ANNUAL REVIEW. Valmet s operations and sustainability in 2015

Transcription

1 ANNUAL REVIEW Valmet s operations and sustainability in 2015

2 Contents Valmet in brief 3 CEO s review 4 Business environment and strategy 8 Business environment 10 Strategy 14 Valmet s value creation 18 Valmet s operations 20 Serving pulp, paper and energy industries 22 Comprehensive offering 24 Research and development 26 Sustainability 28 Sustainable supply chain 31 Health, safety and environment 34 People and performance 38 Cost-effective sustainable solutions 41 Corporate citizenship 43 Contacts 47 Valmet reports 2015 annual review Valmet s operations and sustainability in 2015 ANNUAL REVIEW 2015 The report describes Valmet s market environment and the progress of its strategy, operations and sustainability in financial statements 2015 FINANCIAL STATEMENTS 2015 The report includes Valmet s Financial Statements for 2015 and information about its shares, shareholders and management. gri supplement 2015 GRI SUPPLEMENT 2015 The report defines Valmet s sustainability reporting scope and principles, and alignment with the Global Reporting Initiative (GRI).

3 Valmet Annual Review 2015 Valmet in brief Valmet in brief Net sales by business line, % Valmet is the leading global developer and supplier of process technologies, automation and services for the pulp, paper and energy industries. We aim to become the global champion in serving our customers. Valmet s strong technology offering includes pulp mills, tissue, board and paper production lines, as well as power plants for bioenergy production. Our advanced services and automation solutions improve the reliability and performance of our customers processes and enhance the effective utilization of raw materials and energy. Valmet s net sales in 2015 were approximately EUR 2.9 billion. Our 12,000 professionals around the world work close to our customers and are committed to moving our customers performance forward every day. Valmet s head office is in Espoo, Finland and its shares are listed on the Nasdaq Helsinki. Capital business Stable business Services 39% (40%) Automation 8% (0%) Pulp and Energy 31% (39%) Paper 23% (21%) 1 Key figures Net sales by area, % North America 21% (18%) South America 11% (13%) EMEA * 45% (43%) China 10% (11%) Asia-Pacific 13% (15%) * Europe, the Middle East and Africa CHANGE Orders received, MEUR 2,878 3,071-6% Order backlog 2, MEUR 2,074 1,998 4% Net sales, MEUR 2,928 2,473 18% Earnings before interest, taxes and amortization (EBITA) and non-recurring items, MEUR % % of net sales 6.2% 4.3% Operating profit (EBIT), MEUR % Personnel by business line, % Services 44% (50%) Automation 13% (0%) Pulp and Energy 14% (17%) Paper 25% (30%) Other 4% (4%) Personnel by area, % Dividend per share, EUR % Return on capital employed (ROCE) before taxes, MEUR 12% 9% Research and development expenses, net, MEUR Personnel 2 12,306 10,464 18% Lost-time incident frequency (LTIF) 2, % Support for non-profit organizations, MEUR % Carbon dioxide emissions, 1,000 t % Energy consumption, TJ 1,270 1,260 1% Water consumption, 1,000 m 3 3,032 3,305-8% North America 11% (11%) South America 4% (4%) EMEA 63% (61%) China 16% (18%) Asia-Pacific 6% (6%) 1 Group figures: the formulas for calculation of the key financial figures are presented in the Financial Statements At the end of period. 3 Board of Directors proposal. 4 LTIF reflects the number of injuries resulting in an absence of at least one workday per million hours worked figures include Automation, which has been included in Valmet s reporting since April 1,

4 Valmet Annual Review 2015 CEO's review CEO s review Valmet progressed steadily towards its targets in The acquisition of the process automation business complemented the company s unique offering and increased business stability along with our strong services business. Valmet also retained its position among the world s sustainability leaders for the second consecutive year. Valmet now has two strong years behind it as an independent listed company. These years have been a time of renewal and continuous improvement, and the company now has a solid platform to move forward. Successful automation integration In spring 2015, Valmet took a natural strategic step and acquired the process automation business, which was a perfect fit for the company. The integration of the business as Valmet s fourth business line has been a success, and the acquisition has been warmly welcomed by customers and employees. By uniting automation expertise with our pulp, paper and energy technology and process know-how within the same company, we created an unrivalled offering for our customers. This was an important step towards our vision to become the global champion in serving our customers. Strategy focusing on Must-Wins Valmet s mission is to convert renewable resources into sustainable results. The company s strategy concentrates on key Must-Wins: Customer excellence, Leader in technology and innovation, Excellence in processes, and Winning team. Under these focus areas, we have defined objectives and programs that we have taken systematically forward. During the year, Valmet was able to improve its profitability to the targeted range with an EBITA margin of 6.2%, and the work towards further profitability improvement will continue. The growing, profitable and stable services and automation businesses, along with our work to enhance cost competitiveness and cost flexibility, contributed to the profitability improvement. Good progress in Customer excellence Customer excellence at Valmet means being close to our customers and growth markets, providing significant customer benefits by utilizing our full offering, and continuously developing our local and remote services. 4

5 Valmet Annual Review 2015 CEO's review The integration of the process automation business has been a success. Valmet s first year as an independent company in 2014 was a year of exceptional customer activity and an impressive number of new orders. In 2015, the order intake stabilized and the energy market in particular slowed down significantly. On the other hand, our services business developed well and was able to grow. Furthermore, market activity and customer orders in the automation business were satisfactory throughout the year. The order highlights in 2015 were the agreements to supply key technology for SCA s pulp mill expansion project in Sweden, Metsä Fibre s upcoming bioproduct mill in Finland, and the Huanggang Chenming pulp mill in China. We signed several OptiConcept M board machine supply contracts during the year: with Yuen Foong Yu Packaging in Taiwan, APRIL Group in Indonesia, and Lee & Man in China. Furthermore, we received a number of tissue line orders in different parts of the world. To enhance our presence in the growing Asia-Pacific market, we progressed with the service center investment in Indonesia. In addition, through our advanced process analytics and intelligent machines that are fully integrated into the Industrial Internet, we enabled our customers all over the world to achieve significant energy, water and raw material savings, to improve the availability and performance of their production processes, and to optimize their end product quality. Enhancing technological leadership Success in the highly competitive global environment demands continuous investments in research and development, as well as renewal from our customers and employees. Valmet has three targets for its research and development work: to ensure advanced and competitive technologies and services, to enhance raw material and energy efficiency, and to create ways to replace fossil fuels and raw materials with renewable ones. Valmet invested around EUR 59 million in research and development in We cooperate closely with our customers and utilize our 16 technology research centers around the world. These centers are also often used by our customers to study their process performance and product quality. We have focused on accelerating the commercialization of key innovations. In 2015, we introduced the Valmet IQ product family for online quality control and monitoring of the paperand board-making process. Our OptiConcept M modular paper and board machine and Advantage NTT tissue machines have entered the markets successfully. In 2015, Valmet sold its tenth OptiConcept M machine and sixth Advantage NTT tissue ma- chine. Moreover, our new recovery boiler with record-high steam generation efficiency was chosen for Metsä Fibre s upcoming bioproduct mill and Huanggang Chenming s new pulp mill. Valmet has also a clear roadmap to develop its Industrial Internet offering, and we intend to be front runners in this field. In the coming years, we will introduce even more advanced automation technologies and embedded diagnostics in our customers production processes. At the same time, we will enhance the mobility of our expert services, while keeping information security a high priority. Savings and improved performance through process excellence By developing its key processes, Valmet can still improve quality and operating efficiency and achieve significant savings. During the year, we strengthened the implementation of Lean as a key tool to improve quality, reduce quality costs and shorten lead times throughout Valmet. We continued to develop our sales and project management processes to ensure a globally harmonized and effective way to operate. In 2015, we were again ahead of our procurement savings target and continued to integrate sustainable supply chain practices into our global procurement process and tools. As a result of our long-term focus on occupational safety and safety culture, our safety results continued to improve and we were able to reach an LTIF of 3.3 by the end of the year. As a token of our strong overall sustainability work, Valmet was selected to the Dow Jones World Sustainability Index as being among the 317 most sustainable companies in world for the second year in a row. The significant profitability improvement is a result of team work and determination. Towards a winning team Valmet has today over 12,000 employees around the globe, working close to our customers. The employee engagement survey was carried out for the second time in The results showed that our employees engagement with Valmet has developed strongly and positively, and our employees are proud to work for Valmet and to serve our customers. Furthermore, we continued the systematic development of our personnel by introducing a global training portfolio focusing on strategic competences for Valmet: services, quality and procurement. In the next phase, the portfolio will be complemented with sales management skills. Our efforts to build a performance- and service-oriented culture, as well as our systematic employee development, are bearing fruit already today, and will be a key to the company s competitiveness in the future. 5

6 Valmet Annual Review 2015 CEO's review Highlights 2015 JANUARY 15 Acquisition of Process Automation Systems business MAY 5 Valmet-delivered pulp line at the CMPC Guaíba mill in Brazil started up AUGUST 21 Valmet s tenth OptiConcept M paper production line order from Lee & Man in China SEPTEMBER 15 Valmet s second LignoBoost plant handed over to Stora Enso s Sunila mill in Finland MARCH 11 Order from Nokianvirran Energia for biomass-based boiler plant and automation system in Finland JULY 31 Acquisition of tissue rewinder business from Massimiliano Corsini srl in Italy SEPTEMBER 10 Inclusion in Dow Jones Sustainability Index for the second consecutive year OCTOBER 28 Employee survey shows engagement increase of 9% points APRIL 1 Acquisition of Process Automation Systems business completed AUGUST 18 Main equipment order from Huanggang Chenming Pulp & Paper for its new pulp mill in China SEPTEMBER 14 Valmet s sixth Advantage NTT tissue production line order from Renova in Portugal DECEMBER 2 Key technology order from SCA for its Östrand pulp mill expansion project in Sweden FEBRUARY 13 Key technology order from Metsä Fibre for its Äänekoski bioproduct mill in Finland JUNE 30 Incident frequency (LTIF) reached target level of 4 SEPTEMBER 7 Multi-year consumables and roll service agreement with Stora Enso Kvarnsveden SEPTEMBER 16 Launch of Valmet IQ product family for pulp and paper quality control and monitoring Balanced geographical exposure creates opportunities Today, Valmet is present on all continents. Our balanced geographical presence increases the stability of our order book and overall business. North America and the EMEA area are established markets that have a large base of aging pulp, paper and energy production technology. These areas continue to offer opportunities for Valmet s services business, for new machines and machine rebuilds. South America is traditionally a strong market for our pulp technology business, and it is currently also a promising services market. China has suffered from overcapacity, and its share of Valmet s net sales has considerably decreased since We have prepared for the new market situation in China already in the previous years. In 2015, we got a number of board and tissue machine orders and a pulp mill order from China. The future of the services business looks promising in the Chinese market, as well. In Asia-Pacific, there is particular demand for board and tissue machines, which in the long run also opens up opportunities for our services business. Strong platform to move forward It has been delightful to see the continued positive development of Valmet s brand and reputation among our customers and other stakeholders. The recent independent surveys have showed that already today after only two years Valmet is rated among the top ten most reputable companies in Finland. Our global customer survey also showed that our reputation among our customers is positive and unified, and the customer trust is strong in all market areas. The unique combination of intelligent process technologies, services and automation along with our committed team create the platform to move our customers performance and the whole industry forward. We will continue to work towards our strategy and financial targets, and we will especially focus on improving our customers experience of Valmet every day. I would like to thank all our customers and partners for inspiring cooperation and trust, and the Valmet team for their committed work and energetic spirit, where everybody has given their best during the year. Pasi Laine President and CEO 6

7 Valmet Annual Review 2015 CEO s review MUST-WIN: CUSTOMER EXCELLENCE Increased benefits through full offering High environmental efficiency Oskarshamn Energi s new biomass-fired power plant for combined heat and power production in Sweden was inaugurated in September It will cover 70% of the Oskarshamn municipality s annual district heat demand. Among the key criteria for the new plant was its environmental efficiency and possibility to utilize renewable fuels. These targets were achieved with an optimized combination of Valmet s energy production technologies as well as environmental and automation solutions. The plant has a thermal output of 17.7 megawatts (MW) of district heating and an electrical output of 3.8 MW. The flue gas condenser provides additional 4 MW thermal output to district heating network. Due to high combustion efficiency the plant has low emissions. As feedstock the boiler is able to use local forest residues such as bark and wood chips with moisture content of up to 55%. Taking board production to the next level Siam Kraft PM 16 is a great example of how Valmet s modular OptiConcept M paper machine can take board-making to the next level. PM 16 showcases the cutting-edge technology of paper packaging manufacturing. It combines the world s latest technologies with our expertise, enabling us to meet our customers needs in all details, including finer details, says Wichan Jitpukdee, Managing Director of Siam Kraft Industry. Valmet s OptiConcept M technology combines high productivity with low energy usage. It uses around 30% less energy compared to average containerboard production, while maintaining high strength properties with lower grammages to produce high-quality container board. Valmet s scope for the project included a full board-making line with related automation systems and extended project implementation, as well as comprehensive service packages for maintenance and fabrics. Synergies across all mill operations In Maranhão, Brazil, Valmet has delivered all the main technology for a greenfield pulp mill for Suzano Papel e Celulose S.A. Operational since the end of 2013, the mill has capacity to produce 1.5 million tonnes of bleached eucalyptus pulp per year, making it one of the largest in the world. The mill has been designed for high production and energy efficiency. The fiber line includes Valmet s compact cooking G2 digester, which is the most efficient digester on the market. The mill also produces bioelectricity for the national grid from black liquor and biomass sources. The project is a good example of the benefits of Valmet s unique offering, which enables synergies across all mill operations. Valmet s scope of delivery comprised all the key technologies for the pulp production and recovery process, including an integrated, mill-wide automation solution. 7

8 Business environment and strategy Valmet has a long track record in developing and providing solutions that convert biomass into renewable energy and recyclable products such as pulp, paper, board and tissue.

9 #1 3 Valmet has a leading market position in all its target markets. Automation became Valmet s fourth business line on April 1, 2015.

10 Valmet Annual Review 2015 Business environment Business environment The demand for Valmet s process technologies, services and automation continues to be driven by the consumption of board, paper, tissue, pulp and energy in the global markets. At Valmet, services and automation are considered to be stable businesses, as they represent rather stable and slightly growing markets that are driven by the size of the installed base and mill operating rates. Currently, the increasing consumption of board, tissue and pulp in particular, as well as demand for bioenergy, are boosting production growth, which is creating new demand for Valmet s services and automation. Board, paper and tissue machines, pulp mills, and biomass power boilers are referred to as capital businesses. They are driven by new investments in machinery and mills, which makes these businesses more cyclical and volatile compared to the more stable services and automation businesses. Services Demand for services is driven by increasing pulp, paper 1 and energy production globally, capacity increases especially in emerging markets and the development of capacity utilization rates. Demand for services is favorably affected by energy and raw material efficiency improvements and the increased outsourcing of non-core operations by our customers, while machine and mill closures in developed markets are having an adverse impact on this trend. These drivers are creating a consistent and slightly growing demand for process improvements, spare and wear parts, and outage and maintenance services. Over half of the current installed machine base is in developed markets. In North America and Europe, the service market is stable or slightly growing, despite machine closures and flat overall pulp and paper production. Customers maturity in buying services and increasing the outsourcing of non-core operations is high in developed markets. The largest growth potential, however, is in the emerging markets of China, Asia-Pacific and South America, where the installed machine base is increasing and a younger, but ageing, installed base needs more care than before. Customers are still doing services mostly inhouse, which leaves room for service market growth. Automation Automation services and replacements are developing along with the size and age of the installed base. New automation system deliveries can be replacements of old systems or completely new systems for new machines and mills. Customers typically choose an automation provider for even more than a decade, which creates high barriers to market entry for new competitors. The distributed control system (DCS) market in the pulp, paper, energy and other process industries is growing slightly, with growth in the installed base, as well as a large existing installed base approaching replacement age. The quality management systems market in the pulp and paper industries is in a similar situation to the DCS market, with a slightly growing installed base and a large installed base at replacement age. Analyzers and measurements in the pulp and paper industries is a niche market with specific applications, which is also slightly growing in line with growing pulp and paper production. Pulp Growth in board and tissue consumption are contributing to the demand for pulp. Since recycling rates cannot grow indefinitely, there is demand for virgin wood pulp. Large new pulp mills are being built, mostly in South America and Asia, but there are business opportunities also in the Nordic countries. Upgrades, rebuilds and conversions of the installed base will continue in North America and Europe, with some of these projects including large deliveries of Target market size by business (Total target market size 2 ~ EUR 15 billion) Services 51% Automation 13% Energy 13% Pulp 9% Paper 14% Target market size by area (Total target market size 2 ~ EUR 15 billion) North America 19% South America 10% EMEA 40% China 14% Asia-Pacific 17% 1 Paper in general Includes board, paper and tissue, as well as other paper grades. 2 Market size is defined as Valmet s target market, meaning those geographical markets, product segments and customer industries where Valmet is currently competing or aiming to compete. 10

11 Valmet Annual Review 2015 Business environment new pulp equipment and technologies. In European, North American and South American pulp mills, there is also growing interest in new technologies, e.g. for lignin separation and its further refining. Energy For Valmet, the energy market means biomass power boilers, where our focus is on pulp and paper industries globally and the power generation segment in Europe, North America and Asia-Pacific. Demand for bioenergy is driven by growing global energy consumption, increasing interest in renewable and sustainable energy, the competitiveness of different energy sources, and security of supply. Especially in Northern Europe, combined heat and power generation solutions are increasing the attractiveness of bioenergy, and in all markets multifuel solutions provide fuel flexibility for customers. The multifuel solutions market continues to grow in Asia-Pacific and Eastern Europe. Also repowering, fuel conversions and refurbishment of aging plants are opening up new business opportunities. In Europe, advanced environmental regulations have fueled the biomass-based energy market, but the recession has weakened the market. Long-term drivers of bioenergy are threatened also by uncertainty in regulatory policies, incentives and acceptance. In North America, shale gas-based energy production has reduced the market s interest in bioenergy investments, but there are still occasional bioenergy projects. In emerging markets, bioenergy production is mostly based on low-cost solutions for agro-fuels; however, there are increasing opportunities for bio- and multifuel solutions in Asia-Pacific. The South American market is challenging for global players due to local competitors. Board, paper and tissue World trade and economic growth especially in emerging markets increasing standards of living, the growth of e-commerce and increasing environmental awareness are driving the demand for packaging, which again is increasing the demand for renewable board- and paper-based packaging materials. Investments in high-performance, medium-sized packaging board machines and paper grade conversions are continuing. The increasing role of digital media is decreasing the demand for the graphic paper grades, such as newsprint, magazine, and printing. From a global point of view, the growth in demand for graphic paper has stopped. However, there is still some growth in emerging markets, but the demand is decreasing even more quickly in developed markets. Tissue consumption is growing strongly in all markets, thanks to the economic growth, increased purchasing power and rising standards of living. Urbanization trends, improved hygiene and living conditions are also playing a part, especially in emerging markets, and new products and consumption models, particularly in developed markets, are increasing the demand for our new tissue-making technologies. Global megatrends Increasing standard of living Global GDP growth, urbanization and a growing middle class are driving customer demand, which is in turn increasing the demand for energy, packaging and hygiene papers. Climate change and bioeconomy Consumers environmental awareness and international emissions reduction initiatives are creating demand for energy-efficient and sustainable technologies and solutions based on biomass. Increasing the production of CO 2 -neutral bioenergy is seen as one of the solutions to mitigate climate change. Need for renewable resources Resource scarcity is creating demand for renewable raw materials, products and energy. Products and energy based on biomass are both renewable and CO 2 -neutral and can replace nonrenewable raw materials and fossil fuels. 11

12 Valmet Annual Review 2015 Business environment Market data by business BUSINESS MARKET SIZE 1 & GROWTH MARKET DRIVERS PRODUCT GROUP VALMET S POSITION AND COMPETITION Services EUR 7.5bn ~2% Increasing pulp, paper 2, and energy production Increasing capacity utilization rates Demand for more efficient processes, maintenance and outsourcing of non-core operations Machine and mill closures in EMEA and North America Rolls and Workshop Services Mill Improvements Performance Parts Fabrics #2 3 Voith, Xerium #1 2 Andritz, Voith #1 2 Andritz, Kadant, Voith #4 5 Albany, AstenJohnson, Voith, Xerium Energy and Environmental #1 2 Amec FosterWheeler, Andritz Automation EUR 2.0bn ~1% Increasing pulp, paper and energy production Investments in new pulp and paper machines and power plants Aging automation systems Distributed Control Systems (DCS) Quality Management Systems #2 in P&P 3, niche player in Energy ABB, Honeywell, Siemens #1 2 in P&P ABB, Honeywell, Voith Analyzers and Measurements #1 in P&P ABB, BTG Pulp EUR 1.4bn ~1% Growth in board and tissue consumption Recycling rate development Increased efficiency and size of pulp lines and mills Rebuilds and extensions of existing mills Cyclical demand for large greenfield projects #1 2 Global leader with Andritz Energy EUR 2.0bn ~1% Growth in energy consumption Demand for renewable energy Modernization of aging power plants Incentives and regulation regarding climate change Competitiveness of different energy sources Increased focus on security of supply Demand for combined heat and power solutions #1 3 One of few global players in bioenergy niche Amec FosterWheeler, Andritz Board EUR 1.0bn ~3% World trade and economic growth especially in emerging markets Increasing e-commerce New applications and shift from plastic packaging to renewable materials #1 Andritz, Bellmer, Voith Paper EUR 0.6bn ~-1% Increasing role of digital media decreasing demand for printing and writing papers #1 Voith Tissue EUR 0.6bn ~3% Economic growth and rise in purchasing power and living standards in emerging markets Urbanization and improved hygiene and living conditions New products and consumption models #1 A.Celli, Andritz, Toscotec Voith 1 Market size is defined as Valmet s target market, meaning those geographical markets, product segments and customer industries where Valmet is currently competing or aiming to compete. 2 Refers to board, paper and tissue, as well as other paper grades. 3 Pulp and paper. 4 Based on RISI estimates. 5 Based on estimates by leading research companies. 6 Board, paper and tissue machines, pulp mills, and biomass power boilers are referred to as capital businesses. 12

13 Valmet Annual Review 2015 Business environment Market data by area AREA MARKET SIZE 1 & GROWTH MARKET CHARACTERISTICS VALMET S POSITION AND COMPETITION North America Target market size 1 : EUR 2.9bn P&P 3 annual production 4 : 150m tonnes, growth: +0.1% Size of energy market 5 : EUR 300m Mature, services-focused market with recurring opportunities in paper, tissue and automation Large installed base to be served Opportunities in agreement-based services business Growth opportunities in increased outsourcing Capital 6 project opportunities in tissue and board Capital project activity currently at high level Net sales: EUR 615m (21% of total) Employees: 1,367 (11% of total) Strong position and market share in Valmet s targeted capital businesses. Well-established services and automation businesses Key competitors: ABB, Andritz, Emerson, Honeywell, Voith and US services players Albany, AstenJohnson, Kadant and Xerium South America Target market size: EUR 1.5bn P&P annual production: 45m tonnes, growth: +1.6% Size of energy market : EUR 200m Cyclical capital business relies on new pulp projects Services, tissue and selected board applications provide growth opportunities Services growth potential through growing installed base and demand for more efficient customer operations Growing interest in optimization projects regarding e.g. energy, chemicals savings; efficiency of operations and availability of equipment Net sales: EUR 335m (11% of total) Employees: 531 (4% of total) Valmet has a strong position and installed base in Pulp mills and Services Strong competition with local and global players in all businesses (Services, Paper 2 and Energy) Fierce competition with Andritz for large new pulp projects Local presence and solutions important EMEA Target market size: EUR 6.0bn P&P annual production: 160m tonnes, growth: +0.6% Size of energy market : EUR 1bn Valmet s largest and most important area with significant services and technology markets in all Valmet s businesses Large installed base to be served Growth opportunities in customer agreementbased service business Declining printing and writing business, potential in conversions Capital project opportunities in board, pulp, tissue and bioenergy Uncertainties in regulation and low energy price postpone customers decision making Net sales: EUR 1.3bn (45% of total) Employees: 7,747 (63% of total) Valmet has a strong position in both capital business and services Small players have strengthened their offering through acquisitions China Target market size: EUR 2.1bn P&P annual production: 100m tonnes, growth: +2.5% Size of energy market : EUR 300m Market for capital projects flat and cyclical while services market growing Capital project opportunities in board and tissue, investments especially in lower cost mid-sized machines and rebuilds Developing services market with growth potential through increasing installed base and aging machinery Net sales: EUR 303m (10% of total) Employees: 1,955 (16% of total) Valmet has a strong position in Paper. Recent successes with modular board machine (OptiConcept M) Continued competition: new competitors in mid-size segment, local competitors strengthening through partnering with Western companies Large Valmet-installed base Asia- Pacific Target market size: EUR 2.6bn P&P annual production: 120m tonnes, growth: +1.4% Share of energy market: EUR 200m Increased investments in multifuel boilers and plans for renewable energy development Capital project opportunities in energy and board through customers portfolio changes or production line upgrades Developing services market with growth potential through capacity increases, larger installed base and higher market share Net sales: EUR 372m (13% of total) Employees: 706 (6% of total) Valmet has strong market position and is increasing its local presence Competitors are growing their local presence 13

14 Valmet Annual Review 2015 Strategy Strategy The implementation of Valmet s strategy and Must-Wins continued to bring good results in The acquisition of the Automation business helps Valmet on its way forward to becoming the global champion in serving its customers. Valmet s mission is to convert renewable resources into sustainable results. This means that our process technologies, automation and services make it possible for our customers to produce sustainable products and energy from renewable resources. Moreover, they help Valmet and its customers to perform profitably and responsibly. Our strategy emphasizes competitive offering and a strong commitment to serving our customers. In order to achieve our strategic goals, we pursue four Must-Wins that identify the most important areas and mobilize us to successful execution to reach our performance targets (see table on page 15). Valmet s vision is to become the global champion in serving its customers. Valmet s strategy and financial targets were initially announced in autumn 2013 (see table on page 16). Valmet s Board of Directors reconfirmed the strategy and financial targets in June Increased customer benefits from integrated offering As part of its strategic Must-Wins, Valmet is striving to enhance Customer excellence by strengthening its presence close to customers, providing a unique, full-scope offering and further developing its services offering. We also develop our key account management. In order to strengthen our presence close to customers and growth markets, we are continuing to build a stronger sales and Valmet s way forward Our Vision Our Must-Wins Customer excellence Our Mission Converting renewable r esources into sustainable results Our Values Customers Renewal Excellence People 14 Valmet develops and supplies competitive technology and services to the pulp, paper and energy industries. eader in technology L and innovation xcellence in E processes Winning team We are committed to moving our customers performance forward. Megatrends Increase in standards of living Bioeconomy and climate change Need for renewable solutions Sustainability focus areas Sustainable supply chain Health, safety and environment (HSE) People and performance Cost-effective sustainable solutions Corporate citizenship WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5 Our Strategy To become the global champion in serving our customers

15 Valmet Annual Review 2015 Strategy Our values Customers We move our customers performance forward. Renewal We promote new ideas to create the future. Excellence We improve every day to deliver results. People We work together to make a difference. service network. We are focusing especially on countries with high pulp, energy and paper production and where Valmet currently does not have a strong presence. By enhancing key account management, we aim to better serve our customers needs and improve market coverage. As part of this development, we are focusing on utilizing our customer relationship management (CRM) system more broadly in customer plans and sales management. We have also prepared a specific training program for sales management for 2016 to harmonize sales and customer processes and to further exploit our competitive advantages. As a result of the Automation business acquisition, Valmet now has a unique and distinct offering of process technology, automation and services enabling increased customer benefits. In services, we are continuing the development of a unified concept integrating our full offering, development of remote services and long-term service agreements. The combination of our existing remote connections and our installed base together with our process technology and automation know-how gives us an edge in developing Industrial Internet and next-generation services. Focus on cost competitiveness and new innovations The target of the Leader in technology and innovation Must- Win is to improve product cost competitiveness and develop new products and technologies to create new revenue. In order to reduce customers operational and investment costs and improve Valmet s profitability, we are focusing on developing product cost competitiveness. Modularization, product design and technology transfer enable us to decrease engineering, manufacturing and installation costs. MUST-WIN STRATEGIC GOALS KEY ACHIEVEMENTS Customer excellence Valmet has strong, capable, and committed teams close to customers. We serve our customers with our full offering combining process technology, automation and services. New service center in Brazil and another under construction in Indonesia, supported by new talent hires in emerging markets Key account management: customer relationship management (CRM) system more broadly in use and orders received from key customers increased Services sales continued to grow Automation business acquired to provide increased customer benefits by combining process technology, automation and services Leader in technology and innovation Valmet provides leading technology and cost-competitive products and services that reduce customers operating and investment costs. We develop innovative new solutions which create new customer revenue streams. Share of orders received from new products increased including further orders for Valmet s new paper production technologies such as OptiConcept M board and paper machines and Advantage NTT tissue machines Several new product launches including Valmet IQ online quality management solution Further development and commercialization of lignin separation, prehydrolysis and gasification of biomass and waste Excellence in processes Valmet operates with efficient and harmonized processes and continuously increased cost competitiveness. In capital business, we increase our flexibility to respond to a cyclical demand. Quality as well as health and safety are constantly improved. Programs initiated to harmonize and improve sales and project management processes Lean program being implemented with quality cost and lead time reduction Procurement cost saving targets exceeded in 2014 and 2015 Lost time incident frequency (LTIF) decreased from 5.5. to 3.3 Profitability and flexibility of the cost structure continued to improve following EUR 100 million cost competitiveness program in Winning team Valmet has engaged and performance-driven teams living Valmet s shared values. Competences are globally balanced and close to customers. Values embedded in way of working and company culture Values index created New annual review discussion process implemented Five new global training programs launched Development plans created for 700 management resources, successors and high potentials identified as part of talent review process 15

16 Valmet Annual Review 2015 Strategy We are continuing to bring new products to the markets from all business lines and increase the share of sales from new offerings. We are developing innovative new solutions that create new customer revenue streams, including bioconversion technologies such as LignoBoost lignin separation and pre-hydrolysis. In R&D, we are also increasing our focus on services products and solutions to even better support our customers and grow our services business. (See R&D focus areas on page 38.) Increased efficiency through global processes The Excellence in processes Must-Win focuses on increasing efficiency and profitability by improving sales and project management processes, reducing quality costs and lead times, reducing procurement costs, improving health and safety, and enhancing cost competitiveness and the flexibility of the cost structure. In 2015, Valmet established new, group-wide initiatives to harmonize sales and project management processes, develop common tools and systems, and improve profitability. We also continued to implement the Lean methodology globally to further reduce quality costs, lead times and non-value-adding activities, and engage our personnel in continuous improvement of our processes and ways of working. Strong procurement cost-saving development continued with an increased focus on design-to-cost practices, category management, and improved supplier relationship management. In 2015, the scope of procurement activities was expanded to ensure sustainability in the supply chain. We also work systematically to improve health and safety performance by further streamlining common standards, procedures and tools, as well as improving competencies and awareness of health and safety. In order to increase cost competitiveness and flexibility in cost structure, we are focusing on keeping fixed costs flat with increased volumes and continuing to shift costs to lower-cost countries with outsourcing plans and production transfers. Building a winning team Our Winning Team Must-Win creates a strong foundation for an engaged community by nurturing shared values, driving high performance and ensuring that we have the right competencies in place globally. Our target is to build and maintain a diverse, engaged and performance-driven team. In nurturing our shared values, we have moved from awareness to action by linking our values to our daily work and utilizing the OurVoice engagement survey to evaluate how well we understand and act according to our values. We are continuing to evolve our compensation framework and develop managerial skills to better drive performance. In order to increase our competencies close to our customers, we are continuing the globalization of our capabilities through resourcing and the creation of competence pools, especially in emerging markets and key countries. We are constantly deepening our understanding of current and future talent needs, creating action plans to address gaps and developing our resource planning tools to facilitate more proactive resourcing. Sustainability agenda In 2015, Valmet continued to implement the sustainability agenda as part of the implementation of its business strategy (see table on page 30). The agenda has five focus areas with concrete targets, action plans and key performance indicators for The agenda will be reviewed in early Valmet s financial targets TOPIC TARGET STATUS 2015 Growth Net sales growth to exceed market growth Services sales growth (14%) exceeded market 4 growth (~2%) Cyclicality continues in capital business, Valmet has increased its market share compared to key competitors Profitability EBITA 1 before non-recurring items: 6 9% 2015 EBITA: 6.2% Significant gradual improvement from 2013 (2.1%) and 2014 (4.3%) ROCE Return on capital employed (pre-tax), ROCE 2 : minimum of 15% 2015 ROCE: 12% Significant improvement from 2014 (9%) Dividend policy Dividend payout: at least 40% of net profit Dividend payout: 81% of 2014 net profit Dividend payout: 68% of 2015 net profit 3 1 EBITA (earnings before interest, taxes and amortization) before non-recurring items = operating profit + amortization + nonrecurring items 2 ROCE (pre-tax) = (profit before taxes + interests and other financial expenses) / (balance sheet total - non-interest-bearing liabilities (average for period)) 3 Based on Board of Directors proposal. 4 Services market long-term growth 16

17 Valmet Annual Review 2015 Strategy MUST-WIN: EXCELLENCE IN PROCESSES Enhancing quality and lead times with a comprehensive Lean approach As part of its Must-Wins, Valmet has started a specific Lean transformation program to cut quality costs and lead times. The Lean methodology emphasizes the flow of products, services or information through the operations and functions, rather than just maximizing the use of resources. The target is to create value for customers by eliminating different kinds of waste unnecessary work phases or waiting times and process constraints. In 2015, we held 39 one-day training sessions for over 800 managers and key professionals. We also kicked off a Leading through lean program focusing on the Lean leadership principles, and launched a Lean passport e-learning course for Lean fundamentals, says Jaakko Pentti, Director of QHSE at Valmet. Lean is a long-term commitment to continuous improvement in all parts of the company. It s a transformation which requires a change in mindset at all levels of the Valmet organization. Lean tools have earlier been implemented in some teams in our organization, but we are now implementing a comprehensive Valmet-level approach. Our target is to train everyone at Valmet to get the transformation to full speed. The training has already generated almost a hundred new Lean development projects across the organization and already some concrete results driving further transformation in turn. IF I CAN SEE IT, I CAN FIX IT Visualizing weekly workflows ensures that everyone can follow progress in a timely manner. The joint effort of all employees has led to a number of development suggestions that have resulted in improved process efficiency, productivity and safety, says Jussi Sinisalo, Director of Boiler Production in Tampere, Finland. 5S 1 ALL THE WAY ALIGNED PROCESSES Lean methodology functioned as a gamechanger when the spray blade operations in Clackamas, Oregon, merged with Valmet s Beloit Service Center in Wisconsin: Implementing standardized work processes has helped us reduce variability in the way we make the product. All of our operators are now aligned, which has enabled us to reach record levels in quality, delivery times and productivity, says Will Bolstad, a Grinder Operator at the Valmet Beloit Service Center, USA. Following a successful Lean implementation in its workshop, Valmet s Araucária site in Brazil decided to take a step further in 2015: This year, we also implemented 5S at our offices, which significantly improved the physical environment and material flows, as well as the electronic environment and information flow. This change has had a very positive impact on the overall working environment, says Christiane Bento, a member of the local 5S Committee. 1 Sort, straighten, sanitize, standardize and sustain 17

18 Valmet Annual Review 2015 Valmet s value creation Valmet s value creation INPUTS BUSINESS MODEL Financial Total equity EUR 860 million Interest-bearing debt EUR 371 million Cash and cash equivalents EUR 165 million Natural Purchased components (mainly metals-based) Purchased raw materials (mainly metals, minerals, polymers and gas) Energy consumption 1,270 TJ Water consumption 3,032,000 m 3 Human Number of employees 12,306 FTE 1 of subcontractors and supervised workers Investment in development and know-how Investment in occupational health and safety Infrastructure 140 locations in 33 operating countries 2 34 production units and over 100 service centers 80 sales offices Suppliers in over 50 countries Intellectual Proven customer references Technology know-how Product portfolio 16 technology centers and pilot facilities R&D expenses EUR 59 million 1,800 protected inventions Social and relationship Open dialogue with stakeholders (e.g. customer events, investor meetings, supplier days, stakeholder surveys) Cooperation with over 30 universities and research institutes Over 25 memberships in associations Relationships and partnerships Collaboration with local communities Customers Pulp and paper industry Energy industry Other process industries Key processes R&D Marketing Sales Engineering Procurement Production Delivery Service Our employees, expertise and experience Valmet s Way Forward: Mission, Strategy, Must-Wins, Vision and Values 1 Full-time equivalent 2 Includes technology centers All figures are from Dec 31, 2015, unless otherwise stated. 18

19 Valmet Annual Review 2015 Valmet s value creation OUTPUTS OUTCOMES CUSTOMERS END PRODUCTS Process technologies Pulping process equipment, process islands and complete pulp mills Individual board, tissue and paper machine sections, complete production lines and machine rebuilds Boiler islands, power plants, heating plants Environmental solutions Technologies for converting biomass to fuels, chemicals, and materials Automation Distributed Control Systems (DCS) Quality Management Systems Analyzers and measurements Performance and service solutions Services Spare parts and consumables Paper machine clothing and filter fabrics Rolls and workshop services Mill and plant improvements Maintenance outsourcing Services and environmental solutions for energy production Other outputs CO 2 emissions: Scope 1 3 : 15,400 tco 2 Scope 2 4 : 72,700 tco 2 Waste: Non-Hazardous waste 37,000 t Hazardous waste 1,800 t Economic Payments to shareholders and creditors EUR 51 million Wages and benefits EUR 748 million Payments to suppliers EUR 2,090 million Taxes EUR 29 million Support for non-profit organizations EUR 0.6 million Retained equity EUR 40 million More efficient and profitable customers processes Social Direct and indirect employment Improved employee competences Direct and indirect occupational health and safety Customer loyalty Trust and reputation License to operate Influence on operating environment and regulations Environmental Valmet s own operations More efficient processes enable the use of less natural resources and lower CO 2 emissions Customers operations Valmet s technology and services enable the production of customer s products with less energy, water and raw materials and improved flexibility in fuel source selection to replace fossil fuels with renewable ones Board Paper Tissue Pulp Process steam District heating Electricity Biofuels Biomaterials 3 Scope 1 emissions are direct GHG emissions from sources that are owned or controlled by Valmet, such as fossil fuels burned on site. 4 Scope 2 emissions are indirect GHG emissions resulting from the generation of electricity, heating and cooling, or steam generated off site but purchased by Valmet. 19

20 Valmet s operations With the combination of process technology, automation and services, we take our customers performance forward.

