Valmet Oyj (OTCPK:VOYJF) Q2 2022 Earnings Conference Call July 27, 2022 8:00 AM ET
Company Participants
Pekka Rouhiainen – Head of Investor Relations
Pasi Laine – President & Chief Executive Officer
Conference Call Participants
Antti Kansanen – SEB
Panu Laitinmäki – Danske Bank
Sven Weier – UBS
Johan Eliason – Kepler Cheuvreux
Tomi Railo – DNB
Tom Skogman – Carnegie
Pekka Rouhiainen
Good afternoon, ladies and gentlemen, and welcome to Valmet’s 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, and I am the Head of Investor Relations here at Valmet. And the presenters today will be Pasi Laine, President and CEO of Valmet. And after the presentation, there will be a chance to ask questions over the phone lines.
But Pasi, please go ahead.
Pasi Laine
Thank you, Pekka. Welcome. Our headline today is that orders received increased to €1.3 billion and comparable EBITA to €122 million in the second quarter. I will go first through quarter two in brief, then some words about the segment of business lines. Then some words about Flow Control integration into Valmet, then CFO appointment, financial development, some words about Valmet’s way forward and then guidance and short-term market outlook. And then Pekka will join me in the question-and-answer session.
First quarter two in brief. So, like I said, orders received increased to €1.3 billion. Net sales was almost €1.3 billion — €1.290 billion. Backlog ended up being €4.780 billion and comparable EBITDA increased €122 million and margin was 9.5%. And gearing in the end of the period was 22%.
And here, the numbers and some charts as well, like you see here. We employed last year about — or in end of the quarter, 70,670 people. So we have been, of course, growing because of Neles merger. And net sales, about 46% came from Process Technologies, 31% came from services and 23% from automation.
Geographically, Europe continued to be the biggest one, 36%; North America, the second one and thereafter, China, South America and Asia Pacific. So quite good contribution now from all the areas as well.
Orders received in the quarter increased to €1.3 billion. Here, you see the graph, which is showing that the 12 months cumulative curve is a little bit less than €5 billion currently. Orders received in the first half of the year have been such that the Europe, Middle East and Africa has contributed 43%. North America, 2% China, the third one, Asia Pacific, the second — fourth and the smallest areas in South America.
Stable business, orders received totaled to €2.3 billion. And this is a big development that has taken place in Valmet over the years. So when we started our services, order intake in 2014 was about €1 billion.
Then we acquired automation, continue to grow both automation systems and then services. And now we have first quarter when we have included flow controls for one quarter under order intake now.
So flow control is only one quarter, not LTM in this figure. The order intake is €2.3 billion. And this is, of course, big development in Valmet has changed the company considerably.
Backlog ended up being almost €4.8 billion. It’s the biggest backlog we have reported, of course, flow controls has an impact there as well. But we are saying that 65% of the backlog is coming from product 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 small as well, but 50% of the current backlog is expected to be recognized net sales.
Then some words about the segments and business lines. First, Services. So orders received increased in first half to €911 million. And that’s, of course, big increase. It grew from €752 million to €911 million. So good growth. Net sales has been growing from €625 million to €720 million. The EBITDA has been growing from €83 million to €88 million. But we still have a situation that EBITDA 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. But good development services in order intake in net sales and for the quarter in profitability as well. And what is important is that the orders received has increased in all new geographical areas and all business units as well. So strong performance of the total all unit.
In Automation segment, orders received to €452 million in first half of the year. And here, of course, the big delta is slow. I will come back later on. Last year, our order intake was €239 million, and now it has been €452 million. Net sales has been growing €161 million to €380 million. And profitability, so comparable EBITDA a year ago in automation and then on systems was €20 million. And now in first half of the other segment, the EBITDA has been €60 million. And what’s, of course, nice is that last year, our profitability in the segment was 12.6% and now it has improved 15million, so good development in Automation segment as well.
