Metso Oyj (METSO.FI) 02-Feb Q Earnings Call. Total Pages: 20 Copyright FactSet CallStreet, LLC. Corrected Transcript

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1 Total Pages: 20

2 CORPORTE PRTICIPNTS Juha Rouhiainen Vice President-Investor Relations, Metso Oyj Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj OTHER PRTICIPNTS Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Peter Murdoch nalyst, Morgan Stanley & Co. International Plc Jonathan Hanks nalyst, Goldman Sachs Manu M. Rimpelä nalyst, Nordea Markets ndrew Wilson nalyst, JPMorgan Securities Plc MNGEMENT DISCUSSION SECTION Juha Rouhiainen Vice President-Investor Relations, Metso Oyj Good afternoon or good morning, ladies and gentlemen. This is Juha Rouhiainen, Metso's Investor Relations, and I want to welcome you all to this conference call where we discuss our Fourth uarter 2017 and Full-Year Results. We will begin with the presentation by our President and CEO, ; and CFO, Eeva Sipilä, and after that, we have time for questions. nd as you all know, it's a busy day. So, we try to keep this conference call at a maximum about 55 minutes or 60 minutes. So, please keep that in mind when you are asking questions. nd also, please check the disclaimer we have in the first page of our presentation. With these opening words, I'll be giving over to Nico. Please go ahead. Thank you, Juha. nd as I'm confident that there will be some questions, we will try to keep the presentation as short as possible. If we start with quarter four in brief, of course, no surprise if I tell you that we are experiencing healthy market activities, I would say, in all markets in which we are active in. uarter four was a good overall performance for Flow Control, but lower mining orders and sales and weaker profitability in Minerals made the overall results disappointing. 2

3 We remind you that we acquired WERX, a rubber specialist for mining in ustralia in quarter four and we expanded our aggregates and Flow Control distribution network in a significant way. If we then go to the group quarterly finance financials, you have seen the figures already two weeks ago, when we came out with the profit warning, so I'll not go too much in detail. What is perhaps important to notice is that we had an important currency effect in the quarter for received and for sales. nd our orders grew only 2%, but if we do the same calculation in constant currencies, orders were up 5% and the same for sales, they grew 5%, but in constant currencies 8%. You've seen the adjusted EBIT and the operating profit, a low earnings per share of 0.08, also affected by some tax issues, where Eeva later will explain. nd then a free cash flow of 57 million euro, of course, representing our profit, a slight efficiency improvement in working capital and of course, the money we had to spend to buy WERX. But then, if we go more into the two segments, however, we can explain a bit better what happened in the quarter. nd if we start with Minerals and the quarterly financials for Minerals, orders declined 2%. If we look in constant currencies, orders were up 2%. On the lower side, if I start with equipment, we should not forget that last year or in 2016 quarter four, we got a big aggregate order in Thailand for an application which was a little bit out of our normal reach. nd obviously, that order did not repeat in quarter four 2017, which makes the comparison a little bit difficult. But if we exclude that order, then we had solid aggregate equipment business and very good recycling business. Mining equipment on the weak side, mainly because of timing issues linked to renegotiation of terms and conditions for orders that we receive from customers. I explained [ph] myself a bit (04:10) more in detail. In quarter three, we booked this extraordinary 33.3 million. nd there we explained you that it was mainly related to bad terms and conditions and that we now would work our way back in our quotation platform, all the way back to quotation and make sure that for new quotations and for new orders, terms and conditions were more in line with our expectations. nd that's what we are doing as we speak and we had several of these orders that came in in quarter four. While we were not happy with the terms and conditions and while we had to renegotiate with the customer better terms and conditions, some of them, we managed to close in quarter four, some of them slipped into January this year, some of them we are still negotiating and we hope to finalize now in February. nd as a matter of fact, 2018 started very strongly for mining equipment orders. But, we have also to say that some of those orders that were awarded to us, there the customer rejected to change terms and conditions and apparently, there were colleagues of us in the market that had more risk appetite for us and those orders were then also given to competition. But that's fine, because of course, we are not in the order taking business, we are in the money making business. nd therefore, it's important to know that our backlog [ph] going in (05:47) 2018 is definitely much healthier than it was going into So that's on the equipment side. If we then go on the service side for orders, there we should not forget that quarter three was a very strong quarter for services with plus 15% growth. Now in quarter four, if you correct for currency, it's around 3%. So, if you add them together and correct for currency, it's around 9%. So in line, I would say with our ambition to grow our service business high single-digit. nd there is, of course, always a timing effect, we had last [ph] one in (06:33) 2016 quarter four, several LCS contract, Life Cycle contracts that came in at the end of the year, we got some of them not in quarter four 2017, but in January So just a timing issue and also for service actually January started off very strong. 3

