ELANDERS AB (PUBL)

ELAN B
Temps Différé Nasdaq Stockholm - 17:29:30 26/01/2023
173.40 SEK +0.81%

Transcript : Elanders AB, Q2 2022 Earnings Call, Jul 12, 2022

12/07/2022 | 09:30

Presentation Operator Message
Operator (Operator)

Good day, and welcome to the Elanders AB conference call. At this time, I would like to turn the conference over to Magnus Nilsson, CEO of Elanders. Please go ahead, sir.

Presenter Speech
Magnus Nilsson (Executives)

Thank you. Welcome, everyone. Together with me, I also have Andréas Wikner, Elanders' CFO. And I will start by going directly to Slide #4 in our presentation and talk about our major growth areas that we have identified. The first one is e-commerce where we can actually continue to see a rather stable demand and high activity when it comes to requests from both existing and new customers. And our focus in this area is to mainly work directly with the brand [ owner ] because they are focusing on building up their own e-commerce and not be too dependent on e-tailers.

The second growth opportunity is in the area of contract logistics where we can see that companies are continuing to outsource, and the last few years have showed that you can't rely on a global just-in-time supply chain. And this opens up for more local production and security stock of important components, and because you need a product more close to the market. And this also opens up for more contract logistics deals for Elanders.

The third growth opportunity is in life cycle management, where we take care of the complete life cycle of a product, which is an area that is in line with the need to create more sustainable solutions with a target to maximize the lifespan of a product.

The fourth growth opportunity is in the area of online print. And this area is Elanders' one of the absolute leading production partners in Europe, the different online print companies.

If we then go to Slide #5 and look at our latest acquisition, which is the U.K.-based company, Bonds. Bonds [ an ] important complement to our offering when it comes to life cycle management and will enable us to grow in this area also in U.K. Bonds are specialized in distribution of technical equipment, including value-added services like setting up, installations, take-backs, refurbishment and storing of valuable and sensitive equipment.

If we then go to Slide #6, and you can see how the split of our major customer segments looks like if we include Bergen that we acquired at the end of last year. Including Bergen [indiscernible] and lifestyle actually now at 27% of Elanders' sales and it's actually in line with electronics, but we estimate that they will outgrow electronics in the second half of the year. And as you can see, we have a pretty good split now between different customer segments, which also have helped us now in the second quarter.

If we then go to Slide #8 and look at the second quarter. In the second quarter, we could see a recovery in our [indiscernible] rates to more normal levels, but instead we see continuing increased cost of material, fuel and electricity. And we're also affected by China's zero-tolerance that affected the global supply chain and had a big impact on several of our customers. But despite all these challenges, we are very happy to report a very strong result with an adjusted EBITA that is actually 55% higher than last year, and an adjusted result before tax that is 51% better. We can also show an organic growth of 4% despite the very challenging quarter.

The improved result comes out of Supply Chain Solutions that can show an organic growth of 11% and improved margins, and the main driver behind the growth in supply chain was mainly strong growth in Fashion & Lifestyle but also very stable demand from Electronics and Health Care, and we could also benefit from increased volumes in our Air & Sea activities in Europe.

If we then look at Print & Packaging. Print & Packaging Solutions, we had again a very short quarter and was negatively impacted by increasing material and freight cost but also lower demand of photobooks, calendars and other similar products. But we could see some improvements compared to the first quarter, and in the second quarter, we also signed a new very important agreement with a new customer in the area -- in our focus area of online print. This contract has an estimated yearly sales of around SEK 100 million, and the project will start already in the second half of this year and will also help Print & Packaging to recover.

If we then go to Slide #9 and look at our business area at first quarter and look at Supply Chain Solutions, then you can see in the figures there, what I mentioned before, very strong growth in both sales and results. And even if we exclude the positive one-off items of SEK 40 million, we still managed to improve our EBITA margin in the second quarter to 7.3% compared to 5.9% the year before. And Bergen is, of course, the major reason to the growth, but we could also show an organic growth of 11% for Supply Chain Solutions.

If we then look at Print & Packaging Solutions, we can see a slight increase in sales. And if the result was lower than last year, we could see an improvement compared to the first quarter. We are now working very closely with our customers to find ways to compensate for increased material and energy cost. Very important is also the new online print contract that I mentioned before.

If we then go to Slide #10 to look at our sales by customer segments in the quarter and then look at our sales to automotive. You can see that despite all challenges in the second quarter, improved our sales last year. And even if our customers was very affected by China's zero-tolerance which affected their supply of components, in the end of quarter, we could see some recovery. But we expect that this will go up and down during the year when it comes to China's zero-tolerance.

