Metso Oyj (OTCPK:OUKPF) Q1 2024 Earnings Conference Call April 25, 2024 5:00 AM ET
Company Participants
Eeva Sipilä – Chief Financial Officer
Juha Rouhiainen – Investor Relations
Conference Call Participants
Elliott Robinson – Bank of America Securities
Chitrita Sinha – JP Morgan Securities
Klas Bergelind – Citigroup Global Markets
Max Yates – Morgan Stanley
Anders Idborg – ABG Sundal Collier
Christian Hinderaker – Goldman Sachs
Nick Housden – RBC Capital Markets
Vlad Sergievskii – Barclays
Mikael Doepel – Nordea
Erkki Vesola – Inderes
Juha Rouhiainen
All right. Good morning everyone. This is Juha from Metso’s Investor Relations. I want to welcome you all to this conference call where we discuss our first quarter 2024 results that were announced earlier this morning. As earlier announced this presentation will be held by our CFO, Eeva Sipilä, and this is due to some scheduling conflicts, nothing more dramatic than that.
Before we start the presentation, we have forward-looking statements that is good to remember. Also a reminder that we will have our Annual General Meeting of Shareholders after this call, so that’s why we try and limit the length of the call to 60 minutes. So, please ask questions, one or let’s say max two at a time so we can accommodate all the questions during the duration of the call.
Without further ado, I’ll hand it over to you Eeva.
Eeva Sipilä
Thank you, Juha. And good morning, good afternoon to all of you on my behalf. I’ll start with the highlights of the first quarter. Market activity was in line with our expectations and with what we guided in our market outlook in February. We saw the pickup in Aggregate activities. In Minerals, the activity levels were unchanged with equipment being somewhat muted, whereas aftermarket activity was healthy.
Operationally, it was a solid quarter in the sense that we were able to grow aftermarket sales on the back of the healthy backlog. Our adjusted EBITDA margin shows resilience despite sales being lower year-over-year and also cash flow, the development showed progress.
Moving to the first quarter key figures. In orders, we had a tough comparison and ended 8% down year-on-year, although sequentially growing over 10%. In constant currencies, orders were down 5% year-over-year.
Sales at EUR 1.2 billion were down roughly EUR 100 million or 9%, in constant currencies, 7%. Adjusted EBITDA in Euros was down only 5%, which meant that we delivered a 16.5% margin on our sales. This resilience is obviously something we have worked hard on, working with various structural business improvement topics over the past, but also supported by tight cost management in the past months. I will revert to the other key figures a bit later in the presentation.
Moving then to our segments. I’ll start with Aggregates. We were very satisfied with our order intake of EUR 365 million for the quarter, while down 6% year-over-year; this is a significant pickup from the second half of ‘23 levels.
The market remains below the unit levels of a year ago, and whilst dealer inventories have come down, we expect to see dealers focusing on reducing them further in Q2. But this order intake will give us some operational support in the coming months. With the EUR 300quarterly sales level, our end-of-year backlog gave us; it is a very good achievement from the team to deliver a 17% adjusted EBITDA margin.
In our Minerals segment, we saw similar two Aggregates orders being down year-over-year, but the EUR 997 million order and number for Q1 is growth on the previous year. We, received one bigger copper project order that we announced in January. Otherwise, customers’ slowness in making decisions in equipment continued and service orders were the key contributor for the order intake.
Sales in this segment are largely a derivative of the order intake of mid-last year, and the EUR 914 million levels is 68% made of services sales. Whilst this mixed supported margins, the overall sales remaining on the low side pulled in the other direction, resulting in the 17.5% adjusted EBITDA margin.
Then a few slides on the Group overall financials next. From our Group income statement, I would comment on a few additional lines. Net financial expenses are up year-over-year due to the higher amount of debt, but on similar levels as in the second half of ‘23. We have a bond maturing in Q2, so the amount of debt will decrease by almost EUR 200 million in the next month. Then again, relatively, that older debt has a lower interest cost compared to the more recent bonds.
