Lassila & Tikanoja Oyj (LT5.SG) Earnings Call Transcript & Summary

Good morning, and welcome to Lassila & Tikanoja earnings release for the first half of 2025. We have a little bit of a special combo here today with me. So I have Joni Sorsanen, our CFO; and then Antti Niitynpää, Head of our Facility Services business here with me today.

Good morning.

Good morning.

Yes. Well done. Okay. So today, we have 2 sections in our presentation. First, we will go through normal earnings release, and we will have our first Q&A session after that. And then the second section or second half of the presentation will be focused on the partial demerger process and a little bit of the description of the new companies. And then there will be another Q&A session after that section. So 2 sessions. So -- and I will stop then after the normal earnings release. Good. But let's go and then Joni and Antti will join me for their sections of the presentation. So a few highlights from the first half of 2025. We had very solid performance in Circular Economy and very nice improvement in Facility Services, Finland. Strong sustainability performance. Our customer satisfaction reached all-time high NPS, so very good performance there. And then obviously, the big news of today that our Board of Directors approved the demerger plan to separate the Circular Economy Business operations into new publicly listed company. But I will get back to all of this later in the presentation. Net sales. Overall, our net sales declined still in second quarter, but less than in Q1. And after the first 6 months, we are some 3% behind previous year. Reasons are more or less the same as they were in the first quarter. In Circular Economy, the depressed general economic situation in Finland affected us, especially in construction sector. In Facility Services Finland, lower contract portfolio due to discontinuation of the loss-making contracts. And in Facility Services Sweden, we actually did see sales growth, and that was due to the new customer contracts we got at the end of last year and also a slight support from a stronger Swedish krone, but mainly the growth really came from -- through these new customer contracts. When it comes to adjusted operating profit, overall, a very strong performance for the whole company. Our adjusted operating profit was EUR 17.6 million this year compared to EUR 12.7 million a year ago. So almost a EUR 5 million improvement meaning close to 40% improvement on the comparison period. As I said, a very stable performance in Circular Economy and main improvement came from Facility Services Finland, but also Sweden improved even though it still was loss-making in the first half of this year. If we take a little longer perspective and look at the development from the past 5 years, we can see that the performance in Circular Economy has been very stable, whereas in Facility Services, we can now see that the turnaround is actually taking place as we have indicated earlier. Last 12 months end of June already shows that the adjusted EBIT was EUR 8 million, which is 2.3% in the Facility Services and clearly looking much better than in the past years. Then I'll move on to the segment information. And in Circular Economy business, as I said, solid performance despite the challenging conditions and the relative profitability remained stable year-on-year. Our efficiency improvement measures were visible in the profitability. This also means that we were able to defend our margins, and this is obviously very important because hopefully, we will see some growth in the market also in the future, and it is important to be able to sort of maintain the price level. Annual maintenance breaks in industrial sector were carried out as planned and resourcing was successful. In hazardous waste business, the performance was very much in line with the comparison period. The weak economic situation did affect our environmental construction business. We got less land masses than earlier. But I'm really happy to see that we have been quite successful with our project sales. We also mentioned in our interim report that there is a very large project that we are doing for Boliden Harjavalta that will continue quite some while from here on, but also in for -- or in other projects, we have been quite successful. So our project portfolio in environmental construction looks very promising. In Facility Services Finland, strong profitability improvement in January-June. And the revenue decrease came in the first quarter because of the mild winter, but also in the -- because of the planned optimization of our contract portfolio. The demand for our digital services has remained strong, and we expect that to remain strong in the future. It obviously brings growth by itself. But then more importantly, it also increases our customer loyalty and helps us to sell also the basic services. So we're very happy with the development of our new digital services. Our efficiency measures continued successfully, as you can see from the numbers. And especially this was the case in property maintenance. Obviously, these are sort of long-term programs, and we will continue to execute these programs. And I'm optimistic that we can see even better profitability in Facility Services in the future. Already, the improvement is almost a little over EUR 4 million, which is more than 200% over the previous year. And our adjusted operating margin now after the first 6 months of this year was 5.4%, which is on a good level even compared to our peers. In Facility Services Sweden, the turnaround is happening. We are on the right path, but the operations were still loss-making in the first 6 months. We will continue our efforts. And based on these new customer contracts and the sort of ongoing efficiency programs, I am optimistic that we will see improvement in the Facility Services Sweden in the second half of this year. One thing that is behind in the good performance, especially in the Circular Economy is the fact that our fixed cost base has decreased due to the active efforts that we have done. And the pace is approximately EUR 1 million per quarter. And this was despite the fact that we had about EUR 0.5 million extra cost in Circular Economy due to the rollout of our ERP system. We expect that there will be about the same amount in the second half of this year. We have rolled out about 2/3 of our sites into the ERP system, so 1/3 left. But obviously, there is still some bug fixing and other things to do. So -- that's why we expect there will be still some extra cost and extra personnel in the second half of this year. Our sustainability work has also been successful and perhaps a couple of highlights from the first 6 months. Our own carbon footprint decreased by 22% compared to 2024, similar period, and this is excellent achievement, and it is because of the very sort of systematic development we have done now for several years. We have replaced some of our diesel fleet with biogas trucks. We have further increased our use of biodiesel. And also, we have trained our personnel to drive more economically. And all of this is supporting in us in achieving this target. Also, the customer satisfaction reached all-time high, as I said in the beginning already, and our NPS was 41 this spring, which is really good. Now I think it is Joni's turn to go through the financials.

