Valmet Oyj (VALMT) Earnings Call Transcript & Summary

All right. Ladies and gentlemen, welcome to Valmet's Q4 2020 Results Publication Webcast. My name is Pekka Rouhiainen. I'm the Head of Investor Relations here at Valmet. With me today are Pasi Laine, Valmet's President and CEO; as well as Kari Saarinen, CFO. The agenda is so that Pasi will first go through the highlights of the quarter. Kari will then present financials in more detail. And after that, we will be taking questions over the phone lines. But without further ado, Pasi, please?

Okay. Thank you, Pekka. So welcome also on my behalf. So net sales in Valmet amounted to EUR 3.740 billion and comparable EBITA increased to EUR 365 million in 2020. So I have traditional agenda. First, 2020 in brief, then development of business lines. Then, like Pekka said, Kari will go through the financial development, and thereafter, I'll go through financial proposal, guidance and short-term market outlook. So first, 2020 in brief. So our orders received decreased to EUR 1.772 billion in stable business, and orders received decreased to EUR 1.962 billion in capital business. Net sales were EUR 3.740 billion, and backlog amounted to about EUR 3.3 billion in the end of the year. And comparable EBITA, like we said in the heading, increased to EUR 365 million, and margin was 9.8%. And gearing was 13%. So here, you have the same numbers as well, like total orders received was EUR 3.653 billion, which take into account the challenges during 2020 because of COVID, was a good number. Our net sales were EUR 3.740 billion, and comparable EBITA, like I said, 9.8%. And backlog in the exact numbers, EUR 3.257 billion. End of the year, we employed about 14,000 people. Business-wise, it's remarkable that big part of the business, about 58% -- 54% came in orders received from Pulp and Energy and Paper, capital businesses. And the rest came from our stable businesses, including Services and Automation. Geographically, biggest change was that China was very active. Like you see, 24% of our orders came from China. Traditionally, it has been closer to 10%, 15%. So 24% was a good achievement for us in China. Here, you see the development of Valmet since 2013. So our orders received has been increasing from about EUR 2.2 billion level to EUR 3.6 billion level. Last year was the record, so this year, we were a little bit lower. Net sales has been growing nicely since 2014. And last year, we ended up a little bit over EUR 3.7 billion. Comparable EBITA has been increasing nicely as well. First, it was EUR 50 million. And this year, we ended up EUR 365 million. And at the same time, we have been able to improve comparable EBITA margin every year. And now we ended up in record profitability in EBITA margin, being 9.5%. And that's close to the target which we set couple of years ago to reach 10% to 12% EBITA percentage level. So nice and consistent development environment over the last 7 years. Like I said, our orders received decreased to EUR 3.6 billion. And here, maybe the -- here, you see the graph as well. So at the highest, we were over EUR 4 billion -- EUR 4.3 billion roughly, and now we are at EUR 3.65 billion. And here, you see the area-wise development as well. China orders were EUR 885 million last year. So China was very important for -- market for us in all the businesses, in Services, Automation, Pulp and Energy and Paper. And here, you see also that the order intake declined in North America comparing to earlier years as well as in Europe, Middle East and Africa. Our stable business, which includes Services and Automation, orders received totaled to EUR 1.772 billion, and that's 100 -- roughly EUR 100 million down compared to last year. And this EUR 100 million is coming, like you will later see, from Services. Automation was holding the level of order intake of last year. Then our backlog is EUR 3.257 billion. It's a little bit lower than in earlier quarters, but it's still at good level. So EUR 3.2 billion means that we have very good workload in most of our units. And it means also that in some units, we have a little bit long delivery times than normally we would have. So EUR 3.2 billion order intake is -- or backlog is good backlog for us. We are saying that about 75% of the order backlog is currently expected to realize as net sales during '21. Last year, the corresponding number was about 70%. Then some words about the business lines. Here, first, Services. So order intake ended up in EUR 1.356 billion, and it's down compared to last year about EUR 100 million. Net sales went down as well compared to our last year almost EUR 50 million. But here, one has to pay attention to one topic, and it's that orders received was higher than net sales. So our order intake was higher net sales. And all in all, we are, of course, not talking about the profitability of the separate businesses, but we are happy with the profit development also in Services in 2020. Why order intake declined compared to last year? We have been saying earlier as well that the utilization of graphical paper mills has declined, and it has caused us a decline in order intake. And then, of course, it has been challenging to access customer sites, especially mill improvement type of projects. And that has been causing the other -- or that's the other reason for declining order intake. To the outlook, I'll come back in the end of the presentation. Net -- if we look at business by business unit, the biggest change is that mill improvement business is now 25% of the business and in earlier years, has been quite much bigger percentage. So that's where the biggest hit has happened in our order intake. Geographically, I would point out that China was active, like you see here, 10% ending up somewhere to EUR 135 million. The other area which was active was South America. But there, we had currency headwind. And that's why it was not growing in euros, but in local currencies, we had very good development in South America. The rest of areas were impacted by COVID, like earlier explained. In Automation, our orders received were EUR 315 million last year, 300 -- sorry, EUR 415 million and last year, EUR 416 million. So we had very good catch-up the end -- in last quarter. Last quarter order intake was EUR 120 million, which is the record order intake in Valmet years. We were successful with package sales, so about EUR 80 million of the order intake in Automation came from package sales, which we are selling together -- where we are selling together our capital equipment and automation. So that market was developing well. And all in all, we are quite pleased that Automation, even if there was a COVID year, it was able to achieve last year's numbers in order intake. Net sales grew to EUR 402 million, so also good development. COVID was impacting our Services business, mainly in direct sales, exactly like in Services, but otherwise, our team managed COVID impact very well in Automation. Business -- customer-wise, 71% of our order intake is coming from pulp and paper and 29% last year came from energy and processes. Geographically, China was also stronger than it has been in previous years. Due to the package sales, we have been getting together -- Automation has been getting together with the capital businesses. In Pulp and Energy, third quarter was low in order intake, and then we have bounced back in -- or it's more a timing question, not a bounce back. Timing was more positive in Pulp and Energy in order intake, and our order intake ended up in EUR 291 million in the last quarter. The whole year was EUR 934 million, which is lower than a year ago but still at good level. Net sales ended up in EUR 1 billion and grew over EUR 80 million compared to earlier years. In Pulp and Energy, our organization managed COVID well as well. So of course, there are some delays in some of the projects but nothing material from our perspective. And all in all, our teams have focused a lot in making the best that our personnel is safe as well as customers' personnel are safe in the sites where we work. But good development in Pulp and Energy as well. The big change is that 72% of order intake came from pulp, and energy was 28%. Some years ago, energy was over 50%. Now energy market hasn't been that active. Pulp market has been active. And the positive thing, of course, is that to the big extent, we can use the same resources both in manufacturing and engineering in selling energy boilers and making recovery boilers for pulp sites. So this flexibility in our organization means that we have good workload utilization in -- for energy engineers and energy manufacturing capability because they are now used for pulp projects. Geographically, again, the same comment that China was more active than it usually is. And of course, we got in the beginning of the year, nice order in South America from AMADEUS project. And that's why the South American order intake was nice as well last year. Paper business line continued with order intake of EUR 1 billion, so EUR 1.029 billion. And it's the fourth year in a row that our order intake is over EUR 1 billion. This year -- or last year, our net sales were also EUR 1 billion -- EUR 1.076 million. So market has been active in Paper business line again. And the same message than what I had for Pulp and Energy, our organization has managed COVID-19 exceptional situations well, trying to make sure that our people are safe and then also making sure that our deliveries are working on time. And of course, in all our businesses, people have now learned to work remotely a lot compared to earlier years. So the way how we make start-up is different than it was 2 years ago. And so our organization has learned many new things and ways to work in 2020. Paper business line by customers is interesting one. So 21%, so roughly EUR 200 million, EUR 210 million orders came from traditional paper machines, so printing and writing paper machines. Then board was about 53%, so a majority of our business. And then tissue came back in nice volumes. So about 26%, which corresponds to EUR 260 million order intake roughly was a good year for tissue, and you will see that as a change in our market outlook as well. But all parts of the business were performing well. And like you remember from earlier years, we can use the same engineering, manufacturing capacity for board and paper pulp. And here, you see that 50% of total intake came from China. So we are very pleased with our market development and market position and market activity in China. Good. That was my summary. Now it's Kari's turn to go through the financial numbers.

