Good morning everyone, welcome to Valmet's second quarter 2026 results webcast. I'm Pekka Rouhiainen from Investor Relations, and with me today are Valmet's President and CEO, Thomas Hinnerskov, and our CFO, Katri Hokkanen. Before we begin, I would like to briefly mention the separate stock exchange release we published this morning. Valmet's board of directors has initiated a strategic review regarding a potential separation of the company's two business segments, Biomaterial Solutions and Services, and Process Performance Solutions into two standalone publicly listed companies. We are pleased to be able to share this important strategic step with you today. Next, Thomas will start by discussing the continued strategic development of Valmet, including the recently completed Severn acquisition and the strengthening of our Process Performance Solutions business. He'll explain how these developments have led to the strategic review we announced today.
He will move on to review the key highlights and operational performance for the second quarter, and Katri will cover the financial development in more detail, after which Thomas will return to discuss our guidance and market outlook. As usual, you may submit written questions through the webcast platform at any time, and we will then also open up the lines for Q&A. With that, Thomas, the floor is yours.
Thank you, Pekka. As mentioned, I'll start by discussing the recent Severn acquisition and how we are continuously strategically developing Valmet's portfolio. Before turning to those topics, however, let me just make one comment shortly on our Q2 performance. For me, the second quarter, which was relatively strong in terms of net sales and comparable EBITA, and also order intake, showed that Valmet continues to move in the right direction. Our strategic actions are delivering results, our competitive risk remains strong, and we continue to strengthen the company for the long term. While I'll come back to our Q2 performance in more detail shortly, the strength of those results provides an important context for the strategic step that we announced earlier this morning. With that, let me begin with Severn.
As you well know, on July 1st, we successfully completed the acquisition of Severn and welcomed approximately 950 new colleagues to Valmet. It was really great to be in Houston on the day, meeting colleagues there, having the opportunity to talk to many of them in person, and also walking the shop floor there. Severn is a well-established industrial valve company specializing in severe service Flow Control solution. Severn generated approximately EUR 205 million of net sales in 2025 with an EBITA margin of around 16%. The business has an excellent strategic fit and also cultural fit with Valmet and brings valuable technology, expertise, and customer relationships to Valmet. We're extremely happy to be able to start working with our new colleagues and customers. It's important to highlight how Severn acquisition strengthen our Process Performance Solutions segment and accelerates Valmet's growth beyond the traditional biomaterial markets.
Severn expand our addressable market, increase our install base, create new opportunities in lifecycle services and aftermarket business. With the acquired business included, our Process Performance Solutions segment annual net sales will now be approximately EUR 1.7 billion on an annual basis. At this scale, we can respond faster to customers wherever they operate and invest with more conviction in the technology and service capabilities they need. In fact, during the first week since the closing, we've already seen significant interest from new kinds of customers towards the Process Performance portfolio. Not just towards Flow Control, but also towards our broader portfolio, including Automation Solutions. That leads us today, and today's strategic announcement, which Pekka mentioned earlier. As highlighted by the Severn acquisition, Process Performance Solutions has indeed developed into a large, highly profitable business.
Together with the strong Biomaterial Solutions and Services, this has led us to ask ourselves the important strategic question: Could these two businesses create even more value for shareholders as independent companies than they can together? To really look into this question, we've decided to initiate a strategic review to evaluate a potential separation of Biomaterial Solutions and Services and Process Performance Solutions into two standalone publicly listed companies. Let me emphasize one point immediately. Today's announcement is about initiating a review. No decision has been made to implement a separation. There's no certainty that the review will lead or result in a transaction or a structural change. The purpose of the review is solely to assess whether a separation could create additional long-term shareholder value compared to with the current combined structure.
We expect to provide an update no later than in connection with the publication of our full year 2026 results. Let me explain further why we believe this is the right time to start this review. The automation business we acquired in 2015 was highly complementary to Valmet's core biomaterial business at the time. Back then, around 80% of the business came from Valmet's traditional customer industries, making the industrial logic and customer synergies very strong. Over the past decade, through successful execution, organic growth, and strategic acquisitions, we've transformed that business substantially. Today, Process Performance Solutions is no longer primarily an automation business servicing pulp and paper customers, but instead includes equally strong Automation and Flow Control businesses servicing a versatile group of customers.
In fact, currently up to 70% of the segment's order intake come from industries outside pulp and paper, many of them linked to long-term trends such as energy transition, industrial efficiency, and digitalization. This is a significant shift, and as discussed, the acquisition of Severn further strengthened these characteristics. At the same time, the Process Performance Solutions segment has developed into a major earnings engine in its own right. Today, this segment generates more than EUR 300 million of comparable EBITDA on an annualized basis and contributes nearly half of Valmet's total comparable EBITDA. In other words, what started as a highly complementary business supporting Valmet's core biomaterial offering has evolved into a scaled, high-margin growth platform with its own attractive end markets, growth drivers, and value creation opportunities. As a result, Valmet today consists of two large profitable businesses with strong market position and the scale to succeed independently.
