Interim report 1 January - 30 September 2008 

 Interim report Q3 2008

28 October 2008, 8:00 am

 - Net sales for the third quarter EUR 151.2 million (EUR 138.6 million); operating profit EUR 17.6 million (EUR 15.5 million); operating profit excluding non-recurring and imputed items EUR 16.3 million (EUR 16.9 million); earnings per share EUR 0.31 (EUR 0.28)
- Net sales for January–September EUR 452.9 million (EUR 406.4 million); operating profit EUR 50.6 million (EUR 36.7 million); operating profit excluding non-recurring and imputed items EUR 36.4 million (EUR 41.0 million); earnings per share EUR 0.99 (EUR 0.63)
- Full-year net sales are expected to increase by approximately 10%. Operating profit is expected to be somewhat lower than in the previous year. Due to the capital gain from Ekokem shares, earnings will exceed those for the previous year.
- The equity ratio is expected to remain healthy and the financing for 2009 has been secured.


GROUP NET SALES AND FINANCIAL PERFORMANCE

Third quarter
Lassila & Tikanoja’s net sales for the third quarter totalled EUR 151.2 million (EUR 138.6 million), showing an increase of 9.1%. The growth was entirely organic. The operating profit was EUR 17.6 million (EUR 15.5 million), representing 11.6% (11.2%) of net sales. The operating profit excluding non-recurring and imputed items was EUR 16.3 million (EUR 16.9 million). Earnings per share were EUR 0.31 (EUR 0.28).

Strong organic growth continued. However, the general increase in costs and the reduction in recycling volumes hampered financial performance in the third quarter. Measures to boost production efficiency continued in order to adapt to increased production costs, and prices were revised. Changes in the fair values of oil derivatives raised operating profit by EUR 1.3 million (EUR -0.5 million).

January–September
The nine-month net sales increased by 11.4% to EUR 452.9 million (EUR 406.4 million), with corporate acquisitions accounting for 2.0 percentage points of this growth. Operating profit amounted to EUR 50.6 million (EUR 36.7 million), representing 11.2% (9.0%) of net sales. The operating profit excluding non-recurring and imputed items was EUR 36.4 million (EUR 41.0 million). Earnings per share were EUR 0.99 (EUR 0.63).

Organic growth outperformed market growth, and new service products were introduced to the market. Operating profit fell due to a rise in the general cost level, particularly in the prices of transport fuels. Similarly, the reduction in recycling volumes and the decreased demand for recovered fuels and biofuels attributable to the mild winter burdened financial performance. Changes in the fair values of oil derivatives decreased operating profit by EUR 0.1 million (EUR 2.1 million).

A capital gain of EUR 14.3 million from the sale of Ekokem shares in January increased the operating profit.

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

July–September
The net sales of Environmental Services (waste management, recycling services, L&T Biowatti, environmental products) rose by 8.6% to EUR 73.7 million (EUR 67.9 million). The operating profit was EUR 9.7 million (EUR 9.7 million), and the operating profit excluding non-recurring and imputed items was EUR 9.7 million (EUR 9.9 million).

Strong organic growth continued. Prices were revised and measures to boost production efficiency continued. The profitability of recycling services weakened due to smaller transport and processing volumes resulting from the slowdown in construction and to the decrease in the sales prices of recycled raw materials. 

Construction of added capacity at the Kerava recycling plant proceeded in schedule, and the first stage (recycled timber unit) is expected to be on line early next year. Construction of the second stage (construction waste recycling plant) is about to begin, and the plant is expected to be completed in about a year.

L&T Biowatti reached its targets thanks to an increase in the demand for biofuels during the period. However, the rising costs affected its operations, and production limitations in the mechanical forest industry hampered the procurement of byproducts for raw material. The wood pellet plant in Luumäki with an annual capacity of about 20,000 tonnes was introduced at the beginning of October. 

International operations within Environmental Services expanded, and performance developed favourably. Profitability development was particularly good in Latvia thanks to production efficiency measures and decreased costs.

Net sales for environmental products increased considerably and financial performance improved.

January–September
Environmental Services’ net sales for January–September totalled EUR 225.9 million (EUR 205.1 million); an increase of 10.1%. The operating profit was EUR 26.3 million (EUR 26.6 million), and the operating profit excluding non-recurring and imputed items was EUR 26.3 million (EUR 27.8 million).

Due to the steep rise in the general cost level and transport fuel prices, prices were revised. Financial uncertainty and particularly the slowdown in construction lowered the amount of intake volumes at recycling plants. Measures to enhance production efficiency were launched to adjust to higher production costs.

Construction of substantial added capacity began at the Kerava recycling plant, which will double the plant’s capacity to almost 400,000 tonnes by 2010. At the same time, the recovery rate will increase significantly. 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 landfill site constructed in Kotka will be opened before the end of the year.

