Outotec OYJ (OUKPF) Q2 2016 Results - Earnings Call Transcript

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Outotec OYJ (OTC:OUKPF) Q2 2016 Earnings Conference Call July 27, 2016 8:00 AM ET

Executives

Rita Uotila - Vice President, Investor Relations

Jari Ålgars - Chief Financial Officer, Acting President and Chief Executive Officer

Analysts

Antti Suttelin - Danske Bank

Andrew Wilson - JPMorgan

Manu Rimpelä - Nordea

Tomi Railo - SEB Enskilda Equities

Michael Kaloghiros - Bank of America Merrill Lynch

Jonathan Hanks - Goldman Sachs Global Investment Research

Johnson Imode - Bloomberg Intelligence

Operator

Good day and welcome to the Interim Report for January to June 2016 Conference Call. Today’s call is being recorded.

And at this time, I would like to turn the conference over to Rita Uotila. Please go ahead.

Rita Uotila

Thank you, operator, and ladies and gentlemen, welcome to Outotec’s Q2 Interim Report Briefing. Before we hear the presentations from Jari Ålgars, CFO and acting CEO of Outotec, let me remind you that this is a recorded teleconference and the recording will be available later this afternoon on our website. After the briefing, you will be able to ask question in the Q&A session.

Now, let’s start with the presentation. Go ahead, Jari.

Jari Ålgars

Thank you, Rita, and also welcome on my part, Jari here. So if we start with the presentation, so in all we do safety comes first. So our safety performance in Q1, Q2 has been quite good, because we’ve had zero fatal accidents, our lost-time injury rate has also gone down from last year from 2.8 to 1.5. And then we’ve had 10 lost-time injuries reported on 1,200 reported near misses.

So the development has been quite good. On this part, and thus we are working in quite exotic countries many times, although it’s risky being in many countries nowadays still this has been quite a success for us. If we look at the businesses compared to three, so we can see that the minerals processing is stabilizing while again Metals. Energy, Water remains challenging, for the low metal prices are not promoting any new investments, investments to existing capacity with fast returns and environmental reasons, meaning that, customers want that payback on their investment. They are not investing into capacity too much at the moment, and they also are doing environmental investments, where the emissions over the water treatment or then they really want to utilize the off-gases for other reasons.

So we have the – we see developments – good development in this area. We have also some slowness in services as producers focus on cost optimization and out of the markets. We are looking at, we can say that EMEA and South America are more active markets. And, again, if we look at the metals, gold, copper, and then also as already mentioned sulfuric acid and waste-to-energy are the most active ones, as we will see in the projects also when we go forward when we look at the announcement.

So as said minerals processing is stabilizing, but then also under Metals, Energy, Water, we have a little bit one-sided picture, because the sulfuric acid is actually going quite well. But then the metals refining side is weaker – still weaker.

And if we look at Q2 in a nutshell, the pluses and the minuses, start with the minuses, we have the challenges in the Metals, Energy, Water segments, they continue. We also see that project finalization and payment collection remain challenging, as we have mentioned earlier.

In good times, usually quite easy to get the final acceptance from the clients and get the final payments, because they earn money in times like these, when customers don’t earn money, usually there are good reasons, tough to give final acceptance and try to give the last payment. So it’s really a challenge to get this done to finalize the project. And despite significant savings, which I will come back to later on, which has been successful. We can see that work still remains, which is the bar we still have to do.

If we look at the savings program proceeds on the plus side, the fixed costs had actually been reduced by 19%, well according to plan. And plant and equipment orders in Minerals Processing segment has increased compared to last year, which is a good sign that things started. Things have bottomed out. We already stated that maybe that happened in first quarter. This is further proof of it still the market is not very strong, but there is a market, which was not there in Q1.

And service order intake plus 5% in comparable currencies, which is a plus not a lot, but we still see that this is stabilizing as said after the weather weak December, January and February. So we slowly, but surely going into that right direction.

Plant and equipment orders picked up in minerals processing, so we have more orders we announced in minerals processing. One is process equipment for Houndé Gold, Burkina Faso, one for Acacia Maden in Turkey, one for Bakyrchik Mining in Kazakhstan, and then also we had an iron concentrator to Iran, which was announced just recently.

