Interim Report 1 January - 30 June 2008 

29 July 2008 8.00 am

 Interim Report Q2 2008

• Net sales for the second quarter EUR 154.4 million (EUR 138.8 million); operating profit EUR 10.2 million (EUR 12.0 million); operating profit excluding non-recurring and imputed items EUR 11.3 million (EUR 13.8 million); earnings per share EUR 0.17 (EUR 0.20)
• Net sales for January-June EUR 301.7 million (EUR 267.9 million); operating profit EUR 33.0 million (EUR 21.2 million); operating profit excluding non-recurring and imputed items EUR 20.1 million (EUR 24.1 million); earnings per share EUR 0.68 (EUR 0.35)
• Full-year net sales are expected to increase by approximately 10 per cent. The operating profit excluding non-recurring and imputed items is expected to be somewhat lower than in the previous year. The capital gain from Ekokem shares will improve earnings.

GROUP NET SALES AND FINANCIAL PERFORMANCE

Second quarter
Net sales for the second quarter stood at EUR 154.4 million (EUR 138.8 million). This represented an increase of 11.2%, 1.5 percentage points of which came from corporate acquisitions. The operating profit was EUR 10.2 million (EUR 12.0 million), which is 6.6% (8.7%) of net sales. The operating profit excluding non-recurring and imputed items was EUR 11.3 million (EUR 13.8 million). Earnings per share were EUR 0.17 (EUR 0.20).

Organic growth continued. The quarter’s performance was burdened by a larger rise than expected in the general cost level, particularly in the prices of transport fuels that can only be transferred into sales prices with a delay. The operating profit was also burdened by changes in the fair values of oil derivatives amounting to EUR 1.1 million (EUR 0.5 million).

January-June
Net sales for January-June stood at EUR 301.7 million (EUR 267.9 million). This represented an increase of 12.6%, 3.8 percentage points of which came from corporate acquisitions. The operating profit was EUR 33.0 million (EUR 21.2 million), which is 10.9% (7.9%) of net sales. The operating profit excluding non-recurring and imputed items was EUR 20.1 million (EUR 24.1 million). Earnings per share were EUR 0.68 (EUR 0.35).

Organic growth outperformed market growth, and new service products were introduced to the market. The operating profit was improved by a capital gain of EUR 14.3 million from the sale of Ekokem shares in January. The operating profit excluding non-recurring and imputed items was burdened by a rapid increase in production costs and a decline in the demand for recycled fuels and biofuels due to the mild winter. The operating profit was burdened by changes in the fair values of oil derivatives amounting to EUR 1.4 million (EUR 1.6 million).

Financial summary

* Breakdown of operating profit excluding non-recurring and imputed items is presented at the end of the explanatory statement.

NET SALES AND FINANCIAL PERFORMANCE BY DIVISION

Environmental Services

Second quarter

The net sales of Environmental Services (waste management, recycling services, L&T Biowatti, environmental products) in the second quarter amounted to EUR 76.6 million (EUR 71.7 million), an increase of 6.8%. The operating profit was EUR 8.2 million (EUR 8.1 million).

Rapidly increasing production costs, particularly an increase in the prices of transport fuels, burdened the division’s operating performance. The cost increase had its greatest effect in waste management, which fell short of its targets. The profitability of recycling services was weakened by a continuing increase in the purchase prices of certain waste materials and a downturn in the availability of recycled materials from the forest industry. The heating values of biofuels supplied by L&T Biowatti were higher than in the comparison period, and its performance improved.
 
Operations outside Finland within Environmental Services expanded, and performance developed favourably. Net sales from Environmental Products continued to increase.

All units within waste management and recycling services received certificates for quality, environmental, occupational health and safety management. The objective of certification is to improve service and reinforce shared operating procedures.

January-June
Environmental Services’ net sales for January-June amounted to EUR 152.1 million (EUR 137.1 million), an increase of 10.9%. The operating profit was EUR 16.6 million (EUR 16.9 million).

