Valmet Oyj (OTCPK:VOYJF) Q3 2022 Earnings Conference Call October 26, 2022 7:00 AM ET
Company Participants
Pekka Rouhiainen – Head, Investor Relations
Pasi Laine – President and Chief Executive Officer
Katri Hokkanen – Chief Financial Officer
Conference Call Participants
Antti Kansanen – SEB
Panu Laitinmaki – Danske Bank
Sven Weier – UBS
Johan Eliason – Kepler Cheuvreux
Pekka Rouhiainen
Good afternoon, ladies and gentlemen and welcome to Valmet’s Q3 2022 Results Publication and Webcast. My name is Pekka Rouhiainen. I’m the Head of Investor Relations at Valmet. And the speakers today will be the President and CEO, Pasi Laine; as well as our new CFO, Katri Hokkanen. After the presentations, you will have the chance to ask questions over the phone lines, but now without further ado, Pasi, please go ahead.
Pasi Laine
Thank you, Pekka and welcome, Katri. So headline today is that orders received increased to €1.2 billion and comparable EBITA to €136 million in the third quarter. So first, I’ll go through the quarter in brief, then some words about segments and business lines. Katri will go through financial development and I’ll summarize guidance and short-term market outlook.
First, the third quarter in brief. Like I said, orders received increased to €1.2 billion. Net sales increased to €1.3 billion. Our backlog amounted to €4.7 billion and comparable EBITA increased €136 million, and margin was 10.5%. Gearing in the end of the period was 18%. About 47% of the orders came – or net sales came from Process Technologies, Services contributed 30% and 23% came from Automation segment, so roughly half and half. Geographically, Europe was 35%, North America, 20%, the rest coming from the South America, China, Asia-Pacific. So nothing abnormal here. And then in the end of the period, we employed about 17,500 people.
Orders increased, like I said, to about €1.2 billion. And the trend is now such that, first, if you have the LTM for last 12 months, the trend is close to €5 billion. Here, we have also the geographical split of the orders in this year, and the split is quite traditional. Europe, about 40%; North America, 23%; Asia-Pacific has been active, 16%; China, quite active, 14%; and South America this time not as active corresponding to 7% of the order intake. Our stable business has been the topic for us. So in the beginning of Valmet, orders received in Services was about €1 billion. Services order intake has been growing organically and with some acquisition from €1 billion to €1.7 billion. So nice growth track record.
Then first, we bought Automation Systems. And then later on, we merged with Neles. And now the order intake of Automation segment in the last 6 months is €877 million. So meaning that the LTM for the stable business is about €2.6 billion, and this includes only half a year Flow Controls. And this is the big change that has taken place in Valmet from €1 billion to now €2.6 million. And then if you calculate the Flow Controls for the full year, then it’s, of course, some €100 million more, so nice development. Our backlog in the end of the period was of almost €4.7 billion. This time, we are not telling how much we estimate to be recognized as revenue in this quarter. But all in all, the backlog is – almost €4.7 billion. 60% is related to Process Technologies, 25% to Services and 15% to Automation.
Then some words about the business lines and segments. First, Services. Orders received continued to grow nicely. So our orders received in the first three quarters have been €1.338 billion. Last year, it was €1.094 billion, so nice growth. Net sales has been growing also from €947 million to €1.101 billion. So nice growth on both ones. Then our EBITA percentage last year was 14.1% and this year, 12.9%. So, we still of course have a lot of work to turn the EBITA percentage to the level where it was last year. Katri will come back to the quarterly numbers later on. But cumulatively, we are now 1.2% behind last year. Euro wise, we are ahead. So last year, we made €133 million and this year, we have made €142 million. So nice growth in backlog orders received, nice growth in net sales and profitability percent wise could have been better.
