Good day and welcome to the Elanders AB Conference Call. You will have the opportunity to ask questions after the presentation. This can be done by pressing star one on your telephone keypad. I will now hand you over to your host, Mr. Magnus Nilsson, CEO of Elanders Group, to begin today's conference. Please go ahead, sir.
Thank you. Hi, everyone. It's Magnus Nilsson here speaking, and together with me, I also have Andréas Wikner, our CFO. Okay, I will go directly to slide number 5 in our presentation and talk about our Q3 . Despite a very complex environment, we could deliver a result that is clearly better than last year, and that is a result of our strategy to continually broaden our customer base and also increase our geographic footprint. If we then look at the demand from our different customer segment, we could see a very mixed picture in Q3 , but we managed to compensate low demands from some segments with the help of stronger demands from other segments. We could also continue to see increased costs for fuel and electricity, which continues to put pressure on our operations.
On the other hand, could we see some improvements in a global supply chain with improved capacity and reduced prices. In the quarter, fashion lifestyle in North America continued to go very strong, and we could also see very stable demands from electronics and healthcare and fashion lifestyle in Europe. Asia was a bit weaker, and we needed to compensate low volumes of value-added services with a bigger share of buy and sell. That gives us a bit lower margins. If we now look at print and packaging solutions, could we see a very strong recovery after a very tough first half-year with the help of price increases, better availability of material, and also positive recovery of online printed order products like photo books and calendars.
We could also already in Q3 see positive effects of the online print contract we signed in Q2. If we now look at our numbers, can you see that we managed to deliver an organic growth of 12% and an EBITA excluding one-off items that is actually 76% better than last year. We also improved our result before tax, excluding one-off items with 80%. If we then go to slide number 6 to look at our business areas Q3 and look at Supply Chain Solutions, you can see that we can show a very strong growth in both sales and result, and we improved our EBITA margin to 6% compared to 4.9% the year before, despite a challenging market with lots of fluctuations in demand from our customers.
Bergen is, of course, the major reason to the growth, but we could also show an organic growth of 15% in the quarter without the Bergen. If we then look at Print & Packaging Solutions, we can see a very strong improvement in their adjusted EBITA result, which actually came in 54% better than last year. As mentioned before, the main drivers behind the improved result is that we have managed to get through with price increases for customers and better availability of material like paper and cardboard, and also good recovery when it comes to online print volumes.
If we then go to slide number 7 to look at our sales by customer segment in the quarter and then look at our sales to automotive, you can see that sales improved compared to last year, despite that our customers still have problems with shortage of components like semiconductors, which continually results in irregular outputs from their factories. Positive is that, the majority of our customer in this segment is still showing full order books. If we now look at electronics, is the picture a bit more complicated with decreasing demand in Asia and also decreasing demand on some products in Europe like TVs and printers. On the other hand, can we see an increase in demand for heat pumps and also other equipment that is connected to heat pumps, which increase demand.
We can also see an increased demand for storing of electronic products in Europe, which under Q3 managed to compensate the low demands from TVs and printers. In fashion lifestyle, we continue to see a very strong growth compared to last year. The growth comes mainly from Bergen, but we also continue to see a stable demand in Europe. In Q3, we could actually see rather strong demand regarding our retail deliveries. We go to slide number 8. You can see that healthcare and life science shows a good demand, and we continue to add new customers, both when it comes to contract logistics services and also lifecycle management services like deliveries, installations, cable handling and take back of equipment.
In industrial, we could see a stable demand in Q2 , despite the lower demand of products like power tools, which we could offset by increased volumes in the area of thermal technology. Other sales shows a strong growth, which is mainly driven by recovering demands of photo books, calendars, and children's books and other similar products. We could also see a good demand from other online auto products like smaller series of packaging material. If we then go to slide number 9 and look at how things will be going forward. We can see that Elanders global footprint and diversified customer base really helps in a very challenging market. Decreasing demand for some products can often be compensated by increasing demand from other products.
We can also see that the low demand increases the need for storage of products, and the lack of space of warehousing space makes it possible to achieve rather good margins also in storing of products. We can also see that Bergen's model, which focus on small to medium-sized customers, still works very well because they can compensate low demand from some customers by adding new customers rather quickly in their multi-customer site. I think as everyone understands, the market will continue to be rather challenging and continually increasing costs for food, energy, and electricity will put additional pressure on the consumers the coming months. It also depends how the local authorities will act and how they will compensate the consumers, and also to try to get the inflation under control.
