Elanders AB (publ) (ELANB) Earnings Call Transcript & Summary

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

Yes, welcome, everyone. This is Magnus Nilsson, and together with me is also Andréas Wikner, Elanders' CFO. And I will now start with our presentation. And for you those who have the presentation, I will now move to Slide #5, because the first slide is more about general information about Elanders. So I will start to talk about how it looks on the market for our big -- our biggest customer segment. And if we start with Automotive, which the primary market for Elanders is in Europe. We have seen a slight negative trend for car sales volumes in Europe, and we can also see the same trend for Elanders, even if our product mix are helping us to balance some of the downtrend. But we could see that, especially December was particularly slow, and that was because lots of our main customers in Automotive segment decided to close some extra days in connection with Christmas and New Year. If we then look at Electronics, we have a different picture. And in the Electronics area, Elanders is more acting worldwide. And if we look at 2 big segments we are working with, so could -- then we could see that PC sales volumes continue to increase in 2019, but printer volumes was going down. And you can also see that there's a trend that volumes are shifting to other countries due to the trade war between U.S. and China. This will maybe change now when there is policy and agreement in place, but we don't really know yet how it could -- how it could affect Elanders, and we also had the growth in some of our new clients that we acquired in Electronics in end of 2018. If we then look at Fashion & Lifestyle, where we -- our main markets are Europe and U.S., then we can see that sales of clothes and lifestyle products continues to increase. And Elanders has many customers within this segment and it's mainly working directly with the brands, and not as a third-party logistics solutions provider. And we can see here that Elanders is following the trend, and we could show growth in this area during 2019. If we then look at the Industrial area, where our main market is in Europe, we have seen different pictures from our industrial clients. But if you look at Germany, we have seen a decline in volumes from one of our biggest customers in the second half of 2019. But then in the same time, we could now see in the Purchasing Managers' Index for the manufacturing/service sector in Germany that had increased to 51.1 from 50.2 in December 2019, which is 5-month high and also the sub-index for the manufacturing sector increased to 45.2 from 43.7. So we have some -- we can see some light in Germany, and we hope that it will come back during 2020. Then if I go to Slide #7, and I will then go through some highlights and results of 2019. And if one-off items and IFRS 16 effects are excluded, then Print & Packaging Solutions had their best year ever and increased earnings with 28% and the increased EBITDA -- EBITA margin to 7.1% compared to 6.3%. We think this is very good news for us because the market is still very challenging, but we can see that our concept works very fine, and it's really good margins to be in the Print & Packaging area. If you then look at our Asian part of Supply Chain Solutions, our daughter company Mentor Media, also had a very good year with both increased profit and improved margins. And Elanders continues to have a very strong cash flow in 2019, and the net debt actually decreased by SEK 397 million in 2019, if we exclude IFRS 16 effect. If I then go to Slide #8. As we've communicated before, we put a new CEO in place for our big daughter company in Germany, LGI, in July 2019. And that was Bernd Schwenger, that before joining Elanders was responsible for building up Amazon's logistics operations in Germany. And Bernd's first target was to simplify the structure of LGI and to -- also to decentralize power from LGI's head office down to each business area to get a clear ownership of the customer's result and margin. And in connection with this reorganization, we identified huge cost savings, and we then initiated a cost-saving program, resulting in one-off costs of around SEK 92 million, which should give yearly savings of around SEK 75 million. Another consequence of the restructuring of LGI was that we found an error in one of their transportation management system, which resulted in one-off costs of SEK 87 million, whereof SEK 57 million stems from before 2019. The adjustment had no negative effect on the cash flow. And the EBITA for the full year 2019 was, in total, affected with SEK 150 million due to combined restructuring program and the problems in the transportation management system. If I then look at the P&L for January to December. If we then look at the fourth quarter, our sales increased to SEK 2.9 billion compared to SEK 2.89 billion, but it was actually a slight decrease in organic growth with minus 4%. And if you look at EBITA, it was SEK 160 million compared to SEK 169 million, the year before. And if you look at the total for the whole year, our sales went up to SEK 11.25 billion compared to SEK 10.74 billion, which was a slight organic growth of 0.3%. And our adjusted EBITA went up to SEK 527 million compared to SEK 523 million, the year before. And if we look at our adjusted earning before tax EBITDA that went up to SEK 395 million compared to SEK 366 million. And adjusted profit per share and also excluding the IFRS 16 was actually SEK 7.77 compared to SEK 7.16, the year before. And as mentioned before, we continue to have a very