Luotea Oyj (LUOTEA) Earnings Call Transcript

[Audio Gap] Financial results webcast. The webcast is hosted by L&T CEO, Eero Hautaniemi; and CFO, Valtteri Palin. There's an opportunity to ask questions during the latter part of the broadcast. Eero, please go ahead.

Thank you, Inka, and welcome also on my behalf to this 6 months earnings release. Let's start with a few highlights from first half and second quarter. Our net sales in Q2 were EUR 207 million compared to EUR 219 million a year ago, and this was mainly due to the fact that our renewable energy sources business is now reported below the operating profit. Also, Swedish krone weakened quite significantly compared to the previous year, and its impact was over EUR 6 million to net sales. Our adjusted operating profit was EUR 9.2 million compared to EUR 11 million, and I'll get into the reasons behind that later during the presentation. Our Facility Services Finland and also Industrial Services continued their good performance in the first half and also in the second quarter as Environmental Services and Facility Services Sweden had a softer quarter. And also for those, I will get later during the presentation. Our net cash in the first 6 months was strong and our financial position is strong. We managed to release quite nicely capital from the net working capital, and our plan is to continue on that path. Let's move on to net sales. And as you can see, pretty much all of our businesses were in line with previous year, excluding Industrial Services, which increased by EUR 7.3 million. And as I already mentioned, in Sweden, the weakened Swedish krone had a negative impact by EUR 6.6 million to the net sales. Renewable energy sources impact was EUR 34.1 million during the first 6 months. And now after end of June, the comparable numbers are then the same as we started reporting the renewable energy sources below the operating profit, 1st of July '22. Adjusted operating profit for the first 6 months, 10.6% compared to EUR 11 million adjusted operating profit. And here, you can see that Environmental Services was lower than a year ago by some EUR 900,000 as Industrial Services and Facility Services Finland improved quite nicely. In Facility Services Sweden, we had quite a bit weaker performance in the first 6 months, and I will go into the details as we go into the details as we go into the segment part of the presentation. We do have quite a bit of fluctuation quarter-by-quarter. And typically, first quarter is the weakest and then slightly improving in the second quarter. And then the third quarter is the biggest quarter for us, and then the fourth quarter is approximately at the same level as the second quarter. And this year is no exception to this quarterly fluctuation. And let's move on to the segment part of the presentation, and let's start with Environmental Services. In Environmental Services, we saw a decline in demand in -- especially construction industry and, to some extent, in retail as well. And also, we saw that price levels for recycled raw materials were lower level than they were a year ago. In the second half, the difference will be smaller as the price level started to decline last year already. In Environmental Services, we also did have higher costs in the second quarter. The collective agreement included a one-off payment for the drivers, and that was visible in the numbers, as well as the heavy work that we did for our operating -- new operating system. And that will continue until the end of the year. And next year, we will start the piloting and rollout phase. I will explain a little bit more about the IT development that we are doing in the group later during the presentation. Our new government has, in our view, some very positive intentions in their program, especially the role of the municipal waste companies is going to be clarified. And their role will be focused on the household waste only, unlike the situation currently where the borders are somewhat vague where the municipal waste companies operate. Also, there is an intention to improve the conditions for the recycling industry in general and increase the use of recycled raw materials, and also the environmental permit process should be streamlined. And all of these changes if implemented, and hopefully, when implemented, will be very positive for Lassila & Tikanoja's businesses. In Industrial Services, we did have a strong first 6 months of the year. Especially in the hazardous waste and environmental construction, the performance was good. In general, the environmental construction, we did win quite a few demanding projects, and those projects have proceeded according to the plans. In process cleaning, so far in the first 6 months, the demand has been stable and expected. But obviously, there is a risk in the second half that there might be changes in the planned maintenance breaks, either to the, let's say, scope or timing of those maintenance breaks. But we have a very good dialogue with our customers, and we expect that we can manage if there are changes in the second half of the year. In Sweden, the market situation is similar to Finland. Some of the process industries are suffering from lower demand, and therefore, we had to work a little harder to find new customers. But so far, it has continued quite well in Sweden. So overall, in Industrial Services, our position is strong and performance is very solid. In Facility Services Finland, our positive development continued in the second quarter, although the difference to the comparison period was a little smaller in the second half than it was -- sorry, in the second quarter than it was in the first quarter. One reason for this is that also in Facility Services Finland, the new collective agreements came into force. Actually, they came into force already in May, and the salary increases were quite substantial. And our plan is to make price increases and focus on the efficiency to offset the impact of these pretty sizable salary increases. In Sweden, even though the numbers are not good for the first half of 2023, there is a lot of work that's been done behind the scenes. And actually, our turnaround plans are largely progressing according to the plans. And we do expect quite a nice improvement also in the financials when it comes to the second half of the year. So overall, even though the numbers are not very good in the first half, we expect to see visible results of our turnaround in Sweden already this year. Obviously, the full impact will be visible by the end of 2024. Then, as I promised, I will go a little deeper in the, let's say, renewal road map of our ICT systems. Our, by far, largest program is the new system for our Environmental Services. And we are currently in the build phase, and that phase was very intense in the first half of the year and especially in the second quarter. And as you can see from these numbers below, our spend in the first half of '23 was pretty high, EUR 5.1 million. This includes the CapEx and the actual cost that incurred in the first 6 months. But it gives you a good picture of how much we are investing to external work and also to the internal work to renew our systems. Also, we are renewing our HR master system and the go-live should be at the end of the year, in November this year. Overall, these system renewals and these sort of new operating models will obviously aim to increase our efficiency and improve our ability to use modern technology to improve their customer service, but also to make overall operations much more efficient. And we are confident that we will see very positive results from these changes in the coming years. Then a few sustainability highlights. As I have said earlier, we have invested a lot in strengthening our organization in -- especially in Environmental Services, to bring expertise in circular economy to our company. And our customers have found us, and we have done many interesting projects with different size of customers. And one example is a road map that was created together with Valmet Automotive car factory in Uusikaupunki, Finland. And in this work, we will -- we helped our customer, in this case, Valet Automotive, to find concrete ways, how they can then reach their own sustainability targets by increasing recycling and reducing emissions. And the customer is very pleased with this work that we have done together with them. Also, we had a very positive development in work safety. We have invested quite a lot into this. We are training all of our personnel within, let's say, 12 months. We started with the management last year. And this year, we are rolling out the training to rest of the personnel. As you can understand, this is a pretty sizable investment. But so far, the results have been good and our 3 levels have reached all-time low in the first 6 months of the year. Also, our own CO2 emissions continued to decline, and this was due to the very good actions that we have had, especially in Industrial Services and Facility Services. And you can see from these numbers that we are now quite a bit below last year's levels, even though the volumes in the large scale are approximately the same as they were previous year. Also, our emission intensity has declined quite substantially. Also, one highlight from these numbers is the fact that our sick leave are finally getting down, and they were now 5.3% compared to 5.8% a year ago. Obviously, we are not yet at the levels we would like to be, which is below 5%, but certainly on our way there. And this will help us in staffing, especially in Facility Services Finland and Sweden. In general, I would say that also the availability of workforce is better now than it was a year ago. And that also should help us in the second half in Facility Services businesses, both in Finland and in Sweden. So with that, I will now give the floor to Valtteri, and he will go through some of the financial highlights. Go ahead, Valtteri.

