Oct 31, 2016 Corporate blog

Q3 - Steady development, uncertainty related to O&G

Juha Rouhiainen
Juha Rouhiainen
Vice President, Investor Relations
Metso’s third-quarter result, published on Friday, October 21st, did not offer significant new information about the company or its businesses. The Group’s orders, net sales and result were largely in line with expectations, but the distribution of orders across segments deviated somewhat from expectations.

Flow Control’s weakened orders sparked some discussion, even though there were signs in the air, as a few significant valve companies recently reported that their activities and outlook in oil and gas processing, i.e. in the downstream market, had weakened. Despite these signs, the negative impact of the weakened demand on Metso’s third quarter ended up being greater than expected. The oil and gas industry has seen periodic downturns before, as a result of customers delaying their investment decisions and cutting their costs. The next few months will indicate the direction of market development, and whether the modest order intake of July–September was simply a single weak period or the start of a new trend.        

Minerals’ reported figures were largely in line with those of our peer companies. The order intake for mining equipment continued to grow, but the low order volumes in the previous quarters led to a drop in net sales. Although a gradual improvement in the equity markets is already predicted, basic demand remains at a weak level and the scenario remains unchanged: there are few major projects in the works, while the number of small and mid-sized orders has been satisfactory. At this point, the growth in mining equipment orders appears to indicate that demand will at least not weaken from the current level. In services orders, we did not see as great a drop as we did during the first half of the year. Rebuilds and modernizations, as well as spare parts orders, remained at the same level, whereas demand for wear parts was slightly weaker. Metso changed its guidance for mining industry services to satisfactory in July 2015, and the demand level has been more or less on the same level since then.

Demand for aggregates equipment was slightly stronger in Q3 compared to Q2. The differences between market areas are significant, even though the orders have been of the same size for many quarters in a row. With the improvement in the general economic situation in Europe and the U.S., demand for aggregates equipment has gradually grown. India is also growing as development of road networks and other infrastructure construction is creating demand for Metso’s aggregates equipment and services. In South America, especially in Brazil, the general economic situation is still having a negative impact on orders received from the area. Even if demand were not to weaken much, it is difficult to see signs of growth in the near future.

Despite the decline in net sales, Metso’s result has remained at a good level. This indicates that the company has done well in a challenging market situation. Margins have held up, and cost cutting measures will be continued where needed, also if the markets weaken further.

Following the publication of Metso’s financial results, we met with investors in Helsinki and London, and the development of the markets over the next few quarters will be the focus of interest. Market opinion is that Minerals’ strengthened order backlog indicates a potential increase in net sales in 2017. At the same time, investors and analysts will have to consider whether the development of Flow Control will be weaker than expected, which would partly offset the positive impacts of Minerals’ growth. We will get the answer to that question in only a few months.