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

Ladies and gentlemen, welcome to the Elanders conference call. At this time, I would like to turn the conference over to Mr. Magnus Nilsson. Please go ahead, sir.

Thank you. Welcome, everyone. This is Magnus Nilsson, the CEO of Elanders, and together with me, I also have Andréas Wikner, our CFO. I will now go directly to Slide #5 in our presentation to go through the development for different customer segments during the second quarter. And if we start to look at Automotive. Automotive was affected heavily in the second quarter and the majority of our customers closed down their factories in April, and then they started up slowly in May. And in June, we could see the start of a bigger recovery and now are all our customers' factories up and running again. But still with a bit lower volumes than before the COVID-19 outbreak. If we then look at Electronics. In Electronics, we had another trend and we were affected much less than other areas, and we could see a very stable demand through the whole quarter. And we also expect that the demand should be stable going forward as well. It looks like that home schooling and the people work from home have increased demands, especially for laptops, but also for servers and other network equipment. So that was a very solid quarter for electronics. If we then look at Fashion & Lifestyle, you could see that they also were affected negatively in the second quarter, especially when countries in Europe decided and also in U.S. to close down shops. There was some increase in e-commerce but it couldn't compensate for the loss of the retail volumes. But we could see in the end of the quarter when shops started to open again that we had a rather stable recovery. And we also expect that this recovery will continue going forward into the third quarter. If we then look at Health Care & Life Science, we had a very stable underlying demand, and we also managed to get some rather big one-off business relating to personal protective equipment that increased our sales heavily compared to last year. And we think there still could be some opportunities in this area in the third quarter, but it depends of course with the development of the COVID-19. And it also depends if the local governments will continue to make centralized purchases of personal protection equipment. But overall, a very good quarter for our Health Care & Life Science area. If we now look at the Industrial, that also was affected negatively, like Automotive, but the impact was less than we could see in Automotive and -- but still, several customers was closing down their factories in April. But we could see a quicker recovery in the second half of the quarter compared to Automotive. But several customers are still having a bit lower production volumes than before the pandemic. If I then go to Slide #7, we look at the numbers for the second quarter. There you can see that we actually managed to show an organic growth of 2%. That was mainly driven by a quick recovery in Asia. Asia, we could feel the COVID-19 in large, but already in April, we could see a strong recovery. And then of course, we have the one-off business that generated additional sales of around $45 million. And we could also see during the second quarter, a continuous growth of our subscription box business in U.S. So these 3 was the main drivers that we managed to make an organic growth. In Europe, we had a total opposite picture with a drop in net sales of 28% in the second quarter which also put pressure on our result and the reason why our EBITA went down to SEK 72 million compared to SEK 122 million the year before. But we could see in Europe in the end of the quarter, especially in June, that there was a pretty strong recovery. And we are not really sure how it will last in third quarter, but we are more positive now about Europe as well. Also very positive in the quarter was that we continued to generate a very strong operating cash flow. And our net debt has this year decreased now by around SEK 500 million, which means that our adjusted net debt EBITDA on rolling 12 months now is down at 2.53. So overall, we are very pleased with the outcome of the second quarter and that we managed to balance the huge impact of COVID-19 and still managed to deliver a positive result. If I then go to Slide #8, there you can see that Elanders normally has a very strong cash flow and we also show there that we can handle temporary increases in net debt connected with acquisitions or bigger investments. If we then go to Slide #9, we can see the split between our 2 business areas. If we look at Supply Chain Solutions' accumulated numbers, we can see that they recovered compared to the first quarter and is now only 5% behind in sales but are still 20% behind in result. The main reason why we're behind in result is the huge negative effect COVID-19 had on our European operations in the second quarter. But we expect that our European operations will continue to recover in Q3. If we then look at Print & Packaging Solutions, we can see that they have had a much tougher impact of COVID-19 because of the high exposure to Europe which puts a high pressure on the result which is now down with 65%. In the same time, we can see an increase in sales because of the subscription boxes was growing in the U.S. but it couldn't compensate that lots of our sites went down under break-even levels in the second quarter, which generated losses in several sites. But positive is that the majority of our print sites managed to recover in June, and we could also see a stable increase in demands in the print side, and it also looks rather stable now when we're entering Q3. If we then look at -- if we then go to Slide #10 to look at sales per customer segment, there we can see that Automotive was heavily impacted by corona and sales went down with 48% compared to last year. And this was a segment, as I said before, most heavily affected by COVID-19. And then if you look at Electronics, you can see that we had a very stable demand, and that was because of the demand of the electronic products but also the quick recovery in Asia. If we then look at Fashion & Lifestyle, we can see that the sales in the same level like last year but that was mainly because of the growth of the subscription box business in the U.S. And Health Care shows, of course, a huge growth, but as I mentioned before, the number was boosted by the one-off business for personal protective equipment. And if we then look at Industrial, we can then see a decrease with 21% compared to last year, mainly depending after COVID-19. And then if we go to Slide #11 and look at how it looks like going forward, I must say we are rather positive because now all our major customers up and running again. And we can also see a very stable recovery in Europe, which is a very important region for Elanders. And we also expect that Asia will continue to be stable and it also helps that many countries now have start to ease their restrictions. And it also looks like new outburst of COVID-19 at least can be controlled in limited areas in Europe. But of course the effect of COVID-19 still creates lots of uncertainties. And if it should be in bigger future outbreaks, it can of course put a high pressure on our customer sales, which will then affect us negative as well. We are still in a very strong cash position and our cash, together with unutilized credit facility, is at the exact same level like when we entered the second quarter and they are now at SEK 1.2 billion. And this puts us in a very good position to handle also future disturbances because of COVID-19. And we can also see that the pandemic creates new opportunities like the one-off business, the personal protective equipment. But we're also being approached by many potential customers that now looks for stable and reliable parcels in this uncertain time. And regarding the protective equipment, we have also developed a -- we think we have developed a strong concept around this area and we also hope that we can attract some new customers also going forward. Yes, that was everything from me. And now I hand over to the operator to open up for questions.

