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Edited Transcript of ELAN B.ST earnings conference call or presentation 21-Oct-19 1:00pm GMT

Q3 2019 Elanders AB Earnings Call

Molnlycke Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Elanders AB earnings conference call or presentation Monday, October 21, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Magnus Nilsson

Elanders AB (publ) - President, CEO & Director

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Conference Call Participants

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* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Mattias Ehrenborg

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Elanders quarterly results conference call. At this time, I'd like to turn the conference over to Magnus Nilsson. Please go ahead.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [2]

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Thank you very much. Welcome, everyone. So this is Magnus Nilsson, the CEO of Elanders. And together with me is also Andréas Wikner, our CFO.

And okay, I move to the presentation, and I will then go to Page #2 that shows how Elanders looks today. So today, Elanders has around 90 locations worldwide in 20 countries, and we have almost 7,000 employees.

And then if I move to Page #3, where we are showing our major customer segments, and that is Automotive, that is 25% of our sales; Electronics is 35%; Fashion & Lifestyle is 15%; Health Care & Life Science, less than 5%; and Industrial is 15%.

And then I will go directly to the Slide #5 to say -- to give some comments about the market situation for this segment. And if we then look at Automotive, the primary market for Elanders is Europe. And as I think everyone knows, the trend in the market has been slightly negative in the first 9 months. The trend for Elanders is actually more flat, and that is because our product mix is helping us there because we are not just doing services for new cars, but we're also doing services for R&D and some other parts for the automotive sector.

If we then look at Electronics, where our primary market is more worldwide, the trend in the market is pretty flat. But it's a rather complex picture with PC sales volumes was increasing in Q3. But if you look at printers, especially then desktop printers, there the volumes was going down. And there's also some shift of volumes between different countries due to the trade war between U.S. and China, which also affects Elanders in some sense.

If we look out then at Fashion & Lifestyle, where our primary markets are Europe and U.S., we can see a continuous strong trend in the market and also a strong trend for Elanders. And statistics are showing that sales of Fashion is still going up.

If we then look at Industrial, where our primary market is Europe, there, we can see a more negative trend in the market, both in the market, but also a slight negative trend for Elanders with weaker demand. And the latest Purchasing Manager's Index for manufacturing and the service sector in Germany was also going down in September, and Germany is one of our main markets in this area. So -- but some of our customers goes up, but some customers are going down in Industrial. That was the general comments about the market.

And then if you go to Slide #7 and look at some operational highlights and financials for the third quarter, and I will give my comments excluding IFRS 16 effects, so the numbers are more comparable.

And if we then look at the third quarter, we had a slightly negative organic growth. But if you look at the accumulated numbers, we are still on a positive organic growth. I think the major reason for us that sales went down slightly organically in Q3 is like we have communicated before, we are more selective with our business now and we have a very high focus on margins before sales. So for us, this is more -- it's also more about adjusting and trying to focusing on more profitable business.

And if we look at EBITA margin for the third quarter, it's what's continuing -- improving. And we made an EBITA of SEK 161 million compared to SEK 154 million, and that was an increase in EBITA margin from 5.5% to 5.7% in the third quarter. And then if we look at accumulated, our EBITA is now at SEK 398 million compared to SEK 353 million, and the margin has increased from 4.5% to 4.8%.

In the third quarter, we also continued to have a really strong operating cash flow, which has reduced our leverage, which is now down to 3.0 in net debt/EBITDA on a rolling 12-month basis. And so the operating cash flow in the third quarter was SEK 260 million compared to SEK 52 million the year before. And the accumulated operating cash flow was SEK 556 million compared to SEK 144 million the year before.

And then if we go to Slide #8, we are showing some historic numbers about the development for our cash flow and net debt. And if we look at Q3 in 2018, we had a net debt of SEK 2.89 billion. And if we then compare to Q3 2019, it's down to SEK 2.3 billion.

And as I mentioned before, the net debt/EBITDA on a rolling 12 months is down to 3, and 1 year ago, it was actually 4.4. So the net debt has gone down at almost SEK 600 million the last year. And if we manage to be down to a leverage under 3, we will get even lower interest rates going forward. So we're very pleased with the cash flow and the development of the net debt.

If we then go to Slide #9, where we show our 2 business areas, Supply Chain Solutions and Print & Packaging Solutions, we can see that we have managed to improve our results in both our business areas. And if I start with the Supply Chain Solutions and then comment on the accumulated numbers, we have sales of SEK 6.57 billion compared to SEK 6.25 billion the year before. And EBITA has gone up to SEK 325 million compared to SEK 285 million. And the EBITA margin is now at 4.9% compared to 4.6%.

If we then look at Print & Packaging Solutions, sales first 9 months is up to SEK 1.83 billion compared to SEK 1.62 billion. And EBITA has increased to SEK 98 million compared to SEK 81 million the year before. And the margin is now at 5.4% compared to 5% the year before.

