10/26/2023

speaker
Inka
Investor Relations Manager

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.

speaker
Eero Hautaniemi
Chief Executive Officer

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 31.8 compared to 31.3 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 Crown Euro FX impact was about 7 million negative to our net sales. I'd say the highlight from NetSales was good development in industrial services where we had 7.7% growth year on year in the first nine months of 2023. Adjusted operating profit was slightly better, as I said earlier. And again, if we exclude the renewable energy sources, the improvement was about 800,000 euros compared to 23. Here, our highlight is the facility services Finland, where the improvement was about 4.7 million euros, 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 they 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 a 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 the 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 the 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 six months, six to nine months behind our Finnish facility services. But now we are starting to see the results of our projects. 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 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 the latest strategy in our Capital Markets Day, which will be held on November 23rd this year. So I welcome you all to listen to 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 at 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.

speaker
Valtteri Palin
Chief Financial Officer

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 46 million euros. It was on par with the comparison period, but the content was different last year. We made acquisitions of 22 million euros. and now this year we have invested more on heavy vehicles mainly, and also real estate, machinery, and our ICT systems. Depreciations 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 have 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 2.5 million euros year-to-date. And in the comparison period, it was minus 300. But actually, the first six 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 15 million euros. And so the same reasons also improved earnings per share, which improved 12 cents. Balance sheet items, equity ratio is higher, it's almost 36%, and we were able to push down gearing under 80%. Networking capital, there's a certain seasonality in that it is always at the best level in Q1 and then it goes down and at the end of Q3 it is at the lowest level. The main reason is our employee-related liabilities. Anyhow, we have improved it. It was minus 28.5 million euros. We improved it by 6 million euros. We have improved our payment terms, inventories, and made our invoicing process more effective. Cash flow, it was solid and strong, 28 million euros year-to-date compared to last year, 1 million euros. 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 8 million euros less than in the comparison period. Debts and liquidity, IFR 16, consolidated leasing liabilities is usually in the range of 75 million euros, but then interest bearing debt were 126 million euros, almost 35 million euros less than a year ago. We paid back the rest of the old bond in September, almost 18 million euros, and also we refinanced our bank loan in Q2, and the amount was 10 million euros less. Commercial papers we have in use 10 million euros, in the comparison period 15 million euros and also our committed revolving credit facility 40 million euros is not utilized and also the banked overdraft limits are not in use. The gas balance was 26 million euros. And then loan portfolio, as I said, this year we have paid back loans almost by 30 million euros. It impacts positively on the interest costs. And next refinancing is in 2026, the bank loan of 40 million euros 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 two-thirds of our loans have a fixed interest rate. Good, and then outlook for the year, I will give back to Eero.

speaker
Eero Hautaniemi
Chief Executive Officer

Thank you, Valtteri. We keep our outlook for 2023, 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 35.4 million. That was all from our presentation, and now we welcome your questions.

speaker
Operator
Conference Call 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 Call Operator

The next question comes from Nico Ruakangas from SEB. Please go ahead.

speaker
Nico Ruakangas
Equity Analyst, SEB

This is from SCB. I have a couple of questions. First of all, you commented that the conditions were difficult, especially in environmental services, and the market is not recovering in the near future. Could you comment on the trends in Q3 from the beginning? Did you see any weakening during the quarter, or was the development flat, or the demand development?

speaker
Eero Hautaniemi
Chief Executive Officer

do you expect market to weaken going forward or or the demand inside yes uh 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 2024 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 2024. When it comes to the customers, the construction will probably continue to go down as 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 but we we do not see any any signs of improvement in the in the other segments either all right great so these other segments also that's just the other divisions other 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

speaker
Nico Ruakangas
Equity Analyst, SEB

Yeah, OK, thanks. Then you have made some price increases. So where all those impacts of those price increases you've made this year already in the numbers or should we expect more to come in Q4? And if we should, so in which divisions do you expect price increases?

speaker
Eero Hautaniemi
Chief Executive Officer

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 we'll make price increases accordingly.

speaker
Nico Ruakangas
Equity Analyst, SEB

Yes, I understand. I know that you will discuss this more in the Capital Market Day, but I'm not sure whether you could comment shortly on your announcement from yesterday about the kind of growth opportunities in the circular economy business and maybe timing of when you could enter the new growth path.

speaker
Eero Hautaniemi
Chief Executive Officer

Timing, I cannot comment anymore. compared to what we commented in the release. But as we have said already earlier, we see a possibility to move forward in the value chain of various recycled raw material fractions. We see a pretty potential market in remediation and industrial side streams, but as I said, we will get deeper into this in our our capital markets day but overall we see the circular economy and and the future of our material business is quite positive in the in the longer run yes I understand then final one from me so as you told that Delania has performed

speaker
Nico Ruakangas
Equity Analyst, SEB

quite much better this year compared to last year. So do you expect Laania to continue also this level of profitability coin format, of course, taking the seasonal addition into account?

speaker
Eero Hautaniemi
Chief Executive Officer

In general, the market for Laania is very favorable and we don't see any weakening of those market conditions in the near future.

speaker
Nico Ruakangas
Equity Analyst, SEB

All right. Sounds good. Thank you. That's all from me.

speaker
Eero Hautaniemi
Chief Executive Officer

Thank you.

speaker
Operator
Conference Call Operator

The next question comes from Rauli Juva from Indears. Please go ahead.

speaker
Rauli Juva
Equity Analyst, Inderes

Yeah, hi, it's Rauli from Indears here. Actually, just mostly a more technical question on the numbers. You mentioned the compensation and some one of... amortization related to the ERP systems? And if I look, did I look right that those were not treated as non-recurring items? Is it so that the net impact is still quite marginal in the result?

speaker
Eero Hautaniemi
Chief Executive Officer

Yes, the P&L impact is marginal.

speaker
Rauli Juva
Equity Analyst, Inderes

Okay. And the your underlying depreciation is pretty much unchanged, so the hike in doses is just this one-off thing. Yeah. Yeah, good. Okay, then one maybe a bit more business-related thing regarding the Sweden. You commented that you're now on a good track, and I should continue on that, but could you tell a bit more, if there's beer? has the progress been any slower or faster than you expected in the beginning of the year and have you identified any kind of structural obstacles that would hinder you to get back to the profitability levels you were a few years back?

speaker
Eero Hautaniemi
Chief Executive Officer

Yes, well let's say that the number of things we need to improve in our speediest business is pretty big and therefore the impact to become visible will take some time. So we will have to improve on quite a few areas. In general, I would say we are progressing more or less according to the plan. the structural issue that we have in the Swedish business has not gone anywhere. So the fact that a big part of our business is tied to public tenders and it is very slow process to get the margins to the to the levels they were earlier, as the index clauses are very tight, and the cost inflation has been very rapid. So that is still working against us, but things that we can control are progressing more or less according to the plans.

speaker
Rauli Juva
Equity Analyst, Inderes

Yeah, okay. And do you see a connection to kind of... delivering the profit turnaround and this strategic evaluation with potential sale? Meaning, do you want to achieve first the profitability to return to better levels before you would be considering to sell the business?

speaker
Eero Hautaniemi
Chief Executive Officer

Well, I will have to repeat what we say that we have now started the strategic review, and we estimate that to be completed by the end of next year.

speaker
Rauli Juva
Equity Analyst, Inderes

Yeah, that's clear. All right, that's all for me. Thank you.

speaker
Eero Hautaniemi
Chief Executive Officer

There are no further questions, but as always, we are certainly available for one-to-one discussions, if you so wish. So thank you very much, and we wish you a nice continuation of the week. 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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