If we then look at Electronics, we continue to show a strong demand but here, we also have some impact from China's zero-tolerance, but that was mainly activities in Asia and that we could compensate by a very strong demand in Europe. And we also have got some additional customer projects during the year that helped this area.

In Fashion & Lifestyle, we can show a very strong growth compared to last year. The growth comes mainly from Bergen, but we also still can see a stable demand in Europe. And sales for subscription boxes in the U.S. continues to decline because of less trading of [ freights ] for our customers, but this was compensated by Bergen and Europe.

If we then go to Slide #11, you can see that Health Care and Life Science shows a good growth because of increased demand, and we also have a new customer and our new [indiscernible] site in Germany is now up and running at full capacity. In Industrial, we could see still a stable amount despite some challenges for our customers and still looks stable going forward. Other sales shows growth but a bit lower than expected because of decreasing sales of especially online print products. We expect this area to grow in the second half of the year with the help of the new contract that I mentioned before.

If we then go to Slide 12, and look at how things will be going forward. So despite the very challenging environment, the majority of our customers still reporting that they have a lot of full order books, especially when it comes to automotive, industrial, electronics and health care. So that is still promising even if they have lots of problems to fill up with components.

Fashion & Lifestyle is a bit harder to predict. But for the moment, we continue to see a stable demand and an even growth when it comes to adding new customers. But you can also see that a lot of strategic focus on building up a global footprint and a more diversified customer base has been very helpful in compensating a very volatile market, especially after the acquisition of Bergen that has given us a very strong footprint also in North America.

The zero-tolerance in China and war in Ukraine is, as everyone knows, affecting the global supply chain negatively, but it also create -- but it still also creates some opportunities for global supply chain companies like Elanders. An example is that companies now building up more local sourcing and that increases demand for additional local storage and also more contract logistics services. And you can also see a trend that companies now try to build up more of the security stock of key components to be able to run their production even if there is disturbances with deliveries from -- especially from China.

But as we mentioned before, our biggest challenge is the continuous increased cost of fuel, electricity, material and also higher interest rates could in the long run, of course, puts pressure on both consumers and the companies. But we expect that the demand for global logistics in the long run will continue to grow. And even in this challenging times, we are securing additional capacity in facilities to support the future organic growth.

Okay, that was everything from me. And now we will open up for questions.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] And we will take our first question.

Question
Carl Ragnerstam (Analysts)

It's Carl here from Nordea. A few questions. Firstly, is it possible for you to sort of quantify the margin impact from extraordinary costs or extra costs related to lockdowns in China, overall volatile production in automotive? You had also the inflation in fuel costs.

Answer
Magnus Nilsson (Executives)

I think when it comes to Print & Packaging, it's pretty easy, then you can mainly compare to last year. So there, we can see an impact from 1.1%, at least, on the EBITA margin. When it comes to Supply Chain Solutions, it's a bit more complex. But I think we talk about, I don't know, Andréas, is around at least 1%? 1% in that area as well.

Question
Carl Ragnerstam (Analysts)

Okay. Very helpful. And also, could you perhaps also quantify the EBITA contribution from -- or EBIT for that matter contribution from Bergen Logistics in the quarter?

Answer
Magnus Nilsson (Executives)

We don't give it out. As you know, the result of the company. But we can say like -- that Bergen has been a very strong contributor. And we can also -- they have for the first half year, they can show a sales growth of almost 50% compared to last year. So of course, they are a very important engine in contributing both to sales but also to EBIT. So -- but for the moment, we can say it's a very good acquisition, and we are very happy with them. And they've been balancing the challenges in Europe and also the weaker demand in Asia. So you need to estimate a bit yourself but very good numbers.

Question
Carl Ragnerstam (Analysts)

Definitely. And I mean you said 50% growth. Is it fair to assume that they maintained a flat margin despite the higher growth? And the second part of the question is what is the main growth driver of the 50%, would you say?

Answer
Magnus Nilsson (Executives)

I think the main growth engine is that they had this unique concept when we mentioned. The reason why we acquired them, they have several hundred small to medium-sized customers. No customer is bigger than 4%. And this has made it very -- not easy but more possible for them to quickly move cost -- increase cost to the customer. So they can do it very quick. They don't have long agreements, and they can be more -- take the risk to lose some customers as well. So -- but of course, the growth always comes to capacity, and they opened -- when we acquired them last year, they have just opened a new facility that is almost filled up now. So I think they will be maybe more flat later on, but we are now looking to expand to one additional facility in the U.S. in the beginning of next year.

