Valmet Oyj (VALMT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Valmet's Third Quarter 2023 Result Publication Webcast. My name is Pekka Rouhiainen, I'm the IR here at Valmet. And the presenters today, our Pasi Laine, President and CEO; and then Katri Hokkanen, the CFO of Valmet. As usual, we will first go through the highlights of the quarter. Pasi will be presenting the highlights and Katri, then the financial part, and we will then open the phone lines for Q&A after the presentations. But without further ado, Pasi, please.

Thank you, Pekka. So, headline today is orders received amounting to EUR 980 million and comparable EBITDA increased to EUR 150 million in the third quarter. So like Pekka said, I'll go first through the quarter 3 in brief, then some words about segments and business lines, then some words about the Climate Program. Katri will continue with the highlights of financial development, and -- so Katri has also highlights. And then I'll come back to talk about guidance and short-term market outlook. So first, the quarter 3. So orders received decreased to EUR 980 million, and I'll go through that more in details with the business lines and segments as well. Net sales was about EUR 1.3 billion. Our backlog is still EUR 4.1 billion and comparable EBITA increased to EUR 150 million and margin was 11.6%. Gearing in the end of the period was 21%. So here, the pie charts. Orders received, I have said net sales are little bit below EUR 1.3 billion and comparable EBITDA, EUR 150 million. And comparable EBITDA, 11.6% and backlog of EUR 4.100 billion, a little bit over that. And in the end of the period, we employed 18,000 people. Segment-wise, Process Technologies is now -- was contributing about 43% in net sales; Services, 33%; and Automation, 24%. By geography, Europe, 40%; North America, 23%; Asia-Pacific 17%, so big revenue recognition there. And China, South America, 9% and 10%. So quite normal distribution here in the net sales as well. This is the long-term development of Valmet since beginning of 2013, and I wanted to highlight the long-term development. So when we started, our EBITA was EUR 54 million, and now LTM is EUR 632 million. We have been continuously developing net sales, continuously developing EBITA margin and also EBITA euros, and the work continues. So we are, of course, targeting to reach 12% to 14% EBITA as soon as possible. Now we are at 11.3%, so still 0.7% is missing from the low range of the target. But the work continues and we still believe that just working with continuous improvement, continuous renewal and acquisitions and good integration of the acquisitions, we are going to reach the target sooner or later. Then orders received graph. So it has been growing nicely. There have been bumps on the road early as well, like in COVID times and then also in 2014-'15. So of course, one cannot think that the order intake graph continues to go up all the time. This time, our order intake was EUR 980 million. And then if we look at the cumulative number geographically, Europe has been a little bit less than traditional of 35%. North America, on the other side has been more, 27% from the total order intake. Asia-Pacific has been active. China has been active, and South America, a little bit less than in a normal average year. And like we here see, EUR 980 million is, of course, a low number, but we have had that kind of quarter before as well. So we should not over dramatize the order intake of EUR 980 million. One long-term graph, we have been proudly presenting is this stable business. So when we started, we had about EUR 1 billion in Services order intake. And now our LTM in a stable business, including Automation and Services segment together is a little bit over EUR 3.1 billion, a little bit less than EUR 1.8 million coming from Services and a little bit more than EUR 1.3 million coming from Automation. And of course, the work continues to grow this business in absolute terms with organic growth and with acquisitions. Backlog, like I said, ended at EUR 4.1 billion. It's also going down -- it's going down compared to the peak years, but I think it's normal and in a way, healthy as well. Like we were saying in '21 and '22 that the backlog was so high that our delivery times were getting too long. So now slowly, we are getting back to more normal backlog levels. Backlog level when it was EUR 3 billion, EUR 3.3 billion, we were very happy. Of course, thereafter, we have merged with Neles, so it has an impact on that. But EUR 4.1 billion is still a good level of the backlog. And then also now we have included the number telling that about 30% of backlog is expected to be realized as net sales during '23. Last year, the same percentage was 30%. So before this, we haven't actually announced during the quarter 3 public announcement, the percentage. So now we are doing it to help you to make good analysis of our expected EBITA for this year and for coming year. Then some words about segments and business lines. First, Services. So Katri will go through the quarterly numbers later, and I'll focus on the year-to-date numbers. So year-to-date, Services is still in growth mode, 1% -- little bit more than 1%. So cumulative order intake is -- was EUR 1.356 billion. So we are still on growth mode. LTM is now little bit less than EUR 1.8 billion, so EUR 1.774 billion. Net sales has been growing as well nicely. So net sales ended up in EUR 1.275 billion. And so, we still are getting orders more than what we are recognizing in revenue. What we all are very happy with is that our profitability has improved a lot, almost 3% in 1 year. So -- or in the beginning of this year compared to the last year. So last year, our EBITA margin was 14.8%. And now it's 17.7%. So Aki and -- who is heading the Services and areas together have been doing very good work and our EBITA is now EUR 221 million in the first 9 months. Good development here. To the outlook, I come later back in my last slide. Automation segment. So here, of course, we are not comparing apples-to-apples because in '22, Flow Controls joined us in -- after the first quarter. But order intake has been