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

Hello, and welcome to the Elanders AB conference call. [Operator Instructions] I will now hand you over to Magnus Nilsson to begin today's conference. Please go ahead.

Thank you. Welcome, everyone. This is Magnus Nilsson, CEO of Elanders speaking. And together with me, I also have Andréas Wikner, CFO of Elanders Group. I will now go through the presentation, and I will go directly to Slide #5 and talk about our second quarter. The market continues to be very challenging, and we could in the second quarter also see decreasing demand in North America, especially from our existing fashion customers. But in the same time, could we see an increased amount of requests from potential new customers. In Asia and Europe, it continues to be a lot of soft, but also Europe could see a rather high activity when it comes to requests from new potential customers. In the quarter, we had a negative growth, but this was mainly due to normalized freight prices within our Air & Sea forwarding business. Our adjusted EBITA margin was slightly down to 6.1% compared to 6.3% the year before. Main reason to low margin is the overcapacity that we built up in Europe and the U.S. before the inflation began to solve. Our focus on lowering our working capital and improving our cash flow resulted in a very strong operating cash flow and a cash conversion of 112% compared to 36.8% the year before. If you adjust for dividend payment and currency effects, decreased our net debt actually by SEK 300 million in the second quarter. If we then go to Slide #6. If you look at Supply Chain Solutions, we show a slightly negative organic growth, but that is, like I mentioned before, mainly due to the normalized freight prices within Air & Sea. The reason for the lower adjusted EBITA margin is mainly because of the overcapacity in Europe and U.S., but also weaker demand for high value-added services in Asia. Despite the soft market, are we still getting lots of requests from new customers. And we expect the step-by-step fill up our unutilized capacity, which together with the closing down of the non-profitable road transportation in Germany will help us step by step to improve our margins again. Our actions to improve cash flow and to our working capital has a huge positive effect in Spatial Solutions as we show a cash conversion of 99.6% compared to 15.2% year before, which lifted the whole group's cash promotion in the second quarter. If we then go to Slide #7 to look at Print & Packaging Solutions. We could show a strong improvement when it comes to our adjusted EBITA margin with an adjusted EBITA margin of 5.8% compared to 3.3% the year before. Traditional trend is also affected negatively by the weaker market condition, but online print continues to be strong. And this, combined with successful price increases was the main drivers to the improved margins in the print area. If we then go to Slide #8 and look at the development of our different customer segments in the quarter. And if we start with Fashion, could we see a low demand from several existing customers in North America, which slowed down our growth. But in the same time, could we see a stable inflow requests from new potential customers. And Europe continues to be rather soft, but also here, we are receiving lots of requests. When it comes to Electronics, which is a rather challenging quarter with low demand in both Asia and Europe. But in the end of the quarter, could we see some signs of recovery in Europe when it comes to Electronic products. Our life cycle management service with deliveries and installation of high-tech devices continue to develop very well and continues to show a growth despite the challenging market. The demand from the Industrial segment continues to be more stable, but sales went down because we exited an unprofitable road transportation operation during the quarter. Demand from health care is rather stable, but our sales were lower compared to last year because of normalized prices for Air & Sea transportation. Other show decrease, but online print continues to show very good growth. If we then go to Slide #1, (sic) [ Slide #9 ] we want to update you on important business development projects that we have been -- that we have and are working to implement in 2023. Regarding our rollout of the Bergen concept, we followed our opening of facilities in Atlanta U.S. and Newcastle, U.K. in Q1 with a new site in Shenzhen, China in Q2. All our Bergen sites are supported by our own warehouse management system, CloudX, that offers our customers one single interface, to overlook multiple warehouses globally to follow their -- there they can follow their inventory levels, deliveries, returns, et cetera. CloudX is also integrated with several major carriers. To speed up the development of the platform and we almost doubled the number of software developers in the last 6 months. And as we have mentioned before, we opened 2 new med tech sites during the second half of the year. One of them consoles clean room facility in Indiana, U.S.A. and other sites in Eastern Germany with a focus on factory logistics. And as a result of the near shore, the increase in near-shoring trend, we will also expand our capacity with the new sites in Mexico. If we then go to Slide #10 and look at how things will be going forward. We can still see that the Elanders' global footprint and diversified capital base really helps us in a very challenging market. And the decrease in demand for some product areas can often be at least partly be compensated by increase in demand for other products. You can also see that even if the market is challenging, still a very high activity when it comes to new ARPUs from potential customers because sometimes when it's hard of times also companies look to outsource more. And we can see a rather strong trend in that area with lots of our SKUs coming in. Our investments in additional capacity combined with important global rollout of the Bergen Logistics concept should also be important engine for our future growth. We're also very happy to see the improvements we have management comes to improved cash flow and it will be a continued focus going forward. That was everything for me, and then we open up for questions.

