Valmet Oyj

Good afternoon, ladies and gentlemen, and welcome to Valmet's Q1 2024 result publication and webcast. My name is Pekka Rouhen and I'm the head of investor relations here at Valmet. And the presenters today are Pasi Laine, Valmet's president and CEO, as well as Katri Hokkanen, the CFO. After the presentations, as usual, you will have the chance to ask questions over the phone lines. But without further ado, Pasi, please.

So, welcome. So, headline today is that orders received amounted to 1 billion 50 million and comparable every day to 121 million in the first quarter. So the content is like traditionally, first Q1 in brief, then some words about the segments and business lines. Then I want to market our nice, new, fabulous Valmet DNA DCS system. Then Katri will go through financial development and then I'll come back to say some words about guidance and short-term market outlook. First, the quarter one in brief. So like I said, our orders received ended in 1 billion and 50 million. Net sales ended up in being 1 billion, 212 million. And backlog ended to 3 billion, 790 million. And every day, like I said, was 121 million and was 10.0%. And gearing in the end of the period was 39%. Orders received was now heavily weighting on the stable business. So services was about almost 530 million and automation almost 330 million. Process technology a little bit less than 200 million. So stable business has continued strong development, which has been taking place for years already. In net sales, process technology was bigger, so 500 million services, about 400 million, and automation about a little bit more than 300 million. And in comparable epithet, stable business contributed altogether 110 million, 111 million, and process technology is 21 million. In the end of the period, we employed 19,000 people. The company has grown over 10 years from 10,000 people to 19,000 people. Comparable everyday marching is one of the important targets we have had over the years. Now it's of course nice that we were in the end of the last year at 11.2%, and after the first quarter we are still at 11.2%. Our target is, like you all know, to reach 12-14% as soon as possible. But nice development over the years, and good that we were able to keep that 11.2% also at a sweep-a-day margin after the first quarter in 2024. Orders received has been dropping to pre-COVID levels. So if you look at the graph, 19-20, we were at 4.5 billion euro level, and now we are at 4.5 billion euro level again. So we are now at the pre-COVID levels from an order intake perspective. Europe has continued to be strong in the first quarter, representing 46%. North America is strong, 28%. And then South America is Pacific. China hasn't been active in capital cases, and that's why the share of them has been now dropping compared to the normal situation. Stable business orders received over the last 12 months is almost 3 billion. And that's of course the big change that has taken place in Valmet. So from 1 billion euro services company to the 3 billion euro stable business company. So 1.7 billion has been coming in last 12 months from services and almost 1.3 billion from automation. So this is the part of the business that continues to develop well and has been developing well in the past as well. Backlog is now at 3,790,000, 55% of it is related to process technologies, 30% in services and 15% from automation. And we are saying that about 75% of the backlog is expected to be realized as net sales during 2024. and what it means is that now we are in my mind more at the normal level in our backlog. We had years when the order intake was big and then myself and Katri were saying that our delivery times have been getting longer. Now we are at the situation that of course we need new orders but from the other perspective we have also delivery capability at normal level so we can deliver faster both process technology but also services and automation products and solutions to our customers. So I am still feeling comfortable with the current backlog level what we have now. Then some words about the segments and business line. First services, so for services order intake was a year ago 577 million. Then we had some extraordinary orders there from Chile, but then also the market was extremely hot. Now our order intake was 527 million, and I think it's a good order intake for services in the first quarter. So we are happy with the performance. So we have good activity in China, North America, EMEA and South America, where we still have a little bit less activity in the Asia-Pacific, but generally the order activity is good. In all the business lines, orders have been dropping compared to last year. Extremely good order intake, but we have good activity level in all the business units as well. So we are happy with that development. Then profitability dropped in the first quarter compared to last year, and Katri will go through that more in details, but LDM is at 17.2% level, so nothing dramatic has happened. Of course, we continue to push both the orders and EpiDay up during latter part of the year. Then in automation, orders were last year almost 391 million, now 328 million, so quite big delta. But again, I'm happy with automation order intake as well, and I'll come back to reasoning why I'm happy with two next slides. Net sales has been developing roughly at the bar with last year's first quarter and every day is good level. So last year we ended up at 18.6 and LTM is now 18.7. So good development in profitability of our automation segment as well. Then if we first talk about flow controls, so order intake dropped from 217 million to 194 million and the LTM is now at 766 million, so some 23 million less than in the end of last year. And here the drop is mainly coming from pulp and paper capital. So we have good activity level in refining chemicals, energy, mining and all the others. But then we have seen less activity in pulp and paper capital business. That's where from the drop is coming. And it's logical then when we go through all the slides what we have had. We are still at a good level and Simoa and Simoa's team are continuing to push the order intake up also in the coming quarters. Net sales have been at the same level than last year, nothing dramatic there. And what's of course important is that the order intake is still higher than the net sales, which gives good momentum for the latter part of the year as well. Automation systems, 134 million, dropped by about 40 million compared to last year. And here the biggest explanation is the pulp and paper combined offering with process orders, combined orders with process technology, and then less activity in pulp and paper capital side all in all. The energy and process is developing well and the very important part of us, so automation services, have continued to develop well in the first quarter as well. And net sales has been developing favourably as well in automation and again, order intake is higher than net sales in the first quarter. Then process technologies, and that's where the biggest delta is coming. So at the end of 2021, our order intake was almost 2.8 billion, and now LTM is a little bit less than 1.5 billion. So a big delta. And I'll come back to a little bit later on how we have been preparing to that. But we have been, of course, saying all the time that there is volatility in capital and process technology order intake. And now we see that that's what we have been saying is also materializing. So the order intake was 195 million, which is, of course, in the long run too little. and it's very important to focus on order intake in coming quarters. Net sales was about 500 million and here the profitability end of last year was 4.5% and now it's 4.4%. So of course it's important that we start to get more orders but we still have healthy backlog for