Valmet Oyj
OMXH:VALMT
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Valmet Oyj
Earnings Call Analysis
Q2-2023 Analysis
Valmet Oyj
The company continues to place a strong emphasis on enhancing its Process Technologies and Services as well as Automation. It approaches development with a holistic view, not prioritizing one area over others. Annually, about 50 potential cases are evaluated for acquisition, focusing on those that would contribute to achieving financial targets, particularly an EBITA of 12 to 14 points. A history of active involvement is evidenced by 10 acquisitions and one merger since 2014. Recently, two significant acquisitions were announced: the Körber Business Area Tissue at approximately €380 million, which is expected to close by November 2nd, and the Process Gas Chromatography business from Siemens at an enterprise value of around €102 million, expected to close by April 1st next year.
For the quarter, the company reported an order intake close to €1.3 billion, a decrease of 3%, and a backlog of €4.4 billion, an 8% decline. Net sales reached €1.4 billion, up by 10%. The comparable EBITA was €153 million, or 10.8%, improving by 1.3 percentage points. Adjusted earnings per share were 12% lower at €0.60. The Service segment saw a 6% reduction in orders at €430 million, while the Automation segment increased by 12% to €340 million. Process Technologies orders were down by 8% for the quarter. The EBITA for Services stood at 17.5% for the quarter, with year-to-date at 16.8%. Automation reached 17.9% for the quarter, and Process Technologies struggled at 4.8%.
The company's operational model ensures cash flow positive projects. Despite fluctuations in quarters, there are no significant changes to the overall situation. The management's focus is intensely on the inventory, seeking to manage levels while ensuring delivery capabilities. They expect some natural fluctuation in network capital tied to the cyclical nature of capital orders. Project delays are accounted for as part of regular capacity management practices.
Though recent service order intakes have been lower, the company doesn't foresee a drastic change in customer behavior. A normal year typically sees 55% of orders in the first half and 45% in the second half. As delivery times normalize post-COVID disruptions, customers may be reducing their inventories, but long-term demand for services is expected to continue. The EBITA margin for Services is expected to remain within company targets, despite declines in order intake.
The company revised its market outlook to 'satisfactory' for board and paper. While this adjustment may reflect a lower volume forecast compared to the record 1.6 billion previously achieved, it's emphasized that current conditions shouldn't be compared to 2016 levels when the outlook was previously classified as satisfactory. Continuous progress and changes in expectations mean the contemporary 'satisfactory' embodies an evolved perspective.
The acquisitions are projected to be immediately accretive to EBITA margins, aligning with long-term targets of 12% to 14%. With expected synergies yielding approximately €8 million by the end of 2026, the acquisitions are considered a strategic move to offer more comprehensive solutions to customers. They also provide an opportunity to increase operational efficiency and customer intimacy while strengthening the company’s position in both regional and technologically specific markets.
The company has observed few cancellations but more postponements in projects due to market uncertainty, scrutiny on interest rates, and customer financial positions. The pipeline for projects, especially on the pulp side, is expected to build momentum in 2024. There is a deliberate emphasis on maintaining pricing policies despite market uncertainty to ensure healthy margins are sustained. The process of continuous improvement and cost competitiveness is vital in the regular market climate, reinforcing the company's targets.
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Good afternoon, ladies and gentlemen, and welcome to Valmet's Q2 2023 Result Publication and Webcast. My name is Pekka Rouhiainen, I'm the Head of Investor Relations here at Valmet. And the speakers will be Valmet's President and CEO, Pasi Laine; as well as CFO, Katri Hokkanen. And after the presentation, you will have the chance to ask questions over the phone lines.
But without further ado, Pasi please.
Pekka, thank you. Welcome everybody. So, today's headline is orders received amounted close to €1.3 billion and comparable EBITA increased €153 million in the second quarter.
We have the same setup than earlier, and usually, I'll go first through the quarter two, then some words about the segments and business lines. Then some extra talk -- and extra topic about execution of acquisition strategy, then Katri will go through the financial development. I'll come back to say some words about guidance and short-term market outlook.
So, first, quarter two in brief. So, our orders received were about €1.3 billion. Net sales was about €1.4 billion, backlog in the end of the periods were about €4.4 billion and comparable EBITA increased €153 million, and margin was 10.8%. Gearing in the end of the period was 23%.
And here you see the graphs as well. So, process technologies' net sales was about 44%; Services was 32%; and Automation 24%. Geographically, quite normal distribution. So roughly 40% in Europe, a little bit over 20% in North America, and then the growing areas, China, South America, and Asia-Pacific between 11% and 14%.
