Lamor Corporation Oyj (LAMOR) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Lamor's Q4 webcast. My name is Johanna Gronroos and I'm the Strategy Officer at Lamor. Together with me, I have our new CEO, Johan Gron; and our CFO, Timo Koponen. And as normally, we will walk through our operational highlights, which Johan will walk through, then we will have a look at the financial update and guidance, and then we have -- talk a couple of words about our next leap, so what we're doing, what comes to the strategy implementation. Then the most important part, so Q&A, please send us questions, so we're happy to answer. But let's kick off with the operational highlights. Please, Johan.

Thank you, Johanna. And welcome also on behalf of myself. And I would like to walk through a couple of things regarding our operational highlights during last year. Some key takeaways. As we all know that we have pretty large projects ongoing around the globe. And the performance have been outstanding in the projects during the last year. For example, the soil remediation project in Kuwait. We have to be a little bit proud here because this is the world's largest operation in its own kind in respect to soil remediation that we're operating now at the moment. And then the environmental protection services that we are building up with governmental partner in the Kingdom of Saudi Arabia, which is also quite outstanding and unique from its own perspective. And then the third very interesting project that we are also operating at the moment is the port waste management facility that we are building up in Bangladesh. This is quite unique also from the perspective that we are providing environmental protection technology for the port services, and we will also have a port waste management facility at -- in the port area that will take both solid and liquid waste that is generating on board of the ships that are coming into the port. And then one of the other interesting projects that we are running at the moment is the plastics recycling facility that we are now constructing in Kilpilahti outside of Porvoo here in Finland. This is the first of its kind. We have now -- the plant itself has been erected. And now we are proceeding with towards the end of the year having a commissioning of the facility, but I will come back to that a little bit later. However, the geopolitical situation is challenging in the key areas where we are operating at the moment, which have also had an impact on the situation during last year. People is the most important asset of our company. And we are very proud to say that during last year from February until the end of the year, we were able to operate with up to 3 million safe working hours throughout our organization. And then we will come back to the financial numbers a little bit later on. But just to point out regarding the revenue comparing last year to the previous year, there is a slight reduction in that. But we need to take into account that, let's say, incidents like the Peru and Ecuador oil spill events that were highly impacting the outcome of 2022, we did not have such -- in that same magnitude such activities in 2023, so this was based most on the operative normal activities. To give you a flavor of what is happening in the major projects inside of our company, this is a very illustrative picture of one of the operations or one of the projects. There are 2 sites in Kuwait that we are operating. Here you can see the biopiles, the lines that goes in the upper part of the picture. And then you can see a smaller blue part that is the soil washing plant that is being erected at the moment. So there are 2 different technologies that are being used in our project in Kuwait. The bioremediation where we are growing, developing our own microbes, local microbes that are being used to degradate the hydrocarbons that is in the soil. So for a lower hydrocarbon level, then we are using bioremediation and the microbes to degradate the oil in the soil. And then for the higher content, oil content or hydrocarbon content, we are then using the soil washing plant that is separating water, oil and then sand from each other. So this is a quite unique and a large operation. Just to illustrate the size of one of the sites so that the treatment size is at the size of 1 kilometers times 2 kilometers in area. So it's a quite large operation from that point of view. And now the soil washing plant, that is the second part of the operations here is then being commissioned until the end of last year. So now we have the full operations in both sides. And as I said earlier, this is the world's largest operation of its kind. And we are very proud of being able to operate this together with our partner in Kuwait. And then same thing here, 1 million safe