It was not possible to transfer the major increase in transport fuel prices completely into sales prices. Prices will be increased with a delay, and production efficiency measures were initiated in order to adapt to increased production costs.

Construction of substantial added capacity was initiated at the Kerava recycling park. The capacity of the Kerava plant will be doubled to almost 400,000 tonnes by 2010, and the recovery rate will increase substantially. Due to the reduced capacity of the landfill at the Kerava plant for technical reasons, the costs of disposal of plant reject will increase. The industrial waste landfill under construction in Kotka is expected to be completed within the next few months.

The demand for L&T Biowatti’s biofuels was substantially lower than expected, which was due to the exceptionally mild winter. Warm weather also hampered the collection of forest processed chips, and subcontracting costs increased. L&T Biowatti will invest in its own collecting, processing and transport equipment for forest processed chips and start the production of wood pellets during the current year.

The business in Russia and Latvia developed as planned. Resources were increased to further expand international operations.

Property and Office Support Services

Second quarter
The net sales of Property and Office Support Services (property maintenance and cleaning services) in the second quarter totalled EUR 57.1 million (EUR 48.7 million), an increase of 17.4%. The operating profit was EUR 1.2 million (EUR 1.7 million).

Growth in net sales continued thanks to acquisitions made in the previous year. Organic growth was strong particularly in property maintenance. The division’s performance weakened due to increased production costs that could not be transferred fully to prices.

Operations in Sweden remained in the red, and an extensive action programme to improve profitability is underway.

January-June
The January-June net sales of Property and Office Support Services totalled EUR 112.7 million (EUR 97.4 million), an increase of 15.7%. The operating profit was EUR 2.8 million (EUR 2.8 million).

Contract revenue increased, and the sales of additional services were successful. Price competition remained intense, and operations are being adapted to increased production costs.

New service products were again introduced to the market. New products in cleaning services included the L&T^® EcoCleaning concept, which received the Nordic Ecolabel, also known as the Swan Label, as the first product of the industry in Finland. The concept provides customers the opportunity to carry out concrete environment-friendly actions.

The holding in Blue Service Partners was sold to the joint venture partner in the beginning of February.

The operations in Russia and Latvia developed as planned. The focus in Sweden is still on organic growth and improving profitability. The loss from international operations declined.

Industrial Services

Second quarter
The net sales of Industrial Services (hazardous waste management, industrial solutions, damage repair services, wastewater services) in the second quarter amounted to EUR 22.1 million (EUR 19.6 million), an increase of 12.7%. The operating profit was EUR 1.2 million (EUR 2.6 million).

Rapid fluctuation in the demand for industrial cleaning services continued, and production could not be adapted to the fluctuation quickly enough. Net sales from all product lines increased but it was not yet possible to transfer the entire increase in the cost level into prices. The operating profit was also burdened by changes in the fair values of oil derivatives amounting to EUR 1.1 million (EUR 0.5 million), as well as the costs of raw material storage for the L&T Recoil re-refinery for used lubricating oil that is currently under construction.

New partner agreements were made in damage repair services, and the service network was expanded.

Demand for the division’s services improved towards the end of the period.

January-June
The January-June net sales of Industrial Services amounted to EUR 39.4 million (EUR 35.7 million), an increase of 10.4%. The operating profit was EUR 0.3 million (EUR 2.5 million).

Most of the growth came from operations transferred from Environmental Services. The demand for Industrial Services is usually weakest early in the year; however, demand in the comparison period was exceptionally strong. Production could not be adapted quickly enough to the rapid fluctuation in the demand for services. In the first quarter the earnings were also burdened by difficulties in delivering recycled fuels.

The earnings were also burdened by changes in the fair values of oil derivatives amounting to EUR 1.4 million (EUR 1.6 million).

Pricing will be adjusted, and all product lines will focus on improving profitability. The L&T Recoil re-refinery is expected to be completed towards the end of the year.

