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

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

Thank you. Welcome, everyone. This is Magnus Nilsson, CEO of Elanders Group; and together with me, Andréas Wikner, our CFO, is here as well. Okay. I will now start, go through our presentation, and then we'll go directly to Slide #5 to look at the fourth quarter. And despite the very complex environment, we deliver result that's clearly better than last year as a result of our strategy to continually broaden our customer base, but also our service and to increase our geographic footprint. If we look at the demand from our different customer segments in the fourth quarter, was it a very mixed picture. Some had lower volumes than expected, but [ other ] ones were higher than expected. And then in the end, it resulted in a very strong fourth quarter. Cost for material, fuel and electricity starts to stabilize now, but still on a high level. Positive is that we continue to see improvements in the global supply chain with improved capacity and reduced prices, which will help our customers as well. In the quarter, we can see a very strong performance by Supply Chain Solutions, despite low demand from some product areas like TVs, computers and white goods. This was compensated by a high demand of heat pumps and other electricity saving products. Still a strong growth in the Fashion segment in North America and overall, a stable demand from our auto customer segment. To improve our margins even further in the Supply Chain Solutions, we have also decided to close down some nonprofitable parts of our road transportation activities in Germany. And we have also decided to lower the amount of buy and sell activities in Asia in 2023. Both of these actions will help us to release more capital and, of course, then improve our margins step by step. Print & Packaging Solutions continues to show a strong recovery after a tough first half year, with the help of price increases but also better availability of material. And we could also see a positive recovery from online print auto products like photo books and calenders in the fourth quarter. If we then look at our numbers, can you see that we managed to deliver on EBITA, excluding one-off items that is [ 26% ] better than last year. And if we look at the full year of results for the group, we've managed to improve our profit per share of [ 42% ], which we are very proud of when we consider how challenging 2022 has been. If we then go to Slide #6, look at our business areas, fourth quarter and look at Supply Chain Solutions, can we show a very strong growth in both sales and results, and we improved our adjusted EBITA margin to 7.8% compared to 6% in [ Q4 ], despite the challenging market with lots of fluctuations in the demand from our customers. We should also have in our mind when we compare our fourth quarter in 2022, 2021, that, again, contributed with 2 months of sales in the South in Q4 2021. If we then look at Print & Packaging Solutions, we can see strong improvement in sales, with an organic growth of 12% and an improved adjusted EBITA result. The main drivers behind the improved -- the best result is price increases, better availability of paper and cardboard and a strong recovery when it comes to online print volumes. If we then go to Slide #7 to look at our different customer segments and then look at our sales to Automotive, you can see that sales improved compared to last year, despite the customers still have problems with shortage of components like semiconductors has continually result in regular output from their factories. A big part of the growth in sales actually comes from successful price increases during the year and still very positive in this segment is that Automotive customers still have full order books. If we then look at Electronics, it's the picture a bit more complicated, with lower demand in Asia and also decrease in demand on products like computers in both Asia and Europe. On the other hand, we can we see increase in demand for heat pumps and increased demand for storing of electronics products in Europe, and we expect to see some growth in the demand in Asia in the coming months because of China's new COVID policy. In Fashion & Lifestyle, we can show a good growth compared to last year. The growth comes, of course, mainly from Bergen and North America. And to support this growth, we will, during Q1, open a new site in Atlanta and U.S. In Europe, also demand is slowing a bit, but it was still better than expected. And it looks rather good also, going forward. If we then go to Slide #8, then you can see that Health Care & Life Science shows a good growth. And we have also decided to open a new clean room facility in Indiana in U.S. in 2023. If we look at Industrial, you can see a very stable demand, despite lower demand on products like power tools, but this could offset by increased volumes in the area of thermal technology. Other shows a strong growth, which is mainly driven by recurring demands of photobooks, calendars, children books and other similar online print products. We could also see a good demand from other online -- other products like smaller series of packaging material as well. If we then go to Slide #9, you will see our group targets when it comes to reduction of GHG emissions. We have worked really hard last year to map our greenhouse gas emissions and to plan how we reduce emissions. And we are proud to present a solid 3-step plan. In 2030, should have Scope 1 and 2 emissions reduced with 50% and our Scope 3 emissions related to our own operations by 30%. And then in 2040, should have Scope 1 and 2 emissions be reduced by 75%. And in 2050, should Elanders achieve net zero over the entire value chain. If we then go to Slide #10 and [ fiducial ] things will be going forward. We can really see that Elanders global footprint and diversified customer base really helps in a challenging market and decreasing demand, some products can often be compensated by increasing demand for other products. We can also see that the low demand increases the need for [ sponsorship ] products and the lack of space makes it possible to also achieve good margins in this type of business. We are also benefiting from the near-shoring trend, especially when it comes to our European customers, but now moving parts of their sourcing from Asia to Europe, which increases their demand for supply chain services in Europe. We can especially see this in the Automotive segment that are doing lots of actions in this area to shorten their lead times and to protect or to get our products in time. The restructuring of German road transportation business and our strategic decision to lower amount of buy and sell business will improve our margins, but also lower our working capital that will, of course, effect our top line negatively with around SEK 500 million. And if you look at material and energy prices, they are starting to stabilize. But the inflation drives up expectation when it comes to salary increases, which together with higher interest rates will be the more challenging part in 2023. But I must say, overall, it looks rather good for us, and we have shown in 2022 that we can handle also lots of ups and downs, and we are still very confident that 2023 also could be a good year for the group. Okay. Thank you. And now I hand over to questions. Operator, can you please take care of that?