21 Over 50% of the world s 3,800 pulp and paper mills are served by Valmet. 440 online connections to customer sites enable the utilization of the Industrial Internet already today.

22 Valmet Annual Review 2015 Serving pulp, paper and energy industries Serving pulp, paper and energy industries globally Valmet s unique offering of process technology, automation and services helps to take the pulp, paper and energy industries performance forward. Global presence close to our customers To reach our vision to become the global champion in serving our customers, we have systematically increased our presence close to our global customers. Valmet has operations in 33 countries in a total of 150 locations. Many of our over 100 service centers are located at our customer sites. Valmet is organized around four business lines and five geographical areas. The business lines Services, Automation, Pulp and Energy, and Paper are responsible for technology and product development, technology projects, and services solutions. The areas North America, South America, EMEA, China and Asia-Pacific are responsible for sales and providing services and also supporting project deliveries in their respective regions. The business focus varies slightly from area to area depending on the market maturity and the current market situation. For example, Europe and North America have a large installed base and thus a wide services market with several opportunities for rebuilds in particular, but also for new production lines. In South America, Asia-Pacific and China, there are growth opportunities in both services and in new pulp, board, tissue and bioenergy projects. Valmet has reached a leading position in all its key market segments, with thousands of technology solutions and automation systems delivered and over 2,000 customer plants and mills served globally. Today s success is built on strong history Valmet s over 200 years of industrial history includes numerous mergers and acquisitions, which have led to a comprehensive offering for the industries served. Several of the companies forming part of today s Valmet date back to the 19th century, with some of the earliest being Tamfelt (1797), Tampella (1856), Beloit (1858) and Karlstad Mekaniska Werkstad (1860). The name Valmet was first taken into use in The new Valmet was born on December 31, 2013, when the Pulp, Paper and Power segment was demerged from Metso. In January 2015, Valmet announced the agreement to purchase the Process Automation Systems business from Metso. As a result of the acquisition, Automation became Valmet s fourth business line in April Unique combination of process technologies, automation and services Valmet develops and supplies advanced technologies, automation solutions and services for the pulp, paper and energy industries. Additionally, we have been able to extend some of the products and services to serve other process industries. Our mission is to convert renewable resources into sustainable results, which means that our customers can produce bio-based end products by utilizing our technologies and services. Orders received by business line, EUR million Orders received by area, EUR million 3,500 3,000 2,500 2,000 1,500 1, Services 1,119 (1,055) Automation 222 ( ) Pulp and Energy 864 (1,344) Paper 673 (671) 3,500 3,000 2,500 2,000 1,500 1, North America 717 (490) South America 166 (281) EMEA 1,320 (1,470) China 428 (244) Asia-Pacific 247 (586) 22

23 Valmet Annual Review 2015 Serving pulp, paper and energy industries Valmet worldwide Valmet locations The unique combination of process technology, automation and services enables innovative product and service development and also a more competitive offering. For pulp production, our offering includes entire pulping lines from wood handling to pulp drying, including recovery and evaporation systems. For paper producers, we offer paper, board and tissue production lines and equipment. In heat and power generation, our focus is on biofuel- and multifuel-based solutions. Additionally, we deliver environmental protection solutions to different process industries. We deliver new technology and solutions to widen the raw material base and to produce new bio-based materials. Our advanced automation solutions are designed to improve the performance of our customers processes and their efficiency in terms of costs, material and energy. The solutions range from single measurements to mill-wide turnkey automation projects. The Valmet DNA distributed control system is the single automation system for all functions process, machine, drive and quality controls. The automation systems are complemented by Valmet s analyzers and measurement solutions portfolio. Additionally, we offer a comprehensive quality monitoring and control system for pulp and paper production that utilizes the latest vision and scanner technology. Our comprehensive services offering increases the environmental and cost efficiency of production processes, while ensuring safe and reliable operations. Our services include spare parts and consumables, fabrics, rolls and workshop services, mill and plant improvements, maintenance outsourcing, as well as services and environmental solutions for energy production. Committed to moving our customers performance forward We are committed to moving our customers performance forward. In order to maximize the return on their assets, enhance their processes, and support sustainable development, we focus on finding the right combination of technology, automation and service elements for each of our customers in a particular situation. Process technology, automation and services are all combined in our Industrial Internet offering. We have the infrastructure in place to gather and analyze the data from our customers machines and processes. Together with our customers, we move their performance forward by utilizing the data to optimize operations and to plan preventive maintenance. We have already implemented hundreds of solutions utilizing our Industrial Internet capabilities. Enabled by advanced communication technology and big data analysis, the Industrial Internet is already moving to the next level outside the production facilities. In the coming years, we will enhance mobility and introduce even more advanced automation technologies and embedded diagnostics. 23

24 Valmet Annual Review 2015 Comprehensive offering Comprehensive offering BOARD AND PAPER Recycled fiber lines Tailor-made OptiConcept board and paper lines OptiConcept M modularized board and paper lines Modernizations and grade conversions Standalone products from stock preparation to roll handling TISSUE Advantage NTT tissue lines Advantage DCT tissue lines Advantage TAD tissue lines Rebuilds Stand-alone products, e.g., Yankee cylinders PULP Complete pulp mills Wood handling systems Cooking systems Fiber lines Pulp drying systems Evaporation systems RECOX Recovery boilers White liquor plants ENERGY CYMIC, circulating fluidized bed boilers (CFB) HYBEX, bubbling fluidized bed boilers (BFB) Biomass and waste gasification Modularized power plants Waste heat recovery Emissions control systems SERVICES PROCESS TECHNOLOGY CUSTOMER AUTOMATION BIOTECHNOLOGIES Pyrolysis solutions for bio-oil production LignoBoost for lignin extraction Steam exploded pellets production lines Biomass prehydrolysis for further refining SERVICES AUTOMATION Spare parts and consumables Paper machine clothing and filter fabrics Rolls and workshop services Mill and plant improvements Maintenance outsourcing Services and environmental solutions for energy production (evaporation plants, power boilers and recovery boilers) Valmet DNA Distributed Control System (DCS) Valmet IQ Quality Control System (QCS) Profilers Analyzers and measurements Performance solutions and services Industrial Internet solutions Process simulators Safety systems 24

25 Valmet Annual Review 2015 Comprehensive offering MUST-WIN: LEADER IN TECHNOLOGY AND INNOVATION Improving profitability and sustainability Saving energy with diamonds Valmet s groundbreaking Galileo concept has taken the extremely energy-intensive wood grinding process to a totally new level, as it utilizes diamonds instead of conventional ceramic stones. The Galileo grinder consists of steel segments bolted onto a steel core covered by surface segments. Each segment contains over 60,000 diamonds set in a specific, precise pattern depending on the species of wood in question, the process conditions, and the desired pulp quality. This innovative technology not only cuts energy cost by an estimated 20% to 25% per year, but it also increases pulp production between 20% and 40%. As diamonds are said to last forever, the diamond surface retains its pattern throughout its lifetime and also leads to more uniform end product quality. Maximizing the value of raw material The world s second Valmet-supplied LignoBoost lignin separation plant started up at Stora Enso s new biorefinery at Sunila Pulp Mill in Finland in early The plant is integrated with the pulp mill to separate and collect lignin from the black liquor. Lignin is a very efficient fuel that can be used in power boilers. It can also be further processed into valuable chemicals or materials. This gives pulp mills new potential to increase production, reduce costs and create new sources of income. The new LignoBoost plant will produce 50,000 tonnes of dried lignin per year, which will be used to replace natural gas in the lime kilns in order to reduce carbon dioxide emissions and to provide a new source of income through external sales. LignoBoost is a good example of how Valmet s technologies contribute to a wider value network when industries start to connect in search of synergies and new business potential. High-quality tissue with less fibers Valmet s flexible Advantage NTT technology stands out for producing tissue at low energy cost and high productivity, while increasing end-product quality and flexibility of production. The first NTT line installed at Papel de San Francisco s mill in Mexicali, Mexico in 2013, has proven to be a success in many aspects. This is an extremely energy efficient machine, with high dryness, which gives us previously unheard of productivity. We get conventional products at low energy, and textured tissue as an extra bonus with a quick and easy changeover. I believe NTT can become the new standard for conventional tissue making, states Dario Palma, Operations Director. The plain mode enables both high production volumes and softness at low energy consumption. The textured mode provides the possibility to produce premium quality tissue with 50% to 80% more bulk and softness, while saving up to 20% of fiber. 25

26 Valmet Annual Review 2015 Research and development Research and development Valmet s research and development work is driven by customer needs. As a result of this work, we have continuously improved our products and services and brought new innovations to market. With our research and technology development work, we aim to ensure an advanced and competitive offering of process technologies, automation and services for our current and future customers, enhance raw material efficiency, and promote the use of renewable raw materials. During recent years, Valmet has developed its board, paper and tissue machine offering towards more standardized and modular solutions. This has brought significant savings in customer investments, improved environmental efficiency and reduced the time from order to start-up. Our biotechnology innovations enable wider use of bio-based raw materials and create new revenue streams. Recent examples include LignoBoost lignin separation technology and bio-oil production with pyrolysis technology. Additionally, we have several new and innovative solutions in the pilot and demonstration phase. Our long-term vision is to develop solutions that take the industry to the next level. Such solutions would include mills that can produce pulp, paper and other bioproducts without emissions and with minimum water consumption, and new high-value end products utilizing bio-based raw materials. We are also developing new ways to utilize the Industrial Internet and advanced communication technologies to use indoor navigation and augmented reality in the production facilities we deliver and serve. Differentiation with R&D centers and pilot machines Valmet s own R&D centers and pilot machines form the backbone of our research and development work. Altogether, we have 16 R&D centers and pilot facilities located in Finland, Sweden and Portugal. Our research and development work is complemented by close cooperation with a network of world-leading research facilities and universities. A large amount of our technology development is done in cooperation with our customers, who also have the possibility to conduct their pilot projects with Valmet s pilot machines. CUSTOMER NEEDS VALMET S R&D FOCUS AREAS EXAMPLES OF SUCCESS CONCEPTS AND PRODUCTS Increase production efficiency Improve competitiveness Maximize value of raw materials Widen raw material base Provide high-value end products Develop new innovations and technologies Ensure advanced and competitive technologies and services: - We develop cost-competitive, leading production and automation technologies and services. Enhance raw material, water and energy efficiency: - We combine process technology, automation and services to reduce raw material, water and energy consumption. Promote renewable materials: - We develop solutions to replace fossil materials with renewable ones and to produce new higher-value end products. OptiConcept M board and paper machine Advantage NTT tissue machine Valmet DNA distributed control system High-power recovery boiler LignoBoost lignin separation Resources 16 own technology centers and pilot facilities Annual R&D spend about EUR 59 million Around 1,800 protected inventions Cooperation with customers, universities and research institutions Over 400 R&D professionals globally 26

27 Valmet Annual Review 2015 Research and development MUST-WIN: LEADER IN TECHNOLOGY AND INNOVATION Valmet IQ the smartest way to reach quality goals In 2015, Valmet launched a renewed Valmet IQ product family for its pulp and paper industry customers. Valmet IQ is a next-generation online quality management solution to optimize production processes and the end product quality. The renewed product family consists of a quality control system, profilers, web monitoring and web inspection systems. All components of the Valmet IQ solution are designed to work together. The products are designed to work seamlessly with other automation systems and all paper machines regardless of manufacturer. The easy connectivity with any system allows replacements even piece by piece. Valmet IQ is designed with the experience of thousands of system deliveries by Valmet over more than half a century. The renewed Valmet IQ quality management solution marks a new milestone in pulp and paper quality management featuring a number of innovations like online softness measurement for tissue. The new Valmet IQ is a beneficial solution whether our customer is looking to replace aging or obsolete quality control systems or to build up entirely new quality management solution, says Jari Almi, Director of Quality Management Solutions at Valmet. COMPREHENSIVE ONLINE DIAGNOSTICS The heart of a Valmet quality control system is situational information from the process. Valmet IQ scanners have selectable and adaptive scanning functions combined with high-speed quality sensors to provide many online diagnostic functions to improve paper quality, machine stability and process efficiency. IMPROVED USER INTERFACE INTEGRATED WITH PROCESS DATA The new Valmet IQ user interface with integrated performance reporting takes the user experience to a new level, revealing a clear view of the past, present and future of the process and product quality through intuitive navigation. It also allows for easy grade management. MEASUREMENTS FOR IMPROVED PROCESS EFFICIENCY Measurements are essential tools for reducing production costs and improving quality and efficiency. Valmet IQ introduces several new quality measurements such as an online IQ Softness sensor for tissue the first of its kind the industry. The non-nuclear sensor portfolio for basis weight and moisture measurement has been extended to pulp drying, providing accuracy measurement without the need for special certification or radiation safety issues. 27

28 Sustainability We carry out our operations in a socially responsible, safe and environmentally efficient manner, and help our customers to improve the energy and raw material efficiency of their production processes.

29 For the second year in a row, Valmet was included in the Dow Jones Sustainability Index (DJSI). LTIF 3.3 The year 2015 was Valmet s safest ever, with a record-low lost time incident frequency.

30 Valmet Annual Review 2015 Sustainability Sustainability agenda FOCUS AREA KEY TARGETS HIGHLIGHTS 2015 Sustainable supply chain We enhance our supply chain management and the transparency of our value chain. 100% of Valmet s procurement contracts to include Sustainable Supply Chain policy 80% of Valmet s active and 100% of new suppliers assessed for potential sustainability risks Training of Valmet s entire procurement organization by the end of 2015 Compliance with chemical legislation All active suppliers informed about the Sustainable Supply Chain policy and the policy included in all new procurement contracts 100% of new and existing suppliers assessed for potential sustainability risks 41 supplier sustainability audits conducted 100% of Valmet procurement professionals received sustainability training by end of 2015 Health, safety and environment (HSE) We provide a safe, healthy and well-managed work environment and minimize the environmental impact of our operations. Zero harm, wherever we work 3 safety observation reports per person by end of 2018 Incident frequency by end of 2018: LTIF < 2, TRIF < 5 Energy and CO 2 emissions reduction of 20% by 2020 Water consumption reduction of 15% by 2020 Waste reduction of 15% by 2020 No non-compliance issues No fatalities 0.7 safety observation reports per person LTIF -40% and TRIF -16% Energy consumption +1% CO 2 emissions +3% Water consumption -8% Waste amounts -3% People and performance We develop an engaged and performance-driven community. Values as part of company culture and way of working Defining strategic competencies for each business line and area Manager skill development concept in place Positive trend in engagement and performance levels as measured by regular engagement surveys New values index in place New manager role rolled out to clarify expectations towards managers 5 new global training programs kicked off Engagement increased by 9 percentage points Cost-effective sustainable solutions We develop and provide solutions that support sustainable development. Positive trend in the environmental efficiency of Valmet s solutions Orders received for new solutions Share of orders received from new products increased including further orders for new board, paper and tissue production technologies Several new products launched including the next-generation IQ quality management solution Major orders for pulp technologies Corporate citizenship We are a trusted partner to our stakeholders and a respected corporate citizen. Demonstrate leadership in third-party sustainability ratings Enhance dialogue with stakeholders Inclusion in Dow Jones Sustainability World and Europe Indices (DJSI) for the second consecutive year Updated Code of Conduct enforced with an e-learning completion rate of 90% 30

31 Valmet Annual Review 2015 Sustainable supply chain Sustainable supply chain In 2015, Valmet continued to implement its global activities to enhance sustainable sourcing and the transparency of its value chain. Valmet has a global supplier base with some 9,000 active suppliers in more than 50 countries. However, the majority of Valmet s purchases originate in Finland, Sweden and the United States. Valmet s main purchases consist of metals-based products and components, electronics as well as different services. In order to ensure responsible business practices throughout the supply chain, Valmet s sustainable supply chain focus area comprises five specific actions to enhance more sustainable procurement practices and to minimize potential negative social or environmental impacts. Enforcing new sustainability requirements In 2015, Valmet communicated its Sustainable Supply Chain policy and the requirements set therein to all its active suppliers globally. The policy was also included in Valmet s General Purchasing Conditions (GPC) and made an integral part of contract documentation and purchase orders. Valmet expects all its suppliers to comply with the sustainability requirements in the policy and has zero tolerance towards the use of forced labor or child labor. Compliance with the policy is the starting point for entering into and maintaining all business relationships with Valmet. Valmet wants to work with partners who share the same ethical principles and ideology of responsible business practices. The policy acts as a basis for supplier evaluations, self-assessments and third-party sustainability audits. Assessing sustainability risks Valmet assesses a wide range of topics in its global supplier selection process, ranging from management practices and financial and Sustainable supply chain roadmap Actions 1. Sustainable Supply Chain policy: We expect our suppliers to comply with our Sustainable Supply Chain policy and we will incorporate it in all new procurement contracts. 2. Supplier risk assessment: We integrate supplier sustainability risk assessments into procurement processes. 3. Sustainability audits and supplier self-assessments: We request supplier self-assessments and conduct audits. 4. Conflict-free minerals and compliance with chemical legislation: We strive to ensure that the materials and components we use do not include legally restricted chemicals or minerals from conflict areas. 5. Training: We increase awareness of and competences in sustainable procurement practices within procurement. Performance indicators Coverage of suppliers informed about the Sustainable Supply Chain policy Coverage of risk assessments of new and existing suppliers Implementation rate of internal processes Number of supplier sustainability self-assessments Number of sustainability audits Coverage of new way to operate related to chemicals regulations Highlights 2015 All active suppliers informed about the policy and the policy included in General Purchasing Conditions (GPC) All active suppliers assessed for potential sustainability risks 380 Valmet procurement professionals received sustainability training by the end of 2015 Global way to operate for sustainability audits defined and local sustainability auditors nominated 41 supplier sustainability audits conducted including self-assessments New program kicked-off to ensure compliance with chemical legislation 31

32 Valmet Annual Review 2015 Sustainable supply chain operative performance to ethical business practices, human and labor rights, occupational health and safety, environmental management and product safety. In 2015, Valmet integrated sustainability risk assessments with its supplier approval system. The risk evaluation is based on the country of origin and the purchase category in question. As part of this process, Valmet s entire global supplier base was assessed through a five-level sustainability risk assessment. Ensuring compliance through audits Valmet has a global process in place to ensure compliance with the requirements set out in its Sustainable Supply Chain policy. Based on a sustainability risk assessment, Valmet may ask its suppliers to evaluate their sustainability performance by conducting a self-assessment, which is used as one of the criteria to define the need for a potential sustainability audit. The self-assessment is an online questionnaire integrated with Valmet s supplier approval system and available in nine languages. In 2015, Valmet together with an independent, certified third-party auditor, conducted a total of 41 supplier sustainability audits in Brazil, China, Finland, India, Mexico, Poland, Sweden and the United States. Based on the experiences from the audits, we created a unified way to operate in sustainability audits to ensure a consistent process for all Valmet s sustainability audits globally and to enable comparability between suppliers. The new way to operate will be launched globally in early Increased focus on regulated substances The regulatory framework is continuously developing and will create new obligations for companies. In 2015, Valmet focused on ensuring compliance with the European Union s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) and RoHS (Reduction of Hazardous Substances) directives, and on sourcing conflict-free minerals. To ensure future compliance with, for example, new substance restrictions, Valmet also kicked off a specific development program to further develop its existing processes and controls. Purchases (10 largest countries) EUR MILLION Finland Sweden USA China Germany Brazil Estonia Poland Italy Japan All suppliers informed about new sustainability requirements. 41 supplier sustainability audits conducted globally. Sustainability training As part of its efforts to enhance the sustainability of its supply chain, Valmet has focused on increasing the awareness and competences of sustainable procurement practices in its global procurement organization. In 2015, the sustainability training continued in all areas globally, covering in total 380 procurement professionals. 380 procurement professionals trained for sustainability. 32

33 Valmet Annual Review 2015 Sustainable supply chain MUST-WIN: EXCELLENCE IN PROCESSES From plan to action auditing suppliers in India In September, Valmet s team spent one intensive week in India to audit three of its key suppliers in different parts of the country: Vadodara, Nagpur and Chennai. The target was to ensure that the suppliers meet the requirements set out in Valmet s Sustainable Supply Chain policy, as well as those stated in international and local laws. At each site, we conducted comprehensive workshop tours, employee interviews and documentation reviews to see how the supplier operations are arranged. The audits also served as a good basis to further develop a strong foundation for our future process and cooperation with suppliers, says Manish Sharma, Head of Asia-Pacific Supply Centers. New global way to operate for sustainability audits The audits were part of Valmet s supplier sustainability auditing program in Together with a certified third party specializing in standardized sustainability auditing Valmet conducted supplier sustainability audits in all its geographical areas. The audits served as a basis for defining Valmet s global way to operate in auditing, which will be rolled out in early The new way to operate consists of Valmet-specific processes and guidance, as well as relevant tools and templates. NEW POLICY The Sustainable Supply Chain policy addresses Valmet s requirements for its suppliers regarding business ethics, compliance, human rights and labor rights, occupational health and safety, environmental management and sustainability in products and services. SUSTAINABILITY TRAINING LOCAL AUDITOR POOLS Valmet s procurement organizations in each area have a pool of nominated local sustainability auditors. Not only have the sustainability pilot audits brought a great deal of added value to us as individuals, but they also present a whole new area for us to explore, learn and grow, says Mr. Manmeet Singh Kohli from Valmet s Gurgaon Supply Center in India. Currently 380 procurement professionals from all business lines and areas have participated in sustainability training during 2015 to ensure effective implementation of the new sustainable procurement processes. 33

34 Valmet Annual Review 2015 Health, safety and environment Health, safety and environment Together, we continue to create a culture of HSE excellence through development of leadership, engagement and effective processes. In 2015, we increased our focus on preventive and protective measures. Our roadmap for health, safety and the environment (HSE) sets out the milestones to achieving best-in-class HSE performance. This program engages our people and partners with our goal of zero harm in four areas: culture, processes, competency and performance. The year 2015 was Valmet s safest ever, with a 40% reduction in lost time incident frequency. We continued to realise eco-efficient gains in water consumption and waste reduction during the year. Due to the acquisition of the automation operations during the year, our absolute energy consumption and CO 2 emissions increased slightly. Focus on leadership and engagement HSE responsibilities and accountabilities are clearly defined at Valmet, and actions taken in 2015 have promoted active HSE leadership. The new Valmet manager role description and the associated Forward for Managers training embed key elements of HSE leadership, such as being a role model and driving change. More concretely, we continued the leadership safety walk process and all units set performance targets for key managers. These walks support local HSE engagement as well as improvements, and they have received positive feedback from our people and our customers. We promote HSE awareness throughout the year in our global communications program, supported by local actions. In 2015, a total of 56 Valmet locations took actions as part of the WWF Earth Hour campaign to demonstrate our overall environmental commitment. In April, we launched a campaign to increase safety observation reporting. In October, we held our second annual Health, safety and environment (HSE) roadmap Actions 1. Culture: We systematically enhance leadership, engagement and mindset to move HSE forward. 2. Processes: We ensure processes for effective HSE management are in place in all operations with a focus on defining global standards. We implement best practice as common practice. 3. Competency: We ensure training, competency and awareness are delivered and maintained to effectively manage HSE hazards and impacts. 4. Performance: Our strategic HSE targets and initiatives, translated into local action plans, drive continuous and sustained improvements in safe systems of work, employee wellbeing and our operational footprint. Performance indicators Safety observation and near miss reporting Safety committee coverage (%) Management system coverage HSE training hours per employee Incident and illness frequency Operational eco-efficiency targets: energy and CO 2 reductions, water consumption, amounts of waste Highlights 2015 No fatalities (own people and contractors) LTIF decreased by 40% and TRIF by 16% 0.7 safety reports per person Energy consumption +1%, CO 2 emissions +3%, water consumption -8%, amounts of waste -3 % 8 HSE training hours per employee Harmonization of procedures for safety on customer sites completed Launch of incident reporting app 34

35 Valmet Annual Review 2015 Health, safety and environment Health, safety and environmental data Energy CO 2 emissions Water consumption TJ 1,000 t 1,000 m 3 2, ,000 1,500 1, ,000 3,000 2,000 1, Fuel District heating Direct emissions (scope 1) Water consumption Electricity Steam Indirect emissions (scope 2) TJ/MEUR Net sales 1,000 tco 2 /MEUR Net sales Waste 1,000 t Management systems (% of headcount) SHARE OF CERTIFIED OPERATIONS ISO 9001 Quality Management System 90% ISO Environmental Management System 77% OHSAS Occupational Health and Safety Management System 61% Hazardous waste Non-hazardous waste 1 Including offices Lost time incident frequency (LTIF) 2, own employees Total recordable incident frequency (TRIF) 3, own employees Coverage of safety committees 4, % of workforce Safety committees 80% LTIF reflects the number of injuries resulting in an absence of at least one workday per million hours worked 3 LTIF+medical treatment and restricted work cases 4 Percentage of workforce represented in formal joint management-worker health and safety committees 35

36 Valmet Annual Review 2015 Health, safety and environment HSE awareness week, in conjunction with which we also launched a video about our mill maintenance operations at Orora B9 in Australia, demonstrating how we are building safety excellence on a daily basis. In addition to planned activities, we share local achievements in HSE performance, such as years-without-incidents milestones and best practices, in our internal news flow. Implementing high standards We embed best practice HSE processes in all our operations using common approaches and systems. On one hand, we continuously implement global standards for critical processes, such as serious incident investigation and hazardous substances management. We also started to harmonize site safety procedures this year, and we will continue to pilot them in customer projects in On the other hand, we have started a process of HSE and quality management system standardization and extension of certification to cover all production facilities. Our global standards and practices guide all our people, contractors and visitors in safe and responsible behavior in their everyday work. To assure compliance with global standards, as well as with legal and customer requirements, a corporate HSE audit program is followed each year by the Global HSE team of experts. Our focus in 2015 was on compliance with the Valmet minimum safety standards for high-risk tasks such as isolation of plant and machinery, and working at height. A total of 15 production facilities, as well as 12 customer sites, were audited. Competent people and teams During 2015, we established a global approach for ensuring that our people and partners are competent to carry out their work safely, wherever we operate. A common mandatory level of HSE training is defined for Valmet comprising fundamental HSE topics, as well as location/site-, role/task- and customer-specific training. We renewed our HSE awareness e-learning during the year, and it will be mandatory for all employees and partners as of We are also continuing consolidation of local HSE training matrixes into country-level matrixes capturing all relevant legal requirements matched to specific roles and tasks. Sustainable improvements in performance Through the annual planning process, Valmet defines clear improvement initiatives to achieve its HSE targets. Co-ordinated actions are implemented at the global, business line/area and location levels. Since 2014, additional focus and support has been provided to ten selected locations that have the most room for improvement in terms of HSE performance. A key global focus in 2015 was to activate safety observation reporting as an improvement process. Our global incident management system was developed to enable classification of safety observations into unsafe behavior and unsafe conditions. A mobile reporting app was also developed and launched at the end of the year. Valmet s environmental efficiency program Targets INDICATORS (ROLLING 12 MONTHS) TARGET 2020 Energy consumption and CO 2 emissions reduction (% reduction in yearly consumption compared to net sales, baseline reference yearly average ) 20% Municipal water consumption reduction (% reduction in yearly consumption compared to net sales, baseline reference yearly average ) 15% Total waste amount reduction (% reduction in yearly amounts compared to net sales, baseline reference yearly average ) 15% Waste utilisation rate (%) (% increase in waste utilisation (recycled waste + incineration / total waste), baseline reference yearly average ) 10% Health and safety targets 2018 Lost time incident rate (LTIF) (Lost time incidents per working hours) 2 Total recordable incident rate (TRIF) (LTIF + medical treatment and restricted work cases) 5 Near miss and risk observations HSE training 3 / employee / year 8h / employee / year Number of documented safety inspections per million whrs 150 Work to implement global standards continued through directed business line/area actions. The Paper business line implemented a lifting safety program and the China area a program for enhancing isolation of plant and machinery. Steps towards our eco-efficiency targets are taken in all production facilities based on global and operation-specific HSE action plans. Improvements in 2015 included the ongoing rationalization of the production footprint, upgrading existing processes and application of best available technology for new investments, as well as many small local contributions, such as the practice of turning off workshop lighting during lunchtime, as we do in Gorizia in Italy and Araucária in Brazil. Local health and wellness promotion is planned annually, for example through fitness classes, healthy lifestyle seminars and periodic health check-ups. The Jyväskylä unit became a smoke-free workplace in 2015, and all Finnish locations will follow by The target of the non-smoking policy is to support the health of the employees, decrease costs and positively affect the image of the company as a workplace. 36

