Metso Shields Margins With Cost Cuts as Prices Set for Decline

Metso Oyj (MEO1V), the Finnish maker of rock crushers that spun off its paper-machines unit this month, sees falling prices as mining customers spend less in a “transition year,” Chief Executive Officer Matti Kaehkoenen said.

“Pricing will be tight,” Kaehkoenen said in an interview at the company’s headquarters in Helsinki yesterday. “We understand well that our customers need to lower their operating costs. Also, the fewer projects there are, the tougher the competition for them is.”

Metso, which spun off its less profitable pulp, paper and power unit into Valmet Oyj (VALMT) at the start of this year, is focusing on costs as miners worldwide put investments on hold. Metso began a 100 million-euro ($136 million) savings program Oct. 24 after cutting its full-year outlook a week earlier. The company wants to achieve most of the savings this year, with as much as half coming from improved sourcing of goods and services.

“We’ve got massive procurement programs under way, where we approach our suppliers,” Kaehkoenen said. “We’ve had reasonable success with it. There are no big individual measures that could solve the situation -- it’s about conducting thousands of small negotiations, product redesigns and other measures to lower the costs.”

Metso’s mining, construction and automation had an operating profit margin of more than 11 percent of net sales in 2012, compared with a 4.9 percent margin for the pulp, paper and power business comprising Valmet.

Investment Pick-Up

“It’s reasonable to believe that mining investments will pick up around 2015 and 2016,” Kaehkoenen said. “As deposits are getting poorer, mining companies need to dig deeper and process more to keep up production. For a technology provider like us, this is good news.”

As it waits for spending by the world’s largest miners, such as Rio Tinto Plc (RIO), to recover, Metso is preparing to spend “several hundred million euros” on acquisitions, according to Kaehkoenen. Metso plans to grow its services business and automation unit revenues especially in advanced oil and gas valves, he said. Finding suitable targets also affects the decision on whether it will refinance or repay its 200 million-euro bond maturing in June.

“Our normal housekeeping investments are not that much, between 60 to 80 million euros annually,” Kaehkoenen said. “Our balance sheet can still take on some extra debt.”

Revenue Decline

The company’s mining revenue is set for a “slight” decline this year after reaching 3.49 billion euros in 2012, Pekka Spolander, an analyst at Helsinki-based Pohjola Bank Oyj, said in a note to clients yesterday. Profitability will remain “good” even as part of the targeted savings may flow to customers through lower prices, he said, keeping a buy recommendation on the stock.

The break-up of Metso and Valmet was implemented almost nine years after Cevian Capital’s co-founder Christer Gardell and U.S. investor Carl Icahn first called for it, citing lack of synergies in the mineral and paper-equipment divisions. The split improves focus and transparency, according to Kaehkoenen.

“As the scope narrows, it reaches deeper,” Kaehkoenen said. “Transparency for investors also increases -- it’s easier to explain what these companies are about.”

To contact the reporter on this story: Kasper Viita in Helsinki at kviita1@bloomberg.net

To contact the editor responsible for this story: Christian Wienberg at cwienberg@bloomberg.net

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