working hours achieved in January, just in January. And at this point, roughly 25% out of the total mass have been treated in these -- together in these both soil plants that we have in Kuwait out of the close to 7 million tonnes that is available for us during the 2 remaining. So 2 remaining years to reach up to 6.8 million tonnes. Then a glimpse of what is happening then here in Finland. The Porvoo pilot facility for chemical recycling of based plastics is progressing as planned. We have completed the groundwork, we have completed the walls, the roof of the building and now progressing towards receiving process equipment and then starting to proceed towards the commissioning of the plant in the second half of this year. This is a unique approach that we have here, and we are a part in the value chain that is then generated, recycled oil for the petrochemical industry. And here we are working together with our offtaker, that is Shell, and then making sure that they will get an oil raw material that is also certified. And this is then the first step. The pilot facility will now be ramped up, then proceeding towards the medium term, with 40,000 tonnes capacity in Finland and then on the longer term, then being able to ramp up to 100,000 tonnes of waste into the facility by or within 2026. Some other highlights of the year. We're very proud about the -- I mean, in November, we -- then moved to the NASDAQ Helsinki with our shares. And the top picture here is from the celebrations of that event, that is a proud step on our journey. And then in December, we had a shift in the management of the company, where I then stepped in as the CEO of Lamor and then joined by Johanna as the Chief Strategy Officer. A couple of other highlights of the year. We are also very proud that, for example, we got the second agreement now together with EMSA. And EMSA is the European Maritime Safety agency that is then operating in total 5 sea equipment assistant service stockpiles around Europe from the Black Sea, Mediterranean, on the North Sea and then in the Baltics. There are 2 different stockpiles in the Baltics. And we are operating one in Finland for the northern part of the Baltics and now the North Sea stockpile will also be in our hands. This is not only a stockpile. We are also providing services then to train technical assistance with the technology and then maintaining the technology that is then in these stockpiles. So a very proud moment to be able to be honored with having the trust and working together with EMSA around this. Then we also had an incident in the later part of -- or during the -- towards the end of 2023 where we conducted an oil spill cleanup operation in the Andes together with then local partners. And this is, again, an example of that we are operating in many different conditions around the world, you could say, from jungles, deserts to the Arctic, and that also shows the breadth of our expertise and knowledge in being able to cope with incidents, plan for incidents and support our partners then in these -- during these conditions. And then most of our order intake during the last year consisted of environmental protection technology sales, which is a very important part of our business and continues to be so going forward. As a part of our change and our I mean making sure that we have a larger focus on our operations and also transparency throughout the organization, we have also done some reinforcement of the group leadership team. And new appointments that have now been put in place is that we have Juha Korhonen, who was the interim supply chain and project management responsible person in our organization will now be fully focusing on that area. In the beginning of last year, we also introduced the important market area structure where we have 3 different market areas. We have Americas, Eurasia and then Middle East and Africa. And Östen Lindell will now take the full responsibility for the Europe and Asia market here, and he will be operating out of China -- Beijing, China. So very proud to have one of the leadership team members also located in a very important part of the world and making sure that we are close to the customers and understanding their needs. Then I'm also very proud to say that we now have been able to bring on board Vesa Leino as the Chief Financial Officer as an interim role now in the beginning. And my colleague, Timo Koponen, will leave us in the end of this month. So the group leadership team going forward from 1st of March will then be myself, Johanna Gronroos, Timo Koponen replaced by Vesa Leino. And then the market area leads Santiago Gonzalez, Pentti Korjonen, Östen Lindell and then the functional support through Juha Korhonen and Mervi Oikkonen. Then Timo, your last review on the financials.

