Luotea Oyj (LUOTEA) Earnings Call Transcript

Hi, everyone, and welcome to Lassila & Tikanoja's Full Year Result Webcast. This webcast is presented by L&T's CEO, Eero Hautaniemi; and CFO, Valtteri Palin. There is an opportunity to ask questions at the end of the broadcast either via phone or by providing your question in the window visible below the screen. So Eero, go ahead.

Thank you, Heidi. Good morning everybody and welcome to this Lassila & Tikanoja 2021 earnings release. First few highlights for 2021. We had a solid year in '21, especially, I'm happy about our sales growth, which was 8.1% over the comparison period. And there is -- a big portion of that growth is coming from organic growth. We did have few small acquisitions as well that sort of supported our strong sales growth. Also, our adjusted operating profit increased quite nicely and especially if we consider that there is an adjustment to the operating profit of EUR 1 million related to Cloud SaaS services and it's a change in accounting principles. So considering that, the increase in operating profit was very good. Before we go into the numbers, I would like to, with a few words, address our strategy and strategic process from last year. We did sort of a bigger strategic revision in 2019 and now we revisited that again last year. And during that process, we could identify several megatrends that support our businesses, especially prevention of CO2 emissions or green transition is a big trend that supports all of our businesses. also urbanization that is continuing with increasing pace is supporting very well our Facility Services business. In general, we could identify several growth opportunities for all of our businesses. In this strategy revision, we made sort of few selections and our sort of main focus areas for this strategy period are listed here. First one is growth in our core businesses and this means as a test much more focus to where we clearly have a competitive advantage. To give you an example is, in Environmental Services, we have clearly chosen that we focus on B2B business and growth in B2B business, where we will invest organically and hopefully inorganically as well as the new waste law in Finland will open opportunities for growth in this part of the business. Then secondly, our focus area is sustainability. That was our focus area already in our 2019 strategy. We have sharpened a little bit kind of what we mean by that. We have been very strong in sort of supporting our customers in their daily activities. We have also made a lot of development into our service offering, but now we have much better capabilities also to help our customers in strategic level when they are trying to find answers to their sort of sustainability challenges. Then third area is excellent workplace. As we know and especially now, while we are sort of recovering from this COVID pandemic, there is sort of increasing shortage of labor in Europe, but especially in Finland where the demographic situation is challenging, and therefore we have to be able to be sort of the first choice of on the employees when they decide where to work and that is an area where we have put a lot of effort in the past years and during the strategy period, we will continue to invest into that particular area. And then the fourth area is more efficient operating model. Again here, we have already done work, but we will, sort of, increase the pace of those development actions, so that we are in better shape also operationally for this strategic period. And an example on that sort of the fourth focus area is here. We have done already in the past couple of years quite a bit of development of our processes and supporting IT systems and we will continue this development work for the coming years, say, till the end of '24. And by that time, we have renewed all of our sort of main IT systems and that will increase our efficiency, but obviously it will also provide much better digital tools to service our customers. Obviously, this has meant and will mean that we also spend money to sort of develop our processes and systems and now as we have reported, so there is a new sort of IFRIC agenda, this is -- that sort of changes a little bit how we capitalize these expenses and how do we put -- book those on annual expenses and what it means in practice is that, we will book those a little earlier to expenses rather than capitalizing and then amortizing them over the coming years. So in our case the change is not very big. Last year it was EUR 1 million and this year it is estimated to be in the same range, but it is good to understand when looking at our numbers. Obviously, a strategy without KPIs to measure the progress against the targets is meaningless. So we have strategic targets, which have not changed as such, but what we have done during this strategy round is that we have lifted the bar and increased our ambition level on this and that is through the, sort of, encouraging results we have been able to achieve in the past 3 years. Starting with customer satisfaction, our new target is 50, which is very high number, but we scored 40 in end of last year, which is obviously a very good result and here we asked from over 10,000 customers how they feel about our services. So this is not a small sample that we use to measure the customer satisfaction. And the improvement from 2018 is 22 points, which is a very, very strong improvement. In the same way, employee satisfaction, we measure eNPS and our score was 28 and our target is 50 here as well. 50 is a lofty target for business like ours, where we have obviously a lot of sort of operational work, but still we believe that we can do this and without lofty targets, it sort of doesn't challenge us enough to find new and better ways of organizing the work so that it is motivating for our people. Then very important target for us is CO2 emissions, our own emissions, but also what we can do together with our customers and which is called carbon handprints. So how much we can reduce with the solutions we do together with our customers the CO2 emissions for them. And in our own carbon footprint, our target is to half our emissions from 2018 levels by 2030 and we are well on track on this. And in our carbon handprint, we target or aim to