Metso Oyj Chief Executive Officer Matti Kahkonen said he’s resigned to just breaking even in the market for manufacturing mining equipment as the Finnish company’s emphasis switches to offering more profitable services.
Like other mining-equipment makers such as Sweden’s Atlas Copco AB and Sandvik AB, Metso has seen a steep decline of orders in the last three years as a global slowdown reduced demand and prices for minerals. Costs at factories making gear such as grinders and cable-belt conveyors will be reduced as Metso ensures operations don’t lose money, yet remain ready for any pick-up in orders, the CEO said.
“Our cost structure has got to be such that we’re not going to make any money, but we’re also not going to lose money,” Kahkonen said in an interview at the company’s Helsinki headquarters. Essentially, selling mining equipment should be a “break-even business,” he added.
In the absence of mining equipment sales, Metso is switching emphasis to sales of services and flow-control equipment, which together now represent some 85 percent of revenue, according to Kahkonen. Demand for services could increase by 5 percent to 10 percent a year, and Metso is still only maintaining one-third of the equipment that’s operating in the field, leaving plenty of scope for growth, he said.
At the same time, demand for grinders and other machinery has fallen by more than 70 percent from the 1.4 billion-euro ($1.6 billion) boom year of 2011 and the company only received 45 million euros in equipment orders in the first quarter.
“The first quarter ended up at a very low level, but one cannot draw the conclusion that that is a new normal,” Kahkonen said. “The new normal is somewhere around 300 to 400 million annualized, as we see it today.”
The stock dropped as much as 3.4 percent in Helsinki trading, valuing the company at 3.9 billion euros. Before today, the stock had declined 9.4 percent in the last 12 months, while the OMX Helsinki 25 Index had risen 18 percent.
Metso also makes flow-control products like valves and pumps for customers that include refineries and petrochemical facilities. The oil price crash isn’t deterring it from expanding into the exploration and production market that’s been the hardest hit by investments cuts, according to the CEO. On the contrary, the time may be ripe for such a move.
“From an acquisitions point of view it could be a good time to look at those companies,” Kahkonen said. “Upstream is beaten up badly right now,” he said, referring to the oil exploration and production market. “That doesn’t mean it will be beaten up forever.”
An ideally-sized acquisition would carry a 400 million to 500 million-euro price tag, he said.
“I would still sleep well at night if we’d go up to a billion, as a ballpark number,” Kahkonen said. “If a bigger deal would be needed, you might have to go to your shareholders and ask for more money, because you shouldn’t leverage your balance sheet too much.”
Improving profitability in services and flow control is essential to Metso as it strives to reach a 15 percent margin target set in July last year. In the months following the announcement, the oil price more than halved.
“It remains to be seen how badly flow control will be hit” by the oil price decline, Kahkonen said.
So far, the main effects have been longer decision-making processes, and delays to projects. The company currently has annual equipment sales of some 150 million euros to the oil and gas industry.
While the effects of lower oil investments won’t be nearly as dramatic as the mining-equipment slump, Kahkonen said that the market development since July last year “hasn’t made it easier” to reach the margin target set for mid-2017.
“We are sticking to that target, absolutely,” the CEO said. “We are working hard on that. Then time will tell how close we will get.”