Elanders AB (publ) (ELANB) Earnings Call Transcript

Good day, and welcome to the Elanders AB conference call. At this time, I would like to turn the conference over to Mr. Magnus Nilsson. Over to you, sir.

Thank you. Welcome, everyone. This is Magnus Nilsson, CEO of Elanders. And together with me, I have Andréas Wikner, our CFO. For you that have the presentation material, I will go to Slide #5 and talk about our different market segments. If we start looking at Automotive, we can see that car sales volume is going down dramatically because of the coronavirus. And there was also a lack of component, which have forced the car manufacturers to close down their factories. And this trend we could see in the second half of March and for they have now closed almost all April as well, the majority of the car manufacturers. And as an example, you can also see drop down of sales went down by 15% in the first quarter. But most of the car manufacturers have now announced that they will reopen again soon, and some of them have started up this week, and we expect that the majority will be up and running from next week, at least in Europe, but we expect that they will run with limited capacity, at least the first weeks. If we then look at Electronics, that is Elander's biggest area. We are expecting a much more stable demand in the second quarter as compared to Automotive. And the reason is that we can see an increased demand for laptops, network equipment and accessories due to many people working from home and also a lot of students have home school. So we expect electronics to be almost a much more stable segment for us in the second quarter. If we then look at Fashion & Lifestyle, we can see the dramatic drop in sales for retail stores due to the pandemic. The drop started in Asia, especially in China in February, but then it moved on to Europe in March. We can see some increase in online sales, but it can't compensate for the whole drop in retail. As an example, adidas sales went down 90% in Q1, and they also expect a drop of around 40% in Q2. Elanders could still show growth in Q1, but the growth comes mainly from our fulfillment of subscription boxes in the U.S., as we expect that the second quarter will be very tough for the Fashion & Lifestyle segment. If you then look at the Industrial, it was also affected by the corona pandemic, but the impact was not as hard as automotive, at least not in Q1. In the end of the quarter, some of our customers closed down their factories, but some of them have already started again and others are on their way. Let's just speak about the market. Again, if you look at operational highlights and financials for Q1 and go to Page #7. Our Asian operations within supply chain was affected heavily by the outbreak of corona in the beginning of the quarter but was able to recover quickly and actually had a pretty strong end of the quarter. The outbreak in Asia also created the disruptions in the supply chain for both Electronics and Fashion & Lifestyle, which affected our sales both in Asia and in Europe. There real negative impact of the coronavirus came when Europe was affected in a larger scale and when our customers there started to close down their production and the net sales went down. And that's especially in the second half of March. If you look at our net sales in the business area of Supply Chain Solution, it decreased by 17% organically as a consequence of the corona, but also from us being more selective in the business we should keep. The latter affected mainly the sales within Electronics, Automotive and in Industrial. If you look at Print & Packaging Solutions, we couldn't see any significant effects by the coronavirus in the first part of the quarter, and organic net sales increased by 12%, mainly coming from the subscription box business in the U.S. But we could see an increase in print volumes in Europe in the second half of March. If you then look at the numbers, you can see that our sales went down to SEK 2.7 billion (sic) [ 2.57 billion ] compared to [ SEK 2.83 ] billion the year before. Our EBITA went down to SEK 81 million compared to an adjusted EBITDA of SEK 113 million the year before. And result (sic) [ earnings ] per share went down to 0.43 compared to 1.20 a year before. Positive in the quarter mostly continued by the very strong operating cash flow. And the net debt decreased by SEK 50 million despite a negative currency effect of some SEK 220 million. If I then go to Page 8 and look more at our operating cash flow and net debt. And here we can see that Elanders continues to have the positive trend of net debt-to-EBITDA. But if we exclude the IFRS 16, it's still around 3 and we could also see