Lassila & Tikanoja plc
Stock exchange release
27 October 2020 at 8:00 a.m.
Lassila & Tikanoja plc: Interim Report 1 January–30 September 2020
GOOD PERFORMANCE IN DIFFICULT CIRCUMSTANCES
Unless otherwise mentioned, the figures in brackets refer to the corresponding period in the previous year.
Net sales for the third quarter were EUR 184.8 million (190.5), operating profit was EUR 17.6 million (18.5) and adjusted operating profit was EUR 17.5 million (19.3)*. Earnings per share were EUR 0.37 (0.36).
Net sales for January–September was EUR 552.3 million (585.4), operating profit was EUR 18.3 million (36.1) and adjusted operating profit was EUR 29.0 million (31.0)*. Earnings per share were EUR 0.30 (0.74). Operating profit and earnings per share were negatively affected by costs of EUR 10.4 million recognised in relation to the discontinuation of Russian operations as well as an increase in exchange differences. Exchange differences amounted to EUR -1.3 million (0.6).
The decrease in net sales was attributable to the Q2/2019 divestment of the L&T Korjausrakentaminen business, which is included in the figures for the comparison period, and the coronavirus pandemic.
*In September 2020, Lassila & Tikanoja began to use adjusted operating profit as a new alternative performance measure. The reporting of adjusted operating profit is aimed at improving comparability between reporting periods. Adjusted operating profit excludes substantial costs arising from business restructuring, gains and losses from divestments and costs arising from the discontinuation of businesses.
Outlook, updated 23 October 2020
Full-year net sales for 2020 are expected to decrease year-on-year and adjusted operating profit is estimated to be EUR 35–43 million (40.5).
PRESIDENT AND CEO EERO HAUTANIEMI:
“Our business environment has been exceptional and challenging this year. COVID-19 has affected all of our businesses and the demand for services has been difficult to predict at times. We have had to adjust our service production in response to the constantly changing situation. Anticipating customer needs has required us to be active in our approach, and we have been successful in this respect in light of the circumstances. We have developed new disinfection service solutions to improve the hygiene and safety of our customers, which has helped compensate for the decline in service volumes. Our active work with our customers has also been reflected in our results. Our customer Net Promoter Score (NPS) rose by 13 points to reach a record-high level in our recent measurement. A particularly pleasing aspect of this increase was that the results improved in all of our divisions.
We have also paid special attention to ensuring safe and healthy working conditions for our employees. We have been able to ensure the availability of adequate personal protective equipment and appropriate operating guidelines and instructions as the circumstances have changed. Sickness-related absences have remained on par with the comparison period and the number of COVID-19 infections has been very low.
In these exceptional circumstances, we have continued to execute our strategy in accordance with our plans and our development and investment projects have progressed as planned. Our financial position has remained strong throughout the year. I am especially pleased about the positive development of Facility Services Finland. The division has substantially improved its profit performance, which is an excellent achievement under the prevailing circumstances. With regard to the Group’s profit performance, it is also important that the annual maintenance breaks in the industry sector that were postponed by customers earlier in the year were carried out as planned in the third quarter.
Our business environment is currently characterised by a large number of uncertainties that shape our markets. Nevertheless, we have learned to operate in “the new normal” created by the COVID-19 pandemic, which puts us in a good position to strengthen our market share in all of our divisions.”
GROUP NET SALES AND FINANCIAL PERFORMANCE
Lassila & Tikanoja’s net sales for the third quarter amounted to EUR 184.8 million (190.5), down 3.0% year-on-year. Operating profit was EUR 17.6 million (18.5), or 9.5% (9.7%) of net sales, and adjusted operating profit was EUR 17.5 million (19.3), or 9.5% (10.1%) of net sales. Earnings per share were EUR 0.37 (0.36).
The decrease in net sales and operating profit was mainly attributable to the decline in demand caused by the coronavirus pandemic. The profit impact of the coronavirus pandemic is reduced by the temporary lowering of pension insurance contributions by 2.6 percentage points from 1 May to 31 December 2020, which had an impact of approximately EUR 1.4 million in the third quarter, as well as lower fuel prices.
In Environmental Services, net sales and operating profit decreased year-on-year. In Facility Services Finland, net sales declined but operating profit improved substantially year-on-year. In Industrial Services and Facility Services Sweden, net sales and operating profit increased year-on-year.