Then if you look at the orders receive and trend, our orders received were almost €1.3 billion and then then if you look at the trend, the trend was about close to -- or is ending up somewhere €5.3 billion, €5.4 billion. So, we have been growing constantly through the acquisitions and organic growth, and now we're in 12 months of cumulative terms, we are somewhere at point €5.3 billion, €5.4 billion order intake.
Then if we look geographically, the first six months order intake, North America has been active 26%, Europe a little bit less than 40%, and Asia-Pacific active 16%, China 11%, and South America, 10%. So, good distribution in order intake geographically as well.
Then we have been talking many years about first about Services and then after the acquisition of Automation business, about stable business. And here, you see the development of Valmet's stable business over the years.
So, when we started, our order intake was about €1 billion. And now last 12 months' cumulative is about €3.2 billion. So we have acquired Automation. We have merged with Neles. We have done some other acquisitions as well. Organic growth, we have calculated has been about 8%. So, the big change in Valmet is that now order intake from stable business is about €3.2 billion.
And that now when the capital process technology hasn't been that active, then it means that stable business represents about 60% of our order intake during the last 12 months. Big change compared to year 2014 when only one-third of the order intake came from Services. So, a good development in long run and in short run.
Backlog, like I said, about €4.4 billion. 60% of the backlog is coming from Process Technologies, 25% from Services and 15% from Automation. And we are now saying that about 50% of the backlog is expected to be realized as net sales during this year. And like I said, about 40% of the backlog is related to stable businesses. Last year, the corresponding figure was 35%.
Then some words about the segments of business lines. First, Services. Services order intake during the first six months has been a little bit over €1 billion. So, growth by 11% or 12% compared to last year's first six months. Katri will come back later on to the quarterly numbers. But first half year, Services has been growing nicely.
Net sales has been growing also from €720 million to €846 million and profitability now for large 12 months is 16.8%. So, [Indiscernible] and areas have been doing good work in improving profitability of our services. So, now LTM is 16.8%. So, I'm very happy with the performance of our Services, both in order intake and also in profitability development.
Then Automation segment consisting of Automation Systems and Flow Controls. So, now we have first time for a whole one year nailed now second time, first the whole year in LTM. So, the order intake, LTM is now almost €1.4 billion.
And like I said, some years back, we didn't have this business at all at all. So, €1.4 billion. First half of the year, there we are not comparing apples-to-apples, but the order intake in first half has been €732 million. So, good activity. Net sales has been active as well €642 million and profitability, LTM is now 18.4%, so good profitability level in Automation business as well.
And I'll now say some words about my happiness later on after we'll -- I'll show the business line graphs. So, Flow Controls, here we have the total numbers, not only relevant numbers, but Flow Control has been growing nicely in order intake from €394 million to €427 million. So, nice activity in in order intake. Net sales has been increasing nicely as well. So, we are very happy with the CMOS and CMOS team performance in Flow Control.
And [Indiscernible] has continued the good development in Automation Systems, so order intake now for first six months is about €300 million, last year, €253 million, so €51 million improvement compared to last year. So, good development in Automation as well. And net sales has been developing favorably in Automation as well.
Then Process Technologies orders received was about almost €1.1 billion in first half of the year. So, clearly, the order -- the market activity has been slowing down. So, year ago, our order intake was almost €200 million more than this year in first six months. Net sales has been, of course, active because of earlier, good order intake. So, net sales this year has been a little bit of €1.2 billion in first six months.
We still have challenges with the profitability and still the same reasoning. So, we have some selected pulp and energy projects, which are still impacting the profitability and Katri will come back later on, on the quarterly profitability numbers, but last year, we ended up at 6%, now we are 5.2%. And of course, it's clear that our target is to get to 6% level as soon as possible.
Pulp and energy order intake has been €489 million, so down almost about €90 million compared to last year. And now the LTM is €980 million. Net sales has been developing favorably, so net sales was almost €550 million for the first half of the year.
And here you see the lumpiness in order intake, net sales has been not that lumpy and of course, now there will be a lot of questions also in this kind of call about the flexibility of our capital business. And we have been saying all the years that we have been preparing for many years the business to be as flexible as possible. So, we are prepared for the situation that sometimes the order intake is €1.3 billion, sometimes it's €700 million. And now the LTM is €980 million, so nothing dramatic here either.
Paper business line had excellent year in 2021. It had had good year in 2022. Now LTM is almost €1.2 billion. First half of the year, almost €600 million. So almost, €90 million, €95 million down compared to last year -- year's first half. Net sales about €702 million. So, here as well net sales is higher than the order intake.
Here, the same answer that we have been preparing ourselves for flexibility. And Jari and Jari's team have been working on that topic a lot. So, today's Paper business line has a lot of more flexibility in its capacity cost than and then the Paper business line we started with nine years ago -- almost 10 years ago. So, there is always lumpiness in the order intake of Capital business, and now the market is not as active as it has been, but we are prepared for that.
