Metso Outotec Oyj (OTCPK:OUKPF) Q4 2022 Earnings Conference Call February 17, 2023 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 – Citi
Antti Kansanen – SEB
Christian Hinderaker – Goldman Sachs
Vladimir Sergievskii – Bank of America
William Mackie – Kepler Cheuvreux
Max Yates – Morgan Stanley
Panu Laitinmaki – Danske Bank
Erkki Vesola – Inderes
Juha Rouhiainen
Good afternoon, and good morning, everyone. This is Juha from Metso Outotec Investor Relations, and I want to welcome you all to this conference call, where we discuss Metso Outotec’s Fourth Quarter and Full Year 2022 Results, which were published earlier today. We will have the usual agenda, with a presentation given by our President and CEO, Pekka Vauramo; and CFO, Eeva Sipila. After which, we will be taking your questions. And as you can see from our slide deck, we have the slide discussing forward-looking statements. They are in the beginning.
With these words, I’ll be handing over to Pekka to start the presentation. Please go ahead.
Pekka Vauramo
Thanks, Juha, and welcome to this call, our fourth quarter results call. We had a strong fourth quarter, strong finish of the year, which, if I look back is somewhat exceptional, because we normally have had a dip in the fourth quarter, but this year, last year, the execution was solid throughout the year, until the last day of December. And, therefore, the quarter was strong altogether.
The market was very active, and if you remember, our numerous press releases during the quarter, especially in December, so our order intake was strong and it was mainly consisting of medium size and small orders. Three orders exceeding EUR50 million were also recorded during the quarter. But I think that’s over a normal number of, let’s say, bigger orders that we booked in the month, so solid activity in smaller orders. Also high sales growth and I think it’s also worthwhile at this moment to mention that growth both in orders and in sales were 99% organic. So M&A impact is very minor. M&A impact in the numbers and also worthwhile to mention that all the comparison numbers include in 2021, also our Russian sales and orders, and we have not eliminated them away.
And if we did that one, then, of course, the growth percentages would be even higher than what they were and what they are in these coming comparisons. But adjusted EBITA 14.82%, 2 percentage points more than a year before. Exactly the same margin as we delivered in the third quarter of the year. And if you recall, the second quarter where we had major currency headwind. So we’ve been solidly on this level, the past three quarters of the year. We’re making progress in sustainability in many areas. Internally, we are looking into our plants and operations and delivering good steps towards cleaner operations there. And then externally, our planet positive sales is growing very rapidly at this moment.
During the year, the cash flow has been the weak point in our performance, but we turn the corner in the fourth quarter and delivered a cash flow, which was equal to our adjusted EBITA at the end of the year. Then looking the group numbers as such, so orders received grew by nearly EUR300 million to EUR1.59 billion, growth of 21% and let’s remember the Russia impact here, which — so without Russia, the growth would have been much bigger, plus then the fact that it’s all organic growth.
Sales growth, we grew to EUR1.43 million from EUR1.3 million, growth of 12%. So solid growth there as well. Adjusted EBITA, EUR212 million, 30% growth over last year and the margins 14.8% and last year comparison number for the same quarter, 12.8%. So very strong growth on that line as well. Operating profit EUR185 million, EUR130 million in last year and 12.9% of the sales. Earnings per share EUR0.16 and last year same quarter EUR0.11 and cash flow, EUR212 million for the quarter.
Then if we look at the full year, full year numbers, orders just exceeded EUR6 billion, so 11% growth. And here especially, we see the impact of Russia here and all organic asset sales growth of about EUR1 billion, 25% altogether. Adjusted EBITA EUR731 million, up 34% from year before, representing 13.8%, nearly 1% higher than a year before. And operating profit EUR504 million. This is, of course, here the EUR150 million, provision that we made for Russia in last year in the second quarter is visible and reduces that number, then accordingly.
EPS for the full year for the continuing operations, EUR0.40 and EUR0.35 last year, and then here as well, the EUR150 million, provision for Russia is clearly visible. Without that one, I think the EPS would have been somewhere in the ballpark of EUR0.50 — closer to EUR0.60. And cash flow for the full year, EUR322 million, thanks to stronger cash flow — cash conversion in the fourth quarter. And on the graph, we see the dividend history and proposal for this year. Now the proposal that we did — do put forward for the AGM is EUR0.30 payable in two parts as before, representing a clear growth from year before.
Then when we look at the segments, so we only have the quarterly numbers here, but really strong performances on all lines from aggregates. And when we look at orders, orders we’ve been flagging a little bit softness in European market earlier. European market has performed better than what we expected. It is not back to normal yet, but it’s clearly better one than what we thought it would be. And then, of course, depending on the next few months development in Europe, we see then this positive trend to either to continue or not to continue, but uncertainty is there, the war is still there and those reasons are in place. But so far, it has not affected as heavily as we thought. So we saw increase in orders. Roughly 10% growth on order line.
