The most frequently discussed topics regarding Metso's current state and future outlook.
2015 in short
Metso performed well in a challenging market environment. Margins were maintained, despite the lack of growth and low demand for mining equipment. Our financial targets remain valid though it is obvious that delivering the targets is challenging. During the year markets became more challenging in our customer industries, as we saw a decline in demand for mining and aggregates equipment and oil & gas valves. Demand for mining and aggregates equipment also decreased in some market areas. On the other hand, demand for pulp & paper valves, pumps and Flow Control services increased. Metso continued its strategy implementation by divesting the Process Automations Systems Business (PAS) to Valmet. The divestment was a logical step by which the company is targeting higher margins and lower volatility.
How did the low demand for mining equipment business affect Metso in 2015?
Declining commodity prices reduced our customers’ investments and the number of new projects is low. Replacement equipment was still delivered but also maintenance investments tended to be postponed in the depressed market environment. Metso was able to adjust its operations to the current market environment through a renewal of
the operating model, cost awareness and restructuring measures. These actions helped us to remain competitive and hold our share in a very challenging market. The restructuring measures have been made with a long term perspective – a leaner and adaptive operating model enables a stronger performance when markets turn more favorable.
How do commodity prices reflect the demand for mining services?
Our services business is more resilient to commodity price fluctuations than the equipment business, since existing mines and production plants need maintenance and spare and wear parts to stay operational. Longer dips in commodity prices affect our services business, since margin pressures reduce our customers’ spending. Metso works hard to offer performance services that increase the operational efficiency of our customers and help mitigate higher productions costs.
Will demand for aggregates equipment and services increase?
The aggregates industry is highly dependent on government investments and construction projects. The business is very global and the geographical diversity of the business reduces the impact of cyclicality in different market places. Growth in emerging countries, especially in China and Brazil, slowed in 2015, negatively affecting demand for equipment and services. Some of the decline was offset by growth in the US and a partial recovery in Europe. In the long run we see a growing demand for aggregates equipment, thanks to the ongoing urbanization and increased demand for energy efficient technology.
Oil price impact on Flow Control?
Metso offers valves to mid- and downstream sectors of the oil & gas industry, e.g. refineries and petrochemical plants. Oil & gas valves represent about half of Flow Control’s net sales. The oil price has declined significantly since June 2014, which has led to postponements, delays and discontinuations of oil & gas projects in general.
The low oil price has had an explicitly negative effect on exploration and production (upstream) related investment while transportation and refining (mid- and downstream) activities are more resilient to sudden price fluctuations. Some mid- and downstream projects have also been delayed or postponed since companies have reduced investments in all sectors of the industry in order to cut spending. This caused Metso’s orders for new oil & gas-related projects to decline somewhat in 2015.
Which other customer industries does Flow Control serve?
Metso serves multiple industries through its pump and valve offering. Pumps and related services are mainly sold to the mining industry where Metso increased its market share in the past year. We see a large potential to grow and expand the pumps business both organically and through acquisitions. Besides the oil & gas industry, Metso offers valves and services for the pulp & paper industry and various other process industries. Metso is the world’s largest pulp & paper valve manufacturer and we expect demand for these valves to remain healthy following new pulp mill investments.
Metso’s investment activity and RTD?
Metso has the assets and resources to grow the business and we do not see a larger need for investments in the coming years. The annual capital expenditure level is expected to remain below depreciation and amortization of our assets. Metso’s RTD network encompasses approximately 20 units around the world. Metso actively develops and protects new technologies, processes, and service solutions; the RTD network made 93 (141) invention disclosures during 2015, resulting in 21 (33) priority patent applications. As of the end of 2015, 293 (428) Metso inventions were protected by patents. Research and development expenses in 2015 totaled EUR 40 million, which is 1.3 percent of net sales (EUR 59 million and 1.6%). The decrease in R&D expenses is largely attributable to the divestment of the PAS business. Expenses related to intellectual property rights amounted to EUR 2 million in 2015 (EUR 3 million).
Capital allocation priorities going forward?
Metso’s goal is to remain a solid and predictable dividend payer with a payout ratio above 50 percent of annual EPS. Maintaining our investment-grade credit rating in order to access funding at competitive terms is also important. Given these prerequisites, Metso’s strategic objective is to grow its businesses through development of its existing portfolio and/or by acquiring businesses.
Reaching the profitability target of 15 percent EBITA before non-recurring items?
Growth is a necessity for reaching the margin target announced in July 2014. Given the current market conditions, we have been able to maintain the current EBITA margin level thanks to restructuring measures and cost control.
Reaching ROCE of 30 percent?
In order to reach the ROCE target, we will have to deliver our margin target and increase capital turnover to at least two. Much of the strategy work has been focused on net working capital efficiency, asset-light business models, a strict capex policy and a redefined cash policy. These areas remains in focus when going forward with
our strategy implementation.