Good day and welcome to the Elanders AB conference call. At this time, I would like to turn the conference over to Magnus Nilsson, CEO of Elanders. Please go ahead, sir.
Thank you. Welcome everyone. Together with me, I also have Andréas Wikner, Elanders' CFO. I will start by going directly to slide number 4 in our presentation and talk about our major growth areas that we have identified. The first one is e-commerce, where we can actually continue to see a rather stable demand and high activity when it comes to requests from both existing and new customers. Our focus in this area is to mainly work directly with the brand owners because they are focusing on building up their own e-commerce to not be too dependent on retailers. The second growth opportunity is in the area of contract logistics, where we can see that companies are continuing to outsource.
The last 2 years have showed that you can't rely on a global just-in-time supply chain, and this opens up for more local production and safety stock of important components. Because you need a product closer to the market, and this also opens up for more contract logistics deals for Elanders. The third growth opportunity is in lifecycle management, where we take care of the complete lifecycle of a product, which is an area that is in line with the need to create more sustainable solutions with the target to maximize the lifespan of a product. The fourth growth opportunity is in the area of online print. In this area, Elanders is one of the absolute leading production partners in Europe to different online print companies.
If we go to slide number 5 and look at the latest acquisition, which is the U.K.-based company, Bonds. Bonds will important complementary offering when it comes to lifecycle management, and will enable us to grow in this area of the U.K. Bonds are specialized in distribution of technical equipment, including value-added services like setting up, installations, take-backs, refurbishment, and storing of valuable and sensitive equipment. If we go to slide number 6, you can see how the split of our major customer segments looks like, if we include Bergen that we acquired in the end of last year. Including Bergen is fashion and lifestyle, actually now at 27% of Elanders sales and is actually in line with electronics. We estimate that they will outgrow electronics in the H2 of the year.
As you can see, we have a pretty good split now between different customer segments, which also have helped us now in the second quarter. If we then go to slide number 8 and look at the second quarter. In the Q2 , we could see a recovering in our sick rate to more normal levels, but instead we see continuing increased cost for material, fuel, and electricity. We're also affected by China's zero tolerance that affected the global supply chain and had a big impact on several of our customers. Despite all these challenges, we are very happy to report a very strong result with an adjusted EBITDA that is actually 55% higher than last year and an adjusted result before tax that is 51% better. We can also show an organic growth of 4% despite the very challenging quarter.
The improved result comes out of Supply Chain Solutions that can show an organic growth of 11% and improved margins. The main driver behind the growth in supply chain was mainly strong growth in fashion lifestyle, but also very stable demand from electronics and health care, and we could also benefit from increased volumes in our R&R activities in Europe. If we then look at Print & Packaging Solutions, they had, again, a very challenging quarter and was negatively impacted by increasing material and freight costs, but also lower demand of photo books, calendars, and other similar products. We could see some improvements compared to the Q1 . In the Q2 , they also signed a new, very important agreement with a new customer in our focus area of online print.
This contract has an estimated yearly sales of around SEK 100 million, and the project will start already in the H2 of this year and will also help in the packaging to recover. If we then go to slide number 9 and look at our business area Q1 , and look at Supply Chain Solutions, then you can see the in the figures there what I mentioned before, very strong growth in both sales and results. Even if we exclude the positive one-off items of SEK 40 million, we still managed to improve our EBITDA margin in the Q2 to 7.3% compared to 5.9% the year before. Bergen is, of course, the major reason to the growth, but we could also show an organic growth of 11% for Supply Chain Solutions.
If we then look at Print & Packaging Solutions, can we see a slight increase in sales? Even if the result was lower than last year, we could see an improvement compared to the Q1 . We are now working very closely with our customers to find ways to compensate for increased material and energy costs. Very important is also the new online print contracts that I mentioned before. If we then go to slide number 10 to look at our sales by customer segments in the quarter and then look at our sales to automotive, you can see that we despite all challenges in the Q2 improved our sales last year and even if our customers was very affected by China zero tolerance, which affected their supply of components.