Thank you, Johan, and good morning from my side as well. Let's dig in.

All right. Let's start with the quarterly development. I would say that the picture looks quite familiar to us. So there are deviations between different quarters. Could you highlight what are the reasons behind this time?

Yes. The last quarter was the most active as we had anticipated already, nearly EUR 35 million in turnover, which also, of course, drove the profitability on a very nice level of 11.6%. And what is behind this EUR 35 million? As we have heard before and as we said before, Kuwait, of course, has been the main contributor for the whole year and also is behind those numbers. Bangladesh, Saudi, those usual suspects. We had also a very busy quarter when it comes to the smaller equipment project deliveries, which was highly contributing. And then the oil spill in Ecuador, as Johan already mentioned, was also falling into that number.

Good. If we then move on to the order backlog, slight decrease and orders received EUR 44 million for the whole year '23. Any additional information relating to that?

Yes, of course, the shape of the curve is not good, that we all know. The orders received for the full year was a disappointment, which we have been very open about. And I'm sure that, that will remain in focus also going forward. Having said that, of course, the order backlog is still on a good level, EUR 124 million, out of which roughly EUR 80 million is for '24 revenue or deliveries. So it still gives a good basis for this year. But as said, order intake has been disappointing, and we have said that the geopolitical challenges and political unrest, for example, in Latin America has clearly impacted our business.

Then a couple of words about the whole year numbers. So whole '23 revenue, adjusted operating profit, anything specific that you would like to summarize what comes to that...

Yes. For the full year, the revenue EUR 122.5 million, which is 4% lower than the year before. Maybe an interesting factor there -- fact there is that if we look at it at the comparative exchange rate basis, the decrease would be only 1.5%. So nearly on a similar level to a year before. Adjusted operating profit, EUR 10.9 million. which is down 13.2% and on a total year -- whole year basis 8.9% of the turnover -- revenue, still comfortably in the guidance as we have seen. But of course, a little bit lower volume also hit the profitability all in all. What comes to the earnings per share, that is down by 27% and there, especially the financial expenses at the end of the year were burdening us, Johan already pointed to list the [ chains ] project that we did in the last quarter. We also have to remember that there were arrangement of the green bond earlier in the year. And all those, of course, are one-off costs that been hitting the finance cost. And then, of course, the increased debtness is also having an impact there.

Good. Then a couple of words about the revenue split. We have used to provide information about split hitting the revenue between areas and between solutions, meaning equipment and services. Now we also have the product portfolio split presented here. Any comments about these graphs.

Yes, maybe highlighting from the left, first of all, at Americas, which we have said before, had a very challenging year last year. And as already mentioned a minute ago, the political situation in many of our key countries there, was very, very difficult, which also shows up here. We did not manage to get the orders that we were -- had been anticipating there. So that's the highlight there. And of course, the Middle East and Africa having the Kuwait and Saudi in a very big role in the area was clearly the dominating one. What comes to the solutions split, as we call it, no surprises. This is what we have said from the IPO onwards that this is how the balance will look like. There are some fluctuations depending on a period or year, but the overall picture remains the same, services are driving the growth. But then as you say, the new [ craft ] product portfolio split, which obviously also reflects much better our strategy, the focus areas as we see it, no surprises once again, environmental protection, the conventional bread and butter business, good portion there. And then the material or remediation and restoration Kuwait most of all. Maybe an interesting factor there, the material recycling which, for example, includes the water business. And port waste facility that Johan was also mentioning an area which we see growing, but still on a modest level when looking at the total picture.

Good. Then employees -- number of employees at the period end was actually 840 million, whereas the average was EUR 658 million. Any explanation there?

It's maybe a good reminder for all of us that we have a quite significant fluctuation from period to another -- and this year-end number was once again driven by the Ecuador spill where we hire operators into our books to do the cleanup and it might fluctuate rather significantly from period to another. But all in all, the full year number, of course, once again, Kuwait has been the main explanation there. So it's a product-driven number to a high extent.

Exactly. Then working capital remaining on a higher level. Could you describe the current status and any update about what is expected?

Yes, yes. Am I happy with it. No, I'm not. But this is what it is. As the header says working capital still remains on a high level. The positives out of it is that Kuwait, which is the main contributor in this -- there actually hasn't been an increase from end of quarter 3 to end of quarter 4. So the working capital has remained exactly on the same level, which indicates now that the turn has finally taken place. And also the upper part there contract assets. Maybe it's good to remember that, that also represents a very significant cash flow when the invoicing starts to catch up, which is -- has now started happening. So that is -- of course, still too high when looking at it at spots, but it will come home, as we all know. And also an indication of that is the positive cash flow for the quarter 4 despite of this transaction and mainly the cost that we also discussed earlier. Financial position continues to be a very solid equity ratio at 40% and net gearing 60.7%.