On the left, Process Performance Solutions. As discussed earlier, this business has grown significantly in scale, profitability, and strategic importance. It serves a diversified base of industries with mission-critical automation and flow control solutions. Close to 70% of order intake already comes from outside the pulp and paper industry. On the right, Biomaterial Solutions and Services. This traditional part of Valmet's business has also created substantial value over time. Since Valmet was formed in 2014, its net sales have grown from EUR 2.5 billion to nearly EUR 4 billion, and the share of services has increased to 55%. This marks a clear shift towards a more resilient, service-led business with a high level of recurring revenue. At the same time, our margins have improved from around 2% to close to 10%. Importantly, we're not standing still in today's softer market environment.
In fact, periods like this are often the best time to drive meaningful change. Through the operating model renewal, the global supply transformation, we are strengthening customer proximity, increasing our focus on aftermarket opportunities, improving in procurement, and optimizing our manufacturing footprint. These actions are already visible in the steps we've taken, including the facility closures announced earlier this year in both Europe and China. They position us to emerge stronger, gain market share and service, and continue improving profitability as market conditions recover. Today, Biomaterial Solutions and Services is a global technology leader, lifecycle service leader, servicing customers across pulp, board, paper, tissue, as well as energy. We're at the core of our customers' operation. From the initial technology investments to decades of lifecycle services, we help keep their production running safely, efficiently, and competitively every day.
That gives us the confidence in the future is that we are building on an already strong foundation. We've strengthened the business significantly over the last decade, and we're taking further actions today to increase customer proximity, grow service, and improve profitability. We believe the next chapter is still ahead of us. In conclusion, this review reflects the fact that both businesses have developed into strong and successful operations with distinct business model growth opportunities and capital allocation profiles. This naturally leads to the question of where additional value creation might come from. At this stage, we see three potential areas where a separation could add and create additional shareholder value. First, more focused strategies. Each business operates in different competitive environment, serve different customer needs, and pursues somewhat different growth opportunities.
Greater independence may allow each businesses to make their own decision entirely based on its own priorities and market dynamics. Second, more tailored capital allocation. The business have different investment requirements and different opportunities for both organic and inorganic growth. As we highlighted in our Capital Market Day last year, the M&A potential is clearly high in PPS, with focus on opportunities outside of the pulp and paper industry, as separation may allow each company to allocate capital in a more targeted way, aligned with its own economics and strategic priorities. Third, clear accountability and investment propositions. Separate management teams, boards, and capital allocation frameworks could improve transparency and allow investors to assess each company against the performance drivers most relevant to that business. At the same time, we do recognize that a potential separation would also involve costs and other impacts.
That is exactly why we're conducting a comprehensive review rather than making a decision today. We'll only proceed if the review demonstrates that the long-term benefits clearly outweigh the cost, complexity, and execution risk associated with such a separation. Finally, one more important note around today's announcement. Nothing changes for our customers, our employees, or our day-to-day operation. Business continues as normal. The review does not change our strategy. Customer commitments, deliveries, projects, and services remain unchanged, and our teams remain fully focused on executing and servicing our customers. If a separation were eventually pursued, one of the key objectives would be to preserve that customer value. This will remain an important consideration throughout the review process. The strategic, financial, and operational implications of a potential separation will now be assessed carefully.
The board will only move forward if there's clear evidence of enhanced shareholder value creation. With that background, we can now turn to our second quarter performance. We will get back to the strategic review in due time. The first part of the presentation focused on strategic development of Valmet. The quarter in itself clearly demonstrates the benefits of the strategic actions we have already taken over the past year. The decisive action we took last year to strengthen Valmet's competitiveness have continued to deliver during the quarter. Net sales increased 6% organically, and comparable EBITA increased to EUR 152 million. Comparable EBITA margin remained stable at 11.5%, supported by higher net sales and cost savings. On a year-to-date basis, comparable EBITA is now slightly ahead of last year, demonstrating the resilience of our full-year trajectory despite the softer start to 2026.
Orders received totaled close to EUR 1.4 billion. While orders did decrease 9% from the comparison period, which was mainly driven by our capital project order intake in the Biomaterial Solutions and Services segment, orders increased sequentially from Q1 and were at a solid level. While uncertainty remains in the market, we saw some early signs of stabilization in the Biomaterial Solutions and Services during the quarter. Capital project activity improved sequentially from an unusually low level seen in Q1, while the service market remained soft but did show signs of stabilization. While this is a positive development, it's important to note that the timing of large customer investment decisions continues to have a significant impact on quarterly activity, and we would not yet characterize this as a sort of definitive market turning point. Process Performance Solutions continue to perform well, continues to deliver resilient growth and strong profitability.
As I just briefly explained, the successful completion of the Severn acquisition marked another important step forward in strengthening our Process Performance Solutions business and long-term earnings profile. Based on our first half performance and current visibility, we reiterate our guidance for 2026. Looking at the orders received, orders amounted to EUR 1.4 billion, a decrease of 9% organically compared to a strong comparison period last year. Despite the year-on-year decline, EUR 1.4 billion do represent a solid level of order intake in the current market environment. While orders included one single triple-digit order, overall order intake was quite broad-based. Orders include several mid-sized capital orders across geographies, across customer industries, demonstrating the breadth of our offering and customer base. With that, let's take a closer look at the segment performance. Turning to Process Performance Solutions, we delivered another solid quarter.
