Luotea (Helsinki:LUOTEA) Q1 2026 Earnings Call

0:00 Good morning and welcome to Lascella and Tikhanoya January March twenty twenty six earnings release broadcast. My name is Eero Halbenemi, and today with me I have Jonas Sorsanen, our CFO. Today's agenda is as follows: first, we go through some highlights, both financial and operational highlights. Then we will take a look at the market environment in 1Q twenty six.

0:53 Then we'll dive into the efficiency and operations, and then sustainability. Jone will go through the financial highlights, and then we'll wrap up with the outlook. And obviously, we are ready for your questions after the presentation. First, with a few highlights. Our net sales grew by 6%, despite the challenging market environment, and I'm actually very pleased to report growth like this in a typically very difficult quarter for us. So, always the first quarter for us is the most difficult of the year.

1:43 Our adjusted EBITDA was 11,500,000, which was 1,300,000 less than a year ago. And our adjusted EBITA was SEK0.2 million, compared to SEK2.6 million a year ago. Our free cash flow was in line with the previous years, if we exclude the impact from demerger related payments and settlements. Operationally, we were at the same level. Operationally, as I mentioned already, the market environment is challenging, but we did take active measures to tackle the sharp increase in diesel price, and those measures have been implemented already.

2:49 Our transition service period is approaching to end, and everything is going as planned. We expect to end the transition services between Luotea and us by the end of June. And our cost efficiency programme is on track. Then, let's go a little deeper into the net sales. As I said, our net sales grew by 6%, and organic growth was 2%, and the rest obviously came through acquisitions. This represents a nice continuation for the growth that we had in the second half of twenty twenty five, a little over 5%.

3:45 So, overall, I'm pretty pleased how we have been able to get the growth on track towards our strategic goal, which is growth over 6%. When we look at the growth through different service areas, we can see that in the waste management and recycling, the growth was only 1.2%. And this came from the acquisition that we made last summer. But in hazardous waste and remediation and industrial services and water treatment, we saw very healthy growth in both these business areas. In hazardous waste and remediation, the growth was all organic and it was over 23%.

4:51 And in industrial services and water treatment, 40.3%, and largely this was organic growth. So, pleased with both of these business areas. Obviously, we do have a very challenging environment in waste management and recycling. Then, when we look at the EBITA development, as I said in the highlights, it was 0.2 compared to 2.6, so quite substantially lower. But there are quite logical reasons behind this decline. First of all, the overall volumes in municipal solid waste declined, and this is and has been a challenge for us for quite some time already.

5:55 I was a little bit optimistic when we released our 25 numbers, but obviously, because of the crisis in The Middle East now, growth is very fragile and the market doesn't look quite as good as I thought at the time. Also, because of this crisis in The Middle East, the oil price has increased sharply, and that affected our EBITA by €500,000. We have completed our ERP rollout and the depreciations are about €500,000 higher in the first quarter than they were in the comparison period.

6:56 And also, we saw a difficult market when it comes to treatment fees, because there was an oversupply of waste to be incinerated. We expect this to be more of a temporary situation, but that did affect negatively our first quarter profitability. And obviously, behind all of this, do have the effects of continuing municipalization. Then, going to the market environment, as I said, the market was more challenging than we expected a few months ago.

7:45 The GDP growth is expected to be between 0.51% only, when we thought earlier that it could exceed 1% to be closer to 1.5%. But as I said, now it looks like it will be less than that. And overall, in Finland, the economic recovery is delayed due to this geopolitical situation. This graph shows how the diesel price has reacted to this crisis in The Middle East. And as you can see, the pattern is very similar to what it was in 2022.

8:37 So it's a bit of a deja vu when it comes to the diesel prices. And we have very good processes for situations like this. And like I said earlier, we have already implemented very comprehensive price increases to address this abnormal situation in market. The effect of these price increases was not at all visible in the first quarter, but it will gradually come through in April and May, so we will see partially the impact in the second quarter and full impact from the third quarter onwards.

