Metso Outotec Corp (OTCPK:OUKPF) Q2 2022 Earnings Conference Call June 22, 2022 6:00 AM ET
Company Participants
Juha Rouhiainen – VP, IR
Pekka Vauramo – President, CEO & Chairman
Eeva Sipila – CFO & Deputy CEO
Conference Call Participants
Klas Bergelind – Citigroup
Magnus Kruber – UBS
Will Turner – Goldman Sachs
Vlad Sergievskii – Bank of America Merrill Lynch
Antti Kansanen – SEB
Juha Rouhiainen
Hello everybody. This is Juha from Metso Outotec’s investor relations and I want to welcome you all to this conference call where we discuss our second quarter ’22 results.
Results will be presented by our President and CEO, Pekka Vauramo; and CFO, Eeva Sipila and after the presentation, we’ll be taking your questions.
And during the presentation, we’ll be making forward-looking statements and this is why we the disclaimer in the presentation and we also try and wrap up this call in 60 minutes or so.
So with this introductory words; I’ll be handing over to Pekka. Please go ahead.
Pekka Vauramo
Okay. Thank you, Juha. Welcome to this call. [indiscernible] start with the results, then Eeva will go through financials and I’ll then finish off with the strategy, sustainability and outlook and followed then by Q&A.
But going into the second quarter results, really we see strong activity continuing in the mining market. This was the case in, in second quarter and right now we don’t see a change in that regard going forward as well. Aggregates market — aggregates is more of a local business. Therefore the markets are also behaving somewhat differently. North America is continuing very strong with its softness in European market which started from the war and now of course all the consequential things including potential recession in Europe. So that’s why we are a little cautious on aggregates in Europe.
But really strong order activities, solid sales growth also during the quarter and then the profitability which continues to improve. We do have a major currency impact on the results and those altogether EUR 34 million on group level during the second quarter compared with last year and that of course the numbers somewhat.
Sustainability, we’re taking good steps forward in that one, both booking orders for raw positive products and establishing launching new products and technologies to that area and thus we announced in last week we have booked a non-recurring charge now or provision for Russian wind down and restructuring costs and of course that’s now booked in the second quarter results as well.
But then looking at numbers, orders really strong growth, 18% on comparison, which was already very, very strong comparison a year ago as well. Solid sales growth as well, 28% altogether and trusted EBITA EUR 155, 20% — 19% growth in that one as well and this naturally includes now all the currency related things this EUR 155 million.
So that takes the March into EBITA margin to 12% and operating profit negative there of course, the impact of the e EUR 150 million. Charts for Russian wind down and restructuring is visible in that figure. And cash flow, as we have communicated earlier, we are ramping up our deliveries at this moment and supply chain naturally requires capital at this moment and therefore the cash flow is not as it has been. During the previous 10 or 12 quarters, very strong but now we are returning to, I would say seasonally typical numbers when the volumes are growing rapidly.
Looking at the segments, aggregates delivered a strong segment. Altogether orders remain flat. We have to remember that a year ago, that was a rebound from the COVID lockdowns, we which are really record level order bookings in last year and if we put that one against this year’s number, I would say that this is a very, very good performance also from order’s viewpoint in the aggregates.
North America continues strong. We saw equipment orders declining 6%, services growing by 17%, which is a good result and continuation of positive trend in that regard. Sales grew nicely to EUR 368 million and this was naturally coming from the backlog more than from the orders and services share now in aggregates altogether of 35%.
Trusted EBITA EUR 48 million margin of 13.1 and this is also including the negative currency impact and then another area which where we are not yet through all the adjustments that we need to do because of the inflation consumables that’s contributing in a negative way to the margins. Well, that’s below the average margin levels in sort of aggregates and similar impact there is also in the minerals site, but work continues there in consumables as well.
Minerals orders, very strong growth equipment orders growing 44%, services growing nearly 30%, sales growth in equipment site, 63%; services growing 14% and this natural does have a mix impact there. Services share now was 59% while a year ago, it was 67%. At trusted EBITA EUR 103 million comes to margin of 12.7%. Here again, a negative currency impact included in this one.
