Valmet Oyj

Good afternoon ladies and gentlemen and welcome to Valmet's third quarter 2024 result publication and webcast. Valmet's third quarter was characterized by the fact that comparably the margin was the highest for a third quarter ever at 12%, but then the market activity was slower than expected. My name is Pekka Rouhenen. I'm the head of IR here at Valmet. And in this conference call, we have a new representative, Valmet's new president and CEO, Tomas Hinnerskov, who started in the mid-August. Welcome, Tomas. Thank you. And then, of course, CFO Katri Hokkanen. The agenda today will be so that Thomas will first go through the third quarter results and brief, discuss about the development of the segments, discuss about the guidance and short-term market outlook, and Katri will then later present the financial development in more detail and after that we will be opening the phone lines for Q&A and this time there's also the possibility to ask questions through the online platform so please also utilize that opportunity. But with that I hand over to you Thomas.

Thank you very much, Pekka. Despite having lived in eight countries across three continents, it really feels like coming back home to this strong Finnish engineering company, which I worked for early as well, not the same one, but also a strong Finnish engineering company. So very happy to be here and it feels very good. So let's look at Q3 just in overall terms before Katja goes into the details of what happens during Q3. Overall, orders received amount to 1 billion euros. Market activity was a bit slower than what we actually anticipated a quarter earlier or end of June in particular. We did see stable business order increase, still a little bit short of what earlier expectation in particular in the service business. On the process technology, best orders did decrease and also behind on early expectations as well. However, we did have one big highlight during the month, which was the Arauco order, which is not part of the Q3 orders and will be booked in Q4. As you probably noticed, we did sign the contract yesterday, so now it's sort of the final orders there, and it will be starting. There will be prepayments and booking during Q3. On a positive thing, I think order backlog, $3.5 billion, quite a sizable amount. And what I really also like about it is that roughly half or 50% of the backlog is in the stable business of ours. So that's actually a good profit pool that we have in the backlog there. On the net sales, exactly the same as last year, comparable EBITDA, just like Pekka said, 12%, best ever Q3 margin. Albright was sort of supported by a sales mix that actually support a higher margin. So overall, came in quite positively. Also cash flow, quite nice to see that the operating activities and the operating cash flow is amounting to 110 million. Looking more into the numbers for Q3, orders received, net sales very evenly split in sort of three quarters or three thirds. Whereas then, of course, our higher margin stable business is amounting to the most parts of the whole EBITDA or comparable EBITDA. So still continuing the same way as we've seen in previous quarters. On the comparable EBITDA development, it is really nice to see that we have a good track record of growing the margin over the past 10 years. Last 12 months was, I guess, another record of 11.3%, slightly higher than last year. And again, also supported by SalesMix, which you can also see on the color split on the Q3 24 LTM. Still aiming to achieve the 12% to 14% margin over time, and that is definitely an ambition of ours. Orders received 1 billion euros, flattening out the last 12 months. The last couple of quarters have been more roughly on the same level, 4.5 billion. Those will increase, expect to increase in Q4 due to the Arauco order that will be booked there. Geographical mix right now, North America, Europe, biggest part of the pie. Of course, with Arauco, South America will expand and be a significant part of that orders received for 2024. Maybe also worthwhile noting that China has decreased since it peaked in 2022. Let's just see, there it was. Overall, when we're looking then at taking a double-click on the orders received, just looking at the stable business, currently 3.2 billion euros last 12 months, which, of course, very positive to see still, even though it was not as fast and as much growth that we expected some months earlier, but it was nice to see that this provides sort of a very stable foundation and resilience to whatever cycle we will come through. and it also has good profitability and therefore good profit pool for our future quarters to come. Organic growth, a little over 5% CAGR over the last 10 years. What I would also highlight that within the last 12 months, actually 70% of Valmet's orders received is coming from this stable business, whereas if you look all the way back to 2015, it was less than half of the orders received. So CLEAR has been a development of expanding the stable business. That also, when we look at the order backlog, overall decreasing, but that's because the capital part is decreasing, whereas the stable business is actually increasing. Also there, now 50%, roughly, of the overall backlog, whereas going back to 2015, it was 25%. One of the things that will also help us into Q4 on the bottom line side is that we do expect 70 million more sales coming out of the backlog in Q4 versus what happened actually a year ago. So that will support our Q4 results. Let's have a quick look into the different segments. Process technology has been trending down since sort of the peak end of 2021. Naturally, for the full year of 2024, we do expect to see a strong process technology order due to the Arauco order that will be booked. We