Then on the MEW side, we had a copper smelter and acid plant revamp in South America. And then we also had a sulfuric acid plant for Intesca Industrial in Egypt. These were the main workers, which we have announced for.

And if we look at our minerals processing indeed, the order intake was €261 million, which in comparable currencies for 17% increase to last year. Again, in Metals, Energy and Water, the order intake was €190 million, which was actually €54 million, or 51% less in comparable currencies. And this is also due to some of the timing, we’ve got some big orders in the first, second quarter of last year, which also impacted this month, obviously a significant number.

And if we look at it on the left bottom corner, we can see that the service orders have come down, as well as the CapEx orders, but on the same terms, this has improved when we look at the currency. So Americas consisted of 31% of our order intake; EMEA, 53% of our order intake; and APAC, 16% of our order intake.

We have a stable backlog. We have at the moment a little bit over €1 billion in our backlog. So not a lot of change. We have an order intake, which was more or less same as our stage, so we have been stabilizing that – in that regard, and we expect that’s roughly €490 million out of this backlog will be delivered in Q2, and leading to sales. And Iranian projects not included end of Q2 and backlog was €185 million.

Timing of plant and equipment orders in 2015 and weak service orders in 2016 decreased the sales. If we look at the numbers, we can see that in Q2, our sales was €268 million, when it was €311 million in the comparable period, obviously, decreased by currencies and the service sales was very low in the first or in the second quarter with €100 million compared to €126 million. And this is mainly due to that we had the low order intake in December, January and February, which led to low sales in Q2.

So the share of services in sales dropped from 40% last year to 37% due to this, this year. Gross margins were lower, mainly due to that we did not have any big projects, we could finalize under these provisions for – during this year what we had last year. And adjusted EBIT was €5 million during the second quarter, when it was €16 million last year. The €5 million – as we had €5 million negative in Q1, which means, we came back to black zero in the first-half of the year on the reporting period.

And the profit for the period was minus €3 million, mainly from restructuring cost, and for the reporting period, minus €14 million as we have made period loss in the first quarter of the year. The fixed cost savings did not fully compensate for lower sales. If we look at the first-half of last year, we had €24 million adjusted EBIT. Now, we have much less sales, which brought the results down below the zero line. We also had last year that finalizing project we could release provisions, which further brought the comparison down.

With the fixed cost decrease, we were able to bring the result back to zero. But not more than that. But we still have work to do on our cost side and also in our cost competitiveness improvement in order to bring also the markets up in this situation.

Minerals processing, we had improved order intake, the fixed cost savings starting to show, and the services was impacted by low order intake in Q1. So if you look at the first-half of the year, order intake €261 million, compared to €245 million last year. And if we look at in comparable currencies, this impact was actually even bigger 17% improvement.

Sales again still less, it is following the light from the order intake is still going down as the order intake came down last year, and ending up at €232 million when it was €223 million a year ago same period. And service sales €125 million when it was €150 a year ago, and that impacted by the lower that intake in Q1.

So, and adjusted EBIT still despite the sales was significantly lower was flat €10 million, between same as last year, so which means that their savings have started to show that we were able to keep the profitability despite the drop in the sales. Metals, Energy, Water, metals refinings order is on a low level. Demand for sulfuric acid and off-gas solutions is quite high, quite good. And profitability remain challenging due to this one sidedness and also low order intake.

So for the first quarter or first-half, the order intake was €190 million when it was €409 million last year, very pretty significant number, therefore down 51%. Sales €275 when it was €315 a year ago saw declining. And service part was 90 when it was 94 a year ago on more or less flat looking at comparable currencies. And then the adjusted EBIT actually dropped to €7 – minus €7 million when it was plus €17 million a year ago. The main reason of the difference is really we were not able to finalize projects during this period. And so we were not able to release provisions into the result.

If you look at the next page upgrade and long-term service contract and sales – orders and sales declined and the cost optimization puts pressure on services. We can see that upgrades and shutdown services are postponed. Spare part inventories are optimized, so it’s a tough market to be in. But as said, we have still been remaining to be reasonably resilient here and we’re still going forward with even more focus on this.

