Aspo Oyj (ASPO) Earnings Call Transcript & Summary

Welcome to the half year reporting of Aspo Group. I'm glad to say that we have had an extraordinary Q2 with very strong performance. Revenue growth of some 16%, and our operating profit was EUR 16 million for the second quarter this year. That translates into that we've done EUR 31 million of comparable operating profit during the first half of 2022, which is from an Aspo perspective, a really strong half year. The profit rate close to 10% during the quarter. Going forward, the second half of 2022 will continue strong. It will, though, not be as strong as the first half. However, long term, we have great confidence in that by strong strategy execution, we are able to offset any negative impact coming from the business or environment. And this is built on the fact that we have an even stronger balance sheet, and we have a really strong run rate performance currently. If we then look at on an Aspo level, net sales development, as said, 16% growth, particularly driven by our Shipping business, which had more than 30% growth, but also Telko and Leipurin, both showed really good numbers. Of course, as always, then looking into the future, there are some uncertainties, they are particularly related to the Russia and then secondly, to the macro economical development. And I will comment this kind of by business in this presentation. If we look at operating profit, EUR 16 million, close to 10% operating profit rate. Again, particularly ESL Shipping, extremely strong performance. The same actually goes for Telko. And what is really nice to see is that also Leipurin, the kind of performance improvement has continued, and we are now clearly above a 4% EBIT level at the current state. We have some extraordinary items for Q2, a bit more than EUR 2 million. They are basically -- could be divided into 3 groups. One is impairment of Kauko, EUR 1.3 million. That means that there's no goodwill left when it comes to Kauko. Then secondly, as you very well know, we sold divested at Vulganus. There were some transaction costs related to that, which then including the enterprise value, it generated a small loss of some EUR 300,000, EUR 400,000. And then the remainder of the EUR 2.4 million that is Russia-related basically -- or related to the war in Ukraine. Totally, we have now items impacting the comparability, approximately a bit more than EUR 7 million for the first half of this year, and that can be compared to what we said some months ago, EUR 15 million to EUR 20 million for the whole year. So that EUR 15 million to EUR 20 million, that includes the EUR 7 million that we have for the first half, and it also assumes that we are fully exiting Russia. Really strong cash flow this year, stronger than last year and stronger than 2020. Happy to see that as Q1, all the businesses generated positive cash flow. And naturally, this strong cash flow is very much related to the good profitability. Limited CapEx during H1, basically related to the dockings of ESL Shipping. Working capital actually contributed to cash flow, which I think is a good sign of the fact that Telko is very much focused on their rotation of inventory. Return on equity, strong performance or 30% disregarding the onetime costs. And if you include those, basically the reported return on equity, you're still above the 20% target. ESG, very close to Aspo, and we've been working extensively on this topic also over the past couple of months. I'm glad to say that we are making improvements. You recall from the Capital Markets Day last year that we set the target to reduce emissions by net sales with 30% by year 2025. At that time, we had -- or actually, we compared to the 2020 level, we had actually 0.44 CO2 tonnes per net sales EUR thousand. And our objective for 2025 is 0.3. Now we're exactly half way looking at the rolling 12 months, basically in the first half of this year and the second half of the previous year. We're also happy to say that we have a lot of initiatives. Here, I mention one, for example, the -- we're the first shipping company utilizing low emission fuels in the marine industry, and we have a lot of these type of initiatives that we are working on. Safety, another topic which is really important for us. We're putting a lot of focus on that. And here, I'm happy to present the number of accidents divided by the million working hours, and we are close already to the target of this year, which is a frequency of 7, and 12 months rolling is basically 7.1. Here, what is even more important is that we have a huge improvement in the quality of data. So we are able to better gather all the accidents that is taking place, and that is actually more important than the figures themselves. People power. Last year, we reported really strong AA+ numbers. We've updated those. We are currently at the level of AA, so a slight decline. However, I think this is also excellent performance considering the turmoil in the market, particularly concerning Russia and Ukraine. Then over to the business-specific numbers and maybe a couple of comments on the strategy of these businesses. I'm happy to see that I think there are clear evidence of the fact that our strategy is generating results, and that's not only in these numbers, but also kind of forward-looking ESL Shipping contracts with key customers that will create stable -- more stable cash flows going forward in our advantage. And then also the investments in ESG being a forerunner, I think that will position ESL very well