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 Magnus Nilsson, CEO of Elanders. Please go ahead, sir.

Thank you. Welcome, everyone. Yes, this is Magnus Nilsson speaking and together with me, I also have Andreas Wikner, our CFO. And I will start now with our presentation, and I will now go directly to Slide #4 and 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 requests from both existing and new customers. And for Elanders, its e-commerce actually contributing with 2 growth factors. Number one is the underlying market growth that expects to be around 10% yearly in the coming 5 years both in Europe and North America. And the second growth factor is that when a customer goes from retail to e-commerce, their turnover for us actually increased with 3 to 10x because of activities like pick and pack of single items, single shipments and then on top of that, also return handling. The second growth opportunity we have identified is contract logistics. The trend in general with increased outsourcing continues which creates an underlying yearly growth of contract logistics services with around 4%. And the third growth opportunity is in the area we call life cycle management, where we take care of the complete life cycle of a product. And a good example of that is when it comes to laptops and servers, where we are involved already in the manufacturing process, the distribution of the finished products. And then we do take back of secondhand equipment. We will refurbish them and sell with a target to double the lifespan of the product which contributes very positively from a sustainability perspective. The fourth growth area is the area of online print. That is one of the few areas in commercial print that can show early growth. In this area, Elanders is one of the leading production pulp within Europe to different online print companies, and we're also selling direct to market via our own online print brands for both consumers and companies. And in this area, there is an expected yearly growth of around 10%. If we then go to Slide #5, you can see how the split of our major customer segments now looks like when we include our latest acquisitions, including Bergen Logistics that we acquired last year with Fashion & Lifestyle actually now be Elanders' biggest customer segment at around 30% of sales, followed by Electronics at around 27%. And this also means that around 65% of Elanders sales now noncyclical customers which will, over time, make Elanders more resistant to swings in the global economy. We then go to Slide #5 -- no, Slide #7, and look at the first quarter. The first quarter was very challenging for us because we had very high sick rates in January and February because of COVID, especially then in Europe. It was normalizing in March, but then as everyone knows, in March, the war in Ukraine started, and that especially affected our automotive customers in a negative way but also increased costs for materials, fuel and energy. Despite these challenges, could we see a strong performance from Supply Chain Solutions, and the weaker demand we could see in Europe was compensated by strong growth in North America and also a very stable demand in Asia. Print & Packaging Solutions had a very challenging quarter and was negatively impacted by continuing increased material and freight costs, but it could also see a lower demand of some online print products like photobooks, calendars and other similar products. But despite the overall challenging situation in Europe did we manage to increase our EBITA result with 32%. And we could also show an organic growth of 2%. The improved result shows that the Elanders strategy with a diversified customer base and a wider global footprint works very well. We also improved our operating cash flow to SEK 300 million compared to SEK 107 million the year before. And our ratio for net debt and adjusted EBITDA, excluding IFRS 16 and one-off items but including pro forma sales from acquisitions, amounted to 2.7. If we then go to Slide #8 to look at our business areas, first quarter and look at Supply Chain Solutions, and you can see that we could show a very strong growth in both sales and results. And we also managed to improve our EBITA margin to 6.3% compared to 5.4% the year before. Bergen Logistics is, of course, the major reason to the growth. But we could also show an organic growth of 10% in Supply Chain Solutions in the first quarter. If we then look at Print & Packaging Solutions, we can see a decline in sales, but that is because of less trading of freight in the U.S. And if we take that away, we actually grow also 10% organically in the Print & Packaging area. But the growth is partly driven by increased material prices and increased freight costs. And unfortunately, it decreased our margins because of, as I mentioned before, the increased cost for material and freight cost but also disturbances in our customers' order flow because of lack of components, and as I mentioned before, also lower demand of photobooks, calendar and children books and other similar products. And important for us now going forward is to transfer the increased cost to our customers. If we then go to Slide #9, we look at our sales by customer segment in the quarter and look at Automotive. You can see that even if it was a bit challenging for us, the sales was improved compared to last year. And our underlying -- customers' underlying demand continues to be strong. But the first quarter with the high sick rates and the war in Ukraine was putting lots of pressure on Automotive. But we can now see that our customers are finding new supply ways for products coming from Ukraine before. And we expect them to -- in April to run more in more normal levels. Electronics customers continues to show very strong demand, even if they also were affected by the war in Ukraine because of the global logistics flow, especially with railway for Russia was closed down. And [ we need to reroute ] volumes we are seeing instead. There were some effects of that, but that will also normalize going forward what we can see. If we then go to Slide #10 and look at Fashion & Lifestyle, you can see, of course, a very strong growth compared to last year. And that growth comes mainly from Bergen Logistics but also a continued stable demand in Europe. And then if we look at Health Care & Life Science, we can show a good growth, and we can see an underlying strong increased demand from our customers. We have also added a new customer, and we're also starting up a new MedTech site in Germany -- or have started up a new MedTech site in Germany in the first quarter. If we then go to Slide #11 and look at Industrial, we can see a stable amount in the first quarter despite also some negative effects from the crisis in Ukraine. Other sales shows a growth but lower than expected because of decreasing sales of online print products. If we then go to Slide #12 and look at how things will be going forward. As everyone knows, if the -- the war in Ukraine a humanitarian disaster. For Elanders, it's been very important to help our Ukrainian employees that we have both in Poland and -- especially in Poland but also in Germany. The focus for us in the first quarter has been to helping our employees and their families that has fled Ukraine, to arrange living quarters for them in both Poland, Hungary and Germany. We have also dedicated 3 trucks that are driving necessities to the Ukrainian border on a regular basis. And as everyone understands, if the war continues, there's a risk, of course, that cost of material, energy and fuel will continue to be on a high level with -- which we need to transfer to our customers. And there's also an obvious risk that the war will have negative effect on the general consumption, at least in Europe, which could have some negative effects on our customers. But positive on other side is that we can now see that we have much less negative effects from COVID-19 and our sick rates are back now at a normal level. And a bit challenging going forward is, of course, China's zero tolerance policy which will put pressure on a global supply chain of components and products but also on the manufacturing itself in China and we have, as everyone know, also some manufacturing logistics services in China. But I think despite all these challenges, Elanders is in a very strong position, which we also could show already in Q1. And for the moment, we can balance the challenging European market with a very strong growth in North America and continuing stable demand in Asia. And we also continue with our growth plans. And in the second quarter, we will open a new facility in Atlanta to support our expansion in Fashion & Lifestyle segment in the U.S. And we are also now investigating the possibility to expand our new facility in Oberhausen in Germany to handle all the big volumes of RFQs that was coming in from our customers. So despite a very challenging environment, we can see that the new Elanders works very well. We have a really nice diversified customer base now, and we're also very diversified in a geographic sense, which make us stronger to handle ups and downs in the economy. Okay. Thank you, everyone. Now we open up for questions.