And naturally the margin was impacted by the mix in this quarter, but after all, it’s positive that we can deliver equipment. That’s the future potential for services any anyways and similarly, the sort of low performing area was really consumables. Consumables and we have discussed already before many times what the reason behind and what the dynamics behind the consumables is. We are starting to be through all of that, but still in this quarter, we had that was sort of a low performing area for us.
Metal segment, low orders compared with very strong orders. Last year, we, on the other hand have a very strong backlog and pipeline is strong in metals as it is in minerals as well. So, we are not concerned about the sort of order levels. In this quarter, we really didn’t have anything major that we booked in the metals during the quarter. The biggest orders were sort of range of EUR 20 million or so.
Sales EUR 117 came from the order book, mostly services share declining to 12% because of we are really so busy with the equipment side that service doesn’t get now. Full attention as is out. Trusted EBITA is EUR 11 million, margin EUR 9.3 million. There’s also a minor negative impact from the currencies but since the EBITA EUR 11 million is so small. So we didn’t calculate what the actual there is, but we are tracking very well with the turnaround target that we do have for metals.
In Russia, we announced last week, Monday, the EUR 150 million charge, nonrecurring charge to cover the wind down costs and restructuring of Russian organization. That restructuring is ongoing as we speak. We will complete it during this year. This year, the rest of it as we wind down the business.
Our deliveries to Russia in the second quarter were EUR 67 million and if you remember, we had end of first quarter, EUR 215 million of order book left for non-sanctioned customers and out of that EUR 215 million, we delivered EUR 67 million in the second quarter. It was really slow start of deliveries because of sanctions coming in multiple waves within few days from other end and it was a very moving target before the situation sort of calmed down somewhat and that gave us windows to continue some of the shipments to Russia.
We of course wrote off the Russian backlog, which was the impact of that one and the order backlog was EUR 380 million at the end of the two.
And at this moment, I’ll hand it over to Eeva, and then I’ll come back after a few slides.
Eeva Sipila
Good morning, good afternoon, on my behalf, and apologies, I have a slightly lower voice today. Regarding the income statement, our CEO already commented on the operative performance and as the negative currency impact in our adjusted EBITA so large in the quarter, I’ll start with a few clarifying comments on it.
Now we are a global company operating with all possible currencies. So currency volatility is something we’re used to. We don’t usually bring it up too much as there are positives and negatives going from one quarter to another. We have for years had a proven policy of hedging the margin of bulk incoming orders. Only part of this is under IFRS hedge accounting. Most of the product business is non-hedge accounted, resulting in a different treatment as per IFRS. This hasn’t changed.
What has changed is that our order back is be significantly up. So any currency volatility in design environment comes with a multiplier, and we certainly had volatility in the quarter. US dollar strengthening in as much — as such as immediate term positive, but with the Euro falling into par since 20 years in one quarter, it certainly creates a big mark-to-market loss in the books.
The interest rates between Europe and US jumping and divergent creates an additional negative impact. Then we had high depreciation in many key mining market currencies due to both job politics and their local political situation, South America leading this trend, which again hit the books.
So whilst I sure no one on the line expects FX volatility to disappear, and it’s just perhaps good to appreciate that the impact in one given quarter was higher than we’ve ever seen it and by a big margin, which is why we wanted to be very explicit about it.
But then coming back to issues closer to our business, so Pekka mentioned the pre-announced charge of EUR 150 million that was booked as an adjustment item under group items. So outside of business segment reporting, this means it is visible in group EBIT and pulling basically the quarter to also EUR 113 million. And just to remind everyone of the size of the Russian business plus earlier, it represented some 10% of sales in 2021.
Another illustration is perhaps that if our published order intake growth, year-over-year was 18% excluding Russia, the Q2 of last year to get better comparability considering that zero figure in this Q2 that. So to the quarter growth, actually, would’ve been 25%. So just don’t speak to the strength on the overall market and our ability to adapt to the new geopolitical situation and really sort of focus on business elsewhere.
The tax row shows rather low ETR for the quarter, please pay attention on the first half figure of 28%, which is more relevant than indicating on what we expect for the full year. The big charge made the underlying figures so small that very small items and swing the tax flow in this quarter and as we get back to more normal levels, this impact will disappear.
