VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Report of the Board of Directors January–December 2020

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 Oyj and Valmet Group corporate governance. Valmet Oyj complies without deviation with the Finnish Corporate Governance Code for listed companies. The Code is publicly available at www.cgfinland.fi.

Corporate Governance Statement and Remuneration Report

Valmet has published a separate Corporate Governance Statement and a Remuneration Report for 2020, which comply with the recommendations of the Finnish Corporate Governance Code for listed companies. The statements also cover other central areas of corporate governance. The statements have been published on Valmet’s website, separately from the Board of Directors’ Report, at www.valmet.com/governance.

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 Limited Liability 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 as well as the auditor, their remunerations, and other matters requiring a decision by the Annual General Meeting according to the Finnish Limited Liability Companies Act that are presented to the Annual General Meeting. The 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 shall see to the administration of the company and the appropriate organization of its operations, 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 remuneration of the President and CEO as well as other terms related to the position. The Board of Directors monitors the work of the 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.

Valmet’s results in 2020

Figures in brackets, unless otherwise stated, refer to the comparison period, i.e. the same period of the previous year.

2

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Key figures1

Valmet implemented IFRS 16 – Leases as of January 1, 2019 by applying the simplified transition method and therefore 2018 figures are not restated.

1 The calculation of key figures is presented in the section ‘Formulas for calculation of indicators’.

2 At the end of period.

3 Board of Directors’ proposal.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Orders received decreased 8 percent to EUR 3,653 million in 2020

1  Indicative only. January to December 2020 orders received in euro calculated by applying January to December 2019 average exchange rates to the functional currency orders received values reported by entities.

Orders received decreased 8 percent to EUR 3,653 million (EUR 3,986 million) in 2020. The Services and Automation business lines together accounted for 46 percent (46%) of Valmet’s orders received. Orders received remained at the previous year's level in the Paper business line, and decreased in the Pulp and Energy, Services, and Automation business lines. 

Orders received increased in China and decreased in South America, North America, Asia-Pacific and EMEA (Europe, Middle East and Africa). Measured by orders received, the top three countries were China, the USA and Finland, which together accounted for 50 percent of orders received. The emerging markets accounted for 49 percent (41%) of orders received.

Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased orders received by approximately EUR 101 million in 2020.

In 2020, Valmet received among others an order for key pulp mill technology and automation to Brazil, typically valued at around EUR 200–250 million, an order for a coated board making line to China, typically valued at around EUR 150–200 million, an order for a fine paper making line to China, typically valued at around EUR 80–100 million, and an order for a biomass-fired boiler plant to Finland with a value of approximately EUR 70 million.

Order backlog amounted to EUR 3.3 billion

Order backlog amounted to EUR 3,257 million at the end of the reporting period, and was at the same level as at the end of 2019. Approximately 25 percent of the order backlog relates to stable business (Services and Automation business lines, approximately 25% at the end of December 2019). Approximately 75 percent of the order backlog is currently expected to be realized as net sales during 2021 (at the end of 2019, approximately 70% was expected to be realized as net sales during 2020).

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Net sales amounted to EUR 3,740 million in 2020

1  Indicative only. January to December 2020 net sales in euro calculated by applying January to December 2019 average exchange rates to the functional currency net sales values reported by entities.

Net sales amounted to EUR 3,740 million (EUR 3,547 million) in 2020. The Services and Automation business lines together accounted for 44 percent (48%) of Valmet’s net sales. Net sales increased in the Paper, and Pulp and Energy business lines, and remained at the previous year's level in the Automation and Services business lines.

Net sales increased in South America, Asia-Pacific and China, remained at the previous year's level in EMEA, and decreased in North America. Measured by net sales, the top three countries were the USA, China and Brazil, which together accounted for 38 percent of net sales. Emerging markets accounted for 46 percent (41%) of net sales.

Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased net sales by approximately EUR 100 million in 2020.

Comparable EBITA and operating profit increased

In 2020, comparable earnings before interest, taxes and amortization (Comparable EBITA) were EUR 365 million, i.e. 9.8 percent of net sales (EUR 316 million and 8.9%). Comparable EBITA increased due to higher net sales and lower SG&A expenses. 

Operating profit (EBIT) in 2020 was EUR 319 million, i.e. 8.5 percent of net sales (EUR 281 million and 7.9%). Items affecting comparability amounted to EUR -10 million (EUR -1 million).

Valmet's investment in Neles was not included in Comparable EBITA and it had no material impact on EBIT in 2020.

Net financial income and expenses

Net financial income and expenses in 2020 were EUR -11 million (EUR -11 million).

Profit before taxes and earnings per share increased

Profit before taxes in 2020 was EUR 307 million (EUR 269 million). The profit attributable to owners of the parent was EUR 231 million (EUR 201 million), corresponding to earnings per share (EPS) of EUR 1.54 (EUR 1.35). Valmet's investment in Neles had no material impact on the financial result in 2020.