Regarding taxes, our effective tax rate for the quarter was 25%, which is in line with that of last year’s levels. Earnings per share were $0.15 for the quarter both for continued operations as well as for the overall one including also discontinued.
Regarding our balance sheet, the total is slightly below that of the year-end, and the changes may lean lower receivables on the asset side and lower payables on the liabilities side. These both reflect slower sales, but also our actions to improve cash flow.
Inventories remain flat with the logistical challenges in the Red Sea and in Finland due to the strikes. We weren’t exactly getting much support to improve, but we have actions in place and do expect to yield results in lower inventories in the coming quarters. Net debt was down slightly to EUR 825 million.
Group cash flow from operations before financial items and taxes was EUR 158 million supported by profitability. The net working capital change was still slightly negative, but less than in the previous quarter, so for seasonally, usually a bit of a challenging quarter, we are quite satisfied with the cash.
Finally, on our financial position, so no change as such in the quarter. The second quarter indeed will be busier when we expect to pay out the first installment of the dividend assuming our AGM later today approves the Board’s proposal and then as well indeed what I mentioned earlier, the final EUR 197 million of our earlier bond maturing.
Now this we — did refinance already in November when we launched the EUR 300 million bond, and hence we have as you see from the figure on liquid funds, we have more than normal liquid funds awaiting this repayment.
Moving then to sustainability and our outlook. Good progress in delivering on our sustainability key performance indicators continued also in Q1. We are on target in three out of the four targets. In logistics, the CO2 emissions reduction is only 6%, which means that we have work to do to reach the 20% reduction target we have set for ourselves by 2025. Even if the number of shipments is slightly lower, the longer routes on some of these shipments do increase the challenge from a CO2 point of view.
Then to conclude with our market outlook. We expect the market activity on both the Minerals and Aggregates to remain at the current level. Previously we expected the Aggregates market to improve. This did materialize as you see from our numbers. So now we are expecting the market to continue at this level of activity.
With that, I think we are ready for your questions.
Juha Rouhiainen
Thanks, Eeva. Operator, we can now open lines for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. The next question comes from Elliott Robinson from Bank of America. Please go ahead.
Elliott Robinson
It’s Elliott from Bank of America here. I’ve got two questions. If I can just start with the first one, a quick one on the guidance. Can you just confirm that the guidance is it talking about activity levels on an absolute level in aggregates and mining? It ignores any degree of seasonality, for example. Thank you.
Eeva Sipilä
Yes. Indeed Elliott. We try to focus on the market outlook on the commentary that adds value to you to judge on the sort of underlying healthiness or activity levels. Obviously, we may occasionally comment on seasonality if that is something specifically relevant. But indeed hoping that this outlook sort of adds a bit more flavor than just the seasonal pattern.
Obviously, we have the seasonal pattern mainly in Aggregates in the first half versus the second half, much less so in Minerals.
Elliott Robinson
That’s great. Thank you for that. The second question is actually just to do with the comments that you made within Aggregates and Dealers. Could you just give us a bit more information on; did you say that you were still seeing a bit of destocking? Does that vary by geography at all?
Eeva Sipilä
Well, indeed, we’ve seen the dealer inventories being a — having a sort of dampening effect on demand since last summer, as you may remember. The dealers have been focused on taking their inventories down. Obviously, that inventory has come with a clearly higher cost from a working capital point of view due to the higher financing costs.
Clearly, we’ve seen progress and reduced inventories, and otherwise obviously, I doubt we would have seen such healthy activity in Q1 as we saw. But what I did mention is that it’s not sort of all gone. We do expect the dealers to focus on still, on their inventories and be a bit hesitant to add inventory as such because the financing cost, of course, the interest rates as we all well know, haven’t yet come down. So the cost remains something for them to be focused on.
But these types of degustation issues usually take a few quarters and it’s clearly has made progress. Obviously, there’s always an exception to the rule and things vary. Some are in better shape than others. But overall, it has been moving as expected in the right direction.
Elliott Robinson
All right. That’s perfect. Thank you very much. I’ll get back in the queue. Thank you.
Eeva Sipilä
Thanks.
Operator
The next question comes from Chitrita Sinha from JP Morgan. Please go ahead.
