Hello everybody. Welcome to Metso Outotec's third quarter 2020 results conference call. I'm Juha Rouhiainen from Metso Outotec investor relations, and with me here are our President and CEO, Pekka Vauramo, and CFO, Eeva Sipilä. They will present the results shortly. Before that, I would like to say and point you to the forward-looking statements disclaimer we have in the slide deck, and also a reminder that we intend to limit this call to approximately 60 minutes in total. With these words, I'll hand over to Pekka. Please go ahead.
Thank you, Juha, and welcome to this call. We'll go straight into the third quarter of the year. How we see it, market activity largely unchanged compared to the end of the second quarter. However, COVID is around us, as we all know. Orders and sales are affected, as we can see, different businesses in different ways. I'll come back to that one later on. We have now the first time the new segments there. They are Aggregates, Minerals, and Metals and Recycling, three segments that we are referring to in this one. Overall performance in Aggregates and Minerals segments was healthy, as you can see in the numbers as well. We'll go through them a bit more in detail later on. Integration has started quickly with good progress. We have a solid plan that we are executing, following it step by step with very high discipline.
That's our plan to continue as well. At this moment, we are in cost synergies at EUR 31 million annual run rate. That's end of the quarter. Our target that we communicated is to achieve EUR 50 million mark at the end of the year. We are well in line with that target. Metals business was a disappointment. The markets are suffering in the metals business from, on the other hand, overcapacity that was put in place during the metal super cycle some years back. With the COVID impact, we really haven't been able to turn the pipeline into orders. We are facing a situation that with the current performance, we'll immediately initiate restructuring and turnaround actions. The focus will be in metals on those ones during the coming 12 months.
We've also started planning of recycling business, as it's not seen as synergistic with the rest of the group. These are basically the first set of highlights. Into group numbers, more so orders below last year's level. We had, however, a very high benchmark from a year ago. We have seen now postponements of orders. They are there, and we look forward to announcing some of these orders any time basically now, but it didn't happen during the third quarter, so numbers are therefore down. Sales are also down. This is a consequence of order bookings being slightly below the previous periods also earlier on. Adjusted EBITA, 11.1%, EUR 109 million, and down from last year.
If we take, for example, the metals business alone, there's about a EUR 40 million difference between the performance current, EUR 10 million negative, and last year, I think it was EUR 28 or EUR 29 million positive. That comes to a difference of about EUR 40 million. Clearly we can see where the issues are, and that's why we talk about actions in that area. EBIT because of the adjustment restructuring costs, PPA-related things, 4.8% of the sales. Earnings per share, EUR 0.03. Net debt at EUR 940 and gearing 47%. These are the group numbers. On COVID, particularly, yes, this is affecting businesses. Anything big, bigger projects, takes a longer time to prepare, is complicated to prepare, and takes also a longer time for customers then to finally commit to these ones. We do have a good pipeline there.
We are not concerned about other than the time factor here at this moment. Our own operations are running well. There's no disruptions as such currently with our own factories and supply chain. Aggregates demand, the recovery that was well on its way up until June, then it has stabilized around 75%-80% level of normal, but good growth in China, also positive development in North America happening at this moment with the aggregates. Maybe the recovery is dampened a little bit with the second wave of COVID in some of the markets. We'll see once we get towards the end of the year how the demand picks up for the upcoming spring season in the northern hemisphere. We should start to see that in numbers during the fourth quarter. Of course, subject to the COVID situation.
The bigger projects I commented already, and that's affecting both minerals and metals market. The comparison is really harsh because of large bookings last year of Ma'aden gold project in Saudi Arabia and Udokan copper project in Russia, and those are joint packages between minerals and metals segments. Service somewhat affected primarily in the labor part in professional services, and then on the other hand, in modernization and upgrades. Standard spare parts, consumables, that continues probably better than ever at this moment. It's improving slightly the mix as well because these are the higher margin things, and we have seen really good performance in our consumables business. Business overall, it really has shown its potential, and we look forward to developing that business further. Aggregates segments, orders slightly up thanks to McCloskey acquisition.
There organically, we were 14% down. On the growth, almost 30% came from McCloskey's side. Sales up as well, organically 12% down. Just COVID impact here on both of these numbers. McCloskey contributing nicely into these numbers. EBITDA adjusted, 26 versus 28 last year, despite of lower organic volume and integration of McCloskey. I think this is a good result, what we've been able to achieve. Good adjustments on a cost base, rapid actions that are still in place in Aggregates, and also long-term improvement actions in place. We can expect this segment to develop reasonably well when COVID at one point then leaves us. Minerals side, in addition to project issues that we have had there, the delays there, we have also major currency impact there on orders, 8%, on sales, 9% altogether. We see also the currency impact.
It comes primarily through our services, but there is an capital equipment side in that one as well. Orders are down, but harsh comparison, sales down as well. Currency impact being really a major contributor to that one, organically not so much. Adjusted EBITDA exceeding 15% for the segment with a good mix and already commented really strong performance in our consumables business. Adjusted EBITDA just slightly below last year's numbers. Even though this is of course the area where we have most of the synergies in the Minerals. Yes, our run rate is currently EUR 31 million, but there's not so much yet in the numbers because that is a run rate and forward-looking number, the EUR 31. Really nice, good outlook combined with our synergy targets that are primarily in this area.