little bit over EUR 1 billion, LTM, EUR 1.3 billion, little bit more than EUR 1.3 billion. Net sales, EUR 953 million and LTM, a little bit of EUR 1.3 billion. So quite steady situation now, both in order intake and net sales. We are, of course, very happy that usually profitability has been improving in last quarter. And now, our LTM -- so LTM is -- quarter 3 LTM is already above the last year's -- the whole year, so 18.7%. So good development here as well. And LTM, last 9 months, EBITA has been improving nicely as well. So we have generated EUR 169 million EBITA from our Automation segment. So we are happy with the Automation segment performance in first 9 months. In Flow Control, order intake for the first 9 months has been growing from last year, so it's now at EUR 613 million and LTM is now EUR 802 million. So at good level compared to last year. Net sales has been increasing as well. So we have been getting more and more products and valves out from the factories, which is good. So now LTM is at EUR 773 million and first 9 months have been EUR 581 million. So good development in Flow Controls as well. And the integration into Valmet has been proceeding well like we have been earlier saying as well. So we are happy with the Flow Controls development. Automation Systems growth as well in the first 9 months. So order intake ended up at EUR 408 million and LTM is now a little bit less than EUR 550 million. So good development in order intake. Net sales has been growing as well. LTM is at par with order intake and quarter -- first 3 quarters have resulted in EUR 372 million net sales. So good and steady development for the first 9 months as well in Automation Systems. And like I said, Katri will comment more about the quarterly numbers later on. In Process Technologies, it's easier or more granular to explain by the business lines. But now our order intake is a little bit less than EUR 2 billion in LTM. And we are now at the level where we were 2018, '19 and '20, roughly. So extremely good years, '21 and '22 are now behind us, and now the LTM is around EUR 2 billion. First 9 months order intake has been EUR 1.4 billion, so about EUR 300 million less than a year ago. Net sales, the other way around, has continued to develop well. So of course, we are now recognizing the revenue from the peak order intake years '21 and '22. So net sales, LTM is almost at EUR 2.5 billion and net sales in the first 9 months has been about EUR 1.8 billion. Comparable EBITA is now 4.9%. So like I said, we had very good year, '21, 8.1%. Then we had challenges starting and EBITA dropped to 6%, and now it's at 4.9%. And we have still the same reasons. So we have some challenges in selected pulp and energy projects, which are impacting our profitability. Pulp and Energy business line, order intake in first 3 quarters, EUR 626 million, down by EUR 160 million and EUR 70 million compared to last year. And now our LTM is at EUR 900 million level. So EUR 900 million level we have had earlier, like in 2020. 2017 was even below EUR 700 million and 2015 and '16, were at the same pace. So we have been here as well -- early as well. And we have to remember that we have been very conscious on managing our cost level, we call it capacity costs in Pulp and Energy. And we have been preparing ourselves for this kind of situation that order intake is going down. So we can use less outsourcing capacity in manufacturing, in engineering. And then, of course, we have other flexibility methods to be used as well. Net sales is now about almost EUR 1.1 billion like it has been last year as well on LTM, and the first 3 quarters, almost EUR 800 million. Then Paper business line. Order intake has been almost EUR 800 million in first 3 quarters. Last year, it was EUR 120 million more. But we have to remember that when we looked at the chart that the business line had volume of about EUR 700 million in the order intake for 3 years. Then it jumped to EUR 1 billion, and we were very happy with that EUR 1 billion level. Then it went up to EUR 1.6 billion. And then we continue to say that the market is good, because we have only weak, satisfactory and good as described in words. Then order intake dropped EUR 1.3 billion, and it was at good level. And now LTM is at EUR 1.1 billion level. So we have a little bit challenge in describing the market verbally in a very good way. But this EUR 1 billion level in Paper business line is a good level. Net sales has been the same as in Process Technology (sic), and in Pulp and Energy as well that now we are recognizing the revenue from the peak order intake years. And that's why the order intake is now at EUR 1.4 billion level in LTM. But I'm happy also with Paper business line order intake, so nothing dramatic here. Then some words about the Climate Program. So we launched the Climate Program couple of years back, and we set ourselves target to reduce the emission in our supply chain by 20%, in our own operation by 80% and use phase by 20% and to provide customers with a 100% -- possibility for 100% carbon-neutral production processes in pulp and paper industry. Now we have been, of course, working with customer -- with our suppliers. We have now 45 customers who are engaged in our program. In our own operations, we are more and more buying CO2-free electricity, and we are replacing fossil fuels in locations where it's possible and so on. So we are working on that topic. We, of course, continuously work on the CO2 emissions and energy consumption in our product offering. And that's well on its way. And the big thing is that, this year, we have launched that we can provide our customers with processes for pulp and paper industry, so pulp, paper, bioenergy, tissue so that they are CO2 neutral. Of course, it's depending on the electricity, what they are buying, but we have now possibility to deliver to our customers' technologies, which are CO2-neutral. That's, of course, very big achievement. So now on top of the order intake discussion, it's good to remind that something else needs to be done as well at the same time. Good. So now it's Katri turn to go to highlights of financial development.