Flow Controls first quarter as part of Valmet and a strong start. So last year, order intake was in for minus €151 million. And now the second quarter order intake was €198 million. So good growth. Net sales has been developing favorably as well from €146 million to €177 million. So all in all, Flow Control has been performing like we have expected. So nothing material to any direction. So it’s a good organization and good products, good customers and good business. And it has been performing like we expected during the planning phase of the merger.
Then systems business order intake has been growing in the first half from €239 million to €253 million. Net sales has been developing from €161 million to €203 million. Here, like I’ll come back later on the quarterly numbers in financial segment. We can be happy of the total growth at 6%, but second quarter was not as strong as maybe we would have wished. But all-in-all, good development still in Automation Systems business as well.
Then in Process Technologies, orders received decreased to €1.268 billion. Last year, it was about almost €300 million more. But that’s normal. So the order intake level in first half of the year has been good.
Net sales grew from €1.15 billion to €1.146 billion. Comparable EBITDA last year was €84 million, now €71 million. So our profitability has dropped in this segment from 8.2% to 6.2%. And, of course, we are not happy of that. And mainly the development is caused by some margin erosion in some of the Pulp and Energy projects. I think, I will say last time as well that 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 €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. So last year, service or energy order intake was lower than pulp, but this year, actually, energy has been increasing more and pulp has been decreased. So there is a change in the mix of the order intake. But €581 million is reasonable order intake for the business line.
Net sales has been developing favorably, so from €463 million to €542 million in the first segment. In Paper business line, last year was a very good year in order intake. This year was a good year. So €688 million in the first half is very, very strong order intake level. Net sales has been developing favorably as well from €552 million to €604 million. And 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 route. So despite all these challenges, and Ukrainian war more on top of that. So despite all these challenges, Paper business was able to continue growth mode in net sales, so well done by our team.
Then some words about the war in Ukraine. So like we have been saying that direct impact to development are limited. So we had about 140 people working in Russia. Currently, we have about 80 million people. And then they are working primarily in sales, engineering, maintenance, financial administration. We don’t have any production in Russia, last year, about 2% of net sales came from Russia. We have now reversed about €80 million of order backlog in H1 2022, and then we have roughly made €20 million expenses related to it from Russia in the first half of the year. They are booked as items affecting comparability. So we have still a small backlog, which we believe that we can deliver or have to deliver. And our best understanding is now that expenses we have booked correct ones to close our businesses in Russia. And 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 person.
And then, of course, the biggest impact, what we have from the war in Ukraine is to cost inflation, which we discussed in the last quarterly call as well. No, then some words about the integration of low confers into Valmet. So in the case of proceeding is proceeding according to plan. So we knew the company and they know us. So they are not — no major surprises to anybody. Maybe our strand manage the business is different than flow control is used to, but nothing very big change there. We have now started to market the whole offering to our capital, our technology customers to sell the technology services, automation, bit system and with flow controls.
And then later on, we start to see the synergy potential revenues in 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 €25 million annual run rate which out of which about 60% is achieved by 23% and 90% by end of ’24. So we will continue to work on this topic after summer vacations.
Then Neles merger had, of course, a big impact to our balance sheet. It looks quite different than earlier, like you will see in later graph as well. The — so the total merger consideration was €1.476 billion. And that’s based on the on the share price Valmet had in end of March. And I think it’s thinking about the performance of the flow control currency. I think it’s correct value. Then out of the purchase, we got goodwill more and goodwill increased about €879 million and other intangible assets by €860 million.
This means that there will be big amortizations in coming quarters. And now we are saying that about €24 million per quarter until quarter 1 in ’23, so next year and thereafter about €9 million a quarter for several years. So this is to help you to model the amortization in your calculations. Then the total balance sheet increased to €6.4 billion, €480 million. And that’s, of course, a big increase compared to the earlier one, but a little bit more than €2 billion. Total equity has increased and Valmet’s equity per share has increased as well. So while it looks now from a balance sheet point of view different after the merger with Neles.
