Luotea Oyj (LUOTEA) Earnings Call Transcript

Welcome to L&T's Half Year Financial Results Webcast. The webcast is hosted by L&Ts CEO, Eero Hautaniemi; and CFO, Valtteri Palin. There is an opportunity to ask questions at the end of the broadcast. Eero, please go ahead.

Thank you, Inka. And welcome also on my behalf to this first half year review of Lassila & Tikanoja. First, a few highlights. Our net sales grew nice 10.3% from the previous year, of which 5.6% was organic growth, which is a very good organic growth. Our operating profit was a little bit twofold in Environmental Services and Industrial Services. We managed to get the price increases quite well through. But in Facility Services in Finland and in Sweden, the pricing environment was much tighter, and we didn't get the increases through in the same way as in the other 2 businesses. When we look at the net sales development, you can see that growth was very healthy in Environmental Services and in Industrial Services. Also Facility Services in Finland showed some positive growth. In Sweden, the EUR 4.5 million decrease compared to previous year was mainly due to the very high workload on snow in the previous year. So the underlying business developed pretty much at the same level as year before. Our adjusted operating profit increased in Environmental Services and slightly in Industrial Services, but declined in Facility Services in Finland and in Sweden. Especially the second quarter was very strong in Industrial Services, as expected, when we increased our prices and implemented this kind of special surcharge for the very high diesel prices. When we look at the seasonality of our business, you can see that the third quarter is typically very strong in Facility Services, both in Finland and in Sweden, but also in Industrial Services, it is an important quarter. And that is obviously the case also this year. And especially in Industrial Services, our workload is very high in the third quarter. And now it's critical that we succeed in providing the services as planned. But let's dive into the business area performance, and we'll start with the Environmental Services. And there, as I said, the sales development was very good. And it was attributable to especially good success in the customer front. So we managed to increase our market share. The recyclable material prices continue to stay on a good level. And altogether, the environment was very, very positive for our Environmental Services business. Obviously, the high fuel price is still burdened, but as I said, the price increases went through quite well, and that helped us to improve the profitability. And as you can see, our relative profitability increased from the previous year. There are some dark clouds in the horizon because, as you know, the metal prices have started to decline already. Luckily, metal is a pass-through item for us. So for us, other fractions are much more important than recyclable metals. In Industrial Services, especially the hazardous waste business was the bright spot in our first half performance. There, the volumes were high and the price level was good. Also in environmental construction, the performance was very good. In process cleaning, we did have some challenges as the planned maintenance breaks were again postponed, and this causes the situation where we have a very high workload for the third quarter and the beginning of fourth quarter. And now we have done sort of extra careful planning to make sure that we can successfully deliver the services during this very high peak season. In Facility Services Finland, our challenges continued unfortunately. The COVID still had a little bit of impact, but much less than in the first quarter. But the main challenge for us in the second quarter was the fact that we didn't get through the price increases in the same way as we did in the Environmental Services and Industrial Services. The pricing environment is much more tight in the Facility Services, and it will take a longer time before we can pass through the cost inflation to our customer prices. Obviously, we need to intensify our work to increase the efficiency in the business, but also to get the cost inflation to the prices. In Sweden, the situation is slightly different because there, our contracts are much longer and therefore -- and they are also fixed priced when it comes to the sort of basic services that we provide to our customers. And therefore, it is very important that we now put more focus on the additional work. And we have started actions to increase the additional work, which then helps us to kind of offset the cost inflation, which was very high in Sweden as well. Hopefully, we can also get through some price increases, even though the contracts don't directly allow that for us to do. But also in Sweden, we need to pay a lot more attention to efficiency. And now the third and fourth quarter will show how we can turn around the, I would say, very poor performance of the first half of the 2022. Then I'll move on to our sustainability highlights. Now, when it's summer, it is very nice to tell that we have succeeded quite well in turning lawns into meadows together with Kesko and Neste, for example. And this is a trend that we see will continue in the future, and we have very good capabilities to do these type of projects in much larger scale also in the future. We have also managed to employ about 30 refugees from Ukraine together with Staffpoint, and we will continue our efforts to employ more Ukrainian refugees. And I'm certain that in the second half of the year, we will be able to offer tens of more positions to them. Also, we launched a sustainability-linked bond in the second quarter. And there, we have sort of targets to reduce our own CO2 emissions, but also to reduce the emissions of our subcontractors. And I'm happy to say that we are well in the way of doing this. Obviously, we don't have the slide here. So I thought that we would have the details of the -- of our sustainability work. But when we look at the emissions of our own CO2 emissions, they have developed very favorably and our CO2 intensity has decreased significantly, and it looks like we are well on path in reaching those targets. But with this, I'll hand over to Valtteri and he will go more detail in the financials. Go ahead, Valtteri.

