2/9/2024

speaker
Inka
Moderator, Investor Relations

Welcome to Lassila and Tikanoja's full year results webcast. The webcast is hosted by Elletti's CEO Eero Hautaniemi and CFO Valtteri Paliin. There's an opportunity to ask questions at the end of the broadcast via the phone or by using the chat functionality. Eero, the stage is yours.

speaker
Eero Hautaniemi
CEO

Thank you Inka. Welcome also on my behalf to this Lassila and 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 in Sweden was soft. Our net cash flow was very strong. It was 1.33 euros per share compared to 1.08 euros per share a year earlier. Our dividend proposal for the year or the board's proposal for the annual general shareholders meeting is 49 cents per share. In net sales, industrial services showed 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 in Finland, so our good development continued for the full year. Also, industrial services improved year on year, whereas environmental services and facility services in Sweden declined. We will go deeper into this later in the presentation. So industrial, 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 weaknesses 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 4.5 million euros 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 of this municipalization is estimated to be for 23 minus 2.5 million euros. 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 40 million euros of packaging waste and bio-waste has been gone under municipalization since 22, so 22 and 23, and we estimate that there is a further 30 million that will happen 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 €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 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 this same methodology in 2024 and we are on good track in turning around the facility services Finland. Also, I'm pleased to say that our digital services saw 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 or 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 one and two 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 increased focus in scope three, 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 years to come. When it comes to the employees, we had a lot of focus on training. when it comes to code of conduct information security work safety etc 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 an increasingly important trend when it comes to our customers as well. And there we also did very good groundwork. I'd like to raise the fact that we did 8.7 hectares of meadow restoration projects together with our customers in 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 a 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.

speaker
Valtteri Paliin
CFO

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. They were 61 million euros. 3 million euros more than in 2022, but there were no acquisitions made in 2023, and the share of acquisitions in 2022 was almost 22 million euros. So we invested more in our current operations, mainly in heavy fleet, real estates, but also more than 10 million euros in ICT systems renewal. Depreciations were almost on the same level than a year ago, 57 million euros. And then a few words about our joint venture, Laania. The company was combined with Nelva'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 3.6 million euros compared to 0.7. That's only six months, but the first six months were in 22 almost on that same level. So the profitability improvement is significant. Capital employed went down by almost more than 10 million euros and return on capital employed was almost on the same level than a year ago. It was 10.3%. Earnings per share, 79 cents, and as Eero mentioned, the proposal for the AGM is that the dividend will be 49 cents, and in total that is 18.7 million euros, and it would be paid in the beginning of April. Balanced KPIs improved. Equity ratio is almost 37%, and the gearing is now under 70%. Then, networking capital. We made actions to improve networking capital, more efficient invoicing, payment terms, managing inventories. So it was 47.6 million euros negative. It improved by 10 million euros. And when it's negative, it means that it finances our operations. And the main reason for that is that we have roughly 8000 employees and they are salary related liabilities in the balance sheet. Cash flow, we have had really strong cash flow in 2022 and 2023. Now the cash flow after investments was 51 million euros, 10 million euros, stronger than a year ago, but there were no acquisitions made in 2023. Also, investment growth was a bit more than 10 million euros. 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 70 to 80 million euros. changes on that side. But then when we look at the interest bearing debt, they were 160 million euros. And when you compare it to end of 2022, we repaid almost 30 million euros loans back. Cash position 33 million euros and there are no commercial papers in use and also the revolving credit facility of 40 million euros is not utilized. So the cash position and liquidity is strong. Maturity structure, loan portfolio, there are no changes in Q4. As mentioned, we repaid 28 million euros loans back in 2023, so it decreases the interest costs. And the next repayment will be in 2026, 40 million euros bank loan, and then the bond will mature in 2028. Both 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 two and a half and 65% of the loans have fixed interest rate. Then a few words about the ICT investments. So we have had a project ongoing that we will modernize basically the whole ICT 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 2022. We have also renewed our this administration systems in HR and finance and then the biggest change is in environmental services and industrial services renewal of these ERP systems they should be completed by the end of 2024, but there will be a few modules which will be completed in 2025. But the main work will be done and the whole infrastructure is modernized by the end of this year. We have invested a lot of money into this. In 2021, the capex was 4 million euros per year, 22, seven and a half million euros and 23, more than 10 million euros. Also, in 2024 there will be 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 work costs into 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.

