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

Hello and welcome to the Elanders AB Conference Call. My name is Laura and I will be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Magnus Nilsson, CEO of Elanders, to begin today's conference. Thank you.

Thank you, Laura. Welcome, everyone, to Elanders conference call. This is Magnus Nilsson speaking. Together with me is also Andreas Wikner, Elanders' CFO. Okay. I will start my presentation for you that are following the presentation material, I will now go directly to Slide #5 and talk about our first quarter. The market continues to be rather challenging and especially customers that are exposed to consumers shows a decline in demand. It's also a very short visibility when it comes to future demand. On the positive side is that the global supply chain continues to improve, and we can also see that prices for raw materials, fuel and energy have stabilized. But during the first quarter for Elanders, we had some lower sales from several customers, but that was largely compensated by Elanders' diversified customer base, but also newly acquired customers. This, together with price increases and efficiency improvements based on adjusted EBITA by 16% and also improved our EBITA margin to 6% compared to 5.5% last year. Net financial items, on the other hand, were negatively impacted by the higher interest rates, resulting in lower adjusted earnings per share compared with previous year. Activities aimed at lowering our working capital and improving our cash flow resulted in improved operating cash flow in the quarter. These activities are very important tools for us in our work to reduce our net debt and will continue going forward. During the period, one-off items of minus SEK 67 million were charged to operating results connected to the previously announced adjustment in one of the group's companies in U.S.A. If we then go to Slide #6, I look at Supply Chain Solutions. We show a slightly negative organic growth. But we made -- but at the same time, we made a strong improvement in our EBITA margins and the negative growth was due to low demand from our electronics customers in Asia, and the improved result came from continued growth in North America, but also with the help of improved profitability in Europe. So overall, a very good quarter for Supply Chain Solutions. If we then go to Slide #7 to look at Print & Packaging Solutions. Can we see a strong improvement in sales compared to last year, and we could show an organic growth of 6%. And our majority of our print companies actually improved their results, but this was offset by weaker underlying results in our site in Atlanta. Our important segment Online Print continued to grow in the first quarter. If we then go to Slide #8 to look at the development of our different customer segments in the quarter. And if we start with fashion, we could see continued growth in North America. That was mainly driven by Bergen's business model that enabled us to constantly add new and small, medium-sized customers as a compensation or lower sales to some existing customers. Our development in Europe in fashion was still flat despite a rather challenging market in Q1. When it comes to electronics, was it a rather challenging quarter with declining demand, especially in Asia, where we are rather dependent on manufacturing volumes of laptops and the global laptop market was actually down with 29% in Q1. In Europe, we had a better situation because of our wider customer base and could compensate lower demand from some customers with strong demand from other customers, especially our life cycle management service is focusing on deliveries and installation of high-tech devices was developing very well. If you look at our automotive customers, we could see a rather stable demand in the first quarter. And despite continued disruptions in our production, we were able to increase both sales and earnings as a consequence of price increases and we negotiated agreements with better terms. The demand from the industrial segment was stable and in line with last year, and the same applies to the Health Care segment. If you look at the segment Other, we could show a growth. And this growth was mainly driven by increased online print volumes connected to a new big customer that was announced in Q2 2022. If we then go to Slide #9. I want to update you on some important business development projects for the group that we have been working with and implementing in 2023. Regarding our rollout of the banking concept, we opened a new facility in Atlanta, U.S. A and 1 in Newcastle in Q1 in 2023. We are also planning to open 2 new Medtech sites during the second half of the year. One of them concerns the clean room facility in Indiana, U.S.A. And other side is in the Eastern Germany with the focus on factory logistics for a major newly contracted med-tech manufacturer. And as a result of the near-shoring trend, we will also expand our capacity with the new site in Mexico. We also are proud to announce that we have launched a platform for managing demo equipment and rolling out of new equipment throughout Europe. This platform focused prime on high-value products such as med-tech and IT equipment. And with the help of this platform, we gained 2 new important customers during 2022. We are also continuing our work to closing down loss-making road transportations in Germany, and this will be completed in Q3. If we then go to Slide #10 and looks at how things will be going forward. We can see that the Elanders global footprint and the diverse customer base really helps us in a challenging market and decreasing demand for some of our products can also be compensated by increasing demand from other products. We are also benefiting from the near-shoring trend, especially when it comes to our European customers that now are moving part of the sourcing from Asia to Europe, which increases the demand to supply chain services in Europe. But as mentioned before, our biggest challenge for the moment is increased interest rates that put pressure on the results, and we have several activities ongoing to offset this as much as possible. Prices for raw materials, fuel and energy prices have stabilized. We are also already in almost all countries when it comes to salary increases, and it looks like that will be around 4% to 5% globally for us, and that is manageable, and that was also what we expected in our budget. Okay. That was everything from me. And now I open up for questions.

