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

Good day, and welcome to today's Elanders AB Conference Call. [Operator Instructions] At this time, I'd like to hand the call over to Mr. Magnus Nilsson, CEO. Please go ahead, sir.

Welcome, everyone, to Elanders conference call, and this is Magnus Nilsson speaking. And together with me, I also have our acting CFO, Asa Vilsson as well. I will now start with our presentation, and then we go directly to Slide #5 and talk about our first quarter. As expected, continuing the market to be very challenging in the first quarter, and several of our customers show lower demand compared to the previous year which resulted in a negative organic growth of 9% in the quarter. Of this 9% of negative organic growth, the normalized shipping prices within Air & Sea was roughly 2%. It was mainly customers exposed to end consumers that showed a downturn compared to last year. But our continued focus on lowering our working capital and improving our cash flow resulted in a very strong operating cash flow, and we had a cash conversion of 137% in the quarter, and the cash conversion in the last 12 months of 114%. And if we adjust for dividends payment, currency effects and acquisitions, our net debt excluding IFRS 16 effects actually decreased by SEK 200 million in the first quarter, and we managed to lower our working capital with SEK 241 million. As expected, how our two recent acquisitions increased our debt and our financial costs are negatively affected by both the higher debt, but also the high interest rates, which, of course, put some pressure on our net profit. But despite this soft result in the first quarter, could we show a rolling 12 months net debt EBITDA excluding IFRS 16 and also including pro forma results from our two acquisitions of 3.2. If we then go to Slide #6, and we look at the Supply Chain Solutions. We could show, we had a negative organic growth of 9%. And this was mainly due to weaker demand from our customers, especially exposed to consumable goods and durable goods like automotive and fashion but also our newly acquired company, Kammac, was affected, that is downtrend. This, combined with an overall very soft demand resulted in a lower margin compared to previous year. But on the other hand, continuous actions to improve cash flow and to lower working capital had a very positive effect and Supply Chain Solutions could show a cash conversion of 133% compared to 79% the year before. If we then go to Slide #7 to look at Print & Packaging Solutions. Could we see a similar effect when it comes to negative organic growth, which was 7% for Print. They're also affected by a lot of soft market. But despite this, could the business there show a significant improved EBITA margin of 7.5% compared to 4.1% previous year. And this is a result of -- that we continue to grow in the online print area, but also an effect of the price increases we did last year, and we also have good effects of stabilized energy and material prices. 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 did expect lower demand from our fashion customers, but it was clearly lower than expected, and we could actually see a drop of around 20% in both Europe and in North America. But we think that this was a -- that was an extra negative effect of -- that lots of our customers really try to push out their products in Q4, and there was a lots of discount. And we expect in the coming quarters that we will see some improvement, some existing customers, and we're also ramping up two new major customers in Germany that we have talked about before. We'll be ramping up in the second quarter. So I think it will be step-by-step improve but still a very soft demand in the fashion part. That is Elanders biggest customer segment. When it comes to electronics, the other picture is actually more positive and we could see an organic growth of around 4% in the first quarter. And that was despite that some -- that the demand from some product areas like office print or heat pumps and TVs is still very soft. But then on the other hand, we could see a growth that already started in the fourth quarter when it comes to laptops and servers, but also from several other product areas in electronics area. And our life cycle management services also continues to show growth. And so if we summarize this, we expect that this customer segment will continue to have a positive trend going forward. If we look at the Automotive segment, we could see a very slow start in January and February, but a good recovery in March, and we expect that it will continue on more stable levels in the coming quarters. If we look at the demand from the Industrial segment, it continues to grow out of solid, except in one area, and that is where we deliver heat pump systems for our customers, which was very weak demand also in the first quarter. If we then look at Health Care, could we see a similar positive trend like in electronics and we had an organic growth of 3%. And of course, we also have an increased sales in this customer segment because of the newly acquired companies, Kammac and Bishopsgate, that also increased our sales compared to previous year. And if we then look at other -- we continue to grow in other because there we have the online print, but we also have contribution in this segment from Kammac's customer as segment in retail and food -- in both retail but also food and beverage. If we then go to Slide #9, and I want to update you on our very important acquisition of the U.K.-based company Bishopsgate that was done in February. Bishopsgate has a yearly sales of around GBP 27 million and with double-digit EBITA margin, and they are the absolute market leader in U.K. and Ireland when it comes to what we call technical logistics, which is part of what we call an Elanders life cycle management. Their customers are mainly active in electronics, health care, retail and the bank sector. For these customers, they handle storage, distribution, installation, takebacks, refurbishments and also do service of valuable equipment like could be medical devices, big digital printing machines, data centers, but also charging stations and also things for retail like parcel lockers, vending machines and also some refrigerators. And customers who demand this type of service usually have the same needs in several different countries and by complementing Elanders existing capabilities with Bishopsgate, we can now offer complete solutions to both EU and U.K. And Bishopsgate for you, who remember, it's very similar to the Dutch company Eijgenhuijsen, that we acquired in 2021. And then if I go to Slide #10, and look how it looks forward, and even if the first quarter was very challenging, we expect that the demand will gradually improve during the year as a result of recovery from our existing customers but also a newly acquired customers. And we are also, at the moment, having a very strong pipeline when it comes to ongoing inquiries. So as we see start to be a recovery in Q2, but we expect that it will be much better in the second half of the year. But of course, you need to be prepared. So in parallel with a high level of activity on the sales side, we are continuously reviewing our cost and working on various solutions such as consolidation of warehouse facilities. We look at short-term rentals and also subletting to reduce our overcapacity. And in the end of 2023, we were consolidating 2 warehouses in Netherlands. In Q1, now we have done some consolidation in U.K. So we are working actively also to try to lower the overcapacity if the market should continue to be very soft. We also continue to focus on reducing our net debt by optimizing our working capital and improving cash flow. And as a result, our working capital decreased by SEK 370 million in 2023. And as mentioned before, we managed to reduce it further by SEK 241 million in the first quarter of 2024. Okay. Now I open up for questions.

