Risks and business uncertainties

Threats related to global economy and markets

Financial uncertainty in the global economy, coupled with fluctuations in exchange rates and tightening financial market regulations may have an adverse effect on the availability of financing from banks and capital markets and could reduce the investment appetite of Valmet’s customers. Valmet estimates that the high proportion of business derived from stable business (Services and Automation segments) and the geographical diversification will reduce the possible negative effects that market uncertainties may have.

If global economic growth weakens, it might have adverse effects on new projects under negotiation or on projects in the order backlog. Some projects may be postponed, suspended, or canceled. In the case of long-term delivery projects, initial customer advance payments are typically 10–30 percent of the value of the project, and customers make progress payments as the project is implemented. This significantly decreases the risks and financing requirements related to Valmet’s projects. Valmet continually assesses its customers’ creditworthiness and their ability to meet their obligations. As a rule, Valmet does not finance customer projects. If economic growth slows down significantly, the markets for Valmet’s products may shrink, which may lead to, for example, tougher price competition. 

Increasing geopolitical tensions, increase of protectionist and more political regulation, and sanctions may create uncertainty to customers’ investment activity and impact Valmet’s operations. Changes and uncertainty in future regulation and legislation can have effects, especially on the energy business and the use of data.

Large fluctuations in energy prices can affect the global economy. These fluctuations can also affect Valmet and its customers.

Should the global issues with component availability and logistics continue, it could have adverse effects on Valmet's business.

Changes in labor costs and the prices of raw materials and components can affect Valmet’s profitability. Raw material and component cost inflation has been high, and wage inflation is expected to increase. Valmet’s goal is to offset this through increased productivity and price increases. It is possible, however, that tough competition in some product categories will make it difficult to pass on cost increases to product prices. On the other hand, some of Valmet’s customers are raw material producers and their ability to operate and invest may be enhanced by strengthening commodity prices and hampered by declining commodity prices.

To ensure a high level of quality in both production and services, it is important to sustain a high level of competence and talent availability. This includes, for example, maintaining efficient recruitment programs, utilization of existing talent and sharing knowledge globally.

Through acquisitions, Valmet may become exposed to risks associated with new markets and business environments. The actual acquisition process also includes risks. Other risks associated with acquisitions include, but are not limited to, integration of the acquired business, increased financial risk exposure, retention of key personnel and achieving the targets set for the acquired business.

Valmet’s operations, products and services rely largely on data networks, software and digital solutions. Any malfunctions and cybersecurity breaches in such networks, software and solutions as well as potential failures in information system development projects may adversely affect Valmet’s business and financial position and lead to reputational damage.

Management of project business risks important

An important part of Valmet’s business consists of project business. Pulp business projects in particular can be large, thus project-specific risk management is crucial. Key risks related to projects are project cost estimation, scheduling, project risk management, quality and performance risks, and materials management risks. Risk analysis shall, as a minimum, take place for all significant project quotations. The work concerning threat and opportunity assessment continues during the execution phase of the project. Risk management is based on careful planning and continuous, systematic monitoring and evaluation. Project risks are managed by improving and continuously developing project management processes and the related systems. 

Availability of financing crucial

Securing the continuity of Valmet’s operations requires sufficient available funding under all circumstances. Valmet estimates that its liquid cash assets and committed credit limits are sufficient to secure its immediate liquidity and to ensure the flexibility of financing. The average maturity of Valmet’s non-current debt, excluding lease liabilities, is 3.1 years. Loan facilities include customary covenants, and Valmet is in clear compliance with the covenants at the balance sheet date.

COVID-19 and other pandemics

Epidemic outbreaks and potential other pandemics remain a risk to Valmet’s operations also after COVID-19. Pandemics might have impact on customers' investment activity, the supply chain and business operations by increasing the likelihood of interruptions. Valmet’s operations are dispersed all around the world, Valmet has a global customer base and our suppliers operate in several countries. This mitigates the overall impacts of risks to Valmet, should there be any disruptions in some isolated country or case.

Russia's invasion of Ukraine

The conflict between Russia and Ukraine that started in 2014 concerning certain parts of eastern Ukraine expanded in February 2022 to Russia’s military attack on Ukraine, which caused significant risks and uncertainties to the markets affecting the entire global economic environment and financial markets.

Valmet has evaluated the long-term impact of the situation in Ukraine, reviewed key contractual obligations, project schedules, and identified risks for projects that are delivered to Russia. Based on the review, Valmet has identified projects that no longer meet the criteria of a customer contract for revenue recognition purposes, and has consequently made a reversal of approximately EUR 80 million to its order backlog during 2022. Valmet recorded an expense of approximately EUR 20 million during 2022 for estimated restructuring costs, asset impairments and other exceptional items triggered by Valmet's decision to withdraw from Russia. These costs have been reported in cost of sales, in selling, general and administrative expenses and in other operating expenses, and have been reported as items affecting comparability. Therefore they do not impact Comparable EBITA.

At the end of March 2023, Valmet had a total of 7 employees in Russia. Valmet does not have production in Russia. Russia represented around 2% of Valmet's net sales and 0.1% of procurement spend in 2021. Neither new sales projects in Russia nor new purchases from Russia will be made.

If the war is further prolonged or geopolitical tensions increase further, there could be additional adverse long-term impacts on Valmet’s operations, customer investment activity, project deliveries, availability and prices of components, supply chain and availability of financing for both Valmet and its customers.

Valmet has established a special Incident Management Team (IMT) to manage the impacts of the war in Ukraine on the company. Additionally, our top management and many functions, like HSE, Legal, Sourcing, HR, and IT, are also actively assessing the situation and making needed decisions. Valmet actively complies with all sanctions and export regulations impacting business with Russia and Belarus and monitors development carefully. Valmet continues in reviewing operations in Russia taking into account the local legislation, the safety of our employees and implementing its exit plan.

Valmet will withdraw from Russia completely and will continue to implement the withdrawal in stages as the review of implementation options is fully completed. Valmet's withdrawal from Russia is proceeding according to plan, and the liquidation of the two legal entities is expected to be completed by the end of the third quarter 2023.

Read more on risks and business uncertainties in the Interim Review January-March 2023.