also see sales last 12 months, of course, with the decreasing process technology orders since 21. There will be less, the order book is also declining, therefore also less sales, roughly 300 million less in what we've seen in the last 12 months. That's also led to, which you might also have picked up in our announcement, that we're restructuring the business, the paper business line. and had taken 112 people out, or are taking them out as we speak, in order to counter that order book that is also declining in this business line. Last 12 months, profitability slightly down in the process technology. However, I would, or at least I take note of that The Q3 margin was better than the Q2 margin. We had 4.4% in Q3, this Q3, whereas it was 3% in Q2. Also impacted by some settlements on prior projects. But anyway, I think it's good to see that it's coming up, all right on a too low of a level. Then Arauco project. I have to say it was really great to be in Chile together with the team when we closed this deal and partnered up with Arauco on delivering the most amazing single-phase pulp mill in the world, the largest one. really worked on how could we optimize the outcome and the output of this mill together with the customers and that was basically what I would say was the key to winning this order and very proud of the team and how they sort of on the spot in Santiago de Chile worked in war rooms and creating the right solution for the customers and then delivered this complete full scope Valmet mill that basically have everything that we can do in terms of full automation, flow control, mill-wide optimization. It was just a very, very nice solution and still based on proven technology, which I think is also important to say also from a managing or mitigating the risk perspective when we actually have to deliver this important project and all of Valmet's sustainable technologies in one go, so to say. Really nice project, of course, also proves some or delivers some future service and automation potential after its startup in 27. Services, probably something we're going to talk a bit more about also later today, but orders did grow, which was nice to see. The last 12 months, it was actually record high, 1.8. Still not quite as what we thought some months ago, but the activity has been a bit lower than expected, but it is on a growing path, which is nice to see. Then net sales increased also with that to 1.3 billion. Margin is a little bit down on this compared to previous years, but comparable EBITDA is therefore staying flat versus what we've seen last year. Automation remained the last year's level, orders flat both in automation services, a little bit down in flow control. Net sales went up and also comparable EBITDA remained on last year's level. We're integrating the API as we speak, and I was actually in Singapore a few weeks ago and visiting our new team members there, one of their important sites for API. Really great to meet the team and the passion and the knowledge technology we have. It's a very exciting acquisition that we've made, and I think we will see more of that in the future. Good to see, and very much appreciating the new Val materials that are joining us. I should also note that already now we're two-thirds of the automation orders are actually coming from outside pulp and paper industry. That's important to note. We now see that orders are basically flat. However, I think it's important to note that the pulp and paper industry orders in this segment is slightly down, but actually other industries are up and mitigating or countering that. So that shows that I think we have a strong value proposition and things to offer outside the pulp and paper industry, and I think that is super important. That's something we're going to build more on into the future. So then guidance, short-term market outlook. Probably not a big surprise to anyone that we are changing the short-term guidance or outlook in the service business to satisfactory down from good. Came out of or end of Q2 in June last year or this year. Was a lot of sort of good momentum and we felt strongly about that we were getting into sort of even more growth than actually happened. Now we've seen more that customers' decisions are taking a bit longer time. There is utilization rates of the equipment. Customers' equipment is lower, therefore the consumable spend is lower. Some of the packages and decision making is also taking longer time. A bit slower than expected market activity, but still growth. I think it's important to note that. So, yeah, just something to keep monitoring and keep driving that growth and taking share where possible. Flow control, automation system, as I said, problem pair a bit slower, but actually good development in other process industries is generally good, so therefore we're keeping that on good level. Problem energy, both satisfactory. We sort of view this that this is a view without these kind of mega Arauco orders because that becomes then just too much of an anomaly and swing factor, so satisfactory there. Board and paper, going down a bit, sort of activity, market activity is weak. Pipeline is somewhat there, but the discussion just takes longer time, and there is overcapacity in Europe, so that's also impacting the overall business there, and that's why we're also restructuring that business to take out some capacity in order to adjust that to our actual market situation, but also backlog in that. Tissue, no big changes there, both in terms of tissue and tissue converting. I think market activity is satisfactory, and we have good, healthy activity levels with our customers on discussing that. With that, I'll actually hand over to Katja on the financials, and then we'll see what it means more in details.