[Operator Instructions] The first question comes from Derek Laliberte from ABG Sundal Collier.

So I'd like to start by asking -- Magnus. So I'd like to ask here on -- I mean, it seems clear even from before that Q1 was going to be weaker here, but I'm not saying I was quite surprised by the lower margin here in Supply Chain Solutions. So I was wondering if you could maybe explain a little more what actually drove this? Like how much of it was perhaps a worsening of the overcapacity. Maybe there's a mix between the segments there affecting, and how much was the Kammac still being having a weaker quarter?

I think compared to last year, the absolute biggest negative effect on Supply Chain Solutions was actually the Fashion segment. The Fashion segment is one of our high-margin areas. And even U.S. that has been more resistant before was also suffering with a downturn of 20%. And even if they deliver rather good numbers, of course, it also ends up that they have overcapacity. And but it was even more painful in Europe because there also was 20%, but they don't have the same flexibility. So Fashion, absolutely, but the good news on other side is just in Europe -- it's in Europe as well. We will now ramp up these two bigger clients that we have talked about before. We start implementing in [ QS ] and ramp up in -- and in Q2. And then, of course, we have expected a stronger contribution from Kammac than what we got. And I think because they're also very exposed to, yes end consumer. And I must say U.K. market was really soft in Q1, and we could see it both in Kammac, but also in our existing Elanders U.K. facilities, and even Bishopsgate that we acquired in February that normally is more -- not so sensitive with the life cycle management service, also reported that it was really quiet. So -- but if you look compared to last year, it was -- Fashion was the most painful and also Automotive that was going very strong for us last year, January was totally dead and lots of our customers have closed down and February a slow start, very good March, but you couldn't compensate it. And so it was a mix. And also Industrial, heat pumps was a big thing for us, first half last year, and that affects both industrial and also even electronics, where we also have heat pumps. It was a pretty big mix.

Very helpful. I appreciate the clarity there. And specifically on the overcapacity, I mean, have you been able to sort of start filling it a bit up apart from the bigger customers here? And then also, are you sort of experiencing maybe some customers leaving or going bankrupt or similar in the quarter as well?

I think we have -- now in the Netherlands, we closed one facility in the end of the year and consolidated with a good result in Q1. And Germany, I've talked about before, they start to absolutely look better because we are now working a bit with the Kammac concept there, where we combined short-time volumes with long-term volumes. There we are seeing an improvement. U.S. was tough for us, really tough because there, we also have overcapacity. And when they then -- their volumes then go down with 20%, that was, that was painful. But there, we also have some ideas. And it's always a balance, how quick should you cut down capacity or not? And we are now looking at different ways to maybe consolidate some warehouses in U.S. as well. Of course, it feels like the market maybe -- will be softer longer than we think in fashion, and so that will be one of our actions. So we're -- it's always need to get a balance. So I think we have come a long way, but Q1 was very tough. It was -- but if you look at for us in the result, January or February was very bad. And I must say that March was much better. So that's why we can say that we think that it will be -- it will start to recover in Q2 and then it will be better going forward. But I must say it was a perfect storm in Q1. So too much.

Got it. Okay. No. Okay. So I got it, January and February extremely weak and then improvement in March continuing into to April. And then for, I suppose, for the second half, what needs to happen. I mean, the visibility you -- I mean you get the indications I don't suppose from the clients you have and the contracts ramping up that you should have fairly good visibility of the second half being at least much better than the first half and not only sort of just being dependent on, let's say, some miracle happening in the market, so to speak.

