Raute Oyj (RAUA.F) Earnings Call Transcript & Summary

Good afternoon all, and welcome to this Raute's Half Year Financial Reporting Event. Here are all participants here in the room and also online. My name is Mika Saariaho. I'm Raute's CEO; and together with our CFO, Ville Halttunen, we'll go through the highlights of our events during the first half of this year, including the financials. And at the end, we have also time for Q&A. [Operator Instructions] Okay. Very good. Let's get started. So I want to start with some highlights on the group performance during the first half of the year. I would say that there's kind of 2 sides of the story for Raute during the first half of the year and also in Q2. If we start with the very positive things -- sorry, moving to the right page. Again, so if we start with the positives, we saw very good profitability for Raute during the first half of the year. This profitability improvement continued also in Q2. So we achieved comparable EBITDA level, 14.7% of our net sales, EUR 6.5 million, which is, I would describe as a very good level for Raute type of a company. This was also the first time actually on a rolling 12 months basis that we reached our long-term goal, which is more than 12% EBITDA on a comparable basis. So very happy with that development. This is very much thanks to the excellent project execution, operational efficiencies that we have. We are having still these big projects that we are delivering to our customers all over the world, and those have been progressing on time and on schedule, on budget. So very happy with that development. That is reflected in the numbers that we are sharing today. There was on the financials, a key event during Q2, which was that we announced that we are closing our operations -- own manufacturing operations in China. And this is visible in the financials in such a way that there were in total about EUR 3 million of items affecting comparability and other such things, which were impacting both the EBITDA level and then the net profit EBIT level that we reported. These kind of costs -- onetime costs or related costs to this closure were very much in line with what we already earlier announced during Q2 when we announced the closure of our site. So overall, on financial performance, very happy. I'm very happy as the CEO for the Q2 and the whole first half of the year. And this is, of course, showing that we have been able to raise the level of operational performance from the years -- some years ago, and we are operating at a good level. Then the other side of the coin is maybe that the business environment really remained uncertain during the first half of the year. We know the reasons. These are the reasons that have been discussed in the newspapers every day. So the global uncertainty on the economic development, tariff discussions and all these, it really impacted our customers in such a way that the decisions on new investments into technology were very much frozen during H1, and this continued both in Q2 and then in Q -- sorry, Q1 and then also in Q2. And as a consequence, our order intake was only EUR 12 million during Q2, and this was mainly service-related order intake. And actually, Service business is -- of our 3 businesses is the one which has been doing also quite okay and relatively speaking, very okay during the first half of the year in terms of the order intake. So most of the order intake that we have been getting during the first half of the year are for Service business, which shows that our customers are still operating their sites. They need spare parts, they need our services, and we are providing that. But the investments, smaller and bigger ones have been frozen during the H1. I would say, and we highlight that also in the report that towards end of Q2, we really saw clear improvement and activation again on the commercial discussions, which I see positive concerning deliveries from Raute. And we do believe now that during H2 and then, of course, going to 2026, we see improving environment for us from that point of view. These challenges that we've had on the new order intake side have actually caused us to and resulted in us to also take short-term measures to balance our internal capacity to match really the need. Although still our net sales are on a high level, the workload is not equal across our supply chain. So we are taking very proactivity actions to safeguard our profitability, and that's what we are doing also and have been doing during Q2, and we continue to as need be when we move forward. I think overall, in this challenging business environment, we should be happy that also even with the lower net sales recognition now during Q2, we were able to really achieve good profitability level. I think that demonstrates that we have been improving really our operations, both on the commercial and delivery side of our -- supply delivery side of our work so that we are also able to make proper okay profits even with the lower net sales levels. On the net sales, one more comment, which is that it was somewhat lower than maybe anticipated, but I'm not worried at all about our net sales during Q2. This was due to very normal fluctuations on the revenue recognition calculations. So as it's typical for project type of business, sometimes some deliveries to our customers are on a certain month or they might slip into next month or something like that. So nothing is changing in terms of our guidance for the full year, and I'm quite okay in terms of that lower net sales level for this quarter. Okay. Moving forward, this is the key figures, which we have announced. Net sales, EUR 43.8 million and this was lower than a year ago. It was lower than in Q1 as well. But as I said, I believe that's not a sign of any worries in that sense that the order backlog -- order book, which we still have, EUR 115 million, that is turning into net sales as we move forward. And we are on time, on schedule, on budget on our key projects as we should be. Operating comparable EBITDA, EUR 6.5 million and order intake, EUR 12 million, as mentioned. We do have a strong balance sheet. The equity ratio was further increased and increasing during Q2. So it's 60%. Our long-term goal is to remain it more than 40%. So we are clearly there. And we have about 766 employees directly at Raute, a little bit going down from recent figures because of the closure we've done in China and some layoffs -- temporary layoffs also and layoff that