Metals and Recycling, really EUR 40 million difference in the EBITDA line to last year. With our new financial strategic targets, it's clear that we will immediately initiate actions to restructure this business and work on turnaround, and we will hear about that one a bit later on. The planning has already started. There are projects in this area that are still within reach that we can sign in this year. The order backlog is such low that there's already an inflow of costs from some of our locations and operations into SG&A, as we cannot keep all of them busy. On the other hand, we are in such locations that we cannot use temporary layoffs that flexibly as we can in Finland, for example. Next one.
Okay, I'll hand it over to Eeva to go through the numbers more in detail, and then I'll come back later on.
Thank you, Pekka. Good morning, good afternoon on my behalf. On the financials, following the closing of the Metso Outotec transaction on June 30th, we continue to have several sets of numbers for you for the remainder of this year. The official IFRS numbers have some limitations as they ignore the Outotec history altogether. For estimating run rate, the illustrative combined figures hopefully give some more insight to you. They do combine the history of two separate companies, they are, as their name says, illustrative. The pro forma figures are provided as a third set to give you a combined view following the conventions of pro forma reporting that will be familiar to some of you.
I will try to clarify the main differences during the following few slides, just so that you know which numbers to look, depending, as said, a bit on what the purpose of your thinking is. On the IFRS income statement, the third quarter is the first quarter where the IFRS income statement provides you the full detail on Metso Outotec. As you may remember from Q2, under our IFRS, the first half of 2020 consists only of Metso Minerals. To clarify, the EUR 985 million of sales is the sales from Metso Outotec, whereas the January-September sales of EUR 2.432 billion is a combination of EUR 985 million for Metso Outotec and Metso Minerals' January-June sales. The last year comparison figures under IFRS are solely Metso Minerals figures.
Unfortunately, the earnings per share number is even more complex, as not only is the numerator a combo of two sets of financials as per the earlier mentioned logic, also the denominator, i.e. the number of shares that is used to calculate EPS, is not that straightforward, as it is based on the average number of outstanding shares during the period, and is hence a lower number when it calculates an average from a lower number of shares for the six months and the current Metso Outotec number of shares for the three-month period. When looking at Q3, you're on clear ground. This is the first quarterly earnings report from Metso Outotec. EUR 985 million of sales, adjusted EBITA of EUR 109 million, and then, as Pekka mentioned, the operating profit burdened by adjustments and PPA amortization totals EUR 47 million and 4.88%.
As you may remember from our earlier guidance, the Metso Outotec-related PPA amortization for the second half of 2020 will be EUR 58 million, of which half was reported in the Q3 figures. In addition, we have less than EUR 10 million per quarter of amortization from earlier acquisitions, such as, for example, McCloskey. The total amortization of intangible assets figure for Q3 is EUR 37 million. Here I would like to repeat our earlier guidance that the Metso Outotec-related PPA amortization drops to EUR 38 million annually from next year onwards. Significantly less in a quarter for next year, when the number for two quarters this year was EUR 58 million. An additional point on our tax rate, it is very high for the third quarter as the Metso demerger at mid-year caused some extra costs in the quarter from a tax point of view.
Our effective tax rate, ETR, for the nine months is 29.5%, and we would expect for the full year that the ETR would be in the 28%-29% range. Moving forward, the next page has the illustrative combined figures, which are useful when you want to look at the nine months of Metso Outotec, as here the first half 2020 includes also Outotec in the figures. These are hence better indicating a run rate for us. Here, the adjusted EBITA margin of 11.1% for the quarter compares with a nine-month figure of 11.4%. As we indicated in connection with our Q2, we knew we would face additional costs in the third quarter from having to end most of the temporary cost-saving measures and then not yet having benefit from the synergy cost savings.
Regarding last year's Q3 margin of 14.3%, I would note that we don't consider that as comparable with this quarter due to, at that point, Outotec Metals Refining segment results, including material positive one-offs, which have not occurred this year. My final comment on this slide would be to highlight that the $0.15 EPS on this slide is calculated based on the illustrative combined net result divided by the actual number of shares at Metso Outotec. That is some 830 million altogether. The higher denominator gives a $0.02 lower EPS than shown on the previous page. As said, perhaps more illustrative, this one, to our shareholders. The next slide gives the highlights on our balance sheet. Here we have the benefit of having full comparability with the end of September and end of June figures, illustrating the assets and liabilities of Metso Outotec.
Only the end of December figures are for Metso Minerals only. As you can see from the figures, there was minimal change during the quarter. A slight reduction of the balance sheet total to EUR 5.511 billion. I'll walk you through the net working capital and liquid funds shortly. Before that, just to summarize on the cash flow, where you can see that net cash flow from operating activities for the nine months was EUR 317 million. The same figure after Q2 was EUR 303 million. We had a positive cash flow for the quarter of EUR 14 million. Despite additional profit for the period, we had a negative impact from a change in working capital of EUR 55 million and also a negative impact from net financials and taxes paid.
As you may remember from Q2, the Outotec cash is accounted in this graph on the row of business acquisitions net of cash. This number here, EUR 203 million, being slightly lower than the EUR 216 million reported in Q2. This is due to Now, this nine-month figure also including the impact of our Davies acquisition in August of this year. Moving to our net working capital, a few comments there. Inventories at the end of September were EUR 1,098 million, which is slightly further down from the EUR 1,106 million at the end of June, showing further results from our actions to better manage our supply chain and logistics. Trade receivables, EUR 612 million, slightly up from June, and payables up similarly, and there to a figure of EUR 504 million. Also advances slightly up from June.
