Valmet Oyj (VALMT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Valmet's Q4 2021 Results Publication and Webcast. My name is Pekka Rouhiainen, I'm the Head of Investor Relations here at Valmet. And presenters today are President and CEO, Pasi Laine; and CFO, Kari Saarinen. Without further ado, Pasi, please go ahead.

Thank you, Pekka. Hello, it's Pasi again. So my main message today is that is our orders received increased to EUR 4.7 billion and comparable EBITA increased EUR 429 million in '21, so a good year for Valmet. So the content is like usually, first 2021 in brief, then some words about business lines and how they have been developing. Then Kari will go through the financial development. I will come back again to talk about dividend proposal, guidance and short-term market outlook and about merger with Neles. So first, 2021 in brief. So our orders received in stable business were EUR 1.954 billion, so I'll come back to that later on couple of times. In capital business, orders received were close to EUR 2.9 billion. Our net sales increased to EUR 9.335 billion (sic) EUR 3.935 billion. Our backlog ended up being EUR 4.1 billion. And comparable EBITA increased EUR 429 million and margin was 10.9%. And our gearing was in the end of the period, minus 7%. Here, the same numbers on the left side. And then on top of that, there's information that we had in the end of the year, about 14,200 employees. We look to order intake by business lines. Then of course, the big news is that even if stable business, meaning Automation and Services had a good year, and we're growing nicely. Still the Pulp and Paper activity -- and Paper activity were such that the ratio between stable business and capital was heavily on capital business side. Area-wise, Europe was stronger than normally. Normally it's about 40% in order intake. North America, a little bit below the normal, which is 20% and last year it was 15%. And then of course, it's very nice to see that South America, Asia-Pacific and China were all having good order intake also in '21. Then if we look on development since 2013. So in orders received, we had a record year. In net sales, we had a record year. In comparable EBITA, we had a record year. And in comparable EBITA margin, we had a record year. So we have 8 very good years behind Valmet, and I'll come back later on to the future. But of course, we are very -- very satisfied how the company and our operations have been developing over the last 8 years. Like I said, our orders received ended up EUR 4.7 billion and there you see the quarterly variations. So nice develop in the end of the year. And here, you see also the order intake by our areas. North America was growing from EUR 620 million to EUR 720 million. South America had a very good year, almost EUR 700 million, and last year close to about EUR 380 million. Europe was strong in -- especially in capital, ended up having orders over EUR 2 billion, and last year about EUR 1.4 billion. China is the only area which declined, but then EUR 755 million is very good number for China as well. And Asia-Pacific grew from about EUR 350 million to EUR 540 million. So all the areas -- 4 areas were growing and then China, even if it was declining, had very good year. So geographically also a strong performance in Valmet. Then if we look our development in stable business. First, in 2013-'14, we had only Services business. Then we acquired Automation business and then we have made some more bolt-on acquisitions. 2019 was the record year before COVID. And then the order intake was EUR 1.875 billion. Then we dropped a little bit under EUR 1.8 billion. And now we had a record year in order intake in stable business. And order intake in stable business ended up at EUR 1.954 billion. So order intake was higher than pre-COVID year, and that was also the target. And we are, of course, very pleased that we achieved that target. Our backlog was about EUR 4.1 billion. And out of that, 75% is in capital business and 25% is in Services business. We estimate now that about 70% of the backlog is expected to be realized as net sales during '22. Last year, the corresponding percentage was 75%, but the backlog was about EUR 3.2 billion. So we have a stronger backlog now for '22 than we had in '21. Then some words about the business lines. Services order intake ended up at EUR 1.488 billion, and it's about EUR 30 million higher -- close to EUR 30 million higher than in 2019. So we are very happy that Services is higher -- order intake was higher level -- at higher level than pre-COVID and now we are in growth mode again. So good development in Services. Net sales, Kari will come back later on, but it was growing from 2020 and ended up EUR 1.366 billion. But we are still there behind the pre-COVID level. So this is maybe a slight disappointment to us how Services net sales has been developing. Kari will come back to the reasons later on. Services business line, business unit-wise was developing well. So all the business units had a growth order -- growth in order intake compared to last year. And that's, of course, very good. And all the areas had growth as well. Especially strong was the performance in North America. And we are, of course, happy that in the end of the year, Europe started -- the activity in Europe started to improve, and even Europe ended up in growth numbers compared to last year. In Automation, we ended up at order intake in EUR 467 million, and that was clearly about EUR 50 million higher number than a year ago. So good growth in Automation. Net sales, likewise, wasn't developing as quickly as one would have maybe wished, and we ended up in net sales to EUR 412 million, so EUR 10 million than a year ago. In Automation, about 74% came from Pulp and Paper and the rest came from Energy and Processes. Geographically, Europe was strong, China was strong and the other areas were -- developed well as well. But there, of course, you see that we still have a lot of work to globalize our Automation business. So it's still very much an Europe dominant business. In Pulp and Energy, order intake ended up a little bit below EUR 1.2 billion, so good order intake in Pulp and Energy. In net sales, we ended up a little bit over EUR 1 billion, so EUR 30 million increase there as well compared to last year. So all in all, steady development in Pulp and Energy. And then the big change compared to earlier years is that 78% of the order intake came from Pulp, Energy was 22%. So some of you might remember that it was almost 50%-50% share when the Marine market was very active. So we had -- even if we have been losing some projects in Pulp, order intake in Pulp has been good. And here, geographically, Europe is strong, and obvious reason is that we got very big order from Metsa, that's of course, affecting the order intake. South America was strong as well, and North America is a market area where we still have quite a lot of work to be done. Then Paper, so 4 years in a row, paper was about EUR 1 billion in order intake. And last year, it ended up almost EUR 1.7 billion. So Jari and Jari's team have been doing a very good job in keeping our market share high. And of course, market activity has been high as well, but very good order intake in Paper business line. And net sales has been developing favorably well as well so we were in net sales almost at EUR 1.2 billion level and growth was about EUR 120 million compared to last year. So good development in Paper. And there, when we looked at by business unit, so -- or by customer segments actually, 79% of the orders came from board. So board market has -- board machine market has been very active. 7% came out of Paper. So we have been selling paper machines as well and rebuilds to paper machines, and 14% came out of tissue machines. Geographically, Europe was the biggest. China was smaller than in previous years, but it was still active. So, 24% out of this EUR 1.7 billion is, of course, very good market activity in China. And then, South America was active. North America active, but compared to the others little bit less. And Asia-Pacific active as well, but same story, compared to the others is 13%, but absolute numbers Asia-Pacific has had good activity as well. So this quick overview of the business lines and now it's Kari's turn to talk about the numbers.

