Raute Oyj

OMXH:RAUTE

Earnings Call Analysis

Raute Q3 Reports Profitability Progress and ESG Focus

Raute's Q3 report indicated progressing profitability, with a savings program on track to achieve EUR 4-5 million in cost reductions. Despite a slightly slower Q3 in new orders, the company enjoys a near all-time high backlog of EUR 192 million. The Q3 net sales of EUR 34 million fell, mainly due to the higher share of mill-sized orders with slower realization and slowdowns from the new ERP system. Market uncertainty has increased, affecting some customer operations and orders. Raute's shift in focus towards an ESG-driven growth strategy sees expansion beyond Veneer-based products, exploring opportunities in other engineered wood sectors, like CLT. The company aims for a strategic target of 12% comparable EBITDA over the business cycle, having achieved 8.8% in Q3 and guiding towards EUR 140-150 million in net sales for the full year, while navigating reduced Russian business and embracing increased sales in Europe and North America.

Steady Progress Amidst Market Challenges

Raute Corporation has demonstrated resilience in the face of market uncertainties, particularly evident in the third quarter of 2023. A substantial achievement highlighted was the continued improvement in profitability, benefiting from the ongoing profit improvement program aimed at achieving EUR 4 to 5 million in savings. The program's positive impact on financial performance is unfolding as planned, signaling a step in the right direction, although profitability has not yet reached desired levels.

Strong Order Backlog Fuels Optimism

Despite a slight dip in Q3 order intake, the company reported an almost record-high order backlog of EUR 192 million. This robust backlog, driven by large mill-sized orders with a slower net sales realization profile, positions the company favorably for future revenue. The fluctuation in order intake is considered a normal variation, with management expressing no immediate concerns given the spike in orders at the start of 2023.

Navigating Geopolitical and Market Shifts

The withdrawal from the Russian market, traditionally a significant portion of Raute's business, has posed challenges, resulting in a notable decrease in wood processing and services sales. The implementation of a new ERP system also contributed to decreased sales due to the associated learning curve. However, progress is being made, and the business segments are gradually adapting to overcome these hurdles.

Segment Analysis Reveals Mixed Results

Different segments of Raute's business experienced varying degrees of success in the third quarter. The wood processing segment struggled due to the Russian market's impact and the new ERP system's teething problems but remained profitable. The services segment saw diminished sales due to geopolitical factors and ERP challenges but exhibited potential within expected business fluctuations. The analyzers segment experienced a slight downturn in profitability due to product mix variations, yet it is still considered a promising and valuable aspect of Raute's portfolio.

Financial Strength and Investment Focus

Raute's financial footing remains strong, with an equity ratio of 55.4%, well above the strategic target of 40%. The first nine months of 2023 saw positive cash flows, substantial improvements in net working capital, and strategic investment in ERP systems, all reinforcing the company's ability to execute its growth strategy. Investments in research and development, crucial for maintaining competitive edge, align well with historic levels, ensuring ongoing innovation and market relevance.

Outlook Adjusted With a Focus on Execution

In response to slower than anticipated sales realizations, Raute has adjusted its 2023 guidance, reducing net sales predictions to EUR 140-150 million while raising EBITDA margin forecasts from over 4% to above 6%. This pivot reflects delayed revenue recognition, which is expected to be realized later on. The new guidance is part of a strategic focus to harness the full potential of the recently-implemented ERP system and to complete the exit from the Russian market, with only EUR 1.4 million in orders remaining in the backlog. The efforts to capitalize on the large order backlog and ongoing profitability enhancements yield a positive outlook for the company's future.

Earnings Call Transcript 2023-Q3

[Mika Saariaho, executive]

Ladies and gentlemen, welcome to this Raute's Q3 interim report information call. My name is Mika Saariaho. I'm the CEO of Raute. And together with our CFO, Ville Halttunen, we will go through the main events during Q3 and the business status of our operations in Raute. So looking at some of the highlights for Q3 and where are we now? The positive thing during Q3 was clearly that we saw improvement, continuing on our profitability.