4 On the consumable side, one important thing also to notice is that we expand in quarter three the margin pressure we had on consumables. We went to all our yearly contracts and there are some of them, I would say, a bit more than a handful, less than 10 contracts, where we are not happy at all with the profit performance and there we went back to customers to renegotiate significant price increases, some of them accepted, some of them only accepted in January, some of them we are still negotiating and hopefully, we can implement the price increase now in February. But also there, some of them decided not to renew and look for other alternatives in the market. But again, that's fine because that were orders where we were not making any money. So, that's on the order side for equipment and service. On sales side, plus 6% in constant currencies, I would say on the lower side, because of lower-than-expected sales for service. nd that has to do with constraints in our supply chain for service, in more particular for our cost part. We see challenges, as we also explained in quarter three, as well in our in-house supply chain, from our in-house foundries, as well as from our external supply chain. nd we have taken measures to improve the situation in inhouse. We have invested in extra capacity in our foundries and we see that extra capacity coming on board now and we see also that internal constraint easing up. So we are confident there that will be resolved from the shortterm. When it comes to the external supply chain, of course, it's more challenging, because there we are changing chasing suppliers to get priority and to get the stuff out of the door. But of course, there the real long-term solution is to look for expanding our supplier base. But of course, it's not easy to find a new supplier for [ph] crusher part (09:21). nd once you find it, it takes time before he's up and running, because you have to qualify the supplier, you have to make a first test batch, if they meet them all and so on, so it's a process that easily can take nine months to a year and we started with that six months ago, but that challenge is definitely not over yet. So the lower sales on service and in particular for those families, spare parts, and engineering to other parts, specifically for those family where we have higher margins is an important explanation for the low EBIT margins. nd then the second reason for the low EBIT margin is this continued margin pressure on consumables, as we explained also in quarter three, we have seen material price increases in our foundries already at the beginning of the year. We have tried in the first half of the year to increase prices, but competitive environment did not allow us to do that because apparently all the players in the market didn't see the same material price increases. That pricing pressure has eased up towards the end of quarter three. nd there we were able to increase prices, but, of course, orders taken in, let's say, September, October, it will only deliver them out seven, eight, nine months later. So, that price increase effect we will only see now going into quarter one, quarter two, perhaps even quarter three of this year. nd we also must say that, we were not entirely happy with the price increases realized in the market and, therefore, we have done another price increase and now at the beginning of this year. So, that explains the those are two main reasons I would say for the lower adjusted EBIT margin on the Minerals side. If you then go to Flow Control, I would say, a very good quarter. 19% order growth, 14% sales growth and an EBIT margin of 15.6%, on a level where we want to be. Of course, the comparison with quarter four 2016 was easier, because you remember that quarter three, quarter four 2016 were lower quarters. But, nevertheless, we are very happy overall with the performance of Flow, as well for valves, as for pumps, as well for equipment, as for service. 4

5 nd with that, I give the word to Eeva. Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj Thank you, Nico. Continuing still a few words on Flow Control, just want to highlight a change we have done that you remember that when we come out with numbers later in the year. So, as you well know, we had some changes in the Metso organization, how we run the business and that has impacted also our reporting to the extent that the Flow Control service business definition has been will be aligned as of January 1 to our new organization. nd then, this in practice means that with the current definition as of this year, services sales in 2017 would have been 227 million or 36% of net sales, and service orders would have been 243 million, so 30 again, a 36% share of the total orders. These numbers are available in our release, but just wanted to make sure that you take note of the change going forward. With that, moving to the income statement. So, Nico commented on the numbers included in operating profit. So, I would just highlight the profit for fourth quarter of 20 12million and 102 million for the full-year. Now, these both these numbers were heavily impacted by two separate tax issues that we disclosed already in December to the stock market. Firstly, while we disagreed with the transfer price conclusions made by the Finnish tax authorities for the years , we booked a full claim of 21 million, they are demanding from us. We will appeal, but we do expect the appeal process to take time. So, we felt that it would be more prudent to book it in this way. Secondly, as you are well aware of, there was a tax reform decided on in the U.S., this also had an impact on Metso. We have deferred tax assets in the U.S. that had to be valued with the new corporate tax rate. This affected our tax row with some 8 million. Now this item is obviously non-cash. However, I would still underline that the overall impact of the U.S. tax reform is positive for Metso, and will be it will be already as of this year. Nevertheless, with these two tax items, our effective tax rate totaled 44.6% for nd then, this led to earnings per share being 0.68 for the year and return on capital employed as such before taxes was 10.3%. Moving to the balance sheet, maybe just to highlight two issues visible in the numbers. The WERX acquisition, Nico already mentioned, has an impact. We have some 19 million of new goodwill now included in the books as of the year-end. On various rows of related to working capital items, you obviously see an increase in euros, as our sales growth is coming through and on these items as well. However, I'm happy that we did make some progress efficiency wise. So, the net working capital percentage of sales was 18.5% for 2017 and this is slightly below the number for Moving to cash flow. Firstly, looking at the sort of cash from operating activities, the big difference between 2017 and 2016 is obviously on the net working capital. We had we tied 23 million worth of cash in net working capital in 2017, and if you compare this to the release in 2016, the delta actually between these two years is 150 million, roughly speaking, and that obviously explains quite a big chunk of the difference in cash flow between these two years. dditionally, I would just remind everyone that in 2016, we the taxes paid row included some tax repayments from previous years. So, that level as such was below a more normal level, which you can consider this million to be more close to obviously excluding the one-offs I mentioned previously. 5