Good, then there has been quite a lot of discussion about the acquisitions in this conf calls, but also in one-on-one meetings and there have been a lot of discussion around the topic and now I am happy to inform about two acquisitions we have signed now.
So, first, some words about the strategy. So, we have been saying the whole time that we continue to strengthen our Process Technologies Services and Automation. And we are not prioritizing whether we would focus more on Automation or Services, Process Technology. We look for opportunities to strengthen all of these corners of our triangle. And then we have been saying that we have selected like we are saying here that we annually evaluate about 50 cases. So, we work a lot on this topic.
And then then, of course, we are targeting acquisitions which are helping us to reach our financial targets. to reach 12 to 14 points in EBITA. And we have executed 10 acquisitions and one merger with Neles after 2014. So, we have been active on this topic for many years already.
Now, we are very happy to announce two acquisitions and the first one is the acquisition of Körber Business Area Tissue. We have had many years of discussion with Körber, and I'm very happy now that we are in situation that we have signed the acquisition agreement. So, it was signed on 7th July, enterprise value is about €380 million and then, of course, we need to get the competition of authority approvals in in selected countries, not that many, but in some countries and we expect that we can close the transaction in November 2nd this year.
And the business will be integrated as one part of Paper business line as a separate business unit and in our reporting, we will report part in Process Technology and Services in Services business lines numbers. But the unit will be as one unit, managed by the head of Paper business line.
The business, what they are doing -- or first let's start what we do. So, we do currently tissue machines. So, after tissue machine, you get so called jumbo roll. And then Körber has all the technology to transfer this jumbo roll to rolls what you buy in local stores or what the away-from-home market is using. So, they have all the technologies to transfer the jumbo roll to consumer rolls. And I'll have a picture of that later on.
Körber has the widest offering in converting industry, and it's the market leader. Net sales was about €305 million last year and EBITA margin 12 points. And it has a good, strong and growing service business, which is about 36% of the net sales or was 36% of the net sales in 2022. Headquarter is located in Italy, in Lucca, it's so-called Tissue Valley. And then it has operations, of course, in Italy, Brazil, China, Japan, and USA.
Then the rationale of the acquisition is that we can we are now after the -- it -- the acquisition has been closed, we have the widest technological offering to make fiber to make tissue, jumbo rolls, and then convert that to the end users.
Its strengthening Process Technologies, strengthening Customer Services segment as well and then it's strengthening also our automation offering. We have good automation offering for tissue and Körber has very advanced automation offering where they're using third-party hardware, but they have very good applications and remote services and everything else for the converting customers. So, in the long run, we can see that we will have the benefit of having the data from both sides and trying to optimize the production units.
Then we see that we will have sales synergies and cost synergies so that we estimate those to bring about €8 million benefit by end of the 2026. And here's the picture how it looks like. So, we have first, tissue -- stock preparation, tissue machine, tissue rewinders, and then the converting lines. Converting lines can be -- together with the machine in the same location or in other location.
And a big part of the converting line are sold to tissue machine -- to companies who make tissue as well, about 80%. So, the customer base we are here serving is actually not expanding that much.
So, our current customers are buying the machine from us, and they are buying the converting line from somebody like Körber, but now we are the one stop shop supplier or will be that kind of supplier to that segment in the future. So, I'm very, very happy that, finally, we have signed the agreement and we are waiting eagerly for the closing date.
Then to strengthen automation, we have made a -- signed the deal to acquire the Process Gas Chromatography business from Siemens. We have been looking for opportunities to strengthen our Automation business for many years and there aren't that many companies available which would have a reasonable size of a product business. And we are very happy now that we have been able to sign the deal to acquire this part of the Siemens business.
Enterprise value was about €102 million, and net sales of that business was last year about €120 million, profitability about -- EBITA margin about 10%. So, we see the good potent -- first of all, where they are used. So, these are used in chemical and gas processes to analyze the components of different gases and chemicals.
They are used by big corporation -- big chemical corporation, big petrochemical corporation, big gas corporations. And all the big ones are using these products. And then this product, which is called Maxum, is the market leader. So, it's very well-recognized by the end customers and appreciated by end customers.
So, the rationale is that we can provide good framework to continue this business. We have global network and we can integrate or provide good facilities and good support for the business. It will be organized as one business unit report to head of Valmet or Valmet Automation System business line Head. And we will, of course, have some synergies with Flow Controls as well because Flow Controls is serving the same customers.
And then we see that this is an opportunity also for our system business to learn new industries and get new customers. So, in the long run, I see this as important step to widen the customer base of our very, very well operating Automation business. So, I'm also very happy that we were able to sign this deal, and we are estimating that that the deal will be closed in 1st April next year.
