Alligo AB (publ) (ALLIGOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Momentum Group AB Q4 Report 2019/2020. [Operator Instructions] Today, I am pleased to present CEO, Ulf Lilius; and CFO, Niklas Enmark. Please begin your meeting.

Thank you. First, I would like to say welcome to our web meeting presenting our financial report for our financial year 2019/2020, together with my colleague, Niklas Enmark, Executive Vice President and CFO. If we move to Slide 4, I will give you some highlights from the quarter. The COVID-19 pandemic had limited effect on the group operations during the fourth quarter. It mostly affected the 2 last weeks in March. The industrial market in Norway continued to display a stable performance during the fourth quarter. In Sweden and Finland, we could sense a little bit weaker sentiment in some customer segments. We continue to improve our efficiency and profit, which resulted in an increase in EBITA of 10% to SEK 91 million compared to SEK 83 million previous year as well as improving our cash flow. The corona will affect the group during the coming months and actions are taken continuously to mitigate the negative effects. Decentralized responsibility with increased coordination within TOOLS and Swedol with 3 countries are in focus for the coming financial year. The group's financial position is strong. So at the same time, we're continuing to evaluate attractive acquisition opportunities in the business area Components & Services in order to strengthen our position. If we move to Slide 5. The end of the fourth quarter was characterized by somewhat lower activity among customers, not only due to corona, but trends varied significantly between different customer segments and product areas. We had some negative effects on sales of winter workwear due to the relatively mild weather. In Norway, the demand for -- in oil and gas sector remain favorable, which is an important customer segment for us in that country. In total, for the quarter, we continued to improve our EBITA margin as well as in percentage and numbers compared to last year. This was mainly due to increased gross margins and efficiency actions taken. Since the spin-off, we have managed to increase EBITA every quarter, which is -- this is the 13th consecutive quarters we improved EBITA. We move to Slide 6, I'll give you some headlines of business area for TOOLS & Consumables. As you can see, all of the operations in this business area noted a negative effect on sales during the end of March, even with the effect of total revenue during the fourth quarter of financial year was relatively limited from corona. The relative mild winter had a larger negative effect on sales of the winter workwear. For the business area of TOOLS & Consumables, the sales decreased by 3% organically during the quarter, but we had a stable demand in Norway and Finland, but of course, then weaker than normal in Sweden. If we look TOOLS Norway, they continued with the favorable trend, primarily in the oil and gas sector, construction, civil engineering as well as public administration. Expansion and commissioning of logistics functions for TOOLS Norway resulted in extra cost of approximately SEK 2 million for the operation during the quarter. As a total, we have spent SEK 14 million for building the new logistic hub, and it's now complete and is being continuously optimized. And the share of direct deliveries to end customers is gradually increasing. The revenue for TOOLS Finland rose by 1% during the quarter compared with the preceding year, and we have an increased sales primarily to small- and medium-sized customers. There was a positive trend in all product groups up to the end of March. The personal protective equipment business acquired from Lindström Group contributed to revenue and earnings during the quarter. The sales for TOOLS Sweden decreased during the quarters compared with the preceding year, partly due to lingering cautious attitude among industrial customers. And this could be seen even prior to the effects of the corona pandemic. At the end of the March, we also had, of course, lower sales of winter clothing. The efforts to increase profitability, including increased cost efficiency, sales promotion, changes in purchasing, are proceeding according to the plan. And that contributes to a higher gross margin and lower cost in TOOLS Sweden compared with the preceding year. And in total, we improved the results in TOOLS Sweden compared to last year. The sales in the group niche companies within workwear and promotional products was, of course, negatively impacted by the weaker demand, both for promotional products and winter clothing due to the mild winter, but the earning continued to be stable. If we move to Slide 7, Components & Services. The sales in Components & Services business area increased by 3% during the fourth quarter financial year. Sales to the pulp and paper, steel and automotive segments remained generally positive during the quarter despite negative effects on demand due to the customer actions to mitigate the COVID-19 effect. We also had a positive development for our companies working with service and repairs during the quarter. Measures to improve cost efficiently and customer cultivation had a positive effect from the contribution rates and the operating profit rose during the quarter. . The profit rose by 23%, and the margin was 13.7%. And for the financial year, the business area increased the revenue with 5%, the operating profit by 15%. And this is the best performance year since the spin-off and also in the history of the company, which was founded in 1997 by merging several companies. Focus on the business area Components & Services during this year will be continued focus on profitable growth, both organic and acquired. If we go to Slide 9, I'll give you some of the financial year. Yes, as for all of companies, of course, the financial year was characterized by somewhat lower activity among customers. But trends varied significantly between different customer segments and products. It is nevertheless encouraging to see the revenue growth in Norway, where demand in the oil and gas sector remains favorable. It is also positive that our acquired businesses have contributed by around 4% to revenue growth so far. And the corona had limited effect on revenue for the whole year, but of course, a negative effect at the end of March, especially in the last 2 weeks of March. The operating profit for the financial year includes items affecting competitor variability of SEK 14 million, and its cost arising from the acquisition of Swedol. Adjusted for these items affecting the EBITA rose by 6% for the whole year. Additional extra costs, which I mentioned, of SEK 14 million just pertaining to the expansion of the logistics function in to Norway, as I mentioned, SEK 2 million arised during the fourth quarter. This also had a negative effect, but now we are ready to go. Thanks to our focus initiatives, our cash flow from operating activities strengthened during the quarter and reporting period, even adjusted for IFRS 16 effect. As you also can see, which we released this morning, the Board of Directors proposes that no dividend is paid out for the financial year due to the current situation with COVID-19. We will continue to focus on improvements, both in efficiencies and profits, including the mitigated effects of the corona. We also have a full focus and speed in the merger of TOOLS and Swedol as well as acquisition-driven growth in the business area Components & Services. If we move to Slide 10, Niklas will give you some of the cash flow.