Thank you. [Operator Instructions] And our first question today comes from Adrian Gilani of ABG Sundal Collier.

It's Adrian here from ABG. First, I would just like to start off with a question on the freight and transportation revenues that were down more than 20% year-on-year. Is all of this due to lower freight rates? Or is there a volume decline baked into that as well?

Well, I think it's mainly the price decreases, the normalization of prices for the Air & Sea business.

Okay. So if we look at it on a group level as well, the 9% organic sales decline, could you give us a rough indication of the price and volume split on the group level as well?

That's around 5%, 6%. And then we also, of course, started to close down the road transportation in Germany, that also had some effect, but it will be a bigger effect going into the third quarter on that side.

Okay. Perfect. And then in supply chain, you say you should be able to fill up the current overcapacity and improve margins. Is this something we'll see an effective already in Q3? Or is it something that will take longer?

It's a mix there. If you look at U.S., we are normally taking in more small and medium-sized customers. So that could go be quicker. There we talk about -- we will start picking up in 1 to 2 months. So as long as our existing customers don't continue to decline, that could be effect already, after yes, after the 2 months roughly. In Europe, we are looking at much bigger projects, and we have actually gained 2 very big projects, but 1 of them starts first in Q4 and other project starts in Q1 next year. So there is some -- in Europe, it's often slower. It's bigger customers, bigger projects. U.S. is faster, so it's a mix.

Okay. That's very clear. And then in the print business, you talked about raising prices to customers. But in recent months, looking in from the outside, it looks like both energy and paper prices have come down. So on the current cost levels, is there a risk that you might have to lower prices towards the second half of the year? Or can you sort of enjoy elevated margins for a while here?

Well, I think we can keep up the models with the new pricing. Of course, in some customers that could be in mechanism, but if the material price goes down, we need to also adjust down. But in the same time, of course, also going down. So we have reached a new price level now for lots of our big contracts, and that will help us going forward. That would be -- shouldn't be any negative effect. We also estimate that we still have lots of stock because there was a problem to get material, but that has also normalized. So we also expect that we will be able to lower the working capital step-by-step in the print operations as well.

Okay. And that was going to be my final question, on the working capital. So perfect, you -- but just to clarify, you have talked previously about releasing SEK 400 million for the full year in working capital, and you seem to be on track to do so. But just checking, are you still confident on that number for the full year?

Yes, I think we all are very confident, Adrian. I think how much did we release almost -- in total, already around SEK 200 million, SEK 300 million.

Yes. So the SEK 400 million that we have talked about is absolutely in region hopefully, we can overachieve it as well with some other effects.

Can you give us some -- sort of quantify that? What -- it seems like you -- the way you're talking, it sounds like you can overachieve that by quite a bit.

Yes. It depends also on growth, of course. So if we are successful with the new sales and growth comes back, then you get another effect. So -- but we should -- at least the SEK 400 million is no problem, and it could be, I think, maybe up to SEK 500 million. But then if we get new projects of growth, then we have another effect. So yes.

And we now move on to our next question, which comes from Gustav Berneblad of Nordea.

It's Gustav here from Nordea. Maybe just to build on the cash flow discussion here. Should we expect increased CapEx here when you roll up Bergen in China?

No. The Bergen rollout is not driving so much investments actually because we do it in existing facilities. So the Bergen setup is done in 1 of our mentor facilities in Shenzhen. The 1 in NewCastle, we did in Q1, that was a greenfield. There are some investments coming up, but some of them are a mix. And the 1 we expanded also in Netherlands was in an existing facility. So -- we still -- but we feel like from the beginning, our investment should be roughly in line with the year before because we still are filling up the capacity in equipment in Atlanta and Pennsylvania and some other places, things that already was ordered before the problems was happening. So -- so I think investment will be pretty strong this year as well. But next year, investment levels should actually go down because then we have -- because we have filled up the new warehouses with all the equipments we need, and then it's more for us to gain new sales. So it should be roughly in the same level I see it before. But then it should decline in the next year.

That's clear. And then if we continue in the U.S. for Bergen here, you can comment on a softer demand for fashion here, but -- are we still seeing a year-over-year growth this year? And also, are you seeing a net inflow of customers in Bergen?

