Earnings Call: Q3 2021

Oct 14, 2021

Good day, and welcome to the Elanders AB Conference Call. At this time, I would like to turn the conference over to Magnus Nissen. Please go ahead. Thank you. Welcome, everyone. And together with me on this Please go to Slide number 5 in our presentation and talk about our performance in the Q3 of 2021. The shortage of semiconductors created lots of disturbances in the production for several of our customers. And this created big fluctuations in our demands, which was changing from 1 week to another. And this big fluctuations makes it Almost impossible for us to adjust our cost structure accordingly, and it's also driving lots of additionally salary cost And was putting pressure on our margins and then especially in the Supply Chain Solutions area. The negative impact was especially impacting our result in July August when lots of our customers decided to have extra closing of their manufacturing And also lots of changes in the shift pattern. But we could see in the second half of September Recovery to much more normalized demand and also the production was stabilizing at our customers. This together with that we are negotiating with several customers to find solutions The decrease in the negative effects of the fluctuations created by the semiconductor shortage makes us expect that we will see lower negative Impact in the Q4 despite some continued disturbance when it comes to shortage of semiconductors. We should also have in our minds that last year in Q3, did we still have positive effects on the PP business, And the majority of our customers also showed a very strong recovery from the negative COVID-nineteen impact, resulting in demand that was Actually higher than normal, which also resulted in an optimized utilization of our capacity. If we then go to Slide 6 and look at the numbers, can you see that we despite all these disturbances Showed an organic growth by 3%. The growth comes from the Business Area, Supply Chain Solutions, and the drivers behind the growth It was mainly increased prices for purchase of freight to our customers and also an increased share of buy and sell activities For our electronics customers in Asia, but we could also see a very strong growth for Fashion and Lifestyle in Europe. The semiconductor shortage in the 3rd quarter put a high pressure on our margins and in Q3 resulted This with an EBITA margin of 4.4% compared to 6.8% the year before. But if we look at our accumulated numbers, We're still well ahead of last year with an EBITDA result of SEK 413,000,000 Compared to SEK 342,000,000 the last year. We also continue to receive lots of new requests from both existing and new customers. And then especially when it comes to E Commerce Solutions for the Fashion and Lifestyle segment. To meet the increased demand from Fashion and Lifestyle, we're now Exploring different options to increase our capacity. If we then go to Slide 7, You can see that we continue to have a very strong financial position and our adjusted net debt EBITDA Exclusive IFRS 16 is now at SEK1.67 billion. If we then go to Slide number 8, To look at our 2 different business areas during the Q2, you can see that Supply Chain Solutions managed Show growth despite all the problems regarding our customers and stable demands. But The demand but the problem with the semiconductor was driving lots of costs, which was helping their margins. And also last year, They have the PPE business, which was helping us out with very strong margins. And if we look at Print and Packaging Solutions, we can also see a high impact from the semiconductor shortage, Which resulted in much lower volumes of manuals for our automotive and industrial clients. Their sales went down in the quarter, but That was mainly a result of less trading of freight for the subscription box business in U. S. And this should over time actually result in improved margins. If we then go to Slide number 9, to look up our sales by customer segments in the quarter. And then if we look at our sales of Automotive, You can see the negative impact on our sales compared to last year as a result of the semiconductor shortage, which also affected our margins negatively. Positive is that the majority of our customers still see a very strong underlying demand, and we think they would try to catch up as soon as they have enough Semiconductors. We're also continuing to develop new services in automotive area for electric cars, We have now secured 2 new important projects relating to storing, handling and assembly of battery cells. If we then look at the electronics area, we can see that we had a very strong growth compared to last year. But this growth comes mainly from what I mentioned before, an increased volume of buy and sell in Asia, But also our new service offering RenewTek is also included now in Electronics. Some of our customers were suffering from the lack of semiconductors also in the electronics area, which resulted in less Production in Asia and also lower quantities of products coming to Europe, which also put some pressure on our margins. If we then go to Slide number 10 and look at Fashion and Lifestyle, you can see that we are in line with last year Despite our growth of 30% in Europe, but that was leveled out by decreased Buy and sell of transportations in U. S. But we continue to see a very strong growth from our customers, especially when it comes to Sales for e commerce channels, but also a stable recovery of the retail area. If we look at Healthcare and Life and Science, did we have a large a huge impact last year On sales because of the PPE deliveries in Q2 and Q3, underlying demand continues to look good, and we have acquired some very interesting new customers That will start later this year. If we then go to Slide number 11 and look at Industrial, We can see that their sales also was affected negatively compared to last year. And also this was also because of the lack of semiconductors As you could see in Automotive. If you then look at auto sales, you can see there is a growth in that area, and that is mainly driven by the acquisition of The printing company, Shettel, that is specialized