Lamor Corporation Oyj (LAMOR) Earnings Call Transcript & Summary

Good morning, and welcome to Lamor's Second Quarter Results Webinar. My name is Tapio Pesola, and as of July, I'm in-charge of Communications and Investor Relations here at Lamor. I look forward to talking to all of you over the coming months. Next, together with Vesa and Johan, we'll be going through the results we announced this morning. We'll go through the highlights of the quarter, and we'll also discuss focuses going into the second half. Presentations will be followed by a Q&A. So feel free to start posting questions already during the presentations. With that, go ahead, Johan.

Thank you. First of all, thanks a lot for joining us this morning, and a very, very pleasant summer morning, at least here in the northern hemisphere. First of all, I would like to start off with -- give you a little bit of a glimpse of what happened during Q2 with a couple of -- or 3 different key takeaways. Our expansion continued in the Middle East. I think that this is a great example of our land and expand growth strategy has really been taking off and especially then in the Middle East, which is a good example of how we want to drive the business going forward. And here, Lamor then won a 3-year service agreement worth EUR 55 million. And then also we signed in -- signed a 4-month extension of the NCEC ongoing service agreement that we have in place. So good examples of, let's say, the trust in us, and also that what we talked about earlier that we have very strong references also that we are relying on going forward. The financial improvement from Q1 improved. However, the revenue is below our estimates for the target period. But still, I would like to highlight that now what we put in place during the beginning of the year, the next leap program has really given us an opportunity to improve the profitability compared to Q1 2024. And this is something that we are pushing forward and having a strong focus on the operational efficiency and also improving the profitability of the business. And this was said earlier too that this is very important also when we are then scaling up the business, and that's why the next leap program is in place really to create this foundation that we can grow from. The sales pipeline remains extensive. This has not changed. This is still the same situation, as previously. And that means -- I mean, what you can see is that the cumulative order intake during the first half of the year is greatly higher than in the comparative competitive period last year. And then Lamor is involved in and that we have been said earlier, too, is that the tendering process in several projects are continuing, and that's where we are heavily involved. And this is not only in one region, it's in all 3 regions that we are involved in. And as a follow-up to that, the guidance for 2024, we keep that unchanged. That means in accordance to the revenue, we keep it on the same level as last year. And then as a follow-up of that, the market situation and uncertainty, especially in the schedules of the large tenders means that we will keep the guidance also in -- throughout this period. Then as I alluded earlier that the land and expand strategy, what we've talked about in our strategy earlier is what you could say, globally local. And then to add to that is the land and expand, where the local presence is heavily involved -- is heavily dependent also on local partners or partner networks that we are tying up to us to ensure that we have the, let's say, the cultural and the local aspects involved in the activities that we have ongoing in the areas, where we are present. And then as an example, then the progress in the Middle East. We are talking about Kuwait same thing, land expand; Oman, same thing; and then also in respect to Saudi Arabia, where the key developments during the Q2 period, where we had in April, NCEC service agreement, 4 months extension, and then in May, the NEOM service agreement that we announced earlier. So globally local and then very heavily dependent on the partner network in these regions that brings the local aspect. And then, we have the global, you could say, the references and experience then for operating similar activities in different parts of the world. Some highlights from the -- in respect to the business during Q2 in our segments. So Environmental Protection, I talked about the service agreement in Middle East. I talked about the extension in -- also in Middle East. And then not to forget the rental and response center that we are housing together with the European Maritime Association and also -- is also hosting our rental activities and that we open now in the Netherlands. When we're talking about EMSA, EMSA has 5 different similar centers around Europe, and we are now hosting in Netherlands, the Northern Sea response center; and then in Finland, we have the Nordic Baltic response center that we're also hosting. Hosting means, training, equipment and capabilities, logistical capabilities to deploy the equipment that is involved in these centers, which