Outotec OYJ's (OUKPF) CEO Markku Teräsvasara on Q4 2016 Results - Earnings Call Transcript

| About: Outotec OYJ (OUKPF)
This article is now exclusive for PRO subscribers.

Outotec OYJ (OTC:OUKPF) Q4 2016 Earnings Conference Call February 13, 2017 7:00 AM ET

Executives

Rita Uotila - Vice President, Investor Relations

Markku Teräsvasara - President and Chief Executivce Officer

Jari Ålgars - Chief Financial Officer

Analysts

Andrew Wilson - JPMorgan

Manu Rimpelä - Nordea Markets

Johnson Imode - Bloomberg

Tom Skogman - Carnegie Investment Bank AB

Tomi Railo - SEB

Jonathan Hanks - Goldman Sachs

Johan Eliason - Kepler Cheuvreux

Operator

Please go ahead.

Rita Uotila

Good afternoon ladies and gentlemen, and welcome to Outotec’s Financial Statements Review 2016, a briefing telco. Unfortunately we had some technical problems and we are therefore running a bit late. But now we will hear the presentation from the President and CEO, Markku Teräsvasara and also CFO, Jari Ålgars. So, go ahead Markku.

Markku Teräsvasara

Thank you Rita and good afternoon from my side as well and welcome to the information meeting for the financial statements review for 2016.

As always, we’ve got the safety, safety first and this chart shows our safety performance during 2016 and the parameters that we like to compare us with is the lost-time injury rate showing how many workdays we lose per million hours worked in our worksite or our offices, that includes our own employees and our subcontractors. And we see that we are on a good level, of course our target is zero accident, but 1.8 LTI is already confident to be a good level.

And as an example I would like to take up our ilmenite smelting plant project in Saudi Arabia where they have up until today worked almost 12 million working hours without any absence because of work accident, so LIT rate zero, almost 12 million working hours already year-to-date. And then of course I’m very proud of our people outside and their dedication to safety work and this is not unique, I think we have similar which focus in many, many worksites as well, but of course the target should always be and will always be zero accidents.

Looking at that 2016, if I put it in a nutshell, we can call 2016 as a kind of a watershed year, from two different reasons. I think first of all if you look at the market, after three years of decline in mining environment, we saw metals prices going up during 2016 and also some activities coming back.

First, I think customers are really very concerned about the financial ratios and the working capital and the cash situation, but we saw an improvement already in investments when it comes to mainly Brownfield investments with a short payback period. So we talked about production, debottlenecking of productivity improvements that we saw increasing during the year. That already resulted in improving order intake for Minerals Processing business unit and the other dimension is of course our internal dimensions between Minerals Processing business unit and metal, energy & water business units.

So in minerals processing business unit where we are earlier in the production chain and cycles, we saw a solid improvement in order intake already for the last year and then continued in quarter three and quarter four. So our starting point for 2017 is quite much improved from last year. And of course combined with the – with the improvement in our cost structure and our productivity, we saw that improving our result as well. So Minerals Processing business unit results improved towards the end of the year and we ended the year at good levels as we consider.

On the other hand in Metals, Energy & Water side, the market remains weak throughout, almost the entire 2016. However, we saw activity increase among the customer base towards the end of the year. So we see that the customer activity is improving, there is still some hesitance on orders, but at the moment our quotation portfolio and then when looking into where we are in the process of finalizing some orders, I think the situation is much better than it was one year ago. But of course it is not without competition and we like to see ink on the paper before we can say that the Minerals Processing has improved a lot.

Also I think reflecting back 2016 is €70 million savings campaign that was announced at the end of 2015 that we were able to finalize during the year and which achieved the savings that we had planned. However, we see that on Metals, Energy & Water side we – we’re preparing us for, as orders are delayed so we announced additional cost saving campaign concerning only on the Metals, Energy & Water side and that we did in December.

And also on the same Metals, Energy & Water side, as you probably remember, we also made additional €40 million risk provision regards to one project that is not yet finalized. But of course all these activities were preparing us for 2017.

