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 Mr. Magnus Nilsson. Please go ahead, sir.

Thank you. Welcome, everyone. This is Magnus Nilsson, CEO of Elanders. And together with me, I have also Andréas Wikner, CFO of Elanders AB. I will now go directly to Slide #3 in our presentation to talk about 4 major growth areas that we have identified and that will be our focus areas going forward. The first one is e-commerce, where we can continue to see a very stable growth and also very high activity when it comes to request from both existing and new customers. [indiscernible] e-commerce actually contributing with 2 growth factors. Number one is the underlying market growth that is expected to be around 10% the coming 5 years per year in both Europe and North America. The second growth factor is that when one of our customers goes from retail to e-commerce, it will have turnover for us actually increase with 3 to 10x because of several extra activities, like pick and pack of single items, we need to do single shipment, and then on top of that, we have the whole return handling as well. The second growth opportunity that we have identified is contract logistics, where the trend continues with increased outsourcing. And we can see an expected growth per year the coming 5 years. This area is actually around 4%. The third growth opportunity is in the area of what we call life cycle management, where we take care of the complete life cycle of a product. A very good example of this is when it comes to laptops and servers where we are involved already in the manufacturing process, we take care of the distribution of the finished products, and then we work with takeback of secondhand equipment that we later on refurbish and sell with a target to double the lifespan of the product, which contributes very possible from a sustainability perspective as well. And the fourth growth opportunities for our area Print & Packaging, and that is the area we call online print. That is one of the few areas in commercial print that actually can show yearly growth of around 4% to 5%. This area is [ Elanders' ] one of the leading production partners in Europe and different online print companies, and they're also selling direct to the market via our online print brands for both consumers and companies. If we then go to Slide #4 in our presentation, I want to talk about our recent acquisition of the American company Bergen Logistics that are actually active in 2 of our identified growth areas, e-commerce and contract logistics. Bergen is mainly focusing on providing omnichannel solutions for small- and medium-sized fashion lifestyle brands. And they have developed a unique platform that enables them to handle often more than 100 customers in one site and still deliver strong profitability. And they are also covering both West Coast and East Coast in the U.S., and they also have a site in Canada, which means that Elanders now, with our existing footprint in Europe and Asia, and Bergen Logistics, can offer both existing and new customers global solutions in the 3 biggest markets. If we then go to Slide #5 and look at our second acquisition in the fourth quarter, that this was the Dutch company Eijgenhuijsen that will help us to grow our services when it comes to life cycle management. Eijgenhuijsen is offering complete life cycle management solutions for high-value products, like medical equipment and digital printing machines. And they offer value-added service, like specialized transportation, they do installation, they do service and they also do takebacks and refurbishment of their customers' equipment. If we then go to Slide #6, you can see how the new split look like for our major customer segments when we add pro forma for Bergen Logistics. And including Bergen with Fashion & Lifestyle actually be Elanders' biggest customer segment at 30%, followed by Electronics at around 27%. This also means that with the new setup at around 65% of Elanders sales now belonging to noncyclical customers, which will, over time, make Elanders more resistant to swings in the global economy. If we then go to Slide #8 and look at the fourth quarter. In the fourth quarter, continued the underlying demand from our customers to be very strong. And despite very challenging market conditions, could we show a very strong recovery compared to Q3. The shortage of semiconductors was lower in Q4, but it still resulted in fluctuations in customer demand, which requires an extraordinary flexibility, which, of course, then result in some additional costs. And on top of that, we could also see that material and freight cost continues to increase. We are now, step by step, increasing our prices to our customer, especially with the material, but also when it comes to freight costs, but normally, we have agreements with our customers, there's a 3-month delay. We do an analyze of the price increases in the quarter, and then we can increase the price the quarter after that one. And in the end of December, we could see a small increase in sick leaves because of the Omicron outbreak, which has accelerated now in January. But we hope that this will not last too long. And you could see now numbers from, for example, the East Coast and U.S. that the sick numbers have gone down with almost 90%, and they are around 2, 3 weeks ahead of us in Europe. If we then go to Slide #9 and look at the numbers, you can see that we, despite the challenging second half of 2021 and a slightly lower result in Q4, reached the full year result before tax that was 16% higher than the year before. And if we exclude one-off cost, was actually 20% higher. We also managed to achieve an organic growth in net sales for 2021 of 7%. And this growth comes mainly from the business area of Supply Chain Solutions and then especially from our European activities that continues to receive lots of requests from both existing and new customers. If we then go to Slide #10 and look at our business areas. Fourth quarter, you can see that supply chain managed to show growth in sales, but the result was negatively impacted by one-off costs of around SEK 16 million. And the margin was affected by increased costs connected to, what I said before, fluctuations in demand but also increased freight costs. If we then look at Print & Packaging Solutions, you can see that they went down both in sales and results. But despite much lower sales, they still managed to deliver an EBITA margin almost in line with the year before. And the main reason for the lower sales is less trading of freight for our subscription box business in the U.S. If we then go to Slide #11 to have a look at our sales by customer segments in the quarter and then look at the sales for Automotive, you can see that sales improved compared to last year. And all of our customers continue to see strong underlying demand. And we expect that as soon as they have enough semiconductors, that they will increase the production capacity. If we now look at our Electronics customers, we can show a very strong growth compared to last year. And it looks now that they have overcome the lack of semiconductors much better than the Automotive sector, which resulted in a very strong Q4. And we could see a high demand in both Europe and Asia. We then go to Slide #12 and look at Fashion & Lifestyle. You can see a very strong growth compared to last year. And the growth comes mainly from Bergen Logistics but also the continued organic growth in Europe. Sales of subscription boxes in the U.S. continues to decline because of less trading of freight for our customers, which had a negative effect for this business area. If we then look at Health Care & Life Science, we show a really good growth because of increased demand. But also, we have managed to add some new customers as well. If we now look -- if we then go to Slide #13 and look at Industrial, you can see that their sales continues to be affected negatively compared to last year because of lack of semiconductors. But one of the reason is also that we have exited some low-margin projects. We then look at other sales. You can see there's a strong growth, but that is mainly driven by the acquisition of the German online printing company Schätzl. That is a big supplier when it comes to online print. If we then go in Slide #14 and looks at how things will be going forward, we continue to see a very strong underlying demand, and we also continue to receive lots of requests in both existing and new customers. And the growing e-commerce market continues to drive growth for both Supply Chain Solutions but also when it comes to online print for Print & Packaging Solutions. And with the acquisition of Bergen Logistics, should we be able to capture an even bigger share of the growth from e-commerce. 2021 has been a strong year for Elanders when it comes to acquisitions. And we have actually acquired companies with a total yearly sales of around SEK 1.2 billion, with an average EBITA of around 10%. And all of the acquisitions are in potential growth areas, and we expect them to contribute positive to our future growth and also, over time, make Elanders less sensitive to swings in the global economy. We still expect that shortage of semiconductors and higher freight and material prices will put some pressure on the result in 2022. But apart from this, I'll be carefully optimistic going forward. And as soon as the market normalized, should we be able to capitalize from our customers' strong underlying demand and organic growth. Yes, that was everything from me. And now we open up for questions.

