Earnings Transcript for VALMT.HE - Q4 Fiscal Year 2023

Pekka Rouhiainen: Good afternoon, ladies and gentlemen, and welcome to Valmet's Fourth Quarter 2023 as well as the full financial year 2023 result publication webcast. My name is Pekka Rouhiainen. I'm head of Investor Relations here at Valmet. And the speakers today will be Valmet's President and CEO, Pasi Laine; and CFO, Katri Hokkanen. [Operator Instructions] But without further ado, Pasi, please go ahead.

Pasi Laine: Thank you Pekka. Welcome. So, 10 years have gone, now it's time to look how the numbers look for the tenth year of Valmet. So we are saying that the orders received remained at previous year's level and amounted to close to €5 billion and comparable EBITA increased to €619 million. So first, I'll go through 2023 in brief, then some words about segments and business lines, then Katri will go through the financial development and I will go through dividend proposal, guidance and short-term market outlook. First, '23 in brief. Like I said, orders were close to €5 billion. Net sales increased to €5.5 billion. And backlog in the end of the period was about €4 billion. Our comparable EBITA increased to €619 million and margins were 11.2%. So it's a record net sales in Valmet's history, it's record EBITA in euros and it's also record EBITA margin in Valmet's history. So a good year. And now after we have made the mergers and acquisitions, gearing was 40%, so a little bit higher than it used to be before the acquisitions and mergers. But all in all, good numbers. Then a little bit more about them. So orders received were divided in Services, Automation Process Technologies show that about €1.8 billion came from Process Technologies, then Services and Automation altogether were about €3.1 billion, Services being €1.76 billion and Automation €1.34 billion. Net sales by segment was such that net sales from Process Technologies was €2.4 billion and net sales from Services €1.7 billion and Automation €1.3 billion. And EBITA was such that our Process Technologies contributed €10 million -- €110 million, Services €312 million and Automation €248 million. So nice distribution of the business, orders received, revenues and comparable EBITA. In the end of the period, we employed about 19,000 people. Then here, we have the graphs we have been proudly showing and continue to show proudly. So orders received was a little bit under €5 billion. There is a decline compared to last year. In net sales, we grew to €5.5 billion. It was, of course, nice growth. So we started from €2.5 billion and now we are €5.5 billion company. So we have over doubled our net sales over the years. Comparable EBITA of €619 million. We started from €50 million and since then, every year, we have been able to improve our comparable EBITA euros. And comparable EBITA margin, we started from 2% we ended up now in 11.2%. So last year was an exception, but all the other years we have been able to improve our EBITA margin as well. So all in all, I think all the Valmeteers who have been working here for 10 years and last year can be proud of the achievements, and I would like to thank all the Valmeteers now for the excellent work they have been doing over the years to develop the company further. You can be proud of your achievement -- achievements. Orders received, like I said, a little bit under €4 billion, so €5 billion -- €4.955 billion. Then here, you see also the geographical distribution. So Asia Pacific was almost €700 million, China over about €640 million, Europe declined as well to €1.84 billion -- €1.85 billion, South America was growing to €500 million and North America stayed at the last year's level being €1.27 billion. So we have seen the decline in capital markets. We are [indiscernible] and that's why some of the areas have had small order intake than a year ago. Then, one thing we are also proud of is the development of our stable business. So we started with a company where we had Services order intake of a little bit over €1 billion and now our Services order intake was €1.760 billion. Then we acquired systems, have been growing systems, and then we merged with Neles, so we've been growing Automation business from nothing to €1.340 billion. And now stable business, total orders received is €3.1 billion. This is, of course, the big change that has taken place in Valmet. And we are very, very proud of the development. We have been calculating that organic growth over the years is roughly about 7%, on the businesses we have had and then businesses we have been acquiring. So good development. Backlog is almost €4 billion and I would say that it starts to be on a more normal level. So this end of last year is €4.4 billion was too high. So delivery times were getting too high in many of the businesses and now the level roughly €4 billion is a good level and we remember all good years, '19 and '20 when we've had €3.2 billion level and then we were happy with the backlog as well. So we have to understand that we are now coming out of the exceptional years, and that means that the backlog will be getting smaller as well and delivery time shorter. Now we are saying that about 85% of backlog is expected to realize net sales during '24. Then some words about the aquisitions in '23. So we started the year by making NovaTech Automation's Process Solutions acquisition in U.S., about €18 billion -- €18 million business, and we completed that on January 3. And there, the idea was to get so-called batch control system in our offering, and that's what we achieved and the progress with NovaTech Automation has been good. Then big thing was of course the aquisition of Körber business area tissue, which then became Tissue Converting business unit in Valmet. There we are saying that '23 net sales in the total business was about €300 million and out of which -- out of which net sales we booked about €76 million in our books. It employs or we employ now about 1,170 specialists in -- mainly in Italy, Brazil, U.S., China and Japan, and the acquisition was completed on November 2. Integration has started well, and the atmosphere inside Valmet and inside Tissue Converting is very good. So that has started in a very positive manner. And then we have a process of finalizing the acquisition of Siemens Process Gas Chromatography business, and we are expecting now that the acquisition will be completed on April 1 at the earliest. Then we have also made a contract to acquire Demuth, which is -- which would be strengthening our Brazilian operation for wood handling and there the annual revenue is about €20 million to €30 million. So a lot of activity in acquisitions in '23, and of course, the work continues in '24 to make this acquisition as successful as our early acquisitions have been. Good work by the organization again. Then some words about the segments and business lines. So first, Services. Services order intake stayed at the last year's level. So last year, our '22 order intake was €1.756 billion, and now it was €4 million more, so €1.760 billion. So roughly €20 million of that is coming from Tissue Converting. So without Tissue Converting we would have had a decline of 1%, with Tissue Converting order intake stated at last year's level. And I think it's a good achievement. You all know that our customers are facing quite a lot of challenges with their production volumes. And I think it's a very good achievement that we were able to keep our order intake at last year's level which year was very good, like you here see when you compare between '21 and '22. So there was a lot of growth in '22, and then we were able to keep that level last year. So that was good. Net sales was increasing as well. And then I'm very, very happy that profitability grew to 17.5%. And euro-wise, it was €312 million. So it's good profitability development in euros and in EBITA margin as well. So well done by the areas and our Services business line. Services like -- like, we have had accustomed to do. So we give a little bit more data after all the full years and hear some data about Services as well. So here, you see what's the distribution of different business units. So orders received by business units. You see the orders received by area and you see also the orders received by customer segments. I don't have here the comparison