Stock Exchange release October 28, 2010 11:00:00 AM CET
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Metso Corporation's Interim Review, January 1 - September 30, 2010

Metso Corporation's stock exchange release on October 28, 2010 at around 12:00 p.m. local time

 

Solid performance

 

Highlights of the third quarter of 2010

  • New orders worth EUR 1,409 million were received in July-September, i.e. 37 percent more than in the comparison period (EUR 1,031 million in Q3/2009). 

  • At the end of September, the order backlog was up by 21 percent on the end of December 2009, and totaled EUR 4,144 million (EUR 3,415 million at December 31, 2009). 

  • Net sales increased by 11 percent on the comparison period, and were EUR 1,325 million (EUR 1,196 million in Q3/2009). 

  • Earnings before interest, tax and amortization (EBITA), before non-recurring items, were EUR 128.6 million in July-September, i.e. 9.7 percent of net sales (EUR 134.3 million and 11.2% in Q3/2009). 

  • Operating profit (EBIT) was EUR 103.5 million, i.e. 7.8 percent of net sales (EUR 114.1 million and 9.5% in Q3/2009). 

  • The EBIT includes as a whole EUR 10.5 million in negative non-recurring items (EUR 9.7 million in negative non-recurring items in Q3/2009).  

  • Earnings per share were EUR 0.45 (EUR 0.44 in Q3/2009). 

  • Free cash flow was EUR 122 million (EUR 249 million in Q3/2009).  

  • Return on capital employed (ROCE) before taxes was 13.0 percent (11.1% in Q3/2009). 

 

"I am pleased with our solid performance. Our underlying operational performance has improved quarter on quarter this year, underlying EBITA margin was 7.5 percent in the first quarter, 9.1 percent in the second quarter and now 9.7 percent in this quarter. Another strong area is our services business which continues to develop strongly: orders have grown this year about 38 percent. I am also pleased with our good free cash flow for the quarter. Our strong balance sheet gives us a solid base to develop Metso further", comments Metso's President and CEO Jorma Eloranta.

 

"We anticipate that the gradual recovery will continue in most of our customer industries, but the picture is mixed. Out of our new orders 56 percent came from the emerging markets in the third quarter and the outlook remains strong. In Europe and North America demand outlook is more uncertain. There are also differences between customer industries: for example demand in the mining industry continues strong while in the power market final decision-making in new projects is taking quite a long time despite the favorable long-term demand outlook for renewable energy.

 

Our guidance for 2010 is intact. We have also given our estimate of 2011 development. Our orders received for the first nine months of this year exceed the net sales for the same period by 15 percent. Based on this and assuming that the gradual recovery of the global economy will continue we estimate that in 2011 our net sales will grow about 10 percent compared to this year and EBITA before non-recurring items will improve."

 

 

Metso's key figures

 

EUR million Q3/

2010
Q3/

2009
Chan-

ge %
Q1-Q3/ 2010 Q1-Q3/ 2009 Chan-

ge %
2009
Net sales 1,325 1,196 11 3,865 3,663 6 5,016
Net sales of services business 615 511 20 1,738 1,565 11 2,102
   % of net sales 47 43   46 43   42
Earnings before interest, tax and amortization (EBITA) and non-recurring items  

 

128.6
 

 

134.3
 

 

-4
 

 

341.2
 

 

311.0
 

 

10
 

 

399.0
   % of net sales 9.7 11.2   8.8 8.5   8.0
Operating profit 103.5 114.1 -9 313.0 238.6 31 293.6
   % of net sales 7.8 9.5   8.1 6.5   5.9
Earnings per share, EUR 0.45 0.44 2 1.21 0.88 38 1.06
Orders received 1,409 1,031 37 4,446 2,993 49 4,358
Orders received of services business  

672
 

456
 

47
 

2,000
 

1,450
 

38
 

1,937
Order backlog at end of period       4,144 3,340 24 3,415
Free cash flow 122 249 -51 321 449 -29 717
Return on capital employed (ROCE) before taxes, annualized, %        

 

