ELANDERS AB (PUBL)

ELAN B
Temps Différé Nasdaq Stockholm - 17:29:45 31/01/2023
173.00 SEK -0.46%

Transcript : Elanders AB, Q3 2022 Earnings Call, Oct 17, 2022

17/10/2022 | 15:00

Presentation Operator Message
Operator (Operator)

Good day, and welcome to the Elanders AB conference call. [Operator Instructions] I will now hand you over to your host, Mr. Magnus Nilsson, CEO of Elanders Group to begin today's conference. Please go ahead, sir.

Presenter Speech
Magnus Nilsson (Executives)

Thank you. Hi, everyone. It's Magnus Nilsson here speaking. Together with me, I also have Andréas Wikner, our CFO. Okay. I will go directly to Slide #5 in our presentation and talk about our third quarter. Despite a very complex environment, we could deliver a result that is clearly better than last year, and that is a result of our strategy to continually broaden our customer base and also increase our geographic footprint.

If we then look at the demand from our different customer segments, we could see a very mixed picture in the third quarter, but we managed to compensate the lower demand from some segments with the help of stronger demands from other segments. And we could also continue to see increased cost of fuel and electricity, which continues to put pressure on our operations.

But on the other hand, could we see some improvements in the global supply chain with improved capacity and reduced prices? In the quarter, Fashion & Lifestyle in North America continues to grow very strong. And we could also see very stable amounts from Electronics and Health Care and Fashion & Lifestyle in Europe. Asia was a bit weaker, and we needed to compensate lower volumes, value-added services with a bigger share of buy and sell that gives us a bit lower margins.

If we then look at Print & Packaging Solutions, could we see a very strong recovery after a very tight -- very tough first half year with the help of price increases, better availability of material and also positive recovery of online printed other products like photobooks and calendar. We could also already in Q3 see positive effects of the online print contract we signed in Q2.

If we then look at our numbers, can you see that we managed to deliver an organic growth of 12% and an EBITA, excluding one-off items that is actually 76% better than last year. And we also improved our result before tax, excluding one-off items with 80%. If we then go to Slide #6 to look at our business areas for quarter and look at Supply Chain Solutions.

You can see that we can show a very strong growth in both sales and results, and we've improved our EBITA margin to 6% compared to 4.9% the year before despite a challenging market with lots of fluctuations in demand from our customers.

Bergen is, of course, the major reason to the growth, but we could also show an organic growth of 15% in the quarter without Bergen. If we then look at Print & Packaging Solutions, you can see a very strong improvement in the adjusted EBITA results, which actually came in [ 54% ] better than last year. And as mentioned before, the main drivers behind the improved result is that we have managed to get through with price increases for customers and better availability of material like paper and cardboard and also a good recovery when it comes to online print volumes.

If we then go to Slide #7 to look at our sales by customer segment in the quarter and then look at our sales to automotive, you can see that sales improved compared to last year despite that our customers still have problems with shortage of components like semiconductors, which continually result in regular output from their factories.

The positive is that the majority of our customer in this segment is still showing full order books. If we then look at Electronics, it's the picture a bit more complicated with decreasing demand in Asia and also decreasing demand on some products in Europe like TVs and printers. But on the other hand, can we see an increase in demand for heat pumps and also other equipment that is connected heat pumps, which increased demand.

And we can also see an increased demand for storing of electronic products in Europe, which under Q3 managed to compensate the lower demands from TVs and printers. In Fashion & Lifestyle, we continue to see a very strong growth compared to last year. The growth comes mainly from Bergen, but we also continue to see stable demand in Europe.

And in Q3, we could actually see rather strong demand from our -- regarding our retail delivery.

We then go to Slide #8. You can see that Health Care & Life Science shows a good demand. And we continue to add new customers, both when it comes to contract logistics services and also life cycle management services like deliveries, installations, [indiscernible] handling and takeback of equipment. In industrial, we could see a stable demand in the second quarter despite the lower demand of products like power tools, which we could offset by increased volumes in the area of thermal technology.

