7/26/2023

speaker
Eero
CEO

And welcome also on my behalf to this six months earnings release. Let's start with a few highlights from first half and second quarter. Our net sales in Q2 were 207 million compared to 219 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 crown weakened quite significantly compared to the previous year, and its impact was over 6 million euros to net sales. Our adjusted operating profit was 9.2 million euros compared to 11 million euros. 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 six months was strong and our financial position is strong. We managed to release quite nicely capital from the networking 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 7.3 million euros. And as I already mentioned, in Sweden, the weakened Swedish crown had a negative impact by 6.6 million to the net sales. Renewable energy sources impact was 34.1 million euros during the first six 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 2022. Adjusted operating profit for the first six months. 10.6 compared to 11 million euros adjusted operating profit. And here you can see that environmental... Excuse me. Environmental services was lower. than a year ago by some 900,000 euros as industrial services and facility services, Finland improved quite nicely. In facility services, Sweden, we had quite a bit weaker performance in the first six months. And I will 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. Let's move on to the segment part of the presentation. Let's start with environmental services. In environmental services, we saw a decline in demand, especially in the construction industry, and to some extent in retail as well. And also we saw that the 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 new operating system. And that will continue till 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 and Tikanoja's businesses. In industrial services, we did have a strong first six months of the year. Especially in the hazardous waste and environmental construction, the performance was good. In general, the environmental construction we did when quite a few demanding projects, and those projects have proceeded according to the plans. In process cleaning, so far in the first six 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 have 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 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 into the let's say, renewal roadmap 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, 5.1 million euros. This includes the capex and the actual cost that incurred in the first six 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 new operating models will obviously aim to increase our efficiency and improve our ability to use modern technology to improve the customer service, but also to make overall operations much more efficient. And we are confident that we will see very positive results from these system changes in the coming years. Then a few sustainability highlights. As I have said earlier, we have invested a lot in strengthening our organization, 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 sizes of customers. One example is a roadmap that was created together with Valmet Automotive car factory in Uusikaupunki, Finland. In this work, we helped our customer, in this case, Valvet 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 the rest of the personnel. As you can understand, this is a pretty sizable investment, but so far the results have been good, and our TRIFI levels have reached all-time low in the first six months of the year. Also, our own CO2 emissions continue 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 floor to Valtteri, and he will go through some of the financial highlights. Go ahead, Valtteri.

speaker
Valtteri
CFO

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 31.8 million euros less than a year ago, but in the comparison period we had acquisitions amounted of 20.5 million euros. Depreciations on the same level, 28 million euros, and then return on equity return on capital employee they both improved despite of the lower EBIT level we managed to decrease capital employed by 15 million euros And also our joint venture, Laania, this renewable energy sources company made a good result. 2.2 million euros was our share. And also we terminated interest swap and booked 1.3 million euros gain of that. So they are two items which explains the better And the same reasons, earnings per share, 24 cents are better than in the comparison period. Cash flow was 55 cents, no one of 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're both improved. Equity ratio is now 33.4% and gearing is also below 90%. Networking capital was minus 41.6 million euros. It improved 6 million euros 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 19.3 million euros. It was a strong no one of items and the investments cash flow was minus 19 million euros. Cash flow is predictable and solid. Interest bearing debt and liquidity is IFRS 16 leasing liabilities, consolidated leasing liabilities, which mainly consist the real estate premises and heavy fleet. was 76 million euros they are usually between 70 and 80 million euros then interest bearing debt 134 million euros it decreased by 30 million euros we refinanced the bank loan of 50 million euros by a 40 million euros loan. It's a sustainability-linked loan. There are two 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 20 million euros commercial papers in use, and now we didn't use them. And also on top of that, the revolving credit facility, 40 million euros is not utilized. And same goes with the bank overdraft limits. Cash balance, 30 million euros. So our liquidity position is pretty good. Then loan portfolio. This year we will pay back the rest of the old bond in September, 18 million euros. And in total, we will pay back loans almost 30 million euros 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 30 million euros booked 1.3 million euros gain of it and due to that 70 percent of our loans have now fixed rate and 30 is a variable Weighted average effective interest rate is 3.4% compared previous 2.4%. And then so the next refinancing is in 2026 this 40 million euros and in 28 will mature the bond of 75 million euros which we emitted last year. Good, and now I hand over to Eero.

speaker
Eero
CEO

Thank you, Valtteri. So, finally, the outlook for 2023. 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.

speaker
Operator
Conference Operator

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.

speaker
Operator
Conference Operator

The next question comes from Posi Verzenin from Nordea. Please go ahead.

speaker
Posi Verzenin
Analyst, Nordea

Great, thanks. This is Posi from Nordea. Well, if I start with the three 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 service Sweden will remain loss-making next 12 months period before you actually get the kind of costs to account for 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 10 million euros. And now the second phase looks to kind of require over 20 million euro investment. So together maybe over 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 your efficiency or EBIT in the future and lastly yes regarding the industrial services so how much from the activity in the third quarter from the industrial service segment is actually related to the seasonal maintenances which actually could now be under risk regarding the big demand for the processing industry. These three, thanks.

