Purmo Q2 morning result: Demand weakened more than expected, cost savings increased margins

Translation: Original comment published in Finnish on 7/19/2023 at 8:59 am.

Purmo commented in the June analyst call that volumes had weakened and fallen short of the company's expectations during Q2. As a result, we lowered our pre-result forecasts, but net sales were still 8% below our expectations and well below the consensus forecast, with net sales down 25% year-on-year. However, Purmo's cost savings have been effective and the margin improved year-on-year despite the large volume reduction. Earnings fell slightly short of our expectations. The guidance of a full-year result at last year's level was reiterated. We see downward pressure on our estimates, particularly on net sales and, to a lesser extent, on earnings.

Sharper-than-expected drop in net sales

Purmo's figures in the comparison period were still quite good and the company had indicated that demand had weakened in Q2'23 from previous quarters as well. Despite this, the net sales drop of around 25% was well above expectations and was almost entirely organic. Net sales fell sharply in both divisions and across a broad range of product groups as construction activity slowed. Net sales were also down significantly (around 15%) from Q1'23. The fall in net sales was due to lower volumes and came from a wide range of markets. The decline in demand in the Climate Solutions division was driven by the continued normalization of demand in Italy, the main market for the Solutions division, which has been strong in recent years.

Margins maintained thanks to cost savings

Despite the sharp and larger-than-expected decline in net sales, the company's adjusted EBITDA was at a reasonable level of EUR 21.2 million (Q2'22: 27.8 MEUR and Q1’23: 26.4 MEUR). This means that the margin has even improved slightly year-on-year (11.8% vs. 11.4%) despite the significant decrease in net sales. However, the margin fell from 12.5% in Q1'23. According to the company, Purmo's efficiency program is progressing faster than expected and at the end of Q2 the company had already accumulated run-rate savings of EUR 16 million, when the estimate was EUR 20 million by the end of the year. The result was slightly below our expectations, but we consider the earnings/margin level to be a good performance given the larger-than-expected decline in net sales. The result decreased significantly, but the margin improved in both divisions year-on-year.

Guidance on flat full-year results unchanged

The company reiterated its guidance and expects the adjusted EBITDA margin for 2023 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. After H1'23, Purmo is about EUR 9 million behind last year's level, but the comparison figures in the first half of the year were significantly better than at the end of the year. Our estimate has been at EUR 96 million, close to the upper end of the guidance range. This is subject to slight downward pressure due to the slightly weaker-than-expected result.