numbers, but you can analyze the numbers more in detail and compare them with last year and then you can have maybe some questions. But this is to help you to understand how our Services business have been developing last year, and you can compare that with last -- with the previous years as well. Then in Automation, like I said, order intake has ended up to €1.340 billion and net sales was a little bit lower. Comparable EBITA was €248 million and being 18.6%. So we are happy with the performance in all the respects. Orders received was developing well. Net sales was developing well and EBITA euros were developing well as well as EBITA margin. So good execution of business management by Flow Controls and Automation Systems. In Flow Controls, order intake ended up in €789 million growth from last year by €17 million. Net sales ended up in €777 million, so growth by €60 million compared to last year. We are very happy with the [indiscernible] of Flow Controls and then we can now proudly say that we have completed annual and reached the targeted annual synergies of €25 million on a run rate basis. So Flow Controls organization has been doing good work there. And of course, legacy Valmet has been doing good work. So we have achieved the cost synergies and we have achieved sales synergies 1 year before what we promised when we merged with Neles. So good development here as well. Then here, we have the same distribution. So you can see that about 64% of the order intake is coming from MRO & Services and projects are contributing to about 20% order intake and then valve controls & actuators about 16% of the business. Industry-wise, 28% is coming from Pulp and Paper, the biggest end market is Refining and Chemicals. Renewable energy and Gases is about 10%. Metals and Mining has been developed well, being 10% and other industries 9%. So nice distribution of customer segments here as well. Then Automation Systems, nice growth. Order intake ended up in €551 million. So nice growth compared to last year. Net sales has been growing nicely as well, compared to last year ended up to the same number, €551 million. And our Automation business has been -- systems business has been developing well all over the years like you see here. We started from €337 million and now with one small acquisition, NovaTech, we are now at €551 million. And then the journey continues here with the acquisition of Siemens Gas Chromatography. Business customer-wise, about 70% is coming from Pulp and Paper, 30% from Energy & Process and then distribution by product is such that about 57% is coming from DCS or distributed control systems and quality management system is about 23% and analysis and measurement about 20%. And now, of course, these 2 graphs will change quite much when we complete the acquisition of Siemens Gas Chromatography. So a lot of more business for energy process and then one product group here more in analysis side. Then Process Technologies. So order intake was a little bit over €1.8 billion. So down quite much compared to last year, €500 million. And here, we have to look a little bit longer trends. So when we go to 2018, '19, '20, we are almost at the level where we were there with the order intake. So it's, of course, lower order intake, but it's nothing dramatic in order intake-wise. And I'll come back to years '21 and '22 in business line graphs. Net sales was €2.4 billion and we generated EBITA of €110 million, which was 4.5%. We still have some challenges in selected Pulp projects and then we had some issues and cost overruns -- inflation and cost overruns in some Tissue projects. The positive side here is that now we can say that the energy project challenges are over. So we started to say that we had challenges then when the war in Ukraine started and now we can say that our energy projects are performing well and portfolios also were healthy. So one issue has been solved. Then Pulp and Energy business line order intake was at €854 million, down compared to last year, but it's at the level where it has been several years. And like we have been saying, we have been preparing ourselves for this order intake levels. So our capacity cost in Pulp and Energy is low compared to order intake and net sales. Net sales last year was €1.067 billion. In Pulp and Energy, we could actually change the name now to Energy and Pulp because 2 years in a row, actually Energy has been bigger. So 57% of the order intake is coming from Energy and 43% was coming from Pulp. So this biomass boiler market is an important market for us and has been performing well. And like I just said in an earlier slide, now the execution of the project is also good and has overcome the challenges we got with the inflation coming from the sudden events in the marketplace. So big part of the market is Single island and products. So Complete mills was 22% of the market. So quite often, we talk quite a lot about Complete mills, but like we have been saying this Single island product, so a little bit smaller projects is very essential in big part of the business. Paper business line. Here, you see very well what has happened. And so order intake was somewhere at €700 million level and then it jumped to €1 billion and then we were very proud of €1 billion level. And then in 2021, we were surprised that the order intake went to €1.6 billion and '22, it continued to be at a good level by almost at level of €1.3 billion. Now it's €1 billion and what we still might come little bit later to the outlook, but what I want to point out here that 2 years -- 3 years back we were very proud of €1 billion level and we were then saying that the level is good. We have been careful with capacity cost here as well and then order intake last year doesn't include very much of Tissue Converting, so may be I remember correctly that it was €40 million, but Katri can correct me if I said wrong number. So almost of all of that €1 billion came from the existing businesses. Net sales was €1.3 billion and it's of course the consequence of good years in '21 and '22. Business-wise, interesting is that half of the business came from Board. Last year, it was a lot of higher percentage and we see good activity in Paper machine, so [ 80% ] for printing paper machines. So they are still markets where printing paper machines are needed. We have good offering there and we have good engineering team and the same team is doing the Board machines as well and same manufacturing units are doing the same Board machines, but the Paper is also a good market for us. Tissue, I will come back to outlook later on but Tissue order intake grew last year and 33% of the order intake came from Tissue and that includes also some part of Tissue Converting. But in a way this situation is now healthy, so we are not depending only on packaging material as much as earlier. Then market was dominated by new installations. Rebuilt market was not that strong and see our product was quite small [indiscernible] traditional. So big product business came from new markets -- new installments. Good and then still one extra slide. So again comparing to 10 years back. So our orders received was then about €2.2 billion, €180 -- little bit less than €200 million were coming from Pulp -- customers outside Pulp and Paper, and now the order intake outside Pulp and Paper was €1.3 billion. Our order intake from Pulp and Paper was less than €2 billion and now it was over €3.6 billion. So the message here is that we have believed in Pulp and Paper, and we have been growing organically and supporting that with acquisitions as well and we believe that it has been good market and continues to be good market. At the same time we have been expanding the customer -- customer industries with acquisitions. Our first step was, of course, Automation business and then big step was Flow Controls and then organic growth of NHC as well. So now about €1.3 billion is of the order intake is coming from businesses outside of Pulp and Paper, which then of course increased to diversity of our business portfolio. The boilers which are located in paper mills and pulp mills are calculated here in NHC, but that -- the amount of that varies year to year, but slowly Valmet is also becoming company -- integrated company with more diversified customer base. Good, now I'll let Katri to talk.