6 Net cash from investment includes CapEx and again the WERX acquisition, so this 41 million for the quarter and 66 million for the year. Free cash flow then, which includes cash from operations and the cost of maintenance CapEx that was 57 million for the quarter and 158 million for the year. nd then, maybe a few points still on the financial position, so just to highlight that our financial position continues to be very strong. Gearing at the end of the year was just below 2%. Net debt-to-ebitd is around zero and in the interest cover is [ph] 8 (18:16). Cash assets at the end of December were 673 million. nd with that, it's back to you, Nico. Thank you, Eeva. Then, the dividends, the board has decided to propose a dividend of 1.05 per share, on the same level as last year, showing also the confidence the board and we have in the future. nd, of course, some should one should also take into account that some of the items affecting the P&L are non-cash items and, of course, also reflecting our strong balance sheet. nd then, we come to the market outlook. Market outlook is on the same level as in quarter two quarter three, sorry. So, we expect the market to remain stable for Minerals equipment and services, and we also expect the market to remain stable for Flow Control equipment and services. bit of clarification, because sometimes this stable can be seen as negative. nd we say stable, we believe that Minerals equipment and services will stay on a very healthy strong level, but it will stay stable on that healthy strong level. The reason why we don't say that improving is that we still don't see the greenfield projects becoming concrete. There is a lot of talks about greenfield projects, but nothing concrete yet. nd that would be one of the drivers to change eventually the outlook. nd the same is true for Flow Control, we see very good activity in the market. [ph] Definitely also (20:04) with the oil price at a level where it is today, but we don't see a further improvement from a healthy level. nd with that, I think, we can open the floor then for questions. Juha Rouhiainen Vice President-Investor Relations, Metso Oyj Yes. Thank you, Nico and Eeva. Operator, now we are ready to take questions. 6

7 UESTION ND NSWER SECTION Operator: Thank you, sir. [Operator Instructions] We will now take our first question. Please go ahead, your line is open. Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Yes. Hi, Nico and Eeva, it's Klas from Citi. I've got three questions, please. Firstly, I want to come back to how price versus cost in Minerals can move as we go through the year, especially in the light of a further increase here on input costs. On equipment, you've done a big cleanup of the backlogs, so that should benefit you this year. But I'm thinking more about your discussions with customers on the new contracts both in services and in equipment. When you finally get these at better conditions, you will obviously take some time until they get invoiced. So, in short, how should price versus cost in your sales develop as we go through the year? Yeah. I guess, we have to make a difference between equipment and service; and in service, definitely we are going to make a difference between consumables and our wheel service business. On the equipment side, obviously, we have different aspects, we have the aggregates and the recycling. On the aggregates, a big part of our business also goes to distribution, and that is normal standard price increases that come in and are implemented and imposed through to distribution. nd, I would say something very similar on the direct business for aggregates, where we have no real issues to implement the price increases to the market. nd on the mining side, of course, it's always a project-by-project base and most of our orders we get on the mining side are really unique orders, and that is just a matter for every order that you price it at the right acceptable margin for you. nd also in 2017, margin has not really been the issue for our mining equipment orders. It was more the terms and conditions and the unfavorable terms and conditions. nd that is now what we have tried to improve in quarter four and what we will also continue to do in So, it's not really a matter of having difficulties to implement price increases. It's more the negotiation of the right terms and conditions, and that is important that we start doing that at quotation phase already. If we go to service and make the split between service and consumables or wear parts, service is the same story. There is no difficulties in increasing the prices for spare parts. We see good margin improvement also for our LCS contracts, because there it's where you price also according to the value you're at for the customer. The only real challenge where we see right, it's difficult to get the price increase in line with material price increases for consumables. nd, as I explained also earlier, we believe that we see material price increases earlier than some or most of our competitors, because we have this in-house supply chain for cost of material. nd so, we see that price increase coming into the foundries, and then all the way up to the sale of the final product. nd it looks like some of our competitors see those material price increases coming in later in the cycle and that gives us a little bit of a challenge. 7