Then today’s news is that after a very thorough selection process of CFO, we have selected Katri Hokkanen, as the new CFO, and she will start 1st of August in a row. Like you know, she is now also the intermediate here.
We searched external, internal candidates, had a lot of interviews and select then decided in the end that Katri the best person to continue the CFO function further. She has a long career environment, has been working the whole working life in Valmet in very different roles. So she was running our area, the area – financial organization in Asia Pacific, for example, and last year, she has been Business Controller in Pulp and Energy.
So she knows paper, she knows service, she knows Pulp and Energy business. So she has very good – good background and understanding of our business. And that’s, of course, the strength of — and we are very happy, of course, to have new blood in management team and — and of course, we are very happy that the diversity in our management team age-wise and gender-wise is improving as well.
So Katri is still listening the call, but we have agreed that she can take the well reserved break and she has booked many, many months earlier, and she is not now presenting the results here with me. But next time, you will see Katri in-person in this presentation. So welcome, Katri to the management team.
Then some words about the financial development. I go through the – I’ve discussed some of the quarterly numbers already. So orders received, backlog, net sales and comparable EBITDA and comparable to net sales. Then there is EBITA is bigger than comparable EBITA. And the explanation is that, when we did the merger with Neles, we booked 59 million gain from the shares we owned earlier. And that’s something you have to understand. Then – then that’s netted with the expenses, which we have to book when we are withdrawing from Russia.
And the Delta is now the one what we are showing here, 59 and then 20 and the Delta is positive. It 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.
Then the other new thing here is that we have added adjusting earnings per share KPI here, so that you can follow our adjusting earnings per share without acquisitions. So we have calculated everything else except the amortization, which is coming from the business mergers and acquisitions. And that should be helping you now to understand the company better, when our goodwill and PPA amortization is increasing compared to the earlier years.
So then — the other — okay, I’ll go through the cumulative numbers still. So €2.6 billion, 4% growth compared to last year’s backlog is now 19% higher. Net sales, has been increasing by 25%, so, €2.2 billion. Comparable EBITA €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.
Then, cash flow is €65 million negative, and I’ll come back later on to that one. And gearing now, after the merger is 22%, including the lease liabilities. So, all in all, strong first half, also from figure perspective for Valmet.
Then, some words about the segment figures. Services had a good order intake in the quarter — the second quarter, €460 million, 24% growth compared to last year. Automation segment, of course, has a big figure growth because of the Flow Controls and Process Technologies minus 27% compared to last year. All in all, €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%. So, totally, 36% growth in net sales.
Comparable EBITA, services improved by €10 million and by 22%, and that’s, of course, good performance by Services. Automation had a good quarter, €50 million EBITA in a quarter. Process Technologies had €10 million less than a year ago. And the reason I explained already.
And then, the other, having the head office and everything. So, the €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, but we have to be now very careful with the central head office and head office function and head office costs. So, this 15% is a little bit too much. But all in all, we made €122 million.
Comparable EBITA margin for Services was 14.2%. And that’s, of course, good achievements. So, it was better than a year ago. And 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. So, these are the segment figures for the quarter and half a year, because I explained already.
So gross profit, 24% and we, of course, still have work to do to make sure that the gross profit continues to develop favorably. Then in SG&A, the growth is bigger than it should be, part of that is coming from flow controls, which increased SG&A by EUR 55 million. And then 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 on the part where we would like it to be.
And why I said that was that, of course, here, the nice curve is historically nice curve is not trend in the correct direction. So the LTM is now at 10.4%. And last year, we ended up 10.9% and – and of course, our target is to get as soon as possible between 12% to 14%.
And currently, the trend is not going in the right direction, and we have continued to work on that topic in – in coming quarters and years as well to reach the target what we have set to ourselves. Then cash flow like I said was not good. So cash flow provided by operating activities was minus €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 networking capital as well. So currently, we trade somewhere close to 6% of the rolling 12 months, 12 months order intake at best, if we could say it was at 12% and 14%. And then we were saying in2020 and 2021 that we have more money than we should have.
