Good day, and welcome to the Elanders quarterly results conference call. At this time, I'd like to turn the conference over to Magnus Nilsson. Please go ahead.
Thank you very much. Welcome, everyone, so this is Magnus Nilsson, the CEO of Elanders, and together with me is also Andréas Wikner, our CFO. I move to the presentation, and I will then go to page two, that shows how Elanders looks today. So today, Elanders has around 90 locations worldwide in 20 countries, and we have almost 7,000 employees. Then if I move to page three, where we are showing our major customer segments, and that is automotive, that is 25% of our sales, electronics is 35%, fashion and lifestyle is 15%, healthcare, life science, slightly under 5%, and industrial is 15%. Then I will go directly to slide 5 to give some comments about the market situation for these segments.
If we then look at automotive, the primary market for Elanders is Europe. As I think everyone knows, the trend in the market has been slightly negative in the first nine months. The trend for Elanders is actually more flat, and that is because our product mix is helping us there, because we are not just doing services for new cars, but we also do services for R&D and some other cars for the automotive sector. If we then look at electronics, where our primary market is more worldwide, the trend in the market is pretty flat. But it's a lot of complex picture with PC sales; volumes was increasing in Q3. But if you look at printers, especially desktop printers, the volumes was going down.
There's also some shift of volumes between different countries due to the trade war between US and China, which also affects Elanders in some sense. If you look at then at fashion and lifestyle, where our primary markets are Europe and US, we can see a continuous strong trend in the market and also strong trend for Elanders. And statistics are showing that sales of fashion is still, still going up. If we then look at industrial, where our primary market is Europe, there we can see a more negative trend in the market, both in the market, but also a slight negative trend for Elanders with weaker demand. The latest Purchasing Managers' Index for manufacturing and the service sector in Germany was also going down in September, and Germany is one of our main markets in this area.
But some of our customers goes up, but some customers are going down in industrial. That was the general comments about the market. Then if we go to slide number seven and look at some operational highlights and financials for the third quarter, I will give my comments excluding IFRS 16 effects, so the numbers are more comparable. If we then look at the third quarter, we had a slightly negative organic growth. But if you look at the accumulated numbers, we are still on a positive organic growth. I think the major reason for us that sales went down slightly organically in Q3 is like we have communicated before, we are more selective with our business now, and we have a very high focus on margins before sales.
So, for us, it's more, it's also more about adjusting and try to focusing on more profitable business. And if you look at the EBITDA margin for the third quarter, it was continuing improving, and we made an EBITDA of SEK 161 compared to SEK 154, and that was an increase in EBITDA margin from 5.5% to 5.7% in the third quarter. And then if you look at accumulated, our EBITDA is now SEK 398 million compared to SEK 363 million, and the margin has increased from 4.5% to 4.8%. In the third quarter, we also continued to have a really strong operating cash flow, which has reduced our leverage, which is now down to 3.0 in net debt EBITDA on a rolling twelve-month basis.
So the operating cash flow in the third quarter was SEK 260 million, compared to 52 the year before, and the accumulated operating cash flow was SEK 556 million, compared to 144 the year before. Then if we go to slide 8, we are showing some historic numbers about the development for our cash flow and net debt. And if we look at Q3 in 2018, we had a net debt of SEK 2.89 billion crowns. If we then compare to Q3 2019, it's down to SEK 2.3 billion crowns. And as I mentioned before, the net debt EBITDA on the rolling twelve months is down to three, and one year ago, it was actually 4.4.
So, the net debt has gone down with almost SEK 600 million the last year. And if we manage to go under a leverage under three, we will get even lower interest rates going forward. So we're very pleased with the cash flow and the development of the net debt. If we then go to slide nine, where we show our two business areas, Supply Chain Solutions and Print & Packaging Solutions, we can see that we have managed to improve our results in both our business areas. And if I start with the Supply Chain Solutions, and then comment on the accumulated numbers, we have sales of SEK 6.57 billion compared to SEK 6.25 billion the year before.
EBITDA has gone up to 325, compared to 285, and the EBITDA margin is now at 4.9%, compared to 4.6%. If we then look at Print & Packaging Solutions sales, those nine months is up to SEK 1.83 billion compared to SEK 1.62 billion, and EBITDA has increased to SEK 98 million compared to SEK 81 million the year before, and the margin is now at 5.4% compared to 5% the year before. Then, if we move to picture number 10, and if you look at the level of sales by customer segments, we are there, on that slide, showing the development about the third quarter and also, how development is compared to the year before.