Automation segment, so this includes now half year, Flow Controls and Automation System, of course, for the whole year. Orders received was – in the segment has been €758 million, net sales, €676 million. And our EBITA from the segment has been €112 million and last year, profitability cumulatively EBITA and that included only Automation System was 15.4%, and now EBITA percentage has been 16.6%. And then, of course, during the coming 6 months, we will have a full year here in Automation Segment numbers as well. And then this tells what the size of Automation Segment is and what is the profitability but good development in Automation Segment.
Flow Controls started well, last year in Neles terms orders were about €300 million, now €387 million, so nice growth. And also net sales has been growing from €308 million to €360 million. So we are happy with the merger. We are happy with the performance of Flow Controls. Integration is going as planned. And the atmosphere in legacy Valmet and new Valmet is very good and supported to Flow Controls business. So we are happy with the progress and the attitude of the personnel and management in Flow Controls.
System Automation. Systems business, orders received increased to €371 million. In year-to-date numbers last year, it was €347 million and net sales has been increasing also from €252 million to €317 million. So, nice growth in automation numbers as well. Process Technologies. So this is the segment, including Pulp and Energy and Paper. Orders received was about €1.7 billion, last year €2.2 billion. So there is a fluctuation in the order intake of this segment. Net sales last year was about €1.5 billion, this year about €1.7 billion – €1.75 billion. So I’ll come back to the net sales development on business line numbers separately.
Profitability last year was €130 million or 8.5%, and this year €107 million or 6.1%. We have some challenges in selected Pulp and Energy projects, like we were seeing in the end of last quarter as well. So we have logistic costs overruns, we have inflation challenges, and of course, we have some delays also in some of the projects due to the COVID. So some challenges and in some selected small projects in Pulp and Energy we have also not performed as well as we should have been. That’s where from the delta comes. So Pulp and Energy and selected projects have been impacted. And of course, we work on the topics to turn the trend to better direction.
Pulp and Energy order intake has been about €792 million, last year €922 million, so there is lumpiness in the order intake, net sales this year €798 million and last year €720 million. So LTM revenue is about €1.1 billion and LTM order intake is about €1 billion. So otherwise, good development, but then some challenges in some selected projects. Paper business line orders €921 million, last year almost €1.3 billion. And like we were saying last year, last year was an exception, so the business activity was exceptional last year. We are happy with the order intake of this year. So €921 million is very good order intake level for the unit. Net sales has been improving as well, so last year €817 million and this year €959 million.
LTM net sales-wise is almost €1.3 billion and LTM in order intake is almost €1.3 billion, so we are very happy with the performance of paper taking into account that the paper’s production unit, a big one was – had some challenges due to lockdown in the second quarter in China that has, of course, impacted the operation. And we had also the fire in Rautpohja, which has impacted operations. So Paper business line has been operating very well taking into account all the challenges they have had.
Good. That was a quick summary of segments and business lines. And now I’ll let Katri to come first time here to the stage. So welcome, Katri.
Katri Hokkanen
Thank you, Pasi. My name is Katri Hokkanen and as Pasi said, first time here, and really happy about it. And I will now go through the financial development regarding the third quarter.
So about the key figures. So as you heard, the order intake for the second quarter was a €1.2 billion level. Net sales was at the level of €1.3 billion, and our comparable EBITA was €136 million. And all of these numbers increased compared to last year. But our comparable EBITDA percentage was 10.5% for the quarter and that was 0.9 percentage points lower than a year ago.
Then when looking at the year-to-date numbers. So order intake was at €3.8 million level. That is 4% ahead of last year. Our backlog is at the level of €4.7 billion, being 11% higher than a year ago, and net sales is at the level of €3.5 billion, and that is 29% ahead of last year. Our comparable EBITA was €337 million, and that was 20% higher than a year ago. But same story here then with the quarterly numbers, EBITA percentage is 9.5%, and that is 0.8 percentage points lower than a year ago. We also have now new performance measure now in the chart called adjusted earnings per share, this we already had for the second quarter. And we have taken the amount coming from the business combinations out. And the adjusted EPS was €1.56 year-to-date and that is 11% higher than a year ago and the traditional EPS was €1.25.