increase our carbon handprint faster than our sales growth and this is obviously a challenging target, but we are working very hard with our customers to achieve this. And then obviously financial targets. Here also, I'm really happy that for the first time in many, many years we have been able to grow strongly and our last year's growth was 8.1% of which majority was organic growth, our return on investment was almost 11%. So good increase there. Obviously, we are not where we want to be there yet, but certainly on the path to get there. And our net gearing was still below our threshold, which is 125% and this gives us opportunities to invest in sort of organic growth and also inorganic growth. Okay. With this, I move into the last year's performance and numbers. As I said, the net sales grew very nicely and it grew in all of the businesses and of this growth, almost EUR 50 million was organic growth, so acquisitions as they were meant to be were sort of supportive acquisitions for our continuous organic growth. Clearly, the recovery from COVID pandemic helped us here, but I would say that the work that we have now done for several years is helping us here and we can see that our order books and sort of our customer backlog is much stronger than what it has been in the past years. So I'm quite confident that we will see good growth also in the future. In adjusted operating profit, very strong performance in Environmental Services and Industrial Services especially, and here we have to remember this EUR 1 million adjustment to this change in accounting principles that -- without that this growth would have been even higher i.e., EUR 3.7 million, now it was EUR 2.7 million. So very, very good development on the operating profit level as well. Obviously, Facility Services, Finland did not perform as expected and the performance was there poor, but I will get back to that later when we go through the segment-specific numbers. Here, you can see kind of how our development was quarter by quarter and last year was the second year when we had COVID impact to our numbers. And as you can see from these quarterly numbers, we were sort of better prepared for this, especially in Industrial Services, but also in Facility Services, Sweden, you can say that the performance is more even and this sort of shows that we were quite successful in our planning for this second COVID year and therefore the performance more even throughout the year. Then, I'll move on to segment-specific numbers. And in Environmental Services, as I said, finally, we are starting to see strong growth in the business. Yes, we did make an acquisition, Sihvari acquisition, and that was a very sort of nice fit into our portfolio. And it certainly helped us, but even without the Sihvari acquisition, we did perform commercially very well and therefore our organic growth was strong. Part of this growth is coming from renewable energy sources, but also in the sort of circular economy, we can see that our positioning is strengthening, especially in the B2B segment, where we want to be strong. What was burdening our profitability to some extent was the increasing diesel price. We use a lot of diesel still even though a lot of that is HVO diesel. We are increasing our natural gas fleet as well, but the fact is that the diesel price does affect our costs and therefore it showed a little bit in the EBIT or operating profit performance and this is obviously something we tried to work out with our customers and obviously, we need to make certain that our prices sort of reflect the increase in diesel price. Then, Industrial Services. Strong year sort of returning back to pre-pandemic levels. Our position in the market has strengthened and that shows on the topline. Especially, I would say, the performance was strong in hazardous waste area. There, the sort of the volumes have now returned to the pre-pandemic levels and that is helping us a lot. We have signed an agreement to acquire the small sort of SME hazardous waste business from Fortum, which will then, if it closes, and obviously we expect it to close next week, then we expect that to sort of support our strong development in hazardous waste area. Also in process cleaning, we had a strong year, we did have, because of the pandemic, few occasions where our workload was extremely high and we had to use external workforce and we had to use rented equipment and that negatively impacted to our operating profit, but sort of considering how challenging last year was, I would say, the performance in Industrial Services was excellent. Then Facility Services, Finland. Unfortunately, the saga continued and we still struggled in Property Maintenance and Technical Services. Because of that, after the summer, we made a plan where we restructured quite heavily both of these businesses and we, for example, closed 4 sites in our technical services and we went through our sort of customer portfolio. We went through our organization and sort of management structure and we did necessary changes and we expect that our cost base is at least EUR 3 million lower in Property Maintenance and Technical Services when we start 2022 and that should support good profitability development in those business lines as well. In Cleaning Services, our 2021 performance was solid and there we expect that to continue also this year. So overall, I would say that the situation in Facility Services, Finland is much better now. We have done sort of necessary and required structural changes and also our customer base is stronger, starting '22 than what it was when we started 2021. Then, finally, Sweden. In Sweden, the restrictions related to COVID by the authorities were different compared to Finland and that sort of showed us sort of more even development. Still we didn't get as much additional sales as we expected and that is an area where we need to improve and work harder. But in general, I would say that the performance in our Swedish Facility Services was solid. Here when you look at the operating profit, you have to remember that there is this PPA amortization that is sort of lowering the operating profit. So without that, the operating profit is on quite decent levels. Good. Now, I hand over to Valtteri and he will tell you more about the financials.

