Aspo Oyj

OMXH:ASPO

Earnings Call Transcript

[Rolf Jansson, executive]

Welcome to the financial reporting Q1 2024 of Aspo.

We have had quite a hectic start of year 2024, a lot of strategy execution, actually in all the businesses. When it comes to ESL Shipping, we have now onboard 2 minority investors, OP Infra and Varma. We have also signed a transaction to sell the Supramax vessels. Both of these actions will free up capital to invest in the next wave of environmentally friendly vessels. Telko has made acquisitions, entered into France and Benelux via the acquisitions of Optimol and Greenfluid. And then during April, we announced signing of sales and purchase agreement of Swed Handling, which is a considerable acquisition in Sweden, making actually -- or make -- doubling Telko's revenue in chemicals.

Part of the Swed Handling acquisition is also Kebelco, which then will belong to Leipurin, a very good strategic fit, basically technical products to the food industry. And also Leipurin's transformation has continued successfully during the start of this year.

Result-wise, EUR 4.8 million compared to EUR 8.4 million last year for the first quarter, impacted by the exceptional ice conditions as well as the political strikes here in Finland.

Sustainability. First, emission intensity, a bit of a challenging quarter considering the ice conditions in particular. So those impacted both top line development as well as increased emissions due to longer distances, et cetera, and hence, the emission intensity increased compared to last year. And we need to work to reach the full year target of this year.

Strong development when it comes to safety. I think this is a record level of 3.8 as injury frequency for the first quarter will better than the target of 6.0 for the whole year.

The political strikes as well as the exceptional ice conditions impacted Aspo quite severely during the first quarter, with total impact of EUR 3.7 million on profit level. And this particularly then belongs to ESL Shipping total impact of EUR 3.5 million. Basically, this relates to lower production volumes of our clients. Some harbors were closed, a lot of waiting, rescheduling, et cetera, longer distances, more fuel consumptions and basically an overall decline in cargo flow, let's say, efficiency.

On the Telko and Leipurin side, fairly small impact, and that's due to higher logistics costs and then also some lost volumes. And unfortunately, this is something which will continue also into Q2. So basically, looking at the April numbers, we still recognize and forecast a profit impact -- negative profit impact of EUR 0.7 million before all the flows are kind of normalized. That's EUR 0.5 million for ESL Shipping and then EUR 100,000 each for Leipurin and Telko.

If you then look at the numbers, net sales development, minus 6% compared to last year quarter 1. EUR 133 million was the net sales. And looking first at ESL Shipping, negative impact, again, by the political strikes and winter conditions. But the good news is that we had very healthy and strong demand, kind of underlying demand, despite this challenging environment.

Telko, lower price levels, soft demand if you compare to last year, Q1. But if you compare to the previous quarter, basically, it's stable development, which is kind of positive. And also positive is that we were, during Q1 this year, able to take market share and then also a positive impact on net sales gradually building up from acquisitions.

Leipurin, minus 6%. Basically, a strong inflation in the environment last year turned into deflation. And then we also continued to shift product mix away from commodity categories, which also hit the top line.

Then over to comparable operating profit, as said, EUR 4.8 million. ESL Shipping hit by the EUR 3.5 million of additional kind of costs, strikes and ice conditions. Telko then, negative impact from M&A-related costs, approximately EUR 1 million from due diligence cost and then also from the fact that we value the acquired inventories according to market prices. We now got full effect from cost efficiency improvement efforts from -- implemented last year. And Leipurin, I would say that the transformation is positively on its way, and also the kind of developed product mix improves profitability of Leipurin, Aspo Group level cost on a fairly stable level compared to last year.

We did an impairment of the Supramax vessels. They are now part of the assets to be sold, and hence, we got a onetime effect of close to EUR 8 million out of that, partly that also costs related to the minority investment.

Cash flow, EUR 5.5 million. Basically, the decline came from ESL Shipping. Some change in working capital, basically, Telko's inventories building up since end of last year during these 3 months that had a negative impact, total change in working capital impact of close to EUR 4 million.

And then if we look at free cash flow, actually taking the cash flow to a negative level driven by the fact that we acquired Optimol and Greenfluid in France and Benelux.

If we look at cash flow from financing activities, we got the EUR 45 million of additional equity into ESL Shipping and hence, our balance sheet was very much strengthened.

Return on equity, 5%. If you look at the comparable figures, the decline due to ESL Shipping. And then if you look at the reported figures, clearly minus due to the loss related to the Supramax vessels.

