Raute Oyj (RAUTE) Earnings Call Transcript

Good afternoon, and welcome to Raute's Half Year Financial Report session. My name is Mika Saariaho, I'm Raute's CEO, together with our CFO, Ville Halttunen, we will go through the highlights of our second quarter and first half of the 2026. We also will reserve some time at the end for questions and answers. So the audience online, you can post your questions in the chatbox and the audience here can also then use the microphone at the end of this presentation. Okay. Very good. Let's get started. So if I start with some of the highlights of our second quarter events, I would maybe describe that there was no major change in the operating environment where we've been operating for already for some time, which is characterized by quite big uncertainty and turbulence in the market. So really the uncertainty remained elevated during second quarter as well. And when I say elevated, I really mean what it means to our customers. So, if you look at the customers, industries they operate and their offering is very much to the construction industry, somewhat to transportation, furniture industry, especially construction industry has remained very uncertain and volatile, and we've been now waiting for the recovery of that industry for some time already as an industry. And this is really let's say, impacting quite a lot in our customers' decisions in terms of the new investments into technology, also services and other things that Raute can offer to this industry. So this uncertainty really resulted in us having not really great order intake. It was EUR 18 million. It was higher than a year ago. But a year ago also, first half of the year was very low in terms of the order intake. So this is -- this was the challenging coming from the market environment. If you look at then our own operations, I'm actually very pleased what we achieved in this environment. So despite the low order intake and also quite low net sales, which was EUR 33 million, it was similar to what we had in the first quarter of this year, which is low for us, and it's much lower than a year earlier. Our profitability still was on a good level. I would describe as actually very good level considering the level of operations, level of net sales that we achieved. So we had 12% relative profitability in terms of the comparable EBITDA, EUR 4 million of comparable EBITDA. And this was thanks to very much the continued good work in our customer delivery projects and savings we also achieved throughout our own operations and then also in these projects with a prudent project management. So very happy with that development and continued good performance in our operations. To me, this also demonstrates that also in this low volume environment, we are able to maintain quite good profitability, and that's thanks to a lot of effort and work we've been putting into our operational excellence work during the last and past years. In Wood Processing, which is the biggest unit responsible for this project deliveries to our customers, big projects, especially we can see the profitability on a good level despite the reduced top line, thanks to this project execution and some project provisions also that we were able to release during the second quarter. We also were able to release some reservations in the first quarter of the year. So, this same good level of work continued now. So -- and this, of course, is an operational achievement. It now is visible in this second quarter numbers, but thanks to good work that I'm very pleased during the second quarter. In terms of service business, we were a little bit behind our own plans also in terms of the top line. We saw that still our customers in this environment, they are trying to protect their cash flow. So they are even saving on some quite critical small investment, services, maintenance, this type of work, which then has impacted our service business top line. And due to the lower top line, the profitability, although it was positive, it was not on the level that we expect from our service business in the future in a more normal operating environment. And then as a positive thing on analyzers' business, which is very important for whole Raute, providing really the technology edge into our offering. We saw good I would say, turnaround during the second quarter. Actually, analyzers business did increase from the previous quarters in terms of top line. And when there was an increase, we immediately saw also profitability improvement on the bottom line. So this really, to me, demonstrates the underlying potential we have in the analyzers business and its importance for Raute in the future. So we continued, of course, in this difficult environment, focusing on our own things, things that we can impact, which, of course, is the customer work, which is our own delivery operations, cost control, efficiency improvements. And we obviously -- this is fully in our hands. Some of the things happening on the global industry environment are a little bit outside of our hands. So, we need to focus on things that we can impact, which is a good customer work, of course, trying to realize those new orders also, but then really the internal operations. And I'm happy with that performance and that development during this year as well. Now in terms of the market, we have to be a little bit cautious, but in any statements, but I could say and we are saying that we have observed some signs of improving customer sentiment. It was not realized in Q2 as a new order intake, but this sentiment is clearly there. And why I'm saying this is, of course, some of these projects which we are following and negotiating with customers, they have different gates in the sales funnel, and we see real progress towards completion phase in some of these decisions from a customer point of view. Nevertheless, the uncertainty turbulence clearly remains in the market, and we still have to see when really the sustained recovery in a broader way is taking place. But some good signs we see there in the market. Okay. And here, we see some of the same messages in numbers. So net sales, we saw clear dip from a year ago figures, but it was on the same level as first quarter this year. Comparable EBITDA, I described this EUR 4.0 million as a very good result. It's 12% of the net sales. Our long-term ambition is to achieve 12% over business cycle. So -- and then assuming that this is some kind of a lower cycle at least that we are now experiencing, this is actually a very good achievement indeed. Order intake on a low level, as I said, the same is true now for the order book. It's coming down. I will