Metso Oyj (MXTOF) CEO Pekka Vauramo on Q4 2018 Results - Earnings Call Transcript

Metso Oyj (OTCPK:MXTOF) Q4 2018 Earnings Conference Call February 6, 2019 6:00 AM ET

Company Participants

Juha Rouhiainen - VP, IR

Pekka Vauramo - CEO & President

Eeva Sipilä - CFO & Deputy to CEO

Conference Call Participants

Klas Bergelind - Citigroup

Max Yates - Crédit Suisse

Omid Vaziri - Jefferies

Markus Almerud - Kepler Cheuvreux

Andrew Wilson - JPMorgan Chase & Co.

Antti Suttelin - Danske Bank

Robert Davies - Morgan Stanley

Tanuj Agrawal - Barclays Bank

Manu Rimpelä - Nordea Markets

Jonathan Hanks - Goldman Sachs Group

Magnus Kruber - UBS Investment Bank

Juha Rouhiainen

Good afternoon or good morning, ladies and gentlemen. This is Juha from Metso's Investor Relations, and I want to welcome you all to this conference call, where we discuss our fourth quarter and full year 2018 results. Results will be presented by our President and CEO, Pekka Vauramo; and CFO, Eeva Sipilä, and after their presentation, we will have a Q&A session.

Before we begin, a couple of things. First of all, we have the disclaimer on the second page of our presentation, and we'll be discussing and using forward-looking statements during this event. And another thing is that we try to wrap up this conference call in 60 minutes. So please keep that in mind when asking questions.

With these remarks, we are ready to begin. And I'll be handing over to Pekka. Please go ahead.

Pekka Vauramo

Okay. Thank you, Juha, and good afternoon to all of you. Yes, really happy to present our result for quarter four and for full year 2018. We enjoyed, of course, healthy, strong market activity throughout the year, I would say, and that was the case also during the Q4. And this is visible in our numbers, very strong growth in orders, sales and strong improvement in profitability as well. We've also started the acquisitions. And during the Q4, we closed two of them; and in full year, we closed altogether three acquisitions. I think they are listed somewhere there later on.

The full year really was reflected by strong market activity in all our markets and in all our businesses, and that of course, meant that also the full year numbers improved significantly. We need to also note that the Q4 2017 was an especially weak quarter because of the write-downs that we had to do about a year ago. In 2018, we continued to execute and implement our growth strategy and also made investments on improving our delivery capability and invested also in R&D. I'll come back to these also in a bit later on. Our board will propose a dividend for last year, €1.20, which is €0.15 more than the year before. And we will transition into semi-annual payments, payments where half of the dividends, €0.60, would be paid in May, and the second €0.60 in November this year.

Then looking more closely on the numbers during the fourth quarter. Orders went up by 32%, and in fact, we had a small negative currency impact of fixed currencies. We had 35% growth -- organic growth in our orders, which is very, very strong performance during the quarter. Sales went up as well. If you remember, we had delivery issues and problems early in the year, but we were able to open -- debottleneck our supply chains for the most part. Still, we have some issues but far less than the beginning of the year. Our sales went up by 27% and 30% by fixed currencies and reached almost €900 million during the quarter.

Then adjusted EBITA, almost €100 million; margin, 10.9%. And that is about 50% improvement in terms of actual millions. Operating profit, similar improvement there; and earnings per share, €0.42. And like I said, I mean, the comparison is with the quarter that was very weak. Cash flow, €57 million, somewhat disappointing, but this kind of fast ramp-up and improvement in supply capability ties capital into our supply chain and inventories. And therefore, the cash flow's €57 million during the quarter.

Then when we look at our segments. Minerals, strong performance there. There 35% orders, higher than the year before, and 39% with constant currencies. Extremely strong, strong quarter in order performance. All business areas contributed to this one as well, which is also good, and I would also add that all market areas also contributed to that one. So we grew throughout the company which, I think, considering our global footprint and many things that are happening around us, is good performance.

In mining, we didn't see really big number of major projects or complex projects, as we also call them. But we had lots of small- and mid-sized orders, which in mining is, of course, risk-wise, in fact better for us than complex orders are.

We saw strong growth in aggregates equipment orders in U.S., China and Nordics and also many other markets where we're active in that field. And service orders, of course, I mean, our customers are very busy at this moment and that is reflected in our service orders and sales as well.

Sales went up 29%, and with fixed currencies, 33%. And growth is driven by equipment, which means that it does reduce somewhat our margins, meaning that in the services side, we have higher margins which is no news, I think, to all of us here. But we are at the phase of cycle when equipment orders are relatively higher than average, and therefore, the margins are somewhat reduced. And that is visible also in the graph on the page. EBITA margin, 10.4%, improvement of about 1.5% from last year. And volume definitely contributed on this one, and the equipment order has reduced -- or relatively higher equipment orders pressured the market -- or the margin down.

On Flow side, strong quarter as well. Orders up by 19%, or 20% with fixed currencies, and good growth in the services side as well there. The sales, up 18%, or 21% with fixed currencies. And this is of course thanks to good order performance in the previous quarters. Improvement in our margin in our flow side, 16.4% adjusted EBITA versus 15.6% the year before, primarily contributed by the operational performance in our factories and supply chain altogether.