Good. A little bit longer story from me this time and now I'll let Katri to tell the important topics.
Good afternoon on my behalf as well. Good to be here today to share the finance results with you. I will highlight the key figures for the quarter starting from the order intake that was close to €1.3 billion and 3% lower than the comparison quarter.
Order backlog was at the level of €4.4 billion or 8% down and net sales was 1.4 billion and 10% higher than the comparison quarter. Comparable EBITA was €153 million or 10.8%, and that was 1.3 percentage points higher than last year.
Items affecting comparability that was €2 million for the quarter and last year, it was €32 million. And last year, it was impacted by Neles. Earnings per share -- sorry, adjusted earnings per share for the quarter was €0.60, and that was 12% lower than last year. It was impacted by financial expenses as well as effective tax rate, which was lower last year again because of Neles.
Few words also about the segments, starting from the orders. Services was €430 million, that was 6% lower than the comparison quarter. Maybe good to mention that the second quarter last year was our second best order intake quarter ever, the best was the first quarter this year. And now Services is a little bit over €1 billion when we look at the year-to-date numbers.
Automation had good quarter in terms of order intake, it was €340 million and 12% higher. And year-to-date, Automation was €732 million. Process Technologies was a little bit below €500 million for the quarter, that was 8% lower. And year-to-date, Process Tech is close to €1.1 billion or 15% down. And as total quarter was €1.3 billion, and year-to-date, we were at €2.8 billion or 7% higher.
On the net sales side, it was developing well in all the segments, both for the quarter and also for the year-to-date numbers. Quarter was €1.4 billion and year-to-date, we were at €2.7 billion over 20% higher than last year.
Comparable EBITA was developing nicely for stable business. Services was €80 million for the quarter or 17.5% and year-to-date services was at the level of 16.8%. Automation segment was €61 million or17.9% and year-to-date, they were at 17.2%. Process Technologies was €30 million for the quarter -- sorry, for the quarter, it was 4.8%, and year-to-date, Process Technology was at the level of 4.7%.
Other segment costs were €17 million for second quarter, and year-to-date, it's minus 26%. Here, the beginning of the year has been cost heavy, and there has been lots of activity which has impacted this number.
And the quarter EBITA was €153 million and year-to-date, we are at €286 million or 10.5%, and that is 1.5 percentage points higher than last year year-to-date.
Comparable gross profit was 26% for the quarter. And when we look at the last 12 months, we were at 25% level. SG&A last 12 months, we were at €900 million, and that represents 16% of the net sales.
When we look at net sales and comparable EBITA, so both have been developing favorably. Net sales when we look at last 12 months, we are close to €5.6 billion and out of that €3 billion is related to stable business. And comparable everyday margin last 12 months is now 11.1% and targets is unchanged to be between 12% to 14% and that work continues.
Cash flow for the last 12 months was €273 million, and net working capital was minus €31 million and this is now excluding the dividend liability and it represents 1% of -- sorry, minus 1% of the rolling 12 months orders. And net working capital, of course, the capital project payments are impacting quite a lot here as well as the elevating inventory levels, which we have had.
And maybe good to mention here also that the -- since the proportion of stable business has increased, of course, that comes also with the positive networking capital.
Net debt was €542 million at the end of second quarter and gearing was 23%. Good to mention here that we have now paid the first installment related to dividends out in April and net debt to EBITDA ratio was €0.77.
Capital employed was close to 3.4 billion at the end of second quarter, and comparable return on capital employed was 15%. And good to note here that integration of low control has impacted the capital employed as well as the percentage when looking at the last 12 months numbers. And then last but not least, adjusted earnings per share was €2.42 when looking at the last 12 months numbers. Those were the financials.
Shortly, I will give the floor back to Pasi.
Thank you, Katri. Then still guidance and short-term market outlook. So we keep the same guidance that we estimate the net sales in 2023 will increase in comparison with 2022, and comparably EBITDA in 2023 will increase in comparison with 2022. So increase and increase both.
Then the short-term market outlook and like you remember, we are saying that 50% is coming from our capacity utilization, and 50% is coming from the customer activity. And in services we have downgraded from good to good slash satisfactory. So we have had good order intake, like I was saying, Katri was saying, in services. And that of course is resulting that in a very good capacity utilization currently.
Then we have seen that the market activity has been slowing down, and that's why we are saying that the market outlook – saying that the market activity has decreased to a satisfactory level.
In Flow Controls, we still have a good market outlook. In Automation Systems, we have still good market outlook. In Pulp, we have downgraded from good/satisfactory to satisfactory. So that now when there is some uncertainty in the markets and economic development and also interest rates have been increasing. Then the decisions have been postponed. We have of course active discussions with customers, but let's see when the decisions will materialize, and that's why we have been downgrading the outlook to satisfactory. And you see also that in our order intake, that now the order intake LTM is somewhere at €1 billion level and not higher.
