Aspo Plc

LSE:0J8S

Earnings Call Transcript

[Operator]

Welcome to Aspo Interim Report. [Operator Instructions] Now, I will hand the conference over to the speakers. Please go ahead.

[Rolf Jansson, executive]

Very welcome to the Q3 2022 report of Aspo. We have had an extremely strong quarter. Looking at financial figures, we reached all the financial targets during the quarter, both when it comes to growth, operating margin, return on equity and also gearing. And we're even delivering record high numbers.

So particularly looking at the earnings per share figure, EUR 0.82 per share, and that includes the one-time cost. This figure is EUR 1.05 per share, excluding the one-time cost. This is a record-high figure for 3 quarters this year.

I don't think that -- even more importantly than the financial figures themselves is that we've been able to execute our strategy. So we made some acquisitions, Kobia, Johan Steenks. We were able to close the pooling concept of ESL Shipping. It's a really transformative project of ESL. We're making good progress when it comes to Russian exits. ESL fully exited already. Telko has signed a binding framework agreement and also Leipurin making progress.

We've been able to clean up our portfolio during this year. Yesterday, we came out with the news of sales of Kauko, and already before that, this year we told that Vulganus has been sold. In sustainability, we're doing good progress. And during Q2 and Q3 this year, we've clearly strengthened our balance sheet.

Then, over to the numbers. Top line development continued growth, 8%, Q3, 15% year-to-date growth compared to last year. We are on track compared to our 5% to 10% target. ESL is really driving the growth currently of Aspo, 37% growth.

And naturally, the war in Ukraine, the situation in Russia is impacting the growth of both Telko and Leipurin. However, we are mitigating this going forward with both organic growth in West as well as acquisitions.

Then profitability, a good operating profit of EUR 30 million for the last quarter 8.1%, year-to-date 9% and basically EUR 44 million of operating profit this year.

Again, ESL, very strong results. But from a profit perspective, also Leipurin and Telko are doing good. Onetime costs, which affect comparability, fairly limited for Q3, only EUR 0.7 million, primarily related to transaction costs of Kobia and then Russia.

And then if you look at year-to-date, we are at EUR 8 million. And then if you recall, it's primarily what has happened in Ukraine, both credit losses from customers as well as the inventories, and then the exits of Russia.

And overall, we are forecasting a EUR 25 million onetime costs, which will include then the full exit from Russia and including also this EUR 8 million. Very strong operating cash flow, basically EUR 46 million year-to-date.

Working capital of minus EUR 6 million. This is primarily related to the Green Coasters, which will be sold further to the special purpose vehicle of the pool, basically increasing the inventories of ESL. Telko had performed very well when it comes to working capital.

Then, CapEx investments, basically 2 things. One is the Kobia acquisition, the price was actually EUR 15.6 million, but here impacting cash flow EUR 15.4 million. And then, we have the ESL Green Coaster advanced payments together with the dockings. And that will then take the free cash flow to approximately EUR 18 million.

Return on equity. This is the third quarter in a row with a return on equity above 30%. And even if you incorporate the onetime costs, the return is still above target level at 24%. I mentioned already the divestment of Kauko. Of course, overall, a small transaction, but very important for Aspo, because this will free up management time to other things.

Kauko, basically too small of a business for Aspo and so far generating losses this year, so it should also be an opportunity to improve our results going forward. Sustainability, I think, overall, strong development, particularly when it comes to emissions.

We measure them as divided by net sales. We have a target of a 30% reduction by 2025, and now we are clearly more than half ways. We are at 0.34 compared to the starting point of 0.44. I think all the businesses of Aspo are working on this good progress.

Here is one activity mention of ESL, Virtual Arrival procedure, basically optimizing when the ship will arrive at Harbor, and therefore, it will save a lot of energy. And this is an opportunity where we can share the cost benefits also with our clients.

Safety, we are very much focusing on this. We're currently our safety frequency at 7.8. We're lagging a bit behind compared to the target of this year which is 7. We have -- there are a lot of activities going on. To mention some, for example, the safety walks were particularly in Telko now progressing actively with them, and also on an Aspo level, a lot of activities, following up discussions, learning from each other, et cetera.

