Interim Report 1 January - 30 September 2007  

- Net sales for the third quarter EUR 138.6 million (EUR 111.6 million); operating profit EUR 15.5 million (EUR 19.9 million); earnings per share EUR 0.28 (EUR 0.36)
- Net sales for January-September EUR 406.4 million (EUR 320.6 million); operating profit EUR 36.7 million (EUR 39.9 million); earnings per share EUR 0.63 (EUR 0.72). The operating profit excluding non-recurring and imputed items totalled EUR 41.3 million (EUR 38.0 million).
- In the final quarter the level of the result is expected to remain at about the same level as for the comparative quarter last year. Full-year net sales will increase by clearly more than 20% but earnings per share will decline.


GROUP NET SALES AND FINANCIAL PERFORMANCE

Third quarter

Lassila & Tikanoja’s net sales for the third quarter stood at EUR 138.6 million (EUR 111.6 million). The net sales increased by 24.1%, 19.7 percentage points of which came from corporate acquisitions. The operating profit was EUR 15.5 million (EUR 19.9 million), which is 11.2% (17.8%) of net sales. The operating profit excluding non-recurring and imputed items totalled EUR 17.1 million (EUR 18.0 million).

Organic growth slowed down in Environmental Services and Property and Office Support Services. Strong growth of Industrial Services continued. The operating profit was burdened by non-recurring costs amounting to EUR 1.1 million, as well as imputed changes in the fair value of oil derivatives acquired for hedging the oil re-refinery business that will be launched in 2008 (EUR –0.5 million). In the comparison period, non-recurring income was recognised for EUR 1.9 million.

January-September

The nine-month net sales increased by 26.8% and stood at EUR 406.4 million (EUR 320.6 million), 18.4 percentage points of this growth coming from corporate acquisitions. Earnings per share were EUR 0.63 (EUR 0.72). The operating profit excluding non-recurring and imputed items totalled EUR 41.3 million (EUR 38.0 million).

Organic growth exceeded market growth, and the company’s market position strengthened. This was primarily attributable to well-functioning product development, marketing and sales operations, as well as sustained strong industrial demand. Several new service products were introduced to the market, and new outsourcing contracts were signed particularly in the forest industry. The operating profit was burdened by losses in the joint venture Salvor Oy (EUR 1.8 million), as well as imputed changes in the fair values of oil derivatives (EUR -2.2 million). In the comparison period, non-recurring sales gains were recognised for EUR 1.9 million.

Financial summary

* Breakdown of operating profit excluding non-recurring and imputed items in the condensed financial statements.


NET SALES AND FINANCIAL PERFORMANCE BY DIVISION

Environmental Services

Third quarter

The net sales of Environmental Services (waste management, recycling services, L&T Biowatti, environmental products) in the third quarter amounted to EUR 68.3 million (EUR 53.0 million), an increase of 29.0%. The operating profit was EUR 9.4 million (EUR 10.0 million)

Organic growth in Finland slowed down due to expired municipal contracts, a decline in Salvor’s net sales and a reduced volume of tyre recycling in relation to the comparison period. In other respects, new sales continued to be strong. A substantial contract was signed with regard to producers’ liability, expanding L&T’s operations to include recycling of beverage cans and plastic bottles returned from retailers as of the beginning of 2008. The Bajamaja rental service expanded and clearly outperformed its financial targets.

The result of recycling services was burdened by the losses of the joint venture Salvor Oy EUR -0,5 milllion. L&T became the sole owner of Salvor on 1 September 2007. Integration is estimated to generate additional costs approximately  EUR 0,7 million during the fourth quarter.


The Joensuu recycling plant was put into production, and the final obstacle for a substantial extension to the Kerava plant was lifted when the city plan concerning the plant area became legally valid. Project planning in Kerava has been initiated. The first stage of capacity expansion is estimated to be in operation during the latter half of 2009.

L&T Biowatti’s net sales and earnings developed favourably during the period. The delivery capacity was further improved by building more terminals and increasing stock volumes with the next year in mind.

International business developed as planned in Russia. The profitability of Latvian operations weakened due to an increased level of costs but a substantial price increase implemented in the beginning of October will clearly boost profitability.

Environmental Products’ financial performance improved as a result of strong growth in net sales.

January-September

Environmental Services’ net sales for January-September amounted to EUR 206.3 million (EUR 151.8 million), an increase of 35.9%. The operating profit was EUR 26.0 million (EUR 25.1 million)


Organic growth was strong. The profitability of waste management in relation to the comparison period was weakened by proportional growth in the number of municipal contracts. The volume of recycling services increased thanks to new sales and added plant capacity. Losses in the joint venture Salvor Oy increased substantially due to financial failures in landfill construction and closedown contracts.

