Good afternoon and welcome everybody to this news conference call regarding Valmet's acquisition of a minority share in the future Neles that we announced today. My name is Pekka Rouhiainen, and I'm the Head of Investor Relations here at Valmet. With me in the studio are Pasi Laine, Valmet's President and CEO, and Kari Saarinen, the CFO. Today's agenda is that Pasi will first go through the strategic rationale of the share acquisition and some details regarding the transaction. After that, we open for questions through the telephone lines, and Kari is then available for questions here as well. Pasi, please go ahead.
Thank you, Pekka. It's Pasi talking. The news is that Valmet acquires 14.9% ownership in the future Neles. Valmet has today agreed to acquire 22,674,869 shares in the future Neles Corporation from Solidium Oy. The shares to be acquired represent 14.88% of the Neles shares and votes. Neles Corporation, like you very well know, is planned to be created in a partial de-merge of Metso. The completion of the partial de-merge is expected to take place on June 30 in 2020, and it's pending final merger control approvals. The transaction between Valmet and Solidium is expected to take place on July 1st, 2020. What is Neles? I think many of you have been following Neles lately because Neles is becoming a listed company. Neles is a globally leading valve automation service company with strong exposure to pulp and paper industry.
Approximately 70% of Neles net sale is recurring business. Neles is profitable company with good long-term growth prospects. Neles net sales in 2019 was EUR 660 million, and EBITDA percentage was 14.6%. Since 2011, Neles has been growing about 5% annually. Profitability has improved. Headquarters of Neles are in Vantaa, Finland, close to Helsinki, and it operates in about 40 countries and employs about 2,900 people. Here you see also in the graph different customer segments like pulp and paper is about 26%, oil, gas, and industrial gas about 37%, petrochemical and chemicals 21%, and others 16%. Diversified customer segments and strong position in pulp and paper. Geographically, Americas represent about 40%, Europe 36%, and Asia, including China, about 24%. Geographically very well-positioned in America's growing markets and also in Europe and Middle East and Africa.
Nice customer segments in many different customer segments, good position there, and geographically also very balanced company. Maybe I say a couple words about Neles on top of this because I happen to know company reasonably well. I was myself running big part of Neles since 2003 and the whole Neles as it was part of Metso Automation from, was it 2006 to 2011. I have about eight years history of myself being involved in Neles business, and I know the company. It's good company. It has very good products. It has very good personnel and very capable organization. That's what I can say, of course, not as a totally unbiased person because I'm very proud of having been working with Neles in my career. Now, what is the strategic rationale for acquiring the shares?
Like I said, Neles is a good quality company with large share of recurring business. Neles has a strong position in pulp and paper industry, and that's of course the connection to rest of Valmet. We know pulp and paper. Neles roots are from pulp and paper. Neles has demonstrated good growth and potential to grow further, we wanted to invest in a company. Is there some technical challenge or? Wait a moment. Okay. I don't know. Is there a technical problem or not?
There seems to be some technical problems, I'm not now sure what the situation is.
Okay. Our technical team is saying that general is coming through. Neles has been growing, and it has potential to grow further. We wanted to invest in a good company with a strong position in industry which we know which has been demonstrating growth and has potential to grow further. Of course, we have the same heritage, we know Neles people know us. We serve similar global industries, and we benefit from same global mega trends. What is Valmet's position? Valmet wants to have an active long-term role in development of Neles. Of course, when making so big investment in a company, we want to see that the company is developing well in long run, and that's our goal, and we want to be actively helping and supporting Neles in its growth.
Valmet's target is to increase ownership in Neles when Neles share price supports additional purchases. Now we have about 14.9%. Of course, we want to increase, only if the share price supports that. If not, then, of course, we continue to develop Neles with the all the tools that we will have. Some basic data about the transaction price and timeline. We agreed with Solidium that the agreed purchase price is EUR 8 per share, the total transaction would value to EUR 179 million. Transaction will be paid 100% in cash and the contract has also some extra clauses. There is an adjustment clause, so that there is a variation in the sale price, positive or negative, depending on the share value in the beginning of the trading of Neles shares.
