Luotea Oyj (LUOTEA) Earnings Call Transcript

Welcome to Lassila & Tikanoja full year results webcast. The webcast is hosted by L&T's CEO, Eero Hautaniemi; and CFO, Valtteri Palin. [Operator Instructions] Eero, the stage is yours.

Thank you, Inka. Welcome also on my behalf todays Lassila & Tikanoja 2023 earnings release. A few things, first of all, for the full year 2023, our adjusted operating profit was $39 million compared to $40.9 million a year before. In the background, Industrial Services performed well. When Environmental Services did have a disappointing end of the year and also the performance in Facility Services Sweden was soft. Our net cash flow was very strong. It was EUR 1.33 per share compared to EUR 1.08 per share a year earlier. Our dividend proposal for the year, or the Board's proposal for the Annual General Shareholders Meeting, is at $0.49 per share. In net sales, Industrial Services showed a healthy growth. Also, in Sweden, we actually grew in Swedish crowns. But due to the weaker Swedish crown compared to the euro, our sales in Sweden declined in euros, where in Facility Services Finland, we declined our sales, and that was as planned because we ended some of the unprofitable customer contracts. In Environmental Services, we saw a decline, which was caused by the general weakness of the market and especially the recycled raw material prices and volumes were down from the previous year. Adjusted operating profit, very nice improvement in Facility Services Finland. So our good development continued for the full year. Also, Industrial Services improved year-on-year, whereas Environmental Services and Facility Services Sweden declined. We will go deeper into this later in the presentation. So -- sorry, Environmental Services, the overall economy was challenging, which is pretty much generally known in construction, but also in other customer segments, there were clear weakness in the market. And this was visible in the prices and volumes of the recycled raw materials. And we have estimated that the impact of this was about EUR 4.5 million to our adjusted operating profit. Also the municipalization continued. And in the second half of '23, it happened in the cities that were very important for us, namely Turku and Oulu and certain other cities, and the impact on this municipalization is estimated to be for '23 minus EUR 2.5 million. We did start efficiency measures already fourth quarter last year, and those measures are well underway. I will go to those as well later. But this municipalization -- we already talked about this a couple of years ago when the new law was passed, and now it's starting to become effective. According to our estimates, about EUR 40 million of packaging waste and biowaste has been -- has been gone under municipalization since '22, so '22 and '23. And we estimate that there is a further $30 million that will happen at '24 to '26. This is sort of one part of the equation. At the same time, we have won municipal contracts. Last year, we won municipal contracts worth EUR 8 million and that obviously then supports our net sales. The challenge for us in this municipalization is that they reduce the efficiency of our routes. We have overall more than 10,000 routes all over Finland. And when we lose certain sort of customers within a specific route, then obviously, the efficiency and productivity goes down. And it will take some time before we can reroute all of the affected routes. So this is a big change. And in the short term, the effect is estimated to be negative for us. At the same time, as I said, we have already started efficiency measures to address this challenge. And in 2023, we will have now, based on the actions already done, about 50 white collar employees less in Environmental Services than a year before. And as I said already, we will now focus on rerouting these affected routes, and that is expected to show in our efficiency and productivity of the Environmental Services. In Industrial Services, we had a strong year in all of our business lines. We also showed a healthy growth on the top line. So the organic growth was 6.8%, which is very good performance under these challenging circumstances that we did have last year. Especially in environmental construction, we performed well. Also, the customer volumes in hazardous waste stayed on a healthy level. And we did succeed quite well in our resourcing in 2023 in the planned maintenance breaks that happened last year. In Facility Services Finland, we had a good performance throughout the year. The systematic approach to improve the efficiency and profitability shows in the numbers. And obviously, we will continue to work on the same methodology in 2024, and we are on good track in turning around Facility Services Finland. Also, I'm pleased to say that our digital services, so high demand in 2023 when it comes to the data-driven cleaning or energy efficiency services. In Facility Services Sweden, the improvement projects that we started in 2023 did actually go quite well. But the overall challenging market environment showed especially it was very difficult, especially in the fourth quarter when we saw a very low demand in additional services and that burdened our operating profit in Q4. Obviously, there's still a lot of work to be done in Sweden, and we will continue on this path, and I'm expecting improving results from Facility Services Sweden in 2024. On sustainability front, we did have quite a few positive things. We announced our net-zero target and our Scope 1 and 2 emissions declined by 9.5%, which is a very good result, and this was due to the systematic work that we have done in all of our business lines. We did have an increased focus in Scope 3, so our supply chain and we laid a foundation for further work in 2023. Obviously, there is still a lot of work to be done in supply chain for '24 and years to come. When it comes to the employees, we had a lot of focus on training. When it comes to core conduct, information security, work safety, et cetera, overall, we trained on average, all of our employees with 7.6 hours, which is double the amount we did training a year before. Biodiversity is an important thing and increasingly important trend when it comes to our customers as well. And there, we also did a very good groundwork. I'd like to raise the fact that we did 8.7 hectares of meadow restoration projects together with our customers 2023, and this is a concrete example of the kind of services that we can offer to our customers. And here are the sustainability results in the form of scorecard. As you can see, our recycling rate went down, and this is due to the same fact that I talked about in connection with Environmental Services. So overall, the volumes of recycled materials went down in 2023. And this is also visible in our carbon handprint, which came down. Our activities have not gotten worse. So we are doing even more than what we have done before. But obviously, the volumes do have a big impact to these carbon handprint figures and recycling rates. And obviously, if and when the market recovers, I'm expecting to see an improvement in these numbers as well. But now I hand over to Valtteri to dive deeper into the financials.