Thank you, Eero, and good morning, everyone. I will dive into the numbers and financing, and I'll start with the key figures. Capital expenditure were EUR 31.8 million less than a year ago. But in the comparison period, we had acquisitions amounted of EUR 20.5 million. Depreciations, on the same level, EUR 28 million. And then return on equity, return on capital employed, they both improved. Despite of the lower EBIT level, we managed to decrease capital employed by EUR 15 million. And also our joint ventures, Laania, between renewable energy services company, made a good result. EUR 2.2 million was our share. And also, we terminated interest swap and booked EUR 1.3 million gain of that. So there are 2 items, which explains the better numbers. And the same reasons, earnings per share, EUR 0.24, are better than in the comparison period. Cash flow was EUR 0.55. No one-off items. It was solid and strong compared in the previous year. There were acquisitions, which causes that it was negative. Balance sheet ratios, equity ratio and gearing, they both improved. Equity ratio is now 33.4% and gearing is also below 90%. Net working capital was minus EUR 41.6 million. It improved EUR 6 million from the comparison period. And also relatively, it was minus 5.1%. So it was 1 percentage point better than a year ago. We have made actions to improve our payment terms, and also we have managed to improve other balance sheet items as well. Cash flow was EUR 19.3 million. It was strong. No one-off items. And the investment cash flow was minus EUR 19 million. Our cash flow is predictable and solid. Interest-bearing debt and liquidity. This IFRS 16 leasing liabilities -- consolidated leasing liabilities, which mainly consist the real estate premises and heavy fleet, was EUR 76 million. They are usually between EUR 70 million and EUR 80 million. Then interest-bearing debt, EUR 134 million. It decreased by EUR 30 million. We refinanced the bank loan of EUR 50 million by EUR 40 million loan. It's a sustainability-linked loan. There are 2 sustainability KPIs, accident frequency and carbon footprint. And after that now, all of our bank loans and bonds are sustainability linked. In the comparison period, there were EUR 20 million commercial papers in use, and now we didn't use them. And also on top of that, the revolving credit facility, EUR 40 million, is not utilized. And same goes with the overdraft -- bank overdraft limits. Cash balance, EUR 30 million. So our liquidity position is pretty good. Then loan portfolio. This year, we will pay back the rest of the old bond in September, EUR 18 million. And in total, we will pay back loans almost EUR 30 million this year, which also improves the balance sheet KPIs and also decreases the financial costs. When we refinance this bank loan in conjunction with that, we terminated this interest swap, EUR 30 million booked, EUR 1.3 million benefit. And due to that, 70% of our loans have now fixed rate, and 30% is variable. Weighted average effective interest rate is 3.4% compared previous 2.4%. And then so the next refinancing in 2026 is EUR 40 million. And in '28, will mature the bond of EUR 75 million, which we emitted last year. Good. And now I hand over to Eero.

