Luotea Oyj (LUOTEA) Earnings Call Transcript

All right. It's 1 minute past. So can we do a quick round of introductions before we start this? Is it okay? So my name is Eero Hautaniemi, I'm the President and CEO for Lassila & Tikanoja. And then Valtteri, if you...

Yes, my name is Valtteri Palin, I'm the CFO of the company.

Okay. Well, there are several people or am I the only investors attending?

No, no, there is another one as well.

Okay. So myself -- Frédéric Redel. I'm from France. And I'm the manager of a company called Aqua Asset Management. And thanks very much for organizing this new meeting. I was trying to listen yesterday, but it was not possible.

I understand that. Okay. No, but this is good. And then we have one more, [indiscernible] or something like -- sorry if I put you on hold. Go ahead. [indiscernible] Hello? Are you there? He muted. Okay. Well, we'll go anyway. So there is another investor as well.

Okay.

Good. So how would you like to go through? Do we do the presentation? Or would you like to go for questions and answers? We can do both ways.

Of course. But I'm sorry for that. But it's -- I'd rather follow the presentation, it's okay whether you...

Yes, yes, yes. No, no, that works fine. Good. So we'll go with the presentation. So our first quarter highlights first. There was a clear improvement quarter 1 2020 compared to the last year, and that came from Facility Services in London. And we had good cash flow in the first quarter, and our liquidity position is strong after the first quarter. And we did announce a profit warning last week, Friday, and that was due to the corona crisis and the epidemic and also due to the fact that we made the decision to discontinue our very small Russian operations in 2020. But I'll get back to these sort of highlights during the presentation as well. But let's start with the net sales and how that developed in the first quarter. And overall, our net sales declined by 7.2% to EUR 185 million approximately. And mainly, the decline came from Facility Services Finland where we divested last year in April a renovation services business. So that is the main contributor to the decline. Small part of the decline is also due to the fact that we had very little snow in Southern Finland this year. And typically, what happens when we have a lot of snow, that increases our revenues in property maintenance business. At the same time, that is normally very low profitability. Even last year, it was negative profitability part of our business. So overall, it was a good thing this year that we had very little snow. But the impact in -- revenue-wise is around EUR 3 million, and profitability-wise, maybe EUR 100,000 to EUR 200,000 positive compared to the last year. In Environmental Services, we also had a small decline in the revenues. And that is mainly due to the fact that recyclable fibers, especially cardboard, the price level in Finland has declined. It's started to decline in fourth quarter last year, and that decline has continued beginning of this year and therefore, it affected our revenues. The margin impact is smaller because we are sort of dependent on the market price level, and then we get a margin for handling that. But the margin has also declined as a result of decline in the market price of these cardboards. But again, I'll get back to that later on in the presentation. Then next slide, please. Operating profit development, we had a EUR 2.2 million increase in the operating profit. And as I said in the beginning, it mainly came from Facility Services Finland. Partly also from what is other, we had a net EUR 0.9 million one-off items, positive one-off items as we sold real estate and then we have certain fixed asset write-offs, and the net impact was EUR 0.9 million positive. At the same time, as a group, we had about EUR 0.5 million to EUR 1 million negative impact in the first quarter already due to the coronavirus epidemic. So net-net, I would say, operationally, the improvement is around EUR 2.2 million from last year. Then next slide, please. Let's skip this and go to the Environmental Services directly. So in Environmental Services, in general, and this is or has been the fact in the previous crisis as well, our Environmental Services business is very resilient to crisis. The amount of waste is normally about the same. It sort of shifts from one place to another. But overall, the amount remains pretty stable through the crisis as well. And that is our expectation also in this coronavirus crisis. What may impact our Environmental Services is if there are bigger industrial shutdowns in Finland because of the sort of economic downturn. But so far, the sort of bigger industrial sites and especially food retail has continued on a very high level. Also, online sales is still going strong. So we have not seen a sort of a major downturn. Yes, our gross national product will come down, but sort of the activity in the industrial side and retail is expected to remain even during these times. As I already said, the market price for recycled raw materials, especially paperboard and the cardboard has come down. And this situation, we expect to continue at least this year, probably next year as well, because there is oversupply for this cardboard and paperboard in continental Europe as the -- as China sort of doesn't take it anymore for recycling. So now that oversupply is flowing also to Finland, which wasn't the case until fourth quarter last year. So that's that. If we move to the next one. At -- in Industrial Services, what we do here is we do [ process ] cleaning. That is a big part of the business. Then we handle hazardous waste and we do also a little bit in environmental construction. And we were supposed to have a pretty big year in sort of the planned maintenance breaks. And we prepared in the first quarter. So we did a lot of repair work and incurred extra cost because of the sort of the planned maintenance breaks, which then were postponed due to the coronavirus to the fall and partly to next year as well. So therefore, we had certain extra cost in first quarter that sort of burdened our result compared to the last year. Also, we had some industrial action in the beginning of the year. We had some strikes that impacted our business a little bit negatively, and that also shows in the results. Our market position is strong, and we have gained market share in Finland, and that sort of shows in the top line development, which is very healthy. Obviously, a big question for us is whether these planned maintenance breaks take place in the fall. Right now, it looks like they will take place, and then we will be able to recover, let's say, most of the lost revenue and margin that we will lose in the first half of the year. But if there is a second wave of coronavirus, then it is possible that there will be more limited breaks and therefore, that will hit our [ process ] part of the business. Other parts of Industrial Services, hazardous waste and environmental construction, should be pretty stable. We also have a small sewage cleaning business, which is not affected by the coronavirus here. Then next, Facility Services Finland. Here, we have had a big improvement in profitability in all business lines. We have here cleaning, we have property maintenance and we have technical services. And the coronavirus affects these a little differently. The biggest impact we have seen so far in the cleaning business, where we pretty early on, as the crisis hit Finland, got contacts from our customers requesting smaller scope or putting the services on hold, obviously, not from all of the customers, but some of the customers, and that is going to impact our sales 2020 negatively. At the same time, we got a lot of requests for special cleaning, disinfection, disinfection cleaning, and that is going to sort of offset partly this decline in the sales. Overall, the -- our contract portfolio is on better level this year compared to the last year, and then that sort of shows in the numbers. And our effectiveness is better in all of the business line, and that is also showing in the improvement.