Ongoing projects tied up more capital, I said earlier, the first-half of the year usually due to customer behavior. We have seen a negative net cash from operating activities. We saw it last year, we saw it this year too, but due to that we did not have a lot of new orders that we could book today. Down payments on, except to debt reverse slightly more negative this year in the net cash from operating activities. Again, we were lower on that CapEx and then acquisition, so ending up with clearly less negative number after the investing activities, minus €62 million compared to minus €96 million a year ago.

Liquidity and equity remained solid, we paid of €30 million debt, and we still have a significant liquidity. Our equity-to-asset ratio is good, and our equity is due to this much stronger than we have had. We had last year because of the hybrid, which is treated as equity. So the balance sheet more or less remained flat than a year ago, compared to a year ago.

Fixed cost savings achieved as planned. We had €8 million savings in the first quarter as you can see now that can start to show, we had cumulatively saving €34 million now after the first-half of the year, we expect this to continue to reach the targeted fixed cost level what we have set up for ourselves. So this is going well according to plan.

Personnel development is, of course, the other part of the coin. With this we have – with the savings, this is mainly through personnel reductions, staffings. We announced this and we have 4,900 people now, we’re down to a little bit less than 4,300 people on plants, we have in place, we will continue it.

Key events after June 30, 2016, first one was, we updated our disclosure policy July 1, July 4. We announced the Acacia Maden’s Gökirmak copper project. In July 12, we announced the Bakyrchik Mining, and July 27, we announced Iron Concentrate Project in Iran. And then also, yesterday, we announced that Markku Teräsvasara will assume the duties of Outotec’s CEO on October 1, 2016, one-month earlier than we had slated last time.

Market outlook remains uncertain. Industry’s investment forecast for 2016 is lower than in 2015. We expect further capacity adjustments, where supply exceed demand in those area and current market conditions and long-term metals prices, outlook is not supportive for bigger investments.

Sustainable solutions are in demand due to tightening environmental regulations, as you also can see from that geographic area. Some geographic areas, such as the Middle East are more active. Process modernizations are driven by the scarcity and cost of water, as well as emission control.

And waste-to-energy solutions are in demand in certain countries, but linked to subsidies and environmental regulations. We also expect our opportunities through productivity improvement. The key areas and key focus in 2016 is to improve fixed and product costs, develop service business, and seek opportunities from growth segments ones that are out there, this will continue.

And the sales guidance for 2016 is reiterated, and profitability guidance range is narrowed. And based on the continued challenges of Metals, Energy and Water segment, current order backlog and uncertain market condition, the management narrows its profitability guidance range and expects that in 2016.

Sales will be approximately €1 billion to €1.2 billion, and we already have sales from the first-half of €507 million. We expect from our order backlog, the second-half sales of €490 million. So to reach the lower end of the range, we need €3 million on your sales and to reach the higher end, we would then need €203 million sales. And the adjusted EBIT will be approximately 2% to 4%, thus it was earlier to 5%. And the wide guidance range, we still have in place reflects the current volatility of the market.

And if we look at the profitability roadmap from 2015 to 2016, we see the savings improving, sales reduction, which has come down quite significantly, is it playing a role. We also see a market risk, which is either bigger or smaller depending on how things develop.

We also see that we are not able to get the provision releases we were able to get last year, and then we’ve also added some depreciations this year, ending up in a guidance upper boundary of 4% and lower boundary of 2%, depending on how that market risk and sales develop.

So that was the presentation. And I think now it’s time for some questions.

Rita Uotila

Hello, operator, now we are ready to take questions from telephone lines. Please go ahead.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will now take our first question, Antti Suttelin from Danske Bank. Please go ahead. Your line is open.

Antti Suttelin

Hello, it’s Antti here. I have two questions. First of all, I can see that the cost savings, the €70 million is now fully visible. You had €34 million savings in first-half, that’s close to €70 million on an annual level, and your first-half EBIT was break-even, so what can you do to improve earnings going forward?

Jari Ålgars

We have a number of areas where we see, of course, we will continue with the savings plan I said, so that will continue, and we expect to see more of that. I think the other part is really that we still can do more in the service side. We can even focus more. We can have more site account managers out there.