Markets in North America continue to be very strong. We’ve been actively managing the inflation through many means by being cost conscious and active in the pricing front and that is, of course, visible in all lines of our operation. And I’ll continue with the same comment that we’ve been ahead of the inflation with our actions in cost and pricing side, and that is visible in the aggregate results very clearly.
Strong growth in the equipment orders. Services declined slightly in the quarter about 5%, 3%, quickly calculated about EUR5 million drop in sales. So we want you to not worry too much about that, that 5% negative development in service line. Sales, stronger growth than orders. This was really delivering the backlog and executing. That part, it was done in a solid way and services share now 30% as it was 32%, this was because of faster growth of equipment sales than the services.
Adjusted EBITA nearly doubled from year before and margin reached 16.2% for the segment in the quarter, and it was 10.6% last year. So very strong improvement. We had some one-time issues last year, so that depressed a little bit the numbers, but nevertheless, the performance improvement was really strong in the aggregates, and it’s really in a good phase of the development at this moment. Well managed, well executed business with very strong integration capabilities of the number of bigger and smaller companies that we have acquired over the past three years, four years into our aggregate segment.
In minerals, the quarter, we saw an order growth, strong order growth. And here especially, I mean, the Russia impact is in minerals and to some extent in metals, but mostly so in our mineral segment and we need to read the numbers against that fact. So we were able to compensate both the order line and the sales line from other markets, because our capabilities to deliver to Russia were very limited, and we only delivered those things after 24th of February, that we were committed through our wind-down agreements. We did not book any new orders, as we have said.
And of course, we have been very strict and careful that we haven’t delivered anything that is restricted, and we have not dealt with any of the sanctioned customers in Russia. So good performance, very strong performance and we took actively actions in other parts of the world in order to secure good compensation for the lost part of the business in other areas.
Sales, we saw equipment sales declining slightly 7% and that was because of the Russia wind-down. At the same time, the services growth was strong in there and services share was 62% of the sales in the mineral segment during the quarter. And adjusted EBITA grew by almost EUR40 million, margin 15.8%, which is almost 3 percentage points higher than year before. We see really — see and feel all the final synergies that we did achieve through integration and naturally, the volume development was positive despite of the fact that Russia was taken out of the equation early in the year. And here as well, we’ve been able to successfully to mitigate the increase of our input costs and that is, of course, visible in the results as well.
Metals segment, good strong growth in new orders, includes one bigger order there and then a solid flow of smaller orders. Healthy activity and that activity is continuing in the metal side. Execution of the order book EUR120 million, EUR25 million sales, almost EUR20 million growth from last year. And services share increasing, some good activities we’ve been able to initiate in the services side, and now services represent 18% of the metal sales and contributing, of course, to the successful turnaround of metals.
Adjusted EBITA, EUR15 million, last year EUR21 million. We did not have any sort of major provision releases as we had a year before. So that made up the number last year higher than what the fourth quarter number now was, but this was more sort of operational fully than the comparison a year before. 12.4% margin and thanks to good growth and also well mitigated costs in the projects that we delivered in the metal side.
And with this one, I will hand it over to Eeva for more detailed number review and then I’ll come back with some other things after that. Eeva?
Eeva Sipila
Thank you, Pekka. Good morning, good afternoon on my behalf as well to everybody. Pekka already presented our strong operative figures, so I’ll focus my comments on the items after adjusted EBITA. As adjustments, we recorded a negative EUR10 million in the quarter on the group level. However, you may have noted in the notes section that we had a sizable negative in minerals and the sizable positive in the group. These both related to the Russia wind-down.
Originally, the EUR100 — EUR150 million provision was made on group level at the end of June and by year end, as we have progressed and settled customer by customer, we have transferred the provision for use into the segments, mainly minerals where the actual project related inventories and AR have been booked and need to be written off, of course, there as well.
We had EUR65 million of the provision left at year end, waiting for the final wind-down activities. This we are confident will surface. Net financial expenses are slightly up quarter-on-quarter and more visibly year-over-year, reflecting somewhat higher gross debt and interest costs in today’s market. Our effective tax rate for the year ended at the lower end of our target range at 25%, where the figure for 2021 was 24%. Our earnings per share for continuing operations was EUR0.16 for the fourth quarter and EUR0.40 for the full year, the full year figure including a loss in discontinued operations. And then the number 4, including the discontinued operations was EUR0.13 for the quarter.
Moving to our balance sheet. Total assets are up some EUR900 million from the beginning of the year, but down EUR70 million from the Q3 end. M&A in the year consisted of two small acquisitions, which had limited impact on our balance sheet. Net debt at the end of the year was EUR684 million, so an inch down from the end of September.