13.0
 

 

11.1
   

 

10.0
Equity to assets ratio at end of period, %        

37.2
 

33.2
   

35.7
Gearing at end of period, %       21.3 51.1   32.5

 

 

 

Metso's third quarter 2010 review

 

 

Operating environment and demand in July-September

 

The gradual recovery of demand continued in most of our customer industries in the third quarter of 2010. The growing budget deficits of several European countries and the United States coupled with strong fluctuations in exchange rates have, however, led to uncertainty, which has slowed the recovery of the markets particularly in Europe and North America. In the emerging markets market outlook continues to be strong.  Our customers' overall capacity utilization rates have clearly improved, which has had a positive impact on our services business.

 

Mining companies ran their production at high capacity utilization rates and quotations for equipment and projects were at a strong level resulting in an increase in new orders. Due to the strengthening demand and prices for minerals and due to our large installed equipment base, demand for our services for mining customers improved further.

 

In the construction industry, demand for equipment used in aggregates production was weak in Europe and in North America. Infrastructure construction projects in the Asia-Pacific region and in the Brazilian markets maintained healthy demand thanks to continued economic growth. Demand for our services business for the construction industry was satisfactory.

 

Demand for power plants that utilize renewable energy sources was good in Europe and North America in July-September. Several European countries and the United States have published targets to increase the use of renewable energy supporting the long-term demand for our power plant solutions fuelled by biomass and waste. However, in the short-term, uncertainty in the financial markets and pending policies on support mechanisms for renewable energy are delaying decision-making in several projects. Demand for the power plant services business was good.

 

Demand for our automation products continued to be good as the oil, gas and petrochemical industries increased their investments due to the favourable long-term outlook in the global energy segment. Demand for our automation solutions by the pulp and paper customer industry developed favorably, too. Demand for our services business for automation was good.

 

The demand for metal and solid waste recycling equipment was satisfactory. Demand for recycling equipment services has clearly improved in 2010 alongside the increasing capacity utilization rates of our customers' plants and equipment.

 

The demand for new fiber lines, pulp mill rebuilds and mill services was satisfactory during the quarter as the price and demand of pulp have strengthened. A few large chemical pulp industry projects are in the preparatory phase in South America. Demand for new paper and board lines focused on China and was satisfactory. The use of tissue is quickly growing worldwide, particularly in emerging markets, and the demand for new tissue lines was good. The paper and board industry's improved capacity utilization rates resulted in increased demand for paper machine clothing and our other services products.

 

 

Orders received in July-September

 

In July-September, we received new orders worth EUR 1,409 million, i.e. 37 percent more than in the comparison period (EUR 1,031 million in Q3/2009). The share of emerging markets in our orders received was 56 percent. Orders received increased on the weak comparison period in all of our reporting segments and in all geographical areas except in Western Europe. Services orders increased 47 percent on the comparison period and accounted for 48 percent of the total orders. Services orders grew in all segments.

 

Orders received by Mining and Construction Technology in July-September amounted to EUR 643 million, which was 53 percent more than in the comparison period (EUR 420 million in Q3/2009). This was the seventh consecutive growth quarter since the lowest point in the last quarter of 2008. Orders received from mining customers increased 92 percent whereas orders from construction customers decreased 4 percent. Services business orders were up 30 percent, and the growth came mostly from mining customers. Among the largest, was an order received for mining and minerals processing equipment and services for Nordic Mines' new gold ore processing plant in Finland.

 

Orders received by Energy and Environmental Technology increased by 36 percent on the comparison period and totaled EUR 341 million (EUR 250 million in Q3/2009). Orders received by the Power business increased 32 percent and those of the Automation business by 35 percent. In the Recycling business, orders received grew by nearly 50 percent on the exceptionally weak comparison period. Orders received included a service and rebuild project for one of Celulosa Arauco y Constitucíon's recovery boilers that was damaged in an earthquake in Arauco, Chile, a conversion of a pulverized coal boiler to a biomass-fired boiler for Dalkia in Poland and a new biomass-fired power plant to Bomhus Energi in Sweden.

