Discussions with investors and analysts after Valmet’s Q4/23 results

Valmet reported its Q4 and full year 2023 figures on February 7, 2024. Orders received remained at the previous year’s level in 2023 at close to EUR 5.0 billion. Stable business’ (Services and Automation segments) orders increased to EUR 3.1 billion, while orders in the Process Technologies segment decreased. Valmet’s net sales and comparable EBITA continued their upward trajectory in 2023. Net sales increased 9 percent to EUR 5.5 billion. Comparable EBITA increased for the 10^th consecutive year, reaching EUR 619 million. Comparable EBITA margin improved as well and set a record at 11.2%.

Below are some common themes that we have discussed with investors and analysts after the result release.

Market activity and outlook

The operating environment was not the most favorable in 2023 with high interest rates, inflation, and geopolitical tensions. For Valmet as for many other companies, this meant less orders. Organically, orders received decreased 7 percent. M&A offset some of the decline, and Valmet’s reported orders were down 5 percent.

Services held up pretty well. Services orders remained at last year’s level in 2023, which is a good achievement considering the lower capacity utilization rates in many areas of the pulp and paper industry during the year. In the fourth quarter, excluding the Tissue Converting acquisition, orders were down 8 percent. In Q3/23, decline year-over-year was 18 percent. Sequentially, excluding the acquisition, Services orders were 9 percent higher in Q4/23 than in Q3/23. These figures suggest that Q3 might have been the bottom in Services order intake.

In the result webcast, Valmet’s management said that there is more activity in the services market now than there was in Q3/23. Customers’ capacity utilization rates have been improving, and we have heard from some customers of improvement in their end product demand. Valmet’s short-term market outlook for services remained unchanged: the first half 2024 market outlook for services is good/satisfactory, where good refers to Valmet’s capacity utilization. The management also reminded that the Q1/23 Services orders were exceptionally high, so the comparison figures for Q1/24 are tough.

In the Automation segment, market activity was at a good level during the whole year 2023, and Valmet kept the good short-term market outlook both for automation systems and flow control.

In Process Technologies, orders received declined 21 percent in 2023. In the latter half of 2023, the market was satisfactory for pulp, board and paper, and tissue, and the short-term market outlook remained the same. In pulp, and board and paper, there are projects and customers are discussing investments, but we have seen some delays in project decision schedules. In pulp, there are small and mid-sized projects, but we do not expect big orders in the first half of 2024. In board and paper, the short term market outlook is satisfactory, even though the order intake level in 2023 was rather good. With the satisfactory market outlook we want to indicate that Valmet’ board and paper business will not get back to the exceptional order levels of 2021 and 2022 in 2024. Tissue market is showing signs of improvement but is still at a satisfactory level.

Energy is an exception in Valmet’s process tech portfolio at the moment with good demand outlook. Valmet’s energy orders were higher than pulp orders in both 2023 and 2022, reaching EUR 487 million in 2023. There is a strong interest in our offering for CO2 neutral energy production, especially in Europe.    

Process Technologies margin

Process Technologies’ Comparable EBITA margin decreased to 4.5 percent in 2023, and Q4/23 margin was 4.1 percent. The margin has been under pressure since 2022, as margins in some Pulp and Energy projects were hit by cost inflation. These projects were signed in the end of 2021, and in their pricing, we could not anticipate the high cost inflation which started in 2022. Pulp and energy projects take 2–3 years to complete, meaning there is a negative margin impact for Valmet until these projects are fully delivered and finalised. Some of the impacted pulp projects are still being worked on. The good news is that we have finished the energy projects that were hit by inflation, and the orderbook for energy is healthy.

What was new in the end of 2023 was that there were some project management issues in tissue projects, causing cost overruns. Inflation impacted the profitability of tissue projects with a delay.

We aim to get back to a 6 percent margin in Process Technologies as soon as possible. Valmet is taking measures to ensure solid project management in tissue going forward and inflation is taken into account in pricing of new projects. Furthermore, we try to improve productivity and seek for procurement savings. We also try to upsell to ongoing projects.

Mergers and acquisitions

The execution of Valmet’s acquisition strategy took important steps forward in 2023. We started the year by closing the acquisition of NovaTech Automation's Process Solutions business in the US, extending our automation systems offering to batch and hybrid processes. The acquisition of Tissue Converting business from Körber was completed in early November, complementing both Process Technologies and Services segments. During the third quarter, Valmet entered into an agreement to acquire the Process Gas Chromatography business of Siemens to the Automation segment. Furthermore, in December, we made a contract to acquire Demuth to strengthen our Brazilian operation for wood handling. These acquisitions strengthen all of Valmet’s three segments, complement Valmet’s offering and enable us to serve our customers even better in the future.

2023 was also the first full year for Flow Control as part of Valmet. Flow Control’s order intake has grown well after the merger. The integration is now completed, and we achieved the targeted annual run rate synergies of EUR 25 million one year ahead of the originally communicated schedule.

Following the M&A activity, Valmet’s gearing is now 40% and net debt to EBITDA ratio 1.46. These are historical highs for Valmet. When asked about further acquisitions in the Q4 webcast, the management said that the focus is now on paying back debt and finalizing and integrating the acquisitions. Valmet keeps actively following the M&A opportunities, but the focus is now on ensuring a good payback for the acquisitions made.

Net working capital

In 2023 and 2022, Valmet’s net working capital has been clearly higher than before. In 2023, net working capital was EUR 191 million, 4 percent of orders received. Historically, Valmet’s net working capital has been clearly negative due to the prepayments in the process technology projects.

Payment schedules of large long-term projects have a significant impact on net working capital development. Compared to 2021, net working capital has increased mainly in capital business. Since the merger with Neles in April 2022, Valmet’s business mix contains more stable business, which typically ties up more net working capital than the capital business. The acquisition of Tissue Converting increased net working capital by 92 million in Q4/23.

Market position in pulp

In the Capital Markets Day 2023, Valmet said its market share in pulp equipment is 30–35 percent, instead of the 40 percent communicated earlier. Valmet had lost share to Andritz, who were more willing to do big EPC projects in South America. Valmet’s President and CEO Pasi Laine said on the call that when looking at year 2023, market share was 50/50. Valmet aims to regain the #1 position as a pulp technology supplier.