The story of 2022 was really the growth in net working capital from 29% of sales in 2021 to 36%. Supply chain challenges and inflation led to a significant over EUR0.5 billion increase in our inventories. Accounts receivable and payables were both up as well, but in smaller proportion. Receivables actually grew much less than sales, representing 16% of sales in 2021. They were actually down to 15% of sales in 2022. However, importantly, as Pekka also already referred to, we were able to change course during Q4, and our inventories decreased by EUR40 million during the quarter. As supply chain challenges have reduced, we have been able to take down our buffer stocks. And whilst the impact in the quarter was rather small, it was nevertheless important to stabilize and improve had an direct impact, a positive impact on our cash flow. Also good to remember that the decrease in euros is reduced because of the price component continuing to increase until year-end. So the volume reduction in inventories was actually somewhat more.
Looking back at the inventory growth during 2022, I would say, it was more 50-50 volume and price, whereas earlier in the year, we communicated it was roughly in the 60% volume, 40% price split. Cash flow in the fourth quarter was a clear improvement from the earlier quarters, whilst the net working capital change was still a slight EUR36 million negative. However, our net cash from operations before financial items and taxes was EUR212 million for the quarter, contributing nicely to bring the full year figure up to the EUR322 million. Clearly, the full year number is only half of the 2021 level, as the negative change in net working capital really consumed quite a bit of cash in ’22.
Then maybe a point just for the sake of clarity, the other items in this chart. So they mostly relate to the Russia wind-down. The negative provision affects the profit for the year. However, when the vast majority is non-cash write-downs, the negative impact is neutralized from a cash point of view in this other items row.
Moving then to my final slide and the main points on the financial position. During the fourth quarter, we issued a new EUR300 million bond, while also making a tender offer for the outstanding 2024 bond. And of that, EUR103 million was purchased back. Now these transactions improved our maturity profile significantly. Additionally, during the fourth quarter, we signed a new EUR100 million term loan and EUR50 million RDI loan, of which, the former was drawn during the quarter. Liquidity at the end of the year was more than EUR100 million higher than at the start of the year. Debt to capital stands at 33%. And finally, there were no updates on our ratings in the quarter.
So with that, I would hand it back to our President and CEO. Pekka, please.
Pekka Vauramo
Okay. Thanks Eeva. I will sort of have a few notes on our strategy, sustainability and then finally, outlook before going to the Q&A. Already mentioned that we saw a very strong growth of our planet positive offerings and it is clearly a sign that our efforts to launch more and more planet positive products and solutions is really a right direction to go and we continue to launch new products altogether during the year.
Here and there, of course, the digital part is even more strongly present now and we see that there is much more further potential to improve the results through improving quality with digital solutions for our customers’ processes. We’ve also signed several partnership for developing, mainly decarbonized steel production. Therefore, we also took a decision to invest in Circored pilot plant, in order to make tests with hydrogen-based direct reduction of fine iron ore and we do see activities around decarbonized and hydrogen-based direct reduction growing at this moment. These are, of course, very early phase developments, but clearly a direction where iron and steel industry is headed.
We also saw several orders with significant planet positive content. Battery metals activity is high — was high ordering activity, but we’re doing a lot of research work in that area for our customers, a lot of pilot plant work as well for our customers. We see more and more inquiries for tailings management and dry stacking solutions, which are very positive for water consumption. They also very positive for biodiversity as the dry stacking allows higher storing of tailings, and therefore, reducing the footprint that mining causes.
And then in the smelting side, next generation pelletizing, smelting and pelletizing are potentially merging to some extent at one point and then also sulfuric acid plants for decarbonizing many of our customers industries. We see potential there and a lot of activity in those areas. Very important part and looks like that sustainability is really maturing in throughout the industry and decisions are more and more being made with the sustainability as a sort of leading thought [indiscernible] of the decisions.
Some other sustainability highlights. We have internally completed several green transition projects. In in-house, our science-based targets, implementation of those targets and actions behind the targets is progressing. Now 20% of our spend is with suppliers that have committed to the science-based targets. And nearly 100% of our R&D projects do have sustainability targets in them.
Part of our ESG is naturally our progress in people and culture side. And we have there many actions, driving diversity and inclusion. And like we have said, earlier that we measure very frequently the engagement of our organization, and we have reached to very high level in our engagement, and we are now on top 10% with our international reference group, benchmark group consisting of about 100 companies.
So it is a good position to be at the times when there is a lot of movement in the labor market and people side in marketplace globally. Our market outlook has changed. I mean, we are saying that we continue on current level. And if you recall, our current level is a strong level. We are not anymore flagging the weakness in, particular weakness in aggregates in European market. Of course, the war is still there. War is not over, so we need to be aware of that one. But clearly, we see that the markets are not as soft as we thought them to be earlier.
So fairly confident on near-term outlook. Metal prices are on reasonably high level. They of course are bouncing a little bit up and down, but bouncing on high level aggregates. Customers products are also enjoying very favorable pricing terms in many markets and there seems to be continued demand, and this makes us to believe that, that the markets will continue to be active in that area, especially in North America. Then we see first signs also in China rebound impact of Chinese market. It’s currently on sort of proposal and activity by pipeline level, which then remains to be seen if it turns into orders later on. But a fairly strong and solid outlook view at this moment.