The other non-interest-bearing liabilities, which consists, for example, all the provisions and project-related items totaled EUR 496 million in the graph. We continue to focus on actions to improve cash flow and impact and work with various actions affecting the net working capital. We do see opportunities in harmonizing our ways of working in this area for the group. My final slide would be on our financial position. Our liquidity position is solid. In addition to liquid funds amounting to EUR 477 million on the balance sheet, Metso Outotec has committed an undrawn revolving credit facilities of EUR 790 million at the end of September. This consists of a syndicated EUR 600 million revolving credit facility, EUR 100 million revolving credit facilities maturing in 2021, and an additional EUR 90 million maturing in 2022.
During the third quarter, we repaid Outotec's EUR 150 million hybrid bond in July and Outotec's EUR 150 million bond in September, with bank term loans having clearly lower interest rates. From immediate cost savings actions, we are moving our focus to extending the maturity structure of our debt, as well as reducing the overall amount of debt through cash flow from operations in the coming quarters. With that, I would hand it back to you, Pekka.
Thank you, Eeva, and I'll move to integration strategy and to our outlook for the next 6 months. Integration first, a few words about that one. We are progressing well in line with our plan. The cost synergies that we have been so far able to execute, EUR 31 million basically come from an organization. We have completed all the nominations. Now we have organization fully in place. We have made a big part of the layoffs that we'll make at this moment. A few countries are still pending where we haven't been able to proceed because of the local regulations and legislation that is in place. They will follow a little bit later on. We are slightly ahead of our target level, which is EUR 50 million at the end of this year.
Still the outlook at the end of next year, EUR 120 million accumulated at that point is well achievable. That basically summarizes the integration at this moment. Then we'll move on to the strategy work, the work that we initiated beginning of the quarter. We worked really looking first into portfolio part of the strategy, then the business areas that are the units that are driving really our development, our sales, our growth, and our profitability improvements. They have their own strategies then, and we will be communicating about more details of strategy then in our capital markets day on November 11th. We stated our purpose statement, enabling sustainable modern life. We feel and are excited about this purpose, because it very well describes existence, why do we exist, and what makes our existence meaningful.
We are in the middle of many mega trends, and we can contribute to these mega trends in a positive change, which is in a positive manner. Positive change is part of our brand promise there as well. We know that urbanization requires infrastructure. Infrastructure needs construction materials. Climate change needs electrification. Electrification needs more metals. We all know this story, and we feel that we are important contributor now as Metso Outotec in that one. On our vision part, we want to say we are a number 1 choice for sustainable use of natural resources for our customers, and we also say that we want to deliver service, reliability, innovation, and results, and all of this safely. This is towards our stakeholders.
We have strategic priorities, four of them altogether, starting from customer centricity, sustainability, which we see, of course, important thing for ourselves, for our supply chain, for our own operations. We see that we can contribute to our customers' sustainable development through our offering. Performance culture, which is important driving force towards improving financial performance and integration that we're in the middle. We've also worked on our values that are stated there in the bottom of this chart. The top priority is really four areas. I commented already shortly of them, but our aim really is to become industry-leading company in the eyes of all of different stakeholders. Performance culture we need as a driving force here. That's a program that we will put our organization through.
We will build it bottom-up, such culture and such activities, such way of working for the company that supports us achieving the financial and strategic targets. Customer centricity, we want to secure that our customers are really getting from us what they have ordered from us and with high degree of satisfaction. Sustainability really at the core, 90% of our R&D will have sustainability targets going forward. We also commit ourselves to 1.5 degree maximum global warming target. We have already approved science-based KPIs for that development. Integration is really the most important thing that we drive at this moment in the organization with the announced targets.
We also do have other standalone, what we call standalone improvement targets, where we step by step are restructuring our footprint, supply footprint our logistics, our distribution center footprint, and the integration together with the business area strategies, their growth actions, their profitability improvement actions will contribute to the financial performance of Metso Outotec. The new targets adjusted EBITDA margin over 15% over the cycle. We are in cyclic business. That's why the latter part of the statement, meaning that at the peak of the cycle, we should be above 15% and at the bottom of a cycle, we should see better sort of resilience and recession-proof performance than in the past we've been able to achieve. Our target is to maintain investment-grade rating. We have it currently and aim is to continue to maintain that one.
Dividend payout of at least 50% of earnings per share, fairly similar to what we have had in the past is also in the horizon. Progress in sustainability in alignment with the 1.5 degree commitment that we have given and backed up by really the science-based targets there. In the area where we do have a concern and really as you saw in the numbers, major difference in the metals from last year's almost EUR 30 million adjusted EBITDA to this year, EUR 10 million negative, so difference being EUR 40 million. The situation has become even worse where metals was earlier on, even worse during this year. With those targets that I just mentioned, it's clear that we will start immediately the restructuring and turnaround actions and focus is very much on those during the next 12 months in our metals business.