Thank you, Eero. Yes, as Eero already mentioned, the company had a strong first half of 2025. And as a result of strengthening profitability and improved cash flow, we can report improving key financial metrics almost across the board. Also, we can see at the end of the second quarter, strong financial position and decrease in net interest-bearing debt compared to June 2024. In June, we also refinanced part of our long-term debt, and I will provide details later in the presentation. We also prepared ourselves for the demerger that was announced today as part of this refinancing process. All right. Starting with net working capital. We fell short of previous year's level in net working capital amounting to minus EUR 29 million at the end of second quarter. That is a EUR 4 million change year-on-year. And if we look at the performance in the first half of '25, we can see that net working capital has been tied up by EUR 17 million compared to EUR 14 million in previous year. And looking at our segments, we can see that Facility Services in total, so combining Finland and Sweden performed in a stable manner compared to previous year. While in Circular Economy, we can see net working capital tying up as a result of normal seasonal variation. And as you can see from the graph, we expect net working capital to follow the annual pattern or quarterly pattern we have seen in previous years. So we expect net working capital to be released towards the end of the year. Capital expenditure was somewhat below previous year. However, the composition of capital expenditure was somewhat different compared to previous year. In June 2025, we completed the acquisition of Stena Recycling's pallet business, which was investment of approximately EUR 8 million. Looking at organic investments, we can see a decrease of more than EUR 7 million year-on-year. And here, we can clearly see the decrease in ICT-related investments. And related to this ERP rollout, it's good to note just like Eero already mentioned that now we are booking the rollout costs as operating costs instead of capitalizing them. And we have also, during the quarter, started the amortization of this ERP investment. So that's why our depreciation and amortization expected to increase going forward. Cash flow-wise, free cash flow improved by EUR 6 million compared to H1 '24. We can see that operating cash flow was somewhat below previous year in the first 6 months, mainly as a result of change in net working capital explained previously. However, investments were on a lower level compared to previous year, and that's why, as already noted, January-June cash flow somewhat above previous year. On a rolling 12-month basis, we can see that free cash flow at the end of June '25 was around EUR 47 million compared to EUR 41 million at the end of 2024. Financial position remained strong at the end of the second quarter. Looking at gearing development, we can see that the paid out dividends in April and also the acquisition of this pallet business affected gearing at the end of the second quarter. However, we can see a slight improvement compared to end of Q2 '24. Net interest-bearing debt amounted to EUR 178 million, at the end of the second quarter. That is a decrease of almost EUR 17 million year-on-year. And today, we have announced the demerger plan according to which this EUR 178 million would be divided between Luotea, which is the facility services company and New Lassila & Tikanoja company so that Luotea would be almost net debt free, while the Circular Economy Company, i.e., New Lassila & Tikanoja would carry EUR 174 million out of this net interest-bearing debt of EUR 178 million. But more information on the balance sheet split can be found from the demerger plan announced today. As I already noted, we refinanced part of our long-term debt in June. And first part of the refinancing was this term loan of EUR 40 million, which was set to mature in Q2 '26. And now according to this new agreement, which is 3 years plus 2-year extension option, we are moving the EUR 40 million term loan to mature in 2030, assuming that the 2-year extension option will be utilized. Secondly, we agreed revolving credit facilities for both companies. And if the demerger takes place, New Lassila & Tikanoja would have a revolving credit facility of EUR 40 million, while Luotea would have similar type of facility, but the amount would be EUR 10 million. Also, we have today announced the consent solicitation process for our outstanding notes amounting to EUR 75 million. And in the demerger process, we have prepared ourselves through a bridge facility of EUR 80 million if the note holders wish to exercise their right to redeem their bond-holding through demerger put option. And finally, if we use this bridge facility of EUR 80 million, that will be automatically converted into this EUR 35 million term loan. And also want to highlight here that as we stated in Q1 result disclosure, our aim is to move these outstanding notes to New Lassila & Tikanoja, which is the Circular Economy Company. More information on the consent solicitation process can be found from the separate stock exchange release. Return on capital employed continued to improve and amounting to 4.9% at the end of the second quarter. It's good to note that in the reported return on capital employed, the outcome is affected by year-end '24 goodwill impairment, for example. So here, we have also calculated the adjusted return on capital employed, assuming that these items affecting comparative would have not taken place. And there, we can see that adjusted return on capital employed amounted to 11.9% at the end of the second quarter. Segment-wise, both Circular Economy business and especially Facility Services Finland business can report improving return on capital, especially Facility Services Finland, reporting strong return on capital employed development in June, amounting to 78% already. And finally, we can report strong earnings per share growth, EUR 0.30 in January-June compared to EUR 0.16 in January-June last year, almost doubling year-on-year. And net free cash flow per share in the first half, EUR 0.06 compared to minus EUR 0.10 at the end of -- or in H1 '25. Okay. This was the financing section, and then Eero will continue with guidance.

