Earnings Call: Q2 2021

Jul 13, 2021

Good day, and welcome to the Elanders AB Conference Call. At this time, I would like to turn the conference over Magnus Nielsen. Please go ahead. Thank you. Welcome, everyone. This is Magnus Nielsen, CEO of Alambo and together with me is also Andreas Wieckner, our CFO. I will now go directly to Slide number five in our presentation and talk about our performance in the first quarter. The strong recovery from second half of last year continued in the second quarter and we managed to perform an EBITDA margin of 5.2% compared to 2.8 the year before, which means that we managed to double our result despite the negative effect on EBITA of million because of a stronger Swedish krona. You could see a solid demand from almost all our customer segments, but the shortage of semiconductors continued to create some disturbance in production to some of our customers. These disturbances resulted in cancel and change shift patterns with very short notice, which make it hard for us to adjust our capacity and cost structure. Our net sales grew organically with 6% and the growth came mainly from our business area, Supply Chain Solutions and also the Subscription Box business in US that continues to grow. In the July, we made an acquisition of the German print company Schetzel to strengthen our offering online print, which is one of few areas in print that can show yearly growth. Together with Schetzel, Schetzel will allow us to be one of the leading suppliers in Europe when it comes to online print. If we then go to Slide number six. During the second quarter, we also renewed a very important print contract and the new contract is valid for five years with a yearly sales value of around DKK 150,000,000 to DKK 200,000,000. The new contract also includes other services than print like sourcing and supply chain services. And compared to the old one, this means that we have doubled the turnover per year. The refinancing of the group is now in place and the new contract is valid for three years with potential to prolong it for two years two more years. And the new agreements have better terms compared to the old one, which will lower our financial costs and also give us more flexibility when, for example, comes to acquisitions. If we then go to Slide number seven, then you can see that we continue to have a very strong financial position. Our adjusted net debt to EBITDA, exclusive IFRS 16, is now at EUR 1.5. And then if you go to Slide eight and look at our two different business areas, then you can see that Supply Chain Solutions managed to improve the EBITDA margin to 5.9% compared to 4% last year, and they actually improved their results with 43%. The improved margin came mainly from our European part of Supply Chain Solutions as a result of the cost saving program we did in 2019. And we had an organic growth in the quarter of 4%, and that was despite that the last year had a positive effect on sales of around $45,000,000 because of delivery of personal protective equipment to hospitals. If we now look at Print and Packaging Solutions, we can also see that they have a very strong recovery because they were very affected by COVID-nineteen last year. They reached an EBITA margin of 4.4 compared to minus 1.5% the year before, and they had an organic growth of 10%. If we then go to Slide nine, look at our sales by customer segments in the quarter. If we look at automotive, the sales of automotive was last year very heavily affected by COVID-nineteen and we could show a strong recovery with organic growth of more than 70%. Unfortunately, are they still affected by the lack of semiconductors, which I mentioned before, affects our efficiency negatively and creates some additional costs. Our customers expect it to continue in the second half of the year. If we then look at electronics, we could see that the demand from our electronic customers continued to be that was strong during the whole COVID-nineteen crisis, also show some slight decrease in the second quarter because for some shortage of semiconductors also affected their manufacturing capacity negatively. But we managed to compensate their lower production volumes by growing other services like rework and service of their products, which actually resulted in organic sales in line with last year. If we then go to Slide number 10 and look at Fashion and Lifestyle, you can see that we continue to show a very strong growth in this area. And our organic growth in the quarter was actually over 30% compared to last year. In the second quarter, the biggest part of the growth coming from our activities in Europe and the reasons for the growth was continued strong demand for e commerce deliveries, but also the reopening of shops in Europe. We also continued to see a growth in our subscription box fulfillment business in The U. S. If we now look at Healthcare and Life Science, they had a huge increase in sales last year because of the deal regarding personal protective equipment deliveries that had a positive effect on sales with $45,000,000 last year. Underlying demand continues to look very good and we have acquired some new interesting customer projects that we saw later this year. We then go to Slide number 11 and look at Industrial. You can see that sales recovered compared to last year and we had an organic growth of around 20%. Some of our customers in this area are also affected by the lack of semiconductors, but it has a very low negative impact on the service we are doing. If we can go to Slide number 12 and look at how things will be going forward. We are very happy to see that our strong recovery in the second half of twenty twenty continue in the second quarter. You can also see that the market continues to normalize and we have lots of interesting requests from both existing and new customers. And we have managed to gain several interesting new customers in the last six months. We're also very pleased to see that we continue to grow within e commerce services for both existing and new customers in Fashion Lifestyle. And we can also see that our global footprint is a strong enabler to gain new customers. And this is the reason why we have managed to get in three new Scandinavian brands as customers just in the second