Valmet (VALMT.HE), a leading developer and supplier of technologies, automation, and services for the pulp, paper, and energy industries, reported that its second-quarter orders remained stable at EUR 1.3 billion, matching the previous year's level.
However, net sales saw a 7% decline from the comparative quarter, totaling approximately EUR 1.3 billion. The company's comparable EBITDA for the quarter decreased to EUR 141 million, resulting in a margin of 10.6%.
Valmet also announced a strategic shift to expand its non-pulp and paper businesses, which currently represent about EUR 1.4 billion of the company's overall business. The company has updated its mission statement, aiming to become a global champion in customer service and industry advancement.
Key Takeaways
- Valmet's Q2 order intake remained constant at EUR 1.3 billion, with a 15% growth in the Services segment and a 4% increase in the Automation segment.
- Net sales for Q2 declined by 7% to EUR 1.3 billion, while the full-year net sales also decreased by 7% to EUR 2.5 billion.
- Comparable EBITDA for the quarter was EUR 141 million, a margin of 10.6%, and for the full year was EUR 262 million, a margin of 10.3%.
- The company's market share in Pulp Equipment has recovered to a 50/50 split with competitors after a previous drop to 30%.
- Valmet revised its short-term market outlook from weak to satisfactory and upgraded its guidance for net sales and comparable EBITDA.
- A new CEO, Thomas Hinnerskov, will take the helm on August 12th, succeeding Pasi Laine.
Company Outlook
- Valmet expects improvements in the second half of the year, driven by increased market activity and the positive impact of API integration.
- The company's strategy focuses on continuous improvement and becoming a global champion in serving its customers.
- Valmet revised its short-term market outlook to satisfactory and anticipates net sales to remain at the previous year's level with an increase in comparable EBITDA.
Bearish Highlights
- The company's net profit was impacted by EUR 41 million due to the integration of API.
- There were capacity limitations and a learning curve with the transition to new systems.
- The Process Technology segment saw a decrease in order intake compared to the previous year.
Bullish Highlights
- Valmet reported good order intake across all segments and market areas.
- The company's competitive situation in the pulp market has improved, and it is prepared to take on full-wheel supply projects in Brazil.
- Positive industry sentiment and investments in new machines are seen as crucial for success.
Misses
- Adjusted earnings per share for the quarter were down 28% at EUR 0.43.
- Full-year order intake decreased by 17% to EUR 2.3 billion.
- The Process Technologies segment's order intake was EUR 434 million.
Q&A Highlights
- Valmet is working on optimizing inventory levels as part of its stable business model.
- Around 70% of bookings are considered stable business, which ties up more capital.
- The service sales mix is expected to remain stable in the second half of the year.
Valmet is navigating a challenging market with a focus on strategic growth and operational efficiency. The company's stable order intake amidst declining net sales and profits reflects resilience in its business model. With a strategic shift towards non-pulp and paper businesses and the upcoming leadership transition, Valmet is positioning itself for future growth and success in serving its customers worldwide. The next result webcast will take place on October 30th, where further updates on the company's performance and outlook will be provided.
Full transcript - None (VOYJF) Q2 2024:
Pekka Rouhiainen: Good afternoon, ladies and gentlemen, and welcome to Valmet's Second Quarter 2024 Result Publication and Webcast. My name is Pekka Rouhiainen, I'm the Head of Investor Relations here at Valmet. With me today are Valmet's President and CEO Pasi Laine; and CFO, Katri Hokkanen. After the presentations, as usual, you will have the chance to ask questions over the phone lines. But without further ado, Pasi, please go ahead.