Juha Rouhiainen
All right. That concludes our presentation. And operator, we can now open the conference call lines for questions.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Klas Bergelind from Citi. Please go ahead.
Klas Bergelind
Thank you. Hi, Pekka and Eeva. Klas at Citi. So the first one I had is on the services. You say that, demand is still healthy, but order growth slowed to low-single digits, ex-currency in minerals. I’m trying to understand, if this was softness post, perhaps earlier pre-ordering, where do you perhaps lacked any larger service orders that will come through now at the start of the year, i.e., if this is just a timing issue, why we saw this sharp slowdown? And also obviously quarter-on-quarter down 9% to 10%? I’ll stop there. Thanks.
Pekka Vauramo
Yeah. I think what we saw when I look back, we saw a peak in demand in services, which probably was the pent-up of the COVID times. And looks like that pent-up demand is over, but we see still a very healthy demand in services altogether. So I really don’t — when I sort of look at current trading and things like that, I really don’t see that services is turning down. But clearly, there was a — some sort of peak because of the pent-up demand.
Klas Bergelind
Do you think — I know it’s tricky, maybe to gauge this, but do you think service orders will stay at the current level into the first quarter, or can we be up on some sort of seasonality into the first?
Pekka Vauramo
Well, we are not really guiding it as I said. But like I said, I mean, our activities are on high level in services. So, I really don’t see that there would be a downturn in that regard, that demand for services would drop by me. We have been very busy delivering equipment in all areas and, therefore, we can expect also the services to follow.
Klas Bergelind
Yeah, okay. My second one is on the margin and your 15% target. When do you think — when you think of the positives and negatives back again for 2023, we have increased wage inflation, component costs, i.e., value-add is still not leveling off out, there you still carry good pricing through the backlog, at least in the first half. But at the same time, your synergies is no longer a big tailwind in the bridge. So with, let’s say, high-single-digit revenue growth supported by a solid backlog, do you think you can reach your 15% margin for the year? Just to understand the moving parts. And I know you don’t guide the margins. But just to understand the moving parts of potentially how to get there.
Pekka Vauramo
Yeah. Of course, we — same wish that I had last year, a bit more normality that we wouldn’t have big swings that we need to take and make in the business. I’m referring to Russia now in last year and that sort of things. I think, we have all the pieces in — all the puzzle in place. It’s question about execution and let’s remember that we work continuously also on our cost side, even though we don’t announce major campaigns, but we have roughly what we have said before that. In the past, we used to say that it’s about salary inflation that we work on improvement actions. Now the salary inflation might be somewhat higher, and we necessarily don’t reach that level in our improvement actions, but it’s still a sizable number of millions that we work on that side.
Klas Bergelind
Okay. My very final one is on further margin upside, I’m thinking about minerals obviously. You said earlier that, that you’re working on standardizing the equipment going into projects, more modularization and so forth to get that gross margin up, improving obviously margin in this way at the gross level is more sustainable, but it can take quite a long time. Is that still a three year to four year journey Pekka from here or do you think you can do that 20% quicker than that?
Pekka Vauramo
We need other actions for that 20%. We need to grow faster in services, and that is an area that we are currently looking into. And obviously in our annual strategy update, we will address that one then a bit later on. In this year, we’re just putting our thoughts together, but that’s an area where that we want to speed up and increase the services share, especially in minerals on higher level.
Klas Bergelind
Thank you.
Operator
The next question comes from Antti Kansanen from SEB. Please go ahead.
Antti Kansanen
Hi, Pekka and Eeva, it’s Antti from SEB. Just couple of questions, firstly on aggregates. And if we think about the demand outlook sequentially stable, so if we go back to last year, I guess, the market in Europe was still fairly active in start of the year. So would you say that the demand is probably slightly below last year’s level still and when we are entering the year as we are kind of stabilizing on a bit lower level?
Pekka Vauramo
Yeah, we are now, of course, almost at the end of February and we all know what happened end of February last year. And if I comment from more or less from this day on, I wouldn’t say that we aren’t necessarily down from last year’s activity level at this moment. But if we look at from beginning of year, maybe that is the case.
Antti Kansanen
Yeah, exactly. And then secondly on kind of the profitability numbers in aggregates. I mean, in second quarter you had that kind of a FX-related loss in the numbers. And since then, we’ve seen a really strong margin improvement. So is this kind of fully operational on your pricing and execution? Or is there something FX-related reversal that is in the figures?
Pekka Vauramo
Eeva?
Eeva Sipila
Yeah, I mean, obviously sort of the Q2 was the pain point, when we saw a sort of a such a rapid sort of change. Then, thereafter, it has stabilized. The full year impact of FX was still negative for all businesses, including aggregates, but of course too much. It’s often, we started to see a much more of the positives also from the sort of accounting losses correcting themselves in Q3 and Q4. So I think you could consider this sort of very much sort of operational result there. Really no one-offs. I think the team has just done an excellent job in — with price management addressing sort of fighting inflation proactively and then obviously been able to also execute well. So we had good sort of — steady sort of volumes in all the plants, so that helps us well.