this year and the backlog will be of course delivered according to schedules to our customers. So then how we have been preparing ourselves for the volatility and cyclicality of process technology. So we have been talking about capacity costs last 10 years, and we have been saying that we haven't increased our capacity cost in pulp and energy and paper to make sure that when the little bit less active years and periods come, we are prepared for it. And here you see that in 2023 our capacity cost against net sales was 28% and in the beginning of Valmet it was 47%. And the corresponding percentage is for Palpan Energy at 24% and 21%. So over the years we have made sure that we are not unnecessarily increasing our capacity cost and that has been to prepare ourselves for periods when the volumes are not high level. Then we have started to do some actions to find you our capacity cost. So we had some actions in tissue machines earlier last year. This year, Palpan Energy and Paper Business Line have had some cooperation discussions and we have been reducing the headcount by about 40 and then we have been reducing the subcontractors a lot. And then in Finland, we have also a possibility to utilize temporary layoffs if we see in the future that that's necessary. So there is good flexibility still on top of this capacity cost in our cost structure. Then, of course, in this kind of situation, when the market is not very active, we have to be very active with our procurement actions to make sure that our profitability stays at the targeted level, and that's why we have been very successful in the beginning of the year. So, our supplier base is also having less volumes, and it means that they are more eager to give us competitive prices than two years ago. Then to the short-term market outlooks, I come later on in the end of the presentations. And then, of course, now our LTM was 4.4% in EpiDay, and now the work continues. We are, of course, not starting, but the work continues that we will reach better profitability levels in our coming quarters. So we need orders, but we have flexibility and we have been preparing ourselves for lower volume quarters as well. Then, if I say some words about pulp and energy first. So, water intake was only 57 million, and LTM is now a little bit less than 700 million. In 2017, we were roughly at the same level where we are currently. I'll come back to the outlook later on, but we are keeping the energy outlook as good. So we have many discussions ongoing with our customers. None of them, the bigger one, materialized as a contract in the first quarter, but there are several discussions ongoing with our customers. And long-term and mid-long-term situation in energy hasn't changed at all, even if the quota is weak. Then, if we talk about pulp, we have been saying that we have to focus now on small to medium-sized projects in pulp, and here is the same situation that nothing materialized, not that much materialized as an order in quarter one, but we still have good discussions and activities to continue the discussions with our customers in small and medium-sized pulp projects. And then again, if we go to a little bit longer term view, the longer term view hasn't changed anywhere. So more and more pulp is needed because of the megatrends we have been talking about. So when meeting with our customers, they all, especially in Latin America, talk about future investments coming to increase the pulp capacity in the world. So, we have had two not that good quarters. Medium term, I see the activity level coming back to improved levels. Then paper business line, quite much the same story, but if we first go through it in a way business by business, so in this year we have had satisfactory order intake in end of the last year and beginning of the year as well, and we see market activity at the satisfactory level. In paper and board, the board market is the one where we have seen the biggest hit. So actually paper machine market is now reasonably active and we are reasonably active compared to board machine market. In tissue, we see of course that the long-term development is still there. So everybody needs more tissue, both in developed countries, but also in developing regions. So the long-term view is intact. In paper and board, there's a situation that because of a lot of investments, especially in Europe, there is currently overcapacity, especially in cardboard. And it will take some time before this overcapacity is eating out. But then from the other perspective, there are areas where we already have discussions about increasing capacity and needing to increase capacity. And then we of course have to remember that one third of the investments also during the peak years were such that they were to replace old machines with the new machines. So we have a short-term challenge with order intake, but if I see now the activity with our customers, we continue to have good discussions about increasing capacity and need of new machines in board and paper segment as well. Tissue converting has started well and the activity has been good. So one of my messages is of course that in paper business line we have bigger variety of products currently compared to the past. So we are active with tissue machines, we are active with tissue converting, we are active with paper machines and we are active with board machines and dominance of board machines will be less than it was during the peak years. Good. And then my favorite subject. So I have waited for years to be able to talk about it. So like you all know, I'm an old DCS engineer, so I started my career in programming DCS with my own little hands. That was 1988. and the product was called then Valmet Classic. Then the next one which was then launched in end of 80s was called Valmet XD. And we have been now working with that system over 40 years. The core of the system is from end of 80s, beginning of 90s. And now over the last years, we have spent a lot of effort in renewing the product. And now it has been launched to the market on April 9th. So it has taken 10 years to develop, and now it's ready. Now it's available for the majority of our customers, and it's the first in the market for maybe 30 years as a totally new DCS system. and it's called Valmet DNAe. It's called Valmet DNAe to emphasize that it has full compatibility with our earlier Valmet DNAe and that's very important in our business. So we have to be compatible with earlier generations and that's what we are. Now, what have we done new? We have done new user interface. It's totally web-based, which means that the operator can use it over the normal screens, or somebody can see the screen somewhere in mobile phone, so it's full web-based. We have new configuration tools, so the tools which I have been using are now totally renewed, and of course they are web-based as well. We have now new analytical tools to help customers to improve the reporting and performance of their assets, And then we have also new controllers, new IEOs for the system. So actually all the components have been redone. And so that it's compatible with earlier Valmet DNA systems. And what's very important is that it's totally built in cybersecurity. So all the customers are worried now about cybersecurity. And this system is totally built in has totally built in cybersecurity. So we are very happy that now we have the product on the market. We haven't capitalized R&D, so all the R&D has been spent in our profit and loss statements. So now I of course want to thank automation systems management and personnel for the excellent work that they have been doing. improving the business, growing the business, improving profitability, and then at the same time invest into next generation DNA. So well done. And now after long technical speech, I let Katri to talk about financial numbers.