Then over to the business reports, and starting with ESL, and glad to say that ESL's position continued to deliver good results. If we start with top line, extremely strong growth, 37%. I think overall, kind of 3 drivers behind this good demand. Clearly, good utilization of the fleet capacity in very efficient use, and thirdly, price increases of fuel and LNG. These are the main drivers.

Overall, continued good demand when it comes to contract traffic and also relatively good spot freight rates for ESL. Tons, we transported a bit less than last year, and that's due to a longer transportation routes compared to the situation before the war and also congestions in the harbors.

Then, if we look forward, clear kind of macroeconomic uncertainty. However, we see that we will be able to deliver good results also going forward, considering our customer base and our contracts. The situation varies a bit depending on the customer segments.

For example, very strong demand in energy, good development in pulp, fertilizers, good development, although for, of course, a seasonal business and a bit less favorable development in the metal industry over the next couple of months. Overall, longer term, we see that ESL continues to be well positioned in the Baltic Sea.

There's significant changes due to the war in Ukraine, and we feel that ESL is in a good position and particularly due to the investments in Green Logistics which should support ESL's profit generation long term. The Baltic Dry Index, currently, again, on the same level approximately when the war started end of February, although it's, as you see, very strong volatility over the past couple of months.

And then looking particularly, for example, on the Handysize index, you see that we're still clearly above the kind of historical levels 2015, 2020, although we're lagging behind 2021.

In the Q2 report, I already mentioned about the pool and we were finalizing it. Now I'm happy to say that this deal has been closed, and I see this as a very important strategic vehicle for ESL to facilitate the kind of low-carbon growth strategy and reducing CapEx, improving returns of the company.

Then looking at profit of ESL, a 14.9% of operating margin, very strong. Basically strong profitability in all vessel segments, all customer segments. However, in the coaster segment, relatively seen a bit compared to last year, not as good profitability development during the time chartered vessels, which are priced on a more, higher level.

We see that the market going forward and particularly our long-term contracts will support still the good profitability level of ESL.

Then, over to Telko, which is really a polarized picture. We have West doing very strong, showing very strong development and Russia shrinking business. Basically, overall, the top line declined with 13% during the quarter. Year-to-date, we're still on a growth track. If we speak kind of rough figures, during the quarter, basically the Russian -- Belarusian business declined with 40%, 50% whereas the business invest continued to grow with approximately 10%, just kind of overall ballpark figures, showing really this polarized development.

And this development is also very clear if you look at the business lines. So, lubricants, strong growth, partly due to momentum, partly due to price development, positive price development. And then, plastics, chemicals, very much impacted by Russia. Availability of products improved, still not being on a normal level. And then pricing declined, however, because of the oil prices, energy prices, it was fairly stable development.

And then if we look forward, when it comes to the Western market, there are great uncertainties. There could be rapid changes in the market. However, because of our position in the more kind of engineering specialty products, we see a much more stable development.

Glad to see that we were able to do, let's say, the second acquisition of Telko this year, Mentum, we closed earlier on this year. Johan Steenks, I think, a very good strategic fit with Telko, fairly small business, EUR 5 million. But this is a kind of mix of an add-on and a platform investment. This will enable us to grow on the Norwegian market, both in plastics as well as chemicals.

Some weeks ago, we came out with the news of exiting Telko Russia. This is from a Russian perspective, let's say, the major risk of Aspo. We're selling the business to [ JK Hemic ], an industrial player purchases price EUR 9.5 million. And this will drive write-down of EUR 9 million, including then all transaction costs and including also a write-down of goodwill.

In addition, some translation differences, but these are very dependent on the movement of exit, depending on the exchange rate of euro-ruble. This is a major step of Aspo. Of course, this will still have to be approved by the Commission -- Governmental Commission in Russia, which creates some uncertainty. Then, Telko profitability, EUR 3.7 million, 6.1%. This is now the first time I would say that this gives some understanding of the run rate of Telko profitability-wise after exiting Russia.