that our cash flow -- you can also see now that our cash flow will come under some pressure in Q2 but for the moment, we are in a very strong financial position and expect that we can handle in a very good way. If I then go to Slide #9, a look at our different business areas. And then if you look at Supply Chain Solutions, you can see there that we were affected both at sales and result levels by corona and our sales went down to SEK 1.9 billion compared to SEK 2.23 billion the year before. And our adjusted EBITA went down to SEK 58 million compared to SEK 88 million. If we then look at Print & Packaging Solutions, which we could show stable result in line with the year before, but our margin was affected because of the downtrend in Print in the second half of March. It means that net sales came in at SEK 686 million compared to SEK 599 million and EBITA adjusted was SEK 32 million compared to SEK 33 million the year before. If I then go on to Slide #10 and look at the sales for different company segments. You can see that Automotive decreased in comparison to the same period last year. Especially in the end of the quarter, several customers decided to close down the production due to disruptions in the supply chain resulting in a lack of components because of the coronavirus. Electronics decrease also in comparison to last year. The outbreak of corona had a negative effect on net sale, both in Asia and Europe, for the major part of the quarter. Lack of components resulted in disruptions in our customers' supply chain. At the same time, we also got rid of some buy-and-sell businesses with low margin. If we look at Fashion & Lifestyle, we can see an increase compared to last year despite the drop in sales for retail. But the increase mainly comes from our subscription box business in the U.S.A., which showed significant growth. And we couldn't see any effect on this business because of corona. We could also see some increase of online sales, but could not compensate the drop in retail. If we then look at Industrial, that was actually in line with last year. But in the end of the quarter, several of our customers decided to close down their production due to lack of components. But as mentioned before, some of them are already up and running again. That was our customer segments. So then if we go to Slide #11 and talk about going forward. We can see that the group's cash and cash equivalents, together with unutilized credit facilities actually amounts to more than SEK 1.2 billion. And this puts us in a very good position to manage the consequences of that customers closed down the production during a longer period, even though this closure would have a negative effect on the result. But we feel we can handle some tough months going forward with our strong liquidity. In order to also strengthen our liquidity, our Board has also decided to withdraw the existing dividend proposal. Instead, they will now propose that no dividend will be paid out. We have taken several measures to reduce costs and to meet the temporary decrease in demand. This includes short work for almost 2,000 of our employees. We have also heavily reduced the number of temporary workers. And in parallel, we have strengthened our liquidity by postponing investments and also minimizing costs that are not considered critical to the operations. In the end of March and beginning of April, we had to cease production in some of our smaller sites, in Italy and India, due to government restrictions associated with the coronavirus. In Italy, we are now about to start our production again, but we are still closed down in India. In the second quarter, several sites in Europe will operate with reduced capacity as a consequence of customers keeping the factories closed or running at low speed. This will, of course, heavily impact the group's turnover and result for the second quarter. But we expect that we can balance this in a rather good way, of course with the short work, and we will lift back the employees step-by-step as our customers are increasing their capacity. We can also see that the coronavirus actually creates some new opportunities. And we have been approached by many potential customers that we have not worked with before who wants a more stable and reliable partner in these uncertain times. And this we can especially see in the packaging area, where competitors mainly are small and privately owned will be -- and it will be very hard for them to survive during a more tough second quarter and we expect that this will give us some nice opportunities going forward. Okay. Thank you. That was everything from me. And now we open up for questions. Operator, can you open up for questions?