Return on capital employed (ROCE) and return on equity (ROE)

In 2020, the return on capital employed (ROCE) before taxes was 22 percent (23%) and return on equity (ROE) 21 percent (20%).

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Business lines

Services: Orders received EUR 1,356 million in 2020

In 2020, orders received by the Services business line decreased 7 percent to EUR 1,356 million (EUR 1,459 million). Services accounted for 37 percent (37%) of all orders received. Orders received increased in China, remained at the previous year’s level in South America, and decreased in Asia-Pacific, North America and EMEA. Orders received remained at the previous year's level in Performance Parts and decreased in Mill Improvements, Fabrics, Energy and Environmental, and Rolls.  Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased orders received by approximately EUR 39 million.

Net sales for the Services business line amounted to EUR 1,327 million (EUR 1,374 million) in 2020, corresponding to 35 percent (39%) of Valmet’s net sales. Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased net sales by approximately EUR 30 million.

COVID-19-related travel restrictions and lower capacity utilization in graphical paper mills had a negative impact on Services' orders received and net sales.

Automation: Orders received EUR 334 million in 2020

In 2020, orders received by the Automation business line decreased 7 percent to EUR 334 million (EUR 359 million). Automation accounted for 9 percent (9%) of Valmet’s orders received. Orders received increased in South America and China, and decreased in North America, Asia-Pacific and EMEA. Despite COVID-19, automation services order intake remained at the previous year's level, while capital order intake decreased. Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased orders received by approximately EUR 11 million.

Net sales for the Automation business line amounted to EUR 335 million (EUR 341 million) in 2020, corresponding to 9 percent (10%) of Valmet’s net sales. Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased net sales by approximately EUR 8 million.

Pulp and Energy: Orders received EUR 934 million in 2020

In 2020, orders received by the Pulp and Energy business line decreased 17 percent to EUR 934 million (EUR 1,125 million). Pulp and Energy accounted for 26 percent of all orders received (28%). Orders received increased in China and decreased in all other areas. Orders received decreased in both Pulp and Energy. Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased orders received by approximately EUR 41 million.

Net sales for the Pulp and Energy business line amounted to EUR 1,003 million (EUR 919 million) in 2020, corresponding to 27 percent (26%) of Valmet’s net sales. Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased net sales by approximately EUR 41 million.

The Pulp and Energy business line has managed challenges caused by COVID-19 well, and therefore the pandemic did not cause major impacts on its operations in 2020.

Paper: Orders received EUR 1,029 million in 2020

In 2020, orders received by the Paper business line remained at the previous year’s level and amounted to EUR 1,029 million (EUR 1,043 million). Paper accounted for 28 percent (26%) of all orders received.  Orders received increased in China and decreased in all other areas. Orders received increased in Tissue and decreased in Board and Paper. Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased orders received by approximately EUR 10 million.

Net sales for the Paper business line amounted to EUR 1,076 million (EUR 913 million) in 2020, corresponding to 29 percent (26%) of Valmet’s net sales. Changes in foreign exchange rates compared to the exchange rates for the corresponding period in 2019 decreased net sales by approximately EUR 20 million.

The acquired PMP Group became a part of the Paper business line and is included in Valmet’s financial reporting from the fourth quarter 2020 onwards.

The Paper business line has managed challenges caused by COVID-19 well, and therefore the pandemic did not cause major impacts on its operations in 2020.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Cash flow and financing

Cash flow provided by operating activities amounted to EUR 532 million (EUR 295 million) in 2020. Net working capital totaled EUR -588 million (EUR -426 million) at the end of the reporting period. Change in net working capital in the statement of cash flows was EUR 160 million (EUR -40 million) in 2020. Payment schedules of large capital projects have a significant impact on net working capital development.

Cash flow after investments totaled EUR -60 million (EUR 58 million) in 2020. The acquisition of PMP Group had a cash flow impact of EUR -48 million. Investments in Neles shares had a cash flow impact of EUR -456 million in 2020. During the comparison period 2019, Valmet completed the acquisitions of GL&V and J&L Fiber Services Inc. with a cash flow impact of EUR -163 million.  

At the end of 2020, gearing was 13 percent (-9%) and equity to assets ratio was 39 percent (41%). Interest-bearing liabilities amounted to EUR 497 million (EUR 268 million), and net interest-bearing liabilities totaled EUR 149 million (EUR -90 million) at the end of the reporting period.

The average maturity of Valmet’s non-current debt was 2.3 years, and average interest rate was 1.1 percent at the end of December. Lease liabilities have been excluded from calculation of these two key performance indicators.

Valmet’s liquidity was strong at the end of the reporting period, with cash and cash equivalents amounting to 274 million (EUR 316 million) and interest-bearing current financial assets totaling EUR 73 million (EUR 42 million). The outstanding Nordic Investment Bank loan was repaid and replaced with a new 10-year EUR 50 million loan in January 2020. In April–June, Valmet signed term-loan agreements with a total value of EUR 500 million, of which EUR 279 million was outstanding at the end of the reporting period. In December, Valmet signed an eight-year loan agreement of EUR 100 million with the European Investment Bank, which was undrawn at the end of the reporting period. Valmet’s liquidity was additionally secured by a committed revolving credit facility worth of EUR 200 million, which matures in 2024, and an uncommitted commercial paper program worth of EUR 200 million. Both of these facilities were  undrawn at the end of the reporting period.

