Lamor Corporation Oyj (LAMOR) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Lamor's Q1 webcast. My name is Johanna Gronroos, I'm the CDO at Lamor. And together with me, I have our CEO, Mika Pirneskoski; and CFO, Timo Koponen. We will follow the normal webcast agenda, starting with the operational highlights, which Mika will present, continuing with Timo's financial update and guidance. And then we will talk a couple of words about strategic initiatives and where we are going with those initiatives currently. And then we will close this normally the session with Q&A. So please provide us questions, so we will answer those as well during the webcast. So starting with the operational highlights. What would you like to highlight? How are our big projects proceeding? And what are the main steps taken there?

Okay. So if we start with the alphabetical order and start with Bangladesh, I mean we disclosed the other H2 last year, had some progress early in the project and then everything has been continuing as planned. We don't see any potential risk for delays from our perspective in that project. But then again, I mean, it is in developing countries and includes certain infrastructure being built in the country. So in the final stage is the commissioning could take a little bit longer than expected, but that shouldn't affect our technology deliveries at all. Then if we move towards Kuwait, Q1 was a significant milestone for us. We completed the enabling phase in time. We've started the remediation work already. We've done significant progress in transporting the contaminated soil to our treatment centers, and Q2 will be the first quarter where we will actually do some of the remediation activities. And then Saudi Arabia, finally some good news from there in terms of receiving some of the money. It didn't come as early as we had hoped for. So it was a couple of days after closing the quarter, but altogether in terms of Saudi Arabia, things are in maintenance phase. We are seeing a lot of progress in terms of the working capital situation there. So all going as planned.

Good. Then we've been talking quite a lot about the chemical recycling initiative. Any short update will go into the details a bit later.

Yes. I mean, exciting times ahead. We've done a lot of work this year. I mean, we did the first closing -- in the closing days of 2022. A lot of progress has taken place since. And hopefully, in the coming weeks, if not months, we'll have some super interesting things to share about that as well.

Excellent. Then a couple of words about the revenue, profitability and the guidance. The revenue was significantly lower compared to last year. What are the stories behind it?

Yes. And that is completely true, and I don't think we did ourselves any favors last year because of those 2 spills in South America. So it really set the bar super high for -- especially for quarter 1. I mean if you take away those EUR 29 million in revenue from Q1, I mean, you can still clearly see that we are on a growth path in terms of our base business. But then at the end of the day, I mean, these emergency response operations, they are part of the business -- and the tragic part from an investor perspective is that you can't really forecast when they take place. I mean what we need to ensure is that we have the organization in place, we have the capabilities in place, we have the assets in place to act when something goes badly wrong. So from that perspective, we are still going in the right direction. And to be frank, and I try to touch upon this, at least, in the analyst interviews last year that we'll probably see a slow start of the year, and then things will pick up towards the end of the year. And then if we go to the second part of the question, it seems that I'm a man with many words this morning. So -- as discussed already in the full year '22, we made significant investments in scaling up our resources, being ready to deliver our long-term financial target. So that can clearly be seen in the increased fixed expense level. But then again, I mean, it was calculated. We have great potential in our key markets, and we feel that is justified. And frankly, reporting quarters is probably not beneficial for our business, but it's part of the game. So more can we do.

Any comments that you mentioned about the long-term target? Any comments about the size of the sales funnel currently. How is it going?

I need to be careful here not to disclose too much, trying to comply with the rules and regulations. But I mean, I can safely say that the sales funnel is larger than it's ever been in our history. And we did the strategy update last year. We changed our operating model. We invested quite heavily in local presence in terms of BD and sales functions. And we are really seeing the benefits now already 9 months into this project. So very confident about the people that we've recruited. Very confident about the sales pipeline. But then again, I mean, we are in large-scale business with customers that are either large governmental organization, international -- large international companies. So in most cases, it is a tender process, and we have some past experience now in the large scale, but in the smaller scale that some of the competition will put so low prices that is not feasible for us. Then again, when the project size goes larger, we tend to see that a lot less. But then again, I mean, tenders are tenders. We have quite a nice track record on that front from the previous few years. Then again, we've now started having a larger portfolio of tenders that we take part in the past. I mean we had very limited resources. So we had to select very carefully where to tender, where to play. But now as we take part in more tenders, I mean, I don't think we can continue with our 100% success rate until the end of day. So probably there going to be some losses. But with this sales pipeline, I'm quite confident that we'll be able to win some of them. And hopefully, the most important ones.