strong cash flow which ended up with an operating cash flow, excluding IFRS 16 at SEK 746 million, 2019 compared to SEK 538 million, the year before. If I then go to Slide 9. There, we are showing the historic data about our operating cash flow and net debt. And we are now very pleased with our net debt, which went down to SEK 2.1 billion in Q4, in 2019 compared to SEK 2.5 billion in Q4, 2018. And actually, for just 1.5 years ago, our net debt was SEK 2.9 billion. And this also shows that Elanders has a very underlying strong cash flow, and we can handle temporary increases in net debt in connection with acquisitions or bigger investments. If I then go to Slide #10. And if we look at our 2 business areas. And then we have also comment the numbers excluding IFRS 16 effects on one-off items. If we then look at the sales for the whole year, the sales for Supply Chain Solutions was SEK 8.77 billion compared to SEK 8.52 billion the year before. It was actually minus 2% in organic growth. EBITA was SEK 379 million compared to SEK 401 million and the reason to the low result is mainly connected to very slow market in Germany, especially then in Q4. And it's also interesting to know that the whole saving package we have now done in the restructuring program will -- all connected to our German operation. And then if you look at Print & Packaging Solutions, where we had a really strong year. Our sales went up to SEK 2.56 billion compared to SEK 2.24 billion, which is actually an organic growth of 14%. And our EBITA result went up to SEK 182 million compared to SEK 142 million, which is an increase of 28%. And then if I go to Slide #11 and just look at the turnover of our different customer segments, the last quarters, and as I mentioned before, we could see in the fourth quarter that several of our automotive customers closed down the production some extra days in connection with Christmas and New Year. This also shows in our sales for Automotive that was weaker in the fourth quarter of '19 compared to '18. If we then look at Electronics, we could see an increase year-over-year. And this increase came mainly from both new customers, but also new projects with existing customers and also Fashion & Lifestyle increase compared to last year. And we have also continued to acquire some new interesting customers in this area in 2019. And as I mentioned before, there was -- our volumes going down from our biggest customer in Germany in the industrial area, but we managed to compensate this with some new customers. So -- that means that Industrial was in line compared to last year. And then Slide #2 (sic) [ 12 ] is just more for information to show you the different levels of results, both adjusted and not adjusted and also the effects of IFRS 16. If I then go to Slide #13. We have also decided in today's Board meeting to change our financial goals. We had a goal before to the sales growth of 2% to 3% per year, and we will continue with this same goal going forward. We also had an EBITA margin target of 7%. We will keep that on the same level as well. And then we had a net debt/EBITDA ratio target of 3. We now, because of the strong cash flow and -- has decided to change that target and the new target for net debt/EBITDA is now 2.5. And we have decided to take away the target of -- regarding return on capital employed because of we get high effects from IFRS 16 in that number. If I then go to Slide #14, we have some comments about going forward. We must say that the Print & Packaging Solutions looks very stable going forward. We can see that our setup that we have with high-volume production in lower cost countries and the focus on digital print in more high-cost countries and the consolidations we have done, that we are in a really big -- in a good shape, and we are now taking lots of volumes from competitors in a declining market. And then if I just comment about Mentor Media then they have -- you know Mentor Media, as I said, made a really good year in 2019. But as we have some challenge with our customers due to the long trade war between U.S. and China, which has pushed these companies make some changes in the supply chain in Asia. Now we're not sure anymore if there will be any bigger effect, but -- because of the trade agreement. But also in the same time, we have now started to invest in the health care sector in this company, and we will, during 2020, set up a clean room facility in Singapore to be able to do, what we call, keeping service also for medical companies. And then, of course, there's a new problem coming up now is the coronavirus and for the moment, it's hard for us to estimate an effect of the coronavirus. But of course, we are monitoring it closely. And as you may know, we have 11 sites in China, and we need to follow the development of this as well. And then if you look at LGI, then we can see that they will go into 2020 with a much lower cost base, which prepare them for another market situation. But of course, if that we continue downtrend in Germany, it could be that some of the savings will not get full effect on the result. So we'll hope now that Germany is coming back. And we also estimate that we will continue to have a very strong cash flow going forward, and we'll be able to go down even further in net debt during 2020. And then if we look at the acquisition side, we are now looking more on small- to medium-sized companies with good margins and attractive service that enables us to grow in our customers' value chain and also in our area we call life cycle. So okay. That was everything from me. So we are now opening up for questions.