8 The good news there is, like I explained before that, towards the end of quarter three last year, we were able to put more price increases through in the market. nd so, the orders we took as of quarter three have also better margins than the ones we took at the beginning of nd that will continue now also going into 2018 with another price increase. But, like I said before, the delivery time for these orders is six to nine months. So, an order that we took in September-October, we will only see the sales there in quarter two, perhaps even quarter three So, you will also only see those improvements on those margins to the full extent then later in Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Yeah. No, I understand that, but you say that the big price-cost pressure was really on the consumables, and I know that. But that's shorter lead times in route and you say that on the big orders pricing was never a problem, but now you talk about lead times there of six to nine months. So, that's a little bit confusing for me in terms of where do you see the price-cost pressure? nd it will turn up then in the second half. But was that on the big contracts or not? To be most clear, then hopefully, we only see the real price pressure on wear parts. So, on cost... Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Yeah....of wear parts. nd when I was talking about delivery times six to nine months, there's also there that we have the delivery times of six to nine months. If you take an order, for instance, an engineered part, delivery time is six to nine months. lot of our wear parts yearly contract orders are also with this type of delivery times. So, price pressure is specifically for wear parts, not on the equipment side. Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Okay. My second one is on bottlenecks in services looking at sales. How quickly can we debottleneck, i.e., when can service growth return there to high-single-digit? I mean, internal measures are seeing progress right now, but external is a little bit more difficult. Can we see a jump already in the second quarter, or do we have to wait longer into the year? Of course, we are working on improvements there already since the middle of last year. nd we also announced in quarter three different investments in our internal supply chain. nd like I mentioned earlier, the internal supply chain is easing up, and we are confident that there we will see good improvements on the very short-term. 8

9 On the external supply chain, short-term, the only thing you can do is, chase your suppliers, fight for priority and make sure that they deliver what you ordered. nd that's what we are doing. We have also reinforced their capacity to do that. But, of course, in parallel, we are also extending our supplier network with new suppliers. But like I said before, that takes time, that takes easily nine years nine months up to a year to find a new casting supplier. nd that initiative we also started second half of last year, but then it will not come in the coming months. It will take more time. nd then, realistically speaking, for those new suppliers to come onboard is most probably going to be somewhere in the middle of That will not that is not said that we will not see improvements, of course, we will see improvements, but those improvements come off from internal in case capacity and from increased chasing activities, let's call it like that, towards our existing suppliers. Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Okay. My final one, promise to be quick, is on the outlook, I just want to confirm something here. When you say stable, you say stay at strong healthy level, but what you mean is, we don't see the greenfields coming through. Should I then interpret it that the brownfields are seeing a sequential improvement? So, when you book 55 million of equipment orders, obviously, there were some orders getting pushed into Jan, but can we hope that we go from 60 million, 70 million underlying up to 80 million, 90 million, 100 million in 2018 on sort of a quarterly run rate basis, if you think that stable is brownfield up? Of course, it depends always with what you compare, and our forward statement is always looking for the next six months compared to previous six months. nd I think previous six months, so quarter four and quarter three last year, we have seen already good brownfield activities and we expect those brownfield activities also to continue on a similar high level now into quarter one and quarter two We have a very good pipeline of quotations as well for smaller projects as for bigger, let's call it, brownfield projects. nd we see now [ph] fair (30:08) stocks also around greenfield, but it's too early to be very optimistic on greenfield. But that does not exclude if tomorrow somebody would decide to reactivate some of those greenfield projects that we will not see orders already in s a matter of fact, if customers would decide to reactivate some of the greenfield projects which are already a little bit further in this stage when they were put on hold, we could already see all those from those greenfield projects towards the second half of 2018, but too early to say. Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Thank you. Please, Klas. Operator: We will now take our next question. Please go ahead. Your line is open. 9