share soon how the development has been over the past years. Equity ratio is good. So we have a strong balance sheet. Obviously, we have generated profit now during the past year. So we have a strong balance sheet. So we are in a good position to -- in this turbulent market environment to manage the situation from that point of view. And this, of course, provides also a good basis to go forward when the market recovers. Personnel, roughly on the same level than in the previous quarter and about 700 people working directly at Raute. Order intake here, we see the comparison also to previous years. So obviously, low figure, although this EUR 35 million is more than a year ago for first half, it still is a very low figure. But we can see from this picture also that there is a huge variation between different quarters in terms of Raute's order intake. So we have to admit the order intake volatility is big for our type of a business. And of course, if we book any bigger orders for wood processing, that would have an immediately a bigger impact. But this is where we are now. And if you look at the second quarter events, North America actually played important role on this quite low number, but still North America is an important strategic focus area for us and very important for the whole industry as well. And in terms of order book, we see here the development over the last 6 years or so. Obviously, we had this huge peak at the end of 2023 and beginning of 2024. And there has been a more difficult time for the whole industry since that. So, this downturn in the construction industry and our customers and industries has really continued now for a prolonged time. So obviously, during the years, I should say, there has been expectation not only from us, but from many parties that the recovery would be starting. So we still haven't seen that. And there still is this uncertainty in the market. But I believe strongly that the recovery will take place. We can also see from this figure that when the recovery takes place, it can also be quite fast. So we'll see what happens this time when we move to that phase. Net sales came down from a year ago figure, EUR 66 million in total in the first half, both quarters quite similar. Europe is still playing quite a big role. We still have this quite big projects, which are now towards the end of those project deliveries. And from the accounting point of view, we are recognizing revenue from those projects. So very much Europe dominating there, but North America coming second and then the other regions. And comparable EBITDA, I'm happy, as I said, on this level of EUR 4 million with this volume that we now achieved on top line. We can see here the development over the past years as well. And I would say the quite nice recovery from the very challenging years we had 2021 and 2022 in particular. So happy with that development and taking -- we have taken the operations, I think, to a better level during this time. This is even more visible in the operating profit where the huge losses are visible from the inflation and the war in Ukraine that Russia started. So since that, we have had a nice recovery and operating now on a positive territory also with this low business volumes. Personnel, about 700 people, as I said, the drop from a year ago figure is due to the fact that we had -- we closed the China operations a year ago during Q2. So there was a reduction in the personnel, and that's impacting these numbers. Most of our people work in Europe, but we have important workshop in North America, in U.S.A. and Canada operations there, and those are important global footprint for us from a production point of view. And then we have the sales representatives and sales offices, service centers all around the world. Okay. A couple of more words about the different segments. Wood Processing, I already said this is the most important business unit for us in terms of the overall volumes. This represents a major part of the whole router volume. And I'm so happy to see the overall development from loss-making to profit-making unit. And actually, this second quarter profit margin, which was close to 13%, I would describe this still as a little bit extraordinary. So it was due to the release of some cost provisions, which, of course, might happen in the future, but you can't count on that. We aim to do the accounting so that it takes into account the whole project to the completion. And then this kind of provision release is required that then there's something better happening in the quarter than what we even expected. But good development in the Wood Processing, happy with this 13% margin from this business unit. Services, there was 20% -- close to 20% drop in the top line. And this was now then quite clearly visible in the profitability as well. So obviously, services on our other business as well, there is a quite big net sales to EBITDA lever there. So, when the top line drops, we can see -- we see this, unfortunately, in the profitability as well. And I think services, which is now close to 8% comparable EBITDA margin is clearly not where we want to be on the service business. So I would -- if in Wood Processing, this was exceptionally high. This is a little bit exceptionally low for services. It should be much higher percentage-wise. The reason also for this is that we haven't stopped really the development initiatives in services. So, there's been quite high fixed cost on services. We want to develop the new offering types, which are very important for us in the future, different type of performance contracts and new models serving our customers. And this development work, we have continued despite this challenging environment. Analyzers has had experienced quite tough times last quarter of last year and then first quarter of 2026, we actually had a loss-making business which is obviously not where we should be. We see that this was also due to very low volumes that we had on the fourth and third quarter, if you see from this graph. And now when the volume is up, we can quite directly then see the impact on the profitability. This should be a very high profitable business for us. It's obvious and everybody knows that in this sort of business, the product margins are on a good level as they should be because we are putting a lot of R&D effort into this. But then it means that when the top line increases, it is visible on the bottom line as well. So this was, to us, a good proof again that this is a good profitable business, which we want to grow in the future as we go forward. Okay. And then I will hand it over to Ville, some more words on the numbers.