Pasi Laine: Thank you, Pekka. Welcome. So our headline is that orders received remained at previous year's level and amounted close to 1.3 billion and comparable EBITDA decreased to 141 million in the second quarter. So the content is like normal. So first, quarter two in brief, then some words about development of segments and business lines. Then one slide about our strategic path forward, then Katri will come to talk more about financial development. And then, I'll join again here talking about guidance and short-term market outlook. So first, quarter two in brief. Like I said, orders received remained at previous year's level and amounted close to 1.3 billion. I will go through the business line segments later on, but we are very happy with this 1.3 billion order intake. Net sale was at almost at the same level, about CHF 1.3 billion. Our backlog, I'll come back, was EUR 3. 8 billion, and comparable EBITDA decreased EUR 141 million and margin was 10.6% and gearing in the end of the period was 45%. Orders received were such that, in Services in quarter, orders received was 497, and that's a good number. So, we had very good order intake. If I remember correctly, order intake in Services grew by 15% compared to earlier year. In Automation segment, quarterly order intake was EUR 352 million. There, if I again remember correctly, we had 4% growth. In Process Technology, comparing to last year, order intake decreased, but EUR 434 million order intake is good amount comparing to how the year started in quarter one. So, we are happy with the orders received development in quarter two. Net sales, Katri will go through more in details. And then, comparable EBITDA in Services, we have at EUR 80 million roughly at last year's level, in Automation, EUR 58 million, and then there is a decline in Process Technologies to 15%. Here's the graph how Valamet has been developing over the last 10 years. Now our EBITDA margin is at 11.2%, cumulative for LTM. Like we have been saying, of course, the target is to get between 12% to 14% as soon as possible. Orders received, like we said, was at last year's level and if we take H1 and think about the areas, then Europe was 43%, North America 26%, so both were active, China, Asia Pacific, and South America, traditionally, are about 10% each and now Asia Pacific was more active than normal, so amounted to 15% of order intake in the first half of the year. Stable business. So, this is the story we have been saying over the years and we started our services with order intake about EUR 1.055 billion. Now our LTM is EUR 1.777 billion, so good development. In Automation segment, we didn't have it in the beginning and now the order intake in Automation segment for last 12 months is almost EUR 1.3 billion. So, all this together is about EUR 3.1 billion and this is, of course, good development that has been taking place in Valmet over the years. Stable business represents now 69% of the order intake, thinking about last 12 months. So, it's of course, majority of the business is now coming from our stable business. Then some words about the backlog. So, backlog is decreasing, it's now at EUR 3.8 billion. Now I think it starts to be at a good level. So, when our backlog was at EUR 4.4 billion, then our delivery times for many of the products were too long. Then, of course, long-term customers' perspective and then also from long-term our perspective, so the longer the lead times are, the more difficult it is to prepare oneself, for example, inflation or some very rapid developments like the war which was started by Russia against Ukraine. So, now this EUR 3.8 billion gives customers good delivery times and also from risk management point of view it's better for us. From current backlog about 60%, we are expecting to be materialized as net sales during '24. Last year, the corresponding percentage was 50%. This means that we have now calculated it out at about. We have about EUR 70 million now more backlog to be realized this year comparing to last year, so roughly 70% -- EUR 70 million and about 50% of the backlog is related to stable business last year, about 40% was related to stable business. Then some words about the segments and business lines. So, first, Services. So, in the beginning of the year, order intake grew a little bit compared to last year. So, this year EUR 1.024 billion and last year EUR 1.007 billion and we are very happy with the development of our last quarter and attributable to more quarterly. But I told it already EUR 498 million in order intake. So, that's good development. Net sales has been growing a little bit as well and EBITA is now about last year's level, EUR 140 million comparing last year to EUR 142 million, and so roughly at the same level in euros, down a little bit for the month of March. Automation segment figures for first half of the year were decreasing and like I said in last quarter, it was increasing, but we had very strong start for '23 and that's the reason why we still have a situation compared in the first half of the year, orders have been decreasing in Automation. I'll come back to business line-specific topics later. The first half, EUR 681 million and last year EUR 732 million in last year and last year we had very strong first half -- first quarter of the year. Profitability is roughly at the same level, EUR 110 million last year and EUR 109 million this year. Then Flow Controls business line. Orders received were EUR 389 million in the first half of the year. First half of the year and last year a little bit higher. The change is coming mainly from Pulp & Paper big projects. Although that market hasn't been active earlier like we have seen in our Process Technology order intake. So, mainly, the change is coming from that segment. We have good activity in MRO business and services, which is very important from many perspectives. So, we are selling smaller amount of valves to customers who already have installed base and doing services. That business is doing reasonably well in Flow Control. So, we are happy with the development of Flow Controls. Like we see, net sales and order intake are at par, so current business level continues and of course, the target is to grow the business every year. Of course, Valmet has a target to grow this year as well in order intake. In Automation System business, we had very strong quarter one last year. This year, we had a good quarter two. So, the activity is increasing. But the first half of the year, last year was EUR 304 million, this year EUR 291 million, so small decrease. We have good development in Services & Energy process. And then the market which is not very active is the package sales together with Process Technologies. They'll mainly coming from that. The acquisition of Analyzer Products is now -- was completed 2nd of April. We have about EUR 22 million orders here in quarterly numbers from API in our numbers. Then Process Technology, first quarter last year, sorry, first quarter this year, our order intake was EUR 195 million. Now it bounced back to good levels at EUR 434 million. So, good activity in Process Technology for the quarter. Profitability has been declining. So, last year, our profitability was EUR 59 million and now it was EUR 36 million. So, LTM is now at 4%. Last year, total year was at 4.5%. Pulp & Energy business line, so orders received increased from the 2004 (ph) from the Q1 when order intake was EUR 57 million and now it was EUR 187 million, so clear improvement in market in Pulp & Energy business line and the same has happened in Paper business line. So, orders received for the first quarter were EUR 138 million and now it was EUR 247 million. So, we are back at the normal order intake volumes in both in Pulp & Energy and Paper business line. Now then some words about the strategy. So, of course, we have been working on our strategy process in very active way in the springtime and we have been also telling to investors, to all of you that there is a little bit change in the business scope of Valmet. So earlier we were mainly pulp and paper and bioenergy-focused company. And now, like we presented last time, about 1.4 billion of our businesses coming from non-pulp and paper businesses and this has to be reflected also in our mission statement. And that's why we have now developed our mission statement. In mission statement, we continue to say we create sustainable results by converting renewable resources. So the same story continues. So with pharmaceutical technology, our customers can take renewable resources in and make sustainable products. And then for other industries where flow controls automation systems are mainly active, we say that we make industrial processes reliable and efficient. That's exactly the role of automation. So making processes reliable, safe, efficient, reducing emissions. And that's the mission of our automation segment for non-pulp and paper customers. So Process Energy customers. We are very happy with that definition. And we are also happy that over the years Valmet has developed that much, that we are not only depending on pulp and paper business, we have also other businesses. So it's the same kind of big change that has taken place in our staple business. So it was EUR 1 billion to EUR 3.1 billion and this non-pulp and paper we have been growing from 200 billion to 1.4 billion. And of course, the development continues in the future as well. We haven't done any other changes. So strategy continues to be the same, continuous improvement, the renewal continues to be the same as early and the vision as well to become the global champion serving our customers and in moving the industries forward. So small addition, but very important change in our mission statement and we are very happy with that change. So now I will let Katri to continue the presentation.
