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Good profitability and strong cash flow
Highlights of the third quarter of 2009
* New orders worth EUR 1,031 million were received in July-September i.e. 54 percent less than in the previous year (EUR 2,246 million in Q3/08). * At the end of September, the order backlog was 18 percent lower than at the end of December 2008, amounting to EUR 3,340 million (EUR 4,088 million at December 31, 2008). * Net sales decreased by 22 percent, and were at EUR 1,196 million (EUR 1,528 million in Q3/08). * Earnings before interest, tax and amortization (EBITA) were EUR 124.6 million, i.e. 10.4 percent of net sales (EUR 180.7 million and 11.8% in Q3/2008). * Operating profit (EBIT) was EUR 114.1 million, i.e. 9.5 percent of net sales (EUR 172.3 million and 11.3% in Q3/08). * EBITA and EBIT includes EUR 17 million in non-recurring expenses relating to capacity adjustment measures. EBITA margin before them was 11.9 percent. * Earnings per share were EUR 0.44 (EUR 0.69 in Q3/08). * Free cash flow was EUR 249 million (EUR 91 million in Q3/08). * Return on capital employed (ROCE) before taxes was 11.1 percent (23.3% in Q3/08).
"I am very pleased to report good profitability and strong free cash flow during the third quarter despite the demanding operating environment. It confirms that Metso's cost structure and way of operating are a lot more flexible today than during the previous down turn. Our good performance was also supported by savings from the capacity and cost base adjustment actions that we already started a year ago," says Jorma Eloranta, President and CEO of Metso Corporation.
"Our operating environment continues to be demanding. While we are seeing first signs of gradual recovery in the global economy, and believe that we have now reached the lowest point in market demand, the world economy is far from stable, and there remains uncertainty about the timing and strength of the recovery. Although we estimate that our 2010 net sales will be lower than this year, we expect our profitability to be satisfactory. We have kept this year's guidance intact," Eloranta notes.
"During the past year we have considerably strengthened our long-term competitiveness by introducing new ways to operate across Metso. We believe that we have now taken the majority of the actions required to adjust our cost base and capacity to the demand environment in the near-term. We continue to be alert in case further actions are required. We are now shifting focus to sales efforts and to strengthen our product and services offering. Through these actions we ensure that Metso will emerge as a winner from this downturn," concludes Eloranta.
Metso's key figures
EUR million Q3/09 Q3/08 Change Q1-Q3/ Q1-Q3/ Change 2008
% 2009 2008 %
Net sales 1,196 1,528 -22 3,663 4,561 -20 6,400
Net sales of services 499 586 -15 1,527 1,693 -10 2,343
business
% of net sales 42 39 42 38 37
EBITA before
non-recurring capacity 141.9 180.7 -21 311.7 480.9 -35 680.9
adjustment expenses
% of net sales 11.9 11.8 8.5 10.5 10.6
Earnings before
interest, tax and 124.6 180.7 -31 268.1 480.9 -44 680.9
amortization (EBITA)
% of net sales 10.4 11.8 7.3 10.5 10.6
Operating profit 114.1 172.3 -34 238.6 447.1 -47 637.2
% of net sales 9.5 11.3 6.5 9.8 10.0
Earnings per share, EUR 0.44 0.69 -36 0.88 1.96 -55 2.75
Orders received 1,031 2,246 -54 2,993 5,495 -46 6,384
Order backlog at end of 3,340 5,244 -36 4,088
period
Free cash flow 249 91 174 449 51 780 29
Return on capital
employed (ROCE) 11.1 23.3 23.2
before taxes,
annualized, %
Equity to assets ratio
at end of 33.2 31.5 30.9
period, %
Gearing at end of 51.1 72.2 75.7
period, %
Metso's third quarter 2009 review
Operating environment and demand for products in July-September
Our operating environment continued to be demanding in the third quarter. Our customers were still cautious in their investment decisions, which affected our equipment sales and project businesses in particular.
Most of the mining companies have continued to operate with clearly lower investment budgets than in the peak levels of the past few years. In the third quarter, some mining companies upgraded their capital expenditure plans for 2010 because of the positive metal price development combined with an expectation of a gradual recovery in the global economy. However, these plans are yet to be shown in increased market activity. Due to our strong product and services offering and the significant increase in our installed equipment base during the past few years, demand for our replacement equipment and services by our mining customers continued to be satisfactory. In the construction industry, demand for equipment used in aggregates production was weak primarily because the capacity installed in recent years remained underutilized. Demand for our construction industry services business was satisfactory. Many countries have introduced stimulus measures relating to infrastructure development which are expected to have a positive effect on the demand for construction industry products, but which, for the present, have had little effect.
Demand for power plants utilizing renewable energy sources was satisfactory in Europe and North America. The demand for power plants fuelled by biomass and waste has been boosted as several countries have announced plans to stimulate the use of renewable energy sources. However, the limited availability of financing delayed the decision-making in many of these projects. Demand for our automation and flow control solutions continued at a low level due to capital expenditure plan cuts both in the energy as well as in the paper and pulp customer industries. Demand for metals recycling equipment continued to be weak, owing to reduction in steel production and low price of scrap metal. The demand for the services business in our Energy and Environmental Technology segment was satisfactory.
Demand for fiber lines was weak in the third quarter. The demand for new paper and board lines in China was supported partly by local economic stimulus measures and continued to be satisfactory. In the rest of the world the demand continued to be very weak. Demand for tissue machines was satisfactory. Capacity utilization rates in the pulp and paper industry continued to be low in the third quarter, and demand for the services business was weak especially in North America and Europe.
