Valmet Oyj (VALMT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to this webcast for investors and analysts regarding Valmet's plans to renew its operating model to better serve its customers with a life cycle approach and to increase efficiency. My name is Pekka Rouhiainen, and I'm the Head of Investor Relations here at Valmet. And presenters today will be Thomas Hinnerskov, Valmet's CEO and President; as well as Katri Hokkanen, CFO. We will have half an hour reserved for this. Thomas will first run through the kind of why and what. And after that, we will go through the Q&A session, and you can post your questions through the online platform or also through the teleconference lines. But with this, Thomas, handing over to you.

Thanks, Pekka. Maybe just good afternoon from me as well. Let's start a little bit with the overall background for this. As you all know, towards the end of 2024, we have initiated work to renew the strategy with the aim of identifying future growth areas, expand the growth of the current business, but also simplify the ways of working and finding increased operational efficiency. You have also heard me talk earlier about some of the observations that I made throughout my visit and travel throughout the business, which has a lot of been about how do we actually reduce complexity in this business. And that's why as a first action to support the strategy renewal, we are renewing our operating model to run Valmet in a more effective and efficient way. The strategy, but also the reporting structure of the strategy will, as previously said, be communicated on June 5, 2025 at our Capital Market Day. And that, of course, also includes the -- how we're going to -- the strategic target, including how we're going to report on the current structure and strategy. So of course, we've -- some of us has also met several times, and I have -- we have listened to you in terms of how can we simplify making it easier, in particular for both analysts, but also investors, both future and current investors, to look and have a view on Valmet's performance. The background overall for this change is, as you know, we've plateaued both in terms of organic growth, EBITDA, capital -- return on capital employed, a lot of the KPIs actually sort of plateaued, not something we're really happy with. We've also seen increased overhead costs coming up, actually much more than our sales growth. So that's something that you can see in our structure or in our numbers that some of the complexity is actually visible there. So therefore, we do need to simplify the structure and the ways of working, taking out overlap and efficiency there is throughout the business. So I think it's important to stress or to underline that this is not a reaction to a changed view of our overall market that we operate in. This is about taking out overlaps and inefficiencies internally in our business. It's also about increasing accountability and empowerment so that we can get people to take accountability and feel empowered to solve the customers' problems or any problem as close to the problem as possible. So just reflecting back sort of big picture actually is that we've grown through M&A, and that growth has created complexity, and that complexity in turn, have killed our organic growth. And that's what we're acting on now. And you can say, so why now, Thomas? I mean, normally, you come strategy, then you come operating model or structure, strategy follow structure and then you go about. I just think that we can see so much complexity that we can actually reduce and it's much better to build an effective and efficient strategy on reduced complexity rather than having to deal with the complexity afterwards. So this thing about reducing internal inefficiency is sort of a no-regret move. It's just let's get it done. And then by doing that, we will actually be ready to execute the strategy 1st of July this year, not having to then change the structure and then starting to really execute on the strategy. So I understand if you were sort of question it, but we really need to sort of take complexity down, reduce the internal efficiencies, ready to execute a new strategy July 1. So we've designed this proposed operating model based on 4 fundamentals. We need accountability, we need to see customer success in our business, we want to have a life cycle commitment and we want to see global competitiveness. We want to increase on these. When it comes to accountability, we have in some parts of our business, like a 3-dimensional matrix. It has tried to foster collaboration, but it's basically slowing us down. Collaboration is something good leaders do. It's not something you have to drive with structure. You can do that without structure. So we want to have clear roles, clear responsibilities, clear accountability, full empowerment. We want to solve customers' problems, creating success for our customers. That's how we become successful. Then we want to have a life cycle commitment. It's the same customer that buys our equipment, buy service, buy modernization, upgrades, rebuilds, et cetera. They need to see 1 Valmet coming to them and making sure that they actually operate their equipment in the most effective way, giving them the best outcome that they can have so they become successful in their business. And then it's about global competitiveness. We've had too fragmented landscape in terms of our manufacturing, our procurement. We need to take a bigger overall united view on that and then actually really utilize our global scale to the much higher degree than what we've done so far. So these are the 4 fundamentals that this whole change have been based on. So the changes are in order to deliver this life cycle approach, in order to deliver a simplified organizational structure, we are creating strong business areas where we're basically uniting business lines, service and areas into one that has the local accountability all the way down close to the customer. Then we're going to drive a global competitiveness by consolidating our production capabilities and our procurement in order to, as I said, take advantage of the scale. But also in this dynamic world that we're living in, it is actually important more than ever to have a strong view on not only drive cost competitiveness and your production costs down, but also important to where do you actually produce things in order to be competitive in today's very dynamic trade world. You've probably also seen that this will have an impact. We will expect to reduce by 1,150 roles globally with Valmet, all of them being white collars, and that will have an impact of approximately EUR 80 million with full run rate achieving in beginning of '26. We've also taken the consequence that we have been very top heavy at Valmet, and we've reduced net with 3 executive leadership team positions. This means overall that the executive leadership team structure is going to look like this, 5 strong, fully accountable and responsible business areas: Pulp, Energy and Circularity, Packaging and Paper, Tissue, Flow Control, Automation Solution. Pulp, Energy, Circularity, Packaging Paper, Tissue will then be supported by strong global supply where all our manufacturing capabilities and capacity is united, our procurement capacity as well. That will then drive operational effectiveness or efficiencies and our scale. Then supported by LatAm, where we want to make sure that we have a flawless execution of that very important project, Arauco that we won roughly 6 months ago last year, but also capturing the other growth opportunities that are in this market as we speak. Functional, also China chair. I think it's important to put some words around that. China is a very context heavy and complex environment to operate in. Very many stakeholders need to be managed. We need to have a very senior executive presence there, and that's why we have a China chair representative, making sure that we manage all local stakeholders, but also taking the strong big Chinese key accounts. When they want to go global, they do it together with us. Whole business, so a globally led harmonized way of working of functions where we also are taking out overlap and efficiencies in that. But of course, very locally led so that we, again, drive efficiency, not just in the business fronting the customer, but also in the overall supporting functional structures. So accountability, full empowerment, customer success throughout the life cycle and global competitiveness, really about operating and leading the company in a better, more effective way. So we are ready for strategy execution when July comes. That's basically it. And then I think we are ready to take any Q&A, Pekka?

