Valmet Oyj, the Finnish stalwart known for its dominance in pulp, paper, and energy industries, seems to be quietly orchestrating a revolution. While the latest earnings transcript paints a picture of a company weathering the cyclical storms of its traditional markets, a deeper dive reveals a fascinating story of strategic repositioning, potentially setting the stage for a dramatic upsurge in the automation sector.

The surface narrative is all too familiar: Process Technologies, Valmet's bread and butter for decades, is experiencing a downturn. Orders are down, the outlook is tepid, and capacity adjustments are underway to navigate the rough waters. Yet, within this expected narrative lies a tantalizing clue - a burgeoning stable business that is not just holding its own, but thriving.

Valmet's "stable business," encompassing Services and Automation, now commands an impressive €3 billion in annual orders. This represents a remarkable transformation from just a decade ago when Services, at a mere €1 billion, was the sole pillar of stability. The organic growth of this segment, clocking in at a robust 7% annually, is a testament to Valmet's shrewd acquisitions and consistent internal development.

But what's truly fascinating is the launch of Valmet DNAe, a brand new, fully web-based Distributed Control System (DCS). This, ladies and gentlemen, is not just a product launch; it's a bold proclamation of intent. After 40 years of relying on an aging, though reliable, system, Valmet has unleashed a technological marvel that could significantly disrupt the automation landscape.

Imagine a DCS that empowers operators to manage processes seamlessly from their mobile phones, a system fortified with state-of-the-art cybersecurity, and equipped with intuitive, web-based configuration tools. This is Valmet DNAe, a testament to the company's long-term vision and its unwavering commitment to R&D, even during turbulent times.

While the financial impact of DNAe remains to be seen, the potential is enormous. Armed with a cutting-edge DCS and bolstered by recent acquisitions like NovaTech Automation and Siemens Gas Chromatography, Valmet is poised to attack new market segments with renewed vigor.

The numbers tell an even more compelling story. Valmet's Automation Systems segment, which derives 70% of its business from pulp and paper, witnessed a significant order contraction in the last quarter. This, however, doesn't seem to faze the leadership. Pasi Laine, Valmet's CEO and a self-proclaimed "old DCS engineer," exudes confidence, pointing to a "good activity level" in Energy and Process and, more importantly, the potential of DNAe to unlock new opportunities.

Valmet's Segment Performance

Orders Received Trend

Here's where the hypothesis gets truly interesting. Valmet hasn't disclosed the R&D expenditure for DNAe, but considering the decade-long development cycle, it's safe to assume a significant investment. This, coupled with the full expensing of R&D costs on the income statement, suggests a potential for margin expansion once DNAe gains traction and R&D intensity decreases.

Consider this: if DNAe allows Valmet to penetrate new markets with lower R&D outlays and potentially higher margins, the impact on the bottom line could be substantial. The company, known for its conservative guidance, anticipates flat to slightly growing EBITA for 2024. However, this forecast may not fully account for the disruptive potential of DNAe, particularly in the latter half of the year and beyond.

Valmet's strategic moves resemble a chess grandmaster's calculated gambit. While the company navigates the cyclical challenges of its core businesses, it is simultaneously building a powerful offensive in the automation sector. With DNAe as its spearhead, Valmet could very well be on the cusp of a remarkable growth trajectory, one that might surprise even the most seasoned analysts.

"Fun Fact: Valmet's history is intertwined with Finland's industrial legacy, dating back to the 18th century as a shipyard and metalworks. Today, the company is a global technology leader, but its Finnish roots remain strong, with a commitment to sustainability and innovation."