and third quarter was zero project, so from '16 to '17 it will be better. But '15 was for the long-term, it was all time high, so that I don't expect that to get to that level. But somewhere between '16 and '15 to '17 should be because, it’s not the big many, many huge pavements in a way, but there are reasonable size that project that we see. We should take place in '17 of obvious customers can change differently. But from the very beginning of this year, we saw that '16 for us will be clearly a lower year in pulp and paper than 2015. But for the '17 in pipeline, we can see project that to '17 should be and I believe that it will be but down to '16, but I said the '15 was all the time higher for us.

Operator

We will take our next question from Ben Maslen of Morgan Stanley. Please go ahead. Your line is open.

Ben Maslen

Thank you. Good afternoon Matti. First question Matti, we just come back to the tied up you’ve done on the order backlog. Just talk a little bit more around which projects you’ve taken out of backlog either by commodity or region. And why you’re doing it now seems now time to do it given that the outlook for commodities and the mining industry seems to be better than it was a year ago? That’s the first question. Thank you.

Eeva Sipila

Ben, no specific commodity per se, I mean, obviously, it’s an exercise we do on continues basis based on the most recent view we have together with our customers. So, we would do that inside whatever whether sort of more positive or negative it’s really based on this factual understanding at the end of the quarter. And this is something that maybe now in this quarter, there was a big more activity on that signs. So it was a bit more visible, but especially activity has been very much to same in the previous quarters as well.

Matti Kahkonen

On that but it was, the most of that was clearly one customer specific thing in a way that took place or that not really a conclusion of anything else. It was a long old project that we did some adjustments.

Ben Maslen

Okay. So this is discussion with customers and then they decided, they’re not proceeding with this delay, so you take it out of the backlog?

Eeva Sipila

Correct. Yes.

Ben Maslen

Okay, great. Thank you. And then just looking forward out of the backlog and it’s a better future drive equipment growth next year. If we saw with the backlog at the end of September with just slightly year-on-year, I know guess just signal the Q4 so what is also could be soft. So would it be right to assume into '17 that the backlog is not going to be able to support growth next year unless we see a recovery through the year, but based on what we see at the end of December, it is like to be down year-on-year?

Matti Kahkonen

I think that, your conclusion with that, it sounds some that depending what’s happening in the market, but it’s a correct one.

Ben Maslen

Thank you. And then on minerals, I guess they’re more moving parts, I mean the backlog is 4% higher year-on-year in the September. I mean, you’re signaling less deliveries I think in Q4, but at the same time. I think you have a difficult order in terms of large orders. You have an earning 80 million large order in Q4 last year. So when you look forward to the end of December where do you think the minerals back probably year-on-year and do you think that will support top line growth or at least equipment growth next year? Thank you.

Matti Kahkonen

You conclusion, Ben, once again right, that the backlog should be supporting revenue growth for the equipment minerals business for the next year.

Operator

We will take our next question from Lars Brorson on the Barclays. Please go ahead. You line is open.

Lars Brorson

Hi, thanks. Actually, but this is really a follow-up that earlier question Matti and asking slightly differently and your earnings page for full control for '17. can you just remind us whether there is any meaningful mix impact from the oil and gas and in other words where are margins mid downstream versus rest of flow control? And again just to that earlier question, minus than the lead times of that business please?

Matti Kahkonen

Yes, starting from the lead times of wears and services, it's very fast moving. Typically, it's between four to six months on projects 9 to 12 months, but most probably the most of sort of average somewhere around five to six months lead time for the Flow Control business. Margin wise, Flow Control is quite -- not really a big change is in the way that if you look at either oil and gas or pulp or paper. Throughout the year, they have been becoming more and more equally the same in a way and the backlog point of view not ready to see such a big difference from the margins point of view.

Lars Brorson

And when you look at your shorter title oil and gas businesses including your North American transportation valves business, do you see any signs that might offset the weakness in the broader mid and downstream or is that still as you see it now going to continue to be drag on Flow Control?

Matti Kahkonen

Transportation business will be difficult this year and at least the first half of the next year. So we don’t expect that to come back before the North American titles here that the business start to develop potential then they start to build up a new centre and obviously there is time left before we will start to see the orders. So I would keep that as a low level business activity for the next year. Let’s see Q3, Q4 next year that where are we but I don’t expect any improvement in that respect. And I don’t like the oil and gas obviously it is down as we have indicated it went down already from 15 to 16 if remember somewhere 12 to 13% and right now in oil and gas we are down about 12 to 13% from the 15 levels. So that basically we have come down 25 to 30% from the 14 level so that and much less than the upstream players.

Operator

We will take our next question from Johan Eliason of Kepler Cheuvreux. Please go ahead. Your line is open.