The result of Environmental Products improved clearly on the comparison period.

An extension to capacity was introduced at the Tampere recycling plant. A new recycling plant at Joensuu was completed in August, followed by extensions to the Turku and Valkeakoski plants later this year. The recycling plant in Dubna, Russia is expected to be completed in the beginning of next year. The situation with environmental permits has developed favourably even though appeals against environmental permits are slowing down plant and processing area projects to some extent. The planning of new plants and processing sites will continue in Finland as well as in Russia.

The acquisition of a majority holding in Biowatti Oy was completed on 1 February 2007. L&T Biowatti is the leading bioenergy company utilising renewable energy sources in Finland. It engages in the procurement, processing, marketing and delivery of wood-based fuels for customers. L&T Biowatti’s net sales and earnings developed almost as planned.

Waste management operations in the Moscow region expanded to a new town in May with the gradual transfer of waste management in the town of Sergiev Posad to L&T’s responsibility. L&T currently has waste management operations at two locations in Russia, Dubna and Sergiev Posad. The operations are being expanded into larger cities in a controlled manner.

Property and Office Support Services

Third quarter

The net sales of Property and Office Support Services (property maintenance and cleaning services) totalled EUR 52.0 million (EUR 41.5 million), an increase of 25.3%. The operating profit was EUR 4.2 million (EUR 4.8 million)

Net sales in Finland increased thanks to acquisitions in the beginning of June that will be integrated into L&T by the end of the year. Organic growth in cleaning services slowed down in comparison to the first half of the year, mainly due to the lack of sales resources. The result of Finnish operations in both product lines exceeded the targets, and property management also outperformed the result for the comparison period. Sales of additional services in the summer season were successful. The profitability of technical systems operations normalised after a large unprofitable contract, and the order book grew. During the period, new outsourcing contracts were signed particularly with the forest industry.

Operations abroad remained unprofitable as expected. Non-recurring items of the Russian property services re-organisation burdened the earnings for the period for EUR 0.4 million. The problem with the Russian operations has been high overheads in proportion to net sales. The situation will change at the turn of the year when new service contracts signed during the review period will become effective and net sales will increase.

January-September

The January-September net sales of Property and Office Support Services totalled EUR 149.3 million (EUR 123.8 million), an increase of 20.6%. The operating profit was EUR 7.0 million (EUR 7.6 million)

Organic growth continued in Finland, with net sales growing particularly in property maintenance. Mild weather early in the year did not have much of an improving effect on performance, because snow ploughing is mostly covered by fixed-price advance agreements with subcontractors. There were no snow transports that would have provided for additional invoicing. A large number of new contracts started in cleaning services, and the costs of initiation hampered profitability.

Kiinteistöhuolto Jauhiainen Oy and Siivouspalvelu Ta-Bu Oy were acquired in the beginning of June. Kiinteistöhuolto Jauhiainen Oy is a property maintenance company operating in the Helsinki region that posted net sales of EUR 6.5 million in 2006. It employs 65 people. Siivouspalvelu Ta-Bu Oy operates in the Helsinki and Varkaus regions. Its net sales amounted to EUR 5.3 million in 2006, and it employs around 200 people.

Operations in Russia and Latvia have been reorganised. Sales performance in both countries has been good and an earnings improvement is expected. Recalculations and price increases concerning customer sites have also taken place in both countries.

Three acquisitions have been carried out in Sweden within one year, generating aggregate net sales of approximately EUR 30 million in 2007. The current focus in Sweden is on integrating these companies into one and building a sales organisation.

The division’s operations abroad were running at a loss.


Industrial Services

Third quarter

The net sales of Industrial Services (hazardous waste management, industrial cleaning, damage repair services and wastewater services) amounted to EUR 19.5 million (EUR 18.2 million), an increase of 6.8%. The operating profit was EUR 2.5 million (EUR 3.8 million). The division’s operating profit was burdened by imputed changes in the fair values of oil derivatives amounting to EUR -0.5 million.

Strong demand continued and all product lines increased their net sales, with the strongest growth in damage repair. The growth was entirely organic. However, in line with expectations, net sales growth in the division was moderate compared to the first half of the year because the comparison period last year was exceptionally strong.

Insufficient resourcing burdened the operational result. The proportion of in-house staff in relation to demand was too low, which resulted in an overproportioned increase in the costs of rented labour and presented a constraint for growth. In-house resources were increased and the use of rental labour minimised towards the end of the review period. Furthermore, due to a fire in June, the Tuusula plant for hazardous waste services was out of service for a longer period than expected, which reduced the degree of hazardous waste recovery and increased the costs of logistics. The plant was reintroduced into service in the beginning of October.

