Earnings Call: Q1 2020

Apr 23, 2020

All right, ladies and gentlemen. Welcome to Valmet's Q1 twenty twenty Results Publication and Webcast. My name is Pekka Rohelem. I'm the Head of Investor Relations here at Valmet. And with me today are Pasi Leine, President and CEO as well as Karis Arinen, CFO. After the presentations, you will have the chance to ask questions over the phone lines as we have no physical audience here at Keel Satamer today. But without further ado, Pasi, please go ahead. Thank you, Pekka. So welcome. So our headline is now that orders received increased to €1,200,000,000 and comparable EBITDA to 52,000,000 First, I will go through the quarter in brief, then a couple of words about the business line developments, Karri will go through the financial development and I'll talk about dividend proposal guidance and short term market outlook. First quarter in brief. So our orders received in stable business increased to €514,000,000 In capital business, orders received increased to $697,000,000 Our net sales increased to €821,000,000 Backlog increased to about €3,600,000,000 And comparable EBITA increased to €52,000,000 And margin was 6.3 Our gearing in the end of the quarter was minus 22%. Now quarter one in crafts. So orders received totally was DKK 1,187,000,000.000 net sales, like I said, $821,000,000 comparable EBITDA, 52,000,000 and a comparable EBITDA margin, 6.3%. We employed in the end of the quarter 13,000 almost 600 people. This time, if we look the geographical graph first, so you'll see that South America was big, and that was, of course, due to big pulp in order we got in South America. So South America was 22% of our order intake, and China was 21%. So China has been active like we were also estimating in last year. So China was 21% of our order intake. Europe was 32, continued to be strong as well. Business line wise, capital was very strong in this quarter. And that's why Pulp and Energy and Paper together accounted to almost 60% of the order intake and stable business, so services and automation were of course then a little bit less. Here's the graph how our order intake has been developing. So this quarter, order intake was DKK 1,187,000,000.000, and twelve months cumulative curve is now at the highest ever, so almost DKK4.3 billion or DKK4.3 billion. And that's, of course, nice trend to look at. Then stable business. Orders received increased as well, and it totaled €1,828,000,000 during last four quarters. And this graph is, of course, also nice to look at and shows that we have been growing organically our stable business as well as, of course, with acquisitions. Backlog ended up at almost €3,600,000,000 in the end of quarter, and it's the record backlog for Valmet during all these years Valmet has been operating. And it's about DKK223 million higher than it was in end of last year. Now we are saying that about 60% of backlog is expected to be realized as net sales during 2020. And last year, the same percentage was about 65%, and the corresponding number was DKK3 billion then. And then you can calculate that we have a little bit more backlog now to be recognized this year than last We are saying also that about 30% of the backlog relates to stable businesses, the rest to capital businesses. Then a couple of words about the business line development. First, services. Orders received and net sales increased. Orders increased in the orders received in services ended up at DKK398 million. Out of that, million came from the acquired businesses, which then means that the growth organically was 1%. Are we happy with 1% in normal circumstances? Not. And then maybe now during these little bit more special times, are happy that we were able to grow by 1%. Net sales increased as well and ended up at $295,000,000. And there, the acquisition impact was DKK37 million, which means that actually our net sales in comparable operations declined compared to last year. Orders received increase came from many areas and also business unit wise, especially energy and environment was strong performance parts as well. And then we had challenges in order intake, which means that it decreased in mill improvements and in fabrics. COVID-nineteen had a negative impact to our net sales, especially in field services, mainly improved projects and energy services. So those kind of services where we have to visit customers, it has been very difficult to execute the projects to the end or execute the field services which customers would like to have us to deliver. And of course, we expect that, that challenge will continue or even get worse in second quarter. And still something about order intake in services. So we saw stronger demand first two months and March, and then COVID impact started to show up in order intake numbers and also net sales numbers in March mainly. Of course, China impact was already in February. In automation, our orders received increased to 116,000,000. That's of course a nice number. And then net sales increased to 80,000,000. Here, COVID has the same kind of limitations. We have quite a lot of experts who are visiting customers every day doing different kind of field services, expert services and mill improvement projects. And now when there are some limitations in traveling and also visiting customers, then of course it's more and more challenging to execute that kind of services at the customers. Of course, our teams are looking to use as much modern tools, remote connections, remote work as possible both in automation and services. But of course, these COVID limitations has an impact to our revenue recognition and has had will have it as well in the future. Pulp and Energy. Orders received