In the end of quarter, we could see some recovery, but we expect that this will go up and down during the year when it comes to China zero tolerance. If we then look at electronics, we continue to show a strong demand. But here we also have some impact from China zero tolerance, but that was mainly, you know, activities in Asia, and that we could compensate by a very strong demand in Europe, and we also have got some additional customer projects during the year that helped this area. In fashion lifestyle, we can show a very strong growth compared to last year. The growth comes mainly from Bergen, but we also still can see a stable demand in Europe. Sales for subscription boxes in U.S. continues to decline because of less trading of freight for our customers.
This was compensated by Bergen and Europe. If we then go to slide number 11, we can see that healthcare and life science shows a good growth because of increased demand and we also have some new customers, and our new metric site in Germany is now up and running at full capacity. In industrial, we could see still a stable demand despite some challenges for our customers and still looks stable going forward. Other sales shows growth, but a bit lower than expected because of decreasing sales of especially online printing products. We expect this area to grow in the H2 of the year with the help of the new contract that I mentioned before. If we then go to slide number 12, look at how things will be going forward.
Despite the very challenging environment, the majority of our customers are still reporting that they have a lot of full order books, especially when it comes to automotive, industrial, electronics and healthcare. That is still promising, even if they have lots of problems to fill up with components. Fashion lifestyle is a bit harder to predict, but for the moment, we can continue to see a stable demand and even growth when it comes to adding new customers. You can also see that the Elanders strategic focus on building up a global footprint and a more diversified customer base has been very helpful in compensating a very volatile market, especially after the acquisition of Bergen, that has given us a very strong footprint also in North America.
The zero tolerance in China and the war in Ukraine is, as everyone knows, affecting the global supply chain negatively, but it still also creates some opportunities for global supply chain companies like Elanders. An example is that companies now building up more local sourcing, and that increases demand for additional local storage and also more contract logistics services. You can also see a trend that companies now try to build up more of a security stock of key components to be able to run their production, even if there's disturbances with deliveries from, especially from China. As we mentioned before, biggest challenge is the continuous increased cost of fuel, electricity, material, and also higher interest rates could in the long run, of course, puts pressure on both consumers and the companies.
We expect that the demand for global logistics in the long run will continue to grow. Even in these challenging times, we are securing additional capacity in facilities to support the future organic growth. Okay, that was everything from me, and now we'll open up for questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. A voice prompt on the line will indicate when your line is open. Please state your name before posing your question. Once again, press star one to ask a question, and we will take our first question.
Good morning, it's Carl here from Nordea. A few questions. Firstly, is it possible for you to sort of quantify the margin impact from extraordinary costs or extra costs related to lockdowns in China, overall volatile production in automotive? You had also the inflation in fuel costs.
I think when it comes to print and packaging, it's pretty easy. You can mainly compare to last year. There we can see an impact of around 1.1%, at least, on the EBITA margin. When it comes to supply chain solutions, a bit more complex, but I think we talk about, I don't know, Andréas, around at least 1% in that area as well.
Okay. Very, very helpful. Also, could you perhaps also quantify the EBITA contribution from Bergen Logistics, or EBIT for that matter, contribution from Bergen Logistics in the quarter?
Yeah, we don't give it out, you know, as you know, the results of the company. We can say like that Bergen has been a very strong contributor. We can also, you know, they have for the H1 year, they can show a sales growth of almost 50% compared to last year. Of course, they are a very important engine in contributing both to sales but also to EBIT. For the moment, we can say it's a very good acquisition, and we are very happy with them. They have been balancing, you know, the challenges in Europe and also the weaker demand in Asia. You need to estimate a bit yourself, but very good numbers.
Definitely. I mean, you said 50% growth. Is it fair to assume that they maintained a flat margin despite the high growth? The second part of the question is what is the main growth driver of the 50%, would you say?
I think the main growth engine is that they have this, you know, unique concept when we mentioned the reason why we acquired them, you know. They have several hundred small to medium-sized customers. No customer is bigger than 4%. This had made it not easy, but more possible for them to quickly move costs, increase costs to their customers. They can do it very quick. You know, they don't have long agreements, and they can be more, you know, take the risk to lose some customers as well. But of course, the growth always comes to capacity. When we acquired them last year, they had just opened a new facility that is almost filled up now.
