Interim Report 1 January - 30 June 2006 

 26 July 2006   8.00 am

- Net sales for the second quarter EUR 108.4 million, growth 10.6%; operating profit EUR 11.1 million, growth 4.7%; earnings per share EUR 0.20 (EUR 0.18)
- Net sales for January-June EUR 209.0 million, growth 14%; operating profit EUR 20.0 million, growth 18.3%; earnings per share EUR 0.36 (EUR 0.29)
- Net sales for the whole year are expected to increase in line with the long-term target, i.e. more than 10 per cent, and an improvement in the financial performance for the entire year is expected.


This interim report has been prepared in accordance with the accounting and valuation principles of IFRS. The interim report has not been audited.


GROUP NET SALES AND FINANCIAL PERFORMANCE

Second quarter net sales and financial performance

Lassila & Tikanoja’s net sales in the second quarter totalled EUR 108.4 million (EUR 98.1 million). The operating profit was EUR 11.1 million (EUR 10.6 million), which was 10.2% of net sales (10.8%). Net sales went up by 10.6%, 4.7 percentage points of the increase coming from corporate acquisitions. Net sales were increased by a revival in industrial demand and successful sales work. The costs of expanding international operations and tighter price competition in Finland weakened the financial performance of Property Services.

January-June net sales and financial performance

Net sales for six months went up by 14.0% to EUR 209.0 million (EUR 183.3 million), 6 percentage points of the increase coming from corporate acquisitions. The earnings per share were EUR 0.36 (EUR 0.29). Organic growth exceeded market growth. Most of the increases in costs were passed on to prices. Cleaning operations in Sweden were started at the beginning of the year.

Key figures

NET SALES AND FINANCIAL PERFORMANCE BY DIVISION

Environmental Services

Second quarter

The net sales of Environmental Services (waste management, recycling services, environmental products) in the second quarter amounted to EUR 51.7 million (EUR 47.2 million), an increase of 9.4%. The operating profit was EUR 7.8 million (EUR 6.4 million).

The recycling plant in Turku which was put into production at the beginning of the year attained the projected utilization rate and quality. Strong organic growth and improved productivity in recycling services improved profitability. The recycling plant in Riga, Latvia will come on stream at the end of the summer.

January-June

The net sales of Environmental Services for January-June amounted to EUR 98.8 million (EUR 86.8 million), an increase of 13.9%. The operating profit was EUR 15.1 million (EUR 11.1 million).

Efforts to improve productivity and significant investments in recycling plants were continued. Together with strong organic growth, these have contributed to improved profitability, despite increased competition in certain areas. These measures will be continued for instance with the phased introduction of a new production management system. Two more, possibly three, minor new recycling plants will be built in Finland during the current year, and these will come on stream at the beginning of next year.

International operations developed favourably. The operations of the joint venture Salvor will be concentrated in the latter half of the year. Environmental Products’ financial performance improved as a result of efficiency measures.

Property Services

Second quarter

The net sales of Property Services (property maintenance and cleaning services) totalled EUR 41.2 million (EUR 36.0 million), an increase of 14.7%. The operating profit was EUR 1.5 million (EUR 2.9 million).

The financial performance of Property Services was adversely affected by severe price competition in cleaning services in Finland and by the costs of expanding international operations. The first agreements with forest industry customers for outsourcing support services were signed.

January-June

The net sales of Property Services for January-June totalled EUR 82.4 million (EUR 70.7 million), an increase of 16.5%. The operating profit was EUR 2.8 million (EUR 5.1 million).

Most of the growth in cleaning services occurred abroad, although price increases in Finland were carried out as planned. Price competition in Finland increased clearly. Due to enhanced sales work, the trade in cleaning services improved towards the end of the period.

The cleaning services operations in Moscow recorded a loss. According to plan, these operations will show a profit within one year.

Cleaning services in Sweden were started at the beginning of January with the acquisition of Allied Service Partners Ab, which is based in Stockholm and Gothenburg. Lassila & Tikanoja now provides cleaning services in Sweden, Latvia and Russia. The volume of international operations is being increased both organically and, in Sweden and Latvia, through corporate acquisitions. At the same time, new and more efficient practices are being introduced.

The net sales of property maintenance increased organically, and the result was at the level of the comparative period. Maintenance of technical systems in particular have grown, and operations have expanded to new locations.

Industrial Services

Second quarter

The net sales of Industrial Services (hazardous waste management, industrial cleaning, damage repair services and wastewater services) totalled EUR 16.5 million (EUR 15.7 million), an increase of 4.9%. The operating profit was EUR 2.3 million (EUR 1.8 million).

The improved net sales and operating profit in the second quarter was due to robust demand for industrial cleaning and damage repair services. In particular, damage repair services saw an unusually large number of major consequential damage repair jobs for the time of year. In the comparative period, the financial performance of industrial cleaning was adversely affected by the labour disputes in the forest industry. Demand for hazardous waste management services was less than in the comparative period.