Okay. Thank you, Pasi, and also good afternoon on my behalf as well. So first, I will, of course, like to thank all the Valmeteers who've been involved in this closing now and during these difficult times, some folks even having the virus -- coronavirus and still, like, excellent work. Thank you very much. And now, then looking at quarter 4 in brief. So both capital business as well -- both stable and also capital business orders increased during the quarter. Stable business increased by 10% and capital business by 20%. Net sales were EUR 1.2 billion. Quarter 4 is seasonally high for us. Order backlog at EUR 4.1 billion. Previous year, we were at EUR 3.3 billion, so this is 26% increase. Order -- and then EBITA, that was the same as previous year, so EUR 147 million, previous year EUR 146 million. And EBITA this year -- EBITA percent of year 2021, 12.2% and previous year at 12.5%. Balance sheet was strong. Our gearing was minus 7%. And then some more key figures here. So as I said, our quarterly orders received increased by 16% to around EUR 1.1 billion. Paper business line that increased by 71%, Services business line by 13%, and Automation by 8%. And that means that Pulp and Energy actually [ released ] a bit. Out of the areas, South America increased by over 100%, EMEA by over 60%. Biggest countries for the quarter, they were Brazil, Sweden and the USA. Quarter's net sales EUR 1.2 billion. This is 3% higher than compared to the previous year. Automation and Pulp and Energy business lines increased, Services was flat and Paper business line was minus 5%. Service business line clearly had some delays from subcontractors as well as from transportation impacting the timing of revenue. And Paper business line is currently capacity limited with the longer delivery times than usually with its projects, and that also impacts the revenue recognition there. Cash flow for the quarter, EUR 96 million. Full year's orders received increased by 30% and orders were EUR 4.7 billion. All business lines increased, driven by Paper business line's 65% increase and so Paper business line increased from around EUR 1 billion level to EUR 1.7 billion level, as Pasi already noticed. Pulp and Energy business line increased by 26%, Automation by 14%, and Services by 10%. Important here to notice is that, Service business line was minus 3% after quarter 1, and that full year orders were now 2% above pre-pandemic, so year 2019. So Services clearly back on growth mode. All areas, except China increased. But regardless of that, China remained the second highest area with the others. Full year net sales increased by 5% to above EUR 3.9 billion. Paper business line 11% above, other business lines between 0 and 3% growth. Full year sales split was 57% capital and 43% stable; pretty much the same as last year that was 56%, 44%. So no major change here. Full year comparable EBITA, EUR 429 million or 10.9%. So as Pasi mentioned, record high for us. Increased from previous year, 1.1 percent points EBITA, that was EUR 448 million, including EUR 40 million profits from Neles' profit. Earnings per share, EUR 1.98 and cash flow was EUR 482 million, gearing minus 7%. So good development from previous year's 13%. Gross profit for the quarter 25%. Previous year's quarter 4 was 23%. Stable business' share of the net sales increased slightly for the quarter from 44% to 46%. Full year gross profit was 25% as well. Last year, it was 24%. Project portfolio remained decent. Project execution as well as project management have been solid and also cost inflation. So we have been able to mitigate cost inflation by procurement savings as well as price increases. Business activity, so looking at the SG&A, so business activity increased during the second half, and specifically quarter 4, which also shows that development on SG&A. So SG&A were 15% for -- of the sales for the full year. And comparable EBITA development here, so increase each year. Year '21, as I said, ended at 10.9%. This is in -- at the middle or this is in the middle of that -- our target range in between 10% and 12%, which we set for year 2020 onwards. Cash flow and net working capital. So cash flow was EUR 96 million for the quarter and EUR 482 million for the full year. Profitability and also reduction of net working capital were the key components for a strong cash flow. CapEx were EUR 97 million for the full year, EUR 28 million for the quarter. This is slightly higher than our normal between EUR 80 million and EUR 90 million. We had EUR 570 million cash, end of the year. This is 90% more what we had a year ago. Our net working capital, that reduced to minus EUR 673 million, and it was minus 14% of rolling 12 months' orders. Previous year was minus 16%. Net debt and gearing. So gearing was minus 7% end of the year, previous year's 13%, meaning that the net debt actually reduced from around EUR 150 million level to around minus EUR 90 million. So good development here with gearing and net debt. Return to earnings increased and that means that the equity to asset ratio was 42%. A year ago, we were at 39%. Capital employed and also then return on capital employed. So comparable return on capital employed that was 23%, so good figure. Our capital employed increased, as we can see here. And the cost to retained earnings increased. So that's the driver there. EPS, earnings per share, EUR 1.98 and that's 29% increase from previous year. And this EPS EUR 1.98, so that is pretty much 6.5x higher than what we had 7 years ago once we started. So thank you very much and back to you, Pasi.