Thank you, Thomas, and hello, everybody, on my behalf as well. I will walk through the financials as traditionally, and starting from the key figures. Orders received increased 6% to 1 billion in the quarter, and as Thomas said earlier, so it was lower than what we expected. Order backlog was 3.5 billion and 14% lower, but good to remember that we have 70 million more in the backlog for Q4 than what we had a year ago. Net sales was flat at 1.3 billion and a comparable everyday margin increased to 12% and this was due to more stable business in the sales mix. Items affecting comparability were minus 17 million for the quarter and this was mainly related to process technologies as well as services segments. On the operating profit side, it decreased 14%, and this was due to items affecting comparability and higher amortizations. And I will come back to the rest of the figures in the following slides. Then some words about the segment starting from process technologies. There the order intake was 307 million for the quarter, and as Thomas said earlier, so it was lower than what we expected. Tissue converting orders were 28 million for the quarter, and some orders didn't materialize in paper as we expected in the third quarter, and therefore we are hopeful that the Q4 will be sequentially better quarter for orders in the process tech. Net sales decreased to 488 million and comparable epithelium margin increased from the second quarter to 4.4%, but overall the comparable epithelium is impacted by lower net sales. Then next, services, there the orders increased 18% to 412 million, and this was less than what we expected. As Thomas said earlier, tissue converting orders were 34 million, and currencies had 9 million negative impact on the quarter. And good to remember that the Q3 is typically seasonally lower quarter in services orders, and we did see some customers postponing the meal improvement projects. Then going into the fourth quarter, so tissue converting will support the orders by one month and then the comparison quarter was not so strong last year. On the net sales side, we were 5% higher at 453 million and comparable epiday was exactly flat at 79 million and organic net sales decrease had a negative impact on the margin in services segment. Then next automation, there the orders received increase to 322 million and that was supported by acquisition of analyzer products and integration and FX had a negative impact on the orders. Net sales increased 14% to 354 million and this was also supported by API and here also the FX was negative. Comparable epithet increased to 65 million and even though the API business was at break-even level here and the increase in the comparable epithet was driven by the changes in the sales mix and the margin decreased due to integration of API. Here's the summary of the segments and we've already covered most of the numbers except the other where the expenses have decreased. The comparable epithet in other was minus 10 million for the quarter and here today we were at 32 million which is in line with our expectations. Then regarding comparable cross profits for the last 12 months actually the margin increased to record level of 27.8% and in Q3 comparable cross profit margin increased clearly and this was mainly due to higher portion of stable business. Comparable SG&A costs increased in the third quarter, and this was mainly due to acquisitions. And when we look at the SG&A cost as a percentage of sales, they have increased this year, and it has been impacted by organic net sales decrease. And of course, we are constantly evaluating our cost base and take actions if needed. Then on the cash flow, we are very pleased that the operating cash flow has improved to 500 million for the last 12 months. And the increase there is mainly due to the change in the networking capital. And the networking capital was 3% of the last 12 months orders or 155 million. And acquisitions have added 100 million to networking capital if we compare it to Q3 last year. And as said many times, our networking capital profile has changed during the last year, so we have more stable business and we don't expect to go below zero in the short term here. Net debt remained at the previous quarter's level being around 1 billion, and it has increased in the recent years due to the merger and acquisitions. Gearing was 43% and net debt to EPDA ratio 1.59. And of course, these are higher levels than before, but good to remember that we have more stable business now in Valmet. And the interest rate was 4.4% and net financial expenses 49 million. Return on capital employed has decreased to 13% and capital employed has increased due to acquisitions, which then has led to lower ROC. And last 12 months adjusted earnings per share decreased to €1.98 compared with 2023 and this is mainly due to lower epithet and higher financial expenses. And now I will give the floor back to Pekka. Thank you.

Thank you, Tomas and Katri. Now we go to the Q&A session, then next. And just as a reminder for everybody, you can now pose your questions, ask them through the telephone conference lines, which we will open shortly, and then also through the digital platform. If we start with the questions that we have here on the platform, firstly about the profit warning. There was a profit warning guidance change in June and then another one in October. So if you could elaborate a little bit on the background of those.

Overall, of course, it's unfortunate that we had to sort of have a negative profit warning here in October. I mean, we came out of in June in Q2, saw quite positive development. particularly in the service business, and maybe we got a bit too optimistic about the future and then issued the positive profit warning, thinking that this kind of activity level in terms of that increase would continue into Q3 and Q4. Now we are a bit wiser on that, and we've seen that Q3, yes, we're growing, and it is positive, but it's not as positive as we actually thought it would be. Therefore, we've taken the guidance down. Regrettable, but that's how the market... We've just seen that customers are taking longer time for decision, maybe sweating the asset a little bit more, but also this that it's not running at the same capacity levels that we thought it would be, and therefore consumables is also impacted by that. Thanks, Tomas.