And then if we move to Picture #10. And if we look at Elanders' sales by customer segment, we are now on that slide showing the development the last -- the third quarter and also how development is compared to the year before, we could see in quarter 3 that Automotive was more or less flat in quarter. And I think the reason is that some of our customers are actually performing better than the market, but there are some that also are performing more in line with the market. But for us, it was still flat.

If we look at Electronics, we have a decrease compared to last year. And normally, they have a very high seasonability in the sale, and last year's sales also include certain campaigns in each of our customers. And we had also have the biggest share of buy and sell last year, which pushed up sales.

And If we look at Fashion & Lifestyle, you could see a growth in the quarter. And we cannot see any show -- any signs of the weakening demand, and it's -- we can see strong demand going forward. Industrial was still showing a slight growth, but that's what I mentioned in the market before. We can see there are some signs of weakening demand, especially in the German market for some of our customers.

And the challenges that we also had in the second quarter is that the demand for our customers are still very volatile, and while the volumes goes a bit up and down, and especially in the areas of Automotive, Electronics and Industrial.

And then if we go to Slide 11. Slide 11 is showing the impact of the IFRS 16. So -- and I asked -- we are not going to through the numbers, but it's interesting to see if we look at EBITA, we get the positive effect, but then we get the negative effect with earnings per share. Regarding net debt and EBITDA, we have a neutral effect on return on capital employed to get the negative effect of the IFRS 16. More for your information.

Okay. That was everything from me. And there's also an appendix, but that's more about some background information about Elanders. So I hand over now to the operator to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question here.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [2]

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It's Carl Ragnerstam here from Nordea. So you mentioned that your organic growth was burdened by you phasing out less profitable volumes. How much was that in the quarter?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [3]

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Hard to say in percentage. But I think without doing that, I think it should be around flat, I think around 0%, maybe [effect of] 1%, 2%. And also, we have the impact of the buy and sale -- buy and sell that was higher last year in Electronics area. And that is more low-margin business so doesn't give so much effect on the results.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [4]

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Okay. And which volumes are you phasing out in terms of customer segments? Is it mainly Supply Chain Solutions, Electronics or where are you?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [5]

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Yes. It's mainly in Supply Chain, yes. There are some faults in Electronics, but also some faults in Industrial as well.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [6]

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Okay. And you also mentioned that you saw growth in supply -- or in the Fashion & Lifestyle. But looking at Supply Chain Solutions, it looks like Fashion & Lifestyle is down by 7% year-over-year. Is that the reporting structure between Supply Chain and Print & Packaging or is it underlying market decline? Or how should we look at that?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [7]

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Yes. I don't think it's real. It's not going down for us. I think it's -- this is -- this reporting here is also about how we have defined which customers are going into which areas. So in some of the historic numbers, there can be some parts that should have been in Fashion & Lifestyle before. What we can see, we have good demand, growth in Germany, but also to the subscription box business in U.S., it's also part of Fashion & Lifestyle, so underlying growth is very good.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [8]

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Okay. Perfect. And you also write that you want to increase margins within Industrial segment of Supply Chain Solutions. Could you give us an idea of the current profitability level there? And where do you want to be in like 1 year or so?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [9]

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We don't comment on the margins but in -- for different business areas. But as you know, we have a target of margin of 7% on EBITA levels. So we can say that we are not happy with the margin in that area. So we are working now to improve where we can, both in productivity and also discounting prices. But we also have some projects that we are now targeting to phasing out, but not as contract times. It can take 6 months to 1 year. So -- but it's -- in that area, we have the lowest margin absolutely.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [10]

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Okay. And in terms of phasing out more volumes, what should we expect therefore for H1 2020 or Q4? Or are there many contracts out before tender or...

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [11]

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Yes. We still have a really good inflow with new customers as well. It's hard to say. In some of the projects, we are asking for higher prices, and if it's accepted, we will stay and otherwise, we'll let go. So it's been hard to say. But we think there will be some volumes going out in Electronics that it's more connected to this buy and sell because in buy and sell, we are more looking at cash and the margins are very low. So -- but it's hard to put in a number on it. But it could be as big as we release some of the business there as well, push up margin and to make working capital better fast.

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Operator [12]

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And we'll take our next question.

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Unidentified Analyst, [13]

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This is [Jorgen Master] from Protector Insurance. Could you comment on the risks for your HP contracts given that they're going through a major restructuring program now? And especially mentioned the printer segment as being a particular candidate for the restructuring activities.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [14]

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Yes. I think HPI is, of course, a very important customer for us. And I think the restructuring will not affect our business in Europe. In Europe, we are doing both printer, some PCs. And as I mentioned before, PC sales is -- was, at least in Q3, going up, printer is going down. So I think that's stable for us. It could be maybe more shallowing for us in Asia if HP decides to move some production somewhere or -- but for the moment, we have no signals from them that they are -- that things they are doing should in some way affect us.

But of course, I think lot of volumes in Asia. They can decide if the trade war continues between China and U.S. There is, of course, a risk that they move manufacturing out of China or maybe they move volumes out of Singapore for some reason to another region. So -- but for the moment, it doesn't affect us so much. So it's because we work with different products for them. So it's hard to say. It's hard to say.