Katri Hokkanen: Thank you, Pasi. Hello, everybody, on my behalf as well. I will walk through the financial development next. Here, you can see the key figures after the second quarter. So, order intake was EUR 1.3 billion and roughly on the same level than the comparison quarter. Order backlog amounted to EUR 3.8 billion and net sales was EUR 1.3 billion and that was 7% lower than the comparison quarter. Comparable EBITA was EUR 141 million or 10.6% for the quarter, and here the lower volume in net sales was impacting the comparable EBITA. Adjusted earnings per share for the quarter was EUR 0.43 and that was 28% lower and here the lower results as well as higher financial expenses were the reason. For the full-year numbers, quickly, order intake 2.3 billion so that is 17% lower than last year. Net sales was 2.5 billion and that is also 7% lower and then comparable EBITDA 262 or 10.3% and I will come back to the other balance sheet numbers a bit later in my presentation. Moving then onto the Services starting from the order intake. So that was 497 million for the quarter and that was 15% higher than the comparison quarter. And here orders received from Tissue Converting, which was integrated into Valmet at the beginning of November last year amounted to 38 million. So actually without tissue converting the increase was 7%. Net sales remained at the previous year's level being at 473 million and here Tissue Converting and that was 38 million. Comparable EBITDA remained at previous year's level being at 80 million and the margin decreased to 16.9% and here the organic net sales decrease had a negative impact on the comparable EBITDA margin. The next Automation, their order intake remained at the previous year's level being at 352 million. And in Automation Systems, orders received increased in automation services and decreased in capital, and orders received from the acquired API business amounted to 22 million in the second quarter. And good to note here that the comparison quarter last year included a large single order in flow control. Net sales remained at the previous level and it was 351,000,000 and here the API impact was 19 million in the second quarter. Comparable EBITA remained at previous year's level and it was 58 million and the margin was 16.5% and the margin decreased mainly due to integration of this API business. Lastly some words about Process Technologies. Pasi mentioned already the order intake so it was 434 million and good improvements in the first quarter. Our net sales was 500 million and here we had this you Tissue Converting 41 million and forgot to mention that in the bookings it was 42 million. Then comparable EBITDA amounted to 15 million and the margin was 3% and comparable EBITDA was impacted by lower volume. Then we have a traditional summary slide from the segments and here I want to highlight the other segments. So it was 12 million for the quarter and for full year 23 million. Comparable gross profit was 27.8% of the net sales in the second quarter and here stable business represented 62% of the net sales and when you look at the last 12 months' curve so we were now at 27.1% in comparable gross profit. Then it has been developing well over the years. On comparable SG&A. The expenses were 27 million higher in the second quarter and that was coming from the acquired Tissue Converting and Analyzer Products and integration mainly and when you look at the SG&A chart so for the last 12 months we were now at 942 million level and actually the increase compared to year end 901 million is mainly related to previously mentioned Tissue Converting as well as API. Then cash flow was strong provided from operating activities amounted to 128 million in the second quarter. As said very strong and for the last 12 months we were at 447 million and net working capital amounted to 150 million and that equals 3% of the last 12 months orders received. And if we compare to year 2021, our net working capital has increased mainly in capital business and also due to the integration of Flow Control and Tissue Converting and nowadays, our business mix contains much more stable business, which typically ties up much more net working capital than capital business. Net debt increased. If we compare it against the first quarter, it was EUR 1.1 billion and gearing amounted to 45%. The increase in the net debt and gearing compared to first quarter is mainly related to dividend payment as well as the acquisition of API. Net debt-to-EBITDA ratio increased. Also compared with the first quarter, it was 1.63 and the average interest rate of our total debt was 4.5% at the end of the second quarter, and net financial expenses amounted to EUR 32 million after the first half and the comparison number last year was EUR 12 million. Capital employed was close to EUR 4.2 billion and comparable return on capital employed 14%, and the acquisitions, Analyzer Products and integration this year, Tissue Converting last year, and then Flow Control in 2022 have increased the capital employed. Second quarter, last 12 months adjusted EPS decreased if we compare it with 2023 being at EUR 2.02 and this was mainly due to lower EBITA and higher financial expenses. That was my part. So, I will give the floor back to Pasi. Thank you.