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

It's Carl Ragnerstam here from Nordea. Can you hear me?

Yes.

Carl, we can hear you.

Perfect. So I have a few questions. First of all, you previously communicated that you had 2,000 employees furloughed. So I wonder how many do you have for -- on furloughs today.

Today, I think it's -- we are down to around 300 people, maybe 300, 350.

And that's mainly in Europe, I guess.

It's mainly in the Europe. Yes.

Okay. Perfect. Could you also, regarding the protection gear, I mean could you give us any indication of the earnings impact from these equipment volumes? Are they very profitable or -- yes, how should we look at that?

I think it's a bit sensitive to talk about the margins. But I -- we can say it's a good -- it's a stable margin. So it has given a nice contribution to the profit here. And just to elaborate a bit about that, it's a bit special now because when the thing that happens now with COVID-19 is that normally, hospitals and countries are buying this material by themselves. But during these challenging times, lots of local governments have centralized the purchase. And there we came into the picture by be able to deliver big volumes to the centralized purchases. So if we look at the business going forward, it's not contract-based. It's on a running base. So we think we will still have some business going forward in Q3. But of course in the longer run, we will try also to go directly to the hospitals and other players in this area to offer our service.

Okay. Perfect. And the run rate of these volumes so far in Q3, are they similar to what we saw in Q2 or...

You mean for this business?

Exactly, if we just look at the -- yes, protection.

We can actually not say. We're delivering per week so because -- so it's depending on the development of the COVID-19 in the regions we are delivering. So it's really hard for us. We cannot estimate. We are seeing call-offs week-by-week but we are uncertain.

Okay. But so far in Q3, you have healthy volumes at least? Should we interpret that?

Yes, in July -- in the beginning of July, we have had good volumes, yes.

Okay, perfect. And also, we have discussed that before, but in some of your customer contracts you have minimum volumes. But given the COVID-19 outbreak, I wonder whether it would be possible to claim reimbursements or so on from some of your customers?

Nothing extra going forward. We have already got some reimbursements during the second quarter. So that is on a running basis. So for some customers, we have got extra payment because of very low volumes. And that, together with also some of course support from the government and the short work is also one of the things that helped us to come through the second quarter pretty stable. But there will be no extra going forward.

Okay. Perfect. And is it possible to quantify these volumes in Q2 -- or the reimbursements?

I think that -- no, it's only the government reimbursements that we have in our report. I think -- how much was it in Q2? It was...

