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

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

Thank you. Welcome, everyone. And together here with me is also Andréas Wikner, our CFO. And I will start directly to go to our presentation, and I will go to Slide #5, where I will talk about the results for our fourth quarter and also our yearly results. After a very strong third quarter, we actually managed to perform even better in the fourth quarter, and we achieved an adjusted EBITDA margin of 8.9% compared to 5.8% the year before, which means that we achieved a result that was actually 51% higher than last year. The strong recovery in demand and supply chain solutions, combined with the actions we made in 2019 to lower our cost base and also to improve our productivity, was the biggest driver for the improved result in the fourth quarter. But also Print & Packaging Solutions managed to improve the result in the quarter compared to the year before. In the fourth quarter, we could see a continued strong recovery in almost all customer segments, and net sales grew organically by 5.5%. We could see some downtrend in the demand from retail, but we managed to compensate this with higher demand from our e-commerce customers in Fashion & Lifestyle. To meet up the increasing demand we can see in e-commerce and also to develop our offer in this area, we're now opening up an additional site in Oberhausen in the northwest of Germany, and this site will mainly focus on e-commerce solutions for Fashion & Lifestyle segment, where we for the moment can see a very high activity with lots of queues coming in from both existing and new customers. Thanks to the strong result in the last 6 months, we actually managed to achieve a yearly result higher than the year before even after a very challenging first half year. And our adjusted result per share increased to SEK 8.12 compared to SEK 7.16 the year before. We also continue to show a very strong cash flow, which has resulted in a lower leverage, which means that we can benefit from lower interest rates going forward. And it also increases our capacity to do more acquisition. If we then go to Slide #6, and look at our financial position. Then you can see that our adjusted net debt EBITDA, exclusive IFRS 16, is actually now down to 1.52 compared to 2.96 in 2019. We have also improved our net gearing, which is down to 0.38 compared to 0.74 in 2019. If we then go to Slide #7 to look at our different business areas. In the fourth quarter, you can see that Supply Chain Solutions managed to improve their adjusted EBITDA margin to 8.1% compared to 4.2% the year before, and they actually improved their result with 87% compared to last year. Also, Print & Packaging Solutions managed to increase their EBITDA margin and improve their result with 10% and actually made a fine EBITDA margin of 12.1%. A majority of our print companies could see stable recovery in the fourth quarter, but it was mainly our German operations that were the drivers behind the improved results because of increased web-to-print volumes of both photo books, calendars and market materials for both private persons and companies. And this is a very growing area for us. If we then go to Slide #8 to look at the different customer segments. If we then start to look at Automotive, they could show a very strong recovery in the fourth quarter and our customers didn't do any additional closures during the holidays and more running on normal levels. Our customers also in the Automotive area indicates stable demands going forward even if the COVID-19 actions could put some pressure on the sales because mainly all of them had still rather high backlogs in the order books that they need to produce. Some of our customers could be affected of the lack of electronics components, but for the moment, we don't have any signals from the customers for the different models and brands we are serving. So we don't think it should have a bigger impact on our volumes. If we then look at Electronics. Our sales was lower in the fourth quarter compared to last year, but the reason is that we have taken away some low-margin buy-and-sell business that we were doing in 2019. But the underlying demand was actually very strong, and we expect that the demand for electronics products will continue to be high going forward, especially when it comes to laptops and TVs. And we also see lots of opportunities in this area to grow in the area of what we call life cycle management. If we then go to Slide #9 and look at Fashion & Lifestyle. You can see that we had a very strong growth compared to last year, and that the reason behind it was continuous growth in our subscription box business fulfillment in U.S. but also a strong growth in our e-commerce area as well -- in this e-commerce area as well. We expect that the actions done in different countries connected to COVID-19 will continue to put some pressure on the retail sales, at least in the first quarter of 2021, but we expect to at least partly be able to compensate this with increased e-commerce volumes. If we then look at Health Care & Life Science. We had a strong boost in the second quarter and partly also in the third quarter due to one-off business relating to personal protective equipment for the North and South American market. In the fourth quarter, there was almost no effect on sales on this business, but we could actually see some organic growth from our other services in this area. If we then go to Slide #10 and look at Industrial. You can see that the demand was back on normal levels in the fourth quarter, and we actually managed to show a slight increase in sales. Our customers in this segment have indicated that they will continue to have stable demands going forward if the actions against COVID-19 will not be too extensive and advanced. So if we then go to Slide #11 and see how things looks for Elanders going forward. After a strong recovery in Q3, which was followed up with an even stronger Q4, which confirmed that our restructuring actions in 2019 really has paid off and improved earnings, and this together with our improved financial position for the group makes us, of course, very confident that we will be able to perform also in good levels in 2021. We can also see that the activity when it comes to new RFQs are back to normal levels, and we're looking at several interesting projects from both existing and new customers. The COVID-19 pandemic will, of course, continue to put some pressure on our operations and customer demands. And we also expect that the strengthened Swedish krona might put some pressure on our result as almost all of our earnings are in euros and U.S. dollars. But after a very challenging 2020, we think we have shown that Elanders is on right track, and we expect to be able to continue developing Elanders in a very positive direction. And with our strong financial position, should we also be able to do more acquisitions going forward with a focus to increase our share of business with high added value and also to develop new services. That was everything from me. Operator, please open up for questions.

