Earnings Call: Q2 2021

Jul 22, 2021

Good afternoon, ladies and gentlemen, and welcome to Valmet's Second Quarter 2021 Result Publication Webcast. My name is Pekka Rohenen, and I'm the Head of Investor Relations here at Valmet. The headline for today is that During the Q2, orders received increased to €1,200,000,000 and the comparable EBITDA increased to €95,000,000 And today's presenters will be Pasi Lainen, President and CEO and Kari Saarinen, the CFO. But before we start, let me just read an important notice out loud and ask everybody to pay attention to the slide. So this presentation is to discuss Valmet's Q2 twenty twenty one results. Securities laws in the United States and in other Jurisdictions restrict Valmet from discussing or disclosing information with respect to the contemplated merger with Neles Corporation. Information regarding the contemplated merger can be found at walmet.com/merger. Under the completion of the merger, Valmet and Neles will carry out the respective businesses as separate and independent companies. The merger of Lament and LS and the merger consideration securities have not been and will not be registered under the U. S. Securities of 1933 and may not be offered, sold or delivered within or into the United States except pursuant to an applicable exemption of or in a transaction not subject to the U. S. Securities Act. So that's all from my side. Pasi, please go ahead. Okay. Thank you, Pekka. So My agenda is traditional 1, Q1 2 in brief, then development of business lines, Then some words about very major order we received from Klabin in Brazil. Financial development will be presented By Kari and then guidance on short term outlook will be presented by me again. First, some highlights. So orders received increased to SEK487,000,000 in Stable Business. Our orders received in capital business increased to NOK765,000,000. Net sales remained at previous year's level at NOK 943 €3,000,000 backlog in the end of the quarter amounted to €4,000,000,000 Comparable EBITA increased to NOK 95,000,000 and margin was 10.1%. Tiering was minus 1. So here are the numbers and some by charge as well. So like Pekka said, orders received was totally NOK 1,228,000,000, which is very good level for Valmet. Net sales were NOK 943,000,000 and comparable EBITDA NOK 95,000,000 and comparable EBITDA 10.1%. And backlog exactly in the end of the quarter was NOK 4,000,000,000 and we employed a little bit over 14,000 people in End of the quarter. By business line, paper represented 36% of the order intake. So paper's strong Market and a strong performance continues. Pulp and Paper had a good month as well, 27%, because capital businesses were so strong then Services corresponding to 30% and Automation 7%. And these are, of course, normally a little bit higher numbers. Geographically, South America, due to the big contracting from Klabin, was the biggest area, followed by Europe and China. China continued the strong performance also in quarter 2 in 2021. Then if we when we look at the orders received trend, Now we are again with 12 months cumulative over SEK 4,000,000,000, not at the record level, but close to the record level, which we achieved quarter 1 in year 2020. So good development trend wise and like you see last two quarters have been very strong. The earlier one, Q1, SEK 1,300,000,000 now SEK 1,200,000,000, so altogether SEK 2,500,000,000. Order activity by area is a little bit different compared to the quarter, 2 only. So Europe, about 40% China, strong 24% and now South America, strong 16% as well. In stable business, our orders received totaled to 1,000,000,000,000 NOK 27,000,000 during the last four quarters. So slight increase compared to earlier 2 quarters or even 3 And that's, of course, very important for us because we have a strategic target to grow organically and with the small acquisition, Our stable business as much as we can. And it's, of course, nice to see that we are now at the higher level in order intake than we Backlog, like I said, ended up Being the SEK 4,000,000,000 and of quarter 2, backlog is now 300,000,000 over 300,000,000 higher than a quarter ago. And we are saying that about 45% of the backlog It's expected to be realized as net sales during 2021. And at the end of quarter 2, it was the same 45%. About 25% of the backlog is related to stable business, the rest to capital businesses. So strong backlog. Then some words about the business lines. 