And now it’s going to the other direction. But of course, we continue to work on this topic. We haven’t seen any big changes in the in the contract terms and payment terms in our contracts, but then one fact is that now when the delivery times how longer, we have to order things earlier than we used to. So it has a negative impact. And then, of course, flow controls has an impact on net working capital as well. But these two topics, networking capital and cash flow are things where we will be focusing on in better part of the year.
Now, net debt has now increased. So now we have €510 million net debt and gearing — and like I said, 22%, and like it, our equity and total assets have increased considerably as well, and that comes the next page.
There you see that the capital employed, what we have now due to the major has increased from €1.8 billion to €3.2 billion. And now our return on capital employed comparable return of capital employed is 16%. Our target is to be over 15%. So we are targeted range, but because of the merger, of course, is 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. And then of course, if that would be just EPS, then it wouldn’t be as good as this craft so. Then some words about the strategy. So we have fine-tuned our strategy being such that, first of all, mission we kept the same. So converting the new resources into sustainable results. And that’s still the mission we have. In strategy, we developed with such that we say that we develop a supply competitive and reliable process technology, services and automation to the pulp, paper and energy industry. So there, we work with the whole tier — then we say that automation business covers a wide base of global process industry. So we have offering by which we can serve others than pulp, paper and energy industries. And then we are saying that we are committed to moving customers’ performance forward with our unique offering in a way to serve. So the changes that automation is now as a segment, working with wide range of industries. We continue with the same continuous improvement on renewal topics, we continue with business accelerators — and in vision, we have modified it a little bit when now we said that our vision is to become the global champion in serving our customers and in moving the industry forward.
We have aligned the financial target with the reporting structure. So now we are saying that the Services and Automation segment should grow about 2x of the market growth and net sales for process technologies segment to exceed market growth. This is semantic, but now it’s according to segments, what we are saying.
Profitability targets are, as I said, between 12% to 14% comparable return on capital employed at least 15% and dividend policy continues to be like earlier dividend payout at least 50% of the net profit.
So then guidance and short-term market outlook. So, we have kept the guidance intact Valmet estimates that included the merger with Neles sales in ’22 will increase in comparison with ’21 and comparable EBITDA ’22 will increase in comparison with 21%. In services, we keep the market outlook good. Automation, flow controls, good automation systems, good.
Then in pulp, we are saying, good to satisfactory. And this is coming from the fact that in some of the units in pulp, we have a little bit 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 the outlook from satisfactory to good. In board and paper, we continue with good and in tissue with satisfactory, good. So sorry, it took too long, I know, but we had many topics to cover.
So now it’s your time to make questions and Pekka comes here to help me with answer.
Pekka Rouhiainen
All right. Thanks, Pasi, and let’s move on to questions. So operator, I hand over to you.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Antti Kansanen of SEB. Please go ahead. Your line is open.
Antti Kansanen
Thank you. Hi Pasi and Pekka 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 work flow situation. And perhaps can you talk a little bit more broadly, what do you see regarding your customer discussions regarding them investing taking into account the macro uncertainties and things that we’ll likely see
A – Pasi Laine
Yes. So we have some units, which are overload in pulp and in some we don’t have very good workload and that’s why we have downgraded. And then it goes also for the – for that unit where we don’t have very good workload, the market outlook is not that good either. And then 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. And customers are still planning small to medium-sized projects. And then in the long run, of course, new capacity investments as well.
Antti Kansanen
Is it possible to specify where the workload and outlook is maybe not as good as in the other businesses…
A – Pasi Laine
Can you repeat?
Antti Kansanen
So you mentioned. Yes, sorry. So is it possible to specify the business where the workload and outlook situation has worsened?
