Lassila & Tikanoja Oyj

Welcome to Lassila & Tikanoja's full year results webcast. The webcast is hosted by Eletti's CEO Eero Hautaniemi and CFO Valtteri Palin. There's an opportunity to ask questions via phone or by typing them in the questions field below the screen. The Q&A session will take place at the end of the webcast. Eero, please go ahead.

Thank you, Inka. Good morning to everybody also on my behalf. And as Inka said, welcome to full year 22 earnings release. First, let's start with a few highlights. Our net sales developed quite nicely. It was 844 million compared to 812 million. Also, our net cash flow from operating activities after investments per share increased quite nicely. Our adjusted operating profit declined slightly from previous year, and this was mainly due to the weak performance in our facility services, both Finland and Sweden. At the same time, our material or recycling businesses, i.e. environmental services and industrial services, performed very well last year. But let's get a little deeper into the numbers, and let's start with the net sales development. Here, we have a comparison without the renewable energy sources, as you can see. It is on the right-hand side of the page as a sort of separate bar. So, excluding these renewable energy sources, the net sales in environmental services increased very nicely, 22 by 8.1%, But especially, I'm pleased with our industrial services, where the full year net sales increased more than 25%. In the facility services Finland, especially in the cleaning, we also had very nice sales development. As in Sweden, the sales declined, partly because of the weakening Swedish crown, but also we had less as no work in 2022 compared to the previous year. Moving on to adjusted operating profit. In environmental services, again excluding the renewable energy sources, the adjusted operating profit increased by approximately one million euros, and I will get a little deeper into those numbers, once we get into the segment review. Again, in industrial services, excellent performance, and the adjusted operating profit increased by almost 50% to 13.6 million euros. In facility services, the full year, adjusted operating profit was slightly below zero minus 0.5, which was about 2.3 million euros less than previous year. And also in Sweden, similar performance, we had adjusted operating profit of 0.4 compared to 3.9 previous year. You can see also here the numbers from renewable energy sources, so as you can see, the impact for the full year was approximately one million euros, so not very significant. We have our normal seasonality, and we did have that also in 2022, and it is visible here. Our strong quarters are the second and third quarter, and then the first quarter is always the smallest when it comes to the operating profit, and then the fourth quarter is the third biggest quarter normally, and 22 made no exception in here. Let's dive into the business segments, and let's start with the environmental services. As I said, Our net sales developed very nicely when we look at the full year numbers. And this came through a sharper focus to B2B customers and to producer responsibility organizations that will take, and have taken already, but will take in the future, a bigger part of the volumes in the B2B area. This includes... recyclable bottles, plastics, et cetera, where we can see that the growth is moving more and more towards that direction. When we look at the fourth quarter, you can see that the net sales, again, this is excluding the renewable energy sources, was pretty much flat compared to the previous year, and we saw even a slight decline in the adjusted operating profit This is partially due to the fact that certain raw material prices started to decline in the second half of 22, and especially in cardboard, the decline was pretty sharp in the fourth quarter. And there is always a delay when we see the prices coming down before we get that reflected in the reimbursement prices that we pay to our customers. And that actually explains a big part of the, let's say, decline or weaker performance in the operating profit in fourth quarter. Also, We need to remember that the first quarter in 22 was very difficult in environmental services. We had very high sickness rate, and also we had extremely challenging winter conditions in Finland, which meant that the first quarter performance was weak. So that means that in the second and third quarter, we had excellent performance in environmental services. For 2023, we will continue to focus on B2B customers, and especially, we will increase our efforts with sustainability work, and work with our customers for them to achieve their sustainability targets. We have strengthened our organization, and I'm really pleased with with the initiatives we have started with a number of our large customers in that area. Then moving on to industrial services. Across the board, very strong performance, especially in hazardous waste, We had a really strong year, and that was supported by the acquisition of small customers from, or small customers business from Fortum, and the integration went very well. So overall, the hazardous waste business had a strong year. Market conditions supported the good performance. Also in environmental construction and process cleaning, very solid work. There is a change in the pattern that our customers order or make the plant maintenance breaks, and that sort of affected a little bit to our staffing and made it more challenging, but we could quite well manage those challenges and overall the performance in process cleaning was very good. In Sweden we acquired 70% of SVB and SVB performed really well. In 2022 we had a very healthy growth in the business, and overall we managed to also bring new practices and service innovations from Finland to Sweden, which we hope will then further support our organic growth in Sweden in the coming years. But overall the integration went really well, and I'm very happy with the performance of industrial services as whole in 2022. When we look at the year for our facility services in Finland, there are a couple of things that is good to understand. First of all, we had two very difficult quarters when it comes to the flu or COVID situation, first and fourth quarter were especially difficult in terms of sickness rate. And when we have thousands of employees, it is challenging to find the replacement and also it is more expensive to find a replacement and make special arrangements when you have hundreds of people that are at the same time on sick leave. And that is one of the reasons behind the poor performance in 22. Obviously that is not the only reason. We did have a high turnover of