Good afternoon, ladies and gentlemen, and welcome to Valmet Second Quarter 2022 results publication and webcast. The highlight of this quarter was the fact that Flow Control, the former Neles, was now fully part of Valmet during the quarter. My name is Pekka Rouhiainen. I'm the head of investor relations here at Valmet, and the presenter today will be Pasi Laine, President and CEO of Valmet. After the presentation, there will be a chance to ask questions over the phone lines. Pasi, please go ahead.
Thank you, Pekka. Welcome. Our headline today is that orders received increased to EUR 1.3 billion and comparable EBITA to EUR 122 million in the second quarter. I will go first through quarter two in brief, then some words about the segment and business lines, then some words about Flow Control's integration into Valmet, then CFO appointment, financial development, some words about Valmet's way forward, and then guidance and short-term market outlook. Then Pekka will join me in the question and answer session. First, quarter two in brief. Like said, orders received increased to EUR 1.3 billion. Net sales was almost EUR 1.3 billion, one billion two hundred ninety million. Backlog ended up being four billion seventy-eight, four billion and seven hundred eighty million.
Comparable EBITA increased to EUR 122 million, and margin was 9.5%. Gearing in the end of the period was 22. Here are the numbers, and some charts as well. Like you see here, we employed in end of the quarter 17,670 people. We have been, of course, growing because of Neles merger. In net sales, about 46% came from Process Technologies, 31% came from Services, and 23% from Automation. Geographically, Europe continued to be biggest one, 36%, North America the second one, and thereafter, China, South America, and Asia- Pacific. Quite good contribution now from all the areas as well.
Orders received in the quarter increased to EUR 1.3 billion. Here you see the graphs, which is showing that the 12-month cumulative curve is little bit less than EUR 5 billion currently. Orders received in first half of the year have been such that Europe, Middle East, and Africa has contributed 43%, North America 22%, China the third one, Asia- Pacific the fourth, and the smallest area has been South America. Services business orders received total to EUR 2.3 billion. This is the big development that has taken place in Valmet over the years. When we started our Services, order intake in 2014 was about EUR 1 billion. We acquired Automation, continued to grow both Automation Systems and then Services.
Now we have first quarter when we have included Flow Control for one quarter and the order intake now, Flow Control is only one quarter, not LTM in this figure. The order intake is EUR 2.3 billion. This is of course big development in Valmet which has changed the company considerably. Backlog ended up being almost EUR 4.8 billion. It's the biggest backlog we have reported. Of course, Flow Control has an impact there as well, but we are saying that 65% of the backlog is coming from Process Technologies, 20% from Services, and 15% from Automation. We are saying now also that 50% of the backlog is expected to be realized as net sales during 2022.
Last year the similar figure was 45% and then of course the number was smaller as well. 50% of the current backlog is expected to be recognized in net sales. Some words about the segments and business lines. First, Services. Orders received increased in first half to EUR 911 million, and that's of course big increase. It grew from EUR 752 million to EUR 911 million, so good growth. Net sales has been growing from EUR 625 million to EUR 720 million. EBITA has been growing from EUR 83 million to EUR 88 million, but we still have a situation that EBITA margin for Services is lower than a year ago.
A year ago it was 13.3%, and now it has been for the first half of the year, 12.2%. For the quarterly numbers, I'll come back later on. Good development in Services in order intake, in net sales, and for the quarter in profitability as well. What is important is that the orders received has increased in all the geographical areas and all business units as well. Strong performance of the total, whole unit. In Automation segment, orders received to EUR 452 million in first half of the year. Here, of course, the big delta is Flow Control where I compare back later on. Last year, our order intake was EUR 239 million, and now it's EUR 452 million.