We can improve our supply chain and bring down the cost of our spare and wear parts, and thereby improve our service sales. Also, we can improve our competitiveness in the CapEx side, the same way. We still can go more into better cost countries than where we are today. We still can improve on our supply chains. We can do productization, meaning, that we can optimize our products to be more cost effective, still reaching the same output.

This all we are working on, and I think all of them, we’re expected to see results. We’ve seen results in all of these areas already. But maybe as you’re right, I said, the most visible have been in the cost savings. But we have done, we have mixed results into other areas as well, and we expect to see more of those.

Antti Suttelin

Yes, because if I look at your commentary on the market, it seems that you remain very cautious, you don’t expect much help from the market, is this correct?

Jari Ålgars

This is correct. I think we are looking more at what can we do in the current market to improve our situation.

Antti Suttelin

Okay. And then the second question, positively thinking, how much kind of say, you had project release provision inventory, if I put it that way? Do you have currently? I mean, assuming clients all of a sudden wanted to complete all projects that have been ongoing. How much would you be able to release some provisions in that case?

Jari Ålgars

This is a number we have never let out, and I don’t think we would start now. But we have in each and every project, we aim to have enough provisions. And then if the projects go well, we can release these, because there’s always a risk element. And if that risk element doesn’t happen, we are able to release provisions out, Antti.

Antti Suttelin

But last year, looking just on your buys, it seems that the amount was roughly speaking €30 million in 2015. Is it about the same, or is it considerably different?

Jari Ålgars

I think when you look at our profitability roadmap, we have said that this year, we don’t expect to see much of that at all. So I think this is more or less what we are stating with our profitability roadmap. We see that there’s, of course, less of them, because that year – last year, we were able to finalize many projects we sold during the good old years.

So big – really big ones, and that we have less of them now. But also as stated, it’s more difficult to get them finalized with the clients at the moment and to fight, fighting the final payment. So, everybody, when they have a plant, which is already are performing it kind of, they are not so keen on releasing the last payment to us. So this is a – let’s s ay, the situation is different now than it was beginning of and still last year.

Antti Suttelin

All right. Thank you.

Operator

Thank you. We will now take our next question from Andrew Wilson from JPMorgan. please go ahead. Your line is open.

Andrew Wilson

Hi, good afternoon, everyone. And a few questions if I can, please. And just on the service and business, I was just hoping you can give us a bit more detail across the various areas, because it sounds like, obviously, orders were up, but as you know, it’s against a weak comp, and then sales obviously looked weak. And then your commentary suggesting that the service demand is actually weakening. So in terms of orders for the second-half, should we be expecting service orders becoming down on the H1 win rate. And this is purely on the sort of the genuine upgrade, and we subside, or is it on comps as well. So just looking for a bit more sort of detail around the moving parts there, please?

Jari Ålgars

I think we are – or what we intended to communicate was that, it would remain weak. It’s not in the range anywhere what we saw in December, January and February. I said, we are not at those low levels. But we still don’t see the market taking off kind of strongly in that area. We still see customers avoiding spending as much as possible, but it’s clearly better than it was in December, January and February, and the situation remains.

And I think we are more looking at the market is bad and market is weak, we can do more internally. We can improve our own competitiveness. We can have more people out there on the site. And thereby, we are not anticipating. We are still anticipating, there is opportunity out there going forward. And if you look at them more specifically, I would say, still the CapEx like modernizations in service is very slow, and that’s been the case also during the last quarter.

Andrew Wilson

Okay. So the parts side is actually, is that more unchanged than rather than weaker?

Jari Ålgars

Yes, but this is correct, yes.

Andrew Wilson

Okay. Can I just ask and take questions from those who develop development to the profitability in the second-half. Can you give us any help in sort of switching, I guess sort of through the Q3 and the Q4 in terms of either cost savings, or I guess, where you sort of see clearly we need to make up some margin in the second-half, and should have been constrained in the Q3 or Q4 during this can be an improvement in both quarters just to trying to help us with the quarterly development?