Good. Then guidance for '24.

Yes. This, I'm sure, is an interesting slide for many of our followers. What we say about the '24 is that we estimate our revenue to be at least at the same level as '23. But then instead due to the uncertain market situation and uncertainty regarding the schedule in the large orders we are taking part of -- we do not provide any guidance for the profitability.

Good. Thank you, Timo, for the update. Then a couple of words before going to the Q&A session about what are the plans going forward, how we focus on our strategic targets within the coming months and I would say years as well. Moving on to '24. We are a main listed company and now, of course, really focusing on building a strong team who are committed to work towards the cleaner world and working with clear performance targets and follow-ups around how we perform. We have made and are making investments in our shared culture, making sure that everybody knows how to work at Lamor. And what is our culture all about? This is all about people, everybody needs to be committed and enthusiastic about our targets, and we are working about communication and integrated way of working even more than earlier. As mentioned several times by both Johan and Timo, there are major tender processes ongoing in our key markets and, of course, awaiting decisions on what will the outcomes be currently, unfortunately, not there yet. And then, of course, sustainability is the key in our strategy. So we are trying to make this world a better place, and that's our goal still, but of course, with profitable business models as well. But the business and market as such, it is increasing, it's not decreasing for our business. That's for sure because everybody is interested in how we are doing with the climate change and pollution prevention for instance. Then a bit about the -- what -- from a practical point of view, what we are focusing on and what we think we should have for the next growth leap that we are looking for. First of all, we aim to have a really clarified growth path with systematic execution. What it means, it means that we need to have focus. We need to make sure that we invest in the right tenders and projects. There is a huge amount of opportunity out there, and we need to pick up the right ones to make sure we are able to win them as well. We are -- as I mentioned, when it comes to the culture, I think it's heavily linked with the integrated way of working. So working together as a Lamor team is something that we are heavily working towards with and then, of course, we need to have a performance metrics, how we measure as well, how we perform as a team. Professional focused performance, I guess that's quite a given fact that's something we need to have. So performance is, of course, on top of everything. And I will say that what is linked to that is that we need to have financial discipline and cost efficiency in place as well. And on top of that, a well-known brand and a clear equity story, we have unbelievable references. Now on the table, we must make sure that everybody is aware, what we are doing and what Lamor brand actually represents both for us Lamorians and also for other stakeholders. And here, we have a 3-year path written on the slide. It could be longer, but now it's a 3-year path guided and controlled growth. We start with that one. We measure it continuously at least on a quarterly basis. We continue with the market expansion but starting from our existing markets where we already operate. And then, of course, making sure that the market scalability, which we also have been talking about since our listing to the first north, that is, of course, something that we are heavily looking for, having the repeatable and scalable global business in place. Then Johan, what you would like to summarize something around this strategy slide?

I think that the foundation itself has not changed. It will not change. This will be based on shared -- strong shared values, the passion for the industry that we are serving, the innovation that our company has been known for over the history will still be in the core of our values. And then also trust, as was mentioned earlier too, that references is the heart and the bread and butter of our business. And here, that is based on trust. And that is what we have built up now during the for 3, 4 last years with the large projects and now being in place and something that we can really show with us with being very proud and being able to show the customers around the globe. And what we are living inside of our company. We've been a response company. So problem-solving culture, driven by a strong sense of purpose, that is what is energizing the people inside of our company. So this is something that we will build on going forward, having sustainable solutions, an integrated way of working. And also increasing capabilities and competencies to be sure that we can deliver and again, build trustworthy references to be able to go forward. And with this, I would also like to thank our personnel, our partners and also our shareholders for the strong support during the past year and looking forward, working together with you all and making sure that we bring Lamor and also that we continue on the journey towards a cleaner tomorrow. Thank you.