[Operator Instructions] We will take our first question. Caller, please go ahead.

It's Carl here from Nordea. A couple of questions from my side. Firstly, I think you said in the report at least that some customers are trying to sort of catch up for a period of supply chain issues and lower volumes with increased production. In what subsegments do you see? And will it be seen already in Q4?

Yes, I think it's -- I think the customer segment with the absolute biggest backlog is Automotive, where we know that the customers have huge underlying demand. So -- but it's a bit hard to predict. In the beginning of Q4, they had a better flow of semiconductors, then have some problems again in December. But that is one area that we expect -- as soon as they have components enough, they will increase the capacity a lot. And also a good signal for us was Electronics in Q4, where we could see a strong recovery, at least when it comes to laptops and servers. If they can continue to fill up with the components, we expect that they could grow as well.

And you haven't seen a worsening situation for Electronics when entering 2022? Or is it stable on a better level?

No. It looks like they're on better level. I think they have -- of course, they have a bigger buying power when it comes to semiconductors than Automotive use much more. And what I understand, they're also using more sophisticated semiconductors where there's a better supply, and Automotive is using more of the older versions of the semiconductors, which is harder to get. So that is what we understand from our customers.

Okay. Perfect. And also, of course, volatility negatively impacted the Supply Chain Solutions margins, as you said. I guess maybe it's tough to adjust for. But if you were to just try to adjust at least for it, would you say that sort of the underlying margin could be in Supply Chain Solutions if we take away sort of the volatility, just so we can get the sense where we are with the previous cost savings, et cetera?

Yes. I think if we look at Q4, we made an EBITA margin of 6%. And last year, it was 8%. So I think it's really hard to calculate, but I think it's around 1% to 2%. What do you think, Andréas?