I think in Q1, we still have a double-digit growth. I think in the second quarter, there was actually no growth. It was flat from existing customers. The difference from Q1 to Q2 was in Q1, we didn't see any good inflow of new customers. In Q2, the inflow is much better. It's a bit complicated picture. So we will be surprised that so many customers went down so quickly in Q2, but the U.S. is always faster in both directions. And -- we still haven't gained projects, and we're looking at several new projects. So we hope we have to stabilize in existing customers, and then we will start to grow again. So -- but that gives, of course, a bit negative effect on our margin because they are, for the moment, sitting with pretty high overcapacity because when we invested the investor in southern Pennsylvania. We invested huge in Atlanta, was because they had a huge growth. So we have a -- for a moment now, we have an imbalance but everything looks good going forward. As long as we just fill up the facilities, it will be a good development for us.

Okay. Perfect. And then if we turn to the Industrial segment, which is -- small, but sales looks to be down some 28% year-over-year in Supply Chain Solutions. Is it possible to give more color on what is burning the segment? And also if there are any specific regions here that is softer?

No. I think Industrial, there is also -- I'm sure there's also some Air & Sea in it. But the road transportation that we are closing down in Germany had 2 customer segments. One was industrial and 1 was automotive. And the industrial part was going down already in Q2 and the automotive part will disappear in Q3. So it's -- industrial part, it's mainly projects that we have chosen to not take anymore and there is the transportation effect. So nothing that worries us and the projects we have that we want to have, we have already have, we have to care for that. That is outlook.

Okay. Okay. That's perfect. And then on the print here, it was down 2% organically, but if we adjust for pricing, are we talking closer to a 5% volume decline? Or is it even more or...

No, I don't think so. It's always hard to measure this with price increase compared to organic growth. So -- because I think the traditional -- maybe it went down roughly with 5%. Traditional print is also affected by the downturn in the economy. But that's lower margin business for us. An online print is a much higher margin, and that is growing. So for us in print is normally, we don't care so much when growth -- the organic growth is going down as long as we can improve margins, but is always our focus in that area. So -- but you could be right, it may be around 5% and -- but normally, they have gone down with 2%, 3% per year, roughly. And we had growth last quarter. So it can go a bit up and down, of course.

Yes. Okay. I was just thinking, given if volumes hold up fairly well and input costs remain stable in print, can we expect sort of continued quarter-over-quarter margin recovery here going forward? Or how do you see it?

I think Q3 are normally not a strong quarter, but there could still be some growth. The important for us is the fourth quarter, and that is the driver of the margin for the whole year. For the moment, we have no signs that the fourth quarter should be weaker than last year. So if we can continue to do some improvements in Q3, Q4 will be like last year, then there will be an improvement of the margin of print. Yes. But the market is still very, very strange, lots of ups and downs, also on the print side, especially when it comes to traditional printed volumes.

Yes. Understood. Understood. Yes, I think that was all for me. Thank you.

[Operator Instructions] I'm now moving on to Thomas Nilsson of Analysguiden.

This is Thomas Nilsson from Analysguiden. I have a question regarding your financing costs. Net financial items were negative SEK 73 million in Q2. So I'm wondering, is this the level of interest costs that we will be seeing going forward? And what is the average interest rate that Elanders will be paying on your SEK 7.4 billion net debt going forward?

That's a very good question, Thomas. But it's a good mix in the net debt because to a large extent of IFRS 16 leasing debt that we have there. Looking at the bank financing that is around the net debt without IFRS 16 is around SEK 3 billion, where we have an average interest because it's mainly in dollars, those are mainly euro and dollars. And we have a margin from our lenders, which is around 120 basis points, and then we have a variable interest rates on those loans and on those that financing. And then we have -- on looking at the leasing debt, we have -- over time, it will increase the interest rates because when we go into a new lease term on the facilities, then we use the long-term interest rates as a basis for the leasing that we have. And going back, some of the leasing agreements that we have are -- we have been having for 3, 4 years and that we have a lower interest rate from when they are being sort of replace a new agreement, then it will be a new market interest rate on that one. But let's say, for bank financing, we are around, in total, around 5%, 6%. And in -- on the leasing that it's more like 4% or 5%, I would say, in average. I hope that answers your question. A little bit mixed picture, I would say.

And we're now moving on to a question from Markus Almerud from Penser Bank.

Markus from Penser Bank. A couple of short questions. The first one is on -- to continue on fashion. So you said you were a bit surprised about how some customers came down very, very quickly. Could you give us some more color on that, if there was something sticking out, some of the specific segments, et cetera? That's my first question.