[Operator Instructions] We will now take our first question from Alexander Vilval from Erik Penser Bank.

I would like to start with Bergen Logistics. Obviously, they have contributed to the quarter for Elanders. But can you elaborate a little bit on how their organic growth -- what makes Bergen themselves grow now in terms of customers and perhaps new capacity and so on?

We can see that Bergen has a very strong organic growth. We think it's -- they have a really nice niche in the Fashion & Lifestyle segment, where the focus on small- and medium-sized brands. And they can see a huge increase, still continuing growth in e-commerce, but they also do a lot of omnichannel solutions. So even if e-commerce go more flat, then it goes in retail instead and they have a huge demand. And for us now, it's more about capacity to speed up to handle all the RFQs. And they have opened up a new site in Pennsylvania last year, and now we will open up a new site in Atlanta. And as we say, they have a double-digit growth. I don't think we -- we don't comment in exact numbers, but it's -- their growth has really surprised us, and it looks very promising going forward.

How much can -- this facility in Atlanta, how much does this mean for Bergen in terms of sort of volumes?

It always take some time to fill it up. You rent a new facility. You need to install shelves and equipment, taking customers step by step. But I think if -- as I look in customer demand, they have -- they can grow with -- easily with 20%. So it's more about filling up the capacity to handle it. And with the new facility in Pennsylvania, that is not 100% full yet, and then we are ramping up Atlanta. So yes, it's more capacity of management actually, for the moment for us to handle setting up the new sites. But we're really happy with the -- yes, and we are really happy with the acquisition. It's always nice that the companies that we acquire are delivering what they were promising you when we acquired them. For the moment, it looks very good.

Great. And regarding the new MedTech site in Germany, it's up and running. Can you tell us a little bit about what they're doing and what kind of business they expect to do in this year and next year?

Yes, it's a really sophisticated site because when we work with the MedTech customers, especially in Germany, we always offer them the whole life cycle, which means in this facility, we are storing their consumables. We are storing their technical equipment. We are delivering their equipment. We do preinstallation of the equipment. We are delivering consumables to their customers, but we also do service on site for customers. We do take back and refurbishment. And we also have a service center with our own engineers that are serving their equipment. There, we have also -- we have a big customer there that is growing really good and we added a new very interesting customer in the end of last year that we're now ramping up. So for us, this is a very important part for our future growth. And we can see now when COVID now is more going down, that normal investments in health care is picking up speed. And we can see that the demand from our customers is very high. So we will step by step develop that area that still is pretty small for Elanders, around 5%, but a very interesting area for the future.