We've had now for over a year, this profit improvement program targeting to get EUR 4 million to EUR 5 million savings. And we see that this is proceeding as per plans, and we see also that in Q3, the impact starts to be visible in our financials. So this is positive development. We are not yet there where we want to be in terms of our profitability, but we are making progress in the right direction on profitability topics. Also, what is positive on Raute's situation at the moment is the very high order backlog. We are close to the all-time high backlog of EUR 192 million. Q3 itself was a little bit slower in terms of new order intake.

But I would still consider this as a quite normal fluctuation between the quarters. And I'm also not worried about this order intake figure in Q3 following the very strong quarters and beginning of the year in 2023. We had some slowness in terms of net sales realization. That was due to the fact that the very high order backlog that we have consists of a high portion of mill-sized orders, which very typically have a kind of slower net sales realization profile compared to, for example, services analyzers sales.

The other reason was that we still have some slowness related to our new ERP system. We are learning all the time, and we will be on track and getting the benefits also in the near future, but there was, during Q3, some slowness that we experienced. If we look at the market sentiment, we can say that the market uncertainty has increased. If we look at our customers' operations, we know that on the softer plywood side, the year has been challenging for our customers. And we saw also now during Q3, some slowness on the hardwood plywood side of their operations.

So somewhat challenging market. And the implication to us is that we see some slowness in the single production line orders and also some spare parts orders. However, taking the fact that we have been successfully getting this mill-sized orders and the market has been active on these modernizations and larger deals, we are in a good position taking the business forward as Raute. So we are now very much moving our focus to strategy implementation of our new ESG-driven growth strategy we announced earlier this year. Profitability program is on track.

ESG agenda is proceeding. And we are also expanding our role in the industry as per our strategy. So we are looking at the other engineered wood products outside the Veneer-based industry, and we see good opportunities there in the future for us. We have first openings for example, in the massive CLT wood area, where we are delivering first solutions to our customers here in Europe. One of the key focus areas, obviously, is now to also get the benefits of this new ERP system fully into our operations when we move forward.

Looking at some of the key numbers. Net sales, first 9 months of the year, EUR 100 million. And in Q3, we had -- sorry, EUR 34 million compared to figures we had in 2022, we see a decline on the net sales. However, one has to remember that in 2022, there was a big portion of Russia-related business in our -- still in our business portfolio. And therefore, it's difficult to really compare apples-to-apples, these figures between the years, this time.

In terms of comparable EBITDA, we've generated EUR 6.6 million, comparable EBITDA during the first 9 months, and there was a good quarter in quarter 3 of EUR 3 million of comparable EBITDA. As I said, this is clearly moving to the right direction. It represents, in Q3, 8.8 percentage points of the sales. And we have set a strategic target for Raute at 12% comparable EBITDA over the business cycle. So moving to the right direction, but not yet there where we want to be as a company.

Order intake a bit lower figure in Q3, as I mentioned. But the order backlog is at EUR 192 million, which is very close to all-time high figure for us as Raute. Equity ratio, which is a key figure for us, indicating the strength of our balance sheet is at 55.4%, which is more than our target to maintain it over 40%. So we have, of course, earlier this year, conducted the shares issues, directed share issue and rights issue, together with the junior loan arrangement and this has strengthened our balance sheet. And of course, now as we are also making profits, this is strengthening the equity in our balance sheet.

We have 745 people working at Raute which is a reduction from the high-level figures we had last year and before that. And this is also part of the cost-saving program that we've been implementing as a company and therefore, we have reduced the number of personnel to a certain extent. Order intake. If you look at the geographical split, we see Europe, North America being the biggest market, which is not surprising for us. Big part of this order intake now in Q3 was after sales and modernization projects.

So there was less of the -- processing bigger projects in the order intake this time, but services business was actually having a relatively good quarter in Q3. And of course, if you look at the overall full year order intake, big impact is due to these 3 mill-sized orders that we received this year.

Order book at a high level, we see here the development over the years and quarters. We see that the share of Russia business, which used to be a very big part of Raute's business operations is shrinking, and now we only have EUR 1.4 million order backlog to Russia remaining of the EUR 192 million of order backlog. So we are almost totally gone, totally reduced the Russian business to nonexistence, which is our target also in the very near future.