Can I ask the question?

Yes.

Disinfection services, have you already benefited from that during the first quarter? Or is it more to come in the [indiscernible]

It -- we did have some of that in the first quarter. Not very much, but most of that is going to be in the second quarter. At the same time, other -- the consolidation or smaller scope of services is also going to be visible in the second quarter.

Then in Facility Services Sweden, where we have technical services and some cleaning, the technical services is around EUR 100 million and cleaning is around EUR 25 million annually in terms of revenue. Technical services was hit by the coronavirus already in the first quarter. In second half of March, we had a rapid increase in the sickness rate in Sweden, and it pretty much doubled compared to the normal levels. And that meant that we had to take subcontracting and increase our costs and therefore, burdened our profitability in technical services. Also, additional services that is normally the, let's say, the better part of our business in -- profitability-wise, those additional services were less because the companies were focused on sort of, in a way, surviving on the coronavirus. And that impact is expected to continue as long as we are in the acute phase of the corona crisis. And in Sweden, the approach by the government is different than in Finland. And there, the sickness rates in general in Sweden are much higher, and the impact of the coronavirus is current -- seen also in the sickness rates of our people. And -- but kind of the underlying business is in good trade. We got some new customer contracts for 2020, and we are ramping up those customer contracts in the second quarter and that will sort of help us. But the big question for Sweden and technical services in Sweden is whether the additional sales will return and whether we get to do these sort of extra services, which is an important part of our business. Good news in Sweden is that our customers are fairly resilient to the crisis. We have many hospitals as customers. We have municipalities and we have other sort of very stable customers. But at the same time, because they are dependent on public funding, they will sort of be burdened by the lack of funds to do any sort of extra. In general, I would say that all of our businesses are vital for societies to operate. And therefore, even though we will be impacted in all of our business lines by this coronavirus, the impact will not be as big as for many other companies. And we don't have restaurants and let's say, ships or any sort of transportation companies. We don't have -- we have very, very few hotels as our customers. So we are, in a way, a little bit sheltered from the impact of those businesses where the virus has hit the most. So at the same time, as there is going to be a negative impact, especially in the second quarter, my belief is that we will get through this crisis pretty okay compared to many other companies. And I'll now hand over to Valtteri, and he can go through some financials.