Orders increased organically by 1% with similar development in both Automation Solutions and Flow Control. This reflects the resilience of the business and the benefits of our broad industry exposure. With Flow Control, demand remained healthy across several customer segments, and Automation Solutions continued to see especially good activity in the marine segment with notable new wins. Net sales remained at previous year's level. Flow Control continues to grow while Automation Solutions was lower than the comparison period. Comparable EBITA increased to EUR 69 million, and the margin improved to 18.7%. Profitability remained at a high level and was supported by strong operational execution. While we're very pleased with the current performance, our focus is not on maximizing short-term market margins. We continue to invest selectively in growth opportunities within Process Performance Solutions. The recent acquisition of Severn Group is a good example of this approach.
The transaction is primarily a growth and strategic position opportunity and not a cost synergy case. We're focusing on expanding our market reach, install base, and long-term growth opportunities while maintaining attractive profitability in the business. Turning to Biomaterial Solutions and Services. Orders decreased 13% compared with a strong comparison period last year, but there were some positive sequential signs at capital projects. Large project orders increased to EUR 501 million from the first quarter, supporting our view that Q1 represented an unusual low level of capital project activity. However, while Q2 was a clear improvement, as I noted earlier, the timing of customer investment decision continues to have a significant impact on individual quarters going forward. As Biomaterial Solutions orders declined 8%, the overall market remained soft, but consumables and performance parts held up relatively well in our largest markets, North America and EMEA.
Mill improvements and field service decreased from the comparison period, which was strong in those categories last year. Overall, I would say that we do see some encouraging signs in customer activity, also in services. One element was the stabilization of consumable orders after several weaker quarters. There are indications that some customers are now gradually shifting focus from cost containment back towards operational performance and maintenance needs. However, it is still too early to characterize this as a broader market recovery. Net sales increased 8% organically, supported by a higher share of large project and smaller mill improvement projects. Comparable EBITDA improved to EUR 98 million, and the margin increased to 10.4%, supported by the higher net sales. We continue to see benefits from the action taken during the past year.
The operating renewal, ongoing footprint optimization, and broader cost discipline measures are improving competitiveness and supporting profitability, even as market conditions remains mixed. With that, let me hand over to Katri to take a closer look at the financial developments.
Thank you, Thomas, and good morning, everyone, also from my behalf. Happy to be here today. I will start with the group level development of net sales and profitability. Net sales increased 6% year-on-year to EUR 1.3 billion. Currencies or M&A did not have impact in the figures materially, and organic growth was also 6%. The increase was driven by Biomaterial Solutions and Services, where net sales grew due to higher activity in large projects, including a good development in the landmark Arauco project. Process Performance Solutions net sales remained at the previous year's level. Comparable EBITA increased by EUR 9 million to EUR 152 million from the EUR 143 million in the comparison period. The comparable EBITA margin remained at 11.5%. Higher net sales together with continued cost savings from the operating model renewal supported the earnings development during the quarter.
Like we see pull in the graphs, Q2 followed a rather typical seasonal pattern, and sequentially, both net sales and comparable EBITA increased from the first quarter. Overall, the quarter demonstrates that the actions taken over the past year continue to support the profitability, even in a market environment where customer decision-making remains cautious. Let's take a look at how our cost base has developed in recent years. The benefits from the operating model renewal continue to be clearly visible in our cost base. On a last 12 months basis, comparable SG&A expenses have decreased to EUR 905 million. Compared with the 2024 baseline year, SG&A expenses are now EUR 79 million lower. As a share of net sales, SG&A has improved from 18.4% to 17%. Importantly, these results reflect more than just cost reductions.
The operating model renewal was designed to simplify the organization, improve accountability, and bring us closer to customers through a stronger life cycle focus. The lower cost base is therefore a result of structural improvements in how we operate the business rather than just short-term cost cutting. Order backlog amounted to EUR 4.3 billion at the end of the second quarter. Compared with year-end 2025, the backlog was EUR 47 million lower, but remained at a healthy level. Approximately EUR 2.2 billion of the current backlog is expected to be recognized as net sales during 2026, based on our current delivery schedules. The backlog continues to provide good visibility for deliveries and supports our execution plans for the remainder of the year. As always, our focus remains on disciplined project execution, profitability, and cash generation.
With that, let's now turn to cash flow development. Cash flow from operating activities was EUR 65 million in the second quarter, compared with EUR 79 million in the comparison period. The decrease was mainly related to higher net working capital. Reported net working capital included a EUR 123 million dividend liability that has no cash flow impact. Excluding this liability, net working capital was EUR 154 million higher than at the end of 2025. The development was mainly driven by project timing and phasing effects, which are typical in our business. Comparable cash conversion on a last 12 months basis was 62%. While below our historical average, it is important to remember that quarterly fluctuation in working capital and cash flow are normal in Valmet due to the project-driven nature of the business.
We continue to expect cash conversion to improve during the year, supported by normal project phasing and disciplined working capital management, while quarterly fluctuation can remain significant. The balance sheet remains strong. At the end of the quarter, net debt was EUR 965 million, and gearing stood at 39%, compared with 42% a year earlier. Net debt to EBITDA improved further to 1.42 from 1.60 in the comparison period. The average interest rate of our debt remained stable at 3.6%, and liquidity was strong with EUR 584 million in cash and cash equivalents at quarter end. In addition, our EUR 450 million revolving credit facility was fully undrawn. This balance sheet strength provided the financial flexibility needed to complete the Severn acquisition immediately after the reporting period, and this will have approximately 15 percentage point impact to the gearing.