The demand for L&T Biowatti’s biofuels fell clearly short of the expected level due to the exceptionally mild winter. The mild winter also hampered the collection of forest processed chips and raised subcontracting costs. L&T Biowatti will revise its organisation, expand its service offerings, and invest in its own collecting, processing and transport equipment. The production of wood pellets was launched at the beginning of the final quarter.

Business in Russia and Latvia developed as planned. Resources were increased to expand international operations.
 
All units of Lassila & Tikanoja plc’s Environmental Services received certificates for quality, environmental management, occupational health and safety. The objective of certification is to improve service and reinforce shared operating procedures.

Net sales for environmental products increased and performance development was positive.

Property and Office Support Services 

July–September
The net sales of Property and Office Support Services (property maintenance and cleaning services) grew by 8.4% to EUR 56.3 million (EUR 52.0 million). The operating profit was EUR 4.8 million (EUR 4.2 million), and the operating profit excluding non-recurring and imputed items was EUR 4.8 million (EUR 4.6 million).

The division’s strong organic growth continued, particularly in property maintenance, and additional services sold well in both product lines. Prices were revised. Net sales from international operations increased in Russia and Latvia.

The division’s performance improved as a result of profit improvement in property maintenance and smaller losses from international operations. Production efficiency improvement measures continued to respond to rising production costs, and the action programme to improve profitability in Sweden proceeded according to plans.

January–September
The January–September net sales of Property and Office Support Services increased by 13.2% to EUR 169.0 million (EUR 149.3 million). The operating profit was EUR 7.6 million (EUR 7.0 million), and the operating profit excluding non-recurring and imputed items was EUR 7.6 million (EUR 7.4 million).

Contract revenue increased, and the sales of additional services in both product lines were successful. Production costs rose and price competition remained intense. Operations were adapted to increased production costs, and prices were revised.

New service products were 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.

Loss from international operations declined, and operations in Russia and Latvia developed as planned. In Sweden an extensive action programme has been launched to improve profitability.


Industrial Services

July–September
The net sales of Industrial Services (hazardous waste management, industrial solutions, damage repair services and wastewater services) went up by 15.2% to EUR 22.9 million (EUR 19.9 million). The operating profit was EUR 3.7 million (EUR 2.1 million), and the operating profit excluding non-recurring and imputed items EUR 2.4 million (EUR 3.0 million).

Net sales increased in all product lines, and prices were revised. Fluctuation in demand continued, which was challenging from the production adjustment perspective. Demand for damage repair service was low in the third quarter.

There were several coinciding shutdowns in the industry, which resulted in increased subcontracting. Furthermore, costs associated with the storage of raw materials for the L&T Recoil re-refinery and the starting of operations burdened the financial performance. The completion of the facility will be delayed until next spring because of a design flaw in the piping. Changes in the fair value of oil derivatives raised operating profit by EUR 1.3 million (EUR -0.5 million).

New partner agreements were signed in the industrial solutions business.

Key priorities in operations included profitability improvement and production adjustment to the forthcoming slower winter season.

January–September
The January–September net sales of Industrial Services totalled EUR 62.3 million (EUR 55.6 million); an increase of 12.1%. The operating profit was EUR 4.0 million (EUR 4.6 million), and the operating profit excluding non-recurring and imputed items EUR 4.1 million (EUR 7.3 million).

Production could not be adapted quickly enough to the rapid fluctuations in the demand for Industrial Services. Earnings were also adversely affected by recycled fuel delivery difficulties early this year. Changes in the fair values of oil derivatives amounted to EUR -0.1 million (EUR -2.1 million).

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

Prices were revised, and profitability improvement measures were initiated in all product lines. 


FINANCING

At the end of the period, interest-bearing liabilities amounted to EUR 10.9 million more than a year earlier. Net interest-bearing liabilities, totalling EUR 117.6 million, increased by EUR 6.5 million from the comparison period and by EUR 31.3 million from the beginning of the year. Net finance costs exceeded those for the comparison period by EUR 0.1 million in the third quarter and by EUR 0.4 million in January–September. Interest expenses increased by EUR 0.2 million in the third quarter and by EUR 0.6 million in January–September as a result of the growth in interest-bearing liabilities and a rise in the interest rate level.

An expense of EUR 0.1 million arising from changes in the fair values of interest rate swaps was recognised in the finance costs in the third quarter, equalling to the amount for the comparison period.
In January–September, an expense of EUR 0.2 million arising from the change in the fair value of interest rate swaps was recognised this year as well as in the comparison period.

Net finance costs were 0.8% (0.8%) of net sales and 6.8% (8.4%) of operating profit. The equity ratio was 44.9% (42.6%) and the gearing rate 57.3 (61.7). Cash flows from operating activities in January–September amounted to EUR 41.8 million (EUR 34.4 million), and EUR 8.5 million (EUR 17.7 million) were tied up in the working capital.

