Luotea Oyj (LUOTEA) Earnings Call Transcript

Welcome to L&T's quarterly result webcast. The webcast is hosted by L&T's CEO, Eero Hautaniemi and CFO, Valtteri Palin. There's an opportunity to ask questions at the end of the presentation via phone or by using the chat function. Eero, please go ahead.

Thank you, Inka. Good morning on my behalf as well. And welcome to this interim report January, September 2023. As always, let's start with a few highlights. We did have a solid performance in pretty challenging market. And our adjusted operating profit was EUR 31.8 million compared to EUR 31.3 million in the comparison period. Our net cash flow was strong, and we did announce a result of our strategic review yesterday evening, and I'll come back to that later in the presentation. Let's start with net sales. Excluding renewable energy sources, our net sales was pretty much flat compared to the previous year. FX, the Swedish krona euro FX impact was about EUR 7 million negative to our net sales. I'd say the highlight from net sales was a good development in Industrial Services, where we had 7.7% growth year-on-year in the first 9 months of '23. Adjusted operating profit was slightly better, as I said earlier. And again, if we exclude the renewable energy sources, the improvement was about EUR 800,000 compared to '23. Here, our highlight is the Facility Services in Finland where the improvement was about EUR 4.7 million. But also in other business segments, we did have a very solid performance.    We do have very strong seasonality in our EBIT performance and as I've said earlier, the third quarter is the strongest and especially after COVID-19. It has been the case that the maintenance breaks in Industrial Services are very often in the third quarter compared to the earlier situation where there were more evenly spread throughout the year, and that shows in these numbers. Also, if you look at the Facility Services Finland, we have had solid improvement in the adjusted EBIT every quarter this year. And also, I'd say, in Facility Services Sweden we are seeing now first indications that our hard work is giving results. And now we had adjusted operating profit at the same level as it was last year. Then we'll dive into the segment review and start with Environmental Services. We did have very challenging conditions, as I said earlier.  And especially, it is a fact with Environmental Services. The construction business is very slow. And also volumes in retail are lower than they were a year ago. And the high inflation and slowness in general economic activity shows in the demand of recycled raw materials and both volumes and prices are down compared to the previous year. But despite of these headwinds, I'd say, we did perform quite well. We managed to get new customers, B2B customers, which has been our target especially in producer responsibility organizations. And also, we have been quite successful in the municipalization and we have won quite a few contracts as the municipalization is progressing.    We also did do some efficiency measures, and they are visible already in Q3, and we will continue to be very careful and look ways to make the operations even more efficient going forward as it looks like the market is not going to recover in the near future. In Industrial Services, good performance in all business lines in hazardous waste, the volumes remained on good level and our operational efficiency is very good in the hazardous waste. Also in process cleaning, we did manage to do the staffing well and according to our plans in the third quarter when we had a very high demand for our services. In environmental construction, the workload has been good throughout the year. Although the slowness in construction business is visible in our landfills, where we receive less material than we did last year. In Sweden, we did have a very good year last year. This year has not been quite as good, but still, the performance has been very solid, and we are happy with the development of our Swedish joint venture, where we own 70% of the SVB company.   In Facility Services Finland, our turnaround plan is progressing according to our plans. And the efficiency is increasing, and we will continue to work on the number of efficiency initiatives we have started about a year ago. We did end certain customer contracts where the profitability was not at acceptable level and where we could not agree with the customer on the price level, and we will continue to do so in the future as well. But I expect that we will return to positive growth numbers in the coming quarters as we finish the cleanup of our customer portfolio. But overall, a very solid performance from our Facility Services Finland. And as I already said, in Sweden, we are maybe 6 months, 6 to 9 months behind, our Finnish facility services, but now we are starting to see the results of our turnaround program. And now the third quarter result was at the same level as previous year. Obviously, there is still a lot of work to be done in Sweden, like in Finland as well. But now it looks positive, and we expect to see the improvement to continue in the quarters to come.   Yesterday, we announced results of our strategic review. And in 2019, when we renewed our strategy, we raised sustainability into the center of our strategy. We continued that work in '22. And now in this latest revision we clearly state that we will focus on our material businesses, which are Environmental Services and Industrial Services. And we will seek to get growth from the circular economy. At the same time, we are saying that we will evaluate strategic alternatives for Facility Services Finland and Facility Services Sweden, and all potential options will be considered, including a potential sale of the businesses. But as I said, we are now starting this evaluation. And if and when there are results, we will then obviously communicate about that. We will shed a little bit more light on the thinking behind of the latest strategy in our Capital Markets Day, which will be held on November 23 this year. So I welcome you all to listen that online. In sustainability, we have had also very positive development. Our own CO2 emissions have developed very favorably and they are down quite significantly from the previous year. And this is a result of the good work and systematic work we have done in all of our business lines. Also, I'd like to highlight the much improved development in sick leave percentage. It is now at the end of third quarter, 4.9%, which is almost at 2020 levels and obviously significantly better than what it was '21 and '22. So also in that front, things look good. But now I hand over to Valtteri, and he will take you deeper into the financials.