10 Hi, yes. So, just the first question would be around the backlog for delivery. Obviously you show that your backlog for delivery has gone up sort of quite significantly, but only 85% of it is for delivery in So, I just wanted to check whether that was just due to phasing of orders whether you'd seen any customers sort of continuing to delay any of the deliveries. What was driving the fact that actually the percentage for delivery in 2018 is relatively low by historical standards? I don't know if it low by historical standards, I don't think that is the case. The 85% you talk about, I think, is a normal level, I would say, even that it's on a higher level than historical. But, of course, in our backlog, you remember that we mentioned a big order of a Russian customer in quarter three, I believe, yeah, of more than 100 million, that, of course, affects the backlog in an important way and the way that is delivered out. If the question on the backlog is more, if we have problems in delivering out, I can confirm that there is no problems, except for the service side, as I explained before. On the equipment side, we managed to ramp up our supply chain of factories to cope with the higher output. nd their supply chain or operational efficiency is definitely not an argument, not to get the sales. It's only on the service side, as I explained earlier. Klas H. Bergelind nalyst, Citigroup Global Markets Ltd. Okay. nd just a quick follow-up around the aftermarket business. I mean, we have heard from sort of other players generally that it's consumables are still tough from a pricing standpoint, it's hard to put up prices for older generations of products and it's only really new products that are getting good pricing. So, I mean, do you think the difficulties in putting up prices is just a timing issue, or do you think it's something more structural relating to sort of maybe some years of underinvestment in new products, or would you put it more just down to timing and raw materials? Well, for sure, new product developments helps to go away from, let's call it, the commodity magnet, and it's fair to say that we didn't do enough when it comes to new product development over recent years. We have also explained that in quarter three call, where we said that we want to increase our R&D spend in a significant way. We can reconfirm that, we have the ambition to say more or less double our R&D spend from 1% level up to somewhere at 2% level. If we have the money to do that, we have definitely the projects to do that, good interesting projects with good return on investment. The challenge is a little bit how to ramp up our organization, how to find the people to run those projects. So, in that sense also nobody should expect an overshoot and then go to that 2%, no, it will be more, they go from that 1% level over time to that 2% level. nd we want to do that as soon as possible, of course, because we 10

11 believe that it's really for us an important differentiator that makes us also long-term sustainable, successful, but we will see how fast we can do that. But that's more long-term. On the short-term, for sure, material price increases are for everybody. Everybody buys material in the open market. nd if material prices go up for us, they go up for our competitors as well. Then, there might be a timing issue when those material prices kick in and when those material price increases are then calculated into price increases, but again, we have seen also in the second half or in the last quarter of 2017 that pricing pressure easing up a little bit. But, like I said before, we are definitely not happy with the realized price increases so far. We believe, we have to do there also a better job internally and that's what we are taking in now and what we are also now addressing with another price increase beginning of this year. Okay. But the R&D increased R&D is to go into both, I would imagine, software, but also there probably is a requirement within the equipment and services business on effectively the core products, it's not effectively all R&D investment in new software, sort of future mining, preventative maintenance. It also is required in the core products, is that a fair assessment? It's mainly in the core products. So, it's mainly about new product development. Okay. Thank you very much. Please. Operator: [Operator Instructions] s a reminder, please state your name before posing for question. We will now take our next question. Please go ahead, caller. Peter Murdoch nalyst, Morgan Stanley & Co. International Plc Yeah. Hi, Nico. So, it's Peter Murdoch, Morgan Stanley. Can I start with the outlook? Sorry, just to come back to [ph] Lars's (36:47) point. So, the you say remain stable, but 4 is quite weak in terms of orders and you said January was better, has started off to a better quarter. Do you can you just comment about that? I don't know whether we should be expecting orders flat, they should be increasing next year? 11

12 Yeah. Of course, our outlook we give is a market outlook. So, when we comment on the outlook, we comment on how we see markets are developing. nd we said there that we expect the market in general to stay on the same high level, quarter one, quarter two this year, as it was quarter three, quarter four last year. I repeat, we see very good activity for existing business, smaller projects, brownfield projects. We see this activity in mining, we see that definitely in aggregate, we see that also in recycling, we see it also on the Flow side, that is on market activity. When your question is more on our orders received, there I explained two items on from equipment, why orders are our orders growth is slower than expectation, it's two things. One, the comparison with last year, if you take into account that there was a big order for aggregates from Thailand in there, which was a unique case, a little bit outside of our normal market which did not come back this year and makes the comparison difficult. nd then, the second thing was this negotiation of terms and conditions for mining orders, where, for most of those mining orders, we were successful in renegotiating the terms and conditions, but unfortunately, some of it slipped into quarter one 2018, mainly into January, some of it even into February. nd we're unfortunately or fortunately we also lost then some orders where the customer was not willing to change terms and conditions to what we found a minimum acceptable for us rather than the order was given to some of our colleagues in the market. Peter Murdoch nalyst, Morgan Stanley & Co. International Plc Okay. nd then, before you leave, Nico, I just wanted we're never going to get the new targets may be that you are going to instill. I just wanted your [ph] thoughts, final thought (39:21) on the margin the margin of Metso ending this year, what do you think a normalized margin is for this company? What you think as well in Minerals, what where would you say Metso should be reporting? If you can give any colors around that, that'd be interesting. Yeah. What we have said that in several occasions is that now with the creation of the new organizational setup in the seven business areas, we see and we are convinced that all seven business areas can grow organically faster than the market, that all seven business areas can have good potential to complement that organic growth with nice add-on acquisitions, and that all seven business areas can do that in a profitable way, meaning that we are convinced that all seven business areas can improve bottom line margins. We are also convinced that all seven business areas can show black figures. nd black figures not only from a profit point of view, also from an operating value-added point of view. nd in that respect, we have seen good progress already in 2017 for our equipment divisions. The challenge has really been now in quarter four and a bit also in quarter three. The margins on the service side, which have been disappointing, where we have now the full priority to get them up in Peter Murdoch nalyst, Morgan Stanley & Co. International Plc 12