Moving to our balance sheet; so total assets are up almost EUR 600 million from the beginning of the year or EUR 300 million from Q1. Now, inflation is actually a pretty big impact here. A significant part of the higher inventory of values or accounts payable is price and effects. Volume growth impacted is bigger due to work in progress increasing with the mentioned order backlog, but that alone will not explain this higher price, receivables or similar reflecting higher sales and prices.
Not surprising as such and we have been cautious on this year’s cash flow, but still I think seeing the impact on our net debt on the right hand side is visually quite strong. However, our balance sheet remains very strong. So with a tight focus and comfortable, we can weather the market dynamics.
Cash flow for the quarter is impacted by the big charge. Now, finally the outcome of how much of the cash impact will be, is still not clear. We would expect to be able for example, to resell some of the inventory. But now we have not made any assumptions. We have treated it as cash neutral in the cash flow. So it doesn’t impact the EUR 50 million you see in this table as the outcome of cash flow from operating activities before financial items and taxes. Now that being neutral, it does mean that the quarterly cash flow obviously wasn’t much to write about.
Now we do want to continue to grow in the current active market and does tie working capital in our business. But naturally we do need to be very focusing on ensuring our cash balance is not compromised.
On the financial position, so a few elements to highlight, we extend maturities of some roughly EUR 100 million of debt by drawing on the last year signed Nordic investment bank loan, and then repaying private placements, which reached their maturity end. Then the first part of our dividend for 2021 was paid in May. Again, I think we’re almost EUR 100 million there as well, but those are really the bigger swinging.
And here I actually leave it, hand it out back to you, Pekka.
Pekka Vauramo
Okay. Thank you, Eeva. A few slides about our development regarding strategy sustainability and then finally the outlook. As you know, we do have the review of the metals business underway. We are expecting to complete the review, but within this year, and then we’ll move on in implementation, which of course depends on the final outcome of the review.
But as you saw, business has developed favorably and outlook for metals is good as it is and strong as it is for minerals as well. So I think we have many options and alternatives how to move on with the metals, but we’ll come back to that one when we are ready with our review.
Market is very active for M&A as well. For us, there’s nothing major in the pipeline, but small M&A cases we do have. We announced during the quarter acquisition of Tesab Engineering in Northern Ireland, and we acquired it at the end of April and its now I think it closed at the same time when we signed it and the integration work is ongoing.
There’s a great synergies within Northern Ireland with the earlier acquired McCloskey business out there and we’ll continue to have those both plants in there, but we do some product transfers between the plants, both ways and that will simplify and streamline the production and will get the cost synergies from that one.
We also completed divestment of metals recycling during the quarter and that was a lengthy process, but it’s done now and now we continue then with these three segments that we have left.
On sustainability, we continuously launch new things and promote our planet positive offering consisting of more than hundred different products or technologies. We also taking steps to reduce the CO2 footprint of our own operations. We are looking at our supply footprint as a part of our strategy work going forward and there of course logistics and related CO2 is one of those things, as well as availability of green energy in various regions and markets and we also published the sustainability linked finance framework recently.
The planet positive highlight really was a first full planet positive combination order that we booked during the quarter. This includes the high pressure grinders and worthy mills and with this kind of technology, the energy consumption in communion is reduced dramatically from the traditional crusher and horizontal mill solution.
We are also working actively to launch new products, new solutions in all of our areas. And we are tracking our planet positive sales. These are their only right hand side, bottom of the slide. These are rolling 12 months numbers for last year for the situation at the end of February and situation at the end of May and you can see that our planet positive sales is really growing, growing at the rapid rate, as we promote the products and as we launch new products to that area.
And then we already discussed the elements of the market outlook. We expect market to remain at the current level with the minerals market and then aggregates market declining slightly and this mainly comes from Europe this cautiousness on aggregates market, but with this one we are ready to Q&A.
Question-and-Answer Session
Operator
[Operator instructions] Now, our first question comes from the line of Klas Bergelind of Citi. Please go ahead. Your line is open.