[Operator Instructions] We'll take our first question from Carl Ragnerstam from Nordea.

It's Carl from Nordea. A few questions. Firstly, on the margin side of Supply Chain Solutions. Is it possible to give any flavor on the drivers behind it? I guess a big portion of it is a strong performance in Bergen, but does it explain the whole margin uplift? Or is it -- yes, if you could give us a flavor on that to start off with.

Yes. Carl. No, of course, Bergen is an important driver to the margin improvement. But we could also see that we worked out with the LGI in the last year, so we can also see improvements there. And to reach the next step in improved margins, I think the actions we are now taking in closing down low-margin road transportation business in Germany, that's also in -- LGI will really help us. And also, of course, we can see that the buy and sell activities with the cost to finance it nowadays, it's not a good business for us. It's more driving sales, but no margin. So -- but our rollback, absolutely. But we could also see improvements in LGI and mentoring the end of the year, they had a tough first half year. So now we feel we're on the right way there.

Okay. Very good. And on the cash flow side, you continue to tie up in Q4 here a little bit of working capital, although to a lesser extent than what we've seen before. When would you say that we would or should see releases in the -- is it already in Q4 -- Q1, sorry? Or is it -- or would it come with a lag?

It's Andréas here. Carl, I would say that we would -- we expect some effects in Q1, but we think the major part will come in the second quarter. I would say that we are slightly positive in Q1, but much more in the second quarter.

And is it possible to give some guidance on a full-year basis to -- is it possible to sort of release the roughly SEK 400 million you tied up? Or is it -- yes, what magnitude could we talk about here in 2023?

I would say that it's reachable to be able to do that. It's a little bit timing, I would say, because we -- we look at the balance sheet at a particular date. But in general, overall, I think it should be possible to release up to SEK 400 million -- around SEK 400 million.

We still have a pretty high safety stock in the print area because of the problem with the material and -- but now that starts to look better. So we are expecting that our companies will release a lot of the stock to use that. And then we buy and sell step by step. But road transportation, that will take some time before that gives -- I think that will go after Q2 -- after Q2. So, yes.

Okay. Very good. Sounds promising. And also -- I mean, I guess it's one more for you, Andréas. We can see that net financials continues to come up a bit here in -- also in Q4. Would you say that the Q4 level is the run rate we should expect full year 2023? Or should we expect continued step-up during '23?

No, I think you can assume that Q4 is the run rate for 2023, I would say.

Okay. Very good. And the final one from my side is a bit -- you talked a bit about near-shoring and the potentials from it. Have you so far experienced an increased amount of quotations from your customers? I mean old ones as well as new ones when they move from, I guess, Asia into Europe more? Or is it still too early to see effects from that?

No, we could already see effects from it in Q4 that -- especially on Automotive, already have managed to change some volume flows from Eastern part of Europe into -- to Germany, for example, where we're handling the coordination of all the materials. We can already see positive effects. And we are also starting to see some effects in Mexico, where we have some small activities that our Electronics customers now want us to increase our capacity in Mexico because they will move some value-added services to Mexico to be close to the U.S. market. So everyone has talked about it for a long time, but now we can start to see some clear signs and we -- there's also some increase in activities in India as well with some transfer from Asia into -- or from China to India. So especially Automotive, we can see they are moving pretty quickly, and it's happening. And with our footprint in Europe, it's, of course, very good for us.