and net sales increased. So orders received were DKK376 million. In the graph, see that now the order intake is almost a little bit over DKK1.3 billion in twelve months cumulative curve. South America was strong. Europe was strong. And Asia Pacific, North America, China, not as strong as last year. Our orders received increased both in pulp and energy. Then the interesting topic during last years have been marine scrubbers, and now the marine scrubber orders were only 4,000,000 in this quarter. COVID will have an impact in in pulp and energy as well. So customers are closing some sites so that we can't execute anything or we have challenges to send our specialists to work on sites or our our our subcontracts to do some installation work, and that will, of course, have an impact to our net sales in this year. But otherwise, I will come back later on to the outlook. The outlook for Pulp and Energy is actually still good. In paper, our orders received and net sales increased as well. Paper orders received ended up at €321,000,000 That's of course a nice number. Orders received increased in China and EMEA, decreased in the other areas. And orders received increased both on paper board and paper as well as in tissue. Net sales increased compared to last year. COVID has the same impact in paper as in pulp and energy. And there, the difference between these two businesses is that actually maturity of the work what we do in paper is done in our offices, in our factories, in our subcontracting. So out of the value, what we have in backlog and in orders totally is less depending on-site work than in pulp and energy. And that's why the impact of COVID and site closures will be a little bit less in paper. But of course, it has an impact. Then if I say a couple words about the supply network, then of course, it's obvious that we will have challenges with our supply network, especially in countries like India where the whole country has been locked down for several weeks. And we have quite a big part of not big part, but we have projects where a big part of the subcontracting or our own manufacturing is happening in India. So now it's Karri's turn to go through the financial development. Thanks, Pazi, and also good day on my my behalf. Just looking at our quarter one performance. So orders received were all time high, 1,200,000,000.0. That's exceeding a year ago by 42%. Both capital businesses increased. Pulp and energy business line increased by 87% and paper business line by 76%. Automation total orders, they increased by 30%, and services increased by 11%. Services organic growth was 1%, as Pazi mentioned. About the areas, so South America and China were strong. Also good growth in EMEA. North America and Asia Pacific actually reduced with the orders. Interesting point here is that China orders for the quarter one were the same as full last year. Order backlog, that was at EUR 3,600,000,000.0. This is a record high quarter end for Valmet. 60 of the order backlog will be recognized during the year. That's around EUR 100,000,000 more than last year at this point of time. Net sales for the quarter, $821,000,000. This is 20% higher than a year ago. Pulp and energy increased a lot, 50%. Paper business line, 16%, and and automation totaled by 10%. Services increase was 7%, but services organic growth with net sales actually was negative, so it reduced by 7% or 18,000,000. So services net sales was impacted by by this pandemic and as the access to to customer sites was limited, and also China was was closed for almost a month. Net sales to South America, Asia Pacific and EMEA, they increased. North America was flat and China reduced. Well, overall, during the quarter, capital businesses were strong. Capital had 59% share of the quarter's orders and 56% of share of quarter's net sales. Typical split is fifty-fifty if we look at a bit longer term. Our EBITDA for the quarter, 52,000,000, 9% higher than a year ago. EBITDA was 6.3%. That is 0.6% points below last year's EBITDA percent. Cash flow for the quarter, 173,000,000. Last year, we started with EUR 30,000,000 cash flow. Gearing reduced to minus 22%. Then looking at gross profit and SG and A development. So gross profit for the quarter, that was around CHF 30,000,000 higher than a year ago. Gross profit percent was one percent point below. So then that comes from the capital business' share, which was 56%. Last year, it was 51% for the quarter. So this explains a bit lower gross profit percent. And then looking at quarter's SG and As. So quarter's SG and As actually increased. 60% of the increase is coming out of the acquisitions. So far until the end of quarter one, we haven't had any major reductions for some of the, like, activity related costs such as travel travel costs due to coronavirus. And then looking at our comparable EBITDA. So last twelve months, EBITDA was now 8.7 at 8.7%, so no increase here. Our EBITDA target remains between 1012% that we actually set end of last year. Looking at cash flow. So cash flow was strong, as said, EUR 173,000,000. So we have now had three strong quarters each over EUR 100,000,000 cash flow. The good development at cash flow was actually driven by good development at net working capital, and this net working capital was minus 14% of rolling twelve months orders received. So it was in in a kind of very low level. And and Valmet has a principle that that capital orders are only booked once Valmet has received down payments or letter of credit or similar similar security, and and we had actually a strong quarter with the capital order intake now. Also also the accounts receivables developed very favorably, and also the overdues over sixty days