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

Welcome to the Elanders AB conference call. My name is Allen, 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, to begin today's conference. Thank you.

Thank you, Allen. Welcome, everyone, to Elanders conference call. And together with me here, I also have Asa Vilsson, Elanders CFO. And now I will go to our presentation, and I will go directly to Slide #5, look at the third quarter. And you can see in the third quarter that demand continued to improve, like you also could see in the second quarter. And we could also see that several of our customer segments continues to improve, and the improvement was mainly in Europe and Asia. But North America, that has very high exposure towards Fashion continues to remain weak. But all in all, this resulted in an organic growth of 3.9% for the group. And if you look at our adjusted EBITA result, it also improved and came in 12% higher than previous year. And it was mainly our business area Supply Chain Solutions that was the driver behind both the growth but also the improved results. Our nonadjusted result was positively impacted by one-off items of SEK 139 million, and this was mainly connected to a revaluation of the earn-out for Kammac. When we acquired the U.K. company, Kammac, we paid 2/3 upfront and the size of the payments remaining still was based on the outcome of the results for the full year of 2024, and even if we now can see that Kammac has started to perform better, and it looks much more positive going forward, we'll still have a soft start of the year result in an earn-out payment that is slower than expected. If we then go to Slide #6 and look at our cash flow and cash conversion development. Our year-to-date figures went down to 86%, and that was a result of organic growth in the third quarter that resulted in an increased working capital. If we then go to Slide #7, look at Supply Chain Solutions, you can see that we managed to grow organically with 5.2% compared to 0% in the second quarter. And the growth came mainly from our activities in Europe but also Asia could show a pretty good recovery. As I mentioned before, North America continues to be very soft. But in the end of the quarter, could we see an improvement in the share of prospects that was converted to new customers. And we have also seen in the third quarter that we have a lower churn, and that means that we have lower amount of small, medium-sized customers that goes insolvent or exit us because of financial problems. So we could see a stabilization in that area as well. We also managed to improve our adjusted EBITA result with 23%, and our adjusted EBITA margin increased to 7.2% compared to 6.7% previous year. We can see now when sales recovers that our strategy to increase the share of more value-adding services, the discontinuing of low-margin deals and acquiring companies with higher margins result in improved margins. If you look at the market going forward, it continues to be rather soft, and our customers' forecasts continue to change regularly. And it's hard to predict how the demand will look like in the coming quarters. But overall, for us it trends more positive than before, and we continue to have a good inflow of requests from new potential customers. If we then go to Slide #8 to look at Print & Packaging Solutions. You can see that we had a very challenging quarter as normally was always very soft, but the big difference compared to last year was that also September was very soft, especially regarding demand from our Automotive customers. But it was also lower volumes of market materials because of lower marketing activities from our customers. This resulted in negative growth of 2% and an adjusted EBITA margin of 4.9% compared to 6.5% in the previous year. But on the other hand, if you look at year-to-date, the adjusted EBITA margin is still better than previous year. And we continue to focus on increasing our share of online print, which over time will make us more robust changes in demand in traditional print and improve our margins. And we will also now end the most important quarter for the whole year, the fourth quarter for print and -- so we hope that we can see some recovery also from that point of view. If we then go to Slide #9 to look at our -- the development of our different customer segments in the quarter and start to look at Fashion. You could see some continued recovery compared to our second quarter even if our organic growth was still negative with around 7%. The recovery is mainly in Europe, with the help of new customers and also recovery from some of our existing customers, which actually resulted in an organic growth of 15% in the Fashion segment in Europe. But as I mentioned before, the demand in North America remains pretty weak, and they had a negative organic growth of 19%. And -- but as I mentioned before, we could see a better conversion of prospects and new customers in the end of the quarter. And we should also have in mind that we -- it was -- in Europe, we started much earlier. I think at least 9 months before we could see a downturn in demand in Europe and North America was 9 months late. So I think there's some delay in the recovery. It was positive to see the better trend in Europe, and then we hope that North America will start to improve, especially during next year. And when it comes to Electronics, the picture continues to overall be positive, and we could see an organic growth of around 5% in the quarter despite the demand from some product areas like office printers and heat pumps are still pretty soft. The growth comes mainly from laptops and servers, but also from several other products and our life cycle management service continued to have a positive trend. And we also expect that this positive trend for Electronics will continue going forward. If you look at Automotive was the third quarter of very challenging, especially for our print divisions because the sales is very connected to the number of cars that are built. And in the quarter, resulted this in a negative organic growth of 18% for Print & Packaging. Our Supply Chain activities are much less sensitive to the number of cars that are built, because we are also providing lots of different services and negative organic growth was only 3%, which resulted in a total negative growth of around 7% for the group. Industrial continues to show an overall stable demand and even if it fluctuates quite a lot between different product areas, we managed to deliver an organic growth of 2%. When it comes to Health Care, we continue to see recovery from our existing customers, but more importantly, also very development -- a very positive development from new customers, and we had an organic growth of around 16% in the quarter. Other continues to show growth. There was a contribution from Kammac customers in the food and beverage sector. And in other words, have online print that also continued to grow, but was in a bit slower pace compared to before. If we then go to Slide #10 and look how things will be going forward. I think I mentioned it before, but we continue to expect a gradual improvement of the demand in the coming quarters, even if the market continues to be very uncertain and we need to calculate with some setbacks from some of customers and also that there will be continued swings in the demand. But still, we think it will be improving for us step by step. So over time, balance these swings and to gradually improve our results, we are continuously working with optimizing our cost structure. And we also have a big push to drive new sales. And when it comes to new sales, we start to see a positive result. And this was also an important reason that we could show growth in Europe in the quarter. U.K. that has been more challenging, even more challenging for us throughout the year is now starting to develop in a more positive direction, and we have started to convert more of our prospects to new customers in the U.K. as well. We have also started the establishment of our first contract logistics facility in Thailand, which is a very important step in our strategy to fetch volumes moving out to China and also to grow in Southeast Asia. And this will also help us to support our organic growth during next year. Overall, you can also see that our actions on the cost side, more focus on business with higher margins, gives a very positive result on our margin as soon as sales is recovering. Thank you. Now we open up for questions.