Jari Ålgars

Yes, I think the cost savings will be more kind of, let’s say, I don’t see any big difference between the quarters, as such. It’s more now on the – let’s say cost competitiveness that purchasing savings, how can we improve our overall stock, where I think we can do more impact.

The impact we’ve made on the cost savings, they will continue and they will drop. And we will see them rolling in, but not with any specific different base with any of the quarters. It will just continue and peak days we really saw in quarter two, and then it will be a little bit, let’s say, it will continue, of course, we saw that cost, it is overall cost, but the base will not be as strong as it was in quarter two going forward.

Andrew Wilson

Okay. So you just expect Q3 to improve and then Q4 everything else being equal just because the cost savings clearly comes through incrementally, is that right?

Jari Ålgars

Correct.

Andrew Wilson

Okay. And if I just going to ask one final question, just on the run orders, which ever see – are not in the order book, but in terms of – can you just talk about a little bit about the pipeline and also the kind of timeframe and whether there has been any movement in terms of sort of likely those orders be in a position, where you can take the first payments, and therefore, we can see the new order book?

Jari Ålgars

I think we’re discussing with clients in Iran on an ongoing basis. We have cases there, which we’re quoting. I would say, even though after implementation, they happened, things have been not gotten much different. It still takes a long time, maybe there’s more openness between the bank and trying to find ways between the Iranian banks and the banks we have here.

And also maybe looking at instruments we did not have before like LCs was very hard to find, it was very much cash driven, maybe we will see some new instruments. So I’m still hopeful that Iran will continue to develop, but the development is always slower than what you would want it to be, I think that’s the case. But I’m positive – so I’m positive towards Iran, and we’re focusing on that. I would have liked to see more happen, but I guess that goes for everything I’m looking at. So…

Andrew Wilson

I guess, so we can just characterize that is hopeful on the basis that nothing has gone wrong, it’s just a timing, which we all know, it’s difficult on these orders?

Jari Ålgars

Correct.

Andrew Wilson

That’s very helpful. Thank you.

Jari Ålgars

Thank you.

Operator

Thank you. We will now take our next question from Manu Rimpelä from Nordea. Please go ahead. Your line is open.

Manu Rimpelä

Good afternoon, it’s Manu here from Nordea. And my first question would be on the services. So would you just help us to understand a bit better the phasing of the sales as we go into the second-half of the year, because if we look at the order intake, so that’s been running on organically at around down slightly less than 10% for the first-half of the year and order intake was down 10% in 2016, as well.

So how should we think about that translating into say was from this year, I mean, so far the sales clearly declined in Q2. So should we expect that that deceleration starts again phase in the second-half of the year for services?

Jari Ålgars

I think still the service business, which kind of takes longer to turn into sales has been more of its monetizations and upgrades, where it can be a lack of a year or more before we kind of execute and move it into sales. So it means, obviously, more portion of the sales is more short-term transactional type of business now.

So it should – the most part moving to sales like – as we could see also from the lack of order intake, December, January and February was immediately visible in our sales now in Q2. I think, this is what we should see also going forward.

Manu Rimpelä

Okay. And it was – so Q2 was an abnormally low level because of the level in Q1, is it so?

Jari Ålgars

Correct.

Manu Rimpelä

Okay. And then on the cost savings, how do you see the employees developing for the rest of the year? I mean, you saw a pretty significant drop now in the second and the first quarter compared to the end of last year. So do you still expect or are you kind of reached the level, where you want to be, or are you still looking to get significantly lower that numbers over the coming quarters?

Jari Ålgars

Well, we are still going down. We announced at the time when we did that we would reduce about 650 employees. At the moment, we are on the range of 500 plus. So we still have over 100 to go, which is kind of being executed with the process of negotiation has just taken so long. So it still will go down with roughly at the moment.

Manu Rimpelä

Okay, thank you. And then final question on these, you mentioned the big projects that you were able to complete last year and take provisions from them, and not expecting to get those provisions this year. So are you saying that the margin profile of this project has worsened with – especially, as you mentioned it, there are issues getting the last payments from the customers? So are you having to take a bigger provision cuts or release less provision than you had expected because of these issues, you said impacting profitability more than you had expected?

