Valmet (VALMT)

Helsinki, Finland

KEY TAKEAWAY: Valmet of Helsinki has built a $5 billion market cap company building and servicing mills on behalf of pulp and paper producers all over the world.

By specializing in this one part of the pulp and paper ecosystem, Valmet has been able to become more operationally efficient, which is a requirement in a low margin, labor intensive business. Much of their work is done on site, since mills cannot be efficiently manufactured in a factory. The pulp mill industry is not large enough to attract the interest of infrastructure giants, making Valmet's niche durable.
_____________________________

Building and upgrading pulp and paper mills requires a high degree of customization because wood in each location can be different. Even within the same species, the wood fiber, and consequently the mill requirements, can vary based on soil, climate, age and genetic differences.

Certain tools, e.g. measuring equipment, flow control valves, and baling equipment can be mass produced. However other items, such as chippers and refiners need to be custom modified. Still others, such as fiberglass reinforced plastic scrubbers need to be custom made. The latter are necessary for emissions control.

Valmet, and its close comparables, ANDRITZ and Voith Group, each have 100-300 office and production locations around the globe, with 15,000-30,000 employees each. Their revenues are all in the $5 billion-$10 billion range, indicating revenue per employee $300,000-$400,000. By comparison highly automated manufacturers like Samsung and Hitachi report $2 million revenue per employee.

Valmet's efficiency in managing a sprawling, labor intensive worldwide operations is a competitive moat.

Valmet has managed solid growth while improving profitability in a low margin, middling growth industry. The pulp and paper machine industry has grown, and is projected to grow in the 5% range annually.

Over the past decade Valmet has grown revenues 8% annually. It did this by growing its workforce 6%, and total assets 11% per annum respectively. Still, it managed to improve net margin from 2% to 5% and return on assets from 2% to 6% as it became more and more efficient.

The difficulty in achieving unspectacular numbers, while doing necessary work, makes Valmet's income durable.