Valmet’s Q3/2019 results clearly beat consensus estimates on orders, EBITA and margin. This was reflected in the questions we got after the results announcement. Here come the most common themes.
EBITA margin improvement
Valmet’s comparable EBITA margin was 9.5% in the third quarter, up 1.5 percentage points from Q3/2018. Last 12 months’ margin was 9.1%, highest ever for Valmet. The analysts were wondering how this margin level was achieved, and what can be expected going forward.
Management listed many reasons for Valmet’s margin improvement. In the third quarter, bigger portion of net sales came from better-margin stable business (Services and Automation) than in the comparison period. Quality costs have decreased over the years and we see an improvement in execution. For several quarters now, we have had no major project hits. In fact, in all our capital businesses, margins on delivered projects now tend to be better than as-sold margins. Also pricing has improved somewhat. The acquisitions have supported the margin too, as their profitability has been at the expected level.
Valmet’s target for comparable EBITA margin is 8–10%. Rolling 12 months margin has been within this range for the past three quarters, and the market is expecting Valmet to raise the target. Management first wants to focus on hitting the range for a full year. The CEO commented, however, that considering Valmet’s technology content, market position and importance to its customers, one could claim that the profitability should be even higher than it is today.
Services business growth
A major concern in Valmet’s Q2 results was Services’ negative growth in the quarter excluding the acquisitions. In Q3, organic growth was flat (+1%). The market has been less active in China, Europe and North America, in line with the financial news from these regions. In January–September, orders in Energy and Environment, and Performance Parts increased compared to 2018, while Rolls and Fabrics were at last year’s level. Mill Improvements is the only Services business unit, where orders declined in January–September. In the 3rd quarter, orders in Mill Improvements were at last year’s level.
Management commented that Services sales growth is our target also in a less active market. Valmet’s comprehensive sales network and the largest product portfolio in the industry should support us in reaching this goal. We can sell more services to the existing customers. Management’s focus is on sales management and growing Valmet’s market share.
“In an economic downturn, we will have challenges to grow like everybody else. But on long-term, we still have potential to grow Services organically”, CEO Pasi Laine said.
Like in the 3rd quarter of 2018, Valmet’s marine scrubber orders were high in the quarter, totaling EUR 93 million. Scrubber outlook for the full year is good, but orders will not be as high as last year (EUR 190 million).
Net sales from scrubbers are booked when the contract is completed. To a question about profitability of these projects, management answered that they are happy with the profitability. Scrubber projects are neither big nor risky. Valmet has not had issues with scrubber deliveries or installments.