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 Magnus Nilsson. Please go ahead.

Thank you. Welcome, everyone. And together with me on this phone conference, I also have Andréas Wikner, Elanders' CFO. And I will now go directly to Slide #5 in our presentation and talk about the -- our performance in the third quarter of 2021. The shortage of semiconductors created lots of disturbances in the production for several of our customers, and this created big fluctuations in the demands, which was changing from one week to another. And these big fluctuations makes it almost impossible for us to adjust our cost structure accordingly, and it's also driving lots of additionally salary costs, and was putting pressure on our margins and then especially in the Supply Chain Solutions area. The negative impact was especially impacting our result in July and August when lots of our customers decided to have extra closing of their manufacturing and also lots of changes in the shift pattern. But we could see in the second half of September a recovery to much more normalized demand and also the production was stabilizing at our customers. And this together with that we are negotiating with several customers to find solutions to decrease the negative effects of the fluctuations created by the semiconductor shortage makes us expect that we will see lower negative impact in the fourth quarter despite some continued disturbance when it comes to shortage of semiconductors. We should also have in our minds that last year in Q3, we still have positive effects on the PPE business. And the majority of our customers also showed a very strong recovery from the negative COVID-19 impact, resulting in demand that was actually higher than normal, which also resulted in a optimized utilization of our capacity. If we then go to Slide #6 and look at the numbers, can you see that we, despite all the disturbances, showed an organic growth by 3%. The growth comes from the business area Supply Chain Solutions. And the drivers behind the growth was mainly increased prices for purchase of freight to our customers and also an increased share of buy and sell activities for our Electronics customers in Asia. But we could also see a very strong growth for Fashion & Lifestyle in Europe. The semiconductor shortage in the third quarter put a high pressure on our margins, and in Q3, resulted this with an EBITA margin of 4.4% compared to 6.8% the year before. But if you look at our accumulated numbers, we're still well ahead of last year with an EBITA result of SEK 413 million compared to SEK 342 million the last year. We also continued to receive lots of new requests from both existing and new customers, and then especially when it comes to e-commerce solutions for the Fashion & Lifestyle segment. To meet the increased demand from Fashion & Lifestyle, we're now exploring different options to increase our capacity. If we then go to Slide #7. You can see that we continued to have a very strong financial position. And our adjusted net debt EBITDA, exclusive IFRS 16, is now at 1.67. If we then go to Slide #8 to look at our 2 different business areas during the second quarter. You can see that Supply Chain Solutions managed to show growth despite all the problems regarding our customers and stable demand. But the demand -- but the problem with the semiconductor was driving a lot of cost, which was helping the margins. And also last year, they had the PPE business, which was helping the result with very strong margins. And if we look at Print & Packaging Solutions, we can also see a high impact from the semiconductor shortage, which resulted in much lower volumes of manuals for automotive and industrial client. Now sales went down in the quarter, but that was mainly a result of less trading of freight for the subscription box business in U.S. And this should over time actually result in improved margins. If we then go to Slide #9 to look at our sales by customer segment in the quarter. And then if we look at our sales to Automotive, you can see the negative impact on our sales compared to last year as a result of the semiconductor shortage, which also affected our margins negatively. Positive is that the majority of our customers still see a very strong underlying demand. And we think they will try to catch up as soon as they have enough semiconductors. We're also continuing to develop new services in Automotive area for electric cars. We have now secured 2 new important projects relating to storing, handling and assembly of battery cells. If we then look at the Electronics area, we can see that we had a very strong growth compared to last year. But this growth comes mainly from what I mentioned before, an increased volume of buy and sell in Asia, but also our new service offering, Renewed Tech, is also included now in Electronics. Some of our customers were suffering from the lack of semiconductors also in the Electronics area, which resulted in less production in Asia and also lower quantities of products coming to Europe, which also put some pressure on our margins. If we then go to Slide #10 and look at Fashion & Lifestyle. You can see that we are in line with last year despite our growth of 30% in Europe, but that was leveled out by decreased buy and sell of transportation in U.S. But we continued to see a very strong growth from our customers, especially when it comes to sales via e-commerce channels, but also a stable recovery of the retail area. If we look at Health Care & Life Science, did have the last -- a huge impact last year on sales because of the PPE deliveries in Q2 and Q3. Underlying demand continues to look good, and we have acquired some very interesting new customers that will start later this year. If we then go to Slide #11 and look at Industrial. We can see that their sales also was affected negatively compared to last year. And also, this was also because of the lack of semiconductors that we could see in Automotive. If you then look at Other sales, you can see there is a growth in that area. And that is mainly driven by the acquisition of the printing company, Schätzl, that is specialized in -- previously, in online print, which is one of the few growing areas in print. And we -- our own companies was also having a strong underlying organic growth in this area, so that's just that. Then if we go to the Slide #12 and look how things will be going forward. Yes, as I mentioned before, we continue to see a very strong underlying demand in all our customer segments, which is very positive. And this should result in a very positive result development as soon as the semiconductor availability is stabilizing. And we continued to receive lots of interest and requests from both existing and new customers. We're also very pleased to see that we continued to grow within e-commerce service for both existing and new customers in Fashion & Lifestyle. And we continued to see that our global footprint is a strong enabler to gain new customers. And our new site in North Germany that we started up this year is actually already filled up with new customers. And we are now exploring different ways to increase our capacity to meet up the strong demand, both in Germany but also outside Germany. We continue, as I mentioned before, to have a very strong financial position, which enable us to increase the number of acquisitions. And we also want to continue to grow in the Life Cycle Management area, which will help both us and our customers to reduce carbon dioxide emission. Two of our latest acquisitions, Azalea and ReuseIT, have strengthened our position in this area. And if we look forward, we are carefully optimistic even if the ongoing COVID-19 pandemic continues to affect the global supply chain negatively, especially when it comes to production and shipping from Asia, and that combined with the lack of semiconductors. But we can -- as I mentioned before, we can see now that the semiconductor is start to stabilize. And we can also see that Asia is opening up again and shipping continues -- starts to be going in a normal -- more normal direction. So yes, so for us, after a tough third quarter, we are still optimistic that it will be better going forward and that -- I think the important thing is that our -- all our companies have a very strong underlying demand, which is promising for the future. Okay. Thank you very much. I will now open up for questions.