Orders received in July-September
We received new orders worth EUR 1,031 million in July-September. Orders received were at the same level as during the past three quarters. The value of the orders declined by 54 percent from the comparison period. Orders declined in all reporting segments. Previously received orders equaling some EUR 20 million were canceled from the order backlog during the third quarter, the majority consisting of construction equipment. Orders received by Mining and Construction Technology in July-September equaled EUR 420 million, which was 44 percent less than in the comparison period. The orders received from mining customers decreased by one-half on the very strong comparison period. Orders received consisted mainly of replacement equipment and services orders. Orders received from construction customers declined only by 20 percent from the comparison period because the construction business was the first one to be hit by the global market turmoil already during the third quarter of last year. The largest new order was a delivery of a fine crushing and screening system for Norsk Stein in Norway.
Orders received by the Energy and Environmental Technology segment during the third quarter totaled EUR 250 million, down 56 percent on the comparison period. Orders received by the Power business line declined by 70 percent. The comparison period was exceptionally strong due to two large recovery boiler orders. Orders received decreased by one third in the Automation business line due to strong investment budget cuts in the paper and pulp and energy industries. Orders received by the Recycling business line decreased by close to 60 percent due to customers' low capacity utilization rates. Orders received during the third quarter included a power boiler project for Industrias Celulosa Aragonesa's (SAICA) new waste-to-energy power plant in Spain and an extensive automation package for Shandong Huatai Paper's new paper machine line in China.
Orders received by our Paper and Fiber Technology segment in July-September fell by 61 percent from the comparison period and totaled EUR 369 million. The orders received in the comparison period included two large pulp mill projects. The Paper business line's orders included the world's largest fine paper line order for Zhanjiang Chenming Pulp & Paper's new pulp and paper mill, and a board machine for Fujian Liansheng Paper, both in China. Similarly in China, we concluded agreements with MCC Meili Paper Industry Co. Ltd for a lightweight-coated papermaking line as well as with Shouguang MeiLun Paper Co. Ltd. for the delivery of a large coated fine paper production line. These two orders, together worth over EUR 200 million, are awaiting final contracts before being included in the order backlog. The Tissue business line's orders were at a high level during the third quarter but the Fiber business line received very few new orders and its market outlook continues to be demanding. Orders for the services business remained weak.
Financial performance in July-September
In July-September, our net sales were EUR 1,196 million, which was 22 percent less than a year earlier (EUR 1,528 million in Q3/08). While the services business net sales decreased by 15 percent on the comparison period, they accounted for 42 percent of net sales (39% in Q3/08).
Earnings before interest, tax and amortization (EBITA) for the third quarter were EUR 124.6 million, i.e. 10.4 percent of net sales (EUR 180.7 million and 11.8% in Q3/08). EBITA includes about EUR 17 million in non-recurring expenses resulting from capacity adjustment measures. The biggest part of these, about EUR 11 million, is related to closures of some smaller business units and personnel reductions in Mining and Construction Technology. Personnel reductions in Paper and Fiber Technology account for about EUR 3 million and personnel reductions in Energy and Environmental Technology also for about EUR 3 million. The EBITA margin before these non-recurring capacity adjustment expenses was 11.9 percent. The financial result also includes close to EUR 8 million in capital gains from the sale of shares in Talvivaara Mining Company Plc. Metso's operating profit was EUR 114.1 million, i.e. 9.5 percent of net sales (EUR 172.3 million and 11.3% in Q3/08). The weakening of the financial performance on the comparison period resulted mainly from the 22 percent decrease in net sales and the low capacity utilization rates of several production and engineering units.
EBITA in the third quarter was strong compared to the year's first two quarters. This was partly due to improved gross margin levels in some large projects in the Paper and Power business lines as a result of lower procurement prices and overall successful implementation of the projects. Third-quarter financial performance was also supported by almost EUR 30 million lower sales, general and administration costs than during the first two quarters of the year mainly as a result of low labour costs related to holiday period and high level of temporary lay-offs in Finland and savings resulting from capacity adjustment measures implemented during the first half of the year.
The profit attributable to shareholders was EUR 62 million (EUR 97 million in Q3/08) in the third quarter, corresponding to earnings per share (EPS) of EUR 0.44 (EUR 0.69 per share in Q3/08).
Free cash flow was strong during the third quarter, and was EUR 249 million. The positive cash flow development was supported by a continued strong EUR 159 million decrease of net working capital. One key element in net working capital release was EUR 97 million decrease of inventories in the Mining and Construction Technology segment.
Metso's January-September 2009 Interim Review
Orders received and order backlog
Orders received in January-September totaled EUR 2,993 million, down 46 percent on the comparison period. Previously received orders worth EUR 278 million were canceled in January-September. These order cancellations were booked off directly from our order backlog and therefore had no impact on reported orders received neither on the reporting period nor on the comparison period. Almost EUR 200 million of the cancellations related to the Zhanjiang Chenming pulp project, around EUR 51 million to our Construction business line and some EUR 20 million to the Recycling business line.
China, the United States and Finland generated the largest total value of orders received. The share of emerging markets in orders received was 49 percent (51% in Q1-Q3/08). All of our segments reported a decrease in orders received as our customers hesitated to make new investment decisions.
At the end of September, our order backlog was EUR 3,340 million, which is 18 percent less than at the end of 2008. Around EUR 1.2 billion of the deliveries in our end-of-September order backlog are expected to be completed in 2009, around EUR 1.6 billion in 2010 and the remainder at a later time. The order backlog includes some EUR 600 million in projects with somewhat uncertain delivery schedules and which will, according to present estimates, be delivered after 2010. These projects include, among others, the pulp mill project for Fibria, a new company created by the merger of Votorantim and Aracruz in Brazil.