Thank you, Johan. All right. Then let's move on to the Q&A. There are quite a many of the them. So that you know -- all right, starting with the order backlog. At the end of '23, order backlog for '24 seems to be somewhat lower compared to what it was for '23. And what gives you the confidence that the revenue in '24 will be at least on a '23 level. So even though the part allocated for '24 is lower.

Yes. Now of course, the confidence is based on what we know is happening out there. I mean we have a solid track record on year-on-year that we are able to turn in and out certain amount of business, which mainly relates to our equipment sales in [ one ] of the protection area. Then on top of that, we are serious about these tenders we are participating in. And of course, there is quite a strong indication that we will have a good progress on them. So it's a combination of these facts and plus, of course, the EUR 80 million that is lying there in the books already.

Good. Then could you talk more precisely about your view on the tender processes that are expected near term and the potential impact on revenue and the EBIT margin in '24.

I think that what was mentioned by Timo here is that we are -- at the moment, we are working very faithfully together with our customers on large projects and the tender process are in a certain stage, and we know what is happening in the market. Unfortunately, there have been delays, but also the geopolitical situation at the moment could be somehow a risk. But on the other side, it's also supporting the type of business that we are -- or the type of services that we are providing to the customers around the world. It was mentioned about the southern part of -- or South America and also in the Gulf region. And we all know what the situation is there.

Yes. And when it comes to the profitability part, obviously, since we know that the swings on the top line might be rather significant, and then it's very hard to fix the bottom line, and this is why we have left it open at the moment.

And also that what I forgot to mention in the presentation is that what we do in Kuwait that before being able to treat the land masses, you need to clear the areas from unexploded explosives. So that is a big part of the work that is being done there. And this kind of situations, there is not a lack of that around the globe, as we all know.

Major tender processes have been discussed. There's another question relating to that. But maybe as a continuation to that, still just a clarification. Have they been postponed those tenders? Or did Lamor lose these?

We have not lost large project tenders. There has been postponement in the time schedules. And we all know that, that is -- that can be the situation for large projects in whatever industry we are talking about. But we have not lost, and we have our fingers on the pulse, and we know what the situation is in respect to these areas.

Then we mentioned the cleanup operation in Ecuador, the current one, which started late '23, how much revenue is expected from that one. So basically, overall size of that incident. And then so to understand how is it impacting '23 order backlog, for instance.

No, it is not impacting the order backlog. The cleanup works have been completed there. Actually already in end of January. So it's gone. And of course, whatever revenue that generated will be reported then on quarter 1. And as said [ it accord ] late November. So the first part of it was visible in the '23 full year revenue and also in the last quarter, as commented.

Good. Would you consider raising interest-bearing debt in '24?

As I said, we have a very high level on our working capital still and the contract assets, if I still remind everybody what is it all about. It's all about the difference or lack of invoicing compared to the physical progress of the works, and that is mainly in Kuwait. So we have invested to the treatment sites, all the infrastructure equipment, and we get paid by the clean soil. And that is how the contract has been constructed. And unfortunately, we are acting as a bank there. But on the other hand, our lender is rather credible. So the money is coming in, but this is the way the contract has been constructed.

Then one more question about the EBIT margin estimate for '24. Could you elaborate the main uncertainties? I guess, Timo, you already raised quite a many of them, anything you would like to add?

No, it is really related to the revenue. And we are in no urgency to take projects, for example, under our own criteria. So it is not about that. We see that the opportunities are there just that, okay, we are not able to define at this moment, the timing of the awards and then what will be the effect for '24 turnover or revenue.

Then we are talking quite widely, of course, in the financial reporting about risks. And the question is quite relevant. What is the most significant risk for Lamor in '24?