Okay. Thank you, Eero and Good morning everyone. Let's look at the financials and let's start with adjusted operating profit. In the fourth quarter, the EBIT was EUR 10.1 million and actually every quarter in '21 were better than in comparison period. As Eero mentioned, this IFRIC agenda decision related to interpretation of cloud services in ICT systems affected EUR 1 million negatively the fourth quarter result. Also, we had other one-off item [indiscernible] work accidents by EUR 700,000 from year 2018. On the contrary, in 2020, we had EUR 1 million positive one-off items and this temporary [indiscernible] paying some payment discount in 2020 was almost EUR 4 million. So considering these one-off items, the development behind the figures was actually much better than the figure shows. Net working capital was EUR 46 million, it improved a lot in fourth quarter. One of the reason is that our Renewable Energy Sources business is not included in the net working capital anymore. In December, we published that we will combine our business with Neova board and now we are waiting for competition authorities approval for that and it should come by the end of this year and then the joint venture will start operating. Also, we did other actions to improve net working capital during Q4. We decreased the amount of our invoiced net sales. Also we get the better payment terms with suppliers and customers, so the cash flow was really positive in the last quarter. Key figures, few highlights from here. Capital expenditure, EUR 72 million compared to EUR 48 million. The reason is for the increase that we invest EUR 81 million in acquisitions. So actually the capital expenditure was EUR 7 million less than a year ago. Depreciations were basically on the same level as well. In 2020, we wrote off EUR 5 million in the fixed assets. Then invested capital increased due to the acquisitions by EUR 27 million and then return on investment improved. In 2020, we had that discontinuation costs for us. So that's the explanation, but also our EBIT improved. Our strategic target is 15% and in Industrial Services and Environment Services, we are pretty much there, almost 15%, but in the Facility Services both Finland and Sweden we are under the target that we have now made actions to improve it in those businesses as well. Equity ratio and gearing [indiscernible] sufficient level to keep on investing to our current operations and possibly continue acquisitions. Then the dividend. The dividend is not in this table, but earnings per share was EUR 0.90 and our Board's proposal for the AGM in March will be EUR 0.46. A total amount of dividend would be then roughly EUR 17 million and it will be paid in one instalment at the end of March. Net cash flow, as I mentioned earlier, the investment much higher due to the acquisitions, but as you can see from the table, the cash flow in second quarter and third quarter was much -- a lot negative and we managed to reach positive cumulative cash flow for the year '21 in the fourth quarter, it was really good. Interest-bearing debt and liquidity; interest-bearing debt is EUR 125 million without IFRS 16, it increased by EUR 10 million, but refinanced our acquisitions by this EUR 25 million bank loan. IFRS 16 consolidated leasing liabilities have been between EUR 70 million and EUR 80 million, they're quite stable. Cash in bank was EUR 29 million. Also, we don't have any commercial papers in use. Also, our bank overdraft limit EUR 10 million is not utilized and on top of that we have a revolving credit facility, EUR 30 million which is also unused. So the liquidity position is really strong. Then maturity structure of loans, it's well balanced. No changes in the fourth quarter. We took that EUR 25 million bank loan in 2021 and now next year in September, the bond also will mature and we will probably refinance this in the near future. Now when the inflation is really high and also central banks might probably raise interests, it is good to know that more than 60% -- no, 64% of our loans have a fixed interest rate and the effective interest rate was 1.1%. Okay, I already told about this dividend. And now I give back to Eero.

Yes, I dropped my microphone. Sorry. Okay. For the outlook, the fact is that we have about 8,500 employees and this Omicron variant is affecting our environment in 2 ways. First of all, our customers, as all of you know, in Finland, the restaurants are pretty much closed, also the sort of a specialty retail and certain other areas are heavily affected by this Omicron variant. Also many companies have entirely remote work, which means that there is sort of less work that needs to be done at the offices. So through the sort of restrictions or other consequences by this Omicron variant, there is less demand in first quarter and that affects our businesses. But also, as this Omicron is going through the population as we speak, our sick leaves have increased, obviously, and in certain areas, it has been as high as 15%, which is very high. Normally, we are around 5%. So on average, we have been around 10% with our sick leaves. So obviously that has brought sort of additional challenges to our employees, but also for us in providing the services. So we have to use sort of more over-time, more rented personnel and we have been forced to make sort of special arrangements. And because of these circumstances, we expect them to sort of continue pretty much all of first quarter, so that has overall negative impact to all of our businesses. And if we combine this situation with sort of shortage of labor, the biggest impact will be seen in Facility Service, Finland. Now this is all sort of negative in the first quarter. But as I said earlier in the presentation, our starting point for 2022 is very good. We've had really strong fourth quarter and our order book in all of the businesses is stronger than it has been for years. So sort of the underlying business is performing really well. And I'm very happy about the very good work all of our whole organization has done. So therefore, kind of the underlying business is doing well, but we will have an impact, which is going to be sort of visible in the first quarter. And because of this, our outlook is that, for the 2022, we expect our net sales and adjusted operating profit to be at the same level as it was in 2021 and here it's good to remember that this means plus/minus 5% compared to the comparison period when we say at the same level. Good. Thank you very much. And we are ready for your questions.