And with these short comments, I'll hand it over to Eeva, and then I will come back towards the end after the numbers. Please, Eeva.

Eeva Sipilä

Thanks, Pekka. Good morning, good afternoon to everyone on my behalf as well. Looking at the income statement, Pekka already commented on the items included in the operating profit. So I'll comment that our net financial expenses are down in the year, mainly due to the repayment of loans during the second quarter of last year. Also satisfied with our tax rate, which ended at just below 29% for the year. Earnings per share of €0.42, really a remarkable improvement from 2017.

Moving on to the next slide. As Pekka mentioned, we closed three acquisitions in 2018, so we wanted to open a bit more for your organic and nonorganic growth in orders and sales. As you can see from the graphs, the organic growth is really behind our strong growth, 22% in both orders and sales on a full year comparison. All M&A impact is included in the structural changes column, but that was, in actual numbers, only 1% in the full year comparison.

At this point, it is maybe good to remind you all of a structural change impacting our 2019, namely, that we divested our grinding media business in early January. The business had sales of some €60 million, so please remember to update your models with this amount being out of Metso as of Q1 this year. Going back to 2018. So the foreign exchange rate fluctuation was sizable during the last year, as we all know, for various reasons. And whilst the impact on Metso was slightly less on the second half than in the first half, it still was a negative on our headline orders and sales, as Pekka mentioned, and as well visible on these graphs as well.

Moving to our balance sheet. So really no big changes in the fourth quarter, comparing the year end figures. You see the CapEx and M&A impact in tangible and intangible assets. Inventories ended up €200 million up from a year ago. And really, in order to avoid availability issues with the high growth in demand that we enjoyed, we shifted gears in the beginning of 2018. And as we then saw results of the ramp-up in our supply chain, we were able to tone down a bit during Q4. But really, the sort of negative impact on our cash flow from the inventory buildup, of course, was still significant.

Going forward, as said many times during last year, we do need to improve our supply chain efficiency to not have to build up in this way for availability. But the actions in this area are not quick if we want them to be sustainable. In a high-growth environment, absolute numbers aren't the best indicator. We're really focusing on the inventory turns and DIO type of KPIs. The decrease in our liquid funds and in interest-bearing liabilities is a result of the previously mentioned debt repayments done last year.

The next slide breaks down capital employed and net working capital a bit more in detail. The decrease in our capital employed, combined with improved profitability, contributed to improved return on capital for the year. The graph on the right shows well the inventory increase I just discussed. Despite the strong growth, receivables developed well and we can note a clear improvement in the KPIs on that side, similarly also in payables. Advances were relatively flat, as the bulk of our business last year was services and smaller brownfield-driven replacement type of equipment orders.

Then our cash flow was one of the very few numbers that did not improve in 2018. Net cash from operating activities totaled €177 million. This does include the €21 million additional tax payment done in January 2018 on the ongoing disagreement with the Finnish tax authority on previous year's taxable result. So like-for-like comparison would show an improvement here, despite the negative impact from the change in net working capital of €129 million. The positive future growth-related items of CapEx and acquisitions are clearly visible on this slide, with €67 million in CapEx and €77 million spend in acquisitions, resulting in a free cash flow then of €146 million for the year.

Finally, on our financial position. Our returns improved clearly. And whilst our gearing is up, it continues to be on a very low level at 11.7%. Our interest cover of 13.7 illustrates that we continue to have a solid financial position that will enable us to develop our business forward.

And with that, I would hand it over back to you, Pekka.

Pekka Vauramo

Thank you, Eeva, and I'll move on to my Page 16 and look into what we did during the year. We continued, of course, executing our strategy for profitable growth. We invested in our supply chain, primarily into aggregates equipment, foundry capacity to support -- and wear castings and rubber plants to support our consumable business and the high demand on the other side for the aggregates segment of the business. We also took a decision to invest in a greenfield valve plant in Jiaxing in China, near Shanghai.

We stepped up our R&D efforts. We still continue to do and need to do that one going forward. But we did spend the €39 million on R&D versus €27 million the year before, €12 million addition to that one; and then if we look further down in our digitalization program where we also invested €12 million during the year, so altogether, these development activities meant more than €50 million for us. And we see that as a true investment into the future, and we'll continue to increase those investments as we move on.

And as a result, we launched new products, several new products in different areas, different business areas. And we are also -- we launched also at the end of the year Metso Metrics, where we want to offer connectivity of equipment delivered to our customers, to our performance centers, and will, over time, as the connectivity and the number of connections grows, will give us possibilities through big data and data analysis to provide value-added services to our customers. We've also developed 3D-printing capabilities and we have delivered first valve components, spare parts that are 3D-printed. And this is, of course, means a totally different supply chain for some of our spare parts in that area.

Moving on to next page, the acquisitions. We announced and we also closed the pyro processing company, KFS, Kiln Flame Systems in U.K. during the year. We closed also a valve company acquisition in India, Rotex; and Jonsson och Söner in Sweden, an aggregate equipment business, during the year. We've signed also agreement to acquire HighService Service company in Chile, which is provider of specialized technical services and remote monitoring for mining customers in Chile. This is still pending, and we look forward closing that sometime during the first half of the year.