A positive sign in the quarter was that we can see a normalization when it comes to air and sea freight, both regarding capacity and decreasing prices, which would help some of our customers. We still think that global logistics over time will continue to grow, and we have actually added more capacity in Germany in Q3. We are now also looking at expanding in U.S. and U.K. by adding more warehouse capacity during the first half of next year. Okay, that was everything for me, and now we open up for questions.
As a reminder, if you would like to ask a question or make a contribution, please press star one on your telephone keypad. We will now take our first question. Please go ahead.
Hi, it's Adrian here at ABG. Is my line open?
Hi, Adrian. We can hear you.
Okay, perfect. Just starting off with a question on current trading. We're going into the famous Q4 , and maybe it's a bit too early to say, but do you expect a stronger Q4 than last year for the print and or online print and photo books business? Or do you see a risk to demand considering the sort of poor consumer sentiment at the moment?
I think that with the signals we could see in Q3 with a, you know, strong recovery in this area compared to the numbers the year before, that should be for us a signal that it should be a strong Q4. Also we have an additional contract that we signed in Q2, so we expect higher volumes than last year.
Okay, perfect.
You can always speculate. Some people speculate that this, you know, the times are hard or it's cheaper to buy this kind of products as a Christmas gift and other things, I don't know. We are positive for Q4, yeah.
Yeah. Perfect. Looking a bit at Bergen, you say that there is a high double-digit organic growth, which obviously that's a very big span. Could you sort of quantify a bit more specifically the organic growth in Bergen?
Yeah. I, you know, we talk about improvements around 50% or growth of 50%.
Okay. That's very helpful. Obviously, there are some fears regarding some general economic slowdown in 2023. Looking at Bergen specifically, how resilient do you expect Bergen to be in a sort of recession scenario in 2023?
We expect that they should be rather resilient actually, if it's not a really, you know, bad heavy downturn economy because with their business model to work with, you know, they have around 500 customers, small to mid-size. With their model, they can add on more customers if the demand goes down for a customer. I think they can compensate there partly at least. We think they will be pretty resilient. Yeah. Of course, they will be affected if it's a big downturn, but yeah.
Yeah. You've previously stated that Bergen is close to maximum capacity utilization and that you're working on expanding capacity. Could you just give us a status update here? How long can Bergen sort of maintain this organic growth rate, given the current capacity, and what's the timeline for expanding it?
The timeline for expanding it is that we will start up the new site in Atlanta in Q1. That will add on lots of capacity. You know, over time, you know, to have this big, you know, this growth is not sustainable so. We think they will at least keep, you know, double digits growth, but in a more balanced levels because it's also a capacity management and to handle it. Yeah.
Yeah. Looking at working capital, we have another quarter of fairly significant working capital build up. How should we think going into 2023? Is there a potential to reverse some of this, or is this mostly a function of you growing a lot in North America and in Bergen. Is this sort of structurally higher working capital?
I give it to Andréas.
Thank you. I think we should see a decrease in working capital in the beginning of next year. There are some buy and sell business this year been happening in the Q3 and Q4 that sort of also drives the working capital when it's first being tied up as inventory and then as accounts receivable. There should be an improvement in next year, in the beginning of next year.
Okay. One final question from my end regarding the margin development and supply chain. Obviously we saw solid profits, but comparing to Q2, you were actually clearly above your 7% target in Q2. We saw a full percentage point drop to 6% in Q3. What's the sort of main delta between Q2 and Q3 in supply chain specifically?
I think normally we are stronger in Q2 in supply chain than Q3 because in Q3 we have lots of closing because of holidays in Germany, especially in Europe. Normally we slow down a bit also from margin perspective in Q3. For us, it's nothing.
No, it's a little bit the top-line growth from the buy and sell business which sort of
Yeah
It's lower margin on that business than the other one.
Okay. Other than that, it's just seasonality effects and some more buy and sell business on the top-line.
Yes.
Yeah. We, you know, also for our customers, we responsible to trading lots of freight for them. When the freight cost goes up, it also drives the EBIT turnover, but no margin unfortunately. When prices is more normalizing the transportation sector, we will get an upside from a margin perspective.
Okay. Well, in that case, that's all from me, so thanks for answering my questions.
Thank you, Adrian.
Thank you.
As a reminder, to ask a question, press star one. We will now take our next question. Please go ahead.
Can you hear me?
Please. Yeah.
Yes.
Oh, very good. Hi, it's Carl here, from Redeye.
Hello.