Chitrita Sinha
Good morning. Thank you for taking my questions. I have two, please. Firstly on sales, peers have also seen some weakness this quarter. I just wanted to ask how much of your Q1 sales performance was due to your own seasonality or broader industry trends that you’re seeing? And how confident are you in the run rate improving for the rest of the year?
Eeva Sipilä
Well, indeed. I think our sales really are a reflection of the backlog. I mean, we started the year with a lower backlog and hence then unexpectedly sales in both segments are reflecting that. In Minerals obviously as I referred to in my comments, of course, it’s not just the previous quarter, but it’s really the order intake of Q2 and Q3 last year that is visible.
I wouldn’t say there was seasonality, it’s really a derivative of that. I wouldn’t sort of be able to see any industry pattern. I think these are company specific. As we work with customers, obviously we work with their time schedules on the deliveries. There is a certain difference now when we have clearly less bigger projects and less POC, so more sort of complete contract billing type of things.
But they would be sort of in the course of, very ordinary variation. Now with the sort of improved activity in Aggregates, I think we’re comfortable on seeing our sales pick up. Then again in Minerals, we’ve seen a very stable market, clearly sort of health in the services, and that sort of service order intake usually obviously comes through quicker. That gives us visibility on this year quite well.
Chitrita Sinha
Thank you, Eeva. Then the next question is just on inventory. You mentioned some challenges to unwinding inventories this quarter. They seem to be higher than what we saw in December. What do you see as the cadence of this unwind through this year and next year?
Eeva Sipilä
Yes, I think we’re pretty flat in comparison to year-end or actually 12 months back. Obviously, there is a bit of inflation in these euro numbers if we compare it to the levels of 12 months ago. Volume wise we’ve actually made already some progress. It is a balance that we’re taking ensure availability in times where clearly sort of supply chains are impacted by geopolitical events.
Then in a way of balancing that, with clearly a desire to deliver better cash flow this year. The actions are in place and as I said we do expect to see results in the coming quarters and even if Q1 wasn’t as good a start as we originally perhaps planned. But inline more important of course that the actions are moving.
Chitrita Sinha
Thank you. Very clear.
Eeva Sipilä
Thanks.
Operator
The next question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind
My first question is on the Aggregates outlook. Obviously, the improvement came through as you expected for one quarter. Now you think the market will stay at the current level. On the order trends, in the near term, am I right to assume that you could see a similar sort of decline in orders in Aggregates year-over-year in the second quarter down mid-single.
You talk about continued destocking among dealers, you obviously met very easy comps thereafter, but just in the second quarter, and then around different geographies. Last time you talked about China, India, and Brazil improving on top of what I think was the normal seasonality we get in developed markets. How are the different geographies developing now as part of your forward-thinking? I’ll start there. Thank you.
Eeva Sipilä
Okay. Well, I wouldn’t want to go to a very specific quarterly guidance. There’s always a bit ups and downs. Obviously, as this first quarter, comparisons were tougher in both segments for that matter. The comparisons do get easier as the year moves forward. Then again, our outlook is, we base it on a sequential view going forward, because we think that’s more helpful for you and your colleagues rather than comparing year-over-year.
I think our message in Aggregates is that indeed we saw the pickup and that’s important. We are in that sense, on a healthier level. But it is important to understand that we are below last year’s levels when one looks at the sort of market. We don’t expect that to change in the coming weeks, which is basically what we’re talking about in your reference to a question of Q2.
Here, we would need sort of, clearly a bit more strength on the macro and perhaps interest costs and funding costs of our customers or dealers turning the corner.
Then to your question on, did I get it right on the sort of more from a global point of view and how this varies? Clearly, the North American market is relatively strongest in the sense that the underlying demand there on infrastructure is very visible. Now as we enter the construction season, we clearly see a dealer stock for that.
We have seen the rest of the world improve. I think Europe is the weak link. I’m sure, you know as well as I do on all the challenges we have with the European economy. Obviously, that’s something that I think we’ve said already for a few quarters that we don’t really expect Europe to improve in ‘24, and unfortunately, nothing has happened that would change our mind on that.