we are very proud of and gives us then an opportunity to have a larger role in when we are talking about the response activities and whether it's then rental or other activities. Clean-up projects continues in Peru and Ecuador, and we are progressing on these -- in these areas. We have a strong foothold in respect to clean-up projects, where we're talking about drill cuts or whether we're talking about the land areas that are being remediated. And then technology deliveries, that is still the bread and butter and very important part of our whole activity. They are -- they have continued then with deliveries into Asia then, meaning Hong Kong and then in Europe overall. Then Material Recycling, Bangladesh waste management facility. We have the, let's say, the equipment is on site and the site is also ready for startup of the construction part. So good progress in respect to that part. And then the chemical recycling facility in Kilpilahti is now getting closer and closer to completion. I will take a deeper look at this later on in the presentation. So we'll -- let's keep that for that part. And then on other area that we've been announcing and talking about is the agriculture, our, let's say, entrance into the aquaculture market than with water treatment technologies. And the aquaculture market is quite a big market, if you're looking globally, it's close to $300 billion market globally. And then this is our niche, where we are trying then to be present in the aquaculture market and through then a customer, the Norwegian shipping company, Froy. Then if we're talking about the Soil Remediation and Restoration part, focuses on Middle East and South America in for the current period or during the quarter. In Kuwait, we are still ramping up the soil washing facilities, but we are at a very high operational level, but it's still some fine tuning that is required on that. And let's take a look at that a little bit later in the presentation. So -- and if you talk about operational, other projects have -- in the company has progressed as planned. The sold remediation in Kuwait. I mean, this is, you could say, a world-leading activity that we are involved in. And up to now, we've been treating 3.2 million tons of oil contaminated [ to ] different levels soils that have then been for the 3.2 million bio-remediated. And during the last quarter, it was 1.1 million tons that were treated. So quite good progress. And now we are starting to be at the level that we really can see what are the true costs in the project and areas that can still be optimized and gives an -- us an possibility to look at the historical data and looking forward. So this is in a very good position at the moment. The sole washing plants are in operation. The ramping up process has taken a little bit longer than anticipated, and that's something that we are working hard on at the moment. Then as I said, I mean, this is a unique reference globally, and this is something that is catching a lot of attraction around the globe because as we've been talking about earlier that areas to be remediated is present and similar type of, you could say, contamination of the areas, whether it's then chemical contamination or whether it's then oil contamination, same thing, similar type of treatment processes need to be utilized that. And that's why now we have a very strong reference with different type of technologies varying to tend to the varying contamination levels that is then in present here, for example, in Kuwait. And what you can see in the picture here that the different sections they have -- they are, let's say, divided according to the contamination levels and also is then getting treated in the right way. So that's a very, very strong push forward in respect to Kuwait. And then our plastic waste or the chemical recycling plant, a concept facility that we are now building up in Kilpilahti is progressing towards the completion and then start up during H2 or the latter part of the year. And the plan still remains here that 40,000 tons capacity material to be treated, capacity in Finland during the medium term and then expanding then based on the concept that we are now generating in Kilpilahti towards 100,000 tons of material that can be treated in this type of a facility. And then the exciting new area then, you could say that what we are doing here is we are providing the aquaculture industry with capability to treat water, that is then used to [ tend ] to the fish in the farmed area. So what we are delivering here to Froy, for example, is an in-built system [ in ships ] or in a ship, the first ship now to treat the water for the fish that is then being brought on board for removing parasites from the farmed salmon. And this is a market, a large market in Norway that also has its tentacles across the globe. So in that respect, it's a very exciting market. And now we are then in the installation phase of the first treatment facility in the first ship out of many for our customer, Froy. So with these words, I would like to hand over to Vesa, who will walk through the financial update.