Firstly, correct me if I'm wrong, but I think you mentioned that you managed to grow your European fashion and lifestyle business in the quarter. Is it due to ramp up of new customer contracts, or is it simply because the market held up well? Yeah, I was a bit surprised on that.
No, it's mainly. Of course, we have added some new customers during the year, and they were running well, so that helps. Overall, we saw very strong demand from lots of existing customers, especially when it comes to retail. Also a bit surprising for us, I must say. It's so everyone talks about, you know, a downturn in the economy and whatever, but yeah, there was very strong demand from, you know, also lots of our customers we hadn't had for a long time, but it's more in the retail segment. It's performing very well. Compensated some e-commerce that was a bit weaker, so yeah.
Did you see an equally strong demand throughout the quarter? Was it better in the beginning than in the latter part, or was it more or the same?
Especially in Europe, it was especially strong in September, actually.
Okay. Very interesting. Okay, perfect. Also, is it possible to quantify buy and sell volumes in the quarter? Yeah, I also guess it's still low single digits on those volumes, right, or margins, that is.
Yeah, that's correct. We don't have any exact figure. I don't know if I can give an estimate or something like that.
I think we can maybe make it qualified estimate, but it's
SEK 200 million-SEK 300 million.
Yeah. Roughly SEK 300 million.
In the quarter, yeah.
Yeah. With very low margin, yeah.
Okay. Very helpful. Also you mentioned that you saw growth from heat pumps and other energy efficiency- related products. Do you get this exposure from your Bosch sales, or do you work with other brands as well, and how big is this exposure for you currently?
I think the good thing for us is that we work both in with industrial customers that work with these systems, but also one of our bigger electronics customers also have this different kind of heat pump system. It it's really really helped us. I think it's hard to quantify, but if you say it compensated the customers' downturn in demand of you know, TVs and power tools, that was compensated by these components. We don't separate this one, it's in different business area. We expect it to be very strong demand from these kind of products because they're saving energy and there's lots of other components around it. It's a good thing that we are also diversified.
We could also see that quite a lot, a few of the heat pump players, especially from Asia, are trying to target Europe, building new production capacity Europe. Is it possible for you to sort of gain more traction in the market by getting new deals with the Asians trying to expand to Europe, or?
Yeah, of course, that's always a chance, because we have a long experience for, I think one of our industrial customers, we are, you know, handling everything of their. They have, you know, both small systems, big systems, including pipes and whatever. We have a good track record on handling these products, so of course, there's always a chance for us. One of our customers is actually an Asian customer already, so yeah.
Mm.
It could be a good opportunity, yeah.
Okay, very good. The final one from my side. Have you seen any improvements in a more stabilized production for automotive? Is it still a similarly challenging situation as you saw in Q2 or in Q3 or compared to Q2?
I think unfortunately it's the same. Every time we think they are running better, they're hitting some problems, then they're reducing shifts, and then they increase shifts. I think it's still challenging for them. Some of them was you know running actually pretty well in September, but in August it was pretty weak. It's really hard for us to see. I think when the global supply chain starts to work better with better capacity and air and sea, that will also help. The big question is still the semiconductors that is helping them.
Okay. Sorry, one more if I may.
Yeah.
You also said in the end here that you wanted to add more capacity, for instance, in Germany. Is it any specific end market or customer you're targeting, existing customer, or is it more that you want to have capacity ready if anything comes up, or?
Right. We are adding one of the capacity sites we are adding is actually professional lifestyle because we still believe there's a big growth opportunity in that market. Also we can also see that, you know, also business to business, that there's supposed to be developments when it comes to more, you know, e-commerce between companies. One of the additional sites, we are focusing mainly on industrial customers when it comes to e-com between business to business. We can still see, you know, especially both in Germany and U.S. and U.K., there's a huge demand of capacity also for normal warehousing.
It makes it easier for us to be a bit more aggressive, so we add capacity, then we start with maybe a simple warehousing, and then we try to turn it around to be more value-added services. There's still a huge lack of space in US and Germany and also in UK. UK is also driven by Brexit.
Oh, sorry.
No. The U.K. is also still driven by Brexit that companies need to have, you know, you need to handle your returns in U.K. and to consolidate and before taking them out and also when you ship in, things like that. Yeah.
Would that initially lead to sort of a margin dilution given that you are doing more simple services compared to other sites where you have sort of more value-added services? Or is it-
There is some dilution, what do you say? Normally, absolutely, and that we are counting on. Also now when there's pressure on storing, we can see that prices are increasing, so we can actually also do decent margins on our storing. That's. See, somehow it's maybe easier to expand when consumption goes down a bit because then we can use it for storing, but to get better pay than normally. I think we can balance it, of course, it always costs to do organic growth.