we have introduced. Okay. Order intake, we can see here the very low level of order intake as we have reported and mentioned, only EUR 27 million during the first half of the year. Looking at the history, we can see that these kind of things do happen. Also last year, there was a quarter of EUR 15 million of orders, but this is specifically especially low now if we look at some of the recent history during the last couple of years. And as I said, we believe that this is now improving during H2 and then going to 2026. With our customers, I think we can see that there's increasingly kind of a discussion and average view on the market that maybe we have seen the bottom of the curve for our customer industries and even some of them are reporting that the demand starts to -- there starts to be some signs of a pick up of the demand. But that's what we see. And our comment as a technology provider is based on the active discussions -- commercial discussions we are having with customers. That's forming our view for latter part of the year and then going forward. If we look at where the order intake, which was low -- was coming from, it was coming from North America, Europe. And that's actually now, as I said, it's mostly service order intake. So one can almost read from that, what is the split of our service business globally. We are actually having a lot of customers in North America. There's no problem on service side, even though this market, in particular, is hit by this tariff and global turbulence that we are experiencing. Order book, EUR 115 million, going down from the very high level that we were some time ago. Still historically looking, of course, it's not very untypical. This has happened, but it is much lower than we were just some time ago. We still have in the backlog the big projects and the last miles of those big projects to be delivered, and those are progressing as per our plans with the customer. Net sales, EUR 96 million. I think this is an okay good level for us. Q1 was strong. Q2, a little bit lower, but no worries on that, as I said, EUR 96 million first half. Our guidance for the year is EUR 190 million to EUR 220 million, and we believe that we will be landing there. No changes in that respect. Comparable EBITDA. I consider this as a very strong performance with the lower net sales that we had, EUR 6.5 million is a very good level. And it's, as I mentioned, 14.7% of the net sales, which is a good figure for our type of company. And then there is -- there was significant amount of these items affecting comparability also on the EBITDA level, EUR 2 million roughly. And then there was one additional EUR 1 million below the EBITDA in the profit and loss statement. But that was in line with what we announced. As a reminder, for China exit that we are taking from our own manufacturing operations, we estimated that there will be EUR 3.8 million of kind of costs related to that, and we estimate to have roughly EUR 2 million savings every year related from that. So related to that move. So the benefits are also then coming from this strategic move and the optimization of our supply base. Operating profit. This is the reported operating profit. So this is also hit by then this onetime cost. And of course, if we were to exclude these items and talk about the comparable operating profit, that was EUR 4.9 million for Q2, which is a good level, but the reported year-to-date number is EUR 7.8 million. This time, we separately included the comparable figures all the way to operating profit because this is quite material now in the analysis of our performance. I would consider that the underlying operational performance is on a very solid good level now at Raute with these figures. And then personnel somewhat going down from back year ago numbers. There has been some layoffs and also, of course, the closure of China operation starts to be then visible in these numbers. And we are, at the moment, still hiring on certain areas in Raute like in -- related to some of these project deliveries and customer installation at the customer side. So also that is happening at the same time that we actually are, as a net reducing slightly the personnel. Okay. Moving to segment performance. Wood Processing. This is the unit where we need to realize that we had a number of years of big struggle actually in this business. And now I would describe that we have been able to conclude a very successful turnaround of this business. Yes, net sales went down from -- back a year ago from numbers, but profitability is on a good level, and we've been now making also money on this business. And actually, this 13.7% comparable EBITDA for this type of a project business is a good achievement in my view, and we are happy about that. Services has been developing over the past years quite nicely. There has been growth. There was a slight decline on the net sales as well for Services this time, but the profitability, I consider this good solid profitability, actually increasing from year ago numbers despite the lower net sales. There were some savings on the operational costs as we have been looking at those very carefully now on the first -- in the first half of the year. And Analyzers. This is a business which was also hit by the lower order intake. If we think about the new orders coming in on the Services from orders to delivery, it's a very short time. So this is more like book-to-bill type of a business. For Wood Processing, it can be a very long time from a big order to the delivery and it can take a couple of years. And Analyzers is something in between. So this business has been hit by the fact that there hasn't been this kind of equipment orders during the first half of the year as much as we, obviously, would have hoped. So that is a little bit taking down the net sales from that point of view. But still, we were able to maintain the profitability, which is kind of satisfactory result from that point of view. There's a lot of potential, we believe, in the Analyzers business going forward. It's one of the areas where we really are investing, and this is also then supporting our service, digital services and Wood Processing business through the state-of-the-art analyzing capabilities and the AI-driven analysis that we are introducing to the market. Okay. So that's -- those were some of the highlights and segment-specific comments. I will hand it over to Ville to a little bit open more on the financials and cash flow. Ville?