We will look at both business scope, meaning continue to do the strategic review of the portfolio and the cost structure that we will address further in that business. We also took a decision that we'll start the divestment process of recycling. Planning is currently going on. We felt that recycling is not synergistic enough for the rest of the group now that we are becoming a more focused group. We feel that this is right time to divest the recycling business and find itself for a more suitable home and place to grow and further develop the business. The outlook, same outlook that what we had at the end of second quarter.
The situation is very much the same despite lower order intake. We see that very much as sort of postponements of some of the important potential orders that we have and look forward to getting back on right track very soon in that regard. Second wave of COVID is affecting us and the rest of the world that are still in the first wave, so to say, many countries are still at the peak of it. Of course, it's always possible that things do get worse. At the same time, we see that we all are learning to cope with and live in a different world in this regard. Business is less affected now because of that. Possible that it will cause some negative turns in business. Currently we don't see that in the horizon. Thank you.
Thank you, Pekka. Thank you, Eeva. Operator, we are now ready for questions, and you can open the conference call lines.
Thank you. If you wish to ask an audio question, please do so by pressing zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, it's zero one to ask an audio question. Our first question comes from Klas Bergelind from Citi. Please go ahead.
Yes. Hi, Pekka and Eeva. It's Klas from Citi. My first one is on Services and Minerals. You say that you were able to realize cross-selling synergies, Pekka, but this also seemed to have led to short-term disruption to the business. Service orders seems to have been weaker as you were aligning responsibility in the front end and so forth. Orders are down 17% quarter-on-quarter. How much of that was that short-term disruption owing to the integration relative to weakness in demand? Of course, there are differences upstream versus mid- and downstream, but those upstream highlighted an improved service business quarter-on-quarter. I guess underlying demand was at least stable for you. That is my first question.
Yeah. It is mainly, I would say, the difference comes from the COVID situation that there are restrictions for visiting our customers. Customers don't accept visitors, and it's difficult to perform anything that requires direct involvement from us, either in preparation or delivery of modifications and upgrades. I think that is clear. At the same time, normal spare part orders, they are going as well as before, and consumable business goes probably better than ever before at this moment. It's just sort of sign that customers are concentrating on producing and making profits because prices are high, and they don't even plan to have maintenance shutdowns at this moment as they are difficult to plan. Instead, they want to generate more cash and strengthen their own balances. That is probably the big picture.
Yes, we have made layoffs during the past month and a half, and that has been, of course, it's always disturbing factor in the organization, but I don't really see too much of that impact in the activity.
Okay. Fair enough. My second one is on the equipment side, also in Minerals. Obviously, a tough comp year-over-year from the big greenfield order in old Outotec. Orders were also weaker sequentially versus the second quarter, and you said that bigger investment projects were being planned and prepared, but that the decision-making was slow. This is a timing issue. I guess two questions in one. First, what size are we talking about here when you talk about these projects? Is it similar to the greenfield last year or more like EUR 30 million, EUR 50 million type orders? Second, as I said, we've seen a lot of momentum upstream from others reporting. Do you still think that the strength that we see in Epiroc and at Sandvik, is that still a good lead for your orders in the Minerals business?
It can be. Of course, there's somewhat different dynamics between us and those two companies that you mentioned. My sort of experience from the industry shows that at this moment, when gold price is extremely high on record levels, and that is a segment that moves very fast, and that opens business opportunities to Sandvik's and Epiroc's probably more than for us immediately. For us, further down the road, but not at this moment. This is, of course, something for them to comment rather than us. We do have good pipeline of projects, normal orders that we would call sort of EUR 10 million, EUR 20 million, EUR 30 million. That pipeline is really healthy, and we are booking that kind of orders, but we haven't seen the EUR 100+ million orders.
We don't have too many of such things in the pipeline either. We have a healthy pipeline of, say, between EUR 50 million- EUR 100 million size of projects at this moment. Those are the ones that we expected some of these to come through in a quarter. We didn't get them. They have not disappeared. Day by day, we're getting closer with them as well.
Okay. That's good. My final one is on the new targets and the cost-cutting on the Metso side. The above 15% target is through the cycle, as you said, and that would mean that you're aiming for IEP 1015 on top of realizing sort of the synergies which we get at least at 2019 sales, we can get to a 15% margin adding that in. Are you also already starting with increased standardization of the design of the equipment, increased throughput in the factories, and so forth? Or is that work starting after you have realized the synergies, Pekka, just so we understand that a little bit better?
That work has started already. That's a journey that Metso has been on. Outotec had made already moves in that area, and we will further strengthen that part of it. We want to reduce the project impact overall, and yes, we want to be involved in the projects, not playing really the principal role as a supplier in the projects, but we want to participate them, and the way how we want to participate and will participate more in future is through standardized offering that is pre-engineered and manufactured either in our own plants or our supplier plants.
Thank you.
Our next question comes from Magnus Kruber from UBS. Please go ahead. UBS.
Hi, Pekka, Eeva. You have Magnus here from UBS. A couple of questions from me. First, on the new targets, obviously I noticed that growth is not among them. Maybe you could expand a little bit on why you left that out.
Yeah. Very good question as such. If we look at currently the market where we are, we do have COVID with us. It's a fairly difficult moment to discuss the growth as such. Markets are somewhat depressed throughout, a lot of uncertainty in the area. When you look at our list of divestments that we have announced, it means that our top line will de facto come down with these divestments. We do have further work with our metals. Even though we are not saying that we will be divesting some of it or parts of it is an option that we'll end up doing that as well. Our first goal is really to restructure the business and find out the true potential out of them and keep them in the group.