Klas Bergelind
First I want to start on the FX impact. I get the part with a head that is fully reverse [ph] as you invoice more out of the backlog. But I am assuming on the operational part, other EUR 17 million. Lots of mining currencies came down sharply. This hit you by, I think, half of that EUR 34 million, it was volatile quarter, I guess, this part normalize here into the third.
Could you comment about how you see things now, to what extent we should add back this totally impacting or if we see any negatives also into the third? Thank you.
Eeva Sipila
Sure Klas. So well, I think there’s really many, many moving elements, but maybe the sort is good to understand that there is an operative loss element in those FX hedges coming from the forward points. And obviously as we saw such a big jump in interest rates and that kind of element is what we were partially referring to.
But then of course the main point of the FX hedging is really that it does create a timing hedging when it’s — when it’s not hedge accounting as per IFRS and certainly that we expect to see then the coming — in the coming quarters, when reversing now, then obviously the mining — key mining markets, currency volatility, when it is apparently really reflecting their own political environment not only the sort of general risk aversion of investors from sort of more out of more emerging market currencies.
It’s of course hard to predict which way it goes, but I think we’ve certainly seen changes and we operate in South America for decades, and we certainly seen very big changes now and in one quarter. So in that sense, perhaps a bit more optimistic that we don’t see a similar quarter, but again, your guess is as good as mine obviously on yeah, which route those currencies take.
Klas Bergelind
Yeah. But, just confirm half of it was basically backlog hedges. So as you’re invoicing that half, should at least normalize with high deliveries.
Eeva Sipila
Yeah. It’s a rough rate, 50-50, but just to sort of make it rather easy for you. So certainly sort of we’re comfortable that that half is absolutely timing and then but then just to indicate that it’s there, a sort of real settlement obviously from those forward point in that regard is we’ve lived in so zero interest rate environment class for so long that I think most of us go how things work when we have inflation and interest rates. So yeah.
Klas Bergelind
All right. My, second one is on aggregate and the outlook Pekka; pretty clear that Europe construction is softening down. I think the messaging has been clear from you here at various investor conferences and at the pre calls. Could we talk about the forward guide in relation to other regions? U just want to make sure that you’re not seeing any weak demand at the exit of the quarter, also North America into the third and elsewhere.
Pekka Vauramo
Yeah, we had a very strong finish of the quarter in aggregates order. So, no weakness in that regard. Out there, China has been slowish all along this year, starting already last year. Last year, the super [ph] segment active, but all the others less active in China. India has remained the same as it is, but North America continues probably stronger than ever before.
Klas Bergelind
Okay. No, that’s good. My final one is on the cash flow. You didn’t have if I understood it correctly, a big impact on the — from the China lockdown. But despite this, the working cap hit, this is quite big. We know the demand is strong, but we’re also hearing all lead times easing, if you could comment on how we should think about networking cap into the second half, what do you see bottleneck easing, which should perhaps free up some cash flow?
Eeva Sipila
Well, I wouldn’t perhaps celebrate all things getting better. They I would agree with you that they’re not getting worse and hopefully we don’t have any other sort of external shocks impacting the supply chain. Partly the working capital is this inflationary element in it and of course we do see some of that sort of settling down as well.
So we are more optimistic on the networking capital development that it would tie us as much in the second half, really, as both from that sort of volume and price point of view, but we’re still sort of cautious because you see our backlog, the rate of orders that we took in, obviously there will be a lot of work in progress going, and we do need to work around availability and ensuring our customers a decent lead times and that is unfortunately requiring some additional inventory just to make sure that we don’t have a stoppage for a very, very small something missing. So it’s really about all the time between these two.
Pekka Vauramo
Yeah. Our networking capital is naturally also dependent on large orders and down payments relating to those and we in fact, we booked only one larger order during this quarter. So it really depends then on timing of the future major orders as well.
Operator
Thank you. And our next question comes from the line of Magnus Kruber at UBS. Please go ahead. Your line is open.
Magnus Kruber
Hi, Pekka. Magnus here. A couple of questions for me. Minerals saw a decent margin progression year-over-year, adjusting for the FX impact to supply cost inflation and adverse mix. Could you add a little bit of color on what you saw specifically on price cost and mix respectively on a year-over-year basis? How does that sort bridge look on the margin side and what you expect into the second half?
