Hello, welcome to the Elanders AB conference call. Please note, this call is being recorded. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to Magnus Nilsson to begin today's conference. Please go ahead.
Thank you. Welcome, everyone. Yeah, this is Magnus Nilsson, CEO of Elanders speaking. Together with me, I also have Andreas Wikner, CFO of Elanders Group. I will now go through the presentation. I will go directly to slide number five and talk about our Q2 . The market continues to be very challenging. We could, in the second quarter, also see decreasing demand in North America, especially from our existing fashion customers. In the same time, could we see an increased amount of requests from potential new customers. In Asia and Europe, it continues to be rather soft. Also, Europe could see a rather high activity when it comes to requests from new potential customers. In the quarter, we had a negative growth. This was mainly due to normalized freight prices within our air and sea forwarding business.
Our adjusted EBITA margin went slightly down to 6.1%, compared to 6.3% the year before. Main reason to low margin is the overcapacity that we built up in Europe and U.S. before the inflation began to soar. Our focus on lowering our working capital and improving our cash flow resulted in a very strong operating cash flow and a cash conversion of 112%, compared to 36.8% the year before. If you adjust for dividend payment and currency effects, decreased our net debt actually by SEK 300 million in Q2 . We then go to slide number six, to look at Supply Chain Solutions, we show a slightly negative organic growth, but that is, like I mentioned before, mainly due to the normalized freight prices within air and sea.
The reason for the lower adjusted EBITA margin is mainly because of the overcapacity in Europe and US, but also weaker demand for high value added services in Asia. Despite the soft market, are we still getting lots of requests from new customers. We expect to step by step fill up our unutilized capacity, which together with the closing down of the non-profitable road transportation in Germany, will help us step by step to improve our margins again. Our actions to improve cash flow and to lower our working capital had a huge positive effect on Supply Chain Solutions, as we show cash conversion of 99.6%, compared to 15.2% the year before, which leads to the whole group's cash conversion in the Q2 .
If we then go to slide seven, to look at Print & Packaging Solutions, we could show a strong improvement when it comes to our adjusted EBITA margin, with an adjusted EBITA margin of 5.8%, compared to 3.3% the year before. Traditional print is also affected negatively by the weaker market conditions, but online print continues to go strong, and this, combined with successful price increases, was the main drivers to the improved margins in the print area. If we then go to slide eight and look at the development of our different customer segments in the quarter, and if we start with fashion, could we see a low demand from several existing customers in North America, which slowed down our growth
In the same time, could we see a stable inflow of requests from new potential customers, and Europe continued to be rather soft, but also here we're receiving lots of requests. When it comes to electronics, was it a rather challenging quarter with low demand in both Asia and Europe, in the end of the quarter, could we see some signs of recovery in Europe when it comes to electronic products. Our Life Cycle Management service, which delivers an installation of high-tech devices, continued to develop very well and continues to show a growth despite the challenging market. The demand from the industrial segment continues to be more stable, sales went down because we exited an unprofitable road transportation operation during the quarter.
Demand from healthcare is rather stable, but our sales was low compared to last year because of normalized prices for air and sea transportation. Other show a decrease, but online print continues to show very good growth. We then go to slide number one, we want to update you on important business development projects that we have and are working to implement in 2023. Regarding our rollout of the Bergen Logistics concept, we followed our opening of facilities in Atlanta, US, and Newcastle, UK, in Q1, with a new site in Shenzhen, China, in Q2. All our Bergen Logistics sites are supported by our own warehouse management system, CloudX, that offers our customers one single interface to overlook multiple warehouses globally. They can follow their inventory levels, deliveries, returns, etc .
CloudX is also integrated with several major carriers. To speed up the development of the platform, have we almost doubled the number of software developers in the last six months. As we have mentioned before, we'll be open two new medtech sites during H2 of the year, and one of them concerns cleanroom facility in Indiana, USA, and the other a site in Eastern Germany with a focus on factory logistics. As a result of the nearshoring, the increase in nearshoring trend, we will also expand our capacity with a new site in Mexico. If we go to slide number 10 and look at how things will be going forward, we can still see that the LANXESS global footprint and diversified customer base really helps us in a very challenging market.
Decreasing demand for some product areas can often be at least partly compensated by increasing demand for other products. We can also see that even if the market is challenging, are still a very high activity when it comes to new RFQs from potential customers. Because sometimes when it's harder times, also companies look to outsource more, and we can see a rather strong trend in that area, with lots of RFQs coming in. Our investments in additional capacity, combined with important global rollout of the Bergen Logistics concept, should also be an important engine for our future growth. We are also very happy to see the improvements where management comes to improve cash flow, and it will be a continued focus going forward. That was everything for me, we open up for questions.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad. That is star one for your question. Our first question today comes from Adrian Gilani of ABG Sundal Collier. Please go ahead.