Then we’re really focused on the sort of opportunities we have in Asia and South America. As an example, India right now is entering election season, so Q2 probably will be a bit sluggish there because the country is very focused on running the election process. But, that’s then more of a quarterly issue. Then we would expect the economy as such to deliver opportunities in the second half of the year.
Klas Bergelind
Thank you, Eeva. My second one is on the service orders in Minerals. Ex-currency they are not far from the very strong level of last year, and they’re obviously always seasonally stronger in the first quarter because of these maintenance contracts.
Or if there’s something else, your life cycle penetration coming in better than expected, and so forth. Did we see any early signs of restocking that might be too optimistic? I’m just curious about what drove that sort of again very strong Minerals order intake on the service side. Thank you.
Eeva Sipilä
Yes, sure. I think the main driver is really the production focus of our customers. As you’ve seen, metal prices have actually improved especially copper which is important for us and hence there is indeed a lot of focus on making sure operations are running well, and that obviously builds for a healthy environment for our aftermarket business.
We had a very tough comparison indeed, because last year we had a couple of bigger more, one could say sort of CapEx like orders in the mix. When the slowness on all the bigger decisions is there, that obviously was not there. This really comes from a lot of smaller deals and then really speaks for the underlying activity levels.
Klas Bergelind
Thank you. And then very quick final one is on the margin performance and Aggregates. Don’t get me wrong 17% is a very good level and bad read peers. I appreciate that the level of equipment sales is very low which has seen under absorption. Was there any normalization of price cost in the quarter where costs were perhaps higher still against lower pricing in the P&L?
Eeva Sipilä
I think we’ve done a very good job of balancing and really focusing on our margins, so that we are sort of balancing our cost development with the prices that we drive in the markets. And really that is visible in our margin.
Indeed as you say, obviously, we do have a bit of – we lack some operational leverage in the business because of the volumes on the equipment side being lower. But, then I think we’ve really well compensated by sort of not being very hungry, hungry on the margin side to protect that.
Klas Bergelind
Thank you.
Eeva Sipilä
Thanks.
Operator
The next question comes from Max Yates from Morgan Stanley. Please go ahead.
Max Yates
Good morning, Eeva. I just wanted to ask a question on the Minerals margins and obviously, you’ve done a good job this quarter keeping them flat despite sales declining. If I think about where sales will probably end up for the full year, I think they’ll be around flattish. Do you think in that environment you can continue to keep kind of the margins of the Minerals business flat? I guess the reason I’m asking this is obviously one of the things you’re going to try and do during the year is reduce your inventories.
I’m just wondering whether we should expect any impact to come through on the margins that would be of any size or substantial that we should keep in mind. Or is that not really a concern for you and you think you can continue delivering these kinds of flattish or even slightly higher margins in Minerals, if sales kind of flatten out or even return to growth in the second half? Thank you.0
Eeva Sipilä
Thanks, Max. Indeed we have worked for our margin targets, and hence we are definitely sort of driving for improved margins in Minerals. This year we will be supported by the aftermarket heavy mix. It really is then a question of driving sort of optimal cost actions on the equipment side. Obviously, project execution matters.
We’ve made good progress in improving the gross margins and in our execution and those elements of course are very important for this year as well. We have in the Minerals side the sort of benefit of having pretty good visibility on the sales. In that sense, we can obviously plan our actions on that.
So, indeed we’re comfortable that we are moving in the right direction in the Minerals. We sort of realized that there is a lot of focus on us being able to demonstrate a margin improvement there, and that’s what we’re very focused on. Then, of course, we sort of the external market may make it easier or more difficult for us, but it’s really around the self-help that we’re focused on.
Max Yates
Okay. I mean, maybe if you can just, as a follow-up to that, give us a bit of a feel for kind of the self-help that is going on in the background. Because I think, obviously it’s been some time since we had formal cost savings targets with the synergies plan after Routematic.
