Aspo Oyj (ASPO) Earnings Call Transcript & Summary

Welcome to the Q4 2022 reporting of Aspo. I'm glad to say that we had a strong 2022. We have had a record year when it comes to operating profit, EUR 55 million in the last quarter, EUR 11.3 million. Maybe even more importantly, we've taken major steps when it comes to strategy implementation in a fairly difficult market environment. So far, we signed all the exits related to selected Eastern markets, it has tied up a lot of time of management. Telko has made acquisitions according to the compounder strategy. We're very happy to say that the integration of Leipurin and Kobia is moving in a very successful direction. Out of the 12 Green Coaster vessels, 4 are currently under production and it looks like everything is moving according to schedule. In addition to the financial targets, also ESG targets and ESG development is going in a good direction. If we then look at an Aspo level and the top line development, we have growth of some 11% for the full year and that's only 1% then for the last quarter, driven by Telko situation in Russia and the shrinking business there. Looking at ESL, strong growth throughout the year and actually for Leipurin, even accelerating growth throughout year 2022. If you look at profit, EUR 11.3 million for Q4, close to 7% margin. And for the whole year, EUR 55 million and 8.5%, above our 8% target. And it's quite a similar picture compared to top line development. So Telko's result dropping during the second half due to Russia, Leipurin continuing to develop strongly towards better profitability throughout the year and ESL strong performance throughout last year. We had last year, EUR 24.1 million of items affecting comparability. In October, we forecasted EUR 25 million, so we ended up fairly close to that figure. Basically, all of this is related to Ukraine and Russia. There are some other elements of Chowgule and some other restructuring costs, but these are basically offset by the fact that we sold Espa beginning of last year. So very much related to the war in Ukraine. Very strong cash flow, EUR 68 million, free cash flow of EUR 34 million. And if we look at the CapEx investments, some acquisitions, primarily Kobia and then investments in the Green Coasters and dockings that is the summary of the CapEx investments. And then if we look at working capital, no big changes. Actually Telko's inventory is decreasing and ESL's inventory is increasing because here we find the Green Coasters that we will sell forward to the pool investors when these ships arrive. Return on equity above 30%, which actually is a continued trend throughout 2022. Russia and selective Eastern markets, I'm of course, very happy to say that we now signed 3 binding framework agreements covering Telko Belarus, Telko Russia and then Leipurin East. These all have to be still approved by the commission, but our understanding currently is that when it comes to Telko Russia, we hope for a solution during Q1. And when it comes to Leipurin Russia, we hope to get a solution during the first half of 2022. Then I want to highlight here that you're probably aware of the fact that also Leipurin and Telko, the legal entities in Belarussia have been listed on -- list among approximately other 1,000 foreign companies, which are prohibited to be sold. This means, for example, that when it comes to Telko Belarus, we will wind down the business instead of selling it. However, our business in Belarus is so small that this will not impact our figures. So the big ticket that is the Russian business is making sure that we get a positive verdict by the commission. ESG emissions. Good development driven by growth, driven by operational excellence, particularly for ESL. Safety, we are not yet happy with the results we have here 8.1, that's the safety frequency including all the incidents that has happened. We did not reach the set target of 7. However, we developed in a good direction. I'm happy to say that this is something we're working on a lot in the businesses. So making sure that operating procedures are followed. Safety glasses, helmets, et cetera, and a lot of safety walks and things like this to change the culture basically. People satisfaction, personnel satisfaction continues on a strong level. And we also closely follow up on the trainings and these are well-executed. I want to take the opportunity to welcome Taru Uotila, who takes responsibility of Legal, HR and Sustainability. Taru has a lot of relevant experience from international companies, Fortem, GE Healthcare and also VR Group and big welcome to the team of Aspo. Then moving on to the business-specific numbers and starting with