I think they will be maybe more flat later on, but we are now looking to expand to one additional facility in U.S. in the beginning of next year. But of course, they could also be affected by the consumption going forward. They have an extremely robust business model with you know, several hundred customers, no customer bigger than 4%, very unique offering, and can easily add new clients as a compensation if their customers you know, lose 10% in sales. They can just, not just, but they can add new customers to fill it up. Much harder for us in our other part of Elanders, where we work with you know, huge, big companies, and that hurts us more when their volumes goes up and down.
Mm.
I hope that was an answer to your question.
Yeah, definitely. Have you seen a more stable production pace within automotive, or is it still volatile and by that driving extra costs? Would you say that you could offset the rising fuel costs in H2 of the year, mitigated by price increases?
I must say automotive has been really volatile the whole quarter. I think we saw it was stabilizing the last week in June, but we have seen that trend before and so it's I must say it's really tough times for our automotive and also lots of the industrial customers. I think they have adjusted for Ukraine. I think the problem is China's zero tolerance. If China don't, you know, make lockdowns again, I think it will be much better the H2 . If China again starts closing down, you know, regions in China affecting shipping out of components, they will run into problems again. It's really hard. It looked better in the end of June, yeah, but we cannot see it so far.
When it comes to the fuel prices, lots of these increases are kicking in, and so there we will see some compensation in the H2 of the year. But the problem for us is still that they run their production extremely, you know, it goes extremely up and down. But we think when it comes to Print and Packaging, we are now starting getting through with lots of our customers to increase prices. We should see a recovery at least in Print and Packaging step by step in the H2 of the year.
Very good. The final from my side here is you mentioned that you have seen the more muted demand from some of your customer groups at the end of the quarter. Is it possible to quantify which customer groups and geographies you're primarily seeing this pattern in? Also what portion of group sales is where you can see a bit of muted demand currently?
We have seen some muted demand in some of our fashion and lifestyles brands in Europe. We also have seen muted demand in Asia when it comes to our electronics customers. In Asia, we are not really sure if it's more about this restriction turning on and off, or it's a trend of electronics losing some sales. In the same time, electronics was very stable in Europe in the period. Some fashion customers, some electronics clients in Asia. Otherwise, lots of our big customers still talks about that they have a huge backlog, there are more problem with components.
Okay, super.
So-
Thank you.
Yeah. Welcome.
Once again, as a reminder, to ask a question, press star one. We will now take our next question.
Hi. It's Adrian from ABG. I'd just like to start off with a question regarding you state in the report that you see strong demand from your customers, but that their customers have started flagging for slower demand. I'm just trying to understand sort of the lead times here. How long do you expect it to be before this starts affecting you directly? Since for now your customers should still have full order books.
I think when it comes to our automotive clients, you know, they have their backlog is so big, so even if customers start to cancel, you know, orders, cars, I think they will still be fully loaded as soon as they have material. When it comes to electronics and fashion lifestyle, it's much harder to predict because we don't see so much, you know, their forecasting is always tricky because it's somehow it goes how much they sell day by day. For the moment, we don't see so much disturbances, but there was a report today that, you know, computer sales has gone down heavily. We have not seen that yet, but that maybe will affect us, you know, later on.
I must say it's really hard for us to predict, you know, we are really working hard on focusing on quarter-to-quarter and work hard with our costs and to be prepared. It's what we can say. It's really hard. Very strange times for the moment. Yeah.
Yeah, that's understandable. Regarding the print business, a bit of a similar question. Obviously, the market is, there are some troubling conditions on the market there. Do you see any improvements towards the H2 of the year on the supply side of paper? I mean, it's been a few months since the UPM strike ended. Are we seeing any effects from that at all so far?
Now, there we can actually see regarding Europe, signals from the paper suppliers now that the demand should be more balanced after the summer. It looks like now there will be material enough because we need to decline lots of orders because we don't have paper. The signal is now that will be better in Europe the H2 of the year. In U.S., the signal is we need to wait for next year. There is enormous challenges still with paper demand in U.S., so that will affect us also the H2 of the year. Europe looks better, and we can also see that, the paper price increases now is slowing down a bit because it's been, really hard for us because it's been a moving target.