In Energy we have, and that's of course the whole Pulp and Energy, not only Pulp. In Energy we keep the outlook as good. In Board and Paper, the same what I said earlier. So we have had good and now order intake LTM is somewhere at €1.2 billion and last €600 million in the first half year. And that's why we have now downgraded the outlook from good to satisfactory.
This year, we keep the outlook at satisfactory level. So three changes in the market outlook. Good and now we go to the -- oh no, now I'll let Pekka on the stage and then I'll move.
Yes, thanks Pasi. So now it's time to move to the Q&A session, so I ask Katri also to join Pasi here behind the tables. Thank you, and let's then go to the Q&A. So operator, please.
[Operator Instructions] The next question comes from Antti Kansanen from SEB. Please go ahead.
Hi, guys. It's Antti from SEB. A couple of questions from me and let's start with services. I mean, after Q1 you still had a good market outlook for the business and if you now reflect the order intake that you took during the quarter, was it as you expected, was it weaker than anticipated? And maybe you could talk a little bit more detailed into kind of the market activity, parts and consumables separately, and then perhaps kind of project shutdown services, and things like that separately. What do you see from your client base?
Like Katri said, I'll start and then Katri will add. So, now I lost myself.
Maybe it was the second quarter last year.
Yes, exactly. So, Katri said that last year was very good order intake in the second quarter. So the comparison number is tough. But then of course it's the fact that we are 6% down compared to that. Did we estimate it? I think in the end of March maybe not. Then maybe later on we started to see that the market is slowing down. So still I would say that our understanding in the end of the first quarter was that the market continues to be more active. So there has been a change in the market compared to what we saw in the end of March.
Then a more detailed view. South America is still active, North America is holding, Europe has been holding. Let's see what happens now in Europe after summer vacation. So now of course during the summer time it's a little bit difficult to see any good trends. There is a clear slow market in China. Asia-Pacific is holding, geographically so.
Then in consumables we see less activity. So now when the mills are not running as well as they are, or with as high production volumes as earlier, then we see that there is less need for our paper machine clothing and less need for roll workshop services as well. So those are related to the production volumes.
Then in mill service type of, or project type of, and field service type of services, we see a little bit different behavior that pulp customers have been more active than paper customers in that kind of segment. But as an average, the market has been still reasonably good for the first half of the year. And the performance part has been active.
Yes, I was just kind of thinking that was Q2 demand then ended up being satisfactory? I mean, just trying to get, do you expect the activity kind of sequentially weakened going into the second half versus what you actually then ended up seeing on the second quarter? Or am I kind of over overreaching here?
No, no. We had quite a lot of discussion that should we keep it as good or should we change it? But then we were in the end concluding that now when the order intake in second quarter is 6% down compared to earlier year, then it would not be right to continue to say that the market is good, even if for the first half of the year, order index has been growing.
Okay. And then maybe a bit more detailed question on kind of the shutdown services and things like that. Are you seeing that your clients are kind of cutting production in a way that results you doing shutdown services or are they just kind of lowering it but still continuing to run so that there's perhaps not as much demand as you hoped for?
It's of course, it depends a little bit on the area. So once again, we are operating all the continents and we have thousands of customers, so it's difficult to make one summary. But I would say that, the customers who are now worried about their cash flow are reacting on mill improvement projects quickly, because that's maybe the quickest way for them to reduce their cash outflow. And if they have that kind of improvement projects which are not 100% necessary to be executed now, then they delay their decision making.
All right, makes sense. And then one question on the cash flow. And I mean, you refer to the project payment schedules as one part of kind of what is driving the working capital to be negative. Is this kind of, in your view, a normal project business type of a phenomenon, or is there something related to, I mean you have talked about profitability issues in some of the key projects, so are these also impacting the cash flows or how should we think about and when should we kind of expect improving cash conversion from you?
If I start from the overall situation, our projects are cash flow positive. And that's our operational model. And it was still highly on the positive side, even if it's lower than what it was, for example, at year end. But nothing has really changed. So no changes in the contract terms. There are lots of variations between the quarters. So when we talk about these payment schedules, they are reflected on the time. So that's normal. Nothing special there.
So it's just a kind of cyclical kind of the project cycle and no issues at all. And then perhaps at some point, we should see a reversal or?
Well, it kind of goes with the capital orders. So those can fluctuate quite a lot between the quarters. But I think that when we look at the networking capital as total, of course, the other focus point is the inventory level. So they have been elevating. We have been discussing about it quite a lot. And we have to now check carefully that is there some levels which we can bring down and where do we still face the component availability. Because of course, we want to make sure that we can still deliver.