Thank you, Thomas. And let's take the questions first over the phone lines. So operator, I hand over to you now.

The next question comes from Antti Kansanen from SEB.

It's Antti from SEB. Two questions from me, and I'll take them one by one. If I start with the complexity thing, reducing complexity, are you Thomas, only referring to kind of organizational structure issues here? Or do you also look at kind of the offering, kind of the acquisitions that you have made and is everything that you offer from technology portfolio view part of Valmet going forward?

Very good question, Antti. This part is all about our internal structural complexity. And then should there be any from an offering perspective, that's more on the strategic side, and that will come at that time. But this is all about really making us ready for the future and ready for strategy execution from a structural perspective.

All right. That's clear. And then the second question is on the footprint and, let's say, manufacturing setup. And I guess you a little bit referred to consolidating some of that. But then if I look at kind of the cost reductions that you are making, if I understand correctly, they are fully focused on white collars. So do you feel that your blue collar personnel count is a good fit to the market conditions that you are seeing right now? Or is this also part of the strategy work that will still continue looking at if your production footprint is appropriate right now?

Yes. Good observation, Antti. This is about making us ready to execute on the strategy. And of course, the strategy will then include a road map for our global supply unit with a clear view on where and how should we produce in the most optimal or effective way. Also about -- like we talked a bit about, I think, Antti, earlier or previous times is that we need to create a manufacturing body or structure that can deal with both the peaks and the troughs of the market in a more effective way. So this is just internal efficiency and setting us up for success also when it comes to the global supply chain, but not the global supply chain strategy in itself.

The next question comes from Sven Weier from UBS.

Those are 2 by one, please. The first one is just a technical question. I was just wondering the kind of new divisional structure that you lined out. Is that also going to be kind of the new reporting structure to the market? And will you also still communicate the service business individually? That's the first one.

I tried to allude to it in the beginning. Let me clarify. Of course, I know you're all keen to know what our future reporting structure will be. It's just simply too early for us to do. We will try to make it effective and efficient for you and simplify, but also making sure you get the granularity and the transparency that you would like, and that will come together with the Capital Market Day on the 5th of June. So until then, we will keep reporting in the old structure. And it's also important to say the old structure will keep operating until end of June.

So definitely, there's going to be a new reporting structure from the 1st of July then, whatever it's going to be.

Yes, that's fair to say.

Okay. And sorry, if I missed that at the beginning. I

No. Don't worry. You are not the first one who've asked the question either as well. So don't worry.