Then if I begin to the strategic actions done already mentioned, OP Infra's and Varma's investment into ESL, basically investing EUR 45 million against an equity value of EUR 165 million, taking then Varma's and OP's ownership stake up to 21%. I think this is very important for Aspo and ESL to get this additional equity into ESL that will enable us to pursue growth from the green transition offered by the Nordic Industrials investing in, even fossil-free production and kind of gradually building up the market of ESL Shipping.

Sales of the Supramax vessels, USD 37.1 million, which then generated a loss of approximately EUR 7 million. I think this was a very good strategic move. The Supramax vessels have not been onever the past 10 years, very profitable in comparison to our coasters and handy-sized vessels. And in addition, they are less resilient compared to our smaller vessels more in the spot market where they are all located. And this then will also free up capital to invest in the green transition of ESL.

Telko acquisition of Optimol and Greenfluid, very interesting companies, close to EUR 20 million of net sales, very profitable, EUR 2.2 million of EBIT. And this is, I think, a very kind of a textbook example of a good acquisition for Telko in the Specialty segment, meaning high-performance lubricants, industrial lubricants and entering into new markets, France, Benelux, which will enable us to, at a later stage, build presence also in a kind of wider product mix in these markets. And then also, we expect some synergies here, particularly top line synergies from clients who are already familiar to us in Telko.

Then Swed Handling, as said, the purchase agreement has been signed, Swed Handling, a leading player in chemicals in Sweden. And the net sales, if we look at the chemicals part of the business, it's approximately, let's say, SEK 600 million, and it's a very profitable business, basically EBIT on a EUR 55 million level over the past 2 years. This is a very exciting transaction for us. Telko is already present in Sweden, very small chemicals business, a quite strong lubricants business, and we see significant supply chain synergies here. And in addition, we see opportunities to sell across the borders and benefit from the new competencies and product mix of Swed Handling going forward.

Part of the Swed Handling acquisition, Kebelco, it's basically an approximately net sales EUR 10 million and approximately close to 10% EBIT level, a fairly small company, but with perfect fit to Leipurin. So basically, here, we have Kebelco-selling technical products, flavors, colors, et cetera, to the food industry, and this will enable us to sell these type of products, both to the existing customer base in Sweden but also into Finland. And again, a perfect match from the perspective that we want to invest in Leipurin in such segments, which will give us good profitability going forward. And this is well represented by Kebelco.

Then I would like to ask Erkka Repo, our CFO, on the stage to go through the business-specific numbers. Please.

[Erkka Repo, executive]

Thank you, Rolf. On ESL, the political strikes and the winter conditions affected negatively our cargo volumes. We also had less opportunities for spot market volumes as our vessels were tied into a much slower execution of the contract volumes.

On the contract volumes, we saw healthy demand in steel, in fertilizers and in limestone. In forest products, we experienced still low to moderate demand. And in the energy coal shipments, they decreased significantly compared to the previous year.

ESL comparable operating profit was EUR 2.7 million, with EUR 3.5 million negative impact coming from the strikes and from the exceptional winter conditions. We expect those strike impacts to continue on the second quarter with about EUR 0.5 million impact for our second quarter profits.

We consider these negative impacts very exceptional and onetime in nature, so as these type of events occur very seldom.

In Telko, the first quarter was challenging in a fairly soft market. We experienced low demand and significantly lower prices when compared to the quarter 1 last year. However, sequentially, when we compare to the previous quarter, quarter 4, the volumes and prices were flat.

In Plastics and in Chemicals, prices were significantly lower than last year. In Lubricants, our sales increased with a good demand in industrial lubricants and also the price level in lubricants was on a good level. In Lubricants, also the Optimol and Greenfluid acquisition contributed positively on sales in March.

Telko's comparable operating profit profit was EUR 2.2 million. It includes EUR 0.9 million of acquisition-related costs as acquisitions are part of Telko's compounder strategy. We do not separate acquisition-related costs as comparable items, but they are part of our operating -- comparable operating profit.

Typically, we expect that acquisitions start to contribute positively to our results about 2 to 3 months after the closing. At the closing, we value the inventory to the expected sales value. And then after the closing, we reversed that valuation, and that leads to 2 to 3 months lag for the positive earnings contribution after the closing.

In Leipurin, the sales decreased by 6% compared to the first quarter last year. It was mainly driven by the decrease in market prices, but also our actions to improve the sales mix resulted in decreased volumes in the low-margin categories.

We managed to increase our comparable operating profit to EUR 1.1 million, with 0.5% improvement in the profit margin. This is a really good achievement in a deflationary market, which typically is the most challenging market for us. And therefore, I consider this as a really, really great achievement.