Depending on further review, we may end up doing something in that area as well and that is why we don't talk about growth. For us, more important at this moment is to talk about the margin levels and how do we get into those ones rather than growth. We may come back to that one then maybe next year once things clear out a little bit.
That's very clear. Thank you. That's very good. Secondly, and specifically, you talked about the cost structure in Metals and Recycling, obviously. Could you comment anything about the sort of the timing and size of reduction in cost you might see here?
We are in really early stages of planning of that one. It starts now. We will be able to say something during the Capital Markets Day, but I would say more so in the fourth quarter full year results announcement. That is the timeframe that we do know more. Like you see, it's difficult to talk about 15% if we have a business that's currently running at that sort of loss. We need to be looking at somewhere 10% EBITDA margin on businesses that we will further develop in that segment.
That's very clear. Just a couple I want to wrap up. On the minerals margins, of course, one of your peers published the margin level of their minerals processing business a week ago or so, around 16% on an EBIT level last year. How would you say that your comparable business stack up to that margin level? How much of your mineral sales would we see as comparable versus this competitor in particular? Just as a follow-up on that, do you think there's further scope for consolidation in the midstream part of the equipment industry?
Yes. Without knowing really exactly what's included in that one, but I believe it's crushing and screening products that they have, and related aftermarket that Sandvik now announced will be its business area of its own for them. That includes crushing and screening for both mining applications and then construction applications. Our offerings are somewhat differentiated in that one. We are not really head-on, and our mining crushers and screens, they are in our Minerals, while our aggregates, that's primarily construction quarrying activity. They are not exactly comparable. That is the first set of numbers and we of course make note out of that one.
Further consolidation, as we are talking about ourselves, there are opportunities, but of course, our market share starts to be reasonably high in some of these areas and we are not really looking into anything with regards to that particular business with Metso Outotec.
Got it. Beyond your business, do you think there is scope for more consolidation within the industry as such?
That remains to be seen what happens.
Great. Thank you so much.
Thank you.
Our next question comes from Arsen Tarikov from Credit Suisse. Please go ahead.
Good afternoon. That's Arsen Tarikov from Credit Suisse. Thank you very much for taking my questions. I have three, please. Firstly, on metals recycling business, considering that we don't have a long-term history of margins, could you maybe talk about what's the mid-cycle level of margin has been in that business and whether the cost savings which you're initiating would allow you to achieve that level at lower volumes?
Actually, on the metals side, if you want the history, I would recommend you look at the earlier published Outotec financials. It was a separate segment in Outotec, I think you can go quite a few years back, actually. For recycling, obviously we haven't reported it separately. Based on today's announcement, we would expect it most likely to be reported as a discontinued operation already at year-end, that may be of less interest to you thereafter.
Second, they say with metals energy and water business, the way Outotec reported it, didn't it, also includes energy and water and some other bits which were heavily loss-making in the past.
That's correct. When they announced them to be sold and were moved into discontinued operations a year back, I believe they did provide some information on the other than that. Those were rather small businesses. I think you get the bulk of the comments. For us, unfortunately, it is difficult to comment on what the business perhaps has done. We've obviously seen very unsatisfactory numbers during our tenure. As said, we will initiate a turnaround program. Then we will assess that program. We'll assess the potential. I think it's then we will be rather than talking about the future than the past.
Thank you very much. My second question is around the Minerals margin. Considering that you've seen a lot of mixed support in the quarter and the recent weakness in service orders, how should we think about sustainability of margins and Minerals into Q4?
Well, I think what we will see as a benefit, as our CEO mentioned, the bulk of the synergy savings obviously will impact the minerals segment specifically. As said, when the underlying service business spare parts consumables is doing very well, in a way that is a solid base for us also for Q4. I would be more optimistic about the margin potential going forward, even if the order intake was slightly lower.
Okay. Thank you very much. My last question is around the order intake. I guess, do you think rapid testing or any other solutions, or are there any other solutions which could allow that situation with having troubles with getting access to customer sites be resolved in the coming quarters?
Well, I think obviously the vaccine would be important because, of course now, any new people pose a risk to the customer operations. As our CEO mentioned, with today's prices, nobody wants any sort of downtime in the operations because of the virus. There may be other things. I think we're all learning various health and safety measures better and better in a way to organize operations. As said, of course, it takes some time and experience, and that's what we're seeing, that in the third quarter, if people were able to postpone, it was easier for them to postpone and sort of rather wait either for a bit more experience on certain safety measures or then the vaccine.
That for a certain period of time, you can obviously postpone, but then not for very long, as I'm sure you can imagine.
Sure. Thank you very much.
Thanks.
Our next question comes from Madhusudhan from Bank of America. Please go ahead.
Yes. Hi. Thanks for the call and opportunity to ask the question. Couple of questions. On the order trends, especially given your outlook statement that you expect market conditions to be stable, should we extrapolate that to your order trends as well and expect flattish quarter-on-quarter orders? Should I read more into your earlier statement that you had a few orders which were still in the pipeline, but you were not able to book in third quarter and hence should actually be booked in the fourth quarter? Which basically means that orders for fourth quarter should actually be better than what we saw in third quarter. Just wanted to get a bit more clarity on how should we think about the order book for fourth quarter. Second question is on your margin target of just above 15%.
