Valmet’s Q3 results sparked questions

Valmet published its third quarter 2023 results on October 25. Orders received decreased to EUR 980 million, as orders decreased in Process Technologies, Services and Automation. Valmet’s net sales remained at the previous year’s level. Net sales increased in the Services and Automation segments and decreased in Process Technologies.

The quarter was excellent in terms of profitability. Valmet’s Comparable EBITA increased 11% to EUR 150 million, and Comparable EBITA margin was Valmet’s all time high Q3 margin, 11.6%. Segment margins were 18.4% in Services, 18.7% in Automation and 4.5% in Process Technologies.

During the first nine months, Automation’s orders grew well, and the market activity was good. In Services, the market activity was at a very good level at the start of the year, and order intake in the first quarter was record breaking. Unfortunately, the market activity in Services decreased during the second and third quarter. What comes to the Process Technologies segment, even though there are projects in the pipeline and customers are discussing investments, we have seen some delays in project decision schedules.

As usual, let’s have a look at the topics that were discussed with analysts and investors after the result publication.

How did Services orders develop? How is the outlook?

Orders received in Services decreased 18% in Q3/2023 (-13% in constant currency). There was decline in all geographical areas and in all service businesses, as our customers were saving cash and limiting their spend to mandatory services. Orders in the comparison quarter last year were very high, and back then we had already implemented price increases due to cost inflation. In Services Q3 is often a seasonally slower quarter for orders than Q2.

There are some signs of improvement. The demand seems to have picked up in China and North America. It also looks like the capacity utilisation rates of our customers, which were very low during Q3/23, would gradually be increasing. The short-term market outlook for Services is Good/Satisfactory, meaning that Valmet’s capacity utilization is good, but the market is not as active as in Q1/23 and 2022. Services orders have been higher in Q4 than in Q3 in many years. We are working hard to reach last year’s order intake of EUR 1,756 million in 2023.

One should keep in mind that the long-term drivers and megatrends have not changed: there will still be need for sustainability, digitalization, efficiency and safety, driving upgrades and services on longer term.

Why was Services margin so strong? Can you still improve it?

In Q3, Services Comparable EBITA increased by 45% to EUR 79 million (55m), and the margin increased to 18.4% (14.3%). Comparable EBITA increased due to higher net sales. Net sales increased to EUR 429 million, which is 48 million (13%) higher than in Q3/22. Our pricing has been relatively good and absorption management has been also good.

Services margin has developed nicely this year. The margin in 2022, 14.8%, was disappointing as we were late with price increases to cover cost inflation. We have now been catching up and were able to increase the LTM margin by 3 percentage points to 17.7%. However, cost inflation continues to impact us, especially in salaries.

Our target is to increase Valmet’s Comparable EBITA margin to 12–14%. To achieve that all three segments must improve profitability. In Services we try to push the prices up, invent new, more cost competitive products and services and continue to be strict with cost management.  

How should we read the short-term market outlook for Services?

The short-term market outlook is based on customer activity (50%) and Valmet’s capacity utilization (50%). It is given for the next six months following the reported quarter.  The scale is weak-satisfactory-good.

For Services, the outlook remained good/satisfactory. The order intake is still at last year’s level, so our people are very busy with customer deliveries and capacity utilization is good. However, the market activity in Q3 was down from last year, causing the customer activity part in the outlook to remain satisfactory.

How can the short-term market outlook for Automation Systems still be "good", when the demand outlook for Services, Pulp & Energy and Paper business lines is “satisfactory”?

Despite a bit slower Q3/23, market activity is still at good level in Automation Systems. In January–September 2023, orders grew 10% (+12% in constant currency). Package sales, meaning the automation systems sold with pulp, paper or energy projects, have been roughly 10–20% of Automation System’s order intake in recent years. This part is naturally affected if the activity level in Process Technologies decreases. Around 1/3 of Automation Systems’ sales comes from other process industries than pulp and paper. Also, around 50% of Automation System’s sales comes from services.

Is Valmet aiming to regain market share in pulp?

Yes. The bioproduct factory we delivered to Metsä Fibre in Kemi just started up. It is the biggest softwood pulp mill in the world. Currently we are working on a big hardwood pulp mill rebuild in South America. So we have good reference cases for Valmet pulp technology. Our South American organization is in good shape, and we are eager to participate in the next big pulp mill project.

Can you increase Process Technologies’ margin while volumes are declining?

Process Technologies’ last twelve months’ margin was 4.9%.  Like we have said, the margins in some Pulp and Energy projects were impacted by cost inflation as these projects were sold to customers before the inflation peaked in early 2022. The negative margin impact of these orders will pass once the projects have been delivered.

We have developed a flexible cost structure, which we illustrate with capacity costs. Today, in the Paper business line, capacity costs represent 26% of net sales. In Pulp and Energy business line the capacity costs are 19% of net sales, as we can outsource more in Pulp and Energy than in Paper. When volumes go down, we can scale down the cost base by using less external workforce. We have to be careful with our SG&A costs, too. Valmet’s margin target of 12–14% is valid throughout the cycle.