Pasi Laine: Thank you, Katri. Now, guidance and short-term market outlook. So, if I start from the short-term market outlook, in this year, we keep the satisfactory level. It was satisfactory and it continues to be more than paid, but we are increasing now to satisfactory, from weak to satisfactory. So, earlier, we were saying that the market is weak even if we have satisfactory workload and now we have order intake has been increasing, and we also have market activity in front of us, so that we have good reasons to say that the market activity is at satisfactory level. In Energy, it goes from good level to satisfactory. The European market is less active than it was a year ago and that's why we are reducing it. In Pulp, like you saw, order intake has been improving in Pulp side and the market outlook also for coming product is more active, and that's the reason why we are increasing our short-term market outlook from weak to satisfactory. In Automation Systems, we have been keeping the good level. It continues to be at a good level. We, of course, have to remember as well that last year, we had not that active third quarter in Automation and now we see that we are, of course, not guiding any quarterly numbers, but we see that the market activity for coming end of the year is at a good level this year compared even with last year. In Flow Controls, we have good market activity. Like I said, MRO business services is active. Project hasn't been in Pulp & Paper that much active, but everything else is going on the active And there, it might be good to compare with the third and fourth quarter of last year when we were saying that our workload is still good, but the market activity is satisfactory. And now we say that the market activity is good and workload is good. And this is, of course, a big change in our market situation. And this is the reason -- these are the reasons why we made a proper positive change to our guidance. So we estimate for the whole year that net sales will remain at the previous year's level in comparison with ‘23 and comparable EBITDA in ‘24 will increase in comparison with ‘23. Good. Now I'll let Pekka to say few words.
Pekka Rouhiainen: Thank you, Pasi. So now it's time to go to the Q&A, and I also invite Katri to join Pasi here to the front. So if you are ready for the -- from that part, I will now hand over to the operator, please.
Operator: [Operator Instructions] The next question comes from Sven Weier from UBS. Please go ahead.
Sven Weier: Yeah, good afternoon. Thanks for taking my questions. The first one is just on the outlook change, right? I mean, you obviously just upgraded it back to good after sorry -- to satisfactory after one week quarter. I mean, looking a little bit ahead, if you look at the current Pulp and Paper results and if we think more about maybe bigger capacity projects, would it be fair to say that it will probably take more than one quarter until the outlook goes back to good? That's the first one.
Pasi Laine: No. Now we are, of course, guiding for coming 6 months and there we say that it's at a satisfactory level and we have seen now more activity, customers buying single island projects where we are competitive. So that's why we have now. And we have had also better order intake in quarter two, and we have good visibility for coming quarters. And then for the activity to go to the good level, I would say that in pulp, it means that the big project pipeline should become even more active. And then in paper and board, it should mean that paper and board market should be even more active than it is today.
Sven Weier: Yeah, that makes sense. Thank you. That was the first one. And the second one, I was just wondering, I understand obviously Process Technology EBIT margin was down because of the negative sales development. I was just wondering where you stand on those legacy projects that were lower margin. Has that been largely completed in the meantime? Is that maybe also a reason why you became a bit more upbeat about the guidance that you think you're done on these and you have a better margin in the second half?
Katri Hokkanen: We haven't been kind of commenting the old projects, but what we said about the margin that, of course, net sales has an impact, but we have also been now closing some of old projects and smaller ones, and that has also impacted the margin this year, this quarter.
Pasi Laine: This quarter.
Katri Hokkanen: Sorry, yes, this quarter.
Sven Weier: Which leads me to the next question because I was wondering because you also talked about the first-time integration of API, how that diluted margins, whether maybe also some what you would normally call one-off costs that were not really adjusted in the comparable EBITDA, but were maybe more one-off in nature?
Katri Hokkanen: I can comment kind of in general the Automation segment profitability or the comparable EBITDA. It was flat, but the margin decreased. We also said that this integration of API impacted the margin and we have also published in the interim report that, its impact to Valmet's net profit was minus EUR 41 million. So, it was impacting that.
Sven Weier: But that was the integration cost that you do, however.