All right. Thank you, Pasi, and also good afternoon on my behalf as well. And first, I would like to thank all the Valmeteers who have been working restlessly on very difficult circumstances to deliver these excellent results for year 2020 and also big thanks to the finance team around the world for the quality that is second to none. So quarter 4 in brief. So our orders -- so stable business orders reduced by 9% to EUR 463 million. Our capital business orders received remained at previous year's level at EUR 502 million at the quarter. Quarter's net sales, those increased by 6% to almost EUR 1.2 billion. Capital business increased here 11%, where stable business was flat. Sales mix, 44% net sales was stable, 56% capital. Last year, we were at 47% stable and 53% for capital, so some change there. Our order backlog, EUR 3.3 billion. This is pretty much the same level as last year. And then our comparable EBITA for the quarter, that was record high, 12.5%. And then looking at key figures in a bit more detail. So orders received reduced by 7%. Paper business line increased. Automation total, so including the package sales, those remained at the previous year's level, and Pulp and Energy and as well as Services business line reduced. Orders to China and orders placed at Pacific increased. The other geographical areas reduced during quarter 4. Order backlog, last year's level, we estimate that around 75% of order backlog will be recognized as revenue during this year. Last year, this figure was 70%. Net sales -- total -- net sales were plus 6%, an increase during the quarter at Paper business line. Services and Automation were flat, and Pulp and Energy reduced. Net sales in China increased. Rest of the world was at the previous year's level. Our comparable EBITA, EUR 146 million, which equals to 12.5% and as said, this is record high. Key drivers for strong EBITA were good sales, also successful project execution, also prudence with the costs. Please note that the comparable EBITA here does not include Valmet's share of Neles' profits. Our quarter's order cash flow, EUR 114 million. That's a bit below the last year's but on a relatively good level. And then about full year. So orders received for the full year, those reduced by 8%. Paper business line and Automation business line total, including package orders, were at previous year's level. And then Services business line and also Pulp and Energy business lines reduced. And Pasi already elaborated the impact of COVID-19 pandemic, specifically on Services here. Orders received in China area, those increased and were 3.5x higher than year 2019, and that highlights our strong position in China. Foreign exchange impact to orders received was negative. So calculating with the comparable currency, it was minus EUR 101 million. The impact and majority of that is coming from Brazilian reais. Net sales for the year, a bit over EUR 3.7 billion. Paper business line and also Pulp and Energy business lines increased. So capital business increased. And Automation and Services business lines were at the previous year's level. We had a big increase in South America, over 60% at full year's net sales. Full year comparable EBITA, that increased to 9.8% of net sales or to EUR 365 million. And here, important thing to notice is that we have been able to improve both EBITA percent as well as EBITA euros every year since the beginning of Valmet year 2014. And we are also getting close to our target range of 10% to 12%. Operating profit, 8.5%, and EPS, that was EUR 1.54. Cash flow for the year, EUR 532 million, and gearing was 13%. Absolute gross profit, that was the highest ever. Gross profit percent, that was 23.4%, almost the same as last year. And I said earlier, the stable business sales were 44% of the quarter's net sales. Last year, we were at 47%. Full year stable business net sales also 44%. Last year, it was 48%. So our organization has been successful in maintaining gross profit levels even though the sales mix has changed during the year. SG&As were lower, lower than last year for the quarter as well for the full year. Pandemic has reduced travel and also personnel has found new remote ways to serve our customers and also perform in both external and internal projects. During last year, there were also permanent and temporary layoffs at some functions and locations. And then going further, of course, there will be some pressure in SG&As once the pandemic is over and business activity returns. Our internal improvement projects such as ERP and digitalization continued pretty much at same level as earlier. R&D costs were 2% of net sales. Our EBITA target, that's 10% to 12%, and this was set a year ago. We got very close to the target already within 1 year even with the changed sales mix. And then the highest ever EBITA shows that our stable business were able to perform well even though the net sales were flat and the relative share reduced and that our capital businesses had very good project progress to ensure strong revenue and also -- and they also had resilient project management as -- and execution during the challenging year as well. Cash flow. So we have had now 6 good quarters with cash flow. Quarter's cash flow, EUR 114 million; and full year, EUR 532 million. Favorable development of profitability as well as new capital orders were the key contributors to the record high cash flow. Net working capital. So net working capital was minus 16% of rolling 12 months orders received. Then it was minus EUR 588 million. And that means that in case the net working capital would increase 5% to a bit more normal level to minus 11%, minus 12% of rolling 12 months orders, so net working capital would increase EUR 180 million to EUR 200 million. So that's important to notice here. And then looking at net debt. Net debt, so our gearing increased to 13% from last year's minus 22%. We need to notice here that we took some loans now because of the acquisition of Neles' shares as well as the PMP Poland. Our equity-to-asset ratio, 39%. So that is actually -- that has been -- our equity-to-asset ratio actually has remained quite stable, around 40% over the years. And then return on capital employed. So our capital employed increased because we took that EUR 230 million loans to finance the acquisitions. But with the good financial performance, our return on capital employed was 22%, and that remained over our target level of 20%. Thank you, and back to you, Pasi.