Then a few words about segment key figures. So as I said, year-to-date, we are at 3.8% and 4% ahead of last year. Services is at the level of €1.3 billion, and that is 22% higher than a year ago. And if we take FX impact out, Services growth is roughly 16%. And our estimation is that roughly half of that is related to cost inflation and half is related to organic growth. Then Automation segment, order intake was at the level of €760 million, so that has doubled compared to last year. And that is because we have now two quarters of Flow Control in our numbers. Then Process Technologies, year-to-date €1.7 billion, and that is 20 – some 20% behind last year. So that was the order intake.
Then moving to the net sales. So starting from Services. Services was at the level of €1.1 billion. Automation is roughly on the €680 million level and Process Technologies close to €1.8 billion, and all of these have increased compared to last year.
Then a few words about the comparable EBITA. For the quarter first, so Services was at the level of 14.3%. And you all remember that the first quarter was slow, it was 9.6%, and then the second quarter was 14.2%. And when we look at the full year numbers, Services is now at the level of 12.9%, and that is 1.1 percentage points below last year. Then Automation segment, the EBITA percentage for the quarter was 17.6% and year-to-date we are at 16.6%, and that is 1.2 percentage points higher than a year ago.
Then on the Process technology, so the quarter was 5.8%, year-to-date we are at 6.1%, and that is 2.4 percentage points behind last year. So even if the net sales has increased and the EBITA in millions of euros have increased, unfortunately, our profitability in terms of EBITA is below last year’s numbers.
Then regarding gross profit and SG&A. So our gross profit was at the level of €1.1 billion when looking at the last 12 months, and the percentage has gone down from last year’s 25% to 24%. Our SG&A have increased, so last year, we were at the level of €600 million, and now when looking at the last 12 months, we are at €774 million or 16%. And of course, here the biggest reason is coming from Flow Control. But also on top of that, we are impacted by FX. We have more travel expenses, and we also have more people in SG&A.
Then regarding the comparable margin development. So the trends have been looking really nice over the years. And last year, our net sales was at the level of €3.9 billion. And now when looking at the last 12 months, so we are at €4.7 billion. So there has been growth in the net sales. But when we look at the comparable EBITA margin, so last year from 10.9%, we are now down to 10.2%. And of course, this is going to the wrong direction. And we have to continue to work really hard to get this back on track and to be aligned with our financial target, which is to be between 12% to 14% in comparable EBITA.
Then cash flow. So for the quarter, the cash flow was €115 million. And when looking at the last 12 months, we are at the level of €146 million, and that has decreased from last year. And the reason for that is coming from the Flow Control and also, we have increased our inventories. And net working capital at the end of Q3 was minus €265 million or 5% of the rolling 12 months’ orders. And it’s really important to understand that the whole profile of our net working capital has now changed after Flow Controls became part of us. In the past, we have been saying that net working capital is roughly minus 11% of our rolling 12 months’ orders, and now we have estimated that together with Flow Control the number is minus 7%.
Our net debt came down from the second quarter, and now it was €428 million, and our gearing was 18%. Our equity-to-asset ratio is 47%. Capital employed. Also, this number has changed quite a lot from last year. So when looking at the last 12 months, our capital employed is at the level of €3.3 billion. And our comparable return on capital employed was at the level of 16%. And even if it has come down from previous year’s levels, it’s important to remember that this is aligned with our financial targets. There we say that the comparable ROCE should be at least 15%.
Then a few words about the adjusted EPS still, so as mentioned earlier, we have now these new metrics second time in our numbers. And when looking at the last 12 months, the adjusted EPS was €2.23, and that has increased compared to last year’s €2.09.
That was where the financials, so I will give the floor back to Pasi. Thank you.