Okay. What do you expect for the second half? I guess based on the backlog the growth is maybe slowing down a little bit on the sales side. So is it too early to expect a big improvement on the second half?
I think that if you're referring to the networking capital, of course, it's very highly on our management agenda that I can say one part of course is the inventory, but when it comes to these capital projects and their timing, so that is cyclical and it can cause a fluctuation into the networking capital.
Okay, thank you all for me.
The next question comes from Sven Weyer from UBS. Please go ahead.
Yes, good afternoon and thanks for taking my questions. Firstly, I also wanted to follow up on the service order intake, because I guess if we look at the situation sequentially, it looks a little bit more drastic than just the year on year comparison. I know there's been a big ticket in Q1, there's a bit of seasonality in Q2, but it still seems like a more abrupt change on behalf of your customers, maybe also reflecting their poorer situation that they have in Q1 and Q2.
I was just wondering; do you think that's a kind of a new run rate in the service order intake from here? And have you also been seeing kind of a destocking in Q2 that has maybe made these service orders overshoot to the downside?
Yes. I don't see that it's drastic and it's good that you remind it that in Q1 we had an extraordinary order intake and that's not a comparison. Then in a normal year, like we have been saying earlier, one should remember that in a normal year 55% of the order intake happens in the first half of the year, 45% in the second half of the year. So that has been the normal phenomenon before the COVID times. And now we are maybe more in a normal situation. And then it's true that customers pay attention to the safety of the environment. are most probably de-stocking as well.
So when the delivery times were very long, then we said that part of the order intake is active because customers have to react to the longer delivery times. And now when our delivery times and all the transportation times are getting more back to the normal, then I'm sure that they are also making actions to reduce their inventory levels. And that has of course impact to our services order intake.
But I don't see any drastic change in the customers' behavior. So when they produce with the machinery, then they need to buy spares, they need to buy consumables, they need to continue to maintain the machines. Our customers are still financially strong. They still all believe in the future of the industry. So even if there's now downturn, short downturn in their demand and pricing, then I haven't heard anybody saying that they wouldn't have a big belief in long-term in the industry. And this means then, of course, that the services market will continue. But now that kind of fluctuates.
Yes. And I think you said in the Q1 call, if I remember correctly, you already said that, consumable demand might go down, but on the other hand, you might have more revenues from maintenance shutdowns. And we saw the guidance’s of your customers, right? That there is also maintenance shutdowns in the second half. So is that still your kind of best guidance that there is this kind of balancing out of the two?
Yes, yes. And then maybe where I was not quite sure, not correct is that of course the maintenance shutdowns are happening, but then maybe some of the customers are postponing some of the improvement projects which are not 100% necessary if they want to manage their cash flows. And that's maybe something I didn't think of carefully enough before the conf call after the first quarter.
Okay, fair enough. Thank you. And the second question I just had was on the, when I take your backlog guidance, the 50% remainder of the year, same last year, that's I think suggesting $200 million lower sales than last year, if I did it correctly. So does it mean you have to make any kind of short-term layoffs to deal with that, or how should we look at the overall volume in the second half?
Sven, we are not giving any other guidance that increases the net sales. I think one guidance is that there is now less capital business in the backlog than a year ago. And then about the layoffs, we have been building the business structure such that we have good flexibility in the organization. So currently we don't need any extra layers, but then all the time we have situations that can be that in one specific location we don't have enough work. And especially in Finland it's very easy to lay off temporary people and then people will get back immediately when we have workload back on the normal levels. And that's in a way normal capacity management what we do every year.
Clear. Last question I had was just on the other line, which picked up to minus 17 in the quarter. Is that kind of a Q2 seasonality here because we had the same swing Q2 last year something to keep in mind on that?
When we look at, okay, the Q2 was 17 million and yet to date we are at minus 26. And of course, if you compare it to last year's 39 million, so it has been cost heavy beginning of the year, we estimate that it will be approximately somewhere between 45 million to 50 million.
Okay. Thank you.
The next question comes from Panu Laitinmaki from Danske Bank. Please go ahead.
Hi, thank you. I have three questions. Firstly, on the revised market outlook for board and paper, I mean, how big is this change? And just wondering about the magnitude of the change you see in the market, because if I look at your market outlook, you have had good outlook for this business for quite a long time. And it was in 2016, the last time you expected it to be satisfactory. At that time you had 700 million run rate in the orders and now about 1.2. So is this the kind of level you should expect it to land now? Or any thoughts on what this means?
