Earnings Call: Q1 2021

Apr 22, 2021

All right, ladies and gentlemen. Welcome to Valmet's Q1 20 21 Result Publication and Webcast. My name is Pekka Rohin, and I'm the Head of Investor Relations here at Valmet. And with me today are Pasi Layinen, President and CEO as well as Kari Saarinen, CFO. After the presentations, you will have the chance to ask questions over the phone lines. But without further ado, Pasi, please go ahead. Thank you, Pekka. All right as well. So welcome to the quarterly call. So my headline is or our headline is orders received increased to €1,300,000,000 And comparable EBITDA to NOK 80,000,000 in the first quarter. So I will have the traditional agenda. We will have 1st quarter 1 in brief, then development of business lines, then some words about Palmetz Climate Program. Kari will go through the financial development and I'll come back to the guidance and short term market outlook. And there were €508,000,000 Orders received increased in capital business to €825,000,000 Net sales remained at the previous year's level and they were at €858,000,000 order backlog amounted to EUR 3,700,000,000 and comparable EBITA increased to EUR 80,000,000 and margin was 9.4%. Gearing in the end of the period was 3%. So the main numbers here and some graphs. So orders received totally was €1,300,000,000 so good order intake in 1 quarter. Net sales, euros 858,000,000 that was also good for 1st quarter. Comparable EBITDA, SEK 80,000,000 and comparable EBITDA margin, 9.4%. Our backlog in the end of the quarter was SEK 3,709,000,000 and we employed about 14,000 people. Then if we look Even if they had good order intake. So paper had a good order intake and pulp and energy as well. And Pulp and Energy was 35% of the order intake and paper was 28%. Geographically, China continued to be strong. So 24% of the orders came from China. Europe, thanks to one big order, It was 53%. And because these 2 other areas were big, then of course, the relative portion of the rest of the areas were small. From starting of Valomet and this was the record order intake quarter, so highest ever. It was active. Orders received were at last year's level in stable business and capital business. It increased clearly to SEK825,000,000. The SEK765,000,000 during the last 4th quarters. And last quarter was SEK 508,000,000. A year ago, it was a little bit higher sorry, NOK508,000,000 and last year, it was a little bit higher, NOK514,000,000. But here you see also in the graph that now since the worst point at the 3rd quarter, our orders received Has been steadily going up and it was almost at the level where it was on the record level record quarter a year ago. So good recovery also in stable business. Backlog ended up at EUR 3,700,000,000 And it was SEK 450,000,000 higher than in the end of the year. We are saying that about 65% of the backlog is expected to be realized as net sales during 2021. And last year, the same percentage was 60%. About 30% of the backlog relates to stable business. It remained at the previous year's level and were SEK 385,000,000. And last year, order intake was a little bit higher, end of last year. We have seen a good order intake in Rollers business, then in Performance Parts Board Paper and Tissue Solutions. Orders have been at last year's level. And then, Pulp and Energy Solution and Fabrics were declining compared to last year, but good recovery already in Q1. Customer side and then of course the order intake is also impacted by the low utilization of graphical paper mills. Still so good development in automation. And here, I would also say that recovery came quicker than others maybe or we were anticipating in the end of last year or beginning of this year. COVID has still some impacts to our Automation business as well as for Services business. And of course, last year Q1, we didn't have any COVID restrictions. And then small portion of that Lower net sales is coming from the fact that we rolled out our new ERP system in automation business in Finland. And Sometimes when you roll out new system, then it takes a little while before the organization learns to utilize the system. So nothing operational actually in no operational challenges in Automation. In Pulp and Energy, orders received increased to SEK 461,000,000. Of course, Kemi project which we got from Metso Fiber is a big impact on that order intake and we are very happy with that development and we are very happy not only in Europe market has been active also in North America and China. South America Last year was very high, Asia Pacific the same and then market activity has decreased on those areas compared to last year. In Pulp and Energy Business Line. The organization has managed COVID very well, so we can't see any material impact in our business because of the COVID restriction. In paper, orders received were again at the high level €363,000,000 So the order intake trend continues to be above €1,000,000,000 level if you look LUKTER 12 months cumulative curve in the chart. Net sales has been developing nice in Paper business line as well. So good growth in net sales as well compared to last year. Market has been active in all areas, but of course, China has been the strongest market for us in Paper business. The same as in pulp and energy business lines. So paper organization has managed all the COVID challenges very