Okay. Thank you, Eero, and good morning, everyone. I will talk about the financials, financing, and I start with the key figures. First, capital expenditure. There were EUR 61 million, EUR 3 million more than in 2022, but there were no acquisitions made in '23 and the share of acquisitions in '22 was almost EUR 22 million. So we invested more in our current operations, mainly in heavy fleet, real estate, but also more than EUR 10 million in ICT systems renewal. Depreciations were almost on the same level than a year ago, EUR 57 million and then a few words about our joint venture, Laania. The company was combined with Neova's similar business 18 months ago. It started operating in June 2022. And we are really happy and pleased about the development of the company and the profitability. In '23, our share, 55% of the net result, was EUR 3.6 million compared to $0.7. That's only 6 months, but the first 6 months were in '22 almost on the same level. So the profitability improvement is significant. Capital employed went down by almost -- more than EUR 10 million, and return on capital employed was almost on the same level than a year ago. It was 10.3%. Earnings per share, $0.79. And as Eero mentioned, the proposal for the AGM is that the dividend will be EUR 0.49, and in total, that is EUR 18.7 million, and it would be paid in the beginning of April. Balance sheet KPIs improved. Equity ratio is almost 37%, and the gearing is now under 70%. Then net working capital, we made actions to improve net working capital, more efficient invoicing payment terms, managing inventories. So it was EUR 47.6 million negative. It improved by EUR 10 million. And when it's negative, it means that it finances our operations. And the main reason for that is that we have roughly 8,000 employees, and they are salary-related liabilities in the balance sheet. Cash flow, we have had a really strong cash flow in 2022 and '23. Now the cash flow after investments was EUR 51 million, EUR 10 million stronger than a year ago, but there were no acquisitions made in '23. Also, investments growth was a bit more than EUR 10 million. Then moving on to interest-bearing debt and liquidity. The development on this side has been good. These IFRS 16 consolidated leasing liabilities have been in the range of EUR 70 million to EUR 80 million. There are no changes on that side. But then when we look at the interest-bearing debt, there were EUR 160 million. And when you compare it to end of 2022, we repaid almost EUR 30 million loans back. Cash position, EUR 33 million, and there are no commissary papers in use and also the revolving credit facility of EUR 40 million is not utilized. So the cash position and liquidity is strong. Maturity structure or loan portfolio. There are no changes in Q4. As mentioned, we repaid EUR 28 million loans back in 2023. So it decreases the interest costs. And the next repayment will be in 2026, EUR 40 million bank loan. And then the bond will mature in '28. What these loans are sustainability linked as is the revolving credit facility as well. Average interest rate increased. Now it's -- in '23, it was 4.0% compared to 2.5% and 65% of the loans have fixed interest rates. And a few words about the ICT investments. So we have had a project ongoing that we will modernize basically the whole -- is the infrastructure we have. By the end of 2019, Facility Services Finland ERP system renewal was completed. Also, Facility Services Sweden ERP system renewal was completed in '22. We have also renewed all these administrational systems in HR and finance. And then the biggest change is in Environmental Services and Industrial Services renewal of these ERP systems. There should be completed by the end of 2024, most but there will be a few modules, which will be completed in '25. But the main work will be done and the whole infrastructure will -- is modernized by the end of this year. We have invested a lot of money into this. In 2021, the CapEx was EUR 4 million per year, EUR '22 7.5 million and '23 more than EUR 10 million. Also, 24 million will be -- there will be a heavy investment, but then the costs will go down. And in addition to that, we have also booked consultant costs ,project, people costs, our own staff were costs in this system renewals directly into the P&L, which have, of course, negative impact and those costs will go down as well. Then this was my part, and now I give back to Eero.

