Risks and business uncertainties

Valmet's operations are affected by various strategic, financial, operational and hazard risks. Valmet takes measures to exploit emerging opportunities and to limit the adverse effects of potential threats. The assessment of risks related to sustainable development holds an important role in risk management. If such threats realized, they could have material adverse effects on Valmet’s business, financial situation and operating result, or on the value of shares and other securities.

Threats related to global economy and markets

Financial uncertainty in the global economy, coupled with fluctuations in exchange rates and tightening financial market regulations, may have an adverse effect on the availability of financing from banks and capital markets and could reduce the investment appetite of Valmet’s customers. Valmet estimates that the high proportion of business derived from stable business (Services and Automation segments) and the geographical diversification will reduce the possible negative effects that market uncertainties may have.

If global economic growth weakens, it might have adverse effects on new projects under negotiation or on projects in the order backlog. Some projects may be postponed, suspended, or canceled. In the case of long-term delivery projects, initial customer advance payments are typically 10–30 percent of the value of the project, and customers make progress payments as the project is implemented. This significantly decreases the risks and financing requirements related to Valmet’s projects. Valmet continually assesses its customers’ creditworthiness and their ability to meet their obligations. As a rule, Valmet does not finance customer projects. If economic growth slows down significantly, the markets for Valmet’s products may shrink, which may lead to, for example, tougher price competition.

Large fluctuations in energy prices can affect the global economy. These fluctuations can also affect Valmet and its customers, especially in the energy business.

Should the global issues with component availability and logistics continue, it could have adverse effects on Valmet's business.

Changes in labor costs and the prices of raw materials and components can affect Valmet’s profitability. Raw material and component cost inflation has accelerated, and wage inflation is continuing. Valmet’s goal is to offset this at least partly through increased productivity and price increases. It is possible, however, that tough competition in some product categories will make it difficult to pass on cost increases to product prices. On the other hand, some of Valmet’s customers are raw material producers and their ability to operate and invest may be enhanced by strengthening commodity prices and hampered by declining commodity prices.

Management of project business risks important

An important part of Valmet’s business consists of project business. Pulp business projects in particular can be large, thus project-specific risk management is crucial. Key risks related to
projects are project cost estimation, scheduling, project risk management, quality and performance risks, and materials management risks. Risk analysis shall, as a minimum, take place for all significant project quotations. The work concerning threat and opportunity assessment continues during the execution phase of the project. Risk management is based on careful planning and continuous, systematic monitoring and evaluation. Project risks are managed by improving and continuously developing project management processes and the related systems.

There may be changes in the competitive situation of Valmet’s individual businesses, such as the emergence of new, cost-effective competition in the markets. Valmet can safeguard its
market position by developing its products and services, and through good customer service and local presence.

Availability of financing crucial

Securing the continuity of Valmet’s operations requires sufficient available funding under all circumstances. Valmet estimates that its liquid cash assets and committed credit limits are
sufficient to secure its immediate liquidity and to ensure the flexibility of financing. The average maturity of Valmet’s non-current debt, excluding lease liabilities, is 3.6 years. Loan facilities include customary covenants, and Valmet is in clear compliance with the covenants at the balance sheet date.

COVID-19 pandemic

Depending on the success in suppressing the COVID-19 pandemic and in case the outbreak will be further prolonged, there could be further adverse impact on Valmet’s operations, customer investment activity, project deliveries, supply chain and availability of financing for both Valmet and its customers.

Epidemic outbreaks and potential other pandemics remain a risk to Valmet’s operations also after COVID-19. Pandemics might have impact on the supply chain and business operations by increasing the likelihood of interruptions. Valmet’s operations are dispersed all around the world, Valmet has a global customer base and our suppliers operate in several countries. This mitigates the overall impacts of risks to Valmet, should there be any disruptions in some isolated country or case.

Valmet currently has a solid order backlog, strong balance sheet and liquidity coupled with a flexible organization, and a structured way to operate in changing circumstances. This will support Valmet in mitigating the global challenges caused by COVID-19 and other pandemics. Valmet also has a Global Incident Management Team (IMT), and regional IMT structure established to manage Valmet’s response to pandemics.

War in Ukraine

The conflict between Russia and Ukraine that started in 2014 concerning certain parts of eastern Ukraine expanded in February 2022 to Russia’s military attack on Ukraine, which caused significant risks and uncertainties to the markets affecting the entire global economic environment and financial markets.

Valmet has evaluated the long-term impact of the situation in Ukraine, reviewed key contractual obligations, project schedules, and identified risks for projects that are delivered to Russia. Based on the review, Valmet has identified projects that no longer meet the criteria of a customer contract for revenue recognition purposes, and has consequently made a reversal of approximately EUR 80 million to its order backlog as at June 30, 2022. Valmet recorded an expense of approximately EUR 20 million in January-June for estimated restructuring costs, asset impairments and other exceptional items triggered by Valmet's decision to withdraw from Russia. These costs have been reported in cost of sales, in selling, general and administrative expenses and in other operating expenses, and have been reported as items affecting comparability. Therefore they do not impact Comparable EBITA.

At the end of June 2022, Valmet had a total of approximately 80 employees in Russia, working primarily in sales, engineering, maintenance and financial administration. Valmet does not have production in Russia. Russia represented around 2% of Valmet's net sales and 0.1% of procurement spend in 2021. Neither new sales projects in Russia nor new purchases from Russia will be made.

If the war is further prolonged or geopolitical tensions increase further, there could be additional adverse long-term impacts on Valmet’s operations, customer investment activity, project deliveries, availability and prices of components, supply chain and availability of financing for both Valmet and its customers.

Valmet has established a special Incident Management Team (IMT) to manage the impacts of the war in Ukraine on the company. Additionally, our top management and many functions, like HSE, Legal, Sourcing, HR, and IT, are also actively assessing the situation and making needed decisions. Valmet actively complies with all sanctions and export regulations impacting business with Russia and Belarus and monitors development carefully. Valmet continues in reviewing operations in Russia taking into account the local legislation, the safety of our employees and implementing its exit plan. Valmet will withdraw from Russia completely and will continue to implement the withdrawal in stages as the review of implementation options is fully completed.

 

Read more on risks and business uncertainties in the Half Year Financial review January-June 2022.

More information on financial risk management on this section.

More information on financial risk management on this section.
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