Yes. Don't run away Joni, if there is the Q&A session. So...

Correct.

Yes. Our outlook for 2025 remains unchanged. So the net sales 2025 are estimated to be at the same level as in previous year and adjusted operating profit is estimated to be at the same level or better compared to the previous year. But -- as I said, we stop here now and open the lines for your questions regarding the first half report of 2025. And after this session, then we will focus on the demerger.

[Operator Instructions] The next question comes from Nikko Ruokangas from SEB.

This is Nikko Ruokangas from SEB. I have 4 questions in this part of the presentation, and I'll go one by one. But I'll start with the guidance. So you keep the guidance unchanged despite being EUR 5 million ahead of '24 in adjusted EBIT in H1. So what is the reason for not raising the lower end of the guidance range and still keeping the possibility of flat EBIT this year?

Good question. And obviously, there was quite some consideration that we put into this outlook. As you said, the first half performance was clearly better than a year ago. The main reason is that we have a strong seasonality in our business. And typically, the third quarter is by far the largest. And in general, around 2/3 of the profit comes in the second half of the year. And this fact, combined with the, let's say, recent turbulence and uncertainty in the market led us to keep the outlook unchanged for now. But obviously, as we get into the third quarter, if there are indications as we hope that the good development continues remainder of 2025, we will then reconsider and revisit the outlook.

Okay. So that we don't need to read this as that you would have seen a negative development in your kind of outlook, but more than H1 -- H2 is just a bit in terms of seasonality?

Yes, that is the main reason.

Yes. Okay. Then on Circular Economy development in Q2, and then also maybe referring back to last year a bit. So last year, in Q2, you had several projects normally taking place in Q3 and then they took place in Q2. So how does the seasonal pattern in Q2 and Q3 this year look compared to last year?

Yes. Let's say that there has been more changes in the planned maintenance breaks this year than last year. And as I'm sure you have seen, there are some difficult times when it comes, especially the pulp and paper industry and in general, the sort of the process industry. But also in mining sector, there has been, on one hand, the demand for gold has been extremely high. And then on the other hand, there are perhaps other kind of development in other raw materials. So there has been uncertainty in the market that has led into changes of the scope and timing of some of the maintenance breaks. So this is a long answer. But the conclusion is that in big picture, it is not very different, but there is perhaps a little bit more uncertainty regarding the timing of these maintenance breaks.

All right. So kind of that did not at least too much support your earnings year-on-year compared to last year?

Can you repeat the question?

So kind of the timing in Q2 this year wasn't significant explaining factor in supporting the earnings this year versus last year?

No, I think the -- how it sort of played out this year was that maybe we did get a little bit more maintenance breaks in Q2 this year than we originally expected. But this year wasn't significantly different compared to last year is perhaps what you are after.

Yes. That explains. Then the Facility Services Finland, where you have had very strong profitability improvement, as you indicated. And you are now at 6% rolling adjusted EBIT margin already. So you explained several factors there supporting the development. But do you kind of still think that there is room to improve? Or was there something specifically good in this Q2?

No, there wasn't anything specifically good in this Q2. This is a result of the systematic work we have done now for several years. And it just takes long time before we kind of get everything implemented and working as we have planned. And I see that there is still potential even though performance has improved in property maintenance, but there is still room for further improvement in property maintenance. So it looks quite good right now.

All right. Then last question from me in this part of the Q&A. So you said that the fixed costs have decreased EUR 2 million in H1 compared to last year and that similar amount will be also expected in H2. So do you mean that the run rate improvement in '25 should be EUR 2 million or EUR 4 million?

No. What I was referring to, and I apologize being unclear. What I referred to was that we expect to have EUR 0.5 million extra costs because of the rollout of ERP systems also in the second half. Our efficiency measures have resulted in a reduction of our fixed costs by approximately EUR 2 million in the first 6 months, but that didn't say that it would continue in the same way in the second half. But now that you brought up the question, I'd say that there is still a good chance that we will see a reduction in our fixed costs. But at the same time, we have to remember that the comparison period second half of last year, we already had some of these measures in place. So perhaps it is not quite that much, but we will see.