Johan Eliason

Just coming back to this Flow Control margins, you’re sort of negative year-on-year developments basically started in the fourth quarter last year and at the time you said you did some extra investments of opening offices for sitting capital somewhere around there. How should we think about this in a year-on-year perspective, is that extra cost sale there basically with the low volumes anticipated for Flow Control in the fourth quarter, we should expect the margins to be down on a year-on-year perspective despite last year potential temporary?

Matti Kahkonen

Thanks for the good question. Obviously, those costs as such are there, so that we invested into the some service centers and there so we continue to have those, but at the same time obviously we have been taking cost out and to mitigate and eliminate those from, from that point of view, we are better offset that we have been taking more cost out, and we invested in those case. So that’s the positive. It's and of course we have started to see the transportation impact already last year so that -- but it's a volume gain that the Flow Control cost structures have been streamlined and still better work to be done. And obviously time-to-time, you need to invest and build up the service. But the last year in the Q4, they required a few of those. So that was a little bit not -- let say from the timing point of view not a normal quarter, and this year obviously, we are not planning to have such let's say to the investment cost impact to the Q4 as such.

Johan Eliason

Okay good. And just down on the pulp and papers, is it that primarily a pulp or is it equally placed in pulp and the other paper equipment?

Matti Kahkonen

It's Pulp and also packaging board type of machines that which have been in some tissue. But of course, those big projects if you look at those are always, always a big pulp. But there are quite a few has been ordered to at least driving internet traders, driving to packaging board demand, and this should demand, and those are absolutely driving to pulp demand, so all those three not in the printing and writing of obviously side of the pulp and paper.

Johan Eliason

I wouldn't think that it was packaging and tissue would have been a little bit better this year because spend that acquired pulp orders. So, I misunderstanding sounds thing here?

Matti Kahkonen

This year, there haven't been any big at least any big pulp mill investment. Those took placed orderly partially in '14 and '15, and we don’t see those. For this year another question is whether there will be one or two for the next year. And if total will happen, so then the pipeline is better, but they won't happen exactly in January 2017. But those we case see and there is continuous need for the packaging board and the tissue machines, and it can be that the one packaging board machine only 1 million or 2 million to us. So that is not always, that’s a beginning, but as a one project that we see. But then there are also rebuilds and the refurbishments taking place, and there is a demand for the day-to-day type of valves.

Johan Eliason

Excellent. And then my final question on mining, this, you said about wear parts declining sales and the status would be basically stable or even positive. The declining wear parts sales, is that from early the price effect or is it a volume effect that you might walk away from some volumes in the wear business?

Eeva Sipila

It was a price impact, so the volumes in tons are similar to a year ago. But as you well know there's -- the raw material prices had a big impact on that and that also maybe explains why our margin development has been nevertheless quite good that it is in that sense pass through.

Johan Eliason

So, it's not fatty volumes of the market share basically walking away from too aggressive pricing there?

Eeva Sipila

No, as we've also been able to reduce our cost base, so the business has been healthy and hence we've been continued to take our share.

Operator

We will take our next question from Andrew Wilson of JPMorgan. Please go ahead. Your line is open.

Andrew Wilson

Just a couple of few questions and on the backlog, we're not wishing to lay the comment around this Q4, I am just trying to understand, is the 680 is the level at the end of September main essentially [Indiscernible] on top of that? Is there any reason why shouldn't expect it flow through in a similar way to the Q4 last year, so I think the guidance last year was around 760. You live just in the 760 of revenue in the Q4. And is there any reason to think that I shouldn't use same basis of kind of expectation about to the flow through in the Q4, I mean something fairly in terms of service being a bigger part?

Matti Kahkonen

There is certain loss of course that you could think in those terms, but in the current market situation, it's not anymore about the general things in a way what happens normally over the year end. So it's a very much the customer specific issue and the one project can make a fairly big differences, if something cost 10 million for the next year. So the delta is already 20 million year-over-year, so that one good note or such a conclusion. Of course that gives some guidelines for that, but it can be also very different because, years are not similar rather to each other in that respect because it depends so much on the project mix. And of course the fair visits type of things are not flowing very easily. So, what needs to be done this year, it needs to be done, it's about the project business, but then you need to look at those project-by-project, and that's very difficult to predict in a way that is it going to be the similar type of things than last year or not, very difficult.

Andrew Wilson

And just within that, the comments around orders being postponed or potentially being postponed, just sort of two questions on that, is that input minerals and inflow control, and is it section if anything changing obviously this, which you've been saying the same thing about the order book or the order backlog at the end of Q2 been delivered in Q3, I mean, does it change in terms of the communication you're getting from customers?