Thank you, and good afternoon on my behalf as well. So my name is Ville Halttunen. I'm Raute's CFO. I will give a bit of a deep dive into our financial performance now during Q2. Starting from the earnings per share. Our improved profitability was also positively visible in our comparable EPS, which increased 19% compared to comparison period. The reported EPS numbers were negatively impacted by the strategic decision that we took to close our production unit in China. And net of taxes, that cost was on the bottom line, minus EUR 2.9 million. So in total, we reported now on this China closure EUR 3 million of costs that were on the operating profit level, EUR 2 million of that was visible on the EBITDA level and EUR 3 million on EBIT level and then bottom line, EUR 2.9 million. We have announced earlier that in total, the cost is EUR 3.8 million. So there will be coming still some cost associated with this closure. Effective tax rate was 48% now in the Q2, primarily due to the fact now that we had these China-related costs, for which we did not take the positive tax effect. And on a comparable basis, the EPS number now on a rolling 12-month basis is at EUR 2.65 in total. Then looking into our cash flow performance. Now during the second quarter, our cash flow was quite negative, minus EUR 21 million. We are prepared for this. So this is quite typical in the project business where we operate. And this was primarily due to the normalization of the net working capital which tied now in the quarter EUR 25 million of cash flow. And in the graph here, you can also see that the cash flow is much more volatile compared to the EBITDA performance. So the dark blue is more volatile versus the light blue graphs. And primarily, this goes with the cash -- the payments from our customers, which are milestone based, and they are not going in the sync fully with the revenue recognition. Looking into then the net working capital. So now our net working capital was close to 0 level. We have been able to maintain the net working capital very negative in the history. Now I would say that this is normalized and even a bit more tying position if we look at a bit longer-term history from Raute and the fact now that we have taken actions to improve the commercial terms in our contracts. But obviously, we can expect this type of volatility in the coming quarters as well. So they are very typical in the project business. We continue to have a strong balance sheet that enables us to execute growth strategy. Our equity ratio is at 60% level, increasing clearly now even compared to Q1. Our target here is to maintain it above 40%. And the liquidity position is still strong, EUR 32 million, even if we had now in the second quarter negative operating cash flow and the normalization of net working capital happened now in the quarter. And then at the same time, we also paid dividends, and we have had also a share buyback program ongoing, taking down the net liquidity. So happy about -- still about our strong balance sheet from the CFO point of view. Then the investment level, we have been now during this year, increasing a bit our investment levels. Now in the second quarter, it was EUR 2 million (sic) [ EUR 1 million ] compared to EUR 0.6 million last year. Still the investment level is below the depreciation level. Worth noting is that our depreciation levels have been increasing in the past, primarily due to the ERP renewal that we are undergoing in Raute. Most of the investments are now done, but now the depreciations are running, and that's why the depreciation level is higher. And now in the Q2, we also made an impairment, EUR 1 million, which was reported in the depreciation growth during the second quarter, which is actually not visible in these graphs. Still R&D expenditure, that's something we continue to maintain and see important that we continue to invest into R&D to maintain our strong position in the market and the R&D expenditures were EUR 2.8 million at the level of last year. So this continues to be the case now. So this was my part, and then I hand back to Mika to summarize with the business and outlook.