 

Orders received by Paper and Fiber Technology grew 13 percent on the comparison period and totaled EUR 417 million in July-September (EUR 369 million in Q3/2009). Growth in orders received came from the Fiber business, where new orders grew by 126 percent. The orders received included a coated board line for Lee & Man Paper Manufacturing in Guangdong province and two board machines for Liansheng Paper Industry (Longhai) in Longhai City, China.

 

 

Financial performance in July-September

Our net sales in July-September totaled EUR 1,325 million, which is 11 percent more than a year earlier (EUR 1,196 million in Q3/2009). The services business net sales increased 20 percent on the comparison period, and accounted for 47 percent of total net sales (43% in Q3/2009).

 

In the third quarter, our earnings before interest, tax and amortization and non-recurring items (EBITA before non-recurring items), were EUR 128.6 million, i.e. 9.7 percent of net sales (EUR 134.3 million and 11.2% in Q3/2009). Profitability (i.e. EBITA margin before non-recurring items) continued to show an improving trend after being 7.5 percent in the first quarter and 9.1 percent in the second quarter. Decline in profitability compared with the third quarter in 2009 was primarily due to clear increase in selling, general and administrative expenses (SG&As), from 17.6 percent of net sales to 18.9 percent. SG&As were at an exceptionally low level in the third quarter of 2009 due to strict savings measures. This quarter SG&As have grown as a result of rapidly increased market activity evidenced by 37 percent increase in new orders. Third quarter gross profit margin improved to 26.9 percent from 26.0 percent in the same period last year.

 

Metso's operating profit (EBIT) was EUR 103.5 million, or 7.8 percent of net sales (EUR 114.1 million and 9.5% in Q3/2009). Our EBIT for July-September included the following non-recurring items (see table), which had a total negative impact of EUR 10.5 million on our third-quarter financial performance.

 

Non-recurring items in July-September

 

Q3/2010

 

EUR million
Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso

Group
EBITA before non-recurring items 74.9 31.7 31.8 128.6
% of net sales 13.3 10.2 7.2 9.7
Capacity adjustment expenses -1.2 -2.9 -2.7 -6.8
Adjustments related to intellectual property settlements in the United States and in Australia -2.0 - - -2.0
Adjustments related to business disposal -1.6 - - -1.6
Provision for prior years' ICMS (VAT) tax credit in Brazil -0.1 - - -0.1
Amortization of intangible assets *) -1.8 -5.0 -7.2 -14.6
Operating profit (EBIT) 68.2 23.8 21.9 103.5

 

*) Amortization of intangible assets includes EUR 8.4 million that is related to fair value allocations of acquired businesses.

 

Q3/2009

 

EUR million
Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso

Group
EBITA before non-recurring items 57.7 40.3 35.9 134.3
% of net sales 11.7 11.5 10.1 11.2
Capacity adjustment expenses -10.6 -3.2 -3.5 -17.3
Gain on sale of Talvivaara shares 7.6 - - 7.6
Amortization of intangible assets *) -1.0 -4.2 -4.8 -10.5
Operating profit (EBIT) 53.7 32.9 27.6 114.1
         

 

*) Amortization of intangible assets includes EUR 4.4 million that is related to fair value allocations of acquired businesses.

 

 

Metso's January-September 2010 Interim Review

 

Orders received and order backlog

Orders received in January-September totaled EUR 4,446 million, an increase of 49 percent on the comparison period. Excluding the effect from exchange rate translation, the growth would have been 39 percent. The growth was strongest in the Paper and Fiber Technology segment with other segments also recording clear growth in new orders. Our customers' improved capacity utilization rates led to 38 percent growth in our services orders compared to the same period a year earlier.

 

The three countries with the highest value of orders received were China, the United States and Brazil. The share of emerging markets in our orders received was 53 percent (49% in Q1-Q3/2009).