Pasi Laine: No, integration cost, you would book under comparable but the organization was using all the Siemens systems until 1st of April and then they had to change to all Valmet systems, so meaning ERP. We had full ERP rollout, we had full HR system rollout. We had all the systems rolled out in that organization and it takes a while before they are effective with all those tools, and at the same time, they had some capacity limitations in some of their units. I would say, more that it's a normal situation having that kind of so big change happening in an organization in so short period of time.
Sven Weier: Maybe one final remark from my side, Pasi. Just wanted to congratulate you on a great career and your achievements also at Valmet in the last 10 years. That's been great and I'm wishing you all the best for the next chapter. Thanks for everything.
Pasi Laine: Thank you. I'll talk to a little bit longer answer at the end.
Sven Weier: Thanks, Pasi.
Operator: The next question comes from Panu Laitinmaki from Danske Bank. Please go ahead.
Panu Laitinmaki: Thank you. I have two questions. Firstly, on the guidance and the implied second-half improvement. I mean, you had both revenue and EBITDA down in the first half year-on-year, but then you are guiding flat sales and higher EBITDA for the year. So, it implies a clear improvement in second half. The question is that, what is driving this and how does this split into different divisions? So, are they all going to improve or some of them more than the others? Any comments on that?
Pasi Laine: I can start and then Katri will give the correct answer. So, if we start from Services, we had very low order intake in Services last year, especially in the third quarter and also fourth quarter. And then, we had still high backlog and we had long delivery times and the market was, like you maybe well remember, was quite challenging and now we don't see that kind of situation. We have good market activity. Our delivery times are short in Services. So, based on that market activity and delivery capability, we estimate that our performance in services is better than a year ago. And the same applies in Automation segment. And there, of course, we have also the impact of API in the grades. And so now we have had it for one quarter with all the challenges, I explained. And then in coming quarters, we will have the full positive impact of API coming in the picture as well. In Process Technology, the revenue recognition from new projects is not that big anymore for the year but it has, of course, impact to EBITDA from the workload perspective and then also from margin perspective. Katri, do you want to add?
Katri Hokkanen: And maybe just to add kind of to the net sales. Pasi mentioned also in his presentation that we have now EUR70 million more in the backlog to be recognized this year. And the delivery times are now back in pre-COVID levels. So, of course, those are also important drivers together with the market activity.
Panu Laitinmaki: Thank you. The second question is still on the Process Technologies margin. I mean, I get the comment that revenue was down year-on-year, but it was similar to Q1 sequentially. So like was there something like one off negative in the Process Technologies margin in Q2? And what's your kind of thought of how soon could you return back to 6%, which I believe is the kind of target?
Pasi Laine: So like Katri said, we were closing some projects, So I wanted to close some projects now.
Katri Hokkanen: Yeah. So Pasi has been very active and of course, that was good for us. But they were smaller ones.
Panu Laitinmaki: Okay. Thank you.
Operator: The next question comes from Antti Kansanen from SEB. Please go ahead.
Antti Kansanen: Hi, it's Antti from SEB. Thanks for taking my questions. I'll start with a comment on delivery times. And if you look at kind of single islands in pulp and then your paperboard and tissue machines, kind of the demand that you are facing right now, what are actually the delivery times? What I'm trying to kind of understand is the level of ‘25 sales. So is it still like Q1 and Q2 orders next year that would impact the full year revenues in ‘25?
Pasi Laine: Of course, it will impact. But if I start from the delivery time, so at the longest, I think we started to be at 3 years delivery times in port machines, which was way too long. And now the delivery time would be under 2 years. So now we would be having that kind of delivery time with the customer needs in any case for its construction work and everything else. So now we are packing at normal delivery times. The same applies to Pulp and Energy, Single Island deliveries, where typically the construction works takes 2 years when the groundwork starts. And then I don't remember now, but we haven't -- you can of course calculate actually it from our backlog. We have been telling that how much is related to Process Technology backlog. And from that, you can actually calculate how much typically we recognize revenue from the projects, which we booked during the year in Process Technology. I think we haven't published that number but now, of course, when the delivery times are short, we can recognize more revenue from the new coming orders, and in the situation that we are actually selling capacity, which will be free in a year.
Antti Kansanen: Yes. What I'm trying to maybe better understand from next year's perspective is that, obviously, the existing backlog for '25 and beyond is quite a lot slimmer than it was, for example, a year ago. If we just look at PET, I mean, you have grown the business, you have made acquisitions and there are quite a lot of more personnel in there. So, is kind of the activity level that you are seeing in the marketplace sufficient to have let’s say a satisfactory workload in '25 or, do we kind of need to see a further acceleration to kind of be in the clear for next year's earnings?
Pasi Laine: We have been reporting this capacity cost and we are, of course, managing that capacity cost all the time and like we have this year done already some actions in Pulp & Energy, and then, of course, if needed, there will be further actions but all-in-all, we have tried to be very careful, especially in a Process Technology's capacity cost. If there is too much capacity cost or if there is a possibility after the acquisitions to make the footprint even more effective, then of course, we'll do it.