[ Other ] sales shows a strong growth, which is mainly driven by recovering demand of photobooks, calendar and children books and other similar products. We can also see good demand from other online [ other ] products like small series of packaging material. If we then go to Slide #9 and look at how things would be going forward.

We can see that the Elanders' global footprint and diversified customer base will help in a very challenging market, and decreasing demand for some products can often be compensating by increasing demand from other products. You can also see that the low demand increases the need for storage of products and the lack of space -- of warehousing space makes it possible to achieve rather good margins offering in storing of products.

We can also see that Bergen model with focus on small- to medium-sized customers still works very well because they can compensate low demand from some customers by adding new customers rather quickly in their multi-customer site. But I think as everyone understand, will the market continues to be more challenging and continually increase in costs for food, energy and electricity will put additional pressure on the consumers the coming months.

But it also depends how the local authorities will act and how they will compensate the consumers and also to try to get the inflation under control. Positive sign in the quarter was that we can see a normalization when it comes to Air & Sea freight, both regarding capacity and decreasing prices, which should help some of our customers. And we still think that Global Logistics over time will continue to grow. And we will actually -- we have actually added more capacity in Germany in Q3. And we are now also looking at expanding in the U.S. and U.K. by adding more warehouse capacity during the first half of next year.

Okay. That was everything from me. And now we open up for questions.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] And we will now take our first question. Please go ahead.

Question
Adrian Gilani Göransson (Analysts)

It's Adrian here at ABG. Is my line open?

Answer
Magnus Nilsson (Executives)

HI Adrian, we can hear you.

Question
Adrian Gilani Göransson (Analysts)

Okay. Perfect. Just starting off with a question on current trading. We're going into the famous fourth quarter. And maybe it's a bit too early to say, but do you expect a stronger Q4 than last year for the print or online print and photobooks business? Or do you see a risk to demand considering the sort of poor consumer sentiment at the moment?

Answer
Magnus Nilsson (Executives)

I think that with the signals we could see in Q3 with a strong recovery in this year compared to the numbers the year before that should be, for us, a signal that it should be a strong Q4. And then also, we have an additional contract that we signed in Q2. So we expect higher volumes than last year. You can always speculate -- some people speculate that this -- when the times are [ hard ], it's cheaper to buy these kind of products as a Christmas gift and other things, I don't know. But we are positive for Q4, yes.

Question
Adrian Gilani Göransson (Analysts)

Perfect. Looking a bit at Bergen, you say that there is a high double-digit organic growth, which, obviously, that's a very big span. Could you sort of quantify a bit more specifically the organic growth in Bergen.

Answer
Magnus Nilsson (Executives)

Yes. We talk about improvements around 50% or growth of 50%.

Question
Adrian Gilani Göransson (Analysts)

That's very helpful. Obviously, there are some fears regarding some general economic slowdown in 2023. Looking at Bergen specifically, how resilient do you expect Bergen to be in a sort of recession scenario in 2023? .

Answer
Magnus Nilsson (Executives)

We expect that it should be rather resilient actually. If it's not really that heavy downturn economy because with our business model to work with, they have around 500 customers, small to midsized. So with their model, they can add on more customers if the demand goes down for the customer. So I think they can compensate their partly at least. So we think they will be pretty resilient. Yes. Of course, it will be affected if it's a big downturn, but yes. .

Question
Adrian Gilani Göransson (Analysts)

And you've previously stated that Bergen is close to maximum capacity utilization and that you're working on expanding capacity. Could you just give us a status update here? How long can Bergen sort of maintain this organic growth rate given the current capacity. And what's the time line for expanding it? .

Answer
Magnus Nilsson (Executives)

The time line for expanding it is that we will start up the new site in Atlanta in Q1 that will add on lots of capacity over time to have this big -- this growth is not sustainable, but we think they will at least keep our double-digit growth, but in a more, more balanced levels because it's also the capacity of management and to handle it. Yes.

Question
Adrian Gilani Göransson (Analysts)

Yes. Okay. Looking at working capital, we have another quarter of fairly significant working capital buildup. How should we think going into 2023? Is there a potential to reverse some of this? Or is this mostly a function of you growing a lot in North America in Bergen. So is this sort of structurally higher working capital? .