Wondering whether that is just being a bit more conservative given your I think just adding the synergies will take the pro forma margins above 15%, so are you just being conservative here, and should we expect likely upgrades to this target as well, maybe later on?
Okay. First of all, the order trends, we are really guiding the market outlook. Market outlook has been since, I would say second quarter, exactly the same. That's why we repeat our outlook statement. It's not a straight line connection with our order intake. It's not meant to be that one. There's also other people competing for the same orders. In most cases, there's only one winner and everyone else is a loser. Therefore, you cannot draw a direct line between these two things. Postponements, they are fact of life that we need to live. Our order line was thin because of that one. The comparison from year before with two large projects that Outotec booked at that time makes it even more dramatic the drop than where it actually is.
Like I said, these projects that we have ahead of us, they are mixed projects between metals and minerals, as were the big projects last year that we had. Size-wise, these are not as big as the last year's projects, but there's several of them now. That for the order trends. Don't take the third quarter as a proxy for fourth quarter orders. The margin target, you're right. When you do the math, you end up 15+, but we need to remember that this is cyclical business, and when the upturn starts, everyone gets really busy, and everyone gets, in most of our business, at the same time busy. That's true for our minerals business in particular. Our customers, they sell their products in world markets in US dollars, and when those prices go up, then everyone cranks up and needs everything immediately.
In fact, yesterday they would like to have the delivery. In those circumstances, that is, of course, for us, an opportunity to make much higher margins. When a downturn comes, it also hits more or less at the same time. There can be some commodities, like gold seems to be living its own life. It has done it over the years. Currencies can make a slight impact on that one as well. Overall, downturn hits at the same time. What we can do is take care of our cost base, operate efficiently. It makes us more resilient during the downturn, and it makes us more profitable during the upturn.
Okay. Thank you.
Our next question comes from Antti Kansanen from SEB. Please go ahead with your question.
Hi, guys. It's Antti from SEB. Thanks for taking my questions, couple of those. I'll start coming back to the service orders, just the trends Q3 versus Q2. Can I just confirm that comparison where orders development that you are seeing is quite stable and in line with the customer productions, and there hasn't been any notable, let's say, pre-buying or inventory fill-ups on the previous quarters that would explain part of the Q3 weakness on the services line?
Yeah, correct assumption.
Okay, thanks. Coming back to the margin target and kind of the over the cycle nature of it. In a bigger picture, where do you think we are in the cycle right now? You are seeing quite robust demand on the services side, and then on the other hand, the equipment seems to be quite depressed at the moment. Reflecting to that 15% level, what would be suitable in these market conditions, and where do we stand correctly?
Yeah. My view on, and this is now the cycle is, of course, affected by COVID and by the uncertainty caused by it. Therefore, really difficult to say where we are in the cycle. When we look at metal prices, we should be getting higher up in the cycle at this moment. Really, there's multiple factors here, COVID being one of them. Some of the delivery issues of some of the metals because of other things. Take iron ore, for example, iron ore market is surprisingly strong at this moment, primarily because of delivery issues from Brazil. The longer term trend for growth in needs for metals that exists there, and the investments are ongoing.
For example, copper, battery metals, all these investments, they are being planned, and currently where they are being also acted on and executed are, for example, in many countries where the currencies are currently very weak. Take, for example, Russia. That market is very active at this moment. It is because of healthy level of metal prices, but at the same time, weakness of the local currency, and it makes the operating margin potentially for mine operators very healthy.
Okay. To the aggregates business. You made the McCloskey acquisition, and obviously afterwards, the market environment has been exceptionally difficult. If we think about the synergies related to that and kind of the profitability upside in the aggregates business, is there still some kind of synergy benefits that you expect to reap in the next upcycle? In terms of the 15% target, where do you think aggregates as a business should stand compared to that group-level target?
If we look at the mix of businesses that we have and where aggregates sits in that one. Clearly, in the minerals, we need to look a journey towards 20%, in aggregates journey towards 15%. Then metals, we talk about more once we have the restructuring plan in place. But that's the sort of mindset that we have in these businesses. Aggregates does have more potential. There's good action plans in place. What takes a little bit longer time is to have more standardized offering between the different brands that we have primarily in our mobile equipment range. We can develop product synergies between Metso brand and McCloskey brand in those areas that are not really features that the specific customer segments do need and require. There's further synergies coming out of it.
We can also extend the use of our supply capacity in different parts of the world more efficiently with our multiple brands. We are initiating some actions now within aggregates, where we are moving assembly of some of the products closer to end customers. A huge, big opportunity that we do have is really the markets in the East, both China and longer-term India as well. The boom is currently on in China. India is waiting for things to clear out after many things, including COVID, but also some political turmoil that we have seen in the country. At the core of everything is that we have very much standardized offering of crushers, so either stationary crushers or crushers that go into mobile units.
They are the same crushers, more or less, regardless of what brand we talk about, and these are really the products that form the core of our offering, either stationary or mobile, and they form also the platform for our aftermarket business. There's further potential, and like I said, the mindset is towards 15% during the years to come for aggregates.
Okay, fair enough. Just lastly, from me, a very simple question on the synergies. EUR 31 million run rate now, EUR 50 million end of the year, so would the year-on-year P&L impact for Q4 to be around EUR 8 million? Is that the right thinking behind what you announced?