We also divested, like Eeva mentioned, the grinding media business and that closed beginning of January, so in this year. And it's worthwhile to remind to update your models for that part. Then our board proposes -- will propose a dividend of €1.20, which has increased from last year of €0.15. And we will transition at the same time to semi-annual dividend payments, first €0.60 in May and second one in November of this year. The dividend totals €180 million altogether, which is 79% of our earnings per share.

And last page, the market outlook. We do see continued growth, both in equipment and services businesses in both of our segments, meaning Minerals and Flow Control. And we have changed our -- the structure of how we guide. Now -- we were guiding market outlook earlier on, now we talk about market activity. And we will then define the outlook with different wordings, either grow, remain at current level or decline. And we will be guiding the six months as we've done also before, so six months ahead. And like I said, at this moment, we see continued growth in both of our segments and both in equipment and services side. And even though this is not to forecast for our orders, but if we look at our past performance, it has been very strong and we see that one, too. Market will support the continuation of that one.

Thank you for my part. And I think, now it's time for questions.

Juha Rouhiainen

Thank you, Pekka and Eeva. And operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of Klas Bergelind from Citi.

Klas Bergelind

Pekka and Eeva, it's Klas from Citi. So a couple of questions from me. The first, on services, so a very strong growth across all verticals, particularly in mining and in flow control. And there were performance contracts and shutdown services that came through, which I think surprised some people. To what extent was this a year-end phenomenon, when some shutdowns take place versus actual real underlying improvement, which can see seamless strong growth all between 2019? Because selling more mine automation analyzers is becoming a real thing out there, so I was just wondering if this is a step-change and now can continue to generate growth from Minerals going forward. I will start there.

Pekka Vauramo

Yes, rather difficult to comment whether it is continued. But overall, customers are very busy in their operations and activities at this moment, and that is, I would say, what is driving the strong service sales growth. It's also typical for this time of the -- and this phase of cycle that customers are entering into service agreement and performance agreements with suppliers, and we do see steady growth in that one. On the other hand, we have to say that if we compare with 2017, we have also discontinued several of our service contracts that were -- that did not meet the profitability criteria for ourselves. And in that regard, we were able to improve profitability, of course, at the expense of reduced sales for that part. But overall, the growth was good and strong.

Klas Bergelind

All right. My second one is for you, Pekka. Now that you've been at Metso since November, you are not communicating anything on targets. And I guess, it's a bit early to do that. But just get a sense of your initial impression on the potential to expand the margins, particularly in Minerals. Metso has worked in a more decentralized way now for a year, which should unleash increased accountability any day, but there is hardly a need to increase R&D to make the products more competitive off the market and more captive. So we have, on one side, increased R&D, that's a margin headwind; but then possibly increased productivity and better pricing. So where do you see the productivity improvements and the pricing opportunities here as we go in now into 2019?

Pekka Vauramo

Naturally, healthy markets will support the pricing environment, but at the end of the day, competitiveness of offering is far more important than cycle in this regard. And therefore, we need to continue and will continue to invest in R&D in future as well. When it comes to communicating our targets and things like that, I think we will come sometime mid- this year, maybe in connection of first half results. We will be communicating our new strategies and new targets, so we'll come back to those, once closer. But I have to say that the moral that was put together a year ago, a more sort of decentralized decision-making and giving a lot more authority to seven business areas, has really worked for us. I mean, we've been able to focus on real business issues much faster than we could have earlier on. Business areas that are responsible for the entire supply chain, talk all the way to customers, they've been able to work on de-bottlenecking if there have been issues and whether there have been issues. And there have been, with a couple of them, an issue. And we've seen successful de-bottlenecking during the year, and situation is now much better. The way of working is well understood by the organization, which is also important; and also, which I think is sign of our sort of reporting capabilities, that the numbers are coming together in a fairly stable manner, considering the change that we made only a year ago. So I'm positive about this one and I don't have any changes to make -- major changes or -- in this one. Of course, we'll fine-tune as we go, if we see things.

Klas Bergelind

Just one final and quick follow-up to that, just a question on cost allocation. One big driver behind the productivity improvements at one of your previous employers, Sandvik, was the improved cost allocation. Construction in Sandvik was sitting on direct overheads, which should sit with mining. Construction is a decentralized business, shouldn't have these overheads, and made it unfair for the construction business to sit on these costs when you try to improve profitability. Have you found anything -- unfair cost allocation across the different business area? I'm just trying to gauge if there's any low-hanging fruits that you can see, Pekka, when you've been looking at Metso so far.

Pekka Vauramo

I haven't come across yet, but of course, this discussion is very familiar to me. And especially this kind of model where we have seven businesses, and that, on the other hand, have the same services -- some of the shared services are same and then, of course, the cost need to be allocated. But of course, it's -- for us, as business leaders, it's really a crucial question that the allocations are fair and correct ones so that we can draw right conclusions when it comes to accepting orders, booking orders, doing the pricing and understanding the competitive environment properly. But I haven't seen it as a major issue yet. I think we have a great understanding how different truly the distribution systems, for example, and change are for various business areas and for various customer segments. Mining, we tend to do much more directly; aggregates, we have distributors and dealers, and there, of course, the cost structure will have to be different. On the other hand, when we look at in consolidated terms, including the distribution part of it, whether it's internal or external, then, of course, we come to numbers that are far more comparable. And that should be the basis to look at them, not to over-allocate on areas where we have them -- other distribution costs beyond Metso.