in a business environment where energy prices are increasing. Telko, it was clearly the right strategy to focus on value-added products instead of commodity. I expect commodity to be a lot more volatile compared to engineering products. And as said, we are very much focusing on M&A activities when it comes to Telko. We are working on this and hope to be able to report more over the next couple of months. Leipurin, we see clear signs of our initiatives to improve the EBIT in the numbers. We're very much focused on this full profit potential program, an addition, the Kobia acquisition, which I will come back to. Starting with ESL. And I'm sure you recall that the Q2 has not been -- if you look at kind of a typical year of ESL, it has typically not been the strongest quarter and currently, the Q2 of 2022 is clearly an all-time record for this particular quarter. We've seen a very strong demand for the contract traffic. We've seen good freight rates when it comes to the spot market, which we utilize depending on how much capacity we have available. We had a tremendous success when it comes to shifting our fleet away from Russia to other routes, and that's now fully completed. So we have no Russian-related traffic at the moment. What this has actually meant is that the transportation distances have increased quite significantly due to the fact that the industry is sourcing raw material from longer distance or regions. I feel very confident when it comes to ESL Shipping's performance for 2022. I see that this very strong performance will continue. And then if you look at longer-term natural or uncertainties, I would say, particularly 2: one is industry's opportunity to source raw material, will they get all the raw materials that are needed; and then secondly, we have inflation, in particular, energy prices and how that will impact kind of cost pressure, price pressure on the logistics chain and eventually possibly also impact on volumes and demand. However, I want to stress that these uncertainties are not ESL-specific, they are more on a macro level and related to the whole industry. And then when it comes to ESL, we are in a good position to be able to shift our capacity from one industry to another. And then secondly, as I said, I think we are really strong when it comes to competitiveness considering our new fleet in a world where energy efficiency is really significant. We all follow the Baltic Dry Index very carefully. Here, I think there are a couple of kind of highlights: one is that the volatility continues to be extremely strong; and secondly, we're currently approximately on the same level as end of February when the war started in Ukraine. Here, I want to stress that ESL Shipping is in many times, kind of misunderstood. Our performance is not even close as volatile as this Index due to the contract and the segment that we are in. We mentioned already for some quarters regarding our new financial instruments pooling. We are in the stage of finalizing this concept. We have invited investors to invest in the upcoming fleet basically in the green coasters. And this, I see as a really transformative action by ESL. So I would compare this with the acquisition of Kobia. From a laboring perspective, this will change the business model of ESL. And actually, what it means is that it reduces significantly the CapEx need and at the same time, it improves our return. Naturally, the EBIT percentage, as such, will be lower compared to a fleet which is fully owned. At the same time, we're able to offer investors really interesting returns in high-tech green technology. And this pooling concept we're finalizing now over the next coming weeks and hope to come back to you soon with that. Then ESL, and profitability over EUR 9 million of EBIT and the EBIT percentage, EUR 15.3 million, clearly above the 14% target of ESL. And this is really based on the high demand, strong top line, and then again, an operational success. So if I look at the KPIs, kind of operational KPIs of ESL, they are basically all moving in a good direction. We talked about docking days clearly lower number of docking days for this year compared to last year. And then ballast voyages, the share of these have decreased again significantly from a year-to-year basis, giving us more revenue and better efficiency. Looking at the whole year, we have a lot less docking days this year compared to last year. And as already stated, I think this strong performance of ESL will continue throughout the year. Then over to Telko. Again, very strong performance. We have growth of some 6%. And here, you already can see a clear decline in the growth percentage compared to the 30% during Q1, and that is related to declining sales in Russia. On the positive side, it's really encouraging to see that the business in Ukraine is picking up again. And basically, over the past couple of weeks, we are close to kind of 50% of normal. Commenting then a bit on the specific businesses. Plastics, chemicals, particularly there, you see the Russian impact, so you only have growth of some 2% plastics. There's really a polarized picture. So the engineering plastics are doing really good. And then the more volume, bulk plastics, you see a bit of a sagination in the market. Automotive is not as strong as it has been over the past years. Chemicals, basically high demand, continued strong prices, partly driven by oil and energy costs. Again, in commodity, a bit of softness. Lubricants, extremely strong growth, more than 30% and partly driven