ESL. And as already pointed out, ESL's strong performance continued during the whole year 2022. If we start with top line development, growth of 28% throughout the year, 16% during the last quarter. And this is driven by 3 factors: very strong demand, then our partnerships with industrial companies and then operational excellence in the sense that we were able to utilize our vessel capacity in a very good manner. You very well know that starting, let's say, during summertime last year, the Baltic Dry Indexes have been declining, and that trend has continued during 2023 year-to-date. However, the situation is still such that in the Baltic Sea region, there's a deficit of vessel capacity and I'm talking then about all year-round vessel capacity, ice class capacity. And that we experienced, particularly in the Coaster segment, where we actually have difficulties in securing sufficient capacity of time-chartered Coaster vessels. And luckily, we have -- the majority of our fleet is tied up to long-term customer contract that goes particularly for the Handysize vessels versus the Supramax vessels are more dependent on the spot market development. Here, you can see the development of the indices independently if it's the Baltic Dry Indices -- Index or the Handysize Supramax Indexes, they all look quite similar, so continue decline. And here, of course, also what you can read is that there's high volatility. So it can change in both directions going forward. ESL's operating profit, EUR 10.6 million. To my knowledge, this is the best quarter ever in ESL's history, again driven by strong demand, by a good operational performance, but also due to the fact that weather conditions were good during the last quarter. The margin percent on a small decline compared to Q4 last year and that is, for example, related to the increasing fuel prices. Then over to Telko, quite a polar, let's say, dual situation. We have the Western markets developing very favorably and then we have the situation on the other hand in Russia and Ukraine. Looking at revenue development, we have the decline of top line of approximately 20% during the last quarter, which actually continue then the trend we had during Q3. And here, it's interesting to see that basically, this means that currently we have some 20% to 25% of our Russian business left if you compare Q4 this year -- year 2022 compared to previous year. And as mentioned, in the Western markets, organic growth and then even that being supported by the acquisitions made. If we go a bit into the business lines, Plastics & Chemicals, a decline in price levels during Q4. However, the situation was stabilizing. And for example, in some chemicals, you even had increasing pricing and now going into 2023, I would say, in general, we are above at a normal price level in the market. Extremely strong development by the lubricants business, particularly in the industrial lubricants, supported, of course, by Mentum, but good price development, extremely strong demand. And going forward, as said stabilizing situation. But of course, uncertainties remain, macro-level uncertainties, inflation, energy prices, China, et cetera, which adds uncertainty. We announced in January an acquisition of Eltrex. I think this is kind of a textbook example of a good acquisition opportunity of Telko, spot on kind of market segments, specialty chemicals, very profitable business. And this is basically a market entry for us into the chemical segment in Poland. Then looking at Telko's profitability, you see a clear decline here in profitability during Q4. However, the rationales and drivers behind these are very clear. So we have the situation in Russia, a very shrinking business. Then looking at Ukraine, unfortunately there has been development towards worse. So energy distribution have been very difficult in Ukraine during the fourth quarter and hence that has impacted production and also impacted Telko's business. And then in addition, there are some, let's say, elements of onetime costs, M&A mapping exchange rate losses, ruble Kazakhstan. And then some obsolete inventories, unfortunately, giving a worse result for Q4. I just want to highlight here that I'm not worried at all about Telko's financial performance going forward. As you very well know, approximately 1/4 of Telko's revenue is Russian-related and we will compensate that based on the M&A we do and also we invest a lot in cost efficiency. So I think the situation of Telko looks quite good. Leipurin continued improvement of performance and that you can even see from these top line curves here. So basically, we have had strong growth driven by inflation throughout the year, but then