That adjustment is capped, and it will not have a material impact on the transaction value. The agreement includes also a one-year lock-up period, during which we cannot dispose Neles shares without Solidium's approval. Solidium retains the right of first refusal for a period of three years after closing, and we also have an anti-embarrassment clause according to which Solidium could be entitled to an additional cash payment in certain circumstances where Valmet would acquire or dispose shares in Neles at a higher price during a three-year period after the closing. The transaction is expected to take place on July 1st, 2020, and we will arrange to pay the share acquisition with the new loan facility.
We were active towards Solidium, now I can say that since the demerger was announced, we have been planning for this and have been actively talking, thinking about it, and making different kind of plans. We are happy that we are now in this stage. The contract terms which we mentioned here are actually a good cooperation with Solidium ourselves. Solidium wanted to have a good long-term owner for Neles, and we had the same goal, and that's why it was easy to agree on the lock-up and the anti-embarrassment and first refusal clauses because we want to make sure that we are long-term developers of Neles and Solidium had the same goal. With these words, I'll open the floor for questions, and Kari is here to help me with the questions or with the answers, not with the questions.
Correct.
Ladies and gentlemen, for anyone on the line, please press star and one if you'd like to ask a question. Your first question is from the line of Klas Berglind of Citi. Please go ahead.
Yes. Good afternoon. I just have a couple. I want to come back to the strategic rationale because I totally get the recurring aspect of Neles, the 70%, but why is it important to integrate like this at this valuation? Do you sense that there would be a risk to the Valmet-Neles relationship if Neles would have other owners, i.e., if there would be a bid for the business? To what extent do you intend to increase your ownership? Obviously, maybe this is tricky to answer, but to put this into context, there are players out there that have quite a lot of firepower to pay much more for Neles than EUR 8 per share. I'm interested in your thoughts there.
Now we have agreed to purchase about 15%, we are saying that our target is to increase ownership when the price that supports, that's our goal. I don't know what the other companies are planning and what kind of actions they will have. It's difficult to comment on that. We have, of course, some synergies. We could have some synergies with Neles, but now, of course, we are talking about the minority shareholding, and then it's difficult to tell anything or get any benefit of the synergies, but we want to be actively part of developing Neles. We see it as a good company, and we see there a lot of value increase potential for Neles and then, of course, for Valmet shareholders as well.
Mm-hmm. This is my follow-up to this, is cost of capital and thinking about alternative investing in terms of the opportunity. Obviously we're starting off with a minority ambition to participate in the growth story and to help support that growth. On the other hand of the spectrum, we have, to what extent Neles is a critical asset. Obviously, I don't know about your covenants in terms of balance sheet, but what I'm trying to ask is basically, if we go up towards 3 times net to EBITDA, and if you would look at Neles from the point of view of a very critical asset. I'm just trying to understand a little bit of the strategic considerations. I know it's difficult to answer perhaps, but, yeah, minority versus go all in is, I guess, what I'm after.
Now, of course, the only option was to buy minority and not all in because Neles is not listed yet, the only option was.
Of course
was to buy minority. Of course, we wanted to secure our position as soon as possible, and now we have done that.
All right. I'll get back in line.
Thank you. Your next question is from the line of Antti Kansanen of SEB. Please go ahead.
Hi, Pasi, Kari, and Pekka. It's Antti from SEB. Maybe continuing with the previous questions. You're clearly not a financial investor or a holding company as such, could you comment a little bit about what kind of operational benefits will you be able to provide Neles as a minority shareholder? Maybe you could open up a little bit about the value chain in the pulp and paper in terms of how Neles valves are bundled into the, let's say, projects that you are doing, the pulp mill design or developing the paper machines in there. Compared to how it has been historically, is there any avenues to accelerate Neles growth, or how should we think about the Neles growth in pulp and paper when Valmet is an investor in the company?
Of course, now, like you were saying, we have purchased a minority, and then we haven't had any time to discuss with Neles management at all what kind of cooperation possibilities there would be. Of course, we are talking about the cooperation between two listed companies. Of course, the cooperation should be such that we're for and that has to be the basis. Thinking on that line, when we were saying we had quite a lot of, for example, and that could be one find ways how to put together, even if we are two listed company that work would benefit both company. Actually had the third company working on that digitalization topic early on. Typically how valves are sold, and then, of course, I am an expert now in Neles, and I'm sure you'll get a better answer from Neles.
Typically, the valves can be purchased over technology supplier, so us or Andritz for it, or then the end customer can buy them directly. Neles's so I'm sure that they will keep on having good market position, not depending on who are the minority shareholders.