quarter. And the reason is that they're growing rapidly outside Scandinavia and they need the partner that can support them globally. Our strong financial position together with our new financing agreement enable us to continue the acquisitions. And we have the last three months nine months already made three acquisitions that supports our growth in both life cycle management and online print. COVID-nineteen and the lack of semiconductors and the stronger Swedish krona continues to put some pressure on sales and results, which will continue in the second half of the year. Okay, that was my presentation. And now we are opening up for questions. Thank you. We'll now move to the first question. Please go ahead. Your line is open. Hi, it's Karl here from Nordea. A couple of questions from my side. First, if you could give us an update on the semi con issue by segment and if you expect Q3 to have a greater impact compared with Q2? Let's start with that. Hi, Karl. No, I think when it comes to the semiconductor, it's mainly our area of automotive that is affected. And it doesn't affect sales so much. It's more about that our production is going very up and down. Very short notice, some of our customers maybe take away a shift and then they add a shift like the week after. So it puts some pressure on our margin in that business area. But I think for the moment, in the other areas like electronics, we have managed to balance it with other services as well. It hasn't been so hard for us to handle this lack of semiconductors. And going forward, I must say it's really hard to predict if it will be in the same level or if it will be more serious, you know. The the only information we get from our customers is that they think there will be some pressure also the second half of the year. So, it's really hard. So but hopefully for us, if it's on the same level, then we should be able to balance it in a pretty good way. But, of course, if it should be more serious lack of it, who knows? I don't know. Yeah. Exactly. But no but no drama here in the short term, at least. No. There's no drama indications. It's just an ongoing headache, I think, for our customers. Yeah. And also, with the reopening of societies, people are gradually returning to offices, how do you expect it to to impact the electronics business? What what we can hear from our customers in electronics, there's still a huge demand. You know, one of our biggest customers, they even made a statement that they could actually deliver sell 25% more laptops if they could produce them. So and and there is now and we can also see it in our business where we pay. We do take backs of secondhand computers and things like that. It's a really hard market. Everything we can get in, we can sell immediately. So I think also it's change now, you know, because lots of companies will offer people to work from home. And in lots of countries, you have, you know, let's say, normal desktop computer. And I think more companies now are changing that all their employees should have laptops so they could also work from home. So the expectation from us and our electronics customer is that they can sell what they can do. So it's much more about semiconductors. Okay. Perfect. And a question probably for you, Andreas, regarding the refinancing you mentioned. Could you could you give us maybe give us any of the terms or at least the changes from the previous ones and also maybe the impact on net financials going forward? Yes. Yes, sure. For one thing, we're going from two banks to three banks. We will have one more international European banking constellation. And we are adding sorry. With the new agreement, there would be a little bit more favorable margins on on the interest rates from our side. So it will will have will have some positive effect on the result, but it's not significant. And the the new agreement will also give us the possibility to acquire companies and and sort of be compensated for the EBITDA effect on the results historically. I mean, we can we we we have an acquisition window where we can include the EBITDA for that decision that we have made and not get only the effect on the the net debt when we acquire them. So there are some some of the things that we have in the new agreement that we didn't have in in the old, for example. Okay. Perfect. And and the final one from my side. I mean, you're to to the pandemic, you implemented cost reductions, cost cost out programs in in in LGI. Would you say that that it's more to be done, or are you satisfied with with the current current cost level or or for LGI, that is? No. No. No. I think there's there's still more to be done, but that is more about coming to some of our customer contracts that has too low profit. I think when it comes to the cost structure now with the new organization in LTI, we are really happy with the new setup and the performance. It's much higher. So but as we have mentioned before, we still have some longer contracts in transportation area that we are trying to renegotiate. We will leave some contracts also this year. So but it's more about customer contracts as we try to increase prices or we exit them. So otherwise, we are very happy with the structure and the setup. So there shouldn't be any more big one off costs connected to that. Perfect. Very clear. Thank you. Thank you. We'll now move to the next question. Please go ahead. Your line is open. Hello. Good morning. Alex van Vilval here at Penzer. I think most of my questions have been answered. But regarding acquisitions and new financing, you mentioned that you can take into account basically acquired EBITDA. How much additional potential buying power does this add, would you say? Is this a big step for you when it comes to potential acquisitions, if you would like to sort of expand on that a little bit? Yeah. No. I think that, of course, give us some additional space. And with the bank agreement, we have also more flexibility when it comes to increasing debt. So but it's important the most important thing is that we still can do a lot of acquisitions and be under net debt to EBITDA of around two, if we do smaller ones. But I think to do small acquisitions, we have a capacity now to do around, I don't know, 20,000,000, 30 million