Katri Hokkanen: Hello, everybody on my behalf as well. Good to be here today and I also want to thank all the Valmeteers globally for last year and send my special thank you to the Finance team for closing the year 2023. And I will walk you through the financial development and I will start from the quarter. Orders received decreased close to €1.2 billion, net sales remained at the previous year's level and amounted close to €1.5 billion, order backlog was close to €4 billion and comparable EBITA decreased to €183 million and the margin was 12.2%. Gearing was 40% at the end of last year. I will highlight only the full-year numbers here since I had the quarterly numbers there, but as Pasi already said, order intake was close to €5 billion, net sales record high €5.5 billion, comparable EBITA record €619 million and percentage was 11.2% which was also a record. So we are very proud of the result. I will come back to the other numbers later in my presentation. We have made some adjustments to the presentation, so we have now segments in the separate slides. I hope that you will find this useful. And I will start from Services. And Q4, actually the market was more active than in Q3 and orders received end up to €404 million, and there was €21 million of Tissue Converting inside of this number, however, the changes in the FX rates decreased the order by approximately €14 million. Net sales was €508 million, so that was flat compared to the comparison quarter and comparable EBITA was €91 million or 17.9%. When we look at the full year, order intake was close to €1.8 billion, so that was at the same level than the comparison year. Net sales was also close to €1.8 billion and that was 11% higher than the comparison year. Comparable EBITA was first time ever over €300 million at €312 million and the margin was 17.5%, so very good development in Services segment. Moving to the Automation next, and starting from the quarter, order intake was €319 million, net sales was €375 million and comparable EBITA €79 million. So all of these numbers were on the same level than in the comparison quarter. And margin was 21.1% for the quarter. If we look at the full year, so actually orders received and net sales both reached this €1.3 billion level and here it's good to remember that Flow Control was in our numbers since the second quarter in 2022. Comparable EBITA was €248 million and the margin was 18.6%, so good development here as well. Next, Process Technologies, order intake for the quarter was €432 million and as Pasi said Tissue Converting impacted by €40 million. Net sales was €615 million and the comparable EBITA was €25 million for the quarter or 4.1%. And as already mentioned EBITA decreased as the margins in some Pulp projects were impacted by cost inflation and also due to cost overruns in some Tissue projects. Then for the full year in Process Technologies, order intake was close to €1.9 billion and that was 21% lower than the comparison year. Net sales was close to €2.4 billion and comparable EBITA €110 million or 4 5%. And of course, it was a disappointment for us that the profitability decreased. We also have the traditional segment key figures slide on the presentation. I will not repeat the numbers anymore, but I want to highlight other from here. It was minus €13 million for the quarter and for the full year, it was minus €50 million. Then a few words also about comparable gross profit and SG&A and comparable gross profit was 26.4% in Q4 and stable business represented 59% of the volume and when you look at the chart on the left-hand side, the gross profit has been developing over the years and last year, we were at 25.8% or €1.4 billion. On the SG&A side, comparable SG&A was €901 million for the full year, and that represents 16.3% of the volume. And as you can see from the chart, we have been managing SG&A costs well over the years. Cash flow from operating activities was €352 million, and capital expenditure amounted to €125 million. Net working capital was €191 million, and that was 4% of the orders. And the acquisition of Tissue Converting increased net working capital by approximately €92 million in the fourth quarter. And if we compare the net working capital through the year 2021, it has increased mainly in capital business and also Flow Control and Tissue Converting have been impacting it. And today, our mix contains much more stable business, which typically ties up more net working capital. Net debt was €1 billion at the end of last year, and gearing was 40%. And and the increase here is related to acquisition of Tissue Converting business. Our net debt-to-EBITA ratio increased compared to -- with 2022 and was 1.46%. The average interest rate of our total debt was 4.5%, and net financial expenses amounted to €34 million. Capital employed was close to €4.1 billion and integration of Flow Control as well as the Tissue Converting have increased this number. And comparable return on capital employed was 15%. Then adjusted earnings per share decreased to €2.28, and this was due to higher net financial expenses as well as lower items affecting comparability. This was my part of the presentation. I will give the floor back to Pasi. Thank you.

