Aspo Oyj (ASPO) Earnings Call Transcript & Summary

Welcome to the Q2 financial reporting of Aspo. And as you can see from the header, we had a bit of weaker profitability in Q2 compared to a solid Q1. I will then start with giving an overall picture of the first half of the year before I dig more into the details. If you look at the first half, we had revenue growth of 3%. We have accumulated the operating profit of EUR 12 million. We have a solid balance sheet, good cash flow. And also, the return of equity, if you exclude onetime effects, approximately 14%. We also did good progress when it comes to strategy. The Russian exits are close to being finalized. We did one acquisition of Telko in Poland, and we now exited -- it's actually 4 properties in Sweden, which we then sold and leased back, and that's the history of Kobia. Before I go into the more detailed numbers, a glance on where we're in sustainability. Emission intensity, we're still on target level on the track to reach the target of this year. The target is 0.36. Currently, 12 months rolling is 0.34. And as you very well know, the key drivers in addition to net sales development is naturally the efficiency and operations of ESL. When it comes to safety, we're lagging a bit this year's target. We have a lot of things going on here. For example, in ESL, we're standardizing management of the fleet in order to reach good numbers across vessels, a lot of safety walks. And we are also trying to focus more on kind of preemptive actions and close calls and analyzing these in order to avoid injuries. We also just got in -- just before the summer break, we got the updated employee survey, and we actually received exactly the same ranking as last year. So we're very strong compared to industry benchmarks. A good platform to build on. Then digging into the numbers and starting with the Aspo level and net sales during Q2, we had a sales drop of 3%. And if you look what's behind that, ESL Shipping in decline, top line, partly fuel prices, partly demand; Telko driven by acquisitions, still growing; and the same goes for Leipurin, strong growth due to Kobia and due to inflation. Then operating profit, EUR 3.6 million for Q2. If we start with a kind of good news, Leipurin continued with kind of improving profitability from quarter-to-quarter. And ESL Shipping and Telko due to challenging market, a decline in profitability, and I will come back to the details in regards to this. If we then look at group total net sales, so far, I've presented figures of the continuing businesses. If you look at group total, basically, you can see that the Q1 and Q2 figures for this year is almost unchanged. It's approximately the same numbers. But then if you look back on last year figures, the drop is naturally a lot more significant due to the businesses that we lost in Russia and due to the war in Ukraine. Items affecting comparability during this year, in the first 6 months, EUR 8.3 million, basically close to everything of this is the translation differences due to the exit of Telko. Some smaller items for the continuing business, adding up to minus EUR 0.6 million for the first half of this year. Cash flow, operating cash flow, EUR 18.7 million. All businesses contributing positively to the operating cash flow. Free cash flow at EUR 15 million. And here, we have some CapEx investments, particularly in the green coasters, also the Eltrex acquisition. And actually, the Telko exit from Russia generated a cash outflow of a bit more than EUR 4 million. Basically, we sold the cash in the company at the discounted price. And then finally, and very important, the sales of the properties in Sweden generated more than EUR 10 million. Already this -- the first half of this year, there will be some additional positive effects of this going forward. And this then drives to the EUR 15 million of free cash flow so far this year. Return on equity, 14.3% when you adjust for the onetime effects. If you include the onetime effects, we're down to 2.2%. Maybe before I dig into the details of the business-specific numbers, a bit of a strategy update where I see where we are at, at the moment. It's very clear that the war in Ukraine and the Russian exits are impacting Aspo very negatively. We already, last year, had write-downs of something like EUR 21 million due to this during this first half, approximately EUR 8 million more of write-downs. And basically, we're losing a business which is top line EUR 100 million, and it's done a decent profitability, 5% to 10% EBIT on an annual basis. So this is, of course, a hard hit for us. But at the same time, now when this issue is being solved, this will free up resources to pursue the growth in West and also frees up, of course, significantly time of management. Also see we have a very kind of exciting situation when it comes to ESL Shipping due to the green transition that the industrial sphere here in the Nordics is facing. Our analysis show that the ESL Shipping's market will grow significantly. And we want to be part -- take part of that growth and invest in new technologies, and as you very well know, the first steps have been taken. So we've invested in already in 12 green coasters. We've also focused on the partnership, long-term contracts. And I think together, combined with