FINANCING

At the end of the period, interest-bearing liabilities amounted to EUR 2.1 million more than a year earlier. Net interest-bearing liabilities, totalling EUR 111.8 million, increased by EUR 6.9 million from the comparison period and by EUR 25.4 million from the beginning of the year. Net finance costs increased by EUR 0.1 million in the second quarter and by EUR 0.3 million in January-June. Interest expenses increased by EUR 0.1 million in the second quarter and by EUR 0.4 million in January-June.

An expense of EUR 0.1 million arising from changes in the fair values of interest rate swaps was recognised in the finance costs while there were none of them in the comparison period. Net finance costs were 0.7% (0.7%) of net sales and 6.3% (8.4%) of operating profit.

In January-June, a total of EUR 0.4 million arising from the change in the fair value of interest rate swaps to which hedge accounting under IAS 39 is applied, was recognised as an increase in equity.

The equity ratio was 44.5% (42.2%) and the gearing rate 57.7 (61.2). Cash flows from operating activities in January-June amounted to EUR 25.9 million (EUR 24.7 million), and EUR 2.3 million were tied up in the working capital (EUR 5.8 million). 

DIVIDEND

The Annual General Meeting held on 1 April 2008 resolved on a dividend of EUR 0.55 per share. The dividend, totalling EUR 21.3 million, was paid to the shareholders on 11 April 2008.

CAPITAL EXPENDITURE

Capital expenditure totalled EUR 31.4 million (EUR 64.7 million). Production plants were built and machinery and equipment were purchased and information systems were replaced.

On 1 April 2008, the property maintenance services business of Rantakylän Talonhuolto Oy was acquired into Property and Office Support Services (annual net sales EUR 0.2 million).

In the first quarter the cleaning services business of Siivouspalvelu Siivoset Oy and the cleaning services business of Siivousliike Lainio Oy were acquired into Property and Office Support Services. The business of Obawater Oy was acquired into waste water services within Industrial Services. The combined annual net sales of the acquired businesses totalled EUR 0.7 million.

PERSONNEL

In January-June, the average number of employees converted into full-time equivalents was 7.972 (7.398). At the end of the period, the total number of full-time and part-time employees was 10.087 (9.486). Of them 7.694 (7.212) people worked in Finland and 2.393 (2.274) people in other countries.

SHARE AND SHARE CAPITAL

Traded volume and price
The volume of trading in Lassila & Tikanoja plc shares on OMX Nordic Exchange Helsinki from January through June was 12,459,495, which is 32.1% (24.6%) of the average number of shares. The value of trading was EUR 217.9 million. The trading price varied between EUR 14.60 and EUR 23.00. The closing price was EUR 15.57. The market capitalisation was EUR 604.1 million (EUR 971.8 million) at the end of the period.

Share capital
At the beginning of the year the company’s registered share capital amounted to EUR 19,392,187. Since the beginning of the year, 12,500 shares have been subscribed for pursuant to 2005A share options. After these subscriptions the share capital is EUR 19,398,437, and the number of the shares 38,796,874 shares.

On 28 July 2008, the Board approved the subscriptions of 2,000 new shares made pursuant to the 2005A share options. As a result of these subscriptions, the company’s registered share capital will increase by EUR 1,000 to EUR 19,399,437 and the number of the shares will increase to 38,798,874 shares after the increase has been entered in the Trade Register.

Share option schemes 2005 and 2008
In 2005, 600,000 share options were issued, each entitling its holder to subscribe for one share of Lassila & Tikanoja plc. In the beginning of the exercise period, 25 key persons held 162,000 2005A options. 33 key persons hold 178,000 2005B options and 42 key persons hold 226,500 2005C options. L&T Advance Oy, a wholly-owned subsidiary of Lassila & Tikanoja plc, holds 8,000 2005A options, 22,000 2005B options and 3,500 2005C options.

The exercise price for the 2005A options is EUR 14.22, for 2005B options EUR 16.98 and for 2005C options EUR 26,87. The exercise period for 2005A options is 2 November 2007 to 29 May 2009, for 2005B options 3 November 2008 to 31 May 2010, and for 2005C options 2 November 2009 to 31 May 2011.