in producing online print, Which is one of the few growing areas in print. And we our own companies was also having a strong underlying organic growth in this area. So that was that. And then if we go to the Slide number 12, and look how things will be going forward. Yes, as I mentioned before, we continue to see A very strong underlying demand in all our customer segments, which is very positive. And this should result in a very positive Result development as soon as the semiconductor availability is stabilizing. And we continue to receive lots of interest and requests from both We're also very pleased to see that we continue to grow within e commerce service for both existing and new customers in Fashion and Lifestyle, We continue to see that our global footprint is a strong enable to gain new customers. And our new site in North Germany that we started up This year is actually already filled up with new customers, and we are now exploring different ways to increase our capacity to meet up the strong demand Both in Germany but also outside Germany. We continue, as I mentioned before, to have a very strong financial position, which Enable us to increase the number of acquisitions, and we also want to continue to grow in the life cycle management area, which will help both us and our customers To reduce carbon dioxide emissions. 2 of our latest acquisitions, Astellay and Reuse IP, have strengthened our position in this area. And if we look forward, we are carefully optimistic. Even if the ongoing COVID-nineteen pandemic Continues to affect the global supply chain negatively, especially when it comes to production and shipping from Asia, And that combined with the lack of semiconductors. But we can as I mentioned before, we can see now that the semiconductor So it starts to stabilize. And we can also see that Asia is opening up again and shipping continues starts to be Going in a normal more normal direction. So yes, so far after a tough Q3, we are Still optimistic that it will be better going forward. And I think the important thing is that all our companies have a very strong Underlying demand, which is promising for the future. Okay. Thank you very much. I will now open up for questions. Thank you. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. A voice prompt on your telephone will tell you when your line is open. Please state your name before posing your question. We will now take our first caller. Your line is open. Please go ahead. Hi, it's Karl Anderson here from Nordea. A couple of questions from my side. Firstly, on margins in the quarter, you obviously Under quite there were several reasons. But could you perhaps help us bridge the margin, meaning that you could probably give us Or if you could help us with the effect from, for instance, buy and sell component issues, etcetera. Thank you. Yes. Hi, Karl. I think if you look at our EBITA that was SEK 126,000,000 This year compared to $190,000,000 last year, if I make a very rough bridge, I think $20,000,000 of that is the PPE business, the contribution from the PPE business last year. And then around €4,000,000 is connected to the semiconductor problems in Supply Chain Solutions And roughly SEK 8,000,000 in the Print and Packaging division is connected to less manuals because of the semiconductor. So So it's yes, SEK 20,000,000 PPE and roughly SEK 42,000,000 are connected to the semiconductor issue. Perfect. Thank you. And how much buy and sell volumes did you take on in this quarter? You guided for A bit of a margin dilutive effect from this. And also how important is it to take those volumes in order, I guess, to be able to deliver on more profitable volumes as well. I think the buy and sell activities in Asia Increased with around SEK 80,000,000 in turnover in the 3rd quarter. And as I think we have said before, it's rather low margins in this business. But it's still a very important business for us To get other services where we have much higher margins like factory logistics, electronics. And there we could see also downtrend Also the lack of semiconductors. And we think that the increase in buy and sell is that our customers want to secure that they have And other electronic components that have increased their buffer, which affects our buy and sell. But unfortunately, The production is still much slower than before, so we get less added value. So but we still need to do this by selling. It's an important part. But of course, it's In a quarter like this, it hurts the margin. It drives sales, but not the margin. Thank you. And also you also stated that you saw improvements at the end of the quarter. Could you perhaps elaborate a bit on the improvements And the magnitude of them and also which segments you see improvements in or is it I mean across the board? I must say it was across all areas. So as I mentioned, July August was really tough. And the 1st 2 weeks in September was also very weak, especially when it comes to automotive, but also other customers like electronics. And But in the last few weeks of September, all our customers almost all our customers was running normal shift head on. The Production flow was optimal. So I can say we are in the second half of September, we will be back on the same levels like the year before. It was running very stable. And when it comes to this semiconductor issue, there's lots of signals all the time. But There is if you look at as a company IDC that is following this globally, now they are estimating that should have normalized levels in the second half of twenty twenty two and even overcapacity in 2023. So We think it will now be step by step improving to reach normal levels through the summer next year. We could see it in September as well. There was no sudden shift changes from our customers, This should help us to optimize our production and we can then go down in the number of temp workers and additional ships. The Sorry. Yes, I'm ready. Thank you. Okay. And the final one from my side It's regarding printer packaging and your photo books business as we have seen. Of course, data from the San Diego, I mean, indicating a fairly soft market. Have you seen the same in the