Orders received by reporting segments
Q1-Q3/2009 Q1-Q3/2008
EUR million % of orders EUR million % of orders
received received
Mining and
Construction 1,203 40 2,370 43
Technology
Energy and
Environmental 793 26 1,317 24
Technology
Paper and Fiber 983 33 1,814 32
Technology
Valmet Automotive 42 1 52 1
Intra-Metso orders -28 -58
received
Total 2,993 100 5,495 100
Orders received by market area
+---------------------------------------------------------------- ---+ | | Q1-Q3/2009 | Q1-Q3/2008 | |-------------------------+--------------------+--------------------| | | EUR | % of | EUR | % of | | | million | orders | million | orders | | | | received | | received | |-------------------------+---------+----------+---------+----------| | Europe | 1,081 | 36 | 1,908 | 35 | |-------------------------+---------+----------+---------+----------| | North America | 509 | 17 | 883 | 16 | |-------------------------+---------+----------+---------+----------| | South and Central | 345 | 12 | 1,028 | 19 | | America | | | | | |-------------------------+---------+----------+---------+----------| | Asia-Pacific | 869 | 29 | 1,333 | 24 | |-------------------------+---------+----------+---------+----------| | Rest of the world | 189 | 6 | 343 | 6 | |-------------------------+---------+----------+---------+----------| | Total | 2,993 | 100 | 5,495 | 100 | +-------------------------------------------------------------------+
Net sales
Our net sales for January-September decreased by 20 percent on the comparison period and were EUR 3,663 million (EUR 4,561 million in Q1-Q3/08). Net sales decreased in all reporting segments: in Mining and Construction Technology by 17 percent, in Energy and Environmental Technology by 13 percent and in Paper and Fiber Technology by 29 percent. The net sales of our services business declined by 10 percent and its share of total net sales was 42 percent (38% in Q1-Q3/08).
Measured by net sales, the largest countries were the United States, China and Germany, which together accounted for about 29 percent of our total net sales.
Net sales by reporting segments
Q1-Q3/2009 Q1-Q3/2008
EUR million % of net EUR million % of net
sales sales
Mining and
Construction 1,551 42 1,869 40
Technology
Energy and
Environmental 1,104 30 1,272 28
Technology
Paper and Fiber 1,002 27 1,417 31
Technology
Valmet Automotive 42 1 52 1
Intra-Metso net sales -36 -49
Total 3,663 100 4,561 100
Net sales by market area
Q1-Q3/2009 Q1-Q3/2008
EUR million % of net EUR million % of net
sales sales
Europe 1,589 43 1,913 42
North America 574 16 722 16
South and Central 458 12 557 12
America
Asia-Pacific 755 21 1,082 24
Rest of the world 287 8 287 6
Total 3,663 100 4,561 100
Financial result
Our earnings before interest, tax and amortization (EBITA) for January-September weakened from the comparison period and were EUR 268.1 million, or 7.3 percent of net sales (EUR 480.9 million and 10.5% in Q1-Q3/08). Our financial result includes non-recurring expenses of some EUR 44 million resulting from capacity adjustment measures, of which around EUR 22 million are related to Paper and Fiber Technology, some EUR 16 million to Mining and Construction Technology and almost EUR 6 million to Energy and Environmental Technology. Our EBITA before non-recurring capacity adjustment expenses was EUR 311.7 million or 8.5 percent. Other significant non-recurring items were some EUR 14 million capital gains from the sale of shares in Talvivaara Mining Company Plc, EUR 9 million in non-recurring expenses from dissolving hedging arrangements related to the cancellation of our Chinese customer Zhanjiang Chenming's pulp mill project and EUR 4 million credit loss reserve related to the initiation of the bankruptcy proceedings of two of our paper industry customers.
The EBITA for Mining and Construction Technology in January-September was EUR 157.2 million, declining from the previous year primarily due to the Construction business line's low delivery volumes and capacity utilization rates in all its manufacturing units.
The EBITA for Energy and Environmental Technology was EUR 103.5 million, which was 25 percent weaker than the previous year mainly due to lower net sales in all business lines.
The EBITA for Paper and Fiber Technology was EUR 19.8 million, 79 percent weaker than during the comparison period due to almost 30 percent lower net sales, high non-recurring capacity adjustment expenses and the low utilization rates in many units.
Our operating profit in January-September was EUR 238.6 million, or 6.5 percent of net sales (EUR 447.1 million and 9.8% in Q1-Q3/08). Operating profit before non-recurring expenses related to capacity adjustment measures was EUR 282.2 million or 7.7 percent of net sales.
Our net financing expenses in January-September were EUR 59 million (EUR 54 million in Q1-Q3/08). Due to the higher debt level compared to last year, our interest expenses increased by EUR 5 million and were EUR 56 million (EUR 51 million in Q1-Q3/08).
Our profit before tax was EUR 180 million (EUR 393 million), and our tax rate for 2009 is estimated to be about 30 percent (30% in 2008). The profit attributable to shareholders was EUR 125 million (EUR 277 million) in January-September, corresponding to earnings per share (EPS) of EUR 0.88 (EUR 1.96 per share).
The return on capital employed (ROCE) before taxes in January-September was 11.1 percent (23.3%) and return on equity (ROE) was 11.4 percent (24.5%).
Cash flow and financing
Net cash provided by operating activities for January-September was EUR 487 million (EUR 129 million in Q1-Q3/08).
One of our key targets for this year has been to release cash from net working capital. Our target for 2009 was to release at least EUR 200 million and for 2009-2010 in total about EUR 500 million. During January-September, EUR 294 million of net working capital was released, clearly ahead of our minimum target for 2009. Our inventories have come down EUR 341 million and trade receivables EUR 188 million. On the other hand, trade payables decreased by EUR 182 million. Inventories in Mining and Construction Technology have decreased by EUR 277 million from the beginning of the year as a result of the ongoing inventory control initiative.
Free cash flow for January-September was EUR 449 million (EUR 51 million in Q1-Q3/08).