We'll take our next question from Adrian Gilani from ABG Sundal Collier.

This is Adrian from ABG. Just a quick question, first of all, on the restructuring in Germany. The EBITA effect of SEK 30 million that you mentioned in the press release, is that an immediate effect that we should start seeing that run rate already from Q1? Or would that take some time? And also as a follow-up, is it able -- are you able to quantify the working capital effect from that restructuring as well?

I think I don't -- we don't expect a full run rate in 2023, which is sort of SEK 5 million, because it's -- we are taking it down step by step. But at least -- I think at least 50% of it should come already in 2023. And then '24, its full effect. I don't know where the working capital, it's difficult to quantify.

But SEK 350 million or SEK 300 million?

I think so because sales is around almost SEK 300 million. So yes, like Andréas says, around SEK 40 million, SEK 50 million. Yes.

Okay. That's helpful. Regarding Bergen as well, in previous quarters, you've specifically written that Bergen has had high double-digit growth, and now you've switched to just writing double-digit growth. And I just wanted to know if am I reading too much into that sort of change in wording? Or have we sort of reached the point where Bergen is now starting to reach back capacity and the growth rate is not the same, going forward?

No, no. But I think they had already a big increase in Q4 in 2021. So now when we enter Q4 in 2022 and compared to year before, they still have a very good growth, but it's has gone down a bit. And now they still have capacity for growth because we open up a new facility in Atlanta now in Q1, and they still have 50% available capacity in the site in Pennsylvania. And in Atlanta, I think we will have 75% available capacity. So it's more about how quick you can fill it up. So -- but they have had a tremendous growth this year, and I think they will continue in double digits, but maybe not so high that we had this year or so.

Okay. And just regarding end market demand, you've talked also for 2 quarters about slowing demand in certain segments within Electronics. And I just wanted to see if that -- how does that trend look in Q4 compared to Q3 and perhaps also a bit of sort of current trading so far in Q1?

Well, I think Q4 was continued to be pretty slow for some products like computers and TVs and we normally call white goods more Industrial, but there is also a much lower demand and, as I said, power tools. But the good thing we have other areas like [ thermal ] technology, heat pumps and things like that. And there, the demand is really strong. And I think when we talk about Electronic products, the signals from customers are that they expect not going down more, but it will be pretty slow in the first half year and then pick up speed again in the second half of 2023. And there are uncertainties. But for the moment, January always start slow. But at the moment, we don't see so much more down trend in demand. And overall, it looks pretty stable. But who knows? I think, in Q1, you will really see if the economy will go down more or it will be stabilized. And we also think that some effects are because of post-COVID effect because during the COVID year, laptops were selling in record volumes, lots of white goods, power tools, people were renovating their houses and things like that. So it's really a complex picture to see. And -- but still, it looks rather stable if we look over the whole line of our customer segment.

Okay. I understand there's a lot of moving parts, and it's a bit difficult to call, but...

Yes.

Okay. Also, you gave some color on the margins and supply chain. So I can ask a bit about Print as well. You said that material costs are not as big of an issue in the report. But still, we're seeing a fairly significant margin drop year-over-year. Are paper prices still sort of the biggest reason for this? Or is there something else we should take into account in Print as well?

No. I think the first half year was really bad for us and then it start catching up. But if we look at the fourth quarter, they're 1.3% behind last year. And that is, we still have some price increases to push through to our customers. So we feel a lot of confidence when it comes to Print & Packaging. It takes time to push for the price increases. So for us, it looks like we have a really good recovery in Q3 and Q4. And the margin will come. It takes time, a subcontract, or we cannot take some time to negotiate the price increases, but we are on our way. And also, when the material prices stabilizes, then it's more easy. But when it goes up every second month, you need to have pricing negations every second month. So if it's stabilized, you can push through your price increases and then you have more normal levels. Yes.

And then I can finish off in that case with just a question on your margin target of 7%. It sounds almost like the 7% margin target should be doable in 2023, given the sort of current margins you have and looking also at the sort of you have price increases as well to carry forward to customers in the coming quarters as well. Would you agree that 7% looks doable in 2023?

Yes. I think, absolutely. Then of course, depending on the economy, there should be a wide decrease in demand over all our customer segments, then it will, of course, be challenging. But I think -- if we look at the picture what is today and with all the actions we are taking and also the actions when it comes to buy and sell and the road transportation business in Germany that will affect us a bit still in the first half year, it's absolutely in reach. Yes.

