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

Hello, and welcome to the Elanders AB Conference Call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded [Operator Instructions] I will now hand over the call to your host, Mr. Magnus Nilsson, to begin today's conference. Thank you.

Hi, everyone. Magnus Nilsson here. And together with me is also Andreas Wikner, the CFO of Elanders Group. And I will now go through our presentation, the third quarter. I will now go directly to Slide #5 and talk about the quarter. And the market continues to be very challenging, and we can now see a decreased demand in all our markets, but also in the majority of our customer segments. Positive is that we continue to receive lots of requests from potential new customers. But for the moment, the inflow can't compensate for the lower demand from existing customers. If we look at the growth, we had a negative growth in the quarter, but the large part of it is because of normalized freight prices within Air & Sea. And despite the negative growth, we've shown improved EBITA margin as an effect of our actions to improve margins like exiting low margin business, cost cuts and also price increases. We also continue to focus on lowering our working capital and improving our cash flow, which resulted in a very strong operating cash flow and a cash conversion of 106% compared to 59% the year before. And if we adjust for dividend payments and currency effects, as our net debt, excluding IFRS 16 effects, actually decreased by more than SEK 400 million this year, and our working capital has decreased with SEK 200 million. If we then go to Slide #6, look at Supply Chain Solutions. We show a negative growth, but that is mainly due to normalized freight prices within Air & Sea, but we could also see a weaker demand in the third quarter. Positive in the quarter was that we managed to improve our EBITA margin despite the weaker demand and the overcapacity that we have in Europe and U.S. at the moment. This is a result of our decision to exit nonprofitable road transportation in Germany, but it's also resulted that we have decreased our buy and sell volumes in Asia. We continue to gain new customers and work very hard to fill up our warehouses in Europe and U.S., but it's moving slower than expected as a result of declining demand from our existing customer base. Our actions to improve cash flow and to lower working capital continues to have a very positive effect, and Supply Chain Solutions could show cash conversion of 119% compared to 57% the year before. If we then go to Slide #7 and look at Print & Packaging Solutions. We can see a continued improvement when it comes to both our earnings and adjusted EBITA margin that actually went up to 6.6% compared to 5.4% the year before despite a negative growth. The market for traditional print continues to be soft, but online print continues to go strong. And this, combined with successful price increases but also stabilized material energy prices was the main driver to the improved margins. 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 continue to see a softer demand from existing customers in both Europe and North America. But at the same time, we're seeing a continued stable inflow of new potential customers. But as I mentioned before, the movement is in the pace of this inflow enough to compensate lowering demand from our existing customers. If we then look at electronics, it was a rather challenging quarter, with low demand in both Asia and in Europe. And the signs of recovery that we could see in the end of the second quarter changed back to a more negative trend again in the third quarter. The positive note is that our life cycle management service, focusing on deliveries and installations of high-tech devices, continues to grow despite a very challenging market. If we look at the automotive segment and adjust for the road transportation we're taking away, they are almost in line with last year. And our customers still looks to have a rather solid backlog, but their production is still not running full because they still have some problem with lack of components and materials, but at least not worse than last year. So for the moment, automotive is one of our more stable customer segment. If we look at the Industrial segment, this also continues to be more stable, but we could see for some customers in the third quarter, a bit softer demand. And the main reasons for our lower sales in this area is also because of exited unprofitable road transportation. When it comes to healthcare, it's a bit similar picture like for industrial with a more stable demand. But here, we can also see a softer demand from some clients, which combined with normalized prices for air & sea transportation lowered our sales compared to last year. Other shows a decrease, but online print, as I mentioned before, continues to show a good growth for us. If we then go to Slide #1, we want to update you on important business development projects that we have and are working to implement in 2023. Regarding our rollout of the Bergen concept, we have introduced the concept in 3 of our sites this year, and we are now investigating where the next implementation will be made. And in the end of Q3, we opened our new Medtech site in Germany, which is focusing on logistics services for manufacturers of Medtech equipment. This is a new type of service that we have developed for the healthcare segment based on our long experience of manufacturing logistics for automotive and electronics customers. And as a part of our strategy to develop sustainable solutions, we together with Kjell & Company developed a solution for the reuse of private individuals' IT equipment. The [indiscernible] values very easily the equipment via web solution that is developed by Elanders' subsidiary ReuseIT. And then they hand in it to the closest Kjell & Company store. After that, the equipment is processed by ReuseIT and later on sold via both ReuseIT's and Kjell & Company's web shops. If we then go to Slide #10 and looks how things will be going forward. We can see that Elanders global footprint and diversified customer base helps in a challenging market and decreasing demand of some products can often at least partly be compensated by increasing or stable demand from other product areas. You can also see that even if the market is challenging, there's still lots of opportunities for future growth. And we are, for the moment, working with several important RFQs. Our investment in additional capacity with the important global rollout of the Bergen Logistics concept will be an important ending for the future. And we're also very happy to see that the improvements we have managed when it comes to improved cash flow. And that will be, of course, the continued focus going forward. And we're also, of course, always looking to find cost cuts in our operations to compensate for lower demand. Okay. That was everything from me. And then we open up for questions.

[Operator Instructions] We will take the first question from line of Derek Laliberte from ABG Sundal Collier.

I would like to start by coming back to a question last quarter about price and volume. Wondering what the price component of the organic growth decline of 11% was in this quarter?

The price component was around, of the 11% negative organic growth, that was around 5%, 6%, roughly around half was a price component.

Okay. Great. That's clear. And just on the sales decline in electronics, it did appear to have sort of bottom out. Just wondering what was going on there since it seemed like it did not prove if I remember correctly, towards the end of Q2. So is there something that sort of deteriorated at the end of Q3? Or was there more of a continuous weakening throughout the quarter? And also how much of the decline is due to the discontinuation of the low profitability businesses?

