Metso Oyj

OMXH:METSO

Earnings Call Analysis

Q1 Shows Operational Resilience Amid Market Steadiness

In the first quarter, market activity met expectations with a notable pickup in aggregates but steady activity in minerals. Orders declined 8% year-over-year, though they improved sequentially by over 10%. Sales fell by 9% to €1.2 billion, yet the adjusted EBITA margin exhibited resilience at 16.5%, thanks to structural improvements and stringent cost management. The aggregates segment achieved a robust 17% EBITDA margin despite a year-over-year decline in orders. The Minerals segment saw a growth with a significant copper project order and maintained a 17.5% margin. The company projects steady market activity in both minerals and aggregates moving forward.

Introduction and Market Activity

In the first quarter of 2021, market activity was as expected, matching the company's guidance from February. The aggregates sector showed signs of recovery, while activity in the minerals sector remained stable with strong aftermarket sales but muted equipment sales.

Financial Performance

Orders for the quarter were down 8% year-over-year but showed a sequential growth of over 10%. In constant currency terms, orders were down 5% year-over-year. Sales amounted to EUR 1.2 billion, reflecting a 9% decline year-over-year in constant currency terms. Despite these challenges, the company managed to achieve a resilient adjusted EBITDA margin of 16.5%, thanks to structural business improvements and tight cost management measures.

Segment Highlights: Aggregates

The aggregates segment saw an order intake of EUR 365 million, down 6% year-over-year but picking up significantly from the second half of 2020. This uptick is attributed to the reduction in dealer inventories. Despite lower volumes compared to a year ago, the team achieved a 17% adjusted EBITDA margin.

Segment Highlights: Minerals

In the minerals segment, orders were down year-over-year but showed growth from the previous quarter, amounting to EUR 997 million. A notable copper project order was received in January. Customer decision-making in equipment purchases continued to be slow, but service orders contributed significantly to the order intake. Sales in this segment were predominantly from services (68%), leading to a 17.5% adjusted EBITDA margin.

Income and Expenses

Net financial expenses increased year-over-year due to higher debt levels. However, the overall debt is expected to decrease by EUR 200 million in the next quarter due to a maturing bond. The effective tax rate for the quarter was 25%, consistent with last year. Earnings per share stood at $0.15. The balance sheet showed slight decreases in total assets and liabilities, largely due to lower receivables and payables, reflecting lower sales and cash flow improvement actions.

Cash Flow and Financial Position

Cash flow from operations before financial items and taxes was EUR 158 million, driven by profitability. Net working capital changes were slightly negative but less so than in the previous quarter. Net debt decreased slightly to EUR 825 million. The company plans to pay out the first installment of the dividend and repay a maturing bond, for which funds have already been secured.

Sustainability and Future Outlook

The company made good progress on sustainability key performance indicators, with 3 out of 4 targets on track. However, CO2 emissions reduction in logistics only reached 6%, falling short of the 20% target set for 2025. The market outlook for both minerals and aggregates segments is to remain at the current levels, without expecting immediate improvements.

Geographic Insights

The North American market appears strong, driven by infrastructure demand as the construction season begins. Europe remains weak due to economic challenges, with no expected improvement in 2024. Asia and South America present opportunities, although India's economy may be sluggish in Q2 due to elections.

Service Orders and Seasonal Trends

Service orders in the minerals segment remained robust, almost matching last year's strong levels despite seasonal first-quarter strength. This underscores the importance of production focus among customers, supported by improved metal prices, especially copper.

Margins and Operational Leverage

The aggregates segment achieved a 17% margin despite lower equipment sales and under-absorption. Focused cost management and pricing strategies helped maintain strong margins. In the minerals segment, consistent efforts in project execution and cost management aim to improve margins, with the expectation to sustain or even enhance profitability as sales stabilize.

Earnings Call Transcript 2024-Q1

[Juha Rouhiainen, executive]

All right. Good morning, everyone. This is Juha from Metso's Investor Relations, and I want to welcome you all to this conference call, where we discuss our first quarter 2021 results that were announced earlier this morning. As earlier announced, this presentation will be held by our CFO, Eeva Sipila, and this is due to some scheduling conflicts. Nothing more dramatic than that. Before we start in the presentation, we have forward-looking statements that is good to remember. And also a reminder that we will have our Annual General Meeting of Shareholders after this call. So that's why we try and limit the length of the call to 60 minutes. So please ask questions one or let's say, max 2 at a time so we can accommodate all the questions during the duration of the call. Without further ado, I'll hand over to you, Eva.