Operator

Our next question comes from the line of Max Yates from Crédit Suisse.

Max Yates

Just my first question would be around sell-up activity. You talked a little bit about sort of wanting or preferring small- to mid-sized orders, so were there any larger orders in the quarter that you had walked away from? And should we -- when we think about the outlook for demand being sort of somewhat higher, could your orders be potentially, sequentially flat because you're more selective in the first half than you were in the second? Or is that selectivity already taking place in Q4, i.e. you're actually walking away from some business?

Pekka Vauramo

Probably, Eeva. Eeva has background from full year 2018 better than I do.

Eeva Sipilä

Yes. I think that's not something sort of new now. I think it's partly -- of course, it's a market phenomena. We've discussed with you earlier that the customers are very productivity-focused, and hence, the bulk of the business out there is really on more brownfield and refurbishment type of business. Then I think we have obviously made it very clear internally that we're looking for profitable growth in all the businesses, and of course, that has resulted into better price management, better terms management. And for sure, there has been some business out there that has hence not been that attractive to us. But I wouldn't say this is now anything -- a specific step change. So we're -- we would be looking at sort of a growth outlook. Then the sort of bigger projects, they are -- they come and go. They will sort of, of course, sort of have a big impact on comparability between quarters, if and when they come. And -- but those, as you well know, it's very difficult to guide on the timing of such business. I think our basic message continues to be that the market is more brownfield-oriented than greenfield in -- due to really the strong customer preference on productivity and improved returns. And we -- that's a market that -- and demand that suits us well as well.

Max Yates

Okay. And just my second question would be around working capital. So based on your backlog, you're going to have another year of strong sales growth in 2019. So I just wanted to understand a little bit about how you think working capital evolves in that environment, whether you would be able to keep working capital flat at the current absolute level or you think that you still would need to grow, maybe not in line with sales, but still grow further and therefore be a cash outflow for 2019.

Pekka Vauramo

Eeva?

Eeva Sipilä

Yes. I think it will depend on the growth rate. I definitely -- we sort of -- we have a bit -- as I said, we sort of lately toned down a bit to avoid sort of excessive inventories, and we have quite a lot now to enable us to deliver and provide availability in the coming sort of -- also, taking into account the seasonality in some of our businesses. We definitely need to improve on the turns. And that, we will be working on in the absolute numbers if -- with these type of growth rates that we're reporting now. Obviously, it would be sort of maybe unrealistic to not assume some absolute growth as well, but I think it's really now getting the focus we have, a better sort of visibility into our supply chain. We've sort of -- we had, had success in the ramp-up. We kind of know what's in the chain. So I think we have a lot better opportunity to manage the turns than we had a year back.

Pekka Vauramo

Yes. In this kind of business, the acceleration, otherwise, ties can't be tough.

Max Yates

Is there any percentage of customers becoming more demanding around the payment terms -- or sorry, the receivable terms on orders and that they may be putting some more pressure on the suppliers to hold some working capital?

Pekka Vauramo

I think when we look at internally what that performance has been, I think we have seen slight opposite development, in fact; and in fact, that the payment terms have become somewhat more favorable for us, not in a big time but somewhat improvement over the year.

Operator

Our next question comes from the line of Omid Vaziri from Jefferies International.

Omid Vaziri

I've got two. You've been very clear in your reporting of orders thus far that demand is very much driven by brownfield replacement rather than greenfield. Now in the mining space, we've seen upstream equipment providers announce order wins from large greenfield mines in Latin America, mainly copper. Does your fourth quarter Minerals order development include any order wins from the same? Or are they more likely -- how do you position to win orders for downstream equipment here later on? Also, expected timing would be helpful there. And my second question is on order margin development, how that's been in the fourth quarter, please.

Pekka Vauramo

Yes. We have seen orders during the year on greenfields as well, and specifically, copper. Copper, I mean, it's driven very much by electrification and electric cars. And we've seen also greenfield orders in battery metals, lithium. Just received one repeat order from such a project as well. And it's not only brownfields. There are also greenfields. And this -- of course, this electrification is one of the trends that we are currently experiencing, and that might be something that we'll carry into the future as well as there are several proposals for -- out there for greenfield copper projects that I have seen going through us. The margin development was somewhat slightly disappointing towards end of the year. Then, of course, I mean, when we look at the bottom line margins, they were pressured. Some, I would say, typical year-end bookings of costs that we had, but nothing that major of what we had a year ago. But the margin development was slightly disappointing towards end of the year. But I don't think there's any trend in that one. That one just happened to be a mix issue as we delivered so much equipment during the fourth quarter, in relative terms, more than services.

Operator

Our next question comes from the line of Markus Almerud from Kepler Cheuvreux.

Markus Almerud

Markus from Kepler Cheuvreux. Pekka, I have a couple of questions. Interesting to hear -- assuming that you've spent some of your first couple of months seeing some of your customers, and then it would be interested to hear your -- especially on the mining side, to hear the first impressions there, if you've seen any hesitation given what's going on with the macro economy. And also, if you've seen -- how are the discussions regarding the sales funnel on the greenfield area? And then finally, just your thoughts on -- so everyone knows that copper will be tight fairly soon. And I know it from others, whose -- that the depleting ores in -- among the many of the large mines is a big concern. But still, they're holding back on investments. And why do you think that is and what do you think is needed for that to change? Just your thoughts on that would be interesting.