well. Of course, we have challenges, But the organization has been managing them pretty well. Then some words about the climate program, which we launched in Capital Markets Day and you are all, I assume, aware of it, but it's an important topic and That's why we wanted to take it up once again. So we launched the program and we want to see that we make many different kind of to help in climate change battle. The program is called Forward to a Carbon Neutral Future. Fossil free energy sources in all parts of our production. And then of course, we have to be careful also with traveling, with Traveling is again available or possible after all of us have got the vaccination. So there will be a good focus on our own operations. Our operation and of course supply chain and use phase have a lot of bigger impact to climate change. And we have set the target to Our CO2 emission in supply chain by 20%. There we have to look for more suppliers who have less CO2 emission and then of course develop our products so that CO2 emission production reduction is possible. We have set also the target for use phase and minus 20% is the target to reduce the energy use of Valmet's current technologies. And the current technologies are the best available. So it's a tough challenge to continue to reduce the energy utilization on these technologies further. And then as a separate target, we would like to we will creator technologies where our board paper, polyp tissue customers can produce the products with selected technologies 100 percent carbon neutral. And the timeline for these targets is 2,030. So we have to now make actions to reach this one. I like that time schedule is tough enough and targets are concrete enough. We have got very good feedback from our customers to set targets and very good feedback also from own organization that they feel that it's Palmet's responsibility to work towards these targets. Work during whole COVID-nineteen pandemic. And I think it's excellent results what we can now bring in financial figures. So you all have been doing very good work During last 1 year. So I would like to thank you for that. And now I'll let Kari to come to talk about financial development. Thanks, Pasi. And also good afternoon on my behalf as well. And Pasi also lightened up a bit, and I have to say that we also got the guidance from our board to smile this time once we make the quarterly announcement. So strong guidance for that. Okay. So order receipt, SEK 1,300,000,000, so 11% increase there. And this is the highest for Valmet. And 3 business lines, meaning Pulp and Energy, Paper business line as well as Automation business line increased the orders during the quarter and then services business line was at the same level as last year. Automation business line had the highest orders ever at automation total. And then services business line actually had a slow start for the year. But I think that the development in February And specifically, now in March, has been actually very encouraging. And it was a good achievement for Services business line to reach the record high levels of last year's quarter 1 calculated at comparable currency. EMEA orders were strong, exceeding last year by 77%. Also, North America and China increased. Order backlog, SEK 3,700,000,000, the highest quarter end ever. And we estimate that we recognized 65% of the backlog as revenue during the year. Our net sales exceeded last year's quarter 1 by 5%. Paper business line increased. Services and pulp and energy were flat and automation reduced partially due to the like the new ERP rollout. China increased sales by over 100%, driven by the strong orders last year. Comparable EBITDA, That increased to 9.4%. This is great as typically quarter 1 is the weakest by profitability. Comparable EBITDA does not include Valmet's share of Neles' profits. So in managing business, comparable EBITDA is the most important profitability KPI for us. And once we talk about EBITDA profitability, we typically talk about comparable EBITDA. EBITDA was €89,000,000 or 10.3 percent, and this includes Valmet's share of NLSI's quarter for profits around SEK 4,000,000 and the rest, SEK 5,000,000 is coming from issuer item affecting comparability related to sale of 1 property in North America. Cash flow was 148,000,000, a bit less than quarter 1 last year and gearing was 3%. Gross profit and SG and A Development. Gross profit percent was the same as last year. Quarter sales mix was favorable to capital. It was 60% capital and stable was 40%. Last year, we were at 56% capital and 44% stable. Good execution with the projects continued And we are quite happy with the order backlog quality as well. SG and A stayed reduced 5% from last year. We had some increase due to the acquired P&P Group, but travel costs were lower, And we also had some impact of our headcount reductions that were done last year. During the pandemic, We have learned new ways to work remotely, but there will be some cost increases as the activity levels goes back to normal and improves. But we continue with the Valmet level projects such as ERP and international Internet. So at the moment, more costs and in the future, They will bring us some efficiencies. Our rolling 12 months EBITDA is now 10.4%. So that's first time ever over 10% and within our target range of 10% to 12%. So we are, of