in 2013 printing accounted for nearly all the business. The investment thesis on Elanders hinges on the contract
logistics business – so I will only discuss this business in this write-up.
B. Contract Logistics
Contract logistics is a broad industry with activities ranging:
- From low value-added (let’s call it “freight” business). This business is largely commoditized and margins are
razor-thin (1-2% EBIT margin). In this business they way to make money is through economies of scale and
cost discipline. Danish company DSV would be one of the best in this sub-sector within contract logistics.
- To more “sophisticated” logistics work. This is a much better business as there is more “co-operation”
between supplier/customer (as we shall see in the examples) and longer contractual terms. This high value-
added work results in higher margins of 6-7%.
Elanders focuses on more sophisticated contract logistics work.
I think the best way to understand what sophisticated contract logistic is logistics is through a couple of examples.
2.1 Example 1: Automotive - Just-In-Sequence Delivery for a German car OEM
LGI (now part of Elanders) is the warehouse for some components/parts used by this car OEM in one of their car
manufacturing plants. This is how it works:
- The customer (car OEM) orders some parts they need to manufacture a car to LGI via an IT interface. LGI
takes ca. 900 orders per day on average from this car OEM.
- LGI is responsible for sourcing the parts from a network of 25 suppliers (approved by the OEM), having the
right stock level (this inventory sits on LGI’s balance sheet).
- After LGI receives the order LGI will pick up the parts from its warehouse, package them in a box and
transport the parts to the adequate points of the car assembly line within very short lead-times (measured in
minutes). LGI does roughly 15.000 picks per day implying 16 items per box on average.
Magnus claimed that because of LGI the car OEM was able to reduce warehousing and fulfillment costs.
These contracts are re-tendered every 3-5 years. This is much better than tenders in the freight business which are
annually or half yearly – thus eliminating any room to capture efficiency gains.
In terms of financials Magnus told us that in this type of projects LGI makes 6-7% operating margin. This is
remarkable as (at first sight) the business appears to be a pure execution business with low barriers to
2.2 Example 2: Health Care – Agilent Technologies
Agilent is a US-medtech company specialized in liquid chromatography machines (e.g. used for separating molecules
that are dissolved in a liquid).
Agilent has outsourced the inventory management globally. Elanders has been selected as the partner for Europe; 2
other companies cover Agilent’s US and Asia Pacific operations. For Aligent’s European operations Elanders is
responsible for the whole order management process: order taking/processing, control of inventory, fulfillment and
installation, returns, track & trace…
We did not ask for any success metrics or value-added to Agilent. In Elanders’ website they have posted the following
quote from Agilent: “we have increased the utilization of all [rented] devices by more than 30% while spending much
less time on the process.”
Profitability (EBIT margin) in this type of contracts range from 5 – 10%.