this ESG focus, also in combination with focusing on handies and coasters, this will provide us with a much more stable market going forward. And as we communicated, we are looking into different venues to finance this growth. We're looking to sell a minority share in ESL Shipping. We are looking for incremental pooling opportunities, and we are also looking into selling the 2 supramax vessels. And these measures will enable us to grow ESL. And at the same time, of course, it will free up capacity on the Aspo side to pursue the growth in the other businesses. And here, then particularly Telko, as you know, a very fragmented market, opportunities to consolidate that market and also good kind of business model, light balance sheet, decent margins, and that gives room for good return. And we are focusing on building Telko into a leading European specialty products player. And then Leipurin, I think, tremendous opportunity still to grow the profitability opportunities in commercial, supply chain sourcing. We changed the leadership model to enhance kind of responsibility of the profit and loss. And there's also a good opportunity for growth in prioritized segments going forward. So I would say this is the big picture if we look beyond the kind of one single quarter or this year development. This is the opportunity we have in front of us. Then going into the businesses. First, ESL. And as you see, we have a clear decline in top line during Q2. Already in Q1, the net sales decreased, and if we look at the markets or the type of vessels, basically, the supramax vessels were hit hard by the fact that the spot market has weakened significantly. When it comes to the handysize market, we clearly have lower volumes than last year, partly driven by, for example, the energy segment, but then we're also suffering this quarter due to the fact that we have dockings of some of the profitable vessels when it comes to the handysize segment. And coaster volumes on -- fairly on the expected level despite the constraints we have when we have time-chartered vessels. You need to also -- to realize that the top line was hit hard due to the price development of diesel and LNG during the quarter. And in addition, the dockings and also seasonal maintenance breaks of our clients impacted top line negatively. If we look forward, we see activity -- or our forecast is that the activity will pick up after the slower kind of summer months. And at the same time, if we look at forest, steel, we still see that the volumes will be lower than last year. Still a reminder about the kind of major strategic review that this -- ongoing in ESL. We are aiming to get first result of this review still during this year. And as I said, we're looking at the pooling opportunity, supramax divestiture and then also a sale of a minority stake. And maybe here, reminding also that when it comes to the green coasters, the project is progressing very well. We have the first Green Coaster, which has already been launched into sea, Electramar, and we expect that one to be in Finland here over the next couple of months. If we look at the Baltic Dry Index, I think you can clearly read one major trend here, and that was just after our Q1 reporting. Basically the index developed further into a negative direction. And this particularly has impact on our supramax vessels. Then ESL profitability, EUR 3.3 million this quarter, 7.5% of operating profit margin. And then here, the drivers, market softness, particularly in the spot market, which actually generated losses when it comes to supramax vessels. And then if that kind of covers the demand side, then on the capacity side we have the dockings which impacted profitability negatively and then also as said before, the higher prices of the time-chartered coaster capacity. And if we look going forward, there will still be some dockings of the same vessels or similar vessels going into Q3, so we see still a weaker Q3, and then we're expecting much better figures during Q4 this year. Then over to Telko and starting with the top line development. We still experienced growth in the Q2, 2%. 5% when it comes to the first half of the year. Plastics, very challenging market, prices dropping significantly beyond the expectations that we had when we reported Q1. You see in some product lines even 40% price drops. And these altogether, a weakening top line when it comes to plastics. Chemicals, strong growth, primarily driven by the Eltrex acquisition. Lubricants, still actually a very favorable market in all the business segments, so doing good. And then if we look forward in the plastics side, we see that market conditions will remain challenging, but we see that price trend is flattening out. And in chemicals, lubricants, demand fairly stable but some pressure on the prices going forward. Then on the profitability side, Telko at EUR 0.9 million for the second quarter. This profitability drop driven, I would say, primarily by the fact that when prices drop so much, so fast when it comes to product segments, easily, you end up selling expensive inventory for a cheaper price. That's the key driver. And then if you look at demand on the construction side, very weak demand. And then we also experienced some additional competition from Asia due to the very low-cost logistics