[Operator Instructions] We'll take our first question.

It's Carl Ragnerstam here from Nordea. I have a few questions. First of all, I mean given the extended Automotive production closure in December due to Christmas and New Year's eve and so on. I mean can we expect slightly higher production levels in January or is it still a slow start to Q1?

Yes, it seems like it's coming back, but also the closing days was also affecting the first week of January. But it's a bit of a mixed picture, but if you saw Daimler was releasing data, where the sales is pretty good. So -- but we are hoping, but it's always hard to estimate in January, because January is always a slow month for Automotive. So still a bit uncertain for us to estimate anything.

Okay, perfect. And I mean, we have seen your new CEO, making some restructuring initiatives for LGI. But can you sort of share some further measures that you probably plan to implement during 2020? I mean you have your financial objectives of 7% EBITA margin. I mean can you discuss a little bit also about how you will -- what needs to be done in order to reach that long-term goal? And also, can you do it in these markets?

Okay. Yes, the thing we have done in LGI, that is a big change. It was before 6 different business areas with 6 different heads. And also the transportation was separated from the contract logistics part. And the thing we have done now, we have gone down from 6 business areas, we have 3 business areas. That means that we can take away a lot of, of course, top management, but also we have a clearer direction. So if we then look at Automotive, the guy who is Head of Automotive, today, both owns the transportation part and the contract logistics part. And that makes it easier for us to give more clear margin targets of each business area. So we think that will make a big effect. And then also, we have some really nice areas in LGI with very good margins. And of course, in the new setup we are making, we will prioritize business with higher margins. So it will be very balance going forward. We will have a slim organization, more clear ownership of P&L, everyone has to push to grow and develop business with the right margins. And then we will maybe let some business -- we will let it go when demand is not good enough. And we think we should be able to reach 7%. It will take some time. But if we look at 2019, actually, then both Print & Packaging and our other part of Supply Chain, Mentor Media, reached over 7%. And both of them are also working in very competitive markets. So it must be possible to do it. It will take some time. It's a big company. But I think with the measures we are doing and also the targets we're giving them, so we think it's doable.

Okay, perfect. And also, given your new financial objective with the lower net debt/EBITDA ratio. I mean I wonder do you feel comfortable with making bolt-on acquisition already in 2020, despite the fact that you are still above your financial target? Or are we rather talking about 2021 in terms of acquisitions?

Carl, we lost you in the middle of there, you said, are you -- is that -- are you talking about the...

Okay. Sorry. Do you hear me?

Yes. We can hear you now. But...

Okay. Perfect. I can try to do it again. In terms -- I mean you lowered your net debt/EBITDA ratio, and I mean are you comfortable with making acquisitions already in 2020? Or is it more of a 2021 thing? Or how should we see that?

As I say, we are already now prepared to do some acquisitions in 2020. If they're not too big. If you go for medium sized, then we will go more for companies with high added value and higher margins. Then in the same time, when you acquire them, you will also get an increase in your EBITDA as well. So it should work. So -- and of course, the target 2.5 is over time. So we'll not let it stop us to make maybe a bigger acquisition. But if we don't make any acquisitions, we believe, very close to the target 2020, but it doesn't matter if it will be 2021 for us, because we'd also need -- we see a need of -- that's also a way to improve margins for LGI to speed up the transformation of them could be to do some acquisitions in areas that have a higher margin than 7%, of course. It also makes it easier. So 2.5 is a target over time. And I think we can reach it with some acquisitions. If there [ isn't ] a big one, it will be, of course, a bit delayed.