[Operator Instructions] We'll now move to our first question over the phone.

It's Carl here from Nordea. I have a few questions. Firstly, a question on Supply Chain Solutions and just if you could help us understand the margin improvement year-over-year. I mean how much that comes from cost savings and how much comes from a positive mix effect, perhaps. As you mentioned, you have phased out quite a chunk of business from Mentor Media's buy-and-sell volumes. So could you please help us with that, firstly?

Yes. I think, of course, there have been lots of ups and downs this year. And in the first half year, we had big, negative effects on sales of Supply Chain Solutions in Europe and all the -- the majority of the cost savings programs was actually for our European supply chain business. But when -- then when sales came back on normal levels the second half of the year, we could really see really strong improvements in our European supply chain business and also a good result that we have taken away some low-margin business. We have managed also to increase prices in some business. So I think the second half of the year, the biggest driver for the improvement was actually the European business. And then, also, Asia continued to go on really good levels. And so I think, of course, the first half year, we have this PPE business that was driving good sales and margins for our Asian supply chain business that lifted our result. But if you look at more the clean numbers that is more Q3, Q4, we can really see that there is a strong improvement in margins in European but also that Asia kept up normally rather good levels.

Okay. Perfect. And also, I mean, just looking at Q4, you obviously managed to take out some SG&A yet again by roughly 220 basis points if you take it against sales. So my question is how much of the SG&A reductions would you say will come back as restriction eases and will go back to more normalized society? And how much you define as the sort of long-term, sustainable level of SG&A? It might be a difficult question, but...

I think [indiscernible].

I think -- this is Andréas here. Look, I think you have 2 reasons behind the lower SG&A. I mean it's both from the governmental support but you also have last year that was -- we had the restructuring cost also in the SG&A from our European operations. So it's not -- you're not comparing -- it's not easy to compare apples-to-apples, you have both -- effects from both, I would say, in the numbers. But the biggest effect is from the restructuring costs in the last year's cost. But...

But we have gone down in number of employees as well, of course, in the restructuring programs. There's lower sales cost as well. But I must say it's also hard for us to analyze, like Andréas is saying. But I think we will see it more easily going forward in Q1 and Q2. But there is absolutely a savings there. There is...

So one could say that you are running your business on a quite sustainable SG&A level currently than the -- at least looking at Q4 and so on.

Yes. In Q4, you can say yes.

Yes. Yes.

Okay. Perfect. And also a question regarding the freight rates. They have increased recently. I mean in the short term, would it have a negative impact on you? I mean in the longer term, at least, I know that you're pushing it to your customers. But would you see an effect in the short term?

Yes. We could actually see already in Q4 that our air and sea part, that is part of Supply Chain Solutions, sales went up but it didn't materialize in margins because of the really high freight prices. And there was also some negative currency effects. So you can see that air and see didn't help us so much in Q4, and we expect there will be some negative effect in Q1. But after that, people expect that it will stabilize. So there is an [ undercapacity ] now, so it's extremely overheated and it's really hard also to push the cost to customers as well. So -- but it's not a big quarter for Elanders, and we expect it to be more normal in -- on Q2 going forward there.

Okay. Perfect. And the final one from my side, probably for you, Andréas, and -- I mean looking at the cash flows, yet again quite solid. But looking into 2021, how should we look at working capital and how much you will sort of tie up, given a more normalized market, if you will?

Yes. Yes. The cash flow is amazing this year. I think you have some timing effects there also. So going back to your question, Carl, I think there will be a -- should be a swing back a little bit in the Q1 on the working capital because normally, we should not have really that sort of trend down in our cash flow or in our net debt in 1 quarter. So I think there are timing effects around the year-end. So we will have a back swing. I think the working capital will go up a little bit in Q1, which will affect the cash flow negatively. But it should not be so strong, the trend backwards. I think probably you should still have a positive effect on the net debt anyway from normal operating cash flow unless there are any other sort of things happening. So...