Thank you, Pasi, and hello everybody on my behalf as well. I will walk through the financial development next. Here are the key figures for the quarter. Order intake was 1.05 billion, and it was 32% lower than a year ago. Order backlog was 3.8 billion, and that was roughly on the same level than what we had at year end. Net sales was 1.2 billion, and that was 8% lower, and comparable epithet was 121 million and 10% of net sales. Adjusted earnings per share was 41 cents for the quarter, and that was 19% lower than the comparison quarter, and this is due to lower epithet and higher financial expenses. I will come back to the balance sheet numbers later in my presentation. Then moving on to the segment numbers, starting from services, orders received decreased to 527 million. And as Pasi already mentioned, last year's orders were the highest one ever for Valmet, and this was the second highest for us. Orders received from tissue converting, which was integrated into our numbers in the beginning of November last year, amounted to 39 million in the first quarter. Net sales remained at the previous year's level being at 406 million, and tissue converting part here was 35 million. Comparable epithelium remained at the previous year's level at 60 million, and margin decreased to 14.6%. And good to note that the organic net sales decrease and changes in the FX rates had a negative impact on the comparable epithelium. Moving to the automation next, their orders received decrease to 328 million. And on the automation system side, orders remained at the previous year's level in the automation services and decreased in capital. Orders received increased in energy and process and decreased in pulp and paper. Then on the flow control side, the orders from pulp and paper industry decreased and remained at the previous year's level from other customer industries. And also good to note that the orders received in the comparison quarter were record high for both business lines. Net sales remained at the previous year's level at 309 million, and comparable EBITDA also remained at the previous year's level at 51 million, and the margin was 16.5. Then lastly, process technologies. Pasi went this through already quite thoroughly, but just to summarize the main points here, orders received decrease to 195 million and their tissue converting orders amounted to 48 million. Net sales decreased to 497 million and tissue converting was 28 million in that number. Comparable epithet amounted to 21 million for the quarter and the margin was 4.2%, and this remained at previous quarter's level. Here you can see a summary of the segment key numbers. I will not walk them through again, but worth mentioning that the other segment was 11 million for the quarter. Regarding the comparable cross-profit, that was 28.3% of net sales in the first quarter and stable business represented 59% of the net sales. And as you can see from the chart, last 12 months we were at 26.6% and the cross-profit has been developing well over the years. Comparable SG&A expenses were 14 million higher in the first quarter compared with the comparison quarter. And the issue converting SG&A, comparable SG&A amount to 19 million in the first quarter. And when you look at the chart, 915 million is the last 12 months comparable SG&A, and it represents 16.9% of the net sales. And also SG&A we have been managing well over the years. Regarding cash flow provided by operating activities, it amounted to 138 million in the first quarter. For the last 12 months, we were at 282 million. CapEx amounted to 29 million in the first quarter. Moving to the networking capital, so that amounted to 173 million at the end of Q1, and that is 4% of the last 12 months orders received. And here, good to note that this number is now without the dividend liability. And the acquisition of tissue converting increased the networking capital by approximately 79 million, if we compare it with the comparison quarter. And with a longer trend, if we compare to 2021, the networking capital has increased mainly in the capital business and due to the integration of flow control and tissue converting. And today our business mix contains much more stable business, which typically ties up more networking capital than capital business. Net debt decreased compared with year end, and it was 939 million, and gearing amounted to 39%. And the increase in the net debt and gearing in the fourth quarter was related to tissue converting, and second quarter in 2022 was related to flow control. And net debt to EBITDA ratio, it decreased to 1.36, and the average interest rate of our total debt was 4.3%. 6% at the end of Q1. And worth mentioning that during the first quarter this year, we successfully issued 200 million green bond with 4% fixed annual coupon. And net financial expenses amounted to 13 million in the first quarter. Capital employed was 4.1 billion at the end of Q1 and comparable return on capital employed was 15%. And in Q1, last 12 months, adjusted earnings per share decreased to €2.18. And this was due to lower epithet and higher financial expenses. This was my part. I will give the floor back to Pasi. Thank you.