per year and still be under EUR 2,000,000 in net debt to EBITDA. But we also with the new agreement, of course, can do some big acquisitions and then temporary go up to around 2.5, three point five even. So the new agreement gives us power to do lots of small ones without increased cost, and we can also do bigger. So now it's very good. Okay. Thanks. Thank you. We'll now move to the next question. Magnus and Andreas. So first off, I would like to understand the lower than expected gross margin and the sort of downtick from previous quarters. Was all of it driven by increased costs related to supply chain problems and sort of unpredictable shifts of capacity? Or was it something else as perhaps sales mix as well? I think that could be a bit of a mix because I also think the gross margin is affected by that. We are still continuing to grow with this subscription box business in U. S. That has pretty low contribution in gross margin because there's a big share of transportation cost. And then, of course, it still affects automotive area with the problem with semiconductors where we have a a big organization and when when we cannot utilize it in an optimal way, it also affects the the gross margin. So I think mainly that is the two reasons. Okay. But but it seems like I think fashion lifestyle was down almost 20% sequentially within print and patch packaging. And I guess that implies a drop for subscription boxes, and the margin is down sequentially as well. So maybe first off, is it correct to assume that subscription boxes is down 20% almost? And if so, what's the reason? And if is it still No. No. I think subscription box business is still on the same model level like last year. There's no change. It could not be that effect. So, of course, also, don't know, Anders, it could also be depending which trading and what buy and sell deals we have done in in also yeah. And last year, we had the PPE business also. But still very good gross margin. Yeah. Yeah. That had yeah. A very high gross margin. I think that's also disturbed when you compare it. So on a subscription box business, the money level is actually the same like last year. So it's still growing. So so I don't know if it's the the currency. Course, currency doesn't affect the the margin, but the the looks if you look at the sales, it's not I mean, there there is a positive organic growth in in the subscription box business within print batching solutions. Okay. But but thinking sequentially, I'm looking at the numbers here, it says €294,000,000 in sales within Fashion and Lifestyle last quarter and now down to 39,000,000 within print and packaging. So I'm just wondering if that's subscription boxes mostly and and what's sort of going on in in that area. See here at the moment. It says fashion lifestyle. Yeah. I mean, it's down in in with the packaging fashion lifestyle, it's slightly down. Sequentially, I guess, from q one. And I don't know if in q '19 percent. So I was just wondering if if that volume is sort of dropping off. I I we can see that the growth has slowed down now for the subscription box business. The growth rate is much lower than last year, but we still have grown with 10%. So just Okay. Six months. Okay. Just check the figures. Do you have more questions? Because I'm going to try to look for more deep whenever we can come back to that question. Do you have some other questions? Yeah. I have one more. And looking at sort of the customer segment level as well, there was a fairly large pickup of health care volumes this quarter as well. Is this some kind of a nonrecurring contract? Or should we expect a similar level going forward? No. We can expect the the similar level going forward. We have a good development, online development in the health care part because we are growing this business in both in Asia, and we are doing well in Europe. And we will add a new big customer as well that will come in in the second half of this year. So and we are we are now setting up a new health care center in in Germany as well with more capacity. So we expect to grow that there. It's one of our priorities. Okay. So are these holdings in any way COVID nineteen related, or or will it continue when when things return to normal as well? No. It will continue because it's more related to the other healthcare services that is now recovering when, hospitals can do other things than treating COVID nineteen patients as well. So Yep. So we are mainly in healthcare working with other, you know, for other kind of equipment that you use for for daily use, both consumables and your operations and also lab equipment and things like that. So we we expect that they will come back now, actually. Yeah. Okay. Perfect. That was all the questions I had today. And you're right about the the sales in in in subscription boxes from q two to q one. So there there is a drop in sales between between q one oh, sorry. Q two and q one. Yeah. Between there. Yeah. There's a drop. Yeah. But it's still higher than the year before. Yeah. Okay. Yeah. Mhmm. Yep. So that's great. I I I actually drop? I mean, are are your customers losing their customers or what's sort of going on? No. I I actually know the the reason I wanna think about it because it is you know, we are trading all the freights for the customer, and one of our biggest customers has started to trade some freight by themselves. It's pure, let's say, freight. So if it comes to number of deliveries of boxes, the number is increasing. So it's more that we are moving some part of the freight to the customer directly. And we want to do it as well because if we manage that, we will increase our our margins instead. Okay. So, I guess, the EBITDA effect is very minor from this one? Yeah. Yeah. Yeah. But if we move more to the customer, the EBITA margin can go up in the long run. Yes. Okay? Okay. Perfect. Thank you very much. You're welcome. There are no further questions in the queue at this time. There are no further questions in the queue. I'll hand the call back over to your host for any additional or closing remarks. Okay. Thank you, everyone, for calling in for our conference call, and hope all of you will have a nice summer. Thank you very much. Bye bye. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.