Pasi Laine : Thank you, Katri. So now it's time for dividend proposal, guidance and short-term market outlook. So just -- I'll start with the dividend proposal policy. So the policy is saying that we should pay at least 50% of the net profit and our Board of Directors proposal to the Annual General Meeting is that we would be paying or the company would be paying €1.35 dividend per share, which then would represent about 70% payout ratio. The dividend shall be paid in 2 installments. And here, you see the graph. So since 2013, the order from year 2013, we paid €0.15 and then every year, we have been able to increase our dividend payout. And now if the proposal is approved by the AGM, then the dividend from last year's €1.35. So we are, of course, very proud of being able to propose again increasing dividend to be paid to our shareholders. Then guidance and short-term market outlook. So if I start from the short-term market outlook. So in Services, market is quite much the same what we said in -- after quarter 3. So we see more sales activity now compared to third quarter. Yes. So after what we see more sales activity than in the end of the year, end of the summertime, markets are more stable in a way that all the markets are having activity. And -- but it's not at the level where it used to be. And that's why we are saying that, okay, this I have to take a little bit other way because the market is at the level, order intake was at the level of '22 and now we have some units where we have a little bit challenges with capacity utilization. So we have overcapacity in some of the units -- so we are there in the border line, whether it's good or satisfactory but this is -- the market itself has shown more activity in fourth quarter than we saw in the third quarter, like we said after third quarter. Flow Controls market continues to be active. So it's a good market. We are a niche player and quite much of the order intake development depends on our own activity. So we have still a big market to be served and order intake was at a good level for the whole year and so it continues to be. In Systems business, you saw that order intake has been growing and the market continues to be the same, and we keep the outlook at good. In Pulp, like you saw, order intake in Pulp was about 45% of the Pulp and Energy. So we have the same situation as earlier that customers are investing to Single islands modifications, but we are not seeing big projects moving ahead quickly in the beginning of this year. In Energy market was last year good and it continues to be good. In Paper and Board, the market continues to be satisfactory. And like I said, more paper activity than in a couple of previous year, but then board activity continues at the satisfactory level as well. This year, we still keep at the satisfactory level even if the order intake was growing compared to the previous year. Then we are saying the guidance for '24 that Valmet estimates that net sales in '24 will remain at the previous year's level in comparison with '23, and comparable EBITA in '24 will remain at the previous year's level or increase in comparison with '23. So first, if we talk about the net sales. So of course, our order intake was lower than net sales last year, but then we have to remember that we made sizable acquisition of Tissue Converting. And of course, now we will have the full year's net sales recognition from Tissue Converting for '24. And last year, we had only 2 months. So that will impact the net sales. And then in EBITA, we are saying that it's either on previous year's level, so flat or increasing. Our track record is that we have been improving our EBITA year after year. And that's, of course, the target setting. And we are now guiding that with the backlog and with the business portfolio what we currently have, we are having EBITA either that's flat or increasing, and of course, the Tissue Converting will have an impact as well in EBITA euros. And I'm sure that there will be some question about it later on, but this is the guidance that we have now. Net sales on last year's level and comparable EBITA either at the previous year's level or increase in comparing to previous year.

Pekka Rouhiainen: Thank you Pasi, and it’s now time to move on to the Q&A session. So I ask Katri also to join Pasi here in the front. And I was reported that there were some technical issues during the call, but they should now have been resolved. So hopefully, everything is working now well from here on. But let’s now move on to the questions. So operator, I hand over to you.

Operator: [Operator Instructions] The next question comes from Antti Kansanen from SEB.

Antti Kansanen: It's Antti from SEB. Couple of questions from me. I'll take them one by one. So first is coming back to the sales guidance for '24 and you -- Pasi you referred to your orders being down, but you still expect a fairly similar contribution from the year-end backlog, also should benefit from M&A, I guess you have couple of that have not yet closed, but you expect to close them during '24. So this suggests that you don't expect that much from the business that you usually book during the year, which is largely on Services and Automation. So could you comment a little bit on that one?