37 Valmet Annual Review 2015 Health, safety and environment MUST-WIN: EXCELLENCE IN PROCESSES Taking safety forward every day As stated in Valmet s HSE policy, we strongly believe that all injuries, incidents and health hazards can be prevented, and we are committed to taking personal responsibility for HSE. On a monthly basis, all levels of Valmet management review progress towards HSE performance targets and follow up action plans with a focus on highlights, challenges and the next steps to ensure improvement. HSE alerts with key lessons for all serious incidents, as well as good HSE practices, are standard items in the monthly review. During 2015, we met our mid-term target for lost time incident frequency for own employees and realized a 60% reduction between 2012 and In doing so we eliminated ten serious injuries per month from our places of work. Our operations were again fatality-free for both our people and our contractors (2014: zero). We are actively improving reporting systems to be able to track contractor incident frequencies. Our ongoing focus is on ensuring appropriate systems, competence and behaviors are in place to create a culture where HSE excellence is embedded in our day-to-day activities. We remain committed to active engagement with our customers, people and partners as we continue to move safety forward towards zero harm, wherever we operate. LEADING THE WAY Safety is always first on my agenda. It is all about people, the heart of the company, and that we all return home from work safe, healthy and more knowledgeable each and every day. Our commitment to zero harm is built upon personal responsibility, accountability and clear, consistent leadership by example, says Bertel Karlstedt, President of Valmet s Pulp and Energy business line (in the right). DELIVERING SAFETY EXCELLENCE AT THE CMPC GUÁIBA MILL, BRAZIL Safety was a top priority during the delivery of the new pulp line. At the peak of construction, Valmet had over 4,000 people and contractors at the site, and 5% of work hours were spent on HSE training. At start-up, LTIF (12-month rolling) was at a record good level: Leadership commitment to safety was a key success factor, and constant attention was paid to supervision for safe systems of work. INNOVATING SAFELY IN TAMPERE, FINLAND Valmet s R&D center focuses on developing current and new technologies and fuels. One of many locations with a significant safety milestone, the center has already achieved more than four years injury-free through building a culture where HSE is a visible and integral part of daily operations. Effective risk management and active use of preventive safety observations in particular have been used as means to drive continuous improvement. 37

38 Valmet Annual Review 2015 People and performance People and performance Our people are at the heart of our business. We continuously work to build and develop teams with people from different backgrounds, genders and cultures. Having a diverse workforce creates a more dynamic work environment and leads to new ideas and more competitive products. Engagement on the rise, values support daily work The results of our employee engagement survey improved for nearly all questions in 2015, with total employee engagement increasing globally by nine percentage points to 65%. The results also showed clear improvement in the global focus area Instilling belief in Valmet s future, defined based on the 2014 survey. The share of positive responses for this area increased from 56% to 64%, once again showing that when we focus on a topic, we see results. The survey was used to establish the Values Index, a baseline for how successfully we are embedding our values into our work. People, in particular, saw a high result, with 83% of employees responding favorably to the statement the people I work with cooperate to get the job done. The results of the six values-related questions will be used to further strengthen our culture and way of working. Driving performance Driving performance continued to be a priority in We further developed our compensation framework to support high performance, ensuring the right mix of global and local bonus plans and performance-based salary increases and rewards. The special reward introduced in 2014 to reward individuals on the spot for top performance was expanded with an strengthened focus in We continued to utilize our Annual Review discussion process to review past performance and set targets and development actions for the year ahead. In 2015, we introduced a new tool and schedule to streamline the overall process. These improvements led to better coverage, a six-week shorter process and more time for manager-employee dialogue. We also introduced a mid-year review process to support target achievement, emphasize feedback and monitor ongoing development actions. People and performance roadmap Actions 1. Nurturing shared values: We encourage our people to live our shared values by connecting them to our way forward as a company. 2. Driving performance: We look for ways to improve the performance of our people. We develop processes that recognize and reward top performance, improve managerial skills, and encourage individuals to take an active role in driving their own performance. 3. Globalization of capabilities: In addition to developing our knowledge base, we strive to ensure that we have the right competence in the right place at the right time. Performance indicators Employee engagement survey Annual performance reviews Global and local training offering Highlights 2015 New Values Index to measure how well we are embedding our values in our work Engagement survey with global response rate of 81%, up from 68% Overall engagement rose by 9 percentage points Launch of 5 global training programs with over 320 participants Implementation of Manager Role as part of Forward for Managers training program Mind the Gap competence assessment proceeding worldwide Over 900 actions completed to develop management resources, successors and HIPOs (high potentials) 38

39 Valmet Annual Review 2015 People and performance Developing our people Valmet s talent development portfolio came to life in 2015 with five new global training programs being kicked off, along with a number of global e-learning courses on fundamental topics like the Code of Conduct, Information Security, and Lean. To complement the global learning mix, a range of business-specific and local training courses were also held in line with our learning philosophy, where 70% of learning is on the job, 20% from learning relationships and 10% from traditional training, both internal and external. In addition, we closely followed the development of our talent pool comprising over 700 management resources, successors and high potentials. In 2015, we completed over 900 development actions for this group. For managers, we developed clear expectations that were brought together in a concise manager role description and incorporated into the 360 Feedback and a new manager training program called Forward for Managers, which was completed by 66% of managers in It is an intensive day-long course that focuses on Valmet s Way Forward and our manager role in a dynamic and interactive way. All Valmet managers will take the training by mid % of our employees responded to the employee engagement survey in % point increase in overall employee engagement. Managing our knowledge base We are continuing to actively develop and globalize our capabilities close to our customers, ensuring we have the right resources in the right place at the right time. The Mind the Gap project, which began in 2014 to assess and develop critical business competencies, is proceeding, and the results are being used to create action plans to address gaps and future talent needs. This work is supported by the development of efficient resourcing tools to enhance resource planning and facilitate more proactive resourcing moving forward. Education structure, % Age structure, % Service years, % Doctorate degree 1% Master s degree 13% Bachelor s degree 27% Technical diploma 21% Associate s degree / College degree 11% Non-degree program 3% High school diploma 11% Basic education 7% Unallocated 3% 39

40 Valmet Annual Review 2015 People and performance MUST-WIN: WINNING TEAM A new era in global training Valmet s global training portfolio was successfully kicked off in 2015 with five programs and 11 sessions being run throughout the year. Each of the five programs Forward Strategy, Fast Forward, Champions in Services, Networking in Procurement and Leading through Lean helps us achieve our Must-Wins and utilize our values to drive desired behavior. The programs use a variety of learning methods to inspire thinking and bring minds together. The participant feedback has been positive for all programs, with especially high scores for the innovative hands-on approach and the cross-organization networking opportunity projects Project work is a key element of the programs. Projects bring positive energy to all involved and act as a springboard for innovative thinking. In 2015, more than 150 projects were completed that focused on a variety of topics ranging from improving customer competitiveness in the refiner segment and developing more sustainable solutions in paper technology to overall process improvement and Lean thinking. Sponsors from senior management support all project work. At the end of each program, the projects are evaluated by a committee of senior managers and peers and shared internally with the entire Valmet community. PROJECTS THAT TAKE US FORWARD As the sponsor of our Fast Forward program, I have the opportunity to evaluate the participants individual projects at the close of each program. I ve been particularly impressed with the level of ambition of the topics and their potential impact on Valmet, and I look forward to their realization in the future. In addition to that, the projects enable significant individual development. They also challenge and energize our people and give them the possibility to spar with their senior management mentors, says Julia Macharey, Senior Vice President of Human Resources at Valmet. UNIQUE NETWORKING OPPORTUNITY Forward Strategy and Fast Forward participants experienced a new type of networking called meeting points. Meeting points bring participants together from the two different programs for unique learning, networking and mentoring opportunities. DIVERSE THINKING Valmet s global programs are international programs that focus on our strategy and Must- Wins. When selecting participants we work hard to ensure we have the right mix of experience, competence and future talent to encourage diverse thinking. Over 320 people from Valmet locations around the world participated in the programs in

41 Valmet Annual Review 2015 Cost-effective sustainable solutions Cost-effective sustainable solutions Valmet s solutions help to convert biomass into renewable energy and recyclable products while increasing the economy and efficiency of production. From renewable resources into sustainable results With its advanced technologies and services, Valmet can help its customers produce more value from each tonne of feedstock or fuel they process. All our solutions target maximal raw material utilization and increased recycling, lower energy consumption and increasing use of renewable energy, while at the same time seeking to reduce fresh water consumption, use of chemicals and emissions. Technologies for more sustainable and profitable processes In pulp and paper production, improved material efficiency and lower amounts of waste, as well as reduced energy and water consumption, are normally achieved through process improvements. Paper and board producers can also improve their materials efficiency through lightweighting and by using lower quality raw materials in the manufacturing of high-quality end products. In paper machines, Valmet s research and development work continued to focus on modular and standardized solutions with optimal technology scope. An excellent example is the OptiConcept M modular board and paper machine, which can offer improvements in energy efficiency of up to 30% and enhanced operating profitability, as well as improved user experience and safety. In energy production the flexibility in fuel selection enables our customers to utilize a variety of renewable fuels that are locally available and reduce their use of fossil fuels. For example, Valmet s energy offering includes technologies for converting biomass, waste or a combination of different fuels into energy. Our offering also includes odor and emission control systems for pulp mills as well as heat and power plants. Cost-effective sustainable solutions roadmap Actions 1. Environmental efficiency of solutions: We continuously improve energy, water and raw material efficiency of solutions. 2. New offering: We develop and commercialize new solutions to increase sustainability and economy of customer processes and to create new revenue streams. 3. Customers sustainability needs: We actively engage in dialogue with our customers about their sustainability needs to meet the changing market needs. 4. Intellectual property rights (IPR): We actively protect our own product rights and monitor and respect those of others. Performance indicators Environmental efficiency of solutions Orders received for new products R&D investments in sustainability IPR development Highlights 2015 Share of orders received from new products increased including further orders for Valmet s new paper production technologies such as OptiConcept M board and paper machines and Advantage NTT tissue machines Major orders for pulp technologies with high environmental efficiency Several new products launches, including Valmet IQ online quality management solution Further development and commercialization of bioconversion technologies such as lignin separation, prehydrolysis and gasification of biomass Increase in customers positive perceptions of the sustainability of Valmet s offering increased from 94% to 98% 41

42 Valmet Annual Review 2015 Cost-effective sustainable solutions Valmet has also developed new biomass conversion technologies for producing new bio-based end products such as biogas, biofuels and biomaterials. In recent years, we have introduced several new technologies to the market including LignoBoost for lignin separation, a pyrolysis solution for bio-oil production, and a gasifier for solid biomass and waste. In addition, Valmet has developed its prehydrolysis technology to be applied in second-generation ethanol production. Improving life cycle efficiency Valmet s capabilities and unique offering of process technologies, services and automation is a strong basis for serving our customers in a sustainable way throughout the entire lifecycle of the production process. Our comprehensive range of services and automation helps to improve life cycle efficiency by increasing the environmental and cost efficiency of customers production processes while ensuring safe and reliable operations. The utilization of the Industrial Internet provides further potential to increase efficiency in customers processes. Moreover, advanced remote connections enable our services teams to serve our customers 24/7, regardless or time and place. Safety is part of the innovation process Safety is an integral part of Valmet s technologies, automation and services. The safety requirements of all Valmet s solutions are carefully reviewed and assessed in the innovation process and must be fulfilled in each product development phase. Valmet s solutions are required to be safe to use, and they are designed to meet or exceed all applicable safety standards and regulations. To ensure safe operations, customer training is included in all project deliveries. Moreover, the majority of Valmet s operations are certified to quality, health and safety and environmental management standards, and processes that ensure product safety are followed. New opportunities from the changing business environment The growing concern over the availability of earth s resources is creating pressure to continuously increase resource efficiency. At the same time urbanization, population growth and increased consumption pose a threat to clean air, arable land and fresh water. Evolving environmental regulations are also creating a need for more sustainable processes. Based on life cycle analysis of two product families, we have estimated that around 95% of the environmental impacts of Valmet s entire value chain occurs when Valmet s solutions are being used for production at the customer sites. For this reason, choosing efficient production technologies play a key role in mitigationg climate impacts. Valmet actively engages and cooperates with its customers, as well as research institutions and universities, to collect information on customers sustainability needs and to develop new and improved solutions for the market. In 2015, roughly one-fourth of Valmet s R&D spend was directly linked to improvements in the sustainability performance of new and existing solutions. However, many solutions are also subject to indirect sustainability impacts through other performance improvements. (See R&D focus areas p. 26.) Valmet s solutions convert renewable resources into sustainable results Endproducts Biogas Biofuels Biochemicals Biomaterials New paper grades Heat Electricity Dissolving pulp Chemical pulp Mech pulp Paper Board Tissue Technologies Automation Services Energy Pulp Paper Raw materials Waste Agro Wood Recycled paper Customer industries Energy production Biofuel refining Pulp Paper 42

43 Valmet Annual Review 2015 Corporate citizenship Corporate citizenship In 2015, Valmet reinforced its Code of Conduct to secure a uniform standard of behavior across its global operations. The company also maintained its position among the global sustainability leaders. Valmet is a truly global company with operations in over 30 countries. We provide employment and business opportunities not only directly to Valmet s over 12,000 employees globally, but also to a wide range of other stakeholders, and we indirectly build wealth in local societies. We aim to be seen as a trusted local partner and to build active relations with our stakeholders. We are transparent in our communications with our stakeholders and strive to ensure that all our operations are carried out in accordance with laws and regulations in a socially responsible and globally aligned manner. Operations aligned with international principles and guidelines Valmet has been a signatory of the UN Global Compact (UNGC) since January 2014 and is committed to following the ten universally accepted principles in the areas of human rights, labor, the environment and anti-corruption in its business. We support and respect the protection of human rights and labor rights as expressed in the United Nations Universal Declaration Corporate citizenship roadmap Actions 1. Globally aligned principles: We operate in compliance with laws and regulations and respect globally acknowledged ethical values, principles and human rights. Our operations are guided by our Code of Conduct and related policies. 2. Communication and reporting: We promote active stakeholder dialogue and transparently report on our sustainability performance on an annual basis. 3. Local programs: We participate in community programs to support local economies and communities based on our Principles for Sponsorships and Donations. Performance indicators Third-party sustainability ratings Depth of stakeholder dialogue Highlights 2015 Inclusion in Dow Jones Sustainability World and Europe Indices (DJSI) for a second consecutive year Score of 97/100 for disclosure in CDP s climate change program Updated Code of Conduct enforced across all operations with an e-learning completion rate of 90% Reporting according to GRI G4 core guidelines Valmet s customers, suppliers and employers rated the company s sustainability performance as good or excellent in the 2015 reputation survey The results of the 2015 stakeholder survey align well with Valmet s current sustainability agenda 43

44 Valmet Annual Review 2015 Corporate citizenship of Human Rights, the UN Guiding Principles on Business and Human Rights, and in the Declaration on Fundamental Principles and Rights at Work of the International Labour Organization (ILO). We also take into account the OECD s Guidelines for Multinational Enterprises. Updated Code of Conduct Our daily operations are guided by Valmet s Code of Conduct, which is aligned with the principles set out in the UN Global Compact. Valmet s Code of Conduct guides the behavior and decisions of Valmet s employees and its partners, and creates a uniform foundation for all our business transactions and work assignments. The Code addresses topics such as human rights, labor practices, environmental issues, compliance with laws and regulations, fair competition, occupational well-being and safety, and ethical standards throughout the value chain. In 2015, Valmet updated its Code of Conduct and organized a management training and an obligatory global e-learning course for all employees. The updated Code links more strongly with Valmet s shared values and introduces practical dos and don ts to help apply the Code in daily work. The Code also includes instructions for reporting suspected misconduct, for which Valmet established a new reporting channel in The new channel is maintained by a third party to guarantee anonymity and enables Valmet s employees or any of our stakeholders to make a report 24/7 via telephone or the Internet in their native language. Both the Code of Conduct leaflet and the e-learning material are available in 19 languages. Employees without Internet access are invited to attend classroom training. By the end of 2015, some 90% of Valmet employees had completed the training. All new employees are introduced to, and must familiarize themselves with, the Code of Conduct. The Code of Conduct and its updates are approved by Valmet s Board of Directors. Other guiding policies Valmet s Code of Conduct is supported by a set of policies defining more detailed principles for specific activities. Valmet s Anti-Corruption policy addresses our zero-tolerance approach to bribery and corruption. The Competition Compliance Guidelines provide practical instructions for compliance with competition and anti-trust laws. Training for these topics is organized on a regular basis. The most recent training for the Anti-Corruption e-learning was launched in the last quarter of The training will be given first to top management and other senior management and employees from sales and procurement. The previous training cources on Competition Compliance Guidelines and Anti-Corruption were completed during The next Competition Compliance Guidelines e-learning will take place in In 2015, Valmet invested EUR 20 million in more sustainable business practices. 90% of Valmet s personnel completed the updated Code of Conduct e-learning in Valmet s Health, Safety and Environment (HSE) policy guides our approach to HSE in our own operations, stakeholder collaboration and our offering. The Sustainable Supply Chain policy sets requirements for our suppliers related to sustainable operations. Valmet s Equal Opportunity and Diversity policy promotes equal opportunities for all employees, regardless of gender, age, race, religion or beliefs, ethnic or national origins, marital/civil partnership status, sexuality or disability. Creating added value Valmet cooperates with a number of different stakeholders every day. Our stakeholders are existing and potential customers, existing and potential employees, suppliers and subcontractors, shareholders and investors, media, non-governmental organizations, authorities and local communities, research institutes, universities and vocational schools. We strive to operate in a manner that creates added value to us and our stakeholders. Valmet s value creation model on page describes in more detail how our operations impact the economy, environment and societies around us. Active stakeholder dialogue Valmet actively communicates with its stakeholders through multiple channels such as events, face-to-face meetings, customer magazines, company reports and brochures, online channels, and surveys. 44

45 Valmet Annual Review 2015 Corporate citizenship In order to enable a continuous stakeholder dialogue about its sustainability performance, Valmet has a Web-based brainstorming tool in place. In 2015, 595 external stakeholders and Valmet employees had used the brainstorming tool. The feedback received through the tool indicates that Valmet s stakeholders share the current view on what is important with regard to the company s sustainability performance. The most important topics concerned safety, sustainable solutions, ethical behavior and employee wellbeing. The brainstorming results are reviewed and analyzed on a regular basis to assess potential new topics of concern. In addition to the stakeholder survey, Valmet actively collects stakeholder feedback at different events and meetings, as well as through specific other surveys and external ratings. In 2015, Valmet s customers, suppliers and employers rated the company s sustainability performance as good or excellent in our reputation survey, and the rating of Valmet as a socially and environmentally responsible company increased in the employee engagement survey. Also, the proportion of customers reporting positive perceptions of the sustainability of Valmet s offering increased from 94% to 98% in Comprehensive sustainability reporting We strive to have globally consistent and transparent management and reporting practices so that all our stakeholders can reliably assess the company s sustainability performance and development. Valmet reports annually on its sustainability performance according to the Global Reporting Initiative, GRI G4 Core option, with selected indicators assured by an independent third party. We also report to selected third-party sustainability ratings. In 2015, Valmet was included in the Dow Jones Sustainability Index (DJSI) for the second consecutive year. Valmet also reported to CDP s Climate Change program with a score of 97/100 and performance level B. Income taxes (10 largest countries) EUR MILLION Finland USA Sweden China Japan Portugal Canada India Germany Chile Support for non-profit organizations, % EUR 647,183 in total Youth activities 48% (64%) Environmental protection 46% (18%) Science, research and education 3% (13%) Others 2% (3%) Sports 1% (1.6%) Culture 0.1% (0.4%) Distribution of economic value added to our stakeholder groups DIRECT ECONOMIC VALUE GENERATED ECONOMIC VALUE DISTRIBUTED RETAINED IN BUSINESS Revenues EUR 2,959 million Operating costs: EUR 2,090 million Employee wages and benefits: EUR 748 million Payments to providers of capital: EUR 51 million Payments to government: EUR 29 million Support for non-profit organizations: EUR 0.6 million EUR 40 million 45

46 Valmet Annual Review 2015 Corporate citizenship Improving daily life with fresh water Every year, Valmet supports selected projects globally to meet the needs of the communities around it. We believe that collaboration with local communities around the world results in mutual benefits. In 2015, Valmet teamed up with Keng Zhen Central Primary School located in Shaanxi province in China to address the challenge of fresh water. Keng Zhen Central primary school is one of more than 100,000 rural schools in China, located in a mountainous and geographically remote area. The school had been pumping poor-quality water from underground since there is no water supply system in the town. Fresh water was previously only available a kilometer away in the valley. Valmet decided to solve the challenge by donating new water filters to the school for cooking and drinking, including a service agreement to ensure proper functionality of the equipment. Valmet also donated second-hand computers to the students and promised to provide IT support via the internet. The project demonstrates well the initiatives we hope to promote in local communities. Back in 2008, Valmet in China and all its local employees donated for the rebuilding of two schools which were damaged during the Wenchuan earthquake. Our recent activities in Jiaxian are further examples of our means to collaborate with the communities around us and support their daily operations, says Xie Daorong, Vice President of China Operations. LONG-TERM CHANGE I was delighted to see the faces of the students who tasted the water. It showed we really succeeded in addressing one of the daily challenges of the school, and I am confident that access to fresh water will have a positive impact on the wellbeing of the students and teachers in the long-term, says Wang Hongmei, Marketing Communications Manager at Valmet in China. ACCELERATING LEARNING IN BRAZIL INVESTING IN LOCAL COMMUNITIES In 2015, Valmet spent EUR 0.6 million on selected projects around the world. Valmet s sponsorships and donations focus on science, research, education, environmental protection, nature conservation and youth activities. Valmet s seasonal donation for 2015 was dedicated to Save the Children, WWF and UN Women. In Brazil, Valmet has participated in social and environmental programs through two local non-profit organizations since One of the main targets of the programs is to develop and ensure access to basic education for 75,000 young people in the state of Maranhão. For example, the programs provide special courses for illiterate students to enable them to catch up with their peers at school, says Laura Puustjärvi, Head of Sustainability at Valmet. 46

47 Valmet Annual Review 2015 Contacts Contacts Visiting address Keilasatama 5, Espoo, Finland Postal address P.O. Box 11, Espoo, Finland Tel (0) Media contacts Sustainability contacts Follow Valmet in Twitter or YouTube and join us in Linkedin and Facebook. Twitter.com/valmetglobal Youtube.com/valmetglobal Linkedln.com/company/valmet Facebook.com/valmetcorporation Investor relations Order publications About this report Concept, design and production Miltton Oy Paper MultiArt Silk 300 g MultiArt Silk 130 g Printing Oy Fram Ab The paper, and the pulp used in making the paper, was produced with machines and equipment manufactured by Valmet. The report is printed on MultiArt Silk, which is PEFC-certified and meets the environmental criteria for the Swan ecolabel. PEFC certification confirms that the forests are being sustainably managed. The printing inks and chemicals used in printing comply with the requirements for the Swan ecolabel. The printing ink is plant oil-based, and the other materials used are recyclable and ecofriendly Printed matter 47

48 Converting renewable resources into sustainable results Valmet Corporation Keilasatama 5 / PO Box 11 FI ESPOO, FINLAND

49 FINANCIAL STATEMENTS 2015 WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

50 Valmet is the leading global developer and supplier of process technologies, automation and services for the pulp, paper and energy industries. We aim to become the global champion in serving our customers. Valmet s strong technology offering includes pulp mills, tissue, board and paper production lines, as well as power plants for bioenergy production. Our advanced services and automation solutions improve the reliability and performance of our customers processes and enhance the effective utilization of raw materials and energy. Valmet s net sales in 2015 were approximately EUR 2.9 billion. Our 12,000 professionals around the world work close to our customers and are committed to moving our customers performance forward every day. Valmet s head office is in Espoo, Finland and its shares are listed on the Nasdaq Helsinki. Valmet reports 2015 annual review Valmet s operations and sustainability in 2015 ANNUAL REVIEW 2015 The report describes Valmet s market environment and the progress of its strategy, operations and sustainability in financial statements 2015 FINANCIAL STATEMENTS 2015 The report includes Valmet s Financial Statements for 2015 and information about its shares, shareholders and management. gri supplement 2015 GRI SUPPLEMENT 2015 The report defines Valmet s sustainability reporting scope and principles, and alignment with the Global Reporting Initiative (GRI).

51 Table of contents Notes to the Consolidated Financial Statements Report of the Board of Directors... 4 Consolidated Statement of Income...18 Consolidated Statement of Comprehensive Income...19 Consolidated Statement of Financial Position Consolidated Statement of Cash Flows...22 Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements *)...24 Financial Indicators 2015 and Formulas for Calculation of Indicators...73 Parent Company Statement of Income, FAS Parent Company Statement of Financial Position, FAS...75 Parent Company Statement of Cash Flows, FAS...76 Notes to Parent Company Financial Statements...77 Signatures of Board of Directors Report and Financial Statements...89 Auditor s Report...90 Board of Directors...92 Executive Team...94 Shares and Shareholders...96 Investor Relations...99 *) The accompanying notes form an integral part of these Financial Statements. 1. Background, basis of preparation and accounting principles Reporting segment and geographic information Financial risk management Selling, general and administrative expenses Other operating income and expenses Personnel expenses and the number of personnel Depreciation and amortization Financial income and expenses Income taxes Business combinations and disposals of businesses Intangible assets and property, plant and equipment Investments in associates and joint ventures Available-for-sale financial assets Inventories Revenue recognition Interest bearing and non-interest bearing receivables Financial assets and liabilities Cash and cash equivalents Equity Share-based payments Non-current and current debt Provisions Trade and other payables Post-employment benefit obligations Mortgages and contingent liabilities Lease contracts Derivative financial instruments Related party information Group companies Audit fees Lawsuits and claims Events after the reporting period Key exchange rates 71 3

52 Report of the Board of Directors Report of the Board of Directors January December, 2015 Governance Current legislation, the Company s Articles of Association and the rules and regulations of organizations regulating and supervising the activities of listed companies are complied with in Valmet Corporation and Valmet Group corporate governance. Valmet Corporation complies with the Finnish Corporate Governance Code for listed companies, which was published by the Securities Market Association in October 2015 and came into force on January 1, The Code is publicly available at Corporate Governance Statement Valmet has prepared a separate Corporate Governance Statement for 2015 which complies with the recommendations of the Finnish Corporate Governance Code for listed companies. It also covers other central areas of corporate governance. The statement has been published on Valmet s website, separately from the Board of Directors Report, at Annual General Meeting The Annual General Meeting is the company s highest decision-making body, and its tasks are defined according to the Articles of Association and the Finnish Companies Act. The Annual General Meeting decides on the adoption of the Financial Statements, the distribution of profit, discharging the members of the Board of Directors and the President and CEO from liability, appointing the members, Chairman and Vice Chairman of the Board and the auditor, and their remunerations, as well as other matters requiring a decision by the Annual General Meeting according to the Finnish Companies Act and presented to the Annual General Meeting. The Annual General Meeting convenes at least once a year. The Board of Directors convenes the Annual General Meeting. The Board of Directors The Board of Directors takes care of the company s administration and the appropriate organization of its activities and ensures that the monitoring of the company s accounting and asset management is arranged appropriately. The Board of Directors monitors the Group s activities, finances and risk management, and its task is to promote the interests of shareholders and the Group by ensuring the appropriate organization of the entire Group s governance and operations. According to Valmet s Articles of Association, the Board of Directors shall include at least five (5) members and at most eight (8) members. The term of office of Board members ends at the end of the first Annual General Meeting following the elections. The Annual General Meeting selects the Chairman, Vice Chairman and other members of the Board. President and CEO The Board of Directors selects a President and CEO for the company and decides on the salary and remunerations of the President and CEO and other terms related to the position. The Board of Directors monitors the work of the President and CEO. The President and CEO is responsible for the company s daily administration according to the instructions and regulations of the Board of Directors. The President and CEO is responsible for ensuring the legality of the company s accounting and for the reliable organization of the company s asset management. 4

53 Report of the Board of Directors Valmet s results 2015 Figures in brackets, unless otherwise stated, refer to the comparison period, i.e. the same period of the previous year. Automation has been consolidated into Valmet s financials since April 1, 2015, when the acquisition of Automation was completed. Key figures 1 EUR million Carve-out Orders received 2,878 3,071 2,182 Order backlog 3 2,074 1,998 1,398 Net sales 2,928 2,473 2,613 Earnings before interest, taxes and amortization (EBITA) and non-recurring items % of net sales 6.2% 4.3% 2.1% Earnings before interest, taxes and amortization (EBITA) % of net sales 5.3% 3.8% -1.2% Operating profit (EBIT) % of net sales 4.1% 2.9% -2.2% Profit before taxes Profit/loss Earnings per share, EUR Earnings per share, diluted, EUR Equity per share 3, EUR Dividend per share, EUR Cash flow provided by operating activities Cash flow after investments Return on equity (ROE) 9% 6% -7% 6 Return on capital employed (ROCE) before taxes 12% 9% -4% 1 Group figures: the calculation of key figures is presented in the section Formulas for Calculation of Indicators. 2 Valmet has formed a separate legal group as of December 31, Key figures for 2013 are based on financial carve-out data. Figures based on the Statement of Financial Position as at December 31, 2013 are actual figures. 3 At the end of period. 4 The earnings per share information was computed as if the shares issued in conjunction with the Demerger had been outstanding for the entire comparison period. 5 Board of Directors proposal. 6 In calculating these key ratios, an adjustment of EUR 468 million has been made from Non-current debt, Metso Group to equity in order to reflect the conversion of Metso Svenska AB s non-current debt to Metso Group which took place in January As at Dec 31, Equity to assets ratio and gearing Equity to assets ratio at end of period 36% 42% 41% Gearing at end of period 21% -21% 0% Customer activity increased towards the end of the year In 2015, customer activity increased towards the end of the year, which was visible in orders received. After the high activity in the first half of 2014, orders received decreased to a lower level in the second half of From that level, customer activity and orders received have been growing during In 2015, orders received increased in China and North America, and decreased in other areas. The services business developed well in 2015 and orders received remained stable compared with 2014 in EMEA (Europe, Middle East and Africa) and increased in all other areas. In 2015, the development in the capital business was strong in China and North America. In the automation business, the majority of the orders received came from EMEA in

54 Report of the Board of Directors In the energy business, customers decision making has been slower and in many cases postponed due to uncertainty in regulation in the energy market and the low price of energy. In the pulp business, customers made many investment decisions in Orders received increased in China and North America, stable business 1 orders received EUR 1.3 billion in 2015 Orders received, EUR million Change Services 1,119 1,055 6% Automation Pulp and Energy 864 1,344-36% Paper % Total 2,878 3,071-6% 1 Stable business = Services and Automation business lines. Orders received, EUR million Change North America % South America % EMEA 1,320 1,470-10% China % Asia-Pacific % Total 2,878 3,071-6% Orders received in 2015 amounted to EUR 2,878 million, i.e. 6 percent less than in the comparison period (EUR 3,071 million). The Automation business line contributed to orders received with EUR 222 million. The emerging markets accounted for 36 percent (45%) of orders received. Orders received increased in the Services business line, remained at the previous year s level in the Paper business line, and decreased in the Pulp and Energy business line. Orders received increased in China and North America and decreased in other areas. Measured by orders received, the top three countries were the USA, Finland and China, which together accounted for 49 percent of total orders received (Sweden, Finland and the USA, which together accounted for 41%). In 2015, changes in foreign exchange rates increased orders received by approximately EUR 105 million compared with the exchange rates for The largest orders in 2015 were received by the Pulp and Energy business line. In April, Valmet received an order for key technology to a bioproduct mill in Finland. The estimated value of the delivery, which includes only the core equipment supplied by Valmet, is about EUR million. In August, Valmet received an order for the main equipment to a pulp mill project in China. The value of the order is about EUR 110 million. In December 2015, Valmet received an order for key technology to a pulp mill expansion project in Sweden. Other orders that Valmet received during the year were, among others, an OptiConcept M containerboard production line to China, several automation orders in Europe and North America, an Advantage NTT tissue production line to the USA, and two Advantage DCT tissue production lines to China. Valmet also signed a five-year agreement on the supply of paper machine and fiber line consumables to a customer in Sweden. Order backlog at EUR 2.1 billion As at Dec 31, Order backlog, EUR million Change Total 2,074 1,998 4% At the end of December, the order backlog was EUR 2,074 million, which was 4 percent higher than at the end of the comparison period (EUR 1,998 million). Approximately 25 percent of the order backlog relates to stable business (Services and Automation business lines). At the end of December 2014, approximately 20 percent of the order backlog related to the Services business line. Net sales increased in 2015 Net sales, EUR million Change Services 1, % Automation Pulp and Energy % Paper % Total 2,928 2,473 18% Net sales, EUR million Change North America % South America % EMEA 1,304 1,053 24% China % Asia-Pacific % Total 2,928 2,473 18% Net sales in 2015 increased 18 percent to EUR 2,928 million (EUR 2,473 million). Automation business line contributed to net sales with EUR 229 million. Net sales increased in both the Paper and Services business lines and remained at the previous year s level in the Pulp and Energy business line. The stable business (Services and Automation business lines together) accounted for 46 percent of Valmet s net sales (Services business line accounted for 40% in 2014). Net sales increased in North America, EMEA, and China, and remained at the previous year s level in Asia-Pacific and South America. Measured by net sales, the top three countries were the USA, Finland and Sweden, which together accounted for 43 percent of total net sales (the USA, Sweden and Brazil, which together accounted for 38%). Emerging markets accounted for 42 percent (48%) of net sales. 6