Eeva Sipila

No, I think it's certainly a trend almost in this sense that obviously this general uncertainty has an impact on customer decisions, they are making faster decisions and maybe things are moving a bit and I would say this is the underlying thinking from the customers not very different be it mining or flow. So, they are very obviously very much looking at to -- how much do they need the capacity, how much do they want to sort of protect their year-end balance sheet for example because of the increased delivery needs also acceptance of inwards from us. And so I wouldn’t sort of make it more dramatic as such.

Operator

We will take our next question from Tom Skogman of Handelsbanken. Please go ahead your line is open.

Tom Skogman

I have two questions. I’ll start with the guest or no question. If I understand you right that even if mining equipment orders are down in Q4 year-on-year, you still expect deliveries in full year 2017 to go up, was that likely understood?

Matti Kahkonen

Yes.

Tom Skogman

And then my second question is about SG&A costs. So, there has seen a strong decrease in the first-half this year while in Q3 they were almost flat, and then are down to a level of €125 million to €130 million per quarter. Then you said that, it will be significant cost down in Q4 when it comes to SG&A. So I just want to walk full-year level we should expect for next year on SG&A costs?

Eeva Sipila

I apparently allowed to use more than the two words or at least I’ll need a few more. Yes, the actions that are ongoing we’ll obviously not really have a savings action in this year. So, you will see rather a negative adjustment effect in the quarter. But then going into next year, we’re obviously taking the action because we still see that the market will continue to be challenging and we need to be very focused on our costs. So, we are aiming to have a lower level in next year. And that’s obviously applies for both of the two businesses as been discussed. But I really want to give an exact number at this point, let us first complete the actions. We obviously have plans and targets, but let us first implement and then we have more visibility into the outcome next year.

Tom Skogman

And if I rephrase it in 2015, they were an average 143 per quarter and this year they will likely be just above 130 per quarter. So, will the decrease in 2017 be similar as in 2016 or bigger or smaller?

Eeva Sipila

Well, the net impact will obviously also then be dependent on whether we have any growth initiatives where we want to invest. But we may have publicly commented on the U.S. sites where we’re consolidating and the headcount impact. So, obviously you can calculate what sort of average rough indication of what the levels that we are aiming at.

Matti Kahkonen

I guess that most probably the drop has been bigger in earlier year, so that it won’t be that big. But it will be still going down.

Operator

And we’ll take our next question from Michael Kaloghiros of Bank of America. Please go ahead. Your line is open.

Michael Kaloghiros

First question and maybe a follow-up on the backlog, just want to understand and not you mentioned when the customer and impact I think, which we look every statement for 100 million. Just want to understand those orders that canceling or being reduce other order that we are place long-time ago and that you never been able to deliver and that’s probably why the production has been lower than we expected for sometime or is it can being in any order that is being cancelled?

Matti Kahkonen

These orders were order or there are one project of course many orders were booked quite a long-time ago already.

Michael Kaloghiros

Okay. So basically, trying to look at 12 most rolling orders, there are 850 million orders in the last 12 months rolling in minerals. I mean given these orders are being placing in a fairly, in a tough environment. I guess the customers well and it was tough, when they take all this. Are you now more confident that should be able to deliver this, the orders that you’ve look in the last 12 months?

Matti Kahkonen

Yes. It’s more confidence on those clearly that this and there was this turbulence started, some years back, of course, it was a very uncertain times. And there were postpones and cancellations, but now it’s stabilized and even a little bit to earlier book to project are now proceeding step-by-step even slowly but step-by-step. So I have more confident on that and then year ago, two years ago.

Michael Kaloghiros

Right, so basically with backlog that between this now and book-to-bill of 1.3 times in equipment over the past 12 months that is basically what is here the confident that you’re growing next year in equipment?

Matti Kahkonen

Yes.

Michael Kaloghiros

Thank you. Next question on services, just coming back maybe to questions around refurbishment and upgrade. I think 12 months ago, I think I’m not sure we were showing this pick-up or services business 15% in refurbishment and upgrade. I mean any sense of what it is in the first nine month of this year, 15%, 10% or 5%. Can you give us a degree of management of how big is refurbishment and upgrades within your services sales not orders?

Matti Kahkonen

It’s about the same, so there are not big changes.

Michael Kaloghiros

Okay. And just in terms of profitability given maybe you could bullish on this and you've become more lumpy and you've become that which reported services growth. I mean what the margin profile on products and services, because it looks like CapEx in the type of project and you mentioned like in the margin in mining equipment or more in kind of like single-digit with expect on similar for this project when they comeback or is it more in services like margins much higher margins?