Pekka Vauramo
Eeva, can you take that one as well?
Eeva Sipila
Sure. So to say obviously the mix, if one speaks of the sort of share of services versus equipment is going from a margin point that even to a negative direction still right in the shared services in minerals was only 59% in the quarter. But of course now we’re seeing good growth in the orders. So it be better balance going forward, but what we’ve seen sort of so far.
Then I would say that on the sort of price element certainly is significant, and that we’ve been working, working very, very hard on that also to sort of to really balance the increasing cost and I would say that overall we’re quite happy with where we are when we have such a sort of quick spikes and certainly the war caused a lot of very sort of big turbulence and it is very hard to sort of be prepared for that type of volatility and end up being a bit late in pricing and clearly in some of the areas where we have longer lead times, it has an impact, but we’re certainly happy with how we’ve been able to push overall, I would say the productivity of margin development on the equipment side.
Because some years back with this heavy equipment mix, I think it would’ve been — the margin would look different say. So I think there’s been a tremendous good — amount of good work from the team on really on that.
Magnus Kruber
Okay. So as it stands now, we shouldn’t expect any broad base difference from what we’ve seen in Q2 into the second half from this point of view.
Eeva Sipila
Yeah, I think again, so then your guess is as good as mine on sort of what happens on the inflationary front finding. We’ve seen some settling down but of course it’s still, I would say it’s quite jittery, so it’s difficult to sort of call it sort of which, but that’s kind of the sense and of course, if that eases, it would — that’s the kind of, I would say the base case, we would assume, and then said somewhat sort of stronger growth coming through than in the aftermarket going forward.
Magnus Kruber
Okay. Got it. Thank you. And then also with respected outlook for mining at the moment, of course you reiterate the solid activity in the market, but, typically you start to see a weakening in orders when prices comes down but, of course the past couple of years hasn’t been normal either. So is there anything specific that you would like to call out that suggest that order activities will remain high in the face of weaker pricing?
Pekka Vauramo
Not really yet in this price levels that we see currently. Currently there’s of course, another other side that we need to look at, this is also the inflation and that at one moment of point in time might sort of take some of the projects or postpone some of the projects, but metal prices are still very supportive of investments.
And maybe if they remain roughly on this level where they are today, they are still, on higher than a pre-pandemic levels where, and maybe the war in Ukraine will be seen as a sort of short lived price peak in price afterwards, the price is return to roughly on the same, still relatively high level. So this is this is currently how we look at the things and our proposal pipeline is very much supporting this one as well.
Magnus Kruber
Got it. Thank you. And just one final bookkeeping question with respect to the geographic exposure of aggregates. Could you sort of give us some broad based help on how that stands now?
Pekka Vauramo
North America, number one, Europe, number two, India, China, three and four in that one and Europe and North America, they represent some 70% of the business altogether.
Magnus Kruber
Perfect. Thank you so much.
Operator
Thank you. And our next question comes from the line of Will Turner of Goldman Sachs. Please go ahead. Your line is open.
Will Turner
Hi everyone. So I’ve got a handful of questions. My first one is on the aftermarket order intake. Obviously, it was another quarter of very strong growth and yet this is despite obviously a period where most of the large listed minors have disappointed on their production growth.
So I was wondering, what’s been the driver behind the order intake growth in the aftermarket. Is it customers stocking still on spares and parts or they’re using this production down times, do servicing and can we — could we expect to slow down at some point for the aftermarket business?
Pekka Vauramo
Yeah. I wouldn’t sort of say that customers would be stocking. Of course, supply chain is an issue for everyone, but and that customers possibly would like to do more stocking, but the capabilities to deliver into customers stock are also limited. So, that’s not the reason.
I’m sure that we are seeing some demand coming from the pandemic lockdown times. So some pent-up demand coming from there. Then very high brownfield activity in mining in general and in our cases some of these brownfield activities visible in our service numbers. We have the modifications and upgrades as a part of a part of our service business. They very often include major labor component in addition to engineering component and sort of a supply part and it’s been always part of our service and that’s partially driving the demand as well.