Pasi Laine
Thank you, Katri. So now it’s time for guidance and short-term market outlook. So the guidance we keep as it has been, so we estimate that including the merger with Neles, net sale in ‘22 will increase in comparison with ‘21 and comparable EBITA in ‘22 will increase in comparison with ‘21, so no change in guidance. Then short-term market outlook in Services, like you have seen, order intake has been good. So we have all the reasons to keep the outlook as good. And like you remember, about half comes from market activity half from the work utilization, what we have.
In Automation, in Flow Controls, all the reasons to say that market is good. Order outlook is good. Systems outlook is good, like it has been previous as well. In Pulp, we keep the same as earlier, so good to satisfactory. So we have units which have very heavy workload and good market activity. And then a couple of business units or one business unit where the market activity hasn’t been that good or we haven’t been successful in getting the orders. So good and satisfactory continues to be our market outlook for Pulp.
In Energy market has been good and market activity continues to be good. Board and Paper, the same, like you have seen, order intake is at a good level, not as good as last year. But still to comparing to our capability to deliver, it’s a good level. And this year continues to be at the satisfactory level like it has been the whole year.
So that’s the summary of guidance and short-term market outlook.
Pekka Rouhiainen
Alright. Thank you, Pasi. And now we are ready to move on to the questions-and-answer session. So if Katri also move here behind the table.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Antti Kansanen from SEB. Please go ahead.
Antti Kansanen
Yes. Hi, guys. Its from SEB, couple of questions from me. Firstly, on Europe and the energy situation over there. So what are you seeing through your Service business regarding your clients taking potential downtime, any impacts or any risks that you would like to flag? And also, what are you seeing through your suppliers? Any signs of them struggling or raising prices that you need to pay?
Pasi Laine
That’s Antti, very good question. So like we all know, of course, the energy prices are now high in, especially in middle of Europe. Some of our customers, the ones who are relying on gas, on the energy supply, they suffer with the costs. Some of them have taken – taking downtime because of the costs. Some of course, the ones who are relying on biomass or waste to energy, they don’t have the same price pressure. So actually, they can continue to produce with the normal levels. We haven’t seen any change in our Service order intake yet because of that. So no impact yet. Then what kind of impact it can have? It can have of course, two-way impact. So is the production volume stays at a low level and the demand from consumables starts to decline. But then from the other perspective there, the demand for our customers has been quite good for some time. So it can be also that customers are using other downtime to make some modifications to their production assets. But we haven’t seen yet that what’s the full impact? Then on suppliers, we, of course, are monitoring it very carefully. We haven’t seen yet any impact on pricing. And then, of course, like everybody else, we are also looking for supplies, which would be coming from somewhere else than Middle Europe, if possible.
Antti Kansanen
Alright, fair enough. And then second question to Katri and also welcome to this call from my behalf. So, if you look at your balance sheet, and it’s obviously changed a little bit after the Neles transaction, but your earnings generation should be more stable as well. So how should we think about kind of sustainable net debt or leverage levels that you are comfortable with your balance sheet?
Katri Hokkanen
Yes. So if I start from the balance sheet. So of course, now after Neles became part of us, the balance sheet value has increased. So the sum is €6.55 billion, so it has increased. And we had debt now after the Neles merger, so our gearing went from 22% to 18%. So of course, we are carefully looking at the situation. We have been discussing about the topic. And I think it’s really important to be alert and with the rising interest situation and those kind of things. So, our treasury – organization is working hard on the topic or keeping it under control.
Antti Kansanen
Yes, sure. But you don’t have any kind of a net debt to EBITA or a gearing percentage in mind that would be kind of a limit that you wouldn’t like to go over?
Katri Hokkanen
I think we are now on a very good level. I think that’s fair to say. So we don’t have any limits or we haven’t set any limit for that.
Pasi Laine
Like you want to know our gearing before the merger was sometimes minus 20, sometimes almost plus 30. And we have been comfortable in changing the gearing between those numbers. And now of course, one could think of that gearing numbers could be a little bit more aggressive. But we still think that it’s good to have a good balance sheet and good strong company because you never know what kind of distant pansies there in front of us in the future.