Thank you, Katri. Then still guidance and short-term market outlook. So if I start with kindness, so we keep the guidance the same as we have had. So we are saying that Valmet estimates that net sales in 24 will remain at previous year's level in comparison with 23 and comparable EBITDA in 24 will remain at the previous year's level or increase in comparison with 23. So we keep the same. Then about the short-term market outlook. So I start with the process technology part where I spent more time. So in this year we have had satisfactory situation now for a while and we estimate that the market activity continues also at the same level. In board and paper, we have had quite weak order intake in one quarter, and that's why we changed market outlook and market activity to weak, but we still have satisfactory workload in our factories and organization. And like I said, the long to medium-term market demands haven't changed anywhere. In energy, we had low order intake in this quarter, but it's more a timing issue, so we have had good order intake, we have good workload, and we have good market activity in energy. In pulp, it's the same story as with board and paper, so we had low order intake for the year. We have, of course, a little bit of challenges with the workload as well coming, but then the medium to long-term demand picture in pulp hasn't changed as well, but we have sometimes not that strong quarters and now we have had one of them. So that's about the process technology. And then if we talk about the stable business, where about 3 billion euro of our business is. So in automation systems, we have good market activity and good workload. In flow controls, we have good market activity and good workload as well. And in services, we are now saying that market outlook has improved from satisfactory level to good level. So all the stable businesses have now good market outlook. So that's the summary and now it's Pekka's turn.

All right, thank you, Pasi and Katri for the presentations. And we are now moving on to the Q&A session. So I welcome Katri also behind the table here. All right, operator, I hand over to you now.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Auntie Kansanan from SEB. Please go ahead.

Good afternoon, it's Antti from SEB. A couple of questions and I'll start with automation systems and flow. I mean, obviously it's one quarter, but surprisingly big order contraction for a business that the outlook is good. And I mean, if we look forward to this year, we don't have a great outlook on the pulp and paper segments, and that's still a fairly sizable portion of both flow and systems. And I guess that was driving the decline on Q1. So how should we think about the demand going forward? Can the other businesses compensate for the weaker demand on pulp and paper, which you clearly flag on the PT side?

So our target is of course to grow organically automation system and flow controls. The first quarter was not that strong if you compare that with last year, but last year we had extra, not extraordinary, but all the things were favorable in the beginning of last year. and that of course impacted the order intake both in systems business and in flow controls business. Now with this order intake in flow controls first with 194 million, so it's a good order intake for the first quarter. We have a good customer activity. Of course, we have to compensate the pulp and paper activity with other customer segments, but then there is of course possibility that More and more pulp and paper activity becomes active during the year when the customers start to have more normal production rates and normal profitability as well. So I'm not giving up the pulp and paper activity in flow controls or systems side either. In systems, Sorry, 134 million is a reasonable good order intake for the beginning of the year. Of course, last year we had a lot of package orders, which is impacting the order intake here, or was impacting last year the order intake. There's good activity in services, there's good activity in energy and process. I'm not giving up in pulp and paper here either. And then of course now we have the new system on the market, so now it's a little bit easier to explain to customers what kind of roadmap we have for the DCS and that should also a little bit free up the demand what we have had for DCS systems. We have good management in both organization and we have good organization flow controls and systems. So those are the reasons why we keep the outlook as good.

Yeah, maybe a reminder of last year. Did you kind of see similar trends on the pulp and paper side in flow and automation systems as you did, for example, on services side that the demand actually started to decrease already during last year?

I think we were saying that the order intake was not that good in second and third quarter, if I remember correctly. And then, of course, one which I forgot to say in my presentation, and now as well, and then Katri reminded me, maybe you noticed that, that we, of course, completed the acquisition of Siemens gas chromatograph, which nowadays is called API in our terminology. So, analyze the products and integration and that's of course giving extra boost also for automation order intake just by the volumes what they are bringing but then also possibility later on with synergy order intake. So that's giving new boost to system business. So last time when we have made bigger, that size of acquisition, not even that size, but that remarkable acquisition in systems business was maybe 1987. Okay.

And then on the process tech side and especially on the container board and paper machine, outlook. I don't know exactly what you mean when you talk about mid-term outlook, but I was just wondering how worried should we be on the earnings impact of container board and paper going into back half of this year and into next year? I mean, your backlog is still solid for this year, but looking quite thin for 2025, and I'd assume that the container board and segment has been a sizable chunk of your PTs. earnings historically, so what do you think is needed for those client discussions that you have with the client actually kind of starting to realize into orders and perhaps supporting 24 sales and earnings?