Adding one more system that we’ll spend during 2016 has an impact to 2017 is a dedicated service unit as of April 1 and that work is under decoration, so we are not building up the organization for this New Services business. We see that we have a good install base, quite wide install base on the market and if I’m having more dedicated organization, more clear focus we can get a bigger part of that share and at the same time improve customer satisfaction and our performance.

2016, still looking at it, this slide is a fairly busy slide, but it shows our announced order intake during 2016. So here we announced – here we show all the orders that we announced at separate press releases during 2016. They are fairly well split between the market areas; we have America, €ope, Middle East and Africa, being the biggest region, and then Asia and Pacific being the smallest region. And then we divide that also on products, so the orange ones are Mineral Processing orders and the blue ones are Metals, Energy & Water orders, and then we also see what minerals or metal we talk about.

So as a conclusion, you see a lot of orange, these Mineral Processing orders and you see that most of these bigger orders came from either gold or from copper that was one of the two driving metals to our bigger order intakes. However, we saw activity increasing in most of the metals during the year and a nice order to mention separately is the Lithium beneficiation plant order that we got from Brazil. Also some acid plants on Metals, Energy & Water side, again very much focused on copper.

This is a new score card that we wanted to show to really show the trends in our space, I mean our order intake. On the left side you have Mineral Processing. Both order intakes six months rolling annualized and the sales, same six months rolling. And on the right side you have the same kind of format Outotec has been working.

And I think what is already concluded and you see it very clearly from the Minerals Processing side is that order intake sides improving, but towards the last year, I think continues to improve towards the end of the year and our order intakes today are at the level of 2015, and 2014. And of course the sales will follow later on once we can invoice the projects that we received during 2016.

On the Metals, Energy & Water side you see that as the order intake stopped falling, so it stabilized on a lower levels, but it doesn’t decline at the moment and as said earlier, we also see that we have good projects in the pipeline, so are quite far in negotiation, so of course nothing is clear before the thing is on the paper, but we see clear activities in there as well. So I think our starting point for 2017 is clearly improving.

The next slide showing our service activities and here basically the same, you can conclude the same thing as with these two business units. When it comes to Minerals Processing side, our service order intake improved and when it comes to Metals, Energy & Water side our service order intakes declined somewhat. And also you see the same split between the first half of the year and the second half of the year.

Second half of the year we saw clear activity improvements and more customer base. And if you look at quarter four numbers and look at as those was recurring base means that day-to-day business with spare parts and technical service that was up by 35% in last quarter. So the same trend among there, increased activity towards the end of the year.

Our order backlog remains stable, roughly at €1 billion level and if you notice this that we have about €200 million of orders, so Iran are not including in our order backlog and there we have a policy where we want to have LC open and finalized agreements ready before we register them as an order, but there is already agreed orders for $200 million which is almost out of our order backlog, and roughly €740 million of the year-end order backlog will be invoiced in 2017.

So now I hand the word over to Jari to go through our financial numbers.

Jari Ålgars

Thank you, Markku. If we start with Q4 2016 numbers, the sales was €305 million compared to the previous year’s sale which was €306 million, more or less flat year-on-year. Service sales came down a bit compared to Q4 2015 to €127 million from €138 million before, this was mainly due to modernizations or lack of modernization orders in Metals, Energy & Water segment.

The share of servicing sales also came down to 42% after being 45% due to the same reason. The gross margin was low at 16% due to that we had to make a risk provision in one large project in Metals, Energy & Water in Q4. Calculating that out, the margin was for the rest of the business quite good.

Also the same impact on the adjusted EBIT with minus €25 million, obviously impacted by the same €40 million risk provisions in Q4. We also made restructuring and acquisition related cost of €27 million in Q4, which was due to some €5 million out of old restructuring programs finalizing that out from the 2015, and then also a new restructuring program focused on Metals, Energy & Water which was €23 million.

PPA amortization was €2 million and we ended up with an EBIT of 2015 of minus €53 million and the result for the period was more or less the same because interest cost and taxes more or less neutralized each other.

If we then look at the full year 2016, the sales was €1,058 million, down 9% in comparable currencies in 2015. The service sales was €447 million, down 8% from 2015, main reason in addition to the modernizations in Metals, Energy & Water and also the very low order intake we saw end of 2015, beginning of 2016 which had a significant impact on the sales this year. The share of service in sales was 42% compared to 43% in 2015.