Excellent. Then moving on, quarterly development of the revenue and adjusted EBIT. Please comment maybe starting with the highlights relating to the revenue and adjusted EBIT for the first quarter.

Yes. So if we look at the revenue, EUR 22.8 million for 2023, then we take away the EUR 29 million for the 2 spills in Peru and Ecuador, we are still on a significant growth path. And if you look at the time series, we can clearly see that Q1 was heavily impacted by those 2 spill projects. Then for Q3, we made some significant progress for the enabling works in Kuwait, especially in terms of building the treatment centers. We started to equip them at that time. So that drove the revenue up a little bit because of percent of completion, revenue recognition principles. Then Q4 and Q1 this year, I mean there isn't much difference. I mean some of it is obviously timing, whether it's at the end of the quarter or just before the closing. Then again, if you take away these single incidents, if you like, that drive the revenue up and down, there is a trend in terms of the basic business and its upwards.

And basically, you're saying that also going forward there will be ups and downs in this kind of quarterly follow-ups?

Yes. And like I mentioned, I mean, we are still partly in incident response business. And if we have a significant event, it can drive the revenue up pretty fast. But then again, I mean, if you look at the base business, we're looking to increase the volumes gradually. But then again, I mean, in terms of Kuwait, for example, the treatment process is cyclical. So we estimate its treatment cycle will take approximately 90 days. So how that treatment cycle will then be timed. It could drive some fluctuation. But all in all, I mean, that we see that the trend is upwards and, of course, with the potential that we have in our sales funnel, we hope that we will have a larger portfolio in the future that will then drive down the fluctuations.

Good. Then moving on to the chemical recycling initiative. You opened up a bit where we are currently, but can you describe a bit more in detail from operational perspective. What is actually happening?

Yes. And I think -- even though we've been building treatment facilities in the past, it's been typically a different type of business model where we have, first, the way streams secured by the client. Then we build the facility or design the process, build the facility and start operations. And then again, I mean, this business is a little bit different. I mean, it is a value chain business. I mean, you have different players in the value chain and we start with the collection part. Then you have the logistics part, then you have sorting, or you could have mechanical recycling before the sorting. It depends on the type of operation that you have. And before -- after that, you have the chemical recycling and then you have the offtake for the end product. So the business model is a little bit different. And I think when we went into this project, I mean, they were some lessons to be learned for us, how to build the business case. We've done significant progress on that front. We've modularized the design. So currently the proof point is such that it can be replicated. The proof point is such that it can be scaled up pretty easily. So I think the team has done a marvelous job early this year to really build a very nice blueprint of our facility and how the value chain will look in the future.

Any other like concrete actions taken that you could open up?

I mean, we've finalized the process design. We changed quite a lot of the tech providers that had originally been chosen. We invested a lot more in the pretreatment part of the process. Then we -- for the chemical recycling technology, we went with the European manufacturer at the end to be sure that we comply, for example, with the EU emission regulations and EU taxonomy on a broader scale. And then again, I mean, looking at feedstock and offtake, we've made some significant progress there. And hopefully, we'll be able to disclose a bit more information about that in due time.

Any red flags you would like to raise for what comes to the plastics initial?

I'm not the best person to talk about red flags. I mean my glass is always half full. Of course, it is a new business with a lot of caveats. But if I look at it from sort of the downstream perspective and if I look at the investments that some of the petrochemical industry -- players in the petrochemical industry are doing. The indication in terms of the price development of the end product, I'm really encouraged. There's a lot going on. There is some estimate that the need for this type of raw material in petrochemical industries is a minimum of 10 million tons by 2030. So a lot is going on in this industry. And partially the reason that we sort of jumped into an ongoing project, this is to get the first-mover advantage here in Finland. Try out our distributed liquefaction, idea or a solution. And then take that to our strategic markets.

You mentioned about this facility in Porvoo to be the blueprint factory. What are the plans for the next steps?