We could see in quarter three that automotive was more or less flat in quarter. I think the reason is that some of our customers are actually performing better than the market, but there are some that also are performing more in line with the market. But for us, it was still flat. And if you look at electronics, we have a decrease compared to last year, and normally they have a very high seasonality in their sales, and last year sales also include certain campaigns initiated by our customers. And we had also had a bigger share of buy and sell last year, which pushed up sales.
If we look at fashion lifestyle, we could see a growth in the quarter, and we cannot see any signs of a weakening demand, and we can see a strong demand going forward. Industrial was still showing a slight growth, but when I mentioned the market before, we can see there are some signs of weakening demand, especially in the German market for some of our customers. A challenge is that we also had in the second quarter is that the demand for our customers are still very volatile, so the volumes goes a bit up and down, and especially in the areas of automotive, electronics, and industrial. Then, if we go to slide 11, slide 11 is showing the impact of the IFRS 16.
So, I guess I will not go through the numbers, but it's interesting to see. If you look at EBITDA, we get the positive effect, but then we get the negative effect of earnings per share. Regarding net debt and EBITDA, we have a neutral effect, and on the total capital employed, we get the negative effect of the IFRS 16. More for information. Okay, that was everything from me, and there's also an appendix, but that's more about some background information about Elanders. So, I hand over now to the operator to open up for questions.
Just as a quick reminder, if you'd like to ask a question, please signal by pressing star one on your telephone keypad, and a voice prompt on the phone line will indicate when your line is open, so please state your name before posing your question. Again, that is star one to ask a question. We'll take our first question here. Caller, please go ahead.
Hi, it's Anastasios Chatzifotiou from Nordea. You mentioned that your organic growth was spurred by you phasing out less profitable volumes. How much was that in the quarter?
It's hard to say in percentage, but I think without doing that, I think it should be around flat, I think around 0%, maybe the effect of 1-2%. And also, we have the impact of the buy and sales, buy and sell that was higher last year in electronics area, and that is more low-margin business, so doesn't give so much effect on the result.
Okay, and which volumes are you phasing out in terms of customer segments? Is it mainly Supply Chain Solutions, electronics, or where are you?
Yeah, it's mainly in supply chain, yeah. There's some parts in electronics, but also some parts in industrial as well.
Okay. You also mentioned that you saw growth in supply or in the fashion and lifestyle, but looking at Supply Chain Solutions, it looks like fashion lifestyle is down by 7% year-over-year. Is that the reporting structure between supply chain and Print & Packaging, or is it underlying market decline, or how should we look at that?
Well, yeah, I don't think it's a real, you know, it's not going down for us. I think it's, you know, this is this reporting here is also about how we have defined which customers are going to which areas. So in some of the historic numbers, there can be some part that shouldn't have been in fashion lifestyle before, yeah, before.
Yes.
So we can see, we have good demand growth in Germany, but also to the subscription box business in US, that's also part of the fashion lifestyle. So underlying growth is very good.
Okay, perfect. Then you also write that you want to increase margins within industrial segment of Supply Chain Solutions. Could you give us an idea of the current profitability level there, and where do you want to be in, like, one year or so?
We don't comment on, you know, the margins, but for different business areas. But as you know, we have a target of margin of 7% on EBITDA level, so and we can say that we are not happy with the margin in that area, so we are working now to improve where we can, you know, both in productivity and also discussing prices. But we also have some projects that we are now targeting to phasing out. But, you know, there's contract terms, it can take, you know, 6 months to 1 year. So, but it's in that area, we have the lowest margin, absolutely.
Okay. In terms of phasing out more volumes, what should we expect there for H1 2020 or Q4? Are there many contracts up for tender, or?
Yeah, we still have a really good inflow with new customers as well. It's hard to say. You know, in some of the projects, we are asking for higher prices, and if it's accepted, we will stay, and otherwise, we will let go. So it's a bit hard to say, but we think there will be some volumes going out in electronics that is more connected to this buy and sell, because in buy and sell, we are more locking up cash, and the margins are very low. So, but it's hard to put any number on it, but could that be that we release some of the business there as well to push up margin and to make working capital better for us.
Okay, perfect. Thank you.
Thank you.
We'll take our next question. Caller, please go ahead.
Hi there, this is Jørgen Mørkved from Protector Insurance . Could you comment on the risks for your HP contracts, given that they're going through a major restructuring program now, and especially mention the printer segment as being a particular candidate for the restructuring activities?
Yeah, I think HPI is, of course, a very important customer for us, and I think the restructuring will not affect our business in Europe. In Europe, we are doing both, you know, printers and PCs, and as I mentioned before, PC sales is, was at least in Q3, going up, printers going down. So I think that's stable for us. It could be maybe more challenging for us in Asia if HP decides to move some production somewhere or... But for the moment, we have no signals from them that the things they're doing should in some way affect us. But of course, I think it's more about the volumes in Asia.