I would say that the geopolitical situation at the moment is quite plenty-fold, where we were talking about -- then about South America and then the Gulf region and overall. So that is something that, I guess, for all of us is a situation that is very hard to control. But on the other hand, it's also for a company like we are representing -- it's also an -- how do you say, an opportunity. Be careful and that it's very hard to predict then how it will go. So I would say that, that the geopolitical situation is something that we need to monitor and stay very close to.

Then about strategy, what is the most important strategic target for the group in '24?

I think that what has been pointed out and every all the way from mid-December is the structured way of dealing with our operations around the globe, that is something that we will put very hard and very strong focus on. That goes to us what pointed out earlier that how projects are structured, how to make sure that we are on top of the situation in respect to both technology sales and service sales. And then also to make sure that the Lamor team stay on top of the situations and have the needed information about where we are and where we are going. So being more transparent inside of the organization.

Then there was a question about ESG initiatives for '24. How you're planning on launching on any new group-wide ESG initiatives? I guess I can take that one. So the plan is, of course, we will launch our sustainability report early March. And yes, there will be new targets, I would say that we are already taking a bit hint about the double materiality in our reporting and it supports us heavily in setting targets for ourselves also from a sustainability perspective. Of course, climate change mitigation is something that we need to -- or will continue to work with. And the good thing is that many things that we do and provide solutions are actually mitigating pollution and mitigating climate change in that sense. And the targets are also linked to those on top of what is really important for us is the social aspect. So human rights, anticorruption is always on our ESG agenda, will remain to be one of those in '24 as well. good. Then how do the rising interest rate environment affect Lamor's business in general?

Now as we have said, that is one of the risks on the financial side. If the interest rates would still rise up. Of course, we have a green bond, EUR 25 million with the fixed rate, which we know the outcome for and then the bank loans are, of course, more on a flexible basis. There is not going to be a significant change in that. And of course, the expectation, I guess, still is that the rates would go down at some stage this year. So...

And then continuing to that one, are you satisfied with your current capital structure? Could we see moves at least...

No, I think as we commented, was it in quarter 3. Now the balance starts to look more normal with the right size of the long money and the short money, I wouldn't see any moves on the short term at least.

Then about technological innovations. Could we see new technological innovations from the group in the near-term future?

I think that we have a very good example there in front of us that the plastic recycling activities that we are doing at the moment. This is an emerging business overall, that is now being driven very hard by the need for blend in of recycled oils into the petrochemical value chain. That's only one of them. But then also, I would say that -- and talking about innovation, what we're doing now in Saudi Arabia, we are including the customer, we are including the whole Kingdom in working together with us to set up or we are working together with them to set up a response and preparedness system for along the Red Sea coast. And then we will see what the future will say about the rest.

Good. 2 more questions. We talked about the geopolitical global tensions and risks relating to that. Do you take risk management actions to manage these risks?

Yes, of course. We look at the risks. And as said earlier that people is the most important asset in our company, and we want to make sure that we have the safeguarded personnel and also the operations on a long-term basis. So we are looking into it. We are evaluating very carefully before taking steps.

Good. And then the last one. On a general level, what are your customers saying about the current market environment? Are they more careful about spending?

Again, it depends. When thinking about the geopolitical situation at the moment, there are certain must-have things that we see that is creating a lot of interest. And that will not go away. If the risk situation escalates, then, of course, our services are needed. Whether we're talking about the Baltic Sea with huge amount of crude oil tanker traffic that is going through the Baltics and into the Gulf of Finland or whether we are talking about the Gulf area or whether we are talking about then, for example, the Panama Canal, where the drought is causing also risks in respect to the tanker traffic. So we are -- in that sense, our business is very interesting. And also when talking about cleanups, for example, the Iraq war legacy that we are now cleaning up in Kuwait. This is a huge operation that we are driving at the moment, and it creates a lot of interest because the areas to clean up and due to certain restlessness or operations in certain industries will always be there.

Excellent. Good. Thank you for your really good and many questions, really appreciated. And then our annual report, as I mentioned, will be published on 5th of March. Thank you all.

Thank you.

Thank you.