by the Mentum acquisitions. And looking at Telko, we see that the Western markets will continue to be as strong as here longer term, again, which I mentioned kind of polarization. So commodity products, I think there could be more rapid changes than going forward longer term. And due to the fact that we lose sales in Russia, H2 will be not as strong financially as the first half of 2022. Then looking at Telko's profitability, 10% of operating profit compared to our 8% target, really strong impacted by the fact that we have strong demand, overall favorable market prices and then basically strategy related. So as we communicated last year, we are very much focusing on growing in the West and then value-added products instead of commodity. Then over to Leipurin. We're happy here to say that we have 14% of growth in this market. During Q2, there were still growth in volumes when it comes to Finland and the Baltics, but particularly then inflation also generated revenue and eased, practically Russia, et cetera, in a clear decline. From a strategy perspective, glad to see a very strong growth rates when it comes to the food industry. That is kind of growth embryo of ours and also the bakery in general, developed well. As we said, we will -- we're in the process of trying to divest that Russia, Belarus and Kazakhstan. And if -- the revenue of these 2021 was approximately EUR 23 million, EUR 24 million. We will offset that by the Kobia acquisition, giving us actually 2x more revenue from Sweden. So Kobia's revenue is more than EUR 50 million. Operating profit of Leipurin. Here, one should particularly look at the numbers, excluding Vulganus and excluding one-off items. And there, you can see that for the first half, we had an operating rate of 4.4% and the second half, 4.9%. So this being quite good numbers already. And there are a lot of positive drivers here, partly revenue growth, then clear evidence of our performance improvement program, I guess, particularly kind of combining commercial activities with sourcing and being more dynamic in between. And then, of course, COVID. There were no significant impact of COVID anymore during Q2 this year. Leipurin, Kobia, we came out with this a couple of months ago. Now it's approved by the Swedish competitive authority and the closing date is expected to be on September 1. I think I'm very excited about this acquisition because it will actually take us 180 degrees in the other direction from East to West. And there are expected major synergies due to this acquisition, cross-sales, Kobia is, for example, producing more span in Sweden. We can sell that here in Finland instead of buying it from principles. We have principles in Finland, which are not represented in Sweden and vice versa, good cross-sell opportunities there. This will build us scale, for example, sourcing SG&A, and then I see also kind of knowledge management, for example, when it comes to supply chain. And maybe most importantly, we're able to offer our principles going forward a much broader geographical scope. Vulganus, not a major business of us, but still important for us to clean up our portfolio. This business made a loss of some EUR 800,000 during the first half and we were able to divest it in June. Then back to Aspo's figures and the balance sheet, really strong development of the balance sheet, equity ratio close to 36%, gearing down to 93%. And this builds, I think, particularly on 2 things: one is the strong profitability, and that one is in particular; and then naturally, we released a new hybrid loan of SEK 30 million, which gave a kind of net effect of EUR 10 million. We have strong liquidity, basically EUR 88 million, including the revolving credit facility net debt currently of EUR 145 million, a decrease with more than EUR 20 million and a maturity profile of our loans of extending until 2027. A couple of more words on the Easter market. As already said, ESL full exit already. And both when it comes to Telko and as well as Leipurin, we are working hard on this and hope -- or the clear target is to exit Russia and these specific countries depending on the business still during this year. And from an equity perspective, some EUR 27 million of equity. A bit more on the numbers. If we look at the business that we are basically trying to get rid of trying to divest. These are a bit elaborative figures compared to what we presented earlier. This is now exactly based on the scoping of each of the businesses. Basically, looking at 2021 figures, we're talking about 16% of Aspo's Group revenue. And if you look at Telko, we're talking about approximately EUR 70 million, which is 26% out of Telko's revenues in 2021. And the same figures for Leipurin, we talk about 4% of Aspo Group's net sales and some 23% of labor and net sales. And of course, here, our strategy is to compensate by acquisitions. We succeeded already with Kobia. We're working on the Telko side to avoid any gap in revenue development. Our guidance issued in June, Aspo Group's comparable operating profit will improve from previous year, which was EUR 42.4 million. And then summarizing extremely strong Q2, exceptionally strong second quarter this year. And despite any uncertainty is, we are very confident regarding the full year 2022. And we're also confident that via successfully executing our strategy we will show continued success going forward. That was in brief our half year results, and I would then give the word to the floor and maybe start in the room, if there are any questions.