Then, of course pricing does have an impact in service topline growth as well, as well, mostly through our consumables, because there the price pressures have been the highest, but also in the rest of the services.
Will Turner
Great. And is it possible to kind of quantify how much is the pricing? Is it high single digits, low double digits?
Pekka Vauramo
Great variety between the different business lines and it’s rather complicated to come up with an average for the entire scope of services that we have. We have not published that number.
Will Turner
Okay. And you mentioned only one large order in 2Q but the pipeline is still supportive of good activity. How are you seeing the outlook for large orders? Are there many on the pipeline for the second half and like where do you see those orders coming from?
Pekka Vauramo
We have I would say typically for this type of cycle, typical amount of larger packages, but I would be very cautious with timing, because some of these orders, we forecast for forecast every quarter to come in and then they just happen to come when they come. There’s lot of guesswork relating to that one, but we are in final negotiations in several bigger ones.
Eeva Sipila
Okay. Great. And then, but maybe just to add on that. So I think it’s maybe a underlying that the strength of the minerals order intake is really from the sort of smaller medium. So, because it was just that one and it is a very strong number indeed. Especially if you take into account the comparison I mentioned that one would take sort of without Russia, so sort of last year’s number.
So, I think that’s kind of the type of business we’re seeing and maybe something that also good for you to sort of assume continuing as well.
Will Turner
Understood. Great. And then just my final question when we read through the risk in the interim report, you highlight uncertainty around supplier’s ability to deliver and obviously into the scenario, you may have some contractual penalties, if obviously this impacts your ability to deliver.
And then also, obviously within inventories, a lot of the inventory build-up is from price increases as mentioned earlier on in the call, how is the — is there a risk at all with your current order backlog, especially the ones where you have a fixed price that you struggle to deliver in the second half because of a supplier or because of suppliers having to push through extraordinary prices, which you weren’t originally agreed to when you first won an order?
Eeva Sipila
Well, I think we’re more highlighting the risk from availability point of view. Basically we do have contractual agreements with suppliers. So, it’s not a one way suite on starting them sort of mid delivery to raise promises. I think everybody’s just say to that, you are sort of hoping every morning that you don’t wake up to somebody having a fire or another sort of COVID stoppage of transportation because that’s the type of things which are obviously difficult to prepare for, and that’s maybe more where we really talk about ability to deliver.
And obviously when we talk about big packages, everything is needed for a final assembly and whilst one in this type of environment, I don’t try to put some sort of leeway and buffer time in a way to get things on site, obviously there’s things can happen. And that’s something really to sort of on a very continuous monitoring from our delivery teams on day by day basis, that everybody is up to speed and there is no sort of external sort of shocks.
Will Turner
Okay, great. And there isn’t anything that’s particularly concerning at the moment or deterioration versus the first quarter?
Eeva Sipila
No, I think so. Having sort of survive the sort of immediate impacts of the war, and then obviously the China recent lockdowns. I think, things do look a bit a bit better now, but obviously as we all know the sort of there’s no certainty on that. There wouldn’t be new lockdowns in China, for example. So, I think it’s just has been sort of very continuous monitoring required.
Operator
Thank you. Our next question comes from the line of Andrew [ph] of BNP Paribas Exane. Please go ahead. Your line is open.
UnidentifiedAnalyst
Thank you. Hi Pekka and Eeva. First on your adjusted EBITA growth from EUR 131 million to EUR 155 million year-over-year, despite you have this loss of EUR 34 million, that implies that your organic EBITA contribution is EUR 58 million, which corresponds to an organic operating leverage of 27%, which I think is quite good given supply chain issues and cost inflation.
So does this mean that you’re now able to more than offset cost inflation with cost saving, sales growth and synergies and is there any reason why your organic drop through should not stay strong also in the common quarters?
Pekka Vauramo
Yeah, obviously I think what comes to my mind first is the mix development, a mixed development that is something, we need to pay attention to, but our service volumes are growing nicely and it’s almost like a progressive growth as we have seen. Maybe they are levelling off now on a level where we currently are and stand, but depends very much on mix where we end up with that one. Any other views Eeva?