Thank you, Pasi, and good afternoon to everybody, good to be here today. And I will walk through the financial highlights, as Pasi said, in the next slides. Order intake was EUR 980 million for the quarter. That was 17% lower than the comparison quarter. However, when we look at the full year numbers, order intake was EUR 3.8 billion, which is flat compared to last year. Order backlog was still on a good level, EUR 4.1 billion, and the net sales was EUR 1.3 billion for the quarter, and that was 1% higher than last year. Year-to-date, net sales is slightly over EUR 4 billion and 14% ahead of last year. Comparable EBITA was EUR 150 million for the quarter or 11.6% and actually, this was our record Q3 so far, and we are very pleased with that. Year-to-date, comparable EBITA is EUR 437 million or 10.8%. And when we compare it to last year, we are 1.3 percentage points ahead. So we can clearly see development here as well. Adjusted earnings per share was EUR 0.52 for the quarter. That was 3% higher, even if comparable EBITA increased 11%. And here, the reason is coming from the increased financial expenses. And I will come back to the balance sheet a little bit later in my presentation. A few words also about the segment numbers, starting from the orders. So as you can see from the chart, so orders received decreased in all of the segments in Q3. Services was EUR 349 million. That was 18% lower. And if we take FX impact out, the change was minus 13%. Year-to-date, Services is close to EUR 1.4 billion, and that is 1% ahead of last year. Automation order intake was EUR 289 million for the quarter, so that was 6% lower than last year. However, if we take the FX impact out, the change was minus 1%. And year-to-date, Automation is slightly over EUR 1 billion in terms of orders. And good to remember that, Flow Control was in our numbers since Q2 last year. Process Technologies was EUR 343 million for the quarter and year-to-date, Process Tech is or was at the level of EUR 1.4 billion and 17% behind last year. Moving on to the net sales. So when you look at the quarterly numbers, so net sales increased in stable businesses, both in Services as well as in Automation, but it was 9% lower in Process Technologies. For the full-year, Pasi already went through the numbers, but Services is -- was close to EUR 1.3 billion, 16% ahead; Automation, EUR 953 million; and Process Technologies, EUR 1.8 billion and 3% ahead. Margin-wise, Q3 margins improved in the stable businesses, both in Services and Automation. And Services was 18.4%, and Automation was 18.7%, so very good development there. Process Technologies was 4.5% for the quarter. And for the year-to-date numbers, Services was now at the level of 17.3% and Automation was 17.7%. And both stable businesses have been supporting -- the profitability has been supported by, of course, good development in the volume. And Process Technologies was 4.7%, and that was 1.4 percentage points lower than last year. And all in all, as said, good quarter, 11.6%. And year-to-date, we were at 10.8%, and our target is to be between 12% to 14%. Comparable gross profit, that was 25.9% for the Q3, and stable business was 57% of the volume. And when we look at the last 12 months' numbers, gross profit was EUR 1.4 billion or 26%. Comparable SG&A was EUR 894 million or 16%, so no big changes here. Cash flow was EUR 57 million for the quarter. And when we look at the last 12 months' numbers, it was EUR 215 million. Net working capital was EUR 55 million for the quarter. And the net working capital has increased compared to last year. The increase has happened in Process Technologies as well as in the stable business. And good to remember here that our business mix nowadays contains much more stable business, which ties up net working capital. Net debt, no big changes here compared to the second quarter. Net debt was EUR 531 million and gearing was 21%. Net debt-to-EBITA ratio was 0.74, and the average interest rate of our total debt was 3.6% at the end of Q3, and that was on the same level than in the second quarter. And maybe good to mention also that the financial expenses were EUR 7 million for the quarter and year-to-date, minus EUR 19 million. Capital employed, EUR 3.5 billion for Q3 and comparable return on capital employed was 16%. And adjusted earnings per share increased to EUR 2.43. That was the financials, and I will give the floor back to Pasi. Thank you.

