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

Good day, and welcome to the Elanders AB conference call hosted by Magnus Nilsson, CEO; and Asa Vilsson, CFO. 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.

Thanks, Ben. Welcome, everyone, to Elanders' quarterly conference call. I will now go directly to Slide #5 in our presentation and talk about our third quarter. We could see in the third quarter that our underlying demand improved. And if we adjust for declining prices in the Air & Sea forwarding area, we had a negative organic growth of 2% compared to 5% in the second quarter. And the recovery in demand was mainly driven by improved sales in September. If we look at our adjusted EBITA margin, it continues to improve, and it came in better than both the previous quarter and last year, reaching 7.3% compared to 6.6% last year, and this is a result of our actions to lower our cost base. In the third quarter, we also decided to carry out further restructuring costs in our biggest subsidiary, LGI, as a result of the outcome of our new CEO's review of the company. These measures are mainly affecting their overhead costs, but also some consolidation of warehouse space, but they will, after this action, still have capacity for future growth. Positive in the quarter was that North America came back to organic growth and Asia continues to be stable for us. Europe had a negative organic growth, but that was mainly because of lower prices in the Air & Sea area. And that was especially affecting the trade lines between Asia and Europe. If we then go to Slide #6 and look at our cash flow and cash conversion development, we can continue to show that we deliver very strong cash conversion. In this quarter, it ended at 73% compared to 40% last year. We also managed to continue to reduce our working capital, which went down with SEK 189 million in the first 9 months. And the decrease in working capital, together with strengthening Swedish krona, reduced our net debt with SEK 218 million in the first 9 months despite dividends of SEK 147 million in the second quarter. Including IFRS 16, our net debt has this year been reduced by SEK 907 million. If we then go to Slide #7 to look at Supply Chain Solutions, you can see that the organic growth decreased with 4% compared to a negative growth of 3% in the second quarter. But if we adjust for Air & Sea, it was only negative with 1%. And in the third quarter, North America turned to positive organic growth, which was mainly driven by Bergen Logistics, and Asia remained stable, but Europe had some negative growth, but that was also mainly because of Air & Sea. Our adjusted EBITA margin improved both by quarter-by-quarter and year-over-year as a result of our cost-side measures and came in at 7.9% compared to 7.2% last year. And Supply Chain Solutions continues to have a very strong cash conversion and came in at 105% compared to 47% last year. We also had structural measures of SEK 80 million in the quarter, and this was mainly in our biggest subsidiary, like I mentioned before, in LGI. And LGI has now implemented a new, more efficient organization that will give us savings, especially in the overhead and without reducing the company's future capacity. If we then go to Slide #8 to look at Print & Packaging Solutions, you can see that our result continues to recover despite lower sales and Print came in with an EBITA result of SEK 36 million compared to SEK 32 million the year before. And their EBITA margin improved to 6% compared to 4.9% last year despite a negative organic growth of 4%. The Print started the quarter with very low demand, but they could see a rather strong recovery in September. In the quarter was the additional new yearly sales volume of around EUR 5 million coming from our consolidation activities in the German print market. They were implemented successfully in Germany, and this was one of the reasons for the recovery in September, combined with improvements in other new sales. If we then go to Slide #9 to look at the development of our different customer segments in the quarter and start looking at Electronics. The picture continues overall to be positive even if organic growth was only 1% as a result of Electronics being the first customer segment to recover already in Q3 last year when they had an organic growth of 5%. So overall, continued good demand from Electronics. Fashion had a negative organic growth of 5%. But if we adjust for Air & Sea, we had an organic growth of -- we actually had an organic growth of 1%, mainly driven by the positive recovery I mentioned before in North America by Bergen Logistics that could show an organic growth of 4% in the quarter. The demand in Europe was in line with last year. If we look at Automotive, there continued a negative trend, but improved compared to previous quarter and showed a negative growth of 6% compared to 13% in the second quarter. At the moment, it looks like demand is starting to stabilize from our customers. And we can also see that their forecasts are now more accurate than before. Also Other improved with a negative organic growth of 3% compared to 5% in the previous quarter. And the improvement here came mainly from Print & Packaging with increased publishing and packaging volumes. If we look at Industrial, they had a negative organic growth of 7% compared to 12% in the second quarter. And if we adjust for Air & Sea, could we see a slight growth in the Industrial segment of Supply Chain Solutions, but Print that is exposed to global truck sales showed a negative growth. When it comes to Health Care, we had a negative growth of 12%, but that was mainly as a result of 2 discontinued customers and other customers showed stable demand. If we then go to Slide #10 and look at how things will be going forward. Then, of course, the ongoing trade negotiations continues to create a great deal of uncertainties. But despite this, we can see a higher activity regarding new inquiries in the quarter. And we also gained new customers, and we also managed to renew several important customer projects, especially in the supply chain area. In the quarter, we were also able to see the result of our measures on the cost side, resulting in improved adjusted EBITA margins compared to last year. And with the additional actions taken in the third quarter, we expect to enter next year at a much lower cost base, but with continued capacity for growth. And parallel with these actions, we continue to have a high tempo in our rollout of the group's global warehouse platform, Cloud X, and also the implementation of AI solutions which, over time, will lower our cost base even further, but also increase our efficiency and create even more competitive solutions for our customers. We also still believe that the trade barriers over time will create opportunities for global players such as Elanders by breaking up global logistics chains and replacing them with more regional and local logistics chains. Okay. That was everything from me. So we open up for questions.