13 Okay. But with all seven in the black, do you think longer-term, do you thing Metso is a 15% logistic just a word around that will be interesting. Yeah, okay. You're not going to get a figure out of me until, like you said, before I leave, also not after I left, but I believe there is good potential to significantly improve our margin. I think, there is a lot of self-help for us in our organization on operational side, further quality improvements, further operational improvements and definitely also on the way we do our price management. Some of it we can do on the short-term. Some of it will take longer, because the answer to some of the challenges is definitely new product development, because new product development, if you do it right, it will defend and improve your margins on equipment, but it will also defend and improve your margins for the aftermarket business. nd I think our new MX cone crusher, that is a very good example of the kind of projects we want to do more in the future. But obviously, projects we start today, you will only see the results in three years, four years from now, because the time it takes to develop the project the product, sorry, to bring it to the market and to get the aftermarket, you talk about three years, four years. But I think there is short-term things we can do. That should give us margin improvements short-term and that's more operational. nd then the real sustainable answer is the new product development and that it will only come in three years, four years from now. Then, market conditions of course, will determine, because I hope that the next quarters, Eeva will be able to say that our margin has been diluted, because of product mix, because that will mean that we will continue to grow in the next quarters faster with equipment and with service, which dilutes our margins, but which is a good thing long-term, because it means that we put more equipment into the market. If we put more equipment into the market, we have again more service potential then for the future. Peter Murdoch nalyst, Morgan Stanley & Co. International Plc Okay. Thank you, Nico. Operator: We will now take our next question. Please go ahead, caller. Jonathan Hanks nalyst, Goldman Sachs Hi, Nico. It's Jonathan Hanks from Goldman Sachs. Most of my questions have been answered, but I was just wondering in Flow Control, if you could comment on the demand you've seen within your U.S. shale expose valves business? I know that that's quite a depressed business, I'm just wondering if you started to see demand pick-up there at all? Yeah. We can confirm that we have seen a good high double-digit increase there. But so far, it has been mainly on the replacement side, not too much new business yet. nd when I say that we have seen very nice two-digit increase, one should not forget that the levels where we are today, even with that nice increase, are still, I would 13

14 say, below 50% of our peak levels of some years ago. So, there is still a lot of way to go to come back to the fantastic numbers of years ago. Jonathan Hanks nalyst, Goldman Sachs nd just following up on that, obviously that part of the that supply chain faced a lot of pricing pressure during the downturn. If you look at gross margins of that product versus, say, 2014, have they changed materially? I should look at Eeva, because I don't have the details to be honest on that level. Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj Well, I think the sort of the rapid drop in the market took place some years back, obviously. Obviously, took away a lot of the sort of inflationary pressure that had been sort of included in that as the ramp up had been pretty big. So, it's in that sense, we haven't really seen that much pressure. There's been ample opportunity to source sufficiently. But obviously, this pick up we're seeing is not seen only by us and I would expect that to have an impact and then also on the on also on the component side. But then again, obviously pricing environment should be better as well. So, we see them in that sense moving a bit more in the same direction. gain, I cannot compare this with... Jonathan Hanks nalyst, Goldman Sachs Great. Thank you very much....i cannot compare with years ago. What I can say is that the business we have today in that environment contribute in a positive way to our overall margin. Jonathan Hanks nalyst, Goldman Sachs Okay. Brilliant. Very clear. Thank you. Operator: We will now take our next question. Please go ahead, caller. Thank you. I would like to ask about the Minerals equipment profitability in We know that you had a 33 million overrun in 3, but if you exclude that, was Minerals equipment running a plus or a minus in terms of EBIT in 2017? 14