So now let's turn for guidance and short-term market outlook. So first of all, first, the guidance. So Valmet estimates that net sales in '23 will increase in comparison with '22 and comparable EBITA in '23 will increase in comparison with '22. So no change in our guidance. Then short-term market outlook. And like you remember, we tried to assess here both our capacity utilization and customer activity, 50-50. And first, if we start from Services. So here, like said, we are still in growth mode after the third quarter in year-to-date numbers. And now -- which means, of course, that our capacity utilization is good. Then last quarter, order intake was what Katri said. And that has -- we saw that, and that's why we have been reducing already in -- after second quarter the market activity to satisfactory level. Now, like I said earlier, there is, of course, customer activity, and we start to see signs of activity improvement in North America and China. And it's, of course, very important in North America, which is big, big market and big, big economy when we start to see more activity there. And it's also promising that we start to see more activity in China as well, because that would, of course, generally mean that there's more activity in world economy. So some positive signs now in our customer activity. In Flow Controls, market continues to be good, like you saw in order intake cumulatively. Automation Systems, the same, LTM was at 400 -- between EUR 400 million and EUR 550 million. The third quarter was not strong, but there's always quarterly variations. And Automation System management continues to push a lot for order intake and continues to target the growth also in this year in order intake. In Pulp, we have good reasons to keep the outlook as satisfactory. Like we have been saying earlier, we are not seeing that there would be mega mill decisions coming soon. We are talking with customers about mega mill projects in different parts of the world, and they will come, but not in the near future. But we are, of course, in discussions about them. And meanwhile, we are, of course, focusing on small to medium-sized projects, and we work all the time with customers to -- and customers are having investments in small to medium-sized projects. So we continue to be active there. In Energy, the market outlook has been good and order intake has been good. So no reason to change that. Then board and paper is more challenging from communication perspective. So like you saw, our order intake is -- for the whole Paper business line is EUR 800 million, and it's at a good level. But with this satisfactory, we wanted to signal to you that this EUR 1.6 -- EUR 1.3 billion level is not continuing. But EUR 800 million in order intake for the whole business line in first 3 months is a good level. And then in Tissue, we continue to have the same outlook. So the market outlook has been satisfactory for a while, and it continues to be so. So the one way we have difficulties with communication is board and paper, because one could, of course, think that some have been thinking that with this satisfactory, we mean that the order intake will drop at EUR 700 million level. And like you have seen, our order intake in first 9 months have been already EUR 800 million. So a little bit longer explanation this time, but sometimes it's challenging to describe the market with the 3 words only. So thank you. And now I assume that Pekka will let some of you to make some questions.