Gross margin 22%, obviously heavily also impacted by the risk provision we made in one Metals, Energy & Water project, taking that aside, the margin was at a healthy between 25.6% for the rest of the business.

The adjusted EBIT was minus 23% also affected by the €40 million risk provision, taking that aside, it would have been plus €17 million and roughly at the very low part of the range of our guidance for the year. So, obviously this €40 million risk provision we made which is far outside guidance range.

We made for the full year restructuring cost of €37 million which was due to the previous year’s program, 2015 program, roughly €11 million, a new program in Metals, Energy & Water, €23 million and then some few millions for acquisition related costs.

Taking the PPA amortization into account, we ended the year at minus €68 million EBIT or minus 6%. Same as with Q4, the interest and the taxes more or less neutralized each other, so the results were for the full year ended at minus €69 million.

Going to the next page, we see a bridge between 2015 to 2016, so we have our adjusted EBIT in 2015 of €56 million, the sales came down which more or less wiped that difference out. In addition we made provision releases due to finalized project in 2015 and we also had to make increases in 2016 due to mainly the project I was just mentioning about the risk provision made.

So at that point we are very much in the rate and the fixed cost decrease helped us but it did not help us enough to lift of adjusted EBIT for the full year through the positive figures. Obviously the fixed cost improvement when the market has returned and we see good sales in both our business segments, which will be something which will help us to show better profitability as we can already see in Minerals Processing.

Going to Minerals Processing, we can see that order intake is up 33% in comparable currencies for the full year. Sales flat or slightly lower than 2015, and service sales also down due to the week last quarter of 2015 and first quarter of 2016. And the adjusted EBIT almost doubled despite the sales just slightly down, so here we can really see the benefit of cost savings action we have made and that’s the two last quarters were quite good, our whole adjusted EBIT percentage landed at 7%, their last quarter was also affected by some unrealized and realized losses due to FX agreements, not for that exchange contracts.

Metals, Energy & Water, we saw lack of large plant orders, actually we also saw a lack of smaller orders, so order intake was quite weak at €381 million, down 44% compared to 2015. Sales was also down with 19% from 2015, landing finally at €518 million. The service sales also due to that we saw a little modernizations and upgrades, down to €164 million from €199 million the year before or 14% in comparable currencies.

And the FX impact was about €4 millions, so same as in Minerals Processing. What is imperative here really going forward is that we’ll have just more cost savings action ongoing and that we would start to see some more order intake helping us also in that regard that we could improve the situation.

Going into the cash flow, obviously the cash flow was quite weak due to that we did not get any new orders in Metals, Energy & Water and have their old orders, we – actually we are keeping out of the cash flow because a more matured order skipped and the backlog gets more cash negative because in the beginning of the project it’s very cash specific and then we use this money to build up the project. And that was the most significant – had the most significant impact of all and then the second most impact was due to restructuring costs, we made provisions in 2015, which we were then executing during 2016 and paid out.

We also did a hybrid during the year of €150 million of which we use the proceeds to the main part of repaying short-term loans €112 million. And at the year-end we had cash and cash equivalents of €233 million, so we have a good situation with cash.

Going into liquidity, equity and balance sheet side, we can see that our balance sheet is quite solid. Also that the net interest-bearing debt is negative and the gearing is negative slightly still and we would like obviously to have new orders which would help us in this regard and increase this number. Also we can see clearly that’s the advances received have come down quite significantly. But our equity is strong which is very important for us when we sell these projects or are in, let’s say, planning to sell these projects to our customers for which it is imperative that we have a strong balance sheet and can well handle any big project order.

So this was it from my side, so Markku if you want to continue...

Markku Teräsvasara

Thank you. Yes, we will have a quick look at the market outlook for the first half, guidance for 2017 and then closing remarks and open up the Q&A session.

So, how does it look at the moment? I think what was already said, before I think we have a good outlook for the Minerals Processing business, order intake increased last year and we continue to see and expect to see new opportunities on top of it, but also whatever was sold last year will come to an invoicing this year, so we expect to have a good, better level of business for Mineral Processing side.