[Operator Instructions] We will take our first question from Derek Laliberte, ABG Sundal Collier.

Okay. So I was wondering if you could give some more details on North America here. You mentioned the market remains soft due to the higher share of Fashion customers, but you do see an improvement in signing new clients. Does this mean that you also see demand among existing customers, for example, starting to slowly improve towards the end of the quarter and into Q4 here?

Yes, Derek. Yes, we could see, I think, very important for us because we have a lot of small and medium-sized customers in North America, I think it's around 450 to 500 customers. And very importantly, like I mentioned is that we could see now that the customer that we have starts to look much more stable and much more -- a bit more optimistic for the future. So we don't have so much customers going insolvent. And we could also see that some of our customers start to pick up speed, not like normal year, I must say, because normally, you fill up all the warehouses during the third quarter to be able to be prepared for Black Friday, Cyber Monday and Christmas is still lower than normally. But it's still a good trend, but not so strong yet, but still a positive trend. And also very importantly for us, we always handle lots of prospects every month. And now we can see that the conversion rate especially in September also was much higher than before. And that will maybe not result so much for us in Q4, but it is promising for us in entering next year.

Okay. Great. That's very helpful. And on the U.K. the market is fairly challenging, but you're seeing this improvement, I assume this mainly relates to Kammac or which segments are trending positively in the U.K. right now?

As in the U.K., it's absolutely for Kammac that works a lot with the overflow, but also our company, Bishopsgate has worked with life cycle management that is also very -- normally very stable, has also seen a very soft market. We could also even see it in our print activities. So U.K. has been overall the source for us during this year. But now we see some signs of recovery, but especially we see lots of number of RFQs coming into us. And -- so we can see much more higher activity from new requests and things like that. So it feels like U.K. also shows signs of recovery now.

Sounds promising indeed. And on the Industrial customer segments, kind of a mixed picture, but can you perhaps shed some light on which types of products, for example, are doing better and which are doing worse in terms of the customers?

In which segment -- I missed what is that?

Sorry, the Industrial segment.

Yes, Industrial. I think in Industrial sector, we work with lots of thermal technology, we work with power tools and things like that. And we can see now that also in thermal technology is improving and where we have big heat pump systems and other heating systems. We can see some improvements there, but we can also see improvements in things like power tools that is more going both to consumers and to small construction companies. So I think for us, it starts to look more stable. And we also have managed to increase some volumes, new projects for our customers, and we also have some brand-new customers coming in. So it's a mix of new customers, new projects, but I must say the market starts to look better for us. And this is mainly Germany, actually, because there we are absolute biggest in the Industrial segment. But I can say in Industrial, on the print side, we could see a bit softer demand when it comes to -- but that's on the print side, for heavy equipment and like trucks and things like that. That was a bit softer, yes.