speaker
Eero
CEO

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's 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. Lassilan Tikanoja, even though it 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, five, six 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 very modern system. And obviously, as we are making this kind of sizable investment, there are also efficiencies that 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 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 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. 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.

speaker
Posi Verzenin
Analyst, Nordea

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?

speaker
Eero
CEO

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 in the swedish business but as i said we can't give any numbers regarding the business segment or per individual business segment yes okay i see uh that was all from my side thanks

speaker
Operator
Conference Operator

The next question comes from Niko Ruokangas from SEB. Please go ahead.

speaker
Niko Ruokangas
Analyst, SEB

Hello, this is Niko Ruokangas from SEB. I have also a couple of questions. So first of all, you mentioned potential positive impacts from the current Finnish government initiatives. So could you discuss the size of the potential impact to you?

speaker
Eero
CEO

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.

speaker
Niko Ruokangas
Analyst, SEB

All right. I understand. Thanks. 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 answering the earlier questions. But how much overall economic turbulence have you calculated in your estimates and have something of this economic turbulence surprised you compared to your expectations in the beginning of the year?

speaker
Eero
CEO

Well, I would say that in general, Our estimates were largely in line with what we have actually seen. What was... Let's say... impact came a little sooner to environmental services than we expected. Earlier in the second quarter, we were expecting the slowdown to be more visible during the summer. At the same time, we did do some additional price increases in environmental services already in May, and those impact of those price increases was visible in June already and will be fully visible from third quarter onwards. So we are reacting to these changes that we see in the market. Also, we will very carefully go through the cost structure in the environmental services to make sure that it is in line what the customer demand outlook is for the second half of the year.

speaker
Niko Ruokangas
Analyst, SEB

I understand. And then maybe follow up to this reflecting also some of your answers. So you're now behind last year both on sales and just EBIT. Okay, I understand that it's in the business or changing accounting methods, but you guide them both sales and ebit to be on last year's levels uh despite being now behind so so what do you see are are the biggest risks to the guidance and and what are the biggest reasons making you confident on on reaching uh well um as as we are re repeating our outlook we

speaker
Eero
CEO

The outlook that we have now, business by business, is supporting the fact that we think the second half will be at least in line with last year's second half. The risks I have pretty much gone through already, so we are experiencing already the slowdown of the construction industry. We have been able to offset that partly with focusing more on let's say, refurbishing business. And then when it comes to the industrial services, the risk is around whether there are changes in the scope or timing of these planned maintenance breaks. But as I said, right now it looks pretty good. And the dialogue with the customers is very very good and we believe that we can handle the potential changes there may be.

speaker
Niko Ruokangas
Analyst, SEB

All right. I understand. Thanks. That's all from me.

speaker
Operator
Conference Operator

There are no more questions at this time, so I hand the conference back to the speakers.

speaker
Host
Moderator

We still have a few questions online. Rauli Juva from Inderes is asking, can you share some comments on the outlook of your associate company Laania? I know Q1 is seasonally the strongest, but should we expect year-on-year improvement in H2? And how sustainable do you see the current earnings level?

speaker
Eero
CEO

Well, As I already said, we don't give outlooks business by business. But in general, the market situation in Laania's business is good. And we have done very good work in the joint venture. The integration has gone very, very good. And we have been able to do the changes and the development we have planned. And the demand for this kind of green energy is very high. especially now that there is no import from Russia. So I would say the outlook is solid for Laania.

speaker
Host
Moderator

Thank you. Can you give any comments regarding the court case in Sweden, perhaps in particular on what is the counterclaim of your customer based on?

speaker
Eero
CEO

Well, that's what we are wondering as well. So we don't think there is any grounds in their counterclaim. But obviously, as the counterclaim is sizable, we are obliged to report it. But as I said, we don't think there is any merit at all in their claims.

speaker
Host
Moderator

Thank you. Then we have Henri Parkkinen from OP asking, how much did your comparable employee benefit expenses increase in Q2 or in H1 2023?

speaker
Eero
CEO

I can't answer that question because I don't know the answer. But the salary increases... in certain positions where percentage-wise close to 6%, according to these new collective agreements for this year. So overall, the impact on the salary increases is big because we are very, we have a lot of employees in the company, especially in Facility Services Finland. And as I said, we are, going to do price increases and we are going to focus on improving our efficiency to offset the impact of salary increases. And I'm confident that we can do that by the end of the year.

speaker
Host
Moderator

There are no more questions online. Thank you, Eero.

speaker
Eero
CEO

Thank you very much. Very good questions. And on our behalf, we wish you a very nice continuation of the summer. Thank you. Bye bye.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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