We are comfortable with that level given the strong cash conversion ratio our business inherently has. Comparable ROCE improved to 13.5% from 13.1% in the comparison period, and 12.7% in 2024. As shown in the graph, capital employed decreased by around EUR 79 million compared with 2024. While we remain below our long-term ROCE target, the direction of development continues to be positive. Adjusted earnings per share increased to EUR 0.47 from EUR 0.23 in the comparison period.
The increase in both reported and adjusted earnings per share mainly reflects the restructuring expenses related to the operating model renewal that impacted the comparison period. This slide summarizes the main financial figures for the quarter, and most of these items have already been covered, but I would like to highlight two additional observations. First, items affecting comparability amounted to EUR -1 million during the quarter, compared with EUR -62 million in the comparison period.
Last year's figure was mainly related to restructuring expenses of the operating model renewal. Secondly, the effective tax rate was 34.7% in the second quarter, which is above our long-term average level. Valmet's tax rate typically fluctuates between quarters due to profit mix and timing effects, and as a result, the second quarter level should not be considered indicative of a normal quarterly tax rate going forward. Our long-term average effective tax rate is approximately 25%, which we expect also going forward. In summary, the second quarter demonstrated continued benefits from our operating model renewal, supported by higher net sales and solid operational execution. With that, I hand it back to Thomas to go through the guidance and short-term market outlook. Thanks.
Thanks, Katri. Let me now move to our guidance and short-term market outlook. We reiterate our guidance for 2026, like I said earlier. Valmet continues to estimate that net sales in 2026 will remain at the previous year's level, and comparable EBITDA will remain at previous year's level or increase compared to 2025. Turning into our market outlook. For Process Performance Solutions, we continue to expect the market will remain at low year-on-year growth. The segment has demonstrated good resilience throughout the first half of the year. At the same time, uncertainty related to the geopolitical situation and global economic outlook remains elevated and continues to reduce short-term visibility. For Biomaterial Solutions and Services, we estimate that market activity will remain similar to the second quarter. We were encouraged by the improvement in capital project activity compared to the first quarter.
Timing of large customer investment decisions continue to have a significant impact on activity levels in individual quarters. The Biomaterial Services market is expected to remain soft in the coming quarters, while the overall market appears to be stabilizing compared to the beginning of the year. Overall, the external environment remains uncertain with low visibility. As we look at the remainder of the year, it's worth noting that year-to-date comparable EBITDA is already slightly ahead of last year. In addition, Severn will provide a modest contribution following the closing of the acquisition. At the same time, profitability continues to depend heavily on service activity where market uncertainty remains. Overall, our large install base, strong lifecycle offering, disciplined execution, and the addition of Severn provides a solid foundation as we move into the second half of the year.
Before I conclude, let me comment on another important announcement we made this morning. As you know, we announced earlier this year that Katri would be leaving Valmet, and since then we've conducted a thorough search process with a number of strong candidates. I'm very pleased that the process had resulted in the appointment of Pia Aaltonen-Forsell as Valmet's next CFO. Pia clearly brings a demonstrated broad financial experience and experience from leading complex global organizations. We believe she's an excellent fit for Valmet and for the next phase of our development. Pia is expected to join Valmet no later than the end of January 2027. We look very much forward to welcome Pia to Valmet and to introducing her to many of you next year.
Until Pia joins, we are naturally in the process of appointing an interim CFO, and we expect to be able to announce that during August. With that, let me conclude today with three key messages. First, our performance in the second quarter demonstrates that the action we have taken continues to deliver. Our competitiveness remains strong, profitability improved, and we continue to strengthen Valmet for the long term. Second, both our businesses have developed into strong, increasingly distinct platforms. Process Performance Solutions have evolved into a scale business of approximately EUR 1.7 billion in net sales, with growing exposure to industries critical for the energy transition, while Biomaterial and Services continue to hold a leading position in its markets and also offer significant long-term value creation potential. Thirdly, today's announcement reflects the significant progress both businesses have made.
The strategic review is intended to assess how that progress and future potential can best be translated into long-term shareholder value, we'll get back to this. At the same time, our day-to-day priorities remained unchanged, servicing our customers, executing our strategy, and delivering profitable growth. With that, Pekka, I'm going to hand back to you.
Thank you, Thomas and Katri, for the presentations. We now move to the Q&A session. As usual, you may ask questions either through the webcast platform in the written format or through the conference call line. We have two questions here. First from Christian [Ahlstrom]. Thank you, Christian, for the question. I'll read it here. At the Q1 call, you signaled that the expected Process Performance Solutions margins will decline in order to invest back into growth. However, the Q1 margin increased. Do you still expect lower margin for the rest of the year?
A very good question, Christian. Overall, we are very happy with the PPS performance, and they continue to deliver strong operational performance during the first half. Profitability has also been supported by sort of elevated product margins. What really is important in that business is we're happy with the level of profitability, and we really want to sort of make sure that we push the growth accelerator on that one. That's why we want to sort of keep always looking for potential investment into organic growth. This year some of those growth investments maybe been, I want to say, set back slightly due to some of the geopolitical tension that was created early on in the year.