Antti Kansanen
All right. Very clear. And then, secondly or lastly, a follow-up on the previous question regarding mining services. And when you’re talking about this kind of a pent-up demand being over, are you referring to this kind of a longer lead time modernization refurbishment projects or has there been kind of an inventory adjustment as well regarding spares and consumables demand that your clients perhaps have been filling up inventories and now kind of adjusting them to a more normal levels?
Pekka Vauramo
It’s mostly relating to modifications, really like you said yourself less to or not at all to destocking or anything like that now. There is still a great demand for spare parts, wear parts and that kind of items in the marketplace. And also these modifications, but we are getting to more like a normalized level, when it comes to orders — these orders. These modifications, where the cycle is much longer than in any of the other service activities. So the orders might be a bit lumpy there, but the actual deliveries will be much more even on that side.
Antti Kansanen
Yeah. And should want to assume that perhaps your services sales development will be a bit stronger than the orders, given that you have this longer lead time items that you have taken, but not yet fully kind of converted to sales or?
Pekka Vauramo
Yeah. Well, I wouldn’t necessarily draw that conclusion. I think both lines are still solidly developing some lumpiness on order line in the services. Sales side is more of a sort of steady development on that side.
Antti Kansanen
All right. Very clear. That’s all from me. Thank you.
Operator
The next question comes from participant from Goldman Sachs. Please go ahead.
Christian Hinderaker
Yes. Good morning, everyone. It’s Christian Hinderaker here from Goldman. Thank you for the presentation. I’ve got three questions, if I may. Perhaps, we’ll take them in turn. Firstly, I just wanted to come up on margins. Obviously better than consensus had expected across each of the businesses. Can you provide a little granularity perhaps on the contributions to that to date? I guess, there were some mix tailwinds within minerals, for example, but you’ve also talked about mitigation of cost for pricing, as well as more perhaps structural cost savings. And I just wonder if you can help us a little bit with how to think about, in particular, the cost actions in the year ahead?
Eeva Sipila
Sure. So obviously sort of mix varies from quarter to quarter to quarter, and it’s not just the sort of capital versus aftermarket mix, that we also sort of can have different mixes within capital or within services impacting. But, of course, that’s over time. It’s not that relevant. I would say that, clearly, so the overall, I mean, services — aftermarket share improved towards the year-end, we had a slower start, but then we had good sales, sales volumes in aftermarket and that obviously was a positive. Then again, not — in aggregates, the margin improvement is really much coming from equipment as the growth there was just so much stronger.
And then on per se, cost actions, I think the main focus in — as we continue to see inflationary pressure is really around price and being sort of head on that and proactive on that is most important. Then second is, solid execution. And then obviously, the cost savings, then come on average — on sort of average efficiency improvements. But as we are growing, so I would still say that the focus needs to be on that — on the price and inflation management. And I think we sort of did well in ’22 on that front and that certainly was one of the main success factors in our ’22 earnings definitely. And, of course, sort of the idea is to continue sort of with those learnings into ’23.
Christian Hinderaker
Thank you, Eeva. Maybe I can come back then on the aggregates side. I guess, that’s where you had a positive surprise in terms of demand. Just interested in the developments that you’ve seen there. You mentioned a pickup in seasonality in Europe, for example. And I wonder whether that factors into the increase in the guidance or the outlook at least for the quarter ahead? How we should think as well about the sort of price versus volume? And then finally on Tesab, I think you’ve been shifting there to a dealer led model, wondering how that’s going and also how revenues for that business have developed versus I think EUR30 million that you reported for 2021?
Pekka Vauramo
Yeah, that’s right. We are not really basing our outlook as such on seasonality. It’s a fact of life. We are well-known fact. We are, of course, comparing it to the season at any given time that where we should be going. So it’s not about seasonality this one. In our aggregates side, yes, the volumes are also comparing previous seasons. We are on lower levels when it comes to volumes, but we have done — taken many actions, because of inflation and the pricing levels are different from what they used to be, and that’s evening a little bit the output where our sort of guidance or the outlook changed really refers to is that, we don’t see that sort of softness right now, what we saw during the previous quarter or two quarters, in fact, when we moved — changed the aggregates guidance. So, not about that one.
Then the other part of the question, it was about the margin and that side of it. Of course, the inflation is still there, even though it’s on reduced level. Some of the freight charges have normalized to pre-COVID levels. Not all of them, but some of them. So there are some positive signs, but inflation is still there. It is something that we need to manage. And even though we don’t guide how we plan to do that one, but our track record has been especially in our aggregates side, very good in managing that inflation. And I think we are well alerted of the fact and have actions in place to work under these conditions.