In compliance with the resolution of the Annual General Meeting 2020, Valmet paid dividends of EUR 120 million, corresponding to EUR 0.80 per share.

Capital expenditure

Gross capital expenditure (excluding business combinations and leased assets) totaled EUR 89 million (EUR 79 million) in 2020, of which maintenance investments were EUR 36 million (EUR 34 million).

Acquisitions and disposals

Acquisitions
On September 11, 2020, Valmet announced that it has entered into an agreement to acquire PMP Group in Poland. The acquisition was completed on October 1, 2020. PMP Group supplies process technologies and services for tissue, board and

paper machines globally, focusing on small and medium-sized tissue machines and board and paper machine rebuilds. The enterprise value of the acquisition was approximately EUR 64 million on a cash and debt free basis, and preliminary consideration transferred after ordinary post-closing adjustments was EUR 70 million. The acquisition also includes a conditional and capped earn-out component, with an estimated fair value of EUR 4 million as at acquisition date. The net sales of the company were approximately EUR 70 million in the fiscal year 2019, and PMP employs about 650 people in Poland, China, USA and Italy. PMP is included in Valmet’s financial reporting from the fourth quarter 2020 onwards. The acquired business became a part of Valmet’s Paper business line. 

Disposals

Valmet made no disposals in 2020.

Investments in associated companies

Valmet acquired a minority share in Neles Corporation during July–September 2020. As at December 31, 2020 Valmet held 29.5 percent of Neles' shares and voting rights. Neles is a globally leading diversified valve, valve automation and service company with net sales in 2019 amounting to EUR 660 million and an adjusted EBITA margin of 14.6 percent. Valmet partly financed the share acquisition with a new loan facility.

Valmet announced on September 29, 2020 that it had approached the Board of Directors of Neles with a proposal to start discussions on a potential statutory merger between the two companies. On October 12, 2020, Valmet announced that it sustains its goal to merge Valmet and Neles despite Neles' Board of Directors' negative response to Valmet’s proposal, which Neles had announced on the same day.

Research and development

Valmet’s research and development (R&D) expenses in 2020 amounted to EUR 75 million, i.e. 2.0% percent of net sales (EUR 71 million and 2.0%). Research and development work is carried out predominantly in Finland and Sweden, within the business lines’ R&D organizations and pilot facilities. In addition, research and development takes place within a network of customers, suppliers, research institutes and universities. In the end of 2020, R&D employed 457 people (452 people).

Valmet’s R&D work is based on customers’ needs, such as improving production and resource efficiency, maximizing the value of raw materials, providing new revenue streams, and developing new innovations and technologies.

Valmet develops competitive, leading production and automation technologies and services. To enhance raw material, water and energy efficiency in its customers’ production processes, Valmet combines digitalization, process technology, automation and services. Valmet also develops solutions for replacing fossil materials with renewable ones and for producing new high-value end products.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Number of personnel

During 2020, Valmet employed an average of 13,615 (13,235) people. The number of personnel at the end of December was 14,046 (13,598). Personnel expenses totaled EUR 891 million (EUR 897 million) in 2020, of which wages, salaries and remuneration amounted to EUR 713 million (EUR 708 million).

Impacts of the COVID-19 pandemic on Valmet

The COVID-19 pandemic impacted Valmet’s operations during 2020. Travel restrictions and lower capacity utilization in graphical paper mills had a negative impact on orders received

and net sales of the Services business line. Many customers restricted access to their sites, which led to disturbances especially in field services and mill improvement projects. Also the Automation business line was impacted by access restrictions to some customer sites.

The Pulp and Energy, and Paper business lines have managed challenges caused by COVID-19 well, and therefore COVID-19 did not cause major impacts on the capital business. The organization has performed well under the new circumstances and found new ways to operate, which can be utilized to improve Valmet's processes also after the pandemic. For example, the increased use of Industrial Internet and remote connections resulted in lower travel expenses in 2020.

On April 21, 2020, Valmet announced that due to financial and production related reasons, especially because of the decreasing workload and in order to prepare for the potential widening of the business impacts from the COVID-19 pandemic, the company was to start co-determination negotiations on April 21, 2020, for temporary lay-offs. The employees under negotiations were the Services business line employees in Finland and EMEA area organization in Finland. At the time of the announcement, it was estimated that the need for lay-offs concerns around 200 employees.

On April 24, 2020, Valmet announced that the co-determination negotiations had been completed, and as a result 72 employees in the Services business line in Finland and 105 employees in the EMEA area organization in Finland were to be temporarily laid-off due to low workload. The lay-offs concerned all employee groups. The lay-offs were implemented until the end of October and the scope and length of a lay-off varied up to 90 days at maximum. 