The joint venture L&T Recoil has succeeded better than expected with regard to the procurement of raw material. The company signed a substantial deal with regard to the procurement of raw material originating in Finland, which means that a major part of Finnish raw material can be routed to re-refining. The creation of foreign raw material procurement channels has also progressed faster than expected. Increasing stocks of raw material will result in increased storage costs during the construction stage, as well as an increased demand for working capital, but simultaneously the risks of obtaining raw material and the price risk will be substantially reduced.

January-September

The January-September net sales of Industrial Services amounted to EUR 54.3 million (EUR 47.9 million), an increase of 13.5%. The operating profit was EUR 5.2 million (EUR 6.9 million). The division’s operating profit was burdened by imputed changes in the fair values of oil derivatives amounting to EUR 2.2 million.

The net sales of all product lines increased, with the strongest growth in damage repair services and hazardous waste management. Industrial demand did not even out after the first half of the year but continued to be strong also in the third quarter. The division’s market position has strengthened, which is reflected in factors such as an increase in the number of major customer contracts. The earnings improvement in day-to-day operations was affected by good demand as well as improved productivity. The damage repair service network expanded to two new locations.

A new alternative liquid fuel (ALF) was introduced to the market to replace waste oil that is routed to re-refining. Oil derivatives are used to hedge the profitability of the upcoming re-refinery in situations where the market price of oil falls substantially. Changes in the fair value of oil derivatives have a quarterly earnings effect. The re-refinery is estimated to be completed in the summer 2008.

During the current year, the monthly workload has varied less than previously. In addition to good demand, this is attributable to the fact that the division has been successful in establishing extensive client agreements and partnerships with clients.


FINANCING

At the end of the period, interest-bearing liabilities amounted to EUR 42.6 million more than a year earlier. Net interest-bearing liabilities, totalling EUR 111.1 million, increased by EUR 40.3 million from the comparison period and by EUR 58.6 million from the beginning of the year. Net finance costs exceeded those for the comparison period by EUR 0.6 million in the third quarter, and by EUR 1.7 million in January-September. In the third quarter, interest expenses increased by EUR 0.7 million, and in January-September by EUR 1.6 million, as a result of the growth in interest-bearing liabilities and a rise in the interest rate level. Due to changes in the fair value of interest rate swaps, EUR 0.1 million was booked in finance costs in July-September, while EUR 0.1 million was booked as a decrease in finance income in the comparison period. With regard to changes in the fair value of interest rate swaps in January-September, EUR 0.2 million was booked in finance costs, compared to EUR 0.4 million booked in finance income for the comparison period. Net finance costs were 0.8% (0.4%) of net sales and 8.4% (3.3%) of operating profit.

A total of EUR 0.1 million arising from the change in the fair value of an interest rate swap to which hedge accounting under IAS 39 is applied, was recognised in equity in January-September.

The equity ratio was 42.6% (50.1%)and the gearing rate 61.7 (41.8). In January-September, net cash from operating activities amounted to EUR 34.4 million (EUR 42.1 million), and EUR 17.7 million (EUR 11.4 million) were tied up in the working capital. The high amount of working capital at the end of September was attributable to increased net sales as well as planned increases in the inventories of L&T Biowatti, which was acquired in January, and the joint venture L&T Recoil.


CAPITAL EXPENDITURE

Capital expenditure totalled EUR 77.6 million (EUR 32.1 million) and EUR 47.6 million were spent on company acquisitions. The combined annual net sales of the acquired companies totalled EUR 90.6 million. In addition, production plants were built and machinery and equipment were replaced.

In the beginning of June, L&T acquired half of the minority share in L&T Muoviportti. As a result of this acquisition, a share corresponding to one hundred percent is booked in the consolidated financial statements. The operations of Kuljetus Kummunmäki Oy were acquired for waste management on 1 July. Salvor Oy became a Group company in the beginning of September when L&T acquired the remaining 50 percent of the shares.

The following acquisitions were made in the second quarter:

In early June, Kiinteistöhuolto Jauhiainen Oy and Siivouspalvelu Ta-Bu Oy were acquired.
Kiinteistöhuolto Jauhiainen Oy specialises in property maintenance services in the Helsinki region, and its net sales for the year 2006 amounted to EUR 6.5 million. It employs 65 people. Siivouspalvelu Ta-Bu Oy is a cleaning services company operating both in the Helsinki region and in Varkaus in Central Finland. Its net sales for the year 2006 amounted to EUR 5.3 million, and it employs some 200 people.