Please go ahead.

Olli Vilppo from Inderas. If we think about this EUR 15 million to EUR 20 million one-offs this year, and you told that EUR 7 million has already passed from that. What does it include the rest of it? Is it related to Telko or how we should think about it?

Good question. So basically, it leaves room for EUR 8 million to EUR 30 million for the second half of this year. Based on our kind of assumptions and calculations, it's fully related to the exit of the Russian-related businesses, then how it will be divided between Telko and Leipurin? That's still a question mark, but we feel confident about the range that we're providing.

But if we think that it's much easier to sell the Leipurin Eastern operations because they have the local like sourcing, but what about Telko? How are you able to sell that operations? Or is it more probable that you will like restructure it and then the losses will be in the Telko side.

It's still very difficult to judge. There are very interesting aspects of Telko's business. So of course, it's a much larger business than one of Leipurin. When it comes to Telko, it's basically EUR 70 million if you look at 2021. But basically, what we're selling there or what we're divesting, it's a lot of competencies, resources there are substantial still amount of raw materials in the warehouses, then it's about cash. And then there's an ongoing business, which is somewhat related and dependent on who the buyer is, what you can do with it. So -- but I still think that there's kind of substantial assets, although it's not about production, it's more about inventory and cash.

And what is the situation with the money transfers from Russia to Finland?

Our current understanding is that if you divest a business, it's possible to get the sales price to Finland. But on an ongoing basis, we are limited to, let's say, EUR 100,000 to EUR 150,000 by limited company per month, which we can transfer from Russia. So only considering that it's a long time process to get all the assets back home.

Joonas Ilvonen from Evli. Two questions about Telko. You mentioned a positive volume effect in the Western markets, is it possible to give any color on what kinds of volume increases have you seen in the Western markets, like in percent terms, maybe like Q-on-Q year-on-year? And then also another question about the current price environment. I mean, obviously, it's very favorable. It was already before the war. But what kind of -- could you give some color also on what kind of price increases have you seen like year-on-year or since the beginning of the year?

I think the price increases are very dependent on the product per se. So in engineering products chemicals, plastics, extremely strong development. And then if you look at more commodity products, we have a slight dip then over the past weeks and months. Volume-wise, I would say that we had strong volume growth during Q1, both when it comes to East and West. But what then has happened during Q2 is that the Eastern volume development has clearly declined and is clearly below 0, whereas the Western growth rate has continued as during Q1. And that is fully aligned with our strategy, actually, both of these aspects. So strong focusing on West and strong focus on the value-added products.