I think when it comes to the third quarter, it was not low in the whole quarter. It was actually going a bit up and down. But in September, it was much more slower than in August. And that was, we could see it both in Asia but also the volumes in Europe as well, lots of volumes was coming in, but not so much volume shipped out. And that is main. Then we talk about things like printers, laptops, computers and things like that. And when it comes to a big part of that is buy and sell, Andreas, I think you asked about that, and I think that's in the report, It's in the table... [Technical Difficulty]...Yes, because we have SEK 526 million less in business we have exited in the quarter. And I think the buy and sell is around, I think that's around SEK 300 million -- roughly SEK 300 million that affects the sales in the electronics segment.

Okay. Then I mean you mentioned quite a bit about sort of the overcapacity in Europe and the U.S. I was wondering if you could expand a bit more on the U.S. here, how the progress with acquiring new customers has gone because you said that you've acquired many new customers but has been lower than your expectation on the existing front. Is it just generally weaker demand? Or has there been a lot more bankruptcies, et cetera, among the smaller customer groups?

I think actually the main thing is weak and in general, a weaker demand from our existing customers, so the inflow continues to be good. Interest in North America was strong in Q4 last year, Q1 and start to be a bit soft in Q2, but it was more going down to the, I would say, Europe/Asia level in Q3. So overall, pretty soft and our customers are, for the moment, very careful to drive volume. So it's more about a very soft demand. And for us, then we are a bit squeezed with our overcapacity we created in North America because we have so enormous growth in 2022. So that puts some pressure on our results. So for the moment, it's more an overall weaker demand in the U.S. as well.

All right. I understand. And on the other segments here, I suppose then that's fair. If you look at the automotive, industrial and healthcare, it seems like you also there, I suppose you saw a weakening demand primarily from September in those segments as well in rough measures?

Yes, no, I think in the other segment, it has been most roughly the same during the quarter. It was more electronics that was hit harder in September. The other one was more roughly soft the whole quarter. So nothing dramatic actually. It's more like they have been the other quarters before. So for the moment, it's electronics that can really change from month to month. That ones are more, yes, more soft overall.

Okay. Got you. And just could you give a number on, when it comes to the closure of operations for the [indiscernible] road transportation and the buy and sell, what's the overall impact on the Group margin on the EBITA level, for example, in the quarter?

I think if we then look at supply chain because I think the margin improvement from SEK 6 million to SEK 6.7 million actually comes out of the less buy and sell and road transportation. All of it.

Okay. That's great. And finally, on the working capital, fantastic cash flow here in the quarter. I just wanted to confirm whether you're still confident on releasing up to the SEK 400 million to SEK 500 million on the full year since we're looking at a pretty big release implied in the fourth quarter.

Yes. We are really hoping that we can see a big release in Q4. Then of course, sometimes it can be a timing thing as well how our customer pays like that. But it should be a pretty strong release in Q4.

Okay. Perfect. Those were all my questions.

I just want to add there. The buy and sell business is roughly around SEK 400 million in Q3. It's a little bit more than SEK 300 million, as Magnus indicated.

[Operator Instructions] we will take the next question from line of Gustav Berneblad from Nordea.

In regards to electronics here, did you say that you saw a worsening sequential worsening in September or...

Yes, we said. But at the same time, August was rather good, and then September was very weak. So sometimes it can also be a bit timing, but September was very soft for us there.

Okay. Perfect.

So that will be hard to predict if it will be the same going forward because the visibility is really low to see in the market.

Yes. Got it. Got it. And then in regards to the overcapacity in North America, I guess that's primarily related to Bergen. But what is the plan for the overcapacity? Will you be able to sort of offset these costs? Or do we have to wait until you fill it up with new customers?

No. We are also, of course, always working with some parallel actions. If we see that the inflow goes too slow, we can also sublease space to offset the cost, and we haven't done that before, but we are preparing for that as well. And we're also working with some changes in the price model for the volumes we have there and some other actions. So for us, it's, of course, to try to eliminate any negative effects out of it. And then the next thing will be to fill out to get positive effects on the results. So we expect the coming months here, we will do different actions to soften the negative impact.

Okay. Perfect. And then if we go to automotive, you have commented several quarters now for the interruptions in terms of material component flow and so on. Are you hearing any improvement here? Or what do you expect to have?

I think it's really hard because lots of our customers is, of course, also public companies. So we cannot see any details. We can see the flow that the shift patterns is changing all the time and that they don't run so many shifts that they normally do. And so we are not really sure. But still, we can hear in the market that there is still some struggling with components and also especially, I think, semiconductor. There's still some cars, you cannot get all functions when you order them and we do, it's that's really hard to say. But I must say for us, we have normalized the new level. And as I said, it's a very stable area for us. And if they will then increase manufacturing volumes, it will be a very positive effect for us. But I must say, it's really hard to say. But we know that our customers have a pretty big backlogs. We feel pretty safe with that business area or customer savings.

Yes. Okay. Perfect. And then on Industrial, you commented on some signs of weakening demand. Is it possible to pinpoint sort of more specifically what is weaker here?

I think it's several product areas that are weaker. Also even some of the heat pump business we are doing was also a bit slow because now they are building much less houses also down in Europe. So and that also affect cooling systems and things like that. So that was also a bit of a mixed picture. I think overall, pretty soft. So in all the areas... actually...

And then maybe the last one, just so I understood you correctly. You had a negative organic growth of 11% and roughly half of the negativity there was driven by the lower freight rates? Or how should I interpret it?

Yes, that's correct.

Thank you. There is no further questions at this time.

Okay. And thanks, everyone, for calling in. Thank you.

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