Of course, the operating margin will increase somewhat because we have still here sales from Russia and Belarus. But the Russian business is close to zero from a profitability perspective, and we believe it will remain so during the Q4 this year.

Then last but not least, Leipurin. And here, apologies, there are a lot of structural changes, which makes these figures fairly difficult to understand. We have the Vulganus, we have Russia, we have Kobia. But I will try to explain kind of the top line development here, -- the overall development.

Growth continued 17%. Basically, we have a strong growth, both in Finland, in the Baltics, clear decline in Russia, in the Eastern markets, minus 18%. Kobia, 1 month of top line here, EUR 4.4 million, adding to the revenues. And both bakeries, food industry, also good development, close to 20% growth.

If you look at purely volumes, both in Finland and the Baltic countries, there was a volume decline. We see a clear shift of consumers moving to more affordable products. Some possible impact also by the fact that Finns -- people in the Baltic countries are traveling abroad, less consumption during the summer months in the domestic market.

However, we see kind of going forward that this is very stable market when consumer confidence will come back. So we do not expect this kind of volatility to continue. And the nice thing is that when we'll exit Russia, Kazakhstan and Belarus, we are completely offsetting that with the Kobia acquisition, which is actually double the size of the business that we are exiting.

So that looks for positive development. Kobia acquisition purchase price EUR 15.6 million. We are very happy with this acquisition. We believe it will bring extremely strong synergies. We are already implementing this. To give you some examples, in Finland, we're looking for growth in the food industry that we have not done in Sweden. We're making investments there.

And of course, the Kobia products that are produced in Sweden, this we will start to sell also in Finland, and the Baltic countries to give you some examples.

We are also going to look for the opportunity to sale and lease back the real estate that we acquired in Kobia, of course, spending on the market conditions when this will happen.

Profit development, the graph does not really tell the kind of real trend of Leipurin. I think the big picture is that Leipurin, during the first 3 quarters made an EBIT of 3.5%. And that even includes the negative impact of the Kobia acquisition, because we valued the inventory of Kobia, including the margins, which means that both, when it comes to September figures and also October figures, we'll make a negative result while selling these products in Sweden.

And we see strong potential here both from the full profit potential program that we launched, and then as I said, also the synergies between the countries.

I'm also glad to soon be able to welcome Miska Kuusela to the team. He will start as Leipurin CEO beginning of next year. I think he has extremely relevant background, broad experience of the food industry. He has showed in several cases, as a CEO, the opportunity to develop the businesses, the last 3 -- approximately 3 years in Myllyn Paras with sponsored capital as an owner.

Then back to Aspo level figures. Balance sheet, gearing increased a bit, still below the 100% level and equity ratio increasing a bit to 36%. Net debt declined with some EUR 7 million worth EUR 160 million, and liquidity, very strong maturity profile of the debt, is actually -- we're stretching it further because we raised some EUR 20 million from Nordic Investment Bank, and which you can see in the 2027 and beyond bar.

We came out during this morning with the decision by the Aspo Board that we will pay an additional EUR 0.22 per share as dividend. Meaning that, we, for this year, has paid a total of EUR 0.45 per share. Some weeks ago, we updated our guidance for this year, nothing new here. So our guidance is operating profit of EUR 52 million to EUR 57 million.

And then, summarizing strong Q3 from a financial perspective. Strategy development in good kind of momentum and good progress, and despite the macroeconomic uncertainty, we still see that Aspo is in good position to deliver good result in Q4 this year and beyond.

Thank you very much for this opportunity to present the Q3 results. And I propose we go over to questions and start with the audience here.

[Joonas Ilvonen, analyst]

Joonas Ilvonen from Evli. Could you provide some color on ESL's operational efficiency? I mean obviously, it's already on a very high level, but do you see any further like short improvement potential?

I mean, obviously, you have further long-term drivers like the new hybrid vessels and whatnot. But how do you see the kind of short-term potential for operational efficiency gains from this point?