Yes, 1%, 2%.

Well, it's also our margin with this volatility and the increased costs. And it's actually a bit same for print as well for material costs, where we now manage to increase. So I think 1% to 2% because last year, in Q3, Q4, then everything was running optimal and then we even managed to make 8% in Supply Chain Solutions. But then that was optimal. So if it's run optimal, 1% to 2%.

And on print -- and on Print & Packaging EBITA, there, you had a negative margin development year-over-year. I guess -- on one hand, I guess, you would have a positive margin mix impact from sort of the in-sourced logistics from your subscription box customer. I imagine that it's a low-margin business. But is raw materials the negative delta in margin year-over-year? Or is it the photobook business dragging a bit or...

Some from the photobooks, but I think the biggest impact is from material. We have had paper price increases with 20%, 25%. And of course, for some jobs, paper can be 40% to 50% of the cost we have. And -- so that has been very painful for us. That's why it's important for us now to increase prices. So the majority is -- the major impact is material cost. Otherwise, like you say, with less trading of freight and subscription box business, we should see a stronger improvement in margins. So I think we are in a really good position for Print & Packaging. So when we managed to get pricing to send the price increases to our customers, we will see an improvement in margin. And we will continue this year to have less trading of freight as well. That was mainly in the second half 2021. So we are very optimistic for our Print & Packaging area.

Great. And when do you think that you are fully compensated for higher freight rates, as you mentioned, the material inflation, both for Supply Chain as well as Print & Packaging?

I think for material manufacturing, that will be step by step because around 40%, 50% is no-contract customers. They -- it goes quicker. And so I think that will be step by step. Hopefully, already in Q1, we see effect and then better in Q2. When it comes to freight costs, I must say, it's really hard to estimate somehow because a tricky thing is that China has this no tolerance to COVID. And if they start again to close down harbors, then there will be, again, lack of components, and you will need to move freight from sea to air, and that would drive freight costs again. So I think one of the worst things is actually the zero tolerance in China that people should be aware of could hurt the global economy if they don't decide to just let it go like all the rest of the world.

So no major solutions in the short term, it sounds like, right? For freight or price increases, right?

No. What we will see now in the first quarter, we will get price increases from our customers for freight. So that is good because now there was very high diesel cost in Q4, and that will we be able to adjust from 1st of January. So that is good. We will still see improvements for us step by step. And also for our air and sea part, we can also see that we are now, month by month, can capitalize actually on the higher prices and gain better margin. So I think even if there will be lots of disturbances, we should see step-by-step improvements there as well.

And the final one from my side is a bit on Bergen Logistics. I guess it will be a good platform for your European e-commerce customers to expand into the U.S. Is it too early days? Or have you started cross-selling initiatives between ITG and Bergen?

No, we already have several cross-selling activities. We're actually very close now to get one of our Bergen's U.S. clients in Europe. So they have started off quicker than our European guys. So -- and we have one and also a bigger European client that we're now discussing for U.S. So I expect that this will go in a rather good tempo. I must say Bergen is very -- they have a very good style in the company, very aggressively pushing for more sales. And already in 2020, they opened a site in Netherlands for the European clients. And now they can offer all markets almost in Europe, the bigger markets, like Germany and U.K. as well, from our side. So we are very optimistic for that.

[Operator Instructions] We will take our next question. Caller, please go ahead.

Alexander Vilval, Erik Penser Bank. First, I want to follow up first on print. You talked about hurting margins a little bit, but looking at the EBITDA line, margin seems to be a little bit higher actually than Q4 last year. And would you say that it's more an effect when it comes to volumes and demand rather than you having problems in achieving margins product by product?

Well, we also, of course, are still affected by the corona restrictions in print. So there is -- normally, there's lots of marketing activities that still is a big part for us that is -- has not been running. It started in the beginning of the year going more normally. But then now in the second half, they closed down lots of marketing activities. So that is one reason. And of course, in print, we still deliver a lot of manuals for the car industry, and their demand is much lower than the year before because of the semiconductor issue. So it's -- from the weakness in sales, this comes mainly from the manuals and from marketing activities. So we expect it to be a bit better. And then, of course, we have Schätzl as well, which impacted half of quarter.

Positively.

Positively, yes.

Product by product, it seems that margins are quite healthy still, albeit a lower level when it comes to overall demand.

Yes, absolutely.

A follow-up also on Bergen Logistics. As you said, you have seem to be -- got into a great start, primarily positive when it comes to the Americans coming over here. How is it -- how do you see the future with Bergen and the possibilities for other segments to benefit from your footprint in the U.S.?