Our net interest-bearing liabilities totaled EUR 797 million at the end of September (EUR 1,099 million at December 31, 2008). The total amount of short-term debt maturing over the next 12 months was EUR 257 million at the end of September. EUR 48 million of the short-term debt consists of commercial papers issued in the Finnish markets, EUR 155 million are current portions of long-term debt and the remainder is local working capital financing of subsidiaries, mainly in Brazil.
The amount of commercial paper financing in use during January-September fluctuated between EUR 48-160 million. During January-September, we obtained EUR 365 million in new long-term debt with maturity of 4-5 years. The largest single transaction was a EUR 200 million five-year funding arrangement under the Euro Medium Term Note (EMTN) program. New loans are primarily meant for the refinancing of our existing debt and for the extension of the debt maturity structure. The amount of this new long term debt exceeds the repayments of our earlier loans until halfway through 2011. At the end of September, our total cash assets amounted to EUR 774 million. Out of this EUR 162 million has been invested in instruments with initial maturity exceeding three months and the remaining EUR 612 million is being 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 51.1 percent (72.2%) and the equity-to-assets ratio was 33.2 percent (31.5%). Due to strong operating cash flow and lower capital expenditure, our net gearing has improved during this year. In April, following the Annual General Meeting, we paid EUR 99 million in dividends for 2008.
Capital expenditure
Our gross capital expenditure for January-September decreased by 61 percent on the comparison period to EUR 79 million (EUR 201 million in Q1-Q3/08). The proportion of maintenance investments was 52 percent, i.e. EUR 41 million.
We expect our capital expenditure excluding business acquisitions to remain below EUR 130 million this year. We are significantly restricting the amount of new investments and, when feasible, also extending the implementation schedules of ongoing investment projects.
We are constructing new plant and office premises for the Automation business line in Shanghai, China. The Metso Park industrial facility, designed especially to serve the mining and construction industry, is under construction in Rajasthan, India. In Finland, we are upgrading a pilot machine at the Paper Technology Center in Jyvaeskylae. In Zibo we are establishing our third service center in China for the pulp and paper industry. We have extended the implementation schedules for the Metso Park and Zibo Service Center investments. Investment projects in enterprise resource planning systems are underway in Mining and Construction Technology and in the Automation business line.
Metso's research and development expenses in January-September totaled EUR 84 million, representing 2.3 percent of Metso's net sales (EUR 96 million and 2.1% in Q1-Q3/08).
Acquisitions, divestments and joint ventures
In August, we concluded an agreement to purchase the Pacific/Hoe Saw&Knife Company's coater and doctor blade business in the United States for Paper and Fiber Technology. The annual net sales of the purchased business are below USD 10 million. The transaction has not yet been finalized.
In May, we sold the entire stock of Metso Paper Turku Works Oy in Finland to Stairon Oy. Metso Paper Turku Works Oy manufactured air systems for the pulp and paper industry. The sale had no significant impact on our financial performance. The air system technology and the related business remained in Metso's ownership. Metso Paper Turku Works Oy employed 91 people. In conjunction with the sale, Metso and Stairon agreed on a long-term supply contract for the manufacture of certain key products.
In January, we sold our composites manufacturing business and related assets in Oulu, Finland, to xperion Oy. Annual net sales of the divested business have been less than EUR 5 million. The entire personnel, 21 people, were transferred to xperion Oy. The divested business was part of our Paper business line.
MW Power Oy, a joint venture of Metso's heat and power business and Waertsilae's biopower business, started its operations on January 1, 2009. We own 60 percent and Waertsilae owns 40 percent of the joint venture. An order backlog of about EUR 116 million was transferred with Waertsilae Biopower Oy to the joint venture. In 2008, the total net sales of the company were approximately EUR 130 million and the number of employees about 200.
Adjusting capacity to demand
We began adjusting our capacity and cost structure to the lower demand already in early 2008 and intensified our efforts when the market situation started to weaken in September 2008. We have continued these measures throughout this year. The aim is to ensure the competitiveness of our operations.
Our first steps were to reduce the number of temporary personnel and the use of subcontractors. In addition, we have initiated temporary lay-offs and permanent reductions at several of our units. In most cases, the temporary lay-offs concern all employee groups, and their duration varies, depending on the work load, from a few weeks to longer periods. The temporary lay-offs are mainly in use in Finland where local agreements allow for this type of flexibility. In other countries we have applied alternative options made possible by local labor legislation and union contracts, such as a shortened work week. Through the implementation of temporary lay-offs, we estimate that we will achieve some EUR 25-30 million in savings in personnel costs during this year. In addition to the above-mentioned temporary measures, we have also taken actions to adjust our capacity on a permanent basis to a lower demand environment. Furthermore, we have introduced new more efficient ways to operate which have enabled us to close down smaller units and consolidate our operations to larger entities. As a result, we have cut the number of personnel since the end of June last year to the end of September this year by 2,902 employees. We have also taken decisions or we have discussions underway to further reduce our personnel by another 1,750 employees by early next year. Together these are about 4,650, out of which some 3,000 will be in Finland and Sweden.
When fully implemented these permanent personnel reductions are estimated to decrease our annual wage, salary and related social costs by over EUR 200 million. Out of these we estimate that EUR 100 million will materialize already this year. In January-September we recorded about EUR 44 million in non-recurring capacity adjustment expenses resulting from personnel reductions and the closures of units, and we estimate that during the last quarter we will further record some EUR 30-35 million in non-recurring expenses of this nature. About half of this is related to personnel negotiations initiated in our Fiber business line in October.