Okay. Sounds promising overall. And yes, finally, from my side, if you could also comment on your financial position here, with leverage being quite high at 3.7x. Is this in line with your sort of anticipated development for the year and what you see going forward, please?

No. We were expecting to be more around 3.5x, 3.6x. It was -- but also we were surprised by the strong organic growth. So it was mainly SEK 200 million in working capital that affected us, and that will come back because some of that deals will come back. So it was a temporary up, and we expect that this will start to go down again, with the start in Q4. But at the same time, it's very positive, and it's because of organic growth. So it was mainly working capital.

[Operator Instructions] We will take our next question from Gustav Berneblad, Nordea.

It's Gustav here from Nordea. Maybe just to start with the Fashion here in Europe. I mean, obviously, very strong growth. I think you said 15% organically. But if we sort of exclude the 2 larger customers, you're ramping up, are you growing the underlying business or...

Yes, Gustav. Yes, surprisingly, I must say it's even if you take away the 2 new big customers, we could see actually really good demand. And I must say, especially from our retail customers. E-commerce, I must say, is still more soft and much more volatile, but the retail part in Germany has been very stable for us, and we could even see growth compared to last year. It's -- we have a good mix in Europe for retail and e-com and on different omnichannel solutions. So -- but it was surprisingly good, yes.

Okay. Great. But is it possible to be more specific in terms of, is it low-end Fashion? Or is it high end or...

It's -- we have some big customers in Germany. I should say it's -- you know it better than me. I think it's more like H&M type, price-wise. It's more or low, medium sized. That's doing well. I think with the high Fashion, it's more tough. It's very -- it's harder. So more expensive products. And that's why also I think it's tougher for us in North America because lots of our customer there is in the upper price range. So in Europe, we have more low, medium, yes.

Okay. That's very clear. If we then go to Print & Packaging, I mean could you just be a bit more specific in what is really driving the weaker margin? Is it only volumes? Or is it something else or...

No, it was mainly volumes. So August is always a bit soft for us because of holiday period, then we have recovered in September, but September was very soft. And it was mainly -- it was really tough for us in the Automotive segment. The downtrend in marketing material have been going on for maybe 2 quarters, and I think there will be some recovery. So Automotive was surprisingly weak for us in Q3. It was tough. And in Q3, there's normally is normally online print is pretty soft. So now we're going into the strong period, and normally, in third quarter, we rely more on the Automotive, Industrial customers. That was a bit softer than normal. And also on the truck -- for trucks and also for, what we call, it [ excavators ] and big equipment that we also do in the U.S. was also very soft for print.

Yes. Okay. But it sounds -- it looks also if we look at the reported numbers, it looks like Print is -- or sorry, Fashion is also weak in Print or...

That's what we call a redistribution because we are preparing now to break up Other in more areas because of Kammac and online print for next year. And Print have a customer there that they said that it was Fashion before, but it's actually not, it's more -- [ belong in other areas ]. So it's a reclassification. It's not volume.

Okay. Okay. Okay. I see. That's perfect. And then just looking ahead, is there anything pointing or giving you indications of Q4 for Print not being as seasonally strong as it used or should be or...

No, I don't think so. It's -- we still are very optimistic for Q4 that is extremely important for us. So yes. And some of our customers then in the Automotive side, [ they ] closed down extra in September. So we think they will run more like normal in October, November, and they're always soft in December. But in December, we have huge volumes of online print. So we are still positive for the Print side in Q4.

Yes. Okay. Perfect. And then just the last one. It sounds to me like Kammac is still performing quite well and that the threshold for the earn-out was rather put very high instead of the business being weaker, right?

I think it's a combination, when we acquired them, we know that they were, of course, very sensitive for swings in demand because we work a lot with higher flexibility and overflow. So when we evaluated the company, we said, okay, fine, but we will pay 2/3 and to give you 1/3 in the same multiple, you need to have a very high performance this year. So -- and their performance has been very soft and have been soft in Q1 and Q2. And now even if we could see it's picking up speed, it's still based on the full year. So it's just our model. So -- which is good for us because they didn't perform as we expected and then the earn-out goes down, and hopefully, they will then pick up speed for next year. And then in the end, then it will be very positive for us.

[Operator Instructions] There are no further questions on the line. So I'll now hand you back to your host for closing remarks.

Okay. Thank you, everyone, for listening. And I hope everyone has a great weekend. Thank you very much.

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