Eeva Sipila
And maybe just a final note on Christian. So yeah, good start integration proceeding very well. And yes, obviously we’re sort of integrating also there to optimize our — reach the customers. So sort of planning the sales channel work on that, but going very well. And then we certainly see also clear profitability improvement areas with the synergies than that the Metso Outotec platform can offer the products.
Christian Hinderaker
Thank you, guys. And then finally, maybe just on the cash flow. Interested in how we should think about working capital developments in particular into 2023, in particular around inventories? I know there’s a EUR40 million reduction in Q4. I guess, curious in broad terms ’23, how we should think about it? And also on a quarterly basis, what might want to consider sort of best case inventory improvement to think about?
Eeva Sipila
Yeah, obviously, sort of — whilst we turned the corner, which was important and a clear target for us in Q4. then obviously, there is always room to improve. So the inventory is still in absolute terms are on a high level. And it from the sort of very, very challenging supply chain situation, it does take sort of several quarters to balance. And of course, we’re sort of — we are still a bit sort of cautious. Let’s see what the year ahead has for us stored, so that we don’t want to risk availability. That’s our main customer promise and we need to be very focused on that. But certainly sort of the target for this year is much better cash flow generation and really the — that must come from net working capital releasing cash, unlike it did in 2022. Usually the sort of the early part of the year is tied — does tie some capital. We are especially in the aggregate side, we’re building kind of for the upcoming construction season in the Northern Hemisphere. So not necessarily sort of the best and then we’re sort of going forward hope to improve on that. But there’s certainly potential and then, we don’t have an explicit target on rather than sort of it being a clear focus just based on the sort of levels where we are. All businesses have an opportunity to improve.
Christian Hinderaker
Okay. Thanks very much.
Operator
The next question comes from Vlad Sergievskii from BofA. Please go ahead.
Vladimir Sergievskii
Hi, everyone. Thank you for taking my questions. I’ll start with services if I may, but focus on sales. Obviously, record sales in Q4 and services. At the same time, orders declined sequentially for two quarters now for the reasons you explained. Book-to-bill in services was — I would say materially below one-time in Q4, which actually rarely happens to you guys. So under this backdrop can services sales grow versus a record Q4 level in the coming quarters, or they may moderate?
Pekka Vauramo
Yeah, like I said earlier, we don’t see any particular decline in activity in services. So — and don’t feel any softness in that market either. Maybe the only point is that, that really the pent-up demand for some of these activities within services is maybe over now, but we are still on clearly higher level than pre-COVID with our services as we speak right now.
Vladimir Sergievskii
Brilliant. Thank you very much for that. And if I can ask two quick questions on the P&L, please. Firstly on gross margin, it’s down a bit sequentially in Q4. Well, the mix between equipment and aftermarket was broadly stable on my calculation. Any particular reason for that? And secondly here, there was a pretty meaningful positive contribution from other operating income and expenses line in Q4, it was about EUR20 million if I’m not mistaken. While this line is mostly negative historically, would you be able to comment also what drove this positive contribution in this other income line?
Eeva Sipila
Sure. So on the gross margin side, so nothing, in particular as such. It is obviously a question of the mix of the different businesses and then the sort of execution in those and also a bit between the segments as it does vary. But nothing really to sort of point out on that. And on the other operating income, indeed, it was a plus. I don’t have anything specific in my mind, but why don’t we have a look at that, with Juha, we can sort of come back if there was anything worth highlighting.
Vladimir Sergievskii
That’s brilliant. Thank you very much. And maybe the very last one, housekeeping from my side. Your balance sheet provisions in Q4 has moderated quite materially, which is obviously a good thing. Could you comment on the key drivers? Can we utilize most of them? Have you released some? Any color would be really helpful.
Eeva Sipila
Yeah, there is a couple of factors. The Russia wind-down obviously affects the overall provision level, that was a very significant provision. And as I said, we had from the 150, 65 only left at the year-end. So, that obviously impacts the numbers and generally, the provisions tend to move with as the sort of projects evolve. Again, I think there’s been quarters when you’ve noted that it’s been up and so the project portfolio moves it somewhat now sort of towards the better. We had a pretty good sort of sales deliveries and then on that. But again, sort of, that part will flow sometimes a bit up, sometimes a bit down. But, really the wind-down obviously is a specific topic.
Vladimir Sergievskii
Super. That’s all clear. Thank you so much.
Operator
The next question comes from William Mackie from Kepler Cheuvreux. Please go ahead.
William Mackie
Good morning. It’s Will Mackie from Kepler Cheuvreux. Good morning, Pekka. Good morning, Eeva. Thank you for the time. I guess the first question is a follow-up on the positive price initiatives that you’ve achieved during the year across the business. I recall during ’22, you had to manage very sharp inflation within your consumables business, which affected margins in a number of quarters. Could you actually scale or quantify, please, the level of price impact in Q4 or for the full year across the business? And how you were able to net improve when you compare that to the inflationary pressures?