Pasi Laine: So first, I think in guidance, I'm not a lawyer, but I think we can guide only the businesses which are now part of Valmet. So we can't, in guidance take into account the businesses, which in the future will be part of Valmet. So like Siemens Gas Chromatography impact cannot be guided now, it can be guided only after. So we have our backlog. We have now told to you how big backlog -- part of the backlog will be recognized as revenue this year. And you can calculate from there the book-to-bill what is needed. But then of course, in the business portfolio itself, we target to grow Services like we have been growing all the years we target to grow Flow Controls like we have been growing Automation Systems the same. And then, of course, on top of that, will come to revenue recognition from Tissue Converting as well. Then I think it's clear for everybody that Process Technology revenue without Tissue Converting most probably will go down. So in Pulp and Energy, with the order intake was €850 million and earlier years, it has been higher. So then most probably the old revenue recognition in '24 will be less. The same applies to Paper without Tissue Converting. So what I'm saying is that we are actually confident in Stable business contribution and the revenue recognition from Process Technologies will be smaller now because order intake last year was less than previous years.

Antti Kansanen: Okay. Makes sense. Then the second question is on the Process Tech margins on Q4, and it was a bit weaker trend again. So could you comment a little bit about the issues you had with the Tissue project execution. Is this something that we should take into account going forward? I mean, the Pulp and Energy issues have lasted for a while? Or was this more like a Q4 isolated impact?

Katri Hokkanen: Yes, I can start, and you can complement. So what is the fact that the project management in some of the Tissue projects haven't been good enough and the inflation has now impacted the Tissue profitability with the delay, and you could see it in our numbers. And of course, we are taking all the measures needed, and we always recognize the project revenue with the most probable outcome.

Pasi Laine: And then if you compare a little bit between Pulp and then Tissue, so Pulp project last 2.5, 3 years and Tissue projects go through the delivery in 6 to 9 months. So -- and last year's order intake was reasonably good. So from there, you can [indiscernible] 1 line, which I'm not saying. Okay.

Antti Kansanen: Any comment on how much of those Pulp projects still last in '24, size or length of?

Pasi Laine: No, no any comments on that. We haven't given the backlog figures for business lines and of course, not for business units either.

Katri Hokkanen: But we are doing the best we can, of course, to improve as soon as possible, yes.

Antti Kansanen: Okay. Then last one for me is on the working capital. And Katri, could you remind going forward, what is kind of with the new business structure, a reasonable working capital to sales levels in a few years' time, that's your ambition? Or how should we think about '24?

Katri Hokkanen: Yes. So we are not giving – we don’t have a target for any specific balance sheet items, as you know, but of course, it being positive at €191 million. It’s a big change compared to the levels that it has historically been. Of course, Tissue Converting had an impact of €92 million. So that was one reason, but the mix has changed. So we have much more stable business nowadays and capital project advanced payments can have a really big impact even between the months and the quarters. So of course, all of those elements have to be taken into account. But we have been also saying in the past that the inventories have been on elevated level, and that’s the situation still today. We have many actions ongoing in the organization in all fronts, but the fact is that it takes some time to get that visible also in the numbers. So the work continues there.

Operator: The next question comes from Sven Weier from UBS.

Sven Weier: I also go one by one. The first one is on Service, Pasi, in the last call, you were so kind to give some regional color because I think you said that North America and China, we're showing signs of improvement during Q4. I was just wondering if you have that continuing? Or how do you see the current situation? That's the first one.

Pasi Laine: Thank you. I started to feel time press in my presentation, and I'll skip that one. So thanks for coming back to that swing. So China was doing well. So they almost reached the numbers they had in '23 and '23 was good. So -- and so we see more activity in China. Asia Pacific was flat compared to last year, so also improvement in the latter part of the year. Europe was flat as well compared to last year, which was positive. Then, North America there's activity but not enough decisions. So there, I was a little bit too optimistic in -- after third quarter. And South America had so good year last year that it can be -- and there was one extraordinary order. So they can't continue at the same level this year, but activities in a way, quite uniform currently in all the market areas. So I wouldn't say that any of the market area is less active than the other one compared to a normal situation.

Sven Weier: Yes. Thanks for the color, Pasi. Because I'm also asking because you said you're aiming to grow Service revenues, but your book-to-bill was negative last year. So I was just wondering you see that more second half loaded or more steady development?

Pasi Laine: Now, it's -- there are many things which are moving. And one thing which is moving is the delivery time. So in '23 customers were -- sorry, '22, they were ordering earlier because they were longer delivery times. And now when the delivery times are getting short, the customers are learning it as well. And then our book-to-bill in a year will increase compared to -- most probably increase compared to previous years and will be more in a normal situation.

Sven Weier: The other question I had was just on the capital equipment business. And obviously, sales will decrease this year. But I was just wondering in terms of the load of the factories, I mean, for now, I think you can handle this well. You mentioned capacity cost is well under control. But is there kind of a timing when the new orders need to start to improve that the utilization issues don't become even worse? Or are you fine with the current order intake from the..

Pasi Laine: No, no. We have done some measures already in Tissue machines and in Pulp and Energy to [indiscernible] that capacity cost is well managed. So big part of our capacities in Finland and here is actually very easy to adjust the capacity cost because we have that kind of temporary layoff system. Currently, we have good workload in most of the units. And then, of course, it means that there needs to be a good focus on getting new orders. But in a way, that's normal as well that all the time, you have to win new orders in capital business. So -- and like I said, in Paper side, we have to now adjust back to the years before the extraordinary year. So €1 billion order intake is good level for Paper business line.