Okay. Thank you, Eero. As Eero already mentioned about our operating profit, the main increase came from Facility Services Finland on its own 3 business lines. Then if we start with net working capital, our net working capital was minus EUR 40 million comparing to last year's Q1, EUR 30 million, so the development was very good. And in this kind of situation, we really have to monitor carefully our trade receivables development. And that is maybe the most riskiest asset in the company's balance sheet at the moment, but the development has been pretty good. Then if you look at our return on investment, it was 3.2%. Our first quarter is always the weakest. Then our -- the most profitable quarters are Q2 and Q3 and also Q4. We were able to decrease our capital employed by EUR 25 million due to the good development in net working capital, but we also sold our renovation business in last year's April. Then cash flow remained good. We have a traditionally really stable cash flow. It was roughly EUR 18 million comparing to last year's EUR 16 million. We had 1 real estate. We sold 1 real estate, and that is the reason why our cash used in investment was obviously [ a lot lower ] than last year. But we expect our cash flow to increase and remain on a good level. Then our gearing. We -- the data -- the dividend in March after the AGM in 1 installment, so that is the reason for increase. And also, we had a repurchasing program for our own shares at the end of last year of EUR 5 million. And also, we got some negative translation differences from weakening of ruble and krone and the effect was EUR 4 million. So the total impact of these 2 items were minus EUR 9 million. But despite of that, our gearing stayed pretty much on the same level. Then our interest-bearing debt and liquidity. We have a EUR 100 million commercial paper program, and we have used only EUR 20 million of it. And we also have a bank overdraft limit of EUR 10 million, which is unused. And on top of that, we renewed our revolving credit facility in early April for EUR 30 million, and it is also not utilized. EBIT assets, we have EUR 44 million. So I would say that our liquidity is really strong at the moment in spite of this crisis. Then our loan portfolio is well balanced. We don't have any loan repayments in the next 3 years. And it's also good to know that 80% of our loans have fixed interest rate. Then we updated our outlook last Friday, and Eero will tell more about our updated outlook.

Yes. Our full year net sales is expected to decrease, and operating profit is estimated to be EUR 30 million to EUR 40 million this year, excluding the loss related to discontinuation of Russian operations. And a few words about this, this Russian operations. So we have been in Russia forever, I would say, 20 years at least. And the operation is small in scale. And there was a reform in Russia how they run their waste management. And sort of the area, the larger area where we operate is Moscow Oblast. And there, there were 7 operators, and in our area, there were 2 operators. And now in April, other 1 of our 2 -- or 1 of our 2 operators informed us that they are going to take the logistics for themselves, and that will wipe about half of our sales in Russia. And therefore, we decided that we will withdraw from Russia. And because of that withdrawal, we will have a write-down of approximately EUR 10 million, and the effect to the equity will be slightly less because of the translation difference, so perhaps EUR 8 million. And -- but there will be no cash flow impact from discontinuation of Russian operations. So this was a kind of a matter of time when this happens and now it happened in April that the operators will sort of take it over for themselves. Unfortunately, Russian market is very unpredictable and very difficult environment for any Western company to work. So that was the presentation, and we're happy to answer any questions there may be.