On November 24, 2020, Valmet announced that due to financial and production related reasons, especially because of the decreasing workload, the company starts co-determination negotiations for temporary lay-offs in Finland on November 24, 2020. The employees under negotiations are Services business line’s employees in Finland and the employees of the EMEA area organization in Finland. The lay-offs are going to be temporary and they are estimated to last up to 90 days at maximum. At the time of the announcement, it was estimated that the need for temporary lay-offs concerns around 360 employees. 

On December 2, 2020, Valmet announced that the co-determination negotiations have been completed, and as a result at this stage altogether 372 employees, 227 in the Services business line and 145 employees in the EMEA area organization in Finland will be temporarily laid-off due to low workload. The lay-offs concern all employee groups. The lay-offs can be implemented until the end of April, 2021, and the scope and length of a lay-off can vary up to 90 days at maximum per person.

Changes in Valmet’s Executive team

Valmet announced on November 19, 2020, that Mr. Jukka Tiitinen (M.Sc., Engineering) has been appointed Area President of Valmet’s North America Area as of April 1, 2021. Jukka Tiitinen is currently employed at Valmet as Area President, Asia Pacific. He will continue as a member of Valmet’s Executive

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Team reporting to President and CEO Pasi Laine. Mr. David King, the current Area President, North America, has decided to retire after a long, successful career at Valmet as of March 31, 2021.

Structural changes

Valmet announced on January 21, 2020, that it is planning changes in the Fabrics Business Unit, which is part of the Services Business Line, in order to secure the unit’s profitability and future competitiveness. The most important action in the preliminary plan was to move the dryer fabric and wide filter fabric production from Tampere in Finland to Valmet’s unit in Portugal. Valmet started co-determination negotiations in Fabrics’ operations in Tampere on January 21, 2020.

Valmet announced on March 17, 2020, that the co-determination negotiations have been completed. Valmet will relocate the dryer fabric and wide filter fabric production from Finland to Portugal. As a consequence of the relocation and re-organizing of the work, the need for workforce reduction in Tampere will be 78 persons mainly during 2021. For those affected by the reductions, Valmet will provide support measures like support for studies and re-employment.

Valmet announced on May 26, 2020, that it continues measures to improve the long-term competitiveness of its stable business especially related to Mill Improvements and Rolls and Workshop Services business mainly in EMEA. The aim is to improve the profitability and competitiveness of the respective businesses by optimizing the local presence globally and streamlining the way to operate. The measures may include permanent lay-offs and the restructuring of selected operations. In total the estimated amount of headcount reductions is up to 200 positions. Valmet’s stable business employs altogether approximately 8,300 persons globally.

Strategic goals and their implementation

Valmet is the leading global developer and supplier of technologies, automation and services for the pulp, paper and energy industries. Valmet focuses on delivering technology and services globally to industries that use bio-based raw materials. Valmet's main customer industries are pulp, paper and energy. These are all major global industries that offer growth potential for the future. Valmet is committed to moving its customers' performance forward.

Valmet’s vision is to become the global champion in serving its customers, and its mission is to convert renewable resources into sustainable results. 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 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 our customers' end products.

In order to improve operational excellence, Valmet is in the process of renewing its ERP system. The aim is to improve Valmet’s operational capability through process harmonization

and standardization, and through renewal and modernization of the ERP platform.

Valmet has an annual strategy process, where, among others, Valmet’s strategy, Must-Wins and financial targets are reviewed.

On February 5, 2020, Valmet announced the Board of Directors’ decision to raise Valmet’s financial targets for Comparable EBITA margin and return on capital employed. Valmet’s new target for Comparable EBITA margin is 10–12 percent (previously 8–10%). The new target for Comparable return on capital employed (ROCE) before taxes is at least 20 percent (previously 15–20%). Valmet’s other financial targets remained unchanged.

Valmet's financial targets are the following:

Continued focus on improving profitability

Valmet continues to focus on improving profitability through various actions in e.g. sales process management, project management and project execution, in procurement and quality, as well as in technology and R&D.

To improve sales process management, Valmet is focusing on key account management and analyzing the customers’ share of wallet. Valmet is targeting market share improvement at key customers and adding focus on sales training. Valmet has also launched ‘Valmet's Way to Serve’ services concept – a shift towards more unified and customer-oriented services.

Valmet is continuously improving its project management and project execution by training personnel and implementing a Valmet-wide project execution model. By focusing on improving project management and execution, Valmet is targeting continuous improvement of gross profit.

Valmet has set a long-term savings target for procurement. In order to decrease procurement costs, Valmet is focusing on design-to-cost and adding supplier involvement through supplier relationship management. Valmet has also set a target for quality cost savings and is adding focus on root cause analysis of quality deviations. Furthermore, Valmet is continuing to adopt the Lean principles and methodology.

Valmet is constantly focusing on new technologies and R&D to improve product cost competitiveness and performance. The renewal of Valmet’s ERP system will increase efficiency once implemented. 