9:32 This situation does affect also the recycled material prices. It was not really visible yet at the end of March in the recycled plastic prices, but the expectation is that prices for recycled plastics will go up as a result of this oil price increase. For cardboard and paper, the price level is pretty stable. We do expect also the prices of recycled metal to increase as a result of these problems in supply of materials.

10:33 Then I'll move on to efficiency and operations. Our fixed cost development is visible in this graph, and as you can see, it is very flat. Even though we did complete the demerger, you can see that there is no increase in fixed costs. So we have been able to offset the sort of potential increases in fixed costs with our cost efficiency measures. And the costs are flat, even though our sales have now started to grow. So, eventually, we expect to see the benefits of being able to keep the fixed costs at these levels, or even slightly lower going forward, also in the EBITA line.

11:36 We have initiated a separate review to improve the gross margin in waste management, and this is to offset the negative impacts I just went through that we experienced in first quarter. And that programme, as I said, has been initiated, and we expect to see results of that programme from second quarter this year onwards. So our ICT transformation is getting to the final stages, and we went live with our finance system.

12:32 Also, that is now in the three sixty five environment and fully cloud based from the beginning of May. Obviously, is very good news and we will start to see the benefits of this transformation gradually second quarter onwards this year. But obviously, right now, twenty twenty six, the amortization burden is at its highest and will gradually go down as time progresses. But overall, I'm really pleased where we are with our ICT transformation, and there is a big opportunity for us improve our operational efficiency, but also more importantly improve our customer service and reporting to our customers.

13:40 Then a few highlights from a sustainability perspective. Our own carbon footprint has continued to decline as planned. So it is 4.7 compared to 4.9 a year ago in corresponding quarter. Our carbon handprint is also going down, which is obviously not the goal. But the reason is that the amount of recycled paper has come down for fifteen-twenty years already. And in the past five years, have lost almost two thirds of recycled paper. So the decline is more than 10% per year and will continue.

14:37 Obviously, that is partly offset by recycled cardboard, but not to the same extent as we are losing recycled paper. And that is the main reason why our carbon handprint is going down. At the same time, recycling rates are going up and are supporting the carbon handprint. A very positive development in work safety. Our TRIF was 16.2%, and this is with a big margin, the best result we have ever seen. And what is in the background of these good results is very good preventive work that we have done across the organisation.

15:31 I'm really pleased to see these kind of levels in our work safety. Also, customer satisfaction has remained a good level, despite the very extensive rollout of our ERP systems. And perhaps the final point. We have contributed to giving the opportunities to next generation, and we are offering two fifty jobs for summer employees. With this, I'd like to hand over to Joni, and he will go through financials.

16:18 Joni? Thank you, Eero, and good morning, everyone. I would like to start this section by highlighting some of the key events in the field of financials in the first quarter. As already noted in Eero's section, we had a positive development in net sales. We were growing in line with our mid term strategic target at 6%. However, profitability was below previous year in a seasonally slow quarter due to reasons already outlined in Eros section. We had a stable development in financial position throughout the first quarter, and the balance sheet remained strong at quarter end.

17:11 Operationally, our free cash flow was in line with the comparison period, if we take into account the partial demerger related one off payments and settlements. And finally, L and T's share of profit from joint venture Lania was in line with previous year at €1,700,000 Looking at net working capital development. Net working capital at the end of the quarter was minus €21,500,000 compared to minus €24,600,000 which is a change of 3,200,000 year on year. It's good to note that the comparison figures are prepared on a carve out basis.

18:00 If we look at the change compared to year end, we can see NWC tying up by €8,300,000 and a large part of this change is due to these partial demerger related payments. So operationally, we are fairly satisfied with the net working capital development in the first quarter. And in terms of seasonality, we expect the pattern evident in 2025 to also take place in 2026. So we expect net working capital to weaken in the second and third quarter, and then again release towards the year end.

18:50 Capital expenditure in the first quarter was around EUR4 million compared to EUR3.4 million in the comparison period. CapEx consisted of investments in machinery and equipment and, to a small extent, also in ICT systems. Our depreciation and amortization increased from the comparison period, partly due to these ERP related investments, and were at €11,800,000 compared to 10,500,000 in Q1 twenty twenty five. In full year 2025, our capital expenditure was around €42,000,000 also consisting of organic CapEx of 29% and M and A CapEx of 12.5%.