All right. Thank you, Mika. So hello, and good afternoon also on my behalf. My name is Ville Halttunen and CFO for Raute. So as usual, I'll start from the earnings per share development. We delivered EUR 0.36 of EPS in the quarter, nearly half from a year ago comparables where we were at a record high level. This is primarily volume-driven as our net sales came down by 25%. Also, the operating profit came down. And as a result, then EPS came down. So, despite the good margins, we relatively kept the absolute came down. And no big surprises in the financial items below operating profit, slightly positive financial net items and tax rate of 20%. In the comparable period, we had relatively high one-offs related to the China closure, which are then visible in the reported EPS numbers and also the effective tax rate was higher than normally. Then looking into our cash flow performance in the quarter. Our cash flow was negative EUR 8 million in the quarter. This is our second consecutive negative operating cash flow in this picture. At the same time, we are delivering positive EBITDA. And this is an outcome of our business model basically where the revenue recognition is much more stable and the EBITDA performance is showing that. And then the cash flow cycles are different as primarily our customer payments cycles are very different than the revenue recognition cycles. So, the net working capital change was quite negative now in the quarter. When we look at the net working capital development there, we ended now the quarter at EUR 18.5 million, which is a relatively high number in our business and actually, it's the highest level since 2019. I also brought here a picture a bit longer-term history, which is this smaller picture here, where you can see also that we have been historically also on these levels. And over the long-term period, we are roughly at the 0 level, but there are large swings around this one depending on the cycles of our projects where they are. At the moment, we have had very low order intake of new incoming orders, which typically have upfront payments, which are then impacting this kind of positively. And then on the other hand, there's been some postponements of payments in our existing customer projects. But we expect this to now come actually down as we look into second half of this year. Our balance sheet remains strong. Equity ratio, 65%. During the quarter, we have paid dividends. Also, we repaid the junior loan of EUR 3 million, and then we have had also the share buyback program ongoing. And liquidity, we still have a strong liquidity of EUR 17 million. And on top of this, we have also EUR 15 million revolving credit facility available, so which give us flexibility. And one should also remember now that we have this net working capital now tying the cash quite a lot compared to the history. So that's good to keep in mind. Investment level is same as last year. So no big news here. So EUR 1.7 million after first 6 months, a similar level as last year. So we continue to do some reinvestments in our operations and then some R&D also into these numbers, which is being capitalized. So those are the primary CapEx items there. And still the R&D as what comes to P&L, we have here also a similar level of R&D efforts that we had last year, minor decrease compared to last year. But this is also somewhat now increasing in relation to sales as the sales is coming down more fast. So this is all from my side, and then I'll hand back to Mika to close with the outlook and guidance.