course, very proud of this achievement. And we have come a long way from the levels of year 2014 now to this 10% level. Also, it's worth to notice that the 10% level now comes with the sales mix That is typically not good for us. Capital stable, split was rolling 12 months 57%, 47 percent. So that is typically fifty-fifty. So work continues to even further improve the profitability. Cash flow continues strong. It was SEK 148,000,000. We have now had 7 good quarters in a row With cash flow, CapEx is a bit higher than normal for the quarter. Net working capital, SEK662,000,000, so on a very good level. This will normalize at some point of time. Normal good level is around minus 12% of rolling orders, and that means that the net working capital then would go to around minus SEK 450,000,000. Net debt. It was NOK 30,000,000 or 3%. Last year, net debt increased as we purchased Nelsea shares worth of NOK 450,000,000 and also acquired P&P Group with around SEK 65,000,000 Equity to asset ratio, 37%, slight reduction as the AGM made the decision during quarter 4 in March for SEK 35,000,000 dividend payment. And then capital employed and also then comparable return capital employed. So our return on capital employed percent increased to 25 driven by the increased profitability. This is within our target range and is in a very good level. The strong profitability development, coupled with the strong balance sheet shows here, even though some loans were raised last year in order to finance NellSC Acquisitions. So back to you, Pasi. Thanks. And comparable EBITDA in 2021 will increase in comparison with 2020. So increase, increase. 10 short term market outlook. So we increased our outlook for services From satisfactoryweek to satisfactory. Market has improved considerably In North America, it's active in has been active in China. It's reasonably good in Asia Pacific. South America not yet developing, like you know, COVID is quite active. And in Europe, we still have challenges because of the COVID restriction. But clearly, like Kari said, the market has been improving, But we still kept outlook as satisfactory. In automation, like you saw, order intake has been good And that's why we continue to keep the outlook as good because outlook is good and also workload is good. Pallop, good order intake and there are still projects to be decided, so all the reasons to keep the outlook at good. Energy, boiler market has been a little bit more active than a year ago, but we still keep outlook as weak. Board and Paper order intake has been good, workload is good And there is still long list of prospects, so all the reasons to keep the outlook as good. Paper order sorry, tissue order intake has been good, workload is good and we still have good list of prospects. So all the reasons to keep the outlook So what do you think? Is there more pent up demand after a quiet 2020? Or is it just a return to normal levels, as you've mentioned before, but with a bit of a quicker time schedule? I would say that it's more and more that it's getting more back to the normal situation. The societies and markets have been opening like we all know that China GDP has growing very fast. And then now we all know that North America markets all in all have been recovering quick. So that's why we see also better Auto Indicator taking our services. Okay. Behind the guidance upgrade or is there something positive happening on the capital side as well? We upgraded the guidance because of order intake and backlog. So like you have seen that our backlog is now at the record level and at the same SEK 3,700,000,000 and at the same time, we are saying that bigger percentage of the big backlog is Okay. And then maybe lastly from my side regarding the backlog margins and let's say, your gross margin profile for 2021 2022. Obviously, the service recovery is an important factor here. But Typically, bigger projects have a bit lower margin than smaller projects. And We have been quite a long time now already quite happy with the quality of the order backlog. And that means like for the margin point of view And then also as well as then for the like risk point of view and the latest development, what we have had This big piece of that is coming from the organization's good ability now to deliver the projects Okay. Maybe I'll squeeze one more, just a detailed question in. When you signed the Klabin agreement, Was it 2 years back? There was a letter of intent for a second one scheduled to commence in May 21. Is the time schedule on that one still intact? Or any comments on that one? No comments. So it's up to Klabin to decide what kind of projects they will have and when, and I'm sure that they will then inform. So No comments on that. But maybe I can say that the Klabin first project Going very well. And at least to my understanding, customer is very happy with our performance. Okay. That sounds promising. Thank you. I wonder about your ambitions within recycled and pulp based textiles. I mean, that could be a quite promising market, but you have not really opened up what you're thinking about that market. Dov, we opened a little bit, I think, in our Capital Markets Day or was it of Natural Textiles. So currently, we have announced one project. And then of course, in this kind of technology development, one has to first deliver the first project and then get