The following acquisitions were made in the first quarter:

In December 2006 an agreement was signed on the acquisition of the majority (70%) of the shares of Biowatti Oy from the acting management of the company for Environmental Services. The acquisition became effective on 1 February 2007 after the approval of the competition authority. L&T Biowatti is the leading Finnish bio energy supplier utilising renewable energy sources, operating in the procurement, processing, marketing and delivery of wood-based fuels. The main products are by-products of forest and wood processing industries and logging chips. The net sales of Biowatti for the year 2006 amounted to EUR 64.2 million. Bio fuel sales account for two thirds and industrial raw materials sales for one third of the net sales.

A Swedish cleaning services company Skånsk Allservice AB together with subsidiaries Hygienutveckling AB and Hygienutvickling A/S operating in Norway were acquired in January for Property and Office Support Services. The consolidated net sales of the group totalled EUR 10.8 million in 2006, most of which came from hygiene services for the food industry. Kiinteistöhuolto Pentti Nissinen Oy was acquired for property maintenance services.

The remaining portion of the shares of Suomen Keräystuote Oy was purchased for recycling services within Environmental Services. Lassila & Tikanoja held already 94.5% of Suomen Keräystuote shares.


PERSONNEL

In January – September, the average number of employees converted into full-time equivalents was 7,723 (6,863). At the end of the period, the total number of full-time and part-time employees was 9,226 (8,290). Of them 2,237 (1,610)people worked outside Finland.


SHARES AND SHARE CAPITAL

Traded volume and price
The volume of trading in Lassila & Tikanoja plc shares on OMX Nordic Exchange in Helsinki from January through September was 15,076,007, which is 39.0% (23.0%) of the average number of shares. The value of trading was EUR 362.0 million. The trading price varied between EUR 20.06 and EUR 27.96. The closing price was EUR 22.63. The market capitalisation was EUR 876.9 million (EUR 602.3 million) at the end of the period.

Share capital
At the beginning of the year the company’s registered share capital amounted to EUR 19,264,087. Since the beginning of the year, 223,455 shares have been subscribed for pursuant to 2002C options. After these subscriptions the share capital is EUR 19,375,814.50, and the number of the shares 38,751,629 shares.

Option plans 2002 and 2005
The subscription periods for 2002A and 2002B share options have ended. 280,000 2002C options have been issued. 274,000 have been granted to key persons of the company. 
Until 20 July 2007, a total of 241,155 shares have been subscribed for pursuant to the 2002C options. Pursuant to the remaining outstanding 2002C options a maximum of 32,845 shares can be subscribed for, which is 0.1% of the current number of shares. The share subscription price is EUR 11.46. The 2002C options have been listed on the Helsinki Stock Exchange since 2 May 2006. The subscription period ends on 30 October 2007.

In 2005, 600,000 share options were issued, each entitling its holder to subscribe for one share of Lassila & Tikanoja plc. Presently, 25 key persons hold 162,000 2005A options, 35 key persons hold 193,000 2005B options and 41 key persons hold 230,000 2005C options. L&T Advance Oy, a wholly-owned subsidiary of Lassila & Tikanoja plc, holds 8,000 2005A options and 7,000 2005B options.

The share subscription price for 2005A options is EUR 14.22, for 2005B options EUR 16.98 and for 2005C options EUR 26.87. The options issued under the share option plan 2005 entitle their holders to subscribe for a maximum of 1.5% of the current number of shares. L&T’s Board of Directors has decided to apply for the listing of options 2005A as of 2 November 2007.

Shareholders
At the end of the financial period, the company had 5,050 (4,615) shareholders. Nominee-registered holdings accounted for 13.3% (9.4%) of the total number of shares.

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.


RESOLUTIONS BY THE ANNUAL GENERAL MEETING

The Annual General Meeting of Lassila & Tikanoja plc, which was held on 26 March 2007, adopted the financial statements for the financial year 2006 and released the members of the Board of Directors and the President and CEO from liability. The AGM resolved that a dividend of EUR 0.55, a total of EUR 21.2 million, as proposed by the Board of Directors, be paid for the financial year 2006. The dividend payment date was 5 April 2007.

The Annual General Meeting confirmed the number of the members of the Board of Directors five (5). The following Board members were re-elected to the Board until the end of the following AGM: Lasse Kurkilahti, Juhani Lassila, Juhani Maijala and Soili Suonoja. Eero Hautaniemi was elected as a new member for the same term.