Good. Then it's time for dividend proposal guidance and short-term market outlook. So our dividend policy is saying that we should pay dividend -- the dividend payout would be at least 50% of net profit. And our Board of Directors is proposing to Annual General Meeting that we would pay 90% -- EUR 0.90 per share, which represents about 58% payout ratio. And if that will be approved by AGM, then we would have a nice history of growing our dividend constantly year after year. And now the increase would be EUR 0.10 per share comparing to last year. So EUR 0.90 per share is now the proposed. And we are, of course, happy that we have been able to increase our dividends year after year since Valmet has been demerged. Then guidance and short-term market outlook. So guidance is that Valmet estimates that net sales in 2021 remain at the previous year's level in comparison with 2020, and comparable EBITA in 2021 will remain at the previous year's level in comparison with 2020. So we are saying flat, flat for net sales and EBITA. Then market outlook, which is for coming 6 months, and we are saying that 50% roughly is coming from capacity utilization and 50% from market activity. In Services, we are still seeing satisfactory and weak. And then if a I little bit describe the areas, then we have good activity in China. I would say Asia Pacific is becoming more active. Then in Europe, it's very difficult to know how things are developing. North America, the same. And then South America will continue to be active. So that's geographically. Then business type-wise, we will have still challenges to access customer sites in mill type of project -- any type of projects. And then rest of the services should be more coming to the normal level. Then how we see a little bit longer term the future is such that the first half, because the vaccination hasn't been proceeding further, there are some implications to our Services business. And then during the latter part of the year, we start to see more activity in mill type of projects as well with our customers. That's our current thinking in the long run. In Automation, we changed the market outlook to good -- or the outlook to good. And like you saw, our order intake was at last year's level. We have good capacity utilization in almost all the units, and there is good market activity in Automation still, so all the reasons to say that the market is good. In Pulp, you saw the order intake was good in 2020. And there are still several projects in development phase and negotiation phase. So we have all the reasons to say that Pulp continues to be good. In Energy, market was not active last year. And currently, we are saying that the outlook is weak. And there, like I said, of course, it would be nice to have satisfactory and good in Energy as well. But capacity utilization point of view, we can use almost all the people in recovery side and in other parts of the Pulp and Energy business. So we don't have a challenge with capacity utilization at all in that business. Paper and board, good order intake, like you saw, and market activity continues to be as good. Tissue order intake improved in latter part of the year, which means that now we have good utilization, and the market activity is good as well. So this is the outlook we have now for coming 6 months. So Pekka?