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Disclosure of non-financial information

Valmet reports its non-financial information according to Finnish Accounting Act, based on the non-financial reporting directive (NFRD). In addition, Valmet has aligned its climate-related financial risks and opportunities reporting with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

Business model and value creation

Valmet’s mission is to convert renewable resources into sustainable results. Sustainability, including climate-related matters, is at the core of all Valmet’s operations. Valmet has an active and open dialogue with its stakeholders. Valmet’s product and service portfolio consists of technologies that increase the value of its customers’ end products. Valmet works closely with its customers throughout its key processes – from product development to the commercialization of new solutions. Valmet has the financial strength to invest in innovations and growth.

 Valmet is mitigating the impacts of climate change, adapting to global warming, and driving the transition of the pulp and paper industry towards a low-carbon economy by enabling energy and resource-efficient low-carbon pulp, paper and energy production. The successful management of climate-related risks and opportunities is a key element in the delivery of our strategy.

In addition to value for its owners, Valmet creates economic value as an employer and taxpayer. Valmet provides employment and business opportunities to a wide range of stakeholders and indirectly builds wealth in local societies.

Valmet’s technology and services enable customers to produce their products with fewer resources, less emissions and fewer raw materials, and to improve flexibility in fuel source selection to replace fossil fuels with renewable ones. In Valmet’s own operations, more efficient processes and energy efficiency improvements enable the use of fewer natural resources and lower CO2 emissions.

Valmet strives to develop the transparency and traceability of its entire value chain, from the sourcing of raw materials to the recycling of its products. Valmet mainly purchases raw materials, components, energy and services.

Valmet has estimated that around 4 percent of its environmental impact arises from its supply chain, and around 1 percent from its own operations. The remaining 95 percent is caused when customers use Valmet’s technologies over their entire life cycles.

Materiality assessment

Valmet has assessed the most significant topics of the non-financial disclosure by conducting an internal stakeholder review. All topics have been assessed based on their importance to Valmet and its stakeholders with key experts and management. Valmet has defined five sustainability focus areas, covering the most material sustainability topics for Valmet: a sustainable supply chain; health, safety and environment; people and performance; sustainable solutions and corporate citizenship.

Valmet has a systematic company-wide risk management process for regularly assessing the probability and impact of

risks and opportunities, in which sustainability, including climate-related matters are integrated. Valmet has several group-wide policies in place to mitigate these risks.

The basis of Valmet’s operations is its Code of Conduct, which creates a uniform and ethical foundation for all our business transactions and work assignments. Valmet strives for globally consistent and transparent management practices to ensure all its stakeholders can reliably assess the company’s sustainable operations and development.

Valmet’s sustainability agenda, related goals, and all supporting policies are owned, driven and monitored by Valmet’s Executive Team. Sustainability performance is reviewed annually by the Executive Team. All Valmet’s operations are responsible for ensuring that group-wide initiatives are implemented to meet Valmet’s sustainability goals. Valmet ties selected sustainability topics, such as health, safety and quality, as well as sustainable supply chain KPIs, to remuneration.

Material topics
Environmental and climate-related matters

Valmet has defined targets for the reduction of energy and water consumption, as well as CO2 emissions and waste by 2030. Valmet provides its customers with more sustainable solutions that help to improve environmental performance and safety. Valmet continuously improves the environmental efficiency in all production facilities, and the resource and energy efficiency of its own technologies and solutions, based on global and operation-specific HSE and R&D action plans.

Social and employment-related matters

Valmet’s operations provide direct and indirect employment for a wide range of stakeholders. Valmet continuously improves employee skills and capabilities, striving to ensure a healthy and safe working environment for both its own people and partners. Valmet participates in discussions regarding its operating environment and regulations. Valmet builds trust and reputation by operating in a sustainable and profitable manner.

Respect for human rights

As a global technology and services supplier, Valmet operates in a highly multicultural environment. Valmet recognizes its responsibility to respect human rights and requires its business partners to do the same. Valmet is committed to international frameworks related to human rights, such as the UN Guiding Principles on Business and Human Rights. Valmet recognizes the business benefits of having a diverse workforce and aims to provide equal opportunities for everyone.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Anti-corruption and bribery

Valmet has several policies in place which guide its and its partners’ operations regarding corruption, bribery and competition compliance. Valmet arranges regular training on its Code of Conduct, anti-corruption principles and competition compliance guidelines to enforce the principles set by the policies. All Valmet’s suppliers are required to commit to the principles set by the Sustainable Supply Chain Policy, by which compliance is assessed through potential self-assessments and audits.