15 Yeah. We have the ambition to not to go into those details anymore in the future. But I know that my predecessor has commented on this, so you still have this you have the figures in mind for equipment. We can confirm that that is no longer the case in 2017 that we have seen very nice improvement there and that we are in black figures. Okay. nd then I would like to ask about procurement programs that you have been running. You have previously said that you targeted a 45 million saving in procurement costs for the year Did you reach this, is my first question? nd then do you have any thoughts for 2018 in terms of procurement? Of course, you can make different statements, because you can have savings. But if you only talk about savings and you don't talk about the cost increases, you might get to the wrong conclusion. nd for sure, we have had significant savings by different purchasing programs we had in the different business areas. But okay, it's a reality that we have material price inflation and we have salary inflation. nd if you take the savings and the increases together, we still have a net positive, so meaning a saving, but definitely not to the extent of the figure that you mentioned. nd that's also the reason why we have to make sure that we realize those price increases in the market. Okay. So, if I try to put these all together, it sounds to me like Minerals services margin will fall in 2018, equipment margin in Minerals may go up in 2018, and then procurement cost cutting will help, but to a lesser extent than To me, this sounds like Minerals EBIT margin will fall in 2018, is this a fair conclusion? I don't think this is a fair conclusion, but of course, it's your conclusion and every opinion is right in that aspect. I can only repeat what I said before, we have seven business areas. For all seven business areas, we have the ambition this year and that is also translate into the targets we gave the seven business areas to grow faster than the market organically, to complement that organic growth with the right add-on acquisitions and to do that in a profitable way. That means that for all seven business areas, the margin expectation for 2018 is higher than Then again, what that brings together in the mix, it all depends on how fast we grow equipment, first to service. We have said that we have the ambition to grow service high single-digit, if equipment grows less, okay, you should see also that margin improvement translated on group level. If equipment grows significantly faster in sales than service, okay, then you will get a dilution because of the product mix. nd again, we hope to have a project dilution because of product mix, because that would mean that we grow much faster in equipment than in service, and if we can then grow that high single-digit in service, that would be for us a good thing. 15

16 ll right. Thank you. Operator: We will take our next question. Please go ahead, your line is open. Manu M. Rimpelä nalyst, Nordea Markets Good afternoon. It's Manu Rimpelä from Nordea Markets. My first question would be on the terms and conditions that you talked about, so could you just give us some more practical examples of how you end up losing margin on the equipment contracts when you have bad terms and conditions and how will you change them in practice? Yeah. We can do that. I can give a couple general examples. Of course, in mining contracts, there is always penalties to be possibly paid; penalties for late delivery, penalties for non-performance, penalties for warranty. nd the magnitude of those penalties you define in your terms and conditions. nd something that is, for instance, for us completely unacceptable is that those penalties would not have a limit, because then, you gamble. That's one example. nother example, of course, is the if you sell something you want to get paid. So, it's good if your payment ideally is cash positive. That means that you get the money [ph] before (52:09) expense. nd there, again, it can be cash positive or it can be that you get the money only when you made all the costs, depending on the projects and depending on the type of customer that can be at very high risk. nd there, we have defined for ourselves, I would say, points of no return, points where we don't want to go over. nd if we go over those points then the terms or conditions the terms and conditions are for us not acceptable and then we have to go back to the customers and try to explain to the customer and renegotiate with the customer. nd most of the time, competitors have similar thinking because, of course, also competitors want to collect the money and also they want to limit their risk exposure. Then, it depends on how you judge and sometimes competitors have more risk appetite than us, perhaps sometimes it's the opposite, but those are couple of examples. Manu M. Rimpelä nalyst, Nordea Markets Okay. nd then a follow-up question on that, you mentioned that you see that the order backlog is healthier going into 2018 than it was a year-ago, but from what you're saying, it rather sounds to me that you had [ph] two large conditions on taking (53:25) in orders during 2017, which you only now really at the end of 4 have sorted out. So, is that fair to say that there is still risk for the backlog having lower margin orders than that you had now started taking with these new set of rules? 16

17 When we announced the 33.3 million extraordinary cost booking in quarter three, afterwards we got several times the question, is it this or is more to come? nd we have confirmed at different occasions and we can confirm now again that with the information we have today, before the project look today, we don't see any reason, any need to have an additional extraordinary booking in the future. In other words, we believe that with the 33 million, we booked the cost we have to book and the orders we have today in the backlog are in line with expectation. Manu M. Rimpelä nalyst, Nordea Markets Okay. Then the second question or third question would be on the can you just talk about your confidence in actually being able to pass on the price increases in consumables, because I mean, you kind of explained that you have your own foundries which makes you more exposed to raw materials. But then what have you seen historically that what is the lag in these type of situations, or is it so that the other players are just able to purchase the equipment or consumables from third-party suppliers and squeeze them on pricing, which mean that there will be kind of a constant lag from your side if raw material prices keep on going higher, as they still seem to be doing? Well, it's for sure that we see [indiscernible] (55:24) in our own foundries, which can also be an advantage because if you see it early, you can also anticipate price increases. Then, of course, how much price you get out of the market depends also on how competitive your offer is and competitiveness that are not in the sense of price, but competitive in do you have a better solution for your customer or not. We see that definitely today, many customers are willing to pay a premium for a longer-lasting wear parts solution or for higher productivity. We also see with material prices further going up, mines running at full speed that the appetite from the mining customers to try something, let's call it, something cheap or something new is lower. Mines today are really concerned, they want to run the mine, they don't want to stop. nd so, they also go then easier back to proven solutions and definitely, Metso in that aspect also for consumables, is a proven solution. Manu M. Rimpelä nalyst, Nordea Markets Okay. Final two housekeeping questions. Can you just comment on the tax rate where do you see it for this year and maybe 2019 given the U.S. tax change and the one-offs you had and then also thoughts around the cash flow and working capital profile? Thank you. No further questions. Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj Yeah, regarding the tax rate, Manu, so we would expect to be slightly below 30%. So then and this would then include the benefit we get from the U.S., so we would be lower than we have been. nd then your sorry, your other part of the question was, was it cash related to working capital cash flow and working capital, so... Manu M. Rimpelä nalyst, Nordea Markets Yes, cash flow and working capital. 17