[Operator Instructions] We will take our first question from Adrian Gilani at ABG Sundal Collier.

This is Adrian of ABG. I guess starting off, if you could just comment a bit on current trading, particularly perhaps for the customer segments like electronics, where you mentioned that you're seeing softer trend, is there a risk that this trend of slowing demand could accelerate into Q2?

No, I don't think it will accelerate. I think it will be a lot of similar to Q1. And then, the indications from our big global customers is that they expect that Q1 will be slow like Q4 last year and Q1 and they expect a recovery in Q3 and Q4. So we don't think it will accelerate. It will be around on the same level. And then hopefully, it will catch up more in the Q3, Q4.

Okay. That's fair, and also regarding input costs. You just say that input costs have stabilized. To me, that statement seems a bit conservative given that both fuel prices and paper prices have come down a lot. Shouldn't your input cost to be sort of notable decreasing at this point?

Yes, the fuel cost, we can see there is a decreasing and that also helped us in the first quarter, of course. But paper prices still -- is more stable. It's easy for us to get paper, but the price decreases are still slow. And we -- but we are expecting them hopefully to come. But in the same time, lots of paper manufacturers still announce closing down of capacity. So it's still flat for us. We don't see any upside in that one, but fuel absolutely an upside.

Okay. And then in the Print segment, you have fairly flat adjusted EBITA development year-on-year, but we also know that last year's figures include these wrongly reported numbers in that subsidiary. You've given us the full year correction for 2022, half of SEK 70 million. Are you able to give us the specifically the Q1 effect from that accounting errors so that we can assess the year-on-year improvement in Q1 for print?

We cannot say really exactly for that, but if you look at print and packaging, the adjusted EBITA was SEK 24 million compared to SEK 25 million. But it is an effect of at least around SEK 5 million to SEK 10 million. So as for us, there is a strong organic improvement, but this Atlanta thing is helping us when we compare.

I understand. And just follow-up on that one-off. In the preliminary release, you said that the SEK 70 million one-off figure was your best guess at the time, but not an exact figure. Just to clarify, have you now taken the SEK 67 million. Is that the exact figure? Or is it still possible that you have to take additional one-offs in coming quarters?

No, we don't think there will be an additional. We can see now that, that's why we also went from SEK 70 million to SEK 67 million. So we feel rather safe, but there's lots of things that need to be validated, but we don't expect any extra bad news from that one.

Okay. And just a final question from my end regarding the cash flows. You've previously stated or said that we could expect roughly SEK 400 million sort of working capital release for year 2023. We had SEK 55 million in this quarter. Is it still your expectation to be able to release SEK 400 million for the full year?

Yes, we still expect that. We can see now that we can go down in inventory and there's a lots of other things happening. So we still believe in that one. Thank you, Adrian.

We'll now move on to our next question from Carl at Nordea.

It's Carl here from Nordea. Firstly, back a little bit to the accounting error in the U.S. I acknowledge, of course, that you're running a decentralized organization but as it's a second time around. I mean, I wonder if you could elaborate on your plans to strengthen or maybe reorganize your internal control functions in order to prevent these things to happen again? And also the second part, it is, of course, with the issue in Atlanta, I guess, profitability underlying is much lower than you previously thought, at least. Is it up for divestiture discontinuation? Or is it cash generation? I guess, with negative working capital, good enough for valid reasons to keep it?

Okay. Now of course, this is always bad when the things like happens like Atlanta, and we have developed several functions to strengthen internal control, and we are now also doing a postmortem this one, how we can improve even more. And the thing started in 2019 and as the company has been checked by auditors in '19 and 2021, and they couldn't find anything. And so of course, we will now try to learn as much as possible for this one. And then we have just added after month before this happened in additional resource -- resource and internal control. Just to focus on this smaller company. So -- and so that we would do everything we can improve. And when I look also to the profitability of the company, we cannot really say it at the moment because what we can see is that they didn't increase prices enough during last year to compensate the material price increases. We have a team in place to really understand. The first thing we need to understand, can we rather quickly turn around again to make money again. And one of the biggest parts that was there was the subscription box business, but that is already transferred from 1st of January to Bergen so that is under control, and there was lot of the problems coming out from that as well. So now it's the print operations. And we need to go through it clearly to see can we easily turn it around? Can we do some price increases and improvement? And otherwise, we will need to consider how we work -- what we should do with it? But it's too early on this stage. But, if it's not profitable definitely to take actions, but we don't really know yet. It takes some time to go for customers, the pricing and things like that.