[indiscernible]

SEK 35 million I think in Q2. We got some government support in Europe -- no, globally, actually. There was some support in Asia and U.S. as well.

Okay. Perfect. And would you say that the stronger volumes you saw from Electronics fueled by the work-from-home trend is continuing so far in Q3 or -- and do you sort of see a risk of inventory build-up effects in some of the other segments?

No. I think for Electronics, the demands we see now looks very stable going forward. And we can see in all the volumes coming in to us, it's turning around very quickly and shipped. So we don't -- we haven't any signals that are building up inventories further out in the supply chain. And also same for other customers. Our stocks has come down and our customers have been careful as we're now ramping up step by step. So I think the hardest business area for us to predict is actually Automotive. That is now running very stable in June. Still on lower volumes, but it's -- that is the hardest area for us to understand how to look going forward. Of course, they have lots of backlog, the car manufactures. So the question is, how will this run in the Q3 and Q4? Will people start buying cars again? And I think that's the importance for that area. But for other areas like Fashion & Lifestyle, we can see now there is a clear increase in sales for our customers since the shops was opened up. Also Industrials is coming back. So overall, it looks pretty stable now when we go in Q3. Because if you look at our second quarter, of course, April was a disaster; May was something in between; and June was a rather good recovery. That was how the quarter looked like.

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

This is Erik from ABG. I've had indications that delivery plans in the automotive industry is back to like 90% of normal levels for the rest of the year. Is this in line with what you're experiencing?

No, we don't see -- we don't get so long forecast from our Automotive clients for the moment. It's more like we are getting the coming weeks which kind of shift patterns they are running. And in May, when they started, they were running 1 shift. In the mid of June, lots of them went over to 2 shifts for some models. And they have even entered 3 shift in some models. So there's a high uncertainty. We have one Automotive client that makes really nice cars, but they're running 100%. But if you look at the other ones, I think they are now running around 70% roughly. We don't know how long it will go -- when they will increase or not. It's -- they're very careful to give us this information.

Okay. You've previously talked about seeing a larger effect of the cost-saving program in Q2. How much has been realized in this quarter?

You mean in Q2?

Yes.

Yes. Yes, there was lots of cost savings. But yes, mainly, everything was realized in Q2. The thing we write in the report, the government funds that we have absorbed in Q2. There will be some support in Q3 as well because we still have people on short work. Especially in Germany, we have around 275 people that we will get some extra support. We still do some short work in -- also in Sweden and U.K. and some other countries. So -- but it will be less than in Q2.

Could you quantify a bit more? How much less?

This is very flexible. So it depends on our customer ramping up because when they're ramping up, we call back the short work people and then we don't get the funds from the government. So I don't know. It's really hard.

Okay. How has this quarter affected progress on the long-term goal of 7% EBITDA margin?

You mean how the...

How this quarter has -- for example, new contracts impacted the long-term margin goals? Are you able to close new contracts?

We have been able actually to close on new contracts here. And also we have prolonged lots of existing contracts. We have also managed to do some price increasing in some contracts. So overall, our strategy to make our margins better, we can see that it works. And we can also see, even if we have had a tough time in Germany of course because of COVID-19, that our cost-saving program that we made last year is working. So we can see that we have a low breakeven and that is of course promising if the volumes -- when the volumes are returning. So we have continued that job. And I think it looks promising going forward. But of course you need the sales volumes to reach the better margins. But overall business-wise, it looks okay going forward.

Okay. Has the competitive landscape changed in any way? For example, for competitors having a hard time?

We [ cannot ] see. We can see especially -- yes, in Print & Packaging, we can see that it's a high pressure now. It was a tough market before and we can see some bankruptcies in the Print & Packaging. That will be beneficial for us and we have some customers talking with, that now are thinking about leaving their suppliers because of their weak position. And so in Print & Packaging especially we can see that in the long run, we can get some good effects out of that, yes.

[Operator Instructions] Okay. It appears that there are no further questions at this time. Mr. Nilsson, I'd like to turn the conference back to you for any additional or closing remarks. Thank you.

Thank you. Again, thank you, everyone, for calling in to our conference call, and I wish you a nice summer, of course. Thank you. Bye-bye.

Hello, everybody. Thank you for your participation in today's call. This concludes the conference. You can now disconnect. Thank you.