And we also see increased activity in Metals, Energy & Water. But as mentioned earlier, of course we want to see the ink on the paper and then really finalize some of the negotiations that are ongoing at the moment and that is of course affecting the year for us going forward. And the timing of these large orders are significant not so much from the fact that they will be invoiced during the next year, but of course as soon as we get them, we can put our people to work and they start to sell our products which otherwise would then not been that big for us, so receiving big orders will help us finance in the April. And then there is some process for the projects and competition and we need to win and that’s what we want to do.

Of course on a global, as far as I think, we see the economic environment and political environment having some uncertainty of course our estimates are based on the foreseeable future at the moment. Would there be any dramatic changes on those areas, of course we need to adjust our operations accordingly.

Financial guidance, based on our order backlog at the moment and the market outlook, as well as achieved cost savings, as I say, we expect to get between €1,050 million and €1,150 million as an average it’s [Technical Difficulty] out of 75% compared to 2016. Out of those €740 million as I said earlier is something that we have already in our order backlog at the end of 2016. So the remaining balance between €300 million to €400 million is coming from service, is coming from the Minerals Processing order equipment deliveries and some deals from the new Metals, Energy & Water business. But of course those orders normally have a big project time and the invoicing starts coming in after one year roughly.

So on service side, definitely we start the year with €200 million order backlog, most of which will be invoiced and as we get the orders, we invoice the further. And we have a good situation also similar in Minerals Processing side. Adjusted EBIT range between 3% to 5%, which is today and this is the outlook for 2017.

Now to summarize it with the closing remarks, I think 2016 we kind of touched the bottom. We saw a lot of improvement already from the market side, but also from the actions and activities that Outotec has done during 2015 and 2016.

We have a good situation in Minerals Processing and the ambition is to continue winning orders from the market that is more active than in a couple of years in the past. And we want to achieve stability in Metal, Energy & Water side. The cost savings actions will continue as we announced additional savings campaign, but at the same time, of course we want to get some of these big orders as early in the year as possible and we are working for them as well.

New Service business unit will be active as of April 1 and then of course start by prioritizing our service offering and then strengthening our customer service. And you see that in our install base we have a good opportunity and with more focused, more dedicated approach.

And in the same time or at the same time we reorganized ourselves a bit to improve the focus in our organization, increased the speed and increased the agility in our teams, by going from a methods organization into more a product line type of organization with key roles and responsibilities and clear responsibility and we think that that will improve our decision making speed and also agility going forward.

Together with that increase transparency in our businesses so that we can early on see deviations in the individual units and can quickly perform and act very quickly. After April 1, when the new organization has been put in place then we – and already starting now of course we do review the strategic focus area for Outotec, and for those points I think we will be coming back in our Capital Markets Day which is scheduled for September 21st.

So that was the presentation from our side. And now we’ll open the channel for questions.

Rita Uotila

Thank you Markku and Jari. Now we are ready to take questions from telephone lines.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take our first question with Andrew Wilson from JPMorgan. Please go ahead, your line is now open.

Andrew Wilson

Hi, good afternoon everyone and just three questions from me. Just talking about the Metals, Energy & Water orders, it sounds like certainly the backdrop has improved in terms of the number of orders. Can you just talk about how competitive that is in terms of pricing or contract terms and just how that compares to sort of the backlog that you currently have in Metals, Energy & Water, please?

Markku Teräsvasara

I think of course when it comes to pricing and profitability, there is some deviation or variation from project to project. But all in all, of course our ambition is not to give in anything in our margins. So whatever cost saving we can achieve, maybe all of it can be used in competition, but all-in-all I think the ambition is to get business and maintain profitability or slightly improve.

Andrew Wilson

And can I just – on the – go head, sorry.

Markku Teräsvasara

Yes, I think you also had a question on the pipeline and stuff I understood. So if I compare or if you compare our situation for one year ago, I think and where we are in this quotation process? Because these are also very time taking processes, sometimes you negotiate over one year and some time even over two year. So where we see our quotation portfolio and the maturity in that and how close to we are finalizing them, I think the situation is better than we had last year, so we are – in many projects we are much closer contract awards than we were one year ago.