Or maybe 25, did you mean 25 or 24? 25. Yeah, so you are right that we have still solid backlog and now we need orders to make sure that 25 will be successful year for Valmet as well. So in Europe and mid-term I meant that we have been talking about six months market outlook and then we have been talking about the long term and there's something between is the mid-term that may be not happening in six months but still in active discussion so So in Europe, I'm not expecting too much from the paper and board machine market. There might be some rebuilds, but otherwise not that much activity because of the overcapacity. But then China is still a growth market. China was last year producing pulp and paper and board more than ever. And the demand growth continues there. South America has less board production than consumption. And then in North America, the fleets are getting older all the time. And we have been saying that we have been replacing old machines one to two machine a year or actually more machines but we have been selling one to two machines a year to replace the old machines so those market drivers continue and and when the little bit the economical situation is getting clarified then then i would be hopeful that customers continue to invest okay and then lastly on the pt margins i mean there wasn't any mention of those

project issues on tissue or pulp or energy? Maybe you just have talked about them enough, or does it mean that those projects are starting to fade from the backlog?

I think in project business you have always a portfolio of projects and some are successful and some are not successful and then somehow it's not anymore adding value that we are too much focusing on individual projects and that's why why we are now saying that profitability of the business is LDM of about 4.4%, and now we have to work towards improving the profitability, but it's not anymore adding value to you or us to talk about individual or segmented projects.

All right, thank you.

The next question comes from Johan Eliasson from Kepler Chevreux. Please go ahead.

Hi, it's Johan from Kepler Chevreux. Just following up on Antti's question here on the sort of backlog in process tech. I mean, when do you need to see orders improving again before you will need to announce some more? cost-cutting activities in the pulp or on the board side. Is it late this year or is it later than that?

No, so of course we need orders all the time, but like I said, we have a reasonable backlog for this year. So then it would be good to have order intake improving in quarter three latest.

And you talked about these capacity costs obviously much lower on the pulp side than on the board side. So should we be more worried about the board's potential impact on your profitability going forward than pulp if these orders come?

Yes, like we have been talking is that in pulp and energy it's easier to subcontract some of the production and in paper we have products which we can't outsource except to our competition and that's why we have higher capacity cost in our production but we have been Besides that, we have been outsourcing some of not that core production to our subcontractors, and we can, of course, insource it. And then, of course, if that's not enough, then we have to plan some other actions. But currently, we don't have any of that kind of plans in place.

Okay. And then on services, you upgraded the short-term outlook to good. You talked about improved customer activity. It's not visible in the order intake in this quarter, but how should we interpret this? Is it sort of something you're seeing in the pipeline now?

Actually, like Katri was saying, the services order intake was the second quarter ever. So last year we had extraordinary good order intake. So we had some orders which were postponed by customers from 22 to 23, and that happened at the beginning of the year. Then we had one big order in Chile and everything was booming. So actually I'm happy with the order intake, 527 million for the first quarter. And then, like you said, we have good activity in North America, in Europe, in China, in South America, and the activity level hasn't been that good in Asia Pacific, but four out of five areas have good activity levels.

Yeah, good. And then finally, maybe a question for Katri here. Historically, you talked about your networking capital in relationship to orders received should be if I remember it sort of negative eight percent or so and now obviously you have a different business mix. Do you have any sort of targets for your networking capital ratios going forward or is it just what they turn out to be basically?

Yeah, maybe if I answer kind of what we are most actively working with is clearly the inventories. So we brought them after the COVID level and of course we are still optimizing the inventory levels and it goes by different businesses. And as said also earlier, the capital prepayments can have a big impact. We haven't seen any kind of a fast improvement in the net working capital, but also the business mix, as you said, has changed. So stable business is almost 70% of the volume and in the past it was a little bit over 30%. So that is also good to understand that it is different. The business mix is different nowadays than what it was back in the days.

Are you seeing any changes in the payment terms of projects now when demand is weaker? Or should we expect that going forward?

We haven't had any changes in the payment terms. Of course, every project is negotiated separately, but we continue to be tough on those ones as well. And our project business is cash flow positive.

OK, thank you very much.

The next question comes from Ponu Leytinmaki from Danske Bank. Please go ahead.

Yes, thank you. I have a few questions. Firstly, starting on the guidance that is unchanged and then the market outlooks that have been revised. And mainly, like the service outlook is now better than it was three months ago. And shouldn't that have kind of upside to your earnings guidance, given that it's kind of a business that has a short cycle?

No, we are not guiding the profitability of different businesses, so a little bit difficult to answer to that. But our guidance is currently flat or increase, and we are still in that range, flat or increase.

Maybe what I meant was that when you get the guidance after Q4, what kind of market outlook were you assuming? Did the range kind of already include some potential changes in these segment outlooks?