Net sales, geographically, a lot of business coming from Europe and North America, there was still some pieces for Russia as we were having the wind down of the Russian operations compared to 2022, there was a reduction in the net sales. But as mentioned last year, there was quite a lot of business from Russia, and there were some considerations related to Russian write-downs and terminations, which were a little bit distorting the numbers, and the comparison is difficult. It's more important maybe to look that in 2023, we see in Q3 now increasing net sales from Q2 numbers.

So we are on growing track. And now if we look at the new guidance that we are giving for full year we are indicating EUR 140 million to EUR 150 million of net sales, and we are now at EUR 100 million. So Q4 should be then EUR 40 million to EUR 50 million of net sales. So we are increasing from that point of view. Comparable EBITDA, which is the key profitability measure we are sharing. We generated EUR 3 million of comparable EBITDA.

Very important to notice that all the businesses, 3 business units that we have were positive in terms of comparable EBITDA, and that's a good thing for us. And going forward also gives a good foundation to develop all the businesses according to our strategy.

We had some items affecting comparability during Q3 of EUR 0.3 million, and those mainly out of records related to our new ERP system. Operating profit year-to-date number, we are positive now after really challenging times, 3 years of challenges and in particular, last year, the challenge caused by the Russian war in Ukraine. Ukraine really has challenged our business, and now we are back on the profitable numbers, which is, of course, very important for us and a good development from that point of view.

Personnel, 745 people working at Raute, and most of them in Europe, main location here in Nastola, Kajaani all main locations here in Finland. Then we have North America, where we have also workshop and machine vision unit for analyzers. China works up there. And then some other locations where we also have our sales representatives to Oslo customers. Okay. Looking at the segment performance a little bit in more detail.

Wood Processing Sales came down last year. The reasons I already mentioned, Russia was a big part of the numbers in 2022, both in new net sales generation in wood processing following the fact that big part of the order backlog now is this -- really the revenue recognition happens a bit later in time lower than -- and then we had also impact from this new ERP system that we have implemented and went live during Q2, and it was impacting wood processing business, and there was some slowness in the business operations. But we are learning all the time and recovering from those, from that learning curve as we speak.

Comparable EBITDA positive EUR 0.5 million, of course, went down from last year's numbers when there was this Russia-related releases and it's important that we have wood processing also showing positive numbers in that sense. Services sales down from last year. Again, there was impact from Russian operations Also, this new ERP system is impacting our services to a certain extent. So there has been some slowness in the service business as well.

However, this figure is relatively okay for service business profitability came down due to the lower volume, but service is a good business for us. And I would say that this is within the normal fluctuations of the business volume between the quarters.

So we are making good progress. There's also some new important openings for us in the new digital services that we are offering to our customers and some performance related services that we are developing, the new concepts with our customers. But the service business overall, of course, is seeing the impact of the market slowness, which is then consequence of customers not operating at full speed on their sites. And therefore, the spare parts business opportunities are more limited than in other market conditions.

Analyzers business small decrease from last year's figures. Profitability, a little bit came down from the comparison period. There was some impact of the product mix variations during Q3. So not all the products inside analyzers have the same profitability, and there was some variation now in Q3 to direction that the profitability was a little bit lower. However, analyzers is a good, profitable business for us, and I see that this is going to be the future as well.

Okay. So this is a short update on the group level consideration segment performance and Ville would go through some cash flow and balance sheet figures.

[Ville Halttunen, executive]

Okay. Thank you, Mika. Yes, my name is Ville Halttunen. I'm CFO for Raute. So I'll go through some of the key figures of Raute, end of Q3. Starting with the cash flow, we had a strong cash flow during the first 9 months of this year, EUR 29 million in total was supported by the new orders that we have received now during the first half of this year. During the third quarter, our cash flow was EUR 2.9 million, which was quite well in line with the EBITDA generation of EUR 2.7 million.

Last year, in the same period, our cash flow was negative EUR 10 million. And it was basically due to the net working capital, which tied more capital during the last year same period. On a rolling 12-month basis, our cash flow is now strong, EUR 30 million in total. It's shown here in the green line here, which is clearly higher than the EBITDA level of EUR 6.5 Million, which we have here represented in yellow and the delta there between it's the net working capital and primarily the repayments that we have received from our customers for the projects that we have received.