No, we are not giving guidance on order intake on business lines. But 2016, the market has been active and very active. We are used to the levels where the order intake is at a totally different level than in 2016, when we didn't actually believe that the order intake will go over one billion. Like you have noticed, the record has been 1.6 billion. And then in 2016, we didn't even dream of that kind of volumes. Now, of course, after the good years, our expectation level and your expectation level have changed. So one should not compare these two words, satisfactory 2016, with today's word satisfactory.
Okay. Thank you. Then on the services, margin, I mean, can you comment on what do you expect in the coming quarters given that the orders came down? So maybe revenue will follow and then you probably had quite good pricing impact year-on-year and you started to have that later last year. So basically, do you expect margin to improve going forward?
It is difficult, you can take it.
I can start and then you can continue. Of course, we are not guiding the margin going forward, but you are right, it has been developing. So it was now 16.8. And if you compare it to last year's 14.8, of course there has been good development. Volume has been supporting it, so we have more net sales. And it's also good to remember what was the situation last year. So the profitability for services segment was below 10 on the first quarter, and second quarter was a little bit over 14. So price increases have been done.
And of course, we continue to work on the profit improvement. So Valmet's target is still to get between 12 to 14 and we continue to work on profitability of all the businesses, including services.
Thank you. My final question is on process technologies. And let's say propane projects in that business. The margin was similar in Q2 compared to Q1. So basically the question is that, do you have any kind of new issues there? Or is it still the same projects impacted by inflation? Or what is kind of behind the margin level we saw?
It's the same issue.
Okay. Thank you.
The next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead.
Hi, it's Johan here at Kepler Cheuvreux. Just a question on the M&A, I mean, you gave us some profitability numbers for the businesses you're acquiring. Are you targeting that these will be supportive of your 12% to 14% EBITDA margin target? And then when would that be?
We are – look. Yes, we are targeting that they are supporting our targets, but then of course we will not in the future comment their profitability separately and they will be integrated into our organization. So it will be part of the process technology services and automation profitability numbers. But of course, the target is that, if we buy something, then it's also supporting us in the long run to achieve our profitability targets.
Good. And obviously you are buying these right now when the interest rates are going up and then this will impact your debt quite significantly. Can you indicate anything about what sort of interest rates you're expecting to finance these acquisitions with?
We cannot give any kind of more detailed information regarding that. But at the end of second quarter, the average interest rate was 3.6%.
Thanks. Okay. And then finally coming back to services a little bit, we've seen now the orders trending well above revenues for some time, which is a bit unusual for services which typically has shorter delivery times. Will there be a sort of a catch-up now coming on the revenue side from the services?
So we have had long delivery times in services as well. From that perspective, it's good that for a while we will have higher net sales than order intake. Like I was referring earlier to the normal year before COVID, then it was so that net order intake was 45% -- 55% in the first half of the year and 45% in the second. Then the revenue typically goes the other way around. So first half 45% and the latter half 55%. So that's a typical year.
Okay.
And you haven't seen any order cancellations irrespective of if it's in services, or the project businesses, et cetera.
Excellent. Thank you very much.
The next question comes from Tomi Railo from DNB. Please go ahead.
Hello. Tomi here from DNB. Also on services, I hear you saying that the downgrade, you had a chat if it was good or satisfactory or kept good. It's a combination of customer activity and capacity utilization. How should we read 430 level going into the second half? Is it better to assume that the customer activity drags down that 430 or should 430 be a bottom level?
I have difficulties to follow that. What was it? 430. 430, okay, okay, okay. So, you mean now that, what's the order intake, against this 430 which was the second quarter order intake level. So like said, in the beginning of the year, usually we get 55% and the latter part 45%. Then does it happen every year? No. And then are we giving guidance based on one quarter order intake and what happens to the next one? Maybe not.
We work hard -- no, let's start from the other angle. So, like, we all remember, last year we had a lot of challenges. So there was COVID and different kinds of supply chain challenges and logistic challenges. And we had a war start in Ukraine and we had also a fire in Rautpohja. So now all that kind of extra hassle is away and we can focus on managing the business.
So, of course, now I'm sure that Aker and all the area heads are focusing a lot now in managing the order intake and services. So that's the key focus on top of, of course, winning capital cases and on focusing on networking capital reduction and cost competitiveness actions.
So -- but we have now very well management capacity available to focus on order intake. And that's where services and area management will focus the latter part of the year.
Thank you. And the second question, just on the capital pipeline. You talk about delays in decision making. Has the pipeline as such changed in terms of the number of potential projects values, or is it just a function of the delay decision making?
In the pulp side, it actually has been the same. We were also expecting lower activity level for this year. The bigger projects will be starting to develop maybe more in 2024.