1st, services. So Order intake is now was now in first half of the year, euros 756,000,000. So €30,000,000 improvement compared to last year. That's, of course, very good. Net sales has been growing also by €11,000,000 compared to last year, So ended up being SEK628,000,000 in 1st 2 quarters. Market activity Has improved on or is good in North America, China, South America has improved. It's flat in Asia Pacific And Europe is still having COVID impact. So Europe is the market where we haven't seen the growth in services yet. But all in all, good development in services. And of course, we still have COVID related restriction in traveling and access to customer sites. And then of course, Graphical Paper decline has continued in this year as well, which has impacted our services order intake. But all in all, We are now in growth mode compared to last year. Automation Orders received totaled to 239,000,000. So there is €25,000,000 growth Compared to last year, good growth as well. Net sales hasn't been growing yet and that's just timing, timing, Nothing else timing issue. We are, of course, happy that automation has continued to grow. And even if COVID has been there, now the Trend of 12 months order intake is even higher level than it has ever been. So nice development in automation. Of course, like in services as well, We still have some traveling restriction impacting our automation business, but automation has been strongly contributing to the development of Alamed during the 1st 2 quarters of 2021. In Pulp and Energy, Orders received increased to NOK 326,000,000 in quarter 2. And it's a strong quarter again. Of course, Q1 was even stronger, but now we have 3 strong quarters in a row, which means that now the order intake graph of 12 months, 12 last month is now close to a little bit of €1,100,000,000 so at a good level. Net sales has been declining a little bit. So decline it's now NOK469,000,000 Compared to last year's 1st two quarters, NOK 506,000,000. And the decline is can be Claimed by this low order intake in Q3 in 2020 and Q2 in 2020. So now we are Just timing wise having a little bit lower revenue recognition than in the year before, nothing special otherwise. In COVID, our The organization has managed COVID very well. Of course, we have challenges in together with customers to manage COVID in all the sites where we are globally working. But Our organization has been doing very good work on that respect in the Valparne Energy Business. Then paper Orders received in first half of the year, NOK803 1,000,000 last year, NOK522 1,000,000 so very strong First half of the year. And now the 12 months cumulative curve is already at €1,300,000,000 level. So we have a very, Very strong beginning of the year or last year in Paper business line. Net sales has been developing nicely as well. So net sales is now in first half of the year, euros 574,000,000, so Growth by NOK 102,000,000 compared to last year. And like pulp and energy paper business line has managed COVID very well. So again, challenges in many places, but our organization has been doing very good job also in paper business line to manage the approach even if COVID is active. Then some words about big order we got from Klabin In Brazil, so first, we got quite similar order already in May 2019 and that project is now on execution phase. And now during the Q2, we were Very honored by Klabin selecting us to deliver next paper machine line as well. It will be Very big paper machines over 9 large 9 meter wide machine with annual capacity of 460,000 tons. And it can produce large variety of port grades for Brazilian markets and export markets as well. We, at the same time, will deliver next fiber line there, including continuous cooking G3 technology, New plaidskemit term mechanical pulp line automation systems and services, Some selected services for the lines as well. So we are very honored that Klabin has selected us to be The supply of this very remarkable order in Main South America. So Kari, now it's your turn. All right. Thank you, Pasi, and also good afternoon on my behalf as well. So looking at the figures, so we had a strong quarter. All the quarterly As well as the year to date change percentages are positive. Orders received increased 49 Percent over SEK 1,200,000,000. Very, very important is that all the business lines increased. Biggest increase coming from Paper and Pulp and Energy business lines. Paper business line more than doubled. The orders from last year and Pulp and Energy was 50% above last year. Very promisingly also both Services business line as well as Automation business line, they were both growing. Services business line orders increased by 13% and automation business line by 12% compared to year ago. Orders received increased in South America, Asia Pacific, China and North America. And then orders received in EMEA actually were below last year's. Order backlog was record high and reached a bit over SEK4 billion level, and this is 15% above last year's. We are estimating that 45% of the backlog will be recognized revenue during this year. Quarter's net sales, SEK943 million. This is 3% above last year's. Paper, Automation and Services business lines, they all increased