Net sales has been growing EUR 161 million to EUR 380 million. Profitability, comparable EBITA a year ago in Automation Systems was EUR 20 million, and now in first half of the year, the segment EBITA has been 60 million. What's of course nice is that, last year our profitability in the segment was 12.6%, and now it has improved to 15.9%. Good development in Automation segment as well. Flow Control's first quarter, as part of Valmet, strong start. Last year order intake was in former Neles EUR 151 million, and now second quarter order intake was EUR 198 million. Good growth.
Net sales has been developing favorably as well from EUR 146 million to EUR 177 million. All in all, Flow Control has been performing like we have expected. Nothing material to any direction. It's a good organization, good products, good customers and good business and it has been performing like we expected during the planning phase of the merger. Systems business order intake has been growing in first half from EUR 239 million to EUR 253 million. Net sales has been developing from EUR 161 million to EUR 203 million.
Here, like I'll come back later on to the quarterly numbers in financial segment, we can be happy of the total growth, but it's 6%, but second quarter was not as strong as maybe we would have wished. All in all, good development still in Automation Systems business as well. In Process Technologies, orders received decreased to EUR 1,268 million. Last year it was about almost three hundred million more. That's normal. The order intake level in first half of the year has been good. Net sales grew from EUR 1,015 million to EUR 1,146 million. Comparable EBITA last year was EUR 84 million, now EUR 71 million.
Our profitability has dropped in this segment from 8.2%-6.2%, and of course we are not happy of that. Mainly the development is caused by some margin erosion in some of the pulp and energy projects. Like I think I was saying last time as well that there we have inflation pressures touching our business and that has been now materializing also in the second quarter of the year. Pulp and Energy business line order intake was EUR 581 million, smaller than a year ago, but at a healthy level. The big difference here is now that now energy has been increasing and pulp side has been decreasing.
Last year Services or energy order intake was lower than pulp, but this year actually energy has been increasing more and pulp has been decreasing. There is change in the mix of the order intake. EUR 581 million is reasonable order intake for the business line. Net sales has been developing favorably, from EUR 463 million to EUR 542 million in the first half. Paper business line, last year was very good year in order intake. This year was good year, EUR 688 million in first half is a very strong order intake level. Net sales has been developing favorably as well from EUR 552 million to EUR 604 million.
One of course has to remember here that our Paper business line has manufacturing in China where the lockdown was affecting, and then we had also the fire in Rautpohja. Despite all these challenges and the war in Ukraine on top of that, Paper business line was able to continue on growth mode in net sales. Well done by Jari and Jari's team. Some words about the war in Ukraine. Like we have been saying that direct impacts to Valmet are limited. We had about 140 people working in Russia. Currently, we have about 80 people, and then they are working primarily in sales, engineering, maintenance, finance, and administration. We don't have any production in Russia.
Last year about 2% of the net sales came from Russia. We have now reversed about EUR 80 million of order backlog in H1 2022. We have roughly made EUR 20 million expenses related to withdrawal from Russia in first half of the year. They are booked as items affecting comparability. We have still small backlog, which we believe that we can deliver or have to deliver and our best understanding is now that the expenses we have booked are correct ones to close our businesses in Russia. Like we have communicated, we will withdraw the business from Russia and completely, but it will take some time to work in a manner that we are not causing any risk to any persons.
Of course the biggest impact that we have from the war in Ukraine is the cost inflation, which we discussed in last quarterly call as well. Now some words about the integration of Flow Control into Valmet. Integration is proceeding according to plan. We knew the company and they know us, so they are not major surprises to anybody. Maybe our style to manage the business is different than Flow Control is used to, nothing very big change there. We have now started to market the whole offering to our Capital Technology customers, to sell the technology Services, Automation Systems and Flow Control.
Then later on we start to see the synergy potential, revenue synergy potential to materialize, but of course it will take some time. We have started some cost synergy actions in second quarter. We still confirm the earlier statement that we expect to have about EUR 25 million annual run rate synergies which out of which about 60% is achieved by 2023 and 90% by end of 2024. We will continue to work on this topic after summer vacations. Neles merger had of course big impact to our balance sheet. It looks quite different than earlier, like you will see in later graphs as well. The total merger consideration was EUR 1.476 billion.