Okay. Thank you, Eero. And let's move on to the financials. Okay, I will start from the adjusted operating profit. As you can see from the table, our EBIT improved significantly in Q2. Of course, our Q1 was low due to the omicron variant and the higher diesel price. The effect in Q1 was EUR 5.2 million. The cost inflation, COVID, higher diesel price, steel affects to all our businesses negatively and lowers our profitability. And despite of that, our EBIT improved compared to comparison period. Key figures: a few highlights from here, capital expenditure were EUR 35.7 million, but the share of acquisitions was EUR 20.5 million. So the investments to current operations were roughly EUR 50 million. And compared to our depreciations, which were almost EUR 28 million, it means that our cash flow -- or it has a positive impact on our cash flow. Then return on equity, return on investment were lower than in the comparison period due to the lower Q1 result and also our invested capital has increased roughly EUR 45 million from the comparison period. The first reason is the acquisitions we have made, but also now we refinanced our bond and our cash balance at the end of Q2 were higher than normally, which increases our invested capital. Equity ratio gearing on a sufficient level, and they will improve during the next 6 months. Total number of employees exceeded 9,000 for the first time. We got new employees through acquisitions and also, we have a lot of summer employees at the end of Q2. Then net working capital, it was EUR 35.3 million. It improved roughly EUR 11 million from the comparison period. The main reason for that is that in December, we published that we will combine our businesses in renewable energy sources with Neova's similar business. And now we've got approval from competition authorities and the joint venture started operating from the beginning of July. Also, it means that we will not consolidate the net sales of that company to our group figures anymore. So it will lower our net sales in the future. We will consolidate the net result of the company, 55% of that, our share, and it means net result means after taxes and financial costs. Then cash flow and investments. Cash flow was minus EUR 4.9 million, but the acquisitions were EUR 21 million. So actually, our cash flow from current operations were plus EUR 15 million, a lot more than our net result. So the cash flow was really solid and strong, and investments were EUR 27 million, but part of acquisitions in that is roughly EUR 13 million. Then interest-bearing debt and liquidity. So as Eero mentioned earlier, we refinanced our bond. We made a tender offer from the old bond. The tendered amount was EUR 32 million, and we got the targeted amount from the new bond, EUR 75 million. It is for 6 years fixed rate and the rate is 3.375%. So it increased our interest-bearing debt to EUR 165 million. Also, our cash balance was EUR 33 million. So it is a bit higher than normally. The bond, we also announced the sustainability-linked framework. We have 2 KPIs in the bond. The first one is our own greenhouse gas emissions, Scope 1 and 2. And the second one is our contractors' fuel consumption. Also, we renewed our revolving credit facility in Q1, which is unutilized at the moment. So in summary, our liquidity situation is really strong. Then loan portfolio, next year, we will pay back the rest of the old bond, EUR 18 million in September. And also now when we refinanced the bond, we paid back the EUR 25 million loan in June. In 2024, EUR 50 million bank loan will mature and then '28, the new bond. So it's well balanced and the maturity of our loan structure is now really good. The bond increased our effective interest rate. It's now 2.4% compared to earlier 1.1%. But in this uncertain market situation, it's really good that 86% of our loans have fixed rates, so it mitigates our risk in financial costs. All right. Thank you. And now I'll give back to Eero.

Thanks, Valtteri. And then outlook for this year, we repeat our previous outlook, which is that our net sales and operating profit are estimated to be at the same level as previous year. And here, a note about this renewable energy sources business, as Valtteri mentioned, it is going to be now not consolidated, line by line, to our numbers, but only the net profit will be consolidated. And therefore, there is going to be a negative effect to our net sales. So if you were wondering why we repeat the net sales outlook also, that is the reason. So half year's net sales of renewable energy sources will not be in our numbers anymore. Good. Thank you very much. That was the presentation. And now we are ready for the questions.