[Eeva Sipilä, executive]

Thank you Juha. Good morning, good afternoon to all of you on my behalf. And I'll start with the highlights of the first quarter. Market activity was in line with our expectations and with what we guided in our market outlook in February. We saw the pickup in aggregates activity. In Minerals, the activity levels were unchanged with equipment being somewhat muted, whereas aftermarket activity was healthy. Operationally, it was a solid quarter in the sense that we were able to grow aftermarket sales on back of the healthy backlog. Our adjusted EBITA margin shows resilience despite sales being lower year-over-year and also cash flow development showed progress. Moving to the first quarter key figures. In orders, we had a tough comparison and ended 8% down year-on-year, although sequentially growing over 10%. And in constant currencies, orders were down 5% year-over-year. Sales at EUR 1.2 billion were down roughly EUR 100 million or 9% in constant currencies, 7%. Adjusted EBITA in euros was down only 5%, which meant that we delivered 16.5% margin on our sales. This resilience is obviously something we have worked hard on working with various structural business improvement topics over the past, but also supported by tight cost management in the past months. I will revert to the other key figures a bit later in the presentation. Moving then to our segments. I'll start with aggregates. We were very satisfied with our order intake of EUR 365 million for the quarter, while down 6% year-over-year. This is a significant pickup from the second half of '23 levels. The market remains below the unit levels of a year ago. And whilst dealer inventories have come down, we expect to see dealers focusing on reducing them further in Q2. But this order intake will give us some operational support in the coming months. With the EUR 300 million quarterly sales level our end of year backlog gave us, it is a very good achievement from the team to deliver 17% adjusted EBITDA margin. In our Minerals segment, we saw similarly to aggregate orders being down year-over-year, but the EUR 997 million order a number for Q1 is growth on the previous year. We received one bigger copper project order that we announced in January. Otherwise, customer slowness on making decisions in equipment continued and service orders were the key contributor in -- for the order intake. Sales in this segment are largely derivative of the order intake of mid-last year and EUR 940 million level is 68% made of services sales. Whilst this mix supported margins, the overall sales remaining on the low side pulled in the other direction, resulting in the 17.5% adjusted EBITDA margin. Then a few slides on the group overall financials next. From our group income statement, I would comment a few additional lines. Net financial expenses are up year-over-year due to the higher amount of debt, but on similar levels as in the second half of '23. We have a bond maturing in Q2, so the amount of debt will decrease by almost EUR 200 million in next month. Then again, relatively that older debt has a lower interest cost compared to the more recent bonds. Regarding taxes, our effective tax rate for the quarter was 25%, which is in line with that of last year's levels. Earnings per share were $0.15 for the quarter, for continued operations as well as for the overall one, including also discontinued. Regarding our balance sheet, the total is slightly below that of the year-end. And this -- the change is mainly in lower receivables on the asset side and lower payables on the liability side. These both reflect lower sales but also our actions to improve cash flow. Inventories remain flat. With the logistical challenges in the Red Sea and in Finland due to the strikes, we weren't exactly given -- getting much support to improve, but we have actions in place and do expect them to yield results in lower inventories in the coming quarters. Net debt was down slightly to EUR 825 million. Group cash flow from operations before financial items and taxes was EUR 158 million, supported by the profitability. The net working capital change was still slightly negative, but less there than in the previous quarter. So for seasonally usually a bit of a challenging quarter, we are quite satisfied with the cash. Finally, on our financial position. So no changes as such in the quarter, the second quarter, indeed will be busier. When we expect to pay out the first installment of the dividend, assuming our AGM later today approved supports proposal. And then as well, indeed, what I mentioned earlier, the final EUR 197 million of our earlier bond maturing. Now this we did refinance already in November when we launched the EUR 300 million bond. And hence, we have, as you see from the figure on liquid funds, we have more than normal liquid funds waiting for this repayment. Moving then to sustainability and our outlook. Good progress in delivering on our sustainability key performance indicators continued also in Q1. We are on target in 3 out of the 4 targets. In logistics, the CO2 emissions reduction is only 6%, which means that we have work to do to reach the 20% reduction target we have set for ourselves to reach by 2025. Even if the number of shipments is slightly lower, the longer routes on some of these shipments do increase the challenge from a CO2 point of view. And then to conclude with our market outlook. So we expect the market activity on both the minerals and aggregates to remain at the current level. Previously, we expected the aggregates market to improve. This did materialize as you see from our numbers. So now we are expecting the market to continue on this level of activity. And with that, I think we are ready for your questions.