 

At the end of September, our order backlog was EUR 4,144 million, which is 21 percent stronger than at the end of 2009 (EUR 3,415 million). Around EUR 1.6 billion of the orders are expected to be recognized as net sales this year and around EUR 920 million of the total order backlog are services business orders. At the end of September our order backlog included some EUR 395 million worth of orders (EUR 395 million at the end of June, 2010) for projects with uncertain delivery schedules and which will, according to present estimates, be delivered after 2010. The pulp mill project for Fibria, Brazil, is included in these projects.

 

Orders received by reporting segment

 

  Q1-Q3/2010 Q1-Q3/2009
  EUR million % of orders received EUR

million
% of orders received
Mining and Construction Technology  

1,806
 

40
 

1,203
 

40
Energy and Environmental Technology  

1,081
 

24
 

793
 

26
Paper and Fiber Technology 1,560 35 983 33
Valmet Automotive 48 1 42 1
Intra-Metso orders received -49   -28  
Total 4,446 100 2,993 100

 

 

Orders received by market area

  Q1-Q3/2010 Q1-Q3/2009
  EUR million % of orders received EUR

million
% of orders received
Europe 1,605 35 1,081 36
North America 659 15 509 17
South and Central America 647 15 345 12
Asia-Pacific 1,323 30 869 29
Africa and Middle East 212 5 189 6
Total 4,446 100 2,993 100

 

 

 

Net sales

Our net sales for January-September increased by 6 percent on the comparison period and were EUR 3,865 million (EUR 3,663 million in Q1-Q3/2009). Excluding the effect from exchange rate translation, the decline would have been 1 percent. The growth came from Paper and Fiber Technology, which recorded growth of 30 percent on the comparison period. Net sales for Mining and Construction Technology were at around the same level as in the comparison period and net sales for Energy and Environmental Technology fell by 11 percent. Net sales for our services business increased 11 percent (when excluding the impact of the acquired Fabrics business, i.e. the former Tamfelt, the growth was 4 percent) and its share of the total net sales increased to 46 percent (43% in Q1-Q3/2009).

 

Measured by net sales, the largest countries were China, the United States and Brazil, which together accounted for about 36 percent of our total net sales. The share of emerging markets in our net sales was 49 percent (43% in Q1-Q3/2009).

 

Net sales by reporting segment

  Q1-Q3/2010 Q1-Q3/2009
  EUR million % of net sales EUR

million
% of net sales
Mining and Construction Technology  

1,576
 

41
 

1,551
 

42
Energy and Environmental Technology  

978
 

25
 

1,104
 

30
Paper and Fiber Technology 1,301 33 1,002 27
Valmet Automotive 48 1 42 1
Intra-Metso net sales -38   -36  
Total 3,865 100 3,663 100

 

 

Net sales by market area

  Q1-Q3/2010 Q1-Q3/2009
  EUR million % of net sales EUR

million
% of net sales
Europe 1,370 36 1,589 43
North America 665 17 574 16
South and Central America 532 14 458 12
Asia-Pacific 1,086 28 755 21
Africa and Middle East 212 5 287 8
Total 3,865 100 3,663 100

 

 

Financial result

In January-September, our EBITA before non-recurring items was EUR 341.2 million, i.e. 8.8 percent of net sales (EUR 311.0 million and 8.5% in Q1-Q3/2009). Improved capacity utilization rates and higher sales led to about 1 percentage point improvement in gross profit margin which was partly offset by an increase in SG&As from 18.8 percent of net sales in January-September 2009 to 19.2 percent in the same period this year. SG&As have grown as a result of rapidly increased market activity evidenced by 49 percent increase in new orders.

 

Our operating profit (EBIT) for January-September was EUR 313.0 million, or 8.1 percent of net sales (EUR 238.6 million and 6.5% in Q1-Q3/2009).

The EBIT for January-September includes EUR 14.9 million in non-recurring items, which had a positive impact, as specified in the following table.