reduced. Net debt and gearing. Gearing was minus 22% and net debt was minus CHF $220,000,000. Without lease liabilities, gearing would have been minus 28%. End of the quarter, we had CHF $466,000,000 cash and CHF 186,000,000 loans. And on top of that, Valmet has an unused CHF 200,000,000 committed revolving credit facility, which matures year to 02/24. And then return on capital employed. And capital employed so capital employed was EUR 1,300,000,000.0 end of the quarter. Out of this, equity was around EUR 1,000,000,000. Our rolling twelve months capital return on capital employed was 23%, and here our target is more than 20%. Okay. Back to you, Pasi. So, then it's dividend proposal guidance and short term market outlook. So, the board of directors have decided to keep the same dividend proposal than earlier. Our policy is saying that we pay out at least 50% of net profit as a dividend. And the dividend proposal is now 80¢ per share. And here you see how it has been developing over the years. So it's starting from €0.15 went to €0.25 last year it was €0.65 and now Board of Directors proposing for AGM to approve €0.80 a share dividend for 2019. Then our guidance and short term market outlook. Like we announced April 16, Valmed announced on 04/16/2020 that the company withdraws its guidance for 2020 due to the increased uncertainty related to the COVID-nineteen pandemic. And that's of course still the situation. Then if we look the short term market outlook where we, like we have been earlier saying, take into account the current workload and then also the activity level on the market. And in services, we had good market outlook end of last quarter, and now we are dropping that to satisfactory and weak. And why we are using two different words here is is has a reason. Like I have been saying, it's very difficult now to execute mill type of projects and field services. And that will, of course, have an impact to the demand of those services as well. And that's why we are saying that the demand is weak. We also have had started negotiations in Finland to start temporary layoffs for persons who are working on that field services part and not in services and EMEA. I don't know the exact amount of person to whom it's affecting, but we are talking about services and EMEA organization. And we have started also some temporary layoffs in our North American organization for the same reason. And then at the same time, when you are looking our customers coming out with the announcements, they are saying that the production volumes are still reasonably or they are satisfied volumes. And that's why, of course, part of our services will continue to have a satisfactory demand. So that's the explanation between using two words satisfactory and weak. In automation, we are dropping from good to good and satisfactory and the same explanation. So we still have active sales pipeline in automation, but COVID is impacting part of our services and also demand of those services. And that's why we are saying that demand is either good or satisfactory. In pulp, we booked nice orders in quarter one, but we still have active sales pipeline for capital cases. And that's why we keep our outlook for pulp as good. In energy, our outlook has been satisfactory and we'll still keep to satisfactory also for energy. Important paper outlook was good and we keep it at good level. We still have active negotiations ongoing with customers for pulp and paper machines. And this year, we had satisfactory and will continue to keep the satisfactory level also for coming quarter. So, changes in services and automation and the rest are seen to be at the same level where they were in the end of last year. Good. Now, Pekka, it's your turn to say that we'll go to the other side of the room. Yes, exactly. Thank you, Passiv. So we will now take the questions. And according to my information, we already have some questions over the phone lines, and we will now go directly to the phone line questions. So operator, I now hand over to you. Thank And your first question today is from the line of Manu Rimpela from Nordea. Please go ahead. Good afternoon, and thank you for taking my question. My first question would be on the service operations. So I think you reported some 6% decline organically in the sales in in q one. And I was hoping that you would be able to help us to understand a bit better the profile between the different months in January and February. Was it still up? And what kind of run rate did you see in March? And maybe the first comments on April after this kind of lockdown impacts are becoming more visible, that would very much help us to understand what that is the run rate we are at the moment then. Okay. So like I said, order intake was developing better in the first two months and still March. And then last two weeks in March, we we we had more generally the drop in the order intake. In China, it was in the beginning of the year, and then it bounced back. So actually, totally was okay ish in in orders received in in first quarter. And and now, of course, the COVID is is spreading around the world. So so, of course, we estimate that the order intake, especially for mill and no, especially for mill, maybe even roll will continue to be weak for the second second quarter. And then it's very difficult to say that how the market will develop later on because our customers now have to postpone their annual shutdowns. And then, of course, there is a there is a need for the annual shutdown. So so I'm sure that when the when the when the restrictions, travel restrictions are lifted and when when customers are more sure that they can continue their operations even if