Operator, we are ready for questions.

[Operator Instructions] The first question we received is from Pasi Vaisanen, Nordea.

Great. Thanks, This is Pasi from Nordea. I hope that you can hear me.

I can hear you. Thanks.

Yes. Great. I can start with the 3 ones. So the first one is related to this investment in total IT system, so how much actually you have already spent to this installation so far and how much money you are going to spend to this IT systems before 2025 as you actually highlighted on your storage update and what is going to be the payback time for this total investment. I guess it's going to be tens of millions. And secondly, regarding this operating profit margin in Environmental Service business. So kind of what is the underlying EBIT margin run rate for your business when looking at the kind of the current setup and current contracts and portfolio and would it be close to [ 1% ] as actually orally reported from last year. And maybe lastly, regarding the workforce, what has been actually the employee [indiscernible] I mean change percent during the last year and has it been a well above or below the kind of that average looking at the 5 to 10 years period. Thanks.

Okay. Thank you, Good questions. So let's start with the IT systems. So our sort of spend is sort of few millions per year. And let's say in the range of EUR 5 million per year to this system renewal and part of that has been expensed already and part of that is in the balance sheet. And now we have sort of looked at this in the light of this IFRIC agenda decision and now because of that we will expense slightly faster the spend we do into the IT systems. But in the range of EUR 5 million per year is what we spend today in the systems and have spent in the past couple of years as well. Then the second question was around what is the margin in Environmental Services. We do not give out the margin in sort of our circular economy business or recycling business and then renewable energy sources, but it is obvious that the profitability in renewable energy sources is significantly lower than what it is in our recycling business. Once we have received the permission from competition authority, hopefully, after the summer, then obviously the joint venture will be reported outside of L&T's numbers and we will consolidate that on one line only, and then we will show the underlying performance. But in general, our customer contracts are on healthy level. What is burdening our profitability is as I said, the diesel price increase. We have done and we will do sufficient price increases to compensate for that. And then the final question was around sort of what has been our employee turnover. Actually, the good work we have done which shows in eNPS as well is helping us here. So our employee turnover has not significantly increased from sort of normal levels. And we have been able to pretty well keep our employees. There is a variation between the businesses and the turnover is highest by sort of nature in the cleaning business where many people sort of consider that as a temporary work and therefore there is, for all of the players high turnover. But I would say that we are performing quite well compared to the market.

Great. Thanks. I hear you. And just to confirm what has been taken of to effect from the total operating profit margin in environmental service and then looking at the [indiscernible] for this ongoing or the future joint venture with one of [indiscernible] operation. So should we still expect that the margin will be higher than 9% in the future, may be 10% or would they even a chance to reach 11% in the business area.

Let's get back to that once we get the competition authority approval.

The next question is from Jaakko Tyrvainen, SEB.

It's Jaakko from SEB. I would like to continue on the Environmental Service side and the strong sales in Q4 and quickly that, what is driven by [indiscernible] if I recall that you had high inventory levels in that business area earlier this year. And secondly still on the Environmental Service side, Eero, you stated that you're planning price increases in order to compensate the high fuel price impact there. What will be the time lag in order to see this price increases to kind of a have a positive impact in your numbers.

Yes. In fourth quarter, yes, renewable energy sources had a strong performance, especially in December, which was cold and there was high demand for some of their products. As the peat consumption is growing rapidly down, so there was high demand. But the fact is that also in the recycling business, as I already said during the presentation, I think we have turned a new page and we are clearly sort of gaining share again. Obviously, Sihvari is helping us, but in general, I would say our performance has improved, our commercial activities have been more successful and we can see a sort of a strong underlying organic growth as well there. So I'm quite pleased and confident when it comes to the Environmental Services. Part of the growth if we look at sort of year-on-year is coming because of the recovery of the secondary raw material prices. So that has to be kept in mind, but when we look sort of segment-by-segment performance in Environmental Services, I can see that in most of the segments, we are actually growing quite nicely organically as well. And these price increases, we have done price increases already and we will continue to do so as the diesel prices increase. Obviously, we have to be able to compensate for that, which is partly driven by the sort of development in world economy and sort of the crude oil price increases, but partly, it is also driven by the Finnish Government decision, which are obviously completely out of our control. So we need to sort of make sure that we get compensated for those as well.