They can decide, you know, if the trade war continues, between China and U.S., there is, of course, a risk that they move manufacturing out of China or maybe they move volumes out of Singapore for some reason to another region. So, but, but for the moment, it doesn't affect us so much, so it's, because we work with different products for them. So it, it's hard to say. It's hard to say.
All right.
We'll take our next question. Caller, please go ahead.
Yes, hello, Magnus and Andréas. This is Mattias from DNB Markets calling. Can you hear me?
We can hear you, yes.
Perfect. Hello, hello. Okay, so I was wondering, you mentioned you had some negative organic growth due to both weaker demand, primarily in automotive and electronics, but also increased profitability focus. So as you mentioned before, you couldn't exactly say how much shifting out contracts affected, in terms of percentage, but is it possible to get some sort of number, how much it did affect the organic sales for the quarter? Or maybe if it's possible to give some additional flavor to that.
I think the biggest part was, as I said before, electronics, and there was a smaller share of the buy and sell part for some of our customers there. And that is not so contract-based, it's more where we can take this business if we want or not. So, but I think that is the main reason, the buy and sell, because automotive for us was still good in Q3, it was pretty flat, and slightly down, so there are some small parts down and some parts up.
So, yeah, it's actually, it's actually hard to say, but I think what is very important to focus on margin before organic growth, because if you have followed Elanders, we had so strong organic growth the last two to three years. And for us, it's not so bad if it's- if it slows down a bit, especially when we want our companies to focus more on, on margin before, before sales. So it's, we are not pushing them to, you know, as we have lots of RFQs, and we are now saying, no, thank you, to more than before, because we don't think the margin is good enough. So it's also about new business that we are more selective going in. And then, of course, you cannot let the sales go down too much because you have your fixed costs with facilities and things like that.
But yeah. But it's mainly that. It's not a big thing for us, I think, with this organic growth. The supply chain market is still growing, so we can always find more volumes if we are interested, but we want to be more selective.
Okay, I understand. Perfect. And, do you believe that the lower demand that you saw from some of your customers is due to uncertainty where we are going? Or is it more due to permanent lower volumes? Or could you give some more flavor to that, perhaps?
You mean the volatile demand or?
Yeah, exactly. Exactly.
Yeah. I think especially we can notice among our automotive customers that there are still big uncertainties. So, and that makes it really volatile, you know? It's, they try to be careful, and then they slow down too much, and then suddenly they need to work extra days the week after, and, they do some maintenance, and they do it longer than before, and then suddenly they still need to deliver more the week after. So I think there is a big uncertainty on the market in automotive, and that normally also affects our industrial clients, because lots of them are, of course, also suppliers for the automotive industry. So it's mainly there. If you look at fashion and lifestyle, stable growth, yeah.
But also electronics has been a bit up and down, but that, that has also been a problem with components in, in China, according to our customers, they haven't been able to produce, as much as they want. So- but I think it's the market is a bit uncertain, of course, everyone knows that, so. To make our customers act a bit, more, yeah, more careful, and then sometimes too careful, they don't want to build stock, and then they need to suddenly speed up the production, and then they slow down again. So it's more about that.
Okay, I understand. Also, in supply chain, freight forwarding volumes were down 12% year-over-year at this phase, including FX, I assume. Is this also due to profitability focus? Because at the same time, we saw these value-adding services as other contract logistics growing double digits.
I think freight forwarding is. That is more about actually, as it's a combination. I think some of the demand has gone down, but as you see there, that contract logistics has increased, and that is, of course, our focus on margin. So in freight and transportation service, we could see some downtrend in air and sea, which still is good business for us, so that is more connected to how the market looks like.
But in the same time, regarding trucking, you know, road transportation, we are trying to decrease our volume step by step. So that is the two reasons why it's going down. But we're very happy to see that other contract logistics services are increasing, and that is part of our strategy. We want to do more of that instead of freight solutions.
Yeah, of course. And these additional volumes in this particular segment, is this because of new customers coming into the contract base, or are you actually taking more shares in their value chain at the existing customers?
That's a combination. And also that we were very successful in 2018 when we acquired several new clients in that area, and they were not fully up and running last year. So we get positive effects of them. There are some at least three big new customers there, generating volumes both in Asia and in Europe. So it's that's pushing up. And then also in existing customers, we are still taking new kind of services and also let some parts go. But I think it's just that we were very successful in 2018, acquiring new important clients that are performing actually very well also this year.
Okay, perfect. And I assume that they are big drivers of the margin for this quarter also, given the growth.
Yeah. Yep. Yep. Yeah.
Okay, perfect. Thank you very much. That would be all for me.
Thank you.