Good. So next topics are dividend proposal guidance and short-term market outlook. So dividend proposal. First our dividend policy. So our policy is to pay -- dividend payout is at least 50% of net profit, which Kari just explained. And now Board of Directors has a proposal to annual general meeting that we would be paying EUR 1.20 dividend per share, which represents 61% payout ratio. And here, you see also the development of the dividend per share. So we started with EUR 0.15, last year it was EUR 0.90 and now the proposal to AGM is EUR 1.20, being 61% of the net profit. Then our guidance. So, Valmet estimates that net sales in '22 will increase in comparison with '21. And comparable EBITA in '22 will increase in comparison with '21. So both net sales will increase and EBITA will increase. Then short-term market outlook. In Services, we keep the good. So order intake was growing 10%, like Kari was saying. We have good workload situation and market is active, so all the reasons to keep the outlook as good. In Automation, you saw the order intake as well, it has been EUR 600 -- sorry, EUR 468 million, so good order intake and order intake activity and market activity continues at a good level. In Pulp, order intake last year was good, and we still have many cases under development. They are smaller ones maybe than last year, but still good activity in Asia-Pacific, especially in China. In Energy, our order intake improved in the latter part of the year or last quarter and we have also reasonable pipeline now in business -- Energy sales cases. And those are the reasons why we now increased the outlook from weak to satisfactory. Board and Paper last year was -- we only have terminology up to good, but maybe it was a little bit more than good. And we still have good market activity. So we have all the reasons to keep the outlook as good. And this you -- like you saw, order intake was satisfactory last year and so is the market activity, and that's why we keep our outlook at a satisfactory level. So guidance increase, increase, one change in outlook. Now I'll change the slide so that Pekka can talk official talk.