Okay. Thank you, Eero, and good morning, and let's move on to financials and financing. And I'll start with the key figures. First, capital expenditure was EUR 46 million. It was on par with the comparison period, but the content was different. Last year, we made acquisitions of EUR 22 million. And now this year, we have invested more on heavy vehicles, mainly and also real estate, machinery and our ICT systems. Depreciation grew lightly. And then return on equity, return on capital employed. They both improved significantly. There are a few reasons for that. Of course, our EBIT improved. But also now when the interest rates has increased, we have been able to keep our total interest costs on the same level than last year or even a bit lower level. And share of our joint venture, Laania, we own 55% of the company. The result was EUR 2.5 million year-to-date. And in the comparison period, it was minus EUR 300 million, but actually, the first 6 months was reported above the EBIT. But anyway, the company has improved profitability significantly. Also, we were able to decrease the amount of capital employed by EUR 15 million. So these same reasons also improved earnings per share, which improved EUR 0.12.    Balance sheet items. Equity ratio is higher. It's almost 36%, and we were able to push down gearing under 80%. Net working capital, there's a certain seasonality and that it is always at the best level in Q1, and then it goes down at the end of Q3, it is at the lowest level. The main reason is our employee-related liabilities. Anyhow, we have improved. It was minus EUR 28.5 million. We improved it by EUR 6 million. We have improved our payment terms, inventories, and made our invoicing process more effective. Cash flow, it was solid and strong EUR 28 million year-to-date compared to last year, EUR 1 million. Last year, we made the acquisition. So it, of course, affected. But anyway, it's strong at the moment. And the money used in investments was almost EUR 8 million less than in the comparison period. Debts and liquidity. IFRS 16 consolidated leasing liabilities is usually in the range of EUR 75 million. But then interest-bearing debt were EUR 126 million, almost EUR 35 million less than a year ago. We paid back the rest of the old bond in September, almost EUR 18 million. And also, we refinanced our bank loan in Q2 and the amount was EUR 10 million less.    Commercial papers we have in use EUR 10 million in the comparison period, EUR 50 million and also our committed revolving credit facility, EUR 40 million is not utilized and also the bank overdraft limits are not being used. The gas balance was EUR 26 million. And then our loan portfolio, as I said, this year, we have paid back loans almost by EUR 30 million. It impacts positively on the interest costs. And next refinancing is in 2026. A bank loan of EUR 40 million and the bond, which we emitted last year will mature in 2028. At the moment, the average interest rate is 4% compared to 2.5% and 2/3 of our loans have fixed interest rate. Good. And then outlook for the year, I will give back to Eero.

Thank you, Valtteri. We keep our outlook for '23, which is the 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 the net sales from renewable energy sources business in the amount of EUR 35.4 million. That was all from our presentation, and now we welcome your questions.

[Operator Instructions]. The next question comes from Nikko Ruokangas from SEB.

This is Nikko Ruokangas from SEB. I have a couple of questions. So first of all, you commented that the conditions were difficult, especially in Environmental Services and the market is not recovering in near future. So could you comment the trends in Q3 from the beginning. Did you see any weakening during the quarter or was the development flat or the demand development. And do you expect market to weaken going forward or the demand?

Yes. The -- compared to 2022, the recycled raw material market was weaker. But Q4, we expect it to be pretty much on the same level as it was a year ago. So we expect the weakening to sort of even out in Q4. And obviously, it is very difficult to say what happens in '24 at this stage, but we do not see any signs of rapid or actually any kind of improvement in the recycled raw material prices at least in the first half of '24.  When it comes to the customers, the construction will probably continue to go down as the starting on the new projects is still coming down. And we don't see a quick recovery there either. But in the other segments, we think that the market will continue as it is right now, but we do not see any signs of improvement in the other segments, either.

You're right. Great. So these other segments also, not just the other divisions?

Other segments, other customer segments. So construction, as I said, will probably still go down, but others will probably remain at the same level, roughly.

Yes. Okay. Then you have made some price increases. So where all those impacts of those price increases you have made this year already in the numbers? Or should we expect more to come in Q4? And if we should so in which divisions you expect price increase impact still more?

Well, we continuously review our costs and what is then the impact to our prices. And if appropriate, we will make price increases. I cannot comment which segments that would be the case, but we will continuously review the situation and will make price increases accordingly.

Yes. Understand. I understand. Then I know that you will discuss it more in the Capital Markets Day. But I'm not sure whether you could comment shortly your announcement from yesterday. So about the kind of growth opportunities in the circular economy business and maybe timing of when you will be able to enter the new [indiscernible].