All right. Thank you, Pasi and Kari, and we will then move to the Q&A session, and we don't have a physical audience here, here at Keilasatama. We'll be taking questions over the phone lines. So operator, I hand over to you now.

[Operator Instructions] Now our first question comes from the line of Robert Davies at Morgan Stanley.

My question was just around Neles and just in terms of the accounting. When you provided your guidance for flat EBITA for '21 on '20, is that including or excluding the Neles contribution, just to be clear?

Well, thanks for the question. And so our comparable EBITA does not include the -- anything from Neles. So it's without any impact on Neles.

Right. Okay. And then just on, I guess, some of the sort of changes in views in sort of the short-term outlooks. Maybe if you could just kind of walk us through there what was the kind of key driver behind the change in Energy in particular.

Energy, like you saw last year, order intake was quite low compared to the earlier years. So the market activity hasn't been good. And there, the biggest contribution to the change is the marine scrubber business, which was not active last year. 2 years ago, our order intake was roughly EUR 190 million, the year after EUR 120 million, EUR 130 million. And last year, the order intake was very low. So that's maybe the biggest contributor to the low order intake. And we don't see that, that market will bounce big -- in big way back in '21. It will be more active than '20 but not to the level with where it was in 2019.

And then my final one was just around, I guess, the medium-term outlook for margins. You've obviously sort of had a number of years we've made very, very good progress on the margins. And the guide for '21 is sort of flattish. What's the kind of thinking over the sort of next 2 to 3 years in terms of the kind of evolution of the sort of margin profile over that period? Is mix going to be the biggest impact on sort of margin outcome? Is it going to be kind of cost actions? What's going to be the sort of biggest swing factor in your view now over the next 1 to 2 years for where you come in that range?

Thank you. No, our target is to reach EBITA 10% to 12%, and we are now close by. And since the acquisition of Automation, we have been saying that margin improvement comes with operational improvement in all the topics: trying to push the sales prices up; try to develop new, more cost-competitive products; reduce cost in existing products by R&D; improving project delivery by project management; improving quality; improving procurement savings. And we continue to drive all those actions forward. So we are not saying that we are ready with any of those. And then the other thing we have been saying that once we have been increasing the target [ setting ] by 2%, then it's not possible to achieve the improvement if only the other side of the business is -- or one side of the business is developing profitability. So if half is coming from stable, half is coming from capital roughly, then if you want to develop it by 2%, then if the development is coming only from one side, then the other part has to improve by 4%. So we have been pushing profitability up in all our businesses. And like Kari can now comment on the mix issue, which was interesting in 2020.