they have some COVID cases in in in the operation, then there will be again not a boom but activity on these mill services which they can't now perform because those are of course partly even legally required works what they will be performing. So all in all, we estimate that now the activity in second quarter will be weak to satisfactory and then it will be bouncing back. But then at what time it will bounce back, we are not sure yet. Okay. Thank you. And then in terms of the equipment and these large projects, slightly surprised that you will see a very kind of or an active and a positive pipeline of new orders given that we are seeing a lot of your customers starting to cut CapEx. So could you just help us to understand a bit better where where exactly do you see customers being active? And also, what do you see is the risk that these kind of orders will be pulled in the coming months as the customers also realize the situation? So the ones where we are now actively negotiating are such that customers have been planning the projects for a long time. And and, of course, the investments are for long term demand forecasts. And and and think all of us are still seeing that the mega trends which are valid in our industry will continue to be valid also after corona. So it's difficult to see the future without the pulp demand growing. It's difficult to see the future without tissue demand growing or renewable packaging demand growing. And part of our customers are now saying that even if there is a short term turbulence in the market, they want to continue to invest to the industry where they see that in long term the market drivers are are right. And also one one thing to remember here that that many of our customers are very good quality customers with the strong balance sheets and and like long term outlook, and and maybe some of them are also thinking that that's specifically on the manual labor side. They can actually now have have a very good purchasing power. Okay. Thank you. And final question on the cash Just on how should we think about the cash flow for the kind of reminder of the year, given that the bus exception is strong now, probably due to timing of some projects. Well, that that's exactly what you you what you said that that we have a bit too much cash now. So because once we book orders, we have strong capital orders, we have down payments from the customers, and and now we had a bit of an exceptional good good situation now March. And and I think that we we would be very surprised that that the the net working capital level stays with that minus 14 on rolling twelve months orders. And that's not the historical average? Yes. It's not the average is a couple of percentage points less. Perfect. That's all for me. You. The next question is from the line of Antti Stilin from Danske Bank. Please go ahead. Yes. Hi. Just one quick that I understand. Your services orders organically increased by 1%, but sales fell organically by 7%. So why don't they go more in hand in hand? How can your orders increase but then sales fall so much? What's the what's the reason for the gap? Well well, thanks, Antti. So like in normal circumstances, so this is what what happens. So that the first half of the year, have much higher services orders than the second half of the year. And and then with the net sales, it goes the other way around. So that's the normal pattern or seasonality during the year. And and then then also now specifically what Pasi was explaining that certain part of the sales that requires customer acceptances and also and and and and and requires our our presence at customer sites. So this kind of this kind of work, we couldn't perform even even though we had the orders in hand. Yeah. So so they they ordered even if they didn't actually want the service yet? No. They they might have like, if you talk about shutdowns, then the the order might come six months earlier before the shutdown itself happens, then it's in our backlog. And then once we execute the shutdown service, then it's recognized as revenue. And now we haven't been able to execute the jobs. Okay. All right. Thank you. Thanks. Thank you. The next question is from the line of Johann Ellison from Kepler. Please go ahead. Yes. Hi, it's Johan here. Just a question. You obviously still proposed a dividend for the year. You obviously generated good cash now and last year. But aren't you worried that those orders in the pipeline might not come through and your project business will basically consume all of your cash that you have on the balance sheet now in the remainder of the year? And potentially, I mean, the hit on the service businesses could be harder and longer than anticipated at the time being. How have you thought about the sort of the balance sheet from the risk perspective? Well, of course, Johan, if we look at the balance sheet, so we have €280,000,000 more cash than debt if we exclude the lease liabilities. And and and and, of course, we are cautious. And and but our fourth financial target is that we pay more than 50% of net profits as as dividends. And now this this what what we are proposing, 8¢ per share, that's 59% of net profits. And and and and we we haven't seen any calculation of the projects. That's, of course, possible. But but we need to remember that that that there's quite, like, substantial amount of down payments that customer have customers have remitted to to Valmet, and and and and that typically means that that it's it's painful for the customer to withdraw. No. Yeah. But, obviously, delays could could happen, I suppose. But but, I mean, isn't it so that possible milestone payments during the project is working? Of