Okay. Thank you, Ville. So wrapping up the business environment and the discussion we already had. So I would describe the business environment challenging. It's been quite turbulent for our customers and the end-use need for our customers' product. And we have not yet seen kind of a really clear pick up in the construction market, which is a key market for our customers. However, according to the reports from our customers, we said that there may be a slight pick up on the end up, especially in Europe and some comments are steered kind of towards that. So there's a feeling that may be we have seen the bottom to some extent, and we are starting to recover from that point of view. This also very much demand for our customers' products depends on the specific product offering. We have seen throughout this turbulence that birch plywood, high level -- high-quality birch plywood and LVL has remained quite stable. There's been more challenges on the soft plywood side demand. Additional consideration is -- which we see with our customers is the availability and high price of logs. And this is affecting some of our customers depending whether they have their own forestry in their portfolio or they are buying the logs. This is somewhat then compensated by the -- at least partially compensated by the increase in the plywood and prices that we are seeing. So if this is for our customers, then what it means for us. Clearly, we reported low order intake for H1. These U.S. tariffs have really frozen the investment decisions for new technology and new innovations. Our customers have been operating their site and maintaining them in that sense and service has been needed for that, but the new decisions have been really postponed both in North America, but then we need to realize that many of our customers throughout the world in different places are actually based on -- their business is based on the fact that they are actually exporting to U.S. or North America. So that's why this is impacting more widely, of course, the market. And of course, we have then the additional other challenges of the Ukraine here in Europe and other geopolitical tensions also in Asia Pacific. So not an easy environment for our customers. And for us, we have seen this as a low order intake. However, we do estimate some of our customers, especially in Europe, are already preparing to activate for better times and are preparing for the market to become more active. And as I said earlier, we believe that for us as a technology provider, based on the reactivated discussions, commercial discussions at the end of Q2, we believe that there's an improving environment during H2 and then, of course, moving to 2026. We need to realize also that for us, especially the project part of our business, it's a little bit binary. So there might be no orders and then all of a sudden, there is an order. So there is that nature in our offering. And one could, of course, if looking at this positively now as there has been some time of postponements of the decisions that there could be some -- when the recovery really starts, there is a possibility, of course, then that the market really then needs new technology and everybody is activating a little bit at the same time. But at the moment, that is the message. We see improving environment, H2 from the very low level that we had in H1, and that's the statement on the market business environment. And we are maintaining our guidance for 2025. Guidance is net sales EUR 190 million to EUR 220 million now as we were EUR 96 million for H1 on the net sales. So that's what it is. And then EBITDA EUR 20 million to EUR 27 million and we were close to EUR 14 million in the H1. So our guidance remains valid, and that's what we believe we're going to land during this -- by the end of this year. Okay. Very good. So that's all to share at this moment. And now I would like to open this for questions, maybe here from the audience, if there are any questions and maybe there's -- if there's anything from online, but let's start from the audience here, if any.

Joonas, please?

Joonas Ilvonen from Evli. You already discussed the lack of smaller equipment orders, but could I ask for some more context? I mean I think Raute has historically averaged something like EUR 100 million annually in smaller equipment orders. But now I think your trailing 12-month order intake was only like EUR 92 million and a large part of that was within Services. So could you put this into some kind of perspective? And I think already in 2023, your orders were so tilted towards these larger orders. So I guess, I mean, so is there like anything special going on in the market in this sense? I mean, I guess you haven't really lost market share, at least when I think about the 2023 order book when you booked so many big orders. I mean it seems that you should still be very competitive, at least within certain kinds of equipment orders, so.

Yes. Okay. Good question. On the competitiveness, I would not describe that we have lost the competitiveness. I would consider from this 2023 level when we basically got all the big orders in the world, we probably actually even further strengthened Raute's position as the #1 supplier to this industry. So it really has been more during this year about not making any -- our customers not making any investment decisions. Even the small ones have been on hold. So maybe at some point of time, there has been a little bit different dynamics that the service and then there's smaller orders are still coming and not the big ones. But I would say that really what we have experienced now is that any kind of an improvement decisions have been postponed because of the turbulence and uncertainty among our customers. So yes, most of the orders, EUR 27 million in the H1, most of that is Services. That's what it is. And service, of course, is then about spare parts and audits and this kind of help to our customers. And that has continued also during the last months.