[Juha Rouhiainen, executive]

Thanks, Eeva. Operator, we can now open the lines for questions.

[Operator]

[Operator Instructions] the next question comes from Elliott Robinson from Bank of America.

[Elliott Robinson, analyst]

It's Elliott from Bank of America here. I've got 2 questions. If I just start with the first one, a quick one on the guidance. Can you just confirm the guidance is solving, is it talking about activity levels on an absolute level in aggregates and mining. So it ignores any degree of seasonality, for example?

[Eeva Sipilä, executive]

Yes, indeed, so we try to sort of focus on the market outlook on the commentary that adds value to you to judge on the sort of underlying healthiness or activity levels. And obviously, we may occasionally comment on seasonality, if that is something specifically relevant, but indeed hoping that this outlook sort of adds a bit more flavor than just a seasonal pattern. Obviously, we have the seasonal pattern mainly in aggregates in first half versus second half much less so in minerals.

[Elliott Robinson, analyst]

Okay. That's great. And the second question is actually just to do with the comments that you made within aggregates and dealers. Could you just give us a bit more information on -- do you say that you're still seeing a bit of destocking. Does that vary by geography at all?

[Eeva Sipilä, executive]

Well, indeed, we've seen the dealer inventories being -- having a sort of dampening effect on demand since last summer, as you may remember, and the dealers have been focused on taking their inventories down. Obviously, that inventory has come with a clearly higher cost from a working capital point of view due to the higher financing costs. And clearly, we've seen progress i.e., reduced inventories. And otherwise, obviously, I doubt we would have seen such healthy activity in the Q1 as we saw. But what I did mention is that it's not sort of all gone. So we do expect the dealers to focus on still on their inventories and be a bit hesitant to add inventory as such because the financing cost, of course, the interest rates, as we all well know, haven't yet come down, so the cost remains something for them to be focused on. But these type of digestion issues usually take a few quarters, and it clearly has been progress. Obviously, there's always an exception to the rule and things vary. Some are in better shape than others. But overall, it has been moving as expected in the right direction.

[Elliott Robinson, analyst]

Right. That's perfect. I'll get back in the queue. Thank you...

[Operator]

The next question comes from Chitrita Sinha from JP Morgan.

[Chitrita Sinha, analyst]

Good morning, I have 2, please. So firstly, on sales, peers have also seen some weakness this quarter. So I just wanted to ask how much of your Q1 sales performance was due to your own seasonality or broader industry trends that you're seeing? And how confident are you in the run rate improving for the rest of the year?

[Eeva Sipilä, executive]

Well, indeed, I think our sales really are a reflection of the backlog. I mean we started the year with a lower backlog and hence, the unexpectedly sales in both segments are reflecting that in Minerals, obviously, as I referred to in my comments. So of course, it's not just the previous quarter, but it's really the order intake of Q2 and Q3 last year, that is visible. And I wouldn't say there is a seasonality. It's really a derivative of that. I wouldn't sort of be able to see any industry pattern. I think these are company specific. And as we as we work with customers, obviously, we work with their time schedules on the deliveries. There is certain difference now when we have clearly less bigger projects and less POCs or more sort of complete contract billing type of things, but they would be sort of in the course of the sort of very ordinary variation. And now with the sort of improved activity in aggregates, I think we are comfortable on seeing sales pick up. Then again in Minerals. It's -- we've seen a very stable market, clearly sort of health in the services and then that sort of services order intake usually obviously comes through quicker, and that gives us visibility on this year quite well.

[Chitrita Sinha, analyst]

Thank you then next question just on inventory. So you mentioned some challenges to unwind inventories this quarter, and it seemed to be higher than what we saw in December. What do you see as the cadence of this unwind through this year and next year?

[Eeva Sipilä, executive]

Yes, I think we're pretty flat on be it then in comparison to year-end or actually 12 months back. So -- and obviously, there is a bit of inflation in these euro numbers if we compare to the levels of 12 months ago. So volume-wise, we've actually made already some progress. It is a sort of balance that we're taking to sort of ensure availability in times where clearly sort of supply chains are impacted by geopolitical events and then in a way of balancing that with clearly a desire to deliver better cash flow this year. And the actions are in place. And as said, we do expect to see results in the coming quarters and even if Q1 wasn't as good a start as we originally perhaps planned, but in line more important, of course, that the actions are moving.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

Have a class at it. So my first question is on the aggregates outlook. Obviously, the improvement came through as you expected for 1 quarter. And now you think demand will stay at the current level. On the order trend in the near term, am I right to assume that you can see a similar sort of decline in orders in aggregates year-over-year in the second quarter, down mid-single. You talk about continued destocking among dealers. You're obviously meeting very easy comps thereafter, but just on the second quarter. And then around different geographies. Last time, we talked about China, India and Brazil improving on top of what I think was the normal seasonality we get in developed markets. How are the different geographies developing now as part of your forward thinking? I'll start there.

