Nov 27, 2022
After Q3/2022 results release on October 26, Valmet has roadshowed and participated in investor seminars in London, Boston, Montreal, and Toronto. We’ve also met institutional investors in Helsinki and had several virtual meetings and phone calls with investors. Altogether we have met with 85 people during the period. Here are some of the trending themes in the discussions.
Why did the margins drop from Q3/2021?
Comparable EBITA margin decreased in all segments in the third quarter. In Services, the margin decreased by 1.2 percentage points, from 15.5% in Q3/2021 to 14.3% in Q3/2022. The decrease was due to cost inflation. We have increased prices, but we need to continue to work on this topic. Some longer services contracts have not yet come to renewal.
Automation segment’s comparable EBITA margin was 17.6%. The Q3/2021 margin of 20.5% is not quite comparable, as it only covers the Automation Systems business line. In Q3/2022, the segment also included the Flow Control business line. A year ago, Flow Control was still Neles, and Neles reported a 15.5% adjusted EBITA margin for Q3/2021.
The Process Technologies segment had the biggest margin drop. Its comparable EBITA margin fell from 8.9% in Q3/2021 to 5.8% in Q3/2022. The reason for the deteriorated margin was the same as in Q2: some projects in the Pulp and Energy business line were hit by cost inflation. For example, costs for steel, components and logistics increased during the spring. We are actively working to turn the trend in Process Technologies’ profitability.
Valmet aims to compensate the cost inflation for example through savings in procurement, better productivity, and price increases.
How does the energy situation in Europe impact Valmet?
Services orders increased in EMEA in Q3, but we have not identified increased demand specifically due to the energy situation. The demand for Valmet’s energy equipment in turn has been good already for a couple of quarters. It is possible that the demand for our CO2 neutral biomass energy solutions will increase due to the current situation. However, we are not seeing it yet. An investment decision for an energy plant is preceded by a long preparation phase, applying for different permits and ensuring funding.
It is good to remember that many pulp producers are in fact net sellers of electricity and therefore benefiting from the current situation. Some non-integrated customers, for example tissue producers, have a tighter situation.
How would a downturn impact Valmet?
The prospects for macro economy are quite gloomy at the moment, so it is only natural that we’ve had this question frequently. Valmet has a record-high order backlog, mostly due to the boom in board machine orders in recent years. The customers must wait for their board machines for more than two years. We have been operating at maximum capacity utilization and have been expecting the demand to normalize at some point. Once the demand slows down, we will keep on working through the backlog, so first just the waiting times for our customers would become shorter. We have a very flexible cost structure in Process Technologies and can scale the costs down in case of low workload.
The biggest demand driver for Services is customers’ capacity utilization. Should the operating rates fall at our customers’ sites, the demand for Valmet’s spare and wear parts would also fall. It is good to keep in mind, however, that many of our customers are in a very good financial shape, as their products have been in high demand with high prices. Also, on the long term, the demand for pulp, board and tissue is backed by strong megatrends like sustainability and urbanization. Thus, some customers might see a slower demand period as a good time for maintenance projects at their plants, as bigger maintenance works require downtime.
To sum it up, Valmet is not immune to an economic downturn, but we are in a good position to weather the storm. With our Q3 results release, we gave a short-term market outlook until the end of March 2023, and the outlook is good for 5 out of 7 of our businesses. For pulp, the outlook remained good/satisfactory and for tissue satisfactory. There was no change in the short-term market outlook compared to the previous update given in July.
How is the Flow Control integration proceeding?
Flow Control has been part of Valmet for almost eight months now. The integration is proceeding well and according to plan. Our synergy target of EUR 25 million, of which 60% should be achieved by the end of 2023 and 90% by the end of 2024, is still valid. We have already seen clear synergies in some sales projects.
In addition to these themes, investors have been keen to understand more about Valmet’s role in circular economy, the growth drivers of Valmet’s EUR 2.6 billion stable business, Valmet’s new innovations and the strategy to improve Valmet’s profitability towards the targeted 12–14% Comparable EBITA margin. The investors have also shown interest in Valmet’s business opportunities related to replacing plastics in food packaging or sustainable textiles. You can find a blog post about Valmet’s role in the textile industry here. Stay tuned for more about new packaging solutions!