we have from that area. If we then look at the situation going forward, we've taken a lot of actions to save costs, invest in scalability, and then also due to the fact that we see the market flatten out, that will give us much better opportunity to make profitable business. And of course, the acquisitions, which are up to come, they will also support our numbers going forward. Telko in Q2, we exited Russia. So that then frees up time of management to the Western business. And as said, cash outflow of EUR 4.4 million and EBIT impact during the Q2 was a bit more than EUR 7 million of minus. And the bulk of this is basically translation differences, which will not impact the equity of the group. Then over to Leipurin, glad to say that the transformation of Leipurin has continued to be successful. Of course, tremendous growth driven by 2 factors: the acquisition of Kobia and then, secondly, inflation. We still see the negative volume trends in kilos that still comes down, but we are also able to -- have been able to grow top line in Finland over the past quarter, so 8% growth. And if we then look at the market going forward, we see that both the volume decline will flatten out, and we also see the inflation of our product categories to flatten out. So a more stable market is to be expected. And again, we see good opportunities for growth in Leipurin, and we are, of course, speaking to segments which are in particular interest for us, food, frozen products, et cetera. Profitability. Now we reached, excluding then Russia, an EBIT margin about 3%, EUR 1.1 million of operating profit. I would say that the bulk of this is related to the new leadership model and the synergies that we are able to realize between the different countries. We haven't had a lot of negative impact of the volume drops because they have primarily taken place in categories which are not that, from a margin perspective, important for us. And of course, if we expect raw material prices to drop, then inventory management will be critical going forward. But again, if prices starts to drop, we see good opportunities also on the volume side when consumer purchasing power increases. Kobia properties. We acquired Kobia last year summer. Now we divested and leased back all the properties of Kobia. Sales gains of EUR 13.6 million, which is fairly close to the purchase price of Kobia. And if we look at the impact on profit, there's 1 onetime impact compared to the balance sheet value, which is EUR 0.5 million during the first half of this year. And then if we look at the impact on the running profit and loss, considering the depreciation we had for the properties, that adds some EUR 150,000 of cost per year. We're still in the process of exiting Leipurin in Russia, Belarus and Kazakhstan. I think this -- we made good progress here. Basically, the only remaining task here is to get the approval of the local commission in Russia. Everything else is solved. And as stated before, we have a sales price of approximately EUR 8 million, and then if you look at the balance sheet value of these assets, EUR 2.5 million. And looking at current currency ratios, the translation differences are EUR 4.4 million. Then discontinued operations. So here, you basically see the profit and loss of the businesses that have been or will be exited. And the trend is, of course, flattening out to 0 as we are exiting these businesses. Maybe the good news here is that Leipurin Russia is making profit. So the forecast going forward for this business until we do the entire exit is slightly positive. But again, this also shows the major impact of the Russian exits for Aspo. So we lost the business of EUR 100 million, which have here during these years, okay, it's exceptional times, but they've done some profit of 5% to 10% EBIT kind of longer term. Then Aspo's financial position, balance sheet, no major changes. We have still a gearing which is close to what we reported end of last year, 115%, and equity ratio close to 35%. Strong and good liquidity. We have net debt of approximately EUR 162 million, interest-bearing debt of EUR 188 million. Currently, cash, EUR 26 million, out of which, EUR 3.6 million are located in the businesses of Leipurin that are being sold. And then we have some revolving credit facilities, which is fully unused. Summary, what is important for Aspo kind of short term -- longer term, it's exactly the strategy update I just gave you. So of course, pursuing ESL strategy of being a forerunner in ESG, compounding Telko and then improving profitability of Leipurin. We also, very soon want to -- of course, the ambition is to exit Leipurin, particularly in Russia and other Eastern markets. And then beyond acquisitions, we are, of course, also focusing on cost efficiency, and there are different programs ongoing in the company currently. Financial guidelines remains at the EUR 25 million to EUR 35 million operating profit of this year. And for us to be, let's say, in the upper range of this range, that means that the market will need to pick up. And if we are at the bottom range -- bottom side of this range, that means more a continuation of the current market. This was a brief summary of the Q2 results, and I'm happy to take questions, and I guess starting here from the floor. Please, Pasi.