You know, prices was increasing in the end of last year. We were negotiating our customers, then one month later, prices up again, and so on and so on. It's also important for us that the price increases stop, so we can negotiate and get good levels with our customers. It looks like it will be better the H2 of the year for Europe, at least.
Okay. Also a follow-up to what you mentioned recently on Bergen. You said that they had a new facility when you acquired them, that they could sort of grow into their existing capacity. Is that facility now at or close to full capacity, or is there still some room for Bergen to grow within that?
No, there is still some room, but it's pretty close to full capacity. That's why they have managed an increase of 50%. But that is compared to last year. If customer demand is good, they will still do well the rest of the year. Next year, we open up a new facility in the Atlanta area. It's also about management resources. They are working really hard now. It's painful to grow with 50%, but they have managed it in a very impressive way. Yeah.
Yeah. The site you mentioned within healthcare in Germany, you quickly mentioned that that was up and running at full capacity. Can you sort of quantify how much that means for you in revenues, that it's at full capacity?
No, it's as you can see if you look at. I guess you can see the numbers there. If you look at healthcare, life science the H1 year, and that's a pretty good growth. The growth comes mainly out of Europe on this side. Of course, that's important for us. We are adding some new customers as well. The healthcare is still only 4% for us, but it's an area of priority. I think we have grown. Sorry, I have to check here. 26%. We are showing a growth of around 25% the H1 year, and we should be able to do the same in the H2 year, roughly.
Okay. Just one final question on my end regarding the working capital. We saw a fairly significant negative cash effect here. Could you just elaborate a bit on what specifically drove working capital build-up and whether this is an effect that can be reversed in the coming quarters, or if this is a structurally higher working capital going forward?
I give that question to Andréas.
Mm-hmm. Thank you. Now, there's partly one of the things, a couple of things that drives the working capital in the quarter, and some of it should come back in the next quarter. We still have a very good underlying growth, which also means that we are tying up additional working capital. We should have some positive effects in the coming quarters, I would say.
Okay. That was all from me. Thanks for answering my questions.
Thank you.
Again, as a reminder, to ask a question, press star one. We will now take our next question.
Hi, Marcus H ere from Penser Bank. A couple of questions. First, I'm curious to hear about electronics, and then the demand, the somewhat weak demand you're talking about. Is it specifically in China or is it all over Asia?
It's been low for us overall in Asia, so both in our Singapore and China activities. It's really hard to see if that's a first sign of a lower demand. There's also been lots of disturbance with closing down sites of course, China's zero tolerance.
When it comes to that and when it comes to China and the lockdown, has there been any signs at all of it coming back somewhat? I mean, it's difficult to know whether they will close it down again or not. If you look throughout the quarter, have you seen any like easing of it on the back of them starting to open up? Or is it still the same disturbances?
They were opening up in the H2 of the Q2 again. Lots of things was now is running more normal. I saw yesterday there was some rumors that they would maybe do some restrictions in the Shanghai area again. It's really hard. It's hard to see that they really can continue to fight this war, you know, because with this new version of Omicron, they say it's even more hard to stop. Let's see how they do it. For the moment, it looks much better. The harbors, everything is working, materials is going out. Yeah, let's hope yeah for that.
I'm curious also on Europe, especially in industrial, both automotive demand is continuously strong. Also electronics demand is strong in Europe. If you look at trends and directions, would you characterize them as unchanged throughout the quarter? Or do you have any change in up or down?
No, I didn't follow you really. What change do you mean in up and down?
If you look.
You mean-
If you look at demand.
Yeah.
There's strong demand, especially in industrial and automotive and electronics in Europe, for instance.
Yeah.
Is it kind of unchanged throughout the quarter? Or do you see any change in direction at all?
No, I think the demand was.
Throughout the quarter.
We are working mainly with their premium models.
Mm-hmm.
For us, that demand is strong. Some of our customers has communicated that they are focusing less and less on their cheaper models, especially when you talk about the German premium brands. It can be that they have a decline that we don't know about, but we are working more with the premium cars, and they are having an enormous backlog. We also work with their new electric cars as well, so battery handling and things like that. From what we can see, their demand is extremely strong from our customers. It's just problems.