55 Report of the Board of Directors In 2015, changes in foreign exchange rates increased net sales by approximately EUR 78 million compared with the exchange rates for Profitability improved EBITA margin in the targeted range In 2015, earnings before interest, taxes and amortization and non-recurring items (EBITA before non-recurring items) were EUR 182 million, i.e. 6.2 percent of net sales (EUR 106 million and 4.3%). Profitability improved due to increased net sales in the Services and Paper business lines, improved gross profit, and the acquisition of Automation. Operating profit (EBIT) in 2015 was EUR 120 million, i.e. 4.1 percent of net sales (EUR 72 million and 2.9%). Non-recurring items amounted to EUR -26 million (EUR -12 million), of which EUR -14 million related to the acquisition of Automation and EUR -5 million to impairment of fixed assets. Financing activities Net financial income and expenses in 2015 were EUR -10 million (EUR -5 million), of which interest expenses amounted to EUR 13 million (EUR 12 million), interest income to EUR 3 million (EUR 5 million), other financial income and expenses to EUR -2 million (EUR -2 million), dividends received to EUR 0 million (EUR 1 million) and net foreign exchange gains to EUR 2 million (EUR 3 million). Share in profits and losses of associated companies, financial investments, amounted to EUR -2 million (EUR 0 million) in Profit before taxes and earnings per share Profit before taxes for 2015 was EUR 108 million (EUR 67 million). The profit attributable to owners of the parent company in 2015 was EUR 77 million (EUR 46 million), corresponding to earnings per share (EPS) of EUR 0.51 (EUR 0.31). Return on capital employed (ROCE) increased In 2015, return on capital employed (ROCE) before taxes was 12 percent (9%) and return on equity (ROE) 9 percent (6%). Business lines Services orders received and net sales increased in 2015 Services business line Change Orders received (EUR million) 1,119 1,055 6% Net sales (EUR million) 1, % Personnel (end of period) 5,363 5,230 3% During 2015, orders received by the Services business line increased 6 percent to EUR 1,119 million (EUR 1,055 million) and accounted for 39 percent of all orders received (34%). Orders received remained stable compared with the comparison period in EMEA and increased in other areas. During 2015, net sales for the Services business line totaled EUR 1,128 million (EUR 989 million), corresponding to 39 percent of Valmet s net sales (40%). Automation orders received EUR 222 million and net sales EUR 229 million in 2015 Automation business line Change Orders received (EUR million) Net sales (EUR million) Personnel (end of period) 1, The acquisition of Process Automation Systems was completed on April 1, 2015 and the acquired business forms the Automation business line. During April December, orders received by the Automation business line amounted to EUR 222 million and accounted for 8 percent of all orders received. EMEA accounted for approximately 60 percent and North America for approximately 20 percent of orders received. During April December, net sales for the Automation business line totaled to EUR 229 million, corresponding to 8 percent of Valmet s net sales. Pulp and Energy orders received decreased in 2015 Pulp and Energy business line Change Orders received (EUR million) 864 1,344-36% Net sales (EUR million) % Personnel (end of period) 1,750 1,737 1% During 2015, orders received by the Pulp and Energy business line decreased 36 percent to EUR 864 million (EUR 1,344 million) and accounted for 30 percent of all orders received (44%). Orders received increased in China and North America and decreased in other areas. Orders received decreased in both Pulp and Energy. During 2015, net sales for the Pulp and Energy business line totaled to EUR 913 million (EUR 956 million), corresponding to 31 percent of Valmet s net sales (39%). Paper net sales increased in 2015 Paper business line Change Orders received (EUR million) % Net sales (EUR million) % Personnel (end of period) 3,036 3,098-2% 7

56 Report of the Board of Directors During 2015, orders received by the Paper business line remained at the previous year s level at EUR 673 million (EUR 671 million) and accounted for 23 percent of all orders received (22%). Orders received increased in China, North America and South America, remained stable compared to the comparison period in Asia-Pacific, and decreased in EMEA. Orders received remained stable compared to the comparison period in both Board and Paper, as well as Tissue. During 2015, net sales for the Paper business line totaled EUR 659 million (EUR 528 million), corresponding to 23 percent of Valmet s net sales (21%). Cash flow and financing Cash flow provided by operating activities amounted to EUR 78 million (EUR 236 million) in Net working capital was EUR -238 million (EUR -353 million) at the end of December The change in net working capital, net of effect from business combinations and disposals in the condensed consolidated statement of cash flows was EUR -121 million (EUR 103 million) in Payment schedules of large capital projects have a significant impact on net working capital development. Cash flow after investments was EUR -287 million (EUR 194 million) in Gearing was 21 percent (-21%) at the end of December and equity to assets ratio was 36 percent (42%). Gearing increased and the equity to assets ratio decreased, mainly due to the acquisition of Automation, which was completed on April 1, Interest-bearing liabilities were EUR 371 million (EUR 68 million) and net interest-bearing liabilities totaled to EUR 178 million (EUR -166 million) at the end of the reporting period. Interest-bearing liabilities increased due to bank loans to finance the acquisition of Automation. The average maturity for Valmet s non-current debt was 3.4 years and the average interest rate was 1.3 percent. Valmet s liquidity was strong at the end of the reporting period, with cash and cash equivalents totaling to EUR 165 million (EUR 192 million) and interest-bearing available-for-sale financial assets totaling to EUR 7 million (EUR 34 million). Valmet s liquidity was additionally secured by an unused revolving credit facility agreement worth EUR 200 million, that is committed by the banks and matures in 2018, and an uncommitted EUR 200 million commercial paper program, of which none was outstanding at the end of December. On April 10, 2015, Valmet Corporation paid out dividends of EUR 37 million. Investments excluding business combinations decreased in 2015 Gross capital expenditure, excluding business combinations, in 2015 was EUR -44 million (EUR -46 million). Maintenance investments were EUR -36 million (EUR -37 million). Business combinations and disposals of businesses Business combinations Acquisition of Process Automation Systems On April 1, 2015, Valmet completed its acquisition of Process Automation Systems. The final purchase consideration was EUR 312 million in cash. Control in the acquiree was obtained through a series of share deals financed through long-term borrowings. Goodwill of EUR 164 million arising from the acquisition is attributable to the assembled workforce and synergies expected to arise subsequent to the acquisition. Acquisition of MC Paper Machinery and Focus Rewinding business On August 6, 2015, Valmet completed its acquisition of the MC Paper Machinery and Focus Rewinding business, through purchase of 100 percent of the share capital of Valmet Pescia S.r.l.. The purchase consideration paid and provisional goodwill arising from the transaction amounted to EUR 5 million and EUR 5 million, respectively. This acquisition had no material effect on Valmet s financial statements for the August December 2015 period. Disposals Valmet made no disposals during the 12 months period ended December 31, Research and development Valmet s research and development (R&D) expenses for 2015 were EUR 59 million, i.e. 2.0 percent of net sales (EUR 42 million and 1.7%). Research and development work is carried out predominantly in Finland and Sweden within the business lines technology and R&D organizations. In addition, research and development takes place together with a network made up of customers, research facilities and universities. In 2015, R&D employed 456 people (298 people). Valmet s R&D work is based on customers needs, such as increasing production efficiency, improving competitiveness, maximizing the value of raw materials, widening raw material base, providing high-value end products, and developing new innovations and technologies. Currently, Valmet has three focus areas in its R&D work. To ensure advanced and competitive technologies and services, Valmet develops cost competitive, leading production and automation technologies and services. To enhance raw material, water and energy efficiency, Valmet combines process technology, automation and services to reduce raw material, water, and energy consumption in its customers production processes. To promote renewable materials, Valmet develops solutions to replace fossil materials with renewable ones. 8

57 Report of the Board of Directors Valmet has successfully commercialized its techological innovations. Valmet has, for example, sold 10 OptiConcept M board and paper machines, and 6 Advantage NTT tissue machines. Valmet is in the process of delivering its first high power recovery boiler and has delivered 2 LignoBoost lignin separation plants. Valmet has recorded all costs resulting from R&D activities as expenses in the income statement in 2014 and Number of personnel increased mainly due to the acquisition As at Dec 31, Personnel by business line Change Services 5,363 5,230 3% Automation 1, Pulp and Energy 1,750 1,737 1% Paper 3,036 3,098-2% Other % Total (end of period) 12,306 10,464 18% As at Dec 31, Personnel by area Change North America 1,367 1,141 20% South America % EMEA 7,747 6,376 22% China 1,955 1,927 1% Asia-Pacific % Total (end of period) 12,306 10,464 18% In 2015, Valmet employed an average of 11,781 people (10,853). The number of personnel at the end of December was 12,306 (10,464). The number of personnel increased mainly due to the acquisition of Automation. In 2015, personnel expenses totaled to EUR 748 million (EUR 609 million) of which wages, salaries and remuneration equaled to EUR 583 million (EUR 472 million). Strategic goals and their implementation Valmet is a leading global developer and supplier of services, technologies and automation for the pulp, paper and energy industries. Valmet s mission is to convert renewable resources into sustainable results. The company continues to focus on developing and supplying competitive technology and services to the pulp, paper and energy industries. Valmet is committed to moving its customers performance forward. Valmet seeks to achieve its strategic targets by pursuing the following Must-Win initiatives: customer excellence, leader in technology and innovation, excellence in processes, and winning team. Valmet s vision is to become the global champion in serving its customers. Valmet s product and service portfolio consists of productivity-enhancing services, automation solutions, plant upgrades and rebuilds, new cost-efficient equipment and solutions for optimizing energy and raw material usage, and technologies increasing the value of its customers end-products. Valmet s strategy and financial targets were reconfirmed by the Board of Directors in June 2015 (Stock exchange release on June 24, 2015). Valmet has the following financial targets: Financial targets Net sales growth to exceed market growth EBITA margin before non-recurring items: 6 to 9 percent Return on capital employed (pre-tax), ROCE: minimum of 15 percent Dividend payout at least 40 percent of net profit Continued focus on improving profitability Valmet aims to improve product margin by focusing on improving sales and project management. By harmonizing processes and tools, localization of competencies, better selection of sales cases and developing project management, Valmet believes it can improve product margin. In order to reduce quality costs and lead times Valmet is implementing Lean. Implementing Lean is expected to improve efficiency and reduce waste. A common quality development approach, together with different quality tools and processes help reduce quality costs and lead times. In order to affect quality costs and lead times, it is also important to highlight the importance of quality initiatives and accountability. In 2015, Valmet has conducted active Lean training on all levels, and there were over 100 Lean projects, of which majority ongoing. Results in reducing quality costs have been in line with the targets for To improve profitability, Valmet also focuses on procurement savings. These can be achieved by increasing sourcing from cost-competitive countries, by increasing the use of sub-contracting and by consolidating the shipment and warehouse network. Valmet also aims to find savings by focusing on design-to-cost together with suppliers. In 2015, Valmet was ahead of its procurement savings target. Procurement activity has increased in all main cost-competitive areas, such as China, India, Eastern Europe and Mexico. Valmet is constantly focusing on improving product competitiveness in order to increase gross profit and reduce customer investment costs. Valmet focuses on cost efficient design, modularity and standardization, and product-based improvement programs. Following the acquisition of the automation business, Valmet believes it can increase profitability by providing customer benefits by combining process technology, automation and services. Valmet can use common sales lead activation and a harmonized project execution model. Valmet can also utilize low-cost automation engineering and manufacturing optimization and focus on product competitiveness development. 9

58 Report of the Board of Directors Activities and achievements in sustainability Valmet s sustainability agenda focuses on five core areas: sustainable supply chain; health, safety and environment; people and performance; sustainable solutions and corporate citizenship. Each focus area has a specific roadmap with targets and key performance indicators for Implementation of global supply chain activities continued In 2015, Valmet continued to integrate sustainability criteria and tools into its procurement processes. By the end of 2015 all active suppliers had been informed about the company s Sustainable Supply Chain policy and assessed through a 5-level sustainability risk assessment, and relevant tools and processes established for supplier self-assessments and audits. Based on the results from the risk assessments and self-assessments, Valmet conducted in total 41 supplier sustainability audits covering all geographical areas with a third-party sustainability auditor. At the end of 2015, the company kicked off a specific development program to ensure compliance with future chemical regulations. Furthermore, altogether 380 procurement professionals globally received training in sustainability. Improvements in health, safety and environment (HSE) Valmet s lost time incident frequency rate (LTIF) at the end of 2015 was at the level of 3.3 (12 months rolling; 5.5 at the end of December 2014). In 2015, the focus was on improving preventative safety measures, reinforcing safety awareness and leadership, and harmonizing HSE practices in customer project deliveries globally. The development of Valmet s environmental indicators are disclosed as part of Valmet s Annual Report. New solutions for more sustainable production processes Valmet continuously develops and innovates new solutions to drive its customers performance. In 2015, Valmet received further orders for its recent board, paper and tissue technologies which are designed for improved environmental efficiency, profitability and safety of production processes. The company also launched a newgeneration on-line quality management solution, called Valmet IQ, and continued to develop new bioconversion technologies. Personnel engagement increased In 2015, Valmet conducted its second employee engagement survey with a global response rate of 81 percent (68%). The survey results improved in nearly all questions and global employee engagement rose by 9 percentage points to 65 percent. During the year, Valmet launched a renewed global training portfolio. It also continued to develop the role of managers and embed the company values in the daily work. Valmet recognized as one of the world s sustainability leaders In September 2015, Valmet was included in the Dow Jones Sustainability Index (DJSI) for the second consecutive year, among the 317 most sustainable companies in the world. Valmet was listed both in the Dow Jones Sustainability World and Europe indices. Valmet also ranked high in CDP s Climate change program with a score of 97/100. To promote standards of behavior, Valmet enforced its updated Code of Conduct supported by e-learning and class room trainings. By the end of 2015, 90 percent of Valmet s employees had completed this training. Valmet reports annually on its sustainability performance according to the Global Reporting Initiative, GRI G4 Core option, with selected indicators assured by an independent third party. Lawsuits and claims Several lawsuits, claims and disputes based on various grounds are pending against Valmet in various countries, including product liability lawsuits and claims as well as legal disputes related to Valmet s deliveries. On February 20, 2015 Valmet issued a stock exchange release about Andritz Oy having filed a summons application with the Stockholm District Court against Valmet AB, a subsidiary of Valmet Corporation, regarding patent infringement. In the claim Andritz is asking that Valmet under a penalty ceases to utilize the patent allegedly infringing Andritz s patent and the Court to impose royalty and damages on Valmet AB. Valmet has denied the claims in its writ of response submitted to the Stockholm District Court. In June Andritz revised its claim, which subsequently changed their overall claim from EUR 52 million to EUR 54 million and interest for the alleged infringement. Consequently, Valmet filed a second response to the Stockholm District Court in September. Valmet s management does not expect to the best of its present understanding that the outcome of these lawsuits, claims and disputes will have a material adverse effect on Valmet in view of the grounds presented for them, provisions made, insurance coverage in force and the extent of Valmet s total business activities. Valmet is also a plaintiff in several lawsuits. Shares and shareholders Share capital and number of shares At the end of December 2015, Valmet Corporation s share capital totaled to EUR 100,000,000 and the number of shares was 149,864,619. At the end of December, Valmet held 399 treasury shares and the number of outstanding shares was 149,864,

59 Report of the Board of Directors Largest shareholders The following table summarizes the largest shareholders on December 31, Largest shareholders (Euroclear) Holdings % of holdings 1 Solidium Oy 1 16,695, Varma Mutual Pension Insurance Company 4,208, Ilmarinen Mutual Pension Insurance Company 2,980, The State Pension Fund 1,520, Keva 1,502, Nordea Fennia Fund 1,331, Mandatum Life Insurance Company Limited 1,217, Odin Finland 974, Nordea Nordenfonden 811, Danske Invest Finnish Institutional Equity Fund 700, Nordea Pro Finland Fund 700, OP-Finland Value Fund 620, Sigrid Jusélius Foundation 610, Evli Finnish Small Cap Fund 610, Kaleva Mutual Insurance Company 599, Solidium Oy (wholly owned by the Finnish state) In addition to the shareholders presented in the table, the shareholder exceeding five percent ownership in Valmet on December 31, 2015 was Cevian Capital Partners Ltd. (ownership of 6.89 percent as announced on February 13, 2015). All flagging notifications received and announced during 2015 are presented in the section of flagging notifications. Holdings of the Board of Directors in Valmet Corporation on December 31, 2015 Holdings Holdings of interest parties Risberg, Bo Chairman of the Board 3,922 0 Von Frenckell, Mikael Vice Chairman of the Board 107,989 0 Helfer, Friederike Member of the Board 4,187 0 Pehu-Lehtonen, Erkki Yrjö Juhani Member of the Board 7,366 0 Schrøder, Lone Fønss Member of the Board 5,235 0 Ziviani, Rogério Member of the Board 4,187 0 Total 132,886 0 % of outstanding shares 0.09% 0.00% 11

60 Report of the Board of Directors Holdings of the Executive Team in Valmet Corporation on December 31, 2015 Holdings Holdings of interest parties Laine, Pasi Kalevi President and CEO 49,021 0 Saarinen, Kari Juhani CFO 6,325 0 Bohn, William Leslie Area President, North America 6,652 0 Karlstedt, Bertel Evald Business Line President, Pulp and Energy 5,700 0 Macharey, Julia Irene SVP, Human Resources 3,455 0 Niemi, Aki Petri Area President, China 8,000 0 Pietilä, Hannu T. Area President, Asia-Pacific 8,432 0 Ruotsalainen, Jussi Sakari Business Line President, Automation 8,090 0 Salonsaari-Posti, Anu Maarit SVP, Marketing and Communications 1, Simola, Vesa Tuomas Area President, EMEA 5,817 0 Tacla, Celso Luiz Area President, South America 21,175 0 Tiitinen, Jukka Heikki Business Line President, Services 23, Vähäpesola, Jari Business Line President, Paper 12,391 0 Total 160, % of outstanding shares 0.11% 0.00% Distribution of holdings by group on December 31, 2015 Number of shareholders Number of shares % of share capital Nominee registered and non-finnish holders ,891, Finnish institutions, companies and foundations 2,629 34,619, Solidium Oy 1 16,695, Finnish private investors 45,025 21,658, Total 47, ,864, Solidium Oy (wholly owned by the Finnish state) The ownership structure is based on the classification of sectors determined by Statistics Finland. The classification determines mandatory insurance companies, such as pension funds into the general government sector. Other insurance companies are classified under financial and insurance corporations. Distribution of holdings by number of shares held on December 31, 2015 Number of shares Number of shareholders % of shareholders Total number of shares % of share capital , ,034, ,000 23, ,565, ,001 10,000 4, ,354, , , ,727, , ,173, Total 47, ,855, Nominee registered ,114, Treasury shares held by the parent company On shared account ,

61 Report of the Board of Directors Treasury shares and Board authorizations Valmet Corporation s Annual General Meeting on March 27, 2015 authorized Valmet s Board of Directors to resolve on repurchasing Company shares in one or more tranches. The maximum number of shares to be repurchased shall be 10,000,000 shares, which corresponds to approximately 6.7 percent of all the shares in the Company. Company shares may be repurchased otherwise than in proportion to the shareholdings of the shareholders (directed repurchase). Company shares may be repurchased using the unrestricted equity of the Company at a price formed on a regulated market on the main list of the Nasdaq Helsinki Ltd. on the date of the repurchase. Company shares may be repurchased for reasons of developing the Company s capital structure, financing or carrying out acquisitions, investments or other business transactions, or for the shares to be used in an incentive scheme. The Board of Directors resolves on all other terms related to the repurchasing of own shares. Valmet Corporation s Annual General Meeting authorized Valmet s Board of Directors to resolve on the issuance of shares as well as the issuance of special rights entitling to shares, pursuant to Chapter 10(1) of the Finnish Limited Liability Companies Act, in one or more tranches. The issuance of shares may be carried out by issuing new shares as well as transferring treasury shares of Valmet Corporation. Based on the authorization, the Board of Directors may resolve to issue shares in derogation from the shareholder s pre-emptive right and to issue special rights within the conditions of Finnish laws. The maximum number of new shares which may be issued shall be 15,000,000 shares, which corresponds to approximately 10 percent of all the shares in Valmet Corporation. The maximum number of treasury shares which may be issued shall be 10,000,000 shares, which corresponds to approximately 6.7 percent of all the shares in the Company. The Board of Directors is furthermore authorised to issue special rights pursuant to Chapter 10(1) of the Finnish Limited Liability Companies Act entitling their holder to receive new shares or treasury shares for consideration. The maximum number of shares which may be issued based on the special rights shall be 15,000,000 shares, which corresponds to approximately 10 percent of all the shares in Company. This number of shares shall be included in the aggregate numbers of shares mentioned in the previous paragraph. The new shares and treasury shares may be issued for consideration or without consideration. The Board of Directors of Valmet Corporation shall also be authorised to resolve on issuing treasury shares to the Company without consideration. The maximum number of shares which may be issued to Valmet Corporation shall be 10,000,000 shares when combined with the number of shares repurchased based on an authorization. Such a number corresponds to approximately 6.7 percent of all shares in the Company. The treasury shares issued to the Company shall not be taken into account in the limits pursuant to the preceding paragraphs. The Board of Directors resolves on all other terms related to the issuance of shares as well as the issuance of special rights entitling to shares pursuant to Chapter 10(1) of the Finnish Limited Liability Companies Act. The authorisation may be exercised by The Board of Directors for example for reasons of developing the Company s capital structure, in financing or carrying out acquisitions, investments or other business transactions, or for the shares to be used in an incentive scheme. The authorizations shall remain in force until the next Annual General Meeting, and they cancel the Annual General Meeting s authorizations of March 26, Trading in shares The closing price of Valmet s share on the final day of trading for the reporting period, December 30, 2015, was EUR The closing share price on the last day of trading in 2014 (December 30, 2014) was EUR The share price decreased by some 13 percent during the reporting period. The highest price for the share during the reporting period was EUR 12.47, the lowest was EUR 8.36 and the volume-weighted average price was EUR The number of shares traded on Nasdaq Helsinki Ltd during January December was approximately 102 million. The value of trading was approximately EUR 1.1 billion. (Source: Nasdaq) In addition to Nasdaq Helsinki Ltd, Valmet s shares are also traded on other marketplaces, such as Chi-X and BATS. A total of approximately 22 million of Valmet s shares were traded on alternative marketplaces in January December, which equals to approximately 18 percent of the share s total trade volume. Of the alternative exchanges, Valmet s shares were traded especially on Chi-X. (Source: VWD, Six) Market capitalization (excluding treasury shares) stood at EUR 1,334 million at the end of the reporting period. 13

62 Report of the Board of Directors Development of Valmet s share price, December 31, 2014 December 31, 2015 EUR 15 Valmet OMX Helsinki (rebased) January February March April May June July August September October November December Number of shareholders The number of registered shareholders at the end of December 2015 was 47,952 (49,294 on December 31, 2014). Shares owned by nominee-registered parties and by non-finnish parties equaled to 51.3 percent of the total number of shares at the end of December 2015 (54.7% on December 31, 2014). Share capital and share data Share capital, December 31, EUR million Number of shares, December 31: Number of outstanding shares 149,864, ,864,220 Treasury shares held by the parent company Total number of shares 149,864, ,864,619 Average number of outstanding shares 149,864, ,863,252 Average number of diluted shares 149,864, ,863,252 Trading volume on Nasdaq Helsinki Ltd. 102,209, ,682,776 % of total shares for public trading Earnings/share, EUR Earnings/share, diluted, EUR Dividend/share, EUR Dividend, EUR million Dividend/earnings 68% 2 81% Effective dividend yield 3.9% 2 2.4% Price to earnings ratio (P/E) Equity/share, EUR Highest share price, EUR Lowest share price, EUR Volume-weighted average share price, EUR Share price, December 31, EUR Market capitalization 3, December 31, EUR million 1,334 1,532 1 The formulas for calculation of figures are presented in the section Formulas for Calculation of Indicators. 2 Board of Directors proposal. Flagging notifications During the review period, Valmet received the following flagging notifications: Stock exchange release on June 11, 2015 Valmet Corporation received a notification referred to in the Securities Market Act from Franklin Templeton Institutional, LLC, stating that the company s ownership and share of votes in Valmet Corporation has decreased below the threshold of 5 percent (1/20). As a result of share transactions on June 9, 2015, the holding of Franklin Templeton Institutional, LLC decreased to 7,196,324 shares (previously 7,517,629 shares), representing an ownership of 4.80 percent (previously 5.02 percent) of Valmet Corporation s total number of shares and share of votes. Stock exchange release on February 13, 2015 Valmet Corporation received a notification referred to in the Securities Market Act from Cevian Capital Partners Ltd., stating that the company s ownership and share of votes in Valmet Corporation has decreased below the threshold of 10 percent (1/10). As a result of share transactions on February 12, 2015, the holding of Cevian Capital Partners Ltd. decreased to 10,323,191 shares (previously 20,813,714 shares), representing an ownership of 6.89 percent (previously percent) of Valmet Corporation s total number of shares and share of votes. Share-based incentive plans Valmet s share-based incentive plans are part of the remuneration and retention program for Valmet s management. The aim of the plans is to align the objectives of shareholders and management to increase the value of the company, commit management to the company, and offer management a competitive reward plan based on long-term shareholding in Valmet. 3 Excluding treasury shares. 14

63 Report of the Board of Directors Valmet has entered into an agreement with a third-party service provider concerning the administration of the share-based incentive programs for key personnel. At the end of the reporting period, the number of shares held within the administration plan was 473,617. Long-term incentive plan In December 2011, a share-based incentive plan including three performance periods, which were the calendar years 2012, 2013 and 2014, was approved. For the 2012 performance period a gross number of 321,438 shares were earned by 31 participants. The earning criteria of the performance period 2012 were based on net sales growth of the Services business, return on capital employed (ROCE) before taxes and earnings per share (EPS). The reward was paid partly as company shares and partly in cash during For the 2013 performance period, the performance criteria were not met and therefore no rewards will be paid for the 2013 performance period. For the 2014 performance period, the plan was targeted at 40 persons in Valmet s management. From the performance period 2014, a gross number of 268,003 shares were earned. The earning criteria of the performance period 2014 were based on growth in Valmet s EBITA % and growth in Services orders received. The reward will be paid partly as company shares and partly in cash. The cash portion is dedicated to cover taxes and tax-related payments. The expense of the plan is recognized over the vesting period i.e. from the beginning of 2014 until the end of February Long-term incentive plan The Board of Directors of Valmet Corporation approved in December 2014 a new share-based incentive plan for Valmet s key employees. The Plan includes three discretionary periods, which are the calendar years 2015, 2016 and The Board of Directors shall decide on the performance criteria and targets in the beginning of each discretionary period. The Plan is directed to approximately 80 key people. The reward of the plan may not exceed 120 percent of the key employee s annual base salary. As a rule, no reward is paid, if the key employee s employment or service ends before the reward payment. The shares paid as reward may not be transferred during the restriction period, which will end two years from the end of the discretionary period. Should a key employee s employment or service end during the restriction period, as a rule, he or she must gratuitously return the shares given as reward to the Company. The potential reward of the plan from the discretionary period 2015 is based on EBITA % and Services orders received growth %. The potential reward of the plan from the discretionary period 2015 will be paid partly as company shares and partly in cash in The proportion to be paid in cash is intended to cover taxes and tax-related costs arising from the reward to the key employee. The rewards to be paid on the basis of the discretionary period 2015 are in total a maximum of 693,079 shares in Valmet Corporation. As part of the plan, members of Valmet s Executive Team shall have a possibility to receive a matching share reward for the discretionary period 2015 provided that he or she owns or acquires Valmet shares up to a number determined by the Board of Directors by December 31, The Board of Directors of Valmet Corporation decided in December 2015 to continue the share-based incentive program for Valmet s key employees approved in December The potential reward of the program from the discretionary period 2016 is based on EBITA % and orders received growth % of the stable business, that is, the Services and Automation business lines. The potential reward of the plan from the discretionary period 2016 will be paid partly as Valmet shares and partly in cash in The rewards to be paid on the basis of the discretionary period 2016 are in total an approximate maximum of 850,000 shares in Valmet. As part of the share-based incentive program members of the Valmet Executive Team shall have a possibility to receive a matching share reward for the discretionary period 2016 provided that he or she owns or acquires Valmet shares up to a number determined by the Board of Directors by December 31, The shares to be transferred as part of the possible reward will be obtained in public trading, ensuring that the incentive plan will not have a diluting effect on Valmet s share value. More information about share-based incentive plans can be found in Valmet s Corporate Governance Statement which is available at Resolutions of Valmet Corporation s Annual General Meeting The Annual General Meeting of Valmet Corporation was held in Helsinki on March 27, The Annual General Meeting adopted the Financial Statements for 2014 and discharged the members of the Board of Directors and the President and CEO from liability for the 2014 financial year. The Annual General Meeting approved the Board of Directors proposals, which concerned authorizing the Board to resolve on repurchasing company shares and to resolve on the issuance of shares and the issuance of special rights entitling to shares. The Annual General Meeting confirmed the number of Board members as seven and appointed Bo Risberg as a new member of the Board. Bo Risberg was appointed as Chairman of Valmet Corporation s Board and Mikael von Frenckell as Vice Chairman. Lone Fønss Schrøder, Friederike Helfer, Pekka Lundmark, Erkki Pehu-Lehtonen and Rogério Ziviani will continue as members of the Board. The term of office of the members of the Board of Directors expires at the end of the next Annual General Meeting. 15

64 Report of the Board of Directors The Annual General Meeting appointed Pricewaterhouse- Coopers Oy, authorized public accountants, as the company s auditor for a term expiring at the end of the next Annual General Meeting. Valmet published stock exchange releases on March 27, 2015, concerning the resolutions of the Annual General Meeting and the composition of the Board of Directors. The stock exchange releases and a presentation of the Board s members can be viewed on Valmet s website at In compliance with the resolution of the Annual General Meeting on March 27, 2015, Valmet Corporation paid out dividends of EUR 37 million for 2014, corresponding to EUR 0.25 per share, on April 10, Changes in the Board composition On April 7, 2015, Pekka Lundmark announced his resignation from the Board of Directors of the company. The reason for the resignation is his appointment as the President and CEO of Fortum Corporation as of September Valmet announced the resignation as a stock exchange release on April 8, The Board of Directors elected Erkki Pehu-Lehtonen to replace Pekka Lundmark in Valmet s Remuneration and HR Committee. Valmet announced the election as a stock exchange release on April 20, Risks and business uncertainties Valmet s operations are affected by various strategic, financial, operational, and hazard risks. Valmet takes measures to exploit emerging opportunities and to limit the adverse effects of potential threats. The assessment of risks related to sustainable development holds a key role in risk management. If such threats materialized, they could have material adverse effects on Valmet s business, financial situation, and operating result or on the value of shares and other securities. The objective of Valmet s risk management is to ensure the implementation of an effective and successful strategy for achieving both long- and short-term goals. The task of Valmet s management is to regulate risk appetite. In assessing risks, Valmet takes into consideration the probability of the risks and their estimated impact on net sales and financial results. Valmet s management estimates that the company s overall risk level is currently manageable in proportion to the scope of its operations and the practical measures available for managing these risks. 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) 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 down payments are typically percent of the value of the project, and customers make progress payments as a 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 significantly, the markets for Valmet s products may shrink, which may lead to, for example, tougher price competition. Changes and uncertainty in future regulation and legislation can also critically affect especially the energy business. Large fluctuations in energy prices can affect the global economy. These fluctuations can also affect Valmet and its customers, especially in the energy business. Changes in labor costs and the prices of raw materials and components can affect Valmet s profitability. Wage inflation is continuing, but Valmet s goal is to offset this at least partly through increased productivity and strict price discipline. 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. 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. Management of project business risks important An important part of Valmet s business consists of project business. Pulp business projects in particular are large, thus project-specific risk management is crucial. Key risks related to projects are cost accounting, scheduling 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 on continuous, systematic monitoring and drawing on past experiences. Project risks are managed by improving and continuously developing project management processes and the related tools. There may be changes in the competitive situation of Valmet s individual businesses, such as the emergence of new, cost-effective 16

65 Report of the Board of Directors players in the markets. Valmet can safeguard its market position by developing its products and services, and through good customer service and a local presence. Availability of financing crucial Securing the continuity of Valmet s operations requires that sufficient funding is available under all circumstances. Valmet estimates that its liquid cash assets and committed credit limits are sufficient to secure the company s immediate liquidity and to ensure the flexibility of financing. The average maturity for Valmet s non-current debt is 3.4 years. Loan facilities include customary covenants and Valmet is in clear compliance with the covenants at the balance sheet date. Net working capital and capital expenditure levels have a key impact on the adequacy of our financing. Valmet estimates that the company is well-positioned to keep capital expenditure at the level of total depreciation. Of the financial risks that affect Valmet s profit, currency exchange rate risks are among the most substantial. Exchange rate changes can affect Valmet s business, although the wide geographical scope of the company s operations reduces the impact of any individual currency. Economic insecurity typically increases exchange rate fluctuations. Valmet hedges its currency exposures linked to firm delivery and purchase agreements. At the end of December 2015, Valmet had EUR 624 million (EUR 446 million) of goodwill on its statement of financial position. Valmet assesses the value of its goodwill for impairment annually or more frequently if facts and circumstances indicate that a risk of impairment exists. Valmet has not identified any indications of impairment during the reporting period. The principles used for impairment testing are presented in the Annual Report. Events after the reporting period There were no subsequent events after the review period that required recognition or disclosure. Guidance for 2016 Valmet estimates that net sales in 2016 will remain at the same level with 2015 (EUR 2,928 million) and EBITA before non-recurring items in 2016 will increase in comparison with 2015 (EUR 182 million). Short-term outlook General economic outlook Global growth, currently estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in The pickup in global activity is projected to be more gradual than in the October 2015 World Economic Outlook (WEO), especially in emerging market and developing economies. In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps. The picture for emerging market and developing economies is diverse but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in (International Monetary Fund, January 19, 2016) Short-term market outlook Valmet estimates that the short-term market outlook has improved for Board and Paper to good level (previously satisfactory level) and for Energy to satisfactory level (previously weak level). Valmet also estimates that the short-term market outlook for Pulp has decreased to satisfactory level (previously good level). Valmet reiterates the satisfactory short-term market outlook for services, automation, and tissue. Board of Director s proposal for the distribution of profit Valmet Corporation s distributable funds totaled to EUR 882,995, on December 31, 2015, of which the net profit for 2015 was EUR 21,593, (according to Finnish Generally Accepted Accounting Standards). The Board of Directors proposes that a dividend of EUR 0.35 per share be paid based on the statement of financial position to be adopted for the financial year which ended December 31, 2015, and that the remaining part of the profit be retained and carried further in the Company s unrestricted equity. The dividend will be paid to shareholders who on the dividend record date March 24, 2016 are registered in the Company s shareholders register held by Euroclear Finland Ltd. The dividend will be paid on April 6, All the shares in the company are entitled to a dividend with the exception of treasury shares held by the company on the dividend record date. Espoo, February 9, 2016 Valmet Corporation s Board of Directors 17 WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

66 Consolidated Financial Statements Consolidated Statement of Income Year ended Dec 31, EUR million Note Net sales 2, 15 2,928 2,473 Cost of goods sold 6, 7-2,291-2,004 Gross profit Selling, general and administrative expenses 4, 6, Other operating income Other operating expenses Share in profits and losses of associated companies, operative investments Operating profit Financial income 8, Financial expenses 8, Share in profits and losses of associated companies, financial investments Profit before taxes Current tax expense Deferred taxes -1-2 Income taxes, total Profit/loss Attributable to: Owners of the parent company Non-controlling interests - - Profit/loss Earnings per share attributable to owners of the parent: Earnings per share, EUR Diluted earnings per share, EUR