Andrew Wilson

And in fact just a kind of follow-up on that, is that true for sort of the smaller kind of, I guess, more sort of everyday and recurrent type of business? Or was this specifically a commentary on just the sort of large projects which clearly would make a big difference?

Markku Teräsvasara

There is both, but there is a good number of bigger projects in the pipeline as well.

Andrew Wilson

Okay, perfect. Can I just switch on to the restructuring actions? There were the sort of additional actions which were taken in December, could you give us some sort of idea in terms of the timeline, and also the size of the savings that we might expect to see come through in 2017? I’m just looking to bridge kind of an underlying picture from 2016, even if we exclude the big provision in Q4, into that kind of 3% to 5% margin range. And maybe, if you – I guess, a broader question would just – a bit of help in terms of how we should think about the 2016 profitability moving to the 2017’s guidance level?

Jari Ålgars

We started it already in November last year and as was announced we were able to finalize the negotiations in Finland end of last year and they will be executed beginning and are being executed and have been executed here as we speak. For Germany, where – which was the other significant site, it will take a few more months before we have finalized the negotiation and can move into an execution phase. But let’s say, we should start to see impact of that already in Q2.

Andrew Wilson

Okay, so if we were – if we’re thinking about a run rate for 2017 versus 2016, could you help us a little bit with a number to think about?

Jari Ålgars

Let’s put it that way, we have not made any guidance and we’ll not make any guidance because anyway the fixed cost is very heavily impacted by do we get these new orders or not? So do we have loadings and recovery for our people? So therefore we have not made any guidance because it is really a moving number.

Markku Teräsvasara

In that respect, what I think if you look at the number of people we are reducing, we have said that it will be close to 200 and I think also if you look at the savings we were able to do from the previous programs, it’s kind of – there can be something that can be used to some type of guidance.

Andrew Wilson

Okay, yes, that makes sense. And just finally, just on the cash profile, and just thinking about sort of how that looks in 2017, you’ve talked about this sort of maturity in terms of the order profile and backup. And I guess the big – I guess the big delta is just the degree to which the large orders come through and how much of a difference is that going make. I mean, is that a fair comment? We’re basically waiting on those prepayments?

Jari Ålgars

That’s definitely something. I think also looking at 2017 that will definitely be the big swing and obviously we make some restructuring provisions in 2016 which we will have to execute and payout in 2017, so those are the two big swingers also expected to be in 2017. But obviously we – if the market turns as we hope it would turn and obviously we would expect to see some more positive movements in our cash that we saw in last year.

Andrew Wilson

That’s very clear. Thanks, guys.

Operator

[Operator Instructions] Now we’ll take our next question from Manu Rimpelä from Nordea. Please go ahead, your line is now open.

Manu Rimpelä

Good afternoon. My first question would be continuing on the cash flow. So, can you just help us to understand how do you see the difference in terms of prepayments going into 2017? Obviously, the mix has changed from a lot more Minerals Processing, where the order sizes are smaller. And if that type of mix continues, so what type of prepayments are you able to get in these Minerals Processing orders compared to the Metals larger orders?

Markku Teräsvasara

You know it’s – obviously they delivery times are much shorter, so the positive impact is also much shorter and so they are more closer to cash neutral in that way. In the Metals, Energy & water obviously we would get good orders and with good prepayments it take quite a long time before we start to use this up in building their – let’s say, their deliverables for the project. So at first, it’s quite a long time, when we do mainly engineering and planning and purchasing for the job and only then later on we will start to get deliveries which we will have to pay for. So it’s for quite a long time quite positive and this is what we are lacking at the moment, so maybe definitely makes a bigger and longer impact, let’s put it this way.

Manu Rimpelä

Is it fair to say that without the pickup in the larger Metals orders, the working capital situation will probably be quite flat compared to, for instance, 2016?

Markku Teräsvasara

Depends a little on which type of orders we get, so we are not going to give any guidance on the cash flow as such.

Manu Rimpelä

Okay. And then, my second question would be on the margins, and especially the margin guidance. I mean, if you take the 2016 EBITA that you reported of €23 million loss and then you adjust that for the cost overrun, so €54 million. And also the currency, negative currency impact that you booked through the EBITA, then I get to an EBITA margin of 3.6%. So just trying to understand that the mid-point of your guidance that you are kind of suggesting that this will growth some €40 million over 2016, but you’re only suggesting very minor room and the EBITA margins to go up. Could you just help me to understand what’s – are you expecting the Metals to go on significant losses in 2017, or because the Minerals Processing will definitely improve quite significantly this year?