Net sales for January–September amounted to EUR 552.3 million (585.4), down 5.7% year-on-year. Operating profit was EUR 18.3 million (36.1), or 3.3% (6.2%) of net sales, and adjusted operating profit was EUR 29.0 million (31.0), or 5.3% (5.3%) of net sales. Earnings per share were EUR 0.30 (0.74).
The difference between operating profit and adjusted operating profit in January-September 2020 is attributable to the costs of EUR 10.4 million recognised during the review period in relation to the discontinuation of Russian operations and costs of EUR 0.3 million arising from the incorporation of the Group’s divisions effective from 1 January 2021. The costs arising from the incorporation of the Group’s divisions are related to the plan announced in connection with the financial statements release in January 2020 to incorporate the businesses as separate legal entities. The difference between operating profit and adjusted operating profit in the comparison period is attributable to the EUR 5.1 million effect of the sale of L&T Korjausrakentaminen.
The negative effects of the decline in demand caused by the coronavirus pandemic are estimated to have been approximately EUR 19 million on the Group’s net sales and approximately EUR 4.6 million on operating profit after the Group’s adjustment measures and the temporary lowering of pension insurance contributions. The profit impact of the coronavirus pandemic is reduced by the temporary lowering of pension insurance contributions by 2.6 percentage points from 1 May to 31 December 2020, which had a positive impact of approximately EUR 2.3 million, as well as lower fuel prices.
The Group’s operating profit was improved by a gain of EUR 5.7 million recognised in the first quarter on the sale of property included in property, plant and equipment. In addition, non-recurring costs arising from the impairment of fixed assets, for example, were recognised in the total amount of EUR 4.8 million in the first quarter and EUR 0.6 million in the third quarter. The non-recurring items had a positive net effect of EUR 0.3 million on the Group’s operating profit. The items in question are not included in the figures of the business segments. Net profit was negatively affected by the depreciation of the Russian rouble and Swedish krona. Exchange differences amounted to EUR -1.3 million (0.6).
The decrease in operating profit was also attributable to costs of EUR 10.4 million arising from the impairment of balance sheet items in relation to the discontinuation of Russian operations. The discontinuation of Russian operations will have a negative impact of EUR 7.9 million on the Group’s equity. The decrease in operating profit was also attributable to the EUR 5.1 million positive profit impact from the sale of L&T Korjausrakentaminen recognised in the comparison period.
In Environmental Services, net sales decreased year-on-year and operating profit declined significantly due to costs of EUR 10.4 million recognised in relation to the discontinuation of Russian operations. The adjusted operating profit of Environmental Services decreased slightly year-on-year. In Facility Services Finland, net sales declined but operating profit improved substantially year-on-year. In Industrial Services, net sales grew while operating profit decreased year-on-year. In Facility Services Sweden, net sales and operating profit decreased year-on-year.
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NET SALES AND OPERATING PROFIT BY DIVISION
The division’s net sales for the third quarter decreased to EUR 67.5 million (75.0). Operating profit declined year-on-year to EUR 10.3 million (11.2). Excluding Russia, the operating profit of Environmental Services in the third quarter declined year-on-year to EUR 10.0 million (10.5).
The Environmental Services division’s net sales decreased to EUR 216.5 million (231.5). The decline in net sales was attributable to the decrease in demand caused by the COVID-19 pandemic and the discontinuation of Russian operations. Operating profit declined to EUR 12.4 million (24.6) due to costs of EUR 10.4 million recognised in relation to the discontinuation of Russian operations. Excluding Russia, the operating profit of Environmental Services declined year-on-year to EUR 22.2 million (22.8).
The net sales of the Environmental Services division were reduced by the decreased prices of recycled raw materials – particularly fibres, plastic and metals – compared to the reference period. Nevertheless, the division’s profitability remained at a good level. The COVID-19 pandemic continued to lower the operating volumes of customer companies and, consequently, the demand for services in the second and third quarter.
The division’s net sales for the third quarter grew to EUR 30.6 million (27.7). Operating profit improved year-on-year and amounted to EUR 4.5 million (4.4).
The Industrial Services division’s net sales increased to EUR 74.2 million (72.8). Operating profit declined year-on-year to EUR 5.6 million (8.0).
The net sales of Industrial Services decreased during the first half of the year but subsequently began to grow in the third quarter due to new customer agreements and the provision of annual maintenance breaks that were postponed earlier in the year. Operating profit improved in the third quarter thanks to demand growth and the successful planning of operations, in spite of fluctuations in demand and the decreased prices of secondary raw materials.
Facility Services Finland
The division’s net sales for the third quarter decreased to EUR 56.9 million (59.0). Operating profit improved substantially year-on-year and amounted to EUR 3.6 million (2.8).