Of course, the guidance and outlook, what we came after Q4 were like they were, and that was our best understanding then. And now we are giving our best understanding of the market in regards to the guidance and the outlook as well.

Okay. Thanks. Then on services, in the previous quarters you have mentioned that customers have been postponing some non-critical maintenance work during their kind of shutdowns. Does this create pent-up demand in the market and do you see that this could materialize in the coming quarters?

So this pent-up demand, usually answering the same way that actually customers have limited resources to execute the services from their side and we have of course limited resources as well. So I wouldn't be saying that there's that kind of pent-up demand, but of course now when the customers see better how the volumes are developing, how the prices are developing, now of course they have more stable situation to decide what kind of upgrades and services they are going ahead with. So I wouldn't say that it's pent-up, it's more that when the market has stabilized.

Okay, thank you. Then on the M&A contribution, I think it was like 4% on revenue in Q1 and it was 6% in Q4, even though you didn't have the Kerber acquisition for a full quarter in Q4. So I wonder why is that? Is this seasonality or was it due to decline in the revenue of the acquired business?

You answer first. You were asking about the tissue converting business is something that we recognize point in time. So if you were asking about the net sales development.

Yeah, I was asking that the absolute kind of contribution from M&A was similar in Q1 and Q4, but then in Q4 you only had this for like two months.

Yeah. But we are happy with how the tissue converting has started.

I think the first month's revenue is always varying. It's because the organization is in the middle of transformation. I wouldn't draw too big conclusions on that. So like Katri said, first quarter order intake was at a good level and net sales was at a good level as well, but we haven't seen any negative actually trends in tissue converting business. More actually the other way around that we are happy with the performance and we are happy with the team we have been getting and we are happy how well-engaged and energized the team in tissue converting is as a part of Valmet.

Okay, thank you. My final question is from the automation systems and this new product that you launched. Do you expect it to have any kind of near-term impacts on your numbers? You indicated that it probably helps in winning new orders, but anything on the margin side, if you have completed the R&D and did it capitalize that? So is that positive for the profitability?

No, we'll continue to develop D&A further, so it's always a possibility to continue to develop. And then we also upkeep the D&A to make sure that the customers who are running at the D&A are happy with our performance. So we can't cut too much R&D spending because we want to keep our customers happy. In the long run, of course, DNAe will improve our competitiveness, so it has more effective network structure, it has more effective engineering tools, and it has also a more effective hardware structure, so it will improve our competitiveness in, again, I say medium to long term. Short term, it's not affecting.

All right, that's all from me. Thank you.

The next question comes from Mikael Dopel from Nordia. Please go ahead.

Yes, thank you and good afternoon, everybody. I wanted to come back to the guidance here. Given the trends we saw in Q1 with both revenues and earnings clearly down, I guess your guidance is more back and loaded for the years. I'm just wondering what your level of confidence and visibility is now for the full year, and also should we expect better trends here already in Q2?

Katri can give another answer. I'm as confident as when we launched the guidance after Q4.

Yes, and we have a backlog of 3.8 billion and 75% that will materialize as net sales this year. And as Pasi said earlier, the delivery times in our businesses have improved compared to what they have been in the past. So we are back in the pre-COVID level. And then, of course, we have also the new businesses supporting us.

And then we also have to... Like I think I have been saying earlier as well, that you think about last years, the organization has gone through COVID, Ukrainian war, supply challenges, logistic challenges, fire in Rautpohja and starting of inflation, very high inflation in raw materials. And now all that kind of disturbances are actually away. So we can focus on taking care of our customers and taking care of our business. So there's a lot of more management manpower now available for normal business management. And that, of course, gives more confidence also for business execution.

OK, and I guess In addition to that increased focus and management capacity, in your presentation you mentioned, you talked about the service business earnings and margins and that you aim to push up those in the second half of this year. So I was just wondering if any specific drivers behind that that you could mention.

I think you are a little bit twisting because I have been saying all the time that we are pushing all the businesses profitability up. So not specifically services and not specifically latter part of the year, but we have been saying that now we are at 11.2%. Our target is to get 12 to 14% and we are not reaching it if not all the businesses are improving and services is one of them who has to improve. Okay.

And then finally, on automation systems and flow control, again, in your presentation, you mentioned that a bit slow on the pulp and paper project-related side of the business. I'm just wondering if you could just recall or recap for these businesses how big the exposure is to the capital business.

So flow controls, the total pulp and paper exposure is a little bit less than 30%. And in automation system, it's about 70%. And then in automation systems, we haven't been telling, and in flow controls, we haven't been telling how much of those are capital business related.

Okay. Got it. Thank you very much.

The next question comes from Tommy Raylow from DNB. Please go ahead.

Hi, it's Tommy from DNB. Two questions. Firstly, service profitability in the first quarter was down 130 basis points despite the sales growth. Just wondering if you could give any reasons. Is it the price mix or is there kind of a structural reasons, which we should also read into the second or the latter part of the quarters.