That's based on the share price Valmet had at the end of March. Thinking about the performance of the Flow Control currently, I think it's correctly valued. Out of the purchase, we got more goodwill, and the goodwill increased about EUR 879 million and other intangible assets by EUR 860 million. This means that there will be bigger amortizations in coming quarters. Now we are saying that about EUR 24 million per quarter until quarter one in 2023, so next year, and thereafter about EUR 9 million a quarter for several years. This is to help you to model the amortization in your calculations.
The total balance sheet increased to EUR 6.528 billion, and that's of course big increase compared to the earlier one, about a little bit more than EUR 2 billion. Total equity has increased and Valmet's equity per share has increased as well. Valmet looks now from balance sheet point of view different after the merger with Neles. Today's news is that after a very thorough selection process of CFO, we have selected Katri Hokkanen as a new CFO, and she will start first of August in the role. Like you know, she is now also the interim CFO. We searched external, internal candidates, had a lot of interviews and then decided in the end that Katri is the best person to continue the CFO function further.
She has long career in Valmet, has been working the whole working life in Valmet in very different roles. She was running our area, C area financial organization, Asia- Pacific, for example. Last year she has been a Business Controller in Pulp and Energy. She knows paper, she knows service, she knows Pulp and Energy business. She has very good background and understanding of our business, and that's of course the strength of her. We are very happy of course to have new blood in management team. We are very happy that diversity in our management team age-wise and gender-wise is improving as well.
Katri is listening the call, but we have agreed that she can take the well-deserved break, and which she has booked many months earlier, and she's not now presenting the results here with me. Next time you will see Katri in person in this presentation. Welcome, Katri, to the management team. Some words about the financial development. I discussed some of the quarterly numbers already. Orders received, backlog, net sales and comparable EBITA and comparable EBITA of net sales. There is EBITA is bigger than comparable EBITA. The explanation is that when we did the merger with Neles, we booked a EUR 59 million gain from the shares we owned earlier.
That's something you have to understand. That's netted with the expenses which we have to book when we are withdrawing from Russia. The delta is now the one what we are showing here, EUR 59 and then EUR 20 and the delta is positive. Might be that you would have expected that we book here negative figure, but this is IFRS accounting rule, and that's how it goes. The other new thing here is that we have added an adjusted earnings per share KPI here so that you can follow our adjusted earnings per share without acquisitions. We have calculated everything else except the amortization which is coming from the business mergers and acquisitions.
That should be helping you now to understand the company better when our goodwill and PPA amortization is increasing compared to the earlier years. I'll go through the cumulative numbers still. EUR 2.6 billion, 4% growth compared to last year. Backlog is now 19% higher. Net sales has been increasing by 25%, so EUR 2.2 billion. Comparable EBITA, EUR 202 million, 15% increase. Comparable EBITA percentage is 9% last year, 9.7%. Of course, we are not happy of that, but we try to work on that topic. Cash flow is EUR 65 million negative and I'll come back later on to that one.
Gearing now after the merger is 22% including the lease liabilities. All in all, strong first half also from figures perspective for whole Valmet. Some words about the segment figures. Services had a good order intake in the second quarter, EUR 460 million, 24% growth compared to last year. Automation segment of course has big figures growth because of the Flow Control and Process Technologies -27% compared to last year. All in all, EUR 1.3 billion in order intake in the quarter. In net sales, Services was growing by 20% compared to last year. Automation, of course, as a segment grew over 100%, and Process Technologies grew also by 15%.
Totally 36% growth in net sales. Comparable EBITA Services improved by EUR 10 million and by 22%, and that's of course good performance by Services. Automation had good quarter, EUR 50 million EBITA in a quarter. Process Technologies had EUR 10 million less than a year ago, and the reason I explained already. Then the other having the head office and everything, their EUR 15 million is more than it should be on a normal basis. There are some differences in the timing of some of the costs and of course some other extra costs here in. We have to be now very careful with the central office head office and head office function and head office costs.