Yes, Antti. I would take the 31 and divide it by four to get the quarterly impact. Yes.
Okay. On the P&L, yes?
Yes.
Okay, thanks.
Our next question comes from Antti Suttelin, Danske Bank. Please go ahead.
Thank you. This is Antti from Danske Bank. I'm just trying to look beyond COVID, and I'm not asking you to make a guidance or anything like that, but just the way of thinking. If I take Metso Outotec 2019 order intake, and I add McCloskey pro forma so that it would have been for the full year, I end up with a pro forma order intake of EUR 4.8 billion last year. I'm looking into 2022, which hopefully is beyond COVID. Do you think it makes sense to think that Metso Outotec could be on that level of order intake in 2022, EUR 4.8 billion?
Yeah. Without really putting my finger on a number as such, but let's say if things developing and assuming that COVID is no longer with us, and everything else doesn't cause other disturbances, that's the range where we should be by that time.
Okay, thank you. Secondly, still on this third quarter order intake, it looks to me that you may have lost a little bit of market share. Just looking that your order intake fell by 27%, I know that 17 percentage point of that is because of the last contract a year ago, but that still leaves about 10% decline year-over-year. I look at Sandvik, which had + 2%. Is it that you lost some market share, or is it that your part of the market is just weaker compared to Sandvik's market?
We are somewhat in different phases of a cycle always. Secondly, please remember also the currency impact. I cannot recall what Sandvik reported on us, but we have 8% on orders, or was it 9% on sales in our minerals, just the currency impact, so that is a major one.
Yeah, this was ex currencies. Everything is ex currencies.
Okay.
Would you say that you potentially lost some market share?
No.
Because of the integration.
I wouldn't buy into that argument. You cannot draw that conclusion comparing us with Sandvik and Epiroc.
Okay. That's all. Thank you very much
with head-on competitors.
Yes. Thank you.
Our next question comes from Robert Davies from Morgan Stanley. Morgan Stanley, please go ahead with your question.
Yes, thank you for taking my question. My first one was just around some of the site access issues across your mining and aggregates business. If you could give us a sense of where you're seeing the relative disruptions now maybe versus four or five months ago. I just wonder if things have changed. That was my first one.
I think, Robert, part of the challenge is, of course, it does change, clearly certain countries or smaller regions are more impacted. For instance, Southern Africa has been very challenging in the COVID environment with site access. Obviously, it ties to the, if you look at the overall infected people and mortality numbers, similarly in South America, there's some differences between countries, even sites. Obviously, some remote sites are better off in the sense that there is less exposure, whereas some sites are more heavily impacted. I think what we see is quite well tied with the overall WHO statistics on where the virus is causing most turbulence. As said, obviously with bad luck, any site can have some impact. We've had cases in Northern Sweden, which was a very difficult region, and not that many weeks back.
It's more things are evolving, and people are just trying to be very cautious, and to the degree that they can really limit any unnecessary visiting, any unnecessary people at the site.
Thank you. The second question I had was just around maybe margin mix as you go into next year. Just thinking historically about Metso and Outotec, just if you could give us a little color on the difference between the two minerals processing businesses on OE versus aftermarket profitability. I know you won't necessarily give us the exact numbers, but can you give us a sense of where the relative profitabilities were on OE and aftermarket across those businesses? Was the Metso business more profitable in both parts? Was it particular segments that were more profitable? That would be helpful. Thank you.
Yeah. I think obviously on the equipment side, I think it's fairly similar. Obviously, it depends a bit on what products you're looking at, what the specific market position of either company was. I think we have a good base to build on in both companies. We can definitely improve supply chain has been a big topic in both companies. Obviously with the scale we have generated, I think if anything, we have a better platform that will serve both legacies. I think on the service side, generally, obviously, the fact that Metso was much longer on the service journey with much more scale, that obviously tends to be helpful to the invisible in the margins. Again, I think with the additional platform installed base, our target is to improve.
As said, as from a starting point there was maybe a bit more difference on that side.
I see. Thank you. My final one was just maybe thinking about the impact specifically. I don't know if it's possible to quantify, but just in terms of these site access issues, how much of your product sales on the equipment part of your business to your customers depends on having someone on site engaging with a customer and advising them how to, whether it's better to set up a kind of production flow or where you could put pumps and valves and hoppers, and how you set up the overall layout of a mine site. How important is that?
I guess I'm trying to get a sense of how disrupted that element of your business is from an OE standpoint specifically, has been from not having access to get on the customer sites and perhaps as I was thinking into the first half of 2021, if that continues, is there anything you can do to address those issues?
There are things absolutely that we can address, and it has affected our business. It has caused some delays in delivering things and some delays, obviously, the delays will reflect then on a sales line as well. We can prepare ourselves, and we have, of course, started those already in the springtime. We have included various COVID clauses in our contracts and things like that so that we are not exposed to things that are ways beyond ours and also customers' control in that regard, and we have taken that kind of actions. I wouldn't explain with that one too many things. I think mainly they have been cash flow issues. Our cash flow has been good and healthy despite of that one, but it would have been even better, the cash flows, if we would have seen a bit faster progress in some of the projects.
Normally it also means that if we cannot deliver, we see increase in our inventory level at the same time. It does have, in a way, double impact as far as we cannot invoice something and get paid for something sits in our inventory a bit longer time.