Thank you, Pasi. So the next part of the presentation, the Q&A session. After it will contain discussion regarding Valmet's contemplated merger with Neles. Securities laws in the United States and in other jurisdictions restrict Valmet from discussing or disclosing information with respect to the contemplated merger. Under the completion of the merger, Valmet and Neles will carry out their respective businesses as separate and independent companies. The materials and oral comments regarding the contemplated merger are not provided for and are not directed at any person that is a citizen or resident of or located in the United States. That's all, Pasi, please.

Okay. Thank you, Pekka. So, merger with Neles. So like we have been saying, Valmet and Neles to merge, creating a leading company with unique offering for process industries globally. So we are very eager in developing this merger. Like, you know, both the companies' AGMs or AGM general meetings approved the merger in September '21. We have integration planning ongoing. Of course, we have to take into account all the competition authority limitations. But all the teams which now can work under actions whether we can do, have seen a lot of energy and positive atmosphere in the teams. We have competition authority process ongoing, we have obtained unconditional clearances in Germany, Poland, Saudi Arabia, Turkey, South Africa, Chile and Russia. And then with the rest, Valmet and Neles both are working constructively so that we would get the approval from competition authorities as quickly as possible. Of course, it's clear that until the completion of the merger is -- after the merger is completed, we will work as 2 independent companies without any other corporates. The planning close date was targeted on or before April 1, '22. And now as we are already in beginning of February, it's not any more practical to have the -- possible to have the merger happening before April 1. So currently, the target is April 1. And of course, it's still depending on competition authority approvals whether we can keep update. Atmosphere is good and long-term target is good. And then we don't see any big obstacle. We don't see obstacles in the competition authority processes either, but it takes more time than we estimated in July when we announced the merger.

Okay. That concludes the presentation part and we will now move to the Q&A session once we have both gentlemen here behind the tables. And we don't have a physical audience here at Karlstad today so we will directly go to the Q&A or questions over the phone line. So operator, I hand over to you.

[Operator Instructions] Our first question comes from the line of Manu Rimpela from Nordea.

My first question would be on the Services growth. So that was a bit slower than what I had expected and, I guess, that you had expected in the fourth quarter. How do you think about these challenges with the component availability and logistics that impacted the Q4. That when do you think that you will be able to kind of reach more normal delivery schedules?

So I assume your question relates now to the net sales, so I'm happy with the order intake growth, which was 10%, but then net sales growth was, like Kari said, only 3%. Partly, it's timing issue, but partly it's also a component availability issue, and partly it's the component delivery time schedule issue. And our organization is working on all those topics. Of course, I can't tell how much growth we expect, but of course, the aim has to be to get the speed of net sales development closer to the order intake, what we are having now, otherwise, the backlog is growing too much. So our organization is working on all those topics. Kari, do you want to add something?