Yes. No, absolutely agree. And I think we indicated already in the fourth quarter that we expected the first one should be really tough, and the second is small recovery. But the good thing I must say is in several markets, I must say activity is extremely high. So there is -- we have so many RFQs and lots of really big ones where we look at now. So there'll start to be a big movement in the market, which is promising for us. And I must say also that Electronics is now after -- Electronics went down already in 2022. So after more than 1 year, we can -- now we can see recovery, and that's a very important segment for us. So -- and we also think Automotive will be more stable. So that we are -- it feels, it will come back. We have lots of things here, lots of indications.

Sounds promising. And finally, if you just remind us on some of the phaseout of this sort of less profitable businesses and also the normalization related to Air & Sea that should all -- by April now basically, we should have better year-on-year comparisons. Is that correct?

Yes, that's absolutely correct. And I also want -- another comment is also that if you look at the problems with the inflation and things last year. We were not so affected in Q1 because then we still were strong in the U.S. I think this was a tough quarter to compare with last year because then the trend hasn't started in the same way. So yes.

We'll now take our next question from Gustav Berneblad from Nordea.

It's Gustav here from Nordea. Just in terms of -- to build on the Fashion here, I mean you commented on Europe being down some 20% and so forth. But is it possible to say anything? Have you lost the midsized or a larger customer? Or is it just a volume drop by -- or your current customers, would you say?

No, it was -- we haven't lost any customer. It was really a drop. And one interesting thing was the especially big drop on a bit more expensive products and also in e-commerce. And the customer that is more in the -- more similar segment like H&M and those, they were doing pretty well, but the rest was -- so it was more over the whole line, and it was the same trend in North America and in Europe. It was 20% down from existing customers. So it was -- yes.

Yes. Okay. Perfect. That's very clear. And then maybe to jump on the U.S. here. I mean, you comment just shortly there on potentially having some ideas regarding the overcapacity in the U.S. What is that exactly?

No. We have -- even if Bergen is extremely robust and can earn money even if they only run a warehouse that is filled to 50%. We had -- when we acquired them, they have adjusted up a new site in Pennsylvania, and then they also set up a new site in Atlanta. And both of them are not -- they're almost half filled or 50% or 30%, and there's still some remaining. So it could mean that we think about consolidating partly these two warehouses, or we rent out half of the warehouses, things like that, to temporary get down in cost to go down in cost. That is things we look at. Because now suddenly on the market, there's lots of logistics buildings available. So if volume comes, we can quickly get a new facility and then ramp up instead. So that's why.

Okay. That's great. And then maybe -- I mean, you comment also a lot in the report. I mean, Electronics growing organically in the quarter. Is it possible to give any more on this? I mean you comment on sort of laptops and printers, but are you seeing any other products specifically or any geographies, if you can give any more nuance to this?

Yes, that I can give is that this was still soft in Asia, but it's Europe that is really improving, and especially, as I said, laptops and servers, but we have lots of other customers. We have the same Swedish customer do security cameras. We have a company -- customers to do roll printers or rollout or whatever, lots of them were also recovering because all of them have also had a tough year. So now it was -- so also a lot of these medium-sized customers was improving. But heat pumps and big office printers and also TVs because we haven't handled TVs, and that was still very, very soft.

Yes, okay. That's very clear. And then when you talk about growing organically, we are talking about low single digits? Or am I wrong there?

What I mean when I say organic?

When you talk about the positive organic growth in Electronics in the quarter, we are seeing probably low single digits from last year or...

No. But I think when I say organic is that I just for -- because in currency as well, and I take away because now we acquire companies, so they are putting in volumes in electronics. And then, of course, I adjust for the buy and sell. The buy and sell had a huge impact on electronics in sales. So when I take away the buy and sale, you adjust for acquisitions then we can compare then we can see that we have a growth of 4% compared to last year.

Yes. Okay. That's very clear. And then just a quick one on the print. I mean, very impressive margins compared to your history for -- especially at Q1, then would you say -- I mean, you gave a lot of good reasons for why stable raw materials and input prices and so forth. But would you say that this is a margin that is sustainable given sort of all else equal or?

Well, I think you need to look at the normal trend from the other year. So really good Q1, and Q1 -- but normally, Q2, Q3, maybe is a bit slow and then Q4 is always extremely strong. So -- but overall, a good start, and we have done lots of actions on the cost side. So now I'm very optimistic about print. I think if you look at the margin for the whole year, I think we will see a strong improvement this year compared to last year.

[Operator Instructions] And it looks like there are currently no further questions at this time. With this, I would like to hand the call back over to Magnus Nilsson for any additional or closing remarks. Over to you, sir.

Thank you. Thank you, Sergey. Thank you, everyone, for listening to our conference call, and I hope everyone has a great weekend. Thank you very much. Bye-bye.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.