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. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Magnus Nilsson, CEO of Elanders Group to begin today's conference. Thank you.

Thank you, Laura. Welcome, everyone. And together with me here is also Andreas Wikner, our CFO. I will now go directly to Slide #5 and talk about our fourth quarter. The market continues to be very challenging, and the majority of our customers show lower demand compared to the previous year, which was a very strong quarter for Elanders. And this resulted in a negative organic growth of 11% in the quarter. But the large part of the decrease is because of normalized freight prices within Air & Sea. Despite this challenging market and a negative growth, we've shown EBITA margin of 8.1%, which was in line with the year before. And our continued focus on lowering our working capital and improving our cash flow resulted in a very strong operating cash flow and a cash conversion of 104% in the quarter, and cash conversion for the full year of 110% compared to 65% in 2022. And if we adjust for dividend payment, currency effects and acquisitions, our net debt, excluding IFRS 16 effects, actually decreased by almost SEK 500 million this year, and our working capital has decreased with over SEK 370 million. If we then go to Slide #6, to look at our business area Supply Chain Solutions, which saw a negative organic growth, partly due to the normalized freight prices within Air & Sea, but also [Technical Difficulty]. Our latest acquisition, Kammac contributed with 2 months in the fourth quarter and made a positive contribution to our margin but was unable to compensate always the weaker demand for overcapacity, which resulted in us not being able to match last year's adjusted EBITA margin, and we came in with a slightly lower margin. On the other hand, continues our actions to improve cash flow and to lower our working capital to have a very positive effect. And Supply Chain Solutions could show cash conversion of 148.6% compared to 105.7% the year before. If we then go to Slide #7, look at Print & Packaging Solutions. We show continued improvement when it comes to our adjusted EBITA margin that actually went up to 11.3% compared to 10.1% the year before despite also here a negative growth. The main reason for the improved margin was a strong demand from our online print customers, but also price increases and stabilized energy and material costs. Print & Packaging can also show a strong improvement when it comes to cash conversion, which was 95.2% compared to 78% a year before. 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 strong demand from existing customers in both Europe and North America. But at the same time, we're seeing a stable inflow of new potential customers. But for the moment, it's in the pace of this inflow enough to compensating lowering demand from our existing customers and also our existing overcapacity. When it comes to electronics, was the rather challenging quarter with low demand in both Asia and Europe. The market is showing a very mixed picture, and some of our customers are showing signs of recovery, while others have continued to decline. The positive is that our life cycle management service with deliveries and installation of high-tech devices continues to grow despite a challenging market. If we then look at the Automotive segment, auto almost in line with last year, but continues to show very fluctuating demand. The main reason for those sales is because of exited unprofitable road transportation. The demand from the industrial segment continues to be stable. But for some customers, we can now see some signs of weakened demand. And the main reason for our sales in this area is also because of exited unprofitable road transportation. And when it comes to health care, it's a similar picture like industrial with a more stable demand. But here, we can also see softer demand from some clients. Main reason for the higher sales is the acquisition of Kammac. Auto showed growth mainly driven by growth in Print, but also contribution from Kammac was affecting the area of auto. If we then go to Slide #9, I want to update you on the action of Kammac and Kammac has a yearly sales of around GBP 90 million [Technical Difficulty] EBITA margin and they have developed a very unique concept with a [Technical Difficulty] system warehouses in the Northwestern part of England. And the transport concept makes it possible for them to offer the customers maximum flexibility in storage in the offering both short term and long term, and they can only onboard a new customer in just a couple of days. The [ cluster ] concept makes it also possible to them to maximize utilization of the company's resources because they're able to move both the customers' goods between the warehouses, but also more -- very importantly, they can also move their employees between the different warehouses to maximize the utilization of their workforce. And several of their warehouses offer services like bonded warehouses, the temperature control environment, and they also hold several important licenses that enable them to manage medical devices, pharmaceuticals, human consumables and beverage and they are also licensed to perform both import and export of customer products. If you then go to Slide #10, looks of things will be forward. We think that over time, with the acquisition of Kammac help us to improve the group's pay margin, but they will also strengthen our offering by being an important engine in our efforts to fill up our excess capacity, which is currently putting some pressure on profitability. And with our strong underlying cash flow, we feel confident in financing the acquisition with debt, even if it's in the short term will, of course, put some pressure on our earnings per share versus increased financial cost. Going forward, we will continue to focus on cash flow generation, and we will regularly review our cost levels and also act if necessary. That was everything from me. And now we open up questions.