course, there are milestone payments during the projects, and there could be some delays. But but, what we were talking here that with the paper business line projects, typically, we do that 95% ready before we ship it to the customer. So we recognize revenue also 95%, and that means that the milestone payments are are even then a bit more than that. And then with the pulp orders, yes, there's more site work, but that's typically done with the local resources. And and and and these resources typically are are available unless the sites are closed. And and and we have had couple of these cases, but that is not the majority at all. Thank you. The next question is from the line of Tom Skogman from Carnegie. Please go ahead. Yes. Thank you. It's it's Tom here from Carnegie. I was wondering about also, you know, this how would you handle possible kind of request for cancellations or or or large postponements, you know, that will will impact your delivery schedules and and and manpower. I mean, you're dependent to do business with these customers in the future as well. So, of course, in our business, we all the time have delays in some projects. So so part of the projects go exactly like planned in the beginning, in part, there are different kind of delays. Well, customer has delays, for example, with the with the with the construction work. So we we all the time are used to change the time schedules in our project projects, and and that will will continue to be con continue to be so. Then in possible cancellations, our business principle is that we have more cash all the time or advanced payments are bigger than our costs. So so we are not financing customers' projects. So in case that somebody would cancel a project, then we would stop the work and then start negotiations at what happens with the payment with with the goods we have produced already. And like Karri said, they they have paid already quite big amounts, so it will be very expensive exercise for customer to to stop the project. It it has happened in 2008 for one big project, but but that's not not very common that that kind of things happens. And thank you. And and then I wonder about this summer break. I mean, you have postponements in service. Is there a chance that we get the pickup in in during the summer holidays? Have you heard that, you know, the post campaign, the conference will plan, you know, some extra holidays or so that could open up a possibility for you? Sorry. If summer vacations would open summer breaks summer breaks, I think in the cases where we have restrictions to work, the customers have implemented rules that nobody outside can enter their manufacturing facilities. And that's not depending whether they produce or whether they are not producing. And before that kind of customers will lift their limitations, then it's difficult for us to execute certain mill approach. But of course, then from the other side, part of the customers are all the time learning also how to live with this COVID situation and are learning new ways like in automation. They have even built in other control rooms where our people can work so that they are not in contact with with with customers' personnel. So people are innovative when there's need to be innovative. And then finally about your acquisition pipeline. With the, you know, with the risk of demand slowing down, I mean, it would be a perfect time to do some acquisitions this year with your strong balance sheet. Have they have higher or lower hopes than normally for the known the current situation? We'll we continue to work on acquisition topics as as well for the same for the exactly for the reasons you mentioned that might be that it it would be a good time. And then, of course, we have balance sheet now as well, a strong balance sheet. But then, of course, might be that not so many are eager to sell at this point of time. I guess it depends on how much you are prepared to pay. You know? It could even make sense to pay up a bit more to get the right company. We we have to report the price another week for Tom, we have to report the price to you, so we have to be careful to satisfy you. It's true. True. True. Right? It's always the hey. But it's always the case that how much we are prepared to pay. So that's that's always like that. Yes. We basically have a good pipeline, and and then people are prepared to sell companies to you. That's your view. Yep. Alright. Thank you. Thank you. Thank you. The next question is from the line of Tommy Railo from DNB. Please go ahead. Yes. Good afternoon. It's Tommy here. Can you give any comment on the financial performance of the acquisitions you made last year? We heard the contribution on the sales and orders, but how have those companies developed from profitability partners? They have been performing according our expectation. And sustaining the levels you mentioned in connection to the acquisitions? Yes. And now now they are more integrated into our operations. So it's once you integrate it, thereafter, it's more and more difficult to to follow them as as independent units. But they are performing like we have been expecting. Thank you. Thank you. There are no other questions coming through. So I'll hand back to the speakers. All right. Thank you, operator. Thank you, Pasi and Karri. Thank you for the questions. This now concludes our event for today. And as a reminder, today, we also announced Annual General Meeting will be held on June 16, and you can participate via a webcast. Link will be available with the registration form on our website. And then the, q two, half year financial report will be out on, July 23. So see you all then. But up until that, have a nice day.