Thank you, Thomas. Another one, anonymous question. Is the main reason behind splitting up the persistent low multiples of the group?
Good question. Like we said also in this presentation, we've developed over the years two very strong segments. We introduced them, the segments, last year on our capital market. It really is about how can we position these structurally to be in the best position to development? Important to note is now they're actually so that they are servicing different customer segments to a very large extent. Only 30% of the customer segments are overlapping, right? It's also clear that both or the two different platforms have different growth agendas. One is much more, which is the PPS business, prone for that's where we're looking into M&A, inorganic growth. Severn is a good example of that. That means that the capital allocation for these two segments are going to be different going forward.
as a third point, there can also be a point in this, would a separation make it a simpler equity story with dedicated KPIs for these two different segment in order to actually follow and evaluate, are they executing the strategy as communicated?
Great. Thank you, Thomas. that's all from the written format. Operator, handing over to you.
If you wish to ask a question, please dial #5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial #6 on your telephone keypad. The next question comes from Antti Kansanen from SEB. Please go ahead.
Hi, guys. A couple of questions from me. I'll take them one by one, and I will start one regarding the potential separation of the two divisions. Thomas, could you maybe talk a little bit about the synergies between the automation systems business and the flow business within the PPS in terms of shared client base, R&D, and then contrast to what type of synergies the automation business and the pulp and paper equipment business actually have had historically, in terms of if these businesses end up under a separate company going forward?
Great. Thanks. Great to have you on the call, Antti. Let me just write down synergy. The synergies within PPS, within Automation Solutions and Flow Control, that's the clear customer overlap in that. Also even since we've launched the strategy and the new structure last year at the Capital Market Day in June of last year, we've even gone further into that as part of also our commercial excellence efforts, and looking so that there's a greater, actually, customer overlap than probably what we initially thought. That's clearly a top-line synergy between the two within the PPS. Between PPS and bio, I think it's important to note that, just like I also said earlier today, is that we started out to have a very strong industrial logic to actually put automation into the bio business.
The fact is now that the overall PPS business have then gone from actually being 80+ % biomaterial customers to now be less than a third of the biomaterial customers. It is, of course, important also to note, and I guess maybe that's a little bit what you allude to is that, there's also a strength in some of that automation into the bio, and that's of course one of the things that this strategic review needs to assess is what is the synergy there, and how do we actually preserve that strength from a customer value proposition perspective.
I know that it's early days regarding the strategic review, but how should we think about in terms of the structure? Would an outcome where you would separate only the Flow Control business out of the remaining, or would that be a possibility, or is it just a binary of PPS bio or just remaining as a with the current structure?
What we clearly are looking into is taking the two segments, which are very strong individual in itself, and they are close to 50% of the bottom line, and looking into would it make more sense to have them as two separate listed public companies. The purpose is to keep flow and automation together if such a separation should occur. That's the hypothesis.
All right. That is very clear. A couple of questions on the actual Q2 performance and maybe on the biomaterial service demand. You are flagging quite stable parts of the transactional parts and consumables demand, but reduction on the field and mill improvement side. Is this just a function of certain Q2 comps, or how would you comment on the market outlook for a different type of service elements within the bio?
I think that is a great reflection, Antti. How I would think about is basically twofold. First of all, we have had a number of quarters with soft, or particularly soft and even declining parts and consumables. Great to see that that is coming back on more normalized levels. I think it also shows that customers are getting back to we need to operate efficiently. That is the only way to really stay competitive in the market. On the improvement or mill improvement projects, it is also clear that first half last year was particularly strong in those. We really had a year where there was lots of customer focus on this. In particular maybe in China and Latin America, we see very little activity on the large mill improvement and a strong focus instead on the bigger capital projects.
I would interpret it market-wise, there is a little preservation of CapEx in these two areas, going into large capital project rather than the larger improvement projects.
All right. The last one from me is regarding the earnings outlook on the second half, where you are essentially guiding flat to growing earnings. Could you maybe talk a little bit about on the contribution of Severn in terms of any seasonality on the business and any kind of integration, let us say headwinds that maybe would curtail the earnings contribution in third and fourth quarter?
Severn, as you said, we're very happy with the Severn acquisition. It will give us a slight tailwind going into the second half. It's hard to talk at this stage. We're very early in the integration. Far we don't see bigger seasonality in that business. It is also important to remember it actually consists of three businesses with different industrial focuses. They are also impacted of the geopolitical situation, particularly in the Middle East, currently. Some slight tailwind there going into the second half, but difficult to talk about the actual seasonality in that business at current.
All right. Thank you very much.
When you get there.
The next question comes from Panu Laitinmäki from Danske Bank. Please go ahead.
Hi. Thanks for taking my questions. I have two. Firstly, on the strategic review, I understand you have only just announced it, but can I ask about the potential kind of negative synergies in terms of group costs? If you separate the two, what kind of additional costs should be assumed for the new business? Is the kind of current group sales to sales percentage a good guide for that? Any comments around that?