Hi, it's Adrian here at ABG. First, I would just like to start off with a question on the freight and transportation revenues that were down more than 20% year-on-year. Is all of this due to lower freight rates, or is there a volume decline baked into that as well?
Well, I think it's mainly the price decreases, the normalization of prices for the air and sea business.
Okay. If we look at it on group level as well, the 9% organic sales decline, could you give us a rough indication of the price and volume split on the group level as well?
Yeah, that's around 5% to 6%. We also, of course, started to close down the road transportation in Germany, that also had some effects, but it's, it will be a bigger effect going into the Q3 from that side.
Okay, perfect. In Supply Chain Solutions, you say you should be able to fill up the current overcapacity and improve margins. Is this something we'll see in effect of already in Q3, or it's something that will take longer?
It's, it's a mix there. If you look at US, we are normally taking in more small and medium-sized customers, so that could be go quicker. There we talk about we will start filling up, you know, in one to two months. As long as our existing customers don't continue to decline, there could be effects already after, yeah, after two months, roughly. In Europe, we are looking at much bigger projects, and we have actually gained two very big projects, but one of them starts first in Q4, and the other project starts in Q1 next year. There is some... In Europe, it's often slower, it's bigger customers, bigger projects. US is faster, so it's, it's a mix.
Okay. That's very clear. Thank you. In the print business, you talked about raising prices to customers, but in recent months, looking in from the outside, it looks like both energy and the paper prices have come down. On the current cost levels, is there a risk that you might have to lower prices towards the second half of the year, or can you sort of enjoy elevated margins for a while here?
No, I think we can keep up the margins with the new pricing. Of course, in some customers, there could be a mechanism that if the material price goes down, we need to also adjust down, in the same time, of course, the also going down. We have reached a new price level now for lots of our big contracts, and that will help us going forward. Shouldn't be any negative effect.
Yeah. Okay,
We also estimate that, you know, we still have lots of stock because there was a problem to get material, but that has also normalized. We also expect that we will be able to lower the working capital step by step in the print operations as well.
Okay. That was gonna be my final question.
Okay.
On working capital, perfect. Just to clarify, you have talked previously about releasing SEK 400 million for the full year in working capital, and you seem to be on track to do so. Just checking, are you still confident on that number for the full year?
Yeah, I think we are very confident, Andreas. I think, how much did we release? Almost in total, already around SEK 200 to SEK 300 million.
Yeah. The SEK 400 million that we have talked about is absolutely in reach, and hopefully, we can overachieve it as well, with some other effects.
Can you give us some sort of quantify that? What it seems like you, the way you're talking, it sounds like you can overachieve that by quite a bit.
Yeah, it's, it depends also on growth, of course. If we are successful with the new sales and growth comes back, then you get another effect. We should, at least the SEK 400 is no problem, and it could be, I think, maybe up to SEK 500. If we get new projects or growth, then they have another effect.
Okay, perfect. In that case, that was, that was all for me. Thank you.
Thank you, Adrian.
Thank you. We now to move on to our next question, which comes from Gustav Berneblad of Nordea. Please go ahead.
Good morning, it's Gustav here from Nordea. Maybe just to build on the cash flow discussion here, should we expect increased CapEx here when you roll up Bergen in China?
No, the Bergen rollout is not driving so much investment, actually, because we do it in existing facilities. The Bergen setup is done in one of our Mentor Media facilities in Shenzhen. The one in Utah, we did in Q1, that was a greenfield. There are some investments coming up, but some of them are a mix, and the one we expanded also in Netherlands was in an existing facility. We feel like, from the beginning, you know, our investment should be roughly in line with the year before, because we still are filling up the capacity in equipment in Atlanta and Pennsylvania, and some other places. You know, things that already was ordered before, the problems was happening.
I think investments will be pretty strong this year as well, but next year, investment levels should actually go down because then we have, because we have filled up the new warehouses with all the equipments we need, and then it's more for us to gain new sales. It should be roughly in the same level like the year before. It should decline next year.
Oh, that's clear. That's clear. If we continue in the U.S. for Bergen here, you comment on a softer demand for fashion here. Are we still seeing a year-over-year growth this year, and also, are you seeing a net inflow of customers in Bergen?
I think in, you know, in Q1, we still had a double-digit growth. I think in the Q2 , it was actually no growth. It was flat from, you know, from existing customers. The difference from Q1 to Q2 was in Q1, we didn't see any good inflow of new customers. In Q2, the inflow is much better. It's a bit complicated picture. We were a bit surprised that so many customers went down so quickly in Q2. The US i s always faster in both directions. We still have gained projects, and we're looking at several new projects. We hope we stabilize in existing customers, and we will start to grow again.