specifically during Q4, the acquisition of Kobia even accelerated net sales development, 30% of growth in Q4. This growth is relevant both for bakeries and food industry and if we look at the volume trend, it's still disappointing. So this is driven by inflation. So we see that kind of the macro development of the market, consumer confidence is impacting volumes negatively. And we will end up losing the business in the East. But as I told you before, Kobia will compensate more than well for the lost revenue. Some weeks ago, we came out with sales and lease back arrangement of the Gothenburg warehouse of Kobia. If I give you the big picture, so basically in our balance sheet, all the Kobia assets, property assets are valued at approximately EUR 13.5 million. Now we were able to sell one of the smaller entities and even that with the profit compared to the balance sheet value. And we were pursuing opportunities to also sell and lease back the rest of the properties. Profitability of Leipurin continues on a very kind of positive trend. We made EBIT of EUR 4.1 million during 2022. I think this is a clear record year if we look a couple of years back before the times when Leipurin did some EUR 6 million, EUR 7 million of EBIT. But clearly, a very strong performance now of Leipurin, clearly going in the right direction. Kobia didn't really contribute anything to the bottom line last year due to the IFRS changes. So that is still to come during this year. And as said the integration is moving in a good direction and the profit boost program is also going on. So it's a good kind of forecast for Leipurin here. I also want to take the opportunity to welcome Miska Kuusela, who started beginning of this year as the CEO of Leipurin Group. He has a very relevant background in different Finnish and more international food companies and is well onboard. So welcome Miska to the team. Then back to Aspo's financial position and balance sheet. Overall, during last year, we developed in a favorable direction some 35% of equity ratio and gearing of 108%. And if we look at our net debt, it's currently EUR 156 million. A year ago, it was approximately EUR 170 million. Interest rates clearly on an increasing trend, so we need to watch out not for that to impact too much on cash flow. Liquidity remains on a very good level, EUR 34 million plus the facilities of EUR 40 million. And here, I want to highlight that out of the EUR 34 million, some EUR 12 million are tied up to the Russian business that will be exited. And the maturity profile of our debt is fairly healthy. It will be further extended when we take the EUR 32 million loan for the Green Coasters from the Svenska Skeppshypotek which is a 15-years loan. Dividend proposal. Here, if we compare to our earnings per share, EUR 0.6 per share. And if you disregard the onetime cost, then actual earning per share was approximately EUR 1.3 per share. And the proposal by the Board of Directors to the Annual Shareholders Meeting is to pay a dividend of EUR 0.23. And in addition for the -- to authorize the Board to decide an additional payment of EUR 0.23. So that then adding up to EUR 0.46 as dividend compared to the EUR 0.45 paid last year. Still then summarizing the year, if we look from a financial perspective, a record year, EUR 55 million. Basically, all of the financial targets were reached. If we look from a activity perspective and this is a bit of an extended year, we did 4 acquisitions. We exited Vulganus. We exited Chowgule. And addition, we signed exits for the Russian businesses. We made quite major changes when it comes to our financial arrangements. We had a hybrid of EUR 30 million during spring last year. And then we got the pooling arrangement around the Green Coasters up and running after the summer breaks. We invested in the Green Coasters total of 12. I think this summarizes the year fairly well. Then going into 2023, I think we remain in a good position to compound growth. If you look at ESL, it's really about further developing the industrial partnerships and it will be a very much kind of ESG-driven growth, investing in new emission-friendly vessel capacity. Telko will focus on growth, both organic and nonorganic growth and make sure that scalability is on the top of the agenda. And Leipurin, it still remains all about profit improvement and selecting the segments in where we want to grow. And then guidance for year 2023, what we guide is saying that Aspo's comparable operating profit will be higher than EUR 35 million in 2023. This was a short capture of the last quarter of 2022 and then also perspectives on the full year and I'm happy to take questions, starting from the floor.

