Neles’ Half-year Review January 1 – June 30, 2020

This is a summary of Neles’ half-year review for January 1 - June 30, 2020. The complete review is attached to this release and is also available at  www.neles.com/results.

January-June in brief

• Solid underlying operative margins in the second quarter despite challenging Covid-19 pandemic situation
• Oil and Gas as well as Pulp and Paper projects remained active, the Services business and Maintenance, Repairs and Operations-driven (MRO) business affected by mobility restrictions and lockdowns
• Partial demerger of Metso was completed on June 30^th, share trading continuing under Neles name on Nasdaq Helsinki on July 1^st
• Neles Board of Directors confirmed growth strategy and mid-term financial targets on July 1^st

The partial demerger of the Metso Group took place on June 30, 2020, and the continuing operations renamed the Neles Group. Until the end of 2020, Neles Group will be reported as continuing operations and the demerged Metso Minerals business as discontinued operations (for the period January 1 – June 30, 2020).

In this Half-year Review, in addition to IFRS financial information, a comparable balance sheet and a cash flow statement are disclosed. Figures in parentheses refer to the corresponding period in 2019, unless otherwise stated.

Neles Group is reported as one segment starting June 30, 2020.

Summary of key figures

¹ Services sales include the sales volume from the Services business

² Includes HQ and support function cost effect of EUR +1 million in Q2/20 (Q2/2019: -1 million), EUR -1 million in H1/20 (H2/2019:

-2 million) and EUR -7 million in 2019.

³ Adjustment items amounted to EUR 5.6 million in H1/2020. Q2/2019 and full-year 2019 did not include any adjustment items. Adjustment items consist of carve out, rebranding, and establishing and restructuring costs for setting up independent Neles. See Note 10.

Creation of Neles on June 30th

Metso’s Extraordinary General Meeting on October 29, 2019, approved the partial demerger of the company. The registration of the completion of the partial demerger was executed on June 30, 2020. According to the demerger plan, the Metso Minerals businesses were carved out and combined with Outotec Group. Metso’s valves business forms the continuing operations and on July 1, 2020, Metso Group was renamed the Neles Group. Metso’s shareholders continue as shareholders of Neles Corporation. Additionally, shareholders received 4.3 new Outotec shares for one old Metso share as consideration for the distributed net assets of the Minerals business. In IFRS reporting, a gain of EUR 2,022 million has been recorded on the distribution of the Minerals net assets at fair value and is included in Profit for the period, discontinued operations.     

President and CEO Olli Isotalo: Solid performance in a varying market

During the first half of the year, the market activity was varied. We were successful in winning many important Pulp and Paper projects as well as Oil and Gas projects as evidenced in our increased order backlog. Our Services and MRO-driven business was negatively impacted by postponements in customers’ planned maintenance shut-downs, mobility restrictions and lockdowns.

In the second quarter, our profitability was negatively affected by a low sales volume, but we swiftly took actions to reduce our fixed costs and thus were able to deliver a solid adjusted EBITA margin. We paid increased attention to managing our net working capital, but due to low delivery volumes our inventories stayed high; however, we achieved solid cash flow for the second quarter. As part of the adjustment actions we looked at our cost base. Our actions included temporary lay-offs, salary reductions and permanent personnel reductions in e.g. the USA and Finland as well as measures to limit our external spending globally. We also optimized our cost base for our new independent status, for instance, by reallocating resources.

We completed the demerger activities and the launch of Neles during the second quarter. In addition to carve-out activities, we launched Neles’ new brand and values. Our customer promise, Reinventing reliability, emphasizes Neles’ values and our continuous commitment in supporting our customers as they improve the reliability of their operations and achieve better profitability and improved sustainability. This customer promise is underpinned by our deep knowledge of valve and valve control applications in customer processes, our services capabilities and our commitment to maintaining the market-leading quality and technologies in our products.

We defined Neles’ growth strategy and mid-term financial targets, and they were approved by our Board on July 1^st. Our target is to be among the leaders in the valve and valve automation industry by surpassing EUR 1 billion in orders received around 2025. This goal is supported by our plans and target to reach over 5 percent annual organic growth in the mid-term as well as targeted acquisitions to expand our product offering and market reach. We emphasize profitable growth by targeting an EBITA margin above 15 percent of sales. In addition, we are aiming to distribute 40 percent of our underlying net earnings as dividends, while investing in growth.

Market outlook

We expect the market activity in Pulp and Paper projects to continue on a good level.

Market activity in Oil and Gas projects is expected to decline from the good level in the first half of the year, due to overall economic concerns.

Market activity for Services and customer Maintenance, Repair and Operations-driven (MRO) business is expected to gradually improve from the suppressed levels in the first half of the year, as the mobility restrictions are expected to ease and customers’ operations to normalize.

The ongoing Covid-19 pandemic continues to create uncertainties and risks of abrupt changes in all markets.

Covid-19 pandemic update

The Covid-19 pandemic poses significant short-term risks and uncertainties to the markets. The spread and severity of the pandemic continue to be difficult to predict. Abrupt measures taken by various national and local governments to restrict the spread of the virus increase the unpredictability of the demand for Neles’ products and services. The pandemic-related mobility restrictions have impacted Neles’ operations by restricting Neles’ ability to provide services at customer sites as well as the running of manufacturing sites when lockdowns are imposed. These uncertainties are expected to continue in the second half of 2020 although, for the time being, mobility restrictions are being eased on many markets.

The situation has caused some slow-down in customer acceptances and deliveries of goods, hence keeping inventories high. So far, Neles has not experienced any material credit losses or cancellations of orders in the order backlog. During the first half of year, management took proactive measures to ensure safety of the employees and to control costs and preserve cash flow to protect Neles’ financial position. The measures included variety of enforced safety procedures in manufacturing sites, remote working and strict traveling restrictions, cuts on spending across the organization as well as cost saving and optimization activities. Increased attention was paid also to managing net working capital.

There is an increased risk that the pandemic will significantly deteriorate global economic growth, which together with uncertain political and trade-related developments, could affect Neles’ customer industries, reduce the investment appetite and customer spending, and thus weaken the demand for Neles’ products and services as well as affect the company’s business operations and profitability. There are also other market- and customer-related risks that could cause planned and ongoing projects to be postponed, delayed or discontinued.

Audiocast and conference call details

Neles’ President and CEO Olli Isotalo and CFO Simo Sääskilahti will present the financial results in an audiocast and a conference call for analysts and investors today at 2:00 p.m. EEST. The audiocast can be followed at www.neles.com/results. A recording and a transcript will be available at the same webpage after the event has finished.

Conference call participants are requested to dial in five minutes before the event on:

Finland Toll: +358 981 710 310
Sweden Toll: +46 856 642 651 
United Kingdom Toll: +44 333 300 0804
United States Toll: +1 631 913 1422 

PIN: 83484978#

Neles Corporation

Simo Sääskilahti, CFO

Rita Uotila, VP, Investor Relations

For more information, please contact:

Rita Uotila, Vice President, Investor Relations, Tel. +358 400 954141, E-mail: rita.uotila@neles.com

Neles is one of the leading providers of mission-critical flow control solutions and services for process industries. With our global team of experts and innovative solutions, we help our customers to improve their process performance and ensure the safe flow of materials. Neles is listed on the Nasdaq Helsinki in Finland and had sales of about EUR 660 million in 2019. Neles employs about 2,900 people in approximately 40 countries. Neles was created in the partial demerger of Metso Corporation, and trading in Neles stock started on July 1, 2020.

www.neles.com, Twitter.com/nelesflow