Yes. Thank you, Johan. And let's start from something that you touched on already, actually, so the -- so the revenue and profitability and development from Q1. So our revenue grew by EUR 3.2 million from Q1. And just like we said in the end of Q1, when the revenue grows, as the costs are under control, it will have direct impact to profitability. And therefore, the first quarter profitability or adjusted EBIT of net sales was 0.5 percentage points -- sorry, 2 percentage points, it was absolute EUR 0.5 million, and that grew now to EUR 1.4 million and 5.1 percentage points of net sales. Total first half revenue this year was EUR 51 million versus EUR 56.7 million a year ago and then adjusted EBIT, EUR 1.9 million versus EUR 3.9 million in first half '23. And the adjusted EBIT margin accordingly was EUR 3.7 million versus -- 3.7 percentage versus 6.9 percentage. When looking at the numbers, I still want to highlight that during second quarter, we made an update to the Kuwait project total costs. In the total Kuwait project context, the update is reasonably minor, actually, but it does have impact because of the cumulative nature. It does have impact to the second quarter and first half reported numbers. And that impact is EUR 1.9 million, and it is both in revenue and in the adjusted EBIT. So if you, in a way, want to exclude that, just to understand the operational development there, without this update, the second quarter adjusted EBIT percentage would have been 11.4% and then the total first half would have been 7.2%. Okay. Then moving on to the revenue split and how that has developed from a year ago. So let's start from the product portfolio. So the environmental protection was last year, 47% of the total revenue, and now due to mainly actually 2 oil pills during first half in Latin America. This has a bigger share of the total revenue in first half of this year. The other way around material recycling was a stronger first half last year, it was 8%. And the reason for that was that during first half last year, the Bangladesh port reception facility revenue was quite high. It was in a very active stage that build up a project and now it is smaller than in the comparison period. Equipment and services split is actually quite stable. It was 29%, 71% a year ago. So no big change there. And in the areas, the same -- close to the same picture what we had in the end of Q1. So first half last year, Americas, North and South America was 14%. Now I mentioned 2 oil spills there during first half this year, that has increased the proportionate share of revenue coming from North and South America. And then accordingly, the Middle East Africa share was 19% -- sorry, it was 25% and is now 19%. And again, the Bangladesh strong impact there is visible. I'm sorry, I think I said Europe and Africa, I mean Europe and Asia. Okay. Then moving on to the order backlog. So first half -- end of first half order backlog is close to what we had a year ago. So in the end of first half '23, we were at EUR 163 million, now it's EUR 159.1 million. You may remember that when we were going through the first quarter order intake, i.e., orders received during first quarter, we were already saying that being EUR 16 million during first quarter, that was the highest order intake we had during the last 5 quarters. That same trend has now continued, and Johan talked through the background for that a bit. And now we had very strong order intake in the second quarter and the total first half order intake was EUR 85.3 million. And again, as a comparison, -- it's more than 600% growth from comparison -- comparable period last year. But if you look at the total year order intake last year, that was EUR 44 million. So we had not quite a double, but almost double order intake during the first half than what we collected during the full last year. Number of employees. We have this consistently in the materials, and we want to mention this, but it's good to note that the nature of business and the flexibility and agility of the Lamor business model is really high. And therefore, this can fluctuate a lot based on ongoing activities and ongoing oil spills around the world and other projects. So -- and this capability is one of the cornerstones of Lamor operations. And during first half this -- the amount of full-time equivalents or full-time employees in full-time equivalents actually did come down a bit after the oil spills in LatAm were completed. But these are the numbers today. So in the end of the period, we had 584 persons, mainly Middle East and Africa and then second largest group in North and South America and then in Europe and Asia and then average employees were 659 persons. So here, you can see already the difference between average during first half and the end of first half being quite different. So that is just a sign of the flexibility that I talked about there. Then moving to something that I'm sure extremely high on everybody's agenda including the management, and that's the net working capital development. So -- in the end of the first half -- sorry, first quarter, the net working capital was EUR 77.1 million. In the end of the second quarter, it was EUR 77.8 million. And if you look at the kind of the structure of the net working capital, we had good development there. We were able to make the net working capital structure healthier. And we were able to shorten certain cycles in especially Middle East receivables, but it doesn't come through in the numbers yet and the total level of the net working capital stays high. And this is something that is, needless to say, almost is absolutely super high on the management agenda, and there's an increasing amount of activities ongoing to continue the positive trend in the lead times and in the kind of a turnaround of those things, but then also get the absolute amount to start to reduce. Main drivers there continue to be Kuwait and Saudi -- Saudi Arabia and the sizable projects there. The net cash flow from operations during the first half was EUR 11.1 million -- sorry EUR 11.3 million negative. And then if you look at the second quarter, again, the picture is actually quite different than for the total first half. So the second quarter, net cash flow from operations was positive EUR 1.8 million versus then positive EUR 1.1 million in the second quarter of '23. Financial position remains quite good or reasonably good to say. The minimum equity raise is over 36%, and net gearing is 90%. And now as a reminder, so in the comparison period last year, the EUR 25 million green bond that was taken in August, that is the biggest change between the first half '23 and the first half 2024, and that's the kind of the magnitude change in those numbers is coming from that. And then if we still summarize the key figures, revenue, second quarter, EUR 27.1 million, comparable period EUR 33.8 million. And then the total first half, EUR 51 million versus EUR 57 million a year ago. And then the adjusted EBIT, EUR 1.4 million versus EUR 3.7 million a year ago. And then for the second quarter, first half EUR 1.9 million versus EUR 3.9 million for the full first half. Now -- and now I still want to repeat that EUR 1.9 million impact, which is both on revenue and adjusted EBIT. So if you want to do the arithmetics of adding that to numbers, the adjusted EBIT would be EUR 3.3 million. And then the first half -- for the second quarter and the first half would be EUR 3.8 million. But that concludes the financial part, and then I hand over back to Johan.