Thank you, Ulf. As we have expressed before, we have a strong focus on cash flow in the group. And this is -- the last 2 years, we have worked diligently with working capital optimization through increased focus on performance measures but also by doing specific investments for instance, in the buildup of the logistics hub in Norway, as Ulf mentioned. Over these last 2 years, we have also reduced our CapEx level in fixed assets to basically halving the level from 2 years ago to the current level of SEK 18 million for the full year, of which around SEK 2 million is related to immaterial assets. The route to improve working capital come from a number of activities stemming from inventory management, such as adjusting the ordering points to negotiation of customer and supplier agreement. Over the course of the year, we see that we have managed to increase our days of payables outstanding somewhat increasing the positive spread that we have between supplier days and customer days. Also our inventory turnover is just shy of 4x. During the year, we had a positive contribution from working capital changes of SEK 18 million, of which inventory related was SEK 15 million and during the last quarter, we had a positive contribution of SEK 32 million from inventory reductions. For the full year, we then recorded cash flow from operating activities of SEK 505 million compared to SEK 230 million in the year before, of which around SEK 105 million was attributed to the fourth quarter. Also adjusted for the transition to IFRS 16 effect, as Ulf mentioned, that was approximately SEK 212 million plus for the year. We were able to increase the cash flow from operations. Looking at our cash conversion, that is cash flow from operations, including net investment in relation to EBITA, we stood at 84% for the year, up from 55% last year. I would also like to comment on our cash flow from financing activities, as you see here. As you know, our Q4 report is excluding the effects of the Swedol acquisition, which is consolidated as of April 1. And that is with 2 exceptions. First, our financial position is affected by the fact that we had a drawdown on the term loan with a cash offer and March, increasing our liquidity and financial debt monetarily, increasing both by close to SEK 1.2 billion, as you can see here. The other effect, you see in the balance sheet does not here in the cash flow, and that is the increase in equity due to the registration of the issue shares also at the end of the March valued at close to SEK 1.5 billion. If you turn to page -- Slide 11, you see some selected performance measures. And as Ulf mentioned before, our profit expansion measured on EBITA level was 10% for the fourth quarter. For the reporting period, EBITA increased by 6% to SEK 338 million. This means that Momentum Group from the listing in 2017 until this quarter has been able to increase its EBITA each quarter compared to last year. Looking at the drivers of the increase in EBITA margin over these last 3 years, about 1 percentage point comes from gross margin increase and approximately 1 percentage point from reduction in cost of sales. Our financial position is strong. As I mentioned, the effects from the Swedol acquisition is netted in our operational natural position which stood at SEK 166 million at the end of the year. In relation to EBITA and adjusted for IFRS 16 effects, our net debt-to-EBITA stood at 0.5% by the end of the year. This will, of course, change after we consolidate the Swedol, which I will come back to. Cash and cash equivalents, including unutilized granted credit facilities totaled SEK 1.8 billion, of which close to SEK 1.2 billion was then reserved for the acquisition of Swedol closed on 1st April. Related to our other external financial objective, our return on equity was 16%. The equity assets ratio stood at 48% at year-end of the financial year. Our internal profitability ratio, profit over working capital, was 28% for the last 12 months measured on EBITA, an increase for the business area Components & Services, thanks to the increase in margins, whereas the profitability dropped somewhat for the Tools & Consumables side due to the decrease in profit margin. Coming back to the Swedol acquisition. This is, of course, a very important acquisition for us that will have an impact on both operational and financial metrics. We also, of course, understand that this is of interest for you and to understand what the impact on our P&L and balance sheet will be. What we are currently doing is to consolidate the Swedol business in line with what we expressed in the offer documents released in December. This includes standard preliminary PPA, refinancing of debt, et cetera, et cetera. The new business area will be reported externally for the first time in the interim report for the first quarter of this financial year, which will be published on into July 2020. In addition, we have also decided to report the new business area as well as the group's pro forma financial information for the preceding year, the ones that we have just reported in a separate press release ahead of this report in the beginning of July.