So -- but of course, they could also be affected by the consumption going forward. But they have an extremely robust business model with several hundred customers, no customer bigger than 4%. Very unique offering and can easily add new clients as a compensation if the customers lose 10% in sales. They can just -- yes, but they can add new customers to fill it up. So much harder for us in our other parts of Elanders where we work with huge big companies, and that helps us more when their volumes goes up and down. So I hope that answers your question.

Question
Carl Ragnerstam (Analysts)

Yes, definitely, definitely. And also, have you seen more at the end of the quarter entering Q3 here? Have you seen a more stable production pace within automotive? Or is it still volatile than by that driving extra costs? And also, would you say that, that you could offset the rising fuel costs in the second half of the year mitigated by price increases?

Answer
Magnus Nilsson (Executives)

I must say automotive has been really volatile the whole quarter. I think we saw stabilizing the last week in June, but we have seen that trend before. And I must say it's really tough times for our automotive and also lots of the industrial customers. But I think they have adjusted for Ukraine, I think the problem is the China zero-tolerance. So if China don't make close-downs again, I think it will be much better in the second half. But if China again starts closing down regions in China, with effect shipping out of components, they will run into problems again. It's really hard. It looked better in the end of June. So yes, but we cannot see so far.

And when it comes to the fuel prices, we are now -- a lot of the increases are kicking in. And so there, we will see some compensation in the second half of the year. But the problem for us is still that they run their production extremely up and down. But we think when it comes to Print & Packaging, we are now started getting through with lots of our customers to increase prices. So if you see in Calgary, at least, in Print & Packaging, step-by-step in the second half of the year.

Question
Carl Ragnerstam (Analysts)

Very good. And the final from my side here is you mentioned that you have seen a more muted demand for some of your customer groups at the end of the quarter. Is it possible to quantify which customer groups and geographies you're primarily seeing this pattern in? And also what portion of group sales is where you can see a bit of muted demand currently?

Answer
Magnus Nilsson (Executives)

We've seen some muted demand in some of our Fashion and Lifestyle brands in Europe. And we also have seen new to demand in Asia when it comes to our electronics customers. So in Asia, we are not really sure if it's more about these restrictions, on and off or it's a trend of electronics losing some sales. But in the same time, electronics was very stable in Europe in the period at some fashion customers, some electronics clients in Asia. Otherwise, lots of our big customers still talks about that they have a huge backlog. So -- but there are more problem with components.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions]

Question
Adrian Gilani Göransson (Analysts)

It's Adrian Gilani from ABG. I just like to start off with a question regarding, you said in the report that you see strong demand from your customers, but that their customers have started flagging for slower demand. I'm just trying to understand sort of the lead times here. How long do you expect it to be before this starts affecting you directly since for now your customers should still have full order books?

Answer
Magnus Nilsson (Executives)

I think when it comes to our automotive clients, they have -- their backlog is so big. So even if customers start to cancel [ auto ], I think they will still be fully loaded as soon as they have material. When it comes to Electronics and Fashion & Lifestyle, it's much harder to pick because we don't see so much -- their forecasting is all tricky because it somehow goes how much they sell per day. So -- but for the moment, we don't see so much disturbances, but there was a report today that computer sales has gone down heavily. We have not seen that yet, but that maybe will affect us later on. So I must say, it's really hard for us to predict. We are really working hard on focusing on the quarter-to-quarter and work out with our cost and to be prepared. So it's what we can say. It's really hard. Very strange times for the moment.

Question
Adrian Gilani Göransson (Analysts)

Yes, that's understandable. Regarding the Print business, a bit of a similar question. Obviously, the market is -- there are some trouble or troubling conditions on the market there. Could you -- do you see any improvements towards the second half of the year on the supply side of paper? I mean it's been a few months of the UPM strike ended, are we seeing any effects from that at all so far?

Answer
Magnus Nilsson (Executives)

No, we can actually see regarding Europe signals from the paper suppliers now that the demand should be more balanced after the summer. So it looks like now that will be material enough because we need to decline lots of [ orders ] because we don't have paper. But the signal is now that, that will be better in Europe in the second half of the year. But in U.S., the signal is we need to wait for next year, there is enormous challenges still with paper demand in U.S.