Jari Ålgars

No, not really. I think it’s more or like we – before we get the final acceptance, before we get the final payment, we really cannot do anything, because we still have an outstanding risk there. So as long as we are fighting to get those final payments and we cannot really do much of anything. So I think this is the main case. We are seeing delays in this. And as was said earlier, of course, last year, we had – from the golden days, quite a lot of big projects that set provision release, so there are less of them now.

Manu Rimpelä

Is this the reason why you changed the upper end of the margin guidance? So what was that due to?

Jari Ålgars

No, it was more if I said that MEW development. As I said, the order intake was not good in the first-half of the year. And it was also the orders we got, where were at one sided. So I think this is the main reason – and for that. So, obviously, it is quite challenging situation in MEW. And as I said, this is coming in with the lack. MEW, usually come with the lack of about a year and we has gone through the trough already and we see some stabilization with MEW. We definitely are not there yet.

Manu Rimpelä

Okay. Thank you now for the questions.

Operator

Thank you. [Operator Instructions] There are currently no questions in the queue – pardon me. We have another question from Tomi Railo from SEB. Please go ahead. Your line is open.

Tomi Railo

Yes, good afternoon. It’s Tomi from SEB. A couple of questions. First, can you just remind us about the unannounced order seasonality? The level didn’t actually pickup specifically or particularly in the second quarter compared to the third quarter, which usually tends to be the case, but what sort of indications would you have for the third quarter and fourth quarter?

Jari Ålgars

Yes, I think we might see the similar type of trends. The orders that are out, as I said, they are few earlier set also, they are few and far apart. We can see them pretty clearly. We can also see that amount of modernizations, which for part of this unannounced orders is less. So I think we should also see going forward that the amount of unannounced orders are less at least for the time being. This looks to be the case, so.

Tomi Railo

Is that also suggesting that the pipeline has changed and is the customer quoting activity has picked up or has it actually changed at all during the quarter?

Jari Ålgars

The customer quoting activity is actually strong and good. It’s just – they are a bit slow into coming – into a decision making to award the order signed. So we have enough to do on the sales side with quotations and visiting customers and working of different type of projects for them, but for them to make a decision is taking a lot of time. So as you could see, we started to see some decision making in Q2, which we did not see in Q1. At the moment, it looks – situation looks very similar as it does look for the last quarter.

Tomi Railo

Thank you.

Operator

Thank you. We will take our next question from Michael Kaloghiros from Bank of America. Please go ahead. Your line is open.

Michael Kaloghiros

Hi, good afternoon, Jari. Good afternoon, Rita. My question on your restructuring and the personnel developments, it looks like you’ve done a very good work at reducing services personnel over the past year or so. If I look at the non-services personnel, I mean compared to where we were few years ago, I look at the kind of ratio of that non-services to personnel two years back or one year back and where it’s now?

I mean you’re still way below where you were. I hear you say that you pretty much get into the end of the personnel reduction with maybe just another €100 million. I mean should I read that like you find with those kind of right cost structure you have in the non-services part of the business?

Jari Ålgars

I would say that we of course not accepting anything, but profitable businesses. So we are looking at – if we need to do something, somewhere is after we are kind of runoff the current – plans we will make and execute new plans. But at the moment, we have not announced any such.

Michael Kaloghiros

But I mean should understand that you’re keeping the cost structure as it is to I mean maybe to prepare for hopefully getting more volumes or I mean should we expect more constructions come on that part in order to start?

Jari Ålgars

I would say like that I think you can also see from the order intakes. The certain parts of the business are showing kind of a positive trend. Certain parts of the business are challenged and if we can see that that challenge continues, if we are not getting an enough orders, we have to put in more cost structure. So what I’m saying is this is – it’s not stopping here if we need to do a more.

Michael Kaloghiros

And just to – I mean again if you look at maybe roughly, there are kind of services for employee has come down? I mean has improved actually as you reduce the sales personnel, I mean should I just assume this as a proxy for your margin development in services as your margin in services improved over the past nine, 12 months?

Jari Ålgars

I think and the picture is not that – to that kind of clear because some of – with some many of these service people are out in the different countries and in the – those countries, we have a lot of admin people as well and we’ve done quite, let’s say heavy reduction on the admin and function side, more – even more than in the business side.