And the run rate losses of the print operation, could you quantify them?

The run rate was not so good in Q1. And that was around $200,000 negative per month. But there was also a one-off cost and things like that. I think the run rate is not so bad. For us, we are pretty big now. So I don't think it will be material, but we never accept any companies do not own money. So actually, I think we will know more in the coming months about the run rate, but it could be that the company makes maybe losses around $100,000 per month. And then we need to do some quick actions, especially on the pricing side and the productivity side. So it should be pretty fast, hopefully to turn it to zero, zero result. But then zero result is not good enough. So we need to analyze, can we make it profitable, reasonable margin. Otherwise, we need to take some bigger actions.

Okay. Very good. And also on Bergen Logistics, you said they continue to grow double digits. I wonder if you could, I mean, elaborate on the margin development. I mean, with the obviously, quite good growth, do you get a decent drop through? Or is it diluted in any way? Obviously, you consolidated the subscription box, but if you exclude that to start off with? And also what just so we can know what the impact it had on supply chain margins during the quarter.

I think the impressive thing with the Bergen is that they are in a very high expansion phase with the new site in Atlanta. They were taking over this low-margin subscription books business. And then in the same time, they will start to feel in downturn in demand from some customers. And they are expected to grow more than they have grown. We think they will grow really well, but they were more aggressive in their plans, but they still keep up the same margins. There's a slightly down on margins from their side, but that is connected to the new big site in Atlanta. It cost a lot to build up a new huge site. So now they are performing really well. They have a very impressive business model how they can have a very flexible breakeven. And yes, they are really doing very well, really well. But they can feel also a downturn in the demand. But luckily, they could onboard 65 new customers last year. So -- and their biggest client is only 3%. So even if some customer goes down, they can add more. And the firm owner says, and then when the economy comes back, you have more customers and then hopefully all of them go so, yes. But it's -- so the improvement of the margin comes mainly actually from Supply Chain Solutions is that Bergen is more flat money-wise, but LGI has improved in Europe. You see we could see really good improvements from their side, especially on the automotive industrial partner.

And you had no impact from the discontinuation of the overall business in Germany in Q1? Or is it a small impact perhaps or...

No. There is some small negative impact from that one. We made these reserves last year, but it looks like it will take to Q3 before we can close it completely down. So that's not benefiting us some negative impact still.

And my final question from me is on your guidance on lower volumes from electronic customers in Asia. Obviously, we saw the laptop sales as you referred to. But to what degree would you say that the demand is -- or the volumes is hit by maybe your taking on lower amount of buy and sell volumes during the quarter? Or did it maybe it's not relevant? Yes.

No. But we can say, as we have said before, we are really aiming for lower the amount of buy and sell deals, especially in Asia. But -- and we are going down in that one. That is one of the reasons that we didn't have any organic growth in supply chain as well because Asia is down. So it's a combination. But the problem is with this manufacturing logistics, it's much more added value. So we lost a lot of added value in Q1. We still have some buy and sell. We have to keep it up. So for us, we expect Asia to be weak in the first half year, and then we expect improvements, but we are still taking away buy and sell businesses step by step. In Asia, we will have a decline in growth, but hopefully improve margins. But it's -- the timing is tough for us, but share of high added value services are going down. At the same time, we try to get -- take away low margin business. So that was very challenging for us. So if we have that in mind, we are really happy with the Supply Chain Solutions to start in Q1. There was tough times in Asia, but strong in Europe and North America. That could help us balance it. Thanks, Carl.

Thank you. We have no further question in the queue currently. [Operator Instructions] I don't see any further questions in queue. I will now hand it back over to you, Magnus, for any closing remarks. Thank you.

Okay. Thank you, Laura. Thank you, everyone, for listening to our conference call. And so thanks from both me and Andreas, and we wish you a nice weekend. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.