67 Consolidated Financial Statements Consolidated Statement of Comprehensive Income Year ended Dec 31, EUR million Note Profit/loss Items that may be reclassified to profit or loss in subsequent periods: Cash flow hedges 17, 19, Currency translation on subsidiary net investments Income tax relating to items that may be reclassified Items that will not be reclassified to profit or loss: Remeasurement of defined benefit plans Income tax relating to items that will not be reclassified Other comprehensive income/expense Total comprehensive income/expense Attributable to: Owners of the parent company Non-controlling interests 1 - Total comprehensive income/expense

68 Consolidated Financial Statements Consolidated Statement of Financial Position Assets As at Dec 31, EUR million Note Non-current assets Intangible assets Goodwill Other intangible assets Total intangible assets Property, plant and equipment Land and water areas Buildings and structures Machinery and equipment Assets under construction Total property, plant and equipment Financial and other non-current assets Investments in associated companies Available-for-sale financial assets 13, Loans and other receivables 16, Derivative financial instruments 17, Deferred tax asset Other non-current assets Total financial and other non-current assets Total non-current assets 1,378 1,040 Current assets Inventories Receivables Trade and other receivables 16, Amounts due from customers under construction contracts Loans and other receivables 16, Available-for-sale financial assets 13, Derivative financial instruments 17, Income tax receivables Total receivables Cash and cash equivalents 17, Total current assets 1,516 1,372 Total assets 2,894 2,412 20

69 Consolidated Financial Statements Consolidated Statement of Financial Position Equity and liabilities As at Dec 31, EUR million Note Equity Share capital Reserve for invested unrestricted equity Cumulative translation adjustments 18 9 Fair value and other reserves -4-3 Treasury shares -7 - Retained earnings Equity attributable to owners of the parent company Non-controlling interests 6 5 Total equity Liabilities Non-current liabilities Non-current debt 17, Post-employment benefits Provisions Derivative financial instruments 17, Deferred tax liability Other non-current liabilities - 1 Total non-current liabilities Current liabilities Current portion of non-current debt 17, Trade and other payables 17, Provisions Advances received Amounts due to customers under construction contracts Derivative financial instruments 17, Income tax liabilities Total current liabilities 1,491 1,408 Total liabilities 2,033 1,603 Total equity and liabilities 2,894 2, WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

70 Consolidated Financial Statements Consolidated Statement of Cash Flows Year ended Dec 31, EUR million Note Cash flows from operating activities Profit/loss Adjustments Depreciation and amortization 7, Gain (-) / loss (+) on sale of fixed assets Gain (-) / loss (+) on sale of subsidiaries and associated companies 5-2 Dividend income and net interests Income taxes Other non-cash items Change in net working capital, net of effect from business acquisitions and disposals Inventories Trade and other receivables Amounts due to / from customers under construction contracts, net Trade and other payables Interest paid -7-8 Interest received 3 5 Dividends received - 1 Income taxes paid Net cash provided by (+) / used in (-) operating activities Cash flows from investing activities Capital expenditures on fixed assets Proceeds from sale of fixed assets 3 4 Business acquisitions, net of cash acquired Net cash provided by (+) / used in (-) investing activities Cash flows from financing activities Purchase of treasury shares -7 - Dividends paid Net borrowings (+) / payments (-) on current debt - -8 Proceeds from issuance of non-current debt Principal payments of non-current debt Investments in available-for-sale financial assets Proceeds from available-for-sale financial assets Other Net cash provided by (+) / used in (-) financing activities Net increase (+) / decrease (-) in cash and cash equivalents Effect of changes in exchange rates on cash and cash equivalents 1-9 Cash and cash equivalents at beginning of year 17, Cash and cash equivalents at end of year

71 Consolidated Financial Statements Consolidated Statement of Changes in Equity Equity EUR million Reserve for Share invested unrestricted Cumulative translation capital equity adjustments Hedge reserve Fair value reserve Legal reserve Fair value and other reserves Treasury shares Retained earnings attributable to owners of the parent company Non- controlling Total interests equity Balance at Jan 1, Profit/loss Other comprehensive income/expense Cash flow hedges Fair value gains/losses, net of tax Transferred to Other operating income/expenses in profit and loss, net of tax Currency translation on subsidiary net investments Remeasurement of defined benefit plans, net of tax Other comprehensive income/expense total Total comprehensive income/expense Dividends Other Share-based payments, net of tax Balance at Dec 31, Balance at Jan 1, Profit/loss Other comprehensive income/expense Cash flow hedges Fair value gains/losses, net of tax Transferred to Other operating income/expenses in profit and loss, net of tax Currency translation on subsidiary net investments Remeasurement of defined benefit plans, net of tax Other comprehensive income/expense total Total comprehensive income/expense Dividends Purchase of treasury shares Share-based payments, net of tax Balance at Dec 31,

72 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements 1 Background, basis of preparation and accounting principles General information Valmet Corporation (the Company or the parent company ), a public limited liability company, and its subsidiaries (together Valmet, Valmet Group or the Group ) form a global supplier of sustainable technology and services, which designs, develops and produces systems, automation solutions, machinery and equipment for process industries. The main customers of Valmet operate in the pulp, paper and energy industries. Valmet Corporation is domiciled in Helsinki, and its registered address is Keilasatama 5, Espoo, Finland. The Company s shares are listed on the Nasdaq Helsinki Ltd as of January 2, The copies of the consolidated financial statements are available at or the parent company s head office, Keilasatama 5, Espoo, Finland. The consolidated financial statements were authorized for issue by Valmet s Board of Directors on February 9, 2016 after which, in accordance with Finnish Company Law, the financial statements are either approved, amended or rejected in the Annual General Meeting. The consolidated financial statements have been prepared in accordance with the basis of preparation and accounting principles set out below. Basis of preparation These consolidated financial statements were prepared in accordance with the International Financial Reporting Standards ( IFRS ) as adopted by the EU. In the financial statements the figures are presented in million euros subject to rounding, which may cause some rounding inaccuracies in column and total sums. Accounting principles Consolidation Subsidiaries Subsidiaries are all entities over which Valmet Group has control. Control over an entity exists when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When the Group has less than a majority of the voting or similar rights of an entity, the Group considers all relevant facts and circumstances in assessing whether it has control over an entity, including the contractual arrangement with the other vote holders of the entity, rights arising from other contractual arrangements and the Group s voting rights and potential voting rights. The Group reassesses whether or not it controls an entity if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Valmet applies the acquisition method of accounting to account for business combinations. The total consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities assumed and the equity interests issued by Valmet Group. The total consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. Inter-company transactions, balances and unrealized gains and losses on transactions between Group companies are eliminated. Associated companies The consolidated financial statements include associated companies in which Valmet either holds between 20% to 50% of the voting rights or in which Valmet otherwise has significant influence but not control. Investments in associated companies are accounted for using the equity method of accounting. Investments in associates are initially recorded at cost, and the carrying amount is increased or decreased to recognize Valmet s share of changes in net assets of the associates after the date of the acquisition. The Group s investment in associates includes goodwill identified on acquisition. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. Valmet s share of post-acquisition profit or loss is recognized in the statement of income, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. The share of results of associated companies is presented in the statement of income either included in operating profit or adjacent to financial income and expenses below operating profit depending on the nature of the investment. When 24

73 Notes to the Consolidated Financial Statements the Group s share of losses in an associate exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in each associate. Joint ventures Joint ventures are companies in which Valmet exercises joint control with other parties. The Group s investments in joint ventures are accounted for using the equity method. Investments in joint ventures are initially recognized at cost and adjusted thereafter to recognize Valmet s share of post-acquisition changes in net assets. The Group s share of joint ventures post-acquisition profits or losses is recognized in the statement of income, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. Unrealized gains on transactions between the Group and joint ventures are eliminated to the extent of the Group s interest in the joint ventures. Transactions with non-controlling interests Valmet accounts transactions with non-controlling interests that do not result in loss of control as equity transactions. The difference between the fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. If interest in a Group company is reduced but control is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is recorded against the non-controlling interest. Disposal of subsidiaries When Valmet ceases to have control, any remaining interest in the entity is re-measured to its fair value at the date when control is lost, with the change in the carrying amount recognized through profit and loss. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if realized and thus they are recognized in the income statement. Foreign currency translation Items included in the consolidated financial statements of each of Valmet entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). These consolidated financial statements are presented in euros, which is the Group s presentation currency. Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the date of transaction. Non-monetary items that are measured at fair value are translated into functional currency using the exchange rate of the valuation date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement within Financial income and expenses. All other foreign exchange gains and losses are presented in Other operating income and expenses. Translation of the financial statements of foreign Group companies The statements of income of foreign Group companies are translated into euros using the average exchange rate for the reporting period. The statements of financial position are translated at the closing rate of the reporting date. Translating the net income for the period using different exchange rates in the statements of income and in the statement of financial position, results in a translation difference, which is recognized in Other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange rate differences arising are recognized in Other comprehensive income. When a foreign subsidiary is disposed of or sold, exchange rate differences that were recorded in equity are recognized in the statement of income as part of the gain or loss on sale. Derivative financial instruments Valmet uses derivative financial instruments to hedge its exposure to interest rates, foreign currency exchange rates and commodity price risks arising from operational, financing and investment activities. Derivatives are initially recognized in the balance sheet at fair value and subsequently measured at each balance sheet date at their fair value. Derivatives are designated at inception either as hedges of firm commitments or forecasted sales and purchase transactions (cash flow hedge), or as derivatives at fair value through profit and loss that do not meet the hedge accounting criteria. For hedge accounting purposes, the relationship between the hedging instruments and hedged items is documented in accordance with the risk management strategy and objectives. In addition, Valmet tests the effectiveness of the hedge relationships at the inception of the hedge and on a quarterly basis both prospectively and retrospectively. Derivative assets and liabilities are classified as non-current assets or liabilities when the remaining maturities exceed 12 months and as current assets or liabilities when the remaining maturities are less than 12 months. 25

74 Notes to the Consolidated Financial Statements Cash flow hedge Valmet applies cash flow hedge accounting to certain interest rate swaps, foreign currency forward contracts and to electricity forwards. The realized gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognized in the statement of income within financial items concurrently with the recognition of the underlying interest expense. The gain or loss relating to the ineffective portion of interest rate swaps is reported under financial items. The fair value of the interest rate swaps contract is calculated as the present value of the estimated future cash flows arising from the contract. Valmet has designated only the currency component of the foreign currency forward contracts as the hedging instrument to hedge foreign currency denominated firm commitments. The interest component is recognized under Other operating income and expenses. The realized gain or loss relating to the effective portion of the currency forward contracts is recognized in the Statement of income in Revenue or Cost of sales, as appropriate, concurrently with the underlying hedge item. Both at hedge inception and at each balance sheet date an assessment is performed to ensure the continued effectiveness of the designated component of the derivatives in offsetting changes in the fair values of the cash flows of hedged items. Valmet regularly assesses the effectiveness of the fair value changes of the electricity forwards in offsetting the changes in the price of the underlying forecasted electricity purchases in different countries. The realized gain or loss relating to the effective portion of the electricity forward contracts are recognized in Cost of goods sold, whereas the ineffective portion of both realized and unrealized electricity forward contracts is recognized in Other operating income and expenses. When applying hedge accounting, the effective portion of the derivatives is recognized through Other Comprehensive Income (OCI) in the hedge reserve under equity and reversed through OCI to be recorded through profit and loss concurrently with the underlying transaction being hedged. The gain or loss relating to the ineffective portion of the derivatives is reported under Other operating income and expenses in the statement of income. Should a hedged transaction no longer be expected to occur, any cumulative gain or loss previously recognized under equity is reclassified from OCI to profit and loss. Derivatives at fair value through profit and loss Certain foreign exchange forward and electricity forward contracts do not qualify for hedge accounting. Changes in the fair value of foreign exchange forward contracts are mainly recognized in other operating income and expenses. However, when the foreign exchange forwards have been contracted to mitigate the exchange rate risks arising from foreign currency denominated financial items such as loans, receivables and cash, the changes in fair value of the derivatives are recognized in Financial income and expenses. Employee benefits Pensions and coverage of pension liabilities Valmet has various pension schemes in place in its entities in accordance with local regulations and practices in countries in which they operate. In certain countries, the pension schemes are defined benefit plans with retirement, disability, death, and other post- retirement benefits, such as health services, and termination income benefits. Defined benefit plans are post-employment benefit plans other than defined contribution plans. In defined benefit plans the benefits are usually based on the number of service years and the salary levels of the final service year. The schemes are generally funded through payments to insurance companies or to trustee- administered funds as determined by periodic actuarial calculations. In addition, certain entities within Valmet Group have multiemployer pension arrangements classified as defined contribution plans. The contributions to defined contribution plans and to multi-employer and insured plans are charged to profit and loss concurrently with the payment obligations. In defined contribution plans, the Group pays fixed contributions into a separate entity and the Group will have no legal or constructive obligation to pay further contributions. In the case of defined benefit plans, the net defined benefit liability recognized from the plan is the present value of the defined benefit obligation as of the balance sheet date, adjusted by the fair value of the plan assets. Independent actuaries calculate the defined benefit obligation by applying the projected unit credit method under which the estimated future cash flows are discounted to their present value using the discount rate approximating the duration of the pension obligation. The cost of providing retirement and other post-retirement benefits to the personnel is charged to profit and loss concurrently with the service rendered by the personnel. The service cost is recorded under personnel expenses and the net interest is recorded under financial income and expenses. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and return on plan assets excluding interest income are recognized through OCI into shareholders equity. Share-based payments Certain Valmet key personnel participate in share-based incentive plans. Equity-settled share based awards are valued based on the market price of the Valmet share as of the grant date, and recog nized as an employee benefit expense over the vesting period with an cor- 26

75 Notes to the Consolidated Financial Statements responding entry in equity. The liability resulting from cash-settled transactions is measured based on the market price of the Valmet share as of the balance sheet date and accrued as an employee benefit expense with a corresponding entry in the current liabilities until the settlement date. Market conditions, such as the total shareholder return upon which vesting is conditioned, is taken into account when estimating the fair value of the equity instruments granted. The expense relating to the market condition is recognized irrespective of whether that market condition is satisfied. Non-market vesting conditions, such as operating profit, services business growth, return on capital employed and earnings per share targets, are included in assumptions about the amount of share-based payments that are expected to vest. At each balance sheet date, Valmet revises its estimates on the amount of sharebased payments that are expected to vest. The impact of the revision to previous estimate is recognized through profit and loss with corresponding adjustment to equity and current liabilities, as appropriate. Revenue recognition Valmet supplies process automation, machinery, equipment and services for the pulp, paper and energy industries. Revenues from goods and services sold are recognized, net of sales taxes and discounts, when substantially all the risks and rewards of ownership are transferred to the buyer. The transfer of risk typically takes place either when the goods are shipped or made available to the buyer for shipment depending on the terms of the contract. The credit worthiness of the buyer is verified before engaging in a sale. However, if a risk of non-payment arises after revenue recognition, an allowance for non-collectability is established. Percentage-of-completion method Sales and anticipated profits under engineering and construction contracts are recorded on a percentage-of-completion basis. The stage of completion is determined either by units of delivery, which are based on predetermined milestones and on the realized value added (contract value of the work performed to date) or through the cost-to-cost method of accounting. Estimated contract profits are recorded in earnings in proportion to recorded sales. In the cost-to-cost method, sales and profits are recorded after considering the ratio of accumulated costs to estimated total costs to complete each contract. Subcontractor materials, labor and equipment, are included in sales and costs of goods sold when management believes that Valmet is responsible for the ultimate acceptability of the project. Changes to total estimated contract profits (revenue and costs), if any, are recognized in the period in which they are determined. Service revenue Service revenue comprises short-term and long-term maintenance contracts and rebuilding and modification contracts. Revenues from short-term service contracts are recognized once the service has been rendered. Revenues from long-term service contracts are recognized using the cost-to-cost method. Government grants Government grants relating to acquisition of property, plant and equipment are deducted from the acquisition cost of the asset and they reduce the depreciation charge of the related asset. Other government grants are deferred and recognized in profit and loss concurrently with the costs they compensate. Other operating income and expenses Other operating income and expenses comprise income and expenses, which do not directly relate to the operating activity of businesses within Valmet. Such items include costs related to significant restructuring programs, impairment charges, and gains and losses on disposal of fixed assets. Additionally, the interest component of the fair value of derivative financial instruments and unrealized and realized changes in fair value of derivative financial instruments associated with the operating activity, excluding those qualifying for hedge accounting, are recognized in Other operating income and expenses. Income taxes Tax expenses in the statement of income comprise current and deferred taxes. Taxes are recognized in the statement of income except when they are associated with items recognized in other comprehensive income or directly in shareholders equity. Current taxes are calculated on the taxable income on the basis of the tax rate stipulated for each country by the balance sheet date. Additionally, non-recoverable foreign taxes, which are not based on taxable profits, are reported in current taxes. These include for example foreign taxes and/or equivalent payments not based on Double Tax Treaties in force. Taxes are adjusted for the taxes of previous financial periods, if applicable. The management evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. The tax provisions recognized in such situations are based on evaluations by the management. Deferred taxes are calculated on all temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred taxes are calculated on goodwill impairment that is not deductible in taxation and no deferred taxes are recognized on the undistributed profits of subsidiaries to the extent that the difference is unlikely to be reversed in the foreseeable future. Deferred taxes have been calculated using the 27

76 Notes to the Consolidated Financial Statements statutory tax rates or the tax rates enacted or substantively enacted by the balance sheet date. Deferred tax assets are only recognized to the extent that it is probable that future taxable profit will be available against which the temporary difference can be utilized. The most significant temporary differences arise from differences between the revenue recognized from construction contracts using the percentage of completion method and taxable income, depreciation differences relating to property, plant and equipment, defined benefit pension plans, provisions deductible at a later date, measurement at fair value in connection with business combinations and unused tax losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Fixed assets Fixed assets comprise intangible assets and property, plant and equipment. Intangible assets Intangible assets, which comprise mainly goodwill, trademarks, patents and licenses, are stated at historical cost less accumulated amortization and impairment loss, if any. Goodwill is not amortized, but tested annually for impairment. Amortization of intangible assets Amortization of intangible assets with a definite useful life is calculated on a straight-line basis over the expected economic lives of the assets, being the following: Patents and licenses Computer software Technology Customer relationships Other intangibles (incl. order backlog) 5 10 years 3 5 years 3 15 years 3 15 years < 1 15 years Impairment of intangible assets with indefinite useful lives The carrying value of goodwill is reviewed for impairment annually or more frequently, if the facts and circumstances, such as decline in sales, operating profit or cash flows or material adverse changes in the business environment, suggest that carrying value may not be recoverable. Valmet has three cash generating units. The testing of goodwill is performed at the cash generating unit level as goodwill does not generate independent cash flows from the cash generating unit. The annual testing may be performed using the previous year s recoverable amounts of the cash generating unit, if there has not been any significant changes to the assets and liabilities of the cash generating unit, if in the previous testing the recoverable value clearly exceeded the carrying values tested, and if the likelihood that the current recoverable value would be less than the current carrying value of the cash generating unit is remote. Valmet uses a discounted cash flow analysis to assess the fair value of goodwill subject to testing. A previously recognized impairment loss on goodwill is not reversed even if there is significant improvement in circumstances having initially caused the impairment. Research and development costs Research and development costs are mainly expensed as incurred. Research and development costs comprise salaries, services from external suppliers, administration costs, depreciation and amortization of tangible and intangible fixed assets. Development costs meeting certain capitalization criteria under IAS 38 are capitalized and amortized during the expected economic life of the underlying asset. Property, plant and equipment Property, plant and equipment are stated at historical cost, less accumulated depreciation and impairment loss, if any. Land and water areas are not depreciated. Depreciation is calculated on a straight-line basis over the expected useful lives of the assets, being the following: Buildings and structures Machinery and equipment years 3 20 years Expected useful lives are reviewed at each balance sheet date and if they differ significantly from previous estimates, the remaining amortization periods are adjusted accordingly. The carrying value of intangible assets subject to amortization is reviewed for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A previously recognized impairment loss may be reversed if there is significant improvement in the circumstances having initially caused the impairment, however not to a higher value than the carrying amount, which would have been recorded had there been no impairment in prior years. Expected useful lives are reviewed at each balance sheet date and if they differ significantly from previous estimates the remaining depreciation periods are adjusted accordingly. Subsequent improvement costs related to an asset are included in the carrying value of such an asset or recognized as a separate asset, as appropriate, only when the future economic benefits associated with the costs are probable and the related costs can be separated from normal maintenance costs. Valmet reviews property, plant and equipment to be held and used by the entities for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may 28

77 Notes to the Consolidated Financial Statements not be recoverable. Impairment of property, plant and equipment and capital gains and losses on their disposal are included in Other operating income and expenses. Previously recognized impairment on property, plant and equipment is reversed only if there has been a significant change in the estimates used to determine the recoverable amount, however not to exceed the carrying value, which would have been recorded had there been no impairment in prior years. Leases Leases for property, plant and equipment, where Valmet has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in long-term and short-term debt, respectively, and the interest element is charged to profit and loss over the lease period. Property, plant and equipment classified as finance leases are depreciated over the useful life of the asset or over the lease period, if shorter. Leases of property, plant and equipment, where the lessor retains a significant portion of the risks and rewards of ownership, are classified as operating leases. Payments under operating leases are expensed as incurred. Financial assets and liabilities Valmet classifies its financial investments into the following categories: assets and liabilities at fair value through profit and loss, loans and receivables, and available-for-sale financial assets. The classification is determined at the time of the initial recognition depending on the intended purpose. Derivative financial assets and liabilities are initially recognized as at the trade date while for other financial assets and liabilities settlement date accounting is applied. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and Valmet has transferred substantially all risks and rewards of ownership. Financial assets are presented as non-current when their maturity exceeds one year. Assets and liabilities at fair value through profit and loss Derivative financial instruments to which hedge accounting is not applied are fair valued quarterly through profit and loss. Unrealized and realized gains and losses on derivatives are recorded in Other operating income and expenses in the Statement of income. Available-for-sale equity and debt investments Available-for-sale financial assets comprise available-for-sale equity and debt investments. Available-for-sale equity and debt investments are carried at fair value and unrealized gains and losses arising from changes in fair value are recognized through OCI in the fair value reserve of equity. Gains and losses on disposal and impairment, if any, are recorded in the profit and loss and the accumulated change in fair value previously recorded in the fair value reserve of equity is reversed through OCI. On each balance sheet date, Valmet assesses whether there is objective evidence on an available-for-sale financial asset being impaired. In case of a significant or prolonged decline in the fair value of such an asset compared to its acquisition value, the accumulated net loss is reversed from equity and recognized in the income statement. If the amount of the impairment loss decreases in subsequent periods for debt instruments and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the reversal of the previously recognized impairment loss is recognized in the Consolidated statement of income. Loans and receivables Loans and other interest bearing receivables comprise interest bearing trade and loan receivables. Loans and loan receivables are initially recognized at fair value including transaction costs. Subsequently they are recognized at amortized cost using the effective interest rate method. They are subject to regular and systematic review as to collectability. If a loan receivable is estimated to be partly or totally unrecoverable, an impairment loss is recognized for the shortfall between the carrying value and the present value of the expected cash flows. Interest income on loan and other interest bearing receivables is included under Financial income and expenses. Inventories Inventories are valued at the lower of cost and net realizable value. Net realizable value is the estimated amount that can be realized from the sale of the asset in the normal course of business after allowing for the costs of realization. For materials and supplies and finished products, cost is determined on a first in first out (FIFO) basis. The work in progress balance includes specific costs identified for larger projects ongoing as of the balance sheet date. These costs usually include direct inventory costs and costs for absorption of engineering, supplies, manufacturing and project management costs. Trade receivables Trade receivables are recognized at the original amount invoiced to customers and reported on the statement of financial position, net of impairment. The impairment, which is expensed under Other operating income and expenses, is recorded on the basis of periodic reviews of potential non-recovery of receivables by taking into 29

78 Notes to the Consolidated Financial Statements consideration individual customer credit risk, economic trends in customer industries and changes in payment terms. Bad debts are written off when official announcement of receivership, liquidation or bankruptcy is received confirming that the receivable will not be honored. If extended payment terms, exceeding one year, are offered to customers, the invoiced amount is discounted to its present value and interest income is recognized over the credit term. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investment with maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Borrowings Non-current debt is initially recognized at fair value as at the settlement date, net of transaction costs incurred. Subsequently borrowings are measured at amortized cost by using the effective interest rate method. Debt is classified as a current liability unless Valmet has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Provisions Provisions, for which settlement is expected to occur more than one year after the initial recognition, are discounted to their present value and adjusted on subsequent reporting dates for the time effect. Restructuring and capacity adjustment costs A provision for restructuring and capacity adjustment costs is recognized only after management has developed and approved a formal plan to which it is committed and it has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. The costs included in a provision for capacity adjustment are those costs that are either incremental or incurred as a direct result of the plan or are the result of a continuing contractual obligation with no continuing economic benefit to Valmet or a penalty incurred to cancel the contractual obligation. Restructuring and capacity adjustment expenses are recognized in either cost of goods sold or selling, general and administrative expenses depending on the nature of the restructuring expenses. Restructuring costs can also include other costs incurred as a result of the plan, which are recorded under Other operating income and expenses, such as asset write-downs. Environmental remediation costs Valmet accrues for costs associated with environmental remediation obligations when such obligations and related cash outflows to settle the obligation are probable and they can be estimated reliably. Provisions for estimated costs from environmental remediation obligations are generally recognized no later than upon the completion of the remedial feasibility study. Such provisions are adjusted as further information impacting the amount of estimated costs or other circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed virtually certain. Warranty costs A warranty accrual is recognized for the estimated warranty costs for each project. The main principle in measuring the warranty cost accrual is to book a certain percentage, based on past experience, of a project s total costs as an accrual. The actual warranty costs of each project are booked against the warranty provision and thus the remaining warranty provision of each project can be followed. Actual warranty costs for projects are followed regularly in order to assess the feasible amount of the warranty accrual. Segment reporting Valmet supplies process automation, machinery, services, clothing and filter fabrics for the pulp, paper and energy industries. Valmet s operations and profitability is reported as a single reportable segment and operative decisions have been made by Valmet s CEO as Valmet s Chief Operating Decision Maker at Valmet Group level. Valmet has not aggregated operating segments and thus Valmet Group is the reportable operating segment. The performance of the Group is reviewed by the CODM. One key indicator of performance is EBITA (Earnings Before Interest, Taxes and Amortization). The performance is also analyzed by excluding from EBITA items qualifying as non-recurring, such as capacity adjustment costs, impairments, gains and losses on business disposals, and other infrequent events, as these items reduce the comparability of the Group s performance from one period to another. Critical accounting estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make estimates and exercise judgement in the application of the accounting policies. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have 30

79 Notes to the Consolidated Financial Statements a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. Trade receivables Valmet s policy is to calculate an impairment loss based on the best estimate of the amounts that are potentially uncollectable at the balance sheet date. The estimates are based on a systematic ongoing review and evaluation performed as part of the credit risk evaluation process. As part of this evaluation, Valmet takes into account the history of collections, the size and compositions of the receivable balances, current economic events and conditions. Inventory Valmet s policy is to maintain a provision for slow-moving and obsolete inventory based on the best estimate of such amounts at the balance sheet date. The estimates are based on a systematic ongoing review and evaluation of inventory balances. As part of this evaluation, Valmet also considers the composition and age of the inventory compared to anticipated future needs. Revenue recognition Valmet delivers turnkey projects to its customers, where the signing of a sales contract (firm commitment) and the final acceptance of a delivery by the customer may take place in different financial periods. In accordance with its accounting principles, Valmet applies the percentage of completion method ( POC method ) for recognizing such long-term delivery contracts. Recognition of revenue under the POC method is based either on predetermined milestones or cost-to-cost input method. A projected loss on a firm commitment is recognized through profit and loss, when it becomes known. The estimated revenue, the costs and profit, together with the planned delivery schedule of the projects are subject to regular revisions as the contract progresses to completion. Revisions in profit estimates are charged through profit and loss in the period in which the facts that give rise to the revision become known. Although Valmet has significant experience using the POC method, the total costs estimated to be incurred on projects may change over time due to changes in the underlying project cost structures, which may ultimately affect the revenue recognized. Therefore, the POC method is not applied for recognizing sales commitments where the final outcome of the project and related cost structure cannot be pre-established reliably. Hedging of foreign currency denominated firm commitments Under Valmet hedging policy, all Valmet entities have to hedge their foreign currency risk when they have become engaged in a firm commitment denominated in a currency different of their functional currency. The commitment can be between Valmet Corporation and Valmet entities or external to Valmet Group. When a firm commitment qualifies for recognition under the POC method, the entity applies cash flow hedge accounting and recognizes the effect from the hedging instruments in the OCI until the commitment is recognized. Although the characteristics triggering a firm commitment have been defined, the final realization of the unrecognized commitment depends also on factors beyond management control, which cannot be foreseen when initiating the hedge relationship. Such a factor can be a change in the market environment causing the other party to postpone or cancel the commitment. Management tries to the extent possible to include in the contracts clauses reducing the impact of such adverse events to the result. Allocation of purchase price to acquired assets In business combinations, the purchase consideration is allocated to the assets acquired and liabilities assumed with the excess being recognized as goodwill in the balance sheet. Whenever feasible, Valmet has used as a basis for such allocations readily available market values to determine the fair value to be recognized. However, when this has not been possible, as often is the case with intangible assets and certain assets with no active markets or available price quotations, the valuation has been based on past performance of such asset and expected future cash generating capacity. The appraisals, which have been based on current replacement costs, discounted cash flows and estimated selling prices depending on the underlying asset, require management to make estimates and assumptions of the future performance and use of these assets and their impact on the financial position. Any change in Valmet s future business priorities and orientations may affect the planned outcome of initial appraisals. Impairment testing The carrying value of identifiable intangible assets with indefinite economic life such as goodwill is tested annually or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. The carrying values of property, plant and equipment and intangible assets, subject to depreciation and amortization are reviewed for impairment whenever there are indications that their carrying values could exceed their value in use or disposal value if disposal is considered as a possible option. In 2015 Valmet recognized an impairment of EUR 6 million on fixed assets, the corresponding amount for 2014 being EUR 3 million. The annual impairment tests performed in 2015 and 2014 did not result in goodwill impairments. 31

80 Notes to the Consolidated Financial Statements Triggering events for impairment reviews include the following: Material permanent deterioration in the economic or political environment of the customers or of own activity Business s or asset s significant under-performance relative to historical or projected future performance Significant changes in Valmet s strategic orientations affecting the business plans and previous investment policies Preparation of impairment analysis requires use of numerous estimates. The valuation is inherently judgmental and highly susceptible to change from period to period, because it requires management to make assumptions about future supply and demand related to its individual business units, future sales prices and achievable cost savings. The value of the benefits and savings expected from the efficiency improvement programs are inherently subjective. The fair value of the cash generating unit is determined using a weighted average cost of capital as the rate to discount estimated future cash flows. This rate may not be indicative of actual rates obtained in the market. Reserves for restructuring costs Reserves for capacity adjustments and restructuring costs are recognized when the requirements for recognition are satisfied. For reasons beyond the control of management the final costs may differ from the initial amount for which provision has been established. Estimated rates of future pay increases. Actual increases may not reflect estimated future increases. Due to the significant uncertainty of the global economy, these estimates are difficult to project. The actuarial experience that differs from the assumptions and changes in the assumptions results in actuarial gains and losses, which are recognized in OCI. Financial instruments In accordance with the disclosure requirements on financial instruments, the management is obliged to make certain assumptions of the future cash in and outflows arising from such instruments. The management has also had to assume that the fair values of derivatives, especially foreign currency denominated derivatives at balance sheet date materially reflect the future realized cash in or outflow of such instruments. New and amended standards adopted by the Group In the current year, the Group has adopted number of amendments to existing standards forming part of IASB s annual improvement project. The adoption of these amendments did not a have material impact on the Group s financial position. New standards and interpretations not yet adopted The following new standards issued by IASB are expected to be relevant to the Group s operations and financial position: Reserves for warranty and guarantee costs The warranty and guarantee reserve is based on the history of past warranty costs and claims on machines and equipment under warranty. The typical warranty period is 12 months from the date of customer acceptance of the delivered equipment. For larger projects, the average warranty period is two years. For sales involving new technology and long-term delivery contracts, additional warranty reserves may be established on a case by case basis to take into account the potentially increased risk. Pensions In accordance with IAS 19, the benefit expense for defined benefit arrangements is based on assumptions that include the following: The rate used to discount post-employment benefit obligations (both funded and unfunded) has been determined by reference to market yields at the end of the reporting period on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields (at the end of the reporting period) on government bonds have been used. The currency and term of the corporate bonds or government bonds are consistent with the currency and estimated term of the post-employment benefit obligations. IFRS 15, Revenue from contracts with customers, issued in May 2014, is a converged standard on revenue recognition. It replaces IAS 11, Construction contracts, IAS 18, Revenue, and related interpretations. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognizes revenue in accordance with that core principle by applying the following steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation Under IFRS 15, revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. 32

81 Notes to the Consolidated Financial Statements IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity s contracts with customers. The standard is effective for annual periods beginning on or after January 1, The standard has not yet been endorsed by the EU. Management is currently in process of assessing the impact of IFRS 15 on its consolidated financial statements. The complete version of IFRS 9, issued in July 2014, replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through profit and loss. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. There is also a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there are no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value, through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after January 1, The standard has not yet been endorsed by the EU. Valmet has not yet assessed the impact of IFRS 9 on its consolidated financial statements. IFRS 16, Leases, was issued in January 2016 and it will replace the current guidance in IAS 17. The standard introduces a single lessee accounting model and requires a lessee to recognise right of use assets and liabilities for all leases except for leases with a term of less than 12 months and small value assets. The standard applies to annual periods beginning on or after January 1, The standard has not yet been endorsed by the EU. The Group has not yet assessed the impact of IFRS 16 on its consolidated financial statements. 33