Eeva Sipila
Yeah, no, I think Andrew such, I think your analysis is correct that I think the challenge in really what we’ve seen in the past, sort of three quarters I would say is really on kind of being quick enough with pricing to react, to sort of changes in the cost environment and the cost environment really having sort of had more volatility than in a long time for these very many exogenous shocks.
And so I think as such, we we’re quite happy with our ability to sort of run behind and sort of behind or be at the speed of that moving train and I would I would think it would it would get a bit easier. I think we’re at in certain areas that the limits were not where not in all industries. The customer demand will and maybe will ease some of it, some of the inflation or pressure then for those of us working in environments where we’re still sort of, obviously the environment is sort of more benign.
Pekka Vauramo
The business that we need to clearly improve is our consumables business. We’ve spoken about it so many times in this one as well. And if you remember, end of last year, the fourth quarter performance, we were hit really surprisingly high and rapid cost increases, freight chances, energy, raw materials, all came in like a major tsunami at that moment.
And then if we look at our sort of supply chain throughput time, we should be now through those most difficult times and current costing and pricing is based on new normal levels and we’ve worked at the same time with our lifecycle contracts, where there’s always a delay with even though there’s price review points negotiated and more frequent ones negotiated, but there is always a slight delay, but we should be through the most difficult time in that one and that, of course, I think translates into organic drop through as well.
UnidentifiedAnalyst
Sounds good. And then as you cancelled your Russian order book, could you please help us to better understand how sales will develop in the second half of this year? Maybe give us a number on how much of your backlog is expected to be delivered in H2 this year, compared to the corresponding number last year, or how will the cancellation of the Russian battery impact your safe level in H2?
Eeva Sipila
Well Andrea at this point of year when it’s only six months to go, so of course most of the backlog is well into 2023 and 2024. I think the best indication perhaps is that kind of looking at the sequel sequential development to demonstrate now between Q1 and Q2, excuse me, and obviously we as our service or aftermarket order intake has improved for the past couple of quarters, that’s slightly sort of more shorter lead time. So that kind of — that helps. So I would expect us to gain to be able to show some growth, but really partly limited by the availability of components. So not expecting sort of dramatic changes in the sequential development.
UnidentifiedAnalyst
Okay. Thanks. And then lastly straightforward question on FX, based on today’s spot rates, what should we expect the FX impact to be on EBITA in Q3?
Eeva Sipila
I haven’t looked at what they are today. Sorry. It busy kind of things, but I think as if things kind of hold and we don’t see sort of further appreciation of the dollar or further depreciation, then obviously things should be kind of net sort of net zero, but of course again some reversal i.e. positive if they would move back, but that’s kind of by and large, but as said, now I’d compare sorry, yesterday’s rates with quarter and close directly.
UnidentifiedAnalyst
And the net zero comment. That includes the operational losses of as well — just on the hedging side, it’s including just…
Eeva Sipila
Yeah. I think that’s maybe the trickier part is said for a couple years, we didn’t really have to worry so much about interest rates and for points and hence the modeling obviously needs some brushing up. We have now seen obviously ECB move on the interest rate as well, and I guess it is that helps if everything moves in the same direction, it’s a divergence that that makes it and that makes those losses typically sort of and become bigger and that divergence obviously was there in Q2 when different central banks taking different type of action at different times.
UnidentifiedAnalyst
Okay. That’s great. Thank you very much. Have a good summer.
Operator
Thank you. Our next question comes from the line of Vlad Sergievskii of Bank of America. Please go ahead. Your line, is open.
Vlad Sergievskii
Yes. Good afternoon and thank you for taking my several questions. I’ll start with the one on the working capital components. A pretty sizeable EUR 100 million increase in contact assets or Euro. Would you be able to comment on the nature of this increase and this is specifically linked to some Russian projects where you book revenues, but basically can invoice clients. That’s the first one.
Eeva Sipila
Yeah, I think that item is now impacted by the EUR 150 million charge. So basically in order to make it net neutral. So it’s visible in the networking capital number and specifically in that element. So I think I would have nothing more to state on Russia business today, other than where sort of winding it down as much as we can. And we have made the charge on what we assume is the final outcome, but obviously we’ll be a bit wiser in the coming months.