Answer
Magnus Nilsson (Executives)

I give it to Andréas.

Answer
Andréas Wikner (Executives)

Thank you. I think we should see a decrease in working capital in the beginning of next year. There are some buy-and-sell business this year been happening in Q3 and Q4 that [ somehow surprised ] drive the working capital when it's first being tied up as inventory and then accounts receivable. But there should be an improvement in next year -- in the beginning of the next year. .

Question
Adrian Gilani Göransson (Analysts)

Okay. And one final question from my end. Regarding the margin development and supply chain. Obviously, we saw solid profits, but comparing to Q2, you were actually clearly above your 7% target in Q2, and we saw a full percentage point drop to 6% in Q3. What's the sort of main delta between Q2 and Q3 and supply chain specifically? .

Answer
Magnus Nilsson (Executives)

But I think normally, we are stronger in Q2 in supply chain than Q3 because in Q3, we have lots of closing, lots of holidays in Germany, especially in Europe. So normally, we slow down a bit also from a margin perspective in Q3. So for us, it's nothing... .

Answer
Andréas Wikner (Executives)

No, it's a little bit top line growth from the buy and sell business, which still is lower margin on that business than the other one. .

Question
Adrian Gilani Göransson (Analysts)

Okay. But other than that, it's just seasonality effects and some more buy-and-sell business on the top line? .

Answer
Andréas Wikner (Executives)

Yes.

Answer
Magnus Nilsson (Executives)

And then also for our customers, we're responsible to trading lots of freight. So then when the freight cost goes up, it also drives a bit turnover, but no margin, unfortunately. So when prices is more normalizing in transportation sector, we will get some upside from a margin perspective.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] We will now take our next question. Please go ahead.

Question
Carl Ragnerstam (Analysts)

Very good. It's Carl here from Nordea. So firstly, correct me if I'm wrong, but I think you mentioned that you managed to grow your European Fashion & Lifestyle business in the quarter. So is it due to ramp-up of new customer contracts or is it simply because the markets held up well? Or yes, I was a bit surprised on that. .

Answer
Magnus Nilsson (Executives)

No. It's mainly -- of course, we have added some new customers during the year, and they were running well. So that helps. But overall, we saw very strong demand for lots of existing customers, especially when it comes to retail. Also a bit surprising for us.

I must say it's everyone talks about a downturn in the economy or whatever, but Yes, there was a very strong demand from also a lot of our customers we have had for a long time that is more in the retail segment, was performing very well [indiscernible] e-commerce was a bit weaker. So yes.

Question
Carl Ragnerstam (Analysts)

And did you see an equally strong demand throughout the quarter? Was it better in the beginning than in the latter part? Or is it overall the same.

Answer
Magnus Nilsson (Executives)

In Europe, it was especially strong in September, actually. .

Question
Carl Ragnerstam (Analysts)

Okay. Very interesting. Okay. Perfect. And also -- is it possible to quantify buy-and-sell volumes in the quarter? And I also guess, it's still low single digits on those volumes, right, or margins that is? .

Answer
Andréas Wikner (Executives)

That's correct. We don't have any expected figure. I don't know [indiscernible].

Answer
Magnus Nilsson (Executives)

I think we can maybe make it qualify estimation, but it's .

Answer
Andréas Wikner (Executives)

300 million.

Answer
Magnus Nilsson (Executives)

Yes. Roughly 300 million.

Question
Carl Ragnerstam (Analysts)

In the quarter?

Answer
Magnus Nilsson (Executives)

With very low margin...

Question
Carl Ragnerstam (Analysts)

Okay. Very helpful. Also, you mentioned that you saw growth from heat pumps and other energy-efficient related products. Is it -- did you get this exposure from your [indiscernible] sales or do you work with other brands as well? And how big is this exposure for you currently? .

Answer
Magnus Nilsson (Executives)

I think the good thing for us is that we work both in -- with industrial customers that work with these systems, but also one of our bigger electronics customers also have this different kind of heat pump system. So that's really helped us. So I think it's hard to quantify.