A – Pasi Laine
No, but no no. But I can be a little bit more specific, it’s one out of four
Antti Kansanen
Okay. And then secondly, on the kind of the process technology profitability. It seems to be quite isolated on the Pulp and Energy side. So is it such that is it very broad-based, or can you pinpoint it to a number of larger projects? And 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. So I’m assuming that the new orders that you are taking in are more in line with the cost levels that you’re seeing?
A – Pasi Laine
Yes, it’s a small number. And — and some of them are bigger one and some are smaller ones where the costs have been over running. But like you said, it’s in Pulp and Energy limited amount. And then, how long it will take to overcome then, of course, it depends on the booking 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.
And then, of course, like you said in the– in all the orders but we are now negotiating then of course, we are taking all the inflation and more inflation as well into account when pricing projects. But this is goes pretty much in the way that 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.
Antti Kansanen
Yes, absolutely. I think it was very much in line with what you said. Then lastly, for me on the services side and the kind of the margin development showed, like good improvement from Q1. And obviously, order growth was strong considering last year Q2 was already good. So the price realization, I assume, is quite good there. And now you’re 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?
Pasi Laine
Yes. So, our services team and areas worked very hard in turning to profitability because it was not so nice to explain to all of you that we also knew that there has been inflation, and we haven’t been fast enough in increasing our prices and our organization has worked very well on that topic. So, I’m happy of that. And I’m sure that now we know whether how to live in inflationary environment than half a year ago.
Then about the growth, I think they are — and I don’t have a number, it’s a complex, I don’t even have the numbers to tell that what the impact is. The one is, of course, coming — one component of the growth is coming from price increases. Then one is coming from good demand because of the good operational rates of customers and then because of a little bit pent-up demand during the COVID times.
And then 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. And then if there’s a service what they have been earlier ordering performance before they need it, now they might be ordering it six months or eight months earlier. So, there is that kind of phenomena happening as well
Antti Kansanen
All right. That’s very clear. Thank you.
Operator
Thank you. Our next question comes from the line of Panu Laitinmäki of Danske Bank. Please go ahead, your line is open.
Panu Laitinmäki
Thank you. I have two questions. Just a follow-up on the Process Technology margins. So, I mean can you give any indication what would the level of margins be going forward from 5.2%. Do you see like further pressure in the second half given propane projects that you have, or is this kind of improving? And then the second question on the energy outlook, it was upgraded. So, where is it coming from and what are you seeing in the market? Thanks.
Pasi Laine
No. Unluckily, I can’t give a good guidance for Process Technology margin, but of course, we work hard on that topic. So, — no, I can’t give a good guidance on that. But we know that there’s a problem when we are working on the topic.
Then in energy, it has been active in Europe, mainly a little bit in Asia as well, but mainly in Europe. And I think this — so order intake has been good, and then we have also a good pipeline and now because of all these energy crisis we are all reading in the newspapers every day, I would consume that the good outlook and demand and discussion with customers for biomass boilers and waste energy boilers will continue.
Panu Laitinmäki
All right. Thanks.
Operator
Thank you. [Operator Instructions] The next person is Sven Weier of UBS. Please go ahead, your line is open.
Sven Weier
Yes, 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, 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. So we’re still a bit impressed by that improvement. So that’s the first one.
Pasi Laine
Maybe one has to first say that we were disappointed with the first quarter service profitability. So then 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 — head office, how would I say, we have encouraged them. And I’m, of course, happy how it has been developing. And 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 and key and area had understood the magic. So thanks for making the pressure to me.
Sven Weier
Okay. I was wondering also, I mean, you have obviously different units within the service business, right? And 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 contributing to that?
Pasi Laine
I think it’s all of them. And then I wouldn’t say, totally turnaround because last year, our profit was 13.9% and it was 14.2% now. So actually, we got back to the level where we should be. So the first quarter was bad, but now we are at the level where we should be. Not to over margin…
Sven Weier
But you don’t foresee such a quick improvement on the process technology side, so that …?
Pasi Laine
It’s keep it on — sorry, but I can’t give too clear guidance on process technology. So like I said to hand as well that we work on the topic, and we know where the challenges are, but I can’t give you any promises how quickly and when because otherwise, I’m guiding to accurately. Sorry for that.