I guess this could be a bit too detailed question, but could you comment how much have you been using, let's say, other valve suppliers than Neles in your project when you had the option of choosing the valve supplier?
I have personally been always proposing customers to use Neles. Like I said, I'm not a neutral person on that.
Yes, of course. Maybe speculating on, let's say, a scenario of the entire Neles need to be consolidated into Valmet. Theoretically, what kind of outside of basic headquarters and what kind of?
Of course, now about the minority shareholding. Just as theoretically, one can of course assume that. Maybe it's a little bit I can't go too much on details of that because now we are talking only about the minority shareholding.
Okay. Maybe last question from me regarding kind of could you elaborate a bit about the agreement that you have with Solidium. If there, let's say, a bidder that would bid a substantial for Neles than what you paid and kind of see as the fair value. How would that be reflected in your numbers if you would then sell the shares at a higher price, given that you have the agreement with Solidium lasting for 3 years? Basically what would happen from your perspective if within 3 years there would be a substantially higher bid for Neles?
No, our target is to be long-lasting owner of Neles. If there's a higher bidder, so what? We are long-lasting, or we want to be long-lasting owner of Neles. Neles is a good company and we want to strengthen our position there.
Antti, it's Kari here. May I continue also, the sense of this whole agreement is such that Valmet is here long-term. We are not thinking even that kind of. Of course, these kind of situations may come, our thinking is here to stay long.
Okay, you're not willing to say that if there would be, let's say, EUR 50 bid for Neles and you would for some reason need to accept it, would you have to fully compensate the higher price to Solidium if that happens within three years time frame?
No, we are long-term in Neles.
Okay. That's all from me and have a great midsummer. Thanks.
Okay. Thank you, Antti. Thanks for the questions.
Thank you. Your next question is from the line of Antti Suttelin of Danske. Please go ahead.
Hello, it's another Antti here. Why didn't you buy this directly from Metso? In the same way as you bought the Process Automation Systems. You left Neles at that time in Metso. Why didn't you buy it also directly from Valmet? Sorry, from Metso.
How to say. Of course we have been thinking in our long-term strategy already for five years that it would be very nice to be a partial owner of Neles. We had some other topics to be focused on, and we have never actually approached Metso directly.
It would have been much easier. You would have 100% owner. Now you will have many owners to potentially buy shares from.
Yeah. Metso has, of course, made their decision based on what kind of goals and strategic goals they have, and we haven't had any influence on that. Now we saw an opportunity which will never come another time to become a major shareholder in Neles, and we wanted to take the opportunity.
Also, Antti, so after the announcement that Neles would be a standalone company last year, so after that, actually it would have been technically very difficult for Valmet to act here.
I have understood that for Metso practically impossible as well.
Yeah. also that it would be as positive, almost impossible.
Okay.
meaning that after that, this was kind of the option now to go.
Then I guess this is more of the same, I understand that Neles is a great company, what value does Valmet bring owning Neles? You have to keep R&D. You can't cut that, I guess. I don't know whether you can do something on the SG&A front, maybe. I don't know. Can you let me understand why is Valmet a better owner for Neles than someone else?
Of course, we can't cut anything. We, of course, are here to develop Neles, we want to be part of developing Neles we talk about different listed companies. Valmet is one Neles is another one. Our target is not to cut anything. Our target is to develop Neles as well as possible. We know the company. We know the history of it. We know the strength of Neles, we have same heritage, in long-term, we have the same goal to develop very good technological companies which have Nordic roots which have roots in pulp and paper. I think we have there a lot to offer.
From Neles' personnel perspective, I think we are quite positive or neutral if there were, let's say, another valves company in the same position, then I wouldn't feel very sure as an employee of Neles.
Yes. Then finally, since you know the company so well, I would like to use the opportunity to ask. I've tried to get this number from elsewhere. I observe it's difficult to get a number. Maybe you can give me one. What is the average lifetime of a valve? I know that the recurring business is 70%, and I'm just trying to understand how come can it be so high, 70%? What is the average lifetime of a valve, please?
That's a difficult one. You asked the same question from Timo in capital market days, and Timo couldn't answer, maybe. Timo, who is running the valves business now in Neles.
That's why I'm asking you now.