Then more detail on the net working capital development. At the end of Q3, our net working capital was minus EUR 29 million. It reduced by EUR 2 million during the third quarter. And during the first 9 months, the net working capital has improved by EUR 23.5 million from the level of minus EUR 5 million at the end of last year to a level of EUR 29 million at the end of Q3 and primarily there, the component is the prepayments that we have received now from the customers in order to execute the orders that we have received.

Then looking into the balance sheet ratios, our key ratio financial target in the strategy also is equity ratio. And we have a strong balance sheet. 55.4% equity ratio. Our aim is to maintain this above 40% level in the strategy. No major changes now in Q3 in equity ratio. Bigger change came already in the first half when we executed the financing arrangements and raised EUR 15.5 million net new equity, which consisted of EUR 12.5 million of share issues, rights and directed issues and EUR 3 million of convertible loans. And now we have a strong balance sheet to execute our growth strategy as we move forward.

Investments. The main item in our investments is -- or has been the ERP investment and renewal that we have done. And now the investment level is EUR 4.3 million on a rolling 12-month basis at the end of Q3, down from last year, but still on this level. Depreciation level is increasing. We have started the depreciation on the investment in the ERP, which is then increasing the depreciation levels. And then R&D costs and development there. The investments has been now on a rolling 12-month basis at the level of EUR 5.5 million, down from last year on relative to sales, it's 3.8%. And it's going to be down from last year, as we are showing already here at the end of Q3, but on a relative basis, it's quite well in line with the past levels that where we have been. And this continues to be an important area for us to maintain our competitiveness in our offering.

Okay. Thank you from my side, and then I hand back to Mika to finalize on the outlook.

[Mika Saariaho, executive]

Okay. Thanks, Ville. So if you look at now 2023, remaining quarter, I think it's fair to say that the global economy uncertainty is there. We also know that the slowdown of the construction industry has reduced the demand for softwood plywood and also, as I mentioned earlier, also we see some slowness on our customers' operations for the hardwood plywood as well.

So a challenging market a bit from that point of view and from our point of view, as a technology provider it's really about somewhat reduced demand for single production lines and spare parts, which is a consequence of the market uncertainty, but then on the other hand, there has been a very, very good -- Raute's technology for mill-sized orders and modernizations this year -- what we already received. And the trend is these orders are supported really by customers' long-term capacity planning horizon, which is looking at beyond the current market uncertainty on 10-plus year horizon, where the drivers really for engineered wood products demand are very strong, very much related to sustainability agenda in the world.

And we have a unique position as a company to -- as a Raute to serve this kind of demand and be a partner for these kind of solutions. So as mentioned in the beginning, we already changed the guidance actually for [ 2023 ] a week ago or so due to some slowness in the net sales realizations, we reduced the net sales about EUR 40 million to [ EUR 50 million], it used to be more than EUR 150 million. But then on the other hand, we increased the EBITDA margin guidance. It used to be more than 4%, and now we are saying it's more than 6% in terms of comparable EBITDA.

So some change in the guidance. In terms of net sales, I would say that it's really not disappearing anywhere these orders that we have in our backlog, but the realization is happening a bit later. And that's -- new guidance is reflecting that reality as well. I would say that the profit improvement program is developing well, and really the slowness in revenue recognition is very visible, but the sales will be -- net sales will be coming a bit later. And therefore, in that moment, we also recognize the profits of that revenue.

Key focus for us is now, of course, to get the full benefits of this new ERP system, which we've been implementing now on our main site. And I'm sure we are learning all the time more and we are then in addition to having a well-functioning season, we also start to really get the benefits of this system through better visibility and better possibilities to manage our operations. And we have a target to finalize the exit from Russia as soon as possible. There's only 1.4 million of orders in the order backlog left for Russia, and we want to totally exit from Russia as soon as possible. So that's in summary, and in nutshell, this is where we are.

Overall, I could say we can be relatively satisfied with the Q3, especially when it comes to the development of the profitability, although we are not yet on the levels we want to be, and then we are working on this new big mill-sized orders and delivering the order -- high order backlog that we have generated in the earlier part of this year. And from that point of view, the outlook looks quite positive for us going forward. Thank you very much.