I know there’s ongoing work that’s happening behind the scenes, but is there any way you can give us a feel for the kind of one or two things that you’re doing behind the scenes structurally on the cost base in Minerals? I’m thinking about what helps us get that kind of step up from these margins towards that 20% level. Anyway, you can quantify what kind of benefits that may generate either this year or in the next two to three years. Thank you.
Eeva Sipilä
Sure. On the aftermarket side, I mean, it’s not even behind the scenes because we’ve sent out press releases. You’ve seen several actions taken on our aftermarket footprint. We have decided to close our foundry operations in the Czech. We have decided to close a rubber factory in Sweden.
Both of these have been announced and are ongoing, basically in the next couple of months, will sort of seize. That obviously gives us, then certain benefits on what we have been working on with sort of more optimized footprint cost and also sort of improve the utilization rate of what we have ongoing.
Then we’ve been focused on expanding our service networks. We just opened the service center in Australia last month and obviously have made that investment with a very focused business case, and focused actions to be able to grow our presence in a very key mining market. There are a few other ones in the pipeline still under work.
So that, I think they are certainly very concrete things as part of this. Then on the equipment side, it’s really this gross margin focused on procurement savings, efficiency and overall project execution and delivery execution, and those actions continue.
Max Yates
Just to try and push you on any kind of quantification in any way we could frame the size of the impact? Or is that difficult to do at this stage?
Eeva Sipilä
Well, we haven’t commented on individual actions. Obviously, as I said in some of the press releases, you get an idea of the magnitude based on a number of personnel affected, and these types of things. But, overall it’s all done to improve the margin. I think the ultimate measurement is and should be the Minerals segment margin going forward.
Max Yates
Okay, great. I’ll get back in the queue. Thank you.
Operator
The next question comes from Anders Idborg from ABG. Please go ahead.
Anders Idborg
Hello. Just a question on the sales in the deliveries in Minerals. I mean, obviously quite a low number, down about 25% and well below where orders have run for the past year. What was behind this? Was it customers deferring delivery? Was this a surprise to you or was it — how deliveries were scheduled?
Eeva Sipilä
Not a surprise. I think as, and I obviously appreciate you only see the backlog number as such. We obviously kind of see how at time-wise sort of is distributed over the months and the years, and as I said, bearing in mind that, of course, part of the Minerals backlog is also for the next years, for the ‘25 and 26.
I mean, yes, a few days less in March. I wouldn’t write big stories. Easter comes every year, and it just depends a bit on if it’s Q1 or Q2. So of course, a few days of aftermarket business lost, but again, nothing really on that in a big way.
I think it’s really just the sort of what we have in the mix. As I said, we have less POC. Obviously, POC would usually be a bit more sort of stable. When we have more complete cost billing that, of course, means that we need to be fully ready. Then the sort of timing in this sort of small and medium-sized business does vary. It sometimes, just goes between the quarters. So yeah.
Anders Idborg
Okay. That’s good. Just to verify in terms of your backlog and what you deliver now in Minerals, does that now fully reflect a favorable price versus cost situation where you had been able to sort of price those contracts? I mean, even a few quarters ago, we talked about some legacy contracts still flowing out. Do you still, would you say that what we have now is representative basically going forward?
Eeva Sipilä
Yes, I would say what we demonstrate is representative. Obviously, execution is like safety. You need to excel on it every day in a way. But I think the overall, really the sort of legacy sort of coming from dating back prior to merger time and that starts to be pretty much done. Then obviously what we have is something in the discontinued operations, some of those legacies.
But when we think about the Minerals segments, I think rather representative, but as I said it’s really about sort of building also the processes and ways of working, so that we ensure that we do continuously improve. There we have work ongoing, but moving in the right direction.
Anders Idborg
Sounds good. Thank you.
Eeva Sipilä
Thanks.
Operator
The next question comes from Christian Hinderaker from Goldman Sachs. Please go ahead.
Christian Hinderaker
Good morning Eeva. I want to start maybe on the margin in Minerals. I think the service mix was up from 59% to 68% year-on-year, but the margin was flat at 17.5%. Just want to understand, I presume the comps now are comparing like-for-like in terms of the central costs that have been absorbed into the business. I guess, mindful of what’s driving that margin resilient, but clearly the service mix improvement, one might assume that margins were up on an annual basis. I’ll start there.