[Operator Instructions] We will now take our first caller.

It's Carl Ragnerstam here from Nordea. A couple of questions from my side. Firstly, on margins in the quarter. You obviously mentioned quite -- or several reasons. But could you perhaps help us bridge the margin? Meaning that you could probably give us -- or if you could help us with the effect from, for instance, buy and sell, the component issues, et cetera.

Yes. Yes. I think if you look at our EBITA, that was SEK 126 million this year compared to SEK 190 million last year. So if I make there a rough bridge, I think SEK 20 million of that is the PPE business, the contribution from the PPE business last year. And then around SEK 34 million is connected to the semiconductor problems in Supply Chain Solutions, and roughly SEK 8 million in the Print & Packaging division, is connected to less manuals because of the semiconductor. So it's -- yes, SEK 20 million PPE and roughly SEK 42 million are connected to the semiconductor issue.

Perfect. And how much buy and sell volumes did you take on in this quarter? You guided for a bit of a margin dilutive effect from this. And also, how important is it to take those volumes in order, I guess, to be able to deliver on more profitable volumes as well?

I think the buy and sell activities in Asia increased with around SEK 80 million in turnover in the third quarter. And as -- I think we have said before, it's rather low margins in this business. But it's still a very important business for us to get other services where we have much higher margins like factory logistics, electronics. And there, we could see also a down trend because of the lack of semiconductors. And we think that the increase in buy and sell is that our customers want to secure that they have semiconductors and other electronic components that increase the buffer, which affects our buy and sell. But unfortunately, the production is still much slower than before so we get less added value, so -- but we still need to do this buy and selling. It's an important part. But of course, it's -- in a quarter like this, it helps the margin, it drives sales, but not the margin.

And also, you also stated that you saw improvements at the end of the quarter. Could you perhaps elaborate a bit on the improvements and the magnitude of them? And then also, which segments you see improvements in? Or is it, I mean, across the board?

I must say it was across all areas. So as I mentioned, July and August was really tough. And the first 2 weeks in September was also very weak, especially when it comes to Automotive, but also other customers like Electronics and -- but in the last 2 weeks of September, all our customers -- almost all our customers was running normal shift patterns. The production flow was optimal. So I can say, in the second half of September, we were back on the same levels like the year before. So it was running very stable. And when it comes to the semiconductor issue, there's a lot of signals all the time. But there is -- if you look at as a company, IDC that is following this globally, now they are estimating that we should have normalized levels in the second half of 2022 and even overcapacity in 2023. So we think it will now be step-by-step improving to reach normal levels to the summer next year. And we could see it in September as well. There was no sudden shift changes from our customers, which help us to optimize our production. And we can then go down in the number of temp workers and additional shift. So second half of September, very stable.