We will take our next question from Thomas Nilsson from Analysguiden.

I was wondering if you could talk a bit about potential future acquisitions. First, how much can be expected to be added from acquisitions in terms of revenue over, say, the next 3 years? And also, what customer segments are being prioritized?

Okay. Thank you. There were no acquisitions of very important tools for and we've made a really big one with Bergen Logistics. And that affected us a bit. But as you can see in the report, we are now down to net debt to EBITA to 2.8. And of course, we want to go further down. But acquisitions are really important for us. And normally, we can do acquisitions for around SEK 400 million, SEK 500 million per year with our cash flow. And on top of that, of course, we can also utilize the banks. It's hard to say, but I -- for us, it's really important to continue. And the Fashion & Lifestyle is still really interesting. And as we have -- the Bergen model is very successful for us. There could be add-ons in the U.S. on that area. We still see in -- when it comes to more value-added services in Electronics, where we have done some really nice acquisitions the last year in technical logistics and things like that. So now, of course -- but of course, it should be for the right multiple, we should see clear synergies. But I think, in average, the coming 3 years, if you find the right target, I think we could buy at least turnover of around SEK 500 million to, yes, SEK 1 billion something. And then also -- you also look at Medtech Logistics as well, which is an interesting area for us.

[Operator Instructions] We'll take our next question from Markus Almerud from Penser Bank.

Can you hear me now?

Yes, we can hear you, Markus.

Markus here from Penser Bank. So I just wanted to follow up quickly on the second sourcing or the change of value chains, which is I think, is quite exciting. So you say you see some of the Electronics, but also in Automotive, but what kind of discussions are you having and how are they acting? That is, are they adding on? Or are they moving? And to kind of what extent this is happening? So how are they reasoning? Is it just are they adding suppliers? Or do you see full moves of value chains? So if you could talk a little bit about the dynamics. And also, what kind of discussions you're having around this?

Yes. I thought it's always a delicate question because most of our customers are really big public companies as well. So they are maybe not so transparent from a strategic point of view that we can see it more when they are acting. And we could see now that they are moving up for more suppliers in Europe, and we can see that there are -- and sometimes if -- they get the Asian suppliers to move manufacturing into Europe as well. And I think there are two reasons. One reason is, of course, to secure the flow of components and don't rely on globally just in time that -- everyone has learned it's really painful. But there will also be new regulations in EU when it comes to, I think it's tax -- environmental tax when you import products from a country that will add on. So I think also Europe needs to look at -- companies in Europe need to look from that perspective as well. But I think the main reason is that the global just-in-time model has proven that it doesn't work and it could also be political reasons. But we can see that they are acting and Automotive is normally pretty quick, and they are acting Electronics. They also want to do it, but it takes a longer time for them because it's still extremely developed, especially in China, that you need to have a supply, and there's other suppliers supplying them with components. So it takes time. But it looks like there is a trend now with more regional supply chain. And that will normally increase the amount of [ meager ] contract logistics and logistics services because in the end, it means more volumes for suppliers like us.

And am I correct to see because it feels like there is also a change in? I mean, we've discussed it before. And I know that I think you've mentioned this in previous reports as well, but correct me if I'm wrong, but this is the first time that you say that you actually see this and there is no discussions, but that they're now acting on this, is that correct?

Yes, it's actually happened now. We have -- we could see increasing flows of the -- of course, we coordinate for some of our customers in Europe to flow to their factories in Germany, for example. And we could see that the flow coming from other European countries is increasing a lot because it normally goes via different hubs, [ central ] where we are running, and there's a big difference here.

Yes. And if you look at customers outside of Automotive, are you having the same kind of discussions or are you not in a position to say? I mean, is this something which is happening across the board?

I think it's lots of companies want to do it, but we need to be big enough. And there the Automotive guys are normally big enough. They can even have manufacturing of the same car in several countries. I think for [ other ] manufacturing, it can be hard, or maybe they have a huge factory in Asia. They have one in Europe and one in Americas, but they do different products, and then they need to ship them across over the world. And for them to break up the supply chain to do it more regional will cost them much more money and be much more complicated. But I think, in the end, what we hear from lots of more customers to try to find ways to do it, instead of sending both finished products and components over our world all the time.

[Operator Instructions] There are no further questions on the line, sir. Please proceed.

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

Thank you for joining today's call. You may now disconnect.