82 Notes to the Consolidated Financial Statements 2 Reporting segment and geographic information Valmet s operations and profitability is reported as a single reportable segment and operative decisions have been made by Valmet s CEO as Valmet s Chief Operating Decision Maker at Valmet Group level. Following the acquisition of the Automation Business from Metso on April 1, 2015, Automation was established as a separate business line within Valmet. Valmet has not prior to or after the acquisition of Automation aggregated operating segments. Accordingly Valmet Group is the reportable operating segment. The performance of the Group is reviewed by the Chief Operating Decision Maker. One key indicator of performance is EBITA (Earnings Before Interest, Taxes and Amortization). The perfor- mance is also analyzed by excluding from EBITA items qualifying as non-recurring, such as capacity adjustment costs, gains and losses on business disposals, and other infrequent events, as these reduce the comparability of the Group s performance from one period to another. Entity-wide information Valmet s businesses are present in over 30 countries and on all continents. The main market areas are Europe and North America accounting for 64% of net sales in 2015 and 59% in Net sales to unaffiliated customers by destination: EUR million North America South America EMEA China Asia-Pacific Total , , , ,473 Valmet s exports, including sales to unaffiliated customers and intra-group sales from Finland, by destination: EUR million North America South America EMEA China Asia-Pacific Total , Non-current assets by location: EUR million Finland North America South America EMEA excluding Finland China Asia-Pacific Non-allocated Total , Non-current assets comprise intangible assets, property, plant and equipment and investments in associated companies and joint ventures. Non-allocated assets include mainly goodwill and other allocated assets arising from business acquisitions that have not been pushed down to the subsidiaries books. 34

83 Notes to the Consolidated Financial Statements Gross capital expenditure (excluding business combinations) by location: EUR million North America South America EMEA China Asia-Pacific Total Major customers Valmet delivers large long-term construction contracts, which however rarely exceed 10 percent of its net revenue. In 2015 and 2014 there were no single customer with revenue exceeding 10 percent of net sales. 3 Financial risk management As a global company, Valmet is exposed to a variety of business and financial risks. Financial risks are managed centrally by the Corporate Treasury (hereafter the Treasury) under annually reviewed written policies approved by Valmet s Board of Directors. Treasury identifies, evaluates and hedges financial risks in close co-operation with the subsidiaries. The Treasury functions as a counterparty to the subsidiaries, manages centrally external funding and is responsible for the management of financial assets and appropriate hedging measures. The objective of financial risk management is to mitigate potential adverse effects of financial risks on Valmet s financial performance. Sensitivity analysis Sensitivity analysis presented in connection with various financial risks are based on the risk exposures at the balance sheet date. Sensitivities are calculated by assuming a change in one of the risk factors of a financial instrument, such as interest rate or currency. When calculating the sensitivity, commonly used market conventions have been chosen in assuming a variation of one percentage point (100 basis points) in interest rates, a ten percent change in foreign exchange rates and in commodity prices. Liquidity and refinancing risk management Liquidity or refinancing risk arises when a company is not able to arrange funding at terms and conditions corresponding to its creditworthiness. Cautious maturity distribution of debt portfolio and sufficient cash, short-term investments and committed and uncommitted credit facilities are maintained to protect short-term liquidity and to manage refinancing risk. Diversification of funding among different markets and an adequate number of financial institutions are used to safeguard the availability of liquidity at all times. The Treasury monitors bank account structures, cash balances and forecasts of the subsidiaries and manages the utilization of the consolidated cash resources. At the end of 2015 cash and cash equivalents amounted to EUR 165 million (EUR 192 million) and available-for-sale interest bearing financial assets to EUR 7 million (EUR 34 million). In addition Valmet had a committed revolving credit facility of EUR 200 million which matures in 2018, committed overdraft limits of EUR 14 million and uncommitted domestic commercial paper program of EUR 200 million which were all unused at the end of the reporting period. Net working capital management is an integral part of the liquidity risk management. The Treasury monitors and forecasts net working capital fluctuations in close co-operation with the subsidiaries. Net working capital increased to EUR -238 million (EUR -353 million) due to the significant impact of the large capital projects milestone payment schedules on net working capital. Valmet s refinancing risk is managed by balancing the proportion of current and non-current debt and average maturity of non-current debt including committed undrawn credit facility. The average maturity for non-current debt including committed undrawn credit facility was 3.4 years (3.2 years) and current debt including current portion of non-current debt was 17% (76%) of total debt portfolio. The tables below present undiscounted cash flows on the repayments and interests on Valmet s debt by the remaining maturities from the balance sheet date to the contractual maturity date. The maturities of the derivatives are presented in Note

84 Notes to the Consolidated Financial Statements EUR million and later Loans from financial institutions Repayments Interests Trade and other payables Total As at December 31, 2015 there were no material liabilities under finance lease obligations and other debt. Capital structure management The capital structure management seeks to safeguard the ongoing business operations, to ensure flexible access to capital markets and to secure adequate funding at a competitive rate. Capital structure management in Valmet comprises both equity and total debt. As of December 31, 2015 the total equity was EUR 860 million (EUR 809 million) and the amount of total debt was EUR 371 million (EUR 68 million). Valmet has not disclosed any long-term financial ratio for its capital structure. However the objective of Valmet is to maintain strong capital structure in order to secure customers, investors, creditors and market confidence. The capital structure is assessed regularly by the Board of Directors and managed operationally by the Treasury. Loan facility agreements include customary covenants and Valmet is in clear compliance with the covenants at the balance sheet date. Valmet has no credit rating at December 31, As at Dec 31, EUR million Total interest bearing liabilities Cash and cash equivalents Available-for-sale interest bearing financial assets 7 34 Other interest bearing receivables 21 8 Interest bearing net debt Total equity Gearing ratio 21% -21% 36 Interest rate risk Interest rate risk arises when changes in market interest rates and interest margins influence finance costs, returns on financial investments and valuation of interest bearing items. The interest rate risk is managed and controlled by the Treasury. The interest rate risks are managed through balancing the ratio between fixed and floating interest rates and duration of debt and investment portfolios. Additionally, Valmet may use derivative instruments such as forward rate agreements, swaps, options and futures contracts to mitigate the risks arising from interest bearing assets and liabilities. The ratio of fixed rate debt of the total debt is accepted to stay within the 10-60% range including interest rate derivatives. The duration of the non-current debt including the current portion of non-current debt and interest rate derivatives is accepted to deviate between 6 42 months. The fixed rate interest proportion of total debt portfolio was 27 % (52%), the duration was 1.5 years (0.5 years) and the EUR denominated debt was 100% (95%) of the entire gross debt at the end of The basis for the interest rate risk sensitivity analysis is an aggregate corporate level interest rate exposure, composed of interest bearing assets, interest bearing liabilities and interest rate swaps, which are used to hedge the underlying exposures. The sensitivity analysis does not include interest rate impact from foreign exchange derivatives when an impact of one percentage point change in interest rates is not significant, assuming similar change in all currency pairs at the same time. For all interest bearing debt, assets and interest rate derivatives to be fixed during the next 12 months a change of one percentage point upwards or downwards in interest rates with all other variables held constant would have an effect, net of taxes: EUR million Profit/loss -/ /- 1.2 Equity +/ Valmet has used interest rate derivatives to hedge interest rate risk of debt portfolio. All interest rate swaps have been accounted in accordance with the principles of hedge accounting as cash flow hedges. The nominal and fair values of the outstanding interest rate derivative contracts are presented in Note 27. WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

85 Notes to the Consolidated Financial Statements Foreign exchange risk Valmet operates globally and is exposed to foreign exchange risk in several currencies, although the geographical diversity of operations decrease the significance of any individual currency. Substantial proportion of Valmet s net sales and costs are generated in euros (EUR), US dollars (USD), Swedish crowns (SEK) and Chinese yuans (CNY). Transaction exposure Foreign exchange transaction exposure arises when a subsidiary has commercial or financial transactions and payments in another currency than its own functional currency, and when related cash inflow and outflow amounts are not equal or concurrent. In accordance with the Treasury Policy, subsidiaries are required to hedge in full the foreign currency exposures on consolidated statement of financial position and other firm commitments. Cash flows denominated in a currency other than the functional currency of the subsidiary are hedged with internal forward exchange contracts with the Treasury for periods, which do not usually exceed two years. Subsidiaries also carry out hedging directly with banks in countries, where regulation does not allow corporate internal cross-border contracts. The Treasury monitors the net position of each currency and decides to what extent a currency position is to be closed. The Treasury is responsible for entering into an external forward transaction corresponding to the internal forward whenever a subsidiary applies hedge accounting. Valmet s Treasury Policy defines upper limits on the open currency exposures managed by the Treasury; limits have been calculated on the basis of their potential profit and loss impact. To manage the foreign currency exposure the Treasury may use forward exchange contracts and foreign exchange options. Valmet is exposed to foreign currency risk arising from both onand off-balance sheet items. The foreign currency exposure is composed of all assets and liabilities denominated in foreign currencies and their counter values in local currencies. Calculation includes short- and long-term sales and purchase contracts, projected cash flows for unrecognized firm commitments and financial items, net of respective hedges. The table below illustrates corporate s outstanding foreign currency risk at the end of the reporting period: As at Dec 31, 2015 EUR million EUR SEK USD CNY Others Operational items of which trade and other receivables of which trade and other payables Financial items Hedges Total exposure As at Dec 31, 2014 EUR million EUR SEK USD CNY Others Operational items of which trade and other receivables of which trade and other payables Financial items Hedges Total exposure

86 Notes to the Consolidated Financial Statements This corporate level currency exposure is the basis for the sensitivity analysis of foreign exchange risk. Assuming euro to appreciate or depreciate ten percent against all other currencies, the impact on cash flows, net of taxes, would be: As at Dec 31, 2015 EUR million SEK USD CNY Others Total EUR +/-10% change +/ / / / /+ 0.4 As at Dec 31, 2014 EUR million SEK USD CNY Others Total EUR +/-10% change +/ / / / /+ 1.3 The sensitivity analysis as required by IFRS 7, includes financial instruments, such as trade and other receivables, trade and other payables, interest bearing liabilities, deposits, cash and cash equivalents and derivative financial instruments. The table below presents the effects, net of taxes, of a +/- ten percent change in EUR against all other currencies: EUR million Profit/loss +/ /- 7.4 Equity +/ /- 3.0 The effect in equity is the fair value change in derivative contracts qualifying as cash flow hedges for firm sales and purchase contracts. The effect in profit and loss is the fair value change for all other financial instruments exposed to foreign exchange risk. With respect to sales and purchase contracts, this includes derivatives, which qualify as cash flow hedges, to the extent the underlying sales transaction, recognized under the percentage of completion method, has been recognized as revenue. The nominal and fair values of the outstanding foreign exchange derivative contracts are presented in Note 27. Translation or equity exposure Foreign exchange translation exposure arises when the equity, goodwill and fair value step up of a subsidiary is denominated in currency other than the functional currency of the parent company. The total non-eur denominated equity, goodwill and fair value step up of the corporate s subsidiaries were EUR 482 million (EUR 399 million). The major translation exposures were EUR 202 million 38 (EUR 172 million) in SEK and EUR 144 million (EUR 138 million) in CNY. Valmet is currently not hedging any equity exposure. Commodity risk Valmet is exposed to risk in variations of the prices of raw materials and of supplies including energy. Subsidiaries have identified their commodity price hedging needs and hedges have been executed through the Treasury using approved counterparties and instruments. For commodity risks separate overall hedging limits are defined and approved. Hedging is done on a rolling basis with a declining hedging level over time. Electricity exposure in the Nordic subsidiaries has been hedged with electricity forwards and fixed price physical contracts, which are designated as hedges of highly probable future electricity purchases. Hedging is focused on the estimated energy consumption for the next two year period with some contracts extended to approximately five years. The execution of electricity hedging has been outsourced to an external broker. As at December 31, 2015 Valmet had outstanding electricity forwards amounting to 216 GWh (327 GWh) and 153 GWh (18 GWh) under fixed price purchase agreements. Valmet may reduce its exposure to the surcharge for certain metal alloys (Alloy Adjustment Factor) by entering into average-price swap agreements for nickel. As at December 31, 2015 Valmet had no outstanding average-price swap agreements for nickel. The following table presenting the sensitivity analysis of the commodity prices based on financial instruments comprises the net aggregate amount of commodities bought through forward contracts and swaps but excludes the anticipated future consumption of electricity. WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

87 Notes to the Consolidated Financial Statements A ten percent change upwards or downwards in electricity prices would have the following effects, net of taxes: EUR million Profit/loss +/ /- 0.2 Equity +/ /- 0.6 Cash flow hedge accounting has been applied for electricity forward contracts. The effective portion of derivatives is recognized in equity and the ineffective portion is recognized through profit and loss. Credit and counterparty risk Credit or counterparty risk is defined as the possibility of a customer, subsupplier or a financial counterparty not fulfilling its commitments towards Valmet. Subsidiaries are primarily responsible for credit risks pertaining to sales and procurement activities. The subsidiaries assess the credit standing of their customers, by taking into account their financial position, past experience and other relevant factors. Advance payments, letters of credit and third party guarantees are actively used to mitigate credit risks. The Treasury provides centralized services related to trade, project and customer financing and seeks to ensure that the principles of the Treasury Policy are adhered to with respect to terms of payment and required collateral. Valmet has no significant concentrations of credit risks due to the large number and geographic dispersion of companies that comprise corporate s customer base. The maximum credit risk equals the carrying value of trade and other receivables. The credit risk quality is evaluated both on the basis of aging of the trade receivables and also on the basis of customer specific analysis. The aging structure of trade receivables is presented in Note 16. Counterparty risk arises also from financial transactions agreed upon with banks, financial institutions and corporations. The risk is managed by careful selection of banks and other counterparties and by applying counterparty specific limits and netting agreements such as ISDA (Master agreement of International Swaps and Derivatives Association). When measuring the financial credit risk exposure, all open exposures such as cash on bank accounts, investments, deposits and other financial transactions, for example derivative contracts, are included. The compliance with financial counterparty limits are regularly monitored by the management. Fair value estimation For those financial assets and liabilities which have been recognized at fair value in the statement of financial position, the following measurement hierarchy and valuation methods have been applied: Level 1 Quoted unadjusted prices at the balance sheet date in active markets. The market prices are readily and regularly available from an exchange, dealer, broker, market information service system, pricing service or regulatory agency. The quoted market price used for financial assets is the current bid price. Level 1 financial instruments include debt and equity investments classified as financial instruments available-for-sale. Level 2 The fair value of financial instruments in Level 2 is determined using valuation techniques. These techniques utilize observable market data readily and regularly available from an exchange, dealer, broker, market information service system, pricing service or regulatory agency. Level 2 financial instruments include overthe-counter derivatives classified as financial assets/liabilities at fair value through profit and loss or qualified for hedge accounting. Level 3 A financial instrument is categorized into Level 3 if the calculation of the fair value cannot be based on observable market data. The tables below present Valmet s financial assets and liabilities that are measured at fair value. There have been no transfers between fair value levels during Fair value levels of other financial assets and liabilites are shown in Note WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

88 Notes to the Consolidated Financial Statements As at Dec 31, 2015 EUR million Level 1 Level 2 Level 3 Assets Derivatives at fair value through profit and loss Derivatives qualified for hedge accounting Available-for-sale financial assets 8-2 Total assets Liabilities Derivatives at fair value through profit and loss Derivatives qualified for hedge accounting Total liabilities As at Dec 31, 2014 EUR million Level 1 Level 2 Level 3 Assets Derivatives at fair value through profit and loss Derivatives qualified for hedge accounting Available-for-sale financial assets Total assets Liabilities Derivatives at fair value through profit and loss Derivatives qualified for hedge accounting Total liabilities There were no changes in level 3 instruments for the 12 months ended December 31, Selling, general and administrative expenses Year ended Dec 31, EUR million Marketing and selling expenses Research and development expenses, net Administrative expenses Total Research and development expenses, net consists of following: Year ended Dec 31, EUR million Research and development costs, total Grants received 5 2 Depreciation and amortization -5-5 Research and development expenses, net

89 Notes to the Consolidated Financial Statements 5 Other operating income and expenses Year ended Dec 31, EUR million Gain on sale of fixed assets 2 1 Royalty income 2 - Rental income 1 1 Foreign exchange gains 1) Other income 8 6 Other operating income, total Loss on sale of subsidiaries and businesses - -2 Loss on sale of fixed assets - -1 Impairment of fixed assets 2) -6-2 Foreign exchange losses 1) Other expenses 3) Other operating expenses, total Other operating income and expenses, net ) Includes foreign exchange gains and losses resulting from trade receivables and payables and related derivatives. 2) EUR 5 million relates to impairment of buildings in ) EUR 5 million and EUR 7 million of the 2015 amount related to transfer tax paid in connection with acquisition of the Automation business and allowances for doubtful receivables, respectively. 6 Personnel expenses and the number of personnel Personnel expenses: Year ended Dec 31, EUR million Salaries and wages Pension costs, defined contribution plans Pension costs, defined benefit plans 1) -8-6 Other post-employment benefits 1) -4-4 Share-based payments -4-2 Other indirect employee costs Total ) For more information, see Note 24. Number of personnel: Personnel at end of year 12,306 10,464 Average number of personnel during the year 11,781 10,853 41

90 Notes to the Consolidated Financial Statements 7 Depreciation and amortization Year ended Dec 31, EUR million Intangible assets Buildings and structures Machinery and equipment Total Depreciation and amortization by function are as follows: Year ended Dec 31, EUR million Cost of goods sold Selling, general and administrative expenses Marketing and selling Research and development -5-5 Administrative Total Financial income and expenses Year ended Dec 31, EUR million Dividends received - 1 Interest income on available-for-sale instruments - 1 Interest income on cash and cash equivalents 3 4 Net gain from foreign exchange 2 3 Financial income total 6 9 Interest expenses on financial liabilities at amortized cost -9-8 Net interest from defined benefit plans -4-4 Other financial expenses -2-2 Financial expenses total Financial income and expenses, net Interest expenses on financial liabilities at amortized cost include interest expenses on interest-bearing loans, non-current interest rate swaps, and forward points on foreign exchange derivatives that are used for hedging loans, receivables and bank account balances. In 2015 other operating income and expenses includes EUR 5 million net foreign exchange loss (EUR 7 million gains) related to operative items and corresponding derivatives. Net foreign exchange gains of EUR 2 million (EUR 3 million) are recognized in financial income and expenses in

91 Notes to the Consolidated Financial Statements 9 Income taxes The differences between income tax expense computed at the Finnish statutory rate (20.0% in 2014 and 2015) and income tax expense provided on earnings are as follows: Year ended Dec 31, EUR million Income before taxes Taxes calculated according to tax rate in Finland Income tax for prior years 4 - Effect of different tax rates in foreign subsidiaries -4-4 Utilization of tax losses carried forward 2 2 Non-recoverable foreign taxes -3-3 Effect of tax free income and non-deductible expenses -5-2 Other -2-2 Income tax expense Effective tax rate, (%) 28.0% 31.3% Tax effects of components in other comprehensive income: Year ended Dec 31, EUR million Before taxes Tax After taxes Before taxes Tax After taxes Cash flow hedges Remeasurement of defined benefit plans Currency translation on subsidiary net investments Total comprehensive income / expense Current tax - 1 Deferred tax Total

92 Notes to the Consolidated Financial Statements Reconciliation of deferred tax balances: EUR million Balance at beginning of year Charged to income statement Charged to other comprehensive income Acquired in business combination Translation differences Balance at end of year 2015 Deferred tax assets Tax losses carried forward Fixed assets Inventory Provisions Accruals Employee benefits Other Total deferred tax assets Offset against deferred tax liabilities 1) Net deferred tax assets Deferred tax liabilities Purchase price allocations 2 ) Fixed assets Other Total deferred tax liabilities Offset against deferred tax assets 1) Net deferred tax liabilities Deferred tax assets Tax losses carried forward Fixed assets Inventory Provisions Accruals Employee benefits Other Total deferred tax assets Offset against deferred tax liabilities 1) Net deferred tax assets Deferred tax liabilities Purchase price allocations Fixed assets Other Total deferred tax liabilities Offset against deferred tax assets 1) Net deferred tax liabilities ) Deferred tax assets and liabilities are offset when there is legally enforceable right to offset tax assets against tax liabilities and when the deferred income taxes relate to the same fiscal authority. 2) Changes in deferred tax liabilities relates mainly to Automation acquisition. More information on acquisition on Note 10. A deferred tax liability on undistributed profits of Valmet s legal entities located in countries where distribution generates tax consequences is recognized when it is likely that earnings will be distributed in the near future. For the years ended December 31, 2015 and 2014, earnings of EUR 79 million and EUR 81 million, respectively, would have been subject to recognition of a deferred tax liability, had Valmet regarded a distribution in the near future as likely. A deferred tax asset is recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. There were no material tax loss carry-forwards for which a deferred tax asset had not been recognized. Valmet has tax loss carry-forwards of EUR 4 million that will expire within the following five years. 44

93 Notes to the Consolidated Financial Statements 10 Business combinations and disposals of businesses Business combinations Acquisition of Process Automation Systems On April 1, 2015, the Group completed its acquisition of Process Automation Systems. The final purchase consideration was EUR 312 million in cash. Process Automation Systems supplies process automation and information management systems and related applications and services to the pulp, paper, energy and other process industries. Control in the acquiree was obtained through a series of share deals financed through long-term borrowings. Goodwill of EUR 164 million arising from the acquisition is attributable to the assembled workforce and synergies expected to arise subsequent to the acquisition. Majority of the goodwill recognized is not expected to be deductible for income tax purposes. As a result of the acquisition, Valmet will become a stronger and unique technology and services company in its field, with a full automation offering. The acquisition strengthens Valmet s competitiveness by combining paper, pulp and power plant technology offering, services, process know-how and automation into one customer value-adding entity. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition. The below amounts include EUR 2 million of net receivables from Valmet that were settled at closing. As at April 1, EUR million 2015 Non-current assets Goodwill 164 Other intangible assets 166 Property, plant and equipment 26 Financial and other non-current assets 13 Total non-current assets 369 Current assets Inventories 51 Trade receivables 45 Other current assets 70 Cash and cash equivalents 48 Total current assets 213 Non-current liabilities Deferred tax liability 47 Other non-current liabilities 7 Total non-current liabilities 53 Current liabilities Current debt 65 Trade and other payables 51 Advances received 75 Other current liabilities 26 Total current liabilities 216 Net assets acquired

94 Notes to the Consolidated Financial Statements Acquisition related costs of EUR 2 million and EUR 1 million have been charged to selling, general and administrative expenses in the consolidated income statement for the 12 months ended December 31, 2015 and 2014, respectively. From the date of acquisition, Process Automation Systems contributed EUR 229 million of revenue and EUR 19 million to profit of the Group. If the acquisition had occurred on January 1, 2015, management estimates that the combined statement of income would show net sales of EUR 2,983 million and profit of EUR 64 million. These pro-forma amounts, include estimated interest expenses and income taxes as well as the fair value adjustments, determined as at December 31, 2015, for the January March period. The following table presents the cash flows associated with the acquisition of the Process Automation Systems business. EUR million As at April 1, 2015 Consideration transferred -312 Cash and cash equivalents acquired 48 Loan repayments at closing -54 Net cash outflow -318 Acquisition of MC Paper Machinery and Focus Rewinding business On August 6, 2015, the Group completed its acquisition of the MC Paper Machinery and Focus Rewinding business, through purchase of 100 percent of the share capital of Valmet Pescia S.r.l.. The purchase consideration paid and provisional goodwill arising from the transaction amounted to EUR 5 million and EUR 5 million, respectively. The amounts are provisional in nature while work to complete accounting for the business combination still continues. This acquisition had no material effect on Valmet s financial statements for the August December 2015 period. Valmet made no acquisitions during Disposals of businesses Valmet made no disposals during On December 17, 2013 MW Power Oy signed a contract to sell its small-scale heating plant business in Finland and related services operations in Russia to KPA Unicon. The closing of the transaction covering the business in Finland took place on January 31, The closing of the transaction covering the Russian service business took place on June 27, On December 17, 2013 Valmet signed a contract to sell its smallscale heating plant business in Sweden to a part of its current management. The closing of the transaction covering the business in Sweden took place on January 2, 2014 The total annual revenue of the divested businesses has been approximately EUR 30 million, employing 114 employees as of year end These transactions had no material effect on Valmet s 2014 financial statements. 46

95 Notes to the Consolidated Financial Statements 11 Intangible assets and property, plant and equipment Intangible assets EUR million Goodwill Patents and licences Capitalized software Other intangible assets Intangible assets total 2014 Acquisition cost at beginning of year Translation differences Capital expenditure Reclassifications Other changes and disposals Acquisition cost at end of year Accumulated amortization at beginning of year Translation differences Impairment losses Other changes and accumulated amortization of disposals Amortization charges for the year Accumulated amortization at end of year Net book value at end of year EUR million Goodwill Patents and licences Capitalized software Other intangible assets Intangible assets total 2015 Acquisition cost at beginning of year Translation differences Acquired in business combination Capital expenditure Reclassifications Other changes and disposals Acquisition cost at end of year ,147 Accumulated amortization at beginning of year Translation differences Impairment losses Other changes and accumulated amortization of disposals Amortization charges for the year Accumulated amortization at end of year Net book value at end of year

96 Notes to the Consolidated Financial Statements Property, plant and equipment EUR million Land and water areas Buildings and structures Machinery and equipment Assets under construction Property, plant and equipment total 2014 Acquisition cost at beginning of year ,253 Translation differences Disposals of businesses Capital expenditure Reclassifications Other changes and disposals Acquisition cost at end of year ,278 Accumulated depreciation at beginning of year Translation differences Impairment losses Other changes and accumulated depreciation of disposals Depreciation charges for the year Accumulated depreciation at end of year Net book value at end of year EUR million Land and water areas Buildings and structures Machinery and equipment Assets under construction Property, plant and equipment total 2015 Acquisition cost at beginning of year ,278 Translation differences Acquired in business combination Disposals of businesses Capital expenditure Reclassifications Other changes and disposals Acquisition cost at end of year ,336 Accumulated depreciation at beginning of year Translation differences Impairment losses Other changes and accumulated depreciation of disposals Depreciation charges for the year Accumulated depreciation at end of year Net book value at end of year As at December 31, 2015 and 2014 there were no material assets leased under financial lease arrangements included in property, plant and equipment. 48

97 Notes to the Consolidated Financial Statements Goodwill impairment testing Goodwill arising from business acquisitions is allocated as at the acquisition date to the cash generating unit (CGU) or cash generating units (CGUs) expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to the CGU or CGUs. In 2015 Valmet had three CGUs (in 2014 Valmet had two CGUs). The first CGU comprises of Valmet s Paper business line and the paper business related part of Valmet s service business. The second CGU comprises of Valmet s Pulp and Energy business line and the pulp and energy related part of Valmet s service business. In 2015 Valmet identified a third CGU as a result of Valmet s acquisition of Process Automation Systems business. Valmet assesses the value of its goodwill for impairment annually or more frequently, if facts and circumstances indicate, that a risk of impairment exists. If any such indication exists, then the carrying value of the CGU is compared to its recoverable amount, which is determined based on a value in use calculation. This calculation uses pre-tax cash flow projections based on financial budgets approved by Valmet s management and Board of Directors covering a three-year period. The following table sets out the allocation of goodwill as at December 31, 2015 and 2014 and the key assumptions applied in the value in use calculations (testing was performed as at September 30, 2015). As at Dec 31, EUR million Paper business line and the paper business related part of Valmet s service business Pulp and Energy business line and the pulp and energy related part of Valmet s service business Automation business line Total Key assumptions applied Long term growth rate, (%) Paper business line and the paper business related part of Valmet s service business 2.0% 1.9% Pulp and Energy business line and the pulp and energy related part of Valmet s service business 1.4% 1.6% Automation business line 1.0% - Pre-tax discount rate, (%) Paper business line and the paper business related part of Valmet s service business 9.5% 11.0% Pulp and Energy business line and the pulp and energy related part of Valmet s service business 10.1% 11.0% Automation business line 8.7% - Market and product mix Materially stable - EBIT Materially stable - The key assumptions are based on past performance and on expectations of Valmet s management and Board of Directors on market development. External sources are also used to obtain data on growth, demand and price development in establishing the assumptions. The discount rate used in testing is derived from the weighted average cost of capital based on comparable peer industry betas and capital structure. The assumption requiring most judgment is the market and product mix. As a result of the annual impairment tests, no impairment loss was recognized on goodwill in 2015 or

98 Notes to the Consolidated Financial Statements Sensitivity analysis Valmet s management has assessed that no reasonably possible change in any of the key assumptions would cause the CGU s carrying amount to exceed its recoverable amount. A change in a key assumption that would cause the recoverable amount to equal the carrying amount of the CGU is presented in the table below. Change EBIT Paper business line and the paper business related part of Valmet s service business decrease more than 50% Pulp and Energy business line and the pulp and energy related part of Valmet s service business decrease more than 30% Automation decrease more than 35% Pre-tax discount rate, (%) Paper business line and the paper business related part of Valmet s service business increase to more than 26% Pulp and Energy business line and the pulp and energy related part of Valmet s service business increase to more than 17% Automation increase to more than 14% 12 Investments in associates and joint ventures Valmet Group included the following associated companies and joint ventures: Company name Share of ownership Place of incorporation and principal place of business Dec 31, 2015 Dec 31, 2014 Measurement method Allimand S.A. France 35.8% 35.8% Equity Valpro gerenciamento de obras Ltda Brazil 51.0% 51.0% Equity Nanjing SAC Metso Control System Co., Ltd. China 21.95% - Equity Allimand S.A. is a French company that provides products and services for the paper industry and its main focus is on speciality paper- and mid-size board machines. Allimand S.A. is an associated company for Valmet. Management reassessed the nature of its interest in Allimand S.A. in 2015 concluding that its interest in this associate is of an investing rather than an operating nature, and consequently, reporting of Valmet s share of profit and losses in Allimand S.A. below operating profit is appropriate. The share of profit and losses is immaterial in Valpro gerenciamento de obras Ltda is a joint venture between Valmet and Progen which attends exclusively to Valmet projects in the South American pulp, paper and energy market. Valpro gerenciamento de obras Ltda was established in 2013 in order to strengthen and diversify activities in Brazil. The joint venture supplies specialized technical services in the field of construction and erection management. Valpro gerenciamento de obras Ltda is classified as joint venture, because Valmet has, together with the other shareholder, joint power to govern the company. Nanjing SAC Metso Control System Co., Ltd. (SAC) is a company established in 2011 between Metso Automation Co., Ltd. and Guodian Nanjing Automation Co., Ltd.. SAC, Guodian Nanjing Automation Co., Ltd is a public company majority owned by Huadian Power International Corporation Limited, one of the five biggest power producing companies in China. The ownership of Metso Automation Co., Ltd. transferred to Valmet when the Group completed its acquisition of Process Automation Systems on April 1, Nanjing SAC Metso Control System Co., Ltd. concentrates on developing new technology, products and solutions to the digital power plant concepts by combining the resources of the parties. The associated company is focusing especially on the Chinese market. 50

99 Notes to the Consolidated Financial Statements Allimand S.A., Valpro gerenciamento de obras Ltda and Nanjing SAC Metso Control System Co., Ltd. are private companies and there are no quoted market prices available for their shares. There are no contingent liabilities relating to Valmet s interest in Allimand S.A., Valpro gerenciamento de obras Ltda or Nanjing SAC Metso Control System Co., Ltd.. Summarized financial information of Allimand S.A. and Nanjing SAC Metso Control System Co., Ltd. is set out below. The summarized financial information below represents amounts shown in Allimand S.A. s and Nanjing SAC Metso Control System Co., Ltd. s financial statements. The current and non-current assets and liabilities, revenues and results of Valpro gerenciamento de obras Ltda are not material. Allimand S.A. SAC As at Dec 31, As at Dec 31, EUR million ) Non-current assets Current assets Non-current liabilities Current liabilities Net assets Valmet s share of net assets Allimand S.A. SAC Year ended Dec 31, Year ended Dec 31, EUR million ) ) 2014 Revenue Profit/loss ) Period Jan Aug ) Period Apr Dec 2015 Carrying value of investments in associates and joint ventures EUR million Investments in associated companies and joint ventures Acquisition cost at beginning of year 1 1 Acquired in business combination 8 - Acquisition cost at end of year 8 1 Equity adjustments in investments in associated companies and joint ventures Equity adjustments at beginning of year 4 4 Share of results, operative investments 2 - Share of results, financial investments -2 - Equity adjustments at end of year 3 4 Carrying value at end of year

100 Notes to the Consolidated Financial Statements The following transactions were carried out with associated companies and joint ventures and the following balances have arisen from such transactions. Transactions with associated companies and joint ventures EUR million Net sales Purchases Receivables 1 - Payables 1-13 Available-for-sale financial assets The available-for-sale financial assets comprise EUR 1 million listed shares (EUR 1 million), EUR 7 million current interest bearing financial assets (EUR 28 million current, EUR 6 million non-current), which are all valued at their market value. The remaining EUR 2 million as at December 2015 (EUR 2 million) consists of various industrial participations, shares in real estate companies and other shares for which market values do not exist, whereby they are valued at cost. Available-for-sale financial assets have changed as follows: EUR million Carrying value at beginning of year 37 4 Additions - 34 Disposals and other changes Carrying value at end of year Non-current 3 9 Current Inventories As at Dec 31, EUR million Materials and supplies Work in process Finished products Total inventory The cost of inventories recognized as expense was EUR 2,248 million and EUR 1,965 million for the years ended December 31, 2015 and 2014 respectively. 52

101 Notes to the Consolidated Financial Statements Provision for inventory obsolescence has changed as follows: EUR million Balance at beginning of year Translation differences 1 - Additions charged to expense 11 7 Used reserve -2-2 Deductions / other additions Balance at end of year Revenue recognition Net sales recognized under the percentage of completion method amounted to EUR 1,330 million, or 45% of net sales, in Net sales recognized under the percentage of completion method amounted to EUR 1,195 million, or 48% of net sales, in Information on statement of financial position items of uncompleted projects at December 31 is as follows: EUR million Cost and earnings of uncompleted projects Billings of projects Net 2015 Projects where cost and earnings exceed billings 1,594 1, Projects where billings exceed cost and earnings 972 1, Projects where cost and earnings exceed billings 1,472 1, Projects where billings exceed cost and earnings 794 1, Analysis of net sales by category: Year ended Dec 31, EUR million Sale of services and automation 1, Sale of projects, equipment and goods 1,572 1,484 Total 2,928 2,473 53