Perfect. Okay. And the final one from my side is regarding Print & Packaging and then the -- your photobooks business. As we have seen, of course, data from this anew, I mean, indicating a fairly soft market, have you seen the same in the start of Q4? Is it too early to draw any conclusions? Because Q4 is important for the photobook business, right?

Yes. We can see absolutely a softer demand in the photo product. But we have lots of other online printing business that we are growing and especially now with the acquisition of Schätzl. So we think we will have a very strong fourth quarter in Print, but absolutely softer in the -- when it comes to photobooks and photo product. But that is less important for us now than it was before because we are overall there strong in online print. So -- but there is -- and everyone is hoping that the fourth quarter will come back. And of course, people have had some vacations, is some of -- hopefully, they will create Christmas gifts that's normal in the photo business. But it's still too early to say if it will be like that. But we are not so afraid of the impact for us because we have expanded into new other areas when it comes to online print.

We will take our next question from Alexander Vilval from Erik Penser Bank.

Alexander Vilval here, Erik Penser Bank. I would like to just ask a question regarding the situation of the semiconductors. How -- can you describe a little bit how your sort of variable cost base looks when it compares to the volatility in, say, daily volumes with your customers? If there's sort of a threshold where if they sort of push on the gas pedal regarding the production levels for a week at the time and then volumes sort of come down for a few days and then they come back to volumes again? At what sort of volatility level can you match those swings with your cost base? And sort of how agile are you able to be? If -- does it make sense, that kind of question?

Yes. No, I think it makes a lot of sense. So in our -- we are -- in normal times, when the production volumes goes up and down for our customers, for example, Automotive, if they go down from 100% to 90% or 80%, then it's a more constant thing. We know it's for, okay, the coming 4 weeks, they will run 80%. Then it's very easy for us to adjust because we have a huge amount of temporary workers, so then we have to adjust. So we cut down the number of workers. So this is lots of actually employee costs. But with the semiconductor, it's totally abnormal, so that -- the thing that happens is that we get the forecast from the customer, next week, we run this car models, all of them run 3 shifts. Then we book up all the temp workers that week. And then suddenly later in the week before, they will say, no, we cut down. We go down from 3 shifts to 1 shift in this model. And then we go up to 4 shifts in another model. And then we need -- that means we will have 2 shifts, too many people that week. And then for the additional shifts for the other model, we need to then take in extra personnel. So it actually comes down to lots of salary cost. And we don't have this in our SLAs because this has never happened in the history that the car manufacturers are changing from week to week. So I must say it's a total abnormal situation. And then now we are entering lots of discussions with our customers. We cannot continue like this. So I think, together with the semiconductor, we'll be more stabilized. And it should also drive cost for our customers. So hopefully, they will decide, okay, it's better we run constantly 80% than run 120% one week and 60% another week. So I think this is really extraordinary times for everyone. And we can -- we have a huge flexibility with all our temps, but we cannot balance it so quickly. Impossible for us.

Yes. So you're basically -- you're on weekly level and they have...

Yes, yes. Changes are weekly now.

Go up. Yes, yes.

Normally, we need to book for 2 weeks of capacity. So we have a very high flexibility. So it's not about employing people, terminate the employee, because we have this temp workers that we use to balance normal fluctuations. But the situation today, especially in Q3, was totally abnormal. And actually, in Q1 and Q2, they also have problem with semiconductors. But then it was much more normal, more smooth. So I think also that our customer used the opportunity in July and August to push out the holidays for their workers. They pushed them to take out holiday. So that was also making it much, much worse in July and August. So even in Q4, that will be a disturbance. We think it will be on a more stable level. Hope that will answer?

Okay. Also, you mentioned -- yes, absolutely. Great. You mentioned the company's goal regarding the semiconductor levels. And you -- I think you quoted some source regarding the possibility of a normal level in the later half of this year, perhaps overcapacity [ going to ] semiconductors next year. Would you just care to repeat where you got that?