The outstanding options issued under the share option plan 2005 entitle their holders to subscribe for a maximum of 1.4% of the current number of shares. The 2005A options have been listed on the OMX Nordic Exchange Helsinki since 2 November 2007.

The Annual General Meeting of the year 2008 resolved to issue 230,000 share option rights, each entitling its holder to subscribe for one share of Lassila & Tikanoja plc. 43 key persons hold 226,500 options and L&T Advance Oy 3,500 options.

The exercise price for the 2008 options is EUR 16.27. The exercise price of the share options shall, as per the dividend record date, be reduced by the amount of dividend which exceeds 70% of the profit per share for the financial period to which the dividend applies. However, only such dividends whose distribution has been agreed upon after the option pricing period and which have been distributed prior to the share subscription are deducted from the subscription price. The exercise price shall, however, always amount to at least EUR 0.01. The exercise period will be from 1 November 2010 to 31 May 2012.

As a result of the exercise of the outstanding 2008 share options, the number of shares may increase by a maximum of 226,500 new shares, which is 0.6% of the current number of shares.

Shareholders
At the end of the financial period, the company had 6,123 (4,795) shareholders. Nominee-registered holdings accounted for 9.8% (15.1%) of the total number of shares.

Notifications on major holdings
On 20 May 2008, Ilmarinen Mutual Pension Insurance Company announced that its holding of the shares and votes in Lassila & Tikanoja plc had exceeded the threshold of 10%.

On 26 March 2008, Varma Mutual Pension Insurance Company announced that its holding of the shares and votes in Lassila & Tikanoja plc had fallen to 4.52%.

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 1 April 2008, adopted the financial statements for the financial year 2007 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 21.3 million, as proposed by the Board of Directors, be paid for the financial year 2007. The dividend payment date was 11 April 2008.

The Annual General Meeting confirmed the number of the members of the Board of Directors six. The following Board members were re-elected to the Board until the end of the following AGM: Eero Hautaniemi, Lasse Kurkilahti, Juhani Lassila and Juhani Maijala. Heikki Bergholm and Matti Kavetvuo were elected as  new members 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’s proposal to issue 230,000 share options to key personnel of the Lassila & Tikanoja Group and/or to a wholly-owned subsidiary of Lassila & Tikanoja plc.

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

On 22 January 2008, Lassila & Tikanoja sold its holding in the shares of Ekokem Oy Ab to Ilmarinen Mutual Pension Insurance Company. Lassila & Tikanoja had obtained possession of the shares over a period of several years and they no longer had any connection to the business operations of the company and were, consequently, not essential for them. A tax-free capital gain arising from the sale was recognised in the financial statements for the first quarter of the year 2008. The positive effect of the sale on the profit for the period will be EUR 14.2 million.

In a release disclosed on 22 July 2008, the company announced that the full-year operating profit excluding non-recurring and imputed items is estimated to be somewhat lower than in the previous year. Previously the company estimated that the full-year financial performance will remain at the same level as in the previous year.

NEAR-TERM UNCERTAINTIES

If the prices of crucial production factors such as transport fuels continue to increase at the same rate as in the first half of the year, the delay in transferring the cost increase to sales prices may hamper profitability. 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. If the next winter is mild, this will have a negative impact on L&T Biowatti’s earnings development. A planned amendment to Latvian waste legislation may have adverse effects on the competition situation for waste management in Riga towards the end of the year.

PROSPECTS FOR THE REST OF THE YEAR

The demand outlook in Lassila & Tikanoja’s markets remain mostly good but the adaptation of the costs and transferring the cost increases to sales prices will impose challenges.