The table below details the personnel reductions related to the capacity adjustment measures
Mining and Energy and Paper and Metso
Construction Environmental Fiber
Technology Technology Technology
Personnel as of June 30, 10,503 6,311 10,089 28,069
2008
Acquisitions, July 2008 590 127 1,068 1,785
- September 2009
Divestitures, July - - -289 -289
2008--September 2009
Comparable personnel 11,093 6,438 10,868 29,565
amount
Personnel as of 10,014 6,119 9,475 26,663
September 30, 2009
Actual reduction July
2008 -
September 2009 1,079 319 1,393 2,902
Estimated additional
reductions decided 600 350 800 1,750
and underway
Total personnel 1,679 669 2,193 4,652
reductions decided
Temporary lay-offs in 600
man years
Personnel
At the end of September, we had 26,663 employees, which was 2,659 less than at the end of 2008 (29,322 people at December 31, 2008). The number of employees fell especially in Finland and Sweden, as a result of capacity adjustment measures in our Paper and Fiber Technology segment. During January-September, we had an average of 27,976 employees.
Personnel by area
September % of September % of total Change December
30, 2009 total 30, 2008 personnel % 31, 2008
personnel
Finland 8,321 31 9,118 32 -9 9,252
Other Nordic 2,985 11 3,364 12 -11 3,332
countries
Other Europe 3,516 13 3,463 12 2 3,842
North 3,502 13 4,041 14 -13 3,964
America
South and 2,720 10 2,917 10 -7 2,991
Central
America
Asia-Pacific 4,218 16 4,386 15 -4 4,469
Rest of the 1,401 6 1,473 5 -5 1,472
world
Total 26,663 100 28,762 100 -7 29,322
REPORTING SEGMENTS
Mining and Construction Technology
EUR million Q3/09 Q3/08 Change Q1-Q3/ Q1-Q3/ Change 2008
% 09 08 %
Net sales 492 670 -27 1,551 1,869 -17 2,586
Net sales of services 247 274 -10 739 782 -5 1,078
business
% of net sales 50 41 48 42 42
Earnings before
interest, tax and 54.7 98.6 -45 157.2 269.3 -42 361.2
amortization (EBITA)
% of net sales 11.1 14.7 10.1 14.4 14.0
Operating profit 53.7 97.9 -45 154.6 267.1 -42 358.4
% of net sales 10.9 14.6 10.0 14.3 13.9
Orders received 420 747 -44 1,203 2,370 -49 2,709
Order backlog at end 1,103 1,964 -44 1,492
of period
Personnel at end of 10,014 10,829 -8 11,259
Period
Net sales of Mining and Construction Technology decreased by 17 percent on the comparison period, and were EUR 1,551 million. The Mining business line's net sales declined by about 9 percent, while the net sales of the Construction business line were down by about 29 percent. Net sales of the services business declined by 5 percent on the comparison period and accounted for 48 percent of the segment's net sales (42% in Q1-Q3/08).
Mining and Construction Technology's operating profit for January-September was EUR 154.6 million, which was 10.0 percent of net sales (EUR 267.1 million and 14.3%). Operating profit was depressed by about EUR 16 million of non-recurring expenses relating to capacity adjustment measures in several units. The operating profit includes about EUR 14 million capital gains relating to the sale of shares in Talvivaara Mining Company Plc. The profitability of the Mining business line weakened, but remained good. The profitability of the Construction business line, on the other hand, weakened clearly from the comparison period due to the low delivery volumes and capacity utilization rates in manufacturing units and non-recurring expenses resulting from capacity adjustment measures. The main reason for the third-quarter profitability to exceed the profitability of the second quarter of the year were the low level of sales, general and administration costs during the vacation period and savings from the restructuring measures initiated during the first half of the year.
The value of orders received in January-September decreased by 49 percent on the comparison period and equaled EUR 1,203 million (EUR 2,370 million in Q1-Q3/08). The value of new orders received declined in both the Mining business line and Construction business line, as well as in all geographical areas. The relative share of orders received from the emerging markets remained on par with the previous year, amounting to more than 50 percent (52%). During January-September, about EUR 66 million of previously received orders were canceled. In September, we won an order for a fine crushing and screening system for Norsk Stein in Norway.
The order backlog declined by 26 percent from the end of 2008 and totaled EUR 1,103 million at the end of September (EUR 1,492 million at December 31, 2008). Around EUR 160 million of the mining equipment orders in the order backlog have somewhat uncertain delivery schedules.
Energy and Environmental Technology
EUR million Q3/09 Q3/08 Change Q1-Q3/ Q1-Q3/ Change 2008
% 09 08 %
Net sales 350 423 -17 1,104 1,272 -13 1,775
Net sales of services 117 143 -18 379 397 -5 549
business
% of net sales 34 35 35 32 32
Earnings before
interest, tax and 37.1 55.7 -33 103.5 137.8 -25 198.3
amortization (EBITA)
% of net sales 10.6 13.2 9.4 10.8 11.2
Operating profit 32.9 51.2 -36 90.3 120.0 -25 176.0
% of net sales 9.4 12.1 8.2 9.4 9.9
Orders received 250 568 -56 793 1,317 -40 1,658
Order backlog at end of 939 1,402 -33 1,204
period
Personnel at end of 6,119 6,317 -3 6,357
period
The net sales of Energy and Environmental Technology declined by 13 percent on the comparison period and were EUR 1,104 million. The net sales decreased most strongly in the Recycling business line, by almost 30 percent. The net sales of the Power business line declined by 14 percent and Automation business line by 7 percent. The services business declined by 5 percent from the comparison period and accounted for 35 percent of the segment's net sales (32% in Q1-Q3/08).
The Energy and Environmental Technology's EBITA weakened from the previous year and were EUR 103.5 million, or 9.4 percent of net sales (EUR 137.8 million and 10.8% in Q1-Q3/08). The EBITA margin improved slightly from the previous year's level in the Power business line, weakened but remained on a good level in the Automation business line and declined to a weak level in the Recycling business line due to low delivery volumes. The operating profit includes almost EUR 6 million non-recurring expenses relating to the capacity adjustment measures.