Non-financial indicators

Number of environmental compliance cases

No significant environmental incidents resulted from major permit violations, claims, compensations or media coverage related to environmental incidents in 2020.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Breakdown of employees by contract type, employment type, region and gender

1 LTIF reflects the number of injuries resulting in an absence of at least one workday per million hours worked.

2 LTIF + medical treatment and restricted work cases.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Valmet’s management approach for non-financial impacts

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Shares and shareholders

Development of Valmet’s share price since listing, January 2, 2014–December 31, 2020

Share capital and share data1

1 The formulas for calculation of the figures are presented in the section ‘Formulas for Calculation of Indicators´.

2 In addition to Nasdaq Helsinki Ltd, Valmet’s shares are also traded on other marketplaces, such as Cboe CXE, Cboe BXE and Turquoise. A total of approximately 106 million Valmet shares were traded on alternative marketplaces in 2020, which equals to approximately 39 percent of the share’s total trade volume (Bloomberg).

3 Board of Directors’ proposal.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Largest shareholders on December 31, 2020

Source: Euroclear Finland.

Holdings of the Board of Directors in Valmet Oyj on December 31, 2020

Number of shareholders

The number of registered shareholders at the end of December 2020 was 54,178 (45,965).

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Flagging notifications

During the review period, Valmet did not receive flagging notifications referred to in the Securities Market Act.

Trading of shares

The closing price of Valmet’s share on the final day of trading for the reporting period, December 30, 2020, was EUR 23.36, i.e. 9 percent higher than the closing price on the last day of trading in 2019 (EUR 21.36 on December 30, 2019).

In addition to Nasdaq Helsinki Ltd, Valmet’s shares are also traded on other marketplaces, such as Cboe CXE, Cboe BXE and Turquoise. A total of approximately 106 million Valmet shares were traded on alternative marketplaces in 2020, which equals to approximately 39 percent of the share’s total trade volume (Bloomberg).

Board authorizations regarding share repurchase and share issue

Valmet Oyj’s Annual General Meeting on June 16, 2020, authorized Valmet’s Board of Directors to decide on the repurchase of the Company's own shares in one or several tranches. The maximum number of shares to be repurchased shall be 5,000,000 shares, which corresponds to approximately 3.3 percent of all the shares in the Company. The Company's own shares may be repurchased otherwise than in proportion to the shareholdings of the shareholders (directed repurchase). The Company's own shares may be repurchased using the unrestricted equity of the Company at a price formed on a regulated market on the stock exchange main list maintained by Nasdaq Helsinki Ltd on the date of the repurchase.

The Company's own 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, however so that a maximum of 500,000 shares may be repurchased to be used in an incentive scheme, which corresponds to approximately 0.3 percent of all the shares in the Company.

The Board of Directors decides on all other terms related to the repurchasing of the Company's own shares.

Valmet Oyj’s Annual General Meeting authorized Valmet’s Board of Directors to decide 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 several tranches. The issuance of shares may be carried out by offering new shares or by transferring treasury shares

held by Valmet Oyj. Based on this authorization, the Board of Directors may also decide on a directed share issue in deviation from the shareholders’ pre-emptive rights and on the granting of special rights subject to the conditions mentioned in the Finnish Limited Liability Companies Act.

Based on this authorization, a maximum number of 15,000,000 shares may be issued, which corresponds to approximately 10.0 percent of all the shares in Valmet Oyj. 

The new shares and treasury shares may be issued for consideration or without consideration.

The Board of Directors may decide on all other terms of the issuance of shares and special rights entitling to shares pursuant to Chapter 10(1) of the Finnish Limited Liability Companies Act. The Board of Directors may use this authorization, 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 incentive schemes, however so that the Board of Directors may issue a maximum of 500,000 shares to be used in incentive schemes, which corresponds to approximately 0.3 percent of all the shares in the Company.

The authorizations shall remain in force until the close of the next Annual General Meeting, and they cancel the authorizations granted in the Annual General Meeting of March 21, 2019.

In its meeting on December 17, 2020, the Board of Directors of Valmet decided to use the authorization granted by the Annual General Meeting held on June 16, 2020, to repurchase the Company's own shares. Based on the authorization, the Board decided to initiate a fixed-term share buy-back program for the purpose of acquiring the Company's own shares to meet part of the obligations arising from the LTI Plans and the Restricted Pool incentive. The share acquisitions will begin at the earliest on February 8, 2021 and will end at the latest on March 5, 2021. The maximum number of shares to be acquired is 100,000. The shares will be acquired at market price in public trading on Nasdaq Helsinki Ltd. 

As at December 31, 2020, Valmet’s Board of Directors had not used the other authorizations given by the Annual General meeting on June 16, 2020.

Share-based incentive plans

Valmet’s share-based incentive plans are part of the remuneration program for Valmet’s key personnel.  The aim of the plans is to align the interests of the shareholders and the key employees in order to increase the value of Valmet in the long run, to steer the key employees towards achieving the Company’s selected strategic targets, to commit the key employees to the Company, and to offer them a competitive reward plan based on holding the Company's shares. Any shares to be potentially awarded are, or have been, acquired through public trading, and therefore the incentive plans have no diluting effect on the share value.