the personnel as well, but also our operations were not at the shape and level they should have been. And we have, or we started, another program towards the end of the year, 22, and we reduced some 100 positions in the fourth quarter, and some of the restructuring costs are now visible in our fourth quarter numbers. Obviously, we do expect that restructuring to show positive impact in 23. Also, There is a very heavy focus on the customer contracts. We did have a number of customer contracts that were not profitable, and we have started a program to cut down or end those or terminate those programs when possible, and hence, in a way, make our contract portfolio much healthier, and this is the especially in property maintenance. In Sweden, situation was similar, yet somewhat different. We did have a higher sickness rate in the first quarter, but the impact was much smaller in Sweden than in Finland. What did affect? Our Swedish business much more was the fact that the cost inflation was very high, and our contract structure is such that we were unable to increase the prices to the extent necessary to compensate this very high price inflation. Also, our internal efficiency was not at the level it should have been, and therefore, we have started the process or project to simplify our processes and hence make them more efficient, and therefore, obviously, the goal is to improve the profitability. The turnaround in Sweden will probably take a little longer than it takes in Finland, where I hope to see improvement already in the first half of 2023, but in Sweden, it will probably take pretty much all of 2023 before we can see a clear improvement in the performance. We did last year show that... Excuse me. That we have quite a few projects ongoing, to replace or renew our end-of-life systems. And these are pretty big programmes, especially the programme we have in environmental services. It has been ongoing for a couple of years already, but now in 2022, we got into the build phase of the, of the program, and the build phase will continue pretty much end of 23. And the piloting, there will be a testing period at the end of 23, and the piloting and go live will be then early 24. Also, we had to replace our HR a master system, which also should be completed in 2023. And on top of that, we did upgrade our facility services, Sweden system to newer version in 2022. And in industrial services, we have a program that will sort of come after the HR master and environmental services business. So, after we have completed those, we will also have to replace parts of the industrial services system. And all of this obviously means that our investments into the ICT are on a higher level now. They were already in 22 and they will be higher level in 23. And gradually it will start to come down 24 and then 25. We should be at the state where we have done the renewal of all of our main systems. To give you an idea how big of an effort this is, we have currently about 100 people internally working in this system. So obviously it was visible already in our costs in 22, and it will continue to be visible in 23 as well. But this is necessary, and all the projects are proceeding according to the plans, which is a good thing. And once we have these implemented, obviously, we expect to see much better efficiency and also better quality towards the customers. Then I'd like to move on to the sustainability and take up a few highlights from our sustainability work. As you all know, sustainability is in the core of our strategy, and here, We have taken up certain highlights from the, I would say, very extensive sustainability work that we do in the group. First of all, we already, I already spoke about in environmental services, the fact that we have much closer relationships with the responsibility or product responsibility organizations, and we have made an agreement with Suomen pakkaustuottejat, and when the contract is at its sort of full potential, it will mean that we will recycle about 20,000 tons of plastic waste, and it will be mechanically and chemically recycled in Denmark, and this is a a very, I would say, great thing, and will take the plastic recycling to the next level. Safety is very important for us, work safety, and last year we did have a positive development in the work safety, but we are not happy with that. We'd like to take it still to the better levels and therefore we have started a very wide program where we will train all of our employees how they should think when they are at workplace. So we do sort of a mental training for our employees how to improve the work safety when doing the work and We have already trained about 380 people so far, and the response has been very good, and I'm optimistic that we will see a good development in our work safety based on this program. And then, final thing, or final highlight, is that our recycling rate improved to 59.4, which is a very good result and best ever. And one I would say interesting concrete example of the work that we have done with our customers is the pilot project that we have done together with SRV, a construction company, and Stark, which is a hardware retail store where we will not recycle, but reuse, which is even better than recycling, reuse the the wood that is no longer needed in construction sites, and this is, I think, a very innovative and good service, and hopefully, we will come up with much more of these kind of things that will make sure that we do not waste any material, but reuse it as much as possible, and therefore, reduce the consumption of virgin material. Then finally, some additional numbers from our sustainability work. Our carbon footprint and carbon footprint intensity on comparable basis developed very nicely, 22 compared to the previous year. There is a pretty dramatic drop in the carbon handprint year on year, but that is explained by the fact that renewable energy businesses is no longer part of these numbers. And, you know, excluding that from 21 numbers also would show that we actually did improve in our carbon handprint work as well. Final thing from this slide is the sick leave rate, which is 5.6%, and that is highest ever, and obviously, as I said, was very much visible in the numbers. We have calculated for at least 12 years what is the cost of these kind of things, sick leaves and related costs, and The results show that the impact was several millions in 22, and hopefully we will have a better year in 23 from that perspective, because for business like ours, where we have a lot of employees, it is obviously very burdening when a lot of people are sick at the same time. But now I will hand over to Valtteri and he will dive into the financials more deeply.