The value of orders received fell by 40 percent from the comparison period and totaled EUR 793 million. Orders received declined across all of the business lines, most significantly in Recycling. Approximately EUR 84 million of orders previously received by the segment were canceled. The biggest single cancelled order was Zhanjiang Chenming recovery boiler, worth about EUR 60 million. Largest orders came particularly from the energy customer industry, for example a power boiler for Industrias Celulosa Aragonesa's (SAICA) new waste-to-energy power plant in Spain, a power boiler and automation system for PGE Zespol Elektrowni Dolna Odra S.A.'s combined heat and power plant in Poland and automation systems for two energy-from-waste plants in the United Kingdom. In addition, we got an extensive automation package order for Shandong Huatai Paper's new paper machine line in China.
The order backlog at the end of September, EUR 939 million, was 22 percent lower than at the end of 2008. Slightly below EUR 90 million of the order backlog's total value is subject to uncertainties about delivery schedules. These orders include, among others, the deliveries of power boiler and automation technology for the pulp mill project of Fibria (the new company resulting from the merger of Votorantim and Aracruz) in Brazil.
Paper and Fiber Technology
EUR million Q3/09 Q3/08 Change Q1-Q3/ Q1-Q3/ Change 2008
% 09 08 %
Net sales 356 441 -19 1,002 1,417 -29 2,044
Net sales of services 135 169 -20 410 514 -20 716
business
% of net sales 38 38 41 36 35
Earnings before
interest, tax and 32.4 36.9 -12 19.8 94.9 -79 146.1
amortization (EBITA)
% of net sales 9.1 8.4 2.0 6.7 7.1
Operating profit 27.6 34.5 -20 7.8 83.2 -91 130.1
% of net sales 7.8 7.8 0.8 5.9 6.4
Orders received 369 940 -61 983 1,814 -46 2,021
Order backlog at end 1,330 1,931 -31 1,434
of period
Personnel at end of 9,475 10,661 -11 10,544
Period
Net sales of Paper and Fiber Technology decreased by 29 percent in January-September, and were EUR 1,002 million. Net sales of the services business declined by 20 percent due to the overall slowdown of the markets and low capacity utilization rates among customer mills. Services share of total net sales rose to 41 percent due to low new equipment sales (36% in Q1-Q3/08).
Paper and Fiber Technology's EBITA was EUR 19.8 million in January-September i.e. 2.0 percent of net sales (EUR 94.9 million and 6.7% in Q1-Q3/08). The financial result includes about EUR 22 million non-recurring expenses resulting from capacity adjustment measures. The cancellation of the Zhanjiang Chenming pulp mill order resulted in EUR 9 million non-recurring expenses mainly deriving from the dissolving of the hedging arrangements we had entered into. EBITA before the above-mentioned non-recurring expenses resulting from capacity adjustment measures was EUR 41.3 million. In addition, the financial result is burdened by about EUR 4 million credit loss reserve related to the initiated bankruptcy proceedings of two of our North American customers. The profitability for January-September was also weakened by the low utilization rate of our manufacturing and engineering units, high level of capacity adjustment expenses and low net sales. The reason why the third-quarter financial performance clearly exceeded the performance of the two first quarters of the year were the low level of sales, general and administration costs of the vacation period, savings from the restructuring measures initiated during the first half of the year and improved profitability of some large delivery projects in Paper business line.
Demand for pulp industry machinery and equipment continued to be weak. The value of orders received decreased by 46 percent on the comparison period, and was EUR 983 million. The comparison period included two large pulp mill orders. Among the largest orders received during the year were a coated fine paper line order for Shandong Huatai Paper, a fine paper line order for Zhanjiang Chenming and an uncoated fine paper machine order for Sun Paper Group, all to China. The order backlog at the end of September was EUR 1,330 million and about EUR 350 million of the projects in the order backlog are subject to uncertainties relating to delivery schedules. These projects include, for example, the pulp mill project for Fibria (the new company resulting from the merger of Votorantim and Aracruz) in Brazil.
Valmet Automotive
Valmet Automotive's net sales in January-September totaled EUR 42 million (EUR 52 million in Q1-Q3/08). Operating loss was EUR 8.4 million (EUR 1.0 million in Q1-Q3/08). In January-September, Valmet Automotive produced an average of 66 vehicles (95 vehicles in Q1-Q3/08) per day. At the end of September, Valmet Automotive employed 636 people (783 people at December 31, 2008).
In August, Valmet Automotive signed a Letter of Intent with the Norwegian company Think Global AS for manufacturing and engineering the Think City electric car. Planned production volumes amount to thousands of cars annually. The series production will start at the end of 2009. In January, Valmet Automotive signed an agreement with the Danish company Garia AS for the engineering and manufacturing of an electric golf car. The agreement spans several years and involves the production of a few thousand Garia golf cars annually. The series production will start in the end of 2009.
At the end of 2008, Valmet Automotive and the U.S. company Fisker Automotive Inc. signed a long-term cooperation agreement on the engineering and manufacturing of Fisker Karma plug-in hybrid cars in Finland. The first cars will be delivered to Fisker Automotive towards the end of this year. The series production will start in 2010. The annual production is projected to be 15,000 cars. Valmet Automotive's current assembly contract with Porsche will continue until 2012.
Events after the review period
Metso to enter solid waste recycling equipment business
In October, Metso completed the acquisition of Danish M&J Industries A/S, a manufacturing company of mobile and stationary products for solid-waste crushing. The acquired company was integrated into Metso's Recycling business line. The net debt free value of the transaction is about EUR 16 million. M&J Industries has about 100 employees, and its forecasted net sales in 2009 are about EUR 26 million.
Short-term risks of business operations
We estimate that our business environment for the rest of 2009 and first half of 2010 will continue to be demanding.