Eeva Sipilä
As I mentioned in my starting remarks, the balance in a way of that higher service mix then vis-Ã -vis the fact that indeed sales were a bit low. That does create a certain pressure from the more fixed costs, when you think about our R&D type of costs that are distributed on a sales number that’s not growing. But, other than that, there’s really nothing one off or that type of thing. A bit of a slower start for the year.
Christian Hinderaker
Thank you. Maybe just thinking about capital allocation. I think in your AGM release, you’ve confirmed the scope for a potential buyback, if I’ve read it correctly, 80 million shares. I just wonder, how do we think about that in terms of your capital allocation framework? What would be the balance sheet position or market environment that we might see something like that? Also happy to discuss M&A within this context. Thank you.
Eeva Sipilä
Sure. Indeed the Board is requesting from the shareholders the approval for a certain buyback capacity. That request is not a new one. It has been in the previous AGMs as well and then used to varying degrees. What we’re seeing now in the market is actually quite attractive growth opportunities.
Whilst we see that there’s a short term impact from the macro and a bit of hesitancy. The medium-term outlook on, for instance, copper is very attractive. The pressure in a way to extract more Minerals to support the energy transition or the data centers or what have you in the sort of, from the big copper consumption point of view gives us opportunities to grow Metso, and hence for instance, these service center investments expand our footprint in key mining areas is something that we believe that will provide better returns to shareholders.
Hence we were quite eager to drive them forward. There is also certain insourcing ongoing or I didn’t yet mentioned the Mexican filter factory construction, that’s ongoing as an example of that. Then indeed M&A, we did three smaller deals last year. We have a pipeline with several opportunities also as we speak.
Certainly, I’m hopeful that we will be able to close a few of them this year as well, because they’re quite nice adjacencies that we’re looking at fitting well to our business mostly. Of course, rather small businesses, but a few sorts of ones where it also matters, and this sort of new risk environment and a new geopolitical reality, of course, has led us to also think about our supply chain, what we insource, what we outsource, and this type of thinking. Well, I may also be visible in our M&A, assuming sort of things move forward.
Of course, it’s not the easiest market for the buyers and sellers to agree and we have our requirements and our criteria that we stick to. We’ll see how successful we are. But, certainly sort of be it, as I said on the organic or non-organic where we are as management working very actively. Then ultimately, of course, it’s for the board to have their view and their say on that. Are these more attractive from a shareholder point of view than buybacks or can we do both.
Christian Hinderaker
Thank you.
Eeva Sipilä
Thanks.
Operator
The next question comes from Nick Housden from RBC. Please go ahead.
Nick Housden
Hi, thanks for taking my questions. My first one is on the cash flow. Obviously a nice improvement here year-over-year. I was just hoping you could give us an indication of how you expect this to develop as we move through the year, and maybe what some of the main moving pieces are in terms of backlog deliveries and networking capital movements. Thanks.
Eeva Sipilä
Sure. Obviously, the backbone is profitability, and our focus is to be resilient on that even if the outlook is a bit more challenging as discussed. I still think that there is — we’re being focused on the aftermarket business is good at a very cash flow generative business. That mix is supportive with the sort of — lack of bigger projects.
Obviously, there is no really bigger advances, the operative cash flow is very much then relying on our actions, really on the inventory side. As I said, we’ve seen the payables and accounts receivable trend sort of quite logically, and I think we’re on a pretty okay level. They do trend with volumes, whereas in the inventory as I said we do think we are without sort of affecting the availability, without sort of sacrificing growth, we actually have some extra opportunity and that would be the focus then on, but by doing it in a balanced way.
I don’t remember if it was Max or who was kind of referring to the inventory being sort of, risking sort of profitability. Certainly, we don’t see sort of write-down issues that we would have the wrong type of inventory. We just feel we have a bit too much of it. Hence we absolutely focused on dealing it with in a balanced way and one that sort of also from a shareholder value point of view, a meaningful way.