Yeah, so service is comparable. EpiTay was flat at the level of 60 million for the first quarter. The margin dropped, as you said, and kind of from the legacy Valmet, the volumes dropped. And then there was an impact also related to FX rates. And then on top of that, there was some underabsorption also impacting services profitability.

Which is quote to one related.

Exactly. Yes.

Can you open that a little bit, that it's field services?

Yes. So it's partially timing, but it has been slow. And we have been saying earlier also that even if the workload has been good, the market has been satisfactory. And now we are saying that it's good. So it should also support this angle. Yeah.

And maybe just a follow-up still on the service orders in the first quarter. Was there a particularly strong individual order you booked or was there anything special there?

No. Normal quarter in that sense.

Okay and then the second question really on pricing generally where do you see kind of pricing developing do you see pricing pressure or active client talks requesting price reduction so I understand it varies of course quite a lot but any comments on pricing?

We have to think that now when, according to me, life is normal, so there is inflation and interest rates and there is enough supply so nobody is anymore supply limited, then it means that there is cost competition and customers try to push our prices down and we have to push it back so we are back in the normal days and not in the extra extraordinary COVID years and then it means of course that we had to push prices up and try to keep the levels where customers easily understand the price pressure is the salary inflation because they are facing it themselves as well and it's easy to understand in engineering type of services that prices should go up and then of course we have to be improving our efficiency all the time. So now it's time for the organisation to make sure that our procurement is more effective than it used to be, even if it's already good, but it has to improve and internal efficiency as well. So we are back in normal times where the efficiency improvement has to be taking place in all parts of the organisation, not only services planning, but in all parts of the organisation.

Thank you.

The next question comes from Sven Weyer from UBS. Please go ahead.

Good afternoon. Thanks for taking my two follow-up questions. The first one is again on service, if I may. I was just wondering how much of the business is actually exposed to restocking and destocking of your clients on the individual components? Does that play a major role? Because I'd imagine when the cycle was weakening that they've probably gone through quite a bit of a destocking and you had some weak service order quarters and now maybe activity is going back to more normal, which is helping you, or does that not really have an impact? That's the first one. Thank you.

Okay, she decided the title. I think you are quite right that in the middle part of last year there was destocking happening and then also otherwise customers were unsure how the world continues to develop. And now we are saying that we are back in normal and the outlook is good.

So in a way that's now a more sustainable normal level than maybe the extremes we had. Q1 last year was maybe an extreme in the order intake, but then the quarters after maybe a low extreme. So now we're kind of in the middle of that.

I'm not sure if we were saying roughly in the words what you were saying that first quarter was extremely good and then after second quarter we were still on positive growth numbers and after third we were a little bit on negative side because there was very good quarter one and then not that normal quarter two and quarter three.

Gotcha. Second point was just coming back to what you mentioned earlier that I think you said orders should improve by Q3 if I had the latest, if I understood you correctly in terms of you know, getting the load in for later. I mean, it sounds like when I look at the pulp downgrades, that probably refers to the next six months of maybe lower activity and also on board, it didn't sound like there would be an uptick. So isn't that meaning that a reduction is something that is relatively safe to happen? I was just wondering, you know on the on the measures you can take about these short-term measures and i'm sorry not so familiar with the the finnish rules but i was just wondering how long can you take these short-term measures how how what extent can they have is there something to bridge maybe also half a year to 12 months or would that have to be then real proper restructuring instead

We have negotiated, and if I now remember correctly, so I hope our union members are not critical, but they understand that I can't remember all the numbers correctly, but we have negotiated now so that we have possibility to lay off in pulp and energy and in paper side temporary for 90 days a person. And then if that's used, then we can renegotiate it. So there is no limit for that, but currently we have negotiated with our unions the possibility up to 90 days a person, which is already quite a long time.

And there is no limit in terms of you can only do it with like, I don't know, 5% of staff, you can do it with the Which means there is quite some flexibility for you guys.

There is quite some flexibility and of course it's very important that, like I said, long-term market is there and now it's very critical that we take good care of our high professional personnel.

And how does the payment then work for the employees during those short-term measures? Are they still receiving money, some money from you or from the state, or how does the compensation work for the employees?

Somebody might know it better, but we all have to pay to that kind of insurance, unemployment insurance. And then once we are unemployed temporarily, then we are getting the money from that fund. It's not coming from the state. It's not coming from the employee. It's coming from the fund where we all have to contribute a little bit every month.

Okay. Understood. Very clear. Thank you, Pasi.

Okay. Thank you, Sven.

The next question comes from Antti Kansanen from SEB. Please go ahead.

Antti Kansanen from SEB. Sorry, no questions from me. Sven already asked them.

Thanks. The next question comes from Tom Skogman from Carnegie. Please go ahead.

Yes, hi, this is Tom from Carnegie. Pasi, you have been a long time in the industry, so perhaps now as you're still working for Valmi, you can talk about the general mood among customers and how do you see the big picture compared to earlier challenging times for customers a bit more?

