Q1/2024 results: Stable business performed in line with market expectations

Valmet published the Interim Report for the first quarter of 2024 on April 24. Many investors follow the development of Valmet’s stable business very closely, and for their positive surprise, the demand in Services was much better than anticipated as the orders received topped analysts’ expectations clearly. Another important number – Comparable EBITA margin – hit the consensus at 10.0%. Unfortunately some other figures such as capital business orders received, Valmet’s net sales and comparable EBITA were below analysts’ consensus figures.

At EUR 1,050 million, Valmet’s orders received were 32% lower than in the comparison period Q1/2023. Orders decreased in all segments. For Services, the decrease was anticipated, as the comparison period was the highest ever with an exceptionally large single order. Still, Q1/2024 Services orders were the second highest ever, clearly surpassing market expectations and suggesting that the services market is recovering. Valmet also upgraded the short-term market outlook for services from good/satisfactory to good. All areas except Asia-Pacific have returned to a good customer activity level in services.

Also the Automation segment had record high orders in the comparison period, and the softness in the pulp and paper industry was the reason for lower orders both in Flow Control and Automation Systems in the first quarter. Automation Systems orders from energy and other industries increased, and in Flow Control, orders received from other industries remained at the previous year’s level. Valmet retained the good short-term market outlook for both business lines in the Automation segment. Market activity remains at a good level for Automation Systems, and it is good to remember that around half of the business is automation services, which developed well in Q1. In the beginning of April, Automation Systems’ exposure to other than pulp and paper industries increased to 40–45% with the Analyzer Products and Integration business (the acquired Siemens process gas chromatography business). For Flow Control, the market is active in other industries than pulp and paper, and workload is good. It is possible that the customer demand for automation systems and flow control would pick up also in the pulp and paper industry during 2024.

Process Technologies orders for the first quarter were lower than ever and missed the consensus by far. Although one quarter is too short a period to make a trend, it is clear that the customer activity for capital projects in the pulp and paper industry is currently low. We downgraded the short-term market outlook for pulp from satisfactory to weak. The pulp technology market currently consists of small and mid-sized rebuild projects, and we do not expect mega mill orders by the end of September 2024. However, the market will activate at some point. There are some plans in South America, but it is difficult to estimate when decisions will be made.

The short-term market outlook for board and paper was downgraded from satisfactory to weak/satisfactory: customer activity is weak while Valmet’s capacity utilization remains satisfactory. The pipeline has decreased. After the very active years 2021 and 2022, there is overcapacity in Europe in board production. Overall, customers are discussing investments, but we have seen delays in project decision schedules. We expect the orders to pick up once there is more clarity in the economy overall, as the demand drivers are intact. China remains a growth market, and old installed base in North America requires rebuilds. What comes to the other capital businesses, the outlook for tissue remained satisfactory and the outlook for energy remained good. In energy, we have many discussions ongoing with our customers.

To sum up, we have seen better times in the project business. Naturally, the low order intake and outlook downgrades provoked concerns among the analysts at the results webcast. It is important to keep in mind, however, that Valmet today has a large stable business: orders received of the Services and Automation segments amounted to EUR 3.0 billion in the last four quarters (67% of Valmet’s orders received). Stable business has better margins than the capital business, meaning that its role for Valmet’s profitability is even greater. Of the comparable EBITA in the last four quarters (excl. Other), Services and Automation created as much as 85%. All our stable businesses currently have a good market outlook.

Over the years we have developed Valmet’s cost structure to be more flexible in Process Technologies, where the demand can be volatile. Our operational model is based on low capacity costs. In 2023, capacity costs in Paper were 28% of net sales and in Pulp and Energy 21%. Especially in Pulp and Energy, we use a lot of outsourcing and subcontracting. Once the workload is low, we can first reduce outsourcing. In Finland, where Valmet employs approximately 6,900 people, there is the possibility of temporary layoffs when the workload is low. Naturally our procurement also plays an important role in securing Valmet’s profitability.

Valmet’s guidance for 2024 remained unchanged: we anticipate net sales in 2024 to remain at the same level and comparable EBITA to stay at the same level or increase in comparison with year 2023. Our focus is now on order intake. At the same time, we continue to push profitability up, not only in Process Technologies, but in all Valmet’s businesses. As the President and CEO said many times during the results webcast, nothing has changed in the megatrends supporting Valmet’s business. On the long term, the future looks bright.