speaker
Eero Hautaniemi
CEO

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 2023 due to the challenging market conditions. Thank you. That was our presentation and now we're ready for your questions.

speaker
Operator
Conference Operator

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Niko Ruakangas from SEB. Please go ahead.

speaker
Niko Ruakangas
Analyst, SEB

Hello, this is Niko Ruakangas from SEB. STB, 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 wider range than in 23? So in what scenario

speaker
Eero Hautaniemi
CEO

the EBIT will grow and what is the scenario for flat EBIT can 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.

speaker
Niko Ruakangas
Analyst, SEB

No, I think that's good clarity. Thanks. Then on environmental services you already discussed it a bit but the EBIT there weakens clearly in Q4 so at 24 could you give us some kind of tools for the development or what kind of do you expect this kind of weak trend what was visible in Q4 to continue next year or given your actions to improve profitability but also the weak market

speaker
Eero Hautaniemi
CEO

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, 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 current market reality.

speaker
Niko Ruakangas
Analyst, SEB

I understand. Thanks. On facility services, you expect positive impact from facility service speed and improvement actions to be visible by the end of 24. So does that indicate that you should be at healthy or at least healthier profitability run rate by that? Or do you expect to reach rate even in speed and before that already?

speaker
Eero Hautaniemi
CEO

Well, I'm expecting the profitability to be healthier, but I do not want to give guidance by business segments. 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 2023. 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 yeah I understand then still short questions on effects of strikes in Finland how do you see them affecting you It's difficult to say at the moment. So far the impact has been sort of not significant, but no one knows how long and at what extent the strikes will continue. as we get into spring 24. So I guess it remains to be seen. But yes, there have been negative things due to these strikes, and we're working very hard to make sure that there is as much as as little harm as as possible to to our customers to this strike so obviously it is it is not making our work easier in these challenging conditions understands then one final from me about the IT project that Valtteri discussed earlier so what has been the

speaker
Niko Ruakangas
Analyst, SEB

P&L impact in 2023 and do you expect similar kind of P&L impact also in 2024 and then to decline in 2025 like with capital expenditure?

speaker
Eero Hautaniemi
CEO

Yeah, we don't give that specific number out but we have clearly over 50 people working on these projects currently. And you can then estimate based on that what might be the cost, because we don't capitalize any of the work that we are doing internally for these projects. And yes, we do expect their costs to go down starting 25.

speaker
Niko Ruakangas
Analyst, SEB

All right. That's clear. Thank you. That's all from me.

speaker
Eero Hautaniemi
CEO

Thank you.

speaker
Operator
Conference Operator

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

speaker
Inka
Moderator, Investor Relations

There are still a few questions on the chat. The first one is how far has the turnaround on facility services progressed and how much further progress on margins can we expect for Finland?

speaker
Eero Hautaniemi
CEO

The same goes for Finland as for Sweden. So I don't want to give out an outlook for a business segment. But let's say that especially in the property maintenance, we have still quite a bit of room for improvement. What we managed to do in 2023, we managed to make our customer portfolio much healthier. And we also were able to increase our efficiency quite a bit. But as I said, especially in property maintenance, we still have a way to go. And obviously, it would be good to win some new customer contracts, because our target is not to decline in this business, but grow. And 24 is a year when we focus on finding new healthy customer contracts for Facility Services Finland.

speaker
Inka
Moderator, Investor Relations

Thank you. And then the second question. Can you say something about the profitability of the tendered municipal waste contracts you won? How will profitability for environmental services look like in the longer term?

speaker
Eero Hautaniemi
CEO

Yes. No, I cannot say anything specific regarding the profitability of the municipal contracts, but in general I can say that the profitability of these contracts in the tendering process is lower than when we have a contract-based business. And that is one factor behind the 2.5 million decline in the profitability that we saw. The other factor is what I already described, that the productivity has gone down, hopefully temporarily, and we have now actions to offset that. In general, for environmental services, we will sort of go through this wave of municipalization and we will adjust our operations and increase efficiency and go through the rerouting to make sure that the productivity is at the desired level. And as we published our updated strategy in the fall. Our aim is to move further in the value chain and hence sort of move into new areas of business in environmental and industrial services. And obviously we have already had and will continue to have more focus on B2B business where the profitability is on sustainable and healthy level.

speaker
Inka
Moderator, Investor Relations

Thank you, Eero. That was the last question.

speaker
Eero Hautaniemi
CEO

Thank you very much. Have a good continuation of the day and good weekend. 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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