This 15% is a little bit too much. All in all, we made EUR 122 million. Comparable EBITA margin for Services was 14.2%, and that's of course good achievement. It was better than a year ago. Like you remember, our first quarter was not very good, so I'm very happy that Services and areas were able to turn the profitability to the decent level so quickly. Automation, strong 17%, and Process Technologies, not that strong, 5.2%, so 2.7% down compared to last year. These are the segment figures for the quarter and the half a year figures I explained already.
Gross profit 24%. We of course still have work to do to make sure that the gross profit continues to develop favorably. In SG&A, the growth is bigger than it should be. Part of that is coming from Flow Control, which increased the SG&A by EUR 55 million. The legacy Valmet SG&A has been growing as well, and there we have to be very careful now that we manage the SG&A costs carefully and at the same time push the gross margin up, and then we should be again on the path where we would like to be. Why I said that was that of course here the historical curve is not trending the correct direction.
The LTM is now at 10.4% and last year we ended up at 10.9%. Of course our target is to get as soon as possible between 12%-14% and currently the trend is not going the right direction and we have to continue to work on that topic in coming quarters and years as well to reach the target what we have set to ourselves. Cash flow, like I said, was not good. Cash flow provided by operating activities was -EUR 85 million in second quarter. Our inventories have increased and then the net working capital in project business has increased and then Flow Control has added net working capital as well.
Currently we trade somewhere close to 6% of the rolling 12 months order intake. At the best if we could say it was at 12 and 14, and then we were saying in 2020 and 2021 that we have more money than we should have. Now it's going to the other direction. Of course we continue to work on this topic. We haven't seen any big changes in the contract terms and payment terms in our contracts. Then one fact is that now when the delivery times are longer, we have to order things earlier than we used to. It has a negative impact. Then of course Flow Control has an impact on net working capital as well.
These two topics, net working capital and cash flow, are things where we will be focusing on in latter part of the year. Net debt has increased, so we have EUR 510 million net debt and gearing is at 22%. Like I said, our equity and total assets have increased considerably as well and that comes at the next page. You see that the capital employed what we have now due to the merger has increased from EUR 1.8 billion to EUR 3.2 billion. Our Return on Capital Employed, comparable Return on Capital Employed is 16%.
Our target is to be over 15%, so we are targeted range, but because of the merger of course this comparable ROCE has dropped compared to the earlier times. Earnings per share is developing favorably when we calculate the adjusted EPS for 2021 and 2022. Of course, if that would be just EPS, then it wouldn't be as good as this graph shows. Some words about the strategy. We have fine-tuned our strategy being such that first of all mission we kept the same. Converting renewable resources into sustainable results, and that's still the mission we have. In strategy, we developed it such that we say that we develop and supply competitive and reliable Process Technology, Services and Automation to the pulp, paper, and energy industry.
There we work with the whole triangle. We say that Automation business covers a wide base of global process industry. We have offering by which we can serve other than pulp, paper, and energy industries. We are saying that we are committed to moving customers' performance forward with our unique offering and way to serve. The change is that Automation is now as a segment working with wide range of industries. We continue with the same continuous improvement and renewal topics. We continue with business accelerators. And in vision we have modified it a little bit when now we say that our vision is to become the global champion in serving our customers and in moving the industries forward. We have aligned the financial targets with the reporting structure.
Now we are saying that the Services and Automation segment should grow over two times of the market growth and net sales for Process Technology segment to exceed market growth. This is semantic, but now it's according to segments what we are saying. Profitability targets are as said between 12%-14% comparable Return on Capital Employed at least 15%. Dividend policy continues to be like earlier dividend payout at least 50% of the net profit. Still guidance and short-term market outlook. We have kept guidance intact. Valmet estimates that, including the merger with Neles. Net sales in 2022 will increase in comparison with 2021. Comparable EBITA in 2022 will increase in comparison with 2021. In Services we keep the market outlook good. Automation flow controls good. Automation systems good.