Sven Weier
No worries. And then 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?
Pasi Laine
It’s more normal way how to manage the workload. So seldom, we have that kind of situation that you have all the production units in full load and in Finland, we have this possibility for temporary layers. And then when we announced 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 on it’s nothing dramatic. So I would say that, that’s normal capacity management where this temporary lay of mechanism in Finland gives good flexibility.
Sven Weier
Understood. And 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 you?
Pasi Laine
No, we haven’t seen the activity yet, and that’s something I have 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. So you have a point, but I don’t have — we haven’t seen it yet.
Sven Weier
Okay. That’s it from my side. Thanks, Pasi.
Pasi Laine
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead. Your line is open.
Johan Eliason
Yeah. Hi Pasi and Hi Pekka. Just a question follow-up on the services side, you said part of the good orders were sort of catch-up from last year’s lower orders. And if I remember it correctly, it was sort of rebuild and that sort of stuff that went away during the pandemic.
Does this imply now that some of the order recovery you are seeing here is this a bit lower margin type of services?
Pasi Laine
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. So the mix is actually quite much like it has been.
Johan Eliason
Before the pandemic, you mean.
Pasi Laine
Now I’m comparing to last year and 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.
Johan Eliason
Okay. And then, if you gave this backlog and the delivery this year, will all of the services and automation orders be delivered this year, or are there also some orders that slipped into the coming years.
Pasi Laine
We — some of the automation and services backlog is going to next year.
Johan Eliason
Okay, okay. Good. And then just finally on the margin here, I mean…
Pasi Laine
They are planned for next year.
Johan Eliason
Okay. Then on the profitability overall, I mean, Kari [ph] 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.
Pasi Laine
Yeah, we have seasonality. And we will have this year seasonality as well then it’s, of course, difficult to say that how much there will be seasonality so first half against the second half, but like we have been following us as many years. So there is a seasonality continues.
Johan Eliason
Yeah. Excellent. Okay, many thanks and happy summer.
Pasi Laine
Oh, thank you and the same to you.
Operator
Thank you. Our next question comes from the line Tomi Railo of DNB. Please go ahead. Your line is open.
Tomi Railo
Yes hi, Pasi and Pekka. This is Tomi from DNB. Coming back to these process technologies issues, I 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 market.
Pasi Laine
It’s, of course, different reasons for different projects. But big thing is the logistic cost, which has increased, then some of the inflation has been hitting more. And then in some projects, in some small projects, not in the big ones. But in the small project, there has been also some not good enough accuracy in costing — but that from Valmet perspective — from Valmet’s perspective, those are not material.
Tomi Railo
So are there sort of project-related cost overruns also playing out or challenges with protects you mentioned or is that not a major issue?
Pasi Laine
I would say that if one takes the biggest one then is the inflation in logistics and all the other sub-suppliers.
Tomi Railo
Okay. Thank you. And another question on the services. You presented a good list of a 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?
Pasi Laine
Now I would guess that it will continue for a while before all the delivery changes are working quickly again with a normal pace. And then customers have to also learn to trust to that. And then, of course, we have to learn the trust to that as well because 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. So it will take some time before the situation gets back to the normal.
Tomi Railo
Makes sense. Excellent. Thank you very much.
Operator
Thank you. And we have one further person in the queue at this time. That’s Tom Skogman from Carnegie. Please go ahead. Your line is open.
Tom Skogman
Yes. Hi, Pasi. I have a couple of questions, starting with kind of some indications of future net financial costs and taxes. You had no financial cost this quarter despite of course, a big net debt coming from the Neles side. So what should we look at the coming quarters?
Pasi Laine
Yes. Now with our CFO, next to me Pekka can you answer to that?
Pekka Rouhiainen
I didn’t quite catch Tom.
Pasi Laine
Taxes and financial costs.