Full-year net sales are expected to increase by approximately 10 per cent. The operating profit excluding non-recurring and imputed items is expected to be somewhat lower than in the previous year. However, the capital gain from Ekokem shares will improve earnings.
The demand for Environmental Services is expected to remain good. Increasing the capacity of recycling plants and landfills will continue, as well as geographical expansion in Russia. During the rest of the year, L&T Biowatti will continue to invest in strengthening its procurement organisation and collection equipment for forest processed chips, as well as start the production of wood pellets. A potential slowdown in new construction may be reflected in the intake volumes of recycling plants. Environmental Services’ operating profit is expected to remain at the same level as in the previous year.

The market outlook for Property and Office Support Services remains good even though the competitive situation is expected to remain challenging and margins are expected to remain tight. Costs in Finland are increased through pay rises and increases in social security costs and transport fuel prices. The division’s international operations are expected to improve their performance but still remain in the red. The operating profit from Property and Office Support Services is expected to fall somewhat short of the previous year’s level.

The market outlook for Industrial Services remains mostly positive; however, uncertainties in the forest industry will be reflected in services produced by the division. Rapid fluctuations in demand are expected to continue towards the end of the year. The L&T Recoil re-refinery is expected to be completed at the end of the year. The operating profit from Industrial Services is expected to fall short of the previous year’s level.

Investments will be lower than in the previous year. The main emphasis will be on profitability improvement.

BREAKDOWN OF OPERATING PROFIT EXCLUDING NON-RECURRING AND IMPUTED ITEMS

CONDENSED FINANCIAL STATEMENTS 1 JANUARY–30 JUNE 2008
 
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 for the year 2007 have been applied. These interim financial statements have been prepared in accordance with the IFRS standards and interpretations as adopted by the EU. Forthcoming standards and interpretations are presented in the accounting policies in Annual Report 2007. 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 company:

BALANCE SHEET

CASH FLOW STATEMENT

Liquid assets

STATEMENT OF CHANGES IN EQUITY

KEY FIGURES

SEGMENT REPORTING

NET SALES

OPERATING PROFIT

OTHER SEGMENT REPORTING

INCOME STATEMENT BY QUARTER

In September 2007, L&T obtained full ownership of Salvor Oy. The business operations of Salvor were reorganised and most of the operations were transferred from Environmental Services into Industrial Services. The figures for the comparison period have been adjusted accordingly.

BUSINESS ACQUISITIONS

Business combinations in aggregate

The cleaning services business of Siivouspalvelu Siivoset Oy was acquired into Property and Office Support Services on 1 January 2008, the cleaning services business of Siivousliike Lainio Oy on 1 March 2008 and the property maintenance services business of Rantakylän Talonhuolto Oy on 1 April 2008. The business of Obawater Oy was acquired into waste water services within Industrial Services on 15 February 2008.

The aggregate net sales of the acquired companies totalled EUR 680 thousand. The aggregate acquisition cost was EUR 420 thousand, of which EUR 55 thousand was recognised in goodwill. All itemisations in accordance with IFRS 3 are not presented because the figures are immaterial.

The accounting policy concerning business combinations is presented in Annual Report 2007 under Note 2 of the consolidated financial statements and under Summary on significant accounting policies.

CHANGES IN INTANGIBLE ASSETS

CHANGES IN PROPERTY, PLANT AND EQUIPMENT

CAPITAL COMMITMENTS

RELATED-PARTY TRANSACTIONS
(Joint ventures)

CONTINGENT LIABILITIES

Other securities are security deposits.
The Group has given no pledges, mortgages or guarantees on behalf of outsiders.

Operating lease liabilities

Derivative financial instruments
Interest rate swaps

* Hedge accounting under IAS 39 has not been applied to these interest rate swaps. Changes in fair values have been recognised in finance income and costs.
** The interest rate swaps are used to hedge cash flow related to a floating rate loan, and hedge accounting under IAS 39 has been applied to it. The hedges have been effective, and the total change in the fair values have been recognised in the hedging fund under equity.

Currency derivatives

* Hedge accounting under IAS 39 has not been applied to the currency derivatives. Changes in fair values have been recognised in finance income and costs.

Oil derivatives