January-June

The net sales of Industrial Services for January-June was EUR 29.6 million (EUR 27.4 million), an increase of 8.2%. The operating profit was EUR 3.1 million (EUR 1.6 million).

The financial performance and profitability of the division grew substantially due to robust demand and improved profitability. This was mainly due to industrial cleaning, where methodical efforts have been taken to improve cost-efficiency and productivity. Damage repair and wastewater services also improved their financial performance.

In hazardous waste services, the Oulu plant was modernized to respond better to increasing requirements for waste recovery. By continuously raising the rate of waste recovery, the need for expensive delivery of hazardous waste to a third party to be destroyed will be reduced.


FINANCING

Net interest-bearing liabilities amounted to EUR 1.7 million more than a year earlier. Net interest-bearing liabilities, totalling EUR 85.6 million, increased by EUR 1.0 million. In April-June, interest expenses were equal to those in the comparison period, and in January-June EUR 0.2 million less than in the comparison period. An income of EUR 0.1 million (EUR -0.3 million) resulting from changes in the fair values of interest rate swaps was recognised in the income statement in April-June, and EUR 0.5 million in January-June, while there were none in the previous year. In January-June, net finance costs were less than half of the costs for the comparison period, being 0.3% (0.8%) of net sales and 3.0% (8.4%) of operating profit.

A total of EUR 0.4 million arising from the changes in the fair value of an interest rate swap to which hedge accounting under IAS 39 is applied, was recognised in equity in January-June.

The equity ratio was 46.3% (45.0%). The gearing rate was 55.4 (61.8). Cash flow from operating activities amounted to EUR 24.2 million (EUR 17.3 million). EUR 7.4 million were tied up in the working capital (EUR 5.6 million).


INVESTMENTS

In January-June, gross investments totalled EUR 23.8 million (EUR 34.6 million). EUR 9.0 million were spent on five corporate acquisitions. The effect of the combined annual net sales of the acquired companies on the group net sales totalled EUR 18.7 million.

In April majority of the shares of Suomen Keräystuote Oy was acquired, and the company, being previously an associate, became a group company. L&T holds presently 67 per cent of the shares. Suomen Keräystuote Oy is a marketing company owned by Finnish paper collection companies. It supplies collected recoverable paper and board to industry. The net sales for Suomen Keräystuote amounted to EUR 7 million in 2005, but the effect on the group net sales on annual level is only EUR 3.8 million due to intra-group net sales. In addition, the rental operations of WeeCee Finland Oy were acquired.

The following acquisitions were made in the first quarter:
Hämeenlinnan Puhtaanapito Oy, a waste management company, was acquired for Environmental Services. Its net sales totalled EUR 4.4 million in 2005 and it employed 36 people. Allied Service Partners AB (ASP), a Swedish company specialising in property maintenance services, was acquired for Property Services. ASP operates in Stockholm and Gothenburg. The net sales of ASP were EUR 10.3 million in 2005, and it employs 390 people. The property maintenance operations of Kempeleen Kiinteistöhuolto Oy were also acquired.

Machinery and equipment were replaced, production premises were expanded, and new information systems were built. Depreciation amounted to EUR 13.8 million (EUR 11.9 million) in January-June.

In January-June, investments by division were as follows: Environmental Services EUR 11.4 million (EUR 24.6 million), Property Services EUR 9.9 million (EUR 5.5 million), and Industrial Services EUR 2.5 million (EUR 4.5 million).


PERSONNEL

The average number of personnel converted to full-time employees was 6,698 (5,797)in January–June. At the end of June the total number of employees working full-time and part-time was 8,542 people (7,844). Of them 1,490 people (978) were abroad.


SHARES AND SHARE CAPITAL

Traded volume and price

The volume of trading in Lassila & Tikanoja plc shares on the Helsinki Stock Exchange from January through June was 6.841.359, which is 17.8% of the average number of shares. The value of trading was EUR 111.6 million. The trading price varied between EUR 14.75 and EUR 17.70. The closing price was EUR 16.18. The market capitalisation was EUR 621.5 million (EUR 592.7 million) on 30 June 2006.

Share capital

At the beginning of the year the Company’s registered share capital amounted to EUR 19,188,887. During the year 2006, a total of 36,100 shares have been subscribed for pursuant to the 2002B share options. After these subscriptions, the company’s share capital amounts to EUR 19,206,937, and the number of the shares is 38,413,874.

On 25 July 2006, the Board approved the subscriptions of 97,500 new shares made pursuant to the 2002B and 2002C options. As a result of these subscriptions, the registered share capital will increase to EUR 19.255.687 and the number of the shares to 38.511.374 after the increase has been entered in the Trade Register.