And maybe to add on that, that of course, when the Q3 orders were lower than what we expected, so we didn't get the book and bill. supporting the result-making, so that was kind of resulting from what you said earlier.

Yeah, good point. Yes, and the guidance, as a reminder, for the net sales has remained the same, so for the flat net sales, and then comparably with the guidance, what was changed. Then another one was also a recent topic, a little bit after the quarter ended, there was a press release or Stock Exchange release about the arbitration case with Metsä, so any thoughts on that?

Yeah, it's unfortunate that it comes to this point where Meta has pulled us into arbitration. I think three things maybe on that one. We have counterclaims on that. I think we've got our documentation well in order. It's also worthwhile noting that we are not the only one who's been pulled into arbitration during this. And then finally, I also want to sort of emphasize that the mill actually did start on time on the 20th of September last year, and the bail did come out. In that sense, I think we met the deadline and it did produce. We're going to dispute it and then we'll see what's going to happen, but it'll take time.

All right. All right. Thank you. And we will then now move to the conference call next. But please remember to be active also through the platform. We will take also those questions. And I would kindly wish that you limit your calls to one call, one phone call to the conference call per person, so if that's okay for everybody. But with that, operator, I hand over to you.

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 Sven Weyer from UBS. Please go ahead.

Yeah, good afternoon from my side. Thanks for taking my questions and nice to meet you, Thomas. The first one is on your initial findings on the things you might do differently than was done before. And I especially think about the service business. Obviously, you've previously been with a company with a big service franchise and business. Are there any learnings? Because I think you mentioned in your prepared remarks, it was supposed to be a stable business, but I think the last one and a half, two years have shown that maybe service is not so stable. So do you think there's anything you can do to make it more steadily growing, like striking agreements or anything you have in mind? That's the first one. Thank you.

Thanks, Sven. Sorry for the chat, but I think we need to work on the pronunciation, especially on your surname, but hopefully that... That's okay. Liar. If you think sort of initial findings, I think I've really been here, what is it, now 10 weeks. Really spent a lot of time having a lot of overseas travels and also, of course, also in Finland where we have 6,000 employees, but also been in China, in Asia, obviously in Latin America, closing the Arauco deal, been in U.S. Overall, great company, lots of knowledge, lots of passionate people, good technology foundation, which I think is really strong. And of course you can say parts of our market which relate to pulp and paper, there are some challenges in that market and some pockets are more challenging than others and some are actually pretty positive as well. So I think initially I would say that I think we have many opportunities to also, how can I put it, utilize the strong foundation that we have and actually getting more out of the business that we already have. And then, of course, we can still, and I'm still going to see you look at M&A and using that as a strategic tool to expand our business. But I think overall, I would say we have an opportunity to get more out of what we have. Maybe I should also comment, and maybe it's a good time pack, I don't know, but, you know, We are planning to have a CMD in June next year. The exact date is not quite known yet. We haven't settled on that, on either or not the location. But we will have a CMD in June, and that's where I think we're going to deep dive into how I actually see the company going forward, also the opportunities that are there. But I do think we have an opportunity to get more out of what we have and also maybe simplify the business and therefore being able to react and speed up how we are acting in the market as well. Then you had a second question. Was that related to the service, right?

Yes. Yeah, because obviously you're coming from Kona before, I guess.

You can say they're basically three parts to services, which is very much like if you've seen some of the other places that I've been. There's a performance part piece, basically these consumables as well. There's packages where you operate or you make smaller repairs. And then there's the human touch part where you actually have people on site doing things to optimize or maintain the equipment. And those are quite characteristic of other industries as well. And that's also why I don't necessarily see that. I've heard a lot about... I'm the odd one in terms of being CEO of Valmet because I'm the first non-engineer, most likely. We haven't gone back all the way 200 years. I'm probably the first non-industry person, and then I'm also probably the first non-Fin, but of course it gives a bit of different perspective, different eyes, seeing something other service businesses and how you can optimize those and have a stronger value proposition. get more to where you also sell an outcome to the customer rather than a piece or a spare part or something. So we will come back to that and I do think that we have a good foundation to work on.

Sounds fair. I have another maybe also more strategic question because I mean you talked about the Arauco project. It sounds to me that you're fully endorsing the pulp greenfield strategy to go after these big projects. Now, the track record in the past has been a bit mixed and now we have the METSA situation, which I'm still not 100% sure what has caused this. Is it a tech problem or what is it? But I guess it exemplifies that with these big projects, things tend to go wrong. And I was just wondering, would you still be willing Because I think Valmet has the capacity to do it, to take another big pulp contract on in the next 12 months, because obviously there are still a few pending.