And then the second one, and sorry if you alluded to that also, but it's more around how we should think about the cost savings in terms of your current margin targets. I mean, should we think along the lines of they should help to achieve those better? Or will you have kind of entirely new financial targets than in June anyhow. And so we have to think completely differently about this.

Are you thinking, -- Sven, just quickly for my clarification. Are you thinking about our overall financial targets from a margin perspective, not from just...?

[indiscernible] the existing ones.

Fair to say when we come out with the Capital Market on 5th of June, we will also come out with how we view our financial targets overall to be. Of course, you can read the impact. Of course, it will have impact as well on the bottom line. So without any sales, that should, of course, improve our overall margin with this action. But of course, it is how does it impact then our view for the future? A little bit early to say, but I guess it's not pulling down, if I can put it like that.

Yes. That's fair. I mean I just think since last time you communicated these margin targets for the first time, probably the markets are also a little bit tougher than back then. Maybe those measures are simply necessary to safeguard what you have in mind and there needs to be maybe something else on top. But yes, I'll wait for June.

We're looking forward to it.

[Operator Instructions].

All right. It seems there are no more questions over that -- over the conference call lines. So there is also the possibility to ask the questions here over the platform. So please feel free to utilize that as well. And the first one here is from Barclays analyst, James Winchester. So a little bit lengthy one here, but I'll read it loud. So could you provide more detail on why you are combining the service and the OE businesses together for certain end markets? Is it because you're seeing a slowdown in the Service division? Or is it more operational where you might not be growing with the market and therefore, needed to change this? For a while now, a large part of the equity story was the improving and more profitable service business. But with this change, according to James, it will be more opaque to track. So, I guess the first part...

Yes, there are 2 questions. One is how can you track as analyst? We will leave that till the 1st of June. Secondly is of course not about downplaying service as a strategic importance, it is actually to further develop it. When we have looked our strategic work so far, it has been quite clear that the capital business and the service business when it comes to our Pulp, Paper, Energy, Tissue part, they are actually quite interlinked and it is sort of becomes a bit, what I say, slow/not as clear to develop the service strategy together with the overall business. So it is about overall. Of course, our ambition is we need to speed up and get more traction on the service as well as the capital equipment for that matter. Because the capital drives and fuels the service business. So don't -- don't see it as it's sort of undermining the service. But how we've structured the service so far has been quite complex. It has been this part of being 3 dimensions in 1 matrix, and that has slowed us down in terms of development in particular lately.

Thanks, Thomas. And then I guess, more towards Katri side is that how much cash out will come out of this reorganization?

Thank you. That's a very, very good question. All in all, Thomas already mentioned that we are targeting approximately estimating that there would be annual impact of EUR 80 million. We will book restructuring provision for the second quarter. And I think it's fair to say that it's going to be quite sizable. Regarding the cash out impact, that's too early to comment. So we will come back to that later when we are proceeding with this overall process.

Thank you, Katri. And then maybe a related question on what will be the net impact of the cost savings? Are the EUR 80 million cost savings net or gross savings?

This is the total estimated impact, and I'm sure that you're also asking that what will be the impact for this year. And for that, it's way too early to say. Again, we have to come back with further details as we go forward.

But I guess it's fair to say that the redundancy and the reduction in roles are going to be heavy front-loaded, so to say, right? And then there will be some kind of a tail going into second half, first half next year?

Yes, yes.

Good. And then...

Because they are actually dependent on certain enablers that will come a little bit later.

Thank you, guys. And then a question on the reductions. Why are they affecting only white-collar employees and not the blue collar employees?

So this is basically about taking out overlap and inefficiency in our white collar -- in our structural cost and how to run the company. Then the whole manufacturing piece with our global supply, that will be part of a global supply strategy and road map for that going forward after June 5. So it does not include any blue collar at the current.

All right. Those were the questions from the platform and over the phone lines. So Thomas, any closing words from your side?

I think -- I mean, it's -- clearly, it's a huge thing for Valmet. We're really excited about it despite, of course, it has some negative consequences for certain individuals personally. But overall, as a company, we are taking out inefficiencies and overlaps in a complex structure, simplifying it. It's important to remember, it's not a response to a changed market view. It's a response to our own internal lack of efficiency that we are dealing with and taking clear action on in order for us to be ready for the future, ready for the strategy execution come July 1 this year. So with that, I'm really looking forward to engage further, especially once we come out with Q1, but then definitely for the CMD, it's going to be an exciting day, and I'm looking forward to see as many of you there as possible. So thanks for chipping in or coming in and joining the call with a very short notice.

Thank you.

Thank you.