[Rolf Jansson, executive]

If we think very short term, then I would more focus in the -- on the kind of delivering results from the investments we've done in Business Intelligence. So I said that before, we are following up very closely different type of KPIs, and gradually, we optimized the business.

And I mentioned it before that the [ ballast ] ratio is developing in a very good direction, kind of optimizing the transport structure and utilizing the ships to a maximum. I think this is the very short-term opportunity.

But then long term, there's a lot of strategic levers. It's the pooling, the Green Coasters, further investments in Handy, kind of the low carbon shift of the strategy, all of these kind of bringing those together.

[Joonas Ilvonen, analyst]

And do I understand it correct that when you say you see small lesser time charter rates increasing that there's you still see some -- your own pricing kind of tailwind going forward that your rates are still going to increase, catching up with those higher time-chartered rates?

[Rolf Jansson, executive]

Of course, our rates are fully market dependent. But clearly, there's strong correlations between the rates of the time-chartered vessels compared to our rates.

I think there's 2 angles to this. First, how much you pay for the time-chartered vessels. And then secondly, how much capacity you will get. And as you know, when we -- still during this year, we will get these Green Coasters vessels. And after that, we're less dependent on the time chartered vessels overall.

[Joonas Ilvonen, analyst]

And maybe a bit further color on those spot market rate changes. So obviously, you've already seen some declines in the larger vessel categories. But did they already have a -- like what kind of effect on your profitability?

[Rolf Jansson, executive]

I think it's fairly limited effect overall, because the spot market -- I mean, it's only some 20% for us. And then particularly, that is the Supramax vessels to a large extent. And our Supramax vessels are in traffic for the moment. But the problem of course is the challenges that it's only for a couple of months ahead compared to the Handysize vessels and cCaster vessels, which primarily are tied up in long-term contract.

[Joonas Ilvonen, analyst]

And maybe a final question on Telko. So you said that Western margins continued on a strong level, but I think -- was that mainly from a year-on-year perspective? I mean what about quarter-on-quarter? Because obviously, it's a pretty kind of extraordinary market environment. So did you see any softening in quarter-on-quarter in Western margins?

[Rolf Jansson, executive]

If I look at gross margin, they are fairly flat development, so no major changes. If we then divide the market into 2, kind of more commodity kind of volume products versus specialty engineering products, I see some softening when it comes to volume products and commodities, but not in specialty products at all.

[Sauli Vilen, analyst]

Sauli Vilen from Inderes. A couple of questions from me also. About the Kobia sale and leaseback transaction, and on the appendix, you said that the Kobia had tangible assets of close to EUR 13 million. Is that mainly properties? And -- well, that's the first question.

[Rolf Jansson, executive]

It's primarily properties. There are some production equipment as well, but primarily property, yes.

[Sauli Vilen, analyst]

How have you valued those like -- did you appreciate them to full market value, so to speak, when you did the transaction on how we should look at those?

[Rolf Jansson, executive]

I think it's a very conservative valuation of those assets, what we have now in our balance sheet.

[Sauli Vilen, analyst]

Then about the restricted cash in Russia, you had the EUR 14 million at the moment there. Can you like -- how we should look at that amount? Obviously, it's in your books still. But -- like you hope to get it back basically through the sale arrangements, right? Or what is -- since obviously, through dividends, you cannot create too much capital at the moment, I guess?

[Rolf Jansson, executive]

I think that's a very relevant question. So first of all, if kind of -- the EUR 40 million, it's approximately EUR 9 million to EUR 10 million for Telko and EUR 4 million to EUR 5 million of Leipurin. And taking home that money by dividends, it's a long path and it will take too much of time.

So this is really the exit. So now we'll get the EUR 9.5 million back from Telko, when and if that deal is closed. Of course, we are leaving behind something, and that is the inventory.

So -- and then based on that, you have the write-down of the net assets. And then, it's a question of the upcoming purchasing price of Leipurin, Russia. But basically, the answer is that, our aim is to take back that restricted cash of EUR 40 million via the exit.