Thank you, Magnus. [Operator Instructions] We will now take our first question from Gustav at Nordea.

It's Gustav from Nordea. Just to start off, I think just generally within the electronics space, I mean, we hear quite a mixed picture in the space. And I understand it's a quite volatile business for you, but you specifically commented in the report that electronics is weak. So is it possible to expand this a bit and sort of what you see in the market?

We can see electronics, we are exposed to that area, both in Asia and Europe. Asia, we're mainly supporting them with Supply Chain Solutions for manufacturing. And we can see that the production levels are still behind normal, it's clearly lower and volume-wise. So Asia was continued to be soft for us in Q4. When it comes to Europe, it's a more mixed picture because there we are handling the products coming into Europe and then we distribute them. And positive in the quarter was that we could see that the volumes of laptops and also big office printers was recovering. But at the same time, we have some other big electronics customers that do more other types of products and also even including the heat pumps was much lower than expected in Q4. So that's why we say it's a very mixed picture. There were some positive signals in November, December from -- if you look at laptops and printers, service is also pretty stable. But some other electronics customer also was much weaker than expected in Q4.

Yes, that's helpful.

I don't know if that's clarifying, but it's a very mixed picture for the moment. So, yes.

No. I get that, I get that. And then in terms of Fashion & Lifestyle, for the greater part of 2023, I mean, it sounded like the high-end segment sort of held up fairly well. And what are you seeing here? Is it weak across the board? Or is it specific regions or any flavor here could be helpful.

No. I think that both North America and Europe is very similar for the moment. So for some customers, the demand is still stable, but if you look at like Black Friday and the Christmas it's not in the levels like last year because then normally, we have a huge peak, which, of course, has a high contribution for the results. It was not the same picture this year. So I don't think it's so bad. It's around 5% down for a lot of our customers. So -- but I think our biggest problem is that we had a very high growth in 2022, and we're building capacity. It's a mix for us that we sit with too much capacity. And then our customers is down with average of 5%. And we have expected maybe a growth of 10%, 15%. So it's not so dark actually in fashion, but there's no growth and it's slightly negative growth.

Yes. Okay. Perfect. And then maybe if we can just stick to the cost. I mean, in terms of expenses related to sales and admin, I mean, sales is down a bit from last year, but gross profit is up 3%. So are you looking to reduce these expenses to sort of strengthen the margins? Or what do you see here? Or are you waiting for demand to pick up again?

No. We do lots of actions on the cost, been doing that during whole 2023. So we're trying to adjust our cost as much as possible. We will also exit some facilities next year. So we are continually try to push down our costs and to compensate for the soft market.

Great. And then I mean in terms of Bergen in North America, you comment on sort of weaker demand from customers, but you comment still seeing inflow of customers. Are you seeing a net inflow, would you say or...?

No. For the moment, the inflow is too weak to compensate the decrease from the other customers. But it starts to look a bit more stable. But I think the biggest -- it's always -- in Q4, people always spend in the end. So I think it will be shown more now when we enter new year or like Q1, Q2, how it looks like. But I must say Bergen was still doing a bit better than we expected in Q4, not in the same level as the year before. But I must say it's really hard. It's a very, very mixed picture at the moment. So I think it depends a lot on what happens with the interest rates and of course, we need higher consumption of course.

Yes. Okay. Great. And then just maybe the last one here. In terms of net financials, just to clarify, are there any one-off items in there or I mean, is it fair to assume that with a full quarter with the Kammac or the new leverage with Kammac involved, would we see net financials north of SEK 94 million in the short term, would you say?

On the quarterly basis, you say Gustav?

Yes, on a quarterly basis. Because you only had 2 months with the new leverage structure, right?