Yeah. Yeah, I think... I mean, it's sort of, you're pointing out some valid points and of course also, you know, being in Chile, what was it, only a few weeks into the role, of course there was a lot of questions that need to be answered and asked to the team and sort of, Are we really ready on the different things in delivering such a large project? We do have a very good track record, I would say, in South America. It is actually a really good track record, so that is nice to see. We've got a strong team down there, met a lot of the people down there, and particularly important to get who's going to project manage the project. That's one of the key things in terms of actually having success on these large projects. Also, proven technology, so not novel things we need to invent as we go along. We've got a long time that we've actually done the pre-engineering and design of the solution, so that also comforts me. Got very good partners locally in Brazil who's going to help us do some of that work that we don't do ourselves. and they are basically also signed up, so there's also backing from that perspective as well. Demut acquisition also helped. That actually became a sort of important last piece of the puzzle of being able to deliver that comparative overall solution for Aramco so that we can deliver the best pulp mill in the world to them. So overall, I'm actually quite confident that we are there and we're ready to do it and we have time. You also need to be careful that there's not a compressed time schedule, and I think we've sort of designed the right time schedule together with the customer that will enable this to be a successful project from an execution and outcome perspective as well. That's it. Of course, if you want to be in this pop business in Latin America, you do need to be good at these things as well. If you want to play, make sure you get good at it. That's what we try to do. We're setting up ourselves for success and making sure that we mitigate the things we know at current stage.

Is that also a yes to taking on another project in the next 12 months?

Yeah, that's a good question. Thanks for the follow-up. Sorry, it was not intentional. I left it out. Yes, I think overall we do have the capacity to do more. Of course, it's good to get the next couple of months sort of under our belt and get all the planning done and all the structuring done. Once we get there, then we will be ready to discuss the next project with any potential customer. Very clear. Thank you, Thomas. Thanks, Sven.

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

Hi guys and thank you for taking my question and it's actually on board and paper and I mean you flagged this on the guidance downgrade and also kind of down the market outlook so I was just thinking about now that we are maybe entering 2025 with a bit of a slower momentum and a weaker backlog, how should we think about kind of your cost levels on the organization, the workload situation, and then maybe also if you could comment a little bit on the potential order pipeline. I know that the timing of client decision is difficult to estimate, but kind of the pipeline that could help you in 25 regarding workload and revenues. Thank you.

Yeah, thanks, Antti. I think it's important, just on the board and paper, I think it's important to say that actually there's three pieces to it. There's board, paper, and tissue. We've had tissue converting as well. Looking at board and paper, yes, that is a weak, challenging market, and that's also what we see. Tissue and tissue converting, on the other hand, is actually going quite okay, and we've got some good activities there, got also a decent backlog and pipeline on that. So that's sort of more on the positive side. Obviously, we wouldn't have taken 112 people out of the business They've been worked for them. That is, of course, how we are adjusting the capacity to the level of order book that we see and the sales pipeline short-term. I do think that we have some positive dialogues going on that could prove to also come out in Q4 and actually help us into the beginning of next year. That's actually on the good side. Then, of course, we are evaluating capacity cost versus what kind of demand is there that we need to produce. We also need to be a bit cognizant, a bit careful on that we don't cut ourselves too low so that we can't scale up again from a capability perspective. So that's just a very fine balance that we are operating under. But, you know, then you should maybe also just sort of that There is, of course, a little bit difference where in the world you're looking. Yes, Europe is probably the area that is most hit in this part. North America, there is actually some activity there. That's actually quite okay. Then Asia is a bit down as well compared to previous, but I think it depends a little bit on where we are in the world on this one. But, of course, we're constantly monitoring and looking at what's the forward-looking order backlog and pipeline we need to produce versus what's the sales pipeline going to bring us and what we expect.

All right, fair enough.

Maybe one last comment. The customers are, of course, also cognizant about this so that we do have actually quite a good dialogue, I would say, with our customers locally, also on mill level and so on, so that they are making sure that they can get the things when they want them, even if they're sort of postponing it a bit. the actual decision and the payment, which then comes to, once the payment is, then you release the orders for shipment. And of course, the booking bill.

All right, thank you. Then the second one was on the PTAs, EBITDA margin in general. And I think, if I understand correctly, you mentioned that there was still a bit of an impact on prior project settlements. So could you maybe talk about kind of the legacy project backlog? I mean, there was some on Q2, there was still a bit on Q3. So is this something that we should still expect going into Q4 and next year?

Yeah.

I'll take the question.