Sven Weier: And then maybe on the cost overruns in Pulp and in Tissue, I mean, I know you don't give any more details in general, but I was just wondering, should we at least assume that the headwind to earnings will be lower this year than last year?

Pasi Laine: Of course, of course, the backlog, which we inherited from the years before and decisions before Ukraine war and inflation is becoming small.

Sven Weier: And very finally, if I may, just a question for Katri on PPA. I was just wondering if you could give us a guidance on the PPA for the acquisitions that you've done so far?

Katri Hokkanen: Yes. So amortizations were roughly €25 million in the fourth quarter, and this was impacted already a little bit by Tissue Converting and the amortization going forward is roughly €28 million in the coming quarters.

Operator: The next question comes from Panu Laitinmaki from Danske Bank.

Panu Laitinmäki: I have 2 questions. Firstly, on the comment that you saw higher activity in Q4 compared to Q3. So in which businesses was that? And does it mean that like are you now more optimistic on the demand outlook for the next 6 months than you were at the time of the Q3 report?

Pasi Laine: No, we saw more activity in Services and in Automation. Automation order intake in third quarter was quite low, and it rebounded. And then for coming quarters, we gave the guidance, what we gave and then one has to be careful now with first quarter expectations because in Services, we had extraordinary good quarter 1 in year '23. So I think don't expect miracles in quarter one, but the guidance we gave is for coming 6 months, that we see good to satisfactory demand in Services and then we see also good outlook for Automation Systems and Flow Controls.

Panu Laitinmäki : Okay. The second question is on the Process Technologies outlook where you have satisfactory outlook for both Board and Pulp. So just kind of thinking what kind of order level could we expect going forward? Would you think that in Paper, the kind of €800 million annual run rate that we saw in the second half would be kind of bottom and then it could get better over time. And same question for Pulp and Energy, I mean, you had €850 million last year. Energy looks stable or growing and then Pulp was at the lowest level in 10 years. So is this like the floor and it gets better? Or how should we think about that?

Pasi Laine: No. First, if I start from Energy outlook. Last year and previous year, order intake has been good, and we continue to have the outlook as good. And then in Board and Paper, we have reduced the order intake or the outlook to satisfactory, and there is the dilemma that with the same volume, what we have now, 3 years back, we were saying actually that it was a good level. And so it’s not very logical now, but there were these two extraordinary years. In order intake, we can’t, of course, give a guidance on what kind of expectations we have for the year – but the only thing what I want to remind is that there is always quarterly variation in Process Technology business. So some quarters are a little bit lower in order intake and some are then higher. And then I would – or at least for time doing, I’m following the 6-month and 12-month trends and not only one quarter. But unluckily, I can’t give a guidance that what kind of expectations we have the order intake for the Process Technology businesses.

Operator: The next question comes from Johan Eliason from Kepler Cheuvreux.

Johan Eliason : It's Johan at Kepler Cheuvreux. I was wondering a little bit about the competitive landscape going forward. I think your Austrian competitor talked about being a margin focus for the Pulp and Paper business going forward, I guess, is positive in a way. But they also talked about gaining market share in Board and Paper. Where would you see that you face some competition? Is it order in some geographies? Or is it Tissue? And then how do you -- how confident are you on your position in those segments?

Pasi Laine: Johan, I'm -- how would I say? So of course, we have to work with our competitiveness all the time and now what I have been saying to our organization is that, of course, we have to take care of our competitiveness. But luckily, we don't have any extra other topic. So we have normal supply chain situation. We have inflation, which we can foresee. We hope that there is no extra wars coming and so on. So the whole management can focus on improving our daily and weekly and monthly operations. So that -- and that's where from the competitiveness, we will start from. In Board and Paper, we are competing against Voith, so there is 1 competitor. When discussing with customers, it's clear that it's Voith and us, but I am not commenting then anything about on Andritz on that market. Then in Tissue, like we have been saying earlier, there are several players. There's Voith and Andritz, ourselves and some others as well. So there, the market is more dynamic. And we are one of the suppliers, but we are the biggest supplier, but not as dominant as in Paper and Board side. But we continue to believe that we have good technology. We have the best R&D centers. We have cost competitive delivery chain. We have very good engineers. We have very good start-up engineers. So -- so -- and we have good customer relations. So that's on those ones. And the advantage what those given our competitive position, we believe, in the future as well. It's not only 1 or 2 topics.

Johan Eliason: Good. And in terms of pricing, I mean, it's always a bit cyclical in this fairly concentrated market. But how do you see that going forward?

Pasi Laine: Like we have been saying that in especially in Pulp and Paper when -- or Pulp, when the market gets not that active, then customers are focusing on implementing smaller projects. And there, it's easier to differentiate with the technology and supply. And the bigger the project is, the more it's commodity. So actually, the projects are getting smaller, but it's easier to differentiate. In Paper side, we are competing with Voith and we, of course, try to keep our profitability at the level which we have been targeting.

Johan Eliason : Good. And finally, you have plan to retire any news on the replacement process you want to share?

Pasi Laine: The retirement happens in Finland when you are 65. I'm getting only 61, so I have to find 4 years' time, something to before I can retire. I'm not in a position to say anything. I'm sure that our Board is actively looking for my successor and I'm sure that immediately when they have found a good candidate, they will come out with the nominees.

