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

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

Thank you. Welcome, everyone, to Elanders' conference call. So here with me, here is also Asa Vilsson, our CFO. And I will now go directly to our presentation, and I will start with Slide #5 and talk about our second quarter. The demand continued to be weak from several of our customer segments, but we could overall see that demand was improving compared to the first quarter, which resulted in an unchanged organic growth. We saw a positive improvement compared to the first quarter when we had a negative growth of 9%. Also, our adjusted EBITA margin improved compared to the first quarter, and it came in at the same level as previous year. And during the second quarter, Elanders secured a very important contract with one of our biggest electronic customers. And this contract will give us opportunity to open our first contract logistics site in Thailand, which in line with our strategic growth in Southeast Asia and it will also be an important tool for us to capture volumes that are now moving out from China. If we then go to Slide #6 and look at our cash flow and cash conversion development. You can see that we continue to have a very strong cash conversion with 120% in the first half year. And we have also managed to decrease our working capital this year with around SEK 264 million. If we then go to Slide #7, look at Supply Chain Solutions. You can see that we improved compared to the first quarter and our organic growth was unchanged compared to a negative growth of 9% in the first quarter. We could also see an improvement in our EBITA margin that came out at 6.6% compared to 5.4% the first quarter and 6.2% previous year. And we also continue to have a very strong cash conversion in the Supply Chain Solutions area. And in order to adjust the capacity to the current market situation, we also during the quarter decided to consolidate Bergen Logistics Pennsylvania volumes to their site in Atlanta. Which -- if we then go to Slide #8 to look at Print & Packaging Solutions, we could also here see a recovery in demand compared to the first quarter and organic growth was also unchanged compared to last year, which was a positive improvement compared to the negative growth of 7% in the first quarter. Our adjusted EBITA margin was slightly lower than last year, but our cash conversion improved a lot for Print & Packaging Solutions. If we then go to Slide #9 and look at the development of our different customer segments in the quarter and start to look at fashion. In fashion, could we see some recovery compared to our fourth quarter, but organic growth was still negative with around 12%. The recovery was mainly in Europe, with the help of our 2 new big customers, but also a recovery from some of our existing customers. But the demand in North America remained also very weak in the second quarter. When it comes to Electronics, the picture is more positive and we could see an organic growth of around 6% in the second quarter, despite that the demand from some product areas like office print or electronics and TV is still very soft. The growth comes mainly from laptops and servers but also from several other products and our life cycle management services. We expect that the positive trend will continue going forward the second half year for Electronics. If you look at automotive, we could see a big fluctuations in the demand during the quarter and our customers goes down more than usual in connection with the pent up cost in May. And overall, this resulted in a negative organic growth of around 7%. Industrial to show an overall stable demand in the second quarter, even if it fluctuates quite a bit between different product areas. Our organic growth was unchanged compared to last year. When it comes to health care, we continue to see a good recovery from our existing customers, but also a very positive development from new customers, and we had an organic growth of around 16% in the second quarter. Auto show growth driven by online print and in other, we saw contribution from Kammac customers in the food and beverage sector. If we then go to Slide #10 and look at how things will be going forward. We still expect demand to gradually improve during the second half of the year. But the market remains very uncertain and we continue to have a very high focus on new sales to support our growth. And the new contract we secured in Thailand is an important result of this work. We also continue to optimize our cost structure. And in the second quarter, we exited one big warehouse in the U.K. And as I mentioned before, we decided to consolidate warehouse in Pennsylvania volumes to Atlanta. And we also have done a reduction of personnel in several locations. In parallel with this, we are focusing on reducing our net debt by optimizing our working capital and investment and also improve our cash flow. As a result, our working capital decreased by SEK 370 million in 2023. And as I mentioned before, filled of SEK 264 million in the first half year. That was everything from me. And now I open up for questions.

[Operator Instructions] Our first questions come from Derek from ABG Sundal Collier.

Okay. I wanted to ask, firstly, on Kammac, how far would you say that the company is from operating at sort of normalized levels, like any indications when you think you can recover to normalized margins for that subsidiary?