So when looking at the overall process margin, process technologies margin, so we were at 3.9%. And as you know, the second quarter was very low. And there we had those settlements, which you mentioned. The historical project that we have been mentioning earlier, so they are kind of coming into the end. So this is impacted more by the lower net sales. So that's the situation. And when moving forward, of course, then we try to improve the profitability with the existing backlog. But going towards next year, I'm not expecting radical improvements on the process technologies margin. Because the market situation, as Thomas said, is weak or satisfactory. So that's not supporting us with the volume.

All right, that's very helpful.

I guess that's also about, you know, of course, volume also gives leverage to the whole capacity cost, right? And that's where I think that impacts a bit with the softer market, the smaller or lower production volumes.

All right. And then the last question for me was on the automation side, where you kind of mentioned that large portion is coming outside of pulp and paper and, I guess, predominantly on the flow control side. But could you talk a little bit about the progress that you have had, let's say on the automation systems and maybe also on the flow side on expanding into these new verticals or growing within kind of existing strong non pulp and paper industries and kind of opportunities where you see the most potential for the next couple of years to maybe diversify further out of the core pulp and paper business.

Yeah, I think it's sort of, first of all, I think really good to see that two-thirds to 70% of our orders received in these both, actually, business lines or the combined business line, both automation systems and flow control, are coming from outside pop and paper industry. I think that's really good. It's also good to see that the true service part of it is also continuing to grow, so that sort of is a good foundation for recurring revenue. Clearly, also, this success outside Popen Paper also fuels the team's sort of belief and being that we can actually win outside. We actually do have a lot to offer. We do actually have a strong value proposition. We actually have a lot of strength in this distributed control system that can be used elsewhere. So having the team now seeing that and believing strongly in how they can expand outside is a good starting point for expanding sort of even further into other process industries. And I think that one of the maybe reflections of mine when it's been traveling around, we're actually really good at handling large, messy stuff in industrial processes. We don't talk so much about that. But that's actually one of our strengths, and I think we can do more of that in other industries as well. What they sort of more specifically would be, let's come back to that a bit later, Antti.

All right, thank you so much. That's all from me. Yeah, thanks.

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

Hello, this is Johan at Kepler Chevreux. Just two minor questions remaining for me. On non-services, could you just sort of confirm there were no market share losses in consumables or spare parts or anything like that impacting you suddenly? And then secondly, to Katri, you mentioned that net working capital is unlikely to become negative anytime soon. And I was wondering about the prepayment model for this mega order you just realized this week. You still have the traditional prepayment model on that one. You haven't sort of backtracked to any degree on the prepayments there. Thank you.

Thanks for calling in. Overall, I think just to reiterate, the service business and orders received actually did grow, and I don't have reason to believe that on top of that, so that we did grow, and I don't have any belief that we actually lost any market share in this quarter either. So I just think that...

the market in itself was did not have that tailwind that we expected early on maybe thomas's comment is that the market activity in north america and our performance in north america and south america were pretty good so yes where the financial health and the situation of the customers from that standpoint where and continue to be continue to be rather good so uh yeah so also at that we had um had a lower activity in the market in Europe and China and Asia-Pacific. And due to this, the performance there is not so good.

So clearly, it's more about a correlation between our customers' utilization rate of their equipment and also how much money they're making. We see better profitability in a lot of the Americas, or at least South American companies. And then we are, yeah, you can answer that.

I can take the Araujo question. So thank you, Johan, for the question. So you are right. So typically we have these down payments in the big projects between 10 to 30% and case by case then agreed with the customer. And also in this case, we have the down payment. It's going to show in the fourth quarter cash flow. But unfortunately, I cannot give you any exact numbers on that.

okay thank you very much thank you and of course we try to in all projects to stay cash positive throughout the duration of the project right the next question comes from ponu layton markey from danske bank please go ahead

Hi, I had two questions. Firstly, on the outlook for services. So just to understand, what do you mean with the satisfactory outlook? So do you expect orders to grow in Q4 and in the next six months or how should we interpret this?

Yeah, well, if I start with that one, so the services market, like I said, there's some division between the areas, so North America, South America actually doing rather fine, but then the big area of Europe not so good. So as you have seen also from the news so far, some of our major customers that the capacity utilization rates are are not as high. But then, like Katri mentioned earlier in the presentation, we are going into Q4, on the other hand, with confidence that the comparison quarter from last year wasn't that strong. So that, of course, gives us kind of a positive momentum when you compare this Q4 to the quarter from last year. But overall, still the market activity is lower than we saw during the summer and wanted to kind of highlight that the services momentum is now worse than it was three months ago. But expecting growth, I guess. Yes, but for the Q4 coming to the orders, if you compare Q4 to Q4 last year, there's a rather easy comparison quarter. So the expectation for growth is there.