18 Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj Yeah. So, obviously it I would say that the working capital is related to the growth rate. We are in this healthy market, we do certainly expect to continue to grow and that in the sense will put demands on working capital in absolute monetary figures, but we're certainly working quite hard with the with our various supply chain initiatives also on sort of ensuring that efficiency and the turns would improve. nd as we've discussed earlier, there is certainly improvement potential, especially in inventories in our case. So, it's a bit difficult sort of to commenting exactly as we are now obviously sort of trying to do expedite the sales growth based on the sort of fourth quarter disappointments. Then again, as such cash flow operational performance will improve, and then it depends. We will invest a bit more money in CapEx, but still below depreciation. So, the items as such there's no exceptional items, it really comes from the sort of operational performance, and then the sort of how much growth we will see. Operator: We will now take our next question... Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj Okay. nd I believe that's operator, still one question left. So, we could still take a final question. Operator: Yes. We have one more a question. Please go ahead caller, your line is opened. ndrew Wilson nalyst, JPMorgan Securities Plc Hi. It's ndrew Wilson from JPMorgan. I'm guessing kind of this will be a relatively quick one. In terms of the negative mix which you saw in 2017, you kind of flagged in terms of equipment versus service and clearly, bigger picture, that's a positive. I was kind of looking and hoping that you could try and quantify just sort of what we should be expecting to see in terms of 2018 versus 2017 in terms of and kind of what that'll actually mean for the margin in Minerals? I appreciate that's a difficult question, just trying to basically understanding if kind of how much of a drag that might be? Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj Well, I think we would be hesitant to give any formal guidance, but we'll see what was discussed earlier that an important point is obviously that the equipment business is in black figures. So, that's been one issue that we worked hard on. nd then the question obviously is that now right now we're not [ph] self-satisfied (01:00:11), especially with the services margin, so that will be a focal point. There is a difference and there will remain a difference obviously then, which has an impact on the mix, which is not un-significant as such. ndrew Wilson nalyst, JPMorgan Securities Plc Okay. That's helpful. Maybe if I can just tag one more on to the end. I appreciate the detail around the U.S. shale market and kind of oil and gas there and obviously, that pricing with the demand guidance as well. Maybe if I can just ask about the rest of the oil and gas exposure, because clearly we've seen some pretty dramatic recovery from the week second half in Is there still recovery to come in, I guess, the oil and gas exposure, which is not U.S. shale. My sense would be, there probably is something still to go for, is that a fair comment? 18

19 Yeah, of course, you should remember that when we talk about oil and gas, our valve business is only downstream and then very specific higher-end applications mainly into the refineries and so on. So everything what is midstream, downstream is not really affecting our business and you see the biggest change is, of course, midstream and downstream... Eeva Sipilä Chief Financial Officer and Deputy to Chief Executive Officer, Metso Oyj Upstream....sorry, upstream. That being said, downstream in our business we see good project activity in general as well in the western world as in emerging markets. We see also good day-to-day business with our extension of our distributor network, now we also believe we are very well placed to capture more of that day-to-day business. So, we are quite positive, quite optimistic for 2018 for our valve business, yes. ndrew Wilson nalyst, JPMorgan Securities Plc Thank you, Nico. nd good luck in the new job. Thank you. Juha Rouhiainen Vice President-Investor Relations, Metso Oyj ll right, everyone. s we said in the beginning, it's a busy day, so we have to wrap up this conference call here. Nico, any final words? Yeah. Perhaps, I can thank the audience for a good, but short cooperation over the last six months. I definitely enjoyed the interactions I had with you. nd perhaps some of you I might see now also in my new job, where I will start on Monday. That's where I only officially will start as CEO of 15th of March. For the others, I wish you good luck with the follow-up of what, I believe, is a very nice company, Metso, with a very good potential for the future. nd in that respect, I'm also very happy now that Eeva takes over as Interim CEO, because Eeva has been part of the team that put the new organizational setup together and is fully on-board when it comes to the strategy and the vision. So that's also important that in this transition, we will not lose momentum. Eeva will continue to push the new organization in place and that higher momentum in the organization. nd of course, I wish also Eeva a lot of success in this transition period. nd thanks again, and perhaps, see you in my new job. 19