[Eeva Sipilä, executive]

Okay. Well, yes, I wouldn't want to sort of go to sort of a very specific quarterly guidance. There's always a bit ups and downs. -- obviously, sort of as we -- this first quarter comparisons were tougher in both segments for that matter, and the comparisons do get easier as the year moves forward. And then again, our outlook is we base it on a sequential view going forward because we think that's more helpful for you and your colleagues rather than sort of comparing to year-over-year. I think our message in aggregate is that indeed, we saw the pickup, and that's important we are on sort in that sense on a healthier level. But it is important to understand that we are below last year levels one looks at the sort of market. And we don't -- we don't expect that to change in the coming weeks, which is basically what we're talking about in reference to a question of Q2. And here, we would need sort of clearly a bit more strength on the macro and perhaps sort of the interest cost and funding cost of our customers or dealers turning the corner. Then to your question on -- did I get it right on the sort of more from a global point of view on how this varies. So clearly, the North American market is relatively strongest in a sense that the underlying demand there on infrastructure is very visible. And now as we enter the construction season, we've clearly seen a dealer stock for that. We have seen the rest of the world improve. I think Europe is the weak link. It is -- I'm sure you as well as I do on all the challenges we have with the European economy. And obviously, that's something that I think we've said already a few already for a few quarters that we don't really expect Europe to improve in '24. And unfortunately, nothing has happened that would change our mind on that. But then we're really focused on the sort of opportunities we have in Asia, South America. -- as an example, India right now is entering election season. So Q2 probably will be a bit sluggish there because the country is very focused on running the election process, but that's then more a quarterly sort of vision, and then we would expect the economy as such to deliver opportunities in the second half of the year.

[Klas Bergelind, analyst]

My second one is on the service orders in Minerals ex currency, they're not far from the very strong level of last year. And they're obviously always seasonally strong in the first quarter because of these maintenance contracts. Is there something else, your life cycle penetration coming in better than expected and so forth. Did we see any early signs of restocking that might be too optimistic. But just curious about what drove that sort of, again, very strong Minerals order intake on the service side?

[Eeva Sipilä, executive]

Yes. Sure. So I think the main driver is really the production focus of our customers. And as you've seen, metal prices have actually improved, especially copper, which is important for us. And hence, there is indeed a lot of focus on making sure operations are running well, and that obviously builds for a healthy environment for our aftermarket business. We had very tough comparison indeed because last year, we had a couple of bigger more one could say sort of CapEx like orders in the mix. And now when the slowness on all the bigger decisions is there that obviously was not there. So this really comes from a lot of smaller deals and then really speaks for the underlying activity levels.

[Klas Bergelind, analyst]

Very quick final one on the margin performance in aggregates. Don't get me wrong, 17% is a very good level and breeders, -- and I appreciate that the level of equipment sales is very low, which you're seeing under absorption. But was there any normalization of price cost in the quarter where costs were perhaps high still against lower pricing in the P&L?

[Eeva Sipilä, executive]

I think we've done a very good job on balancing and really focusing on our margins so that we are sort of balancing our sort of cost development with the prices that we drive in the markets. And really, that is visible in our margin. Indeed, like you say, so obviously, we do have a bit of -- we lack some operational leverage in the business because of the volumes and equipment side being lower. But then I think we've really well compensated by sort of being very hungry and hungry on the margin side to protect that.

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

I just wanted to ask a question on the Minerals margins. And obviously, kind of you've done a good job this quarter, keeping them flat despite sales declining. If I think about where sales will probably end up for the full year, I think they'll be around flattish. Do you think in that environment, you can continue to keep kind of the margins of the Minerals business flat. And I guess the reason I'm asking this is obviously one of the things you're going to try and do during the year is reduce your inventories. And I'm just wondering whether we should expect any impact to come through on the margins that would be of any size or substantial that we should keep in mind? Or is that not really a concern for you and you think you can continue delivering these kind of flattish or even slightly higher margins in minerals if sales kind of flatten out or even return to growth in the second half?