Thank you, Vesa. As Vesa pointed out that the reduced working capital, that's on our -- highly on our agenda for the second half of this year. And that is something that we have looked into, let's say, locally, that's how we manage it locally in respect to the ongoing the major projects [indiscernible] especially and then also put in place a rigorous assessment and optimization of new needs that are coming up at the moment. As we were alluding to that the funnel has not disappeared. It's still strong, and that means that we need to make sure that we have effective approaches to the projects going forward. But now we have a clear view of the activities that need to be put in place in respect to managing the working capital and reducing that in -- throughout our operations. So that is one area that is high on our agenda and that we live and breathe going forward. And then in respect to the expanding the market and our presence even further, I think that what we pointed out in respect to one area out of the others that we have ongoing is very important here that the tendering processes is something that we are focusing on at the moment and where we are in the, let's say, negotiation phase in several large activities. And that's something that is very important in respect to the expansion of the market presence. And then, of course, we need to highlight also the, let's say, the dual impact of the geopolitics. As we all know that if we are looking on one hand, the need for our -- this type of services that we have increased during the, let's say, at least during the first half of the year. We are not talking about just one area. For example, in Southeast Asia, we all have heard about the recent events in respect to the, let's say, [ Maritime Logistics ] and especially then around Singapore. So these in the big logistical nodes, this is something that is very high on the agenda. And that's where -- it's not just a single equipment that is needed, it's the expertise of planning for events and then also being able to deploy when events appear because time is of essence in respect to costs and also in respect to impact on the environment. Then continued focus on next leap. Next Leap is our attention, our -- let's say, the name for the activities that we are aiming at the current operational activities in respect to efficiency, profitability and also ensuring the scalability that we have safe and efficient operations that can be scaled and with the right type of cost structure then when we are going forward. And that's then enabling the long-term growth of the company. And that's a big important area. And this is just to remind you, we went through this last time that these are the different work streams that we are focusing on in to get the structure in place that can then be efficient in respect to the growth part. And with clear targets that is being followed up on, let's say, a timely manner to be able to ensure that the work is progressing. And that's why we already see signs of these -- the effects, positive effects of the work that we put in place when we are looking on comparing Q1 to Q2. And this is something that we would like to then to come back and show you even more progress when we are going forward. So a short summary of the focus for the second half of the year. Then questions-and-answers.