Thank you, Valtteri. And then we go to the outlook for 2024. At the moment, we do not see any improvement in the general market conditions. So we expect the demand to be on low level. But despite of that, as I said in the presentation earlier, we have a number of actions ongoing in Environmental Services to sort of improve our performance after the weak fourth quarter and to offset the implications of this municipalization and also in facility services in both Finland and Sweden. We continue our journey with this systematic improvement program in both of the businesses, and that gives us confidence that our adjusted operating profit would be at the same level or better than 2023, and in net sales, we expect that to be on the same level as '23 due to the challenging market conditions. Thank you. That was our presentation, and now we're ready for your questions.

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

This is Nikko Ruokangas from SEB. Thank you for the presentation. I have a couple of questions. So first, starting with the guidance you just described. So you expect EBIT to be flat or improving in '24, so what is the variable there for giving a wider range than in '23. So that what -- in what scenario the EBIT will grow? And what is the scenario for flat EBIT and could you just comment a little bit?

I think I commented that already. So right now, the market recovery does not look probable in at least in the first part of '24, but I'm doubtful that we will see much recovery in all of 24. And obviously, assuming that we are successful in these programs that we have ongoing to offset the negative impact of the municipalization and, let's say, difficult market conditions, then it could be that the adjusted operating profit improves. But then if the market conditions are worse or if for some reason, our efforts are not as successful as planned, then it might be on the same level. I don't think I can open that more.

No, I think that's gives clarity. Then on Environmental Services, you already discussed it a bit, but the EBIT there weakened clearly in Q4. So '24, can you give us some kind of tools for the development or what kind of -- do you expect this kind of weak trends what was reasonable in Q4 to continue next year or given your actions to improve profitability but also the weak market?

Yes. As I said, I don't expect any support from the market in general for environmental services or any other of our business lines. So the thinking is that the price levels and the volumes of recycled materials will be on this, let's say, lower than normal or average level. What happened in Q4 on top of the challenging market conditions was that we saw kind of the full effect of this municipalization of the packaging waste and biowaste in markets that are very, very important for us. And as we, at the same time, had to start the municipal contracts that we won in the tendering process that happened when the municipalization took place in, say, early '23 and then was effective in late summer in '23, then there is a delay for getting the productivity to the level it should be in all of our routes. As I said -- routes -- I said, we have more than 10,000 routes overall in Finland. We have -- in environmental services, we have more than 800 heavy vehicles, and we have a lot of drivers. And this is quite a puzzle to make sure that the route efficiency is where it should be, and that will take some time before we get there. But obviously, we're working on that. And also, the fact is that in these market conditions, we need to be extra careful that our fixed costs are as lean as possible. And as I said in the presentation, we have already taken actions to, let's say, right-size the organization to reflect the market -- current market reality.

Understand. Then on first, energy services, you expect positive impact on facility service fee and improvement actions to be visible by the end of '24. So does that indicate that you should be as healthy or at least healthier profitability run rate by that? Or do you expect to retreat even in speed and before that already?

Well, I'm expecting the profitability to be healthier, but I do not want to give guidance by business segment. So the fact is that we actually performed very well in the projects that we had in our turnaround program in Sweden. But at the same time, the general market conditions were very difficult, and we did get negative surprises due to that to our performance in '23. I'd say that we have better control on things now in Sweden, and we have already worked on these turnaround programs for several months. So I expect to see better results in general in '24, but I don't want to give any outlook for the Swedish facility services.