start of Q4? Is it too early draw any conclusions, because Q4 is important for the photobook business, right? Yes. We can see absolutely a softer demand in the photo product. But we have lots of other online printing business that we are growing and especially now with the acquisition of SESHETL. So We think we will have a very strong Q4 in Print, but absolutely softer in the when it comes to photo books and photo products. But that is less important for us now that it was before because we are overall very strong in online print. So There is and everyone is hoping that the Q4 will come back and because people have had some vacations this Tom, hopefully, they will create Christmas gifts as normal in the photo business. But it's still too early to say if it will be like that. But we are not so afraid of the impact for us because we have expanded into new other areas when it comes to online payments. Perfect. Thank you. Thank you. We will take our next question from Alexander Vival from Erik Pemser Bank. Please go ahead. Hello. Alexander Vindhall here, Exane Bank. I would like to just ask a question regarding the situation with the Just how can you describe a little bit how your sort of variable cost base looks when it compares to the Volatility in, say, daily volumes with your customers, if there is sort of a threshold where if they So the push on the gas pedal regarding the production levels for a week at the time and then Volumes sort of come down for a few days and then they come back with volumes again. At what sort of Volatility level, can you match those swings with your cost base? And So how agile are you able to be? Does it make sense? That's the question. Yes. No, no, I think it makes total sense. So we are in normal times, when Production volumes goes up and down for our customers. For example, automotive, if they go down from 100% to 90% or 80%, Then it's a more constant thing. We know it's for, okay, the coming 4 weeks, they will run 80%. Then it's really easy for us to adjust We have a huge amount of temporary work costs, but then we can adjust. So we go down the number of work costs. So this is lots of actually employee costs, but With the semiconductor, it's totally unnormal. So that the thing that happens is that we get the forecast from the customer. And Next week, we run these car models. All of them run pre ship. Then we book up all the Temp Vocals that week. And then suddenly later in the week before, they will say, no, we cut down. We go down from 3 shift to 1 shift in this model. And then we go up to 4 shifts in another model and then we need that means we will have 2 shifts to many people that week. And then for the additional shifts to the other model, we need to then take in extra personnel. So It actually comes down to lots of salary cost. And we don't have this in our SLAs because this has Never happened in the history that the car manufacturers are changing from week to week. So I must say it's a total abnormal situation. And Now we are entering lots of discussions with our customers. We cannot continue like this. So I think together with the same conduct, we'll be more stabilized. And it should also drive costs for our customers. So hopefully, they will decide, Okay. It's better we run constantly 80% and 120% 1 week and 60% another week. So I think this is really extraordinary times for everyone. We cannot we have a huge flexibility It's all our terms, but we cannot balance it so quickly. Impossible for us. Yes. So you're basically on a weekly level and Yes. Yes. It has changes on weekly level. I mean, normally, we need to book for 2 weeks of capacity. So we have a very high flexibility. It's not about employee people, termite employee because we have this temp workload that we use to balance normal fluctuations. But The situation today, especially in Q3, was totally abnormal. And actually in Q1 and Q2, they also had problem with Semiconductors. But then it was much more normal, more smooth. So I think also that our customer used The opportunity in July August to push out holidays for their workers, They pushed them to take out holidays, so that was also making it much, much worse in July, August. So Even in Q4, that will be the storm as we think it will be on a more stable level. Okay. Also you mentioned Yes, absolutely. Great. Thanks. You mentioned a couple of minutes ago regarding the semiconductor levels. I think you quoted some source regarding The possibility of a normal level in the later half of this year perhaps over capacity regarding semiconductors next year. Would you just care to repeat where you got that? That was IDC. Okay. And they follow IT and Technology and it was really hard to find, They have reported had a report in 20 September where they predicted normalization to the sum of 2022 and Overcapacity in 2023 of semiconductors. Okay. So it's the right data. Yes. Thank you. Thank you. We will now take our next question from Adrian Ghilani from ABG. Please go ahead. Hello. This is Adrian Ghilani from ABG. I'd like to start off with a question on, well, you say you've opened up some negotiations with Customers for transferring over some of the increased costs that you've seen. First of all, could you elaborate a bit on Specifically, which industries you've been looking to do this? And also, will this have an effect already in Q4? Or are we going to have to wait to see effects from this? It's mainly customers in the automotive and the electronics area. So when it comes to electronics, It's more about that we have a huge capacity for them in Europe, but less products is coming in. Now we are standing with overcapacity. There, we're hoping to see some result of the negotiations already in Q4. For the automotive part, it's harder to say because we're also discussing both what has Happen what is happening in the future and how does it look for next year. So it's hard to say, but it's also making negotiation going on. And I think That together with the semiconductor stabilizing, I think we will still have an impact on Q4. And then my hope is that we will be back in more normal levels in starting in Q1. And if the cost of compensation from customers also