Yes. Thank you, Pasi. And Katri, I also ask you to now join Pasi here to the front, and we will then move on to the Q&A session. So operator, I hand over to you.

[Operator Instructions] The next question comes from Antti Kansanen from SEB.

It's Antti from SEB. A couple of questions from me, one by one. And I'll start with the Services and the order growth or order decline of 13% on Q3. So could you provide a bit more color on how did you see activity developing for shutdown services, parts and consumables? And also, you mentioned that North America and China, there are some positive signs. How about Europe, is that still weakening or, let's say, stabilizing on lower level?

Katri can help me later on, but I'll start. So Europe, year-to-date numbers is still on growth. And Europe is a typical case that beginning of the year was good. Second quarter was also good and third quarter was weak. And, you all have seen the results of some of our big customers. So production rates in Europe haven't been that high and that has been impacting our order intake in Europe. Business unit-wise, spare parts, performance parts has been at last year's level. There has been growth in Pulp and Energy -- Pulp and Energy solutions. And then Katri, you have to help me.

The rest of the businesses have decreased.

Have been decreased.

Yes. Exactly.

Yes. Did I answer to your question?

Yes. Almost. I was just thinking that the kind of sequentially compared to Q2. I mean, Q2 was a bit down as well. This was more down. So I don't know. Is there any positive signs on Europe if we go into Q4 that it's not declining further, it's stabilizing? Anything you want to comment on that one?

I don't want to comment on that one. It's too early to say. And then I wanted to comment specifically that we have started to see some positive signs in China and North America. The rest, I wouldn't like to comment.

How do you feel about kind of offering of the, let's say, countercyclical things like shutdown services and things like that, that could hold up better or even improve when clients are taking downtime? Has it been weaker than expected? Is there any...

It was weaker than expected in the beginning of the year in paper and tissue, board and tissue side. And the Pulp and Energy was actually more active than normally. And now I think the situation has been balancing. So board and tissue solution business has been coming back. And then Pulp and Energy solution business hasn't been as active as it has been in the beginning of the year. And then our sales force has been quite successful with performance part. So I'm happy that, that has been holding reasonably well.

And then maybe on the Process Tech side and the profitability, and it's still kind of slightly trending downwards, but it has been around that 4%, 5% level now for, I guess, 6 quarters. So how has to work with the legacy low-margin Pulp and Energy progressed during, let's say, first 3 quarters, during Q3, where are we now with those ones?

It has been progressing. And of course, the project which we took then before the COVID, they are getting older and older, which means that there's less and less to be recognized. So it's proceeding according to time schedules of the projects. Do you want to -- Katri add something on that?

No. As I said that, of course, we try to improve the profitability as soon as possible. That's what we have also said in the past.

But I mean, I guess you have commented that usually projects have most kind of a revenue recognition in the middle. And now it seems that just based on what the margin was that you are still kind of in the middle of those revenue recognitions that the impact out of those is not going down if we look at the performance. So is that a fair contribution that there's still quite a lot of work related to those ongoing?