[Sauli Vilen, analyst]

Regarding that, are you still confident that you will exit Leipurin so -- during this year?

[Rolf Jansson, executive]

Definitely, so still the target is to make a full exit during this year. When it comes both to Telko and Leipurin, the bigger question is how fast and when the governmental commission will get -- give approval to these transactions. And there's been a lot of discussions with experts on this topic.

And I think your guess is as good as mine. It can be from a couple of weeks to a couple of months. But I can tell you that we've done all the necessary prepare to work for us. That including valuations, submitting the materials, et cetera. And for Telko, the materials have been submitted already to the commission.

[Sauli Vilen, analyst]

Then, final question about the Telko's profitability. If we look at back like -- let's say, before COVID crisis, Telko's EBIT as a group was like EUR 10 million, give or take.

And the Russia was kind of a big part of it actually, back -- or Russia plus Belarus back then. And now basically, if the run rate is, as you said, the Q3 figures, that means that the Western EBIT level of Telko has multiplied basically, more than doubled, close to tripled or so in rough figures.

So again, just -- obviously, it's still the same business, just the management has changed, or just the market situation is really good at the moment in the West. But like what are the main drivers for the change on -- in the profit side there, since in the profit side, it seems it's a different company, even though it's the same company.

[Rolf Jansson, executive]

Maybe the answer is that it's a different company. So we should not look at the 2020 figures. We should look at the 2021 figures. And if you recall, 2021, we did revenue of approximately EUR 270 million and we delivered EBIT of EUR 21 million.

And then we said that we will divest EUR 70 million, so approximately 1/4 of the revenue will disappear. And if you've got a similar proportion out of the EUR 20 million, then we are roughly on the same level as this EUR 3.7 million that we reported this quarter.

So I think there was extremely successful strategic change between 2020 and 2021. And basically, that was the focus on the value-added products, engineering, plastics, specialty products, very strong focus on margin and very strong focus on working capital and basically rotating the inventory.

So let's compare with the 2021 figures -- and they correlate, I think, very strongly with these figures here.

Then going to the online. So do we have any questions online?

[Operator]

[Operator Instructions]

[Pasi Väisänen, analyst]

Pasi Vaisanen from Nordea Bank. I have several questions. So if I may take those one by one, and we can start with ruble rate.

So with some extra operating profit coming from the very strong ruble against euro in the third quarter, so is this going to offer true underlying EBIT you posted? Or does it include something artificial coming from the currencies?

[Rolf Jansson, executive]

I think that's a very good and valid question. So if we look at kind of year-to-date figures, basically during particularly Q2, I think we benefited a lot from the stronger ruble, because we're very much focused on selling the inventories of Telko in the Russian market against good demand.

And then we -- with a strong ruble exchange rate, that turned into a good profit of Telko. And this is basically what we have, to some extent. At least part of this we have as cash in Russia at the moment. But then looking at Q3, I don't see the ruble rate really affecting the results very limited effect.

I mean the businesses of Aspo in Russia, when it comes to Telko, it's really close to zero, the profit. Leipurin is doing fairly good profit still in Russia, but the figures are still so small that it will not really impact the overall picture.

[Pasi Väisänen, analyst]

Yes, precisely. That actually explains it quite well. And then the second question is regarding this one-off items. So if I read all right, you have already booked EUR 8 million as a one-off for the 9 months period and then the remaining part, EUR 70 million one-off costs and write-downs will be booked in the fourth quarter.

So how this amount is divided between the Telko segment and financial items or to kind of -- where we should actually look at the EUR 70 million to come up at?

[Rolf Jansson, executive]

Again, good question. So we have EUR 8 million year-to-date. If you look at Telko, the Russian exit will have EUR 9 million that is EUR 17 million together. And then the reminder, kind of EUR 8 million, that would come from the exit of Leipurin plus some other structural costs, including. So that is the kind of ballpark explanation of the EUR 25 million.

[Pasi Väisänen, analyst]

And then looking at just Leipurin operations -- and so what would happen if you don't get a reasonable price for Leipurin, Russia business? And are you still going to divest those with EUR 1 million or EUR 2 million? Or are you just actually stopped going to stop the business? Or is it going to be there still in the first quarter of next year?

