Purmo has volume pressure, efficiency improvement progresses and supports the result

Translation: Original comment published in Finnish on 6/16/2023 at 5:00 am.

Purmo arranged a pre-silent period analyst call on Wednesday. The main message was that volumes have continued at a low level and will decrease from Q1, but on the other hand, the company's efficiency program is progressing, which should support the margins. Raw material costs are also decreasing, but a decrease in sales prices reduces its impact. The company’s guidance is that the adjusted EBITDA for the full year will be at last year's level. We do not see any immediate need to revise our estimates.

Volumes are somewhat lower than expected in Q2

Purmo said that volumes have remained at a low level during Q2 and the positive turn expected by the company is not yet visible. Our Q2 net sales estimate for Purmo is practically on par with Q1 and clearly below the strong comparison period (-14%). The company also said that the Italian business of the Solutions unit that has been very strong in recent years has normalized to a lower level. This was expected as Solutions generated a very strong net sales of EUR 53 million in Q222 while our estimate for Q223 is EUR 45 million. There is some downside in our Q2 net sales estimate considering the company's comments. The company has not issued a net sales guidance and we expect full-year net sales to decrease by 5%.

The efficiency program supports profitability

Purmo also commented that its efficiency program has progressed even faster than expected and helps it manage margins in a weak volume situation. In addition, the company has seen the cost of raw materials (especially steel) turning downward, which, in principle, supports profitability. At the same time, however, the company sees a downward pressure in prices, which will at least in the longer term eat away the benefits of lower raw material costs. Purmo’s Q1 result and margin were clearly better than expected. We assumed that this was a better-than-average quarter and have estimated that Q2-Q423 results and margins will be below Q1. All in all, we do not see any significant downward pressure in our earnings estimates, even though our net sales estimate may be slightly optimistic.

Guidance unchanged, our estimate is at its top end

Purmo's guidance is unchanged. It expects 2023 adjusted EBITDA to be at the same level as in 2022, i.e. around EUR 93 million. Purmo says this means a +/- 5% change, or about EUR 88-97.5 million. Our estimate is EUR 96 million, i.e. at the top end of the guidance. We believe that the company should be able to reach the mid-point of the guidance, even if volumes remained at the current level as the margin is supported by efficiency improvements. If the volumes show the positive turn expected by the company, the company can exceed the current guidance range. Purmo reports its Q2 result on July 19.