[Eeva Sipilä, executive]

Thanks, Max. Yes, indeed, we are -- we have worked for our margin targets, and hence, we are definitely sort of driving for improved margins in Minerals. And this year, we will be supported by the aftermarket heavy mix. So it really is then a question of driving sort of optimal cost actions on the equipment side. Obviously, project execution matters. We've made good progress in improving the gross margins in our execution, and those elements, of course, are very important for this year as well. And we have, in the mineral side, the sort of benefit of having pretty good visibility on the sales. So in that sense, we can obviously plan our actions on that. So indeed, we're comfortable that we are moving in the right direction in the minerals, and we sort of realized that there is a lot of focus on us being able to demonstrate margin improvement there, and that's what we're very focused on. And then, of course, we -- sort of the external market may sort of make it easier or more difficult for us, but it's really around the sort of self-help that we're focused on.

[Max Yates, analyst]

Okay. And I mean, maybe if you can just -- as a follow-up to that, give us a bit of a feel for kind of the self-help that is going on in the background? Because I think we've obviously -- it's been some time since we had kind of formal cost savings targets with the synergies planned after RotaTeq. And I know there's kind of ongoing work that's happening behind the scenes. But is there any way you can give us a feel for what the kind of 1 or 2 things that you're doing kind of behind the scenes structurally on the cost base in minerals? And I'm thinking kind of what helps us get that kind of step-up from these margins towards that 20% level? And any way you can sort of quantify what kind of benefits that may generate either this year or in the next 2 to 3 years?

[Eeva Sipilä, executive]

Sure. So on the aftermarket side, it's -- I mean it's not even behind the scenes because we have sort of sent out press releases. You've seen several actions taken on aftermarket footprint, we have decided to close our foundry operations in the check. We have closed the decided to close a rubber factory in Sweden, and both of these have been announced and are now going and basically in the next couple of months will sort of seize and that obviously gives us then certain benefits on what we have been working on with sort of more optimized footprint cost and also sort of improved the utilization rate of what we have ongoing, then we've been focused on expanding our service networks. We just opened the service center in Australia last month and obviously have made that investment with a very focused business case and focused actions on to be able to grow our presence in a very key mining market. And there's a few other ones in the pipeline still Slander works. So that -- I think they are certainly sort of very concrete things as part of this. And then on the equipment side, it's really the sort of gross margin focus. So focused on procurement savings, efficiency and overall project execution and delivery execution, and those actions, the actions continue.

[Max Yates, analyst]

And just to try and push you on any kind of quantification and any way we could sort of frame the size of the impact? Or is that difficult to do at this stage?

[Eeva Sipilä, executive]

Yes. Well, we haven't commented on individual actions. Obviously, as I said on some of the press releases, you get an idea on the magnitude based on a number of personnel effected and these type of things. But overall, it's all done to improve the margin. And I think the ultimate measurement is and should be the Minerals segment margin going forward.

[Max Yates, analyst]

Okay. I'll get back in the queue. Thank you.

[Operator]

The next question comes from Anders Idborg from ABG.

[Anders Idborg, analyst]

Just a question on the sales in the deliveries in Minerals. I mean, obviously, quite a low number, down about 25% and well below where orders have run for the past year. So what was behind this? Was it customers deferring delivery? Was this a surprise to you? Or was it -- how deliveries were scheduled?

[Eeva Sipilä, executive]

Not a surprise. I think -- and obviously, I appreciate you only see the sort of backlog number as such. And we obviously kind of see how a time-wise sort of is distributed over the over the months and the years. And as I said, bearing in mind that, of course, part of the Minerals backlog is also for the next years for the 25 and 26. So yes, I mean, a few days less in March, I wouldn't sort of right big stories Easter comes every year, and it just depends a bit on if it's Q1, Q2. So of course, a few days of aftermarket business lost. But again, nothing really on that in a big way. So I think it's really just the sort of -- what we have in the mix. And as I said, we have less POC, so -- which obviously, POC would usually be a bit more sort of stable. And when we have more complete cost billing, That, of course, means that we need to be fully ready and then the sort of timing in this sort of small and medium-sized business it does vary on it sometimes and just sort of goes between the quarters. So, Yes.

[Anders Idborg, analyst]

Okay. Okay. That's good. And just to verify, in terms of your backlog and what you deliver now in Minerals, does that now fully reflect sort of a favorable price versus cost situation where you had been able to sort of price those contracts? I mean even a few quarters ago, we talked about some legacy contracts still flowing out. Do you still -- would you say that what we have now is representative basically going forward?