Markku Teräsvasara

We are not baking any guidance separately for the different business segments. Let’s just put it that way that we would need some new orders in the Metals, Energy & Water side to bring in workload, move cost from fixed cost up to cost of goods sold and obviously also start to have some sales. As said, the sales impact comes quite slowly, so the impact may take a while so the main impact it would have by getting new orders into Metals, Energy & Water would be mainly at first, at – we really can have good work load for our people.

And obviously this would be helped also then with the restructuring we are doing, so both of these is helping in the same direction. So these two, we would need to have a place to be in a better position going forward. I think to your calculation I can only say it’s correct.

Jari Ålgars

I think just an add-on from my side. And of course you noted as well, that in the fourth quarter the gross margin was impacted by this additional risk provision €40 million. So taking that out from fourth quarter number, I think our profit was on a good level and of course we – the prices are one dimension, but we also at the same time we have good plans in place to save cost from our suppliers and of course that is working in our favor in the competitive market.

Manu Rimpelä

And then the final question from me will be just on the – can you just help us to understand what’s the difference, in your mind, with the low-end and the high-end of the sales guidance? So, is it just all related to the Metals business? Or what’s the kind of in-built flex into that guidance that you are thinking?

Jari Ålgars

I think we can say that Minerals Processing is in a much more stable situation at the moment and it’s – let’s put it that way, where we can more clearly see what the outcome would be. The more questionable side of it is of course Metals, Energy & Water, whereas Markku said, we would need to see those orders coming first, so that we really can secure the downside and start to work on stability and starting to look at more improving our numbers for the whole business, even more than what we were able to do last year.

Manu Rimpelä

So the upper end of the guidance, does that include already a pick-up in the Metals orders, so that will be something that will come then as on top of that?

Markku Teräsvasara

We are not going into such details here. It’s containing a mix of roughly the items I said, but definitely what is very important was this year is to stabilize Metals, Energy & Water, with no doubt it’s definitely very high on our agenda that we can get in those orders and we can improve the situation by the restructuring. Obviously if we don’t get the new orders the restructuring will help some, but it will not take us out of the problems, yet we would still be in a difficult spot, we need both.

Manu Rimpelä

Okay. Thank you. No further questions.

Markku Teräsvasara

Thank you.

Operator

[Operator Instructions] We have our next question in the queue; it’s Johnson Imode from Bloomberg. Please go ahead, your line is now open.

Johnson Imode

Hi, thanks. Just first question is, have we now drawn a line under the risk provisions with the €40 million charge taken in 4Q do you think?

Jari Ålgars

Yes, I think what we see is that of course at the moment we see that our project portfolio and risk provisions are in good balance.

Johnson Imode

Sorry, I didn’t get the end, just say that again please.

Jari Ålgars

Yes, what I said that, after these provisions, we see that our project portfolio and the risk provision line in good balance.

Johnson Imode

Okay, got it, thank you. And then just on Iran, was there any – given that you – this is the biggest order you had last year, and but you still got another €200 outstanding, was there anything different with this order in terms of the customers, there was an availability to make the down payment, given that you said so far that this has been a big issue over there?

Jari Ålgars

No, I think what was the difference is that we received a letter for credit for that one and that’s why we decided to book it and that’s why it is ongoing.

Johnson Imode

And was that win the sense of the client was able to get the banking facility is what you are saying?

Jari Ålgars

Yes.

Johnson Imode

Okay, alright, thank you very much.

Markku Teräsvasara

Thank you.

Operator

[Operator Instructions] We have our next question from Tom Skogman from Carnegie. Please go ahead, your line is now open. Tom Skogman from Carnegie, please go ahead, your line is now open.