Yeah, Panu, as you sort of also allude to in the beginning of your question, it is very early days on that. So far, we've said we are initiating the strategic review. Part of that is, of course, also to look in what are potential dis-synergies on that, including a group cost structure. Just like we've shown the last 12 months at least, we are going into a much leaner, or sort of committed to driving a very lean organization. You saw from Katri's presentation, EUR 79 million less SG&A cost versus 2024. It's a focus area. How much it'll be, that's if we should come back and say, "This is what we're going to do," there'll, of course, be more information on that topic.
Okay. Thank you. Secondly, on Q2 performance in the Biomaterials, it was quite a bit better than Q1. Could you kind of describe what drove the delta? Was it the positive growth in services compared to Q1, or was it more cost savings coming through, or something with the equipment projects?
Yeah, generally, strong execution. Of course, services came out stronger, especially in on parts and consumables, which drive good bottom line. A little bit better service mix than in Q1 this year. That, of course, helped. Also, some of the cost measures also coming through on that. We also executed quite, how would you say, accelerate on some of the capital projects, Arauco being one of them, making sure that we actually getting ahead of the curve there to finalize that next year. Strong delivery on project side, a slightly better mix and on the service side, and some growth on the consumables, cost containment, I would say as well.
You'd also will know that we said in June that we would be doing some temp layoffs here in Finland in particular, that also given a little bit of tailwind in June, the main part of that will actually be coming in the second half.
Okay, thanks. Can I just ask as a follow-up, was there something unusually in the Arauco kind of deliveries between Q1 and Q2 that Q1 was a bit weaker, then Q2 stronger? Just thinking like, is the run rate something in between of those or?
Oh, no, not really.
Thinking of what we-
We've just been very sort of keen on constantly staying ahead of the curve on that one.
Okay. Thank you.
You're welcome.
The next question comes from Sven Weier from UBS. Please go ahead.
Yeah, good morning. Thanks for taking my questions. The first two are also on the potential breakup. I was just wondering what drove the timing of the announcement, because typically these processes go, you become a bit of more an active shareholder who asks for these things, and then this happens, but you guys seem to be more proactive. Did you also sense more shareholder pressure in the last couple of months to do this? What really drove the timing and the general decision to do the strategic review?
Yeah. Thanks, Sven. Clearly, like I said, last year we came out with the Capital Market Day. We sort of split the business into two different segments, the Biomaterial segment and Process Performance segment. We've then executed this, or we've looked more into inorganic growth as well, and we now executed the Severn acquisition. It's sort of a very natural point in saying we have two very strong segments, both on their own, of course, also together. Now just a good time to sort of take a step back in the whole, and ask the strategic question to yourself is, would these two segments be stronger and easier and better developed as standalone, or is the current structure actually a good setup for developing these two segments? It's just a natural progression of the strategic thinking from management and the board.
It was not really that during investor meetings in the last couple of months that there was an increasing kind of shareholder pressure to do this?
No. We are hired to make sure we run the business in the best possible way, that's where we need to take care of our shareholder value, but also deliver to our customers the best, strongest value proposition. That's what it's all about.
I also had a similar question to Antti regarding the synergies between the Automation business and the pulp and paper machinery business because when you guys bought the business more than 10 years ago, I thought there was a strong business logic to do this. You could probably argue Metso should have never spun off Valmet without, and also given that Andritz has this as an integral part of their offering. I did understand you correctly that having a spinoff of Neles alone is not an option. Either they go together or you keep the structure as it is.
I think that there's two ways of looking at it, Sven, and that's what, of course, goes into the review. One is, how do we preserve that offering in the Biomaterial Solutions and Services with the Automation? How actually can we create that and preserve that at an arm's length basis? That's one part. The other part is also that, to your second part, which is that there are also synergies between Flow Control and Automation, and there's a much stronger overlap there in the customer segments or customer industries that they're serving than into the Biomaterial, which is now less than a third of the overall PPS business.
A final question I have is just on the competitive environment on the board machine side, because obviously we saw now for the first time that Andritz won a huge project in Africa. Are you generally seeing more competition on those board projects? You won one in the quarter, obviously, but what's the competitive intensity that you see? Has this gone up quite a bit this year, or what do you observe?
I think the competitive situation is unchanged, I think we've taken our fair share of the market this year so far on board machines.
Okay. Understood. Thank you.
Cool. Thanks, Sven.
The next question comes from Tom Skogman from DNB Carnegie. Please go ahead.
Yes, hello. This is Tom Skogman from DNB Carnegie. I would like to start with a question about the cash flow outlook, as you are approaching the end of the Arauco delivery.
Yeah. I think, Tom, from an Arauco perspective, I think there are still a bit over 12 months left on that delivery, Katri, I'll let you comment a bit more specifically on the cash flow.
Yeah, I think in general, as you saw from the presentation and from the numbers, the cash conversion for the last 12 months was below our average. It's good to remember that there are these quarterly fluctuations, typically in net working capital, that then has an impact on the cash flow. When we look towards the future, we continue to expect cash conversion to improve during the year, it's supported by normal project phasing and working capital being very disciplined, still good to remember that the quarters can fluctuate.
The reason for really asking this is that Valmet, without Neles, used to have more or less kind of a net cash situation, now after paying for Severn, you will have a quite big debt position. I understand it's early days, is there a risk that you need to raise money to make sure both companies have strong enough balance sheets and that Process Performance don't start with a too heavy debt burden holding back acquisitions?