Thank you, Eero, and good morning. And now moving on to the financials. I will start from the adjusted operating profit. In this table, you can see three years development, and as Eero mentioned, we have the same seasonality year on year. 22, we had a good second and third quarter. They were better than in 2020 and 21. And the first quarter was lower due to the COVID and high fuel prices. The last quarter, 9.6 billion euros were... almost the same than a year ago, if you take into account this renewable energy sources, half a million result, they were pretty much exactly the same. We had a really good or strong performance in industrial services and environmental services. Our strategic target in return of capital employed is 15%, and we reached that target in both businesses. In industrial services, the number was 16.1, and in environmental services, 15.3, and they are the most capital-intensive businesses we have. But on the other hand, in facilitated services, both Finland and Sweden, we had difficulties, but we have action plans ongoing in both businesses, and we are expecting improving results. Key figures, a few highlights from here, capital expenditure, 58.2 million euros. It includes the two acquisitions we did in the first quarter, so the investments in current operations were roughly 37 million euros, and if you compare it to depreciation, so that explains partly that good cash flow we had. Return on equity, return on capital employed, they were a bit lower than a year ago. Our capital employed increased by 30 million euros due to the acquisitions, and the result was a bit lower. Earnings per share 83 cents compared to 90, but then the cash flow per share was one euro eight cents compared to 2021's five cents. So, the board dividend proposal for AGM is 47 cents, and the dividend will be paid in the beginning of April in one installment. Balanced KPIs, equity ratio and gearing on a good, sufficient level, almost on the same level than a year ago. Networking capital. was 37.5 million euros negative. It improved a lot during the fourth quarter, 15 million euros. We are a bit behind from last year. The reason is that our net sales has increased, and trade receivables, uninvoiced net sales along that. Cash flow, as I mentioned, it was really strong, 41 million euros. 21, it was 1.7 million euros. The cost of active systems in cash flow was 13 million euros, but then the joint venture in renewable energy sources with Neova, we took a direct loan into the company, and the company paid back the shareholders' loans, 16.4 million euros, so we were able to release capital, and it improved our cash flow. Interest bearing debt, liquidity, the interest bearing debt decreased by 15 million euros, we paid commercial papers, away, we don't have any commensurate papers in use. Also, revolving credit facility overdraft limits are not in use, and the cash position is 50 million euros, so the liquid position is really good. This IFRS 16 consolidated leasing liabilities are 72 million euros. Then loan portfolio 22, we emitted a new bond, 75 million euros. Also, we renewed the revolving credit facility, 40 million euros. And the next repayment, the rest of the old bond, 18 million euros, is in September. And then the next... possible refinancing 50 million euros in 24 in September, if needed. And the bond will mature in 28. Effective interest rate to 2.5% compared to 1.1. I would say that it's still moderate, now when the interest rates are increasing. And now in this situation, it is good that 86% of our loans have fixed interest rate. And then I will hand over to Eero.

Thank you, Valtteri. And the final slide is the outlook for 2023. And the outlook is that the net sales and adjusted operating profit in 2023, are estimated to be at the same level as the previous year, even though the comparison period includes the net sales from renewable energy sources, 35.4 million euros. Good. That was our presentation, and now we are happy to answer to your questions.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Jocko Tervainen from SEB. Please go ahead.

Hi, good morning. It's Jakko from SEB. I could ask about these recycled raw material prices. Could you give some kind of an indication, what was the impact in terms of sales and EBIT during the quarter, if we, for example, compared the situation where the prices were in last summer, and how have the recycled raw material prices moved in the beginning of this year?

Yes. Well, to the net sales, the impact is big. Obviously, cardboard, as the paper volumes are coming down, the cardboard volumes are coming up. And overall, the recycled fibers are approximately at the same level in the big picture. But that is driven by the recycled cardboard. And as the prices came down to more than 50%, obviously, it had a big impact on the net sales. There was some impact, as I said, to the adjusted EBIT as well. But that is more of a timing factor, because there is a delay before we can pass through the... the lower market prices to the reimbursements that we make to our customers. We did not give out any numbers, and I cannot be more specific than that. When it comes to the development of the recycled raw material prices, beginning of this year, there is basically no movement, so they have stabilized, and I think this... So the cardboard price decrease is related to two facts or factors. One is that the inventories are pretty full and also that the economy, especially the, let's say the e-commerce and retail, in general is slowing down a little bit, and that shows in the consumption, in the short term, but I expect that to normalize towards the end of 2023. Obviously, it remains to be seen. And as I said, right now, when it comes to the other prices, they are pretty stable.