[Operator Instructions] The first question comes from the line of Markus Almerud calling from DNB Carnegie.

Markus here. A couple of questions. Maybe first one, if you look at the U.S. in Fashion, is it old customers coming back? Or is it the new customers that we have been talking about for some time, which never came in? Is it that's bringing it up? Or is it old customers who are kind of recovering?

No, it's actually a combination. I think the churn rate that we have talked about before that was very high, was stabilizing already in the last quarter and continued this quarter. So that was good. But it's also new customers. So we added new customers that start to contribute in Q3. So it was a mix of more underlying performance by our customers, but also new sales.

And what does the pipeline look like now in the fashion in the U.S. [indiscernible].

Yes, the pipeline continues to look good. And a lot of the customers we had in the pipeline before that was pausing the negotiations are coming back again. So for us, it looks more promising now. We are hoping to close some more deals in Q4. And some of the deals we closed in Q3 will start first in January next year. So it looks like there's more interest in the market, company -- customers are more open to move to other suppliers and start to find ways to deal with the duties in the U.S.

And on the structural measures, I mean, impressive margin that you showed. And how much of that is -- is it mainly the road business, which was closed down from this quarter? Or is it a mixture of cost savings and the road business?

I think actually more is the cost savings. Of course, we have some effects of the road business, but not -- I think the biggest impact comes of lower cost base, higher efficiency. We have renegotiated several customer contracts as well and lots of operational improvements in several of our supply chain companies. So it was a very good signal for us.

Okay. Okay. And the U.K., how is Kammac going? Any light?

U.K. is still a struggle for us. Our company in Technical Logistics, Bishopsgate, is doing -- continues doing well even in a very tough environment. Kammac has -- still more challenging. We managed to get a new bigger customer in Q3. We had improvements on the cost side. We've lots of actions on the sales side. So slowly, but I must say, in general, the U.K. market is the toughest market for us at the moment.

Okay. Okay. And then I'm just curious on the digitalization that we've been talking about this before as well. But have you seen -- you haven't spoken about this or brought it up for some time. And now you mentioned it, is it something triggering that? I mean, do you see any more of those kind of things going on? Or is it the same as before?

No. We see an increased tempo in this area. And both when it comes to increased productivity and things like that with the help of AI, but also automization in our operations. So we -- in our annual meeting, I was showing robots to one of our customers in Germany. We were implementing the same solution for another big customer in Germany this year that is working really fine. So we try now to increase the tempo, but especially by rolling out our Cloud X platform that we developed by ourselves, we are increasing the tempo in that one. That's why we had the new role as Global COO as well. So -- but I think it's very important because especially when you do omnichannel, your salary cost can be 50% of your cost, 50%, 60%. So there's lots of things to save if you can improve your digitalization, both with systems, but also with robots in the warehouses.

Value chains, which are kind of -- I mean, there's been speculation for some time about the breakup of the value chains, which is more of a longer-term trend, which should benefit you as you need more warehouses like across Europe, for instance. Is anything -- I mean, is that something that is speeding up as well? Or is it still, I mean, a discussion that it should happen?