First, could you comment on Leipurin's EUR 1.1 million adjusted EBITDA? How much does that already reflect this Kobia acquisition synergies? I mean, it's still a very fresh acquisition. So how would you -- could you provide some color on that because -- yes.

Good question. So if we look kind of what Kobia has brought to the table so far, it's actually negative EBIT. If we look at the IFRS changes when it comes to the inventory and then also because the fact that we've valued the properties at EUR 13.5 million, we're doing some depreciation, which did not happen before the acquisition. So from pure EBIT standalone perspective, it's negative contribution for year 2022. Then if we look at synergies, I would say that, so far, they've exceeded expectations. We see a lot of opportunities taking principles from Finland to Sweden, vice versa, see a lot of opportunities of selling Kobia products in Finland and Baltic countries. But at the end of the day, the kind of effects on the Q4, I would say, very limited. So that's definitely a lot more to come during 2023.

All right. Then Q3 EBIT was EUR 3.7 million adjusted and was then discussed that that was like and that should give some sort of sense of the going forward run rate, but now it was only EUR 1.3 million. So could you -- how do you see that in that -- from this perspective?

Good question. So if we look at Telko's EBIT the last 2 years, we were both years beyond EUR 20 million. And then if we kind of deduct the Russian business out of that, it's approximately a quarter. And if we do that on a kind of top line and also kind of an indicative level on the bottom line, I think that gives a fairly good picture of the run rate and that actually resembles the EUR 3.7 million you mentioned for Q3. Q4, I think you cannot read too much out of that on a standalone basis due to the kind of different elements. Of course, there are some risks related, one is the kind of macro level development. One is the longer the Russian business is part of Telko, it will affect the profitability in a bad manner. So the Russian business, it makes a loss of EUR 100,000 to EUR 200,000 per month. So that's a negative impact. And then also the development in Ukraine. Actually, last year, during the summertime, we had fairly good development in Ukraine, but that weakened quite a lot during Q4 due to limited production.

And then maybe about ESL. So outlook, it seems pretty stable. And I guess at this point, you can't really comment too much on the latter half of this year. But if we think about how does it look like in Q1 or H1 from a comparison perspective to last year, like, how would you describe pricing for the smaller vessels now compared to a year ago? And also how does the situation for Supramaxes look at the moment?

I think you very well summarizes it, but it's very difficult to kind of forecast H2 this year. A lot of things can happen. Longer term, I believe very strongly in what we're doing kind of ESG industrial partnerships, et cetera. When it comes to the Coaster segments, we have a deficit of some 5, 6 vessels currently and we want to add capacity. From that perspective, the Green Coaster investments from a timing perspective is quite ideal. So we will start getting the Green Coasters during fall this year. And the Supramax vessels, basically, they are tied to traffic until end of February, mid-February. But after that, if you are not able to do kind of longer-term commitments, we are, to some extent, dependent on the spot market development. So -- and Handysize segment, that fleet is very well tied to the industrial partnership. So the possible weaknesses lies in the Supra segment than the fact that we lack capacity in Coasters.

Super pricing, is it still like relatively good for this Q1 period when you have them?

The current contracts that we have are still on a good level.

Sauli Vilen from Inderes. About your guidance, can you give us some more light like, on what kind of scenario are you basing on your guidance since, obviously, you are guiding EBIT to come down fairly significantly?

If I comment on the specific businesses. So Leipurin, I see improving performance. Telko, I see basically deep in the profitability only based on the fact that we will exit the Russian business. However, we will try to compensate via cost efficiency improvements and M&As. And then ESL, which had kind of a record year 2022, we will go down a bit and this assumption is basically built on what I just mentioned. So the spot market development then securing sufficient all year on capacity in the Coaster segment.

Then on the Russian exit, obviously, you are doing everything you can to get out of there. But what if you don't -- what if the commission or whatever the entities disapproves the sale? What -- you obviously have some kind of plan B, what that would mean?

I think it's a very relevant question. And as I mentioned in the presentation, we put a lot of efforts into this process and it also means that we will not give up. So even if the commission would kind of disapprove the applications, depending on the feedback we get, there might be a different kind of venues to take. And then there, of course, at the end of the day, we're in the situation where we have a very, very small inventory and then cash in the banks. So of course, we will do our outmost to get that cash back to Finland. And then, of course, if you look at the kind of worst-case scenario, that could take some time depending on the commission approval. But there might be then some legal scenarios how to do it and cooperation with different parties, et cetera.

Then in Finland, we have this thing called AKT, who are on strike at the moment. So does that affect you in any way if the strike prolongs from here?

Very kind of accurate question what is going on here at the moment. So our situation is if you look at ESL that if -- let's assume that this will be approximately 2 weeks strike. Then that would cost us in profitability. Our estimate currently is EUR 0.5 million. And then if I look at the 2 other businesses, they work in a bit -- in different manners. So in case it will only be a 2-week strike, then I think the effects will be very limited. But then if it will go beyond that, we will have some problems in securing capacity, et cetera. So it's a bit of a dual picture. And this EUR 0.5 million, it's a very preliminary figure, but based on our kind of fast analysis, it should be the right magnitude.

Then finally on the financial income, you actually booked some positive financial income items during Q4. I guess this is for the CFO. So what items were there? Dividends from east or -- okay. Very helpful.

Anyone else questions on the floor? If not, then do we have any questions online?

[Operator Instructions]

No questions online. I want to thank you for the shown interest towards Aspo's financial performance. Thank you very much.