May 31, 2018
So far in 2018, Valmet has attended 16 different roadshows and investor seminars. After Q1 results, Valmet has been traveling in London, Amsterdam, Los Angeles and New York, and has of course met with investors also at our head office and in conference calls. As usual, there were some popular topics that were discussed in most of the meetings. Here are the top three questions raised by the investors in our recent meetings.
Situation in the pulp market
By far the most common topic in investor meetings recently has been the lack of new pulp mill orders. The pulp producers are doing well due to high pulp prices, there are strong megatrends backing up future pulp demand, and we have not seen a new mega mill order in 2.5 years. So why are the pulp producers not investing in new mills? When and where does Valmet expect the next big pulp order?When would Valmet see the revenue?
Hindsight is easy – surely many pulp producers regret that they did not invest in new mills a couple of years ago. Back then nobody foresaw that the development of the pulp prices would be this favorable. Political uncertainty and economical challenges in Brazil have had an impact, as has the consolidation of the pulp producers (Eldorado was acquired by Asia Pulp & Paper, and Fibria is merging with Suzano). Other reasons for postponing investment decisions might have been a shortage of raw material, i.e. wood, or difficulties in obtaining financing.
It is impossible to predict, when the next pulp mill order will come. Most likely, some customers are considering different alternatives and planning new investments, but so far, no decisions have been announced. With Q1 results, Valmet kept the ‘weak’ short-term market outlook for pulp unchanged, signaling that the investment activity isn’t expected to be very high during Q2 and Q3. We are confident, however, that investment decisions on new pulp mills are only a question of time. As one of the two companies in the world with the capability to supply a complete pulp mill, Valmet will for sure be involved in the discussions.
Reaching the margin target
Valmet’s roadmap in reaching its target EBITA margin of 8–10% is another major interest of the investors. What is driving the margin expansion, and when will Valmet get to the targeted range?
An important factor in Valmet’s margin improvement is increasing the services and automation businesses. Of the installed base of paper and pulp capacity, Valmet’s market share is approximately 40%. At the same time, Valmet’s market share in Services is 14%, which leaves room for growth. We have put a lot of effort in sales training and key account management to increase our share of the customer’s wallet. We have also simplified Valmet’s offering to make it more understandable to customers.
Another important area contributing to margin development is project management and project execution. Typically, projects are executed well. In project business, however, there are always also more problematic projects. We believe that we can be even better in project management and project execution, which would surely also support profitability.
Further, to improve profitability and reach the margin target, we are focusing on saving in procurement and quality costs. The development in procurement costs has been slightly better than planned in the past couple of years, while there is still some way to go to reach the targeted level of quality costs, <1.3% of net sales.
Lastly, in R&D, we constantly look for better technological solutions and product cost efficiencies. Valmet is also implementing a new ERP system, which is expected to bring cost savings in a few years’ time.
Outlook in the Paper business line
After the extraordinary high order intake in Paper in 2017, one of the common investor questions is the outlook for this business line in 2018 and beyond. With Q1 results, Valmet’s short-term market outlook for both board and paper, and tissue was good, which is the best rating in our 3-step scale. The outlook is given for the next six months from the end of the reported quarter, i.e. for Q2 and Q3 of 2018 in this case. In the beginning of the year, the board market has continued to be active, while the tissue market activity has been somewhat lower than last year. It is important to bear in mind that 2017 was an exceptional year for the Paper business line, with orders received exceeding EUR 1 billion. In the longer term, the consumption of both board and tissue is growing some 2–3 percent per year on average.