No, we see big benefits with that one because they are -- and even if they are mainly focusing on Fashion & Lifestyle, they also do some smaller Electronics customers. So I think especially for us in the Electronics area, where we are also very big, we have had opportunity in the history in the U.S., but we haven't been able to cover it or manage it. So for us, of course, the first focus is to grow Fashion & Lifestyle, but it's also now to go to all our Electronics customers to say that now we are covering both East and West Coast and Canada. So -- and with the sophisticated platform and everything, so it's a great opportunity. And we also now have, if I could say, like made a much higher stand of the management in the U.S. with the people Bergen is bringing in. So there could be lots of opportunities for the future.

Would that be something to look forward to more when it comes to perhaps next year and go forward right then of the first priority? Or how do you sort of prioritize those efforts?

No, I think 2022, we will focus a lot on the low-hanging fruit at the Fashion & Lifestyle. But I think year after that, then we will start also to look more into other customer segments. And then I think it's mainly Electronics. We don't see any growth for Industrial or Automotive. It's not in our strategy in North America. But the Electronics is very interesting, yes.

Right. Great. You mentioned the contract-based 3 months delay in price increases in certain contracts. Which specific prices are impacted by this? And how sort of the -- are those terms in contracts general for most of your customers? Or can you elaborate a little bit on that?

If it comes to transportation, it's normally cost that you can follow an index. And for example, the diesel cost has gone up dramatically in the last quarter as well. And then we can -- in our contract, then you look at the average price of diesel in the fourth quarter, then we are allowed to apply that from 1st of January. So that is very straightforward. And it's also for some of our printing customers when it comes to paper prices, you need to -- there need to be a quarter, and then we will look at paper price index. And if that is -- we then can show a 20% increase, we will then, starting from January, increase paper costs with 20%. But then there is the more -- the harder one is when the problem that's been on transportation side, that there suddenly is no drivers, everyone is sick, you need to buy from another supplier, and then the suppliers use the momentum to increase their prices temporary, like 10%, 20%, 30%. That's much harder because it's really hard to show some data behind it. But hopefully, this will normalize because a lot of this is also connected to the latest Omicron outbreak. And if that stabilizes and countries are opening up to have less quarantine days, we think that should be normalized a bit. So -- but that you cannot push forward to your customers, not easy.

Great. And when it comes to overall demand, it seems that it's very strong pretty much across the board from your customers, but there are certain factors, which could then have problems, and there are sort of hiccups in the supply chain or so. Which segments do you see that where demand is clearly higher than you actually can deliver right now?

I think it's -- especially for us in Automotive, we are working with the premium car manufacturers in Germany, and we know that one of our customers, they have, for some models, a backlog of 2 years. For them, it's everything if they can. And also one of our other customers, and we could see in December, they prioritized the most expensive model, of course. They were running that in extra shifts, but all the standard models, they closed production for almost 3 weeks. But of course, there's still a demand for those cars. They can lose some volumes to competitors, but lots of our customers are doing premium cars, so there is an enormous backlog. Even if they lose 50%, they have maybe sometimes 1 year to catch up, so we have to wait for -- we wait for that one. Electronics, you could see, they are more improving a lot in Q4. At least for laptops and servers. Printers is not back on normal levels because they prioritized laptops and servers. It's more margin. But that could also -- there's also actually a backlog waiting there.

Okay. A final question just regarding tax rate. Where about do you see the tax rate for 2022 about on a corporate level?

I give that to Andréas.

We are estimating, so it was very, very high in Q4. We're still investigating a little bit support. But we expect it to be around 29% -- 28%, 29% in 2022, the effective tax.

[Operator Instructions] We will take our next question. Caller, please go ahead.

This is Thomas Nilsson from Analysguiden. I have a question regarding your financial targets when it comes to EBITA, which we have a target of 7%. When considering you acquired businesses with turnover of SEK 1.2 billion in 2021 that had EBITA margins around 10%, when it comes to your own target, could you give us a hint as to when in time you think you will reach the 7%? Could it happen in 2022 or 2023?

I think with our latest acquisitions that are, like you say, around 10%, and we have lot -- done lots of cost improvements, that is hard to see now with all the challenges, but if things normalize together, with the acquisitions, I think we should be able to do it 2023.

At this time, we have not received any further telephone questions. I would like to hand the conference back to our host for any additional or closing remarks.

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

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.