Long-term incentive plan 2018–2020

In December 2017, the Board of Directors of Valmet Oyj approved a long-term share-based incentive plan for Valmet's key employees. The plan includes three performance periods,

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

which are the calendar years 2018, 2019 and 2020. Valmet's Board of Directors decided on the performance criteria and targets in the beginning of each performance period. The LTI Plan is directed to approximately 130 participants (including Executive Team members, key employees and management talents).

In its meeting on December 19, 2019, the Board of Directors of Valmet decided to use the authorization granted by the Annual General Meeting held on March 21, 2019, to acquire the Company's own shares. Based on the authorization, the Board decided to initiate a fixed-term share buy-back program for the purpose of acquiring the Company's own shares to meet part of the obligations arising from the LTI Plan and the Restricted Shares Pool incentive plans. The share acquisitions began on February 10, 2020 and ended on February 24, 2020. The total number of acquired shares was 270,000. The shares were acquired at market price in public trading on Nasdaq Helsinki Ltd.

In its meeting on December 19, 2019, Valmet’s Board of Directors also decided to use the authorization to issue shares. In a directed share issue on March 16, 2020, a total of 152,122 Valmet’s treasury shares were conveyed without consideration to the participants of the long-term share-based incentive plan for the performance period 2019, in accordance with the terms and conditions of the plan. 

Long-term incentive plan 2021–2023

In its meeting on December 17, 2020, the Board of Directors of Valmet Oyj decided on new share-based long-term incentive plans, a Performance Share Plan and a Deferred Share Plan, for Valmet's key employees.

Performance Share Plan

The Performance Share Plan is directed to the Executive Team members. It includes a three-year performance period parallel to a one-year performance period. Valmet's Board of Directors decides on the predefined performance measures and targets in the beginning of each performance period.

Deferred Share Plan

The Deferred Share Plan is directed to other key employees and management talents. It includes a one-year performance period, the year 2021. The predefined performance measures and targets are decided by Valmet’s Board of Directors and will be the same as in the Executive Team’s Performance Share Plan. The Deferred Share Plan is directed to a maximum of 130 participants, of which approximately 80 are key employees in management positions, and approximately 50 are management talents.

The rewards to be paid for performance periods 2021–2023 on the basis of the Performance Share Plan and the Deferred Share Plan will correspond to a maximum total of 460,000 shares.

The Board of Directors of Valmet Oyj approved in December 2017 a share ownership recommendation for Valmet's Executive Team members. All members of the Executive Team are recommended to own and hold an amount of Company shares equaling to their gross annual base salary (100 percent ownership recommendation).

At the end of the reporting period, the Company held 373,643 treasury shares related to the share-based incentive programs.

More information about share-based incentive plans can be found in Valmet’s Remuneration Report, which is available at www.valmet.com/governance.

Resolutions of Valmet Oyj’s Annual General Meeting

The Annual General Meeting 2020 was held in Helsinki on June 16, 2020. The Annual General Meeting adopted the Financial Statements for 2019 and discharged the members of the Board of Directors and the President and CEO from liability for the 2019 financial year. The Annual General Meeting approved the Board of Directors' proposals concerning authorizing the Board to decide on repurchasing the Company’s own shares and to decide on the issuance of shares and the issuance of special rights entitling to shares. The Annual General Meeting also approved the remuneration policy for governing bodies.

The Annual General Meeting 2020 confirmed the number of Board members as seven and reappointed Mikael Mäkinen as Chairman of Valmet Oyj's Board and Aaro Cantell as Vice-Chairman. Pekka Kemppainen, Monika Maurer, Eriikka

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

Söderström, Tarja Tyni 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 close of the Annual General Meeting 2021.

PricewaterhouseCoopers Oy was elected as the Company's auditor for a term expiring at the end of the next Annual General Meeting.

Valmet published a stock exchange release on June 16, 2020, concerning the resolutions of the Annual General Meeting and the organizing meeting of the Board of Directors. The stock exchange release and meeting materials can be viewed on Valmet’s website at www.valmet.com/agm

In compliance with the resolution of the Annual General Meeting, on June 25, 2020, Valmet paid out dividends of EUR 0.80 per share.

Annual General Meeting 2020 was cancelled and postponed to June 16, 2020

On March 17,2020, following the development of the coronavirus situation and the announcement by the Finnish Government on March 16, 2020, the Board of Directors of Valmet decided to cancel the Annual General Meeting from March 19, 2020. On April 23, 2020, Valmet published a notice convening the Annual General Meeting, which took place on June 16, 2020. The resolutions of the meeting are presented above. 

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. Valmet is also a plaintiff in several lawsuits.

Valmet announced on December 22, 2016, that it has received a reassessment decision from the Finnish tax authority for Valmet Technologies Inc. The reassessment decision is a result of a tax audit carried out in the company, concerning tax years 2010–2012. During the first quarter 2017 Valmet paid additional taxes, late payment interests and penalties in total of EUR 19 million related to the reassessment decision. Valmet considers the Finnish tax authority's decision unfounded and has appealed of the decision.

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 currently presented for them, provisions made, insurance coverage in force and the extent of Valmet’s total business activities.