That gives, of course, a bit negative effect on our margin because they are, for the moment, sitting with pretty high overcapacity, because when we invested, they invested first in Pennsylvania, we invested huge in Atlanta, was because they had a huge growth. We have for a moment now, we have an imbalance. Everything looks good going forward. As long as we just fill up the facilities, it will be a good development for us.
Okay, perfect. If we turn to the industrial segment, which is kind of small, but sales looks to be down some 28% year-over-year in Supply Chain Solutions. Is it possible to give more color on what is burning the segment, and also if there are any specific regions here, that is softer?
No, I think industrial, there is also, I'm sure there's also some RNC in it, but, you know, the road transportation that we are closing down in Germany had two customer segments. One was industrial and one was automotive. The industrial part was going down already in Q2, and the automotive part will disappear in Q3. It's in the industrial part, it's mainly projects that we have chosen to not take anymore, and there is the transportation effect. Nothing that worries us, and the projects we have, that we want to have, we all have, we have kept. That is how it looks.
Okay. Okay, okay. That's perfect. On the print here, it was down 2% organically, if we adjust for pricing, are we talking closer to a 5% volume decline, or is it even more, or?
No, I don't think so. It's, it's always hard to measure this with price increases compared to organic growth. I think the tradition, maybe it went down roughly with 5%. Traditional print is also affected by the downturn in the economy, but that's lower margin business for us, and online print is a much higher margin, and that is growing. For us, in print, it's normally we don't care so much when growth, you know, the organic growth is going down, as long as we can improve margins, but it's always our focus in that area. You could be right. It could be maybe around 5%, but normally, they are going down with 2%, 3% per year, roughly.
We had growth last quarter, so it can go a bit up and down, of course. Yeah.
Yeah, okay. Yeah, I was just thinking, given if volumes hold up fairly well and input costs remain stable in print, can we expect sort of a continued quarter-over-quarter margin recovery here going forward? Or how do you see it?
I think in Q3 is all normally not a strong quarter, but there could still be some growth. The important for us is the fourth quarter, and that is the driver of the margin for the whole year. For the moment, we have no signs that the fourth quarter should be weaker than last year. If we can continue to do some improvements in Q3, Q4 will be like last year, then there will be an improvement of the margin of print. Yes. The market is still very, very strange. Lots of ups and downs, also on the print side, especially when it comes to traditional printed volumes.
Yeah, understood. Understood. Yeah, I think that was all for me. Thank you.
Thank you.
Thank you. As a brief reminder, that is star one for your question today. We're now moving on to Thomas Nielsen of Analysguiden. Please go ahead.
Hello, this is Thomas Nielsen from Analysguiden. I have a question regarding your financing costs. Net financial items were negative SEK 73 million in Q2. I'm wondering, is this the level of interest costs that we will be seeing going forward? What is the average interest rate that Elanders will be paying on your SEK 7.4 billion net debt going forward? Thank you.
That's a very good question, Thomas. It's a good mix in the net debt, because a large extent is IFRS 16 leasing debt that we have there. Looking at the bank financing that is around, the net debt without IFRS 16 is around SEK 3 billion. There we have an average interest, because it's mainly in dollars, or mainly euro and dollars. We have a margin from our lenders, which is around 120 basis points, and then we have a variable interest rate on those loans and on that financing.
We have on looking at the leasing debt, we have over time, it will increase the interest rates, because we when we go into a new lease term on the facilities, then we use the long term interest rates as a basis for the leasing debt that we have. Going back, some of the leasing agreements that we have are we have been having for three, four years, and they will have a lower interest rate. When they are being sort of replaced with new agreements, then there will be a new market interest rate on that one. Let's say for bank financing, we are around, in total, around 5% to 6%.
In on the leasing debt, it's more like four or five, I would say, in average. I hope that answers your question. It a little bit, yeah, mixed picture, I would say.
Okay. Thank you very much .
No problem. Thank you.
Thank you.
Thank you. We're now moving on to a question from Markus Almerud from Pareto Securities. Please go ahead.
Yeah. Hi, Markus, from Pareto Securities. A couple of short questions. The first one is on to continue on fashion. You said you were a bit surprised about how some customers came down very, very quickly. Could you give us some more color on that, if there was something sticking out, some specific segments, etc ? That's my first question.