102 Notes to the Consolidated Financial Statements 16 Interest bearing and non-interest bearing receivables As at Dec 31, EUR million Non-current Current Total Non-current Current Total Interest bearing receivables Loan receivables Trade receivables Total Non-interest bearing receivables Trade receivables Receivables from related parties Prepaid expenses and accrued income Other receivables Total Allowance for trade receivables has changed as follows: EUR million Balance at beginning of year Addition charged to expense 6 4 Used reserve -2-1 Unused amounts reversed -1-1 Balance at end of year Analysis of trade receivables by age: As at Dec 31, EUR million Trade receivables, not due at reporting date Trade receivables 1 30 days overdue Trade receivables days overdue Trade receivables days overdue Trade receivables days overdue Trade receivables more than 180 days overdue Total

103 Notes to the Consolidated Financial Statements 17 Financial assets and liabilities Financial assets and liabilities divided by categories were as follows at December 31: EUR million Financial assets at fair value through profit and loss Derivatives qualified for hedge accounting Loans and receivables Availablefor-sale financial assets Carrying value Fair value Fair value level 2015 Non-current assets Available-for-sale financial assets ,3 Loan receivables Derivative financial instruments Total Current assets Available-for-sale financial assets Trade receivables Derivative financial instruments Cash and cash equivalents Total EUR million Liabilities at fair value through profit and loss Derivatives qualified for hedge accounting Financial liabilities measured at amortized cost Carrying value Fair value Fair value level 2015 Non-current liabilities Loans from financial institutions Derivative financial instruments Total Current liabilities Current portion of non-current debt Trade payables Derivative financial instruments Total

104 Notes to the Consolidated Financial Statements EUR million Financial assets at fair value through profit and loss Derivatives qualified for hedge accounting Available- Loans and for-sale receivables financial assets Carrying value Fair value Fair value level 2014 Non-current assets Available-for-sale financial assets , 3 Loan receivables Trade receivables Total Current assets Available-for-sale financial assets , 2 Trade receivables Derivative financial instruments Cash and cash equivalents Total EUR million Liabilities at fair value through profit and loss Derivatives qualified for hedge accounting Financial liabilities measured at amortized cost Carrying value Fair value Fair value level 2014 Non-current liabilities Loans from financial institutions Derivative financial instruments Total Current liabilities Current portion of non-current debt Trade payables Derivative financial instruments Total Valmet manages its cash by investing in financial instruments with varying maturities. Instruments with maturities exceeding three months are classified as available-for-sale financial assets and instruments with maturities of less than three months are classified as cash and cash equivalents. The hierarchy of fair value levels is presented in Note 3. For more information of derivative financial instruments, see Note

105 Notes to the Consolidated Financial Statements 18 Cash and cash equivalents As at Dec 31, EUR million Cash at bank and in hand Commercial papers and other investments Total cash and cash equivalents The maturity of cash and cash equivalents does not exceed three months. 19 Equity Share capital and number of shares Valmet Corporation s registered share capital was EUR 100,000,000 as at December 31, 2015 and EUR 100,000,000 as at December 31, The share capital is fully paid. Valmet s total number of shares is 149,864,619 and the number of outstanding shares as at December 31, 2015 was 149,864,220 (149,864,220 shares). The number of shares held by Valmet Corporation was 399 (399 shares). The average amount of shares outstanding amounted to 149,864,220 (149,863,252) during the financial year ended at December 31, Valmet Corporation has one series of shares. The shares of Valmet Corporation do not have a nominal value. In 2015, there has been no changes in the number of outstanding shares or share capital. Treasury shares Valmet Corporation acquired 14,310 of its own shares through a purchase on the Helsinki Stock Exchange (Nasdaq Helsinki Ltd) on April 2, The price paid was EUR per share. The total amount paid to acquire the shares, including transaction costs, was EUR 109 thousand and it has been deducted from retained earnings in equity. In accordance with a resolution of Valmet Corporation s Board of Directors, Valmet Corporation has conveyed a total of 13,911 of these shares to 25 of Valmet s key employees included in the Group s share-based incentive program The handover date for the shares was April 30, 2014 after which the remaining number of shares held by Valmet Corporation was 399. The total value of the conveyed shares, including the related transaction costs, was EUR 117 thousand which has been recognised in equity as an increase in reserve for invested unrestricted equity. Valmet has entered into an agreement with a third-party service provider concerning the administration of the share-based incentive programs for key personnel. As at December 31, 2015, the number of shares held within the administration plan was 473,617. Dividends The Board of Directors proposes that a dividend of EUR 0.35 per share will be paid out based on the statement of financial position to be adopted for the financial year ended December 31, 2015, and that the remaining part of the retained earnings will be carried forward in Valmet Corporation s unrestricted equity. These financial statements do not reflect this dividend payable of EUR 52 million. Dividends paid relating to the year ended December 31, 2014 were 0.25 EUR per share totaling EUR 37 million. Fair value and other reserves Hedge reserve includes fair value movements of derivative financial instruments which qualify for hedge accounting. Fair value reserve includes the change in fair values of assets classified as available-for-sale. Legal reserve consists of restricted equity, which has been transferred from distributable funds under the Articles of Association, local company law or by a decision of the shareholders. Reserve for invested unrestricted equity Reserve for invested unrestricted equity includes other equityrelated investments and share subscription prices to the extent not designated to be included in share capital. The reserve for invested non-restricted equity fund in Valmet s consolidated statement of financial position consists of the fund held by the parent company Valmet Corporation. Cumulative translation adjustments Cumulative translation adjustments consist of currency translation differences, which relate to translation of foreign operations financial statements. 57

106 Notes to the Consolidated Financial Statements 20 Share-based payments Long-term incentive plan for In December 2011, a share-based incentive plan including three performance periods, which were the calendar years 2012, 2013 and 2014, was approved. The reward for each performance period of the plan cannot exceed 120 percent of a participant s total annual base salary. As a rule no reward is paid if the key employee s employment or service ends before the reward payment. For the 2012 performance period a gross number of 321,438 shares were earned by 31 participants. The earning criteria of the performance period 2012 were based on net sales growth of the Services business, return on capital employed (ROCE) before taxes and earnings per share (EPS). The reward was paid partly as company shares and partly in cash during The cash portion was dedicated to cover taxes and tax-related payments. The expense of the plan was recognized over the vesting period i.e. from the beginning of 2012 until the end of February The recognized expense of the equity portion was based on a grant date share price of EUR For the 2013 performance period, the performance criteria was not met and therefore no rewards will be paid for the 2013 performance period. For the 2014 performance period, the plan was targeted at 40 persons in Valmet s management. From the performance period 2014 a gross number of 268,003 shares were earned. The earning criteria of the performance period 2014 were based on growth in Valmet s EBITA % and growth in Services orders received. The reward will be paid partly as company shares and partly in cash. The cash portion is dedicated to cover taxes and tax-related payments. The expense of the plan is recognized over the vesting period i.e. from the beginning of 2014 until the end of February The recognized expense of the equity portion is based on Valmet s average share price on the grant date of EUR Long-term incentive plan for The Board of Directors of Valmet Corporation approved in December 2014 a new share-based incentive plan for Valmet s key employees. The Plan includes three discretionary periods, which are the calendar years 2015, 2016 and The Board of Directors shall decide on the performance criteria and targets in the beginning of each discretionary period. The potential reward of the plan from the discretionary period 2015 is based on EBITA % and Services orders received growth %. The potential reward of the plan from the discretionary period 2015 will be paid partly as company shares and partly in cash in The proportion to be paid in cash is intended to cover taxes and tax-related costs arising from the reward to the key employee. As a rule, no reward is paid, if the key employee s employment or service ends before the reward payment. As part of the plan, members of Valmet s Executive Team shall have a possibility to receive a matching share reward for the discretionary period 2015 provided that he or she owns or acquires Valmet shares up to a number determined by the Board of Directors by December 31, Reward receipt is tied to continued employment or service of the Valmet Executive Team member upon reward payment. The reward of the plan may not exceed 120 percent of the key employee s annual base salary. The shares paid as reward may not be transferred during the restriction period, which will end two years from the end of the discretionary period. Should a key employee s employment or service end during the restriction period, as a rule, he or she must gratuitously return the shares given as reward to the Company. The plan is directed to approximately 80 people. The rewards to be paid on the basis of the discretionary period 2015 are in total a maximum of 693,079 shares in Valmet Corporation including a cash payment to cover taxes and tax-related payments arising from the reward to the key employee. The expense of the discretionary period 2015 is recognized over the vesting period i.e. from the beginning of 2015 until the end of December The recognized expense of the equity portion is based on Valmet s closing share price on the grant date of EUR As at December 31, 2015 a total of 540,032 shares had been allotted to participants. The Board of Directors of Valmet Corporation decided in December 2015 to continue the share based incentive program for Valmet s key employees approved in December The potential reward of the program from the discretionary period 2016 is based on EBITA % and orders received growth % of the stable business, that is, the Services and Automation business lines. The potential reward of the plan from the discretionary period 2016 will be paid partly as Valmet shares and partly in cash in The proportion to be paid in cash is intended to cover taxes and tax-related costs arising from the reward to the key employee. As a rule, no reward is paid, if the key employee s employment or service ends before the reward payment. 58

107 Notes to the Consolidated Financial Statements As part of the share based incentive program members of the Valmet Executive Team shall have a possibility to receive a matching share reward for the discretionary period 2016 provided that he or she owns or acquires Valmet shares up to a number determined by the Board of Directors by December 31, The reward receipt is tied to the continued employment or service of the Valmet Executive Team member upon reward payment. The plan is directed to approximately 80 people. The rewards to be paid on the basis of the discretionary period 2016 are in total an approximate maximum of 850,000 shares in Valmet. The reward of the plan may not exceed 120 percent of the key employee s annual total base salary. The shares paid as reward may not be transferred during the restriction period, which will end two years from the end of the discretionary period. Should a key employee s employment or service end during the restriction period, as a rule, he or she must gratuitously return the shares given as reward to Valmet. Granted share amounts of the share-based incentive plans: Shares total 2015 Plan At beginning of year 568,686 Paid -321,438 Returned -12,746 Other 33,500 At end of year 268,003 Plan At beginning of year - Granted 693,079 Returned -25,741 Expired -127,306 At end of year 540,032 Costs recognized for the share ownership plans The compensation expense for the shares, which are accounted for as equity-settled, is recognized as an employee benefit expense with corresponding entry in equity. The cost of the equity-settled portion, which will be evenly recognized during the required service period, is based on the market price of the Valmet share on the grant date. The compensation expense resulting from the cash-settled portion is recognized as an employee benefit expense with a corresponding entry in current liabilities. The cash-settled portion is fair valued at each balance sheet date based on the prevailing share price. As at December 31, 2015 the total carrying value of the cash-settled portion was EUR 3 million (EUR 2 million). The table below represents the costs recognized for the sharebased payment plans. EUR thousand Plan Plan Plan Total , , ,174-4,155 59

108 Notes to the Consolidated Financial Statements 21 Non-current and current debt As at Dec 31, Carrying value Fair value EUR million Non-current debt Current portion of non-current debt Total debt The fair value of non-current debt is equal to the present value of its future cash flows. More information about the maturities are presented in Note Provisions As at Dec 31, 2015 Restructuring provisions EUR million Warranty and guarantee liabilities Other provisions Total Balance at beginning of year Translation differences Addition charged to expense Acquired in business combination Used reserve Reversal of reserve / other changes Balance at end of year Non-current 10 Current 98 Provisions, for which the expected settlement date exceeds one year from the moment of their recognition, are discounted to their present value and adjusted in subsequent periods for the time effect. Warranty and guarantee liabilities Valmet issues various types of contractual product warranties under which it generally guarantees the performance levels agreed in the sales contract, the performance of products delivered during the agreed warranty period and services rendered for a certain period or term. The warranty liability is based on historical realized warranty costs for deliveries of standard products and services. The usual warranty period is 12 to 24 months from the date of customer acceptance of the delivered equipment. For more complex contracts, including long-term projects, the warranty reserve is calculated contract by contract and updated regularly to ensure its sufficiency. Restructuring provisions The costs included in a provision for restructuring are those costs that are either incremental and incurred as a direct result of the formal plan approved and committed by management, or are the result of a continuing contractual obligation with no economic benefit to Valmet or a penalty incurred for a cancelled contractual obligation. Environmental and product liabilities Valmet accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably calculable. The amounts of accruals are adjusted later as further information develops or circumstances change. The Group has no material environmental and product liabilities as at December 31, 2014 or December 31, Other provisions Other provisions comprise among other things provisions related to personnel and lawsuits. 60

109 Notes to the Consolidated Financial Statements 23 Trade and other payables As at Dec 31, EUR million Trade payables Accrued interest 2 - Accrued personnel costs Accrued project costs Other payables Trade and other payables total The maturity of payables rarely exceeds six months and is largely determined by local trade practices and individual agreements between Valmet and its suppliers. Accrued personnel costs, which include holiday pay, are settled in accordance with local laws and stipulations. 24 Post-employment benefit obligations Valmet sponsors both defined contribution and defined benefit arrangements. Valmet operates various defined benefit pension and other long term employee benefit arrangements pursuant to local conditions, practices and collective bargaining agreements in the countries in which it operates. The majority of Valmet s defined benefit liabilities relate to arrangements that are funded through payments to either insurance companies or to independently administered funds based on periodic actuarial calculations. Other arrangements are unfunded with benefits being paid directly by Valmet as they fall due. All arrangements are subject to local tax and legal restrictions in their respective jurisdictions. Valmet s defined benefit pension arrangements in the US, Canada and Sweden together represent 85% of Valmet s Defined Benefit Obligation and 79% of its pension assets. These arrangements provide income in retirement which is substantially based on salary and service at or near retirement. In the US and Canada annual valuations are carried out to determine whether cash funding contributions are required in accordance with local legislation. Defined benefit pension arrangements in Sweden are offered in accordance with collective labor agreements and are unfunded. The liability recorded on Valmet s balance sheet and cash contributions to funded arrangements are sensitive to the assumptions used to measure the liabilities, the extent to which actual experience differs to the assumptions made and the returns on plan assets. Therefore Valmet is exposed to the risk that balance sheet liabilities and/or cash contributions increase based on these influences. Assets of Valmet s funded arrangements are managed by external fund managers. The allocation of assets is reviewed regularly by those responsible for managing Valmet s arrangements based on local legislation, professional advice and consultation with Valmet, based on acceptable risk tolerances. The expected contributions to arrangements in 2016 are EUR 5 million. 61

110 Notes to the Consolidated Financial Statements The amounts recognized as at December 31 in the statement of financial position are as follows: EUR million Funded Unfunded Total Funded Unfunded Total Present value of funded obligation Fair value of plan assets Net surplus (-) / deficit (+) of funded plans Present value of unfunded obligation Asset (-) / liability (+) recognized in the statement of financial position Amounts in the statement of financial position Liabilities Assets Net liability The amounts recognized in the statement of income are as follows: Year ended Dec, EUR million Funded Unfunded Total Funded Unfunded Total Employer's current service cost Net interest on net surplus / deficit Expense recognized in the statement of income The changes in the present value of the defined benefit obligation are as follows: EUR million Funded Unfunded Total Funded Unfunded Total Present value of obligation at beginning of year Other adjustments 1) Employer's current service cost Interest expense Adjustment due to business combinations Liabilities extinguished on settlements or curtailments Actuarial gain (-) / loss (+) due to change in assumptions - financial Actuarial gain (-) / loss (+) due to change in assumptions - demographic Actuarial gain(-)/loss (+) due to experience Benefits paid from the arrangements Benefits paid directly by employer Currency gain (-) / loss (+) Present value of defined benefit obligation at end of year of which related to active members of which related to deferred members of which related to pensioner members ) Extension of coverage 62

111 Notes to the Consolidated Financial Statements The changes in the fair value of the plan assets during the year are as follows: EUR million Funded Unfunded Total Funded Unfunded Total Fair value of plan assets at beginning of year Other adjustments to the fair value of assets Interest income on assets Return on plan assets excluding interest income Adjustment due to business combinations Assets distributed on settlements Employer contributions Benefits paid from the arrangements Benefits paid directly by employer Currency gain (+) / loss (-) Fair value of plan assets at end of year Remeasurements of the net defined benefit liability / asset reported in other comprehensive income are as follows: Year ended Dec, EUR million Funded Unfunded Total Funded Unfunded Total Experience gain (-) / loss (+) on assets Actuarial gain (-) / loss (+) on liabilities due to change in financial assumptions Actuarial gain (-) / loss (+) on liabilities due to change in demographic assumptions Actuarial gain (-) / loss (+) on liabilities due to experience Total gain (-) / loss (+) recognized in OCI The major categories of plan assets as a percentage of total plan assets of Valmet s defined benefit plans are as follows: As at Dec 31 Quoted Unquoted Total Quoted Unquoted Total Equities 37% - 37% 42% - 42% Bonds 34% - 34% 37% - 37% Other 8% 21% 29% 7% 14% 22% Total 79% 21% 100% 86% 14% 100% At December 31, 2015 there were no plan assets invested in affiliated companies or property occupied by affiliated companies. 63

112 Notes to the Consolidated Financial Statements The principal actuarial assumptions used to determine the defined benefit obligation (expressed as weighted averages) are as follows: As at Dec 31 Funded Unfunded Total Funded Unfunded Total Discount rate 3.7% 3.0% 3.5% 3.5% 2.7% 3.2% Salary increase 2.8% 2.6% 2.7% 2.9% 2.5% 2.7% Pension increase 1.9% 2.5% 2.3% 2.0% 2.5% 2.4% Medical cost trend rates - 6.9% 6.9% - 7.4% 7.4% The weighted average life expectancy used for the major defined benefit plans are as follows: Life expectancy at age 65 for a male participant currently aged 65 Life expectancy at age 65 for a male participant currently aged 45 Expressed in years Sweden Canada USA Finland Life expectancy is allowed for in the assessment of the defined benefit obligation using mortality tables which are generally based on experience within the country in which the arrangement is located with (in many cases) an allowance made for anticipated future improvements in longevity. Sensitivity analysis on present value of defined benefit obligation: EUR million Funded Unfunded Total Funded Unfunded Total Discount rate Increase of 0.25% Decrease of 0.25% Salary increase rate Increase of 0.25% Decrease of 0.25% Pension increase rate Increase of 0.25% Decrease of 0.25% Medical cost trend Increase of 1% Decrease of 1% Life expectancy Increase of one year Decrease of one year

113 Notes to the Consolidated Financial Statements Weighted average duration of defined benefit obligation: Expressed in years Funded Unfunded Total Funded Unfunded Total As at December Mortgages and contingent liabilities Valmet Corporation, with its subsidiaries, and financial institutions have guaranteed commitments arising from the ordinary course of business of Valmet Group up to a maximum of EUR 771 million and EUR 1,170 million as at December 31, 2015 and 2014, respectively. Valmet Group entities had given guarantees on behalf of others of EUR 4 million and EUR 5 million as at December 31, 2015 and 2014, respectively. 26 Lease contracts Valmet leases offices, manufacturing and warehouse space under various noncancellable leases. Certain contracts contain renewal options for various periods of time. Minimum annual rental expenses for leases in effect at December 31 are shown in the table below: EUR million Not later than 1 year Later than 1 year and not later than 2 years Later than 2 years and not later than 3 years 9 8 Later than 3 years and not later than 4 years 6 5 Later than 4 years and not later than 5 years 3 3 Later than 5 years 6 6 Total minimum lease payments Total rental expenses amounted to EUR 22 million in 2015 and EUR 18 million in As at December 31, 2015 and 2014 there were no material assets leased under financial lease arrangements. 65

114 Notes to the Consolidated Financial Statements 27 Derivative financial instruments Notional amounts and fair values of derivative financial instruments as at December 31 are as follows: EUR million Notional amount Fair value, assets Fair value, liabilities Fair value, net 2015 Forward exchange contracts 1) 1, Under hedge accounting Not qualifying for hedge accounting Electricity forward contracts 2) Under hedge accounting Not qualifying for hedge accounting Interest rate swaps 1) Under hedge accounting Total Netting fair values of derivative financial instruments subject to ISDAs 3) Net Total Forward exchange contracts 1) 1, Under hedge accounting Not qualifying for hedge accounting Electricity forward contracts 2) Under hedge accounting Not qualifying for hedge accounting Total Netting fair values of derivative financial instruments subject to ISDAs 3) Net Total

115 Notes to the Consolidated Financial Statements As at December 31, the maturities of financial derivatives are the following: and later 2015 Notional amounts Forward exchange contracts 1) 1, Electricity forward contracts 2) Interest rate swaps 1) Fair values, EUR million Forward exchange contracts Electricity forward contracts Interest rate swaps and later 2014 Notional amounts Forward exchange contracts 1) 1, Electricity forward contracts 2) Fair values, EUR million Forward exchange contracts Electricity forward contracts ) Notional amount in EUR million 2) Notional amount in GWh 3) Group s derivatives are carried out under International Swaps and Derivatives Association s Master Agreements (ISDA). In case of an event of default under these Agreements the non-defaulting party may request early termination and set-off of all outstanding transactions. These Agreements do not meet the criteria for offsetting in the statement of financial position. 67

116 Notes to the Consolidated Financial Statements 28 Related party information Valmet s related parties include Valmet Group companies and associated companies and joint ventures (see Note 12) as well as the members of Valmet s Board of Directors and Executive Team. Remuneration of Chief Executive Officer and other Executive Team members The table below presents the expenses related to management compensation that have been recognized in the statement of income. More information about share-based payments is presented in Note 20. EUR thousand Salaries and other short-term benefits Performance bonus Share-based payment Post-retirement benefits Termination benefits Total 2015 President and CEO ,411 Other Executive Team members -2, ,581-1, ,698 Total -3,478-1,021-1,992-1, , President and CEO ,121 Other Executive Team members -2, ,552 Total -3, ,151-1, ,674 The President and CEO is entitled to retire when reaching 63 years of age. All other Executive Team members belong to the pension systems of their country of residence and have a statutory retirement age. The President and CEO and some members of the Executive Team have an additional defined contribution plan. Contributions to the plan are percent of the employee s annual salary. Expenses are included in the post-retirement benefits together with statutory pension benefits presented in the table above. The final benefit received by the employee depends on the return on the plan s investments. Remuneration paid to members of the Board of Directors EUR thousand 2015 Jukka Viinanen, Chairman until March 27, Bo Risberg, Chairman since March 27, Mikael von Frenckell, Vice Chairman -74 Friederike Helfer, Member -74 Pekka Lundmark, Member until April 7, Erkki Pehu-Lehtonen, Member -64 Lone Fønss Schrøder, Member -71 Rogério Ziviani, Member -85 Eija Lahti-Jäntti, Personnel Representative -8 Total -504 As at December 31, 2015, the aggregate shareholding of the Board of Directors, the President and CEO and other Executive Team members was 293,214 shares (197,647 shares as at December 31, 2014). 68 Valmet has no loan receivables from the Executive Team or the Board of Directors. No pledges or other commitments have been given on behalf of management or shareholders. WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

117 Notes to the Consolidated Financial Statements 29 Group companies Company name Country of incorporation and place of business Primary nature of business Parent holding, % Group ownership interest, % Valmet Automation Pty Ltd Australia Sales Valmet Pty Ltd Australia Sales Valmet Automation GesmbH Austria Sales Valmet GesmbH Austria Sales Valmet Automacao Ltda Brazil Manufacturing Valmet Celulose Papel e Energia Ltda Brazil Manufacturing Valmet Fabrics Tecidos Técnicos Ltda Brazil Manufacturing Valmet Sulamericana Celulose Papel e Energia Ltda Brazil Manufacturing Valmet Ltd. Canada Sales Valmet SA Chile Sales Valmet (China) Co., Ltd. China Manufacturing Valmet Fabrics (China) Co., Ltd. China Sales Valmet Paper (Shanghai) Co., Ltd. China Sales Valmet Paper Technology (China) Co., Ltd. China Manufacturing Valmet Paper Technology (Guangzhou) Co., Ltd. China Manufacturing Valmet Paper Technology (Xi'an) Co., Ltd. China Manufacturing Valmet Automation (Shanghai) Co., Ltd. China Manufacturing Valmet d.o.o. Croatia Manufacturing Valmet Automation s.r.o Czech Republic Sales Valmet s.r.o. Czech Republic Manufacturing Valmet Technologies Oü Estonia Sales Valmet Automation Oy Finland Manufacturing Valmet Automation Property Oy Finland Holding Valmet Kauttua Oy Finland Manufacturing Valmet Technologies Oy Finland Manufacturing Valmet Automation SAS France Sales Valmet SAS France Manufacturing Valmet Automation GmbH Germany Sales Valmet Deutschland GmbH Germany Holding Valmet GmbH Germany Sales Valmet Panelboard GmbH Germany Manufacturing Valmet Plattling GmbH Germany Sales Valmet Automation Limited India Manufacturing Valmet Chennai Pvt. Ltd. India Manufacturing PT Valmet Indonesia Sales PT Valmet Automation Indonesia Indonesia Sales PT Valmet Technology Center Indonesia Sales Valmet Como Srl Italy Manufacturing Valmet Pescia Srl Italy Manufacturing Valmet SpA Italy Manufacturing Valmet Automation K.K. Japan Sales Valmet K.K. Japan Sales Valmet Sdn Bhd Malaysia Sales Valmet Automation BV Netherlands Sales Valmet Automation A/S Norway Sales

118 Notes to the Consolidated Financial Statements Company name Country of incorporation and place of business Primary nature of business Parent holding, % Group ownership interest, % Valmet AS Norway Manufacturing Valmet Automation Sp. z o.o. Poland Manufacturing Valmet Technologies Sp. z o.o. Poland Manufacturing Valmet Lda Portugal Manufacturing Valmet Automation Limited Republic of Korea Sales Valmet Inc. Republic of Korea Sales Valmet ZAO Russia Sales Valmet Automation JSC Russia Sales Valmet Pte. Ltd. Singapore Sales Valmet Automation Pte. Ltd. Singapore Sales Valmet Automation (Pty) Ltd South Africa Manufacturing Valmet South Africa (Pty) Ltd South Africa Sales Valmet Technologies, S.A.U Spain Manufacturing Valmet Technologies Zaragoza SL Spain Manufacturing Valmet AB Sweden Manufacturing Valmet Automation AB Sweden Manufacturing Valmet Automation Co., Ltd. Thailand Sales Valmet Co., Ltd. Thailand Sales Valmet Seluloz Kagit Enerji Teknolojileri A.S. Turkey Sales Valmet Automation Limited United Kingdom Sales Valmet Limited United Kingdom Manufacturing Valmet, Inc. USA Sales Allimand S.A. France Manufacturing Valpro gerenciamento de obras Ltda Brazil Manufacturing Nanjing SAC Metso Control System Co., Ltd. China Manufacturing Audit fees In 2015, the Annual General Meeting of Valmet Corporation elected Authorised Public Accountants PricewaterhouseCoopers Oy (PwC) as Valmet Corporation s auditor. Year ended Dec 31, EUR million Paid to PwC Paid to other auditors Paid to PwC Paid to other auditors Audit Tax consulting Other services Total

119 Notes to the Consolidated Financial Statements 31 Lawsuits and claims Several lawsuits, claims and disputes based on various grounds are pending against Valmet in various countries, including product liability lawsuits and claims as well as legal disputes related to Valmet s deliveries. On February 20, 2015 Valmet issued a stock exchange release about Andritz Oy having filed a summons application with the Stockholm District Court against Valmet AB, a subsidiary of Valmet Corporation, regarding patent infringement. In the claim, Andritz is asking that Valmet under a penalty ceases to utilize the patent allegedly infringing Andritz s patent and the Court to impose royalty and damages on Valmet AB. Valmet has denied the claims in its writ of response submitted to the Stockholm District Court. In June, Andritz revised its claim, which subsequently changed their overall claim from EUR 52 million to EUR 54 million and interest for the alleged infringement. Consequently, Valmet filed a second response to the Stockholm District Court in September. Valmet s management does not expect to the best of its present understanding that the outcome of these lawsuits, claims and disputes will have a material adverse effect on Valmet in view of the grounds presented for them, provisions made, insurance coverage in force and the extent of Valmet s total business activities. Valmet is also a plaintiff in several lawsuits. 32 Events after the reporting period There were no subsequent events after the review period that required recognition or disclosure. 33 Key exchange rates Average rates Year-end rates USD (US dollar) SEK (Swedish krona) BRL (Brazilian real) CNY (Chinese yuan)

120 Financial Indicators 2015 and 2014 Financial Indicators 2015 and 2014 EUR million As at and for the twelve months ended Dec 31, 2015 As at and for the twelve months ended Dec 31, 2014 Net sales 2,928 2,473 Net sales change, % 18% -5% Operating profit % of net sales 4.1% 2.9% Profit before tax % of net sales 3.7% 2.7% Profit % of net sales 2.7% 1.9% Profit attributable to owners of the parent company Amortization Depreciation Depreciation and amortization % of net sales -3.1% -2.9% EBITA % of net sales 5.3% 3.8% Financial income and expenses, net % of net sales -0.3% -0.2% Interest expenses % of net sales -0.5% -0.5% Gross capital expenditure (incl. business acquisitions) % of net sales -12.6% -1.8% Business acquisitions, net of cash acquired Cash flow provided by operating activities Cash flow after investments Research and development expenses, net % of net sales -2.0% -1.7% Total assets 2,894 2,412 Equity attributable to owners of the parent Total equity Interest bearing liabilities Net interest bearing liabilities Net working capital (NWC) Return on equity (ROE), % 9% 6% Return on capital employed (ROCE) before taxes, % 12% 9% Equity to assets ratio, % 36% 42% Gearing, % 21% -21% Orders received 2,878 3,071 Order backlog at end of year 2,074 1,998 Average number of personnel 11,781 10,853 Personnel at end of year 12,306 10,464 72

121 Formulas for Calculation of Indicators Formulas for Calculation of Indicators EBITA: Operating profit + amortization + goodwill impairment Gearing, %: Net interest bearing liabilities Total equity x 100 EBITA before non-recurring items: Operating profit + amortization + goodwill impairment + non-recurring items Net interest bearing liabilities: Non-current interest bearing debt + current interest bearing debt - Cash and cash equivalents - other interest bearing assets Earnings per share: Profit attributable to shareholders of the company Average number of outstanding shares during period Net Working Capital: Other non-current assets + inventories + trade and other receivables + Amounts due from customers under construction contracts + Derivative financial instruments (assets) - Post-employment benefit obligations - provisions - Trade and other payables - advances received - Amounts due to customers under construction contracts - Derivative financial instruments (liabilities) Earnings per share, diluted: Profit attributable to shareholders of the company Average number of diluted shares during period Dividend per share: Dividend for the financial period Basic number of shares at end of period Return on equity (ROE), %: Profit Total equity (average for period) Dividend / earnings ratio (%): x 100 Dividend per share Earnings per share x 100 Return on capital employed (ROCE) before taxes, %: Effective dividend yield, %: Profit before tax + interest and other financial expenses Balance sheet total - non-interest bearing liabilities (average for period) x 100 Dividend per share Closing share price at end of period x 100 Equity to assets ratio, %: Price / earnings ratio: Total equity Balance sheet total advances received x 100 Closing share price at end of period Earnings per share 73

122 Parent Company Financial Statements Parent Company Statement of Income, FAS Year ended Dec 31, EUR Note Other operating income 2 11,441, ,498, Personnel expenses 3-10,859, ,857, Depreciation and amortization -733, , Other operating expenses 4-14,030, ,186, Operating profit/loss -14,182, ,245, Financial income and expenses, net 6 32,861, ,203, Profit/loss before extraordinary items 18,679, ,041, Group contributions - 10,340, Profit/loss before appropriations and taxes 18,679, ,298, Income taxes 8 2,914, , Profit/loss 21,593, ,818,

123 Parent Company Financial Statements Parent Company Statement of Financial Position, FAS Assets As at Dec 31, EUR Note Non-current assets Intangible assets 9 207, , Property, plant and equipment 9 6,989, ,659, Equity investments 10 1,448,890, ,131,401, Non-current receivables 12, ,917, ,582, Total non-current assets 1,563,004, ,300,891, Current assets Current receivables 12, ,204, ,207, Available-for-sale financial assets 13 6,029, ,987, Cash and cash equivalents 68,004, ,226, Total current assets 177,238, ,421, Total assets 1,740,243, ,598,312, Equity and liabilities As at Dec 31, EUR Note Equity 14 Share capital 100,000, ,000, Reserve for invested unrestricted equity 409,654, ,727, Fair value and other reserves -392, , Retained earnings 451,747, ,776, Profit/loss 21,593, ,818, Total equity 982,602, ,004,344, Liabilities Non-current liabilities 13, ,269, ,914, Current liabilities 13, ,370, ,054, Total liabilities 757,640, ,968, Total equity and liabilities 1,740,243, ,598,312,

124 Parent Company Financial Statements Parent Company Statement of Cash Flows, FAS Year ended Dec 31, EUR thousand Cash flows from operating activities: Profit / loss before extraordinary items 18,679-7,042 Adjustments Depreciation and amortization Financial income and expenses, net -32,861-8,203 Other non-cash items Cash flow before changes in working capital -31,748-7,487 Increase (-) / decrease (+) in current non-interest bearing receivables 32,972-45,436 Increase (+) / decrease (-) in current non-interest bearing liabilities -30,678 37,368 Change in working capital 2,294-8,068 Interest and other financial expenses paid -13,211-9,217 Dividends received 35,007 6,047 Interest received 7,675 8,783 Income taxes paid Group contribution received 10,340 - Net cash provided by operating activities 28,360-17,316 Cash flows from investing activities: Investments in tangible and intangible assets -23-1,312 Proceeds from sale of tangible and intangible assets Net increase (+) / decrease (-) in loan receivables from Group companies 72, ,796 Investments in subsidiaries -317,489 - Repayment of capital reserve - 68,538 Other investments 26,221-34,867 Net cash used in investing activities -218, ,569 Cash flows from financing activities: Net borrowings (+) / payments (-) of debt from Group companies -165,300 92,652 Net borrowings (+) / payments (-) of non-current debt 305, ,048 Issue of Treasury shares to management 1, Purchase of Treasury shares -7, Dividends paid -37,348-22,480 Net increase (+) / decrease (-) in Group pool accounts 76,294-83,035 Net cash provided by (+) / used in (-) financing activities 172, ,928 Net increase (+) / decrease (-) in bank and cash -17,221 9,325 Cash and cash equivalents at beginning of year 85,226 75,901 Cash and cash equivalents at end of year 68,005 85,226 76