the reference and thereafter one can continue to expand that technology. But basically, we have very good technologies based on our pulp and paper stock prep equipment to recycle textiles. And we haven't set the ambition yet, But we see it as a very promising future growth avenue for Valmet in coming several years. We should not expect too much to happening 1 to 2 years' time, but then let's say that in 5 years, I have big expectation that it starts to be a business for us. So what is your plan then? Because this Was it renewed, Selle? I think it was not your own technology, but do you have plans for own technology development or just I'm not that sure that what everything is public, but one part of the Renewal is delivered by Renewal and then the rest It's developed delivered by us and everything what we deliver is totally our own technology and our IPR. Flotation where you separate natural fibers from the fossil fibers, Then you have different kind of refining segment stations, then you have also bleaching. So same kind of unit processes, What we actually do for recycled fiber and polyp together. So our thinking here should be that You will focus on selling components where you have your own IP basically, and then there might be different No, a little bit more than components, so part of the processes. Okay. And then the service strength, So the spare parts was at the last year's level and then we have now reorganized mill improvement to Enne. So we were talking earlier about milli improvement at Enne. And now we have PES, so Pulp and Energy Solutions and then paper Board Paper and Tissue Solutions. So we have now grouped that in customer segments to better serve our customers. In this PTS, our order intake was at at last year's level and then PES was lower than last year level, but the comparison time included quite big NII project. So I think both were developing reasonably well in the first quarter. 27%, 28%, not 24% that we had last year. Well, Tom, that's something that we shouldn't look at only 1 quarter's tax. So that's the tax what we now booked. And sometimes, it also depends on which legal entity those go And also, if we have some taxes that come to Finland from other countries that there's some double as well. So we shouldn't look at 1 quarter at all. And I don't think that there's any major difference with our effective tax rate Thank you. Our next question comes from Manu Grimpela from Nordea. Please go ahead. Your line is now open. Help us to better understand the development in the margin from the Q1 last year to this quarter. Where did the improvement come from? Well, a big piece of that comes from the increased sales and then also Another portion also then comes from the lower SG and As. So these are the 2 biggest ones here. So we are probably looking at the pretty sizable increase in your sales. So how should we think about EBITDA bridge for the full year, given that what we already see in an exceptionally strong start to the year. Similar type of a margin improvement phase if your sales continue to increase like this. Well, of course, one thing, Manu, is such that if we now go for the Q2 and then further on second half of the year. So activity level surely increases. And even though Our organization has learned new ways of working and we've done a lot of like there. We have a lot of like digitalized ways to cooperate internally and also with the customers, so some travel costs. Like top line development. And there, we guided now that our net sales increases and so that's the biggest source the And also good execution. Okay, great. And then finally, in terms of the services business. So I think you mentioned that you didn't see any significant pent up demand during the Q1, but it was more return or normalization of the But considering the very good prices that the your customers, both outboard tissue producers are enjoying at the moment and also demand seems to be at the pretty good level and we haven't been able to access the sites so called pent up demand comes, then we will come back to the levels where we were earlier in mill type of business, But it will not overshoot because customers have also limited resources to plan and execute shutdowns and smaller projects and the same with us and with our competitors. So it will go to the certain level, but we don't We will not see overshooting of those activities suddenly. And I still keep that theory. Okay. If I may follow-up on that. So could you help us to understand how much we are below the pre COVID levels in that part of the business to understand. We were saying that order intake also at par with this new PTS and below last year in PES. Any percentage how much We are below the No, no. Okay. That's all. Thank you. Thanks, Manu. Thank you. Just as a quick reminder, if you wish to ask an audio question, please press 1 on your telephone keypad. Okay. There appears to be no further questions registered. So I'll now hand over back to the speakers. Okay. Thank you, everybody, for the questions and active participation, and thank you for the presenters. And it's now time to conclude this event. Q2 result will be published on July 22nd. And if somebody has some more questions popping into mind, so Please just be in contact and we will then solve those. But thank you, everybody, for now and have a nice rest of the day.