Pekka Rouhiainen
I don’t have an answer to that one.
Pasi Laine
So we have now the net debt what we have said. And then like we have been earlier communicating our interest rates are competitive. So 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. Then in taxes, we don’t see — I don’t see any change actually compared to the earlier years when thinking about when we have analyzed the taxation. So I don’t see any change happening in that number either.
Tom Skogman
Okay. Then on roll manufacturing, we had the factory fire, how well have you managed to find replacing capacity. And as part of this question, also the former CFO said that he expected Paper sales could reach 1.3. And then we started to do it faster, the fire, but now you had very good kind of deliveries in the Paper division. So what sale is kind of reasonable to expect in Paper this year?
Pasi Laine
So net sales I can’t, of course, guide too well. But our organization managed the fire very well. So, of course, — so fire was, first of all, isolated to one island only. And then the three and 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 to approval. The 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 lining, managing the situation. So they have done very good work. But, sorry, I can’t give you exact estimate for net sales.
Tom Skogman
But if I understand you right, the fire is not really holding back deliveries, because you fear three, two months ago?
Pasi Laine
The impact has been smaller than what we feared. Thanks to the good work of our team.
Tom Skogman
Yeah. And earlier you talked about opening bottlenecks in Paper to increase capacity. Could you give an update on where we are with that?
Pasi Laine
Actually, then Paper business line is now working on the same topic — on this topic at the same time, because for us to catch all the delivery schedules, we have to increase the capacity. So they are working at the same time on the fire, but then also on finding extra new ways how to catch up missed hours we have lost during the fire.
Tom Skogman
And then the steel price has come — or steel hedging, but what will be the impact from…
Pasi Laine
No, no, you had a little bit cut. So you asked something about steel prices?
Tom Skogman
Yeah. So the steel price had a short peak and now it is down again, and what will this mean for you with your hedging?
Pasi Laine
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 drop in steel prices. I don’t have that number in my head yet. But this is, of course, an opportunity for us.
Tom Skogman
Yeah. And then finally just about this kind of dynamic demand implications from changes in the world. So the price of the board machines and pulse machines are often lost in the last two years – and now we see, of course, we have this gas situation in Germany, and we have a lot of paper manufacturing in German and you also have your key competitor being based in Germany? What do you see do not talk about the demand in the next quarter or two quarters ahead. But is this 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 on this gas situation?
Pasi Laine
Joe. I haven’t had too much now customer discussions of the summer vacation, middle Europeans are still on vacation. So some of the customers will, of course, think that should they delay the decision a little bit the way that the commodity prices will go down. And some are seeing that market has been that good that they’ll continue with the time schedules, what they have had.
And then, of course, the third component is that, if there will be a recession in Germany and Middle Europe, that what – how much it will impact demand of packaging material. Then that will be kind of short-term challenge. But then in long term, I haven’t seen actually anybody saying that the demand for renewable packaging materials wouldn’t be an recyclable packaging materials wouldn’t be increasing – so our customers still have long-term positive view of the future. And then between, there will be maybe some hiccups. But long term, I’m confident.
Tom Skogman
Okay. Thank you.
Operator
Thank you. And we had one further question come through. That’s from the line of Tomi Railo at DNB. Please go ahead. Your line is open.
Tomi Railo
Yes. Still have one housekeeping question. You had the €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 – on that line.
Pasi Laine
Not to direct guidance, but we have to work on that topic.
Tomi Railo
But is that a little bit on the high side, or should it –
Pasi Laine
I think it’s on high side.
Tomi Railo
Okay. Thank you.
Pasi Laine
Thank you.
Operator
And there are no further questions on the line at this time, so I’ll hand back to our speakers for the closing comments.
Pasi Laine
But thank you. Sorry for giving half in our presentation, but luckily, you had enough energy to continue to follow it. Pekka, now it’s your closing remarks.
Pekka Rouhiainen
Thanks, Pasi. And 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 the event.
Pasi Laine
Thank you.
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