125 Notes to Parent Company Financial Statements Notes to Parent Company Financial Statements 1 Accounting principles The parent company s financial statements have been prepaid in accordance with the Finnish Generally Accepted Accounting Principles. Non-current assets Tangible and intangible assets are measured at historical cost, less accumulated depreciation according to plan. Land and water areas are not depreciated. Depreciation and amortization is calculated on a straight-line basis over the expected useful lives of the assets as follows: Other intangible assets Buildings and structures Machinery and equipment Other tangible assets 5 10 years years 3 5 years 20 years Investments in subsidiaries and other companies are measured at acquisition cost, or fair value in case the fair value is less than cost. Financial Instruments Valmet s financial risk management is carried out by a central treasury department (the Group Treasury) under the policies approved by the Board of Directors. The Group Treasury functions in co-operation with the operating units to minimize financial risks to both the parent company and the Group. The Group s external and internal forward exchange contracts are measured at fair value. The change in the fair value of the instruments used in hedging of operational activities is recognized as Other income and expenses in Statement of income. The change in the fair value of the instruments used in hedging of the foreign currency financial items is recognized in the Financial income and expenses in the Statement of income. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The derivative contracts used to hedge the commodity risk related to the electricity price risk are measured at fair value. The change in the fair value of electricity derivatives is recognized as Other income and expenses in the Statement of income. The fair value of electricity derivatives are based on quoted market prices at the balance sheet date. Principles of hedge accounting are applied in accounting for interest rate risks arising from floating rate debt. The derivative financial instruments used to hedge the interest rate risk are measured at fair value. The realized gain or loss relating to the effective portion of interest rate swaps is recognized in the Statement of income within Financial income and expenses concurrently with the recognition of the underlying interest expense. The gain or loss relating to the ineffective portion of interest rate swaps is reported under Financial income and expenses in the Statement of income. The gain or loss relating to the effective portion of interest rate swaps is recognized in the Hedge reserve of the shareholders s equity in the Statement of financial position. The fair value on the interest rate swap contract is calculated as the present value of the estimated future cash flows arising from the contract. Available-for-sale financial assets are measured at fair value. The change in the fair value is recognized in the Fair value reserve of the shareholder s equity in the Statement of financial position. The fair value of available-for-sale financial assets is determined using market rates as at the balance sheet date. Pensions An external pension insurance company manages the parent company s statutory and voluntary pension plan. Contributions are expensed to the statement of income as incurred. Deferred taxes A deferred tax liability or asset has been calculated for all temporary differences between tax bases of assets and liabilities and their amounts in financial reporting, using the enacted tax rates effective for future years. The deferred tax liabilities are recognized in the statement of financial position in full, and the deferred tax assets are recognized when it is probable that there will be sufficient taxable profit against which the asset can be utilized. Foreign currency transactions Transactions in foreign currency are recorded at the exchange rate prevailing on the date on the individual transaction. Foreign currency denominated monetary items recognized in the statement of the financial position have been translated at the exchange rates prevailing at the balance sheet date. Exchange gains and losses related to business operations are recognized as other income and expenses in the statement of income. Exchange gains and losses related to financing operations are recognized under financial income and expenses. Receivables Receivables are measured at amortized cost using the effective interest method, less provision for impairment. 77

126 Notes to Parent Company Financial Statements Share-based incentive plans Rewards arising from share-based incentive plans are settled partly in shares and partly in cash. The shares to be transferred as part of the plan are obtained in public trading. The acquisition of shares is recognized as decrease in Retained earnings and transfer of shares as increase in Invested non-restricted equity and Personnel expenses. The part settled in cash is recognized in the Statement of income under Personnel expenses at the time of payment. Extraordinary income and expenses Extraordinary income and expenses consist of items, such as Group contributions, that fall outside the ordinary activities of the company. Bank and cash Bank and cash consist of cash in banks and other liquid investments with initial maturity of three months or less. 2 Other operating income Year ended Dec 31, EUR thousand Services to Group companies 11,441 9,498 3 Personnel expenses Year ended Dec 31, EUR thousand Salaries and wages -8,639-9,388 Pension costs -1,783-2,019 Other indirect employee costs Total -10,859-11,858 Remuneration paid to Management: Year ended Dec 31, EUR thousand Chief Executive Officer -1,411-1,121 Members of the Board Total -1,914-1,679 The President and CEO has the right to retire at the age of 63 years. The President and CEO has an additional defined contribution plan. The contribution to the plan is 20 percent of his annual salary. Expenses are included in the remuneration paid to management table above. Additional information on management remuneration is presented in Note 28 of the Consolidated financial statements. 78

127 Notes to Parent Company Financial Statements Number of personnel: Personnel at end of year Average number of personnel during the year Other operating expenses Year ended Dec 31, EUR thousand Consulting and other services -8,703-5,389 IT -1,845-1,893 Valuation of derivatives -1,790-2,108 Other -1,693-2,796 Total -14,031-12,186 5 Audit fees Year ended Dec 31, EUR thousand Audit Tax consulting Other services Total

128 Notes to Parent Company Financial Statements 6 Financial income and expenses Year ended Dec 31, EUR thousand Group companies Other companies Total Group companies Other companies Total Dividends received 35, ,007 5,000 1,047 6,047 Interest income 6, ,021 10, ,896 Other financial income 22,091 42,024 64,115 6,967 14,349 21,316 Interest expenses -1,108-7,663-8,771-2,059-6,082-8,141 Other financial expenses -30,425-34,086-64,511-5,844-16,071-21,915 Total 32,861 8,203 7 Fair value hedges recognized in income statement Year ended Dec 31, EUR thousand Other operating expenses Changes in fair value of derivatives -1,790-2,108 Other financial expenses Changes in fair value of derivatives 1,869-15,490 8 Income taxes Year ended Dec 31, EUR thousand Income tax for the financial period Income tax for prior years -2 - Change in deferred taxes 2, Total 2,

129 Notes to Parent Company Financial Statements 9 Intangible assets, Property, plant and equipment EUR thousand Intangible assets Land areas Buildings and structures Machinery and equipment Other tangible assets Tangible assets total Total 2014 Acquisition cost at beginning of financial period , ,716 9,719 Additions Acquisition cost as at Dec , ,309 10,617 Accumulated depreciation at beginning of financial period , ,007-2,010 Depreciation charges for the financial period Accumulated depreciation as at Dec , ,649-2,709 Net book value as at Dec , ,660 7,907 EUR thousand Intangible assets Land areas Buildings and structures Machinery and equipment Other tangible assets Tangible assets total Total 2015 Acquisition cost at beginning of financial period , ,309 10,617 Disposals Additions Acquisition cost as at Dec , ,209 10,540 Accumulated depreciation at beginning of financial period ,649-2,709 Other changes and accumulated depreciation of disposals Depreciation charges for the financial - period Accumulated depreciation as at Dec , ,220-3,343 Net book value as at Dec , ,989 7,197 81

130 Notes to Parent Company Financial Statements 10 Investments EUR thousand Group companies Others Investments total Shares 2014 Acquisition cost at beginning of financial period 1,198,578 1,362 1,199,940 Disposals -68, ,538 Acquisition cost as at Dec 31 1,130,040 1,362 1,131,401 Net book value as at Dec 31 1,130,040 1,362 1,131,401 EUR thousand Group companies Others Investments total Shares 2015 Acquisition cost at beginning of financial period 1,130,040 1,362 1,131,401 Acquisitions 317, ,488 Acquisition cost as at Dec 31 1,447,528 1,362 1,448,890 Net book value as at Dec 31 1,447,528 1,362 1,448, Shareholdings Domicile Ownership % Valmet Technologies Oy Finland, Helsinki Valmet AB Sweden, Sundsvall Valmet Inc. USA, Duluth 90.0 Valmet Automation Oy Finland, Helsinki Valmet Automation Property Oy Finland, Helsinki Valmet Automation Pty Ltd Australia, Melbourne

131 Notes to Parent Company Financial Statements 12 Specification of receivables Non-current receivables As at Dec 31, EUR thousand Loan receivables from Group companies 97, ,554 Deferred tax asset 5,069 2,014 Derivatives 2, Other receivables 2,616 1,879 Non-current receivables total 106, ,583 Current receivables As at Dec 31, EUR thousand Trade receivables from Group companies 5,189 13,004 Other 4 10 Total 5,193 13,014 Loan receivables from Group companies 65,997 72,308 Group pool account 1,537 26,901 Total 67,534 99,209 Prepaid expenses and accrued income from Group companies 14,747 45,020 Other 15,725 21,922 Total 30,472 66,942 Other receivables VAT receivables 2 27 Other receivables 3 15 Total 5 42 Current receivables total 103, ,207 Current receivables from Group companies total 87, ,233 Specification of prepaid expenses and accrued income As at Dec 31, EUR thousand Prepaid expenses and accrued income from Group companies Group contribution receivables - 10,340 Accrued interest income 2,072 2,640 Derivatives 12,345 31,220 Other Total 14,747 45,020 Other prepaid expenses and accrued income Accrued interest income 7 94 Derivatives 12,270 19,326 Other accrued items 3,448 2,502 Total 15,725 21,922 83

132 Notes to Parent Company Financial Statements 13 Financial assets and liabilities recognized at fair value EUR thousand Fair value Dec Changes in fair value recognized in profit or loss Changes in fair value recognized in fair value reserve or hedge reserve Fair value Dec 31 Changes in fair value recognized in profit or loss Changes in fair value recognized in fair value reserve or hedge reserve Forward exchange contracts With Group companies 1,471 6,684-12,526 23,522 - Others 2,417-7, ,695-38,589 - Forward commodity contracts (electricity) Others -3, ,531-2,531 - Forward contracts (interest rate swap) Others Available-for-sale financial assets Others 6, ,

133 Notes to Parent Company Financial Statements 14 Statement of changes in equity As at Dec 31, EUR thousand Share capital as at Jan 1 100, ,000 Share capital as at Dec , ,000 Reserve for invested unrestricted equity as at Jan 1 407, ,611 Share-based payments 1, Reserve for invested unrestricted equity as at Dec , ,727 Fair value and other reserves as at Jan Additions Fair value reserve as at Dec Retained earnings as at Jan 1 496, ,365 Dividends paid -37,348-22,480 Purchase of Treasury shares -7, Retained earnings as at Dec , ,776 Profit/loss 21,593 3,818 Total equity as at Dec ,602 1,004,344 Statement of distributable funds As at Dec 31, EUR Invested non-restricted equity fund 409,654, ,727, Retained earnings 451,747, ,776, Profit/loss 21,593, ,818, Total distributable funds 882,995, ,322,

134 Notes to Parent Company Financial Statements 15 Non-current liabilities As at Dec 31, EUR thousand Loans from financial institutions 308,429 14,286 Derivatives 2,841 2,628 Non-current liabilities total 311,270 16, Current liabilities As at Dec 31, EUR thousand Current portion of non-current loans 60,857 49,841 Trade payables to Group companies 286 2,994 Others 1,348 1,544 Total 1,634 4,538 Accrued expenses and deferred income to Group companies 11,027 18,928 Others 18,246 34,113 Total 29,273 53,041 Other current interest bearing debt to Group companies 45, ,820 Group pool accounts 308, ,061 Total 354, ,881 Other current non-interest bearing debt to others Current liabilities total 446, ,054 Current liabilities to Group companies total 365, ,803 86

135 Notes to Parent Company Financial Statements Specification of accrued expenses and deferred income As at Dec 31, EUR thousand Accrued expenses and deferred income to Group companies Accrued interest expenses Derivatives 10,874 18,694 Other accrued items Total 11,027 18,928 Accrued expenses and deferred income to others Accrued interest expenses 1, Derivatives 12,975 30,060 Accrued salaries, wages and social costs 3,002 3,509 Other accrued items Total 18,246 34, Other contingencies Guarantees As at Dec 31, EUR thousand Guarantees on behalf of subsidiaries 766,392 1,162,166 Lease commitments As at Dec 31, EUR thousand Payments in the following year Payments later Total Other commitments As at Dec 31, EUR thousand Payments in the following year Payments later 1,250 1,867 Total 1,902 2,467 87

136 List of Account Books Used in Parent Company List of Account Books Used in Parent Company Voucher class General journal and general ledger in electronic format Specifications of accounts receivable and payable in electronic format Fixed assets entries 01, 03, 04 in electronic format Bank entries 10, 16, 17, 20, 27, 36, 42 in electronic format Sales invoices RV in electronic format Purchase invoices 23 in electronic format Travel invoices 32 in electronic format Salary entries 33 in electronic format Journal vouchers 30, 31, 51, 52, 53, 54, 55, 59, 64, 67, 68, 71, 72, 75, 79 in electronic format Financing entries 34, 35 in electronic format 88 WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

137 Signatures of Board of Directors Report and Financial Statements Signatures of Board of Directors Report and Financial Statements Espoo, February 9, 2016 Bo Risberg Chairman of the Board Mikael von Frenckell Vice Chairman of the Board Friederike Helfer Member of the Board Erkki Pehu-Lehtonen Member of the Board Lone FØnss SchrØder Member of the Board Rogério Ziviani Member of the Board Pasi Laine President and CEO The Auditor s Note Our auditor s report has been issued today. Espoo, February 9, 2016 PricewaterhouseCoopers Oy Authorized Public Accountant Firm Jouko Malinen Authorized Public Accountant 89

138 Auditor s Report Auditor s Report (Translation from the Finnish Original) To the Annual General Meeting of Valmet Corporation We have audited the accounting records, the financial statements, the report of the Board of Directors and the administration of Valmet Corporation for the year ended 31 December, The financial statements comprise the consolidated statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows, and notes to the consolidated financial statements, as well as the parent company s balance sheet, income statement, cash flow statement and notes to the financial statements. Responsibility of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the preparation of financial statements and the report of the Board of Directors that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company s accounts and finances, and the Managing Director shall see to it that the accounts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner. Auditor s Responsibility Our responsibility is to express an opinion on the financial statements, on the consolidated financial statements and on the report of the Board of Directors based on our audit. The Auditing Act requires that we comply with the requirements of professional ethics. We conducted our audit in accordance with good auditing practice in Finland. Good auditing practice requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the report of the Board of Directors are free from material misstatement, and whether the members of the Board of Directors of the parent company or the Managing Director are guilty of an act or negligence which may result in liability in damages towards the company or whether they have violated the Limited Liability Companies Act or the articles of association of the company. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and the report of the Board of Directors. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of financial statements and report of the Board of Directors that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements and the report of the Board of Directors. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 90

139 Auditor s Report Opinion on the Consolidated Financial Statements In our opinion, the consolidated financial statements give a true and fair view of the financial position, financial performance, and cash flows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. Opinion on the Company s Financial Statements and the Report of the Board of Directors In our opinion, the financial statements and the report of the Board of Directors give a true and fair view of both the consolidated and the parent company s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. The information in the report of the Board of Directors is consistent with the information in the financial statements. Espoo, February 9, 2016 PricewaterhouseCoopers Oy Authorised Public Accountants Jouko Malinen Authorised Public Accountant 91

140 Board of Directors Board of Directors Bo Risberg born 1956 Valmet Board Member and Chairman of the Board since March 27, 2015 Chairman of the Board s Remuneration and HR Committee Independent of the company and independent of significant shareholders BSc (Mech. Eng), MBA Chairman of the Board in Piab Group Holding AB Vice Chairman of the Board in Grundfos Holding A/S and IMD (International Management Development Institute) Board Member of Nordstjernan AB and Trelleborg AB Mikael von Frenckell born 1947 Valmet Board Member and Vice Chairman of the Board since 2013 Member of the Board s Remuneration and HR Committee Independent of the company and independent of significant shareholders M.Sc. (Soc.) Board Member of Antti Ahlströmin Perilliset Oy, Sponsor Capital Oy and Sponsor Capital Partners Oy Lone Fønss Schrøder born Valmet Board Member since 2014 Chairman of the Board s Audit Committee Independent of the company and independent of significant shareholders M.Sc. (Econ.), Accounting; LL.M Board Member of Saxobank A/S, Volvo PV AB, Schneider SE, Bilfinger Berger SE, INGKA Holding B.V, Akastor ASA, Canada Steamship Lines and Credit Suisse London. Friederike Helfer born 1976 Valmet Board Member since 2013 Member of the Board s Audit Committee Independent of the company and independent of significant shareholders M.Sc. Real Estate Development, Diplom-Ingenieur in Urban Planning, CFA charterholder Main occupation: Partner at Cevian Capital WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

141 Board of Directors Erkki Pehu-Lehtonen born 1950 Valmet Board Member since 2013 Member of the Board s Audit Committee and Remuneration and HR Committee Independent of the company and independent of significant shareholders M.Sc. (Mechanical Engineering) Chairman of the Board in Raute Corporation Rogério Ziviani born 1956 Valmet Board Member since 2013 Independent of the company and independent of significant shareholders B.Sc. in Business Management, MBA Board Member of Innovatech Negócios Florestais Eija Lahti-Jäntti born 1963 Personnel representative since 2014 MBA Main occupation: Project coordinator at Valmet Personnel representative Eija Lahti-Jäntti will participate as an invited expert in meetings of the Board of Directors. Employed by Valmet since 1988 Jukka Viinanen was Chairman of Valmet s Board and Chairman of the Board s Remuneration and HR Committee until March 27, Pekka Lundmark was Member of Valmet s Board and Member of the Board s Remuneration and HR Committee until April 7, More information about Valmet s Board of Directors: 93 WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

142 Executive Team Executive Team Pasi Laine born 1963 President and CEO M.Sc. (Eng.) Jukka Tiitinen born 1965 Business Line President, Services M.Sc. (Eng.) Sakari Ruotsalainen born 1955 Business Line President, Automation, from April 1, 2015 M.Sc. (Eng.) Bertel Karlstedt born 1962 Business Line President, Pulp and Energy, from February 1, 2015 M.Sc. (Eng.) Jari Vähäpesola born 1959 Business Line President, Paper M.Sc. (Eng.) Diploma in International Marketing Management William (Bill) Bohn born 1954 Area President, North America B.Sc. (Pulp and Paper) B.Sc. (Forestry) Celso Tacla born 1964 Area President, South America MBA Vesa Simola born 1967 Area President, EMEA, from August 1, 2015 MSc. (Eng.) Production Engineer Chemical Engineer 94

143 Executive Team Aki Niemi born 1969 Area President, China M.Sc. (Eng.) Hannu T Pietilä born 1962 Area President, Asia Pacific B.Sc. (Mechanical Engineering) Kari Saarinen born 1961 CFO, from November 15, 2015 (previously SVP, Strategy and Operational Development) M.Sc. (Accounting and Finance) Julia Macharey born 1977 Senior Vice President, Human Resources B.A. (Intercultural Communication) M.Sc. (Econ.) Anu Salonsaari-Posti born 1968 Senior Vice President, Marketing and Communications M.Sc. (Econ.) MBA Juha Lappalainen born 1962 Senior Vice President, Strategy and Operational Development, from January 4, 2016 MSc. (Eng.) Markku Honkasalo was CFO until November 14, Hannu Mälkiä was Area President, EMEA, until July 31, More information about Valmet s Executive Team: 95

144 Shares and Shareholders Shares and Shareholders Valmet s share The trading in Valmet Corporation shares commenced in Nasdaq Helsinki Ltd. on January 2, Valmet s share capital amounts to EUR 100,000,000 and the aggregate number of Valmet shares is 149,864,619. Valmet has one series of shares and its shares have no nominal value. Each share will carry one vote at the general meeting of shareholders. The volume of Valmet shares traded in Nasdaq Helsinki Ltd. during 2015 was 102,181,856, which represents approximately 82 percent of the total volume of traded Valmet shares. In addition to Nasdaq Helsinki Ltd., Valmet shares are also traded on other market places, such as Chi-X and BATS. During 2015, the volume of Valmet s shares traded on the alternative market places was 21,850,143, which represents approximately 18 percent of the total volume of traded Valmet s shares. Of the alternative market places, Valmet s shares were traded especially on Chi-X. (Source: VWS, Six) Valmet Corporation held 399 Valmet shares on December 31, Closing price December 31, 2014: EUR December 31, 2015: EUR 8.90 Change: -12.9% High, low and average price during the review period High: EUR Low: EUR 8.36 Volume-weighted average share price: EUR Market capitalization of shares December 31, 2014: EUR 1,531,616,406 December 31, 2015: EUR 1,333,795,109 Change: EUR -197,821,297 Volume Total: 124,031,999 % of outstanding: 82.8% EUR 15 Shares, Million January February March April May June July August September October November December 0 Valmet OMX Helsinki (rebased) Volume (Valmet) Basic information on Valmet share Listed: Nasdaq Helsinki First day of listing: January 2, 2014 Trading currency: euro Industry classification: Large corporations Trading code: VALMT ISIN code: FI Reuters instrument code: VALMT.HE Bloomberg symbol: VALMT FH Indices In 2015, Valmet s shares belonged at least to the following indices: OMX Helsinki Benchmark OMX Helsinki 25 OMX Helsinki Industrials OMX Helsinki Large Cap NASDAQ OMX Nordic 120 Dow Jones Sustainability World (DJSI World) and Europe (DJSI Europe) OMX GES Ethical Nordic Index 96

145 Shares and Shareholders Shareholders The number of registered shareholders at the end of December 2015 was 47,952 (49,294 on December 31, 2014). Shares owned by nominee-registered parties and by non-finnish parties equaled 51.3 percent of the total number of shares at the end of December 2015 (54.7% on December 31, 2014). Largest shareholders Valmet s largest shareholders according to Euroclear Finland are listed below. In addition, according to a notification received by Valmet from Cevian Capital Partners Ltd., Cevian Capital Partners Ltd. held, on February 12, 2015, altogether 10,323,191 shares, which corresponds to 6.89 percent of all Valmet s shares and votes. Largest shareholders (Euroclear) Holdings % of holdings 1 Solidium Oy 1 16,695, Varma Mutual Pension Insurance Company 4,208, Ilmarinen Mutual Pension Insurance Company 2,980, The State Pension Fund 1,520, Keva 1,502, Nordea Fennia Fund 1,331, Mandatum Life Insurance Company Limited 1,217, Odin Finland 974, Nordea Nordenfonden 811, Danske Invest Finnish Institutional Equity Fund 700, Nordea Pro Finland Fund 700, OP-Finland Value Fund 620, Sigrid Jusélius Foundation 610, Evli Finnish Small Cap Fund 610, Kaleva Mutual Insurance Company 599, Solidium Oy (wholly owned by the Finnish state) Holdings of the Board of Directors and CEO in Valmet as at December 31, 2015 Holdings Holdings of interest parties Risberg, Bo Chairman of the Board 3,922 0 Von Frenckell, Mikael Vice Chairman of the Board 107,989 0 Helfer, Friederike Member of the Board 4,187 0 Pehu-Lehtonen, Erkki Yrjö Juhani Member of the Board 7,366 0 Schrøder, Lone Fønss Member of the Board 5,235 0 Ziviani, Rogério Member of the Board 4,187 0 Laine, Pasi Kalevi President and CEO 49,

146 Shares and Shareholders Distribution of holdings by number of shares held on December 31, 2015 Number of shares Number of shareholders % of shareholders Total number of shares % of share capital , ,034, ,000 23, ,565, ,001 10,000 4, ,354, , , ,727, , ,173, Total 47, ,855, Nominee registered ,114, Treasury shares held by the parent company On shared account , Distribution of holdings by group on December 31, 2015 Nominee registered and non-finnish holders 51.3% Finnish institutions, companies and foundations 23.1% Solidium Oy % Finnish private investors 14.5% Number of shareholders Number of shares % of share capital Nominee registered and non-finnish holders ,891, Finnish institutions, companies and foundations 2,629 34,619, Solidium Oy ,695, Finnish private investors 45,025 21,658, Total 47, ,864, Solidium Oy (wholly owned by the Finnish state) The ownership structure is based on the sector classifications of Statistics Finland. The classification specifies institutions that invest in compulsory insurance, such as pension insurance companies in the public sector. Life and accident insurance companies, among others, are defined as finance and insurance institutions. 98 WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5

147 Investor Relations Investor Relations Valmet s pulp-themed site visit to Sundsvall, Sweden in September Mission and goal The main task of Valmet s Investor Relations is to ensure that the markets have correct and sufficient information in order to determine the value of Valmet s share. Investor Relations is responsible for planning and executing financial and investor communications, and all investor requests are processed centrally through Valmet s Investor Relations. In addition to Financial Statements and Interim Reviews, the investor website, stock exchange releases and press releases, Valmet s investor communication involves investor meetings, seminars, webcasts, news conferences of result publications, site visits and general meetings. Valmet also arranges Capital Markets Days for investors and analysts. Valmet s Investor Relations is also responsible for gathering and analyzing market information and investor feedback to be used by Valmet s management and the Board of Directors. Silent period Valmet observes a 21 days silent period prior to the publication of financial results. During this time, Valmet does not comment on the company s financial situation, markets or future outlook and Valmet s executives and employees do not meet with representatives of capital markets or financial media. Investor Relations in 2015 During 2015, Valmet s Investor Relations have actively arranged different events for investors and analysts. In 2015 Valmet participated in 250 investor meetings, seminars or conference calls. In addition to investor relations, also the CEO, CFO, Business Line Presidents and Area Presidents have participated in investor events. Valmet s site visits have also offered a chance to meet local business management. Altogether, Valmet was on roadshows for a total of 32 days and in 13 different countries, including Great Britain, France, Switzerland, Germany, Austria, Belgium, Sweden, Norway, Denmark, Netherlands, the United States, and Singapore. The publication dates for Valmet s Interim Reviews in 2015 were February 6, April 29, July 30 and October 28. For Interim Reviews published on February 6, April 29 and October 28, Valmet also arranged news conferences, where the CEO and CFO presented the results for the previous quarter. It was possible to follow these 99

148 Investor Relations Valmet s site visit to Tampere was arranged in November 2015 and focused on automation business. Site visit to Shanghai, China in September 2015 was focused on Valmet s operations and market in China. Valmet s site visit to Jyväskylä, Finland in June 2015 focused on Valmet s board and paper business. Valmet was presenting for private investors at Rahapäivä event in September 2015 arranged by Arvopaperi. Investor and analyst group was introduced to Valmet site at Jiading in September events at Valmet headquarters in Keilasatama, via a live webcast on Valmet s investor website, a conference call or via Twitter. For the Interim Review published on July 30, Valmet arranged a conference call, and it was also possible to follow the call via a live audiocast on Valmet s investor website. Recordings and transcripts of these events are available on Valmet s investor website. During 2015, Valmet arranged four site visits for institutional investors and analysts. The purpose of these visits was to give a better insight into Valmet s businesses, and every visit focused on one part of Valmet s businesses. The first visit, on June 3 4, was to Jyväskylä, Finland and the purpose of the visit was to introduce Valmet s board and paper business. During the same trip, the group also visited Metsä Fibre s pulp mill and Metsä Board s board machine in Äänekoski. On September 10, the destination of the site visit was Sundsvall, Sweden, where the visitor group was introduced to Valmet s pulp business. On September 24, Valmet arranged a site visit to Shanghai, China, with a focus on the Chinese market and Valmet s operations in China. The last site visit for the year was on November 26 to Tampere, Finland, where the theme was Valmet s automation business. The highlights of the site visits are introduced in the IR Director s blog and in summary videos in the IR Video Gallery. In September, Valmet arranged a presentation by CFO Markku Honkasalo at Valmet Headquarters in Espoo, and in December Valmet s new CFO, Kari Saarinen, hosted an introductory presentation to institutional investors and analysts. During the year Valmet has also participated in different events for private investors, such as the Rahapäivä event, an event by Arvopaperi with an engineering company theme, and the Sijoitus Invest 2015 event. Valmet has also conducted sales briefings for brokers based mainly in Finland and the USA. Valmet has also been actively present in social media. Interesting topics for investors, for example highlights of the site visits and questions related to Interim Reviews, are presented in the IR Director s blog on Valmet s investor website. In addition, VP, Investor Relations in Valmet, Hanna-Maria Heikkinen, has written posts in an Arvopaperi partner blog, where she has discussed global trends and developments related to Valmet s operating environment. Valmet s Investor Relations also has a Twitter account, which is used to give updates from different events, such as Valmet s news conferences for result publications. It is also possible for investors to order Valmet s IR Newsletter, which is published four times a year. The IR Newsletter summarizes the highlights of each quarter. It is also possible to get to know Valmet as an investment by watching videos in the IR Video Gallery. Investor Relations provide different summary videos of site visits and quarterly results, among others. Launched in autumn 2015, Valmet s IR Video Academy offers short videos introducing Valmet as an investment. 100

149 Investor Relations MAY Q1 presentation for Finnish institutions, Helsinki JANUARY SEB Nordic Seminar, Copenhagen MARCH Capital Markets Day, London Annual General Meeting Roadshow Amsterdam London UBS Pan European Small & Midcap Conference, London Goldman Sachs European Small & Mid Cap Symposium, London Berenberg European Conference USA, New York SEB NASDAQ OMX Nordic Market Day 2015, New York Forest Products & Paper Seminar 2015, Helsinki Roadshow Frankfurt JULY Publication of Q2 Interim Review and audiocast SEPTEMBER FIM one-on-one seminar, Helsinki Rahapäivä event, Helsinki Site visit, Sundsvall Management presentation at Valmet Headquarters, Espoo Roadshow New York Boston Chicago Paris London Geneva NOVEMBER Sijoitus Invest 2015 event, Helsinki Site visit, Tampere Pörssi-ilta event, Tampere Roadshow New York Boston Frankfurt Vienna Singapore Stockholm FEBRUARY Publication of Financial Statements Review for 2015 and webcast Q4 presentation for Finnish institutions, Helsinki Roadshow Stockholm Oslo Singapore Tokyo APRIL Publication of Q1 Interim Review and webcast JUNE Site visit, Jyväskylä Nordic Mid/Small Cap Seminar 2015, Stockholm Berenberg Energy Efficiency & Construction Conference, Zürich Arvopaperi event: Engineering companies, Helsinki Roadshow Paris AUGUST Q2 presentation for Finnish institutions, Helsinki Aftermarket Services seminar, Helsinki OCTOBER Publication of Q3 Interim Review and webcast Q3 presentation for Finnish institutions, Helsinki DECEMBER Berenberg European Conference, London Lunch with CFO for analysts and institutional investors, Helsinki Roadshow Brussels Investors met Meetings and events Countries visited Days of roadshow ~490 ~

150 Investor Relations Analyst coverage During 2015, at least 12 analysts had coverage on Valmet, and of the analysts eight are located in Helsinki, two in London, one in Stockholm and one in Frankfurt. Analyst contact information and consensus estimates are available on Valmet s investor website. Valmet does not take any responsibility for the content, accuracy or completeness of the views of the capital market representatives. According to Valmet s knowledge at least the following analysts have regular coverage on Valmet s share. Helsinki Carnegie Investment Bank Danske Markets Equities SEB Evli Bank Handelsbanken Capital Markets Inderes Nordea Pohjola Bank Rest of Europe Berenberg DnB NOR Kepler Cheuvreux UBS Valmet s investors website Valmet offers its investor information also on Valmet s investor website. The investor website provides information about Valmet as an investment as well as Valmet s operating environment. The website also offers various tools for monitoring the development of Valmet s share, such as an interactive share monitor and a closing price search function. In addition, the pages offer information on the company s insiders and their holdings as well as monthly updated information on the holdings of Valmet s top shareholders and on the ownership structure. The investor website also features financial reports, presentation material and webcast recordings of Valmet s result publication news conferences. In addition, the IR Director s blog features Valmet-related posts aimed at investors. In 2015 Valmet s investor website won first place in the Best investor website contest, in the category of the Large Cap companies. The contest was arranged by the Finnish Foundation for Share Promotion and the Finnish Society of Financial Analysts. In the contest, the Finnish websites of the companies listed on the Helsinki Stock Exchange were evaluated. Financial calendar 2016 February 9, 2016 Financial Statements Review 2015 March 22, 2016 April 6, 2016 April 27, 2016 July 7, 2016 July 28, 2016 September 20, 2016 October 6, 2016 October 27, 2016 Annual General Meeting Silent period begins Publication of Interim Review for January March 2016 Silent period begins Publication of Interim Review for January June 2016 Capital Markets Day in Helsinki Silent period begins Publication of Interim Review for January September 2016 The calendar is available on Valmet s investor website. Investor Relations contact information Hanna-Maria Heikkinen VP, Investor Relations Tel Calle Loikkanen Investor Relations Manager Tel Maija Honkanen Financial Communicator Tel All meeting requests are coordinated by Maija Honkanen. 102

151 Contacts Contacts Visiting address Keilasatama 5, Espoo, Finland Postal address P.O. Box 11, Espoo, Finland Tel (0) Media contacts Sustainability contacts Investor relations Order publications Follow Valmet in Twitter or YouTube and join us in Linkedin and Facebook. Twitter.com/valmetglobal Youtube.com/valmetglobal Linkedln.com/company/valmet Facebook.com/valmetcorporation About this report Concept, design and production Miltton Oy Paper MultiArt Silk 300 g MultiArt Silk 115 g Printing Oy Fram Ab Printed matter The paper, and the pulp used in making the paper, was produced with machines and equipment manufactured by Valmet. The report is printed on MultiArt Silk, which is PEFC-certified and meets the environmental criteria for the Swan ecolabel. PEFC certification confirms that the forests are being sustainably managed. The printing inks and chemicals used in printing comply with the requirements for the Swan ecolabel. The printing ink is plant oil-based, and the other materials used are recyclable and ecofriendly. 103 WorldReginfo - 9f0ac05a-bc3b-4aea-bb0c-8f62a096fda5