So that will affect us also the second half of the year. But Europe looks better, and we can also see that the paper price increases now is slowing down a bit because it's been really hard for us because it's been a moving target, papers' prices was increasing in the end of last year. We will negotiating our customers and 1 month later, prices up again and so on and so on. So it's also important for us that the price increases stop so we can negotiate and get good levels with our customers. But it looks like it will be better the second half of the year for Europe, at least.

Question
Adrian Gilani Göransson (Analysts)

Okay. And also a follow-up to what you mentioned recently on Bergen. You said that they had a new facility when you acquired them that they could sort of grow into their existing capacity. Is that facility now at or close to full capacity? Or is there still some room for Bergen to grow within that?

Answer
Magnus Nilsson (Executives)

There is still some room, but it's pretty close to full capacity. That's why they have managed an increase of 50%. So there -- but that is compared to last year. And so they will still -- if customer demand is good, it was to do well the rest of the year. And then the next year, we open up a new facility in the Atlanta area. So it's also about management resources. They are working really hard now. It's painful to grow with 50%, but have managed it in a very impressive way so.

Question
Adrian Gilani Göransson (Analysts)

Yes. And also the site you mentioned within Healthcare in Germany, you quickly mentioned that, that was up and running at full capacity. Can you sort of quantify how much that means for you in revenues that is at full capacity?

Answer
Magnus Nilsson (Executives)

No, as you can see, if we look at just to see the numbers there, if you look at Healthcare, Life Science the first half year, and that is a pretty good growth, and the growth comes mainly out of Europe on this site. So of course, that's important for us. And we are adding some new customers as well. But the Healthcare is still only 4% for us, but it's an area of priority. So I think we have grown -- sorry, I'll check here, we have shown a growth of around 25% the first half year, and we should be able to do the same in the second half year, roughly.

Question
Adrian Gilani Göransson (Analysts)

And just one final question on my end regarding the working capital. We saw a fairly significant negative cash effect here. Could you just elaborate a bit on what specifically drove working capital buildup and whether this is an effect that can be reversed in the coming quarters or if this is a structurally higher working capital going forward?

Answer
Magnus Nilsson (Executives)

I give that question to Andréas.

Answer
Andréas Wikner (Executives)

Thank you. There's partly one of things, a couple of things that drives the working capital in the quarter and some of it should come back in the next quarter, but we still have a very good underlying growth, which also means that we are tying up additional working capital. But we should have some positive effects the coming quarters.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions]

Question
Markus Almerud (Analysts)

Markus Almerud here from Penser Bank. A couple of questions. First, I'm curious to hear about electronics and then the demand somewhat weaker demand you're talking about. Is it specifically in China? Or is it all over Asia?

Answer
Magnus Nilsson (Executives)

It's been lower for us overall in Asia. So both in our Singapore and China activities. But it's really hard to see if that's the first sign of a lower demand, but there's also been a lot of disturbance with closing down sites, because of China zero-tolerance.

Question
Markus Almerud (Analysts)

And when it comes to that and when it comes to China and the lockdown, has it been any signs at all of it coming back somewhat? I mean, it's difficult to know whether they will close it down again or not. But if you look throughout the quarter, have you seen any like easing of it on the back of them starting to open up? Or is it still the same amid disturbances?

Answer
Magnus Nilsson (Executives)

No, they were opening up in the second half of the second quarter again. So lots of things now is running more normal. But I saw yesterday, there was some rumors that they would maybe do some restrictions in the Shanghai area again. So it's really hard. It's hard to see that they really can continue to fight this war because with this new version of Omicron, let's say, it's even more hard to stop. So let's see how they do it. But for the moment, it looks much better, the harbor, everything is working, materials are going out. So yes, let's hope for that.

Question
Markus Almerud (Analysts)

Okay. And then I would just also on Europe business, especially in industrial, both automotive demand, it is continuously strong also electronics demand is strong in Europe. If you look at trends and directions, are they kind of -- would you characterize as unchanged throughout the quarter? Or do you have any change in up or down?

Answer
Magnus Nilsson (Executives)

I didn't follow you really. What change do you mean up and down?

Question
Markus Almerud (Analysts)

So if you look at demand, there's strong demand, especially in Industrial and Automotive and Electronics in Europe, for instance. Are you seeing -- is it kind of unchanged throughout the quarter? Or do you see any change in direction at all?