Matti Kahkonen

That margins overall in different categories have been fairly stable. So, that I don’t see differences in the profitability of the services and looking at the peso. The refurbishments are always project-by-project that there are time-to-time, they are complete very, very profitable or sometime there are less profitable or orders, so there is a more volatility in that. So that it’s not, that is higher OpEx, it can be both at the same time in the backlog. Spares and wears are much more stable in the way. But I don’t see any that it would be more in the high margin or more in the low margin, most popular. We will see both investments when the time goes far.

Michael Kaloghiros

Okay. Thank you. Last one on Flow Control and I think add in my note that from you just go through, in current environment margin and flow control would be in the range of 13, 14. Now that you can reflect expanding [indiscernible] you mentioned by 15% margin. Just want to understand, the changes basically the extra cost savings that we’re doing, that makes you confident which again get both the 13%, 14% even in which volume environment or is it a single or what expense that changing anything the margin bracket for that division?

Matti Kahkonen

It was mentioned already couple of quarters ago, when we were discussing about the last year we’re now 17%, 18%. So that’s where we are now, where we are heading and obviously then we end up I'd say that somewhere 13, 14, 15 is more likely new situation because of the big impact with this U.S. Transportation business was impacted 2 or 3 parentage point. So that was a loss extent, of course if things would get very, very, very difficult for the whole next year then we need to regard this almost we can take the cost out. But that is pretty much where to start to guide us, speculate any of that. So that this, 13 and 15 what more likely indication that, if you take some of those training away that we saw a year ago also which impacting this year. Some of the headwinds in oil and gas already last year 13%, but went down this year, 13% but went down on year-on-year, year-to-date number. So, those were impacting from the volume order here, we ended up to this 13, 15 and of course some sort of indicating, but we haven’t never ever give a guidance to the business area or the reporting segment profitability. But just to answering to the question that we’re basically, could be so, that was the background for this number.

Michael Kaloghiros

Okay. So I mean going back to the observation in that class people in the consensus having margins of 14.1% next year, I mean doesn’t consensus that much, if we think the range, based on the volume that you see in the margin, you got in the backlog and pricing environments in that segments. You think this is within guidance?

Matti Kahkonen

No, we already on the '17 guidance, so, I would not like to comment on '17 numbers.

Michael Kaloghiros

And you just give us margin version, just the version, is that you’re not concerned?

Matti Kahkonen

In the current circumstances that this what we have been saying, and I said that too earlier to draw any conclusion sort of the order job because it would not only coming from the pulp. And in the oil and gas, there was impact from the pulp and paper as well. And we see different pipeline for the pulp and paper, and oil and gas which is largely impacting to the order intake in Q3. That pipeline is not shortly, and it’s too earlier and too difficult almost important to say how is that going to be in Q1 or Q2, which will have impact for the next year, next station and the profitability for full contract anyhow, so that too early to conclusion or comment on that.

Operator

We will take our next question from Manu Rimpelä of Nordea Markets. Please go ahead. Your line is open.

Manu Rimpelä

Two quick follow-ups from me. Firstly, are you able to comment on the Flow Control margin difference between the equipment and the service businesses, is equipment is still clearly profitable at this levels?

Matti Kahkonen

Yes, we haven't really -- this question comes time-to-time up in a way and it depends. But overall one could say that the Flow Capital is also on a positive side.

Manu Rimpelä

Okay and second question on raw materials going in '17, so do you see any headwind from that margin to expect that maybe you don’t really have an issues with those, as far as cause inflation?

Eeva Sipila

Well, it's a obviously something that we are looking into as we are planning into next year after many, many years of positive trend in a sense of more deflation pressures. I think the tide will turn at some point and there is certain discussion in specific areas. But let's see, I think there will be very much link to the overall global economic outlook which onshore you follow even more closely, then we have the chance. But I would expect a lot of tailwind just maybe the sort of the answer at this point. And let's see if there is headwind and then we need to sort of act accordingly.

Manu Rimpelä

Are you been able to quantify the tailwinds that you have been receiving over the last couple of years?

Eeva Sipila

No, it's a difficult think, I mean obviously yes there has been some tailwind, but then obviously our customers having to have partially been very well aware of the tailwinds. So it's also been a discussion item and then we touch the sort of rare parts, somewhat earlier in today's call. So with -- said that there is obviously a lot of moving elements both positive and negative in numbers, but overall I think we can conclude that we are satisfied with that 12.1% EBITA margin in the quarter.

Operator

As we have no further questions in the queue. I would like to turn the call back to the speakers for any additional or closing remarks.

Juha Rouhiainen

All right, thanks very much all of you for participating and asking questions and taking part in discussions. This concludes our conference call for third quarter '16 results. And we hope to see you all again very soon. In the meantime, have a good weekend. Bye-bye.

Matti Kahkonen

Thank you.

Eeva Sipila

Thank you.

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