Vlad Sergievskii
That’s great. But if I to clarify then with regards to this, the bridge between your unadjusted and adjusted going, would it be fair to say then if, until renewable related to Russia going up, that you booking some of the Russian revenues in your recurring earning and then effectively taking out the provisions and treating it as nonrecurring would, would it be a fair kind of statement or I’m missing something here?
Eeva Sipila
Well, with the charge, we have basically sort of written down operative assets and that really was the impact that we wouldn’t have them. So we are looking at the total outcome. Obviously there is each project, there’s different elements, but that’s been the approach. So a more gross level at this point and we were busy in that in the coming months on where we exactly land.
Vlad Sergievskii
Understood. And then two very quick housekeeping ones if I may. One is on FX, the net hedge liability, I think increased a little bit by about EUR 50 million over the quarter. Is it an indication that there is some more unrealized hedging loss, which will cash out later on? And then if you can provide a quick update on where you are on the Saudi project ramp up. Thank you so much.
Eeva Sipila
I’ll take the first one and Pekka you comment on Saudis and no, what I think the answer is that, a hedge accounting, obviously, a project business is made in the hedge accountant and that volatility doesn’t go through the P&L. This is really the product side of business, where we don’t kind — where we’re not able to fulfil the hedge accounting requirements by IFRS, and that is then mark-to-market.
And so as my definition, they are mark-to-market as of with the rates of NW. So there is no — there is no additional sort of losses anyway. It is mark-to-market and then just very clear as such, but Pekka on the Saudi.
Pekka Vauramo
Yes. The ramp up continues there. Customer needed to change the feed material the concentrate, and also the site that they feed into the furnace and we’ve installed the increase of power supply to several weeks, to same level, constant level in order to learn the parameters — operating parameters for the new quality feed. So this is really something which is not dependent on us at all.
It’s clearly an issue that customer needed to do because they run out of the material that we originally used, but no major issues during the ramp up. Lots of learnings and I would say that relatively good teamwork at the site between customers operating personnel and our experts there and so far everything looks good with the ramp up.
Operator
Thank you. And we have one further person in the queue at this time. That’s Antti Kansanen of SEB. Please go ahead. Your line is open.
Antti Kansanen
Yeah. Good afternoon, Pekka and Eeva. Just two questions from my side regarding minerals services. Firstly, on the consumable side, could you comment, what has been size of the business during the first half and how much do you think your margins have been held back by the negative impact from input costs and pricing?
Eeva Sipila
Yeah. Our volume is slightly below EUR 1 billion in consumables altogether. So that’s for the volume wise and then if I do look at the margin side, we are several percentage points below our last two years performance in consumables at this moment.
Eeva Sipila
And Antti EUR 1 billion is an annual figure, so…
Antti Kansanen
Sure. And then the second one was kind of on the discrepancy between order growth and sales growth in mineral services. So is this kind of a difference being driven by pricing, but that has say a different impact on orders and sales. Is it delivery model mix or has the kind of the order growth came from a longer lead time regarding modernizations or upgrades? Or how should we think about the backlog build in services, if you may?
Pekka Vauramo
I think its mix of all of that what you said. We have five or six business lines within our services that behave in this regard differently. There’s very short cycle business, those really book-to-bill business, but then there is business which does have a lead time of even more than a year. So it is mixed bag in that regard.
Antti Kansanen
And would it be fair to assume that those kind of the longer lead time types of businesses have led the growth in the past couple of quarters as we’ve seen some of the lockdowns fad and so forth?
Pekka Vauramo
That is, that is true. Yes.
Operator
Thank you. And as there are no further questions at this time, I’ll hand back to our speakers for the closing comments.
Pekka Vauramo
All right. Perfect. Thanks everybody for joining us. This is it for the second quarter results. Just a reminder that we’ll be having our Capital Markets Day on 15 of September, September 15, and more information and registration will be sent in due course after we have had a bit of a break now in early August, but we’ll come back to that and in the meantime, thanks again and good bye.
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