Okay. Thank you, Ville. So -- by the way, I forgot to say in the beginning, if you want to post questions in Finnish, that's also okay in the chatbox. So we'll look at those after I say something about the outlook for '26. I actually already spoke about this, the operating environment. It's been a challenging environment for the industry overall. And when I say industry, I mean our customers, in particular, of course, we are here to serve our customers, and we live and breathe together with our customers. And their investments, of course, in a market where they are struggling with cash flows and profits is impacting some of the decisions on the investments as well. And we still have this sustained global geopolitical uncertainty as well. So all these are impacting our industry. We have seen also during the second quarter, again, changes in the tariffs, which are impacting our customers in North America, in particular. There was again, discussions, and I was visiting myself, some of the customers there, and they are impacted quite differently. Little bit arbitrary also, I would even say, in some of these cases. So that is making very difficult then to make investments in this environment. But then I would say again that despite this uncertainty, we are seeing our customers in Europe, North America. And I would also say in Asia and Oceania now, which was a little bit maybe new things that they have continued preparations for future investments and especially such that then improve the production efficiency and their competitiveness. And what they are really looking for is something where I think we as a Raute, we have a good fit. I mean, our customers are looking sustainable technologies, automation levels and really efficiency overall for the whole process, which is something where we can support maybe also versus some of our competitors who are more focused on particular equipment when we have the overall process expertise in-house, so we can serve our customers with these cases. And of course, the major industries which are impacting us are the construction industry. But of course, some of our customers are then working in niche areas, and it might be something on the furniture or transportation and maybe even LNG vessels or something like that. And then they have a little bit different dynamics from their point of view. So not all customers are suffering. There are also customers who are actually having a good profitable business, and they are -- they are planning at least for the future investments. And of course, all we are waiting that some of these signs from the overall geopolitical tensions and those to ease out. So this would make it easier for the decisions to take place. Overall, I think that we are well positioned to capture these opportunities when the recovery really in a wider way takes place. And of course, service analyzers play a very important role in that business. Service was now down, but it's very important, our field service people and personnel who are meeting our customers literally daily. So they really know what is happening in the customer operations and makes it then possible for us to help with the investments as well. Same is true with analyzers, digital services where we capture -- also with the help of AI, we capture information and manage that and provide insights to our customers. So this is where we are as an industry. And I cannot promise when exactly the order intake will start to recover, but I remain confident that it will recover and there are good signs and someday it will happen. But this, of course, has proven now that we are living in quite cyclical environment as Raute. And because of that, we have really seriously focused on our own internal operations. And on that development, I'm very happy, and that is bearing fruit now in this challenging environment as well. In terms of the guidance for this 2026, we have communicated in the beginning of the year that we gave actually quite a wide range for our guidance. And the idea is also that we now narrow it when we move forward. And now in the second quarter, what we did was that we narrowed the net sales expectation. We did take down somewhat the upper limit of this range. So now we are saying it's going to be EUR 125 million to EUR 145 million for the full year. And then in terms of the comparable EBITDA, although we took down net sales guidance, we did not -- at least we did not change the midpoint of the guidance for the EBITDA. So, we took a little bit up the lower limit and then a little bit down the upper limit. So, we expect now EUR 11 million to EUR 18 million comparable EBITDA for 2026. And you can see here the figures for '25, which is demonstrating how cyclical the industry is and the business is. It was EUR 175 million, year earlier, it was more than EUR 200 million. So we need to live in this kind of environment. We want to increase the share of services, recurring revenue analyzers. And I think we are on the right path to that, but still we are experiencing this prolonged downturn in the top line and -- but ready to capture new opportunities when those emerge. Okay. Very good. So that was the key messages, highlights of second quarter, first half of the year. Maybe I invite Ville on stage. So are there any questions? So maybe we start from the audience here, if there are any questions here?

Yes, of course. It's Antti- Pekka from Inderes. First, could you please elaborate a bit what is the status of these 5 projects that you sold in '23 and '24? Meta is not yet in production, but how about the other 4 factories? And do you still expect payments from these projects?

Yes. Actually, not going to any secrets of any customer, but let's say is actually already producing. So some stages have been passed already from that point of view. Of course, the full production is only coming online later this year, in line with the timeline that we have agreed with them. Things are progressing very well there. No worries. Then we have a couple of other projects we announced in 2023. That was in the Baltic area in France, and then there was in Uruguay. Those are also progressing, I would say, in line with the normal variations of those projects in terms of timeline. Some things are happening a little bit faster, some a little bit slower. But in terms of our performance, which we can also see in the financial figures, we are very happy with that, and things are progressing okay. In terms of the payment, which is more than -- well, it's both the POC question, but also maybe more a cash flow question. There will still be payments coming from those projects. And it's very typical for projects. The last payments are at the end, when really everything has been accepted, and the site is really up and running. I don't know, Ville, you want to comment that was more the cash flow projection we have, which we are not giving, but I think you said we probably see some improvement in the situation.

Yes, you can draw the same conclusions that also now in these big projects, we have now recognized more revenue than what we have received cash for. So still, we expect material payments from them, but I think it's within the normal cycles, as you said, the payments.

Then you said that orders were postponed, but they were moved to the completion phase. So does it basically mean that you have won some meaningful amount of projects from competition, but the final investment decision is pending on customer?

Well, if we look at the market, of course, I would say in the competitive landscape, maybe it would be too much to say that we have won something significant from competitors, but I wouldn't say the other way around also that we would have lost something. I would say the competitive landscape remains quite similar to what it has been. Then in terms of the moving to completion stage, where I was maybe a little bit fussy about what I said, I may remain fussy, which is to say that it's more like, of course, these are long negotiations with customers, and you need to understand the dynamics and particular customers have certain cases in their process. So some things have become even closer to their final decisions. Maybe they are pending board decisions or some financing bank decisions or things like that. So I would say from our funnel, more things have moved to those stages, which is very close to getting orders in. And yes, whether then and when we get anything bigger, it really is like I can't say, I can't promise. It can be any quarter, or it can still take a while.

And is there any kind of rule of thumb for how often your customers review like these decisions? Is it like monthly or quarterly or bi-monthly?