Yes. And, of course, Manu, obviously, you can calculate it so that if the orders increased 10%, net sales 3%, so that means that order backlog that we are sitting at this is more than EUR 100 million or higher than what it was a year ago. So it's based on the calculation here. And so, it's in the backlog now.

I appreciate that. But maybe I am trying to understand that, do you think that these same challenges will continue still in the first quarter or are you seeing the pipe delivery schedules improving so that we can project the kind of couple of quarters' sales in Q1 and Q2?

I think it's very difficult to give a yes or no answer because there are so many moving components there. So in some countries still the COVID restrictions continue. And then now, currently, almost all the European countries are opening more or less, so it will have a positive impact. Then if Omicron will be spreading more in Asia, then it might have a negative impact. Then our organization has, of course, learned to live with the longer delivery times from our sub-suppliers, but delivery times are still longer than they were some months ago. So there are many components which are changing and then it's very difficult to, say, give you an exact answer, Manu. Sorry about that.

No, that's fine. Then second question on the gross margin and the cost base, especially SG&A part of it. So do you see that the step-up we saw in this fourth quarter was kind of now we have reached the normal level and when we look at the Q1 to Q3 comparison base from 2021, is that on a normal level or do we have more this kind of step-ups to be expected in '22?

Thanks, Manu. So of course, one thing is that the gross profit, 25%, so it's a good gross profit for us and also shows that we have resilience on the cost inflation side. Then if we look at the -- and also the project execution, project management has been good. And then if we look at the SG&A side and the cost side, so you're right in that sense that first half of the year was lower with SG&A than the second half. And second half also, so we had increased in quarter 4 compared to previous year's quarter 4, which was unusually low. And I would say that we are now very -- quarter 4 was very close to the normal level where we are. So that's how I would say it now.

Maybe just to clarify. So, is it fair to assume that also the first 9 months of '21 were abnormally low or were they close to normal.

Well, first half was low. First half was low. But I wouldn't say so that the third quarter was low. So that was coming close to normal already.

And then I'm not sure whether you can comment about this merger with Neles, they more than you commented already. But any thoughts around or can you share anything about the countries where we have competition authorities looking more at the details. So have you received any request for more information or has there been any one of them that has already kind of approved the process and anything you can share why it's taking longer?

There are still discussion ongoing, for example, in Brazil. And to my knowledge, only one company has been complaining about the merger and it's Andritz.

And the next question comes from the line of Sven Weier from UBS.

Two questions from my side, please. The first one is on what you announced on the taxonomy. And sorry, if you maybe commented on that already in the past. But I was just wondering why the stable service business does not qualify and the capital equipment business does. What's the difference here?

You said it exactly like it is. So we have been calculating that from our business, 51% is eligible for in this taxonomy calculation. And the definition is such that if you sell -- according our understanding -- that if we sell a bio boiler it's -- biomass boiler it's included. If we sell a board machine, it's included. But then if you serve it, it's not included. So that's the definition in taxonomy, and we, of course, had to take that into account into -- in our calculation. Does it make sense for a Master of Science? Not.

To me neither, but I'll accept that. So it has -- it's a kind of independent what you service as a general activity is not applicable.

If I remember correctly, and might be that I don't remember correctly. But it's so that if you make maintenance work for wind turbine, then it's calculated. But if you're making the same kind of activity for biomass boiler, both being CO2-neutral, electricity providers, then in biomass boiler the maintenance work is not included. And why it's so, I don't know.

And was this kind of already expected this kind of a outcome for you before or not a surprise to you.

No. Let's put it the other way around that. This is the first time when companies are doing it and the taxonomy definitions are new. So let's hope that in coming year, the rules are getting better and we'll make it easier to make good analysis of the company. So maybe that's a politically correct answer.