Good question, Tom. I think about two things. One is when we did the Neles acquisition, the proportion of projects in the biomaterial business versus the proportion of service was much higher, therefore, there was a much higher proportion of prepayment into these projects. On the debt leverage, I would say even when we add the Severn, we have a debt leverage that is actually lower than last year, I don't see any challenges on that.
Could you open up a bit on the M&A pipeline?
That will improve over the year with the strong. Sorry, go ahead.
Could you open up a bit about the M&A pipeline in Process Performance? You have done some very good acquisitions, and I'm not now talking about the next six months, rather five years ahead. Should we expect that business as a standalone to continue on this kind of path of finding a lot of acquisitions? What is the big picture in the M&A funnel there?
Yeah. I think what you can expect is twofold. One is we put more emphasis on scanning the market for suitable acquisition targets where the strategic fit is strong and where we are good owners of the asset. That has sort of strengthened, and we have put more effort and resources behind that. If we find suitable targets, expect us to continue doing good value accretive deals on that one.
On the profile of the Biomaterials business, could you somehow turn that business into more of a service business and less of a project business? Would it be possible to change how you sell, for instance, large pulp mill projects and really market the business as a service business more?
First of all, I think we have turned it already into a much more of an aftermarket business, and that's really also what you talked about in the Capital Market Day last year. We said, what we look at is, yes, we do the projects. How we deliver those, I don't think that will actually change much over the years. I don't see a big path for that. However, we do see that the growth opportunity really is in the aftermarket. That comes, of course, when I say aftermarket, I mean everything from the consumable, the parts, but also to the mill improvement projects, large improvement projects, bigger rebuilds, and brownfield.
We know if you think about the technology age of the two very mature market, Europe and North America, there are quite big opportunities in terms of helping our customers there driving or having a more efficient equipment, so that they can actually be more competitive in the market. We are pushing. This is how we see the growth. This is really about the aftermarket. The projects are cream on the cake.
Okay. Finally on the Automation Solutions orders, I think they were slightly soft this quarter. Is there any reason to that?
Slightly what? Sorry, I couldn't hear what you said, Tom.
The Automation Solutions orders. I think they were a bit soft this quarter. Is it just temporary or any structural change?
No. I think this is just between the quarters, it might vary a bit. We had also a strong Q2 last year as well. We had some good wins, particularly in the marines business, which we're very happy about. That also fueled this thing about, we have such a strong value proposition outside of the pulp and paper business as well with these technologies, both in Automation Solutions, but also in Flow Control. We are market leader in those two areas in the pulp and paper, but it also two-thirds of the business is supporting other industries in a very strong way.
Okay. Thank you.
Thank you.
The next question comes from Christoph Blieffert from BNP Paribas. Please go ahead.
Good morning. Thank you for taking my questions. I would like to start with the potential separation, and this is now a technical one. If we would like to allocate the group level as a group net debt to the divisional level, what would be a suitable approach to do that?
Yeah, thanks for the question, Christoph. This is, of course, very early days, and this is way too technical to be answering now. I think what is important to note on the net debt is that, we are better than last year despite the Severn acquisition. That's a positive thing. If it works for two entities, should we split it up, it will also work for Well, it works for one entity in the sum. It should be split up, it would also work for two. Of course, these two entities would have different cash requirement or different requirements, and that will be taken into account should we get to that stage in terms of the balance sheet.
Okay. The second question is more strategically on the trends we have been seeing in service revenues and biomaterials. Do you think the change in the operational model has negatively impacted the operating performance and has contributed to the revenue decline you have faced in the first six months of the year, or has this been simply driven by the adverse market conditions? Thank you.
It's clear we have had some quite challenging market conditions the last 12 years. What I would also pay attention to is the operating model have been driving a EUR 79 million bottom-line SG&A impact for the last 12 months. That's, of course, a major contribution to the profitability levels that we are seeing now, despite the softer market that we're also experiencing in the biomaterial.
Okay. Thank you.
Also, you should also think about that the big change on some of these servicings is actually on the mill improvement projects.
Understood.
Yeah. Thanks, Christoph.
The next question comes from Mikael Doepel from Nordea. Please go ahead.
Yes. Hi. Good morning, guys. Mikael Doepel from Nordea. Two questions, please. Firstly, on the project business pipeline, how would you describe that now? I think you got one order from China in the quarter. You've been talking about the good pipeline over there. We've seen the CNPC project being a bit delayed. If you could talk a bit about what you're seeing out there when it comes to the big projects and what your expectations are. And then secondly, on the service outlook overall. I think you're guiding for a soft market. At the same time, you're saying that you're seeing some signs of improvement. Just wondering how we should read this. As you pointed out, we have seen multiple quarters of weakness already in this business.
Is it fair to assume that slight improvement, perhaps coupled with weak comps, should actually mean that this business should turn back to growth in the second half? Or how do you view the situation?