and then Pulp and Energy business line reduced. Sales in China as well as in North America increased. Quarter's comparable EBITDA, That was CHF95 million or 10.1%. Please note that this comparable EBITDA, this does not Include Valmet's share of Neles' profits. Cash flow for the quarter, that was CHF 180,000,000 And gearing was minus 1%. Year to date orders increased by 26%, driven by Paper Business Lines over 50% growth in the beginning of the year and also by Pulpane Energy's over 30% growth. Automation increased by 12% and Services business line was plus 4% compared to year ago. All Year to date, all areas except Asia Pacific increased. Year to date net sales that increased by 3%, driven by strong Paper business line. Comparable EBITDA was 9.7 percent or SEK 175,000,000 after 2 first Quarters of the year, relatively good increase. As a year ago, we were at 7.4% or at SEK 128,000,000. Gross profit and SG and A. So quarter's gross profit, that was 26% of net sales, Meaning 3% point increase compared to year ago, strong sales management And also sales work, good project execution and cost control were important here. Sales mix was almost the same as a year ago. Services and Automation business lines together were 44% of the sales. Last year, they were 43 SG and A for the quarter, 16% of net sales, the same as year ago. Some increase in the absolute number. Business activity has increased. We are following the development of SG and A, of course, very thoroughly. And then comparable EBITDA. So 1st quarter comparable EBITDA for the quarter was 10.1% And last 12 months is now at 10.8 percent and first time over SEK 400,000,000 SEK 412,000,000 now. We are well within our target range, 10% to 12%, but so far, We have not reached the target for a full calendar year. Important to notice here also that stable business net sales last 12 months, end of quarter 2, it was SEK 30,000,000 higher than end of quarter 1, so good development there as well. Looking at cash flow. So cash flow was SEK 180,000,000 driven by good profitability And also reduction of net working capital. And we have had we have now had 8 quarters with relatively healthy cash flow. Net working capital, minus SEK 764,000,000, which is minus 18% of rolling 12 months orders received. Net sales is low Because we have received customer payments, but we have not yet recognized revenue out of those payments or Invoice to customers. If we calculate net working capital on a normal good level of minus 12% Of rolling 12 months orders received, the difference is around SEK 230,000,000 to the current level. Then looking at net debt and gearing. So net debt was minus SEK 9,000,000. Gearing was minus 1%, so we were debt free. We paid dividends worth of SEK135 1,000,000 during the quarter. Equity to asset ratio, 39%, so no major change here. End of last quarter, which was 37%, but that's it. No major changes. And then capital employed and return on capital employed, there our target is to be above 20% And actually, return on capital employed, that remained on a good level and was 25% Compared to capital employed year ago, equity has increased around SEK 180,000,000 And interest bearing debt around NOK 130,000,000. So back to you, Pasi. Thank you, Kari. So now guidance and short term market outlook. So guidance, we have kept the same. So Valmet estimates that net sales in 2021 We'll increase in comparison with 2020 and comparable EBITDA in 2021 will increase in comparison with 2020. So increase, increase. Then short term market outlook. In Services, we have changed Our improved outlook from satisfactory to goodsatisfactory. And satisfactory comes from the European area. All the rest we would say that the market activity is at a good level. So improvement, clear improvement compared to beginning of the year or end of last year. In automation, we have good sales activity. We have good order intake. So all the reasons To keep the market outlook at good level, pulp, good Activity and good order intake, so all the reasons to keep the good level. In energy, we still have a weak market So we have got some orders, but we are not at the level where we have been. And that's why we keep the weak outlook as well. And then again, the same comment that we can use Same resources also in pulp recovery, boiler sites, so there are no issues with the organization utilization. Important paper, market has been good. We have been winning a lot of orders and market activity continues to be good. And Tissue, it's the same. Order intake has been good and market activity continues to be good. So 1, 2, 3, 4 good, 1 good satisfactory and then 1 week. So that's our market outlook. Thank you, Pasi and Karje. We will now move to the Q and A session over the telephone lines. And as a gentle reminder, this Event is not to discuss the contemplated merger