Pekka Vauramo
Well, we really don’t have a sort of a chart that would break down that one, but I think we commented on a headwind in our consumables that it was on annual level of about EUR40 million and looks like that we have recovered that now with our actions going forward. So good result in that field, but pricing management has been an issue and I feel that we’ve done it successfully through the year. And that management, of course, includes all kinds of actions, actions in cost side, actions in pricing side and other things like that. We also have to remember that what effect were on actual prices is also the currency development and we have seen there are positives and negatives in that area. Net impact still is negative in the currencies on a full year level, but, of course we are expecting that one to level now going forward.
William Mackie
Okay, thank you for the color. My second question relates to your current assessment of the market trends, particularly within the minerals segment, you mentioned that the group and the company was successful to compensate for the loss of volumes from Russia. Could you perhaps provide a little color of how you see or how the sales teams are seeing the prospects, in particular verticals like copper, gold or cobalt and lithium and other battery metals?
Pekka Vauramo
The battery metals is clearly that activity is high currently and we booked several orders end of last year. And from that area our sort of research labs are busy with 10s of samples. We are doing lot of lab tests, we’re doing lot of pilot plant testing in that area and it’s mostly greenfield activity and it’s lithium, it’s nickel. When it comes to battery metals, some other railroads as well. We see activity in many so called critical metals and minerals activity, which is starting up, but it’s probably one very practical sample of deglobalization in our customer industry. Because all bigger countries have their own critical metals program, all regions like EU have in the same way. And clearly, the purpose is there to secure either domestic supply of these critical metals or at least a supply from the nearby countries and regions, where the relationships are friendly. So clearly a sign of deglobalization in that part.
William Mackie
And were there any particular countries or regions that were able to specifically compensate for the loss of Russian opportunity?
Pekka Vauramo
I think that activity was in all regions, I would say. Of course, the initial reaction what we saw in the metals market was that the prices went up and they went up from a very high level. And that as a such initiated many, many actions and activities. And when we — for example, when we first looked at that how should we react on activity in Russia going down and the initial thought was that, okay, we need to reduce costs very quickly, because overall volumes will come down. But within a few weeks, it was evident that the activity in the rest of the world will compensate and instead of entering the cost cutting, we did all kinds of actions in order to boost our sales capabilities and motivation in our organization to win and bring more orders in from those areas where the activity increased. And it was really, really global the increase that we saw happening.
William Mackie
Thank you. And my final area of question was relating to follows on from that, relates to one of your comments during the presentation about China. Perhaps you could just refresh us on your current footprint in China and how Metso Outotec is positioned to benefit from the potential reopening and the various stimulus measures that are being discussed?
Pekka Vauramo
Yeah. We do have several factories in China. Most of them are really focused and geared up to deliver and serve Chinese market. The Chinese market, of course, for us includes China itself, but it includes also what we call, Silk Road. Silk Road business that is business, where Chinese or either companies are either directly investing or Chinese government is funding the construction of or development of a mine in other countries outside China. And we have been particularly successful in growing that business for us and combined the Silk Road business and business inside China is not the biggest market area as such, but is growing rapidly to become one of the biggest market areas for us.
William Mackie
Super. Thank you very much.
Operator
The next question comes from Max Yates from Morgan Stanley. Please go ahead.
Max Yates
Thank you. Can I start on my first question to ask about the strategic review in minerals? Could you just give us an update — sorry, strategic review of metals? Could you just give us an update on where you are with that? Are you kind of entering into negotiations about a possible disposal? Just any thinking with timeline on when that is likely to have results and how it’s evolved so far? Thank you.
Pekka Vauramo
Yeah. We said in the Q&A part of our CM, Capital Markets Day in last year that we see that we would come to conclusion during the first quarter of the year timeline as such, it’s not fixed. And last year, when I look at it back was not really stable enough to conclude that part. The M&A market in particular turned rather difficult for known reasons, including the interest rate and the availability of funding and the valuation disparity between sellers and buyers that opened up. And I would say that, if we see a bit more stability in that one, then, of course, that will help us to conclude, but that’s all I have to say about the strategic review in that part.
Max Yates
Okay. But we should have an update in some form within the first quarter, is that correct? [indiscernible] Is that the right way to interpret it?
Pekka Vauramo
That’s what we look, but I mean, there is guarantees for that one. Because things will have to fall in the right places before we can conclude that.
Max Yates
Okay. And just a housekeeping question around the central coast line. That’s obviously been quite a bit higher this year. Could you maybe talk a little bit about sort of what was driving that and what you feel a sort of sustainable level or a normalized level for this line would be going forward?