We had some positive effects from currency in the fourth quarter in -- which are reported in finance, not from operations, but from the long-term liabilities for long-term receivables. But there are some one-off -- positive one-off effects because the krona strengthened against dollar and euro by the end of the year. And then we had the other effect in the beginning of 2024. So I would say it could be a few million higher, I would say, on a quarterly basis with Kammac includes the loans to Kammac because you don't have a full period also for Kammac here for the acquisition [indiscernible] but has great business.

That's very helpful. Perfect. That's all for me.

We'll now move on to our next question from Derek at ABG Sundal Collier.

First, with regards to Kammac, could you give some nuance specifically on that, how it performed in Q4 or rather the 2 months that was included in terms of growth or margins? Or if you have any other comments around that.

Well, the thing is that they were delivering roughly the margins we were expecting, and we only got [ November, December ]. We didn't see any growth in sales. Also in U.K., it's a bit soft, but that was we were expecting in Q4. But margin-wise, it looked good. And yes, nothing, not more to say actually. But it's a good acquisition, and we are very happy that we could -- that we can manage to do this acquisition with just debt without any -- we don't need an external cash, and we think it will be a very important contribution for us going forward.

All right. That's very helpful. And yes, it looks very exciting. And also if I could continue just on Kammac, if you could give some comment on the distribution amongst the segments there. I know you mentioned in the presentation here, contributions in the health care and other segments, but I was also expecting some in Industrial and Fashion, I think. So any comments you have on that would be helpful.

Yes. I think the difference here with Kammac from other Supply Chain companies that is more niched and bag into mainly fashion and LGI do all of our areas and Mentor Media is more in electronics and health care. So Kammac works in a total another way. They work a lot with both retail, they handle dry food, they handle medical substances, some parts in automotive as well. So that's why they are giving us a big push in auto. So I think how much the effect is, I think in auto, they are what we call auto is more than [ 45% ] [indiscernible] Andreas?

Yes.

But health care is around 20% that are contributing it. And then you have industrial, it's around 20% as well. We can say the biggest area is health care around 25%, industrial 20% and auto, we have around 40%.

Great. No, that's very helpful.

Somehow it makes them more robust somehow because they are very -- they are licensed to handle so much different things from food to pharmaceuticals and medical equipment and they do import, export in all these bonded warehouses they have, it's a big strength for them because that's important in the U.K.

That looks very exciting, the acquisition, I think. And on -- could you comment -- I know you mentioned some comments about this, but could you share some color on the different regions like the Europe and the U.S., for example, how that has sort of changed the market situation in Q4 versus the previous quarter, Q3, what you're seeing there?

I think for the moment, it's very similar. But if you look at 2023, in Q1, we had still a strong Q1, and that was, of course, the U.S. because Europe was slowing down already in Q4 2022. But after that, also U.S. is going down. So it's very similar, similar picture. It's -- I think when we talk with our customers, both in Europe and in North America is that they expect a slow start of the year and -- but they are very positive when it comes to the second half of the year because everyone is waiting for the interest rates to go down, stimulate economy. And the picture is a bit similar in Asia as well, because that is more manufacturing for Europe and U.S. So of course, if the demand goes down in Europe and in North America, they slow down. So I think overall, it's the same picture. It's not dramatic down, but there's no growth. And I think electronics has been the toughest area for us going down, absolutely much more than all the other areas. So -- but there, we are hoping to see a recovery step-by-step in 2024. It feels like there will be a recovery. So that would be very important for us. And automotive is very hard to analyze for the moment because they have been running 60%, 70% production speed since 2022. So for us, we think the picture there would be roughly the same. But there, we have done lots of improvements in our earnings with new contracts and things like that. So now it's a bit soft everywhere.

All right. That's fair. Now that's very helpful to understand the situation better. And I was going to ask you also about the overcapacity, maybe primarily in the U.S. I know you mentioned that the new inflow of customers started to compensate for the outflow currently. But with regards to filling this overcapacity, is that sort of progressing above or below or according to the plan that you have and what you were expecting?