Operator: The next question comes from Mikael Doepel from Nordea.

Mikael Doepel: Just a quick follow-up on the Service side. So I'm listening to your earlier answers. And if I understand you correctly, you are mainly referring to what happened basically in Q4 compared to Q3 and how the year ended. But I was wondering if you could say anything about what you're seeing now in the early parts of this year. You mentioned North America not delivering as you expected. Has that improved now as the destock -- restocking? Any color you can give on the early parts of the year in the Service business would be helpful.

Pasi Laine: I tried to give a color that earlier -- of the third quarter, we were saying that we see more activity in -- activity improvement in China and North America. And now I try to say that actually, the activity level is uniform in all the units, and it's very difficult for me to say that one would be more active and the other less active. So that's -- and then we, of course, all know that utilization rates of the customer assets have been improving, and some of our customers have been saying that they see in a way, a little bit improving demand for their end products, which might in the latter part of the year have a positive impact to last. But currently, I can't distinguish between the areas. They have quite much the same kind of activity level. And then I was saying that I'd be careful that last year quarter 1 was exceptionally good.

Mikael Doepel: And then a question on the guidance. So basically, you're saying revenues that is overall and then I guess you aim to improve the margins basically across all business areas. I'm just wondering if you could talk a bit about the building blocks to be able to do that. So what would drive your margins higher rate which certain you are in.

Pasi Laine: No. It's the same building blocks we have had up to now. So we -- our EBITA margin was only 12% okay, I should not maybe say only, it was 11.2%, but our target is 12%. So we need to improve profitability in EBITA margin in all the businesses. So we have to improve it in Automation. We have to improve it in Services and Process Technology to reach that 12%, which is the minimum of our target setting. And we have been saying earlier as well that it's not 1 or 2 miracles, we have to implement. It's a lot of things, thousands of small actions trying to push the sales prices up, develop new products with better competitiveness and then reduce cost base on the existing products and then improve our internal processes from project management and product sales to delivery, improve procurement, reduce quality costs. So all those things have to happen for us to improve profitability. And then, of course, one important topic is SG&A management, which Katri mentioned earlier.

Mikael Doepel: Right, right. And just on the point finally from my side, just wondering how you're seeing the price cost equation overall going into 2024. So do you see a need to still raise prices in some certain segments? Or would you say that you are well covered given the -- because the inflation that you're seeing now in terms of pricing of your products and services?

Pasi Laine: Now we see that the salary inflation continues and of course, a big part of our costs are in salaries. And then there might be a deflation in some of the materials, but it might be that that’s been actually compensated by the inflation of – in the work what we buy. So we have to be very careful with all our cost actions to try to find more cost-effective supplies and companies we work with. And then, of course, be very careful with our internal costs.

Operator: The next question comes from Tom Skogman from Carnegie.

Tom Skogman : Yes. I have a couple of questions. I'll take them one at a time. First of all, I just noticed in the Pulp & Paper segment, your customers, some are still doing okay while some are really, really struggling. So do you see different behaviors among them that point as decision-making is moved to the head office, making it more difficult to close also kind of smaller, let's say, Automation deals or something. Do you see any kind of worrying sign among certain customers that are really struggling now?

Pasi Laine: We saw it actually happening in quarter 2, beginning of quarter 3, and then we saw that also in our Services order intake and Automation order intake, but that was not kind of actions customers implemented to make sure that the cash flows are good for year '23. Then generally, we have so vast customer base that always we have customers who are centralizing decision-making, and then some are decentralizing. So I don't see there actually any change in the whole portfolio of customers. So we have huge amount of customers and some might be centralizing currently, some not.

Tom Skogman : Okay. And then in Pulp, of course, now we have seen that profitability has been [indiscernible] for already quite some time and you have at least not gained the market share in this business. So what can you do to improve the competitiveness in policies? Is it mainly just about project execution? Or do you need to bring new innovations to the market? Or what do you think you need to do to regain or to go back to #1 position in Pulp. I want to do that.

Pasi Laine: Actually, our market, according to our statistics, market share was roughly 50-50 last year. So we have been gaining market share from Andritz last year. And like I've been earlier saying when the market is very active in South America where the Austrians want to do big APC project then when we are suffering on market share, but currently, at least according to our statistics, we are roughly on par with Andritz. So -- which then means that we gained market share last year.

Tom Skogman : And on the way of doing business and to improve profitability there.

Pasi Laine: No, no. No, we are executing small- to medium-size projects more than bigger mill wide contracts.

Tom Skogman : But do you need to bring new products like you did in Board machines some 10 years ago to improve competitiveness or -- is it just about project management to avoid cost overruns due to improved margin.

Pasi Laine: We are, of course, all the time developing, offering also for all the Process Technologies. We have R&D centers and pilot machines for all the parts of Pulp mill. But -- and we will be bringing some new things on the market as well. But we haven't launched them yet, so I'm not saying anything. But of course, we all the time work on our competitiveness and also on the performance of the product offering that we have for Pulp.

Tom Skogman: And then a question to Katri. If all these acquisitions that you have presented but not closed, if they are closed, what would the kind of rolling PPAs and, let's say, net financial costs and taxes be, by the end of this year on a quarterly level. How much will they grow? It's a bit hard to estimate PPAs for us.