This is Pasi. Maybe the microphone is on, yes. Pasi from Nordea. And I have a couple of questions, starting with the shipping segment. So are you now kind of postponing the supramax divestment program due to kind of overcapacity in the market and the very weak kind of shipping environment? And in the case you are actually able to divest these supramax vessels, are you still going forward with the possible divestment of the minority share in the ESL Shipping segment? So are these kind of -- should we expect both of these to happen or either one of those? And then a kind of -- then let's see, I have the last one. Yes, regarding the shipping market and especially operations so could you please quantify what would be the share of steel and forest sectors from your kind of tons or kind of net sales in the segment, so that we could actually try to calculate what would be the kind of small weakness [ in the ] demand affecting your operations going forward? And is there any kind of outlook for the fourth quarter of this year? Because I would assume that this weakness is going to stay at least in the third quarter. So what is the visibility for your kind of main customers in that sense?

Good. Let's start with the supramax vessels. So naturally, it's a question of optimizing from a timing perspective. So naturally, we're aiming to get an -- as good price as possible. And of course, it's a market with high fluctuations. Then there's a strategic dimension with our supramax vessels. So very high-quality ice class, different other criteria. So you could expect a premium depending on the buyer. But it's a pure [ optimation ], so of course, we aim to get an as good price as possible, and we are assessing our options. Then if we look at the 3 strategic alternatives we have, so the minority pooling and then the supramax vessels, they are all on the table, and we can implement either 1 or all 3 of these pending on the situation. So I don't see them as such that if we complete 1, then we definitely will exclude the 2 other ones. Then when it comes to steel and forest for ESL, these are clearly the 2 strategic markets. And I would say kind of ballpark figures, clear majority over 50% of sales from these 2 segments. And then I think you're very right saying that if we look at ESL's business going forward, Q3, we still expect to be weak and then a strong improvement during Q4. And what is this based on? It's clearly our customer forecast that we receive. So that's in brief.

Yes. Thanks, I hear you. And I guess everyone is hoping to kind of improvement in the fourth quarter. But when it comes to the kind of the full year outlook, I mean your range of the tough to gain EBIT, kind of, is -- so roughly EUR 10 million. And then looking at what you actually achieved in the first quarter, the range for the full year is quite wide. So how come you were not able to shrink the kind of guidance range at all? Is there kind of uncertainty regarding the fourth quarter is such a high still?

Good question. And naturally, this is the topic we discuss a lot internally, and we concluded to keep this range based on the uncertainty in the market. And of course, that is related to the demand of ESL and then, I would say, particularly market prices of Telko. These are the 2 major drivers, which very much impacted the Q2 results as well.

Joonas from Evli. Perhaps a question concerning ESL and the long-term investment opportunities around the Baltic Sea. So these are to happen over the years, sometime in the future. But have you already identified certain specific new customer accounts which could drive volumes? Or are there maybe like certain ports which could drive significant new cargo volumes? Like for instance, in Finland, there's at least Kokkola, which is already confirmed to receive like many billion euros worth of new investments.