The equity ratio is expected to remain healthy, and financing for 2009 has already been secured.


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 52.2 million (EUR 77.6 million). Production plants were built and machinery and equipment were purchased and information systems were replaced.

In the second quarter the property maintenance services business of Rantakylän Talonhuolto Oy and 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–September, the average number of employees converted into full-time equivalents was 8,177 (7,723). At the end of the period, the total number of full-time and part-time employees was 9,625 (9,226). Of them 7,326 (6,989) people worked in Finland and 2,299 (2,237) people in other countries.


SHARE AND SHARE CAPITAL

Traded volume and price
The volume of trading in Lassila & Tikanoja plc shares on NASDAQ OMX Helsinki from January through September was 15,370,189 which is 39.6% (39.0%) of the average number of shares. The value of trading was EUR 261.4 million. The trading price varied between EUR 12.88 and EUR 23.00. The closing price was EUR 13.80. The market capitalisation was EUR 535.4 million (EUR 876.9 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, 14,500 shares have been subscribed for pursuant to 2005A share options. After these subscriptions the share capital is EUR 19,399,437, and the number of the shares 38,798,874 shares.

Share option scheme 2005
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. 32 key persons hold 176,000 2005B options and 40 key persons hold 221,500 2005C options. L&T Advance Oy, a wholly-owned subsidiary of Lassila & Tikanoja plc, holds 8,000 2005A options, 24,000 2005B options and 8,500 2005C options and these options will not be exercised.  

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 NASDAQ OMX Helsinki since 2 November 2007.

Share option scheme 2008
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. 41 key persons hold 220,500 options and L&T Advance Oy 9,500 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 220,500 new shares, which is 0.6% of the current number of shares.

Shareholders
At the end of the financial period, the company had 5,978 (5,050) shareholders. Nominee-registered holdings accounted for 10.7% (13.3%) of the total number of shares.

Notifications on major holdings
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%.

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%.

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-exempt 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.

On 3 October 2008, the company announced that the waste oil re-refinery of joint venture L&T Recoil Oy will not be completed until next spring, while earlier it was expected to be completed towards the end of this year. Flaws had been detected in the piping design, which postpone the completion with a few months.


NEAR-TERM UNCERTAINTIES

Although the markets in which L&T primarily operates are not highly cyclical, slowdown in economy may reduce transport and recycling volumes and the number of commissioned assignments. The slowdown in the construction business has already translated into lower volumes of construction waste, and it is highly likely that further slowdown is in the horizon. Planning and implementing work is more difficult because of the rapid fluctuations in the demand for Industrial Services, particularly in forest industry.

A further postponement in the starting of L&T Recoil’s operations and changes in the fair values of oil derivatives associated with the business 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. Heavier forest industry production restrictions are very likely, which will hamper L&T Biowatti’s supply of by-products for raw material. A planned amendment to Latvian waste legislation may have adverse effects on the competition situation for waste management in Riga.


PROSPECTS FOR THE REST OF THE YEAR

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, due to the capital gain from Ekokem shares, earnings will exceed those for the previous year.

In Environmental Services, the slowdown in the construction and forest industries will affect transport and intake volumes. In other respects, the market outlook for Environmental Services is stable. The full-year operating profit excluding non-recurring and imputed items for Environmental Services is expected to be at a slightly lower level than a year ago.

The market outlook for Property and Office Support Services will remain stable. However, the competitive environment will remain challenging, and the financial uncertainties may reflect in the number of commissioned assignments. The division’s international operations are expected to improve their performance but still remain in the red. The full-year operating profit excluding non-recurring and imputed items from Property and Office Support Services is expected to fall somewhat short of the previous year’s level due to higher social costs.

Strong fluctuations in the demand for Industrial Services are likely to continue in the final quarter, and production adjustment measures will continue. After the end of the period, a decision has been made to discontinue the division’s soil washing services which have been making a loss. As a result, a non-recurring expense amounting to approximately EUR 2.6 million will be recognised for the final quarter. The division’s full-year operating profit excluding non-recurring and imputed items will fall short of last year’s level.

Operations will focus on profitability improvement. Investments will be lower than in the previous year.



BREAKDOWN OF OPERATING PROFIT EXCLUDING NON-RECURRING AND IMPUTED ITEMS

CONDENSED FINANCIAL STATEMENTS 1 JANUARY–30 SEPTEMBER 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 excluding the tax-exempt gain on sale of Ekokem shares.

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 were 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.

On 1 October 2008, Jätehuolto Savolainen Oy group was acquired, a company specialising in waste management and recycling services, with annual net sales of EUR 2.5 million. The company also provides waste water, hazardous waste management and industrial cleaning services. Oulun TOP-Huolto Oy, a company specialising in property management, was acquired in October through a purchase entering into force on 1 November 2008. The company’s annual net sales for 2007 amounted to EUR 2.5 million.

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