with Neles. So operator, I hand over to you. Thank Our first question comes from the line of Antti Kansanen from SEB. Please go ahead. Yes. Hi, it's Antti from SEB. Thanks for taking my questions. First would be on the profitability and the gross margin On Q2, and Kari already mentioned that kind of the execution and all of that was good. But was there something Extraordinary good or something timing related that drove the gross margin expansion? And then related to that, should we be worried of some inflationary pressures going Forward regarding raw materials, components, logistics and such. Well, if you're looking at the project margin or product margin, so Antti, there was nothing major there. So solid execution and I said good sales work, good sales management. We kept the sales The asphalt margins, so overall, like organization worked very well. And of course, one thing is that we have worked very, very long in order to be here, But nothing really major. And then if you posit the Yes. I agree with that what Kari said. And then about inflation, so of course, we see now raw material prices increasing, some raw material price Increasing and then logistics costs increasing. And we have to fight against it. And then at the same time, look for other savings opportunities It's in our procurement, but it's clearly a topic for us in coming quarters to fight against the Inflation in raw materials and logistics. Okay. And then secondly, on the backlog and the structure of the backlog, you have roughly, I guess SEK 1,000,000,000 in the stable business. So just a reminder on how much of that is tends to be delivered on the second half? And how much is, Let's say more short cyclical something that you book in orders on second half and then also deliver before year end, So just to get kind of growth expectations clear? You mean in Stable business in and stable business backlog. So you can I think it's Pretty no it's normal distribution in for this year and for coming year? And then you might be able to From the same facts what we came last year and then comparing how much book to bill we have been. So we mean with book to bill something what we booked this year and can still recognize as revenue, how much book to bill we were able to generate last year and then you get Quite good estimate of our net sales in stable business. Okay. That's all for me. And maybe one thing still to notice is that our like growth at services orders, 2nd quarter 13%, So clearly higher growth than what we had at the Q1. So and also we changed the services outlook to good Factory now. So one data point here. Okay. Okay. Very clear. Thank you. Thanks. And the next question comes from the line of Tomi Reilov from DNB. Please go ahead. Yes. Hello. This is Tomet from DNB. A question relating to pulp activity, if you can describe a little bit what's happening in the market? And second part, would you have enough capacity to take, Let's say, another one bigger order still during this year. So Pallop activity continues. There are projects in especially in South America and maybe some in Asia Pacific as well, Where customers are active with the bigger ones and then, of course, smaller and medium sized capacity addition projects In Europe and North America as well. So there is market activity. We can still take orders in, but of course, delivery time starts to be quite long. So we work hard on making sure that we have good delivery times for the cases where we are still active. And Then in real life, it goes so that because in pulp mill, there are several islands like fiber line and recovery island and then Paltra, the workload in each of the unit in Valmet is not the same. So actually, the delivery times are a little bit varying from unit to unit. And then you were asking our capacity. No, I was answering to that already actually that Capacity is varying in our units. Some have a little bit More capacity to take deliveries with shorter delivery times and then the others have to Proposed to customers a little bit longer delivery times. Thank you. And then on the energy side, If I can ask just in the Q1, I think you were maybe a little bit hopeful that there could be Improving activity, but have you been seeing any of that? I could say that you announced orders, but Has it, in a way, been slower than you anticipated? And what would you see in terms of the second half Activity. Would there be enough? Market has been more active. And there has been, Let's say, from our capacity perspective, enough. But then we kept it still as weak because we all remember That unit have had also higher order intake. I think the highest order intake in a year has been about SEK 500,000,000 and we are not at that level. So we get enough orders to fulfill our capacity and to execute them as well. But then should we hope for higher