Pekka Vauramo

Yes, I have met with some of the customers, and I don't really feel that they are slowing down things. Of course, the general uncertainty on things that we all are aware of is probably in back of their minds. But like I said, I mean, we have several big proposals out there, greenfield proposals as well, and they tend to take more and more time nowadays. Nowadays, the permitting is a very slow process, and it's getting slower year by year throughout the world. There are new mining regulations -- environmental regulations coming in place. And this preparation seems to be taking longer and longer year after year. I think that is something that's in the back of the minds of our customers, rather than anything which is more short-term. And sorry, I forgot parts of your question.

Markus Almerud

Do you think it's just -- so it's more of this -- I mean, the procedures are more difficult and that's what's making them take time rather than that they don't run after the mines. So it's just taking a longer time to get there. That's the impression, yes?

Pekka Vauramo

This is how I read it, yes.

Operator

Our next question comes from the line of Andrew Wilson from JP Morgan.

Andrew Wilson

I just wanted to start with -- I guess it's probably a question for Eeva. The 2019 kind of margin dynamics, I just wanted to try and get some, I guess, even if it's a qualitative commentary on -- we're obviously expecting good volume growth, and kind of against that, we've got the negative mix. But also, there's quite a lot, I think, happening in terms of interim improvements, which business has been working through. And we'll probably get a benefit from that coming through, and then, so we'll see more materials and cost inflation. I just wanted to try to get a sense of, I guess, probably particularly in Minerals but also Flow Control, just how you see those margins developing in '19 and just the key things that we need to think about for our models, please?

Eeva Sipilä

Sure. Well, I think you sort of had a good key list already there. I mean, obviously, the order backlog, we start the year with this significantly up and will give us good sort of volume leverage into the year. Then, of course, it is -- the mix is more equipment than services, as you rightly note. And you saw the impact of the mix also in the Q4 numbers, so that is something maybe sort of a somewhat bigger change perhaps in Minerals than in Flow. But I think both are sort of subject to that. Then again, the -- I think the -- so the challenge right now with the uncertainty around us is really to understand the sort of inflationary pressure: raw materials, what will really happen there? Because, obviously, they are impacted by many other industries, not just our own. And even if the sort of mining comments seem from everyone to be quite positive, of course, we buy similar stuff to some other industries where the comments have been more mixed.

We're still assuming that there will be a cost pressure inflation on -- for us, and we're -- so the expectation is that whilst we continue to work on pricing, that we don't necessarily see -- expect sort of a positiveness from there. Let's see where it really ends. This is a -- I think it's better for us to be prudent, and then we see where things go during the year. Then, yes, definitely, I think we made good progress in many areas on the strategy execution that Pekka also noted earlier. But specifically in the supply chain, we've discussed many times during last year that, that is a longer-term thing. And let's -- it should help on the margin side from just having less hassle and less sort of logistical issues, but of course, it should also then help on the inventory turns. So I think those are really the key things at this point. Wouldn't really want to go into more sort of -- more specifics on that. But I think those are the ones to watch and which we will then be, obviously, be discussing during -- as the year unfolds.

Andrew Wilson

That's helpful. And just a couple of questions, just on end market dynamics. If you could just kind of talk about oil and gas in a bit more detail. I mean, there's obviously some comments in the release, but just in terms of, I guess, how you're seeing that develop for the Q4 and just if there's specific pockets of kind of the oil and gas supply chain, which has been particularly strong. And secondly, just on the aggregates. I feel like for the last two years, we've basically been talking about a pretty positive picture. And aggregates are probably a surprise on the upside against kind of our missed expectations. But can you just talk about, I guess, how concerned are we that we're sort of at already very elevated levels and just get a sense of how you see that develop. That would be very helpful.

Pekka Vauramo

On the oil side, of course, the -- first of all, the sudden drop in oil price and then that one starting to climb up again and then going a little bit up and down, up and down. But it has now stabilized over the past few weeks in terms of Brent on $60 level, and I think that gives a little bit stability on the oil side. And we are not very concerned about that one at this moment at all. And we're sort of fairly confident on that, that the business will continue in good and favorable terms there in near future. Then the aggregates, there's some interesting developments happening. I mean, all the big economies -- I mean, some of them are developed countries. Some developing countries seem to be fairly well in that regard. India, elections ahead, it remains to be seen what the impact of that one is. It's may be a little slowdown for a month or two, but overall, I think the infrastructure development there will have to continue and it will continue and it's boosting our aggregates business.