Antti Kansanen
Yes, absolutely. And then kind of continuing with that theme, if we think about dividends and your payout rate, is there a new kind of adjusted EPS, something that we should look when we kind of assess the payout ratio or just the reported net profit?
Pasi Laine
We have had the policy to pay over 50% and like you know, our track record has been to pay a little bit more. But of course, we can’t give you any guidance yet what kind of thoughts we have. But the track record has been that we have been paying a little bit more than the policies say.
Antti Kansanen
Alright. Thank you.
Operator
The next question comes from Panu Laitinmaki from Danske Bank. Please go ahead.
Panu Laitinmaki
Yes. Thank you. It’s Panu Laitinmaki from Danske. I have two questions, both on margins. So, firstly, on the services business, it kind of went down again after Q2, where you went back to normal. So, can you kind of explain what is going on there? And kind of what do you see going forward, when can you mitigate the inflation? And then secondly, on the Process Technologies, we saw a sequential improvement from Q2. Is this kind of the way to go for the coming quarters, or how do you see this developing with the problem projects that you have mentioned? Thanks.
Pasi Laine
I think in services, first quarter, like Katri said, first quarter was not that good, second quarter was a little bit better. But then I think we tried to communicate that the actual was 1% below last year. And now we are 1.2% below the last year. So, in a way, third quarter continued the trend where we were after the second quarter. Of course, we – so like Katri said also, we are not happy with the profitability development. So, our Head of Business line, Aki, is working very hard on the topic together with the area colleagues. And we have had too much delay in pushing the increasing inflation to our sales prices. And that has taken a little bit too long time, but I am sure that Aki is working on the topic. Of course, we can’t give you any estimates when we will see a positive change, but we work on the topic. Then on Process Technology, if you look at the Process Technology segment profitability numbers last year, you will see that there is some fluctuation. So, there is still – and there will be always some fluctuation in the EBITA percentage. So, it’s not like a trend that stays all the time at the same level. So, we are below in the profitability. And we are below of last year’s profitability due to the – some selected projects in Pulp and Energy, like we have been saying. But the same, you can’t take one quarter and think that it’s a trend. So, we have to look a little bit longer terms when analyzing the numbers.
Panu Laitinmaki
Thanks. Can I ask on the Process Technology, so would you think that going into next year, you would have kind of digested the impact from these projects, or is it something that will burden for a longer time?
Pasi Laine
We haven’t given estimates for the segment. So, then it’s very difficult to answer to your question. But of course, we work hard on a – if I start from that level that our target is to make 12 points, and we are not at the 12 points. So, then of course, Process Technology, Automation Services segment all have to improve for us to reach the target.
Panu Laitinmaki
Alright. Thanks.
Operator
The next question comes from Weier from UBS. Please go ahead.
Sven Weier
Yes. Good afternoon. It’s Sven from UBS. I have a few questions, if I may. The first one is on the pulp business. And I was wondering if you could go in a little bit more detail into the leadership changes you have made over the last coming months. And whether that also implies that’s a general strategy change in pulp. I am just wondering, especially with regards to your strategy on Greenfield mills, given that, I mean it looks quite likely that also in the future, these projects will be quite, quite sizable and whether you deem them in general, a bit too risky. That’s the first one. Thank you.
Pasi Laine
So, we have been developing the leadership team all the time, and now we had a – first of all, Bertel has been doing good work 7 years in running pulp business – Pulp and Energy. It’s a tough place to be in. And then we have, at the same time, been developing Sami, who has very good track record in automation. And then we saw the possibility that Bertel would focus on the topics where he is very strong, so customer contacts and customer care of big customers. And then at the same time have a smooth transition then so that Sami will take over the business line leadership. The change has gone well. Bertel is doing very good work, Sami is doing good work. So, I am happy with the change. We are not – that has nothing to do with the strategy change, so we keep the same strategy. And now we have fresh blood in executing the strategy. Greenfield, I have been careful with the very big Greenfield projects in South America. And like I have been saying earlier, that might be that now when Valmet is a strong company, having so big stable business. We have a very good track record in executing the projects in South America. So, it might be that we are willing in coming years to take a little bit more risk than what we have had earlier.