The global economic recession may have adverse effects on projects in our order backlog. Some projects may be postponed or they may be suspended or canceled. We estimate that slightly over 15 percent of orders in the order backlog at the moment are subject to uncertainties relating to delivery schedules. We apply the percentage of completion method to long-term delivery agreements, meaning that we recognize income on long-term delivery agreements according to the progress of the delivery. The customer advance payment is typically 10-30 percent of the project value, in addition to which the customer makes progress payments based on the milestones during the project execution, which significantly decreases risk and our financing requirements related to projects. We continually assess our customers' creditworthiness and ability to fulfill their obligations. If a customer faces liquidity problems, we will discuss the possibility of changing project delivery schedules and terms of payment and any other measures needed. As a rule, we do not finance customer projects.
We have launched many measures to adjust to the rapidly changed operating environment. We are adjusting our capacity and cost structure to correspond with the lower demand, in order to maintain our competitiveness. As a result of the global economic recession, the markets for our products are contracting, which may lead to tightening cost competition.
Securing the continuity of our operations requires that sufficient funding is available under all circumstances. The financial crisis may have adverse effects on the availability of debt financing and increase the costs relating to it. We estimate that our financial assets totaling EUR 774 million and available credit facilities are sufficient to secure short-term liquidity. Committed credit facilities available for withdrawal amounted to EUR 500 million. The average repayment period for our long-term loan capital is 3.9 years. More than half of our long-term debt will mature after 2011. There are no prepayment covenants in our debt facilities that would be triggered by changes in credit ratings. Some of our debt facilities include financial covenants related to capital structure. Currently we fully meet the covenants and other terms related to our financing agreements. We consider our flexibility in relation to the covenants to be adequate.
The levels of net working capital and capital expenditure have a fundamental effect on the adequacy of financing. Our aim is to decrease the level of our net working capital, and this could be difficult to achieve if the economic situation remains demanding. We do not have any large-scale investment projects underway, and we estimate that we are well positioned to keep our capital expenditure at a moderate level in the coming years.
We have EUR 787 million of goodwill on our balance sheet related to corporate acquisitions made over the last 10 years. We monitor our goodwill quarterly and carry out comprehensive impairment testing annually in September. Following the significant changes in our business environment, we have conducted additional impairment testing reviews at the end of every quarter since September 2008, and have not found any impairment necessary. The quarterly testing reviews have been conducted with the same principles as the annual tests and the discount rates have been adjusted when appropriate. The principles of the impairment testing are represented in the Annual Report.
Changes in the prices of raw materials and components could affect our profitability. On one hand, the risk of increases in procurement costs typically diminishes during economic downturn. On the other hand, some of our customers are raw material producers, whose ability to operate and invest may be hampered by declining raw material prices. Changes in raw material and component prices also affect the value of our inventories. This year, we have sold construction equipment from the inventory with a lower contribution margin than during the past few years.
Of the financial risks that affect our financial results, currency exchange rate risks are among the most substantial. Exchange rate changes can affect our business, although the geo-graphical scope of our operations decreases the significance of any individual currency. The uncertainty in the financial markets is likely to increase exchange rate fluctuations. Our policy is to hedge currency exposures from firm commitments.
Short-term outlook
Although there are signs of gradual economic recovery, we estimate that our business environment will continue to be demanding during the rest of the year and first half of 2010.
Our customers are still being cautious in their investment decisions, which particularly affects our equipment sales and project business. We estimate that our customers' capacity utilization rates are slowly improving assuming that the overall positive momentum in the global economy will continue. We estimate that this will have positive, gradual impact first in our services business.
Mining companies have made substantial cuts in their investment plans over the year compared with recent years and are still ready to curtail their production if needed. However, some mining companies have upgraded their investment plans for 2010, but it remains to be seen when this will start to have an impact on new equipment market. Due to our strong product and services offering, as well as our large installed equipment base, which has grown significantly over the last few years, the demand for our mining replacement and services business is expected to continue satisfactory. In the construction industry, we estimate that the demand for equipment relating to aggregates production will be weak. Many countries have introduced stimulus measures relating to infrastructure development which we expect to have a positive effect on the demand for our construction industry products in the long term, but which, for the present, have had little effect. We estimate that the demand for our services offering in the construction industry will be satisfactory.
We estimate that the demand for power plants utilizing renewable energy sources will be satisfactory in Europe and North America. Many countries have initiated plans to increase the use of renewable energy sources. This is expected to support the demand for power plants utilizing biomass and waste. However, limited availability of financing may delay decision-making in projects. We estimate that the demand for our automation and flow control products will be satisfactory. The demand for metals recycling equipment is expected to be weak, owing to the low price of scrap metal and reduction in steel production. Demand for the services business in Energy and Environmental Technology is expected to be satisfactory.
We estimate that the demand for fiber lines will remain weak and that for paper and board lines will be satisfactory. Several paper and board machine projects have materialized in China during the past months, partly thanks to local stimulus measures. The delivery schedules of some of the major paper and board machine and fiber line projects in our order backlog have been prolonged. We estimate that the low capacity utilization rates in the pulp and paper industry will continue to have a negative impact on the demand for our services business, particularly in North America and Europe.
We estimate that our net sales will exceed EUR 5 billion in 2009. During the first nine months we have generated net sales of EUR 3.7 billion and our order backlog stands at EUR 3.3 billion, of which about EUR 1.2 billion consists of deliveries for 2009. We expect our profitability level to be satisfactory in 2009. We also expect our free cash flow to improve considerably on 2008. Although we estimate that our 2010 net sales will be lower than this year, we expect our profitability to be satisfactory.
The net sales and profitability estimates are based on our current market outlook and business scope. Helsinki, October 29, 2009
Metso Corporation's Board of Directors
It should be noted that certain statements herein which are not historical facts, including, without limitation, those regarding expectations for general economic development and the market situation, expectations for customer industry profitability and investment willingness, expectations for company growth, development and profitability and the realization of synergy benefits and cost savings, and statements preceded by "expects", "estimates", "forecasts" or similar expressions, are forward-looking statements. These statements are based on current decisions and plans and currently known factors. They involve risks and uncertainties which may cause the actual results to materially differ from the results currently expected by the company.