Nick Housden
Okay, great. Then turning to the Aggregates margins, I mean, 17% in a fairly significant downturn is quite an impressive performance. I’m just wondering how much operating leverage is still in that business.
The cycle, hopefully improves in the coming quarters. I appreciate you’ve taken quite a lot of cost out of the business and you’re expanding the footprint in India. But, it just feels like unless there’s no operating leverage in the business, then as the cycle does improve, that margin should be moving much more into the upper teens.
Eeva Sipilä
Well, indeed. If you look back at relatively recent history when we had a bit more operational leverage, we did deliver an 18% margin. Obviously, we are down even if I think we’ve been running faster than anything else, but still, the lack of volume obviously has an impact.
Of course, this is not unexpected as I said, I think we’ve had a pretty clear view of the market and we’ve taken action very early and now with the Q1 going, it is going very much as expected. Of course, that gives us that visibility and helps us to plan and really manage the operational leverage.
Indeed, the task would be slightly easier if there was a bit of a pickup in the European economy. As I said, we’re not assuming it this year. It’s not something we’re counting on.
Nick Housden
Great. Thank you.
Operator
The next question comes from Vlad Sergievskii from Barclays. Please go ahead.
Vlad Sergievskii
Yes. Good morning. Thank you very much for taking my two questions. Both of them will be on gross margin. Let me start by highlighting that, obviously a gross margin was, I think, record high this quarter, which is a very good result despite the material decline in sales. What do you think was behind such a big drop in the cost of goods sold to make it happen?
Eeva Sipilä
Well, I would say Vlad it is that sort of work that I referred to earlier, really managing our margins in a way, and balancing what the cost of goods coming in versus price. Then also focus on procurement, specifically in the Minerals segment. There’s been a lot of activity on that side and really improving how we work with the supply chain in a focused way.
Because at the end of the day, in a way, we want to continue growing R&D and in that sense, we want to have the opportunity to also invest in SG&A, and putting that together with the target of improving margins, it does mean that the gross margin really need to be the focus and that there needs to be improvement there to show the improvement also on the adjusted EBITDA line.
Vlad Sergievskii
That’s clear. Thanks very much. Can I also ask about the potential impact of the plant inventory reduction on gross margins going forward? Because when I look at your inventory composition, it looks like the biggest opportunity to reduce is on finished goods. If you start selling more finished goods, wouldn’t it mechanically potentially have a less favorable impact on the absorption of costs of goods sold?
Eeva Sipilä
Well, I think it’s sort of — indeed this absorption is related to how we’re able to run operations. Then inventory, of course, is out of operations already. If we’re able to move that further then it can potentially add on, obviously, than if it means that we need to reduce activity in our operations to push a bit more inventory through rather than fresher deliveries.
Then, of course, your question is — or what you’re referring to could materialize. And as I said that’s really a balance that we’re working on. As such we believe and feel that we have a strong balance sheet. There’s no urgency. The market is certainly relatively healthy, and we’re taking the inventory actions in a very balanced way.
But it is, in some cases, it’s also a balance between those two. Then it’s just a question, okay how do you plan it? How do you then take costs out, so that sort of under absorption doesn’t impact the margins?
Vlad Sergievskii
Thank you very much. That’s very clear.
Eeva Sipilä
Thanks, Vlad.
Operator
The next question comes from Mikael Doepel from Nordea . Please go ahead.
Mikael Doepel
Thank you. Firstly, coming back to the question on Aggregates and the margins there, you said you did 17% with weaker leverage compared to last year when you did 18%. Was just wondering based on a comment there, I mean, it seems as if this should more or less move up the quarter rather than downwards.
But just wondering, should we see a 17% margin as the sustained floor level, or is there any reason to assume weaker margins in the second half of this year, maybe driven by mix or something else? Could give some comments on that?
Eeva Sipilä
Yes. Obviously, in Aggregates, we have that three to four month visibility which is clearly shorter than in Minerals. In that sense predicting the outcome of the second quarter from a volume and hence operational leverage point of view will be, is somewhat challenging. I mean, we will be wiser on it, because I said it is partly now a reflection also on the macro and the financing costs and the dealer inventories on that.