In Pulp we are saying Good to Satisfactory. This is coming from the fact that in some of the units in pulp we have a little bit worse workload situation. In some we have very good, in some not that good, and that's why we are saying Good to Satisfactory. In energy, we have increased outlook from satisfactory to good. In Board and Paper, we continue with good, and in tissue with satisfactory. Good. Sorry it took too long I know, but we had many topics to cover. Now it's your time to make questions, and Pekka comes here to help me with answers.
All right. Thanks Pasi, and let's move on to questions. Operator, I hand over to you.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two to cancel. Our first question comes from Antti Kansanen of SEB. Please go ahead, your line is open.
Thank you. Hi Pasi and Pekka. A few questions from me. First on the outlook and the downgrade on the Pulp side. Did I understand correctly that it refers only to the workflow situation? Perhaps can you talk a little bit more broadly what you see regarding your customer discussions regarding them investing, taking into account the macro uncertainties and things that we've lately seen?
Yeah, so we have some units which are overloaded in Pulp and Energy and some which don't have very good workload. That's why we have downgraded. Then it goes also that for that unit where we don't have very good workload, the market outlook is not that good either. For the rest, the market outlook is better. Customer activity in small to medium-sized projects for most of the business units is good, but for one it's not that good. Customers are still planning small to medium-sized projects, and then in long run of course new capacity investments as well.
Is it possible to specify where the workload and outlook is maybe not as good as in the other businesses?
Pardon? Can you repeat?
Is it possible to specify the business where the workload and outlook situation has worsened within?
No, no. I can be a little bit more specific. It's one out of four.
Okay. Makes sense. Then secondly on the kind of the Process Technology profitability, it seems to be quite isolated on the Pulp and Energy side. Is it such that is it very broad-based, or can you pinpoint it to number of larger projects? Kind of is it possible to think about how long these processes will run? Obviously trying to get how long are we living with this mismatch of prices and cost levels. I'm assuming that the new orders that you are taking in are more in line with the cost levels.
Yeah
that you're seeing.
Yeah. It's a small number, and some of them are bigger one and some are smaller ones where the costs have been overrunning. Like you said, it's in Pulp and Energy, limited amount. How long it will take to overcome then of course it depends on the pacing speed, so I can't say exactly even if I know how long will it take, but I can't explain it too much in detail. Of course like you said in all the orders what we are now negotiating, then of course we are taking all the inflation and war inflation as well into account when pricing the project. This is.
Goes pretty much in the way what we try to communicate in quarter one. I hope that we were clear on that then that we will have challenges with some pulp and energy projects.
Yeah, absolutely. I think it was very much in line what you said.
Yeah.
Lastly from me on the Services side and there kind of the margin developments showed quite good improvement from Q1, and then obviously order growth was strong considering last year's Q2 was already good. So the price realization I assume is quite good there, and now you are already kind of seeing the impact of price hikes that you have made, or is there something else that is also driving kind of the growth and profitability in that division?
Yeah. Our Services team and areas worked very hard in turning the profitability because it was not so nice to explain to all of you that we all knew that there has been inflation and we haven't been fast enough in increasing our prices. Our organization has worked very well on that topic. I'm happy of that. I'm sure that now we know better how to live in inflationary environment than half a year ago. About the growth, I think there are, and I don't have the number. It's so complex that I don't even have the numbers to tell that what the impact is. One component of the growth is coming from price increases.
One is coming from good demand because of the good operational rates of customers and then because of little bit pent-up demand during the COVID times. There is a third component which I want to be specific. There is that component that customers are now ordering the Services earlier than they used to because all of us have learned that there are longer delivery times, and of course, our customers understand it as well. If there's a service what they have been earlier ordering four months before they need it, now they might be ordering it six months or eight months earlier. There is that kind of phenomenon happening as well.