China, on the other hand, has banned river sand, which is the most common construction material. And now river sands cannot be used at all and all sand must be manufactured sand in China, and that is supporting the aggregates side to great a extent over there. At the same time, they are consolidating smaller quarries. Smaller quarries will not get operating licenses anymore, and the bigger quarries have capabilities to invest on more mechanized equipment. And we are both, in India and in China, much better present now with our local manufacturing and with our joint venture companies, and we saw very favorable development in both in India and in China -- China last year, in this one. And I have no reasons to assume that it would change considering that now all sand in China needs to be manufactured sand. At the same time, all construction materials need to be recirculated. For example, the concrete roads, the highway network in China will be converted to asphalt and there's huge amount of concrete that need to be recirculated. And that is business opportunity for us. U.S. aggregates market goes very well favorably. And it remains to be seen then what happens in Brazil, now in the infrastructure side, when the new president is in the office. And anyways, people are fairly optimistic about that market as well. So we see some really good, interesting developments in aggregates altogether throughout the world, and therefore, we are investing in our factories and capabilities and new products in that area; and made also one acquisition last year, a smaller one, the Swedish Jonsson och Söner business that we bought, and have now and integrated that one.

Operator

Our next question comes from the line of Antti Suttelin from Danske Bank.

Antti Suttelin

This is Antti. I would like to come back to Minerals Services orders. I think you reported 12% growth last year. I think that number must be much higher than the overall production increase by your customers. So what drove that growth? Is it market share? Or what is it?

Eeva Sipilä

Well, I think, Antti, there's many things. The composition of our service business, if you remember, also includes refurbishment type of engineered projects. And that, of course, business was at very, very low levels just some two years back. And of course, that improvement, which is part of the sort of productivity-improving mission our customers are on has been visible in our numbers. And we think we have a good offering, a lot of competence there really to take a big bulk of that business. I think we've done very well also in the key mining markets and very good work from our teams globally on -- also, pricing, of course, is a positive impact on the growth. We -- that's been an area where we have also worked very hard. So I think it is really at the core of the strategy, and hence, due to the size of the business, it's managing it well. It shows on the overall bottom line as well.

Pekka Vauramo

I would say that services especially enjoys the new organization and more focus on that particular part of the business, and it's bringing results.

Antti Suttelin

Yes. And would you expect this kind of refurbishment activity to continue also in '19?

Pekka Vauramo

I think where the markets currently are, everyone is doing the same what we did, de-bottlenecking their processes and equipment. And that is really something, what Eeva refers to, this engineer-to-order type of activity, ETO, as we call that one, there's a lot of opportunities out there in that field.

Antti Suttelin

Okay. And then I think you said, Pekka, something about potentially giving out new targets. Could you repeat that statement? When and what targets could this be?

Pekka Vauramo

Yes. We, of course -- I mean, we are reviewing our strategy. It's normally, in many companies, the activity that companies do during the first half of the year. And we are doing that one now, just recently initiated it. And of course, we will look into all activities that we do, and we have a process in place. And most likely, we'll communicate the outcome for that one after the first half of the year.

Antti Suttelin

Okay. And finally, could you explain to me why you have Minerals business and why you have Flow Control business? How do these two businesses act together?

Pekka Vauramo

Okay. A question that has been answered many, many times before my time, I think. I think, after all, of course, the composition of company tells a lot about its history and its roots, and we have good and solid Minerals business, very profitable Flow side of the business. And of course, one might speculate that while -- that something could be done about it, but then, on the other hand, our balance sheet is very strong at this moment and we need to look at the total picture how to develop this company going forward. So I don't think there's any other reasoning for that one, that this is the DNA of current Metso, and we'll continue with the portfolio that we have in hand.

Operator

Our next question comes from the line of Robert Davies from Morgan Stanley.

Robert Davies

The first one was just really around what's changed, in your opinion, between 3Q and 4Q in your decision to kind of change the guidance between the Mining aftermarket and both the OEM aftermarket on Flow? You've obviously kind of come out with some more positive demand outlook kind of comments for those markets. So I just wondered, between 3Q and 4Q, ultimately, what is the change there? And the second was just around the Flow Control business. Given the movement in oil prices, you mentioned the sort of stability of Brent around $60, but is there any sort of potential lag effect their from the kind of 40% movement all over the fourth quarter that we should expect in 1Q? Or how should we kind of think typically between these movements in oil prices? How directly correlated are you?

Pekka Vauramo

If I take the oil price first. Of course, it's not direct because we are not in upstream oil, which is far more sensitive to oil price changes. But of course, stability, overall, it's normally a positive sign also to the downstream side because, I mean, the refining fees and those tend to be far more stable in those conditions than when the oil prices are fluctuating. So therefore, it's more stable environment, I would say, for our customers to operate, and that should be favorable. Then, of course, services in sort of the flow side and oil and gas, that's driven quite a lot by the shutdown activity that the refineries have and the petrochemical plants have there. And we don't see any sort of major change in that regard, meaning that there will be shutdowns again that are always the service opportunities for us in near term as well. The services, the second part of question was...

Eeva Sipilä

On the outlook.

Pekka Vauramo

Yes. We do see a strong demand for services. And we also -- that's the reason why we ended up acquiring the HighService business in Chile, which really hasn't closed yet. But that will start to contribute to our service business, hopefully, during the second half. Of course, that is not all the growth that we see and that is from a fairly small footprint, but we can say that the value-added services that they provide and remote monitoring, we could expand to other parts of the world and as the nature of service business will be changing with a far better connectivity and the big data and data analysis on top of that one. So those are some of the drivers that we do see happening there right now.

Eeva Sipilä

And maybe, Robert, just to -- if you're...