Leipurin continues to execute profit improvement actions in commercial, supply chain and in sourcing areas. Also, in Leipurin, the Kebelco is expected to start contributing positively, 2 to 3 months after the closing.

Our balance sheet has significantly strengthened by the EUR 45 million minority investment into ESL Shipping. Our group equity ratio is at 38.6%, which is a high level compared to the long-time history in Aspo.

Also, we have a strong liquidity with EUR 68 million cash and EUR 40 million unused revolving credit facilities. And our liquidity is expected to remain strong after the announced transactions, assuming they are closed as planned, with the Supramax vessels contributing about EUR 30 million and the purchase price of Swed Handling being about EUR 40 million. So a strong balance sheet and strong liquidity expected to continue.

Thank you, and handing over back to Rolf.

[Rolf Jansson, executive]

Thank you. Then basically summarizing this quarter, strong strategic implementation and profit impacted by the political strikes and exceptional winter conditions.

If we then look forward, starting with ESL, already mentioned already during Q1, we see strong underlying demand. We see that also going forward for the steel industry, in particularly, and also gradually picking up in the forest industry. Then it's good to understand that typically, ESL Shipping, during the summer, the volumes typically would be in decline compared to the beginning of the year. Longer term, we see a very positive outlook, there's tighter supply and demand situation. Basically our customers investing a lot in the green transition in new production. And then we see our forecast is based on the fact that vessel capacity will be in -- declined in the -- regionally in this area.

If we then look at Telko, we look forward, basically, stable market development going forward and prices and volumes demand gradually picking up, particularly during the second half of this year. Leipurin, modest volume growth, particularly in [ deflationary ] market where prices go a bit down. However, we see significant growth opportunity in the food industry, where our position still is kind of minor. And this is a market which is multifold compared to the current bakery market where Leipurin is particularly present today.

Guidance, we estimate the operating -- comparable operating profit to exceed EUR 30 million this year compared to the EUR 26.5 million last year. And there are basically 4 drivers to this improvement compared to last year. One is market conditions, we expect them to pick up, particularly during the second half of the year.

Secondly, we will get -- or ESL shipping will get green coaster vessels onboard. Basically, we have the first one already in the market, and it will start producing profit during the second quarter of this year. And this is important to understand. So basically, the investment decisions done in 2021, they will start contributing now this year in our profit.

And then Telko's acquisitions also to contribute to this year's operating profit. And then throughout the group Aspo, all of its businesses, we have a lot of development activities going on, being monitored, being executed to drive up the profitability of all the businesses at Aspo.

Finally, I want to take the opportunity to welcome you to our Capital Markets Day next week on Tuesday, and you will be able to access the link via our web page and to hear on our -- listen into our strategic update.

I would like to ask Erkka to join me here on the stage, and then we are ready for any questions that you may have. Maybe starting here on the floor.

[Unknown Analyst]

I have a couple of questions. Maybe I just take those one by one, easy to remember. So starting with your guidance. So you kept actually your guidance kind of unchanged. But does it still include the acquisition made recently, this Swed Handling? So in terms of including that, so what's the expected kind of earnings effect in terms of EBIT for the second half then when looking at the guidance?

[Rolf Jansson, executive]

When we came out with the Q4 results and guidance, which now is kept unchanged, we said that the Telko acquisitions are included in this guidance, and that goes also for Swed Handling. If we then look at the Q1 comparable operating profit of EUR 4.8 million compared to our guidance above EUR 30 million for the whole year, it's fully understandable that which Erkka also mentioned in his presentation, that Q1 does not, in any way, represent the run rate profitability of Aspo currently. So that means that the result of the second half of this year is a significant improvement compared to the first half.

[Erkka Repo, executive]

And then maybe continuing that, we expect the Swed Handling closing to be during third quarter, and then the positive earnings contribution starting 2 to 3 months after that. So the positive earnings contribution for 2024 is still fairly minor.

[Unknown Analyst]

Yes. And then looking at the kind of the run rate for your profitability in terms of EBIT margin, You have now sold loss-making Supramax vessels and acquired Swed Handling. So what's the kind of run rate for the operating profit then by excluding this timing effect and the kind of other issues?

[Rolf Jansson, executive]

I can enlighten it a bit. If we look at the Supramax vessels during the first quarter, I would say that the profitability of these are aligned with last year's profitability of the Supramax vessels. So fairly moderate, so kind of fairly limited impact when deducting these. If you look at the Telko profitability and try to understand the run rate, there's a couple of aspects. One is that you need to exclude M&A costs, kind of the due diligence costs, et cetera. And that will already take Telko's operating profit above 6%. And then basically one needs to add kind of longer-term acquisitions made plus potential synergies, and then you get the run rate.