Tom Skogman

This is Tom Skogman from Carnegie. Sorry, I’ve had problems with the phone, it’s broken down a couple of times here, so I might ask something that already has been answered. But I’ll try it. First of all, I wonder about Outotec in the coming cycle in the mining industry compared to other equity buyers. Everybody knows this will be a cycle about productivity improvement and Markku has a broad experience and work competence as well. So we understand how old the products are, I know how they fit into this upcoming cycle, and it will be more about just productivity improvements and not about just…

Markku Teräsvasara

I think they fit in well. I think if I look at the offer system, we have good strong process knowledge in our companies and the know-how to run these processes. So when customer wants to improve the recovery all over the cost or actually both and also on top of it, reduce the environmental impact. I think we are well equipped for taking care of these kinds of orders.

Tom Skogman

Okay. Then, about your expectations for the first half, I mean, when I listen to you it sounds like you really need more orders, Metals, Energy & Water portfolio, I mean, should we read this as that you have very low expectations for the first six months of this year?

Markku Teräsvasara

I think when expectation is low or high, I think and maybe pretty overplayed that’s Metals, Energy & Water and with – I think we have a good order portfolio in metal – in processing side we have a good order backlog in service side and those give us some stability. On top of it, the rest is depending a little bit on when this Metals, Energy & Water orders will come in, but we should not over dramatize that either.

Tom Skogman

Then, about cost savings for this year, I mean, what is the magnitude, if you just look at your fixed cost saving for metals?

Markku Teräsvasara

I think that question was answered by Jari that is, to some degree we don’t guide to the savings as such, but of course we made a provision of €24 million and calculating back from the previous savings campaigns and also that we estimate roughly 200 people to be impacted by this, you can make an assumption.

Tom Skogman

Okay. Then, about these products that you have taken provisions, are they finalized, or are there some still some risk?

Markku Teräsvasara

They are ongoing. The one that we announced in December, that project is still ongoing. What we feel – we feel that our provisions are now well in line with the risks involved.

Tom Skogman

Okay. And then, finally, about – I realize you don’t pay out any dividend when you report a loss, but how should we think going ahead, given you have a hybrid loan? Do you aim to pay dividends as long as you have the hybrid loan, or do you want to pay that back first?

Markku Teräsvasara

I think that is a question that we in this room cannot answer.

Do we have someone on the line, operator?

Operator

Yes, sir. We’ll take our next question from Tomi Railo from SEB. Please go ahead, your line is now open.

Tomi Railo

Hello, can you hear me?

Markku Teräsvasara

Yes.

Tomi Railo

Okay. I had one specific question on lithium. You booked a nice order for 2016, I believe, well over €35 million. Can you talk about the activity and pipeline for lithium, as such, and if you think you book more of these kind of orders?

Markku Teräsvasara

There is some players that we are negotiating, but it’s too early to say whether they materialize as an order during 2017.

Tomi Railo

Thank you.

Operator

Thank you. And now we’ll take our next question from Manu Rimpelä from Nordea. Please go ahead. Your line is now open.

Manu Rimpelae

Just a follow-up question, could you talk about how do you see the operational leverage in the two different divisions? If we start seeing volumes – volume recoveries, so how much do you expect the drop through to be? That’s the question.

Markku Teräsvasara

Can you clarify your question a bit more, it’s a bit difficult, did you get it?

Jari Ålgars

Yes, I think I know what you are asking for. Obviously, we are trying to improve also the operational leverage on the metals, energy, water side, but it takes sometime to put it in place. And we hope that we would come at the right level and start to see some singular movement as we saw in minerals processing when the order intake would start to improve. Obviously, we also know about long-term metals, energy, water profitably has been slightly lower than minerals processing over time.

Manu Rimpelae

And where do you see a more normalized operational leverage trying to calculate that? I’m looking at Q4, or the last couple of quarters, obviously it’s very much impacted by all the cost savings measures that we’re doing. But when you think you think about the next kind of three years of, for instance, minerals processing, so what type of operational leverage would you be happy with?

Jari Ålgars

I don’t think we have guided that specifically, but let’s put it that way. With the restructuring we have in the pipeline now and which we’re finalizing here during the first-half of the year provided, we get a decent order intake during the first-half of the year. We would expect to be in a much better position in the second-half of the year. But maybe only later on, we will start to see it as the sales of the big metals, energy, water projects comes quite. So it would start to improve only significantly later on.