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 an important 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 advance payments are typically 10–30 percent of the value of the project, and customers make progress payments as the project is implemented. This significantly decreases the risks and financing requirements related to Valmet’s projects. Valmet continually assesses its customers’ creditworthiness and their ability to meet their obligations. As a rule, Valmet does not finance customer projects. If economic growth slows down significantly, the markets for Valmet’s products may shrink, which may lead to, for example, tougher price competition. 

Changes and uncertainty in future regulation and legislation can also have critical effects, especially on 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.

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

Through acquisitions, Valmet may become exposed to risks associated with new markets and business environments. The actual acquisition process also includes risks. Other risks associated with acquisitions include, but are not limited to,

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

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

There may be changes in the competitive situation of Valmet’s individual businesses, such as the emergence of new, cost-effective competition in the markets. Valmet can safeguard its market position by developing its products and services, and through good customer service and local presence.

Availability of financing crucial

Securing the continuity of Valmet’s operations requires sufficient available funding under all circumstances. Valmet estimates that its liquid cash assets and committed credit limits are sufficient to secure its immediate liquidity and to ensure the flexibility of financing. The average maturity of Valmet’s non-current debt, excluding lease liabilities, is 2.3 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 Valmet’s financing. Setting aside investments into the renewal of the ERP system, Valmet does not expect any significant increase in annual capital expenditure and estimates that it 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.

Changes in legislation and the way authorities interpret regulation, for example regarding taxation, can also have an impact on Valmet’s financials.

As at December 31, 2020, Valmet had EUR 711 million (EUR 687 million) of goodwill on its statement of financial position. Valmet assesses the carrying value of its goodwill for impairment annually, or more frequently if facts and circumstances indicate that carrying value may not be recoverable. Valmet has not identified any indications of impairment during the reporting period. The principles used for impairment testing are presented in the Financial Statements.

The COVID-19 pandemic

Depending on the success in suppressing the COVID-19 pandemic and in case the outbreak will be further prolonged, there could be further adverse impact on Valmet’s operations, customer investment activity, project deliveries, supply chain and availability of financing for both Valmet and its customers. Valmet currently has a solid order backlog, strong balance sheet and liquidity coupled with a flexible  organization, and a structured way to operate in changing circumstances. This will aid Valmet in mitigating the global challenges caused by COVID-19.

Events after the reporting period

There have been no subsequent events after the review period that required recognition or disclosure.

Guidance for 2021

Valmet estimates that net sales in 2021 will remain at the previous year’s level in comparison with 2020 (EUR 3,740 million) and Comparable EBITA in 2021 will remain at the previous year’s level in comparison with 2020 (EUR 365 million). 

Short-term outlook

General economic outlook according to IMF

Although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus pose concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 5.5 percent in 2021 and 4.2 percent in 2022. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies. The strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis. (International Monetary Fund, January 26, 2021)

Short-term market outlook

Valmet estimates that the short-term market outlook is good for automation, pulp, board and paper, and tissue, satisfactory/weak for services, and weak for energy.

Board of Director's proposal for the distribution of profit

Valmet Oyj’s distributable funds on December 31, 2020 totaled EUR 1,225,703,224.57 of which the net profit for 2020  was EUR 186,455,188.79 (according to Finnish Generally Accepted Accounting Standards).

The Board of Directors proposes that a dividend of EUR 0.90 per share be paid based on the statement of financial position to be adopted for the financial year which ended December 31, 2020, and that the remaining part of the profit be retained and carried further in the Company’s unrestricted equity.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | REPORT OF THE BOARD OF DIRECTORS

The dividend will be paid to shareholders who on the dividend record date March 25, 2021, are registered in the Company’s shareholders’ register held by Euroclear Finland Ltd. The dividend will be paid on April 7, 2021. All the shares in the Company are entitled to a dividend except for treasury shares held by the Company on the dividend record date.

In Espoo on February 4, 2021

Valmet’s Board of Directors

VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | FINANCIAL INDICATORS

Financial indicators

1 Valmet implemented IFRS 16 – Leases as of January 1, 2019 by applying the simplified transition method and therefore 2018 figures are not restated.

2 2017 financials have been presented on restated basis due to the retrospective implementation of IFRS 15 – Revenue from contracts with customers as of January 1, 2018.

3 In the calculation of 2017 figures, non-restated data points from 2016 have been used.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | FORMULAS FOR CALCULATION OF INDICATORS

Formulas for calculation of indicators

In addition to financial performance indicators as defined by IFRS, Valmet publishes certain other widely used measures of performance that can be derived from figures in the Consolidated statement of income and financial position, as well as notes thereto. The formulas for calculation of these alternative performance measures are presented below.

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | CONSOLIDATED FINANCIAL STATEMENTS

Consolidated statement of income

  VALMET | FINANCIAL STATEMENTS 2020 AND INFORMATION FOR INVESTORS | CONSOLIDATED FINANCIAL STATEMENTS