I guess, if nuclear is sustainable, then there is hope for you guys. Strange taxonomy thing. And let's go to the second question then I had was just on the further margin improvement, right? You already now reached the midpoint of the guidance. And when I look at some of the starting points for this year, right, and of course, it seems that the capital equipment business could be growing a bit faster than service. So there's maybe a bit of a mixed headwind there, but you had the same last year, and does this stop you from improving margin? Then we have inflation, of course, we have maybe the mix within the capital equipment business, which to me seems to be a bit more biased to the board side of things in terms of sales increase, which I guess would be positive. So yes, just in terms of how we should think about further margin progression towards the, let's say, higher end of the target.

I think Kari can continue. I give first one answer, that if you look to history then -- from 2015, then we have had 0.5 point quite often improvement. Then last year we had 1 point improvement. Then of course, we continue to try to develop the margin as well as possible. It's not developing maybe all the time as fast as it has been now developing during the COVID times, and they're [ one ]. Of course, we work on improving gross margin, but at the same time, like Manu was asking, we will -- companies like we, we will have heavier SG&A cost when the normal activity level has now -- or is in place again. So that's how I would answer. Then Kari can continue.

Well, of course, Paper business increase is important as we -- as you know as well, and then other thing is these volumes. And if we just purely look at our backlog, so our backlog is 26% higher than what it was a year ago. And that means that we have a strong starting point now for this year, 2022. So 26% backlog, EUR 4.1 million, so it is strong.

So you're going to have, obviously, good operating leverage this year. Of course, yes.

And the next question comes from line of Sindre Sorbye from Arctic.

I think 2 of my questions were answered. But another one on the Energy side there we see upgraded your near-term outlook. Will you say that this perhaps could be related to the energy squeeze and the increasing energy prices you see. And also then following the line of the previous questioner, would it now, according to your understanding, the taxonomy alignment for bio-based boilers?

I think -- and it's like, the projects -- the development phase takes quite often one to 2 or even 3 years. So, now when we talk about energy crisis in the middle of Europe, then if somebody is now reacting to it, then we will start to see that in our order book maybe in a year or 2 or 3 years. So currently, the ones where we have been getting deals and where we are negotiating deals are, of course, projects where we have been active long time. The CO2 battle has a positive impact to our boiler business in Europe, and of course in Asia as well. And that's maybe the long-term thing that's impacting our Energy business. So people want to replace coal boilers with the biomass boilers and sorted waste boilers and create energy -- electricity or steam, and that's the market where we are active. Taxonomy, of course, helps because these products have been included in taxonomy. Then there are some details which are not supporting us and those, I hope, will be corrected in the taxonomy later on. But of course, taxonomy helps in that respect.

And then my final question. There was -- you discussed SG&A, and I think you, Kari, said that Q4 was, let's say, close to normal. But would you say, if it is close to normal in let's say a percentage of sales or is it more like the nominal level?

Sindre, that's, of course, like the quarterly sales fluctuate and last year's SG&A were 15% of net sales, and I think that overall it's a good level to be at 15%. But there's no guarantees that we would be exactly that next year or this year now.

So I mean, if margin -- I mean, if you aim to at least nudge up your margins that you have been doing successfully for a number of the areas, that should most likely be in the -- seen in the gross margin and not in the SG&A as percent of sales.

Well, of course, gross margin or gross profit percent would need to increase. And also, then keeping the SG&A in a decent level and 14%-15% there is a good target.

Yes. And my final is -- my final, final. How satisfied are you with the development on quality cost during 2021.

I was just looking at the 5 years’ graph in our quality cost development, and I was pleased with that. So we have been working all the years -- now 8 years in improving quality, and we see clear improvement, so I am satisfied with the development.

Next question comes from the line of Peter Testa from One Investments.

I have 3, please. One is just looking at the environment for, what we call, sort of book and burn business, i.e. business which is orders received and executed during the year. Last year was a pretty good performance, and improved the average for the sales of the group. I was wondering if you have any thoughts based upon -- with reopening of access to sites and commercial activity, the extent to which we should have some thoughts on that part of the business and what you think are the key determinants or drivers of book and burn, please?

So of course, if we now look at this year, so Europe is opening up and Europe is our biggest service market, USA or North America is -- U.S. is open as well, so that should support our business clearly.

That maybe, so if I continue that's in Services.