I see. Great. Thank you very much.
Thank you. Our next question comes from Tommy Riley from DNB. Please go ahead.
Yes, hi. This is Tommy from DNB. Coming back to the market and order intake development, would you say that you have walked away from some projects?
Yes, we can say that we have walked away from some of the projects without being any specific in that one for reasons that we felt were good and genuine reasons.
That you have become and try to be more strict on the, let's say, pricing or profitability levels what the projects can offer to you.
Various terms, I would say.
Okay. Secondly given the metals outlook and timing perhaps of the orders, would you say that the losses could worsen going into the fourth quarter from the third quarter levels?
I would say that it depends what kind of orders we book. Currently, the order backlog is very thin in our metals side, which means that any order that comes in, we will start to work on them and through POC, we will start the sales coming in fairly rapidly in that one. It's dependent on these orders coming on time.
Okay. Thank you.
We have initiated already actions earlier in our metals side, but we won't see the impact in the cost side before first quarter of next year and end of first quarter of next year.
Okay, thank you.
Our next question comes from Manu Rimpelä from Nordea. Please go ahead.
Good afternoon. It's Manu Rimpela from Nordea here. Getting back to the metals business. Is it so that the only issue you have currently is related to the utilization rate, that there is no problems with the old backlog project delivering losses?
There's no new news in that front as such. Yes, we know that we have some of the legacy projects where we have issues. There's nothing new as such that we would report at this moment. Its primary reason is that there's no orders. The genuine situation that margin levels in those projects is questionable and some of the other terms are not just unacceptable at this moment.
Does that mean that the competitive situation is so tough that you decide not to take those orders?
I don't know whether it's competitive situation or whether it's then customer's assessment on the situation. Like I said earlier, we have walked away from some of the opportunities.
Okay, could you remind us about the remaining metals business, how that is roughly split between the different businesses within metals?
It's very much order-driven. We have certain resources that are fixed per technology but certain part of resources are then moving according to orders. It's fairly difficult to give you a split, but over time, Eeva, do you have anything we could share on that one?
Yeah, to be honest, not quite sure how Outotec has described it earlier, but I guess you will know that there is a hydro-related business, there is a smelting-related business, there is ferrous technology, and then there is a host of other technologies which you can group under various names more on the chemical side of things. As Pekka said, you can of course look at numbers five years back and have a certain view on the size of the business right now. Situation looks very different. I think we want to pursue now the restructuring turnaround and assess that we have a more healthy cost structure that can generate reasonable margins with the current volumes rather than hope that volumes will somehow cure the problem.
I think this is a structural issue needs to be handled, and then let's see where we are with the size and scoping of the business thereafter.
There's about five businesses within the metals segment excluding now recycling. I think they are size-wise and like said, driven by order intake between EUR 50 million- EUR 150 million, I would say annually, the size of the business.
Okay, thank you. Then final question on the Metals business. This big problem project in Saudi Arabia, how possible is it for you to dispose parts of the Metals business as long as you have this problem project ongoing? Are these five business units completely separate from each other?
In that regard, they are separate. That issue is within the smelting part, and that is one of the businesses within the metals. It's obviously that divesting business where we have a project like that, it's not realistic to expect that we would be able to divest that one with any sort of foreseeable terms. Feasible terms.
Okay, thank you. No further questions.
Our next question comes from Societe Generale. Please go ahead with your question.
Hi, thanks for taking my questions. I have three questions, and we'll go one at a time. Again, sorry to labor on the order intake in the third quarter. If you exclude the order take last year, the orders were still down double-digit. I was wondering how much of it could be attributed to the projects being postponed, as you said, and how much was maybe due to you losing some market share in the quarter?
Like I said, I will not quite buy the argument of us losing the market share. Big projects are there, so that is clear. They were there a year ago. The rest, I would say, to a great extent, that is COVID impact, what we've seen there.
Okay, got it. Also we have been hearing about customers postponing decisions even before the COVID as well. Do you think there are any other factors we should be aware of apart from the COVID, which is still making customers hesitant on taking decisions on the large orders?
Yeah, I think the businesses with bigger projects, they tend to be very lumpy. Single decisions and timing of them is very crucial to these ones. Even though we do have experience on how the decision-making cycle in projects in general go, it's always difficult guesswork that when finally all the pieces are in place so that the board level, these are very often board-level decisions to proceed with our customers and how the timing then goes. There's a difficulty to forecast. It's a different ballgame to forecast something standard product that we are selling in big quantities where there's hundreds, maybe thousands of customers. There you can read much more reliably from microdata the sort of order bookings than in projects.
Understood. Lastly, just one of the bookkeeping questions in terms of the service orders. Could you share what is the split in the services business, particularly for the professional services, mainly the part of the service which requires your presence in the mines?
Yeah, if your question was on how much of our service business is more labor-related, then that would be sort of 10%-15% from the services total.
Okay. Thank you very much.
Thank you.
All right, ladies and gentlemen, we need to conclude this results conference call now. We thank you for being with us today. As has already been mentioned, we will arrange a Capital Markets Roadshow, a virtual one, November 11th. For more information, please check out our website, mogroup.com. We'll hope to meet you there, and for the time being, we say thank you and goodbye.
Thank you.
Thank you.