But, I think the structural issues we’ve done obviously help support, indeed the seasonality of the business, means that there can be relatively speaking slightly less volumes in the second half versus the first half, depending really on the market activity and the order intake in the coming months.
We certainly have a lot of work ahead of us to run on this level. I think this is truly a very good achievement for the team. But, of course, success builds success. It’s also seeing what we can do and how we can act and trying to manage that, but without giving any exact promises on how the quarters will look like. But I think we’ve come a long way in building that resilience, but there is always an element of mix and then as I said, this sort of market can of course, still take turns that we don’t see today.
Mikael Doepel
Right, okay. That’s fair. Then my second question is on your selling pricing in general. If you could talk a bit about that, what actions you took in the first quarter? Is there any other actions you need to take now based on inflation? I mean, you talked about some index pricing on parts of the consumables business, maybe in Minerals and maybe also on the project business.
Are there any hikes that you’re doing in the service business? Are you lowering prices on some of the equipment business? Just to give some flavor on how you see the overall pricing picture out there right now and what kind of things you are doing.
Eeva Sipilä
Sure. Obviously entering into this year we saw ahead in inflation in the area of labor and that has happened. Maybe there is, the overall economy slowing has meant that in some areas there’s a bit less pressure on salary and wage inflation. Still obviously in many countries, the salary levels were lagging the inflation in the previous couple of years. There’s a bit of that catch up. That’s something we were very focused on making sure that we do ensure that is visible in our pricing, what comes to areas where that labor component is heavier.
Again, I think this is going as planned. It’s obviously no surprise to our customers either. Everybody sees the same in the areas where there is a talent shortage. It’s just important to be ahead of the curve in a way and be alert to it.
Then obviously there’s clearly less inflationary pressure in certain other areas, specifically in China. I would say it’s a rather deflationary environment. Of course, then balancing our procurement to areas where we can find opportunities at the same time and then making sure that we also are able to price the value we provide to our customers. I think that just rather requires a lot of tight discipline and daily management.
Mikael Doepel
Okay. Thank you very much.
Eeva Sipilä
Thank you.
Operator
The next question comes from Erkki Vesola from Inderes. Please go ahead.
Erkki Vesola
Yes. Can you hear me?
Eeva Sipilä
Yes, I can.
Erkki Vesola
Yes, still continuing on Aggregates. Just for modeling purposes, could you provide us at least a verbal description of the Aggregates of European sales division between different parts of Europe? I mean, say, between North, South, and Eastern Europe? What kind of demand outlook differences do you see between these regions, if any?
Eeva Sipilä
Well, Europe has been a rather heterogeneous basket for the past couple of years. Indeed we do see differences in different parts of Europe. Overall Nordics continue to be the weaker area. The construction market here, also on the infrastructure side is muted. It’s perhaps slightly better coming from very low levels, but still on weak levels.
There was a lot of activity last year in France related also to the Olympics. Obviously, now everything for that is built and in that sense ready. There’s been a bit of slower demand there. Then again, it’s still on a healthy level, but I would say that was at a very high level last year.
Then, overall, I would say that less changes in the other parts, be it Central or Eastern or Southern Europe as such. Indeed it does, there is a clear link to the overall economy and as we know, the European economies are slightly in different stages. So there’s some difference there.
Erkki Vesola
Thank you. Then could you provide a little bit of info where your exposure is the biggest in the Central European countries?
Eeva Sipilä
Well, I think we’re relatively well present in all of the main markets. One could, of course, assume that relatively our home market is well covered by Metso. But, that whole market has been on low levels for a couple of years already, obviously. We have focused on other areas. We have a – I would say a generally good foot print in the Eastern European countries. Obviously, there’s still an opportunity for us to grow and strengthen our network.
Erkki Vesola
Okay. Sounds very good. Thank you so much.
Eeva Sipilä
Thank you.
Juha Rouhiainen
All right. Thanks, everybody for participating and asking questions. This conference call concludes now and we are getting ready to welcome our shareholders to the Annual General Meeting. For everybody, we wish good day and speak soon. Thanks. Bye.