All right. That's very clear. Thank you.
Thank you. Our next question comes from the line of Daniel Schmidt of Danske Bank. Please go ahead, your line is open.
Thank you. I have two questions. Just to follow up on the Process Technology margins. I mean, can you give any indication what the level of margins would be going forward from 5.2%? Do you see like further pressure in the second half given the problem projects that you have, or is this kind of improving? Then the second question on the energy outlook, it was upgraded. Where is it coming from, and what are you seeing in the market? Thanks.
Unluckily, I can't give a good guidance for Process Technology margin, but of course we work hard on that topic. I can't give a good guidance on that, but we know that Process Technology a problem and then we are working on the topic. In energy, it has been active in Europe mainly, little bit in Asia as well, but mainly in Europe. Order intake has been good, and we have also good pipeline and now because of all this energy crisis we are all reading in the newspapers every day, I would assume that the good outlook and demand and discussion with customers for biomass boilers and waste to energy boilers will continue.
All right. Thanks.
Thank you. We currently have one further person in the queue. Just as a reminder to participants, if you do have a question, please dial zero one on your telephone keypads now. The next person is Sven Weier of UBS. Please go ahead, your line is open.
Yeah. Thanks. Good afternoon, Pasi. Good afternoon, Pekka. The first one is just a follow-up on the service margin. I mean, as it was already said to you, had quite a remarkable sequential turnaround there. I was just wondering, I mean, has that exceeded your expectations because you improved almost by 500 basis points? And I was just curious, how did you do that? I mean, it's real fast. Is there more to go for? I mean, typically in the second half you have higher service margins than in the first half. I'm still a bit impressed by that improvement. That's the first one.
Maybe one has to first say that we were disappointed with the first quarter poor Services profitability. If you calculate the delta from there, then of course it has to be big because first quarter was not good. Services team has worked very hard on this topic, and we from head office, how would I say, we have encouraged them. I'm of course happy how it has been developing. I was saying that to our team that I don't want to continue to explain to you that our Services profitability is not developing favorably. Aki and area heads understood the message. Thanks for making the pressure to me.
Okay. I was just wondering also, I mean, you have obviously different units within the service business, right? If I remember correctly, there was one specific area that was falling quite a bit short of your expectations in Q1. Is that really then also responsible for the turnaround then or is it basically all these subdivisions and Services?
Yeah. I think-
Contributing to that?
No, I think it's all of them and then I wouldn't say totally turnaround because last year our profit was 13% and it was 14.2% now. Actually we got back to the level where we should be. The first quarter was bad, but now we are at the level where we should be. Not to overmarket the action.
You don't foresee such a quick improvement on the Process Technology side?
Uh.
There it could take a bit longer or.
No. Sorry, but I can't give too clear guidance on Process Technology. Like I said to Daniel as well, that we work on the topic and we know where the challenges are, but I can't give any promises how quickly and when because otherwise I'm guiding too accurately. Sorry for that.
No worries. I was just wondering, I think on the Neles side of the flow side of the business you had temporary layoffs, and if I remember correctly, this is more of an impact in Q3. I mean, is that a tangible impact or will we not be able to see that?
It's more normal way how to manage the workload. Seldom you have that kind of situation that you have all the production units in full load. In Finland, we have this possibility for temporary layoffs. Then when we announce the layoff, we have to tell the total personnel in that unit, and we are not allowed to tell that how big portion of them might be affected if all of them are one or two days away. That's why the announcement was bigger than the planned action. It's nothing dramatic. I would say that that's normal capacity management where this temporary layoff mechanism in Finland gives good flexibility.
Understood. The last one I just had was on the scrubber side of things. I mean, of course, the spreads at the moment are kind of record high, several hundred dollars, and still there is not much activity. I mean, what do you reckon the customers are waiting for here?
No, we haven't seen the activity yet. That's something I had to check as well that do we start to see it? Because you are right that now the spreads are big and then there should be more market activity. You have a point, but we haven't seen it yet.