The net sales of Facility Services Finland decreased to EUR 171.7 million (189.8). Operating profit improved substantially year-on-year to EUR 1.3 million (-2.7).
The decline in the net sales of Facility Services Finland was due to the divestment of L&T Korjausrakentaminen during the comparison period and the impact of the COVID-19 pandemic. Demand declined the most in the technical systems maintenance business. The segment’s operating profit improved substantially year-on-year thanks to a significant improvement in customer cooperation and cost adjustments. Successful sales and service production strengthened the operating profit and market position of the cleaning services business.
Facility Services Sweden
The division’s net sales for the third quarter increased to EUR 31.5 million (30.5). Operating profit improved year-on-year and amounted to EUR 1.5 million (1.4).
The net sales of Facility Services Sweden amounted to EUR 94.5 million (96.0). Operating profit declined year-on-year to EUR 2.0 million (2.9).
The effects of the COVID-19 pandemic were the most obvious in March–May. Operating profit during the review period was weighed down by a substantially higher-than-usual sickness rate and the resulting increase in subcontracting costs on the one hand and the reduced additional sales orders of certain customer accounts on the other hand. The Swedish state’s support measures for businesses partially compensated for the impacts of the COVID-19 pandemic starting from the beginning of May. The substantial decline in additional sales orders and caution amongst customers nevertheless had a negative impact on business operations. The negative impacts of the pandemic decreased in the third quarter, with net sales and operating profit both being slightly higher than in the comparison period.
Net cash flow from operating activities amounted to EUR 20.3 million (42.3). A total of EUR 12.4 million in working capital was committed (EUR 1.5 million committed), most of which related to an increase in inventories based on contracts related to renewable energy sources. Cash flow during the review period was improved by the sale of property included in property, plant and equipment and reduced by a planned EUR 9.4 million increase in inventories. Cash flow in the comparison period was increased by the sale of L&T Korjausrakentaminen Oy.
At the end of the period, interest-bearing liabilities amounted to EUR 191.4 million (175.2). Net interest-bearing liabilities totalled EUR 161.7 million (155.4). The average interest rate on long-term loans excluding IFRS 16 liabilities, with interest rate hedging, was 1.3% (1.3).
Of the EUR 100.0 million commercial paper programme, EUR 15.0 million (0.0) was in use at the end of the period. A committed credit limit totalling EUR 30.0 million was not in use, as was the case in the comparison period. The Group renewed the credit limit during the review period. The newly signed credit facility will mature in the second quarter of 2022.
Net financial expenses amounted to EUR 4.1 million (2.3). Exchange rate changes accounted for EUR 1.3 million (-0.6) of net financial expenses. Net financial expenses were 0.7% (0.4%) of net sales. The exchange rate changes were caused by the depreciation of the Russian rouble and Swedish krona.
The equity ratio was 32.2% (35.9%) and the gearing rate was 89.3% (78.1%). Liquid assets at the end of the period amounted to EUR 29.8 million (19.7). The company has taken measures to ensure its liquidity in response to the coronavirus pandemic. Overdue trade receivables and credit losses have not increased during the pandemic.
DISTRIBUTION OF ASSETS
The Annual General Meeting held on 12 March 2020 resolved that a dividend of EUR 0.92 per share be paid on the basis of the balance sheet that was adopted for the financial year 2019. The dividend, totalling EUR 35.0 million, was paid to shareholders on 23 March 2020.
Gross capital expenditure totalled EUR 32.8 million (33.2), consisting primarily of machine and equipment purchases as well as investments in information systems and buildings. During the review period, we invested in the construction of strategically important final disposal locations and critically evaluated replacement investments due to the market uncertainty caused by the coronavirus pandemic.
During the period under review, the average number of employees converted into full-time equivalents was 7,249 (7,365). At the end of the period, L&T had 8,440 (8,414) full-time and part-time employees. Of these, 6,930 (6,662) worked in Finland and 1,510 (1,752) in other countries.
The year 2020 has been exceptional due to the coronavirus pandemic also for L&T’s personnel. The Group has been able to ensure the provision of personal protective equipment for employees under all circumstances. In September, L&T also purchased 17,000 non-disposable face masks to improve the safety of employees during commutes and in their free time. Employee well-being has been supported in a number of ways, including a dedicated coronavirus helpline and digital discussion services that help employees cope with the mental strain caused by the situation.