Okay. Thank you. All from my side. Thank you.
Thanks a lot.
Thank you.
Again, as a reminder to ask a question, press star one. We will now take our next question. Please go ahead.
Is it me?
Yes.
Yeah, I didn't know whose line was open, 'cause it didn't say. Hi, Marcus Hultner at the bank. Like to start following up on the previous question. You've seen supply chains. You're talking about supply chains opening up a bit and then working a bit better in general. But then we also have the semiconductors. Can you talk a little bit about that? Are you seeing any easing on the semiconductor side as well? 'Cause we know that freight rates have come down, and that's an indication of supply chains working better. We know that electronics, especially consumer electronics are also falling demand, which should ease up some semiconductors. What are you seeing there? Are you seeing some easing?
I think it's a bit hard for us, you know. It's pretty complex with these semiconductors, but as an amateur in that area, I think we can guess if consumer electronics is going down a bit because consumers buy less computers and printers. Hopefully, that should help the automotive sector buy more capacity from the semiconductor manufacturers, even if what I understand, there's different levels on them. There's always lots of reports coming out. We can see some indications now that they expect this will be better next year, at least the second half. We heard that one year ago, and then there was problems again. It's I must say it's very complicated, but it looks like it should be better.
Okay, that's nothing you've heard in details from, I mean, from your customers. It's nothing that you have discussed?
No
That they have signaled. Okay. My second question is so we're seeing consumer discretionary in particular falling. You talk about white goods and you're seeing printers, et cetera, also falling, you see demand for those falling. And automotive is a bit of a special situation where lead times have been very long. Can you talk a little bit about the industrial sector? What do you see in industry? Because we see other manufacturers who actually hold up quite well despite leading indicators, et cetera, falling quite sharply. It would be interesting to hear what you see.
Well, I think in our industrial segment, I think the demand still looks very stable. There was some part going down like power tools and more tools for home. In the, on the other hand, there was, you know, the thermal technology going up. In for us, industrial is also trucks, and I think the demand still looks good for trucks and things like that. I think overall, industrial looks good, looks stable. Yeah.
Okay. Then finally, my final question is on the comment you made about increasing demand for stock, I mean for building stocks in certain segments. Does this? Is this across the board? Is this broad or is it connected to the areas where you also see weakness? I mean, or is it too difficult to say and too complex?
No, it's absolutely connected to where we see weaknesses, yeah. That is where we see the volumes going down, that the product flow is still coming in from outside their home market, and then they need to store it because they cannot push it out to retail and retailers and so on.
That also means that you don't see that similar type of movement in automotive and industrial segments.
No
For instance?
Yeah, no. No, not so much, no.
Okay, perfect. Okay, thank you very much.
Thank you.
Again as a reminder, to ask a question, press star one. We will now take our next question. Please go ahead.
Yeah, good afternoon. This is Stefan Söderberg from SEB.
Hi, Stefan.
I have a question on your cost assumption for next year, starting with the leasing cost or rental cost. I guess they are tied to the inflation. What's the contract look like for next year? Also on the energy side, if prices remains at these levels, what kind of cost increase do you expect to see in 2023? Thirdly, how do you compensate for these cost increases? Thank you.
Thank you. Well, I think what you say, Andréas, the leasing cost is normally connected to inflation or index. Of course, that will have an effect. Normally in our contract, at least when it's single customer sites, we have the same in our agreements with our customers. When rental price goes up, we push it forward to customers. In the multi-customer sites, it's another question because you normally have several customers. Normally you have it in a contract or it's something you need to negotiate with your customers. Can you add something more about that?
Quite good, I think.
Yeah. I think normally we can act. I think the increases will be higher than normal, but mainly our customers are prepared for it, and we have the tools to increase prices.
A good and ongoing dialogue with them about the price increase.
Okay. You expect to see no pressure on your profit for this kind of cost increases?
No, we don't see so big pressure from that area. I think it's the harder thing is, of course, when it comes to you know negotiations about salary increases next year. Because it's more easy maybe with the you know with the rental because there's an index and we can you know just provide the data for our customers. I think it's much harder later on to compensate if the salary increase is too high, then you need to be in the discussions with the customers more than normally then, yeah.
Okay. Thank you.
Thank you.
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Okay. Thank you everyone for calling in to our phone conference. Thank you. Bye-bye.
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