Okay. That's it from my side. Thanks, Pasi.
Okay. Thank you.
Thank you. Our next question comes from the line of Johan Eliasson of Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi, Pasi. Hi, Pekka. Just a question follow up on the Services side. You said part of the good orders were a sort of catch up from last year's lower orders. If I remember it correctly, it was sort of rebuilds and that sort of stuff that went away during the pandemic. Does this imply now that some of the order recovery you're seeing here is this a bit lower margin type of Services?
I would say that the order intake is now quite much normal, like we are saying that all the business units have been increasing the order intake. The mix is actually quite much like it has been.
Before the pandemic, you mean? Yeah.
Now I'm comparing to last year. Last year the activity so started to be. I would say that it's quite close to the one which was before pandemic as well.
Okay. Then you gave this backlog and the delivery this year. Will all of the Services and Automation orders be delivered this year, or are those also some orders that slipped into the coming years?
Some of the Automation and Services backlog is going to next year.
Okay. Okay, good. Just finally on the margin here, I mean.
Not slipping. They are planned for next year.
Okay. On the profitability overall, I mean, Kari always used to talk about the seasonality that you will have typically the highest margin in the final quarter, et cetera. You don't see anything that would change that this year despite the issues you have on the Process Technology side?
We have seasonality and we've had this year seasonality as well. It's of course difficult to say that how much there will be seasonality, so first half against second half. Like you have been following us many years, so there is a seasonality. It continues.
Yeah. Excellent. Okay. Many thanks and happy summer.
Oh, thank you. The same to you.
Thank you. Our next question comes from the line of Tomi Railo o f DNB. Please go ahead. Your line is open.
Hi, Pasi and Pekka. This is Tomi from DNB. Coming back to this Process Technologies issues. Just want to get the picture right and confirmed. Is it project-related cost overrun issues or is it price and cost mismatch which is causing this margin?
It's of course different reasons for different project, but big thing is the logistics cost which has increased. Some of the inflation has been hitting more. In some projects, in some small projects, not in the big ones, but in small projects there has been also some not good enough accuracy in costing. That from Valmet perspective.
But that-
Valmet's perspective, those are not material.
Are there sort of a project-related cost overruns also playing a part or challenges with projects as you mentioned or?
Uh-
Is that not the major issue?
I would say that if one takes the biggest one, then it's the inflation in logistics and all the other sub-suppliers.
Okay. Thank you. Another question on the Services. You presented a good list of activities driving the growth. I was just wondering if the extended lead times can you see those as temporary or can you see that actually this activity which is coming earlier than before can that be sustained for a couple of quarters or is it just a temporary for second quarter?
Now I would guess that it will continue for a while before all the delivery chains are working quickly again and with the normal pace. Then customers have to also learn to trust to that and then, of course, we have to learn to trust to that as well because now when we are quoting something then we of course take extra time for the delivery times to make sure that we can keep the promised time schedule. It will take some time before the situation gets back to the normal.
Makes sense. Excellent. Thank you very much.
Thank you. We have one further person in the queue at this time. That's Tom Skogman from Carnegie. Please go ahead. Your line is open.
Yes. Hi, Pasi and Pekka. This is Tom from Carnegie. I have a couple of questions starting with kind of some indications about the future net financial costs and taxes. You had no financial cost this quarter despite of course a big, you know, net debt coming from the Neles side. What should we look for the coming quarters?
Yeah. Now without CFO next to me, Pekka, can you answer to that or is it?
I didn't quite catch Tom's question, so.
Taxes and financial costs.
Oh, I don't have an answer to that one.
Yeah. We have now the net debt what we have said and then like we have been earlier communicating our interest rates are competitive. From that perspective, I wouldn't see any big change compared to earlier times except that we have a little bit more debt or we have more debt than earlier. In taxes we don't see. I don't see any change actually compared to the earlier years when thinking about we have analyzed the taxation. I don't see any change happening in that number either.