Yes.

Then, of course, we have very high backlog now in Paper business side. So then it means that maybe the capability to do a book and bill in a year in capital side is less than it was a year ago.

Any thoughts on modernization. Are there kind of upgrading type parts of service where given then in some cases the, obviously, the pricing and margin environment for the customers is very good. They'd probably be encouraged to run as much as they can, but it's been the case for a while. Any thoughts on how that might work through?

The conversion market, we book quite often in capital, it's a bigger conversion. And then, of course, there are graphical paper machines, which are being rebuilt to packaging grades and that market was active in '21, and we estimate that it continues to be active in '22. So maybe one or 2 years ago, I was saying that now the market of the suitable machines to be converted is empty. But then, of course, what happens is that when more newer graphical paper machines are being shut down then there are new possibilities for rebuilds as well and that's where rebuild market has continued to be active, even if maybe 2 years ago we were saying something else. So currently, we see that this rebuild market is active in Paper side and board side.

And then on the -- you talked a bit about the timing of execution at the end of the year due to maybe component delays of delivery on both Pulp and in Paper. I was wondering if you had any thoughts as to why -- as to how substantial that was kind of like the question asked earlier on the Service side. The extent to which you feel that will be cleared through, whether there's a cost impact of that, which you need to mitigate just to understand how that supply chain factor may be impacting the capital equipment part?

Well, maybe one thing is that this component shortage, so that's impacting more on the Automation and also somewhat to Services as well. And then Pulp business, as such, was not so much impacted on this. So it was Paper business line is capacity limited, so we do big piece manufacturing ourselves and we are quite full now. So it means that once we take orders, so the project deliveries are -- take longer time than usually. So biggest impact as I said for Automation or Services and also somewhat to Automation as well, and impacting to revenue recognition end of last year.

Because you made the point to revenue recognition is maybe a bit slower in some of those -- the capital -- larger capital equipment that, that's basically just due to your pace of capacity. Not due to suppliers or others.

Yes. Paper business line, correctly.

Yes, fine. And then the last question is just on China, which had a terrific order intake in 2020, obviously, came off that, but was still good in '21. You'd mentioned earlier on when going through the business line that you had some interesting visibility in China. I was wondering if you could just give any comments on how you think given the annual phasing, we've seen views on China pipeline an opportunity?

China was more active in '21 than I thought and currently, we see good activity in China still.

The next question comes from the line of Johan Eliason from Kepler Cheuvreux.

Just a question here while we were on this margin, and you still have upside to your high end of your margin targets. Historically, when we've asked you about where should this improvement come from, you basically said that all business lines can improve the margin as of now. Is this still the case?

No, it's still the case, and the answer is still the same. That if you want to improve by 2% then if only 1/2 has to do with then they have to improve by 4%. And then it's fair in management that we divide the pain even to our team. So we still try to improve profitability in all the business lines.

Then I was curious about one comment you made about the pulp market. You mentioned you had a very small share of orders from North America. And I was sort of wondering, I mean, the pulp mills in North America is pretty old and we've seen big upgrade of the mills in Scandinavia here. Shouldn't there be sort of an upside -- upcycle coming for the North American mills as well? And should that be an opportunity for you or is this small share of North America more related to the fact that you don't have a strong market position over there in pulp?

Our market position is not very strong, but it's strong in, let's say -- strong enough, one can say. We can improve it. But interestingly, pulp mills haven't been rebuilt in North America. So if I go a little bit in the history, then there were maybe 20 years that in North America there were no new paper machines or board machine built. First new one came maybe 2010 in operation. And now we are selling maybe one machine a year or even a little bit more. And the same rebuild or new machine market hasn't started in pulp. Production assets are there very old. We expect that the market will come and we are preparing ourselves for that market. But then will it take off in '23, '24 or '25, I don't know. But in a way, it would be very difficult to see that it wouldn't be taking off at one point of the time. North America has very good wood assets. So -- and they have industry and tradition to make pulp, so that's a market where at one point of time, Valmet will be active.