But if you say it compensated the customers downturn in demand of TVs and power tools, that was compensated by these components. We don't separate this one. It's in different business areas. But we expect it to be very strong demand from these kind of products because they're saving energy and there's lots of other components around it. So it's a good thing that we are also diversified.

Question
Carl Ragnerstam (Analysts)

And we could also see that quite a few of the heat pump players, especially from Asia are trying to target Europe, building new production capacity in Europe. Is it possible for you to sort of gain more traction in the market by getting new deals with the Asians trying to expand to Europe or...?

Answer
Magnus Nilsson (Executives)

Yes, of course, that's always a chance because we have a long experience for I think one of our industrial customers, we are handling everything of [ that ]. They have both small systems, big systems, including pipes and wherever. We have a good track record in handling these products. So of course, there's always a chance for us. And one of our customers is actually an Asian customer already. So it could be a good opportunity.

Question
Carl Ragnerstam (Analysts)

Okay. Very good. And the final one from my side. Have you seen any improvement in a more stabilized production for automotive? Or is it still similarly challenging situation as you saw in Q2 or in Q3 compared to Q2? .

Answer
Magnus Nilsson (Executives)

I think, unfortunately, it's the same. Every time we think are running better, they they're hitting some problems than we are reducing shifts and then they increase shifts. So I think it's still challenging to them. Some of them was running actually pretty well in September, but in August, it was pretty weak. So it's really hard for us to see. But I think now when the global supply chain starts to work better with better capacity in Air & Sea, that will also help. But the big question is still the semiconductors that is sorting them .

Question
Carl Ragnerstam (Analysts)

Okay. And sorry, 1 more, if I may. You also said then here that you wanted to add more capacity, for instance, in Germany. Is it any specific end market or customer you're targeting existing customers? Is it more that you want to have capacity ready if anything comes up or...?

Answer
Magnus Nilsson (Executives)

We are adding -- one of the capacity sites we are adding is actually for Fashion & Lifestyle because we still believe has a big growth opportunity in that market. But also, we can also see that also business-to-business that has part to be development when it comes to more e-commerce between companies.

So one of the additional sites, we are focusing mainly on industrial customers when it comes to the e-comm between business to business. So we can still see, especially both in Germany and U.S. and U.K., there is a huge demand of capacity also for normal warehousing. So -- it makes us easier for us to be a bit more aggressive. So we add capacity. Then we start with maybe a simple warehousing and then we try to turn it around to build more added value services. But there's still a huge lack of space in U.S. and Germany and also in U.K. The U.K. is also still driven by Brexit, but companies need to have -- you need to handle your returns in the U.K. and to consolidate and before taking them out and also when you ship in things like that. So yes.

Question
Carl Ragnerstam (Analysts)

Will that initially lead to sort of a margin dilution given that you are doing more simple services compared to other sites where you have sort of more value-added services? Or is it...?

Answer
Magnus Nilsson (Executives)

There is some dilution, what do you say, but normally absolutely that we are counting on. But also now when it's a pressure of storing, we can see that prices are increasing so you can actually also do decent margins of your storing. So that somehow it's maybe easier to expand when consumption goes down a bit because then we can use it for storing but to get better paid than normally. So I think we can balance it, but of course, it always costs to do organic growth. .

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] We will now take our next question.

Question
Markus Almerud (Analysts)

Yes, I didn't know whose line was open because I didn't say. Markus Almerud at Penser Bank. I'd like to start following up on the previous question. So you've seen supply chains. You're talking about supply chains opening up a bit and then working a bit better in general. But then we also have the semiconductors. So can you talk a little bit about that, what. Are you seeing any easing on the semiconductor side as well?

Because we know that freight rates have come down, and that's an indication of supply chains working better. And we know that electronic and especially consumer electronics are also falling demand, which should ease up some semiconductors. So what are you seeing there. Are you seeing some easing...?

Answer
Magnus Nilsson (Executives)

I think it's a bit hard for us. We're not -- it's pretty complex with these semiconductors. But as an [indiscernible] in that area, I think we can get -- if consumer electronics is going down a bit because consumers buy computers and printers. Hopefully, that should help the automotive sector by more capacity from the semiconductor manufacturers, even if I -- what I understand there's different levels of them.