No. I think it was slower. We were expecting it to go a bit quicker, especially in Q4, but it was still flat. But we think that this year, we will step by step be able to fill it up. So it's taking a bit longer time than we expected because the churn of existing customers has been higher than expected. And we work with lots of small and medium-sized customers and lots of them has actually went out of business because they run out of cash. So -- and that was a higher percent than we expected. But we have now a lot of cooperation between our European companies and also with Kammac, we have to find volumes also from European customers. So it's a high focus for us now, both for Bergen, but also for ITG and LGI to fill up space. But we expect we will do it step by step this year, and that will have a big impact for us when we manage that.

Got it. And I have a couple of more questions. I'm not sure exactly how relevant this is for you, but there seems to be a pending strike amongst Finnish paper workers. I mean they have any reflections on how this potentially could affect the Print & Packaging Solutions because it seems, historically, at some point, this has had somewhat of an impact on margins.

For the moment, we don't see any impact of that. And for the moment, the special traditional printers also are going down. So there's no problem to get paper material and also the paper prices has actually even start to go down a bit because they increased going up a lot in 2022. So, now, we don't see any impact from that.

Okay. And on another external, I suppose, subject and fact there, reading about this shipping disruptions and the Red Sea affecting Asia to Europe because of the situation in that region. I'm wondering if you have any -- what you're seeing with regards to this and how this potentially could impact you here in the beginning of the year?

We still -- we don't have any of our big customers reporting any problem with the outflows of components and goods. So -- but of course, it depends how long it will be and -- but then -- but -- so there could be a small downside and that they don't fill up the warehouses and things like that. But on the other hand, we have our Air & Sea division and that could be an upside because if that slows down, then the prices will go up for both air and sea and there could be an upside for us. So for the moment, we don't see any negative impact from that.

Great. That's very, very useful. Okay. Those were all my questions.

We'll now take our next question from Thomas Nilsson at Analysguiden.

Despite the challenges in the market, the Print & Packaging Solutions segment showed improved profitability. Could you perhaps provide some insight into the drivers behind this improvement? And also, how do you plan to sustain and grow this segment, given the increasing number of bankruptcies in the industry and the shift towards online print products.

Thank you. No. [Technical Difficulty] margins comes out of what we call online print, but also digital print in general. So we have been -- we are successful in that area where we do much more shorter runs both for companies and then just one item for consumers. So that's a very prioritized area for us, and we have a really good growth. And there you can make much better margin -- so -- but if we then look at the traditional print, we can see that the decrease is continuing, and it's a challenge for us. But we are used to that since many years. So we will continue to consolidate our more traditional production. And then we are planning to grow in what we call online print, but also digital print for companies and things like that. So -- and for us, it's sometimes good when it's tougher times because then our competitors that they often are just local competitors, go bankrupt and sort of go out of market. So I think we have a really good position in print, and we think we will be able to continue to strengthen our margins there. And I think we have a very unique position. We are one of the few still global players around, but it's also that we are global when it comes to digital and online print. And -- so we mainly compete with small local ones and they have problem to handle when the volumes are growing too much and the complexity is high. So we are very positive to the print and packaging area despite it's a very tough market. So we have our strategy very clear to consolidate traditional capacity volume and then to step by step to grow in online print area by aiming to get more customers and to be the absolute #1 supplier in that area.

[Operator Instructions] We'll now take our next question from Markus Almerud at Carnegie.

All right. This is Markus Almerud with Carnegie.. Can you hear me?

Yes, Markus.

Yes. So my first question is on electronic. You were talking a little bit about good signs in December for laptops and printers. Could you elaborate a little bit on those signs? And that -- and then also, can you talk a little bit about sequentially what you see in electronics, if it's actually gotten -- seen a big change sequentially from Q3 to Q4 or has it been fairly stable?

Sorry, Markus, Your line is -- it's really hard for us to hear. Could you have followed Andreas? It was really hard. Can you try again?

Yes. Can you hear better now?

Now, it's better. Yes.