Katri Hokkanen: And if I may add what we also discussed after the first quarter call that procurement savings, of course, is a very important topic for us. And we then said that we have actually been having a good start on that. Of course, we work in many fronts.
Antti Kansanen: And I guess also kind of the backlog margin for delivery is better given the impact from legacy projects but I don't know if you want to quantify anything on that front.
Pasi Laine: You guessed correctly.
Antti Kansanen: Yes, I thought so. All right, thank you.
Operator: The next question comes from Mikael Doepel from Nordea. Please go ahead.
Mikael Doepel: Yes. Thank you and good afternoon everybody. I have just a couple of quick questions. Following on the earlier one regarding the delivery times, I was wondering if you could talk a bit about that also in terms of Automation segment as well as the Service business. What is the lead time now from orders to sales in those segments?
Pasi Laine: So, in Automation segment, first, while typically if you sell a project, then the project delivery time goes together with the Process Technology order or delivery time. So, customers are ordering them well in advance, or it can be that delivery time is one year or even longer. In Services, the delivery time can be some weeks and then typically, if customers buying maintenance and repair operations valves were, let's say, 3, 4, 5, 7 valves, 10 valves, then the delivery time is from 3 months to 6 months. Systems business, of course, service goes quick, that's where it goes quickly and if you buy a QCS system, the delivery time is something like 4 to 5 months, and DCS about 6 months to one year. And then, of course, in this bigger project, we use POC method in revenue recognition. So the revenue recognition from our perspective happens when the costs are coming in.
Mikael Doepel: Okay. Now, that's helpful. Thank you. And then just a final one from my side on the service business. Just wondering if you could talk a bit about what kind of dynamics you currently see in that your service division or segment. I think you've been talking about customer operating rates improving in the past couple of quarters. Listening to your customers, it sounds like that's going to continue but is there something else also happening? I think there might be some upgrades and that kind of work that didn't really material last year. Do you see any kind of change into the dynamics? Do you see some pent-up demand coming through? Any color you can give there would be helpful. Thank you.
Pasi Laine: Thanks, Mikael. That was a good point. I think neither of us remembered to say it. But in Services, we can now say that all market areas are active. So earlier, we were hinting that couple of market areas haven't been that active and now in last quarter, actually all market areas, so North America, South America, Europe, Asia Pacific, and China, all have been active and then we have seen also good activity level in all the PEUs. So all the PEUs have also good activity level. And I think that tells that the whole industry is back in normal business. Maybe there is still room for improvement in operational rates and prices in some of the segments but currently, the goods services order intake is coming from all parts, which is positive. I don't know if Katri wants to add to that.
Katri Hokkanen: No, you're right. So all businesses and all market areas. So that's very, very good.
Mikael Doepel: All right. Thank you very much.
Pasi Laine: For reminding us because that was in our question-and-answer story, but we forgot to tell it.
Mikael Doepel: Yeah, it does. Again true. Thank you very much.
Operator: The next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead.
Johan Eliason: Hi, Pasi and Katri. This is Johan at Kepler Cheuvreux. I have two questions. First, you talk about this improved market activity on pulp. I understand that primarily single island orders and similar but I've also understood there's been some news articles about 3 pretty big pulp projects all in Brazil. And I was wondering a little bit how you view your competitive situation? I mean, at the last CMD, you sort of indicated that your market share had fallen to 30%-40% from previously, I think, 40%-60% or something like that in Pulp Equipment. What's your view on these orders? Will any of these materialize? And would you be willing or first of all, would you be competitive to win them? And what would you be willing to take them as EPC contracts or would you still sort of prefer to take parts of these potentially very big projects? I guess, now that's a bit up to your successor CEO, obviously, but what's your view on those projects? Thanks.
Pasi Laine: First of all, we cannot comment about the projects themselves. And you can follow our customers' communication and they are talking about the project. But you are right that, there are projects developing in Brazil and they are all in Brazil and it's good that they are in Brazil. Then you were saying, like, we have been saying ourselves that the market share dropped during one-and-a-half to 30% last year. Again when there were not big mega mills decisions done, then actually our market share was again 50/50 with them. We have a very capable team in Brazil making EPC projects. Why we have been not that successful lately in a couple of big projects? One reason was that we were executing at the same time very big paper machine project. So, we couldn't take the risk of overloading our organization. Currently, we have reasonable market workload in our organization and we are sure that, our organization can take full wheel supply if customers so decides, and we are, of course, working hard with our competitiveness. Like Katri said, it's quite a lot of depending also on the supply chain. And then, we have been, of course, making sure that we have good references in Brazil. So, we have excellent references on our customer base and all the mills we have been delivering are working with very good efficiency, and that, of course, helps us also in discussions about the future cases.