So I think that’s probably what to some degrees is shining through here also. So it’s not, even if it’s a service here, it means also support people to reach the service business. And also it means blue color people, because they also have over them contract, for instance, which also makes a big impact on this. And in some of the areas, we can – we have seen that customers have been sourced part of the work.

So and also in some areas, we have seen that customers have reduced the amount of work. So – as such I would say, the margins have remained, and we have adjusted the people to where the business level is currently.

Michael Kaloghiros

Second question on, I mean, maybe coming back to the question earlier on your adjustment of the guidance. And I’m trying to recompile the different moving parts, because on the one hand, you say that you didn’t get the orders that were expected in Metals, Energy business, but you haven’t moved the top line guidance, which was the margin guidance.

So, I mean, is it the execution in that business that you maybe – they are performing to previous expectations, or is it the project that you were expecting to complete this year with some prototype of provision release at the end of the year that slipped into 2017. How should we read this?

Jari Ålgars

I think really we should read it in that way that MEW is very much about sizable project, and where we have a good backlog and where we have carrying forward. And the worrying part is, of course, it will be tough to get new orders to fill up when the backlog is starting to decline, then we come to a point, where work stops. But many times we see we have a visibility six, eight months forward on the workload in MEW, which means in principal you don’t see any order intake.

But it still doesn’t mean that we don’t have work. But at some point, of course, when there’s not enough of orders coming in filling up, where others are going out of sales, then at some point we have to do something. And I think this is how you should read MEW. We need to improve the order intake going forward, otherwise we have to do something else.

Michael Kaloghiros

But trying to assume that the phasing of the delivery of the backlog hasn’t changed this quarter compared to where it was beginning of the year or last quarter?

Jari Ålgars

Correct. This is correct. But we still have work going forward, but let’s say that, what we see in front of us, the workload is diminishing, because we have so low order intake in first-half of the year. Now we need to improve that in the second-half of the year getting some of those bigger projects, which we did not achieve during the first-half of the year, which would give us more work and backlog and then carry us forward. Otherwise, obviously, we have to look at how can we save costs.

Michael Kaloghiros

Last question, maybe just on cash, which has been disappointing so far this year. I read your comment on your receivables and how difficult it is, maybe if you can give us a bit more comment on this and also just if I look at your advance payments, we see, it looks like, I mean, they are coming down in the first six months compared to where they were at the end of last year, while at the same time the book-to-bill is positive and it’s positive as well on the equipment side, though. I mean, have you seen like a change in the amount of advance payments that you received, or is it just a timing effect? I mean, I was looking kind of the dollar terms in the cash budget?

Jari Ålgars

It consist of of two parts. One is it’s purely a timing issue. We usually see more payments in the second-half of the year due to our customers buy and we have seen that during the last three years. It follows a U-curve. So for us, this is more or less going according to the plan with this order intake. This is roughly what we should see and this usually turns to the positive on the second-half of the year. So we have turn back to more – we turn back more to the starting point of the year. So this is – we don’t expect to see anything different this year either.

Michael Kaloghiros

Okay, good. Thank you very much.

Operator

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

Jonathan Hanks

Hi, Rita. Just wanted to clarify maybe I missed it, and did you mentioned that kind of ability to collect payments from your customers have been getting worse throughout the year or is that just kind of a general comment on the first-half?

Jari Ålgars

I would say it’s more a general comments from the first-half and we see that we just have to work more and more, and harder on this one. But we also see that when we work harder, we get more results. So the situation has not changed than this. So certain countries where we see more challenges than others and then in India for instance China. Those are power countries where we see even more challenging than elsewhere. But this is to some degree of global phenomenon that we see.

But some customers still are good in paying and have been doing this also in two different times, but there are customers who clearly utilize the situation of and we have to fight to get that one. But things not gone worse during this first – I cannot say it’s worse now than it was at year end. The situation is the same, same amount of work.

Jonathan Hanks

Okay, thank you very much.

Rita Uotila

Thank you.

Operator

Thank you. We will now take our next question from Johnson Imode from Bloomberg. Please go ahead. Your line is open.

