Purmo Q3 next Wednesday: Efficiency struggle in a weak market

Translation: Original comment published in Finnish on 10/18/2023 at 6:40 am EEST

Purmo will publish its Q3 result next Wednesday morning. We believe the market situation has remained weak over the summer but on the other hand, the efficiency program is progressing well. We expect a clear decrease in net sales from the comparison period, but the result will improve slightly. For the full year, the company’s guidance is adjusted EBITDA being on a similar level (+/- 5%) to 2022 (92.9 MEUR), which we expect to be repeated while our estimate is pretty much at last year's level.

We expect a drop in net sales from the comparison period, roughly at the Q2 level

Purmo's demand, especially in radiators, weakened clearly during 2022, but net sales was relatively stable in Q3'22-Q1'23 and even dropped a notch more in Q2'23. The general economic situation, and especially the construction situation, has continued to deteriorate, but we expect the company’s net sales to be around the Q2'23 level. Compared to the comparison period, we expect a clear 16% decrease, evenly from both divisions.

The efficiency program supports the result

The drop in net sales and its negative leverage effect has a negative impact on earnings development. However, the company’s efficiency program is progressing and we believe that it will adjust costs to lower demand levels. We expect the adjusted EBITDA to be EUR 21.5 million (Q3'22: 19.6 MEUR and Q22’23: 21.2 MEUR). We estimate that the absolute result and especially the margin in the Climate Products & Systems segment will increase as the efficiency program progresses. In the Climate Solutions segment, we expect a result of EUR 6 million, where it has been for the last four quarters. However, since comparison data for the new segments is only available for last year, seasonal variation is not fully known. The company's reported earnings are depressed by the non-recurring costs of the efficiency program, which means there is no reliable consensus estimate available for earnings.

Guidance for a flat full-year result likely to remain, but we believe the estimate risk is more downward

The weak market and the possible price erosion create pressure for Purmo's full-year result and guidance. However, raw material costs are falling and the efficiency program is generating savings. The company has provided no net sales guidance for 2023 (we expect a 15% drop) but has said that adjusted EBITDA will 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 93 million, i.e. at the mid-point of the guidance. This assumes that the impact of falling prices will not significantly outweigh the benefit of falling raw materials and Purmo will be successful in continued improvement of margins with the efficiency measures.