Thank you, Niklas. If we move on to Slide 13. For some of you that have followed us since the spin-off, we have had our focus in 3 main areas: change and improvement initiatives in tools, continued development and establishment of niche offerings in current operations, and as a third acquisition-driven growth strategy with focus on niche acquisitions. Over the course of these last 3 years, we have concluded 11 acquisitions with some SEK 650 million annualized revenue in line with these focus areas. We're happy to see that required units at a lower energy and new opportunities to the group. We will continue with our initiative in M&A also going forward post the Swedol acquisition. As I mentioned, we have a strong financial position, and we're increasingly building a good pipeline, not at least in the business area Components & Services, where we see we will focus a lot of our M&A activities going forward. Slide 14. In mid-November, we took, as you know, a strategically important step to TOOLS and Swedol. Together with TOOLS, we are creating a stronger partner in the market. We are confident that the combined -- a combination of TOOLS and Swedol, complementary customer-focused sales channels will help our 2 companies to become an even stronger and more attractive business partner together. Together, we will be able to strengthen our product range, procurement channels and logistics solutions. We will be able to increase the proportion of our own product brands and develop an even better service offering new digital solutions. The merger is logical from an industrial perspective, and we create favorable opportunities to continue to generate value for our owners. If you turn to Slide 15. Yes, we will now adapt our 3 main focus areas in the short- to medium-term in order to take the next step in our development. As number one, of course, the integration and merger of TOOLS and Swedol in the business area. The ambition is to improve the EBITA margin of the new business area to 10% over time from 6.5%, which we have as a baseline rolling September 12, 2019. The second focus will be continued development and improvement of efficiency and profit in all group companies as well as we mitigate the COVID-19 effect. As Niklas mentioned, we have been able to increase our gross margin and lower our cost of sales percentage. The third, as I have mentioned, the acquisition-driven growth strategy within business area Components & Services to build it even stronger, both in revenue and EBITA margins. I will give you some final words before we open up for Q&A. As we, at Momentum Group, put another financial year behind us, [ occurred ] as an independent company, it is an entirely different group that we -- one, we started the year with. I will, therefore, welcome all of our new Swedol colleagues to the Momentum Group, and I also like to extend my deepest thanks to all the dedicated employees across the entire group for your hard work during the 2019/'20 financial year and also to our customers and business partners as well as, you, investors for your continued confidence. We look forward to continuing our development and improvement journey together with all of you. So please open up for Q&A.