volumes? Yes. And that might not materialize this year. Okay. Thank you. Our next question comes from the line of Antti Suttelin from Danske Bank. Please go ahead. Thank you. This is Antti. On the services side and the clubbing, I wonder how you booked the services content of the Klabin agreement. Was that a big driver of The 13% increase in services order intake, I'm kind of trying to figure out the underlying order intake growth in services. It varies a little bit, but spare parts packages, if it's Tied with the contract capital contract that will be booked at the same time. But then if there is a services agreement, Then it depends on the agreement content. So if I remember correctly, Kari, correct me, but it's 6 months in advance what we book The services agreement content. So Globin had a positive impact, but I wouldn't say that this 13% were Just coming from there. We have generally had more, say, services Activity, especially in North America and Klabin is not in North America. In China. In China. All right. So basically, you would say that the 13% is reflective of what really is going on? Yes. All right. Comparing to last year's COVID Quarter. Yes, of course. Thank you. And we have another question from Sven Weier from UBS. Please go ahead. Yes. Good afternoon from my side. Thanks for taking my questions. I ask them 1 by 1. The first one is on the Klabin option. I was just wondering, do you have still any other contracts So where you have such options or was the Klabin option quite a unique situation? That's the first one. We have very good offering now for folding boxboard machines because we are market leader in folding boxboard. And then In that board category, you need also PEC TMP lines, and we have very good PEC TMP offering. So that's actually not the Only of the kind. I think we have even announced some others where we have the same kind of setup, Our CT, BCTMP and then folding boxboard. And so options like that are still not the how should I say the rule, right? It's still an exceptional one That clients have to go for an option. Well, If you Sven mean that in general in our business, so do we have like if we have a contract, if this there's an optional another contract, so Okay. Sometimes it happens, but no, it's not it happens once in a while. Okay. Thank you. The second question was just on the travel cost. I think you mentioned in Q2 some of the travel cost was coming back. I just wonder where you are in terms of the travel activity relative to the pre pandemic and whether you really see that going back to where it was. So what's your best guess at the current stage? Well, yes, quarter 2, there was some increase in the travel cost comparing to the very low level what we had in quarter 2 last year. And then if we see how the world then goes forward, so of course, business activity increases, there's some Tempt up demand also to meet the customers, also for some like people meeting internally as well. But the question is that do we go to the levels where we were before the pandemic? So I think that In many ways of doing business and having internal meetings, so There has been good learnings now and also like big steps forward in how to use the electronic media, And I doubt that we go to those levels. And then And then Kari and Yes. And then we all have dreamed that we can start traveling, but it seems that every month, the starting of that day is further away. Yes. Unfortunately, yes. And then you mentioned the negative impact on the service This is from the paper closures. I mean, is that something you can quantify how much that was in the quarter? Or is it the kind of the historical average that You always have in the last years. We have been saying that we lose SEK 10,000,000 to SEK 20,000,000 in order intake by In a year from paper machine and old pulp mill closures and last year, it was a little bit more. But this year, no, we are in growth mode. So this year, we haven't seen too many closures happening. Okay. And then the final question, if I may, is just on the scrubber business. I think you mentioned in Huich, we had 0 orders. I mean, we can see that the tendering activity is picking up for the new build. I mean, are you only active on the retrofit sites on scrubbers or also for new build? We are active on both sides, but currently, order intake has been very low in this year. And you don't see any change in the pipeline that this is improving? It might change, but then It's better to wait and see still. Okay. Thank you, guys. Much appreciated. Thank you. Thank you, Sven. And as there are no further questions, I'll hand it back to the speakers. Thank you for the discussions, and we will then conclude today's event here. And as a reminder, Vamed's Q3 interim report will be published on the 26th October. But I wish everybody now a nice summer.