PricewaterhouseCoopers Oy, Authorised Public Accountants, were elected auditors with Heikki Lassila, Authorised Public Accountant, acting as Principal Auditor.

The Annual General Meeting approved the Board of Directors’ proposal to amend the Articles of Association in order to align them with the new Finnish Companies Act. The provisions on minimum and maximum share capital as well as on minimum and maximum number of shares were also removed.

At its organising meeting following the Annual General Meeting, the Board of Directors re-elected Juhani Maijala as Chairman of the Board and Juhani Lassila as Vice Chairman.


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

In a release disclosed on 23 July 2007, the company announced that the full-year financial result is estimated to be lower than in the previous year, though the operative result for the final half of the year is expected to remain on the same level as in the previous year. Previously the company estimated that the full-year financial performance will improve. Full-year net sales are still estimated to increase by clearly more than 20%.

On 14 September 2007, the Board of Directors resolved to apply for listing of 2005A share option rights on the OMX Nordic Exchange in Helsinki starting from 2 November 2007.


NEAR-TERM UNCERTAINTIES

The most substantial near-term uncertainty factor is the possibility that the performance of foreign units within Property and Office Support Services may not improve on the planned schedule. Changes in the fair values of oil derivatives associated with L&T Recoil’s business depend on the development of world market prices for oil, and may have a substantial effect on the operating profit of Industrial Services. Fluctuations in the price of carbon dioxide emission rights have a substantial effect on the demand for L&T Biowatti’s wood-based fuels. In principle, a high price for emission rights will increase the demand for L&T Biowatti’s products, and vice versa. A planned amendment to Latvian waste legislation may have adverse effects on the competition situation for waste management in Riga next year.


PROSPECTS FOR THE REST OF THE YEAR 2007

The prospects for Lassila & Tikanoja’s markets remain mostly good. Organic growth is estimated to strengthen slightly compared to the third quarter of 2007. Full-year net sales are going to increase by clearly more than 20% but earnings per share will decline. Result for the final quarter are estimated to be approximately at the same level as last year.
 
Last year, the earnings for the final quarter were improved by non-recurring income of EUR 1.0 million. In July, it was estimated that the result of operations in the second half of 2007 will remain at the previous year’s level. This estimate has not been changed.

The demand for Environmental Services will remain strong in Finland. Increasing plant capacity and a versatile service offering will probably improve L&T’s market position. During the current year, L&T Biowatti will strengthen the procurement of raw materials, increase stocks, improve its delivery capacity and thus prepare for increased demand in 2008. The final-quarter operating profit of the division is expected to be on a par with last year’s level. 

The market outlook for Property and Office Support Services in Finland is moderate as outsourcing continues. Cleaning operations abroad are unprofitable but the loss is expected to be smaller than a year earlier. The final-quarter earnings for the entire division are expected to improve.

The market outlook for Industrial Services is positive. Strong demand seems to continue. The risk of obtaining raw material for the upcoming operations of the joint venture L&T Recoil can be considered to have disappeared. Comparable operating profit for the division excluding the effect of changes in the value of oil derivatives is expected to be on a par with last year’s level. Last year, imputed changes in the value of oil derivatives improved earnings by EUR 0.7 million.

An increase in the capacity of the Turku and Valkeakoski plants will be completed during the final quarter. The planning and construction of new plants will continue. Due to completed corporate acquisitions and other investment decisions made, the full-year capital expenditure will exceed the previous year’s level.


CONDENSED FINANCIAL STATEMENTS 1 JANUARY – 30 SEPTEMBER 2007 

ACCOUNTING POLICIES

This interim financial report is in compliance with IAS 34, Interim Financial Reporting Standard. The same accounting policies as in the annual financial statements of 31 December 2006 have been applied. These interim financial statements have been prepared in accordance with the IFRS standards and interpretations that were effective on 31 March 2007. The new IFRIC interpretations (7-10) valid as of 1 January 2007 did not affect the consolidated financial statements. IFRS 7 (effective as of 1 January 2007) does not affect these interim financial statements, because they are condensed. Income tax expense is based on the estimated average annual income tax rate, which would be applicable to expected total annual earnings.

The preparation of financial statements in accordance with IFRS require the management to make such estimates and assumptions that affect the carrying amounts at the balance sheet date for the assets and liabilities and the amounts of revenues and expenses. Judgements are also made in applying the accounting policies. Actual results may differ from the estimates and assumptions. 

The interim financial statements have not been audited.


INCOME STATEMENT

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

BALANCE SHEET

CASH FLOW STATEMENT

Liquid assets

STATEMENT OF CHANGES IN EQUITY