19:51 In terms of cash flow, as already noted, taking into account the one off type of partial debenture related payments, free cash flow was in line with the previous year. Here we have depicted the free cash flow bridge on a rolling twelve month basis, so from April 25 until March 26. So on a rolling twelve month basis, the company has generated adjusted EBITDA of EUR 83,000,000, net cash flow from operations of EUR 67,000,000, impacted by items affecting comparability around EUR 6,000,000 and finally, free cash flow on a rolling twelve month basis around EUR34 million, which in relation to reported EBITDA is conversion of around 45%.

20:51 Balance sheet remains strong at quarter end. Our net debt in relation to adjusted EBITDA was 1.9%, which is well in the range of 1.5% to 2.5%, which is our midterm strategic target. Net interest bearing debt at 161,500,000, consisting or including also lease liabilities around €66,000,000 Equity ratio was practically intact compared to year end and was 35.1%, and gearing also developing on a fairly stable manner compared to year end at 94.5%.

21:39 Looking at the financial position, it's good to note that the first, second and third quarters of twenty twenty five were prepared on a carve out basis, so they do not reflect the capital and financing structure of Lasila and Tiganoje. Looking at the maturity structure of our interest bearing liabilities, the financial debt of the company consists of a 75,000,000 bond, which is due in 2018, and a 50,000,000 bank loan, which is also due in 2028, but includes a two year extension option, by which the maturity date can be moved into 2030.

22:32 The company had a strong liquidity position at the end of the quarter, around €30,000,000 We had no commercial papers outstanding at reporting date. Also, the company's credit limits and account limits were totally unused at the quarter end. The average interest rate of our long term loans was 3.2. And finally, some other KPIs for the company in the first quarter. Our reported return on capital was 9.3%, impacted by one off items and also carve out principles, especially concerning financial year 2025, because this KPI is calculated on a rolling twelve month basis.

23:27 Here we have calculated a more comparable and adjusted figures for return on capital and also for return on equity. So 10.7% for return on capital and 14.4% for return on equity. And as already noted, our share of profit from LANIA was on previous year's level at SEK 1,700,000 and earnings per share minus SEK $0.01. Also, when looking at the earnings per share figures, it's good to note that the 2025, due to carve out principles are not comparable with 2026. But with these words, I would like to hand over back to Eero.

24:15 Thank you, Johnny. And then our outlook for 2026, which is unchanged. We estimate our net sales to be between EUR420 million and EUR450 million, and adjusted EBITA to be between 38,000,000 and €44,000,000 But with this, we'd like to hand over to you and we are ready for your questions. The next question comes from Nico Ruukangas from SEB.

25:18 Hello. This is Nikronis from SEB. Thank you for the presentation. I have a couple of questions, and I'd like to go one by one. And starting with the outlook, you discussed as the last topic now. So you highlighted in the beginning that the market doesn't look as strong as it did in February when you reported your Q4 earnings. So how worried are you regarding your guidance this year now given the comments on weakened markets? And then are the improvement actions you are taking enough to offset these market challenges? Yes, that is a fair and good question.

26:07 Yes, we strongly believe that our actions are sufficient and we are quite confident that we will reach this outlook. All right. Then you highlighted higher waste treatment fees, which you also highlighted that will be temporary. So can you explain the background a bit? Did you see these higher waste treatment fees already in the beginning of this year? Or was this a surprise? And then how big was this impact and how temporary do you expect them to be? Yes, again a good question. So, there has been, let's say, quite a bit of fluctuation this, especially as it relates to the incinerated waste.

27:10 And if we go back to '22, when the Russian border was closed and nothing was coming from Russia to Finland. There was a shortage of all sorts of material that could produce heat. And then that situation has normalised and there has been an increasing import of waste to Finland, as you probably have noted from media as well. And then, on top of that, winter, not this winter, but the previous winter was very warm and many of the district heating companies were stocking up different types of materials that they could use to produce energy and heating.