Robert Davies

Understood. Maybe just one follow-up. Just the service activity that you mentioned, so you'll strengthen it. Could you sort of disaggregate a little bit between how much is kind of projects and refurbishment and how much is sort of the underlying and typical day-to-day service business that you would normally see? You mentioned a kind of higher contribution in projects so I was just trying to get some idea, if you could quantify how much of an impact that's been in the quarter.

Eeva Sipilä

Yes. I don't think we necessarily want to break it down to the details. But if one thing, so the sort of engineered side, this refurbishment side, we've seen higher growth there -- growth rate, partly, of course, due to lower starting point; whereas the sort of field service, spare part business started to improve in late 2016 already. So we -- in those businesses, it's also partly that we have high -- they've all grown, but then the sort of comps are obviously -- were tougher in -- for them.

Pekka Vauramo

I think we have added resources to this type of activity, engineering resources. And then, of course, our supply capabilities are also boosting our service side because we are, to a great extent, in the same supply chain for that part of the service as we are with the equipment.

Operator

Our next question comes from the line of Tanuj Agrawal from Barclays.

Tanuj Agrawal

This Tanuj Agrawal from Barclays. I have one question on your outlook actually, specifically, on Minerals. So when you say Minerals are expected to grow -- and I heard your comment on aggregates, so is it like more strong growth in aggregates and a more modest growth in mining? I say that also because we are hearing players exposed in the mining industry, they have been pointing out a more modest view, at least for 2019, in mining, and in particular, in copper. I mean, I totally get the view of the secular growth story there. But at the same time, if we look at the projects, I mean, in the last two years, there have been over 2 million tons of copper projects which have been approved. So I mean, how do you see the project pipeline going ahead? Because I don't see many projects ready to go projects there. So what's the visibility of that 2019 pipeline specifically? So is it that 2019 would be slow before 2020 gets kind of strong again? That's my first question.

Pekka Vauramo

Yes. Of course, when you look at these projects from our perspective, and then, that might be somewhat different view than what people do get because our view starts, of course, from the feasibility study and approval and go-ahead decisions of the entire project. But then, when we go into the inside the project, the view starts to change a little bit. So even though we may not see greenfield projects right now that many, but there have been greenfields that have -- that were greenfields some time ago and are now getting active -- more active for us in near term. I would say that -- and of course, I mean, I cannot comment what -- your view is inside into these projects, but we do have, through our offering and proposals activity, somewhat different view, and it's not happening at the same time when the big projects -- or assets are announced by our customers. And mining, of course, copper is clear. That will go ahead. And I commented earlier on the permitting, which is getting more complicated. And that is -- I would say, that is a clear difference between now, and let's say, 2006, '07, when the super cycle started. And a lot of regulation has changed since those days. And all over the world, it has become more difficult to open new mines. And that is something that we are going through here, and it's probably visible in terms of copper. At the same time, yes, some of the projects, maybe our clients are looking more closely at the risks because copper specifically is going underground. It's been going underground for quite some time.

At the same time, the grades are lower. And the ores, when they come from deeper mines, are harder. So those are the risk factors that our clients have. On the other hand, if rock gets harder, there's more opportunities for us. If there's less copper on the ore, it means that more rock, more ore needs to be crushed and milled. So once again, more opportunities for us. But like I said, I mean, these are in big picture, the moves and changes that are happening. The aggregates business is, I would say, there are a few really major countries in the world where the infrastructure development more or less decides where the aggregates goes, even though that business is global. But I commented earlier on, on China, India and a little bit U.S.A. and a few words about Brazil, and we see positive things there. And we should not ignore Europe either in the aggregates side. It's -- Northern Europe, specifically, has been a good market for us. And we see that to continue. And for the time being, we see the aggregates business really prospering in all these main markets as well.

Tanuj Agrawal

Okay. And just one very small one, actually, on Cualojeco. It's a $5 billion large project. When you moved it in Q3, it was somewhere around -- it was booked as a mid-sized project. Given that it was such a large project, are you expecting any more significant orders around Cualojeco going ahead? I mean, I'm not looking into couples of tens of millions going ahead in future, but some significant orders.

Pekka Vauramo

Yes. I haven't -- I'm not that aware of details of Cualojeco. I, of course, heard the name of the project and are aware of the order, but what the follow-ups on that one is, I would have to check that one from our people. And on the other hand, we will not comment to details on individual project either.

Operator

Our next question comes from the line of Manu Rimpelä from Nordea.

Manu Rimpelä

My first question would be on the cost inflation, a clarification on the comments you made. So did I understand you correct, that you're aiming for offsetting cost inflation with price increases but you are uncertain whether you will be able to do that? I mean, net pricing could be a headwind in 2019.

Eeva Sipilä

Sorry, then, I was unclear. We are -- yes, we are targeting to offset the net cost impact with pricing. I am pretty comfortable that, that is achievable. But I'm not necessarily assuming that we can improve the margin, which was a specific question from Andrew earlier, with pricing.

Manu Rimpelä

Okay. And then another question in terms of the Minerals, EBITA and operating leverage. So we have seen a sequential improvement in the fourth quarter, but the overall operating leverage still remains just around 15%, 16% in the fourth quarter. So I mean, where do you see that, now that you're starting to solve the supply chain issues and potentially gaining traction on pricing and that delivery should continue to kind of remain strong? So where do you see that, the operating leverage capabilities of those business unit is? Can you give us some light on that?