Dividend

The Annual General Meeting held on 23 March 2006 resolved on a dividend of EUR 0.40 per share. The dividend, totalling EUR 15.4 million, was paid on 4 April 2006.

Share option plans 2002 and 2005

The subscription period for 2002A options has ended. Until 13 July 2006, a total of 239,000 shares pursuant to the 2002B options and a total of 17,700 shares pursuant to the 2002C options have been subscribed for. Pursuant to the remaining outstanding 2002B share options a maximum of 17,000 shares and pursuant to the remaining 2002C options a maximum of 256,300 shares can be subscribed for. Pursuant to all remaining outstanding 2002 options a maximum of 273,300 shares may be subscribed for, which is 0.7% of the current number of shares.

The share subscription price for the 2002B options is EUR 7.02 and for 2002C options EUR 11.46. 2002 options have been granted to 28 key persons. The 2002B options have been listed on the Helsinki Stock Exchange since 2 May 2005 and the 2002C options since 2 May 2006.

In 2005, 600,000 share options were issued, each entitling its holder to subscribe for one share of Lassila & Tikanoja plc. All 170,000 2005A options have been granted to 27 key persons of the Company, and all 200,000 2005B options to 36 key persons of the Company. The share subscription price for the 2005A options is EUR 14.22, and for 2005B options EUR 16.98. All 230,000 2005C options have been subscribed for by L&T Advance Oy, a wholly-owned subsidiary of Lassila & Tikanoja plc to be granted at a later date to the present or future key persons of the Company. The options issued under the share option plan 2005 entitle their holders to subscribe for a maximum of 1.6% of the current number of shares.

Notifications on major holdings

On 10 April 2006, Tapiola Group reported that its holding in the share capital and votes of Lassila & Tikanoja plc had decreased to 4.6%.

Authorisation for the Board of Directors

The Board of Directors is not authorised to effect any share issues or to launch a convertible bond or a bond with warrants. Neither is the Board authorised to decide on the repurchase nor disposal of the Company’s own shares.


BOARD OF DIRECTORS AND AUDITORS

The Annual General Meeting of Shareholders held on 23 March 2006 confirmed five
as the number of the members of the Board of Directors. The following Board members were re-elected to the Board until the end of the following AGM: Heikki Hakala, Lasse Kurkilahti, Juhani Lassila, Juhani Maijala and Soili Suonoja.

PricewaterhouseCoopers Oy, Authorised Public Accountants, were elected auditors. Principal Auditor is Heikki Lassila, Authorised Public Accountant.

In a meeting held after the Annual General Meeting the Board of Directors re-elected Juhani Maijala as Chairman of the Board and Heikki Hakala as Vice Chairman.


SUMMARY OF STOCK EXCHANGE RELEASES PURSUANT TO ARTICLE 7, CHAPTER 2 OF THE SECURITIES MARKETS ACT

On 23 March 2006, the Board of Directors resolved to apply for listing of 2002C share option rights on the main list of the Helsinki Stock Exchange starting from 2 May 2006.


PROSPECTS FOR THE REMAINDER OF 2006

Prospects in L&T’s divisions are still good. The demand for environmental services and recycled fuels is growing steadily in Finland. The environmental permits that have been granted enable investments in new recycling plants.

Outsourcing of support services in the forest industry will continue. Together with continued local government outsourcing, this will increase the market for property and support services. Competition in property services in Finland will remain fierce. The cleaning operations in Sweden will be strengthened. Investments in the expansion of cleaning services abroad will continue to have an adverse effect on profitability in the latter half of the year.

The market outlook for Industrial Services is favourable, particularly for industrial cleaning, where the order book is strong and demand is more even and more predictable than in earlier years. The market for hazardous waste management in Finland is not really growing. L&T is responding to increasingly severe competition by raising the degree of processing and through good cost control.

According to the Lassila & Tikanoja strategy that was updated in the early summer, the company’s fundamental strategy remains unchanged, but productivity improvement and the speeding up of product development will be given more emphasis than before. This will be enacted by giving the entire personnel greater involvement in the improvement of operations and by regarding business as a set of processes whose speed and cost-efficiency can be improved. The aim is to launch new service products almost on a monthly basis.

Organic growth is expected to remain at a good level, but not as strong as in the first half of the year. Net sales for the whole year are expected to increase in line with the long-term target, i.e. more than 10 per cent, and an improvement in the financial performance for the entire year is expected.



INCOME STATEMENT

Earnings per share for profit attributable to the equity holders of the parent:

BALANCE SHEET

CASH FLOW STATEMENT

STATEMENT OF CHANGES IN EQUITY

KEY FIGURES

EVA = operating profit – cost calculated on invested capital (average of four quarters). WACC 2006: 8.75%; 2005: 9.0%


SEGMENT REPORTING

NET SALES

OPERATING PROFIT

OTHER SEGMENT REPORTING

SEGMENT REPORTING BY QUARTER