Johnson Imode

Thanks. Just getting to Iran, I was just – it looks like you are looking some orders now. But I was wondering if you had a service to why some customers are able to make advance payments to you and other those you’re still finding a very difficult?

Jari Ålgars

Yes, I think there are customers there, which are more better of than others and cash available and then I think we can also see that, it’s always a cash allocation that cash is a scarce resource in Iran and it gets allocated to the projects that are – most either that by the quite a lot of it is being allocated into the oil field industry, currently because the – payback is very short and getting their oil running.

But we also see clear science that they also want to improve their assets, what they have in their – minerals side, so in the mining area side. So I’m expecting to see some business going forward. But that said, it’s very slow and it’s a lot of work to get there, before we have everything set on the bank, set on the things we place.

Johnson Imode

So you’re saying this is less of a banking issue now, and more of a how customers allocating cash?

Jari Ålgars

Though I would say, for it all us, all I think it’s a question of allocating cash. I think for our customers is the spending on what kind of financial situation they are in. Even though if they have cash we need to setup – kind of banking facilities at both ends, and I think also I said LC’s have coming to the big churn as one option, which we have not in for a while or for a long while. So it’s going more into a more or let’s say normal business model, but slowly because banks have to get close to each other first and then just marked – trust each other and get used into function.

Johnson Imode

Okay, thank you.

Jari Ålgars

Yes.

Operator

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

Andrew Wilson

Hi, again just a couple of quarterly quick follow-ups. On the – just on the projects, and where you starting to get finalized, and where the payments are forthcoming. Can you just explain, what – it’s somewhat like, standard situation is, but because they have effectively a system that’s working, the net is holding off the final payment, and if that’s the case, what exactly is the leverage that you’ve got to ensure these payments they confirm, just trying to think about how this kind of unwinds over the next 12 months or so?

Jari Ålgars

Yes, I think obviously, our customers when they have made a decision that they go with us, it’s a long-term decision. We’re there for a long time and they will meet us when there’s something that needs to be fixed, or they need some spare parts or similar. And that’s usually spend a time on detailed comp, but it’s kind of at some point, we might have less leverage, at some point we might have higher leverage. But over a period of time, there’s an off-leverage to collect the money off.

So I think it’s more a timing issue than anything else. But, obviously, there is always a risk with the clients that something might happen. So the longer it takes and the risk that something might happen during this year is kind of making or that – the risk levels are higher than normally, because many of our customers are not earning the money they used to so, situation is different.

Andrew Wilson

Okay. And if I can just ask just final question. I might have missed it in terms of the disclosure, perhaps you can help me. And across the two segments, can you give us an idea with how the service orders have trended by segment year-on-year, please?

Jari Ålgars

As said, the modernizations and upgrades are still down. I think on the spare and wear parts, I said, that’s more definitely more resilient. And then on, let’s say field service, let’s say, freights, it’s pretty okay, it’s developing as it should. So I think that’s more or less where we’re maybe on operated and maintained contract, we can see that some customers are more, let’s say, heavy daunting in doing those. I think, also for us, we are also pushing to make sure that we have enough profitability out of that. So that’s probably looked at from both sides.

Andrew Wilson

And if you were to split those dynamics by Minerals Processing and Metal, Energy and Water, can you give us an idea of what the year-on-year picture for the key divisions is, please?

Jari Ålgars

We have not given that guidance, so for the order intake of the service side. So, as said, I think in general, if the plants are running, we see field service, we will see spare or wear parts. But I think when it comes to modernizations – we – as it is more CapEx related, we see more of the same type of trend as we see in the bigger projects, if that is some guidance.

Andrew Wilson

That’s very helpful, Jari. Thank you.

Jari Ålgars

Thank you.

Operator

Thank you. There are currently no more questions on the phone line. So I’ll turn the call back to your host for any additional or closing remarks.

Rita Uotila

Thank you, everyone, for participating. And so, you can close the teleconference from [indiscernible] next call. Thank you.

Operator

Thank you, ladies and gentlemen. That will conclude today’s call. And you may now all disconnect.

Jari Ålgars

Thank you.

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