You're very right. So this is a kind of strategic outlook, which will happen gradually over the next, let's say, 10 years. And it's very valid when it comes to the steel industry, producing fossil-free metals and, I think, also very valid when it comes to the forest industry, investing a lot more in production capacity. And there, we've seen some tremendous investments already over the past couple of years. I would say the Northern Bay Area is extremely interested from this ESG perspective. And based on our calculation, there's really kind of a significant -- the market upside will [ work on ] a multifold. And there are new customers as well. There are some new investments, which makes kind of new entries into the market. And then, of course, we also had the opportunity to expand our share of the market. So all in all, extremely interesting opportunity for us. Particularly if you compare to the situation a couple of years back, when there was the question that, hey, to what extent will we have, in the Nordic countries, production of mass industrial products, and now it's very clear that this will be a significant production going forward and a growing one. So that market, as in our mind, changed entirely. And we see that for -- demand for fossil-free transportations are extremely significant, considering the investments that the industry is doing.

Maybe a related follow-up question, do you think the kind of the Baltic Sea port infrastructure is basically already there in place for you, i.e., you wouldn't need any new port investments to help these volumes? Like, for example, I think there's been only like -- I think in Luleå, Sweden, they are deepening the harbor. But at least it seems to me that the Western coast of Finland or the whole coast of Finland is pretty dense with ports. So do you think the infrastructure is basically already for you there in place and shouldn't need really any more, those kinds of -- any new ports or any port investments, any deepenings and stuff like that? So...

I don't see any need for new ports, but I see a lot of need for investments in existing ports. And Luleå is a very good example. Kokkola is another good example. And of course, that will facilitate the growing volumes.

Maybe just one little detail related to Telko. So you mentioned these Asian imports. Did they only mainly affect the plastic business? Or were the chemicals and lubricants businesses also affected by these Asian imports?

I would say, primarily plastics in the current situation, but there are certainly some chemicals as well. This is only 1 driver. I would still come back to the fact that the 2 main drivers, 1 is the price development of plastics and particularly volume plastics to the lesser extent, specialty plastics. And it's, of course, very related to the overall GDP development and particularly construction in this case, which is a really soft market currently.

Sauli Vilen from Inderes. About labor and in the report, you stated that you are considering possible for acquisitions and also possible divestments in Leipurin. Can you open that up a little bit more?

First of all, I would say that we have a very good opportunity to grow organically. And just to give a bit of understanding of that, for example, in Sweden, we are mostly present in the artisan bakery segment, and there's good opportunities to expand into industrial bakeries and into the food industry. We're -- you're aware of the fact that we divested Vulganus. We're very much looking at the business portfolio to kind of get the very focused and -- business which is focused on such segments, which will provide us with growth. So bakery food industry and anything beyond that, so is questionable. No decisions taken there. When it comes to possible acquisitions, we're clearly only looking for such acquisitions, which would have clear kind of synergies -- add-on synergies with the current businesses. No kind of new markets which we are considering, which wouldn't have these type of synergies.

Then about your ability or also maybe an appetite to continue the current serial acquirer strategy at the moment since, I mean, well, your balance sheet leeway is fairly limited. You could say that the industries have continued to rise. And obviously, now your cash flow is also squeezed kind of a bit due to the market environment, which is foggy, you could say. So I mean are you still like pushing full throttle ahead with the serial acquirer strategy? Or how you see this?

I think it's a twofold answer. So if we look at entirely new businesses of Aspo, they are not our current primary focus. But if we look at Telko compounding, it's clearly a top priority of us. We want to be part of this market, light balance sheet, good margins, fragmented market. We see an opportunity to take a really strong position in Europe when it comes to specialty products. So that one, we will not abandon. Any further questions on the line?

[Operator Instructions] There are no questions at this time, so I hand the conference back to the speakers.

Thank you very much for attending this financial reporting of Aspo and looking forward to keep on the good dialogue. Thanks.