August 10, 2022
Valmet’s Q2 results showed relatively good performance considering the challenging circumstances. Despite cost inflation, logistics issues, China lockdown, the war in Ukraine and the fire at one of our plants in Finland, many numbers beat consensus estimates.
The following three themes raised most questions to Valmet’s management in the results webcast.
Margin drop in Process Technologies
The comparable EBITA for Process Technologies decreased 24% during the quarter, and the margin fell from 8.0% a year ago to 5.2% in Q2/2022. Naturally, this caused concern among the analysts. The reason for the deteriorated profitability was cost inflation, which hit margins of some projects of the Pulp and Energy business line. For example, logistics costs have increased.
The pulp and energy projects typically take several years to complete, and the revenues are recognized gradually as the project progresses. Thus, there is a risk that cost inflation will have a negative impact on some pulp and energy projects also during the second half of 2022. We are trying to mitigate the impact by improving productivity and seeking for procurement savings.
The Services segment’s orders, net sales and comparable EBITA all grew 20+% in Q2 and beat the expectations by far. Orders received increased in all Valmet’s service businesses, and in all geographical areas except for China. What were the drivers for the strong performance in Services?
Firstly, we have increased prices to tackle cost inflation. President and CEO Pasi Laine praised the Services team for their hard work after the start of the year, when pricing lagged behind hiked costs. Secondly, there is a strong demand, thanks to the high capacity utilization levels of board and pulp producers. There is also some pent-up demand from the COVID times. The third reason is that the customers’ purchasing behavior has changed. They now place orders earlier than before as delivery times have lengthened.
Changes in short-term market outlook
With the results, Valmet gives a six-month market outlook for its seven businesses. This time, two changes were made to the outlook.
The short-term outlook for the energy market was upgraded from satisfactory to good. Energy orders increased during the first half of the year, and the workload is good. The customers are active and there is a nice pipeline in boilers, especially in Europe. With our offering for CO2 neutral energy production, Valmet is in a good spot in the current environment. Our target is to grow the energy business in 2022.
The marine scrubber business in turn was immaterial for Valmet in the first half, and we have not seen signs of the scrubber market picking up yet. Valmet does not expect significant order intake for scrubbers this year.
For pulp, the short-term market outlook was downgraded from good to good/satisfactory. The reason for a twofold rating is that workload and customer activity vary between business units. While most pulp units have a good workload and market situation, one unit has weakness in both. The market for small and mid-sized projects is active for three out of four units. On the long run, we expect also larger pulp investments.
We thank the analysts for good questions and a lively discussion!