In March, the Group held negotiations concerning temporary layoffs in its Finnish operations pursuant to Chapter 8 of the Act on Co-operation within Undertakings. The temporary layoffs caused by the impact of the coronavirus pandemic and agreed upon in the negotiations were implemented by the end of September. Following the negotiations, employees from the Group’s Finnish operations have been temporarily laid off. At the end of the review period, the total number of laid-off employees throughout the Group was approximately 250.
SHARES AND SHARE CAPITAL
Traded volume and price
The volume of trading during the first three quarters of the year, was 9.1 million shares, which is 24.0% (10.6%) of the average number of outstanding shares. The value of trading was EUR 123.8 million (58.9). The highest share price was EUR 16.76 and the lowest EUR 10.06. The closing price was EUR 12.96. At the end of the review period, the market capitalisation excluding the shares held by the company was EUR 493.8 million (520.4).
At the end of the period, the company held 693,589 of its own shares, representing 1.8% of all shares and votes.
Share capital and number of shares
The company’s registered share capital amounts to EUR 19,399,437 and the number of outstanding shares is 38,105,285. The average number of shares excluding the shares held by the company was 38,102,222.
At the end of the period, the company had 18,964 (15,085) shareholders. Nominee-registered holdings accounted for 10.4% (18.3%) of the total number of shares.
Authorisations for the Board of Directors
The Annual General Meeting held on 12 March 2020 authorised Lassila & Tikanoja plc’s Board of Directors to make decisions on the repurchase of the company’s own shares using the company’s unrestricted equity. In addition, the Annual General Meeting authorised the Board of Directors to decide on a share issue and the issuance of special rights entitling their holders to shares.
The Board of Directors is authorised to purchase a maximum of 2,000,000 company shares (5.2% of the total number of shares). The repurchase authorisation is effective for 18 months.
The Board of Directors is authorised to decide on the issuance of new shares or shares which may be held by the company through a share issue and/or issuance of option rights or other special rights conferring entitlement to shares, referred to in Chapter 10, Section 1 of the Finnish Companies Act, so that under the authorisation, a maximum of 2,000,000 shares (5.2% of the total number of shares) may be issued and/or conveyed. The authorisation is effective for 18 months.
RESOLUTIONS BY THE ANNUAL GENERAL MEETING
The Annual General Meeting, which was held on 12 March 2020, adopted the financial statements and consolidated financial statements for 2019 and released the members of the Board of Directors and the President and CEO from liability.
The Annual General Meeting resolved that a dividend of EUR 0.92 per share, totalling EUR 35.0 million, be paid on the basis of the balance sheet adopted for the financial year 2019. It was decided that the dividend be paid on 23 March 2020.
The Annual General Meeting confirmed the number of members of the Board of Directors as seven. Heikki Bergholm, Teemu Kangas-Kärki, Laura Lares, Sakari Lassila, Miikka Maijala and Laura Tarkka were re-elected to the Board until the end of the following Annual General Meeting, and Pasi Tolppanen was elected as a new member.
KPMG Oy Ab, Authorised Public Accountants, was elected auditor. KPMG Oy Ab named Leenakaisa Winberg, Authorised Public Accountant, as its principal auditor.
The Annual General Meeting resolved to establish a permanent Shareholders’ Nomination Board. The Nomination Board shall be responsible for preparing and presenting proposals covering the remuneration and number of members of the Company’s Board of Directors as well as proposals on the members of the Board of Directors to the Annual General Meeting and, where needed, to an Extraordinary General Meeting. The Nomination Board shall also be responsible for identifying successors to existing Board members.
The resolutions of the Annual General Meeting were announced in more detail in a stock exchange release on 12 March 2020.
BOARD OF DIRECTORS
The members of Lassila & Tikanoja plc’s Board of Directors are Heikki Bergholm, Teemu Kangas-Kärki, Laura Lares, Sakari Lassila, Miikka Maijala, Laura Tarkka and Pasi Tolppanen. At its constitutive meeting after the Annual General Meeting, the Board of Directors elected Heikki Bergholm as Chairman of the Board and Sakari Lassila as Vice Chairman.
Sakari Lassila was elected as the Chairman of the Audit Committee and Teemu Kangas-Kärki and Pasi Tolppanen as members. Heikki Bergholm was elected as the Chairman of the Personnel Committee and Laura Lares, Miikka Maijala and Laura Tarkka as members.
KEY EVENTS DURING THE REVIEW PERIOD
On 8 April, the Group announced that it has signed a new revolving credit facility of EUR 30 million. The revolving credit facility will mature in the second quarter of 2022. The agreement includes a one-year extension option. The agreement was signed with Danske Bank.