[Eeva Sipilä, executive]

Yes, I would say what we demonstrate is representative. Obviously, execution is that you -- it's like safety, you need to excel on it every day in a way. But I think overall, really, the sort of the legacy sort of coming from sort of dating back to sort of prior to merger time and that starts to be pretty much done. And then obviously, what we have is something in the discontinued operation, some of those legacies that. But when we think about the Minerals segment, so I think rather representative. But as I said, it's really about sort of building also the sort of processes and ways of working so that we ensure that we do continuously improve. And there, we have work ongoing but moving in the right direction.

[Operator]

The next question comes from Christian Hinderaker from Goldman Sachs.

[Christian Hinderaker, analyst]

I want to start maybe on the margin in Minerals. I think the service mix was up from 59% to 68% year-on-year, but the margin flat at 17.5%. Just want to understand, I presume the comps now are comparing like-for-like in terms of the central costs that have been absorbed into the business, I guess, mindful of what's driving that margin resilient. But clearly, the service mix improvement, one might assume that margins were up on an annual basis. I'll start there.

[Eeva Sipilä, executive]

Yes. As I mentioned in my starting my remarks. So the balance in a way of that sort of higher service mix than visa the fact that indeed sales were a bit low. So that does create certain or pressure from the more fixed cost when you think about our R&D type of costs that get distributed on a sales number, that's not growing. But other than that, there's really no sort of nothing one-off or that type of thing and a bit of a sort of slower start for the year.

[Christian Hinderaker, analyst]

Maybe just thinking about capital allocation. I think in your AGM release, you've confirmed scope for potential buyback if I've read it correctly, 82 million shares. I just wonder how do we think about that in terms of your capital allocation framework? What would be the balance sheet position or sort of market environment that we might see something like that? And also happy to discuss M&A within this context?

[Eeva Sipilä, executive]

Sure. So indeed, the Board is requesting from the shareholders, the approval for a certain buyback capacity. That request has -- is not a new one. It has been in the previous AGMs as well and then sort of used to varying degrees. What we're seeing now in the market is actually quite attractive growth opportunities whilst we see that is a short-term impact from the macro and a bit of hesitancy, -- the medium-term outlook on, for instance, copper is very, very attractive and the pressure in a way to extract more minerals to support the energy transition or the data centers or what have you in the sort of -- from a big copper consumption point of view, give us sort of opportunities to grow Metso. And hence, these -- for instance, the service center investments kind of expanding our footprint in key mining areas is something that we believe that will provide better returns to shareholders. And hence, we're quite eager to drive them forward. There's also a certain in-sourcing ongoing -- I didn't yet mention the Mexican filter factory construction that's ongoing as an example of that. And then indeed, M&A, we did 3 smaller deals last year. We have a pipeline with several opportunities also as we speak. And certainly, I'm hopeful that we will be able to close a few of them this year as well because they are quite nice adjacencies that we're looking at fitting well to our business, mostly, of course, rather small businesses, but a few sort of ones where it also matters and this sort of new risk environment and a new geopolitical reality, of course, has led us to also think about our supply chain, what we in-source, what we outsource and these type of this type of sort of in this type of thinking well may also be the NMB visible in our M&A, assuming so of things move forward. Of course, it's not the easiest market for the buyers and sellers to agree and we have our requirements and our criteria that we stick to. So we'll see how successful we are. But certainly sort of be it, as I said, on organic or nonorganic, where we are as management working very actively. And then ultimately, of course, it's for the Board then to have their view and their say on that, are these more attractive from a shareholder point of view than buybacks, Or can we do both.

[Operator]

The next question comes from Nicholas Housden from RBC. Question.

[Nicholas Housden, analyst]

My first one is on the cash flow. Obviously, a nice improvement here year-over-year. I was just hoping you could give us an indication of how you expect this to develop as we move through the year and maybe what some of the main moving pieces are in terms of backlog deliveries and net working capital movements.

[Eeva Sipilä, executive]

Sure. So obviously, sort of the backbone is the profitability and our focus to sort of be resilient on that even if the outlook is a bit more challenging as discussed. I still think that there is -- we're being focused on the aftermarket business is good at sort of also cash flow -- a very sort of cash flow generative business. And that's -- hence, the mix is supportive with the sort of lack of bigger projects. Obviously, there's no really bigger advances. So the operating cash flow is very much than relying on our actions really on the -- in the inventory side. As I said, the sort of -- we've seen the sort of payables and accounts receivable trends sort of quite logically. And I think we're sort of a pretty okay level. So they do trend with volumes, whereas in the inventory, as said, we do think we are without sort of affecting availability without sort of sacrificing on growth. We actually have some sort of extra opportunity and that would be the focus then on but doing it in a balanced way. I don't remember, was it Max or who was kind of referring to the ore inventory being sort of a risking sort of profitability. And certainly, we don't see sort of write-down issues that we would have the wrong type of inventory. We just feel we have a bit of a bit too much of it, and hence, we're absolutely sort of focused on sort of dealing it with in a sort of -- in a balanced way and one that sort of also sort of a sort of a shareholder value point of view, a meaningful way.