And then in the pulp or port side, there have been a couple of cancellations -- public cancellations, at least one cancellation of one big project in Europe. Otherwise, they are postponements. So customers are now thinking about interest rates, demand development, and their own cash flow situations, and own balance sheet, and then estimating and thinking when to go ahead with the investments. But I'm aware of only one cancellation of a project that's now in our sales pipeline.
Thank you.
The next question comes from Antti Kansanen from SEB. Please go ahead.
Yes, hi. I just wanted to follow-up on the Körber acquisitions. Could you maybe talk a little bit more, kind of, what is the biggest opportunity that you Valmet can make to this business? I mean, from a technology point of view, it looks like a separate technology from tissue machines and then to converting. Is there a benefit of you making both machines? Is there a benefit for the client that you sell both of those machines? Like where can you actually move the needle with this business?
So the machines are different and then the positive thing, no. One difference is that the projects what we will be selling there are small compared to our machines. So even if the picture looks a little bit different, but you can buy a converting line from 3 million to 7 million. So the risk level is different in converting business. So it's a more normal machinery business compared to our big machinery business.
Technology-wise, we see that there is improvement potential in the operational efficiency of converting lines. So converting lines are not running very effectively currently, and we see that there is an opportunity that the ones who make the jumbo reels, so we have the jumbo reel technology and data, and if we use that technology to optimize the jumbo reel for the converting and the data to optimize the converting line performance, the operational efficiency in converting lines can be increased.
Then the combination will have a lot more frequent customer contacts. So the converting lines are there all the time developing the offering for customers. So they have frequent contact with the customers and the machine supplier doesn't have the same. So we actually get a lot more intimacy with our customer base once we have concluded the acquisition.
And then from the client's perspective, we can offer the whole solution if somebody is building a new plant, including tissue machine and converting line, we are then the only Western supplier who can supply the whole package to them.
Okay. And just to make sure, kind of from competition or market share perspective, are these kind of two different markets, the machine market where you are operating and the converter market that you are buying, that there shouldn't be any major concern?
They are different markets.
Okay. And maybe lastly on Körber tissue, is there kind of we know the geographical split, but is there something you can add or are they underrepresented in some of the market areas where you are strong or anything like that?
We both have possibility to strengthen ourselves in Asia-Pacific.
All right. Sounds good. Thank you.
Thanks.
The next question comes from Tom Skogman from Carnegie. Please go ahead.
Yes, hello. This is Tom Skogman from Carnegie. I wonder about pricing when you have a more uncertain market. My understanding is that pricing has improved a lot since, let's say, seven or eight years back in board and pulp. Are you prepared to use pricing now in order to secure orders in a more uncertain market? Or will you be really stubborn and hold on to your but include sales margin in new orders?
In Process Technology, we'll continue with the same policy. We don't see any reason to be more flexible in Process Technology.
Okay. And then I wonder about automation systems and the order outlook. When you now have lowered the outlook for pulp and paper, is it kind of just a question of time before you weaken automation as well as such a large share goes to your own project and they come at the later stage in the project?
Currently, we haven't seen it. So 30% of the system business is coming from non-pulp and paper customers. And then our organization has been developing new products to pulp and paper customers. We are introducing new products all the time. We have good customer contacts. We have good planning together with customers how to keep our systems up to date. So currently we don't see that kind of phenomenon.
But just to get more exact data, how large share of automation system sales goes to your own new equipment kind of projects?
It's between 10% to 20% on a yearly basis. And like you have seen, this year order intake in paper machines have been dropping already. So it hasn't been that active and it has been earlier in some years.
And then finally about the pulp project sales funnel. Is there more than one project in the funnel for next year, so we don't end up in a situation where competition as I know this is horrible for if it's just one huge project? Are there more than one?
Timing-wise, I can't say when the decisions are coming, but there are several in development phase.
Okay. Thank you.
[Operator Instructions] The next question comes from Mikael Doepel from Nordea. Please go ahead.
Thank you. Just a quick follow-up there on Tom's question about the pricing versus uncertain market. You talked about Process Technologies there, but how about the rest of the business, for example the service business or any other segments? Do you see price pressure there?
We see price pressure there all the time, and I think I've been all the time already earlier saying that markets are getting more normal. There were times when it was easy to easy. We were delayed, but it was more easy to increase the prices, and now we are in a normal market situation, so we have to make sure that we improve our cost competitiveness all the time to continue to improve the profitability.
So Valmet's target is to get between 12 to 14, and we can't get there if businesses are not continuing to improve their profitability. So in a normal market, I'm that old, but in a normal market, in my mind, there is interest rate, and there is inflation and there is competition.
Got it. That's clear. Thank you.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you then for the lively discussion and Q3 results will be published on the October 25. So until then, I wish everybody a really nice summer. Thank you.
And you wish very long summer. Good, thank you.
Thank you.