Yes. So in the first phase, I mean, it is a 10-ton capacity. But as mentioned already, I mean, the design is such that if we find a suitable raw material, if everything goes as planned, we can pretty easily scale up that volume there in Kilpilahti. Then again, I mean, as communicated earlier, the plan is to build a 40-ton capacity here in Finland and AD centralized 40-ton capacity. The other location is still under discussion. We have few ideas. But we are quite confident we really see the need. And if we look at the pickup perspective, and if you look at what everybody is trying to achieve in terms of plastic waste is to increase the recycling rate. And basically, increasing the recycling rate will require a combination of both mechanical recycling and chemical recycling and potentially other alternative technologies as well. And it is very much in the scope of all plastic producers, all the plastic users that the recycling rate will go up. So the market trend is super positive from our perspective, and it seems to be strengthening in every week or every month.

Good. Thanks for the update. Then about the soil remediation projects in Kuwait. Any, so to say, highlights, what is ongoing? You open it up a bit already, a bit more indeed.

So of course, we already have 500,000 tons of soil in our treatment areas. And on paper on a slide that might not seem like a lot, but it is quite a few truckloads. It is quite a few biofuels. It is a lot of soil to be treated. So amazing achievement from our team, first of all, to finalize the enabling phase in time. Our project there in North is ranked #1 among all the projects. So super happy with the performance of the team there. Some catching up to do with our sales team, but we are doing the best we can to create a healthy internal competition in terms of performance. And as said, I mean, we expect the progress to speed up this year. We are quite confident about the technology choices that we've done, for example, in terms of soil washing. So all in all, I mean, super happy with the performance of the team and then potentially some positive surprises in terms of progress for this year. Inshah'Allah, as they say in Kuwait.

Maybe a small question and with a short answer. About the technologies we are using. We're talking about bioremediation and soil washing. What does it actually mean? With a short answer.

A short answer. So bioremediation is basically that we enhance the biological capabilities of the soil to treat itself in a way. So what we do is that we add nutrition. We add some moisture and we've designed a bacteria population to degrade the oil. And if you look at that alternative compared to any other technology from, for example, emission perspective, it is a lot more environmentally friendly. A lot of the emissions will be absorbed by the soil and used by the bacteria. So the emissions are super much lower than in any other technology. In terms of soil washing, what we've seen from the competition, I mean they've gone with sort of a small-scale modular system. We went with maybe the roll choice of the market paid a premium, but we believe that it is the most robust soil washing technology available. And I'm super confident that it's going to work wonders there.

We talk in our strategy a lot about having the anchor contracts in certain countries. Kuwait for sure being one of them. Anything you would like to share what comes to that?

Yes. Of course, I mean these Kuwaiti projects are really, I mean, flagship projects in the environmental solutions market at this moment. So, of course, for our brand, it's been super helpful, especially with KOC. And we are already seeing some traction there. So following our strategy, winning an anchor contract, establishing ourselves and then utilizing the position to cross-sell.

Good. Then we'll move on. Thank you, Mika, and then we'll move on to the financial update and guidance, and Timo will continue. So first of all, some key figures, what would you like to bring up from these figures for this quarter?

Yes. Obviously, a lot of it was already kind of explained and elaborated by Mika, but if he picking up the obvious ones, the revenue, EUR 22.8 million for the quarter. First of all, that was very, very much as we had planned it. And obviously, the big point there is to, when comparing to a like-for-like basis to last year, then we have to really understand the big effect by those to -- emergency projects we did EUR 29 million should be taken out. So in that respect, no surprises. But of course, when looking at the percentage change, that's a big mover. And then obviously, that falls down into the EBITDA and operating profit accordingly. And the double effect we have in EBIT, obviously, is that since the volume is relatively low, then the relative share of the fixed expenses, which was also elaborated or earlier is higher. So kind of that highlights or magnifies the effect. Other than that, no big things there. Obviously, when we look at the number of employees, for example, at the end of the period or average and look at it at the comparison period. Once again, we can see the big magnitude we had a year ago. And the growth we have had in the number of employees, now since the year-end is relating to Kuwait, which is now really picking up in terms of the soil remediation operation.

We have the revenue split on the picture as well. We don't actually have the comparison compared to previous year. But any comments about that, Middle East and Africa being now the biggest one on the graph and it was completely different when we have a look at the Q1 '22.

No, yes. Now the revenue is driven by Kuwait, Saudi. Bangladesh is picking up. Those are the big movers there a year ago. Obviously, both Peru and Ecuador made the graphs being Americas heavy. So that's the big swing as we have elaborated.

Good. Then moving on to the order backlog and order intake. What's the message here?