Johan Eliason: Excellent. Sounds good. Then just coming back to this somewhat underperforming legacy projects. With the Q2 numbers, can we now say going forward that, that's all behind you or will there still be some lingering project impacts in the coming quarters?
Pasi Laine: In projects, you always have a situation that some projects go well and some don't and like Katri said, we wanted to close some of the lengthy discussions, where I have been myself involved and wanted to close them now before I leave the company.
Johan Eliason: Okay. Excellent. I must say, I've been impressed how the company has developed under your leadership, especially compared with the previous decade when it was part of Metso (OTC:MXTOF) and I wish you all the good luck for your future endeavors. Thank you, Pasi.
Pasi Laine: Thank you, Johan.
Operator: The next question comes from Tomi Railo from DNB. Please go ahead.
Tomi Railo: Yes. Hi, Pasi. It's Tomi from DNB. Still coming back to the guidance upgrade earlier in June. You mentioned then that, overall general positive development and reading is now, I guess, that it's more second half tilted profit improvement year-on-year. My first question is that, what do you mean by increasing clean EBITDA year-on-year and I'm not very optimistic to get an answer, but I'm still trying.
Pasi Laine: You will not get a clear answer, sorry, Tomi. Good try and thanks for letting us know that your expectations were not very high. But we mean of course that it's increasing. So.
Tomi Railo: And the second question is that this is then as everyone has seen, second half built it. And I hear you, that you are saying services automation improvement. Is there something that we you know, but we can't see? For example, PT having easy comparison for the second half, where the numbers last year impacted by cost overruns included in the numbers, so you can comfortably yourself see that you will beat those numbers. Hence, profit improvement is coming from BP (NYSE:BP) side especially as well or maybe savings timings also, which is triggering the second half profit improvement year-on-year?
Pasi Laine: So of course, we have to be confident ourselves. Otherwise, we shouldn't have done it. And we have our estimation process and based on that process, we are giving the guidance. And when the estimation process is giving the numbers, then of course, management has to make the profit warning to whichever direction. So you have to do it when your numbers are showing that. And we are not guiding quarters. We are guiding for the full year. And like you said to yourself, and maybe I have been saying and Katri as well, that comparison quarters, for example, in Services are not that challenging from last year. And that's why we believe that we can make better numbers in the latter part of the year.
Tomi Railo: Thank you. And I'm still continuing that you practically refer to Services now, especially with the latter comment but would you be able to comment kind of ranking? Is it services tilted? Is it automation-tilted? How much is the kind of weight from BP side because, of course, there is expectation that it's really second-half improvement because we are behind for the first half. Where is it coming from?
Pasi Laine: We can't give business by numbers. Like you know, we are guiding only for the whole company and then it's not acceptable to give guidance for segments or business lines.
Katri Hokkanen: And if you look now where we are today, you're talking about the comparable EBITDA. So stable business is flat year-over-year and then the decrease is related to Process Technologies. And Pasi has been talking a lot about the improved market outlook compared to last year in services. So market outlook is good and also in the Automation segment, it's good and upgrade also Pulp in Board and Paper. So all of these ingredients. And then, of course, what we mentioned earlier about having EUR70 million more order backlog for this year to be recognized. So it's a combination. Of course, the market activity is really important there.
Tomi Railo: All right. Thank you very much and all the best, Pasi. It's been a pleasure.
Pasi Laine: Thank you, Tomi.
Operator: The next question comes from Tom Skogman from Carnigie. Please go ahead.
Tom Skogman: Yes, hi. This is Tom from Carnegie. And also congratulations from me to you, Pasi. 10 good years at Valmet. That's a big achievement. But I would like to use your knowledge that you have built up just to talk about the industry sentiment. And I mean, last year was a big shock for your customers and some pulp and paper companies were forced to cut dividends aggressively. We have heard that there is overcapacity being built in Europe and in China in board machines, et cetera but could you open up this landscape not for next quarter, but just the next 3 to 5 years? How do you see this playing out? Does it still work for Valmet?
Pasi Laine: That's a good question. I was visiting some customers, and I'm not saying in which area and I was asking them to two different CEOs. How do you see the market? The first question is okay, that, it's good market. And then the next, comment was, of course, depending on which year you compare and both were saying that they themselves have to forget the exceptional COVID years, when it was very easy to make money. I said that, comparing to earlier years, market is good, and they continue to develop their companies and that's somehow the sentiment in many of our customer discussions that they continue to believe in the industry. They know that there were a couple of quite easy years, and now they have to work hard on making good numbers but nobody is somehow in long or medium term suspecting whether they are in good business. So, if we think about between 2000 and 2010, when there was bad years, then everybody was losing their confidence in long-term development. Now, that's not the case at all. And then, what is interesting is that, now, for example, we have overcapacity in Europe, then actually the ones who have modern machine and can run lightweight are having good situation, because their cost base is lower per produced package and because of energy and raw material and many other things. So, actually, now we start to see again that the ones who have been investing in new machines are doing better than the ones who haven't been doing it, which then, of course, gives confidence to those customers who have been buying bigger modern machines from us.