So better year on year, but sequentially softer.

You could say that way. So like Thomas explained earlier, that the market activity during summer was really good. We came with the profit warning during that time with quite some optimism on the services momentum, but we are seeing now that that momentum is not as high as we expected.

Okay, thank you. Then secondly on the margin in automation, that was pretty good even though you integrated the acquisition that I think you mentioned was at break even. So what brought the underlying improvement in the margins?

I can take and you can then add if you want so as I said during my slides so it was related to the sales mix so there are some variations there can be variations between the quarters and and this was now the end result for this and I said the API was then diluting the margin so it's not necessarily the run rate at this level but it was a good quarter mix wise We were happy with the quarter, so of course, API was there impacting, but it was a good sales mix for this quarter.

Okay, thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Tomi Reilo from DNB. Please go ahead.

Hi, Tomas, Katri and Pekka. It's Tomi from DNB. Still a follow-up to what you mentioned, the market challenges in the P&T and why not also a little bit weaker or satisfactory service market. Can you describe a little bit the pricing environment? Is there still price increases? In the numbers, in orders, what we see, or are customers starting to more aggressively ask for price decreases? And what's your own agenda? Are you trying to raise the prices?

I think that the pricing environment is similar to what it has been. So of course it's tough but but we are trying to increase the prices as the inflation is especially impacting the salaries for the project business. So it's of course case by case pricing for individual projects and there we take the forecast did inflation also into the pricing so in a way normal pricing environment so we don't get any tailwind from the situation but but similar to what it has been earlier months all right and also uh sorry if i missed this but uh but as you have uh

the 50-50 split in the market outlook comment. How do you describe that situation in the services? Is it due to market weakness or is it more capacity issue or where does the downgrade come from?

So, all in all, the market activity... I can start and then you can continue.

I'm not sure I heard it completely.

Yeah. So, overall, the market activity, as has been discussed today, is slower than what we saw at the end of second quarter. And we have seen some customers postponing, for example, these meal improvement projects, and I think you also mentioned that earlier. And the consumer post part of the business is very much linked to the operating rates of our customers. And they have increased, but they are not on the level that they were in 2022. And also some customers have publicized some market-related downtime, and of course then that is impacting us as well. But maybe in a way to, on a positive note, that this Araukko case will of course bring us a good package order for services as well. So that's kind of a positive view towards the end of the year. Anything you want to add, guys?

Yeah, for the services, of course, if you look at the net sales development, it's rather positive. So if you would be only looking at the workload, it's probably better than satisfactory at the moment. But I wanted to clearly highlight, like I said, the market situation here.

Maybe it's a bit more a function of that we were too optimistic in June, and now we're coming a bit back to Earth, so to say. There's still growth there, there's still activities. Yes, the packages are not going out the door as fast and as quickly as we would like, but it's still quite... an overall okay market that we are operating in at current. And, of course, it does that. Why is that? Why are the packages not going to optimize the modernization of the rebuilds, the upgrading, not going as fast? But it is a function of that customers mills are not operating to the same say utilization rate as you would think and also that they are not making as much money as they would like and therefore they're trying to sort of say okay can we time it a little bit right maybe I can throw in the third one if it's possible your

they improved year on year after it was down after the first half. But you need to see even stronger improvement in the fourth quarter year on year to meet the guidance. I'm just wondering if you can give any color. Is this expected to come purely from services or how do you expect the kind of the profit improvement to pick up in automation as well?

If I start, so if I answer first kind of with the net sales, so there we are about 200 million behind and you know that the Q4 is usually a very strong quarter for us both in terms of net sales as well as comparable epithet. Regarding the segments, so we actually expect the stable businesses grow on the fourth quarter in terms of net sales. On the process technology side, it will not be as high as it was last year, but hopefully better than what we had now in the third quarter. And then also in terms of the volume, so tissue converting API will support in organically, and then we have the 70 million more in the backlog, what was mentioned earlier as well. And then on the EBITDA side, so maybe the comment there is that the sales mix there is more on the stable side.

Perfect. Thank you very much.

All right, thank you. I guess those were all the questions from the conference call line, but I have quite a few here in the iPad. Hopefully the presenters still have a little bit more energy left in the tank. So let's take at least some from here. So firstly, about you, Tomas, coming in as the new CEO, replacing the old CEO, how the handover has been with the previous CEO and where do you see Valmetkem improve in the future?