[Nicholas Housden, analyst]

Okay. Great. And then turning to the aggregates margins. I mean, 17% in a fairly significant downturn is quite an impressive performance. So I'm just wondering how much operating leverage is still in that business as the cycle hopefully improves in the coming quarters? I appreciate you've taken quite a lot of cost out of the business and you're expanding the footprint in India. But it just feels like, unless there's just no operating leverage in the business, then as the cycle does improve, then that margin should be moving much more into the upper teens.

[Eeva Sipilä, executive]

Well, indeed, if you look back at relatively recent history when we had a bit more operational leverage, we did deliver 18% margin. So obviously, we are down even if I think we've sort of been running faster than anything else, but still the sort of the lack of the volume obviously has an impact. Of course, sort of this is not sort of unexpected. As I said, I think we've sort of had a pretty clear view on the market, and we've sort of taken action early, very early. And now with the sort of Q1 going very much as expected. Of course, that gives us -- that visibility helps us a plan and really manage the operational leverage -- but indeed, the task would be slightly easier if there was a bit of a pickup in the European economy. But as I said, we're not sort of assuming it this year. So it's not something we're sort of counting on.

[Operator]

The next question comes from Vladimir Sergievskii from Barclays.

[Vladimir Sergievskiy, analyst]

Thank you very much for taking my question, Both of them will be on gross margin. And let me start with highlighting that obviously, gross margin was, I think, a record high this quarter, which is a very good result despite the material decline in sales. What do you think was behind actually a big drop in cost of goods sold to make it happen?

[Eeva Sipilä, executive]

Well, I would say that it is that sort of work that I referred to earlier, really managing our sort of margins in a way and balancing the sort of what the sort of cost of goods coming in versus price. Then also the sort of focus on procurement, specifically in the Minerals segment, there's been a lot of activity on that side and really sort of improving how we work with the supply chain and in a focused way. And because at the end of the day, in a way, we sort of want to continue growing R&D. And in that sense, we sort of want to have opportunity to also invest in SG&A and that putting that together with a target of improving margins, it does mean that the gross margin is really needs to be the focus. And that -- there needs to be improvement there to show the sort of improvement also on the adjusted EBITDA line.

[Vladimir Sergievskiy, analyst]

That's clear. Can I also ask about the potential impact of the planned inventory reduction on gross margins going forward? Because when I look at your inventory composition, it looks like the biggest opportunity to reduce is on finished goods. -- if you start selling more finished goods, wouldn't it mechanically potentially have less favorable impact on the absorption of cost of goods sold?

[Eeva Sipilä, executive]

Well, I think it's sort of the -- indeed, the sort of absorption is related to sort of how we're able to run operations. And then inventory, of course, is out of operations already. So it's -- if we're able to sort of move that further, then it can potentially add on. Obviously, then it sort of means that we need to sort of reduce activity in our operations to sort of push a bit more inventory through rather than sort of fresher deliveries then, of course, sort of your question is would -- or what you're referring to could materialize. And as I said, that's really a balance that we're working on. As such, we believe and feel that we have a strong balance sheet. There is no urgency. There's no sort of -- the market is certainly a relatively healthy and that we're sort of taking the inventory actions in a very balanced way in a way. But it is -- in some cases, it's also a sort of balance between those 2. And then it's just a question, okay, how do you plan it? How do you then take cost out so that, that sort of under absorption doesn't impact the margins?

[Vladimir Sergievskiy, analyst]

That's very clear. Thanks.

[Operator]

The next question comes from Mikael Doepel from Nordea.

[Mikael Doepel, analyst]

Firstly, coming back to the question on aggregates and the margins there. I said you did 17 here with a weaker kind of leverage compared to last year when you did '18. Just wondering basic commentary, I mean it seems as if this should more or less move up further rather than downwards. But just wondering, should we see 17% margin as kind of a sustained low level? Or is there any reason to assume weaker margins in the second half of this year, maybe driven by mix or something else? -- could give some comments on that.