Katri Hokkanen: Yes. It's too early to say though. So currently, we are focusing, of course, completing these acquisitions. And I already mentioned that Tissue Converting is now in our numbers and amortization will be €28 million for the coming quarters. But for the others, it's way too early to say.

Tom Skogman: And finally, then acquisitions. You have done a lot of acquisitions last year. Now you have in your kind of history quite high net debt-to-EBITDA ratio. Are you still looking for more acquisitions to secure that earnings can grow even during this tougher period on the EBITA level? Or are you now kind of waiting to strengthen the balance sheet before looking for more acquisitions.

Pasi Laine: I think when we started, our gearing was 0, then it went to minus 20, and then we made acquisition, it went to plus 20, so now it's at 40. So I think we have to work a little bit and pay our debt back and then we have room for acquisitions. So our track record is that such that we are better in making big enough acquisitions. And then it means that, first, we have to work with our debt level, and then there's room for acquisitions. So currently, -- we are, of course, actively following all the time to markets, but the main focus is now in making sure that there's good payback of the acquisitions we have done.

Katri Hokkanen: And if I may add also that the integration of the acquisitions, it takes a lot of effort, and we historically have been really good at that. And of course, we want to do all the acquisitions the same way. It requires a lot of work and the organization is very busy.

Operator: The next question comes from Tomi Railo from DNB.

Tomi Railo: It's Tomi from DNB. Feeling a bit desperate, but I try. '23 cost overrun or inflation impacted. It would be very helpful if you could give any comment on the Tissue impact in the fourth quarter. Are we talking about some millions or net levels and maybe also for the full year just to get any feeling.

Pasi Laine: This is so difficult, but I'll let -- put you on the ice.

Katri Hokkanen: What we can say, of course, is that you see the impact in the numbers. So for the quarter, the profitability or the margin was 4.1% and for the full year, 4.5%. So -- of course, you can see the numbers there, but I cannot give you more exact comments on that.

Tomi Railo: I try it a little bit the other way around. Some years ago, there was a lot of talk about quality costs and Valmet aim an ability to reduce the quality cost. Would you say that the quality costs over the past years have shoot up significantly. Can you help if you could give a number in terms of percentage of sales? How much quality costs are these days? And maybe thirdly, if and what kind of actions have you taken to reduce the quality costs?

Pasi Laine: So quality costs, we haven’t announced it now. So in CMD, I think we had the number. I don’t remember by heart the number. We announced the quality costs and 5%, a little bit up last year. And then – but not even close to the levels where they were earlier. And we have quite a lot of work ongoing with the quality and have had that all the time. Quality costs, which happened in ‘22 and ‘23 were quite much COVID related. So it was impossible to travel to make quality checks at our sub-suppliers all over the globe. And then some mistakes happened. And then the other COVID-related quality cost source was that when people are working remotely, then sometimes the quality of the teamwork is not as good as when they are in the office. So now when we are back more in a normal situation, then I assume that the quality, what we see will reach the levels which we had before COVID – before the COVID impacted the quality numbers. I am not a fan of remote work.

Operator: The next question comes from Antti Kansanen from SEB.

Antti Kansanen: Pasi, you mentioned earlier that the backlog has kind of normalized and the lead times are now back to normal. But when I kind of look at your backlog that stretches beyond the next 12 months is basically the similar levels as it was 5, 6 years ago. And obviously, there's a lot of inflation between your much bigger company. So -- is this a concern in a sense that there's increasing pressure to get new business during '24. I have to maintain the workload situation and so forth. And also in this kind of a demand environment, is it helpful for you guys that the delivery times are shorter. Does it really matter when many of your clients are quite hesitant to invest right now?

Pasi Laine: Of course, the delivery times matter all the time. So when discussing with customers, then once they make the decision to build something, then of course, they want to have the machine up and running as quickly as possible because then they start to generate cash again. So of course, it's important. And it was a little bit challenging and not only a little bit challenging to explain that it takes 3 years to deliver a Board machine. So now we are talking about normal delivery times. And then backlog otherwise, I'm still confident with the backlog. And of course, we have to get new orders in, but we still have the workload situation, what we described in the market outlook, which has 50% from the capacity utilization factor and then 50% from the market activity point of view. So that's the outlook what we have.

Antti Kansanen: Okay. And maybe a quick detailed one on the backlog. On the Services and Automation backlog, you probably don't have much that stretches beyond '24? Or what do you include in the Services backlog?

Pasi Laine: If we are having a long-term contract then remind me, is it 6 months?

Katri Hokkanen: Yes, 6 months depending on the contract, yes.

Pasi Laine: So we are not booking the whole contract. So you are right that some of the services -- a big part of the Services has delivered from the backlog of Services has delivered in this year. And the same goes with Automation.

Antti Kansanen: Okay. So I mean, if I just do the numbers, it appears that actually the PT backlog shouldn't imply much sales decline this year, but there should be a big step down perhaps in '25, but perhaps is reading too much.

Pasi Laine: Difficult to comment on your XL.

Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Pekka Rouhiainen : All right. Thank you for the lively Q&A. And the next events for Valmet will be the AGM on March 21, and then the first quarter results of '24 will be published on April 24. So -- those are the next event. Thank you, Pasi and Katri, for the presentations and everybody for the questions, and it's now going to wrap up this event. So goodbye for now.