Okay. On roll manufacturing, where you had the factory fire, how well have you managed to find replacing capacity? As part of this question also the former CFO said that he expected paper sales could reach EUR 1.3, you know, then we started to doubt that after the fire, but now we had very good kind of deliveries in the paper division. What sales is kind of reasonable to expect?
Yeah
in Paper this year?
Net sales I can't of course guide too well but our organization managed the fire very well. Fire was first of all isolated to one island only and then the three, four others we got back to almost. Three of them we got reasonably quickly to normal operation. Part of the fifth one as well and then the one where the fire was, part of that is now could be used in a normal operation but we still need to work with the authorities to get the approval. Team has found some subcontracting capacity for many of the activities. For some of the activities we still need to work on.
to solve all the delivery issues but I have to give a lot of credit to Paper business line in managing the situation, so they have done very good work. Sorry then, I can't give exact estimate for the net sales.
If I understand right, the fire is not really holding back deliveries.
Mm-hmm
as you feared 3 months or 2 months ago.
No, the impact has been smaller than what we feared. Thanks to the.
And, and before-
Thanks to the good work of our team.
Earlier you talked about opening bottlenecks in paper to increase capacity. Could you give an update on where we are with that?
Actually, Paper business line is now working on the same topic at the same time because for us to catch all the delivery schedules we have to increase the capacity. They are working at the same time on the fire but then also on finding extra new ways how to catch up the missed hours we have lost due to the fire.
Yes. The steel price has come down but our steel hedging, but what will the impact?
No, no.
from
You're a little bit cut, so you asked something about steel price.
The steel price had a short peak, and now it is down again. What will this mean for you with your hedging?
We of course had to buy steel for some of the deliveries when there was the peak of the steel price and then now of course we have to see that what kind of possibilities we have now to benefit from the dropping steel prices. I don't have that number in my head yet. This is of course an opportunity for us.
Finally just about this kind of dynamic demand implications from changes in the world. The price of your, you know, board machines and pulp machines are up a lot in the last two years. Now we see, of course, you have this gas situation in Germany and you have a lot of, you know, paper manufacturing in Germany, and you also have your key competitor being based in Germany. What do you see if you not talk about the demand the next quarter or two quarters ahead, but is it a problem in customer discussions that prices have increased so much in your type of products the last couple of years, and what do you see from this gas situation?
I haven't had too much customer discussions now after summer vacation. Middle Europeans are still on vacation. Some of the customers will of course think that should they delay the decision little bit to wait that the commodity prices will go down, and some are seeing that the market has been that good that they'll continue with the time schedules what they have had. Of course the third component is that if there will be a recession in Germany and Middle Europe, how much it will impact demand of packaging material, then that will be kind of short-term challenge. In long term, I haven't seen actually anybody saying that the demand for renewable packaging materials wouldn't be.
Recyclable packaging materials wouldn't be increasing. Our customers still have long-term positive view of the future, and then there will be maybe some hiccups, but long term I'm confident.
Okay. Thank you.
Thank you. We've had one further question come through. That's from the line of Tomi Railo at DNB. Please go ahead. Your line is open.
Yes. Still have one housekeeping question. You had the EUR 50 million cost on the other line for common group costs. Is that a fair assumption now going forward with Neles or any guidance on the-
Not direct.
...
Not direct guidance, but we have to work on that topic.
Is that a little bit on the high side or should it-
Uh, uh
Should it be lower?
No. I think it's on high side.
Okay. Thank you.
Thank you.
There are no further questions on the line at this time, so I'll hand back to our speakers for the closing comments.
Pekka, we close soon, but thank you. Sorry for giving half an hour presentation, but luckily you had enough energy to continue to follow it. Pekka, now it's your-
Yeah
closing words.
Thanks. Thanks, Pasi. Thanks everybody for the good questions, and have a nice summer and we will get back to the Q3 results then on the 26th of October. Thank you very much. This concludes now the-