And we'll take our next question.

This is Edvard Hagman from ABG. I thought I would reintroduce myself as I'm taking over the coverage after Mattias. And I have a few questions for you. Could you maybe shed some lights on the freight and transportation revenue stream as it's down 18% year-over-year and 14% sequentially? Is this a result of your strategy with reduction in less profitable contracts? Or is it a question of lower demand or competition?

Yes. No, I think a big part of it is actually that we are taking away [ bad ] business, and we also closed down some part of our road freight. But there's also some effect on our air and sea company that the air and sea volumes have went down in the last 6 months because of the global economy. But I think the main part is connected to the things we have done in the transportation side. And I think you can see there could be some more reductions going forward as well. But there was some signs in the air and sea part, the transportation also went down and -- which is a rather good business for us.

Okay. You recently expanded the restructuring program and announced the annual savings from SEK 60 million to SEK 75 million that you would expect occurring in 2020. Do you expect this to occur already in the first quarter? Or will the savings impact arrive later this year?

We think that the bigger part will start coming in Q2. We'll have some effects in Q1, but starting in Q2, we will say, a bigger effect of the saving package.

All right. And as the German automotive sector is seeing declines in volumes, is this something you see impacting the profitability level on new automotive contracts? Or how do you deal with this matter ahead as you are more restrictive with new contracts?

I don't think -- we haven't seen it so much in new contracts. I think the main problem for us have been that the volumes goes up and down. I think the main problem is there's no -- there's not a clear trend that volume is going down. So where customers are acting very up and down the last 6 months, there are some weeks we are running extra shifts. Some weeks, they closed some extra days. And so that's why it has affected our results more than it normally should do because if you look at supply chain, what we have is mainly personnel. So if you can see a continuous downtrend. We can adjust our cost and then it will not affect the results so much. But during Q3 and Q4, the problem for us has been that our customers are going up and down. So it's been very uncertain. So it has affected our results negatively in Q4. So I think that's the main part that our result was lower in Q4 was because of the Automotive area. As well as it's very important now if it stabilized on a level. It doesn't matter so much if it doesn't grow anymore, it goes down a bit. But if the demand gets more stable, we can adjust our cost structure, obviously.

Okay. You have earlier mentioned the flexible costs in Germany, thanks to regulations and favorable short-time labor. Have you or are you planning on utilizing the German labor system that enables you to reduce the labor hours, while the government is covering for the shortfall in the wages?

We have made some preparation, but it's also connected to my comment before that then you need to have a continuous downtrend. You cannot use it if you call in your personnel extra 1 week and you send home them another week. So to utilize -- to use this system that is -- it's a very good system. You need to say, you need to be able to say, okay, coming 6 months or 12 months, we want to reduce working time to 20%. And for the moment, we haven't been able to do it because of the ups and downs in the demand from the automotive area. But if we see if it continues, both in Automotive and Industrial, this is something the tool we will absolutely use because it's very good.

[Operator Instructions] And it appears that we have no further questions. Oh, I spoke too soon. I'm sorry. We'll take our next question.

I've just got a quick question on your new sales growth target. Can you elaborate on that, because I think you mentioned something else in the reports. The new target being 3% to 5%. And in the PowerPoint presentation, you said 2% to 3%.

Did you mean -- sorry, did you mean the growth in turnover or the other growth, 5%.

On Page 13 in the presentation, you said new goals, financial goals, sales growth of 2% to 3% per year.

Sales, 2% to 3%. Sorry, it should be 3% to 5%.

Yes. okay. Thanks for clarifying.

Sorry for that.

[Operator Instructions] And it appears we have no further questions, gentlemen. I would like to turn the conference back over to our speakers for any concluding remarks.

Okay. Thank you, everyone, for calling in to Elanders' quarterly call. Thank you. Bye-bye.

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.