Yes. Okay. So my first question is on electronics. So can you please elaborate a little bit. You were talking about good signs in December on laptops and printers. If you could elaborate a little bit on that. And then also, in terms of sequential change from Q3 to Q4, was it fairly stable, you would say, in electronics? Or has it gotten worse?

No, absolutely not getting worse in Q4. It's been a lot of mediocre for us in, I think, 6 quarters now, started over the first half of -- second half of 2022. So absolutely not worse, but we were hoping for a recovery in Q4 and Q3, but it was not coming, and now we think it will be a bit delayed. So -- but interesting was that printers and laptops have been up and down. But both in November and December, we could see a stable demand, much better demand. But then on the other hand, we have lots of other electronic customers that make everything from TVs to cameras or whatever. And they were much lower than in Q4 than we expected. So they were taking -- so -- but on the same level, roughly. No, nothing dramatic. It's just a bit -- continues to be slow in general.

Okay. And then to continue fashion, and we've already talked about the intake of new or inflow of new customers in North America, in particular, we've been talking about in the past couple of quarters since you had some -- you lost some customers in the second quarter, and that's been slower than you had expected. Can you tell us a little bit about Europe? Because I think initially, you were saying that or you were thinking that you would see new flow customers in Q4 in North America and then it will come in the first half in Europe. So if you could talk a little bit about the picture in Europe?

Yes. So the picture in Europe, I think, overall, our customers down around 5%, existing customers. And then we also have the overcapacity problem. But the positive thing for us in Europe is that we have 2 big customers that we acquired in 2023 that will now ramp up in Q1 and Q2, 2 big -- really big customers. So that will help us in Europe. And can we then also fill up a bit of the excess space in North Germany, I think we start really good position. So it's -- I must say, in Europe, it's still stable. It's more that we need inflow. But with these 2 customers, hopefully, they ramp up in the speed that they have set. And so then it starts to look better. It's more that we missed growth. We built muscles both in Europe and in the U.S. for growth, and that was [ sad ] for us. That is our main problem because if you look at profitability per customer and sites that are fully loaded, it still looks very good for us. It's more than just the problem.

And in terms of Kammac, I mean, it's based in the U.K. What's their international business and I mean buying and selling internationally? And do you expect that to grow? Or is it more domestically?

No. I think the interesting for us with Kammac even it's a very strong in local in U.K., the majority of the customers are big international customers. So we have already now a lot of cooperation between Kammac, LGI, Mentor and Bergen of course, then we will want to offer their customers also in a global way. And also, we have had during the years, lots of our big [indiscernible] for U.K. in supply chain, but we have not been able to handle them. So now with Kammac, we can go with our customers we have in Germany, for example, and offer them a stronger footprint in the U.K. So -- and U.K. has been a weak spot for us all the time. And Germany, we are really strong. We are strong in Netherlands. And for us to grow in the U.K., it's really interesting from both a local but also global perspective.

And then finally, I guess, on the net debt-to-EBITDA level, if you could just give us some hint about what net debt-to-EBITDA, we would be looking for pharma including Kammac? Because I assume that I mean the whole net debt effect is in there, but not EBITDA.

No. I think we measure to the banks, it's a pro forma then so, pro forma excluding one-offs and excluding one-offs. So that looks really good in Q4. What was Andreas? 2.84%, better than expected, but we also have some help of Swedish with the current set up with the krona was a bit stronger. So because we are -- but there is a strategic decision for us. With our strong cash flow, we told the market that we should lower the working capital with SEK 300 million to SEK 400 million, 2023, and we lowered the SEK 370 million. We generated strong cash flow. So even if we would go up in some quarter to 3.3%, 3.5%, -- for us, that was a strategic decision, and we can handle that, and then we will be able to push it down. And then when the interest rate is [Technical Difficulty] we have an upside of that one. On pro forma basis, yes.

Yes. And the 2.8% is excluding IFRS 16 impacts, I assume.

That's correct.

I don't see any questions in queue. [Operator Instructions] There are no further questions in queue, I will now hand it back to Magnus for closing remarks. Thank you.

Okay. Thank you, everyone, for listening to our conference and have a good day. Thanks. Bye-bye.

Thank you. Label and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.