Thanks, everyone, and thank you, Vesa for the presentation. We are ready to start the Q&A. We already have a few questions maybe lined up, and please keep posting also during the session, so we probably can answer all of them. First question is from Antti Koskivuori from Danske. Your guidance implies a clear pickup in the second half revenues against the first half. What are the main [ levers ] in your estimates, so basically what gives you confidence in a stronger second half?

I mean, we already can see the improvement in respect to Q1 to Q2 and now focusing on second half of the year, we are confident that, let's say, the projects that are in the pipeline and also the activities that are ongoing in the market that they will -- that will -- they will support us in getting to the revenue target that we have set for the year.

I'll add -- sorry, for switching this. I'll add one follow-up to that actually. As per the second half, how much are you expecting NEOM the agreement signed in May to contribute in 2024 already?

So maybe I'll take it. So the structure and the way the NEOM project will work is that during this third quarter, we actually focus on building the service capability in Saudi Arabia. And then the actual revenue starts to then flow when we start the service. So when we start to provide the service, that will then initiate also the revenue, and that is expected to happen during the fourth quarter.

So the first is the mobilization phase, and then we are ready to deliver the services on site and being I mean, have the readiness with the full project then going forward.

Thank you, and sorry about the technical difficulties in the beginning. So probably the first question was not heard, but I think the answer was still clear. Let's move on to next question. So then profitability, Antti had a question about EBIT margins going forward. What are the main uncertainties in the EBIT margin, keeping you from giving guidance on profitability? Would you say that also revenue outlook has similar uncertainties? Or are these more related to costs? And actually, Aapeli also had a same kind of question, so what is behind not giving the guidance. And are you planning to give one later this year.

Do you want to start?

I can start. Yes. I mean still, we are -- there are uncertainties in the market then in respect to the projects and how they are proceeding. And that's why we've chosen not yet to give a guidance regarding the profitability for the year.

Yes. And then -- I mean, for the projects, the tenders, the expected revenues, we have a rather rigorous forecasting process in place that we run every quarter. We just finished that one in July, which gives us confidence on the guidance. But then at the same time, like we have said, the nature of the projects is such that predicting their profitability on a detailed level is actually quite challenging. And now we saw the -- now we saw the impact on the second quarter. Actually, that same impact is -- would be -- and that's what we are actually working on to reduce the project costs that will have the -- the similar impact to other directions. So there is a fair amount of uncertainties, ups and downs that still are in the profitability, hence not giving guidance there.

But this is a great question. And that's why we also put this next leap program into place to better get the, let's say, the insight and also to get the grip of the local activities and then being able to make the predictions then going forward.

Okay. Before I ask the next one, I just want to remind our viewers that you can still keep posting questions. So please do that. Actually, regarding -- let's get back to the NEOM question earlier because there was just a new question now. Still Antti wanting to clarify, should we expect a bigger lump of revenues from NEOM contracts from equipment deliveries during the first quarters of the contract? So that's just elaborating.

The project is now in the mobilization phase, and this is something that we'll come back to a little bit later. We expect that we will be up, I mean, operative [ than ] in the, let's say, end of Q3, beginning of Q4, and that's really the focus at the moment. Do you want to add something on that.

Yes. Like I said, the revenue from NEOM project comes hand-in-hand with the services provided. And yes, there is a kind of a ramp-up of the services. So not -- they are not in full force from the very beginning. Hence, there is a development of the revenue as well there. But then that will be reasonably stable during the lifetime of the project because that is directly dependent on the services that we provide there. And maybe I think it's still good to add that the -- without talking about absolute numbers, the NEOM project is not something that would impact, for example, the guidance so -- for this year.

Okay. Then let's stick to the more significant projects because there are some questions about Kuwait as well. So maybe I'll start with Aapeli's question. So could you elaborate more about the update made to the Kuwait projects cost estimates. So what was behind this? And also, should this be a onetime case? Or should we expect more updates in the future since there could be a clear -- or these could have a clear effect on our profitability, for instance?

So briefly, so Kuwait project revenue is recognized based on this percentage of completion principle and then that measured by the deliverables that have happened during the project. And then when you have a percentage of completion, the percentage is always calculated from the total number. And when you change that total number, even slightly, that will have impact to the cumulative revenue. Yes, we have a special focus and increasing understanding about especially the Kuwait project cost buildup and then also the forecast. And that's actually something where the management has spent a lot of time because this is so important to understand it. And like I already said, this is -- our goal is actually to reduce that total, but it's work to be done. And nothing that I can such talk about, but it is a very important factor, and it is continuously in the focus. And now we have selected an approach, where we want to be rather agile in updating that total cost when we know more.