Sven Weier
Okay. Thank you for that. The second question is on the Board side, please. I mean obviously, we saw now two quarters where the order intake was a bit weak. Of course, the comp is tough. The outlook is still good. I was just wondering, I mean is the unchanged outlook with the goods predominantly because you still have a very high load for the quarter and maybe years to come? Whereas the new order activity continues to be slow, or how should we look at that situation?
Pasi Laine
I think first of all, process the paper business line order intake has been now €921 million, and then when we had order intake was €1 billion, we said that it’s a very good level. And the whole year last year, we were saying that this level of orders coming in was extraordinary. So, this €1.6 billion was something which, in a way, is even too high comparing to our capacity. So, now if you see that our net sales is somewhere at €1.3 billion level. So, €1.6 billion means almost three months more backlog in a year. So, of course, that kind of situation cannot continue. I see that the market activity and our order intake in the beginning of the year has been actually good. The comparison period was extremely good, but this €921 million is a good level for the paper business line.
Sven Weier
Okay. Good. Thank you, Pasi. And maybe one for Katri, and also welcome from my side. It’s just on the receivables because we saw a bit of a sequential drop from over €800 million to below €700 million, which I think seasonally is a little bit unusual. Could you just walk us through what happened on the receivables? Thank you.
Katri Hokkanen
In my opinion, the receivable, it varies between the quarters, and it varies between the months. So, there was nothing extraordinary in that change.
Sven Weier
So, it’s been a normal receivable collection of factoring or something like that?
Katri Hokkanen
I would say that we are doing a good job with the receivable collection overall. So, that’s how we are working all the time in all the businesses.
Sven Weier
Okay. Sounds good. Thank you both.
Pasi Laine
Thank you, Sven.
Operator
The next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead.
Johan Eliason
Yes. Hi. This is Johan at Kepler Cheuvreux. Hi Pasi. And I had a question really to Katri, actually on this comment about services order intake, 16% currency adjusted roughly half on price. What was the price in the sales in the quarter so we can get a feeling for how the prices are catching up with the inflation and how will it pan out in the coming quarter? Thank you.
Katri Hokkanen
Well, the trend, of course, if you – I think it’s very positive, first of all, that we have been able to increase the prices. And of course, there has been the organic growth. So, eventually you will see also that trend in the net sales as well. So, I would say that it goes both ways.
Johan Eliason
Yes. But didn’t you have any price hikes in the sales?
Katri Hokkanen
As said, so we have, of course, increased the prices. So, that comes then through also in the net sales when services is doing the invoicing and sending the goods. So, when we increase the prices and when we deliver, then that is visible there as well. So, both order intake and net sales, there was a good increase.
Johan Eliason
At this 8% level for both?
Katri Hokkanen
We now commented only for the order intake, but you can calculate it from that.
Johan Eliason
Okay. Thanks. That’s all I have. Thank you very much.
Operator
[Operator Instructions] There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.
End of Q&A
Pasi Laine
Robot and not the lady this time.
Pekka Rouhiainen
Yes. Pasi, that’s a correct observation. So, we are now ready to conclude the event and I would like to remind everybody about our upcoming events. So, of course, the financial statements, i.e., the Q4 will be released on the February 2. But before that, we will have a site visit to Flow Controls site in Hakkila, Finland. So, hopefully, everybody who are interested are already registered to that event. So, if not, please remember to do it. And then save the date also for the Capital Markets Day. So, that’s going to take place on the March 8, 2023 here in Espoo, Finland. But yes, I guess that’s all from our side. So, thank you, Pasi and Katri and everybody for the questions, and have a nice rest of the day.
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