No. I think Kammac had a very weak first quarter. It was also pretty soft in the second quarter, but we have some new deals coming in and -- but it takes some time. And I must say the U.K. market is still very soft for us. We could see the same in Bishopsgate. But Bishopsgate is much more niche, and they manage very strong numbers because of new sales. So I think, Kammac, it's hard to say. We think there will be a gradual improvement also now starting in Q3, and then that it will be -- take more speed in Q4. But it's still pretty soft market and most of their customers are exposed to consumables and so the demand is much lower than last year, actually. But there are some good signs, but it will take some time. So starting recovery in Q3 and more up to better margins in Q4. That is our explanation.

Okay. Great. I appreciate the clarity. And on that point, are you seeing any -- what are sort of your expectations for the U.K. market in general here going into H2? I understand you're saying it's soft, but are you seeing any indications that it's sort of bottomed out or similar?

Yes, you can see some indications in the end of the second quarter that some of our customers indicate a more positive signal. But I think U.K. is -- for us, it's a bit like U.S. It's much more soft in both U.S. and U.K. than rest of Europe, for example. So I think lots of people in U.K. and U.S. are talking about that the interest rates need to go down a bit to give more confidence to people. So it's hard to predict. But I think if there will be some changes in the interest rates and then also when you enter all the second half of the year, you're getting closer to Black Friday and things like that. So it's -- no, but it's hard to say. I must say both the U.S. and U.K. For us, for the moment, they are very slow both markets.

Okay. Got it. And I was going to ask on fashion there in the U.S., I suppose it's sort of the same conclusion. I think you mentioned that it's weak, but maybe some indications that, that does trust as well, I suppose.

Well, I must say fashion in U.S. For the moment, we don't see any indications for improvement. It's very slow, still around 20% lower than last year. But in the U.S., things can change quickly. So it's hard to predict. But for the moment, very slow. But in Europe, on the other hand, we could see a good improvement in fashion in the second quarter, both from our existing customers and new customers. So there, it feels like -- we see -- we actually had a growth in Europe. So that could balance North America.

Very helpful. And I was wondering if you could provide any comments on the pricing situation. Are you seeing price pressure in the market? And in that case, how are you responding to this?

No, the price pressure continues to be pretty high because there is lots of overcapacity in the logistics sector for the moment. But we are always very reluctant to go down too much in price. So that is also one of the reasons for companies like Kammac as well that we still try to protect the pricing and be a bit careful. So of course, we can take some short-term contracts with lower price, but there's still a pretty strong price pressure. But that's on all our markets. So -- but that normally change very quickly when the demand is recovering because then suddenly, there's no overcapacity. For us, we see that's a temporary problem. But of course, we look at our cost structure and this was also one of the reasons that we decided to close down in Pennsylvania, transfer the volumes to Atlanta because that will give us yearly savings of around $3.5 million. We consolidate also personnel and we are more slim. So in some sense, that is also the tool you do to meet more the price pressure on the market. But still, we try to keep our margin level. You need to be -- have a balance of patience and being aggressive in the market like this.

Yes. Got it. And on a general basis here, can you say something about the development in demand, the trends during the quarter? Is it fair to say that at sort of started out a bit sluggish after Q1 and then gradually improved? Or how should we view that?

Yes, I think -- the thing that's very important for us because this is one of our absolute biggest customer segment is Electronics, and we always have Electronics, health care to get on. And there we could see already and then Q4, they were recovering and it feels like -- and they were the first going into the lower demand cycle. So they are continued to improve, and we see high activity. Our customers are more confident. So there will be an important area for us in the second half of the year. And also industrial is still also very solid for us, that's also good. And also that fashion in Europe now shows signals to come back. So overall, it's much better now in Q2 than Q1, but it's still a bit slower than we and our customers expected when we enter Q1, for example. So it's -- there is some good signals from some of our areas. Automotive is much harder to predict because it's very -- it fluctuates a lot between different car models. Electric cars are very soft and hybrids are going better and normal ones goes well. So it's still a bit -- still low visibility.