Yeah. Good observations, Mikael. If you just take on the project pipeline first, like I said, we do see better activity in terms of discussions with customers than what we saw maybe six months ago. That, I think, is a positive. Of course, difficult to predict between the quarters. I would also emphasize that this quarter, which I see it as a positive as well, was that, yes, there was one bigger order that was triple millions. However, the rest was very broad-based, both in terms of geographies, where they're coming from, but also in terms of the business area that they were coming from. Both tissue, both board, both pulp, all gotten large and sizable orders and across different geographies. I think that's a positive. That is not a one punch, and then it looked good, but actually that it was good foundational about that.
Also that the conversation we have with customers is also fairly broad-based as well. As said also, it is a little bit hard to predict between the quarters. On the service side, yes, good to see that the parts, consumables stabilizing, coming back up, customers being more focused on operational efficiency and actually maintaining the equipment rather than really maybe sweating the assets a little bit, which we've seen in the past maybe 12 months. Also that sharing of spare parts between sites has also maybe been reduced now or has come to a natural low level. I do want to, and that's what we emphasize a little bit, the visibility is and has been lower the last 12 months than what we've actually seen historically.
Okay. Fair enough. Thank you very much.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Antti Kansanen from SEB. Please go ahead.
Yeah. Thanks for taking my follow-up. My question is on, let's say, cost inflation and backlog and order margins. How do you see pressure coming from your suppliers, and obviously freight costs as well, compared to the open project backlog that you have and the new orders that you have taken on the quarter going into next year's margin forecasts? Is there pressure on margins, or can you price them accordingly?
Yeah. Clearly, this is an important area for us also as management constantly having visibility to the inflation, as you're very right, that freight has gone up quite substantially lately, and that is, of course, something that we have both been, so I would say, successfully been on a whole sourcing side, but also on the pricing, actually passing the cost inflation on. Maybe I should also emphasize that the, I'm going to say, the strategic initiative we made last year with forming our global supply function and recruiting also people from the outside, really setting a very, very, the strongest team you can think of, have paid off. Even though they might start a little bit late in terms of end of last year and getting the team together, they have actually delivered in an accelerated way for this year.
We've seen double digits impact, low teens in this first half, and we'll see the same thing in the next half. We also have the bold action we took on some of the sites, both in Europe and in China, that'll have a EUR 200 million impact starting in 2027 as well. That is important part of us staying competitive, both in terms of being competitive, but also making sure that we preserve the margins.
All right. Regarding the timelines of revenue contributions from the Arauco project, is there anything you would want to guide in terms of second half and how much is still left for next year in terms of the project revenues?
Hi, Antti. Katri here. We have been saying in the call earlier that we are expecting roughly EUR 400 million for this year, actually now, due to the things that we have already discussed today, we are estimating that the revenue recognition would be around EUR 500 million this year, and the remainder goes to next year. Now it's very active phase of the project.
How much was it last year? Just a reminder.
It was roughly EUR 400 million.
All right. Thank you. That's all from me.
Thank you.
There are no more questions at this time. I hand the conference back to the speakers.
Thank you. Thank you for that. There are still a few questions here on the platform that weren't already addressed. First of all, does the guidance now include the Severn acquisition? Could you please confirm?
Yes, like I said, we will get a slight tailwind from the Severn acquisition. We also will get some tailwind from the cost-saving actions we're taking, not just the cost control action we've taken over the year, but also the temporary layoff that we announced earlier in the second quarter will give us some benefit into the second half of the year. Year to date, we're slight ahead. We had a good trend in Q2 versus Q1, and then Severn gives a little bit of tailwind. The big swing factor is the service, especially on the parts and consumables and how we can get that through the order book and into net sales.
Thanks. A follow-up from Christian here. Could you consider selling one of the segments rather than listing?
I think, we more or less addressed that a little bit earlier today in the call. I think what this review is about is really about would it make us in a better position to really develop these two segments if they're standalone rather than together. That's why we come out and say two potential listed companies. Of course, the board will support all shareholders and make the best decision for the shareholders and how to actually develop the company going forward, which means that there can, of course, be other ideas coming to the table, and then we'll have to look at those.
Sure. Thank you, Thomas. That's all also from the webcast. Handing over back to you, Thomas, for final remarks.
Thank you very much, Pekka, and thanks everyone for joining us today. I would like to thank all our customers for their trust, but also all the Valmet employees for their commitment and hard work throughout the quarter. It's definitely been a challenging quarter. Just open the news and you will know that lots of curve balls are coming when you run a global company, really well done by the 20,000 Valmet employees. As you've heard today, we have an important period ahead of us. What gives me real confidence is the strength of the business that we built, the two different segments, the commitment of our people, and the opportunities that we see ahead of us. Regardless of the outcome of the review, those fundamentals do really remain unchanged. We have strong value propositions. We have a strong offering, great committed employees.
We continue running the business with full speed ahead. Before we close, I do want to hand a special thanks to Katri. This is your final earnings call, I think number 17 as CFO and actually the eighth together with me. I do want to thank you for very strong support. Great discussions in terms of everything from how to run the business, strategic decisions, but also preparing for these kind of calls and going through everything, all the details that comes with that. Huge thanks. To those ones on the call who maybe also are following where Katri is going, do make sure you ask some real challenging questions, particularly in Q3 this year, when Katri has just joined and is very new.
On that happy note, I do thank you very much for joining, enjoy your summer, see you soon after the summer holidays. Take really good care, all the best