28:24 And this has sort of the warm winter earlier and sort of the overall market situation has led to a little bit of imbalance in the market. That has caused a bit of a peak in the gate fees. When I talk about temporary, I mean that in general nothing has changed. There is serious overcapacity of incineration in Finland.

29:09 It is estimated to be somewhere between 30 to 40%. That can be partly offset by import, but we don't expect that to be a permanent solution. We expect gate fees in the long run to go down. But as I said, there are temporary fluctuations in the market and that does affect us as well. For the most part, it was not a surprise to us. There were certain elements that were perhaps a little bit of a surprise, but not to a large extent. Okay. That was a good explanation. And if you compare it to higher fuel costs impact year on year, so which one, the higher fuel costs or fees had a bigger negative impact to you in Q1?

30:17 Obviously, we didn't open in the report the impact of this, but I would say that this was also in the range of several hundreds of thousands, so it was not insignificant compared to 2025. But as I said, we had anticipated most of that already when we made our plans for 2026. Okay. Fair enough. Good. Then I still have a question on your sales. And especially water treatment sales growth strong, but you didn't open that much organic growth drivers there. So can you give some color on that? Yes.

31:08 We had very good demand for our process cleaning services in the first quarter, and also the execution of these projects was very good. So that is the main reason. There were certain customers that perhaps typically don't have as much demand for our services as they did in 2026. All right. So it was not kind of a timing impact between quarters that much, but there were some kind of extraordinary good items.

31:58 Well, yes and no. I think we have been successful also in the customer front and getting a wider customer base, which obviously helps us when there is demand to win those projects and execute them well. So it is not extraordinary from that perspective. Yes, and that's a good sign. Good. Then one last for me on costs regarding the demerger. So did you have any kind of extra costs which you didn't adjust for in adjusted EBITA regarding the demerger or other kind of costs that will go away soon if you exclude the costs you highlighted regarding the ERP renewal?

33:11 Well, obviously, as said, we still had the rollout for our finance system, our consolidation system, our customer support system. So we did have sort of the final parts of our ICT transformation taking place in the first quarter and still a little bit in the second quarter. So I would expect that we have have a little bit of extra cost around that. But when it comes to the demerger related things, then we have tried to take them out from the operational results.

34:03 From that perspective, I'd say that the adjusted EBITA is clean. But we do have extra cost as we are sort of finalizing this ERP transformation journey. And as I said in the presentation, we expect to be there by the end of June this year, and we will start seeing the efficiencies gradually coming in the coming quarters this year. All right, good. Thank you for the explanation and thank you. That's all from me. Thanks, Nico. There are no more questions at this time.

34:49 There is a question online, so Keija will read it. Yes, we have few questions. First one: How big of a headwind do you expect from higher diesel prices in Q2? Impossible to say, sorry. So, obviously, we have taken the measures to offset the diesel prices as we have experienced them now. We do not expect this to be over in weeks, but it probably will take months. Let's see what happens, but obviously it's impossible to predict when it ends.

35:38 Okay, second one. How big a share of the increase in diesel price you believe you can pass on to customers? Well, it is a combination of efficiency measures and price increases. But as I showed in the graph from 2022, we have very good processes to manage these kind of exceptional situations. I'd expect us to be able to reach our outlook, as said, and handle the situation with price increases and efficiency measures.

36:26 Then, next one. How confident are you that the price increases and cost efficiency measures now being implemented will be enough to restore profitability during the rest of this year? And when should investor expect to see a clear margin recovery? Well, as I have already said during this webcast, we keep our outlook and we are confident that we will reach it. That probably answers the substance of the question. Then last one. Aside from the higher fuel prices, was there any negative surprises in Q1 result compared to your expectations in the beginning of the year?

37:20 Well, think I already answered to that question as well, so I have nothing to add beyond what I've already gone through. But thank you for the very good questions. It seems like there are no more questions, so we thank you for your interest to LASILANTikanuj and wish you a nice continuation of the day. Thanks. Bye bye. Thank you. Bye.