Yes. I think we expect that we should manage to be -- continue to be under net debt-to-EBITDA, including IFRS outlook, too, anyway. So it looks very good at the moment, yes.

And we'll now move to our next question over the phone.

This is Erik from ABG. So Carl asked a lot of good questions, but I have 2 more. So you mentioned that there was an increase of online sales for customers and that you're focused on increasing that portion of the business. But could you tell us how much it is right now and also how much it will be after these new contracts you mentioned that are going to be in the numbers for 2021?

I don't think -- we don't have the, we can say, the exact numbers. It's tough to estimate. But it's...

The new contract will not add on so much sales. I think it's -- when it's up and running 100%, it will probably be around EUR 10 million or SEK 100 million.

Yes. That we have SEK 100 million in sales. And some of our customers is a mix of e-commerce or retail, we haven't really managed to get out of Elanders. But you could see the Fashion & Lifestyle area in Europe is mainly affected by the retail, but their sales actually went up even if some customers went down. So I don't think we can give -- I think we can come back after Q1. When things are more normal, we can start to comment on that one.

Okay. I understand. And then it also seems like subscription boxes has kept growing at about 40%. Feel free to correct me if that's wrong. Is this just growth with your existing customers? Or are you adding new ones as well?

It's mainly from existing customers, especially from 2 big clients that both of them have had really strong growth. So we actually don't have -- have had any capacity to add on some new customers. We have actually been almost overheated and because of the restrictions also in U.S. about workers' systems, and so we have been totally proud with the volume. So for us, going forward, that business is to -- try to focus to improve productivity and things like that, and maybe also open up some more capacity to growth. But...

The running rate for that one is now roughly at SEK 65 million, SEK 70 million per month in sales for the subscription book.

So given that the capacity is full now, could you grow in H1? Or kind of how should we think about adding capacity to that business?

I don't think we will see so much growth this year than last year. No, I don't think so, because there's still some restrictions in the Atlanta area where we operate. It's hard for us to expand as well because it's really complicated. And we need to use subcontractors now. We don't want to increase the share of subcontractors. I think we will take care of the business we have. And -- but of course, if our existing customers grow, then we need to follow them. So there still will be some growth first half year compared to the year before, but I think it's in a way to stabilize now. But it's -- this business has surprised us all the time. It's crazy it can grow like it is growing. So -- and during now with the COVID-19, I think it just has added volumes because people cannot go to shops and things like that. So more people have adapted subscriptions for this kind of product.

And that business is -- margin is low 1 digit, you can say.

Yes.

So we mainly want to focus on improving the profitability for that business now, perhaps not growing so much more because we have a lot of corona restrictions also regarding the workplace and how people can work because we cannot stand too tightly and things like that. So it's more about improving effectiveness and productivity going forward, I think, same kind of [ growth ].

[Operator Instructions] And we'll now move to our next question over the phone.

[ Alexander Revalier, Danske Bank ]. Let me have...

[ Alexander ]?

The fact that e-commerce in Fashion & Lifestyle has compensated for a weaker side on retail, this sort of internal move in a specific customer segment, do you see any similarities when it comes to other segments where one form of business can sort of compensate, perhaps an older business model, when it comes to your other exposures besides Fashion & Lifestyle?

Well, we can actually see in the Automotive area now that the car brands also have reacted because they had lots of pain in the second quarter when the car dealers was closed down. And then lots of them could actually not sell any cars. So we have seen both in U.K. and also from Germany now that you can actually connect with the car sales guy via your mobile phone. They go around and show you different cars. They show specifications. If you want to test drive, they send the car home to you and you can test drive it and pick it up. So you can see lots of adjustments also in the Automotive side, and I think that will speed it up as much as we can. I know that time was doing lots of campaigns now, buy a new car via the Internet instead. So everyone is adjusted. And I think it would stay as well for a long time. I think lots other customer segments have learned now that if you cannot sell via Internet, e-commerce, then you have huge problems when things like the COVID-19 happens. So absolutely, we can see the trend also outside Fashion & Lifestyle, especially Automotive. And also Electronics have always been very strong in e-commerce. So we were expecting that we should have a downtrend, for example, in Europe where we're running a huge hub for one of electronic customers, actually 2 huge hubs. And they have not had any pain because of retail going down. Then they [ upsell ] their e-commerce instead. So I think that's why Elanders also have managed to go pretty strong in 2020. And then of course, on the Print side, you also have had a change, but that's been going on for many years that people order print via e-commerce solutions instead. And that's also one area -- that's also one of the reasons that our Print & Packaging, especially in Germany, could make a tremendous Q4 because people are ordering -- also companies was ordering printed material via e-commerce instead.