I think in the fashion side, if we take Europe, it's been a bit up and down now for a couple of quarters. Some customers are being very soft. Some customers are strong. So no slight decrease. But the difference was in North America. As you know, we have had growth. Our customers are doing very well, even in Q1. So that happened in Q2. But I think it's an effect. We are there working with small, medium-sized customers. We talk about 450 to 500 customers. So -- so the thing that surprised us, of course, some of them are very close to the breakeven. So when they lose some sales, several of them actually went bankrupt. So it has collapsed. And even some of the bigger ones also went to Chapter 11. And then the rest was going down with a couple of percentage. So I think overall, I think it only went down with around 2% in North America sales, but the problem was that some of our customers actually went into Chapter 11 had made a bigger effect. But then we have an inflow. So in the same time, it was flat. So it's -- and then you can only see that in both U.S. and also U.K. that when it's smaller companies, it can go pretty quickly from being stable to the Chapter 11 level actually. So I think the market is, of course, softer in the U.S. also. They have been later than Europe. But hopefully, this is more of a temporary effect than the one with not for good financial position, they're disappearing very quickly. The other ones are more stable and they will be stable, and then we can fill up with new customers.

So -- but when you talk about demand for your larger customer groups, you talked about that being weaker than Q2 and then weakening throughout the quarter and being weak at the end of the quarter. If you look at fashion, particularly, will -- is that the same kind of pattern? Or would you describe the demand there for a rather flattish rather than anything else? Is how I read you? Or do I overview?

Yes. No. I think it's still actually rather flattish. If we take away the companies that went bankrupt where they lost some bigger volumes pretty quickly. Otherwise, it's actually pretty flattish and that you can also see in our organic growth as well because if we take away the effects of the Air & Sea, if we are down with 3%, 4%, still overall, I must say lots of our customers still keep up because it's over the whole line. We lose some in automotive because they cannot produce in the right pace. We have some percentage down in the fashion Same, in electronics is even more down. And then industrial, if it just the things we took away, it's pretty stable. So I think overall, it's not so bad. But I think for us, Elanders we had an enormous growth last year and also before that, of course, we were building up capacity. So for us, we are more a bit squeezed now with too much capacity and it's a soft market. But I should not say that, that the market is like really bad. Yes, it's very soft. But we see now electronic signal, maybe this could see an improvement in the end of the quarter. We are hoping that our automotive customers now will pick up the speed in their production because they are still going in a very limited speed. So I must say it's a very complicated picture. But it's no areas showing this at but the worst one is actually electronics, on the laptop printer side, that has been really tough for us for the first 6 months, where we now can see some signs of recovery. So hopefully, fashion things like it is, and then we are filling up with new projects overall.

And if you talk about it, you said there is a little bit of easing in the electronics business. But you also mentioned Europe in the report. But what are the signals drop from Asia, in particular on that side? Is that also easing a little bit? Or is it still...

No. Asia is still very slow. So the thing we can see because we are running lots of the European hubs or the electronics. So what we could see in the end of the quarter is the inflow is now picking up. So the inflow of new computers, printers is filling up. And that means that the retailers have sold out a lot of the things they had on stock. So that is also in. But I think for Asia, overall, it's really very soft for us in electronics. So not any big improvements yet. And it could also be connected that China has lower growth than expected after they took away the COVID restriction. So in Asia, we haven't get both the local effect and also the export effect, but it's still soft.

And then finally, just to follow up on where, what you've seen in -- that we spoke about this in a transition of volumes to Europe and onshore for the past couple of quarters. Can you just update us what you're seeing there, both in terms of automotive and electronics? You're building a facility in Mexico, but could you just give us an update on where we stand and what you've seen in the past quarter on this?

No. It's still really growing, especially for automotive. Automotive, we can still see, because we handle a lot of the component flows from other European countries, especially into the German car industry. And there, the volumes has been a really strong flow, a huge increase. So in that part, it's going really well for us in automotive. The other part when it comes to build the cars, that is the problem, not as much now because of the component issues. But the trend continues strongly. But I think automotive is the ones that are driving it. For the electronics industry, it's much more complex to move from Asia to Europe from a cost perspective and have built up so many out in Asia. So -- but what is correct, we see effect is Mexico. So we see that we're moving some activities to Mexico. That's why we are expanding there. So that's why we estimate to grow there. But for Europe, I think electronics, we will not see the same effect. The automotive is the biggest one, absolutely.

Thank you. [Operator Instructions] There appears to be no further questions at this time. I would like to hand the call back over to you, Mr. Nilsson, for any additional or closing remarks.

Okay. Thank you. Okay. Thank you, everyone, for calling in, and we wish you a really great summer, all of you. Thank you very much. Bye-bye.

Thank you. That will conclude today's call. You may now disconnect.