And finally, Leipurin, as said, we're aiming for the 5%-plus EBIT. And currently, the path has been taken in that direction.

[Unknown Analyst]

Yes, I see. Then looking at these green coasters and especially next year went to effect, is actually more visible coming from the new vessels. So these new green coasters going to kind of support your 14% EBIT margin target on the segment. So should we still expect that to improve or kind of decline to kind of the run rate for your operating profit margin?

[Rolf Jansson, executive]

The green coasters, there are basically twofold. So half of them go into the pool, and then half of them are part of our balance sheet, and it's actually every second one. In average, these will, according to our plans, support the 14% EBIT target.

[Unknown Analyst]

Okay. That's understood. Well, I have 2 more questions here. When looking at the Leipurin segment, I mean, if I remember right, over 10 years, Leipurin has tried to reach the 5% margin. And we are not still there. So is that true that's something you have not made yet how to get to kind of the target profitability in the segment in Leipurin?

[Rolf Jansson, executive]

Good question. So it's very true that the Leipurin's profitability over the past years have been dissatisfying. We've done a lot of actions. One is kind of focus of the business model, selling noncore assets and noncore businesses. Then I think it's a renewal of the management model, very much focusing on the country-specific profit and loss, and then on upgrading and capability across all the entire value chain. I think this now has taken us well beyond 3% of EBIT.

And then is it possible to go beyond 5%? I think the answer is, from my perspective, fully clear yes. And I think looking at Kebelco, gives us an understanding of what can be done. So basically, of course, Kebelco is a much smaller business size-wise, approximately EUR 10 million. But here, Kebelco is doing an operating profit in the magnitude of, let's say, 7%, 8%, 9%. And the ingredient there to drive that type of performance is to focus on technical products, driving growth in food industry and not growing and investing in the commodity sector. So that does not mean that we will kind of depart from the current business, but all the growth investments will be made in the more lucrative segments, and that should be the driver for the improved profitability.

[Unknown Analyst]

Yes. And the last one from my [ body is ] related to Telko segment and the contracts you have made with your customers. So if the raw material prices are down, is it so that your operating profit is down, respectively? Or is there any kind of other items, including this contract? So is it truly kind of coming through from the raw materials directly operating profit effect?

[Rolf Jansson, executive]

There are some kind of back-to-back deals, but in practice, it functions as you described. And that means that it's no problem if there are low price levels or if it's high price levels, and there's no problem or challenge if it's gradually shifting price level. But what happens when kind of prices decline very rapidly, and that happened in Q2 last year when it comes to volume plastic, then basically, we run the risk of selling expensive inventory at cheaper price levels. So this is very much about inventory management, and that we are putting a lot of focus on.

[Kasper Mellas, analyst]

This is Kasper Mellas from Inderes. I would like to hear more about the ESL's investment plans. So how many vessels are you expecting to acquire with your investment of EUR 45 million? Could you give us any guidance on how to think about that?

[Rolf Jansson, executive]

Maybe a couple of thoughts. One is that the first green coaster has just arrived and will get one incremental green coaster on a quarterly basis over the next approximately 2, 2.5 years. So I would say that during this time frame, we will make at least the final decision of investing going forward. How many ships, it's still a question mark. I would say that we are now looking more into the handy segment since we have already invested in the coaster segment. And we're looking for the kind of best technology to be as competitive in this green transition as possible.

[Kasper Mellas, analyst]

Why would you say that, for example, EUR 120 million and EUR 150 million would be kind of a appropriate range to assume as the total investment capacity regarding the -- Assuming the LTVs are probably around 60%, 70%?

[Rolf Jansson, executive]

I would say that the investments that we are planning is of larger size than the green coaster investment made. And that was basically EUR 75 million plus EUR 75 million, so partly them pooling, adding up to EUR 150 million. And if you look at debt opportunity, basically, it's equity-to-debt, that's 1 ratio to 2, basically, which could be possible in this type of investments.

[Erkka Repo, executive]

No more questions.

[Rolf Jansson, executive]

Any questions online?

[Operator]

[Operator Instructions] There are no questions at this time. So I hand the conference back to the speakers.

[Rolf Jansson, executive]

Thank you very much for attending this Q1 reporting of Aspo. And once again, welcome to the Capital Markets Day next week on Tuesday. Thank you.