[Rolf Jansson, executive]

We will -- in any case, we will make the write-downs during this year based on either clear exits or then kind of best estimates of this situation. And we still, in all of these cases, we have several scenarios on the table. And let's assume for a while that if we would not be able to find a good buyer for Leipurin, Russia -- we also, of course, have a wind-down scenario. But that's painful. It takes a lot of time.

And as already commented before, you have limited opportunity to take back capital from Russia at the moment. So we are really working on finding a good buyer for the business.

And I think we have relatively good prospects here because basically, what are we selling? We're selling cash. We're selling inventories. We're selling networks and competencies. But a great share of the value is actually tied to the cash reserve and then to inventory.

So from that perspective, it should be a fairly interesting asset to buy for some investors.

[Pasi Väisänen, analyst]

And then I have at least 2 questions here on my list. And the next one is related to hybrid loan and interest expenses.

If I actually saw right from the past reports, you have usually booked interest expenses to reported EPS figure. And now it -- I think it is not there for the third quarter. So is there something changed into reporting, or how to kind of book this interest expense is coming from the new [ pattern? ]

[Rolf Jansson, executive]

I don't think we have made any changes. I think these expenses should also be found on the row of financing expenses. That should include the hybrid loan as well.

Arto, do you want to further comment on this topic?

[Arto Meitsalo, executive]

Okay, Pasi. In EPS calculation, we still have them in -- we have to check whether there is some misunderstanding in income statement. Of course, this interest of hybrid loan is not included. So EPS calculation, there should be this interest.

[Pasi Väisänen, analyst]

Maybe it was EUR 0.02 if I calculate it right, but I end up EUR 0.28, and you reported EUR 0.30. So that was the kind of difference. But we can look that it a bit later on and check that calculation.

And maybe a bit kind of a broader question then, as a last, regarding the business environment and next year. So would it be a kind of a realistic assumption that your operating profit could even decline next year when taking into account kind of the Russian operations and exit from there, which actually could even take EUR 10 million out from the front operating profit, and then taking into account also the recent decline in the yields of shipping market?

So are these recent acquisitions enough to fulfill the EBIT gap coming from the key decline in shipping and also the Russia exit in this year?

[Rolf Jansson, executive]

If I comment kind of business by business, so starting with Leipurin, we will fully compensate the Russian business with the acquisition of Kobia. When it comes to Telko, we're saying that the Q3 result, EUR 3.7 million is a fairly good indication of the run rate going forward.

And that also, if you tie back to the 2021 figures and deduct basically 1 quarter of the top line, and results also a rise at the same indication. And then when it comes to ESL, as said in the presentation, if we look kind of short term, we see that we, based on our customer contracts, are able to deliver continued good results.

Then longer term, naturally, there's a lot of uncertainty when it comes to the macroeconomical aspect. However, we see us being a kind of good strategic position to deliver results, both based on the investments that we're doing in green logistics, but also due to the changes in the market here in the Baltic Sea area, which should further strengthen ESL's position.

To give you one example of that, I mean, we always talk about Finland being an island from a logistical perspective. This is, of course, even more true now. If you close the border between Finland and Russia, then that means a kind of modal shift forward to shipping, which should be in our benefit as one example.

[Pasi Väisänen, analyst]

So by calculating that EUR 3.7 million EBIT run rate, that would actually lead to a EUR 8 million decline in the Telko segment's operating profit for next year. And if the shipping is down and the Leipurin impact -- so I guess that actually leads to the fact that operating profit could decline. Is there something else I should take into account?

[Rolf Jansson, executive]

So as I said, Leipurin should be a strong development based on Kobia acquisition. Telko, we're trying to compensate what we're losing in Russia via organic growth and acquisitions, and ESL overall, we see that we're still in a strong position to deliver good results going forward.

Any further questions?

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Rolf Jansson, executive]

Thank you very much for showing continued interest in Aspo, and thank you for participating.