I think it's probably just fair to say that the profitability in the Process Technology can also vary between the quarter. So it's always the mix, what is the revenue recognition. So I think in general, that's it.

And then more detailed answer would go to the interesting discussion about book revenue and margin recognition.

And I guess also, when do you expect those projects to be behind you, but I'm not expecting a firm answer on that one.

Your assumption was good.

Right. Okay. Maybe, last one for me would be on cash flow and working capital. And I understand kind of the business mix impact with more stable business now. But what has been kind of happening with working capital within stable business and within Process Tech? And when and if should we kind of expect improving cash conversion?

Okay. So first of all, of course, the development has been in such a favor that net working capital has increased. So it was now plus 55%, and the change was minus EUR 85 million in Q3, and inventories have continued to increase. That's the reason. And we have a high focus on the topic. So we are working on it. Of course, it takes some time. We have to go through everything that where we can reduce kind of the safety stock levels. But at the same time, the portion of stable business has increased. And as you know, the prepayments on the capital side, they can have a significant impact on the net working capital. But I would say that at the moment, the focus is on the inventories. Receivable collection is on a good level as well as payables, so nothing special there.

And you are very much focused on this topic. So like we were saying earlier, it was little bit difficult to challenge the organization with the inventory levels when there was a lot of difficulties just to get the goods and products from sub-suppliers. And now when the delivery times are getting more normal, then of course, we have to work hard on getting -- to get back to the levels where we were early and Katri is very actively working on that topic.

But I guess, also within PT, the impact is less advances and higher inventories that are kind of the key issues that you are dealing with?

Actually, on the Process Technology side, the inventory, they are not increasing that much because the work in progress we are doing, they are cost-to-cost revenue recognition. So I would say that the inventory is more on the stable side. But as you said, the advanced payments, they make a difference there.

The next question comes from Sven Weier from UBS.

Pasi, the first one I had was just when you said there are signs of activity improvement in the U.S. and in China, was that just referring to Services? Or do you also see that in parts of the capital equipment side?

That comment was in Services. And then generally, for example, Chinese market has been quite good. So we just announced nice order even today for containerboard and some of the tissue machine lines. So actually -- but the comment was for Services, but China has been good also from a capital perspective.

Okay. And what I was also wondering on the Q3 development also when we look at it sequentially. I mean, it strikes me also with a few other companies that now after 4 years, we have seasonality coming back. And that Q3 was also maybe seasonally and more impacted than in the last couple of years. Would you confirm that also from your side that this might have not only been the weak market, but there's also a seasonality element this year?

I haven't had time to read what the other companies have been saying. But I think there has been some reaction from our customer side. If you remember what the customers were saying after first quarter, they were telling that the challenge is the destocking that's happening and then quarter 3 will be a normal quarter again. And now when listening our customers' quarterly calls, they are now saying that they start to see the market to improve. And because there has been delay on that improvement, they have been a little bit tougher with the maintenance spending and the machines have been not running at the speed what they were running earlier and which has impacted our services.

And I think you also mentioned that, obviously, the decisions on the capital equipment side in Pulp have been -- there are projects, but they are delayed. But do you think we're talking here about delays until further notice or really a bit further out? Or how should we think about those projects costs.

In Pulp, I think I haven't said that there have been delays in Pulp side. I think I have been saying that the postponement have been more on board side and tissue side. In Pulp, customers who have plans to invest in new mills, the discussions continue. And the customers who have the plans, they have actually also publicly said when they would go ahead. But our tradition is not to tell the amount. So you can check it from their IR pages. But the big pulp project development continues like planned currently. But there is no big decision…

And as you mentioned on the board and tissue side…

sorry?

Sorry, sorry. But in those decisions on the board and on the tissue side that are being postponed. Are we -- do we have to expect longer postponement? Or how should we think about that?