[Operator Instructions] We have one question in the queue so far that's from the line of Karl-Johan Bonnevier of DNB Markets.

A couple of questions, if I may. If I look at your last slide, looking at the focus areas going ahead. Obviously, there is a lot of questions regarding Swedol, how you see that integration and then how that potentially can balance the challenge on COVID-19 that you see out there for the moment. So if you take it in, sort of integrating Swedol, do you see a lot of cost that is supposed to hit the profit and loss account during this year? I haven't seen any guidance for that historically.

So, I didn't really -- yes, Karl. Did you ask how the business area will -- how we mitigate the COVID-19 and how it could be effected?

No. Let's start with, say, the integration of Swedol. What kind of costs you related to that looking at the current year?

Okay. Now I understand you better. We have put up the project and we have working in some work streams. So we have a customer offering logistics and IT and then, of course, supporting activities. But in every work stream, we are now looking into, as you asked for, how long time will it take us to get out the synergies to get us to 10%? How much will it cost? And will we have some investment? And that work will be progress and presented in June for the Board. So we're not ready of this work. And that is, of course, due to the COVID-19 effect. We have not been able to meeting and greeting physically as we would like to do, but we have web meetings and digital meetings every day.

And when you look at -- yes, I know it's hard to -- so basically, in June, we should be able to -- or when do you believe that you can communicate something for us in the market?

Yes, in the first quarterly report, then we readily release.

Yes, it's up to the Board, of course, what they will likely release, but we will be ready to shoot in the first quarter release.

Excellent. And that weighs a great interest.

Yes. In July.

Yes. Mid-July.

Mid-July.

And when you look at the COVID-19 impact, you indicate that you had a bigger impact coming up towards the end of the quarter. Could you give us some sort of idea about the kind of challenge you now face here, say, during April or since the quarter ended? How many employees that you might have in this kind of short-term employment programs or something that give some color about the challenge you are trying to mitigate the performance?

Yes. I was along 2008, 2009 in the group. In the group at that time, we lost, for the whole year, 10% in sales in the Components & Services and we lost 25% of sales in the other business segments, TOOLS and supplies. At that time, the group halved the EBIT losing that amount of sales. So we -- our ambition is to mitigate around that sales numbers in 10% and 25% in both business areas. And our challenge or our aim actually is to not lose any EBIT. That's right. But of course, that's the guidance.

And if -- that's an interesting indication. But if you assume that you are seeing something for the moment that average is down 20%. And you feel that you still have the cost flexibility to meet that?

Yes. That's correct. As I said, between 10% and 25%, the sales decrease is very much like 2008, 2009 at this time. And we -- of course, we have meetings every week where we're looking at the sales figures, and we mitigate -- do mitigating effects. And of course, in Norway, they had this flexibility to release people or shorter go down in work time. So in Norway, we saw it very early due to the effect of closing schools and child care. And now when we have this possibility in Sweden, we use that as well and we use it in Finland. So I think we have more flexibility to mitigate the effect than we had in 2008 and 2009. So we will do everything to do profit protection but not to destroy the future of the company. As you know, if you look at the cost base that we have, the largest asset and also the largest cost that we have is the personnel, then, of course, and thanks to -- due to this change in sort of view, especially in Sweden. I mean there are more easy and more short-term possibilities to, of course, reduce the personnel costs. And that is basically what we are focused on short-term working, et cetera, et cetera. But basically, what we are doing is, of course, that we are looking at each item and trying to see if this is nice to have or need to have in relation to this mitigation effect that we are working with. And as we have said also, I mean, we think that what we are doing now is that we are very much working on this -- on a very activity-based level. So the activities are very much done out there in the operating entities where they have improved familiarity with sort of the customers and the suppliers and the personnel. So -- and I think that our model here with a very decentralized mode of operation with strong commitment to safeguarding profit, that's the benefit for us as we have seen that the effects have come quite rapidly out in the different businesses. Yes.