Would you see it possible to expand into further similar sites in other geographical locations?

Yes, we have actually. Before we only did it in Europe, in Germany, but we also now moved one of our MedTech customers to Netherlands, so our new facility there. So we've also had a special MedTech part here to also expand because both Netherlands and Germany are very big markets when it comes to specialty MedTech equipment. So in our expansion now we move one big customer to Netherlands, and we will develop it from there. And we also have activities in Singapore when it comes to health care with clean room capabilities. We do hospital logistics. We're also trying to grow in that area in Asia as well.

We will now take our next question from Adrian Gilani from ABG Sundal Collier.

It's Adrian here from ABG. I'd just like to start off with a question on the current trading. So you mentioned in the report that you saw sort of a bit of a slowdown in demand in Europe towards the end of the quarter. Is this something that you've seen sort of continue or even accelerate into Q2 so far?

No. We haven't. Because the slowdown was mainly from our automotive clients because I didn't know. We realized rather quickly that there was 65,000 people in Ukraine working for, doing parts for the automotive industry, so especially cable trees. So the big effect was that automotive closed down in our several shifts, but they are now up and running in April again. So we could see some Fashion & Lifestyle slowing down a bit in Germany. We don't know if it was temporary or an effect of lower consumption. But for the moment, it looks more stable again because March was hit hard by the automotive area. But they found out other sourcing ways now.

And obviously, I mean you talked a lot about the issues you had in Q1, but margins held up a lot better than we had expected, and you even increased the margins year-over-year. Should we assume that you sort of managed to move on a lot of your input price increases during Q1 towards your customers and that you're doing that in Q2 as well?

Yes, yes, I think so. We can, see, especially in Supply Chain Solutions, we have managed to transfer a lot of additional costs. We have also managed to earn more when we are trading freight now. So in Supply Chain Solutions, I think the trend will continue with improved margins. Print & Packaging Solutions, really challenging for the moment. I think we have -- everyone has realized now that during COVID, lots of paper mills was closed down and the industry was closing down more than what the underlying demand is. And this Ukraine crisis also fueled that even more. So paper price just continues to go up, but it's also really hard to find paper. We need to buy when we can buy, we need to say, no, thank you to Europe, to some Europe. So Supply Chain Solutions, that will be continued improved in margin. The only risk we see there on Supply Chain Solutions is the zero tolerance of COVID in China. And we also have facilities around the Shanghai area that they have closed down for the moment. And if it doesn't last along, I think we can absorb that. But it also could affect, of course, our electronics customers and manufacturing in China. And that we don't -- we cannot really see the effect of that one. So -- but it looks still pretty good. And we also had the growth in North America that helps us, so yes.

You mentioned sort of the zero tolerance policy in China. And that was actually going to be my next question. First of all, we saw during Q1, there was the Shenzhen lockdown. And as I understand, that didn't have too much of an effect, but you can probably elaborate a bit on that. And then the Shanghai one, how are you -- sort of how much operations do you actually have in Shanghai?

Yes. The Shenzhen one didn't help us so much. It was more helping, I think, shipments, but our customers managed to balance that. But Shanghai area is much tougher for us. We have 4 sites in around that area. And they have been temporary shutdown now in April. But now to indicate we can open them again. So if it stays with that, then everything should be fine. I think we are more worried about the impact on all the electronics manufacturing that we don't really can see, but they're also spread out. So it will depend for us a lot, if they're closing down next step in Chongqing or in Chengdu or whatever. So China is big. So -- but I think it's a bit stressful for everyone, for our customers and especially with shipments if they close down the harbors. But I think now the harbors are running again. Let us hope that it will work. But the signal now that we can open up again now in end of April for Shanghai site.

And just one final question on my end. You also talked a bit about sort of the rising paper prices and you mentioned the lack of paper, there's obviously been major strikes at finished pulp mills recently. But has this been purely sort of a margin effect for you that you managed to get all the paper, but at a higher price? Or have you actually lost sales because there's paper to be bought?

We're also -- it's both. We're also losing sales, especially on -- normally in the print industry, there's a lot of what we call one-off spot jobs. Lots of those jobs are canceled. So we have managed to secure paper for our big customers, but we have needed to build very high stocks in paper. But it's -- but the signals are that the market should normalize in the second half of the year. And hopefully, the strike in Finland will be over soon because that also affects -- And we're also now managing to push lots of price increases to our customers, so they understand the problem. So there have been -- but the problem is when it increases month by month, so you need to go to the customer every month. So, but hopefully, it will be normalized and we will catch up with increased prices and then it should be fine.

[Operator Instructions] There are currently no questions in the queue at this time. I will turn the call back to your host.

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

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.