[Eeva Sipilä, executive]

Yes. Obviously, sort of in aggregate, we have that sort of 3- to 4-month visibility, which is clearly shorter than in minerals. So in that sense, sort of predicting what the outcome of second quarter from a sort of volume and hence, operational leverage point of view will be is somewhat challenging. I mean we will sort of be wiser on -- because I said it is partly now a reflection also on the macro and financing costs and the dealer inventories on that. And -- but I think the sort of structural issues we've done, obviously, helped support indeed sort of the seasonality of the business means that there can be relatively speaking, slightly less volumes in the second half versus first half, depending then on really on the sort of market activity and the order intake in the coming months. So we certainly have a lot of work ahead of us to sort of run on this level. I think this is truly a sort of a very good achievement from the team. But of course, success build success, it's also sort of seeing the sort of what we can do and how we can act and trying to manage in that. But without sort of giving any exact promises on how the quarters will look like. But I think we've come a long way in building that resilience and then -- but there is always an element of mix. And as I said, the sort of market can, of course, still take turns that we are -- that we don't see today.

[Mikael Doepel, analyst]

Right. Okay. That's fair. And then my second question is on your selling pricing in general, if you could talk a bit about that, what kind of actions you took in the first quarter? Is there any other actions you need to take now based on inflation? I mean you talked about some index pricing on parts of the consumables business, maybe in Minerals and maybe also on the project business. Are there any hikes that you're doing in the service business, are you lowering pricing on some of the equipment business? Just to give some flavor on how you see the overall pricing picture out there right now and what kind of things you are doing on that.

[Eeva Sipilä, executive]

Sure. So obviously, entering into this year, we saw ahead in inflation in the area of labor and that data has sort of -- has happened, maybe there's -- the overall economy slowing has meant that in some areas, there is a bit less pressure on salary and wage inflation, but still sort of, obviously, in many countries, the salary levels were kind of lagging the inflation in the previous couple of years. So there's a bit of that catch-up. And that's something we were very focused on making sure that we do ensure that, that is visible in our pricing when it comes to areas where that labor component is heavier. And again, I think this is gone as planned. It's obviously no surprise to our customers, either everybody sees the same in the areas where there is talent shortage. So that is -- it's just important to kind of be ahead of the curve in a way and be alert on it. And then obviously, there's clearly less inflationary pressure in certain other areas, specifically in China, I would say it's rather deflationary environment and of course, then balancing the sort of our procurement to areas where we sort of can sort of find opportunities at the same time and then as making sure that we also are able to price the value we provide to our customers. And I think that's just sort of rather requires a lot of tight discipline and daily management.

[Operator]

The next question comes from Erkki Vesola from India.

[Erkki Vesola, analyst]

Can you hear me? Yes, still continuing on aggregates. And just for modeling purposes, could you provide us at least a verbal description of the aggregates European sales division between different parts of Europe. I mean say, between North, South and Eastern Europe and what kind of demand outlook differences you see between these regions, if any?

[Eeva Sipilä, executive]

Well, Europe has been a rather sort of heterogenic basket for the past couple of years. So indeed, we do see differences in different parts of Europe. Overall, Nordics continue to be the weaker area. The construction market here, also on the infrastructure side is muted. It's perhaps slightly better coming from a sort of very low levels, but still sort of on weak levels. There was a lot of activity last year in France related also to the Olympics. Obviously, now everything for that is built and in that sense ready. So there's been a bit of a slower demand there. Then again, it's still on a healthy level. But I would say that was on a very high-level last year. And then overall, I would say that less changes in the other parts, be it Central or Eastern or Southern Europe as such. But indeed, the -- it does -- there is a sort of clear link to the overall economy. And as we know, the European economies are slightly in different stages. So there's some difference there.

[Erkki Vesola, analyst]

And then could you provide a little bit of for where your exposure is the biggest in the Central European countries.

[Eeva Sipilä, executive]

Well, I think we're sort of -- we're relatively well present in all of the main markets. One could, of course, assume that relatively -- our home market is well covered by Metso. But as that whole market has been on low levels for a couple of years already, obviously, and we have focused on other areas. We have, I would say, a generally good footprint in the Eastern European countries. Obviously, there's still opportunity for us to grow and strengthen our network.

[Erkki Vesola, analyst]

Okay. Sounds very good. Thank you so much.

[Juha Rouhiainen, executive]

All right. Thanks, everybody, for participating and asking questions. This conference call concludes now, and we are getting ready to welcome our shareholders to the Annual General Meeting. For everybody, we wish a good day and speak soon. Thanks. Bye.