[Operator Instructions] We now take our first question.

It's Carl here from Nordea. Can you hear me?

Yes, we can hear you, Carl. Hello.

Perfect. Perfect. So first of all, could you say whether you had any impact from government support programs in your Q1 numbers?

Yes, we have some impact because of support in China and Singapore, but it's not any bigger amounts, but we have got some support. We think that the bigger part will come in Q2 because the short-work support we will gain in Europe.

Okay. Perfect. And could you perhaps give any indication of the last weeks of March and beginning of April, how -- in terms of demand situation and, yes, more or less a trading update?

Yes, if we look at the different areas, if you look at Automotive, it was pretty well to the middle of March and then they just closed down. So we went from 100% to 0 orders for last 2 weeks in March. So that was a big impact. As I said before, they have closed down in April. And the question is how quick they will ramp-up in May and going forward. Electronics was a very mixed picture, of course. We were hit very hard in February because of the closing down in China that also affected both our operations in Asia, but also in Europe. Of course, we are driving a huge hub for electronics in Europe. So we also went from 100% to 0 in a couple of weeks. But then in March, we could see a good increase in electronics, both in Asia and in Europe, actually. So -- and we expect that the demand for electronics will be pretty good going forward in Q2. So that should be pretty stable. Our Fashion & Lifestyle is much more -- I think it's the most complex one because there was, of course, a hit in Asia locally, but also most of the customers we are selling out of Europe, we are doing shipments to Asia and take care of the supply for all the retail business in Asia, and that was halted already in Europe in February. And then when China was recovering, then governments closed all retail shops in Europe, so Fashion & Lifestyle had a really bad March in that sense, especially our more important clients. It comes from a sales and earnings perspective. And the outlook for Fashion & Lifestyle is really hard to say. We are -- now they have opened up some smaller shops in Germany, which is good. Small retail shops are allowed. Hopefully, other countries will follow, but we should expect very tough second quarter for Fashion & Lifestyle, just like for Automotive. In Industrial, for us, I think, will be a bit hit. We will have some hit in Q2, but not as big as Fashion and Automotive. That is the outlook I can give. And everything is really uncertain. It's really hard for us to put the numbers actually.

Okay. Perfect. Very helpful. And could you also just shed some light on you receiving compensation for at least minimum volumes in some of your -- some of your customers. I mean is that possible given the financial situation that some of them might be in?

I think that will be, of course, a balance. We can see from some customers in other automotive area, we will get some compensations in the second quarter, especially when we drive some in-house operations for them. And we will also see some compensation in Fashion & Lifestyle. And so -- but of course, it's a balance there in the fashion side. I think if the customer is in a weak position, we need to be a bit more flexible. But we will receive some compensations. And -- but I think the biggest saving for us is the short work in -- especially again in Germany. That is the most important for us and that we -- regarding the German regulations can take people back step-by-step and that the government there is covering all the costs and they are at short work.

Okay. Perfect. And the final one for me. Could you perhaps remind us of your fixed cost base, or at least how -- what portion of your cost base that is variable? And can you also elaborate on what measures you are taking in order to adjust your cost base to the new situation?

I think if you go for the -- the easiest part is, of course, that we have slowed down investments, and we want to do critical investments. We have sent home all -- almost all temporary workers, that has a big effect. But then, of course, it comes down to salaries. And if you look at the supply chain business in Europe, salaries can be around 40%, 50%. So of course, when you can put a big amount on to people on short work, that's -- it's a huge saving. But then, of course, we still have lots of fixed costs in rents and things like that. If you go to our print operations, salary part is more down to 20%, 25%. You don't have the same effect, and we have more fixed cost in equipment. But the biggest cost-saving impact is when we can have lots of supply chain personnel in Europe on short-work. That's why we have been very active on that one and can handle around 2,000 people.

And can we also expect more of a long-term or -- mid to long-term measures in terms of cost cutting, if you have a more -- more bearish outlook short term at least?

I think for the moment, we don't see the need for any bigger cuts in employees. We will do some, of course, some adjustments in some of our sites, especially in countries where short work is not allowed and there is no subsidies around it. But if you look at Germany, that we have the biggest hit of the corona impact, the short work regulations are actually very good, and you can run it for more than 12 months. So for us, it's -- and the government is covering the cost. So for the moment, it's much better for us. We have heavy insurance work and to be prepared to increase capacity step-by-step as long as the customer are increasing. But of course, if we go into Q3, and you can see there's some major trends and that consumption goes down, if there's too big unemployment and the measures the governments are taking is not working, then of course, we will see if we need to do any more long-term things, like sending people home. But for the moment, we are in a very flexible, good position with a high exposure to the German market.

We now take the next question from Mr. Edvard Hagman from ABG Sundal Collier.

This is Edvard from ABG. Can you hear me?

Yes. Hi, Edvard.