So -- and there's always lots of reports coming out. But there was some -- we can see some indications now that they expect this will be better next year -- at least the second half. But -- but we know that 1 year ago, and then there was problems again. So it's -- I must say it's very complicated, but it looks like it should be better.

Question
Markus Almerud (Analysts)

Okay. But there's nothing you've heard in detail -- I mean, from your customers is nothing that you've discussed? .

Answer
Magnus Nilsson (Executives)

No.

Question
Markus Almerud (Analysts)

That they have signaled. Okay. My second question is, so we're seeing consumer discretionary in particular falling. You talk about white goods, you're seeing printers [ also ] falling -- demand for those falling. And automotive is a bit of a special situation where lead times have been very, very long. Can you talk a little bit about the industrial sector?

What do you see in the industry? Because we see other manufacturers who actually hold up quite well despite leading indicators, et cetera, falling quite sharply. So it would be interesting to hear what you see.?

Answer
Magnus Nilsson (Executives)

Well, I think in our industrial segment, I think the demand still looks very stable. There was some parts going down like power tools and more tools for home. But then on the other hand, I was -- the technology going up and [ in truck ] industries also trucks think the demand still looks good for trucks and things like that. And I think overall, industrial looks good, looks stable. .

Question
Markus Almerud (Analysts)

Okay. Okay. And then finally, my final question is on the comment you made about increasing demand for stock, I mean, for building stocks in certain segments.

Does this -- is this across the board? Is it broad? Or is it connected to the areas where you also see weakness? I mean -- or is it too difficult to say too complex?

Answer
Magnus Nilsson (Executives)

No, it's absolutely connected to where we say weaknesses, yes. So that is where we see the volumes going down, that the project flow is still coming in from outside their home market, and then they need to store it because they cannot push it out to the retail and retail and so on. .

Question
Markus Almerud (Analysts)

And that also means that you don't see that similar type of movement in automotive, in industrial segments.

Answer
Magnus Nilsson (Executives)

No, no, not so much, no.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions]

Question
Unknown Analyst (Analysts)

[indiscernible]. Question on your cost assumption for next year and starting with the leasing cost or rental cost, I guess they are prior to the inflation and how do -- what's the contracts look like for next year? And also on the energy side, if prices remain at these levels, what kind of cost increase do you expect to see in [ quarter 3 ]. Thirdly, how do you compensate for these cost increases? .

Answer
Magnus Nilsson (Executives)

Thank you. I think what we say, Andreas, but the leasing cost is normally connected to inflation or index. Of course, that will have an effect. But normally, in our contract, when it -- at least when it's single customer sites, we have the same in our agreement with our customers. So rental price goes up, we push it forward customers. In the multi-customer side, it's another question because we normally have several customers.

But normally, you have it in a contract or it's something you need to negotiate with your customers? Can you add something more about that...?

I think normally, we can act. I think the increases will be higher than normal, but mainly of customers are prepared for it, and we have the tools to increase.

Answer
Andréas Wikner (Executives)

Good and ongoing dialogue with them about the price increase. .

Question
Unknown Analyst (Analysts)

Okay. So you expect to see no pressure on [ profit ] for this kind of cost increases.

Answer
Magnus Nilsson (Executives)

No, we don't see so big pressure from that area. I think it's -- hard of thing is, of course, when it comes to negotiations about salary increases next year. Of course, it's more easy maybe with a rental process and index, and we can just provide the data for our customers. I think -- it's much harder later on to compensate if the salary increase is too high, then you need to be in discussions with the customers more than normally than that. .

Question and Answer Operator Message
Operator (Operator)

And there are no further questions at the moment. [Operator Instructions] There are no further questions. So I will hand you back to your host to conclude today's conference.

Answer
Magnus Nilsson (Executives)

Okay. Thank you, everyone, for calling in to our phone conference. Thank you. Bye-bye. .

Question and Answer Operator Message
Operator (Operator)

Thank you for joining today's call. You may now disconnect.

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