Yes. No, I think it's very important to point out also that during the -- let's say, the progress of the project that we also see the impact of different components in this total process and how to work with them. So now we have a more stable understanding on what is going on in the -- throughout the whole project. And I think that, that is a stable basis that now has been generated for going forward.

I think actually, we -- you already touched upon this now in those comments. Aapeli also had a question that are there some lessons learned from the first Saudi Arabia project. So for instance, working capital can be used in next projects or something. Is there something you want to add to the previous comments already about the learnings in Saudi Arabia so far?

No, I think that in all these major projects, the learnings that we've generated in them, this is something -- this is part of the work that we are doing now that to ensure that we can improve certain parts of the projects to have better visibility and also to ensure that the -- let's say, the payment schedules are being followed and that we have a diligent follow-up on that locally, in these different cultures that has a major impact. And also, that, let's say, constant communication between the projects and getting the learnings in place is going to be very critical for us. And every project that we are putting in place now have certain guidance that are based on the learnings from the previous ones. And here, we are clearly improving compared to earlier stages.

Going forward also, I think this was on -- from Antti. So thinking about working capital, what would we say consider as a target level for working capital -- net working capital.

That's a good question. I should actually answer that negative would be the target because that's what you always should shoot for. But at the moment, like seriously, our goal is to release the first funds that are tied up in those big projects. And then I think longer term, we need to look for like a aspirational target level or type of guidance for that number. But as of now, we don't have it. But seriously, I think almost all the companies should have a target of negative net working capital.

That I think we can agree on. I have 2 more questions here waiting. So still time if you want to post more questions. This is a more detailed one from Antti regarding the update on the Kuwait project. So we said in the CEO statement that and the financial segment of report that excluding the update, adjusted EBIT would have been at the comparison period's level in this year's second quarter. Could you confirm that the negative impact from the update was EUR 2.3 million in Q2 and the EBIT margin would have been 13.6%, but this is -- I just need to check the question.

Just to repeat. So the impact was EUR 1.9 million, and it impacted both the revenue and the profitability.

Yes. Okay. If Antti asked that question wrongly, then please state it again, but that was what was written. So then finally, there's one more question, and this is about Kilpilahti, maybe a more long-term question. So how is it possible to build a 100-ton chemical recycling capacity in just 2 years. So that is maybe for you, Johan.

Yes, yes.

And at the moment, that's the final question we have.

That's a good question. And I mean, still the plan for us is to now to make sure that we get this concept plant in place, and that will then have a capacity of 30,000 tons to 40,000 tons and then 2 additional plants that will be initiated when this is in place. And that's according to our strategy that we have in place now, this planning -- for this planning period and that is our -- still our target that we are pushing towards.

Let me just clarify 2 additional lines not plants.

For the [ strategic ] period to get up to 100,000 tons then it's 2 additional plants.

Thank you. Two more questions came up. So any new ESG initiatives planned in the foreseeable future?

We're pushing forward regarding the ESG. It's a part of integral part of our strategy, business strategy. It's not something separate. It's a part of this, and that's something that we're trying to tie into our operations across the globe. So that is -- it's going to be one part of our way of working and I don't see that as an issue going forward.

And then a question on M&A, any M&A on agenda for this year?

We will come back to that when it's -- when that kind of an issue will be on the agenda. Otherwise, we will stay to what we've talked about earlier.

Okay. Still on the next 2 quarters, a question from [ Emma]. Have you identified any new significant business risks that could possibly impact Q3 and Q4 in the results?

That's a good comment. As of now, this is what we now talked about and the, let's say, the business risks have not changed compared to what we've talked about earlier. They remain on the agenda and something that we are tackling. But anything new that would be on the horizon. I think that, that is not actual at the moment.

And then currently, the final question. So are you happy with the current capital structure? Or could we expect any significant changes in capital structure during the rest of 2024?

Well capital structure, including the net working capital, so no, we are not happy with that. So we are working on to that, that improved.

Yes. I think that was clearly stated. At this moment, I think we have answered all the questions, and there are no more questions at this time, and still no. So I think that concludes our webinar this time. Thank you. We look forward to talking to you again with our Q3 results, and thank you for joining us today.

Thank you.

Thank you.