Manu Rimpelae

Okay. Thank you.

Jari Ålgars

But in our view, it should be enough, or we hope it to be enough.

Operator

Thank you. Now, we’ll take our next question from Jonathan Hanks from Goldman Sachs. Please go ahead. Your line is now open.

Jonathan Hanks

Hi, Markku, hi, Jari, just wanted to ask on service. Firstly, these kind of larger refurb upgrade orders have been – in service have been depressed for sometime. I’m just wondering, what’s your sense on how long they can be depressed without miners having to come back and do them, given that production continues to grow?

And then just secondly, just wondering on the installed base, obviously, Outotec has talked for a while about the opportunity of only servicing a very small part of their installed base. What is the – what do you think is the solution to growing market share there? Is it about investing more in putting feet on the street, so to speak, or is it something else? Thanks

Markku Teräsvasara

Well, the first part of the question that part where we’ve based on of course, that depends on the customer and the customer situation. I think we – despite of the profitability improvements and improvements, that situation at some of our customers, but there’s still very much an attitude that perhaps [Technical Difficulty] to sweat the assets as much as possible. So sometimes pushing the boundaries, trying to run themselves without major overhauls longer and longer to see how long those go. So it’s really difficult to say exactly when they start increasing. But, of course, we expect that at movement, there will be an upside on this for investment [Technical Difficulty].

And your second question was related to our customers on how we plan to improve. I think what we’re doing as a first step now after having this service business unit organization in place, we will review our service – often service portfolio. So product line by product line to really review and see what are the opportunities, where can we add value, and where we in a way, it’s better to believe that’s part of the work for someone. So that is the first thing to do.

Looking at the position we are today in many, many products, I think we can definitely improve our customer churn, also customer satisfaction with more dedicated, more focused culture.

Jonathan Hanks

Okay. Thank you very much.

Markku Teräsvasara

Thank you.

Operator

Thank you. [Operator Instructions] Our next question in the queue is Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is now open.

Johan Eliason

Yes, hello. This is Johan Elia. I hope you can hear me. Just a question coming back to this lithium order. I understand, you mentioned that you had another one in the pipeline in negotiation. But overall, how significant do you see this opportunity? I understand that it’s very much driven by the demand for batteries in electric cars, for example. Is this a significant opportunity for you, or are we sort of seeing this one or two types of projects per annum potential for you? Thank you.

Markku Teräsvasara

Yes, I think what at this stage is a little bit difficult, we have to foresee exactly how big that could be. There’s increased interest and there’s various discussions ongoing, whether that comes big in relation to, for example, coal and copper, and so and I think it’s too early to say. But definitely, there’s an opportunity and we would closely monitor that.

Johan Eliason

Okay, good. And then talking about this other Iranian orders that you mentioned, you have sort of €200 million that you haven’t put into your backlog yet, what needs to happen there? Does the Iranian state needs to get better sort of finances through selling its oil in the markets, or is it so that you have to have more willing banks to issue these guarantees for you to sort of put the orders into your backlog, any light on that situation?

Jari Ålgars

I think what I think I mentioned already that we – one good solution that we used regards to these two asset plans is to open a letter of credit. And of course, when that facility is being opened then it’s a go ahead. But at the end of the day, it’s one way or the other securing the financing of that project.

Johan Eliason

And then the reason for this order securing the finance and not the other ones, what’s the difference here? Why does one – why does – why did this one get the letter of credit and not the other ones?

Markku Teräsvasara

I think, generally speaking, it has not been so easy to get the LCs opened [indiscernible] on deals today. I think we were one of the first one to succeed with that. So I think we have first one opened and we’re working on to open more, but it’s – that opportunity needs to, of course, improve.

Johan Eliason

Yes. Okay. Thank you very much.

Markku Teräsvasara

Thank you.

Operator

Thank you. There is nobody else signaling for questions over the phone at this time, sir.

Markku Teräsvasara

Okay.

Rita Uotila

Thanks. Thank you.

Markku Teräsvasara

Thank you very much.

Rita Uotila

Thank you all for participating.

Jari Ålgars

Thank you.

Markku Teräsvasara

Okay, goodbye.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s conference call. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!