On 24 April, the company issued a profit warning, lowered its outlook for 2020 and announced the discontinuation of Russian operations. According to the updated outlook, full-year net sales for 2020 are expected to decrease year-on-year and operating profit is estimated to be EUR 30–40 million (40.5) excluding loss related to the discontinuation of Russian operations.
On 25 September, the Group announced that Lassila & Tikanoja plc’s three largest shareholders (a group of shareholders, Mandatum Life Insurance Company Limited and the Evald ja Hilda Nissin Säätiö foundation) have appointed their representatives to Lassila & Tikanoja plc’s Nomination Board. The Chairman of Lassila & Tikanoja plc’s Board of Directors, Heikki Bergholm, acts as the fourth member of the Nomination Board. The Nomination Board prepares proposals on the members of the Board of Directors and on the remuneration paid to them for the next Annual General Meeting.
EVENTS AFTER THE REVIEW PERIOD
On 23 October, the Group issued a profit warning and announced that it is increasing the previously issued range of operating profit and changing the outlook to use adjusted operating profit instead of operating profit, as previously. According to the updated outlook, full-year net sales for 2020 are expected to decrease year-on-year and adjusted operating profit is estimated to be EUR 35–43 million (40.5).
NEAR-TERM RISKS AND UNCERTAINTIES
The measures and recommendations issued by the authorities to restrict the COVID-19 pandemic and the resulting customer-specific production restrictions and adjustment measures are expected to cause disruptions in service production throughout the remainder of the year. This is expected to be most apparent in separately ordered services, such as the maintenance of technical systems and process cleaning.
The economic uncertainty caused by COVID-19 has been reflected in the demand for industrial services and made it difficult to predict. Industrial customers postponed maintenance breaks from the spring to later in the year but, for the time being, they have been carried out at the planned scale. If maintenance breaks were to be cancelled or postponed to next year, this would affect the demand for, and result of, process cleaning services.
The decline in industrial volume caused by COVID-19, the general economic uncertainty and the import restrictions imposed by China on recyclable materials have reduced the demand for, and prices of, key secondary raw materials. This market disruption is expected to continue next year, and it is anticipated to have an impact on the net sales and profitability of the Environmental Services division.
Decreasing oil prices reduce our fuel costs but, at the same time, they have a negative effect on the prices of oil-based secondary raw materials, such as recycled plastic and regenerated lubricants. However, the net effect of the lower oil price is positive at the Group level.
In the long term, challenges associated with the availability of labour may restrict business growth and elevate production costs.
The company has several ERP system renewal projects under way. Temporary additional costs arising from system deployments and establishing the operating model may weigh down the company’s result.
In June, a draft tax audit by the Large Taxpayers Office proposed that approximately EUR 1.1 million in waste tax would be payable by L&T for 2018. Based on the response submitted by the Group, the tax authorities have lowered the amount to approximately EUR 0.2 million. The Group considers the tax authorities’ interpretation to still be erroneous and the matter remains under review.
More detailed information on Lassila & Tikanoja’s risks and risk management is provided in the 2019 Annual Report and in the Report of the Board of Directors and the consolidated financial statements.
Outlook for 2020, updated on 23 October 2020
Full-year net sales for 2020 are expected to decrease year-on-year and adjusted operating profit is estimated to be EUR 35–43 million (40.5).
Previous outlook for 2020, issued on 24 April 2020
Full-year net sales for 2020 are expected to decrease year-on-year and operating profit is estimated to be EUR 30–40 million (40.5) excluding loss related to the discontinuation of Russian operations.
LASSILA & TIKANOJA PLC
Board of Directors
President and CEO
For additional information, please contact:
Eero Hautaniemi, President and CEO, tel. +358 10 636 2810
Valtteri Palin, CFO, tel. +358 40 734 7749
Lassila & Tikanoja is a service company that is putting the circular economy into practice. Together with our customers, we keep materials and properties in productive use for as long as
possible and we enhance the use of raw materials and energy. This is to create more value with the circular economy for our customers, personnel and society in a broader sense. Achieving this also means growth in value for our shareholders. Our objective is to continuously grow our actions’ carbon handprint, our positive effect on the climate. We assume our social responsibility by, for example, looking after the work ability of our personnel and also offering jobs to those who are struggling to find employment. L&T operates in Finland, Sweden and Russia. L&T employs 8,200 people. Net sales in 2019 amounted to EUR 784.3 million. L&T is listed on Nasdaq Helsinki.