The next question comes from the line of Antti Kansanen from SEB.

Its Antti from SEB. I was just trying to get my head around the gross margin expectations for this year. I mean, a quite impressive result from '21. But if you look what you have in your backlog and to be delivered this year, and the cost pressures that we are seeing across the board, potential delays and so on. Can you kind of achieve the same gross margins with the same project execution? I mean, do you need to improve it further? But I guess, you said you were happy or pleased how it went in '21, so is there a risk of a bit of a margin squeeze from cost side in '22?

Well, Antti, that's actually quite difficult to say. But if we look at the backlog that we are having, so of course, like we have projects that where the as-sold margin is higher and then we -- there's some projects where the as-sold margin is a bit lower. And so, it really depends on the portfolio what we are having. And our target is that once -- whenever we take a project, we also then improve the as-sold margin so that we deliver it even better than as we sold it. And once we do it, we improve.

But in a sense, the '21 performance it's nothing exceptionally good. It's a repeatable performance going into '22 and onwards?

Well, maybe still one thing to say here that, overall, we've been saying now some time already that we are quite happy with our project portfolio, and last year we had good projects.

And good execution, like you said.

Yes, exactly.

And then secondly, if we look at the paper orders, I mean, EUR 1.7 billion is quite much higher than it was on the couple of previous years and driven by board. How would you kind of account for the market share gains? Is it in a certain product, pipes, or larger machines, a certain region, more across the board? Could you talk a little bit more about that and perhaps the board pipeline going into '22? I mean, the outlook is good, but is it normal good or as good as it was last year?

We have been successful with big and fast machines. So -- and when our customers want to make lighter and lighter board, then to be economical, efficient, they have to build bigger and faster machines. And our R&D has been developing very good products, which are helping customers to run board machines -- white board machines fast. And we have had good start-ups, and we have been gaining good references based on that. And that's why paper has been improving the market share against the close competition. Then market outlook, like I said, it's good. So we still have good size of projects in negotiation phase. And of course, the challenge in our case is that the delivery time starts to be longer, because backlog is big, and like Kari said, delivery capability can't be increased quickly too much. But Paper business has been developing well and we -- and I'm sure that Jari Vahapesola, who is running it will make everything that the development continues in favorable terms in '22 as well.

Yes. I mean, my follow-up question was how do you manage it going forward? I mean, I am sure you don't want to just build up backlog. Is it feasible to ramp up growth investments into capacity, to be more selective of taking new orders? What's kind of the target at this type of a backlog level?

We have investment program ongoing in Jyvaskyla to increase the capacity, and that program will have some impact in latter part of '22, if everything goes like planned.

And we just have a follow-up from Manu Rimpela from Nordea.

Just getting back to the Paper division and the backlogs or sorry the capacity which is full at the moment. So how should we think about the potential for you to generate revenue from the deliveries to kind of a Q4 level of around EUR 350 million of sales. Is that kind of pretty much the maximum? I'm just kind of trying to understand what kind of revenue growth we should expect since the backlog provides you more than enough revenue growth, but kind of how do you think about the limitations?

Of course, we are not guiding directly what is the revenue for Paper business line. If you look the graph, net sales was EUR 900 million, then it was EUR 1.76 billion and now almost EUR 1.2 billion. And then that increase includes, of course, be in Poland as well. So that's the historical pace we have had in our revenue increase.

And then maybe another question just on the Paper outlook. So with EUR 1.7 billion of order intake and the last couple of years before that at EUR 1 billion. So if your orders would be closer to that EUR 1 billion in '22, would that still mean that the outlook for you is good since your utilization rates are probably going through the roof at the moment?

It would mean, because we have been saying that EUR 1 billion is a good level, but then I'm not saying whether we would be happy with EUR 1 billion.

And as there are no further questions, I'll hand it back to the speakers.

Okay. Thank you for the questions for everybody, and this now concludes the event. We will then see each other next time on April 27 when the Q1 interim report will be published by Valmet. But until that, have a nice rest of the week.

Thank you.

Thank you.