Such factors include, but are not limited to:
1. general economic conditions, including fluctuations in
exchange rates and interest levels which influence the operating
environment and profitability of customers and thereby the orders
received by the company and their margins
2. the competitive situation, especially significant
technological solutions developed by competitors
3. the company's own operating conditions, such as the success of
production, product development and project management and their
continuous development and improvement
4. the success of pending and future acquisitions and
restructuring.
The Interim Review is unaudited
CONSOLIDATED STATEMENT OF INCOME
EUR million 7-9/2009 7-9/2008 1-9/2009 1-9/2008 1-12/2008
Net sales 1,196 1,528 3,663 4,561 6,400
Cost of goods sold -885 -1,114 -2,752 -3,362 -4,733
Gross profit 311 414 911 1,199 1,667
Selling, general and
administrative expenses -210 -246 -688 -761 -1,043
Other operating income
and expenses, net 13 4 15 8 11
Share in profits of
associated companies 0 0 1 1 2
Operating profit 114 172 239 447 637
% of net sales 9.5% 11.3% 6.5% 9.8% 10.0%
Financial income and
expenses, net -23 -35 -59 -54 -89
Profit before taxes 91 137 180 393 548
Income taxes -28 -39 -54 -115 -158
Profit 63 98 126 278 390
Attributable to:
Shareholders of the
company 62 97 125 277 389
Minority interests 1 1 1 1 1
Profit 63 98 126 278 390
Earnings per share, EUR 0.44 0.69 0.88 1.96 2.75
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
EUR million 7-9/2009 7-9/2008 1-9/2009 1-9/2008 1-12/2008
Profit 63 98 126 278 390
Cash flow hedges, net
of tax 7 -18 17 -9 -33
Available-for-sale
equity investments, net
of tax -5 -10 5 -10 -19
Currency translation on
subsidiary net
investments 13 38 61 -12 -49
Net investment hedge
gains (losses), net of
tax -2 -11 0 -3 -11
Defined benefit plan
actuarial gains
(losses), net of tax - - - - -22
Other comprehensive
income (expense) 13 -1 83 -34 -134
Total comprehensive
income (expense) 76 97 209 244 256
Attributable to:
Shareholders of the
company 75 96 208 243 255
Minority interests 1 1 1 1 1
Total comprehensive
income (expense) 76 97 209 244 256
CONSOLIDATED BALANCE SHEET
ASSETS
Sep 30, Dec 31,
EUR million Sep 30, 2009 2008 2008
Non-current assets
Intangible assets
Goodwill 787 780 778
Other intangible assets 249 262 254
1,036 1,042 1,032
Property, plant and equipment
Land and water areas 58 56 58
Buildings and structures 233 232 239
Machinery and equipment 371 357 366
Assets under construction 53 79 63
715 724 726
Financial and other assets
Investments in associated companies 15 13 14
Available-for-sale equity investments 25 32 18
Loan and other interest bearing
receivables 9 16 8
Available-for-sale financial investments 44 5 5
Financial instruments held for trading 39 - -
Derivative financial instruments 0 3 0
Deferred tax asset 181 121 174
Other non-current assets 34 15 26
347 205 245
Total non-current assets 2,098 1,971 2,003
Current assets
Inventories 1,316 1,745 1,606
Receivables
Trade and other receivables 976 1,177 1,146
Cost and earnings of projects under
construction in excess of advance
billings 296 365 362
Loan and other interest bearing
receivables 8 2 9
Available-for-sale financial assets 79 - -
Derivative financial instruments 34 24 48
Income tax receivables 40 21 23
1,433 1,589 1,588
Cash and cash equivalents 612 256 314
Total current assets 3,361 3,590 3,508
TOTAL ASSETS 5,459 5,561 5,511
SHAREHOLDERS' EQUITY AND LIABILITIES
EUR million Sep 30, 2009 Sep 30, 2008 Dec 31, 2008
Equity
Share capital 241 241 241
Share premium reserve - - -
Cumulative translation
adjustments -75 -91 -136
Fair value and other reserves 511 520 490
Retained earnings 872 761 849
Equity attributable to
shareholders 1,549 1,431 1,444
Minority interests 10 9 9
Total equity 1,559 1,440 1,453
Liabilities
Non-current liabilities
Long-term debt 1,331 894 1,089
Post employment benefit
obligations 192 172 191
Provisions 46 35 36
Derivative financial
instruments 8 0 8
Deferred tax liability 47 33 45
Other long-term liabilities 2 4 4
Total non-current liabilities 1,626 1,138 1,373
Current liabilities
Current portion of long-term
debt 155 89 101
Short-term debt 102 336 245
Trade and other payables 958 1,247 1,189
Provisions 237 217 218
Advances received 412 631 479
Billings in excess of cost and
earnings of projects
under construction 355 366 323
Derivative financial
instruments 27 50 82
Income tax liabilities 28 47 48
Total current liabilities 2,274 2,983 2,685
Total liabilities 3,900 4,121 4,058
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES 5,459 5,561 5,511
NET INTEREST BEARING
LIABILITIES
EUR million Sep 30, 2009 Sep 30, 2008 Dec 31, 2008
Long-term interest bearing
debt 1,331 894 1,089
Short-term interest bearing
debt 257 425 346
Cash and cash equivalents -612 -256 -314
Other interest bearing assets -179 -23 -22
Total 797 1,040 1,099
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
EUR million 7-9/2009 7-9/2008 1-9/2009 1-9/2008 1-12/2008
Cash flows from
operating activities:
Profit 63 98 126 278 390
Adjustments to reconcile profit
to net cash pr For full details for MX click here.
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