Non-recurring items

 

Q1-Q3/2010

 

EUR million
Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso

Group
EBITA before non-recurring items 179.2 92.8 86.7 341.2
% of net sales 11.4 9.5 6.7 8.8
Capacity adjustment expenses -1.2 -7.9 -5.6 -14.7
Gain on sale of Talvivaara shares 1.1 - - 1.1
Gain on intellectual property settlements in the United States and in Australia 30.1 - - 30.1
Gain on business disposal 0.9 - - 0.9
Credit loss reserve related to two paper machine customers - - 0.9 0.9
Provision for prior years' ICMS (VAT) tax credits in Brazil -3.4 - - -3.4
Amortization of intangible assets *) -4.7 -14.9 -21.8 -43.1
Operating profit (EBIT) 202.0 70.0 60.2 313.0
         

 

*) Amortization of intangible assets includes EUR 25.0 million that is related to fair value allocations of acquired businesses.

 

Q1-Q3/2009

 

EUR million
Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso

Group
EBITA before non-recurring items 159.4 109.5 54.5 311.0
% of net sales 10.3 9.9 5.4 8.5
Capacity adjustment expenses -16.0 -6.0 -21.6 -43.6
Gain on sale of Talvivaara shares 13.8 - - 13.8
Hedging reversal due to a cancelled customer order - - -9.0 -9.0
Credit loss reserve related to two paper machine customers - - -4.1 -4.1
Amortization of intangible assets *) -2.6 -13.2 -12.0 -29.5
Operating profit (EBIT) 154.6 90.3 7.8 238.6
         

 

*) Amortization of intangible assets includes EUR 13.7 million that is related to fair value allocations of acquired businesses.

 

2009

 

EUR million
Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso

Group
EBITA before non-recurring items 201.6 147.4 71.3 399.0
% of net sales 9.7 9.7 5.1 8.0
Capacity adjustment expenses -21.9 -11.1 -41.7 -74.7
Gain on sale of Talvivaara shares 23.1 - - 23.1
Hedging reversal due to a cancelled customer order - - -9.0 -9.0
Credit loss reserve related to two paper machine customers - - -4.1 -4.1
Amortization of intangible assets *) -4.0 -18.2 -15.7 -40.7
Operating profit (EBIT) 198.8 118.1 0.8 293.6
         

 

*) Amortization of intangible assets includes EUR 18.5 million that is related to fair value allocations of acquired businesses.

 

Group Head Office's operating profit in January-September includes foreign exchange gains of EUR 9 million from foreign exchange hedge contracts made by reporting segments with Group Treasury (EUR 10 million gain in Q1-Q3/2009). Corresponding foreign exchange losses are included in the operating results of the reporting segments.

 

Our net financing expenses in January-September were EUR 53 million (EUR 59 million in Q1-Q3/2009). Interest expenses were EUR 52 million (EUR 56 million in Q1-Q3/2009). Net financing expenses include EUR 9 million in foreign exchange losses related to the above-mentioned Group Head Office's foreign exchange gain.

 

Our profit before taxes was EUR 260 million (EUR 180 million) and we estimate our tax rate for 2010 to be about 30 percent (32% in 2009).

 

The profit attributable to shareholders was EUR 181 million in January-September (EUR 125 million in Q1-Q3/2009), corresponding to earnings per share (EPS) of EUR 1.21 (EUR 0.88/share).

 

The return on capital employed (ROCE) before taxes in January-September was 13.0 percent (11.1%) and return on equity (ROE) was 13.5 percent (11.4%).

 

Cash flow and financing

Net cash generated by operating activities for January-September was EUR 368 million (EUR 487 million in Q1-Q3/2009).

 

Net working capital decreased in January-September by EUR 31 million.

 

Free cash flow in January-September was EUR 321 million (EUR 449 million in Q1-Q3/2009).

 

Net interest-bearing liabilities totaled EUR 415 million at the end of September (EUR 583 million at December 31, 2009).

 

Our total cash assets at the end of September were EUR 984 million, EUR 362 million of which has been invested in financial instruments with an initial maturity exceeding three months. The remaining EUR 622 million has been accounted for as cash and cash equivalents. The syndicated EUR 500 million revolving loan facility is available until late 2011, and it is currently undrawn. Metso's liquidity position is good.