And obviously, since the start of April, now also Swedol is part of your universe, so to say. And when I look back at Swedol in 2008, '09, they obviously seem to have an even higher resilience than -- and the old Momentum operations back then. Is that your impression now where you have taken that over as well that this is a good resilient operation even in this kind of market environment?

I mean, it's -- I think it's a bit too early to say the data up here for sure. But I think that if you look at what we are doing, in relation to sort of the different businesses, as we see that they are basically pursuing the same activities that we are doing. And that, of course, is very reassuring for us to see that they are sort of on the goal immediately, where they see also some kind of deterioration when it comes to demand. And of course, there is that obviously a bit different from the 2 set up. But I think that's their resilience is good. But it's too early basically to make a sort of strong commitment to where to land. And as we have expressed, I think, I mean, it's a general conclusion, of course, for every business. I think that the effect, we much -- we're depending on how this niche will be and basically how good it will be. So that's a ten-thousand-dollar question.

And when I look at the service operation, obviously, very impressive margins in the quarter. And how much is that if realization coming out of the acquisition that are not the contribution level where they should be? Or is it the old operation that's really is the main source for the improvements?

It's -- there's 2 things. It's the old operation, and it's the last acquisition of ETAB, which is performing very well due to the fact it's more hydraulics that we are entering, and we are also scaling up that businesses within the old operation, so to say. So it's both organically, but of course, ETAB is pushing up the margin as well.

And you're also...

Yes, basically -- sorry.

No, no, you just continue.

Okay. Just to add to what Ulf just mentioned, we have sort of made a commitment to ourselves and our customers that we will keep the business going. And I mean, a lot of what we are trying here are sort of critical components for keeping the production up from everything to set customers such as LKV mining related to also the vehicle manufacturers. And we are not selling components to the vehicles, we are selling components to the manufacturing according to that, but we see that we have been able to keep our part of that sort of contract. We have kept all our businesses open, and we have a very good ability to supply the needs of our customers. And I think that we have made a very strong gain here that we have sort of give the points before that this really materialized, we have been able to keep up our customer from this very much even though this last period have been tough. I think it's been tougher to many of our competitors.

And finally, I see the -- in your mission statement or your strategy focus statement that you are still signing more acquisitions to come in particularly Components & Services. Is it possible to conclude acquisitions in the current environment? Or is it wait and see over the next maybe 1 or 2 quarters before the pipeline can start to bring new targets in?

No. It's not wait and see. We are ready to aim and fire. We, of course, have dialogues going on, but it's harder to meet physical, and that's why maybe it would be lagged, but we are -- dialogue is ongoing and it's not wait and see. I think it's a lot of opportunity that also can arise from this for -- in this business area for us.

Yes. If you take a view, say, 2 to 3 years out, what would be your ambition to grow Components & Services into? Obviously, the TOOLS & Consumables side is getting an enormous boost from the Swedol acquisition.

I mean, if we look to double the revenue, it normally takes 5 years, but we will try to double it in less than that. That's our ambition.

[Operator Instructions] Okay. There are currently no further questions coming through at this time.

Okay. Thank you all for listening in. And for you who will listen to this later on, please do not hesitate to contact us if you have any questions. Thank you very much.

Thank you.