Thank you, Valtteri. So finally, the outlook for '23. Our outlook is unchanged. As I said, we do have typically a quarterly fluctuation. And even though the second quarter was a little bit on the soft side, the outlook for the year is solid. And therefore, we reiterate our outlook, which is that our net sales and adjusted operating profit are estimated to be at the same level as in the previous year, even though the comparison period includes net sales from the renewable energy sources. So that was our presentation, and now we are ready for your questions.

[Operator Instructions] The next question comes from Pasi Väisänen from Nordea.

Great. This is Pasi from Nordea. Well, if I start with the 3 questions, and the first one is related to Sweden and Facility Services. So when looking at your kind of cost overruns and the renewal of the contracts in the country and operations, so would it be possible that Facility Services Sweden will remain loss-making next 12 months period before you actually get the kind of full -- costs to kind of full contract prices end of '24? And the second question is related to these investments you have made to the IT system. So if I remember right, the first phase of IT system investment required some over EUR 10 million. And now the second phase looks to kind of require over EUR 20 million investment, so to get maybe over EUR 30 million. So do you have any payback calculation for these investments? Or do you need to make this investment just to keep your profitability and operating profit at the current level? Or would it be so that it actually improves efficiency or EBIT in the future? And lastly, yes, regarding Industrial Services. So how much from the activity in the third quarter from the Industrial Services segment is actually related to the seasonal maintenances, which actually could now be an under risk regarding the big and demand for the processing industry? These three.

Yes. Okay. Let's start from the last. The Industrial Services, as I said, right now the outlook for the third quarter is actually quite good. So there has been slight changes to the timing and scope, but nothing major. But obviously, there is always a risk that something may come, especially towards the end of the third quarter. But overall, this situation where you run down the operations and up the operations again is actually not so bad for our type of supporting services. There is demand for our services in those type of situations. So overall, I would say that as of now, the outlook in Industrial Services is good. But as you said, there is always a risk that something may come. And we have experienced these kind of situations during the COVID time, and we were able to adapt. But obviously, it requires very careful and good planning to optimize the use of resources. Then the second question was regarding these IT systems. Now Lassila & Tikanoja, even though is one corporation, has different businesses. And this first investment that you mentioned was for Facility Services Finland and the accounting system, which was done, I would say, 5, 6 years ago, maybe. And these system renewals that we're doing now are around Environmental Services, Industrial Services and our HR master. And obviously, in all companies, the systems have to be up to date. So if I start with Environmental Services, our current system is about 20 years old, and it has to be replaced. And when we -- as I showed -- actually, I could take back the picture. The planning of this system renewal was started already in 2020. And it is not one system, but it is actually several different systems where there is sort of one main ERP in the center. But also the systems around it will be renewed, and the sort of new solution will be cloud-based and a very modern system app. And obviously, as we are making this kind of sizable investment, there are also efficiencies, but we aim to get through this system renewal. And yes, we will see efficiency gains in the coming years. But in the case of Environmental Services, those gains will be visible only 2025 onwards. Obviously, as environmental systems -- Environmental Services is a very big and important part of the company, we want to be very careful with this implementation and make sure that there are no hiccups while implementing and that it really fulfills the needs and requirements of our business. So yes, there are investment calculations. And partly, it is a replacement. And then partly, it is to get efficiencies in the future. And then the first question was around Swedish business. We give outlook for this year only. And as I said, I believe and we estimate that the second half will be clearly better than the first half. And we do not give segment-based numbers out. We give outlook for the group. But as I said, we expect the second half to be better than the first half in Sweden.

Yes. Great. That was very helpful. But if I read between the lines, it's possible that Sweden will be loss-making in the second half. I guess that's a reasonable assumption. Would it be so?

As I said, we don't give out outlooks by business. But as I said -- let's do it this way. I'll go back to the quarterly performance. And as you can see, as in Finland, also in Sweden, typically, the third and fourth quarter are much stronger than the first and second quarter. Obviously, in this year, as we have been doing quite a few things to turn around the business, the costs are visible in the first half, but we do expect the second half to be better than the first half. And that will be also helped by the normal seasonality in the Swedish business. But as I said, we can't give any numbers regarding the business segment or per individual business segment.

The next question comes from Nikko Ruokangas from SEB.

This is Nikko from SEB. I have also a couple of questions. So first of all, you mentioned potential positive impacts from the current finished government initiatives. So could you discuss the size of the potential impact to you?

Yes. We are happy to do that, but not now. We have planned and we will have a Capital Markets Day at the end of the year in November. And by that time, we know a little more and we have had time to analyze a little more what the impact might be. But especially the first bullet point where the role of the municipal waste companies is, let's say, clarified will be potentially quite significant for us in the future.

All right. I understand. Then also regarding the Industrial Services. So you had already before described that your Industrial Services is related to overall economic situation, as you already discussed earlier in this call and answered to earlier questions. So -- but how much overall economic turbulence have you calculated in your estimate? And has something of this economic turbulence surprised you compared to your expectations in the beginning of the year?