Thank you, Ton. That was a good question. I have been visiting some customers here in Europe, in North America, in South America lately. And maybe we all are old men and women, but we all said that life is normal. So actually there was quite a lot of confidence in South America to the medium to long-term development of the industry. Then last week I was in North America and our customers were saying that we can of course compare the years to the extraordinary COVID years, but if we stop that and compare that to 2019, then market is normal. And then with the European customers, they all are, of course, saying, the ones who are in Gartonport, they are saying that there's overcapacity, but the demand continues to grow with the GDP growth as well. And then we have to exclude the extraordinary COVID years. So I haven't met anybody who wouldn't be trusting to the future of the industry.

Assuming in North America, I mean, the consumption is growing, the consumer strong population is growing, but we have hardly seen new equipment orders from North America in the last 10 years. And the install base is very old. Could that kind of be the place? where we will see strong orders the next years?

We have been actually selling one to two new port machines every year, last years to North America. So we have customers who have been buying from us and then they have been closing three, four old machines and that market continues. So the thing what you said has happened in the board machine side already. Tissue market has been active. And where we haven't seen yet activity is pulp side. And then we all believe that in coming years North American pulp mills need to be partly rebuilt.

Okay. Then I would like to ask about the Siemens gas acquisition. What does this mean strategically for automation systems and what type of sales synergies do you see from that acquisition?

So, we call it now API. API is easier. Okay, it's analysis of products and integration. So, they are serving chemical, petrochemical refineries. Actually, the same customers what flow controllers is serving. So, actually, we get bigger share of wallet from those customers as a combination of RP and flow controls. Might be that different persons in the organizations are buying them, sometimes same, but in any case, we are more important supplier now for that customer segment. Then we bought a little bit more than a year ago a batch patch software company in North America and that's serving the same customers API is serving and now with our new DNA we can enhance our product offering on top of the or under the patch control we would be selling our DNA to the customers who already have been buying the patch controls and the gas chromatographs. So directly there will be no Synergy sales, but indirectly we have a lot of better visibility and customer contacts to new customer segments to whom we can start to market our DNAe.

Okay and then the new automation DNAe product is that for some reason better suited to other industries than pulp and paper so you could you know generate you know a lot of growth the next 10 years from other industries somehow that it will be better than the old model for other industries?

It's now the most modern in the world. So then for our sales troops, it's a lot easier to sell to new customers something which is totally new and it's cyber secure and all the things that I said already in my presentation. And to go with that kind of product to new customers instead with a product where the core has been developed some decades ago already. So it will have a lot of, or our sales troops will have a lot of easier tasks to sell it to new customers. And then, of course, in a short while, it should be, of course, more cost-competitive than the current offering, because it has better engineering tools and more cost-competitive hardware as well.

So any concrete plans to expand to new industries or so that we should know of?

No, I wouldn't go to that detail. Of course, we have some plans, but I wouldn't go to that detail.

And then finally, to your CFO. Networking capital is now 850 million euros above the end of 2021. The Nellis acquisition brought some 200 million euros. Now we have the Kerber acquisition. And of course, they say, but could you break down this a bit? Because, I mean, it's easy to be scared that there will be problems with some projects that the customers don't want to pay because there are some quality issues or so, and why we should not be afraid of that. When you just show this slide, it's really hard to grasp this.

So if I kind of what I said earlier was that also as you said that we have had these acquisitions and mergers but the part of the stable business has increased if you compare it to the earlier years. So it's almost 70% of stable business. There are no kind of issues with the receivables so collection works well. No topics there. Of course, what can swing the networking capital are the capital prepayments. And then the inventory I mentioned earlier, that of course, it's very much linked to the stable business. And we are actively working with that. However, when the stable business has been growing, also the POC, what we are recognizing from the VIP has been increasing. So you have to look at kind of all the elements that are there.

Okay, thank you.

The next question comes from Johan Eliasson from Kepler Chew Reacts. Please go ahead.

Hi, it's Johan again. Just curious, following up on Tom's question here, where you see a potential recovery in sort of either pulp or board. You mentioned North America needs some renewals going forward. If we look at Geographies, and I guess this relates mainly outside of Europe as your competitors are sort of also Euro-based in most of your segments. Would you say you are better positioned in terms of reference installations, service network in any geography if sort of equipment demand starts to take off than your competitors?

In China, we all are present, but we have the widest services offering in China. But then I'm sure that when China market is active, then all of us are there. In North America, we have the strongest installed base in paper and board. and the strongest service network as well. Europe, we are roughly at the same level. In South America, we are strong. and we have been reasonable during last years become also strong in paper and board where we were not early active practically at all but then of course our friends in germany and our friends from austria they have good services networks as well so to conclude if if north america is to take off you would have a little bit of an edge

Is that the way to see it? Yes. Excellent. Thank you very much.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.

Thank you for the active Q&A session then for the audience and Pasi and Katri for the answers. So the half year result will be published in the July 24th, so exactly three months from now. So I wish everybody now a nice rest of the day and bye for now.