Answer
Magnus Nilsson (Executives)

No, I think the demand is strong. But I think we are working mainly with their premium models. And -- so for us, that demand is strong. But some of our customers has communicated that they are focusing less and less on their cheaper model, especially when you talk about the German premium brands. So it can be that they have a decline that we don't know about, but we are working more with the premium cars and they have an enormous backlog. And we also work with the new electric cars as well. So battery handling and things like that.

So -- but from what we can see, their demand is extremely strong from our customers. It's just problem -- problems with material components. It's -- as soon as they have material, they run extra shifts, the whole quarter.

Question
Markus Almerud (Analysts)

Still mainly a supply problem rather than demand problems that you're seeing basically across the board is how you would put it?

Answer
Magnus Nilsson (Executives)

Yes, yes.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions]

Question
Unknown Analyst (Analysts)

My name is [ Raden Javic ] here from [ Roland Invest ] in Norway. And my first congratulations on a very strong quarter. I think you navigate, and again, in a difficult environment. My question is related to the interest rate hike. So could you update us a bit more about when will that influence on your P&L? And to what kind of degree, if you look ahead a year or 2 with the present interest rate environment? Could you share a bit of information on how fast and how much do you see that increase?

Answer
Andréas Wikner (Executives)

I will take that question. This is Andréas here. We will see an increase in interest costs in the coming quarters. We don't have any fixed interest, I would say, in general, on our external borrowing. Our lease liabilities, there are -- sort of the interest rates are set at the beginning of each lease term for each contract. But for the normal, let say, the credit facility agreement, we have interest rates based on SOFR and also on -- yes, say, variable rates. So it will impact us after we send in the statistics this quarter. For example, we will have an increase in interest rates with 20 basis points on the actual market rate, also because the net debt-to-EBITDA multiple will also affect. We have a revenue interest rate, would you say, [indiscernible] or depending on how our leverage are -- but we will have effects on it going forward. I would say I don't know exactly if that answers your questions but your question.

Question
Unknown Analyst (Analysts)

I think what you are saying is that it's influencing, in my opinion, pretty slowly. But at the end of the day, you expect it to rise obviously in present environment. My second question to that is that will you consider to increase your EBIT target in the future, in order to compensate for higher interest rates, which certainly will influence a bit lockdown on your P&L to compensate 2 years from now? Or have you had this kind of discussions and if it's possible?

Answer
Magnus Nilsson (Executives)

To compensate by increasing...

Answer
Andréas Wikner (Executives)

The long-term target to -- because of the higher interest rates.

Answer
Magnus Nilsson (Executives)

Yes, the target.

Question
Unknown Analyst (Analysts)

My question is, if interest rates are moving north with 2 percentage points during the next 2 to 3 years, then your EBIT target could stick to your present [ 7 ], but it will lead to -- because you are paying more interest rate on your debt so I think is SEK 7 billion or something like that. So is it possible to -- do you discuss to increase your future the target in order to kind of compensate for that interest rate level, and leave that price to the client, if that possible. Do you discuss it? And is it possible?

Answer
Magnus Nilsson (Executives)

Yes. We always, of course, try to get higher. And the four acquisitions we made last year, all of them had over 10% EBITA margin. So that's one tool. But another tool for us is we normally have very strong cash flows as well. And so for us, if the environment gets tougher with higher interest rates, we can not so quickly, but we can also do other things like to be a bit tougher with investment, a bit slower in expansion. And then pretty quickly, then we will have a strong cash inflow that will push down our net debt.

So for us, I think to work, of course, margin up is an important tool to increase your EBITDA. But we know also that we have a capacity to rather quickly to work aggressively to push down the debt with our cash flow. I think that's even a stronger tool for us to increase the margin, actually. Because we can we can for a while tell our guys, slow down investment, maybe we don't expand, we wait the quarter to get down because we have these steps for margins in the interest rate as well. That is a very important tool for us.

And we are not afraid of a higher interest rate in that sense. But that will, of course -- then we need to make a decision maybe to slow down a bit of our organic growth, be a bit more careful, focused pushing down for a while our debt, and then we can increase the speed again. Maybe one more comment as well if the economy slows down, then we normally don't look up so much in working capital idle, so that will also give us some positive effects on net debt.

Question and Answer Operator Message
Operator (Operator)

We have no further questions at the moment. [Operator Instructions] Thank you. It appears that we have no further questions for today's call. So I would like to turn the conference back to our speakers for any additional or closing remarks.

Answer
Magnus Nilsson (Executives)

Okay. Thank you, everyone, for calling in, and we wish everyone a really nice summer. Thank you very much.

Question and Answer Operator Message
Operator (Operator)

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.

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