I think in the fashion side, if you take Europe, it's been a bit up and down now for a couple of quarters. Some customers are being very soft, some customers are strong, so not a high decrease. The difference was in North America, as you know, we have had a growth. Our customers are doing very well, even in Q1. That happens in Q2. I think it's an effect. We are there working with small, medium-sized customers. We talk about 450 to 500 customers. The thing that surprised us, of course, some of them are very close to their break even. When they lose some sales, several of them actually went bankrupt, just collapsed. Even some of the bigger ones also went to Chapter 11.
The rest was going down with a couple of percentage. Overall, I think it only went down with around 2% in North America sales, but the problem was that some of our customers actually went into Chapter 11 and made a bigger effect. We have an inflows, in the same time it was flat. As you can normally see that in both US and also UK, when it's smaller companies, it can go pretty quickly from being stable to go to Chapter 11, actually. The market is, of course, softer in US also. They've been later than Europe, hopefully this is.
It's more of a temporary effect, that the one with not so good financial position, they're disappearing very quickly. The other ones are more stable, and they will be stable, and then we can fill up with new customers.
Mm-hmm. When you talk about, when you talk about demand for your larger customer groups, you talk about that being weaker than Q2 and then weakening throughout the quarter and being weak at the end of the quarter. If you look at fashion, particularly, is that the same kind of pattern, or would you describe the demand there for, as rather flattish, rather than anything else? Is how I read you, or do I overread you?
I think it's still actually rather flattish. If we take away the companies that went, you know, bankrupt, where we lost some bigger volumes pretty quickly. Otherwise, it's actually pretty flat, flattish, and that we can also see in our organic growth as well, because if you take away the effects of the RNC, even if we are down with 3% to4%, it's still overall, I must say, lots of our customers still keep up. It's over the whole line, you know, we lose some in automotive because they cannot produce in the right pace. We have some percentage down in fashion. Same in electronics, is even more down, and then industrial, if you just, the things we took away, it's pretty stable.
I think our overall, it's not so bad, but I think, you know, for us, Elanders, we had enormous growth, last year and also before that. Of course, we were building up capacity, so for us, we are more a bit squeezed now with too much capacity, and it's a soft market. I should not say that the market is, like, really bad. It's just, it's very soft.
Mm-hmm.
We see now electronic signal, maybe, this could see an improvement in the end of the quarter. We are hoping that our automotive customers now will pick up the speed in their production because they're still going on in a very limited speed. I must say it's a very complicated picture, but it's. No area is showing dissolve, but the worst one is actually electronics on the laptop, printer side. That has been really tough for us the first six months, where we now can see some signs of recovery. Hopefully, fashion stays like it is, and then we are filling up with new products going forward.
If you talk about the, you say there is a bit of easing in the electronics business, but you also mentioned Europe in the report. What are the signals from Asia in particular, on that side? Is that also easing a little bit, or is it still?
No, Asia is still very slow. The thing we can see, because we are, you know, we are running lots of the European hubs for the electronics. What we could see in the end of quarter is the inflow is now picking up. The inflow of new computers, printers, is filling up, and that means that the retailers have sold out lots of the things they had on stock. That's a first sign, but I think for Asia, overall, it's still very soft for us in electronics, so not any big improvements yet. It could also be connected that China has lower growth than expected after the greater COVID restrictions.
In Asia, we have get both a local effect and also the export effect, but it's still soft, yeah.
Finally, just to follow up on where, what you've seen in. We spoke about this in the transition of volumes to Europe and onshore for the past couple of quarters. Can you just update us where, what you're seeing there, both in terms of automotive and electronics? You're building a facility in Mexico, can you just give us an update on where we stand and what you've seen in the past quarter on this?
No, it's still really growing, especially for automotive. Automotive, we can still see, because we handle lots of the component flows from other European countries, especially into the German car industry, and there, the volumes has been a really strong flow, a huge increase. I n that part, it's going really well for us in automotive. The other part, when it comes to build the cars, that is the problem. That is much slow because of the component issues, but the trend continues strongly. I think automotive is the ones that are driving it. For the electronics industry, it's much more complex to move from Asia to Europe from a cost perspective, and they have built up so many years in Asia, for electronics, we see effect is Mexico.
We see that they're moving some activities to Mexico, that's why we are expanding there, so that's why we estimate to grow there. For Europe, I think electronics, we will not see the same effect. There, automotive is the biggest one, absolutely.
Okay. Thank you very much.
Thank you, Markus.
Thank you. As a final reminder, that is star one for your questions today. We will pause for a brief moment. There appears to be no further questions at this time. I would like to hand the call back over to you, Mr. Nilsson, for any additional or closing remarks.
Okay, thank you. Okay, thank you everyone for calling in, and, we wish you a really great summer, all of you. Thank you very much. Bye bye.
Thank you. That will conclude today's call. You may now disconnect.