Eeva Sipila
Well, it’s a combination, of course, Max, of many things. I would say, the one specific item affecting this year has been Russia-related items, which are kind of the — sort of, there is other costs than sort of pure wind-down or restructuring related just from a quick exit. So that are not business specific, so that’s been one abnormal impact. I mean, typically, of course, we have variety towards the year-end. We have all kinds of year-end valuation be it pensions, insurances and these type of things. Say, it’d typically tend to have a bit of a bigger number in Q4. They are just difficult to plan and time sort of better than during the year. So in that sense, not necessarily the full year, of course, was on the high side, Q4 perhaps not so much. And then there is still some sort of remaining group sort of IT-related issues from the final tails of the integration in these type of things. So I would guide for sort of a lower number in ’23. That is our really is quite a chunk of one-off, but at the same time, it’s not to sort of, there will be costs going — also going forward in this road and kind of don’t fit naturally any of the segments.
Max Yates
Okay. And just my final question is around pricing in the aftermarket. And I guess, one thing, I wanted to understand now that some of the input costs around steel, freight, energy are coming down. I would imagine some of your aftermarket. So your consumable contracts have indexation clauses in them that protect you on the way out. So I just wanted to understand kind of how these typically work? How some of the costs moderate? So if you could give us a feel for, do you think that kind of a small proportion, medium proportion of your aftermarket contracts will be affected or will be impacted by these? And just how we should think about that in terms of indexation clauses now? Some of those costs are coming down.
Pekka Vauramo
The index is there to protect our margin and that’s how they work. It’s not a continuous adjustment. It takes place at certain frequencies, quarterly frequencies, and, of course, within extraordinary cost increases or reductions, there is a possibility to see a faster react on that one. But like I said, they are there to protect our margin and as I said, it’s a positive development that we see. So far the activity is not very high. I don’t hear our customers turning to us, but, of course, there are some automatic index adjustments happening, which I necessarily wouldn’t be aware. But like said, I mean, it’s protecting our margins.
Max Yates
Okay. And I mean, I would — just so I understand, would you say this is kind of industry standard that on a, kind of, if there is such thing as a normal aftermarket consumables contract, would you say there are on the majority of contracts or would you say, it’s on less than 50%? I’d just love to understand kind of how normal this is in terms of just your kind of — your typical aftermarket contract with the customer?
Pekka Vauramo
Yeah, of course, it is a contract detail. But we have spoken about it, when it relates to our contracts and I would say, that it’s a standard term in our contracts.
Max Yates
Okay, helpful. Thank you very much.
Operator
The next question comes from Panu Laitinmaki from Danske Bank. Please go ahead.
Panu Laitinmaki
Thank you. I just had one final question about the outlook. So how should we kind of really understand it? If you say that, you expect the market activity to remain at the current levels, so does it mean like flat on year-on-year comparison for the orders for the next six months or at the same pace of improvement? Or what do you mean, if we think about it kind of literally?
Pekka Vauramo
Yeah. The guidance, it is a six-month guidance and it’s not really reflecting previous year, if I understand it correctly. From our side it is really sequential development based on recent quarters or in comparison with recent quarters.
Panu Laitinmaki
So basically, it’s like EUR1.6 billion orders for the next two quarters?
Pekka Vauramo
We don’t guide the orders.
Panu Laitinmaki
Yeah. Okay. Thank you.
Operator
The next question comes from Erkki Vesola from Inderes. Pease go ahead.
Erkki Vesola
Hi, Pekka and Eeva. Erkki from Inderes. Continuing on China, could you compare your current tendering activity in China to the one prior to COVID close starts? And where do you expect this activity to materialize as orders?
Pekka Vauramo
Yeah, I would say that the domestic demand in China, we see some early rebound from restrictions and restrictions were lifted like just month and a half ago. So it’s a very recent thing and a big part of the past month and a half was in Chinese New Year and related traveling. So it’s not really actions that would be visible in our order bookings or numbers. But we know that activity level has increased there. Our dealers in aggregates market are busy in China. Their activity level is on totally different level, where it used to be. And if things continue smoothly, we can expect to see things turning into orders during the coming months. In the minerals side, the activity has been strong throughout both in China, same applies to metals. If you recall, we booked several pelletizing orders in China in last year and that side has been almost like unaffected. And then I commented earlier the Silk Road part of the business that has been active and growing all the time.
Erkki Vesola
Okay, thank you so much. And then regarding the aggregates marketing in the US. How important will the IRAs projects be for you in the coming years, and when do you foresee aggregates demand materializing linked to these project?
Pekka Vauramo
Yeah, I’m not that sure how the — how much the IRA relates to our aggregates demand as such directly, maybe indirectly to some extent. But what is the fact is that there is tens of billions of still unallocated highway reconstruction maintenance funds that wait for reward. And that is what I think will be the main driver for aggregates in the US. That will keep the sort of infrastructure segment of construction on very active for months to come.
Erkki Vesola
Okay, thanks so much.
Juha Rouhiainen
All right. I guess, those were the questions. At this time, we thank you for participating. We thank you for taking part in Q&A. This concludes our fourth quarter and full year 2022 results conference call. We’ll be back with the first quarter results on May 3rd, and hope to see you at that time, at the latest. So, thank you and good-bye for now.
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