So you basically imply that there should be quite a lot of pent-up demand in Europe when it comes to these smaller types of equipment orders. But I think one related question. I think lasting peace in Ukraine is still quite far away. But have you like already discussed this prospect with your customers? And when you say you see recovery in H2, this is not like in anyhow actually tied to the question of peace in Ukraine, even without the peace in Ukraine, you could still expect.

Yes. So our comment on the improving market for us as well during H2 is not based on the assumption that there's, for example, peace in Ukraine and we get orders related to that. It's not based on that. So I think that is one of the bigger upsides for the whole industry overall if that does happen in a kind of sustainable and right way as we know, looking from this part of the world. So that's additional upside. So not based on that. And then we don't know really what -- how the customers will take that in different regions. But when they have more certainty on their business, I think that's when they probably start also investing into new technology and releasing the operational bottlenecks, which has not really happened because of the uncertainty. It's very material for our customers to think whether they have 0% or 15% or 50% tariffs for the export to U.S.A. and you can't -- you basically -- it's understandable that then they make a decision, let's not invest anything into anything because we might not have a business in the future, somebody else has it or -- and also somebody else doesn't make the decision yet because he or she is not sure whether he will have the business. So nobody is making decisions. That's basically what we are experiencing quite a lot.

Okay. Another question related to Wood Processing margins. So Wood Processing did like almost 12% EBITDA margin on a rolling 12-month basis and 14% in H1. And this was mainly due to these larger orders. I think historically, these larger orders have been associated with smaller margins, but I guess it's clearly now not the case. Some things have changed in this respect. But when looking forward, I mean, right now, it's clear that Wood Processing volumes will decline at least by some amount in the coming quarters or in the year or so. But even if there should be some pick up demand, I think your order book will -- Wood Processing order book will be more tilted towards these smaller kinds of orders. And would you just say that these smaller orders might still be easier to execute with higher margins than these larger orders? I mean could that be like a -- because there's -- clearly, there will be a margin headwind from this volume headwind, but could this possible change in order book structure be a positive margin?

Yes. I don't think it has not changed for Raute that typically, the best margins we typically would be service-related businesses and very small kind of upgrades and things like that. The next best is a little bit bigger one, modernizations and things like that. Typically, the lowest margin quite understandably is on a very big projects because then the negotiation is also much tougher. And of course, it provides big workload for ourselves and the customer is also more powerful in those discussions. However, I would say that we've been successful both on the commercial side on the big projects, but I think especially we've been successful on the delivery of those. So we have not experienced cost overruns or schedule overruns on those. Of course, need to knock the wood, but I think we are actually truly on a different level than we were, let's say, 5 years ago or something like that when we were delivering projects. A lot of effort have been also put into this area. So that is bearing fruit, I think. Okay. Antti, please.

Antti-Pekka Viljakainen from Inderes. Your cost base adapted to declining top-line much better than in history. So my question is, was there anything exceptional in cost in Q2 apart from this reported NRI, of course?

I think some of your analysts asked the same question during the Q1. On Q1, I said that there was nothing exceptional. I would say now overall H1, there was maybe something which was slightly better than, [ than ] would be maybe the average outcome. But then on the other hand, it was such things that on the projects, maybe if we had known before, we would have actually had the profitability already earlier. So it was just that something -- like some projects were ending and there was something better happening during Q2. Overall, on H1, I wouldn't describe this as significantly material there. It really was truly because of the good performance during that quarter -- during that whole first half of the year.

Okay. And Q3 has been quite tough and relatively quiet period for Raute in terms of order intake. So do you expect the demand to pick up already in Q3? Or is it more about Q4 and next year?