Okay. Great. Sounds promising though. And then finally on -- back to heat pump, I know it's not major for you, but on the heat pump side, what are you experiencing there?

We could see for one of our customers, we could see some recovery in Q2. And for one of our customers, it was still slow. But they work with different systems. But the one that is more in the German market could -- we could see some weaknesses and improvements from our customer in the second quarter. But our other customer that is more delivering for the whole Europe, still very slow in Q2.

[Operator Instructions] We will take our next question from Markus Almerud from Carnegie.

Yes. Markus Almerud here. I would like to just continue maybe on the demand question. So you're talking about demand being better? And just from what I understand, you're also talking about sequential improvement from Q1. If you look at the poor segments, Automotive and Fashion, what do they look like sequentially? I understand there's a big drop year-on-year, but if you look at sequential trends for those 2 segments in particular.

I think for that 2 segments, if you look sequentially, it's, of course, if you look at 2023, Q1 was pretty stable for them still and then we had a big drop in Q2. And now we are roughly in the same line. So sequentially, you can say that the negative trend stopped in Q2, but it's not a really big growth because it's more like the same level as 2023 in Q2.

Okay. Okay. Just kind of floating around at the bottom and not moving downwards and not moving upwards? Is that the right way to see it?

Yes, yes. It's pretty stable. So I think the last 4 quarters, everything has been falling, but now the falling has stopped for that 2 areas. And for Electronics, there's even then a sequential growth. So -- but they were -- Electronics was entering this lower demand much earlier than fashion did, for example. Electronics is in sequential growth then, yes.

And if I look at fashion, the new -- I understand the whole segment is soft, but what does -- what kind of discussions you're having about new customers? I know that when we went into this softness in the fashion, you have a big pipeline of fashion or new fashion customers coming along. What are those discussions? Where are you on those discussions?

If we look at -- if we start with Europe, where we work with more bigger customers, you know we got 2 big new customers and we are still looking for some very interesting projects there. So I think there the pipeline looks very stable. And then of course, there's price pressure in the market. But yes, we have also acquired a couple of new customers in the second quarter and that is not so big like other ones, but there's still a good momentum. So there the trend looks much better for Europe. For U.S., we still have a high pipeline. But there, we work with lots of small, medium-sized fashion customer. And we have a pretty high shown. I think the -- there is still a trend, lots of them go bankrupt. So in average, 4 customers per month is going bankrupt. But then we have also an inflow of customers, but the demand is lower. So the inflow is still good, but the demand is too low for the existing one and we still are losing customers that are actually disappearing from the market. So that's why there is more complex. I must say fashion, absolutely more positive in Q2 in Europe. But Europe was also entering the low demand earlier than U.S. because U.S., we didn't -- so it's like a cycle here. So I think U.S. is one quarter behind Europe now when it comes to fashion. We hope to see a recovery in Q4 more in U.S., North America. We have different cycles on region and the customer segments. You can really see differences, but you need to have in mind when they were entering the decrease in demand and when the recovery comes. So the cycle is around 1 year for all our segments actually. Yes.

And when we sat -- we had this call 3 months ago after Q1 and you compare it to right now, do you have the same expectations? Because we were also then talking about the recovery in the second half. Would you say that, that certainty or uncertainty of a decrease or increase during this quarter, has it changed?

No, I must say it's slightly more uncertain when compared to Q1 because a lot of our customers in Q1 had high expectations for second half of the year. Now they still expect a gradual improvement, but I think it will be a bit slower. So I think it's slightly lower expectation than I had in Q1. But I think more it's about timing here. I think the trend has changed. So there will be improvement. The question is about the speed in the recovery. So almost all our segments, yes.

Okay. And then finally, just on freight prices. I assume they are stable now.

Yes, they are stable. There is no price increase. We are in line with last year. So we don't see any bigger effects there.

Thank you. It appears there are no further questions at this time. I will now hand you back to Magnus Nilsson for any additional or closing remarks. Please go ahead, sir.

Okay. I just want to say thank you, everyone, for listening in to our phone conference, and I hope that everyone will have a great summer. Thank you very much. Bye-bye.

Thank you for those joining. You may now disconnect.