together with more stabilization of the semiconductor. Okay. Also you already touched a bit on the photo box business for Q or For the book business for Q4, but if we assume that demand does remain strong in Q4, are you that you're going to be able to deliver on the demand at valve or the demanded quantities? Or are there certain logistics issues that we have to take into account here? Now we have a very good strong capacity, especially now when we added The company that we have acquired now that is 100% specialized on online print and that Together with our existing big facility in Germany makes us very strong. We have a very high flexibility. And We also have added some new customers in the photo book and the photo business as well. It's not just our own brands. We are now actually serving several Other brands as well. So from a production perspective, we are now we're in a good shape. This year, we are not so afraid of the COVID. Last year, it was the high pressure for us to manage the Christmas volumes. And then at the same time, we're afraid of And our outbreaks of COVID in our production, so but that looks much more stable now actually. Okay. And you also mentioned some irregularities in the demand patterns from your customers. I just want to know how good is your visibility here How long before does the customer have to give you notice if they'd like to cancel a delivery or reduce the size of a certain delivery? So how long do you actually see these demand patterns forward? No, as I said before, I hope Stabilize. We often have in our contract that they need to fulfill different forecasts they give us. But that is based more on how the world works before. And if they change shift pattern All the time, but in the end, they still reach 80% or 90% of promised volumes, Then we cannot claim according to the contract because when we made this contract, no one realized that an issue like This semiconductor could actually happen at this but this is the things we discussed with our customers. I think this is something also to take with us for the future To have in our contract to also to be able to claim extra money to cover additional cost when these Strange things happen. So I think that's the lesson to learn there from this COVID and all the semiconductor thing as well. Okay. And just a final question from my side. Obviously, the supply chain issues are stealing all the headlines, but you also mentioned A product mix effect from an increased share of freight forwarding businesses affecting margins. Is it possible to quantify how large of an effect this has had On your operating results and in contrast to the supply chain issues then. Yes. I think the transportation part has been driving lots of additional sales. It's hard to say the numbers, but I think it's I will invite Andreas. Maybe you have an estimation of how much sales I think I have here yes, but I have here, I have There was a growth from L and C of actually almost EUR 17,000,000 in Q3 additional sales Around SEK 180,000,000, which increased prices, which we could just send to our customers. But we are now also improving our margins on this increased prices on Air and Sea. But that in Q3, there was mainly €70,000,000 just bringing through, just going through. And you also have the effect from the subscription box So in the U. S. On the other way? Yes, the other way around where we have we are now trading much less Great for our subscription box business in U. S. And that was a negative effect of SEK 80,000,000 or not negative, but less turnover, but that will Improve our margins over time. It's actually a positive thing. Okay. Thanks for your answers. That was all for me. Yes. Thank you. We will now take our next question. Caller, your line is open. Please go ahead. Hello. This is a question from Thomas Neeson at Ameluz Geiden. Regarding acquisitions going forward, could you elaborate a bit about what page you're looking at in terms of how much Sales acquisitions are expected to add in the coming years? And also in what business areas you are Currently most interested in doing acquisitions. Okay. Yes, when it comes to acquisitions, We have 2, let's say, 2 tracks that we're following there. 1 is to add more in what we call life cycle Management, like the RenewTech, where we buy companies that They do take backs of IT equipment. They refresh it. They sell it on the market secondhand, which is very good for the environment. And There we added 2 companies that are like I mentioned before, Acelera and UCITS. We're looking for more companies in that area from a global basis. And then you talk about normally rather small medium sized companies with the sales of around, yes, maybe SEK 100,000,000 to SEK 200,000,000. But another area that we're also looking a lot is for the when it comes to Fashion Lifestyle. Of course, we can see when it comes to e commerce and Fashion Lifestyle, it's not slowing down. And we had a tremendous Amount of ARPUs coming into us, both regarding local business in Europe, but also we have Lots of interest from customers that want us to serve them globally. Normally, we start with them in Europe, then they want us to So I'll put them in U. S. And then later on in Asia. So we're also looking for capacity in that area. And then, of course, then we can talk about bigger numbers Then we talk about specialized supply chain companies for Fashion Lifestyle. And I think, Gilead, maybe we can talk about turnover, everything from Maybe SEK 200,000,000 to SEK 2,000,000,000. So we are following 2 tracks there, Medium sized to get more added value, more advanced services like segment management. But we really had a strong belief in the Fashion Lifestyle area, and we need to get more muscles there. And we want to be one of the Few global players in that area. So yes, it could be both small but also big if we find the right target. Okay. Thank you. Thank you. As there are no further questions at this time, I'd like to turn the call back your speakers for any additional or closing remarks. Okay. Thank you everyone for listening in to our conference call. Thank you. Bye bye. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.