Plenty of companies have decided to postpone CapEx unless they are totally necessary. You don't seem to do that. You don't need to. You've never mentioned these kind of things. Can you comment?

Yes, we have postponed some investments but not much. Because our view is that this is a temporary crisis. Even though the economic downturn will be severe this year, I would say, in all European countries, nevertheless, as I said also, many of the services that we provide are needed during the crisis and after the crisis. So we want to make certain that when the crisis starts to ease off, we are well prepared, and we are competitive and we can attack the market.

Okay. Am I still the only one? Can I go on with questions? So what will [indiscernible]

Yes, please. Please do.

Okay. In your assumption, when you explained you expect an operating profit of EUR 30 million to EUR 40 million, well, you remain clear that the impact of the virus is not as huge for you as for a lot of others. But nevertheless, what is your assumption regarding people going back to work? Actually, I'm not totally familiar with the situation of Finland. I think you have confinement like us, but not as tough. Yes, I'm French, not as tough as us.

No, no. Yes. So actually, the people are working, as we speak, in Finland. And there are -- the areas that are affecting our business right now are the schools. Schools are closed. And we do, for example, cleaning and property maintenance for some cities like -- I live in the city of Espoo, which is next to Helsinki. And the city of Espoo is a big customer for us. And therefore, the scope of our services is less. We have certain operations in the main airport of Finland. And obviously, nothing is happening there. So there will be, and there is an impact to our business because some of these restrictions that the government has imposed to the society and gradually, those will be eased. As we speak, our government is having a meeting, and they are considering whether they open the schools. And the health care officials are of an opinion that the schools should be opened. And if the schools are opened, then obviously, there will be, again, more work that needs to be done. But we don't know that. So as for many other companies, this is a completely new situation, and we can't sort of know what is going to happen next. But right now, it looks like that the government is going to gradually ease the restrictions. What will remain, it seems to be pretty clear that there will be no sort of big festivals or football games or things like that where there would be a lot of people gathering together at the same time. So those ones would be the last to be sort of released.

Okay. These are some events sometimes you would work for possibly?

Sorry?

Football games and festivals, you might be involved into that or...

No, no, no. Yes, those are not really our customers.

Can we use the opportunity -- you've been CEO for 1 year, if I'm right, or 1.5?

Yes, just a little over 1 year, yes.

You cannot use the opportunity -- to ask you, I'm not very familiar, as you see, with your company. But regarding strategy, will there be some changes when -- you've divested Russia, but you've been clear, it's more of a reaction to what happens than maybe a strategic decision. But other ways, things you want to change, the way -- regarding the strategy of the company?

Yes. Yes, that is true. And last year, we did quite a bit of work on our strategy. And what we did was that -- I mean Lassila & Tikanoja has for years already worked very actively on sort of bringing the responsibility in the center of what we do. But last year, we sort of made even a step change there. And we now have long-term targets and many of those are not financial targets, but they are related to this -- what we can do for the environment and what we do for our employees and for our customers. And for example, our carbon handprint is 1.2 million tonnes, which is a lot. I mean our carbon footprint is around 60,000 tonnes. So our carbon handprint is 20x bigger than our carbon footprint. So kind of taking the environmental crisis into the center of our strategy is something we really change. Also, when it comes to the operations, we are very much focused on Finland and Sweden and after the crisis or who knows what happens during the crisis. If there are opportunities, we would be interested in expanding to Sweden, especially in Industrial Services, but also to increase our footprint in the technical services in Sweden. And we believe that we have very high-quality operations, and our customers are really happy with our operations. In our Industrial Services, our Net Promoter Score is around 50, which is very high in this industry. So we have, for years, worked on the quality of the services, work safety, et cetera, and process industry very much like a sort of reliable partner in this kind of activities.