Okay, thanks. Then my second one on industrial services, where you had a pretty solid year after COVID, and you perhaps enjoyed some pent-up demand there. What is the outlook for 2023 in this segment? Should we expect declining volumes because of the situation, a bit abnormal situation seen in 2022?

We do not expect declining volumes, but at the same time, we do not expect to see similar growth figures as we enjoyed 22. We expect a normal year when it comes to the industrial services. Obviously, this is dependent on a couple of things, how the overall economical development is going to be. I guess the consensus is that the spring and summer will be somewhat slow, and then the demand or the activity will pick up towards the end of the year. But also the negotiations with the employee, organizations are very much open right now, and at this stage, we don't know how it will go, and should there be heavy strikes that will then impact overall to the industrial activity in Finland, then obviously, it would be reflected in our business as well, but hopefully, that will not happen.

Right, thanks. Then my final one on pricing and inflation. The salary inflation expectations are rather high. Could you talk about a bit on the current pricing and competitive environment in various segments? Will you be able to kind of push through the salary inflation that we will evidence?

Yes. Well, obviously, if there are exceptionally high salary increases, we will make adjustments to our pricing, and then it will vary a bit business by business how we will get through, but I'm fairly confident that as this is kind of a general thing in the whole economy, that there is more receptiveness to this type of price increases, and we should get pretty much all of it through to the prices.

Okay. Super helpful. Thanks.

That's all from my side. Thank you.

Please state your name and company. Please go ahead.

Hi, this is Pasi from Nordea. Well, I guess you already said that you have actually not been able to improve prices in the facility service business when looking at the Finland and Sweden. So I would actually like to know how long are these contracts and so kind of what usually happens when you are calling the customer and kind of proposing a price hike. So is it so that the customer actually says that it's not going to happen and then the only way for you is practically try to get down your own cost base And maybe another point regarding the industrial services. So you said that there's one particularly good customer in the hazardous waste management in that segment. So, I just wanted to know that, is it Fortum, actually, the new customer, from which you actually acquired operations, or are there some kind of external customers you are kind of posting very good figures in the third quarter and fourth quarter?

Thanks. Well, actually, if I take the second question first. So, I don't think we have, you know, any any very big customers in hazardous waste, quite the opposite. We have a lot of customers and a very wide customer base, and there is no single customer that is sticking out in the hazardous waste. In general, the market was pretty good in 22. So, that question, I'm afraid, I don't quite understand. But when it comes to the price increases in facility services, in Sweden, the index, especially in the public sector contract, is based on the salaries and salary increases, and therefore, the indexation in the contracts helps us to get seller-related increases better through into the contract. But we do have certain contracts, there are not very many of those, but we do have certain contracts where we have been unable to agree with the customer about the sufficient price increases, and there, Obviously, we need to improve our efficiency, but at the end of the day, we will terminate such contracts, because there's no point to continue to work for free for any customer. And those... Contracts in Finland, some of them are valid towards the end of 23, but nothing will continue in 24, and there are very few contracts that are that long. In Sweden, as I've said earlier, the situation is somewhat different, and there Also, we need to improve the efficiency of our own operations, which is what we are doing with our simplified project in the Swedish operations, and hopefully, through that, we will release more time from our personnel to do additional sales that will help us to compensate part of this inflation.

Okay, that's understood. And when looking at the kind of your full year guidance, which is practically kind of on a top level, I guess it's from 2 to 4, 5% increase when you say that it's going to be stable. So are these kind of discontinued customer contracts already included on your guidance? So it's not kind of a kind of negative kind of on top of your current full year guidance then?

No, it's not negative on top of that. Yes, we have tried to include, let's say the risks we are aware of at the moment into our outlook and one might call it a cautious outlook, but at the same time, we do have to I have to accept the fact that right now, let's say, especially the first half of 2023 doesn't look too, let's say, good from a growth perspective. So let's see what happens in the second half of the year, but right now, we have taken into consideration what the sort of overall economic outlook is for 23, in our main markets, which are obviously Finland and Sweden. Okay. I hear you. That's fully understood.

Thanks.

As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. As there are no more questions at this time, I would like to thank you all for listening in. And if you would like to get sort of further understanding to our 2022 numbers, feel free to be in touch with us, Valtteri, or me, or our investor relations. I wish you very nice continuation of the day. Thanks. Bye-bye.