When it comes to Print, given the strong development there, and you also mentioned in the report that you are looking at more opportunities when it comes to M&A, could Print be part of perhaps -- could acquisitions in Print be a possibility? Or is it strictly Supply Chain Solutions where you're looking into the future when it comes to acquisitions?

I think that the main focus is, of course, Supply Chain, to develop that. But sometimes, you can find some print companies with very special products that will not disappear because of the structural changes. It could also be some companies that are developed when it comes to the web-to-print area. So we don't close the door for that, but I think our focus is Supply Chain Solutions. But when something interesting comes up in Print that can strengthen our business going forward, it could be a possibility.

And in the Supply Chain Solutions, are there any specific segments where you would tend to look when it comes to acquisitions? Or is it more an opportunistic approach?

No. I think it's -- for us, it's what we call life cycle management and where we want to focus our acquisitions and supply chain. And for us, life cycle management is when we take care of the whole end-to-end solution for customers. We get the products on their manufacturing unit. We store it. We deliver it. But we also install it. We do service. And then in the end, we do what we call this unique IT, that recovery. We take back their equipment. We refresh it. We sell it for them on the, let's say, second-hand market. So -- and of course, in this area, there's much more added value. It's much more of a service. So that is our main target when we look at acquisitions in Supply Chain Solutions, and there's lots of interesting opportunities there for growth.

All right.

We can also see -- we can actually see a trend -- sorry, we can also see a trend that lots of big companies that before had their own servicing [ units ] now also decide that they want to outsource this part. So one of our med tech customers, we are growing now and we are taking care of their service, of their lab equipment in more and more countries. So, yes. So it's an interesting area for Electronics and Health Care.

All right. I was sort of wondering about, on the Print side, where do you see capacity utilization [ part ] being in your Print business? Are you running full? Or can you grow in that business with the capacity you have? Or was it...

We can still grow. Some of our countries was not running -- or sites was not running full in the fourth quarter. So some of the sites was only running at maybe a 70% capacity. So for us, it's -- and it's very easy for us to add more volumes without driving up investments too much. So if we can find the volumes, we can absolutely grow. But it's a tough business, the Print business. But a good thing has been with the COVID-19 in that sense is that especially in Germany, there have been lots of companies going bankrupt, and that actually resulted that we have got more volumes also from existing customers. So yes, we still see lower [indiscernible].

Yes. But I mean there are some healthy margins there, and the -- those are not sort of, by all means, peak margins, so you could add more volume and have more volume in the capacity you have, given that there are, perhaps, competitors in worse shape and, perhaps, are losing some business, yes.

Yes. But I think we had a very strong concept where we produce bigger volumes in low-cost countries in Europe, and then we have very sophisticated, what we call, digital print to handle, the small and quick ones in Europe. I think that's one of the reasons we are one of the more profitable print groups in the world, I think. But then we should not forget that the fourth quarter is always the best quarter for our Print business, and it normally slows down in Q1. And also, our photo business, our own brands that is included in the Print & Packaging was actually doing very well also in the fourth quarter. It's had really strong sales in photo products for consumers also from our own brands. So it's a good combination. But just to point out, fourth quarter is always the absolute best for the Print & Packaging Solutions there.

Great. One final question, please. Regarding the comment on the request from both new and existing customers for new business. Are there any segments that stand out? And is it -- does it apply to both Print and Supply Chain?

I think it's -- actually, especially in Fashion & Lifestyle, in Supply Chain Solutions, we have lots of RFQs and -- but also in the Electronics area, you can see in Europe at least. And also Automotive is coming back now with some new projects and things like that, especially when it comes to electric cars. So it's almost over the online. And for Print, there is also -- especially in the web-to-print area where we have more and more partners, we are -- both our own solutions in the web-to-print but we also serve other big players that sell print via Internet. So -- but you can see now that people have adapted that we -- to the new situation. So the digital customer meeting is working much, much better. And companies cannot postpone anymore the -- by the new RFQs, the new projects and things like that. So it's nice. It works much better now compared to the first half year.

Mr. Nilsson, there are no further questions queued at this time, sir. I'd like to turn the conference back over to yourself for any additional or closing remarks.

Okay. No thank you, everyone, for listening in and also thank you for very good questions. So yes, thank you. Bye-bye.

Pardon my interruption, sir. We do have one further question queued.

Okay.

No, they have now -- they have removed themselves from the queue now, sir. I do apologize.

No problem.

So ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.