I guess it's where we can improve is a big question for everybody around, including the organization as well, of course. Started 12th of August, really had a good introduction so far, traveling around to the whole world, and most parts of it at least. As I started in the beginning saying, China, Singapore, Indonesia, several places in Europe, Latin America, US. It's been good to get all the pieces of the puzzle and put that together into this Valmet picture. There's of course a current picture and then there's the thing about what could the future picture be like. And I think we've got a lot of... First of all, I think we've got a very solid, strong foundation. Lots of good people, good technology, got good knowledge. And then it's about how can we actually get more out of that and move into the future. And there, as we said, we'll have the CMD in June. They will definitely deep dive into it and share a lot of the thoughts so far. But clearly, you know, questions, you know, how can we, with strong service, stable business, how can we expand that more? How can we get more out of it? How can we maybe simplify a bit of our, how we operate so that we become faster and more agile? It's some of the questions that we will need to sort of answer for ourselves going forward, future, right? Good, thank you. Also, good handover from the board, being quite keen on giving their perspective and view on how they see the world, or Valmet, and where they also see some of the future opportunities.

Thank you, Tomas. Then a question on the share buybacks. What's your view on the share buybacks in the future?

They are not on our agenda at the moment. We have closed some acquisitions lately and we have full focus on closing those. So capital allocation, maybe that is not in our minds, firstly, at the moment. I'm sure you agree.

But it's an interesting question, and it's, you know, different markets also have, you can see that there are different sort of views to it, right? Some markets might actually have more share buybacks than dividend, and others have more dividend, and depending also on the ownership structure and so on, I think, yeah. I think overall, capital allocation is an important topic. Also, how we see the investment and so on. Definitely something we'll come back to, but not necessarily in terms of Capital Buy Mac or whatever. But we, as an organization, is something that we are looking at. Also, where do we allocate in terms of, if you think about acquisition strategies, where would we actually want to spend acquisition funds?

Well, that leads us to the next question, which is about M&A and ROCE. So the person here is asking about your view on ROCE and M&A. We've, as Valmet, been active on the M&A front with quite a good success, but it's fair to say that the ROCE has been decreasing somewhat. So what's your view on this?

Yeah, I mean, of course, important matrix. As a company, you have to remember that at the end of the day, it is about what do you invest, what cash do you actually generate, and the accounting numbers are, of course, also something that you manage the business with, but the accounting numbers should lead to return on capital employed, and that's what we're here for in terms for the shareholders, right? That's what matters at the end of the day. Clearly, of course, if you're a shareholder, you looked at that the row C was 23% in 21, and then we've done some acquisitions, and now it's 13%, something like that. That's, of course, a question to raise, and that also comes into when, I mean, if you're trading at eight times, but you buy something at 14 times, that will impact it, right? But yeah, important topic. I think also important metric in terms of our decision making.

Thank you. And then a question about API, so the analyzer products and integration business that was acquired recently. When do you expect it to return back to its profitability level of about 10% EBITDA margin before the acquisition? As a background, it was You said in the report that API has now been having approximately 5 million euros impact to the net profit as a negative side year to date. So when do we expect it to return to normal profitability level?

I think that's maybe a bit too detailed question to answer, but what I can say is that it was extremely challenging carve out and the organization has been doing fantastic job. So it will take some time and now the focus is on getting everything on boarded and going on with the integration. So let's see.

Thank you Katri. Then another one still on the SG&A costs which have been going up as a percentage of net sales and then of course due to acquisitions also an absolute turn. What could be a reasonable target for the future in terms of SG&A as a percentage of group sales?

Yeah, maybe it is very difficult to say percentage target, but you are right, the SG&E has been increasing, and the increase is actually related to acquisitions. Of course, then the change in the volume, as I said during my presentation, that there has been decline in the organic net sales, and of course, then that is impacting the percentage. But of course, constantly we are evaluating our cost base and take then actions if needed. All right.

But I think it's also important to say that, you know, different types of businesses require different types of structures, right? So it's hard to say sort of overall what's the percentage target. You need to sort of look more granular to that. And that's, of course, our job as a leadership team of the business that, you know, you look at each individual business lines or business unit, what should the structure be like and the structure cost be like?

Thank you. Those were all the questions from the conference call lines. This is how I am indicated here. So those have been tackled and also I think everything here from the online platform. So the next webcast for investors will then be on the february 13 in terms of the q4 results but now i'd like to thank the audience and thank thomas and katri for the for the presentations and the discussions so uh thank you and uh see you on the february 13 the latest then thank you thank you