 

At the end of September, our gearing was 21.3 percent (51.1%) and equity-to-assets ratio was 37.2 percent (33.2%). In April, following the Annual General Meeting, we paid EUR 105 million in dividends for 2009.

 

Capital expenditure and R&D

Our gross capital expenditure in January-September, excluding business acquisitions, was EUR 90 million (EUR 79 million in Q1-Q3/2009). The share of maintenance investments was 59 percent, i.e. EUR 53 million. Capital expenditure on fixed assets includes two small technology related acquisitions. In April we purchased the paper machine web inspection and web break system business from Viconsys with about 30 people, and in August we purchased Camoplast-Finntrack Oy's rubber belt related business with 16 people to complement our service and product offering to pulp and paper customers. We estimate new capital expenditure in 2010 to somewhat exceed the 2009 level (EUR 117 million in 2009).

 

The first phase of Metso's largest single investment so far in India, Metso Park, was completed in March and the second phase has been initiated. A technology center specializing in automation and flow control solutions and products was opened in May in Shanghai, China. In York, Pennsylvania, USA, Mining and Construction Technology took up new office premises under operating lease arrangements in May. In June, construction work was started in Vantaa for a new facility for our industrial valve production in Finland. This investment will be accounted as an operating lease. In Araucaria, Parana state, Brazil, construction work on a new facility for our regional pulping and power operations has been started. In Jyväskylä, Finland, we completed an upgrade of a pilot machine at the Paper Technology Center. In Zibo, our third service center in China for the pulp and paper industry is nearly finished. Investment projects in global enterprise resource planning systems are underway in Mining and Construction Technology and in the Automation business.

 

Metso's research and development expenses in January-September totaled EUR 76 million, representing 2.0 percent of Metso's net sales (EUR 84 million and 2.3% in Q1-Q3/2009).

 

Acquisitions, divestments and joint ventures

In July, we acquired the repair service business of Wyesco of Louisiana, L.L.C., in the U.S. state of Louisiana. The business was affiliated to Metso's Paper and Fiber Technology segment and it employs 30 people.

 

In April, we sold the Flexowell conveyor belt operations in Germany to ContiTech Transportbandsysteme GmbH. Flexowell was part of Metso's Mining and Construction Technology segment.

 

In November 2009, we concluded a combination agreement with Tamfelt, one of the world's leading suppliers of technical textiles. The exchange offer was carried out in November-December of 2009 and successfully completed on December 23, 2009. The remaining 2 percent of Tamfelt's shares were redeemed in accordance with the Finnish Companies Act, and in May Metso gained title to all the shares in Tamfelt. The redemption price determined in the Arbitral Tribunal was EUR 7.17 per share. Metso paid the redemption price of EUR 4.3 million in September 2010 to the minority shareholders of Tamfelt who were party to the redemption proceedings.

 

Since the acquisition, Tamfelt has been a part of our Paper and Fiber Technology segment and constitutes today the segment's Fabrics business line.

 

 

Personnel

At the end of September, we had 27,552 employees, which was 386 more than at the end of 2009 (27,166 employees at December 31, 2009), and 719 employees less than a year ago, taking into account the impact of the acquired and divested businesses. The number of employees increased 5 percent in Mining and Construction Technology, and in Energy and Environmental Technology as well as Paper and Fiber Technology it stayed at around the same level as it was at the end of 2009. During January-September, we had an average of 27,333 employees.

 

Personnel by area

  Sep 30,
2010
% of total personnel Sep 30, 2009 % of total person-

nel
Change % Dec 31,
2009
Finland 8,767 32 8,321 31 5 8,746
Other Nordic countries 2,867 10 2,985 11 -4 2,995
Rest of Europe 3,430 12 3,516 13 -2 3,678
North America 3,454 13 3,502 13 -1 3,428
South and Central America 3,045 11 2,720 10 12 2,618
Asia-Pacific 4,599 17 4,218 16 9 4,316
Africa and Middle East 1,390 5 1,401 6 -1 1,385
Total 27,552 100 26,663 100