Pekka Vauramo

Yes. I would say that, looking back and what I have understood of last year, is that we really struggled with our supply chain. And those ramp-up efforts that we did have, there was a major cost element in all of them. And as we are now in much more balanced situation, though still in a growth -- rapid growth mode, we could expect somewhat improved leverage as we move on. We do have some structural issues that we need to take a position later on in order to make sure that we have smooth internal supply chains inside the company, and we are addressing those things with numerous actions, as we speak. So we need to continue to develop that one. But I think we know where the issues are and we are acting on them.

Manu Rimpelä

Okay, so you would feel comfortable in targeting a higher operating leverage in 2019 than you had in the fourth quarter?

Pekka Vauramo

Well, that needs to be seen what we are able to deliver. But we have actions in place where we are addressing these issues.

Operator

Our next question comes from the line at home for Jonathan Hanks from Goldman Sachs.

Jonathan Hanks

Obviously, you talked a lot in the past about increasing R&D, and you managed to increase it by about €12 million in 2018. I'm just wondering, is that about the level of increase we should expect again in 2019? Or do you hope to ramp up the increase a bit more aggressively there?

Pekka Vauramo

That, I would say, is roughly on the level what we'll do this year. Then it, of course, depends also on how we -- what sort of projects we do approve during this year a little bit. But of course, the key in R&D activity is to have the right people, right resources, right skills in place, and that is normally the bottleneck when ramping up the R&D. So therefore, I would say that we'll continue in the big picture with the same pace. We also need to look into the digitalization because some part of that could be also regarded as an R&D, and there, we are ramping up also our activities.

Jonathan Hanks

Okay. Great, very clear. And then a quick one on Flow Control. Obviously, very impressive margins this year on sales, which are still some way below prior peaks. I mean, could you maybe remind us a little bit why the margin has been so strong this year? And is there any tailwinds this year which could reverse next year? Or really, should we just take this as the new base and just think about normal operating leverage from this level?

Pekka Vauramo

I mean, if we look at what we have done over the years in our of valve side, first of all, I mean, we have solid products, I would say, solid product lines there. The assortment is good. We have good solid service business. Then in relative terms, we are manufacturing more and more in lower-cost environments, and we'll continue with that shift since we have acquired the business in India. We just had groundbreaking in China -- inside China, at a lower-cost environment than where we operate currently. And yes, we can expect that our sort of operations become more cost-efficient in future as well. Then the other side, the revenue side and the pricing side of it, that depends on how the markets develop in the long run, but we're taking lot of actions in our supply chain side to reduce the cost.

Operator

Our next question comes from the line of Magnus Kruber from UBS.

Magnus Kruber

Magnus with UBS. Just a couple of ones for me. First, returning to the growth rate in the aggregates business, would you say that the growth rate you saw in the second half of '18 was slower than the one you saw in the second half of '17? That's my first one.

Eeva Sipilä

No, it was -- actually, we saw higher growth rate. Seasonally, typically, aggregates growth is higher in the first half compared to the second half. But if you're comparing '17 and '18, so the growth increased.

Magnus Kruber

Okay, okay. But if you look at the full year, did the full year grow faster in 2018 than you saw with the growth rate in 2017?

Eeva Sipilä

Yes, yes.

Magnus Kruber

Okay. Good, that's perfect. Secondly, on the mining equipment, you have said in the past that equipment has not had a positive contribution to profitability for some time. Could you give some flavor on how that developed in the quarter?

Eeva Sipilä

Well, we ended up the year with slightly positive numbers also in that area. Obviously, it's not a sort of -- it's an area where a lot of the improvement also was -- went in to increased R&D because that's one of the areas where we put more focus on. So it's not -- I think it's maybe a tough -- it's not a fully comparable comparison. But anyway, it was in the black, even with the R&D costs. So that was an, of course, important milestone.

Magnus Kruber

That's very good. And just -- also, in the past year, you've given assessment on what should we do with your invoice from backlog in the next year. Do you have such a number for '19?

Eeva Sipilä

The big chunk of the order backlog is -- will be -- is planned to be delivered in 29 due to the composition of the order backlog being very much services and aggregates, valves, equipment type. As we discussed earlier, the sort of amount of big mining projects is less, and those were typically -- are multi-year. And of course, there's some of those from -- in that. But really, the sort of vast majority is in '19.

Magnus Kruber

Got it. And I guess one bookkeeping. Tax rates for '19, what should we see there?

Eeva Sipilä

Well, we're working hard to improve the structure we have and even took some one-off costs for that in the fourth quarter. So the target is to move in the right direction from the shareholders' point of view, but nothing -- I'm not expecting anything dramatic. So you can, of course, for prudence's sake also use 2018 rates as a starting point.

Operator

And that was our last registered question, so I will now hand the call back to you, speakers, for your final comments.

Juha Rouhiainen

All right, thank you. We have run a little bit past 60 minutes. So it's a good time to conclude this conference call for fourth quarter and full year 2018 results. Our next call is scheduled for April 25, 2019, when we start reporting 2019 with the first quarter numbers. So we'll speak to you then at the latest, and now we say thank you, and goodbye.