Okay.
Problems with materials and components. It's. As soon as they have material, they run extra shifts. Yeah, the whole quarter.
Still mainly a supply problem rather than demand problem that you're seeing basically across the board.
Yeah
Is how you would put it?
Yeah.
Okay.
Yeah.
Okay. Thank you.
Thank you.
Once again, as a reminder, to ask a question, press star one. We will now take our next question.
Hello, my name is from Validé Invest in Norway. First, congratulations on a very strong quarter. I-
Thank you.
I think you navigate elegantly in a difficult environment. My question is related to the interest rate hikes. Could you update us a bit more about when will that influence on your PNL, and to what kind of degree? If you look ahead a year or two with the present interest rate environment, could you share a bit of information on how fast and how much do you see that increase?
I will take that question.
Mm-hmm.
I think it's Andréas here. We will see an increase in interest cost in coming quarters. We have—you could say we don't have any fixed interests, I would say, in general, on our external borrowing. Our lease liabilities, the interest rates are set at the beginning of each lease term for each contract. For the normal, we say, the credit facility agreement, we have interest rates based on SOFR and also on variable rates. It will impact us.
After we send in the certificate this quarter, for example, we will have an increase in interest rates with 20 basis points on the actual market rate also because the net debt EBITDA multiple will also affect, we have an interest rate, which is there or depending on how our leverage are. We will have an effect on it going forward, I would say. I don't know exactly if that answers your questions, but or your question.
I think what you're saying is that it's influencing, in my opinion, pretty slowly. At the end of the day, you expect it to rise obviously in present environment. My second question to that is that, will you consider to increase your EBIT target in the future, in order to compensate for higher interest rates, which certainly will influence a bit lower down on your P&L? Would you go to 8 to compensate 2 years from now? Or, have you had these kind of discussions, and is it possible?
To compensate by increasing EBITDA target, the long-term target to because of the higher interest rates? Yeah, the target, yeah.
My question is.
Yeah.
Yeah, my question is related to if interest rates are moving north with 2 percentage points during the next 2 to 3 years?
Mm-hmm.
Your EBIT target could stick to your present 7%, but it will lead to a lower earnings per share because you are paying higher interest rates on your debt.
Yeah.
Which I think is SEK 7 billion or something like that. Is it possible to or do you discuss to increase your future EBIT target in order to kind of compensate for that interest rate level and leave that price to the client? Is that possible? Do you discuss it, and is it possible?
Yeah, no, we always of course try to get higher. You know, the four acquisitions we made last year, all of them had over 10% EBITDA margin. That's one tool. Another tool for us is we normally have, you know, very strong cash flows as well. For us, if the environment gets tougher with higher interest rates, we can, not say quickly, but we can also do other things like to be a bit tougher with investment, bit slower in expansion, and then pretty quickly we will have a strong cash inflow that will push down our net debt. For us, I think, you know, to work, of course, margin up is an important tool and to increase your EBITDA.
We know also that we have a capacity to rather quickly work aggressively to push down the debt with our cash flow. I think that's even a stronger tool for us to increase the margin, actually.
Yeah.
Because we can then, you know, we can for a while tell our guys, "Okay, we slow down investment. Maybe we don't expand. We wait a quarter to get down." Because we have this swaps for margins in the interest rate as well. That is a very important tool for us. We are not afraid of higher interest rates in that sense, but that will, of course. We need to make a decision maybe to slow down a bit of our organic growth, be a bit more careful, focus pushing down for a while our debt, and then we can increase the speed again.
Thanks a lot for reassuring answer from your side. That's everything from me now. Thank you.
Thank you. One more comment as well. If the economy slows down, then we normally don't lock up so much in working capital either. That will also give us some positive effects on net debt. Okay.
There are no further questions at the moment. Once again, press star one to ask a question. Okay, it appears that we have no further questions for today's call, so I would like to turn the conference back to our speakers for any additional or closing remarks.
Okay. No, but thank you everyone for calling in, and we wish everyone a really nice summer. Thank you very much.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.