That's, of course, something we don't know quite exactly. So we are saying that this is happening during H2. But of course, there are possibilities, of course, because we did see at the end of Q2 improving environment already in terms of commercial discussions. So of course, some of this can be possibly realized Q3 and then going to Q4 and moving forward. But I'm not giving here promises on that one. And of course, the uncertainties are still there in the market can still be that during Q3, something happens with the tariffs and there's all these kind of things. So that will -- this will definitely continue to have impact on the timing of exact decision-making. But overall, if I still recap, I think our customers are seeing that their business is picking up, maybe the bottom has been there. And typically, this is then resulting in some new orders coming throughout as well when it's -- time is right for that.

Okay. Looking forward to that. And finally, about pricing, do you think that the customers try to use delay in decision-making as a tool to bargain pricing? And how do you see your pricing power as your backlog is declining?

I think really the big -- really, truly the reason for delayed decision-making has been this uncertainty in the market. Customer discussions have always been tough. So -- and there's always kind of tough negotiations. Whether the competition has now increased, I'm not sure, maybe in certain areas, but like certain areas where Raute has a key advantage like a bigger, fuller delivery -- integrated delivery to our customer. I don't think there's any change in our competitive position because we are one of the only ones, if not the only one who is able to offer some of those. And then there's a different competition like in Analyzers area when we are introducing the next generation of AI solutions, those are very competitive. So pricing is also -- we believe we can -- and fairly so we can make it win-win with our customers also even if pricing is also correct for Raute.

We can take…

If no questions from the audience, you can still think -- let's take maybe the online.

Yes. We have a couple of questions from here. So regarding your order pipeline, do you see there also bigger investment projects that could materialize during the rest of the year?

On the bigger projects, maybe in the history, except now maybe 2023 when we got a lot of big orders, it's typical that we would get 1 or 1.5 big orders every year. We haven't been getting now any for some time. So of course, everything is possible, but I mean this is -- the timing of those is very difficult to predict. And whether they happen in certain quarter or actually half a year later is something I can't give a promise at this point for our business.

Then a question to the tariffs. Are you able to pass on 15% tariff on your North American customers? Have you seen any changes in activity in that particular market?

We can see from the order intake and what we said, we haven't been basically getting much orders from North America for equipment and bigger deliveries. We have got the Services. On Services, we have, I would say, a quite good situation. We are also having some local manufacturing on Services or manufacturing from Canada, which today doesn't have actually tariffs to U.S.A. kind of maybe surprisingly, doesn't have anything. So we can manage that, I'm sure. And then with this 15%, I would describe that we should be able to operate in U.S.A., specifically also with these tariffs. The additional challenge maybe, at the moment, is that also euro has strengthened quite a bit against U.S. dollars, maybe another 15% during this year. So that is putting an additional challenge. The 15% tariff itself doesn't necessarily change the competitive landscape because if the other technology suppliers from other side of the world also have that same tariff. So relatively speaking, we are in the same position. When it comes to sharing or who pays for the tariffs, that is based -- that is case-by-case discussion. Sometimes we might be discussing maybe giving a discount to customer, but it's always like customer has to carry the tariffs. That's the normal condition that we have. But whether we then give some discount kind of meeting in the middle or something like that, those are case-by-case considerations. And sometimes, depending on what we offer, we do consider that and sometimes we don't need to consider that. So it really varies.

We have one more question. Given the previously reported challenges from raw materials and freight costs in earlier interim reports, what are the current cost trends affecting your margin development in H1? How are you mitigating this?

Okay. Now I'm not quite sure whether the raw material comment was referring to the raw material of our customers, which is then the forestry product logs. There we have seen actually a big challenge for our customers. And talking about that raw material cost, that probably is actually -- if we think about, can be actually, in a sense, good thing for Raute because then you really need to recover and use the raw material to the maximum, and we have the best technology to do that. So that kind of a raw material increase for our customers just makes the raw material more valuable, which means that it has to be truly processed with the best possible technology, which we have to offer. Then it -- what comes to our raw materials for our deliveries, those would be steel and logistics. We have actually not seen so significant inflation or increase in those materials for our deliveries recently. That was true, let's say, 3, 4 years ago, it was a significant challenge, but it's not really at the moment something that we would need to highlight.

That's all from web.

Okay. If no additional comments from the audience here, I want to thank you all for participating this info session, and I will see you next time when we report the Q3 results. Thank you very much.

Thank you.