My history is so old that I would say that it goes 20, 30 years.
You don't get to 7% return.
Don't put that in any Excel format, but that's okay. Of course then if I go more into details, then it depends a lot on the media which goes in the pipe. If the media is very abrasive then it can be that one has to change the inner part of the valve once a year. It depends a lot on the media.
Yeah.
Yeah.
Okay. Thanks for the answers.
Your next question is from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead.
Hi Pasi, Kari and Pekka. Johan here. Just wondering, this sounds like a political situation. Isn't it so that the Finnish government, Solidium, which is a controlling shareholder of Valmet, obviously in a very cheap way, can now control two companies in one stake. Have you reviewed the impact for other minority shareholders in Valmet that this is a fair deal for all participants?
Yes, of course. That's even a legal obligation. Of course, it's ethical obligation for the management to think about, and board as well, to think about the advantage of all the shareholders. Of course, that's the starting point for all the actions what Valmet is doing. From Solidium's perspective, of course, they want to make sure that all the companies they have ownership in are working accord this principle. Because this is a related party transaction, there is also a legal requirement that everything has to happen based on the market values. There's ethical and principle reason, there's even legal reason to make sure that everything has happened according to market practices.
Okay.
We believe that in long run this is very good investment for Valmet's shareholders.
Okay. Another perspective is among investors, Valmet is seen as a sustainability company with good long-term progress, I think your motto is sort of converting resources into sustainable results, now you buy a company with almost a 40% exposure to oil and gas industry. How was your thinking there?
Yeah. Of course, Neles is working in oil and gas industry then one has to look at what kind of products Neles is offering for that industry. Neles is offering precise control valves which are reducing the leakages, for example, in gas applications. Then this oil and gas, 37% includes industrial gas where big share of that is actually making different kind of industrial gases, oxygen and many others, where this industrial gas applications Neles is strong. Neles is helping these industries to be more environmentally friendly and with energy and shutdown valves also more safe.
Okay, good. On the earnings front, pretty solid margins in Neles. How will the balance sheet look like when it's a standalone company? Have you looked at that?
Maybe it's not good for us to comment on Neles, so I can technically on that kind of general things repeat what also my colleague Olli has been telling capital market days, but maybe we cannot go now to balance sheet details of Neles.
Well, Neles has said that they have quite strong balance sheet, EUR 90 million loans and 150 million shares.
Okay. I wasn't updated on how the balance sheet will look like post the demerger. No, it's a net debt of EUR 90 million, is that what I understand?
Yeah. You can check that at the CMD material.
Yeah. Okay, excellent. Many thanks.
Okay. Thank you, Johan.
One again to star and one for any questions. We also have a question from the line of Sven Weier of UBS. Please go ahead.
Yeah. Thank you for taking my question. Good afternoon. It's just regarding your further share purchase, and I'm sorry if you answered that already, but my line was breaking up. It was just because you said you intend to buy further shares. First of all, is the ultimate aim of you to reach a majority, or did you say you are happy to be a minority shareholder also in the long term? Then also
How would you want to motivate a Neles shareholder to sell? Because when I put myself into the shoes of a Neles shareholder, I would think my downside is protected because there is you, potentially in the market. On the other hand, I could have the upside, once there is potentially a comeback of oil and gas CapEx, they come through with their margin improvement. It's a pretty asymmetric profile for me as a Neles shareholder. I was just wondering, how would you motivate me to sell to you? Thank you.
Thank you.
We are here for long term, of course there are ups and downs in all share prices. You are more a financial expert, but I don't fully buy the story that we have set the floor for the price.
Did you say you would be fine with being a minority shareholder in the long term? You don't necessarily need to have the majority?
We are committed long term and if financially it makes sense not to increase too much our shareholding, then long term we are minority shareholder.
Okay. Thank you.
Yeah. When we said that we would increase, but not at any cost.
Understood. Thanks.
Once again, it is star and one if you'd like to ask a question. We currently have no further questions. Please continue.
All right. If there are no more questions, this concludes this event. Thank you, Pasi Laine, for presenting and answering Kari Saarinen as well. We will meet in about one month when we publish the Q2 results on the 23rd of July. Have a nice midsummer, everybody.
Nice summer to everybody who is in northern hemisphere. Okay, bye-bye.
Bye.
Bye.
That concludes presentation. Thank you for participating.