Tom Skogman: Yes. And would you expect that equipment sales will tilt more to pulp the next 5 years, after 5 really good years in paper?
Pasi Laine: There was an exceptional time in paper. Like you remember, we had about EUR 700 million order intake, then it went to EUR 1 billion, and then suddenly EUR 1.7 billion and was at EUR 1.3 billion thereafter. This was this extraordinary COVID time, I would. I'm not, of course, saying that, let's say, so that this kind of market volume, EUR 1 billion is a good volume for our Papa er business line. And then in Pulp, there is more lumpiness in order intake. Sometimes the order intake is a lot of EUR 1 billion, sometimes less. It depends just on timing that which year it happens to be. So, I wouldn't be saying that there's tilt from other market to another one. It depends more at how the timing of individual projects is happening. Both are needed. So, if there's new pulp, then the pulp needs to be used as well. Like we were saying also in our Capital Markets Day, it was Jari (ph) who was telling that about 30% of our board machines and paper machines, even on the high market were sold to replace old capacity.
Tom Skogman: And how would you see plantations being developed? We hear every now and then that there's a lack of good locations for plantations, which could be a limiting factor for the whole industry, the European?
Pasi Laine: That discussion was very active 2 years ago and now it has disappeared again. So in South America, when they are developing new plantations, then it takes 7 years for them for the trees to grow. So if somebody starts new plantation now, then he could start to build a pulp mill after 4 years. And now our customers are saying that they have active projects and then of course, they have secured their raw material supply if they are talking about investments.
Tom Skogman: And then a question to Katri. I mean, networking capital has changed a lot and the business mix has changed a lot. Can you provide some kind of a range where you expect it to be with Valmet's current business mix? Are we really on a high level at the moment or not?
Katri Hokkanen: I think if you look at the developments, of course, it improved from year-end. So that was positive thing and inventories is the topic where we are mainly working with. So we have said that on the stable business side, the inventories have been on elevated level. And we have been actively working with those. Some changes there were now, especially in the Finnish goods, so they came down. On the other hand, the work in progress has increased a bit then, and that is then linked to the stable business where majority of the revenue recognition is done in point in time. But inventory is the topic that we have been working with and I cannot give you exact amount because, of course, then when you have capital projects, the prepayments can have a big impact then. And now capital volume has been lower as we have been discussing a lot. So it's a combination of that. But of course, we want to optimize the levels, and we are working hard with that.
Tom Skogman: But it's like 5% to minus 5% of orders or what is some kind of an acceptable range for current Valmet?
Katri Hokkanen: I think you have to look at it also kind of from historical perspective. So Pasi was mentioning the stable business part. So close to 70% is stable business from the bookings. So you have to take that into account that it ties more capital than capital business.
Tom Skogman: Yeah. And then finally, the service sales mix, what will it be in the second half based on what you have booked as orders in the first half? Will it tilt more or less to spare parts or modernization project?
Pasi Laine: Like I said, we have now good activity in all the businesses. So I would more say that it's stable, I think to any direction.
Tom Skogman: All right. Thank you, Pasi and Katri.
Pasi Laine: We'll close the meeting, I would say, somewhere. So, 11 years ago, we started IR work with Valmet. So now we have been listed over 10.5 years. We calculated I have participated in roughly 600 IR meetings over the years. And I think all of them are not calculated. So I have done over 600 meetings with our analysts and investors. And first to the analysts, I have to say that, we have had the luxury of having very good and professional analysts. So, you all who have been working and analyzing us, who are now doing and who have been earlier doing, you have been very professional and you have been doing very good questions and good reports and have been treating Valmet in fair and professional ways. So, that has been very nice. And then, of course, we have had a lot of discussions with investors as well and I have to say that, I have learned a lot from this investor and IR meetings. So, investors and analysts is a bunch of people, where you end up, if you have good brains and good mathematical thinking and I have enjoyed a lot discussing with you and debating with you and trying to answer to your difficult questions in a way that it helps you, but that I'm not opening too much but I have enjoyed a lot to work with you and I hope you all personally, all the best in the future and continue to be very constructive and supportive to Katri and Valmet and then I am happy as well. So, thank you.
Pekka Rouhiainen: Thank you, Pasi for those words. I'm sure also on behalf of all the analysts and investors as well. So, for Valmet, the next larger event is, of course, the August 12th when Thomas Hinnerskov will start as the President and CEO of Valmet. And then that, of course, means that Pasi Laine will also be leaving Valmet. On my behalf, thank you very much, Pasi, for these years. And Valmet's next result webcast will be then on October 30th. So, until then, have a nice summer, everybody.
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