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Operator [15]

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And we'll take our next question.

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Mattias Ehrenborg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [16]

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This is Mattias from ABG calling. Okay. So I was wondering, you mentioned that you had some negative organic growth due to both weaker demand primarily in Automotive and Electronics, but also increased profitability focus. So as you mentioned before, you couldn't exactly say how much shifting of contracts affected on -- in terms of percentage. But is it possible to get some sort of number how much it did affect the organic sales for the quarter? Or maybe is it possible to get some additional flavor to that?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [17]

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I think the biggest part was, as I said before, Electronics. And there was a less -- a smaller share of buy and sell for some of our customers there, and that is not so contract-based. It's more of where we can take given -- take this business if we want or not. So -- but I think that is the main reason with the buy and sell because Automotive was still good in Q3, was pretty flat and slightly down. So there is some small parts down and some parts up. So it's actually hard to say.

But I think what is very important to focus on margin before organic growth because if you have followed Elanders, we had so strong organic growth the last 2, 3 years. And for us, it's not so bad if it slows down a bit, especially when we want our company to focus more on margin before sales. So we are not pushing down to -- there's -- we have lots on our queues and we are now saying, "No, thank you" to more than before because we don't think the margin is good enough. So it's also about new business that we are more selective going in.

And then of course, you cannot let the sales go down too much because you have your fixed cost with facilities or things like that. But yes, it's mainly that. It's also a big thing for us, I think, this organic growth. You could -- the supply chain market is still growing, so we can always find more volumes if we are interested it, but we want to be more selective.

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Mattias Ehrenborg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [18]

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Okay. I understand. Perfect. And then do you believe that the lower demand that you saw some -- that you saw from some of your customers is due to uncertainty where we are going? Or is it more due to permanent lower volumes? Or could you give us some more flavor to that, perhaps?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [19]

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You mean the volatile demand or...

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Mattias Ehrenborg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [20]

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Yes. Exactly, exactly.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [21]

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Yes. I think especially, we can note, there's more Automotive customers, but there are still big uncertainties. So -- and that makes it really volatile. If they try to be careful and then they slow down too much -- and in some days, they need to work extra days, the week after. And they do some maintenance and they do it longer than before. And then someday, they still need to deliver more the week after. So I think there is the big uncertainty on the market in Automotive. And that normally also affects the -- our Industrial clients because lots of them are, of course, also suppliers for the automotive industry. So it's mainly there.

If you look at Fashion & Lifestyle, tables are awesome, yes. But also, Electronics has been a bit up and down, but that -- there's also been a problem with components in China according to our customers, haven't been able to produce as much as they want. So -- but I think if the market is a bit uncertain, of course, everyone knows that so. They make our customers act a bit more careful. And then sometimes too careful, they don't want to build stock, and then they need to someday speed up the production and then they slow down again. So it's more about that.

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Mattias Ehrenborg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [22]

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Okay. I understand. And also, in Supply Chain, freight forwarding volumes were down 12% year-over-year at this pace, including FX, I assume. Is this also due to profitability focus? Because at the same time, we saw this and value-adding services as other contract logistics growing double digits.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [23]

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I think freight forwarding is -- that is more about actually as -- it's a combination. I think some of the demand has gone down. But as you see, the contract logistics has increased, and that is, of course, our focus on margin. So in freight and transportation service, you could see some downtrend in L&C, which we -- still is good business for us. So that is more connected to what the market looks like.

But in the same time, regarding trucking, road transportation, we are now trying -- we are trying to decrease our volumes step by step. So that is the 2 reasons why it's going down. But we're very happy to see that other contract logistics service are increasing, and that is the start of our strategy. We want to do more of that instead of freight solutions.

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Mattias Ehrenborg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [24]

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Of course. And these additional volumes in this particular segment, is this because of new customers coming into the contract base? Or are you actually taking more shares in the value chain at the existing customers?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [25]

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That's a combination. And also that we were successful in 2018 when we acquired several new clients in that area. And they are -- they were not fully up and running last year as we get positive effects from them. There's some -- at least 3 big new customers there generating volumes, both in Asia and Europe, so it's pushing up. And then also in existing customers, we are still taking new kind of services and also at some parts of the globe. But I think that we were very successful in 2018 in acquiring new important clients that are performing actually very well also this year.

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Mattias Ehrenborg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [26]

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Okay. Perfect. And I assume that they are big drivers of the margin now for this quarter also given the growth?

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [27]

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Yes, yes, yes.

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Operator [28]

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(Operator Instructions) All right. That looks like there are no other phone questions at this time.

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Magnus Nilsson, Elanders AB (publ) - President, CEO & Director [29]

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Okay, okay. Thank you, everyone, for calling in. And we close this session.

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Operator [30]

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And ladies and gentlemen, this does conclude the call. Thank you for your participation. You may now disconnect.