I think it's a mix. Our new warehouse in Thailand that we not so long opened up, we are now seeing more and more volumes coming out of China to Thailand. So that's positive. Also in Mexico, we can see growth now even if there's lots of discussions between Mexico and U.S. So there is things happening. We haven't seen so much in Europe yet, but I think it will come in Europe. You can see also Asian and also Chinese companies moving into more of the eastern part of Europe. So it should come. It takes some time, but I think it will come more and more.

[Operator Instructions] The next question comes from the line of Gustav Berneblad from Nordea.

Maybe just to build on Markus' question there on the road transportation business and the cost savings from that. Just can you just remind me, is it -- do we see full effect from this now in Q3?

Yes. We see that for the cost savings, yes. And there was no sales as well from that business in Q3. So, yes.

That's perfect, sir. And then just on the demand situation, I mean, you are commenting on seeing sort of signs improving here at the end of the quarter. I mean, it would be interesting to hear you just elaborate a bit on this. And do you think that it might be just a catch-up effect from a sort of weaker summer months? Or is it generally a better demand picture, would you say?

No. But I think in general, it's better because especially if you look at contract logistics, and if we adjust there for Air & Sea, there was only a small negative growth and much better than the second quarter and the first quarter actually. So we can see that the underlying demand in contract logistics was better, growth in U.S., Europe overall pretty stable, Asia stable. So -- and also, we can see that the forecast, like I mentioned before, is more accurate from our Automotive and Industrial customers. So for the moment, it feels more stable. So I don't think it's a catch-up effect because even if September was very strong and July and August was weak. But if you summarize the quarter compared to the other quarters, it feels better. It's still very hard to predict in this market. But -- and also the signals, more RFQs, we have more requests from new customers. Activity is a bit higher. We feel like customers, both existing but also new ones now are ready to move. Before lots of things stopped for these 2 quarters, but it seems like companies are adjusting now and start to move forward. So, yes.

Very interesting. And then when you look at your overall capacity situation, I mean, you've done a lot of work here. But do you see potential for further cost savings and reduction to streamline operations even further? Or are you sort of satisfied at these levels?

No. I think we are -- for the moment now, we are pretty satisfied. It feels like we -- now we want to catch up and see all the effects of all the savings we have done. So I don't expect any major things now, and we are pretty slim now in most of our companies, especially when it comes to admin and personnel. We are in a good shape. We still have overcapacity in space. But in the same time, we want space as well when the market returns. So no, we are in a pretty good spot now, and we are excited to see how things develop going forward.

That's very clear. And then just the last one here on Supply Chain Solutions. I mean -- again, I mean, you've done a lot of work here. But given sort of a normalized market, where do you see sort of the longer-term margin potential in this business going forward, if you were to reason?

Yes. If we look at third quarter, now we did 7.9% EBITA margin. And third quarter is pretty -- yes, then August is a big holiday month in Germany and U.K. And so it's -- we don't have so much seasons in supply chain, but I think that was really a good signal that we can be around 8% in supply chain overall.

The next question comes from the line of [indiscernible] calling from Protector.

So just a couple of questions for me. The structural measures taken in LGI, what kind of quarterly savings do you expect that to be?

What the savings will be going forward?

Yes.

Yes, the latest ones.

Yes.

Yes. We expect they will give a yearly saving of EUR 7 million.

Yes. And do you expect anything of that to come already in the Q4 numbers?

They will come, some already in Q4, but not the full effect because of timing and because it's a lot of people we are releasing. So full effect will be starting in January with yearly savings. There will be some savings also in Q4, but not 100%.

Okay. And last one, on net finance, what should we expect the quarterly amount to be?

On net finance, you mean on the debt side or...

Yes. On the total, it was -- was it SEK 118 million this quarter.

The finance cost. I think that should be roughly the same, I think. Yes, it should be roughly the same.

Well, ladies and gentlemen, we currently have no questions coming through. [Operator Instructions] There are no further questions. So I will hand you back to your host to conclude today's conference. Thank you.

Okay. Great. Thanks to everyone listening to our conference. Thank you. Bye-bye.

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