Yes. So still to continue so that our stable business and capital business mix typically is 50-50. So that's a normal year if we look at like past years. And now it was 56-44. And so even with that mix, so we were able to reach 9.8%. So that, of course, shows that our capital business is strong, and we are executing our projects well. And then also to elaborate a bit more Pasi was saying, so not to forget the ERP project one day is going to bring us efficiencies as well as the internal digitalization as well.

Our next question comes from the line of Manu Rimpelä of Nordea Markets.

My question would be on the margins of the different business units. I know you don't talk about the absolute margins, but maybe you could help us to understand that. How did they evolve during the year? Did we see margin improvement across all of the business lines? Or was there some that didn't improve margins, for example, Services?

All our businesses were developing favorably.

Okay. That is clear. And then if you talk about these bigger pulp projects that you mentioned that you have in the pipeline, so can you comment a bit about how do you see them being geographically spread across the globe?

Bigger and medium and smaller. So South America will become active either this year or next year, again, with capacity extensions or even there are discussions about the new mills. Then Asia has potential. And then one interesting area is China as well. So some of the Chinese customers are planning to build virgin fiber pulp mills in China. So China will be active market. So at least 3 -- these 3 will be active.

And maybe to follow up on that topic. So would you say that the current backlog, which is at a pretty good level, would carry you through 2021 with good utilization rates? Or do you still have backlog left in the equipment business for the start of 2022? So what I'm trying to understand is that when do you think that you will need to start getting new orders from these bigger projects in order to kind of ensure the backlog continuation -- or utilization continuation in the equipment business?

I answer a little bit the other way around. Last -- like last year, Pulp and Energy order intake was somewhere EUR 940 million, and it's good enough level for us to keep everybody busy. And to get to that level, we needed one bigger order in -- from -- and it came in South America. So with this EUR 900 million level, we have good utilization. And when it goes over, then we have, of course, even better utilization. And currently, we are only giving market outlook for coming 6 months. But if I give more general answer, it seems that all our customers are pretty confident that the long-term development of pulp demand is good and also that long-term board and packaging create demands as well as tissue demands are good. So then, of course, there are variations between the quarters and half years. But I think all our customers are pretty confident with the long-term development currently.

Now our next question comes from the line of Tom Skogman of Carnegie.

Yes, this is Tom from Carnegie. A bit of kind of technicality. So I understand you don't book Neles now as part of EBITA adjusted, but is it booked as EU items, and is that a line where we'll find it in the future? Or where will it be found?

Neles -- well, the Neles' -- the share of Neles' profit is part of EBITA and also EBIT. So it is there, but it's not part of the comparable EBITA. So because we treat that as an item that management can't really impact on the level of the profit there.

And that explains...

Can we say that we think about it, how to make sure that everybody understands how much is coming from Neles?

Yes, it is there. So that is -- so maybe, Tom, to continue still, so we have -- our share of Neles' quarterly profit from quarter 3 2020, and that is around EUR 3 million in EBITA.

Yes, I noticed there was like plus 1 between EBITA adjusted and EBITA reported. So there are then EU items and then it's plus 3 from this. It makes it a bit complicated. [ You won't ] find the numbers.

Yes, that's a bit -- gets a bit complicated, Tom, but there's also then items between comparable -- other items between comparable EBITA and EBITA as well.

Yes, I hope you can clarify that in some tables in coming reports. Then I wonder how much sales came from the acquired PMP company in 2020.

That was around EUR 27 million that came from PMP Poland.

And that's the full year figure, right?

Yes, that's all in quarter 4 because we started to consolidate beginning of October.

Yes. And then the FX impact on top line last year, what -- I heard you say, was it -- it was quite a big number, but I couldn't catch it during your presentation.

Yes, Tom. So it was EUR 101 million, the conversion for orders, so EUR 101 million. And for net sales, it was EUR 100 million.

Negative.

Negative, and big piece coming from Brazilian reais.

Yes. And then finally, I have to ask, of course, again about Neles. Now we saw that Alfa Laval's CEO yesterday stated that he's still very interested in buying Neles. So I mean what should we expect without perhaps talking about your [ tax situation ], but is it so that this really remain an unclear situation most likely throughout this year? Or what do you expect?